Toray Industries Inc. Annual Report 2014

Plain-text annual report

O U R N E X T M O V E Annual Report 2014 April 1, 2013–March 31, 2014 . c n I , s e i r t s u d n I y a r o T 02 4 1 0 2 t r o p e R l a u n n A I N N O V A T I O N b y C h e m i s t r y Contents 02 INNOVATION BY CHEMISTRY 10 INTEGRATED VALUE CREATION 12 Consolidated Financial & Non-ﬁ nancial Highlights 14 To Toray Stockholders and Investors 19 Special Feature: Medium-term Management Program “Project AP-G 2016” 29 Toray Group Segments 38 INTEGRATED VALUE MANAGEMENT 40 R&D and Intellectual Property 45 Sustainable Management 59 FINANCIAL SECTION 103 INVESTOR INFORMATION AND CORPORATE DATA Profile Toray Group is an integrated chemical industry group aiming to be a global top company in advanced materials based on the ﬁ rm belief that, “as the foundation of products, materials have the power to bring about fundamental transfor- mations in society.” Based on our core technologies of organic synthetic chemistry, polymer chemistry, biotechnology, and nanotechnol- ogy as the sources of value creation, we develop the Core Growth Driving Businesses of Fibers & Textiles and Plastics & Chemicals, Strategically Expanding Businesses of IT-related Products and Carbon Fiber Composite Materials, and Intensively Developing and Expanding Businesses of Environment & Engineering and Life Science in 25 countries and regions around the world. Toray aims to be a corporate group with high value for all stakeholders and seeks to use the power of chemistry to address social issues worldwide guided by our corporate philosophy of “contributing to society through the creation of new value with innovative ideas, technologies and products.” Corporate Philosophy Contributing to society through the creation of new value with innovative ideas, technologies and products Corporate Missions For our customers To provide new value to our customers through high-quality products and superior services For our employees To provide our employees with opportunities for self development in a challenging environment For our stockholders To provide our stockholders with dependable and trustworthy management For society To establish ties and develop mutual trust as a responsible corporate citizen The Concept of our Corporate Slogan, “Innovation by Chemistry” The Toray Group adopted “Innovation by Chemistry” as its corporate slogan in April 2006 as a declaration of our intention to use chemistry as the driving force in our aim “to become a top global corpo- ration in advanced materials.” The word “Chemistry” has two meanings. The obvious one is the science that forms the basis for the advanced materials which we supply. The other is rapport. For us, that means maintaining a good rapport with everyone who is involved with TORAY—customers, employees, stockholders, business partners, con- sumers, and people in the local community—and maintaining good rapport among the companies in the TORAY group and strong connections among our business ofﬁ ces throughout the world. “Innovation” is how we will realize our corporate philosophy of “Contributing to society through the creation of new value with innovative ideas, technologies and products.” “Innovation” refers not only to technological innovation but to our intention to pursue innovation in all aspects of our corporate activities. . c n I , s e i r t s u d n I y a r o T 03 4 1 0 2 t r o p e R l a u n n A Cautionary statement with respect to forward-looking statements Descriptions of predicted business results, projections and business plans contained in this annual report are based on forecasts and assumptions regarding the future business environment made at the present time. This annual report is not a guarantee of the Company’s future business performance. . c n I , s e i r t s u d n I y a r o T 04 4 1 0 2 t r o p e R l a u n n A A D V A N C E D M a t e r i a l s g e n e r a t e . . . A D V A N C E D M a t e r i a l s g e n e r a t e F u t u r e I n d u s t r y History shows that advanced materials created in one period become the core drivers of industry in the next period. This means materials, as used for a wide range of products, have the power to potentially bring about a fundamental transforma- tion in society and people’s lives. One example is HEATTECH®, Toray’s collaborative development with UNIQLO, in 2003, integrating the best of our synthetic ﬁ ber technologies to create the remarkably comfortable clothing with revolution- ary functionality. HEATTECH® has achieved com- bination of various functions such as absorption and heat retention, and the technology is further advancing, while its market is growing worldwide. HEATTECH® is a registered trademark of Fast Retailing Co., Ltd. Akihiro Nikkaku President . c n I , s e i r t s u d n I y a r o T 05 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 06 4 1 0 2 t r o p e R l a u n n A G R E E N t e c h n o l o g i e s l e a d t o . . . G R E E N I n n o v a t i o n Toray Group is harnessing the power of chemistry to help solve environmental, natural resource, and energy issues that affect us all. Toray was one of the world’s ﬁ rst manufacturers to begin development of carbon ﬁ ber composite materi- als. Our tenacious drive to advance and commercial- ize our innovations has created TORAYCA® and led to the Boeing Company using the material as a primary structure material of 787 Dreamliner, Boeing’s state- of-the-art passenger plane, for signiﬁ cant reduc- tions in weight and CO2 emissions. In other ﬁ elds, the recent shale gas revolution is also generating demand for TORAYCA®, which is used in compressed natural gas (CNG) tanks for automobiles. Our desalination technology that converts seawater to safe drinking water also helps many water-hungry communities. Toray’s reverse osmosis water treat- ment membranes (RO), which are created from our unique nanotechnology, are used in the world’s largest desalination plants such as in Algeria and Singapore. Expanding China’s economy is making growth in wa- ter demand, thereby increasing construction of such plants. Our technology now provides daily life water to over 100 million people on the planet. . c n I , s e i r t s u d n I y a r o T 07 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 08 4 1 0 2 t r o p e R l a u n n A L I F E w i l l b e b e t t e r w i t h . . . L I F E I n n o v a t i o n We are raising the quality of medical treatment and reducing the burden at healthcare facilities. Toray Group has been improving the quality of healthcare since the 1970s when it began full- ﬂ edged development of pharmaceuticals and medi- cal devices. We continue to develop new, innovative products, such as the FERON® treatment for viral hepatitis and malignant tumor and the FILTRYZER® artiﬁ cial kidney units. These products are playing important roles at healthcare facilities. In addition, medical uniforms are made from our high-functional ﬁ bers and textiles for increased hygiene and comfort, and patients’ wear have become much more convenient with our materi- als. Moreover, carbon ﬁ ber composite materials are used as top panels for CT scanners to reduce patient radiation exposure due to their high radiolucency enabling highly accurate X-ray imaging even at low dosage levels. Toray Group will continue developing pharma- ceuticals and medical devices while applying its advanced materials to create new products and con- tribute to the development in the life innovation ﬁ eld. . c n I , s e i r t s u d n I y a r o T 09 4 1 0 2 t r o p e R l a u n n A (Billion yen) 200 150 . c n I , s e i r t s u d n I y a r o T 10 4 1 0 2 t r o p e R l a u n n A I N T E G R A T E D V a l u e C r e a t i o n NT-II 100 93.0 93.0 NT-21 81.1 81.1 8 56.86. 56.8 33.03 33.0 51.2 50 8 18.8 0 Contents 12 Consolidated Financial & Non-ﬁ nancial Highlights Trends in Operating Income FY 2000 2001 2002 2003 2004 2005 14 To Toray Stockholders and Investors 19 Special Feature: Medium-term Management Program “Project AP-G 2016” 29 Toray Group Segments Long-term Corporate Vision: AP-Growth TORAY 2020: Toray Group’s vision is to be “a corporate group that continually increases revenues and profits,” “a corporate group that proactively contributes to social development and environ- mental stewardship,” and “a corporate group that provides high value for all stake- holders.” To realize this vision, we are stepping up efforts to expand earnings and broaden our global operations while continuing to develop the green innovation and life innovation businesses. Our performance objective is attaining consolidated net sales of ¥3 trillion and operating income of ¥300 billion around the year 2020. AP-G 2016 300.0 AP-G 2013 180.0 IT-II IT-2010 130,0 103.403 103.4 102.4 102.4 .1 100. 100.1 107.707 107.7 .3 105.05 105.3 83.43 83.4 0 36.0 40.1 40.1 2006 2007 2008 2009 2010 2011 2012 2013 2014 (Forecast) 2016 (Target) Arou Around 2020 (Image) Medium-term Management Program: Project AP-G 2016: Project AP-G 2016 is a three-year medium-term management program for implementing our growth strategies and fortifying our corporate structure to put us in a position to achieve our long-term corporate vision. Under the previous Project AP-G 2013, which completed in ﬁ scal 2013, we made substantial progress expanding our busi- nesses in growth business ﬁ elds and growth regions and set the Group on a new path for growth. We are continuing this proactive management stance with Project AP-G 2016 that launched in ﬁ scal 2014 and sets consolidated performance tar- gets for ﬁ scal 2016 of ¥2.3 trillion in net sales and ¥180 billion in operating income. Image of Financial Indicators Around 2020 Net Sales ¥3,000 billion Core Growth Driving Businesses ¥1,500 billion (50%) Strategically Expanding Businesses and Intensively Developing and Expanding Businesses ¥1,500 billion (50%) Green Innovation Businesses ¥1,000 billion (33%) Life Innovation Businesses ¥300 billion (10%) Asia, America, Emerging countries* ¥1,800 billion (60%) ( ) net sales ratio Operating Income ¥300 billion Operating Income to Net Sales ratio 10% ROA 10% ROE 13% * Under “Project AP-G 2013,” sales fore- cast to Asia and Emerging countries was 1,500 billion yen. Forecast is revised as above in “Project AP-G 2016.” . c n I , s e i r t s u d n I y a r o T 11 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 12 4 1 0 2 t r o p e R l a u n n A Consolidated Financial & Non-financial Highlights Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31 Financial Highlights For the year: Net sales Operating income Net income (loss) Millions of yen Thousands of U.S. dollars*1 2014 2013 2012 2011 2010 2014 ¥1,837,778 ¥1,592,279 ¥1,588,604 ¥1,539,693 ¥1,359,631 $17,842,505 105,253 59,608 83,436 48,477 107,721 100,087 40,107 1,021,874 64,218 57,925 (14,158) 578,718 Cash ﬂ ows from operating activities 161,455 100,815 104,410 129,214 166,215 1,567,524 Cash ﬂ ows used in investing activities (214,826) (107,525) (104,002) (50,734) (121,723) (2,085,689) Free cash ﬂ ows (53,371) (6,710) 408 78,480 44,492 (518,165) Cash ﬂ ows from ﬁ nancing activities Capital expenditures Depreciation and amortization R&D expenditure 41,475 118,207 78,743 55,500 26,167 99,135 67,588 53,342 (23,645) (33,039) (43,361) 402,670 98,384 67,443 51,450 55,942 70,479 46,566 57,073 74,904 46,188 1,147,641 764,495 538,835 At year-end: Total assets Net assets ¥2,119,683 ¥1,731,933 ¥1,581,501 ¥1,567,470 ¥1,556,796 $20,579,447 944,625 778,626 674,149 640,970 518,216 9,171,117 Per share of common stock (in yen and U.S. dollars): Net income (loss): Basic Diluted Cash dividends Net assets Ratios: Operating income to net sales Equity ratio ROA ROE Debt/equity ratio (times) Non-ﬁ nancial Highlights Number of employees Toray Domestic Overseas Percentage of women in management positions (non-consolidated)*2 Employment rate for the handicapped (non-consolidated)*3 ¥ 36.59 ¥ 29.75 ¥ 39.41 ¥ 36.41 ¥ (10.12) $ 0.36 35.70 10 28.90 10 37.46 10 34.43 7.5 — 5 527.32 444.45 384.90 363.90 336.65 0.35 0.10 5.12 5.7% 40.5% 5.5% 7.5% 0.76 5.2% 41.8% 5.0% 7.2% 0.73 6.8% 39.7% 6.8% 10.5% 0.77 6.5% 37.8% 6.4% 10.9% 0.83 2.9% 30.3% 2.6% (3.0)% 1.34 7,123 10,247 28,511 7,097 10,177 25,310 6,976 10,303 22,948 6,797 10,261 21,682 6,915 10,339 20,682 7.95% 7.49% 7.06% 6.77% 6.36% 2.07% 2.03% 1.96% 1.95% 1.93% Social contribution activities*4 (billions of yen) 1.1 1.1 1.2 1.3 1.0 *1: U.S. dollar amounts have been converted from yen at the exchange rate of ¥103=US$1, the approximate exchange rate prevailing on March 31, 2014. *2: As of end April each year *3: As of end June each year *4: See page 13 for more details. Net Sales (Billions of yen) 2,500 2,000 1,500 1,000 500 0 Mar/ 10 11 12 13 14 15 (Forecast) Cash Flows (Billions of yen) 200 150 100 50 0 -50 -100 -150 -200 -250 Mar/ 10 11 12 13 14 Cash flows from operating activities Cash flows used in investing activities Free cash flows Operating Income and Operating Income to Net Sales (Billions of yen) 150 120 90 60 30 0 Mar/ 10 11 12 13 14 15 (Forecast) Operating income (left) Net Income (Loss) (Billions of yen) 80 60 40 20 0 -20 (%) 10 8 6 4 2 0 Mar/ 10 11 12 13 14 15 (Forecast) Operating income to net sales (right) Net Assets and Equity Ratio Cash Dividend Per Share (Billions of yen) 1,000 (%) 60 (Yen) 10 750 500 250 0 Mar/ 10 11 12 13 14 Net assets (left) Equity ratio (right) 45 30 15 0 . c n I , s e i r t s u d n I y a r o T 13 4 1 0 2 t r o p e R l a u n n A ROA and ROE Number of Employees (%) 12 8 4 0 -4 Mar/ 10 11 12 13 14 ROA ROE 50,000 40,000 30,000 20,000 10,000 0 Mar/ 10 11 12 13 14 Toray Domestic Overseas 8 6 4 2 0 Mar/ 10 11 12 13 14 15 (Forecast) Breakdown of Social Contribution Activities Academics, science research, education 58% Year ended March 2014 Disaster relief and other activities 8% Environmental preservation 3% Community social welfare, international exchange 17% Art, culture, sports 14% To Toray Stockholders and Investors Akihiro Nikkaku President . c n I , s e i r t s u d n I y a r o T 14 4 1 0 2 t r o p e R l a u n n A The Toray Group is further advancing growth strategies and corporate structure reinforcement measures to realize sustaining earnings growth. Three Group-wide Projects under the Medium-term Management Program—Project AP-G 2013 Green Innovation Business Expansion (GR) Project Global development of Green Innovation Businesses based on our strengths in chemistry Asia and Emerging Country Business Expansion (AE) Project Proactive development of business in Asia and emerging countries in other regions Total Cost Reduction (TC-II) Project Establishment of a robust business footing through initiatives based on group-wide projects Major Results of “Project AP-G 2013” Net Sales Net Sales of Green Innovation Businesses Net Sales in Growth Countries and Regions Operating Income Operating Income to Net Sales ROA ROE (Billion yen) FY2010 (Actual) 1,539.7 378.0 540.3 100.1 6.5% 6.4% 10.9% FY2013 (Initial Target) 1,800.0 500.0 720.0 150.0 8.3% 8% 11% FY2013 (Actual) 1,837.8 575.0 708.6 105.3 5.7% 5.5% 7.5% ROA=Operating Income/Total Assets ROE=Net Income/Shareholders’ Equity Record-high Sales in Fiscal 2013 I would like to begin this report by expressing our pro- found gratitude to our stockholders and investors for their continuing support. In the year ended March 31, 2014 (ﬁ scal 2013), economic conditions improved mar- ginally but remained virtually stagnant in Europe, and economic growth rates slowed in China and other emerging countries. The U.S. economy continued expanding at a moderate pace supported by improv- ing employment and steady personal consumption. The Japanese economy continued its gradual recov- ery trend supported by a ﬁ rm undertone in personal consumption and public investment, some movement toward recovery in private-sector capital investment, and steadily improving employment conditions. In these conditions, the Toray Group generated 15.4% year-on-year growth in all the segments to a record-high ¥1,837.8 billion in consolidated net sales in ﬁ scal 2013: the Fibers & Textiles, Plastics & Chemicals, IT-related Products, Carbon Fiber Composite Materials, Environment & Engineering, Life Science, and Others segments. Operating income also approached record levels, rising 26.1% to ¥105.3 billion, and net income increased 23.0% to ¥59.6 billion. Based on this earn- ings performance and the business outlook for ﬁ scal 2014, the Company declared an annual dividend of ¥10.00 per share. Proactive Management Initiatives of Project AP-G 2013 Next, I review Project AP-G 2013 medium-term manage- ment program for the ﬁ scal years 2011 to 2013, com- pleted in ﬁ scal 2013. Under Project AP-G 2013, we implemented growth strategies guided by the core objective to “expand busi- nesses in growth business ﬁ elds and regions” and took steps to further strengthen our total cost competitive- ness with the aim of putting us in a position to fulﬁ ll our AP-Growth TORAY 2020 long-term corporate vision for our business structure and achieve the performance targets of consolidated net sales of ¥3 trillion and oper- ating income of ¥300 billion around the year 2020. Project AP-G 2013 comprised three Group-wide proj- ects: the Green Innovation Business Expansion (GR) Project focused on ﬁ nding solutions for global environ- mental, natural resource, and energy issues, the Asia and Emerging Country Business Expansion (AE) Project to develop growth strategies for those regions, and the Total Cost Reduction (TC-II) Project. Our efforts proved successful, as we steadily advanced our growth strategies and exceeded our project’s sales target. We also made investments for global growth in all of our business segments and advanced R&D for major new products and technologies for the future. . c n I , s e i r t s u d n I y a r o T 15 4 1 0 2 t r o p e R l a u n n A To Toray Stockholders and Investors Trends in Net Sales of Green Innovation Businesses (Billion yen) 2,000 Green Innovation Businesses Net Sales Trends in Net Sales in Growth Countries and Regions (Billion yen) Growth countries and regions (Asia, Others) 2,000 Others (Japan, U.S., Europe) . c n I , s e i r t s u d n I y a r o T 16 4 1 0 2 t r o p e R l a u n n A 1,500 1,000 500 1,500 1,000 500 0 FY 07 10 11 12 13 (Initial Target) 13 (Actual) 0 FY 00 10 11 12 13 (Initial Target) 13 (Actual) Net sales ratio of Green Innovation Businesses Net sales ratio of Growth Countries and Regions FY2007 (Actual) 13% FY2011 (Actual) 27% FY2012 (Actual) 28% FY2013 (Initial Target) 28% FY2013 (Actual) 31% FY2000 (Actual) 23% FY2011 (Actual) 35% FY2012 (Actual) 36% FY2013 (Initial Target) 40% FY2013 (Actual) 39% Green Innovation Business Expansion Project Targets Exceeded The Green Innovation Business Expansion (GR) Project is a strategy to establish the Group as the leading player in the global markets for carbon ﬁ ber composite mate- rials, water treatment membranes, battery materials, and biomass materials. Green Innovation Business net sales reached ¥575.0 billion in ﬁ scal 2013, substantially exceeding our initial ¥500 billion target for the year. Key GR Project Developments under Project AP-G 2013 in Fiscal 2013 were as follows. Carbon Fiber Composite Materials • Resolved to expand production capacity at the four global bases in Japan, the U.S., France, and South Korea. (Carbon ﬁ ber at all bases in March 2012; prepreg in Japan in June 2013 and the U.S. in January 2014) • Established or invested in automotive parts manufac- turing companies in Japan, Asia, the U.S., and Europe. (Europe in March 2011, Japan and Asia in April 2013, the U.S. in July 2013) • Acquired and made Zoltek Companies, Inc., a large tow carbon ﬁ ber manufacturer in the U.S., a wholly owned subsidiary. (February 2014) Battery Components • Made Toray Tonen Specialty Separator Godo Kaisha a wholly owned subsidiary and Toray Battery Separator Film Godo Kaisha (currently a company limited) (January 2012) Water Treatment Membranes • Concluded a contract to establish a water treatment joint venture, Toray Membrane Middle East LLC, with the Abunayyan Holding Company, a strategic business group partner in the electric power and water desalination ﬁ eld in Saudi Arabia (February 2014) Printing Plate Materials • Constructed and started operation of a waterless print- ing plate manufacturing plant in the Czech Republic (November 2013) Biomass Materials • Successfully test produced the world’s ﬁ rst 100% bio- based polyester ﬁ ber (November 2011) Asia and Emerging Country Business Expansion Project Targets at Target Level The Asia and Emerging Country Business Expansion (AE) Project is a strategy for investing in business growth and establishing and expanding business bases in regions of expected growth around the world. Sales in growth countries and regions grew to ¥708.6 billion in ﬁ scal 2013, which was very close to our target level, and sales to Asian and emerging countries increased to 39% of total sales. Key AE Project Developments under Project AP-G 2013 in Fiscal 2013 were as follows. Variable Cost Reduction Implement “Variable cost innovation 10% (Vci-10)” Project (cid:116)(cid:49)(cid:83)(cid:80)(cid:78)(cid:80)(cid:85)(cid:70)(cid:1)(cid:68)(cid:80)(cid:84)(cid:85)(cid:1) (cid:83)(cid:70)(cid:69)(cid:86)(cid:68)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:74)(cid:79)(cid:1)(cid:77)(cid:74)(cid:79)(cid:70)(cid:1)(cid:88)(cid:74)(cid:85)(cid:73)(cid:1) (cid:67)(cid:86)(cid:84)(cid:74)(cid:79)(cid:70)(cid:84)(cid:84)(cid:1)(cid:84)(cid:85)(cid:83)(cid:66)(cid:85)(cid:70)(cid:72)(cid:74)(cid:70)(cid:84) (cid:116)(cid:39)(cid:86)(cid:83)(cid:85)(cid:73)(cid:70)(cid:83)(cid:1)(cid:84)(cid:85)(cid:83)(cid:70)(cid:79)(cid:72)(cid:85)(cid:73)(cid:70)(cid:79)(cid:1) (cid:68)(cid:80)(cid:77)(cid:77)(cid:66)(cid:67)(cid:80)(cid:83)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:88)(cid:74)(cid:85)(cid:73)(cid:74)(cid:79)(cid:1) (cid:85)(cid:73)(cid:70)(cid:1)(cid:40)(cid:83)(cid:80)(cid:86)(cid:81) (cid:116)(cid:52)(cid:85)(cid:83)(cid:70)(cid:79)(cid:72)(cid:85)(cid:73)(cid:70)(cid:79)(cid:1)(cid:72)(cid:77)(cid:80)(cid:67)(cid:66)(cid:77)(cid:1) (cid:81)(cid:83)(cid:80)(cid:68)(cid:86)(cid:83)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:1)(cid:84)(cid:90)(cid:84)(cid:85)(cid:70)(cid:78) Fixed Cost Reduction Reduce variable costs by over 3% each year and over 10% (over 70 billion yen) over three years Reduced 11.4% or 75.7 billion yen in three years Results 27.0 Billion yen 10% over three years (more than 70 billion yen) 24.1 Billion yen 24.6 Billion yen (cid:53)(cid:66)(cid:83)(cid:72)(cid:70)(cid:85) (cid:39)(cid:58)(cid:18)(cid:18) (cid:39)(cid:58)(cid:18)(cid:19) (cid:39)(cid:58)(cid:18)(cid:20) (cid:116)(cid:34)(cid:81)(cid:81)(cid:83)(cid:80)(cid:81)(cid:83)(cid:74)(cid:66)(cid:85)(cid:70)(cid:77)(cid:90)(cid:1)(cid:78)(cid:66)(cid:79)(cid:66)(cid:72)(cid:70)(cid:69)(cid:1)(cid:71)(cid:74)(cid:89)(cid:70)(cid:69)(cid:1)(cid:68)(cid:80)(cid:84)(cid:85)(cid:84)(cid:1)(cid:74)(cid:79)(cid:1)(cid:85)(cid:73)(cid:74)(cid:84)(cid:1)(cid:67)(cid:86)(cid:84)(cid:74)(cid:79)(cid:70)(cid:84)(cid:84)(cid:1)(cid:70)(cid:89)(cid:81)(cid:66)(cid:79)(cid:84)(cid:74)(cid:80)(cid:79)(cid:66)(cid:83)(cid:90)(cid:1)(cid:81)(cid:73)(cid:66)(cid:84)(cid:70) (cid:116)(cid:42)(cid:79)(cid:85)(cid:83)(cid:80)(cid:69)(cid:86)(cid:68)(cid:70)(cid:69)(cid:1)(cid:49)(cid:14)(cid:83)(cid:66)(cid:85)(cid:74)(cid:80)(cid:1)(cid:66)(cid:68)(cid:68)(cid:80)(cid:86)(cid:79)(cid:85)(cid:74)(cid:79)(cid:72)(cid:1)(cid:78)(cid:70)(cid:85)(cid:73)(cid:80)(cid:69)(cid:1)(cid:85)(cid:80)(cid:1)(cid:84)(cid:70)(cid:68)(cid:86)(cid:83)(cid:70)(cid:1)(cid:81)(cid:83)(cid:80)(cid:71)(cid:74)(cid:85)(cid:1)(cid:66)(cid:81)(cid:81)(cid:83)(cid:80)(cid:81)(cid:83)(cid:74)(cid:66)(cid:85)(cid:70)(cid:1)(cid:85)(cid:80)(cid:1) (cid:74)(cid:79)(cid:68)(cid:83)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:66)(cid:77)(cid:1)(cid:71)(cid:74)(cid:89)(cid:70)(cid:69)(cid:1)(cid:68)(cid:80)(cid:84)(cid:85)(cid:84) (cid:116)(cid:36)(cid:80)(cid:79)(cid:85)(cid:74)(cid:79)(cid:86)(cid:70)(cid:69)(cid:1)(cid:85)(cid:80)(cid:1)(cid:74)(cid:78)(cid:81)(cid:83)(cid:80)(cid:87)(cid:70)(cid:1)(cid:80)(cid:81)(cid:70)(cid:83)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:66)(cid:77)(cid:1)(cid:70)(cid:71)(cid:71)(cid:70)(cid:68)(cid:85)(cid:74)(cid:87)(cid:70)(cid:79)(cid:70)(cid:84)(cid:84)(cid:1)(cid:85)(cid:80)(cid:1)(cid:76)(cid:70)(cid:70)(cid:81)(cid:1)(cid:71)(cid:74)(cid:89)(cid:70)(cid:69)(cid:1)(cid:68)(cid:80)(cid:84)(cid:85)(cid:84)(cid:1)(cid:66)(cid:85)(cid:1) (cid:81)(cid:83)(cid:80)(cid:81)(cid:70)(cid:83)(cid:1)(cid:77)(cid:70)(cid:87)(cid:70)(cid:77)(cid:84)(cid:1)(cid:74)(cid:79)(cid:1)(cid:77)(cid:74)(cid:79)(cid:70)(cid:1)(cid:88)(cid:74)(cid:85)(cid:73)(cid:1)(cid:81)(cid:83)(cid:80)(cid:71)(cid:74)(cid:85)(cid:1)(cid:72)(cid:83)(cid:80)(cid:88)(cid:85)(cid:73) Reduced 46.3 billion yen in costs budget in three years P-ratio=1.0 * P (performance)-ratio=fixed cost growth rate/marginal profit growth rate: 1.0 or less, or manageme at each division against a budget. China (cid:129) Established a manufacture and sales company for dialy- sis machines and artiﬁ cial kidneys (June 2011) (cid:129) Started operations at a new manufacturing plant for dialy- sis machines (April 2012) (cid:129) Established and started operation of a plastic resin compound company in Chengdu, Szechuan Province (August 2013) ASEAN (cid:129) Expanded production capacity and started operation at a facility in Thailand for Nylon 66 ﬁ ber for automobile air- bags (August 2012) (cid:129) Resolved to establish a vapor deposition facility for pack- aging ﬁ lms in Malaysia (April 2013) (cid:129) Launched a business for high-performance polypropyl- ene spunbond nonwoven fabric for disposable diapers in Indonesia (June 2013) (cid:129) Established and started operation of a plastic resin com- pound manufacturing base in Indonesia (November 2013) South Korea (cid:129) Subsidiary Toray Advanced Materials Korea Inc. acquired a 56.2% stake and made a subsidiary of ﬁ ber and water treatment membrane manufacturer Woongjin Chemical Co., Ltd. (February 2014) Emerging Countries (cid:129) Enhanced the operating and information-gathering bases in India, Brazil and Turkey TC-II Project Targets Exceeded, but the Revenue Environment becomes Severer In the second half period of the AP-G 2013 Project, we confronted the harsh business environment, which included the persisting recession in Europe following the sovereign debt crisis, slowing economic growth in China, and sluggish growth in emerging economies triggered by the tapering of monetary easing policy in the U.S. We also faced unexpectedly strong revenue pressure in the IT-related segment from inert growth for liquid crystal display (LCD) panels for TVs and weaken- ing PDP demand, which led to falling PDP material and component prices, and in the Plastics & Chemicals seg- ment from declining polyester ﬁ lm prices. In these rapidly changing business conditions, we continued rigorously implementing the Total Cost Reduction (TC-II) Project toward our three-year target to cut variable costs by 10% (3% or more per year) or by over ¥70 billion from the FY2010 level and ultimately reduced variable costs by ¥75.7 billion, marking a 11.4% reduction. We also reduced ﬁ xed costs by ¥46.3 billion relative to the three year budget and maintained a per- formance ratio of 1.0, meeting our objective of holding it at 1.0 or lower. The P-ratio, which is derived by dividing the ﬁ xed cost growth rate by the marginal proﬁ t growth rate, is a benchmark indicator we introduced for the cur- rent business expansion phase to ensure that the rise in ﬁ xed costs is proportionate to our proﬁ t levels. . c n I , s e i r t s u d n I y a r o T 17 4 1 0 2 t r o p e R l a u n n A To Toray Stockholders and Investors . c n I , s e i r t s u d n I y a r o T 18 4 1 0 2 t r o p e R l a u n n A Trends in Capital Expenditures, Depreciation and R&D Expenses Capital Expenditures (Billion yen) 160 Depreciation (Billion yen) 80 R&D Expenses (Billion yen) 80 120 80 40 0 60 40 20 0 60 40 20 0 FY 12 13 14 (Forecast) FY 12 13 14 (Forecast) FY 12 13 14 (Forecast) Consolidated Subsidiaries Consolidated Subsidiaries Consolidated Subsidiaries Toray Toray Toray Forecast for Double-digit Sales and Proﬁ t Growth in Fiscal 2014 In ﬁ scal 2014, the ﬁ rst year of the new three-year medium-term management program Project AP-G 2016, we anticipate our investments for growth through plant construction and expansion for polypropylene spun- bond, airbag ﬁ bers, high-performance ﬁ lms, carbon ﬁ ber, high-performance resins, and other products to gener- ate expanding production output and sales around the world. At the same time, we will continue endeavor- ing to reduce our total costs. Based on this outlook, we forecast double-digit growth in sales and proﬁ t in ﬁ scal 2014 with consolidated net sales rising to ¥2,150 bil- lion, operating income to ¥130 billion, and net income to ¥70 billion. Beginning in ﬁ scal 2014, the Company and its consolidated subsidiaries in Japan will change the method for calculating the depreciation costs of tan- Business Forecast for the Fiscal Year 2014 FY2014 (Forecast) (Billions of yen) Changes Net Sales 2,150.0 +17.0% Operating Income 130.0 +23.5% Net Income 70.0 +17.4% Remarks: Estimated exchange rate: 100 yen/US$ gible ﬁ xed assets from the declining-balance method to the straight-line method. We estimate that the effect will be a decrease of about ¥9.0 billion in depreciation costs in ﬁ scal 2014. We anticipate overall moderately improving global economic conditions during the year despite some lin- gering areas of concern. We also anticipate gradual recovery in business conditions in Japan, particularly in the second half of the ﬁ scal year after temporary reper- cussions from the consumption tax increase. Toray Group will continue constantly seeking to pio- neer technological advances in the world and develop and commercialize leading-edge technologies and new materials under the ﬁ rm belief that materials, as used for a wide range of products, have the power to bring about fundamental transformations in society. We will maintain our business growth track by emphasizing our capabilities in all aspects of our operating activities and by overcoming obstacles through thorough under- standing and analysis of actual conditions. Through our products, activities, and innovations, we will continue creating new value that contributes to society. To the Next Stage Special Feature M E D I U M - T E R M M A N A G E M E N T P R O G R A M Pr oje ct AP- G 2016 (FY2 014–FY 2016 ) Innovation and Proactive Management –Implementation of Growth Strategy– . c n I , s e i r t s u d n I y a r o T 19 4 1 0 2 t r o p e R l a u n n A Financial Targets Net Sales Operating Incommmmmmeeeeee Operating Incommmmmmme te te te tte to No No No No No NNNet et et eteee SaSaSaSaalS es Ratio ROA ROE FY201013 (Actual)l) 1,837.8 105.33 5.7% 5.5% 7.5% BBBBilBilBilBiBilBillioiliolioliolioionsnsnsnsnns fofofofofofofof yenyennnnnnyenyenyeny FY2016 (Target) 2,300 180 8% 8% 10%%%% Remarks: Estimated exchange rate 100 yen/US$ Estimated oil price 110 US$/B (DUBAI FOB) Basic policy of Dividends Aim for sustainable increase of dividends linked to the business performance Guide line of D/E ratio Below 1 Toray Group is following the completion of Project AP-G 2013 with the new medium-term management program Project AP-G 2016 for ﬁ scal years 2014 to 2016 (April 2014 through March 2017). Project AP-G 2016 launches a new set of growth strategies to continue advancing and building on the previous project’s progress expanding businesses in growth ﬁ elds and regions and establishing a robust business footing by cost reductions. We will also continue stressing “innovation and proactive management” to further advance our growth strategies and corporate structure reinforcement measures. The project also outlines plans for step- ping up investment and R&D to broaden our businesses and enhance our future proﬁ tability. Management also aims to continue to increase the dividend distribution amount linked to our results performance, while maintain- ing a healthy ﬁ nancial standing with a debt-to-equity ratio of one or below. We will advance business expansion into domains where we can fully leverage Toray Group’s strengths and implement strategies and programs to become the global leader in each segment The Key Principles of Project AP-G 2016 Project AP-G 2016 will continue to drive us closer to our AP-Growth TORAY 2020 long-term corporate vision by con- tinuing and deepening the Project AP-G 2013 initiatives for Green Innovation Business Expansion, Asia and Emerging Country Business Expansion, and Variable and Fixed Cost Reduction. Furthermore, we will broaden these three to add new initiatives of Life Innovation Business Expansion, the Americas Business Expansion, and Production Process Innovation and Total Operational Cost Reduction in Sales and Marketing. These key principles will guide our efforts to advance business expansion into domains where we can fully lever- age Toray Group’s strengths and to implement strategies and programs to become the global leader in each seg- ment as we seek to attain ﬁ scal 2016 performance targets of consolidated net sales of ¥2,300 billion and operating income of ¥180 billion. . c n I , s e i r t s u d n I y a r o T 20 4 1 0 2 t r o p e R l a u n n A A P - G 2 0 1 6 B a s i c S t r a t e g i e s Basic Segment Strategies and Objectives Each segment will implement basic strategies toward achieving speciﬁ c objectives for Project AP-G 2016. Fibers & Textiles Plastics & Chemicals IT-related Products Bolster earning strength as the Core Growth Driving Businesses and expand global busi- ness in growth markets and regions Expand business and increase earnings by developing high value-added products for growing applications and market regions Expand business by developing and market- ing new high value-added products focused on the display and semiconductor ﬁ elds (Billion yen) 1,000 (Billion yen) 100 (Billion yen) 600 (Billion yen) 60 (Billion yen) 300 (Billion yen) 60 500 0 Net sales (left) Operating income (right) 50 0 FY 2013 (Actual) 2016 (Targets) 300 0 30 0 FY 2013 (Actual) 2016 (Targets) 200 100 0 40 20 2013 (Actual) 2016 (Targets) 0 FY AP-G 2013 AP-G 2016 Additional New Perspective AdAA ditional New Perspective Capture Business Opportunities in Growth Business Fields Expansion of Green Innovation Businesses + Expansion of Life Innovation Businesses EExpansion of Life Innovation Businesses Business Expansion in Growth Countries and Regions Expansion of Asia and Emerging Country Businesses + Expansion of Businesses in America EExpansion of Businesses in America Strengthen Total Cost Reduction Reduction of Variable Costs and Fixed Costs + Innovation of Production Process, Total Operational IInnovation of Production Process, Total Operational CCost Reduction in Sales and Marketing Cost Reduction in Sales and Marketing . c n I , s e i r t s u d n I y a r o T 21 4 1 0 2 t r o p e R l a u n n A Carbon Fiber Composite Materials Environment & Engineering Life Science Further expand business as the world’s lead- ing carbon ﬁ ber manufacturer Expand business in the environment and ener- gy ﬁ elds by applying primarily our expertise in water treatment membranes and facility design Strengthen development globally and seek to contribute to medical advances (Billion yen) 200 (Billion yen) 40 (Billion yen) 300 100 0 20 0 FY 2013 (Actual) 2016 (Targets) 200 100 0 (Billion yen) 30 20 10 2013 (Actual) 2016 (Targets) 0 FY (Billion yen) 90 60 30 0 (Billion yen) 15 10 5 0 2013 (Actual) 2016 (Targets) FY . c n I , s e i r t s u d n I y a r o T 22 4 1 0 2 t r o p e R l a u n n A We will use innovation to drive further growth in the Environment & Energy and the Medical & Health ﬁ elds The ﬁ rst basic strategy, “business expansion in growth business ﬁ elds,” will be implemented by leveraging our accumulated technological capabilities and strong business foundation to develop advanced materials and create new businesses with a focus on the Environment & Energy and Medical & Health ﬁ elds. We will expand businesses that contribute solutions to environmental as well as resource and energy issues (Billion yen) 1,000 ( ) net sales ratio The Green Innovation Business Expansion (GR) Project calls for achieving net sales near ¥700 billion in ﬁ scal 2016 in ﬁ elds that contribute to resolving environmental as well as resource and energy issues including energy conserva- tion, new energy, biomass derivatives, water treatment, air puriﬁ cation, low environmental burden, recycling, and pro- cess innovation with the addition of shale gas development and related industries in priority ﬁ elds. At the same time, we will implement environmental Life Cycle Management (LCM) practices to reduce the environmental burden over the complete life cycles of products and services from raw materials to production, use, and disposal and promote sustainable growth for Toray Group. 700 (approx. 30%) 575 (31%) 800 600 400 200 0 FY 2013 Actual 2016 Target 2020 Image Reduction of GHG Emissions Low Environmental Load Water Treatment Recycling Air Purification Others B A S I C S T R A T E G Y 1 Bus in ess Expa nsion in Gr owt h Bu si nes s Fi el ds G R E E N I N N O VAT I O N B U S I N E S S E X PA N S I O N ( G R ) P r o j e c t FY2016 Sales Target ¥700 billion Toray Group Green Innovation Businesses Net Sales in FY2013 ¥575.0 billion Air Purification >Dust collecting filter/air filter Recycling > Regeneration-type recycling, circulation-type recycling/ material, chemical recycling Water Treatment > RO, MBR, MF/UF membrane > TORAYVINO™ home water purifier Reduction of GHG emissions > TORAYCA® carbon fiber for aircrafts, automobiles, pressure vessels, etc. >Back sheets for solar cells/ lithium-ion battery separators ©BOEING ©LUXFER GAS CYLINDERS Low Environmental Load > Non-halogen flame-retardant material > TORAY WATERLESS PLATE® In the Environment & Energy ﬁ eld, we will pursue business opportunities in the shale gas revolution to further acceler- ate the growth of the Green Innovation businesses. In the Medical & Health ﬁ eld, the Life Innovation Business Expansion Project is a fundamental strategy as we expand our present pharmaceutical and medical businesses and implement growth strategies engaging Toray Group’s advantages such as advanced materials, core and fundamental technologies, and business platforms. We will expand businesses that improve the quality of healthcare, ease the burden at medical institutions, and contribute to health and longevity (Billion yen) 300 ( ) net sales ratio The Life Innovation Business Expansion (LI) Project calls for achieving net sales of ¥170 billion in ﬁ scal 2016. To this end, 200 we will expand business in our present pharmaceutical and medical businesses and apply the Toray Group’s advanced materials, core and fundamental technologies, and busi- ness platforms to improve the quality of healthcare, ease 100 170 (approx. 7%) approx.120 （approx. 7%） the burden at medical institutions, and contribute to health and longevity. In the pharmaceutical and medical busi- nesses, we will achieve this by creating new products and cultivating new business ﬁ elds as well as strengthening development of our competitive advanced materials for medical equipment and healthcare products. We will also collaborate with strategic partners, participate in medical clusters, and take other steps to expand business, acceler- ate development, and explore new business avenues. 0 FY 2013 Actual 2016 Target 2020 Image Advanced Materials in LI Business* Pharmaceuticals & Medical *Toray Group estimation B A S I C S T R A T E G Y 1 Busi ness Ex pansion in Gr owt h Bu si n ess Fi el ds L I F E I N N O VAT I O N B U S I N E S S E X PA N S I O N ( L I ) P r o j e c t FY2016 Sales Target ¥170 billion Toray Group Life Innovation Businesses Net Sales in FY2013 Approx. ¥120.0 billion . c n I , s e i r t s u d n I y a r o T 23 4 1 0 2 t r o p e R l a u n n A Advanced Materials in LI Business* Approx. ¥62 billion > PP spunbond for sanitary materials > TORAYVINO™ home water purifier > Hospital-use clothing > Air filter > X-ray CT cradle, cartridge > DNA chip (for research) *Toray Group estimation Pharmaceuticals and Medical Approx. ¥58 billion > Pharmaceuticals > Artificial kidney > Catheter > Dialysis machine > Contact lens > Extracorporeal circulation therapeutic columns We will further strengthen the organic relationships among Toray Group overseas bases to develop new markets and expand business (Billion yen) 1,800 ( ) net sales ratio Implementing the second basic strategy of “business expansion in growth countries and regions” entails accel- erating the Asia and Emerging Country Business Expansion (AE) Project of the previous Project AP-G 2013 and ensuring that we fully capture the demand being created by the grow- ing middle- and upper-income populations in those regions. Project AP-G 2016’s Asia, Americas and Emerging Country Business Expansion (AE-II) Project adds the Americas to the target growth regions and a focus on strengthening organic collaboration between the Group’s overseas bases and establishing new business bases. The ﬁ scal 2016 perfor- mance objective for the project is for net sales near ¥1,150 billion, representing roughly 50% of total sales. 1,500 1,200 900 600 300 1,150 (approx. 50%) approx. 809 （approx. 44%) 0 FY 2013 Actual 2016 Target 2020 Image . c n I , s e i r t s u d n I y a r o T 24 4 1 0 2 t r o p e R l a u n n A B A S I C S T R A T E G Y 2 Business Ex pansio n in Gr owth Count rie s and R egio ns A S I A , A M E R I C A S A N D E M E R G I N G C O U N T R Y B U S I N E S S E X PA N S I O N ( A E - I I ) P r o j e c t FY2016 Sales Target ¥1,150 billion Initiatives in Asia and Emerging Countries We will fully leverage the solid business foundation we have constructed in China to continue expanding business and improving proﬁ tability. We will also introduce high- performance products to meet the increasing demand from the growing market for high value-added products and for environmental solutions accompanying the coun- try’s industrialization. In Indonesia, Thailand, and Malaysia, we will acceler- ate development in our strength area of high value-added products and new business in the light of each country’s industrial policy and level of industrial sophistication. In India, we will expand business and establish new pro- duction bases. We will also expand our business in other emerging countries and regions, including Central and South America, the Middle East and Turkey, Russia, Central and Eastern Europe, and Africa. Initiatives in the Americas Toray Group views the Americas as a new driver of busi- ness expansion. The shale gas revolution is spurring the U.S. to regain industrial competitiveness and to rejuve- nate the manufacturing industry while the development of new leading-edge technologies in the aircraft and energy industries in the country is generating growing demand for advanced materials. The Toray Group purchased approximately 400 acres (1.6 million square meters) of commercial land in South Carolina in February 2014 and plans to concentrate man- agement resources on preparing the site to become a new supply hub for advanced materials. Our carbon ﬁ ber composite materials business is one of our core operations in the U.S., and we have fully integrat- ed production systems carrying out the complete process from raw material ﬁ ber spinning to carbonization and produc- tion equipment for prepreg intermediate material using high- performance TORAYCA® carbon ﬁ ber. We are planning to expand our presence to meet the growing demand from the in- creasing production of Boeing 787 aircraft and for compressed natural gas tanks and other energy-related applications. Each of the textile, resin, and carbon ﬁ ber compos- ite businesses is considering new manufacturing bases to meet the rising demand in North, Central and South Americas for automotive components. Moreover, we are aggressively seeking to expand operations by entering new business areas and pursuing strategic M&A and alliances. . c n I , s e i r t s u d n I y a r o T 25 4 1 0 2 t r o p e R l a u n n A Fibers & Textiles Plastics & Chemicals IT-related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Trading Companies Overseas Offices/ Regional Supervisory Organization . c n I , s e i r t s u d n I y a r o T 26 4 1 0 2 t r o p e R l a u n n A Constantly strengthening the corporate structure, creating a resilient business structure, and targeting the world’s highest level of cost competitiveness The Total Cost Reduction (TC-III) Project, the third basic strat- egy, extends and deepens the focus on reducing variable costs and strict management of ﬁ xed costs using the per- formance ratio (P-ratio) from the TC-II Project of the previous Project AP-G 2013, while adding new initiatives for “produc- tion process innovation” and “total operational cost reduc- tion in sales and marketing.” The TC-III Project targets cutting costs by a total of ¥200 billion from ﬁ scal 2014 to 2016. Continuation of TC-II Innovation of Production Process (cid:129) Continuing the activities of variable costs reduction (over 3% each year and over 10% over three years) (cid:129) Controlling ﬁ xed costs through P-ratio* accounting method (P-ratio=under 0.96 each ﬁ scal year) (cid:129) Activities involve participation of employees group-wide (cid:129) Set up innovative production processes to achieve drastic cost reductions based on new perspectives and approaches (cid:129)Collaborate across organizations, between research, technical, production and engineering departments Total Operational Cost Reduction in Sales and Marketing (cid:129) Establish a highly competitive supply chain, by analyzing and understanding the operational costs and logistics systems * P (performance)-ratio=ﬁ xed cost growth rate/marginal proﬁ t growth rate: 1.0 or less, or manageme at each division against a budget. B A S I C S T R A T E G Y 3 Bolst ering Compe titiveness T O TA L C O S T R E D U C T I O N ( T C - I I I ) P r o j e c t Target to reduce ¥200 billion from 2014 to 2016 B A S I C S T R A T E G Y 4 S T R E N G T H E N I N G S a l e s a n d M a r k e t i n g Toray Group Midstream and Downstream Strategies [Carbon Fiber Composite Materials, Aircraft Application] Supply Prepreg Aircraft Manufacturer (cid:116)(cid:1)(cid:49)(cid:83)(cid:80)(cid:69)(cid:86)(cid:68)(cid:85)(cid:1)(cid:69)(cid:70)(cid:87)(cid:70)(cid:77)(cid:80)(cid:81)(cid:78)(cid:70)(cid:79)(cid:85) (cid:116)(cid:1)(cid:53)(cid:70)(cid:68)(cid:73)(cid:79)(cid:74)(cid:68)(cid:66)(cid:77)(cid:1)(cid:84)(cid:86)(cid:81)(cid:81)(cid:80)(cid:83)(cid:85) (cid:116)(cid:1)(cid:52)(cid:85)(cid:66)(cid:67)(cid:77)(cid:70)(cid:1)(cid:84)(cid:86)(cid:81)(cid:81)(cid:77)(cid:90) Tier 1 Tier 2 Toray Group Material and Processed products manufacturer We will implement business strategies that encompass the complete supply chain and create proﬁ t-generating sales channels to expand global business revenue The fourth basic strategy is “strengthening sales and mar- keting.” We will bolster our sales capabilities by horizontally developing business operations modeled after the Fibers & Textiles segment and the Carbon Fiber Composite Materials segment’s aircraft applications with strategies that encom- pass the complete supply chain to create proﬁ t-generating sales channels to expand global business revenues. To achieve this, we will develop a full-ﬂ edged solutions business and strengthen ties with key customers. Fur- thermore, we will implement measures aimed at elevat- ing all of our products and businesses to leading positions around the world. We will also expand the businesses and cultivate a core sales staff with global skill sets. In addi- tion, management resources will be focused on advancing the global business development and launching effective PR strategies to raise Toray brand recognition and brand strength overseas. [Fibers & Textiles, Apparel Applications] General Supply Chain (Numbers of multi-steps in sales channels of each material, applications and items) Fibers Manufacturer (cid:53)(cid:83)(cid:66)(cid:69)(cid:74)(cid:79)(cid:72) (cid:53)(cid:70)(cid:89)(cid:85)(cid:74)(cid:77)(cid:70) Manufacturer (cid:53)(cid:83)(cid:66)(cid:69)(cid:74)(cid:79)(cid:72) Garment Manufacturer (cid:53)(cid:83)(cid:66)(cid:69)(cid:74)(cid:79)(cid:72) Apparel Ware house Dealer Retailer Development of New Supply Chains = One Stop Total Service (Respond directly to any material, application or item) Toray Group Yarn-manufacturing > Weaving/Knitting > Dyeing > Garment Apparel, SPA The ﬁ fth basic strategy comprises “R&D strategies” and “intellectual property strategies.” Our R&D strategies will entail activating Toray Group’s core and fundamental technologies, and business platforms to focus on busi- ness themes that generate primary, long-term competitive strength. Moreover, we will fortify peripheral areas to our core products and technologies in addition to the cores, work at research leading to advances into new ﬁ elds and technologies, and pursue production process innovation that will lead to future core technologies. We have set a budget for research and technology development dur- ing the three years to 2016 of ¥180 billion with 50% to be applied to Green Innovation and 20% to Life Innovation. Our intellectual property strategies are to construct competitive entry barriers to our business arenas globally and to bolster the Toray Group’s technical advantages. R&D Expenses Green (cid:42)(cid:79)(cid:79)(cid:80)(cid:87)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79) Life (cid:42)(cid:79)(cid:79)(cid:80)(cid:87)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79) B A S I C S T R A T E G Y 5 Invest R & D S T R AT E G I E S/ I n t e l l e c t u a l P R O P E R T Y S T R AT E G I E S ¥180 billion of R&D expenses in 3 years from FY2014 B A S I C S T R A T E G Y 6 C a p i t a l I n v e s t m e n t S T R AT E G I E S ¥400 billion of capital investment planned in 3 years from FY2014 The sixth basic strategy is laid as “capital investment strategies.” We have set a three-year capital investment budget of ¥400 billion, with roughly 60% to be used in growth and expansion business ﬁ elds as well as 60% to focus on investment in Asia, emerging countries, and the Americas where we expect clear economic growth. This investment program to ﬁ scal 2016 will be designed to promote business expansion and include investment in long-term growth strategies aimed at reaching our objec- tives for 2020. Maintenance/ Improvement Growth and Expansion Approx. 60% of total capital expenditures will be allocated to Growth and Expansion fields Japan, others Asia/ Emerging Countries Americas Approx. 60% of total capital expenditures will be allocated to Asia/Emerging Countries and Americas . c n I , s e i r t s u d n I y a r o T 27 4 1 0 2 t r o p e R l a u n n A B A S I C S T R A T E G Y 7 M & A a n d Business Alliance S T R AT E G I E S The seventh basic strategy is set as “M&A and business alliance strategies.” We will pursue M&A and alliances capable of generating advantageous synergy effects with our core technologies as an effective option for advancing our growth strategy and actively invest our management resources in rewarding cases for realizing the business expansion required to become the global business leader. M&A funds will be allocated and used based on strategic decisions and will not utilize funds from the capital invest- ment budget. The effective application of these strategies will require highly capable human resources in key position in each of the target areas. We will secure and cultivate highly skilled employees capable of driving dramatic growth of our global operations. Based on our business strate- gies, we actively rotate staff among Toray and afﬁ liated companies in Japan and abroad, securing and cultivat- ing core human resources, and optimally assigning per- sonnel throughout the Group. In overseas businesses, we will also work to secure and cultivate local core staff to carry out business operations. Furthermore, we aim to secure and cultivate per- sonnel with global skill sets, the ability to make on-site decisions and provide leadership on the front lines, and to formulate effective action plans for new business development, structural reform, and other key strate- gies. We will continue to employ and cultivate a diverse staff of men and women from around the world and provide a full range of training programs along with on- the-job training to further augment each employee’s professional expertise. . c n I , s e i r t s u d n I y a r o T 28 4 1 0 2 t r o p e R l a u n n A B A S I C S T R A T E G Y 8 H u m a n R e s o u r c e s S T R AT E G I E S Tr e n d s i n C a s h F l o w s Implementing the eight basic strategies will put us in a phase of higher cash ﬂ ow for investing until ﬁ scal 2016. At the same time, we remain committed to providing invest- ment return to stockholders and plan to raise cash ﬂ ows from operating activities with the goal of generating over- all positive free cash ﬂ ow for the three years of the AP-G 2016 Project. Trends in Consolidated Cash Flows (Billion yen) Cash flows from operating activities Cash flows from investment activities Free cash flows 300 200 100 0 -100 -200 -300 FY 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Toray Group Segments C or e G rowth Driving Busine sses St r a t eg ically Expanding Busine sses F I B E R S & T E X T I L E S P L A S T I C S & C H E M I C A L S I T - R E L A T E D P R O D U C T S C A R B O N F I B E R C O M P O S I T E M A T E R I A L S E N V I R O N M E N T & E N G I N E E R I N G Int e ns ively De ve lo ping and E xpa nding Businesse s L I F E S C I E N C E . c n I , s e i r t s u d n I y a r o T 29 4 1 0 2 t r o p e R l a u n n A Toray Group works to expand earnings via our Strategically Expanding Businesses of IT-related Products and Carbon Fiber Composite Materials, while securing proﬁ ts from Core Growth Driving Businesses, Fibers & Textiles and Plastics & Chemicals. Simultaneously, Toray Group nurtures pri- mary revenue sources in the future business, such as the life science, water treatment, and envi- ronment ﬁ elds to seek sustainable growth. Toray Group Segments Business Categories Segments . c n I , s e i r t s u d n I y a r o T 30 4 1 0 2 t r o p e R l a u n n A Core Growth Driving Businesses Strategically Expanding Businesses Intensively Developing and Expanding Businesses Net Sales Ratio 66.7% Operating Income Ratio 56.1% Net Sales Ratio 19.6% Operating Income Ratio 32.8% Net Sales Ratio 13.0% Operating Income Ratio 9.5% F I B E R S & T E X T I L E S P L A S T I C S & C H E M I C A L S I T - R E L A T E D P R O D U C T S C A R B O N F I B E R C O M P O S I T E M A T E R I A L S E N V I R O N M E N T & E N G I N E E R I N G L I F E S C I E N C E Notes: 1 Each percentage shows the share of net sales/operating income in the consolidated net sales/consolidated operating income respectively in the segment. 2 Excludes other businesses, equivalent to ¥14.3 billion (0.8%) in net sales and ¥2.0 billion (1.6%) in operating income, and adjustment of operating income of -¥21.2 billion. Main Products Application Examples Filament yarns, staple ﬁ bers, and woven and knitted fabrics of nylon, polyester and acrylic ﬁ bers, etc.; non-woven fabrics, man-made suede and apparel products (cid:129) Women’s and men’s clothes (coats: man-made suede, dress shirts: polyester-cotton blended fabric, stockings: nylon ﬁ ber, apparel products) (cid:129) Automobiles (car seats: polyester ﬁ ber, airbags: nylon ﬁ ber, seatbelts: polyester ﬁ ber) Nylon, ABS, PBT, PPS and other resins and molded products, polyoleﬁ n foam; polyester, polypropylene, PPS and other ﬁ lms and pro- cessed ﬁ lm products; raw materials for synthetic ﬁ bers and other plastics; zeolite catalysts; ﬁ ne chemicals for pharmaceuticals and agrochem- icals; veterinary medicine (excludes ﬁ lm and resin covered in IT-related Products segment) Films and plastic products for information and telecommunications related products; materi- als for electronic circuits and semiconductors; color ﬁ lters for LCDs and related materials; materials for plasma display panels; magnetic recording materials; graphic materials and IT equipment Carbon ﬁ bers, carbon ﬁ ber composite materials and their molded products (cid:129) Furniture & interior (sofas: man-made suede, carpets: BCF nylon, curtains: halogen-free, ﬂ ame retardant materials) (cid:129) Disposable diapers: polypropylene ﬁ lament yarn non-woven fabric (cid:129) Tents: polyester ﬁ ber (cid:129) Automobile components (radiator tanks: nylon resin, intake manifold: nylon resin, connectors: PBT resin, capacitor for hybrid cars: polypropylene ﬁ lm) (cid:129) Home appliances (housing for washing machines, vacuum cleaners, air conditioners: ABS resin) (cid:129) Power tools (circular tools housing: nylon resin) (cid:129) Backsheet of solar panels (PET ﬁ lm) (cid:129) Packs for snack (polypropylene ﬁ lm, PET ﬁ lm) (cid:129) Veterinary medicine (for dogs and cats) (cid:129) Flat panel display televisions (PET ﬁ lm and LCD color ﬁ lter manufacturing equipment) (cid:129) PCs (circuit materials, PET ﬁ lm, polyimide coatings) (cid:129) Cellular phones (color ﬁ lters, LCP resin, circuit materials, PET ﬁ lm) (cid:129) Printing (waterless printing plates, relief printing on resins, printing equipment) (cid:129) Backup tapes for server (PET ﬁ lm) (cid:129) In-vehicle multimedia LANs (optical ﬁ ber) (cid:129) Semiconductors (semiconductor coating materials) (cid:129) Aircraft structure (carbon ﬁ ber composite materials) (cid:129) Sports gear and goods: golf shafts, tennis rackets (cid:129) Bike frames: carbon ﬁ ber composite materials (cid:129) PC chassis (carbon ﬁ ber molded products) (cid:129) Wind-power generator blades (carbon ﬁ bers) (cid:129) Marine vessels (carbon ﬁ bers) (cid:129) Industrial equipment materials (carbon ﬁ ber, carbon ﬁ ber composite materials) (cid:129) Bridge pier reinforcement (carbon ﬁ ber woven fabrics) . c n I , s e i r t s u d n I y a r o T 31 4 1 0 2 t r o p e R l a u n n A Comprehensive engineering; condominiums; industrial equipment and machinery; environment- related equipment; water treatment membranes and related equipment; materials for housing, building and civil engineering (cid:129) Seawater desalination facilities (water treatment membranes and equipment) (cid:129) Sewage and waste-water treatment facilities (water treatment membranes and equipment) (cid:129) Condominiums (cid:129) Housing (wall siding for houses, interior materials for buildings) (cid:129) Plants and manufacturing facilities (comprehensive engineering services) Pharmaceuticals and medical products; analy- sis, physical evaluation and research services (cid:129) Pharmaceuticals (natural interferon-beta preparation, prostacyclin, antipruritus drug for suppressing intractable itching accompanying hemodialysis) (cid:129) Medical treatment devices (hemodialyzers, dialyzer and equipment) Toray Group Segments Core Growth Driving Businesses Fibers & Textiles Fiscal Net sales Operating income Assets 2012 632.2 43.2 456.8 2013 755.5 52.9 618.5 Fiscal 2014 forecasts announced on August 7, 2014. Changes 19.5% 22.4% (Billions of yen) 2014 Forecast 870.0 56.0 Net Sales Operating Income 755.5 632.2 (Billions of yen) 52.9 43.2 2012 2013 2012 2013 (FY) ROA (Operating income/Assets) Operating income to net sales 9.8% 7.0% Capital expenditures ¥26.1 billion . c n I , s e i r t s u d n I y a r o T 32 4 1 0 2 t r o p e R l a u n n A Summary of Consolidated Financial Results for the Year Ended March 31, 2014 (Fiscal 2013) Fibers & Textiles segment net sales increased 19.5% year on year to ¥755.5 billion. Operating income increased 22.4% to ¥52.9 billion. In Japan, while sales of functional apparel applications grew strongly, those of general apparel applications, though show- ing signs of recovery, remained weak. On the other hand, exports recovered partly due to the correction in the strong yen. Sales for industrial applications, led by automobile-related applications, con- tinued on track to recovery. Overseas, while the conditions continued to be tough with Europe remaining mired in economic slump and sluggish domestic demand in China, textile subsidiaries in Southeast Asia and China pursued sales expansion and a shift towards high value added prod- ucts. Also, while the ﬂ oods in Thailand that occurred in October 2011 had affected the operations in the same period a year earlier, the production and sales recovered since then, contributing to the improved performance. Outlook for the Year Ending March 2015 (Fiscal 2014) In Japan, despite continuous signs of recovery in demand for apparel applications, it is forecast that demand will be weak centered in the ﬁ rst half partially due to the fallback from advance demand before the expected consumption tax increase. The impact of rising raw mate- rial and fuel prices is also a concern. Overseas, the economic condi- tions in the U.S. and emerging countries will generally remain steady, while demand will stagnate in Europe and remains weak in China. In this business environment, the Fibers & Textiles segment will continue fortifying and expanding the integrated operations from ﬁ bers and textiles to end products businesses, which are Toray’s areas of strong advantage, and seek to expand sales for automobile airbag, disposable diaper, and environmental applications and other growth ﬁ elds as well as in China, emerging countries, the U.S., and other growth regions. We will also strengthen the segment’s cor- porate structure through cost reduction and other measures and aim to achieve earnings growth and global business expansion as expected of Toray’s Core Growth Driving Business. Topics High-performance Polypropylene Spunbond Capacity to be Expanded in China Toray has decided to expand the production facilities of the high-performance polypro- pylene spunbond (PP spunbond) business of Toray Polytech (Nantong) Co., Ltd. (TPN). The new facility will have an annual pro- duction capacity of about 20,000 tons, increasing TPN’s annual capacity to about 78,000 tons. Production at the new facil- ity is scheduled to start in December 2014 and will bring the Toray Group’s annual pro- duction capacity for PP spunbond to about 141,000 tons. The Toray Group currently produces PP spunbond at production facili- ties in Korea, China, and Indonesia, where the production started in June 2013, for markets in Japan, Korea, China, India, ASEAN countries, and throughout in Asia. The expanding market for disposable dia- pers for babies and infants is expected to boost annual demand for PP spunbond in Asia from an estimated 290,000 tons in 2012 to 750,000 tons in 2020. Toray is preparing for the demand growth and developing prod- ucts to meet the need for high-performance disposable diaper materials. Core Growth Driving Businesses Plastics & Chemicals Fiscal Net sales Operating income Assets 2012 395.8 18.3 456.7 2013 470.5 18.0 507.1 Fiscal 2014 forecasts announced on August 7, 2014. Changes 18.9% -1.6% (Billions of yen) 2014 Forecast 550.0 24.0 Net Sales Operating Income 470.5 395.8 18.3 18.0 (Billions of yen) 2012 2013 2012 2013 (FY) ROA (Operating income/Assets) Operating income to net sales 3.7% 3.8% Capital expenditures ¥18.2 billion . c n I , s e i r t s u d n I y a r o T 33 4 1 0 2 t r o p e R l a u n n A Summary of Consolidated Financial Results for the Year Ended March 31, 2014 (Fiscal 2013) Plastics & Chemicals segment net sales increased 18.9% year on year to ¥470.5 billion. Operating income declined 1.6% to ¥18.0 billion. Though sales for automotive applications in the resin business increased in Japan, those for electronics and general industrial applications remained weak. The business was also affected by the increase in raw material prices resulting from the correction of the strong yen. Overseas, automotive applications in North America, China and Southeast Asia led the sales expansion. Demand for the ﬁ lm business’s products remained sluggish on the whole within and outside Japan, with continued price competition, even though domestic sales for capacitors used in hybrid cars remained strong. Also, trading subsidiaries expanded their business transactions on the back of market recovery and strong overseas business. Outlook for the Year Ending March 2015 (Fiscal 2014) Economic conditions in Japan are forecast to improve, supported by brisk demand with particularly strong growth in high value-added ﬁ elds, amid various unstable elements, including sharply ﬂ uctuat- ing raw material and fuel costs. Overseas, demand is expected to recover worldwide, led by emerging countries. In this business environment, in the plastic resins business, we plan to maximize sales of strong-selling products and expand sales in China, ASEAN, and emerging countries while quickly incorporat- ing material and fuel costs rises into our product prices to maintain and expand the spread between these costs and sales prices. In the ﬁ lms business, although we expect strong pressure from custom- ers to lower prices, we will continue expanding sales of high value- added products for packaging and industrial applications. Topics TORELINA® PPS Resin Production Base to be Constructed in South Korea It has been decided to construct a new pro- duction plant for the TORELINA® polyphen- ylene sulﬁ de (PPS) resin at Toray Advanced Materials Korea Inc., a 100% subsidiary. The facility, which will be the Toray’s ﬁ rst overseas production base for PPS resin, is scheduled to start operations in April 2016 with an annual production capacity of 8,600 tons, bringing the Group’s total annual pro- duction capacity for PPS resin to 27,600 tons, combined with the Tokai Plant. The facility will be a highly cost compet- itive operation with fully integrated produc- tion from main raw materials to resin and will supply products to resin compounds bases mainly in China, excluding portions used in South Korea. The factory will also install resin compound lines for design and functionality processing with an annual capacity of 3,300 tons and is aiming to start precedent shipments in October 2015. PPS resin is a “super engineering plas- tic” with superior mechanical strength and resistance to heat, chemicals, and ﬁ re and is widely used in automotive electrical com- ponents, electrical machinery, electronic devices, ofﬁ ce automation equipment, and home appliances. Worldwide demand for compounds was estimated at 70,000 tons in 2012 and is expected to continue grow- ing at an annual pace of 8% or higher. Toray Group Segments Strategically Expanding Businesses IT-related Products Fiscal Net sales Operating income Assets 2012 237.6 23.0 334.2 2013 245.7 24.6 361.1 Fiscal 2014 forecasts announced on August 7, 2014. Changes 3.4% 7.1% (Billions of yen) 2014 Forecast 275.0 30.0 Net Sales Operating Income 237.6 245.7 (Billions of yen) 23.0 24.6 2012 2013 2012 2013 (FY) ROA (Operating income/Assets) Operating income to net sales 7.1% 10.0% Capital expenditures ¥17.2 billion . c n I , s e i r t s u d n I y a r o T 34 4 1 0 2 t r o p e R l a u n n A Summary of Consolidated Financial Results for the Year Ended March 31, 2014 (Fiscal 2013) IT-related Products segment net sales increased 3.4% year on year to ¥245.7 billion. Operating income increased 7.1% to ¥24.6 billion. The sales of products for small and mid-sized displays such as smartphones and tablet terminals in general were strong, although they were partly affected by the production adjustment of end products in the second half. Sales of ﬁ lms and processed ﬁ lm prod- ucts for large LCD panels, after performing strongly in the ﬁ rst half, were inﬂ uenced by stagnating demand for ﬂ at-screen TV sets in the second half. Sub-segments Fiscal Display materials Electronic components, semiconductors, electric circuit materials (Billions of yen) 2012 79.0 2013 85.5 Changes 8% 96.6 106.6 10% Data storage materials Equipment, others 31.2 30.7 30.9 22.7 -1% -26% Outlook for the Year Ending March 2015 (Fiscal 2014) It is forecast that large LCD panel makers will continue operating at a ﬁ rm pace while customers will relentlessly demand for lower prices. A temporary adjustment can be expected but the demand will continuously grow for smartphone and tablet device compo- nents. Prices will be also under increasing pressure to be lowered. In this business environment, we will seek to expand sales and market share for our high value-added ﬁ lms and processed ﬁ lm products for display and electronic component applications. We will also focus on raising sales of other products including organic EL materials, semiconductor materials, printing materials, and bat- tery separator ﬁ lms. Topics Capacity Expanded for RAYBRID™ Photosensitive Functional Materials In September 2013, Toray expanded its annual production capacity six-fold to 120 tons for the RAYBRID™ photosensitive con- ductive paste for touch panel wiring patterns. Narrowing frame sections on smart- phones and tablet devices for enlarging screen sizes are requiring increasingly ﬁ n- er conductive wiring to convey signals from the touch panel to the computer components. Photolithography is gaining increasing attention as a method for cre- ating cellular micro patterns. The method involves coating a photosensitive paste on a substrate and forming a wiring pattern through the process including exposure, development, and ﬁ ring. Toray’s RAYBRID™ is a photosensitive func- tional material used as a substrate coating material in the microfabrication photolitho- graphic process and enables microwiring through a photosensitive resin containing in- organic particles with various functions. The Company is fortifying its RAYBRID™ mar- keting efforts to expand sales in the smart- phone and tablet device market, which is projected to grow to annual shipments of 2 billion units in 2017. Strategically Expanding Businesses Carbon Fiber Composite Materials Fiscal Net sales Operating income Assets 2012 77.6 7.3 233.1 2013 113.3 16.9 341.8 Fiscal 2014 forecasts announced on August 7, 2014. (Billions of yen) Changes 46.0% 2014 Forecast 160.0 131.9% 23.0 Net Sales Operating Income 113.3 77.6 (Billions of yen) 16.9 ROA (Operating income/Assets) Operating income to net sales 5.9% 14.9% 2012 2013 7.3 2012 2013 (FY) Capital expenditures ¥38.5 billion Summary of Consolidated Financial Results for the Year Ended March 31, 2014 (Fiscal 2013) Carbon Fiber Composite Materials segment net sales increased 46.0% year on year to ¥113.3 billion. Operating income increased 131.9% to ¥16.9 billion. As demand for aircrafts as well as that in the environment and energy ﬁ elds including compressed natural gas tank applications expanded, sales of carbon ﬁ bers and intermediate products (pre- preg) grew strongly for aerospace applications and general indus- trial applications. In the composite business, sales of carbon ﬁ ber reinforced plastic chassis for notebook PCs, which boast high strength and light weight, increased. Sub-segments Fiscal Aircraft Sporting goods Industrial 2012 30.4 12.2 35.0 (Billions of yen) Changes 88% 16% 20% 2013 57.2 14.2 41.9 Outlook for the Year Ending March 2015 (Fiscal 2014) It is forecast that demand for aircraft and environment and energy- related applications will continue driving steady growth in global demand for carbon ﬁ ber in 2014. Simultaneously, pricing competi- tion will remain in Asia for general-purpose and sports applications and the markets will not recover in the immediate future. In this business environment, we plan to maintain steady ship- ments of carbon ﬁ ber for aircraft applications centered on our Boeing 787 account and to expand sales in line with the growing demand for environment and energy-related product applications. In carbon ﬁ ber products for sports applications, we will shift to high value-added products and revise prices on general-purpose products. Topics Acquisition of Zoltek, of the U.S., Marks Entry to the Large Tow Carbon Fiber Business Toray purchased all shares of large tow*1 carbon ﬁ ber manufacturer Zoltek Compa- nies, Inc., of the U.S., and made the compa- ny a wholly owned subsidiary. We expect global demand for carbon ﬁ ber to grow by 15% or more annually not only for its energy-saving potential as lightweight material but for its capability as a contrib- utor to broader use of oil and coal alterna- tive energy sources. We expect widening use of regular tow*2 carbon ﬁ ber materials for applications requiring high performance and high quality, such as in aircrafts, as well as large tow materials, which offer an attrac- tive cost and performance balance for use in wind-power generation equipment and as an automotive structural material. After entering the large tow carbon ﬁ ber business in 1988, Zoltek implemented com- prehensive measures to enhance its cost competitiveness and generated substantial business and earnings growth. Toray had focused management resourc- es on building its strength in regular tow carbon ﬁ ber, but did not offer any large tow products and was seeking an entry to the rapidly growing market for general-purpose products. The acquisition of Zoltek provides opportunities for new growth. *1 Large tow carbon ﬁ ber is carbon ﬁ ber with 40,000 or more ﬁ laments. *2 Regular tow carbon ﬁ ber is carbon ﬁ ber with up to 24,000 ﬁ laments. . c n I , s e i r t s u d n I y a r o T 35 4 1 0 2 t r o p e R l a u n n A Toray Group Segments Intensively Developing and Expanding Businesses Environment & Engineering Fiscal Net sales Operating income Assets 2012 178.4 2.6 176.6 2013 180.2 6.4 202.1 Fiscal 2014 forecasts announced on August 7, 2014. (Billions of yen) Changes 1.0% 2014 Forecast 220.0 143.4% 9.5 Net Sales Operating Income 178.4 180.2 (Billions of yen) 6.4 ROA (Operating income/Assets) Operating income to net sales 3.4% 3.6% 2012 2013 2.6 2012 2013 (FY) Capital expenditures ¥3.2 billion . c n I , s e i r t s u d n I y a r o T 36 4 1 0 2 t r o p e R l a u n n A Summary of Consolidated Financial Results for the Year Ended March 31, 2014 (Fiscal 2013) Environment & Engineering segment net sales increased 1.0% year on year to ¥180.2 billion. Operating income increased 143.4% to ¥6.4 billion. While the market for water treatment membranes has not yet fully recovered reﬂ ecting continued uncertainties over the global economic outlook, shipment of reverse osmosis membranes to the Middle East was strong at Toray. Among domestic subsidiaries, the progress of plant construction projects remained slow at an engi- neering subsidiary. Outlook for the Year Ending March 2015 (Fiscal 2014) We plan to expand sales while vastly cutting costs in the water treat- ment membranes business amid expectations of improving busi- ness conditions worldwide supported by ongoing strong business in Asia and gradually improving conditions in the U.S. and Europe. In the engineering business, we aim to increase orders for indus- trial, solar cell, and lithium-ion battery equipment. Topics Joint Venture Agreement with Abunayyan Holding Company of Saudi Arabia Toray and Abunayyan Holding Company (AHC), of Saudi Arabia, signed an agree- ment to launch Toray Membrane Middle East LLC (TMME) as a joint venture special- izing in water and wastewater treatment technologies in Dammam, Saudi Arabia. TMME will manufacture and sell water treatment membranes and provide tech- nical services and will be launched with an expected ¥8.2 billion in capital funding from AHC and Toray’s water treatment sub- sidiary Toray Membrane Europe AG (TMEu). TMME will construct a world-class re- verse osmosis (RO) membrane element pro- duction plant in Dammam’s Third Industrial City with Toray’s manufacturing technology and plans to commence operations meet- ing global quality control standards in 2015. This new plant by TMME will globally make the Toray Group’s ﬁ fth base of the RO mem- brane elements manufacturing in addition to the Group’s current operational manufac- turing bases in Japan, the U.S., China and South Korea. Intensively Developing and Expanding Businesses Life Science Fiscal Net sales Operating income Assets 2012 56.6 7.5 69.1 2013 58.2 5.6 76.4 Fiscal 2014 forecasts announced on August 7, 2014. Changes 2.8% -24.8% (Billions of yen) 2014 Forecast 60.0 6.5 Net Sales Operating Income 56.6 58.2 7.5 (Billions of yen) 5.6 2012 2013 2012 2013 (FY) ROA (Operating income/Assets) Operating income to net sales 7.7% 9.6% Capital expenditures ¥8.7 billion Summary of Consolidated Financial Results for the Year Ended March 31, 2014 (Fiscal 2013) Life Science segment net sales increased 2.8% year on year to ¥58.2 billion. Operating income declined 24.8% to ¥5.6 billion. Sales of REMITCH®, an oral anti-pruritus drug for hemodialysis patients, expanded robustly, though other pharmaceutical products were affected by intensifying competition and royalty income on some products decreased. In medical devices, sales in Japan as well as exports of FILTRYZER®, polymethylmethacrylate (PMMA) dialysis membrane-based hemodialyzer, and TORAYSULFONE®, polysulfone membrane artiﬁ cial kidneys, grew strongly. *REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. Outlook for the Year Ending March 2015 (Fiscal 2014) The pharmaceutical and medical device markets are expected to grow steadily overall, even as competition continues intensifying from the introduction of a growing number of generic drugs. In these conditions, we will seek to further expand sales of REMITCH® as well as of dialyzers, dialysis equipment, and other medical devices. Toray Medical (Qingdao) Co., Ltd. in China started its production of dialyzers in March 2014 and launched sales for the Japanese market in April. *REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. . c n I , s e i r t s u d n I y a r o T 37 4 1 0 2 t r o p e R l a u n n A Topics New Life Innovation Facilities Established in Minnesota, USA, and Kobe, Japan Toray established new life innovation re- search facilities in the Medical Devices Center of the University of Minnesota in the U.S. and the Kobe Biomedical Innovation Cluster in Japan to strengthen its capabil- ities in research and technology develop- ment for expanding its business in the life innovation ﬁ eld. Minnesota is a major medical indus- try cluster area where some of the world’s most advanced R&D in medical devices is taking place, and Kobe is rapidly becoming a key medical cluster site in Japan. Toray is actively seeking alliances with world’s medi- cal institutions, testing and diagnostic facil- ities, and medical instrument makers in the cluster regions with the aim of accelerat- ing development of medical devices and expanding applications of Toray’s advanced materials for medical devices. The increasing complexity and sophisti- cation of medical practice is creating a need for more direct and rapid exchange of infor- mation. While developing its medical device, pharmaceuticals, and bio tool businesses, Toray is seeking to meet the increasingly sophisticated needs by providing advanced materials to medical device makers and a wide range of materials with advanced func- tionality for use at medical sites. . c n I , s e i r t s u d n I y a r o T 38 4 1 0 2 t r o p e R l a u n n A I N T E G R A T E D Va l u e M a n a g e m e n t Contents 40 R&D and Intellectual Property 45 Sustainable Management 46 CSR Initiatives 52 Corporate Governance 56 Corporate Information Toray Group aims to be a corporate group that delivers exceptional value to each and every one of its stake- holders. Based on its corporate philosophy, “contributing to society through the creation of new value with innovative ideas, technologies and products by creating new value,” the Group advances its global opera- tions through the strategy trinity of Business, R&D, and Intellectual property. At the same time, the Group promotes bolstered safety, accident prevention, and environmental preservation, corporate ethics, and legal compliance to fulﬁ ll its corporate social responsibility (CSR) as its top priority management theme to achieve sustainable growth. . c n I , s e i r t s u d n I y a r o T 39 4 1 0 2 t r o p e R l a u n n A R&D and Intellectual Property Since its founding, Toray has carried out R&D on advanced materials based on the ﬁ rm conviction that “Research and technical development provide the key to building the Toray of tomorrow.” Core Technologies Polymer Chemistry Organic Synthetic Chemistry Biotechnology R & D Bas ic Pol i cy, Feat ur es, and Strengths . c n I , s e i r t s u d n I y a r o T 40 4 1 0 2 t r o p e R l a u n n A Toray R&D Features 1. Culture of Commitment to Basic Research We are creating innovative, advanced materials and grow- ing further. Originated as ﬁ bers & textile materials, our products, such as leading-edge carbon ﬁ ber and water separation membranes for water treatment, are the fruits of many years’ diligent R&D. We have the culture of pri- oritizing basic research unaltered by popular trends with our belief that values the ultimate pursuit as we can make new innovations and discoveries when we continue delv- ing deep into one theme. 2. Specialist Teams in Many Fields Toray’s teams of specialists have abundant knowledge and experience in a wide variety of ﬁ elds including poly- mer design, function enhancement technology, and drug discovery, formulation, and pharmacology, which are appli- cations of our core technologies. 3. Undivided R&D Organization Toray’s R&D organization operates as a single, undivided system led by the Technology Center, which formulates company-wide R&D strategies and plans for key projects. Aiming to be the Global Leader in Advanced Materials Toray Group aims to be the global leader in advanced materials. Following our motto that “innovative products only come with innovative materials,” we are deepening and integrating our four core technologies of organic synthetic chemistry, polymer chemistry, biotechnology, and nanotechnology to pursue innovation and play an active role developing society as well as conserving and existing in harmony with the environment. Fiber Technology Synthetic Fibers Core Technologies Advanced Materials Film Technology Polymer Design High-performance Polymers Specialty Polymers Textile Technology Textiles, Apparels Ultramicro Fiber Technology Film Processing Technology Suede-texture Artificial Leather High-performance Films and Processed Film Products Molding Technology Engineering Plastics Fine Patterning Carbonization Technology l y g o o n h c e t o n a N Fine and Composite Technology Microstructure Control . c n I , s e i r t s u d n I y a r o T 41 4 1 0 2 t r o p e R l a u n n A Electronic Materials Printing Materials Carbon Fibers, Advanced Composite Materials Industrial Materials and Amenity Materials Synthetic Raw Materials High-performance Membranes, Water Treatment Systems Artificial Organs and Medical Devices Fine Chemicals, Veterinary Medicines Medical Chemistry Pharmaceuticals This structure facilitates technology fusion that leads to innovation and enables advanced materials created in one ﬁ eld to be rapidly applied to other ﬁ elds. 4. Leader in Industry-government-academia Collaborative Research External collaboration and open innovation activities with industries, governments, and academic institu- tions in Japan and overseas has made Toray a leader in technology fusion and a producer of first-to-market advanced materials. 5. Advanced Analytical Capabilities Toray is constantly extending the limits of technology through its close relation with Toray Research Center Inc. (TRC). Created from Toray’s Research and Development Division, TRC maintains state-of-the-art, maximum-perfor- mance facilities and provides technical support by apply- ing analytical techniques and physical analysis methods for “cause analysis” and “problem solving” related to R&D and production technology. R&D and Intellectual Property Toray Group’s R&D facilitates fortifying the stable revenue bases and enhancing the earnings of the two Core Growth Driving Businesses of Fibers & Textiles and Plastics & Chemicals. R&D also supplies a steady stream of advanced materials in the Group’s four priority growth ﬁ elds of environment, water-related and energy; information, telecommunications and electronics; automobiles and aircraft; and life science. . c n I , s e i r t s u d n I y a r o T 42 4 1 0 2 t r o p e R l a u n n A R & D R &D Exp enditure an d A chievements Percentages of Total R&D Expenses in Fiscal 2013 FIBERS & TEXTILES 8% PLASTICS & CHEMICALS 14% IT-RELATED PRODUCTS CARBON FIBER COMPOSITE MATERIALS ENVIRONMENT & ENGINEERING LIFE SCIENCE 21% 6% 3% 13% g n i v i r D h t w o r G e r o C s e s s e n i s u B i g n d n a p x E s e s s e n i s u B i g n d n a p x E d n a s e s s e n i s u B y l l a c i g e t a r t S i g n p o l e v e D y l e v i s n e t n I R&D Expenses (Billions of yen) 60 55.5 billion yen 50 40 30 20 10 0 Fiscal/ 09 10 11 12 13 Toray Consolidated subsidiaries HEAD OFFICE R&D 35% Fiscal 2013 R&D Achievements R&D Topics Toray successfully developed synthetic ﬁ ber manufac- turing technology capable of freely combining raw res- ins on the nanometer order and the school uniform industry’s ﬁ rst gym wear made from plant-based poly- ester ﬁ ber. Furthermore, it developed the MIRANY™ textile fabric using the ﬁ nest nylon ﬁ lament yarn of the world’s best quality standards. Toray successfully developed a carbon ﬁ ber-reinforced polyphenylene sulﬁ de (PPS) resin that can be used for injection molding and has comparable tensile strength to aluminum die-cast. It also cooperated with Genomatica, Inc., of the U.S., in successful trial polymerization of a partially biomass-based polybutylene terephthalate (PBT) at a medium-sized facility. Toray developed a heat-resistant photosensitive resist that vastly simpliﬁ es the ion injection processes for sili- con carbide semiconductor device manufacturing. The segment also developed a photosensitive polyimide bonding ﬁ lm with applications as a sealant material for miniaturized electronic components and high-density packaging. Moreover, it achieved the world’s highest degree of carrier mobility for a single-wall carbon nano- tube (CNT) thin-ﬁ lm transistor (TFT) coating. In addition, it developed and marketed a new product using photo- sensitive conductive paste enabling touch panel wiring with 20 µm particle distribution. Toray developed high tensile strength and modulus car- bon ﬁ ber TORAYCA® T1100G and high-performance prepreg using TORAYCA® T1100G. Toray developed a high permeability, high durabil- ity reverse osmosis membrane that operates under ultralow pressure enabling 30% energy saving for water treatment. In amenity products, the segment developed and launched sales of the compact and attractively designed TORAYVINO™ Cassetty 307MX faucet water ﬁ lter with high particle removal performance. Following the positive response to its successful devel- opment and marketing of the REMITCH®* Capsules 2.5 µg, the world’s ﬁ rst oral antipruritus drug with the selec- tive k-opioid receptor agonist for hemodialysis-related refractory pruritus, the Life Science segment received the National Invention Prize, “Inventor’s Award,” for the k-opioid receptor agonist nalfuraﬁ ne hydrochloride. *REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. Corporate Research In the corporate research, Toray achieved the world’s highest level of conversion efﬁ ciency exceeding 10% of a single-layer element for organic membrane solar cells. In new businesses, the adoption of Toray’s high sensitivity DNA microarray 3D-Gene® by the University of Cambridge, in England, prompted accelerating adop- tion of the biomarker measurement technology in the UK and across Europe. T O P I C S 1 Carbon ﬁ ber composite materials for aircraft earns a 13th Okochi Memorial Prize Toray was awarded the 60th Annual (Fiscal 2013) Okochi Memorial Grand Production Prize for its accomplish- ment developing carbon ﬁ ber composite materials for aircrafts. The Company was highly lauded for develop- ing the TORAYCA® T800S/3900-2B prepreg, an interme- diate composite material and establishing its production systems. This composite was selected as a primary structure material by The Boeing Company for its state- of-the-art Boeing 787 model, making it the world’s ﬁ rst commercial aircraft with an all-composite primary struc- ture. The Okochi Memorial Prize is awarded in Japan for outstanding achievements in industrial engineering, R&D of production technologies, and the implementa- tion of advanced manufacturing systems. In the award’s 60-year history, Toray has received the Okochi Memorial Prize 13 times, including in the previous ﬁ scal year, and the prestigious Grand Production Prize three times. T O P I C S 2 Ultralow pressure, high durability reverse osmosis membrane achieves 30% energy saving Toray successfully increased number of ﬁ ne pores in minute space in separating function layer material for improved water permeability while blocking other mol- ecules, such as sodium ions. It enables separation function layers to be formed with resistance to pore- structural deterioration and superior durability even for chemical cleaning. These new developments in RO membrane tech- nology maintained the outstanding substance removal performance while improving water permeability by 1.5 times, enabling water treatment with lower pres- sure and resulting in energy saving of about 30%. The membrane is expected to contribute to reduction of water treatment costs for wastewater treatment and other applications where low water quality requires more frequent treatment. Toray is aiming to commercially launch the “ultralow pressure, high durability RO membrane” in 2014 and actively introduce it to the rapidly expanding Asian markets including China and India as well as Europe, North America, and other regions. . c n I , s e i r t s u d n I y a r o T 43 4 1 0 2 t r o p e R l a u n n A R&D and Intellectual Property I N T E L L E C T U A L P R O P E R T Y Basic Policy and Priority Strategies . c n I , s e i r t s u d n I y a r o T 44 4 1 0 2 t r o p e R l a u n n A Intellectual property strategies must be organically linked to business strategies and R&D strategies. Toray pursues an intellectual property strategy with coordination of these three areas in line with management policies. While continuing to create innovative new materials and technologies, Toray seeks to ﬁ rmly maintain its tech- nical advantages by pursuing an intellectual property strat- egy comprising the following four points, the realization of which would be entry barriers for competitors. 1. Further enhance the quality of patents 2. Construct a globally competitive network of patents 3. Protect the Company’s technical advantages with effec- tive measures including strategic patent applications 4. Cultivate personnel with deep knowledge of overseas intellectual property The Company is currently stepping up patent applications and rights acquisitions and constructing a strong patent portfolio globally with a priority in the growth areas of the Project AP-G 2016 medium-term management program’s Green Innovation Business Expansion (GR) Project and Life Innovation Business Expansion (LI) Project. Under the Asia, America and Emerging Country Business Expansion (AE-II) Project, the Company is formulating and advancing intellectual property strategies correlated with the business strategies and R&D strategies that Toray Group is implementing globally with a focus on growth countries and regions showing promise for future business expan- sion. While fortifying Toray’s patent applications and rights acquisitions overseas, Toray Group companies overseas are also stepping up patent application and rights acquisition activities to properly protect inventions created at Group R&D bases worldwide. Toray Patents Filed in Year Ended March 31, 2014 1,580 Overseas Domestic 3,445 Total Patents Held to Date Overseas Domestic 886 1,205 In ﬁ scal 2013, Toray Group ﬁ led 1,580 patent applications in Japan and 3,445 overseas, and 886 patents in Japan and 1,205 overseas of them were registered. Toray publishes an annual Intellectual Property Report describing the intellectual property initiatives by Toray Group. The report is available for download at: http://www.toray.com/ir/library/lib_005.html S U S T A I N A B L E M a n a g e m e n t The Fifth CSR Road Map Creation of New Value Governance • Contributing solutions to social issues through business activities • Corporate governance and management transparency • Corporate ethics and legal compliance • Risk management CSR Guidelines • Train personnel and promote human rights • Product safety and quality • Facilitate CSR initiatives throughout the supply chain • Communication • Social contribution activities • Emphasize safety, accident prevention, and environ- mental preservation . c n I , s e i r t s u d n I y a r o T 45 4 1 0 2 t r o p e R l a u n n A Society Environment We regard safety, accident prevention and environmental preservation as well as corporate ethics and legal compliance as the most important management priorities for Toray Group. Our goal is to earn respect and support in the international community and provide high value for all stakehold- ers by contributing to society through our core business activities. Sustainable Management CSR Initiatives Toray Group’s Corporate Philosophy and CSR Activities Toray’s Management Philosophy and Code of Conduct . c n I , s e i r t s u d n I y a r o T 46 4 1 0 2 t r o p e R l a u n n A Management Philosophy Corporate Philosophy Declaration outlining the obligations of Toray Group as a good corporate citizen Corporate Missions Basic objectives are based on a breakdown of the Corporate Philosophy as related to each type of stakeholder Corporate Guiding Principles Putting the Corporate Philosophy and the Corporate Mission into practice together with the aims and goals of each and every employee Corporate Ethics and Legal Compliance Code of Conduct Concrete standards relating to ethics and compliance with laws and regulations Toray Group views the objective of CSR to be to realize sustainable social and corporate development by apply- ing “Response + Ability” to social issues and changes. Throughout our history, our mission has been to con- tribute to society through our core business activities following our Corporate Philosophy of “contributing to society through the creation of new value with innovative ideas, technologies and products,” and our Management Philosophy is to realize this mission by fulﬁ lling our CSR. Our Management Philosophy is also supported by our Corporate Ethics and Legal Compliance Code of Conduct, which provide a reference for speciﬁ c stan- dards of conduct for all employees. Progress we have achieved in implementing the Company’s Fourth CSR Road Map launched in ﬁ scal 2011 includes life cycle management (LCM) analysis of our core products, the achievement and third-party veriﬁ cation of greenhouse gas (GHG) emissions reduc- tion targets, reorganization of our CSR procurement structure, creation of a business continuity plan (BCP) for earthquakes, and improvement of our priority risk response preparedness. We also established interdepartmental working groups and improved our response structure to incorpo- rate newly emerging issues, such as conﬂ ict minerals. Environmental Management Initiatives Promotion of LCM-based Environmental Management Toray Group’s approach to environmental management is based on lifecycle management (LCM). With the LCM concept, all business activities are viewed from the per- spective of product and service lifecycles. The aim is to improve economic and social value while reducing environmental loads. Our Green Innovation products all embody this concept. Our LCM initiatives include the introduction of lifecycle assessment and the T-E2A efﬁ - ciency analysis tool. We are now working to disseminate and consolidate these concepts. The International Council of Chemical Associations and the World Business Council of Sustainable Development in October 2013 published international guidelines for accounting for and reporting greenhouse gas emissions. Toray and the Japan Chemical Industry Association played a central role in the creation of the publication. The new guidelines are another step toward interna- tional recognition of the Japanese guidelines published in February 2012 and are drawing attention as a Japan- led movement for standardization that will inﬂ uence the direction of rules governing the measurement of CO2 emissions while also promoting widespread adoption of the fundamental principles of the Toray LCM-based Environmental Management. Initiatives to Fight Global Warming Toray Group was an early adopter of greenhouse gas (GHG) reduction initiatives aimed at realizing a sustain- able low-carbon society. Under the Fourth Medium- Term Environmental Plan launched in ﬁ scal 2011, the Group has systematically implemented measures to reduce GHG emissions, including improving its pro- cesses to conserve energy and installing gas cogene- ration systems. Voluntary Reduction in Atmospheric Emission of Chemical Substances Toray Group regards the reduction of environmental loads, including releases of chemical substances into the atmosphere, as one of its most important priorities. We are working to achieve this goal through group- level initiatives. Under the Fourth Medium-Term Environmental Plan, launched in April 2011, we are systematically imple- menting voluntary initiatives to resolutely achieve the targets of ﬁ scal 2015 for reducing emissions of sub- stances covered by the PRTR law and volatile organic substances (VOCs). Initiatives to Prevent Air and Water Pollution Toray Group’s environmental preservation activities include permanent measures to prevent air and water pollution at its production facilities. Efforts in Japan and overseas in recent years include installing desulfurization systems, converting to alternative fuels to reduce sulfur oxide (SOx) emissions, and expanding our wastewater treatment facilities and other measures to lower chemi- cal oxygen demand (COD) levels. Water Resource Management Initiatives Toray Group, through its water treatment business, is addressing water resource issues around the world based on the following principles. The Group also takes steps to ensure the proper management of water resources used in its business activities, including using recycled water to enhance water usage efﬁ ciency. 1. Toray Group recognizes that water is one of the most important resources for humanity, and that people are confronting problems related to water resources in many areas of the world. 2. Toray Group is committed to helping to solve global water resources problems through its products, tech- nologies and services. 3. Toray Group continuously monitors the state of regional water resources, and conducts appropriate management of water resources according to the basic principle of sharing precious water resources with the local communities where the Group operates. Initiatives to Reduce Waste Toray Group is seeking to achieve zero waste emissions to help create a sustainable, recycling-oriented society. The Group is implementing measures to achieve the Fourth Medium-Term Environmental Plan’s ﬁ scal 2015 numerical targets for simply disposed waste, landﬁ ll, and recycling ratios set as indicators for measuring progress toward attaining zero emissions. Biodiversity Conservation Initiatives Together with the reduction of greenhouse gas emis- sions, biodiversity conservation is recognized by Toray Group as a key global environmental priority. Our initia- tives relating to biodiversity conservation and sustain- able use are guided by the Toray Group Biodiversity Basic Policy, which was adopted in 2010. In line with the policy, the Group is consolidating its biodiversity conservation measures, formulating three- year road maps, and prioritizing the implementation of new initiatives. In 2013, Toray Group launched a new set of measures under the Second Three-year Road Map of environmental measures for the ﬁ scal years 2013 to 2015, which focuses mainly on activities to increase and preserve greenery. . c n I , s e i r t s u d n I y a r o T 47 4 1 0 2 t r o p e R l a u n n A Sustainable Management CSR Initiatives . c n I , s e i r t s u d n I y a r o T 48 4 1 0 2 t r o p e R l a u n n A CSR Procurement and Purchasing CSR Procurement and Purchasing Activities As a manufacturer of advanced materials, Toray places considerable importance on source control linked to end- user needs in a number of areas, such as raw materials used to make the materials and products that it supplies, and also in relation to its production facilities. This per- ception, and our commitment to fair trade, are reﬂ ected in our Basic Purchasing Policies. We have also formulated CSR Procurement Guidelines, which call for the devel- opment of value chains that allow us to fulﬁ ll our social responsibilities in partnership with our suppliers, and for Training and Human Rights Promoting Human Rights Toray Group regards respect for human rights as a vital aspect of its business operations. In addition to our efforts to improve awareness of human rights, we totally prohibit discrimination based on ethnicity, beliefs, gen- der, educational background, nationality, religion, physi- cal characteristics or other attributes. This prohibition applies to recruitment activities, deployment, remuneration, education and retirement. In compliance with international rules, including the United Nations Universal Declaration of Human Rights and the ILO Convention, we also prohibit forced labor and child labor. In addition, we are committed to full compliance with the laws and regulations of each country and region. Retaining and Nurturing Employees who Generate New Value Toray Group’s “commitment to employees” is stipulated in its Corporate Guiding Principles. The Group’s basic policy regarding core staff is to provide stable, continu- ous employment based on a long-term outlook, irrespec- tive of economic trends and corporate performance. In addition, we do not make employment adjustment for short-term purposes. the supply of environmentally and socially responsible materials and products to our customers. Toray has also adopted CSR procurement compliance rules covering all corporate activities to ensure that it is able to provide cus- tomers with accurate reports about its CSR initiatives. Toray has established contact points for CSR procure- ment, through which we manage and internally share customer and supplier information. Environmentally Conscious Distribution Policies Toray’s Basic Distribution Policies deﬁ nes key policies relating to the equity and fairness of business transac- tions, and to environmental preservation. In addition to our ongoing efforts to reduce logistics-related environ- mental loads and improve quality, we also hold annual brieﬁ ngs on our Basic Distribution Policies to ensure that our logistics partners are fully conversant with Toray poli- cies on logistics, and to enhance performance. The Group is actively working to expand its global businesses and is stepping up activities in Japan and overseas to recruit and cultivate strongly motivated and highly skilled employees with global capabilities. With the aim of cultivating fair-minded individuals with high ethical standards and a sense of responsibil- ity as well as professionals and leaders with foresight and a sense of balance, the Group provides a wide range of training for employees at all levels and in all ﬁ elds to strengthen management capabilities, augment sales capabilities, production technology skills, and special- ized expertise, and develop abilities to adapt to a global- izing environment. Promoting Diversity Toray Group promotes diversity to help create thriving workplaces where people from diverse backgrounds can perform to their full potential. Throughout its history, Toray has actively employed women and sought to provide comfortable work environ- ments for them. The number and percentage of women holding management positions continues to rise each year as a result of ongoing improvements in its pro- motion structure and revisions to employee programs, including the introduction of a childcare leave program in 1974, almost 20 years before its establishment as law. As in April 2014, 7.95% of unit manager positions or higher, and 4.17% of section manager positions or higher were held by women. . c n I , s e i r t s u d n I y a r o T 49 4 1 0 2 t r o p e R l a u n n A Communication Activities All of our business activities depend on good dialog with stakeholders. Toray Group is committed to com- munication in good faith, including the timely disclo- sure of accurate information, as the basis for mutual understanding with our wide-ranging stakeholders, including stockholders, customers, employees and local communities. Stakeholder Communication One way we communicate with stockholders and inves- tors is through quarterly ﬁ nancial presentations. We also hold requisite brieﬁ ngs for individual investors. In addition, we communicate directly with investors and analysts in individual meetings, as required. We also ensure fair disclosure of information by dis- tributing annual reports and other documents, and by posting information that is useful to stockholders and investors on our website. Toray lives up to its reputation for putting the customer ﬁ rst by actively communicating with our customers, primar- ily through our sales and marketing divisions. We also partic- ipate in many exhibitions and brieﬁ ngs targeted customers. The Group communicates with employees through in-house publications, intranet, and other various media presenting messages from the President and other infor- mation in Japanese, English, and Chinese to share infor- mation and deepen understanding of management and business topics. Toray Group also highly values dialogue between its Group companies, ofﬁ ces and factories and their local communities in Japan and overseas, and regularly holds social gatherings with local residents. We also seek to maintain good relations with people from the local com- munities by efforts such as presentation meetings about our business activities and products as well as river and road cleanup activities around our factory sites. While Toray has presented comprehensive informa- tion in English on our corporate websites, we launched web pages for India and Taiwan on the heels of con- tent for the U.S., Malaysia, and Thailand, speciﬁ cally for local viewers. We are also preparing to open pages for Singapore, Europe, Brazil, and South Korea. Furthermore, Toray Group has now provided the updated corporate website with responsive web design to enable viewers to browse not only PCs but smartphones, tablets, and other various devices with optimal design. Principal SRI indexes in which Toray is included • FTSE KLD Global Climate 100 Index • Morningstar Socially Responsible Investment Index (as of March 31, 2014) Sustainable Management CSR Initiatives . c n I , s e i r t s u d n I y a r o T 50 4 1 0 2 t r o p e R l a u n n A Social Contribution Activities In ﬁ scal 2013, Toray Industries contributed approxi- mately ¥800 million in funding and the Toray Group pro- vided a total of approximately ¥1.1 billion for CSR activities. Our Social Contribution Policy Through our core business activities, we fulﬁ ll our Corporate Philosophy of “contributing to society through the creation of new value with innovative ideas, technologies and products.” We also contribute to soci- ety in various other ways under the Toray Group Social Initiative Policies. Our wide-ranging activities include the provision of funding for the Toray Science Foundation (Public Interest Incorporated Foundation), which was founded in 1960. Contributing to Future Generations Children will inherit the future. Toray Group supports education by providing products, technology and human resources. Employees act as special instruc- tors for elementary and junior high school programs that teach children to enjoy scientiﬁ c experiments and understand the role of technology in solving global envi- ronmental problems. Toray and Toray Research Center Inc. host science camps, which are science and tech- nology experiment programs for high school students with an interest in science. Front-line researchers and engineers use experiments and other activities to pro- vide direct instruction to high schools students from throughout Japan. Topic TORAYSCUE® Used for Disaster Relief in the Philippines Toray Group, through an intermediary NGO, donated two TORAYSCUE® portable freshwater generators to the Philippines to assist relief operations in areas devastated by Typhoon Haiyan in November 2013. The TORAYSCUE® freshwater generators incorporate reverse osmosis membranes, which Toray developed and have been used for many seawater desalination projects. The generator leverages pressurization to ﬁ lter out not only bacteria, viruses, and ﬁ ne particles, but salts, heavy metals, and organic substances from water and produce highly pure and safe drinking water. Toray speciﬁ cally designed the generators to be portable and enable their use to secure drinking water in disaster emergencies. Toray received a request of TORAYSCUE® from Operation Blessing Japan*, a speciﬁ ed nonproﬁ t corpo- ration that started quickly performing emergency relief efforts in the disaster-stricken area. The NPO had pre- viously expressed interest in the freshwater generators, and Toray donated the TORAYSCUE® units to ensure affected people secured a sufﬁ cient supply of safe water following the typhoon disaster. Operation Blessing Japan team members, who received instructions from Toray, taught local residents on the use of the equipment. In the areas where the two generators were set up, people expressed heart- felt appreciation for the aid and also commented on the good taste of the water. Toray Group will continue using its technology and products to help resolve social issues, while collaborat- ing with NPOs and NGOs, as it aims to maintain its sta- tus as a corporate group with high social value. * Operation Blessing Japan’s parent organization, Operation Blessing Inter- national Relief and Development Corporation, is headquartered in Vir- ginia, the U.S., and is one of the world’s largest charity groups providing clean water, disaster relief, medical aid, and other assistance programs. Established after the Great East Japan Earthquake, the organization is conducting disaster relief and reconstruction support programs. Pagnamitan Village in Guiuan, Eastern Samar Province, on Samar Island (Program launched January 21, 2014) TORAYSCUE® freshwater generators are providing drink- ing water, until new wells are dug, for approximately 300 households in Pagnamitan Village and the neighboring area. Pagnamitan Village was where Typhoon Haiyan made landfall. . c n I , s e i r t s u d n I y a r o T 51 4 1 0 2 t r o p e R l a u n n A Bantigue Village in Panay, Capiz Province, on Panay Island (Program launched February 27, 2014) The village of Bantigue was particularly devastated by the typhoon, with approximately 90% of the homes destroyed and the wells contaminated with salt- water. A Philippines military ship helped deliver the TORAYSCUE® units, which were used to provide daily drinking water for some 400 households in the village and on nearby islands. All photographs are courtesy of Operation Blessing Japan For more information on CSR, please see: http://www.toray.com/csr/ Sustainable Management Corporate Governance . c n I , s e i r t s u d n I y a r o T 52 4 1 0 2 t r o p e R l a u n n A Toray Group’s Basic Policy on Corporate Governance Toray Group’s basic policy on corporate governance is contained in its Corporate Missions, which requires the Group to provide stockholders with dependable and trustworthy management. The Corporate Guiding Principles require the Group to obtain the trust of soci- ety and meet its expectations by acting fairly while maintaining high ethical standards and a strong sense of responsibility as well as maintaining transparency in management. Toray’s management structure has been designed to facilitate the realization of these objectives. Outline of Corporate Governance Structure and Reasons for Adoption Toray’s Board of Directors is made up of 26 members. As Toray is a manufacturer that supplies basic materials to a broad range of industries, it needs to make various man- agement and business decisions based on expert knowl- edge concerning speciﬁ c businesses. In addition, under Toray’s governance structure, members of the Board with extensive knowledge of its business activities who are elected at general stockholders’ meetings make deci- sions and execute business under supervision conducted from diverse viewpoints from the perspective of fulﬁ lling management’s responsibilities to stockholders. In order to further enhance the transparency and objectivity of management by supervising members of the Board from a broader perspective, Toray elected one outside director at the Ordinary General Meeting of Stockholders held on June 25, 2014. Toray operates under a corporate auditor system. Two members of the four-member Board of Corporate Auditors are outside corporate auditors. The corporate auditors conduct auditing activities based on expertise and abundant experiences concerning corporate legal affairs as well as ﬁ nancial and accounting affairs. Toray operates under a corporate auditor system. To ensure management transparency, as well as objectivity and neutrality in management oversight, the Company has a Board of Corporate Auditors that is fully independent of the Board of Directors. Basic Policy on Internal Control Systems and Their Development We develop and maintain internal control systems as a framework for the development of appropriate orga- nizational structures, the formulation of rules and reg- ulations, the dissemination of information and the monitoring of business operations. The purpose of these systems is to ensure that all Toray Group executives and employees are able to realize the Corporate Philosophy, Corporate Missions and Corporate Guiding Principles of Toray Group, as expressed in the words “contributing to society through the creation of new value with innova- tive ideas, technologies and products.” We review and improve these systems as required to ensure that our business operations are conducted efﬁ ciently and in compliance with the law. The following speciﬁ c systems have been established. (cid:129) System to ensure that the execution of duties by members of the Board and employees comply with laws and regulations and the Company’s Articles of Incorporation (cid:129) System to ensure the efﬁ cient execution of duties by members of the Board execute their duties efﬁ ciently (cid:129) System for preserving and managing information pertaining to the execution of duties by the members of the Board (cid:129) Rules and other systems pertaining to controls over risks of loss (cid:129) System of reporting to corporate auditors and other systems for ensuring effective implementation of audits by corporate auditors (cid:129) Items pertaining to employees assisting with corporate auditors’ duties and items pertaining to the indepen- dence of said employees (cid:129) System for ensuring appropriate business operations by Toray Group Governance Structure Toray Group is determined to justify the trust placed in it by society by working in good faith to maintain highly transparent governance systems. General Stockholders Meeting Election Election Election Audit Board of Corporate Auditors Audit Board of Directors Resolution Auditing Department President Approval Deliberations Council Executive Committee and Board of Senior Vice Presidents Accounting Auditor Internal audit Audit Management execution Company-wide Committees CSR Committee Toray’s Divisions and plants Japanese subsidiaries and afﬁ liates Overseas subsidiaries and afﬁ liates Departmental Committees Auditing by Corporate Auditors, Internal Auditors The corporate auditors, including the outside corporate auditors, possess considerable expertise concerning ﬁ nancial and accounting affairs. In ﬁ scal 2013, too, they attended meetings of the Board of Directors, and held meeting with all members of the Board, divisional and departmental general managers and conducted periodic audits of Toray ofﬁ ces and plants worldwide, including subsidiaries and afﬁ liated companies. The corporate auditors also work closely with internal control organizations. For example, they attend as observ- ers at meetings of the Corporate Ethics Committee, which was established to promote corporate ethics and regu- latory compliance as key elements of corporate social responsibility, and the Company-Wide Legal Compliance Committee. The Audit Department, which reports directly to the President, was established as part of our internal control structure. Its task is to conduct internal audits of Toray and its subsidiaries and afﬁ liated companies. Information is continually exchanged. For example, all audit reports submitted to the President by the Audit Department are also submitted to the corporate auditors. . c n I , s e i r t s u d n I y a r o T 53 4 1 0 2 t r o p e R l a u n n A Remuneration (I) Details of Remuneration Position Total remuneration (millions of yen) Total remuneration by type (millions of yen) Basic Bonuses Provision for the allowance for retirement beneﬁ ts 18 Stock options as remuneration 248 Members of the Board 1,535 1,124 146 Corporate auditors (excluding outside corporate auditors) Outside corporate auditors 86 21 79 19 7 2 — — — — Notes: 1. Recipients included two directors who retired during ﬁ scal 2013, and one corporate auditor (excluding outside corporate auditors). 2. Total amounts of remuneration do not include ¥84 million paid in salaries to eight employee-directors. Recipients 28 3 2 Sustainable Management Corporate Governance (II) Total Remuneration Received by Members of the Board and Corporate Auditors Name Total consolidated remuneration (millions of yen) Position Status of company Basic Bonuses Sadayuki Sakakibara Akihiro Nikkaku 151 134 Member of the Board Filing company Member of the Board Filing company 115 98 15 15 Note: Information about consolidated remuneration is shown only for persons receiving more than ¥100 million. Total remuneration by type (millions of yen) Provision for the allowance for retirement beneﬁ ts — Stock options as remuneration 21 — 21 . c n I , s e i r t s u d n I y a r o T 54 4 1 0 2 t r o p e R l a u n n A (III) Policy on Remuneration for Members of the Board and Corporate Auditors Remuneration for members of the Board and corporate auditors consists of monthly remuneration, a bonus and stock acquisition rights in the form of stock options. The purpose of this structure is to ensure management trans- parency and fairness, and to provide enhanced incentives for the improvement of ﬁ nancial performance and corpo- rate value in the short-, medium- and long-term perspec- tives. Remuneration for corporate auditors consists of monthly remuneration and a bonus. Furthermore, the amount of remuneration for mem- bers of the Board and corporate auditors is set at suf- ﬁ cient levels to secure capable personnel and provide motivation to enhance business performance while tak- ing into account the results of research conducted by a third-party organization to ensure objectivity. The maximum total amount of monthly remunera- tion is determined by resolution at the Ordinary General Meeting of Stockholders. Resolutions are passed as required to determine whether or not bonuses should be paid and the amount of such bonuses. Ordinary General Meetings of Stockholders set upper limits for the number of stock options granted to mem- bers of the Board as remuneration, and for the total amount of remuneration provided. The Board of Directors determines the number of stock options granted to members of the Board within those limits according to internal regulations established by the Company. Corporate Ethics and Legal Compliance All of us at Toray Group are working as one to uphold cor- porate ethics and ensure legal compliance in accordance with clear guidelines established by and under the lead- ership of the top management. Framework for Promoting Corporate Ethics and Legal Compliance Toray has established a Corporate Ethics Committee under the chairmanship of the President as a framework for coop- erative initiatives by labor and management. This commit- tee deliberates on all policies pertaining to corporate ethics. The Company-Wide Legal Compliance Committee works under the auspices of the Corporate Ethics Committee to pro- mote independent activities, and is speciﬁ cally tasked with advancing initiatives relating to company-wide priorities. The committee’s administration is based on close communica- tion between committee members, who are mainly section managers from each business line, and top management. All divisions, ofﬁ ces and plants have established CSR/ Legal Compliance Committees to carry out activities in- volving individual employees in their workplaces. Subsidiaries and afﬁ liated companies in Japan and overseas have also established CSR/Legal Compliance Committees and are promoting activities in cooperation with Toray’s relevant divisions and the CSR Operations Dept. To ensure that all executives and employees, includ- ing contract, part-time and temporary employees, are fully informed about compliance requirements, we dis- tribute copies of the Corporate Ethics and Legal Compli- ance Handbook, which deﬁ nes standards of conduct and provides detailed information about matters that require special care. The Handbook is updated as required, such as when laws and regulations are amended. The subsidiaries and afﬁ liated companies in Japan and overseas that established CSR/Legal Compliance Committees are working to ensure consistent compli- ance by compiling similar codes of conduct, guidelines, handbooks and other materials. Framework for Promoting Corporate Ethics and Legal Compliance in Toray Corporate Ethics Committee * Chaired by Toray’s company president Company-wide Legal Compliance Committee Division-and Plant-level CSR/Legal Compliance Committees Risk Management We regard risk management as a fundamental element in the corporate management of Toray Group. Under our corporate risk management policies, which are admin- istered over three-year cycles, we aim to identify and reduce potential risk factors in our business activities and prevent recurrences. We have also formulated Crisis Management Regulations as the basis for the devel- opment and administration of an Emergency Quick Response System designed to prevent emergency situa- tions from expanding and ensuring the early restoration of normal operations. Developing Risk Management System Toray has established the Group-wide Risk Management Committee under the CSR Committee in order to moni- tor the status of company-wide risk reduction efforts in normal times and to manage the functions of planning and promotion of company-wide risk management mea- sures in an integrated manner. Moreover, the Company has established risk manage- ment subcommittees at divisions, business ofﬁ ces and plants, and they are engaging in activities to prevent and reduce risks speciﬁ c thereto. Group companies are also promoting activities to reduce risks speciﬁ c to themselves and report the sta- tus of activities each ﬁ scal year to the Group-Wide Risk Management Committee. Under the corporate risk management system intro- duced in ﬁ scal 2008, we evaluate potential risk factors that could affect the business operations of Toray Group from a group-wide perspective. The system is managed based on the PDCA cycle. Dealing with Priority Risks Risk reduction measures relating to priority risks are implemented by the units responsible for each risk category, or by working groups. The Group-Wide Risk Management Committee receives regular reports about priority risks and assesses progress toward the reduction of risks after seeking input from the director in charge of each area. Working groups are established to take action in relation to the following types of priority risks. 1. Information security risks Toray continued to use e-learning to provide secu- rity training. In ﬁ scal 2013, a total of 8,200 employees have completed this program. 2. Supply-chain risks Toray Group checked the status of use of conﬂ ict min- erals with regard to all products manufactured by the group and ensured that customer inquiries are answered promptly and efﬁ ciently based on central management of data. Crisis Management System Toray’s Crisis Management Regulations set out basic principles for a group-wide response to serious risks affecting Toray Group. The purpose of the regulations is to ensure a consistent and comprehensive response in a crisis situation. The regulations are revised as appropriate so as to prepare for new risks that may emerge as a result of change in the social environment. Security Trade Administration Toray maintains strict control over exports of all prod- ucts, equipment, materials and samples and provision of technologies to overseas entities, with particular emphasis placed on control over items which are sub- ject to the list control and whose exports require per- mission by the Minister of Economy, Trade and Industry, such as TORAYCA® resin compounds, carbon ﬁ ber com- posite materials, coatings for semiconductors and water treatment membranes. Promotion of Business Continuity Plan (BCP) We have always regarded major earthquakes as a signiﬁ - cant risk factor and conducted activities under our Major Earthquake Business Continuity Plan. In ﬁ scal 2013, we assumed a scenario in which it is impossible to establish a Company-Wide Response Headquarters in Tokyo because the capital has been directly hit by a major earthquake. Under this sce- nario, we conducted drills for the establishment of an emergency Company-Wide Response Headquarters in Kansai and for the transfer of the response function to a Company-Wide Response Headquarters in Tokyo after the restoration of the Tokyo Head Ofﬁ ce. Toray has introduced a system to check the safety and whereabouts of employees at all of its ofﬁ ces and plants and is also introducing a similar system at afﬁ liated com- panies in Japan. In addition, we are continually working to mitigate risk factors that could affect business continuity by systemati- cally implementing earthquake-prooﬁ ng of plant buildings, reviewing continuity planning for corporate functions and key business operations and identifying potential prob- lems affecting supply chains for each product. . c n I , s e i r t s u d n I y a r o T 55 4 1 0 2 t r o p e R l a u n n A Corporate Information Board of Directors and Corporate Auditors (As of June 25, 2014) . c n I , s e i r t s u d n I y a r o T 56 4 1 0 2 t r o p e R l a u n n A Chairman of the Board Sadayuki Sakakibara President and Representative Member of the Board Akihiro Nikkaku Executive Vice President and Representative Member of the Board Eizo Tanaka Executive Vice President and Representative Member of the Board Nobuo Suzui Executive Vice President and Representative Member of the Board Koichi Abe Senior Vice President (Member of the Board & Member of the Executive Committee) Senior Vice President (Member of the Board & Member of the Executive Committee) Senior Vice President (Member of the Board & Member of the Executive Committee) Senior Vice President (Member of the Board & Member of the Executive Committee) Senior Vice President (Member of the Board & Member of the Executive Committee) Moriyuki Onishi Shinichi Okuda Kazushi Hashimoto Ryo Murayama Yukichi Deguchi Senior Vice President (Member of the Board) Senior Vice President (Member of the Board) Senior Vice President (Member of the Board) Senior Vice President (Member of the Board) Senior Vice President (Member of the Board) Senior Vice President (Member of the Board) Senior Vice President (Member of the Board) Akira Uchida Shogo Masuda Akira Umeda Hiroshi Murakami Akio Sato Hiroshi Otani Satoru Hagiwara Vice President (Member of the Board) Vice President (Member of the Board) Vice President (Member of the Board) Vice President (Member of the Board) Vice President (Member of the Board) Vice President (Member of the Board) Vice President (Member of the Board) Minoru Yoshinaga Kunihiko Yoshida Toru Fukasawa Yasuo Suga Hirofumi Kobayashi Masashi Fujita Kazuhiko Shutou Vice President (Member of the Board) Vice President (Member of the Board) Tetsuya Tsunekawa Kunio Ito*1 Corporate Auditor Kiyoshi Fukuchi Corporate Auditor Motoyuki Yagita Corporate Auditor Mitsuaki Yahagi*2 Corporate Auditor Makoto Matsuo*2 *1 Kunio Ito is outside director. *2 Mitsuaki Yahagi and Makoto Matsuo are outside corporate auditors. Organization (As of July 1, 2014) Board of Directors Corporate Strategic Planning Division President & Executive Vice President Personnel & Industrial Relations Division General Administration & Legal Division Executive Committee & Board of Senior Vice Presidents Board of Corporate Auditors Corporate Auditors . c n I , s e i r t s u d n I y a r o T 57 4 1 0 2 t r o p e R l a u n n A Finance & Controller’s Division Investor Relations Dept. Corporate Communications Dept. Auditing Dept. Intellectual Property Division Information Systems Division Purchasing & Logistics Division International Division Advertising Dept. Corporate Marketing Planning Dept. Automotive Material Strategic Planning Dept. Global Environment Business Strategic Planning Dept. Life Innovation Business Strategic Planning Dept. Branch Afﬁ liated Companies Division Fibers & Textiles Division Resins & Chemicals Division Films Division Torayca & Advanced Composites Division Electronic & Information Materials Division Pharmaceuticals & Medical Products Division Water Treatment & Environment Division Product Safety & Quality Assurance Planning Dept. Regulatory Compliance Division Technology Center Manufacturing Division Engineering Division Research & Development Division . c n I , s e i r t s u d n I y a r o T 58 4 1 0 2 t r o p e R l a u n n A Toray Group Worldwide Network (Major consolidated subsidiaries and afﬁ liates) (As of March 31, 2014) Toray Group operates businesses in 25 countries and regions including Japan. Consolidated subsidiaries Subsidiaries accounted for by equity method Total subsidiaries Afﬁ liates accounted for by equity method Companies subject to consolidation Japan Overseas Total 62 27 89 13 97 159 29 126 56 215 25 38 102 151 253 EUROPE United Kingdom Consolidated Subsidiaries ● Toray Textiles Europe Ltd. (TTEL) ■ Toray International U.K. Ltd. (TIUK) France Consolidated Subsidiaries ■ ● Toray Films Europe S.A.S. (TFE) ■ Toray Carbon Fibers Europe S.A. (CFE) Switzerland Subsidiary Accounted for by Equity Method ● Toray Membrane Europe AG (TMEu) Italy Consolidated Subsidiary ● Alcantara S.p.A. Subsidiary Accounted for by Equity Method ■ Toray International Italy S.r.l. (TIIT) Czech Republic Consolidated Subsidiary ● Toray Textiles Central Europe s.r.o. (TTCE) Germany Consolidated Subsidiaries ■ Toray International Europe GmbH (TIEU) Others ASIA China Consolidated Subsidiaries ■ Toray Industries (China) Co., Ltd. (TCH) ● Toray Fibers (Nantong) Co., Ltd. (TFNL) ● Toray Sakai Weaving & Dyeing (Nantong) Co., Ltd. (TSD) ● Toray Polytech (Nantong) Co., Ltd. (TPN) ● Toray Jifa (Qingdao) Textile Co., Ltd. (TJQ) ■ ● Toray Plastics (China) Co., Ltd. (TPCH) ■ ● Toray Plastics (Shenzhen) Ltd. (TPSZ) ■ ● Toray Plastics (Chengdu) Co., Ltd. (TPCD) ■ ● Toray Plastics Precision (Hong Kong) Ltd. (TPPH) ■ ● Toray Plastics Precision (Zhongshan) Ltd. (TPPZ) ■ Toray Industries (H.K.) Ltd. (THK) ■ Toray International (China) Co., Ltd. (TICH) ■ Toray Film Products (Hong Kong) Ltd. (TFH) ■ Toray Film Products (Zhongshan) Ltd. (TFZ) ● Toray BlueStar Membrane Co., Ltd. (TBMC) ■ Toray Medical (Qingdao) Co., Ltd. (TMQ) Others Afﬁ liate Accounted for by Equity Method ■ Yihua Toray Polyester Film Co., Ltd. (YTP) Taiwan Consolidated Subsidiary ■ Toray Advanced Film Kaohsiung Co., Ltd. (TAFK) Subsidiary Accounted for by Equity Method ■ Toray International Taipei Inc. (TITP) Others Republic of Korea Consolidated Subsidiaries ● ■ ● Toray Advanced Materials Korea Inc. (TAK) ● STEMCO, Ltd. (STEMCO) ● ■ ● Toray Chemical Korea Inc. (TCK) Afﬁ liates Accounted for by Equity Method ● STECO, Ltd. (STECO) Others Malaysia Consolidated Subsidiaries ● Penfabric Sdn. Berhad (PAB) ● ■ ● Penﬁ bre Sdn. Berhad (PFR) ■ ● Toray Plastics (Malaysia) Sdn. Berhad (TPM) Others Subsidiary Accounted for by Equity Method ■ Toray Industries (Malaysia) Sdn. Berhad (TML) Afﬁ liate Accounted for by Equity Method Indonesia Consolidated Subsidiaries ● P.T. Acryl Textile Mills (ACTEM) ● P.T. Century Textile Industry Tbk (CENTEX) ● P.T. Easterntex (ETX) ● P.T. Indonesia Synthetic Textile Mills (ISTEM) ● P.T. Indonesia Toray Synthetics (ITS) ● P.T. Toray Polytech Jakarta (TPJ) Subsidiaries Accounted for by Equity Method ■ P.T. Toray Industries Indonesia (TIN) ■ Toray BASF PBT Resin Sdn. Berhad (TBPR) Others Singapore Consolidated Subsidiary ■ Toray International Singapore Pte. Ltd. (TISP) Japan Consolidated Subsidiaries ● ■ Ichimura Sangyo, Co., Ltd. ● ■ ● Toray Fine Chemicals Co., Ltd. ■ ● Toyo Plastic Seiko Co., Ltd. ■ ● Toray Advanced Film Co., Ltd. ● Toray KP Films Inc. ● Toray Battery Separator Film Co., Ltd. ■ Soda Aromatic Co., Ltd. ● ● Toray Engineering Co., Ltd. ● Toray Construction Co., Ltd. ● Suido Kiko Kaisha, Ltd. ■ Toray Medical Co., Ltd. ■ Toray Research Center Inc. ■ Toray International, Inc. ■ Chori Co., Ltd. Others Subsidiaries Accounted for by Equity Method ■ Toray Carbon Magic Co., Ltd. ■ Toyo Business Support Inc. Others Afﬁ liates Accounted for by Equity Method ● ■ ● Du Pont-Toray Co., Ltd. ● Toray Opelontex Co., Ltd. ■ ● Dow Corning Toray Co., Ltd. ■ Sanyo Chemical Industries, Ltd. Others Afﬁ liates Accounted for by Equity Method ■ P.T. Petnesia Resindo (PNR) Others Thailand Consolidated Subsidiaries ● Luckytex (Thailand) Public Co., Ltd. (LTX) ● Thai Toray Textile Mills Public Co., Ltd. (TTTM) ● ■ ● Thai Toray Synthetics Co., Ltd. (TTS) Subsidiary Accounted for by Equity Method ■ Toray Industries (Thailand) Co., Ltd. (TTH) Afﬁ liate Accounted for by Equity Method ■ Thai PET Resin Co., Ltd. (TPRC) NORTH AMERICA U.S.A. Consolidated Subsidiaries ● Toray Fluoroﬁ bers (America), Inc. (TFA) ● ■ Toray International America Inc. (TIAM) ■ Toray Plastics (America), Inc. (TPA) ■ Toray Resin Co. (TREC) ■ Toray Carbon Fibers America, Inc. (CFA) ■ Toray Composites (America), Inc. (TCA) ■ Zoltek Companies, Inc. (Zoltek) ● Toray Membrane USA, Inc. (TMUS) Others ■ Regional Supervisory Organization ● Fibers & Textiles ■ Plastics & Chemicals ● IT-related Products ■ Carbon Fiber Composite Materials ● Environment & Engineering ■ Life Science & Other Businesses ■ Trading Major Ofﬁ ces in Japan Overseas Ofﬁ ces and Branches Osaka Head Ofﬁ ce Nakanoshima Mitsui Building, 3-3, Nakanoshima 3-chome, Kita-ku, Osaka 530-8222, Japan Telephone: 81 (6) 6445-4101 Facsimile: 81 (6) 7688-3774 New York Toray Industries (America) Inc. (TAM) 461 Fifth Ave., 9th Fl., New York, NY 10017, U.S.A. Telephone: 1 (212) 697-8150 Facsimile: 1 (212) 972-4279 Germany Toray Industries, Inc., Europe Ofﬁ ce (TEU) Hugenottenallee 175, 63263 Neu-Isenburg, Germany Telephone: (49) 6102-7999-1000 Facsimile: (49) 6102-7999-1008 Beijing Toray Industries, Inc., Beijing Ofﬁ ce Beijing Fortune Bldg., No. 917, 5, Dong San Huan Bei-Lu, Chao Yang District, Beijing 100004, China Telephone: 86 (10) 6590-8961—3 Facsimile: 86 (10) 6590-8964 Seoul Toray Industries, Inc., Seoul Ofﬁ ce 10th Fl., 155, Mapo-daero, Mapo-gu, Seoul 121-721, Republic of Korea Telephone: 82 (2) 707-0381—2 Facsimile: 82 (2) 707-0067 India Toray Industries (India) Private Limited (TID) Unit No. 504, 5th Floor, Vatika City Point, MG Road Gurgaon, Haryana 122002, India Telephone: 91 (12) 4387-7900 Facsimile: 91 (12) 4387-7901 Brazil Toray do Brasil Ltda. (TBL) Av. Paulista, 1048-Conj 71 Bela Vista Sao Paulo - SP 01310-100, Brasil Telephone/Facsimile: 55 (11) 4314-7792 . c n I , s e i r t s u d n I y a r o T 59 4 1 0 2 t r o p e R l a u n n A F I N A N C I A L S e c t i o n Contents 60 Six-Year Summary of Selected Financial Data 61 Management’s Discussion and Analysis 66 Consolidated Balance Sheets 68 Consolidated Statements of Income 68 Consolidated Statements of Comprehensive Income 69 Consolidated Statements of Changes in Net Assets 70 Consolidated Statements of Cash Flows 71 Notes to Consolidated Financial Statements 102 Independent Auditor’s Report . c n I , s e i r t s u d n I y a r o T 60 4 1 0 2 t r o p e R l a u n n A Six-Year Summary of Selected Financial Data Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31 Net sales*1 Fibers & Textiles Plastics & Chemicals IT-related Products Millions of yen 2014 2013*2 2012 2011 2010 2009 ¥ 1,837,778 ¥ 1,592,279 ¥ 1,588,604 ¥ 1,539,693 ¥ 1,359,631 ¥ 1,471,561 755,474 632,150 638,375 584,115 525,204 568,996 470,542 395,835 397,815 382,299 332,735 377,644 245,741 237,593 243,404 262,027 230,433 229,421 Carbon Fiber Composite Materials 113,342 77,620 69,914 67,018 50,676 70,390 Environment & Engineering 180,197 178,355 170,247 178,183 159,787 160,207 Life Science Others 58,205 14,277 56,599 55,554 52,430 46,656 14,127 13,295 13,621 14,140 — — Life Science & Other Businesses — — — — — 64,903 Operating income 105,253 83,436 107,721 100,087 40,107 36,006 Income (loss) before income taxes and minority interests Net income (loss) Net cash provided by operating activities 97,760 77,828 101,091 82,893 (2,415) (19,751) 59,608 48,477 64,218 57,925 (14,158) (16,326) 161,455 100,815 104,410 129,214 166,215 38,447 Depreciation and amortization 78,743 67,588 67,443 70,479 74,904 83,764 Capital expenditures 118,207 99,135 98,384 55,942 57,073 92,349 Total assets 2,119,683 1,731,933 1,581,501 1,567,470 1,556,796 1,523,603 Property, plant and equipment, net 781,235 627,240 561,923 531,595 580,344 596,261 Interest-bearing liabilities 654,163 532,002 481,906 493,509 632,160 663,945 Net assets 944,625 778,626 674,149 640,970 518,216 512,610 Yen Per share of common stock: Net income (loss): Basic Diluted Cash dividends Net assets Ratios: ¥ 36.59 ¥ 29.75 ¥ 39.41 ¥ 36.41 ¥ (10.12) ¥ (11.66) 35.70 28.90 37.46 34.43 — 10.00 10.00 10.00 7.50 5.00 — 7.50 527.32 444.45 384.90 363.90 336.65 335.04 Operating income to net sales 5.73% 5.24% 6.78% 6.50% 2.95% 2.45% Net income (loss) to net sales Equity ratio Return on equity 3.24 40.5 7.5 3.04 41.8 7.2 Debt/equity ratio (times) 0.76 0.73 4.04 39.7 10.5 0.77 Yen 3.76 37.8 10.9 0.83 (1.04) 30.3 (3.0) 1.34 Common stock price range: High Low ¥ 786 ¥ 654 ¥ 631 ¥ 643 ¥ 591 ¥ 584 421 511 420 390 (1.11) 30.8 (3.1) 1.42 694 350 Number of employees 45,881 42,584 40,227 38,740 37,936 37,924 *1 Effective from the year ended March 31, 2011, “Revised Accounting Standard for Disclosures about Segments of an Enterprise and Related Information” (Accounting Standards Board of Japan (ASBJ) Statement No.17, March 27, 2009) and “Guidance on the Accounting Standard for Disclosures about Segments of an Enterprise and Related Information” (ASBJ Guidance No.20, March 21, 2008) are applied. Accordingly, segment information for the year ended March 31, 2010 is restated. *2 Effective from the year ended March 31, 2014, certain overseas subsidiaries applied IAS 19 “Employee Beneﬁ ts” (revised on June 16, 2011). As this change in accounting policy is applied retrospectively, the related ﬁ nancial data for 2013 reﬂ ect the retrospective application. Management’s Discussion and Analysis OVERVIEW During the period covered by year ended March 31, 2014 (ﬁ s- cal 2013), the global economy continued to expand gradually, as consumer spending in the U.S. increased on the back of improved employment, while the European economy contin- ued to stagnate despite some signs of recovery and the growth rate of China and other emerging economies slowed down. The Japanese economy has been recovering at a gradual pace with consumer spending and public investment remaining steady, the private sector’s capital expenditure also showing signs of recovery and employment situation improving steadily. Under such circumstances, Toray Group implemented the growth strategy with focus on pursuing business expansion in growth business ﬁ elds and growth regions and further bol- stering its total cost competitiveness in accordance with the medium-term management program “Project AP-G 2013.” As a result of these efforts, Toray Group posted a year-on- year increase in both revenues and earnings. INCOME ANALYSIS Net Sales Consolidated net sales in the year ended March 31, 2014 amount- ed to ¥1,837.8 billion, up 15.4% or ¥245.5 billion from the previ- ous ﬁ scal year. Sales increased in all business segments. Sales by Segment Fibers & Textiles Total sales in this segment increased ¥123.3 billion, or 19.5%, to ¥755.5 billion. In Japan, while sales of functional apparel applications grew strongly, those of general apparel applications, though showing signs of recovery, remained weak. On the other hand, exports recovered partly due to the correction in the strong yen. Sales for industrial applications, led by automobile-related applications, continued on track to recovery. Overseas, while the conditions continued to be tough with Europe remaining mired in economic slump and sluggish domestic demand in China, textile subsidiaries in Southeast Asia and China pursued sales expansion and a shift towards high value-added products. Also, while the ﬂ oods in Thailand that occurred in October 2011 had affected the operations in the same period a year earlier, the production and sales recov- ered since then, contributing to the improved performance. Plastics & Chemicals Total sales in this segment increased ¥74.7 billion, or 18.9%, to ¥470.5 billion. Though sales for automotive applications in the resin busi- ness increased in Japan, those for electronics and general industrial applications remained weak. Overseas, automotive applications in North America, China and Southeast Asia led the sales expansion. Net Sales by Segment (Billions of yen) 2,000 1,837.8 1,592.3 1,588.6 1,539.7 1,500 1,471.6 1,359.6 1,000 500 0 Operating Income by Segment (Billions of yen) 150 107.7 105.3 100.1 83.4 40.1 36.0 120 90 60 30 0 -30 Mar/ ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 Mar/ ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 (cid:81) Fibers & Textiles (cid:81) Plastics & Chemicals (cid:81) IT-related Products (cid:81) Carbon Fiber Composite Materials (cid:81) Environment & Engineering (cid:81) Life Science & Other Businesses (cid:81) Life Science (cid:81) Others (cid:81) Fibers & Textiles (cid:81) Plastics & Chemicals (cid:81) IT-related Products (cid:81) Carbon Fiber Composite Materials (cid:81) Environment & Engineering (cid:81) Life Science & Other Businesses (cid:81) Life Science (cid:81) Others (cid:81) Elimination & Corporate (cid:81) Adjustment *1 Effective from the year ended March 31, 2011, “Revised Accounting Standard for Disclosures about Segments of an Enterprise and Related Information” (ASBJ Statement No.17 of March 27, 2009) and “Guidance on the Accounting Standard for Disclosures about Segments of an Enterprise and Related Information” (ASBJ Guidance No.20 of March 21, 2008) are applied. Accordingly, segment Information for the year ended March 31, 2010 is restated. *2 Operating income by segment that is not attributable to any segment is included in “Elimination & Corporate” for the ﬁ scal year ended March 31, 2009, and included in “Adjustment” for the ﬁ scal years ended March 31, 2010, 2011, 2012, 2013 and 2014 respectively. . c n I , s e i r t s u d n I y a r o T 61 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 62 4 1 0 2 t r o p e R l a u n n A Demand for the ﬁ lm business’s products remained slug- gish on the whole within and outside Japan, with continued price competition, even though domestic sales for capacitors used in hybrid cars remained strong. Also, trading subsidiaries expanded their business transactions on the back of market recovery and strong overseas business. IT-related Products Total sales in this segment increased ¥8.1 billion, or 3.4%, to ¥245.7 billion. The sales of products for small and mid-sized displays such as smartphones and tablet terminals in general were strong, although they were partly affected by the production adjust- ment of end products in the second half. Sales of ﬁ lms and processed ﬁ lm products for large LCD panels, after perform- ing strongly in the ﬁ rst half, were inﬂ uenced by stagnating demand for ﬂ at-screen TV sets in the second half. Carbon Fiber Composite Materials Total sales in this segment increased ¥35.7 billion, or 46.0%, to ¥113.3 billion. As demand for aircrafts as well as that in the environment and energy ﬁ elds including compressed natural gas tank appli- cations expanded, sales of carbon ﬁ bers and intermediate products (prepreg) grew strongly for aerospace applications and general industrial applications. In the composite business, sales of carbon ﬁ ber reinforced plastic chassis for notebook PCs, which boast high strength and light weight, increased. Environment & Engineering Total sales in this segment increased ¥1.8 billion, or 1.0%, to ¥180.2 billion. While the market for water treatment membranes has not yet fully recovered reﬂ ecting continued uncertainties over the global economic outlook, shipment of reverse osmosis mem- branes to the Middle East was strong at the Company. Among domestic subsidiaries, the progress of plant construction proj- ects remained slow at an engineering subsidiary. Life Science Total sales in this segment increased ¥1.6 billion, or 2.8%, to ¥58.2 billion. Sales of REMITCH®*, an oral anti-pruritus drug for hemo- dialysis patients, expanded robustly, though other pharma- ceutical products were affected by intensifying competition and royalty income on some products decreased. In medi- cal devices, sales in Japan as well as exports of FlLTRYZER®, polymethylmethacrylate (PMMA) dialysis membrane-based hemodialyzer, and TORAYSULFONE®, polysulfone membrane artiﬁ cial kidneys, grew strongly. *REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. Others Net sales increased ¥0.2 billion, or 1.1%, to ¥14.3 billion. Costs and Expenses The ratio of total costs and expenses to net sales for the year was 94.3%, down 0.5 percentage points from the previous ﬁ s- cal year. Consolidated net sales increased 15.4% year on year, and cost of sales increased 16.0%. As a result, the cost of sales ratio increased 0.4 percentage points to 80.8%. Selling, general and administrative expenses increased ¥19.2 billion, or 8.4%, to ¥247.4 billion. The ratio of selling, general and administrative expenses to net sales decreased 0.9 percentage points to 13.5%. R&D expenses increased ¥2.2 billion, or 4.0%, to ¥55.5 billion. Operating Income and Net Income Consolidated operating income increased ¥21.8 billion or 26.1% from the previous ﬁ scal year, to ¥105.3 billion, and the ratio of operating income to net sales rose 0.5 percentage point to 5.7%. Operating income rose in all segments but Plastics & Chemicals and Life Science. Fibers & Textiles segment operating income rose ¥9.7 billion or 22.4% year on year to ¥52.9 billion supported by increased sales and a shift to high value-added products at the textile subsidiaries in Southeast Asia and China as well as the low comparison base due to the impact on last year’s perfor- mance from the ﬂ oods in Thailand. Operating income in the Plastics & Chemicals segment dipped by ¥0.3 billion or 1.6% to ¥18.0 billion. The resin busi- ness recorded brisk sales for automotive applications in Japan, but results were tempered by higher materials costs related to the correction of the strong yen. Film business sales struggled against weak overall demand in Japan and overseas along with ongoing price competition. IT-related Products segment operating income rose ¥1.6 bil- lion or 7.1% to ¥24.6 billion supported by generally solid sales of small and mid-sized display materials for smartphones, tab- let computers, and other products. The Carbon Fiber Composite Materials segment generated a ¥9.6 billion or 131.9% increase in operating income to ¥16.9 bil- lion. Sales of carbon ﬁ bers and intermediate products (prepreg) for aircraft, aerospace, and general industrial applications were brisk amid growing demand for aircrafts as well as that in the environment and energy ﬁ elds including compressed natural gas tank applications. Operating income in the Environment & Engineering seg- ment rose ¥3.8 billion or 143.4% to ¥6.4 billion supported by strong shipments of reverse osmosis membranes to the Middle East and other products by the water treatment mem- branes business. The Life Science segment posted a ¥1.9 billion or 24.8% decline in operating income to ¥5.6 billion due mainly to inten- sifying competition and decreased license fee revenue in med- ical products. Operating income of Others rose ¥0.4 billion or 27.6% to ¥2.0 billion. In net other income (expenses), Toray Group reported ¥7.5 billion in expenses, a ¥1.9 billion year-on-year increase. Interest and dividend income increased ¥0.5 billion over the previous ﬁ scal year to ¥3.8 billion, while interest expense fell ¥0.6 billion to ¥4.9 billion. This led to a ¥1.1 billion improve- ment in net ﬁ nancial expenses to ¥1.1 billion. Equity in earn- ings of unconsolidated subsidiaries and afﬁ liated companies increased ¥0.3 billion to ¥7.7 billion. Loss on impairment of ﬁ xed assets increased ¥12.4 billion year on year to ¥14.4 bil- lion. Loss on sales and disposal of property, plant and equip- ment, net, increased by ¥0.8 billion to ¥5.2 billion. As a result of the above, income before income taxes and minority interests increased ¥19.9 billion to ¥97.8 billion. After deductions for income taxes and minority interests in earnings of consolidated subsidiaries, net income amounted to ¥59.6 billion, up ¥11.1 billion from the previous ﬁ scal year. Net income per share was ¥36.59, an increase of ¥6.84. The Company declared a year-end cash dividend of ¥5.00 per share in light of the proﬁ t conditions for the year under review and the proﬁ t outlook for the next ﬁ scal term. Added to the interim cash dividend, this brought the total annual dividend to ¥10.00 per share. FINANCIAL POSITION Assets Total assets on March 31, 2014, stood at ¥2,119.7 billion, up ¥387.8 billion or 22.4% from the end of the previous ﬁ scal year. This was mainly due to the increases in trade receivables, in inven- tories and in property, plant and equipment, net of depreciation. Total Assets and Net Assets (Billions of yen) 2,400 (%) 80 2,119.7 1,800 1,200 1,731.9 60 1,523.6 1,556.8 1,567.5 1,581.5 39.7 41.8 37.8 40.5 40 944.6 30.8 30.3 778.6 518.2 641.0 674.1 600 512.6 0 Mar/ ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 (cid:81) Total Assets (cid:81) Net Assets —Equity Ratio 20 0 * Effective from the year ended March 31, 2014, certain overseas subsidiar- ies applied IAS 19 “Employee Beneﬁ ts” (revised on June 16, 2011). As this change in accounting policy is applied retrospectively, the related ﬁ nancial data for 2013 reﬂ ect the retrospective application. Current Assets Current assets were up 15.5%, or ¥123.6 billion, to ¥920.4 billion. Trade receivables were up 14.2%, or ¥43.9 billion, to ¥352.1 billion. Inventories rose to ¥370.8 billion, up ¥57.1 bil- lion or 18.2%. Property, Plant and Equipment Property, plant and equipment, net of depreciation compared with the end of the previous ﬁ scal year grew 24.6%, or ¥154.0 billion, to ¥781.2 billion. Capital expenditures totaled ¥113.9 billion, up 16.2% or ¥15.9 billion based on our policy of invest- ing selectively in prospective growth areas while streamlining and modernizing production facilities to enhance production efﬁ ciency. In the Fibers & Textiles segment, capital expenditures totaled ¥26.1 billion, which included additional polypropylene spun- bond production facilities at Toray Polytech (Nantong) Co., Ltd. In the Plastics & Chemicals segment, capital expenditures amounted to ¥18.2 billion, which included new PPS resin pro- duction facilities at Toray Advanced Materials Korea Inc. Capital expenditures in the IT-related Products segment were ¥17.2 billion, which included additional polyethylene ﬁ lm production facilities at Toray Battery Separator Film Co., Ltd. In the Carbon Fiber Composite Materials segment, capital expenditures amounted to ¥38.5 billion, which included additional carbon ﬁ ber production facilities at Toray Carbon Fibers Europe S.A. In the Environment & Engineering segment, capital expenditures amounted to ¥3.2 billion. In the Life Science segment, capital expenditures amounted to ¥8.7 billion, which included new dia- lyzer production facilities at Toray Medical (Qingdao) Co., Ltd. Liabilities Total liabilities increased ¥221.8 billion, or 23.3%, to ¥1,175.1 billion. A major factor was the increase in total interest-bearing liabilities—consisting of short-term bank loans, current portion of long-term debt, commercial paper, long-term debt and lease obligations—up ¥122.2 billion, or 23.0%, to ¥654.2 billion. Net Assets Net assets came to ¥944.6 billion and net assets less minor- ity interests in consolidated subsidiaries and stock acquisition rights stood at ¥859.0 billion. As a result, net assets per share increased ¥82.87 to ¥527.32. The equity ratio fell 1.3 percent- age points to 40.5%, while the debt/equity ratio worsened by 0.03 point to 0.76. CASH FLOWS In the year ended March 31, 2014, net cash used in invest- ing activities exceeded net cash provided by operating activi- ties by ¥53.4 billion. On the other hand, net cash provided by ﬁ nancing activities was ¥41.5 billion due mainly to an increase in interest-bearing liabilities. Including ﬂ uctuations in foreign currency exchange rates, cash and cash equivalents at ﬁ scal . c n I , s e i r t s u d n I y a r o T 63 4 1 0 2 t r o p e R l a u n n A year-end stood at ¥113.1 billion, up ¥5.4 billion or 5.1% from the end of the previous ﬁ scal year. Cash Flows from Operating Activities Net cash provided by operating activities amounted to ¥161.5 billion, up ¥60.6 billion from the previous ﬁ scal year. Major factors for provision of cash include income before income taxes and minority interests of ¥97.8 billion and depreciation and amortization of ¥78.7 billion, while major factors for use of cash include an increase in inventories of ¥18.9 billion, and income taxes paid of ¥23.2 billion. Cash Flows from Investing Activities Net cash used in investing activities totaled ¥214.8 billion, up ¥107.3 billion from the previous ﬁ scal year. Main factors include capital expenditures of ¥112.9 billion. Cash Flows from Financing Activities Net cash provided by ﬁ nancing activities was ¥41.5 billion, up ¥15.3 billion from the previous ﬁ scal year. Main factors include proceeds from long-term debt of ¥170.1 billion, which con- trasted with repayment of long-term debt of ¥100.3 billion and cash dividends paid of ¥17.4 billion. BUSINESS RISKS Operational and other risks faced by Toray Group that could have a major inﬂ uence on the decisions of investors are described below. Toray Group works constantly to avoid such potential risks, minimize their impact, and build a system to enable swift responses and accurate information disclosure on the occurrence of unforeseen situations. Please note that the risks described below are those identiﬁ ed by Toray Group when this annual report was produced, and do not represent all the operational and other risks that could affect Toray Group. (1) Domestic and overseas demand and market trends As a supplier of basic materials to a broad range of industries, Toray Group is exposed to various factors that could cause a sharp drop in demand for its products. These include changes in both worldwide and regional supply-demand conditions, increased use of substitute materials, and changes to the pur- chasing policies of business partners. In addition to severe competition with other companies, Toray Group’s various busi- nesses also face the risk of new players entering the market. Price ﬂ uctuations, stemming from the reduction of National Health Insurance (NHI) drug prices and reimbursement prices, also affect the pharmaceuticals and medical products busi- ness. Although Toray Group takes steps to maintain its com- petitive advantage, a decline in demand for, or falling prices of, such items, or the appearance of a credit risk affecting Toray Group’s business partners, could have a negative impact on Toray Group’s results of operations and ﬁ nancial conditions. (2) Rising prices of fuel and raw materials The prices of petrochemical raw materials and fuel used by Toray Group are subject to signiﬁ cant ﬂ uctuations. If Toray Group is unable to fully pass the increases in such prices on to its product prices, or cannot raise its product prices due to lack of progress in shifting to high-value-added products, its results of operations and ﬁ nancial conditions could be nega- tively affected. . c n I , s e i r t s u d n I y a r o T 64 4 1 0 2 t r o p e R l a u n n A Interest-bearing Liabilities and D/E Ratio (Billions of yen) 700 663.9 (Times) 1.60 654.2 632.2 1.42 1.34 493.5 481.9 532.0 0.83 0.77 0.73 0.76 Cash Flows (Billions of yen) 200 166.2 1.40 1.20 1.00 0.80 0.60 0.40 0.20 150 100 50 0 -50 -100 -150 -200 -250 161.5 129.2 104.4 100.8 78.5 38.4 -74.9 44.5 0.4 -6.7 -50.7 -53.4 -113.4 -121.7 -104.0 -107.5 -214.8 600 500 400 300 200 100 0 Mar/ ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 Mar/ ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 (cid:81) Interest-bearing Liabilities —D/E Ratio (cid:81) Cash Flows from Operating Activities (cid:81) Cash Flows from Investing Activities —Free Cash Flows (3) Capital expenditures, joint ventures, — Unforeseen introduction, changes or abolition of laws and alliances and acquisitions Toray Group makes capital expenditures in a wide range of business ﬁ elds. Its other activities include formation of various joint ventures or strategic alliances with third parties, as well as business acquisitions. When Toray Group becomes involved in capital expendi- tures, joint ventures, alliances and acquisitions, it considers the potential for proﬁ tability and return on investment. However, there is not necessarily any guarantee that the outcome will be consistent with expectations. If unforeseen market changes or signiﬁ cant discrepancies between actual results and initial business plans occur due to sudden changes in the operat- ing environment, there could be a loss on impairment of ﬁ xed assets or equity in losses of unconsolidated subsidiaries and afﬁ liated companies. As a result, Toray Group’s results of oper- ations and ﬁ nancial conditions could be negatively affected. (4) Foreign currency, interest rate and securities market ﬂ uctuations Foreign currency exchange rate ﬂ uctuations affect Toray Group’s consolidated ﬁ nancial statements when the ﬁ nancial statements of the overseas operations presented in local cur- rencies are translated into yen. Toray Group takes measures, such as entering forward exchange contracts, to alleviate risks associated with transactions denominated in foreign curren- cies. However, unforeseen exchange rate ﬂ uctuations could have an impact on Toray Group’s results of operations and ﬁ nancial conditions. Moreover, rapid and unforeseen changes in interest rates and other aspects of ﬁ nancial market turmoils, as well as changes in the value of securities and pension assets held by Toray Group, may have an impact on Toray Group’s results of operations and ﬁ nancial conditions. (5) Changes in assumptions on which forecasts are based that might affect employee retirement beneﬁ t obligations and deferred tax assets Toray’s consolidated ﬁ nancial statements contain employee retirement beneﬁ t obligations based on future pension pay- ments calculated in accordance with certain criteria, as well as deferred tax assets stated according to likely tax refunds based on taxable income estimates for the future ﬁ scal years. However, if changes in the criteria used to calculate pension payments were to occur, or if ﬂ uctuations arose in the esti- mates of future taxable income, Toray Group’s results of oper- ations and ﬁ nancial conditions could be affected. (6) Overseas operations Toray Group is developing a broad geographical presence, with operations in various countries of Asia, Europe, and the Americas. Some of the major potential risks associated with various regions are summarized below. If such risks were to become reality, Toray Group’s results of operations and ﬁ nan- cial conditions could be negatively affected. regulations such as changes in taxation systems — Unforeseen economic or political events — Social upheaval, including acts of terror or war (7) Product liability Toray Group strives to supply the world’s best-in-class product quality. However, it cannot always guarantee against a major unforeseen quality problem. If quality-related serious situa- tions were to occur, Toray Group’s results of operations and ﬁ nancial conditions could be negatively affected. (8) Lawsuits In the course of conducting its wide range of business activ- ities, Toray Group faces the risk of being targeted by legal action pertaining to various matters such as intellectual prop- erty, product liability, environment, and labor issues. If Toray Group were subject to a major lawsuit, its results of operations and ﬁ nancial conditions could be negatively affected. (9) Laws and regulations, taxes, competition policies and internal controls Various laws and regulations apply in the countries and regions where Toray Group conducts its business. These laws and regulations include regulations related to the envi- ronment, commercial trading, labor, intellectual property, taxa- tion and foreign exchange, investment approval protocols and import/export controls, and policies on competition based on antitrust laws. Through the establishment and maintenance of internal control systems, Toray Group endeavors to comply with all such laws and regulations. However, changes to such laws and regulations, including the introduction of new envi- ronmental regulations and taxes, as well as changes to the corporate income tax rate could affect Toray Group’s results of operations and ﬁ nancial conditions. Also, if Toray Group is judged as having violated such laws and regulations, is sub- ject to government sanctions initiated by a fair trade commis- sion, receives a notice of correction from tax authorities, has an employee who engages in illicit behavior, or is unable to uphold internal controls pertaining to ﬁ nancial statements, its results of operations and ﬁ nancial conditions could be nega- tively affected. (10) Natural disasters and accidents Toray Group places top priority on safety, accident prevention, and environmental preservation. To minimize losses caused by the suspension of production, Toray Group conducts regu- lar accident prevention inspections, maintenance of its manu- facturing facilities, and safety activities. However, the advent of a major natural disaster or unprecedented accident could cause damage to Toray Group’s manufacturing facilities, or could cause inadequate supply of raw materials, which could have a negative impact on its results of operations and ﬁ nan- cial conditions. . c n I , s e i r t s u d n I y a r o T 65 4 1 0 2 t r o p e R l a u n n A Consolidated Balance Sheets Toray Industries, Inc. and Consolidated Subsidiaries March 31, 2014 and 2013 Assets Current assets: Cash (Notes 4 and 5) Time deposits (Notes 4 and 5) Trade receivables (Notes 4, 5 and 7): Notes receivable Accounts receivable Inventories (Notes 3 and 4) Deferred tax assets (Note 10) Prepaid expenses and other current assets (Notes 5 and 6) Allowance for doubtful accounts Total current assets . c n I , s e i r t s u d n I y a r o T 66 4 1 0 2 t r o p e R l a u n n A Property, plant and equipment (Notes 4 and 13): Land Buildings Machinery and equipment Construction in progress Accumulated depreciation Property, plant and equipment, net Intangible assets (Note 13): Goodwill Other Total intangible assets Investments and other assets: Millions of yen Thousands of U.S. dollars (Note 2) 2014 2013 2014 ¥ 80,582 ¥ 87,276 $ 782,350 33,556 21,390 325,786 25,685 32,747 326,409 275,483 370,822 313,707 25,600 21,405 60,204 46,852 (2,493) (2,128) 249,369 3,169,019 3,600,214 248,544 584,505 (24,204) 920,365 796,732 8,935,583 76,403 69,672 547,810 489,399 741,777 5,318,544 1,819,635 1,572,900 17,666,359 97,810 62,998 949,612 2,541,658 2,194,969 24,676,291 (1,760,423) (1,567,729) (17,091,485) 781,235 627,240 7,584,806 72,300 29,767 27,784 12,853 100,084 42,620 701,942 269,748 971,689 Investments in unconsolidated subsidiaries and afﬁ liated companies (Note 5) 100,643 78,031 Investment securities (Notes 4, 5 and 6) Long-term loans receivable Deferred tax assets (Note 10) Other (Note 8) Allowance for doubtful accounts Total investments and other assets 146,232 120,851 1,551 929 21,441 19,502 50,454 48,144 (2,322) (2,116) 977,117 1,419,728 15,058 208,165 489,845 (22,544) 317,999 265,341 3,087,369 Total assets ¥ 2,119,683 ¥ 1,731,933 $ 20,579,447 See accompanying notes to consolidated ﬁ nancial statements. Liabilities and Net Assets Current liabilities: Millions of yen Thousands of U.S. dollars (Note 2) 2014 2013 2014 Short-term bank loans (Notes 4, 5 and 7) ¥ 131,444 ¥ 98,633 $ 1,276,155 Current portion of long-term debt (Notes 4, 5 and 7) Commercial paper (Note 5) Trade payables (Notes 5 and 7): Notes payable Accounts payable Income taxes payable (Note 10) Accrued liabilities Other current liabilities (Notes 4 and 10) Total current liabilities 77,201 98,225 10,000 30,000 33,403 31,077 176,062 154,850 16,411 9,764 52,439 45,593 99,622 82,136 749,524 97,087 324,301 1,709,340 159,330 509,117 967,204 596,582 550,278 5,792,058 Long-term debt (Notes 4, 5 and 7) 428,932 302,739 4,164,388 Deferred tax liabilities (Note 10) 20,758 9,048 201,534 Accrued employees’ retirement beneﬁ ts (Note 8) — 69,359 — Net deﬁ ned beneﬁ t liability (Note 8) 93,172 — 904,583 Customers’ guarantee deposits and other liabilities (Note 4) 35,614 21,883 345,767 Total liabilities 1,175,058 953,307 11,408,330 Commitments and contingent liabilities (Note 12) Net assets (Note 11): Stockholders’ equity: Common stock: Authorized—4,000,000,000 shares Issued—1,631,481,403 shares Capital surplus Retained earnings Treasury stock, at cost Total stockholders’ equity Accumulated other comprehensive income: Net unrealized gains on securities Net deferred losses on hedges Foreign currency translation adjustments Remeasurements of deﬁ ned beneﬁ t plans Total accumulated other comprehensive income Stock acquisition rights (Note 9) Minority interests in consolidated subsidiaries Total net assets Total liabilities and net assets 147,873 147,873 136,735 136,748 505,834 462,536 1,435,660 1,327,524 4,911,010 (1,455) (1,170) (14,126) 788,987 745,987 7,660,068 49,546 35,388 (508) (883) 37,664 (55,515) (16,688) (816) 70,014 (21,826) 991 566 84,633 53,899 481,029 (4,932) 365,670 (162,019) 679,748 9,621 821,680 944,625 778,626 9,171,117 ¥ 2,119,683 ¥ 1,731,933 $ 20,579,447 . c n I , s e i r t s u d n I y a r o T 67 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 68 4 1 0 2 t r o p e R l a u n n A (47,515) 36,835 74,757 (50,883) (139,709) 3,495 50,272 (72,748) 949,126 257,845 54,767 312,612 636,515 (57,796) Consolidated Statements of Income Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2014 and 2013 Net sales Costs and expenses: Millions of yen Thousands of U.S. dollars (Note 2) 2014 2013 2014 ¥ 1,837,778 ¥ 1,592,279 $ 17,842,505 Cost of sales (Notes 3, 8, 13 and 14) 1,485,171 1,280,649 14,419,136 Selling, general and administrative expenses (Notes 8, 13 and 14) 247,354 228,194 2,401,495 1,732,525 1,508,843 16,820,631 105,253 83,436 1,021,874 Operating income Other income (expenses): Interest expense Interest and dividend income Equity in earnings of unconsolidated subsidiaries and afﬁ liated companies Loss on sales and disposal of property, plant and equipment, net Loss on impairment of ﬁ xed assets Gain on sales and loss on write-down of investment securities, net Other, net (4,894) (5,460) 3,794 7,700 (5,241) (14,390) 360 5,178 (7,493) 3,247 7,431 (4,444) (1,972) (1,267) (3,143) (5,608) Income before income taxes and minority interests 97,760 77,828 Income taxes (Note 10): Current Deferred Income before minority interests Minority interests in earnings of consolidated subsidiaries 26,558 17,876 5,641 32,199 65,561 8,870 26,746 51,082 (5,953) (2,605) Net income ¥ 59,608 ¥ 48,477 $ 578,718 See accompanying notes to consolidated ﬁ nancial statements. Consolidated Statements of Comprehensive Income Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2014 and 2013 Income before minority interests Other comprehensive income (Note 16) Net unrealized gains on securities Net deferred gains (losses) on hedges Foreign currency translation adjustments Remeasurements of deﬁ ned beneﬁ t plans Share of other comprehensive income of unconsolidated subsidiaries and afﬁ liated companies accounted for by the equity method Total other comprehensive income Comprehensive income Total comprehensive income attributable to: Owners of the parent Minority interests See accompanying notes to consolidated ﬁ nancial statements. Millions of yen Thousands of U.S. dollars (Note 2) 2014 2013 2014 ¥ 65,561 ¥ 51,082 $ 636,515 13,951 332 94,354 (82) 14,981 (807) 52,466 (508) 135,447 3,223 916,058 (796) 5,212 2,607 50,602 113,767 68,739 1,104,534 ¥ 179,328 ¥ 119,821 $ 1,741,049 ¥ 167,273 ¥ 113,675 $ 1,624,010 12,055 6,146 117,039 Consolidated Statements of Changes in Net Assets Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2014 and 2013 Stockholders’ equity Accumulated other comprehensive income Millions of yen Common stock Capital surplus Retained earnings Treasury stock, at cost Total stockholders’ equity Net unrealized gains on securities Net deferred losses on hedges Foreign currency translation adjustments Remeasure- ments of deﬁ ned beneﬁ t plans Total accumulated other compre- hensive income Stock acquisition rights Minority interests in consolidated subsidiaries Total net assets Balance as of April 1, 2012 ¥147,873 ¥136,740 ¥430,365 ¥(1,194) ¥713,784 ¥20,659 ¥ (78) ¥(107,254) ¥ — ¥(86,673) ¥287 ¥46,751 ¥674,149 Cumulative effect of changes in accounting policies (351) (351) (130) (481) Restated balance 147,873 136,740 430,365 (1,194) 713,784 20,659 (78) (107,254) (351) (87,024) 287 46,621 673,668 Changes in: Dividends Net income Acquisition of treasury stock Disposition of treasury stock Other Items other than stockholders’ equity, net (16,302) 48,477 8 (4) (16,302) 48,477 (36) 68 (4) (36) 60 (16,302) 48,477 (36) 68 (4) 14,729 (805) 51,739 (465) 65,198 279 7,278 72,755 Total changes — 8 32,171 24 32,203 14,729 (805) 51,739 (465) 65,198 279 7,278 104,958 Balance as of March 31, 2013 ¥147,873 ¥136,748 ¥462,536 ¥(1,170) ¥745,987 ¥35,388 ¥(883) ¥ (55,515) ¥ (816) ¥(21,826) ¥566 ¥53,899 ¥778,626 Balance as of April 1, 2013 ¥147,873 ¥136,748 ¥462,536 ¥(1,170) ¥745,987 ¥35,388 ¥(883) ¥ (55,515) ¥ (816) ¥(21,826) ¥566 ¥53,899 ¥778,626 Changes in: Dividends Net income Acquisition of treasury stock Disposition of treasury stock Other Items other than stockholders’ equity, net (16,300) 59,608 (13) (10) (16,300) 59,608 (394) 96 (10) (394) 109 (16,300) 59,608 (394) 96 (10) 14,158 375 93,179 (15,872) 91,840 425 30,734 122,999 Total changes — (13) 43,298 (285) 43,000 14,158 375 93,179 (15,872) 91,840 425 30,734 165,999 Balance as of March 31, 2014 ¥147,873 ¥136,735 ¥505,834 ¥(1,455) ¥788,987 ¥49,546 ¥(508) ¥ 37,664 ¥(16,688) ¥ 70,014 ¥991 ¥84,633 ¥944,625 Stockholders’ equity Accumulated other comprehensive income Thousands of U.S. dollars (Note 2) Common stock Capital surplus Retained earnings Treasury stock, at cost Total stockholders’ equity Net unrealized gains on securities Net deferred losses on hedges Foreign currency translation adjustments Remeasure- ments of deﬁ ned beneﬁ t plans Total accumulated other compre- hensive income Stock acquisition rights Minority interests in consolidated subsidiaries Total net assets Balance as of April 1, 2013 $1,435,660 $1,327,650 $4,490,641 $(11,359) $7,242,592 $343,573 $(8,573) $ (538,981) $ (7,922) $ (211,903) $5,495 $ 523,291 $ 7,559,476 Changes in: Dividends Net income Acquisition of treasury stock Disposition of treasury stock Other Items other than stockholders’ equity, net (158,252) 578,718 (126) (97) (158,252) 578,718 (3,825) 932 (97) (3,825) 1,058 (158,252) 578,718 (3,825) 932 (97) 137,456 3,641 904,650 (154,097) 891,650 4,126 298,388 1,194,165 Total changes — (126) 420,369 (2,767) 417,476 137,456 3,641 904,650 (154,097) 891,650 4,126 298,388 1,611,641 Balance as of March 31, 2014 $1,435,660 $1,327,524 $4,911,010 $(14,126) $7,660,068 $481,029 $(4,932) $ 365,670 $(162,019) $ 679,748 $9,621 $821,680 $9,171,117 See accompanying notes to consolidated ﬁ nancial statements. . c n I , s e i r t s u d n I y a r o T 69 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 70 4 1 0 2 t r o p e R l a u n n A Consolidated Statements of Cash Flows Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2014 and 2013 Cash ﬂ ows from operating activities: Income before income taxes and minority interests ¥ 97,760 ¥ 77,828 $ 949,126 Millions of yen Thousands of U.S. dollars (Note 2) 2014 2013 2014 Adjustments to reconcile income before income taxes and minority interests to net cash provided by operating activities: Depreciation and amortization Loss on impairment of ﬁ xed assets Interest and dividend income Equity in earnings of unconsolidated subsidiaries and afﬁ liated companies Interest expense Loss on sales and disposal of property, plant and equipment, net Gain and loss on sales and loss on write-down of investment securities, net Insurance income Increase in accrued employees’ retirement beneﬁ ts Increase in net deﬁ ned beneﬁ t liability Increase in trade receivables Increase in inventories Decrease in trade payables Other, net Subtotal Interest and dividends received Interest paid Income taxes paid Proceeds from insurance 78,743 14,390 (3,794) (7,700) 4,894 5,241 (343) (6,818) — 3,066 (6,330) (18,908) (1,582) 15,933 67,588 1,972 (3,247) (7,431) 5,460 4,444 1,442 (274) 1,844 — (10,223) (4,473) (5,170) (12,364) 764,495 139,709 (36,835) (74,757) 47,515 50,883 (3,330) (66,194) — 29,767 (61,456) (183,573) (15,359) 154,689 174,552 117,396 1,694,680 8,208 (4,962) 9,647 (5,565) (23,161) (20,937) 6,818 274 79,689 (48,175) (224,864) 66,194 Net cash provided by operating activities 161,455 100,815 1,567,524 Cash ﬂ ows from investing activities: Capital expenditures Purchases of investment securities Proceeds from sales of property, plant and equipment Proceeds from sales of investment securities Acquisition of shares of consolidated subsidiaries resulting in change in scope of consolidation Additional acquisition of shares of consolidated subsidiaries Other, net (112,905) (105,093) (1,096,165) (10,513) 2,057 954 (91,391) — (3,028) (1,951) 1,635 257 (1,328) (374) (671) (102,068) 19,971 9,262 (887,291) — (29,398) Net cash used in investing activities (214,826) (107,525) (2,085,689) Cash ﬂ ows from ﬁ nancing activities: Net decrease in short-term debt Proceeds from long-term debt Repayment of long-term debt Cash dividends paid Other, net Net cash provided by ﬁ nancing activities Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents (9,716) (5,788) (94,330) 170,139 101,565 1,651,835 (100,266) (17,357) (1,325) 41,475 17,343 5,447 (53,806) (17,210) 1,406 26,167 6,811 26,268 (973,456) (168,515) (12,864) 402,670 168,379 52,883 Cash and cash equivalents at beginning of year 107,690 81,289 1,045,534 Beginning balance of cash and cash equivalents at subsidiaries not previously included in consolidation — 133 — Cash and cash equivalents at end of year ¥ 113,137 ¥ 107,690 $ 1,098,417 See accompanying notes to consolidated ﬁ nancial statements. Notes to Consolidated Financial Statements Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2014 and 2013 1. SIGNIFICANT ACCOUNTING POLICIES a) Basis of Presenting Consolidated Financial Statements The accompanying consolidated ﬁ nancial statements of Toray Industries, Inc. (the “Company”) and its consolidated subsid- iaries have been prepared in accordance with the provisions set forth in the Financial Instruments and Exchange Law of Japan and its related accounting regulations, and in conformity with accounting principles and practices generally accepted in Japan, which are different in certain respects as to appli- cation and disclosure requirements of International Financial Reporting Standards. For the preparation of consolidated ﬁ nancial statements, the accounting policies and procedures applied to a par- ent company and its subsidiaries for similar transactions and events under similar circumstances should be uniﬁ ed, in princi- ple. However, ﬁ nancial statements prepared by overseas sub- sidiaries in accordance with International Financial Reporting Standards or the generally accepted accounting principles in the United States tentatively may be used for the consolida- tion process. In addition, some items should be adjusted in the consolidation process so that net income is accurately accounted for, unless they are not material. Certain items presented in the original consolidated ﬁ nan- cial statements in Japanese have been reclassiﬁ ed for the con- venience of readers outside Japan. b) Principles of Consolidation The accompanying consolidated ﬁ nancial statements include the accounts of the Company and substantially all of its subsidiaries. Assets and liabilities of the consolidated subsidiaries are revalued to fair market value when the majority interest in the subsidiaries is purchased. Investments in unconsolidated subsidiaries and afﬁ liated companies are accounted for by the equity method. All intercompany accounts and transactions have been elim- inated in consolidation. The difference between the acquisition cost and the underlying net assets of the subsidiaries is recog- nized as goodwill and amortized principally over its estimated useful life not exceeding twenty years on a straight-line method. c) Cash and Cash Equivalents Cash and cash equivalents at March 31, 2014 and 2013 include cash, short-term time deposits which may be withdrawn on demand without diminution of principal and highly liquid investments with original maturities of three months or less. Cash and cash equivalents consisted of: Millions of yen Thousands of U.S. dollars 2014 2013 2014 Cash ¥ 80,582 ¥ 87,276 $ 782,350 Time deposits 33,556 21,390 325,786 Less — Time deposits with maturities of over 3 months (1,001) (976) (9,718) Cash and cash equivalents ¥ 113,137 ¥ 107,690 $ 1,098,417 d) Financial Instruments Derivatives: All derivatives are stated at fair value, with changes in fair value included in net income or loss for the period in which they arise, except for derivatives that are designated as “hedging instruments” (see Hedge Accounting below). Securities: Held-to-maturity debt securities that the Company and its con- solidated subsidiaries have the intent to hold to maturity, are stated at cost after accounting for premium or discount on acquisition, which are amortized over the period to maturity. Other securities for which market quotations are avail- able are stated at fair value. Net unrealized gains or losses on these securities are reported as a separate item in net assets at a net-of-tax amount. Other securities for which market quotations are unavailable are stated at cost, except as stated in the paragraph below. In cases where the fair value of held-to-maturity debt securities or other securities has declined signiﬁ cantly and such impairment of the value is not deemed temporary, those securities are written down to fair value and the result- ing losses are included in net income or loss for the period. Hedge Accounting: Gains or losses arising from changes in fair value of deriv- atives designated as “hedging instruments” are deferred as a separate item of net assets at a net-of-tax amount and included in net income or loss in the same period during which the gains and losses on the hedged items or transac- tions are recognized. The derivatives designated as hedging instruments by the Company and its consolidated subsidiaries are principally interest rate swaps and forward foreign exchange contracts. The related hedged items are trade accounts receivable and payable, long-term bank loans and debt securities issued by the Company and its consolidated subsidiaries. The Company and its consolidated subsidiaries have a pol- icy to utilize the above hedging instruments in order to reduce their exposure to the risk of interest rate and foreign currency ﬂ uctuations. Thus, their purchases of the hedging instruments are limited to, at maximum, the amounts of the hedged items. The Company and its consolidated subsidiaries eval- uate the effectiveness of hedging activities by refer- ence to the accumulated gains or losses on the hedging instruments and the related hedged items from the com- mencement of the hedges. e) Allowance for Doubtful Accounts In the Company and its domestic consolidated subsidiaries, an allowance for doubtful accounts, including receivables and loans, is determined from the amounts considered unlikely to be recovered, estimated from past actual bad debt ratio records for general receivables and from studying the probability of recovery in individual cases where there is concern over claims. . c n I , s e i r t s u d n I y a r o T 71 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 72 4 1 0 2 t r o p e R l a u n n A f) Inventories Inventories are stated at the lower of acquisition cost, princi- pally determined by the moving average method, or net sell- ing value to reﬂ ect any decreased proﬁ tability of inventories. g) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation for property, plant and equipment (except leased assets) of the Company and its domestic consolidated subsidiaries is principally computed by the declining balance method, and depreciation for those of its overseas consolidated subsidiaries is principally computed by the straight-line method at rates based on estimated useful lives that are as follows: Buildings 3–60 years Machinery and equipment 3–15 years Principally, a depreciation method of leased assets is iden- tical to the method applicable to its own ﬁ xed assets. In the Company and its domestic consolidated subsidiaries, ﬁ nance lease transactions which do not transfer ownership of the leased assets whose lease inceptions are on or before March 31, 2008 are accounted for by a method similar to the method applicable to ordinary operating lease transactions. h) Income Taxes Income taxes of the Company and its domestic consolidated subsidiaries consist of corporate income taxes, local inhabitants taxes and enterprise taxes. Deferred income taxes are deter- mined using the asset and liability approach, where deferred tax assets and liabilities are recognized for temporary differences between the tax basis of assets and liabilities and their reported amount in the ﬁ nancial statements. The Company also provides for the anticipated tax effect of future remittances of retained earnings from overseas subsidiaries and afﬁ liated companies. i) Retirement Beneﬁ ts The Company and its domestic consolidated subsidiaries have an unfunded lump-sum beneﬁ t plan, a funded contributory pension plan and a deﬁ ned contribution pension plan covering all eligible employees. Under the terms of the unfunded lump-sum beneﬁ t plan, eligible employees are entitled under most circumstances, upon mandatory retirement or earlier voluntary severance, to indemnities based on compensation at the time of severance and years of service. The funded contributory pension plan and the deﬁ ned con- tribution pension plan provide, in general, pension payments for life commencing from age 60. To provide for the payment of retirement beneﬁ ts to employ- ees, net deﬁ ned beneﬁ t liability is recognized at an amount equal to the expected retirement beneﬁ t obligations net of the fair value of pension assets at the end of the period. Past service cost is amortized as incurred using the straight- line method over a certain period within the employees’ aver- age remaining years of service (primarily 15 years). Actuarial gains and losses are amortized from the follow- ing ﬁ scal year after recognition using the straight-line method over a certain period within the employees’ average remaining years of service (primarily 15 years). Unrecognized actuarial gains and losses and unrecog- nized past service cost are recognized in remeasurements of deﬁ ned beneﬁ t plans in accumulated other comprehensive income under the net assets section, net of deferred taxes. Allowance for retirement beneﬁ ts for members of the Board and corporate auditors (“executives”) of the Company and certain of its domestic consolidated subsidiaries is pro- vided based on the companies’ pertinent rules and is calcu- lated as the estimated amount which would be payable if all executives were to retire at the balance sheet date. Any amounts payable to executives upon retirement are subject to approval at the annual stockholders’ meeting. The amount is included in “customers’ guarantee deposits and other liabili- ties” on the consolidated balance sheets. j) Appropriation of Retained Earnings Cash dividends are recorded in the ﬁ scal year when the pro- posed appropriation of retained earnings is approved by the Board of Directors and/or stockholders. k) Foreign Currency Transactions All monetary assets and liabilities denominated in foreign cur- rencies, whether long-term or short-term, are translated into Japanese yen at the exchange rates prevailing at the balance sheet date. Resulting gains and losses are included in net income or loss for the period. l) Translation of Foreign Currency Financial Statements Translation of foreign currency ﬁ nancial statements of over- seas subsidiaries into Japanese yen for consolidation pur- poses is made by using the current exchange rates prevailing at their balance sheet dates, with the exception that the trans- lation of stockholders’ equity is made by using historical rates. Revenue and expense accounts are principally translated at the average exchange rates during the year. Differences in yen amounts arising from the use of different rates are pre- sented as “foreign currency translation adjustments” in net assets except for the portion belonging to minority stockhold- ers, which is included in “minority interests in consolidated subsidiaries” in net assets. m) Application of “Employee Beneﬁ ts” In connection with the application of “Employee Beneﬁ ts” (International Accounting Standards Board, International Accounting Standard No. 19, revised on June 16, 2011) from ﬁ s- cal periods starting on or after January 1, 2013, effective from the year ended March 31, 2014, certain overseas subsidiaries have adopted accounting standard and thereby changed their methods for recognizing actuarial gains and losses, past ser- vice cost, and net interest on the net deﬁ ned beneﬁ t liability, etc. Changes in the accounting policy have been applied retro- actively in the consolidated ﬁ nancial statements for the year ended March 31, 2013. The effect of the retrospective applica- tion is insigniﬁ cant. n) Application of Accounting Standard for Retirement Beneﬁ ts Effective from the end of the year ended March 31, 2014, for the Company has adopted “Accounting Standard Retirement Beneﬁ ts” (Accounting Standards Board of Japan (ASBJ) Statement No. 26, May 17, 2012) and “Guidance on Accounting Standard for Retirement Beneﬁ ts” (ASBJ Guidance No. 25, May 17, 2012) (except for certain provisions described in the main clause of Section 35 of the standard and in the main clause of Section 67 of the guidance). Accordingly, the Company and its domestic consolidated subsidiaries have adopted a new accounting method under which an amount equal to the expected retirement beneﬁ t obligations net of the fair value of pension assets is recorded as net deﬁ ned ben- eﬁ t asset or liability, and unrecognized actuarial gains and losses and unrecognized past service cost are recorded in net deﬁ ned beneﬁ t asset and liability. The application of the standard and the guidance is sub- ject to the transitional treatment set forth in Section 37 of the standard, and the effect of the change is added to or deducted from remeasurements of deﬁ ned beneﬁ t plans in accumu- lated other comprehensive income at March 31, 2014. As a result, the Company and its domestic consolidated subsid- iaries recorded net deﬁ ned beneﬁ t asset of ¥24,500 million ($237,864 thousand) (included in other in investments and other assets) and net deﬁ ned beneﬁ t liability of ¥84,579 million ($821,155 thousand), while accumulated other comprehensive income decreased by ¥15,825 million ($153,641 thousand). In addition, net assets per share decreased by ¥9.71 ($0.09). o) Standards Issued but Not Yet Adopted Accounting Standards for Business Combinations On September 13, 2013, the ASBJ issued “Revised Accounting Standard for Business Combinations” (ASBJ Statement No.21), “Revised Accounting Standard for Consolidated Financial Statements” (ASBJ Statement No.22), “Revised Accounting Standard for Business Divestitures” (ASBJ Statement No.7), “Revised Accounting Standard for Earnings Per Share” (ASBJ Statement No.2), “Revised Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures” (ASBJ Guidance No.10) and “Revised Guidance on Accounting Standard for Earnings Per Share” (ASBJ Guidance No.4). (1) Overview Under these revised accounting standards, the account- ing treatment for any changes in a parent’s ownership 2. U.S. DOLLAR AMOUNTS interest in a subsidiary when the parent retains control over the subsidiary and the corresponding accounting for acquisition-related costs were revised. In addition, the presentation method of net income was amended, the reference to “minority interests” was changed to “non- controlling interests,” and transitional provisions for these accounting standards were also deﬁ ned. (2) Scheduled Date of Adoption The Company expects to adopt these revised accounting standards and guidance from the beginning of the year ending March 31, 2016. (3) Impact of Adopting Revised Accounting Standards and Guidance The impact of adopting the revised accounting standards and guidance on consolidated ﬁ nancial statements is cur- rently under evaluation. Accounting Standards for Retirement Beneﬁ ts On May 17, 2012, the ASBJ issued “Accounting Standard for Retirement Beneﬁ ts” (ASBJ Statement No.26) and “Guidance on Accounting Standard for Retirement Beneﬁ ts” (ASBJ Guidance No.25), which replaced the Accounting Standard for Retirement Beneﬁ ts that had been issued by the Business Accounting Council in 1998 with an effective date of April 1, 2000 and the other related practical guidance, being followed by partial amendments from time to time through 2009. (1) Overview The standard provides guidance for the accounting for unrecognized actuarial gains and losses and unrecognized past service cost, the calculation methods for retirement beneﬁ t obligation and service cost, and enhancement of disclosures taking into consideration improvements to ﬁ nancial reporting and international trends. (2) Scheduled Date of Adoption Revisions to the calculation methods for the retirement ben- eﬁ t obligation and service cost are scheduled to be adopted from the beginning of the year ending March 31, 2015. (3) Impact of Adopting Revised Accounting Standard and Guidance The impact of adopting the revised accounting standard and guidance on consolidated ﬁ nancial statements is cur- rently under evaluation. The Company and its domestic consolidated subsidiaries maintain their accounting records in yen. The U.S. dollar amounts included in the accompanying consolidated ﬁ nancial statements and notes thereto represent the arithmetic results of translating yen into U.S. dollars at the rate of ¥103 to $1.00, the approximate exchange rate prevailing on March 31, 2014. The inclusion of such U.S. dol- lar amounts is solely for the convenience of readers outside Japan and is not intended to imply that yen amounts and assets and lia- bilities that originated in yen have been or could be readily con- verted, realized or settled in U.S. dollars at this or at any other rate. . c n I , s e i r t s u d n I y a r o T 73 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 74 4 1 0 2 t r o p e R l a u n n A 3. INVENTORIES At March 31, 2014 and 2013, inventories consisted of the following: Merchandise and ﬁ nished goods Work in process Raw materials and supplies Millions of yen Thousands of U.S. dollars 2014 2013 2014 ¥ 211,837 ¥ 175,553 $ 2,056,670 74,546 84,439 70,121 68,033 723,748 819,796 ¥ 370,822 ¥ 313,707 $ 3,600,214 Losses recognized and charged to cost of sales as a result of valuation at March 31, 2014 and 2013 were ¥2,559 million ($24,845 thousand) and ¥2,139 million, respectively. 4. SHORT-TERM BANK LOANS, LONG-TERM DEBT AND LEASE OBLIGATIONS Short-term bank loans at March 31, 2014 and 2013 represented bank overdrafts and short-term notes. The Company is not required to pay commitment fees on unused balances of the bank overdraft agreements. Long-term debt and lease obligations at March 31, 2014 and 2013 were as follows: Loans principally from banks and insurance companies with interest rates primarily from 0.16% to 7.05%, maturing serially through 2025: Unsecured Secured Lease obligations maturing serially through 2028: Unsecured Yen notes with an interest rate of 1.61% due 2013 Yen notes with an interest rate of 0.93% due 2022 Yen notes with an interest rate of 1.01% due 2023 Zero coupon convertible bonds due 2014 Korean won notes with an interest rate of 5.7% due 2014 U.S. dollar notes with an interest rate of 3 month U.S. dollar LIBOR+1.3% due 2014 Less amounts due within one year At March 31, 2014, assets pledged as collateral were as follows: Cash and time deposits Trade receivables Inventories Property, plant and equipment, net Investment securities Others Millions of yen Thousands of U.S. dollars 2014 2013 2014 ¥ 441,883 ¥ 320,964 $ 4,290,126 20,197 — 196,087 6,586 — 20,000 20,000 2,405 10,000 20,000 — — 50,000 2,998 1,055 — — 63,942 — 194,175 194,175 — 29,107 10,243 512,719 403,369 4,977,854 78,959 99,115 766,592 ¥ 433,760 ¥ 304,254 $ 4,211,262 Millions of yen Thousands of U.S. dollars ¥ 3,240 $ 31,456 1,717 3,511 16,670 34,087 42,384 411,495 60 2,976 583 28,893 ¥ 53,888 $ 523,184 The annual maturities of long-term debt and lease obligations subsequent to March 31, 2014 were as follows: Years ending March 31: 2015 2016 2017 2018 2019 2020 and thereafter 5. FINANCIAL INSTRUMENTS Conditions of Financial Instruments a) Policy in Relation to Financial Instruments The policy of the Company and its consolidated subsidiaries is to manage funds only by short-term deposits, etc. and to raise funds by borrowing from banks and issuing corporate bonds. The Company and its consolidated subsidiaries use derivatives to hedge risks associated with foreign currency exchange rates and ﬂ uctuations of borrowing interest rates and do not enter into derivative transactions for speculative or trading purposes. b) Contents and Risk of Financial Instruments and Risk Management System Trade receivables are operating receivables and therefore are exposed to customer credit risk. Under their internal regula- tions, the Company and its consolidated subsidiaries care- fully manage payment periods for receivables and outstanding balances of all customers and regularly monitor the credit standing of major clients. Operating receivables and payables denominated in foreign currencies that arise from the global business operations are also exposed to foreign currency exchange risk. The Company and its consolidated subsidiaries hedge this risk mainly through the use of forward exchange contracts against positions after netting receivables and pay- ables denominated in the same foreign currencies. Likewise, the Company and its consolidated subsidiaries mainly use cur- rency swaps to hedge the foreign currency exchange risk of bank loans denominated in foreign currencies. Investment securities are exposed to the risk of market price ﬂ uctuations. Most of these securities are the shares of corporations with which the Company and its consolidated subsidiaries have business relationships. The fair value and ﬁ nancial positions of the issuing entities (clients) are regularly monitored. Trade payables are operating payables, most of which are due and payable within one year. Millions of yen Thousands of U.S. dollars ¥ 78,959 $ 766,592 62,603 57,687 77,220 35,943 607,796 560,068 749,709 348,961 200,307 1,944,728 ¥ 512,719 $ 4,977,854 . c n I , s e i r t s u d n I y a r o T 75 4 1 0 2 t r o p e R l a u n n A Short-term bank loans and commercial paper are ﬁ nanc- ing instruments mainly for operating transactions, while long- term bank loans and bonds (due within ten years, in principle) are primarily for capital expenditures. Bank loans and bonds are exposed to the risk of interest rate ﬂ uctuation. Bank loans and bonds at ﬂ oating interest rates carry the risk of higher inter- est expenses when rates rise, while bank loans and bonds at ﬁ xed interest rates carry the risk of higher interest expenses when rates fall. The Company and its consolidated subsidiar- ies use derivative transactions (interest rate swap transactions) to minimize the risk of interest rate ﬂ uctuation, taking into con- sideration the balance between ﬁ xed interest rates and ﬂ oating interest rates. Hedging instruments, hedged items, the policy for utiliz- ing such hedging instruments and the method for evaluat- ing the effectiveness of hedging activities are described in Note 1. SIGNIFICANT ACCOUNTING POLICIES d) Financial the Instruments, Hedge Accounting Consolidated Financial Statements. Derivative transactions are executed and managed in accor- dance with the internal regulations prescribing the authoriza- tion for transactions. To mitigate credit risk, the Company and its consolidated subsidiaries carry out derivative transactions only with highly rated ﬁ nancial institutions. the Notes to in c) Supplemental Explanation on Fair Value of Financial Instruments The fair value of ﬁ nancial instruments is based on market prices, or reasonable estimate of fair value for instruments for which market prices are not available. Estimates of fair value are subject to ﬂ uctuation because they employ various factors and assumptions. In addition, the contract amount of deriva- tives in Note 7. DERIVATIVES in the Notes to the Consolidated Financial Statements is not an indicator of market risk associ- ated with derivative transactions. Fair Value of Financial Instruments Carrying value, fair value and unrealized gain (loss) as of March 31, 2014 and 2013 were as follows. In addition, ﬁ nancial instruments, for which it is extremely difﬁ cult to measure the fair value, are not included. (Please refer to Note 2 below). . c n I , s e i r t s u d n I y a r o T 76 4 1 0 2 t r o p e R l a u n n A Cash and time deposits Trade receivables Investment securities Held-to-maturity debt securities Investment securities in subsidiaries and afﬁ liated companies Other securities Assets Trade payables Short-term bank loans Commercial paper Bonds *1 Long-term bank loans *2 Liabilities Derivative transactions *3 Hedge accounting is not applied Hedge accounting is applied Derivative transactions Cash and time deposits Trade receivables Investment securities Held-to-maturity debt securities Investment securities in subsidiaries and afﬁ liated companies Other securities Assets Trade payables Short-term bank loans Commercial paper Bonds *1 Long-term bank loans *2 Liabilities Derivative transactions *3 Hedge accounting is not applied Hedge accounting is applied Derivative transactions Millions of yen 2014 Carrying value Fair value Unrealized gain (loss) ¥ 114,138 ¥ 114,138 ¥ — 352,094 352,094 94 17,753 94 13,665 139,491 139,491 — — (4,088) — ¥ 623,570 ¥ 619,482 ¥ (4,088) ¥ 209,465 ¥ 209,465 ¥ — 131,444 131,444 10,000 44,053 10,000 44,089 — — 36 462,080 468,931 6,851 ¥ 857,042 ¥ 863,929 ¥ 6,887 ¥ (85) ¥ (85) ¥ — (539) (539) — ¥ (624) ¥ (624) ¥ — Millions of yen 2013 Carrying value Fair value Unrealized gain (loss) ¥ 108,666 ¥ 108,666 ¥ — 308,230 308,230 92 15,355 92 9,817 115,575 115,575 ¥ 547,918 ¥ 542,380 ¥ 185,927 ¥ 185,927 98,633 30,000 80,000 98,633 30,000 80,222 — — (5,538) — ¥ (5,538) ¥ — — — 222 320,964 327,307 ¥ 715,524 ¥ 722,089 6,343 ¥ 6,565 ¥ 426 ¥ 426 ¥ — (1,145) (1,145) — ¥ (719) ¥ (719) ¥ — Cash and time deposits Trade receivables Investment securities $ 1,108,136 $ 1,108,136 $ 3,418,388 3,418,388 Held-to-maturity debt securities 913 913 — — — Investment securities in subsidiaries and afﬁ liated companies 172,359 132,670 (39,689) Thousands of U.S. dollars 2014 Carrying value Fair value Unrealized gain (loss) Other securities Assets Trade payables Short-term bank loans Commercial paper Bonds *1 Long-term bank loans *2 Liabilities Derivative transactions *3 Hedge accounting is not applied Hedge accounting is applied Derivative transactions 1,354,282 1,354,282 — $ 6,054,078 $ 6,014,388 $ (39,689) $ 2,033,641 $ 2,033,641 $ 1,276,155 1,276,155 97,087 427,699 97,087 428,049 4,486,214 4,552,728 — — — 350 66,515 $ 8,320,796 $ 8,387,660 $ 66,864 $ (825) $ (825) $ (5,233) (5,233) $ (6,058) $ (6,058) $ — — — *1: Bonds include bonds due within one year. *2: Long-term bank loans include long-term bank loans due within one year. *3: Receivables and payables arising from derivative transactions are indicated in net amounts. Total net payables, if any, are shown in parentheses. Notes: 1. Estimation method for fair value of ﬁ nancial instruments and items related to securities and derivative transactions Assets Cash and time deposits and Trade receivables Carrying value is used for fair value since the items will be settled within the short term and the fair value is approximately equal to the carrying value. Investment securities Securities are valued at quoted market price. Debt securities are valued at quoted market price or at the price provided by correspondent ﬁ nancial institutions. For information on securities classiﬁ ed by holding purpose, please refer to Note 6. SECURITIES of the Notes to the Consolidated Financial Statements. Liabilities Trade payables, Short-term bank loans and Commercial paper Carrying value is used for fair value since the items will be settled within the short term and the fair value is approximately equal to the carrying value. Bonds The fair value of bonds is based on market price. However, in cases where the interest rate of bonds ﬂ uctuates or the spe- cial accounting method for interest rate swaps is applied to make the interest rate ﬂ uctuating, the fair value is approximately equal to the carrying value because the interest rates are adjusted periodically. Therefore, the fair value is based on the car- rying value. Long-term bank loans The fair value of long-term bank loans is estimated by discounting the principal amounts and interest based on estimated interest rates if similar new loans were entered into in the current period. The fair value of long-term bank loans for which the special accounting method for interest rate swaps is applied is estimated by discounting the total principal amount and inter- est (accounted for together with the interest rate swaps) based on estimated interest rates if similar new loans were entered into in the current period. For long-term bank loans at ﬂ oating interest rates, however, the fair value is approximately equal to the carrying value because the interest rates are adjusted periodically. Therefore, the fair value is based on the carrying value. Derivative transactions Please refer to Note 7. DERIVATIVES in the Notes to the Consolidated Financial Statements. . c n I , s e i r t s u d n I y a r o T 77 4 1 0 2 t r o p e R l a u n n A 2. Financial instruments for which it is extremely difﬁ cult to determine the fair value Unlisted securities Millions of yen Thousands of U.S. dollars 2014 2013 2014 ¥ 72,663 ¥ 54,075 $ 705,466 Unlisted securities have no quoted market price and the fair value is extremely difﬁ cult to determine. Therefore, they are not included in the preceding table. 3. Redemption schedule for receivables and investment securities with maturities at March 31, 2014 and 2013 . c n I , s e i r t s u d n I y a r o T 78 4 1 0 2 t r o p e R l a u n n A Cash and time deposits Trade receivables Investment securities Held-to-maturity debt securities Other securities Cash and time deposits Trade receivables Investment securities Held-to-maturity debt securities Other securities Cash and time deposits Trade receivables Investment securities Held-to-maturity debt securities Other securities Millions of yen 2014 Due within one year Due after one year through ﬁ ve years Due after ﬁ ve years through ten years Due after ten years ¥ 114,138 352,094 3 725 ¥ 466,960 ¥ — — 82 — ¥ 82 ¥ — — 9 10 ¥ 19 ¥ — — — 800 ¥ 800 Millions of yen 2013 Due within one year Due after one year through ﬁ ve years Due after ﬁ ve years through ten years Due after ten years ¥ 108,666 308,230 14 — ¥ 416,910 ¥ — — 72 574 ¥ 646 ¥ — — 6 10 ¥ 16 Thousands of U.S. dollars 2014 Due within one year Due after one year through ﬁ ve years Due after ﬁ ve years through ten years $ 1,108,136 3,418,388 29 7,039 $ 4,533,592 $ — — 796 — $ 796 $ — — 87 97 $ 184 ¥ — — — 800 ¥ 800 Due after ten years $ — — — 7,767 $ 7,767 4. The redemption schedule for long-term debt is disclosed in Note 4. SHORT-TERM BANK LOANS, LONG-TERM DEBT AND LEASE OBLIGATIONS of the Notes to the Consolidated Financial Statements. 6. SECURITIES At March 31, 2014 and 2013, information on securities classiﬁ ed as held-to-maturity debt securities was as follows: Held-to-maturity debt securities ¥ 94 Carrying value Millions of yen 2014 Thousands of U.S. dollars 2014 Fair value ¥ 94 Unrealized gains Unrealized losses ¥ — ¥ — Carrying value $ 913 Fair value $ 913 Unrealized gains Unrealized losses $ — $ — Held-to-maturity debt securities ¥ 92 Carrying value Millions of yen 2013 Fair value ¥ 92 Unrealized gains Unrealized losses ¥ — ¥ — At March 31, 2014 and 2013, information on securities classiﬁ ed as other securities was as follows: Millions of yen 2014 Thousands of U.S. dollars 2014 Carrying value Acquisition cost Unrealized gains Unrealized losses Carrying value Acquisition cost Unrealized gains Unrealized losses Other securities ¥ 139,491 ¥ 65,303 ¥ 75,558 ¥ 1,370 $ 1,354,282 $ 634,010 $ 733,573 $ 13,301 Millions of yen 2013 Carrying value Acquisition cost Unrealized gains Unrealized losses Other securities ¥ 115,575 ¥ 62,341 ¥ 56,236 ¥ 3,002 . c n I , s e i r t s u d n I y a r o T 79 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 80 4 1 0 2 t r o p e R l a u n n A 7. DERIVATIVES The Company and its consolidated subsidiaries had the following derivative contracts outstanding at March 31, 2014 and 2013: Hedge accounting is not applied Millions of yen Thousands of U.S. dollars Forward foreign exchange contracts: Buying U.S. dollar Buying euro Buying British pound Buying Thai baht Buying Australian dollar Buying New Zealand dollar Buying Japanese yen Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Japanese yen Foreign currency swaps: Contract amount 2014 Fair value Unrealized gain (loss) Contract amount 2014 Fair value Unrealized gain (loss) ¥ 4,802 ¥ 37 ¥ 37 $ 46,621 $ 359 $ 359 44 5 442 1 3 879 6,891 196 130 8 1,304 0 0 (2) 0 0 (23) (4) 1 0 0 34 0 0 (2) 0 0 (23) (4) 1 0 0 34 427 49 0 0 4,291 (19) 10 29 0 0 8,534 (223) 66,903 1,903 1,262 78 (39) 10 0 0 12,660 330 0 0 (19) 0 0 (223) (39) 10 0 0 330 Receiving U.S. dollar, paying Korean won 1,449 (144) (144) 14,068 (1,398) (1,398) Interest rate swaps: Floating-rate receipt, ﬁ xed-rate payment 1,000 16 16 9,709 155 155 ¥ — ¥ (85) ¥ (85) $ — $ (825) $ (825) Forward foreign exchange contracts: Buying U.S. dollar Buying euro Buying Thai baht Buying Japanese yen Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Japanese yen Foreign currency swaps: 281 422 362 5,314 218 147 50 823 Receiving U.S. dollar, paying Korean won 1,477 Foreign currency options: Buying Japanese yen (put) Selling Japanese yen (call) Interest rate swaps: Floating-rate receipt, ﬁ xed-rate payment 600 600 693 Millions of yen 2013 Fair value Contract amount ¥ 4,468 ¥ 292 Unrealized gain (loss) ¥ 292 0 116 (9) (30) 0 0 1 16 (31) 76 0 (5) 0 116 (9) (30) 0 0 1 16 (31) 76 0 (5) ¥ — ¥ 426 ¥ 426 Hedge accounting is applied Millions of yen 2014 Hedge accounting method Type of derivative and principal hedged items Contract amount Fair value Estimation method for fair value Deferral hedge method Forward foreign exchange contracts: Accounted for as part of trade receivables Special accounting method for interest rate swaps Allocation method for forward foreign exchange contracts and trade payables Buying U.S. dollar Buying Japanese yen Selling U.S. dollar Selling euro Foreign currency options: Accounted for as part of trade payables Buying Japanese yen (call) Selling Japanese yen (put) Foreign currency swaps: Accounted for as part of bonds and long-term bank loans Receiving U.S. dollar, paying Korean won Interest rate swaps: Accounted for as part of long-term bank loans Floating-rate receipt, ﬁ xed-rate payment Interest rate swaps: Accounted for as part of bonds ¥ 221 2,991 738 131 1,270 875 ¥ (4) Forward foreign exchange quotes (202) 8 4 (67) The price provided by 44 correspondent ﬁ nancial institutions 4,076 (74) The price provided by correspondent ﬁ nancial institutions 5,011 (92) The price provided by correspondent ﬁ nancial institutions and long-term bank loans Floating-rate receipt, ﬁ xed-rate payment Floating-rate receipt, ﬂ oating-rate payment Fixed-rate receipt, ﬂ oating-rate payment 58,200 *1 57,600 68,000 Forward foreign exchange contracts: Accounted for as part of trade receivables and trade payables (Forecasted transactions) Buying U.S. dollar Buying euro Buying Chinese yuan Buying Korean won Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Japanese yen Forward foreign exchange contracts: Accounted for as part of trade receivables and trade payables Buying U.S. dollar Buying euro Buying Chinese yuan Buying Japanese yen Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Thai baht Foreign currency swaps: Accounted for as part of long-term bank loans Receiving U.S. dollar, paying Japanese yen Receiving Australian dollar, paying Japanese yen 26,027 1,186 1,259 4,185 15,848 2,199 1 43 40 18,528 *2 64 15 4 35,901 4,703 30 189 108 152,156 *2 3,129 — 36 Forward foreign exchange quotes 17 (23) (57) (74) (55) 0 0 0 — — ¥ — ¥ (539) . c n I , s e i r t s u d n I y a r o T 81 4 1 0 2 t r o p e R l a u n n A Hedge accounting method Type of derivative and principal hedged items Contract amount Fair value Estimation method for fair value Deferral hedge method Forward foreign exchange contracts: Accounted for as part of trade receivables Millions of yen 2013 Special accounting method for interest rate swaps Allocation method for forward foreign exchange contracts . c n I , s e i r t s u d n I y a r o T 82 4 1 0 2 t r o p e R l a u n n A and trade payables Buying U.S. dollar Buying euro Buying Japanese yen Selling U.S. dollar Selling euro Selling Japanese yen Foreign currency options: Accounted for as part of trade payables Buying Japanese yen (call) Selling Japanese yen (put) Interest rate swaps: Accounted for as part of long-term bank loans Floating-rate receipt, ﬁ xed-rate payment Interest rate swaps: Accounted for as part of bonds and long-term bank loans Floating-rate receipt, ﬁ xed-rate payment Floating-rate receipt, ﬂ oating-rate payment Fixed-rate receipt, ﬂ oating-rate payment Forward foreign exchange contracts: Accounted for as part of trade receivables and trade payables (Forecasted transactions) Buying U.S. dollar Buying euro Buying Canadian dollar Buying Czech koruna Buying Chinese yuan Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Foreign currency swaps: Accounted for as part of long-term bank loans ¥ 26 ¥ 199 5,818 402 107 783 2 Forward foreign exchange quotes 7 (463) 8 2 86 5,787 2,974 (520) The price provided by 269 correspondent ﬁ nancial institutions 8,386 (224) The price provided by correspondent ﬁ nancial institutions 72,500*1 49,400 48,000 20,183 1,232 467 1,800 510 14,639 2,070 3 1 — 501 Forward foreign exchange quotes 18 (5) (33) 100 (639) (61) 0 0 (Forecasted transactions) Receiving U.S. dollar, paying Japanese yen 20,000 (193) The price provided by correspondent ﬁ nancial institutions Forward foreign exchange contracts: Accounted for as part of trade receivables and trade payables Buying U.S. dollar Buying euro Buying Canadian dollar Buying Thai baht Selling U.S. dollar Selling euro Selling British pound Selling Canadian dollar Selling Thai baht Foreign currency swaps: Accounted for as part of long-term bank loans Receiving U.S. dollar, paying Japanese yen Receiving Australian dollar, paying Japanese yen 15,161*2 44 3 4 30,361 4,258 15 21 75 44,417*2 3,129 ¥ — ¥ (1,145) — — Hedge accounting method Type of derivative and principal hedged items Contract amount Fair value Estimation method for fair value Deferral hedge method Forward foreign exchange contracts: Accounted for as part of trade receivables Thousands of U.S. dollars 2014 Special accounting method for interest rate swaps Allocation method for forward foreign exchange contracts and trade payables Buying U.S. dollar Buying Japanese yen Selling U.S. dollar Selling euro Foreign currency options: Accounted for as part of trade payables Buying Japanese yen (call) Selling Japanese yen (put) Foreign currency swaps: Accounted for as part of bonds $ 2,146 29,039 7,165 1,272 $ (39) Forward foreign exchange quotes (1,961) 78 39 12,330 8,495 (650) The price provided by 427 correspondent ﬁ nancial institutions and long-term bank loans Receiving U.S. dollar, paying Korean won 39,573 (718) The price provided by correspondent ﬁ nancial institutions Interest rate swaps: Accounted for as part of long-term bank loans Floating-rate receipt, ﬁ xed-rate payment Interest rate swaps: Accounted for as part of bonds 48,650 (893) The price provided by correspondent ﬁ nancial institutions and long-term bank loans Floating-rate receipt, ﬁ xed-rate payment Floating-rate receipt, ﬂ oating-rate payment Fixed-rate receipt, ﬂ oating-rate payment 565,049 *1 559,223 660,194 Forward foreign exchange contracts: Accounted for as part of trade receivables and trade payables (Forecasted transactions) Buying U.S. dollar Buying euro Buying Chinese yuan Buying Korean won Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Japanese yen 252,689 11,515 12,223 40,631 153,864 21,350 10 417 388 Forward foreign exchange contracts: Accounted for as part of trade receivables and trade payables Buying U.S. dollar Buying euro Buying Chinese yuan Buying Japanese yen Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Thai baht Foreign currency swaps: Accounted for as part of long-term bank loans 179,883 *2 621 146 39 348,553 45,660 291 1,835 1,049 — 350 Forward foreign exchange quotes 165 (223) (553) (718) (534) 0 0 0 — — . c n I , s e i r t s u d n I y a r o T 83 4 1 0 2 t r o p e R l a u n n A Receiving U.S. dollar, paying Japanese yen 1,477,243 *2 Receiving Australian dollar, 30,379 paying Japanese yen *1 The fair value of interest rate swaps to which a special accounting method is applied is included in the fair value of bonds and long-term bank loans in Note 5. FINANCIAL INSTRUMENTS of the Notes to the Consolidated Financial Statements because such interest rate swaps are accounted for together with the corresponding bonds and long-term bank loans. *2 The fair value of forward foreign exchange contracts to which the allocation method is applied, except for forecasted transactions, is included in the fair value of trade receivables, trade payables and long-term bank loans in Note 5. FINANCIAL INSTRUMENTS of the Notes to the Consolidated Financial Statements since such forward foreign exchange contracts are accounted for together with the corresponding trade receivables, trade payables and long-term bank loans. $ — $(5,233) . c n I , s e i r t s u d n I y a r o T 84 4 1 0 2 t r o p e R l a u n n A 8. RETIREMENT BENEFIT PLAN For the year ended March 31, 2014 The changes in the retirement beneﬁ t obligation during the year ended March 31, 2014 were as follows: Millions of yen Thousands of U.S. dollars Retirement beneﬁ t obligation at April 1, 2013 Service cost Interest cost Actuarial gains and losses Retirement beneﬁ t paid Past service cost Effect of signiﬁ cant business combinations Other 2014 2014 ¥ 181,735 $ 1,764,417 5,927 3,590 12,106 (15,650) (33) 3,115 1,726 57,544 34,854 117,534 (151,942) (320) 30,243 16,757 Retirement beneﬁ t obligation at March 31, 2014 ¥ 192,516 $ 1,869,087 The changes in the plan assets at fair value during the year ended March 31, 2014 were as follows: Millions of yen Thousands of U.S. dollars Plan assets at April 1, 2013 Expected return on plan assets Actuarial gains and losses Contributions Retirement beneﬁ t paid Effect of signiﬁ cant business combinations Other Plan assets at March 31, 2014 2014 2014 ¥ 117,661 $ 1,142,340 2,408 8,516 4,724 (12,000) 1,710 825 23,379 82,680 45,864 (116,505) 16,602 8,010 ¥ 123,844 $ 1,202,369 The following table sets forth the funded status of the plans and the amounts recognized in the consolidated balance sheet as of March 31, 2014 for the Company’s and its consolidated subsidiaries’ deﬁ ned beneﬁ t plans: Millions of yen Thousands of U.S. dollars Funded retirement beneﬁ t obligation Plan assets at fair value Unfunded retirement beneﬁ t obligation Net liability for retirement beneﬁ ts in the balance sheet Net deﬁ ned beneﬁ t liability Net deﬁ ned beneﬁ t asset 2014 2014 ¥ 112,024 $ 1,087,612 (123,844) (1,202,369) (11,820) 80,492 68,672 93,172 (24,500) (114,757) 781,476 666,718 904,583 (237,864) Net liability for retirement beneﬁ ts in the balance sheet ¥ 68,672 $ 666,718 The components of retirement beneﬁ t expense for the year ended March 31, 2014 were as follows: Service cost Interest cost Expected return on plan assets Amortization of actuarial gains and losses Amortization of past service cost Retirement beneﬁ t expense Millions of yen Thousands of U.S. dollars 2014 2014 ¥ 5,927 $ 57,544 3,590 (2,408) 6,522 (2,866) 34,854 (23,379) 63,320 (27,825) ¥ 10,765 $ 104,515 In addition to the above, special severance payments of ¥733 million ($7,117 thousand) and contributions to the deﬁ ned contribu- tion pension plan of ¥5,224 million ($50,718 thousand) were recognized for the year ended March 31, 2014. Actuarial gains and losses included in other comprehensive income (before tax effect) for the year ended March 31, 2014 were as follows: Actuarial gains and losses Total Millions of yen 2014 ¥ (105) ¥ (105) Thousands of U.S. dollars 2014 $ (1,019) $ (1,019) Unrecognized past service cost and unrecognized actuarial gains and losses included in accumulated other comprehensive income (before tax effect) as of March 31, 2014 were as follows: Millions of yen Thousands of U.S. dollars Unrecognized past service cost Unrecognized actuarial gains and losses Total 2014 2014 ¥ (16,378) 41,396 ¥ 25,018 $ (159,010) 401,903 $ 242,893 The fair value of plan assets, by major category, as a percentage of total plan assets as of March 31, 2014 was as follows: Bonds Stocks Cash and time deposits Other Total 2014 13% 53% 6% 28% 100% The expected return on plan assets has been estimated based on the anticipated allocation to each asset class and the expected long-term returns on assets held in each category. . c n I , s e i r t s u d n I y a r o T 85 4 1 0 2 t r o p e R l a u n n A The assumptions used in accounting for the above plans were as follows: Discount rate Expected rate of return on plan assets For the year ended March 31, 2013 Accrued employees’ retirement beneﬁ ts as of March 31, 2013 were analyzed as follows: Retirement beneﬁ t obligations Plan assets Unrecognized actuarial gains and losses Unrecognized past service cost Prepaid pension cost (included in other assets) Accrued employees‘ retirement beneﬁ ts 2014 primarily 2.0% primarily 2.0% Millions of yen 2013 ¥ (181,735) 117,661 (64,074) 42,946 (19,222) (40,350) 29,009 ¥ (69,359) . c n I , s e i r t s u d n I y a r o T 86 4 1 0 2 t r o p e R l a u n n A The components of net periodic beneﬁ t cost related to the employees’ retirement beneﬁ ts for the year ended March 31, 2013 were as follows: Service cost Interest cost Expected return on plan assets Amortization of actuarial gains and losses Amortization of past service cost Net periodic beneﬁ t cost Contribution to deﬁ ned contribution pension plan and other Millions of yen 2013 ¥ 5,552 3,782 (3,359) 6,976 (2,871) 10,080 4,706 ¥ 14,786 In addition to the above, special severance payments of ¥752 million were recognized for the year ended March 31, 2013. Assumptions used in calculation of the above information were as follows: Method of attributing the projected beneﬁ ts to periods of services Discount rate Expected rate of return on plan assets Amortization period of past service cost Amortization period of actuarial gains and losses 2013 straight-line basis primarily 2.0% primarily 3.0% primarily 15 years primarily 15 years 9. STOCK OPTION PLANS 1. Stock option expense included in selling, general and administrative expenses amounted to ¥322 million ($3,126 thousand) and ¥345 million for the years ended March 31, 2014 and 2013, respectively. 2. Information on stock options issued The following table summarizes the stock options outstanding as of March 31, 2014. Company name Toray Industries, Inc. Position and number of grantees Type and number of shares to be issued upon exercise Grant date Vesting conditions Vesting period Exercise period No.1 Stock Option Plan No.2 Stock Option Plan No.3 Stock Option Plan Members of the Board of the Company Directors of the Company 28 32 26 32 26 26 Common stock 747,000 shares 844,000 shares 583,000 shares August 20, 2011 August 4, 2012 August 10, 2013 Based on the number of months that have elapsed during the vesting period Based on the number of months that have elapsed during the vesting period Based on the number of months that have elapsed during the vesting period June 24, 2011– June 22, 2012 June 22, 2012– June 26, 2013 June 26, 2013– June 25, 2014 August 21, 2011– August 20, 2041 August 5, 2012– August 4, 2042 August 11, 2013– August 10, 2043 Company name Toray Chemical Korea Inc. Position and number of grantees Executives of the Company No.1 Stock Option Plan 15 No.2 Stock Option Plan No.3 Stock Option Plan 1 5 Common stock 526,816 shares 18,815 shares 108,160 shares Type and number of shares to be issued upon exercise Grant date Vesting conditions Vesting period Exercise period Company name March 21, 2008 July 22, 2008 March 20, 2009 Holders must be in continuous employ- ment from the grant date to the vesting date of March 20, 2011 Holders must be in continuous employ- ment from the grant date to the vesting date of July 21, 2011 Holders must be in continuous employ- ment from the grant date to the vesting date of March 19, 2012 March 21, 2008– March 20, 2011 March 21, 2011– March 20, 2018 July 22, 2008– July 21, 2011 July 22, 2011– July 21, 2018 March 20, 2009– March 19, 2012 March 20, 2012– March 19, 2019 Toray Chemical Korea Inc. No.4 Stock Option Plan No.5 Stock Option Plan No.6 Stock Option Plan 2 4 5 Position and number of grantees Executives of the Company Type and number of shares to be issued upon exercise Grant date Vesting conditions Vesting period Exercise period Common stock 20,000 shares 38,468 shares 41,120 shares March 19, 2010 March 18, 2011 March 23, 2012 Holders must be in continuous employ- ment from the grant date to the vesting date of March 18, 2013 Holders must be in continuous employ- ment from the grant date to the vesting date of March 17, 2014 Holders must be in continuous employ- ment from the grant date to the vesting date of March 22, 2015 March 19, 2010– March 18, 2013 March 18, 2011– March 17, 2014 March 23, 2012– March 22, 2015 March 19, 2013– March 18, 2020 March 18, 2014– March 17, 2021 March 23, 2015– March 22, 2022 The following table summarizes movements of stock options during the year and price information on stock options as of March 31, 2014. The number of stock options are translated into the number of shares. (1) Number of stock options Company name Toray Industries, Inc. No.1 Stock Option Plan No.2 Stock Option Plan No.3 Stock Option Plan Stock acquisition rights not yet vested As of March 31, 2013 Granted Forfeited Vested As of March 31, 2014 Stock acquisition rights already vested As of March 31, 2013 Vested Exercised Forfeited As of March 31, 2014 — — — — — 618,000 — 100,000 — 518,000 237,000 — — 237,000 — 607,000 237,000 107,000 — 737,000 — 583,000 — 412,000 171,000 — 412,000 — — 412,000 . c n I , s e i r t s u d n I y a r o T 87 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 88 4 1 0 2 t r o p e R l a u n n A Company name Toray Chemical Korea Inc. No.1 Stock Option Plan No.2 Stock Option Plan No.3 Stock Option Plan Stock acquisition rights not yet vested As of December 31, 2012 Granted Increase due to consolidation Forfeited Vested As of December 31, 2013 Stock acquisition rights already vested As of December 31, 2012 Vested — — — — — — — — — — — — — — — — — — — — — — — — Increase due to consolidation 202,260 18,815 75,240 Exercised Forfeited — — — — — — As of December 31, 2013 202,260 18,815 75,240 Company name Toray Chemical Korea Inc. No.4 Stock Option Plan No.5 Stock Option Plan No.6 Stock Option Plan Stock acquisition rights not yet vested As of December 31, 2012 Granted Increase due to consolidation Forfeited Vested As of December 31, 2013 Stock acquisition rights already vested As of December 31, 2012 Vested Increase due to consolidation Exercised Forfeited As of December 31, 2013 (2) Price information Company name Exercise price Weighted average price at exercise Fair value per share at the grant date Company name Exercise price Weighted average price at exercise Fair value per share at the grant date — — — — — — — — 20,000 — — 20,000 — — 28,468 — — 28,468 — — — — — — — — 41,120 — — 41,120 — — — — — — Yen Toray Industries, Inc. No.2 Stock Option Plan ¥ 1 621 394 Won Toray Chemical Korea Inc. No.2 Stock Option Plan W 8,480 — 7,067 No.3 Stock Option Plan ¥ 1 — 546 No.3 Stock Option Plan W 6,900 — 5,597 No.1 Stock Option Plan ¥ 1 621 513 No.1 Stock Option Plan W 6,030 — 5,006 Company name Exercise price Weighted average price at exercise Fair value per share at the grant date Company name Exercise price Weighted average price at exercise Fair value per share at the grant date Company name Exercise price Weighted average price at exercise Fair value per share at the grant date Company name Exercise price Weighted average price at exercise Fair value per share at the grant date Won Toray Chemical Korea Inc. No.5 Stock Option Plan W 11,900 — 9,310 U.S. dollars Toray Industries, Inc. No.2 Stock Option Plan $ 0.01 6.03 3.83 U.S. dollars Toray Chemical Korea Inc. No.2 Stock Option Plan $ 7.97 — 6.64 U.S. dollars Toray Chemical Korea Inc. No.5 Stock Option Plan $ 11.18 — 8.75 No.6 Stock Option Plan W 9,980 — 5,360 No.3 Stock Option Plan $ 0.01 — 5.30 No.3 Stock Option Plan $ 6.48 — 5.26 No.6 Stock Option Plan $ 9.38 — 5.04 No.4 Stock Option Plan W 10,800 — 8,120 No.1 Stock Option Plan $ 0.01 6.03 4.98 No.1 Stock Option Plan $ 5.67 — 4.70 No.4 Stock Option Plan $ 10.15 — 7.63 . c n I , s e i r t s u d n I y a r o T 89 4 1 0 2 t r o p e R l a u n n A 3. Estimation method and assumptions used for the per share fair value of stock options (1) Estimation method Black-Scholes model (2) Assumptions used for the per share fair value of stock options Company name Expected volatility*1 Expected holding period*2 Expected dividend*3 Risk-free rate*4 Toray Industries, Inc. No.3 Stock Option Plan 34.057% 8 years ¥10 per share ($0.10) 0.623% *1 The expected volatility is based on actual share prices during 8 years from August 11, 2005 to August 9, 2013. *2 The expected holding period is calculated based on the service period of past members of the Board. *3 This is based on the dividend for the year ended March 31, 2013. *4 The risk-free interest rate is the yield on Japanese government bonds for the period that corresponds to the remaining life of the option. Because it is difﬁ cult to reasonably estimate the number of options that will expire in the future, only the number of options that have actually forfeited is applied. . c n I , s e i r t s u d n I y a r o T 90 4 1 0 2 t r o p e R l a u n n A 10. INCOME TAXES The statutory tax rate in Japan used for calculating deferred tax assets and liabilities for the years ended March 31, 2014 and 2013 was 38.0%. At March 31, 2014 and 2013, signiﬁ cant components of deferred tax assets and liabilities were as follows: Deferred tax assets: Accrued bonuses Accrued employees’ retirement beneﬁ ts Net deﬁ ned beneﬁ t liability Tax loss carryforwards Unrealized intercompany proﬁ ts Investments in subsidiaries and afﬁ liated companies Other Valuation allowance Total deferred tax assets Deferred tax liabilities: Reserve for advanced depreciation Depreciation Undistributed earnings of overseas subsidiaries and afﬁ liated companies Unrealized gains on securities Other Total deferred tax liabilities Net deferred tax assets Millions of yen Thousands of U.S. dollars 2014 2013 2014 ¥ 6,154 ¥ — 35,001 39,172 13,736 23,047 36,559 5,975 27,501 — 35,273 11,464 22,631 34,602 $ 59,748 — 339,816 380,311 133,359 223,757 354,942 153,669 (48,394) 105,275 137,446 (41,467) 95,979 1,491,932 (469,845) 1,022,087 6,653 20,948 11,287 25,706 14,419 10,220 14,711 7,926 19,181 12,091 64,592 203,379 109,583 249,573 139,990 79,013 ¥ 26,262 64,129 ¥ 31,850 767,117 $ 254,971 At March 31, 2014 and 2013, deferred tax assets and liabilities were classiﬁ ed as follows: Deferred tax assets - current Deferred tax assets - non-current Deferred tax liabilities - current (included in other current liabilities) Deferred tax liabilities - non-current Millions of yen 2014 ¥ 25,600 21,441 21 20,758 2013 ¥ 21,405 19,502 9 9,048 Thousands of U.S. dollars 2014 $ 248,544 208,165 204 201,534 The reconciliation of the statutory tax rate and the effective income tax rates for the years ended March 31, 2014 and 2013 was as follows: Statutory tax rate Increase (decrease) in taxes resulting from: Permanent differences Equity in earnings of unconsolidated subsidiaries and afﬁ liated companies Differences of tax rates for overseas consolidated subsidiaries Undistributed earnings of overseas subsidiaries and afﬁ liated companies Change in statutory tax rate Amortization of goodwill Other Effective income tax rates 2014 38.0% (1.3) (3.0) (5.8) 3.4 1.6 1.4 (1.4) 32.9% 2013 38.0% 0.7 (3.6) (7.2) 2.4 — 1.5 2.6 34.4% The “Act for Partial Amendment of the Income Tax Act, etc.” (Act No. 10 of 2014) was promulgated on March 31, 2014 and, as a result, the Company and its domestic subsidiaries are no longer subject to the Special Reconstruction Corporation Tax effective for ﬁ scal years beginning on or after April 1, 2014. As a result, the effective statutory tax rate used to measure the Company’s deferred tax assets and liabilities was changed from 38.0% to 35.6% for the temporary differences expected to be realized or settled in the ﬁ scal year beginning April 1, 2014. The effect of the announced reduction of the effective statutory tax rate was to decrease deferred tax assets after offsetting deferred tax liabilities by ¥1,627 million ($15,796 thousand), net deferred losses on hedges by ¥6 million ($58 thousand) and remeasurements of deﬁ ned beneﬁ t plans by ¥74 million ($718 thousand) and increase deferred income taxes by ¥1,547 million ($15,019 thousand) as of and for the year ended March 31, 2014. 11. NET ASSETS The Corporation Law of Japan provides that an amount equal to 10% of the amount to be disbursed as distributions of cap- ital surplus (other than the capital reserve) and retained earn- ings other than the earned reserve) be transferred to the capital reserve and the earned reserve, respectively, until the sum of the capital reserve and the earned reserve equals 25% of the capital stock account. Such distributions can be made at any time by resolution of the stockholders, or by the Board of Directors if certain conditions are met. At the June 2014 annual stockholders’ meeting, stock- holders approved the payment of cash dividends of ¥5.00 per share, aggregating to ¥8,149 million ($79,117 thousand) which has not been reﬂ ected in the accompanying consolidated ﬁ nancial statements for the year ended March 31, 2014. 12. COMMITMENTS AND CONTINGENT LIABILITIES At March 31, 2014, commitment line of credit to unconsolidated subsidiaries and afﬁ liated companies was as follows: Total commitment line of credit Loans receivable outstanding Balance This commitment does not necessarily imply that the unused amount may be fully utilized. Millions of yen ¥ 3,400 196 ¥ 3,204 Thousands of U.S. dollars $ 33,010 1,903 $ 31,107 At March 31, 2014 and 2013, contingent liabilities were as follows: As guarantors of loans to: Unconsolidated subsidiaries and afﬁ liated companies Other Notes discounted Export bills discounted Notes endorsed Millions of yen Thousands of U.S. dollars 2014 2013 2014 ¥ 3,324 ¥ 1,432 8,052 6,959 ¥ 11,376 ¥ 8,391 ¥ 1,060 ¥ 627 892 — 541 640 $ 32,272 78,175 $ 110,447 $ 10,291 6,087 8,660 Contingent liabilities associated with securitization of receivables ¥ 11,531 ¥ 10,361 $ 111,951 . c n I , s e i r t s u d n I y a r o T 91 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 92 4 1 0 2 t r o p e R l a u n n A 13. LEASES Finance leases The Group holds certain buildings, machinery and equipment and intangible assets by leases. Finance lease transactions which do not transfer ownership of the leased assets whose lease inceptions are on or before March 31, 2008 are accounted for by a method similar to the method applicable to ordinary operating lease transactions. Total lease payments under these leases were ¥209 million ($2,029 thousand) and ¥383 million for the years ended March 31, 2014 and 2013, respectively. Pro forma information relating to acquisi- tion costs, accumulated depreciation/amortization and accumu- lated loss on impairment and net book value for property held under ﬁ nance lease transactions which do not transfer owner- ship of the leased property to the lessee on an “as if capitalized” basis at March 31, 2014 and 2013 was as follows: March 31, 2014: Machinery and equipment March 31, 2013: Machinery and equipment March 31, 2014: Machinery and equipment Millions of yen Accumulated depreciation/ amortization Net book value Acquisition costs ¥ 1,727 ¥ 1,727 ¥ 1,581 ¥ 1,581 ¥ 146 ¥ 146 Millions of yen Accumulated depreciation/ amortization Net book value Acquisition costs ¥ 2,160 ¥ 2,160 ¥ 1,793 ¥ 1,793 ¥ 367 ¥ 367 Thousands of U.S. dollars Acquisition costs $ 16,767 $ 16,767 Accumulated depreciation/ amortization $ 15,350 $ 15,350 Net book value $ 1,417 $ 1,417 Future minimum lease payments under ﬁ nance leases subsequent to March 31, 2014 and 2013 were as follows: Due within one year Due after one year Total Millions of yen 2014 ¥ 134 12 ¥ 146 2013 ¥ 220 147 ¥ 367 Thousands of U.S. dollars 2014 $ 1,301 117 $ 1,417 The acquisition costs and future minimum lease payments under ﬁ nance leases include the imputed interest expense portion. Operating leases Future minimum lease payments under noncancellable operating leases subsequent to March 31, 2014 and 2013 were as follows: Due within one year Due after one year Total Millions of yen 2014 ¥ 420 1,755 ¥ 2,175 2013 ¥ 247 586 ¥ 833 Thousands of U.S. dollars 2014 $ 4,078 17,039 $ 21,117 14. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses included in cost of sales and selling, general and administrative expenses for the years ended March 31, 2014 and 2013 were ¥55,500 million ($538,835 thousand) and ¥53,342 million, respectively. 15. LOSS ON IMPAIRMENT OF FIXED ASSETS The Company and its consolidated subsidiaries grouped assets used for business based on the classiﬁ cation under the manage- ment accounting. For assets to be disposed and idle assets, each asset is considered to constitute a group. For the year ended March 31, 2014, the carrying value of certain business-use assets for which proﬁ tability declined and assets to be disposed were written down to the recoverable amount. As a result, the Company and its consolidated subsidiaries recog- nized a loss on impairment of ﬁ xed assets in the amount of ¥14,390 million ($139,709 thousand). The major assets for which a loss on impairment was recognized were as follows: Millions of yen Thousands of U.S. dollars Location Use Classiﬁ cation Loss on impairment Urayasu, Chiba, Japan Second Head Ofﬁ ce Bldg. St-Maurice de Beynost, France Films production facilities Buildings Land Other Machinery and equipment Other ¥ 1,131 7,060 3 ¥ 3,385 506 $ 10,981 68,544 29 $ 32,864 4,913 The recoverable amount of the above assets was measured at their value in use or the net selling value. The value in use was cal- culated by discounting future cash ﬂ ows at a discount rate of 8%, and the net selling value was calculated based on the real estate appraisal value. 16. OTHER COMPREHENSIVE INCOME The following table presents reclassiﬁ cation adjustments and tax effects allocated to each component of other comprehensive income for the years ended March 31, 2014 and 2013. Millions of yen Thousands of U.S. dollars Net unrealized gains on securities: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses included in net income Before tax effect Tax effect Net unrealized gains on securities Net deferred gains (losses) on hedges: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses included in net income Assets acquisition cost adjustment Before tax effect Tax effect Net deferred gains (losses) on hedges Foreign currency translation adjustments: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses included in net income Foreign currency translation adjustments Remeasurements of deﬁ ned beneﬁ t plans: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses included in net income Before tax effect Tax effect Remeasurements of deﬁ ned beneﬁ t plans Share of other comprehensive income of unconsolidated subsidiaries and afﬁ liated companies accounted for by the equity method: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses included in net income Share of other comprehensive income of unconsolidated subsidiaries and afﬁ liated companies accounted for by the equity method Total other comprehensive income 2014 2013 2014 ¥ 21,039 (8) 21,031 (7,080) 13,951 ¥ 21,611 1,467 23,078 (8,097) 14,981 $ 204,262 (78) 204,184 (68,738) 135,447 (432) 72 896 536 (204) 332 (955) (17) (385) (1,357) 550 (807) 94,366 (12) 94,354 51,585 881 52,466 (199) 94 (105) 23 (82) 5,225 (13) 5,212 (661) — (661) 153 (508) 2,614 (7) 2,607 (4,194) 699 8,699 5,204 (1,981) 3,223 916,175 (117) 916,058 (1,932) 913 (1,019) 223 (796) 50,728 (126) 50,602 ¥ 113,767 ¥ 68,739 $ 1,104,534 . c n I , s e i r t s u d n I y a r o T 93 4 1 0 2 t r o p e R l a u n n A 17. Business Combinations Acquisition of Zoltek Companies, Inc. 1. Summary of business combination The Company purchased the entire stake in Zoltek Companies, Inc. on February 28, 2014. (1) Name and business of the acquired company Name of the acquired company: Zoltek Companies, Inc. Business: Manufacture and distribution of large tow carbon ﬁ ber composite materials (2) Major reason for business combination The Company has showed its presence in the ﬁ eld of advanced applications such as aerospace and natural gas pressure ves- sels by concentrating its business resources on high-performance / high-quality regular tow carbon ﬁ ber. Through entering into the large tow carbon ﬁ ber business, the Company aims to address promising growth in commodity industrial ﬁ eld such as wind energy-related applications, which show rapid demand growth in recent years, and automobile structural parts applications. (3) Date of business combination February 28, 2014 (4) Legal form of business combination Acquisition of shares for cash consideration (5) Company name after business combination Zoltek Companies, Inc. (6) Percentage of acquired voting rights 100% (7) Basis for determining the acquiring company The Company acquired 100% of the voting rights in exchange for cash. 2. Period of operating results of the acquired company included in the consolidated ﬁ nancial statements The acquired company’s balance sheet date is September 30, 2013. For consolidation purposes, the ﬁ nancial statements as of December 31, 2013 were used. However, as the Company deemed the acquisition date as January 1, 2014, operating results were not included in the consolidated ﬁ nancial statements. 3. Acquisition cost Acquisition cost: $584,000 thousand Cost directly related to acquisition: ¥859 million ($8,340 thousand) 4. Amount of goodwill, reason for recognition, and amortization method and period Amount of goodwill: $275,000 thousand Reason for recognition: Goodwill was recognized as the excess of the acquisition cost over the net fair value of assets acquired and liabilities assumed. Amortization method and period: Straight-line method over 10 years . c n I , s e i r t s u d n I y a r o T 94 4 1 0 2 t r o p e R l a u n n A 5. Details on assets acquired and liabilities assumed on the date of business combination Current assets Non-current assets $154,000 thousand $209,000 thousand $363,000 thousand Total assets Current liabilities Non-current liabilities Total liabilities $22,000 thousand $24,000 thousand $46,000 thousand 6. Allocation of acquisition cost As the allocation of the acquisition cost is incomplete as of March 31, 2014, provisional accounting treatment is applied based on reasonable information available as of that date. 7. Effect on the consolidated statement of income assuming the business combination had been carried out on April 1, 2013 The effect on operating results for the year ended March 31, 2014 was immaterial. This information has not been audited by the independent auditors of the Company. Purchase of Shares in Woongjin Chemical Co., Ltd. 1. Summary of business combination Toray Advanced Materials Korea Inc., a consolidated subsidiary of the Company, purchased a 56.35% stake in Korea’s Woongjin Chemical Co., Ltd. on February 28, 2014. (1) Name and business of the acquired company Name of the acquired company: Woongjin Chemical Co., Ltd. Business: Manufacture and distribution of ﬁ bers, water treatment ﬁ lters, A-PET sheets (cast ﬁ lm), etc. (2) Major reason for business combination By acquiring the acquired company’s main business of ﬁ bers and textiles as well as its water treatment ﬁ lters business, which has grown in recent years and has been improving proﬁ tability, the Company expects it would enhance the busi- ness foundation of Toray Advanced Materials Korea Inc. and generate synergies in the overall business development of the Toray Group. (3) Date of business combination February 28, 2014 (4) Legal form of business combination Acquisition of shares for cash consideration (5) Company name after business combination Woongjin Chemical Co., Ltd. (The name has been changed to Toray Chemical Korea Inc. effective March 31, 2014.) (6) Percentage of acquired voting rights Percentage of voting rights before the acquisition: 0.52% Percentage of additional acquisition of voting rights: 56.35% Percentage of voting rights after the acquisition: 56.88% (7) Basis for determining the acquiring company The Company and Toray Advanced Materials Korea Inc. acquired more than half of the voting rights in exchange for cash. 2. Period of operating results of the acquired company included in the consolidated ﬁ nancial statements The acquired company’s balance sheet date is December 31, 2013. However, as the Company deemed the acquisition date as January 1, 2014, operating results were not included in the consolidated ﬁ nancial statements. 3. Acquisition cost Acquisition cost: W432.7 billion ($406,673 thousand) 4. Amount of goodwill, reason for recognition, and amortization method and period Amount of goodwill: W168.5 billion ($158,365 thousand) Reason for recognition: Goodwill was recognized as the excess of the acquisition cost over the net fair value of assets acquired and liabilities assumed. Amortization method and period: Straight-line method over 10 years 5. Details on assets acquired and liabilities assumed on the date of business combination Current assets W251.8 billion ($236,654 thousand) Non-current assets W703.1 billion ($660,808 thousand) W954.9 billion ($897,462 thousand) Total assets Current liabilities W273.0 billion ($256,579 thousand) Non-current liabilities W215.5 billion ($202,538 thousand) W488.6 billion ($459,117 thousand) Total liabilities 6. Effect on the consolidated statement of income assuming the business combination had been carried out on April 1, 2013 The effect on operating results for the year ended March 31, 2014 was immaterial. This information has not been audited by the independent auditors of the Company. . c n I , s e i r t s u d n I y a r o T 95 4 1 0 2 t r o p e R l a u n n A . c n I , s e i r t s u d n I y a r o T 96 4 1 0 2 t r o p e R l a u n n A 18. Supplementary Cash Flow Information The following is the summary of assets acquired and liabilities assumed through the acquisition of shares of Zoltek Companies, Inc., its subsidiaries and Woongjin Chemical Co., Ltd. (renamed Toray Chemical Korea Inc.), related acquisition costs and net disbursement during the year ended March 31, 2014: Current assets Non-current assets Goodwill Current liabilities Non-current liabilities Minority interests in consolidated subsidiaries Other Acquisition costs of shares Cash and cash equivalents Net disbursement due to share acquisition 19. Segment Information Millions of yen Thousands of U.S. dollars 2014 2014 ¥ 41,405 92,356 41,438 (29,662) (24,056) (20,024) (460) $ 401,990 896,660 402,311 (287,981) (233,553) (194,408) (4,466) 100,997 980,553 (9,606) (93,262) ¥ 91,391 $ 887,291 (Segment information) 1. Outline of reportable segments The reportable segments of the Group are components for which discrete ﬁ nancial information is available and whose operating results are regularly reviewed by the Board of Directors to make decisions about resource allocation to the segments and assess performance. The Company identiﬁ es the following six segments according to the nature of the products and market for their products. Reportable segment Main products Fibers & Textiles Plastics & Chemicals IT-related Products Filament yarns, staple ﬁ bers, and woven and knitted fabrics of nylon, polyester and acrylic ﬁ bers, etc.; non-woven fabrics, ultra-microﬁ ber non-woven fabric with suede texture and apparel products Nylon, ABS, PBT, PPS and other resins and molded products, polyoleﬁ n foam; polyester, polypropylene, PPS and other ﬁ lms and processed ﬁ lm products; raw materials for synthetic ﬁ bers and other plastics; zeolite catalysts; ﬁ ne chemicals for pharmaceuticals and agrochem- icals; veterinary medicine (excludes ﬁ lm and resin covered in IT-related Products segment) Films and plastic products for information and telecommunications related products; mate- rials for electronic circuits and semiconductors; color ﬁ lters for LCDs and related materials and equipment; materials for plasma display panels; magnetic recording materials; graphic materials and related equipment Carbon Fiber Composite Materials Carbon ﬁ bers, carbon ﬁ ber composite materials and their molded products Environment & Engineering Comprehensive engineering; condominiums; industrial equipment and machinery; environment-related equipment; water treatment membranes and related equipment; materials for housing, building and civil engineering Life Science Pharmaceuticals and medical devices 2. Measurement of sales, income, assets and other material items of reportable segments The accounting policies for the reportable segments are the same as those described in Note 1. SIGNIFICANT ACCOUNTING POLICIES. The ﬁ gures of segment income are based on operating income. Intersegment sales are determined based on consideration of the market price and related information. 3. Information on sales, income, assets and other material items of reportable segments Millions of yen Year ended March 31, 2014: Sales to outside customers ¥ 755,474 ¥ 470,542 ¥ 245,741 ¥ 113,342 ¥ 180,197 ¥ 58,205 ¥ 14,277 ¥1,837,778 ¥ 7,139 Intersegment sales 16,199 32,751 118,518 Life Science 1,213 60,907 308 Others 1 Total IT- related Products Carbon Fiber Composite Materials Environment & Engineering Plastics & Chemicals Fibers & Textiles Adjustments Consolidated Total — ¥ 1,837,778 — (118,518) Total sales ¥ 756,687 ¥ 503,293 ¥ 252,880 ¥ 113,650 ¥ 241,104 ¥ 58,206 ¥ 30,476 ¥ 1,956,296 ¥ (118,518) ¥ 1,837,778 Segment income ¥ 52,919 ¥ 18,010 ¥ 24,586 ¥ 16,927 ¥ 6,397 ¥ 5,605 ¥ 1,987 ¥ 126,431 ¥ (21,178) ¥ 105,253 ¥ 618,469 ¥ 507,133 ¥ 361,102 ¥ 341,762 ¥ 202,146 ¥ 76,440 ¥ 57,717 ¥ 2,164,769 ¥ (45,086) ¥ 2,119,683 Segment assets Depreciation and amortization Investment in unconsolidated subsidiaries and afﬁ liated companies accounted for by the equity method Capital expenditures 19,368 19,688 18,331 14,339 2,843 2,134 1,235 77,938 805 78,743 24,148 41,252 4,006 3,432 9,996 2,853 5,422 91,109 (587) 90,522 26,842 19,386 20,059 40,290 3,333 8,632 1,069 119,611 (1,404) 118,207 Millions of yen . c n I , s e i r t s u d n I y a r o T 97 4 1 0 2 t r o p e R l a u n n A Year ended March 31, 2013: Sales to outside customers ¥ 632,150 ¥ 395,835 ¥ 237,593 ¥ 77,620 ¥ 178,355 ¥ 56,599 ¥ 14,127 ¥ 1,592,279 ¥ 7,403 Intersegment sales 27,946 Life Science 64,485 652 839 Others 1 Total IT- related Products Carbon Fiber Composite Materials Environment & Engineering Plastics & Chemicals Fibers & Textiles 16,301 117,627 (117,627) Adjustments Consolidated Total — ¥ 1,592,279 — Total sales ¥ 632,989 ¥ 423,781 ¥ 244,996 ¥ 78,272 ¥ 242,840 ¥ 56,600 ¥ 30,428 ¥ 1,709,906 ¥ (117,627) ¥ 1,592,279 Segment income ¥ 43,222 ¥ 18,302 ¥ 22,959 ¥ 7,299 ¥ 2,628 ¥ 7,456 ¥ 1,557 ¥ 103,423 ¥ (19,987) ¥ 83,436 ¥ 456,766 ¥ 456,685 ¥ 334,165 ¥ 233,085 ¥ 176,568 ¥ 69,087 ¥ 47,238 ¥ 1,773,594 ¥ (41,661) ¥ 1,731,933 Segment assets Depreciation and amortization Investment in unconsolidated subsidiaries and afﬁ liated companies accounted for by the equity method Capital expenditures 15,572 17,704 15,850 11,760 2,626 1,905 1,257 66,674 914 67,588 16,308 36,386 3,205 224 6,938 2,933 5,075 71,069 (631) 70,438 27,297 24,521 23,393 15,561 4,251 4,488 889 100,400 (1,265) 99,135 Thousands of U.S. dollars Year ended March 31, 2014: Sales to outside customers $ 7,334,699 $ 4,568,369 $ 2,385,835 $ 1,100,408 $ 1,749,485 $ 565,097 $ 138,612 Intersegment sales 591,330 317,971 Life Science 69,311 11,777 2,990 Others IT- related Products Carbon Fiber Composite Materials Environment & Engineering Plastics & Chemicals Fibers & Textiles Total Adjustments Consolidated Total 10 157,272 1,150,660 (1,150,660) $ 17,842,505 $ — $ 17,842,505 — Total sales $ 7,346,476 $ 4,886,340 $ 2,455,146 $ 1,103,398 $ 2,340,816 $ 565,107 $ 295,883 $ 18,993,165 $ (1,150,660) $ 17,842,505 Segment income $ 513,777 $ 174,854 $ 238,699 $ 164,340 $ 62,107 $ 54,417 $ 19,291 $ 1,227,485 $ (205,612) $ 1,021,874 $ 6,004,553 $ 4,923,621 $ 3,505,845 $ 3,318,078 $ 1,962,583 $ 742,136 $ 560,359 $ 21,017,175 $ (437,728) $ 20,579,447 Segment assets Depreciation and amortization Investment in unconsolidated subsidiaries and afﬁ liated companies accounted for by the equity method Capital expenditures 188,039 191,146 177,971 139,214 27,602 20,718 11,990 756,680 7,816 764,495 234,447 400,505 38,893 33,320 97,049 27,699 52,641 884,553 (5,699) 878,854 260,602 188,214 194,748 391,165 32,359 83,806 10,379 1,161,272 (13,631) 1,147,641 Notes: 1) “Others” represents service-related businesses such as analysis, survey and research. 2) a) “Adjustments” of segment income for the year ended March 31, 2014 of ¥(21,178) million ($(205,612) thousand) includes intersegment eliminations of ¥(934) million ($(9,068) thousand) and corporate expenses of ¥(20,244) million ($(196,544) thou- sand). “Adjustments” of segment income for the year ended March 31, 2013 of ¥(19,987) million includes intersegment elim- inations of ¥(27) million and corporate expenses of ¥(19,960) million. The corporate expenses consist of the headquarters’ research expenses, etc. that are not allocated to each reportable segment. b) “Adjustments” of segment assets for the year ended March 31, 2014 of ¥(45,086) million ($(437,728) thousand) includes inter- segment eliminations of ¥(63,419) million ($(615,718) thousand) and corporate assets of ¥18,333 million ($177,990 thousand). “Adjustments” of segment assets for the year ended March 31, 2013 of ¥(41,661) million includes intersegment elimina- tions of ¥(61,374) million and corporate assets of ¥19,713 million. The corporate assets consist of the headquarters’ research assets, etc. that are not allocated to each reportable segment. 3) “Segment income” is reconciled to operating income. . c n I , s e i r t s u d n I y a r o T 98 4 1 0 2 t r o p e R l a u n n A (Related information) Geographic information Sales to outside customers Millions of yen Asia Year ended March 31, 2014: Japan China Others North America, Europe and other areas Total Sales to outside customers ¥ 925,867 ¥ 305,742 ¥ 323,151 ¥ 283,018 ¥ 1,837,778 Year ended March 31, 2013: Japan China Others Millions of yen Asia North America, Europe and other areas Total Sales to outside customers ¥ 870,315 ¥ 222,514 ¥ 268,291 ¥ 231,159 ¥ 1,592,279 Year ended March 31, 2014: Japan China Others Asia North America, Europe and other areas Total Sales to outside customers $ 8,989,000 $ 2,968,369 $ 3,137,388 $ 2,747,748 $ 17,842,505 Thousands of U.S. dollars Sales amounts are allocated to countries or regions according to the customers’ location. Property, plant and equipment, net Millions of yen Asia March 31, 2014: Japan Republic of Korea Others North America, Europe and other areas Total Property, plant and equipment, net ¥305,161 ¥152,570 ¥154,781 ¥168,723 ¥781,235 March 31, 2013: Japan Republic of Korea Others Millions of yen Asia North America, Europe and other areas Total Property, plant and equipment, net ¥317,658 ¥84,534 ¥124,686 ¥100,362 ¥627,240 March 31, 2014: Japan Republic of Korea Others Asia North America, Europe and other areas Total Property, plant and equipment, net $ 2,962,728 $ 1,481,262 $ 1,502,728 $ 1,638,087 $ 7,584,806 Thousands of U.S. dollars (Information about loss on impairment of ﬁ xed assets by reportable segments) Year ended March 31, 2014: Loss on impairment Fibers & Textiles Plastics & Chemicals IT- related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & corporate Total ¥ 1,687 ¥ 6,826 ¥ 2,425 ¥ 2,512 ¥ 259 ¥ 681 ¥ — ¥ — ¥ 14,390 Millions of yen Year ended March 31, 2013: Loss on impairment Fibers & Textiles ¥ 150 Plastics & Chemicals IT- related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & corporate Total ¥ 280 ¥ 225 ¥ 264 ¥ 990 ¥ 63 ¥ — ¥ — ¥ 1,972 Millions of yen Year ended March 31, 2014: Loss on impairment Fibers & Textiles Plastics & Chemicals IT- related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & corporate Total $ 16,379 $ 66,272 $ 23,544 $ 24,388 $ 2,515 $ 6,612 $ — $ — $ 139,709 Thousands of U.S. dollars (Information about amortization and balance of goodwill by reportable segments) Millions of yen Year ended March 31, 2014: Amortization of goodwill Balance of goodwill Fibers & Textiles Plastics & Chemicals IT- related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & corporate Total ¥ 12,724 (25) ¥ 191 1,384 ¥ 3,070 ¥ 24,801 29,976 300 ¥ — 3,414 ¥ — — ¥ — 1 ¥ — ¥ 3,536 — 72,300 Year ended March 31, 2013: Amortization of goodwill Balance of goodwill Fibers & Textiles Plastics & Chemicals IT- related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & corporate Total Millions of yen ¥ (248) (72) ¥ 16 907 ¥ 3,132 ¥ 238 ¥ (16) 27,871 1,060 — ¥ — — ¥ 1 1 ¥ — ¥ 3,123 — 29,767 Year ended March 31, 2014: Amortization of goodwill Balance of goodwill Fibers & Textiles Plastics & Chemicals IT- related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & corporate Total $ (243) $ 1,854 123,534 13,437 $ 29,806 $ 2,913 $ — 240,786 291,029 33,146 $ — — $ — 10 $ — $ 34,330 — 701,942 Thousands of U.S. dollars “Others” represents service-related businesses such as analysis, survey and research. 20. AMOUNTS PER SHARE Basic net income per share is computed based on the net income attributable to stockholders of common stock and the weighted-average number of shares of common stock out- standing during the year. Diluted net income per share is computed based on the net income available for distribution to the stockholders and the weighted-average number of shares of common stock outstanding during the year after giving effect to the dilutive potential of shares of common stock to be issued upon the exercise of warrants and stock acquisition rights. Amounts per share of net assets are computed based on the net assets available for distribution to the stockholders and the number of shares of common stock outstanding at year end. Cash dividends per share represent the cash dividends pro- posed by the Board of Directors applicable to the respective years together with any interim cash dividends paid. . c n I , s e i r t s u d n I y a r o T 99 4 1 0 2 t r o p e R l a u n n A Net income: Basic Diluted Cash dividends applicable to the year Net assets 21. SUBSEQUENT EVENTS Year ended March 31, 2014 Yen 2014 2013 U.S. dollars 2014 ¥ 36.59 35.70 10.00 527.32 ¥ 29.75 28.90 10.00 444.45 $ 0.36 0.35 0.10 5.12 Issuance of Zero Coupon Convertible Bonds The Board of Directors of the Company resolved the issuance of zero coupon convertible bonds due 2019 and zero coupon con- vertible bonds due 2021(hereinafter, the “Bonds”) on May 22, 2014. The payments for the Bonds were completed on June 9, 2014 (London time; unless otherwise indicated, hereinafter the same shall apply). The outline of the issuance is as follows: 1. Outline of Zero Coupon Convertible Bonds due 2019 (1) Issue Price (amount to be paid) 100.0% of the principal amount of the Bonds (The Bonds are issued in the denomination of ¥10 million ($97 thousand) each.) (2) Offer Price 102.5% of the principal amount of the Bonds . c n I , s e i r t s u d n I y a r o T 100 4 1 0 2 t r o p e R l a u n n A (3) Aggregate Principal Amount of the Bonds ¥50 billion ($485 million) plus an aggregate principal amount of the Bonds in respect of replacement certiﬁ cates (for lost, sto- len, destroyed, mutilated or defaced certiﬁ cates, if issued in accordance with the terms and conditions of the Bonds) (4) Coupon Zero (5) Closing Date and Issuing Date of the Bonds June 9, 2014 (6) Redemption The Bonds shall be redeemed at 100% of their principal amount on August 30, 2019 (maturity date). In addition to this, the Bonds may be redeemed if certain events occur as set forth in the terms and conditions of the Bonds. (7) Matters regarding Stock Acquisition Rights [1] Class and number of shares issued upon exercise of stock acquisition rights The class of shares to be acquired by a bondholder exercising its stock acquisition rights shall be the shares of common stock of the Company, and the number of the shares shall be determined by dividing the aggregate principal amount of the Bonds with respect to the exercised stock acquisition rights by the conversion price as set forth in [3] (ii). Fractions of a share shall not be issued upon the exercise and no adjustment or cash payment shall be made. [2] Number of stock acquisition rights 5,000 plus the number of stock acquisition rights determined by dividing an aggregate principal amount of the Bonds in respect of replacement certiﬁ cates by ¥10 million ($97 thousand) [3] Amounts to be paid upon exercise of stock acquisition rights (i) Upon exercise of each stock acquisition right, the relevant Bond shall be deemed to be acquired by the Company as a capital contribution in kind by the relevant bondholder at the price equal to the principal amount of the Bond. (ii) Conversion price ¥891 ($9) per share (initial conversion price) [4] Exercise period of stock acquisition rights At any time during the period from, and including, June 23, 2014 to, and including, August 16, 2019 (at the local time of the place where the stock acquisition right is to be exercised), but subject to certain provisions in the terms and condi- tions of the Bonds [5] Capital stock and capital surplus increased by the exercise of stock acquisition rights The amount of capital stock increased by the exercise of stock acquisition rights shall be 50% of the maximum capital increase amount calculated in accordance with Article 17 of the Ordinance on Company Accounting, rounding up the frac- tion. The amount of capital surplus increased shall be the difference between the maximum capital increase amount and the amount of capital stock increased. [6] Grant of stock acquisition rights by the succeeding company in case of organizational restructuring, etc. Certain provisions in the terms and conditions of the Bonds (8) Acquisition at the Option of the Company Certain provisions in the terms and conditions of the Bonds (9) Collateral and Guarantee No collateral or guarantee (10) Use of Proceeds The net proceeds from the issuance of zero coupon convertible bonds due 2019 and 2021 are expected to be used primar- ily as follows: [1] approximately ¥50 billion ($485 million) by the end of March 2015 for Toray Group’s capital expenditures including in respect of carbon ﬁ ber and prepreg (sheet consisting of resin-impregnated carbon ﬁ ber) facilities in Japan and the United States, facilities for ﬁ lms for IT-related products in Japan, and PPS (polyphenylene sulphide) resin facilities in South Korea; [2] approximately ¥30 billion ($291 million) by the end of March 2015 for R&D expenses, principally in respect of Green Innovation Businesses and Life Innovation Businesses, which Toray Group considers to be its growth business ﬁ elds; and [3] approximately ¥20 billion ($194 million) by the end of July 2014 as funding for the repurchase of its own shares by the Company with a view to enabling the Company to implement ﬂ exible capital policies that respond to changes in the business environment. As the number of its own shares the Company is able to repurchase is dependent on, among other things, market conditions, to the extent not all of the amount referred to above in respect of the proceeds of the offering of the Bonds is applied towards such repurchase, any balance will be applied towards repayment of interest-bearing liabilities. 2. Outline of Zero Coupon Convertible Bonds due 2021 (1) Issue Price (amount to be paid) 100.0% of the principal amount of the Bonds (The Bonds are issued in the denomination of ¥10 million ($97 thousand) each.) (2) Offer Price 102.5% of the principal amount of the Bonds (3) Aggregate Principal Amount of the Bonds ¥50 billion ($485 million) plus an aggregate principal amount of the Bonds in respect of replacement certiﬁ cates (for lost, stolen, destroyed, mutilated or defaced certiﬁ cates, if issued in accordance with the terms and conditions of the Bonds) (4) Coupon Zero (5) Closing Date and Issuing Date of the Bonds June 9, 2014 (6) Redemption The Bonds shall be redeemed at 100% of their principal amount on August 31, 2021 (maturity date). In addition to this, the Bonds may be redeemed if certain events occur as set forth in the terms and conditions of the Bonds. (7) Matters regarding Stock Acquisition Rights [1] Class and number of shares issued upon exercise of stock acquisition rights The class of shares to be acquired by a bondholder exercising its stock acquisition rights shall be the shares of common stock of the Company, and the number of the shares shall be determined by dividing the aggregate principal amount of the Bonds with respect to the exercised stock acquisition rights by the conversion price as set forth in [3] (ii). Fractions of a share shall not be issued upon the exercise and no adjustment or cash payment shall be made. [2] Number of stock acquisition rights 5,000 plus the number of stock acquisition rights determined by dividing an aggregate principal amount of the Bonds in respect of replacement certiﬁ cates by ¥10 million ($97 thousand) [3] Amounts to be paid upon exercise of stock acquisition rights (i) Upon exercise of each stock acquisition right, the relevant Bond shall be deemed to be acquired by the Company as a capital contribution in kind by the relevant bondholder at the price equal to the principal amount of the Bond. (ii) Conversion price ¥827 ($8) per share (initial conversion price) [4] Exercise period of stock acquisition rights At any time during the period from, and including, June 23, 2014 to, and including, August 17, 2021 (at the local time of the place where the stock acquisition right is to be exercised), but subject to certain provisions in the terms and conditions of the Bonds [5] Capital stock and capital surplus increased by the exercise of stock acquisition rights The amount of capital stock increased by the exercise of stock acquisition rights shall be 50% of the maximum capital increase amount calculated in accordance with Article 17 of the Ordinance on Company Accounting, rounding up the frac- tion. The amount of capital surplus increased shall be the difference between the maximum capital increase amount and the amount of capital stock increased. [6] Grant of stock acquisition rights by the succeeding company in case of organizational restructuring, etc. Certain provisions in the terms and conditions of the Bonds (8) Acquisition at the Option of the Company Certain provisions in the terms and conditions of the Bonds (9) Collateral and Guarantee No collateral or guarantee (10) Use of Proceeds Please refer to 1(10) above. Repurchase of Shares The Board of Directors of the Company resolved at the meeting held on May 22, 2014 to repurchase the Company’s shares, pur- suant to the provision of Article 156 of the Companies Act, as applied pursuant to the provision of Article 165, Paragraph 3 thereof. 1. Reason for Repurchase The Company intends to repurchase its own shares in order to implement ﬂ exible capital policies that respond to changes in the business environment. 2. Matters regarding Repurchase . c n I , s e i r t s u d n I y a r o T 101 4 1 0 2 t r o p e R l a u n n A (1) Class of Shares to be Repurchased (2) Total Number of Shares to be Repurchased Up to 36,000,000 shares (3) Total Amount of Shares to be Repurchased Up to ¥20 billion ($194 million) (4) Repurchase Period (5) Repurchase Method From May 23, 2014 to July 31, 2014 Market purchase Common stock . c n I , s e i r t s u d n I y a r o T 102 4 1 0 2 t r o p e R l a u n n A Investor Information (As of March 31, 2014) Common Stock: Issued: 1,629,814,175 shares (excluding treasury stock) Number of Stockholders: 172,709 Annual General Meeting: The annual general meeting of stockholders is normally held in June in Tokyo. Listings: Common stock is listed on the Tokyo Stock Exchange. Independent Auditors: Ernst & Young ShinNihon LLC Transfer Agent: Sumitomo Mitsui Trust Bank, Limited 1-4-1, Marunouchi Chiyoda-ku, Tokyo 100-0005, Japan Cash Dividends Per Share Total for the year Interim Principal Stockholders 2014 2013 ¥10.00 ¥10.00 5.00 5.00 Thousands of shares Percentage of shares held The Master Trust Bank of Japan, Ltd. (Trust account) 116,556 Nippon Life Insurance Co. Japan Trustee Services Bank, Ltd. (Trust account) Mitsui Life Insurance Co., Ltd. Sumitomo Mitsui Banking Corporation Japan Trustee Services Bank, Ltd. (Trust 4 account) Mitsui Fudosan Co., Ltd. State Street Bank West Client-Treaty Mitsui Sumitomo Insurance Co., Ltd. 71,212 70,393 35,961 30,022 21,447 19,460 19,057 17,638 7.15 4.37 4.32 2.21 1.84 1.32 1.19 1.17 1.08 The Chase Manhattan Bank, N.A. London S.L. Omnibus Account 16,924 1.04 * Percentage of shares held is calculated excluding 1,667,228 shares of treasury stock. Stock Price Range Composition of Stockholders (Thousands of shares) (Yen) 1,200 1,000 800 600 400 200 0 2009 April 2010 April 2011 April 2012 April 2013 April 2014 March Individuals and Others 450,898 27.64% Companies and Individuals in Foreign Countries 412,928 25.31% Financial Institutions 596,714 36.57% Securities Companies 24,000 1.47% Other Japanese Companies 146,942 9.01% . c n I , s e i r t s u d n I y a r o T 103 4 1 0 2 t r o p e R l a u n n A Corporate Data (As of March 31, 2014) Toray Industries, Inc. Head Ofﬁ ce Nihonbashi Mitsui Tower, 1-1, Nihonbashi-Muromachi 2-chome, Chuo-ku, Tokyo 103-8666, Japan Telephone: 81 (3) 3245-5111 Facsimile: 81 (3) 3245-5054 URL: http://www.toray.com Established: January 1926 Paid-in Capital: ¥147,873,030,771 Number of Employees: 45,881 Parent company: 7,123 Japanese subsidiaries: 10,247 Overseas subsidiaries: 28,511 Toray Industries, Inc. 1-1, Nihonbashi-Muromachi 2-chome, Chuo-ku, Tokyo 103-8666, Japan Telephone: 81(3)3245-5111 Facsimile: 81(3)3245-5054 URL: http://www.toray.com For questions about this report: Contact IR Dept. Telephone: 81(3)3245-5113 Facsimile: 81(3)3245-5459 e-mail: ir@nts.toray.co.jp Printed in Japan Issued: October 2014

Continue reading text version or see original annual report in PDF format above