Toray Industries Inc.
Annual Report 2017

Plain-text annual report

The TORAY WAY AN NUAL REPORT April 1, 2016–March 31, 2017 2017 Toray Group is an integrated chemical industry group aiming to be a global top company in advanced materials based on the firm belief that, “as the foundation of products, materials have the power to bring about fundamental transformations in society.” “Innovation by Chemistry” We are constantly striving to create new value in each of our businesses— Fibers & Textiles, Performance Chemicals, Carbon Fiber Composite Materials, Environ- ment & Engineering, and Life Science—which are all founded on our core technologies: organic synthetic chemistry, polymer chemistry, biotechnology, and nanotechnology. 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 C O N T E N T S 04 Financial & Non-financial Highlights 06 To Our Stockholders and Investors 09 Medium-term Management Program: “Project AP-G 2019” 19 Founded on Technology and Knowledge 25 Business Summaries and Strategies by Segment 34 Sustainable Management System 47 Organization 48 Toray Group Worldwide Network 49 Financial Section 89 Independent Auditor’s Report 90 Investor Information 90 Corporate Data 02 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 envi- ronment made at the present time. This annual report is not a guarantee of the Company’s future business performance. 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 while guided by our corporate philosophy of “contribut- ing to society through the creation of new value with innovative ideas, technologies and products.” OUR PHILOSOPHY 03 0919342549Financial Highlights Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31 3% 3% 1% 1% 9% 9% 8% 8% 42% 42% 14% 14% 1% 1% 1% 1% 6% 6% 13% 13% ¥2,026.5 ¥2,026.5 billion billion ¥146.9 ¥146.9 billion billion 18% 18% 39% 39% Fibers & Textiles Plastics & Chemicals IT-related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Other Businesses 25% 25% 20% 20% Net Sales Ratio by Segment Operating Income Ratio by Segment (2017) (2017) Years ended March 31 For the year: Net sales Operating income Net income attributable to owners of parent Cash flows from operating activities Cash flows used in investing activities Free cash flows Cash flows from financing activities Capital expenditures Depreciation and amortization R&D expenditure At year-end: Total assets Net assets Per share of common stock (in yen and U.S. dollars): Net income attributable to owners of parent: Basic Diluted Cash dividends Net assets Ratios (%): Operating income to net sales Equity ratio ROA ROE Debt/equity ratio (times) 2015 2016 2017 2017 Billions of yen Millions of U.S. dollars*1 ¥2,010.7 ¥2,104.4 ¥2,026.5 $18,061 123.5 71.0 141.3 (140.7) 0.6 (10.0) 124.9 81.5 59.5 154.5 90.1 196.1 (154.4) 41.7 (77.6) 136.6 91.2 58.8 146.9 99.4 174.0 (135.2) 38.7 (18.0) 152.0 89.1 59.2 1,309 886 1,550 (1,205) 345 (161) 1,355 794 528 ¥2,357.9 1,080.8 ¥2,278.4 1,024.9 ¥2,396.8 1,100.2 $21,362 9,805 $0.55 0.55 0.12 5.69 ¥44.33 44.28 11.00 616.70 6.1 41.8 5.5 7.7 0.71 ¥56.38 56.31 13.00 591.50 7.3 41.5 6.7 9.3 0.74 ¥62.17 62.10 14.00 638.64 7.2 42.6 6.3 10.1 0.70 *1 U.S. dollar amounts have been converted from yen at the exchange rate of ¥112.2=US$1, the approximate exchange rate prevailing on March 31, 2017. 04 Non-financial Highlights Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31 (1,000 tons-CO2 eq) (Tons) (%) 5,488 5,605 5,228 957 1,013 994 1.5 1.1 0.6 2015 2016 2017 2015 2016 2017 2015 2016 2017 Greenhouse Gas Emissions Atmospheric Emissions of VOC Landfill Waste Rate (Toray Group) (Toray Group) (Toray Industries, Inc. and its group companies in Japan) Years ended March 31 2015 2016 2017 Number of employees—consolidated Male Female Percentage of women in management positions—non-consolidated*2 (%) Employment rate for the handicapped—non-consolidated*3 (%) Index of Environmental Impact Greenhouse gas emissions—Toray Group (1,000 tons-CO2 eq) Atmospheric emissions of VOC—Toray Group (tons) Atmospheric emissions (SOx)—Toray Group (tons) Water emissions (BOD)—Toray Group (tons) Water emissions (COD)—Toray Group (tons) Landfill waste rate— Toray Industries, Inc. and its group companies in Japan (%) 45,789 — — 8.3 2.1 5,228 957 3,658 935 2,462 1.1 45,839 32,629 13,210 8.7 2.1 5,488 1,013 3,192 973 2,475 1.5 46,248 33,274 12,974 8.9 2.2 5,605 994 3,374 927 2,403 0.6 Facility investment in safety, health, accident prevention, and environmental preservation projects—Toray Group (billions of yen) 10.34 11.60 11.22 Social contribution expenditure—consolidated basis (billions of yen)*4 1.2 1.5 1.6 *2 As of end April each year *3 As of end June each year *4 Social contribution expenditure consists of the amount of expenditure for academics, science research, education; art, culture, sports; community social welfare, international exchange; environmental preservation; and disaster relief and other activities. 05 To Our Stockholders and Investors Toray’s Performance in Fiscal 2016 We would like to express our sincere appreciation for the continuous sup- port and understanding of our stock- holders and investors. In fiscal 2016 (the year ended March 31, 2017), the global economy, on the whole, maintained its recovery. The Jap- anese economy also continued on a gradual recovery track. Under such circumstances, Toray Group, based on the Medium-term Man- agement Program, “Project AP-G 2016,” which spans the three years from fiscal 2014 to fiscal 2016, implemented a growth strategy focused on taking ad- vantage of growth business fields, pur- suing business expansion in growth countries and regions, and further bol- stering its competitiveness in accor- dance with the program. As for foreign exchange rates, the yen remained stron- ger against the U.S. dollar and other ma- jor currencies compared with a year earlier, resulting in declines in net sales and profits at overseas subsidiaries when converted into yen. As a result, consolidated net sales for fiscal 2016 declined 3.7% compared with the same period of the previous fiscal year to ¥2,026.5 billion. Operating income decreased 4.9% to ¥146.9 bil- lion, and ordinary income fell 4.3% to ¥143.7 billion. Net income attributable to owners of parent increased by 10.3% to ¥99.4 billion. Promotion of Long-term Corporate Vision and Medium-term Management Program Toray Group established a ten-year, long- term corporate vision, “AP-Growth TORAY 2020” (Vision 2020) in 2011, aiming to be Akihiro Ni kkaku President Toray Industries, Inc. TURNING TECHNOLOGY INTO VALUE “Innovation by Chemistry” expresses our drive to be- come a global top company in advanced materials, with chemistry at our core. 06 a corporate group that continually in- nesses in fields that contribute to re- our hollow fiber ultrafiltration mem- creases revenues and profits and that solving global environmental, resource, brane modules, in April 2015, from the provides high value for all stakeholders. and energy issues. We have steadily Republic of Korea’s largest membrane “Vision 2020” sets our sights on sustain- expanded this business, taking net filtration water purification facility and, ably increasing revenue and profit, as we sales from ¥463.1 billion in fiscal 2013 in December 2015, from a water filtra- aim to have consolidated net sales of ¥3 to ¥628.2 billion in fiscal 2016. We had tion facility in Thailand, which is the trillion, operating income of ¥300 billion important progress in the aircraft field, largest such facility in Southeast Asia. and ROE of 13% around 2020. in which we signed a long-term, com- In our LI Project, we have been As the first stage of “Vision 2020,” prehensive supply contract for carbon working to improve quality of health- we established “Project AP-G 2013,” a fiber prepreg with The Boeing Company care, ease burdens on medical profes- three-year medium-term management in November 2015. We have started sionals, and contribute to health and program starting in fiscal 2011. We fol- joint development under a new frame- longevity. lowed this with our second stage, work and have decided to build new, We have steadily increased our net “Project AP-G 2016,” from fiscal 2014. integrated production facilities for car- sales from ¥119.6 billion in fiscal 2013 to Under “Project AP-G 2016,” we fo- bon fiber prepreg in South Carolina, ¥195.5 billion in fiscal 2016. In the ad- cused on growth business fields— United States. vanced materials field, demand for PP Green Innovation Business Expansion Meanwhile, in the automotive in- spunbond for hygiene products is rapid- (GR) Project and Life Innovation Busi- dustry, Toray started supplying carbon ly increasing in Asia, and we have con- ness Expansion (LI) Project—and grow- fiber components for fuel cell vehicles, tinued to strengthen our production ca- ing in growth countries and regions— in November 2014, to Toyota Motor pacity in our plants in the Republic of Asia, Americas, Developing Countries Corporation and, in April 2016, to Hon- Korea, China, and Indonesia. Thus, Toray Business Expansion (AE-II) Project. da Motor Co., Ltd. We expect this sector has built a strong supply network as a Combined with the Total Cost Re- to grow in the future. main supplier of PP spunbond in Asia. duction (TC-III) Project, for bolstering As the demand for lithium battery In the pharmaceutical and medical competitiveness, the entire Toray Group separators increases in the battery ma- devices field, we obtained approval of is moving forward jointly on these four terials field, we are following increased an additional indication for our oral an- projects. capacity in Japan from September 2015 tipruritus drug REMITCH® (a registered Review of “Project AP-G 2016” with additional production capabilities trademark of Torii Pharmaceutical Co., in the Republic of Korea. Ltd.), as well as approval in February In the water-treatment membrane 2017 to start clinical trials of our new field, we contribute to solving water re- cancer drug TRK-950. Our GR Project aims to expand busi- source issues. We received orders for In the AE-II Project, we have worked Long-term Corporate Vision and Medium-term Management Program Long-term Corporate Vision AP-Growth TORAY 2020 (Vision 2020) Medium-term Management Program AP-G 2013 Reform and Proactive Management A New Growth Track AP-G 2016 Innovation and Proactive Management Implementation of Growth Strategy AP-G 2019 Innovation and Proactive Management To Achieve the Vision 2020 Goals 2011 April 2014 April 2017 April 2019 March 07 To Our Stockholders and Investors to open new markets and expand our gram, “Project AP-G 2019.” It follows be the best we can be, and do what business by organically strengthening “Project AP-G 2016” as the third stage of should be done. collaboration with Toray Group’s over- “Vision 2020,” which covers the period People-centric management is also seas bases, resulting in steadily increas- from fiscal 2017 to fiscal 2019. With “In- important. To this end, we are investing ing net sales from ¥809.3 billion in fiscal novation and Proactive Management” as in human resource development based 2013 to ¥919.6 billion in fiscal 2016. In its overarching theme, “Project AP-G on the concept that the success or fail- this period, Toray established a new 2019” is for completing our ongoing ini- ure of a company is decided by its peo- joint-venture water treatment company tiatives while also enhancing initiatives to ple—employees shape its destiny. in China, Toray WBD Membrane Technol- create new revenue sources for increas- Valuing human resources is an as- ogy (JS) Co., Ltd., in June 2016. In the ing our corporate value and supporting pect in which Japanese management Americas, Toray established a resin sustainable growth from 2020 onwards. excels. At Toray Group, we are not only compounding company in Mexico in Oc- (For more information on “Project AP-G managing in this style in Japan but in tober 2014. In March 2016, we expanded 2019,” please see pages 9–18.) our entire global operations. large tow carbon fiber capacity, and de- cided to build a new integrated plant for airbag fibers and fabrics in July 2016. In our TC-III Project we have been Toray Management Style and Sustainability We hold a medium- to long-term view of our environment and have a solid grasp on our situation, which al- lows us to do what should be done and thoroughly reducing variable and fixed Our corporate philosophy of “contribut- address the issues we need to in ad- costs while pursuing production pro- ing to society through creating new vance of our global competitors. We are cess innovation and total operational value with innovative ideas, technolo- growing sustainably as we face our next cost reduction in sales and marketing. gies and products,” is the basis for our step, and continue to be a corporate We thus reduced cost by a total of strong belief that “technology changes group that provides high value to our ¥194.9 billion over the three years from materials and materials change soci- stockholders, and all our stakeholders. fiscal 2014 to fiscal 2016. ety.” Vital in creating new value is man- We hope you share our long-term vision agement from a long-term perspective. and we ask for your continued support. Aiming for Sustainable Medium- to Long-term Growth Developing materials takes time and accumulated technology; as such, it September 2017 also requires unwavering management Akihiro Nikkaku in the long term. To achieve unwaver- In February 2017, Toray formulated the ing, farsighted management it is vital to new Medium-term Management Pro- be faithful to the fundamentals, work to Targets and Results of Medium-term Management Program: Project AP-G 2016 Net Sales (Trillions of yen) Operating Income (Billions of yen) 200 150 100 50 0 ROE (%) 12 9 6 3 0 FY2013 FY2016 (Target) (Result) FY2013 FY2016 (Target) (Result) FY2013 FY2016 (Target) (Result) 2.5 2.0 1.5 1.0 0.5 0 08 Medium-term Management Program: “Project AP-G 2019” Toray Group established a long-term cor- porate vision, “AP-Growth TORAY 2020” (Vision 2020), taking into consideration our corporate structure from 2011 until 2020, aiming to become a corporate group that continually increases revenues and profits and that provides high value for all stakeholders. The third medium-term management program under “Vision 2020,” “Project AP-G 2019,” sets out three basic strate- gies for achieving “Vision 2020”: business expansion in growth business fields; ex- pansion and advancement of global busi- ness; and strengthening competitiveness. Moreover, under this program we are pro- actively creating new revenue streams with our sights set on increasing our cor- porate value and continuing sustainable growth beyond 2020. 09 09 Medium-term Management Program: “Project AP-G 2019” Innovation and Proactive Management— To Achieve the “Vision 2020” Goals BASIC STRATEGIES 01 Business Expansion in Growth Business Fields Contribute to resolving global environmental Improve quality of healthcare, ease burden on issues and energy and resources issues medical professionals, and contribute to health Expansion of Green Innovation Businesses and longevity Expansion of Life Innovation Businesses Please see pages 12-13. Please see pages 14-15. Target net sales in fiscal 2019: Target net sales in fiscal 2019: ¥900.0 billion ¥270.0 billion KEY INITIATIVES 01 New Business Creation 02 R&D and Intellectual Property Toray will create new businesses with revenues of ¥1 trillion in the 2020s. Toray will invest a total of ¥220 billion in R&D over three years from the start of fiscal 2017. In order to make sources of earnings for the next growth stage, we will identify several large-scale themes that will lead to the creation of new busi- ness domains in the 2020s, and accelerate product development and business formation by allocating the resources selectively. 50% 25% Half of R&D expenses will be allocated to Green Innovation, and one-quarter to Life Innovation Green Innovation Life Innovation 5 10 3Financial Targets FY2016 (Actual) FY2019 (Target) Net Sales ¥2,026.5 billion ¥2,700.0 billion Dividend Policy Operating Income ¥146.9 billion ¥250.0 billion Operating Income to Net Sales ROA (Operating Income/Total Assets) ROE (Net Income/ Owners’ Equity) 7.2% 6.3% 9% about 9% 10.1% about 12% Aim for sustainable dividend increase linked to business performance Guideline of D/E Ratio Below 1 *Exchange rate assumption: ¥100/US$ 02 Expansion and Advancement of Global Business 03 Strengthening Competitiveness Expand business globally by capturing profit Pursue total cost reduction, and strengthen opportunities in growth countries and regions corporate structure, and sales and marketing Please see pages 16-17. Please see page 18. Target net sales in fiscal 2019: ¥1,500.0 billion Target cost reductions fiscal 2017–fiscal 2019: ¥220 billion 03 Capital Investment 04 M&A and Business Alliances Toray will make a total of ¥500 billion in capital investment in the three years from the start of fiscal 2017. To increase and to complement growth of existing businesses, Toray will proactively utilize M&A and business alliances as means to adjust to the chang- ing business environment and to attain sustainable growth. 60% Allocate 60% of total capital expenditures to growth and expansion fields Growth and Expansion Maintenance/Improvement 05 Human Resources Toray will develop leaders at management level for the next generation, and secure and develop core 60% Allocate 60% of total capital human resources who will exhibit “strong opera- expenditures to overseas tional competency” at the frontlines. Overseas Japan 11 3 BASIC STRATEGIES 01 Business Expansion in Growth Business Fields Expansion of Green Innovation Businesses Toray Group’s Green Innovation businesses contribute to society by providing solutions to is- sues such as the global environment, energy and resources, as well as supporting the Group’s sustainable growth. In this field, we are seizing various opportunities for business growth such as reducing greenhouse gas (GHG) emissions, decreasing environmental impact, water treat- ment, recycling, and air purification. We will further expand our businesses in this field by prioritizing investment of business resources such as capital investment and R&D in existing large business themes. In the fields such as renewable energy and environmentally friendly vehicles we will contribute to solving social issues by creating and supplying advanced materials. As a result, we will achieve greater profits. Moreover, we will continue with our environmental management initiative of lifecycle management (LCM), which considers environmental impacts throughout the entire lifecycle of products and services. Net Sales of Green Innovation Businesses ¥628.2 billion (31%) ¥463.1 billion (25%) ¥900.0 billion (33%) FY2013 FY2016 FY2019 (Target) GHG Reduction Low Environmental Impact Water Treatment Recycling Air Purification Other *( ) net sales ratio 12 Carbon fiber, which is one-quarter of the weight and ten times the tensile strength of steel, accounts for 50% of the structural weight of Boeing 787s. The environmental impact of aircraft is drastically reduced by making them lighter. Automobiles with a lighter environmental foot- print, such as electric and fuel cell vehicles, are becoming more common. Toray is contributing to the realization of low-carbon societies through our proprietary carbon fiber components and separators for lithium-ion secondary batteries. Main Business Fields GHG Reduction Carbon fiber for aircraft, automobiles, wind-turbine blades, pressure vessels, etc. Separators for lithium-ion secondary batteries Low Environmental Impact Non-halogen flame retardant material TORAY WATERLESS PLATE® Water Treatment Water treatment membranes such as RO, MBR, MF/UF membranes Home water purifiers Recycling Regeneration-type recycling, circulation-type recycling Material, chemical recycling Air Purification Dust-collecting filters Air filters Water resource issues are growing around the world. Toray is tackling such water scarcity issues through mem- brane treatment technologies for seawater desalination and wastewater reclamation. 13 3 BASIC STRATEGIES 01 Business Expansion in Growth Business Fields Expansion of Life Innovation Businesses Our Life Innovation businesses aim to improve the quality of health- care, ease the burden on medical professionals, and contribute to health and longevity from various avenues by using our extensive range of group-wide managerial resources. In Toray’s pharmaceuticals and medical devices business, which is primarily based on products such as pharmaceuticals, dialysis machines, and catheters, we will continue to restructure the busi- ness by changing our business portfolio and expanding our busi- ness overseas. In advanced materials fields—such as high-functional polypro- pylene spunbond and sports fabrics, disposable protective cloth- ing, and clothing using functional materials for vital signs monitor- ing—we will accelerate expansion of each product business, including further expansion globally. We will also enhance building of business models to expand business related to downstream fields and the final market. Toray’s proprietary advanced materials are used in numerous fields and help our lives become safer and more com- fortable. 14 Net Sales of Life Innovation Businesses ¥195.5 billion (10%) ¥119.6 billion (7%) ¥270.0 billion (10%) FY2013 FY2016 FY2019 (Target) Advanced Materials in LI Businesses Pharmaceuticals & Medical Devices *( ) net sales ratio Main Business Fields Advanced Materials in LI Businesses Pharmaceuticals/ Medical Devices PP spunbond for hygiene products Functional materials for vital signs monitoring Disposable protective clothing Air filters Pharmaceuticals Artificial kidneys Catheters Dialysis machines Extracorporeal circulation therapeutic columns X-ray CT cradles, cartridges Contact lenses DNA chips High-sensitivity protein detection system Fabric for sportswear 15 3 BASIC STRATEGIES 02 Expansion and Advancement of Global Business In the United States and Europe there is increasing de- mand for advanced materials in industries such as auto- motive and energy fields. Meanwhile, noticeable trends in China and other emerging countries are improvements in their standard of living associated with rising income levels and strengthening of environmental regulations. We will expand our business globally by capturing profit opportunities by foreseeing such trends in growth coun- tries and regions. Overseas Net Sales ¥883.7 billion ¥1,042.1 billion ¥1,500.0 billion FY2013 FY2016 FY2019 (Target) 16 FOR GLOBAL BUSINESS EXPANSION AND ADVANCEMENT 01 Promote “AE (Asia, Americas, Europe, and Emerging Regions) Project” targeting overseas businesses on a group-wide basis 02 Prioritize allocation of capital investment and R&D resources to growth countries and regions 03 Establish a supply system for cost competitive products 04 Radically reform business composition and organizational struc- tures for advancement of business 05 In the businesses that have a global platform, differentiated prod- ucts, and core technologies, implement brand initiatives based on integrated business strategies and establish a supply chain 17 3 BASIC STRATEGIES 03 Strengthening Competitiveness We will strengthen our competitiveness by pursuing total cost reduction, and strengthening our corporate structure, and sales and marketing. We aim to reduce costs by a total of ¥220 billion in three years from fiscal 2017 under the current Medium-term Management Program, “Project AP-G 2019.” PURSUE TOTAL COST REDUCTION, AND STRENGTHEN CORPORATE STRUCTURE AND SALES AND MARKETING t Promote Total Cost Reduction (TC) Project on a group-wide basis t Activities of variable cost reduction (annual target at over 3.6%) t Control fixed costs through P-ratio* accounting method (P-ratio of under 0.96 each fiscal year) TOTAL COST REDUCTION t For innovation of production process, identify themes by category in terms of “innovative cost reduction,” “large-scale total cost reduction,” and “capacity increase of existing fa- cilities” to achieve reduction effects by more than ¥50 billion in three years * P (Performance) - ratio = fixed cost growth rate/marginal profit growth rate Target: less than 1.0 or monitored by division under budget STRENGTHENING CORPORATE STRUCTURE t Clarify issues of companies and businesses with profitability problems, and gather Toray Group’s collective efforts to improve revenue and profit Options include reducing or withdrawing from businesses with limited growth poten- tial or excessive competition t Manage the Group’s assets effectively and expand revenue and profit STRENGTHENING SALES AND MARKETING t Sales and marketing lead the way in building a profit-making system in cooperation with production, the technology and R&D departments, and external partners t Maximize revenue and profit of existing businesses through improvement in price poli- cies, distribution systems and brand initiatives 18 Founded on Technology and Knowledge Since its founding, Toray has carried out R&D on advanced materials based on the firm conviction that “research and techni- cal development provide the key to build- ing the Toray of tomorrow.” Materials have a low profile because they are hid- den in the final product, but history at- tests to the fact that advanced materials have created next-generation industries. For example, the invention of synthetic polymers sparked the creation of numer- ous industries including today’s synthetic fiber and plastic industries. Similarly, the discovery of semiconductors led to tran- sistors, large-scale integrated circuits, and the modern IT industry. Today, a new aircraft industry is developing thanks to the advent of carbon fiber composite ma- terials. Without technological and materi- als innovation, we cannot solve essential problems. We at Toray will continue creat- ing innovative materials that help solve many of the world’s social and economic challenges. 19 19Founded on Technology and Knowledge Toray’s Technical Fields Fusing Core Technologies to Develop Advanced Materials Toray Group’s core technologies are “organic synthetic chemistry,” “polymer chemistry,” “bio- technology” and “nanotechnology.” Based on these, we are working toward greater depth and fusion of fundamental technologies such as polymerization, yarn-making, fibers application processing, film processing, and organic synthesis, while expanding our operations from fibers and textiles to films, chemicals, and plastic resins. We are also creating advanced materials and developing businesses in the fields of electronics & information materials, carbon fiber com- posite materials, pharmaceuticals, medical devices, and water treatment. Material Design TORAY’s Core Technologies Organic Synthetic Chemistry Polymer Chemistry Biotechnology Nano- technology Textile Technology Fiber Technology Fine Technology Carbonization Technology Molding Technology Film Technology Film Processing Technology Dispersion Control Technique Coating Technology Fine Patterning Surface Control Technology Microstructure Technology Gene Utilization Technology Medicinal Technology Fermentation Technology Synthetic Fibers Textiles, Apparels Industrial Materials, Amenity Materials Man-made Suede Carbon Fibers Advanced Composite Materials Engineering Plastics High-performance Films Electronic Materials Printing Materials High-performance Membranes, Water Treatment Systems Artificial Organs, Medical Devices Biotools Pharmaceuticals Veterinary Medicines, Fine Chemicals Synthetic, Plastic Raw Materials 20 Founded on Technology and Knowledge Basic Approach to R&D ¥59.2 billion 53.3 10.8 55.5 12.6 59.5 58.8 15.0 16.1 17.3 42.5 42.9 44.5 42.7 41.9 Toray Consolidated subsidiaries FY2012 FY2013 FY2014 FY2015 FY2016 R&D Expenses (Billions of yen) Persistent Efforts Based on Insight into Material Value It inevitably takes a certain amount of time to develop and commercialize a mate- rial. As an example, Toray began research on carbon fibers in 1961. Commercial production began 10 years later in 1971, and today these fibers are used in numer- ous aircraft, such as the Boeing 787. Many overseas chemical companies withdrew from development of carbon fibers or scaled down their efforts, but Toray saw their potential value as a material, and worked persistently, developing the business through applications such as fishing rods and golf shafts. While we were building cashflow and refining our technology, we worked with the long-term goal of the eventual application of carbon fibers in aircraft. This ability to foresee value in ma- terials together with our strong commitment to persist forms the basic approach and real strength of our research and development at Toray. The Philosophical DNA of Toray Researchers and Engineers: “The Deeper, the Newer” The phrase, “The Deeper, the Newer,” has been passed down as a key phrase at Toray, and is part of the philosophical DNA of our researchers and engineers. The concept underlying this is that when you dig deep into something, the result will be new discoveries and inventions. We are always in pursuit of the ultimate limits. This pursuit of R&D cannot be achieved with a complacent attitude; it must be based on an understanding of the needs of society and with a grand vision of the times. Only then can we create genuinely innovative materials that have value to society and the economy. Basic Policies and Strategies Our basic policy of research and development is to strengthen the stable revenue base and increase revenue of our Core Growth Driving Businesses while continuing to produce advanced materials in Strategically Expanding Businesses and Inten- sively Developing and Expanding Businesses. Fundamental to this is organic growth based on deepening and fusing our core technologies, and further, through open innovation with high synergistic effects. Based on our “Project AP-G 2019” medium- term management program, we will create new technologies and materials focus- ing on our Green Innovation and Life Innovation businesses. Moreover, we aim to put the intrinsic values of these new technologies and materials to practical use. 21 Founded on Technology and Knowledge Fiscal 2016 Topics Development of TORAYCA® Prepreg for Next-generation Aerospace Applications We at Toray have developed the world’s highest perfor- mance prepreg (resin-impregnated carbon fiber sheet), TORAYCA®, which has 30% improved tensile strength and impact resistance compared with conventional materials, for next-generation aerospace applications. Toray has been supplying the aerospace industry with high-perfor- mance TORAYCA® 3900 series prepregs, particularly for primary aircraft structures, for more than 20 years. We have now developed a high-performance thermosetting matrix resin series, including the 3940 matrix resin, which solves a difficult trade-off problem and combines a high level of elasticity and toughness. A new composite material of this matrix resin and the world’s highest strength carbon fiber, TORAYCA® T1100G provides an improved tensile strength and impact resistance of 30% over conventional materials, and greatly improves the mechanical properties such as compression strength and peel resistance. De- pending on the type of application, there is a possible weight reduction of up to 20%. This is expected to further improve the efficiency and reliability of aircraft parts such as the main wing, fuselage and engine parts. Technological Demonstration of Cellulosic Sugar-manufacturing System Using Membranes Toray, in a joint venture with Mitsui Sugar Co., Ltd., has started a technological demonstration to manufacture cellulosic sug- ar—a raw material used for producing various biochemical products—from the bagasse (sugar cane biowaste) generat- ed at sugar mills in Thailand. The technological demonstration is part of the research and technical development of a biopro- cess using membranes that combines Toray’s water treat- ment membrane and biotechnologies. The bioprocess using membranes is a technology enabling the production of high quality, low cost cellulosic sugar from inedible biomass. It also saves 50% energy in manufacturing by using water treatment membranes in the saccharification and refining processes. Commencement of Clinical Trial of Cancer Drug in the United States Toray was allowed by the United States Food and Drug Ad- ministration (FDA) in February 2017 to commence a Phase I clinical trial of TRK-950, a therapeutic agent for solid cancer, the first such trial to be originated by Toray. TRK-950 is a monoclonal antibody preparation that recognizes and at- tacks cancer cells. Currently, we are promoting its global clinical development, including in Europe and the United States, seeking prompt marketing approval of a first-in-class cancer treatment drug. R&D Achievements by Segment Fibers & Textiles We at Toray have developed a polyester textile, which is moder- ately bulky and stretchable with a smooth and flexible texture characteristic of ultra-fine micro-crimped fibers, using our in- novative composite spinning technology NANODESIGN®. We are also working on product development of hitoe®, a functional material for vital signs monitoring, and have started a service for protecting workers by continually monitoring the biological information of the wearer. Plastics & Chemicals We have made a world-first innovation by developing a super- tough polyamide material that is difficult to break, even under impact, and maintains its strength and rigidity. We achieved this by incorporating a movable cross-link structure in which the mo- lecular bond can slide, enabling it to disperse applied force at the molecular level. Moreover, we have obtained approval to manu- facture and market DORNER® to treat feline chronic kidney dis- ease. This drug is the first of its kind in Japan and was developed utilizing much accumulated basic and clinical data for DORNER®. IT-related Products Toray has developed a waterless UV printing system using wa- ter-soluble inks, a very eco-friendly approach to printing as it uses no volatile organic solvents. The system is made possible through the use of a newly designed hydrophilic polymer and TORAY waterless plates. We also have been awarded the 63rd Okochi Memorial Production Prize (fiscal 2016) by the Okochi Memorial Foundation for our photosensitive polyimide for the insulating layer in an organic electro luminescence display. Carbon Fiber Composite Materials We have developed the world’s highest performance TORAYCA® prepreg. We were awarded the 65th CSJ Award for Technical Development (fiscal 2016) by the Chemical Society of Japan for development of high performance CFRP with the use of epoxy resin NANOALLOY® technology applying reaction-induced phase separation. Environment & Engineering Toray, in collaboration with the University of Tokyo Institute for Solid State Physics, shed new light on water mobility in reverse osmosis (RO) membrane pores. This has opened the way for developing innovative energy saving RO membranes. Moreover, our development of highly functional RO membranes was awarded both the Minister of Economy, Trade and Industry Award and the Minister of the Environment Award at the 15th Green Sustainable Chemistry (GSC) Awards. Life Science Toray has commenced a Phase I clinical trial of TRK-950, a ther- apeutic agent for solid cancer, in the United States. In Japan, we have obtained manufacturing and marketing approval for OD tablets as an additional orally disintegrating tablet formulation of REMITCH® CAPSULES 2.5 µg, used for treating pruritus in he- modialysis and chronic liver disease patients. – REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. 22 Founded on Technology and Knowledge Research and Development Framework Technology Center: Our Headquarters for R&D The Technology Center is the headquarters for all of our research and technical development capabilities at Toray Group, and it serves as our international head- quarters for R&D. By having so many experts from so many fields in one undivided R&D organization, the fusion of technologies gives birth to new technologies, and we can solve an issue in one business field by applying the entirety of our technical expertise from a range of fields. Moreover, we are building a framework to enable various advanced materials and technologies created for use in one field to be rapidly applied to other fields. Promoting Open Innovation We are promoting open innovation in collaboration with customers, business part- ners and external organizations at our Automotive & Aircraft Center, our base for developing advanced materials for automotive and aircraft application, and at our Environment & Energy Center, which is an organization for technological collabora- tion in the environmental and energy fields. Our center for life innovations is our Life Innovation Business Strategic Planning Department, with offices in Kobe, Hyogo Prefecture, Japan and Minnesota, U.S. It works closely with the Technology Center and with domestic and international medical institutions, laboratories and medical equipment companies. Toray Group R&D Framework Corporate Strategic Planning Division Head Office Staff Fibers & Textiles Division Manufacturing Division t n e m l t r a p e D d e t a e r - y g o o n h c e T l t n e m l t r a p e D d e t a e r - g n i r u t c a f u n a M Resins & Chemicals Division Board of Directors Films Division President Executive Vice Presidents Executive Committee Board of Senior Vice Presidents Torayca & Advanced Composites Division Electronic & Information Materials Division Pharmaceuticals & Medical Products Division Water Treatment & Environment Division Affiliated Companies Division Regional Supervisory Organization i l n o i s i v D t n e m p o e v e D & h c r a e s e R Fibers & Textiles Research Laboratories Films & Film Products Research Laboratories Chemicals Research Laboratories Composite Materials Research Laboratories Electronic & Imaging Materials Research Laboratories Global Environment Research Laboratories Pharmaceutical Research Laboratories New Frontiers Research Laboratories Advanced Materials Research Laboratories r e t n e C h c r a e s e R c i s a B Research & Development Planning Department Technology Center Advanced Textiles Development Center Development Center Environment & Energy Center Environment & Energy Development Center Automotive & Aircraft Center Advanced Composite Center Automotive Center New Projects Development Division Engineering Development Center ) l o r t n o c t c e r i d ( r e t n e C y g o o n h c e T l i n o i s i v D g n i r e e n g n E i Intellectual Property Division R&D Bases Intellectual Property Department Toray Intellectual Property Center, Ltd. lChina ........................ 3 locations lRepublic of Korea ..... 3 locations lSingapore ................. 1 location lUSA .......................... 3 locations lEurope ....... 4 locations lMalaysia .... 1 location lThailand ..... 1 location Overseas Information Bases lUSA ................ 3 locations lEurope ............ 1 location Global R&D Bases (As of June 2017) 23 Founded on Technology and Knowledge Intellectual Property The Toray Group recognizes intellectual property as an important management re- source. Our intellectual property strategy takes a trilateral approach, organically coor- dinating with our R&D strategies and business strategies. While continuing to create innovative new materials and technologies, Toray Group will promote intellectual prop- erty strategies consisting of the four points below in order to build barriers to entry that will protect the results of our R&D and firmly maintain our technological advantages. 1. Further enhance the quality of patents 2. Construct a globally competitive patent portfolio 3. Protect the Company’s technical advantages with effective measures including strategic patent applications 4. Cultivate personnel with deep knowledge of overseas intellectual property Toray Group is currently stepping up patent applications and rights acquisitions and constructing a strong patent portfolio with a priority in the growth areas of the “Project AP-G 2019” medium-term management program’s Green Innovation Busi- ness Expansion (GR) Project and Life Innovation Business Expansion (LI) Project. Moreover, with an aim of expanding and advancing our business globally, Toray Group is formulating and pursuing intellectual property strategies correlated with the business strategies and R&D strategies we are implementing globally with a focus on growth countries and regions. Domestic: 1,651 Domestic: 613 5,632 2,389 Overseas: 3,981 Overseas: 1,776 Toray Patents Filed in Fiscal 2016 Toray Patents Held to Date Toray publishes an annual Intellectual Property Report describing the intellectual property initiatives by the Toray Group. The report is available for download at: http://www.toray.com/ir/library/lib_005.html 24 Business Summaries and Strategies by Segment Until fiscal 2016 (the year ended March 31, 2017), Toray had six segments: Fibers & Textiles, Plastics & Chemicals, IT-related Products, Carbon Fiber Composite Mate- rials, Environment & Engineering, and Life Science. Recently, however, growth business fields that are considered socially impor- tant are becoming more diverse, ranging from transportation to the environment, resources and energy, and health care and longevity. As a result, our Group prod- ucts are increasingly being used in more complex and varied ways. To meet these changing societal needs, in fiscal 2017 we eliminated the Plastics & Chemicals and IT-related Products to create a new seg- ment called Performance Chemicals. For ease of understanding, we will first go over our fiscal 2016 performance in the former six segments. We will then outline our future key initiatives and fore- cast based on the five new segments. 25 25 Results by Segment for Fiscal 2016 Years ended March 31 Net sales Operating income Assets Operating income to net sales ROA (Operating income/Assets) Capital expenditures 2015 856.7 55.6 705.5 6.5 % 8.4 % 37.0 2016 892.0 68.9 680.9 7.7 % 9.9 % 35.4 (Billions of yen) 2017 856.1 66.8 722.1 7.8 % 9.2 % 41.1 Results In Japan, demand for apparel and industrial applications remained weak. Against this background, Toray Group strived to expand sales on the whole and worked to improve profitability by upgrading the business primarily through promotion of a business format that integrates fibers to textiles to final products and improving profitability through cost reduction. Overseas, mainly in apparel appli- cations, business performance of some subsidiaries in Southeast Asia and other regions were af- fected by a slowdown in final demand in Europe and China. On the other hand, materials for auto- motive applications and hygiene products remained strong in general. As a result, overall sales of Fibers & Textiles segment declined 4.0% to ¥856.1 billion from the previous year and operating income fell 3.1% to ¥66.8 billion. I S C P O T Toray to Start Airbag Nylon Fiber and Fabric Business in Mexico Toray has decided to start an au- tomobile airbag nylon fiber and fabric business at our Mexican subsidiary, Toray Advanced Textile Mexico, S.A. de C.V. (TAMX). TAMX will introduce production facilities with annual production capacity of about 10,000 tons of nylon fi- bers and fabrics for airbags by in- vesting approximately ¥10 billion. Operations are set to begin in March 2018. Demand for airbag fabrics in the Americas is expect- ed to continue growing signifi- cantly. This is creating increased demand for production of those fabrics in Mexico. The establishment of the new production base in Mexico is in response to such growing de- mand by building an integrated production system for yarn to fabric in the Americas, which is one of the most prominent airbag fabric markets in the world, and capture the robust demand for airbag fabric around the world including in Asia and Europe. Toray’s Italian Subsidiary to Enhance Production Capacity of Alcantara® Toray has decided to increase production of luxury material Al- cantara® at Alcantara S.p.A. The company plans to invest approxi- mately ¥35 billion in a phased manner over the next five years, in response to the trend in de- mand, to roughly double the cur- rent production capacity. Alcantara® has been adopted as automobile interior material primarily in luxury models due to its global brand recognition and a varied product lineup. Demand for use in electric vehicles is also ex- panding. Demand for Alcantara® is not limited to automobile interior application, with growing new de- mand for it as a material to deco- rate consumer electronics devic- es such as PCs and headphones, which is expected to lead to a shortfall in production capacity of the material in 2019. The decision to enhance production is in re- sponse to such robust demand. Toray to Enhance Production Capacity of High-performance Polypropylene Spunbond Nonwoven Fabric in Republic of Korea Toray has decided to enhance the production capacity of its high- performance polypropylene spun- bond for hygiene products at Toray Advanced Materials Korea Inc. (TAK), which is Toray’s Korean subsidiary. TAK will build an addi- tional facility—to start operations in April 2018—with a production capacity of approximately 18,000 tons per year. Demand for disposable dia- pers has been rapidly increasing in ASEAN member countries, In- dia, and China, and major hygiene products manufacturers have been successively declaring plans to expand plants producing prod- ucts for these countries. Accord- ingly, demand for PP spunbond, the main raw material of dispos- able diapers, is expected to grow, and there could be shortages in supply. Toray’s PP spunbond is currently sold widely throughout Asia. The PP spunbond produc- tion facility being added at P.T. Toray Polytech Jakarta (TPJ) start- ed operation in September 2016. Toray will continue to expand its business in emerging markets such as rapidly growing China, In- dia, and ASEAN countries. Core Growth Driving Business Fibers & Textiles 26 Core Growth Driving Business Plastics & Chemicals I S C P O T Years ended March 31 Net sales Operating income Assets Operating income to net sales ROA (Operating income/Assets) Capital expenditures 2015 496.4 23.9 562.1 4.8 % 4.5 % 21.5 2016 521.2 29.4 524.6 5.6 % 5.4 % 31.2 (Billions of yen) 2017 499.1 33.8 542.0 6.8 % 6.2 % 25.1 Results In the resin business, shipment for automotive applications was strong in general, both in Japan and overseas. Besides automotive applications, Toray Group also promoted sales expansion of ABS and PPS resins. In the film business, while overseas demand for some applications in the U.S. and Europe was sluggish, the Group made efforts to expand sales of high value-added products in Asia and other regions, and the products for packaging applications performed strongly in Japan. Toray Group, despite many of the business’s products being affected by price competition in Japan and abroad, strived to improve profitability of the business by focusing on sales expansion of high value-added products as well as on cost reduction. As a result, overall sales of Plastics & Chemicals segment declined 4.2% to ¥499.1 billion from the previous year while operating income increased 15.0% to ¥33.8 billion. Toray is Now the World’s Largest PPS Resin Manufacturer Toray to Increase Production Capacity of TORAYPEF® Polyolefin Foam at U.S. Subsidiary Veterinary Drug to Treat Chronic Kidney Disease in Cats Approved for Manufacture and Sale We have decided to increase our production capacity of TORAY- PEF® polyolefin foam manufac- tured at our subsidiary, Toray Plastics (America), Inc. (TPA), in Rhode Island. TORAYPEF® is a polyolefin foam developed using Toray's proprietary manufactur- ing method with a wide range of uses including for automobile in- teriors, as insulation for consum- er electronics, and as cushioning material for housing and civil en- gineering applications due to its excellent moldability, heat insula- tion, cushioning and moisture- barrier properties. We are invest- ing about ¥4.0 billion to add a manufacturing facility with an annual production capacity of 3,000 tons, which will become operational in early 2018. With this, our total TORAYPEF® pro- duction capacity at TPA will in- crease significantly to 7,500 tons a year. Toray’s new veterinary drug to treat chronic kidney disease in cats, RAPROSTM, an oral prostacy- clin (PGI2), attained approval for manufacture and sale on January 13, 2017. Kyoritsu Seiyaku Corpo- ration started sales in April this year. RAPROSTM is an oral prostacy- clin (PGI2), with beraprost sodium as its active ingredient. It works to protect vascular endothelial cells, to widen blood vessels, to inhibit inflammatory cytokine production and has an antiplatelet effect. These pharmacological actions are thought to improve the ischemia and hypoxia of the kidney, and to help limit the deterioration in kid- ney function and to improve clini- cal symptoms. RAPROSTM is the first drug approved in Japan clinically prov- en to help limit the deterioration of kidney function. We believe this paves the way to provide en- couraging treatment options for cats. We at Toray will continue to respond to veterinarians’ unmet medical needs in caring for ani- mals by developing new drugs. In July 2016, we held the comple- tion ceremony for a new plant that produces polyphenylene sulfide (PPS) resin TORELINA® at our whol- ly owned Korean subsidiary Toray Inc. Advanced Materials Korea Moreover, by manufacturing sodi- um hydrogen sulfide (NaSH) and paradichlorobenzene (p-DCB), the two main raw materials for manu- facturing PPS resin at the same plant, Toray intends to make it a cost competitive integrated manu- facturing base producing every- thing from raw materials and poly- mers to compounds. The plant has a capacity to produce 8,600 tons of PPS resin annually, which, with our existing Tokai plant, will boost our annual production capacity of PPS resin to 27,600 tons. Toray Group is a comprehen- sive PPS manufacturer, which of- fers PPS not only as compounds but also as films and fibers, and is the largest player in the field. With the establishment of the new pro- duction facility announced this time, the Group will pursue expan- sion of its compounds lineup into high-performance and environ- mentally friendly products, whose demand is expected to grow in the future, and further enhance its position as the world’s number- one in the PPS resin field. 27 Years ended March 31 Net sales Operating income Assets Operating income to net sales ROA (Operating income/Assets) Capital expenditures 2015 248.0 24.5 360.4 9.9 % 6.8 % 16.3 2016 251.1 26.2 362.9 10.4 % 7.2 % 29.8 (Billions of yen) 2017 254.4 30.5 384.8 12.0 % 7.9 % 32.4 Results Among materials for flat panel displays, smartphone- and tablet terminal-related materials per- formed strongly with shipments for organic EL applications growing. Shipment of battery separator films for lithium-ion secondary batteries expanded reflecting demand growth. While many of the business’s applications were affected by price competition, Toray Group strived to improve profit- ability of the business by focusing on sales expansion of high value-added products as well as on cost reduction. As a result, overall sales of IT-related Products segment increased 1.3% to ¥254.4 billion from the previous year and operating income rose 16.7% to ¥30.5 billion. Strategically Expanding Business IT-related Products I S C P O T Strengthening Group Structure for Separators for Lithium-ion Secondary Batteries Toray’s Printing-type CNT Semiconductor Achieves World's Highest Level of Carrier Mobility Toray Develops World’s First UV Printing System Free of Organic Solvents In the field of semiconductor sin- gle-walled carbon nanotubes (CNTs), Toray’s printing-type semi- conductor achieved the world's highest level of carrier mobility (an index of mobility of carriers, such as electron holes and elec- trons, within the semiconductor) of 81 cm2/Vs. With this result, we became the world’s first to show that it is possible to use printing technology to manufacture at low cost highly functional devices such as ultra-high frequency ra- dio-frequency identification (UHF RFID) tags, IC tags with a long transmission distance, that are ar- guably vital in the IoT era. Toray decided to absorb Toray Battery Separator Film Co., Ltd. (Toray BSF), a wholly owned con- solidated subsidiary that manu- factures and markets separators for lithium-ion secondary batter- ies (LIB), effective April 1, 2017. In the LIB market, the business envi- ronment is significantly changing as the demand for electric vehi- cles is expected to grow rapidly in addition to the existing consumer electronics applications, which makes it even more important to have the ability to quickly respond to the growth and sophistication of functions of separators for LIB. Based on the recognition of these trends, Toray decided to absorb Toray BSF to strengthen the foun- dation of our Group structure to appropriately respond to the LIB separator business. Toray has developed a waterless UV printing system using water- soluble inks, an extremely eco- friendly approach to printing as it uses no volatile organic solvents. is made possible The system through the use of Toray’s newly developed hydrophilic polymer and TORAY WATERLESS PLATE®. The developed waterless UV off- set printing system can be cleaned with a water-based cleaning agent—as it contains no volatile organic solvents and the inks used are water soluble—thus reducing emissions and use of volatile organic solvents generat- ed in the printing process. Fur- thermore, printing conditions such as temperature are greatly improved, significantly reducing generation of volatile organic compounds (VOCs). TORAY WATERLESS PLATE® 28 Results by Segment for Fiscal 2016 Years ended March 31 Net sales Operating income Assets Operating income to net sales ROA (Operating income/Assets) Capital expenditures 2015 158.4 26.2 436.8 16.6 % 6.7 % 45.5 2016 186.2 36.1 429.5 19.4 % 8.3 % 32.1 (Billions of yen) 2017 161.6 24.0 461.0 14.8 % 5.2 % 46.5 Results In the Carbon Fiber Composite Materials segment, while the final demand for aircraft was strong, demand for carbon fiber intermediate products (prepreg) remained on a weak note, reflecting the inventory adjustment in the supply chain. Demand of products for compressed natural gas tank ap- plications was slow due to the impact of the decline in crude oil prices. Meanwhile, shipment for wind turbine blade applications expanded on the back of growing demand. As a result, overall sales of Carbon Fiber Composite Materials segment declined 13.2% to ¥161.6 billion from the previous year and operating income fell 33.6% to ¥24.0 billion. Strategically Expanding Business Carbon Fiber Composite Materials I S C P O T Toray to Enhance Production Facilities of Large Tow Carbon Fiber Toray has decided to enhance the production facilities for large tow carbon fiber at Zoltek Companies, Inc. By the end of 2017, Zoltek will begin increasing production ca- pacity and will continue to do so until capacity at the Mexico plant is doubled to more than 10,000 tons per year. With this expansion, Zoltek’s total global production capacity will grow to more than 20,000 tons per year from the cur- rent 15,000 tons. This capacity expansion is a key move, as the demand for large tow carbon fiber is growing rapidly for industrial applications including wind turbine blades, and the in- dustry is already experiencing a supply shortage, especially in Asia, led by China and India. While the current expansion in production capacity will address this surge in demand in the short term, usage of large tow carbon fiber is expected to increase exponentially in auto- mobile structures in the future. In order to respond to this active de- mand, Toray plans to continue ex- panding carbon fiber production capacities at Zoltek and to estab- lish a stable supply structure. Toray to Establish Large-scale Production Facility for Fuel Cell Electrode Substrates at its Ehime Plant in Japan Toray has decided to develop a new large-scale production facil- ity at our Ehime Plant, Japan, for manufacturing carbon paper for the electrode substrates of fuel cell stacks. With a planned com- pletion date of May 2018, we will build a cutting-edge facility—ap- proximately five times the capac- ity of our current Shiga Plant—to efficiently produce carbon paper. Toray’s carbon paper for electrode substrates of fuel cell stacks has now been consecu- tively adopted for the fuel cell ve- hicle MIRAI, by Toyota Motor Cor- poration, and for the fuel cell vehicle CLARITY FUEL CELL, by Honda Motor Co., Ltd. Fuel cell ve- hicles are the ultimate in environ- mentally friendly driving, emitting no carbon dioxide, and mark a huge step towards building a hy- drogen-based society. Currently, Japanese vehicle manufacturers are starting serious development of next-generation models. More- over, demand for other applica- tions, such as forklifts, is expected to increase. Therefore, we decided it was necessary to dramatically expand production capacity. 29 Years ended March 31 Net sales Operating income Assets Operating income to net sales ROA (Operating income/Assets) Capital expenditures 2015 180.0 8.0 204.2 4.5 % 3.9 % 3.3 2016 183.3 9.6 193.8 5.2 % 4.8 % 3.6 (Billions of yen) 2017 186.1 9.9 204.3 5.3 % 4.8 % 4.5 Results In the water treatment business, although Toray Group continued to work on sales expansion of reverse osmosis membranes and other products, exports from Japan were affected by the further appreciation of the yen. Among domestic subsidiaries in the segment, pharmaceuticals-related plant construction and lithium-ion secondary battery-related machinery at an engineering subsid- iary performed strongly. As a result, overall sales of Environment & Engineering segment increased 1.5% to ¥186.1 billion from the previous year and operating income rose 3.3% to ¥9.9 billion. Intensively Developing and Expanding Business Environment & Engineering I S C P O T Toray Establishes New Company to Manufacture and Sell Water Treatment Membranes in China Toray Celebrates 30th Anniversary of Household Water Purifier TORAYVINO® Toray’s line of household water TORAYVINO®, which purifiers, reached its 30th anniversary this fiscal year since debuting in 1986 as a counter top water purifier, has expanded to meet the chang- ing needs and lifestyles of cus- tomers to include faucet mounted and under-the-sink water purifi- ers, and pitchers and dechlorinat- ing shower heads. In 2014, the line boasted total cumulative sales of 100 million units and filter car- tridges. We will continue to pro- vide delicious and safe water for everyone’s family as the leading household water purifier manu- facturer. Faucet mounted TORAYVINO® In June 2016, Toray established a new company, Toray WBD Mem- brane Technology (JS) Co., Ltd. (TWMT), in a joint venture with Ji- angsu Water Business Doctor En- vironmental Technology Co., Ltd., a leading engineering company in the industrial wastewater field in China. TWMT plans to manu- facture and sell water treatment membranes for use in membrane bioreactor (MBR) systems and rapidly expand its presence in the Chinese market with its pro- prietary membrane, MEMBRAY®. Demand for MBRs for waste- water recycling is expected to increase in China on the back of tightening regulations for water quality and demand for use in solving water shortages—both byproducts of industrial develop- ment. Toray’s water treatment membranes are the core of our Green Innovation business. We will continue to target large-scale orders for projects using our MEMBRAY® MBR membrane. In addition, we will accumulate fur- ther sales for our membranes that hold top-level market shares, reverse osmosis namely our membrane ROMEMBRA® and our UF membrane TORAYFIL®, which is used for applications such as treating river water. 30 Results by Segment for Fiscal 2016 Years ended March 31 Net sales Operating income Assets Operating income to net sales ROA (Operating income/Assets) Capital expenditures 2015 57.0 4.1 82.9 7.1 % 5.1 % 2.5 2016 55.8 3.1 83.3 5.5 % 3.7 % 3.2 (Billions of yen) 2017 54.2 2.1 79.7 4.0 % 2.7 % 3.4 Results In the pharmaceutical business, sales volume of pruritus treatment REMITCH® grew solidly, as the product received approval for an additional indication in 2015, while it was affected by the National Health Insurance drug price revision in April 2016. Shipment of natural-type interferon beta prepara- tion FERON® and orally active prostacyclin derivative DORNER® remained sluggish due to the impact of alternative medicines and their generic drugs. In the medical devices business, shipment of dia- lyzers grew strongly in Japan and overseas. As a result, overall sales of Life Science segment declined 3.0% to ¥54.2 billion from the previous year and operating income fell 30.0% to ¥2.1 billion. Intensively Developing and Expanding Business Life Science I S C P O T Toray Expands Range of Pruritus Treatment REMITCH® Full-scale Release of New Dialysis Machine TC-R In March 2017, Toray received ap- proval to manufacture and market a new dosage form of REMITCH® CAP- SULES 2.5 µg, an orally disintegrating tablet formulation (REMITCH® OD Tablets 2.5 µg). These new tablets can be taken with or without water. Therefore, it is expected to expand the options available to patients whose swallowing capabilities have deteriorated, such as the elderly, or those who have restrictions on wa- ter intake. Also, in September 2016, we filed an additional indication of ef- ficacy for REMITCH® CAPSULES 2.5 µg to treat pruritus (use only when sufficient efficacy is not obtained with the existing therapies or treat- ments) in peritoneal dialysis pa- tients in Japan. By obtaining this indication—adding another option to available treatments—we ex- pect to be able to greatly contrib- ute to the treatment of pruritus in peritoneal dialysis patients. Toray has begun full-scale sale of its multi-patient dialysis machine TC-R in June 2016. TC-R achieves a new level in safety and comfort for dialysis treatments, meeting the high requirements of the medical industry for safety, dependability, operability, workability, functional- ity and cleaning of dialysate. Com- pared to previous Toray dialysis machines it has improved dialy- sate adjustment and supply capa- bilities, as well as dialysate clean- ing capacity through its endotoxin retentive filter (ETRF). TC-R – REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. 31 Breakdown of Medium-term Business Strategies by New Segments The new segments, which apply from fiscal 2017, are categorized as follows. Fibers & Textiles is a Core Growth Driving Business. Newly created Performance Chemicals, which eliminated the former Plastics & Chemicals and IT-related Products, and Carbon Fiber Composite Materials are Strategically Expanding Busi- nesses, while Environment & Engineering and Life Science are Intensively Developing and Expanding Busi- nesses. Under this new five segment structure we will aim to sustainably grow revenue in each business. Moreover, while Performance Chemicals is basically a Strategically Expanding Business, chemicals and some resin products are Core Growth Driving Businesses. Business Categories Basic Policies Financial Targets (Billions of yen) Fibers & Textiles Performance Chemicals As a core growth driving business of Toray, strengthen its earnings structure, and expand business in growth business fields and regions. Further enhance global operations to pursue for significant growth. Expand business by sales expansion of high value-added products in growth business fields and maximum utilization of global bases. Strengthen earnings base by business struc- ture reform. Carbon Fiber Composite Materials Further expand the business as the world’s number-one manufacturer of carbon fibers. Environment & Engineering Expand business in the environment and energy field with focus on water treatment membranes and facility design capabilities. Net sales Operating income 0 . 0 2 1 , 1 1 . 6 5 8 0 . 2 9 8 . 6 6 Fiscal 2016 (Actual) Fiscal 2019 (Target) Fiscal 2016 (Actual) Fiscal 2019 (Target) Net sales Operating income 0 . 0 5 9 6 . 4 2 7 0 . 3 0 1 8 . 1 6 Fiscal 2016 (Actual) Fiscal 2019 (Target) Fiscal 2016 (Actual) Fiscal 2019 (Target) Net sales Operating income 0 . 0 6 2 6 . 1 6 1 0 . 5 4 0 . 4 2 Fiscal 2016 (Actual) Fiscal 2019 (Target) Fiscal 2016 (Actual) Fiscal 2019 (Target) Net sales Operating income 0 . 0 7 2 . 5 2 1 2 0 . 0 2 . 7 1 1 Fiscal 2016 (Actual) Fiscal 2019 (Target) Fiscal 2016 (Actual) Fiscal 2019 (Target) Net sales Operating income Life Science Expand sales of strategic products globally, enhance effective product development. 2 . 4 5 0 . 0 8 0 . 9 1 . 2 Fiscal 2016 (Actual) Fiscal 2019 (Target) Fiscal 2016 (Actual) Fiscal 2019 (Target) Note: Fiscal 2016 results have been restated to conform with new segments. 32 Segment Changes Business Categories Former Segment New Segments (from fiscal 2017) Core Growth Driving Businesses Strategically Expanding Businesses Intensively Developing and Expanding Businesses Fibers & Textiles Plastics & Chemicals IT-related Products Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Carbon Fiber Composite Materials Environment & Engineering Environment & Engineering Life Science Life Science Basic Strategies Main Products l Maintain and reinforce domestic business foundation and processing platform, and further strengthen business competitiveness l Reinforce business foundation of its existing operations at overseas locations, and expand business in growth business fields and regions l Strengthen Toray Group’s global operations and create new business areas by developing and expand- ing business on multiple levels combining its strengths in diverse product lines, supply chain, and glob- al sales Aim to achieve significant growth by the global fibers/textiles/final products integrated business for- mat and SCM, reinforce value chain of strategic products, and expand new business areas Filament yarns, staple fibers spun yarns, woven and knitted fabrics of nylon, polyester, acrylics and others; non-woven fabrics; ultra- microfiber non-woven fabric with suede texture; apparel products Resins, Chemicals Business l Allocate management resources and promote business expansion in growing businesses including PPS resin, resin compounds overseas and automotive materials Films Business l Invest in lithium-ion battery separator films and promote sales expansion through product development l Reorganize manufacturing of PET film, increase value of existing products by utilizing global operations, and enhance sales expansion Electronic & Information Materials Business l Expand sales of organic EL-related materials and accelerate technology development and commercialization Resins and molded products, poly- olefin foam, films and processed film products, raw materials for synthetic fibers and plastics, fine chemicals, veterinary medicine, electronic & information materials, graphic materials, etc. of products beyond the LCD display field Aerospace Applications l Further strengthen existing partnerships l Capture new programs Industrial Applications l Reinforce the overwhelming top position in the market by leveraging comprehensive strength with lineups of regular tow and large tow products l Reinforce the overwhelming top position in the wind-turbine application market through strengthening alli- ances with major customers, supported by the cost competitiveness in large tow products l Develop intermediate products/molding technology and enhance the supply chain to meet the full-scale expansion of demand for automotive applications Water Treatment Business l Expand business and improve revenue and profit in the membrane business l Enhance new development of reverse osmosis membrane products and strengthen cost competitiveness l Expand sales of UF membranes in China and the USA l Strengthen business foundation in the water treatment system and plant business Engineering Business l Expand plant business and industrial machinery (in the environment and energy fields, and life science field) l Make use of external resources in growth areas l Strengthen cost competitiveness l Accelerate overseas expansion Carbon fibers, carbon fiber com- posite materials, and molded prod- ucts from those materials Comprehensive engineering; con- dominiums; industrial equipment and machinery; environment-relat- ed equipment; water treatment membranes and related equip- ment; materials for housing, build- ing and civil engineering applica- tions Pharmaceutical Business l Expand sales of oral antipruritus drug, REMITCH® l Create next-generation drug with new process l Adjust management system associated with downsizing of existing pharmaceutical business Medical Devices Business l Expand sales of emergency and intensive care products l Develop dialyzer products and expand sales in Japan and overseas l Enhance expansion of bio-tools – REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. Pharmaceuticals; medical devices 33 Sustainable Management System We at Toray Group believe a company is a public institution for the public good. Therefore, we run our business based on a long-term perspective. The word “Chem- istry” in our corporate slogan “Innovation by Chemistry” has two meanings. The ob- vious one is the science that forms the basis for the advanced materials that we supply. The other is rapport. We will work to realize a sustainable society by main- taining good rapport and cooperation with everyone involved with Toray—cus- tomers, employees, stockholders, busi- ness partners, and people in the local community. It is our mission to create a global group with high inherent value that is ready to take on global social is- sues related to our environment, resourc- es and energy. Principal SRI indexes in which Toray is included DJSI Asia Pacific MSCI ESG Indexes Ethibel Pioneer & Excellence Registers Morningstar Socially Responsible Investment Index Euronext Vigeo World 120 Index SNAM Sustainability Indices (as of March 31, 2017) 34 34Sustainable Management System Toray Group’s Sustainability Contributing to a Sustain- able Society ciety’s health and welfare. We will thus tainable growth founded on principles. As maximize the utilization of our advanced a materials manufacturer, we will man- The world is facing increasing challenges. We believe it is our public duty to help address social issues, such as increasing global warming, food and water scarcity due to population increases, sustainabili- ty of resources and energy, and uncer- tainty over security and health. As the foundation of products, mate- rials have the power to bring about fun- damental transformations in society. We materials and core technologies to age our Group based on trustworthiness, wrestle with the rising costs of medical fairness, and transparency, while always care and ageing populations. maintaining thorough product safety and Our role as a basic materials manu- quality, and safety, accident prevention, facturer is to constantly develop innova- and environmental preservation. This is tive materials for society. This will also because we believe that we are a public drive our sustainable growth. institution with a duty to make valuable contributions to society and the public Achieving Sustainable Corporate Growth good. believe we can help realize a sustainable At Toray we want to grow sustainably and society and fulfill our social responsibili- make significant progress with our ad- ties in a way that is only possible for vanced materials globally under our long- Toray: by producing original materials term corporate vision, “AP-Growth TORAY that bring new value to the world. This is 2020” (Vision 2020). We have established based on our corporate philosophy of a new medium-term management pro- “contributing to society through the cre- gram, “Project AP-G 2019,” starting in fis- ation of new value with innovative ideas, cal 2017 (year ending March 2018), as the technologies and products.” Social Role as a Manufacturer of Advanced Materials third stage in achieving this long-term vi- sion. One of the basic strategies of this is business expansion in growth business fields. Under this we are working on two group-wide projects, Green Innovation Business Expansion (GR) Project and Life Toray’s carbon fiber composite materi- Innovation Business Expansion (LI) Proj- als are making aircraft and automobiles ect. Through these we are working to lighter. This is helping to drastically re- duce CO2 emissions and bringing low- carbon societies closer to becoming a solve critical issues relating to the global environment, resources, and energy, as well as to enhance the quality of medical reality. Toray’s advanced materials can care and contribute to health and also make a major contribution to the longevity. renewable energy field, such as carbon Sustainable growth is essential for a fiber for wind turbine blades and battery company to survive for more than a cen- separator films for lithium-ion second- ary batteries. tury. Numerous factors are needed to maintain sustainable growth. We must To realize a recycling-oriented soci- develop diverse human resources and ety we must overcome water resource partnerships, domestically and abroad, issues. Our membrane separation tech- and maintain a competitive advantage nology, developed over many years, can based on proprietary technological ca- help resolve water scarcity by enabling pabilities and intellectual property strat- seawater desalination and wastewater egies. It is also vital we, as members of treatment. society, maintain good relations with all We are pushing forward with re- stakeholders. search and development to improve so- We, at Toray Group, will achieve sus- 35 Sustainable Management System Stakeholder Engagement Toray Group has established Basic Policies to Promote Dialogue with Stakeholders. We are proactively communicating with various stake- holders in all aspects of our corpo- rate activities. Engaging with Shareholders and Investors The Group actively communicates with institutional investors and securities company analysts by providing informa- tion materials when requested and holding same-day results briefings when quarterly earnings are announced. The Group also provides a wide variety of in- formation about management policy and strategy as well as financial and earnings information through its annual report, IR materials, and information Engaging with Business Partners Engaging with the Mass Media While providing materials and products Toray recognizes that public relations as a manufacturer of advanced materi- and corporate communication activities als, Toray Group must engage in up- have a role in fulfilling responsibilities for stream management of its supply chains information disclosure as well as influ- to better fulfill the needs of its custom- encing public opinion. Accordingly, ers, including the areas of production Toray’s Corporate Communications De- facilities and procured raw materials partment reports directly to the presi- and resources. Accordingly, the Group dent, and actively engages with a wide has established its Basic Purchasing range of media organizations, acting as Policies to emphasize this approach and the public’s point of contact with the ensure fair purchasing practices. Company. Based on Toray’s Information Toray’s Basic Distribution Policies Disclosure Principles, the department emphasize environmental preservation provides fair and impartial information, and continuous work to improve quality even if it may cast the Company in a bad and reduce environmental impact from light, in a timely and appropriate man- transportation, together with fair and ner. In fiscal 2016, the Company issued equitable transactions. Together with 187 press releases and responded to our business partners we are working 289 media requests for information. pages on its website for stockholders toward more secure supply chain man- and investors. In fiscal 2016, Toray held agement. four results briefings and held 646 meet- ings with investors and analysts. Engaging with Customers Toray believes that the customer comes first. We closely communicate with our customers, mainly through our sales de- partments, and periodically conduct customer satisfaction surveys. The re- sults of these surveys are shared inter- nally at Board meetings and through in- house newsletters as we strive to provide even higher quality customer Engaging with Employees Engaging with Local Communities Toray Group strives to engage in more active dialogue with nearby residents in The Group communicates with employ- a variety of settings, including participat- ees through in-house newsletters, in- ing in events sponsored by local govern- tranet, company-wide bulletin boards ments and inviting local residents onto and other media. To share information factory grounds for summer festivals. and deepen understanding of manage- Following the Toray Group Social Ini- ment and business topics, messages tiatives Policies, we aim for our social from the President, Japanese, English, contribution activities to contribute to and Chinese versions of in-house news- sustainable development while meeting letters, and explanations of manage- the expectations of local communities. ment and business topics and projects We are proactively improving science are made available via all types of and technology in various countries. We service. media. contribute through our Toray Science Foundation in Japan and similar founda- tions in Malaysia, Thailand and Indone- sia. We also actively promote sports in Asia by co-sponsoring the Shanghai In- ternational Marathon. 36 Sustainable Management System Nurturing Human Resources and Respecting Human Rights Retaining and Nurturing Employees who Generate New Value Respect for Human Rights Promoting Diversity Toray Group believes that respect for Toray Group is committed to promoting The success or failure of a company is human rights is a mandatory principle employee diversity to help build thriving decided by its people—employees shape for corporate management, without workplaces where each individual’s abil- its destiny. Guided by this concept, Toray which it would not be possible to en- ities can flourish. We believe this is key Group considers securing and develop- gage in corporate activities while build- to sustainable growth. We are employ- ing outstanding human resources as one ing positive relationships with stake- ing personnel regardless of nationality of its most important tasks and a funda- holders. Toray Group works to promote not only at our Group companies around mental management priority. As part of and raise awareness of human rights, the world but also at our headquarters future global business development, and, in its Corporate Ethics and Legal in Japan, in line with the trend of in- Toray Group will continue to secure and Compliance Code of Conduct, outlines creasing globalization. develop human resources that operate the importance of respecting human We are currently actively promoting on a global level with a strong sense of rights. Discrimination of any kind based female employees to managerial posi- commitment. Based on the following four on race, creed, skin color, gender, reli- tions and improving the working condi- goals, Toray Group is promoting human gion, nationality, language, physical tions of our female employees. We are resource development. characteristics, possessions, place of also expanding our employment of peo- • Development of fair-minded individu- als who act with high ethical stan- dards and a sense of responsibility • Training of professionals with ad- vanced expertise, technical skills and originality in problem solving • Development of leaders who act with foresight and a sense of balance • Development of leaders and profes- sionals who can competently com- pete on a global level birth, or any other personal characteris- ple with disabilities and re-employment tic is strictly forbidden in every pro- of retirees (60 and older). Moreover, we cess—from recruiting and hiring to work are working to improve the work-life bal- placement, compensation, training, and ance of our employees. We are improv- retirement. In fiscal 2014, the Group ex- ing and expanding our welfare and child panded this commitment to address dis- care support systems, as well as reduc- crimination based on gender identifica- ing overtime hours and encouraging use tion and sexual orientation. of paid leave. Internationally, Toray Group takes stringent measures to comply with the related laws and regulations of each country in which it operates. Further- more, the Group respects international standards including the United Nations Universal Declaration of Human Rights To achieve these goals, Toray Group con- and the International Labour Organiza- ducts various kinds of training programs tion’s standards prohibiting all forced tailored to each of the four goals. These labor and child labor. Toray Group makes programs are systematic and logically or- every effort to prevent it from becoming ganized, and they are offered to employ- complicit in human rights abuses. ees of all levels working in every field in We hold human rights promotion the Group. With a view to strengthening campaigns annually, promoting a better international operations, Toray Group has understanding about preventing sexual designed the training to improve man- harassment, power harassment and agement capabilities, sales performance, maternity harassment. The campaigns production technical skills, and special- also address lesbian, gay, bisexual, and ized skills. transgender (LGBT) issues (i.e., sexual minorities). 37 Sustainable Management System Environmental Management Initiatives Promotion of LCM-based Environmental Management Voluntary Reduction in Atmospheric Emission of Chemical Substances Initiatives to Reduce Waste Toray Group recognizes the importance To solve global environmental problems, Since we are engaged in the chemicals of effectively utilizing resources and fa- it is vital that we address these prob- business, Toray Group believes that the cilitating zero emissions in creating a lems across the entire life cycle of prod- reduction of environmental impacts, in- sustainable, recycling-oriented society. ucts and services. Thereby reducing cluding release of chemical substances We have set group-wide targets toward their environmental footprint while also into the atmosphere, is one of its most attaining zero emissions and are making improving their economic and social important priorities. steady progress toward our various nu- value. To this end, Toray Group promotes We are actively reducing emissions. merical goals for our ratios of directly lifecycle management (LCM). Our Fifth Medium-term Environmental disposed waste, landfill, and recycling. This approach is the foundation of Plan (fiscal 2016 to fiscal 2020) sets out Toray’s Green Innovation Businesses. Toray Group has adopted LCA*1 meth- ods and the Toray Eco-Efficiency Analy- sis (T-E2A)*2 tool to promote and en- trench LCM. *1 Life cycle assessment: Assessment of envi- ronmental impacts taking into account the entire life cycle of products and services— from resource extraction to manufacturing, use, and disposal. *2 Toray Eco-Efficiency Analysis (T-E2A): Envi- ronmental analysis tool developed by Toray. It produces a map of multiple products plot- ted along the axes of environmental impact and economic performance, enabling users to select the most environmentally friendly and economical products. Initiatives to Conserve Energy and Efforts against Global Warming Toray Group was an early adopter of greenhouse gas (GHG) emissions reduc- our targets for such initiatives, particu- Biodiversity Initiatives larly for substances covered by the PRTR law and volatile organic substanc- es (VOCs). Initiatives to Prevent Air and Water Pollution Toray Group recognizes the protection of biodiversity as an important theme in its initiatives for reducing greenhouse gases and confronting global environmental problems. We aim to help realize a sus- Toray Group has ongoing environmental tainable society by analyzing the impact protection initiatives in place at its pro- of our business activities on biodiversity. duction facilities. The Group will focus Based on the Toray Group’s Biodi- efforts on reducing sulfur oxide (SOx) versity Initiatives, we have been formu- emissions by installing desulfurization lating three-year road maps and imple- systems and converting to alternative menting measures in order of priority. fuels, as well as on lowering chemical The plants of Toray industries, Inc. and oxygen demand (COD) levels by expand- its affiliated companies in Japan operate ing our wastewater treatment facilities greenery policies and plans through 2020, and other measures. Water Resource Management Initiatives guided by the Toray Group Basic Policy for Increasing Green Areas. The plans encom- pass initiatives to conserve green areas, including natural forests*3 that have been protected since the plants began operat- tion initiatives in order to help realize Toray Group, through its water treat- ing. Sustainable greenery conservation sustainable, low-carbon societies. In fis- ment business, is addressing water re- initiatives also help to conserve the envi- cal 2016 we announced our Fifth Medi- source issues around the world. The ronment for communities. um-term Environmental Plan, under Group also takes steps to ensure the We periodically conduct a survey to which we are systematically conserving proper management of water resources determine the usage of bio-based raw energy by improving our processes and used in its business activities, including materials in product manufacturing. We installing gas cogeneration systems, using recycled water to enhance water also incorporated into our management among other initiatives. usage efficiency. rules a process for checking for impact Toray Group practices the 3Rs (re- on biodiversity, while also looking to duce, reuse, recycle) in consuming wa- conserve biodiversity through our social ter resources, and monitors the quality contribution activities. of water that is released into public bod- ies of water. *3 Natural forests: Natural groves or forestation formed of vegetation native to that area 38 Sustainable Management System Corporate Governance Basic Policy From the outset, one of Toray Group’s managerial principles has been that the purpose of a company is to contribute to society. The Group has developed a tations by acting fairly while maintaining entrusted them with management. They high ethical standards and a strong seek to appropriately fulfill their respec- sense of responsibility and maintaining tive roles while fulfilling their duty to re- transparency in management.” port on management status to stock- When establishing the corporate holders and other stakeholders. governance structure, the Group seeks Toray’s Board of Directors consists of to realize these philosophies as its basic 25 members. Since Toray Group supplies Management Philosophy that incorpo- policy. rates this principle. The Group system- atizes the Management Philosophy as a Corporate Philosophy, Corporate Mis- sions, and Corporate Guiding Principles. Among these, the Corporate Missions call for desirable relationships with stakeholders and enunciate the Group’s commitment “To provide our stockhold- ers with dependable and trustworthy management.” In addition, the Corpo- rate Guiding Principles stipulate the Group’s commitment to “Obtaining the trust of society and meeting the expec- Systems for Executing and Supervising Management materials to a wide range of industries and globally plays an active part in a broad scope of business fields, it is nec- essary to evaluate various risks multilat- erally based on expertise relevant to Toray is a company with a Board of Cor- worksites, not only for management porate Auditors, and the members of judgment and decision-making but also the Board and corporate auditors are for oversight. To that end, the Board of elected at the general meeting of stock- Directors formulates a structure in which holders. Members of the Board and cor- members of the Board familiar with Toray porate auditors, as officers directly Group businesses oversee management elected at the general meeting of stock- and make decisions from various view- holders, clearly recognize their fiduciary points. Meanwhile, Toray also elects two responsibility to stockholders, who have outside directors to the board to ensure Corporate Governance System Election Election Election General Stockholders Meeting Accounting Auditor Board of Corporate Auditors (Corporate Auditors) Audit Board of Directors Audit Audit Auditing Department Conference Organs Executive Committee Board of Senior Vice Presidents Business Execution Divisions Internal Audit Oversight & Decision-making Functions Report Governance Committee President Company-wide Committees Business Execution Functions Corporate Ethics Committees CSR Committee Divisions, offices and plants in Japan Japanese subsidiaries and affiliates Overseas subsidiaries and affiliates Departmental Committees Toray Group’s Management Philosophy: http://www.toray.com/aboutus/philosophy.html Toray Group’s Basic Policy on Corporate Governance: http://www.toray.com/aboutus/governance/gov_001.html 39 transparency and fairness, to ensure Toray has established the Gover- operation of the Board of Directors oversight from an even broader perspec- nance Committee, as an advisory body • Policy on nominating candidates for tive, and to obtain appropriate manageri- to the Board of Directors in order to re- members of the Board and corporate al advice from a medium- to long-term port on important medium- to long-term auditors perspective. Furthermore, the Board of issues regarding our corporate gover- • Remuneration system for members Corporate Auditors oversees the execu- nance. The Governance Committee con- of the Board and corporate auditors tion of operations by members of the sists of the Chairman of the Board, Pres- • Basic policy on electing the senior Board based on professional knowledge ident, and all of the outside directors of management, including the President in fields such as finance, accounting and Toray. An outside director chairs the law in addition to an understanding committee. The Committee deliberates about businesses, from a standpoint en- on matters regarding the Company’s tirely independent of the Board of Direc- overall corporate governance, including: Election of Outside Directors tors as a system to secure transparency • Structure of the Board of Directors At Toray, we ensure objectivity and trans- and fairness of oversight and decision- and the Board of Corporate Auditors parency of corporate governance by es- making. • Evaluation of the management and tablishing and disclosing standards for The following table outlines the basis for election of our outside directors/corporate auditors and details of their independence. • Is highly expert in accounting and business administration as a Kunio Ito (Director) university professor • Has extensive experience as a corporate outside director • No matters affect his independence from Toray Ryoji Noyori (Director) • Has extensive experience as a university professor and highly specialized expertise in organic synthetic chemistry, which is a core Toray technology • Has experience as a corporate outside director • Although he served as a special adviser for Toray’s research and technology strategy until April 2015, the annual remuneration he was paid by Toray over the past three years, even at its peak, was less than 10% of his total income; therefore, this is considered to have no impact on his independence Toshio Nagai (Corporate auditor) • Has an excellent track record of high standing in the legal profes- sion and a solid character and judgement, so we believe he can audit appropriately from an objective standpoint • No matters affect his independence from Toray Kazuya Jono (Corporate auditor) • Has held key positions in the corporate world and has solid char- acter and judgement, so we believe he can audit appropriately from an objective standpoint • Formerly employed by Sumitomo Mitsui Banking Corporation and Citibank Bank Ltd.; Toray has regular banking transactions with both banks. With respect to Sumitomo Mitsui Banking Cor- poration, over three years have passed since he retired from the board, and we have no borrowing from Citibank Bank Ltd., there- fore independence is not affected. Toray’s balance of borrowing from Sumitomo Mitsui Banking Corporation (including syndicated loans) as of 31 March 2017 is 0.9% of total assets, which is not high compared with other banks. independence of outside directors and outside corporate auditors. Toray's out- side directors and outside corporate au- ditors meet Toray’s standards for inde- pendence and meet the independence requirements set by the Tokyo Stock Ex- change. We, therefore, have submitted notification to the Tokyo Stock Exchange of their status as independent officers. Progress in Establishing Risk Management and Internal Control Systems To realize the Management Philosophy, the Company shall establish a structure to execute its business legally and effec- tively by improving its internal control system according to the following basic policy as a structure to enable it to ap- propriately establish organization, for- mulate regulations, communicate infor- mation, and monitor the execution of operations. 1. System to ensure that the execution of duties by members of the Board and employees complies with laws and regulations and the Company’s Articles of Incorporation Standards for Judging the Independence of Outside Directors/Corporate Auditors http://www.toray.com/aboutus/governance/gov_002.html 40 Sustainable Management System Corporate Governance Toray shall establish the Corporate Eth- policy, while the Board of Senior Vice management systems appropriate for ics Committee, as one of the company- Presidents shall be in charge of issues their respective business forms and wide committees to promote obser- related to implementation. business environments, and shall re- vance of corporate ethics and legal 3. System for preserving and manag- ceive regular reports on the status of compliance, and shall take other mea- ing information pertaining to the ex- sures to improve the required internal ecution of duties by the members of systems, including the establishment the Board their activities. To establish a system for ensuring that members of the Board, etc. of subsid- of dedicated organizations. Toray shall establish regulations for im- iaries effectively execute their duties, We shall establish the Corporate Ethics portant documents and important in- the Company shall provide regulations and Legal Compliance Code of Con- formation related to management, on the scope under which the Compa- duct as specific provisions to be ob- confidential information and personal ny can reserve its authority over the served by members of the Board and information, and appropriately pre- execution of business operations. In employees, and shall take other mea- serve and manage them in accordance addition, the Company shall endeavor sures to improve the required guide- with the regulations. to grasp management information in a lines, etc. Especially with regard to 4. Regulations and other systems per- unified manner and provide assistance eliminating relations with antisocial taining to controls over risks of loss and guidance necessary for subsidiar- forces, the Company shall act as one Toray shall identify potential risks in ies by determining divisions, etc. with to stand firmly against them. business activities, promote company- control over its respective subsidiaries. We shall establish an internal reporting wide risk management to strive to re- To establish a system for ensuring that system (whistle-blowing system) for duce the level of risk under normal the execution of duties by members of the reporting of the discovery of viola- business conditions, and prevent fu- the Board, etc., and employees of sub- tion of laws, regulations, or the Com- ture crises, as well as improve regula- sidiaries complies with laws and regu- pany’s Articles of Incorporation. tions and establish an internal commit- lations and the Articles of Incorpora- We shall establish a Security Trade tee so we can respond rapidly in the tion, the Company shall thoroughly Control Program, one of the most im- event of a major crisis. familiarize its subsidiaries with the portant legal compliance issues, and We shall establish an internal control Company’s Corporate Ethics and Legal establish an organization dedicated to system for financial reporting that en- Compliance Code of Conduct as a security export control. sures the reliability of financial reporting. code of conduct in common for the 2. System to ensure the efficient exe- 5. System for ensuring appropriate busi- Toray Group. At the same time, the cution of duties by members of the ness operations within subsidiaries Company shall request the subsidiar- Board To establish a system under which ies to establish their own codes of Toray shall establish the Authority of subsidiaries report to the Company on conduct, guidelines, etc. in consider- Top Management to stipulate matters matters regarding the execution of du- ation of the laws and regulations, busi- with respect to which decision-making ties by members of the Board, etc. of ness practices, business forms, and authority is reserved by the Board of the subsidiaries, the Company shall other factors in their respective coun- Directors and matters with respect to provide regulations on the regular re- tries. In addition, the Company shall which decision-making is delegated to porting of important management in- direct its subsidiaries to establish sys- the President, General Managers, etc., formation to the Company and regu- tems under which the status of inter- from among matters necessary for larly hold conferences at which the nal whistle-blowing by members of the decision-making. Company’s management receives di- Board, etc. and employees of the sub- Toray shall establish the Executive rect reports on the status of the man- sidiaries is appropriately reported to Committee and Board of Senior Vice Presidents as deliberative organs for agement of the subsidiaries. To establish regulations and other sys- the Company. 6. System for reporting to corporate au- important matters decided by the tems pertaining to controls over risks ditors and systems for ensuring that Board of Directors or the President. of loss for subsidiaries, the Company persons who report to corporate au- The Executive Committee shall be re- shall provide subsidiaries with guid- ditors are not treated disadvanta- sponsible for the general direction of ance to help them to establish risk geously because of their reporting 41  Members of the Board, etc. and em- Toray shall pay expenses, etc. incurred Corporate auditors shall attend Board ployees of Toray Group and corporate from the execution of duties by corpo- of Directors meetings and other impor- auditors of subsidiaries shall report rate auditors. tant meetings so that they may ascer- matters regarding the execution of du- 8. Items pertaining to employees assist- tain important decision-making pro- ties to corporate auditors in response ing with corporate auditors’ duties, cesses and the execution of operations. to requests from the corporate audi- items pertaining to the independence Corporate auditors shall hold regular tors. of said employees from members of meetings with members of the Board The department in charge of the inter- the Board, and items pertaining to and management and conduct regular nal reporting system (whistle-blowing the assurance of effectiveness of in- visiting audits of Toray offices, plants, system) shall regularly report the sta- structions from the corporate audi- and subsidiaries. tus of internal whistle-blowing in the tors to said employees Toray Group to the corporate auditors. Toray shall assign a full-time employee Toray shall stipulate regulations to the to provide assistance if and when cor- effect that members of the Board and porate auditors request assistance. Remuneration for Members of the Board employees who report to corporate The said employee shall exclusively Given their roles, remuneration for auditors shall not be subjected to any follow the corporate auditors’ com- members of the Board consists of disadvantageous treatment because mands and instructions, and the Com- monthly remuneration, a bonus and of the said reporting, and shall provide pany shall consult with corporate audi- stock acquisition rights as stock options. subsidiaries with guidance to help tors in advance with respect to the Remuneration for outside directors con- them stipulate the same regulations. personnel arrangements for the said sists only of monthly remuneration. Re- 7. Items pertaining to the handling of employee. muneration is set at a level that enables expenses and liabilities arising from 9. Other systems for ensuring effective the Company to secure superior human the execution of duties by corporate implementation of audits by corpo- resources and further motivate them to auditors rate auditors improve performance, referring to the Details of Remuneration in Fiscal 2016 Position Total remuneration (millions of yen) Total remuneration by type (millions of yen) Basic Bonuses Provision for the allowance for retirement benefits Stock options as remunerations Recipients Members of the Board (excluding outside directors) Corporate auditors (excluding outside corporate auditors) Outside directors Outside corporate auditors 1,334 928 154 81 24 19 81 24 19 — — — 0 — — — 252 — — — 29 3 2 2 Notes: 1. Recipients included six members of the Board and one corporate auditor who retired during fiscal 2016. 2. Total amounts of remuneration do not include the ¥81 million paid in salaries to eleven employee-directors. Total Remuneration Received by Members of the Board and Corporate Auditors Name Total consolidated remuneration (millions of yen) Position Status of company Basic Bonuses Provision for the allowance for retirement benefits Stock options as remuneration Total consolidated remuneration by type (millions of yen) Akihiro Nikkaku 149 Member of the Board Filing company 104 20 — 25 Note: Total remuneration only includes persons receiving more than ¥100 million. 42 Sustainable Management System Corporate Governance results of a survey of other companies’ companies’ remuneration by an external to implement initiatives rooted in the remuneration by an external third-party third-party organization. With respect to workplace and fully engage all employ- organization. monthly remuneration, the maximum ees. With respect to monthly remunera- limit of total remuneration is determined Toray has established CSR/legal tion, the maximum limit of total remuner- at general meetings of stockholders. compliance committees at its domestic ation is determined at general meetings Within the scope of the maximum limit, Group companies, and appointed exec- of stockholders. Within the scope of the monthly remuneration to each corporate utives and section managers in charge maximum limit, monthly remuneration to auditor is determined through negotia- of legal compliance. Furthermore, rele- each member of the Board is determined tions with the said auditor based on the vant departments at Toray’s headquar- by the President based on the Company’s Company’s internal regulations. ters collaborate to hold a group-wide internal regulations with a resolution at a Board of Directors meeting. The provision and the total amount of bonuses are determined each time at Status of Compliance Initiatives corporate ethics and legal compliance meetings annually to improve under- standing of revised laws and particular issues. a general meeting of stockholders. Par- Toray Group is keenly aware that strict CSR/legal compliance committees ticulars of the agenda at the general adherence to laws, regulations and so- have also been established at Group meeting of stockholders are resolved by cial norms is an essential facet of corpo- companies around the world. With sup- the Board of Directors through confer- rate management. Toray’s top manage- port from Toray’s International Division, ence among the senior management, ment takes a clear position on corporate CSR Operations Department, and other including the President, in consideration ethics and legal compliance, and strives relevant sections, the committees inde- of the consolidated and non-consolidat- to improve the conduct of all companies pendently promote initiatives related to ed business results for each fiscal year in Toray Group. plus the historical record. A bonus to each member of the Board is deter- mined by the President according to each member’s performance based on the Company’s internal regulations with Framework for Promoting Corporate Ethics and Legal Compliance legal compliance and corporate ethics. The Corporate Ethics and Legal Compliance Code of Conduct is a strict set of standards that every Toray Group executive and employee closely follows when performing corporate activities. In a resolution at a Board of Directors Toray operates a Corporate Ethics Com- the event that a violation is discovered, meeting. mittee chaired by the President. The strict discipline is carried out in consul- The maximum limit of total number committee oversees corporate policies tation with the Company’s Rewards and of Stock Acquisition Rights as well as the relating to corporate ethics, and imple- Sanctions Committee. Toray has put to- limit of remuneration relating to the ments initiatives through the joint efforts gether the Corporate Ethics and Legal granting of the Stock Acquisition Rights of labor and management. Underneath it Compliance Handbook, which explains as stock options to members of the is a Company-Wide Legal Compliance the code and gives details of the compli- Board is resolved at the general meeting Committee that functions as a forum for ance helpline, to ensure comprehensive of stockholders, and within that limit, sharing the views of management and understanding for all Toray and Japa- the total number of Stock Acquisition the policies that are decided by the Cor- nese affiliated company executives and Rights to be allocated to the members of porate Ethics Committee and for report- employees, including contracted, part- the Board shall be decided at the Board ing status of implementation of corporate time and temporary workers. of Directors meeting based on the Com- ethics and compliance initiatives at work- Overseas Group and affiliated com- pany’s internal regulations. places. This committee is primarily com- panies make corporate ethics and legal Given their roles, remuneration for prised of section managers and, while compliance handbooks for each country corporate auditors consists only of communicating with upper manage- or region. These are then distributed to monthly remuneration. Remuneration is ment, takes initiatives that address com- all managers and employees to ensure set at a level that enables the Company pany-wide compliance issues. Further- comprehensive understanding of the to secure superior human resources, re- more, CSR/legal compliance committees code of conduct. ferring to the results of a survey of other operate at the divisional and plant levels 43 Status of Risk Manage- ment Initiatives Addressing Priority Risks Supply Chain Risk Reduction Toray has established a Risk Manage- Once every three years, Toray reviews In fiscal 2016, we analyzed the results ment Committee under the CSR Com- its priority risks. The activities for reduc- and gave feedback to the suppliers sur- mittee to regularly monitor the progress ing each risk are led by a specific depart- veyed in last year’s CSR procurement of risk reduction measures across all ment or working group, and implement- survey. We also further reviewed ways Group companies and conduct planning ed in line with a three-year roadmap. of addressing global human rights is- and promotion of risk management Fiscal 2016 was the second year of im- sues, particularly in our overseas Group measures. Under the Risk Management plementing initiatives identified in the supply chain. Committee, local risk management com- third risk priority screening. As a result Moreover, Toray Group conducts mittees have been established at each of these efforts, Toray surpassed its tar- checks for the use of conflict minerals in of Toray’s divisions, departments, offic- get for priority risks identified and miti- all products and has been working to es, and plants. gated in fiscal 2016. make its responses to customers' re- Group-wide measures determined Considerable progress was made in quests for surveys quicker and more ef- by the Risk Management Committee are improving the accuracy of the existing ficient by integrating data management. given to local risk management commit- business continuity plan, particularly for tees, which then incorporate these mea- major earthquakes and new strains of sures in their own initiatives to reduce influenza. Moreover, tighter information risks particular to their respective divi- security measures were undertaken in Maintaining Information Security sion, department, office or plant, while certain business fields, above and be- In fiscal 2016, we changed the IT Promo- carrying out coordinated risk manage- yond Group standards. tion Committee, which has been work- ment activities. Toray also conducted a simple risk ing for greater dissemination of informa- Toray Group has also established a evaluation questionnaire of each de- tion in general at Toray, to an organization risk management system for the Group partment head in fiscal 2016. This was specifically focused on Toray Group in- and affiliated companies in Japan and used to evaluate whether any potential formation security. overseas, led by their presidents. The risks had dramatically increased since Besides this, we have established a system promotes initiatives to reduce the group-wide fiscal 2014 evaluation. group-wide committee working to re- the specific risks faced by each compa- This evaluation confirmed that there duce existing serious risks, such as legal ny. Each Group company reports on the were no issues to be added as priority compliance; fluctuations in raw material results of these initiatives to the Risk risks for the current term. prices, exchange rates or economic Management Committee every fiscal The status of risk at Group and affili- conditions; business strategy; and secu- year. ated companies in Japan was investi- rity export control at Toray Group. When- Toray Group regularly evaluates gated through a questionnaire on the ever necessary, the committee reports company-wide risks, identifies risks that status of their risk management activi- on the status of risk reduction activities should be prioritized in light of their po- ties. Interviews were conducted at some to the Board of Directors. tential impact on management of the of these companies, and specific mitiga- Group, and is working to reduce these tion measures for risk were discussed risks through the PDCA cycle. with leading sections in headquarters. In fiscal 2016, we also started dis- cussions on methods and procedures for conducting a risk assessment group- wide, including affiliated companies. 44 Sustainable Management System Corporate Governance Crisis Management System plans for these selected products. In addition, we finished introducing a safety confirmation system covering Preparedness for New Influenza Pandemic In its Crisis Management Regulations, all domestic affiliated companies and In June 2015, we revised the Toray Group Toray Group has clearly defined the ba- continued systematic earthquake-proof- Business Continuity Plan for Pandemic sic principles for a group-wide response ing of plant buildings. Influenza to address both strongly and to serious risks affecting Toray Group in Since fiscal 2012, Toray Group has weakly virulent influenzas. Toray Group’s order to ensure a consistent and com- conducted drills to create a temporary business offices and plants have revised prehensive response in a crisis situation. group-wide headquarters. In fiscal 2016, and begun implementing their crisis The regulations are revised as appropri- the Group began conducting drills based management systems and measures to ate so as to prepare for new risks that on a disaster scenario involving an prevent the spread of infection by virus. may emerge as a result of change in the earthquake comparable to the March In fiscal 2016, we continued finaliz- social environment. 2011 Great East Japan Earthquake and a ing our Guidelines for Continuity Plan In fiscal 2016, Toray reviewed crisis secondary earthquake striking directly and Scale-down Plan of Business Opera- management regulations focusing on underneath Tokyo simultaneously that tions to prevent the spread of infection the risk management of domestic and would cause extensive damage to in an emergency and to fulfill our social overseas affiliated companies and re- Group companies and plants situated in responsibility for the supply of products. vised them in May 2017. all areas of Japan to the east of and in- This involved planning for securing man- As part of our crisis management cluding Shizuoka Prefecture. First, drills agement resources such as our supply activities, we also recognize the impor- were held to establish a temporary chain and operational structure based tance of, and continue to provide appro- group-wide headquarters in Kansai. on a classification of the importance of priate and timely advice to Toray Group Then, in a scenario in which the Tokyo each of our products and operations ac- employees on, issues such as managing headquarters has been restored, drills cording to the level of epidemic. personal safety on overseas business simulating moving the temporary group- Domestic affiliated companies have trips, and countermeasures for terror- wide headquarters back to Tokyo were established and started operating crisis ism or political instability risks. held. Efforts were made to make the management systems and infection Preparedness for a Major Earthquake drills as realistic as possible with some prevention measures similar to Toray’s. parts of the scenario undisclosed to drill Moreover, overseas affiliated compa- participants. Also, in conjunction with nies are working to reduce the particu- the drills, we reviewed the most impor- lar risks they face in their respective Identifying major earthquakes as a prior- tant tasks of the headquarters’ staff and countries. ity risk factor, Toray Group continues to the departments. develop its business continuity plan for The Group launched the Toray Di- large-scale earthquakes. In fiscal 2016, saster Map System after the Great East we formulated the Toray Group Business Japan Earthquake. This system is for rap- Continuity Plan for Large-scale Earth- idly and accurately grasping the extent quakes by systematizing our previously of damage caused by an earthquake to held preparedness activities. Further, we Toray Group and at its business part- selected products for which we have a ners. The system helped to ensure busi- strong responsibility to supply to society ness continuity after the April 2016 Ku- in the event of an earthquake. To this mamoto earthquake. end we compiled procedures for devel- oping business continuity plans for im- portant products that are essential to society and strategically important to our business. In fiscal 2017, we will con- tinue developing business continuity 45 Sustainable Management System Board of Directors and Corporate Auditors (As of June 27, 2017) President and Representative Member of the Board Akihiro Nikkaku Executive Vice President and Representative Member of the Board Koichi Abe Executive Vice President and Representative Member of the Board Kazushi Hashimoto Senior Vice President (Member of the Board and Member of the Executive Committee) Ryo Murayama Senior Vice President (Member of the Board and Member of the Executive Committee) Yukichi Deguchi Senior Vice President (Member of the Board and Member of the Executive Committee) Akira Umeda Senior Vice President (Member of the Board and Member of the Executive Committee) Mitsuo Ohya Senior Vice President (Member of the Board) Hiroshi Otani Senior Vice President (Member of the Board) Toru Fukasawa Senior Vice President (Member of the Board) Yasuo Suga Senior Vice President (Member of the Board) Hirofumi Kobayashi Senior Vice President (Member of the Board) Kazuhiko Shuto Senior Vice President (Member of the Board) Tetsuya Tsunekawa Senior Vice President (Member of the Board) Kazuo Morimoto Senior Vice President (Member of the Board) Osamu Inoue Vice President (Member of the Board) Satoru Nishino Vice President (Member of the Board) Yoshiyuki Tanaka Vice President (Member of the Board) Takashi Fujimoto Vice President (Member of the Board) Yuji Fukuda Vice President (Member of the Board) Shigeki Taniguchi Vice President (Member of the Board) Toshiyuki Kondo Vice President (Member of the Board) Kenichiro Miki Vice President (Member of the Board) Hideki Hirabayashi Vice President (Member of the Board) Kunio Ito*1 Vice President (Member of the Board) Ryoji Noyori*1 Corporate Auditor Shogo Masuda Corporate Auditor Shoshiro Taneichi Corporate Auditor Toshio Nagai*2 Corporate Auditor Kazuya Jono*2 *1 Kunio Ito and Ryoji Noyori are outside directors. *2 Toshio Nagai and Kazuya Jono are outside corporate auditors. 46 Organization (As of July 1, 2017) Board of Directors Corporate Strategic Planning Division General Administration & Legal Division President & Executive Vice Presidents Personnel & Industrial Relations Division Executive Committee & Board of Senior Vice Presidents 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 Affiliated Companies Division Fibers & Textiles Division Resins & Chemicals Division Board of Corporate Auditors Films Division Corporate Auditors Electronic & Information Materials Division Torayca & Advanced Composites Division Pharmaceuticals & Medical Products Division Water Treatment & Environment Division HS Business Development Dept. Product Safety & Quality Assurance Planning Dept. Technology Center Manufacturing Division Engineering Division Research & Development Division 47 Toray Group Worldwide Network (As of March 31, 2017) Toray Group operates businesses in 26 countries and regions including Japan. Japan Overseas Total Consolidated subsidiaries Subsidiaries accounted for by equity method Total subsidiaries Affiliates accounted for by equity method Companies subject to consolidation 60 26 86 13 99 98 35 133 23 156 158 61 219 36 255 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. (Alcantara) Subsidiaries Accounted for by Equity Method ◆ Toray International Italy S.r.l. (TIIT) ■ Composite Materials (Italy) S.r.l. (CIT) ■ Delta-Tech S.p.A (DELTA) Czech Republic Consolidated Subsidiary ● Toray Textiles Central Europe s.r.o. (TTCE) Germany Consolidated Subsidiaries ■ Euro Advanced Carbon Fiber Composites GmbH (EACC) ◆ 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) Malaysia Consolidated Subsidiaries ● Penfabric Sdn. Berhad (PAB) ● ◉ ○ Penfibre Sdn. Berhad (PFR) ◉ ○ Toray Plastics (Malaysia) Sdn. Berhad (TPM) Others Subsidiary Accounted for by Equity Method ★ Toray Industries (Malaysia) Sdn. Berhad (TML) Affiliate Accounted for by Equity Method ◉ Toray BASF PBT Resin Sdn. Berhad (TBPR) Singapore Consolidated Subsidiary ◆ Toray International Singapore Pte. Ltd. (TISP) Japan Consolidated Subsidiaries ● ◉ Ichimura Sangyo, Co., Ltd. ● ◉ ○ Toray Fine Chemicals Co., Ltd. ◉ ○ Toray Plastics Precision Co., Ltd. ◉ ○ Toray Advanced Film Co., Ltd. ○ Toray KP Films Inc. ○ Toray Battery Separator Film Co., Ltd.*1 ◉ 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 Affiliates Accounted for by Equity Method ● ◉ ○ Du Pont-Toray Co., Ltd. ● Toray Opelontex Co., Ltd. ◉ ○ Dow Corning Toray Co., Ltd. ◉ Sanyo Chemical Industries, Ltd. Others *1 Toray Battery Separator Film Co., Ltd. was absorbed into Toray Industries, Inc. on April 1, 2017. 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) Others Affiliates 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) ■ Carbon Magic (Thailand) Co., Ltd. (CMTH) Subsidiary Accounted for by Equity Method ★ Toray Industries (Thailand) Co., Ltd. (TTH) Affiliate Accounted for by Equity Method ◉ Thai PET Resin Co., Ltd. (TPRC) NORTH AMERICA U.S.A. Consolidated Subsidiaries ● Toray Fluorofibers (America), Inc. (TFA) ● ◆ Toray International America Inc. (TIAM) ◉ Toray Plastics (America), Inc. (TPA) ◉ Toray Resin Co. (TREC) ■ Toray Carbon Fibers America, Inc. (CFA)*2 ■ Toray Composites (America), Inc. (TCA)*2 ■ Zoltek Companies, Inc. (Zoltek) ☆ Toray Membrane USA, Inc. (TMUS) Others *2 CFA and TCA were merged on April 1, 2017, to estab- lish Toray Composite Materials America, Inc. (CMA) as the new company. Mexico Subsidiary Accounted for by Equity Method ◉ Toray Resin Mexico, S.A. de C.V. (TRMX) ★ Regional Supervisory Organization ■ Carbon Fiber Composite Materials ● Fibers & Textiles ◉ Plastics & Chemicals ○ IT-related Products ☆ Environment & Engineering □ Life Science & Other Businesses ◆ Trading Others Major Offices in Japan Overseas Offices and Branches Affiliate Accounted for by Equity Method ◉ Yihua Toray Polyester Film Co., Ltd. (YTP) Taiwan Consolidated Subsidiary ◉ Toray Advanced Film Kaohsiung Co., Ltd. (TAFK) Subsidiaries 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) Affiliates Accounted for by Equity Method ○ STECO, Ltd. (STECO) Others Osaka Head Office Nakanoshima Mitsui Building, 3-3, Nakanoshima 3-chome, Kita-ku, Osaka 530-8222, Japan Telephone: 81 (6) 6445-4101 Facsimile: 81 (6) 7688-4001 New York Toray Industries (America), Inc. (TAM) 9th Fl., 461 Fifth Ave., New York, NY 10017, U.S.A. Telephone: 1 (212) 697-8150 Facsimile: 1 (212) 972-4279 Germany Toray Industries Europe GmbH (TEU) Hugenottenallee 175, 63263 Neu-Isenburg, Germany Telephone: (49) 6102-7999-1000 Facsimile: (49) 6102-7999-1008 Beijing Toray Industries, Inc., Beijing Office Beijing Fortune Bldg., No. 702, 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 Office 36F. FKI Tower, 24, Yeoui-daero, Yeongdeungpo-gu, Seoul, 150-881 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 48 Financial Section C O N T E N T S Ten-Year Summary of Selected Financial Data 50 Management’s Discussion and Analysis 52 Consolidated Balance Sheets 58 Consolidated Statements of Income 60 Consolidated Statements of Comprehensive Income 60 Consolidated Statements of Changes in Net Assets 61 Consolidated Statements of Cash Flows 62 Notes to Consolidated Financial Statements 63 Independent Auditor’s Report 89 49 49Ten-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 Carbon Fiber Composite Materials Environment & Engineering Life Science Others Life Science & Other Businesses Operating income Income (loss) before income taxes and non-controlling interests Net income (loss) attributable to owners of parent Net cash provided by operating activities Depreciation and amortization Capital expenditures Total assets Property, plant and equipment, net Interest-bearing liabilities Net assets Per share of common stock: Net income (loss) attributable to owners of parent: Basic Diluted Cash dividends Net assets Ratios: Operating income to net sales Net income (loss) attributable to owners of parent to net sales Equity ratio Return on equity Debt/equity ratio (times) Common stock price range: High Low 2008 2009 2010 2011 2012 2013*2 2014 2015 2016 2017 ¥1,649,670 ¥1,471,561 ¥1,359,631 ¥1,539,693 ¥1,588,604 ¥1,592,279 ¥1,837,778 ¥2,010,734 ¥2,104,430 ¥2,026,470 637,343 404,015 283,734 83,580 173,213 — — 67,785 103,429 78,565 48,069 110,367 86,423 146,787 568,996 377,644 229,421 70,390 160,207 — — 64,903 36,006 (19,751) (16,326) 38,447 83,764 92,349 525,204 332,735 230,433 50,676 159,787 46,656 14,140 — 40,107 (2,415) (14,158) 166,215 74,904 57,073 1,698,226 1,523,603 1,556,796 1,567,470 1,581,501 1,731,933 2,119,683 2,357,925 2,278,386 2,396,785 680,993 591,182 642,159 596,261 663,945 512,610 580,344 632,160 518,216 1,080,757 1,024,909 1,100,176 ¥ 34.34 ¥ (11.66) ¥ (10.12) ¥ 36.41 ¥ 39.41 ¥ 29.75 ¥ 36.59 ¥ 44.33 ¥ 56.38 ¥ 62.17 — 10.00 423.78 6.27 2.91 34.9 8.1 1.00 — 7.50 335.04 2.45 (1.11) 30.8 (3.1) 1.42 — 5.00 336.65 2.95 (1.04) 30.3 (3.0) 1.34 ¥ 998 ¥ 694 ¥ 591 ¥ 643 ¥ 631 ¥ 654 ¥ 786 ¥ 1,057.5 ¥ 1,146.0 ¥ 1,027.5 529 350 390 420 511 421 584 626 871.7 854.0 584,115 382,299 262,027 67,018 178,183 52,430 13,621 — 100,087 82,893 57,925 129,214 70,479 55,942 531,595 493,509 640,970 34.43 7.50 363.90 6.50 3.76 37.8 10.9 0.83 638,375 397,815 243,404 69,914 170,247 55,554 13,295 — 107,721 101,091 64,218 104,410 67,443 98,384 561,923 481,906 674,149 37.46 10.00 384.90 6.78 4.04 39.7 10.5 0.77 632,150 395,835 237,593 77,620 178,355 56,599 14,127 — 83,436 77,828 48,477 100,815 67,588 99,135 627,240 532,002 778,626 28.90 10.00 444.45 5.24 3.04 41.8 7.2 0.73 755,474 470,542 245,741 113,342 180,197 58,205 14,277 — 105,253 97,760 59,608 161,455 78,743 118,207 781,235 654,163 944,625 35.70 10.00 527.32 5.73 3.24 40.5 7.5 0.76 856,676 496,370 247,975 158,365 179,988 57,039 14,321 — 123,481 114,469 71,021 141,282 81,480 124,929 855,593 700,258 44.28 11.00 616.70 6.14 3.53 41.8 7.7 0.71 892,039 521,238 251,072 186,196 183,324 55,841 14,720 — 154,480 137,808 90,132 196,142 91,168 136,556 830,612 704,253 56.31 13.00 591.50 7.34 4.28 41.5 9.3 0.74 Millions of yen 856,124 499,099 254,439 161,608 186,113 54,150 14,937 — 146,893 139,012 99,418 173,958 89,073 152,039 881,434 716,399 Yen 62.10 14.00 638.64 % 7.25 4.91 42.6 10.1 0.70 Yen Number of employees 38,565 37,924 37,936 38,740 40,227 42,584 45,881 45,789 45,839 46,248 *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 Benefits” (revised on June 16, 2011). As this change in accounting policy is applied retrospectively, the related financial data for 2013 reflect the retrospective application. 50 Net sales*1 Fibers & Textiles Plastics & Chemicals IT-related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Others Life Science & Other Businesses Operating income Income (loss) before income taxes and non-controlling interests Net income (loss) attributable to owners of parent Net cash provided by operating activities Depreciation and amortization Capital expenditures Total assets Property, plant and equipment, net Interest-bearing liabilities Net assets Per share of common stock: Net income (loss) attributable to owners of parent: Basic Diluted Cash dividends Net assets Ratios: Operating income to net sales Equity ratio Return on equity Debt/equity ratio (times) Common stock price range: High Low Net income (loss) attributable to owners of parent to net sales 637,343 404,015 283,734 83,580 173,213 — — 67,785 103,429 78,565 48,069 110,367 86,423 146,787 680,993 591,182 642,159 — 10.00 423.78 6.27 2.91 34.9 8.1 1.00 568,996 377,644 229,421 70,390 160,207 — — 64,903 36,006 (19,751) (16,326) 38,447 83,764 92,349 596,261 663,945 512,610 — 7.50 335.04 2.45 (1.11) 30.8 (3.1) 1.42 525,204 332,735 230,433 50,676 159,787 46,656 14,140 — 40,107 (2,415) (14,158) 166,215 74,904 57,073 580,344 632,160 518,216 — 5.00 336.65 2.95 (1.04) 30.3 (3.0) 1.34 2008 2009 2010 2011 2012 2013*2 2014 2015 2016 2017 ¥1,649,670 ¥1,471,561 ¥1,359,631 ¥1,539,693 ¥1,588,604 ¥1,592,279 ¥1,837,778 ¥2,010,734 ¥2,104,430 ¥2,026,470 Millions of yen 584,115 382,299 262,027 67,018 178,183 52,430 13,621 — 100,087 82,893 57,925 129,214 70,479 55,942 638,375 397,815 243,404 69,914 170,247 55,554 13,295 — 107,721 101,091 64,218 104,410 67,443 98,384 632,150 395,835 237,593 77,620 178,355 56,599 14,127 — 83,436 77,828 48,477 100,815 67,588 99,135 755,474 470,542 245,741 113,342 180,197 58,205 14,277 — 105,253 97,760 59,608 161,455 78,743 118,207 856,676 496,370 247,975 158,365 179,988 57,039 14,321 — 123,481 114,469 71,021 141,282 81,480 124,929 892,039 521,238 251,072 186,196 183,324 55,841 14,720 — 154,480 137,808 90,132 196,142 91,168 136,556 856,124 499,099 254,439 161,608 186,113 54,150 14,937 — 146,893 139,012 99,418 173,958 89,073 152,039 1,698,226 1,523,603 1,556,796 1,567,470 1,581,501 1,731,933 2,119,683 2,357,925 2,278,386 2,396,785 531,595 493,509 640,970 561,923 481,906 674,149 627,240 532,002 778,626 781,235 654,163 944,625 855,593 700,258 830,612 704,253 881,434 716,399 1,080,757 1,024,909 1,100,176 Yen ¥ 34.34 ¥ (11.66) ¥ (10.12) ¥ 36.41 ¥ 39.41 ¥ 29.75 ¥ 36.59 ¥ 44.33 ¥ 56.38 ¥ 62.17 34.43 7.50 363.90 6.50 3.76 37.8 10.9 0.83 37.46 10.00 384.90 6.78 4.04 39.7 10.5 0.77 28.90 10.00 444.45 5.24 3.04 41.8 7.2 0.73 35.70 10.00 527.32 5.73 3.24 40.5 7.5 0.76 44.28 11.00 616.70 6.14 3.53 41.8 7.7 0.71 56.31 13.00 591.50 7.34 4.28 41.5 9.3 0.74 62.10 14.00 638.64 % 7.25 4.91 42.6 10.1 0.70 Yen Number of employees 38,565 37,924 37,936 38,740 40,227 42,584 45,881 45,789 45,839 46,248 ¥ 998 ¥ 694 ¥ 591 ¥ 643 ¥ 631 ¥ 654 ¥ 786 ¥ 1,057.5 ¥ 1,146.0 ¥ 1,027.5 529 350 390 420 511 421 584 626 871.7 854.0 51 Management’s Discussion and Analysis OVERVIEW INCOME ANALYSIS During the period covered by the year ended March Net Sales 31, 2017 (fiscal 2016), the global economy as a whole Consolidated net sales for fiscal 2016 were in ¥2,026.5 maintained its recovery trend despite some delay billion, down by ¥78.0 billion (3.7%) from the previous seen in the U.S. and Europe. The Chinese economy fiscal year. Regarding the sales by business segment, has been heading toward a rally, and there were also net sales in the IT-related Products, Environment & signs of economic improvement in many of the other Engineering and Others segments increased, while emerging countries. The Japanese economy in general those in the Fibers & Textiles, Plastics & Chemicals, continued on a gradual recovery track on the back of Carbon Fiber Composite Materials and Life Science an improving employment and income situation. segments decreased. U n d e r s u c h c i r c u m s t a n c e s , T o r a y G r o u p implemented a growth strategy focused on taking Costs and Expenses advantage of growth business fields and business The ratio of total costs and expenses to net sales for opportunities while pursuing business expansion in the fiscal year under review was 92.8%, slightly up by growth countries and regions, as well as further 0.1 percentage points year on year. bolstering its competitiveness. These initiatives were C o n s o l i d a t e d n e t s a l e s a n d c o s t o f s a l e s guided by the medium-term management program decreased from the previous fiscal year by 3.7% and “Project AP-G 2016,” which spans the three years 4.0%, respectively. As a result, the cost of sales ratio from fiscal year 2014 to 2016. Unfavorable foreign improved by 0.2 percentage points to 78.8%. exchange rates meant that, the yen was stronger Selling, general and administrative expenses against the U.S. dollar and other major currencies decreased by ¥4.3 billion (1.5%) to ¥283.1 billion. The compared with a year earlier, which resulted in ratio of selling, general and administrative expenses declines in net sales and profits at overseas to net sales rose by 0.3 percentage points to 14.0%. subsidiaries when converted into yen. R&D expenses increased by ¥0.4 billion (0.8%) to As a result, Toray Group posted a year-on-year ¥59.2 billion. decrease in both consolidated net sales and operating income, while posting an increase in net income attributable to owners of parent, a record-high. Net Sales by Segment (Billions of yen) Operating Income by Segment (Billions of yen) 2,500 2,000 1,500 1,000 500 0 2,010.7 2,104.4 2,026.5 1,837.8 1,588.6 1,592.3 Mar/’12 ’13 ’14 ’15 ’16 ’17 200 150 100 50 0 -50 154.5 146.9 123.5 107.7 105.3 83.4 Mar/’12 ’13 ’14 ’15 ’16 ’17 Fibers & Textiles Carbon Fiber Composite Materials Life Science Others Plastics & Chemicals IT-related Products Environment & Engineering Fibers & Textiles Carbon Fiber Composite Materials Life Science Others Plastics & Chemicals Adjustment IT-related Products Environment & Engineering 52 * Operating income by segment that is not attributable to any segment is included in “Adjustment.” Operating Income and Net Income Business Performance by Segment Consolidated operating income declined by ¥7.6 Fibers & Textiles billion (4.9%) year on year to ¥146.9 billion, and the In Japan, the demand for apparel and industrial ratio of operating income to net sales declined slightly applications remained weak. Against this background, by 0.1 percentage points to 7.2%. Operating income Toray Group strived to expand sales on the whole and by business segment declined in the Fibers & Textiles, worked to improve profitability by upgrading the Carbon Fiber Composite Materials and Life Science business, primarily through the promotion of a segments, while that in the Plastics & Chemicals, IT- business format that integrates the process from related Products, Environment & Engineering and fibers to final products through textiles, as well as by Others segments increased. advancing cost reductions. In net other income (expenses), Toray Group Overseas, mainly in apparel applications, the reported net expenses of ¥7.9 billion in fiscal 2016, business performance of some subsidiaries, mainly in down by ¥8.8 billion (52.7%) from the previous fiscal Southeast Asia, was affected by the slowdown in final year. Interest and dividend income decreased slightly demand in Europe and China. On the other hand, by ¥0.0 billion (0.6%) to ¥5.0 billion, and interest materials for automotive applications and hygiene expense also decreased by ¥0.7 billion (13.0%) to ¥4.7 products remained strong in general. billion. As a result, net financial income of ¥0.4 billion As a result, overall sales of the Fibers & Textiles was recorded in fiscal 2016, reversing ¥0.3 billion net segment for fiscal 2016 declined by ¥35.9 billion (4.0%) financial expenses posted in the previous fiscal year. to ¥856.1 billion from the previous year, and operating Equity in earnings of unconsolidated subsidiaries and income fell by ¥2.1 billion (3.1%) to ¥66.8 billion. affiliated companies rose year on year by ¥2.5 billion (49.6%) to ¥7.5 billion. Loss on impairment of fixed Plastics & Chemicals assets decreased by ¥6.1 billion (67.7%) to ¥2.9 billion. In the resin business, shipments of automotive Net loss on sales and disposal of property, plant and applications were strong in general, both in Japan and equipment decreased by ¥0.1 billion (2.5%) to ¥5.0 overseas. Toray Group also promoted expanded sales billion. Gain on sales and loss on write-down of of ABS and PPS resins for non-automotive applications. investment securities, net, increased by ¥0.7 billion In the film business, while the demand for some (29.8%) to ¥3.0 billion. applications in the U.S. and Europe was sluggish, As a result of the above, income before income Toray Group moved to expand the sales of high value- taxes and non-controlling interests grew by ¥1.2 added products in Asia and other regions. In Japan, billion (0.9%) from the previous fiscal year to ¥139.0 products for packaging applications performed billion. After deductions for income taxes and net strongly. income attributable to non-controlling interests, net Despite many of the segment’s products being income attributable to owners of parent amounted to affected by price competition in Japan and abroad, ¥99.4 billion, up by ¥9.3 billion (10.3%) year on year. Toray Group strived to improve the profitability of the Net income per share was ¥62.17, an increase of business by focusing on the sales expansion of high ¥5.79. The Company declared a year-end cash dividend value-added products, as well as on cost reduction. of ¥7.00 per share in light of the profit conditions for As a result, overall sales of the Plastics & Chemicals the year under review and the profit outlook for the segment declined by ¥22.1 billion (4.2%) to ¥499.1 next fiscal year. When added to the interim cash billion from the previous year, while operating income dividend, the total annual dividend for fiscal 2016 was increased by ¥4.4 billion (15.0%) to ¥33.8 billion. ¥14.00 per share. 53 IT-related Products and operating income fell by ¥12.2 billion (33.6%) to Among materials for flat panel displays, smartphone- ¥24.0 billion. and tablet terminal-related materials performed strongly, with growing shipments of organic EL Environment & Engineering applications. Shipments of battery separator films for In the water treatment business, although Toray lithium-ion secondary batteries expanded, reflecting Group continued to work on expanding sales of growth in demand. reverse osmosis membranes and other products, While many of the segment’s applications were exports from Japan were affected by the further affected by price competition, Toray Group endeavored appreciation of the yen. Among domestic subsidiaries to improve the profitability of this business by in the segment, pharmaceutical-related plant concentrating efforts on expanding sales of high value- construction and lithium-ion secondary battery- added products, as well as on cost reduction. related machinery at an engineering subsidiary As a result, overall sales of the IT-related Products performed strongly. segment increased by ¥3.4 billion (1.3%) to ¥254.4 As a result, overall sales of the Environment & billion from the previous year, and operating income, Engineering segment increased by ¥2.8 billion (1.5 %) as well, rose by ¥4.4 billion (16.7%) to ¥30.5 billion. to ¥186.1 billion from the previous year, and operating income also rose by ¥0.3 billion (3.3%) to Carbon Fiber Composite Materials ¥9.9 billion. In the Carbon Fiber Composite Materials segment, while final demand for aircraft was strong, the Life Science demand for carbon fiber intermediate products (prepreg) remained on a weak note, reflecting inventory adjustment in the supply chain. Demand for In the pharmaceutical business, while the sales volume of pruritus treatment REMITCH®* grew solidly, as the product received approval for an additional products for compressed natural gas tank applications indication in 2015, it was also affected by a National was slow due to the impact of declining crude oil Health Insurance drug price revision in April 2016. The prices. Meanwhile, shipments of products for wind turbine blade applications expanded on the back of growing demand. As a result, overall sales of the Carbon Fiber shipment of natural-type interferon beta preparation FERON® and orally active prostacyclin derivative DORNER® remained sluggish due to the impact of alternative medicines and generic drugs. Composite Materials segment declined by ¥24.6 In the medical devices business, the shipment of billion (13.2%) to ¥161.6 billion from the previous year, dialyzers grew strongly both in Japan and overseas. Total Assets and Net Assets (Billions of yen) 2,400 2,357.9 2,278.4 2,396.8 2,119.7 1,800 1,731.9 1,581.5 (%) 80 60 1,200 600 0 41.8 40.5 41.8 41.5 1,080.8 1,024.9 39.7 674.1 944.6 778.6 42.6 1,100.2 40 20 0 Mar/’12 ’13 ’14 ’15 ’16 ’17 Total Assets Net Assets Equity Ratio * Effective from the year ended March 31, 2014, certain overseas sub- sidiaries applied IAS 19 “Employee Benefits” (revised on June 16, 2011). As this change in accounting policy is applied retrospectively, the relat- ed financial data for 2013 reflect the retrospective application. 54 As a result, overall sales of the Life Science controlling interests and stock acquisition rights stood segment declined by ¥1.7 billion (3.0%) to ¥54.2 billion at ¥1,021.3 billion. The equity ratio at the end of the from the previous year, and operating income fell ¥0.9 year under review came to 42.6%, a 1.1 percentage- billion (30.0%) to ¥2.1 billion. point increase compared with the level at the end of *REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. the previous fiscal year. Others Net sales increased by ¥0.2 billion (1.5%) from the previous fiscal year to ¥14.9 billion, and operating income as well increased by ¥0.0 billion (1.4%) to ¥2.0 billion. FINANCIAL POSITION CASH FLOWS For fiscal 2016, net cash provided by operating activities exceeded net cash used in investing activities by ¥38.7 billion. On the other hand, net cash used in financing activities resulted in ¥18.0 billion. Including the cash and cash equivalents at subsidiaries not previously included in consolidation and the effect Analysis of Assets, Liabilities and Net Assets of exchange rate changes, cash and cash equivalents Total assets of Toray Group as of March 31, 2017 stood as of March 31, 2017 amounted to ¥131.4 billion, up at ¥2,396.8 billion, up by ¥118.4 billion compared to by ¥21.6 billion (19.7%). the previous fiscal year-end. Current assets increased by ¥57.2 billion mainly due to the increases in cash Cash Flows from Operating Activities and time deposits as well as trade receivables. Total Net cash provided by operating activities decreased by non-current assets also increased by ¥61.2 billion ¥22.2 billion compared to the previous fiscal year to mainly due to the increases in property, plant and ¥174.0 billion. Major cash-increasing factors included equipment and investment securities. income before income taxes and non-controlling Total liabilities rose by ¥43.1 billion year on year interests of ¥139.0 billion, and depreciation and to ¥1,296.6 billion, primarily due to the increases in amortization of ¥89.1 billion. Major cash-decreasing trade payables and interest-bearing liabilities. factors, on the other hand, were the increase in trade Total net assets increased by ¥75.3 billion from receivables of ¥25.0 billion, the increase in inventories the previous fiscal year-end to ¥1,100.2 billion, of ¥16.5 billion, and income taxes paid of ¥28.3 billion. reflecting the increase in retained earnings due to net income posted for fiscal 2016. Net assets less non- Interest-bearing Liabilities and D/E Ratio (Billions of yen) 800 600 532.0 481.9 700.3 704.3 716.4 654.2 (Times) 1.60 1.20 400 0.77 0.73 0.76 0.71 0.74 0.80 0.70 200 0 Mar/’12 ’13 ’14 ’15 ’16 ’17 Interest-bearing Liabilities D/E Ratio 0.40 0 Cash Flows (Billions of yen) 200 150 100 50 0 -50 -100 -150 -200 -250 196.1 174.0 161.5 141.3 104.4 100.8 41.7 38.7 0.4 -6.7 0.6 -53.4 -104.0 -107.5 -140.7 -154.4 -135.2 -214.8 Mar/’12 ’13 ’14 ’15 ’16 ’17 Cash Flows from Operating Activities Cash Flows from Investing Activities Free Cash Flows 55 Cash Flows from Investing Activities (2) Rising prices of fuel and raw materials Net cash used in investing activities totaled ¥135.2 The prices of petrochemical raw materials and fuel billion, down by ¥19.2 billion compared to the used by Toray Group are subject to significant previous fiscal year. Major cash-flow factors included fluctuations. If Toray Group is unable to fully pass the capital expenditures of ¥143.9 billion. increases in such prices on to its product prices, or cannot raise its product prices due to lack of progress Cash Flows from Financing Activities in shifting to high-value-added products, its results of Net cash used in financing activities decreased by operations and financial conditions could be ¥59.6 billion year on year to ¥18.0 billion. Repayment negatively affected. of long-term debt of ¥49.3 billion was offset by proceeds from long-term debt of ¥50.9 billion. In (3) Capital expenditures, joint ventures, alliances addition, short-term debt recorded a net increase of and acquisitions ¥8.6 billion, reversing the net decrease of ¥42.3 billion Toray Group makes capital expenditures in a wide for the previous fiscal year. range of business fields. Its other activities include formation of various joint ventures or strategic alliances with third parties, as well as business BUSINESS RISKS acquisitions. When Toray Group becomes involved in capital Operational and other risks faced by Toray Group that e x p e n d i t u r e s , j o i n t v e n t u r e s , a l l i a n c e s a n d could have a major influence on the decisions of acquisitions, it considers the potential for profitability investors are described below. Toray Group works and return on investment. However, there is not constantly to avoid such potential risks, minimize their necessarily any guarantee that the outcome will be impact, and build a system to enable swift responses consistent with expectations. If unforeseen market a n d a c c u r a t e i n f o r m a t i o n d i s c l o s u r e o n t h e changes or significant discrepancies between actual occurrence of unforeseen situations. Please note that results and initial business plans occur due to sudden the risks described below are those identified by changes in the operating environment, there could be Toray Group when this annual report was produced, a loss on impairment of fixed assets or equity in and do not represent all the operational and other losses of unconsolidated subsidiaries and affiliated risks that could affect Toray Group. companies. As a result, Toray Group’s results of operations and financial conditions could be (1) Domestic and overseas demand and market negatively affected. trends As a supplier of basic materials to a broad range of (4) Foreign currency, interest rate and securities industries, Toray Group is exposed to various factors market fluctuations that could cause a sharp drop in demand for its Foreign currency exchange rate fluctuations affect products. These include changes in both worldwide Toray Group’s consolidated financial statements when and regional supply-demand conditions, increased use the financial statements of the overseas operations of substitute materials, and changes to the purchasing presented in local currencies are translated into yen. policies of business partners. In addition to severe Toray Group takes measures, such as entering competition with other companies, Toray Group’s forward exchange contracts, to alleviate risks various businesses also face the risk of new players associated with transactions denominated in foreign entering the market. Price fluctuations, stemming currencies. However, unforeseen exchange rate from the reduction of National Health Insurance (NHI) fluctuations could have an impact on Toray Group’s drug prices and reimbursement prices, also affect the results of operations and financial conditions. pharmaceuticals and medical products business. Moreover, rapid and unforeseen changes in Although Toray Group takes steps to maintain its interest rates and other aspects of financial market competitive advantage, a decline in demand for, or turmoils, as well as changes in the value of securities falling prices of, such items, or the appearance of a and pension assets held by Toray Group, may have an credit risk affecting Toray Group’s business partners, impact on Toray Group’s results of operations and could have a negative impact on Toray Group’s results financial conditions. of operations and financial conditions. 56 (5) Changes in assumptions on which forecasts are (9) Laws and regulations, taxes, competition poli- based that might affect employee retirement cies and internal controls benefit obligations and deferred tax assets Various laws and regulations apply in the countries Toray’s consolidated financial statements contain and regions where Toray Group conducts its business. employee retirement benefit obligations based on These laws and regulations include regulations related future pension payments calculated in accordance to the environment, commercial trading, labor, with certain criteria, as well as deferred tax assets intellectual property, taxation and foreign exchange, stated according to likely tax refunds based on taxable investment approval protocols and import/export income estimates for the future fiscal years. However, controls, and policies on competition based on if changes in the criteria used to calculate pension antitrust laws. Through the establishment and payments were to occur, or if fluctuations arose in the maintenance of internal control systems, Toray Group estimates of future taxable income, Toray Group’s e n d e a v o r s t o c o m p l y w i t h a l l s u c h l a w s a n d results of operations and financial conditions could be regulations. However, changes to such laws and affected. (6) Overseas operations regulations, including the introduction of new environmental regulations and taxes, as well as changes to the corporate income tax rate could affect Toray Group is developing a broad geographical Toray Group’s results of operations and financial presence, with operations in various countries of Asia, conditions. Also, if Toray Group is judged as having Europe, and the Americas. Some of the major potential violated such laws and regulations, is subject to risks associated with various regions are summarized government sanctions initiated by a fair trade below. If such risks were to become reality, Toray commission, receives a notice of correction from tax Group’s results of operations and financial conditions authorities, has an employee who engages in illicit could be negatively affected. behavior, or is unable to uphold internal controls pertaining to financial statements, its results of — Unforeseen introduction, changes or abolition of operations and financial conditions could be laws and regulations such as changes in taxation negatively affected. systems — Unforeseen economic or political events (10) Natural disasters and accidents — Social upheaval, including acts of terror or war Toray Group places top priority on safety, accident (7) Product liability prevention, and environmental preservation. To minimize losses caused by the suspension of Toray Group strives to supply the world’s best-in-class production, Toray Group conducts regular accident product quality. However, it cannot always guarantee p r e v e n t i o n i n s p e c t i o n s , m a i n t e n a n c e o f i t s against a major unforeseen quality problem. If quality- manufacturing facilities, and safety activities. related serious situations were to occur, Toray However, the advent of a major natural disaster or Group’s results of operations and financial conditions unprecedented accident could cause damage to Toray could be negatively affected. (8) Lawsuits Group’s manufacturing facilities, or could cause inadequate supply of raw materials, which could have a negative impact on its results of operations and In the course of conducting its wide range of business financial conditions. activities, Toray Group faces the risk of being targeted by legal action pertaining to various matters such as (11) Information security risk intellectual property, product liability, environment, The Toray Group’s information systems and networks and labor issues. If Toray Group were subject to a are fundamentally essential elements in the execution major lawsuit, its results of operations and financial of the Group’s business operations and every security conditions could be negatively affected. precaution is taken in their formulation and operation. Unauthorized access, data alteration, theft or deletion, an interruption of system operations that causes a work stoppage or leads to a lost of trust in the Group, or a leak of confidential information outside the Company, or other such incident could negatively impact the Toray Group’s earnings and financial conditions. 57 Consolidated Balance Sheets Toray Industries, Inc. and Consolidated Subsidiaries March 31, 2017 and 2016 ASSETS Current assets: Cash (Note 5) Time deposits (Notes 4 and 5) Trade receivables (Notes 5 and 7): Notes receivable Accounts receivable Inventories (Note 3) Deferred tax assets (Note 10) Prepaid expenses and other current assets (Notes 5 and 6) Allowance for doubtful accounts Total current assets Property, plant and equipment (Notes 4 and 13): Land Buildings Machinery and equipment Construction in progress Other 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) 2017 2016 2017 ¥ 97,920 45,191 ¥ 89,976 30,192 $ 872,727 402,772 53,213 372,909 409,332 26,438 63,911 (2,205) 1,066,709 79,831 602,423 1,859,050 107,562 111,307 2,760,173 (1,878,739) 881,434 35,633 366,587 394,034 24,113 70,815 (1,791) 1,009,559 474,269 3,323,610 3,648,235 235,633 569,617 (19,652) 9,507,210 76,942 584,763 1,808,732 97,497 106,510 2,674,444 (1,843,832) 830,612 711,506 5,369,189 16,569,073 958,663 992,041 24,600,472 (16,744,554) 7,855,918 45,779 31,516 77,295 54,299 32,860 87,159 408,012 280,891 688,904 Investments in unconsolidated subsidiaries and affiliated companies (Note 5) Investment securities (Notes 4, 5 and 6) Long-term loans receivable Deferred tax assets (Note 10) Other (Notes 4 and 8) Allowance for doubtful accounts Total investments and other assets 113,206 186,512 1,566 13,513 59,813 (3,263) 371,347 118,949 158,541 1,494 12,633 62,868 (3,429) 351,056 1,008,966 1,662,317 13,957 120,437 533,093 (29,082) 3,309,688 Total assets ¥ 2,396,785 ¥ 2,278,386 $ 21,361,720 See accompanying notes to consolidated financial statements. 58 LIABILITIES AND NET ASSETS Current liabilities: Short-term bank loans (Notes 4, 5 and 7) 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 Millions of yen Thousands of U.S. dollars (Note 2) 2017 2016 2017 ¥ 132,014 110,244 19,000 ¥ 135,960 48,507 6,000 $ 1,176,595 982,567 169,340 40,814 188,378 18,560 58,244 102,722 669,976 38,273 174,870 15,815 57,645 94,278 571,348 363,761 1,678,948 165,419 519,109 915,526 5,971,266 Long-term debt (Notes 4, 5 and 7) 450,757 510,349 4,017,442 Deferred tax liabilities (Note 10) 43,320 34,632 386,096 Net defined benefit liability (Note 8) 103,459 104,803 922,094 Customers’ guarantee deposits and other liabilities (Note 4) Total liabilities 29,097 1,296,609 32,345 1,253,477 259,332 11,556,230 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 gains (losses) on hedges Foreign currency translation adjustments Remeasurements of defined benefit plans Total accumulated other comprehensive income Stock acquisition rights (Note 9) Non-controlling interests Total net assets Total liabilities and net assets 147,873 121,091 691,290 (20,822) 939,432 66,513 21 13,764 1,542 81,840 1,205 77,699 1,100,176 ¥2,396,785 147,873 119,180 614,334 (21,163) 860,224 61,272 (490) 29,270 (4,708) 85,344 1,181 78,160 1,024,909 ¥2,278,386 1,317,941 1,079,242 6,161,230 (185,579) 8,372,834 592,807 187 122,674 13,743 729,412 10,740 692,504 9,805,490 $21,361,720 59 Consolidated Statements of Income Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2017 and 2016 Net sales Costs and expenses: Cost of sales (Notes 3, 8, 13 and 14) Selling, general and administrative expenses (Notes 8, 9, 13 and 14) Operating income Other income (expenses): Interest expense Interest and dividend income Equity in earnings of unconsolidated subsidiaries and affiliated companies Loss on sales and disposal of property, plant and equipment, net Loss on impairment of fixed assets (Note 15) Gain on sales and loss on write-down of investment securities, net Other, net Income before income taxes and non-controlling interests Income taxes (Note 10): Current Deferred Net income Net income attributable to non-controlling interests Net income attributable to owners of parent See accompanying notes to consolidated financial statements. Millions of yen Thousands of U.S. dollars (Note 2) 2017 2016 2017 ¥2,026,470 ¥2,104,430 $18,061,230 1,596,472 283,105 1,879,577 146,893 1,662,556 287,394 1,949,950 154,480 14,228,806 2,523,217 16,752,023 1,309,207 (4,654) 5,010 7,506 (4,971) (2,925) 2,951 (10,798) (7,881) 139,012 (5,350) 5,042 5,016 (5,098) (9,063) 2,273 (9,492) (16,672) 137,808 (41,480) 44,652 66,898 (44,305) (26,070) 26,301 (96,239) (70,241) 1,238,966 31,361 1,708 33,069 105,943 (6,525) ¥ 99,418 31,435 9,191 40,626 97,182 (7,050) ¥ 90,132 279,510 15,223 294,733 944,234 (58,155) $ 886,078 Consolidated Statements of Comprehensive Income Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2017 and 2016 Net income Other comprehensive income (Note 16) Net unrealized gains (losses) on securities Net deferred gains (losses) on hedges Foreign currency translation adjustments Remeasurements of defined benefit plans Share of other comprehensive income of unconsolidated subsidiaries and affiliated companies accounted for by the equity method Total other comprehensive income Comprehensive income Total comprehensive income attributable to: Owners of parent Non-controlling interests See accompanying notes to consolidated financial statements. Millions of yen Thousands of U.S. dollars (Note 2) 2017 2016 2017 ¥105,943 ¥ 97,182 $ 944,234 5,131 643 (14,114) 6,305 (1,950) (3,985) ¥101,958 (17,868) (100) (59,118) (3,273) (3,933) (84,292) ¥ 12,890 45,731 5,731 (125,793) 56,194 (17,380) (35,517) $ 908,717 ¥ 95,914 6,044 ¥ 10,881 2,009 $ 854,848 53,868 60 Consolidated Statements of Changes in Net Assets Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2017 and 2016 Balance as of April 1, 2015 Changes in: Dividends Net income attributable to owners of parent Purchase of treasury stock Disposition of treasury stock Change in equity attributable to parent arising from transaction with non-controlling shareholders Effect of change in accounting period of subsidiaries and affiliated companies Other Items other than stockholders’ equity, net Total changes Balance as of March 31, 2016 Balance as of April 1, 2016 Changes in: Dividends Net income attributable to owners of parent Purchase of treasury stock Disposition of treasury stock Change in equity attributable to parent arising from transaction with non-controlling shareholders Effect of change in accounting period of subsidiaries and affiliated companies Other Items other than stockholders’ equity, net 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 gains (losses) on hedges Foreign currency translation adjustments Remeasure- ments of defined benefit plans Total accumulated other comprehen- sive income Stock acquisition rights Non- controlling interests Total net assets ¥147,873 ¥136,727 ¥544,557 ¥(21,345) ¥807,812 ¥ 79,093 ¥(387) ¥100,097 ¥ (947) ¥177,856 ¥1,207 ¥ 93,882 ¥1,080,757 (19,191) 90,132 (64) 246 (52) (17,547) (1,105) (59) 52 (19,191) 90,132 (64) 194 (17,547) (1,105) (7) (19,191) 90,132 (64) 194 (17,547) (1,105) (7) — ¥147,873 ¥147,873 (17,547) ¥119,180 ¥119,180 69,777 ¥614,334 ¥614,334 182 ¥(21,163) ¥(21,163) 52,412 ¥860,224 ¥860,224 (17,821) (17,821) ¥ 61,272 ¥ 61,272 (103) (103) ¥(490) ¥(490) (70,827) (70,827) ¥ 29,270 ¥ 29,270 (3,761) (3,761) ¥(4,708) ¥(4,708) (92,512) (92,512) ¥ 85,344 ¥ 85,344 (26) (26) ¥1,181 ¥1,181 (108,260) (15,722) (15,722) (55,848) ¥ 78,160 ¥1,024,909 ¥ 78,160 ¥1,024,909 (22,396) 99,418 (22,396) 99,418 (25) 323 (25) 366 (43) 1,911 43 (66) (22,396) 99,418 (25) 323 1,911 — (23) 5,241 5,241 ¥ 66,513 511 511 ¥ 21 (15,506) (15,506) ¥ 13,764 6,250 6,250 ¥ 1,542 (3,504) (3,504) ¥ 81,840 24 24 ¥1,205 (461) (461) (3,941) 75,267 ¥ 77,699 ¥1,100,176 1,911 — (23) 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 gains (losses) on hedges Foreign currency translation adjustments Remeasure- ments of defined benefit plans Total accumulated other comprehen- sive income Stock acquisition rights Non- controlling interests Total net assets $1,317,941 $1,062,210 $5,475,348 $(188,619) $7,666,881 $546,096 $(4,367) $ 260,873 $(41,961) $760,642 $10,526 $696,613 $9,134,661 Total changes Balance as of March 31, 2017 — ¥147,873 1,911 ¥121,091 76,956 ¥691,290 341 ¥(20,822) 79,208 ¥939,432 Balance as of April 1, 2016 Changes in: Dividends Net income attributable to owners of parent Purchase of treasury stock Disposition of treasury stock Change in equity attributable to parent arising from transaction with non-controlling shareholders Effect of change in accounting period of subsidiaries and affiliated companies Other Items other than stockholders’ equity, net Total changes Balance as of March 31, 2017 (199,608) (199,608) 886,078 886,078 (223) 2,879 (223) 3,262 (383) 17,032 383 (588) 17,032 — (205) 46,711 46,711 $1,317,941 $1,079,242 $6,161,230 $(185,579) $8,372,834 $592,807 685,882 705,954 17,032 3,039 — See accompanying notes to consolidated financial statements. (199,608) 886,078 (223) 2,879 17,032 — (205) 4,554 4,554 $ 187 55,704 (138,200) (138,200) 55,704 $ 122,674 $ 13,743 (31,230) (31,230) $729,412 214 214 $10,740 (4,109) (4,109) (35,125) 670,829 $692,504 $9,805,490 61 Consolidated Statements of Cash Flows Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2017 and 2016 Cash flows from operating activities: Income before income taxes and non-controlling interests ¥ 139,012 ¥ 137,808 $ 1,238,966 Millions of yen Thousands of U.S. dollars (Note 2) 2017 2016 2017 Adjustments to reconcile income before income taxes and non-controlling interests to net cash provided by operating activities: Depreciation and amortization Loss on impairment of fixed assets Interest and dividend income Equity in earnings of unconsolidated subsidiaries and affiliated 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 Decrease in net defined benefit liability Increase in trade receivables Increase in inventories Increase (decrease) in trade payables Other, net Subtotal Interest and dividends received Interest paid Income taxes paid Net cash provided by operating activities Cash flows 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 Other, net Net cash used in investing activities Cash flows from financing activities: Net increase (decrease) in short-term debt Proceeds from long-term debt Repayment of long-term debt Cash dividends paid Payments from changes in ownership interests in subsidiaries that do not result in change in scope of consolidation Other, net Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents 89,073 2,925 (5,010) (7,506) 4,654 4,971 (3,010) (234) (24,993) (16,483) 17,982 (3,714) 197,667 9,175 (4,572) (28,312) 173,958 (143,894) (4,616) 2,114 7,009 — 4,145 (135,242) 8,621 50,929 (49,323) (24,316) (3,064) (865) (18,018) (847) 19,851 91,168 9,063 (5,042) (5,016) 5,350 5,098 (1,998) (2,829) (20,775) (15,207) (473) 16,817 213,964 14,945 (5,212) (27,555) 196,142 (129,114) (11,308) 1,702 5,762 (6,226) (15,230) (154,414) (42,255) 88,182 (66,894) (20,600) (32,024) (4,014) (77,605) (7,860) (43,737) 793,877 26,070 (44,652) (66,898) 41,480 44,305 (26,827) (2,086) (222,754) (146,907) 160,267 (33,102) 1,761,738 81,774 (40,749) (252,335) 1,550,428 (1,282,478) (41,141) 18,841 62,469 — 36,943 (1,205,365) 76,836 453,913 (439,599) (216,720) (27,308) (7,709) (160,588) (7,549) 176,925 Cash and cash equivalents at beginning of year 109,778 112,489 978,414 Beginning balance of cash and cash equivalents at subsidiaries not previously included in consolidation 1,712 57 15,258 Increase in cash and cash equivalents resulting from change in accounting period of consolidated subsidiaries Increase in cash and cash equivalents resulting from merger with unconsolidated subsidiaries — 64 40,969 — — 570 Cash and cash equivalents at end of year ¥ 131,405 ¥ 109,778 $ 1,171,168 See accompanying notes to consolidated financial statements. 62 Notes to Consolidated Financial Statements Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2017 and 2016 1. SIGNIFICANT ACCOUNTING POLICIES a) Basis of Presenting Consolidated Financial Statements The accompanying consolidated financial statements of Toray Industries, Inc. (the “Company”) and its consolidated subsidiaries have been prepared in accordance with the provisions set forth in the Financial Instruments and Exchange Act 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 application and disclosure requirements of International Financial Reporting Standards. For the preparation of consolidated financial statements, the accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should be unified, in principle. However, financial statements prepared by overseas subsidiaries in accordance with International Financial Reporting Standards or the generally accepted accounting principles in the United States tentatively may be used for the consolidation 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 financial statements in Japanese have been reclassified for the convenience of readers outside Japan. b) Principles of Consolidation The accompanying consolidated financial 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 Company acquires control over the subsidiaries. Investments in unconsolidated subsidiaries and affiliated companies are accounted for by the equity method. All intercompany accounts and transactions have been eliminated in consolidation. The difference between the acquisition cost and the underlying net assets of the subsidiaries is recognized 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, 2017 and 2016 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 2017 ¥ 97,920 45,191 2016 ¥ 89,976 30,192 Thousands of U.S. dollars 2017 $ 872,727 402,772 (11,746) (10,390) (104,688) 40 ¥131,405 — ¥109,778 357 $1,171,168 Cash Time deposits Less—Time deposits with maturities of over 3 months Marketable securities with original maturities of 3 months or less Cash and cash equivalents 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 consolidated 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 available 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 significantly and such impairment of the value is not deemed temporary, those securities are written down to fair value and the resulting losses are included in net income or loss for the period. Hedge Accounting: Gains or losses arising from changes in fair value of derivatives 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 transactions 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. 63 The Company and its consolidated subsidiaries have a policy to utilize the above hedging instruments in order to reduce their exposure to the risk of interest rate and foreign currency fluctuations. Thus, their purchases of the hedging instruments are limited to, at maximum, the amounts of the hedged items. The Company and its consolidated subsidiaries evaluate the effectiveness of hedging activities by reference to the accumulated gains or losses on the hedging instruments and the related hedged items from the commencement 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. f) Inventories Inventories are stated at the lower of acquisition cost, principally determined by the moving average method, or net selling value to reflect any decreased profitability of inventories. g) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation for property, plant and equipment (except leased assets) is principally computed by the straight-line method at rates based on estimated useful lives that are as follows: Buildings Machinery and equipment 3–60 years 3–15 years Principally, a depreciation method of leased assets is identical to the method applicable to its own fixed assets. 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 determined 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 financial statements. The Company also provides for the anticipated tax effect of future remittances of retained earnings from subsidiaries and affiliated companies. The Company and some of its domestic consolidated subsidiaries adopt the consolidated taxation system. i) Consumption Taxes Transactions subject to consumption taxes are recorded at amounts exclusive of consumption taxes. j) Retirement Benefits The Company and its domestic consolidated subsidiaries have an unfunded lump-sum benefit plan, a funded contributory pension plan and a defined contribution pension plan covering all eligible employees. Under the terms of the unfunded lump-sum benefit 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 defined contribution pension plan provide, in general, pension payments for life commencing from age 60. To provide for the payment of retirement benefits to employees, net defined benefit liability is recognized at an amount equal to the expected retirement benefit 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’ average remaining years of service (primarily 13 years). Actuarial gains and losses are amortized from the following fiscal year after recognition using the straight-line method over a certain period within the employees’ average remaining years of service (primarily 13 years). Unrecognized actuarial gains and losses and unrecognized past service cost are recognized in remeasurements of defined benefit plans in accumulated other comprehensive income under the net assets section, net of deferred taxes. Allowance for retirement benefits for members of the Board and corporate auditors (“executives”) of the Company and certain of its domestic consolidated subsidiaries is provided based on the companies’ pertinent rules and is calculated 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 liabilities” on the consolidated balance sheets. k) Appropriation of Retained Earnings Cash dividends are recorded in the fiscal year when the proposed appropriation of retained earnings is approved by the Board of Directors and/or stockholders. l) Foreign Currency Transactions All monetary assets and liabilities denominated in foreign currencies, 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. m) Translation of Foreign Currency Financial Statements Translation of foreign currency financial statements of overseas subsidiaries into Japanese yen for consolidation purposes is made by using the current exchange rates 64 prevailing at their balance sheet dates, with the exception that the translation 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 presented as “foreign currency translation adjustments” in net assets except for the portion belonging to non-controlling shareholders, which is included in “non- controlling interests” in net assets. 2. U.S. DOLLAR AMOUNTS n) Application of Revised Implementation Guidance on Recoverability of Deferred Tax Assets The Company and its consolidated subsidiaries adopted “Revised Implementation Guidance on Recoverability of Deferred Tax Assets” (ASBJ Guidance No. 26, March 28, 2016) from the beginning of the year ended March 31, 2017. The Company and its domestic consolidated subsidiaries maintain their accounting records in yen. The U.S. dollar amounts included in the accompanying consolidated financial statements and notes thereto represent the arithmetic results of translating yen into U.S. dollars at the rate of ¥112.2 to $1.00, the approximate exchange rate prevailing on March 31, 2017. The inclusion of such U.S. dollar amounts is solely for the convenience of readers outside Japan and is not intended to imply that the assets and liabilities that originated in yen have been or could be readily converted, realized or settled in U.S. dollars at this or at any other rate. 3. INVENTORIES At March 31, 2017 and 2016, inventories consisted of the following: Merchandise and finished goods Work in process Raw materials and supplies Millions of yen 2017 ¥235,127 78,646 95,559 ¥409,332 2016 ¥229,199 75,992 88,843 ¥394,034 Thousands of U.S. dollars 2017 $2,095,606 700,945 851,684 $3,648,235 Losses recognized and charged to cost of sales as a result of valuation at March 31, 2017 and 2016 were ¥6,246 million ($55,668 thousand) and ¥6,443 million, respectively. 65 4. SHORT-TERM BANK LOANS, LONG-TERM DEBT AND LEASE OBLIGATIONS Short-term bank loans at March 31, 2017 and 2016 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, 2017 and 2016 were as follows: Loans principally from banks and insurance companies with interest rates primarily from 0.02% to 11.50%, maturing serially through 2026: Unsecured Secured Lease obligations maturing serially through 2036: Unsecured Yen notes with an interest rate of 0.42% due 2018 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 2019 Zero coupon convertible bonds due 2021 Less amounts due within one year At March 31, 2017, assets pledged as collateral were as follows: Time deposits Property, plant and equipment, net Investment securities Others Millions of yen 2017 2016 Thousands of U.S. dollars 2017 ¥420,399 592 4,384 10 20,000 20,000 50,000 50,000 565,385 111,376 ¥454,009 ¥418,581 255 $3,746,872 5,276 3,437 20 20,000 20,000 50,000 50,000 562,293 49,558 ¥512,735 39,073 89 178,253 178,253 445,633 445,633 5,039,082 992,656 $4,046,426 Millions of yen Thousands of U.S. dollars ¥ 828 4,045 1,023 518 ¥6,414 $ 7,380 36,052 9,118 4,617 $57,166 The annual maturities of long-term debt and lease obligations subsequent to March 31, 2017 were as follows: Years ending March 31: 2018 2019 2020 2021 2022 2023 and thereafter Millions of yen Thousands of U.S. dollars ¥111,376 62,007 64,451 66,946 68,070 192,535 ¥565,385 $ 992,656 552,647 574,430 596,667 606,684 1,715,998 $5,039,082 66 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 fluctuations 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 its internal regulations, the Company carefully manages the payment periods for receivables and outstanding balances of all customers and regularly monitors the credit standing of major clients. Consolidated subsidiaries also monitor and manage the credit standings of their 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 payables denominated in the same foreign currencies. Likewise, the Company and its consolidated subsidiaries mainly use currency swaps to hedge the foreign currency exchange risk of bank loans denominated in foreign currencies. I n v e s t m e n t s e c u r i t i e s a r e m o s t l y t h e s h a r e s o f corporations with which the Group has business relationships and are exposed to the risk of market price fluctuations. The fair value of the investment securities and financial positions of the issuing entities (clients) are regularly monitored. Trade payables are operating payables, most of which are due and payable within one year. Short-term bank loans and commercial paper are financing 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 fluctuation. Bank loans and bonds at floating interest rates carry the risk of higher interest expenses when rates rise, while bank loans and bonds at fixed interest rates carry the risk of higher interest expenses when rates fall. The Company and its consolidated subsidiaries use derivative transactions (interest rate swap transactions) to minimize the risk of interest rate fluctuation, taking into consideration the balance between fixed interest rates and floating interest rates. Hedging instruments, hedged items, the policy for utilizing such hedging instruments and the method for evaluating the effectiveness of hedging activities are described in Note 1. SIGNIFICANT ACCOUNTING POLICIES d) Financial Instruments, Hedge Accounting in the Notes to the Consolidated Financial Statements. Derivative transactions are executed and managed in accordance with the internal regulations prescribing the authorization for transactions. To mitigate credit risk, the Company and its consolidated subsidiaries carry out derivative transactions only with highly rated financial institutions. c) Supplemental Explanation on Fair Value of Financial Instruments The fair value of financial 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 fluctuation because they employ various factors and assumptions. In addition, the contract amount of derivatives in Note 7. DERIVATIVES in the Notes to the Consolidated Financial Statements is not an indicator of market risk associated with derivative transactions. 67 Fair Value of Financial Instruments Carrying value, fair value and unrealized gain (loss) as of March 31, 2017 and 2016 were as follows. In addition, financial instruments, for which it is extremely difficult to measure the fair value, are not included. (Please refer to Note 2 below). Cash and time deposits Trade receivables Investment securities Held-to-maturity debt securities Investment securities in subsidiaries and affiliated 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 affiliated 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 2017 Carrying value Fair value Unrealized gain (loss) ¥143,111 426,122 ¥143,111 426,122 100 22,001 177,825 ¥769,159 ¥229,192 132,014 19,000 140,010 420,991 ¥941,207 103 20,788 177,825 ¥767,949 ¥229,192 132,014 19,000 162,942 420,261 ¥963,409 ¥ (135) 101 ¥ (34) ¥ (135) 101 ¥ (34) Millions of yen 2016 ¥ — — 3 (1,213) — ¥ (1,210) ¥ — — — 22,932 (730) ¥22,202 ¥ — — ¥ — Carrying value Fair value Unrealized gain (loss) ¥120,168 402,220 105 20,785 151,051 ¥694,329 ¥213,143 135,960 6,000 140,020 418,836 ¥913,959 ¥ 56 12 ¥ 68 ¥120,168 402,220 110 19,178 151,051 ¥692,727 ¥213,143 135,960 6,000 163,078 422,631 ¥940,812 ¥ 56 12 ¥ 68 ¥ — — 5 (1,607) — ¥ (1,602) ¥ — — — 23,058 3,795 ¥26,853 ¥ — — ¥ — 68 Cash and time deposits Trade receivables Investment securities Held-to-maturity debt securities Investment securities in subsidiaries and affiliated 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 Thousands of U.S. dollars 2017 Carrying value Fair value Unrealized gain (loss) $1,275,499 3,797,879 $1,275,499 3,797,879 $ — — 891 196,087 1,584,893 $6,855,250 $2,042,709 1,176,595 169,340 1,247,861 3,752,148 $8,388,654 918 185,276 1,584,893 $6,844,465 $2,042,709 1,176,595 169,340 1,452,246 3,745,642 $8,586,533 $ (1,203) 900 $ (303) $ (1,203) 900 $ (303) 27 (10,811) — $ (10,784) $ — — — 204,385 (6,506) $197,879 $ — — $ — *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 financial 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, etc. are valued at quoted market price or at the price provided by correspondent financial institutions. For information on securities classified 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 with market price is based on market price. The fair value of bonds without market price is estimated by discounting the principal amounts and interest based on interest rates adjusted for the remaining periods and credit risk of the bonds. However, for floating-rate bonds or fixed-rate bonds converted to floating using interest rate swaps accounted for under the special accounting treatment for interest rate swaps, 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. 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 interest (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 floating 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. 69 2. Financial instruments for which it is extremely difficult to determine the fair value Unlisted equity securities Unlisted debt securities Millions of yen 2017 ¥78,266 2,000 2016 ¥83,080 2,000 Thousands of U.S. dollars 2017 $ 697,558 17,825 These securities have no quoted market price and the fair value is extremely difficult to determine. Therefore, they are not included in the preceding table. 3. Redemption schedule for receivables and investment securities with maturities at March 31, 2017 and 2016 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 2017 Due within one year Due after one year through five years Due after five years through ten years Due after ten years ¥143,111 426,112 9 40 ¥569,272 ¥— — — — ¥— ¥ — — 12 60 ¥72 ¥ — 10 79 1 ¥90 Millions of yen 2016 Due within one year Due after one year through five years Due after five years through ten years Due after ten years ¥120,168 402,106 16 986 ¥523,276 ¥ — 114 79 — ¥193 ¥— — 10 10 ¥20 ¥ — — — 100 ¥100 Thousands of U.S. dollars 2017 Due within one year Due after one year through five years Due after five years through ten years Due after ten years $1,275,499 3,797,790 80 357 $5,073,725 $ — 89 704 9 $802 $ — — 107 535 $642 $— — — — $— 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. 70 6. SECURITIES At March 31, 2017 and 2016, information on securities classified as held-to-maturity debt securities was as follows: Millions of yen 2017 Thousands of U.S. dollars 2017 Held-to-maturity debt securities Carrying value ¥100 Fair value ¥103 Unrealized gains Unrealized losses ¥3 ¥0 Carrying value $891 Fair value Unrealized gains Unrealized losses $918 $27 $0 Held-to-maturity debt securities Carrying value ¥105 Fair value ¥110 Unrealized gains Unrealized losses ¥5 ¥— Millions of yen 2016 At March 31, 2017 and 2016, information on securities classified as other securities was as follows: Millions of yen 2017 Thousands of U.S. dollars 2017 Carrying value Acquisition cost Unrealized gains Unrealized losses Carrying value Acquisition cost Unrealized gains Unrealized losses Other securities ¥177,825 ¥84,862 ¥95,378 ¥2,415 $1,584,893 $756,346 $850,071 $21,524 Millions of yen 2016 Carrying value Acquisition cost Unrealized gains Unrealized losses Other securities ¥151,051 ¥65,632 ¥87,758 ¥2,339 71 7. DERIVATIVES The Company and its consolidated subsidiaries had the following derivative contracts outstanding at March 31, 2017 and 2016: Hedge accounting is not applied Millions of yen Thousands of U.S. dollars 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: Contract amount ¥9,964 1,141 319 4,397 9,098 446 67 107 2,053 2017 Fair value ¥ 36 (10) 37 (211) (9) (5) (0) 1 (27) Unrealized gain (loss) Contract amount ¥ 36 (10) 37 (211) (9) (5) (0) 1 (27) $88,806 10,169 2,843 39,189 81,087 3,975 597 954 18,298 2017 Fair value $ 321 (89) 330 (1,881) (80) (45) (0) 9 (241) Unrealized gain (loss) $ 321 (89) 330 (1,881) (80) (45) (0) 9 (241) Receiving U.S. dollar, paying Thai baht 5,075 ¥ — 53 ¥(135) 53 ¥(135) 45,232 472 $ — $(1,203) 472 $(1,203) Forward foreign exchange contracts: Buying U.S. dollar Buying euro Buying Chinese yuan Buying Thai baht Buying Japanese yen Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Japanese yen Foreign currency swaps: Receiving U.S. dollar, paying Korean won Receiving U.S. dollar, paying Thai baht Millions of yen 2016 Fair value Unrealized gain (loss) ¥(332) (0) (2) (12) 55 296 (7) 1 (0) 41 (22) 38 ¥ 56 ¥(332) (0) (2) (12) 55 296 (7) 1 (0) 41 (22) 38 ¥ 56 Contract amount ¥ 7,408 31 680 360 7,678 11,923 187 41 18 1,614 1,076 5,132 ¥ — 72 Hedge accounting is applied Millions of yen 2017 Type of derivative and principal hedged items Contract amount Fair value*1, 2 Estimation method for fair value Forward foreign exchange contracts: Accounted for as part of trade receivables and trade payables Buying Japanese yen Selling euro Selling Chinese yuan Foreign currency swaps: Accounted for as part of long-term bank loans Receiving U.S. dollar, paying Korean won Receiving Japanese yen, paying Korean won Interest rate swaps: ¥ 1,397 2,074 652 ¥ 15 Forward foreign exchange quotes (25) 2 7,028 16,000 0 The price provided by correspon- (667) dent financial institutions Accounted for as part of long-term bank loans Floating-rate receipt, fixed-rate payment 86,468 221 The price provided by correspon- dent financial institutions Hedge accounting method Deferral hedge method Special accounting method for interest rate swaps Allocation method for forward foreign exchange contracts — 302 Forward foreign exchange quotes 5 (2) 118 5 1 119 8 0 (1) 0 0 Interest rate swaps: Accounted for as part of bonds and long-term bank loans Floating-rate receipt, fixed-rate payment Floating-rate receipt, floating-rate payment Fixed-rate receipt, floating rate payment 2,000 26,900 40,000 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 Thai baht Buying Korean won Buying Indian rupee Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Thai baht 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: 16,655 655 377 900 333 259 18,140 1,176 17 79 61 12 13,044 232 1,518 4 25,972 3,310 24 502 3 Accounted for as part of long-term bank loans Receiving U.S. dollar, paying Japanese yen Receiving Australian dollar, paying Japanese yen 160,981 3,129 ¥ — ¥ 101 — — 73 Hedge accounting method Deferral hedge method Special accounting method for interest rate swaps Allocation method for forward foreign exchange contracts Type of derivative and principal hedged items Contract amount Fair value*1, 2 Estimation method for fair value Millions of yen 2016 Forward foreign exchange contracts: Accounted for as part of trade receivables and trade payables 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) Foreign currency swaps: Accounted for as part of long-term bank loans Receiving U.S. dollar, paying Korean won Receiving Japanese yen, paying Korean won Interest rate swaps: Forward foreign exchange quotes ¥ 1,856 772 367 258 ¥ 31 24 (14) 3 396 198 3 (2) The price provided by correspondent financial institutions 6,403 6,000 234 26 The price provided by correspondent financial institutions Accounted for as part of long-term bank loans Floating-rate receipt, fixed-rate payment 14,790 (153) The price provided by correspondent financial institutions Interest rate swaps: Accounted for as part of bonds and long-term bank loans Floating-rate receipt, fixed-rate payment Floating-rate receipt, floating-rate payment Fixed-rate receipt, floating rate payment 2,000 26,900 53,000 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 Buying Indian rupee Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Thai baht 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 Selling Japanese yen Foreign currency swaps: 26,720 542 566 174 179 13,467 1,117 7 75 2 29 19,569 190 410 5 34,467 3,684 22 592 20 2 — (707) Forward foreign exchange quotes 6 (7) (4) (0) 564 9 0 (1) 0 0 — — Accounted for as part of long-term bank loans Receiving U.S. dollar, paying Japanese yen Receiving Australian dollar, paying Japanese yen 177,778 3,129 ¥ — ¥ 12 74 Hedge accounting method Deferral hedge method Special accounting method for interest rate swaps Allocation method for forward foreign exchange contracts Type of derivative and principal hedged items Contract amount Fair value*1, 2 Estimation method for fair value Thousands of U.S. dollars 2017 Forward foreign exchange contracts: Accounted for as part of trade receivables and trade payables Buying Japanese yen Selling euro Selling Chinese yuan Foreign currency swaps: Accounted for as part of long-term bank loans Receiving U.S. dollar, paying Korean won Receiving Japanese yen, paying Korean won Interest rate swaps: $ 12,451 18,485 5,811 $ 134 Forward foreign exchange quotes (223) 18 62,638 142,602 0 The price provided by correspon- (5,945) dent financial institutions Accounted for as part of long-term bank loans Floating-rate receipt, fixed-rate payment 770,660 1,970 The price provided by correspon- dent financial institutions Interest rate swaps: Accounted for as part of bonds and long-term bank loans Floating-rate receipt, fixed-rate payment Floating-rate receipt, floating-rate payment Fixed-rate receipt, floating rate payment 17,825 239,750 356,506 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 Thai baht Buying Korean won Buying Indian rupee Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Thai baht 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: 148,440 5,838 3,360 8,021 2,968 2,308 161,676 10,481 152 704 544 107 116,257 2,068 13,529 36 231,480 29,501 214 4,474 27 Accounted for as part of long-term bank loans Receiving U.S. dollar, paying Japanese yen Receiving Australian dollar, paying Japanese yen 1,434,768 27,888 $ — $ 900 — 2,692 Forward foreign exchange quotes 45 (18) 1,052 45 9 1,061 71 0 (9) 0 0 — — *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. 75 8. RETIREMENT BENEFIT PLAN The changes in the retirement benefit obligation during the years ended March 31, 2017 and 2016 were as follows: Retirement benefit obligation at beginning of the year Service cost Interest cost Actuarial gains and losses Retirement benefit paid Effect of change in accounting period Other Retirement benefit obligation at end of the year Millions of yen 2017 ¥203,426 7,281 1,500 (682) (14,856) — 242 ¥196,911 2016 ¥210,751 7,489 1,660 1,270 (16,203) 1,363 (2,904) ¥203,426 The changes in the plan assets at fair value during the years ended March 31, 2017 and 2016 were as follows: Plan assets at beginning of the year Expected return on plan assets Actuarial gains and losses Contributions Retirement benefit paid Return of assets from retirement benefit trust Effect of change in accounting period Other Plan assets at end of the year Millions of yen 2017 ¥131,360 2,490 12,871 6,552 (10,077) (21,632) — 210 ¥121,774 2016 ¥140,541 2,888 (6,789) 7,727 (10,873) — (336) (1,798) ¥131,360 Thousands of U.S. dollars 2017 $1,813,066 64,893 13,369 (6,078) (132,406) — 2,157 $1,755,000 Thousands of U.S. dollars 2017 $1,170,766 22,193 114,715 58,396 (89,813) (192,799) — 1,872 $1,085,330 The following table sets forth the funded status of the plans and the amounts recognized in the consolidated balance sheets as of March 31, 2017 and 2016 for the Company’s and its consolidated subsidiaries’ defined benefit plans: Funded retirement benefit obligation Plan assets at fair value Unfunded retirement benefit obligation Net liability for retirement benefits in the balance sheets Net defined benefit liability Net defined benefit asset (included in other non-current assets) Net liability for retirement benefits in the balance sheets Millions of yen 2017 ¥ 102,223 (121,774) (19,551) 94,688 75,137 103,459 (28,322) ¥ 75,137 Thousands of U.S. dollars 2017 $ 911,078 (1,085,330) (174,251) 843,922 669,670 2016 ¥ 108,274 (131,360) (23,086) 95,152 72,066 104,803 (32,737) ¥ 72,066 922,094 (252,424) $ 669,670 The components of retirement benefit expense for the years ended March 31, 2017 and 2016 were as follows: Service cost Interest cost Expected return on plan assets Amortization of actuarial gains and losses Amortization of past service cost Gain on return of assets from retirement benefit trust Retirement benefit expense Millions of yen 2017 2016 ¥ 7,281 1,500 (2,490) 648 (4,221) (810) ¥ 1,908 ¥ 7,489 1,660 (2,888) 7,107 (4,300) — ¥ 9,068 Thousands of U.S. dollars 2017 $ 64,893 13,369 (22,193) 5,775 (37,620) (7,219) $ 17,005 76 In addition to the above, special severance payments of ¥967 million ($8,619 thousand) and ¥1,329 million were recognized for the years ended March 31, 2017 and 2016, respectively. Contributions to the defined contribution pension plan of ¥6,297 million ($56,123 thousand) and ¥6,057 million were recognized for the years ended March 31, 2017 and 2016, respectively. The components of remeasurements of defined benefit plans included in other comprehensive income (before tax effect) for the years ended March 31, 2017 and 2016 were as follows: Past service cost Actuarial gains and losses Total Millions of yen 2017 ¥ (4,221) 13,320 ¥ 9,099 2016 ¥ (4,300) (559) ¥ (4,859) Thousands of U.S. dollars 2017 $ (37,620) 118,717 $ 81,096 The components of remeasurements of defined benefit plans included in accumulated other comprehensive income (before tax effect) as of March 31, 2017 and 2016 were as follows: Unrecognized past service cost Unrecognized actuarial gains and losses Total Millions of yen 2017 2016 ¥(4,202) 1,950 ¥(2,252) ¥ (8,423) 15,276 ¥ 6,853 Thousands of U.S. dollars 2017 $(37,451) 17,380 $(20,071) The fair value of plan assets, by major category, as a percentage of total plan assets as of March 31, 2017 and 2016 was as follows: Bonds Stocks Life insurance Cash and time deposits Other Total 2017 2016 12% 52% 26% 8% 2% 100% 10% 57% 24% 7% 2% 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. The assumptions used in accounting for the above plans were as follows: Discount rate Expected rate of return on plan assets Expected rate of salary increase 2017 2016 primarily 0.6% primarily 0.6% primarily 2.0% primarily 2.0% primarily 7.5% primarily 7.5% 77 9. STOCK OPTION PLANS 1. Stock option expense included in selling, general and administrative expenses amounted to ¥346 million ($3,084 thousand) and ¥351 million for the years ended March 31, 2017 and 2016, respectively. 2. Information on stock options issued The following table summarizes the stock options outstanding as of March 31, 2017. Company name Toray Industries, Inc. 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 August 21, 2011– August 20, 2041 June 22, 2012– June 26, 2013 August 5, 2012– August 4, 2042 June 26, 2013– June 25, 2014 August 11, 2013– August 10, 2043 No. 4 Stock Option Plan No. 5 Stock Option Plan No. 6 Stock Option Plan Toray Industries, Inc. Members of the Board of the Company Directors of the Company 25 27 23 31 23 30 Common stock 569,000 shares 358,000 shares 381,000 shares August 9, 2014 August 22, 2015 August 20, 2016 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 25, 2014– June 24, 2015 June 24, 2015– June 28, 2016 June 28, 2016– June 27, 2017 August 10, 2014– August 9, 2044 August 23, 2015– August 22, 2045 August 21, 2016– August 20, 2046 Position and number of grantees Type and number of shares to be issued upon exercise Grant date Vesting conditions Vesting period Exercise period Company name Position and number of grantees Type and number of shares to be issued upon exercise Grant date Vesting conditions Vesting period Exercise period Company name Toray Chemical Korea Inc. No. 2 Stock Option Plan 1 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 18,815 shares July 22, 2008 Holders must be in continu- ous employment from the grant date to the vesting date of July 21, 2011 July 22, 2008– July 21, 2011 July 22, 2011– July 21, 2018 78 The following table summarizes movements of stock options during the year and price information on stock options as of March 31, 2017. The number of stock options are translated into the number of shares. (1) Number of stock options Company name Stock acquisition rights not yet vested As of March 31, 2016 Granted Forfeited Vested As of March 31, 2017 Stock acquisition rights already vested As of March 31, 2016 Vested Exercised Forfeited As of March 31, 2017 Company name Stock acquisition rights not yet vested As of March 31, 2016 Granted Forfeited Vested As of March 31, 2017 Stock acquisition rights already vested As of March 31, 2016 Vested Exercised Forfeited As of March 31, 2017 Company name Stock acquisition rights not yet vested As of March 31, 2016 Granted Forfeited Vested As of March 31, 2017 Stock acquisition rights already vested As of March 31, 2016 Vested Exercised Forfeited As of March 31, 2017 Toray Industries, Inc. No. 1 Stock Option Plan No. 2 Stock Option Plan No. 3 Stock Option Plan — — — — — 352,000 — 110,000 — 242,000 — — — — — 512,000 — 157,000 — 355,000 — — — — — 421,000 — 115,000 — 306,000 Toray Industries, Inc. No. 4 Stock Option Plan No. 5 Stock Option Plan No. 6 Stock Option Plan 103,000 — — 103,000 — 255,000 103,000 72,000 — 286,000 — 381,000 — 271,000 110,000 — 271,000 — — 271,000 — — — — — 480,000 — 115,000 — 365,000 Toray Chemical Korea Inc. No. 2 Stock Option Plan — — — — — 18,815 — — — 18,815 79 (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 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 Yen Toray Industries, Inc. No. 2 Stock Option Plan ¥ 1 880.4 394 Yen Toray Industries, Inc. No. 5 Stock Option Plan ¥ 1 880.4 987 U.S. dollars Toray Industries, Inc. No. 2 Stock Option Plan $0.01 7.85 3.51 U.S. dollars Toray Industries, Inc. No. 5 Stock Option Plan $0.01 7.85 8.80 No. 3 Stock Option Plan ¥ 1 880.4 546 No. 6 Stock Option Plan ¥ 1 — 902 No. 3 Stock Option Plan $0.01 7.85 4.87 No. 6 Stock Option Plan $0.01 — 8.04 No. 1 Stock Option Plan ¥ 1 880.4 513 No. 4 Stock Option Plan ¥ 1 880.4 605 Won Toray Chemical Korea Inc. No. 2 Stock Option Plan W=8,480 — 7,067 No. 1 Stock Option Plan $0.01 7.85 4.57 No. 4 Stock Option Plan $0.01 7.85 5.39 U.S. dollars Toray Chemical Korea Inc. No. 2 Stock Option Plan $7.59 — 6.32 80 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. 6 Stock Option Plan 31.825% 8 years ¥13 per share ($0.12) (0.164)% *1 The expected volatility is based on actual share prices during 8 years from August 21, 2008 to August 19, 2016. *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, 2016. *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 difficult to reasonably estimate the number of options that will expire in the future, only the number of options that have actually forfeited is applied. 10. INCOME TAXES The statutory tax rates in Japan for the years ended March 31, 2017 and 2016 were 30.9% and 33.1%, respectively. At March 31, 2017 and 2016, significant components of deferred tax assets and liabilities were as follows: Deferred tax assets: Accrued bonuses Depreciation and impairment loss Net defined benefit liability Tax loss carryforwards Unrealized intercompany profits Investments in subsidiaries and affiliated companies Other Valuation allowance Total deferred tax assets Deferred tax liabilities: Reserve for advanced depreciation Depreciation Undistributed earnings of subsidiaries and affiliated companies Unrealized gains on securities Other Total deferred tax liabilities Net deferred tax assets (liabilities) Millions of yen 2017 2016 ¥ 5,978 10,680 33,396 17,136 16,512 19,593 33,005 136,300 (41,168) 95,132 4,854 22,070 17,749 28,768 25,064 98,505 ¥ (3,373) ¥ 5,778 11,932 34,731 18,080 15,612 20,418 31,403 137,954 (44,154) 93,800 5,019 22,882 16,028 26,227 21,589 91,745 ¥ 2,055 At March 31, 2017 and 2016, deferred tax assets and liabilities were classified 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 2017 ¥26,438 13,513 4 43,320 2016 ¥24,113 12,633 59 34,632 Thousands of U.S. dollars 2017 $ 53,280 95,187 297,647 152,727 147,166 174,626 294,162 1,214,795 (366,916) 847,879 43,262 196,702 158,191 256,399 223,387 877,941 $ (30,062) Thousands of U.S. dollars 2017 $235,633 120,437 36 386,096 81 The reconciliation of the statutory tax rate and the effective income tax rate for the years ended March 31, 2017 and 2016 was as follows: 2017 2016 Statutory tax rate Increase (decrease) in taxes resulting from: Permanent differences Recognition of certain deferred tax assets by reversal of valuation allowance Equity in earnings of unconsolidated subsidiaries and affiliated companies Income taxes for prior periods Differences of tax rates for overseas consolidated subsidiaries Undistributed earnings of subsidiaries and affiliated companies Change in statutory tax rate Amortization of goodwill Other Effective income tax rate 11. NET ASSETS 30.9% 0.4 (2.4) (1.7) (1.7) (2.9) 1.4 — 1.9 (2.1) 23.8% 33.1% 0.2 (1.1) (1.2) — (3.3) 0.5 1.3 2.2 (2.2) 29.5% The Corporation Law of Japan provides that an amount equal to 10% of the amount to be disbursed as distributions of capital surplus (other than the capital reserve) and retained earnings (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 2017 annual stockholders’ meeting, stockholders approved the payment of cash dividends of ¥7.00 per share, aggregating to ¥11,200 million ($99,822 thousand) which has not been reflected in the accompanying consolidated financial statements for the year ended March 31, 2017. 12. COMMITMENTS AND CONTINGENT LIABILITIES At March 31, 2017, commitment line of credit to unconsolidated subsidiaries and affiliated 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. At March 31, 2017 and 2016, contingent liabilities were as follows: Millions of yen Thousands of U.S. dollars ¥280 134 ¥146 $2,496 1,194 $1,301 As guarantors of loans to: Unconsolidated subsidiaries and affiliated companies Other Notes discounted Export bills discounted Notes endorsed Contingent liabilities associated with securitization of receivables Millions of yen 2017 2016 Thousands of U.S. dollars 2017 ¥5,774 2,849 ¥8,623 ¥ 307 785 1,162 ¥3,255 ¥11,283 9,148 ¥20,431 ¥ 89 635 1,160 ¥ 9,573 $51,462 25,392 $76,854 $ 2,736 6,996 10,357 $29,011 82 13. LEASES Finance leases The Group holds certain buildings, machinery and equipment and intangible assets by leases. Operating leases Future minimum lease payments under noncancellable operating leases subsequent to March 31, 2017 and 2016 were as follows: Due within one year Due after one year Total Millions of yen 2017 2016 ¥ 343 1,193 ¥1,536 ¥ 368 1,323 ¥1,691 Thousands of U.S. dollars 2017 $ 3,057 10,633 $13,690 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, 2017 and 2016 were ¥59,230 million ($527,897 thousand) and ¥58,783 million, respectively. 15. LOSS ON IMPAIRMENT OF FIXED ASSETS The Company and its consolidated subsidiaries grouped assets used for business based on the classification under the management accounting. For assets to be disposed and idle assets, each asset is considered to constitute a group. For the year ended March 31, 2017, the carrying value of certain business-use assets for which profitability declined were written down to the recoverable amount. As a result, the Company and its consolidated subsidiaries recognized loss on impairment of fixed assets in the amount of ¥2,925 million ($26,070 thousand). For the year ended March 31, 2016, the carrying value of certain business-use assets for which profitability declined were written down to the recoverable amount. As a result, the Company and its consolidated subsidiaries recognized loss on impairment of fixed assets in the amount of ¥9,063 million. The major assets for which a loss on impairment was recognized for the year ended March 31, 2016 were as follows: Location Use Classification Loss on impairment Millions of yen Otsu, Shiga, Japan Films production facilities St-Maurice de Beynost, France Films production facilities Buildings Machinery and equipment Other Machinery and equipment Other ¥ 594 1,401 243 ¥3,949 87 The recoverable amount of the above assets was measured at their value in use. The value in use was calculated by discounting future cash flows at discount rates of 5% – 8%. 83 16. OTHER COMPREHENSIVE INCOME The following table presents reclassification adjustments and tax effects allocated to each component of other comprehensive income for the years ended March 31, 2017 and 2016. Millions of yen 2017 2016 Net unrealized gains (losses) on securities: Amount arising during the year Reclassification adjustments for gains and losses included in net income Before tax effect Tax effect Net unrealized gains (losses) on securities Net deferred gains (losses) on hedges: Amount arising during the year Reclassification 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 Reclassification adjustments for gains and losses included in net income Before tax effect Tax effect Foreign currency translation adjustments Remeasurements of defined benefit plans: Amount arising during the year Reclassification adjustments for gains and losses included in net income Before tax effect Tax effect Remeasurements of defined benefit plans ¥ 11,004 (3,454) 7,550 (2,419) 5,131 918 15 — 933 (290) 643 (14,953) 838 (14,115) 1 (14,114) 13,482 (4,383) 9,099 (2,794) 6,305 Share of other comprehensive income of unconsolidated subsidiaries and affiliated companies accounted for by the equity method: Amount arising during the year Reclassification adjustments for gains and losses included in net income (1,938) (12) ¥(26,313) (2,099) (28,412) 10,544 (17,868) (137) 13 22 (102) 2 (100) (59,123) — (59,123) 5 (59,118) (7,666) 2,807 (4,859) 1,586 (3,273) (3,722) (211) Thousands of U.S. dollars 2017 $ 98,075 (30,784) 67,291 (21,560) 45,731 8,182 134 — 8,316 (2,585) 5,731 (133,271) 7,469 (125,802) 9 (125,793) 120,160 (39,064) 81,096 (24,902) 56,194 (17,273) (107) Share of other comprehensive income of unconsolidated subsidiaries and affiliated companies accounted for by the equity method Total other comprehensive income (1,950) ¥ (3,985) (3,933) ¥(84,292) (17,380) $ (35,517) 84 17. SEGMENT INFORMATION (Segment information) 1. Outline of reportable segments The reportable segments of the Group are components for which discrete financial 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 identifies 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 fibers, and woven and knitted fabrics of nylon, polyester and acrylic fibers, etc.; non-woven fabrics, ultra-microfiber non-woven fabric with suede texture and apparel products Nylon, ABS, PBT, PPS and other resins and molded products, polyolefin foam; polyester, polypropylene, PPS and other films and processed film products; raw materials for synthetic fibers and other plastics; zeolite catalysts; fine chemicals for pharmaceuticals and agrochem- icals; veterinary medicine (excludes film 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 filters for LCDs and related materials and equipment; magnetic recording materials; graphic materials and related equipment Carbon Fiber Composite Materials Carbon fibers, carbon fiber 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 figures 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, 2017: Fibers & Textiles Plastics & Chemicals IT-related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Others Total Adjustments Consolidated Total Sales to outside customers ¥856,124 ¥499,099 ¥254,439 ¥161,608 ¥186,113 ¥54,150 ¥14,937 ¥2,026,470 ¥ — ¥2,026,470 Intersegment sales Total sales Segment income Segment assets 1,001 16,043 7,627 519 68,038 2 16,681 109,911 (109,911) — ¥857,125 ¥515,142 ¥262,066 ¥162,127 ¥254,151 ¥54,152 ¥31,618 ¥2,136,381 ¥(109,911) ¥2,026,470 ¥ 66,768 ¥ 33,798 ¥ 30,528 ¥ 23,963 ¥ 9,904 ¥ 2,148 ¥ 1,990 ¥ 169,099 ¥ (22,206) ¥ 146,893 ¥722,078 ¥541,995 ¥384,773 ¥460,968 ¥204,323 ¥79,732 ¥57,463 ¥2,451,332 ¥ (54,547) ¥2,396,785 Depreciation and amortization 27,460 18,019 15,702 19,967 4,231 2,581 1,209 89,169 (96) 89,073 Investment in unconsolidated subsidiaries and affiliated companies accounted for by the equity method Capital expenditures 26,827 41,143 42,598 25,133 1,800 8,563 10,058 32,437 46,459 4,544 2,763 3,445 7,727 1,157 100,336 154,318 (414) 99,922 (2,279) 152,039 85 Millions of yen Year ended March 31, 2016: Fibers & Textiles Plastics & Chemicals IT-related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Others Total Adjustments Consolidated Total Sales to outside customers ¥892,039 ¥521,238 ¥251,072 ¥186,196 ¥183,324 ¥55,841 ¥14,720 ¥2,104,430 ¥ — ¥2,104,430 Intersegment sales Total sales Segment income Segment assets 1,035 19,148 7,614 369 62,608 8 16,422 107,204 (107,204) — ¥893,074 ¥540,386 ¥258,686 ¥186,565 ¥245,932 ¥55,849 ¥31,142 ¥2,211,634 ¥(107,204) ¥2,104,430 ¥ 68,909 ¥ 29,384 ¥ 26,150 ¥ 36,115 ¥ 9,584 ¥ 3,068 ¥ 1,962 ¥ 175,172 ¥ (20,692) ¥ 154,480 ¥680,947 ¥524,558 ¥362,851 ¥429,503 ¥193,837 ¥83,277 ¥55,302 ¥2,330,275 ¥ (51,889) ¥2,278,386 Depreciation and amortization 25,839 18,514 17,034 21,313 4,408 2,832 1,201 91,141 27 91,168 Investment in unconsolidated subsidiaries and affiliated companies accounted for by the equity method Capital expenditures 34,860 35,436 39,492 31,244 1,873 29,773 10,273 32,095 10,613 3,604 3,243 3,223 6,331 1,531 106,685 136,906 (451) 106,234 (350) 136,556 Thousands of U.S. dollars Year ended March 31, 2017: Fibers & Textiles Plastics & Chemicals IT-related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Others Total Adjustments Consolidated Total Sales to outside customers $7,630,339 $4,448,298 $2,267,727 $1,440,357 $1,658,761 $482,620 $133,128 $18,061,230 $ — $18,061,230 Intersegment sales Total sales Segment income Segment assets 8,922 142,986 67,977 4,626 606,399 18 148,672 979,599 (979,599) — $7,639,260 $4,591,283 $2,335,704 $1,444,982 $2,265,160 $482,638 $281,800 $19,040,829 $(979,599) $18,061,230 $ 595,080 $ 301,230 $ 272,086 $ 213,574 $ 88,271 $ 19,144 $ 17,736 $ 1,507,121 $(197,914) $ 1,309,207 $6,435,633 $4,830,615 $3,429,349 $4,108,449 $1,821,061 $710,624 $512,148 $21,847,879 $(486,159) $21,361,720 Depreciation and amortization 244,742 160,597 139,947 177,959 37,709 23,004 10,775 794,733 (856) 793,877 Investment in unconsolidated subsidiaries and affiliated companies accounted for by the equity method 239,100 379,661 16,043 76,319 Capital expenditures 366,693 224,002 289,100 414,073 89,643 40,499 24,626 30,704 68,868 894,260 (3,690) 890,570 10,312 1,375,383 (20,312) 1,355,071 Notes: 1) “Others” represents service-related businesses such as analysis, survey and research. 2) a) “Adjustments” of segment income for the year ended March 31, 2017 of ¥(22,206) million ($(197,914) thousand) includes intersegment eliminations of ¥(708) million ($(6,310) thousand) and corporate expenses of ¥(21,498) million ($(191,604) thousand). “Adjustments” of segment income for the year ended March 31, 2016 of ¥(20,692) million includes intersegment eliminations of ¥(167) million and corporate expenses of ¥(20,525) million. The corporate expenses consist of the headquarters’ research expenses, etc. that are not allocated to each reportable segment. b) “Adjustments” of segment assets at March 31, 2017 of ¥(54,547) million ($(486,159) thousand) includes intersegment eliminations of ¥(71,516) million ($(637,398) thousand) and corporate assets of ¥16,969 million ($151,239 thousand). “Adjustments” of segment assets at March 31, 2016 of ¥(51,889) million includes intersegment eliminations of ¥(68,133) million and corporate assets of ¥16,244 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. (Related information) Geographic information Sales to outside customers Year ended March 31, 2017: Sales to outside customers Year ended March 31, 2016: Sales to outside customers 86 Millions of yen Asia Japan China Others North America, Europe and other areas Total ¥976,839 ¥335,469 ¥376,134 ¥338,028 ¥2,026,470 Millions of yen Asia Japan China Others North America, Europe and other areas Total ¥995,093 ¥352,967 ¥387,219 ¥369,151 ¥2,104,430 Year ended March 31, 2017: Sales to outside customers Thousands of U.S. dollars Japan China Others Asia North America, Europe and other areas Total $8,706,230 $2,989,920 $3,352,353 $3,012,727 $18,061,230 Sales amounts are allocated to countries or regions according to the customers’ location. Property, plant and equipment, net Millions of yen March 31, 2017: Japan Republic of Korea Others U.S.A. Others Total Property, plant and equipment, net ¥316,310 ¥186,259 ¥155,441 ¥122,890 ¥100,534 ¥881,434 Asia North America, Europe and other areas March 31, 2016: Japan Republic of Korea Others U.S.A. Others Total Property, plant and equipment, net ¥315,020 ¥168,706 ¥158,930 ¥91,080 ¥96,876 ¥830,612 Millions of yen Asia North America, Europe and other areas Thousands of U.S. dollars Asia North America, Europe and other areas March 31, 2017: Japan Republic of Korea Others U.S.A. Others Total Property, plant and equipment, net $2,819,162 $1,660,062 $1,385,392 $1,095,276 $896,025 $7,855,918 (Information about loss on impairment of fixed assets by reportable segments) Year ended March 31, 2017: Fibers & Textiles Plastics & Chemicals IT-related Products Millions of yen Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total Loss on impairment ¥1,095 ¥401 ¥476 ¥— ¥15 ¥938 ¥— ¥— ¥2,925 Year ended March 31, 2016: Fibers & Textiles Plastics & Chemicals IT-related Products Millions of yen Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total Loss on impairment ¥— ¥5,281 ¥3,297 ¥— ¥485 ¥— ¥— ¥— ¥9,063 Year ended March 31, 2017: Fibers & Textiles Plastics & Chemicals IT-related Products Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total Loss on impairment $9,759 $3,574 $4,242 $— $134 $8,360 $— $— $26,070 Thousands of U.S. dollars (Information about amortization and balance of goodwill by reportable segments) Year ended March 31, 2017: Amortization of goodwill Balance of goodwill Fibers & Textiles ¥1,208 8,657 Plastics & Chemicals ¥1,083 3,250 IT-related Products ¥ 3,098 14,716 Year ended March 31, 2016: Amortization of goodwill Balance of goodwill Fibers & Textiles ¥1,331 9,762 Plastics & Chemicals ¥1,132 4,328 IT-related Products ¥ 3,102 17,814 Millions of yen Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate ¥ 2,768 16,842 ¥ 323 2,314 ¥— — ¥— — ¥— — Millions of yen Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate ¥ 3,116 19,786 ¥ 356 2,609 ¥— — ¥— — ¥— — Total ¥ 8,480 45,779 Total ¥ 9,037 54,299 87 Year ended March 31, 2017: Fibers & Textiles Plastics & Chemicals IT-related Products Carbon Fiber Composite Materials Environment & Engineering Amortization of goodwill Balance of goodwill $10,766 77,157 $ 9,652 $ 27,611 $ 24,670 $ 2,879 20,624 150,107 131,159 28,966 Life Science Others Elimination & Corporate $— — $— — $— — Total $ 75,579 408,012 Thousands of U.S. dollars “Others” represents service-related businesses such as analysis, survey and research. 18. AMOUNTS PER SHARE Basic net income per share is computed based on the net income attributable to owners of parent available for distribution to stockholders of common stock and the weighted-average number of shares of common stock outstanding during the year. Diluted net income per share is computed based on the net income attributable to owners of parent 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 proposed by the Board of Directors applicable to the respective years together with any interim cash dividends paid. Yen 2017 2016 U.S. dollars 2017 ¥ 62.17 62.10 14.00 638.64 ¥ 56.38 56.31 13.00 591.50 $0.55 0.55 0.12 5.69 Net income attributable to owners of parent: Basic Diluted Cash dividends applicable to the year Net assets 19. RELATED PARTY TRANSACTIONS Corporate pension for employees Year ended March 31, 2017 Name Category Relationship Description of the transaction Amount of the transaction Retirement benefit trust Corporate pension Plan assets under retirement benefit accounting Return of part of assets ¥21,632 million ($192,799 thousand) Year ended March 31, 2016 No items to be reported. 88 89 Investor Information (As of March 31, 2017) Common Stock: Cash Dividends Per Share Issued: 1,599,971,887 shares (excluding treasury stock) Number of Stockholders: 137,641 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 Years ended March 31 Total for the year Interim Principal Stockholders 2017 2016 ¥14.00 7.00 ¥13.00 6.00 Thousands of shares Percentage of shares held The Master Trust Bank of Japan, Ltd. (Trust Account) 116,760 Japan Trustee Services Bank, Ltd. (Trust Account) Nippon Life Insurance Co. Mitsui Life Insurance Co., Ltd. Sumitomo Mitsui Banking Corporation Japan Trustee Services Bank, Ltd. (Trust 5 Account) State Street Bank West Client – Treaty 505234 Japan Trustee Services Bank, Ltd. (Trust 4 Account) Japan Trustee Services Bank, Ltd. (Trust 9 Account) Japan Trustee Services Bank, Ltd. (Trust 7 Account) 95,213 71,212 35,961 30,022 27,918 25,813 23,366 22,164 20,896 *Percentage of shares held is calculated excluding 31,509,516 shares of treasury stock. 7.30 5.95 4.45 2.25 1.88 1.74 1.61 1.46 1.39 1.31 Stock Price Range Composition of Stockholders (Thousands of shares) (Yen) 1,200 1,000 800 600 400 200 0 2012 April 2013 April 2014 April 2015 April 2016 April 2017 March Treasury Stock 31,510 1.93% Individuals and Others 332,696 20.39% Companies and Individuals in Foreign Countries 472,246 28.95% Japanese government and local government 7 0.00% Financial Institutions 633,999 38.86% Securities Companies 23,100 1.42% Other Japanese Companies 137,924 8.45% Corporate Data (As of March 31, 2017) Toray Industries, Inc. Head Office 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 Capital Stock: ¥147,873,030,771 Number of Employees: 46,248 Parent company: 7,220 Japanese subsidiaries: 10,657 Overseas subsidiaries: 28,371 90 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 Toray’s “Blue Butterfly” Corporate Advertising Automotive Materials Version Plant-based Polyester Version Carbon Fiber Version Food Packaging Film Version About Our Blue Butterfly The Butterfly Effect is one of the ideas in chaos theory that suggests that a flap of a butterfly’s wings in one part of the world can set off a tornado in another. This idea proposes that one small change can instigate various phenomena that ultimately results in a larger transformation. Materials are the foundation of all products. And we at Toray believe that the evolution of materials is what will help change the future in a bigger, better way. Just like the butterfly effect. Printed in Japan Issued: September 2017 

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