Kao Corp. Annual Report 2013

Plain-text annual report

Global Presence through Innovation The Kao Group aims to become a company with a global presence. In markets worldwide, we are integrating our unique insights to achieve meaningful innovation. This enables the value offerings that truly transform our core philosophies into realities. The Kao Way The Kao Way explains the essence of Kao’s unique corporate culture and spirit, which have been developed through our business activities since the founding of the company. Our mission is to strive for the wholehearted satisfaction and enrichment of the lives of people globally and to contribute to the sustainability of the world, with products and brands of excellent value that are created from the consumer's and customer's perspective. This commitment is embraced by all members of the Kao Group as we work together with passion to share joy with consumers and customers in our core domains of cleanliness, beauty, health and chemicals. * We deﬁne Yoki-Monozukuri as “a strong commitment by all members to provide products and brands of excellent value for consumer satisfaction.” This core concept distinguishes Kao from all others. ** Genba literally means “actual spot.” At Kao, Genba-ism deﬁnes the importance of observing things “on-site,” in the actual location and environment, both internally and externally, in order to maximize our understanding of the business and optimize our performance. Further information is available at: http://www.kao.com/jp/en/corp_about/kaoway.html Forward-Looking Statements Forward-looking statements such as earnings forecasts and other projections contained in this report are based on information available at the time of publication and assumptions that management believes to be reasonable. Actual results may differ materially from those expectations due to various factors. CONTENTS 2 Our Vision for the Future 4 A Message from President and CEO Michitaka Sawada 10 Directors, Audit & Supervisory Board Members and Executive Ofﬁcers 12 Kao at a Glance 15 Management Foundation 23 Financial Section 66 Principal Subsidiaries and Afﬁliates 67 Investor Information FINANCIAL HIGHLIGHTS Due to a change in the ﬁscal year end, the term of consolidation for the ﬁscal period ended December 31, 2012 consisted of the nine months from April to December for Kao Corporation and its subsidiaries whose ﬁscal year end was previously March 31 and the twelve months from January to December for subsidiaries whose ﬁscal year end was December 31. (Years ended March 31, 2010 to 2012, period ended December 31, 2012 and years ended December 31, 2012 and 2013) Net Sales and Operating Income Ratio (Billions of yen) 1,500 1,184.4 1,186.8 1,216.1 1,220.4 1,315.2 1,000 1,012.6 8.8 8.9 10.0 9.2 9.5 500 7.9 0 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 (Restated) Dec. 2013 Net Sales (Left) Operating Income Ratio (Right) Net Income and ROE* Net Income per Share (%) 25 (Billions of yen) 80 20 15 10 5 0 60 40 20 0 64.8 10.7 52.4 52.8 53.1 9.8 9.4 9.5 46.7 8.5 40.5 7.3 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 (Restated) Dec. 2013 Net Income (Left) ROE* (Right) *In calculating ROE, equity excludes minority interests and stock acquisition rights. (%) 20 (Yen) 150 15 10 5 0 100 50 0 126.03 100.46 101.12 101.77 87.69 75.57 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 (Restated) Dec. 2013 Kao Corporation and Consolidated Subsidiaries Years ended December 31, 2013 and 2012, period ended December 31, 2012, and year ended March 31, 2012 For the year: Net sales ...................................... EBITA ........................................... Operating income ......................... Net income ................................... EBITDA ......................................... At year end: Total assets .................................. Net worth ..................................... Per share: Net income ................................... Cash dividends ............................. Net worth ..................................... Dec. 2013 ¥1,315.2 154.8 124.7 64.8 202.0 1,133.3 628.7 Billions of yen Dec. 2012 (Restated) ¥1,220.4 143.8 111.8 53.1 189.2 Dec. 2012 Mar. 2012 ¥1,012.6 125.7 101.6 52.8 161.4 ¥1,216.1 142.2 108.6 52.4 188.4 Millions of U.S. dollars Dec. 2013 $12,479.5 1,468.8 1,182.8 614.5 1,916.2 Change Dec. Dec. 2012 2013 (Restated) 7.8% 7.6 11.5 21.9 6.8 — — 1,030.3 582.7 991.3 538.0 10,753.2 5,965.5 — — Yen U.S. dollars Change ¥ 126.03 64.00 1,227.54 ¥101.77 — — ¥ 101.12 62.00 1,116.61 ¥ 100.46 60.00 1,031.08 $ 1.20 0.61 11.65 23.8% — — Notes: 1. The U.S. dollar amounts are translated, for convenience only, at the rate of ¥105.39=US$1, the approximate exchange rate at December 31, 2013. 2. Yen and U.S. dollar amounts are rounded to the nearest whole number or decimal. 3. Earnings before interest, taxes, depreciation and amortization (EBITDA) is operating income before depreciation and amortization. 4. Net worth is equity, excluding minority interests and stock acquisition rights. 5. December 2012 (restated) represents figures for the year from January 1 to December 31, 2012 for Kao Group companies whose fiscal year end was previously March 31. Kao Corporation Annual Report 2013 1 Laurier1979Laurier sanitary napkins gain broad acceptance among women as a new type of sanitary napkin developed using super-absorbent polymers.Bioré1980Bioré Facial Foam offers an alternative to soap in the form of a new, neutral type of facial cleanser that is gentle on the skin.Kao Kona Sentaku1951Japan's ﬁrst synthetic powder laundry detergent for household use becomes a hit, spurred on by the growing use of electric washing machines.Kao Shampoo1932This product makes “shampoo” an everyday word, changing Japanese hair washing habits.Kao SekkenRepresentative Products1890Kao Sekken, a domestically produced quality facial soap, is launched in Japan.MIGHTY1964MIGHTY, a superplasticizer for concrete, is launched as a chemical product, supporting Japan’s rapid economic growth through uses including construction of the Shinkansen bullet train system.Mypet1960Mypet, Japan’s ﬁrst liquid household detergent, is launched.For over 120 years, the Kao Group has provided both consumer products that bring cleanliness, beauty and health to daily living, and chemical products that contribute to the growth of industry. We aim to build a global presence by continuous innovation to drive the creation of distinctive value offerings that bring positive change to daily living.Our Vision for the FutureNet salesTarget 1:Target 2: Fiscal 2015¥1.4 trillionOverseas sales ratio 30% or moreOperating income ¥150 billionBreak previous records for consolidated net sales and proﬁtsKao Group Mid-term Plan 2015 (K15)2 Kao Corporation Annual Report 2013 Kao Soﬁna1982Kao Soﬁna is launched as a new line of basic skin care cosmetic products offering dermatology-based basic skin care.Merries1984Merries baby diapers are a new type of disposable diaper derived from the development of various new processing technologies and functional materials such as super-absorbent polymers, non-woven sheets, and breathable sheets.Attack1987Breakout hit Attack compact laundry detergent makes detergent history using innovative biotechnologies for powerful cleansing at one-fourth the volume of conventional powder detergents.Healthya Green Tea2003Healthya Green Tea, which contains high levels of tea catechin, is the ﬁrst tea product in Japan to be approved by the Ministry of Health, Labor and Welfare as a Food for Speciﬁed Health Uses (FOSHU) due to its suitability for people concerned about body fat.Attack Neo2009Attack Neo, the world’s most concentrated liquid laundry detergent, is launched, delivering a new level of environmentally friendly performance with just one rinse cycle.Jergens Natural Glow2005Jergens Natural Glow, a sunless self-tanning hand and body lotion, is launched in the U.S.Healthya Coffee2013Launch of Healthya Coffee containing a high level of polyphenol “coffee chlorogenic acid” found in coffee beans. It is the ﬁrst coffee drink to be approved as a FOSHU that promotes body fat utilization.¥1.4 trillion 2015Net saleshe FutureA Company with a Global PresenceWe enrich the lives of people all over the world by driving change through the making of distinctive value offerings with our twin objectives of proﬁtable growth and contribution to the sustainability of society.Kao Corporation Annual Report 2013 3A Message from President and CEO Michitaka Sawada The Kao Group Mid-Term Plan 2015 (K15) got off to an excellent start in 2013, with record operating income. We will continue to focus on innovation to achieve the targets of K15 and become a company with a global presence. Michitaka Sawada President and Chief Executive Officer Net sales ¥1,315.2 billion +7.8% 1 Operating income ¥124.7 billion +11.5% 1 EBITA3 ¥154.8 billion +7.6% 1 EVA2 138 (Year ended December 31, 2011 = 100) Net income ¥64.8 billion Cash dividends +21.9% 1 ¥64.00 per share 24th consecutive period of increase +2.00 per share 1. Due to a change in the ﬁscal year end, growth for the year ended December. 31, 2013 is a comparison with the restated business results for the twelve-month period from January 1 to December 31, 2012. 2. EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. 3. Earnings before interest, taxes and amortization (EBITA) is operating income before amortization of goodwill and other items related to acquisitions. 4 Kao Corporation Annual Report 2013 1 Please begin by briefly discussing the voluntary recall at Kanebo Cosmetics and subsequent Kao Group initiatives. Kao’s subsidiary Kanebo Cosmetics decided to implement a voluntary recall of certain brightening products in Japan and some Asian countries* because of cases of vitiligo-like symptoms on the skin of some customers who used the products. We are wholeheartedly supporting the recovery of all those who experienced symptoms. This has included visiting individuals to conﬁrm their conditions and establishing a follow-up system. In January 2014, I also assumed direct control of our new quality assurance organization so I can be closely involved. The entire Kao Group is working to ensure even higher levels of safety and reliability in its products. * On July 4, 2013, Kanebo Cosmetics Inc., Lissage Ltd. and e’quipe, Ltd. of the Kao Group announced a voluntary recall of brightening products containing the quasi-drug-ingredient Rhododenol, which was approved by the Japanese Ministry of Health, Labour and Welfare in accordance with the Pharmaceutical Affairs Act after passing extensive safety tests. Kanebo Cosmetics’ Voluntary Recall Timeline July 2013 ■ Initiated a voluntary product recall ■ Established a task force ■ Began visiting all customers who had come forward ■ Began an independent study by outside experts (attorneys) ■ The Japanese Dermatological Association established a special committee to investigate the conditions and develop a treatment ■ Established a long-term follow-up system August 2013 ■ Merger of the quality control division and consumer center of Kanebo Cosmetics into Kao Corporation September 2013 ■ Reported the results of the independent study by outside experts and announced how Kanebo Cosmetics would address them October 2013 ■ Kao announced the integration of the research and production divisions of Kanebo Cosmetics into Kao Corporation starting from January 2014 January 2014 ■ Kao established a fund for research into vitiligo-like symptoms experienced by users of products containing Rhododenol 2 Please discuss your goals for a Kao Group that evolves through innovation. The primary goal of the Kao Group is to become a company with a global presence. I want the Kao Group to achieve recognition as a company and a manufacturer that makes distinctive value offerings. That is how we can realize the Kao Way, our corporate philosophy, which is to strive for the wholehearted satisfaction and enrichment of the lives of people globally and to contribute to the sustainability of the world. Innovation enables the value offerings that truly bring the Kao Group’s core philosophies to life. Over the years, the Kao Group has expanded its Consumer Products Business to include cleanliness, beauty and health. We used to directly transform cleanliness technology into products and value, but today, technology alone does not satisfy consumer expectations. As we expand in beauty and health, we also see that technology no longer directly equates to value. Rather, we need to develop Kao Corporation Annual Report 2013 5 comprehensive offerings that showcase the value offered by technology. We must also achieve meaningful innovation by integrating incremental insights. These approaches will enable the Kao Group to create innovative products and services that enrich people’s lives and society. Leading-edge research is vital for the development of excellent products. However, product development alone does not define our ability to deliver distinctive value offerings. Offerings that are a step ahead of their time are not readily accepted in the consumer products business. We need to make value offerings that are a “half-step ahead” to innovate successfully. The rising standard of living around the world is adding to the challenge of making value offerings. We therefore need to appeal to consumers through a wide range of innovations that will enrich society, including product and marketing innovations. Ultra Attack Neo ultra-concentrated liquid laundry detergent, Japan Emerging cleanliness needs include products that conserve electricity and water, and that give busy people more time in their lives by reducing the time spent doing laundry. The distinctive offerings of Ultra Attack Neo address these needs. ■ Deeper cleaning ability provided by Kao’s original next-generation cleaning ingredient “ultra anions,” which quickly penetrates and breaks down stains ■ Effective removal of stains and odors, even in washing machines with a reduced-time washing function, as a new proposal to meet the strong needs of busy people for shorter laundering time 3 The Kao Group launched its K15 mid-term plan in 2013. What were the first-year results, including progress of K15’s three growth strategies? In 2013, for the first time ever the Kao Group announced its mid-term plan to stakeholders. The global economy continued its anemic recovery. The pace of growth slowed in emerging countries, while the U.S. economy expanded and Europe showed signs of an upturn despite continuing weakness. In Japan, the economy recovered gradually as personal consumption picked up due to positive expectations for economic measures. In addition, the decline in consumer purchase prices appeared to have bottomed out. Market conditions improved progressively through the year, as consumer became more accepting of higher prices for value offered by household and personal care products. We concentrated on maximizing the use of Kao Group assets during 2013. Examples from our R&D operations included expanding the application of technology developed for a particular product to additional products. We also revitalized existing products by transforming our approach to communicating product value. We began seeing results during 2013 from our drive to maximize asset use, and expect to see more in the future. 6 Kao Corporation Annual Report 2013 A Message from President and CEO Michitaka Sawada We generated growth in sales and earnings for the fourth consecutive year, excluding the impact of the change in fiscal year during fiscal 2012, and also exceeded our target for record operating income. The overseas sales ratio, which is the proportion of net sales to foreign customers, rose to 30.9 percent, in part because of the depreciation of the yen. We also launched three strategies for generating profitable growth and internal projects to support them. I will briefly outline the progress of these strategies. Kao Group Mid-term Plan 2015 (K15) Target 1 Break previous records for net sales and profits Target 2 Achieve numerical management targets for FY2015 ■ Net sales: ¥1.4 trillion ■ Operating income: ¥150 billion ■ Overseas sales ratio: 30% or more Growth Strategies to Achieve K15 1. Expand the Consumer Products Business globally ■ Growth markets: Expand the business significantly by proposing products in the domain of “cleanliness” including laundry detergents, baby diapers and sanitary napkins that target the growing middle-class consumer segments ■ Mature markets: Accelerate growth with high-value-added products 2. Further reinforce the Fabric and Home Care Business, and accelerate profitable growth in the Beauty Care and Human Health Care Businesses Fabric and Home Care Business ■ Maintain or capture the top share in each product category Beauty Care Business and Human Health Care Business ■ Move the cosmetics business to a phase of profitable growth ■ Propose products and services through new approaches focused on health and the aging society 3. Reinforce the Chemical Business ■ Promote to generate higher value by leveraging eco-technology research ■ Strengthen synergy with the Consumer Products Business Three Growth Strategies Strategy 1 Expand the Consumer Products Business globally We categorized our markets as mature or growth, then steadily began expanding sales. The Consumer Products Business in Asia performed well and drove global expansion. I would like to see the Kao Group maintain the overseas sales ratio at 30 percent or higher, regardless of exchange rate movements. In growth markets, we are focusing on launching laundry detergents, baby diapers and sanitary products for the middle-class Kao Corporation Annual Report 2013 7 consumer segment. During 2013, we launched Merries baby diapers manufactured in China and Attack Power Soaking powder laundry detergent for washing by hand. Strategy 2 Further reinforce the Fabric and Home Care Business, and accelerate proﬁtable growth in the Beauty Care and Human Health Care Businesses The Fabric and Home Care Business generated solid growth and increased earnings. With an operating margin of approximately 20 percent, it made the steadiest progress among our business segments. As exempliﬁed by Ultra Attack Neo laundry detergent, the Kao Group demonstrated leadership in changing lifestyles in Japan with new value offerings. Laundry detergent performance was also solid in Thailand and Indonesia, demonstrating that progress in reinforcing this business was not limited to Japan. Conditions were challenging in cosmetics due to the voluntary recall at Kanebo Cosmetics. Excluding Kanebo Cosmetics, however, the Beauty Care Business made progress. Baby diapers led growth in the Human Health Care Business, and sales of Laurier sanitary napkins continued to drive growth in Thailand and Indonesia. Moreover, Megurhythm steam eye mask was a hit in Japan and Hong Kong. This product created a new market with its concept of improving blood circulation. Our marketing activities also supported sales growth by anticipating consumer and lifestyle changes with “half-step ahead” proposals driven by fresh analyses of the data we have collected. Strategy 3 Reinforce the Chemical Business The Chemical Business serves a wide array of industries globally. It also enhances the competitiveness of the Kao Group’s Consumer Products Business through synergies such as supplying raw materials that add value to consumer products while reducing costs and ensuring stable raw material procurement. Enhancing the Chemical Business and the Consumer Products Business is vital for the Kao Group to grow proﬁtably. During 2013, market conditions challenged the Chemical Business. The Kao Group strengthened this business by concentrating on increased production and products that use eco-technologies, such as low-temperature fusing toner binder and cleaning agents for steel sheets. In oleo chemicals, the Kao Group expanded fatty alcohol production facilities and increased sales volume. The Chemical Business has been focusing on acquiring new customers for performance and specialty chemicals. Sales of performance chemicals were ﬁrm due to the development and sale of high-value-added products. The specialty chemicals business is responding effectively to structural changes in our customers’ industries. 8 Kao Corporation Annual Report 2013 4 What is your long- term objective? 5 Please close with some insights for investors. A Message from President and CEO Michitaka Sawada Our most important long-term objective is to become a company with a global presence, and that means a company that makes distinctive value offerings. Achieving the targets of K15 is just one milestone on the way to that goal. I want the Kao Group to move beyond its accomplishments in 2013 to reach the next level in 2014 so that we can achieve the targets of K15, and we are going to implement a number of measures during 2014 to do so. We will continue to invest to put our three growth strategies into action. We want to maintain the strong momentum of our businesses in 2013 while investing to enable more aggressive initiatives that will further reinforce the Fabric and Home Care Business and improve performance in the Beauty Care and Human Health Care Businesses. For cosmetics, we will accelerate the turnaround at Kanebo Cosmetics with products that allow people to fully experience beauty with their senses. The Chemical Business will enhance oleo chemical products by adding value to mitigate ﬂuctuations in the prices of raw materials, and support stable sales. It also aims to expand sales by using creative technologies that address environmental concerns to develop new materials and other products. In 2013, we formulated the Kao Sustainability Statement to delineate a clear vision for implementing the Kao Way. Moreover, we improved our corporate governance system in March 2014. We have a new team of Board Members and Executive Ofﬁcers to speed up decision making and strengthen our response to change, and we have an equal number of inside directors and outside directors to heighten transparency and bring external perspectives to the Kao Group. The Kao Group aims to become a company with a global presence. We will therefore generate sustained proﬁtable growth with distinctive value offerings, and contribute to the sustainability of society by helping to resolve social issues and making social contributions through our business activities. We are conﬁdent that we will increase shareholder value by increasing Economic Value Added (EVA), a key Kao Group management indicator. Summarized below, our priorities for deploying free cash ﬂow remain unchanged. We are excited about the Kao Group’s future, and we invite investors to share our enthusiasm. Use of Free Cash Flow* 1. Capital expenditures and M&A for future growth 2. Steady and continuous cash dividends ■ Year ended December 31, 2013 Cash dividends per share: ¥64.00 Payout ratio: 50.8% 24th consecutive period of increase in dividends 3. Share repurchases and repayment of interest-bearing debt including borrowings ■ February to April 2013 Share repurchases: ¥30.0 billion * Free cash ﬂow = Net cash provided by operating activities + Net cash used in investing activities Kao Corporation Annual Report 2013 9 Directors, Audit & Supervisory Board Members and Executive Officers (As of March 28, 2014) Directors * Holds the post of Executive Officer concurrently ** Outside Director Michitaka Sawada* Representative Director Apr. 1981 Jun. 2006 Jun. 2008 Jun. 2012 Jan. 2014 Joined the Company Executive Ofﬁcer Member of the Board, Executive Ofﬁcer Representative Director, President and Chief Executive Ofﬁcer (current) Responsible for Product Quality Management (current) Toshiaki Takeuchi* Representative Director Apr. 1981 Mar. 2009 Mar. 2010 May 2011 May 2012 Jun. 2012 Apr. 2013 Mar. 2014 Joined the Company Vice President, Corporate Planning, Kao Customer Marketing Co., Ltd. Member of the Board, Executive Ofﬁcer, Kao Customer Marketing Co., Ltd. Member of the Board, Senior Managing Executive Ofﬁcer, Kao Customer Marketing Co., Ltd. Representative Director, Senior Managing Executive Ofﬁcer, Kao Customer Marketing Co., Ltd. Executive Ofﬁcer Representative Director, Executive Vice President, Kao Customer Marketing Co., Ltd. Member of the Board, Representative Director, Managing Executive Ofﬁcer, President and Chief Executive Ofﬁcer, Kao Customer Marketing Co., Ltd. (current) Toru Nagashima** Senior Advisor, Teijin Limited Apr. 1965 Jun. 2000 Apr. 2001 Jun. 2001 Nov. 2001 Jun. 2002 Jun. 2008 Mar. 2013 Apr. 2013 Jun. 2013 Joined Teijin Limited Member of the Board, and CESHO (Chief Environment, Safety & Health Ofﬁcer), Teijin Limited Member of the Board, CMO (Chief Marketing Ofﬁcer) and General Manager of Corporate Strategy & Planning Ofﬁce, Teijin Limited Managing Director, CMO (Chief Marketing Ofﬁcer) and General Manager of Corporate Strategy & Planning Ofﬁce, Teijin Limited President & Representative Director, COO, Teijin Limited President & Representative Director, CEO, Teijin Limited Chairman of the Board, Teijin Limited Member of the Board, Kao Corporation (current) Senior Advisor, Member of the Board, Teijin Limited Senior Advisor, Teijin Limited (current) Executive Officers Michitaka Sawada President and Chief Executive Ofﬁcer Responsible for Product Quality Management Toshiharu Numata Senior Managing Executive Ofﬁcer President, Consumer Products and Chemical Business, China Chairman of the Board and Chief Executive Ofﬁcer, Kao (China) Holding Co., Ltd. Chairman of the Board, Kao Commercial (Shanghai) Co., Ltd. Chairman of the Board, Kanebo Cosmetics (China) Co., Ltd. Katsuhiko Yoshida Managing Executive Ofﬁcer President, Consumer Products, Global Responsible for Kao Professional Services Co., Ltd. Toshiaki Takeuchi Managing Executive Ofﬁcer Representative Director, President and Chief Executive Ofﬁcer, Kao Customer Marketing Co., Ltd. 10 Kao Corporation Annual Report 2013 Masumi Natsusaka Managing Executive Ofﬁcer Responsible for Beauty Care Business President, Beauty Care Cosmetics Business Unit, Global President, Kanebo Cosmetics Inc. Yoshinori Takema Managing Executive Ofﬁcer Senior Vice President, Research and Development, Global Responsible for TCR Promotion Motohiro Morimura Managing Executive Ofﬁcer Senior Vice President, Production and Engineering, Global Vice President, Plant Management, Wakayama Plant Vice President, Engineering, Global Senior Vice President, Environment and Safety Management, Global Responsible for Logistics Shinichiro Hiramine Senior Vice President, Corporate Communications, Global Katsuhiko Yoshida* Representative Director Apr. 1979 Apr. 2007 Jun. 2007 Apr. 2010 Jun. 2012 Mar. 2014 Joined the Company President, Human Health Care Business Unit Executive Ofﬁcer President, Fabric and Home Care Business Unit Managing Executive Ofﬁcer (current) Member of the Board, Representative Director, President, Consumer Products; Responsible for Kao Professional Services Co., Ltd. (current) Sonosuke Kadonaga** President, Intrinsics Apr. 1976 Aug. 1986 Jul. 2009 Jun. 2012 Mar. 2014 Chairman of the Board of Directors Joined Chiyoda Corporation Joined McKinsey & Company, Inc., Japan President, Intrinsics (current) Member of the Board, Kao Corporation (current) Masayuki Oku** Chairman of the Board, Sumitomo Mitsui Financial Group, Inc. Apr. 1968 Jun. 1994 Nov. 1998 Jun. 1999 Jan. 2001 Apr. 2001 Dec. 2002 Jun. 2003 Jun. 2005 Mar. 2014 Joined Sumitomo Bank Director, Sumitomo Bank Managing Director, Sumitomo Bank Managing Director and Managing Executive Ofﬁcer, Sumitomo Bank Senior Managing Director and Senior Managing Executive Ofﬁcer, Sumitomo Bank Senior Managing Director and Senior Managing Executive Ofﬁcer, Sumitomo Mitsui Banking Corporation Senior Managing Director, Sumitomo Mitsui Financial Group, Inc. Deputy President and Executive Ofﬁcer, Sumitomo Mitsui Banking Corporation Chairman of the Board, Sumitomo Mitsui Financial Group, Inc. (current), and President and Chief Executive Ofﬁcer, Sumitomo Mitsui Banking Corporation Member of the Board, Kao Corporation (current) Shigeru Koshiba Senior Vice President, Corporate Strategy, Global Takuji Yasukawa President, Human Health Care Business Unit - Food and Beverage Business Group, Global Yasushi Aoki Senior Vice President, Human Capital Development, Global Representative Director, Chairman of the Board, Senior Executive Ofﬁcer, Senior Vice President, Human Resources and Administration, Kanebo Cosmetics Inc. President, Kao Group Corporate Pension Fund President, Kao Health Insurance Naohisa Kure Vice President, Strategy Research, Global Hideko Aoki Senior Vice President, Product Quality Management, Global Audit & Supervisory Board Members *** Outside Audit & Supervisory Board Member Takayuki Ishige Full-time Audit & Supervisory Board Member Joined the Company Senior Manager - International, Global Internal Audit Apr. 1978 Jan. 2003 Sep. 2006 Vice President, Global Internal Audit Jun. 2011 Full-time Audit & Supervisory Board Member (current) Teruo Suzuki*** Audit & Supervisory Board Member, Certiﬁed Public Accountant Aug. 1978 Jan. 2004 Jun. 2012 Registered as Certiﬁed Public Accountant Partner, KPMG AZSA LLC Audit & Supervisory Board Member, Kao Corporation (current) Yumiko Waseda*** Audit & Supervisory Board Member Attorney-at-Law Apr. 1985 Apr. 2013 Jan. 2014 Mar. 2014 Registered as an attorney-at-law Joined Masayuki Matsuda Law & Patent Offices (now Mori Hamada & Matsumoto, a law ﬁrm) Joined Tokyo Roppongi Law & Patent Ofﬁces Partner, Tokyo Roppongi Law & Patent Ofﬁces (current) Audit & Supervisory Board Member, Kao Corporation (current) Shoji Kobayashi Full-time Audit & Supervisory Board Member Apr. 1979 Jun. 2006 Apr. 2007 Jun. 2010 Mar. 2013 Joined the Company Executive Ofﬁcer Vice President, Chemical Business Unit, Global President, Chemical Business Unit, Global Full-time Audit & Supervisory Board Member (current) Norio Igarashi*** Audit & Supervisory Board Member, Certiﬁed Public Accountant, Professor, Yokohama National University Apr. 1977 Registered as Certiﬁed Public Accountant Jul. 1988 Partner, Aoyama Audit Corporation and Price Waterhouse Apr. 2007 Professor, Graduate School of International Social Sciences, Yokohama National University (current) Audit & Supervisory Board Member, Kao Corporation (current) Mar. 2013 Executive Officers Minoru Utsumi Vice President, Production and Engineering - Beauty Care Supply Chain Management, Global Vice President, Supply Chain Management Strategy and Planning, Global Vice President, Plant Management, Tokyo Plant Masakazu Negoro President, Chemical Business Unit, Global Chairman of the Board, Fatty Chemical (Malaysia) Sdn. Bhd. Chairman of the Board, Pilipinas Kao, Inc. Presidente, Kao Chemicals Europe, S.L. Yoshimichi Saita Senior Vice President, Media Planning and Management, Global Kenji Miyawaki Senior Vice President, Marketing Research and Development, Global Kazuyoshi Aoki Senior Vice President, Accounting and Finance, Global Responsible for EVA Promotion Tadaaki Sugiyama Senior Vice President, Legal and Compliance, Global Responsible for Information Systems Kozo Saito President, Consumer Products, Asia, Americas and EMEA Chairman of the Board, Kao USA Inc. Hideki Tanaka Senior Vice President, Procurement, Global Takehiko Shinto Representative Director, Executive Vice President, Kao Customer Marketing Co., Ltd. Jun Shida Vice President, Development Research – Health Care/Household/Chemicals, Global Yasushi Wada Vice President, Plant Management, Kawasaki Plant Vice President, Beauty Care Supply Chain Management – Skin Care/Hair Care, Global Tomoharu Matsuda President, Beauty Care Skin Care/Hair Care Business Unit, Global Yoshihiro Hasebe Vice President, Research and Development, Global Vice President, Core Technology, Global Kao Corporation Annual Report 2013 11 Kao at a Glance Business Segment Sales (Year ended December 31, 2013) Chemical Business Breakdown by Region Consumer Products Business Breakdown by Region Japan Asia Americas Europe Eliminations (Billions of yen) 223.3 125.6 86.8 39.9 62.3 (91.2) Chemical Business Meeting diverse needs of global customers Kao Chemicals offers a broad variety of chemical products globally, including oleo chemicals manufactured from natural fats and oils, surfactants, toners and toner binders, and fragrances and aroma chemicals. Japan Asia Americas Europe Eliminations (Billions of yen) 1,091.9 866.4 116.4 68.9 72.1 (32.0) Beauty Care Business Responding to people's desire to be beautiful In order to allow all consumers to achieve their own unique beauty with leading technologies, Kao Beauty Care offers products including cosmetics, skin care such as facial and body cleansers, and hair care such as shampoos and conditioners. ¥223.3 billion 17.0% Consolidated Net Sales ¥1,315.2 billion ¥570.3 billion 43.4% ¥311.0 billion 23.6% ¥210.6 billion 16.0% Fabric and Home Care Business Enabling cleaner and more comfortable lives every day Kao Fabric and Home Care offers fabric care products such as laundry detergents and fabric softener, as well as home care products such as dishwashing detergents and kitchen cleaners, that are designed for quality, functionality and ease of use in order to help consumers enjoy a clean and comfortable lifestyle. 12 Kao Corporation Annual Report 2013 Human Health Care Business Making every day of people's lives more comfortable and healthier Kao Human Health Care offers products that help consumers to live healthy and comfortable lives, including sanitary products with unique proprietary technologies, functional health beverages with new performance values, and other products such as toothpaste and bath additives. (cid:116)(cid:1)(cid:1)(cid:39)(cid:74)(cid:72)(cid:86)(cid:83)(cid:70)(cid:84)(cid:1)(cid:74)(cid:79)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:72)(cid:83)(cid:66)(cid:81)(cid:73)(cid:1)(cid:83)(cid:70)(cid:81)(cid:83)(cid:70)(cid:84)(cid:70)(cid:79)(cid:85)(cid:1)(cid:79)(cid:70)(cid:85)(cid:1)(cid:84)(cid:66)(cid:77)(cid:70)(cid:84)(cid:1)(cid:85)(cid:80)(cid:1)(cid:80)(cid:86)(cid:85)(cid:84)(cid:74)(cid:69)(cid:70)(cid:1)(cid:68)(cid:86)(cid:84)(cid:85)(cid:80)(cid:78)(cid:70)(cid:83)(cid:84)(cid:1)(cid:80)(cid:79)(cid:77)(cid:90)(cid:15) (cid:116)(cid:1)(cid:1)(cid:47)(cid:70)(cid:85)(cid:1)(cid:84)(cid:66)(cid:77)(cid:70)(cid:84)(cid:1)(cid:67)(cid:90)(cid:1)(cid:83)(cid:70)(cid:72)(cid:74)(cid:80)(cid:79)(cid:1)(cid:66)(cid:83)(cid:70)(cid:1)(cid:68)(cid:77)(cid:66)(cid:84)(cid:84)(cid:74)(cid:109)(cid:70)(cid:69)(cid:1)(cid:67)(cid:66)(cid:84)(cid:70)(cid:69)(cid:1)(cid:80)(cid:79)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:77)(cid:80)(cid:68)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:80)(cid:71)(cid:1)(cid:44)(cid:66)(cid:80)(cid:1)(cid:40)(cid:83)(cid:80)(cid:86)(cid:81)(cid:1)(cid:68)(cid:80)(cid:78)(cid:81)(cid:66)(cid:79)(cid:74)(cid:70)(cid:84)(cid:15) (cid:116)(cid:1)(cid:38)(cid:77)(cid:74)(cid:78)(cid:74)(cid:79)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:84)(cid:1)(cid:83)(cid:70)(cid:81)(cid:83)(cid:70)(cid:84)(cid:70)(cid:79)(cid:85)(cid:1)(cid:74)(cid:79)(cid:85)(cid:70)(cid:83)(cid:83)(cid:70)(cid:72)(cid:74)(cid:80)(cid:79)(cid:1)(cid:84)(cid:66)(cid:77)(cid:70)(cid:84)(cid:15) Net Sales (Billions of yen) 537.9 570.3 444.4 Beauty Care Business Operating Income / EBITA* Operating Income Ratio (Year ended March 31, 2012, period ended December 31, 2012 and year ended December 31, 2013) (Billions of yen) (%) Operating Income (Left) EBITA (Left) Operating Income Ratio (Right) 4.9 54.0 4.2 48.9 45.9 40 2.9 20 15.4 21.8 23.9 * EBITA (Earnings before interest, taxes and amortization) is operating income before amortization of goodwill and other items related to acquisitions. 800 600 400 200 0 100 0 200 100 0 400 300 200 100 0 Mar. 2012 Dec. 2012 Dec. 2013 Mar. 2012 Dec. 2012 Dec. 2013 (Billions of yen) 300 (Billions of yen) 200 181.8 152.0 210.6 Human Health Care Business Operating Income (Left) Operating Income Ratio (Right) 16.9 14.6 11.5 8.0 7.6 8.0 Mar. 2012 Dec. 2012 Dec. 2013 Mar. 2012 Dec. 2012 Dec. 2013 (Billions of yen) 400 (Billions of yen) 300 285.6 60 55.5 311.0 236.7 Operating Income (Left) Operating Income Ratio (Right) 62.2 51.4 21.7 19.4 20.0 20 Fabric and Home Care Business Mar. 2012 Dec. 2012 Dec. 2013 Mar. 2012 Dec. 2012 Dec. 2013 (Billions of yen) (Billions of yen) Chemical Business 247.6 261.2 208.1 Operating Income (Left) Operating Income Ratio (Right) 23.0 9.3 16.8 21.5 8.1 8.2 Mar. 2012 Dec. 2012 Dec. 2013 Note: Net sales include intersegment sales. Mar. 2012 Dec. 2012 Dec. 2013 7 6 5 4 3 2 1 0 (%) 25 20 15 10 5 0 (%) 40 30 10 0 (%) 20 15 10 5 0 80 60 0 25 20 15 10 5 0 80 40 20 0 40 30 20 10 0 s s e n i s u B s t c u d o r P r e m u s n o C s s e n i s u B l a c i m e h C Business Segment Sales (Year ended December 31, 2013) Net Sales (Billions of yen) 800 Chemical Business Breakdown by Region Consumer Products Business Breakdown by Region Japan Asia Americas Europe Eliminations (Billions of yen) 223.3 125.6 86.8 39.9 62.3 (91.2) Japan Asia Americas Europe Eliminations (Billions of yen) 1,091.9 866.4 116.4 68.9 72.1 (32.0) ¥223.3 billion 17.0% Consolidated Net Sales ¥1,315.2 billion ¥570.3 billion 43.4% ¥311.0 billion 23.6% ¥210.6 billion 16.0% Beauty Care Business Human Health Care Business Fabric and Home Care Business Chemical Business Operating Income / EBITA* Operating Income Ratio (Year ended March 31, 2012, period ended December 31, 2012 and year ended December 31, 2013) (Billions of yen) 80 Operating Income (Left) EBITA (Left) Operating Income Ratio (Right) 600 400 200 0 537.9 444.4 570.3 60 4.9 48.9 45.9 54.0 4.2 40 2.9 20 15.4 21.8 23.9 Mar. 2012 Dec. 2012 Dec. 2013 0 Mar. 2012 Dec. 2012 Dec. 2013 (Billions of yen) 300 (Billions of yen) 25 Operating Income (Left) Operating Income Ratio (Right) 200 181.8 152.0 210.6 100 0 Mar. 2012 Dec. 2012 Dec. 2013 20 15 10 5 0 16.9 14.6 11.5 8.0 7.6 8.0 Mar. 2012 Dec. 2012 Dec. 2013 (Billions of yen) 400 (Billions of yen) 80 Operating Income (Left) 311.0 Operating Income Ratio (Right) 62.2 300 285.6 60 55.5 236.7 * EBITA (Earnings before interest, taxes and amortization) is operating income before amortization of goodwill and other items related to acquisitions. (%) 7 6 5 4 3 2 1 0 (%) 25 20 15 10 5 0 (%) 40 30 51.4 21.7 19.4 20.0 20 200 100 0 Mar. 2012 Dec. 2012 Dec. 2013 40 20 0 Mar. 2012 Dec. 2012 Dec. 2013 10 0 (%) 20 15 10 5 0 (Billions of yen) 400 (Billions of yen) 40 Operating Income (Left) Operating Income Ratio (Right) 247.6 261.2 208.1 300 200 100 0 Mar. 2012 Dec. 2012 Note: Net sales include intersegment sales. Dec. 2013 30 20 10 0 23.0 9.3 16.8 21.5 8.1 8.2 Mar. 2012 Dec. 2012 Dec. 2013 s s e n i s u B s t c u d o r P r e m u s n o C s s e n i s u B l a c i m e h C Kao Corporation Annual Report 2013 13 Beauty Care BusinessFabric and Home Care BusinessHuman Health Care BusinessChemical BusinessRepresentative ProductsMid-Term StrategiesChemical BusinessConsumer Products Business(cid:116) Accelerate growth through integrated global business operations.(cid:116) Attain proﬁtable growth utilizing value- added technologies in targeted market segments.(cid:116) Aim for top-line growth in the mass market through differentiation in quality and cost.(cid:116) Promote expansion of sanitary products in Asia based on recognition of Japanese quality.(cid:116) In Japan, work to add value to existing products in response to market changes and create new product categories.(cid:116) In Japan, propose a new way to do laundry for busy people with an ultra-concentrated liquid detergent that achieves amazing whiteness even with a reduced-time washing function.(cid:116) In China and other Asian countries where the liquid laundry detergent market is expanding, launch, nurture and strengthen new products with Kao’s unique technology to meet local needs and surpass market growth.(cid:116) Develop and strengthen eco-friendly materials and products that will contribute to sustainability.(cid:116) Enhance information-related products to complement the evolving IT industry.14 Kao Corporation Annual Report 2013 Management FoundationThe Kao Group is working to enhance the management foundation that supports its business activities to become a company with a global presence that achieves both proﬁtable growth and sustained contributions to society.Research and Development 16 Kao Sustainability Statement 18Corporate Governance 20Compliance and Risk Management 22Kao Corporation Annual Report 2013 15Research and DevelopmentConsumer ResearchProduct Design forValue CreationApplication Research forProduct DevelopmentFUNDAMENTAL RESEARCHMaterial SciencePolymer ScienceFats andOils ScienceSurface ScienceBiological ScienceAromaChemicalsSpecialtyChemicalsBiologicallyActive MaterialsFunctional PolymersFat and Oil DerivativesMaterial for HealthyFunctional FoodsEnzymesBiomimetic MaterialsSurfactantsFunctionalInorganic MaterialsEnvironmentallyConscious MaterialsPRODUCT DEVELOPMENT RESEARCHResearch and Development StrategyKao’s mission is to strive for the wholehearted satisfaction and enrichment of the lives of people globally and to contribute to the sustainability of the world, with products and brands of excellent value that are created from the consumer’s and customer’s perspective. Based on this mission, Kao’s research and development division combines original ideas with an understanding of the various cultures and needs of consumers in diverse countries and regions to develop innovative products and technologies that create new value and new markets. Approximately 2,800 Kao Group personnel conduct research and development, and R&D expenditures for the entire Kao Group in the fiscal year ended December 31, 2013 were ¥49.7 billion, equivalent to 3.8% of net sales.In recent years, numerous epidemiological studies covering tens of thousands of subjects have reported the efﬁcacy of coffee against diseases such as diabetes and arteriosclerotic disease. This led Kao to focus on the polyphenol “chlorogenic acids” in coffee beans and to start work on verifying their health beneﬁts. Mitochondria are energy-producing structures in liver and muscle cells and are closely related to fat utilization in the body. Enzymes in mitochondria burn fats and convert them to energy. Kao found that coffee chlorogenic acid stimulates uptake of fats into mitochondria and enhances their ability to burn fats, thus reducing body fat. The fat-burning effects were observed not only in dietary fat from meals, but also in accumulated body fat. Japan’s Consumer Affairs Agency conﬁrmed the positive effects on body fat from the underlying mechanism of fat utilization by chlorogenic acids, and approved their labeling as a Food for Speciﬁed Health Uses suitable for people who are concerned about body fat. After intensive research, Kao launched Healthya Coffee in 2013 as a method of promoting body fat utilization that offers both health beneﬁts and great taste. Topics The Function of Coffee Chlorogenic Acid in Body Fat UtilizationCreating Innovative Products through the Integration of Science and TechnologyCoffee chlorogenic acid enhances fat utilization in mitochondriafatenzyme16 Kao Corporation Annual Report 2013 Management Foundation Main R&D Results by Business Segment Consumer Products Business ● Beauty Care Business Kao conducts research for a deep understanding of the true nature of the skin and hair of people around the world and develops materials and formulations that give rise to new functions. By doing so, we aim to help consumers achieve healthy, beautiful skin and hair and to offer beauty proposals tailored to diverse lifestyles. To strengthen the cosmetics business and fully guarantee safety and reliability, we integrated the safety and analytical research functions of Kao and Kanebo Cosmetics in September 2013 to thoroughly inculcate Yoki- Monozukuri. In hair care, we launched Segreta volumizing shampoo, which expertly combines ingredients with a styling effect in a product that volumizes thin hair without requiring a conditioner in Japan. R&D expenditures in this business totaled ¥20.0 billion. ● Human Health Care Business Kao researches the body, both physically and mentally, to improve the quality of life by making the most of people’s natural vitality. In food and beverages, as the result of years of research into polyphenols, we launched Healthya Coffee. This coffee drink, which contains a high level of polyphenol “chlorogenic acids,” is the first to be approved as a Food for Specified Health Uses due to its effect of promoting body fat utilization. The product proposes a new style of health care to control body fat through everyday coffee consumption. R&D expenditures in this business totaled ¥11.6 billion. ● Fabric and Home Care Business Kao’s research and development spans a wide range of fields from household products that meet diverse needs to products for professional use where a high level of cleanliness and hygiene is required. In fabric care, we launched Ultra Attack Neo ultra-concentrated liquid laundry detergent. The product uses “ultra anions,” a next-generation cleaning ingredient developed over years of surfactant research, to offer full cleaning power even when used in machines with a reduced-time washing function. R&D expenditures in this business totaled ¥7.4 billion. Chemical Business In this business, Kao’s research and development strives for more substantive R&D results in areas including oils and fats, surfactants and polymers to produce chemical products distinguished by their ability to meet diverse needs in a wide range of industries. In oleo chemicals, we are developing catalysts and process technology for fatty alcohols and tertiary amines. In performance chemicals, we are developing value-added products with a reduced environmental burden. We are also working in areas such as the development of a molding agent that helps to reduce waste and energy consumption. In specialty chemicals, development efforts include raising the ratio of bio-ingredients in our toner binder. R&D expenditures in this business totaled ¥10.7 billion. Kao Corporation Annual Report 2013 17 Kao Sustainability StatementFormulation and BackgroundBased on its corporate philosophy, the Kao Way, the Kao Group contributes to realizing a sustainable society by working to find solutions to social issues through Yoki-Monozukuri tailored to the needs of the times and the community. On July 1, 2013, we announced the Kao Sustainability Statement to share with stakeholders Three Key Areas and Target FieldsTo grow its business responsibly and sustainably, the Kao Group will focus its efforts on the three key areas of Conservation, Community and Culture. These were chosen for their compatibility with the mid-term plan and the Kao Group’s corporate resources as well as their importance for resolving social issues.inside and outside the Kao Group our policy for achieving both corporate growth and a sustainable society as our business expands globally. With this statement as our point of reference, the Kao Group proactively seeks the trust and support of its stakeholders, aiming to enhance its contributions to a sustainable society.ConservationCommunity CultureFieldsReducing environmental impacts of our business activitiesEngaging with communities through businessIntegrityEnvironmental activities in partnership with stakeholdersEngaging with local communities through partnershipsDiversity and InclusionDay-to-day Work / Basic ActivitiesCommunityCultureConservationThree Key AreasKao Sustainability Statement18 Kao Corporation Annual Report 2013 Main Activities in the Three Key AreasConservationSaving Energy with Low-Temperature Fusing Toner BinderKao is improving the environmental efficiency of its chemical products, helping customers conserve energy and reduce CO2 emissions simply by using these products. One example is the low-temperature fusing toner binder used in photocopiers and printers. Approximately 70 percent of the energy expended by photocopiers and printers occurs during heat treatment fusing toner to paper. Kao developed a toner binder accomplishing the same task at a lower temperature, greatly cutting power consumption for customers during product use.CommunityBetter Lives with the Habit of Hand WashingKao Commercial (Thailand) Co., Ltd. is working to reduce the risk of infectious diseases in tropical areas. After the major floods in Bangkok in 2011, the company distributed Bioré Foaming Hand Wash to children in kindergartens and elementary schools to help them understand the importance of washing their hands. These and similar activities helped to raise awareness that using cleansers leads to a better life. In 2013, the company used “edutainment”* to teach an effective hand-washing method at a total of ten schools. Children passed on what they learned to their families, spreading the habit of hand washing. In this way the company contributes to improving hygiene.* Education through entertainmentCultureCelebrating Women’s RadianceHarvesting and processing of the shea nut, which is the main ingredient in Jergens Shea Butter from Kao USA Inc., is done completely by women in West Africa. The income they earn empowers them to make financial decisions to support their families. By procuring the shea nut from various locations, Kao helps to uplift these women’s lives as it strives for sustainable sourcing practices. In addition, Kao donates to the Global Shea Alliance, an organization committed to the education and empowerment of the more than 16 million women who collect and process the shea nut across Africa.Management FoundationToner fuses topaper uponapplication of heatPreviouslyHeating rollLow-temperaturefusing toner binderTeaching children in Thailand how to wash hands effectivelyAfrican women harvesting shea (above) and Jergens products in limited edition packaging (left)Kao Corporation Annual Report 2013 19Corporate Governance Basic Position on Corporate Governance and Current Structure and implements appropriate measures while integrating social trends and responding to the requests of The Company’s basic position on corporate governance is shareholders and all other stakeholders. In line with this to establish and operate a management system and an basic position, the Company has introduced an Executive internal control system that can realize speedy, highly Ofﬁ cer system as a structure to promote the separation efﬁ cient, sound and transparent management with the of supervision and execution within the governance aim of continuously enhancing corporate value. The framework of a Board of Directors, half of which is Company considers corporate governance to be one of composed of Outside Directors, and an Audit & its most important management issues. The Company Supervisory Board, more than half of which is composed conducts annual reviews of these management issues of Outside Audit & Supervisory Board Members. Members Attending Board of Directors Meetings*** Executive Ofﬁ cers Directors Audit & Supervisory Board Members As of March 28, 2014 Inside Outside** 3 2 26* 3 3 — Term 1 year 4 years 1 year Includes the three Directors from inside the Company listed above. * ** The Company has submitted ﬁ ve of the six Outside Directors/Audit & Supervisory Board Members to the Tokyo Stock Exchange, Inc. as Independent Directors/Audit & Supervisory Board Members who maintain their neutrality independent from management. *** The position of chairman of the Board of Directors is held by an Independent Outside Director. Corporate Governance Structure Shareholders Meeting Monitoring Audit & Supervisory Board Audit Board of Directors Chairman: Independent Outside Director Board of Directors consists of the same numbers of Inside Directors and Outside Directors Committee for the Examination of the Nominees for the Members of the Board of Directors and Executive Officers Compensation Advisory Committee Audit s r o t i d u A g n i t n u o c c A Audit Audit Investigation (Attendance) Supervision 〔 All the Outside Directors and Outside Audit & Supervisory Board Members are members of both committees 〕 Management Committee Sustainability Committee Eco-Strategy Committee Corporate Audit Services Internal Audit Audit Internal Control Committee Disclosure Committee Compliance Committee Information Security Committee Risk Management Committee Committee for Responsible Care Promotion Quality Assurance Committee s r e y w a L e d s t u O i e c n a i l p m o C e n i l t o H n o i t a t l u s n o C Executing Divisions Executive Officer Responsible for each Division 　 ● Business Divisions (each Business Unit etc.) 　 ● Functional Divisions (Research & Development, Production & Engineering, each Corporate Functional Division) Conference by Audit & Supervisory Board Members of Domestic Group Companies (Attendance) Subsidiaries/Affiliates Audit Audit & Supervisory Board Members Accounting Auditors Certifed Public Accountants Audit Note: Our policy is to ask lawyers and other experts, as necessary, when making business decisions concerning business management and daily operations. 20 Kao Corporation Annual Report 2013 Management Foundation Message from the New Chairman of the Board of Directors, Independent Outside Director Sonosuke Kadonaga At Kao, I believe Board meetings have been managed well, maintaining transparency and making good corporate governance possible. The Board has been composed of seven Inside Directors, three Outside Directors, including myself, and ﬁve Audit and Supervisory Board Members, including three from outside. The chairman has been the former President and CEO, serving as a Director but not concurrently as an Executive Ofﬁcer. As a result of the most recent change in the composition of the Board, the number of Inside and Outside Directors has become equal. I think this change will lead to even better corporate governance because it helps to provide more objective views in making decisions. I, as an Outside Director, will chair the discussions. As I am not involved in day-to-day execution, I plan to attend key internal Sonosuke Kadonaga Chairman of the Board of Directors Independent Outside Director meetings as an observer to deepen my understanding of the issues before chairing discussions at the Board meetings. I will effectively lead the discussions at Board meetings, maintaining objectivity and keeping in mind the Kao Way, which I value above all. Organizations Supporting the Corporate Governance Structure examination and evaluation are reported at a meeting of the Board of Directors. As organizations supporting its corporate governance The Committee for the Examination of the Nominees structure, the Company has established the Advisory for the Members of the Board of Directors and Executive Committee for Member of the Board of Directors and Ofﬁcers consists exclusively of all Outside Directors and Executive Ofﬁcer Compensation, the Committee for the all Outside Audit & Supervisory Board Members. This Examination of the Nominees for the Members of the committee examines potential candidates for Members Board of Directors and Executive Ofﬁcers, and the Audit of the Board of Directors and Executive Ofﬁcers and the & Supervisory Board, which fulﬁll functions similar to the management and execution structure, including the compensation committee, nominating committee and presidency and other positions, and proposes candidates audit committee of a “company with committees.” at a meeting of the Board of Directors. The Advisory Committee for Member of the Board of The Audit & Supervisory Board is an organization Directors and Executive Ofﬁcer Compensation consists recognized by the Corporation Law of Japan. It audits the of the chairman of the Board of Directors, all execution by Directors and the structure for supervision Representative Directors, all Outside Directors and all of this execution, and consists of ﬁve members, three of Outside Audit & Supervisory Board Members. This whom are Outside Audit & Supervisory Board Members committee meets at least once a year during the who ensure independence from management. The Audit remuneration revision period to examine and evaluate the & Supervisory Board Members attend meetings of the appropriateness of the remuneration system and the Board of Directors and other important meetings with level of remuneration for the members of the Board of the authority to enjoin illegal practices by Directors. Directors and Executive Ofﬁcers. The results of the Kao Corporation Annual Report 2013 21 annually re-examines the contents of the BCG, which sets forth the Company’s stance regarding interactions with government officials, corporate entertaining and gift-giving, political donations, and other compliance-related policies. The most recent revision of the BCG was made in July 2013. The revision made clear Kao’s strong stance on preventing bribery. In addition to specifying that employees shall not offer or accept bribes, regardless of whether the person accepting the bribe is a government official, a private company or an individual, the revision also prohibits “facilitation payments,” which are small payments to government officials to speed up routine non-discretionary government actions. Based on the above revision, the Compliance Committee created a global template for preparing Anti-Bribery Guidelines at each Kao Group company. The template features a strong anti-bribery stance, which will be common to all Anti-Bribery Guidelines, and entertainment rules and operating procedures, which can be modified to fit the circumstances of each Kao Group company.Policy Kao upholds the principle of “Integrity,” passed down from the Company’s founder, as one of the “Values” of its corporate philosophy, the “Kao Way.” “Integrity” means to behave lawfully and ethically, and to conduct fair and honest business activities. To implement “Integrity” in daily operations, Kao has set three targets for spreading and establishing compliance on a global level: (1) enactment and review of the Kao Business Conduct Guidelines (BCG) and compliance-related policies; (2) maintenance and operation of compliance hotlines for early detection and resolution of possible legal or ethical violations and other issues; and (3) implementation of educational activities to promote each employee’s understanding of the BCG.Revision of the BCGSociety’s expectations of a company’s role evolve in line with society’s changing views on sustainability. In response to these changes, Kao’s Compliance Committee Complianceexamined risks that could have a serious negative impact on Yoki-Monozukuri and the business continuity of the Kao Group. In addition, we evaluated our measures to date and worked to reduce the negative impact from risks by addressing issues that became apparent. Moreover, as our business becomes more global, events that necessitate an immediate response are complex and wide-ranging, and precise handling is required. Consequently, we upgraded and enhanced our system to deal with emergencies globally.In order to practice Yoki-Monozukuri as stated in the Kao Way, we should visualize the various risks pertaining to business activities and implement measures to minimize their frequency and influence. Meanwhile, we must be prepared at all times to minimize damage and loss in the event that such risk becomes a reality. Kao conducts risk management activities with this in mind, administering measures according to its understanding and prioritization of each risk. During the fiscal year ended December 31, 2013, we Risk ManagementCompliance and Risk Management22 Kao Corporation Annual Report 2013 Financial Section11-Year Summary 24 Management Discussion and Analysis 26Consolidated Financial Statements 36Notes to Consolidated Financial Statements 42Independent Auditor’s Report 65Kao Corporation Annual Report 2013 23Kao Corporation and Consolidated Subsidiaries Millions of yen Dec. Dec. 2012 Dec. Mar. 2013 (Restated) 2012 2012 For the year: Net sales ............................................................................... Business Segments Beauty Care Business .................................................... Human Health Care Business ......................................... Fabric and Home Care Business ..................................... Consumer Products Business ..................................... Chemical Business ......................................................... Eliminations .................................................................... Former Segments Consumer Products ........................................................ Prestige Cosmetics ........................................................ Chemical Products ......................................................... Eliminations .................................................................... Geographic Area Japan ............................................................................. Asia ................................................................................ Asia and Oceania ............................................................ Americas ........................................................................ North America ................................................................ Europe ........................................................................... Eliminations .................................................................... Operating income ................................................................. Net income ........................................................................... Capital expenditures ............................................................. Depreciation and amortization ............................................... Cash flows ............................................................................ Research and development expenditures.............................. (% of sales) ........................................................................... Advertising expenditures ...................................................... (% of sales) ...........................................................................At year end: Total assets .......................................................................... Net worth ............................................................................. Number of employees........................................................... Yen Per share: Net income ........................................................................... Cash dividends ...................................................................... Net worth ............................................................................. Weighted average number of shares outstanding during the period (in thousands) ........................ % Key financial ratios: Return on sales ..................................................................... Return on equity ................................................................... Net worth ratio ...................................................................... ¥1,216,096 537,938 181,758 285,645 1,005,341 247,635 (36,880) — — — — 925,339 — 173,588 — 85,397 117,005 (85,233) 108,590 52,435 47,178 79,798 101,960 48,171 4.0% 82,209 6.8% 991,272 538,030 34,069 ¥ 100.46 60.00 1,031.08 521,936 4.3% 9.8 54.3 ¥1,220,359 537,814 189,614 291,988 1,019,416 236,473 (35,530) — — — — 933,767 160,005 — 89,998 — 110,519 (73,930) 111,791 53,107 — — — — — — — — — — ¥101.77 — — — 4.4% 9.5 — ¥1,315,217 570,268 210,628 311,023 1,091,919 261,192 (37,894) — — — — 959,405 199,655 — 108,599 — 134,168 (86,610) 124,656 64,764 63,687 77,297 109,497 49,650 3.8% 86,406 6.6% 1,133,276 628,709 33,054 ¥ 126.03 64.00 1,227.54 513,880 4.9% 10.7 55.5 ¥1,012,595 444,425 151,977 236,748 833,150 208,071 (28,626) — — — — 720,789 159,857 — 89,998 — 110,519 (68,568) 101,567 52,765 41,929 59,788 80,200 37,493 3.7% 67,045 6.6% 1,030,347 582,699 33,350 ¥ 101.12 62.00 1,116.61 521,824 5.2% 9.4 56.6 Notes: 1. Due to a change in the fiscal year end, the term of consolidation for the fiscal period ended December 31, 2012 consists of the nine months from April to December for Kao Corporation and its subsidiaries whose fiscal year end was previously March 31 and the twelve months from January to December for subsidiaries whose fiscal year end was December 31. 2. December 2012 (restated) represents figures for the year from January 1 to December 31, 2012, for Kao Group companies whose fiscal year end was previously March 31. 3. Australia and New Zealand, which had been included in Asia and Oceania until the fiscal year ended March 31, 2012, have been reclassified under Americas from the fiscal period ended December 31, 2012. 4. Kao reorganized its operations effective April 2007 by integrating the former consumer products business and prestige cosmetics business into the Consumer Products Business, which is divided into three businesses (the Beauty Care Business, the Human Health Care Business and the Fabric and Home Care Business). Together with the Chemical Business, Kao’s business operations now consist of four segments. Figures for March 2007 have been restated to reflect the change. 5. Net sales by segment include intersegment sales. Under the former segments, net sales of Chemical Products include intersegment sales to Consumer Products and Prestige Cosmetics. Under the current segments, net sales of the Chemical Business include intersegment sales to the Beauty Care Business, the Human Health Care Business and the Fabric and Home Care Business.11-Year SummaryYears ended December 31, 2013 and 2012, period ended December 31, 2012, and years ended March 31, 2012 to 2004.24 Kao Corporation Annual Report 2013 Kao Corporation and Consolidated Subsidiaries For the year: Business Segments Net sales ............................................................................... Beauty Care Business .................................................... Human Health Care Business ......................................... Fabric and Home Care Business ..................................... Consumer Products Business ..................................... Chemical Business ......................................................... Eliminations .................................................................... Former Segments Consumer Products ........................................................ Prestige Cosmetics ........................................................ Chemical Products ......................................................... Eliminations .................................................................... Geographic Area Japan ............................................................................. Asia ................................................................................ Asia and Oceania ............................................................ Americas ........................................................................ North America ................................................................ Europe ........................................................................... Eliminations .................................................................... Operating income ................................................................. Net income ........................................................................... Capital expenditures ............................................................. Depreciation and amortization ............................................... Cash flows ............................................................................ Research and development expenditures.............................. (% of sales) ........................................................................... Advertising expenditures ...................................................... (% of sales) ........................................................................... At year end: Total assets .......................................................................... Net worth ............................................................................. Number of employees........................................................... Per share: Net income ........................................................................... Cash dividends ...................................................................... Net worth ............................................................................. Weighted average number of shares outstanding during the period (in thousands) ........................ Key financial ratios: Return on sales ..................................................................... Return on equity ................................................................... Net worth ratio ...................................................................... Yen % Millions of yen Dec. 2013 Dec. 2012 (Restated) Dec. 2012 Mar. 2012 Mar. 2011 Mar. 2010 Mar. 2009 Mar. 2008 Mar. 2007 Mar. 2006 Mar. 2005 Mar. 2004 Millions of yen ¥1,186,831 ¥1,184,385 ¥1,276,316 ¥1,318,514 ¥1,231,808 ¥ 971,230 ¥936,851 ¥902,628 533,514 175,761 279,008 988,283 231,997 (33,449) 547,944 183,151 276,918 1,008,013 207,834 (31,462) 588,330 191,319 274,202 1,053,851 262,058 (39,593) 627,914 191,300 274,657 1,093,871 258,674 (34,031) 584,284 183,608 269,519 1,037,411 223,609 (29,212) — — — — 912,443 — 152,361 — 80,328 112,123 (70,424) 104,591 46,738 49,101 81,380 97,028 45,516 3.8% 81,082 6.8% — — — — 918,499 — 131,699 — 79,200 111,158 (56,171) 94,034 40,507 44,868 84,778 95,269 44,911 3.8% 86,359 7.3% — — — — 953,369 — 161,927 — 98,999 140,623 (78,602) 96,800 64,463 44,624 87,463 122,441 46,126 3.6% 90,258 7.1% — — — — 968,594 — 158,295 — 111,017 154,648 (74,040) 116,253 66,562 49,045 93,444 131,114 45,070 3.4% 99,176 7.5% 744,748 292,663 223,609 (29,212) 924,196 — 125,989 — 106,731 135,918 (61,026) 120,858 70,528 70,143 92,171 134,906 44,389 3.6% 96,892 7.9% — — — — — — 704,034 85,247 208,890 (26,941) 708,056 — 110,898 — 95,168 109,486 (52,378) 120,135 71,140 203,595 60,758 107,943 40,262 4.1% 83,770 8.6% 1,022,799 528,895 1,065,751 565,133 1,119,676 545,230 1,232,601 574,038 1,247,797 564,532 1,220,564 509,676 34,743 34,913 33,745 32,900 32,175 29,908 Yen — — — — — — 690,007 78,294 196,989 (28,439) 703,085 — 100,282 — 83,638 93,804 (43,958) 121,379 72,180 54,318 56,794 109,704 39,764 4.2% 84,157 9.0% 688,974 448,249 19,143 — — — — — — 670,438 77,648 181,621 (27,079) 673,657 — 101,452 — 79,907 84,899 (37,287) 119,706 65,359 51,823 58,166 106,430 38,506 4.3% 82,773 9.2% 723,891 427,757 19,330 ¥ 87.69 58.00 1,013.05 ¥ 75.57 57.00 1,054.31 ¥ 120.25 56.00 1,017.19 ¥ 122.53 54.00 1,070.67 ¥ 129.41 52.00 1,035.66 ¥130.58 50.00 935.11 ¥131.16 38.00 821.47 ¥119.06 32.00 782.14 532,980 536,009 536,085 543,228 544,996 544,127 549,626 547,865 3.9% 8.5 51.7 3.4% 7.3 53.0 5.1% 11.5 48.7 % 5.0% 11.7 46.6 5.7% 13.1 45.2 7.3% 14.9 41.8 7.7% 16.5 65.1 7.2% 15.5 59.1 6. Kanebo Cosmetics Inc. and its consolidated subsidiaries are included in the consolidated statements of income from the year ended March 31, 2007, and in the consolidated balance sheets as of March 31, 2006. The results of Kanebo Cosmetics Inc., which had a fiscal year ended December 31, are included for the eleven months starting in February 2006, after the company was added to the Kao Group. 7. Net sales by geographic area including interregion sales are classified based on the location of Kao Group companies. 8. Cash flows are defined as net income plus depreciation and amortization minus cash dividends. 9. Net income per share is computed based on the weighted average number of shares outstanding during the respective years. The portion of net income unavailable to common shareholders, such as preferred dividends, which should be included in the appropriation of retained earnings, is deducted from net income for the calculation of net income per share. The same method is applied to the calculation of net worth per share. 10. Cash dividends per share are the amounts applicable to the respective years, including dividends to be paid after the end of the year. 11. Net worth is equity, excluding minority interests and stock acquisition rights. 12. In calculating return on equity, equity excludes minority interests and stock acquisition rights. Kao Corporation Annual Report 2013 25 Management Discussion and Analysis Change in Fiscal Year launch and nurture products with high added value in response to changes in consumer needs based on its concept Due to a change in the fiscal year end, the term of consolidation of Yoki-Monozukuri,* which emphasizes research and for the fiscal period ended December 31, 2012 consisted of development geared to customers and consumers. The Kao the nine months from April to December for Kao Corporation Group also promoted cost reduction activities. (the “Company”) and its subsidiaries whose fiscal year end Kanebo Cosmetics Inc., Lissage Ltd. and e’quipe, Ltd. of was previously March 31 and the twelve months from January the Kao Group announced a voluntary recall on July 4, 2013 to December for subsidiaries whose fiscal year end was due to the confirmation of cases of white blotches appearing December 31. Accordingly, for ease of comparison with the on the skin of consumers who have used brightening products fiscal year ended December 31, 2013 (January 1 to December containing the ingredient Rhododenol that are manufactured 31, 2013), figures for the previous fiscal period are presented and sold by the three companies because of the possibility of for the equivalent period (January 1 to December 31, 2012) as a connection between the symptoms and the products. In “restated fiscal 2012.” addition to conducting a thorough recall of the relevant products, the companies are working to gain an understanding Overview of Consolidated Results of the conditions of people who are experiencing symptoms and to support their recovery. Moreover, the Kao Group is During the fiscal year ended December 31, 2013, a weak working to prevent a recurrence. A total of ¥12.1 billion recovery of the overall global economy continued. As the (US$114.4 million) related to the voluntary recall consisted of tempo of economic expansion moderated in emerging a decrease of ¥2.4 billion (US$22.8 million) in gross profit due nations, the United States showed a recovery trend and signs to factors including the deduction from net sales of goods of an upturn became evident in Europe, although weakness returned from retailers and ¥9.7 billion (US$91.6 million) in persisted. The Japanese economy gradually recovered as expenditures, including an estimated portion recorded as loss personal consumption picked up due to a sense of related to cosmetics, under other expenses. expectation regarding government economic measures. The Net sales increased 7.8 percent compared with restated household and personal care products market in Japan, a key fiscal 2012 to ¥1,315.2 billion (US$12,479.5 million). market for the Kao Group, grew by 2 percent on a value basis Operating income increased ¥12.9 billion compared with compared with the period from January to December 2012, restated fiscal 2012 to ¥124.7 billion (US$1,182.8 million) and and a sense emerged that the decline in consumer purchase net income increased ¥11.7 billion compared with restated prices had bottomed out. The cosmetics market in Japan fiscal 2012 to ¥64.8 billion (US$614.5 million). declined. Under these circumstances, the Kao Group worked to * The Kao Group defines Yoki-Monozukuri as a strong commitment by all members to provide products and brands of excellent value for consumer satisfaction. In Japanese, Yoki literally means “good/excellent,” and Monozukuri means “development/manufacturing of products.” Net Sales / Gross Proﬁt Ratio Net Sales / Gross Proﬁt Ratio Net Sales (Left) Net Sales (Left) Gross Proﬁt Ratio (Right) Gross Proﬁt Ratio (Right) Operating Income / Operating Income / Operating Income Ratio Operating Income Ratio Operating Income (Left) Operating Income Ratio (Right) Operating Income (Left) Operating Income Ratio (Right) Net Income / Return on Sales Net Income / Return on Sales Net Income (Left) Net Income (Left) Net Income per Share Net Income per Share Return on Sales (Right) Return on Sales (Right) (Years ended March 31, 2010 to 2012, period ended December 31, 2012 and years ended December 31, 2012 and 2013) (Billions of yen) (Billions of yen) 80 80 (%) 15 (%) 15 (Yen) (Yen) 150 150 64.8 64.8 126.03 126.03 52.4 52.4 52.8 52.8 53.1 53.1 10 10 100 100 100.46 100.46 101.12 101.12 101.77 101.77 87.69 87.69 75.57 75.57 5.2 4.3 5.2 4.4 4.9 4.4 4.9 5 50 50 46.7 46.7 40.5 40 40.5 3.9 3.4 4.3 3.9 60 60 40 20 0 3.4 20 0 Mar. 2010 5 0 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) 0 Dec. 2013 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 (Restated) (Restated) (Billions of yen) (Billions of yen) 1,500 1,500 1,184.4 1,184.4 1,186.8 1,216.1 1,186.8 1,216.1 1,220.4 1,220.4 1,315.2 (%) 100 1,315.2 (%) 100 80 80 1,000 1,000 58.4 58.4 58.0 58.0 56.8 1,012.6 1,012.6 56.8 56.3 56.3 56.5 56.5 60 60 500 500 40 40 20 20 0 0 Mar. 2010 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 Dec. 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) 0 0 Dec. 2013 Note: The gross proﬁt ratio has not been disclosed for the year ended Note: The gross proﬁt ratio has not been disclosed for the year ended December 31, 2012. December 31, 2012. 26 Kao Corporation Annual Report 2013 (Billions of yen) 150 (Billions of yen) 150 104.6 108.6 104.6 100 100 94.0 94.0 124.7 108.6 101.6 111.8 111.8 101.6 (%) 20 124.7 15 (%) 20 15 50 0 7.9 50 0 Mar. 2010 8.9 8.8 10.0 8.9 10.0 9.2 9.2 9.5 9.5 10 10 8.8 7.9 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 Dec. 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) 5 0 5 0 Dec. 2013 Consumer Products Business Consumer Products Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 1,200 1,200 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) Beauty Care Business Beauty Care Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) 150 150 750 750 1,000 1,008.0 1,000 1,008.0 988.3 1,005.3 988.3 1,005.3 1,091.9 1,091.9 1,019.4 1,019.4 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 50 50 833.2 833.2 93.4 93.4 103.0 103.0 100 100 500 500 74.4 80.5 74.4 85.6 80.5 85.6 84.7 84.7 547.9 547.9 533.5 533.5 537.9 537.9 537.8 570.3 537.8 570.3 40 40 444.4 444.4 21.8 21.8 20.1 20.1 30 30 23.9 23.9 20 20 50 50 250 250 15.4 15.4 4.7 5.5 4.7 5.5 800 800 600 600 400 400 200 200 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) 0 Dec. 2013 0 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) 10 10 0 0 Dec. 2013 Human Health Care Business Human Health Care Business Fabric and Home Care Business Fabric and Home Care Business Net Sales / Net Sales / Operating Income Operating Income Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) Net Sales / Net Sales / Operating Income Operating Income Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) Chemical Business Chemical Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 250 250 (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) 25 25 350 350 80 80 300 300 300 300 276.9 276.9 279.0 285.6 279.0 285.6 60.7 60.7 59.7 59.7 311.0 311.0 292.0 292.0 59.6 62.2 59.6 62.2 60 60 55.5 55.5 236.7 236.7 51.4 51.4 200 200 183.2 183.2 175.8 181.8 175.8 181.8 150 150 15.3 15.3 14.6 152.0 14.6 152.0 210.6 210.6 189.6 189.6 20 20 16.9 16.9 13.6 13.6 15 15 11.5 11.5 100 100 9.0 9.0 50 50 10 10 5 0 5 0 250 250 200 200 150 150 100 100 50 0 50 0 Mar. 2010 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 40 40 261.2 261.2 247.6 247.6 232.0 232.0 236.5 236.5 208.1 208.1 30 30 207.8 207.8 200 200 24.1 24.1 23.0 23.0 19.7 19.7 16.8 18.1 16.8 21.5 21.5 18.1 20 20 40 40 20 20 100 100 10 10 0 0 Dec. 2013 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) Dec. 2013 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) 0 0 Dec. 2013 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) Note: Net sales include intersegment sales. Note: Net sales include intersegment sales. Total Assets / Net Worth* Total Assets / Net Worth* Total Assets Total Assets Net Worth Net Worth Cash Flows* / Cash Flows* / Capital Expenditures Capital Expenditures Cash Flows Cash Flows Capital Expenditures Capital Expenditures Cash Dividends per Share / Cash Dividends per Share / Cash Dividends per Share (Left) Cash Dividends per Share (Left) EVA* EVA* Payout Ratio (Right) Payout Ratio (Right) (Year ended March 31, 2000 = 100) (Year ended March 31, 2000 = 100) (Billions of yen) (Billions of yen) 1,500 1,500 (Billions of yen) (Billions of yen) 150 150 1,065.8 1,065.8 1,022.8 1,022.8 991.3 991.3 1,030.3 1,030.3 1,000 1,000 1,133.3 1,133.3 100 95.3 100 95.3 97.0 97.0 102.0 102.0 565.1 565.1 528.9 528.9 538.0 538.0 582.7 582.7 628.7 628.7 500 500 50 50 44.9 49.1 44.9 49.1 47.2 47.2 41.9 41.9 109.5 109.5 60 57.00 60 57.00 58.00 60.00 58.00 60.00 62.00 62.00 64.00 64.00 80.2 80.2 63.7 63.7 75.4 75.4 66.1 66.1 59.7 59.7 61.3 61.3 163 154 154 142 163 134 142 132 132 120 120 113 113 100 (%) 100 (%) 100 200 200 75 75 150 150 50.8 50.8 50 50 100 100 100 25 25 50 50 (EVA restated on a full-year (EVA restated on a full-year basis / EVA for the year ended basis / EVA for the year ended December 31, 2011 = 100) December 31, 2011 = 100) 200 200 134 125 125 91 91 67 95 67 150 150 138 138 106 95 106 100 100 100 112 100 112 50 50 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 * Net worth is equity, excluding minorit y interests a nd stock * Net worth is equity, excluding minorit y interests a nd stock acquisition rights. acquisition rights. * Cash ﬂows are deﬁned as net income plus depreciation and * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. amortization minus cash dividends. Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 0 0 0 0 Mar. 2000 Mar. Mar. 2000 2001 Mar. Mar. 2001 2002 Mar. Mar. 2002 2003 Mar. Mar. 2003 2004 Mar. Mar. 2004 2005 Mar. Mar. 2005 2006 Mar. Mar. 2006 2007 Mar. Mar. 2007 2008 Mar. Mar. 2008 2009 Mar. Mar. 2009 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. 2012 0 0 Dec. 2011 Dec. Dec. 2011 2012 Dec. Dec. 2012 2013 Dec. 2013 *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. Payout Ratio Payout Ratio (Yen) (Yen) 80 80 40 40 20 20 0 0 Mar. 2010 Cash Flows* / Cash Flows* / Capital Expenditures Capital Expenditures Cash Flows Cash Flows Capital Expenditures Capital Expenditures (Billions of yen) (Billions of yen) 200 200 150 150 100 95.3 100 95.3 97.0 102.0 97.0 102.0 109.5 109.5 80.2 80.2 80.2 80.2 63.7 63.7 50 50 44.9 49.1 44.9 49.1 47.2 47.2 41.9 41.9 41.9 41.9 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 (Restated) (Restated) * Cash ﬂows are deﬁned as net income plus depreciation and * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. amortization minus cash dividends. (Billions of yen) (Billions of yen) 200 200 163 163 154 154 142 142 132 132 134 134 125 125 150 150 113 120 113 120 100 100 100 100 106 106 91 95 91 95 67 67 50 50 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EVE for the the year ended March 31, 2000 = 100) EVE for the the year ended March 31, 2000 = 100) *EVE (Economic Value Added) is a registered trademark of Stewart & Co. *EVE (Economic Value Added) is a registered trademark of Stewart & Co. Costs, Expenses and Income as Percentages of Net Sales Year ended December 31, 2013, period ended December 31, 2012 and year ended March 31, 2012 Cost of sales .................................................................................. Gross profit .................................................................................... Selling, general and administrative expenses ................................ Operating income .......................................................................... Income before income taxes and minority interests ..................... Net income .................................................................................... Dec. 2013 43.5% 56.5 47.0 9.5 8.7 4.9 Dec. 2012 43.7% 56.3 46.3 10.0 10.1 5.2 Mar. 2012 43.2% 56.8 47.9 8.9 8.7 4.3 Analysis of Income Statement Operating income increased ¥12.9 billion compared with restated fiscal 2012 to ¥124.7 billion (US$1,182.8 million), Net sales increased 7.8 percent compared with restated fiscal despite recording expenses related to the voluntary recall, 2012 to ¥1,315.2 billion (US$12,479.5 million). Excluding the due to the effect of increased sales of the Consumer Products effect of currency translation, net sales would have increased Business in Japan and Asia in addition to factors including 2.1 percent. In the Consumer Products Business in Japan, cost reduction activities and a decrease in depreciation and sales of each business were steady excluding the impact of amortization expenses. the voluntary recall, due in part to market growth, new Net income increased ¥11.7 billion compared with restated product launches and further strengthening of sales fiscal 2012 to ¥64.8 billion (US$614.5 million) despite promotion activities. In Asia, sales were strong in the Human recording other expenses. Health Care Business, which includes sanitary products, and Net income per share was ¥126.03 (US$1.20), an increase of the Fabric and Home Care Business, which includes laundry ¥24.26, or 23.8 percent, from ¥101.77 in restated fiscal 2012. detergents. In the Chemical Business, excluding the effect of currency translation, sales decreased compared with restated fiscal 2012 due to the impact of decreased demand from customer industries and fluctuations in selling prices in connection with lower prices for natural fats and oils used as raw materials. Net Sales / Gross Proﬁt Ratio Net Sales / Gross Proﬁt Ratio Net Sales (Left) Net Sales (Left) Gross Proﬁt Ratio (Right) Gross Proﬁt Ratio (Right) Operating Income / Operating Income / Operating Income Ratio Operating Income Ratio Operating Income (Left) Operating Income (Left) Operating Income Ratio (Right) Operating Income Ratio (Right) Net Income / Return on Sales Net Income / Return on Sales Net Income (Left) Return on Sales (Right) Net Income (Left) Return on Sales (Right) Net Income per Share Net Income per Share (Years ended March 31, 2010 to 2012, period ended December 31, 2012 and years ended December 31, 2012 and 2013) (%) (%) 20 20 (Billions of yen) 80 (Billions of yen) 80 (%) 15 (%) 15 (Yen) 150 (Yen) 150 64.8 64.8 126.03 126.03 100.46 101.12 100.46 101.12 101.77 101.77 Dec. 2012 Dec. 2012 Dec. 2012 Dec. 2013 Dec. 2013 Dec. 2013 Dec. 2012 Dec. 2013 Dec. 2012 (Restated) Dec. 2012 (Restated) Dec. 2012 (Restated) Dec. 2012 (Restated) Mar. 2010 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 5 5 0 0 20 20 0 0 0 0 0 0 Mar. 2010 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 3.4 3.4 3.9 3.9 4.3 4.3 5.2 5.2 4.4 4.4 4.9 4.9 5 5 50 50 60 60 46.7 46.7 40.5 40.5 40 40 52.4 52.4 52.8 52.8 53.1 53.1 10 10 100 100 87.69 87.69 75.57 75.57 (Billions of yen) (Billions of yen) 1,500 1,500 1,184.4 1,184.4 1,186.8 1,186.8 1,216.1 1,216.1 1,220.4 1,220.4 1,315.2 1,315.2 1,000 1,000 58.4 58.4 58.0 58.0 1,012.6 1,012.6 56.8 56.8 56.3 56.3 56.5 56.5 60 60 (Billions of yen) (Billions of yen) 150 150 100 100 94.0 94.0 7.9 7.9 50 50 124.7 124.7 111.8 111.8 15 15 104.6 104.6 108.6 108.6 101.6 101.6 10.0 10.0 8.8 8.8 8.9 8.9 9.2 9.2 9.5 9.5 10 10 (%) (%) 100 100 80 80 40 40 20 20 0 0 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 (Restated) (Restated) Note: The gross proﬁt ratio has not been disclosed for the year ended Note: The gross proﬁt ratio has not been disclosed for the year ended December 31, 2012. December 31, 2012. 0 0 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 (Restated) (Restated) Consumer Products Business Consumer Products Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 1,200 1,200 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 150 150 1,091.9 1,091.9 1,000 1,000 1,008.0 1,008.0 988.3 988.3 1,005.3 1,005.3 1,019.4 1,019.4 833.2 833.2 85.6 85.6 84.7 84.7 93.4 93.4 103.0 103.0 100 100 74.4 74.4 80.5 80.5 Beauty Care Business Beauty Care Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 750 750 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 50 50 547.9 547.9 533.5 533.5 537.9 537.9 537.8 537.8 570.3 570.3 40 40 500 500 444.4 444.4 21.8 21.8 20.1 20.1 23.9 23.9 50 50 250 250 15.4 15.4 4.7 4.7 5.5 5.5 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 (Restated) (Restated) Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 (Restated) (Restated) 0 0 0 0 30 30 20 20 10 10 0 0 500 500 0 0 800 800 600 600 400 400 200 200 0 0 500 500 0 0 Kao Corporation Annual Report 2013 27 Human Health Care Business Human Health Care Business Fabric and Home Care Business Fabric and Home Care Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 250 250 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) 25 25 350 350 200 200 183.2 183.2 175.8 175.8 181.8 181.8 150 150 15.3 15.3 14.6 14.6 152.0 152.0 210.6 210.6 189.6 189.6 20 20 16.9 16.9 13.6 13.6 11.5 11.5 300 300 276.9 276.9 279.0 279.0 60.7 60.7 59.7 59.7 285.6 285.6 55.5 55.5 236.7 236.7 51.4 51.4 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 80 80 311.0 311.0 292.0 292.0 59.6 59.6 62.2 62.2 60 60 Chemical Business Chemical Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 300 300 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 40 40 261.2 261.2 247.6 247.6 232.0 232.0 236.5 236.5 208.1 208.1 30 30 207.8 207.8 200 200 24.1 24.1 23.0 23.0 19.7 19.7 21.5 21.5 16.8 16.8 18.1 18.1 20 20 100 100 9.0 9.0 50 50 0 0 15 15 10 10 5 5 0 0 250 250 200 200 150 150 100 100 50 50 0 0 40 40 20 20 100 100 0 0 0 0 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 (Restated) (Restated) Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 (Restated) (Restated) Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 (Restated) (Restated) Note: Net sales include intersegment sales. Note: Net sales include intersegment sales. Total Assets / Net Worth* Total Assets / Net Worth* Total Assets Total Assets Net Worth Net Worth Cash Flows* / Cash Flows* / Capital Expenditures Capital Expenditures Cash Flows Cash Flows Capital Expenditures Capital Expenditures Cash Dividends per Share / Cash Dividends per Share / Cash Dividends per Share (Left) Cash Dividends per Share (Left) EVA* EVA* Payout Ratio (Right) Payout Ratio (Right) (Year ended March 31, 2000 = 100) (Year ended March 31, 2000 = 100) (Billions of yen) (Billions of yen) 1,500 1,500 (Billions of yen) (Billions of yen) 150 150 1,065.8 1,065.8 1,022.8 1,022.8 991.3 991.3 1,030.3 1,030.3 1,000 1,000 1,133.3 1,133.3 100 100 95.3 95.3 97.0 97.0 102.0 102.0 565.1 565.1 528.9 528.9 538.0 538.0 582.7 582.7 628.7 628.7 50 50 44.9 44.9 49.1 49.1 47.2 47.2 41.9 41.9 109.5 109.5 80.2 80.2 63.7 63.7 57.00 57.00 60 60 58.00 58.00 60.00 60.00 62.00 62.00 64.00 64.00 75.4 75.4 66.1 66.1 59.7 59.7 61.3 61.3 50.8 50.8 50 50 100 100 100 100 142 142 132 132 113 113 120 120 163 163 154 154 134 134 125 125 Payout Ratio Payout Ratio (Yen) (Yen) 80 80 40 40 20 20 0 0 (EVA restated on a full-year (EVA restated on a full-year basis / EVA for the year ended basis / EVA for the year ended December 31, 2011 = 100) December 31, 2011 = 100) 91 91 95 95 100 100 106 106 112 112 100 100 67 67 138 138 200 200 150 150 50 50 0 0 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 0 0 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 * Net worth is equity, excluding minorit y interests a nd stock * Net worth is equity, excluding minorit y interests a nd stock acquisition rights. acquisition rights. * Cash ﬂows are deﬁned as net income plus depreciation and * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. amortization minus cash dividends. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 Dec. Dec. Dec. Dec. Dec. Dec. 2011 2011 2012 2012 2013 2013 *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. 10 10 0 0 (%) (%) 100 100 75 75 25 25 0 0 200 200 150 150 50 50 0 0 Cash Flows* / Cash Flows* / Capital Expenditures Capital Expenditures (Billions of yen) (Billions of yen) 200 200 150 150 Cash Flows Cash Flows Capital Expenditures Capital Expenditures 100 100 95.3 95.3 97.0 97.0 102.0 102.0 80.2 80.2 80.2 80.2 50 50 44.9 44.9 49.1 49.1 47.2 47.2 41.9 41.9 41.9 41.9 109.5 109.5 63.7 63.7 0 0 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 (Restated) (Restated) * Cash ﬂows are deﬁned as net income plus depreciation and * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. amortization minus cash dividends. (Billions of yen) (Billions of yen) 200 200 163 163 154 154 142 142 132 132 134 134 125 125 150 150 113 120 113 120 100 100 100 100 106 106 91 91 95 95 67 67 50 50 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EVE for the the year ended March 31, 2000 = 100) EVE for the the year ended March 31, 2000 = 100) *EVE (Economic Value Added) is a registered trademark of Stewart & Co. *EVE (Economic Value Added) is a registered trademark of Stewart & Co. Information by Segment In Europe, sales increased 26.0 percent to ¥72.1 billion (US$684.6 million). Excluding the effect of currency Consumer Products Business translation, sales would have increased 1.0 percent. Sales of Sales increased 7.1 percent compared with restated fiscal 2012 professional hair care products were steady. to ¥1,091.9 billion (US$10,360.7 million). Excluding the effect of Operating income increased ¥9.6 billion compared with currency translation, sales would have increased 2.9 percent. restated fiscal 2012 to ¥103.0 billion (US$977.0 million) due to In Japan, sales increased 2.8 percent compared with the effect of increased sales as a result of strong performance restated fiscal 2012 to ¥866.4 billion (US$8,220.7 million). in Japan and Asia in addition to factors including a decrease in Sales grew in a relatively stable market environment as the depreciation and amortization expenses and more efficient Kao Group launched new and improved products in response management of expenses. to changing consumer lifestyles and social issues such as the environment, health consciousness and the aging society, and Note: The Kao Group’s Consumer Products Business consists of the Beauty Care Business, the Human Health Care Business, and the Fabric and Home Care Business. enhanced proposal-based sales, among other measures. On the other hand, sales of Kanebo Cosmetics were impacted by Beauty Care Business returns from retailers and self-imposed cutbacks in marketing Sales increased 6.0 percent compared with restated fiscal activities in connection with the voluntary recall of brightening 2012 to ¥570.3 billion (US$5,411.0 million). Excluding the products containing the ingredient Rhododenol. effect of currency translation, sales would have increased In Asia, sales increased 33.3 percent to ¥116.4 billion Net Sales / Gross Proﬁt Ratio Net Sales / Gross Proﬁt Ratio Net Sales (Left) (US$1,104.8 million). Excluding the effect of currency Gross Proﬁt Ratio (Right) Net Sales (Left) Gross Proﬁt Ratio (Right) translation, sales would have increased 11.0 percent. Steady (Billions of yen) (Billions of yen) 1,500 1,500 growth continued as a result of integrated management in Asia, (%) 100 (%) 100 1,315.2 1,315.2 1,184.4 including Japan, and the Kao Group carried out aggressive 80 1,186.8 1,186.8 1,184.4 80 1,216.1 1,216.1 1,220.4 1,220.4 measures including collaboration with retailers, utilization of 1,000 58.4 56.3 wholesale channels, and expansion of sales of laundry 56.8 58.4 58.0 56.5 56.8 56.5 58.0 56.3 60 60 1,012.6 1,012.6 detergents. In China, the Kao Group launched baby diapers and 40 40 500 laundry detergent targeting middle-class consumers. 20 20 In the Americas, sales increased 21.7 percent to ¥68.9 billion (US$653.9 million). Excluding the effect of currency 0 0 translation, sales would have increased 0.5 percent. Sales of Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 Dec. 2012 Dec. 2013 0 Mar. 2010 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) Note: The gross proﬁt ratio has not been disclosed for the year ended Note: The gross proﬁt ratio has not been disclosed for the year ended improved skin care products grew. December 31, 2012. December 31, 2012. 1,000 500 0 0.2 percent. Operating Income / Operating Income / Operating Income (Left) Sales of cosmetics decreased 1.1 percent compared with Operating Income Ratio Operating Income Ratio Operating Income Ratio (Right) restated fiscal 2012 to ¥257.1 billion (US$2,439.6 million). (Billions of yen) (%) 150 20 Operating Income (Left) Operating Income Ratio (Right) (Billions of yen) 150 Excluding the effect of currency translation, sales would have (%) 20 Net Income / Return on Sales Net Income / Return on Sales Net Income (Left) Net Income (Left) Net Income per Share Net Income per Share Return on Sales (Right) Return on Sales (Right) (Billions of yen) (Billions of yen) 80 80 (%) 15 (%) 15 (Yen) (Yen) 150 150 decreased 3.4 percent. 108.6 In Japan, sales decreased compared with restated fiscal 104.6 101.6 101.6 104.6 108.6 100 100 94.0 94.0 111.8 111.8 124.7 124.7 15 2012, due in part to the impact of returns from retailers and 10.0 10.0 8.8 8.9 8.9 9.2 9.2 9.5 9.5 10 self-imposed cutbacks in marketing activities in connection 8.8 7.9 7.9 50 50 with the voluntary recall of Kanebo Cosmetics brightening 5 products containing the ingredient Rhododenol. In a 0 contracting market, the Kao Group continued to work to 0 Dec. reinforce focal brands, with growth in sales of counseling 2013 0 Mar. 2010 Mar. 2010 Mar. 2011 Mar. 2012 Mar. 2011 Dec. 2012 Mar. 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) brands SOFINA Primavista base makeup and the renewed 15 10 5 0 46.7 46.7 40.5 40 40.5 3.9 3.4 4.3 3.9 60 60 40 20 0 3.4 20 0 Mar. 2010 64.8 64.8 126.03 126.03 52.4 52.4 52.8 52.8 53.1 53.1 10 10 100 100 100.46 100.46 101.12 101.12 101.77 101.77 87.69 87.69 75.57 75.57 5.2 4.3 5.2 4.4 4.9 4.4 4.9 5 50 50 5 0 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) 0 Dec. 2013 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) Dec. 2013 (Years ended March 31, 2010 to 2012, period ended December 31, 2012 and years ended December 31, 2012 and 2013) Consumer Products Business Consumer Products Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 1,200 1,200 1,000 1,008.0 1,000 1,008.0 988.3 1,005.3 988.3 1,005.3 1,019.4 Net Sales (Left) Operating Income (Right) Net Sales (Left) Operating Income (Right) (Billions of yen) 150 1,091.9 (Billions of yen) 150 1,091.9 1,019.4 833.2 833.2 85.6 80.5 85.6 84.7 93.4 84.7 103.0 93.4 103.0 100 100 74.4 80.5 74.4 Beauty Care Business Beauty Care Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) 750 (Billions of yen) 750 Net Sales (Left) Operating Income (Right) Net Sales (Left) Operating Income (Right) (Billions of yen) 50 (Billions of yen) 50 547.9 547.9 533.5 533.5 537.9 537.9 537.8 570.3 537.8 40 570.3 500 500 444.4 444.4 21.8 21.8 20.1 23.9 20.1 50 50 250 250 15.4 15.4 4.7 5.5 4.7 5.5 800 800 600 600 400 400 200 200 30 23.9 20 10 40 30 20 10 0 0 0 Mar. 2010 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 Dec. 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) 0 Dec. 2013 0 0 0 Mar. 2010 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 Dec. 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) 0 Dec. 2013 28 Kao Corporation Annual Report 2013 Human Health Care Business Human Health Care Business Fabric and Home Care Business Fabric and Home Care Business Net Sales / Net Sales / Operating Income Operating Income Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) Net Sales / Net Sales / Operating Income Operating Income Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) Chemical Business Chemical Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 250 250 (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) 80 80 300 300 300 300 276.9 276.9 279.0 285.6 279.0 285.6 60.7 60.7 59.7 59.7 311.0 311.0 292.0 292.0 59.6 62.2 59.6 62.2 60 60 55.5 55.5 236.7 236.7 51.4 51.4 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 40 40 261.2 261.2 247.6 247.6 232.0 232.0 236.5 236.5 208.1 208.1 30 30 207.8 207.8 200 200 24.1 24.1 23.0 23.0 19.7 19.7 16.8 18.1 16.8 21.5 21.5 18.1 20 20 40 40 20 20 100 100 10 10 0 0 Dec. 2013 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) 0 0 Dec. 2013 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) Note: Net sales include intersegment sales. Note: Net sales include intersegment sales. 200 200 183.2 183.2 175.8 181.8 175.8 181.8 189.6 189.6 150 150 15.3 15.3 14.6 152.0 14.6 152.0 13.6 13.6 11.5 11.5 100 100 9.0 9.0 210.6 210.6 16.9 16.9 50 50 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 (Restated) (Restated) 25 20 15 10 5 0 25 20 15 10 5 0 350 350 250 250 200 200 150 150 100 100 50 0 50 0 Mar. 2010 Total Assets / Net Worth* Total Assets / Net Worth* Total Assets Total Assets Net Worth Net Worth Cash Flows* / Cash Flows* / Capital Expenditures Capital Expenditures Cash Flows Cash Flows Capital Expenditures Capital Expenditures Cash Dividends per Share / Cash Dividends per Share / Cash Dividends per Share (Left) Cash Dividends per Share (Left) EVA* EVA* Payout Ratio (Right) Payout Ratio (Right) (Year ended March 31, 2000 = 100) (Year ended March 31, 2000 = 100) Payout Ratio Payout Ratio (Yen) 80 (Yen) 80 (%) 100 (%) 100 200 200 (Billions of yen) (Billions of yen) 1,500 1,500 (Billions of yen) (Billions of yen) 150 150 1,065.8 1,065.8 1,022.8 1,022.8 991.3 991.3 1,030.3 1,030.3 1,000 1,000 1,133.3 1,133.3 100 95.3 100 95.3 97.0 97.0 102.0 102.0 565.1 565.1 528.9 528.9 538.0 538.0 582.7 582.7 628.7 628.7 500 500 50 50 44.9 49.1 44.9 49.1 47.2 47.2 41.9 41.9 109.5 109.5 80.2 80.2 63.7 63.7 60 57.00 60 57.00 58.00 58.00 60.00 75.4 75.4 66.1 66.1 62.00 60.00 62.00 64.00 64.00 75 75 150 150 59.7 59.7 61.3 61.3 50.8 50.8 50 50 100 100 100 132 120 120 113 113 100 163 154 154 142 163 134 142 132 25 25 50 50 (EVA restated on a full-year (EVA restated on a full-year basis / EVA for the year ended basis / EVA for the year ended December 31, 2011 = 100) December 31, 2011 = 100) 200 200 134 125 125 91 91 67 95 67 150 150 138 138 106 95 106 100 100 100 112 100 112 50 50 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 * Net worth is equity, excluding minorit y interests a nd stock * Net worth is equity, excluding minorit y interests a nd stock acquisition rights. acquisition rights. * Cash ﬂows are deﬁned as net income plus depreciation and * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. amortization minus cash dividends. Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 0 0 0 0 Mar. 2000 Mar. Mar. 2000 2001 Mar. Mar. 2001 2002 Mar. Mar. 2002 2003 Mar. Mar. 2003 2004 Mar. Mar. 2004 2005 Mar. Mar. 2005 2006 Mar. Mar. 2006 2007 Mar. Mar. 2007 2008 Mar. Mar. 2008 2009 Mar. Mar. 2009 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. 2012 0 0 Dec. 2011 Dec. Dec. 2011 2012 Dec. Dec. 2012 2013 Dec. 2013 *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. 40 40 20 20 0 0 Mar. 2010 Cash Flows* / Cash Flows* / Capital Expenditures Capital Expenditures Cash Flows Cash Flows Capital Expenditures Capital Expenditures (Billions of yen) (Billions of yen) 200 200 150 150 100 95.3 100 95.3 97.0 102.0 97.0 102.0 109.5 109.5 80.2 80.2 80.2 80.2 63.7 63.7 50 50 44.9 49.1 44.9 49.1 47.2 47.2 41.9 41.9 41.9 41.9 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) Dec. 2013 * Cash ﬂows are deﬁned as net income plus depreciation and * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. amortization minus cash dividends. (Billions of yen) (Billions of yen) 200 200 163 163 154 154 142 142 132 132 134 134 125 125 150 150 113 120 113 120 100 100 100 100 106 106 91 95 91 95 67 67 50 50 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EVE for the the year ended March 31, 2000 = 100) EVE for the the year ended March 31, 2000 = 100) *EVE (Economic Value Added) is a registered trademark of Stewart & Co. *EVE (Economic Value Added) is a registered trademark of Stewart & Co. Management Discussion and Analysis GRACE SOFINA skin care line, as well as self-selection brands Human Health Care Business KATE makeup and Allie UV care. Outside Japan, sales Sales increased 11.1 percent compared with restated fiscal Net Sales / Gross Proﬁt Ratio increased excluding the effect of currency translation. Net Sales / Gross Proﬁt Ratio Net Sales (Left) Net Sales (Left) Sales of skin care products increased compared with Gross Proﬁt Ratio (Right) Gross Proﬁt Ratio (Right) 2012 to ¥210.6 billion (US$1,998.6 million). Excluding the effect Operating Income / Operating Income / Operating Income (Left) Operating Income Ratio Operating Income Ratio of currency translation, sales would have increased 7.8 percent. Operating Income Ratio (Right) Operating Income (Left) Operating Income Ratio (Right) (%) (Billions of yen) (Billions of yen) restated fiscal 2012. In Japan, sales increased with growth in 100 1,500 1,500 sales of Bioré facial cleansers and UV care products and 1,184.4 strong performance by Bioré U body cleanser, which added (%) 100 1,315.2 1,220.4 1,220.4 1,315.2 1,184.4 1,186.8 1,186.8 1,216.1 1,216.1 80 80 1,000 500 0 1,000 new scented offerings, and Curél derma care products. In 58.4 58.4 58.0 58.0 56.8 56.8 56.3 56.3 56.5 56.5 60 60 1,012.6 1,012.6 Asia, Bioré facial and body cleansers performed strongly and sales grew. In the Americas, an improved version of Jergens 500 Natural Glow sunless self-tanning hand and body lotion 40 40 20 20 performed steadily. Sales of hair care products were on par with restated fiscal 0 Dec. Mar. 2012 2010 2012. In Japan, shampoos and conditioners were on a Dec. 2013 Mar. 2012 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) 0 0 (Billions of yen) 150 (%) (Billions of yen) Sales of food and beverage products increased compared 20 150 with restated fiscal 2012, due in part to strong sales of Healthya (%) 20 124.7 124.7 15 Coffee, launched in Japan in April 2013 from the Healthya series 15 108.6 101.6 111.8 111.8 101.6 104.6 104.6 108.6 100 of functional drinks that promote body fat utilization. 94.0 100 94.0 Sales of sanitary products increased compared with 10 9.5 9.5 8.9 8.9 9.2 9.2 8.8 8.8 10.0 10.0 10 restated fiscal 2012. In the Laurier brand of sanitary napkins, 7.9 50 50 7.9 sales of high-value-added products such as Laurier F, which 5 5 protects skin from dampness and chafing, increased in Japan 0 with the effect of the launch of improved products, and sales 0 Mar. 2012 of the Laurier brand increased in Asia, mainly in Indonesia 0 Dec. 2013 0 Mar. 2010 Mar. 2010 Mar. 2011 Mar. 2011 Dec. 2012 Mar. 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) Note: The gross proﬁt ratio has not been disclosed for the year ended Note: The gross proﬁt ratio has not been disclosed for the year ended recovery track as new products performed steadily and new December 31, 2012. December 31, 2012. and Thailand. hair styling products performed well, but hair coloring Sales of Merries baby diapers were strong in Japan and products were impacted by market contraction. In Asia, sales also grew in China and Russia. In China, at the beginning of Consumer Products Business decreased excluding the effect of currency translation amid Consumer Products Business severe competitive conditions. In the Americas and Europe, Net Sales / Net Sales / sales of the Goldwell professional hair care brand increased. Operating Income Operating Income Operating income was impacted by the voluntary recall but (Billions of yen) (Billions of yen) 1,200 1,200 increased ¥3.8 billion compared with restated fiscal 2012 to 1,008.0 1,000 ¥23.9 billion (US$227.1 million), due in part to the effect of Net Sales (Left) Operating Income (Right) Net Sales (Left) Operating Income (Right) (Billions of yen) 150 1,091.9 (Billions of yen) 150 1,091.9 1,005.3 1,019.4 1,008.0 1,005.3 1,019.4 988.3 988.3 1,000 800 600 400 833.2 increased sales and a decrease in depreciation and amortization 800 103.0 100 103.0 833.2 100 93.4 93.4 80.5 85.6 80.5 85.6 84.7 84.7 74.4 74.4 expenses. Operating income before amortization of goodwill 600 and other items related to acquisitions (EBITA) increased ¥2.0 50 400 billion compared with restated fiscal 2012 to ¥54.0 billion 50 the fiscal year the Kao Group began sales of locally Beauty Care Business Beauty Care Business manufactured products targeting middle-class consumers and Net Sales / Net Sales / worked to expand sales. Operating Income Operating Income Sales of personal health products increased compared with (Billions of yen) (Billions of yen) 50 750 restated fiscal 2012. Sales of oral care products increased Net Sales (Left) Operating Income (Right) Net Sales (Left) Operating Income (Right) (Billions of yen) 750 (Billions of yen) 50 533.5 547.9 547.9 compared with restated fiscal 2012 due in part to sales of 537.9 new high-value-added products. Bath additives sold strongly 500 444.4 30 and sales of Megurhythm steam thermo power pads also 23.9 40 570.3 570.3 537.8 533.5 537.8 537.9 444.4 23.9 500 40 30 increased substantially. 250 Operating income increased ¥3.2 billion compared with 15.4 15.4 250 20 20 21.8 21.8 20.1 20.1 200 200 (US$512.8 million), which is equivalent to 9.5 percent of sales. 0 0 Mar. 2010 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 Dec. 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) 0 Dec. 2013 0 10 restated fiscal 2012 to ¥16.9 billion (US$159.9 million) due to 5.5 5.5 10 4.7 4.7 0 more efficient management of expenses in addition to the Mar. 2012 Mar. effect of increased sales. 2012 0 Dec. 2013 0 Mar. 2010 Mar. 2011 Dec. 2012 Mar. 2010 Mar. 2011 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) 0 Human Health Care Business Human Health Care Business Net Sales / Net Sales / Operating Income Operating Income Net Sales (Left) Operating Income (Right) Net Sales (Left) Operating Income (Right) Fabric and Home Care Business Fabric and Home Care Business Net Sales / Net Sales / Operating Income Operating Income Net Sales (Left) Operating Income (Right) Net Sales (Left) Operating Income (Right) (Years ended March 31, 2010 to 2012, period ended December 31, 2012 and years ended December 31, 2012 and 2013) Net Income / Return on Sales Net Income / Return on Sales Net Income (Left) Net Income (Left) Net Income per Share Net Income per Share Return on Sales (Right) Return on Sales (Right) (Billions of yen) (Billions of yen) 80 80 (%) 15 (%) 15 (Yen) (Yen) 150 150 64.8 64.8 126.03 126.03 52.4 52.4 52.8 52.8 53.1 53.1 10 10 100 100 100.46 100.46 101.12 101.12 101.77 101.77 87.69 87.69 75.57 75.57 5.2 4.3 5.2 4.4 4.9 4.4 4.9 5 50 50 46.7 46.7 40.5 40 40.5 3.9 3.4 4.3 3.9 60 60 40 20 0 3.4 20 0 Mar. 2010 5 0 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) 0 Dec. 2013 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) Dec. 2013 Chemical Business Chemical Business Net Sales / Operating Income Net Sales / Operating Income (Billions of yen) 250 (Billions of yen) 250 (Billions of yen) 25 (Billions of yen) 25 (Billions of yen) 350 (Billions of yen) 350 (Billions of yen) 80 (Billions of yen) 80 (Billions of yen) (Billions of yen) 300 300 20 300 300 276.9 276.9 279.0 285.6 279.0 60.7 60.7 59.7 285.6 292.0 311.0 292.0 311.0 62.2 59.6 59.7 55.5 55.5 236.7 236.7 51.4 59.6 51.4 200 200 183.2 183.2 175.8 181.8 175.8 181.8 210.6 189.6 189.6 210.6 20 16.9 16.9 150 150 15.3 15.3 14.6 152.0 14.6 152.0 13.6 13.6 15 15 11.5 11.5 100 100 9.0 9.0 50 50 0 0 Mar. 2010 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 Dec. 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) 10 10 5 0 5 0 Dec. 2013 250 250 200 200 150 150 100 100 50 0 50 0 Mar. 2010 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 40 40 261.2 261.2 247.6 247.6 232.0 232.0 236.5 236.5 208.1 208.1 30 30 207.8 207.8 200 200 24.1 24.1 23.0 23.0 19.7 19.7 16.8 18.1 16.8 21.5 21.5 18.1 20 20 100 100 10 10 62.2 60 60 40 40 20 20 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 Dec. 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2012 2013 (Restated) 0 0 Dec. 2013 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) 0 0 Dec. 2013 Kao Corporation Annual Report 2013 29 Note: Net sales include intersegment sales. Note: Net sales include intersegment sales. Total Assets / Net Worth* Total Assets / Net Worth* Total Assets Total Assets Net Worth Net Worth Cash Flows* / Cash Flows* / Capital Expenditures Capital Expenditures Cash Flows Cash Flows Capital Expenditures Capital Expenditures Cash Dividends per Share / Cash Dividends per Share / Cash Dividends per Share (Left) Cash Dividends per Share (Left) EVA* EVA* Payout Ratio (Right) Payout Ratio (Right) (Year ended March 31, 2000 = 100) (Year ended March 31, 2000 = 100) (Billions of yen) (Billions of yen) 1,500 1,500 (Billions of yen) (Billions of yen) 150 150 1,065.8 1,065.8 1,022.8 1,022.8 991.3 991.3 1,030.3 1,030.3 1,000 1,000 1,133.3 1,133.3 100 95.3 100 95.3 97.0 97.0 102.0 102.0 565.1 565.1 528.9 528.9 538.0 538.0 582.7 582.7 628.7 628.7 500 500 50 50 44.9 49.1 44.9 49.1 47.2 47.2 41.9 41.9 109.5 109.5 60 57.00 60 57.00 58.00 60.00 58.00 60.00 62.00 62.00 64.00 64.00 80.2 80.2 63.7 63.7 75.4 75.4 66.1 66.1 59.7 59.7 61.3 61.3 163 154 154 142 163 134 142 132 132 120 120 113 113 100 (%) 100 (%) 100 200 200 75 75 150 150 50.8 50.8 50 50 100 100 100 25 25 50 50 (EVA restated on a full-year (EVA restated on a full-year basis / EVA for the year ended basis / EVA for the year ended December 31, 2011 = 100) December 31, 2011 = 100) 200 200 134 125 125 91 91 67 95 67 150 150 138 138 106 95 106 100 100 100 112 100 112 50 50 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 * Net worth is equity, excluding minorit y interests a nd stock * Net worth is equity, excluding minorit y interests a nd stock acquisition rights. acquisition rights. * Cash ﬂows are deﬁned as net income plus depreciation and * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. amortization minus cash dividends. Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 0 0 0 0 Mar. 2000 Mar. Mar. 2000 2001 Mar. Mar. 2001 2002 Mar. Mar. 2002 2003 Mar. Mar. 2003 2004 Mar. Mar. 2004 2005 Mar. Mar. 2005 2006 Mar. Mar. 2006 2007 Mar. Mar. 2007 2008 Mar. Mar. 2008 2009 Mar. Mar. 2009 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. 2012 0 0 Dec. 2011 Dec. Dec. 2011 2012 Dec. Dec. 2012 2013 Dec. 2013 *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. Payout Ratio Payout Ratio (Yen) (Yen) 80 80 40 40 20 20 0 0 Mar. 2010 Cash Flows* / Cash Flows* / Capital Expenditures Capital Expenditures Cash Flows Cash Flows Capital Expenditures Capital Expenditures (Billions of yen) (Billions of yen) 200 200 150 150 100 95.3 100 95.3 97.0 102.0 97.0 102.0 109.5 109.5 80.2 80.2 80.2 80.2 63.7 63.7 50 50 44.9 49.1 44.9 49.1 47.2 47.2 41.9 41.9 41.9 41.9 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) Dec. 2013 * Cash ﬂows are deﬁned as net income plus depreciation and * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. amortization minus cash dividends. (Billions of yen) (Billions of yen) 200 200 163 163 154 154 142 142 132 132 134 134 125 125 150 150 113 120 113 120 100 100 100 100 106 106 91 95 91 95 67 67 50 50 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EVE for the the year ended March 31, 2000 = 100) EVE for the the year ended March 31, 2000 = 100) *EVE (Economic Value Added) is a registered trademark of Stewart & Co. *EVE (Economic Value Added) is a registered trademark of Stewart & Co. Net Sales / Gross Proﬁt Ratio Net Sales (Left) Gross Proﬁt Ratio (Right) Operating Income / Operating Income Ratio Operating Income (Left) Operating Income Ratio (Right) Net Income / Return on Sales Net Income per Share Net Income (Left) Return on Sales (Right) (Billions of yen) 1,500 1,184.4 1,186.8 1,216.1 1,220.4 1,315.2 1,000 58.4 58.0 1,012.6 56.8 56.3 56.5 500 0 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 (Restated) Dec. 2013 (%) 100 80 60 40 20 0 (Billions of yen) 150 100 94.0 7.9 50 0 124.7 111.8 104.6 108.6 101.6 10.0 8.8 8.9 9.2 9.5 10 126.03 100.46 101.12 101.77 87.69 75.57 (Billions of yen) 46.7 40.5 80 60 40 20 0 64.8 52.4 52.8 53.1 3.4 3.9 4.3 5.2 4.4 4.9 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) Fabric and Home Care Business Note: The gross proﬁt ratio has not been disclosed for the year ended products such as Bath Magiclean Aroma Deodorizer Plus and December 31, 2012. Sales increased 6.5 percent compared with restated fiscal Toilet Magiclean Aroma Deodorizer Plus. In addition, the Kao 60 40 20 0 Net Income / Return on Sales 2012 to ¥311.0 billion (US$2,951.2 million). Excluding the effect Net Income (Left) Return on Sales (Right) of currency translation, sales would have increased 4.5 percent. (%) 15 Sales of fabric care products increased compared with (Billions of yen) 80 restated fiscal 2012. In Japan, the Kao Group worked to 64.8 highlight the reduced laundry time and environmental appeal 52.4 52.8 53.1 of conserving water, electricity and resources with the Neo 46.7 10 series, which includes Ultra Attack Neo ultra-concentrated liquid laundry detergent. In August 2013, the Kao Group 4.3 5 4.4 3.9 5.2 4.9 40.5 3.4 Group launched a 3D adsorbent dry sheet with more fibers for Net Income per Share (Yen) 150 Quickle Wiper household cleaning sheets, and sales were strong. Consumer Products Business Operating income increased ¥2.6 billion compared with Net Sales / Net Sales (Left) Operating Income Operating Income (Right) 126.03 (Billions of yen) (Billions of yen) 150 1,200 the effect of increased sales and cost reduction activities. restated fiscal 2012 to ¥62.2 billion (US$590.0 million) due to 101.77 101.12 100.46 1,091.9 100 1,008.0 988.3 87.69 1,005.3 1,000 Chemical Business 75.57 1,019.4 833.2 800 100 85.6 Demand increased in certain customer industries in Japan, 84.7 93.4 50 80.5 103.0 600 74.4 launched Ultra Attack Neo, which effectively removes stains including in export-related industries due to the depreciation and odors in just five minutes of washing time as a proposal of the yen and in construction-related industries due to 400 50 0 0 Mar. 2010 for use with a reduced-time washing function in response to Dec. Mar. 2013 2012 the social trend toward an increase in two-income Dec. 2012 (Restated) Dec. 2012 Mar. 2011 200 reconstruction demand following the Great East Japan Mar. 2012 Earthquake and demand in advance of the April 2014 increase Dec. 2012 (Restated) Dec. 2013 Mar. 2010 Mar. 2011 Dec. 2012 households, and expanded the number of users, including users of Attack Neo Antibacterial EX Power liquid laundry in the consumption tax rate. However, sales were impacted Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2013 by selling price adjustments in connection with lower prices Dec. 2012 (Restated) 0 detergent, which has strong deodorizing and antibacterial for natural fats and oils used as raw materials and the properties. In addition, the Kao Group stimulated the powder economic slump in Europe. As a result of these factors, sales laundry detergent market with the April 2013 launch of a refill product for Attack powder laundry detergent that reduces environmental impact. Flair Fragrance fabric softener and Wide Haiter EX Power, a fabric bleach for color garments with were ¥261.2 billion (US$2,478.3 million), an increase of 10.5 Human Health Care Business Net Sales / Operating Income percent compared with restated fiscal 2012, including the Net Sales (Left) Operating Income (Right) impact of the depreciation of the yen on currency translation. (Billions of yen) 250 However, excluding the effect of currency translation, sales (Billions of yen) 25 a powerful deodorizing function, performed well. Sales grew would have decreased 1.0 percent. 210.6 in Asia as Attack laundry detergent performed strongly in Indonesia and Thailand and the Kao Group stimulated the 200 In oleo chemicals, the Kao Group expanded its facilities for 183.2 181.8 189.6 20 175.8 16.9 fatty alcohols and increased sales volume. However, sales 14.6 15 150 152.0 15.3 13.6 markets in Taiwan and Hong Kong with the launch of a liquid were impacted by a drop in demand from customer industries 11.5 laundry detergent with a strengthened antibacterial function. 100 9.0 and fluctuations in selling prices due to lower prices for 10 Sales of home care products increased compared with natural fats and oils used as raw materials. In performance 5 50 restated fiscal 2012. In Japan, Kitchen Haiter bleach performed chemicals, sales were firm as the Kao Group worked to 0 0 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 (Restated) Dec. 2013 0 (Restated) strongly. Sales of household cleaners increased with new develop and expand sales of high-value-added products with (Years ended March 31, 2010 to 2012, period ended December 31, 2012 and years ended December 31, 2012 and 2013) Beauty Care Business Net Sales / Operating Income (Billions of yen) 750 Net Sales (Left) Operating Income (Right) (Billions of yen) 500 250 0 547.9 533.5 537.9 537.8 570.3 444.4 15.4 21.8 20.1 23.9 4.7 5.5 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) Fabric and Home Care Business Net Sales / Operating Income (Billions of yen) 350 300 250 200 150 100 50 0 Net Sales (Left) Operating Income (Right) (Billions of yen) 311.0 292.0 59.6 62.2 276.9 279.0 60.7 59.7 285.6 55.5 236.7 51.4 Chemical Business Net Sales / Operating Income (Billions of yen) 300 247.6 232.0 208.1 24.1 23.0 207.8 19.7 Net Sales (Left) Operating Income (Right) (Billions of yen) 261.2 236.5 21.5 16.8 18.1 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) Note: Net sales include intersegment sales. (%) 20 15 5 0 50 40 30 20 10 0 80 60 40 20 0 200 100 0 (Yen) 80 60 40 20 0 (%) 15 10 5 0 40 30 20 10 0 (%) 100 75 50 25 0 (Yen) 150 100 50 0 200 150 100 50 0 Human Health Care Business Fabric and Home Care Business Net Sales / Operating Income (Billions of yen) Net Sales (Left) Operating Income (Right) Net Sales / Operating Income (Billions of yen) (Billions of yen) Chemical Business Net Sales / Operating Income (Billions of yen) 300 Net Sales (Left) Operating Income (Right) (Billions of yen) 200 100 0 247.6 232.0 208.1 24.1 23.0 261.2 236.5 21.5 16.8 18.1 207.8 19.7 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 (Restated) Dec. 2013 Note: Net sales include intersegment sales. 30 Kao Corporation Annual Report 2013 40 30 20 10 0 Total Assets / Net Worth* Total Assets Net Worth (Billions of yen) 1,500 Cash Flows* / Capital Expenditures (Billions of yen) 150 1,065.8 1,000 1,022.8 991.3 1,030.3 1,133.3 100 95.3 97.0 102.0 500 0 565.1 528.9 538.0 582.7 628.7 50 44.9 49.1 47.2 41.9 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2013 0 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2013 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2013 * Net worth is equity, excluding minorit y interests a nd stock acquisition rights. * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. Cash Flows Capital Expenditures Cash Dividends per Share / Payout Ratio Cash Dividends per Share (Left) Payout Ratio (Right) EVA* (Year ended March 31, 2000 = 100) 80.2 109.5 63.7 57.00 75.4 58.00 66.1 60.00 62.00 64.00 59.7 61.3 50.8 163 154 142 132 134 125 113 120 100 106 95 91 67 (EVA restated on a full-year basis / EVA for the year ended December 31, 2011 = 100) 138 112 100 200 150 100 50 0 Mar. 2000 Mar. 2001 Mar. 2002 Mar. 2003 Mar. 2004 Mar. 2005 Mar. 2006 Mar. 2007 Mar. 2008 Mar. 2009 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2011 Dec. 2012 Dec. 2013 *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2013 0 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2013 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2013 * Net worth is equity, excluding minorit y interests a nd stock acquisition rights. * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. Cash Flows Capital Expenditures Cash Dividends per Share / Payout Ratio Cash Dividends per Share (Left) Payout Ratio (Right) EVA* (Year ended March 31, 2000 = 100) 80.2 109.5 63.7 57.00 75.4 58.00 66.1 60.00 62.00 64.00 59.7 61.3 50.8 163 154 142 132 134 125 113 120 100 Cash Flows* / 91 Capital Expenditures 95 106 (Billions of yen) 67 (Yen) 80 60 40 20 0 (%) 100 75 50 25 0 200 150 100 50 0 (EVA restated on a full-year basis / EVA for the year ended December 31, 2011 = 100) 138 112 100 Cash Flows Capital Expenditures 200 150 100 50 0 Mar. 2000 Mar. 2001 Mar. 2002 Mar. 2003 Mar. 2004 Mar. 2005 Mar. 2006 Mar. 2007 Mar. 2008 Mar. 2009 *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. Mar. 2010 95.3 Mar. 2011 97.0 Mar. 2012 102.0 Dec. 2011 Dec. 2012 109.5 Dec. 2013 80.2 80.2 63.7 44.9 49.1 47.2 41.9 41.9 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. 200 150 100 50 0 Cash Flows* / Capital Expenditures (Billions of yen) Cash Flows Capital Expenditures 95.3 97.0 102.0 80.2 80.2 44.9 49.1 47.2 41.9 41.9 109.5 63.7 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. (Billions of yen) 120 113 100 100 200 150 50 0 163 154 142 132 134 125 106 91 95 67 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EVE for the the year ended March 31, 2000 = 100) *EVE (Economic Value Added) is a registered trademark of Stewart & Co. (Billions of yen) 120 113 100 100 200 150 50 0 163 154 142 132 134 125 106 91 95 67 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EVE for the the year ended March 31, 2000 = 100) *EVE (Economic Value Added) is a registered trademark of Stewart & Co. (%) 100 80 60 40 20 0 50 0 25 20 15 10 5 0 Net Sales / Gross Proﬁt Ratio Net Sales (Left) Gross Proﬁt Ratio (Right) Operating Income / Operating Income Ratio Operating Income (Left) Operating Income Ratio (Right) (Billions of yen) 1,500 1,184.4 1,186.8 1,216.1 1,220.4 1,315.2 1,000 58.4 58.0 1,012.6 56.8 56.3 56.5 124.7 111.8 104.6 108.6 101.6 10.0 8.8 8.9 9.2 9.5 10 (Billions of yen) 150 100 94.0 7.9 50 0 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) Note: The gross proﬁt ratio has not been disclosed for the year ended December 31, 2012. Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) Consumer Products Business Net Sales / Operating Income (Billions of yen) Net Sales (Left) Operating Income (Right) (Billions of yen) 150 1,091.9 1,008.0 988.3 1,005.3 1,019.4 833.2 85.6 84.7 93.4 103.0 100 74.4 80.5 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) Beauty Care Business Net Sales / Operating Income (Billions of yen) 750 Net Sales (Left) Operating Income (Right) (Billions of yen) 547.9 533.5 537.9 537.8 570.3 444.4 15.4 21.8 20.1 23.9 4.7 5.5 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 183.2 175.8 181.8 15.3 14.6 152.0 9.0 189.6 210.6 16.9 13.6 11.5 Net Sales (Left) Operating Income (Right) (Billions of yen) 311.0 292.0 59.6 62.2 276.9 279.0 60.7 59.7 285.6 55.5 236.7 51.4 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 (Restated) Total Assets / Net Worth* Total Assets Net Worth (Billions of yen) 1,500 Cash Flows* / Capital Expenditures (Billions of yen) 150 1,065.8 1,000 1,022.8 991.3 1,030.3 1,133.3 100 95.3 97.0 102.0 565.1 528.9 538.0 582.7 628.7 50 44.9 49.1 47.2 41.9 (%) 20 15 5 0 50 40 30 20 10 0 80 60 40 20 0 500 0 1,200 1,000 800 600 400 200 0 250 200 150 100 50 0 500 0 500 250 0 350 300 250 200 150 100 50 0 200 150 100 50 0 Operating income increased ¥3.4 billion yen compared with Beauty Care Business Beauty Care Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 750 750 restated fiscal 2012 to ¥21.5 billion (US$204.1 million), despite Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) the impact of lower demand from customer industries, as the Kao Group worked to increase sales volume and reduce costs. (Billions of yen) 50 (Billions of yen) 50 reduced environmental impact. Specialty chemicals were Total equity increased ¥46.6 billion from the end of fiscal impacted by the economic downturn and structural changes in 2012 to ¥642.6 billion (US$6,097.7 million). The principal the personal computer market. increases in equity were net income totaling ¥64.8 billion Note: The gross proﬁt ratio has not been disclosed for the year ended Note: The gross proﬁt ratio has not been disclosed for the year ended December 31, 2012. December 31, 2012. Consumer Products Business Consumer Products Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 1,200 1,200 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 150 150 1,091.9 1,091.9 1,000 1,008.0 1,000 1,008.0 988.3 1,005.3 988.3 1,005.3 1,019.4 1,019.4 (US$614.5 million) and foreign currency translation adjustments of ¥43.5 billion. The principal decreases in equity were a ¥30.0 billion decrease due to purchase of treasury stock and payments of dividends from retained earnings totaling ¥32.6 billion. In June 2013, the Company retired treasury stock. As a result, the net worth ratio (defined as net worth divided by total assets) was 55.5 percent compared with 56.6 percent at the end of fiscal 2012. Cash Flows The balance of cash and cash equivalents at December 31, 833.2 833.2 93.4 84.7 80.5 74.4 85.6 80.5 85.6 84.7 103.0 93.4 103.0 100 100 500 50 50 250 800 800 600 74.4 600 400 400 200 200 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) 0 Dec. 2013 0 0 547.9 533.5 547.9 537.9 Financial Structure 444.4 537.9 533.5 500 537.8 444.4 570.3 537.8 40 570.3 30 40 30 Total assets increased ¥102.9 billion from the end of fiscal 21.8 20 21.8 20.1 2012 to ¥1,133.3 billion (US$10,753.2 million). The principal 15.4 20.1 15.4 20 250 23.9 23.9 increases in assets were a ¥27.0 billion increase in cash and 10 10 4.7 5.5 4.7 5.5 time deposits, a ¥17.7 billion increase in notes and accounts 0 Mar. 2010 receivable – trade, a ¥33.2 billion increase in short-term Mar. Mar. 2011 2010 Mar. Mar. 2012 2011 Dec. Mar. 2012 2012 Dec. Dec. 2012 2012 (Restated) Dec. 2013 Dec. 2012 (Restated) investments, a ¥14.7 billion increase in finished goods and a 0 0 Dec. 2013 Net Sales / Gross Proﬁt Ratio Net Sales / Gross Proﬁt Ratio Net Sales (Left) Net Sales (Left) Gross Proﬁt Ratio (Right) Gross Proﬁt Ratio (Right) Operating Income / Operating Income / Operating Income Ratio Operating Income Ratio Operating Income (Left) Operating Income (Left) Operating Income Ratio (Right) Operating Income Ratio (Right) Net Income / Return on Sales Net Income / Return on Sales Net Income (Left) Net Income (Left) Net Income per Share Net Income per Share Return on Sales (Right) Return on Sales (Right) (Billions of yen) (Billions of yen) 150 150 (Billions of yen) (Billions of yen) 80 80 (%) 15 (%) 15 (Yen) 150 (Yen) 150 (Billions of yen) (Billions of yen) 1,500 1,500 1,184.4 1,184.4 1,186.8 1,216.1 1,186.8 1,216.1 1,220.4 1,220.4 1,315.2 1,315.2 1,000 1,000 58.4 58.4 58.0 58.0 56.8 56.8 56.3 56.3 56.5 56.5 60 1,012.6 1,012.6 500 500 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) (%) 100 80 60 40 20 0 (%) 100 80 40 20 0 Dec. 2013 (%) 20 124.7 111.8 124.7 15 (%) 20 15 108.6 104.6 108.6 101.6 111.8 101.6 8.9 8.8 10.0 8.9 10.0 9.2 9.5 9.2 10 9.5 10 104.6 94.0 8.8 7.9 Mar. Mar. 2011 2010 Mar. Mar. 2012 2011 Dec. Mar. 2012 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2013 2012 (Restated) 5 0 5 0 Dec. 2013 100 94.0 100 50 0 7.9 50 0 Mar. 2010 60 60 40 20 0 40.5 40 3.4 20 0 Mar. 2010 64.8 64.8 126.03 126.03 46.7 52.4 46.7 52.8 52.4 53.1 52.8 53.1 10 10 100 100 100.46 101.12 100.46 101.12 101.77 101.77 40.5 Management Discussion and Analysis 3.9 3.4 4.3 3.9 4.3 5.2 5.2 4.4 4.9 4.4 4.9 5 Mar. Mar. 2011 2010 Mar. Mar. 2012 2011 Dec. Mar. 2012 2012 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2013 2012 (Restated) 0 Dec. 2013 5 0 50 50 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) Dec. 2013 87.69 87.69 75.57 75.57 EVA* EVA* (Year ended March 31, 2000 = 100) (Year ended March 31, 2000 = 100) 200 200 150 150 100 100 100 113 100 132 120 120 113 163 154 154 142 163 134 142 132 (EVA restated on a full-year (EVA restated on a full-year basis / EVA for the year ended basis / EVA for the year ended December 31, 2011 = 100) December 31, 2011 = 100) 200 200 134 125 125 91 91 67 95 67 150 150 138 138 106 95 106 100 100 100 112 100 112 50 50 (Billions of yen) (Billions of yen) 200 200 150 150 100 100 100 113 120 100 142 120 132 113 163 163 142 154 134 154 132 134 125 125 106 106 91 95 91 95 67 67 50 50 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EVE for the the year ended March 31, 2000 = 100) EVE for the the year ended March 31, 2000 = 100) *EVE (Economic Value Added) is a registered trademark of Stewart & Co. *EVE (Economic Value Added) is a registered trademark of Stewart & Co. ¥24.9 billion increase in property, plant and equipment. The 2013 increased ¥67.2 billion compared with the end of fiscal principal decrease in assets was a ¥23.3 billion decrease in 2012 to ¥227.6 billion (US$2,159.6 million). Human Health Care Business Human Health Care Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 250 250 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 25 25 200 200 183.2 150 150 183.2 175.8 181.8 175.8 181.8 15.3 15.3 14.6 152.0 14.6 152.0 210.6 210.6 189.6 189.6 16.9 16.9 13.6 11.5 11.5 13.6 100 100 9.0 9.0 50 50 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 (Restated) (Restated) 20 15 10 5 0 20 15 10 5 0 300 250 200 150 100 50 0 intangible assets due to the progress of amortization of Fabric and Home Care Business Fabric and Home Care Business Net Sales / Net Sales / Operating Income Operating Income trademarks and other intellectual property rights and goodwill. Total liabilities increased ¥56.4 billion from the end of fiscal Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 350 350 2012 to ¥490.6 billion (US$4,655.4 million). The principal (Billions of yen) 80 changes in current liabilities were a ¥9.5 billion increase in 300 276.9 notes and accounts payable – trade, a ¥29.5 billion decrease in (Billions of yen) 80 311.0 55.5 51.4 current portion of long-term debt, a ¥3.4 billion increase in 59.7 55.5 62.2 59.6 279.0 276.9 60.7 59.7 236.7 285.6 236.7 311.0 279.0 285.6 292.0 292.0 59.6 62.2 60.7 51.4 250 60 60 200 notes and accounts payable – other, a ¥16.8 billion increase in 40 40 150 accrued expenses and a ¥20.7 billion increase in income taxes 100 payable. The principal changes in long-term liabilities were a 20 20 50 ¥28.8 billion increase in long-term debt and a ¥3.1 billion Chemical Business Chemical Business Cash Flows from Operating Activities Net Sales / Net Sales / Net Sales (Left) Net Sales (Left) Operating Income Operating Income Operating Income (Right) Operating Income (Right) Net cash provided by operating activities totaled ¥178.7 billion (Billions of yen) (Billions of yen) (US$1,696.0 million). The principal increases in net cash were 300 income before income taxes and minority interests of ¥114.9 247.6 billion, depreciation and amortization of ¥77.3 billion, change in 30 208.1 232.0 207.8 40 261.2 (Billions of yen) (Billions of yen) 247.6 236.5 232.0 261.2 236.5 300 30 40 208.1 200 trade payables of ¥3.5 billion and change in notes and 24.1 23.0 accounts payable – other and accrued expenses of ¥16.8 20 21.5 19.7 24.1 19.7 23.0 21.5 16.8 18.1 16.8 18.1 20 207.8 200 billion. The principal decreases in net cash were income taxes 100 paid of ¥29.8 billion and change in inventories of ¥5.4 billion. 100 10 10 increase in liability for retirement benefits. Mar. Mar. 2011 2010 Mar. Mar. 2012 2011 Dec. Mar. 2012 2012 0 Mar. 2010 Dec. Dec. 2012 2012 (Restated) Dec. Dec. 2013 2012 (Restated) 0 0 0 Dec. 2013 0 Mar. 2010 Mar. 2011 Mar. Mar. 2011 2010 Dec. Dec. 2012 2012 (Restated) Note: Net sales include intersegment sales. Dec. Mar. 2012 2012 Mar. 2012 Note: Net sales include intersegment sales. Dec. Dec. 2013 2012 (Restated) 0 Dec. 2013 0 (Years ended March 31, 2010 to 2012, period ended December 31, 2012 and years ended December 31, 2012 and 2013) Cash Dividends per Share / Cash Dividends per Share / Payout Ratio Payout Ratio Cash Dividends per Share (Left) Payout Ratio (Right) Cash Dividends per Share (Left) Payout Ratio (Right) (Yen) 80 (Yen) 80 60 57.00 60 75.4 40 40 20 20 0 0 Mar. 2010 (%) 100 (%) 100 57.00 58.00 60.00 58.00 75.4 66.1 66.1 59.7 62.00 60.00 64.00 62.00 64.00 75 61.3 59.7 61.3 50.8 50 50.8 75 50 25 25 50 50 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 0 Dec. 2013 0 0 0 Mar. 2000 Mar. Mar. 2001 2000 Mar. Mar. 2002 2001 Mar. Mar. 2003 2002 Mar. Mar. 2004 2003 Mar. Mar. 2005 2004 Mar. Mar. 2006 2005 Mar. Mar. 2007 2006 Mar. Mar. 2008 2007 Mar. Mar. 2009 2008 Mar. Mar. 2010 2009 Mar. Mar. 2011 2010 Mar. Mar. 2012 2011 Mar. 2012 0 0 Dec. 2011 Dec. Dec. 2012 2011 Dec. Dec. 2013 2012 Dec. 2013 *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. Kao Corporation Annual Report 2013 31 Total Assets / Net Worth* Total Assets / Net Worth* Total Assets Total Assets Net Worth Net Worth Cash Flows* / Capital Expenditures Cash Flows* / Capital Expenditures Cash Flows Cash Flows Capital Expenditures Capital Expenditures (Billions of yen) (Billions of yen) 1,500 1,500 (Billions of yen) (Billions of yen) 150 150 1,065.8 1,065.8 1,022.8 1,022.8 991.3 1,030.3 991.3 1,030.3 1,000 1,000 1,133.3 1,133.3 100 95.3 100 95.3 97.0 102.0 97.0 102.0 109.5 109.5 565.1 565.1 528.9 528.9 538.0 582.7 538.0 628.7 582.7 628.7 500 500 50 44.9 50 49.1 44.9 49.1 47.2 47.2 41.9 41.9 80.2 80.2 63.7 63.7 0 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2013 Dec. 2013 0 0 Mar. 2010 Mar. 2010 Mar. 2011 Mar. 2011 Mar. 2012 Mar. 2012 Dec. 2012 Dec. 2012 Dec. 2013 Dec. 2013 * Net worth is equity, excluding minorit y interests a nd stock * Net worth is equity, excluding minorit y interests a nd stock acquisition rights. acquisition rights. * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. Cash Flows* / Cash Flows* / Capital Expenditures Capital Expenditures Cash Flows Cash Flows Capital Expenditures Capital Expenditures (Billions of yen) (Billions of yen) 200 200 150 150 100 95.3 100 97.0 95.3 102.0 97.0 102.0 109.5 109.5 80.2 80.2 80.2 80.2 63.7 63.7 44.9 50 49.1 44.9 49.1 47.2 47.2 41.9 41.9 41.9 41.9 0 Mar. 2010 Mar. Mar. 2010 2011 Mar. Mar. 2011 2012 Mar. Dec. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2012 2013 (Restated) (Restated) Dec. 2013 * Cash ﬂows are deﬁned as net income plus depreciation and * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. amortization minus cash dividends. 50 0 (%) (%) 20 20 15 15 5 5 0 0 50 50 40 40 30 30 20 20 10 10 0 0 80 80 60 60 40 40 20 20 0 0 500 500 0 0 1,200 1,200 1,000 1,000 800 800 600 600 400 400 200 200 0 0 250 250 200 200 150 150 100 100 50 50 0 0 1,000 1,000 500 500 0 0 Consumer Products Business Consumer Products Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 1,008.0 1,008.0 988.3 988.3 1,005.3 1,005.3 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 150 150 1,091.9 1,091.9 833.2 833.2 103.0 103.0 74.4 74.4 80.5 80.5 85.6 85.6 84.7 84.7 Beauty Care Business Beauty Care Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 750 750 Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) 547.9 547.9 533.5 533.5 537.9 537.9 570.3 570.3 444.4 444.4 21.8 21.8 23.9 23.9 15.4 15.4 4.7 4.7 5.5 5.5 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 Human Health Care Business Human Health Care Business Fabric and Home Care Business Fabric and Home Care Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) (Billions of yen) (Billions of yen) Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) (Billions of yen) (Billions of yen) Chemical Business Chemical Business Net Sales / Net Sales / Operating Income Operating Income (Billions of yen) (Billions of yen) 300 300 210.6 210.6 16.9 16.9 183.2 183.2 181.8 181.8 175.8 175.8 15.3 15.3 14.6 14.6 152.0 152.0 11.5 11.5 9.0 9.0 276.9 276.9 60.7 60.7 279.0 279.0 59.7 59.7 285.6 285.6 311.0 311.0 62.2 62.2 55.5 55.5 236.7 236.7 51.4 51.4 247.6 247.6 232.0 232.0 208.1 208.1 24.1 24.1 23.0 23.0 207.8 207.8 19.7 19.7 261.2 261.2 21.5 21.5 16.8 16.8 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 Note: Net sales include intersegment sales. Note: Net sales include intersegment sales. Total Assets / Net Worth* Total Assets / Net Worth* Total Assets Total Assets Net Worth Net Worth (Billions of yen) (Billions of yen) 1,500 1,500 Cash Flows* / Cash Flows* / Capital Expenditures Capital Expenditures (Billions of yen) (Billions of yen) 150 150 1,065.8 1,065.8 1,022.8 1,022.8 991.3 991.3 1,030.3 1,030.3 1,133.3 1,133.3 100 100 95.3 95.3 97.0 97.0 102.0 102.0 565.1 565.1 528.9 528.9 538.0 538.0 582.7 582.7 628.7 628.7 50 50 44.9 44.9 49.1 49.1 47.2 47.2 41.9 41.9 80.2 80.2 109.5 109.5 63.7 63.7 57.00 57.00 75.4 75.4 58.00 58.00 66.1 66.1 60.00 60.00 62.00 62.00 64.00 64.00 59.7 59.7 61.3 61.3 50.8 50.8 200 200 100 100 0 0 (Yen) (Yen) 80 80 60 60 40 40 20 20 0 0 (%) (%) 15 15 10 10 5 5 0 0 40 40 30 30 20 20 10 10 0 0 (%) (%) 100 100 75 75 50 50 25 25 0 0 (%) (%) 100 100 80 80 60 60 40 40 20 20 0 0 100 100 50 50 0 0 25 25 20 20 15 15 10 10 5 5 0 0 500 500 250 250 0 0 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 200 200 150 150 100 100 50 50 0 0 Net Sales / Gross Proﬁt Ratio Net Sales / Gross Proﬁt Ratio Net Sales (Left) Net Sales (Left) Gross Proﬁt Ratio (Right) Gross Proﬁt Ratio (Right) Operating Income / Operating Income / Operating Income Ratio Operating Income Ratio Operating Income (Left) Operating Income (Left) Operating Income Ratio (Right) Operating Income Ratio (Right) Net Income / Return on Sales Net Income / Return on Sales Net Income per Share Net Income per Share Net Income (Left) Net Income (Left) Return on Sales (Right) Return on Sales (Right) (Billions of yen) (Billions of yen) 1,500 1,500 1,184.4 1,184.4 1,186.8 1,186.8 1,216.1 1,216.1 1,315.2 1,315.2 1,000 1,000 58.4 58.4 58.0 58.0 1,012.6 1,012.6 56.8 56.8 56.3 56.3 56.5 56.5 124.7 124.7 104.6 104.6 108.6 108.6 101.6 101.6 10.0 10.0 8.8 8.8 8.9 8.9 9.5 9.5 10 10 (Billions of yen) (Billions of yen) 150 150 100 100 94.0 94.0 7.9 7.9 50 50 0 0 (Billions of yen) (Billions of yen) 80 80 60 60 40 40 20 20 0 0 64.8 64.8 52.4 52.4 52.8 52.8 46.7 46.7 40.5 40.5 3.4 3.4 3.9 3.9 4.3 4.3 5.2 5.2 4.9 4.9 (Yen) (Yen) 150 150 100 100 50 50 0 0 126.03 126.03 100.46 100.46 101.12 101.12 87.69 87.69 75.57 75.57 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 Cash Flows from Investing Activities 2013 of ¥32.00 (US$0.30) per share, an increase of ¥1.00 per Net cash used in investing activities totaled ¥57.8 billion share compared with the previous fiscal year. Consequently, (US$548.2 million). This primarily consisted of ¥55.7 billion for cash dividends for the fiscal year increased ¥2.00 per share purchase of property, plant and equipment and ¥4.9 billion for compared with the previous fiscal period, resulting in a total purchase of intangible assets. of ¥64.00 (US$0.61) per share and a consolidated payout ratio of 50.8 percent. Cash Flows from Financing Activities For the fiscal year ending December 31, 2014, the Net cash used in financing activities totaled ¥67.5 billion Company plans to pay total cash dividends of ¥68.00 (US$640.1 million). The principal decreases in net cash were (US$0.65) per share, an increase of ¥4.00 per share compared ¥30.0 billion for purchase of treasury stock and ¥35.0 billion with the fiscal year ended December 31, 2013. Although the for payments of cash dividends, including to minority operating environment is challenging, this plan is in shareholders. In June 2013, the Company redeemed ¥50.0 accordance with the Company’s basic policies regarding billion in bonds and issued bonds in the same amount in the distribution of profits, and free cash flow and other factors same month to maintain an appropriate capital cost ratio and have also been taken into consideration. As a result, the to enhance its financial base for investment in growth. projected consolidated payout ratio is 46.4 percent. Basic Policies Regarding Distribution of Profits and Dividends for the Period EVA Net Sales (Left) Net Sales (Left) Operating Income (Right) Operating Income (Right) In order to achieve profitable growth, the Company secures management metric, defined as net operating profit after tax (Billions of yen) (Billions of yen) an internal reserve for capital investment and acquisitions (NOPAT) less a charge for the cost of capital employed in the Economic Value Added (EVA): is the Kao Group’s main from a medium-to-long-term management perspective and business. We believe EVA indicates “true” profit. Continuously places priority on providing shareholders with steady and increasing EVA raises corporate value, which is consistent continuous dividends. In addition, the Company flexibly with the long-term interest of not only shareholders but other considers the repurchase of its shares and retirement of stakeholders as well. The Kao Group aims to conduct business treasury stock from the standpoint of improving capital activities that expand the scale of its business while also efficiency. increasing EVA, and uses EVA for business performance In accordance with these policies, the Company announced evaluation, performance-based compensation and strategic a year-end dividend for the fiscal year ended December 31, decision-making. During the fiscal year ended December 31, Cash Flows Cash Flows Capital Expenditures Capital Expenditures Cash Dividends per Share / Cash Dividends per Share / Payout Ratio Payout Ratio Cash Dividends per Share (Left) Cash Dividends per Share (Left) Payout Ratio (Right) Payout Ratio (Right) EVA* EVA* (Year ended March 31, 2000 = 100) (Year ended March 31, 2000 = 100) EVA** EVA** (Year ended December 31, 2011 = 100) (Year ended December 31, 2011 = 100) 163 163 154 154 142 142 132 132 134 134 125 125 113 113 120 120 100 100 106 106 95 95 91 91 67 67 200 200 150 150 100 100 50 50 0 0 138 138 112 112 100 100 200 200 150 150 100 100 50 50 0 0 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 * Net worth is equity, excluding minority interests and stock * Net worth is equity, excluding minority interests and stock acquisition rights. acquisition rights. 0 0 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 * Cash ﬂows are deﬁned as net income plus depreciation and * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. amortization minus cash dividends. Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 Mar. Mar. 2000 2000 Mar. Mar. 2001 2001 Mar. Mar. 2002 2002 Mar. Mar. 2003 2003 Mar. Mar. 2004 2004 Mar. Mar. 2005 2005 Mar. Mar. 2006 2006 Mar. Mar. 2007 2007 Mar. Mar. 2008 2008 Mar. Mar. 2009 2009 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2011 2011 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. *EVA (Economic Value Added) is a registered trademark of Stern Stewart & Co. **Due to the change in the ﬁscal year end, EVA has been restated on a calendar year basis for periods ended December 31,2011 and 2012. **Due to the change in the ﬁscal year end, EVA has been restated on a calendar year basis for periods ended December 31,2011 and 2012. 32 Kao Corporation Annual Report 2013 Cash Flows* / Cash Flows* / Capital Expenditures Capital Expenditures (Billions of yen) (Billions of yen) Cash Flows Cash Flows Capital Expenditures Capital Expenditures 95.3 95.3 97.0 97.0 102.0 102.0 80.2 80.2 109.5 109.5 63.7 63.7 44.9 44.9 49.1 49.1 47.2 47.2 41.9 41.9 Mar. Mar. 2010 2010 Mar. Mar. 2011 2011 Mar. Mar. 2012 2012 Dec. Dec. 2012 2012 Dec. Dec. 2013 2013 * Cash ﬂows are deﬁned as net income plus depreciation and * Cash ﬂows are deﬁned as net income plus depreciation and amortization minus cash dividends. amortization minus cash dividends. (Billions of yen) (Billions of yen) 120 120 113 113 100 100 100 100 200 200 150 150 50 50 0 0 163 163 154 154 142 142 132 132 134 134 125 125 106 106 91 91 95 95 67 67 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EVE for the the year ended March 31, 2000 = 100) EVE for the the year ended March 31, 2000 = 100) *EVE (Economic Value Added) is a registered trademark of Stewart & Co. *EVE (Economic Value Added) is a registered trademark of Stewart & Co. Management Discussion and Analysis 2013, EVA increased to 138 from 112 in the previous year due this free cash flow. Investments for mergers and acquisitions to an increase in NOPAT and measures to reduce capital and additional capital expenditures for future growth are the charges, including stock repurchases. EVA is expressed as an top priorities, followed by stable and continuous dividends. index with the year ended December 31, 2011 as 100. The Kao During the fiscal year, Kao Corporation worked to reduce Group conducted the following EVA-related activities during invested capital with the repurchase of ¥30.0 billion of its stock the fiscal year. from the market. The repurchased shares have been retired. Kao Corporation increased cash dividends per share for the Investing for Growth: During the fiscal year ended December fiscal year by ¥2.00 to ¥64.00 (US$0.61), the 24th consecutive 31, 2013, the Kao Group invested aggressively for future year of growth in cash dividends. growth. In Japan, the construction of a new plant for sanitary * Free cash flow: Net cash provided by operating activities + Net cash products within the Sakata Plant complex in Sakata, Yamagata Prefecture is under way. The new plant is intended to used in investing activities reinforce the Kao Group’s stable supply structure to address Business Risks and Other Risks the rapid increase in demand for Merries baby diapers in Japan and overseas. Investment in the building and new facilities at the plant totaled approximately ¥5.0 billion. In China, a plant for diapers started operations and the Kao Group began sales targeting the middle-class consumer segment. Research and development expenditures were ¥49.7 billion (US$471.1 million), the equivalent of 3.8 percent of net sales. Increasing Profit: During the fiscal year ended December 31, 2013, sales volume grew from strong performance by Merries baby diapers and Attack laundry detergents. Sales increased with the launch in Japan of an ultra-concentrated liquid laundry detergent that can significantly reduce washing time, while in Asia, Attack laundry detergents sold strongly in Indonesia and Thailand and the Kao Group launched a laundry detergent with strengthened antibacterial properties in Taiwan and Hong Kong. Sales in Japan of a fabric softener that releases additional fresh fragrance upon sensing perspiration, other moisture or motion, were also favorable. Sales of baby diapers grew in Japan, China and Russia, contributing to improvement in NOPAT. In the Chemical Business, sales volume increased following capacity expansion of facilities for Various risks arise in the course of a company’s business. The Kao Group takes reasonable measures to mitigate risks by preventing the occurrence of, diversifying and hedging them. However, unanticipated situations may occur that exert a significant impact on the Kao Group’s business results and financial condition. The risks described below are not a comprehensive list of risks the Kao Group faces. Other risks exist and may have an impact on investment decisions. Any statements below concerning the future are judgments made by Kao Corporation as of the submission of its securities report to the Ministry of Finance on March 28, 2014. (1) Market and Consumer Demand The Japanese consumer products market, the foundation of the Kao Group’s operations, has been sluggish in recent years, due to economic stagnation as well as changes in the Kao Group’s customer base as a consequence of the declining birth rate and aging society. Utilizing the changes in the values of its customer base, the Kao Group aims to respond to consumers’ needs by applying its comprehensive Yoki- Monozukuri (see note on page 26) capabilities and working to develop value-added products to maintain and improve its brand values. However, a number of factors could cause fatty alcohols. Moreover, ongoing total cost reduction uncertainties in the Kao Group’s business activities, delaying activities cut costs by ¥9.0 billion (US$85.4 million). On the an adequate response to these changes. This could have a other hand, NOPAT was negatively affected by losses related gradual impact on the Kao Group’s business results and to the Kanebo Cosmetics voluntary recall. financial condition. Financial Improvement: Free cash flow* totaled ¥121.0 (2) Cosmetics Business billion (US$1,147.8 million) for the fiscal year ended December The Kao Group operates the cosmetics business, where it is 31, 2013. The Kao Group has set priorities for how it will deploy difficult to attain significant results using the business model Kao Corporation Annual Report 2013 33 it has developed to date, due to intensifying competition in However, results may not meet the initial intentions due to Japan and overseas from competitors in the same industries reasons including a lack of consumer acceptance of new and the entrance of new companies from other industries, as products’ environmental technologies or a lack of distinct well as changes in consumer purchasing attitudes advantage over other companies’ products. This could have an accompanied by substantial changes in retail channels. The impact on the Kao Group’s business results and financial Kao Group is rebuilding its cosmetics business in Japan condition. through initiatives including brand and marketing reform. However, a delay in appropriate response could have an (6) Raw Material Prices impact on the Kao Group’s business results and financial Market prices for fats and oils used as raw materials for condition. products of the Kao Group and petroleum-related raw materials may change for various reasons including (3) Distributors and Retailers geopolitical risks, the balance between supply and demand, The Kao Group is highly dependent on the Japanese market. abnormal weather and exchange rate fluctuations. The Kao Particularly in the consumer products business in Japan, the Group has moved to reduce the effect of increases in raw progress of new groups of retailers due to merger and material prices through measures including cost reductions integration, changes in sales channels and the appearance of and passing on increases in raw material costs into product new distributors in response to changes in consumer activity prices. However, unexpectedly radical changes in market could affect the Kao Group’s sales activities. The Kao Group is conditions and pricing could have an impact on the Kao offering proposals and conducting activities that correspond to Group’s business results and financial condition. these changes in the retail environment. Nevertheless, a delay in appropriate response could have a gradual impact on the (7) Product Quality Kao Group’s business results and financial condition. The Kao Group designs and manufactures products from the viewpoint of consumers, in compliance with related laws and (4) Overseas Operations regulations and voluntary standards. In the development As one of its growth strategies, the Kao Group is conducting stage prior to market launch, the Kao Group conducts operations in markets in Asia, the Americas and Europe, with thorough safety testing and survey research to confirm the a particular emphasis on strengthening its operations in safety of products. After market launch, the Kao Group works countries where higher economic growth rates and market to further improve quality by incorporating the opinions and expansion are forecast. However, the possible occurrence of desires of consumers through its consumer communication factors such as a slowdown in economic growth and uncertain centers. However, the unanticipated occurrence of a serious political or social conditions in the course of business could quality problem or concerns about product safety or reliability have an impact on the Kao Group’s business results and resulting from new scientific knowledge would not only cause financial condition. In addition, factors such as competition, difficulties for the relevant brand, but would also have a major cost management, distribution, and relationships with vendors impact on the reputation of all of the Kao Group’s products. may not go as planned. This could have an impact on the Kao This could have an impact on the Kao Group’s business Group’s business results and financial condition. results and financial condition. (5) Environmental Activities (8) Earthquakes and Other Incidents The Kao Group works for both business growth and “eco- The Kao Group has implemented earthquake resistance innovation” by developing products with high environmental diagnoses, seismic retrofitting, emergency drills simulating value that conserve water and other resources, as well as crisis situations, and systems to confirm employee safety at focusing on using raw materials that are low in greenhouse all of its production facilities and primary offices in Japan, and gas emission volumes or recyclable, conserving energy in has promoted the formulation of a business continuity plan production and distribution, and employing renewable energy, (BCP). The Kao Group is currently planning to strengthen its in addition to their original product quality and performance. disaster countermeasures, including reviewing its measures 34 Kao Corporation Annual Report 2013 Management Discussion and Analysis to respond to risks and reinforcing its BCP. In spite of these (11) Human Resources measures, however, in the event of an earthquake on a scale Securing capable human resources is indispensable to achieve beyond our assumptions and the consequent damage, the the Kao Group’s business goals. Hiring, developing and Kao Group’s ability to secure raw materials, maintain retaining human resources with advanced expertise to production, or supply products to the market may be implement R&D, production of technologies, market planning disrupted, or demand trends could change significantly due to and sales activities are necessary to the Yoki-Monozukuri that a worsening economic environment, which could have a consumers consistently support. However, an inability to serious impact on the Kao Group’s business results and secure superior human resources due to changes in financial condition. Furthermore, impediments to continuing employment conditions or other factors could have an impact production, securing raw materials, or supplying products to on the Kao Group’s business results and financial condition. markets due to factors including a fire or explosion at production facilities, information system malfunction, (12) Legal and Regulatory Issues problems at a supplier of raw materials, dysfunction of social In the course of its business activities, the Kao Group must infrastructures such as electric power and water, comply with a variety of laws and regulations concerning environmental pollution from radioactive materials or other areas such as standards for product quality and safety, the harmful substances, terrorism, political change, riots and environment and chemical substances, as well as accounting other incidents could have a serious impact on the Kao standards, tax law and regulations related to labor and Group’s business results and financial condition. transactions. The Kao Group has constructed a compliance system and strives to comply with all related laws and (9) Currency Exchange Rate Fluctuations regulations. However, a serious legal violation, change in Foreign currency-denominated transactions are affected by current laws and regulations, or new laws and regulations changes in currency exchange rates. The Kao Group hedges could restrict the Kao Group’s business activities, require foreign exchange risk through various measures such as investment for compliance, or otherwise affect the Kao settlement of transactions through foreign currency accounts, Group. This could have an impact on the Kao Group’s business foreign exchange contracts, and currency swaps to mitigate results and financial condition. the effect on business results. The Kao Group does not engage in derivative transactions for the purpose of speculation. However, items denominated in local currencies, including the sales, expenses and assets of overseas consolidated subsidiaries, are translated into Japanese yen for preparation of the consolidated financial statements. If the exchange rate at the time of conversion differs substantially from the expected rate, the value after translation into yen will change significantly, which will have an impact on the Kao Group’s business results and financial condition. (10) Impairment The Kao Group records various tangible and intangible fixed assets and deferred tax assets including assets used in the course of business and goodwill incurred in corporate acquisitions. Impairment of or increase in valuation allowance for these assets may be required if cash flow does not meet expectations due to trends in future business results, decline in market value or other factors. This accounting treatment could have an impact on the Kao Group’s business results and financial condition. Kao Corporation Annual Report 2013 35 Consolidated Balance Sheet Kao Corporation and Consolidated Subsidiaries December 31, 2013 and 2012 Assets Current assets: Cash and time deposits (Notes 3 and 16) .................................................. Short-term investments (Notes 3, 4 and 16) .............................................. Notes and accounts receivable (Note 16): Millions of yen Dec. 2013 Dec. 2012 Thousands of U.S. dollars (Note 2) Dec. 2013 ¥ 126,314 101,645 ¥ 99,334 68,443 $ 1,198,539 964,465 ........................................................................................ Trade (Note 5) Nonconsolidated subsidiaries and affiliates ............................................ Other ...................................................................................................... Inventories: Finished goods Work in process and raw materials ....................................................................................... ........................................................ Deferred tax assets (Note 6) ...................................................................... Other current assets .................................................................................. Allowance for doubtful receivables (Note 16) ............................................. ............................................................................ Total current assets 180,603 2,372 4,011 99,453 39,655 22,736 18,845 (1,669) 593,965 162,866 2,693 4,370 84,712 37,495 17,002 17,841 (1,349) 493,407 Property, plant and equipment: Land........................................................................................................... Buildings and structures ............................................................................ Machinery, equipment and other ............................................................... Lease assets (Note 7) ................................................................................ Construction in progress ............................................................................ Total .................................................................................................... Accumulated depreciation ......................................................................... ..................................................... Net property, plant and equipment 64,900 354,012 747,947 12,049 22,945 1,201,853 (924,569) 277,284 64,807 332,690 715,094 11,889 16,777 1,141,257 (888,913) 252,344 1,713,664 22,507 38,059 943,666 376,269 215,732 178,810 (15,836) 5,635,875 615,808 3,359,066 7,096,945 114,328 217,715 11,403,862 (8,772,834) 2,631,028 Intangible assets: Goodwill .................................................................................................... Trademarks ................................................................................................ Other intangible assets .............................................................................. ........................................................................ Total intangible assets 152,286 28,498 11,834 192,618 159,165 41,851 14,907 215,923 1,444,976 270,405 112,288 1,827,669 Investments and other assets: Investment securities (Notes 4 and 16) ..................................................... Investments in and advances to nonconsolidated subsidiaries and affiliates ....................................................................... Deferred tax assets (Note 6) ...................................................................... Other assets (Note 8) ................................................................................ .................................................... Total investments and other assets 10,776 7,670 102,249 7,275 23,985 27,373 69,409 ¥1,133,276 7,452 28,282 25,269 68,673 ¥1,030,347 69,029 227,583 259,731 658,592 $10,753,164 See Notes to Consolidated Financial Statements. 36 Kao Corporation Annual Report 2013 Liabilities and Equity Current liabilities: Short-term debt (Notes 5 and 16) ................................................................... Current portion of long-term debt (Notes 5 and 16) ........................................ Notes and accounts payable (Note 16): Trade ........................................................................................................... Nonconsolidated subsidiaries and affiliates ................................................. Other ........................................................................................................... Income taxes payable (Note 16) ..................................................................... Accrued expenses .......................................................................................... Other current liabilities (Notes 5 and 6) .......................................................... Total current liabilities .............................................................................. Long-term liabilities: Long-term debt (Notes 5 and 16) .................................................................... Liability for retirement benefits (Note 8) ......................................................... Other (Notes 5 and 6) ..................................................................................... Total long-term liabilities .......................................................................... Commitments and contingent liabilities (Notes 7, 9 and 17) Equity (Notes 10 and 11): Common stock: Authorized — 1,000,000,000 shares in Dec. 2013 and Dec. 2012 Issued — 516,000,000 shares in Dec. 2013 and 526,212,501 shares in Dec. 2012 ... Capital surplus ................................................................................................. Stock acquisition rights ................................................................................... Retained earnings ........................................................................................... Treasury stock, at cost Millions of yen Dec. 2013 Dec. 2012 Thousands of U.S. dollars (Note 2) Dec. 2013 ¥ 1,278 21,256 ¥ 3,115 50,803 $ 12,126 201,689 112,972 6,596 51,322 32,322 91,006 21,562 338,314 84,916 48,847 18,559 152,322 103,430 5,824 47,907 11,658 74,209 18,928 315,874 56,072 45,717 16,601 118,390 1,071,943 62,587 486,972 306,689 863,516 204,593 3,210,115 805,731 463,488 176,098 1,445,317 85,424 109,561 1,120 471,383 85,424 109,561 1,294 468,019 810,551 1,039,577 10,627 4,472,749 (3,829,950 shares in Dec. 2013 and 4,368,145 shares in Dec. 2012) ............ (9,397) (8,985) (89,164) Accumulated other comprehensive income Unrealized gain on available-for-sale securities ........................................... Deferred gain (loss) on derivatives under hedge accounting ...................... Foreign currency translation adjustments ................................................... Post retirement liability adjustments for foreign consolidated subsidiaries ... Total ......................................................................................................... Minority interests ............................................................................................ Total equity .............................................................................................. See notes to consolidated financial statements. 4,733 12 (28,416) (4,590) 629,830 12,810 642,640 ¥1,133,276 2,447 6 (71,872) (1,901) 583,993 12,090 596,083 ¥1,030,347 44,909 114 (269,627) (43,553) 5,976,183 121,549 6,097,732 $10,753,164 Kao Corporation Annual Report 2013 37 Consolidated Statement of Income Kao Corporation and Consolidated Subsidiaries Year ended December 31, 2013 and period ended December 31, 2012 Millions of yen Dec. 2013 Dec. 2012 Thousands of U.S. dollars (Note 2) Dec. 2013 Net sales (Note 13) ............................................................................................ ¥1,315,217 ¥1,012,595 $12,479,524 Cost of sales ..................................................................................................... Gross profit ..................................................................................................... Selling, general and administrative expenses (Note 14) ............................... Operating income (Note 13) ............................................................................ Other income (expenses): Interest and dividend income .......................................................................... Interest expense ............................................................................................ Foreign currency exchange gain (loss) ............................................................ Equity in earnings (losses) of nonconsolidated subsidiaries and affiliates ...... Other, net (Note 15) ........................................................................................ Other income (expenses), net ..................................................................... 572,769 742,448 617,792 124,656 1,133 (1,213) (320) 2,272 (11,589) (9,717) 442,522 570,073 468,506 101,567 1,011 (1,181) (280) 1,710 (523) 737 5,434,757 7,044,767 5,861,960 1,182,807 10,751 (11,510) (3,037) 21,558 (109,963) (92,201) Income before income taxes and minority interests ..................................... 114,939 102,304 1,090,606 Income taxes (Note 6): Current ............................................................................................................ Deferred .......................................................................................................... Total income taxes ...................................................................................... 50,752 (1,619) 49,133 32,550 15,619 48,169 481,564 (15,363) 466,201 Income before minority interests .................................................................... 65,806 54,135 624,405 Minority interests in earnings of consolidated subsidiaries ............................ 1,042 1,370 9,887 Net income ........................................................................................................ ¥ 64,764 ¥ 52,765 $ 614,518 Per share of common stock (Notes 1.u and 18): Basic net income ............................................................................................ Diluted net income .......................................................................................... Cash dividends applicable to the year ............................................................. Yen ¥126.03 125.89 64.00 ¥101.12 101.08 62.00 U.S. dollars (Note 2) $1.20 1.19 0.61 See Notes to Consolidated Financial Statements. 38 Kao Corporation Annual Report 2013 Consolidated Statement of Comprehensive Income Kao Corporation and Consolidated Subsidiaries Year ended December 31, 2013 and period ended December 31, 2012 Millions of yen Dec. 2013 Dec. 2012 Thousands of U.S. dollars (Note 2) Dec. 2013 Income before minority interests ....................................................................... ¥ 65,806 ¥54,135 $ 624,405 Other comprehensive income (Note 12) Unrealized gain (loss) on available-for-sale securities ......................................... Foreign currency translation adjustments .......................................................... Share of other comprehensive income in affiliates ............................................ Post retirement liability adjustments for foreign consolidated subsidiaries ....... Total other comprehensive income ................................................................ 2,044 44,201 335 (2,759) 43,821 141 25,315 137 (204) 25,389 19,395 419,403 3,179 (26,179) 415,798 Comprehensive income ...................................................................................... ¥109,627 ¥79,524 $1,040,203 Comprehensive income attributable to: Shareholders of Kao Corporation ....................................................................... Minority interests ............................................................................................... ¥107,823 1,804 ¥76,956 2,568 $1,023,086 17,117 See Notes to Consolidated Financial Statements. Kao Corporation Annual Report 2013 39 Consolidated Statement of Changes in Equity Kao Corporation and Consolidated Subsidiaries Year ended December 31, 2013 and period ended December 31, 2012 Thousands Outstanding number of shares of common stock Common stock Capital surplus Stock acquisition rights Retained earnings 521,810 ¥85,424 ¥109,561 ¥1,238 ¥447,619 52,765 Millions of yen Unrealized gain on available- for-sale securities Deferred gain (loss) on derivatives under hedge accounting Foreign currency translation adjustments Post retirement liability adjustments for foreign consolidated subsidiaries Treasury stock, at cost ¥2,283 ¥ (3) ¥(96,094) ¥(1,697) ¥ (9,064) (3) 37 521,844 85,424 109,561 56 1,294 (9,999) 325 (32,353) (12) 468,019 (19) 64,764 (32,564) (79) (28,738) 164 2,447 9 6 24,222 (71,872) (204) (1,901) (6) 85 (8,985) (30,038) 888 28,738 512,170 ¥85,424 ¥109,561 (174) ¥1,120 ¥471,383 2,286 ¥4,733 6 ¥12 43,456 ¥(28,416) (2,689) ¥(4,590) ¥ (9,397) Total Minority interests Total equity ¥539,267 52,765 ¥10,437 ¥549,704 52,765 (32,353) (6) 73 24,247 583,993 (19) 64,764 (32,564) (30,038) 809 — 42,885 ¥629,830 1,653 12,090 (32,353) (6) 73 25,900 596,083 (19) 64,764 (32,564) (30,038) 809 — 43,605 ¥12,810 ¥642,640 720 Thousands Outstanding number of shares of common stock Common stock Capital surplus Stock acquisition rights Retained earnings Thousands of U.S. dollars (Note 2) Unrealized gain on available- for-sale securities Deferred gain (loss) on derivatives under hedge accounting Foreign currency translation adjustments Post retirement liability adjustments for foreign consolidated subsidiaries Treasury stock, at cost Total Minority interests Total equity 521,844 $810,551 $1,039,577 $12,278 $4,440,829 $23,218 $ 57 $(681,962) $(18,038) $ (85,254) $5,541,256 $114,717 $5,655,973 (9,999) 325 (180) 614,518 (308,986) (750) (272,682) 512,170 $810,551 $1,039,577 $10,627 $4,472,749 (1,651) 21,691 $44,909 57 412,335 $114 $(269,627) (180) 614,518 (180) 614,518 (308,986) (308,986) (285,018) (285,018) 7,676 7,676 — — 413,749 406,917 (25,515) $(43,553) $ (89,164) $5,976,183 $121,549 $6,097,732 (285,018) 8,426 272,682 6,832 Balance at April 1, 2012 .............. Net income ........................... Cash dividends, ¥62.00 per share ................. Purchase of treasury stock ..... Disposal of treasury stock ...... Net change in the year ........... Balance at December 31, 2012 ... Adjustment of retained earnings for newly consolidated subsidiaries .... Net income ............................ Cash dividends, ¥63.00 per share ................. Purchase of treasury stock ..... Disposal of treasury stock ...... Retirement of treasury stock ... Net change in the year ........... Balance at December 31, 2013 ... Balance at December 31, 2012 ... Adjustment of retained earnings for newly consolidated subsidiaries .... Net income ............................ Cash dividends, US$0.60 per share .............. Purchase of treasury stock ..... Disposal of treasury stock ...... Retirement of treasury stock ... Net change in the year ........... Balance at December 31, 2013 ... See Notes to Consolidated Financial Statements. 40 Kao Corporation Annual Report 2013 Consolidated Statement of Cash Flows Kao Corporation and Consolidated Subsidiaries Year ended December 31, 2013 and period ended December 31, 2012 Millions of yen Dec. 2013 Dec. 2012 Thousands of U.S. dollars (Note 2) Dec. 2013 Operating activities: Income before income taxes and minority interests ...................................... ¥114,939 ¥102,304 $1,090,606 Adjustments for: Income taxes paid ....................................................................................... Depreciation and amortization ..................................................................... (Gain) loss on sales or disposals of property, plant and equipment, net ..... (Gain) loss on transfer of business .............................................................. Equity in (earnings) losses of nonconsolidated subsidiaries and affiliates .. Unrealized foreign currency exchange (gain) loss ....................................... Change in trade receivables ........................................................................ Change in inventories .................................................................................. Change in trade payables ............................................................................ Change in notes and accounts payable - other and accrued expenses ....... Other, net .................................................................................................... Net cash provided by operating activities ................................................ Investing activities: Payments into time deposits .......................................................................... Proceeds from withdrawal of time deposits ................................................... Purchase of short-term investments ............................................................... Proceeds from the redemption and sales of short-term investments ............ Purchase of property, plant and equipment .................................................... Purchase of intangible assets ......................................................................... Increase in investments in and advances to nonconsolidated subsidiaries and affiliates .............................................................................. Payment for purchase of newly consolidated subsidiaries, net of cash acquired ................................................................. Other, net ........................................................................................................ Net cash used in investing activities ........................................................ Financing activities: Increase (decrease) in short-term debt ........................................................... Proceeds from long-term loans ....................................................................... Repayments of long-term loans ..................................................................... Proceeds from issuance of bonds ................................................................ Redemption of bonds .................................................................................... Purchase of treasury stock ............................................................................. Payments of cash dividends ........................................................................... Other, net ........................................................................................................ Net cash used in financing activities ........................................................ (29,829) 77,297 2,644 (350) (2,272) 381 (2,415) (5,405) 3,505 16,819 3,431 178,745 (4,802) 7,190 (7,998) 13,000 (55,672) (4,882) (40,105) 59,788 2,082 — (1,710) (1,389) (12,395) 5,083 (9,637) (117) (6,547) 97,357 (1,939) 4,400 (10,000) 5,078 (34,555) (2,595) (283,034) 733,438 25,088 (3,321) (21,558) 3,615 (22,915) (51,286) 33,257 159,588 32,556 1,696,034 (45,564) 68,223 (75,890) 123,351 (528,247) (46,323) (1) (949) (9) (891) (3,722) (57,778) (2,311) 19 (9) 50,000 (50,000) (30,039) (34,985) (134) (67,459) — (4,081) (44,641) 717 217 (205) — — (7) (33,513) 763 (32,028) (8,454) (35,317) (548,230) (21,928) 180 (85) 474,428 (474,428) (285,027) (331,957) (1,272) (640,089) Translation adjustments on cash and cash equivalents ............................... Net increase (decrease) in cash and cash equivalents .................................. Cash and cash equivalents, beginning of year (Note 3) ................................. Cash and cash equivalents of newly consolidated subsidiaries, increase .. Cash and cash equivalents, end of year (Note 3) ........................................... 13,032 66,540 160,435 623 ¥227,598 9,702 30,390 129,737 308 ¥160,435 123,655 631,370 1,522,298 5,911 $2,159,579 See Notes to Consolidated Financial Statements. Kao Corporation Annual Report 2013 41 Notes to Consolidated Financial Statements Kao Corporation and Consolidated Subsidiaries Year ended December 31, 2013 and period ended December 31, 2012 1 Summary of Significant Accounting Policies a) Basis of presenting consolidated financial statements The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Law and its related accounting regulations, and in accordance with accounting principles generally accepted in Japan (“Japanese GAAP”), which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards. In preparing the consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued in Japan in order to present them in a form that is more familiar to readers outside Japan. Certain financial statement items of prior fiscal period were reclassified to conform to the presentation for current fiscal year. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. b) Change in fiscal year Kao Corporation (the “Company”) changed its fiscal year end from March 31 to December 31 by the resolution of the 106th Annual General Meeting of Shareholders held on June 28, 2012 to promote integrated management of its global business and to further enhance management transparency through timely and accurate disclosure of management information. The prior fiscal period, which is a transitional period for the change in the fiscal year, is the nine-month period from April 1, 2012 to December 31, 2012 due to this change. Accordingly, the closing date of the consolidated subsidiaries is the same as the consolidated closing date. Consolidated financial statements for the period ended December 31, 2012 are prepared based on the nine-month fiscal period from April 1, 2012 to December 31, 2012, of 10 consolidated subsidiaries, whose closing date was March 31, and the twelve-month fiscal period, from January 1, 2012 to December 31, 2012, of the other 83 consolidated subsidiaries. c) Consolidation and accounting for investments in nonconsolidated subsidiaries and affiliates The accompanying consolidated financial statements include the accounts of the Company and its significant subsidiaries (collectively, the “Companies”). Investments in most of the nonconsolidated subsidiaries and affiliates over which the Companies have the ability to exercise significant influence (mainly 20-50 percent owned companies) are accounted for using the equity method. Under the control or influence concept, companies in which the parent company and/or its consolidated subsidiaries, directly or indirectly, are able to exercise control over operations are fully consolidated, and other companies over which the Company and/ or its consolidated subsidiaries have the ability to exercise significant influence are accounted for using the equity method. Investments in the remaining subsidiaries and affiliates are stated at cost except for write-downs recorded for the value of 42 Kao Corporation Annual Report 2013 investments that have been permanently impaired. If the equity method of accounting had been applied to these investments, the effect on the accompanying consolidated financial statements would not be material. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Companies is eliminated. The excess of cost of investments in the subsidiaries and affiliates over the fair value of the net assets of the acquired subsidiary and affiliate at the dates of acquisition, consolidation goodwill, is being amortized over an estimated period not exceeding 20 years, or 5 years in situations in which the useful lives cannot be estimated. d) Unification of accounting policies applied to foreign subsidiaries for the consolidated financial statements The accounting standard for unification of accounting policies applied to foreign subsidiaries for the consolidated financial statements requires: (1) the accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should, in principle, be unified for the preparation of the consolidated financial statements, (2) financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or the generally accepted accounting principles in the United States of America tentatively may be used for the consolidation process, (3) however, the following items should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: 1) Amortization of goodwill 2) Scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in equity 3) Expensing capitalized development costs of R&D 4) Cancellation of the fair value model accounting for property, plant, and equipment and investment properties and incorporation of the cost model accounting 5) Exclusion of minority interests from net income, if contained e) Unification of accounting policies applied to foreign affiliated companies for the equity method The accounting standard requires adjustments to be made to conform the affiliate’s accounting policies for similar transactions and events under similar circumstances to those of the parent company when the affiliate’s financial statements are used in applying the equity method unless it is impracticable to determine such adjustments. In addition, financial statements prepared by foreign affiliated companies in accordance with either International Financial Reporting Standards or the generally accepted accounting principles in the United States tentatively may be used in applying the equity method if the following items are adjusted so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: 1) Amortization of goodwill 2) Scheduled amortization of actuarial gain or loss on pensions that has been directly recorded in equity 3) Expensing capitalized development costs of R&D 4) Cancellation of the fair value model accounting for property, plant, and equipment and investment properties and incorporation of the cost model accounting 5) Exclusion of minority interests from net income, if contained f) Business combinations The accounting standard for business combinations requires companies to account for business combinations in accordance with the following policies: 1) Business combinations should be accounted for by the purchase method except combinations of entities under common control and joint ventures. 2) In-process research and development (IPR&D) acquired in the business combination should be capitalized as an intangible asset. 3) The acquirer should recognize the bargain purchase gain in profit or loss immediately on the acquisition date after reassessing and confirming that all of the assets acquired and all of the liabilities assumed have been identified after a review of the procedures used in the purchase allocation. Under the accounting standard for business separations, in a business separation where the interests of the investor no longer continue and the investment is settled, the difference between the fair value of the consideration received for the transferred business and the book value of net assets transferred to the separated business is recognized as a gain or loss on business separation in the statement of income. In a business separation where the interests of the investor continue and the investment is not settled, no such gain or loss on business separation is recognized. g) Cash equivalents For purposes of the statement of cash flows, cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits, commercial paper, investment trusts in bonds and receivables that are represented as short-term investments, all of which mature or become due within three months of the date of acquisition. h) Inventories The accounting standard for measurement of inventories requires that inventories held for sale in the ordinary course of business be measured at the lower of cost or net selling value, which is defined as the selling price less additional estimated manufacturing costs and estimated direct selling expenses. The replacement cost may be used in place of the net selling value, if appropriate. Cost of inventories is determined principally by the average method. The cost of inventories held by certain foreign consolidated subsidiaries is determined by the first-in, first-out method. i) Short-term investments and investment securities Short-term investments and investment securities are classified and accounted for, depending on management’s intent, as follows: i) held-to-maturity debt securities, which are expected to be held to maturity with the positive intent and ability to hold to maturity, are reported at amortized cost and ii) available-for-sale securities, which are not classified as the aforementioned securities, are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity. Non-marketable available-for-sale securities are stated at cost determined by the moving-average method. For other than temporary declines in fair value, investment securities are reduced to net realizable value by a charge to income. j) Property, plant and equipment Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is computed under the straight-line method over the estimated useful lives, principally ranging from 21 to 35 years for buildings and structures and 7 or 9 years for machinery and equipment. k) Intangible assets Goodwill and trademarks are amortized on a straight-line basis over 15 or 20 years, and 10 years, respectively. l) Long-lived assets The Companies review their long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. An impairment loss would be recognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition. m) Retirement and pension plans The Company and most domestic consolidated subsidiaries have a cash balance plan and a defined contribution pension plan covering substantially all of their employees. The cash balance plan is linked to market interest rates and treated as a defined benefit plan. The pension plan also covers employees of certain nonconsolidated subsidiaries and affiliates in Japan. In addition, these companies may pay an early retirement allowance to early retired employees. Certain domestic consolidated subsidiaries have a defined benefit plan that provides for a lump-sum payment to terminated employees. The subsidiaries may pay an additional lump-sum payment that is not subject to actuarial calculations under the accounting standard for retirement benefits. Certain foreign subsidiaries have a defined contribution plan and/or a defined benefit plan. Some of these foreign subsidiaries apply the “corridor approach” in calculating actuarial gain or loss. Certain foreign subsidiaries also have local employees’ retirement benefit plans and provide for the amount to recognize the liability for these employees’ retirement benefits, primarily determined on an actuarial basis. The unrecognized transitional obligation, the unrecognized net actuarial gain or loss and the unrecognized prior service cost are being amortized over 15, 10 and 15 years, respectively. These amortizations are recognized in cost of sales and selling, general and administrative expenses in the consolidated statement of income. Kao Corporation Annual Report 2013 43 n) Asset retirement obligations The accounting standard for asset retirement obligations defines an asset retirement obligation as a legal obligation imposed either by law or contract that results from the acquisition, construction, development and the normal operation of a tangible fixed asset and is associated with the retirement of such tangible fixed asset. The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and is recorded in the period in which the obligation is incurred if a reasonable estimate can be made. If a reasonable estimate of the asset retirement obligation cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonable estimate of asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capitalized by increasing the carrying amount of the related fixed asset by the amount of the liability. The asset retirement cost is subsequently allocated to expense through depreciation over the remaining useful life of the asset. Over time, the liability is accreted to its present value each period. Any subsequent revisions to the timing or the amount of the original estimate of undiscounted cash flows are reflected as an increase or a decrease in the carrying amount of the liability and the capitalized amount of the related asset retirement cost. o) Stock options The accounting standard for stock options requires companies to recognize compensation expense for employee stock options based on the fair value at the date of grant and over the vesting period as consideration for receiving goods or services. The standard also requires companies to account for stock options granted to non-employees based on the fair value of either the stock option or the goods or services received. In the balance sheet, the stock option is presented as a stock acquisition right as a separate component of equity until exercised. The standard covers equity-settled, share-based payment transactions, but does not cover cash-settled, share-based payment transactions. In addition, the standard allows unlisted companies to measure options at their intrinsic value if they cannot reliably estimate fair value. p) Leases The accounting standard for lease transactions requires that all finance lease transactions should be capitalized to recognize lease assets and lease obligations in the balance sheet. In addition, the accounting standard permits leases which do not transfer ownership of the leased property to the lessee to be measured at the obligations under finance leases less interest expense and recorded as acquisition cost of lease assets. All other leases are accounted for as operating leases. q) Income taxes The Companies provide for income taxes applicable to all items included in the consolidated statements of income regardless of when such taxes are payable. Income taxes based on temporary differences between tax and financial reporting purposes are reflected as deferred income taxes in the consolidated financial statements using the asset and liability method. The Company and certain subsidiaries file tax returns under the consolidated taxation system, which allows tax payments to be based on the combined profits or losses. 44 Kao Corporation Annual Report 2013 r) Foreign currency transactions All short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rates at the balance sheet date. The foreign exchange gains and losses from translation are recognized in the consolidated statement of income to the extent that they are not hedged by foreign exchange derivatives. s) Foreign currency financial statements The balance sheet accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date except for equity, which is translated at the historical rate. Differences arising from such translation are shown as “Foreign currency translation adjustments” in a separate component of equity. Revenue and expense accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the average exchange rate. t) Derivatives and hedging activities The Companies use derivative financial instruments to manage their exposures to fluctuations in foreign exchange and interest rates. Foreign exchange forward contracts, foreign currency swaps and interest rate swaps are utilized by the Companies to reduce foreign currency exchange and interest rate risks. The Companies do not enter into derivatives for trading purposes or speculative purposes. Derivative financial instruments and foreign currency transactions are classified and accounted for as follows: a) all derivatives are recognized as either assets or liabilities and measured at fair value, and gains or losses on derivative transactions are recognized in the consolidated statements of income, and b) for derivatives used for hedging purposes, if derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on derivatives are deferred until maturity of the hedged transactions. Short-term and long-term loan receivables denominated in foreign currencies, for which foreign exchange forward contracts or foreign currency swaps are used to hedge the foreign currency fluctuations, are translated at the contracted rate if the forward contracts or the swap contracts qualify for specific hedge accounting. The interest rate swaps which qualify for hedge accounting and meet specific matching criteria are not remeasured at market value but the differential paid or received under the swap agreements are recognized and included in interest expense or income as incurred. u) Per share information Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period, retroactively adjusted for stock splits. Diluted net income per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised into common stock or resulted in the issuance of common stock. Cash dividends per share presented in the accompanying consolidated statement of income are dividends applicable to the respective years including dividends to be paid after the end of the year. Notes to Consolidated Financial Statements v) Accounting changes and error corrections The accounting standard for accounting changes and error corrections requires the following: 1) Changes in Accounting Policies When a new accounting policy is applied following revision of an accounting standard, the new policy is applied retrospectively unless the revised accounting standard includes specific transitional provisions in which case the entity shall comply with the specific transitional provisions. 2) Changes in Presentations When the presentation of financial statements is changed, prior period financial statements are reclassified in accordance with the new presentation. 3) Changes in Accounting Estimates A change in an accounting estimate is accounted for in the period of the change if the change affects that period only, and is accounted for prospectively if the change affects both the period of the change and future periods. 4) Corrections of Prior Period Errors When an error in prior period financial statements is discovered, those statements are restated. w) Changes in accounting principles that are difficult to distinguish from changes in accounting estimates The method for depreciation of property, plant and equipment (excluding lease assets), which was previously mainly the declining balance method for the Company and its consolidated subsidiaries in Japan, has been changed to the straight-line method from the fiscal year ended December 31, 2013. The change is due to a reconsideration of factors including the actual conditions of use of the property, plant and equipment of the Kao Group on the occasion of a shift to global integrated management that began in the Beauty Care Business in the Americas and Europe in 2012 and in the Consumer Products Business in Asia from 2013. As a result, the Company has decided that the use of the straight-line method of depreciation more appropriately reflects the corporate activities of the Kao Group because stable operation is expected throughout the period of use due to the extension of product life cycles to establish a global brand. The impact of this change on operating income, and income before income taxes and minority interests for the fiscal year ended December 31, 2013 is immaterial. x) Changes in presentation In the consolidated statement of cash flows, “Change in prepaid pension cost” and “Change in liability for retirement benefits”, which were separately disclosed as items within “Operating activities” in the prior fiscal period, are included in “Other, net” in the current fiscal year due to the decrease in materiality. On the other hand, “Change in notes and accounts payables – other and accrued expenses”, which was included in “Other, net” in prior fiscal period is separately disclosed due to the increase in materiality. In addition, “Payments into time deposits”, which was included in “Other, net” of “Investing activities” in prior fiscal period, is separately disclosed due to the increase in materiality. Consequently, “Change in prepaid pension cost” and “Change in liability for retirement benefits”, which were reported as a cash inflow of ¥75 million, and as a cash outflow of ¥56 million, respectively within “Operating activities” of the statement of cash flows of prior fiscal period, are reclassified to “Other, net”, which is reported as a cash outflow of ¥6,547 million. On the other hand, “Change in notes and accounts payables – other and accrued expenses”, which was included in “Other, net” of “Operating activities”, is separately disclosed as a cash outflow of ¥117 million. In addition, “Payments into time deposits”, which was included in “Other, net” of “Investing activities” in prior fiscal period, is separately disclosed as a cash outflow of ¥1,939 million. y) New accounting pronouncements Accounting Standard for Retirement Benefits On May 17, 2012, the Accounting Standards Board of Japan (the “ASBJ”) issued ASBJ Statement No. 26, “Accounting Standard for Retirement Benefits” and ASBJ Guidance No. 25, “Guidance on Accounting Standard for Retirement Benefits,” which replaced the Accounting Standard for Retirement Benefits that had been issued by the Business Accounting Council in 1998 with effective date of April 1, 2000 and the other related practical guidances. Major changes are as follows: 1) Treatment in the consolidated balance sheet Under the current requirements, actuarial gains and losses and past service costs that are yet to be recognized in profit or loss are not recognized in the balance sheet, and the difference between retirement benefit obligations and plan assets (hereinafter, “deficit or surplus”), adjusted by such unrecognized amounts, are recognized as a liability or asset. Under the revised accounting standard, actuarial gains and losses and past service costs that are yet to be recognized in profit or loss shall be recognized within equity (accumulated other comprehensive income), after adjusting for tax effects, and the deficit or surplus shall be recognized as a liability or asset. 2) Treatment in the consolidated statement of income and the statement of comprehensive income The revised accounting standard does not change how to recognize actuarial gains and losses and past service costs in profit or loss. Those amounts would be recognized in profit or loss over a certain period no longer than the expected average remaining working lives of the employees. However, actuarial gains and losses and past service costs that arose in the current period and are yet to be recognized in profit or loss shall be included in other comprehensive income and actuarial gains and losses and past service costs that were recognized in other comprehensive income in prior periods and then recognized in profit or loss in the current period shall be treated as reclassification adjustments. This accounting standard and the guidance are effective from the end of fiscal years beginning on or after April 1, 2013 with earlier adoption permitted from the beginning of fiscal years beginning on or after April 1, 2013. However, no retrospective application of this accounting standard to consolidated financial statements in prior periods is required. The Company will apply the revised accounting standard from the end of fiscal year beginning on January 1, 2014 and is in the process of measuring the effects of applying the revised accounting standard. Kao Corporation Annual Report 2013 45 2 Translation into United States Dollars The Companies’ accounts are maintained in or translated into Japanese yen. The United States dollar (US$) amounts included herein represent translations using the approximate exchange rate at December 31, 2013 of ¥105.39=US$1, solely for convenience. The translations should not be construed as representations that Japanese yen amounts have been, could have been, or could in the future be, converted into United States dollars at that or any other rate. 3 Cash and Cash Equivalents Cash and cash equivalents at December 31, 2013 and 2012 consisted of the following: Cash and time deposits ............................................................................................ Short-term investments ............................................................................................ Less: time deposits and short-term investments which mature or become due over three months after the date of acquisition ....................................... Cash and cash equivalents ....................................................................................... Millions of yen Dec. 2013 ¥126,314 101,645 Dec. 2012 ¥ 99,334 68,443 Thousands of U.S. dollars Dec. 2013 $1,198,539 964,465 (361) ¥227,598 (7,342) ¥160,435 (3,425) $2,159,579 4 Short-Term Investments and Investment Securities Short-term investments and investment securities as of December 31, 2013 and 2012 consisted of the following: Short-term investments: Investment trust funds and other ........................................................................ Total ................................................................................................................. ¥101,645 ¥101,645 Investment securities: Marketable equity securities ................................................................................ Investment trust funds and other ........................................................................ Total ................................................................................................................. ¥ 9,595 1,181 ¥ 10,776 Dec. 2013 Dec. 2012 ¥68,443 ¥68,443 ¥ 6,489 1,181 ¥ 7,670 Millions of yen Thousands of U.S. dollars Dec. 2013 $964,465 $964,465 $ 91,043 11,206 $102,249 The carrying amount and aggregate fair value of the securities classified as available-for-sale and held-to-maturity at December 31, 2013 and 2012 were as follows: Securities classified as: Available-for-sale: Equity securities ....................................................................... Debt securities and other ......................................................... Held-to-maturity: Debt securities and other ......................................................... Millions of yen Dec. 2013 Cost Unrealized gains Unrealized losses Fair value ¥ 2,666 41,651 ¥6,966 — 59,994 — ¥37 — — ¥ 9,595 41,651 59,994 46 Kao Corporation Annual Report 2013 Notes to Consolidated Financial Statements Securities classified as: Available-for-sale: Equity securities ....................................................................... Debt securities and other ......................................................... Held-to-maturity: Debt securities and other ......................................................... Securities classified as: Available-for-sale: Equity securities ....................................................................... Debt securities and other ......................................................... Held-to-maturity: Debt securities and other ......................................................... Millions of yen Dec. 2012 Cost Unrealized gains Unrealized losses Fair value ¥ 2,707 41,280 27,163 ¥3,888 ¥106 ¥ 6,489 — — — — 41,280 27,163 Thousands of U.S. dollars Dec. 2013 Cost Unrealized gains Unrealized losses Fair value $ 25,297 395,208 $66,097 — $351 — $ 91,043 395,208 569,257 — — 569,257 Available-for-sale securities whose fair values are not readily determinable as of December 31, 2013 and 2012 were as follows: Available-for-sale: Equity securities ........................................................................................... Total　　　　　　　　　　　 ................................................................... ¥1,181 ¥1,181 Dec. 2013 Dec. 2012 ¥1,181 ¥1,181 Carrying amount Millions of yen Thousands of U.S. dollars Dec. 2013 $11,206 $11,206 Proceeds from sales of available-for-sale securities for the year ended December 31, 2013 and the period ended December 31, 2012 were ¥9 million (US$85 thousand) and ¥123 million, respectively. Gross realized gains on these sales, computed on the moving-average cost basis, for the year ended December 31, 2013 and the period ended December 31, 2012 were ¥3 million (US$28 thousand) and ¥28 million respectively. The carrying values of debt securities by contractual maturities for securities classified as held-to-maturity at December 31, 2013 are included in Note 16. 5 Short-Term and Long-Term Debt Short-term debt at December 31, 2013 and 2012 consisted of the following: Secured loans principally from financial institutions ................................................. Unsecured loans principally from financial institutions ............................................. Total .................................................................................................................. Millions of yen Dec. 2013 ¥ — 1,278 ¥1,278 Dec. 2012 ¥ 154 2,961 ¥3,115 Thousands of U.S. dollars Dec. 2013 $ — 12,126 $12,126 The weighted average interest rates applicable to the above loans were 1.37% and 3.41% at December 31, 2013 and 2012, respectively. In addition to the above short-term debt, deposits payable to affiliates, included in other current liabilities, were ¥4,273 million (US$40,545 thousand) and ¥3,332 million at December 31, 2013 and 2012, respectively, and the applicable interest rates were 0.56% and 0.40% at December 31, 2013 and 2012, respectively. The secured loans are collateralized by trade accounts receivable of ¥108 million (US$1,025 thousand) and ¥250 million at December 31, 2013 and 2012, respectively. Kao Corporation Annual Report 2013 47 Long-term debt at December 31, 2013 and 2012 consisted of the following: Unsecured bonds due 2013, 1.91% ......................................................................... Unsecured bonds due 2018, 0.39%, and 2020, 0.62% ........................................... Unsecured loans principally from financial institutions, weighted average rate 0.56% in Dec. 2013, 0.57% in Dec. 2012 ........................ Lease obligations ...................................................................................................... Less current portion .............................................................................................. Total .................................................................................................................. Millions of yen Dec. 2013 ¥ — 50,000 50,103 6,069 ¥106,172 (21,256) ¥ 84,916 Dec. 2012 ¥ 50,000 — 50,073 6,802 ¥106,875 (50,803) ¥ 56,072 Thousands of U.S. dollars Dec. 2013 $ — 474,428 475,406 57,586 $1,007,420 (201,689) $ 805,731 In addition to the above long-term debt, deposits payable to customers, included in other long-term liabilities, were ¥6,008 million (US$56,998 thousand) and ¥6,002 million at December 31, 2013 and 2012, respectively, and the applicable interest rates were 0.11% and 0.10% at December 31, 2013 and 2012, respectively. The aggregate annual maturities of long-term debt as of December 31, 2013 were as follows: Years ending December 31 2014 ................................................................................................................................................. 2015 ................................................................................................................................................. 2016 ................................................................................................................................................. 2017 ................................................................................................................................................. 2018 ................................................................................................................................................. 2019 and thereafter ......................................................................................................................... Total ............................................................................................................................................. Millions of yen ¥ 21,256 20,792 741 10,676 25,583 27,124 ¥106,172 Thousands of U.S. dollars $ 201,689 197,286 7,031 101,300 242,746 257,368 $1,007,420 6 Income Taxes The Company and its domestic subsidiaries are subject to Japanese national and local taxes based on income, which in the aggregate resulted in a normal statutory tax rate of approximately 38% for the year ended December 31, 2013 and the period ended December 31, 2012. Foreign subsidiaries are subject to income taxes of the countries in which they operate. Tax effects of significant temporary differences and tax loss carryforwards that resulted in deferred tax assets or liabilities at December 31, 2013 and 2012 were as follows: Millions of yen Dec. 2013 Dec. 2012 Deferred tax assets: Depreciation and amortization .............................................................................. Pension and severance costs ............................................................................... Accrued expenses ................................................................................................ Enterprise taxes .................................................................................................... Tax loss carryforwards .......................................................................................... Other ..................................................................................................................... Less valuation allowance ...................................................................................... Deferred tax assets .................................................................................................. Deferred tax liabilities: Unrealized gain on available-for-sale securities ..................................................... Undistributed foreign earnings ............................................................................. Deferred gains on sales of property ..................................................................... Prepaid pension cost ............................................................................................ Other ..................................................................................................................... Deferred tax liabilities ............................................................................................... ¥ 20,634 16,272 10,649 1,928 33,021 17,650 (28,127) ¥ 72,027 ¥ (2,482) (11,524) (3,800) (1,461) (8,707) ¥(27,974) ¥ 18,000 16,311 7,216 962 39,988 14,611 (30,542) ¥ 66,546 ¥ (1,359) (9,898) (3,840) (1,335) (7,148) ¥(23,580) Net deferred tax assets ............................................................................................ ¥ 44,053 ¥ 42,966 48 Kao Corporation Annual Report 2013 Thousands of U.S. dollars Dec. 2013 $ 195,787 154,398 101,044 18,294 313,322 167,473 (266,885) $ 683,433 $ (23,551) (109,346) (36,057) (13,863) (82,616) $(265,433) $ 418,000 Notes to Consolidated Financial Statements A reconciliation between the normal effective statutory tax rates and the actual effective tax rates reflected in the accompanying consolidated statements of income was as follows: Normal effective statutory tax rate ........................................................................... Tax credit for research and development costs and other ................................... Valuation allowance .............................................................................................. Expiration of tax loss carryforwards ...................................................................... Amortization expenses not deductible for income tax purposes .......................... Other – net ............................................................................................................ Actual effective tax rate ............................................................................................ Dec. 2013 38.0% (2.2) (3.7) 8.9 3.7 (1.9) 42.8% Dec. 2012 38.0% (2.1) (0.1) 5.6 3.4 2.3 47.1% 7 Leases (a) Finance leases: The Companies lease certain buildings, machinery, computer equipment and other assets. (b) Operating leases: The minimum rental commitments under noncancellable operating leases as of December 31, 2013 and 2012 were as follows: Due within one year ................................................................................................... Due after one year ...................................................................................................... Total ........................................................................................................................ Millions of yen Dec. 2013 ¥ 9,090 22,128 ¥31,218 Dec. 2012 ¥ 8,593 23,049 ¥31,642 Thousands of U.S. dollars Dec. 2013 $ 86,251 209,963 $296,214 8 Retirement Benefits The Company and most domestic consolidated subsidiaries have a cash balance plan and a defined contribution pension plan. The cash balance plan is linked to market interest rates and treated as a defined benefit pension plan. These companies may pay an early retirement allowance to early retired employees. Certain domestic consolidated subsidiaries have a defined benefit plan that provides for a lump-sum payment to terminated employees. The subsidiaries may make an additional lump-sum payment that is not subject to actuarial calculations under the accounting standard for retirement benefits. Certain foreign consolidated subsidiaries have a contribution plan and/or a defined benefit plan. The liability for retirement benefits at December 31, 2013 and 2012 consisted of the following: Projected benefit obligation ...................................................................................... Fair value of plan assets ........................................................................................... Unrecognized prior service cost ............................................................................... Unrecognized actuarial gain (loss) ............................................................................ Unrecognized transitional obligation ......................................................................... Prepaid pension cost ................................................................................................ Net liability for retirement benefits ....................................................................... Millions of yen Dec. 2013 ¥ 272,497 (230,352) 5,004 3,892 (2,240) 46 ¥ 48,847 Dec. 2012 ¥ 267,987 (207,111) 7,210 (18,392) (4,124) 147 ¥ 45,717 Thousands of U.S. dollars Dec. 2013 $ 2,585,606 (2,185,710) 47,481 36,929 (21,254) 436 $ 463,488 Kao Corporation Annual Report 2013 49 The components of net periodic benefit costs for the year ended December 31, 2013 and the period ended December 31, 2012 were as follows: Service cost .............................................................................................................. Interest cost ............................................................................................................. Expected return on plan assets ................................................................................ Amortization of prior service cost (credit) ................................................................. Recognized actuarial (gain) loss ................................................................................ Amortization of transitional obligation ...................................................................... Net periodic benefit costs ..................................................................................... Millions of yen Dec. 2013 ¥ 9,699 4,916 (4,734) (1,967) (19) 1,802 ¥ 9,697 Dec. 2012 ¥ 6,808 4,176 (3,579) (2,456) 869 1,257 ¥ 7,075 Thousands of U.S. dollars Dec. 2013 $ 92,030 46,646 (44,919) (18,664) (180) 17,098 $ 92,011 Assumptions used for the year ended December 31, 2013 and the period ended December 31, 2012 were set forth as follows: Discount rate ................................................................................................................. Expected rate of return on plan assets .......................................................................... Amortization period of prior service cost ....................................................................... Recognition period of actuarial gain / loss ..................................................................... Amortization period of transitional obligation ................................................................ Dec. 2013 Primarily 1.6% Primarily 2.0% Primarily 15 years Primarily 10 years 15 years Dec. 2012 Primarily 1.6% Primarily 2.0% Primarily 15 years Primarily 10 years 15 years In addition to the above net periodic benefit costs, the costs for other retirement and pension plans such as a defined contribution plan and for other supplemental retirement benefits were ¥3,343 million (US$31,720 thousand) and ¥2,597 million for the year ended December 31, 2013 and the period ended December 31, 2012, respectively. Certain foreign subsidiaries apply the “corridor approach” in calculating actuarial gain or loss. 9 Contingent Liabilities At December 31, 2013, the Companies had the following contingent liabilities: Trade notes discounted ....................................................................................................................... Guarantees of borrowings, principally of affiliates and employees ..................................................... Millions of yen ¥ 46 484 Thousands of U.S. dollars $ 436 4,592 The Companies are parties to pending litigation arising in the normal course of business. While it is not possible to predict the outcome of pending litigation, the Company believes, after consultation with counsel, that the results of such proceedings will not have a material adverse effect upon the Company’s consolidated financial position and the results of its operations and its cash flows. 50 Kao Corporation Annual Report 2013 10 Equity Significant provisions in the Corporation Law of Japan (the “Corporation Law”) that affect financial and accounting matters are summarized below: (a) Dividends Under the Corporation Law, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders’ meeting. For companies that meet certain criteria such as having: (1) a board of directors, (2) independent auditors, (3) an audit & supervisory board, and (4) terms of service of directors prescribed as one year under the articles of incorporation rather than the normal term of two years, the boards of directors of such companies may declare dividends (except for dividends in kind) at any time during the fiscal year if the companies have prescribed so in their articles of incorporation. The Company meets all four criteria, but has not made the said prescription in its articles of incorporation. The Company pays the dividends semi-annually as a year-end dividend and an interim dividend. Semiannual interim dividends may also be paid once a year upon resolution by the board of directors if the articles of incorporation of the company so stipulate. The Company pays semiannual interim dividends upon the resolution by the Board of Directors because the articles of incorporation of the Company so stipulate. The Corporation Law permits companies to distribute dividends- in-kind (non-cash assets) to shareholders subject to a certain limitation and additional requirements. The Corporation Law provides certain limitations on the amounts available for dividends or the purchase of own stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3 million. (b) Increases / decreases and transfer of common stock, reserve and surplus The Corporation Law requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Corporation Law, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Corporation Law also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution at the shareholders’ meeting. The Company’s legal reserve amount, which is included in retained earnings, totaled ¥14,117 million (US$133,950 thousand) at both December 31, 2013 and 2012. The Company’s additional paid-in capital amount, which is included in capital surplus, totaled ¥108,889 million (US$1,033,200 thousand) at both December 31, 2013 and 2012. Notes to Consolidated Financial Statements The accompanying consolidated financial statements do not include any provision for the year-end dividend of ¥32.0 (US$0.30) per share, aggregating ¥16,407 million (US$155,679 thousand) which the Company will subsequently propose at the 108th Annual General Meeting of Shareholders to be held on March 28, 2014 as an appropriation of retained earnings in respect of the year ended December 31, 2013. (c) Treasury stock and treasury stock acquisition rights The Corporation Law also provides for companies to purchase their own stock and retire treasury stock by resolution of the board of directors. The amount of own stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by a specific formula. Under the Corporation Law, stock acquisition rights are presented as a separate component of equity. The Corporation Law also provides that companies can purchase both their own stock and stock acquisition rights in their own companies. Such treasury stock is presented as a separate component of equity. Such stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights. The Company purchased 10.0 million shares of its common stock from the market during the fiscal year ended December 31, 2013, at an aggregate cost of ¥30,000 million (US$284,657 thousand). On June 19, 2013, the Company retired 10.2 million shares of treasury stock by the resolution of the Board of Directors at the meeting held on May 30, 2013. Kao Corporation Annual Report 2013 51 11 Stock-Based Compensation Plans The stock options for the year ended December 31, 2013 were as follows: Name Persons originally granted Number of options originally granted Date of grant Exercise price Exercise price (U.S. dollars) (Yen) Stock option 2006 I 12 Executive Officers of the Company** 12,000 shares* September 29, 2006 Stock option 2006 II 14 Directors of the Company 26,000 shares* September 29, 2006 ¥1 ¥1 $0.01 $0.01 Stock option 2006 III Stock option 2007 I 79 Employees of the Company 4 Directors of subsidiaries of the Company 13 Directors of the Company 25,000 shares* August 31, 2007 437,000 shares* September 29, 2006 ¥3,211 $30.47 Stock option 2007 II 14 Executive Officers of the Company*** 14,000 shares* August 31, 2007 Stock option 2007 III Stock option 2008 I 78 Employees of the Company 4 Directors of subsidiaries of the Company 14 Directors of the Company 24,000 shares* August 29, 2008 430,000 shares* August 31, 2007 ¥3,446 $32.70 Stock option 2008 II 12 Executive Officers of the Company**** 12,000 shares* August 29, 2008 Stock option 2008 III Stock option 2009 I 81 Employees of the Company 4 Directors of subsidiaries of the Company 13 Directors of the Company 36,000 shares* August 28, 2009 447,000 shares* August 29, 2008 ¥3,100 $29.41 Stock option 2009 II 12 Executive Officers of the Company***** 24,000 shares* August 28, 2009 Stock option 2009 III Stock option 2010 I 74 Employees of the Company 8 Directors of subsidiaries of the Company 14 Directors of the Company 38,000 shares* August 25, 2010 430,000 shares* August 28, 2009 ¥2,355 $22.35 Stock option 2010 II 12 Executive Officers of the Company****** 24,000 shares* August 25, 2010 Stock option 2010 III Stock option 2011 I 81 Employees of the Company 2 Directors of subsidiaries of the Company 13 Directors of the Company 36,000 shares* August 25, 2011 435,000 shares* August 25, 2010 ¥2,190 $20.78 Stock option 2011 II 13 Executive Officers of the Company******* 26,000 shares* August 25, 2011 Stock option 2011 III Stock option 2012 I 81 Employees of the Company 1 Director of subsidiary of the Company 1 Employee of subsidiary of the Company 9 Directors of the Company 30,000 shares* August 23, 2012 435,000 shares* August 25, 2011 ¥2,254 $21.39 ¥1 ¥1 $0.01 $0.01 ¥1 ¥1 $0.01 $0.01 ¥1 ¥1 $0.01 $0.01 ¥1 ¥1 $0.01 $0.01 ¥1 ¥1 $0.01 $0.01 ¥1 ¥1 ¥1 ¥1 $0.01 $0.01 $0.01 $0.01 Stock option 2012 II 22 Executive Officers of the Company******** 49,000 shares* August 23, 2012 Stock option 2013 I 10 Directors of the Company 22,000 shares* May 23, 2013 Stock option 2013 II 22 Executive Officers of the Company********* 27,000 shares* May 23, 2013 * The number of options originally granted converts into number of shares of common stock. ** The 12 Executive Officers were not members of the Board of Directors of the Company at the date of grant. *** The 14 Executive Officers were not members of the Board of Directors of the Company at the date of grant. **** The 12 Executive Officers were not members of the Board of Directors of the Company at the date of grant. ***** The 12 Executive Officers were not members of the Board of Directors of the Company at the date of grant. ****** The 12 Executive Officers were not members of the Board of Directors of the Company at the date of grant. ******* The 13 Executive Officers were not members of the Board of Directors of the Company at the date of grant. ******** The 22 Executive Officers were not members of the Board of Directors of the Company at the date of grant. ********* The 22 Executive Officers were not members of the Board of Directors of the Company at the date of grant. 52 Kao Corporation Annual Report 2013 Exercise period July 1, 2008 through June 28, 2013 July 1, 2008 through June 28, 2013 July 1, 2008 through June 28, 2013 July 1, 2009 through June 30, 2014 July 1, 2009 through June 30, 2014 September 1, 2009 through August 29, 2014 July 1, 2010 through June 30, 2015 July 1, 2010 through June 30, 2015 September 1, 2010 through August 31, 2015 July 1, 2011 through June 30, 2016 July 1, 2011 through June 30, 2016 September 1, 2011 through August 31, 2016 July 1, 2012 through June 30, 2017 July 1, 2012 through June 30, 2017 September 1, 2012 through August 31, 2017 July 1, 2013 through June 29, 2018 July 1, 2013 through June 29, 2018 September 1, 2013 through August 31, 2018 July 1, 2014 through June 28, 2019 July 1, 2014 through June 28, 2019 July 1, 2015 through June 30, 2020 July 1, 2015 through June 30, 2020 Notes to Consolidated Financial Statements The activity of stock options was as follows: (Number of shares) Stock option Stock option Stock option Stock option Stock option Stock option Stock option Stock option Stock option Stock option Stock option 2006 I 2006 II 2006 III 2007 I 2007 II 2007 III 2008 I 2008 II 2008 III 2009 I 2009 II For the year ended December 31, 2013 Non-vested Outstanding at December 31, 2012 ... Granted ...................................... Expired ....................................... Vested ........................................ Outstanding at December 31, 2013 ... Vested Outstanding at December 31, 2012 ... Vested ........................................ Exercised .................................... Expired ....................................... Outstanding at December 31, 2013 ... Exercise price — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 3,000 — 3,000 — — 4,000 — 4,000 — — 296,000 — 3,000 293,000 — 4,000 — — — 4,000 5,000 — 1,000 — 4,000 322,000 — — 34,000 288,000 8,000 — 3,000 — 5,000 5,000 — 1,000 — 4,000 442,000 — 12,000 — 430,000 14,000 — 3,000 — 11,000 12,000 — 3,000 — 9,000 Yen ................................................. U.S. dollars ..................................... ¥1 $0.01 ¥1 $0.01 ¥3,211 $30.47 ¥1 $0.01 ¥1 $0.01 ¥3,446 $32.70 ¥1 $0.01 ¥1 $0.01 ¥3,100 $29.41 ¥1 $0.01 ¥1 $0.01 Average stock price at exercise Yen ................................................. U.S. dollars ..................................... ¥3,195 $30.32 ¥3,240 $30.74 ¥3,435 $32.59 — — ¥3,290 $31.22 — — ¥3,065 $29.08 ¥3,290 $31.22 ¥3,319 $31.49 ¥3,140 $29.79 ¥3,217 $30.52 Fair value price at grant date Yen ................................................. U.S. dollars ..................................... ¥2,932 $27.82 ¥2,932 $27.82 ¥435 $4.13 ¥3,063 $29.06 ¥3,063 $29.06 ¥420 $3.99 ¥2,865 $27.18 ¥2,865 $27.18 ¥426 $4.04 ¥2,115 $20.07 ¥2,115 $20.07 (Number of shares) Stock option Stock option Stock option Stock option Stock option Stock option Stock option Stock option Stock option Stock option Stock option 2011 II 2009 III 2011 III 2010 III 2010 II 2012 II 2013 II 2013 I 2010 I 2011 I 2012 I For the year ended December 31, 2013 Non-vested Outstanding at December 31, 2012 ... Granted ...................................... Expired ....................................... Vested ........................................ Outstanding at December 31, 2013 ... Vested Outstanding at December 31, 2012 ... Vested ........................................ Exercised .................................... Expired ....................................... Outstanding at December 31, 2013 ... Exercise price — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 430,000 — 63,000 — 367,000 23,000 — 7,000 — 16,000 14,000 — 4,000 — 10,000 431,000 — 187,000 — 244,000 36,000 — 13,000 — 23,000 26,000 — 8,000 — 18,000 435,000 — 9,000 5,000 421,000 28,000 — — — 28,000 49,000 — — — 49,000 — 22,000 — 22,000 — — 22,000 — — 22,000 — 27,000 — 27,000 — — 27,000 — — 27,000 Yen ................................................. U.S. dollars ..................................... ¥2,355 $22.35 ¥1 $0.01 ¥1 $0.01 ¥2,190 $20.78 ¥1 $0.01 ¥1 $0.01 ¥2,254 $21.39 ¥1 $0.01 ¥1 $0.01 ¥1 $0.01 ¥1 $0.01 Average stock price at exercise Yen ................................................. U.S. dollars ..................................... ¥3,234 $30.69 ¥3,098 $29.40 ¥3,032 $28.77 ¥3,200 $30.36 ¥3,167 $30.05 ¥3,275 $31.08 ¥3,158 $29.96 — — — — — — — — Fair value price at grant date Yen ................................................. U.S. dollars ..................................... ¥394 $3.74 ¥1,749 $16.60 ¥1,749 $16.60 ¥245 $2.32 ¥1,718 $16.30 ¥1,718 $16.30 ¥211 $2.00 ¥2,119 $20.11 ¥2,119 $20.11 ¥3,027 $28.72 ¥3,027 $28.72 The fair value prices for 2013 stock options were estimated using the Black-Scholes Option Pricing Model with the following assumptions: Volatility of stock price ......................................................................................................................... Estimated remaining outstanding period .............................................................................................. Estimated dividend per share Stock option 2013 I 19.967% 4.5 years Stock option 2013 II 19.967% 4.5 years Yen ................................................................................................................................................... U.S. dollars ....................................................................................................................................... Risk-free interest rate .......................................................................................................................... ¥62 $0.59 0.328% ¥62 $0.59 0.328% Kao Corporation Annual Report 2013 53 12 Comprehensive Income Each component of other comprehensive income for the year ended December 31, 2013 and the period ended December 31, 2012 were as follows: Unrealized gain (loss) on available-for-sale securities Gains (losses) arising during the year ................................................................... Reclassification adjustments to profit or loss ....................................................... Amount before income tax effect ......................................................................... Income tax effect .................................................................................................. Total ...................................................................................................................... Foreign currency translation adjustments Adjustments arising during the year ..................................................................... Reclassification adjustments to profit or loss ....................................................... Amount before income tax effect ......................................................................... Income tax effect .................................................................................................. Total ...................................................................................................................... Share of other comprehensive income in affiliates Gains (losses) arising during the year ................................................................... Total ...................................................................................................................... Post retirement liability adjustments for foreign consolidated subsidiaries Adjustments arising during the year ..................................................................... Reclassification adjustments to profit or loss ....................................................... Amount before income tax effect ......................................................................... Income tax effect .................................................................................................. Total ...................................................................................................................... Millions of yen Dec. 2013 ¥ 3,122 55 3,177 (1,133) ¥ 2,044 ¥44,201 — 44,201 — ¥44,201 ¥ 335 ¥ 335 ¥ (4,401) 748 (3,653) 894 ¥ (2,759) Dec. 2012 ¥ 248 (28) 220 (79) ¥ 141 ¥25,315 — 25,315 — ¥25,315 ¥ 137 ¥ 137 ¥ (681) 352 (329) 125 ¥ (204) Thousands of U.S. dollars Dec. 2013 $ 29,623 522 30,145 (10,750) $ 19,395 $419,403 — 419,403 — $419,403 $ 3,179 $ 3,179 $ (41,759) 7,097 (34,662) 8,483 $ (26,179) Total other comprehensive income .................................................................. ¥43,821 ¥25,389 $415,798 54 Kao Corporation Annual Report 2013 Notes to Consolidated Financial Statements 13 Segment Information (1) Description of reportable segments The Companies’ reportable segments are components for which separate financial information is available, and whose operating results are reviewed regularly by the chief operating decision maker in order to determine allocation of resources and assess segment performance. The Companies are organized into four business operating units, the Beauty Care Business, the Human Health Care Business and the Fabric and Home Care Business (collectively, the Consumer Products Business) and the Chemical Business. Each business operating unit plans comprehensive strategies for business in Japan and other countries, and conducts its own business activities. Therefore, the Companies have four reportable segments: the Beauty Care Business, the Human Health Care Business, the Fabric and Home Care Business and the Chemical Business. The Beauty Care Business segment manufactures and sells cosmetics, skin care and hair care products. The Human Health Care Business segment manufactures and sells food and beverage, sanitary and personal health products. The Fabric and Home Care Business segment manufactures and sells fabric care and home care products. The Chemical Business segment manufactures and sells oleo chemicals, performance chemicals and specialty chemicals. (2) Methods of measurement for sales, profit (loss), assets, and other items for reportable segments The amount of segment profit corresponds to that of operating income. Intersegment sales and transfer prices are calculated mainly based on market value or manufacturing cost. (a) Information related to sales, profit (loss), assets, and other items Information by reportable segment of the Companies for the year ended December 31, 2013 and the period ended December 31, 2012 was as follows: Millions of yen Dec. 2013 Sales to customers ........................... Intersegment sales ........................... Total sales ......................................... Segment profit (Operating income) ... Segment assets** ............................ Other Depreciation and amortization*** .. Investments in equity method affiliates** ..................... Increase in property, plant and equipment and intangible assets .. Reportable segment Consumer Products Business Human Health Fabric and Home Care Business Care Business Total ¥210,628 — 210,628 ¥ 16,850 ¥130,610 — 311,023 ¥311,023 ¥1,091,919 — 1,091,919 ¥ 62,183 ¥ 102,966 ¥148,936 ¥ 762,250 Beauty Care Business ¥570,268 — 570,268 ¥ 23,933 ¥482,704 Chemical Business ¥223,298 37,894 261,192 ¥ 21,509 ¥245,720 Reconciliations* Consolidated ¥ — (37,894) (37,894) ¥ 181 ¥125,306 ¥1,315,217 — 1,315,217 ¥ 124,656 ¥1,133,276 ¥ 32,094 ¥ 8,993 ¥ 9,008 ¥ 50,095 ¥ 13,373 ¥ — ¥ 63,468 3,074 994 1,116 5,184 2,026 19,219 13,628 14,699 47,546 16,141 — — 7,210 63,687 * Reconciliation of segment profit includes elimination of intersegment transactions of inventory. Reconciliation of assets includes ¥152,828 million of the Company’s financial assets and negative ¥27,522 million elimination of receivables among reportable segments. ** Balances as of December 31, 2013 *** Depreciation and amortization excludes amortization of goodwill. Kao Corporation Annual Report 2013 55 Millions of yen Dec. 2012 Sales to customers ........................... Intersegment sales ........................... Total sales ......................................... Segment profit (Operating income) ... Segment assets** ............................ Other Depreciation and amortization*** .. Investments in equity method affiliates** ..................... Increase in property, plant and equipment and intangible assets .. Reportable segment Beauty Care Business ¥444,425 — 444,425 ¥ 21,821 ¥466,279 Consumer Products Business Human Health Fabric and Home Care Business Care Business ¥151,977 — 151,977 ¥ 11,548 ¥112,751 ¥236,748 — 236,748 ¥ 51,368 ¥143,177 Total ¥833,150 — 833,150 ¥ 84,737 ¥722,207 Chemical Business ¥179,445 28,626 208,071 ¥ 16,813 ¥217,046 Reconciliations* Consolidated ¥ — (28,626) (28,626) ¥ 17 ¥ 91,094 ¥1,012,595 — 1,012,595 ¥ 101,567 ¥1,030,347 ¥ 26,365 ¥ 6,410 ¥ 6,669 ¥ 39,444 ¥ 10,626 ¥ — ¥ 50,070 2,660 1,010 1,194 4,864 1,736 11,693 8,830 8,701 29,224 12,705 — — 6,600 41,929 * Reconciliation of segment profit includes elimination of intersegment transactions of inventory. Reconciliation of assets includes ¥111,393 million of the Company’s financial assets and negative ¥20,299 million elimination of receivables among reportable segments. ** Balances as of December 31, 2012 *** Depreciation and amortization excludes amortization of goodwill. Thousands of U.S. dollars Dec. 2013 Reportable segment Beauty Care Business Consumer Products Business Human Health Fabric and Home Care Business Care Business Total Chemical Business Reconciliations* Consolidated Sales to customers ........................... $5,411,026 Intersegment sales ........................... — Total sales ......................................... 5,411,026 Segment profit (Operating income) ... $ 227,090 Segment assets** ............................ $4,580,169 Other Depreciation and amortization*** .. $ 304,526 — 1,988,558 $1,998,558 $2,951,162 $10,360,746 — 2,951,162 10,360,746 $ 159,882 $ 590,028 $ 977,000 $1,239,302 $1,413,189 $ 7,232,660 — $2,118,778 $ — 359,560 2,478,338 (359,560) (359,560) $ 204,090 $ 1,717 $2,331,531 $1,188,973 $12,479,524 — 12,479,524 $ 1,182,807 $10,753,164 $ 85,331 $ 85,473 $ 475,330 $ 126,890 $ — $ 602,220 Investments in equity method affiliates** ..................... Increase in property, plant and equipment and intangible assets .. 29,168 9,432 10,589 49,189 19,224 182,361 129,310 139,472 451,143 153,155 — — 68,413 604,298 * Reconciliation of segment profit includes elimination of intersegment transactions of inventory. Reconciliation of assets includes $1,450,118 thousand of the Company’s financial assets and negative $261,145 thousand elimination of receivables among reportable segments. ** Balances as of December 31, 2013 *** Depreciation and amortization excludes amortization of goodwill. 56 Kao Corporation Annual Report 2013 Notes to Consolidated Financial Statements (b) Information related to reportable segments Sales by geographic area for the year ended December 31, 2013 and the period ended December 31, 2012 were as follows: Sales to customers ................................................... ¥908,801 ¥171,202 Japan Asia Sales to customers ................................................... ¥690,518 ¥130,213 Japan Asia Millions of yen Dec. 2013 Americas* ¥112,569 Millions of yen Dec. 2012 Americas* ¥93,358 Europe** ¥122,645 Consolidated ¥1,315,217 Europe** ¥98,506 Consolidated ¥1,012,595 Thousands of U.S. dollars Dec. 2013 Sales to customers ................................................... $8,623,219 $1,624,462 $1,068,118 $1,163,725 $12,479,524 Japan Asia Americas* Europe** Consolidated Note: Sales are classified in countries or regions based on location of customers. Property, plant and equipment by geographic area for the year ended December 31, 2013 and the period ended December 31, 2012 were as follows: Property, plant and equipment ................................. ¥188,533 ¥56,636 Japan Asia Property, plant and equipment ................................. ¥187,524 ¥40,654 Japan Asia Millions of yen Dec. 2013 Americas* ¥12,642 Millions of yen Dec. 2012 Americas* ¥9,350 Europe** ¥19,473 Consolidated ¥277,284 Europe** ¥14,816 Consolidated ¥252,344 Thousands of U.S. dollars Dec. 2013 Property, plant and equipment .................................... $1,788,909 $537,394 * Americas: North America, South America, and Oceania ** Europe: Europe and South Africa Japan Asia Americas* $119,954 Europe** $184,771 Consolidated $2,631,028 Kao Corporation Annual Report 2013 57 (c) Impairment losses by reportable segment Impairment losses by reportable segment for the year ended December 31, 2013 and the period ended December 31, 2012 were as follows: Millions of yen Dec. 2013 Reportable segment Consumer Products Business Beauty Care Business Human Health Fabric and Home Care Business Care Business Impairment losses of assets .............. ¥96 ¥35 ¥54 Total ¥185 Chemical Business ¥785 Reconciliations Consolidated ¥— ¥970 Reportable segment Consumer Products Business Beauty Care Business Human Health Fabric and Home Care Business Care Business Impairment losses of assets .............. ¥77 ¥ — ¥ — Total ¥77 Chemical Business ¥5 Reconciliations Consolidated ¥ — ¥82 Millions of yen Dec. 2012 Reportable segment Consumer Products Business Beauty Care Business Human Health Fabric and Home Care Business Care Business Impairment losses of assets .............. $911 $332 $512 Total $1,755 Chemical Business $7,449 Reconciliations Consolidated $— $9,204 Thousands of U.S. dollars Dec. 2013 (d) Amortization and balance of goodwill by reportable segment Amortization and balance of goodwill by reportable segment for the year ended December 31, 2013 and the period ended December 31, 2012 were as follows: Millions of yen Dec. 2013 Amortization of goodwill .................... Goodwill at December 31, 2013 ....... Reportable segment Beauty Care Business ¥ 13,829 152,286 Consumer Products Business Human Health Fabric and Home Care Business Care Business ¥— — ¥— — Total ¥ 13,829 152,286 Chemical Business ¥— — Reconciliations ¥— — Consolidated ¥ 13,829 152,286 Amortization of goodwill .................... Goodwill at December 31, 2012 ........ Reportable segment Beauty Care Business ¥ 9,718 159,165 Consumer Products Business Human Health Fabric and Home Care Business Care Business ¥ — — ¥ — — Total ¥ 9,718 159,165 Chemical Business ¥ — — Reconciliations Consolidated ¥ — — ¥ 9,718 159,165 Millions of yen Dec. 2012 58 Kao Corporation Annual Report 2013 Notes to Consolidated Financial Statements Thousands of U.S. dollars Dec. 2013 Beauty Care Business Amortization of goodwill .................... $ 131,217 1,444,976 Goodwill at December 31, 2013 ........ Reportable segment Consumer Products Business Human Health Fabric and Home Care Business Care Business $— — $— — Total $ 131,217 1,444,976 Chemical Business $— — Reconciliations $— — Consolidated $ 131,217 1,444,976 14 Selling, General and Administrative Expenses Selling, general and administrative expenses principally consisted of the following: Advertising ................................................................................................................ Promotion ................................................................................................................. Research and development ...................................................................................... Salaries and bonuses ................................................................................................ Packing and delivery expenses ................................................................................. 15 Other Income (Expenses) “Other, net” consisted of the following: Gain on sales of stock of subsidiary ......................................................................... Loss related to cosmetics* ...................................................................................... Loss on sales or disposals of property, plant and equipment, net ........................... Other, net ................................................................................................................. Total ...................................................................................................................... Millions of yen Dec. 2013 ¥ 86,406 69,554 49,650 130,265 77,253 Dec. 2012 ¥67,045 52,101 37,493 97,738 56,792 Millions of yen Dec. 2013 ¥ — (9,652) (2,645) 708 ¥(11,589) Dec. 2012 ¥ 270 — (2,082) 1,289 ¥ (523) Thousands of U.S. dollars Dec. 2013 $ 819,869 659,968 471,107 1,236,028 733,020 Thousands of U.S. dollars Dec. 2013 $ — (91,584) (25,097) 6,718 $(109,963) * In connection with the voluntary recall by Kanebo Cosmetics Inc., Lissage Ltd. and e’quipe, Ltd., gross profit decreased by ¥2,400 million (US$22,773 thousand) due to various factors including the deduction from net sales of goods returned from retailers, and ¥9,652 million (US$91,584 thousand) in expenditures, including an estimated portion recorded as other expenses, was recorded as “Loss related to cosmetics” under other expenses in the consolidated statement of income. The relevant amount of impact was included in the operating income of the “Beauty Care Business” segment in segment information (Note 13). Please note that items in compensation expenses for which actual losses cannot be estimated have not been recorded in “Loss related to cosmetics”. Kao Corporation Annual Report 2013 59 16 Financial Instruments (1) Group policy for financial instruments The Companies position excess cash as standby funds until investing them in business activities, and manage them by investment only in short-term, low-risk financial instruments. The Companies have a policy to finance by debt from financial institutions and issuance of corporate bonds and other instruments in capital markets. The Companies use derivatives to hedge risk and do not use derivatives for the purposes of speculation. (2) Nature and extent of risks arising from financial instruments and risk management Receivables such as trade notes and trade accounts are exposed to customer credit risk. The Companies manage this risk by ensuring their internal deliberations and approval processes of reviewing customers’ credit standing before entering into transactions with new customers. In addition, the Companies secure guarantee deposits or collateral as necessary. Furthermore, the Companies monitor due dates and manage balances of receivables by customer and periodically check the credit risk of key customers. Marketable securities, which consist of commercial papers of highly-rated companies, bond investment trusts and others, are highly safe and liquid financial instruments. Investment securities, which consist mainly of stock of business partners, are exposed to stock price volatility risk. The Companies periodically check the validity of their stockholdings. Payment terms of payables, such as trade notes and trade accounts, are mostly less than one year. Loans, principally from financial institutions, in short-term debt are mainly for financing related to operating activities. Bonds and loans principally from financial institutions in long-term debt are for financing related to maintenance of appropriate capital cost ratio and investment in property, plant and equipment. Certain loans with floating interest rates are exposed to interest rate volatility risk. The Companies use interest rate swaps for the purpose of hedging the interest rate volatility risk by converting the floating rates into fixed rates. Derivative transactions entered into and managed by the Companies are made in accordance with internal policies that regulate objectives, credit limit amount, scope, organization and others. The Companies do not use derivatives for the purpose of speculation. All derivative transactions are entered into to meet requirements for hedging risk incorporated in the Companies’ business. The Companies limit the counterparties to these derivative transactions to major international financial institutions to reduce their credit risk. With regard to payables, such as trade notes, trade accounts and loans, the Companies monitor and manage liquidity risk by preparing monthly forecast statements of cash flows of each company. (3) Fair values of financial instruments Fair values of financial instruments are based on the quoted price in active markets. If a quoted price is not available, other rational valuation techniques are used. Also see Note 17 for details of the fair values of derivatives. The contract amounts of derivatives which are shown in Note 17 do not represent the amounts exchanged by the parties and do not measure the Companies’ exposure to credit or market risk. The carrying amount, fair value and unrealized gain or loss of financial instruments as of December 31, 2013 and 2012 consisted of the following: Cash and time deposits ........................................................................................ Short-term investments ........................................................................................ Notes and accounts receivable ............................................................................. Allowance for doubtful receivables ................................................................... Notes and accounts receivable, net .................................................................. Investment securities ........................................................................................... Total ................................................................................................................... Short-term debt .................................................................................................... Current portion of long-term debt ......................................................................... Notes and accounts payable ................................................................................. Income taxes payable ........................................................................................... Long-term debt ..................................................................................................... Total ................................................................................................................... Millions of yen Dec. 2013 Fair value ¥126,314 101,645 184,483 9,595 ¥423,037 ¥ 1,278 21,299 170,890 32,322 85,313 ¥311,102 Unrealized gain/(loss) ¥ — — — — ¥ — ¥ — (43) — — (397) ¥(440) Carrying amount ¥126,314 101,645 186,986 (1,503) 185,483 9,595 ¥423,037 ¥ 1,278 21,256 170,890 32,322 84,916 ¥310,662 Derivatives ............................................................................................................ ¥ (189) ¥ (189) ¥ — 60 Kao Corporation Annual Report 2013 Notes to Consolidated Financial Statements Cash and time deposits ........................................................................................ Short-term investments ........................................................................................ Notes and accounts receivable ............................................................................. Allowance for doubtful receivables ................................................................... Notes and accounts receivable, net .................................................................. Investment securities ........................................................................................... Total ................................................................................................................... Short-term debt .................................................................................................... Current portion of long-term debt ......................................................................... Notes and accounts payable ................................................................................. Income taxes payable ........................................................................................... Long-term debt ..................................................................................................... Total ................................................................................................................... Millions of yen Dec. 2012 Fair value ¥ 99,334 68,443 168,683 6,489 ¥342,949 ¥ 3,115 51,202 157,161 11,658 56,151 ¥279,287 Carrying amount ¥ 99,334 68,443 169,929 (1,246) 168,683 6,489 ¥342,949 ¥ 3,115 50,803 157,161 11,658 56,072 ¥278,809 Unrealized gain/(loss) ¥ — — — — ¥ — ¥ — (399) — — (79) ¥(478) Derivatives ............................................................................................................ ¥ (20) ¥ (20) ¥ — Cash and time deposits ........................................................................................ Short-term investments ........................................................................................ Notes and accounts receivable ............................................................................. Allowance for doubtful receivables ................................................................... Notes and accounts receivable, net .................................................................. Investment securities ........................................................................................... Total ................................................................................................................... Short-term debt .................................................................................................... Current portion of long-term debt ......................................................................... Notes and accounts payable ................................................................................. Income taxes payable ........................................................................................... Long-term debt ..................................................................................................... Total ................................................................................................................... Thousands of U.S. dollars Dec. 2013 Fair value $1,198,539 964,465 1,759,968 91,043 $4,014,015 $ 12,126 202,097 1,621,502 306,689 809,498 $2,951,912 Carrying amount $1,198,539 964,465 1,774,230 (14,262) 1,759,968 91,043 $4,014,015 $ 12,126 201,689 1,621,502 306,689 805,731 $2,947,737 Unrealized gain/(loss) $ — — — — $ — $ — (408) — — (3,767) $(4,175) Derivatives ............................................................................................................ $ (1,793) $ (1,793) $ — Cash and time deposits The carrying values of cash and time deposits approximate fair value because of their short maturities. Notes and accounts receivables The carrying values of notes and accounts receivable approximate fair value because of their short maturities. Short-term investments and investment securities The fair value of marketable equity securities is measured at the quoted market price of the stock exchange. The fair value of marketable debt securities is measured at the quoted market price of the stock exchange or at the quoted price obtained from the financial institutions if there is no quoted market price. The carrying values of other marketable securities, such as commercial papers, investment trust funds and others, approximate fair value because of their short maturities. See Note 4 for information of the fair value of short-term investments and investment securities by classification. Short-term debt The carrying values of short-term debt approximate fair value because of their short maturities. Current portion of long-term debt The fair value of fixed interest loans is measured at the present value by discounting expected repayments of principal and interest in the remaining period using an assumed interest rate on an equivalent new loan. Kao Corporation Annual Report 2013 61 Notes and accounts payable, and income taxes payable The carrying values of notes and accounts payable, and income taxes payable approximate fair value because of their short maturities. Long-term debt The fair value of bonds issued by the Company is measured at the quoted market price. The fair value of fixed interest loans is measured at the present value by discounting expected repayments of principal and interest in the remaining period using an assumed interest rate on an equivalent new loan. The fair value of long-term loans subject to a special accounting method for interest rate swaps which qualify for hedge accounting and meet specific matching criteria is measured at the present value by discounting expected repayments of principal and interest together with the interest rate swaps in the remaining period using an assumed interest rate on an equivalent new loan. The fair value of lease obligations is measured at the present value by discounting expected repayments of lease obligations including interest in the remaining period using an assumed interest rate on equivalent new lease obligations. Derivatives Information on fair value of derivatives is included in Note 17. The carrying amount of financial instruments whose fair value cannot be reliably determined as of December 31, 2013 and 2012 consisted of the following: Investment securities that do not have a quoted market price in an active market ............................................................................ ¥1,181 ¥1,181 $11,206 (4) Maturity analysis for financial assets and securities with contractual maturities The maturity analysis for financial assets and securities with contractual maturities as of December 31, 2013 was as follows: Millions of yen Dec. 2013 Dec. 2012 Thousands of U.S. dollars Dec. 2013 Due within one year Millions of yen Due after one year through five years Due after five years through ten years Cash and time deposits ............................................................................................ Short-term investments and investment securities: Held-to-maturity debt securities ........................................................................... Available-for-sale other securities with contractual maturities ............................. Notes and accounts receivable ................................................................................. Total ...................................................................................................................... ¥126,314 ¥— 60,000 224 186,986 ¥373,524 — — — ¥— ¥— — — — ¥— Due within one year Thousands of U.S. dollars Due after Due after five years one year through ten through five years years Cash and time deposits ............................................................................................ Short-term investments and investment securities: Held-to-maturity debt securities ........................................................................... Available-for-sale other securities with contractual maturities ............................. Notes and accounts receivable ................................................................................. Total ...................................................................................................................... $1,198,539 $— 569,314 2,124 1,774,230 $3,544,207 — — — $— $— — — — $— Please see Note 5 for annual maturities of long-term debt. Due after ten years ¥— — — — ¥— Due after ten years $— — — — $— 62 Kao Corporation Annual Report 2013 Notes to Consolidated Financial Statements 17 Derivatives (a) Derivative transactions to which hedge accounting is not applied The Company had the following derivative contracts outstanding to which hedge accounting was not applied at December 31, 2013 and 2012. Foreign exchange forward contracts: Buying U.S. Dollar ................................................................................................. Buying Japanese Yen .......................................................................................... Buying other currencies ........................................................................................ Selling U.S. Dollar ................................................................................................. Selling other currencies ....................................................................................... Foreign currency swaps: Receiving Japanese Yen, paying Chinese Yuan ................................................... Receiving U.S. Dollar, paying Indonesian Rupiah ................................................. Interest rate swaps: Receiving floating rate, paying fixed rate .............................................................. Foreign exchange forward contracts: Buying U.S. Dollar ................................................................................................. Buying Japanese Yen ........................................................................................... Buying other currencies ........................................................................................ Selling U.S. Dollar ................................................................................................. Selling other currencies ........................................................................................ Foreign exchange forward contracts: Buying U.S. Dollar ................................................................................................. Buying Japanese Yen ........................................................................................... Buying other currencies ........................................................................................ Selling U.S. Dollar ................................................................................................. Selling other currencies ........................................................................................ Foreign currency swaps: Receiving Japanese Yen, paying Chinese Yuan ................................................... Receiving U.S. Dollar, paying Indonesian Rupiah ................................................. Interest rate swaps: Receiving floating rate, paying fixed rate .............................................................. Millions of yen Dec. 2013 Contract amount ¥3,974 33 8 6,996 1,120 Contract amount due after one year ¥2,739 — — — — 2,279 2,832 2,279 2,832 Fair value Unrealized gain / (loss) ¥ (12) (3) 0 (36) 2 (380) 295 ¥ (12) (3) 0 (36) 2 (380) 295 281 281 (55) (55) Millions of yen Dec. 2012 Contract amount due after one year ¥830 — — 813 — Fair value Unrealized gain / (loss) ¥(16) (1) 0 18 (21) ¥(16) (1) 0 18 (21) Thousands of U.S. dollars Dec. 2013 Contract amount due after one year $25,989 — — — — Fair value Unrealized gain / (loss) $ (114) (28) 0 (342) 19 $ (114) (28) 0 (342) 19 Contract amount ¥ 960 11 14 6,390 1,652 Contract amount $37,708 313 76 66,382 10,627 21,624 26,872 21,624 26,872 (3,606) 2,799 (3,606) 2,799 2,666 2,666 (522) (522) Kao Corporation Annual Report 2013 63 (b) Derivative transactions to which hedge accounting is applied The Companies had the following derivative contracts outstanding to which hedge accounting was applied at December 31, 2013 and 2012. Dec. 2013 Contract amount due after one year Millions of yen Dec. 2012 Contract Fair value Contract amount amount due after one year Thousands of U.S. dollars Dec. 2013 Fair value Contract Contract amount amount due after one year Fair value Hedged item Contract amount Interest rate swaps: (Fixed rate payment, Floating rate receipt) .......... Long-term debt ¥40,000 ¥20,000 — ¥40,000 ¥40,000 — $379,543 $189,771 — The interest rate swaps which qualify for hedge accounting and meet specific matching criteria are not remeasured at market value but the differentials paid or received under the swap agreements are recognized and included in interest expense or income. In addition, the fair value of the interest rate swaps is included in that of the hedged item, long-term debt, in Note 16. 18 Net Income per Share A reconciliation of the differences between basic and diluted net income per share (”EPS“) for the year ended December 31, 2013 and the period ended December 31, 2012 was as follows: Millions of yen Net income Thousands of shares Weighted average shares Yen U.S. dollars EPS For the year ended December 31, 2013: Basic EPS Net income available to common shareholders .................... Effect of dilutive securities Warrants ............................................................................... Diluted EPS Net income for computation ................................................. ¥64,764 513,880 ¥126.03 $1.20 — 550 ¥64,764 514,430 ¥125.89 $1.19 Millions of yen Net income Thousands of shares Weighted average shares Yen EPS For the period ended December 31, 2012: Basic EPS Net income available to common shareholders .................... Effect of dilutive securities Warrants ............................................................................... Diluted EPS Net income for computation ................................................. ¥52,765 521,824 ¥101.12 — 212 ¥52,765 522,036 ¥101.08 64 Kao Corporation Annual Report 2013 Kao Corporation Annual Report 2013 65 Principal Subsidiaries and Affiliates (As of March 28, 2014) Country/Area Business Company Country/Area Business Company (cid:79) (cid:79) (cid:3) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) Kao Canada Inc. Kao USA Inc. Kao America Inc. Kao Specialties Americas LLC Quimi-Kao, S.A. de C.V. Kao Germany GmbH Guhl Ikebana GmbH Kao Manufacturing Germany GmbH (cid:79) Kao Chemicals GmbH Kao Netherlands B.V. Kao (UK) Limited KPSS (UK) Limited Kao Prestige Limited Molton Brown Limited Kao Switzerland AG Kanebo Cosmetics (Europe) Ltd. (cid:79) (cid:79) Kao Chemicals Europe, S.L. Kao Corporation S.A. Consumer Products Business (cid:3)(cid:79) Beauty Care Business (cid:3)(cid:79)(cid:3)Human Health Care Business (cid:3)(cid:79)(cid:3)Fabric and Home Care Business Chemical Business (cid:3)(cid:79) Chemical Business Japan China Taiwan Vietnam Philippines Thailand Malaysia Singapore Indonesia Australia (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) Kao Customer Marketing Co., Ltd. Canada Kanebo Cosmetics Inc. United States Kanebo Cosmetics Sales Inc. E'quipe, Ltd. Kanebo Cosmillion Ltd. Nivea-Kao Co., Ltd. Ehime Sanitary Products Co., Ltd. Kao Professional Services Co., Ltd. Kao-Quaker Co., Ltd. Kao (China) Holding Co., Ltd. Kao Corporation Shanghai Kao Commercial (Shanghai) Co., Ltd. Kanebo Cosmetics (China) Co., Ltd. Shanghai Kanebo Cosmetics Co., Ltd. Mexico Germany Netherlands United Kingdom Kao Chemical Corporation Shanghai Switzerland Kao Trading Corporation Shanghai Kao (Hong Kong) Ltd. Spain (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) Kao (Taiwan) Corporation (cid:79) (cid:79) Kao Vietnam Co., Ltd. Pilipinas Kao, Inc. Kao Industrial (Thailand) Co., Ltd. Kao Commercial (Thailand) Co., Ltd. Kao Soap (Malaysia) Sdn. Bhd. (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) Kao (Malaysia) Sdn. Bhd. (cid:79) (cid:79) (cid:79) (cid:79) Fatty Chemical (Malaysia) Sdn. Bhd. Kao Plasticizer (Malaysia) Sdn. Bhd. Kao Oleochemical (Malaysia) Sdn. Bhd. Kao Singapore Private Limited P.T. Kao Indonesia (cid:79) P.T. Kao Indonesia Chemicals Kao Australia Pty. Ltd. (cid:79) (cid:79) (cid:79) (cid:79) (cid:79) 66 Kao Corporation Annual Report 2013 Investor Information (As of December 31, 2013) Kao Corporation Head Office 14-10, Nihonbashi Kayabacho 1-chome, Chuo-ku, Tokyo 103-8210, Japan Telephone: 81-3-3660-7111 Founded June 19, 1887 Common Stock Authorized: 1,000,000,000 shares Issued: 516,000,000 shares Outstanding (excluding treasury stock): 512,726,542 shares Number of Shareholders: 50,403 Stock Listing Tokyo Stock Exchange Ticker Symbol Number 4452 Administrator of Shareholder Register Sumitomo Mitsui Trust Bank, Limited 8-4, Izumi 2-chome, Suginami-ku, Tokyo 168-0063, Japan Depositary and Registration for American Depositary Receipts (ADR Ticker Symbol: KCRPY) JPMorgan Chase Bank, N.A. 1 Chase Manhattan Plaza, Floor 58, New York, NY 10005, U.S.A. Top Ten Shareholders Name of Shareholder Number of Shares (thousand shares) Ratio of Shareholding* (percentage) The Master Trust Bank of Japan, Ltd. (Trust Account) Japan Trustee Services Bank, Ltd. (Trust Account) Northern Trust Co. (AVFC) Sub A/C American Clients State Street Bank and Trust Company 505223 State Street Bank and Trust Company Tokio Marine & Nichido Fire Insurance Co., Ltd. State Street Bank and Trust Company 505225 Mellon Bank, N.A. as Agent for its Client Mellon Omnibus US Pension The Bank of New York Mellon SA/NV 10 Kao Group Employee Shareholding Association * Ratio of shareholding is calculated based on the outstanding shares. 24,822 24,337 23,332 15,857 12,905 9,553 8,778 8,581 8,121 7,593 4.84 4.75 4.55 3.09 2.52 1.86 1.71 1.67 1.58 1.48 Composition of Shareholders Securities Companies 4.52% Other Japanese Companies 3.99% Individuals and Others 12.91% Financial Institutions 27.30% Treasury Stock 0.63% Companies and Individuals in Foreign Countries 50.65% Securities Companies 3.59% Treasury Stock 0.73% Companies and Individuals in Foreign Countries 47.75% Other Japanese Companies 4.04% Individuals and Others 14.57% Financial Institutions 29.32% For the Kao Sustainability Report and Kao Group Profile, please refer to the Kao Group website at http://www.kao.com/group/en/group/reports.html Investor Relations Telephone: 81-3-3660-7101 Facsimile: 81-3-3660-8978 E-mail: ir@kao.co.jp Website: http://www.kao.com/jp/en/corp_ir/investors.html Stock Price Range and Trading Volume (Tokyo Stock Exchange) Stock Price Range (Yen) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 80 60 40 20 0 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 120 100 80 60 40 20 0 Common Stock Price Range Tokyo Price Index Close Monthly Trading Volume (Million Shares) Apr. 2009 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012 Dec. 2013 Kao Corporation Annual Report 2013 67 Stock Price Range (Yen) Common Stock Price Range Monthly Trading Volume (Million Shares) Tokyo Price Index Close Apr. 2008 Mar. 2009 Mar. 2010 Mar. 2011 Mar. 2012 Dec. 2012

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