Toray Industries Inc.
Annual Report 2019

Plain-text annual report

T o r a y I n d u s t r i e s , I n c . I n t e g r a t e d A n n u a l R e p o r t 2 0 1 9 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 CONTE NTS VA LU ES 02 Corporate Philosophy/Corporate Missions 04 Financial & Non-financial Highlights 06 To Our Stockholders and Investors 10 Sustainability Vision VA LU E CREAT IO N 12 Toray’s Value Creation Process 14 History of Value Creation and Medium- to Long-term Targets (KPIs) 18 Toray’s Strengths 01: Research and Development 22 Toray’s Strengths 02: Marketing 24 Toray’s Strengths 03: Supply Chain Management 26 Toray’s Strengths 04: Global Production System 28 Special Feature: R&D Dialogue “We All Dreamed About Becoming a Scientist” ST RAT EGY 34 The Medium-term Management Program “Project AP-G 2019” 40 Results by Segment for Fiscal 2018 42 Fibers & Textiles 44 Performance Chemicals 46 Carbon Fiber Composite Materials 48 Environment & Engineering 50 Life Science 52 R&D/Intellectual Property SUS TA IN AB ILI TY 54 Risk Management G OVERNAN CE DATA 58 Environmental Management Initiatives 60 Human Resources Management 63 Organization 64 Corporate Governance 68 Compliance 71 Analyzing and Evaluating the Effectiveness of the Board of Directors 72 Board of Directors and Corporate Auditors 74 Comments from the Outside Directors 76 Stakeholder Engagement 77 External Evaluation 78 Toray Group Worldwide Network 79 Financial Section 121 Investor Information/Corporate Data Title (TORAY REPORT, MESSAGE): Tetsukuro Matsunaga, “NAGAUTA-SHAMISEN” Artist, Important intangible cultural property “NAGAUTA” holder 02 VALUESIntegrated Annual Report 2019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 transforma- tions in society.” Based on this belief, our goal is to become a global top company in advanced materials as an integrated chemical indus- try group. Since our establishment, we have positioned “contributing to society” 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 technologies and ad- vanced materials. With this in mind, we are working to become a corporate group that provides high value to all stakeholders. 03 VALUESToray Industries, Inc.Financial & Non-financial Highlights Net Sales (Billions of yen) 3,000 2,000 1,000 0 Operating Income and Operating Income to Net Sales Ratio ROA, ROE and Net Income Attributable to Owners of Parent (Billions of yen) 200 (%) 8 (Billions of yen) 120 150 100 50 0 6 4 2 0 100 80 60 40 20 0 (%) 12 10 8 6 4 2 0 (FY) 15 16 17 18 19 Forecast (FY) 15 16 17 18 19 Forecast Operating income (left) Operating income to net sales ratio (right) (FY) 15 16 17 18 19 Forecast Net income attributable to owners of parent (left) ROA (right) ROE (right) Net Assets and Equity Ratio Cash Flows Dividend per Share and Payout Ratio (Billions of yen) 1,500 1,200 900 600 300 0 (%) 50 40 30 20 10 0 (Billions of yen) 200 (Billions of yen) 60 (Yen) 20 100 0 -100 -200 -300 30 0 -30 -60 -90 15 10 5 0 (FY) 15 16 17 18 (FY) 15 16 17 18 (FY) 15 16 17 18 Net assets (left) Equity ratio (right) Cash flows from operating activities (left) Cash flows from investing activities (left) Free cash flows (right) Dividend per Share (left) Payout Ratio (right) (%) 40 30 20 10 0 19 Forecast Capital Expenditures and Depreciation Net Sales of Green Innovation and Life Innovation Businesses Environmental Facility Investment and Environmental Preservation Costs Reduction of Atmospheric VOC Emissions Comparative Water Usage per Unit of Sales (FY 2001, set to an index value of 100) Waste Recycling Rate (Billions of yen) 200 (Billions of yen) 1,000 150 100 50 0 800 600 400 200 0 (Billions of yen) 8 6 4 2 0 (FY) 15 16 17 18 19 Forecast (FY) 15 16 17 18 19 Target Capital Expenditures* Depreciation* Green Innovation Life Innovation (FY) 15 16 17 18 19 Forecast Environmental facility investment Environmental preservation costs (FY) 15 16 17 18 (FY) 15 16 17 18 (FY) 15 16 17 18 * Total of tangible assets and intangible assets (excluding goodwill) from FY 2016 Tangible assets for FY2015 04 R&D Expenses (Billions of yen) R&D Staff approx. 4,000 Percentage of Women in Unit Manager or Higher Positions (Toray) Number of Employees by Gender (FY) 15 16 17 18 19 (FY) 15 16 17 18 (FY) 15 16 17 18 Forecast Average Time on the Job and Number of Employees Taking Childcare Leave Energy Consumption and per Unit Reduction of Greenhouse Gas Emissions Energy Consumption Index (Base year FY 1990) (Toray Group companies in Japan) (Employees) (Million gigajoules) (Year) 20 15 10 5 0 (Index) 90 60 30 0 Target Reduction of more than 15% compared to FY 1990 (FY) 15 16 17 18 (FY) 15 16 17 18 (FY) 15 16 17 18 Number of employees taking childcare leave (left) Average time on the job (right) Male Female Male Female Energy consumption (left) Per unit energy consumption index (right) Target more than 70% FY 2000 Target less than 61% of FY 2001 level Target more than 86% (Employees) 50,000 40,000 30,000 20,000 10,000 0 Male Female (%) 30 25 20 15 10 0 (%) 90 85 80 0 (%) 9.5 9.0 8.5 0 30 20 10 0 (%) 65 60 55 50 45 0 80 60 40 20 0 80 60 40 20 0 (%) 80 75 70 65 0 VALUESIntegrated Annual Report 2019(%) 12 10 8 6 4 2 0 (%) 40 30 20 10 0 2,000 1,000 0 1,500 1,200 900 600 300 0 200 150 100 50 0 (%) 50 40 30 20 10 0 200 150 100 50 0 200 100 0 -100 -200 -300 800 600 400 200 0 (%) 8 6 4 2 0 60 30 0 -30 -60 -90 120 100 80 60 40 20 0 (Yen) 20 15 10 5 0 8 6 4 2 0 Net Sales (Billions of yen) 3,000 Operating Income and Operating Income to Net Sales Ratio ROA, ROE and Net Income Attributable to Owners of Parent (Billions of yen) (Billions of yen) R&D Expenses (Billions of yen) 80 R&D Staff approx. 4,000 60 40 20 0 Percentage of Women in Unit Manager or Higher Positions (Toray) Number of Employees by Gender (%) 9.5 9.0 8.5 0 (Employees) 50,000 40,000 30,000 20,000 10,000 0 (FY) 15 16 17 18 19 (FY) 15 16 17 18 19 (FY) 15 16 17 18 19 Forecast Operating income (left) Operating income to net sales ratio (right) Forecast Net income attributable to owners of Forecast parent (left) ROA (right) ROE (right) (FY) 15 16 17 18 19 Forecast (FY) 15 16 17 18 (FY) 15 16 17 18 Male Female Net Assets and Equity Ratio Cash Flows Dividend per Share and Payout Ratio Average Time on the Job and Number of Employees Taking Childcare Leave Energy Consumption and per Unit Energy Consumption Index (Base year FY 1990) Reduction of Greenhouse Gas Emissions (Toray Group companies in Japan) (Billions of yen) (Billions of yen) (Billions of yen) (Employees) 80 (Year) 20 (Million gigajoules) 30 (Index) 90 60 40 20 0 15 10 5 0 20 10 0 60 30 0 (%) 30 25 20 15 10 0 Target Reduction of more than 15% compared to FY 1990 (FY) 15 16 17 18 (FY) 15 16 17 18 (FY) 15 16 17 18 19 (FY) 15 16 17 18 (FY) 15 16 17 18 (FY) 15 16 17 18 Net assets (left) Equity ratio (right) Cash flows from operating activities (left) Cash flows from investing activities (left) Free cash flows (right) Dividend per Share (left) Payout Ratio (right) Forecast Number of employees taking childcare leave (left) Male Female Average time on the job (right) Male Female Energy consumption (left) Per unit energy consumption index (right) Capital Expenditures and Depreciation Net Sales of Green Innovation and Life Innovation Businesses Environmental Facility Investment and Environmental Preservation Costs Reduction of Atmospheric VOC Emissions Comparative Water Usage per Unit of Sales (FY 2001, set to an index value of 100) Waste Recycling Rate (Billions of yen) (Billions of yen) (Billions of yen) 1,000 (FY) 15 16 17 18 19 (FY) 15 16 17 18 19 (FY) 15 16 17 18 19 Forecast Target Forecast Capital Expenditures* Depreciation* Green Innovation Life Innovation Environmental facility investment Environmental preservation costs * Total of tangible assets and intangible assets (excluding goodwill) from FY 2016 Tangible assets for FY2015 (%) 80 75 70 65 0 Target more than 70% FY 2000 (%) 65 60 55 50 45 0 Target less than 61% of FY 2001 level (%) 90 85 80 0 Target more than 86% (FY) 15 16 17 18 (FY) 15 16 17 18 (FY) 15 16 17 18 05 VALUESToray Industries, Inc.To Our Stockholders and Investors Maintaining a Sustainable Growth Trend Surpassing the record high of the previous fiscal year, Toray’s consolidated net sales increased 8.3% year on year, to ¥2,388.8 billion in fiscal 2018, the fiscal year ended March 31, 2019. From a profit perspective, however, oper- ating income declined 9.6% compared with the previous fiscal year, to ¥141.5 billion. This was largely due to rise in raw material and fuel prices and the impact of such fac- tors as the economic slowdown in China in the latter half of fiscal 2018. Looking ahead, the Company is projecting a return to both net sales and operating income growth in fis- cal 2019. Currently, Toray Group is in the third stage of its long- term corporate vision, “AP-Growth TORAY 2020.” In spe- cific terms, we are working on “business expansion in growth business fields,” “expansion and advancement of global business,” and “strengthening competitiveness,” as growth strategies under our medium-term manage- ment program, “Project AP-G 2019.” As far as efforts for “expansion and advancement of global business” are concerned, we are pushing forward the Green Innovation Business Expansion (GR) Project in a bid to help resolve global environmental as well as resource and energy issues, and the Life Innovation Business Expansion (LI) Project in an effort to enhance the quality of medical care, ease the burden of medical professionals, and contribute 06 VALUESIntegrated Annual Report 2019Making the Most of Its Unique Attributes, Toray is Committed to Becoming a Truly Excellent Company Akihiro Nikkaku President to the realization of a society where people live long and healthy lives. Complementing these Group-wide initia- tives, we are also focusing on the creation of new busi- nesses that will serve as the source of earnings in the new growth phase from 2020. Why Target Net Sales of ¥3 Trillion? When formulating our current long-term corporate vision in 2011, our goal was to achieve consolidated net sales of ¥3 trillion around 2020. We are taking definitive steps toward achieving this goal. We believe that net sales of ¥3 trillion as a materials manufacturer equates to the ¥10 to ¥15 tril- lion of end-consumer assembly companies in the automo- bile and home appliance industries. This level of net sales is also essential for Toray Group to announce its presence as a global excellent company in its chosen field. The fun- damental value of an end product will not change without an innovative change in its material. In other words, the use of innovative materials can help significantly increase the worth of an end product. With a strong sense of mis- sion, and the firm belief that “materials have the power to bring about fundamental transformations in society,” we are confident in our ability to achieve net sales of ¥3 tril- lion by continuously developing and commercializing inno- vative technologies and advanced materials ahead of the global competition. Steady Increase in Long-term Corporate Value In 2018, we formulated the “Toray Group Sustainability Vision,” which incorporates The World as Envisioned by Toray Group in 2050. Under this vision, we are looking to implement four broad initiatives: (1) accelerate measures to counter climate change, (2) realize sustainable, recy- cling-based use of resources and production, (3) provide clean water and air, and (4) contribute to better medical care and hygiene for people worldwide. With the global population expected to increase to 10 bil- lion by 2050, there are mounting environmental challenges such as the aging demographics in developed countries, cli- mate change, water scarcity, and resource depletion, facing the planet earth. Recognizing that sustainability is a com- mon issue of the utmost global importance in the 21st cen- tury, contributions by the corporate sector to help solve these problems through initiatives such as the sustainable development goals (SDGs) adopted by the United Nations, are attracting widespread interest. Against this backdrop, Toray Group has positioned “contributing to society” as the focus of its existence since its establishment and identi- fied “contributing to society through the creation of new value with innovative ideas, technologies, and products” as its corporate philosophy. Consistently dealing with global issues, we are confident that our efforts in conjunction with global partners are enhancing the Group’s long-term corpo- rate value with each passing year. 07 VALUESToray Industries, Inc.Adopting a Long-term Perspective and Engaging in Management That Sets Up Programs to Address Issues Today, discontinuous change at an extraordinary pace is con- sidered a common occurrence. In reality, gaps are emerg- ing between expectations regarding the pace of demand growth and long-term investments in research and techno- logical development. There are instances where projected sales and earnings can no longer be anticipated. Because of our technology reserves built up over the past decade or two, we are confident that innovative materials can indeed be developed. In addition, materials possess unlim- ited potential. When in tune with the requirements of the era, we have on numerous occasions witnessed the birth of major new markets. Initially developed for a different pur- pose, high-performance films, for example, have been used for reflectors and in the polarizer production process as a result of the emergence of LCD televisions, as well as in touch panels following the increasing use of smartphones and tablets. The development of materials is both interest- ing and problematic, with a huge difference from the end product assembly industry when it comes to the diversity in application development. Naturally, securing anticipated sales and earnings through targeted applications is basic to any management approach. Engaging in continuous investment and devel- opment based on an optimistic forecast is never a rec- ipe for success. Given the limited nature of management resources, it is only natural and prudent that a company withdraw from a business that is detrimental to its corpo- rate value. For a materials company, however, a business that is currently underperforming may still offer potential sometime in the future. While the pace at which earnings can be generated is a key factor, a more important point in determining the potential of a business is the existence or otherwise of long-term social value. For this reason, it is vital to maintain a long-term vision. Our management approach is therefore to identify short-, medium-, and long- term issues based on a long-term vision. My philosophy is to stay focused on the basics, visualize how the Company should be, and do whatever has to be done. As for staying focused on the basics, we refer to efforts aimed at leveraging our core technologies while focusing on growth markets where issues need to be addressed. The important point here is to identify and target business domains that offer considerable potential. To this end, we rec- ognize the critical need to conduct thoroughgoing analyses of the competition and other key factors. Based on these anal- yses, we acknowledge the importance of putting in place a meticulous implementation plan that unifies the production, sales and marketing as well as R&D functions to steadily push the plan forward in conjunction with related parties. As a materials manufacturer, it is vital that we paint a picture of the future that includes Win-Win relationships with robust part- ners. Under its Group-wide management strategies, Toray Group crystallizes its 10-year, broad outlook into a long-term vision. At the same time, the medium-term management pro- gram is formulated, which identifies management issues that need to be resolved. For the next three years during the mid- term, efforts are made to solve the issues. Rather than put- ting in place a “plan” that is grounded in a set of numerical targets, our focus is on the medium-term “issues.” In short, Toray Group management implements “programs to address issues,” in the belief that forecast results and numerical tar- gets will follow after solving each issue. Intense Tenacity Helps Create Business Opportunities Toray Group’s intense tenacity is second to none. This attri- bute is also a feature in the Group’s commitment to a “long- term continuity” approach. For example, the advent of an era in which carbon fibers, which are light, strong, and do not rust, would be widely used in the manufacture of air- crafts, was readily predictable. However, many companies withdrew from this field as a result of difficulties in securing profits in the short term. Under these circumstances, we discovered alternative applications for carbon fiber in the manufacture of such items as fishing rods and golf clubs. On this basis, we have tenaciously continued with the development of new technologies. More than four decades have now passed since these R&D efforts began. Today, carbon fiber composite materials are used as structural materials in the manufacture of all aircrafts. Application has also expanded to automobiles, and Toray Group’s carbon fibers have forged an unwavering position as the market 08 VALUESIntegrated Annual Report 2019leader. This “long-term continuity” approach, which serves as a wellspring for the creation of business opportunities, is not limited to carbon fiber. We are broadening this approach to encompass a wide variety of materials. All Answers can be Found at the “Genba” (Workplace) Toray Group’s commitment to a “Genba” (Workplace) approach is also a key defining feature. The very essence of Toray Group’s management is grounded in its comprehensive understanding of conditions at the workplace and the deci- sions made from a long-term perspective. The source of our competitive advantage is the ability to create value by drawing on the technologies and expertise accumulated at the work- place as well as our ability to evaluate multifaceted opportu- nities and risks based on a wealth of knowledge. By keeping a close eye on each workplace and understanding the true nature of activities, we are better placed to clarify what needs to be done and how to resolve issues. Our focus on the work- place is therefore maintained on a daily basis with important decisions, on whether to act or not and whether to continue or suspend operations, made in conjunction with onsite input. This approach to position workplace information at the heart of management is employed in the resolution of issues by all divisions and departments including production, sales and mar- keting, and research and technological development. About the Plastic Free Movement Despite signs of a growing global movement to go plas- tic free, plastics have historically helped enrich people’s lives. While recent debate tends to focus on the negative impact that plastics impose, it is imperative that attention is directed toward the issue of disposal and how best to promote effective use. We recognize the need to reduce plastic usage and the importance of advancing recycling across the entire supply chain while putting in place the necessary incentives. As far as film packaging materials and the reduction of plastic usage are concerned, steps are being taken to lower the amount of use through thin-layer formation technology, the replacement of containers with films, and ongoing efforts to cutback food loss. From a recycling perspective, we have been engaging in business activities that employ materials derived from the collection of PET bottles and paying particu- lar attention to the recycling of carbon fiber reinforced plastic. Moreover, we are conducting research and development into plant-based bio-PET, working toward the production of vari- ous chemicals that use the cellulose from agricultural prod- uct residues as a raw material, and vigorously promoting the development of processing technologies for the manufac- ture of cellulose-derived sugar. People-centric Management Another noteworthy aspect of Toray Group is its “peo- ple-centric management.” Throughout our history, we have adhered strictly to the philosophy that “the success or failure of a company is decided by its people, and that employees shape its destiny.” Referring to the function of Toray Group’s inaugural production facility, the location of the Company’s foundation, Asahiko Karashima, as the first general manager of Shiga Plant also commented that “The Plant should be a place for the cultivation of human char- acter. Companies should not only manufacture products, but also help develop human resources. People represent a key asset that is not posted to a balance sheet.” This con- cept remains a common thread throughout each generation of Toray Group’s management. Cherishing its employees, every effort continues to be made to instill a sense to loyalty and to enhance motivation. Making the most of this unique style of Japanese management, our employees are con- tributing significantly to the success of the Company over the long term. We are also seeing the growth of overseas employees who will guide our operations in the future. We are convinced that this is an extremely important factor that will help increase Toray Group’s long-term corporate value. To this point, I have outlined details of the key concepts that underpin Toray Group’s corporate value: “long-term per- spective,” “intense tenacity,” “Genba approach,” and “peo- ple-centric management.” I hope that all stockholders and investors evaluate the Company in light of these key words and ask for your continued support and understanding. Akihiro Nikkaku President 09 VALUESToray Industries, Inc.Sustainability Vision Toray Group is an advocate of the idea that “materials can change our lives.” Guided by this unwavering belief since its founda- tion, the Group has faithfully followed a policy of “adapting to the times based on a long-term vision, rather than drift with the trends of each era,” and positioned efforts to contribute to soci- ety by providing innovative technologies and advanced materials as the foundation for its existence. Meanwhile, as we face 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 soci- ety, the need to maintain and improve people’s health has also becoming an important issue. Under these circumstances, we recognize the critical need to gather and apply the wisdom required to tackle the various chal- lenges that the world faces in balancing “development” activities Providing Innovative Technologies and Advanced Materials to Help Address Global Issues with the importance of maintaining “sustainability” as a corpo- rate group that engages in economic activities that consume global resources. With a view to showing our efforts to contribute to society through the promotion of business and approach to reducing any associated environmental burden as well as our medium- and long-term initiatives to address, we announced details of the Toray Group Sustainability Vision in July 2018, which incor- porates The World as Envisioned by Toray Group in 2050, Toray Group Initiatives to achieve this, as well as Quantitative Targets for Fiscal 2030. As we look to the year 2050 and its image of the world from four distinct perspectives, Toray Group has identified issues that need to be addressed based on the value that it is capable of providing through innovative technologies and advanced materi- als. Moreover, we will work diligently to eliminate any negative impact on the global environment and sustainability as a result of our growth and development. At the same time, we will engage in Group-wide activities in an effort to resolve a variety of issues and work to achieve global targets including sustainable develop- ment goals (SDGs) together with worldwide partners. 10 VALUESIntegrated Annual Report 2019Th e Wor ld in 2050 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 Accelerating measures to counter climate change Realizing sustainable, recycling-based use of resources and production Providing clean water and air Contributing to better medical care and hygiene for people worldwide Toray Group’s Contributions Quantitative Targets for Fiscal 2030 (The baseline year for quantitative targets is fiscal 2013) 11 VALUESToray Industries, Inc.SupplyingGreen Innovation Products4foldSupplyingLife Innovation Products6foldAnnualWater Filtration Throughput3foldReducingGHG Emissions per Unit of Sales30%ReductionReducingWater Consumption per Unit of Sales30%ReductionToray‘s Value Creation Process that enable it to “Contribute to society through the creation of new value with innovative ideas, technologies, and products” Toray Group has continued to place the utmost importance on efforts aimed at contributing to society through business activities. While management from a long-term perspective that best reflects the requirements of the times, the Group has also engaged in people-centric management. Drawing on each of these core values since our foundation, we have worked diligently to pursue a process of co-creation with every customer that makes up the supply chain while ensuring mutual collaboration between our inherent R&D, marketing, and production strengths. Through these means, Toray Group is endeavoring to crystallize the four features of the world envisioned under its Sustainability Vision. Engagin Engagin create new markets throu create new markets throu g in R g in R h te h te c c h h g g & & D D t t o o Fibers & Fibers & Textiles Textiles Life Science Life Science n n o o l l o o g g i i c c a a l l i i n n n n o o v v a a t t i i o o n n y y s b s b n n o o i i t t a a c c i i l l p p p p a a t t c c u u d d o o r r p p g g n n i i z z i i l l a a e e R R R&D R&D e strengths e strengths p-wid p-wid u u o o r r g g g g n n i i s s u u n n o o i i t t a a v v o o n n n n Performance Performance Chemicals Chemicals i i l l a a c c i i g g o o l l o o n n h h c c e e t t g g n n i i d d a a r r g g p p u u Production Production Corporate Philosophy Corporate Philosophy Contributing to Contributing to society through society through the creation of the creation of new value with new value with innovative ideas, innovative ideas, technologies, technologies, and products and products Carbon Fiber Carbon Fiber Composite Composite Materials Materials p ti m al s u p ply chain p ti m al s u p ply chain o m e r n e e d s by o m e r n e e d s by t t n n t a t a d o d o u u i n g c i n g c r o b u r o b u M e e t M e e t b u i l d i n g a b u i l d i n g a s s s s Marketing Marketing Customers Customers Innovation Innovation through through Co-creation Co-creation Environment & Environment & Engineering Engineering Proposal Proposal Needs Needs Providing Providing New New Value Value to to Society Society Realizing Realizing Toray Group’s Toray Group’s Four Visions Four Visions for the World for the World （Sustainability （Sustainability Vision） Vision） Value that we cherish as management Value that we cherish as management Core Value Core Value Contributing to Contributing to society through society through business business activities activities Management Management from a long-term from a long-term perspective perspective People-centric People-centric management management (employees shape (employees shape the destiny of the destiny of a company) a company) 12 VALUE CREATIONIntegrated Annual Report 2019 Proposal Marketing Innovation through Co-creation Customers Needs Providing New Value to Society Realizing Toray Group’s Four Visions for the World （Sustainability Vision） e strengths p-wid u o r g y s b n o i t a c i l p p a t c u d o r p g n i s u n o i t a v o n n i g n i z i l a e R l a c i g o l o n h c e t g n i d a r g p u create new markets throu Engagin g in R R&D Fibers & Textiles Life Science g h te & D t o c h n o l o g i c a l i n n o v a t i o n Corporate Philosophy Contributing to society through the creation of new value with innovative ideas, technologies, and products Performance Chemicals Environment & Engineering Production Carbon Fiber Composite Materials o m e r n e e d s by p ti m al s u p ply chain M e e t t u s s n t a i n g c r o b u d o b u i l d i n g a Value that we cherish as management Core Value Contributing to society through business activities Management from a long-term perspective People-centric management (employees shape the destiny of a company) 13 VALUE CREATIONToray Industries, Inc. An Advanced Materials Manufacturer That Gives Shape to Advanced Industries Since our establishment, we have positioned “contributing to society” 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. 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 incor- porators 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. Polyester Film Global Share No.1 1959 Manufacture of LUMIRROR® polyester film began Toray was the first company in Japan to industrialize 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, specialty products, and others. Carbon Fiber Global Share No.1 1941 Succeeded in the synthesis and melt spinning of Nylon 6 fiber using proprietary technology Developed using proprietary technology, “Nylon 6” has created new markets as a new fiber that can be applied in fishing nets as well as apparels such as stockings. 1955 Company principle established “Toyo Rayon contributes to society” 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 soci- ety in which they live.” Luxury Non-woven Fabric with Suede Texture Global Share No.1 1971 Manufacture and marketing of carbon fiber TORAYCA® began High-performance carbon fiber TORAYCA® features light weight, high tensile strength, and high stiffness. Sales activi- ties commenced under the registered trademark “TORAYCA” from 1971. 1971 Marketing of ESCAINE®, ultra-microfiber non-woven fabric with suede texture, began ESCAINE® 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. 1976 Marketing of TORAYCON® PBT resin began Featuring outstanding long-term heat-resistance, chemical-re- sistance, 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 precision parts for office equipment. 14 VALUE CREATIONIntegrated Annual Report 2019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, technol- ogies, and products.” At the same time, we established our new corporate symbol as fur- ther commemoration of 60 years in business. RO Membrane Global Share No.1 1980 Marketing of ROMEMBRA® reverse osmosis membrane elements began Research began in 1968 with ongoing development as a water treatment membrane. ROMEMBRA® enabled the production of ultra-pure water for the semiconductor indus- try and the desalination of sea and brine water. 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. 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 fishing rods, golf shafts, and other sporting goods. Through improved technology and quality, the Company built up trust in this product as a secondary struc- tural 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 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 CO., LTD., a company that enriches people’s lives through clothes. Under this partnership both companies provide products that deliver new value and unprecedented levels of performance and comfort to people all over the world. The two companies are now in the third stage of the strategic partnership agreement. 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 and value creation, which utilizes the strengths of advanced materials. 15 VALUE CREATIONToray Industries, Inc.Enhancing Long-term Corporate Value 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 creating a host of advanced materials and high value-added products in a broad range of films, chemicals, plastic 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 uti- lized as a driving force, we will adopt a long-term perspective toward enhancing our corporate value. Others 1% Life Science 2% Environment & Engineering 11% (Trillion yen) Net Sales 3.0 Carbon Fiber Composite Materials 9% FY 2018 Consolidated Net Sales ¥2,388.8billion Fibers & Textiles 41% Performance Chemicals 36% New Products & Other Businesses 6% Pharmaceuticals & Medical Products 5% Housing & Engineering 12% IT-related Products 14% FY 2000 Consolidated Net Sales ¥1,075.4billion Fibers & Textiles 40% Plastics & Chemicals 23% New Products & Other Businesses 6% Housing & Engineering 8% Plastics & Chemicals 27% FY 1985 Consolidated Net Sales ¥787.0billion Fibers & Textiles 58% 1926 1930 1940 1950 1960 1970 1980 1990 2000 2010 Non-consolidated Consolidated “US GAAP” for 1964 - 1983, “Japanese GAAP” after 1984 16 2.5 2.0 1.5 1.0 0.5 0 2020 (FY) VALUE CREATIONIntegrated Annual Report 2019Others 1% Life Science 2% (Trillion yen) Net Sales 3.0 Environment & Engineering 11% Carbon Fiber Composite Materials 9% Performance Chemicals 36% FY 2018 Consolidated Net Sales ¥2,388.8billion Fibers & Textiles 41% New Products & Other Businesses 6% Pharmaceuticals & Medical Products 5% Housing & Engineering 12% FY 2000 Consolidated Net Sales Fibers & Textiles 40% IT-related Products 14% ¥1,075.4billion Plastics & Chemicals 23% New Products & Other Businesses 6% Housing & Engineering 8% Plastics & Chemicals 27% Fibers & Textiles 58% FY 1985 Consolidated Net Sales ¥787.0billion 1926 1930 1940 1950 1960 1970 1980 1990 2000 2010 Non-consolidated Consolidated “US GAAP” for 1964 - 1983, “Japanese GAAP” after 1984 Financial KPI Net Sales Operating Income FY 2019 (Forecast) ¥2,530.0billion FY 2019 (Forecast) ¥160.0billion Operating Income to Net Sales Ratio FY 2019 (Forecast) 6.3% ROA FY 2019 (Forecast) approx.6% ROE FY 2019 (Forecast) approx.8% Dividend Policy Aim for sustainable dividend increase linked to business performance Guideline of D/E ratio Below1 Net Sales of Green Innovation Business FY 2019 (Target) ¥900.0billion Net Sales of Life Innovation Business FY 2019 (Target) ¥270.0billion R&D Expenses Capital Investment Cumulative outlook for FY 2017-2019 ¥205.6billion Cumulative outlook for FY 2017-2019 ¥496.9billion Net Sales of New Business Creation 2020s Target ¥1,000.0billion Sustainable Related KPI (excerpt) FY 2020 Target Environmental Management Reduction of greenhouse gas emissions per unit of sales more than 15% (Compared to FY 1990) Water usage per unit of sales (Compared to FY 2001) less than 61% Group companies that have adopted a mid-term human resource plan 100% Number of Group companies that have requested their suppliers to practice CSR procurement More than 40companies Human Resource Management Supply Chain Management For more details, please refer to the following website (KPIs on promoting CSR): Toray website > Social Responsibility >CSR Road Map and Progress on Key Performance Indicators 17 2.5 2.0 1.5 1.0 0.5 0 2020 (FY) VALUE CREATIONToray Industries, Inc.Inheriting the Ideas of “Long-term Continuity” and “Pursuit of the Ultimate Limits” The phrase, “The Deeper, the Newer,” has been passed down as a key phrase at Toray Group, and has become part of the Group’s DNA. The concept underlying this is that when you dig deep into something and pursue it to its ultimate limit, the result will be new discoveries and inventions. An example of this would be the pursuit of the ultimate lim- its of film surface formation technologies. In the past, inorganic parti- cles were added to the entirety of the film to create random projections on the surface, but Toray Group developed a technology that thinly lam- inates particle-based polymers on the film surface, with the particles aligned and the protrusion height carefully controlled. This technology contributed greatly to the success of the Company’s high-quality reso- lution video film business. While the appearance of DVDs signaled the end of the videotape market, the technology itself has been applied to other applications, including for data tape film and in support of the man- ufacturing process for polarizers and ceramic capacitors. Our focus on Cultivating Business Seeds with the Potential to Create New Value Toray’s Strengths 01 Research and Development pursuing advanced technology stems from our belief that over time, the most advanced technology will likely be used in an increasing number of applications. While it is true that it takes a certain amount of time to develop and commercialize advanced materials, the steadfast commitment to long-term continuity which is inextricably linked to the pursuit of the ultimate limits has become a hallmark of Toray Group. As an exam- ple, reverse osmosis membranes used in water purification and carbon fiber composite materials, which are among the Company’s mainstay products, took nearly a half century from initial research to large-scale market formation. The strength of our R&D stems from the ability of the Group to rec- ognize the long-term value of materials and the will to follow through, i.e., adhering to the concept of long-term continuity and the pursuit of the ultimate limits. This focus is the source of our hard-to-imitate com- petitive advantage and the wellspring of true innovation. Toray Group has continued to invest in R&D without regard to fluc- tuations in the economy, and for many years has seen no substantial change in R&D costs as a percentage of sales, which serves to illustrate that innovation at the Group is based on the idea of long-term continuity and pursuing the ultimate limits. 18 VALUE CREATIONIntegrated Annual Report 2019Curiosity-driven Research Producing the Seeds of New Technologies Research for innovative new materials starts with the creation of themes in “fuzzy front end” (it literally means vague and uncertain world, and here defined as the period between when a product is first considered and when it is for- mally judged ready to enter development) . Somewhat similar to trying to dig a well in the vast desert first, it is important in this process not only to have a strong will, but also to have a system that promotes research activities that respect the creativity of those conducting the research. Toray Group has since its founding encouraged independent research. At present, we believe about 20% of research time should be spent on curiosi- ty-driven research, with each person focused on original basic research with the aim of creating a large-scale theme. This system has been effective in motivating research and has resulted in the creation of a variety of technolo- gies. Researchers focused on this kind of curiosity-driven research were also one of the main reasons Toray Group was able to identify the value of carbon fiber before others and move into full-fledged research in the field. Curiosity- driven research also contributed to the development of highly profitable main- stay products such as thin layer laminated polyester film and artificial leather. F u z z y f r o n t e n d r e s e a r c h C u r i o s i t y - d r i v e n m e e t i n g R e s e a r c h p r o p o s a l m e e t i n g P r o j e c t p r o p o s a l C r o s s - l a b o r a t o r y p r o p o s a l m e e t i n g r e s e a r c h p r o j e c t s G e n e r a t i o n o f n e w 19 VALUE CREATIONToray Industries, Inc. Everything Derived from “four core technologies” At first glance, it could appear that Toray Group business portfolio is diversified across a wide range of segments. However, all of these segments are built on our four core technologies. In addition to the organic synthetic chemis- try, biotechnology, and polymer chemistry technologies the Company has focused its efforts on since its founding, Toray Group has added nanotechnology, the pursuit to the ulti- mate limits, as a fourth core technology. Using these four technologies, Toray Group is promoting greater depth and fusion of fundamental technologies such as polymerization, spinning, fibers application processing, film processing, and organic synthesis. The Group is also creating advanced materials and developing businesses in the fields of textiles, films, resins, chemicals, electronic & information materials, carbon fiber composite materials, pharmaceuticals, medical devices, and water treatment. All of these products have the four core technologies in common, which contributes to the likely emergence of technological synergies, and Toray Group is able to produce materials with even higher added value thanks to its various businesses combining the inno- vative technologies and advanced materials derived from these four core technologies. Solving Problems Using the Results from Core Technologie Research and Development An Undivided R&D Organization Toray Group has centralized all of its R&D func- tions 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 tech- nologies. Moreover, the system enables the Group to exhibit combined strength by actively exploiting techniques and knowledge from many fields to solve problems in a single business area. It also enables various advanced materials and technologies to rap- idly apply to multiple businesses. With a focus on solving some of the issues facing the world, we are also developing Green Innovation Business and Life Innovation Business as Group-wide projects, based on the fusion of technologies. Using a one-package system centered on the Technology Center as a hub, we are focused on promoting the use of innovative technologies and advanced materi- als derived from our four core technologies in other fields, with the goal of maximizing returns on annual R&D investment of about ¥70 billion. 20 Technology Center Technical departments in Business Divisions Technical departments in Manufacturing Division Development Center New Projects Development Division Engineering Division Research & Development Division Infrastructure for pharmaceticals/ medical products business Strengths in advanced materials Medical field Improving healthcare quality and easing burden on medical professionals Healthcare field Contributing to health and longevity High-efficiency in Energy Use New Energies Creation of Non-petroleum Materials Water Treatment Membranes Core Polymer Chemistry Nanotechnology Technologies Organic Synthetic Chemistry Biotechnology VALUE CREATIONIntegrated Annual Report 2019Technology Center Technical departments in Business Divisions Technical departments in Manufacturing Division Development Center New Projects Development Division Engineering Division Research & Development Division Infrastructure for pharmaceticals/ medical products business Strengths in advanced materials Medical field Improving healthcare quality and easing burden on medical professionals Healthcare field Contributing to health and longevity Creation of Non-petroleum Materials High-efficiency in Energy Use New Energies Organic Synthetic Chemistry Nanotechnology Core Technologies Polymer Chemistry Biotechnology Water Treatment Membranes 21 VALUE CREATIONToray Industries, Inc.1990 Certified as primary structural material for the Boeing 777 Carbon Fiber Global Top Share 2006 Comprehensive formal agreement signed for long-term supply of carbon fiber composite materials for the Boeing 787 1973 Adopted for golf club shafts 1971 Started manufacturing of carbon fiber (Osaka Technical Research Institute Method) 1975 Certified as secondary structural material for the Boeing 737 1972 Adopted for fishing rods 1961 Started research In addition to commercializing innovative materials, Toray recognizes the critical need to put forward proposals that dramatically increase the value of customers’ products. With this in mind, Toray Group moves beyond the simple supply of materials, and works diligently to advance solutions that address customers’ issues on the back of commonly shared visions. Toray began the full-fledged production of commercial carbon fiber in 1971. Given the absence of carbon fiber market when we started, it was imperative that we take steps to create the market from scratch, while developing processing and molding methods, either on our own or in collaboration with customers. At the outset, we focused on the sporting and leisure fields, where a certain level of demand could be expected if the performance of products was high even when materials were a lit- tle expensive. As a result, we were successful in creating the market in the fields of fishing rods, golf clubs, and tennis rackets. In contrast aircrafts, an area Toray Group targeted for carbon fiber sales in the long run, was hit by the first oil crisis in 1973. This set off the ongoing search for lighter weight, energy efficient materials by aircraft manufacturers, demand for carbon fiber reinforced plastic (CFRP) grad- ually increased for the use in the secondary structures of aircrafts, such as rudders. Based on the track record, The Boeing Company adopted plans to apply CFRP as a primary structural material (for structural parts where damage is directly linked to a crash) in its Boeing 777 in 1980, Sharing Visions with Customers while Creating Markets Toray’s Strengths 02 Marketing and requested global manufacturers to step up their development of high-performance carbon fibers as well as CFRP. Against the backdrop of an increasingly competitive environment in the development of new technologies by each company, our product was certified as the world’s first and only product which cleared the specification requirements put forward by The Boeing Company in 1990. Our product has been recognized for its reliability as a material used in the manufacture of aircrafts, as well as for its stable supply and cost per- formance. Through a process of interactive technology exchange, Toray and The Boeing Company have continued to engage in the develop- ment of next-generation aircrafts, while nurturing strong ties of mutual trust. In 2003, both companies commenced the joint development of a CFRP for use in the next-generation medium-sized passenger aircraft the Boeing 787. After executing a fundamental agreement for the sup- ply of materials in 2004, the companies concluded a long-term 16-year comprehensive supply contract in 2006. Spurred by the hope that car- bon fiber would be adopted as a core material in the manufacture of all aircrafts, Toray has continued to engage in development. In a major step toward crystalizing visions of Toray Group and The Boeing Company, the Boeing 787, for the first time in the world, entered service across domestic flights in Japan in 2011. Over the ensuing period, the Boeing 787 operations have been expanded to service routes around the world. Indicative of the widespread growth of the carbon fiber market, and our strong belief that materials have the power to bring about funda- mental transformations in society, we are sharing visions with custom- ers while providing broad solutions that help realize those visions as our inherent strength. As a result of these endeavors, we are expanding manufacturing markets in which materials play a leading role. 22 Innovative Materials VALUE CREATIONIntegrated Annual Report 2019 1990 Certified as primary structural material for the Boeing 777 Carbon Fiber Global Top Share 1973 Adopted for golf club shafts 1971 Started manufacturing of carbon fiber (Osaka Technical Research Institute Method) 1972 Adopted for fishing rods 1961 Started research Innovative Materials 2006 Comprehensive formal agreement signed for long-term supply of carbon fiber composite materials for the Boeing 787 1975 Certified as secondary structural material for the Boeing 737 Developing a Carbon Fiber That Realizes Both Tensile Strength and Tensile Modulus Recognized as a material that does not rust, carbon fiber is also one quarter the weight of steel while providing approximately 10 times the tensile strength. Among its many merits, carbon fiber can help raise the humidity in aircraft cabins, enhance comfort by allowing the use of large windows as well as other structural ben- efits, not to mention improvements in fuel consumption. In 2014, Toray launched T1100G carbon fiber with the world’s highest tensile strength and continues to expand the potential of carbon fibers into high-end sporting goods and structural materials in the aerospace field. In 2018, Toray developed the TORAYCA® MX series that realizes both tensile strength and tensile modulus. While the high degree of technological difficulty required to overcome the trade-off relationship between fiber tensile strength and tensile modulus had posed a major impediment to development, Toray was able to find a solution by employing proprietary technology to con- trol the graphite crystal structure of fibers at a nano level. Looking ahead, the Company will upgrade and expand its product lineup and actively promote application proposals inherent in the market. 23 VALUE CREATIONToray Industries, Inc. Since the dawn of the synthetic fibers market shortly after the end of the Second World War, Toray Group has not only supplied materials to primary users such as spinning companies and fiber merchants, but has also focused its energies on promoting the use of new material brands, including “Nylon” and “Tetoron” throughout the supply chain, from wholesalers to distributors. As the market for ready-made garments from brand-name apparel manufacturers increased in the 1960s–1970s, Toray organized its domestic production team, largely in Hokuriku manu- facturing region, for the weaving, spinning, dyeing, fiber processing, and knitting segments, contributing to the establishment of an integrated fiber and textile business model. The Group moved to accelerate global operations in the 1980s and 1990s, advancing the establishment of an integrated production system that cov- ered everything from fiber to dyeing, in Southeast Asia and China. The turn of the century saw strong growth in SPA (specialty store retailer of private label apparel) and fast fashion businesses. The SPA business model is very different from the traditional product-out busi- ness model, in which production is maintained at a constant level at each stage. In the SPA business model, production immediately reflects consumer behavior based on data collected at the store, bypassing interim distributors and allowing companies to completely sell out prod- ucts while avoiding both excess inventories and lost sales opportunities. Building a Supply Chain Unrivaled in the World with Our Powerful Partners Toray’s Strengths 03 Supply Chain Management Toray Group had the production technology capable of mass producing high-quality products, as well as a strategy for the global textile busi- ness that was well suited to the SPA mechanism. The Group also had a robust R&D system for the development of new and unique products. The Company in 2006 agreed to a strategic partnership with UNIQLO CO., LTD. and thereafter reformed the distribution system for fibers & textiles. The two companies moved to bridge the boundaries between a material manufacturer and a specialty store retailer of private label apparel (SPA), establishing an unprecedented business model in the world in which the two operated together as a virtual company that han- dled planning, development, production, and distribution for everything from raw materials to finished products. This contributed to the estab- lishment of a global supply system, with production bases being located not only in China, but also in the ASEAN countries and Bangladesh. The Company has since continued to expand its integrated fibers, textiles, and garments business. Toray remains focused on building and oper- ating a global supply chain network that can organically tie together a variety of processing stages and quickly deliver products with identi- cal levels of quality thanks to the optimally located, efficient, and cost competitive production bases. Toray’s building of a supply chain system unparalleled in the world contributed to the radical transformation of dis- tribution systems in Japan, and appealing Japanese technology to the world, which has added new value to the textile industry. 24 Trading Trading Dyeing Dyeing Fiber Manufacturer Fiber Manufacturer Existing Supply Chain Existing Supply Chain One-stop Total Service One-stop Total Service Fiber Fiber manufacturing manufacturing Weaving, Weaving, Knitting Knitting Toray Group Toray Group Trading Trading Apparel Apparel Retailing Retailing SPA SPA Trading Trading Garment Manufacturer Garment Manufacturer Trading Trading Textile Manufacturer Textile Manufacturer Garment Garment VALUE CREATIONIntegrated Annual Report 2019Trading Apparel Retailing SPA Trading Garment Manufacturer Trading Textile Manufacturer Garment Trading Dyeing Weaving, Knitting Toray Group Fiber Manufacturer Existing Supply Chain One-stop Total Service Fiber manufacturing Dramatic Reform of Distribution Systems for Textile Industry The strategic partnership agreement between Toray and UNIQLO CO., LTD. in 2006 represented the realization of a ver- tically linked structure based on the “total industry” concept, which integrates planning, development, production, and distri- bution of everything from materials to final goods. This system allowed the rapid resolution of the problems associated with dis- tribution system inefficiencies in the Japanese textile industry. Distribution systems up to that point had been characterized by multiple levels, in which product flow was different according to material, application, or item. This contributed to a longer supply chain, difficulties in determining consumption at the retail level, uncertainties and speculation at each stage leading to distribu- tor inventory build-ups, increased losses, and thus leading to an impairment of global competitiveness of the industry. The col- laboration with UNIQLO CO., LTD. contributed to Toray Group’s textile business consolidating its multi-level supply chain into a simple and flexible production system better linked to actual demand trend. The Group aims for the business to achieve sus- tainability through the sharp reduction of inventory risk as well as production and distribution costs on a global basis. 25 VALUE CREATIONToray Industries, Inc.Guided by our basic policy of global management that emphasizes the need to take root over a long period in order to contribute to the economic devel- opment of the countries and regions where we operate our businesses, Toray Group’s overseas production activities began with the establishment of a subsidiary in Thailand to provide integrated spinning, weaving, and dyeing of polyester-rayon fabric in 1963. As a Japanese company, Toray engaged in local production from an extremely early period. Beginning with Southeast Asia during the 1960s and 1970s, the Company’s global network expanded to Europe and the U.S. in the 1980s, and then to the Republic of Korea and China in the 1990s. The Group has established production bases for such items as films and carbon fiber, in addition to fibers and textiles. Today, every effort is being made to promote organic collaboration among Group bases in Japan and overseas. Through these means, Toray is build- ing an optimal global production and supply structure that adapts flexibly to changes in the business environment in line with market, foreign currency, and other trends. Furthermore, successful steps are being taken to create a production system that can supply high-quality products on a stable and continuous basis in any region. Europe European Airbag Textile Market Working to Secure Sustainable Growth on a Global Scale through Organic Collaboration Among Production Bases Asian Airbag Textile Market China India Thailand Japan Fiber Production and Sales 3 countries Textile Production and sales 6 countries R&D Center 2 countries Marketing 8 countries Toray’s Strengths 04 Global Production System As of the end of fiscal 2018, Toray Group’s network expanded to 26 coun- tries worldwide. Accounting for 55% of the Group’s total revenue, overseas sales amounted to roughly ¥1,300 billion. In contrast, the Group’s overseas production ratio substantially exceeds its sales ratio. More than 75 to 80% of such principal products as fibers and textiles, resins, films, and carbon fibers are manufactured outside of Japan. Drawing on its global production system as a source of considerable strength, Toray Group is implementing a sustainable growth cycle. In specific terms, we are undertaking cutting-edge innovative research and development at our mother plant in Japan, while at the same time adopting a strategy to establish local production systems swiftly and flexibly from the perspectives of demand and cost competitive- ness. Complementing these endeavors, we are also promoting the devel- opment of applications that cater to local needs at each production base. This in turn enables us to capture new profit opportunities. 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 Overseas Bases Development of applications that address local needs Local production based on location of demand and cost competitiveness Reinvest in R&D 26 Americas Airbag Textile Market USA Mexico Brazil VALUE CREATIONIntegrated Annual Report 2019 Europe Europe European European Airbag Textile Market Airbag Textile Market Global Production System Working to Secure Sustainable Growth on a Global Scale through Organic Collaboration Among Production Bases Asian Airbag Textile Market Asian Airbag Textile Market China China India India Thailand Thailand Japan Japan Fiber Production and Sales Fiber Production and Sales 3 countries 3 countries Textile Production Textile Production and sales and sales 6 countries 6 countries R&D Center R&D Center 2 countries 2 countries Marketing Marketing 8 countries 8 countries Americas Airbag Textile Market Americas Airbag Textile Market USA USA Mexico Mexico Brazil Brazil Working to Secure the Leading Position in Airbag Textile through a Global Integrated Production System The airbag market is exhibiting rapid growth due to upswings in the number of automobiles sold in emerging countries as well as installation rates. In its airbag fibers & textiles business, Toray Group began the integrated production of a wide range of products from fibers to textiles in Mexico from 2018 as a part of efforts to further reinforce its global production system. Currently, Group com- panies manufacture airbag fibers in three loca- tions and airbag textiles in six locations worldwide, respectively, under the global production system that is capable of providing airbag textiles of a uni- form quality in a timely manner across the Group’s entire network. As a result of these efforts, Toray Group is highly praised from a business continu- ity plan (BCP) perspective. Going forward, we are aiming to secure the top market share in the global airbag textiles market where strict quality control and reliability of products are required. 27 VALUE CREATIONToray Industries, Inc. Special Feature R&D Dialogue First of all, please tell us about your points of contact between Toray and science. Abe | It really is an honor to be able to talk science with you Dr. Noyori, a recipient of the Nobel Prize in Chemistry. The results of your research into chirally catalyzed hydrogenation reactions became useful technologies that are widely used in the production of compounds, including pharmaceuti- cals. I have heard that your contacts with Toray date back a very long time. Noyori | My family has long had a connection with Toray, or Toyo Rayon as it was back then. My grandfather and Asahiko Karashima, the compa- ny’s future second chairman, were relatives and childhood friends from the same hometown, and I recollect hearing from my grandmother words that Mr. Karashima reportedly said, “If you lick it, rayon melts like glue.” What sparked my interest in science was Dr. Hideki Yukawa becom- ing the first Japanese Nobel laureate in the impoverished period right after the end of the Second World War. Many young boys held on to aspirations of emulating Dr. Yukawa, and I, at that time, an elementary school pupil, was one of them. Then, just prior to entering junior high school, my father, who was a researcher at a major chemical company, took me to a presentation on Toyo Rayon’s nylon product development, where the president back then, Kikuo Sodeyama, introduced nylon as “an epoch-making product that is made from coal, water, and air.” Since that was a time when people had nothing, I was impressed to learn even then that “chemistry is just like alchemy in that it can turn something worth nothing into things of value.” This “Nylon Incident” gave me added impetus that led me to get enthusiastic about studying science. Added to We All Dreamed About Becoming a Scientist which, as I always used to hear my father say at meal- times, “The companies with money depend on over- seas technology, and that is no good. To get back on its feet, Japan should focus on develop- ing domestic technologies.” As I grew up in such an environment, I aimed for and entered Kyoto University Faculty of Engineering, which has strengths in chemistry. I had thought that someday I would like to aim to become a researcher at Toyo Rayon. When Koichi Abe Executive Vice President and Representative Member of the Board Chief Technology Officer (CTO) Toray Industries, Inc. Born in 1953 Completed Master’s Degree (Physical Chemistry), Graduate School of Engineering Science, Osaka University 1977 Joined the Company (Films & Film Products Research Laboratories) 2005 Vice President and General Manager of Research & Development Division Since 2014 Executive Vice President and Representative Member of the Board 28 VALUE CREATIONIntegrated Annual Report 2019I entered graduate school, however, I was enthusiastic about research and, having been recommended by the professor supervising my work, chose the path of remaining there with the aim of becoming a researcher. But, after having bounced around from one place to the next, I have become deeply involved with Toray as an outside director over the past four years, so my dream came true, and I am finding it very rewarding. Abe | What led me to have an interest in science was not some lofty moti- vation like that of Dr. Noyori, but the Astro Boy manga series. A child of sci- ence, jet propulsion, 100,000 horsepower, a nuclear-powered hero fighting for justice…I received strong messages that science exists for and con- tributes to society, and vaguely wanted to somehow contribute to society myself through science when I was older. Later, I attended a public high school where I could choose a mathematics and science course from the first grade. The science classes there were not centered on classroom lectures, but a repetitive experience of experimenting by replacing basic principles with macro models. My teacher at that time would give fervent speeches about famous sayings from Nobel Prize winners, and I remem- ber one that seemed to resonate with me in particular was something that Pasteur is supposed to have said: “Chance favors the prepared mind.” I interpreted this as “Lady Luck smiles on those who continue to be aware of problems,” and that is still my motto. Also, when the teacher gave us a problem of estimating the number of soybeans packed into a plastic case, you run out of time if you try to calculate it properly. I was taken aback by this. In fact, it taught the importance of intuition. Those kinds of unconven- tional courses aroused my curiosity about science all the more. In my university days, as a researcher, I had knowledge hammered We All Dreamed About Becoming a Scientist into me, such as “Predict the answer before experimenting. The exper- iment provides confirmation,” “Before conducting an experiment, think carefully about whether the experiment is really necessary,” and “If you conduct a two-hour experiment, take at least twice as much thinking time in the laboratory.” One day, by changing an experiment’s procedure, a phenome- non completely different from the conventional prediction had occurred, and the professor supervising my work told me “We are having a company to file a patent application for your research.” That company was Toray. It was with that kind of relationship that I joined Toray and was initially assigned to the Films & Film Products Research Laboratories. Here too, little things I became aware of and an awareness of problems when conducting one research theme provided hints for setting the next theme. At Toray, key phrases like “The deeper, the newer” and “Pursuit of the ultimate limits” have been handed down over the years, but the result of having instilled them in me was that we developed the thin film lamination technology for magnetic tape, New Surface Topography (NEST), for which we won an Okochi Memorial Production Prize. Ryoji Noyori Outside Director, Toray Industries, Inc. Born in 1938 Graduated from Kyoto University Doctor of Engineering, Distinguished Professor, Nagoya University 2000 Received Order of Culture from Japanese Government 2001 Received Nobel Prize in Chemistry for the development of chirally catalyzed hydrogenation reactions Since 2015 Outside Director, Toray Industries, Inc. 29 VALUE CREATIONToray Industries, Inc. comprehensive strengths by utilizing technologies and knowl- edge from different fields to solve issues in one business field, such as the medical-field researchers who are lending their sup- port to organic synthetic chemistry technologies. Noyori | Toray has earned a very high level of trust from soci- ety by having each of its businesses provide products based on proprietary technologies. It might well be that Toray’s comprehensive strengths, in which a wide range of knowl- edge and technology can bring about innovation across busi- nesses, are a feature unrivaled by other companies. However, in unforgiving competition with European and U.S. compa- nies, which always follow bold selection and concentration policies, and Asian companies with their low-cost production capabilities, Toray must be careful not to expand its business domain too far so that its relative competitiveness is not lost. Abe | I agree with you. If researchers were to be given a free rein in the setting and management of research themes, management resources would be scattered and research efficiency would decline, making it impossible to win against fierce competition. Having said that, in maintaining technol- ogy-based management having an environment that draws out the free ideas of researchers is of absolute necessity. This we thus call “underground research,” and at Toray, researchers are encouraged to spend about 20% of their working hours conducting discretionary preliminary exper- iments and investigations without reporting them to their supervisors. Carbon fiber and my development of NEST arose from underground research. However, when moving from the research stage to the development stage, because we will create a pilot plant and need a lot of raw materials and people, it is impossible to do everything. Deciding what to invest in is the real thrill of man- agement, but since it is a very hard decision to make, I make a point of making a judgment after trying as much as possible to quantify the extent of its value. Moreover, since this is an age in which our integral technologies are being caught up in the blink of an eye, we carefully examine whether it is a theme that would enable us to demonstrate Toray’s strengths in the years to come, not just transiently. Priority is also given to those themes that have a high affinity with Toray’s business and tech- nological foundations and that cannot be built overnight. I call this “appropriateness for the Company” and is something to which I attach great importance. We are advancing to develop- ment stages when we can build up an exact picture of where to get value for money from the technology, where we could earn income in the value chain and how to build a business model that minimizes risk and maximizes return. It is said that it is difficult for innovation to happen in Japan. What are your thoughts on this issue? Noyori | Japanese companies are often said to “win in tech- nology and lose in business.” Since projects do not advance to the development stage despite their high potential and are poorly converted into value, Japanese R&D expenses tend to be perceived as costs rather than investments. Just because a project did not reach the commercialization stage, how- ever, does not necessarily mean that the technological level was inferior, and there are many “premature inventions” Intense tenacity is a strength based on a typically Japanese trait, and this the biggest barrier to entry for new market entrants. In what areas do Toray’s R&D fortes lie? Abe | First of all, Toray doesn’t express research and techno- logical development as the one combined term in Japanese, unlike such as R&D in English, and always puts a break in between, research and technological development. Research is like creating one from zero, in other words akin to dig- ging a well, whereas technological development is recogniz- ing that you will fabricate a target quality product in a fixed time for a fixed cost. Having made the distinction between research and technological development in this way, we build one-package systems in which these elements are not divided into two and that I manage in my capacity as general manager of the Technology Center or CTO. Secondly, at Toray, we identify the value of materials with a broad vision of the times and have that culture of persistently pursuing the ultimate limits with a focus on basic research atti- tude. In global competition, this intense tenacity is a strength based on a typically Japanese trait, and I consider this the biggest barrier to entry for potential new market entrants. As exemplified by carbon fiber, which became the main structural material for aircrafts more than half a century after the start of research, the culture of commitment to the “Pursuit of the ultimate limits” has built up a host of successful experiences and we continue to reap the benefits to this day. Finally, the reason why we have a Technology Center is to integrate Toray’s research and technological development func- tions and bring together experts from a variety of fields. The exis- tence of this organization enables the development of advanced materials created in one field to be deployed in other fields. Occurrences of fusions of technologies are also facilitated. One example is the “DNA Chip,” which is expected to detect various types of cancer from a small amount of blood and was created by the shared knowledge of biotechnology and nanotechnology experts. Also, to solve the problems associated with carbon fiber and water treatment membranes, we are demonstrating our 30 VALUE CREATIONIntegrated Annual Report 2019that the times have not caught up with. If, a few years later, an idea were to undergo huge transformation outside the company that had first thought of it, that would be a story of extreme wasted effort. We should not be passive with regards to markets, but instead gather information, look out across the world and proactively make proposals that make use of our inventions and technologies. Japanese companies have keen “insect eyes” to view one thing intensely and precisely, but I think we have more of a need to develop “bird’s eyes” to have a panoramic, bird’s-eye view of things and “fish eyes” to sense as yet unrevealed phenomena and signs. Then, as we enter the age of “value co-creation” on a worldwide basis, there is another problem in that Japanese people are not aware of the differences between groups and teams. A group has the meaning of a “flock” that occurs spon- taneously based on homogeneity, whereas a team is an “orga- nization” that has an artificially defined purpose. Since the traditional Japanese spirit of “doing something while main- taining precious harmony” has its origins in flocks, this exerts great influence in social stability and in the execution of rou- tine tasks. However, the power of multiplication to create new value does not emerge from a homogeneous group. Solo musi- cians and vocalists are good in music, but in an orchestra for- mat you have to bring together virtuosos for performances on a variety of musical instruments. And it will take an excellent conductor to hold them together. Unlike tug-of-war competi- tions, baseball and rugby games need players with different roles in order to win, and team lineups that are rich in diversity are essential. To speed up innovation, Japanese companies in particular should be aware that selecting different people, not closed groups, forms winning teams. Because Silicon Valley is able to do that, startups succeed. They benefit from investing in innovative ideas, bring together diverse talent from around the world with that capital, and create the strongest teams. Another thing I would like to add is that I think science and technology also requires art, or perhaps I should say, an ele- ment of sensitivity. At advanced technology universities, not only in Europe and the United States but also in Asia, there is an increasing number of art departments that inspire sensi- tivity. There are many Toray researchers with excellent STEM (Science, Technology, Engineering, Mathematics), but hav- ing added Art, the people who possess a sense of STEAM will become indispensable for future business development. Naturally, company research should be conducted not for solving immediate problems but for creating new value for the future. Society is vast. Researchers and engineers tend to attack a research theme with established logic, but unless they pos- sess the “creativity” to provide “imagination,” they will not be able to create things the world wants. In that sense, the approach that says an expert will realize something with the ideas from an amateur is also important. Isn’t it also important, however, to adopt various sensibilities and think about innova- tion with soft ideas, such as from sales and marketing depart- ments that are in contact with customers on a daily basis, people who are sensitive to life or employees who attended art schools who possess more keenly developed intuition and “feel”? Abe | To respond to Dr. Noyori’s suggestions, Toray is now in the process of building the R&D Innovation Center for the Future and is aiming for its completion in December 2019. The Center To win in business, Japanese companies should be aware of forming winning teams rather than closed groups. will consist of an integrated research building, which will fulfill an ideas creation function, and an experimental research build- ing that will promote the prototype production, assessment and demonstration of products developed on the basis of those ideas. The plan is for the Advisory Board to also welcome peo- ple from the areas of humanities and social sciences. Instead of the Center serving just as a technological development base for monozukuri (manufacturing), we are exploring the functions and mechanisms necessary for the future society and trying to conduct kotozukuri (the creation of added value) using the strengths of materials. The Center will also fulfill an innovation hub function, such as an international conference hall, exhibition/ demonstration area, and open lab, and accelerate strategic open innovation through exchange, fusion, and collaboration with aca- demia and important partners in various fields. Please tell us more about the importance of open innovation. Noyori | The days when a company could singlehandedly under- take everything, from research to technological development, have passed. In the pharmaceutical industry collaboration with external research institutes and startups has become com- monplace. Innovation has a difficult birth from the traditional large companies with entrenched organizations. What is effec- tive instead is an “ecosystem” in which various structural ele- ments function cyclically and efficiently, like the ecosystems in the natural world. In other words, as a strategy, it the important for Toray to regard its own technologies as the core, to create high value-added products while utilizing external technologies and capital, and build the mechanisms to continuously generate revenue. The Toray Technology Center is not a place to lock up the accumulated knowledge and technology in a safe. To bring about innovation, Toray should actively promote not only inter- nal use but also the integration of technologies with the outside, and I think that Executive Vice President and CTO Abe’s role, in the control tower overseeing operations, is of great importance. 31 VALUE CREATIONToray Industries, Inc.Abe | I think Toray originally had an ethos of what we now call open innovation, but around the year 2000, the Company was particularly concerned about self-sufficiency. However, in the fiscal year ended March 2002, when Toray (uncon- solidated) recorded a loss in operating profit, we earnestly reflected on that particular commitment and established the New Frontiers Research Laboratories in 2003. However, looking back, the basic invention of carbon fiber was that of Dr. Akio Shindo of the Osaka Technical Research Institute (now the National Institute of Advanced Industrial Science and Technology (AIST) Kansai). Toray quickly realized its value, received a patent license, and has persistently contin- ued research and technological development. I think this is exactly what open innovation is all about. I would like to reaf- firm that kind of activity and thereby bestow a meaningful function on the R&D Innovation Center for the Future. In the sense of science for solving social issues, the marine plastics pollution issue is coming under intense scrutiny. Please tell us about the efforts that Toray is making in this regard. Abe | Resolving the marine plastic pollution issue is positioned as a priority theme at Toray. However, just because something is made from biodegradable plastic, it does not mean that it will easily biodegrade when thrown away into seawater. The misunderstanding that plastic immediately biodegrades may conversely encourage more dumping. Giving consideration to such possibility, Toray is focusing on recyclability. For exam- ple, most packaging bags commonly used in supermarkets are plastic films but they are made in combination with multi- ple materials. By reducing the material to one type of film, we believe that recycling would be greatly encouraged. Noyori | There is an increasing demand for materials that contribute not only to innovative functions, but also to a recy- cling economy. This is because the more useful the product, the more its negative impact, such as in the form of environ- mental problems, tends to increase. Research to efficiently produce oil-derived structures that realize breakthrough func- tionality will continue to be important. On the other hand, since Toray is a company that provides materials to all indus- tries around the world, I think that it has a social obligation to make effective proposals for environmental problems, includ- ing marine plastic pollution, by the power of materials. In addi- tion, because Toray advocates that “materials can change our lives,” as a Toray supporter, I would like the Company to for- mulate and address “what should be done,” not at the level of doing “what can be done,” but in a leading role in solving these global issues. What are your thoughts on human resource development that contributes to the world with the power of science? Abe | Researchers and engineers who have made great achievements at Toray are not passive, have a high sense of purpose and mission, and are able to actively think and work, but they also are “people with extensive expertise backed by basic scientific capabilities.” However, the recent trend at universities is that specialized fields have become limited and more extensive, but even after completing a master’s program in polymer chemistry, it seems that the basic scien- tific ability to see the entire picture, including the surround- ings—the “bird’s eyes” that Dr. Noyori mentioned—seems to have declined. In the meantime, it has become no longer possible to create major new products from a single tech- nology, and it remains difficult to produce significant results from research conducted in isolation. Moreover, the major subjects at universities and research themes at companies do not always coincide. Thus, people who can see things with “bird’s eyes,” who possess multiple areas of exper- tise, even if they are not the same depth, and who know the key points to look for when approaching unknown fields, are producing great results. These are the types of human resources on which we are focusing development. To create a climate where one could concentrate on research and technological development for a long time, and in which young researchers could work hard to become “research professionals,” Toray established a Research Fellow System in 1992, and an Engineering Fellow System in 1998. We bestow the titles of Research Fellow or Engineering Fellow on research and technological devel- opment engineers who have achieved breakthroughs that have contributed to the Company or have demonstrated their professional leadership in either of those fields. As an effect of this, there are people with proficient skills at Toray. We have also compiled a collection of successful cases called “How I Proceeded with My Research,” about how breakthroughs have come about, and are making efforts to pass them on. Noyori | People are drawn to people. Rather than learning what kind of a product was made, people are more inter- ested in the routes taken to bring about success. I think it’s very good to pass on the efforts of successful people. In my experience, the owner of an original idea is not necessarily an excellent student who can do anything, or a student with high academic grades. Rather, the ideas and behavior of honors students are said to be similar. It is a prob- lem if everyone is outside the norm, but in making some- thing that does not yet exist, you cannot ignore the ideas of eccentrics and stubborn researchers. I think that non-stan- dard ideas will arise from those who have been self-taught since they were young and are in the habit of self-study. For that reason, it is not easy for them to abandon pet theories and they tend to be isolated in an organization, but regard- less of that I think that it should be Toray that trains the non-conformists of this world. In addition, it is clear that we are heading to an era in which data will be known as the second oil resource, and AI and big data will exert their influence. In that respect, it has become important to secure and train human resources who are strong in mathematics and statistics. As far as researchers are concerned, there was an awareness that digital technology is a means to do things efficiently, and that digitalization and systemization are somehow alien to a world of steady manual labor like chemistry. But this belief should be revised. The evolution of IT has enabled explora- tion with orders of magnitude and speed. In 10 years’ time, the chemical industry map will be filled with the colors of the 32 VALUE CREATIONIntegrated Annual Report 2019 If you want to become a researcher, you will need the spirit to make a big hit. I would like scientists to live in a world they themselves have created. Koichi Abe Ryoji Noyori companies that are data driven. Throughout the Company, Toray should aim to be the market leader in the new informa- tion-oriented society. Finally, as a message to the researchers and engineers who will be leading the coming era, please tell us what kind of human resources Toray is seeking. Abe | In the words of our late honorary chairman, Katsunosuke Maeda, Toray is seeking for human resources who “have a discerning eye for change and possess the power to see through the essence of the matter” and are capable of “inde- pendently tackling their own issues head-on.” This has not changed and will not change. On top of that, I think that even a company with sales exceeding ¥3 trillion will start to decline if it loses its spirit as a collective of startups. To be honest, in the past, I was researching films with the spirit of “making a big hit.” I still feel that pioneer in me saying, “I will change Toray with my own strength. I will change the world with my own strength.” I would like everyone to possess that degree of fearlessness. Noyori | I would like young people who are full of intelli- gence and sensibility to fully recognize the current trends in a world where the way things are in modern civilization are being questioned, to fully utilize their talents upon coming to Toray. Toray is aiming for global recognition as an excel- lent company. Based on Toray’s philosophy that is similar to CSV (Creating shared value), which balances economic profit activities and the creation of social value, the com- pany is staking its future on the Green Innovation Business Expansion Project and Life Innovation Business Expansion Project. What is meant by life here? Toray should aim not only for innovation for life but also for innovation of livelihoods and lifestyles. These will become possible only after reflecting the will of society. There is a host of opportunities for Toray to do that. I know from personal experience that science makes great contributions to society and is a truly rewarding life occupa- tion. I would like young scientists who are breaking new ground toward the future, to live in a world they themselves have created, not one given to them by others. Possessing that spirit, I hope that they can depict the future society the way it should be, by cooperating with a variety of people. As one of the Company’s directors myself, I am aware of my responsibility to those who will be responsible for the future of Toray. Yoshikazu Ito, who himself developed a nylon manufacturing method utilizing photosynthesis, and changed the company name from Toyo Rayon to Toray after taking office as president, and focused on developing busi- ness in the non-textile sector, said, “It is easy to just improve business results over the short term. The president’s job is to sow the seeds for the generation after next.” This spirit of management has been passed down to Toray’s current pres- ident, Akihiro Nikkaku. I, too, would like to support manage- ment with that kind of spirit. 33 VALUE CREATIONToray Industries, Inc. Overview of Toray Group’s Performance in Fiscal 2018 (The Fiscal Year Ended March 31, 2019) Record High Sales Against the Backdrop of a Harsh Profit Environment With the goals of becoming a corporate group that continually both the corporate and household sectors remained steady in increases revenues and profits while offering high value to all general, although there were some weaknesses in exports and stakeholders, Toray Group formulated the long-term corporate production toward the end of the fiscal year. At the same time, vision “AP-Growth TORAY 2020 (abbreviated as “Vision 2020”)” however, the rise in raw material and fuel prices had a negative in 2011. Under this vision, we have set our sights on sustain- impact on Toray Group’s profit. ably increasing revenues and profits. In specific terms, we are Under these circumstances, Toray Group’s consolidated per- targeting consolidated net sales of ¥3 trillion, operating income formance saw year-on-year increases in net sales across all seg- of ¥300 billion, and ROE of 13% around 2020. ments excluding the Life Science business. In specific terms, The current medium-term management program, “Project consolidated net sales surged to a record high, climbing 8.3% AP-G 2019,” which covers the three-year period from April 2017 compared with the previous fiscal year, to ¥2,388.8 billion. From a to March 2020, is the third stage of Vision 2020. Under Project profit perspective, sales expenses increased on the back of sales AP-G 2019, we are carrying out three growth strategies with expansion. At the same time, the Group incurred an upswing in focus on taking advantage of growth business fields, pursuing production fixed costs. While steps were taken to pass rising business expansion in growth countries and regions, as well as raw materials costs on to selling prices, Toray Group was unable further bolstering its cost competitiveness. At the same time, we to fully pass on the raw materials price increase to the sales are promoting initiatives aimed at creating new sources of earn- price. As a result, the Group reported a negative gap between ings that will help drive Toray Group through a period of sustain- raw material costs and selling prices. Taking into account each able growth from 2020 onwards and enhance corporate value. of these factors, consolidated operating income for the fiscal During the period under review, the global economy as a year under review came to ¥141.5 billion, down 9.6% compared whole continued to recover gradually, underpinned by the strong with the previous fiscal year. Net income attributable to owners U.S. economy amid prolonged pressure from the uncertain future of parent was ¥79.4 billion, a year-on-year decrease of 17.2%. weighing on the economy, but the pace of growth slowed in As far as dividends are concerned, in light of the aforemen- the second half of the fiscal year due to intensified trade fric- tioned performance trends, Toray Group set the annual dividend tions and the notable deceleration in the Chinese economy. The for fiscal 2018 at ¥16 per share, up ¥1 per share, for a dividend Japanese economy continued on its gradual recovery track, as payout ratio of 32.3%. Basic Issues of “Project AP-G 2019” Income Variance Factor Analysis (Billion yen) 1 Proactively expand business in growth fields, countries, and regions 2 Improve profitability by continuously creating and expanding differentiated products 3 Steadily realize profit improvements through rad- ical reforms both in business and organizational structures 4 Continue “strengthening of cost competitiveness” to reinforce and strengthen earning structure 5 Continue “pursuit of the ultimate limits” for the creation of new and innovative materials and cre- ate large-scale new businesses 6 Thoroughly implement “safety, accident preven- tion, and environmental preservation” and “busi- ness ethics and legal compliance” globally 7 Secure and develop human resources that can contribute to “strong workplace capability” Net change in price Difference in quantity +27.9 -15.9 156.5 Cost variance, etc. -26.8 Difference from foreign currency translation of overseas subsidiaries’ results -0.2 141.5 -15.0 FY Mar/18 FY Mar/19 34 STRATEGYIntegrated Annual Report 2019 Medium-term Management Program: Project AP-G 2019 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. Green Innovation Business Expansion (GR) Project Life Innovation Business Expansion (LI) Project In addition to preserving the global environment, Toray Group Making the most of its management resources, Toray Group is provides solutions that help address energy and resource issues working to expand its business by enhancing the quality of med- while targeting business expansion. As a result, the Group takes ical care, alleviating the burden of medical professionals, and every opportunity to reduce greenhouse gas (GHG) emissions, contributing to the maintenance of health and longevity. In fis- lower its environmental footprint, and to support the treatment cal 2018, net sales from LI Project businesses were ¥223.0 bil- of water, recycling, and air purification. In fiscal 2018, net sales lion, up 5.2% compared with the previous fiscal year. from GR Project businesses were ¥786.9 billion, up 10.5% com- pared with the previous fiscal year. Expanding Business in Fields That Address Issues such as the Reduction of GHG Emissions, Biomass, and Water Treatment Rolling Out the LI Project by Promoting Advanced Materials in Addition to Pharmaceuticals and Medical Devices Under the LI Project, Toray Group upgraded and expanded its lineup of INOUE BALLOON™ expanding balloon mitral valvu- Under the fiscal 2018 GR Project, the decision was made to loplasty catheters for use in aortic valves in the pharmaceuticals increase large tow carbon fiber production capacity at the facil- and medical devices fields. Moreover, the Company signed a ity in Hungary at Zoltek Companies, Inc., as a part of efforts license agreement with Meiji Seika Pharma Co., Ltd. on an orally to reduce GHG emissions. Moreover, the Company developed the new carbon fiber TORAYCA® MX series that realizes both higher tensile strength and tensile modulus. In the biomass field, we released Ultrasuede® BX, non-woven material with a suede texture that realizes the highest proportion of plant-based raw materials in the world. Turning to the field of water treatment, Toray Group commenced sales of the ROMEMBRA®TLF series, reverse osmosis (RO) membrane element ideal for the treat- ment of wastewater. The TLF series offers 30% higher perme- ability compared with current models, which in turn helps to significantly reduce operating costs. Utilizing a new membrane surface coating technology, the TLF series also lowers the fre- quency of replacement. disintegrating tablets formulation of the antipruritic drug TRK-820 developed and manufactured by Toray Group. The license allows Meiji Seika Pharma to exclusively develop and commercialize the product in Thailand and Indonesia. Meanwhile, every effort is being made to accelerate the rollout of the LI Project through advanced materials. Toray Group developed and commenced sales of hitoe®, a wearable monitoring system, for long-term medical use. In addition to acquiring the EU type examination certificate (CE marking) for its chemical protective clothing LIVMOA® 3000 series, the Company also developed LIVMOA® CL, a sterilized type of LIVMOA® comfortable disposable pro- tective wear, for use in cleanrooms. Net Sales of Green Innovation Businesses Net Sales of Life Innovation Businesses (Billion yen) 1,000 800 600 400 200 0 (FY) ( ) net sales ratio 900.0 (33%) 712.3 (32%) 786.9 (33%) 628.2 (31%) 2016 Actual 2017 Actual 2018 Actual 2019 Target 300 200 100 0 (FY) (Billion yen) Advanced Materials in LI Business* Pharmacueticals & Medical Products Business 211.9 (10%) 223.0 (9%) 195.5 (10%) ( ) net sales ratio 270.0 (10%) 2016 Actual 2017 Actual 2018 Actual 2019 Target *Toray Group estimation 35 STRATEGYToray Industries, Inc.Medium-term Management Program: Project AP-G 2019 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 2018, overseas sales were ¥1,271.3 billion, up 10.5% compared with the previous fiscal year. Decision to Increase Production Capacity in the U.S. and Asia In a bid to expand and advance its global business, Toray Group ramped up efforts to increase production capacity in the U.S. and Asia. Turning first to India, the decision was made to establish a production facility for the nylon and polybutylene terephthalate (PBT) resin compounds used in such products as electronic com- ponents of automobiles and electrical and electronic connectors. Net Sales of Expansion and Advancement of Global Businesses (Combined sales of overseas consolidated subsidiaries) (Billion yen) 1,500 *based on an exchange rate of 100 yen / US$ for the past FYs also 1,500.0 1,271.3 1,200 1,150.8 In Malaysia, Toray Group decided to increase its produc- 1,042.1 tion capacity of its acrylonitrile butadiene styrene (ABS) resin TOYOLAC®. Operations are forecasted to commence in November 2020, in a bid to expand transparent-grade sales where the Group has the leading global market share. In China, positive steps were taken to establish a joint venture corpora- tion to manufacture and market drinking water treatment facili- ties with ORIX Corporation and China Water Affairs Group Ltd. Moving on to the U.S., Toray Group decided to increase the production capacity of its polypropylene film TORAYFAN® in order to address increasing demand in the food packaging mar- ket. The aim is to commence operations from 2020. 900 600 300 0 (FY) 2016 Actual 2017 Actual 2018 Actual 2019 Target Overseas Production Ratio of Main Products (Production capacity at the end of March 2019) Fibers Resins Films Overseas 75% Domestic 25% Overseas 75% Domestic 25% Overseas 78% Domestic 22% Carbon Fibers Overseas 81% Domestic 19% 36 STRATEGYIntegrated Annual Report 2019 THREE BASIC STRATEGIES 03 Strengthening Competitiveness In addition to the growth strategies of “business expansion in growth business fields” and “expansion and advancement of global business,” Toray Group is promoting efforts to strengthen its competitiveness from three specific perspectives: (1) total cost reduction, (2) strengthening its corporate structure, and (3) strengthening sales and marketing. 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 “innovative cost reduc- tion,” “large-scale total cost reduction” and “capac- ity 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 Carried out Total Cost Reductions That Exceed the Previous Fiscal Year Under its Group-wide Total Cost Reduction (TC) Project, Toray Group is looking to curtail costs by a total of ¥220 billion over the three-year period from fiscal 2017 through cutbacks in variable and fixed costs as well as production process innovation. In fis- cal 2018, successful steps were taken to reduce costs by ¥84.1 billion compared with ¥69.3 billion in fiscal 2017. In a bid to strengthen the Group’s corporate structure, Toray Advanced Material Korea Inc. absorbed Toray Chemical Korea Inc. in April 2019 with the aim of creating further syner- gies and pursuing operational efficiency. Working to strengthen sales and marketing, Toray Group completed the acquisition of TenCate Advanced Composites Holding B.V., a company that manufactures and markets carbon fiber composite materials, in July 2018. By unifying the brand name to “Toray Advanced Composites” and increasing awareness, the goal is to consol- idate the employees of each company both in name and sub- stance while strengthening collaboration. Manage the Group’s assets effectively and expand Total Cost Reduction Results of FY2018 revenue and profit Strengthening Sales and Marketing Sales and marketing leads to build a “profit-making system” in cooperation with production, technol- ogy, R&D departments, and external partners Maximize the revenue and profit of existing busi- nesses through improvements in price policies, distribution systems and brand initiatives Fixed Costs Reduced: 34.9 billion yen (P-ratio*=1.03) Variable Costs Reduced: 31.6 billion yen (Reduction ratio 3.3%) Total Reduced: 84.1 billion yen Innovation of Production Processes Reduced: 17.6 billion yen *P (Performance)-ratio=fixed cost growth rate/marginal profit growth rate. Target: less than 1.0 or monitored by division under budget. 37 STRATEGYToray Industries, Inc. Performance Forecasts for Fiscal 2019 Working Toward Further Increasing Revenues and Profits by Strengthening the Company’s Corporate Structure, Expanding Business, and Promoting Business Structure Reform The global economy as a whole is expected to recover slightly Based on the aforementioned, Toray Group is expected to pay from late 2019, though a slowdown is expected in the pace an annual dividend of ¥16 per share, unchanged from the fiscal of growth primarily in China and the U.S. However, attention year under review. should be also paid to risk factors such as increasing trade friction Taking into consideration the various trends over these three between countries such as the U.S. and China, the downward years, including the rise in raw material and fuel prices, increas- swing in the Chinese economy and the outcome of negotia- ingly fierce trade friction between such countries as the U.S. and tions for the U.K.’s withdrawal from the EU. The Japanese econ- China, and the downturn in the Chinese economy, operating con- omy is expected to continue on a gradual recovery track on ditions in which Toray Group operates have changed dramatically the back of improvement in the employment and income envi- compared with initial forecasts. Accordingly, results are antici- ronment while growths in exports and production are likely to pated to fall below the goals identified at the time AP-G 2019 slow. Nevertheless, it is necessary to note the economic impact was initially set. In fiscal 2019, every effort will again be made of uncertainties in overseas economies and the fluctuations in to stringently control fixed costs. At the same time, energies will crude oil prices and in the financial markets. be directed toward carrying out a project that aims to address Under these circumstances, Toray Group is projecting con- priority issues. With the full support of the Group, steps will be solidated net sales for fiscal 2019 of ¥2,530 billion. From a profit taken to accelerate the pace of problem resolution, expand busi- perspective, the forecast for operating income is ¥160 billion ness, and promote business structure reform. and net income attributable to owners of parent is ¥93 billion. Consolidated Business Forecast for Fiscal 2019 Billion yen Net Sales Operating Income Net Income Attributable to Owners of Parent Assumed exchange rate : 110 yen / US$ FY 2019 (Forecast) Changes 2,530.0 160.0 93.0 +5.9% +13.1% +17.2% Forecast by Segment for Fiscal 2019 Billion yen Net Sales (Changes) Operating Income (Changes) Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Adjustment Consolidated 1,000.0 (+25.7) 935.0 (+66.2) 250.0 (+34.1) 270.0 (+12.3) 55.0 (+1.3) 20.0 (+1.5) — 2,530.0 (+141.2) 70.0 (-2.9) 81.0 (+13.3) 22.0 (+10.5) 14.0 (+1.8) 0.0 (-1.3) 3.0 (-0.1) -30.0 (-2.7) 160.0 (+18.5) 38 STRATEGYIntegrated Annual Report 2019 Promoting Capital Investments in Growth Fields with Focus on Overseas Businesses As far as capital investments are concerned, Toray Group will look to reinforce facilities in growth fields with focus on overseas busi- nesses. Plans are in place to undertake capital investments totaling ¥165 billion (depreciation and amortization of ¥113 billion) and R&D expenses of ¥73 billion in fiscal 2019. Capital Expenditures* (Billion yen) 200 174.0 165.0 157.9 150 100 50 0 48.8 61.9 32.6 6.3 2.8 5.5 51.3 66.2 42.5 7.5 2.1 4.4 Fibers & Textiles 45.0 Performance Chemicals 72.0 Carbon Fiber Composite Materials 27.0 Environment & Engineering 12.0 Life Science 3.0 Others 6.0 Depreciation* (Billion yen) 120 100 98.0 113.0 104.1 80 60 40 20 0 R&D Expenses (Billion yen) 73.0 66.2 66.4 80 60 40 20 0 (FY) 2017 2018 2019 Forecast Consolidated Subsidiaries Toray (FY) 2017 2018 2019 Forecast (FY) 2017 2018 2019 Forecast Consolidated Subsidiaries Consolidated Subsidiaries Toray Toray * Total of tangible assets and intangible assets (excluding goodwill) Major Capital Expenditure Projects FY March 2019 Toray Battery Separator Film Korea Limited Battery separator film SETELA® production facilities Zoltek Companies, Inc. Large tow carbon fiber ZOLTEKTM production facilities Alcantara S.p.A. Alcantara® production facilities Toray BSF Coating Korea Limited Battery separator film SETELA® coating facilities FY March 2020 Alcantara S.p.A. Zoltek Zrt. Alcantara® production facilities Large tow carbon fiber ZOLTEKTM production facilities Toray Plastics (Malaysia) Sdn. Berhad ABS resin TOYOLAC® production facilities 39 STRATEGYToray Industries, Inc.Results by Segment for Fiscal 2018 Business Categories and Segments Summary of Financial Results Fibers & Textiles In Japan, demand for industrial applications such as automobiles was strong in general, while shipment of apparel applications remained weak partly due to the unseasonable weather. Against this background, Toray Group not only strived to expand sales in each application but also worked to expand the business format that integrates fibers to tex- tiles to final products while focusing on strengthening cost competitiveness. Overseas, business performance of some subsidiaries in Southeast Asia remained slow, and was affected by a slowdown in demand for materials for automotive and other applica- tions from the second half of the fiscal year, reflecting the deceleration of the Chinese economy. The Group expanded the integrated business for apparel applications. The segment’s business both in Japan and abroad was generally affected by the increase in raw material prices. Performance Chemicals In the resins business, Toray Group expanded sales of automotive applications while passing on the rise in raw material prices to the sales price, but the business was affected by the economic slowdown in China. The chemicals business saw an improvement in the basic chemicals market and sales of fine chemical products also increased. In the films business, shipment of battery separator films for lithium-ion secondary batter- ies increased reflecting demand growth, while polyester films and other products were broadly affected by the increase in raw material prices. The electronic & information materials business was affected by the slowing demand in the smartphone market. Carbon Fiber Composite Materials In the Carbon Fiber Composite Materials segment, demand for aircraft applications was mostly strong given the completion of the inventory adjustment in the supply chain. Demand for industrial applications showed a recovery trend for the most part, primarily in the environment and energy-related fields led by compressed natural gas tank applica- tions and wind turbine blade applications. However, the segment was affected by rising raw material prices and intensifying competition. The cost of starting a new project at a composite subsidiary overseas increased and the segment also incurred fees related to the acquisition of the entire stake in TenCate Advanced Composites Holding B.V. In the water treatment business, demand for reverse osmosis membranes and other Environment & Engineering products grew strongly on the whole in Japan and abroad. Among domestic subsidiar- ies in the segment, the trading volume of a trading subsidiary increased, while an engi- neering subsidiary outside Japan was affected by the conclusion of a large-scale plant construction project. Life Science In the pharmaceutical business, while sales volume of orally active prostacyclin derivative DORNER® increased in the overseas markets, the sales were affected by its generic ver- sions and the revision of National Health Insurance drug price standards in Japan. Sales of pruritus treatment REMITCH®* were influenced by the market entry of its generic versions. The medical devices business was affected by the reduction of the insurance reimburse- ment amount in Japan and the increase in raw material prices, while shipment of dialyzers grew strongly in Japan and overseas and sales volume of dialysis machines also expanded. *REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. Net Sales 974.3 (41%) Operating Income 72.9 (43%) Net Sales 868.8 (36%) Net Sales 215.9 (9%) Net Sales 257.7 (11%) Net Sales 53.7 (2%) Operating Income 67.7 (40%) Operating Income 11.5 (7%) Operating Income 12.2 (7%) Operating Income 1.3 (1%) 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 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 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 40 STRATEGYIntegrated Annual Report 2019 Fibers & Textiles S t r a t e g i c a l l y E x p a n d i n g B u s i n e s s e s Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science C o r e G r o w t h D r i v i n g B u s i n e s s I n t e n s i v e l y D e v e l o p i n g a n d E x p a n d i n g B u s i n e s s e s Performance (Billions of yen) Main Products * The figures in parentheses of each segment are composition ratios by segment. Main Products Net Sales 974.3 (41%) Operating Income 72.9 (43%) Net Sales 868.8 (36%) Net Sales 215.9 (9%) Net Sales 257.7 (11%) • 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. • 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. Operating Income 67.7 (40%) Operating Income 11.5 (7%) Operating Income 12.2 (7%) Net Sales 53.7 (2%) Operating Income 1.3 (1%) • Pharmaceuticals • Medical devices, etc. Excludes other businesses, equivalent to ¥18.5 billion (1%) in net sales and ¥3.1 billion (2%) in operating income, and adjustment of operating income of -¥27.3 billion. The composition ratio by segment of operating income is calculated excluding the adjustment amount. 41 STRATEGYToray Industries, Inc. Core Growth Driving Businesses Fibers & Textiles Years ended March 31 2017 2018 Changes 2019 Forecast Net sales (Billion yen) Operating income (Billion yen) Operating income to net sales 913.6 72.4 7.9% 974.3 72.9 7.5% +6.6% +0.6% 1,000.0 70.0 Changes in Operating Income (Billion yen) 72.4 +3.9 -3.9 +0.7 -0.2 72.9 +0.5 FY Mar/18 Difference in quantity Net change in price Cost variance, etc. Difference from foreign currency translation of overseas subsidiaries’results FY Mar/19 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 prod- ucts, and expand new business areas Fiscal 2019 Outlook • In apparel applications, anticipate 2019 autumn/winter business to be weak due to the warm winter in 2018, despite the efforts to expand sales in all applications and high value-added products • In industrial applications, seek to expand sales by utilizing enhanced facilities such as PP spunbond, airbags, and ultra-microfiber non-woven fabric with suede texture Net Sales (Billion yen) 974.3 Operating Income (Billion yen) 72.9 Operating Income to Net Sales 7.5% ROA (Operating Income/ Assets) 9.3% 42 STRATEGYIntegrated Annual Report 2019Topics 01 Toray completes its new TECHNORAMA GIII textile and garment development base Toray completed the construction of its new TECHNORAMA GIII textile and garment devel- opment base, located in the Advanced Textiles Development Center at the Company’s Seta Plant, in June 2018. The Advanced Textiles Development Center is Toray’s headquar- ters for the development of high-level processing technologies, from spinning and yarn texturing to weaving, knitting, dyeing and sewing. Toray launched the TECHNORAMA weather simulation laboratory for the first time in 1983 and has continued to develop numerous highly functional products, including moisture-permeable waterproof mate- rial and functional innerwear. Toray in 2008 established TECHNORAMA GII, a large-scale weather simulation laboratory that can accommodate items such as cars, at the Toray Fibers & Textiles Research Laboratories (China) Co., Ltd. (TFRC) in China, and has contin- ued to promote the development of highly functional textiles, industrial materials and envi- ronment-conscious materials. The new weather simulation laboratory at TECNORAMA GIII can not only recre- ate a diverse range of weather conditions, including extremely low temperature and low humidity environments, as well as torrential rain, but can also allow experiments focused on sudden temperature changes in our daily lives. It also enhances evaluation and analysis technologies through physiological analysis based on human engineering, and motion analysis based on sports engineering, so that Toray can continue to work on the development of new fields. The Company has also established an Open Lab, which is a joint development base designed to improve the sophistication of products and shorten development cycles through collaboration with partners both within and outside the Company. 02 Toray launches sales of Ultrasuede® BX, an environmentally friendly non-woven material with a suede texture that has the world’s highest level of plant-based raw material content Toray has launched sales of “Ultrasuede® BX,” a non-woven material with a suede tex- ture. The material uses plant-derived polyester and polyurethane as raw materials, giv- ing it a plant-based raw material content ratio of about 30%, the highest in the world. Ultrasuede® BX is also the world’s first non-woven material with a suede texture using plant-based polyurethane as a raw material. The Company targets sales of ¥500 million from the product in fiscal 2019 and sales of ¥3 billion in fiscal 2023. In the past, durability and texture have been key challenges for plant based polyure- thane. To solve these issues, Toray used its unique design technologies in areas from original polymers to material structures, as well as its polyurethane coagulation technol- ogy to succeed in developing the Ultrasuede® BX product, which has a high plant-based raw material ratio, as well as superior feeling and functionality, including in areas such as durability, air-permeability, and maintenance. Marketed globally by Toray, Ultrasuede® is a cutting-edge non-woven material with a suede texture representing the best of Japanese quality. Toray developed the prod- uct in 1970 and through continuous technological advancements has created a highly sophisticated and functional material that can be used not only in fashion and interior design, but also in automotive and aircraft interiors, sports equipment, and accesso- ries for smartphones and other mobile devices. Toray has also been focusing on the development of environmentally-friendly sustainable products and has been market- ing “Ultrasuede® PX,” which uses a plant-based polyester since 2016. The addition of Ultrasuede® BX to the brand’s product lineup further expands the Company’s develop- ment of non-woven materials with a suede texture that contribute to both sustainability and new creation. 43 STRATEGYToray Industries, Inc. Core Growth Driving Businesses/Strategically Expanding Businesses Performance Chemicals Years ended March 31 2017 2018 Changes 2019 Forecast Net sales (Billion yen) Operating income (Billion yen) Operating income to net sales 803.3 71.4 8.9% 868.8 67.7 7.8% +8.2% -5.1% 935.0 81.0 Changes in Operating Income (Billion yen) 71.4 +5.5 -4.4 -4.8 -0.0 67.7 -3.7 FY Mar/18 Difference in quantity Net change in price Cost variance, etc. Difference from foreign currency translation of overseas subsidiaries’results FY Mar/19 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, includ- ing 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 busi- nesses including 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 develop- ment and commercialization of products beyond the LCD display field Fiscal 2019 Outlook • In resins business, will expand sales of high-functional ABS resins and engineer- ing plastics for automotive applications, etc. • In films business, intend to expand sales in growth business fields, including battery separator films and MLCC release films • In electronic & information materials business, expect to increase sales of OLED- related materials and electronic circuit materials Net Sales (Billion yen) 868.8 Operating Income (Billion yen) 67.7 Operating Income to Net Sales 7.8% ROA (Operating Income/ Assets) 6.9% 44 STRATEGYIntegrated Annual Report 2019Topics 01 Toray bolsters production capacity for ABS resin TOYOLAC® at Malaysian Subsidiary Toray has decided to increase the production capacity for its ABS resin TOYOLAC®, which is manufactured and distributed by Toray Plastics (Malaysia) Sdn. Berhad (TPM). The Company will add a facility with annual production capacity of 75,000 tons in an effort to expand sales of high performance varieties such as transparent grade, for which the Company has the No. 1 global market share, thanks to its cost competitive- ness and stable quality, which is due in large part to the Company’s proprietary continu- ous polymerization production process. The Company aims to launch operations under the new arrangement in November 2020. The move will increase TPM’s production capacity to 425,000 tons a year, and Toray Group’s capacity, including the existing facil- ity at Toray Chiba Plant, to 497,000 tons a year. ABS resin is a plastic that is light, strong, and elegant. It shows excellent process- ability, and it is used for an extremely wide range of applications, from industrial items to household goods. In 2018, global demand for ABS resins was 9 million tons and is expected to grow steadily at 3% a year, as demand is expected to increase in China, the ASEAN community, and emerging countries. Global demand for high performance ABS resin such as transparent ABS, and resins with added properties such as heat resistance and chemical resistance, in 2018 is estimated at about 2.1 million tons. Amid increased demand for enhanced functionality in a wide range of applications, including home appliances, office automation, automobiles, and toys, demand for these products is expected to grow at 4% or more annually. While the mother plant in Chiba is accelerating the shift in its product mix to focus mainly on highly functional ABS resins, including medical-use transparent ABS, the increase in production in Malaysia will accelerate the expansion of potential applica- tions and advance the Company’s entry into the European, U.S., and Indian markets, in addition to the existing mainstay Chinese and ASEAN markets. 02 Toray to increase production capacity of polypropylene film TORAYFAN® at U.S. subsidiary Toray has decided to increase production capacity for its polypropylene film TORAYFAN®, which is manufactured by Toray Plastics (America), Inc. (TPA). A new production facil- ity with annual capacity of 30,000 tons will be additionally built at TPA’s Rhode Island plant, with the goal of starting operations in 2020. TORAYFAN® is considered the light- est of the plastic films and shows superiority in transparency, toughness, and the abil- ity to preserve aromas. It is widely used for general industrial applications, capacitors, and packaging materials. TPA has high share in high value-added packaging materials in the North American market. The biaxially-oriented polypropylene market in North America is expected to grow at a pace of 3% a year as the population in the region expands. In the food packaging film market in particular, there is an increasing push to extend the shelf life of food and to diversify package designs for snacks, confections, and health foods such as nutrition bars. The announced production capacity increase is in response to this kind of diver- sification and the growing sophistication of customer needs, and by moving quickly to expand production capacity at TPA, the Company aims to further expand its biaxially-ori- ented polypropylene business. 45 STRATEGYToray Industries, Inc.Strategically Expanding Businesses Carbon Fiber Composite Materials Years ended March 31 2017 2018 Changes 2019 Forecast Net sales (Billion yen) Operating income (Billion yen) 177.9 20.8 Operating income to net sales 11.7% 215.9 11.5 5.3% +21.3% -44.4% 250.0 22.0 Changes in Operating Income (Billion yen) +16.7 -5.6 -20.4 20.8 -9.2 +0.1 11.5 FY Mar/18 Difference in quantity Net change in price Cost variance, etc. Difference from foreign currency translation of overseas subsidiaries’results FY Mar/19 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 turbine 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 competi- tiveness in large tow products • Develop intermediate products/molding technologies and enhance the sup- ply chain to meet the full-scale expansion in automotive application demand Fiscal 2019 Outlook • In aerospace applications, expect shipment to expand in response to the increase in production volume of our major customer • In industrial applications, seek to expand sales primarily in the environment and energy-related fields • Will promote cost reductions at a composite subsidiary overseas Net Sales (Billion yen) 215.9 Operating Income (Billion yen) 11.5 Operating Income to Net Sales 5.3% ROA (Operating Income/ Assets) 2.1% 46 STRATEGYIntegrated Annual Report 2019Topics 01 Increasing production capacity for large tow carbon fiber at Zoltek Companies, Inc. Toray has decided to increase production capacity for large tow* carbon fiber at the U.S. subsidiary Zoltek Companies, Inc. Through this facility expansion, the Company aims to increase production capacity at Zoltek’s Hungarian facility from 10,000 tons to 15,000 tons annually. Total investment will exceed US$130 million and production will start in early 2020. Zoltek has already implemented equipment enhancements and raised the capacity of their Mexican facility from 5,000 tons per year to 10,000 tons per year. Once the current enhancements at the Hungarian facility are in place, Zoltek’s total annual production capacity will be approximately 25,000 tons or more. Zoltek signed a strategic cooperation agreement with the Hungarian government in March 2015, with the company receiving strong support from the government, includ- ing in infrastructure development, employee recruitment, and employee education. The announced facility expansion has been planned in line with the content of the strategic cooperation agreement. Demand for large tow carbon fiber for industrial applications is rapidly expanding. Demand for wind turbine blades, the main application for Zoltek’s large tow carbon fiber, is expanding not only in Europe, but in South America as well as Asia, particularly China and India. Furthermore, due to the larger size of the turbines, carbon fiber usage per blade is also expected to increase. Zoltek will continue to leverage the strengths of its production bases in the U.S., Hungary, and Mexico and follow a business model based on local production and con- sumption as it aims to capture the growing global demand of wind turbine blade manu- facturers. Europe is taking the lead in the use of carbon fiber for automotive structural applications, and Zoltek has established a timely supply chain for the region originating from the Hungarian facility, which is currently expanding its production capacity. The company will continue to respond quickly to demand growth moving forward. Zoltek is also focused on enhancing its carbon fiber production facilities at the Hungarian and Mexican plants, and as the world’s number one supplier of large tow carbon fiber remains committed to the building of a top-tier supply system. * Large tow: carbon fiber having more than 40K filaments (40,000 fibers) that is used as a relative low-priced mate- rial and satisfies industrial application requirements, including those related to wind turbine blades and strength- ening agents for resin compounds. 02 Toray acquires TenCate Advanced Composites stock Toray purchased all outstanding shares of TenCate Advanced Composites Holdings B.V., a Dutch carbon fiber composite material manufacturer in July 2018. This company is a prepreg manufacturer with its main manufacturing bases in Europe and the U.S. and has an established track record of supplying thermoplastic prepreg and high heat resistance thermoset resin materials in a wide range of applications. Also, it is a global leader in carbon fiber intermediate materials using thermoplastic resins. The acquisi- tion is expected to generate significant synergies by combining Toray’s broad range of carbon fiber and polymer technologies with the product lineup of the newly acquired company. Moreover, by combining the two companies’ distribution channels, Toray can offer a wider product lineup to its customers. Toray will continue to respond swiftly to the market expansion in small-sized aircraft and over the medium to long term to expand the business further in industrial applications, including automotive applications. 47 STRATEGYToray Industries, Inc.Intensively Developing and Expanding Businesses Environment & Engineering Years ended March 31 2017 2018 Changes 2019 Forecast Net sales (Billion yen) Operating income (Billion yen) Operating income to net sales 238.3 13.3 5.6% 257.7 12.2 4.7% +8.1% -7.9% 270.0 14.0 Changes in Operating Income (Billion yen) 13.3 +2.0 -1.6 -1.4 -0.0 12.2 -1.1 FY Mar/18 Difference in quantity Net change in price Cost variance, etc. Difference from foreign currency translation of overseas subsidiaries’results FY Mar/19 Basic Policy • Expand business in the environment and energy field with focus on water treat- ment membranes 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 2019 Outlook • In the water treatment business, seek to expand sales of the membrane business including RO membranes to meet the growing global demand Net Sales (Billion yen) 257.7 Operating Income (Billion yen) 12.2 Operating Income to Net Sales 4.7% ROA (Operating Income/ Assets) 4.6% 48 STRATEGYIntegrated Annual Report 2019Topics 01 Established a drinking water treatment facility production and sales company in China Operating its water treatment business in China since the 1980’s, Toray, along with ORIX Corporation (ORIX) and China Water Affairs Group Ltd. (China Water Affairs), established a joint-venture corporation (Jiangxi Yinli Drinking Water Equipment Co., Ltd.) in March 2019. ORIX established China’s first leasing company in 1981. Since then, it has utilized its experience to expand its financial and investment businesses in China. China Water Affairs is a comprehensive water treatment company listed on the Hong Kong Stock Exchange. In addition to the operation and management of water supply and sewage facilities in regional cities across China, the Chinese firm also handles peripheral projects including infrastructure and maintenance. China, in recent years, has seen an increase in demand for water suitable for drinking straight from the tap. With this in mind, the three companies concluded a strategic part- nership, and through the establishment of the joint venture will incorporate Toray’s mem- brane filtration technologies to manufacture and sell drinking water treatment facilities that are capable of supplying water that is suitable for drinking directly from the source. After obtaining water products production and sales license from the Chinese govern- ment, the joint venture intends to utilize China Water Affairs’ expertise and networks in the water business in China to install facilities in public buildings such as schools and hos- pitals, as well as private buildings such as hotels, offices, and apartments. 02 Establishing a joint-venture company in the Republic of Korea to expand the air filter business Toray established M&T Engineering Co., Ltd (M&TE) in the Republic of Korea as a joint venture company with MCM Co., Ltd. (MCM), a company under the Chung Ho Nais Group, which is engaged in the sales of water purifiers and air cleaners. M&TE com- menced operations in October 2018. The company is capitalized at 6 billion won (about ¥600 million), with MCM having a 60% stake and Toray having a 40% stake. M&TE combines the assembling and processing, as well as automation expertise of MCM with Toray integrated design and development technology, starting from fibers and fil- ter materials to assembled units, so as to build a local production setup for the high-per- formance filters necessary to expand the company’s business in the Republic of Korea as well as to supply to Korean manufacturers with a global presence. The Chung Ho Nais Group has a strong share of the Korean water purifier market, and has a broad business base, with sales to major global players in the country and exports to some 60 countries. Toray has been producing non-woven fabric for air filters since 2012 at Toray Fibers (Nantong) Co., Ltd. (TFNL), its fiber production base in China. This has allowed the Company to build a local production and supply structure adapted to the Chinese GB standards* and contribute to measures aimed at reducing atmospheric pollution, which has become a serious social issue. M&TE will assemble filters that use TFNL’s non-wo- ven fabric for high-performance filters, thus accelerating the sales expansion in the country, as well as around the world, by directly supplying major home electronics and automobile manufacturers. * Chinese GB standards: Chinese national standards related to initial performance and performance throughout the life of air purifiers. 49 STRATEGYToray Industries, Inc.Intensively Developing and Expanding Businesses Life Science Years ended March 31 2017 2018 Changes 2019 Forecast Net sales (Billion yen) Operating income (Billion yen) Operating income to net sales 53.8 1.9 3.6% 53.7 1.3 2.4% -0.3% -33.0% 55.0 0 Changes in Operating Income (Billion yen) 1.9 -1.5 +1.2 +0.0 1.3 -0.6 -0.4 FY Mar/18 Difference in quantity Net change in price Cost variance, etc. Difference from foreign currency translation of overseas subsidiaries’results FY Mar/19 Basic Policy • Maintain and expand domestic market share, accelerate and strengthen over- seas 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 bur- den on medical professionals, 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 insur- ance 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 cardiovascular products • Quickly commercialize bio-devices Fiscal 2019 Outlook • In pharmaceuticals, anticipate pruritus treatment REMITCH®* to be affected by its generic versions • In the medical devices business, will expand sales of our dialysis-related prod- ucts, but expect price competition to intensify and demand for some products to decrease *REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. Net Sales (Billion yen) 53.7 Operating Income (Billion yen) 1.3 Operating Income to Net Sales 2.4% ROA (Operating Income/ Assets) 1.7% 50 STRATEGYIntegrated Annual Report 2019Topics 01 Exclusive license agreement for Antipruritic Agent TRK-820 in Thailand and Indonesia Toray and Meiji Seika Pharma Co., Ltd. (Meiji) signed an exclusive license agreement on the orally disintegrating (OD) tablets formulation for the antipruritic drug TRK-820 devel- oped by Toray. Pursuant to the agreement, Meiji gains the exclusive rights to develop and commercialize the product in Thailand and Indonesia. In return, Meiji will pay an ini- tial payment as well as milestone payments in line with development progress to Toray. TRK-820 is marketed as REMITCH®*1 Capsule 2.5µg and REMITCH® OD Tablet 2.5µg in Japan to improve pruritus in hemodialysis patients and patients with chronic liver disease (used only when sufficient efficacy is not obtained with the existing ther- apies or treatments). In particular, the REMITCH® OD Tablet can be administered both with and without water and is expected to contribute to improved medication compli- ance*2 for patients with a deteriorated swallowing function, which would include some senior citizens and those with limited water intake abilities. Meiji has consolidated pharmaceutical manufacturing subsidiaries in Thailand and Indonesia. Thailand in particular has a large number of end-stage renal disease patients and it is one of the countries where there is a strong need for hemodialysis treatment. Toray and Meiji expect to make a significant contribution to easing pruritus in dialysis and chronic liver disease patients in Thailand and Indonesia who have until now not had access to effective treatment. *1 REMITCH®: The world’s first highly selective (kappa)-opioid receptor agonist developed by Toray. REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. *2 Medication compliance: The act of taking medication on schedule and taking medication as prescribed. 02 Nucleic acid drug TRK-250 receives orphan drug designation from the U.S. FDA TRK-250 is a nucleic acid drug for the treatment of Idiopathic Pulmonary Fibrosis (IPF), originated by BONAC Corporation (BONAC) and currently undergoing a Phase I clinical trial in the U.S. with IPF patients by Toray. BONAC received an Orphan Drug Designation from the U.S. Food and Drug Administration (FDA) for TRK-250 in February 2019. The orphan drug designation enables benefits such as 7-year marketing exclusivity, tax cred- its for clinical trials costs, and a partial waiver on marketing application costs in the U.S. IPF is a disorder with a poor prognosis and an unpredictable clinical course, in which fibrosis of intestinal pneumonia progresses irreversibly. Thus, the development of a novel drug with new mechanisms is expected to broaden the treatment options in clin- ical practice. TRK-250 inhibits the progression of pulmonary fibrosis by selectively suppressing the expression of transforming growth factor-beta 1 (TGF- 1) protein, a key growth fac- tor involved in lung fibrosis, at the gene expression level. One of the features of the agent is that it is a single strand long-chain nucleic acid with a unique molecular structure employing BONAC’s proprietary nucleic acid platform. The treatment is expected to over- come the issue of stability, a common problem in conventional nucleic acid treatments. Moreover, it comes in an aerosol form that can be administered directly to the lung, which is expected to carry the agent efficiently to the target organ. With TRK-250’s orphan status in hand, Toray and BONAC are focused on further accelerating the development of TRK-250, and aim to market the treatment in the late 2020s. 51 STRATEGYToray Industries, Inc. R&D Fiscal 2018 R&D Expenses ¥66.4billion R&D Expenses (Billion yen) Toray Consolidated subsidiaries 66.4 66.2 59.5 58.8 59.2 14 15 16 17 18 (FY) Percentage Breakdown of Total R&D Expenses in Fiscal 2018 Fibers & Textiles business 9% Performance Chemicals business 28% Carbon Fiber Composite Materials business 14% Environment & Engineering business 6% Life Science business 5% Corporate R&D 38% Fiscal 2018 R&D Achievements Fiscal 2018 Topics Fibers & Textiles Using our innovative composite spinning technology, we have developed Primeflex®, a material composed of two-component, bimetal thread that has the smallest diameter in the world at 0.8dtex. In addition, we have developed Deep Color NylonTM, a UV-blocking nylon textile that features deep, vivid colors, superior color fastness, and is composed of a fiber structure with minimal amorphous components, which cause colors to fade. We have also developed “Ultrasuede® BX,” an ultra-microfiber non-woven fabric with suede tex- ture that is about 30% made of plant-based raw mate- rials, realizing the highest proportion of plant-based raw materials--Polyester and Polyurethane--in the world. Performance Chemicals Using our proprietary precise control alloy technol- ogy, we have developed a new polyphenylene sul- fide (PPS) resin that boasts the world’s highest level of flexibility while featuring strong thermal and chemi- cal resistance. We have also developed a solar control film that possesses one of the world’s highest levels of heat reflection properties with respect to infrared radiation from the sun. This film also further deep- ens our nano-layering technology while maintaining glass-like transparency. In addition, we developed the world’s first waterless offset printing equipment that does not use VOCs and capable of reducing power consumption by around 80% compared with conven- tional printing methods. Carbon Fiber Composite Materials We have developed the TORAYCA® MX series, a new carbon fiber that improves tensile strength by around 30% while retaining the equivalent tensile modulus to conventional carbon fibers through the application of technology to improve the orientation by closely con- trolling the graphite crystal structure in a nano order. We also have developed prepreg (resin-impregnated carbon-fiber sheets) for primary structural components of aircraft that applies new molding technology with- out using autoclaves that was developed in the pre- vious fiscal year. Environment & Engineering We have developed technology that limits the resis- tance of the feed water and purified water flowing through the reverse osmosis (RO) membrane to the minimum, thus boosting the velocity of flow of feed water. Consequently, we have succeeded in improv- ing water recovery by as much as twice. In addition, we have successfully created a polyvinylidene fluo- ride (PVDF) ultrafiltration (UF) membrane that further deepens pore diameter control technology, effectively separates micro substances, and features a high level of water permeability. Life Science We have created a new fibrous adsorbent for purify- ing blood that applies synthetic fiber spinning tech- nology to selectively eliminate bio targets such as cells and proteins. In addition, we are accelerating the development of TRK-950 antibody drug currently undergoing Phase 1 clinical testing with the aim of gaining approval early as a cancer treatment. We have also begun a Phase 1 clinical trial in the United States for TRK-250, a nucleic acid drug jointly developed with BONAC Corporation. TRK-250 was granted an Orphan Drug Designation by the U.S. Food and Drug Administration (FDA) for the treatment of idiopathic pulmonary fibrosis. Toray Creates Innovative UV Blocking Film by Deepening Nano-multilayer Technology The use of OLED displays has been spreading rapidly. However, according to some reports, such displays have been found to be sensitive to UV damage, even in the 400 nm range, close to visible light, leading to calls for further improve- ments in durability. Given this, Toray successfully developed an innovative UV blocking film that, while being thin, blocks 99.99% of UV rays, main- tains transparency, and is capable of cutting UV up to around the 400 nm range. The new product, “PICASUS®UV” is a laminated film comprised of several hundreds to thousands of nano-scale layers, representing a greater depth of our pro- prietary technology that works to individually design the thickness and layout of these layers, and to precisely control the wavelength bands of reflection and transmission. Toray aims to mass produce this film from 2020, and going beyond displays, anticipates various other applications for automobile, building and construction mate- rial, agriculture, electronic material, and special packaging in the pharmaceutical and other fields. Development and Commercialization of High-performance Positive Photosensitive Siloxane Coatings Recognized with the CSJ Award for Technical Development Toray has been honored with the 67th (2018) CSJ Award for Technical Development by the Chemical Society of Japan. The award recog- nizes this innovative technology for its realiza- tion of high degrees of resolution and sensitivity with the positive-tone photosensitive properties of siloxane, a hybrid organic and inorganic mate- rial that offers exceptional transparency and heat resistance. The award also highly evaluated the technology for its high degrees of design and property freedom with, such as refraction index control and calcined silicates, which can lead to significant contributions to higher performance of displays, touch sensors, image sensors and other optical devices. Successful Execution of National Project with Toray DNA Chip Toray has developed its DNA Chip “3D-Gene®” that is 100 times more sensitive than conven- tional products. And based on this technology, Toray enabled the super sensitive detection of microRNA in blood. Until fiscal 2018, Toray has been promoting a large-scale national project with the National Cancer Center, the representa- tive cancer research and clinical center of Japan, and other organizations. As a result, Toray carried out a study involving 1,000 cases, using serum samples from, such as breast cancer or colon cancer patients, and good results were obtained. Deepening the cooperation with related orga- nizations, Toray will continue to concentrate all power and aim at the early application for mar- keting authorization and its approval. 52 Intellectual Property Strategies Management Strategies R&D Strategies Business Strategies Patents Filed 5,639 5,654 5,383 1,643 1,537 1,617 3,846 4,037 3,996 16 17 18 (FY) Patents Held 15,727 14,472 17,156 5,745 5,809 5,861 11,411 9,918 8,611 16 17 18 (FY) Domestic Overseas STRATEGYIntegrated Annual Report 2019R&D Expenses (Billion yen) Toray Consolidated subsidiaries 66.4 66.2 59.5 58.8 59.2 14 15 16 17 18 (FY) Percentage Breakdown of Total R&D Expenses in Fiscal 2018 Carbon Fiber Composite Materials business Fibers & Textiles business Performance Chemicals business 9% 28% 14% 6% 5% Corporate R&D 38% Life Science business Environment & Engineering business Intellectual Property Basic Policies on Intellectual Property Intellectual Property Strategies Toray Group has formulated and executes the following four intellectual property strategies as its basic poli- cies on intellectual property. 1 Intellectual property strategies, as a part of the strategy trinity, that conform to management Management Strategies R&D Strategies Business Strategies Patents Filed 5,639 5,654 5,383 1,643 1,537 1,617 3,846 4,037 3,996 16 17 18 (FY) Patents Held 15,727 14,472 17,156 5,745 5,809 5,861 11,411 9,918 8,611 16 17 18 (FY) Domestic Overseas principles Toray Group regards intellectual property as one of its vital management resources. We integrate our intellec- tual property strategies mutually and organically with our business strategies and R&D strategies, 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 intellectual prop- erty, 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 products and tech- nologies and patents owned by other companies, and we thoroughly educate employees to prevent infringe- ment 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 depending on the circumstances by exercising our patent rights, such as demanding that infringement cease, receiving mone- tary 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 applications 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 intellectual 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 systems 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 avoiding careless disclo- sure of technical information through the publication of patent applications. We expect these initiatives to sup- port 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 individual 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 surging growth in the num- ber 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 over- seas subsidiaries and affiliated companies. We are also making concerted efforts to provide the same kind of intellectual property education at subsid- iaries and affiliated companies in and outside of Japan. Moreover, we will assign intellectual property special- ists to companies actively engaging in R&D and work to improve education for researchers and engineers. Toray Selected as One of the 2018-2019 Top 100 Global Innovators Analyzing trends in intellectual property based on proprietary data, Clarivate Analytics, based in the U.S., selects and celebrates the world’s 100 most innovative companies and institutions. This is the third time that Toray has been selected for the list, following 2015 and 2017. 53 STRATEGYToray Industries, Inc.Risk Management Under normal conditions, Toray Group focuses on mitigating risks and preventing crises from occurring. In the event of a crisis, the Group strives to prevent damage from spreading by con- trolling and normalizing the situation quickly with a prompt and appropriate response. Risk Management Concept Toray Group periodically identifies potential risks in its man- agement activities to mitigate risks and prevent crises. The Group has also established an Emergency Quick Response System for the event of major emergencies, through which it takes a prompt, appropriate measures in order to prevent damage from spreading, control and normalize the situation quickly. Risk Management Framework The risks surrounding Toray Group continue to change, meaning that the Group now faces the urgent issues, which are addressing risks that rapidly materialize from changes in the surrounding environment, and strengthening the frame- works for more rapid response. As part of its manage- ment strategy, Toray established a dedicated organization in April 2018 that promotes risk management and closely communicates with the top management and the Board of Directors. Toray has also defined the procedures for risk management during normal times and the quick response procedures during the occurrence of crisis within the Crisis Management Regulations, for which this dedicated organi- zation provides overall management. Establishment of the Risk Management Committee Risk Management System (After June 2019) Chairperson: Corporate Strategic Planning General manager (Executive Vice President) Risk Management Committee Directions on measures Activity reports Directions on measures Activity reports Priority Risk Mitigation Activities Divisions and Departments responsible for Priority Risk Mitigation Overseas Crisis Management Committee Directions on measures Activity reports Toray and all Japanese and overseas subsidiaries and affiliated companies Local Crisis Management Committees in each country and region In May 2018, Toray established the Risk Management Committee as an organization that deliberates, consults, and provides information for the purpose of promoting risk man- agement throughout Toray Group. The General Manager of the Corporate Strategic Planning Division (Executive Vice President and Representative Member of the Board) serves as chairperson. This Committee’s primary activities include priority risk mitigation as part of periodic risk management. In addition, the Overseas Crisis Management Committee and Local Crisis Management Committees, which are in charge of managing overseas travel for employees and col- lecting overseas risk information during normal times, have also been placed under this Committee. Risk Management Initiative Status (1) Periodic Risk Management (Priority Risk Mitigation Activities) Toray Group comprehensively determines company-wide risks (climate change, natural disasters, legal violations, scan- dals, etc.) and identifies key risks upon implementing a com- parative assessment of the importance of each risk item. Ultimately, the opinion of the Risk Management Committee, for which General Manager of the Corporate Strategic Planning Division manager (Executive Vice President and Representative Member of the Board) serves as chairper- son, is sought before determining the priority risks. In terms of the priority risks, Toray promotes activities to reduce risks through a three-year PDCA cycle. During the fourth priority risk mitigation cycle, which covers the three- year activity period starting in fiscal 2018 (2018-2020), Toray is deploying these activities throughout the entire Group, including all Group companies in and outside of Japan. For this period, the priority risks include quality management, earthquake measures, information management, and CSR procurement, among others. Group-wide activities include selecting the divisions and departments responsible for addressing each risk, estab- lishing a road map for outlining the three-year risk mitigation activity plan, and creating annual activity plans. In addition, each year Toray reports on the annual activity performance for the entire Group at the Risk Management Committee and follows-up on the progress status. When formulat- ing the annual action plan for the following fiscal year, the results of this follow-up work and response to risks that 54 SUSTAINABILITYIntegrated Annual Report 2019 have newly emerged from changes in the environment are discussed and are taken into account. (2) Continuous Risk Management (Observing trends in Japan and abroad, detecting, assessing, and monitoring risks) Toray vigilantly maintains an eye on trends in Japan and around the world in order to detect risks which may give a significant impact on the management of Toray Group. When a relevant risk is detected, for example trade friction between the U.S. and China, plastic pollution in the world’s oceans, and GDPR, Toray establishes a company-wide sys- tem without delay and implements the necessary mea- sures throughout the Group. (3) Response in the Event of a Crisis Toray Group has established fundamental principles that form the basis of a company-wide response in the event of a major crisis within the Crisis Management Regulations. In the event of a crisis that necessitates a Company-wide response, Toray responds by setting up a Group-wide quick response system (Group-wide headquarters). Emergency Quick Response System President Propose establishment of Emergency Headquarters General Manager of Corporate Strategic Planning Division; Leader of Risk management Group, Corporate Strategic Planning Division Officials responsible when emergency occurs (Heads of divisions and departments) First report Reports from the division where emergency occurred Media coverage Company-wide Emergency Headquarters Chief Sub chief Staff Secretariats (Head of Secretariat: General Strategic Planning Division) On-site emergency headquarters (Emergency headquarters of each office, plant, and company/country) Chief Staff Secretariats Emergency press releases Supporting plants Notification to relevant divisions 55 SUSTAINABILITYToray Industries, Inc.Risk Management 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 sys- tem to enable swift responses and accurate information disclosure on the occurrence of unforeseen situations. Please note that the risks described below are not all of those identified by Toray Group, and do not represent all the operational and other risks that could affect Toray Group. • Domestic and overseas demand and product market trends • Rising prices of fuel and raw materials • Capital expenditures, joint ventures, alliances and acquisitions, etc. • Fluctuations in foreign currency, interest rate, and the securities market • Changes in assumptions on which forecasts are based that might affect employee retirement benefit obligations and deferred tax assets • Overseas operations • Product liability • Lawsuits • Laws and regulations, taxes, competition poli- cies, and internal controls • Natural disasters and accidents • Information security risks Addressing Fluctuations in Exchange Rates Foreign currency exchange rate fluctuations affect Toray Group’s consolidated financial statements when the finan- cial statements of the overseas operations presented in local currencies are translated into yen. Toray Group takes measures, such as entering 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. In response to currency rate fluctuations, Toray Group utilizes its strength of maintaining business bases through- out the world while encouraging local production for local consumption. At the same time, by flexibly carrying out global operations, Toray Group is striving to build a man- agement structure that is well-shielded from the impact of exchange rate fluctuations. Moreover, Toray Group works to gather information regarding currency movements in each country (region), while at the same time monitoring the exchange rate exposure of Group companies and their hedge position as part of its efforts to mitigate currency exchange risk. Addressing Risks Related to Overseas Operations Toray Group is developing a broad geographical presence, with operations in various countries of Asia, Europe and the United States. 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. (1) Unforeseen introduction, changes or abolition of laws and regulations, such as changes in taxation systems and tariffs which affect adversely (2) Unforeseen, disadvantageous economic or political events (3) Social upheaval, including acts of terror or war When making decisions regarding investments related to the overseas operations, Toray Group collectively considers and carefully investigates the investment country (region) in terms of the current and long-term outlook for the polit- ical, economic, and social climate, the organizational sta- tus of the legal system, and the development status of the regional economic sphere. During the investment exe- cution period, Toray Group also references the execution plan (progress schedule), which integrates the local politi- cal, economic, security, and legal system related risk items, 56 SUSTAINABILITYIntegrated Annual Report 2019 that was formulated when the investment decision was made, and makes periodic follow-ups regarding the prog- ress status of the project. Moreover, once the investment project is completed, the latest information for each region is acquired and information related to country risk, including safety issues, is shared throughout the Group. Addressing Major Earthquakes Toray Group maintains a business continuity plan (BCP) in case of a major earthquake, which has been identified as a priority risk to address. Toray Group has established a basic policy for ensur- ing business continuity in the event of a major earthquake. Namely, Toray Group prioritizes the safety of its employees and preventing any impact on the local community, strives to prevent the further spread of damage and the event of secondary disasters, continues to supply key products and works toward a rapid recovery of business operations, and fulfills its social responsibility to continue supplying prod- ucts. As part of this process, Toray Group continues to con- duct evacuation drills in the event of an earthquake, make systematic quake-resistant upgrades to plant buildings, and draft BCPs. In fiscal 2018, Toray Group created and began imple- menting BCPs for key products selected from each busi- ness in accordance with the procedures for developing BCPs for designated priority products in an earthquake. As with Toray itself, Toray Group began selecting key prod- ucts and formulating BCPs for Group companies in Japan. In addition, Toray Group has conducted drills to establish a temporary Group-wide headquarters based on a scenario involving a large-scale earthquake every year since fiscal 2012. As a result of its preparations during normal times, Toray Group was able to promptly establish a Group-wide headquarters and confirm the safety of its employees fol- lowing the earthquake that occurred in the northern part of Osaka in June 2018. Moreover, Toray Group was able to utilize the Toray Disaster Map System (a system for rap- idly and accurately mapping the extent of damage based on location data for business partners and Toray Group), intro- duced following the Great East Japan Earthquake, to rapidly confirm the status of the supply chain. Going forward, Toray Group will continue to enhance its ability to respond in the event of an earthquake through such drills. Addressing Information Security Related Risks Toray Group’s information systems and networks are fun- damentally essential elements in the execution of the Group’s business operations and every security precaution is taken in their development and operation. However, if such an incident as a work stoppage, a loss of trust in the Group, and a leak of confidential information were caused by unauthorized access, data alteration, theft or deletion, an interruption of system operations, or any other informa- tion security threats, Toray Group’s earnings and financial conditions could be negatively affected. Toray Group formulated its internal rules to appropri- ately manage technical information and other confidential information held by the Group, improved its information management frameworks, and established methods for handling information depending on the level of confi- dentiality. When a security-related incident occurs, the Information Security Officer follows the rules and coop- erates with related divisions and departments and also employs outside experts to promptly address the issue. In terms of information security for Group companies in and outside of Japan, Toray Group aims to enhance the level of information security throughout the Group in con- sideration of the increased threat of cyber attacks. The Group has begun providing information security audits for each Group company in and outside of Japan, and plans to conduct such audits once every three years. Moreover, each Group company is prohibited from destroying or fal- sifying information, leaking confidential information, and using information in an unauthorized manner. Toray Group has also defined the information management frameworks, roles, and responsibilities for each Group company, and educates all employees in regard to these. Moreover, Toray Group analyzes risk based on incident cases and external trends, and informs each Group company of the required measures through Group-wide management policies. Toray Group also confirms and follows-up on the response status of each Group company through annual reports. 57 SUSTAINABILITYToray Industries, Inc. Environmental Management Initiatives Promoting Life Cycle Management for the Environment In addressing global environmental issues, Toray Group has long believed it vital to focus not only on reducing greenhouse gas emissions as a result of the Company’s manufacturing activities, but also considering the entire life cycle of prod- ucts and services to reduce environmental impact, while also delivering improved economic and social value. With this in mind, Toray Group practices life cycle management (LCM), with a focus on reducing CO2 emissions throughout a prod- uct or service’s entire life cycle. For Toray Group, LCM targets a reduction in greenhouse gas emissions (Avoided Emissions*) throughout the global sup- ply chain through an expansion in the environmentally-friendly products (GR products) business. The idea of LCM is being actively adopted by industry in Japan and chemical sector com- panies throughout the world. * Avoided Emissions refers to the amount of greenhouse gas emissions expected to be reduced as a result of an older product or service being replaced by a newer product or service developed by the Company. Toray announces its Support for the TCFD Recommendations and Joins the TCFD Consortium of Japan Toray, in May 2019, announced its support for the Recommen- dations*1 of the Task Force on Climate-related Financial Disclo- sures (TCFD), as well as the company’s participation in the TCFD Consortium of Japan*2 that was launched in the same month. In regard to contributing to solutions to the issue of cli- mate change, Toray believes achieving environmental impact reductions alongside sustainable growth requires a clear understanding, gained through LCM, of the CO2 balance for a product or service throughout its entire lifecycle. With this in mind, the company has been working to reduce greenhouse gas emissions throughout the value chain, with one exam- ple being the use of carbon fiber to reduce the weight of air- crafts, Toray Group has also been promoting the expansion of its Green Innovation business through investment with a long-term perspective of management resources in research and development targeting the practical use of new non-fos- sil resources, including bio resources. Toray Group will actively promote the disclosure of informa- tion in line with the TCFD Recommendations, communicating to the world its active commitment to contributing toward solu- tions to the issue of climate change before all others. *1 TCFD recommendations: Final report released by the TCFD in June 2017 for the purpose of supporting companies with the disclosure of information on climate-related risks and opportunities and stabilizing financial markets through a smooth transition to a low-carbon society. *2 TCFD Consortium of Japan: A group of companies and financial institutions that supports the TCFD recommendations, the consortium of Japan was established to discuss effective corporate information disclosure and initia- tives to link disclosed information to appropriate investment decisions on the part of financial institutions and other organizations. 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 con- tinue 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 emis- sions as “Reducing emissions more than 15% below the fis- cal 1990 level and maintaining that level until fiscal 2020” and implements planned reduction measures. CO2 emissions in fis- cal 2018 decreased by 74,000 tons from the previous fiscal year’s level due to higher production in line with business expansion. Greenhouse gas emissions rose 3.8%, to 1.95 million tons from the previous fiscal year, although this was a reduction of 23.2% 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, compared to the fiscal 1990 level. Toray and its Group compa- nies’ emissions of greenhouse gas were down 4.3% in fiscal 2018 compared to the previous fiscal year. Greenhouse gas emissions per unit of sales improved 6.2 points compared to the previous fiscal year and were 29.7% below the base year. Fiscal 2018 greenhouse gas emissions for Toray Group worldwide were 5.63 million tons-CO2 equivalent, a decline of 2.9% 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 Group is actively engaged in energy conservation activities in line with its goal of reducing the per-unit energy consumption rate* by 2% annually. In fiscal 2018, energy con- sumption declined by 4.7% compared to the previous fiscal year, largely due to a decline in production. However, the per- unit energy consumption rate deteriorated 2.1% compared to the previous fiscal year. Nevertheless, per-unit energy Greenhouse Gas Emissions and Greenhouse Gas Emissions Per Unit of Sales (Toray Group in Japan) 100.0 Base value 83.6 277 257 Target 85.0 79.6 246 76.5 243 70.3 232 Greenhouse Gas Emissions (10,000 tons-CO2 eq) Greenhouse Gas Emissions Per Unit of Sales (index) 90 15 16 17 18 20 (FY) 58 SUSTAINABILITYIntegrated Annual Report 2019 consumption was still 16.8% lower than in the base year. * Energy consumption per converted unit of production volume Voluntary Initiatives to Reduce Atmospheric Emissions of Chemical Substances As a corporate group that does business in the chemicals sec- tor, Toray Group places the highest priority on reducing emis- sions of chemicals into the atmosphere in order to reduce its environmental impact. In fiscal 2018, Toray Group’s atmospheric emissions of PRTR Law-specified substances were 886 tons, which repre- sented a 66% reduction compared to the base year of fiscal 2000. VOC atmospheric emissions amounted to 1,129 tons, a 72% reduction compared to fiscal 2000. The Group has reached its target in terms of VOC atmospheric emissions. Initiatives for Managing Water Resources Toray Group has always been working through its water treat- ment business to provide solutions to water resource prob- lems around the world. Toray Group practices the 3Rs (reduce, reuse, recycle) in consuming water resources, and moni- tors the quality of water that is released into public waters, 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 vol- ume of water used for industrial purposes. In fiscal 2018, Toray Group used 230 million tons of water, an increase of 1% over the 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 2018 stood at 51.0 points, an improvement of 3.0 points from the previous fiscal year. Initiatives to Reduce Waste Waste Recycling Rate 85.7% 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, landfill 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 monetary worth) Initiatives to Prevent Air and Water Pollution Toray Group implements ongoing initiatives at plants to reduce sulfur oxide (SOx) emissions by installing desulfuriza- tion equipment and switching to cleaner fuels, and reduce chemical oxygen demand (COD) by expanding wastewater treatment facilities. Biodiversity Initiatives Toray Group has positioned biodiversity, along with reducing greenhouse gas emissions, as an import- ant theme regarding global environmental problems, and pur- sues biodiversity initiatives 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 greenery 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 possible, including healthy natural forests*2, that have been protected since the plants began operating. These sustainable greenery conservation initiatives also help to conserve the environment 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. Atmospheric Emissions of PRTR Law-specified Substances Base value 2,624 (tons) 752 663 Target 787 873 886 VOC Atmospheric Emissions Base value 3,973(tons) Target 1,192 1,006 994 1,108 1,129 00 15 16 17 18 20 (FY) 00 15 16 17 18 20 (FY) 59 SUSTAINABILITYToray Industries, Inc. Human Resources Management Committed to Human Rights We at Toray Group believe respect for human rights is a mandatory management principle for ensuring the continu- ity of corporate activities and building positive relationships with all of the Group’s stakeholders. Based on this princi- ple, 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 declar- ing 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, socioeconomic status, place of birth, or any other personal characteristics, is strictly forbidden in every process from recruiting and hiring to work placement, treat- ment, 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 dedicated 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 principle for corporate manage- ment. 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 fulfill our duty of respect for human rights as a good corporate citizen. 1. We will respect human rights, character, and indi- viduality 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 supply 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 activ- ities and to avoid or reduce such influences. 4. If it becomes evident that we have caused or con- tributed 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 fos- ter a proper understanding of issues among them. Identifying, Assessing, and Preventing Human Rights Risk Toray Group conducts surveys related to awareness, edu- cation, and other human rights promotion activities once per year at all offices and plants, major Group companies in Japan, and overseas subsidiaries and affiliated compa- nies. The Group verifies the results of these through the Human Rights Promotion Committee in Japan and the Global Human Rights Promotion Committee. From among the results, the Group identifies human rights related issues and problematic points, as well as points of concern, and investigates and implements initiatives in accordance with the human rights promotion framework. Moreover, the Group has designed systems (Corporate Ethics and Legal Compliance Helpline in Japan and whistle-blowing con- tact offices at each overseas company) that enable Group employees to report and consult on human rights issues as part of its efforts to take prompt, appropriate action when a problem occurs and to help reduce human rights risk. Securing and Developing Human Resources to Create New Value Training Expenditures per Employee 90,261yen The success or failure of a company is decided by its peo- ple—employees shape its destiny. 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 developing outstanding human resources capable of performing on a global stage as a fundamental management priority. Based on the follow- ing 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, techni- cal 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 Systematic and Effective Training Toray develops well-designed training programs and system- atically executes diverse training programs to enhance man- agement, sales and marketing, production technology, and specialized skills, and to better equip employees to address globalization. These programs cover all levels of employees 60 SUSTAINABILITYIntegrated Annual Report 2019and fields, aiming to develop future management candidates while expanding and educating the base of core staff ready to employ their strong capabilities to lead on the front lines. Over the recent years, Toray has concentrated on enhancing and expanding its development of global human resources through Overseas Training for Young Employees, the Toray Global English School, and Business English Intensive Training, as well as through joint ses- sions of the Toray Management School and Toray Group Senior Management Seminar. Toray also implements the Global Diversity Seminar for non-Japanese employees working at Toray. Development of Future Management Candidates Toray Group implements training in order to systemati- cally develop future management candidates. Numerous employees who have undergone the training are already active in management positions. Since fiscal 2014, Toray Group has been working on a succession plan and personnel development plan based on a medium- and long-term perspective and drawing up a medium-term human resources plan and practicing sys- tematic personnel assignment to ensure that core staff can tackle important business issues. The Group implements human resources strategies designed to support business strategies by verifying the availability of successor candi- dates for core positions and developing individualized devel- opment plans for future management candidates, including for national staff at group companies outside Japan. Promoting Diversity Toray Group is committed to securing outstanding human resources who have a high sense of ambition and who can play an active role in global business, regardless of gender, nationality, or career history at the time of hiring, as part of our efforts to build thriving workplaces in which a diverse range of individuals can fully demonstrate their potential. Fostering an Organizational Culture Conducive to the Career Advancement of Women Women in Management Positions 4.9% Toray has long advanced the creation of workplace environ- ments in which women will feel comfortable in performing their duties. The number of female employees in upper-level positions has increased steadily, and as of April 2019, women held 9.3% of unit manager or higher positions, and 4.9% 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* for the five-year period from fiscal 2016 to Management Training for Developing Future Management Candidates Program Participants Purpose Year started Total participants through FY 2018 Management Training for General Managers Division and department managers of Toray, Board members/officers of Group companies in and outside Japan Develop management leaders at Toray and Group companies 2013 147 Toray Management School Section managers of Toray Toray Group Management School Department managers of Group companies in Japan Develop future management candidates at Toray and Group companies Develop management candidates focusing on Group companies in Japan 1991 540 2006 263 Toray Group Executive Seminar Board members/officers of Group companies outside Japan Develop core staff at Group companies outside Japan 2004 98 Toray Group Senior Management Seminar Senior Manager of Group companies outside Japan Develop management candidates focusing on Group companies outside Japan 1996 301 61 SUSTAINABILITYToray Industries, Inc.Human Resources Management 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. * 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 employees who were initially hired into the G Course who are eligible for promotion to managerial position that year Promoting Communication Among Women in the Workplace In 2014, women serving as general managers at the Toray Group developed and initiated a career advancement sem- inar for women serving as managers and occupational spe- cialists, and it has now been held four times. Since fiscal 2016, the seminar participants have organized discussion meetings for women annually at all of Toray’s offices and plants in Japan. Open to all women at Toray, the meetings offer an opportunity for women in all workplaces of vari- ous ages and at various stages of life to talk honestly about balancing work and home life, sharing and educating each other about the challenges and issues they face. Employment of Persons with Disabilities Percentage of Companies Achieving Legally Mandated Employment Rate of Persons with Disabilities 50.0% Toray Group hires and employs persons with disabilities, from those with physical challenges to persons with intellec- tual and mental challenges. The Group is making workplace improvements to remove physical barriers for persons with handicaps as well as instituting safety measures. Additionally, the Group provides comprehensive training upon work place- ment 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 50.0% of Toray Group companies in Japan. Group com- panies 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 due to hiring difficulties. Toray will continue to focus on this issue moving forward. Re-employment System In order to support the participation of those over 60 years of age, in fiscal 2001 Toray introduced a re-employment system open to all of its unionized employees who wish to continue working. The Company expanded the system in 2005 to include employees in management and specialized fields, and has continued to apply this system ever since. Creating a Positive Workplace for Employees Helping Employees Maintain Work-life Balance Percentage of Available Annual Paid Leave Used by Employees 89.7% 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. In particular, the systems Toray provides for childcare, family care, and maternity protec- tion exceed the legally mandated minimums and have been improved for easy use. In 2007, Toray was certified as an employer that complies with the action plan standards under the Act on Advancement of Measures to Support Raising Next-Generation Children. As part of its commitment to workplace innovation to balance work and family life, Toray strives to create a com- fortable 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 89.7% of available annual paid leave in fiscal 2018). Employee Health Toray views employee health management as a man- agement priority, and thus undertakes related initiatives in a strategic manner. Toray works with the employee health insurance association and actively encourages the health of its employees, including through the sharing of health related information over the intranet at all offices and plants and by holding participatory events that utilize health related information websites. Toray is also address- ing mental health, and since fiscal 2011 the Company has been independently implementing employee stress check- ups through an external provider. Toray uses the results of these check-ups in helping employees to recognize their own stress levels, supporting approaches to dealing with stress, and improving the workplace environment. In rec- ognition of these efforts, in February 2019 Toray was certi- fied as a Health and Productivity Management Organization (White 500) as it was in 2018. Please refer to Toray Group CSR information on our website: Toray website> Sustainability 62 SUSTAINABILITYIntegrated Annual Report 2019Organization (As of July 1, 2019) Board of Directors President & Executive Vice Presidents Executive Committee Board of Corporate Auditors Corporate Auditors Corporate Strategic Planning Division Representative from Overseas General Administration & Communications Division Legal & Compliance Division Personnel & Industrial Relations Division Finance & Controller’s Division Quality Assurance Division Auditing Dept. Corporate Auditors Office Intellectual Property Division Information Systems Division Purchasing & Logistics Division Corporate Marketing Planning Dept. Global Environment Business Strategic Planning Dept. Life Innovation Business Strategic Planning Dept. Branches Affiliated Companies Division Fibers & Textiles Division Resins & Chemicals Division Films Division Torayca & Advanced Composites Division Electronic & Information Materials Division Pharmaceuticals & Medical Products Division Water Treatment & Environment Division Technology Center Manufacturing Division Engineering Division Research & Development Division 63 GOVERNANCEToray Industries, Inc.Corporate Governance Basic Policy From the outset, one of Toray Group’s managerial princi- ples has been that the purpose of a company is to contrib- ute to society. The Group has developed a Management Philosophy that incorporates this principle. The Group systematizes the Management Philosophy as a Corporate Philosophy, Corporate Missions, and Corporate Guiding Principles. Among these, the Corporate Missions call for desirable relationships with stakeholders and enun- ciate the Group’s commitment “To provide our sharehold- ers with dependable and trustworthy management.” In addition, the Corporate Guiding Principles stipulate the Group’s commitment to “Obtaining the trust of society and meeting the expectations by acting fairly while maintaining high ethical standards and a strong sense of responsibility and maintaining transparency in management.” When establishing the corporate governance structure, the 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 members of the Board and corporate auditors are elected at the general meeting of stockholders. Members of the Board and corporate auditors, as offi- cers directly elected at the general meeting of stockhold- ers, clearly recognize fiduciary responsibility to stockholders who have entrusted the management and appropriately ful- fill their respective roles while discharging accountability Corporate Governance Structures about management status to stockholders and other stakeholders. Toray’s Board of Directors consists of 19 members. Since Toray Group supplies a wide range of industries with basic materials and globally plays an active part in a broad scope of business fields, it is necessary to evaluate vari- ous risks multilaterally based on expertise relevant to the worksites, not only for management judgment and deci- sion-making but also for oversight. To that end, the Board of Directors formulates a structure in which members of the Board familiar with Toray Group businesses oversee man- agement and make decisions from various viewpoints. Furthermore, the Board of Corporate Auditors oversees the execution of operations by the members of the Board based on professional knowledge in fields such as finance, accounting and law in addition to an understanding about businesses, from a standpoint entirely independent of the Board of Directors as a system to secure transparency and fairness of oversight and decision-making. Toray established the Governance Committee as an advisory organ to the Board of Directors in order to report to the Board of Directors on important issues regarding the Company’s corporate governance over the mid- to long- term. The Governance Committee consists of the Chairman of the Board, President, and all of the outside directors, and an outside director serves as a chairperson. Deliberation at the Governance Committee encompasses matters regard- ing the Company’s overall corporate governance matters, including the following. Election Election Election General Meeting of Stockholders Independent Auditor Board of Corporate Auditors (Corporate Auditors) Audit Audit Audit Oversight & Decision-making Functions Board of Directors Governance Committee Report Auditing Department President Business Execution Functions Conference Organs Executive Committee Internal Audit Company-wide Committees Ethics and Compliance Committee Risk Management Committee CSR Committee etc. Divisions, offices, and plants in Japan Japanese subsidiaries and affiliates Overseas subsidiaries and affiliates Departmental Committees and conferences 64 GOVERNANCEIntegrated Annual Report 2019• Structure of the Board of Directors and the Board of Corporate Auditors • Evaluation of the management and operation of the Board of Directors • Policy on nominating candidates for members of the Board and corporate auditors • Remuneration system for members of the Board and corporate auditors • Basic policy on electing member of the senior man- agement, including the President Election of Outside Directors At Toray, we ensure objectivity and transparency of corpo- rate governance by establishing and disclosing standards for independence of outside directors and outside corpo- rate auditors. Toray’s outside directors and outside corpo- rate auditors meet Toray’s standards for independence and meet the independence requirements set by the Tokyo Stock Exchange. We, therefore, have submitted notification to the Tokyo Stock 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 • Has highly specialized expertise 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 judg- ment, 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 2019 is 3.2% of total assets, which is not prominent compared with other banks. Hiroyuki Kumasaka Corporate auditor • Has advanced knowledge in accounting as well as a wealth of experience and an established track record as a certified public accountant. He is also known for his impeccable character and deep insight, and can conduct appropriate audits in an objective manner. • He first joined Fuso Audit Corporation (later known as MISUZU Audit Corporation) and served as an independent accounting auditor of the company in his capacity as a designated partner of the audit corporation for a period of time. This does not impact his independence as it has been more than three years since the audit corporation was relieved of its auditing responsibilities for the Company (in 2013). Basic Policy on Internal Control System To realize the Management Philosophy, the Company shall establish a structure to execute its business legally and effec- tively by improving its internal control system according to the following basic policy as a structure to enable it to appropri- ately establish organization, formulate regulations, commu- nicate information, and monitor the execution of operations. 1. System to ensure that the execution of duties by members of the Board and employees complies with laws and regulations and the Company’s Articles of Incorporation • Toray shall establish the Ethics and Compliance Committee, as one of the company-wide committees to promote observance of corporate ethics and legal com- pliance, and shall take other measures to improve the required internal systems, including the establishment of dedicated organizations. • Toray shall establish the Corporate Ethics and Legal Compliance Code of Conduct as specific provisions to be observed by members of the Board and employees, and shall take other measures to improve the required guide- lines, etc. Especially with regard to eliminating relations with antisocial forces, the Company shall act as one to stand firmly against them. • Toray shall establish an internal reporting system (whis- tle-blowing system) for the reporting of the discovery of violation of laws, regulations, or the Company’s Articles of Incorporation. • Toray shall establish Security Trade Control Program, one of the most important legal compliance issues, and estab- lish an organization dedicated to security export control. 65 GOVERNANCEToray Industries, Inc.Corporate Governance 2. System to ensure the efficient execution of duties by members of the Board • 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 mat- ters with respect to which decision-making is delegated to the President, general managers, etc., from among matters necessary for decision-making. • Toray shall establish the Executive Committee as deliber- ative organs for important matters decided by the Board of Directors or the President. The Executive Committee shall be responsible for the general direction of policy, and shall be in charge of issues related to implementation. 3. System for preserving and managing information pertaining to the execution of duties by the members of the Board • Toray shall establish regulations for important documents and important information related to management, confiden- tial information and personal information, and appropriately preserve and manage them in accordance with the rules. 4. Regulations and other systems pertaining to controls over risks of loss • 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 crises, as well as improve regulations and establish an internal committee to enable immediate implementation in the event of a major crisis. • Toray shall establish an internal control system for financial reporting that ensures the reliability of financial reporting. 5. System for ensuring appropriate business operations within subsidiaries • To establish a system under which subsidiaries report to the Company on matters regarding the execution of duties by members of the Board, etc. of the subsidiar- ies, the Company shall provide regulations on the regu- lar reporting of important management information to the Company and regularly hold conferences at which the Company’s management receives direct reports on the status of the management of the subsidiaries. • To establish regulations and other systems pertaining to controls over risks of loss for subsidiaries, the Company shall provide subsidiaries with guidance to help them to establish risk management systems appropriate for their respective business forms and business environments, and shall receive regular reports on the status of their activities. • To establish a system for ensuring that members of the 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 exe- cution of business operations. In addition, the Company shall endeavor to grasp management information in a uni- fied manner and provide assistance and guidance neces- sary for subsidiaries by determining divisions, etc. with control over its respective subsidiaries. • To establish a system for ensuring that the execution of duties by members of the Board, etc. and employees of subsidiar- ies complies with laws and regulations and the Articles of Incorporation, the Company shall thoroughly familiarize its subsidiaries with the Company’s Corporate Ethics and Legal Compliance Code of Conduct as a code of conduct in common for Toray Group. At the same time, the Company shall request the subsidiaries to establish their own codes of conduct, guide- lines, etc. in consideration of the laws and regulations, business practices, business forms, and other factors in their respec- tive countries. In addition, the Company shall direct its subsid- iaries to establish systems under which the status of internal whistle-blowing by members of the Board, etc. and employees of the subsidiaries is appropriately reported to the Company. 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 • Members of the Board, etc. and employees of Toray Group and corporate auditors of subsidiaries shall report matters regarding the execution of duties to corporate auditors in response to requests from the corporate auditors. • Department in charge of the internal reporting system (whis- tle-blowing system) shall regularly report the status of inter- nal whistle-blowing in Toray Group to the corporate auditors. • Toray shall stipulate regulations to the effect that members of the Board and employees who report to corporate audi- tors shall not be subjected to any disadvantageous treatment because of the said reporting, and shall provide subsidiaries with guidance to help them stipulate the same regulations. 7. Items pertaining to the handling of expenses and liabilities arising from the execution of duties by corporate auditors • Toray shall pay expenses, etc. incurred from the execution of duties by corporate auditors. 8. Items pertaining to employees assisting with 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 • Toray shall assign a full-time employee to provide assistance if and when corporate auditors request assistance. The said employee shall exclusively follow the corporate auditors’ commands and instructions, and the Company shall consult with corporate auditors in advance with respect to the per- sonnel arrangements for the said employee. 66 GOVERNANCEIntegrated Annual Report 20199. Other systems for ensuring effective implementation of audits by corporate auditors • Corporate auditors shall attend Board of Directors meet- ings and other important meetings so that they may ascertain important decision-making processes and the execution of operations. • Corporate auditors shall hold regular meetings with mem- bers of the Board and management and conduct regular visiting audits of Toray offices, plants, and subsidiaries. Remuneration for Members of the Board Given their roles, remuneration for internal members of the Board consists of basic remuneration (monthly remunera- tion,) as well as a performance-based remuneration, a bonus and stock acquisition rights as stock options. Remuneration for outside directors consists of monthly remuneration only. Remuneration is set at a level that enables the Company to secure superior human resources and further motivate them to improve performance, referring to the results of a survey of other companies’ remuneration by an external third-party organization. The Company undertakes reviews of the payment ratios of performance-based remuneration and remuneration, etc. other than performance-based remuneration as appropriate, based on the results of a survey of other companies’ remu- neration and deliberations at the Governance Committee, etc. With respect to monthly remuneration, the maximum limit of total remuneration is determined at general meet- ings of stockholders. Within the scope of the maximum limit, monthly remuneration of each members of the Board is determined by the President based on the Company’s internal regulations resolved at the Board of Directors’ meeting. The provision and the total amount of bonuses are deter- mined each time at a general meeting of stockholders. Particulars of the agenda at the general meeting of stock- holders are resolved by the Board of Directors through conference among senior management, including the President, in consideration of the consolidated operating income for each fiscal year that best represents the results of the Company’s global business operations, plus the his- torical record, etc. A bonus to each member of the Board is determined by the President according to each member’s performance based on the Company’s internal regulations with a resolution at a Board of Directors meeting. The maximum limit of total number of Stock Acquisition Rights as well as the limit of remuneration relating to the granting of the Stock Acquisition Rights as stock options to members of the Board is resolved at the general meeting of stockholders, and within that limit, the total number of Stock Acquisition Rights to be allocated to the members of the Board shall be decided at the Board of Directors meet- ing based on the Company’s internal regulations. Given their roles, remuneration for corporate auditors con- sists of monthly remuneration only. Remuneration is set at a level that enables the Company to secure superior human resources, referring to the results of a survey of other com- panies’ remuneration by an external third-party organization. With respect to monthly remuneration, the maximum limit of total remuneration is determined at general meet- ings of stockholders. Within the scope of the maximum limit, monthly remuneration to each corporate auditor is determined through consultation by corporate auditors based on the Company’s internal regulations. The Governance Committee continuously reviews the remuneration system for members of the Board and corpo- rate auditors. Details of Remuneration in Fiscal 2018 Position Total remuneration (millions of yen) Members of the Board (excluding outside directors) 1,171 Corporate auditors (excluding outside corporate auditors) Outside directors Outside corporate auditors 79 24 19 Total remuneration by type (millions of yen) Basic 818 79 24 19 Bonuses Stock options as remunerations Recipients 163 — — — 190 — — — 25 2 2 2 Notes: 1. Recipients included eight members of the Board (excluding outside directors) who retired during fiscal 2018. 2. Total amounts of remuneration do not include the ¥47 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 153 Member of the Board Filing company Total consolidated remuneration by type (millions of yen) Basic 104 Bonuses 26 Stock options as remuneration 22 Note: Total remuneration only includes persons receiving more than ¥100 million. 67 GOVERNANCEToray Industries, Inc. Compliance Status of Compliance Initiatives Toray Group recognizes the absolute importance of compli- ance with laws, regulations, and social norms if the com- pany is to live up to its corporate philosophy. Moreover, contributing to society by working to resolve major global issues through the use of innovative technologies and advanced materials requires us to build and maintain rela- tionships of trust with our various stakeholders. In order to gain this trust and ensure Toray Group’s sus- tainable contribution to society, it is essential to comply with the laws and regulations related to our business activ- ities in each country in which we operate and maintain the highest level of integrity in all our actions. Based on these concepts, top management focuses on its leadership role in making compliance a priority, requiring corporate ethics and strict compliance with the law not only within the Group, but among suppliers as well. Ethics and Compliance Toray has established the Ethics and Compliance Committee, as a Group-wide committee, chaired by the President and consisting of members of the Board. A joint effort between labor and management, the Committee deliberates on pol- icies and discusses measures relating to corporate ethics. The Committee met twice in fiscal 2018, reviewing the ethics and compliance systems for Toray Group and discussing the results from activities in fiscal 2017 as well as activity plans and progress in fiscal 2018. Acting as leaders, divisional and departmental general managers at each workplace adopt a top-down approach toward promoting initiatives. Affiliate Companies’ Compliance Meeting as well as Over- seas Affiliate Companies’ Compliance Meetings have been established as subordinate organizations of the Ethics and Compliance Committee with respect to subsidiaries and affili- ated companies in Japan and overseas. These meetings study and promote compliance activities implemented in each com- pany, country, and region. In addition, the Corporate Ethics and Legal Compliance Code of Conduct is a strict set of standards that every Toray Group executive and employee closely follows when performing cor- porate activities. In the event that a violation is discovered, strict discipline is carried out in consultation with the Company’s Rewards and Sanctions Committee. Toray has put together the Corporate Ethics and Legal Compliance Handbook, which explains the code and gives details of the compliance help- line, to ensure comprehensive understanding for all Toray and its Japanese Group companies’ executives and employees, including contracted, part-time and temporary workers. Group companies outside Japan prepare national and regional editions of the Corporate Ethics and Legal Compliance Handbooks. Every executive and employee of Group companies outside Japan receives a copy of the handbook to ensure that they are fully informed of the cor- porate policy on the code of conduct. Corporate Ethics and Legal Compliance Training Initiatives Toray posts information on CSR and legal compliance on its corporate intranet. In addition, Toray relays important information about Japanese and other national legislation that relates to its business, such as antitrust laws, labor laws, and anti-bribery rules, to all Group companies, includ- ing those outside Japan. Workplace discussion is fostered by the holding of study groups and workshops at work- place where cases of misconduct by other companies are reviewed. Since fiscal 2012, Toray has provided online train- ing courses on corporate ethics and legal compliance for all executives and employees, including contracted, part- time and temporary workers. In fiscal 2018, Toray worked to raise awareness of human rights issues using case stud- ies based on actual reports and consultations within Toray Group, reminding all participants that issues can occur in any department. Using the same materials, the Company implemented training at Toray Group companies in Japan. Expanding the Whistle-Blowing System By means of the Corporate Ethics and Legal Compliance Helpline, its whistle-blowing system, the Company empha- sizes the self-correction function, by which it is expected that employees will be first to take the initiative in managing con- duct with regard to corporate ethics and legal compliance, and consult with a supervisor as soon as an issue arises. Should consulting with a supervisor prove problematic, Toray ensures that employees have access to alternative means of reporting and consulting such as via contact points at its offices, plants and labor unions or directly to the secretariat of the Ethics and Compliance Committee via phone or email. Each Toray Group company in Japan has established a Helpline contact point, and Toray has also created an exter- nal Helpline contact point shared by all Group companies in Japan to make it easier for employees to report and consult. Overseas subsidiaries and affiliated companies also have sys- tems set up at all their companies, and there have been reports made in several countries and regions, so Toray is working to resolve the issues, while carefully confirming the circum- stances in interviews and investigations. In addition to these moves, in fiscal 2016 Toray established a whistle-blowing sys- tem for Group companies to directly report serious miscon- duct, such as violations of antitrust laws and bribery, and is working to inform all Toray Group companies about the system. The operational status of the whistle-blowing system, including the number of reports (consultations) and other details, is reported to members of the Board via the Ethics and Compliance Committee, which sits twice a year. 68 GOVERNANCEIntegrated Annual Report 2019 Reinforcing in Product Quality Assurance Compliance Improving Security Trade Controls To reinforce product quality assurance compliance across the Toray Group, we will mainly address the following five issues. (1) Strengthening of the entire Toray Group’s product quality assurance system We provide guidance on the development of product qual- ity assurance systems for each division and Group company and are promoting audits of the product quality assurance systems and the effectiveness of operations. After clarify- ing what product quality assurance should involve, we will set tasks based on any deviations between the actual sit- uation and what it should be and promote improvements. (2) Development of human resources to prevent fraud and fostering of a workplace culture We provide product quality assurance compliance educa- tion. The education for Toray Industries, Inc. has been com- pleted, and in fiscal 2019 we will promote product quality assurance compliance education for domestic and overseas subsidiaries and affiliated companies. (3) Ascertain actual situation for contracts with customers for quality assurance and create guidelines We are making headway with the compilation of contract guidelines with regard to product quality assurance. We will check contracts for conformity with the guidelines and review any necessary items. (4) Appropriate maintenance and management of measuring equipment Having created a risk assessment table to determine the need for the updating and maintenance of measuring equipment, we were able to pinpoint the equipment that was in need of updating. In fiscal 2019, we will deploy this method at domes- tic and overseas subsidiaries and affiliated companies. (5) Setting up a quality data management system that prevents fraud We are promoting the construction of a data management system, featuring measurement automation, the automatic transfer of measurement data, and the automatic issuance of inspection reports, which thus involves as little manual intervention as possible. Sharing the latest trends on security trade controls and education to raise awareness of new regulations In addition to conventional concerns about the prolifera- tion of weapons of mass destruction, in security trade con- trols the necessity has arisen to carry out risk management in consideration of the changes in the international secu- rity balance. Having held a meeting of the Security Trade Control Committee, the members of which include officers from the divisions and Group companies involved in exports and technology provision, and considered the risks to be dealt with based on, for example, the latest international situation and the trend for revising laws, we decided on the measures for fiscal 2018. The committee members also hold the Division/Group Company Security Trade Control Committee and, in addition to working to thoroughly make Company-wide measures known to all, implement addi- tional measures on matters to be addressed in the depart- ments in charge and at related companies. Practically Addressing Risks The Toray Group performs risk management of security trade controls with regard to the export of all products, devices, materials, and samples, as well as the transfer of technologies outside Japan. Particularly strict manage- ment is necessary for TORAYCA® carbon fiber and its com- posite materials, semiconductor coating agents, and water treatment membranes, which are listed as restricted items requiring export permission from the Japanese Minister of Economy, Trade and Industry. The following measures to enhance risk management associated with security trade controls have been implemented based on conditions in and outside of Japan. (1) Enhanced employees’ capacity for accurate judgment at divisions/group companies Having launched an e-learning course where inexperi- enced practitioners can learn at any time, we worked to establish basic business knowledge (A total of two programs with the participation of 3,582 employees). We also implemented a practical education program to improve the management practices, such as risk deter- mination, export transactions, and technology provision, for more highly specialized practitioners (A total of 14 programs with the participation of 901 employees). Having promoted in a planned manner the exam authorized by the Center for Information on Security Trade Controls in Japan, a total of 336 employees passed, bringing the cumulative total of Toray Group employees who have passed the exam to 3,771. 69 GOVERNANCEToray Industries, Inc.Implementing Internal Legal Audits In fiscal 2016, Toray adopted a Group-wide system for self-inspections and mutual internal control audits and has conducted internal legal and compliance audits of desig- nated Toray divisions and departments and domestic and overseas subsidiaries and affiliated companies every two years. Having conducted legal and compliance internal audits of the designated companies of overseas subsidiar- ies and affiliated companies in fiscal 2017, in fiscal 2018 the Company confirmed the improvement status of the items pointed out by the audit and that the rate of improvement had reached 100% (including those under improvement). In fiscal 2018, we also conducted internal legal and compli- ance audits of designated Toray divisions and departments and domestic subsidiaries and affiliated companies. Tax Compliance Efforts Toray Group strives to pay tax properly in accordance with international standards, such as the tax laws and related rules of each country/region and OECD guidelines. With regard to transfer prices, which have become increasingly important with the increase in international transactions, we strive for appropriate income distribution by calculating transaction prices after taking into consideration the prin- ciples between independent companies. In addition, Toray neither performs tax planning with the intention of making excessive tax savings nor conducts arbitrary tax avoidance through the use of tax havens. Compliance (2) Conducted regular audits Having carried out paper audits and on-site audits for each Group company, Toray provided individualized guidance based on the results to help Group companies make improvements. (3) Enhanced information sharing and reporting Toray integrated and centralized information on concerns such as suspicious trade inquiries, reported or consulted with the appropriate authorities as required, and took the appropriate measures. The Company also shared suspicious trade information at various company meet- ings, and took steps to improve its risk management. (4) Improved inspection systems Having completed the development of the basic func- tions of the next security trade control system, we started coordination with the sales key system while repeating operational tests for each division. A system is now in place to prevent accidental shipments due to human error. Promotion of Mission B.E.A.R. Activities As a new measure under the slogan “Having the integrity to do the right thing in the right way” in fiscal 2018, Toray Group is promoting the following four compliance principles and more effective compliance initiatives. Four Compliance Action Principles B: Be fair, be honest and have integrity E: Encourage respect and communication A: Adopt a “genba” approach—Look to the facts! R: Responsibility as a member of our excellent company The “Mission B.E.A.R.” compliance program, which takes the latter part of its name from the first letter in each of the four action principles, requires Toray Group companies to identify through questionnaires compliance risks, followed by the formulation of a response plan and the implemen- tation of countermeasures. Follow-ups on results are then conducted as part of PDCA activities. In fiscal 2019, we will continue to monitor and support activities at each Group company aimed at promoting com- pliance, bolstering our risk response based on regional and operational factors, and building a corporate culture cen- tered on integrity. 70 GOVERNANCEIntegrated Annual Report 2019 Analyzing and Evaluating the Effectiveness of the Board of Directors Process of Analysis and Evaluation Overview of the Results of the Analysis and Evaluation Over the period from late-March 2019 to mid-April 2019, Toray’s Board of Directors conducted a “Questionnaire Survey to Evaluate the Effectiveness of the Board of Directors in the fiscal year ended March 31, 2019.” The 23 survey respondents, who comprised all of the Board mem- bers and corporate auditors, answered questions on the fol- lowing survey items and gave their names. (1) Management Philosophy and Corporate Missions (2) Size and structure of the Board of Directors (3) Segregation of oversight and business operations (4) Provision of information prior to Board of Directors meetings (5) Number of agenda at Board of Directors meetings (6) Proceedings at Board of Directors meetings (7) Management response to opinions, etc. at Board of Directors meetings (8) Authority of the Board of Directors (9) Appropriate response to conflicts of interest (10) Communication with stakeholders (11) Communication among members of the Board (12) Opportunities to acquire knowledge (13) Compliance promotion (14) Overall evaluation In addition to the questionnaire, secretariat of the Board of Directors individually interviewed outside directors and out- side corporate auditors (total of four persons) to hear their opinions in relation to their responses to the questionnaire. The survey results were analyzed and evaluated at the Governance Committee held on June 11, 2019 and the results of the analysis and evaluation were deliberated at the Board of Directors meeting held on June 20, 2019. The following overview of the results of the analysis and evaluation describes the contents resolved at the Board of Directors meeting. (1) In the fiscal year ended March 31, 2019, the Board of Directors performed oversight and decision-making based on a deep understanding and sympathy with the Management Philosophy and Corporate Missions. As a result, we believe that the Board of Directors gener- ally fulfilled its roles and responsibilities in indicating the direction of corporate strategies and other major courses of action in an appropriate manner. (2) In the fiscal year ended March 31, 2019, the Board of Directors held 15 meetings in total to perform oversight and decision-making in a timely and appropriate manner. Furthermore, it promoted reviews on the scope of del- egating decision-making authority. Through these initia- tives, we believe that the Board of Directors generally fulfilled its roles and responsibilities in establishing an environment conducive to appropriate risk-taking by the senior management in an appropriate manner. (3) With respect to the 15 Board of Directors meetings held in the fiscal year ended March 31, 2019, the attendance rate of the members of the Board was 100%. Outside directors made remarks mainly from their respective professional viewpoints. The opinions, etc. at the Board of Directors meetings, including the abovementioned remarks, were appropriately reflected in measures taken by the management. With respect to transactions caus- ing possible conflicts of interest, internal procedures to handle them were appropriately carried out. In light of the above, we believe that the Board of Directors gen- erally fulfilled its roles and responsibilities in carrying out the effective oversight of members of the Board and the management from an independent and objective stand- point in an appropriate manner. (4) Based on the above, we believe that the Board of Directors generally fulfilled its roles and responsibilities in an effective manner in the fiscal year ended March 31, 2019. With regard to the matter, “further activating dis- cussions at the Board of Directors meetings,” however, specific measures for improvement must be taken in the fiscal year ending March 31, 2020 and thereafter to fur- ther improve the effectiveness of the Board of Directors. (5) With respect to the opinions, etc. received from the mem- bers of the Board and corporate auditors in the course of evaluating the effectiveness of the Board of Directors, the Governance Committee shall deepen discussions based on those opinions with a view to further improving the effectiveness of the Board of Directors, as necessary. 71 GOVERNANCEToray Industries, Inc.Board of Directors and Corporate Auditors (As of June 25, 2019) President and Representative Member of the Board Akihiro Nikkaku Chief Executive Officer, Chief Operating Officer 1973 Joined the Company 2001 General Manager, Engineering Division; General Manager, Second Engineering Dept. 2002 Vice President (Member of the Board) 2004 Senior Vice President (Member of the Board) 2006 Senior Vice President (Member of the Board & Member of the Executive Committee) 2007 Executive Vice President and Representative Member of the Board 2010 President and Representative Member of the Board (incumbent) Executive Vice President and Representative Member of the Board Koichi Abe In charge of Intellectual Property Division, Global Environment Business Strategic Planning Dept., and Life Innovation Business Strategic Planning Dept.; General Manager, Technology Center; General Manager, Toray Human Resources Development Center 1977 Joined the Company 2004 General Manager, Aichi Plant 2005 Vice President (Member of the Board) 2009 Senior Vice President (Member of the Board) 2011 Senior Vice President (Member of the Board & Member of the Executive Committee) 2013 Senior Vice President and Representative Member of the Board 2014 Executive Vice President and Representative Member of the Board (incumbent) Executive Vice President and Representative Member of the Board Ryo Murayama In charge of Marketing and Sales; in charge of Corporate Marketing Planning Dept., and branches; General Manager, Affiliated Companies Division 1973 Joined the Company 2005 General Manager, LCD Materials Division 2008 Vice President (Member of the Board) 2010 Senior Vice President (Member of the Board) 2013 Senior Vice President (Member of the Board and Member of the Executive Committee) 2018 Executive Vice President and Representative Member of the Board (incumbent) Executive Vice President and Representative Member of the Board Yukichi Deguchi General Manager, Corporate Strategic Planning Division; General Manager, Quality Assurance Division; in charge of Legal & Compliance Division (Security Trade Administration Dept.), HS Business Development Dept. 1973 Joined the Company 2009 Assistant General Manager, Research & Development Division 2009 Vice President (Member of the Board) 2012 Senior Vice President (Member of the Board) 2014 Senior Vice President (Member of the Board and Member of the Executive Committee) 2018 Executive Vice President and Representative Member of the Board (incumbent) Senior Vice President (Member of the Board and Member of the Executive Committee) Mitsuo Ohya General Manager, Fibers & Textiles Division; General Manager, Osaka Head Office 1980 Joined the Company 2009 General Manager, Industrial & Textile Fibers Division 2012 Vice President (Member of the Board) 2014 Retired from Vice President (Member of the Board) President and Representative Member of the Board, Toray International, Inc. 2016 Senior Vice President (Member of the Board & Member of the Executive Committee) (incumbent) Senior Vice President (Member of the Board and Member of the Executive Committee) Hiroshi Otani General Manager, Water Treatment & Environment Division; Chairman, Toray Asia Pte. Ltd. (part-time) 1978 Joined the Company 2011 Assistant General Manager, Water Treatment & Environment Division 2011 Vice President (Member of the Board) 2014 Senior Vice President (Member of the Board) 2018 Senior Vice President (Member of the Board & Member of the Executive Committee) (incumbent) Senior Vice President (Member of the Board and Member of the Executive Committee) Toru Fukasawa General Manager, Finance & Controller’s Division 1978 Joined the Company 2010 Chief Executive Representative for America; Chief Representative for America; Chairman, Toray Holding (U.S.A.), Inc.; President, Toray Industries (America), Inc. 2012 Vice President (Member of the Board) 2015 Senior Vice President (Member of the Board) 2018 Senior Vice President (Member of the Board & Member of the Executive Committee) (incumbent) Senior Vice President (Member of the Board and Member of the Executive Committee) Kazuo Morimoto General Manager, Torayca & Advanced Composites Division; Chairman, Toray Carbon Fibers Europe S.A. (part-time) Senior Vice President (Member of the Board and Member of the Executive Committee) Osamu Inoue General Manager, Films Division; Chairman, Toray Films Europe S.A.S. (part-time) 1975 Joined the Company 2008 General Manager, Purchasing & 1976 Joined the Company 2008 Chairman, Toray Plastics Europe Logistics Division 2009 Vice President (Member of the Board) 2012 Retired from Vice President (Member of the Board) Chief Executive Representative for the Americas; Chief Representative for the Americas; Chairman, Toray Holding (U.S.A.), Inc.; President, Toray Industries (America), Inc. 2015 President and Representative Member of the Board, Du Pont-Toray Co., Ltd. 2017 Senior Vice President (Member of the Board) 2018 Senior Vice President (Member of the Board & Member of the Executive Committee) (incumbent) S.A.S.; Chairman, Toray Films Europe S.A.S. 2010 Vice President (Member of the Board) 2012 Retired from Vice President (Member of the Board) President and Representative Member of the Board, Toray Battery Separator Film Co., Ltd. 2017 Assistant General Manager, Films Division Senior Vice President (Member of the Board) 2018 Senior Vice President (Member of the Board & Member of the Executive Committee) (incumbent) 72 GOVERNANCEIntegrated Annual Report 2019 Senior Vice President (Member of the Board) Hirofumi Kobayashi General Manager, Pharmaceuticals & Medical Products Division 1983 Joined the Company 2011 General Manager, Electronic & Information Materials Division (Technology and Manufacturing) 2013 Vice President (Member of the Board) Senior Vice President (Member of the Board) Tetsuya Tsunekawa General Manager, Research & Development Division; General Manager, Basic Research Center 1984 Joined the Company 2012 General Manager, Tsuchiura Plant 2014 Vice President (Member of the Board) 2016 Senior Vice President (Member of 2016 Senior Vice President (Member of the Board) (incumbent) the Board) (incumbent) Senior Vice President (Member of the Board) Takashi Fujimoto General Manager, Information Systems Division, Purchasing & Logistics Division; General Manager, Engineering Division 1980 Joined the Company 2014 President and Representative Member of the Board, Toray Precision Co., Ltd. 2016 Vice President (Member of the Board) 2018 Senior Vice President (Member of the Board) (incumbent) Senior Vice President (Member of the Board) Kazuyuki Adachi General Manager, Manufacturing Division; General Manager, Textile Technology & Manufacturing Division 1980 Joined the Company 2004 President, Toray Textiles Central Europe s.r.o. 2013 Director, Toray Industries (China) Co., Ltd.; Chairman and President, Toray Sakai Weaving & Dyeing (Nantong) Co., Ltd. 2016 Director, Toray Industries (Thailand) Co., Ltd.; President, Luckytex (Thailand) Public Company Limited 2018 Senior Vice President (Member of the Board) (incumbent) Vice President (Member of the Board) Shigeki Taniguchi General Manager, Personnel & Industrial Relations Division 1983 Joined the Company 2015 General Manager, General Administration & Legal Division; General Manager, General Administration Dept. 2016 Vice President (Member of the Board) (incumbent) Vice President (Member of the Board) Hideki Hirabayashi In charge of CSR; General Manager, Legal & Compliance Division; General Manager, General Administration & Communications Division; General Manager, Tokyo Head Office 1981 Joined the Company 2016 General Manager, General Administration & Legal Division; General Manager, General Administration Dept. 2017 Vice President (Member of the Board) (incumbent) Vice President (Member of the Board) Hiroshi Enomoto General Manager, Electronic & Information Materials Division 1983 Joined the Company 2012 General Manager, Electronic Materials Division; General Manager, Electronic & Information Materials Dept. 2018 Vice President (Member of the Board) (incumbent) Vice President (Member of the Board) Nobuyuki Inohara General Manager, Resins & Chemicals Division 1983 Joined the Company 2005 General Manager, Polyester Polymers Dept. 2010 General Manager, Torayca Reinforced Plastics Dept. 2013 General Manager, Resins Division & General Manager, Torayca Reinforced Plastics Dept. 2014 General Manager, Resins Division 2015 President and Representative Member of the Board, Toray Plastics Precision Co., Ltd. 2019 Vice President (Member of the Board) (incumbent) Outside Director Kunio Ito Outside Director Ryoji Noyori 2002 Dean, Graduate School of 1997 Dean, Graduate School of Science Commerce and Management and Faculty of Commerce and Management, Hitotsubashi University 2004 Executive Vice President and Board Member, Hitotsubashi University 2013 Director, Kobayashi Pharmaceutical Co., Ltd. (incumbent) 2014 Director, Seven & i Holdings Co., Ltd. (incumbent) Vice President (Member of the Board) of the Company (incumbent) 2018 Research Professor, Department of Business Administration, Hitotsubashi University Business School (incumbent) and School of Science, Nagoya University 2001 Director, TAKASAGO INTERNATIONAL CORPORATION (incumbent) 2003 President, RIKEN 2004 Special Professor, Nagoya University (incumbent) 2015 Director-General, Center for Research and Development Strategy, Japan Science and Technology Agency (incumbent) Vice President (Member of the Board) of the Company (incumbent) Corporate Auditor Shoshiro Taneichi 1979 Joined the Company 2012 General Manager, Shiga Plant 2016 Corporate Auditor (incumbent) Corporate Auditor Shogo Masuda 1975 Joined the Company 2006 Assistant General Manager, Affiliated Companies Division; General Manager, Affiliated Companies Administration Dept.; General Manager on Special Assignment, Corporate Strategic Planning Division 2007 Vice President (Member of the Board) 2011 Senior Vice President (Member of the Board) 2016 Senior Vice President (Member of the Board & Member of the Executive Committee) 2017 Corporate Auditor (incumbent) Outside Corporate Auditor Toshio Nagai Outside Corporate Auditor Kazuya Jono Outside Corporate Auditor Hiroyuki Kumasaka 2008 Chief Research Officer, Supreme Court 2012 President, Hiroshima High Court 2013 President, Osaka High Court 2014 Mandatorily retired Registered as a lawyer (The Dai-ichi Tokyo Bar Association) Takusyou Sogo Law Office (incumbent) 2015 Outside Corporate Auditor of the Company (incumbent) 2016 Outside Corporate Auditor, SUMITOMO CORPORATION (incumbent) 1977 Joined Mitsui Bank, Limited 2005 Executive Officer, Sumitomo Mitsui Banking Corporation 2007 Managing Executive Officer, Sumitomo Mitsui Banking Corporation 2010 Senior Managing Director, Sumitomo Mitsui Banking Corporation 2012 Retired Representative Director, President & CEO, Citibank Japan Ltd. 2014 Retired 2015 Outside Corporate Auditor of the Company (incumbent) 2019 Outside Corporate Auditor, Brother 1973 Joined FUSO Audit Corporation (later MISUZU Audit Corporation) 2007 Chairs of the Board of Council; Head, Tokyo Office, the Audit Corporation Representative Liquidator, the Audit Corporation 2008 Outside Corporate Auditor, MATSUDA SANGYO CO., LTD. 2011 External Corporate Auditor of the Board, Japan Airlines Co., Ltd. 2015 Outside Audit and Supervisory Committee Member, MATSUDA SANGYO CO., LTD. Industries (incumbent) 2019 Outside Corporate Auditor of the Company (incumbent) 73 GOVERNANCEToray Industries, Inc. Comments from the Outside Directors I will make contributions by increasing the quality of corporate governance and ensuring sustainable growth of Toray’s corporate value. Kunio Ito Outside Director Q A Q A Q A How would you rate Toray’s corporate governance? The sense of discipline that forms the basis of corporate governance is firmly entrenched in Toray’s employees and management. Moreover, considerable progress is being made to further energize the Board of Directors which plays a central role in the governance function. As a part of efforts to evaluate the effectiveness of the Board of Directors, we are drawing on the results of signed questionnaires. Steps are being taken to analyze any changes from the previous year and dis- crepancies between the evaluations by internal and outside directors. In addition, detailed hearings with outside directors and outside cor- porate auditors are being held to clarify issues for the next fiscal year. Furthermore, the level of competence exhibited by the Governance Committee, which also encompasses the nomination and remunera- tion functions, continues to improve with each passing year. What do you believe is your role as an outside director? The role of an outside director, as I see it, is to properly grasp the back- ground behind each agenda item presented to the Board of Directors and the impact on corporate value. Moreover, outside directors need to exercise judgment from a long-term perspective and not a myopic view. At the same time, outside directors must ensure that the activi- ties and decisions of the Company can be explained to all stakeholders including shareholders, from the standpoint of a third party. As chair- person of the Governance Committee, which serves as an advisory body to the Board of Directors, I will contribute to efforts aimed at put- ting in place a proper succession plan as well as the remuneration sys- tem. I will also focus on steadily increasing the quality of governance and to secure the sustainable growth of Toray’s corporate value. What issues do you think the Company will face in its efforts to secure sustainable growth? Toray has been actively engaged in the development of advanced tech- nologies in order to realize its overarching philosophy and strong belief that materials have the power to bring about fundamental transforma- tions in society. Looking ahead, the Company must continue to ramp up and further enhance these efforts. However, in this VUCA* era of intense environmental change, I would like Toray to foster an agile orga- nizational culture. At the same time, it is important that the Company fur- ther entrench an entrepreneurial spirit in its employees going forward. In this sense, I would hope that employees enjoy the freedom to paint their own picture as if working on a blank canvas when actively promot- ing open innovation with startups and other companies. Put simply, it is vital that Toray remains a leading company in solving social issues. * VUCA: Acronym for “Volatility,” “Uncertainty,” “Complexity,” and “Ambiguity” 74 GOVERNANCEIntegrated Annual Report 2019I will express my opinion on Toray’s research and technological development issues and human resource development. Ryoji Noyori Outside Director Q A Q A Q A How would you rate Toray’s corporate governance? For many years, Toray Group has won an acknowledged reputation for being an organization acting with the greatest sincerity by accumu- lated efforts of its forerunners. Regrettably, there were deviant acts in product quality control at a subsidiary the year before last that brought considerable disgrace upon the Group as a whole. On the other hand, the case served as an opportunity to promote a restoration of disci- pline from every point of view across the entire organization. Amid the increase in overseas activities in the coming years, the Company should be highly evaluated for making every effort to avoid unfore- seen circumstances by ingraining the Toray spirit even in different cul- tural regions. What do you believe is your role as an outside director? As a lowly government servant, I have long been involved in scien- tific research and education at universities and have participated in the administration of national research and development institutes as well as in the formulation of policies for promoting Japan’s science and technology. I have also broadened my knowledge of overseas situation in these areas. Based on those experiences, I believe that I am mainly responsible for advising on Toray’s research, technological develop- ment issues, and human resource development. Manufacturing is the basis of Japanese industry, and “materials have the power to change the world,” but the future business environment is not an extension of that of today. I would thus like to watch closely the trend and request change in awareness. What issues do you think the Company will face in its efforts to secure sustainable growth? Toray, with its leading technology, should evolve from being “Japan’s No. 1 materials company” to “the Company that attracts the world.” If that is the case, what kind of technologies are required in the new era? Not only its R&D teams, but also Toray as a whole should sharpen sensitivities, gather knowledge, and create new values on their own. Such a spirit is required. Toray must not stay as the down- stream industry servant. From the perspective of fairness between the current and future generations, it is inevitable that society will shift to a “circular economy.” I would like you to lead the future soci- ety proactively with pride. 75 GOVERNANCEToray Industries, Inc.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. With the goal of strengthening our system for engag- ing with stakeholders, we established a new organization to supervise communications in general in April 2018, and we are working on centralizing the function of information transmission for both internal and external of the Company. Engaging with Stockholders and Investors The Group actively communicates with institutional inves- tors and securities company analysts by providing informa- tion materials when requested and holding same-day results briefings when quarterly earnings are announced. In addition to IR materials, including annual reports, the Group also pro- vides a wide range of information on management policies and strategies, as well as financial and earnings informa- tion in the Investor Relations section of the Toray website. We also hold briefings on business for stockholders in order to deepen their understanding of Toray Group. In fiscal 2018, Toray held four results briefings and held 560 meetings with investors and analysts. Engaging with Customers Toray believes that the customer comes first. We closely com- municate with our customers, mainly through our marketing and sales departments, and periodically conduct customer satisfaction surveys. The results of these surveys are shared internally at Board meetings and through in-house newsletters as we strive to provide even higher quality customer service. We have also established showrooms at a number of locations, including the head office in Tokyo, the Toray Shiga Plant, and the Toray Human Resources Development Center in Mishima, Shizuoka Prefecture, showing our busi- nesses and product applications in an easy-to-understand manner to the public so as to deepen their understanding of Toray Group’s stance toward contributing to solving vari- ous problems by creating and providing innovative technol- ogies and cutting-edge materials. Engaging with Business Partners Engaging with Employees While providing materials and products as a manufac- turer of advanced materials, Toray Group must engage in upstream management of its supply chains to better ful- fill the needs of its customers, including the areas of pro- duction facilities and procured raw materials and resources. Accordingly, the Group has established its Basic Purchasing Policies and Basic Distribution Policies to emphasize this approach and ensure fair business activities. Throughout the Group we are promoting proper and fair transactions, adherence to laws, environmental preservation, respect for human rights, improvements in quality and other policies in initiatives with regard to corporate responsibility in procure- ment, purchasing, and distribution. Using in-house newsletters, the company intranet, and company-wide bulletin boards, Toray Group actively pro- motes communication with its employees to not only dis- seminate information on company policies and issues, but to improve cohesion of the Toray brand and heighten each employee’s sense of belonging. In addition to messages from the President being pro- vided in all media, in-house newsletters are published in Japanese, English, and Chinese, with the goal of sharing information and promoting understanding of current proj- ects and key management and business topics. In addition, in 2017, we established TORAY NAVI Lite, an intranet site geared toward Group companies in and outside of Japan, representing the construction of global infrastruc- ture for the sharing of information. Engaging with the Mass Media Engaging with Local Communities Toray recognizes that public relations and corporate com- munication activities have a role in fulfilling responsibili- ties for information disclosure as well as influencing public opinion. Accordingly, Toray’s Corporate Communications Department actively engages with a wide range of media organizations, acting as the public’s point of contact with the Company. Based on Toray’s Information Disclosure Principles, the department provides fair and impartial infor- mation, even if it may cast the Company in a bad light, in a timely and appropriate manner. In fiscal 2018, the Company issued 180 press releases and responded to 295 media requests for information. In addition to holding informal gatherings for discussion reg- ularly, Toray Group strives to engage in more active dialogue with nearby residents in a variety of other settings, including by participating in events sponsored by local governments and inviting local residents onto plant grounds for summer festivals. Following Toray Group Social Initiative Policies, we aim for our social contribution activities to contribute to sus- tainable development while meeting the expectations of local communities. A specific example of this is the establishment of Toray Science Foundation in Japan, and similar foundations in Malaysia, Thailand, Indonesia, and the Republic of Korea, which contribute to raising the level of science and technol- ogy in these countries. We also actively promote sports in Asia by co-sponsoring the Shanghai International Marathon. 76 DATAIntegrated Annual Report 2019 External Evaluation Toray was included in the following SRI indices as of June 30, 2019. Dow Jones Sustainability Index Asia Pacific MSCI ESG Indexes Toray is included in the Asia Pacific Index of the Dow Jones Sustainability Indices (DJSI), an SRI index admin- istered by U.S.-based Dow Jones and Switzerland-based RobecoSAM. Toray is included in the MSCI ESG Indexes. MSCI pro- vides institutional investors (from pension funds to hedge funds) across the globe with various tools to sup- port 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 orga- nization that promotes socially responsible investment. Selected for inclusion in the FTSE4Good Index Series Toray was selected for inclusion in the FTSE4Good Index Series. The FTSE4Good Index Series was developed by UK-based FTSE Russell. Those companies that imple- ment outstanding ESG practices are selected for this index series. Selected for inclusion in the Euronext Vigeo World 120 Index Toray was selected for inclusion in the Euronext Vigeo World 120 Index. The Euronext Vigeo World 120 Index is a stock index developed by Euronext, a European exchange located in Amsterdam, the Netherlands and Vigeo Eiris (France, UK), an ESG rating and research agency. This index is composed of the 120 top ranked lead- ing companies in ESG selected from major corporations in Europe, North America, and Asia-Pacific region. 77 DATAToray Industries, Inc.Toray Group Worldwide Network 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 61 26 87 14 101 124 29 153 21 174 185 55 240 35 275 (As of March 31, 2019) Japan France Indonesia Consolidated Subsidiaries Consolidated Subsidiaries Consolidated Subsidiaries l n Ichimura Sangyo, Co., Ltd. n Toray Films Europe S.A.S. l n P.T. Indonesia Toray Synthetics n Toray Plastics Precision Co., Ltd. n Toray Carbon Fibers Europe S.A. l P.T. Toray Polytech Jakarta n Toray Fine Chemicals Co., Ltd. n Soda Aromatic Co., Ltd. n Toray Advanced Film Co., Ltd. l Suido Kiko Kaisha, Ltd. l Toray Construction Co., Ltd. l Toray Engineering Co., Ltd. n Toray Medical Co., Ltd. l Toray Systems Center, Inc. l Toray Enterprise Corp. n Toray International, Inc. n Chori Co., Ltd. Affiliates Accounted for by Equity Method l n Du Pont-Toray Co., Ltd. l Toray Opelontex Co., Ltd. l Japan Vilene Company, Ltd. n Dow Corning Toray Co., Ltd. n Sanyo Chemical Industries, Ltd. United Kingdom Consolidated Subsidiaries l Toray Textiles Europe Ltd. Italy Consolidated Subsidiary l Alcantara S.p.A. China Thailand Consolidated Subsidiaries Consolidated Subsidiaries l l Toray Fibers (Nantong) Co., Ltd. l Toray Textiles (Thailand) Public l Toray Sakai Weaving & Dyeing Company Limited (Nantong) Co., Ltd. l n Thai Toray Synthetics Co., Ltd. l Toray Polytech (Nantong) Co., Ltd. l Toray Industries (H.K.) Ltd. n Toray Plastics (China) Co.,Ltd l Toray Industries (China) Co., Ltd. Affiliates Accounted for by Equity Method l Pacific Textiles Holdings Ltd. Republic of Korea Consolidated Subsidiaries U.S.A. Consolidated Subsidiaries n Toray Plastics (America), Inc. n Toray Resin Co. n Toray Composite Materials America, Inc. n Zoltek Companies, Inc. n Toray Advanced Composites USA Inc. ln n l Toray Advanced Materials Korea Inc. Others n Toray Battery Separator Film Korea Limited n STEMCO, Ltd. l Fibers & Textiles Affiliates Accounted for by Equity Method n Performance Chemicals n STECO, Ltd. Malaysia Consolidated Subsidiaries l Penfabric Sdn. Berhad l n Penfibre Sdn. Berhad n Toray Plastics (Malaysia) Sdn. Berhad n Carbon Fiber Composite Materials l Environment & Engineering n Life Science l Others n Trading Major Offices and Plants in Japan Osaka Head Office Branches Nagoya, Hokuriku, Kyushu, Tohoku, Chugoku & Shikoku Plants Shiga, Seta, Ehime, Nagoya, Tokai, Aichi, Okazaki, Mishima, Chiba, Tsuchiura, Gifu, Ishikawa, Nasu Overseas Offices U.S.A. Toray Industries (America), Inc. Germany Toray Industries Europe GmbH Republic of Korea Toray Industries Korea Inc. India Toray Industries (India) Private Limited China Toray Industries, Inc., Beijing Office Brazil Toray do Brasil Ltda. 78 DATAIntegrated Annual Report 2019 FINANCIAL SECTION CONTENTS 80 Ten-Year Summary of Selected Financial Data 82 Management’s Discussion and Analysis 86 Consolidated Balance Sheets 88 Consolidated Statements of Income 88 Consolidated Statements of Comprehensive Income 89 Consolidated Statements of Changes in Net Assets 90 Consolidated Statements of Cash Flows 91 Notes to Consolidated Financial Statements 120 Independent Auditor’s Report 79 DATAToray Industries, Inc.Ten-Year Summary of Selected Financial Data Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31 Net sales Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Plastics & Chemicals IT-related Products 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 2010 2011 2012 ¥ 1,359,631 ¥ 1,539,693 ¥ 1,588,604 525,204 584,115 638,375 — 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 — 69,914 170,247 55,554 13,295 397,815 243,404 107,721 101,091 64,218 104,410 67,443 98,384 1,556,796 1,567,470 1,581,501 580,344 632,160 518,216 531,595 493,509 640,970 561,923 481,906 674,149 ¥ (10.12) ¥ — 5.00 336.65 2.95 (1.04) 30.3 (3.0) 1.34 ¥ 591 390 ¥ 36.41 34.43 7.50 363.90 ¥ 39.41 37.46 10.00 384.90 6.50 3.76 37.8 10.9 0.83 643 420 6.78 4.04 39.7 10.5 0.77 631 511 ¥ Number of employees 37,936 38,740 40,227 *1 Certain overseas subsidiaries adopted IAS 19 “Employee Benefits” (revised on June 16, 2011) effective from the year ended March 31, 2014. The related figures for the year ended March 31, 2013 are retrospectively restated accordingly. *2 Toray Group changed the reportable segments effective from the year ended March 31, 2018. The related figures for the year ended March 31, 2017 are retrospec- tively restated accordingly. *3 “Partial Amendments to Accounting Standard for Tax Effect Accounting” (Accounting Standards Board of Japan (ASBJ) Statement No. 28, February 16, 2018) is applied from the year ended March 31, 2019 and onward. The related figures for the year ended March 31, 2018 are retrospectively restated accordingly. 80 DATAIntegrated Annual Report 2019 2013*1 2014 2015 2016 2017*2 2018*3 Millions of yen 2019 ¥ 1,592,279 ¥ 1,837,778 ¥ 2,010,734 ¥ 2,104,430 ¥ 2,026,470 ¥ 2,204,858 ¥ 2,388,848 632,150 755,474 856,676 892,039 — 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 95,815 153,324 974,265 868,847 215,913 257,673 53,653 18,497 — — 141,469 127,419 79,373 176,239 101,711 172,696 1,731,933 2,119,683 2,357,925 2,278,386 2,396,785 2,575,910 2,788,351 627,240 532,002 778,626 781,235 654,163 944,625 855,593 700,258 830,612 704,253 881,434 716,399 927,029 816,325 996,876 976,251 1,080,757 1,024,909 1,100,176 1,169,188 1,213,944 ¥ 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 ¥ 59.97 59.90 15.00 681.92 ¥ 49.61 49.56 16.00 706.95 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 7.10 4.35 42.3 9.1 0.75 5.92 3.32 40.6 7.1 0.86 ¥ 1,057.5 ¥ 1,146.0 ¥ 1,027.5 ¥ 1,208.0 ¥ 1,035.5 626 871.7 854.0 903.1 705.1 42,584 45,881 45,789 45,839 46,248 45,762 48,320 Yen % Yen 81 DATAToray Industries, Inc.Management’s Discussion and Analysis OVERVIEW INCOME ANALYSIS For the year ended March 31, 2019, the global economy as a whole continued to recover gradually, underpinned by the strong U.S. economy amid prolonged pressure from the uncertain future weighing on the economy, but the pace of growth slowed in the second half of the fiscal year due to intensified trade frictions and the notable deceleration in the Chinese economy. The Japanese economy continued on its gradual recovery track, as both the corporate and household sectors remained steady in general, although there were some weaknesses in exports and produc- tion towards the end of the fiscal year. At the same time, however, the rise in raw material and fuel prices had a negative impact on Toray Group’s profit. Under such circumstances, Toray Group, since April, 2017, has been working on the medium-term management program “Project AP-G 2019” that spans over three years through fiscal year 2019 and has been implementing the growth strategy with focus on taking advantage of growth business fields, pursuing business expansion in growth countries and regions as well as further bolstering its cost competitiveness. Net Sales Net sales for the year ended March 31, 2019 were in ¥2,388.8 bil- lion, up by ¥184.0 billion (8.3%) 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 segment decreased. Costs and Expenses The ratio of total costs and expenses to net sales for the year ended March 31, 2019 was 94.1%, up 1.2 percentage points year on year. Net sales and the cost of sales increased from the previous year by 8.3% and 10.7%, respectively. As a result, the cost of sales ratio rose by 1.7 percentage points to 81.0%. Selling, general and administrative expenses increased by ¥11.5 billion (3.8%) to ¥311.9 billion. The ratio of selling, general and administrative expenses to net sales declined by 0.6 percent- age points to 13.1%. R&D expenses increased by ¥0.1 billion (0.2%) to ¥66.4 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 2,000 2,000 1,837.8 2,010.7 1,837.8 2,388.8 2,388.8 2,204.9 2,204.9 2,104.4 2,010.7 2,104.4 2,026.5 2,026.5 (Billions of yen) (Billions of yen) 200 200 154.5 154.5 146.9 156.5 156.5 146.9 141.5 141.5 150 150 123.5 123.5 105.3 105.3 1,500 1,500 1,000 1,000 500 500 0 0 100 100 50 50 0 0 -50 -50 Mar/ ‘14 ‘15 Mar/ ‘14 ‘16 ‘15 ‘17 ‘16 ‘18 ‘17 ‘19 ‘18 ‘19 Mar/ ‘14 Mar/ ‘14 ‘15 ‘15 ‘16 ‘17 ‘16 ‘18 ‘17 ‘19 ‘18 ‘19 ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others ■ Environment & Engineering ■ Life Science ■ Others ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others ■ Environment & Engineering ■ Life Science ■ Others ■ Adjustments ■ Adjustments *1 Toray Group changed the reportable segments effective from the year ended March 31, 2018. The related figures for the year ended March 31, 2017 are retro- spectively restated accordingly. 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 “Adjustments.” Interest-bearing Liabilities and D/E Ratio Interest-bearing Liabilities and D/E Ratio (Billions of yen) 2,800 (Billions of yen) 2,800 82 2,100 2,119.7 2,100 2,357.9 2,119.7 2,357.9 2,278.4 2,396.8 2,278.4 2,575.9 2,396.8 (%) 80 2,788.4 2,575.9 (%) 80 2,788.4 (Billions of yen) 1,000 (Billions of yen) 1,000 (Times) 1.20 (Times) 1.20 976.3 976.3 60 60 750 750 654.2 700.3 654.2 716.4 704.3 700.3 704.3 816.3 716.4 816.3 0.86 0.90 0.86 0.90 0.76 0.76 0.71 0.74 0.71 0.70 0.74 0.70 0.75 0.75 500 500 0.60 0.60 1,400 40.5 1,400 41.8 40.5 41.8 41.5 42.6 41.5 42.6 42.3 944.6 1,080.8 944.6 1,080.8 1,024.9 1,100.2 1,024.9 1,169.2 1,100.2 42.3 40.6 40.6 40 40 1,213.9 1,169.2 1,213.9 700 700 20 20 250 250 0.30 0.30 0 0 0 0 0 0 0.00 0.00 Mar/ ‘14 Mar/ ‘15 ‘14 ‘16 ‘15 ‘16 ‘17 ‘17 ‘18 ‘19 ‘18 ‘19 Mar/ ‘14 Mar/ ‘15 ‘14 ‘16 ‘15 ‘17 ‘16 ‘18 ‘17 ‘19 ‘18 ‘19 ■ 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) 161.5 161.5 141.3 196.1 141.3 196.1 174.0 174.0 176.2 176.2 129.2 129.2 200 150 100 50 0 -50 200 150 100 50 0 -50 -53.4 -53.4 -100 -100 -150 -150 -200 -250 -200 -214.8 -250 -230 -230 41.7 0.6 41.7 38.7 38.7 0.6 -57.5 -57.5 -84.0 -84.0 -140.7 -140.7 -154.4 -135.2 -154.4 -135.2 -214.8 -186.7 -186.7 -260.2 -260.2 Mar/ ‘14 Mar/ ‘14 ‘15 ‘15 ‘16 ‘16 ‘17 ‘18 ‘17 ‘18 ‘19 ‘19 ■ 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 DATAIntegrated Annual Report 2019Operating Income and Net Income Operating income fell by ¥15.0 billion (9.6%) year on year to ¥141.5 billion. The ratio of operating income to net sales declined by 1.2 percentage points to 5.9%. Operating income by busi- ness segment increased in the Fibers & Textiles and Others seg- ments while decreasing in the Performance Chemicals, Carbon Fiber Composite Materials, Environment & Engineering, and Life Science segments. In net other income (expenses), Toray Group reported net expenses of ¥14.1 billion in the year ended March 31, 2019, down by ¥5.8 billion (29.2%) from the previous year. Interest and dividend income increased by ¥1.7 billion (31.8%) to ¥6.9 billion, and interest expenses also climbed by ¥2.1 billion (40.7%). As a result, net financial expense of ¥0.3 billion was recorded in the year ended March 31, 2019, down ¥0.4 billion compared with the previous year. Equity in earnings of unconsolidated subsidiaries and affiliated companies rose by ¥0.4 billion (4.3%) year on year to ¥9.6 billion. Net gain on sales and disposal of property, plant and equipment came to ¥9.8 billion, a turnaround of ¥16.8 bil- lion from the loss recorded in the previous year. Loss on impair- ment of fixed assets increased by ¥14.5 billion (366.9%) to ¥18.4 billion. Net loss on sales and loss on write-down of investment securities deteriorated by ¥4.1 billion year on year to ¥0.7 billion. In the year ended March 31, 2019, the Group posted a gain on return of assets from retirement benefit trust of ¥2.5 billion. As a result of the aforementioned, income before income taxes declined by ¥9.2 billion (6.7%) year on year to ¥127.4 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 ¥79.4 billion, down ¥16.5 billion (17.2%) year on year. Net income per share was ¥49.61, a decrease of ¥10.4. In light of profit conditions for the year ended March 31, 2019 and outlook for the next year, the total annual dividend for the year ended March 31, 2019 was set at ¥16.00 per share. This com- prised an interim cash dividend of ¥8.00 per share and a year-end cash dividend of ¥8.00 per share. Business Performance by Segment Fibers & Textiles In Japan, demand for industrial applications such as automobiles was strong in general, while shipment of apparel applications remained weak partly due to the unseasonable weather. Against this background, Toray Group not only strived to expand sales in each application 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 remained slow, and was affected by a slowdown in demand for materials for automotive and other applications from the second half of the fiscal year, reflecting the decelera- tion of the Chinese economy. The Group expanded the integrated business for apparel applications. The segment’s business both in Japan and abroad was gener- ally affected by the increase in raw material prices. As a result, overall sales of Fibers & Textiles segment increased 6.6% to ¥974.3 billion from the previous year and oper- ating income rose 0.6% to ¥72.9 billion. Performance Chemicals In the resins business, Toray Group expanded sales of automo- tive applications while passing on the rise in raw material prices to the sales price, but the business was affected by the economic slowdown in China. The chemicals business saw an improve- ment in the basic chemicals market and sales of fine chemical products also increased. In the films business, shipment of bat- tery separator films for lithium-ion secondary batteries increased reflecting demand growth, while polyester films and other prod- ucts were broadly affected by the increase in raw material prices. The electronic & information materials business was affected by the slowing demand in the smartphone market. As a result, overall sales of Performance Chemicals seg- ment increased 8.2% to ¥868.8 billion from the previous year. Operating income declined 5.1% to ¥67.7 billion. Carbon Fiber Composite Materials In the Carbon Fiber Composite Materials segment, demand for aircraft applications was mostly strong given the completion of the inventory adjustment in the supply chain. Demand for indus- trial applications showed a recovery trend for the most part, primarily in the environment and energy-related fields led by compressed natural gas tank applications and wind turbine blade applications. However, the segment was affected by rising raw material prices and intensifying competition. The cost of starting a new project at a composite subsidiary overseas increased and the segment also incurred fees related to the acquisition of the entire stake in TenCate Advanced Composites Holding B.V. As a result, overall sales of Carbon Fiber Composite Materials segment increased 21.3% to ¥215.9 billion from the previous year while operating income fell 44.4% to ¥11.5 billion. 83 DATAToray Industries, Inc. Environment & Engineering In the water treatment business, demand for reverse osmosis membranes and other products grew strongly on the whole in Japan and abroad. Among domestic subsidiaries in the segment, the trading volume of a trading subsidiary increased, while an engineering subsidiary outside Japan was affected by the conclu- sion of a large-scale plant construction project. As a result, overall sales of Environment & Engineering seg- ment increased 8.1% to ¥257.7 billion from the previous year while operating income declined 7.9% to ¥12.2 billion. Life Science In the pharmaceutical business, while sales volume of orally active prostacyclin derivative DORNER® increased in the over- seas markets, the sales were affected by its generic versions and the revision of National Health Insurance drug price standards in Japan. Sales of pruritus treatment REMITCH®* were influenced by the market entry of its generic versions. The medical devices business was affected by the reduc- tion of the insurance reimbursement amount in Japan and the increase in raw material prices, while shipment of dialyzers grew strongly in Japan and overseas and sales volume of dialysis machines also expanded. As a result, overall sales of Life Science segment declined 0.3% to ¥53.7 billion from the previous year and operating income fell 33.0% to ¥1.3 billion. *REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. Others Net sales increased by ¥0.6 billion (3.2%) from the previous year to ¥18.5 billion, and operating income as well increased by ¥0.2 billion (6.5%) to ¥3.1 billion. FINANCIAL POSITION Net Sales by Segment Toray Group adopted “Partial Amendments to Accounting (Billions of yen) Standard for Tax Effect Accounting” (ASBJ Statement No. 28, 2,500 February 16, 2018) effective from the year ended March 31, 2019. The following analysis of financial position bases on the 2,104.4 accordingly restated figures for the year ended March 31, 2018. 2,000 2,388.8 2,204.9 2,026.5 2,010.7 1,837.8 Analysis of Assets, Liabilities and Net Assets As of March 31, 2019, Toray Group’s total assets stood at 1,500 ¥2,788.4 billion, up ¥212.4 billion from the end of the pre- vious year. Current assets rose ¥64.3 billion as trade notes and accounts receivable increased, while noncurrent assets 1,000 expanded ¥148.1 billion due to increases in property, plant and equipment and intangible assets. Total liabilities rose ¥167.7 billion from the end of the previous 500 year to ¥1,574.4 billion, due primarily to an increase in interest- bearing debts. 0 Operating Income by Segment (Billions of yen) 200 154.5 146.9 156.5 141.5 123.5 105.3 150 100 50 0 -50 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ■ 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 ■ Adjustments Total Assets and Net Assets Interest-bearing Liabilities and D/E Ratio (%) 80 2,788.4 60 40.6 40 (Billions of yen) 2,800 2,119.7 2,100 2,357.9 2,278.4 2,396.8 2,575.9 40.5 944.6 1,400 700 0 41.8 41.5 42.6 42.3 1,080.8 1,024.9 1,100.2 1,169.2 1,213.9 20 0 816.3 716.4 700.3 704.3 654.2 0.76 0.71 0.74 0.70 0.75 (Billions of yen) 1,000 750 500 250 0 (Times) 1.20 976.3 0.90 0.86 0.60 0.30 0.00 84 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ■ Total Assets ■ Net Assets —Equity Ratio * “Partial Amendments to Accounting Standard for Tax Effect Accounting” (ASBJ Statement No. 28, February 16, 2018) is applied from the year ended March 31, 2019 and onward. The related figures for the year ended March 31, 2018 are retrospectively restated accordingly. ■ Interest-bearing Liabilities —D/E Ratio Cash Flows (Billions of yen) 200 161.5 150 100 50 0 -50 -100 -150 -200 -250 -230 -53.4 -214.8 196.1 141.3 174.0 176.2 129.2 41.7 38.7 0.6 -140.7 -154.4 -135.2 -57.5 -84.0 -186.7 -260.2 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ■ Cash Flows from Operating Activities ■ Cash Flows from Investing Activities —Free Cash Flows DATAIntegrated Annual Report 2019 Net Sales by Segment (Billions of yen) 2,500 2,388.8 2,204.9 2,010.7 2,104.4 2,026.5 1,837.8 Operating Income by Segment (Billions of yen) 200 154.5 146.9 156.5 141.5 123.5 105.3 2,000 1,500 1,000 500 0 ‘18 ‘17 ‘16 ‘15 Mar/ ‘14 Looking at major movements, the increase in trade receivables was held to ¥33.6 billion compared with ¥62.0 billion in the previ- ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ous year. In the year ended March 31, 2019, the Group reported a ■ IT-related Products ■ Carbon Fiber Composite Materials decrease in inventories of ¥28.4 billion compared with an increase ■ Environment & Engineering ■ Life Science ■ Others of ¥31.5 billion for the previous year and a decrease in trade pay- ables of ¥11.8 billion compared with an increase of ¥11.6 billion in the previous year. ‘19 Total Assets and Net Assets Cash Flows from Investing Activities (Billions of yen) Net cash used in investing activities totaled ¥260.2 billion, up 2,800 ¥73.6 billion (39.4%) compared with the previous year. This largely reflected payments for the purchase of shares in subsid- iary companies that resulted in a change in the scope of con- 2,100 solidation of ¥114.6 billion compared with ¥2.7 billion for the previous year. (%) 80 2,119.7 2,357.9 2,278.4 2,396.8 2,575.9 2,788.4 60 42.6 42.3 41.8 41.5 40 700 40.5 40.6 944.6 1,100.2 1,080.8 1,213.9 1,169.2 Cash Flows from Financing Activities 1,400 Net cash provided by financing activities came to ¥118.9 billion, up by ¥57.1 billion compared with the previous year. Major cash- 1,024.9 decreasing factors included a net decrease in short-term debt of ¥18.6 billion compared with a net increase of ¥30.5 billion for the previous year and repayment of long-term debt of ¥66.8 billion, down by ¥44.6 billion from the previous year. The major cash- increasing factor, on the other hand, was proceeds from long- term debt of ¥234.5 billion, up by ¥55.6 billion year on year. ‘16 20 Mar/ ‘15 ‘18 ‘19 ‘14 ‘17 0 0 150 100 50 0 -50 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ■ Fibers & Textiles ■ Performance Chemicals ■ Plastics & Chemicals ■ IT-related Products ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Others ■ Adjustments Interest-bearing Liabilities and D/E Ratio (Billions of yen) 1,000 816.3 716.4 700.3 704.3 654.2 0.76 0.71 0.74 0.70 0.75 750 500 250 0 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 (Times) 1.20 976.3 0.90 0.86 0.60 0.30 0.00 ■ Total Assets ■ Net Assets —Equity Ratio ■ Interest-bearing Liabilities —D/E Ratio Net assets expanded by ¥44.8 billion compared with the end of the previous year to ¥1,213.9 billion, reflecting an increase in retained earnings due to recognition of net income for the year. Net assets less non-controlling interests and stock acquisition rights stood at ¥1,131.0 billion. The equity ratio at the end of the year came to 40.6%, a 1.8 percentage-point decrease compared with the level at the end of the previous year. Operating Income by Segment (Billions of yen) CASH FLOWS 200 154.5 146.9 156.5 141.5 105.3 123.5 For the year ended March 31, 2019, net cash used in investing activities exceeded net cash provided by operating activities by 150 ¥84.0 billion. Meanwhile, net cash provided by financing activi- ties came to ¥118.9 billion owing mainly to the increase in inter- est-bearing liabilities. As a result, after counting exchange rate 100 changes and cash and cash equivalents at subsidiaries not previ- ously included in consolidation, cash and cash equivalents as of March 31, 2019 amounted to ¥173.1 billion, up by ¥38.8 billion (28.9%) compared with the end of the previous year on a con- solidated basis. 50 0 Cash Flows from Operating Activities Net cash provided by operating activities increased by ¥47.1 bil- lion (36.4%) compared with the previous year to ¥176.2 billion. -50 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ■ 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 ■ Adjustments (Billions of yen) 2,800 2,119.7 2,100 2,357.9 2,278.4 2,396.8 40.5 944.6 41.8 41.5 42.6 42.3 40.6 40 1,169.2 1,213.9 1,080.8 1,024.9 1,100.2 Total Assets and Net Assets Interest-bearing Liabilities and D/E Ratio (%) 80 2,788.4 2,575.9 (Billions of yen) 1,000 816.3 716.4 700.3 704.3 654.2 0.76 0.71 0.74 0.70 0.75 60 20 0 750 500 250 0 (Times) 1.20 976.3 0.90 0.86 0.60 0.30 0.00 Cash Flows (Billions of yen) 200 161.5 150 100 50 0 -50 -100 -150 -200 -250 -230 -53.4 -214.8 196.1 141.3 174.0 176.2 129.2 41.7 38.7 0.6 -140.7 -154.4 -135.2 -57.5 -84.0 -186.7 -260.2 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ■ 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 Cash Flows (Billions of yen) 161.5 141.3 196.1 174.0 176.2 129.2 41.7 38.7 0.6 -53.4 -214.8 -140.7 -154.4 -135.2 -57.5 -84.0 -186.7 -260.2 Mar/ ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ■ Cash Flows from Operating Activities ■ Cash Flows from Investing Activities —Free Cash Flows 85 Net Sales by Segment (Billions of yen) 2,500 2,388.8 2,204.9 2,010.7 2,104.4 2,026.5 1,837.8 2,000 1,500 1,000 500 0 1,400 700 0 200 150 100 50 0 -50 -100 -150 -200 -250 -230 DATAToray Industries, Inc.Consolidated Balance Sheets Toray Industries, Inc. and Consolidated Subsidiaries March 31, 2019 and 2018 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) 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: Investments in unconsolidated subsidiaries and affiliated companies (Note 5) Investment securities (Notes 4, 5 and 6) Long-term loans receivable Deferred tax assets (Note 10) Other (Notes 4 and 8) Allowance for doubtful accounts Millions of yen Thousands of U.S. dollars (Note 2) 2019 2018 2019 ¥ 140,701 ¥ 108,379 $ 1,267,577 27,806 32,722 250,505 56,346 474,712 419,527 74,517 (2,280) 55,499 434,050 439,673 58,739 (2,037) 507,622 4,276,685 3,779,523 671,324 (20,541) 1,191,329 1,127,025 10,732,694 77,687 78,370 699,883 651,084 631,681 5,865,622 1,989,553 1,902,003 17,923,901 143,847 121,512 120,514 115,121 1,295,919 1,094,703 2,983,683 2,847,689 26,880,027 (1,986,807) (1,920,660) (17,899,162) 996,876 927,029 8,980,865 85,712 85,537 171,249 40,146 28,501 68,647 772,180 770,604 1,542,784 163,052 188,000 2,477 21,978 56,171 172,315 201,314 1,447 21,539 59,555 (2,781) (2,961) 1,468,937 1,693,694 22,315 198,000 506,045 (25,054) Total investments and other assets 428,897 453,209 3,863,937 Total assets ¥ 2,788,351 ¥ 2,575,910 $ 25,120,279 See accompanying notes to consolidated financial statements. 86 DATAIntegrated Annual Report 2019Liabilities and Net Assets Current liabilities: Millions of yen Thousands of U.S. dollars (Note 2) 2019 2018 2019 Short-term bank loans (Notes 4 and 5) ¥ 175,567 ¥ 135,936 $ 1,581,685 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 (Note 4) Total current liabilities Non-current liabilities: Long-term debt (Notes 4, 5 and 7) Deferred tax liabilities (Note 10) Net defined benefit liability (Note 8) Other non-current liabilities (Note 4) Total non-current liabilities Total liabilities 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 94,094 — 63,203 46,000 847,694 — 38,824 38,433 349,766 201,730 207,117 1,817,387 13,578 64,850 107,850 696,493 13,966 62,363 109,478 676,496 122,324 584,234 971,622 6,274,712 702,761 567,657 6,331,180 48,758 31,387 100,730 101,786 25,665 29,396 439,261 907,477 231,216 877,914 730,226 7,909,135 1,574,407 1,406,722 14,183,847 147,873 147,873 1,332,189 117,760 817,263 117,572 763,504 1,060,901 7,362,730 (20,358) (20,631) (183,405) 1,062,538 1,008,318 9,572,414 64,662 74,290 582,541 75 896 2,862 68,495 1,338 81,573 (901) 4,830 4,158 82,377 1,334 77,159 676 8,072 25,784 617,072 12,054 734,892 1,213,944 1,169,188 10,936,432 ¥ 2,788,351 ¥ 2,575,910 $ 25,120,279 87 DATAToray Industries, Inc.Consolidated Statements of Income Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2019 and 2018 Net sales Costs and expenses: Cost of sales (Notes 3, 8, 13 and 14) Selling, general and administrative expenses (Notes 8, 9, 13 and 14) Operating income Other income (expenses): Interest expenses Interest and dividend income Equity in earnings of unconsolidated subsidiaries and affiliated companies Gain (loss) on sales and disposal of property, plant and equipment, net Loss on impairment of fixed assets (Note 15) Gain (loss) on sales and loss on write-down of investment securities, net Loss on liquidation and devaluation of subsidiaries and affiliated companies Gain on return of assets from retirement benefits trust Environmental expenses Settlement package 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. Millions of yen Thousands of U.S. dollars (Note 2) 2019 2018 2019 ¥ 2,388,848 ¥ 2,204,858 $ 21,521,153 1,935,486 1,748,017 311,893 300,377 2,247,379 2,048,394 141,469 156,464 17,436,811 2,809,847 20,246,658 1,274,495 (7,161) 6,883 9,619 9,751 (18,414) (625) (673) 2,532 — (864) (15,098) (14,050) 127,419 37,293 2,338 39,631 87,788 8,415 (5,091) 5,222 9,221 (7,084) (3,944) 3,445 (3,591) — (2,597) — (15,433) (19,852) 136,612 34,851 (1,419) 33,432 103,180 7,265 (64,514) 62,009 86,658 87,847 (165,892) (5,631) (6,063) 22,811 — (7,784) (136,018) (126,577) 1,147,919 335,973 21,063 357,036 790,883 75,811 ¥ 79,373 ¥ 95,915 $ 715,072 Consolidated Statements of Comprehensive Income Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2019 and 2018 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. 88 Millions of yen Thousands of U.S. dollars (Note 2) 2019 2018 2019 ¥ 87,788 ¥ 103,180 $ 790,883 (9,579) 1,064 (4,767) (1,325) (605) 8,100 (997) (5,820) 2,635 (1,770) (86,297) 9,586 (42,946) (11,937) (5,450) (15,212) 2,148 ¥ 72,576 ¥ 105,328 (137,045) $ 653,838 ¥ 65,491 ¥ 96,452 7,085 8,876 $ 590,009 63,829 DATAIntegrated Annual Report 2019Consolidated Statements of Changes in Net Assets Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2019 and 2018 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 ¥ 121,091 ¥ 691,290 ¥ (20,822) ¥ 939,432 ¥ 66,513 ¥ 21 ¥ 13,764 ¥ 1,542 ¥ 81,840 ¥ 1,205 ¥ 77,699 ¥ 1,100,176 (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) 126 7,777 (922) (8,934) 2,616 537 129 (540) — ¥ 147,873 ¥ 147,873 (3,519) ¥ 117,572 ¥ 117,572 72,214 ¥ 763,504 ¥ 763,504 191 68,886 ¥ (20,631) ¥ 1,008,318 ¥ (20,631) ¥ 1,008,318 7,777 ¥ 74,290 ¥ 74,290 (922) ¥ (901) ¥ (901) (8,934) ¥ 4,830 ¥ 4,830 2,616 ¥ 4,158 ¥ 4,158 537 ¥ 82,377 ¥ 82,377 129 ¥ 1,334 ¥ 1,334 (540) ¥ 77,159 ¥ 77,159 69,012 ¥ 1,169,188 ¥ 1,169,188 (25,608) 79,373 (2) 273 (6) 2 (25,608) 79,373 (2) 287 174 (4) 14 174 (25,608) 79,373 (2) 287 174 (4) — ¥ 147,873 188 ¥ 117,760 53,759 ¥ 817,263 273 54,220 ¥ (20,358) ¥ 1,062,538 (9,628) ¥ 64,662 976 ¥ 75 (3,934) ¥ 896 (1,296) ¥ 2,862 (13,882) ¥ 68,495 4 ¥ 1,338 4,414 44,756 ¥ 81,573 ¥ 1,213,944 (9,628) 976 (3,934) (1,296) (13,882) 4 4,414 (9,464) 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 $ 1,332,189 $ 1,059,207 $ 6,878,414 $ (185,865) $ 9,083,946 $ 669,279 $ (8,117) $ 43,514 $ 37,459 $ 742,135 $ 12,018 $ 695,126 $ 10,533,225 (230,703) 715,072 (18) 2,459 (230,703) 715,072 (18) 2,586 1,568 126 1,568 (54) 18 (36) (230,703) 715,072 (18) 2,586 1,568 (36) — 484,315 $ 1,332,189 $ 1,060,901 $ 7,362,730 1,694 (86,739) 8,793 (35,441) (11,676) (125,063) 36 39,766 (85,261) 2,459 488,468 $ (183,405) $ 9,572,414 (86,739) $ 582,541 8,793 $ 676 (35,441) $ 8,072 (11,676) $ 25,784 (125,063) $ 617,072 36 $ 12,054 39,766 403,207 $ 734,892 $ 10,936,432 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, 2018 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, 2019 Balance as of April 1, 2018 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, 2019 See accompanying notes to consolidated financial statements. 89 DATAToray Industries, Inc.Consolidated Statements of Cash Flows Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2019 and 2018 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 expenses 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 Purchase of investment securities Proceeds from sales of property, plant and equipment Proceeds from sales of investment securities Acquisition of shares of consolidated subsidiaries resulting in change in scope of consolidation (Note 18) 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) 2019 2018 2019 ¥ 127,419 ¥ 136,612 $ 1,147,919 101,711 18,414 (6,883) (9,619) 7,161 (9,751) 666 (1,451) (33,582) 28,427 (11,843) (464) 95,815 3,944 (5,222) (9,221) 5,091 7,084 (3,239) 193 (61,969) (31,492) 11,594 3,271 916,315 165,892 (62,009) (86,658) 64,514 (87,847) 6,000 (13,072) (302,541) 256,099 (106,694) (4,180) 210,205 152,461 1,893,739 15,704 (7,098) (42,572) 176,239 16,111 (5,052) (34,340) 129,180 141,477 (63,946) (383,532) 1,587,739 (169,630) (147,925) (1,528,198) (4,131) (67,274) 19,254 8,387 2,996 13,421 (37,216) 173,459 75,559 (114,564) (2,654) (1,032,108) 437 14,751 3,937 (260,247) (186,685) (2,344,568) (18,596) 234,530 (66,843) (29,875) 30,520 178,912 (111,446) (24,439) (344) (10,480) 19 118,891 (327) 34,556 (1,294) 61,773 (1,924) 2,344 (167,532) 2,112,883 (602,189) (269,144) (3,099) 171 1,071,090 (2,946) 311,315 Cash and cash equivalents at beginning of year 134,315 131,405 1,210,045 Beginning balance of cash and cash equivalents at subsidiaries not previously included in consolidation 4,207 566 37,901 Cash and cash equivalents at end of year ¥ 173,078 ¥ 134,315 $ 1,559,261 See accompanying notes to consolidated financial statements. 90 DATAIntegrated Annual Report 2019Notes to Consolidated Financial Statements Toray Industries, Inc. and Consolidated Subsidiaries Years ended March 31, 2019 and 2018 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, 2019 and 2018 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 2019 2018 2019 ¥140,701 ¥108,379 $1,267,577 27,806 32,722 250,505 (2,841) (6,786) (25,595) 7,412 — 66,775 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 ¥173,078 ¥134,315 $1,559,261 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 pol- icy to utilize the above hedging instruments in order to reduce their exposure to the risk of interest rate and foreign currency fluctuations. Thus, their purchase of the hedging instruments are limited to, at maximum, the amounts of the hedged items. The Company and its consolidated subsidiaries evaluate the effectiveness of hedging activities by reference to the accumulated gains or losses on the hedging instruments and the related hedged items from the commencement of the hedges. 91 DATAToray Industries, Inc. 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. 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 file consolidated tax returns in their respective countries. i) Consumption Taxes Transactions subject to consumption taxes are recorded at amounts exclusive of consumption taxes. j) Retirement Benefits The Company and some of its consolidated subsidiaries have unfunded lump-sum benefit plans, funded contributory pension plans and/or defined contribution pension plans covering eligible employees. Under the terms of the unfunded lump-sum benefit plans, 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 plans and the defined con- tribution pension plans 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 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. An allowance is separately provided against retirement ben- efits for the members of the boards of some consolidated sub- sidiaries and is included in “other non-current liabilities” on the consolidated balance sheets. The amount is calculated based on the internal company policies as the estimated amount that would be payable if all such board members were to retire at the balance sheet date. 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. 92 DATAIntegrated Annual Report 2019 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. (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. 2. U.S. DOLLAR AMOUNTS Leases (IFRS 16) (1) Overview This accounting standard primarily requires that lessees recog- nize right-of-use assets and lease liabilities for basically all leases. (2) Scheduled Date of Adoption Subsidiaries outside of Japan are going to adopt this standard starting from the beginning of the year ending March 31, 2020. (3) Impact of Adoption The Company is currently evaluating the effect of adopting this accounting standard on its consolidated financial statements. o) Changes in Presentation Partial Amendments to Accounting Standard for Tax Effect Accounting The Company and its consolidated subsidiaries have adopted “Partial Amendments to Accounting Standard for Tax Effect Accounting” (ASBJ Statement No. 28, February 16, 2018) (the Partial Amendments) from the beginning of the year ended March 31, 2019. As such, deferred tax assets and deferred tax liabilities are included within investments and other assets and non-current liabilities, respectively. As a result, ¥25,641 million of deferred tax assets in current assets and ¥30 million of deferred tax liabilities in other current liabilities previously presented in the consolidated balance sheet as of March 31, 2018 are reclassified and included in deferred tax assets in investments and other assets and deferred tax liabilities in non-current liabilities, respectively. Since the Company and its consolidated subsidiaries off- set deferred tax assets and deferred tax liabilities of the same taxable entity, total assets as of March 31, 2018 decreased by ¥17,004 million. Also, Note 10. INCOME TAXES in the Notes to the Consolidated Financial Statements is expanded in accordance with Articles 3, 4 and 5 of the Partial Amendments. However, comparative information for the year ended March 31, 2018 is not provided in Note 10 in accordance with the transitional provisions set forth in Article 7 of the Partial Amendments. 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 ¥111.0 to $1.00, the approximate exchange rate prevailing on March 31, 2019. 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. 93 DATAToray Industries, Inc.3. INVENTORIES At March 31, 2019 and 2018, inventories consisted of the following: Merchandise and finished goods Work in process Raw materials and supplies Millions of yen 2019 ¥ 228,480 85,880 105,167 ¥ 419,527 2018 ¥ 248,513 92,501 98,659 ¥ 439,673 Thousands of U.S. dollars 2019 $ 2,058,378 773,694 947,450 $ 3,779,523 Losses recognized and charged to cost of sales as a result of valuation at March 31, 2019 and 2018 were ¥4,502 million ($40,559 thou- sand) and ¥2,578 million, respectively. 4. SHORT-TERM BANK LOANS, LONG-TERM DEBT AND LEASE OBLIGATIONS Short-term bank loans at March 31, 2019 and 2018 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, 2019 and 2018 were as follows: Loans principally from banks and insurance companies with interest rates primarily from 0.00% to 11.50%, maturing serially through 2029: Unsecured Secured Lease obligations maturing serially through 2036: Unsecured 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 0.24% due 2025 Yen notes with an interest rate of 0.38% due 2027 Yen notes with an interest rate of 0.38% due 2028 Yen notes with an interest rate of 0.83% due 2038 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 At March 31, 2019, 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 2019 2018 2019 ¥ 456,402 453 ¥ 388,821 546 $ 4,111,730 4,081 3,829 — 20,000 20,000 40,000 40,000 60,000 40,000 20,000 50,000 50,000 — 800,684 94,493 ¥ 706,191 3,529 4 20,000 20,000 40,000 — 60,000 — — 50,000 50,000 1,488 634,389 63,646 ¥ 570,743 Millions of yen 2019 ¥ 919 1,191 1,006 623 34,495 — 180,180 180,180 360,360 360,360 540,541 360,360 180,180 450,450 450,450 — 7,213,369 851,288 $ 6,362,081 Thousands of U.S. dollars 2019 $ 8,279 10,730 9,063 5,613 ¥ 3,739 $ 33,685 94 DATAIntegrated Annual Report 2019The annual maturities of long-term debt and lease obligations subsequent to March 31, 2019 were as follows: Years ending March 31: 2020 2021 2022 2023 2024 2025 and thereafter Millions of yen Thousands of U.S. dollars 2019 2019 ¥ 94,493 $ 851,288 111,114 90,365 83,914 103,403 317,395 1,001,027 814,099 755,982 931,559 2,859,414 ¥ 800,684 $ 7,213,369 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 Company and its consolidated subsidiaries have business relationships and are exposed to the risk of market price fluctuations. The fair value of the investment securities and financial positions of the issuing entities (clients) are regu- larly monitored. Trade payables are operating payables, most of which are due and payable within one year. Short-term bank loans and commercial paper are financing instruments mainly for operating transactions, while long-term bank loans and bonds are primarily for capital expenditures. Bank loans and bonds are exposed to the risk of interest rate fluctu- ation. 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 fluctuation, taking into consider- ation the balance between fixed interest rates and floating inter- est 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 ACCOUNTING POLICIES d) Financial Instruments, Hedge 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. 95 DATAToray Industries, Inc. Fair Value of Financial Instruments Carrying value, fair value and unrealized gain (loss) as of March 31, 2019 and 2018 were as follows. In addition, financial instruments, for which it is extremely difficult to measure the fair value, are not included. (Please refer to Note 2 below) Cash and time deposits Trade receivables Investment securities Held-to-maturity debt securities Investment securities in subsidiaries and affiliated companies Other securities Assets Trade payables Short-term bank loans Commercial paper Bonds *1 Long-term bank loans *2 Liabilities Derivative transactions *3 Hedge accounting is not applied Hedge accounting is applied Derivative transactions Cash and time deposits Trade receivables Investment securities Held-to-maturity debt securities Investment securities in subsidiaries and affiliated companies Other securities Assets Trade payables Short-term bank loans Commercial paper Bonds *1 Long-term bank loans *2 Liabilities Derivative transactions *3 Hedge accounting is not applied Hedge accounting is applied Derivative transactions Millions of yen 2019 Fair value Carrying value Unrealized gain (loss) ¥ 168,507 ¥ 168,507 ¥ 531,058 531,058 101 73,940 188,586 105 62,426 188,586 — — 4 (11,514) — ¥ 962,192 ¥ 950,682 ¥ (11,510) ¥ 240,554 ¥ 240,554 ¥ 175,567 175,567 — 340,000 456,855 — 345,092 456,478 — — — 5,092 (377) ¥ 1,212,976 ¥ 1,217,691 ¥ 4,715 ¥ ¥ (587) ¥ (587) ¥ 779 192 ¥ 779 192 ¥ — — — Millions of yen 2018 Fair value Carrying value Unrealized gain (loss) ¥ 141,101 ¥ 141,101 ¥ 489,549 489,549 100 75,608 191,975 101 62,736 191,975 — — 1 (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) ¥ ¥ — — — 96 DATAIntegrated Annual Report 2019 Cash and time deposits Trade receivables Investment securities $ 1,518,081 $ 1,518,081 $ 4,784,306 4,784,306 Held-to-maturity debt securities 910 946 — — 36 Thousands of U.S. dollars Carrying value 2019 Fair value Unrealized gain (loss) 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 666,126 562,396 (103,730) 1,698,973 1,698,973 — $ 8,668,396 $ 8,564,703 $ (103,694) $ 2,167,153 $ 2,167,153 $ 1,581,685 1,581,685 — — — — — 3,063,063 4,115,811 3,108,937 4,112,414 45,874 (3,396) $ 10,927,712 $ 10,970,189 $ 42,477 $ $ (5,288) $ (5,288) $ 7,018 7,018 1,730 $ 1,730 $ — — — *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. 97 DATAToray Industries, Inc. 2. Financial instruments for which it is extremely difficult to determine the fair value Unlisted equity securities Unlisted debt securities Millions of yen Thousands of U.S. dollars 2019 2018 2019 ¥ 78,466 ¥ 83,414 $ 706,901 — 2,000 — 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, 2019 and 2018 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 2019 Due within one year Due after one year through five years Due after five years through ten years ¥ 168,507 531,058 32 7,412 ¥ — ¥ — — 58 12 — 11 53 Due after ten years ¥ — — — — ¥ 707,009 ¥ 70 ¥ 64 ¥ — Millions of yen 2018 Due within one year Due after one year through five years Due after five years through ten years ¥ 141,101 489,401 ¥ — 148 7 — 81 12 ¥ — — 12 53 Due after ten years ¥ — — — — ¥ 630,509 ¥ 241 ¥ 65 ¥ — Thousands of U.S. dollars 2019 Due within one year Due after one year through five years Due after five years through ten years $ 1,518,081 $ — 4,784,306 288 66,775 — 523 108 $ 6,369,450 $ 631 $ — — 99 477 $ 577 Due after ten years $ — — — — $ — 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. 98 DATAIntegrated Annual Report 20196. SECURITIES At March 31, 2019 and 2018, information on securities classified as held-to-maturity debt securities was as follows: Held-to-maturity debt securities Carrying value ¥ 101 Fair value Unrealized gains Unrealized losses ¥ 105 ¥ 4 ¥ 0 Carrying value $ 910 Fair value Unrealized gains Unrealized losses $ 946 $ 36 $ 0 Millions of yen 2019 Thousands of U.S. dollars 2019 Held-to-maturity debt securities Millions of yen 2018 Carrying value ¥ 100 Fair value Unrealized gains Unrealized losses ¥ 101 ¥ 2 ¥ 1 At March 31, 2019 and 2018, information on securities classified as other securities was as follows: Millions of yen 2019 Thousands of U.S. dollars 2019 Carrying value Acquisition cost Unrealized gains Unrealized losses Carrying value Acquisition cost Unrealized gains Unrealized losses Other securities ¥ 188,586 ¥ 97,348 ¥ 96,192 ¥ 4,954 $ 1,698,973 $ 877,009 $ 866,595 $ 44,631 Millions of yen 2018 Carrying value Acquisition cost Unrealized gains Unrealized losses Other securities ¥ 191,975 ¥ 87,263 ¥ 104,906 ¥ 194 99 DATAToray Industries, Inc.7. DERIVATIVES The Company and its consolidated subsidiaries had the following derivative contracts outstanding at March 31, 2019 and 2018: 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 Chinese yuan Selling Thai baht Selling Indonesian rupiah Selling Japanese yen Foreign currency swaps: Contract amount 2019 Fair value Unrealized gain (loss) Contract amount 2019 Fair value Unrealized gain (loss) ¥ 6,481 ¥ 24 ¥ 24 $ 58,387 $ 216 $ 216 10,298 375 649 4,453 15,505 1,777 931 87 136 (28) 4 4 (19) (102) 17 (25) 0 0 (28) 4 4 (19) (102) 17 (25) 0 0 92,775 3,378 5,847 40,117 139,685 16,009 8,387 784 1,225 (252) (252) 36 36 (171) (919) 153 (225) 0 0 36 36 (171) (919) 153 (225) 0 0 8,331 (114) (114) 75,054 (1,027) (1,027) Receiving U.S. dollar, paying Thai baht 3,688 (348) (348) 33,225 (3,135) (3,135) ¥ — ¥ (587) ¥ (587) $ — $ (5,288) $ (5,288) 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: Millions of yen 2018 Fair value Contract amount Unrealized gain (loss) ¥ 10,350 ¥ (252) ¥ (252) 1,865 370 212 1,077 14,057 1,532 10 402 179 87 5,806 (32) 3 (2) 2 117 32 0 (9) (1) (0) (60) (32) 3 (2) 2 117 32 0 (9) (1) (0) (60) Receiving U.S. dollar, paying Thai baht 3,592 (412) (412) ¥ — ¥ (614) ¥ (614) 100 DATAIntegrated Annual Report 2019Hedge accounting is applied Millions of yen 2019 Hedge accounting method Type of contract and primary hedged items Contract amount Fair value Estimation method for fair value Deferral hedge method Forward foreign exchange contracts: For trade receivables and trade payables Buying Japanese yen Selling U.S. dollar Selling euro Selling Chinese yuan Foreign currency swaps: For long-term bank loans ¥ 1,638 ¥ (2) Forward foreign exchange quotes 1,150 647 182 (11) 3 1 Receiving U.S. dollar, paying Korean won Receiving Japanese yen, paying Korean won 4,900 7,782 80 Prices provided by financial institutions 225 Interest rate swaps: For long-term bank loans Floating-rate receipt, fixed-rate payment 40,000 29 Interest rate swaps: For bonds and long-term bank loans Prices provided by financial institutions Floating-rate receipt, fixed-rate payment Floating-rate receipt, floating-rate payment Fixed-rate receipt, floating rate payment 504 26,900 40,000 —*1 — Special accounting method for interest rate swaps Allocation method for forward foreign exchange contracts Forward foreign exchange contracts: For forecast transactions denominated in foreign currencies 23,887 376 Forward foreign exchange quotes 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 British pound Buying Chinese yuan Buying Japanese yen Selling U.S. dollar Selling euro Selling British pound Selling Chinese yuan Selling Thai baht (8) (4) 111 (20) (9) 8 0 0 0 —*2 730 537 426 2,158 21,422 649 10 1 52 12,383 217 1 72 4 28,612 3,685 13 44 6 Foreign currency swaps: For long-term bank loans Receiving U.S. dollar, paying Japanese yen 129,389 ¥ — —*2 ¥ 779 — — 101 DATAToray Industries, Inc.Hedge accounting method Type of contract and primary hedged items Contract amount Fair value Estimation method for fair value Deferral hedge method Forward foreign exchange contracts: For trade receivables and trade payables Millions of yen 2018 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 Forward foreign exchange quotes 2,512 854 1,202 839 29 (1) 1 4 Receiving U.S. dollar, paying Korean won Receiving Japanese yen, paying Korean won 5,994 10,196 (240) Prices provided by 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 Prices provided by financial institutions Floating-rate receipt, fixed-rate payment Floating-rate receipt, floating-rate payment Fixed-rate receipt, floating rate payment 364 26,900 40,000 —*1 — Special accounting method for interest rate swaps Allocation method for forward foreign exchange contracts 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 Receiving U.S. dollar, paying Japanese yen 131,046 (183) Forward foreign exchange quotes (1,343) (1) 105 (2) 280 38 0 0 0 —*2 — —*2 — ¥ — ¥ (1,479) 102 DATAIntegrated Annual Report 2019Hedge accounting method Type of contract and primary hedged items Contract amount Fair value Estimation method for fair value Deferral hedge method Forward foreign exchange contracts: For trade receivables and trade payables Thousands of U.S. dollars 2019 Buying Japanese yen Selling U.S. dollar Selling euro Selling Chinese yuan Foreign currency swaps: For long-term bank loans $ 14,757 $ (18) Forward foreign exchange quotes 10,360 5,829 1,640 (99) 27 9 Receiving U.S. dollar, paying Korean won Receiving Japanese yen, paying Korean won 44,144 70,108 721 Prices provided by financial institutions 2,027 Interest rate swaps: For long-term bank loans Floating-rate receipt, fixed-rate payment 360,360 261 Interest rate swaps: For bonds and long-term bank loans Prices provided by financial institutions Floating-rate receipt, fixed-rate payment Floating-rate receipt, floating-rate payment Fixed-rate receipt, floating rate payment 4,541 242,342 360,360 —*1 — Special accounting method for interest rate swaps Allocation method for forward foreign exchange contracts Forward foreign exchange contracts: For forecast transactions denominated in foreign currencies 215,198 3,387 Forward foreign exchange quotes 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 British pound 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 6,577 4,838 3,838 19,441 192,991 5,847 90 9 468 111,559 1,955 9 649 36 257,766 33,198 117 396 54 (72) (36) 1,000 (180) (81) 72 0 0 0 —*2 — —*2 — Receiving U.S. dollar, paying Japanese yen 1,165,667 *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. $ — $ 7,018 103 DATAToray Industries, Inc.8. RETIREMENT BENEFIT PLAN The changes in the retirement benefit obligation during the years ended March 31, 2019 and 2018 were as follows: Retirement benefit obligation at beginning of the year ¥ 190,262 ¥ 196,911 $ 1,714,072 Millions of yen Thousands of U.S. dollars 2019 2018 2019 Service cost Interest cost Actuarial gains and losses Retirement benefit paid Past service cost Other 7,171 1,549 (109) (14,225) (294) (215) 7,552 1,596 (1,573) (14,178) — (46) 64,604 13,955 (982) (128,153) (2,649) (1,937) Retirement benefit obligation at end of the year ¥ 184,139 ¥ 190,262 $ 1,658,910 The changes in the plan assets at fair value during the years ended March 31, 2019 and 2018 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 2019 2018 2019 ¥ 117,288 ¥ 121,774 $ 1,056,649 2,417 (2,154) 7,547 (8,858) (7,867) (524) 2,560 5,738 6,602 (9,258) (9,931) (197) 21,775 (19,405) 67,991 (79,802) (70,874) (4,721) ¥ 107,849 ¥ 117,288 $ 971,613 The following table sets forth the funded status of the plans and the amounts recognized in the consolidated balance sheets as of March 31, 2019 and 2018 for the Company’s and its consolidated subsidiaries’ defined benefit plans: Funded retirement benefit obligation Plan assets at fair value Unfunded retirement benefit obligation Net liability for retirement benefits in the balance sheets Net defined benefit liability Net defined benefit asset (included in other non-current assets) Millions of yen Thousands of U.S. dollars 2019 2018 2019 ¥ 90,262 ¥ 96,258 $ 813,171 (107,849) (117,288) (17,587) (21,030) 93,877 76,290 94,004 72,974 100,730 (24,440) 101,786 (28,812) (971,613) (158,441) 845,739 687,297 907,477 (220,180) Net liability for retirement benefits in the balance sheets ¥ 76,290 ¥ 72,974 $ 687,297 104 DATAIntegrated Annual Report 2019The components of retirement benefit expense for the years ended March 31, 2019 and 2018 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 2019 ¥ 7,171 2018 ¥ 7,552 1,549 (2,417) 2,465 (36) (2,532) 1,596 (2,560) 622 (4,248) — Thousands of U.S. dollars 2019 $ 64,604 13,955 (21,775) 22,207 (324) (22,811) Retirement benefit expense ¥ 6,200 ¥ 2,962 $ 55,856 In addition to the above, special severance payments of ¥1,705 million ($15,360 thousand) and ¥1,442 million were recognized for the years ended March 31, 2019 and 2018, respectively. Contributions to defined contribution pension plans of ¥7,118 million ($64,126 thou- sand) and ¥6,996 million were recognized for the years ended March 31, 2019 and 2018, respectively. The components of remeasurements of defined benefit plans included in other comprehensive income (before tax effect) for the years ended March 31, 2019 and 2018 were as follows: Past service cost Actuarial gains and losses Total Millions of yen 2019 2018 ¥ 258 ¥ (4,248) (2,114) 7,960 ¥ (1,856) ¥ 3,712 Thousands of U.S. dollars 2019 $ 2,324 (19,045) $ (16,721) The components of remeasurements of defined benefit plans included in accumulated other comprehensive income (before tax effect) as of March 31, 2019 and 2018 were as follows: Unrecognized past service cost Unrecognized actuarial gains and losses Total Millions of yen 2019 2018 ¥ (212) ¥ 46 (3,896) (6,010) ¥ (4,108) ¥ (5,964) Thousands of U.S. dollars 2019 $ (1,910) (35,099) $ (37,009) The fair value of plan assets, by major category, as a percentage of total plan assets as of March 31, 2019 and 2018 was as follows: Bonds Stocks General accounts of life insurance companies Cash and time deposits Other Total 2019 2018 9% 45% 27% 16% 3% 11% 50% 26% 10% 3% 100% 100% The expected rate of return on plan assets is determined based on the current and anticipated allocation of plan assets and the current and expected long-term returns on diverse assets that compose the plan assets. The key 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 2019 2018 primarily 0.6% primarily 0.6% primarily 2.0% primarily 2.0% primarily 5.9% primarily 7.5% 105 DATAToray Industries, Inc.9. STOCK OPTION PLANS 1. Stock option expenses included in selling, general and administrative expenses amounted to ¥290 million ($2,613 thousand) and ¥338 million for the years ended March 31, 2019 and 2018, respectively. 2. Information on stock options issued The following table summarizes the stock options outstanding as of March 31, 2019. Company name Position and number of grantees Class and number of shares to be issued upon exercise Grant date Vesting conditions Vesting period Exercise period Company name Position and number of grantees Class and number of shares to be issued upon exercise Grant date Vesting conditions Vesting period Exercise period Company name Position and number of grantees Class and number of shares to be issued upon exercise Grant date Vesting conditions Vesting period Exercise period Members of the Board of the Company Directors of the Company No.1 Stock Option Plan 28 32 Toray Industries, Inc. No.2 Stock Option Plan 26 32 No.3 Stock Option Plan 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 Members of the Board of the Company Directors of the Company No.4 Stock Option Plan 25 27 Toray Industries, Inc. No.5 Stock Option Plan 23 31 No. 6 Stock Option Plan 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 No.8 Stock Option Plan Members of the Board of the Company Directors of the Company 23 31 17 35 Common stock 374,000 shares 387,000 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 August 18, 2018 Based on the number of months that have elapsed during the vesting period June 26, 2018- June 25, 2019 August 19, 2018- August 18, 2048 106 DATAIntegrated Annual Report 2019The following table summarizes movements of stock options during the year and price information on stock options as of March 31, 2019. The number of stock options are translated into the number of shares. (1) Number of stock options Company name Stock acquisition rights not yet vested As of March 31, 2018 Granted Forfeited Vested As of March 31, 2019 Stock acquisition rights already vested As of March 31, 2018 Vested Exercised Forfeited As of March 31, 2019 Company name Stock acquisition rights not yet vested As of March 31, 2018 Granted Forfeited Vested As of March 31, 2019 Stock acquisition rights already vested As of March 31, 2018 Vested Exercised Forfeited As of March 31, 2019 Company name Stock acquisition rights not yet vested As of March 31, 2018 Granted Forfeited Vested As of March 31, 2019 Stock acquisition rights already vested As of March 31, 2018 Vested Exercised Forfeited As of March 31, 2019 No.1 Stock Option Plan Toray Industries, Inc. No.2 Stock Option Plan No.3 Stock Option Plan — — — — — 218,000 — 59,000 — 159,000 — — — — — 290,000 — 74,000 — 216,000 — — — — — 252,000 — 58,000 — 194,000 No.4 Stock Option Plan Toray Industries, Inc. No.5 Stock Option Plan No.6 Stock Option Plan — — — — — 330,000 — 59,000 — 271,000 — — — — — 302,000 — 66,000 — 236,000 — — — — — 241,000 — 48,000 — 193,000 Toray Industries, Inc. No.7 Stock Option Plan No.8 Stock Option Plan 109,000 — — 109,000 — 265,000 109,000 61,000 — 313,000 — 387,000 — 277,000 110,000 — 277,000 — — 277,000 107 DATAToray Industries, Inc.(2) Price information Company name Exercise price Weighted average price at exercise Fair value per share at the grant date Company name Exercise price Weighted average price at exercise Fair value per share at the grant date Company name Exercise price Weighted average price at exercise Fair value per share at the grant date Company name Exercise price Weighted average price at exercise Fair value per share at the grant date Company name Exercise price Weighted average price at exercise Fair value per share at the grant date Company name Exercise price Weighted average price at exercise Fair value per share at the grant date No.3 Stock Option Plan ¥ 1 852.7 546 No.6 Stock Option Plan ¥ 1 852.7 902 No.3 Stock Option Plan $ 0.01 7.68 4.92 No.6 Stock Option Plan $ 0.01 7.68 8.13 Yen Toray Industries, Inc. No.2 Stock Option Plan ¥ 1 852.7 394 Yen Toray Industries, Inc. No.5 Stock Option Plan ¥ 1 852.7 987 No.1 Stock Option Plan ¥ 1 852.7 513 No.4 Stock Option Plan ¥ 1 852.7 605 Yen Toray Industries, Inc. No.7 Stock Option Plan ¥ 1 852.7 899 No.1 Stock Option Plan $ 0.01 7.68 4.62 No.4 Stock Option Plan $ 0.01 7.68 5.45 No.8 Stock Option Plan ¥ 1 — 710 U.S. dollars Toray Industries, Inc. No.2 Stock Option Plan $ 0.01 7.68 3.55 U.S. dollars Toray Industries, Inc. No.5 Stock Option Plan $ 0.01 7.68 8.89 U.S. dollars Toray Industries, Inc. No.7 Stock Option Plan $ 0.01 7.68 8.10 No.8 Stock Option Plan $ 0.01 — 6.40 108 DATAIntegrated Annual Report 2019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.8 Stock Option Plan 24.874% 7 years ¥15 per share ($0.14) (0.015)% *1 The expected volatility is based on actual share prices during 7 years from August 19, 2011 to August 17, 2018. *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, 2018. *4 The risk-free interest rate is the yield on Japanese government bonds for the period that corresponds to the remaining life of the option. Because it is difficult to reasonably estimate the number of options that will expire in the future, only the number of options that have actually forfeited is applied. 10. INCOME TAXES The statutory tax rates in Japan for the years ended March 31, 2019 and 2018 were 30.6% and 30.9%, respectively. At March 31, 2019 and 2018, significant components of deferred tax assets and liabilities were as follows: Deferred tax assets: Accrued bonuses Depreciation and impairment loss Net defined benefit liability Net operating loss carryforwards (Note) Unrealized intercompany profits Other Valuation allowance for net operating loss carryforwards (Note) Valuation allowance for deductible temporary differences Total valuation allowance Total deferred tax assets Deferred tax liabilities: Reserve for tax purpose reduction entry Depreciation Undistributed earnings of subsidiaries and affiliated companies Unrealized gains on securities Acquisition-related basis differences Other Total deferred tax liabilities Net deferred tax assets (liabilities) Millions of yen Thousands of U.S. dollars 2019 2018 2019 ¥ 6,496 10,379 31,035 14,924 15,362 36,944 115,140 (12,673) (15,213) (27,886) 87,254 6,157 21,195 22,154 28,990 19,746 15,792 114,034 ¥ (26,780) ¥ 6,134 10,876 32,101 13,473 15,401 33,481 111,466 — — (23,228) 88,238 4,571 18,419 19,870 31,776 4,700 18,750 98,086 (9,848) ¥ $ $ 58,523 93,505 279,595 134,450 138,396 332,829 1,037,297 (114,171) (137,054) (251,225) 786,072 55,468 190,946 199,586 261,171 177,892 142,270 1,027,333 (241,261) 109 DATAToray Industries, Inc. Note: A breakdown of net operating loss carryforwards and valuation allowance by expiry date as of March 31, 2019 is as follows: Due within one year ¥ 1,108 (1,106) 2 ¥ Due after one year through two years ¥ 537 (434) ¥ 103 Due after two years through three years ¥ 841 (401) ¥ 440 Millions of yen 2019 Due after three years through four years ¥ 591 (522) ¥ 69 Due after four years through five years ¥ 1,105 (891) ¥ 214 Thousands of U.S. dollars Due within one year $ 9,982 (9,964) 18 $ Due after one year through two years $ 4,838 (3,910) $ 928 Due after two years through three years $ 7,577 (3,613) $ 3,964 2019 Due after three years through four years $ 5,324 (4,703) $ 622 Due after four years through five years $ 9,955 (8,027) $ 1,928 Due after five years ¥ 10,742 (9,319) ¥ 1,423 Total ¥ 14,924 (12,673) ¥ 2,251 Due after five years Total $ 96,775 (83,955) $ 12,820 $ 134,450 (114,171) $ 20,279 Net operating loss carryforwards* Valuation allowance Deferred tax assets Net operating loss carryforwards* Valuation allowance Deferred tax assets * The amount is determined by multiplying the corresponding net operating loss carryforwards by the effective statutory tax rate. Changes in Presentation “Acquisition-related basis differences” that were posted in “Other” under “Deferred tax liabilities” as of March 31, 2018 are listed as a separate line item starting from the year ended March 31, 2019 due to an increase in materiality. The figures as of March 31, 2018 are restated to reflect this change in presentation. As a result, ¥23,450 million posted in “Other” under “Deferred tax liabilities” as of March 31, 2018 is reclassified into “Acquisition- related basis differences” of ¥4,700 million and “Other” of ¥18,750 million. The reconciliation of the statutory tax rate and the effective income tax rate for the years ended March 31, 2019 and 2018 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 2019 — — — — — — — — — — — 2018 30.9% 0.7 (0.2) (2.1) (0.2) (3.9) 1.6 (3.2) 2.0 (1.1) 24.5% * Information for the year ended March 31, 2019 is not provided because the difference between the statutory tax rate and the effective income tax rate was less than 5% of the statutory tax rate. 110 DATAIntegrated Annual Report 2019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 2019 annual stockholders’ meeting, stockhold- ers approved the payment of cash dividends of ¥8.00 per share, aggregating to ¥12,806 million ($115,369 thousand) which has not been reflected in the accompanying consolidated financial statements for the year ended March 31, 2019. 12. COMMITMENTS AND CONTINGENT LIABILITIES At March 31, 2019, commitment line of credit to unconsolidated subsidiaries and affiliated companies was as follows: Total commitment line of credit Loans receivable outstanding Balance This commitment does not necessarily imply that the unused amount may be fully utilized. At March 31, 2019 and 2018, contingent liabilities were as follows: Millions of yen Thousands of U.S. dollars 2019 ¥ 380 155 ¥ 225 2019 $ 3,423 1,396 $ 2,027 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 13. LEASES Millions of yen Thousands of U.S. dollars 2019 2018 2019 ¥ 6,579 3,341 ¥ 9,920 ¥ 1,550 6,140 1,755 ¥ 1,187 ¥ 5,959 3,494 ¥ 9,453 ¥ 1,922 2,820 1,538 ¥ 1,216 $ 59,270 30,099 $ 89,369 $ 13,964 55,315 15,811 $ 10,694 Finance leases The Company and its consolidated subsidiaries hold certain buildings, machinery and equipment and intangible assets by leases. Operating leases Future minimum lease payments under non-cancellable operating leases subsequent to March 31, 2019 and 2018 were as follows: Due within one year Due after one year Total Millions of yen 2019 ¥ 903 5,535 ¥ 6,438 2018 ¥ 358 952 ¥ 1,310 Thousands of U.S. dollars 2019 $ 8,135 49,865 $ 58,000 111 DATAToray Industries, Inc.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, 2019 and 2018 were ¥66,355 million ($597,793 thousand) and ¥66,229 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 individual asset is considered to constitute a group. For the year ended March 31, 2019, the carrying value of goodwill, intangible assets and other assets of some consolidated subsidiaries was fully written down because the originally anticipated income was not expected any longer. As a result, the Company and its consolidated subsidiaries recognized loss on impairment in the amount of ¥18,414 million ($165,892 thousand). The major assets for which a loss on impairment was recognized were as follows: Location Use Classification Seoul, Korea, etc. Fibers & Textiles Yokohama, Kanagawa, Japan Environment & Engineering Machinery and equipment Goodwill Other intangible assets Goodwill Millions of yen Loss on impairment ¥ 840 6,054 5,154 ¥ 1,654 Thousands of U.S. dollars Loss on impairment $ 7,568 54,541 46,432 $ 14,901 The recoverable amount of the above assets was measured at value in use, and that of goodwill and other intangible assets was assessed at zero. 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 million. The major assets for which a loss on impairment was recognized were as follows: Location Use Classification Esslingen, Germany, etc. Composites production facilities Buildings Machinery and equipment Construction in progress Other Millions of yen Loss on impairment ¥ 156 893 1,781 94 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. 112 DATAIntegrated Annual Report 2019 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, 2019 and 2018. 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 Basis adjustments for assets 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 2019 2018 2019 ¥ (12,196) ¥ 15,089 $ (109,874) (1,296) (13,492) 3,913 (9,579) 1,414 (25) 130 1,519 (455) 1,064 (4,767) — (4,767) — (3,400) 11,689 (3,589) 8,100 (1,302) (104) — (1,406) 409 (997) (4,471) (1,375) (5,846) 26 (11,676) (121,550) 35,252 (86,297) 12,739 (225) 1,171 13,685 (4,099) 9,586 (42,946) — (42,946) — (4,767) (5,820) (42,946) (1,753) (103) (1,856) 531 (1,325) (422) (183) (605) 7,338 (3,626) 3,712 (1,077) 2,635 (1,697) (73) (1,770) (15,793) (928) (16,721) 4,784 (11,937) (3,802) (1,649) (5,450) Total other comprehensive income ¥ (15,212) ¥ 2,148 $ (137,045) 113 DATAToray Industries, Inc.17. BUSINESS COMBINATIONS Business combination by acquisition 1. Overview of the business combination The Company purchased all shares of TenCate Advanced Composites Holding B.V. (TCAC) on July 17, 2018. (1) Name of the acquired company and description of its business Name of the acquired company TenCate Advanced Composites Holding B.V. Description of business Manufacture and distribution of carbon fiber composite materials (2) Major reason for the business combination TCAC is a prepreg manufacturer with its main manufacturing bases in Europe and the U.S. and has a track record of widely supply- ing thermoplastic resins and high heat resistance thermoset resin materials. Especially, TCAC is a global leading company of carbon fiber intermediate materials using thermoplastic resins. The acquisition is expected to generate significant synergies by combining the product lineup in which TCAC specializes with the broad range of carbon fiber as well as polymer technologies, which are Toray’s strengths. Combining the two companies’ distribution channels, the Company can offer a wider product lineup to the customers. Toray will respond swiftly to the expansion of the market for small-sized aircraft and expand the business further for industrial use applications including automobiles in the medium- to long-term. (3) Date of the business combination July 17, 2018 (4) Legal form of the business combination Share acquisition in consideration of cash (5) Name of the company after the business combination Toray TCAC Holding B.V. (6) Percentage of voting rights acquired 100% (7) Basis for determining an acquiring company The Company acquired 100% of the voting rights through a share acquisition in consideration of cash. 2. Period of acquiree’s results included in the consolidated financial statements From October 1, 2018 to March 31, 2019 3. Acquisition cost Consideration for acquisition Acquisition cost Cash ¥117,117 million ($1,055,108 thousand) ¥117,117 million ($1,055,108 thousand) 4. Major acquisition-related costs Advisory fees and others ¥1,205 million ($10,856 thousand) 5. Amount of goodwill incurred, reasons for the goodwill incurred and the method and period of amortization (1) Amount of goodwill incurred ¥65,783 million ($592,640 thousand) (2) Reasons for the goodwill incurred Since the acquisition cost exceeded the net amount of assets acquired and liabilities assumed, the excess amount was recorded as goodwill. (3) Method and period of amortization Goodwill is amortized by the straight-line method over 20 years. 6. Assets acquired and liabilities assumed on the date of the business combination Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities 114 Millions of yen ¥ 11,422 72,566 ¥ 83,988 ¥ 13,864 18,940 ¥ 32,804 Thousands of U.S. dollars $ 102,901 653,748 $ 756,649 $ 124,901 170,631 $ 295,532 DATAIntegrated Annual Report 2019 7. Breakdown of amount allocated to intangible assets other than goodwill and weighted average amortization period by major type of asset Breakdown by major type Customer-related assets Technology-related assets Total Millions of yen Thousands of U.S. dollars Amount ¥ 42,021 26,957 ¥ 68,978 $ 378,568 242,856 $ 621,423 Amortization period 20 years 24 years 22 years 8. Effect on the consolidated statements of income assuming the business combination had been carried out on April 1, 2018 The effect on operating results for the year ended March 31, 2019 was immaterial. This information has not been audited by the indepen- dent auditors of the Company. 18. SUPPLEMENTARY CASH FLOW INFORMATION The following table reconciles the net payments with the acquisition cost with regard to the share acquisition of TenCate Advanced Composites Holding B.V. executed in the year ended March 31, 2019. Acquisition cost Cash and cash equivalents Net payments for acquisition 19. SEGMENT INFORMATION Millions of yen 2019 ¥ 117,117 (2,553) ¥ 114,564 Thousands of U.S. dollars 2019 $ 1,055,108 (23,000) $ 1,032,108 1. Outline of reportable segments The reportable segments of the Company and its consolidated subsidiaries are components for which discrete financial information is avail- able and whose operating results are regularly reviewed by the Board of Directors to make decisions about resource allocation to the seg- ments 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 and others; 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, medical devices, etc. 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. 115 DATAToray Industries, Inc. 3. Information on sales, income, assets and other material items of reportable segments Millions of yen 2019 Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others*1 Total Adjustments*2 Consolidated Total *3 Sales to outside customers ¥ 974,265 ¥ 868,847 ¥ 215,913 ¥ 257,673 ¥ 53,653 ¥ 18,497 ¥ 2,388,848 ¥ — ¥ 2,388,848 Intersegment sales 1,372 18,985 820 74,960 — 26,536 122,673 (122,673) — Total sales Segment income Segment assets Depreciation and amortization Investment in unconsolidated subsidiaries and affiliated companies accounted for by the equity method Capital expenditures *4 ¥ 975,637 ¥ 887,832 ¥ 216,733 ¥ 332,633 ¥ 53,653 ¥ 45,033 ¥ 2,511,521 ¥ (122,673) ¥ 2,388,848 ¥ 72,880 ¥ 67,702 ¥ 11,542 ¥ 12,236 ¥ 1,301 ¥ 3,084 ¥ 168,745 ¥ (27,276) ¥ 141,469 ¥ 795,382 ¥ 1,002,305 ¥ 640,161 ¥ 255,338 ¥ 70,792 ¥ 83,764 ¥ 2,847,742 ¥ (59,391) ¥ 2,788,351 29,342 39,099 25,042 4,531 2,638 1,416 102,068 (357) 101,711 76,464 50,969 1,611 12,205 2,849 8,248 152,346 (318) 152,028 51,726 67,004 43,079 7,621 2,126 3,430 174,986 (2,290) 172,696 Millions of yen 2018 Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others*1 Total Adjustments*2 Consolidated Total *3 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 Segment income Segment assets Depreciation and amortization Investment in unconsolidated subsidiaries and affiliated companies accounted for by the equity method Capital expenditures *4 ¥ 914,858 ¥ 821,212 ¥ 178,540 ¥ 307,709 ¥ 53,803 ¥ 42,386 ¥ 2,318,508 ¥ (113,650) ¥ 2,204,858 ¥ 72,418 ¥ 71,363 ¥ 20,764 ¥ 13,287 ¥ 1,942 ¥ 2,897 ¥ 182,671 ¥ (26,207) ¥ 156,464 ¥ 778,930 ¥ 974,165 ¥ 463,640 ¥ 273,259 ¥ 78,194 ¥ 64,362 ¥ 2,632,550 ¥ (56,640) ¥ 2,575,910 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 48,761 61,362 32,604 5,978 2,768 1,564 153,037 287 153,324 Thousands of U.S. dollars 2019 Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others*1 Total Adjustments*2 Consolidated Total *3 Sales to outside customers $ 8,777,162 $ 7,827,450 $ 1,945,162 $ 2,321,378 $ 483,360 $ 166,640 $ 21,521,153 $ — $ 21,521,153 Intersegment sales 12,360 171,036 7,387 675,315 — 239,063 1,105,162 (1,105,162) — Total sales Segment income Segment assets Depreciation and amortization Investment in unconsolidated subsidiaries and affiliated companies accounted for by the equity method Capital expenditures *4 $ 8,789,523 $ 7,998,486 $ 1,952,550 $ 2,996,694 $ 483,360 $ 405,703 $ 22,626,315 $ (1,105,162) $ 21,521,153 $ 656,577 $ 609,928 $ 103,982 $ 110,234 $ 11,721 $ 27,784 $ 1,520,225 $ (245,730) $ 1,274,495 $ 7,165,604 $ 9,029,775 $ 5,767,216 $ 2,300,342 $ 637,766 $ 754,631 $ 25,655,333 $ (535,054) $ 25,120,279 264,342 352,243 225,604 40,820 23,766 12,757 919,532 (3,216) 916,315 688,865 459,180 14,514 109,955 25,667 74,306 1,372,486 (2,865) 1,369,622 466,000 603,640 388,099 68,658 19,153 30,901 1,576,450 (20,631) 1,555,820 *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, 2019 of ¥(27,276) million ($(245,730) thousand) includes intersegment eliminations of ¥(1,018) million ($(9,171) thousand) and corporate expenses of ¥(26,258) million ($(236,559) thousand). “Adjustments” of segment income for the year ended March 31, 2018 of ¥(26,207) million includes intersegment eliminations of ¥(1,600) million and corporate expenses of ¥(24,607) million. The corporate expenses consist of the headquarters’ research expenses that are not allocated to each reportable segment. b) “Adjustments” of segment assets for the year ended March 31, 2019 of ¥(59,391) million ($(535,054) thousand) includes intersegment eliminations of ¥(79,609) million ($(717,198) thousand) and corporate assets of ¥20,218 million ($182,144 thousand). “Adjustments” of segment assets for the year ended March 31, 2018 of ¥(56,640) million includes intersegment eliminations of ¥(77,624) million and corporate assets of ¥20,984 million. The corporate assets consist of the headquar- ters’ research assets that are not allocated to each reportable segment. *3 “Segment income” is reconciled to operating income. *4 “Capital expenditures” do not include the increase in assets resulting from inclusion of subsidiaries in consolidation. 116 DATAIntegrated Annual Report 2019 4. Related information a) Geographic information on sales to outside customers Millions of yen 2019 Asia Japan China Others North America, Europe and other areas Total Sales to outside customers ¥ 1,085,701 ¥ 426,788 ¥ 454,401 ¥ 421,958 ¥ 2,388,848 Sales to outside customers ¥ 1,005,260 ¥ 386,520 ¥ 421,456 ¥ 391,622 ¥ 2,204,858 Millions of yen 2018 Asia Japan China Others North America, Europe and other areas Total Thousands of U.S. dollars 2019 Asia Japan China Others North America, Europe and other areas Total Sales to outside customers $ 9,781,090 $ 3,844,937 $ 4,093,703 $ 3,801,423 $ 21,521,153 Sales amounts are allocated to countries or regions according to the customers’ location. b) Geographic information on property, plant and equipment Property, plant and equipment, net ¥ 331,978 ¥ 212,713 ¥ 166,506 ¥ 131,848 ¥ 153,831 ¥ 996,876 Japan Republic of Korea Others U.S.A. Others Total Millions of yen 2019 Asia North America, Europe and other areas Property, plant and equipment, net ¥ 326,679 ¥ 199,721 ¥ 153,741 ¥ 123,042 ¥ 123,846 ¥ 927,029 Japan Republic of Korea Others U.S.A. Others Total Millions of yen 2018 Asia North America, Europe and other areas Property, plant and equipment, net $ 2,990,793 $ 1,916,333 $ 1,500,054 $ 1,187,820 $ 1,385,865 $ 8,980,865 Japan Republic of Korea Others U.S.A. Others Total Thousands of U.S. dollars 2019 Asia North America, Europe and other areas 117 DATAToray Industries, Inc.5. Loss on impairment of fixed assets by reportable segment Millions of yen 2019 Loss on impairment ¥ 13,322 ¥ 1,145 ¥ 776 ¥ 2,395 ¥ 776 ¥ — ¥ — ¥ 18,414 Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total Millions of yen 2018 Loss on impairment Fibers & Textiles ¥ 24 Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total ¥ 899 ¥ 2,924 ¥ 36 ¥ 61 ¥ — ¥ — ¥ 3,944 Loss on impairment $ 120,018 $ 10,315 $ 6,991 $ 21,577 $ 6,991 $ — $ — $ 165,892 Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total Thousands of U.S. dollars 2019 6. Amortization and balance of goodwill by reportable segment Millions of yen 2019 Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Amortization of goodwill ¥ 1,297 ¥ 4,384 ¥ 5,054 ¥ 864 Balance of goodwill 81 10,705 73,337 1,589 Life Science Others ¥ — — ¥ — — Elimination & Corporate ¥ — — Total ¥ 11,599 85,712 Millions of yen 2018 Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Amortization of goodwill ¥ 1,289 ¥ 4,186 ¥ 2,613 ¥ 777 Balance of goodwill 7,440 15,094 13,474 4,138 Life Science Others ¥ — — ¥ — — Elimination & Corporate ¥ — — Total ¥ 8,865 40,146 Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Others Elimination & Corporate Total Amortization of goodwill $ 11,685 $ 39,495 $ 45,532 $ 7,784 Balance of goodwill 730 96,441 660,694 14,315 $ — — $ — — $ — $ 104,495 — 772,180 Thousands of U.S. dollars 2019 118 DATAIntegrated Annual Report 201920. 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 21. RELATED PARTY TRANSACTIONS Year ended March 31, 2019 No items to be reported. 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 2019 2018 U.S. dollars 2019 ¥ 49.61 49.56 16.00 706.95 ¥ 59.97 59.90 15.00 681.92 $ 0.45 0.45 0.14 6.37 119 DATAToray Industries, Inc.120 DATAIntegrated Annual Report 2019Investor Information (As of March 31, 2019) Common Stock: Issued: 1,600,694,991 shares (excluding treasury stock) Number of Stockholders: 176,504 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 Auditor: Ernst & Young ShinNihon LLC Transfer Agent: Sumitomo Mitsui Trust Bank, Limited 1-4-1, Marunouchi Chiyoda-ku, Tokyo 100-0005, Japan Cash Dividends Per Share Total for the year Interim FY 2018 FY 2017 ¥16.00 ¥15.00 8.00 7.00 Principal Stockholders Shares held The Master Trust Bank of Japan, Ltd. (Trust Account) 131,980,000 Percentage of shares held*1 8.25 Japan Trustee Services Bank, Ltd. (Trust Account) Nippon Life Insurance Co. Ltd. Mitsui Life Insurance Co., Ltd.*2 National Mutual Insurance Federation of Agricultural Cooperatives Japan Trustee Services Bank, Ltd. (Trust 5 Account) Sumitomo Mitsui Banking Corporation Japan Trustee Services Bank, Ltd. (Trust 4 Account) Japan Trustee Services Bank, Ltd. (Trust 9 Account) JP Morgan Chase Bank 385151 93,983,844 71,212,250 35,961,000 5.87 4.45 2.25 32,193,000 2.01 29,813,300 27,022,000 25,856,800 25,404,900 23,565,640 1.86 1.69 1.62 1.59 1.47 *1 Percentage of shares held is calculated excluding 30,786,412 shares of trea- sury stock. *2 Mitsui Life Insurance Co., Ltd. was renamed TAIJU LIFE INSURANCE COMPANY LIMITED on April 1, 2019. Stock Price Range Composition of Stockholders (Thousands of shares) (Yen) 1,500 1,200 900 600 300 0 2014 April 2015 April 2016 April 2017 April 2018 April 2019 March Treasury Stock 30,786 1.89% Individuals and Others 329,191 20.18% Non-Japanese Investors 448,078 27.46% Japanese Government & Local Government 14 0.00% Japanese Financial Institutions 663,065 40.64% Japanese Securities Companies 24,504 1.50% Other Japanese Companies 135,844 8.33% Corporate Data (As of March 31, 2019) 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: 48,320 Parent company: 7,585 Japanese subsidiaries: 10,563 Overseas subsidiaries: 30,172 Toray Industries, Inc. 121 DATA T o r a y I n d u s t r i e s , I n c . I n t e g r a t e d A n n u a l R e p o r t 2 0 1 9 Printed in Japan Issued: September 2019 

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