ASAHI KASEI CORP
Annual Report 2007

Plain-text annual report

A n n u a l R e p o r t 2 0 0 7 A S A H I K A S E I C O R P O R A T O N I Annual Report 2007 Basic Credo of the Asahi Kasei Group Basic tenets We the Asahi Kasei Group, through constant innovation and advances based in science and the human intellect, will contribute to human life and human livelihood. Guiding precepts We will create new value, thinking and working in unison with the customer, from the perspective of the customer. We will respect the employee as an individual, and value teamwork and worthy endeavor. We will contribute to our shareholders, and to all whom we work with and serve, as an international, high earnings enterprise. We will strive for harmony with the natural environment and ensure the safety of our products, operations, and activities. We will progress in concert with society, and honor the laws and standards of society as a good corporate citizen. Contents The Asahi Kasei History .................................................................................................................. 01 Consolidated Financial Highlights ................................................................................................. 04 To Our Shareholders ....................................................................................................................... 05 Driving the Strategic Advance: Growth Action – 2010 ................................................................... 06 Asahi Kasei Group Operations, Worldwide ................................................................................... 12 At a Glance ...................................................................................................................................... 14 Operating Segment ........................................................................................................................ 16 Corporate Governance ................................................................................................................... 32 Corporate Social Responsibility ...................................................................................................... 36 Directors, Corporate Auditors, Executive Officers ........................................................................ 38 Financial Section ............................................................................................................................. 39 Major Subsidiaries and Affiliates ................................................................................................... 70 Corporate Profile ............................................................................................................................ 72 Investors Information ..................................................................................................................... 73 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this annual report with respect to Asahi Kasei’s estimated future revenues and profits, strategies, tenets, financial forecasts, and other statements that are not historical facts are forward-looking statements. Such forward-looking statements are based on management’s judgments, predictions, and forecasts in light of information currently available and involve many potential risks and uncertainties that could cause actual results to differ materially from the content of these statements. Accordingly, undue reliance should not be placed on such forward-looking statements. This annual report was printed with vegetable-based ink on recycled paper. ASAHI KASEI CORPORATION A copy of the Company,s annual report and further information will be made available upon request in writing to: Corporate Communications Asahi Kasei Corporation 1-1-2 Yurakucho, Chiyoda-ku, Tokyo 100-8440, Japan Phone: +81-3-3507-2060 www.asahi-kasei.co.jp Fax: +81-3-3507-2495 A n n u a l R e p o r t 2 0 0 7 A S A H I K A S E I C O R P O R A T O N I Annual Report 2007 Basic Credo of the Asahi Kasei Group Basic tenets We the Asahi Kasei Group, through constant innovation and advances based in science and the human intellect, will contribute to human life and human livelihood. Guiding precepts We will create new value, thinking and working in unison with the customer, from the perspective of the customer. We will respect the employee as an individual, and value teamwork and worthy endeavor. We will contribute to our shareholders, and to all whom we work with and serve, as an international, high earnings enterprise. We will strive for harmony with the natural environment and ensure the safety of our products, operations, and activities. We will progress in concert with society, and honor the laws and standards of society as a good corporate citizen. Contents The Asahi Kasei History .................................................................................................................. 01 Consolidated Financial Highlights ................................................................................................. 04 To Our Shareholders ....................................................................................................................... 05 Driving the Strategic Advance: Growth Action – 2010 ................................................................... 06 Asahi Kasei Group Operations, Worldwide ................................................................................... 12 At a Glance ...................................................................................................................................... 14 Operating Segment ........................................................................................................................ 16 Corporate Governance ................................................................................................................... 32 Corporate Social Responsibility ...................................................................................................... 36 Directors, Corporate Auditors, Executive Officers ........................................................................ 38 Financial Section ............................................................................................................................. 39 Major Subsidiaries and Affiliates ................................................................................................... 70 Corporate Profile ............................................................................................................................ 72 Investors Information ..................................................................................................................... 73 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this annual report with respect to Asahi Kasei’s estimated future revenues and profits, strategies, tenets, financial forecasts, and other statements that are not historical facts are forward-looking statements. Such forward-looking statements are based on management’s judgments, predictions, and forecasts in light of information currently available and involve many potential risks and uncertainties that could cause actual results to differ materially from the content of these statements. Accordingly, undue reliance should not be placed on such forward-looking statements. This annual report was printed with vegetable-based ink on recycled paper. ASAHI KASEI CORPORATION A copy of the Company,s annual report and further information will be made available upon request in writing to: Corporate Communications Asahi Kasei Corporation 1-1-2 Yurakucho, Chiyoda-ku, Tokyo 100-8440, Japan Phone: +81-3-3507-2060 www.asahi-kasei.co.jp Fax: +81-3-3507-2495 The Asahi Kasei History Our roots Growth in concert with the Japanese economy Throughout Japan’s period of post-war recovery and into the 1990s, our expansion and growth was largely driven by diversification. As it became clear that greater selectivity of businesses was required to revitalize operations, we moved beyond this mode of growth through diversification and entered a phase of selective diversification and structural transformation. Asahi Kasei’s operating profit* Japan’s GDP FY 1960=100 Growth through diversification Selective diversification and structural transformation FY 1955 1965 1975 1985 1995 2005 * Three-year moving average, non-consolidated until FY 1980. Growth through diversification A concerted drive to diversify into a broad range of fields began in the 1950s. A rapid pace of growth was sustained by successive advances into new fields of business, which were developed based on combinations of new technology with the technology of established businesses. When each business began to mature, its growth would naturally tend to slow. As this happened, there were other businesses which were new and growing quickly, ensuring that a high overall rate of growth was maintained. Nonwoven fiber Hollow-fiber membranes Spandex Microporous membrane Maturing Growth • Regenerated fiber • Chemical fertilizer • Explosives Incubation • Petrochemicals • Synthetic fibers • Housing • Construction materials • Electronics • Pharmaceuticals & medical devices 1923 Ammonia Ammonium sulfate 1924 Rayon 1931 Bemberg™ 1932 Explosives 1953/1957 Saran™ fiber Polystyrene 1959/1962 Acrylic fiber Acrylonitrile 1964 Nylon fiber Synthetic rubber 1972 Ethylene plant 1967 Hebel™ 1972 Hebel Haus™ 1975 Artificial kidneys 1978 Hall elements 1981 Pharmaceuticals business unit Dry film resist 1983 LSIs Shitagau Noguchi Our roots trace to the May 1922 establishment of Asahi Kenshoku K.K. (Asahi Fabric) and the October 1923 start of ammonia production by the Casale process in Nobeoka, Miyazaki Prefecture, at Nihon Chisso Hiryou K.K. (Japan Nitrogenous Fertilizer), founded by Shitagau Noguchi. Utilizing this ammonia, Japan Bemberg Fiber Co., Ltd. began production of Bemberg™ rayon by the cuprammonium process in April 1931, and in May of the same year the Nobeoka plant of Nihon Chisso Hiryou was spun off and established as Nobeoka Ammonia Fiber Co., Ltd., the formal establishment date of Asahi Kasei. The first decades were a time of growth through expansion in the production of industrial chemicals and chemical derivatives such as caustic soda, chlorine, fertilizers, nitrocellulose and industrial explosives, Bemberg™ and viscose rayon cellulosic fibers, and flavor enhancer. The years following World War II began broader ranging expansion into new fields, which has brought Asahi Kasei to the forefront of the Japanese chemical industry. Selective diversification and structural transformation The seven years from fiscal 1999 to fiscal 2005 were a time of selective diversification and structural transformation to establish a solid basis for renewed growth and expansion. With the Ishin-2000 initiative of fiscal 1999 to fiscal 2002, we accelerated the transformation to a high-earnings operational structure, and made a transition to a high-speed management system. Performance chemicals, electronics, and medical devices were expanded as high-earnings businesses, while viscose rayon, foods, and liquors, businesses with lower assets efficiency, were divested or closed. With the Ishin-05 initiative of fiscal 2003 to fiscal 2005, we advanced the transition to a high-earnings business portfolio, and in October 2003 made a transformation to a holding company configuration with a core operating company in each main field of business. Improved earnings and financial strength 0.78 0.79 0.62 0.54 D/E ratio Profit*, ¥ billion Net income (loss), ¥ billion 96.0 74.3 51.2 17.4 20.5 25.2 45.7 5.2 0.64 0.62 0.49 0.40 104.7 95.6 80.4 61.6 56.5 59.7 27.7 Ishin-2000 Ishin-05 (66.8) 2003 FY 1998 * Operating profit prior to amortization of actuarial differences in retirement benefits. 2001 2002 1999 2000 2004 2005 Ishin-2000 Selectivity and focus • Focus on competitive-superiority businesses • Fostering next-generation growth drivers • Divestment or closure of businesses with low assets efficiency • Stable financial foundation Ishin-05 Selective diversification • Building on strengths • Creation of cash flow • Management speed and autonomy Share of operating profit in four main sectors Homes & Construction Materials 29% FY 1998 FY 2005 Homes & Construction Materials 29% Chemical- based 40% Chemical- based 44% Pharma 21% Pharma 10% Electronics Materials & Devices 9% Electronics Materials & Devices 18% Investors Information As of April 1, 2007 Stock Listings Stock Code Authorized Shares Outstanding Shares Transfer Agent Independent Auditors Tokyo, Osaka, Nagoya, Fukuoka, Sapporo 3407 4,000,000,000 1,402,616,332 Sumitomo Trust & Banking Co., Ltd. 4-5-33 Kitahama, Chuo-ku Osaka 541-8639, Japan PricewaterhouseCoopers Aarata Number of Shareholders 126,348 % of equity* Largest Shareholders Master Trust Bank of Japan, Ltd. TS ..............................................................4.99 Nippon Life Insurance Co. .............................................................................4.80 Japan Trustee Services Bank, Ltd. TS..............................................................3.56 Employees’ Stockholding ................................................................................2.65 Sumitomo Mitsui Banking Corp.....................................................................2.53 Japan Trustee Services Bank, Ltd. TS4 ...........................................................2.32 Dai-ichi Mutual Life Insurance Co. ...............................................................2.30 Tokio Marine & Nichido Fire Insurance Co., Ltd. .........................................2.22 Meiji Yasuda Life Insurance Co. .....................................................................1.76 Mizuho Corporate Bank, Ltd..........................................................................1.45 * Percentage of equity ownership after exclusion of treasury stock. Distribution by Type of Shareholder Distribution by Number of Shares Held Japanese financial institutions Foreign investors Japanese individuals and groups Japanese securities companies Other Japanese companies 43.93% 27.72% 21.50% 2.05% 4.80% 100,000 or more 10,000–99,999 1,000–9,999 Less than 1,000 80.85% 6.40% 12.31% 0.44% 1,402,616,332 shares TM: Trademark or registered trademark of Asahi Kasei Corporation, affiliated companies, or third parties granting rights to Asahi Kasei Corporation or affiliated companies. 01 02 Annual Report 2007 73 Growth Action – 2010 Embarking on a new phase of growth Through our previous strategic management initiatives, we established a solid foundation for a new phase of growth for the Asahi Kasei Group. In the Growth Action – 2010 initiative of fiscal 2006 to fiscal 2010, we are expanding global businesses and enhancing domestic businesses with strategic investment for growth to bring greater corporate value and brand strength. Annual Report 2007 03 Consolidated Financial Highlights Asahi Kasei Corporation and consolidated subsidiaries Fiscal year beginning April 1 For the year Net sales Operating profit Income before income taxes and minority interest Net income Capital expenditure Depreciation and amortization R&D expenditures At year-end Total assets Net worth† Fiscal year beginning April 1 Per share Net income Net worth‡ Cash dividends 2006 ￥1,623.8 127.8 114.9 68.6 84.4 71.6 52.4 ¥ billion 2005 ￥1,498.6 108.7 94.5 59.7 66.3 69.4 51.5 2004 ￥1,377.7 115.8 91.1 56.5 68.5 71.5 50.7 ￥1,459.9 645.7 ￥1,376.0 594.2 ￥1,270.1 511.7 2006 ¥ 2005 2004 ￥ 49.00 ￥ 42.46 ￥ 40.16 461.50 12.00 424.34 10.00 365.43 8.00 US$ million * 2006 ＄13,761 1,083 974 581 715 607 444 ＄12,372 5,538 US$ * 2006 ＄0.42 3.91 0.10 * U.S. dollar amounts in this annual report are translated from Japanese yen, for convenience only, at the rate of ¥118=US$1 as described in Note 4 of Notes to Consolidated Financial Statements. † Net assets less minority interest in consolidated subsidiaries. Through the year beginning April 1, 2005, figures for shareholders’ equity shown. ‡ At fiscal year end. Fiscal year beginning April 1 Key indexes Operating profit margin ROE Net worth to total assets D/E ratio 2006 7.9 % 11.1 % 44.2 % 0.34 2005 7.3 % 10.8 % 43.2 % 0.40 2004 8.4 % 11.7 % 40.3 % 0.49 Net Sales, Operating Profit Margin Net Income, ROE Total Assets, Net Worth Net sales, left scale Operating profit margin, right scale Net income, left scale ROE, right scale % 12 ¥ billion 90 11.7 1,624 1,499 7.9 8 60 56 7.3 1,378 8.4 11.1 69 10.8 60 ¥ billion 1,800 1,200 600 4 0 30 0 2004 2005 Fiscal year 2006 0 2004 2005 Fiscal year 2006 04 Total assets Net worth % 12 ¥ billion 1,500 1,270 1,376 1,460 8 4 0 1,000 500 0 512 594 646 2004 2005 Fiscal year 2006 To Our Shareholders Although consumer spending remained moderate, the Japanese economy grew with strong corporate earnings, an improved employment outlook, and increased private-sector capital investment. The operating climate nevertheless remained challenging, with persistently elevated prices for petroleum and petrochemical feedstocks such as naphtha necessitating cost-cutting measures and sales price increases. In fiscal 2006, the first year of our Growth Action – 2010 initiative, consolidated net sales grew by ¥125.2 billion from a year ago to ¥1,623.8 billion. Sales growth was greatest in chemicals operations, with product prices rising to compensate for increased feedstocks costs. Operating profit grew by ¥19.1 billion to ¥127.8 billion. Operating profit growth was greatest in chemicals operations, with strong overseas market conditions, in pharmaceuticals operations, with significant licensing income, and in electronics operations, with strong demand in consumer electronics applications. Ordinary profit grew by ¥22.3 billion to ¥126.5 billion. Net income grew by ¥8.9 billion to ¥68.6 billion. Each of theses results was a new record high. In the light of these results, dividends were increased by ¥2 per share to ¥12 per share. Strategic investment is being advanced in fiscal 2007 as we lay the foundation for expansion and growth to achieve our Growth Action – 2010 performance goals and obtain heightened corporate value and brand strength for the Asahi Kasei Group. August 2007 Left: Nobuo Yamaguchi, Chairman of the Board Right: Shiro Hiruta, President Nobuo Yamaguchi Chairman of the Board Shiro Hiruta President Annual Report 2007 05 Driving the Strategic Advance: Growth Action – 2010 By executing our Growth Action – 2010 strategy, the Asahi Kasei Group will gain a stronger presence in global markets and make more of a contribution to people’s lives around the world. Shiro Hiruta President With our previous strategic initiative, Ishin-05, we implemented business portfolio realignments to effect our refounding as a selectively diversified enterprise group, transformed the operational structure for cash flow creation, and adopted a holding company configuration to increase management speed and autonomy. The result was rising profitability, greater financial strength, and robust cash flow. We nevertheless remain highly dependent on the Japanese economy, and to outpace Japan’s GDP growth over the long term we need to take bigger strides in the expansion of globally competitive businesses and the creation and development of new businesses. At the same time we need to enhance our domestic businesses to obtain greater added value and adapt to the changing industrial structure in Japan. These are the strategic pillars of our Growth Action – 2010 initiative for fiscal 2006 through 2010, to advance our business portfolio realignment for expansion and growth, and to obtain greater corporate value and brand strength. Performance targets for fiscal 2010 include ¥1,800 billion in sales, ¥150 billion in operating profit, and ¥80 billion in net income. To achieve these goals we are stepping up the pace of capital expenditure, with a ¥400 billion provision for strategic investment over the five-year period over and above our ordinary level of investments. Strategic investment, which includes M&A, is centered on monomers, specialized-function chemical-based products, electronics 06 materials and devices, and medical devices, fields where we have the most potential for global growth based on our inherent competitive advantages. During fiscal 2006 we expanded production capacity in many of our global businesses, including with new plants located overseas, and advanced studies on further strategic actions to expand these businesses. Fiscal 2007 is going to be a key year for the execution of strategic investment in these areas. Asahi Kasei’s Operating Profit and Japan’s GDP Asahi Kasei’s operating profit* Japan’s GDP FY 1960=100 (cid:0)(cid:1)(cid:2)(cid:3)(cid:4)(cid:5) (cid:7)(cid:8)(cid:4)(cid:9)(cid:2)(cid:10) (cid:11) (cid:12)(cid:13)(cid:14)(cid:13) Exceeding Japan’s GDP growth through expansion of global businesses FY 1955 1965 1975 1985 1995 2005 …… * Three-year moving average, non-consolidated until FY 1980. Basic Framework Long-term Investment Plan Advancing Business Portfolio Realignment Investment, past 3 years Plan for FY 2006 to 2010 Global businesses High growth businesses Chemical-based, specialized- function Electronic materials Medical devices Electronic devices Pursuing higher growth with strong, stable base Stable growth, stable earnings businesses Monomers Polymers Acrylonitrile, MMA, styrene monomer, etc. Including processed products Domestic businesses Housing, construction materials, pharmaceuticals, home-use products, etc. Expanding global businesses Enhancing domestic businesses Targets Greater corporate value and brand strength Net sales ¥1,800 billion Operating profit ¥150 billion Net income ¥80 billion Expansion of global businesses Until the 1990s our global businesses accounted for only about 40% of total sales. In fiscal 2005 this reached 54%, and we are aiming to increase it to 60%. Overseas sales in fiscal 2006 were 26.4% of total sales, and we want this to reach at least one-third. Most of the businesses we are expanding globally are not in commodity product fields but in high value-added specialty product fields. Rather than pursuing greater scale in overseas markets, our strategy is to generate stable earnings through overseas production of high value-added products. We are not building plants overseas simply to Expansion Maintenance Maintenance Expansion (a) ¥70 to ¥80 billion/year ¥800 billion over 5 years = (a)×5 + strategic investment of ¥400 billion Breakdown of Strategic Investment Pharma Homes & Construction Materials Chemical-based Electronics Materials & Devices Renewing ethylene center, etc. Monomers Specialized-function products Electronics Materials & Devices New business creation Enhancing domestic businesses (¥ billion) Organic M&A 20 40 40 50 40 30 – – 50 100 – – Total 220 150 have more production bases, but only if and when they make sense within our overall approach to a given market in each region. Especially for specialty products, our plants in Japan serve as the base for technology and R&D, while overseas plants are constructed as deemed necessary from the standpoint of matching the location of production with that of demand. Annual Report 2007 07 Driving the Strategic Advance: Growth Action – 2010 Global advances in fiscal 2006 In chemicals, we began commercial operation at a subsidiary in Korea for process validation of the world’s first propane process for production of acrylonitrile (AN), an intermediate used in the manufacture of acrylic fiber and ABS. We are planning a new AN plant in Thailand based on this new process using natural gas-derived feedstock, and a formal investment decision will be made in fiscal 2007. In China, we began operation of a new plant for the assembly of Microza™ microfiltration (MF), and advanced construction of a new plant to produce Duranate™ hexamethylene diisocyanate (HDI)-based polyisocyanate. In electronics, we expanded our plant in China for Sunfort™ photosensitive dry film resist (DFR), and advanced development of new functional materials for flexible printed circuits and flat panel displays. We are scheduled to start shipping paid samples of new optical films in fiscal 2007. In medical devices, we are adding production capacity for APS™ polysulfone-membrane artificial kidneys and expanding our therapeutic apheresis device business. At the holding company, we established a subsidiary in China to provide management support to the various group operations there. In services ranging from business infrastructure to market development and incubation of new businesses, this will facilitate the expansion and growth of operations in the increasingly important Chinese market. Fiscal 2006 in strategic context During the year, we had strong overseas demand, especially in China, and made good progress on product price increases to overcome high feedstock costs. The overall rise in profits reflected sustained, wide-ranging growth in many fields of operation. In all, we made a good start to our Growth Action – 2010 initiative, with strongest performance in chemicals and electronics, resulting in record-high sales and profits. The strong performance of chemicals operations in fiscal 2006 was a result of actions taken with our Ishin-05 initiative to build on our strong businesses, enabling us to maintain a price spread even when feedstock costs rise. At lot of investment since Ishin-2000 has been to strengthen monomers businesses. Such proactive investments, including infrastructure improvements, have raised the base of performance to a higher level. As we cannot expect much growth in the general market for homes, management of housing operations is focused on maintaining stable performance. Orders for fiscal 2006 were lower than we had expected, resulting in decreased profits. We are working to achieve greater cost reductions while enhancing new product development, gaining greater marketing efficiency, and growing housing-related businesses such as remodeling. Pharmaceutical and medical device operations had reimbursement price cuts but nevertheless increased profits in fiscal 2006 with licensing income and growing medical device sales. We are making a large increase in clinical development expenses for pharmaceuticals in fiscal 2007, and if all goes well our product pipeline will be filled through 2012. We will soon be able to enjoy the fruits of past research in pharmaceuticals. In artificial kidneys, we will continue to solidify and expand on our world No. 2 position. We are advancing successive production capacity expansions, established a manufacturing joint venture with Kuraray Medical, and in October 2007 are scheduled to integrate their artificial kidney business with ours. Global development of the business will include expansion of sales capabilities in Europe and the US. Sales of electronic materials such as Sunfort™ photosensitive dry film resist and Pimel™ photosensitive polyimide precursor, which enjoy high global market shares, grew steadily in fiscal 2006, as did sales of LSIs and other electronic devices, with strong demand in home electronics applications. We will continue to expand capacity in our established businesses, while pursuing M&A and alliances in related areas where we can gain synergies. Profitability in fibers for fiscal 2006 was affected by an 08 operating loss at the Dorlastan™ spandex business acquired in March from Lanxess of Germany, but we have applied Roica™ technology and both the US and German plants are now profitable on a monthly basis. These businesses will make a solid contribution to profits in fiscal 2007. We will also complete a commercial plant this year for Precisé™, a new highly functional nonwoven for industrial applications, which will help nonwovens operations overcome the challenge of high feedstock costs. Performance in construction materials has steadily improved, and operating profit rose to 7% of sales in fiscal 2006. We will not be pursuing large growth in sales, but will focus on developing profitable new products that contribute to safety and ecology. Profits from consumable products were down slightly in fiscal 2006 due to high feedstock costs, but the April 2007 integration of Asahi Kasei Life & Living with Asahi Kasei Chemicals will provide greater resources for growth in home-use products and enable the development of higher value-added films and sheets with novel functionality, together with the expansion into new applications, by combining the polymer processing technologies and marketing capabilities of the two companies for packaging materials. Financial Performance Net sales Operating profit Ordinary profit Net income Total assets Net worth * Interest-bearing debt D/E ratio FY 2005 FY 2006 1,498.6 1,623.8 108.7 104.2 59.7 127.8 126.5 68.6 (¥ billion) Percent Change +8.4 % +17.5 % +21.4 % +14.9 % (¥ billion, except D/E ratio) FY 2005 FY 2006 Change 1,376.0 1,459.9 594.2 235.8 0.40 645.7 216.9 0.34 +83.9 +51.4 –18.9 –0.06 * Net assets less minority interest in consolidated subsidiaries. Figure for shareholders’ equity shown for FY 2005. Annual Report 2007 09 Driving the Strategic Advance: Growth Action – 2010 Major Investments Completed in FY 2006 Chemicals Expansion of plant for Hipore™ Li-ion rechargeable battery separators Segment Project New assembly plant for Microza™ microfiltration membranes Application of propane process at one AN line of Tong Suh Petrochemical Location Japan China Korea Fibers Installation of Roica™ production equipment at Asahi Kasei Spandex Europe plant Germany Electronics Materials & Devices Expansion of plant for LSIs Expansion of plant for Sunfort™ dry film resist Under construction at FY 2006 year-end Chemicals Homes Pharma New plant for compound semiconductor wafer processing New plant for Duranate™ hexamethylene diisocyanate-based polyisocyanate New housing R&D center Expansion of assembly plant for APS™ artificial kidneys Expansion of assembly plant for Planova™ virus removal filters Japan China Japan China Japan China Japan Fibers Installation of Roica™ production equipment at Asahi Kasei Spandex America plant US Electronics Materials & Devices New plant for Precisé™ nonwovens Expansion of plant for photomask pellicles Japan Japan Fiscal 2007 outlook Sales growth will largely be in chemicals, with continuingly strong overseas demand, and in fibers, with the inclusion of a full year of sales from the spandex business acquired from Lanxess. Though our underlying profitability continues to grow, we are forecasting a slight decrease in reported operating profit due to decreased licensing income in pharmaceuticals and a projected ¥4.7 billion effect of new accounting standards for depreciation of fixed assets. We are forecasting record-high net income of ¥70 billion or more. This will also be the year for advancing strategic investments in many businesses to enable us to achieve our performance targets in fiscal 2010. 10 Shareholder returns We would like to provide returns to shareholders first and foremost through continuous dividend increases over the long term. As set forth in Growth Action – 2010, internal financial reserves based on consolidated performance will be directed toward strategic investments to bring continuous profit growth, enabling continuous dividend increases. Annual dividends were ¥6 per share in fiscal 2003, the first year of our Ishin-05 initiative, and ¥12 per share in fiscal 2006. We would like to increase dividends each year by at least ¥1 per share. In February 2007 we cancelled 40 million shares of treasury stock to heighten shareholder value. Continuous Earnings and Dividends Increase through Strategic Investment Strategic investment (¥220 billion + M&A ¥150 billion) Cash flows Interest-bearing debt Net worth/total assets & D/E ratio (up to 50% & 0.5 w/M&A) Continuous earnings increase (6% p.a. for net income) Improved ROA (target of 5%) Improved ROE (target of 10%) Continuous dividends increase (resources of ¥20–30 billion) Payout ratio (target of 20–30%) Share buybacks Return to shareholders in fiscal 2006 • ¥2 increase in dividends from ¥10 to ¥12 per share. • Cancellation of 40 million shares of treasury stock on February. 28, 2007. Net Income, Cash Dividends ¥ billion 150 120 90 60 Net income Cash dividends 13 12 10 8 6 56.5 59.7 68.6 70.0 30 27.7 0 2003 2004 2005 2006 2007 Forecast Fiscal year ¥ 15 12 9 6 3 0 Long term vision for growth Once achieving our performance targets in Growth Action – 2010, if we maintain the same rate of growth through fiscal 2015, operating profit will be double what it was in fiscal 2005. As we achieve this, our corporate value will rise commensurately. We are now launching a group-wide project to formulate action plans in promising growth fields. By fiscal 2015, global businesses will probably be 60% or more of our total, with many products having high global market shares in specialty areas. Asahi Kasei will have a much stronger global presence, make more of a contribution to people’s lives around the world. Annual Report 2007 11 Asahi Kasei Group Operations, Worldwide (As of April 1, 2007) Operations of the Asahi Kasei Group extend to many locations throughout the world. The growth of these operations is a key element in the expansion of global businesses as part of our Growth Action – 2010 strategic initiative. Zhangjiagang ● Asahi-DuPont POM (Zhangjiagang) 　 Co., Ltd. Suzhou ● Asahikasei (Suzhou) Plastics 　 Compound Co., Ltd. ● Asahi Kasei Electronics 　 Materials (Suzhou) Co., Ltd. Nantong ● Asahi Kasei Performance 　 Chemicals Corp. Shanghai ● Asahi Kasei Business 　 Management (Shanghai) Co., Ltd. ● Asahikasei Plastics (Shanghai) 　 Co., Ltd. Hangzhou ● Asahi Kasei Microza (Hangzhou) Co., Ltd. ● Asahi Kasei Medical (Hangzhou) Co., Ltd. ● Hangzhou Asahikasei Spandex Co., Ltd. ● Hangzhou Asahikasei Textiles Co., Ltd. Korea ● Tong Suh Petrochemical Corp., Ltd. ● Asahi Kasei Adipic Acid (Korea) Co., Ltd. ● Delaglas Korea Corp. ● Nikkiso Asahi Kasei Medical Korea Co., Ltd. ● Asahi Kasei EMD Korea Corp. Japan Hong Kong ● Asahi Kasei Plastics 　(Hong Kong) Co., Ltd. ● Asahi Chemical (HK) Ltd. China Thailand ● Asahikasei Plastics (Thailand) Co., Ltd. ● Thai Asahi Kasei Spandex Co., Ltd. Taiwan ● Formosa Asahi Spandex Co., Ltd. ● Asahi Kasei EMD Taiwan Corp. ● Asahi-Schwebel (Taiwan) Co., Ltd. ● Asahi Kasei Wah Lee Hi-Tech Corp. Singapore ● Asahi Kasei Plastics Singapore Pte. Ltd. ● Polyxylenol Singapore Pte. Ltd. Indonesia ● PT Nippisun Indonesia Europe ● NV Asahi Thermofil (Europe) SA ● NV Asahi Photoproducts (Europe) SA ● Asahi Photoproducts (UK) Ltd. ● AK&N (UK) Ltd. ● Asahi Thermofil (UK) Ltd. ● Asahi Thermofil (France) SA ● Asahi Kasei Medical Europe GmbH ● Asahi Pharma Spain, SL ● Asahi Kasei Spandex Europe GmbH ● Asahi Kasei Fibers Italy SRL ● Asahi Kasei Fibers Deutschland GmbH 12 Expanding global businesses – Share of sales by character of business FY 1998 Domestic Businesses 57% Global Businesses 43% FY 2005 FY 2010 target Domestic Businesses Global Businesses 45% 55% Domestic Businesses Global Businesses 40% 60% Gunma Saitama Ageo Kawasaki Hozumi Shiga Moriyama Ono Mizushima Iwakuni Osaka head office Wakayama Chikushino Oita Nobeoka Shiraoi Mibu Tomobe Sakai Tokyo head office Chiba Ohito Fuji Nagoya Suzuka America ● Asahi Kasei America, Inc. ● Asahikasei Plastics (America) Inc. ● Asahi Kasei Plastics North America, Inc. ● Asahi Chemical Intermediates Inc. ● Sun Plastech Inc. ● Asahi Kasei Spandex America, Inc. ● AKM Semiconductor, Inc. ● ： ● ： ● ： ● ： ● ： Holding company Chemicals segment Pharma segment Fibers segment Electronics Materials & Devices segment Annual Report 2007 13 At a Glance Segments, Core Operating Companies Core Operating Company Directors * Chemicals Homes Pharma Fibers Taketsugu Fujiwara Keiji Kamei Masanori Warabi Shigeru Mizutani Masami Fujimori Kyosuke Komiya Hajime Nagahara Tadashi Akaishi President & Representative Director, Presidential Executive Officer Director, Vice-Presidential Executive Officer Director, Primary Executive Officer Director, Primary Executive Officer Director, Senior Executive Officer Director, Senior Executive Officer Director, Senior Executive Officer Director, Senior Executive Officer Toshiaki Okamoto Shingo Hatano Tsuyoshi Shimizu Morio Watanabe Eisuke Ikeda Chairman of the Board & Director President & Representative Director, Presidential Executive Officer Director, Senior Executive Officer Director, Senior Executive Officer Director, Senior Executive Officer Kei Oe Yasuyuki Yoshida Tsutomu Inada Akio Kobayashi President & Representative Director, Presidential Executive Officer Director, Primary Executive Officer Director, Primary Executive Officer Director, Senior Executive Officer Masaki Sakamoto Ryo Matsui Hidefumi Takai President & Representative Director, Presidential Executive Officer Director, Senior Executive Officer Director, Executive Officer Electronics Materials & Devices Makoto Konosu Katsuhiko Yamazoe Koji Yamada Hajime Nagahara President & Representative Director, Presidential Executive Officer Director, Senior Executive Officer Director, Executive Officer Director Construction Materials Hiroshi Kobayashi Fumio Nakagawa Masafumi Funaki Tsuyoshi Shimizu President & Representative Director, Presidential Executive Officer Director, Senior Executive Officer Director, Senior Executive Officer Director Life & Living Asahi Kasei Life & Living Corp. was integrated with Asahi Kasei Chemicals Corp. on April 1, 2007. Services, Engineering and Others 14 * As of April 1, 2007 FY06 Composition of Net sales, Operating Profit * Net sales Operating profit 46% ¥752.6 billion 39% ¥52.0 billion Major Consolidated Subsidiaries Main Businesses Sanyo Petrochemical Co., Ltd. Japan Elastomer Co., Ltd. Asahi Kasei Technoplus Co., Ltd. Tong Suh Petrochemical Corp., Ltd. Asahi Kasei Plastics Singapore Pte. Ltd. Asahikasei Plastics (America) Inc. Asahi Kasei Performance Chemicals Corp. Organic and inorganic industrial chemicals, synthetic resin, synthetic rubber, high-compound fertilizer, coating materials, latex, pharmaceutical and food additives, explosives, photopolymers and platemaking systems, separation and ion-exchange membranes, systems, and equipment. Net sales Operating profit Asahi Kasei Jyuko Co., Ltd. Asahi Kasei Mortgage Corp. Asahi Kasei Reform Co., Ltd. Asahi Kasei Real Estate, Ltd. Hebel Haus™ houses, Hebel Maison™ apartments, condominiums, remodeling, real estate, residential land development, financial services. Net sales Operating profit Asahi Kasei Medical Co., Ltd. Asahi Kasei N&P Co., Ltd. Asahikasei Aime Co., Ltd. Asahi Kasei Medical (Hangzhou) Co., Ltd. Pharmaceuticals, pharmaceutical intermediates, feed additives, diagnostic reagents, hemodialyzers and other medical devices. Net sales Operating profit Kyokuyo Sangyo Co., Ltd. Thai Asahi Kasei Spandex Co., Ltd. Hangzhou Asahikasei Spandex Co., Ltd. Asahi Kasei Spandex Europe GmbH Asahi Kasei Spandex America, Inc. Asahi Chemical (HK) Ltd. Hangzhou Asahikasei Textiles Co., Ltd. Roica™ elastic polyurethane filament (spandex), Eltas™ spunbond, Lamous™ artificial suede, Bemliese™ cupro cellulosic nonwoven, Bemberg™ cupro cellulosic fiber, polyester filament, Solotex™ polytrimethylene terephthalate (PTT) fiber. Net sales Operating profit Asahi Kasei Microsystems Co., Ltd. Asahi-Schwebel Co., Ltd. Asahi Kasei Electronics Co., Ltd. Asahi Kasei Electronics Materials (Suzhou) Co., Ltd. Asahi-Schwebel (Taiwan) Co., Ltd. Pimel™ photosensitive polyimide precursor, Sunfort™ photosensitive dry-film resist, Hall elements, LSIs, glass fabric for printed circuit boards. Net sales Operating profit Asahi Kasei Foundation Systems Corp. Asahi Kasei Marinetech Co., Ltd. Hebel™ autoclaved lightweight concrete, construction piles, Neoma™ foam and other thermal insulation, artificial fish reef and other marine structures. Net sales Operating profit Asahi Kasei Pax Corp. Asahi Home Products Co., Ltd. Asahi Home Products Co., Ltd. was renamed Asahi Kasei Home Products Corp. on April 1, 2007. Saran Wrap™ cling film, Ziploc™ storage bags, plastic film, sheet, and foam. Net sales Operating profit Asahi Research Center Co., Ltd. Asahi Finance Co., Ltd. Asahi Kasei Engineering Co., Ltd. Asahi Kasei Amidas Co., Ltd. Plant, equipment, process engineering, employment agency, think tank. 25% ¥405.7 billion 21% ¥27.5 billion 6% ¥104.5 billion 10% ¥13.9 billion 7% ¥106.6 billion 3% ¥4.2 billion 7% ¥112.1 billion 17% ¥22.6 billion 4% ¥60.8 billion 4% ¥5.0 billion 3% ¥52.6 billion 3% ¥4.6 billion 2% ¥28.9 billion 3% ¥3.9 billion * Before corporate expenses and eliminations Annual Report 2007 15 Operating Segment Chemicals With the basic ideal Creating the Future with Chemistry to guide the advancement and growth of operations, all businesses have been classified as those for strategic expansion and those for stable earnings. Management resources are focused on advancing the growth of strategic expansion businesses, while stable earnings businesses are strengthened and enhanced to heighten profitability. Taketsugu Fujiwara President, Asahi Kasei Chemicals Major Products Chemicals and derivative products Ammonia, nitric acid, caustic soda, acrylonitrile (AN), styrene, adipic acid, methyl methacrylate (MMA). Polymer products Suntec™ polyethylene (PE), Stylac™-AS styrene-acrylonitrile, Stylac™-ABS acrylonitrile-butadiene-styrene, polymethyl methacrylate (PMMA), synthetic rubber and elastomer, styrene-butadiene latex, Tenac™ polyacetal, Xyron™ modified polyphenylene ether (mPPE), Leona™ nylon 66 polymer and filament. Specialty products Coating materials, Ceolus™ microcrystalline cellulose, explosives, explosion-bonded metal clad, APR™ photosensitive resin, AFP™ photosensitive plates, printing plate making systems, Microza™ UF and MF membranes and systems, Hipore™ microporous membrane, ion-exchange membranes and electrolysis systems. Growth Action – 2010 Each business is classified either as a strategic expansion business, with management resources focused on achieving growth and high earnings, or as a stable growth, stable earnings business, with efforts focused on strengthening and enhancement to heighten profitability. Strategic expansion businesses, characterized by the potential to attain greater earnings and stronger market position through expansion of scale, include AN, MMA, and synthetic rubber and elastomers. Those characterized by the potential to attain growth through linkage with growing market segments, building on established strengths, and extension into peripheral fields, include battery/fuel cell materials and water treatment systems. Stable earnings businesses, characterized by the potential to attain greater added value and stable earnings growth through a leading position in growing market segments, include polymers/compounds and performance chemicals. Those characterized by the potential to maintain stable earnings through a strengthened operational base and structure include petrochemicals, basic chemicals, and ethylene center derivatives with the exception of those marked for strategic expansion. 16 Net Sales ¥ billion 900 750 600 450 300 150 0 831.0 752.6 660.4 2005 2006 2007 Forecast Fiscal year Operating Profit, Operating Profit Margin Operating profit, left scale Operating profit margin, right scale ¥ billion 60 50 40 30 20 10 0 % 12 10 8 6 4 2 0 56.5 52.0 6.9 6.8 40.5 6.1 2005 2006 2007 Forecast Fiscal year The Year in Review Sales for the segment grew by ¥92.2 billion to ¥752.6 billion, a 14.0% increase. Operating profit grew by ¥11.5 billion to ¥52.0 billion, a 28.3% increase. Sales and operating profit in volume products, comprising chemicals/derivative products and polymer products, increased. Product price increases and strong overseas demand helped to overcome higher feedstock costs. In chemicals and derivative products, operating profit increased with strong overseas demand for acrylonitrile and styrene, and with a sharp rise in the market price of adipic acid due to a tight market balance. In polymer products, profitability of Leona™ nylon 66 resin and filament increased. Sales and operating profit in specialty products grew with increased shipments of Hipore™ Li-ion rechargeable battery separators following plant expansion, export of membrane process chlor-alkali electrolyzers to China, and increased shipments of ion-exchange membranes for chlor-alkali. Notable Developments A new production line in Moriyama for Hipore™ Li-ion rechargeable battery separators began operation in October 2006. The decision was made in December 2006 to install a new steam boiler and power generation turbine to use lower-cost fuel at the Mizushima Works, with start-up in fiscal 2009. Working together with adjacent companies, the project will strengthen competitiveness in Mizushima. A new plant in China for assembly of Microza™ microfiltration (MF) membrane for water treatment began operation in December 2006. Korean subsidiary Tong Suh Petrochemical began commercial operation for validation of the world’s first propane process for acrylonitrile production in January 2007. The decision was made in January 2007 to expand production capacity in Kawasaki for ion-exchange membranes for chlor-alkali with start-up in fiscal 2008. Market Environment Outlook for fiscal 2007 Demand for volume products will remain strong, but the outlook for feedstock prices is unclear. The focus in chemicals and derivative products will be on maintaining appropriate pricing and stable operation. In polymer products, profit growth will be obtained through expansion of differentiated grades. Specialty products will perform well with continuing strong demand in IT, home electronics, and automotive applications. Expanded production capacity for Hipore™ Li-ion rechargeable battery separators, the new assembly line for Microza™ MF in China, and the start-up of a new plant in China for Duranate™ hexamethylene diisocyanate-based polyisocyanate will enable further expansion of sales. R&D Technology development in line with the basic ideal of Creating the Future with Chemistry is directed toward the fields of petrochemicals, electronics and optics, and environment and energy. The focus in petrochemicals and monomers is on advances and innovations in catalysts and chemical processes for diversification of feedstocks, the most recent example being the validation and commercial operation of the world’s first propane process for AN. In electronics and optics, functional sheets and films for LCDs and other flat-panel displays are nearing commercialization. Development in the field of energy will be expanded from the base of Hipore™ Li-ion rechargeable battery separator technology. In ecology, development of water treatment materials technology is advancing for expansion into promising new markets. In polymers/compounds and performance chemicals, the focus is on obtaining higher added value. Annual Report 2007 17 Highlights World’s first commercial propane-process AN plant Asahi Kasei Chemicals developed the world’s first process technology for production of AN from propane gas, with validation and commercial operation beginning in January 2007 at Tong Suh Petrochemical, its subsidiary in Korea. AN is a production material for acrylic fiber and ABS resin, which is used in home appliances. It is conventionally produced from propylene derived from naphtha, a petroleum-based feedstock. The propane process technology enables production of AN without using naphtha or other petroleum-based feed. A large-scale propane-process AN plant is scheduled for start-up in late 2009 in Thailand, near abundant natural gas deposits. With the continuing expansion and growth of operations in Asia, we are aiming for the world’s top share in AN. AN plants in Korea New steam boiler and power generation turbine at Mizushima Works In December 2006 the decision was made to install a new steam boiler and power generation turbine using lower-cost fuel to strengthen competitiveness at the Mizushima Works. Start-up is scheduled for fiscal 2009. The facilities, to be operated jointly with Zeon Corp., will use SDA pitch supplied from a petroleum refinery of Nippon Oil Corp. in Mizushima. This project has been selected by NEDO 18 (New Energy and Industrial Technology Development Organization) for support for energy conservation. Our Mizushima Works Expansion of ion-exchange membrane production capacity In January 2007, the decision was made to expand production capacity for ion-exchange membranes in Kawasaki, to meet growing demand worldwide. Start-up is scheduled for fiscal 2008. The ion-exchange membranes are used in the electrolysis of brine to produce chlorine and caustic soda. There is a clear outlook for growing membrane demand, as new membrane-process chlor-alkali plants and plant expansions will be required to enable increased production of PVC and caustic soda, for which the market is particularly strong in the fast-growing economies of China and India. Asahi Kasei Chemicals is world’s only supplier of the complete range of essential technology for membrane-process chlor-alkali, including its own electrolyzers, electrodes, ion-exchange membranes, and operating technology. The expansion of production capacity for ion-exchange membranes will further strengthen the business and solidify AKC’s position as the world’s top supplier of both the membranes and chlor-alkali electrolysis systems. Membrane-process chlor-alkali plant Operating Segment Homes Marketing resources are focused on demand for rebuilding in urban areas backed by the Long Life Home product strategy to maintain and enhance customer satisfaction over the long term. Shingo Hatano President, Asahi Kasei Homes Major Products Hebel Haus™ houses, Hebel Maison™ apartments, condominiums, remodeling, real estate, residential land development, home financing. Growth Action – 2010 Marketing of order-built homes is focused on demand for home rebuilding in major urban areas, as a high-earnings operational structure is reinforced and expanded. Specific actions include: • Successive development of new products tailored to specific market characteristics in different regions. • Advancement of cost reductions through shared logistical networks with other home builders. • Productivity enhancements through reduced home construction time. • Advanced development of technology to enhance the Long Life Home product strategy. Long-term customer relationships are maintained through the provision of remodeling, real estate, and financial services. Specific actions include: • Expansion of real estate operations in brokerage of used Hebel Haus™ homes. • Expansion of remodeling operations through high value-added services for long-term maintenance and enhancement of home asset value. • Establishment of stable earnings in home financing operations with mortgage securitization and development of homeowners insurance business. • Development of new businesses utilizing proprietary technology, know-how, and the asset value of Hebel Haus™ homes. Net Sales ¥ billion 500 400 300 200 100 0 404.5 405.7 410.0 2005 2006 2007 Forecast Fiscal year Operating Profit, Operating Profit Margin Operating profit, left scale Operating profit margin, right scale ¥ billion 30 28.2 27.5 29.0 25 20 15 10 5 0 7.0 6.8 7.1 2005 2006 2007 Forecast Fiscal year % 12 10 8 6 4 2 0 Annual Report 2007 19 Sales Trends of Home Segment Orders Received Others Pre-built homes Order-built homes ¥ billion 400 300 280.0 16.7 332.0 1.1 20.1 318.2 1.1 36.0 354.1 347.5 1.1 1.0 33.6 28.9 344.0 1.0 26.0 200 100 0 263.3 281.1 310.7 319.4 317.6 317.0 2002 2003 2004 2005 2006 2007 Forecast Fiscal year ¥ billion 400 289.3 300 318.1 301.8 313.3 303.4 310.0 200 100 0 2002 2003 2004 2005 2006 2007 Forecast Fiscal year heighten efforts to maintain sales amid weak demand. Asahi Kasei Homes will focus on increasing unit-home orders from customers who are rebuilding in urban markets where it has established strengths, further advancing product development and promotion based on the Long Life Home concept. R&D R&D is focused on enhancing core technologies. Shelter technology brings greater safety and security through earthquake resistance, seismic damping, and fire resistance; greater long-term usability through physical durability/ evaluation, systematic maintenance, and ease of remodeling; enhanced livability through thermal insulation, air circulation, and sound barrier; and enhanced ecology through recycling and incorporation of greenery. Lifestyle technology brings greater comfort, convenience, and satisfaction, while evaluation/simulation technology is being enhanced to enable buyers to more intuitively appreciate the real-world effects of variations and modifications to a home design so that it is optimized to taste before building. Additional research is focused on the physiological and psychological aspects of comfort, and how these can be utilized through technological development to achieve greater energy efficiency and environmental compatibility in homes optimized for health and comfort. The Year in Review Sales for the segment grew by ¥1.2 billion to ¥405.7 billion, a 0.3% increase. Operating profit decreased by ¥0.7 billion to ¥27.5 billion, a 2.5% decline. Unit prices of order-built homes increased, but the number of deliveries of both order-built homes and condominiums declined, and sales and operating profit in housing operation decreased. Marketing efforts for order- built homes were focused on eliciting demand for rebuilding, but new orders worth ¥303.4 billion received during the period were ¥10.0 billion less than a year ago. Sales and operating profit in housing-related operations increased. Real estate operations had rising income from rentals. Remodeling operations also grew. Notable Developments Construction of a new R&D center in Fuji began in November 2006. The new center will perform research on basic technology for the Long Life Home product concept, and drive the development of next-generation products, with opening scheduled for October 2007. The Hebel Haus Luft™ with living space optimized for the senior couple went on sale in January 2007. Market Environment Outlook for fiscal 2007 The market for housing will be generally slack as retirement of the baby-boom generation reduces aggregate national disposable income and as purchasing desire is moderated by apprehension that salary deductions for social security will increase. Competition will likely intensify as home sellers 20 Highlights Hebel Haus Luft™ With living space optimized for the senior couple, the Hebel Haus Luft™ went on sale in January 2007. Designed to meet the needs of couples in their 50s and 60s who are rebuilding, the home enables the residents to maintain loose contact from a comfortable distance while engaging in separate activities. The concept for this style of home layout emerged from a study performed by Asahi Kasei Homes, which found that many couples whose children have moved out want to have their own spaces to spend time in, but do not want these spaces to be separated by walls or partitions that inhibit communication and interaction. Asahi Kasei Homes will continue to develop new products like this one which meet the specific needs of customers for rebuilding. Housing R&D center In November 2006 Asahi Kasei Homes began construction of a new R&D center in Fuji, the central location of R&D facilities for the Asahi Kasei Group. With opening scheduled for October 2007, the new center will perform research on basic technology for the Long Life Home product concept, and drive the development of next-generation products. The housing technology R&D function will be transferred from its current location at a laboratory in Tokyo. The new location in Fuji will afford a larger scale and wider range of facilities, and enable synergies through interaction with the other Asahi Kasei Group researchers at the same site. The site of the new R&D center will also feature a 10,000 m2 zone for ecology and the environment, where a diverse natural ecosystem will be nurtured. Hebel Haus Luft™ Hebel Haus Greenplus™ Featuring rich greenery in a confined urban setting, the Hebel Haus Greenplus™ went on sale in September 2006. Several innovations were applied to maximize the integration of trees and plants within the limited space of an urban land parcel. These include a system to support plants in front of a wall face, and a new range of durable steel planters, in addition to the rooftop gardening system previously available. Together with the optimal utilization of natural wind and sunlight, these raise the level of relaxing greenery and environmentally friendly living which can be obtained in a small urban plot. Asahi Kasei Homes will continue to develop new urban home products like this one which provide enhanced comfort and ecology. Housing R&D center in Fuji Hebel Haus Greenplus™ Rooftop gardening system Annual Report 2007 21 Operating Segment Pharma The pharmaceutical business is advancing as a specialized, R&D-centered operation, with the field of orthopedics the central focus of management resources. The medical device business is directed toward for global leadership in systems for therapeutic blood filtration. Kei Oe President, Asahi Kasei Pharma Major Products Elcitonin™, Bredinin™, Flivas™, Toledomin™, and other pharmaceuticals, pharmaceutical intermediates, functional food additives, diagnostic reagents, APS™ artificial kidneys, Sepacell™ leukocyte reduction filters, Cellsorba™ leukocyte adsorption columns, Planova™ virus removal filters, contact lenses. Growth Action – 2010 Pharmaceuticals business: Advancement as a specialized, R&D-centered operation, with management resources focused on selected therapeutic fields. Expansion of operations through structural reform and slim, robust management, building on an established presence in selected therapeutic fields in the Japanese market. In pharmaceutical intermediates and diagnostic reagents, structural reform is advancing to enable global growth and expansion in selected fields of competitive superiority. Asahi Kasei Medical: Directed toward global leadership in therapeutic blood filtration systems. Global growth and expansion as a high-earnings enterprise based on consolidation in the field of hemodialysis, eliciting new demand for plasmapheresis and leukocytapheresis products, expanding demand for Sepacell™ leukocyte reduction filters, and expanding demand for Planova™ virus removal filters. 22 Net Sales ¥ billion 120 100 80 60 40 20 0 105.8 104.5 109.0 2005 2006 2007 Forecast Fiscal year Operating Profit, Operating Profit Margin Operating profit, left scale Operating profit margin, right scale ¥ billion 15 13.9 12 11.1 11.5 % 20 16 9 6 3 0 13.3 12 10.6 10.4 2005 2006 2007 Forecast Fiscal year 8 4 0 Pharmaceutical Product Pipeline Development stage Product Objective Class Indication Pending approval ART-123 (injection) New biologic Recombinant human thrombomodulin Disseminated intravascular coagulation AK-120 (oral) New chemical entity Antiviral Herpes zoster Phase III AT-877 (injection) Additional indication Rho-kinase inhibitor Acute cerebral thrombosis Phase II AT-877 (oral) Additional indication Rho-kinase inhibitor Angina pectoris PTH (injection) Additional indication Synthetic human parathyroid hormone Osteoporosis KT-611 (oral) Additional indication α-1 blocker Neurogenic bladder Phase II (overseas) ART-123 (injection) New biologic Recombinant human thrombomodulin Disseminated intravascular coagulation The Year in Review Sales for the segment decreased by ¥1.4 billion to ¥104.5 billion, a 1.3% decline. Operating profit grew by ¥2.8 billion to ¥13.9 billion, a 25.5% increase. Sales in pharmaceutical operations decreased with reimbursement price cuts and decreased shipments of pharmaceutical intermediates. Operating profit grew with licensing income for fasudil hydrochloride rho-kinase inhibitor. Sales and operating profit in devices grew with increased shipments of APS™ polysulfone-membrane artificial kidneys and Planova™ virus removal filters, and with measures to reduce operating costs. Notable Developments Expansion of the Nagoya Pharmaceuticals Plant, the main site for production of pharmaceuticals, was completed in February 2007. Asahi Kasei Medical and Kuraray Medical reached basic agreement for the integration of their dialyzer businesses in October 2007. Market Environment Outlook for fiscal 2007 Pharmaceuticals operations will remain challenging, with a low birthrate and aging population prompting curtailments in national healthcare expenditures, with intensified competition, and with increased R&D expenditure. Sales growth will be obtained through measures to reinforce our main products, including the launch of Flivas™ 75 mg orally disintegrating tablets. In medical devices, a new plant in Nobeoka for dry-pack APS™ polysulfone-membrane dialyzers is under construction with integrated spinning and assembly lines as part of a plan to expand production capacity to 30 million modules/year by fiscal 2010. R&D In pharmaceuticals, the focus is on new drug development in the fields of orthopedics, the central nervous system, and urology, and on extension of market life through enhanced product conformation. In medical devices, developments are advancing in fields related to hemodialysis, apheresis, leukocyte removal, and virus removal. Next-generation fields of research include autohemotherapy and cell therapy. Highlights New drug development In August 2006 Asahi Kasei Pharma (AKP) applied for Japanese regulatory approval for a new anticoagulant, ART- 123, and licensed overseas rights to Artisan Pharma Inc. Discovered by AKP, ART-123 features a novel mechanism of anticoagulation. Artisan Pharma, newly established with venture-capital financing, obtains rights for development and sale of the compound in several overseas markets. With this development, business related to ART-123 will expand to many countries outside Japan. Integration of dialyzer businesses Asahi Kasei Medical (AM) and Kuraray Medical (KM) have agreed to integrate their dialyzer businesses. AM produces APS™ dialyzers based on polysulfone hollow-fiber membrane technology, the global standard for high-performance, and dialyzers based on cellulose hollow-fiber membrane technology, while KM produces dialyzers based on ethylene- vinyl alcohol copolymer (EVOH) hollow-fiber membrane technology which enables mild and gentle hemodialysis. The integrated operation, scheduled to start in October 2007 as Asahi Kasei Kuraray Medical, will enjoy an enhanced position as Japan’s leading dialyzer producer with growing business worldwide. APS™ polysulfone-membrane hemodialyzer Annual Report 2007 23 Operating Segment Fibers The focus is on achieving growth by advancing a transformation from a business structure centered on products for the Japanese market for apparel through expansion of overseas business and development of business in non- apparel, industrial-use materials. Masaki Sakamoto President, Asahi Kasei Fibers Major Products Roica™ elastic polyurethane filament, Eltas™ spunbond, Lamous™ artificial suede, and other nonwovens, Bemberg™ cupro cellulosic fiber, polyester filament. Growth Action – 2010 Achieving continuous growth by advancing a transformation from a business structure centered on products for the Japanese market for apparel through expansion of overseas business and development of business in non-apparel, industrial-use materials. R&D is focused on driving the growth of business in industrial-use materials to develop as a new core field of operation. For greater earnings in established businesses: • Development and expansion in global markets and industrial materials. • Full utilization of available resources to expand earnings. Proactive investment for expansion. • Establishment of new pricing structure through a shift of resources to high-earnings application fields and geographic regions. • Continuous cost reduction. For expansion of new businesses: • Expansion of Solotex™ polytrimethylene terephthalate (PTT) fiber business in new application fields. Commercialization of Cyberlon™ polyketone fiber business. • Development of new businesses peripheral to established cellulosic fibers and nonwovens businesses. Rapid scale-up to form new core business. • Extension of business domain based on established technology and know-how, in growth fields not limited to fiber production. • Advancement of alliances and joint projects with partners within and outside the Asahi Kasei Group. 24 Net Sales ¥ billion 120 100 89.7 115.0 106.6 80 60 40 20 0 2005 2006 2007 Forecast Fiscal year Operating Profit, Operating Profit Margin Operating profit, left scale Operating profit margin, right scale ¥ billion 6 5 4 3 2 1 0 % 12 10 8 6 4 2 0 5.5 4.0 4.2 4.5 3.9 4.8 2005 2006 2007 Forecast Fiscal year The Year in Review Sales for the segment grew by ¥16.9 billion to ¥106.6 billion, an 18.9% increase. Operating profit grew by ¥0.1 billion to ¥4.2 billion, a 3.4% increase. Sales of elastic polyurethane filament grew with increased shipments of Roica™, improved market conditions, and the inclusion of the Dorlastan™ business acquired from Lanxess, but operating profit decreased as the Dorlastan™ business operated at a loss. Roica™ production equipment is being installed at the Dorlastan™ plants in the US and Europe, and the business is forecast to become profitable in fiscal 2007. Sales and operating profit in Bemberg™ cupro grew with increased exports. Nonwovens operations were impacted by the effect of elevated feedstock costs, but sales and operating profit grew with increased shipments of Lamous™ artificial suede in car seat applications. Notable Developments Roica™ SF went on sale in February 2007 as the eighth in the series of Roica™ performance yarns. A large-scale plant for Precisé™ is under construction in Moriyama with start- up scheduled for autumn 2007. Market Environment Outlook for Fiscal 2007 Continuing full production and rising product prices are forecast with increased demand for Roica™, though the operating environment will remain challenging with high feedstock costs. Processing costs for Bemberg™ will increase and demand in Japan will be weak, but increased sales volume is forecast in non-lining applications and in overseas markets. Shipments of Lamous™ will increase, mainly for car seats in the US and Europe, and development will be advanced for nonwovens. R&D The ratio of R&D expenditure on new materials to that on existing materials is 2:3 and increasing as greater emphasis is focused on development of new materials. R&D on existing materials is directed toward the development of new high value-added grades of Roica™ spandex, Bemberg™ cupro, and nonwovens which meet market needs for advanced performance. R&D on new materials is directed toward the development of unique products which will elicit new demand. A pilot plant for polyketone filament started up at the beginning of 2006, with samples supplied to users for evaluation. Highlights New nonwoven Precisé™ A new polyester nonwoven with a highly uniform structure of layers of filament with different denier, Precisé™ went on sale in August 2006. Precisé™ features a previously unavailable combination of heat resistance, strength, and rigidity, providing outstanding performance and functionality in a wide range of applications including filtration and separation, food packaging, and medical tape. A large-scale plant for Precisé™ is under construction in Moriyama, with production capacity expansions to be made as demand increases. Market launch of Roica™ SF The latest high-function Roica™ spandex yarn, Roica™ SF, went on sale in February 2007. Roica™ SF, the eighth in this series, features high inter-yarn adhesion for resistance to runs and fraying, while maintaining elasticity and heat resistance. The result is a previously unavailable level of quality and durability in stockings and other garments. Spandex yarns, characterized by excellent stretch and recovery, are often used in sportswear and stockings. The Roica™ product lineup includes many specialty grades with additional performance features that set them apart from ordinary spandex. These high-performance Roica™ grades have been adopted for a wide range of uses around the world. Asahi Kasei Fibers will continue to develop specialty Roica™ grades with new features and functions that meet demanding market needs. Stocking made with ordinary spandex (left) and Roica™ SF (right) after stocking run test Annual Report 2007 25 Operating Segment Electronics Materials & Devices Growth of a high-earnings operational structure is obtained through leadership in the development of products for emerging applications in each market segment for electronic materials and electronic devices. Makoto Konosu President, Asahi Kasei EMD Major Products Pimel™ photosensitive polyimide precursor (PSPI), Sunfort™ photosensitive dry film resist (DFR), photomask pellicles, Luminous™ plastic optical fiber, LSIs, Hall elements, glass fabric. Growth Action – 2010 In electronic devices: • Established LSI and sensor businesses are being expanded. • New high-performance hybrid devices combining sensors and LSIs are being developed. • Marketing is being expanded world-wide. In electronic materials: • Industry-leading positions are being reinforced for Sunfort™ DFR, Pimel™ PSPI, and photomask pellicles for LCD panel production. • Other core businesses including glass fabric are also being expanded. • Development of new applications is being advanced, including materials for flat- panel displays using established core technology in photosensitive materials and materials for semiconductor packaging. 26 Net Sales ¥ billion 150 120 112.1 102.9 123.0 90 60 30 0 2005 2006 2007 Forecast Fiscal year Operating Profit, Operating Profit Margin Operating profit, left scale Operating profit margin, right scale ¥ billion 25 20 15 10 5 0 22.6 20.2 19.3 18.8 23.5 % 25 20 19.1 15 10 5 0 2005 2006 2007 Forecast Fiscal year The Year in Review Sales for the segment grew by ¥9.2 billion to ¥112.1 billion, a 9.0% increase. Operating profit grew by ¥3.3 billion to ¥22.6 billion, a 17.0% increase. Sales and operating profit in electronic devices grew as shipments of LSIs and magnetic sensors increased with strong demand in cell phone and home electronics applications. Sales and operating profit in electronic materials grew as shipments of Sunfort™ photosensitive dry film resist increased following a large expansion of production capacity and shipments of ultra-thin grades of glass fabric for printed circuit boards increased. Notable Developments Research, development, marketing, and sales functions of Asahi Kasei Microsystems, Asahi Kasei Electronics, and Asahi-Schwebel were transferred to Asahi Kasei EMD in April 2007. Fully integrated operation will bring greater speed and sharper market focus throughout the electronics materials and electronics devices business. Market Environment Outlook for Fiscal 2007 The overall operating environment is forecast to be firm, with an end to the inventory adjustments for PCs and flat- panel displays which began in late 2006. Foreseeable risk factors include a slowdown in the US economy, a rapid appreciation of the Chinese yuan, declining product prices, and rising materials costs. Development of differentiated products for high-growth applications will advance, and an ongoing review of the operational structure will be performed from a mid-term strategic perspective. R&D R&D is directed toward meeting needs and providing solutions to problems identified through interaction with the customer. Developments in electronics devices include combinations of sensor technology with digital/analog mixed-signal LSI technology for hybrid devices with unique functions. Developments in electronics materials include high-performance structural materials for LCD panels and next-generation package substrate materials compatible with emerging standards for high transmission speeds, performance, and reliability. Highlights Expansion of capacity at DFR plant in China Production capacity for Sunfort™ photosensitive dry film resist (DFR) at Asahi Kasei Electronics Materials (Suzhou) Co., Ltd. was expanded in July 2006 to meet strong demand growth. The subsidiary in Suzhou now has the largest DFR plant in China. DFR is used to form circuit patterns on printed wiring boards for PCs, cell phones, and automotive electronics. Sunfort™ DFR holds the top share in Japan and a leading position in the global market, and further expansions of production capacity will enable growing market share even as demand increases. Sunfort™ photosensitive dry film resist Start-up of compound semiconductor wafer processing plant A new compound semiconductor wafer processing plant in Fuji began commercial operation in December 2006. Hall ICs manufactured at the plant feature greatly improved temperature dependency and sensing precision. Sales of products with these performance features are growing in consumer electronics applications which require precise position detection, and in automotive applications which require reliable tolerance to extreme temperature conditions. The new compound semiconductor wafer processing plant in Fuji Annual Report 2007 27 Operating Segment Construction Materials With a reinforced commitment to customer focus, safety, security, and comfort, operational reform is advancing for heightened competitiveness of established businesses, expansion and development of new business, and establishment of new business models. Hiroshi Kobayashi President, Asahi Kasei Construction Materials Major Products Hebel™ autoclaved lightweight concrete (ALC) panels, steel-frame structural components, piles and foundation systems, Neoma™ foam insulation panels, artificial fish reefs and other marine structures. Growth Action – 2010 Further reinforcing the enhanced operational structure with growth through the expansion and development of new businesses and the establishment of new business models. Enhancing competitiveness of established businesses: • Ongoing operating cost reductions and enhanced product quality and service to ensure stable profitability of the Hebel™ ALC business. • Expansion and reinforcement of Hebel Lite™, Hebel Powerboard™, and small- scale piles businesses. Expansion and development of new businesses: • Wide-ranging study of new business opportunities, both domestic and overseas. • Swift commercialization of projects under development. • Collaboration with Asahi Kasei Homes. Establishment of new business models: • Expansion of installation business for piles and foundation systems and for ALC panels and other exterior wall products. • Identification of new research projects based on customer needs. • Intensified marketing of housing materials and insulation materials through direct contact with builders and constructors. 28 Net Sales ¥ billion 70 60.8 63.0 56.5 60 50 40 30 20 10 0 2005 2006 2007 Forecast Fiscal year Operating Profit, Operating Profit Margin Operating profit, left scale Operating profit margin, right scale ¥ billion 6 5 4 3 2 1 0 % 12 10 8 6 4 2 0 5.5 8.7 5.0 8.3 3.8 6.8 2005 2006 2007 Forecast Fiscal year The Year in Review Sales for the segment grew by ¥4.3 billion to ¥60.8 billion, a 7.6% increase. Operating profit grew by ¥1.2 billion to ¥5.0 billion, a 32.0% increase. Building materials and housing materials operations were affected by high feedstock and fuel costs for production of Hebel™ autoclaved lightweight concrete (ALC) panels, but sales and operating profit grew with measures to reduce operating costs and with higher sales prices. Sales and operating profit in foundation systems grew with an expansion of new applications for Eazet™ and ATT Column™ piles for small-scale construction. Sales and operating profit in insulation materials grew with a successful expansion of the user base for Neoma™ high-performance phenolic foam panels resulting in increased shipments. Notable Developments A television advertising campaign for Neoma™ foam insulation panels began in October 2006. Market Environment Outlook for Fiscal 2007 The Japanese economy is forecast to remain firm, with the number of new private-sector construction projects and the number of housing starts being about the same as in fiscal 2006. Given this operating environment, shipment volumes will increase and profitability will be maintained through continuing cost reductions and product price rises to overcome elevated feedstock and fuel prices. R&D The phenolic foam thermal insulation business will be expanded through developments to enhance production efficiency and enable composite product variations. High performance materials for housing, ecoefficient building foundation systems, and ALC panels with additional functions are under development. Highlights DynaWing™ piling system Full-scale marketing began in May 2006 for the DynaWing™ pre-cast concrete piling system featuring minimal soil disposal and high load-bearing capacity. The new system combines an advanced boring technique and pile design to greatly reduce the amount of soil disposal required for a high-load piling installation. Foundation systems of Asahi Kasei Construction Materials include a wide range of innovative products featuring high- performance, ease of installation, and ecoefficiency, from large pre-cast concrete piles to specialty piles for small-scale construction such as Eazet™ and ATT Column™. The addition of DynaWing™ enhances the pre-cast concrete pile lineup as a core field of business. DynaWing™ installation FreeDonut™ I-beam reinforcement system Nation-wide marketing began in September 2006 for the FreeDonut™ system for reinforcement of openings to pass plumbing and wiring through steel I-beams. To make the most efficient use of space, such openings are often employed in the horizontal frame members of steel-frame buildings. The FreeDonut™ system greatly reduces the cost and labor required to reinforce beams where these openings are made, resulting in faster, more efficient construction. Asahi Kasei Construction Materials has developed a range of innovative structural systems and components, including the BasePack™ earthquake-resistant column base attachment system, the Fabluxe™-G steel frame connection node, and the E-coupler™ steel column coupling system. The addition of the FreeDonut™ system enhances the product lineup in this growing field of business. Plug weld Sleeve Ring FreeDonut™ installation schematic Annual Report 2007 29 Operating Segment Life & Living Major Products Saran Wrap™ cling film, Ziploc™ storage bags, film, sheet, foam. Net Sales ¥ billion 60 50 40 30 20 10 0 51.9 52.6 ¥ 2005 2006 Fiscal year Operating Profit, Operating Profit Margin Operating profit, left scale Operating profit margin, right scale % 15 12 9 6 3 0 ¥ billion 5 4.8 4.6 4 3 2 1 0 30 9.3 8.7 2005 2006 Fiscal year The Year in Review Sales for the segment grew by ¥0.6 billion to ¥52.6 billion, a 1.2% increase. Operating profit decreased by ¥0.2 billion to ¥4.6 billion, a 5.0% increase. Sales of home-use products grew with increased shipments of Saran Wrap™ cling film and Saran™ fiber, but operating profit decreased with higher feedstock and packaging costs and increased advertising expenses. Sales of packaging materials were on par with a year ago, but operating profit decreased as a result of the impact of elevated feedstock costs. Highlights Integration with Asahi Kasei Chemicals The operations of Asahi Kasei Life & Living were integrated with Asahi Kasei Chemicals on April 1, 2007. The business in home-use products such as Saran Wrap™ cling film was transferred to Asahi Kasei Home Products Corp., which will expand operations as a subsidiary of Asahi Kasei Chemicals. Integration of polymer processing technologies and marketing functions will bring synergy in the development of high performance, high value-added films and sheets for new applications. Limited-edition Saran Wrap™ packaging Saran Wrap™ with limited-edition packaging featuring summer festival scenes went on sale in the Tohoku and Shikoku regions in July 2006. This was followed in December 2006 with limited-edition packaging in the same regions featuring winter landscapes and natural scenery. In Hokkaido, Saran Wrap™ with limited-edition packaging featuring the Fighters professional baseball team went on sale in April 2007. Further such limited-edition packaging for Saran Wrap™ will be developed to promote sales in specific regions around Japan. Limited-edition Saran Wrap™ Operating Segment Services, Engineering and Others Major Products Plant engineering, environmental engineering, personnel staffing and placement, think tank services. Net Sales ¥ billion 35 31.0 28.9 26.8 30 25 20 15 10 5 0 2005 2006 2007 Forecast Fiscal year Operating Profit, Operating Profit Margin Operating profit, left scale Operating profit margin, right scale ¥ billion 5 4 3 2 1 0 % 20 16 3.9 4.0 3.3 12.2 13.5 12.9 12 8 4 0 2005 2006 2007 Forecast Fiscal year The Year in Review Sales for the segment grew by ¥2.1 billion to ¥28.9 billion, a 7.7% increase. Operating profit grew by ¥0.6 billion to ¥3.9 billion, a 17.4% increase. Sales and operating profit in engineering operations grew with strong business in overseas plant engineering. Sales in personnel staffing and placement operations increased with growing demand, and operating profit was on par with a year ago. Market Environment Outlook for Fiscal 2007 Although private-sector capital investment will remain firm, discretion will be required in bidding for new orders for engineering projects due to the sharp rise in the price of steel, especially stainless steel, and the growing selectivity of subcontractors. In the personnel staffing and placement business, profitability is forecast to decline with difficulty in securing staff. Growth is forecast for business within the Asahi Kasei Group such as contract staffing of production personnel and implementation of education and training programs. R&D Engineering developments in progress include a system to test for minute metallic impurities in an electronic material production process, a joint project for next-generation automotive safety features, technology to inspect for internal pipe corrosion, and technology for diagnosis of sliding bearings. Annual Report 2007 31 Corporate Governance The Asahi Kasei Group constantly endeavors to heighten fast-moving and transparent management as essential for maximum corporate value and greater earnings. The effort for enriched and enhanced corporate governance is ongoing, building on the October 2003 transformation to a holding company configuration with separate execution and oversight functions which established a management framework with clear delineation of executive authority and responsibility. Corporate Governance System Shareholders Holding Company Asahi Kasei Board of Corporate Auditors Board of Directors Group Advisory Committee Chairman of the Board President Strategic Management Council CSR Council Group staff functions • Strategic planning & analysis • Compliance & risk management • Resources administration Development of new businesses Internal Auditing Internal Control Project Group Executives Council Core Operating Companies, business fields Asahi Kasei Chemicals Asahi Kasei Homes Asahi Kasei Pharma Chemicals Housing Pharmaceuticals, medical products Asahi Kasei Fibers Fiber, textiles Asahi Kasei EMD Electronics materials and devices Asahi Kasei Construction Materials Construction materials (As of April 1, 2007) Board of Directors Oversees group management, and deliberates and decides on basic group policy and strategy, and on substantive proposals by the Strategic Management Council. The Chairman of the holding company chairs meetings of the Board of Directors. Meets once or twice per month. Strategic Management Council Deliberates and decides on substantive matters relating to the operation of the holding company and of the group. Its decisions are made by the President of the holding company, who chairs meetings of the council, after deliberation by the attending constituent members. Meets twice per month. 32 Group Advisory Committee The advisory body to the holding company Board of Directors, composed of the Chairman and the President of the holding company and outside advisors. Meets twice per year. Group Executives Council Conducts the dissemination of substantive group information and the exchange of group information, and deliberates on matters requiring coordination among the core operating companies. Meets once per month. Board of Corporate Auditors Comprises four Corporate Auditors, of which two are Outside Corporate Auditors. Corporate Auditors exchange views, deliberate, and decide on substantive matters relating to auditing. Meets at least once per quarter. Executive Officer System An executive officer system of management is employed at the holding company and at each core operating company. Authority and responsibility for the management of each core operating company is held by the President and the other Executive Officers of that company. Authority and responsibility for the management of the holding company and of the group is held by the President and the other Executive Officers of the holding company. The President of the holding company oversees the executive management and performance of the core Election of Outside Directors operating companies and of their Presidents. The holding company Board of Directors oversees the executive management and performance of the holding company President and of the group. For both the holding company and the core operating companies, the number of Directors and Executive Officers is as small as possible. In all cases, the term of office is one year, and management results and performance are reviewed each fiscal year. Two Outside Directors, Yuzo Seto, former President and Representative Director of Asahi Breweries, Ltd., and Yukiharu Kodama, former Administrative Vice Minister of the Ministry of International Trade and Industry, were elected at the 116th Ordinary General Meeting of Shareholders held in June 2007. Internal Control System Recognizing the importance of an optimum system of internal control to ensure high management quality, reliable financial reporting, and effective risk management and legal compliance, we formed an Internal Control Project in October 2005 to prepare an internal control system for implementation throughout the Asahi Kasei Group. Application of the system on a trial basis began in April 2006. Our Board of Directors adopted a basic policy for internal control in May 2006 in accordance with Article 362 of the Corporation Law, which requires a Board resolution related to the preparation of an internal control system, and Article 100 of the Ordinance for Implementation of the Corporation Law, which specifies certain elements required of such a system. The basic policy was revised in March 2007. Audits The Financial Instruments and Exchange Law enacted in June 2006 will require the management of companies with market-listed shares to assess the effectiveness of internal controls for financial reporting, and to have these assessments audited by independent CPAs or auditing firms. Taking effect from the fiscal year starting on or after April 1, 2008, these requirements will be applied in accordance with standards issued by the Business Accounting Council of the Financial Services Agency on February 15, 2007. The Asahi Kasei Group’s comprehensive system of internal control, including internal controls for financial reporting, will be fully completed in fiscal 2007, with operational implementation beginning in April 2008. Internal Auditing is a corporate organ under the direct authority of the President of the holding company. Each year, Internal Auditing prepares plans for an internal audit in accordance with basic corporate regulations for internal audits, obtains the President’s approval for these plans, and then performs the internal audit. In accordance with the audit policy adopted by the Board of Corporate Auditors, each Corporate Auditor attends meetings of the Board of Directors and audits Directors in the discharge of their duties through examination of business performance. The Corporate Auditors Office provides staff to support Corporate Auditors in their duties. PricewaterhouseCoopers Aarata is contracted as the Independent Auditors to perform financial audits in accordance with the Commercial Code and Securities Law, succeeding the previously contracted firm, ChuoAoyama PricewaterhouseCoopers, now Misuzu Audit Corp., which was sanctioned by the Financial Services Agency with a two- month suspension of auditing services from July 1, 2006 to August 31, 2006 and thus lost standing to serve as the company’s Independent Auditors on July 1, 2006. The Board of Corporate Auditors met in July 2006 and Annual Report 2007 33 appointed PricewaterhouseCoopers Aarata as Interim Independent Auditors. Partners of the Independent Auditors designated to perform the audit for fiscal 2006 were as follows. • Katsunori Sasayama • Takahiro Nakazawa The Independent Auditors form a team of assistants for performance of the audit in accordance with its audit plan. The team mainly comprises certified public accountants and junior accountants, and also includes certified information systems accountants and other specialist accountants. Internal Auditing, the Board of Corporate Auditors, and the Corporate Auditors of core operating companies and other subsidiaries regularly meet to confirm the effectiveness of internal governance systems for legal compliance and risk management. The Board of Corporate Auditors provides counsel to the Independent Auditors with respect to its audit plan, and receives the results of the consolidated financial audit of Asahi Kasei for the fiscal half-year and fiscal year. Compliance Hotline The Asahi Kasei Group began operating a Compliance Hotline in April 2005 to ensure that personnel have secure and trusted recourse to report any possible ethical lapses which may be encountered or observed. Reports can be made through the corporate intranet or by post, in the name of the reporting party or anonymously. Structures are in place to ensure that the reporting party incurs no disfavor or disadvantage as a result of having made a report. Compliance Corporate Ethics Our Corporate Ethics – Basic Policy and Code of Conduct is the standard and guide for ethical conduct throughout the day-to-day work of each and every member of the Asahi Kasei Group. It has been translated into English and Chinese, and applies to all majority-held subsidiaries the world over. Corporate Ethics – Basic Policy • Creating value, contributing to society • Caring for environment, health, and safety • Honoring law and norms of society • Excluding subversive elements • Respecting the individual • Ensuring transparency • Respecting information and intellectual property • Practicing corporate ethics 34 Risk Management Risk Management Committee The Risk Management Committee was established under the CSR Council in April 2005 to enhance the risk management system for prevention of operational crises and minimization of the effects of crises which occur. The Board of Directors in March 2007 enacted Basic Risk Management Regulations, effective April 1, 2007, providing clear guidelines to heighten the capability and effectiveness for risk management and emergency response throughout the Asahi Kasei Group. Corporate Risk Management Corporate Risk Management works with the various divisions and departments to guide the proper response to any major accidents, incidents, or problems which cause significant damage to Asahi Kasei Group operations or which may foreseeably cause Asahi Kasei Group operations to have adverse effects on the general public. In fiscal 2006, Corporate Risk Management provided guidance to personnel traveling abroad on business or stationed abroad, and coordinated the response to the damage caused by a tornado. Role of Corporate Risk Management Corporate Risk Management Information disclosure through Corporate Communications Direction and guidance Stakeholders Employees Emerging crisis Fact checking, coordination Typhoon, earthquake, or other natural disaster; industrial accident causing pollution or injury; terrorism; infectious disease; product safety incident, etc. Response Responsible division or department Annual Report 2007 35 Corporate Social Responsibility CSR at the Asahi Kasei Group CSR in Action We believe that CSR is achieved through the sustainable expansion of operations effecting increased corporate value, enabling fulfillment of the needs and expectations of our various stakeholders, in accordance with our basic tenets of contribution to human life and human livelihood through constant innovation and advances based in science and the human intellect. CSR Fundamentals Based in an understanding of the effects of our operations on the global environment and the global community, efforts and actions related to CSR are based in our four CSR Fundamentals: Compliance, Respect for Employee Individuality, Responsible Care*, and Corporate Citizenship. Asahi Kasei Group CSR The employee Employee fulfillment The community Community outreach The environment Environmental protection The customer Customer satisfaction Sustainable increase in corporate value The shareholder Shareholder returns The supplier Fair business dealings The local economy Local economic participation Business operations CSR Fundamentals Compliance Respect for Employee Individuality Responsible Care Corporate Citizenship * Responsible Care represents the commitment and initiative to secure and improve safety and environmental protection at every step of the product life-cycle through the individual determination and responsibility of each firm producing and handling chemical products. As of October 2006, fifty-two countries throughout the world have a Responsible Care program. 36 Framework for advancement The CSR Council, formed in April 2005 with the holding company President serving as chair, formulates CSR policy and guides the CSR effort throughout the Asahi Kasei Group. Specific CSR initiatives are implemented by the committees under the authority of the CSR Council, including the Corporate Ethics Committee to ensure regulatory compliance and the Responsible Care Committee President CSR Council • Formulation of unified policy and action plans • Guidance and counsel for the subordinate committees • Preparation of reports • Monitoring of independent evaluation • Disclosure of CSR information to guide efforts for environment, health, and safety. The Risk Management Committee formulates the response to contingencies such as a major earthquake. The Community Fellowship Committee promotes and coordinates the effort for outreach and fellowship in each local community where we operate. Corporate Ethics Committee Advancement of ethics education and operation of compliance hotline Market Compliance Committee Compliance with Antimonopoly Law and prevention of violation Export Control Committee Compliance with export-related regulations and prevention of violation Responsible Care Committee Environmental preservation, product safety, physical integrity and safe operation, workplace safety, hygiene, and health, and community outreach Risk Management Committee Crisis prevention and damage minimization Community Fellowship Committee Advancement of community fellowship activities Award for Prevention of Global Warming Asahi Kasei Chemicals and Asahi Kasei Engineering received the Environment Minister’s Award for Prevention of Global Warming in December 2006. The award cited the development of technology for thermal decomposition of the greenhouse gas N2O, a by-product of adipic acid production, into nitrogen and oxygen, and reduction of N2O emission by approximately 6 million tons CO2- equivalent. The Asahi Kasei Group has also joined the Environment Ministry’s “Team Minus 6%” campaign for global warming prevention, and reduced domestic greenhouse gas emission in fiscal 2006 by 51% from the fiscal 1990 baseline set forth in the Kyoto Protocol. Equipment for thermal decomposition of N2O Annual Report 2007 37 Directors, Corporate Auditors, Excecutive Officers (As of June 28, 2007) Yuji Tsuchiya Corporate Auditor Kenji Nakamae Corporate Auditor Katsuo Wajiki Outside Corporate Auditor Kazuo Tezuka Outside Corporate Auditor Masanori Mizunaga Lead Executive Officer Tsutomu Inada Executive Officer Hajime Nagahara Executive Officer Yoshio Hayashi Executive Officer Nobuo Yamaguchi Chairman of the Board & Representative Director Shiro Hiruta President & Representative Director, Presidential Executive Officer Ichiro Itoh Director, Vice-Presidential Executive Officer Strategy; Accounting & Finance Kunio Kohga Director, Primary Executive Officer ESH; Production Technology; PL Katsuhiko Sato Director, Senior Executive Officer Procurement Kiyoshi Tsujita Director, Senior Executive Officer Human Resources; Compliance Kageyasu Akashi Director, Executive Officer R&D Koji Fujiwara Director, Executive Officer Strategy; Accounting & Finance Yuji Mizuno Director, Executive Officer Legal & General Affairs; Compliance Yuzo Seto Outside Director Yukiharu Kodama Outside Director 38 Financial Section Contents Consolidated Eleven-Year Summary .............................................................................................. 40 Management’s Discussion and Analysis ......................................................................................... 42 Risk Analysis .................................................................................................................................... 49 Consolidated Balance Sheets ......................................................................................................... 50 Consolidated Statements of Income .............................................................................................. 52 Consolidated Statements of Shareholders’ Equity ........................................................................ 53 Consolidated Statements of Changes in Net Assets ..................................................................... 53 Consolidated Statements of Cash Flows ........................................................................................ 54 Notes to Consolidated Financial Statements ................................................................................. 55 Report of Independent Auditors ................................................................................................... 69 Annual Report 2007 39 Consolidated Eleven-Year Summary Asahi Kasei Corporation and Consolidated Subsidiaries For the year ended March 31 Net Sales Chemicals Chemical and Chemical-related Chemicals and Plastics Homes Housing and Construction Materials Pharmaa Fibersa Electronics Materials & Devicesa Construction Materials Life & Living Special Products and Services Electronics Membranes and Systems Biotechnology and Medical Products Speciality Products Foods and Liquors Engineering and Othersa Services, Engineering and Othersa Domestic sales Overseas sales Operating profit Ordinary profit Income (loss) before income taxes Net income (loss) Net income (loss) per share, yen Capital expenditure Depreciation and amortization R&D expenditures Cash dividends per share, yen As of March 31 Total assets Inventories Property, plant and equipment Investments and other assets Net worthb Net worth per share, yen Net worth/total assets, % Number of employees 2007 2006 2005c 2004 2003d ¥1,623,791 752,632 – – 405,695 – 104,474 106,639 112,094 60,818 52,558 – – – – – – – 28,881 1,195,751 428,040 127,801 126,507 114,883 68,575 49.00 84,413 71,646 52,426 12.00 ¥1,498,620 660,402 – – 404,539 – 105,842 89,704 102,859 56,512 51,942 – – – – – – – 26,821 1,125,454 373,166 108,726 104,166 94,481 59,668 42.46 66,310 69,399 51,467 10.00 ¥1,377,697 570,182 – – 375,755 – 103,933 91,518 93,024 59,908 59,149 – – – – – – – 24,228 1,067,893 309,804 115,809 112,876 91,141 56,454 40.16 68,479 71,531 50,715 8.00 ¥1,253,534 453,707 – – 361,273 – 105,965 101,514 82,484 60,622 59,813 – – – – – – – 28,156 1,011,366 242,168 60,932 53,643 54,820 27,672 19.62 86,387 64,408 48,420 6.00 ¥1,193,614 424,673 – – 320,553 – 105,463 110,551 71,579 63,101 52,908 – – – – – – – 44,786 981,064 212,550 61,555 50,389 (100,869) (66,791) (47.63) 93,985 60,808 49,311 6.00 2007 2006 2005 2004 2003 ¥1,459,922 240,066 426,959 281,502 645,655 461.50 44.2 23,715 ¥1,376,044 214,062 414,368 284,390 594,211 424.34 43.2 23,030 ¥1,270,057 202,521 419,969 223,958 511,726 365.43 40.3 23,820 ¥1,249,206 181,609 428,302 226,825 450,451 321.41 36.1 25,011 ¥1,212,374 176,788 427,188 198,697 407,639 290.92 33.6 25,730 a. For continuity, figures for business categories which were renamed are shown on the same line. • Through the year ended March 31, 2003: Figures shown as Pharma are those for the previous Health Care sector, figures shown as Fibers are those for the previous Fibers and Textiles sector, figures shown as Electronics Materials & Devices are those for the previous Electronics sector, and figures shown as Services, Engineering and Others are those for the previous Liquors, Services and Others sector. • With the divestment of foods operations, the “foods and liquors” and “engineering and services” segments are combined as “engineering and others.” Through the year ended March 31, 1999, figures shown as “engineering and others” are those for the previous “engineering and services” segment. b. Net assets less minority interest in consolidated subsidiaries. Though the year ended March 31, 2006, figures for shareholders’ equity shown. c. For comparison purposes, results for the year ended March 31, 2005 are recalculated to reflect the April 2005 transfer of Leona™ nylon 66 filament operations from the Fibers segment to the Chemicals segment. d. For comparison purposes, results by business category for the year ended March 31, 2003 are recalculated in accordance with the revised categories for the year ended March 31, 2004, which are aligned with the core operating companies in the holding company configuration adopted in October 1, 2003. • The “fabricated home products” segment of the Chemical and Chemical-related sector is separated to an independent Life & Living segment. The remainder of the Chemical and Chemical-related sector is reclassified as the Chemicals segment. • The Housing and Construction Materials sector is separated into the Homes segment and the Construction Materials segment. 40 2003 2002 2001e 2001 2000 1999 1998f 1998 1997 Millions of yen, except where noted ¥1,193,614 – 477,581 – – 383,654 105,463 110,551 71,579 – – – – – – – – – 44,786 981,064 212,550 61,555 50,389 (100,869) (66,791) (47.63) 93,985 60,808 49,311 6.00 ¥1,195,393 – 440,698 – – 408,474 98,686 125,908 64,062 – – – – – – – – – 57,565 1,006,810 188,583 45,664 39,849 10,679 5,180 3.61 74,826 60,676 49,574 6.00 ¥1,269,415 – 449,470 – – 433,440 95,481 134,791 95,999 – – – – – – – – – 60,234 1,086,219 183,196 96,024 86,747 50,318 25,177 17.45 69,188 62,222 49,768 6.00 ¥1,269,415 – – 430,934 – 433,440 – 134,791 – – – 270,250 96,228 18,307 95,481 – – 60,234 – 1,086,219 183,196 96,024 86,747 50,318 25,177 17.45 69,188 62,222 49,768 6.00 ¥1,194,462 – – 379,677 – 412,954 – 139,181 – – – 262,650 80,653 17,967 93,460 – – 70,570 – 1,044,630 149,832 74,323 85,853 39,615 20,525 14.23 63,213 63,629 50,015 6.00 ¥1,171,845 – – 375,048 – 372,649 – 148,277 – – – 275,871 66,212 18,133 88,050 – 90,068 13,408 – 1,009,439 162,406 51,237 42,443 37,525 17,392 12.06 70,461 63,845 56,844 6.00 ¥1,281,675 – – 400,420 – 425,553 – 181,542 – – – 274,160 63,235 20,828 82,703 – 88,478 18,916 – 1,127,590 154,085 62,814 56,271 40,264 20,809 14.43 74,981 67,117 57,023 6.00 ¥1,281,675 – – 373,874 – 424,532 – 181,542 – – – 301,727 62,337 – 82,703 33,593 88,478 34,616 – 1,127,590 154,085 62,814 56,271 40,264 20,809 14.43 74,981 67,117 57,023 6.00 ¥1,291,599 – – 363,589 – 451,407 – 184,065 – – – 292,538 59,457 – 82,058 29,464 89,014 32,545 – 1,133,811 157,788 72,103 60,686 49,259 25,353 17.57 73,217 70,897 55,591 6.00 2003 2002 2001 2001 2000 1999 1998 1998 1997 ¥1,212,374 176,788 427,188 198,697 407,639 290.92 33.6 25,730 ¥1,193,011 180,826 415,193 181,618 496,826 353.16 41.6 26,227 ¥1,240,008 196,510 419,168 176,177 516,013 357.70 41.6 26,695 ¥1,240,008 196,510 419,168 176,177 516,013 357.70 41.6 26,695 ¥1,180,372 181,771 416,881 127,013 476,159 330.07 40.3 26,580 ¥1,185,249 193,691 435,005 132,251 464,339 321.88 39.2 29,263 ¥1,206,872 198,651 424,499 141,388 455,250 315.64 37.7 27,792 ¥1,206,872 198,651 424,499 141,388 455,250 315.64 37.7 27,792 ¥1,250,921 206,253 424,002 151,804 442,730 306.89 35.4 26,721 • The Health Care sector is renamed the Pharma segment. • The Fibers and Textiles sector is renamed the Fibers segment. • The Electronics sector is renamed the Electronics Materials & Devices segment. • With the divestment of liquors operations, the Liquors, Services and Others sector is renamed the Services, Engineering and Others segment. e. For comparison purposes, results by business category for the year ended March 31, 2001 are recalculated in accordance with the revised categories for the year ended March 31, 2002. • Operations of the “membranes and systems” segment combine with the Chemicals and Plastics sector to form the Chemical and Chemical-related sector. • The “electronics” segment is reclassified as the Electronics sector. • Operations of the “biotechnology and medical products” segment are reclassified as the Health Care sector. • The remaining operations comprise the Liquors, Services and Others sector, in place of the “engineering and others” segment. f. For comparison purposes, results by business category for the year ended March 31, 1998 are recalculated in accordance with the revised categories for the year ended March 31, 1999. • Photopolymer and explosives operations are transferred from the Special Products and Services sector to the Chemicals and Plastics sector. • Artificial fish reef operations are transferred from the Special Products and Services sector to the Housing and Construction Materials sector. • Within the Special Products and Services sector, functional membrane operations are transferred from the “speciality products” segment to the “membranes and systems” segment, and ion-exchange product operations are transferred from the “engineering and services” segment to the “membranes and systems” segment. Annual Report 2007 41 Management’s Discussion and Analysis Fiscal 2006 (April 1, 2006 – March 31, 2007) Overview of Fiscal 2006 Consolidated Results Operating Environment Although consumer spending remained moderate, the Japanese economy grew with strong corporate earnings, an improved employment outlook, and increased private-sector capital investment. The operating climate nevertheless remained challenging, with persistently elevated prices for petroleum and petrochemical feedstocks such as naphtha necessitating cost-cutting measures and sales price increases. Net Sales, Operating Profit Consolidated net sales grew by ¥125.2 billion from a year ago to ¥1,623.8 billion, an 8.4% increase. Sales growth was greatest in chemicals operations, with product prices rising to compensate for increased feedstock costs. Operating profit grew by ¥19.1 billion to ¥127.8 billion, a 17.5% increase. Operating profit growth was greatest in chemicals operations, with strong overseas market conditions, in pharmaceuticals operations, with significant licensing income, and in electronics operations, with strong demand in consumer electronics applications. As a percentage of net sales, cost of sales increased by 0.2 percentage points to 75.4%, largely due to increases in the cost of naphtha and other feedstocks. SG&A increased by ¥9.6 billion, but decreased as a percentage of net sales by 0.8 percentage points to 16.7% due to the higher rate of growth in net sales. Operating profit as a percentage of net sales increased by 0.6 percentage points to 7.9%. Non-operating Income and Expenses, Ordinary Profit Net non-operating expenses were ¥1.3 billion, ¥3.3 billion lower than the ¥4.6 billion of a year earlier. Loss on disposal of inventories was ¥4.4 billion, ¥1.7 billion higher than the ¥2.7 billion of a year earlier. Insurance recoveries were ¥4.6 billion, ¥3.3 billion higher than the ¥1.3 billion of a year earlier. Equity in net earnings of unconsolidated subsidiaries and affiliates was ¥2.6 billion, ¥2.1 billion higher than the ¥0.5 billion of a year earlier. As a result, ordinary profit grew by ¥22.3 billion to ¥126.5 billion, a 21.4% increase. Special Gains and Losses Special gains of ¥3.1 billion included gains on sale of investment securities. Special losses of ¥14.7 billion included a ¥9.1 billion loss on disposal of property, plant, and equipment and ¥4.8 billion in restructuring charges. The net special loss of ¥11.6 billion was ¥1.9 billion higher than a year earlier, when a ¥5.7 billion gain on sale of idle land was recorded. Net Income With ordinary profit of ¥126.5 billion and the net special loss of ¥11.6 billion, income before income taxes and minority interest was ¥114.9 billion. Currently payable income taxes of ¥42.2 billion and deferred income tax Operating Profit, Operating Profit Margin ¥ billion 150 120 90 60 30 0 SG&A, SG&A Ratio ¥ billion 300 240 180 120 60 0 % 10 8 6 4 2 0 % 20 16 12 8 4 0 Net Income, Net Income per Share ¥ billion 80 60 40 20 0 ¥ 60 45 30 15 0 04 05 Fiscal year 06 04 05 Fiscal year 06 04 05 Fiscal year 06 Operating profit, left scale Operation profit margin, right scale SG&A, left scale SG&A ratio, right scale 04 05 Fiscal year 06 Net income, left scale Net income per share, right scale Net Sales ¥ billion 2,000 1,500 1,000 500 0 42 obligation of ¥3.6 billion combined for an income tax expense of ¥45.8 billion. Minority interest in income of consolidated subsidiaries was ¥0.5 billion. As a result, net income grew by ¥8.9 billion to ¥68.6 billion, a 14.9% increase, and net income per share increased by ¥6.54 to ¥49.00 from the ¥42.46 of a year earlier. Results by Segment Operating Segments Seven operating segments correspond to the core operating companies, and the Services, Engineering and Others segment comprises the remainder of operations. Chemicals Sales for the segment grew by ¥92.2 billion to ¥752.6 billion, a 14.0% increase. Operating profit grew by ¥11.5 billion to ¥52.0 billion, a 28.3% increase. Sales and operating profit in volume products, comprising chemicals/derivative products and polymer products, increased. Product price increases and strong overseas demand helped to overcome higher feedstock costs. In chemicals and derivative products, operating profit increased with strong overseas demand for acrylonitrile and styrene, and with a sharp rise in the market price of adipic acid due to a tight market balance. In polymer products, profitability of Leona™ nylon 66 resin and filament increased. Sales and operating profit in specialty products grew with increased shipments of Hipore™ Li-ion rechargeable battery separators following plant expansion, export of membrane- process chlor-alkali electrolyzers to China, and increased shipments of ion-exchange membranes for chlor-alkali. Homes Sales for the segment grew by ¥1.2 billion to ¥405.7 billion, a 0.3% increase. Operating profit decreased by ¥0.7 billion to ¥27.5 billion, a 2.5% decline. Unit prices of order-built homes increased, but the number of deliveries of both order-built homes and condominiums declined, and sales and operating profit in housing operations decreased. Marketing efforts for order-built homes were focused on eliciting demand for rebuilding, but new orders worth ¥303.4 billion received during the period were ¥10.0 billion less than a year ago. Sales and operating profit in housing-related operations increased. Real estate operations had rising income from rentals. Remodeling operations also grew. In November 2006 construction began for a housing R&D center in Fuji to enhance product development in line with the Long Life Home strategy. Pharma Sales for the segment decreased by ¥1.4 billion to ¥104.5 billion, a 1.3% decline. Operating profit grew by ¥2.8 billion to ¥13.9 billion, a 25.5% increase. ROE % 15 10 5 0 Chemicals ¥ billion 800 600 400 200 0 ¥ billion % 80 8 60 6 40 4 20 2 0 Homes ¥ billion 500 400 300 200 100 0 ¥ billion % 30 10 24 8 18 6 12 4 6 2 0 Pharma ¥ billion 150 120 90 60 30 0 ¥ billion % 15 15 12 12 9 9 6 6 3 3 0 04 05 Fiscal year 06 04* 05 Fiscal year 06 04 05 Fiscal year 06 04 05 Fiscal year 06 Net sales, left scale Operating profit, right scale (upper) Operating profit margin, right scale (lower) Net sales, left scale Operating profit, right scale (upper) Operating profit margin, right scale (lower) Net sales, left scale Operating profit, right scale (upper) Operating profit margin, right scale (lower) * Including Leona™ filament operations. Annual Report 2007 43 Sales in pharmaceuticals operations decreased with reimbursement price cuts and decreased shipments of pharmaceutical intermediates. Operating profit grew with licensing income for fasudil hydrochloride rho-kinase inhibitor. Sales and operating profit in devices grew with increased shipments of APS™ polysulfone-membrane artificial kidneys and Planova™ virus removal filters, and with measures to reduce operating costs. Fibers Sales for the segment grew by ¥16.9 billion to ¥106.6 billion, an 18.9% increase. Operating profit grew by ¥0.1 billion to ¥4.2 billion, a 3.4% increase. Sales of elastic polyurethane filament grew with increased shipments of Roica™, improved market conditions, and the inclusion of the Dorlastan™ business acquired from Lanxess, but operating profit decreased as the Dorlastan™ business operated at a loss. Roica™ production equipment is being installed at the Dorlastan™ plants in the US and Europe, and the business is forecast to become profitable in fiscal 2007. Sales and operating profit in Bemberg™ cupro grew with increased exports. Nonwovens operations were impacted by the effect of elevated feedstock costs, but sales and operating profit grew with increased shipments of Lamous™ artificial suede in car seat applications. Electronics Materials & Devices Sales for the segment grew by ¥9.2 billion to ¥112.1 billion, a 9.0% increase. Operating profit grew by ¥3.3 billion to ¥22.6 billion, a 17.0% increase. Sales and operating profit in electronic devices grew as shipments of LSIs and magnetic sensors increased with strong demand in cell phone and home electronics applications. Sales and operating profit in electronic materials grew as shipments of Sunfort™ photosensitive dry film resist increased following a large expansion of production capacity and shipments of ultra-thin grades of glass fabric for printed circuit boards increased. Construction Materials Sales for the segment grew by ¥4.3 billion to ¥60.8 billion, a 7.6% increase. Operating profit grew by ¥1.2 billion to ¥5.0 billion, a 32.0% increase. Building materials and housing materials operations were affected by high feedstock and fuel costs for production of Hebel™ autoclaved lightweight concrete (ALC) panels, but sales and operating profit grew with measures to reduce operating costs and with higher sales prices. Sales and operating profit in foundation systems grew with an expansion of new applications for Eazet™ and ATT Column™ piles for small-scale construction. Sales and operating profit in insulation materials grew with a Fibers ¥ billion 150 120 90 60 30 0 Electronics Materials & Devices Construction Materials ¥ billion % 10 10 8 8 6 6 4 4 2 2 0 ¥ billion 150 120 90 60 30 0 ¥ billion % 30 25 24 20 18 15 12 10 6 5 0 ¥ billion 90 60 30 0 ¥ billion % 6 9 4 6 2 3 0 04* 05 Fiscal year 06 04 05 Fiscal year 06 04 05 Fiscal year 06 Net sales, left scale Operating profit, right scale (upper) Operating profit margin, right scale (lower) Net sales, left scale Operating profit, right scale (upper) Operating profit margin, right scale (lower) Net sales, left scale Operating profit, right scale (upper) Operating profit margin, right scale (lower) * Not including Leona™ filament operations. 44 successful expansion of the user base for Neoma™ high- performance phenolic foam panels resulting in increased shipments. Life & Living Sales for the segment grew by ¥0.6 billion to ¥52.6 billion, a 1.2% increase. Operating profit decreased by ¥0.2 billion to ¥4.6 billion, a 5.0% decline. Sales of home-use products grew with increased shipments of Saran Wrap™ cling film and Saran™ fiber, but operating profit decreased with higher feedstock and packaging costs and increased advertising expenses. Sales of packaging materials were on par with a year ago, but operating profit decreased as a result of the impact of elevated feedstock costs. With the April 2007 merger of Asahi Kasei Life & Living Corp. with Asahi Kasei Chemicals Corp., the business of the Life & Living operating segment is included in the Chemicals operating segment starting with the new fiscal year. Services, Engineering and Others Sales for the segment grew by ¥2.1 billion to ¥28.9 billion, a 7.7% increase. Operating profit grew by ¥0.6 billion to ¥3.9 billion, a 17.4% increase. Sales and operating profit in engineering operations grew with strong business in overseas plant engineering. Sales in personnel staffing and placement operations increased with growing demand, and operating profit was on par with a year ago. Geographical Information Geographic segment information is not shown because over 90% of total sales were from operations domiciled in Japan and over 90% of total assets were located in Japan. Overseas Sales Overseas sales increased, largely in Chemicals, by ¥54.9 billion to ¥428.0 billion, a 14.7% increase and a 1.5 percentage point increase to 26.4% of consolidated net sales. Liquidity and Capital Resources Financial Position Total assets at fiscal year end were ¥1,459.9 billion, ¥83.9 billion (6.1%) higher than a year earlier, with ¥25.1 billion of the increase as an effect of the closing date falling on a bank holiday. Current assets increased by ¥78.8 billion (12.2%) to ¥723.0 billion. Notes and accounts receivable, trade, increased by ¥30.9 billion with the closing date bank holiday and high selling prices and greater sales in Chemicals. Inventories increased by ¥25.9 billion, largely in Chemicals and Homes. Cash on hand and in banks increased by ¥15.1 billion with the closing date bank holiday. Life & Living ¥ billion 80 60 40 20 0 Services, Engineering and Others ¥ billion % 8 12 6 9 4 6 2 3 0 ¥ billion 40 30 20 10 0 ¥ billion % 4 16 3 12 2 8 1 4 0 04 05 Fiscal year 06 04 05 Fiscal year 06 Net sales, left scale Operating profit, right scale (upper) Operating profit margin, right scale (lower) Net sales, left scale Operating profit, right scale (upper) Operating profit margin, right scale (lower) Annual Report 2007 45 Fixed assets increased by ¥5.1 billion (0.7%) to ¥736.9 billion. Tangible fixed assets increased by ¥12.6 billion as the value of asset acquisitions exceeded the value of depre- ciation and disposals. Intangible fixed assets decreased by ¥4.6 billion, and the market value of investment securities decreased by ¥6.9 billion. Current liabilities increased by ¥63.8 billion (14.5%) to ¥503.6 billion. Notes and accounts payable, trade, increased by ¥53.9 billion with the closing date bank holiday and the previous year’s closing date coming during a maintenance turnaround in Chemicals. Short-term borrowings increased by ¥7.6 billion. Long-term liabilities decreased by ¥32.4 billion (9.7%) to ¥302.8 billion. Bonds decreased by ¥24.0 billion, and accrued pension and severance costs decreased by ¥6.3 billion. Interest-bearing debt decreased by ¥18.9 billion to ¥216.9 billion, with ¥23.0 billion of bonds redemption and a ¥7.6 billion increase in short-term borrowings. Net assets increased by ¥52.4 billion (8.7%) from the ¥601.1 billion of a year ago to ¥653.5 billion. Net unrealized gain on securities decreased by ¥5.6 billion, while retained earnings increased by ¥38.1 billion. Net worth per share increased by ¥37.16 to ¥461.50. Net worth/total assets increased from 43.2% to 44.2%, and debt-to-equity ratio decreased from 0.40 to 0.34. Total Assets, Net Worth ¥ billion 150 100 50 0 Net Worth to Total Assets % 50 40 30 20 10 0 04 05 Fiscal year 06 04 05 Fiscal year 06 Total assets Net worth 46 Capital Expenditure Capital expenditure was primarily for new and expanded production plant and equipment in long-term growth fields. Investments were also made for rationalization, modification, maintenance, and IT systems to bring greater product reliability and cost reductions. Capital expenditure by operating segment shown below is for tangible and intangible fixed assets, combined, before consumption tax. For comparison purposes, the previous year’s segment figures have been revised to reflect the April 2005 transfer of Leona™ nylon 66 filament operations from Fibers to Chemicals. Chemicals Homes Pharma Fibers Electronics Materials & Devices Construction Materials Life & Living Services, Engineering and Others Combined Corporate assets and eliminations Consolidated Totals for the year (¥ million) 42,569 2,701 5,722 6,362 16,234 2,301 3,455 760 80,104 4,308 84,413 Compared to previous year (%) 159.8 75.4 116.9 117.4 108.5 99.5 74.2 73.3 126.2 153.1 127.3 Notable capital expenditure by operating segment was as follows: • Chemicals: Modification of acrylonitrile plant to use propane process, capacity expansion for Hipore™ Li-ion rechargeable battery separators, new facility for assembly Interest-Bearing Debt, D/E Ratio ¥ billion 400 300 200 100 0 04 05 Fiscal year 06 Interest-bearing debt, left scale D/E ratio, right scale Capital Expenditure, Depreciation and Amortization ¥ billion 1.00 100 0.75 0.50 0.25 0.00 75 50 25 0 04 05 Fiscal year 06 Capital expenditure Depreciation and amortization of Microza™ water treatment membranes, new facility for thermal power generation. • Homes: IT systems, construction system modification, rationalization, maintenance. • Pharma: Plant modification, rationalization, maintenance. • Fibers: Modification of spandex plant to use Roica™ technology. • Electronics Materials & Devices: Installation of finer process plant for LSIs, capacity expansion for LSIs, capacity expansion for Sunfort™ photosensitive dry film resist. • Construction Materials: Plant modification, rationalization, and maintenance. • Life & Living: Plant modification, rationalization, and maintenance. • Services, Engineering and Others: IT systems, rationalization, labor-saving, and maintenance. • Corporate assets: Corporate research facilities; maintenance. Cash Flows Free cash flows were ¥47.1 billion as cash generated, prin- cipally operating profit and depreciation and amortization, exceeded cash used, principally for acquisition of fixed assets and investment securities. Cash flows from financing activities, principally for reduction of interest-bearing debt and payment of dividends, were a net ¥36.0 billion cash used. After including ¥3.6 billion cash and cash equivalents held by newly consolidated subsidiaries, cash and cash equivalents at fiscal year end were ¥101.7 billion, ¥15.3 billion greater than a year earlier. Cash flows from operating activities Higher selling prices in Chemicals and the closing date bank holiday resulted in increases in notes and accounts receivable, trade, aggregating ¥26.4 billion cash used, increased inventories, notably in Homes, resulted in ¥23.0 billion cash used, and ¥45.5 billion was used for payment of income taxes. Income before income taxes and minority interest generated ¥114.9 billion, depreciation and amor- tization generated ¥71.6 billion, and an increase in notes and accounts payable, trade, generated ¥51.6 billion. Net cash generated from operating activities was ¥128.4 billion, ¥19.8 billion more than a year earlier. Cash flows from investing activities Cash used included ¥77.4 billion for acquisition of tangible fixed assets for continuing expansion of competitive- superiority operations and enhancement of overall compet- itiveness and ¥4.9 billion for acquisition of intangible fixed assets. Cash generated from sales of property, plant and equipment aggregated ¥3.0 billion. Net cash used in investing activities was ¥81.3 billion, ¥21.0 billion more than a year earlier. Cash flows from financing activities A net ¥21.7 billion was used for interest-bearing debt such as borrowings and bonds. A further ¥14.0 billion was used for payment of parent-company dividends. A net ¥36.0 billion was used in financing activities, ¥5.1 billion more than a year earlier. Free Cash Flows ¥ billion Cash Flows ¥ billion 50 40 30 20 10 0 200 100 0 (100) (200) 04 05 Fiscal year 06 04 05 Fiscal year 06 Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities Annual Report 2007 47 Housing-Related Tax Policy, Interest Rate Fluctuation Operations in the Homes segment are affected by Japanese tax policies as they relate to home acquisition and by fluctuations in Japanese interest rates. Changes in Japanese tax policy, including consumption taxes, or fluctuations in Japanese interest rates may result in diminished housing demand, thereby affecting our consolidated performance and financial condition. Profitability of Electronics-Related Businesses The electronics industry is characterized by sharp market cycles. The profitability of electronics-related businesses may decline significantly in a relatively short time, thereby affecting our consolidated performance and financial condition. Because products in this field rapidly become obsolete, the timely development and commercialization of leading-edge devices and materials is required. New product development may be delayed, or demand fluctuations may exceed expectations, thereby affecting our consolidated performance and financial condition. Pharmaceuticals and Medical Devices Pharmaceutical and medical device businesses may be significantly affected by government measures to curtail health care expenditure or other changes in government policy. Unforeseeable side effects or complications may emerge, significantly affecting these businesses. The pharmaceutical business additionally faces the possibility that product approval may be withdrawn as a result of Japan’s reexamination system, and that competition may intensify as a result of the market entry of generics. For pharmaceuticals and medical devices under development, regulatory approval may fail to be obtained, market demand may be lower than expected, and the national reimbursement prices may be lower than expected. Such scenarios may affect our consolidated performance and financial condition. Risk Analysis Operating risks and non-operating risks which may influence investor decisions are described below. The management maintains awareness of the possibility that these scenarios may emerge, and measures to avoid their emergence and to minimize their impact on corporate performance in the event that they do emerge are implemented to the fullest possible extent. The description of risks given here includes elements which may emerge in the future, but being based on current evaluations as this report is being prepared it does not include risks which could not be foreseen at this time. Crude Oil and Naphtha Prices Operating costs in operations based on petrochemicals are affected by prices for crude oil and naphtha. If crude oil and naphtha prices rise, selling prices for products derived from these feedstocks must be increased in a timely manner to maintain sufficient price spreads. Price spreads may diminish, thereby affecting our consolidated performance and financial condition. Exchange Rate Fluctuation Operations based overseas maintain accounts in the local currency where they operate. The yen value of items carried in these accounts is affected by the rate of exchange at the time of conversion to yen. Although measures such as currency exchange hedges are utilized to minimize the short- term effects of exchange rate fluctuations, such fluctuations may exceed the foreseeable range over the short to long term, thereby affecting our consolidated performance and financial condition. Overseas Operations Overseas operations may face a variety of risks which cannot be foreseen, including the existence or emergence of economically unfavorable circumstances due to legal and regulatory changes, vulnerability of infrastructure, difficulty in hiring/retaining qualified employees, or other factors, and social or political instability due to terrorism, war, or other factors. Overseas operations may be impaired by such scenarios, thereby affecting our consolidated performance and business plans. 48 Industrial Accidents and Natural Disasters The occurrence of a significant industrial accident or natural disaster at a plant or elsewhere may result in a loss of public trust, the emergence of costs associated with accident response, including compensation, and the emergence of costs associated with plant shutdown, including opportunity loss and compensation to customers, thereby affecting our consolidated performance and financial condition. Intellectual Property, Product Liability, and Legal Regulation An unfavorable ruling may emerge in a dispute relating to intellectual property, a product defect resulting in a large- scale recall and compensation whose costs exceed insurance coverage may emerge, and detrimental legal and regulatory changes may emerge in any country where we operate. Such scenarios may affect our consolidated performance and financial condition. Irrecoverable Credits Credits extended to customers may become irrecoverable to an unforeseeable extent, necessitating additional losses or allowances to be recorded in financial accounts, and thereby affecting our consolidated performance and financial condition. Annual Report 2007 49 Consolidated Balance Sheets Asahi Kasei Corporation and Consolidated Subsidiaries March 31, 2007 and 2006 ASSETS Current assets: Cash on hand and in banks (Note 6) Notes and accounts receivable, trade (Note 7) Marketable securities (Notes 6 and 8) Inventories Deferred income taxes (Note 12) Other current assets (Note 7) Allowance for doubtful accounts Fixed assets: Property, plant and equipment, net of accumulated depreciation (Notes 9 and 10) – Buildings Machinery and equipment Land Construction in progress Other Intangible fixed assets – Goodwill Other Investments and other assets – Investment securities (Notes 7 and 8) Long-term receivables (Note 7) Deferred income taxes (Note 12) Other Allowance for doubtful accounts Millions of yen 2007 2006 ¥ 101,514 300,385 400 240,006 26,650 55,831 (1,791) 722,995 ¥ 86,422 269,509 446 214,062 29,385 45,828 (1,460) 644,192 Thousands of U.S. dollars (Note 4) 2007 $ 860,288 2,545,636 3,390 2,033,949 225,847 473,144 (15,178) 6,127,076 158,953 174,776 55,192 21,935 16,103 426,959 155,630 170,364 55,240 18,108 15,026 414,368 1,347,060 1,481,152 467,729 185,890 136,466 3,618,297 6,045 22,421 28,466 5,700 27,394 33,094 51,229 190,008 241,237 241,696 4,636 10,479 24,769 (78) 281,502 248,616 3,043 8,915 24,680 (864) 284,390 2,048,271 39,288 88,805 209,907 (661) 2,385,610 736,927 731,852 6,245,144 Total assets ¥1,459,922 ¥1,376,044 $12,372,220 The accompanying notes are an integral part of these statements. 50 LIABILITIES AND NET ASSETS Liabilities: Current liabilities – Notes and accounts payable, trade (Note 7) Short-term borrowings (Notes 7 and 10) Current portion of long-term debt (Note 10) Accrued income taxes Accrued expenses (Note 7) Advances received Other current liabilities Long-term liabilities – Long-term debt (Note 10) Accrued pension and severance costs (Note 11) Deferred income taxes (Note 12) Customers’ guarantee deposits Other long-term liabilities Net assets: Shareholders’ equity: Common stock – Authorized – 4,000,000,000 shares Issued and outstanding – 1,402,616,332 shares Capital surplus Retained earnings (Note 20) Treasury stock, at cost (2007 – 3,570,390 shares, 2006 – 42,799,834 shares) Valuation, translation adjustments and others Net unrealized gain on securities Net deferred profit on hedges Revaluation surplus (Note 13) Cumulative translation adjustments Millions of yen 2007 2006 ¥ 186,900 51,273 36,555 18,232 111,027 48,873 50,709 503,569 129,074 126,266 26,210 18,660 2,632 302,842 ¥ 132,980 46,380 32,842 19,511 110,231 48,877 48,902 439,723 156,300 132,433 27,781 18,306 373 335,193 Thousands of U.S. dollars (Note 4) 2007 $ 1,583,898 434,517 309,788 154,508 940,881 414,178 429,763 4,267,533 1,093,847 1,070,051 222,119 158,136 22,305 2,566,458 806,411 774,916 6,833,911 103,389 79,396 380,515 (1,544) 561,756 79,823 58 1,106 2,913 83,900 103,389 79,433 342,450 (17,311) 507,961 85,383 – 966 (99) 86,250 876,178 672,847 3,224,703 (13,084) 4,760,644 676,466 492 9,373 24,686 711,017 Minority interest in consolidated subsidiaries (Note 3 (a)) 7,855 6,917 66,568 Commitments and contingent liabilities (Notes 17 and 21) 653,511 601,128 5,538,229 Total liabilities and net assets ¥1,459,922 ¥1,376,044 $12,372,220 The accompanying notes are an integral part of these statements. Annual Report 2007 51 Consolidated Statements of Income Asahi Kasei Corporation and Consolidated Subsidiaries Years ended March 31, 2007 and 2006 Net sales (Notes 7 and 18) Cost of sales (Notes 7 and 14) Gross profit Selling, general and administrative expenses (Note 14) Operating profit (Note 18) Non-operating income: Interest and dividend income Equity in net earnings of unconsolidated subsidiaries and affiliates Insurance recoveries Other Total non-operating income Non-operating expenses: Interest expense Loss due to disasters Loss on disposal of inventories Other Total non-operating expenses Ordinary profit Special gains: Gain on sales of investment securities (Note 8) Gain on sale of property, plant and equipment Reversal of allowance for doubtful account Gain on change in equity Total special gains Special losses: Loss on sales of investment securities (Note 8) Loss on devaluation of investment securities Loss on disposal of property, plant and equipment Impairment loss (Note 15) Restructuring charges (Notes 15 and 16) Total special losses Income before income taxes and minority interest Income taxes (Note 12) – currently payable – deferred (obligation)/benefit Minority interest in income of consolidated subsidiaries Net income Per share data: Net income (Note 22) – Basic – Diluted Cash dividends The accompanying notes are an integral part of these statements. 52 Millions of yen 2007 2006 ¥1,623,791 1,224,041 399,750 271,949 127,801 ¥1,498,620 1,127,530 371,090 262,364 108,726 3,015 2,647 4,558 2,861 13,081 4,118 – 4,380 5,877 14,375 126,507 1,516 919 – 656 3,091 – 701 9,074 189 4,751 14,715 114,883 (42,247) (3,553) (508) 68,575 2007 ¥49.00 ¥ – ¥12.00 ¥ 2,653 536 1,292 2,935 7,416 3,570 1,285 2,703 4,418 11,976 104,166 – 5,670 210 – 5,880 854 703 7,038 3,799 3,171 15,565 94,481 (38,963) 4,417 (267) 59,668 Yen 2006 ¥42.46 ¥ – ¥10.00 ¥ Thousands of U.S. dollars (Note 4) 2007 $13,760,941 10,373,229 3,387,712 2,304,653 1,083,059 25,551 22,432 38,627 24,246 110,856 34,898 – 37,119 49,805 121,822 1,072,093 12,848 7,788 – 5,559 26,195 – 5,940 76,898 1,602 40,263 124,703 973,585 (358,026) (30,110) (4,305) 581,144 U.S. dollars (Note 4) 2007 $0.42 $ – $0.10 $ Consolidated Statements of Shareholders’ Equity Asahi Kasei Corporation and Consolidated Subsidiaries Year ended March 31, 2006 Balance at March 31, 2005 Gain on sales of treasury stock Net income for the year ended March 31, 2006 Decrease in retained earnings due to newly consolidated subsidiaries and affiliates, or subsidiaries and affiliates excluded from consolidation Net change in unrealized gain on securities Foreign currency translation adjustments Purchase of treasury stock Cash dividends Bonuses to directors and corporate auditors Balance at March 31, 2006 Common stock ¥103,389 Capital surplus ¥79,423 10 ¥103,389 ¥79,433 Retained earnings (Note 20) ¥295,594 59,668 (11) (12,602) (199) ¥342,450 Revaluation surplus (Note 13) ¥966 Net unrealized gain on securities ¥54,703 Cumulative translation adjustments ¥(5,380) Treasury stock, at cost ¥(16,969) 30,680 5,281 (342) ¥966 ¥85,383 ¥ (99) ¥(17,311) Millions of yen Total ¥511,726 10 59,668 (11) 30,680 5,281 (342) (12,602) (199) ¥594,211 Consolidated Statements of Changes in Net Assets Asahi Kasei Corporation and Consolidated Subsidiaries Year ended March 31, 2007 Millions of yen Balance at March 31, 2006 Changes of items during the period Year-end dividend Interim dividend Bonuses to directors and corporate auditors Net income Increase due to newly consolidated subsidiaries Decrease due to newly consolidated subsidiaries Increase due to unconsolidated subsidiaries and affiliates for which the equity method newly applies Purchase of treasury stock Disposal of treasury stock Cancellation of treasury stock Net increase (decrease) in net assets others than shareholders’ equity Total changes of items during the period Balance at March 31, 2007 Balance at March 31, 2006 Changes of items during the period Year-end dividend Interim dividend Bonuses to directors and corporate auditors Net income Increase due to newly consolidated subsidiaries Decrease due to newly consolidated subsidiaries Increase due to unconsolidated subsidiaries and affiliates for which the equity method newly applies Purchase of treasury stock Disposal of treasury stock Cancellation of treasury stock Net increase (decrease) in net assets others than shareholders’ equity Total changes of items during the period Balance at March 31, 2007 Shareholders’ equity Valuation, translation adjustments and others Common stock ¥103,389 Capital surplus ¥79,433 Retained earnings (Note 20) ¥342,450 Treasury stock, at cost ¥(17,311) Total shareholders’ equity ¥507,961 Net unrealized gain on securities ¥85,383 Net deferred Revaluation Cumulative translation surplus profit on adjustments (Note 13) hedges (99) ¥ 966 ¥ – ¥ Total valuation, translation adjustments and others ¥86,250 Minority interest in consolidated subsidiaries ¥6,917 (6,999) (6,998) (228) 68,575 22 (2) 20 18 (55) (16,325) (634) 21 16,380 (6,999) (6,998) (228) 68,575 22 (2) 20 (634) 39 – Total net assets ¥601,128 (6,999) (6,998) (228) 68,575 22 (2) 20 (634) 39 – – ¥103,389 (37) ¥79,396 38,065 ¥380,515 15,767 ¥ (1,544) 53,795 ¥561,756 (5,560) (5,560) ¥79,823 58 58 ¥58 140 140 ¥1,106 3,012 3,012 ¥ 2,913 (2,350) (2,350) ¥83,900 938 938 ¥7,855 (1,412) 52,383 ¥653,511 Shareholders’ equity Valuation, translation adjustments and others Common stock $876,178 Capital surplus $673,161 Retained earnings (Note 20) $2,902,119 Treasury stock, at cost Total shareholders’ equity $(146,703) $4,304,755 Net unrealized gain on securities $723,586 Net deferred Revaluation Cumulative translation surplus profit on adjustments (Note 13) hedges $ (839) $8,186 $ – Total valuation, translation adjustments and others $730,933 Minority interest in consolidated subsidiaries $ 58,619 Total net assets $5,094,307 Thousands of U.S. dollars (Note 4) (59,314) (59,305) (1,932) 581,144 186 (17) 169 153 (467) (138,347) (5,373) 178 138,814 (59,314) (59,305) (1,932) 581,144 186 (17) 169 (5,373) 331 – (59,314) (59,305) (1,932) 581,144 186 (17) 169 (5,373) 331 – – $876,178 (314) $672,847 322,584 $3,224,703 133,619 455,889 $ (13,084) $4,760,644 (47,120) (47,120) $676,466 492 492 $492 1,187 1,187 $9,373 25,525 25,525 $24,686 (19,916) (19,916) $711,017 7,949 7,949 (11,967) 443,922 $66,568 $5,538,229 The accompanying notes are an integral part of these statements. Annual Report 2007 53 Consolidated Statements of Cash Flows Asahi Kasei Corporation and Consolidated Subsidiaries Years ended March 31, 2007 and 2006 Cash flows from operating activities: Income before income taxes and minority interest Depreciation and amortization Impairment loss Amortization of goodwill Amortization of negative goodwill Decrease in accrued pension and severance costs Interest and dividend income Interest expense Equity in net earnings of unconsolidated subsidiaries and affiliates Gain on sales of investment securities Loss on sales of investment securities Loss on devaluation of investment securities Gain on sale of property, plant and equipment Loss on disposal of property, plant and equipment Increase in notes and accounts receivable, trade Increase in inventories (Decrease) increase in notes and accounts payable, trade (Decrease) increase in accrued expenses Decrease in advances received Other Sub total Interest and dividend income, received Interest expense, paid Income taxes, paid Net cash provided by operating activities Cash flows from investing activities: Payments for purchases of time deposits Proceeds from maturities of time deposits Payments for purchases of marketable securities Proceeds from sales of marketable securities Payments for acquisition of property, plant and equipment Proceeds from sales of property, plant and equipment Payments for acquisition of intangible fixed assets Payments for purchases of investment securities Proceeds from sales of investment securities Proceeds from sales of consolidated subsidiaries Payments for loan receivables Collections of loan receivables Other Net cash used in investing activities Cash flows from financing activities: Proceeds from short-term borrowings Repayment of short-term borrowings Proceeds from issuance of commercial papers Repayment of commercial papers Proceeds from long-term loans Repayment of long-term loans Repayment of bonds Payments for purchases of treasury stock Proceeds from sale of treasury stock Dividends paid by parent company Dividends paid to minority interests in consolidated subsidiaries Other Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents held by newly consolidated subsidiaries Cash and cash equivalents at end of year (Note 6) The accompanying notes are an integral part of these statements. 54 Millions of yen 2007 2006 ¥ 114,883 71,646 189 824 (196) (6,701) (3,015) 4,118 (2,647) (1,516) – 701 (919) 9,074 (26,425) (23,006) 51,605 (399) (85) (14,921) 173,210 4,941 (4,210) (45,508) 128,433 (192) 473 (14) 1 (77,357) 2,976 (4,872) (3,003) 2,557 – (5,655) 4,195 (456) (81,347) 39,760 (36,293) 150,000 (150,000) 8,337 (10,456) (23,000) (501) 40 (13,991) (136) 215 (36,025) ¥ 94,481 69,399 3,799 259 – (3,127) (2,653) 3,570 (536) – 854 703 (5,670) 7,038 (16,393) (11,075) (2,075) 11,532 (1,192) (11,695) 137,219 4,110 (3,656) (29,053) 108,620 (498) 125 – 30 (59,074) 8,824 (7,341) (6,848) 1,099 1,962 (5,293) 7,600 (959) (60,373) 25,019 (7,923) – – 2,903 (6,584) (31,000) (378) 33 (12,592) (355) (4) (30,881) 643 11,704 86,390 3,625 ¥ 101,719 426 17,792 68,456 142 ¥ 86,390 Thousands of U.S. dollars (Note 4) 2007 $ 973,585 607,170 1,602 6,983 (1,661) (56,788) (25,551) 34,898 (22,432) (12,848) – 5,940 (7,788) 76,898 (223,941) (194,966) 437,331 (3,382) (720) (126,449) 1,467,881 41,873 (35,678) (385,661) 1,088,415 (1,627) 4,009 (119) 8 (655,568) 25,220 (41,288) (25,449) 21,670 – (47,924) 35,551 (3,864) (689,381) 336,949 (307,568) 1,271,186 (1,271,186) 70,653 (88,610) (194,915) (4,246) 339 (118,568) (1,153) 1,822 (305,297) 5,449 99,186 732,119 30,720 $ 862,025 Notes to Consolidated Financial Statements Asahi Kasei Corporation and Consolidated Subsidiaries March 31, 2007 and 2006 1. Major policies for preparing the consolidated financial statements The consolidated financial statements, which are filed with the Japanese Ministry of Finance (hereinafter called the “MOF”) as required by the Securities and Exchange Law in Japan, are prepared in accordance with accounting principles generally accepted in Japan, which are different in certain respects from the application and disclosure requirements of International Financial Reporting Standards. The accompanying consolidated financial statements are a translation of those filed with the MOF and incorporate certain modifications to enhance foreign readers’ understanding of the financial statements. In addition, the notes to the consolidated financial statements include certain financial information which is not required under the disclosure regulations in Japan, but is presented herein as additional information. In addition, certain reclassifications of previously reported amounts have been made to conform to current classifications. Such modifications or reclassifications have no effect on net income or retained earnings. Consolidation and investments in affiliated companies – The consolidated financial statements consist of the account of parent company and 111 subsidiaries (105 subsidiaries at March 31, 2006) (hereinafter collectively referred to as the “Company”) which, with minor exceptions due to materiality, are all majority and wholly owned companies, including 7 Core operating companies (Asahi Kasei Chemicals Corporation, Asahi Kasei Homes Corporation, Asahi Kasei Pharma Corporation, Asahi Kasei Fibers Corporation, Asahi Kasei EMD Corporation, Asahi Kasei Construction Materials Corporation, and Asahi Kasei Life & 2. Significant accounting policies (a) Cash and cash equivalents For cash flow statement purposes, cash and cash equivalents include all highly liquid investments, generally with original maturities of three months or less, which are readily convertible to known amounts of cash and are so near maturity that they present an insignificant risk of changes in value due to changes in interest rates. (b) Inventories Inventories are principally stated at the lower of average cost or market value. Residential lots and dwellings of sale are stated at specifically identified costs. (c) Fixed assets and depreciation/amortization Property, plant and equipment are stated at cost. Significant renewals and improvements are capitalized at cost, while maintenance and repairs are charged to income as incurred. Depreciation is provided for under the declining-balance method for property, plant and equipment, except for buildings which are Living Corporation), Tong Suh Petrochemical Corp. Ltd. (Korea), Sanyo Petrochemical Co., Ltd., Asahi Kasei Microsystems Co., Ltd. and Asahi Kasei Medical Co., Ltd. All significant inter- company transactions and accounts have been eliminated. Investments in unconsolidated subsidiaries and 20% to 50% owned companies in which the Company exercises significant influence are accounted for, with minor exceptions due to materiality, using the equity method of accounting. There were 53 such unconsolidated subsidiaries and 20% to 50% owned companies to which the equity method is applied at March 31, 2007 (55 at March 31, 2006), including Asahi Kasei Metals Ltd., Asahi Kasei Finechem Co., Ltd. and Asahi Organic Chemicals Industry Co., Ltd. Certain subsidiaries results are reported in the consolidated financial statements using a December 31, or a February 28 year- end. Material differences in inter-company transactions and accounts arising from the use of different fiscal year-ends are appropriately adjusted for through consolidation procedures. The excess of the cost over the underlying net equity of investments in subsidiaries and affiliated companies accounted for using the equity method of accounting is allocated to identifiable assets and liabilities based on fair values at the date of acquisition. The unassigned residual value of the excess of the cost over the underlying net equity is recognized as goodwill or negative goodwill. The Company amortizes goodwill and negative goodwill using the straight-line method over the estimated period of benefit over a five or twenty-year period, with the exception of minor amounts, which are charged to income in the year of acquisition. depreciated using the straight-line method, at rates based on estimated useful lives of the assets, principally ranging from five to sixty years for buildings and from four to twenty-two years for machinery and equipment. Intangible fixed assets, including software for internal use, are amortized using the straight-line method over the estimated useful lives of the asset. The estimated useful life of software for internal use is mainly five years. (Accounting for impairment of fixed assets) On August 9, 2002, the Business Accounting Council in Japan issued “Accounting Standards for Impairment of Fixed Assets.” The standard became effective for the fiscal year ended March 31, 2006. The Company adopted this standard in the fiscal year ended March 31, 2006. The standard requires that fixed assets should be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized in the income Annual Report 2007 55 statement by reducing the carrying amount of impaired assets or a group of assets to the recoverable amount to be measured as the higher of the net selling price or value in use. The Company deducts accumulated impairment losses on fixed assets directly from the corresponding assets in the consolidated balance sheets. (d) Accrued pension and severance costs Accrued pension and severance costs at March 31, 2007 and 2006 represent the estimated present value of projected benefit oblig- ations in excess of the fair value of the plan assets. Unrecognized prior service costs are amortized on a straight-line basis primarily over ten years. Unrecognized actuarial gains/losses, resulting from variances between actual results and economic estimates or actuarial assumptions, are amortized on a straight-line basis primarily over the following ten years. (Change in method of amortization of unrecognized actuarial gains/losses) The parent company and certain Japanese subsidiaries have been fully amortizing unrecognized actuarial gains/losses in the year following that in which they arose. Beginning with the fiscal year ended March 31, 2006, actuarial gains/losses which arise each year are amortized on a straight-line basis over the following ten years. Actuarial gain of ¥23,604 million occurred in the year ended March 31, 2006 would be amortized on a straight-line basis over the following ten years. Consequently, net pension and severance costs would be ¥21,244 million higher, ordinary profit would be ¥19,639 million lower, and income before income taxes and minority interests would be ¥19,639 million lower in the year ended March 31, 2007 than if one-year amortization were continued. In the fiscal year ended March 31, 2007, the effect of this change on profits for the fiscal year ended March 31, 2007 was not significantly different than one described in the financial statements for the year ended March 31, 2006. Provision is made for lump-sum indemnities to directors and corporate auditors equal to the estimated liability calculated under the internal rules of the Company. (e) Financial instruments i) Securities Securities are classified into four categories; trading securities, held-to-maturity debt securities, equity securities of unconsolidated subsidiaries and affiliates, and other securities. At March 31, 2007 and 2006, the Company did not have trading securities or held-to-maturity debt securities. Equity securities of unconsolidated subsidiaries and affiliates are accounted for, with minor exceptions due to materiality, using the equity method of accounting. are stated at cost. In cases where any significant decline in the realizable value is assessed to be other than temporary, the cost of other securities is devalued by the impaired amount and is charged to income. Realized gains and losses are determined using the average cost method and are reflected in the income statement. ii) Derivative financial instruments All derivatives are stated at fair value. Gains or losses arising from changes in fair value are charged or credited to income for the period in which they arise, except for derivatives that are designated as hedging instruments. Gains or losses arising from changes in fair value of these qualifying hedges are deferred as “Net deferred profit on hedges” to be offset against gains or losses of the underlying hedged assets and liabilities. (f) Taxes Accrued income taxes are stated at the estimated amount payable for corporation, enterprise, and inhabitant taxes. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company has elected to file its return under the consolidated tax filing system. (g) Leases Under Japanese accounting practices, financing leases must be capitalized by the lessee except for those leases that do not transfer ownership of the leased asset to the lessee as part of the lease. Such exceptions can be accounted for either as financing leases or operating leases with an appropriate footnote disclosure. Periodic lease charges for financing leases entered into by the parent company and its Japanese subsidiaries, where lessors retain the ownership of the leased assets, are charged to income as incurred. (h) Translation of foreign currencies Foreign currency receivables and payables are translated into Japanese yen at the exchange rates prevailing at the balance sheet date. Resulting gains and losses are charged or credited to income for the period. Assets, liabilities, income and expenses of foreign subsidiaries and 20% to 50% owned companies accounted for using the equity method of accounting are translated into Japanese yen at year-end exchange rates. Shareholders’ equity of foreign subsidiaries and 20% to 50% owned companies is translated into Japanese yen at the historical exchange rates. The translation differences in Japanese yen amounts arising from the use of different rates are recognized as cumulative translation adjustments in the balance sheets. Other securities, whose fair values are readily determinable, A portion of the cumulative translation adjustments is allocated are carried at fair value with net unrealized gains or losses included as a component of net assets, net of related taxes. Other securities, whose fair values are not readily determinable, to “Minority interest in consolidated subsidiaries” and the Company’s portion is presented as a separate component of net assets in the balance sheets. 56 3. Changes in significant accounting policies (a) Presentation of net assets in the balance sheet(s) On December 9, 2005, the Accounting Standards Board of Japan (ASBJ) issued its “Accounting Standard for Presentation of Net Assets in the Balance Sheet” and its “Guidance on Accounting Standard for Presentation of Net Assets in the Balance Sheet.” The parent company and its Japanese subsidiaries adopted this standard in the fiscal year ended March 31, 2007, with application in accordance with this guidance. Previously, the balance sheets had comprised assets, liabilities, minority interest in consolidated subsidiaries, and shareholders’ equity. The balance sheets now comprise assets, liabilities, and net assets; net assets comprising shareholders’ equity, valuation, translation adjustments and others, and minority interest in consolidated subsidiaries. Minority interest in consolidated subsidiaries, which had been presented between liabilities and shareholders’ equity, is now included in net assets. Valuation, translation adjustments and others is presented net of applicable deferred income taxes. Under the previous accounting policy, shareholders’ equity would have been ¥645,597 million (US$5,471,161 thousand) as of March 31, 2007. (b) Bonuses to directors and corporate auditors On November 29, 2005, the ASBJ issued its “Accounting Standard for Directors’ Bonus.” The parent company and its 4. United States dollar amounts The U.S. dollar amounts presented in the financial statements are included solely for the convenience of readers. These translations should not be construed as representations that the Japanese yen amounts actually represent, or have been or could be converted into U.S. dollars. As the amounts shown in U.S. dollars are for 5. Derivative financial instruments The Company operates internationally, giving rise to exposure to market risks from fluctuations in foreign currency exchange and interest rates. In the normal course of its risk management efforts, the Company uses a variety of derivative financial instruments, which include foreign currency forward exchange contracts, interest rate swap agreements and currency swap agreements, to reduce its exposures. In accordance with the Company’s policy, these financial instruments are utilized solely for hedging purposes and the Company does not hold or issue financial instruments for trading or speculation purposes. The Company has entered into foreign currency forward exchange contracts with banks as hedges against receivables and payables denominated in foreign currencies. As these foreign currency forward exchange contracts are utilized solely for hedging purposes, the resulting gains or losses are offset against foreign exchange gains or losses on the underlying hedged assets and liabilities. Japanese subsidiaries adopted this standard in the fiscal year ended March 31, 2007. Previously, bonuses to directors and corporate auditors were appropriated from retained earnings. Bonuses to directors and corporate auditors are now treated as operating expenses during the fiscal period in which they occur. Under the previous accounting policy, operating profit, ordinary profit, and income before income taxes and minority interest would have been ¥222 million (US$1,881 thousand) higher in the fiscal year ended March 31, 2007. The effect by industry segment is shown in Note 18. (c) Business combinations and divestitures On October 31, 2003, the Business Accounting Council in Japan issued its “Accounting Standard for Business Combinations,” and on December 27, 2005, the ASBJ issued its “Accounting Standard for Business Divestitures” and “Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures.” On December 22, 2006, the ASBJ revised its “Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures.” The parent company and its Japanese subsidiaries adopted these standards in the fiscal year ended March 31, 2007, with application in accordance with this guidance. convenience only, and are not intended to be computed in accordance with generally accepted translation procedures, the approximate current exchange rate of ¥118= US$1 prevailing on March 31, 2007 has been used. Interest rate swap agreements and currency swap agreements are used to limit the Company’s exposure to losses in relation to interest expense from adverse fluctuations in foreign currency exchange and interest rates. The related differentials to be paid or received under the interest rate swap agreements are recognized in interest expense over the terms of the agreements. Currency swap agreements are accounted for in a manner similar to that used for foreign currency forward exchange contracts. The Company does not anticipate any credit loss from nonperformance by the counter-parties to foreign currency forward exchange contracts, interest rate swap agreements or currency swap agreements. Since the derivative financial instruments of the Company are solely for hedging purposes, gains or losses arising from changes in fair value are deferred as “Net deferred profit on hedges” to be off-set against foreign exchange gains or losses on the underlying hedged assets and liabilities. Accordingly, the information relating to fair values is not applicable. Annual Report 2007 57 6. Cash and cash equivalents Reconciliation of cash and cash equivalents on the consolidated statements of cash flows to the amounts disclosed on the balance sheets at March 31 is as follows: Cash on hand and in banks Time deposits with deposit term of over 3 months Money market funds, medium-term government bond funds and others included in marketable securities Cash and cash equivalents Millions of yen 2006 2007 ¥101,514 (192) ¥86,422 (454) Thousands of U.S. dollars 2007 $860,288 (1,627) 397 ¥101,719 422 ¥86,390 3,364 $862,025 7. Account balances and transactions with affiliated companies Major account balances with unconsolidated subsidiaries and 20% to 50% owned companies accounted for under the equity method of accounting are as follows: Notes and accounts receivable, trade Other current assets Investment securities Long-term receivables Notes and accounts payable, trade Short-term borrowings Accrued expenses Millions of yen 2006 2007 ¥22,077 8,869 47,491 2,263 7,490 1,520 2,711 ¥15,606 7,692 44,383 2,064 5,171 1,093 4,028 Thousands of U.S. dollars 2007 $187,093 75,161 402,466 19,178 63,475 12,881 22,975 Major transactions between the Company and its unconsolidated subsidiaries and 20% to 50% owned companies accounted for using the equity method of accounting are as follows: Sales Purchases 8. Marketable securities and investment securities Millions of yen 2006 2007 ¥78,040 19,874 ¥65,818 13,436 Thousands of U.S. dollars 2007 $661,356 168,424 (a) Other securities with available fair value — The aggregate cost, carrying amount which was identical to fair value, gross unrealized gains and losses of debt and equity securities classified as other securities for which fair values were available at March 31 are as follows: Millions of yen 2007 Unrealized gains (losses) Cost Carrying amount ¥39,675 ¥173,612 ¥133,937 802 23 825 ¥40,500 629 23 652 ¥174,264 (173) – (173) ¥133,764 Securities with unrealized gains: Equity securities Securities with unrealized losses: Equity securities Debt securities 58 Securities with unrealized gains: Equity securities Securities with unrealized losses: Equity securities Debt securities Securities with unrealized gains: Equity securities Securities with unrealized losses: Equity securities Debt securities Millions of yen 2006 Unrealized gains (losses) Cost Carrying amount ¥38,774 ¥181,704 ¥142,930 130 24 154 ¥38,928 106 24 130 ¥181,834 (24) – (24) ¥142,906 Thousands of U.S. dollars 2007 Cost Carrying amount Unrealized gains (losses) $336,228 $1,471,288 $1,135,060 6,797 195 6,992 $343,220 5,331 195 5,526 $1,476,814 (1,466) – (1,466) $1,133,594 Losses on devaluation of other securities, whose fair values were readily determinable, for the year ended March 31, 2007, totaled ¥213 million (US$1,805 thousand). (b) The realized gains and losses on the sale of other securities during the year ended March 31 are as follows: Selling amount Gain on sales of securities Loss on sales of securities Millions of yen 2006 ¥587 267 4 2007 ¥1,310 832 0 (c) The carrying amounts of other securities for which fair values were not readily determinable at March 31 are as follows: Equity investment in funds Equity investments in nonpublic companies (d) Redemption schedules for maturity of debt securities at March 31 are as follows: Millions of yen 2006 2007 ¥10,001 6,996 ¥10,001 7,521 Thousands of U.S. dollars 2007 $11,102 7,051 0 Thousands of U.S. dollars 2007 $84,754 59,288 Millions of yen 2007 Debt securities: Government and municipal bonds Due within one year Due after one year, within five years Due after five years, within ten years Due after more than ten years ¥5 ¥5 ¥9 ¥9 ¥ 2 ¥ 2 ¥ – ¥ – Annual Report 2007 59 Debt securities: Government and municipal bonds Debt securities: Government and municipal bonds Millions of yen 2006 Due within one year Due after one year, within five years Due after five years, within ten years Due after more than ten years ¥23 ¥23 ¥1 ¥1 ¥ – ¥ – ¥ – ¥ – Thousands of U.S. dollars 2007 Due within one year Due after one year, within five years Due after five years, within ten years Due after more than ten years $42 $42 $76 $76 $17 $17 $ – $ – 9. Accumulated depreciation Accumulated depreciation at March 31 is comprised of the following: Buildings Machinery and equipment Other 10. Borrowings Millions of yen 2006 2007 ¥ 213,372 935,316 85,842 ¥1,234,530 ¥ 208,128 891,598 84,591 ¥1,184,317 Thousands of U.S. dollars 2007 $ 1,808,237 7,926,407 727,475 $10,462,119 Short-term borrowings at March 31, 2007 and 2006 represented loans, principally from banks. The weighted average interest rates on these borrowings were 1.84 % in 2007 and 1.23 % in 2006. Long-term debt at March 31 is comprised of the following: Loans, principally from banks and insurance companies due 2007 to 2023 with weighted average interest rates of 2.86% (short-term portion) and 1.84% (long-term portion): Secured Unsecured Unsecured 1.02% to 2.15% yen bonds due 2007 to 2009 Unsecured 1.0% to 1.8% step up coupon Euro yen bonds due 2011 Unsecured 10 years constant manurity swap rate less 6 months yen LIBOR multiplied by 0.45% Euro yen bonds due 2006 Unsecured 0.29% to 2.83% Euro yen bonds due 2007 to 2009 Unsecured US$1.9% to 3.5% reversal dual currency Euro yen bonds due 2007 to 2013 Less – Portion due within one year Millions of yen 2006 2007 ¥ 1,003 80,626 45,000 10,000 – 17,000 12,000 165,629 (36,555) ¥129,074 ¥ 1,354 80,788 65,000 10,000 2,000 18,000 12,000 189,142 (32,842) ¥156,300 Thousands of U.S. dollars 2007 $ 8,500 683,271 381,356 84,745 – 144,068 101,695 1,403,635 (309,788) $1,093,847 60 The aggregate annual maturities of long-term debt after March 31, 2007 are as follows: Years ending March 31 2008 2009 2010 2011 and thereafter Millions of yen ¥ 36,555 32,195 37,100 59,779 ¥165,629 Thousands of U.S. dollars $ 309,788 272,839 314,407 506,601 $1,403,635 A summary of assets pledged as collateral for short-term loans and long-term debt at March 31, 2007 is as follows: Property, plant and equipment 11. Accrued pension and severance costs Upon terminating employment, employees of the parent company and its major subsidiaries in Japan are entitled, under most circumstances, to lump-sum severance indemnities and/or pension payments determined by reference mainly to their current basic rate of pay and length of service. Additional benefits may be granted to employees depending on the conditions under which termination of employment occurs. Certain foreign subsidiaries have defined benefit pension plans or defined contribution plans. Millions of yen ¥4,685 Thousands of U.S. dollars $39,703 The obligation for these severance indemnity benefits is provided for through accruals, contributory funded defined benefit pension plans, contributory funded defined benefit enterprise pension plans and non-contributory funded tax- qualified pension plans. Information on accrued severance and pension costs as at March 31, 2007 and 2006 are as follows: Projected benefit obligations Fair value of plan assets Unrecognized actuarial gains/losses Unrecognized prior service costs Prepaid pension cost Retirement benefits for employees Retirement benefits for directors and corporate auditors Accrued pension and severance costs 2007 ¥(302,528) 215,846 (86,682) (25,631) (8,403) (4,648) (125,364) (902) ¥(126,266) Millions of yen 2006 ¥(300,327) 206,022 (94,305) (23,619) (9,797) (3,896) (131,617) (816) ¥(132,433) Thousands of U.S. dollars 2007 $(2,563,797) 1,829,203 (734,594) (217,212) (71,212) (39,390) (1,062,408) (7,643) $(1,070,051) Note: The figures in the above table do not include additional benefit payables amounting to ¥82 million (US$695 thousand) and ¥1,352 million at March 31, 2007 and 2006, respectively. The amounts are recorded as part of current liabilities on the consolidated balance sheets at March 31, 2007 and 2006. Annual Report 2007 61 Net periodic pension and severance costs for employees for the years ended March 31, 2007 and 2006 include the following components: Service cost (*1) Interest cost Expected return on plan assets Amortization of unrecognized actuarial gains/losses Amortization of unrecognized prior service costs Net pension and severance costs 2007 ¥ 8,775 7,385 (5,229) (2,380) (1,393) ¥ 7,158 Millions of yen 2006 ¥ 8,697 7,293 (4,409) (2,726) (1,394) ¥ 7,461 Thousands of U.S. dollars 2007 $ 74,364 62,585 (44,314) (20,169) (11,805) $ 60,661 *1: The figures in the above table do not include the contributions made by employees. *2: In addition to the above costs, additional benefits amounting to ¥782 million (US$ 6,627 thousand) and ¥1,962 million were charged to income for the year ended March 31, 2007 and 2006, respectively. The assumptions used in calculation of the above information are as follows: Discount rate Expected rate of return on plan assets Method of attributing the projected benefits to periods of employee service Amortization of unrecognized prior service costs Amortization of unrecognized actuarial gains/losses 12. Taxes 2007 2.5% 2.5% Straight-line basis Mainly 10 years Mainly 10 years 2006 2.5% 2.5% Straight-line basis Mainly 10 years 1 year Income taxes applicable to the parent company and subsidiaries in Japan include (1) corporation tax, (2) enterprise tax and (3) inhabitants tax. Significant components of the deferred tax assets and liabilities at March 31 are as follows: Millions of yen 2006 2007 Thousands of U.S. dollars 2007 ¥ 50,524 8,611 7,080 4,674 4,107 3,387 2,401 2,060 1,094 375 353 12,560 97,226 (9,997) 87,229 ¥ 53,496 8,317 6,205 3,196 4,130 3,016 2,145 1,308 1,037 525 425 13,817 97,617 (6,203) 91,414 (56,513) (14,995) (1,070) (3,732) (76,310) (60,281) (15,777) (1,621) (3,216) (80,895) $ 428,169 72,975 60,000 39,610 34,805 28,703 20,347 17,458 9,271 3,178 2,992 106,441 823,949 (84,720) 739,229 (478,924) (127,076) (9,068) (31,627) (646,695) ¥ 10,919 ¥ 10,519 $ 92,534 Deferred tax assets: Accrued pension and severance costs Accrued bonuses Loss on disposal of property, plant and equipment Tax loss carryforwards Unrealized gain on fixed assets and others Devaluation of inventories Accrued enterprise tax Impairment loss Devaluation of investment securities Allowance for doubtful accounts Depreciation Other Sub total deferred tax assets Less: Valuation allowance Total deferred tax assets Deferred tax liabilities: Unrealized gains on securities Reserve for fixed assets reduction Reserve for special depreciation Other Total deferred tax liabilities Net deferred tax assets (liabilities) 62 Reconciliation of the differences between the statutory tax rate and the effective income tax rate for the year ended March 31 is as follows: Statutory tax rate Increase (reduction) in taxes resulting from: Non-deductible expenses and non-taxable income Equalization inhabitants taxes R&D expenses deductible from income taxes Amortization of goodwill Equity in earnings of unconsolidated subsidiaries and affiliates Other Effective income tax rate 2007 40.7% 2.0 0.4 (3.9) 0.1 (0.9) 1.5 39.9% Statutory tax rate Increase (reduction) in taxes resulting from: Non-deductible expenses and non-taxable income Equalization inhabitants taxes R&D expenses deductible from income taxes IT investments deductible from income taxes Amortization of goodwill Equity in earnings of unconsolidated subsidiaries and affiliates Other Effective income tax rate 2006 40.7% 2.1 0.4 (6.4) (0.4) 0.1 (0.2) 0.3 36.6% In Japan, the consumption tax system is designed so that all goods and services are taxed at a flat rate of 5% unless specified otherwise. Assets, liabilities and profit and loss accounts are stated net of consumption tax. 13. Revaluation surplus A revaluation surplus is recorded by a consolidated foreign subsidiary, based on the applicable laws. 14. Selling, general and administrative expenses Major components of selling, general and administrative expenses are as follows: Freight and storage Salaries and benefits Depreciation Research and development (*) Advertising Rent Millions of yen 2006 2007 ¥34,287 87,819 11,176 37,307 14,744 28,392 ¥32,554 87,117 10,718 35,832 13,411 28,072 Thousands of U.S. dollars 2007 $290,568 744,229 94,712 316,161 124,949 240,610 (*) The aggregate amounts of research and development expenses included in manufacturing costs and selling, general and administrative expenses for the years ended March 31, 2007 and 2006 are ¥52,426 million (US$ 444,288 thousand) and ¥51,467 million, respectively. 15. Impairment loss Grouping of operating assets is based on managerial accounting categories, with consideration given to production process, geographic location, and domain of authority for making investment decisions. Idle assets are recorded separately in each fixed assets class. In the fiscal year ended March 31, 2007, the book value of machinery and equipment with no specific prospect for conversion of use and of land with diminished market value was reduced to the recoverable amount, resulting in a special loss of ¥189 million (US$ 1,602 thousand) as impairment loss and ¥1,659 million (US$ 14,059 thousand) as a restructuring charge. In the fiscal year ended March 31, 2006, resulting in a special loss of ¥3,799 million was recorded as impairment loss. Recoverable amount for machinery and equipment was taken as disposable value less cost of disposal, and that for land was taken as net selling price mainly based on the appraisal value as determined by a real estate appraiser. Annual Report 2007 63 16. Restructuring charges Major components of the restructuring charges are as follows: Loss on disposal and devaluation of assets and others Impairment of fixed assets Loss on liquidation of subsidiaries and others 17. Leases Periodic lease charges for the Company’s financing leases, where lessors retain the ownership of the leased assets, are charged to income. Such lease charges are ¥4,551 million (US$38,568 Millions of yen 2006 ¥2,456 – 715 ¥3,171 2007 ¥2,577 1,659 515 ¥4,751 Thousands of U.S. dollars 2007 $21,839 14,509 4,365 $40,263 thousand) and ¥4,554 million for the years ended March 31, 2007 and 2006, respectively. The future lease payments under the Company’s financing leases and non-cancelable operating leases at March 31, including amounts representing interest, were as follows: Due within one year Due after one year Millions of yen 2006 2007 ¥ 4,287 5,770 ¥10,057 ¥ 3,971 6,161 ¥10,132 Thousands of U.S. dollars 2007 $36,331 48,898 $85,229 The leased assets under the Company’s financing leases, where lessors retain ownership of the leased assets were accounted for as operating leases by the Company. If the leases had been capitalized, then the cost of the assets and the related accumulated amortization, computed using the straight-line method over the term of the lease, at March 31, 2007 and 2006 would have been as follows: Buildings Machinery and equipment Other tangible fixed assets Intangible fixed assets – other Buildings Machinery and equipment Other tangible fixed assets Intangible fixed assets – other Thousands of U.S. dollars 2007 Net amount $73,508 1,907 8,119 1,695 $85,229 Millions of yen 2007 Net amount ¥ 8,674 225 958 200 ¥10,057 Millions of yen 2006 Net amount ¥ 8,738 238 883 273 ¥10,132 Accumulated amortization ¥8,026 328 1,050 358 ¥9,762 Accumulated amortization ¥6,387 378 841 355 ¥7,961 Cost ¥16,700 553 2,008 558 ¥19,819 Cost ¥15,125 616 1,724 628 ¥18,093 The amortization amount of the leased assets, computed using the straight-line method over the term of the leases, would have been ¥4,551 million (US$38,568 thousand) and ¥4,554 million for the years ended March 31, 2007 and 2006, respectively. No impairment loss is allocated to the leased assets. 64 18. Business segment information (1) Industry segments — Sales and operating profit (loss) for the year ended March 31: Sales: Customers Intersegment Total Operating expenses Operating profit (loss) Chemicals Homes Pharma Fibers ¥752,632 16,590 769,222 717,255 ¥ 51,967 ¥405,695 316 406,011 378,502 ¥ 27,509 ¥104,474 9 104,483 90,610 ¥ 13,873 ¥106,639 1,870 108,509 104,356 ¥ 4,153 Sales: Customers Intersegment Total Operating expenses Operating profit (loss) Chemicals Homes Pharma Fibers ¥660,402 16,659 677,061 636,549 ¥ 40,512 ¥404,539 111 404,650 376,432 ¥ 28,218 ¥105,842 19 105,861 94,803 ¥ 11,058 ¥89,704 2,262 91,966 87,950 ¥ 4,016 Sales: Customers Intersegment Total Operating expenses Operating profit (loss) Chemicals Homes Pharma Fibers $6,378,237 140,594 6,518,831 6,078,433 $ 440,398 $3,438,093 2,678 3,440,771 3,207,644 $ 233,127 $885,373 76 885,449 767,881 $117,568 $903,721 15,847 919,568 884,373 $ 35,195 Construction Materials Life & Living Services, Engineering and Others ¥60,818 12,465 73,283 68,246 ¥ 5,037 ¥52,558 3,875 56,433 51,848 ¥ 4,585 ¥28,881 29,305 58,186 54,331 ¥ 3,855 Construction Materials Life & Living Services, Engineering and Others ¥56,512 11,596 68,108 64,292 ¥ 3,816 ¥51,942 3,624 55,566 50,740 ¥ 4,826 ¥26,821 27,247 54,068 50,785 ¥ 3,283 Combined ¥1,623,791 65,639 1,689,430 1,555,829 ¥ 133,601 Combined ¥1,498,620 62,510 1,561,130 1,446,068 ¥ 115,062 Construction Materials Life & Living Services, Engineering and Others Combined Millions of yen 2007 Corporate expenses and eliminations Consolidated ¥ – (65,639) (65,639) (59,839) ¥ (5,800) ¥1,623,791 – 1,623,791 1,495,990 ¥ 127,801 Millions of yen 2006 Corporate expenses and eliminations Consolidated ¥ – (62,510) (62,510) (56,174) ¥ (6,336) ¥1,498,620 – 1,498,620 1,389,894 ¥ 108,726 Thousands of U.S. dollars 2007 Corporate expenses and eliminations Consolidated $515,407 105,635 621,042 578,356 $ 42,686 $445,407 32,839 478,246 439,390 $ 38,856 $244,754 248,348 493,102 460,432 $ 32,670 $13,760,941 556,263 14,317,204 13,184,992 $ 1,132,212 $ $13,760,941 – – (556,263) 13,760,941 (556,263) 12,677,882 (507,110) $ (49,153) $ 1,083,059 Electronics Materials & Devices ¥112,094 1,209 113,303 90,681 ¥ 22,622 Electronics Materials & Devices ¥102,858 992 103,850 84,517 ¥ 19,333 Electronics Materials & Devices $949,949 10,246 960,195 768,483 $191,712 Identifiable assets, depreciation and amortization, impairment loss and capital expenditure as of and for the year ended March 31: Chemicals Homes Pharma Fibers Electronics Materials & Devices Construction Materials Life & Living Services, Engineering and Others Millions of yen 2007 Corporate assets and Combined eliminations Consolidated ¥594,205 ¥212,739 ¥120,926 ¥115,575 ¥123,764 ¥55,141 ¥49,473 ¥317,537 ¥1,589,360 ¥(129,438) ¥1,459,922 31,934 164 42,569 2,383 – 2,701 6,553 1,659 5,722 5,302 – 6,362 13,356 – 16,234 3,040 – 2,301 4,152 – 3,455 735 – 760 67,455 1,823 80,104 4,191 25 4,309 71,646 1,848 84,413 Chemicals Homes Pharma Fibers Electronics Materials & Devices Construction Materials Life & Living Services, Engineering and Others Millions of Yen 2006 Corporate assets and Combined eliminations Consolidated ¥529,100 ¥200,066 ¥118,721 ¥105,718 ¥114,743 ¥49,557 ¥50,970 ¥317,171 ¥1,486,046 ¥(110,002) ¥1,376,044 31,281 – 26,632 2,448 251 3,583 6,364 – 4,897 5,337 – 5,417 12,051 – 14,960 3,129 – 2,313 4,352 – 4,655 715 – 1,038 65,677 251 63,495 3,722 3,548 2,815 69,399 3,799 66,310 Identifiable assets Depreciation and amortization Impairment loss Capital expenditure Identifiable assets Depreciation and amortization Impairment loss Capital expenditure Annual Report 2007 65 Chemicals Homes Pharma Fibers Electronics Materials & Devices Construction Materials Life & Living Services, Engineering and Others Thousands of U.S. dollars 2007 Corporate assets and Combined eliminations Consolidated Identifiable assets Depreciation and amortization Impairment loss Capital expenditure $5,035,636 $1,802,873 $1,024,797 $979,449 $1,048,847 $467,297 $419,263 $2,690,991 $13,469,153 $(1,096,933) $12,372,220 270,627 1,390 $ 360,754 $ 20,195 – 22,890 $ 44,932 55,534 14,059 – 48,491 $ 53,915 113,187 – $ 137,576 25,763 – $ 19,500 35,187 – $ 29,280 $ 6,229 – 6,441 $ 571,654 15,449 678,847 $ 35,516 212 36,517 $ 607,170 15,661 715,364 Note 1: The Company’s industry segments are aggregated into eight segments based primarily upon similarities of products, services, and economic characteristics. Chemicals– The Company produces, processes and sells monomers and basic chemicals (such as ammonia, nitric acid, caustic soda, acrylonitrile, styrene monomer, methyl methacrylate (MMA) monomer, PMMA resin, high-compound fertilizers, and adipic acid), polymer and elastomers (such as Suntec™ polyethylene (PE), Stylac™ -AS (styrene-acrylonitrile), Stylac™-ABS (acrylonitrile-butadiene-styrene), synthetic rubber, Tenac™ polyacetal, Xyron™ modified polyphenylene ether (mPPE), and Leona™ nylon 66 polymer and filament), specialty products and systems (such as coating materials, latex, Ceolus™ microcrystalline cellulose, explosives, explosion-bonded metal clad, APR™ photosensitive resin and printing plate making systems, Microza™ UF and MF membranes and systems, Hipore™ microporous membrane, and ion-exchange membranes and electrolysis systems). Homes– The Company builds Hebel Haus™ pre-fabricated, custom-built homes, and Hebel Maison™ apartments, and operates related businesses such as condominiums, remodeling, real estate, residential land development, and home financing. Pharma– The Company produces and sells pharmaceuticals (such as Elcitonin™, Bredinin™, Flivas™, and Toledomin™), pharmaceutical intermediates, diagnostics reagents. The Company also manufactures APS™ artificial kidneys, Sepacell™ leukocyte reduction filters, Cellsorba™ leukocyte adsorption columns, Planova™ virus removal filters, and contact lenses. Fibers– The Company produces and sells Roica™ elastic polyurethane filament, nonwoven fabrics (such as Eltas™ spunbond and Lamous™ artificial suede), Bemberg™ cuprammonium rayon, and polyester filament. Electronics Materials & Devices– The Company produces and sells Pimel™ photosensitive polyimide, Sunfort™ photosensitive dry film resist (DFR), photomask pellicles, LSIs, Hall elements, and glass fabric. Construction Materials– The Company produces and sells autoclaved lightweight concrete (ALC) panels (such as Hebel™), piles, Neoma™ foam insulation panels, and artificial fish reefs. Life & Living– The Company produces and sells Saran Wrap™ cling film, Ziploc™ storage bags, and plastic films, sheets, and foams. Services, Engineering, and Others– The Company provides plant engineering, environmental engineering, personnel staffing and placement, and think tank services. 2: Accounting Standard for Directors’ Bonus became effective for the fiscal year ended March 31, 2007. The Company applies this new standard in the fiscal year ended March 31, 2007. The effect by industry segment is that operating expenses in the following segments are higher by the following amounts: “Chemicals” ¥35 million (US$296 thousand), “Homes” ¥35 million (US$296 thousand), “Pharma” ¥15 million (US$127 thousand), “Fibers” ¥14 million (US$119 thousand), “Electronics Materials & Devices” ¥10 million (US$85 thousand), “Construction Materials” ¥16 million (US$136 thousand), “Life & Living” ¥6 million (US$51 thousand), “Corporate” ¥91 million (US$771 thousand) in the year ended March 31, 2007 than if the previous method had been continued. This had the effect of decreasing the operating profit of each segment. 3: Accounting Standards for Impairment of Fixed Assets became effective for the fiscal year ended March 31, 2006. The Company applies this new standard in the fiscal year ended March 31, 2006. 4: The parent company and certain Japanese subsidiaries have been fully amortizing unrecognized actuarial gains/losses in the year following that in which they arose. Beginning with the fiscal year ended March 31, 2006, actuarial gains/losses are amortized on a straight-line basis over the ten years following that in which they arise. Actuarial gain of ¥23,604 million occurred in the year ended March 31, 2006 would be amortized on a straight-line basis over the following ten years, net pension and severance costs would be ¥19,639 million higher than if one-year amortization had been continued. The effect by industry segment is that operating expenses would be higher by the following amounts: “Chemicals” ¥6,064 million, “Homes” ¥3,097 million, “Pharma” ¥2,830 million, “Fibers” ¥1,869 million, “Electronics Materials & Devices” ¥1,077 million, “Construction Materials” ¥1,368 million, “Life & Living” ¥855 million, “Corporate” ¥2,478 million in the year ended March 31, 2007 than if one-year amortization had been continued. In the fiscal year ended March 31, 2007, the effect of this change by industry segment on profits was not significantly different than one described in the financial statements for the year ended March 31, 2006. 5: Corporate operating expenses included in “Corporate expenses and eliminations” as of the years ended March 31, 2007 and 2006 amount to ¥14,325 million (US$121,398 thousand) and ¥15,209 million, respectively. 6: Corporate assets such as surplus funds (cash on hand and in banks), long-term-investment funds (investment securities etc.) and land etc. included in “Corporate assets and eliminations” for the years ended March 31, 2007 and 2006 amount to ¥443,000 million (US$3,754,237 thousand) and ¥447,076 million, respectively. 66 (2) Geographic areas — Total sales and assets of consolidated subsidiaries located in countries or regions outside of Japan as of and for the years ended March 31, 2007 and 2006 were not significant. (3) Overseas sales — Overseas sales for the years ended March 31, 2007 and 2006 were as follows: Millions of yen Millions of yen Thousands of U.S. dollars Others 2007 Total East Asia Others 2006 Total East Asia Others 2007 Total ¥182,764 ¥ 428,040 1,623,791 – ¥222,377 – ¥150,789 – ¥ 373,166 1,498,620 $2,078,611 – $1,548,847 $ 3,627,458 13,760,941 – East Asia ¥245,276 – 15.1% 11.3% 26.4% 14.8% 10.1% 24.9% Overseas sales Consolidated net sales Percentage of consolidated net sales (%) Note 1: Geographical distance is considered in the classification of country or area. 2: Major countries or areas included in each category are as follows; East Asia: China, Korea and Taiwan Others: Southeast Asia (except East Asia), U.S.A., Europe and others. 3: Overseas sales represent the sales of the Company to countries and areas outside of Japan. 19. Related Party Transactions Transactions for the year ended March 31, 2007 between the Company and related parties are as follows: Type of related parties Name Occupation Equity ownership in the Company Nature of transactions Amount (*1) Millions of yen Thousands of U.S. dollars Corporate Auditor Yuichiro Miyake Attorney 0.0% Attorney’s fees (*2) 58 492 *1: Not including consumption tax. *2: Amounts of attorney’s fees were determined using a reasonable method of calculation based on guidelines formerly issued by the Japan Federation of Bar Associations and other standards. There were no transactions for the year ended March 31, 2006 between the Company and related parties. 20. Appropriation of retained earnings Appropriations of retained earnings are not accrued in the financial statements for the period to which they relate, but are recorded in the subsequent accounting period after approval by the Board of Directors. Retained earnings at March 31, 2007 include amounts 21. Contingent liabilities representing final cash dividends of ¥9,795 million (US$83,008 thousand) which were approved at the Board meeting held on May 8, 2007. Contingent liabilities at March 31, arising in the ordinary course of business are as follows: Notes discounted Loans guaranteed Commitment for guarantees Letters of awareness Millions of yen 2006 2007 ¥ 141 11,185 2,363 235 ¥13,924 ¥ 296 15,569 2,646 734 ¥19,245 Thousands of U.S. dollars 2007 $ 1,195 94,788 20,025 1,992 $118,000 The parent company and certain of its subsidiaries and affiliates were defendants in several pending lawsuits. However, based upon the information currently available to both the Company and its legal counsel, management of the Company believes that any damages from such lawsuits will not have a material effect on the Company’s consolidated financial statements. Annual Report 2007 67 22. Reconciliation of the differences between basic and diluted net income per share Reconciliation of the differences between basic and diluted net income per share for the years ended March 31 is as follows: Net income Amount not allocated to the common stock Net income allocated to the common stock Effect of dilutive securities Net income allocated to the common stock for computation of diluted net income per share Weighted-average shares Effect of dilutive securities Weighted-average shares for computation of diluted net income per share Basic net income per share Diluted net income per share Thousands of U.S. dollars 2007 $581,144 – $581,144 – $581,144 Millions of yen 2006 2007 ¥68,575 – ¥68,575 – ¥68,575 ¥59,668 (218) ¥59,450 – ¥59,450 Thousands of shares 2006 2007 1,399,462 – 1,399,462 1,400,109 – 1,400,109 2007 ¥49.00 Yen 2006 ¥42.46 ¥ – ¥ – U.S. dollars 2007 $0.42 $ – As the Company had no dilutive securities as at March 31, 2007 and 2006, the Company does not disclose diluted net income for the years ended March 31, 2007 and 2006. 23. Subsequent event Subsequent to March 31, 2007, Asahi Kasei Life & Living Corp., a wholly-owned subsidiary, was merged into Asahi Kasei Chemicals Corp., a wholly-owned subsidiary, on April 1, 2007. Accordingly, a result of re-evaluation of the Company's industry segment configuration, the Life & Living segment would be combined with the Chemicals segment based on the similarity of product types and characteristics and the unification of the organization. 68 Annual Report 2007 69 Major Subsidiaries and Affiliates As of April 1, 2007 Company Main products/business line Paid-in capital (million) Equity interest (%) Chemicals Benzene, ethylene Packaging products and solutions Epoxy resin Cling film, other household products Aluminum paste Specialty chemicals Shotgun cartridges Sale of industrial explosives, civil engineering materials Processing and sale of plastic and fiber Synthetic rubber Silicone Caustic soda, chlorine Biaxially oriented polystyrene sheet Polystyrene Fertilizer Synthetic resin, fabricated plastic products Compounded performance resin operations Coloring and compounding of performance resin Sale of acrylonitrile Sale of purging compound Acrylonitrile, sodium cyanide Adipic acid, microporous membrane PMMA sheet for light-guide plates Sale of performance resin Coloring and compounding of performance resin Polyacetal High-performance HDI-based polyisocyanate Industrial membranes and systems Sales of performance resin Performance resin PPE powder Coloring and compounding of performance resin Coloring and compounding of styrenic resin Sale of compounded performance resin Sale of photopolymer, printing plate making systems Sale of photopolymer, printing plate making systems Compounded performance resin operations Coloring and compounding of performance resin Coloring and compounding of performance resin Housing Steel frames Financial services Home maintenance and remodeling Home leasing, real estate brokerage ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ US$ US$ US$ US$ W W W CNY CNY US$ CNY CNY HK$ US$ US$ B US$ A A £ £ £ A ¥ ¥ ¥ ¥ ¥ 3,000 2,000 490 300 250 250 175 100 132 160 1,000 1,050 1,000 1,050 5,000 305 5,000 17.8** 21.7** 16.4 1.0 50,642 1,500 5,000 18 50 32.0 149 29 20.0 46.0 35.0 140 6.3 5.0 3.4 0.3 11.1 5.3 4.3 3,250 2,820 500 250 200 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 99.4 75.0 50.0 50.0 50.0 45.0 35.0 29.8 100.0 100.0 100.0 100.0 100.0 100.0 60.0 100.0 51.0 50.0 100.0 100.0 100.0 100.0 70.0 100.0 25.7 100.0 100.0 100.0 65.0 65.0 65.0 100.0 100.0 100.0 100.0 100.0 Chemicals Segment Asahi Kasei Chemicals Corp.* Sanyo Petrochemical Co., Ltd.* Asahi Kasei Pax Corp.* Asahi Kasei Epoxy Co., Ltd.* Asahi Kasei Home Products Corp.* Asahi Kasei Metals Ltd. Asahi Kasei Finechem Co., Ltd. Asahi SKB Co., Ltd. Asahi Kasei Geotechnologies Co., Ltd. Asahi Kasei Technoplus Co., Ltd.* Japan Elastomer Co., Ltd.* Wacker Asahikasei Silicone Co., Ltd. Okayama Chemical Co., Ltd. Sundic Inc. PS Japan Corp. Chisso Asahi Fertilizer Co., Ltd. Asahi Organic Chemicals Industry Co., Ltd. Asahikasei Plastics (America) Inc.* Asahi Kasei Plastics North America, Inc.* Asahi Chemical Intermediates Inc.* Sun Plastech Inc.* Tong Suh Petrochemical Corp., Ltd.* Asahi Kasei Chemicals Korea Co., Ltd. Delaglas Korea Corp. Asahikasei Plastics (Shanghai) Co., Ltd. Asahikasei (Suzhou) Plastics Compound Co., Ltd. Asahi-DuPont POM (Zhangjiagang) Co., Ltd. Asahi Kasei Performance Chemicals Corp.* Asahi Kasei Microza (Hangzhou) Co., Ltd.* Asahi Kasei Plastics (Hong Kong) Co., Ltd. Asahi Kasei Plastics Singapore Pte. Ltd.* Polyxylenol Singapore Pte. Ltd.* Asahikasei Plastics (Thailand) Co., Ltd. PT Nippisun Indonesia NV Asahi Thermofil (Europe) SA* NV Asahi Photoproducts (Europe) SA* Asahi Photoproducts (UK) Ltd.* AK&N (UK) Ltd.* Asahi Thermofil (UK) Ltd.* Asahi Thermofil (France) SA* Homes Segment Asahi Kasei Homes Corp.* Asahi Kasei Jyuko Co., Ltd.* Asahi Kasei Mortgage Corp.* Asahi Kasei Reform Co., Ltd.* Asahi Kasei Real Estate, Ltd.* * Consolidated subsidiary ** Including capital reserve 70 Company Main products/business line Paid-in capital (million) Equity interest (%) Pharma Segment Asahi Kasei Pharma Corp.* Asahi Kasei Medical Co., Ltd.* Asahi Kasei N&P Co., Ltd.* Asahikasei Aime Co., Ltd.* Nikkiso Asahi Kasei Medical Korea Co., Ltd. Asahi Kasei Medical (Hangzhou) Co., Ltd.* Asahi Kasei Medical Europe GmbH Asahi Pharma Spain, SL Fibers Segment Asahi Kasei Fibers Corp.* Kyokuyo Sangyo Co., Ltd.* DuPont-Asahi Flash Spun Products Co., Ltd. Solotex Corp. Asahi Kasei Spandex America, Inc.* Hangzhou Asahikasei Spandex Co., Ltd.* Hangzhou Asahikasei Textiles Co., Ltd.* Formosa Asahi Spandex Co., Ltd. Asahi Chemical (HK) Ltd.* Thai Asahi Kasei Spandex Co., Ltd.* Asahi Kasei Spandex Europe GmbH* Asahi Kasei Fibers Italy SRL Asahi Kasei Fibers Deutschland GmbH Electronics Materials & Devices Segment Asahi Kasei EMD Corp.* Asahi Kasei Microsystems Co., Ltd.* Asahi-Schwebel Co., Ltd.* Asahi Kasei Electronics Co., Ltd.* AKM Semiconductor, Inc.* Asahi Kasei EMD Korea Corp. Asahi Kasei Electronics Materials (Suzhou) Co., Ltd.* Asahi Kasei EMD Taiwan Corp. Asahi Kasei Wah Lee Hi-Tech Corp.* Asahi-Schwebel (Taiwan) Co., Ltd.* Construction Materials Segment Asahi Kasei Construction Materials Corp.* Asahi Kasei Foundation Systems Corp.* Asahi Kasei Marinetech Co., Ltd.* Services, Engineering and Others Segment Asahi Research Center Co., Ltd.* Asahi Finance Co., Ltd.* Asahi Kasei Engineering Co., Ltd.* Asahi Kasei Trading Co., Ltd.* Sun Trading Co., Ltd.* Asahi Kasei Amidas Co., Ltd.* AJS Inc. Asahi Kasei America, Inc.* Asahi Kasei Business Management (Shanghai) Co., Ltd. * Consolidated subsidiary ** Including capital reserve Pharmaceuticals, medical products Medical devices, medical systems Functional food ingredients Contact lenses Sale of medical devices Hemodialyzers Sale of medical devices, medical systems Pharmaceuticals Fiber, textiles Processing and sale of fiber, textiles Flash spun Polytrimethylene terephthalate fiber Spandex Spandex Warp-knit spandex textiles Spandex Promotion and marketing of fiber and textiles Spandex Spandex Sale of spandex and cupro cellulosic fiber Sale of artficial suede Electronics materials and devices LSIs Glass fabric Hall elements Sale of LSIs Sale of pellicles Photosensitive dry film resist Sale of pellicles Photosensitive dry film resist Glass fabric Construction materials Installation of piles Sale of marine structures Information and analysis Investment, finance Plant, equipment, process engineering Sale of Asahi Kasei products Sale of Asahi Kasei products Employment agency, consulting Computer software, IT systems Business support services Business support services ¥ ¥ ¥ ¥ W CNY A A ¥ ¥ ¥ ¥ US$ CNY CNY NT$ HK$ B A A A ¥ ¥ ¥ ¥ US$ W CNY NT$ NT$ NT$ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ US$ US$ 3,000 800 495 480 4,400 163 0.2 0.1 3,000 80 450 250 10.2 132 78 801 65 700 10.0** 3.0 0.3 3,000 50 50 50 2.9 820 181 1.0 49 326 3,000 200 30 3,000 800 400 98 94 80 800 0.1 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 50.0 50.0 100.0 100.0 82.5 50.0 100.0 60.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 80.6 51.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 49.0 100.0 3.0 100.0 Annual Report 2007 71 Corporate Profile As of March 31, 2007 Company Name Asahi Kasei Corporation Date of Establishment May 21, 1931 Paid-in Capital Employees ¥103,388,521,767 23,715 (Consolidated) 786 (Non-consolidated) Asahi Kasei Group Offices Asahi Kasei Corporation Tokyo Head Office 1-1-2 Yurakucho, Chiyoda-ku Tokyo 100-8440, Japan Phone: +81-3-3507-2060 Fax: +81-3-3507-2495 Osaka Head Office 1-2-6 Dojimahama, Kita-ku Osaka 530-8205, Japan Phone: +81-6-6347-3111 Fax: +81-6-6347-3077 Beijing Office Room 1408 New China Insurance Tower No.12 Jian Guo Men Wai Avenue Chao Yang District Beijing 100022, China Phone: +86-10-6569-3939 Fax: +86-10-6569-3938 Shanghai Office Room 2321 Shanghai Central Plaza 381 Huaihai Zhong Road Shanghai 200020, China Phone: +86-21-6391-6111 Fax: +86-21-6391-6686 Asahi Kasei America, Inc. 535 Madison Avenue, 33rd Floor New York, NY 10022, USA Phone: +1-212-371-9900 Fax: +1-212-371-9050 72 Core Operating Companies Asahi Kasei Chemicals 1-1-2 Yurakucho, Chiyoda-ku Tokyo 100-8440, Japan Phone: +81-3-3507-2220 Asahi Kasei Homes 1-24-1 Nishi-shinjuku, Shinjuku-ku Tokyo 160-8345, Japan Phone: +81-3-3344-7111 Asahi Kasei Pharma 9-1 Kanda Mitoshiro-cho, Chiyoda-ku Tokyo 101-8481, Japan Phone: +81-3-3259-5777 Asahi Kasei Fibers 1-2-6 Dojimahama, Kita-ku Osaka 530-8205, Japan Phone: +81-6-6347-3500 Asahi Kasei EMD 1-23-7 Nishi-shinjuku, Shinjuku-ku Tokyo 160-0023, Japan Phone: +81-3-6911-2700 Asahi Kasei Construction Materials 2-12-7 Higashi-shinbashi, Minato-ku Tokyo 105-0021, Japan Phone: +81-3-5473-5251 Asahi Kasei Life & Living* 1-1-2 Yurakucho, Chiyoda-ku Tokyo 100-8440, Japan * Merged with Asahi Kasei Chemicals on April 1, 2007. The Asahi Kasei History Our roots Growth in concert with the Japanese economy Throughout Japan’s period of post-war recovery and into the 1990s, our expansion and growth was largely driven by diversification. As it became clear that greater selectivity of businesses was required to revitalize operations, we moved beyond this mode of growth through diversification and entered a phase of selective diversification and structural transformation. Asahi Kasei’s operating profit* Japan’s GDP FY 1960=100 Growth through diversification Selective diversification and structural transformation FY 1955 1965 1975 1985 1995 2005 * Three-year moving average, non-consolidated until FY 1980. Growth through diversification A concerted drive to diversify into a broad range of fields began in the 1950s. A rapid pace of growth was sustained by successive advances into new fields of business, which were developed based on combinations of new technology with the technology of established businesses. When each business began to mature, its growth would naturally tend to slow. As this happened, there were other businesses which were new and growing quickly, ensuring that a high overall rate of growth was maintained. Nonwoven fiber Hollow-fiber membranes Spandex Microporous membrane Maturing Growth • Regenerated fiber • Chemical fertilizer • Explosives Incubation • Petrochemicals • Synthetic fibers • Housing • Construction materials • Electronics • Pharmaceuticals & medical devices 1923 Ammonia Ammonium sulfate 1924 Rayon 1931 Bemberg™ 1932 Explosives 1953/1957 Saran™ fiber Polystyrene 1959/1962 Acrylic fiber Acrylonitrile 1964 Nylon fiber Synthetic rubber 1972 Ethylene plant 1967 Hebel™ 1972 Hebel Haus™ 1975 Artificial kidneys 1978 Hall elements 1981 Pharmaceuticals business unit Dry film resist 1983 LSIs Shitagau Noguchi Our roots trace to the May 1922 establishment of Asahi Kenshoku K.K. (Asahi Fabric) and the October 1923 start of ammonia production by the Casale process in Nobeoka, Miyazaki Prefecture, at Nihon Chisso Hiryou K.K. (Japan Nitrogenous Fertilizer), founded by Shitagau Noguchi. Utilizing this ammonia, Japan Bemberg Fiber Co., Ltd. began production of Bemberg™ rayon by the cuprammonium process in April 1931, and in May of the same year the Nobeoka plant of Nihon Chisso Hiryou was spun off and established as Nobeoka Ammonia Fiber Co., Ltd., the formal establishment date of Asahi Kasei. The first decades were a time of growth through expansion in the production of industrial chemicals and chemical derivatives such as caustic soda, chlorine, fertilizers, nitrocellulose and industrial explosives, Bemberg™ and viscose rayon cellulosic fibers, and flavor enhancer. The years following World War II began broader ranging expansion into new fields, which has brought Asahi Kasei to the forefront of the Japanese chemical industry. Selective diversification and structural transformation The seven years from fiscal 1999 to fiscal 2005 were a time of selective diversification and structural transformation to establish a solid basis for renewed growth and expansion. With the Ishin-2000 initiative of fiscal 1999 to fiscal 2002, we accelerated the transformation to a high-earnings operational structure, and made a transition to a high-speed management system. Performance chemicals, electronics, and medical devices were expanded as high-earnings businesses, while viscose rayon, foods, and liquors, businesses with lower assets efficiency, were divested or closed. With the Ishin-05 initiative of fiscal 2003 to fiscal 2005, we advanced the transition to a high-earnings business portfolio, and in October 2003 made a transformation to a holding company configuration with a core operating company in each main field of business. Improved earnings and financial strength 0.78 0.79 0.62 0.54 D/E ratio Profit*, ¥ billion Net income (loss), ¥ billion 96.0 74.3 51.2 17.4 20.5 25.2 45.7 5.2 0.64 0.62 0.49 0.40 104.7 95.6 80.4 61.6 56.5 59.7 27.7 Ishin-2000 Ishin-05 (66.8) 2003 FY 1998 * Operating profit prior to amortization of actuarial differences in retirement benefits. 2001 2002 1999 2000 2004 2005 Ishin-2000 Selectivity and focus • Focus on competitive-superiority businesses • Fostering next-generation growth drivers • Divestment or closure of businesses with low assets efficiency • Stable financial foundation Ishin-05 Selective diversification • Building on strengths • Creation of cash flow • Management speed and autonomy Share of operating profit in four main sectors Homes & Construction Materials 29% FY 1998 FY 2005 Homes & Construction Materials 29% Chemical- based 40% Chemical- based 44% Pharma 21% Pharma 10% Electronics Materials & Devices 9% Electronics Materials & Devices 18% Investors Information As of April 1, 2007 Stock Listings Stock Code Authorized Shares Outstanding Shares Transfer Agent Independent Auditors Tokyo, Osaka, Nagoya, Fukuoka, Sapporo 3407 4,000,000,000 1,402,616,332 Sumitomo Trust & Banking Co., Ltd. 4-5-33 Kitahama, Chuo-ku Osaka 541-8639, Japan PricewaterhouseCoopers Aarata Number of Shareholders 126,348 % of equity* Largest Shareholders Master Trust Bank of Japan, Ltd. TS ..............................................................4.99 Nippon Life Insurance Co. .............................................................................4.80 Japan Trustee Services Bank, Ltd. TS..............................................................3.56 Employees’ Stockholding ................................................................................2.65 Sumitomo Mitsui Banking Corp.....................................................................2.53 Japan Trustee Services Bank, Ltd. TS4 ...........................................................2.32 Dai-ichi Mutual Life Insurance Co. ...............................................................2.30 Tokio Marine & Nichido Fire Insurance Co., Ltd. .........................................2.22 Meiji Yasuda Life Insurance Co. .....................................................................1.76 Mizuho Corporate Bank, Ltd..........................................................................1.45 * Percentage of equity ownership after exclusion of treasury stock. Distribution by Type of Shareholder Distribution by Number of Shares Held Japanese financial institutions Foreign investors Japanese individuals and groups Japanese securities companies Other Japanese companies 43.93% 27.72% 21.50% 2.05% 4.80% 100,000 or more 10,000–99,999 1,000–9,999 Less than 1,000 80.85% 6.40% 12.31% 0.44% 1,402,616,332 shares TM: Trademark or registered trademark of Asahi Kasei Corporation, affiliated companies, or third parties granting rights to Asahi Kasei Corporation or affiliated companies. 01 02 Annual Report 2007 73 A n n u a l R e p o r t 2 0 0 7 A S A H I K A S E I C O R P O R A T O N I Annual Report 2007 Basic Credo of the Asahi Kasei Group Basic tenets We the Asahi Kasei Group, through constant innovation and advances based in science and the human intellect, will contribute to human life and human livelihood. Guiding precepts We will create new value, thinking and working in unison with the customer, from the perspective of the customer. We will respect the employee as an individual, and value teamwork and worthy endeavor. We will contribute to our shareholders, and to all whom we work with and serve, as an international, high earnings enterprise. We will strive for harmony with the natural environment and ensure the safety of our products, operations, and activities. We will progress in concert with society, and honor the laws and standards of society as a good corporate citizen. Contents The Asahi Kasei History .................................................................................................................. 01 Consolidated Financial Highlights ................................................................................................. 04 To Our Shareholders ....................................................................................................................... 05 Driving the Strategic Advance: Growth Action – 2010 ................................................................... 06 Asahi Kasei Group Operations, Worldwide ................................................................................... 12 At a Glance ...................................................................................................................................... 14 Operating Segment ........................................................................................................................ 16 Corporate Governance ................................................................................................................... 32 Corporate Social Responsibility ...................................................................................................... 36 Directors, Corporate Auditors, Executive Officers ........................................................................ 38 Financial Section ............................................................................................................................. 39 Major Subsidiaries and Affiliates ................................................................................................... 70 Corporate Profile ............................................................................................................................ 72 Investors Information ..................................................................................................................... 73 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this annual report with respect to Asahi Kasei’s estimated future revenues and profits, strategies, tenets, financial forecasts, and other statements that are not historical facts are forward-looking statements. Such forward-looking statements are based on management’s judgments, predictions, and forecasts in light of information currently available and involve many potential risks and uncertainties that could cause actual results to differ materially from the content of these statements. Accordingly, undue reliance should not be placed on such forward-looking statements. This annual report was printed with vegetable-based ink on recycled paper. ASAHI KASEI CORPORATION A copy of the Company,s annual report and further information will be made available upon request in writing to: Corporate Communications Asahi Kasei Corporation 1-1-2 Yurakucho, Chiyoda-ku, Tokyo 100-8440, Japan Phone: +81-3-3507-2060 www.asahi-kasei.co.jp Fax: +81-3-3507-2495 

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