Toray Industries Inc.
Annual Report 2018

Plain-text annual report

AUGUST 31, 2018 R E P O RT |2 0 1 8 Possibilities, turning seawater into drinking water, reinforcing genetic analy- sis for medical breakthroughs, furthering the evolution of eco-cars, producing plant-based functional clothing, extending the shelf life of food for reduced waste, and creating a world where everyone can achieve their personal best. Materials have the power to do all of this and more, because materials make our modern world. The world is full of possibilities and our materials can change the world, which we will never stop believing. ANNUAL REPORT 2018 April 1, 2017–March 31, 2018 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 Contents VALUE CREATION 03 Toray’s Story of Creating Value 04 Using the Power of Chemistry to Address a Host of Issues Worldwide 06 Toray Group’s Business Process 08 Toray Group’s Basic Strategy for Sustainable Growth 10 A Path of Sustainable Growth Since the Company’s Foundation and Medium- to Long-term Targets (KPIs) 12 A History of Value Creation 14 Toray Group’s Providing Value 16 Financial & Non-financial Highlights STRATEGY 18 To Our Stockholders and Investors 28 Results by Segment for Fiscal 2017 30 Fibers & Textiles 31 Performance Chemicals 32 Carbon Fiber Composite Materials 33 Environment & Engineering 34 Life Science 35 Founded on Technology and Knowledge SUSTAINABILITY MANAGEMENT 42 Toray Group Sustainability Vision 44 Sustainability in Toray Group 46 Environmental Management Initiatives 48 Human Resource Development and Training 50 Stakeholder Engagement 52 Corporate Governance 58 Board of Directors and Corporate Auditors 59 Organization 60 Toray Group Worldwide Network 61 Financial Section 103 Investor Information/Corporate Data Cautionary statement with respect to forward-looking statements Descriptions of predicted business results, projections and business plans contained in this annual report are based on forecasts and assumptions regarding the future business environment made at the present time. This annual report is not a guarantee of the Company’s future business performance. 02 Annual Report 2018 Toray’s Story of Creating Value INNOVATION BY CHEMISTRY Materials can Change Our Lives Toray Group firmly believes that “materials, as the foundation of all products, have the power to bring about fundamental transformations in society.” Based on this belief, our goal is to become a global top company in advanced materials as an integrated chemical industry group. Since our establishment, we have positioned “contributing to communities” as the focus of our existence. Carrying this focus into our corporate philosophy of “contributing to society through the creation of new value with innovative ideas, technologies, and products,” we are ramping up efforts to solve a host of issues worldwide together with global partners by providing innovative technolo- gies and advanced materials. With this in mind, we are working to become a corporate group that provides high value to all stakeholders. The World as Envisioned by Toray Group in 2050 Toray Group’s innovative technologies and advanced materials A net zero emissions world, where greenhouse gas emissions are completely offset by absorption Accelerating measures to counter climate change A world where resources are sustainably managed Realizing sustainable, recycling-based use of resources and production A world with a restored natural environment, with clean water and air for everyone Providing clean water and air A world where everyone enjoys good health and hygiene Contributing to better medical care and hygiene for people worldwide 03 Toray Industries, Inc.Using the Power of Chemistry to Address a Host of Issues Worldwide 04 Annual Report 2018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 and better way. Much like the butterfly effect*. Looking at such issues as climate change, water scarcity, and the depletion of resources, the world in which we live is growing increasingly severe with each passing day. Exacerbating many of these problems, the world’s population is projected to reach around 10 billion in 2050. Against this back- drop of population growth and the continuous aging of society, the need to maintain and improve people’s health is becoming an increasingly important issue. Looking ahead, Toray Group recognizes the need to overcome a host of challenges for people all over the world to enjoy prolonged healthy lifestyles while benefiting from the abundant gifts of nature. At the same time, we remain fully confident that material innovation is vital to the manufacture of attractive end products that can in turn provide the fundamental solutions necessary to address many of these global problems. It is in fact this confidence that drives our mission to develop and commercialize innovative technologies and advanced materials from a long-term perspective, and to contribute to society as a part of efforts to realize the world to which we aspire. * 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 trans- formation in the future. 05 Toray Industries, Inc.Advanced Materials Give Shape to Advanced Industries —Toray Group’s Business Process Raw Materials Management Resources INPUTS Petrochemical products Metals, mineral raw materials Natural fiber Plant-based material Water resources Energy resources (Crude oil, natural gas, etc.) Financial Capital Net assets ¥1,169.2 billion A+ Rating (R&I) Equipment Capital Capital Expenditures ¥157.9 billion Intellectual Capital Valid and Enforceable Patents Domestic 5,809 Overseas 9,918 R&D Expenses ¥66.2 billion Human Capital Number of Employees 45,762 Gender Ratio (Male:Female) 73:27 Number of R&D staff about 4,000 Business Bases 26 countries/regions Natural Capital Social and Relationship Capital 06 Annual Report 2018Drawing on organic synthetic chemistry, polymer chemistry, bio- and nanotechnology as its core technol- ogies, Toray Group provides innovative technologies and advanced materials in each of the fibers and tex- tiles, performance chemicals, carbon fiber composite materials, environment and engineering, and life science business domains. Through a process of co-creation with customers, we are generating new value. INPUTS OUTPUTS Toray Group’s Business Process Core Technologies + Co-creation Business Domains *Operating Income Ratio by Business Segment (As of March 31, 2018) Organic Synthetic Chemistry Fibers & Textiles 40% Polymer Chemistry Performance Chemicals 39% Co-creating with customers Carbon Fiber Composite Materials 11% Biotechnology Environment & Engineering 7% Nanotechnology Life Science & Other Businesses 3% 07 Toray Industries, Inc.Employees Shape the Destiny of a Company —Toray Group’s Basic Strategy for Sustainable Growth People-centric Management Based on the concept that “the success or failure of a company is decided by its people, and that employ- ees shape its destiny,” Toray has continued to nurture its employees as a long-term management resource since its establishment. Management’s efforts there- fore reflect the importance placed on continuously motivating employees as the key to improving the Company’s performance. The Direction of Toray’s Human Resources Development 01 Development of fair-minded individuals who act with high ethical standards and a sense of responsibility 02 Training of professionals with advanced expertise, technical skills, and originality in problem solving 03 Development of leaders who act with foresight and a sense of balance 04 Development of individuals, professionals, and leaders who can play an active role in global business Toray’s Basic Strategies (Toward Sustainable Growth) 1 Developing Innovative Technologies and Advanced Materials from a Long-term Perspective Social Issues Climate change Water scarcity Resource depletion Population increase Aging of population Others Lightweight materials for automobiles and aircraft Plant-based polyester fibers Materials for solar and wind power generation Organic synthetic chemistry Lithium-ion battery separators Polymer chemistry Core Technologies Bio- technology Reverse osmosis membranes for seawater desalination Nano- technology hitoeTM functional material for vital signs monitoring DNA chip Protective clothing Toray executes diverse training programs to enhance management, sales and marketing, and production tech- nology capabilities, and specialized skills, and to better equip employees to address globalization. These pro- grams cover all levels of employees and fields, aiming to develop future management candidates while expanding and educating the base of core staff ready to employ their strong work place capabilities to lead on the front lines. Adopting a long-term perspective, Toray sees the potential value that materials can provide in addressing social issues and market needs through innovative and effective solutions. As a result, the Company engages tenaciously in the development of advanced materials drawing on its core technologies. 08 Carbon Fiber Composite Materials, Aircraft Application Aircraft manufacturer Product Development Technical Support Stable Supply Tier 1 Tier 2 Providing Prepreg Toray Group Fibers & Textiles, Apparel Applications Existing Supply Chain (Apparel) (multi-steps in sales channels of each materials, applications, and items) F i b e r M a n u f a c t u r e r T e x t i l e M a n u f a c t u r e r G a r m e n t M a n u f a c t u r e r T r a d i n g T r a d i n g T r a d i n g A p p a r e l T r a d i n g R e t a i l i n g Integrated Apparel Flow (Toray Group responds to all customers needs-any materials, applications, or items) Toray Group Yarn manufacturing Weaving, Knitting Dyeing Garment Apparel, SPA, etc. Mother Plants in Japan Development of advanced materials Creation of high value-added products Development of innovative processes Radical cost reductions Further expand business and strengthen cost competitiveness Reinvest in R&D Overseas Bases Development of applications that address local needs Local production based on location of demand and cost competitiveness Annual Report 2018 Employees Shape the Destiny of a Company —Toray Group’s Basic Strategy for Sustainable Growth Guided by the understanding that “employees shape the destiny of a company,” Toray Group is lever- aging the strengths of our human resources together with our research and development capabilities while adopting the basic strategy of building competitive advantage. This enables us to ensure its sus- tainable growth. 2 Carrying Out Business Strategies that Take into Account the Entire Supply Chain Carbon Fiber Composite Materials, Aircraft Application Aircraft manufacturer Product Development Technical Support Stable Supply 3 Working Toward Sustainable Growth on a Global Scale Business Bases 26countries/regions Overseas Sales Ratio 54% Tier 1 Tier 2 Providing Prepreg Toray Group Fibers & Textiles, Apparel Applications Existing Supply Chain (Apparel) (multi-steps in sales channels of each materials, applications, and items) i F b e r M a n u f a c t u r e r T r a d n g i T e x t i l e M a n u f a c t u r e r T r a d n g i G a r m e n t M a n u f a c t u r e r T r a d n g i A p p a r e l T r a d n g i R e t a i l i n g Mother Plants in Japan Development of advanced materials Creation of high value-added products Development of innovative processes Radical cost reductions Further expand business and strengthen cost competitiveness Reinvest in R&D Overseas Bases Development of applications that address local needs Local production based on location of demand and cost competitiveness Integrated Apparel Flow (Toray Group responds to all customers needs-any materials, applications, or items) Toray Group Yarn manufacturing Weaving, Knitting Dyeing Garment Apparel, SPA, etc. Toray is building close-knit ties with powerful busi- ness partners by carrying our business strategies that take into account the entire supply chain. At the same time, the Company is honing the quality and performance of new materials. Through these means, we are establishing a position of competi- tive advantage. Toray engages in cutting-edge innovative R&D at mother plants in Japan while working to realize a sustainable growth cycle on a global scale. To this end, we are adopting both a flexible and timely approach as we work to build a local production structure that takes into consideration the location of demand as well as cost competitive concerns. At the same time, we are undertaking the devel- opment of applications that address local needs at each site. By the same token, we are cultivating markets in growth countries and regions while tak- ing steps to capture new profit opportunities. 09 Toray’s Basic Strategies (Toward Sustainable Growth) Social Issues Climate change Water scarcity Resource depletion Population increase Aging of population Others Lightweight materials for automobiles and aircraft Plant-based polyester fibers Materials for solar and wind power generation Organic synthetic chemistry Lithium-ion battery separators Polymer chemistry Core Bio- Technologies technology Reverse osmosis membranes for seawater desalination Nano- technology hitoeTM functional material for vital signs monitoring DNA chip Protective clothing Toray Industries, Inc. Enhancing Long-term Corporate Value —A Path of Sustainable Growth since the Company’s Foundation and Medium- to Long-term Targets (KPIs) 1926 Began as a manufacturer of viscose rayon The former Mitsui & Co.* was an importer of rayon yarn from Courtaulds PLC of the U.K. for sale in Japan. Mitsui established Toyo Rayon Co., Ltd. based on the national policy promoting Japanese industrial manufacturing. At the inaugural meeting on January 12, 1926, Yunosuke Yasukawa—at the time a managing director of Mitsui & Co.—acted as a representative of the incorpora- tors and stated his hopes that the company would generate “major benefits for the national economy.” * Note that the former Mitsui & Co. was a completely different corporate entity with no legal connection to the present-day Mitsui & Co. Other Businesses 1% Life Science 2% Environment & Engineering 11% Carbon Fiber Composite Materials 8% FY2017 Consolidated Net Sales ¥2,204.9billion Fibers & Textiles 41% Performance Chemicals 36% New Products & Other Businesses 6% Pharmaceuticals & Medical Products 5% Housing & Engineering 12% IT-related Products 14% FY2000 Consolidated Net Sales ¥1,075.4billion Fibers & Textiles 40% New Products & Other Businesses 6% Housing & Engineering 8% Plastics & Chemicals 23% FY1985 Consolidated Net Sales ¥787.0billion Fibers & Textiles 58% Plastics & Chemicals 27% Changes in Net Sales (trillion yen) 3.0 2.5 2.0 1.5 1.0 0.5 0 1926 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 (Fiscal Year) “US GAAP” for 1964 - 1983, “Japanese GAAP” after 1984 Non-consolidated Consolidated 10 Annual Report 2018Enhancing Long-term Corporate Value —A Path of Sustainable Growth since the Company’s Foundation and Medium- to Long-term Targets (KPIs) Toray Group began as a manufacturer of viscose rayon in 1926. On top of all three major synthetic fibers, nylon, polyester, and acrylic, the Company has continued to develop innovative technologies while creat- ing a host of advanced materials and high-value-added products in a broad range of films, chemicals, plas- tic resins, carbon fiber composite materials, pharmaceuticals, and medical products, water treatment, and environmental fields. With an eye toward how society will evolve in 2050 and how innovative technologies and advanced materials may be utilized as a driving force, we will adopt a long-term perspective toward enhancing our corporate value. Other Businesses 1% Life Science 2% Environment & Engineering 11% Carbon Fiber Composite Materials 8% FY2017 Consolidated Net Sales ¥2,204.9billion Fibers & Textiles 41% Performance Chemicals 36% New Products & Other Businesses 6% Pharmaceuticals & Medical Products 5% Housing & Engineering 12% FY2000 Consolidated Net Sales ¥1,075.4billion Fibers & Textiles 40% IT-related Products 14% New Products & Other Businesses 6% Housing & Engineering 8% Plastics & Chemicals 23% FY1985 Consolidated Net Sales ¥787.0billion Fibers & Textiles 58% Plastics & Chemicals 27% Changes in Net Sales (trillion yen) 3.0 2.5 2.0 1.5 1.0 0.5 0 1926 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 (Fiscal Year) “US GAAP” for 1964 - 1983, “Japanese GAAP” after 1984 Non-consolidated Consolidated Financial KPI Net Sales Operating Income Operating Income to Net Sales Ratio ROA ROE Dividend policy Guideline of D/E ratio Net Sales of Green Innovation Business FY2016 FY2019 (Target) ¥2,026.5billion > ¥2,700.0billion ¥146.9billion > ¥250.0billion 7.2% > 6.3% > 9% approx9% 10.1% > approx12% Aim for sustainable dividend increase linked to business performance Below 1 ¥628.2billion > ¥900.0billion Net Sales of Life Innovation Business ¥195.5billion > ¥270.0billion R&D Expenses Capital Investment Net Sales of New Business Creation ¥220.0billion (Total of 3 years from FY 2017) ¥500.0billion (Total of 3 years from FY 2017) ¥1,000.0billion (2020s) Improve Long-term Corporate Value Sustainable Related KPI (excerpt) FY 2019 Target Environmental Management Reduction of greenhouse gas emissions per unit of sales: 15% reduction continued (Compared to FY 1990) Water usage per unit of sales (Compared to FY 2001): 61% reduction Human Resource Management Group companies that have adopted a mid-term human resource plan:100% Supply Chain Management Number of Group companies that have requested their suppliers to practice CSR procurement: More than 40 companies For details, we are publishing it as a KPI on promoting CSR: Toray website > Social Responsibility >CSR Road Map 11 Toray Industries, Inc.An Advanced Materials Manufacturer That Gives Shape to Advanced Industries —A History of Value Creation 1955 Company principle established “Toyo Rayon contributes to communities” was identified as the Company’s original principle. Shigeki Tashiro, the Company’s chairman at that time, states “Just like individual people, companies have a social responsibility to improve the society in which they live.” 1941 Succeeded in the synthesis and melt spinning of nylon 6 fiber using proprietary technology Developed using proprietary technol- ogy, “Nylon 6” has created new mar- kets as a new fiber that can be applied in fishing nets as well as apparels such as stockings. 1959 Manufacture of Lumirror™ polyester film began Toray was the first company in Japan to indus- trialize polyester film. Positive steps have been taken to address market growth and to adapt to changing conditions and circumstances while gaining a share across a wide range of fields such as video tapes, industrial materials, spe- cialty products, and others. 1971 Manufacture and marketing of carbon fiber TORAYCATM began High-performance carbon fiber TORAYCA™ features light weight, high tensile strength, and high stiff- ness. Sales activities commenced under the registered trademark “TORAYCA” from 1971. 1971 Marketing of ESCAINETM, ultra- microfiber non-woven fabric with suede texture, began ESCAINETM is a non-woven fabric with suede texture using ultrafine microfibers. It was highly acclaimed as a fashion material for its lightweight and excellent chromogenic prop- erties. Currently, it is being used in such areas as automobile interiors and furniture. 12 1976 Marketing of TORAYCON™ PBT resin began Featuring outstanding long-term heat-resis- tance, chemical-resistance, weather resistance, and electrical characteristics, TORAYCON™ is widely used in various connectors and other automobile parts, bobbins, coil cases and other electronic and electrical components, and preci- sion parts for office equipment. 1980 Marketing of ROMEMBRA™ reverse-osmosis membrane elements began Research began in 1968 with ongoing devel- opment as a water treatment membrane. ROMEMBRA™ enabled the production of ultra-pure water for the semiconductor industry and the desalination of sea and brine water. Annual Report 2018Since our establishment, we have positioned “contributing to communities” as the focus of our existence. Carrying this focus into our corporate philosophy of “contributing to society through the creation of new value with innovative ideas, technologies, and products,” we have created a succession of materials that bring unprecedented levels of value to the world and forged a globally leading presence as an advanced materials manufacturer that gives shape to advanced industries. 1986 The declaration of “A new founding” and a corporate philosophy was established to commemorate 60 years in business We reviewed the Company principle and established a new corporate philosophy: “Contributing to society through the creation of new value with innovative ideas, tech- nologies, and products.” At the same time, we established our new corporate symbol as further commemoration of 60 years in business. 2016 Decided to establish the R&D Innovation Center for the Future as a project to commemorate the Company’s 90th anniversary Toray decided to establish the R&D Innovation Center for the Future at its Shiga Plant where the Company was founded, and will strengthen R&D to make people’s lives better with Kotozukuri, value creation, which utilizes the strengths of advanced materials. 1990 TORAYCA™ carbon-fiber prepreg certified as a primary structural material for U.S. Boeing passenger aircraft Initially the main applications of carbon fiber were fish- ing rods, golf shafts, and other sporting goods. Through improved technology and quality, the Company built up trust in this product as a secondary structural material in aircraft applications. In 1990, Toray prepreg was cer- tified for the first time as a primary structural material (for structural parts where damage is directly linked to a crash) for the Boeing 777. 2006 Corporate slogan formulated In April 2006, Toray Group created a new, long-term corporate vision—”AP-In- novation TORAY 21”—and adopted the corporate slogan “Innovation by Chemistry,” declaring its aspiration “to become a global top company of advanced materials,” while focusing on Chemistry. 2006 Strategic partnership started with UNIQLO Co., Ltd. As a company that provides innovative technologies and materials that have the power to fundamentally change society, Toray Group entered into a partnership agreement with UNIQLO, a company that enriches people’s lives through clothes. Under this partnership both companies provide products that deliver new value and unprec- edented levels of performance and comfort to people all over the world. The two companies are now on the third stage of the strategic partnership agreement. 13 Toray Industries, Inc.Providing Solutions to Social Issues through Innovation —Toray Group’s Providing Value Carbon Fiber Composite Materials Reducing CO2 Emissions and Realizing a New Energy Society through Lightweight Materials Carbon fiber is one quarter the weight while provid- ing 10 times the tensile strength of steel, plus it does not rust. Toray has tenaciously honed its stable pro- duction technology for high-quality carbon fiber for over 50 years. Toray’s carbon fiber composite mate- rials are currently used in the manufacture of aircraft wings, fuselage and other parts helping to reduce fuel consumption and CO2 emissions thanks to their light- weight properties. They are also used in the hydrogen tanks for wind turbine blades and fuel cell vehicles that support a new energy society. Fibers & Textiles, Performance Chemicals Toward a Sustainable Society through the Use of Biomass Resources With the increase in the world’s population as well as energy consumption, the global scale depletion of petroleum/fossil fuels and increased atmospheric CO2 concentration (the main cause of global warming) are becoming issues. Toray believes in realizing a sustain- able society that takes into consideration the needs of both the Earth and its inhabitants by changing the raw materials of petroleum-derived products. Materials and products made using Toray’s biomass-based polymers make this a reality. Aircraft with 50% CFRP used in their body structure weight compared with conventional aircraft approx 20% lighter Lifecycle CO2 emissions exhibit a 27,000 t-CO2 reduction per aircraft over 10 years Toray Group’s Vision for the World and Contributions A net zero emissions world, where greenhouse gas emissions are completely offset by absorption Accelerating measures to counter climate change A world where resources are sustainably managed Realizing sustainable, recycling-based use of resources and production Light- weight Electri- fication Safety Com- fortable Fibers & Textiles, Performance Chemicals, and Carbon Fiber Composite Materials Supporting the Automobile Industry, Where Technology Innovation Continues to Progress, through Advanced Materials The automobile industry is experiencing a period of technology innovation from a wide range of energy, IT, environmental and other related perspectives. As the manner in which cars are manufactured continues to adapt to changing trends including the focus on a sustainable, low-carbon society, self-driving automobiles and the way in which people view vehicles, Toray Group is placing the utmost emphasis on four core concepts—lightweight, electrification, safety, and comfort—in its development of new materials. 14 Annual Report 2018Toray Group is providing innovative technologies and advanced materials that greatly contribute to the fundamental solutions of global problems. We help accelerate the pace of transition to a sustainable society to cope with increasing environmental problems including climate change and water shortages due to population growth and secure the health and longevity that people desire by stimulating improvements in medical technologies, developments in preventative health care, and reduction of burdens on medical professionals. Renewable resources No increase in CO2 concentration in the atmosphere Continuous measurement of biological information by simply wearing Maintaining sound health A world with a restored natural environment, with clean water and air for everyone Providing clean water and air A world where everyone enjoys good health and hygiene Contributing to better medical care and hygiene for people worldwide Water Treatment Resolving Global Scale Water Shortage Issues with Water Treatment Technologies Toray has developed reverse osmosis (RO) membranes that facilitate the extraction of drinking water from the Earth’s abundant supply of seawater. The Company’s water treatment technologies are today being used at water treatment plants worldwide. In addition to sea- water desalination, Toray’s RO membrane elements are helping in the fight against global water shortages and improvement of the world’s water environments by reusing sewage water. Toray’s RO membrane elements account for a cumulative water equivalent of 59.9 mil- lion m3 per day. This in turn is equivalent to the daily life water of 420 million people. Fibers & Textiles Functional Materials That Biosense Body Signals Toray took on a new challenge and collaborated cross-in- dustrially with Nippon Telegraph and Telephone Corporation (NTT) to develop and commercialize hitoeTM, a functional material capable of gathering biologi- cal information. Nanofibers measuring just 1/100th the diameter of a human hair are coated with special highly conductive resins and are used for biosensing clothing with the ability to sense a heart rate, cardiographic wave- forms, and other body signals with high sensitivity. Since this material is highly durable, formfitting, and breath- able, expectations are that it will be used across a wide range of sporting, work safety management as well as nursing, monitoring and health care fields. Cumulative water equivalent of RO membrane elements used at water treatment plants 59.9 million m3 per day Equivalent to the daily life water of 420 million people 15 Toray Industries, Inc.Financial & Non-financial Highlights Financial Highlights Net sales (Billions of yen) 2,500 2,000 1,500 1,000 500 0 Operating Income and Operating Income to Net Sales (Billions of yen) 200 (%) 8 Non-financial Highlights Net Sales of Green Innovation Net Sales of Life Innovation Businesses (Billions of yen) 10,000 Businesses (Billions of yen) 3,000 150 100 50 0 6 4 2 0 Mar/ 14 15 16 17 18 (Forecast) Mar/ 14 15 16 17 18 (Forecast) Operating income (left) Operating income to net sales (right) Mar/ 14 15 16 17 Mar/ 14 15 16 17 19 (Target) 19 (Target) ROA, ROE and Net Income Attributable to Owners of Parent (Billions of yen) 120 (%) 12 Net Assets and Equity Ratio Cash Flows Number of Employees by Gender Percentage of Woman in Reduction of Greenhouse Gas Unit Manager or Higher Positions Emissions (Toray) (Billions of yen) 1,200 (%) 60 (Billions of yen) 200 (Billions of yen) 80 100 80 60 40 20 0 10 1,000 8 6 4 2 0 800 600 400 200 0 50 40 30 20 10 0 100 0 -100 -200 40 0 -40 -80 At least 15% lower than fiscal 1990 Mar/ 14 15 16 17 18 (Forecast) Net Income Attributable to Owners of Parent (left) ROA (right) ROE (right) Mar/ 14 15 16 17 Mar/ 14 15 16 17 Mar/ 15 16 17 Mar/ 14 15 16 17 Mar/ 14 15 16 17 Net assets (left) Equity ratio (right) Cash flows from operating activities (left) Cash flows used in investing activities (left) Free cash flows (right) Dividend per Share and Payout Ratio (Yen) 20 Capital Expenditures and Depreciation (Billions of yen) 200 (%) 40 R&D Expenses (Billions of yen) 80 Reduction of Atmospheric VOC Comparative Water Usage per Unit Waste Recycling Rate Emissions of Sales (FY2001, set to an index value of 100) At least 70% lower than fiscal 2000 No more than 61% of 2001 level At least 86% 30 150 20 100 10 50 0 0 60 40 20 0 Mar/ 14 15 16 17 18 (Forecast) Mar/ 14 15 16 17 18 (Forecast) Mar/ 14 15 16 17 18 (Forecast) Dividend per Share (left) Payout Ratio (right) Capital Expenditures Depreciation * Total of tangible assets and intangible assets (excluding goodwill) Mar/ 14 15 16 17 Mar/ 14 15 16 17 Mar/ 14 15 16 17 Target *No target value for FY 2014 Target *Percentage relative to FY2001 Target *No target value for FY 2014 15 10 5 0 16 8,000 6,000 4,000 2,000 0 (%) 9 7 0 (%*) 65 60 55 50 0 (Number) 50,000 40,000 30,000 20,000 10,000 0 Man Woman (%) 80 75 70 65 0 2,000 1,000 0 (%) 25 20 15 10 0 (%) 90 85 80 0 Target Annual Report 2018Mar/ 14 15 16 17 18 Mar/ 14 15 16 17 18 (Forecast) Operating income (left) Operating income to net sales (right) (Forecast) Attributable to Owners of Parent (Billions of yen) (Billions of yen) (Billions of yen) (%) 8 6 4 2 0 80 40 0 -40 -80 Net sales (Billions of yen) 2,500 2,000 1,500 1,000 500 0 (%) 12 (Billions of yen) 1,200 10 1,000 8 6 4 2 0 800 600 400 200 0 30 150 20 100 10 50 0 0 (%) 60 50 40 30 20 10 0 200 150 100 50 0 200 100 0 -100 -200 80 60 40 20 0 120 100 80 60 40 20 0 (Yen) 20 15 10 5 0 Financial Highlights Operating Income and Operating Income to Net Sales (Billions of yen) Non-financial Highlights Net Sales of Green Innovation Businesses (Billions of yen) 10,000 Net Sales of Life Innovation Businesses (Billions of yen) 3,000 ROA, ROE and Net Income Net Assets and Equity Ratio Cash Flows Number of Employees by Gender (Number) 50,000 40,000 30,000 20,000 10,000 0 8,000 6,000 4,000 2,000 0 2,000 1,000 0 Mar/ 14 15 16 17 19 (Target) Mar/ 14 15 16 17 19 (Target) Percentage of Woman in Unit Manager or Higher Positions (%) 9 Reduction of Greenhouse Gas Emissions (Toray) (%) 25 7 0 At least 15% lower than fiscal 1990 20 15 10 0 Mar/ 14 15 16 17 18 Mar/ 14 15 16 17 Mar/ 14 15 16 17 Mar/ 15 16 17 Mar/ 14 15 16 17 Mar/ 14 15 16 17 (Forecast) Net Income Attributable to Owners of Parent (left) ROA (right) ROE (right) Net assets (left) Equity ratio (right) Cash flows from operating activities (left) Cash flows used in investing activities (left) Free cash flows (right) Dividend per Share and Payout Ratio Capital Expenditures and R&D Expenses (Billions of yen) Depreciation (Billions of yen) (%) 40 200 Mar/ 14 15 16 17 18 Mar/ 14 15 16 17 18 Mar/ 14 15 16 17 18 (Forecast) (Forecast) (Forecast) Dividend per Share (left) Payout Ratio (right) Capital Expenditures Depreciation * Total of tangible assets and intangible assets (excluding goodwill) Man Woman Target Reduction of Atmospheric VOC Emissions Comparative Water Usage per Unit of Sales (FY2001, set to an index value of 100) Waste Recycling Rate (%) 80 75 70 65 0 At least 70% lower than fiscal 2000 (%*) 65 60 55 50 0 No more than 61% of 2001 level (%) 90 85 80 0 At least 86% Mar/ 14 15 16 17 Mar/ 14 15 16 17 Mar/ 14 15 16 17 Target *No target value for FY 2014 Target *Percentage relative to FY2001 Target *No target value for FY 2014 17 Toray Industries, Inc.Akihiro Nikkaku President 18 TORAY Report 2018 Annual Report 2018To Our Stockholders and Investors Toray Group provides innovative technologies and advanced materials. The Group is committed to further increasing revenues and profits by contributing to society through the creation of new value with innovative ideas, technologies, and products that are in high market demand. Toray Group’s Unwavering Management period to fiscal 2019, and systematically continue to pro- mote CSR in every aspect of business. Working to ensure Materials offer infinite possibilities. We at Toray Group balance between the need for Toray Group’s sustainable maintain the unwavering belief that materials, which growth and fulfilling our CSR, we are working to align CSR form the foundation of all products, have the power to initiatives with the Group’s management strategies. intrinsically change society. Guided by this belief, we are Under these circumstances, it was discovered that working diligently to develop and commercialize innova- Toray Hybrid Cord, Inc., a subsidiary of the Company, tive technologies and advanced materials ahead of the had inappropriately overwritten data in product inspec- global competition in an effort to contribute to society tion reports. It has been confirmed in this case that there at large. Persistent research as well as technologies and were no legal violations and no problems relating to the know-how accumulated over a long period are essential safety of customers’ products. An evaluation submit- to unearthing first-in-class materials. The manufactur- ted by an expert committee entrusted by Toray Group ing process is also grounded in efforts to hone a com- to investigate the matter stated that while the Group’s petitive spirit throughout the workplace as a wellspring response was essentially appropriate, it recommended for innovation. Our role therefore is to tackle the world’s that steps be taken to strengthen compliance measures. long-term challenges head-on and to focus closely on our In addition, this incident provided us with the opportunity operational competency at work place while considering to investigate quality data of the entire Group at the same how to utilize the potential of new materials from a long- time. We have subsequently confirmed that there are no term perspective. Based on a firm grasp of existing con- legal violations or problems which will affect the safety of ditions, we are drawing a clear image of the very best customers’ products. that we can be, setting and addressing those issues that Toray Group has initiated measures to secure the need to be overcome, and adopting an unwavering man- effectiveness of quality assurance activities across the agement style that is unaffected by popular trends. entire Group and will redouble efforts relating to compli- “Having the Integrity to Do the Right Thing in the Right Way” ance adherence, including quality assurance. In order to ensure quality assurance and address problems in a rapid and appropriate manner if they occur, Toray Group will strengthen communication with customers. The Board of With respect to safety, accident prevention and environmen- Directors and Corporate Auditors receive regular reports tal preservation, corporate ethics and legal compliance and about the status of progress of these measures to fulfill other essentials of Corporate Social Responsibility (CSR), the Group’s governance functions. The Group will hence- Toray Group is strengthening its CSR initiatives as issues forth engage in its corporate activities with the concerted that take the highest managerial priority. We have drawn commitment of all of executives and employees “to have up the “Sixth CSR Roadmap,” which covers the three-year the integrity to do the right thing in the right way.” 19 Toray Industries, Inc. To Our Stockholders and Investors Overview of Toray Group’s Performance in Fiscal 2017 (The Fiscal Year Ended March 31, 2018) Record High Sales and Operating Income that are designed to secure business expansion in growth business fields as well as growth countries and regions, while strengthening our competitiveness. From here, we will report our performance in fiscal 2017. As a result, consolidated net sales for fiscal 2017 In addition to signs of the economy picking up in emerg- increased 8.8% compared with the previous fiscal year, ing countries, the global economy in general, including the to ¥2,204.9 billion. From a profit perspective on a year-on- U.S. and Europe, continued along a recovery path in fiscal year basis, operating income improved 6.5%, to ¥156.5 2017. On the domestic front, the Japanese economy also billion. Net income attributable to owners of parent, on maintained its gradual recovery on the back of improving the other hand, fell 3.5%, to ¥95.9 billion. Taking the employment and income conditions. Meanwhile, the rise aforementioned into consideration, Toray Group achieved in raw material and fuel prices had a negative impact on record high net sales and operating income in the fiscal Toray Group’s profits. year under review. Under these business circumstances, Toray Group As far as the return of profits to shareholders is con- embarked on the new medium-term management pro- cerned, we have set the annual cash dividend at ¥15 per gram, “Project AP-G 2019,” which spans the three-year share, a year-on-year increase of ¥1 per share. This takes period from April 2017 to the end of March 2020. Under into account our performance in fiscal 2017. this program, we are implementing growth strategies Income Variance Factor Analysis (Billion yen) 250 Difference in selling prices of petrochemical-based products, etc. Difference in raw materials’ cost and fuel prices of petrochemical-based products, etc. Difference from foreign currency translation of overseas subsidiaries’ results +19.3 -40.6 Difference in quantity 146.9 +33.9 Other cost variance -0.0 -13.8 +7.6 +3.2 156.5 Variance in operating cost Price change of products less subject to price effect of petrochemical-based raw materials (net) 200 150 100 50 0 FY Mar/2017 +9.6 FY Mar/2018 “Petrochemical-based products, etc.” are the total of Fibers & Textiles, Performance Chemicals, and Carbon Fiber Composite Materials segments. 20 Annual Report 2018The Medium-term Management Program “Project AP-G 2019” To Our Stockholders and Investors Toray Group’s Approach to Management Based on a Long-term Perspective 2020” (Vision 2020) in 2011 in a bid to become a corpo- rate group that continually increases revenues and profits and provides high value for all stakeholders. Under Vision Toray Group maintains a long-term perspective in the con- 2020, we have set our sights on sustainably increasing duct of its business. Within the framework of its Long- revenues and profits. In specific terms, we are targeting term Corporate Vision, which looks 10 years into the consolidated net sales of ¥3 trillion, operating income of future, the Company identifies key medium-term issues ¥300 billion, and an ROE of 13% around 2020. that need to be addressed over a span of three years as The current medium-term management program, a part of efforts to achieve its vision. At the same time, “Project AP-G 2019” is the third stage of Vision 2020. we work diligently to address short-term issues based on Under “Project AP-G 2019,” we are carrying out the annual budgets. In this sense, we do not focus on medi- three conventional basic strategies of business expan- um-term “plans,” but more on medium-term “programs” sion in growth business fields, expansion and advance- to address key “issues.” Rather than put in place a plan ment of global business, and growth by strengthening that is grounded in a set of numerical targets, our focus is our competitiveness. At the same time, we are focus- on medium-term issues. In this regard, the achievement ing on creating new businesses that will help drive Toray of numerical targets is simply a by-product of efforts Group through a period of renewed growth during the designed to implement programs aimed at addressing 2020s. As far as our performance targets are concerned, specific issues. we will look to achieve consolidated net sales of ¥2,700 Based on this understanding, Toray Group put in place billion and consolidated operating income of ¥250 billion the Long-term Corporate Vision “AP-Growth TORAY in fiscal 2019, the last fiscal year of “Project AP-G 2019.” Basic Issues of “Project AP-G 2019” 1 2 3 4 5 6 7 Proactively expand business in growth fields, countries, and regions Improve profitability by continuously creating and expanding differentiated products Steadily realize profit improvements through radical reforms both in business and organizational structures Continue “strengthening of cost competitiveness” to reinforce and strengthen earning structure Continue “pursuit of the ultimate limits” for the creation of new and innovative materials and create large-scale new businesses Thoroughly implement “safety, accident prevention, and environmental preservation” and “business ethics and legal compliance” globally Secure and develop human resources that can contribute to “strong workplace capability” 21 Toray Industries, Inc. To Our Stockholders and Investors THREE BASIC STRATEGIES 01 Business Expansion in Growth Business Fields Toray Group is working diligently to put forward the two Group-wide Green Innovation Business Expansion (GR) and Life Innovation Business Expansion (LI) projects. The Green Innovation Business Expansion Project In addition to preserving the global environment, Toray Group provides solutions that help address energy and resource issues while targeting business expansion. As a result, the Company takes every opportunity to reduce greenhouse gas (GHG) emissions, lower its environmental footprint, and to support the treatment of water, recy- cling, and air purification. In fiscal 2017, net sales from GR Project businesses were ¥712.3 billion, up 13.4% com- pared with the previous fiscal year. Upgrading and Expanding the Carbon Fiber Reinforced Plastics (CFRP) Business Foundation That Contributes to the Reduction of GHG Emissions Toray Group and France-based Safran concluded an implementation agreement for the supply of higher per- formance carbon fiber composite materials for use in next-generation aircraft engines in March 2018. By deep- ening its direct contact and discussions with aircraft engine manufacturers and continuing its development of innovative composite materials, the Company is taking steps to further expand its business by promoting avia- tion and aircraft engine applications, which are projected (LIBs) that commonly go into manufacturing mobile elec- tronic devices, electric vehicles and other products. We have focused on capturing a definitive share of the rapidly expanding demand in recent years and are endeavoring to secure a leading position in the global market for BSF. Received an Order to Supply the Ultrafiltration (UF) Membrane, TORAYFILTM, for the Large- scale Wastewater Treatment Facility for Production of Drinking Water in the U.S. Toray Group received an order to supply hollow fiber UF membrane modules TORAYFILTM for the largest waste- water treatment facility for production of drinking water to increase in the future, while working to enhance per- in the U.S. in March 2018. Acclaimed for its high run- formance, conserve energy, and lower costs. Moreover, Toray Group reached an agreement to acquire all of the shares of TenCate Advanced Composites ning performance and durability, plans are in place to commence shipments of TORAYFILTM from around 2019 and for the facility to start production in 2021. Currently, Holding B.V. (TCAC) based in the Netherlands in March the U.S. is plagued with an acute shortage of water. This 2018. With its main manufacturing bases in Europe and is especially the case along the west coast where the the U.S., TCAC is especially strong in carbon fiber com- demand for wastewater reuse is projected to expand. posite materials using thermoplastic resins that improve Looking ahead, Toray Group will focus on securing proj- the efficiency of molding parts. By introducing Toray ect orders that help address these water issues as a Group’s carbon fiber and polymer technologies and com- global player that handles a comprehensive range of bining the two companies’ supply chains, this acquisition UF, reverse osmosis (RO) and microfiltration (MF) mem- is expected to generate significant synergies going for- branes as well as membrane bioreactor (MBR) systems. ward. We will respond swiftly to demand expansion of the market for small-sized aircraft and expand the busi- ness further for industrial applications including automo- biles in the medium to long term. Boosting Battery Separator Film (BSF) Production Capacity for Electric Vehicles and Other Uses Toray Group decided to increase its BSF production capac- ity in the Republic of Korea by roughly 50% in October 2017. At the same time, steps are being taken to substan- tially increase coating capacity. Battery separator films that offer a high level of performance and reliability are widely used as separators in the lithium-ion secondary batteries Expansion of Green Innovation Businesses (Billion yen) 1,000 800 600 400 200 0 FY ( ) net sales ratio 900.0 (33%) 657.1 (31%) 628.2 (31%) 712.3 (32%) 2015 Actual 2016 Actual 2017 Actual 2019 Target 22 Annual Report 2018 01 Business Expansion in Growth Business Fields To Our Stockholders and Investors The Life Innovation Business Expansion (LI) Project Making the most of its management resources, Toray Group is working to expand its business by enhancing the quality of medical care, alleviating the burden of medical professionals, and contributing to the maintenance of health and longevity. In fiscal 2017, net sales from LI Project businesses were ¥211.9 billion, up 8.4% compared with the previous fiscal year. Expanding Polypropylene (PP) Spunbond Production Bases to Address the Demand for Disposable Diapers in China Advancing Clinical Trials while Working to Secure Early Regulatory Approval of TRK- 950 as an Epoch-making Cancer Treatment China has forged a position as the largest consumer of Toray Group is advancing phase I clinical trials in the U.S. disposable diapers. In addition to its existing local base and France on TRK-950, a proprietary therapeutic agent in East China, Toray Group acquired land for commer- for the treatment for solid cancer. TRK-950 is a monoclo- cial use in South China for the purpose of expanding its nal antibody preparation that combines with and attacks high-performance PP spunbond production capacity in cancer cells. Developed by the Group’s New Frontiers November 2017. Plans are in place for a new production Research Laboratories, which was established in 2003, facility to commence operations in fiscal 2019. Demand TRK-950 is the culmination of efforts aimed at deepen- for disposable diapers continues to expand in China as ing and integrating Toray Group’s core technologies and lifestyles improve on the back of rising incomes and the a key tool in cultivating opportunities in the medical busi- number of newborns increases following discontinuation ness domain. Advancing global clinical development in of the nation’s one-child policy. As a result, major san- Europe and the U.S., the Group is working to secure the itary product manufacturers are actively establishing or early regulatory approval of TRK-950 as a first-in-class expanding production facilities for disposable diapers in cancer treatment drug. China. In addition to capturing a definitive share of this demand, Toray Group is accelerating the pace of global PP spunbond business expansion where it boasts con- siderable strengths from each of the production network and quality perspectives. General Sales of High-performance Limited-use (Disposable) Protective Clothing Building on its track record of developing products for a wide range of applications including decontamination work on an individual basis, Toray Group commenced general sales of LIVMOA®, a line of highly breath- able limited-use (disposable) protective clothing in May 2017. Recognized as highly breathable, LIVMOA® helps to enhance comfort by reducing the sticky sensation caused by humid conditions and is distinguished by its particle absorption and dust-proofing properties. Expansion of Life Innovation Businesses (Billion yen) 300 200 100 0 FY ( ) net sales ratio 270.0 (10%) 195.5 (10%) 211.9 (10%) 159.6 (7%) 2015 Actual 2016 Actual 2017 Actual 2019 Target Advanced Materials in LI Businesses* Pharmaceuticals & Medical Devices *Toray Group estimation 23 Toray Industries, Inc.To Our Stockholders and Investors THREE BASIC STRATEGIES 02 Expansion and Advancement of Global Business Looking at conditions in which Toray Group operates, the need for advanced technologies in such wide-ranging fields as automobiles and energy is increasing in the U.S. and Europe. At the same time, standards of living are improving and environmental regulations becoming more stringent in China and emerging countries. Against this backdrop, Toray Group is working to expand its global business by capturing profit opportunities. In fiscal 2017, overseas sales were ¥1,150.8 billion, up 10.4% compared with the previous fiscal year. Acquired an Equity Interest in a Major Knitted Fabrics Company Based in Hong Kong; Company Included in the Scope of Consolidation as an Equity-method Affiliate environmental restrictions in the world. Building on the experience of the Automotive Center (AMC), which is located within Toray Group’s Nagoya Plant, and in order to further drive expansion of Toray Group’s automo- tive-related business, AMCEU will play the major role of Toray Group acquired a 28% stake in Pacific Textiles a core technology development base in Europe that is Holdings Ltd. (Pacific Textiles), a Hong Kong-based com- capable of handling new applications through R&D and pany that engages in the manufacture and sale of knit- offering one-stop service to customers in Europe. ted, dyed and printed fabrics, for an acquisition cost of approximately ¥59 billion in July 2017. The company has been included in Toray Group’s scope of consolidation as an equity-method affiliate. With a production scale that is Initiating Steps to Fully Expand Business in India matched by only a handful of companies throughout the In February 2018, Toray Group acquired land in Sri City in world, Pacific Textiles is a highly profitable business entity the State of Andhra Pradesh, India as a base to be used thanks to its considerable cost and quality competitive primarily for new business by its Indian subsidiary Toray advantage that is making significant inroads targeting major Industries (India) Private Limited (TID). Accordingly, Toray apparel companies in Europe and the U.S. as well as spe- Group will actively direct management resources toward cialty store retailers of private label apparel (SPA). By acquir- developing this land as an important base for its advanced ing an equity interest, Toray Group will further strengthen materials business. In business fields where demand is its relationship with Pacific Textiles, expand its knitted fab- expected to expand, Toray Group will work from this rics business, and work vigorously to increase the sophis- newly developed site to address domestic demand in tication of its operations as a global integrated business. India and to grow its global operations focusing mainly on Newly Established a Polyphenylene Sulfide (PPS) Resin Compound Base in Hungary South Asia. As an initial step, a new base for the PP spun- bond for hygiene products business targeting disposable diapers will be established (operations scheduled to com- mence in 2020). Thereafter, a new production facility for Operations commenced at a new PPS resin compound nylon and PBT resin compounds will be constructed to production facility at the Hungarian plant of Toray Group’s meet the demand for high-performance resins in line U.S. subsidiary Zoltek Companies, Inc., the world’s larg- with automobile market expansion (operations scheduled est supplier of large tow carbon fibers in March 2018. This to commence in September 2019). represents Toray Group’s first resin compound production facility in Europe. Working with its sales company Toray Resins Europe GmbH, a company that was established Overseas Net Sales (Total of Overseas Consolidated Subsidiaries) in Germany to engage in marketing and technical service (Billion yen) functions in 2015, Toray Group will position this new pro- 1,500 (calculation based on 100 yen / US$ for all years listed below) 1,500.0 duction facility at the heart of efforts to expand the resin business in Europe and to further cement the Group’s sta- tus as the world’s leading manufacturer of PPS resins. 1,016.7 1,042.1 1,000 1,150.8 Planning to Open the Automotive Center Europe in Germany Toray Group has announced that it will open the Automotive Center Europe (AMCEU) in August 2018 in Germany, as a part of efforts to strengthen its R&D function in Europe, which stands at the forefront of 500 0 FY 2015 Actual 2016 Actual 2017 Actual 2019 Target 24 Annual Report 2018THREE BASIC STRATEGIES 03 Strengthening Competitiveness In addition to the growth strategies of “business expansion in growth business fields” and “expan- sion and advancement of global business,” Toray Group is promoting efforts to strengthen its com- petitiveness from three specific perspectives: (1) total cost reduction, (2) strengthening its corporate structure, and (3) strengthening sales and marketing. To Our Stockholders and Investors Total Cost Reduction #Promote Total Cost Reduction (TC) Project on a Group-wide basis #Activities of variable cost reduction (annual target at over 3.6%) #Control fixed costs using the P-ratio* accounting method (P-ratio=under 0.96 each fiscal year) # For innovation of the production process, identify themes by category in terms of “innova- tive cost reduction,” “large-scale total cost reduction” and “capacity increase of existing facilities” to achieve reduction effects by more than ¥50 billion in three years Strengthening Corporate Structure # 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 potential or excessive competition #Manage the Group’s assets effectively and expand revenue and profit Strengthening Sales and Marketing # Sales and marketing leads to build a “profit-making system” in cooperation with produc- tion, technology, R&D departments and external partners # Maximize the revenue and profit of existing businesses through improvements in price pol- icies, distribution systems and brand initiatives Strengthen the Corporate Structure as well as Sales and Marketing while Promoting Cost Reduction of a Chinese subsidiary which manufactures textiles. In addition to modifying an existing facility in its film busi- ness, the decision has also been made to start produc- tion of multilayered ceramic capacitor (MLCC) release As a part of efforts to secure total cost reduction, Toray Group films, a growth field. is implementing the Group-wide Total Cost Reduction (TC) As far as efforts to strengthen sales and marketing are Project. In carrying out this project, the Company is looking concerned, Toray Group entered into a technical coopera- to reduce costs by a total of ¥220 billion over a three-year tion agreement relating to OLED materials with Idemitsu period from fiscal 2017 through a process of variable cost, Kosan Co., Ltd. Moreover, the Company is proactively fixed cost, and production process innovation. collaborating with leading outside partners. This included In order to strengthen its corporate structure, Toray participation in a joint exhibition with UNIQLO for the first Group is conducting a share and management transfer time in New York. Total Cost Reduction Results of FY2017 Variable Costs Fixed Costs Reduced: 28.0 billion yen (Reduction ratio 3.2%) Reduced: 25.0 billion yen (P-ratio*=0.99) Innovation of Production Processes Reduced: 16.3 billion yen Total Reduced: 69.3billion yen *P (Performance)-ratio=fixed cost growth rate/marginal profit growth rate. Target: less than 1.0 or monitored by division under budget. 25 Toray Industries, Inc. To Our Stockholders and Investors Performance Forecasts for Fiscal 2018 Working Toward Further Increasing Revenues and Profits Under these conditions, consolidated net sales for fiscal 2018 are projected to reach ¥2,450 billion. From a profit perspective, operating income is forecast to come In fiscal 2018, the global economy as a whole is expected in at ¥165 billion and net income attributable to owners to continue its gradual expansion, as the economies of of parent at ¥98 billion. With the Corporate Mission of the U.S., Europe, and other developed countries main- continuously increasing cash dividends in line with the tain their expansion and emerging economies in general Company’s performance, Toray Group plans to pay an perform strongly except for a slight slowdown in China. annual dividend of ¥16 per share for fiscal 2018. However, attention should be paid to risk factors such as the protectionism trade policies of developed countries, expansion of trade friction, and financial market turmoil caused by moves toward monetary policy normaliza- tion in the U.S. and Europe. The Japanese economy is Proactively Undertaking Investments Designed to Secure Sustainable Growth on an Ongoing Basis also expected to continue on a gradual recovery track on In fiscal 2018, Toray Group will work diligently to realize the the back of improving employment and income condi- effects of the global increase in production and sales of tions, though there are concerns that the economy may such products as battery separator films for lithium-ion sec- be affected by uncertainties in overseas economies and ondary batteries (LIBs), PP spunbond for hygiene products fluctuations in crude oil prices and in financial markets. and carbon fiber composite materials. At the same time, the Consolidated Business Forecast for Fiscal 2018 Billion yen Net Sales Operating Income Net Income Attributable to Owners of Parent Assumed exchange rate : 110 yen / US$ (Released August 6, 2018) FY2018 (Forecast) 2,450.0 165.0 98.0 Changes +245.1 +8.5 +2.1 Forecast by Segment for Fiscal 2018 Billion yen Net Sales (Changes) Operating Income (Changes) Fibers & Textiles 1,000.0 (+86.4) 81.0 (+8.6) Performance Chemicals 895.0 (+91.7) 79.0 (+7.6) Carbon Fiber Composite Materials 215.0 (+37.1) 15.0 (-5.8) Environment & Engineering 260.0 (+21.7) 16.0 (+2.7) Life Science Others Adjustment Consolidated (Released August 6, 2018) 26 60.0 (+6.2) 1.0 (-0.9) 20.0 (+2.1) 4.0 (+1.1) — -31.0 (-4.8) 2,450.0 (+245.1) 165.0 (+8.5) Annual Report 2018 Performance Forecasts for Fiscal 2018 To Our Stockholders and Investors Company will shift to high value-added products and culti- vate new applications and customers across each of its busi- Adopting a Policy of Public Interest Capitalism nesses. If synergies appear to be achievable through the Toray Group recognizes that corporations are public insti- use of the Group’s strengths, Toray Group will extend and tutions. Based on this understanding, the Company is supplement the growth of its existing businesses by flexi- aiming to contribute to the growth and development of bly pursuing M&A and alliance opportunities. Furthermore, society at large including all stakeholders such as share- every effort will be made to secure a business structure that holders, customers, employees, and the local commu- is insulated as much as possible from the effects of such nity. Guided by the concept of public interest capitalism, factors as changes in foreign currency exchange rates as Toray Group is committed to securing the sustainable well as raw material and fuel prices by making use of the growth in concert with society. In other words, the Group’s global business foundations. Toray Group will aim Company will work diligently to develop and commercial- to sustain its growth through capital expenditure, research ize innovative technologies and advanced materials that and development, and human resources development from are capable of changing people’s lives. Every effort will a medium- to long-term perspective. be made to contribute to society by creating new value As far as its capital expenditure is concerned, Toray that addresses market needs, which will in turn lead to Group is looking at engaging in investments totaling ¥500 further expansion of revenues and profits. billion over a three-year period from fiscal 2017. At the We ask all shareholders and investors for the long- same time, in line with plans to undertake R&D expenses term support and understanding of our management of around ¥220 billion mainly in Green Innovation Business style and endeavors. Expansion and Life Innovation Business Expansion proj- ects, Toray Group plans to undertake capital expenditures (depreciation and amortization of ¥105 billion) of ¥180 bil- lion and R&D expenses of ¥73 billion in fiscal 2018. Capital Expenditures* Depreciation R&D Expenses (Billion yen) Consolidated Subsidiaries (Billion yen) Consolidated Subsidiaries (Billion yen) Consolidated Subsidiaries 200 150 100 50 0 FY Toray 180.0 156.3 157.9 2016 2017 2018 Forecast 120 100 80 60 40 20 0 FY Toray 98.0 91.1 105.0 2016 2017 2018 Forecast 80 60 40 20 0 FY Toray 59.2 73.0 66.2 2016 2017 2018 Forecast * Total of tangible assets and intangible assets (excluding goodwill) Major Capital Expenditure Projects FY March 2018 FY March 2019 Toray Advanced Materials Korea Inc. High-functional polypropylene spunbond production facilities Zoltek Companies, Inc. Large tow carbon fiber ZOLTEKTM production facilities Toray Battery Separator Film Korea Limited Battery separator film SETELATM production facilities Toray Composite Materials America, Inc. Carbon fiber TORAYCATM prepreg integrated production facilities Toray Battery Separator Film Korea Limited Battery separator film SETELATM production facilities Alcantara S.p.A. AlcantaraTM production facilities Zoltek Companies, Inc. Large tow carbon fiber ZOLTEKTM production facilities Toray Polytech (Foshan) Co., Ltd. High-functional polypropylene spunbond production facilities 27 Toray Industries, Inc.Results by Segment for Fiscal 2017 Business Categories and Segments Summary of Financial Results C o r e G r o w t h D r i i v n g B u s i n e s s I i n t e n s i v e l y D e v e l o p n g a n d E x p a n d n g B u s i n e s s e s i Fibers & Textiles Performance Chemicals In Japan, demand for some industrial applications such as automobiles was strong and apparel applications saw gradual improvement in store sales of final products. Against this background, Toray Group not only strived to expand sales in both apparel and industrial applications but also worked to expand the busi- ness format that integrates fibers to textiles to final products while focusing on strengthening cost competitiveness. Overseas, business performance of some subsidiaries in Southeast Asia and the Republic of Korea remained slow. On the other hand, materials for automo- tive applications and hygiene products remained strong in general and the Group expanded the integrated business for apparel applications. In the resin business, shipment for automotive applications was strong in general, mainly in Japan. Besides automotive applications, Toray Group also promoted sales expansion of ABS and PPS resins. In the film business, shipment of battery separator films for lithium-ion secondary batteries increased reflecting demand growth, while films for electronic parts which are used for applications such as smartphones continued to be favorable. In the electronic & information materi- als business, demand for OLED panels increased and shipment of related mate- rials expanded. Carbon Fiber Composite Materials With the final demand for the aircraft remaining strong in the aerospace applica- tions, shipments showed signs of recovery as the inventory adjustment in the supply chain was completed. In the industrial applications, demand showed a recovery trend primarily in the environment and energy-related field led by com- pressed natural gas tank applications and wind turbine blade applications. The segment was affected by increases in raw material prices as well as intensify- ing competition. Environment & Engineering In the water treatment business, demand for reverse osmosis membranes and other products in general grew strongly in Japan and abroad. In terms of domestic subsidiaries in the segment, industrial machinery and electronics-related equipment performed strongly at an engineering subsidiary. Life Science In the pharmaceutical business, shipment of pruritus treatment REMITCH®* expanded due to the impact of the introduction of a new dosage form and approval of new indications. On the other hand, 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, and royalty income on some products decreased. In the medical devices business, shipment of dialyzers grew strongly. * REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. S t r a t e g i c a l l y E x p a n d n g B u s i n e s s e s i 28 Annual Report 2018 Performance (Billions of yen) * The figures in parentheses of each segment are composition ratios by segment. Main Products Net sales 913.6 (41％) Operating Income 72.4 (40％) • Filament yarns, staple fibers, spun yarns, woven and knitted fabrics of nylon, polyester, acrylic, and others • Non-woven fabrics • Ultra-microfiber non-woven fabric with suede texture • Apparel products, etc. Net sales 803.3 (36％) Operating Income 71.4 (39％) Net sales 177.9 (8％) Net sales 238.3 (11％) Net sales 53.8 (2％) Operating Income 20.8 (11％) Operating Income 13.3 (7％) Operating Income 1.9 (1％) • Nylon, ABS, PBT, PPS, and other resins and molded products • Polyolefin foam • Polyester, polyethylene, polypropylene, and other films and processed film products • Raw materials for synthetic fibers, and other plastics • Fine chemicals • Electronic and information materials and graphic materials, etc. • Carbon fibers, carbon fiber composite materials, and molded products from those materials, etc. • Comprehensive engineering • Condominiums • Industrial equipment and machinery • IT-related equipment • Water treatment membranes and related equipment • Materials for housing, building, and civil engineering applications, etc. • Pharmaceuticals • Medical devices, etc. Excludes other businesses, equivalent to ¥17.9 billion (1%) in net sales and ¥2.9 billion (2%) in operating income, and adjustment of operating income of -¥26.2 billion. The composition ratio by segment of operating income is calculated excluding the adjustment amount. 29 Toray Industries, Inc.Core Growth Driving Business Fibers & Textiles 2016 856.1 66.8 7.8% (Billions of yen) 2017 Changes 2018 Forecast 913.6 +6.7% 1,000.0 72.4 7.9% +8.5% 81.0 8.1% Years ended March 31 Net sales Operating income Operating income to net sales 2018 forecasts announced on August 6, 2018. Basic Policy • Strengthen its earnings structure as a core growth driving business of Toray, and expand business in growth business fields and regions • Aim for significant growth in the segment through the further enhancement of global operations Earnings Opportunities and Risks • Growing need for advanced materials contributing to the resolution for global environmental and energy/resource issues, and health and longevity • Changes in the global economy and personal spending trends • Improving standards of living and tighter regulations in China and emerging economies as income levels in those areas rise • Raw materials and fuel prices trends Basic Strategies for Achieving the Medium-term Management Program “AP-G 2019” Targets • Maintain and reinforce domestic business foundation and processing platform in production areas, and further strengthen business competitiveness • Reinforce business foundation of existing operations at overseas locations, and expand business in growth business fields and regions • Strengthen Toray Group’s global operations and create new business areas by developing and expanding business on multiple levels combining its strength of diverse product lines, supply chain, and global sales > Aim to achieve significant growth by the global fibers/textiles/final products integrated business format and SCM, reinforce value chain of strategic products, and expand new business areas Fiscal 2018 Outlook In apparel applications, we are focused on enhancing our business model, including expansion of our business format that integrates fibers to textiles to final products. In industrial applications we will expand sales in growth regions on the back of enhanced capacity in growth fields such as hygiene materials and automotive applications. In addition to continuing to pass on rise in raw material prices to selling prices, we aim to bolster our business structure through cost reductions and other measures, enhance the global business, and expand earnings as expected as a core growth driving business. Net Sales (Billions of yen) 913.6 Operating Income (Billions of yen) 72.4 Operating income to net sales 7.9% ROA (Operating income/Assets) 9.6% 30 Annual Report 2018 Core Growth Driving Businesses/Strategically Expanding Businesses Performance Chemicals 2016 724.6 61.8 8.5% (Billions of yen) 2017 Changes 2018 Forecast 803.3 +10.9% 895.0 71.4 +15.5% 79.0 8.9% 8.8% Years ended March 31 Net sales Operating income Operating income to net sales 2018 forecasts announced on August 6, 2018. Basic Policy • Expand business by expanding sales of high value-added products in growth business fields and maximum utilization of global bases • Strengthen earnings base by business structure reform Earnings Opportunities and Risks • Growing need for advanced materials contributing to the resolution of global environmental and energy/resource issues • Changing in the demand trends of end products such as automobiles, including electric vehicles, LCD TVs and smartphones, and changes in technological trends in various components. • Raw materials price trends Basic Strategies for Achieving the Medium-term Management Program “AP-G 2019” Targets n Resins, Chemicals Business • Allocate management resources and promote business expansion in growing businesses includ- ing PPS resins, resin compounds overseas, and automotive materials n Films Business • Invest in facilities for lithium-ion battery separator films and promote sales expansion through product development • Reorganize manufacturing of PET films, increase value of existing products by utilizing global operations, and enhance sales expansion n Electronic & Information Materials Business • Expand sales of OLED related materials and accelerate technology development and commer- cialization of products beyond the LCD display field Fiscal 2018 Outlook Amid ongoing stability in global automobile production, we target sales expansion in automotive application in the resins business as demand for plastic resins expands in line with the trend in auto- mobiles toward electrification and reduced weight. We also focus on expanding sales on the back of enhanced capacity at TORAYPEFTM. In the films business, by utilizing our global operation, we will expand sales of PET films par- ticularly for high value-added products including electronic components. We focus on the sales expansion of battery separator films for lithium-ion secondary batteries to meet growing demand by increasing capacity utilization on the back of sequential capacity expansions enacted in fiscal 2017. For the electronic & information materials business, we target the sales expansion of OLED related materials in line with growth in the overall market. In addition to continuing to pass on rise in raw material prices to selling prices, we will strive toward reducing overall costs. 31 Net Sales (Billions of yen) 803.3 Operating Income (Billions of yen) 71.4 Operating income to net sales 8.9% ROA (Operating income/Assets) 7.6% Toray Industries, Inc. Strategically Expanding Businesses Carbon Fiber Composite Materials Years ended March 31 Net sales Operating income (Billions of yen) 2016 161.6 34.0 2017 Changes 2018 Forecast 177.9 +10.1% 215.0 20.8 -13.3% 15.0 Operating income to net sales 14.8% 11.7% 7.0% 2018 forecasts announced on August 6, 2018. Basic Policy • Further expand the business as the world’s number-one manufacturer of carbon fibers Earnings Opportunities and Risks • Growing need for advanced materials contributing to the resolution of global environmental and energy/resource issues • Demand trends in end products, including automobiles, compressed natural gas tanks, wind tur- bine blades, and aircraft • Global supply and demand balance for carbon fiber • Trends in raw materials and fuel prices, foreign currency exchange rates Basic Strategies for Achieving the Medium-term Management Program “AP-G 2019” Targets n Aerospace Applications • Further strengthen existing partnerships • Capture new programs n Industrial Applications • Reinforce dominant market share by leveraging comprehensive strengths in lineup of regular tow and large tow products • Reinforce dominant market share in the wind-turbine blade applications by strengthening alliance with major customers, supported by the cost competitiveness in large tow products • Develop intermediate products/molding technologies and enhance the supply chain to meet the full-scale expansion in automotive application demand Fiscal 2018 Outlook • For aerospace applications, given the completion of the inventory adjustment in the supply chain in fiscal 2017, we expect an expansion in carbon fiber composite material demand amid steady final demand for aircraft. • For industrial applications, we are targeting sales expansion amid a recovery in overall demand, particularly for environmental and energy-related products such as wind turbine blades and com- pressed natural gas tanks. We will expand sales of wind turbine blade applications, where demand is expanding, making good use of the sequential expansions in capacity from the fourth quarter of fiscal 2017 in large tow products. • In addition to continuing to pass on rise in raw material prices to selling prices, we will to strive toward reducing overall costs. Net Sales (Billions of yen) 177.9 Operating Income (Billions of yen) 20.8 Operating income to net sales 11.7% ROA (Operating income/Assets) 4.5% 32 Annual Report 2018Intensively Developing and Expanding Businesses Environment & Engineering 2016 212.5 11.7 5.5% (Billions of yen) 2017 Changes 2018 Forecast 238.3 +12.1% 260.0 13.3 +13.5% 16.0 5.6% 6.2% Years ended March 31 Net sales Operating income Operating income to net sales 2018 forecasts announced on August 6, 2018. Basic Policy • Expand business in the environment and energy field with focus on water treatment mem- branes and facility design capabilities Earnings Opportunities and Risks • Growing need for advanced materials that can contribute to the resolution of global environmental and energy/resource issues, and related machinery to manufacture them • Political instability in areas suffering from water shortages • Crude oil price trends • Capex trends at mainstay customers Basic Strategies for Achieving the Medium-term Management Program “AP-G 2019” Targets n Water Treatment Business • Expand business and strengthen competitiveness in the membrane business • Enhance development of reverse osmosis membrane products and strengthen cost competitiveness • Expand sales of UF membranes in China and the U.S.A. • Strengthen the business foundation in the water treatment system and plant business n Engineering Business • Expand plant business and industrial machinery (in the environment and energy fields and the life science field) • Make use of external resources in growth areas • Strengthen cost competitiveness • Accelerate overseas expansion Fiscal 2018 Outlook • In the water treatment business, as to reverse osmosis membranes, we target sales expansion of drinking water use by seawater desalination and brine water desalination, and industrial applica- tions including pure water production for industrial use, as well as in the field of wastewater reuse. As to UF/MF membranes, we target sales promotion for water purification applications and prepro- cessing applications in wastewater reuse as well as desalination of sea water. We are focused on expanding sales of MBR membranes for wastewater reuse applications in emerging economies such as India and the countries of South and Central America. • For the engineering subsidiary, we focus on an expansion in plant construction in the environmental and energy field as well as in the life science field. In the industrial machinery business, we target sales expansions particularly in the fields of electric vehicles and semiconductors, where demand is expected to rise. 33 Net Sales (Billions of yen) 238.3 Operating Income (Billions of yen) 13.3 Operating income to net sales 5.6% ROA (Operating income/Assets) 5.2% Toray Industries, Inc.Intensively Developing and Expanding Businesses Life Science Years ended March 31 Net sales Operating income 2016 54.2 2.1 Operating income to net sales 4.0% 2018 forecasts announced on August 6, 2018. 2017 53.8 1.9 3.6% (Billions of yen) Changes 2018 Forecast -0.6% -9.6% 60.0 1.0 1.7% Basic Policy • Maintain and expand domestic market share, accelerate and strengthen overseas development • Use selection and concentration to promote more efficient product development Earnings Opportunities and Risks • Growing need for advanced materials to improve quality of healthcare, ease burden on medical pro- fessionals, and contribute to health and longevity • Japanese government’s promotion of generic products and ongoing revision of National Health Insurance drug price standards as well as reduction of the insurance reimbursement prices • Laws and regulations trends in each country Basic Strategies for Achieving the Medium-term Management Program “AP-G 2019” Targets n Pharmaceutical Business • Maintain the domestic market share and develop overseas markets of oral antipruritus drug REMITCH®* • Create next-generation drugs using new processes n Medical Devices Business • Expand sales of dialyzer products in Japan and overseas • Expand domestic sales and accelerate overseas development in critical care and cardiovascu- lar products • Quickly commercialize bio-devices Fiscal 2018 Outlook • While the pharmaceutical business appears to be facing headwinds from the emergence of generic products, we expect the oral antipruritus drug REMITCH®* oral disintegrating tablets, which were launched in June 2017, to maintain its domestic market share through appealing its superiority, and we will concurrently target acceleration in overseas development. In regard to drug development moving forward, we focus on a pipeline expansion in priority areas, including neurological diseases as well as kidney diseases, autoimmune disorders and cancer, and research in innovative bio-phar- maceuticals aiming at the creation of next-generation drugs. • In the medical devices business, we target an expansion in the domestic and overseas dialysis busi- ness thanks to the provision of one-stop services combining dialyzers developed based on Toray’s hollow fiber technology with dialysis machinery and its management system, which can be used for a variety of dialysis-related medical needs. • In the medical products business, we focus on expanding sales through improvements in existing products, indication expansion and the acceleration of overseas development, particularly in the pri- ority areas of emergency care, intensive care (acute blood purification), and cardiovascular products. As we look to an expansion in business moving forward, we will advance the development of new medical devices based on the technologies related to advanced materials, in which Toray excels. *REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd Net Sales (Billions of yen) 53.8 Operating Income (Billions of yen) 1.9 Operating income to net sales 3.6% ROA (Operating income/Assets) 2.4% 34 Annual Report 2018FOUNDED ON TECHNOLOGY AND KNOWLEDGE Toray Group’s medium-term management program, “Project AP-G 2019,” aims for the creation of new technologies and materials, with particular focus on “Green Innovation” and “Life Innovation” businesses, as well as the promotion of measures to manifest the essential value of these technologies and materi- als. The company also maintains technological competitiveness by constructing a solid market entry bar- rier with its intellectual property. 35 Toray Industries, Inc.R&D R&D Philosophy Since its very inception, Toray Group has continuously carried out R&D on advanced materials based on the firm conviction that R&D pro- vide the key to building Toray of tomorrow. The company has accordingly continued to focus on R&D of advanced materials based on the needs of the times. However, it inevitably takes a certain amount of time to develop and commercialize materials. Accordingly, we focus on maintaining the ability to recognize the value of materials and the will to follow through in development. Our basic policy is pipeline management, management based on R&D with a long-term focus, emphasizing not only on immediate profit-making themes, but the next one, and the one after that as well. The phrase, “The Deeper, the Newer,” has been passed down as a key phrase at Toray, and is part of the 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. With this in mind, we continue to challenge the ultimate based on a grand vision for the times and the needs of society, with the goal of creating innovation that has both economic and social value. Characteristic of R&D of Toray 1 Culture of Commitment to Basic Research Our culture prioritizes basic research that has to be based on a grand vision of the times, recognizes the value of materials and is unswayed by current trends and so pro- vides a fertile foundation for continuing to create innovative advanced materials like our carbon fibers and reverse osmosis membranes. 2 Long-term and Persistent Efforts to Pursue Advanced Materials and Technology to the Ultimate Limits Our commitment to unceasing pursuit in R&D—exemplified in our strong preference for advanced materials and belief that delving deeper into a single theme yields new inventions and discoveries—has taken root in the form of persistent efforts over the long term. We believe this “super-continuity” approach spurs innovation. 3 Specialist Teams in Many Fields Toray’s teams of specialists have abundant knowledge and experience in a wide variety of fields including polymer design, high-function technology, and drug discovery, for- mulation, and pharmacology, which are applications of our core technologies. 4 Undivided R&D Organization The Technology Center serves as the nexus for all R&D functions enabling advanced materials created in one field to be rapidly applied to other fields. 5 Integrating Technologies by Industry-government-academia Collaborative Research Toray actively engages in technology fusion through external collaboration and open innovation activities with industries, governments, and academic institutions in Japan and overseas with the aim of continuing to create innovative advanced materials. 6 Strategic Partnerships with Industry Leaders Toray produces first-to-market advanced materials in growth markets through collabo- rations with leading companies and venture companies in Japan and overseas. 7 Advanced Analytical Capabilities Toray works closely with Toray Research Center Inc., which has extensive achieve- ments in commissioned analysis and research studies, to enhance the Company’s anal- ysis capabilities for its R&D and manufacturing technology. 36 Annual Report 2018 R&D Organization at Toray Group Toray has centralized all of its R&D functions into a single organization called the Technology Center. Bringing together specialists from many fields in this undivided R&D organization makes it easier to create new innovations by integrating technologies. Moreover, the sys- tem enables the company to exhibit combined strength by actively exploiting techniques and knowledge from many fields to solve prob- lems in a single business area. It also enables to be rapidly applied to various advanced materials and technologies to multiple businesses. On the other hand, under the direct control of the Technology Center are the Automotive & Aircraft Center, which develops advanced materials for automobiles and aircraft applications, and the Environment & Energy Development Center, which focuses on technology cooperation in the environment and energy fields. Through these organizations, the company is promoting open innovation with its cus- tomers, business partners, and external organizations. In addition, the Life Innovation business is led by the Life Innovation Business Strategic Planning Department, which promotes close cooperation with, in addition to bases in Kobe and Minnesota (US), domestic and overseas medical institutions, diagnostic centers, med- ical device firms, not to mention the Technology Center. Executive Committee President Executive Vice President Board of Directors Corporate Strategic Planning Division Head Office Staff Fibers & Textiles Division Manufacturing Division l T e c h n o o g y - r e a t e d J o b s i t e s l M a n u f a c t u r i n g - r e a t e d J o b s i t e s l Resins & Chemicals Division Films Division Torayca & Advanced Composites Division Electronic & Information Materials Division Pharmaceuticals & Medical Products Division Water Treatment & Environment Division Affiliated Companies Division Technology Center R e s e a r c h & D e v e l o p m e n t D i v i s i o n 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 B a s i c R e s e a r c h C e n t e r Pharmaceutical Research Laboratories New Frontiers Research Laboratories Advanced Materials Research Laboratories Research & Development Planning Dept T e c h n o l o g y C e n t e r ( D e v e l o p m e n t ) E n g i n e e r i n g D i v i s i o n Global R&D Bases R&D Bases China.............................3 locations Republic of Korea........3 locations Singapore.....................1 location USA...............................5 locations Europe. .................5 locations Malaysia ..............1 location Thailand ...............2 locations India......................1 location Technology Center Planning Dept. Development Center Environment & Energy Development Center Automotive & Aircraft Center Advanced Composite Center Automotive Center New Projects Development Division Engineering Development Center Advanced Textiles Development Center Overseas Information Bases USA........................3 locations 37 Toray Industries, Inc. R&D Toray’s Technical Fields — Development of Advanced Materials by Integrating Toray’s Core Technologies Toray Group’s core technologies are “organic synthetic chemistry,” “polymer chemistry,” “biotechnology” and “nanotechnology.” Based on these, we are working toward greater depth and fusion of fundamental technologies such as polymerization, yarn-making, fibers appli- cation 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 electronic & information materials, carbon fiber composite materials, pharmaceuticals, medical devices, and water treatment. Synthetic Fibers Textile Technology Textiles, Apparels Fiber Technology Fine Technology Industrial Materials, Amenity Materials Man-made Suede Carbonization Technology Carbon Fibers Molding Technology Film Technology Film Processing Technology Dispersion Control Technique Coating Technology Material Design TORAY’s Core Technologies Organic Synthetic Chemistry Polymer Chemistry Fine Patterning Microstructure Technology Biotechnology Surface Control Technology Gene Utilization Technology Medicinal Technology Fermentation Technology Nanotechnology 38 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 Annual Report 2018 Material Design TORAY’s Core Technologies Organic Synthetic Chemistry Polymer Chemistry Nanotechnology Textile Technology Textiles, Apparels Fiber Technology Fine Technology Carbonization Technology Carbon Fibers Film Technology Film Processing Technology Dispersion Control Technique Coating Technology Molding Technology Fine Patterning Synthetic Fibers Industrial Materials, Amenity Materials Man-made Suede 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 Biotechnology Surface Control Technology Microstructure Technology Gene Utilization Technology Medicinal Technology Fermentation Technology Fiscal 2017 R&D Expenses ¥66.2billion R&D Expenses (Billions of yen) Toray Consolidated subsidiaries 66.2 59.5 58.8 59.2 55.5 13 14 15 16 17 (Fiscal) Percentage Breakdown of Total R&D Expenses in Fiscal 2017 ● Fibers & Textiles business 8% ● Performance Chemicals business 32% ● Carbon Fiber Composite Materials business 11% ● Environment & Engineering business 7% ● Life Science business 6% ● CORPORATE R&D 36% Fiscal 2017 R&D Achievements Fiscal 2017 Topics Fibers & Textiles Using our unique oil-resistant processing technology, we have developed the LIVMOA™ 3500 series, a lim- ited-use chemical protective clothing, to resist external oil penetration. We have also developed WithRelief™, a high-functional, skin-friendly insect-resistant tex- tile, which is a quality that previous high-functional insect-resistant materials did not possess. In addi- tion, we have developed a high-permeability type ENTRANT™, a high-performance textile with water resistance and moisture permeability that is also about 50 times more breathable than previous products. Performance Chemicals We have developed a PET film with a smooth and durable surface that is resistant to scratches thanks to a hybrid coating formed through the combination of super hard nanoparticles and a functional polymer dispersing agent. We have also successfully devel- oped a biaxially oriented PET film with the world’s high- est level of thermal conductivity—about 2.5x the level shown in previous products. In addition, for non-de- structive X-ray testing and mammography applications, we have developed an X-ray scintillator panel that pro- duces clear and high-spatial resolution X-ray images. Carbon Fiber Composite Materials Toray’s newly developed fabrication technology for carbon fiber reinforced plastic enables both improved dimensional accuracy and the saving of energy. The company has also decided to introduce process devel- opment equipment to create a high-performance carbon fiber for the next generation. With this equip- ment, we will develop the world’s strongest yarn and innovative technologies to improve productivity, and aim to achieve balance with further high performance and low costs. Environment & Engineering In collaboration with RIKEN, the company has developed innovative technologies aimed at analyzing the phenom- enon in which contaminants under a variety of conditions will adhere to and clog reverse osmosis membranes. This analysis contributed to our development of new low-fouling membranes. As a method for treating and reusing sewage and industrial wastewater, we have also developed basic technologies for converting aeration energy of the membrane separation activated sludge process to highly efficient cleaning energy. The company was also awarded from the Japan Chemical Industry Association the 49th (fiscal 2017) JCIA Technology Award (Grand Prize) for the development of high perfor- mance reverse osmosis membranes. Life Science The company has developed orally disintegrating decay (OD) tablets that can be taken with or without water for anti-itching medication TRK-280. The company also obtained approval for the domestic manufacture and sale of REMITCH®* OD Tablets 2.5μg and started selling them. Moreover, phase I clinical testing of the company’s TRK-950, an antibody drug for cancers, was carried out in the US and France. Toray also developed Prelina II RichTM, a bifocal contact lens that improves focus correction. *REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. Developing CFRP Fabrication Technologies to Achieve Improved Dimensional Accuracy and the Saving of Energy Toray has developed innovative fabrication technologies for carbon fiber reinforced plas- tics (CFRP), which are usually molded by plac- ing prepreg (an intermediate material in sheet form) on a mold and cured using hot air heat- ing. However, hot air heating has the disad- vantage that it suffers from inefficient heat transfer and it requires time to heat up. There is also dimensional accuracy problem after hardening in large, complex-shaped parts with varying thicknesses. However, the newly developed fabrica- tion technology achieves an energy savings of about 50% by placing a predetermined number of sheet heaters on the mold’s sur- face, with contact heating taking place under vacuum pressure. The application of opti- mum temperature distribution to each part allows parts to be fabricated into a shape and dimension closer to the original design, and also requires less time. We will verify this new technology and expand its use to for aircraft, automotive, and general industri- al-use applications. Development of an X-ray Scintillator Panel Enabling Clear X-ray Images Toray has developed a pixelated X-ray scintil- lator panel for delivering X-ray images that are 2-4 times higher spatial-resolution than those produced by previous panels. In previous X-ray scintillator panels, images could be blurry as visible light created from the X-rays was spread in all directions and detected by a wide range of sensor pixels. To overcome this issue, we applied our unique high-definition barrier rib for- mation technology. Also, the new X-ray panel uses technologies filling a barrier rib with scin- tillator material uniformly and improving effi- ciency of light utilization, which partitions the scintillator into the size of the pixel of a sensor, allowing limits on the spread of visible light. This in turn allows the panel to produce even higher spatial-resolution images. This product can be used for X-ray mam- mography and non-destructive X-ray eval- uation, which could contribute to the early detection of breast cancer and improved product safety through the detection of small defects and foreign matter in electronic com- ponents, aircraft components, lithium-ion bat- teries, and the like. 39 Toray Industries, Inc. Intellectual Property Basic Policies on Intellectual Property Toray Group has formulated and executes the following four intellectual property strategies as its basic policies on intellectual property. 1 Intellectual property strategies, as a part of the strategy trinity, that conform to management principles Toray Group regards intellectual property as one of its vital management resources. We integrate our intellectual property strategies mutually and organically with our business strategies and R&D strat- egies, and as part of this “trinity,” we designate intellectual property strategies as one of the most important elements of our management strategies. 2 Promoting the procurement of rights In order to protect Toray Group’s products and technologies and to ensure profits in terms of intel- lectual property, we hold as many useful patent rights as possible and build patent portfolios. At the same time, we pay close attention to efficient patenting by raising the quality of each patent and not making needless applications. 3 Respecting the rights of others Toray has operated a system for comprehensively investigating the relations between its own prod- ucts and technologies and patents owned by other companies, and we thoroughly educate employ- ees to prevent infringement on patent rights of other parties. 4 Rightful enforcement of our own rights When Toray Group’s patent rights are infringed upon by another party, we take proper steps depend- ing on the circumstances by exercising our patent rights, such as demanding that infringement cease, receiving monetary profits from licensing, and using our patent rights for cross-licensing with the patent rights of other parties. Intellectual Property Strategies in Line with Our Management Strategies 1 Promoting global intellectual property strategies of Toray Group We will promote Toray’s patent applications and patenting in countries other than Japan, particularly in those growth countries and regions where we aim to achieve business expansion in the future. Together with this, we will support global business growth by working to strengthen patent applica- tions and patenting from overseas subsidiaries and affiliated companies to ensure the appropriate protection of inventions created in our bases in each country. We will also establish Group-wide intel- lectual property strategies that bind Toray Group’s research and technology development for each business field. In addition, we will establish and strengthen patent and trademark management sys- tems at each company in Toray Group. 2 Firmly maintaining our technological advantage through strategic patent applications and other such efforts and rolling them out at subsidiaries and affiliated companies in Japan and overseas At Toray Group, we are working to build patent portfolios with emphasis on the “Green Innovation Business Expansion (GR) Project” and “Life Innovation Business Expansion (LI) Project” while avoid- ing careless disclosure of technical information through the publication of patent applications. We expect these initiatives to support our businesses in the growth fields as a powerful barrier against entry in the future. We will also spread these efforts to our subsidiaries and affiliated companies in Japan and overseas. 3 Executing intellectual property strategies that are organically linked to our business In order to promote the execution of intellectual property strategies linked to our individual business activities, Toray Group will strengthen participation in the patent activities of business divisions, and together with this, will work on intellectual property education according to the needs of the individ- ual business divisions. 4 Strengthening utilization of our brand and trademarks Together with our aim to enhance the value of our technology through technology brands, we will deal strictly with imitation products and other infringements of Toray Group’s trademarks amid surg- ing growth in the number of online transactions. 5 Developing human resources to support global intellectual property activities Toray carries out multifaceted and multilevel education for everyone from management to new employees and front-line sales representatives, covering domestic and overseas patent systems and practice. Additionally, at the Intellectual Property Division, together with encouraging the acquisition of patent attorney qualification, we actively support staff in their efforts to strengthen their foreign language capabilities and dispatch staff to overseas subsidiaries and affiliated companies. We are also making concerted efforts to provide the same kind of intellectual property education at subsidiaries and affiliated companies in and outside of Japan. Moreover, we will assign intellec- tual property specialists to companies actively engaging in R&D and work to improve education for researchers and engineers. Intellectual Property Strategies Management Strategies R&D Strategies Business Strategies Patents Filed 5,639 5,383 5,022 1,580 1,643 1,537 3,846 3,996 3,442 15 16 17 (FY) Patents Held to Date 2,389 2,444 578 613 1,733 518 1,866 1,776 1,215 15 16 17 (FY) Domestic Overseas 40 Annual Report 2018Improve capacity to address social issues Toray Group will work to instill a greater awareness of CSR among employees, aiming to do its part to address social issues—such as global environmental problems as well as health maintenance and longevity. The Group will also work to improve its ability not only to seize upon opportunities, but also to deal with risks. Strengthen CSR activities throughout the entire supply chain By facilitating CSR initiatives group-wide, Toray Group will work to instill CSR awareness and promote CSR activities at suppliers. Step up efforts on group-wide CSR activities Now that Toray Group has established comprehensive pol- icies and material issues for CSR as key performance indica- tors, the Group will implement CSR activities with an eye on actual conditions at individual Group companies. Facilitate activities to meet the expectations of stakeholders In order to gain a high degree of trust from all stakeholders, Toray Group will actively disclose non-fi- nancial information and engage in dialogue with stakeholders, and make the most of this process in its CSR activities. SUSTAINABLE MANAGEMENT SYSTEM We at Toray Group recognize that business expansion and CSR are the two fundamentals of growth. In addition to working to solve social issues through the performance of our business activities, we position the promotion of CSR as a priority management issue and aim for sustainable growth based on a mutual understanding with shareholders, customers, employees, business partners, local communities and all of our stakeholders. Toray Industries, Inc. 41 41 Toray Industries, Inc.Sustainable Management System Toray Group Sustainability Vision Toray Group provides innovative technologies and advanced materials that contribute to achieving SDGs by addressing global issues. Formulation of Toray Group Sustainability Vision Since Toray’s founding in 1926, based upon our belief that materials can change our lives, we have delivered innovative technologies and advanced materials that provide solutions to various challenges the world faces regarding the balance between development and sustainability. Through this we have also been able to serve society, which is a foundation of our existence. This holds true for today as well. Many of the projects that Toray Group promotes under its Medium-term Management Program work to contribute solutions to global environmental issues and human longevity, and can be considered, by their very nature, to address sustainable development goals (SDGs). Given this, and with an ever-greater awareness of sustainability issues, we have formulated Toray Group Sustainability Vision that incorporates The World as Envisioned by Toray Group in 2050, and to achieve that, Toray Group Initiatives, as well as Quantitative Targets for Fiscal 2030. As we look to the year 2050, and in consideration of the value that it is capable of providing to the world, Toray Group is aiming for 1) a net zero emissions world, where greenhouse gas emissions are completely offset by absorption; 2) a world where resources are sus- tainably managed; 3) a world with a restored natural environment, with clean water and air for everyone; and 4) a world where everyone enjoys good health and hygiene. Formulation of KPIs and Contributing to Meeting SDGs and Other Global Objectives To contribute to realizing the four above stated specific initiatives, Toray Group has formulated key performance indicators (KPIs) as it approaches fiscal 2030. By incorporating these into issues to be addressed by management, and given the organic growth generated, we will do our utmost to eliminate any negative impact on global sustainability, and in tandem with that, expand a supply of products that contribute solutions to problems, while setting our sights on accomplishing SDGs and other global objectives. Toray Group’s vision for the world Toray Group’s contributions 1 Accelerating measures to counter climate change 2 Realizing sustainable, recycling-based use of resources and production 3 4 Providing clean water and air Contributing to better medical care and hygiene for people worldwide Toray Group’s innovative technologies and advanced materials A net zero emissions world, where greenhouse gas emissions are completely offset by absorption A world where resources are sustainably managed A world with a restored natural environment, with clean water and air for everyone A world where everyone enjoys good health and hygiene 42 Annual Report 2018Quantitative Targets for Fiscal 2030 (The baseline year for quantitative targets is fiscal 2013) • Supply four times more Green Innovation products (products that help to solve issues related to the global environment, resources, and energy) (This will avoid eight times more CO2 emissions in the value chain*1) • Supply six times more Life Innovation products (products that enhance public health, improve the quality of medical care, and contribute to health maintenance and longevity) • Triple the total annual volume of water treated using Toray’s water treatment membranes*2 • Reduce greenhouse gas emissions in production activities by 30% per unit of sales across the entire Toray Group by introducing renewable energy or taking other initiatives*3 • Reduce water usage in production activities by 30% per unit of sales across the entire Toray Group *1 For CO2 emissions avoided in the value chain, Toray calculates the CO2 emissions reduced throughout the value chain of products in accordance with the chemical sector guidelines of the Japan Chemical Industry Association, the International Council of Chemical Associations (ICCA), and the World Business Council For Sustainable Development (WBCSD). *2 Toray calculates water treated with Toray’s water treatment membranes by multiplying the amount of fresh water that its ultrafiltration water treatment membranes can produce per day, including reverse osmosis (RO), ultrafiltration (UF) and membrane separation bioreactors (MBR), by the number of membrane elements sold. *3 In Japan, Toray works to surpass the reduction target set for the industrial sector by the Japanese government (absolute emissions reduced by 7%), which is based on the Paris Agreement. With the use of renewable energies and other zero emission power sources rising worldwide, Toray Group aims to employ zero-emission power sources at a rate equivalent to or better than the targets in each country by 2030. 43 Toray Industries, Inc.Sustainable Management System Sustainability in Toray Group In order to achieve sustainable growth, corporations must do business in a way that earns the broad trust of stakeholders. To live up to its philosophy, Toray Group implements its management strategies hand-in-hand with its efforts to fulfill corporate social responsibilities. Unification of Management Strategies and CSR Link Management Strategies and CSR Toray Group is committed to making a proactive contribution to social develop- ment and environmental stewardship, providing high value to all stakeholders, and aims to continually increase its revenues and profits. Therefore, through its Medium-term Management Program Project AP-G 2019, it stresses the importance of practicing corporate social responsibility through a commitment to safety, accident prevention, environmental preservation, corporate eth- Management Philosophy Realize Realize ics, and legal compliance. Meanwhile, the Group has set out the Sixth CSR Execute Execute Road Map, which covers the same time frame as Project AP-G 2019. The road map mandates the Group to expand its efforts to realize the creation of new value and implement more robust environmental, social and governance (ESG) practices. In addition, in fiscal 2015 Toray Group adopted its CSR materiality (material issues for CSR) which incorporated input from thought leaders, and reevaluated this process with the fiscal 2017 start of the Sixth CSR Road Map, setting forth KPIs and managing its progress every fiscal year. Management Strategies Social Responsibility CSR Committee Human Rights Promotion Committee Human rights promotion committees Link Ethics and Compliance Committee in Japan Global Human Rights Promotion Committee Affiliate Companies’ Compliance Meeting Overseas Affiliate Companies’ Compliance Meetings FY2011-FY2013 FY2014-FY2016 FY2017-FY2019 Long-term corporate vision AP-Growth TORAY 2020 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 Fourth CSR Road Map Integrated guidelines, defined and announces KPIs Fifth CSR Road Map Expanded scope of KPIs to entire Toray Group Sixth CSR Road Map Setting higher targets Pursuing Our Corporate Philosophy and SDG Initiatives SDGs and Toray’s Initiatives Since its foundation in 1926, Toray has upheld a corporate philosophy of “contributing to society through creating new value,” and devel- oped innovative materials from a long-term perspective based on the concept of being a “entity for society” and of “people-centric man- agement.” Through providing the materials, Toray has aimed to help solve social issues that include global environmental problems. In addition, operating throughout the globe, Toray has expanded overseas businesses with the idea of contributing to each country’s industrial development, export growth, and increasing technological levels from a long-term perspective. In this way, Toray Group’s initiatives taken to date are in keeping with finding solutions to global social problems that have been raised as sustainable development goals (SDGs). Based on its corporate philosophy, Toray Group aims in the years ahead to contribute further to solving social issues such as global environmental problems and realizing societies where people live long and healthy lives. 44 Committee and Implementation Organization Group-wide committees Company-wide committees Division- and plant-level committees B o a r d o f D i r e c t o r s P r e s i d e n t Risk Management Committee Safety, Health, and Environment Committee Product Safety and Quality Assurance Committee Security Trade Administration Committee Committees for non-CSR affairs Divisional meetings, etc. Local risk management committees Traffic safety subcommittees Safety and health committees Environment and accident prevention committees Product safety committees • Green Innovation Businesses (trial introduction of tube-shaped planters Roll PlanterTM*1)　 • Life Innovation Businesses • Prevention of air pollution at plants (reduction of atmospheric emissions of chemical substances) • Support for science education at schools • Workshops at the Science Museum, Tokyo, Japan • Support through the Science Education Award sponsored by Toray Science Foundation and science foundations in three ASEAN countries and the Republic of Korea • Promotion of women’s active participation (Toray Industries, Inc.) • Support for events to train female high school students in science and technology courses • Green Innovation Businesses (securing safe drinking water with water treatment membranes, and other activities) • Water management in plants • Green Innovation Businesses (contribution to dissemination of renewable energy) • Promotion of work-life balance • Promotion of employment of the disabled and the elderly • Respect for human rights in CSR Procurement Guidelines • Establishment of Toray Group Policy for Human Rights • Research grants to young researchers through Toray Science Foundation and science foundations in three ASEAN countries and the Republic of Korea • Green Innovation Businesses (reinforcement of wooden roof with para-aramid fiber, Kevlar®*2) • Green Innovation Businesses (utilization of biological resources and promotion of product recycling) • Reduction of waste from production sites • Green Innovation Businesses (curbing CO2 emissions throughout the product lifecycle) • Reduction of CO2 emissions at the manufacturing stage • Prevention of water pollution at plants • Green Innovation Businesses (waterless printing technology) • Initiatives under the Toray Group Biodiversity Basic Policy • Survey of bio-based raw material procurement • Initiatives pursuant to Toray Group Basic Policy for Increasing Green Areas (greening activities at plants) • Various environmental preservation activities at Headquarters, plants, etc. Annual Report 2018 Management Philosophy Realize Realize Execute Execute Management Strategies Social Responsibility Link Management Strategies and CSR Organizational Structure for Corporate Social Responsibility Toray Group’s CSR Committee serves as a Group-wide deliberative organization for important issues concerning corporate social respon- sibility. The committee promotes CSR activities in cooperation with five other Group-wide committees, assigns tasks along with the themes in the CSR Guidelines to the five committees, and build a system for the Group as a whole promoting CSR. Committee and Implementation Organization Group-wide committees Company-wide committees Division- and plant-level committees CSR Committee FY2011-FY2013 FY2014-FY2016 FY2017-FY2019 Long-term corporate vision AP-Growth TORAY 2020 AP-G 2013 AP-G 2016 AP-G 2019 Reform and Proactive Management Innovation and Proactive Management Innovation and Proactive Management —A New Growth Track —Implementation of Growth Strategy —To Achieve the Vision 2020 Goals Fourth CSR Road Map Integrated guidelines, defined and announces KPIs Fifth CSR Road Map Expanded scope of KPIs to entire Toray Group Sixth CSR Road Map Setting higher targets Link Ethics and Compliance Committee B o a r d o f D i r e c t o r s P r e s d e n t i Risk Management Committee Safety, Health, and Environment Committee Product Safety and Quality Assurance Committee Security Trade Administration Committee Committees for non-CSR affairs Human Rights Promotion Committee in Japan Global Human Rights Promotion Committee Affiliate Companies’ Compliance Meeting Overseas Affiliate Companies’ Compliance Meetings Human rights promotion committees Divisional meetings, etc. Local risk management committees Traffic safety subcommittees Safety and health committees Environment and accident prevention committees Product safety committees SDGs and Toray’s Initiatives • Green Innovation Businesses (trial introduction of tube-shaped planters Roll PlanterTM*1)　 • Life Innovation Businesses • Prevention of air pollution at plants (reduction of atmospheric emissions of chemical substances) • Support for science education at schools • Workshops at the Science Museum, Tokyo, Japan • Support through the Science Education Award sponsored by Toray Science Foundation and science foundations in three ASEAN countries and the Republic of Korea • Promotion of women’s active participation (Toray Industries, Inc.) • Support for events to train female high school students in science and technology courses • Green Innovation Businesses (securing safe drinking water with water treatment membranes, and other activities) • Water management in plants • Green Innovation Businesses (contribution to dissemination of renewable energy) • Promotion of work-life balance • Promotion of employment of the disabled and the elderly • Respect for human rights in CSR Procurement Guidelines • Establishment of Toray Group Policy for Human Rights • Research grants to young researchers through Toray Science Foundation and science foundations in three ASEAN countries and the Republic of Korea • Green Innovation Businesses (reinforcement of wooden roof with para-aramid fiber, Kevlar®*2) • Green Innovation Businesses (utilization of biological resources and promotion of product recycling) • Reduction of waste from production sites • Green Innovation Businesses (curbing CO2 emissions throughout the product lifecycle) • Reduction of CO2 emissions at the manufacturing stage • Prevention of water pollution at plants • Green Innovation Businesses (waterless printing technology) • Initiatives under the Toray Group Biodiversity Basic Policy • Survey of bio-based raw material procurement • Initiatives pursuant to Toray Group Basic Policy for Increasing Green Areas (greening activities at plants) • Various environmental preservation activities at Headquarters, plants, etc. *1 Roll PlanterTM is a registered trademark of Mitsukawa Co., Ltd. *2 Kevlar® is a registered trademark of E. l. du Pont de Nemours and Company 45 Toray Industries, Inc. Sustainable Management System Environmental Management Initiatives Promoting Life Cycle Management In addressing global environmental issues, it is vital to consider the entire life cycle of prod- ucts and services in order to reduce environmental impact while also delivering improved economic and social value. To this end, Toray Group practices life cycle management. Life cycle management is the basis for Toray’s Green Innovation products, and the Group has adopted life cycle assessment*1 and Toray Eco-Efficiency Analysis (T-E2A)*2 tool and is work- ing to ensure these are employed thoroughly in all of its businesses. *1 Life cycle assessment (LCA) is a method for quantitatively assessing resources that have gone into a prod- uct, its environmental burden, and the environmental impact the product has on the Earth and the ecosystem throughout the life cycle of the product. *2 T-E2A is an environmental analysis tool developed by Toray. It produces a map of multiple products plotted along the axes of environmental impact and economic performance, enabling users to select the most environ- mentally friendly and economical products. Progress on the Fifth Medium-Term Environmental Plan Toray Group is now implementing its Fifth Medium-Term Environmental Plan, which runs from fiscal 2016 to fiscal 2020. The plan aims to further reduce the Group’s environmental impact. Amid further projected increases in production volumes for high-performance films and carbon fiber, the Group will continue to pursue environmental initiatives in order to achieve the challenging targets of the new plan. Initiatives to Curb Global Warming Toray has set its goal for the reduction of greenhouse gas emissions as “maintaining emis- sions at least 15% below the fiscal 1990 level, by fiscal 2020” and implements planned reduction measures. CO2 emissions in fiscal 2017 increased by 18,000 tons from the previ- ous fiscal year’s level due to higher production in line with business expansion. Greenhouse gas emissions rose 1.1%, to 2.03 million tons from the previous fiscal year, although this was a reduction of 20.1% from the fiscal 1990 level, continuing to meet its reduction target. Toray and its Group companies in Japan work to curb global warming with the goal of reducing greenhouse gas emissions by 15% on a per-unit-of-sales basis by fiscal 2020, com- pared to the fiscal 1990 level. Toray and its Group companies’ emissions of greenhouse gas were down 1.1% in fiscal 2017 compared to the previous fiscal year. Greenhouse gas emis- sions per unit of sales improved 3.1 points compared to the previous fiscal year and were 23.5% below the base year. Fiscal 2017 greenhouse gas emissions for Toray Group worldwide were 5.48 million tons-CO2 equivalent, a decline of 2.4% compared to the previous fiscal year. All Toray Group manufacturing companies and plants will work to achieve the Group’s goal of reducing the per-unit energy consumption rate by 2% each fiscal year and strive to reduce greenhouse gas emissions throughout the Group. Energy Conservation Measures Toray has set a goal of reducing its per-unit energy consumption by 2% annually and vig- orously works on energy conservation measures. In fiscal 2017, Toray increased energy consumption by 4% compared to the previous fiscal year mainly on account of higher pro- duction. However, it improved its per-unit energy consumption by 1.3% year on year as a result of energy conservation measures taken at each plant, energy conservation diagnos- tics performed by the Company’s own energy efficiency specialists, and other initiatives. This was an improvement from the base year of 18.4%. Utilizing Natural Energy and Converting to Natural Gas for Fuel Toray Group is systematically switching to natural gas for fuel and deploying cogeneration systems with the goal of conserving energy. In addition, in fiscal 2016, as an initiative for effective use of renewable energy, Toray’s Nagoya Plant installed a small hydroelectric sys- tem that generates power using the incoming industrial water pressure, and in fiscal 2017, Toray’s Seta Plant installed a solar power generation system. Both systems have com- menced operations. Greenhouse Gas Emissions and Greenhouse Gas Emissions Per Unit of Sales (Toray Group in Japan) 100.0 Base value 277 84.0 84.0 79.7 Target 85.0 259 258 76.6 246 243 90 14 15 16 17 Greenhouse Gas Emissions (10,000 tons-CO2 eq) 20 (FY) Greenhouse Gas Emissions Per Unit of Sales (index) 46 Annual Report 2018 Voluntary Initiatives to Reduce Atmospheric Emissions of Chemical Substances As a corporate group that does business in the chemicals sector, Toray Group places the highest priority on reducing emissions of chemicals into the atmosphere in order to reduce its environmental impact. In fiscal 2017, Toray Group’s atmospheric emissions of PRTR Law-specified substances were 873 tons, which represented a 67% reduction compared to the base year of fiscal 2000. VOC atmospheric emissions amounted to 1,108 tons, a 72% reduction compared to fiscal 2000. The Group is executing reduction measures with the aim of achieving the objec- tives of the Fifth Medium-Term Environmental Plan. Initiatives to Prevent Air and Water Pollution Toray Group implements ongoing initiatives at production sites to reduce sulfur oxide (SOx) emissions by installing desulfurization equipment and switching to cleaner fuels, and reduce chemical oxygen demand (COD) by expanding wastewater treatment facilities. Initiatives for Managing Water Resources Toray Group has always been working through its water treatment business to provide solu- tions to water resource problems around the world. Toray Group practices the 3Rs (reduce, reuse, recycle) in consuming water resources, and monitors the quality of water that is released into public bodies of water. Additionally, at overseas-based Group companies located in drought-stricken regions in particular, we conduct recycling of cooling and effluent water and also work to reduce the volume of water used for industrial purposes. In fiscal 2017, Toray Group used 228 million tons of water, an increase of 1% over the Atmospheric Emissions of PRTR Law-Specified Substances Base value 2,624 (tons) Target 787 873 752 695 663 00 14 15 16 17 20 (FY) VOC Atmospheric Emissions Base value 3,973 (tons) Target 1,192 previous fiscal year. Compared to the amount used per unit of sales in fiscal 2001, set to an index value of 100, usage in fiscal 2017 stood at 54.0 points, an improvement of 5.5 points 955 1,006 994 1,108 from the previous fiscal year. 00 14 15 16 17 20 (FY) Waste Recycling Rate 85.8% Initiatives to Reduce Waste Toray Group is carrying out zero emission initiatives as it works toward the realization of a sustainable, recycling-based world. Under the Fifth Medium-Term Environmental Plan, the Group worked to achieve its fiscal 2020 targets for rates of simply disposed waste*1, land- fill waste*2 and recycled waste*3, which have been set as indicators for measuring progress toward attaining zero emissions. *1 Simply disposed waste rate = (incineration +landfill) / total waste *2 Landfill waste rate = landfill waste / total waste *3 Recycling rate = (recycled resources + resources with monetary worth) / (total waste + resources with mon- etary worth) Biodiversity Initiatives Toray Group has positioned biodiversity, along with reducing greenhouse gas emissions, as an important theme regarding global environmental problems, and pursues biodiversity ini- tiatives in accordance with a three-year action road map and sets its priorities based on the Group’s Biodiversity Initiatives. Plants at Toray and Group companies in Japan operate green- ery policies and plans through around 2020, guided by Toray Group Basic Policy for Increasing Green Areas*1. The plans encompass initiatives to conserve green areas as much as pos- sible, including healthy natural forests*2, that have been protected since the plants began operating. These sustainable greenery conservation initiatives also help to conserve the envi- ronment for communities. *1 Natural groves or forestation by species based on potential native vegetation *2 Toray Group Basic Policy on Increasing Green Areas was established in 2012, evolving out of greenery policies that were first established in 1973. 47 Toray Industries, Inc. Sustainable Management System Human Resource Development and Training Committed to Human Rights We at Toray Group believe respect for human rights is a mandatory management principle for ensuring the continuity of corporate activities and building positive relationships with all of the Group’s stakeholders. Based on this principle, in December 2017 we formulated Toray Group Policy for Human Rights. The Group also works to promote and raise awareness of human rights, for instance by declaring its commitment to the respect of human rights in its Corporate Ethics and Legal Compliance Code of Conduct. In the Code, discrimination of any kind based on race, creed, skin color, gender, religion, nationality, language, physical characteristics, socioeco- nomic status, place of birth or any other personal characteristics is strictly forbidden in every process from recruiting and hiring to work placement, treatment, training, and retirement. Since fiscal 2014, the Group has also been tackling the issue of discrimination based on gender identification and sexual orientation. In January 2017, the Group established a dedi- cated hotline for LGBT (sexual minority) issues, Nijiiro Consultation Service. Toray Group Policy for Human Rights We at Toray Group believe that respect for human rights is a mandatory prin- ciple for corporate management. Therefore, we respect international standards such as the United Nations Universal Declaration of Human Rights and the International Labor Organization’s standards in compliance with the laws and regulations of countries and regions where we operate, and will endeavor to ful- fill our duty of respect for human rights as a good corporate citizen. 1. We will respect human rights, character and individuality of employees and eliminate harassment and discrimination in workplaces. Furthermore, we will prohibit child labor, forced labor and unfair low-wage labor. 2. We will strive to promote respect for human rights throughout the entire sup- ply chain related to our business activities. In addition, we will not be complicit in infringing on the human rights. 3. We will endeavor to understand adverse human rights impacts associated with our business activities and to avoid or reduce such influences. 4. If it becomes evident that we have caused or contributed to adverse human rights impacts, we will promptly take appropriate actions. 5. We will promote educational activities about issues of human rights for every employee and foster a proper understanding of issues among them. Basic Policy on Human Resources Hiring The success or failure of a company is decided by its people—employees shape its des- tiny. Guided by this concept, Toray Group, both in and outside of Japan, regards human resources as the most important management resources and considers securing and devel- oping outstanding human resources capable of performing on a global stage as a fundamen- tal management priority. Based on the following four goals, Toray Group is promoting human resource development. • Development of fair-minded individuals who act with high ethical standards and a sense of responsibility • Training of professionals with advanced expertise, technical skills and originality in problem solving • Development of leaders who act with foresight and a sense of balance • Development of individuals, professionals, and leaders who can play an active role in global business To achieve these goals, Toray Group is taking deliberate measures to conduct a variety of training that will strengthen and raise an array of capabilities for employees at every level and field. Training Expenditures per Employee 99,069yen 48 Annual Report 2018Women in Management Positions 4.6% Percent of Companies Achieving Legally Mandated Employment Rate of Persons with Disabilities 60.0% Percentage of Available Annual Paid Leave Used by Employees 88.4% Diversity Promotion Initiatives Fostering an Organizational Culture Conducive to the Career Advancement of Women Toray has long advanced the creation of workplace environments in which women will feel comfortable in performing their duties. As of April 2018, women held 9.0% of unit manager or higher positions, and 4.6% of section manager or higher positions. In fiscal 2016, based on Japan’s Act on Promotion of Women’s Participation and Advancement in the Workplace, enacted in that same year, Toray developed an action plan to increase the percentage of female employees promoted to managerial positions by focusing on making and steadily implementing individualized career plans and raising awareness of career development. Under this action plan, Toray has set as its immediate target to ensure an average promotion rate for women that is at least 80% that of men*1 for the five-year period from fiscal 2016 to fiscal 2020. This figure is the Japanese Ministry of Health, Labour and Welfare’s yardstick for determining whether or not excessive discrepancy exists based on gender. *1 Promotion rate of women to managerial positions compared to that of men = Percentage of female employees promoted to managerial positions / Percentage of male employees promoted to managerial positions Percentage promoted to managerial positions = Individuals promoted to managerial positions / No. of employ- ees who were initially hired into the G Course who are eligible for promotion to managerial position that year Employment of Persons with Disabilities Toray Group hires and employs persons with disabilities, from those with physical challenges to persons with intellectual and mental challenges. The Group is making workplace improve- ments to remove physical barriers for persons with handicaps as well as instituting safety measures. Additionally, the Group provides comprehensive training upon work placement and gathers feedback from persons with disabilities to make workplace improvements. Further, Toray meets Japan’s legal minimum of 2.2% persons with disabilities, as do 60.0% of Toray Group companies in Japan. Group companies actively seek to hire persons with disabilities through public organizations and job placement agencies. However, some individual Group companies do not meet the mandated legal requirement, although the Group companies collectively meet the minimum. Toray will continue to focus on this issue moving forward. Helping Employees Maintain Work-Life Balance Toray has worked to further improve systems that help employees achieve a harmonious balance between work and family life by offering a wider variety of lifestyle options for both men and women. Toray has put in place systems that allow employees to work from home or have lower-hour work schedules for child care or care giving, and a coreless flex system for all Tokyo and Osaka head office employees. As part of its commitment to workplace innovation to balance work and family life, Toray strives to create a comfortable environment throughout its work sites. Since fiscal 2008, (1) regular discussions are held in each workplace to raise awareness of different working styles; (2) working late at night or on holidays is in principle prohibited; (3) all lights are turned off at a certain time at night; and (4) Company-wide “no overtime days” take place one day each month. Toray has also been working on ongoing initiatives to cut overtime hours and to encourage employees to take annual paid leave. (Employees used 88.4% of available annual paid leave in fiscal 2017). Employee Health Toray views employee health management as a management priority. Strategic initiatives are now underway, including some undertaken in collaboration with the employee health insur- ance association. Toray is also addressing mental health. Since fiscal 2011 the Company has been independently implementing employee stress check-ups through an external provider, and has added content in accordance with revisions to Japan’s Industrial Safety and Health Act. Group companies in Japan also implement similar employee stress check-ups. In rec- ognition of these efforts, in February 2018 Toray was certified as a Health and Productivity Management Organization (White 500). 49 Toray Industries, Inc. Sustainable Management System Stakeholder Engagement Toray Group has established Basic Policies to Promote Dialogue with Stakeholders. We are proactively communicating with various stakeholders in all aspects of our corporate activities. Engaging with Stockholders and Investors Engaging with Customers The Group actively communicates with institutional Toray believes that the customer comes first. We investors and securities company analysts by provid- closely communicate with our customers, mainly ing information materials when requested and holding through our marketing and sales departments, and peri- same-day results briefings when quarterly earnings are odically conduct customer satisfaction surveys. The announced. The Group also provides a wide variety of results of these surveys are shared internally at Board information about management policy and strategy as meetings and through inhouse newsletters as we strive well as financial and earnings information through its to provide even higher quality customer service. annual report, IR presentation materials, and information pages on its website for stockholders and investors. In fiscal 2017, Toray held four results briefings and held 676 meetings with investors and analysts. Engaging with Business Partners Engaging with Employees While providing materials and products as a manufac- The Group communicates with employees through turer of advanced materials, Toray Group must engage in-house newsletters, intranet, company-wide bulle- in upstream management of its supply chains to bet- tin boards and other media. To share information and ter fulfill the needs of its customers, including the areas deepen understanding of management and business of production facilities and procured raw materials and topics, messages from the President, Japanese, English, resources. Accordingly, the Group has established its and Chinese versions of in-house newsletters, and expla- Basic Purchasing Policies and Basic Distribution Policies nations of management and business topics and projects to emphasize this approach and ensure fair business are made available via all types of media. In addition, in activities. Throughout the Group we are promoting 2017, we established TORAY NAVI Lite, an intranet site proper and fair transactions, adherence to laws, environ- geared toward Group companies in and outside of Japan, mental preservation, respect for human rights, improve- representing the construction of global infrastructure for ments in quality and other policies in initiatives with the sharing of information. regard to corporate responsibility in procurement, pur- chasing, and distribution. Engaging with the Mass Media Engaging with Local Communities Toray recognizes that public relations and corporate Toray Group strives to engage in more active dialogue communication activities have a role in fulfilling respon- with nearby residents in a variety of settings, including sibilities for information disclosure as well as influ- participating in events sponsored by local governments encing public opinion. Accordingly, Toray’s Corporate and inviting local residents onto plant grounds for sum- Communications Department reports directly to the mer festivals. Following Toray Group Social Initiative President, and actively engages with a wide range of Policies, we aim for our social contribution activities to media organizations, acting as the public’s point of con- contribute to sustainable development while meeting the tact with the Company. Based on Toray’s Information expectations of local communities. A specific example Disclosure Principles, the department provides fair and of this is the establishment of Toray Science Foundation impartial information, even if it may cast the Company in in Japan, and similar foundations in Malaysia, Thailand, a bad light, in a timely and appropriate manner. Indonesia and the Republic of Korea, which contribute to In fiscal 2017, the Company issued 187 press releases raising the level of science and technology in these coun- and responded to 318 media requests for information. tries. We also actively promote sports in Asia by co-spon- soring the Shanghai International Marathon. 50 Annual Report 2018 External Evaluation Toray was included in the following SRI indices as of March 31, 2018. Dow Jones Sustainability Index Asia Pacific MSCI ESG Indexes Toray is included in the Asia Pacific Index of the Dow Jones Toray is included in the MSCI ESG Indexes. MSCI provides insti- Sustainability Indices (DJSI), an SRI index administered by U.S.- tutional investors (from pension funds to hedge funds) across based Dow Jones and Switzerland-based RobecoSAM. the globe with various tools to support investment decisions. Ethibel Pioneer & Excellence Registers Toray is included in the Ethibel Pioneer and Ethibel Excellence investment registers of Forum Ethibel, a Belgian non-profit organi- zation that promotes socially responsible investment. Morningstar Socially Responsible Investment Index (MS-SRI) Toray is included in the Morningstar Socially Responsible Investment (MS-SRI) Index. Morningstar Japan K.K. selects 150 listed companies in Japan that have been assessed for out- standing social responsibility, indexing the prices of their shares. MS-SRI is the first SRI index in Japan. Sompo Japan Nipponkoa Asset Management (SNAM) Sustainability Index Toray is included in the SNAM Sustainability Index managed by Sompo Japan Nipponkoa Asset Management (SNAM). The SNAM Sustainability Index is an SRI index fund for pension funds and institutional investors that broadly invest in corporations that rate highly for environmental, social, and governance (ESG). 51 Toray Industries, Inc.Sustainable Management System Corporate Governance Basic Policy From the outset, one of Toray Group’s managerial principles has commitment “To provide our shareholders with dependable and been that the purpose of a company is to contribute to society. trustworthy management.” In addition, the Corporate Guiding The Group has developed a Management Philosophy that incor- Principles stipulate the Group’s commitment to “Obtaining the porates this principle. trust of society and meeting the expectations by acting fairly The Group systematizes the Management Philosophy as a while maintaining high ethical standards and a strong sense of Corporate Philosophy, Corporate Missions, and Corporate Guiding responsibility and maintaining transparency in management.” Principles. Among these, the Corporate Missions call for desir- When establishing the corporate governance structure, the able relationships with stakeholders and enunciate the Group’s Group seeks to realize these philosophies as its basic policy. Systems for Executing and Supervising Management Toray is a company with Board of Corporate Auditors, and the entirely independent of the Board of Directors as a system to members of the Board and corporate auditors are elected at the secure transparency and fairness of oversight and decision-making. general meeting of stockholders. Toray established the Governance Committee as an advisory Members of the Board and corporate auditors, as officers organ to the Board of Directors in order to report to the Board directly elected at the general meeting of stockholders, clearly of Directors on important issues regarding the Company’s cor- recognize fiduciary responsibility to stockholders who have porate governance over the mid- to long-term. The Governance entrusted the management and appropriately fulfill their respec- Committee consists of the Chairman of the Board, President, and tive roles while discharging accountability about management all of the outside directors, and an outside director serves as a status to stockholders and other stakeholders. chairperson. Deliberation at the Governance Committee encom- Toray’s Board of Directors consists of 19 members. Since passes matters regarding the Company’s overall corporate gover- Toray Group supplies a wide range of industries with basic mate- nance matters, including the following. rials and globally plays an active part in a broad scope of business fields, it is necessary to evaluate various risks multilaterally based • Structure of the Board of Directors and the Board of on expertise relevant to the worksites, not only for management Corporate Auditors judgment and decision-making but also for oversight. To that end, • Evaluation of the management and operation of the Board the Board of Directors formulates a structure in which members of Directors of the Board familiar with Toray Group businesses oversee man- • Policy on nominating candidates for members of the Board agement and make decisions from various viewpoints. and corporate auditors Furthermore, the Board of Corporate Auditors oversees the exe- • Remuneration system for members of the Board and cor- cution of operations by the members of the Board based on profes- porate auditors sional knowledge in fields such as finance, accounting and law in • Basic policy on electing member of the senior manage- addition to an understanding about businesses, from a standpoint ment, including the President Corporate Governance System Election Election Election General Stockholders Meeting Accounting Auditor Audit Board of Corporate Auditors (Corporate Auditors) Audit Audit Oversight & Decision-making Functions Board of Directors Governance Committee Report Auditing Department President Business Execution Functions Conference Organs Executive Committee Internal Audit Business Execution Divisions Company-wide Committees Ethics and Compliance Committee CSR Committee Divisions, offices and plants in Japan Japanese subsidiaries and affiliates Overseas subsidiaries and affiliates Departmental Committees 52 Annual Report 2018 Election of Outside Directors At Toray, we ensure objectivity and transparency of corporate standards for independence and meet the independence require- governance by establishing and disclosing standards for indepen- ments set by the Tokyo Stock Exchange. dence of outside directors and outside corporate auditors. Toray’s We, therefore, have submitted notification to the Tokyo Stock outside directors and outside corporate auditors meet Toray’s Exchange of their status as independent officers. The following table outlines the basis for election of our outside directors/corporate auditors and details of their independence. Kunio Ito (Director) Ryoji Noyori (Director) Toshio Nagai (Corporate auditor) Kazuya Jono (Corporate auditor) • Is highly expert in accounting and business administration as a university professor • Has extensive experience as a corporate outside director • No matters affect his independence from Toray • 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 • No matters affect his independence from Toray • Has an excellent track record of high standing in the legal profession and a solid character and judgment, so we believe he can audit appropriately from an objective standpoint • No matters affect his independence from Toray • Has held key positions in the corporate world and has solid character and judgment, so we believe he can audit appropriately from an objective standpoint • Formerly employed by Sumitomo Mitsui Banking Corporation and Citibank Japan Ltd. (current Citibank, N.A., Tokyo Branch); Toray has regular banking transactions with both banks. With respect to Sumitomo Mitsui Banking Corporation, over three years have passed since he retired from the board, and we have no borrowing from Citibank, N.A., therefore independence is not affected. Toray’s balance of borrowing from Sumitomo Mitsui Banking Corporation (including syndicated loans) as of 31 March 2018 is 0.7% of total assets, which is not high compared with other banks. Basic Policy on Internal Control System To realize the Management Philosophy, the Company shall estab- • Toray shall establish Security Trade Control Program, one of the lish a structure to execute its business legally and effectively by most important legal compliance issues, and establish an orga- improving its internal control system according to the following nization dedicated to security export control. basic policy as a structure to enable it to appropriately establish organization, formulate regulations, communicate information, 2. System to ensure the efficient execution of duties and monitor the execution of operations. by members of the Board 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 • Toray shall establish the Authority of Top Management to stipulate matters with respect to which decision-making authority is reserved by the Board of Directors and matters with respect to which deci- sion-making is delegated to the President, General Managers, etc., from among matters necessary for decision-making. • Toray shall establish the Ethics and Compliance Committee, as • Toray shall establish the Executive Committee as deliberative one of the company-wide committees to promote observance organs for important matters decided by the Board of Directors of corporate ethics and legal compliance, and shall take other or the President. The Executive Committee shall be responsi- measures to improve the required internal systems, including ble for the general direction of policy, and shall be in charge of the establishment of dedicated organizations. issues related to implementation. • Toray shall establish the Corporate Ethics and Legal Compliance Code of Conduct as specific provisions to be observed by 3. System for preserving and managing information members of the Board and employees, and shall take other measures to improve the required guidelines, etc. Especially pertaining to the execution of duties by the members of the Board with regard to eliminating relations with antisocial forces, the • Toray shall establish regulations for important documents and Company shall act as one to stand firmly against them. important information related to management, confidential • Toray shall establish an internal reporting system (whistle-blow- information and personal information, and appropriately pre- ing system) for the reporting of the discovery of violation of serve and manage them in accordance with the rules. laws, regulations, or the Company’s Articles of Incorporation. 53 Toray Industries, Inc.Sustainable Management System Corporate Governance 4. Regulations and other systems pertaining to members of the Board, etc. and employees of the subsidiaries controls over risks of loss is appropriately reported to the Company. • Toray shall identify potential risks in business activities, promote company-wide risk management to strive to reduce the level of risk under normal business conditions, and prevent future cri- ses, as well as improve regulations and establish an internal committee to enable immediate implementation in the event 6. System for reporting to corporate auditors and systems for ensuring that persons who report to corporate auditors are not treated disadvantageously because of their reporting of a major crisis. • Members of the Board, etc. and employees of Toray Group and • Toray shall establish an internal control system for financial corporate auditors of subsidiaries shall report matters regard- reporting that ensures the reliability of financial reporting. ing the execution of duties to corporate auditors in response to requests from the corporate auditors. 5. System for ensuring appropriate business • Department in charge of the internal reporting system (whis- operations within subsidiaries tle-blowing system) shall regularly report the status of internal • To establish a system under which subsidiaries report to the whistle-blowing in Toray Group to the corporate auditors. Company on matters regarding the execution of duties by mem- • Toray shall stipulate regulations to the effect that members of bers of the Board, etc. of the subsidiaries, the Company shall the Board and employees who report to corporate auditors shall provide regulations on the regular reporting of important man- not be subjected to any disadvantageous treatment because of agement information to the Company and regularly hold con- the said reporting, and shall provide subsidiaries with guidance ferences at which the Company’s management receives direct to help them stipulate the same regulations. reports on the status of the management of the subsidiaries. • To establish regulations and other systems pertaining to con- trols over risks of loss for subsidiaries, the Company shall pro- vide subsidiaries with guidance to help them to establish risk 7. Items pertaining to the handling of expenses and liabilities arising from the execution of duties by corporate auditors management systems appropriate for their respective business • Toray shall pay expenses, etc. incurred from the execution of forms and business environments, and shall receive regular duties by corporate auditors. reports on the status of their activities. • To establish a system for ensuring that members of the 8. Items pertaining to employees assisting with Board, etc. of subsidiaries effectively execute their duties, the Company shall provide regulations on the scope under which the Company can reserve its authority over the execution of business operations. In addition, the Company shall endeavor to grasp management information in a unified manner and corporate auditors’ duties, items pertaining to the independence of said employees from members of the Board, and items pertaining to the assurance of effectiveness of instructions from the corporate auditors to said employees provide assistance and guidance necessary for subsidiaries • Toray shall assign a full-time employee to provide assistance by determining divisions, etc. with control over its respective if and when corporate auditors request assistance. The said subsidiaries. employee shall exclusively follow the corporate auditors’ com- • To establish a system for ensuring that the execution of duties by mands and instructions, and the Company shall consult with members of the Board, etc. and employees of subsidiaries com- corporate auditors in advance with respect to the personnel plies with laws and regulations and the Articles of Incorporation, arrangements for the said employee. the Company shall thoroughly familiarize its subsidiaries with the Company’s Corporate Ethics and Legal Compliance Code of 9. Other systems for ensuring effective Conduct as a code of conduct in common for Toray Group. At the same time, the Company shall request the subsidiaries to implementation of audits by corporate auditors • Corporate auditors shall attend Board of Directors meetings and establish their own codes of conduct, guidelines, etc. in con- other important meetings so that they may ascertain import- sideration of the laws and regulations, business practices, busi- ant decision-making processes and the execution of operations. ness forms, and other factors in their respective countries. In • Corporate auditors shall hold regular meetings with members of addition, the Company shall direct its subsidiaries to establish the Board and management and conduct regular visiting audits systems under which the status of internal whistle-blowing by of Toray offices, plants, and subsidiaries. Remuneration for members of the Board Given their roles, remuneration for internal members of the Board Remuneration is set at a level that enables the Company to consists of monthly remuneration, a bonus and stock acquisition secure superior human resources and further motivate them to rights as stock options. Remuneration for outside directors con- improve performance, referring to the results of a survey of other sists of monthly remuneration only. companies’ remuneration by an external third-party organization. 54 Annual Report 2018With respect to monthly remuneration, the maximum limit of total Stock Acquisition Rights as stock options to members of the Board remuneration is determined at general meetings of stockholders. is resolved at the general meeting of stockholders, and within that Within the scope of the maximum limit, monthly remuneration to limit, the total number of Stock Acquisition Rights to be allocated each member of the Board is determined by the President based to the members of the Board shall be decided at the Board of on the Company’s internal regulations with a resolution at a Board Directors meeting based on the Company’s internal regulations. of Directors meeting. Given their roles, remuneration for corporate auditors consists The provision and the total amount of bonuses are determined of monthly remuneration only. Remuneration is set at a level that each time at a general meeting of stockholders. Particulars of enables the Company to secure superior human resources, refer- the agenda at the general meeting of stockholders are resolved ring to the results of a survey of other companies’ remuneration by the Board of Directors through conference among the senior by an external third-party organization. management, including the President, in consideration of the With respect to monthly remuneration, the maximum limit consolidated and non-consolidated business results for each fis- of total remuneration is determined at general meetings of cal year plus the historical record. A bonus to each member of the stockholders. Within the scope of the maximum limit, monthly Board is determined by the President according to each mem- remuneration to each corporate auditor is determined through ber’s performance based on the Company’s internal regulations consultation by corporate auditors based on the Company’s inter- with a resolution at a Board of Directors meeting. nal regulations. The maximum limit of total number of Stock Acquisition Rights The Governance Committee continuously reviews the remu- as well as the limit of remuneration relating to the granting of the neration system for members of the Board and corporate auditors. Details of Remuneration in Fiscal 2017 Position Total remuneration (millions of yen) Total remuneration by type (millions of yen) Basic Bonuses Stock options as remunerations Recipients Members of the Board (excluding outside directors) 1,360 Corporate auditors (excluding outside corporate auditors) Outside directors Outside corporate auditors 80 24 19 906 80 24 19 214 — — — 240 — — — 26 3 2 2 Notes: 1. Recipients included three members of the Board and one corporate auditor who retired during fiscal 2017. 2. Total amounts of remuneration do not include the ¥93 million paid in salaries to eight employee-directors. Total Remuneration Received by Members of the Board and Corporate Auditors Name Total consolidated remuneration (millions of yen) Position Status of company Akihiro Nikkaku 157 Member of the Board Filing company Total consolidated remuneration by type (millions of yen) Basic 104 Bonuses Stock options as remuneration 29 24 Note: Total remuneration only includes persons receiving more than ¥100 million. Status of Compliance Initiatives Toray Group recognizes the absolute importance of compliance execution of their own duties and guides the entire Group’s with laws, regulations, and social norms. Top management takes approach to compliance. a clear position on corporate ethics and legal compliance in the Framework for Promoting Corporate Ethics and Legal Compliance Toray has established the Ethics and Compliance Committee, relating to corporate ethics, while advancing initiatives through as a company-wide committee, chaired by the President. The the joint efforts of labor and management. Acting as leaders, Committee deliberates on policies and discusses measures divisional and departmental general managers at each worksite 55 Toray Industries, Inc. Sustainable Management System Corporate Governance adopt a top-down approach toward promoting initiatives. Group companies outside Japan prepare national and Affiliate Companies’ Compliance Meeting as well as Overseas regional editions of the Corporate Ethics and Legal Compliance Affiliate Companies’ Compliance Meetings have been estab- Handbooks. Every executive and employee of Group compa- lished as subordinate organizations of the Ethics and Compliance nies outside Japan receives a copy of the handbook to ensure Committee with respect to subsidiaries and affiliates in Japan that they are fully informed of the corporate policy on the code and overseas. These meetings study and promote compliance of conduct. activities implemented in each company, country, and region. Toray established and is advancing the following common In addition, the Corporate Ethics and Legal Compliance Code company-wide challenges related to corporate ethics and legal of Conduct is a strict set of standards that every Toray Group compliance for fiscal 2017. Activities are also being undertaken executive and employee closely follows when performing corpo- based on Toray’s common company-wide challenges at subsid- rate activities. In the event that a violation is discovered, strict dis- iaries and affiliates in Japan and overseas. cipline is carried out in consultation with the Company’s Rewards and Sanctions Committee. Toray has put together the Corporate • Implemented self-monitoring and mutual inspection system Ethics and Legal Compliance Handbook, which explains the code for internal control and gives details of the compliance helpline, to ensure com- • Provided thorough training on security trade controls prehensive understanding for all Toray and its Japanese Group • Provided all employees with comprehensive information on companies’ executives and employees, including contracted, antitrust laws and anti-bribery rules around the world part-time and temporary workers. • Implemented initiatives to ensure strict compliance Status of Risk Management Initiatives Toray has established a Risk Management Committee as a Risk Management Committee. Furthermore, the Overseas Crisis subordinate organization under the CSR Committee. The CSR Management Committee and the local Crisis Management Operations Department serves as a secretariat office for the Risk Committees, in charge of managing overseas travel for employ- Management Committee, by which Toray monitors the progress ees and collecting information on overseas risk during normal of risk reduction across Toray Group under normal business con- business conditions, have now been similarly organized as subor- ditions, and maintains a framework for planning, drafting, and pro- dinate organizations of the Risk Management Committee. moting company-wide risk management measures. In addition, Toray established local risk management committees as subordi- Toray Group Risk Management System nate organizations of the Risk Management Committee at each of Toray’s divisions, departments, offices, and plants. These com- mittees have taken actions to reduce risk by implementing com- pany-wide measures together with individually established risk measures. However, in response to an incident where quality data was overwritten at a Group company in Japan, Toray once again recognized that strengthening risk management group-wide has emerged as an urgent management issue. Subsequently, Toray established a dedicated organization within the Corporate Strategic Planning Division, which is under the direct control of the President, in April 2018 as part of the management strat- egy for the purpose of strengthening and promoting risk man- agement throughout Toray Group to a greater degree than in the past, closely communicating with the top management. Toray has since transferred the risk management functions from the CSR Operations Department to this organization. Chairperson: Corporate Strategic Planning Division manager Risk Management Committee (Secretariat office: Corporate Strategic Planning Division) Directions on implementation policy Activity reports Risk management committees at divisions, departments, offices and plants Directions on implementation policy Activity reports Overseas Crisis Management Committee (Secretariat office: Group Management Department) Directions on implementation policy Activity reports Local Crisis Management Committees in each country and region As an organization to deliberate and provide information regarding risk management throughout Toray Group, in May Quick Response System During Emergencies Toray Group has established Crisis Management Regulations, a 2018 Toray also established the Risk Management Committee set of clear fundamental principles that form the basis of a com- (company-wide committee) with Corporate Strategic Planning pany-wide response in the event of a major crisis. The Group Division manager as chairperson. This company-wide Committee works to ensure the thorough implementation of these regula- absorbed the responsibilities of the original Risk Management tions when required. Moreover, the Group reviews the regula- Committee and inherited the local risk management committees tions as appropriate to prepare for new risks that emerge due to that were formed as subordinate organizations of the original changes in the social environment. 56 Annual Report 2018  Along with the changes made to the risk management sys- tem in April 2018, Toray significantly overhauled the risk manage- Addressing Existing Major Risks In terms of addressing existing major risks, such as legal com- ment system during normal business operations and the quick pliance, fluctuations in raw material prices, business strate- response system for emergencies, and revised these regulations gies, economic condition and currency fluctuations, and security in June 2018. In particular, a rule was established calling upon export controls, the staff divisions and departments, and related divisions and departments in which an emergency has occurred group-wide committees whose normal business activities serve to always report first to the Corporate Strategic Planning Division directly as risk measures continuously undertake and follow-up so that rapid management decisions can be made in the event of on activities to reduce risk. an emergency. Toray has also recognized the security control for overseas business travels and measures against political instability and ter- Detecting Major Foreseeable Risks Toray vigilantly maintains an eye on trends in Japan and around rorism as material risk issues for some time, and continues to the world in order to detect risks which may give a significant keep employees informed with up-to-date information under the impact on the management of Toray Group. When a relevant risk direction of the responsible division or department as part of the is detected, Toray Corporate Strategic Planning Division takes Group’s emergency responses. the lead in drafting a response measure without delay and imple- ments the necessary measures throughout the Group. Addressing Priority Risks Once every three years, Toray identifies and assesses compa- ny-wide risks, and reviews the priority risks based on the results Educating Employees In order to cultivate an awareness of risk management among of this action. In terms of the selected priority risks, Toray pro- employees, Toray has set up the implementation of risk manage- motes activities to reduce risks through a three-year PDCA cycle. ment education as one of the KPIs for the Sixth CSR Road Map. Fiscal 2017 was the final fiscal year of the third PDCA cycle. Based on the situation of the individual countries, in fiscal 2017 The remaining issues from the past two years of this PDCA cycle Toray implemented e-learning and group education with a focus were reorganized, and Toray advanced the necessary measures on human rights issues and activities aimed at reducing risks at for each risk. Moreover, Toray conducted its fourth company-wide the individual companies. risk identification and assessment, and selected the fourth Toray Group priority risks, covering three years starting from fiscal 2018, as the priority risks to be shared throughout the Group. Preparedness for Major Earthquakes Toray Group continues to maintain and review its business con- From fiscal 2018, Toray will work to reduce these priority risks tinuity plan (BCP) for large-scale earthquakes, which has been throughout Toray Group, including Group companies in Japan and identified as one of the priority risks. overseas. Supply Chain Risk Reduction In fiscal 2017, Toray analyzed the responses to the CSR procure- For the important products selected for each business in com- pliance with the procedures for developing BCPs for designated priority products in the case of an earthquake, in fiscal 2017 Toray formulated BCPs, and continued with the systematic quake-resis- ment survey distributed to its suppliers, after which a suppli- tant upgrading of our plant buildings. er-specific assessment sheet was drawn up for each supplier and Moreover, Toray Group has conducted drills to establish a shared with each Group company. Moreover, Toray followed-up temporary Group-wide headquarters based on a scenario involv- on the CSR procurement progress status of each Group com- ing a large-scale earthquake every year since fiscal 2012. In fiscal pany outside of Japan, and provided support as necessary, includ- 2017, Toray held a drill based on a scenario involving a massive ing sending CSR procurement survey templates from the Head earthquake along the Nankai Trough. This drill involved the oper- Office to those companies in which initiatives were insufficient. ation of the employee safety confirmation system introduced at In addition, Toray reviews the usage status of conflict minerals Toray and its Group companies in Japan. The drill also included and the country of origin for all of its products every year. Toray realistic specifications, including intentionally not disclosing some also conducted this survey in fiscal 2017. aspects of the scenario beforehand in order to harden the rapid Maintaining Information Security Toray provides security education to employees every year as judgment skills of those on the ground. In conjunction with this drill, Toray also reviewed those operations considered to be of highest priority for the Head Office staff divisions and depart- a means of managing information management (leaks) risks. In ments in order to maintain the minimum amount of corporate addition to providing this education, in fiscal 2017, Toray con- functionality during a disaster. ducted a simulation exercise involving targeted e-mail attacks In addition, Toray Group also deployed Toray Disaster Map for all employees in seeking to nurture and elevate the security System following the Great East Japan Earthquake in order to awareness among the employees. rapidly and accurately map the extent of damage based on loca- tion data for business partners and Toray Group. 57 Toray Industries, Inc. Sustainable Management System Board of Directors and Corporate Auditors (As of June 26, 2018) 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 Ryo Murayama Executive Vice President and Representative Member of the Board Yukichi Deguchi Senior Vice President (Member of the Board and Member of the Executive Committee) Mitsuo Ohya Senior Vice President (Member of the Board and Member of the Executive Committee) Hiroshi Otani Senior Vice President (Member of the Board and Member of the Executive Committee) Toru Fukasawa Senior Vice President (Member of the Board and Member of the Executive Committee) Kazuo Morimoto Senior Vice President (Member of the Board and Member of the Executive Committee) Osamu Inoue 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) Tetsuya Tsunekawa Senior Vice President (Member of the Board) Takashi Fujimoto Senior Vice President (Member of the Board) Kazuyuki Adachi Vice President (Member of the Board) Shigeki Taniguchi Vice President (Member of the Board) Hideki Hirabayashi Vice President (Member of the Board) Hiroshi Enomoto 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. 58 Annual Report 2018Organization (As of July 1, 2018) Board of Directors Corporate Strategic Planning Division President & Executive Vice Presidents Legal & Compliance Division General Administration & Communications Division Executive Committee Personnel & Industrial Relations Division Finance & Controller’s Division Quality Assurance Division Auditing Dept. Intellectual Property Division Information Systems Division Purchasing & Logistics Division Corporate Marketing Planning Dept. Automotive Material Strategic Planning Dept. Global Environment Business Strategic Planning Dept. Life Innovation Business Strategic Planning Dept. Branches Affiliated Companies Division Fibers & Textiles Division Resins & Chemicals Division Board of Corporate Auditors Films Division Corporate Auditors Torayca & Advanced Composites Division Electronic & Information Materials Division Pharmaceuticals & Medical Products Division Water Treatment & Environment Division HS Business Development Dept. Technology Center Manufacturing Division Engineering Division Research & Development Division 59 Toray Industries, Inc.Toray Group Worldwide Network (As of March 31, 2018) Toray Group operates businesses in 26 countries and regions including Japan. Consolidated subsidiaries Subsidiaries accounted for by equity method Total subsidiaries Affiliates accounted for by equity method Companies subject to consolidation Japan Overseas Total 162 101 34 60 222 135 22 35 257 157 61 26 87 13 100 EUROPE United Kingdom Consolidated Subsidiaries l Toray Textiles Europe Ltd. (TTEL) n Toray International U.K. Ltd. (TIUK) France Consolidated Subsidiaries n l Toray Films Europe S.A.S. (TFE) n Toray Carbon Fibers Europe S.A. (CFE) Switzerland Subsidiary Accounted for by Equity Method l Toray Membrane Europe AG (TMEu) Italy Consolidated Subsidiary l Alcantara S.p.A. Subsidiaries Accounted for by Equity Method n Toray International Italy S.r.l. (TIIT) n Composite Materials (Italy) S.r.l. (CIT) n Delta-Tech S.p.A. (DELTA) Czech Republic Consolidated Subsidiary n l Toray Textiles Central Europe s.r.o. (TTCE) Germany Consolidated Subsidiaries n Euro Advanced Carbon Fiber Composites GmbH (EACC) n Toray International Europe GmbH (TIEU) Others ASIA China Consolidated Subsidiaries n Toray Industries (China) Co., Ltd. (TCH) l Toray Fibers (Nantong) Co., Ltd. (TFNL) l Toray Sakai Weaving & Dyeing (Nantong) Co., Ltd. (TSD) l Toray Polytech (Nantong) Co., Ltd. (TPN) n l Toray Plastics (China) Co., Ltd. (TPCH) n l Toray Plastics (Shenzhen) Ltd. (TPSZ) n l Toray Plastics (Chengdu) Co., Ltd. (TPCD) n l Toray Plastics Precision (Hong Kong) Ltd. (TPPH) n l Toray Plastics Precision (Zhongshan) Ltd. (TPPZ) n Toray Industries (H.K.) Ltd. (THK) n Toray International (China) Co., Ltd. (TICH) n Toray Film Products (Hong Kong) Ltd. (TFH) n Toray Film Products (Zhongshan) Ltd. (TFZ) l Toray BlueStar Membrane Co., Ltd. (TBMC) n Toray Medical (Qingdao) Co., Ltd. (TMQ) Others Affiliate Accounted for by Equity Method n Yihua Toray Polyester Film Co., Ltd. (YTP) Taiwan Consolidated Subsidiary n Toray Advanced Film Kaohsiung Co., Ltd. (TAFK) Subsidiaries Accounted for by Equity Method n Toray International Taipei Inc. (TITP) Others Republic of Korea Consolidated Subsidiaries l n l Toray Advanced Materials Korea Inc. (TAK) l STEMCO, Ltd. (STEMCO) l n l Toray Chemical Korea Inc. (TCK) Affiliates Accounted for by Equity Method l STECO, Ltd. (STECO) Others 60 Malaysia Consolidated Subsidiaries l Penfabric Sdn. Berhad (PAB) l n l Penfibre Sdn. Berhad (PFR) n l Toray Plastics (Malaysia) Sdn. Berhad (TPM) Others Subsidiary Accounted for by Equity Method n Toray Industries (Malaysia) Sdn. Berhad (TML) Affiliate Accounted for by Equity Method n Toray BASF PBT Resin Sdn. Berhad (TBPR) Singapore Consolidated Subsidiary n Toray International Singapore Pte. Ltd. (TISP) Japan Consolidated Subsidiaries l n Ichimura Sangyo, Co., Ltd. l n l Toray Fine Chemicals Co., Ltd. n l Toyo Plastic Seiko Co., Ltd. n l Toray Advanced Film Co., Ltd. l Toray KP Films Inc. n Soda Aromatic Co., Ltd. l l Toray Engineering Co., Ltd. n Toray Carbon Magic Co., Ltd. l Toray Construction Co., Ltd. l Suido Kiko Kaisha, Ltd. n Toray Medical Co., Ltd. n Toray Research Center Inc. n Toray International, Inc. n Chori Co., Ltd. Others Subsidiaries Accounted for by Equity Method n Toyo Business Support Inc. Others Affiliates Accounted for by Equity Method l n l Du Pont-Toray Co., Ltd. l Toray Opelontex Co., Ltd. n l Dow Corning Toray Co., Ltd. n Sanyo Chemical Industries, Ltd. Others Indonesia Consolidated Subsidiaries l P.T. Acryl Textile Mills (ACTEM) l P.T. Century Textile Industry Tbk (CENTEX) l P.T. Easterntex (ETX) l P.T. Indonesia Synthetic Textile Mills (ISTEM) l P.T. Indonesia Toray Synthetics (ITS) l P.T. Toray Polytech Jakarta (TPJ) Subsidiaries Accounted for by Equity Method n P.T. Toray Industries Indonesia (TIN) Others Affiliates Accounted for by Equity Method n P.T. Petnesia Resindo (PNR) Others Thailand Consolidated Subsidiaries l Luckytex (Thailand) Public Co., Ltd. (LTX) l Thai Toray Textile Mills Public Co., Ltd. (TTTM) l n l Thai Toray Synthetics Co., Ltd. (TTS) Subsidiaries Accounted for by Equity Method n Toray Industries (Thailand) Co., Ltd. (TTH) n Carbon Magic (Thailand) Co., Ltd. (CMTH) NORTH AMERICA U.S.A. Consolidated Subsidiaries l Toray Fluorofibers (America), Inc. (TFA) n Toray Plastics (America), Inc. (TPA) n Toray Resin Co. (TREC) n Toray Composite Materials America, Inc. (CMA) n Zoltek Companies, Inc. (Zoltek) l Toray Membrane USA, Inc. (TMUS) n Toray International America Inc. (TIAM) Others Mexico Consolidated Subsidiary n Toray Resin Mexico, S.A. de C.V. (TRMX) n Regional Supervisory Organization l Fibers & Textiles n Performance Chemicals l IT-related Products n Carbon Fiber Composite Materials l Environment & Engineering n Life Science & Other Businesses n Trading Major Office in Japan Overseas Offices 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 U.S.A. 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 Office GmbH (TEU) Hugenottenallee 175, 63263 Neu-Isenburg, Germany Telephone: (49) 6102-7999-1000 Facsimile: (49) 6102-7999-1008 China 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 Republic of Korea Toray Industries, Inc., Seoul Office 36Fl., FKI Tower, 24, Yeoui-daero, Yeongdeungpo-gu, Seoul, 07320 Republic of Korea Telephone: 82 (2) 707-0381—2 Facsimile: 82 (2) 707-0067 India Toray Industries (India) Private Limited (TID) 12th Fl., Prestige Polygon, 471 Anna Salai, Teynampet, Chennai 600035, Tamil Nadu, INDIA Telephone: 91 (44) 4003-6100 Facsimile: 91 (44) 4003-6101 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 Annual Report 2018 FINANCIAL SECTION CONTENTS 62 Ten-Year Summary of Selected Financial Data 64 Management’s Discussion and Analysis 70 Consolidated Balance Sheets 72 Consolidated Statements of Income 72 Consolidated Statements of Comprehensive Income 73 Consolidated Statements of Changes in Net Assets 74 Consolidated Statements of Cash Flows 75 Notes to Consolidated Financial Statements 102 Independent Auditor’s Report Toray Industries, Inc. 61 Ten-Year Summary of Selected Financial Data Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31 Net sales*1, 3 Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Plastics & Chemicals IT-related Products Life Science & Other Businesses Operating income Income (loss) before income taxes 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 2009 2010 2011 ¥ 1,471,561 ¥ 1,359,631 ¥ 1,539,693 568,996 525,204 584,115 — 70,390 160,207 — — 377,644 229,421 64,903 36,006 (19,751) (16,326) 38,447 83,764 92,349 — 50,676 159,787 46,656 14,140 332,735 230,433 — 40,107 (2,415) (14,158) 166,215 74,904 57,073 — 67,018 178,183 52,430 13,621 382,299 262,027 — 100,087 82,893 57,925 129,214 70,479 55,942 1,523,603 1,556,796 1,567,470 596,261 663,945 512,610 580,344 632,160 518,216 531,595 493,509 640,970 ¥ (11.66) ¥ (10.12) ¥ — 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 ¥ ¥ 694 350 591 390 ¥ 36.41 34.43 7.50 363.90 6.50 3.76 37.8 10.9 0.83 643 420 Number of employees 37,924 37,936 38,740 *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. *3 Toray Group changed the reportable segments from the year ended March 31, 2018. Accordingly, the actual figures for the year ended March 31, 2017 are restated to reflect the changes in reportable segments. 62 Annual Report 2018 2012 2013*2 2014 2015 2016 2017 2018 ¥ 1,588,604 ¥ 1,592,279 ¥ 1,837,778 ¥ 2,010,734 ¥ 2,104,430 ¥ 2,026,470 ¥ 2,204,858 Millions of yen 638,375 632,150 755,474 856,676 892,039 — 69,914 170,247 55,554 13,295 397,815 243,404 — 107,721 101,091 64,218 104,410 67,443 98,384 — 77,620 178,355 56,599 14,127 395,835 237,593 — 83,436 77,828 48,477 100,815 67,588 99,135 — 113,342 180,197 58,205 14,277 470,542 245,741 — 105,253 97,760 59,608 161,455 78,743 118,207 — 158,365 179,988 57,039 14,321 496,370 247,975 — 123,481 114,469 71,021 141,282 81,480 124,929 — 186,196 183,324 55,841 14,720 521,238 251,072 — 154,480 137,808 90,132 196,142 91,168 136,556 856,124 724,648 161,608 212,548 54,150 17,392 — — — 146,893 139,012 99,418 173,958 89,073 152,039 913,610 803,310 177,949 238,256 53,803 17,930 — — — 156,464 136,612 95,915 129,180 95,815 153,324 1,581,501 1,731,933 2,119,683 2,357,925 2,278,386 2,396,785 2,592,914 561,923 481,906 674,149 627,240 532,002 778,626 781,235 654,163 855,593 700,258 830,612 704,253 881,434 716,399 927,029 816,325 944,625 1,080,757 1,024,909 1,100,176 1,169,188 Yen ¥ 59.97 59.90 15.00 681.92 % 7.10 4.35 42.1 9.1 0.75 Yen ¥ 39.41 37.46 10.00 384.90 ¥ 29.75 28.90 10.00 444.45 ¥ 36.59 35.70 10.00 527.32 ¥ 44.33 44.28 11.00 616.70 ¥ 56.38 56.31 13.00 591.50 ¥ 62.17 62.10 14.00 638.64 6.78 4.04 39.7 10.5 0.77 631 511 5.24 3.04 41.8 7.2 0.73 654 421 ¥ 5.73 3.24 40.5 7.5 0.76 786 584 ¥ ¥ 6.14 3.53 41.8 7.7 0.71 7.34 4.28 41.5 9.3 0.74 7.25 4.91 42.6 10.1 0.70 ¥ 1,057.5 ¥ 1,146.0 ¥ 1,027.5 ¥ 1,208.0 626 871.7 854.0 903.1 40,227 42,584 45,881 45,789 45,839 46,248 45,762 63 Toray Industries, Inc. Management’s Discussion and Analysis OVERVIEW INCOME ANALYSIS For the year ended March 31, 2018, the U.S. and European econ- omy continued to register a gradual recovery. There were signs of the economy picking up in many emerging countries. The Japanese economy, in general, continued on its gradual recovery track on the back of improving employment and income situation. In the meantime, the rise in raw material and fuel prices had a negative impact on Toray Group’s profits. Under such circumstances, Toray Group, in April 2017, embarked on the new medium-term management program “Project AP-G 2019” that spans over three years from fiscal year 2017 to 2019 and has been implementing the growth strategy with focus on taking advantage of growth business fields, pursu- ing business expansion in growth countries and regions as well as further bolstering its cost competitiveness. As a result, Toray Group posted record net sales and operating income. Net Sales Net sales for the year ended March 31, 2018 were in ¥2,204.9 bil- lion, up by ¥178.4 billion (8.8%) from the previous year. Regarding the sales by business segment, net sales in the Fibers & Textiles, Performance Chemicals, Carbon Fiber Composite Materials, Environment & Engineering and Others segments increased, while those in the Life Science segments decreased. Costs and Expenses The ratio of total costs and expenses to net sales for the year ended March 31, 2018 was 92.9%, slightly up by 0.2 percentage points year on year. Net sales and cost of sales increased from the previous year by 8.8% and 9.5%, respectively. As a result, the cost of sales ratio rose by 0.5 percentage points to 79.3%. Selling, general and administrative expenses increased by ¥17.3 billion (6.1%) to ¥300.4 billion. The ratio of selling, general and administrative expenses to net sales declined by 0.3 percent- age points to 13.6%. R&D expenses increased by ¥7.0 billion (11.8%) to ¥66.2 billion. Net Sales by Segment Net Sales by Segment Operating Income by Segment Operating Income by Segment (Billions of yen) 2,500 (Billions of yen) 2,500 2,104.4 2,204.9 2,204.9 2,104.4 2,010.7 2,026.5 2,026.5 2,000 2,000 2,010.7 1,837.8 1,837.8 1,592.3 1,592.3 1,500 1,500 1,000 1,000 500 500 0 0 (Billions of yen) 200 (Billions of yen) 200 154.5 154.5 146.9 156.5 156.5 146.9 150 150 123.5 123.5 105.3 105.3 83.4 83.4 100 100 50 50 0 0 -50 -50 Mar/ ‘13 ‘14 Mar/ ‘13 ‘15 ‘14 ‘16 ‘15 ‘17 ‘16 ‘18 ‘17 ‘18 Mar/ ‘13 ‘14 Mar/ ‘13 ‘15 ‘14 ‘16 ‘15 ‘17 ‘16 ‘18 ‘17 ‘18 ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others ■ Adjustment ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others ■ Adjustment *1 Toray Group changed the reportable segments from the year ended March 31, 2018. Accordingly, the actual figures for the year ended March 31, 2017 are restated to reflect the changes in reportable segments. Total Assets and Net Assets Total Assets and Net Assets *2 Operating income by segment that is not attributable to any segment is included in “Adjustment.” Interest-bearing Liabilities and D/E Ratio Interest-bearing Liabilities and D/E Ratio (Billions of yen) 2,800 (Billions of yen) 2,800 2,357.9 64 2,119.7 2,119.7 2,357.9 2,278.4 2,396.8 2,278.4 2,100 2,100 1,731.9 1,731.9 (%) 80 2,592.9 (%) 80 2,592.9 2,396.8 60 60 41.8 41.8 40.5 41.8 40.5 41.8 41.5 42.6 41.5 42.6 42.1 1,400 1,400 42.1 40 40 1,169.2 1,100.2 1,169.2 1,080.8 944.6 1,080.8 1,024.9 1,100.2 1,024.9 944.6 778.6 778.6 700 700 20 20 (Billions of yen) 900 (Billions of yen) 900 (Times) 1.20 (Times) 1.20 816.3 816.3 700.3 704.3 700.3 716.4 704.3 716.4 654.2 654.2 600 600 532.0 532.0 0.90 0.90 0.76 0.76 0.74 0.74 0.75 0.75 0.73 0.73 0.71 0.71 0.70 0.70 300 300 0.60 0.60 0 0 0 0 0.30 0.30 Mar/ ‘13 Mar/ ‘14 ‘13 ‘15 ‘14 ‘15 ‘16 ‘16 ‘17 ‘18 ‘17 Mar/ ‘13 Mar/ ‘14 ‘13 ‘15 ‘14 ‘16 ‘15 ‘17 ‘16 ‘18 ‘17 ‘18 0 0 ‘18 ■ Total Assets ■ Net Assets —Equity Ratio ■ Total Assets ■ Net Assets —Equity Ratio ■ Interest-bearing Liabilities ■ Interest-bearing Liabilities —D/E Ratio —D/E Ratio Cash Flows Cash Flows (Billions of yen) (Billions of yen) 200 200 150 150 161.5 161.5 141.3 196.1 141.3 196.1 174.0 174.0 129.2 129.2 100 100.8 100 100.8 50 50 0 0 -6.7 -6.7 -50 -50 -100 -100 -107.5 -107.5 -150 -150 -200 -200 -250 -250 41.7 41.7 38.7 38.7 0.6 0.6 -53.4 -53.4 -57.5 -57.5 -140.7 -140.7 -154.4 -135.2 -154.4 -135.2 -186.7 -186.7 -214.8 -214.8 Mar/ ‘13 Mar/ ‘14 ‘13 ‘15 ‘14 ‘16 ‘15 ‘17 ‘16 ‘18 ‘17 ‘18 ■ Cash Flows from Operating Activities ■ Cash Flows from Operating Activities ■ Cash Flows from Investing Activities ■ Cash Flows from Investing Activities —Free Cash Flows —Free Cash Flows Annual Report 2018 Operating Income and Net Income Operating income climbed by ¥9.6 billion (6.5%) year on year to ¥156.5 billion, the ratio of operating income to net sales declined slightly by 0.2 percentage points to 7.1%. Operating income by business segment increased in the Fibers & Textiles, Performance Chemicals, Environment & Engineering and Others segments, while decreasing in the Carbon Fiber Composite Materials and Life Science segments. In net other income (expenses), Toray Group reported net expenses of ¥19.9 billion in the year ended March 31, 2018, up by ¥12.0 billion (151.9%) from the previous year. Interest and dividend income increased by ¥0.2 billion (4.2%) to ¥5.2 billion, and interest expense also climbed by ¥0.4 billion (9.4%). As a result, net financial income of ¥0.1 billion was recorded in the year ended March 31, 2018, down ¥0.2 billion compared with the previous year. Equity in earnings of unconsolidated subsid- iaries and affiliated companies rose year on year by ¥1.7 billion (22.8%) to ¥9.2 billion. Net loss on sales and disposal of property, plant and equipment climbed by ¥2.1 billion (42.5%) to ¥7.1 bil- lion. Loss on impairment of fixed assets increased by ¥1.0 billion (34.8%) to ¥3.9 billion. Net gain on sales and loss on write-down of investment securities grew by ¥0.5 billion (16.7%) to ¥3.4 bil- lion. In the year ended March 31, 2018, the Group posted a loss on liquidation and devaluation of subsidiaries and affiliated com- panies of ¥3.6 billion and environmental expenses of ¥2.6 billion. As a result of the aforementioned, income before income taxes declined by ¥2.4 billion (1.7%) year on year to ¥136.6 bil- lion. After deductions for income taxes and net income attrib- utable to non-controlling interests, net income attributable to owners of parent amounted to ¥95.9 billion, down ¥3.5 billion (3.5%) year on year. Net income per share was ¥59.97, a decrease of ¥2.2. In light of profit conditions for the year ended March 31, 2018 and out- look for the next year, the total annual dividend for the year ended March 31, 2018 was set at ¥15.00 per share. This comprised an interim cash dividend of ¥7.00 per share and a year-end cash divi- dend of ¥8.00 per share. Business Performance by Segment Toray Group changed the reportable segments from the year ended March 31, 2018. The following analysis bases on the new reportable segments and the accordingly restated figures for the year ended March 31, 2017. Fibers & Textiles In Japan, demand for some industrial applications such as auto- mobiles was strong and apparel applications saw gradual improve- ment in store sales of final products. Against this background, Toray Group not only strived to expand sales in both apparel and industrial applications but also worked to expand the business format that integrates fibers to textiles to final products while focusing on strengthening cost competitiveness. Overseas, business performance of some subsidiaries in Southeast Asia and Republic of Korea remained slow. On the other hand, materials for automotive applications and hygiene products remained strong in general and the Group expanded the integrated business for apparel applications. As a result, overall sales of Fibers & Textiles segment increased 6.7% to ¥913.6 billion from the previous year and oper- ating income rose 8.5% to ¥72.4 billion. Performance Chemicals In the resin business, shipment for automotive applications was strong in general, mainly in Japan. Besides automotive applica- tions, Toray Group also promoted sales expansion of ABS and PPS resins. In the film business, shipment of battery separa- tor films for lithium-ion secondary batteries increased reflect- ing demand growth, while films for electronic parts which are used for applications such as smartphones continued to be favor- able. In the electronic & information materials business, demand for OLED panels increased and shipment of related materials expanded. As a result, overall sales of Performance Chemicals segment increased 10.9% to ¥803.3 billion from the previous year and operating income increased 15.5% to ¥71.4 billion. 65 Toray Industries, Inc. Carbon Fiber Composite Materials With the final demand for the aircraft remaining strong in the aero- space applications, shipments showed signs of recovery as the inventory adjustment in the supply chain was completed. In the industrial applications, demand showed a recovery trend primar- ily in the environment and energy-related field led by compressed natural gas tank applications and wind turbine blade applications. The segment was affected by increases in raw material prices as well as intensifying competition. As a result, overall sales of Carbon Fiber Composite Materials segment increased 10.1% to ¥177.9 billion from the previous year while operating income fell 13.3% to ¥20.8 billion. Environment & Engineering In the water treatment business, demand for reverse osmosis membranes and other products in general grew strongly in Japan and abroad. In terms of domestic subsidiaries in the segment, industrial machinery and electronics-related equipment performed strongly at an engineering subsidiary. As a result, overall sales of Environment & Engineering seg- ment increased 12.1% to ¥238.3 billion from the previous year and operating income rose 13.5% to ¥13.3 billion. Life Science In the pharmaceutical business, shipment of pruritus treatment REMITCH®* expanded due to the impact of the introduction of a new dosage form and approval of new indications. On the other hand, 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 Net Sales by Segment generic drugs, and royalty income on some products decreased. In the medical devices business, shipment of dialyzers grew (Billions of yen) strongly. 2,500 As a result, overall sales of Life Science segment declined 0.6% to ¥53.8 billion from the previous year and operating 2,026.5 income fell 9.6% to ¥1.9 billion. 2,000 2,204.9 2,104.4 2,010.7 1,837.8 *REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. 1,592.3 1,500 Others Net sales increased 3.1% to ¥17.9 billion from the previous year and operating income as well increased 10.4% to ¥2.9 billion. 1,000 FINANCIAL POSITION 500 0 Analysis of Assets, Liabilities and Net Assets As of March 31, 2018, Toray Group’s total assets stood at ¥2,592.9 billion, up ¥196.1 billion from the end of the previ- ‘17 ous year. Current assets rose ¥86.0 billion as trade notes and accounts receivable as well as inventories increased, while ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others Mar/ ‘13 ‘15 ‘18 ‘16 ‘14 Operating Income by Segment (Billions of yen) 200 156.5 154.5 146.9 123.5 105.3 83.4 150 100 50 0 -50 Mar/ ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others ■ Adjustment Total Assets and Net Assets Interest-bearing Liabilities and D/E Ratio (%) 80 2,592.9 2,357.9 2,278.4 2,396.8 (Billions of yen) 2,800 2,100 2,119.7 1,731.9 41.8 40.5 41.8 41.5 42.6 42.1 1,080.8 1,024.9 1,100.2 1,169.2 944.6 778.6 1,400 700 0 60 40 20 0 (Billions of yen) 900 600 532.0 300 0 (Times) 1.20 816.3 700.3 704.3 716.4 654.2 0.76 0.73 0.74 0.75 0.71 0.70 0.90 0.60 0.30 Mar/ ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 Mar/ ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ■ Total Assets ■ Net Assets —Equity Ratio * Effective from the year ended March 31, 2014, certain overseas subsidiar- ies 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. ■ Interest-bearing Liabilities —D/E Ratio 66 196.1 174.0 41.7 38.7 129.2 -57.5 Cash Flows (Billions of yen) 200 161.5 141.3 100.8 -6.7 0.6 -53.4 -107.5 150 100 50 0 -50 -100 -150 -200 -250 -140.7 -154.4 -135.2 -186.7 -214.8 Mar/ ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ■ Cash Flows from Operating Activities ■ Cash Flows from Investing Activities —Free Cash Flows Annual Report 2018 Net Sales by Segment (Billions of yen) 2,500 2,204.9 2,104.4 2,026.5 2,010.7 1,837.8 1,592.3 2,000 1,500 1,000 500 0 noncurrent assets expanded ¥110.2 billion due to increases in property, plant and equipment and investment securities. Total liabilities rose ¥127.1 billion from the end of the previ- ous year to ¥1,423.7 billion, due primarily to an increase in inter- est-bearing debts. Net assets expanded by ¥69.0 billion compared with the end of the previous year to ¥1,169.2 billion, reflecting an increase in retained earnings due to net income for the year. Net assets less non-controlling interests and stock acquisition rights stood at ¥1,090.7 billion. The equity ratio at the end of the year came to 42.1%, a 0.5 percentage-point decrease compared with the level 154.5 at the end of the previous year. Operating Income by Segment (Billions of yen) 200 146.9 156.5 150 123.5 105.3 CASH FLOWS 83.4 100 50 For the year ended March 31, 2018, net cash used in investing activities exceeded net cash provided by operating activities by ¥57.5 billion. Meanwhile, net cash provided by financing activi- ties came to ¥61.8 billion owing mainly to the increase in inter- est-bearing liabilities. As a result, after counting exchange rate changes and cash and cash equivalents at subsidiaries not pre- viously included in consolidation, cash and cash equivalents as of March 31, 2018 amounted to ¥134.3 billion, up by ¥2.9 billion (2.2%) compared with the end of the previous year on a consol- idated basis. Mar/ ‘13 ‘14 -50 ‘15 ‘16 ‘17 ‘18 0 ‘16 ‘15 ‘14 Mar/ ‘13 Cash Flows from Operating Activities ‘18 ‘17 Net cash provided by operating activities decreased by ¥44.8 bil- ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals lion (25.7%) compared with the previous year to ¥129.2 billion. ■ IT-related Products ■ Carbon Fiber Composite Materials Major cash-increasing factors included income before income ■ Environment & Engineering ■ Life Science ■ Others taxes of ¥136.6 billion, down ¥2.4 billion, and depreciation and amortization of ¥95.8 billion, up ¥6.7 billion. Major cash-decreas- ing factors, on the other hand, were the increase in trade receiv- Total Assets and Net Assets ables of ¥62.0 billion, up ¥37.0 billion, and income taxes paid of ¥34.3 billion, up ¥6.0 billion. (Billions of yen) 2,800 Cash Flows from Investing Activities 2,396.8 Net cash used in investing activities totaled ¥186.7 billion, up ¥51.4 billion (38.0%) compared with the previous year. Major 2,100 cash-decreasing factors included capital expenditures of ¥147.9 billion, up ¥4.0 billion, and purchases of investment securities of ¥67.3 billion, up ¥62.7 billion. (%) 80 2,592.9 1,731.9 2,119.7 2,357.9 2,278.4 60 41.8 40.5 41.8 41.5 42.6 42.1 40 944.6 778.6 700 1,100.2 1,080.8 1,024.9 1,169.2 1,400 Cash Flows from Financing Activities Net cash provided by financing activities came to ¥61.8 billion, a turnaround of ¥79.8 billion from the net cash used in financ- ing activities of the previous year. Major cash-increasing fac- tors included proceeds from long-term debt of ¥178.9 billion, up ¥128.0 billion. The major cash-decreasing factor, on the other hand, was repayment of long-term debt of ¥111.4 billion, up ¥62.1 billion. Mar/ ‘15 ‘13 ‘14 ‘16 ‘17 ‘18 20 0 0 ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others ■ Adjustment ■ Total Assets ■ Net Assets —Equity Ratio Operating Income by Segment (Billions of yen) 200 156.5 154.5 146.9 123.5 105.3 83.4 150 100 50 0 -50 Mar/ ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others ■ Adjustment Interest-bearing Liabilities and D/E Ratio (Billions of yen) 900 600 532.0 300 0 (Times) 1.20 816.3 700.3 704.3 716.4 654.2 0.76 0.73 0.74 0.75 0.71 0.70 0.90 0.60 0.30 Mar/ ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ■ Interest-bearing Liabilities —D/E Ratio Total Assets and Net Assets Interest-bearing Liabilities and D/E Ratio (Times) 1.20 816.3 700.3 704.3 716.4 654.2 (Billions of yen) 900 600 532.0 0.76 0.73 0.74 0.75 0.71 0.70 300 0 0.90 0.60 0.30 Cash Flows (Billions of yen) 200 196.1 174.0 41.7 38.7 129.2 -57.5 161.5 141.3 100.8 -6.7 0.6 -53.4 -107.5 -140.7 -154.4 -135.2 -186.7 -214.8 150 100 50 0 -50 -100 -150 -200 -250 Mar/ ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 Mar/ ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 Mar/ ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ■ Total Assets ■ Net Assets —Equity Ratio ■ Interest-bearing Liabilities —D/E Ratio ■ Cash Flows from Operating Activities ■ Cash Flows from Investing Activities —Free Cash Flows 67 Net Sales by Segment (Billions of yen) 2,500 2,204.9 2,104.4 2,026.5 2,010.7 1,837.8 1,592.3 Mar/ ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others (%) 80 2,592.9 2,357.9 2,278.4 2,396.8 (Billions of yen) 2,800 2,100 2,119.7 1,731.9 41.8 40.5 41.8 41.5 42.6 42.1 1,080.8 1,024.9 1,100.2 1,169.2 944.6 778.6 60 40 20 0 Cash Flows (Billions of yen) 161.5 141.3 100.8 -6.7 0.6 -53.4 -107.5 196.1 174.0 41.7 38.7 129.2 -57.5 -140.7 -154.4 -135.2 -186.7 -214.8 Mar/ ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ■ Cash Flows from Operating Activities ■ Cash Flows from Investing Activities —Free Cash Flows 2,000 1,500 1,000 500 0 1,400 700 0 200 150 100 50 0 -50 -100 -150 -200 -250 Toray Industries, Inc. BUSINESS RISKS Operational and other risks faced by Toray Group that could have a major influence on the decisions of investors are described below. Toray Group works constantly to avoid such potential risks, minimize their impact, and build a system to enable swift responses and accurate information disclosure on the occurrence of unforeseen situations. Please note that the risks described below are those identified by Toray Group when this annual report was produced, and do not represent all the operational and other risks that could affect Toray Group. (1) Domestic and overseas demand and market trends As a supplier of basic materials to a broad range of industries, Toray Group is exposed to various factors that could cause a sharp drop in demand for its products. These include changes in both worldwide and regional supply-demand conditions, increased use of substitute materials, and changes to the purchasing policies of business partners. In addition to severe competition with other companies, Toray Group’s various businesses also face the risk of new players entering the market. Price fluctuations, stemming from the reduction of National Health Insurance (NHI) drug prices and reimbursement prices, also affect the pharmaceuticals and medical products business. Although Toray Group takes steps to maintain its competitive advantage, a decline in demand for, or fall- ing prices of, such items, or the appearance of a credit risk affect- ing Toray Group’s business partners, could have a negative impact on Toray Group’s results of operations and financial conditions. (2) Rising prices of fuel and raw materials The prices of petrochemical raw materials and fuel used by Toray Group are subject to significant fluctuations. If Toray Group is unable to fully pass the increases in such prices on to its product prices, or cannot raise its product prices due to lack of progress in shifting to high-value-added products, its results of operations and financial conditions could be negatively affected. (3) Capital expenditures, joint ventures, alliances and acquisitions Toray Group makes capital expenditures in a wide range of busi- ness fields. Its other activities include formation of various joint ventures or strategic alliances with third parties, as well as busi- ness acquisitions. When Toray Group becomes involved in capital expenditures, joint ventures, alliances and acquisitions, it considers the poten- tial for profitability and return on investment. However, there is not necessarily any guarantee that the outcome will be consis- tent with expectations. If unforeseen market changes or signif- icant discrepancies between actual results and initial business plans occur due to sudden changes in the operating environment, there could be a loss on impairment of fixed assets or equity in losses of unconsolidated subsidiaries and affiliated companies. As a result, Toray Group’s results of operations and financial con- ditions could be negatively affected. (4) Foreign currency, interest rate and securities market fluctuations Foreign currency exchange rate fluctuations affect Toray Group’s consolidated financial statements when the financial statements of the overseas operations presented in local currencies are translated into yen. Toray Group takes measures, such as enter- ing forward exchange contracts, to alleviate risks associated with transactions denominated in foreign currencies. However, unforeseen exchange rate fluctuations could have an impact on Toray Group’s results of operations and financial conditions. Moreover, rapid and unforeseen changes in interest rates and other aspects of financial market turmoil, as well as changes in the value of securities and pension assets held by Toray Group, may have an impact on Toray Group’s results of operations and financial conditions. 68 Annual Report 2018(5) Changes in assumptions on which forecasts are based that might affect employee retirement benefit obligations and deferred tax assets Toray’s consolidated financial statements contain employee retirement benefit obligations based on future pension payments calculated in accordance with certain criteria, as well as deferred tax assets stated according to likely tax refunds based on taxable income estimates for the future fiscal years. However, if changes in the criteria used to calculate pension payments were to occur, or if fluctuations arose in the estimates of future taxable income, Toray Group’s results of operations and financial conditions could be affected. (6) Overseas operations Toray Group is developing a broad geographical presence, with operations in various countries of Asia, Europe, and the Americas. Some of the major potential risks associated with various regions are summarized below. If such risks were to become reality, Toray Group’s results of operations and financial conditions could be negatively affected. — Unforeseen introduction, changes or abolition of laws and reg- ulations such as changes in taxation systems — Unforeseen economic or political events — Social upheaval, including acts of terror or war (7) Product liability Toray Group strives to supply the world’s best-in-class product quality. However, it cannot always guarantee against a major unforeseen quality problem. If quality related serious situations were to occur, Toray Group’s results of operations and financial conditions could be negatively affected. (8) Lawsuits In the course of conducting its wide range of business activities, Toray Group faces the risk of being targeted by legal action per- taining to various matters such as intellectual property, product liability, environment, and labor issues. If Toray Group were sub- ject to a major lawsuit, its results of operations and financial con- ditions could be negatively affected. (9) Laws and regulations, taxes, competition policies and internal controls Various laws and regulations apply in the countries and regions where Toray Group conducts its business. These laws and reg- ulations include regulations related to the environment, com- mercial trading, labor, intellectual property, taxation and foreign exchange, investment approval protocols and import/export controls, and policies on competition based on antitrust laws. Through the establishment and maintenance of internal control systems, Toray Group endeavors to comply with all such laws and regulations. However, changes to such laws and regulations, including the introduction of new environmental regulations and taxes, as well as changes to the corporate income tax rate could affect Toray Group’s results of operations and financial condi- tions. Also, if Toray Group is judged as having violated such laws and regulations, is subject to government sanctions initiated by a fair trade commission, receives a notice of correction from tax authorities, has an employee who engages in illicit behavior, or is unable to uphold internal controls pertaining to financial state- ments, its results of operations and financial conditions could be negatively affected. (10) Natural disasters and accidents Toray Group places top priority on safety, accident prevention, and environmental preservation. To minimize losses caused by the suspension of production, Toray Group conducts regular acci- dent prevention inspections, maintenance of its manufacturing facilities, and safety activities. However, the advent of a major natural disaster or unprecedented accident could cause damage to Toray Group’s manufacturing facilities, or could cause inad- equate supply of raw materials, which could have a negative impact on its results of operations and financial conditions. (11) Information security risk Toray Group’s information systems and networks are fundamen- tally essential elements in the execution of the Group’s business operations and every security precaution is taken in their devel- opment and operation. However, if such an incident as a work stoppage, a loss of trust in the Group, and a leak of confiden- tial information were caused by unauthorized access, data alter- ation, theft or deletion, an interruption of system operations, or any other information security threats, Toray Group’s earnings and financial conditions could be negatively affected. 69 Toray Industries, Inc.Consolidated Balance Sheets Toray Industries, Inc. and Consolidated Subsidiaries March 31, 2018 and 2017 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) 2018 2017 2018 ¥ 108,379 ¥ 97,920 $ 1,020,518 32,722 45,191 308,117 55,499 53,213 434,050 372,909 439,673 409,332 25,641 26,438 58,739 63,911 (2,037) (2,205) 522,589 4,087,100 4,140,047 241,441 553,098 (19,181) 1,152,666 1,066,709 10,853,729 78,370 79,831 737,947 631,681 602,423 5,948,032 1,902,003 1,859,050 17,909,633 120,514 107,562 115,121 111,307 1,134,783 1,084,002 2,847,689 2,760,173 26,814,397 (1,920,660) (1,878,739) (18,085,311) 927,029 881,434 8,729,087 40,146 45,779 28,501 31,516 68,647 77,295 378,023 268,371 646,394 Investments in unconsolidated subsidiaries and affiliated companies (Note 5) 172,315 113,206 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 201,314 186,512 1,447 1,566 12,902 13,513 59,555 59,813 (2,961) (3,263) 1,622,552 1,895,612 13,625 121,488 560,782 (27,881) Total investments and other assets 444,572 371,347 4,186,177 Total assets ¥ 2,592,914 ¥ 2,396,785 $ 24,415,386 See accompanying notes to consolidated financial statements. 70 Annual Report 2018 Liabilities and Net Assets Current liabilities: Millions of yen Thousands of U.S. dollars (Note 2) 2018 2017 2018 Short-term bank loans (Notes 4, 5 and 7) ¥ 135,936 ¥ 132,014 $ 1,280,000 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 63,203 110,244 46,000 19,000 595,132 433,145 38,433 40,814 361,893 207,117 188,378 1,950,254 13,966 18,560 62,363 58,244 109,508 102,722 676,526 669,976 131,507 587,222 1,031,149 6,370,301 Long-term debt (Notes 4, 5 and 7) 567,657 450,757 5,345,169 Deferred tax liabilities (Note 10) 48,361 43,320 455,377 Net defined benefit liability (Note 8) 101,786 103,459 958,437 Customers’ guarantee deposits and other liabilities (Note 4) 29,396 29,097 276,798 Total liabilities 1,423,726 1,296,609 13,406,083 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 (losses) 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 147,873 147,873 117,572 121,091 763,504 691,290 1,392,401 1,107,081 7,189,303 (20,631) (20,822) (194,266) 1,008,318 939,432 9,494,520 74,290 66,513 699,529 (901) 21 4,830 13,764 4,158 1,542 82,377 81,840 1,334 1,205 77,159 77,699 (8,484) 45,480 39,153 775,678 12,561 726,544 1,169,188 1,100,176 11,009,303 ¥ 2,592,914 ¥ 2,396,785 $ 24,415,386 71 Toray Industries, Inc. Consolidated Statements of Income Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2018 and 2017 Net sales Costs and expenses: Millions of yen Thousands of U.S. dollars (Note 2) 2018 2017 2018 ¥ 2,204,858 ¥ 2,026,470 $ 20,761,375 Cost of sales (Notes 3, 8, 13 and 14) 1,748,017 1,596,472 16,459,670 Selling, general and administrative expenses (Notes 8, 9, 13 and 14) 300,377 283,105 2,828,409 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 Loss on liquidation and devaluation of subsidiaries and affiliated companies Environmental expenses Other, net Income before income taxes 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. 2,048,394 1,879,577 19,288,079 156,464 146,893 1,473,296 (5,091) (4,654) 5,222 9,221 (7,084) (3,944) 3,445 (3,591) (2,597) 5,010 7,506 (4,971) (2,925) 2,951 — — (15,433) (10,798) (19,852) (7,881) (47,938) 49,171 86,827 (66,704) (37,137) 32,439 (33,814) (24,454) (145,320) (186,930) 136,612 139,012 1,286,365 34,851 31,361 (1,419) 1,708 33,432 33,069 103,180 105,943 (7,265) (6,525) 328,164 (13,362) 314,802 971,563 (68,409) ¥ 95,915 ¥ 99,418 $ 903,154 Consolidated Statements of Comprehensive Income Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2018 and 2017 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. 72 Millions of yen Thousands of U.S. dollars (Note 2) 2018 2017 2018 ¥ 103,180 ¥ 105,943 $ 971,563 8,100 (997) (5,820) 2,635 5,131 643 (14,114) 6,305 (1,770) (1,950) 76,271 (9,388) (54,802) 24,812 (16,667) 2,148 (3,985) 20,226 ¥ 105,328 ¥ 101,958 $ 991,789 ¥ 96,452 ¥ 95,914 $ 908,211 8,876 6,044 83,578 Annual Report 2018 Consolidated Statements of Changes in Net Assets Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2018 and 2017 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 (losses) on securities Net deferred gains (losses) on hedges Foreign currency translation adjustments Remeasure- ments of defined benefit plans Total accumulated other compre- hensive income Stock acquisition rights Non- controlling interests Total net assets ¥ 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 (22,396) 99,418 (43) 1,911 43 (66) (25) 366 (22,396) 99,418 (25) 323 1,911 (23) (22,396) 99,418 (25) 323 1,911 (23) — ¥ 147,873 ¥ 147,873 1,911 ¥ 121,091 ¥ 121,091 76,956 ¥ 691,290 ¥ 691,290 341 ¥ (20,822) ¥ (20,822) 79,208 ¥ 939,432 ¥ 939,432 5,241 ¥ 66,513 ¥ 66,513 511 ¥ 21 ¥ 21 (15,506) ¥ 13,764 ¥ 13,764 6,250 ¥ 1,542 ¥ 1,542 (3,504) ¥ 81,840 ¥ 81,840 24 ¥ 1,205 ¥ 1,205 (461) ¥ 77,699 ¥ 77,699 75,267 ¥ 1,100,176 ¥ 1,100,176 5,241 511 (15,506) 6,250 (3,504) 24 (461) (3,941) (22,402) 95,915 (1,299) 2 (3,521) (3) 194 (22,402) 95,915 (3) 196 (3,521) (1,299) (22,402) 95,915 (3) 196 (3,521) (1,299) — ¥ 147,873 (3,519) ¥ 117,572 72,214 ¥ 763,504 191 68,886 ¥ (20,631) ¥ 1,008,318 7,777 ¥ 74,290 (922) ¥ (901) (8,934) ¥ 4,830 2,616 ¥ 4,158 537 ¥ 82,377 129 ¥ 1,334 (540) 69,012 ¥ 77,159 ¥ 1,169,188 7,777 (922) (8,934) 2,616 537 129 (540) 126 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 (losses) on securities Net deferred gains (losses) on hedges Foreign currency translation adjustments Remeasure- ments of defined benefit plans Total accumulated other compre- hensive income Stock acquisition rights Non- controlling interests Total net assets $ 1,392,401 $ 1,140,217 $ 6,509,322 $ (196,064) $ 8,845,876 $ 626,299 $ 198 $ 129,605 $ 14,520 $ 770,621 $ 11,347 $ 731,629 $ 10,359,473 (210,942) 903,154 (12,232) 19 (33,154) (28) 1,827 (210,942) 903,154 (28) 1,846 (33,154) (12,232) (210,942) 903,154 (28) 1,846 (33,154) (12,232) — 679,981 $ 1,392,401 $ 1,107,081 $ 7,189,303 (33,136) 73,230 (8,682) (84,124) 24,633 5,056 1,215 (5,085) 1,186 1,798 648,644 $ (194,266) $ 9,494,520 73,230 $ 699,529 (8,682) $ (8,484) (84,124) $ 45,480 24,633 $ 39,153 5,056 $ 775,678 1,215 $ 12,561 (5,085) 649,831 $ 726,544 $ 11,009,303 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 Other Items other than stockholders’ equity, net Total changes Balance as of March 31, 2017 Balance as of April 1, 2017 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 Other Items other than stockholders’ equity, net Total changes Balance as of March 31, 2018 Balance as of April 1, 2017 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 Other Items other than stockholders’ equity, net Total changes Balance as of March 31, 2018 See accompanying notes to consolidated financial statements. 73 Toray Industries, Inc.Consolidated Statements of Cash Flows Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2018 and 2017 Cash flows from operating activities: Income before income taxes Adjustments to reconcile income before income taxes 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 (gain) on sales and disposal of property, plant and equipment, net Loss (gain) on sales and write-down of investment securities, net Increase (decrease) in net defined benefit liability Decrease (increase) in trade receivables Decrease (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 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 provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Millions of yen Thousands of U.S. dollars (Note 2) 2018 2017 2018 ¥ 136,612 ¥ 139,012 $ 1,286,365 95,815 89,073 3,944 (5,222) (9,221) 5,091 7,084 (3,239) 193 (61,969) (31,492) 2,925 (5,010) (7,506) 4,654 4,971 (3,010) (234) (24,993) (16,483) 11,594 17,982 3,271 (3,714) 902,213 37,137 (49,171) (86,827) 47,938 66,704 (30,499) 1,817 (583,512) (296,535) 109,171 30,800 152,461 197,667 1,435,603 16,111 (5,052) (34,340) 9,175 (4,572) (28,312) 151,704 (47,571) (323,352) 129,180 173,958 1,216,384 (147,925) (143,894) (1,392,891) (67,274) 2,996 13,421 12,097 (4,616) 2,114 7,009 4,145 (633,465) 28,211 126,375 113,908 (186,685) (135,242) (1,757,863) 30,520 8,621 287,382 178,912 50,929 1,684,670 (111,446) (24,439) (49,323) (24,316) (1,049,397) (230,122) (10,480) (3,064) (1,294) (865) 61,773 (18,018) (1,924) (847) 2,344 19,851 (98,682) (12,185) 581,667 (18,117) 22,072 Cash and cash equivalents at beginning of year 131,405 109,778 1,237,335 Beginning balance of cash and cash equivalents at subsidiaries not previously included in consolidation 566 1,712 5,330 Increase in cash and cash equivalents resulting from merger with unconsolidated subsidiaries — 64 — Cash and cash equivalents at end of year ¥ 134,315 ¥ 131,405 $ 1,264,736 See accompanying notes to consolidated financial statements. 74 Annual Report 2018 Notes to Consolidated Financial Statements Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2018 and 2017 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 account- ing 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 sim- ilar circumstances should be unified, in principle. However, finan- cial 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 conve- nience 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 reval- ued to fair market value when the Company acquires control over the subsidiaries. Investments in unconsolidated subsidiaries and affiliated com- panies are accounted for by the equity method. All intercompany accounts and transactions have been elimi- nated 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, 2018 and 2017 include cash, short-term time deposits which may be withdrawn on demand without diminution of principal and highly liquid invest- ments with original maturities of three months or less. Cash and cash equivalents consisted of: Millions of yen Thousands of U.S. dollars 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 2018 2017 ¥ 108,379 ¥ 97,920 $ 1,020,518 32,722 45,191 308,117 2018 (6,786) (11,746) (63,898) — 40 — ¥ 134,315 ¥ 131,405 $ 1,264,736 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 consol- idated 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 secu- rities or other securities has declined significantly and such impairment of the value is not deemed temporary, those secu- rities 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 sepa- rate 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 inter- est rate swaps and forward foreign exchange contracts. The related hedged items are trade accounts receivable and pay- able, long-term bank loans and debt securities issued by the Company and its consolidated subsidiaries. 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 fluctua- tions. Thus, their purchases of the hedging instruments are lim- ited 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 recov- ered, estimated from past actual bad debt ratio records for general receivables and from studying the probability of recovery in individ- ual cases where there is concern over claims. 75 Toray Industries, Inc. 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 3–60 years Machinery and equipment 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 sub- sidiaries 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 lia- bilities are recognized for temporary differences between the tax basis of assets and liabilities and their reported amount in the finan- cial 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 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 pen- sion plan and a defined contribution pension plan covering all eli- gible employees. Under the terms of the unfunded lump-sum benefit plan, eli- gible employees are entitled under most circumstances, upon mandatory retirement or earlier voluntary severance, to indemni- ties based on compensation at the time of severance and years of service. The funded contributory pension plan and the defined contri- bution pension plan provide, in general, pension payments for life commencing from age 60. To provide for the payment of retirement benefits to employ- ees, 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 12 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 12 years). Unrecognized actuarial gains and losses and unrecognized 76 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 of the Company and certain of its domes- tic consolidated subsidiaries is provided based on the compa- nies’ pertinent rules and is calculated as the estimated amount which would be payable if all the executives were to retire at the balance sheet date. Any amounts payable to the executives upon retirement are subject to approval at the annual stockhold- ers’ 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 cur- rencies, whether long-term or short-term, are translated into Japanese yen at the exchange rates prevailing at the balance sheet date. Resulting gains and losses are included in net income or loss for the period. m) Translation of Foreign Currency Financial Statements Translation of foreign currency financial statements of over- seas subsidiaries into Japanese yen for consolidation purposes is made by using the current exchange rates 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 “for- eign 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. n) Standards Issued but Not Yet Adopted Accounting Standard and Implementation Guidance on Revenue Recognition On March 30, 2018, the Accounting Standards Board of Japan (ASBJ) issued “Accounting Standard for Revenue Recognition” (ASBJ Statement No. 29) and “Implementation Guidance on Accounting Standard for Revenue Recognition” (ASBJ Guidance No. 30). (1) Overview This is a comprehensive accounting standard for revenue rec- ognition. The standard establishes the following five-step model that an entity applies when recognizing revenue from customers: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obli- gations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. Annual Report 2018 (2) Scheduled Date of Adoption The Company is currently deciding the date of adopting this accounting standard and implementation guidance. (3) Impact of Adoption The Company is currently evaluating the effect of adopting this accounting standard and implementation guidance on its consoli- dated financial statements. o) Changes in Accounting Estimates In accounting for retirement benefits, the actuarial gains and losses and past service costs, which were previously amortized primarily over 13 years, are now amortized primarily over 12 years effective from the year ended March 31, 2018 because of a decrease in the employees’ average remaining years of service. This change resulted in increases of ¥2,540 million ($23,917 thousand) and ¥2,573 million ($24,228 thousand) in operating income and income before income taxes, respectively, for the year ended March 31, 2018. The impact of this change on each reportable segment is explained in Note 17. SEGMENT INFORMATION in the Notes to the Consolidated Financial Statements. 2. U.S. DOLLAR AMOUNTS 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 ¥106.2 to $1.00, the approximate exchange rate prevailing on March 31, 2018. The inclusion of such U.S. dol- lar amounts is solely for the convenience of readers outside Japan and is not intended to imply that the assets and liabilities that orig- inated 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, 2018 and 2017, inventories consisted of the following: Merchandise and finished goods Work in process Raw materials and supplies Millions of yen Thousands of U.S. dollars 2018 2017 2018 ¥ 248,513 92,501 98,659 ¥ 439,673 ¥ 235,127 78,646 95,559 ¥ 409,332 $ 2,340,047 871,008 928,992 $ 4,140,047 Losses recognized and charged to cost of sales as a result of valuation at March 31, 2018 and 2017 were ¥2,578 million ($24,275 thou- sand) and ¥6,246 million, respectively. 4. SHORT-TERM BANK LOANS, LONG-TERM DEBT AND LEASE OBLIGATIONS Short-term bank loans at March 31, 2018 and 2017 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, 2018 and 2017 were as follows: Loans principally from banks and insurance companies with interest rates primarily from 0.01% to 11.50%, maturing serially through 2026: Unsecured Secured ¥ 388,821 546 ¥ 420,399 592 $ 3,661,215 5,141 Millions of yen Thousands of U.S. dollars 2018 2017 2018 Lease obligations maturing serially through 2036: Unsecured 3,529 Yen notes with an interest rate of 0.42% due 2018 Yen notes with an interest rate of 0.96% due 2018 Yen notes with an interest rate of 0.93% due 2022 Yen notes with an interest rate of 1.01% due 2023 Yen notes with an interest rate of 0.25% due 2024 Yen notes with an interest rate of 0.38% due 2027 Zero coupon convertible bonds due 2019 Zero coupon convertible bonds due 2021 Yen notes with a floating interest rate of 6 month Japanese yen TIBOR + 0% due 2024 Less amounts due within one year — 4 20,000 20,000 40,000 60,000 50,000 50,000 1,488 634,389 63,646 ¥ 570,743 4,384 10 — 20,000 20,000 — — 50,000 50,000 — 565,385 111,376 ¥ 454,009 33,230 — 38 188,324 188,324 376,648 564,972 470,810 470,810 14,011 5,973,531 599,303 $ 5,374,228 77 Toray Industries, Inc. At March 31, 2018, assets pledged as collateral were as follows: Time deposits Property, plant and equipment, net Investment securities Others Millions of yen Thousands of U.S. dollars ¥ 922 1,312 1,279 568 ¥ 4,081 $ 8,682 12,354 12,043 5,348 $ 38,427 The annual maturities of long-term debt and lease obligations subsequent to March 31, 2018 were as follows: Years ending March 31: 2019 2020 2021 2022 2023 2024 and thereafter 5. FINANCIAL INSTRUMENTS Conditions of Financial Instruments a) Policy in Relation to Financial Instruments The policy of the Company and its consolidated subsidiaries is to manage funds only by short-term deposits, etc. and to raise funds by borrowing from banks and issuing corporate bonds. The Company and its consolidated subsidiaries use derivatives to hedge risks associated with foreign currency exchange rates and 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 receiv- ables and outstanding balances of all customers and regularly monitors the credit standing of major clients. Consolidated sub- sidiaries also monitor and manage the credit standings of their cli- ents. 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 net- ting receivables and payables denominated in the same foreign currencies. Likewise, the Company and its consolidated subsid- iaries mainly use currency swaps to hedge the foreign currency exchange risk of bank loans denominated in foreign currencies. Investment securities are mostly the shares of corporations with which the Group has business relationships and are exposed to the risk of market price fluctuations. The fair value of the invest- ment securities and financial positions of the issuing entities (cli- ents) are regularly monitored. Trade payables are operating payables, most of which are due and payable within one year. 78 Millions of yen Thousands of U.S. dollars ¥ 63,646 $ 599,303 93,260 90,674 78,091 71,746 236,972 878,154 853,804 735,320 675,574 2,231,375 ¥ 634,389 $ 5,973,531 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 pri- marily for capital expenditures. Bank loans and bonds are exposed to the risk of interest rate fluctuation. Those with floating rates bear the risk of higher nominal interest expenses when interest rates rise, whereas those with fixed rates bear the risk of higher real interest expenses when interest rates fall. The Company and its consolidated subsidiaries use derivative transactions (interest rate swap transactions) to minimize the risk of interest rate fluc- tuation, taking into consideration the balance between fixed inter- est rates and floating interest rates. Hedging instruments, hedged items, the policy for utilizing such hedging instruments and the method for evaluating the effective- ness of hedging activities are described in Note 1. SIGNIFICANT Instruments, Hedge ACCOUNTING POLICIES d) Financial Accounting in the Notes to the Consolidated Financial Statements. Derivative transactions are executed and managed in accor- dance with the internal regulations prescribing the authorization for transactions. To mitigate the 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 sub- ject 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. Annual Report 2018 Fair Value of Financial Instruments Carrying value, fair value and unrealized gain (loss) as of March 31, 2018 and 2017 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 — — 1 — — — Millions of yen 2018 Carrying value Fair value Unrealized gain (loss) ¥ 141,101 ¥ 141,101 ¥ 489,549 489,549 100 75,608 191,975 101 62,736 191,975 (12,872) — ¥ 898,333 ¥ 885,462 ¥ (12,871) ¥ 245,550 ¥ 245,550 ¥ 135,936 46,000 241,493 389,367 135,936 46,000 263,419 386,972 21,926 (2,395) ¥ 1,058,346 ¥ 1,077,877 ¥ 19,531 ¥ (614) ¥ (614) (1,479) (1,479) ¥ (2,093) ¥ (2,093) ¥ ¥ — — — Millions of yen 2017 Carrying value Fair value Unrealized gain (loss) ¥ 143,111 ¥ 143,111 ¥ 426,122 426,122 100 22,001 177,825 103 20,788 177,825 — — 3 (1,213) — ¥ 769,159 ¥ 767,949 ¥ (1,210) ¥ 229,192 ¥ 229,192 ¥ 132,014 19,000 140,010 420,991 132,014 19,000 162,942 420,261 — — — 22,932 (730) ¥ 941,207 ¥ 963,409 ¥ 22,202 ¥ (135) ¥ (135) 101 ¥ (34) ¥ 101 (34) ¥ ¥ — — — 79 Toray Industries, Inc. Cash and time deposits Trade receivables Investment securities $ 1,328,635 $ 1,328,635 $ 4,609,689 4,609,689 Held-to-maturity debt securities 942 951 — — 9 Investment securities in subsidiaries and affiliated companies 711,940 590,734 (121,205) Thousands of U.S. dollars 2018 Carrying value Fair value Unrealized gain (loss) Other securities Assets Trade payables Short-term bank loans Commercial paper Bonds *1 Long-term bank loans *2 Liabilities Derivative transactions *3 Hedge accounting is not applied Hedge accounting is applied Derivative transactions 1,807,674 1,807,674 — $ 8,458,879 $ 8,337,684 $ (121,196) $ 2,312,147 $ 2,312,147 $ 1,280,000 1,280,000 433,145 433,145 — — — 2,273,945 2,480,405 206,460 3,666,356 3,643,804 (22,552) $ 9,965,593 $ 10,149,501 $ 183,908 $ (5,782) $ (5,782) (13,927) (13,927) $ (19,708) $ (19,708) $ $ — — — *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 cor- respondent 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 and fixed-rate bonds converted to floating using interest rate swaps accounted for under the special accounting method for interest rate swaps, the fair value is approximately equal to the carrying value because the inter- est 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 inter- est rates if similar new loans were entered into in the current period. The fair value of long-term bank loans for which the spe- cial 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. 80 Annual Report 2018 2. Financial instruments for which it is extremely difficult to determine the fair value Unlisted equity securities Unlisted debt securities Millions of yen 2018 2017 ¥ 83,414 ¥ 78,266 2,000 2,000 Thousands of U.S. dollars 2018 $ 785,443 18,832 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, 2018 and 2017 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 2018 Due within one year Due after one year through five years Due after five years through ten years Due after ten years ¥ 141,101 489,401 7 — ¥ 630,509 ¥ — 148 81 12 ¥ 241 ¥ — — 12 53 ¥ 65 ¥ — — — — ¥ — 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 ¥ — 10 79 1 ¥ 90 ¥ — — 12 60 ¥ 72 ¥ — — — — ¥ — Thousands of U.S. dollars 2018 Due within one year Due after one year through five years Due after five years through ten years Due after ten years $ 1,328,635 4,608,296 $ — 1,394 66 763 — 113 $ 5,936,996 $ 2,269 $ — — 113 499 $ 612 $ — — — — $ — 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. 81 Toray Industries, Inc. 6. SECURITIES At March 31, 2018 and 2017, information on securities classified as held-to-maturity debt securities was as follows: Held-to-maturity debt securities Carrying value ¥ 100 Fair value ¥ 101 Unrealized gains Unrealized losses ¥ 2 ¥ 1 Carrying value $ 942 Fair value $ 951 Unrealized gains Unrealized losses $ 19 $ 9 Millions of yen 2018 Thousands of U.S. dollars 2018 Held-to-maturity debt securities Millions of yen 2017 Carrying value ¥ 100 Fair value ¥ 103 Unrealized gains Unrealized losses ¥ 3 ¥ 0 At March 31, 2018 and 2017, information on securities classified as other securities was as follows: Millions of yen 2018 Thousands of U.S. dollars 2018 Carrying value Acquisition cost Unrealized gains Unrealized losses Carrying value Acquisition cost Unrealized gains Unrealized losses Other securities ¥ 191,975 ¥ 87,263 ¥ 104,906 ¥ 194 $ 1,807,674 $ 821,685 $ 987,815 $ 1,827 Millions of yen 2017 Carrying value Acquisition cost Unrealized gains Unrealized losses Other securities ¥ 177,825 ¥ 84,862 ¥ 95,378 ¥ 2,415 82 Annual Report 20187. DERIVATIVES The Company and its consolidated subsidiaries had the following derivative contracts outstanding at March 31, 2018 and 2017: 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 Malaysian ringgit Buying Japanese yen Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Thai baht Selling Indonesian rupiah Selling Japanese yen Foreign currency swaps: Contract amount 2018 Fair value Unrealized gain (loss) Contract amount 2018 Fair value Unrealized gain (loss) ¥ 10,350 ¥ (252) ¥ (252) $ 97,458 $ (2,373) $ (2,373) 1,865 370 212 1,077 (32) 3 (2) 2 (32) 3 (2) 2 17,561 (301) 3,484 1,996 10,141 28 (19) 19 (301) 28 (19) 19 14,057 117 117 132,363 1,102 1,102 1,532 10 402 179 87 5,806 32 0 (9) (1) (0) (60) 32 0 (9) (1) (0) (60) 14,426 94 3,785 1,685 819 301 0 (85) (9) (0) 54,670 (565) 301 0 (85) (9) (0) (565) Receiving U.S. dollar, paying Thai baht 3,592 (412) ¥ — ¥ (614) (412) ¥ (614) 33,823 (3,879) (3,879) $ — $ (5,782) $ (5,782) 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: Receiving U.S. dollar, paying Thai baht Millions of yen 2017 Fair value Contract amount Unrealized gain (loss) ¥ 9,964 ¥ 36 ¥ 36 1,141 319 4,397 9,098 446 67 107 2,053 5,075 (10) 37 (211) (9) (5) (0) 1 (27) 53 (10) 37 (211) (9) (5) (0) 1 (27) 53 ¥ — ¥ (135) ¥ (135) 83 Toray Industries, Inc. Hedge accounting is applied Millions of yen 2018 Hedge accounting method Type of derivative and principal hedged items Contract amount Fair value *1, 2 Estimation method for fair value Deferral hedge method Forward foreign exchange contracts: For trade receivables and trade payables Buying U.S. dollar Buying Japanese yen Selling U.S. dollar Selling euro Selling Chinese yuan Foreign currency swaps: For long-term bank loans ¥ 426 2,512 854 1,202 839 ¥ 2 Forward foreign exchange quotes 29 (1) 1 4 Receiving U.S. dollar, paying Korean won Receiving Japanese yen, paying Korean won 5,994 10,196 (240) The price provided by correspon- dent financial institutions (321) Interest rate swaps: For long-term bank loans Floating-rate receipt, fixed-rate payment 54,985 153 Interest rate swaps: For bonds and long-term bank loans Floating-rate receipt, fixed-rate payment Floating-rate receipt, floating-rate payment Fixed-rate receipt, floating rate payment 364 26,900 40,000 The price provided by correspon- dent financial institutions — Forward foreign exchange contracts: For forecast transactions denominated in foreign currencies Buying U.S. dollar Buying euro Buying Chinese yuan Buying Thai baht Buying Korean won Selling U.S. dollar Selling euro Selling British pound Selling Thai baht Selling Japanese yen Forward foreign exchange contracts: For trade receivables and trade payables Buying U.S. dollar Buying euro Buying Chinese yuan Buying Korean won Buying Japanese yen Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Foreign currency swaps: For long-term bank loans 21,996 123,153 367 483 177 9,583 1,422 10 3 30 12,568 91 8 31 7 25,303 3,854 28 73 (183) Forward foreign exchange quotes (1,343) (1) 105 (2) 280 38 0 0 0 — — Receiving U.S. dollar, paying Japanese yen 131,046 ¥ — ¥ (1,479) Special accounting method for interest rate swaps Allocation method for forward foreign exchange contracts 84 Annual Report 2018 Hedge accounting method Type of derivative and principal hedged items Contract amount Fair value *1, 2 Estimation method for fair value Deferral hedge method Forward foreign exchange contracts: For trade receivables and trade payables Millions of yen 2017 Buying Japanese yen Selling euro Selling Chinese yuan Foreign currency swaps: For long-term bank loans ¥ 1,397 2,074 652 ¥ 15 Forward foreign exchange quotes (25) 2 Receiving U.S. dollar, paying Korean won Receiving Japanese yen, paying Korean won 7,028 16,000 0 The price provided by correspon- (667) dent financial institutions Interest rate swaps: For long-term bank loans Floating-rate receipt, fixed-rate payment 86,468 221 Interest rate swaps: For 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 The price provided by correspon- dent financial institutions — 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 Forward foreign exchange contracts: For trade receivables and trade payables (forecast 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: For 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: For long-term bank loans 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 Receiving U.S. dollar, paying Japanese yen Receiving Australian dollar, paying Japanese yen 160,981 3,129 ¥ — ¥ 101 — — 85 Toray Industries, Inc. Hedge accounting method Type of derivative and principal hedged items Contract amount Fair value *1, 2 Estimation method for fair value Deferral hedge method Forward foreign exchange contracts: For trade receivables and trade payables Thousands of U.S. dollars 2018 Special accounting method for interest rate swaps Allocation method for forward foreign exchange contracts Buying U.S. dollar Buying Japanese yen Selling U.S. dollar Selling euro Selling Chinese yuan Foreign currency swaps: For long-term bank loans $ 4,011 23,653 8,041 11,318 7,900 $ 19 Forward foreign exchange quotes 273 (9) 9 38 Receiving U.S. dollar, paying Korean won Receiving Japanese yen, paying Korean won 56,441 96,008 (2,260) The price provided by correspon- dent financial institutions (3,023) Interest rate swaps: For long-term bank loans Floating-rate receipt, fixed-rate payment 517,750 1,441 Interest rate swaps: For bonds and long-term bank loans Floating-rate receipt, fixed-rate payment Floating-rate receipt, floating-rate payment Fixed-rate receipt, floating rate payment 3,427 253,296 376,648 The price provided by correspon- dent financial institutions — Forward foreign exchange contracts: For forecast transactions denominated in foreign currencies Buying U.S. dollar Buying euro Buying Chinese yuan Buying Thai baht Buying Korean won Selling U.S. dollar Selling euro Selling British pound Selling Thai baht 207,119 1,159,633 3,456 4,548 1,667 90,235 13,390 94 28 (1,723) Forward foreign exchange quotes (12,646) (9) 989 (19) 2,637 358 0 0 Selling Japanese yen 282 0 Forward foreign exchange contracts: For trade receivables and trade payables Buying U.S. dollar Buying euro Buying Chinese yuan Buying Korean won Buying Japanese yen Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Foreign currency swaps: For long-term bank loans 118,343 857 75 292 66 238,258 36,290 264 687 — — Receiving U.S. dollar, paying Japanese yen 1,233,955 $ — $ (13,927) *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 corre- sponding bonds and long-term bank loans. *2 The fair value of forward foreign exchange contracts to which the allocation method is applied, except for forecast 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 for- ward foreign exchange contracts are accounted for together with the corresponding trade receivables, trade payables and long-term bank loans. 86 Annual Report 20188. RETIREMENT BENEFIT PLAN The changes in the retirement benefit obligation during the years ended March 31, 2018 and 2017 were as follows: Retirement benefit obligation at beginning of the year ¥ 196,911 ¥ 203,426 $ 1,854,153 Millions of yen Thousands of U.S. dollars 2018 2017 2018 Service cost Interest cost Actuarial gains and losses Retirement benefit paid Other 7,552 1,596 (1,573) (14,178) (46) 7,281 1,500 (682) (14,856) 242 71,111 15,028 (14,812) (133,503) (433) Retirement benefit obligation at end of the year ¥ 190,262 ¥ 196,911 $ 1,791,544 The changes in the plan assets at fair value during the years ended March 31, 2018 and 2017 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 benefits trust Other Plan assets at end of the year Millions of yen Thousands of U.S. dollars 2018 2017 2018 ¥ 121,774 ¥ 131,360 $ 1,146,648 2,560 5,738 6,602 (9,258) (9,931) (197) 2,490 12,871 6,552 (10,077) (21,632) 210 24,105 54,030 62,166 (87,175) (93,512) (1,855) ¥ 117,288 ¥ 121,774 $ 1,104,407 The following table sets forth the funded status of the plans and the amounts recognized in the consolidated balance sheets as of March 31, 2018 and 2017 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 Millions of yen Thousands of U.S. dollars 2018 2017 2018 ¥ 96,258 ¥ 102,223 $ 906,384 (117,288) (121,774) (1,104,407) (21,030) (19,551) (198,023) 94,004 72,974 94,688 75,137 885,160 687,137 Net defined benefit liability Net defined benefit asset (included in other non-current assets) 101,786 103,459 (28,812) (28,322) 958,437 (271,299) Net liability for retirement benefits in the balance sheets ¥ 72,974 ¥ 75,137 $ 687,137 87 Toray Industries, Inc. The components of retirement benefit expense for the years ended March 31, 2018 and 2017 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 benefits trust Millions of yen 2018 2017 ¥ 7,552 ¥ 7,281 1,596 (2,560) 622 (4,248) — 1,500 (2,490) 648 (4,221) (810) Thousands of U.S. dollars 2018 $ 71,111 15,028 (24,105) 5,857 (40,000) — Retirement benefit expense ¥ 2,962 ¥ 1,908 $ 27,891 In addition to the above, special severance payments of ¥1,442 million ($13,578 thousand) and ¥967 million were recognized for the years ended March 31, 2018 and 2017, respectively. Contributions to the defined contribution pension plan of ¥6,996 million ($65,876 thou- sand) and ¥6,297 million were recognized for the years ended March 31, 2018 and 2017, respectively. The components of remeasurements of defined benefit plans included in other comprehensive income (before tax effect) for the years ended March 31, 2018 and 2017 were as follows: Past service cost Actuarial gains and losses Total Millions of yen Thousands of U.S. dollars 2018 2017 2018 ¥ (4,248) ¥ (4,221) $ (40,000) 7,960 ¥ 3,712 13,320 ¥ 9,099 74,953 $ 34,953 The components of remeasurements of defined benefit plans included in accumulated other comprehensive income (before tax effect) as of March 31, 2018 and 2017 were as follows: Unrecognized past service cost Unrecognized actuarial gains and losses Total Millions of yen Thousands of U.S. dollars 2018 2017 2018 ¥ 46 ¥ (4,202) $ 433 (6,010) 1,950 (56,591) ¥ (5,964) ¥ (2,252) $ (56,158) The fair value of plan assets, by major category, as a percentage of total plan assets as of March 31, 2018 and 2017 was as follows: Bonds Stocks Life insurance Cash and time deposits Other Total 2018 2017 11% 50% 26% 10% 3% 12% 52% 26% 8% 2% 100% 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 88 2018 2017 primarily 0.6% primarily 0.6% primarily 2.0% primarily 2.0% primarily 7.5% primarily 7.5% Annual Report 2018 9. STOCK OPTION PLANS 1. Stock option expense included in selling, general and administrative expenses amounted to ¥338 million ($3,183 thousand) and ¥346 million for the years ended March 31, 2018 and 2017, respectively. 2. Information on stock options issued The following table summarizes the stock options outstanding as of March 31, 2018. Company name Toray Industries, Inc. Position and number of grantees Type and number of shares to be issued upon exercise Grant date Vesting conditions Vesting period Exercise period 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 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 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 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 August 4, 2012 Based on the number of months that have elapsed during the vesting period June 22, 2012- June 26, 2013 August 5, 2012- August 4, 2042 August 10, 2013 Based on the number of months that have elapsed during the vesting period June 26, 2013- June 25, 2014 August 11, 2013- August 10, 2043 Toray Industries, Inc. No.4 Stock Option Plan No.5 Stock Option Plan No. 6 Stock Option Plan 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 Based on the number of months that have elapsed during the vesting period June 25, 2014- June 24, 2015 August 10, 2014- August 9, 2044 August 22, 2015 Based on the number of months that have elapsed during the vesting period June 24, 2015- June 28, 2016 August 23, 2015- August 22, 2045 August 20, 2016 Based on the number of months that have elapsed during the vesting period June 28, 2016- June 27, 2017 August 21, 2016- August 20, 2046 Toray Industries, Inc. No.7 Stock Option Plan Members of the Board of the Company Directors of the Company 23 31 Common stock 374,000 shares August 19, 2017 Based on the number of months that have elapsed during the vesting period June 27, 2017- June 26, 2018 August 20, 2017- August 19, 2047 Toray Chemical Korea Inc. No.2 Stock Option Plan 1 Position and number Executives of the of grantees 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 continuous 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 89 Toray Industries, Inc.The following table summarizes movements of stock options during the year and price information on stock options as of March 31, 2018. The number of stock options are translated into the number of shares. (1) Number of stock options Company name Toray Industries, Inc. No.1 Stock Option Plan No.2 Stock Option Plan No.3 Stock Option Plan Stock acquisition rights not yet vested As of March 31, 2017 Granted Forfeited Vested As of March 31, 2018 Stock acquisition rights already vested As of March 31, 2017 Vested Exercised Forfeited As of March 31, 2018 — — — — — 242,000 — 24,000 — 218,000 — — — — — 355,000 — 65,000 — 290,000 — — — — — 306,000 — 54,000 — 252,000 Company name Toray Industries, Inc. No.4 Stock Option Plan No.5 Stock Option Plan No.6 Stock Option Plan Stock acquisition rights not yet vested As of March 31, 2017 Granted Forfeited Vested As of March 31, 2018 Stock acquisition rights already vested As of March 31, 2017 Vested Exercised Forfeited As of March 31, 2018 — — — — — 365,000 — 63,000 — 302,000 — — — — — 286,000 — 45,000 — 241,000 110,000 — — 110,000 — 271,000 110,000 51,000 — 330,000 Company name Toray Industries, Inc. Toray Chemical Korea Inc. No.7 Stock Option Plan No.2 Stock Option Plan Stock acquisition rights not yet vested As of March 31, 2017 Granted Forfeited Vested As of March 31, 2018 Stock acquisition rights already vested As of March 31, 2017 Vested Exercised Forfeited As of March 31, 2018 — 374,000 — 265,000 109,000 — 265,000 — — 265,000 — — — — — 18,815 — 18,815 — — 90 Annual Report 2018(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 Yen Toray Industries, Inc. No.1 Stock Option Plan No.2 Stock Option Plan No.3 Stock Option Plan ¥ 1 948.8 513 ¥ 1 948.8 394 ¥ 1 948.8 546 Yen Toray Industries, Inc. No.4 Stock Option Plan No.5 Stock Option Plan No.6 Stock Option Plan ¥ 1 948.8 605 ¥ 1 948.8 987 Yen Won ¥ 1 948.8 902 Company name Toray Industries, Inc. Toray Chemical Korea Inc. 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 No.7 Stock Option Plan No.2 Stock Option Plan ¥ 1 — 899 W 8,480 19,000 7,067 U.S. dollars Toray Industries, Inc. No.1 Stock Option Plan No.2 Stock Option Plan No.3 Stock Option Plan $ 0.01 8.93 4.83 $ 0.01 8.93 3.71 $ 0.01 8.93 5.14 U.S. dollars Toray Industries, Inc. No.4 Stock Option Plan No.5 Stock Option Plan No.6 Stock Option Plan $ 0.01 8.93 5.70 U.S. dollars $ 0.01 8.93 9.29 $ 0.01 8.93 8.49 Company name Toray Industries, Inc. Toray Chemical Korea Inc. Exercise price Weighted average price at exercise Fair value per share at the grant date No.7 Stock Option Plan No.2 Stock Option Plan $ 0.01 — 8.47 $ 7.97 17.87 6.65 91 Toray Industries, Inc.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.7 Stock Option Plan 26.630% 7 years ¥14 per share ($0.13) (0.056)% *1 The expected volatility is based on actual share prices during 7 years from August 20, 2010 to August 18, 2017. *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, 2017. *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 rate in Japan for the years ended March 31, 2018 and 2017 was 30.9%. At March 31, 2018 and 2017, 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 Thousands of U.S. dollars 2018 2017 2018 ¥ 6,134 10,876 32,101 13,473 15,401 21,764 33,481 133,230 (44,992) 88,238 4,571 18,419 19,870 31,776 23,450 98,086 (9,848) ¥ ¥ 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) ¥ $ 57,759 102,411 302,269 126,864 145,019 204,934 315,264 1,254,520 (423,653) 830,866 43,041 173,437 187,100 299,209 220,810 923,597 (92,731) $ 92 Annual Report 2018 At March 31, 2018 and 2017, 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 2018 ¥ 25,641 12,902 30 48,361 2017 ¥ 26,438 13,513 4 43,320 Thousands of U.S. dollars 2018 $ 241,441 121,488 282 455,377 The reconciliation of the statutory tax rate and the effective income tax rate for the years ended March 31, 2018 and 2017 was as follows: 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 Impact of the Tax Cuts and Jobs Act in the United States Amortization of goodwill Other Effective income tax rate 2018 30.9% 0.7 (0.2) (2.1) (0.2) (3.9) 1.6 (3.2) 2.0 (1.1) 24.5% 2017 30.9% 0.4 (2.4) (1.7) (1.7) (2.9) 1.4 — 1.9 (2.1) 23.8% On December 22, 2017, the Tax Cuts and Jobs Act was enacted in the United States, effectively lowering the federal corporate income tax rate effective for the periods beginning on or after January 1, 2018. Consequently, the federal corporate income tax rate applicable to the Company’s consolidated subsidiaries in the U.S. was reduced from 35% to 21%. As a result, as of and for the year ended March 31, 2018, net deferred tax liabilities have decreased by ¥4,822 million ($45,405 thousand), deferred income taxes have decreased by ¥4,838 mil- lion ($45,556 thousand) and remeasurements of defined benefit plans have decreased by ¥16 million ($151 thousand). 11. NET ASSETS The Corporation Law of Japan provides that an amount equal to 10% of the amount to be disbursed as distributions of capital sur- plus (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 condi- tions are met. At the June 2018 annual stockholders’ meeting, stockhold- ers approved the payment of cash dividends of ¥8.00 per share, aggregating to ¥12,802 million ($120,546 thousand) which has not been reflected in the accompanying consolidated financial statements for the year ended March 31, 2018. 93 Toray Industries, Inc. 12. COMMITMENTS AND CONTINGENT LIABILITIES At March 31, 2018, commitment line of credit to unconsolidated subsidiaries and affiliated companies was as follows: Total commitment line of credit Loans receivable outstanding Balance Millions of yen ¥ 380 212 ¥ 168 Thousands of U.S. dollars $ 3,578 1,996 $ 1,582 This commitment does not necessarily imply that the unused amount may be fully utilized. At March 31, 2018 and 2017, contingent liabilities were as follows: 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 Thousands of U.S. dollars 2018 2017 2018 ¥ 5,959 3,494 ¥ 9,453 ¥ 1,922 2,820 1,538 ¥ 1,216 ¥ 5,774 2,849 ¥ 8,623 307 ¥ 785 1,162 ¥ 3,255 $ 56,111 32,900 $ 89,011 $ 18,098 26,554 14,482 $ 11,450 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, 2018 and 2017 were as follows: Due within one year Due after one year Total Millions of yen 2018 ¥ 358 952 ¥ 1,310 2017 ¥ 343 1,193 ¥ 1,536 Thousands of U.S. dollars 2018 $ 3,371 8,964 $ 12,335 94 Annual Report 2018 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, 2018 and 2017 were ¥66,229 million ($623,625 thousand) and ¥59,230 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, 2018, 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 ¥3,944 mil- lion ($37,137 thousand). The major assets for which a loss on impairment was recognized were as follows: Location Use Classification Loss on impairment Millions of yen Thousands of U.S. dollars Esslingen, Germany, etc. Manufacturing facilities for carbon fiber composites Buildings Machinery and equipment Construction in progress Other ¥ 156 893 1,781 94 $ 1,469 8,409 16,770 885 The recoverable amount of the above assets was measured at the net selling value. The net selling value was calculated based on the appraisal value. 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. 95 Toray Industries, Inc. 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, 2018 and 2017. 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 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 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 Share of other comprehensive income of unconsolidated subsidiaries and affiliated companies accounted for by the equity method Millions of yen Thousands of U.S. dollars 2018 2017 2018 ¥ 15,089 ¥ 11,004 $ 142,081 (3,400) 11,689 (3,589) 8,100 (1,302) (104) (1,406) 409 (997) (4,471) (1,375) (5,846) 26 (3,454) 7,550 (2,419) 5,131 918 15 933 (290) 643 (14,953) 838 (14,115) 1 (5,820) (14,114) 7,338 13,482 (3,626) 3,712 (1,077) 2,635 (4,383) 9,099 (2,794) 6,305 (32,015) 110,066 (33,795) 76,271 (12,260) (979) (13,239) 3,851 (9,388) (42,100) (12,947) (55,047) 245 (54,802) 69,096 (34,143) 34,953 (10,141) 24,812 (1,697) (73) (1,938) (12) (15,979) (687) (1,770) (1,950) (16,667) Total other comprehensive income ¥ 2,148 ¥ (3,985) $ 20,226 96 Annual Report 2018 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 regu- larly reviewed by the Board of Directors to make decisions about resource allocation to the segments and assess performance. The Company identifies the following five segments according to the nature of the products and market for their products. Reportable segment Main products Fibers & Textiles Performance Chemicals Filament yarns, staple fibers, spun yarns, woven and knitted fabrics of nylon, polyester, acrylic, etc.; non-woven fabrics; ultra-microfiber non-woven fabric with suede texture; apparel products Nylon, ABS, PBT, PPS and other resins and molded products; polyolefin foam; polyester, polyethyl- ene, polypropylene and other films and processed film products; raw materials for synthetic fibers and other plastics; fine chemicals; electronic and information materials and graphic materials Carbon Fiber Composite Materials Carbon fibers, carbon fiber composite materials and their molded products Environment & Engineering Comprehensive engineering; condominiums; industrial equipment and machinery; IT-related equipment; water treatment membranes and related equipment; materials for housing, building and civil engineering applications Life Science Pharmaceuticals and medical devices Changes in Reportable Segments The Company changed the reportable segments from six reportable segments of Fibers & Textiles, Plastics & Chemicals, IT-related Products, Carbon Fiber Composite Materials, Environment & Engineering and Life Science to five reportable segments by integrating the Plastics & Chemicals and IT-related Products segments into the Performance Chemicals segment, effective from the year ended March 31, 2018. IT-related equipment business and service-related business such as information processing, previously classified in IT-related Products, were reclassified to Environment & Engineering and Others, respectively. Accordingly, the actual figures for the year ended March 31, 2017 are restated to reflect the changes in reportable segments. 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 mar- ket price and related information. Changes in Accounting Estimates As noted in Note 1. SIGNIFICANT ACCOUNTING POLICIES, in accounting for retirement benefits, the actuarial gains and losses and past service costs, which were previously amortized primarily over 13 years, are now amortized primarily over 12 years effective from the year ended March 31, 2018 because of a decrease in the employees’ average remaining years of service. This change increased segment income in the year ended March 31, 2018 by ¥679 million ($6,394 thousand) in Fibers & Textiles, ¥1,022 million ($9,623 thousand) in Performance Chemicals, ¥349 million ($3,286 thousand) in Carbon Fiber Composite Materials, ¥274 million ($2,580 thousand) in Environment & Engineering and ¥216 million ($2,034 thousand) in Life Science segments. 97 Toray Industries, Inc. 3. Information on sales, income, assets and other material items of reportable segments Millions of yen Year ended March 31, 2018: Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Total Adjustments Consolidated Total Sales to outside customers ¥ 913,610 ¥ 803,310 ¥ 177,949 ¥ 238,256 ¥ 53,803 ¥ 17,930 ¥ 2,204,858 ¥ — ¥ 2,204,858 Intersegment sales 1,248 17,902 591 69,453 — 24,456 113,650 (113,650) — Total sales ¥ 914,858 ¥ 821,212 ¥ 178,540 ¥ 307,709 ¥ 53,803 ¥ 42,386 ¥ 2,318,508 ¥ (113,650) ¥ 2,204,858 Segment income ¥ 72,418 ¥ 71,363 ¥ 20,764 ¥ 13,287 ¥ 1,942 ¥ 2,897 ¥ 182,671 ¥ (26,207) ¥ 156,464 Segment assets ¥ 783,869 ¥ 981,288 ¥ 466,119 ¥ 274,219 ¥ 79,015 ¥ 65,044 ¥ 2,649,554 ¥ (56,640) ¥ 2,592,914 Depreciation and amortization Investment in unconsolidated subsidiaries and affiliated companies accounted for by the equity method 28,186 37,451 21,575 4,719 2,572 1,418 95,921 (106) 95,815 84,079 48,318 8,073 10,930 2,780 7,867 162,047 (240) 161,807 Capital expenditures 48,761 61,362 32,604 5,978 2,768 1,564 153,037 287 153,324 Millions of yen Year ended March 31, 2017: Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Total Adjustments Consolidated Total Sales to outside customers ¥ 856,124 ¥ 724,648 ¥ 161,608 ¥ 212,548 ¥ 54,150 ¥ 17,392 ¥ 2,026,470 ¥ — ¥ 2,026,470 Intersegment sales 1,001 16,684 519 68,588 2 23,666 110,460 (110,460) — Total sales ¥ 857,125 ¥ 741,332 ¥ 162,127 ¥ 281,136 ¥ 54,152 ¥ 41,058 ¥ 2,136,930 ¥ (110,460) ¥ 2,026,470 Segment income ¥ 66,768 ¥ 61,807 ¥ 23,963 ¥ 11,710 ¥ 2,148 ¥ 2,625 ¥ 169,021 ¥ (22,128) ¥ 146,893 Segment assets ¥ 722,078 ¥ 890,870 ¥ 460,968 ¥ 233,890 ¥ 79,732 ¥ 63,650 ¥ 2,451,188 ¥ (54,403) ¥ 2,396,785 Depreciation and amortization Investment in unconsolidated subsidiaries and affiliated companies accounted for by the equity method 27,460 33,077 19,967 4,737 2,581 1,365 89,187 (114) 89,073 26,827 44,398 8,563 10,058 2,763 7,727 100,336 (414) 99,922 Capital expenditures 41,143 56,824 46,459 5,053 3,445 1,394 154,318 (2,279) 152,039 98 Annual Report 2018Thousands of U.S. dollars Year ended March 31, 2018: Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Total Adjustments Consolidated Total Sales to outside customers $ 8,602,731 $ 7,564,124 $ 1,675,603 $ 2,243,465 $ 506,620 $ 168,832 $ 20,761,375 $ — $ 20,761,375 Intersegment sales 11,751 168,569 5,565 653,983 — 230,282 1,070,151 (1,070,151) — Total sales $ 8,614,482 $ 7,732,693 $ 1,681,168 $ 2,897,448 $ 506,620 $ 399,115 $ 21,831,525 $ (1,070,151) $ 20,761,375 Segment income $ 681,902 $ 671,968 $ 195,518 $ 125,113 $ 18,286 $ 27,279 $ 1,720,066 $ (246,770) $ 1,473,296 Segment assets $ 7,381,064 $ 9,240,000 $ 4,389,068 $ 2,582,100 $ 744,021 $ 612,467 $ 24,948,719 $ (533,333) $ 24,415,386 Depreciation and amortization Investment in unconsolidated subsidiaries and affiliated companies accounted for by the equity method 265,405 352,646 203,154 44,435 24,218 13,352 903,211 (998) 902,213 791,704 454,972 76,017 102,919 26,177 74,077 1,525,866 (2,260) 1,523,606 Capital expenditures 459,143 577,797 307,006 56,290 26,064 14,727 1,441,026 2,702 1,443,729 Notes: 1) “Others” represents service-related businesses such as analysis, physical evaluation and research. 2) a) “Adjustments” of segment income for the year ended March 31, 2018 of ¥(26,207) million ($(246,770) thousand) includes inter- segment eliminations of ¥(1,600) million ($(15,066) thousand) and corporate expenses of ¥(24,607) million ($(231,704) thousand). “Adjustments” of segment income for the year ended March 31, 2017 of ¥(22,128) million includes intersegment eliminations of ¥(630) million and corporate expenses of ¥(21,498) million. The corporate expenses consist of the headquarters’ research expenses, etc. that are not allocated to each reportable segment. b) “Adjustments” of segment assets for the year ended March 31, 2018 of ¥(56,640) million ($(533,333) thousand) includes inter- segment eliminations of ¥(77,624) million ($(730,923) thousand) and corporate assets of ¥20,984 million ($197,589 thousand). “Adjustments” of segment assets for the year ended March 31, 2017 of ¥(54,403) million includes intersegment eliminations of ¥(71,372) million and corporate assets of ¥16,969 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 Millions of yen Asia Year ended March 31, 2018: Japan China Others North America, Europe and other areas Total Sales to outside customers ¥ 1,005,260 ¥ 386,520 ¥ 421,456 ¥ 391,622 ¥ 2,204,858 Year ended March 31, 2017: Sales to outside customers Year ended March 31, 2018: Sales to outside customers 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 Thousands of U.S. dollars Asia Japan China Others North America, Europe and other areas Total $ 9,465,725 $ 3,639,548 $ 3,968,512 $ 3,687,589 $ 20,761,375 Sales amounts are allocated to countries or regions according to the customers’ location. 99 Toray Industries, Inc. Property, plant and equipment, net Millions of yen Asia North America, Europe and other areas March 31, 2018: Japan Republic of Korea Others U.S.A. Others Total Property, plant and equipment, net ¥ 326,679 ¥ 199,721 ¥ 153,741 ¥ 123,042 ¥ 123,846 ¥ 927,029 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 Millions of yen Asia North America, Europe and other areas March 31, 2018: Japan Republic of Korea Others U.S.A. Others Total Property, plant and equipment, net $ 3,076,073 $ 1,880,612 $ 1,447,655 $ 1,158,588 $ 1,166,158 $ 8,729,087 Thousands of U.S. dollars Asia North America, Europe and other areas (Information about loss on impairment of fixed assets by reportable segments) Year ended March 31, 2018: Loss on impairment Year ended March 31, 2017: Loss on impairment Year ended March 31, 2018: Loss on impairment Millions of yen Fibers & Textiles ¥ 24 Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total ¥ 899 ¥ 2,924 ¥ 36 ¥ 61 ¥ — ¥ — ¥ 3,944 Millions of yen Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total ¥ 1,095 ¥ 877 ¥ — ¥ 15 ¥ 938 ¥ — ¥ — ¥ 2,925 Thousands of U.S. dollars Fibers & Textiles $ 226 Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total $ 8,465 $ 27,533 $ 339 $ 574 $ — $ — $ 37,137 (Information about amortization and balance of goodwill by reportable segments) Millions of yen Year ended March 31, 2018: Amortization of goodwill Balance of goodwill Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total ¥ 1,289 7,440 ¥ 4,186 15,094 ¥ 2,613 13,474 ¥ 777 4,138 ¥ — — ¥ — — ¥ — — ¥ 8,865 40,146 Millions of yen Year ended March 31, 2017: Amortization of goodwill Balance of goodwill Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total ¥ 1,208 8,657 ¥ 4,181 17,966 ¥ 2,768 16,842 ¥ 323 2,314 ¥ — — ¥ — — ¥ — — ¥ 8,480 45,779 Year ended March 31, 2018: Amortization of goodwill Balance of goodwill Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total $ 12,137 70,056 $ 39,416 142,128 $ 24,605 126,874 $ 7,316 38,964 $ — — $ — — $ — — $ 83,475 378,023 Thousands of U.S. dollars 100 Annual Report 2018 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 stock- holders 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 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, 2018 No items to be reported. upon the exercise of warrants and stock acquisition rights. Amounts per share of net assets are computed based on the net assets available for distribution to the stockholders and the number of shares of common stock outstanding at year end. Cash dividends per share represent the cash dividends pro- posed by the Board of Directors applicable to the respective years together with any interim cash dividends paid. Yen 2018 2017 U.S. dollars 2018 ¥ 59.97 59.90 15.00 681.92 ¥ 62.17 62.10 14.00 638.64 $ 0.56 0.56 0.14 6.42 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 20. ADDITIONAL INFORMATION Planned Share Purchase of TenCate Advanced Composites Holding B.V. (2) Name of the seller Koninklijke Ten Cate B.V. On March 14, 2018, the Company reached an agreement with Koninklijke Ten Cate B.V. to purchase the entire share of its sub- sidiary TenCate Advanced Composites Holding B.V. (TCAC). (3) Outline of the acquired company Name: TenCate Advanced Composites Holding B.V. Business: Manufacture and distribution of carbon fiber compos- (1) Objective of share purchase TCAC is a prepreg manufacturer with its main manufacturing bases in Europe and the U.S. and has a track record of widely supplying thermoplastic prepreg and high heat resistance ther- moset resin materials. Especially, TCAC is a global leading com- pany of carbon fiber intermediate materials using thermoplastic resins. The acquisition is expected to generate significant syner- gies by combining the product lineup in which TCAC specializes with the broad range of carbon fiber as well as polymer technol- ogies, which are the Company’s strengths. Combining the two companies’ distribution channels, the Company can offer a wider product lineup to the customers. The Company will respond swiftly to the expansion of the market for small-sized aircraft and expand the business further for industrial use applications includ- ing automobiles in the medium- to long-term. ite materials Size of business (year ended December 31, 2017) Revenues: EUR 197 million Total assets: EUR 148 million (4) Number of shares to be purchased, purchase price and percentage ownership after purchase Shares to be purchased: 100 shares Aggregate purchase price: EUR 930 million Percentage ownership after purchase: 100% Note: The purchase price includes net debt in addition to the share purchase price. The purchase price will be adjusted in accordance with any adjustments stipulated in the share purchase agreement. (5) Methods for fundraising Own funds, borrowings, bonds, etc. 101 Toray Industries, Inc. 102 Annual Report 2018Investor Information (As of March 31, 2018) Common Stock: Issued: 1,600,271,569 shares (excluding treasury stock) Number of Stockholders: 155,653 Annual General Meeting: The annual general meeting of stockholders is normally held in June in Tokyo. Listings: Common stock is listed on the Tokyo Stock Exchange. Independent Auditors: Ernst & Young ShinNihon LLC Transfer Agent: Sumitomo Mitsui Trust Bank, Limited 1-4-1, Marunouchi Chiyoda-ku, Tokyo 100-0005, Japan Cash Dividends Per Share Years ended March 31 Total for the year Interim Principal Stockholders FY 2018 FY 2017 ¥15.00 ¥14.00 7.00 7.00 Thousands of shares Percentage of shares held The Master Trust Bank of Japan, Ltd. (Trust Account) 117,902,200 Japan Trustee Services Bank, Ltd. (Trust Account) 91,157,200 Nippon Life Insurance Co. Mitsui Life Insurance Co., Ltd. State Street Bank West Client – Treaty 505234 71,212,250 35,961,000 31,680,351 Japan Trustee Services Bank, Ltd. (Trust 5 Account) 29,035,900 Sumitomo Mitsui Banking Corporation 28,522,000 Japan Trustee Services Bank, Ltd. (Trust 4 Account) 25,510,000 Japan Trustee Services Bank, Ltd. (Trust 7 Account) 21,638,700 Japan Trustee Services Bank, Ltd. (Trust 1 Account) 21,546,300 7.37 5.70 4.45 2.25 1.98 1.81 1.78 1.59 1.35 1.35 * Percentage of shares held is calculated excluding 31,209,834 shares of treasury stock. Stock Price Range Composition of Stockholders (Thousands of shares) (Yen) 1,500 1,200 900 600 300 0 2013 April 2014 April 2015 April 2016 April 2017 April 2018 March Treasury Stock 31,210 1.91% Individuals and Others 306,751 18.80% Companies and Individuals in Foreign Countries 520,655 31.91% Financial Institutions 624,763 38.29% Securities Companies 12,754 0.78% Other Japanese Companies 135,348 8.30% Corporate Data (As of March 31, 2016) 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 www.toray.com URL: Established: January 1926 Paid-in Capital: ¥147,873,030,771 Number of Employees: 45,762 Parent company: 7,625 Japanese subsidiaries: 10,590 Overseas subsidiaries: 27,547 103 Toray Industries, Inc. Printed in Japan 

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