Toray Industries Inc.
Annual Report 2021

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1 2 0 1 2 d 1.3.3 0 ate rt 2 0.4.1-2 r o g y Inte p e al R 2 0 2 a r o T u n n A T o r a y I n t e g r a t e d A n n u a l R e p o r t 2 0 2 1 T o r a y I n d u s t r i e s , I n c . s e v i r L u e O g n a h als C i r e t a M 02 h y p T o r a y P h ilo s o Vision Corporate Philosophy Corporate Missions Corporate Slogan Corporate Guiding Principles Corporate Culture Presidentʼs Principles Toray Philosohy In addition to our traditional Management Philosophy (which includes the Corporate Philosophy, Corporate Missions, Corporate Guiding Principles), the Toray Philosophy includes the Corporate Slogan (which simply expresses Toray’s stance on embodying the Corporate Philosophy), the Vision (which represents the direction the Group is headed), the Corporate Culture (which includes values and management perspec- tives that have been maintained since the company’s found- ing), and the President’s Principles. Toray Industries, Inc.Integrated Annual Report 2021 03 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 meaningful work and fair opportunities For our shareholders: To practice sincere and trustworthy management For society: To establish ties and develop mutual trust as a responsible corporate citizen Corporate Guiding Principles Safety and Environment Placing top priority on safety, accident prevention and environmental preservation in order to protect the safety and health of employees, customers and local communities and contribute to building a sustainable society Ethics and Fairness Acting with fairness, high ethical standards and a strong sense of responsibility while complying with laws, regulations and social norms to earn trust and meet social expectations Customer-Focus Providing solutions of high value to customers, and pursuing customer satisfaction and the world’s highest level of quality Innovation Achieving continuous innovation in all corporate activities, and aiming for dynamic evolution and growth Strong Genba-Ryoku (Workplace Competency) Learning from one another and making self-driven efforts to leverage technologies and expertise in order to strengthen work- place competency, which is the foundation of our corporate activities Cooperation and Co-creation Forming integrated internal linkages and strategic alliances with external partners, and evolving together with society by cre- ating new value Emphasis on Human Resources Providing motivating work environments where employees can demonstrate their abilities, and building a vibrant corporate culture Information Disclosure Appropriately disclosing corporate information and enhancing communication with stakeholders in order to maintain manage- ment transparency Respect for Human Rights Fulfilling our responsibility to respect human rights as a good corporate citizen Vision Toray Group Sustainability Vision Corporate Culture • Contributing to society through business activities • People-centric management • Management from a long-term perspective • Pioneering spirit President’s Principles • Stay focused on the basics, search for ideal approaches, identify the right steps, and then carry them out • All solutions can ultimately be found in the Genba (workplace) • Consider what is best for the company • Have the integrity to do the right thing in the right way Corporate Slogan Innovation by Chemistry Toray Industries, Inc.Integrated Annual Report 2021 04 Highlights 06 Financial Highlights 08 Non-Financial Highlights 02 Toray Philosophy 10 To Our Stakeholders Value Creation 16 The Toray Group Sustainability Vision and Mid- to Long-term Strategy 24 Financial Strategy 26 The Toray Group Value Creation Process Initiatives for Global Environmental Issues 36 Toward Achieving Carbon Neutrality by 2050 37 TCFD Initiatives 38 Toward Realization of a Circular Economy 39 Toward Realization of Decarbonized Hydrogen Society 40 Status of Environmental Management Initiatives Digital Transformation 42 Advanced Business Management by Utilizing Digital Technologies Toray Industries, Inc.Integrated Annual Report 2021Contents 05 Human Resources 44 Human Resources Management 46 Interviews • President & CEO, Toray Plastics (America) Inc. • Director of the Board & Vice President, Toray Industries (China), Co., Ltd. Corporate Governance 50 Organization 51 Members of the Board and Corporate Auditors 52 Management Team 54 Roundtable Discussion of Outside Directors Towards Enhancing Toray’s Corporate Value 62 Corporate Governance 68 Compliance Segment Information 72 Results by Segment for Fiscal 2020 74 Fibers & Textiles 76 Performance Chemicals 80 Carbon Fiber Composite Materials 82 Environment & Engineering 84 Life Science R&D Intellectual Property 86 R&D 88 Intellectual Property 89 Financial Section 164 Stakeholder Engagement 165 External Evaluation 166 Toray Group Worldwide Network Data 167 Investor Information/ Corporate Data Toray Industries, Inc.Integrated Annual Report 2021 06 Financial Highlights Net Sales/Revenue FY 2020 Revenue (consolidated) ¥1,883.6 billion Operating Income/ Core Operating Income, Operating Income to Net Sales/ Core Operating Income to Revenue Net Income Attributable to Owners of Parent/Profit Attributable to Owners of Parent, ROA and ROE FY 2020 Core Operating Income (consolidated) FY 2020 Profit Attributable to Owners of Parent ¥90.3 billion Core Operating Income to Revenue 4.8% (Billion yen) 2,500 (Billion yen) 200 2,000 1,500 1,000 0 150 100 50 0 ¥45.8 billion ROE 3.9% ROA 3.2% (Billion yen) 120 100 80 60 40 20 0 (%) 8 6 4 2 0 (%) 12 10 8 6 4 2 0 Dividend per Share and Payout Ratio Capital Expenditures Depreciation and Amortization FY 2020 Capital Expenditures ¥133.2 billion FY 2020 Depreciation and Amortization ¥119.1 billion Dividend per Share FY 2020 ¥9.0 Payout Ratio 31.0% (Yen) 20 (%) 50 (Billion yen) 200 (Billion yen) 16 12 8 4 0 80 60 40 20 0 40 30 20 10 0 150 100 50 0 2.5 2.0 1.5 1.0 0.5 0 Forecast Environmental Facility Environmental Preservation R&D Expenses/Expenditures Investment FY 2020 R&D Expenditures ¥62.8 billion FY 2020 ¥1.5 billion Costs FY 2020 ¥7.6 billion Environmental Facility Investment Environmental Preservation Costs (Billion yen) (Billion yen) (Billion yen) 140 120 100 80 60 40 20 0 8 6 4 2 0 (FY) 17 18 19 20 21 Forecast (FY) 17 18 19 20 21 Forecast (FY) 17 18 19 20 21 Forecast (FY) 17 18 19 20 21 (FY) 17 18 19 20 21 (FY) 17 18 19 20 21 Forecast Forecast Forecast J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS Operating income/Core operating income (left) Operating income to net sales/ Core operating income to revenue (right) Net income attributable to owners of parent/ Profit attributable to owners of parent (left) ROA (right) ROE (right) Dividend per share (left) Payout ratio (right) Net Assets/Total Assets and Equity Ratio Interest-bearing Liabilities and Debt/equity Ratio Cash Flows End of FY 2020 Total Assets ¥1,322.3 billion Equity Ratio 43.5% (Billion yen) 1,500 1,200 900 600 300 0 End of FY 2020 Interest-bearing Liabilities ¥973.9 billion Debt/equity Ratio 0.79 (%) 50 (Billion yen) 1,000 40 30 20 10 0 800 600 400 200 0 FY 2020 Cash Flows from Operating Activities Cash Flows from Investing Activities ¥211.6 billion ¥-97.9 billion Free Cash Flow ¥113.7 billion (Billion yen) 300 200 100 0 -100 -200 1.0 0.8 0.6 0.4 0.2 0 -300 (Billion yen) 120 80 40 0 -40 -80 -120 (FY) 17 18 19 20 (FY) 17 18 19 20 (FY) 17 18 19 20 (FY) 17 18 19 20 21 (FY) 17 18 19 20 (FY) 17 18 19 20 J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS Net assets/Total assets (left) Equity ratio (right) Interest-bearing liabilities (left) Debt/equity ratio (right) Cash flows from operating activities (left) Cash flows from investing activities (left) Free cash flow (right) Toray Industries, Inc.Integrated Annual Report 2021 07 Operating Income/ Core Operating Income, Operating Income to Net Sales/ of Parent/Profit Attributable to Net Income Attributable to Owners Net Sales/Revenue Core Operating Income to Revenue Owners of Parent, ROA and ROE FY 2020 Revenue (consolidated) ¥1,883.6 billion FY 2020 FY 2020 Core Operating Income (consolidated) Profit Attributable to Owners of Parent ¥90.3 billion Core Operating Income to Revenue 4.8% (Billion yen) 200 150 100 50 0 ¥45.8 billion ROE 3.9% ROA 3.2% (Billion yen) (%) 8 6 4 2 0 120 100 80 60 40 20 0 Dividend per Share and Payout Ratio FY 2020 Dividend per Share ¥9.0 Payout Ratio 31.0% (Yen) 20 16 12 8 4 0 Capital Expenditures Depreciation and Amortization FY 2020 Capital Expenditures ¥133.2 billion FY 2020 Depreciation and Amortization ¥119.1 billion (%) 50 (Billion yen) 200 40 30 20 10 0 150 100 50 0 (Billion yen) 140 120 100 80 60 40 20 0 (FY) 17 18 19 20 21 (FY) 17 18 19 20 21 (FY) 17 18 19 20 21 Forecast Forecast Forecast (FY) 17 18 19 20 21 Forecast (FY) 17 18 19 20 21 Forecast (FY) 17 18 19 20 21 Forecast J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS Operating income/Core operating income (left) Net income attributable to owners of parent/ Operating income to net sales/ Core operating income to revenue (right) Profit attributable to owners of parent (left) ROA (right) ROE (right) Dividend per share (left) Payout ratio (right) Net Assets/Total Assets and Interest-bearing Liabilities and Debt/equity Ratio Cash Flows R&D Expenses/Expenditures End of FY 2020 Interest-bearing Liabilities ¥973.9 billion Debt/equity Ratio 0.79 FY 2020 Cash Flows from Cash Flows from Operating Activities Investing Activities ¥211.6 billion ¥-97.9 billion Free Cash Flow ¥113.7 billion (%) 50 (Billion yen) 1,000 (Billion yen) 1.0 300 (Billion yen) 120 40 30 20 10 0 800 600 400 200 0 0.8 0.6 0.4 0.2 200 100 0 -100 -200 0 -300 FY 2020 R&D Expenditures ¥62.8 billion (Billion yen) 80 60 40 20 0 Environmental Facility Investment Environmental Preservation Costs FY 2020 Environmental Facility Investment FY 2020 Environmental Preservation Costs ¥1.5 billion ¥7.6 billion (Billion yen) 2.5 2.0 1.5 1.0 0.5 0 (Billion yen) 8 6 4 2 0 (FY) 17 18 19 20 (FY) 17 18 19 20 (FY) 17 18 19 20 (FY) 17 18 19 20 21 Forecast (FY) 17 18 19 20 (FY) 17 18 19 20 J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS Net assets/Total assets (left) Equity ratio (right) Interest-bearing liabilities (left) Debt/equity ratio (right) Cash flows from operating activities (left) Cash flows from investing activities (left) Free cash flow (right) (Billion yen) 2,500 2,000 1,500 1,000 0 Equity Ratio 43.5% (Billion yen) 1,500 1,200 900 600 300 0 Equity Ratio End of FY 2020 Total Assets ¥1,322.3 billion (%) 12 10 8 6 4 2 0 80 40 0 -40 -80 -120 Toray Industries, Inc.Integrated Annual Report 2021 08 Non-Financial Highlights Net Sales/Revenue of Green Innovation Businesses Net Sales/Revenue of Life Innovation Businesses FY 2020 Revenue of Green Innovation Businesses FY 2020 Revenue of Life Innovation Businesses ¥711.8 billion ¥275.6 billion Avoided CO2 Emissions FY 2020 Avoided CO2 Emissions 245 million tons Energy Consumption and per Unit Energy Consumption Index (VS. FY 1990 / Toray) FY 2020 Energy Consumption 24.1 Million gigajoules Per Unit Energy Consumption Index 89.8 (FY 1990 is set to an index value of 100) Reduction of Atmospheric VOC Emissions (VS. FY 2000) Waste Recycling Rate Reduction of Atmospheric VOC Emissions Waste Recycling Rate FY 2020 73.8% FY 2020 86.2% (Billion yen) 1,000 800 600 400 200 0 (Billion yen) (Million tons) (Million gigajoules) 300 250 200 150 100 50 0 250 200 150 100 50 0 (FY) 17 18 19 20 22 Target (FY) 17 18 19 20 J-GAAP IFRS J-GAAP 22 Target IFRS (FY) 18 19 20 (FY) 1990 2017 18 19 20 (FY) 17 18 19 20 (FY) 17 18 19 20 Contributed Annual Water Filtration Throughput FY 2020 Contributed annual water filtration throughput 56 million tons/day (Million tons/day) 60 50 40 30 20 10 0 Reduction of Greenhouse Gas Emissions per Unit of Sales/ Revenue (%) (VS. FY 2013) Reduction of Comparative Water Usage per Unit of Sales/ Revenue (%) (VS. FY 2013) FY 2020 Reduction of Greenhouse Gas Emissions per Unit of Revenue (%) FY 2020 Reduction of Comparative Water Usage per Unit of Revenue (%) 14% 18% (FY 2013 is set to an index value of 100) (FY 2013 is set to an index value of 100) (Index) 100 90 80 0 (Index) 100 80 60 0 (FY) 18 19 20 (FY) 13 17 18 19 20 (FY) 13 17 18 19 20 (FY) 17 18 19 20 (FY) 17 18 19 20 (FY) 17 18 19 20 Energy consumption (left) Per unit energy consumption index (right) Percentage of Women in Unit Manager or Higher Positions (Toray) FY 2020 9.8% Percentage of Women in Unit Manager or Higher Positions Number of Employees by Number of Employees Taking Female 33,403 12,864 Average Time on the Job and Childcare Leave (Toray) FY 2020 Number of Employees Taking Number of Employees Taking Childcare Leave: Male Childcare Leave: Female 22 Average Time on the Job: Male 15.8 years (Employees) 66 Average Time on the Job: Female 16.7 years 50 40 30 20 10 0 (%) 10.0 9.5 9.0 0 (Index) 100 (%) 80 80 75 60 70 40 65 0 0 Gender FY 2020 Male (Employees) 50,000 40,000 30,000 20,000 10,000 0 Male Female (%) 90 85 80 0 90 60 30 0 (Years) 18 12 6 0 Number of employees taking childcare leave (left) Average time on the job (right) Male Female Male Female Toray Industries, Inc.Integrated Annual Report 2021 Net Sales/Revenue of Net Sales/Revenue of Green Innovation Businesses Life Innovation Businesses Avoided CO2 Emissions FY 2020 FY 2020 FY 2020 Revenue of Green Innovation Businesses Revenue of Life Innovation Businesses Avoided CO2 Emissions ¥711.8 billion ¥275.6 billion 245 million tons Energy Consumption and per Unit Energy Consumption Index (VS. FY 1990 / Toray) Reduction of Atmospheric VOC Emissions (VS. FY 2000) Waste Recycling Rate FY 2020 Energy Consumption 24.1 Million gigajoules FY 2020 Reduction of Atmospheric VOC Emissions FY 2020 Waste Recycling Rate 73.8% 86.2% 09 Per Unit Energy Consumption Index 89.8 (FY 1990 is set to an index value of 100) (Million gigajoules) 50 (Index) 100 (%) 80 40 30 20 10 0 80 75 60 70 40 65 0 0 (%) 90 85 80 0 (FY) 17 18 19 20 22 (FY) 17 18 19 20 22 (FY) 18 19 20 (FY) 1990 2017 18 19 20 (FY) 17 18 19 20 (FY) 17 18 19 20 Energy consumption (left) Per unit energy consumption index (right) Percentage of Women in Unit Manager or Higher Positions (Toray) FY 2020 Percentage of Women in Unit Manager or Higher Positions 9.8% Number of Employees by Gender FY 2020 Male Female 33,403 12,864 (%) 10.0 9.5 9.0 0 (Employees) 50,000 40,000 30,000 20,000 10,000 0 Average Time on the Job and Number of Employees Taking Childcare Leave (Toray) FY 2020 Number of Employees Taking Childcare Leave: Male Number of Employees Taking Childcare Leave: Female 22 Average Time on the Job: Male 15.8 years (Employees) 90 66 Average Time on the Job: Female 16.7 years 60 30 0 (Years) 18 12 6 0 (FY) 18 19 20 (FY) 13 17 18 19 20 (FY) 13 17 18 19 20 (FY) 17 18 19 20 (FY) 17 18 19 20 (FY) 17 18 19 20 Male Female Number of employees taking childcare leave (left) Male Female Average time on the job (right) Male Female (Billion yen) (Million tons) (Billion yen) 1,000 800 600 400 200 0 60 50 40 30 20 10 0 300 250 200 150 100 50 0 FY 2020 14% (Index) 100 90 80 0 J-GAAP Target IFRS J-GAAP Target IFRS Contributed Annual Water Filtration Throughput Emissions per Unit of Sales/ Revenue (%) (VS. FY 2013) Usage per Unit of Sales/ Revenue (%) (VS. FY 2013) Reduction of Greenhouse Gas Reduction of Comparative Water FY 2020 Contributed annual water filtration throughput 56 million tons/day (Million tons/day) Reduction of Greenhouse Gas Emissions per Unit of Revenue (%) Reduction of Comparative Water Usage per Unit of Revenue (%) (FY 2013 is set to an index value of 100) (FY 2013 is set to an index value of 100) 250 200 150 100 50 0 FY 2020 18% (Index) 100 80 60 0 Toray Industries, Inc.Integrated Annual Report 2021 10 To Our Stakeholders Adversity puts our strengths in a new light Despite the partial abatement of the COVID-19 pandemic thanks to progress in vaccinations, new mutant strains mean that the world has still yet to see any signs of an end to the spread of infection. I would therefore like to once again express our sympathies to all of those who have suffered from this calamity since last year. Amid the restrictions placed on the movement of and con- tact between people throughout the globe, Toray Group has endeavored to manage our businesses in a way that fulfills our responsibility to continue supplying products as a basic materials manufacturer. Similarly, we have prioritized the health of our employees in Japan and around the world, as well as the prevention of infection by the virus. Unable to avoid the impacts of stagnation in production and consumption activities across the globe, however, consolidated reve- nue for fiscal 2020 declined 9.9% compared with the pre- vious fiscal year to ¥1,883.6 billion, and core operating income fell 28.1% to ¥90.3 billion. Meanwhile, operat- ing income declined 51.3% to ¥55.9 billion and profit attrib- utable to owners of parent declined by 45.6% to ¥45.8 billion as a U.S. carbon fiber subsidiary recorded an impair- ment loss. Contributing to Build a Sustainable Society by Innovation of Materials Although these challenges show how we were signifi- cantly affected by the COVID- 19 pandemic during fiscal 2020, this actually allowed me to fully experience the power of Toray Group. First and foremost, we demon- strated our strengths in devel- oping and providing materials for a variety of applications and met the expectations of a world that demands a sustain- able society, thereby expand- ing the ways in which we deliver new value to society. And because our high-perfor- mance, high-grade, and inno- vative materials are realized through the ultra-long-term accumulation of technology that is unique to Japanese companies, I am certain the roles played by Toray Group will only continue to expand into the future. In addition, given that we produce 70 to 80% of our main products outside of Japan due to having advanced local production for local consumption on a global basis, our ability to maintain operations despite the restric- tions on movement has served as a major advantage amid the COVID-19 pandemic. Unwavering management with a long-term perspective In order to realize the perspectives of the world which consider Toray Industries, Inc.Integrated Annual Report 2021 11 Akihiro Nikkaku President Toray Industries, Inc. Toray Industries, Inc.Integrated Annual Report 2021 12 the way the world should be in 2050, as envisioned by the Toray Group Sustainability Vision, we aim to achieve sound, sustainable growth by focusing our energies on the Green Innovation (GR) Business, which contributes to solving global environmental and energy issues, and the Life Innovation (LI) Business, which contributes to solving issues such as those involved with longevity, for example. Similarly, we will seize upon the direction these changes in the world taken under TORAY VISION 2030 (VISION 2030), our 10-year long-term corporate vision formulated as the milestone for these efforts, and under Project AP-G 2022 (AP-G 2022), a 3-year medi- um-term management program we established to achieve the long-term vision. Along with our annual plans, we are steadily advancing manage- ment in a way that tackles existing problems in a manner that is founded on the three time frames of long-term, medium-term, and present. Steadily building a response to these existing problems will help define a path to the future and solidify our business foundation. In this way, our basic approach to management based on a long-term perspective remains unchanged. In fiscal 2021, Toray Group’s performance has taken a positive turn. Although economic recov- ery varies by country depending on their prog- ress in vaccinations and economic measures, and despite the fact that an end to skyrocketing crude oil prices and other external environmental factors remain as deeply uncertain as ever, auto- motive applications and IT-related materials are performing strongly. Against this backdrop, we foresee the COVID-19 pandemic coming to an end and the global economy generally returning to a growth trajectory during fiscal 2022, the final year of AP-G 2022. Likewise, Toray Group will, in a timely manner, organize a system to increase pro- duction and supply for those markets forecasted to see a recovery and expansion in demand, and will endeavor to minimize the impact of more immediate issues, such as skyrocketing raw material prices, by working to use formula pricing that links market conditions to product prices. Materials change our lives With materials as the starting point of everything the world produces, we engage in business oper- ations under the conviction that “materials, which form the base of all products, have the power to intrinsically change society.” As the digital economy advances, the makeup of the industrial structure is shifting from a focus on hardware to software, which is evolving to allow the world to steadily realize those ideas that were once only dreams. Yet, even AI, an area that is receiving the greatest amount of attention, cannot exist without development in hardware like high-speed logic elements and high-capac- ity memory elements. And it is the materials that comprise the hardware that are the basis for the hardware-based innovation, so there is no ques- tion that "innovation starting from materials" has become ever more common. Even in the tech- nologically mature fibers and textiles industry, for example, we have developed innovative conju- gate spinning technologies like NANODESIGNTM, which have enabled us to add completely new functions and textures, and to deliver new add- ed-value. In other words, materials hold an unlim- ited potential to drive innovation. Expanding “Innovation through Co-creation” “Innovation through Co-creation” is a unique feature and strength of the Toray Group Value Creation Process. Simply developing innovative materials alone will not give rise to markets, however. Which is why we require partners who will provide applications, who are willing to accept Toray Industries, Inc.Integrated Annual Report 2021 13 Achieving carbon neutrality for society and the Company In addition to the COVID-19 pandemic, population growth, aging popu- lation, climate change, water shortages, resource depletion, and other global-scale challenges are both related to each other and becoming worse. In recent years in particular, global environmental issues have become serious topics of discussion in those countries around the world that have experienced torrential rains and severe cold waves as a result of abnormal weather. Toray Group has a history of focusing on envi- ronmental management, and we stated achieving “a net zero emissions world, where greenhouse gas emissions are completely offset by absorp- tion,” in other words carbon neutrality, as a goal in the Toray Group Sustainability Vision. In order to execute what we propose, we are advanc- ing our “contributions to solving climate change issues through the value chain” for society as part of the GR Business, while engaging in efforts to “address climate change across business activ- ities” within the Group, such as reducing GHG emissions at the manufacturing stage. The GR Business contributes to reductions in GHG emissions throughout society by supplying various materials such as those that decrease the weight and improve the fuel efficiency of air- craft and automobiles. We believe that “tech- nologies that contribute to a circular economy” and “hydrogen-related technologies” will also serve as major drivers in achieving carbon neu- trality by 2050. In contributing to a circular econ- omy, we will work to expand the business for fibers and textiles made of raw materials recycled from used polyester (PET) bottles, and to build a recycling system for release PET films used in electronic component applications. In terms of unfamiliar materials, and who possess a culture and vision overflowing with a readiness to take on new challenges, like Toray. Our collaboration with Fast Retailing Co., Ltd. (Fast Retailing), which has produced revolution- ary products like HEATTECHTM, AIRismTM, and Ultra Light DownTM, is now in its twenty-second year, and has grown stronger with each passing year. This historic co-creation was the result of the meeting between Toray, with its conviction that “fibers and textiles is still a growth industry when looked at globally” in an era when many industries were moving away from these, and Fast Retailing, with its philosophy of “Changing clothes. Changing conventional wisdom. Change the world.” With their leaders sharing the same vision, the burning desire of Toray’s engineers to undertake challenges drove breakthroughs in response to the requests of Fast Retailing, which sincerely believes that its clothing concepts can change the world. Similarly, our alliance with The Boeing Company based in the U.S.A., which was only dreaming of building aircraft from car- bon fibers at its outset, is a partnership that was achieved specifically because both companies share a corporate culture that values the continu- ous pursuit of innovation. It is likely that more and more companies will seek out innovativeness from the power of materials as the world becomes flooded with things and only those things that offer unprece- dented value will be chosen. Against this backdrop, we will increasingly accelerate “Innovation through Co-creation” together with various part- ners that boldly challenge breakthroughs. * HEATTECHTM, AIRismTM and Ultra Light DownTM is a trademark of Fast Retailing Co., Ltd. Toray Industries, Inc.Integrated Annual Report 2021 14 hydrogen-related technologies, we entered a partnership agreement with Siemens Energy AG in regard to creating green hydrogen produc- tion technologies. Likewise, Toray Group’s contributions to carbon neu- trality through the value chain will likely increase to an immeasurable scale in the future. As Toray Group is advocating for environmental management, in addi- tion to the environmental contributions we are making externally based on the products that we have developed and with our partnerships, we believe that Toray Group’s investigate the merits and demerits of doing so business activities themselves should also be car- as we pursue ideal working styles. bon neutral. We will therefore focus our energies At research and development sites, the use of on various initiatives for this purpose, including AI and MI (materials informatics) has enhanced switching to zero-emissions electricity and fuel, productivity. Meanwhile, production sites also increasing the efficiency of existing production now employ big data analysis and have gained the processes, developing low-GHG emission manu- ability to discover those signs of problems that facturing technologies, developing recycling and were only recognizable by skilled workers in the bio-related technologies, and absorbing and recy- past. Yet, AI and MI do not produce anything from cling CO2, etc. Accelerating development of innovative technologies through digital technology Working styles have undergone significant scratch. Despite being able to discover signs of problems at an early stage, without knowledge of the workplace itself these discoveries will not rapidly lead to solutions. Even now that we are faced with restrictions on going to workplaces in person due to the COVID-19 pandemic, I still changes as a result of the COVID-19 pandemic. say that all solutions can ultimately be found in Just as teleworking reduced temporal and dis- the Genba (workplace). True digital transforma- tance related restrictions on work, it is also making tion (DX) relies on the skillful use of digital tools to routine tasks, primarily, more efficient. We there- further increase the level of work, but only when fore believe it will continue to remain entrenched based on an understanding of telework, as well as to some degree. From the perspective of commu- the rules and principles of the workplace. nication, however, we have also discovered lim- its to its potential. Although we have increased the rate of teleworking across the Group as a means of addressing COVID-19, we will closely Putting “People-centric Management” into practice globally Toray has passed down a culture of “people-cen- tric management” since our founding. Likewise, we recognize human resources as an important asset that is not listed on the balance sheet, and that fostering people directly connects to cor- porate value. This set of values befitting of a Japanese corporation is also accepted by Group companies outside of Japan. In the U.S.A., where short-term results are prioritized, where there is a deep-rooted belief that labor costs are variable rather than fixed, and where labor turnover is severe, Toray Plastics (America), Inc., has truly embodied Toray’s approach to “people-centric management.” Amid the Toray Industries, Inc.Integrated Annual Report 2021 15 functions to represent the executive officers as internal directors, and four outside directors with experience and expertise in a wide range of fields to thoroughly debate the direction of the Company, manage- ment policies, and medium- and long-term business plans. This in turn allows the Board to fully deliberate on important issues from a wide range of viewpoints starting from the investigation stage prior to pass- ing down resolutions, which helps lead to rapid COVID-19 pandemic, it seized upon the shift to decision-making. longer food shelf-life and enhanced production capacity for packaging films to adhere to sustain- able growth. When it operated as a manufacturer of video tape films in the past, the crushing wave Social contributions through the creation of new value In May 2020, we organized the “Toray-style of digitalization even brought it to the precipice of Management” passed down since our founding, life or death as a company at one point. Even so, it and announced the “Toray Philosophy” with our did not consider downsizing and instead success- corporate philosophy of “Contributing to society fully turned this crisis into an opportunity by pio- through the creation of new value with innovative neering the window glass protection film market ideas, technologies and products” at its top posi- using its technologies. It later made another stra- tion. In order for each employee to realize contribu- tegic shift in target applications, maintains a low tions to society through the creation of new value turnover rate, and has put “people-centric man- as part of their respective jobs, we hold deep con- agement” into practice, despite being a company versations at each group company and site, and based in the U.S.A. As such, it has since emerged repeatedly hold direct dialogue between execu- as a group member of which we are very proud. tives and employees. In this way, we seek to max- Enhancing the effectiveness of the Board of Directors During fiscal 2020, we also revised our gover- imize the value the Group delivers to society. In part due to the COVID-19 pandemic, we are currently in a state of global political, economic, and social chaos. Even so, Toray Group remains nance structure. The Board of Directors must committed to providing fundamental solutions evaluate the various risks that encompass our to global-scale problems through the creation of businesses from multiple standpoints in order innovative technologies and advanced materials, to fulfill its oversight and decision-making roles. and is determined to fulfill our increasingly import- Specifically, we believe it is important for the ant roles as a corporate entity worthy of society’s Board to fulfill its oversight function by discussing respect. For this reason, we ask that all of our beforehand the general direction of the Company, stakeholders grant us their continued understand- for example our approach to the long-term vision, ing and support. large-scale capital investments, and M&As, among others, and by verifying the execution sta- tus of major initiatives. As part of our reforms to the governance structure for fulfilling these oversight responsi- bilities, we appointed eight executive officers with responsibility for the major businesses and Akihiro Nikkaku President Toray Industries, Inc. Toray Industries, Inc.Integrated Annual Report 2021 THE TORAY GROUP SUSTAINABILITY VISION and MID- TO LONG-TERM STRATEGY In order to realize the four perspectives of the world envisioned in 2050 as clarified in the Toray Group Sustainability Vision, Toray Group, in May 2020, announced its Long-Term Corporate vision, TORAY VISION 2030 (VISION 2030) as a milestone, along with the Medium-Term Management program, Project AP-G 2022 (AP-G 2022), which defines issues to be addressed over the three-year Vision 16 period from fiscal 2020 to fiscal 2022. Toray Group Sustainability Vision Long-Term Corporate Vision TORAY VISION 2030 Medium-Term Management Program Project AP-G 2022 TORAY GROUP SUSTAINABILITY VISION Toray Group Sustainability Vision, formulated in change, water shortages, and resource deple- July 2018, clarifies the four perspectives of the tion. “We are convinced that Toray Group can world in 2050 that Toray Group aims to achieve, continue to grow without negatively impact- as well as the initiatives that must be taken in ing global sustainability. We will do our utmost order to realize them. More specifically, Toray to address global issues, including the goals of Group’s mission is to provide through innovative the Paris Agreement and the United Nations technologies and advanced materials the neces- Sustainable Development Goals (SDGs), while sary solutions to the challenges facing the world working closely with our business partners in terms of both development and sustainabil- worldwide.” This declaration forms the foun- ity, including the issues of an ever-increasing dation for VISION 2030 and indicates the future global population, aging populations, climate direction of the Group. The World as Envisioned in 2050 and Toray Group Initiatives Toray Group Initiatives Four Perspectives of the World as Envisioned in 2050 17 Green Innovation (GR) Businesses Accelerating measures to counter climate change A net zero emissions world, where greenhouse gas emissions are completely offset by absorption Toray Group’s innovative technologies and advanced materials Life Innovation (LI) Businesses Realizing sustainable, recycling-based use of resources and production A world where resources are sustainably managed Providing clean water and air A world with a restored natural environment, with clean water and air for everyone Contributing to better medical care and hygiene for people worldwide A world where everyone enjoys good health and hygiene CORPORATE GOVERNANCE SYSTEM TO REALIZE TORAY GROUP SUSTAINABILITY Three group-wide committees—the CSR achieving 2030 numerical targets. In addition, Committee, the Risk Management Committee, and together with deliberations on important policies the Safety, Health, and Environment Committee— and issues pertaining to climate change, it works have monitored, evaluated, and functioned to man- to coordinate with the CSR Committee, the Risk age global challenges, including climate change, at Management Committee, the Safety, Health, and Toray Group. However, in order to accelerate these Environment Committee, and the Technology existing initiatives, on April 1, 2021, Toray Group Committee, committees which deal with climate newly established the Sustainability Committee, change-related issues, to address items related chaired by the President. to climate change throughout Toray Group. The Sustainability Committee is responsi- The Board of Directors receives reports on ble for formulating the overall medium- to long- deliberations of each of the group-wide commit- term roadmap and action plan for realizing the tees one or more times per year, and conducts Sustainability Vision, while also comprehensively oversight and decision making. In the formula- managing deliberations and implementation tion of business strategy and management deci- issues, as well as activity progress concern- sions at the Board of Directors, these reports ing the annual activity plans for the three group- are considered to be an important element with wide projects (Green Innovation (GR) Project, regard to issues of climate change and are com- 18 Life Innovation (LI) Project, and the Challenge 30 prehensively deliberated and decided. Project) that guide the Group’s journey toward Board of Directors Management, Decision-making Reporting Sustainability Committee Chair : President • Draws up the overall roadmap for achieving the Sustainability Vision • Centrally manages the three group-wide projects • Responsible for overseeing the implementation of efforts to address climate change Cooperation Progress on the issues are managed in the three group-wide projects GR Project LI Project • Promote the expansion of GR businesses • Manage the progress of revenue from GR businesses, contribution to CO2 reduction, and water filtration through- put contribution • Promote the expansion of LI businesses • Manage the progress of revenue from LI businesses Challenge 30 Project • Manage the progress of reducing GHG emissions per unit of revenue and water usage per unit of revenue CSR Committee Risk Management Committee Safety, Health, and Environment Committee Technology Committee LONG-TERM CORPORATE VISION TORAY VISION 2030 Toray Group aims to achieve sound, sustainable management foundation” to enable investment growth while promoting a business model trans- for growth based on enhanced capital investment formation by accurately identifying changing efficiency and an improved financial structure. industrial trends brought about by demographic Under VISION 2030, Toray Group is promot- factors, environmental issues, and technologi- ing cross-segment initiatives to expand scale and cal innovation. With this in mind, Toray Group is improve revenues and profits in the GR business promoting active investment to promote “global and LI business. At the same time, the Group is expansion in growth business fields.” To make working on the Future Toray-2020s Project (FT this possible, the Group is working to maximize Project), a group-wide effort to focus resources in the value it can create over the medium- to long- major themes, both on a qualitative and quantita- term by “strengthening competitiveness” through tive basis, and accelerate the creation and develop- continuous business model innovations and ment of new business models, in order to achieve total cost reductions, and by “strengthening the total sales of around ¥1 trillion in the 2020s. Long-term strategies to achieve “sound, sustainable growth” 1. Global expansion in growth business fields • Promote GR businesses that help solve global environmental issues as well as resource and energy issues • Promote LI businesses that contribute to better medical care and longevity, foster public health, and sup- 19 port personal safety 2. Strengthening competitiveness • Create new value through business advancement and high added-value creation, thereby providing solutions with a materials-oriented approach to customers and society • Pursue dramatic cost reductions by setting challenging targets as well as strive to reduce environ- mental impact 3. Strengthening the management foundation • Improve cash flow and capital efficiency, and balance financial soundness and growth investment • Conduct business structure and organizational structure reforms of low-growth and low-profitabil- ity businesses FY 2030 Sustainability TargetsFY 2013 Actual (baseline year)(J-GAAP)FY 2030 Target (compared with FY 2013)(IFRS)GR Net sales / Revenue463.1 billion yen4 foldLI Net sales / Revenue119.6 billion yen6 foldAvoided CO2 emissions38.4 million tons8 foldContributed annual water filtration throughput27.23 million tons/day3 foldGreenhouse gas emissions per unit of sales in production activities3.37 thousand tons/billion yen30% reductionWater consumption per unit of sales in production activities152 thousand tons/billion yen30% reduction Progress Made with Medium-Term Management Program MEDIUM-TERM MANAGEMENT PROGRAM PROJECT AP-G 2022 20 Under the Medium-Term Management Program, Project AP-G 2022 (AP-G 2022), which covers the three-year period from fiscal 2020 to fiscal 2022, the three basic strategies “global expansion in growth business fields,” “strengthening com- petitiveness,” and “strengthening the man- agement foundation” were adopted toward the realization of the sound and sustainable growth, as mentioned in the Long-Term Corporate Vision, TORAY VISION 2030. Specifically, Toray Group is working to expand Green Innovation (GR) business, which will contribute to solving global environmental, resource and energy issues, and Life Innovation (LI) business, which will contrib- ute to better medical care, longevity, foster public health, and support personal safety. In addition, to ensure financial soundness, the Group is conduct- ing business operations with even more consider- ation than before of the balance between profit, cash flow, and asset efficiency, while promoting the business structure reform of low-growth and low-profitability businesses. Financial Targets (Billion yen) FY 2020 Actual FY 2021 Forecast FY 2022 Target Revenue 1,883.6 2,220.0 2,600.0 Core Operating Income Core Operating Margin ROE ROA 90.3 130.0 180.0 4.8% 5.9% 7% 3.9% about 7% about 9% 3.2% about 5% about 7% Free Cash Flow 113.7 Positive 120 billion yen or more (total of 3 years) D/E Ratio 0.79 Management in accordance with the guideline (around 0.8) around 0.8 (guideline) Dividend Payout Ratio 31% 28% about 30% 1 Basic Strategy Global expansion in growth business fields Utilizing Toray Group’s advanced materials and core technologies, under the strategy “global expan- sion in growth business fields” in AP-G 2022, Toray Group is working to drive GR and LI business expan- sion through promotion of group-wide projects. Green Innovation (GR) Business Expansion By allocating resources for capital investment and R&D in a focused manner and for large-scale themes, the Group is targeting revenue in the GR business in fiscal 2022 of ¥1 trillion. The large-scale themes include lightweight materials, biomass-de- rived materials, recycled materials, lithium-ion bat- tery separator films, large tow carbon fibers for wind turbine blade applications, water treatment mem- branes, and hydrogen- and fuel cell-related materi- als. In fiscal 2020, due to the impact of the COVID-19 pandemic, the energy-saving field that includes car- bon fibers for aircraft remained sluggish, and the revenue of the GR business decreased 13.2% from the previous fiscal year to ¥711.8 billion. However, revenue from carbon fibers for wind turbine blades, recycling and new energy fields remains strong, and the gross profit margin of the GR business is higher than the group average. In fiscal 2020, Toray developed and began mass production of advanced-grade TORAYFANTM, a highly thermal- and voltage-resistant, biaxially ori- ented polypropylene (OPP) film for use in capacitors for electric vehicles (xEVs). In the water treatment membrane business, the hollow fiber membrane-type ultrafiltration (UF) membrane HFUG-2020AN, which features the largest membrane surface area in the world, was selected for use in a large-scale wastewater treatment facility located in Wuxi, China, the full-scale operation of which began in June 2020. On sale since 2019, this UF membrane has been highly evaluated for its supe- rior operational stability and economic performance due to its compact offering, and its adoption has been expanded to a variety of applications, such as water purification, industrial water purification, and indus- trial wastewater recycling. To date, this membrane has been adopted in nine countries around the world. In addition, with Spain’s SP Group, Toray suc- ceeded in demonstrating the world’s first 100% VOC-free waterless, electron beam (EB) offset printing technology in the field of flexible packag- ing printing. Net Sales/Revenue from Life Innovation Businesses 300.0 275.6 223.2 24 20 24 20 Net Sales/Revenue from Life Innovation Businesses (Billion yen) Gross profit margin of Life Innovation Businesses (%) Group average gross profit margin (%) (FY) 2019 2020 2022 Target J-GAAP IFRS FY 2020 Revenue 275.6 Billion yen Breakdown by Business Field (%) Breakdown by Segment (%) 9 31 60 Supporting health maintenance and longevity Improving the quality of medical care, ease burdens on medical professionals Supporting personal safety 19 81 Advanced Materials in LI Business Pharmaceuticals & Medical Devices Net Sales/Revenue from Green Innovation Businesses 1,000.0 820.1 711.8 23 20 25 20 Net Sales/Revenue from Green Innovation Businesses (Billion yen) Gross profit margin of Green Innovation Businesses (%) Group average gross profit margin (%) (FY) 2019 2020 2022 Target J-GAAP IFRS FY 2020 Revenue 711.8 Billion yen Breakdown by Business Field (%) Breakdown by Segment (%) 1 2 6 10 17 15 48 Energy conservation New energy Water treatment Recycling Air purification Biomass-based 19 20 21 39 Fibers & Textiles Performance Chemicals Other Low environmental impact Carbon Fiber Composite Materials Net Sales/Revenue from Life Innovation Businesses 300.0 275.6 223.2 24 20 24 20 Net Sales/Revenue from Life Innovation Businesses (Billion yen) Gross profit margin of Life Innovation Businesses (%) Group average gross profit margin (%) (FY) 2019 J-GAAP 2020 2022 Target IFRS FY 2020 Revenue 275.6 Billion yen Breakdown by Segment (%) Breakdown by Business Field (%) 9 31 60 Supporting health maintenance and longevity Improving the quality of medical care, ease burdens on medical professionals Supporting personal safety 19 81 Advanced Materials in LI Business Pharmaceuticals & Medical Devices Net Sales/Revenue from Green Innovation Businesses 1,000.0 820.1 711.8 23 20 25 20 Net Sales/Revenue from Green Innovation Businesses (Billion yen) Gross profit margin of Green Innovation Businesses (%) Group average gross profit margin (%) (FY) 2019 J-GAAP 2020 2022 Target IFRS FY 2020 Revenue 711.8 Billion yen Breakdown by Business Field (%) Breakdown by Segment (%) 1 2 6 10 17 15 48 19 20 21 39 Energy conservation New energy Fibers & Textiles Performance Chemicals Low environmental impact Carbon Fiber Composite Materials Water treatment Recycling Air purification Biomass-based Other Life Innovation (LI) Business Expansion In addition to the ideas of supporting health main- tenance and longevity, as well as improving the quality of medical care and easing burdens on medical professionals, Toray Group has broadened the definition of Life Innovation to include prod- ucts for personal safety, in response to threats such as abnormal weather and natural disasters, as these appear to have been increasing in recent years. Moreover, by providing solutions that are unique to the Group—thanks to its expertise in materials—to a variety of health-related social issues, the Group aims to boost revenue in the LI business to ¥300 billion in fiscal 2022. In fiscal 2020, shipments of nonwoven fabrics for medical gowns and masks increased, and the addition of the “personal safety” area resulted in an increase in revenue of 23.5% compared with the previous fiscal year to ¥275.6 billion. The gross profit mar- gin is also higher than the group average. In fiscal 2020, Toray Group contributed to the prevention of the spread and the treat- infections by providing ment of COVID-19 TORAYMYXINTM extracorporeal hemoperfu- sion cartridge, single-use medical gowns, and nonwoven fabrics for masks. Based on requests from the Japanese government, the Group has put in place a domestic production system for medical gowns that can reliably deliver the required quan- tity to medical professionals in a short period of time. For nonwoven fabrics for masks, the Group made full use of its global production facilities and established a supply system five times the size of that prior to the COVID-19 pandemic. Developed as a new concept antibody drug that can be expected to be effective in many types of cancer, TRK-950 has been adminis- tered to more than 100 patients since the start of Phase I clinical trials which began in March 2017, in the U.S.A. and France. Toray has received no reports of safety issues to date*. * Not the final result Meanwhile, as a business development of the functional material hitoeTM, Toray has commer- cialized—in collaboration with NTT TechnoCross Corporation and Goldwin Inc.—a shirt-type sen- sor that can simultaneously measure heart rate, temperature, and humidity as part of a “heat countermeasure service” that detects signs of poor physical condition in hot environments. 21 22 New Business Creation To generate sources of earnings for the next growth stage under AP-G 2022, several large- scale themes were selected that can be expected to lead to the creation of one business domain in the 2020s and promoted under the Future TORAY-2020s Project (FT Project). Specifically, the aim is to create new busi- nesses and form a large-scale business domain by accelerating development and business model construction concerning themes geared toward the resolving of global environmental issues and realizing a safe, secure, healthy and long-lived society. These themes include: hydrogen- and fuel cell-related materials; biomass utilization products and processing technologies; environ- mentally-friendly printing solutions; hygiene and health-care products; and sensing device-related materials. For example, in biomass utilization products and processing technologies, the Company is developing applications for products obtained from a demonstration plant that produces cellu- losic sugar from the surplus bagasse generated at a sugar refinery. In environmentally-friendly printing solutions, Toray succeeded in giving a practical demonstration of 100% VOC-free water- less electron beam (EB) offset printing technol- ogy in the field of flexible packaging printing, a world first, and have launched a dedicated print- ing plate. 2 Basic Strategy Strengthening Competitiveness To strengthen competitiveness, the Group is work- ing on three priority issues: total cost reduction; business advancement and high added-value cre- ation; and enhancing workplace competency in sales & marketing and production. For total cost reduction, Total Cost Reduction Project (NTC Project) is promoted across the Group, and the target is to reduce ¥150 bil- lion over a three-year period through activi- ties to reduce variable and fixed costs and bring about innovation in production processes. In this regard, in fiscal 2020, variable costs were reduced by ¥32.4 billion, fixed costs by ¥31.7 billion, and production process inno- vations reduced costs by ¥3.3 billion, for a total reduction of ¥67.4 billion (progress rate of 45%). As for business advancement and high add- ed-value creation, the Group is working not only to achieve advancement in products but also to add high value by integrating and combining prod- ucts and services, to create new value through alliances, and to pursue innovation in the value chain by utilizing Information and Communication Technology (ICT). To enhance workplace com- petency in sales & marketing and produc- tion, the Group is devising ways to strengthen the global supply chain, especially for growth markets. To give an example, for the fibers, tex- tiles, and garments for apparel-use, with regard to the “integrated business from fibers and tex- tiles to garments” supply chain which is based on applications and end-customer needs, the Group is working on strengthening the supply chain in China, extending the supply chain in ASEAN countries, and establishing supply chains in South Asia, centered on India. 3 Basic Strategy Strengthening the Management Foundation In strengthening the management foundation, two themes are promoted: strengthening the financial structure by improving cash efficiency; and the business structure reform of low-growth and low-profitability businesses. With regard to strengthening the financial structure by improving cash effi- ciency, business operations will be carried out with a stronger awareness of cash flow, which is the certainty of a return on investment, toward “sound, sustainable growth.” Excluding M&A, the target is to generate more than ¥ 120 billion in free cash flow during the period covered by AP-G 2022. In fiscal 2020, the business environment was harsh due to the impact of the COVID-19 pandemic, but free cash flow expanded to ¥113.7 billion. In addition, the D/E ratio was 0.79, which was below the guideline set at around 0.8. In the case of the business structure reform of low-growth and low-profitability busi- nesses, structural reform of the polyester/cotton blended textile (T/C) business is underway in the fibers and textiles business. Specifically, in response to the irreversible decrease in demand for business shirts due to the COVID-19 pandemic, the decision to close the spin- ning mills of Penfabric Sdn. Berhad was taken in June 2020. In light of this situation, coop- eration within the Group is further strength- ened, in areas such as the supply of greige (textiles before dyeing and post-processing), and expansion into areas such as workwear, casual wear, and anti-epidemic applications are also promoted. In addition, in the domestic tex- tile subsidiaries, Toray Group is working as one to reform the business structure centered on withdrawing from low-profitability businesses and shifting to highly profitable businesses in response to the gradual decline in domestic tex- tile demand. Based on plans to cut aircraft pro- duction that were triggered by the COVID-19 pandemic, a carbon fiber composite materials subsidiary in the U.S.A. optimized its workforce and recorded impairment losses, while the sur- plus equipment of the Group are being used for production of carbon fiber for other applications. Initiatives for Sustainability With regard to sustainability targets, the growth in the revenue of the GR business has temporarily slowed down due to the impact of the COVID-19 pandemic, but the revenue of the LI business is steadily increas- ing. In addition, the avoided CO2 emissions and the contributed annual water filtration throughput are steadily expanding. In addition to promoting the recy- cling of raw materials, biotechnology, the utilization of renewable energy, and the reuse of water resources, Toray is aiming to realize a circular economy by con- tributing to the development of hydrogen production (water electrolysis), hydrogen infrastructure (compres- sion and storage), and hydrogen utilization (fuel cell) technologies that enable carbon neutrality. This will be achieved through the development, manufacture and sale of materials for water electrolysis, hydrogen com- pression, and fuel cells, such as polymer electrolyte membrane (PEM) and electrode base materials. Sustainability Targets FY 2013 Actual (baseline year) (J-GAAP) FY 2020 Actual (compared with FY 2013) (IFRS) FY 2022 Target (compared with FY 2013) (IFRS) FY 2030 Target (compared with FY 2013) (IFRS) 23 GR Net sales / Revenue 463.1 billion yen LI Net sales / Revenue 119.6 billion yen 711.8 billion yen (1.5 fold) 1,000.0 billion yen (2.2 fold) 275.6 billion yen (2.3 fold) 300.0 billion yen (2.5 fold) Avoided CO2 emissions 38.4 million tons 6.4 fold Contributed Annual water filtration throughput 27.23 million tons/day Greenhouse gas emissions per unit of sales in production activities 3.37 thousand tons/billion yen Water consumption per unit of sales in production activities 152 thousand tons/billion yen 2.0 fold 2.90 thousand tons/billion yen (14% reduction) 125.2 thousand tons/billion yen (18% reduction) 5.3 fold 2.4 fold 20% reduction 30% reduction 25% reduction 30% reduction 4 fold 6 fold 8 fold 3 fold 24 Financial Strategy Message from Corporate Vice President, Finance & Controller’s Division Masahiko Okamoto Member of the Board Corporate Vice President, Finance & Controller’s Division Strive to strengthen financial structure by improving capital efficiency while pursuing investment for future growth Basic Policies of the Financial Strategy The basic policies of Toray’s financial strategy are to both expand its businesses and strengthen its financial structure. Under the Medium-Term Man- agement Program, Project AP-G 2022 (AP-G 2022), Toray plans to allocate a total of ¥500 billion in capital expenditures and ¥220 bil- lion in R&D expenditures over a three-year period in order to pur- sue global business expansion in growth business fields cen- tered on the Green Innovation (GR) Business and Life Innovation (LI) Business. On the other hand, to strengthen its financial struc- ture, the Company aims to gener- ate more than ¥120 billion in free cash flow over a three-year period and has set an even stricter D/E ratio guideline of around 0.8 to enhance its financial discipline. Measures to Strengthen Financial Structure 1. Enhance Cash Flow Management In order to improve cash flow company-wide, the Company introduced a system to manage free cash flow for each division in fiscal 2020, in which each division autonomously manages cash inflows from revenue and core operating income as well as cash outflows for capital expenditures and changes in working capital such as inventories. In addition, the Company continues to implement the “3C-i (Cash Conversion Cycle Improvement) Activity” in order to reduce working capital. Return on Capital Investment 2. Increase Certainty of Working Capital and CCC (Cash Conversion Cycle) (Billion yen) 800 600 400 200 0 (Days) 120 115 110 105 0 (FY) 2017 2018 2019 2020 J-GAAP IFRS Inventories (left) Net receivables and payables (left) CCC (right) Toray engages in economic evaluation of capital investment plans by setting and checking invest- ment profitability standards (hurdle rates) able to reach ROA and ROE targets. After the projects are implemented, the Company conducts regu- lar follow-ups, and it discusses how to make up for underperforming projects and then implements countermeasures. In addition, Toray has reviewed its capital invest- ment management and operation methods since fiscal 2020 based on an analysis that the main rea- sons why past capital investments have not gen- erated returns as planned were the occurrence of unexpected risks and not sufficiently responding to the risks that actually materialized. The Company identifies risks from every angle, starting from the Cash Flows (Billion yen) 300 200 100 0 -100 -200 -300 (Billion yen) 1,500 1,200 900 600 300 0 (FY) 2017 2018 2019 2020 J-GAAP IFRS Cash flows from operating activities Cash flows from investing activities ( M&A) Free cash flow Interest-bearing Liabilities, Owner’s Equity and Debt/equity Ratio (D/E Ratio) 1.0 0.8 0.6 0.4 0.2 0 (FY) 2017 2018 2019 2020 J-GAAP IFRS Interest-bearing liabilities (left) Owner's Equity (left) Debt/equity ratio (right) conceptual stage of a capital investment, and thoroughly manages risks from the execution of the proposed plan to the recovery of investment to ensure that the planned return on invested capital is secured. 3. Business Structure Reform of Low-Growth, Low-Profitability Businesses To improve company-wide profitability and capital efficiency, Toray has introduced return on invested capital (ROIC) as a profitability indicator for screening low-growth and low-profitability businesses. The Company calculates ROIC for each business and product, and for businesses and products where ROIC is below the cost of capital and growth poten- tial is low, the Executive Committee discusses how to improve profit- ability and growth potential through restructuring and implements mea- sures to restore the original profit- ability of the business. 25 Cash Flows and Balance Sheets Free cash flow for fiscal 2020 was ¥113.7 bil- lion (up ¥18.3 billion year-on-year), securing a high level of cash flow. Although core operat- ing income decreased to ¥90.3 billion (down ¥35.3 billion year-on-year), cash flows provided by operating activities came to ¥211.6 billion (down ¥26.7 billion year-on-year) due to efforts to strengthen working capital management through 3C-i activities. In addition, net cash used in investing activities amounted to ¥97.9 billion (a decrease of ¥45.0 billion year-on-year), since while Toray made the necessary capital invest- ments for growth based on strict project selec- tion, it sold assets no longer worth holding. For fiscal 2021, Toray expects to maintain positive free cash flow by working to increase core oper- ating income and thoroughly managing working capital and capital expenditures. The D/E ratio for fiscal 2020 was 0.79, a decrease of 0.10 from the previous fiscal year due to an increase in owner’s equity and a decrease in interest-bearing liabilities, which is in line with the guideline of around 0.8. Shareholder Returns Toray considers the appropriate distribution of profits to shareholders to be an important man- agement issue, and its basic policy is to pay appropriate dividends by comprehensively taking into account business earnings trends, financial structure, and the securing of retained earnings necessary for future growth. Under AP-G 2022, Toray aims to continuously hike dividends, target- ing a dividend payout ratio of about 30%. Cash Flows (Billion yen) 300 200 100 0 -100 -200 -300 (FY) 2017 2018 2019 2020 J-GAAP IFRS Cash flows from operating activities Cash flows from investing activities ( M&A) Free cash flow Interest-bearing Liabilities, Owner’s Equity and Debt/equity Ratio (D/E Ratio) (Billion yen) 1,500 1.0 1,200 900 600 300 0 0.8 0.6 0.4 0.2 0 (FY) 2017 2018 2019 2020 J-GAAP IFRS Interest-bearing liabilities (left) Owner's Equity (left) Debt/equity ratio (right) Working Capital and CCC (Cash Conversion Cycle) (Billion yen) 800 600 400 200 0 (Days) 120 115 110 105 0 (FY) 2017 2018 2019 2020 J-GAAP IFRS Inventories (left) Net receivables and payables (left) CCC (right) The Toray Group Value Creation Process R&D E ngaging in R&D to cre t hrough technologic ate n e w al in n o v m a r k e t s Fibers & Textiles Life Science a t i o n g technological e strengths din a r g p u y b s n o d i w - p u o r g i t a c i l g n i s p u Performance Chemicals Environment & Engineering p a t c u d n o i t a v o n n i o r p g n i liz a e R Production Carbon Fiber Composite Materials Me e t s t o u i n g c u b o r a ain h g m er needs by buildin n d o ptim al supply c s t a Sales & Marketing Innovation through Co-creation Customers Proposal Needs A net zero emissions world, where greenhouse gas emissions are completely offset by absorption A world where resources are sustainably managed Providing New Value to Society Four Perspectives of the World as Envisioned in 2050 Toray Group Sustainability Vision A world with a restored natural environment, with clean water and air for everyone A world where everyone enjoys good health and hygiene Value that we cherish as management core value Contributing to society through business activities People-centric management Management from a long-term perspective 26 CorporatePhilosophyValue Creation g technological e strengths din a r g p u y b s n o i t a c i l d i w - p u o r g g n i s p u p a t c u d n o i t a o r p v o n n i g n i liz a e R al in n o v m a r k e t s a t i o n Sales & Marketing ain h g m er needs by buildin n d o ptim al supply c R&D E ngaging in R&D to cre t hrough technologic ate n e w Fibers & Textiles Life Science Performance Chemicals Environment & Engineering Carbon Fiber Composite Materials Production i n g c Me e t s t o u s t a u b o r a Value that we cherish as management core value Contributing to society through business activities People-centric management Management from a long-term perspective Proposal A net zero emissions world, where greenhouse gas emissions are completely offset by absorption A world where resources are sustainably managed Innovation through Co-creation Customers Providing New Value to Society Four Perspectives of the World as Envisioned in 2050 Toray Group Sustainability Vision Needs s h o w n A n e x a m f r o m p l e t o h f e t h n e e x T A world with a restored natural environment, with clean water and air for everyone A world where everyone enjoys good health and hygiene t o r p a a y g e G r o o n w u p v a r d s. alu e creation process is 27 CorporatePhilosophyUnder TORAY VISION 2030, we will continue to provide new value in society through mutual cooperation in R&D, sales and marketing, and production, the key strengths of Toray Group, based on the core values of “contributing to society through business activi-ties,” “management from a long-term perspective,” and “people-centric management.” At the same time, we will focus on fostering co-creation with our customers and supply chain partners, starting at the materials stage. In this way we will contribute to the realization of the four perspectives of the world as outlined in the Toray Group Sustainability Vision. STORIES OF THE CREATION OF NEW VALUE WITH INNOVATIVE IDEAS, TECHNOLOGIES, AND PRODUCTS RO MEMBRANES Structure of RO membrane Prevents salt penetration Separation layer Crosslinked aromatic polyamide 200nm Polysulfone supporting layer 45µm Polyester nonwoven fabric 100µm RO membrane sheet 200nm Surface micro-structure of RO membrane RO element RO unit HISTORIES OF TORAY’S RO BUSINESS EXPANSION AND R&D R&D started in the U.S.A. and at Toray In 1960, following a speech by J.F. Kennedy, the U.S.A. promoted a desalination project using Reverse Osmosis membranes (RO membranes) as a national project, and developed Cellulose Acetate membranes (CA membranes). Toray began research on RO membranes in 1968 and has been developing RO membrane technologies, expanding its business for over 50 years, and introducing numerous RO membranes to the world. Basic research, establishment of fundamental technologies and start of production The history of Toray’s RO membrane business can be divided into two periods: the emergence period from the start of research until around 2000, and the global business expansion period after 2006. In the emergence period, Toray conducted R&D of membrane itself and developed manufacturing technologies, such as the assembly of membrane elements . In 1980, Toray started CA membrane production in Shiga, Japan, and in 1985, a full- scale RO production plant for polyamide compos- ite membranes was completed in Ehime, Japan. With the completion of the Ehime Plant, RO membranes for brackish water desalination were commercialized and sales were started. Although CA membranes had been shipped for the original purpose of seawater desalination for small seawater desalination systems for remote islands in Japan, the demand was still small. The market for brackish desalination and wastewater treatment had not yet grown sufficiently, and the business situation remained severe. Continuation of business with RO membranes for ultra-pure water production process and start of the seawater desalination business In the 1980s, the semiconductor industry had grown into a huge market, leading the growth of the Japanese industrial sector, and RO mem- branes were used for the production of ultra-pure water used in semiconductor manufacturing. However, as the semiconductor manufacturing hub shifted to the Republic of Korea and China, Toray decided on full-scale entry to the seawa- ter desalination membrane, which was its original intention. In 1991, Toray commercialized polyamide com- posite membranes for seawater desalination and received an order for membranes for the Okinawa seawater desalination Plant (40,000 m3/day), the larg- est plant in Japan at the time. However, the demand for seawater desalination were small in Japan, where water was basically in plenty, and Toray decided to enter the overseas market in earnest. 28 Value Creation Process 1 ENTERING THE GLOBAL MARKET AND ESTABLISHING THE GLOBAL SALES TEAM (GST) SYSTEM Entering the U.S.A. market and Organizing the Global Sales Team (GST) In 2000, Toray Membrane America, Inc. (TMA) was established as a joint venture with IONICS (an engineering company that was later acquired by GE) in the U.S.A., which was the world’s larg- est RO membrane market at the time. TMA began producing RO elements by importing seawater desalination RO membranes produced in Ehime and started sales of those elements. TMA supplied membranes to the Trinidad and Tobago Seawater Desalination Plant which was the biggest in the western hemisphere in 2002, and the Sulaibia Wastewater Treatment Plant in Kuwait which was the largest in the world, in 2005. Later, TMA was dissolved and Toray Membrane USA, Inc. (TMUS) was established as a wholly owned subsidiary of Toray. From TMUS, Toray Group established pro- duction, sales and Marketig, and development bases in various regions around the world, and during this time, Toray formed the basic concept for expanding its water treatment business. Specifically, • The quality of the feed water for water treatment (seawater, river water, etc.) differs from country to country and region to region, and the require- ments for water treatment also differ. In order to grasp the needs of customers accurately, local sales representatives who are familiar with the local situation are necessary. • In many cases, global giant water business com- panies and construction companies execute water treatment projects of large-scale seawater desalination in the world, so in order to respond to global business schemes such as borderless inquiries and procurement, it is necessary to have sales offices around the world and a global coordination system for each office. • In addition, in order to reflect market trends and customer needs in products and services, it is necessary to have local development, produc- tion, and sales bases. Based on this principle the GST was organized by inviting the finest people in the water treatment industry to each sales base as managers and hiring people with local sales experience. The decision to make a full entry into the global market and the establishment of the GST system enabled Toray to directly grasp the actual situa- tion of the market and customers, and it became a source of accelerating the creation of new value for the Company, which had previously conducted sales and marketing in overseas only through trad- ing companies or distributors. Interview The reason for the establishment of TMUS and the situation at the time Tatsuya Tamura, General Manager of RO Membrane Product Dept. (MC) In this discussion, we have Mr. Steven Cappos and Mr. Kwak Soon-chul, who have been with us since the beginning of the GST. First, we would like to hear from Mr. Cappos, who was the plant manager when TMUS was established in 2006 and is currently the presi- dent of TMUS, about the situation at the time of the company’s launch and the key points of sales in the Americas since then. Steven Cappos, President of TMUS When TMUS was established, experts of the RO membrane industry not only from the U.S.A. but also from around the world gathered. All of them knew the characteristics of the RO market in the U.S.A. and the needs of cus- tomers, and due to their experience, they were able to move around the U.S.A. to contribute to the sales expansion of TMUS. The U.S.A. has a wide range of applications for RO membranes and is the world’s leading RO membrane mar- ket in terms of both business and technology, so we quickly captured the needs of the market and 29 communicated them to GST members around the world. For example, we have captured the needs of membranes for boiler pure water for industrial use, and for food industry and drinking water, and utilized them in the development of TMUS’s own products. In addition, the market for brackish RO membranes for industrial water is quite large in the U.S.A., and we formulated a business strat- egy for brackish RO that is different from that for large-scale seawater projects, and we have been constantly competing with large-scale competi- tors. Since the early stage of the launch of GST, we have accurately grasped the market informa- tion and have taken several measures, which have led to our current business expansion. Sales by GST: Winning the Shuaibah project MC One of the purposes of forming the GST was to win large projects through global collab- oration. I would like to ask Mr. Kwak, who was mainly in charge of winning large seawater proj- ects, about the situation and strategy at that time. Kwak-Soon Chul, President of Toray Asia Pte. Ltd. (TAS) In those days, I was mainly in charge of acquiring orders of large-scale projects. Since Toray was a new player in the RO membrane mar- ket for large-scale projects at the time, our primary target was emerging engineering companies that did not have strong relation to existing membrane manufacturers. One of the first successful exam- ples of a large-scale project was the Shuaibah proj- ect in Kingdom of Saudi Arabia (KSA). In this project, concerned parties were scat- tered around the world, as the operating com- pany and the commission company were located in KSA, the investor was in KSA, the plant con- struction company was in the Republic of Korea, the plant design company was in the U.S.A., and the consultant was in Dubai, in the United Arab Emirates (UAE). In order to deal with this, each party worked together to negotiate and win the order. For example, TMUS handled the U.S.A., Toray HQ handled Republic of Korea, and TMEu handled KSA and Dubai in UAE. Since we were able to negotiate closely in each region, we were able to conduct sales activities by grasping the needs of customers in each area. Entering the Singapore Market MC Mr. Kwak, after winning the Shuaibah proj- ect, you moved to Singapore as the President of TAS in 2008, and now you are the GST Chairman. Could you tell us about the status of project acquisition in Singapore at the time? Kwak Singapore is an island nation where water is limited, and it depends on Malaysia for most of its water supply, so securing water is important for its national security. For this reason, Singapore has been actively promoting seawater desalina- tion and reuse of wastewater (NEWater), in order to promote self-sufficiency of water resources. Since around 2006, GST has been working to win orders for RO membranes for large-scale plants to be constructed in Singapore, which we have tar- geted as our most important region for the RO membrane business. At that time, Singapore was aiming to become a global water technology hub and was trying to research and incorporate water treatment technologies from around the world, so we collaborated with a local university and estab- lished Toray Singapore Water Research Center (TSWRC) as a new water treatment research base for the Group. We also developed sales activities to win orders for large-scale projects by utilizing the GST network around the world, and the knowl- edge we gained from winning the Shuaibah proj- ect was very useful. Entering the Chinese market, establishing JV MC In China, which is currently the world’s larg- est market for RO membranes, Toray BlueStar Membrane Co., Ltd. (TBMC) was established as a joint venture with ChemChina in 2009, and started production and sales activities in 2010. Mr. Gao, who has been a GST member since TBMC’s establishment, as well as Chairman and President of Toray Industries (China) Co., Ltd., will talk about the situation at the time of TBMC’s establishment and its subsequent sales activities. 30 Gao Zhiwen, Director of the Board & Vice President, Toray Industries (China) Co., Ltd. (TCH) TBMC was established as a joint venture in accordance with Toray’s policy for establishing overseas production bases: the existence of a mar- ket, the availability of raw materials, the presence of governmental support from both countries, and the presence of a strong local partner, etc. As you know, China has its own culture and rules. Unless you understand them well, you cannot capture the needs of local market and customers. When TBMC was established, sales leader with foreign nationality started to develop the Chinese market, but couldn’t achieve satisfactory results because the person did not understand the market characteristics. In 2015, I was entrusted as the leader of the sales team. Based on the management up until that point, we gradually expanded our business by conducting sales and technical service activities by the Chinese peo- ple who were very familiar with the Chinese culture and market, and who have a good network of con- tacts, thus gaining the trust of customers. Sales Volume of Toray RO Membranes Based on Cumulative Water Production Rate and History of Expansion of the Water Treatment Business (Water volume conversion cumulative out load: million m3/day) 80 2nd production base in China established Started Operation of the Ehime RO Membrane Production Plant TMME established TARC established TBMC established/TSWRC established Acquired the Shuaibah Seawater RO Membrane Order TMUS established/GST organized/ TAS established Trinidad and Tobago Desalination Plant Begins Operation Okinawa Desalination Plant Begins Operation 60 40 20 0 (FY) 85 90 Pure water production 00 95 Brackish water desalination 05 10 15 20 Seawater desalination Wastewater reclamation Cumulative water supply of 91,400,000 m3/day: equivalent to 8% of the world’s population, or 640 million people (as of March 31, 2021) Value Creation Process 2 DEVELOPMENT OF NEW TECHNOLOGIES AND PRODUCTS THAT MEET THE NEEDS Interview Development of high boron removal membrane for seawater desalination MC By interacting directly with customers, GST has been able to accurately capture the different needs of each country, region and customer, and based on this information, R&D and technical departments have been able to develop new products, and in particular, there have been many cases of dramatic improvements in technology and product value. Mr. Cappos, could you give us examples of this? Cappos I would like to mention the development of technology to improve boron removal performance. In 2006, in accordance with WHO’s Boron Guidelines, the tightening of its regulation value had a major impact on the operation and management of water utilities around the world and on the designs of plant manufacturers. In addition, the actual boron concentration setting values are determined by each country where the plant is installed, and the required removal performance varies from country to country. In order to respond to these changes, it was important for the GST to work closely with each region, government and users. The GST shared this information, as well as information on the market trends of each country and region, and collaborated with HQ to set targets for membrane development and consider how to respond to each project. MC Due to tightening boron regulations, improve- ment of boron removal performance was required, and the technical department was subjected to quite challenging demands at the time. Let’s hear about the difficulties from the General Manager of the Global Environment Research Laboratory and the General Manager of the membrane tech- nical department, who were in charge of techno- logical development. Kozo Takahashi, General Manager of Global Environment Research Laboratories The performance requirements for RO 31 membranes have always been high rejection rates, high permeability (low operating pressure), high durability, maintaining water quality of desalination process, and developing materials for low cost, but regulations are becoming stricter as issues of envi- ronmental sustainability, pollution prevention, and health maintenance become important issues. For example, in the case of seawater desalina- tion, the WHO’s regulation on boron concentration has become stricter due to the problems of repro- ductive abnormalities and withering of citrus plants caused by boron. Seawater contains around 5 ppm of boron. Since the water produced by newly constructed desali- nation plants must comply with these regulations (0.5~1.0 ppm or below), higher boron removal per- formance was required for RO membranes. Since boron has a small atomic diameter, RO mem- branes, which are based on filtration separation by size, are required to have smaller and uniform pore size. In order to develop such a new RO membrane, it is necessary to measure the pore size of the mem- brane, but there was no way to measure the pore size of organic matter at the sub-nanometer level. Therefore, in collaboration with Toray Research Center (TRC), a subsidiary of Toray that has one of the world’s leading analytical technologies, we investigated a method to measure the pore size distribution of RO membranes using Positron Annihilation Lifetime Spectroscopy (PALS), and developed a technology to measure the membrane pore size (the size of the pores in the membrane) at the nanometer level. The measurement results were correlated with the boron removal rate, and the required pore size of the RO membrane was determined, and finally a high boron removal RO membrane was obtained on a bench scale. Correlation between Boron Removal Ratio and Pore Diameter* of Membrane 100 98 96 94 92 90 88 86 ) % ( l a v o m e r n o r o B 0.4 0.5 0.6 Pore diameter (nm) 0.7 0.8 *Pore size is measured by PALS (Positron Annihilation Lifetime Spectroscopy). Takao Sasaki, General Manager of Membrane Technical Department Specifications of final products are defined and mass production technology is estab- lished at the Membrane Technical Department. The specifications for the high boron removal membrane were clarified at the Global Environment Research Laboratories, and the target RO membrane was obtained on a bench scale. Taking over this technol- ogy, the Membrane Technical Department started to study the production conditions for the actual pro- duction machine. In order to control the pore size and obtain uniformity of membranes, we analyzed the factors of membrane production conditions, and after repeated prototyping and evaluation, we finally developed the target product. We followed up on the operation of the prototype RO membrane in an actual plant, confirmed its initial performance stabil- ity and durability, and launched it as a new product. MC The technology obtained through this devel- opment was not only for the development of high boron removal RO membranes, but also for the uniformity of pore size control of the entire RO membrane, which greatly improved our sub- sequent research and new product development capabilities. This has been the driving force behind the expansion of our global market share to more than 60% of seawater RO membranes. Development of highly durable brackish water desalination membrane (Tough Membrane) MC The development, production, and sales of RO membranes for seawater desalination, which require state-of-the-art high performance, has been the concept since the start of the business, but the demand for large-scale seawater desali- nation plant construction fluctuates greatly from year to year depending on the global economic situation. In order to realize a stable expansion of business, it was necessary to focus on the area of RO membranes for brackish water applications, where the market is large and the needs are sta- ble. The market share of brackish RO membranes has expanded to the point where it is now com- peting for the top share in the world market, but please tell us about the events that triggered this expansion, Mr. Gao. 32 Gao The RO membrane market in China has grown to be the largest in the world, and is a market in which membrane manufacturers around the world are competing. At that time, our two competitors were competing for the top share. Toray established a new local JV company, TBMC, and started full- scale sales of brackish RO membranes, but faced major problems in around 2011. The customer’s plant experienced a number of troubles that caused the water quality to drop within a relatively short period of time after the start of operation. We investigated the plant, but couldn’t find the cause. The HQ investiga- tion concluded that it was probably an operational error where chlorine came into contact with the RO membrane during operation. We replaced elements, but the situation did not improve, and rumors spread that Toray RO was not durable enough, and TBMC was facing a critical situation. So we asked HQ to conduct a thorough investigation again. Masahide Taniguchi, General Manager of Water Treatment Technical Department At the time, brackish RO membranes were sold all over the world. We obtained the degraded RO membranes from the customer and investigated them. As a result, we found that the degradation of performance was due to oxidation of the membrane surface, and we thought that the oxi- dation was caused by chlorine contact due to opera- tional errors by the operator. In response to repeated requests for investiga- tion from TBMC, we dispatched a technical service team from HQ to the customer in China. As a result of thorough investigation, including parallel opera- tion with another company’s RO membranes, we found that there was an issue with our membranes when chemical cleaning method was used. This cleaning method, at the time, was becoming main- stream in China. TBMC immediately asked the customers who were experiencing problems to improve their chemi- cal cleaning methods and started development at the Global Environment Research Laboratory to enhance the durability of the membrane against chemicals. ect structure with sales and marketing, techni- cal, and research departments becoming as one. Membrane performance is affected by the minor constituents in the raw water, so in order to deter- mine the durability of the membrane, we repeatedly conducted durability tests using various proto- type membranes with different formulations and using Chinese water at Toray Advanced Materials Research Laboratories (China) Co., Ltd. (TARC), our research base in China. As a result of promoting the development of highly durable RO membranes as a project team, we were able to develop a brack- ish RO membrane that is more durable than com- petitors and launch it into the market. Sasaki These internal relevant departments ana- lyzed the phenomenon, researched new products, and improved operational technology, while the Membrane Technical Department established man- ufacturing technology of new products. Gao By quickly reporting requests from users to the R&D team, conducting joint evaluation and cause investigation by the Global Environment Research Laboratories and TARC, and develop- ing technology to enhance durability based on the findings, we were able to develop a brackish RO membrane with strong chemical durability that sur- passed that of competitors. We named this product “Tough Membrane” and launched it, which rapidly expanded sales and led to a large increase in mar- ket share in China. Cappos The sales volume of Tough Membranes greatly expanded not only in China where perfor- mance of RO membrane easily deteriorated, but also in the U.S.A. and Europe, where there were no occurrences of such deterioration, and they grew to become a representative product of Toray Brackish RO membranes. In addition, Toray developed and launched a series of new products (Tough Series) that added new values to Tough Membrane, such as high productivity, energy saving, and low fouling, and became a driving force for Toray to compete for the world’s top share in brackish RO. Takahashi We started development to enhance the chemical durabilities (oxidation tolerance) of brackish RO membranes by establishing a proj- Kwak The GST learned a lot from the develop- ment of the Tough Membrane as well. The Tough 33 Membrane eventually became a very easy to use RO membrane for our customers due to its enhanced chemical tolerance. We came to realize through this case is the fact that customers don’t say anything does not mean they are satisfied, but they just think this product is the way it is. By mate- rializing such hidden problems and needs, we were able to improve customer satisfaction. I recognized that it is very important for GST and technical ser- vice teams to work together to uncover the hidden needs of customers. MC GST receives a complaint, and the technical service team conducts various investigations and tests at the customer’s plant to determine the cause of the performance degradation problem, which is then passed on to R&D. Then, in the process of evaluating and analyzing the developed mem- brane at the customer’s plant in collaboration with GST, the customer and the technical service team, we gained the customer’s trust by responding to various information and questions from the cus- tomer, and as a result, though it looks troublesome at a glance, we were able to smoothly proceed with the development of the Tough Membrane. Taniguchi In order improve customer satisfaction with GST members at each base, currently, we have placed technical service teams at GST loca- tions around the world and organized them as Global Technical Service Team (GTST) under the control of HQ to strengthen our capabilities. The role of the GTST team is to design RO membranes for large-scale seawater desalination projects and reuse of sewage wastewater, start-up and sup- port operation of plant, investigate the causes of customer complaints and defects, identify prod- uct weaknesses and provide feedback to the R&D department, and evaluate the performance of new products. Regarding the RO membrane plant, in par- ticular, as our business expands, the number of new requests including energy conservation, complaints and requests for cooperation from customers has also increased. Our company develops and sells high-performance membrane products, but we believe that it is important to get deeply involved with our customers in terms of usage rules and oper- ational technology to let them handle the product perfectly. By cooperating and communicating with our customers, we can understand their true needs that even they are not aware of, and give an advice and make a proposal to them. Reflecting the knowl- edge acquired in new development themes, and “create new value” in cooperation with our custom- ers. Taking advantage of GTST which is the strong point of our water treatment business, I would like to further strengthen such an initiative. About the value chain in the company MC In terms of value creation in the RO busi- ness, which is the main objective of the round- table discussion, Toray Group’s value chain has also made a significant contribution. Toray pro- vides cutting-edge materials all over the world, and advanced materials such as tricot made from Toray’s nonwoven polyester fabric Toray AXTERTM Global Expansion of Water Treatment Business 1. Identify customer needs and propose solutions through our global sales and technical service network 2. Development of new products that match customer needs through our global R&D system 3. Reliable supply of high quality products by global production network TMEu (Switzerland) TMSP (Spain) TBMC・TMFC・ TWMT (China) TMME (Saudi Arabia) TAK (Republic of Korea) TORAY TARC (China) TSWRC (Singapore) TAS (Singapore) TMUS (USA) Major sales base Sales office Agency Production base Research center 34 Sales & Marketing Technical service Value Creation Cycle Production R&D and Toray TETORONTM are also used in key compo- nents that affect the performance and production cost of RO membranes. In addition, TRC, a wholly owned subsidiary of Toray, possesses one of the world’s leading analytical facilities and technolo- gies, which are essential for analyzing the used products, as well as for developing new products and technologies that pursue the ultimate limits of recent years. And for RO production facilities, the Engineering Division, a group of professionals in equipment development and design, works together with the technology development department of the Water Treatment Division to develop, design, con- struct, and maintain the facilities. The engineering department contributes to the realization of highly competitive production facilities that include not only product performance and production capac- ity, but also ease of operation and maintainability of the facilities. Sasaki Functional polymer is used as a base mate- rial for RO membranes, and it helps to maintain the strength and durability of RO membranes and RO elements. When RO membranes were first devel- oped in the U.S.A., taffeta, which is used for yacht sails, was used as the base material, but today, staple nonwoven fabrics (paper-formed nonwoven fabrics) are the mainstream. As a manufacturer of fibers and textiles materi- als, Toray supplied fibers used as raw materials for taffeta and nonwoven fabrics, but in order to meet the needs for enhanced pressure resistance due to the high-pressure operation of RO membranes in the desalination of high-temperature, high-concen- tration seawater in the Middle East, Toray worked on the development of base materials. The key point in developing the technology to use the filament nonwoven fabric AXTERTM, which is overwhelmingly superior in terms of strength and cost to the staple nonwoven fabric that is the industry standard, was the technology to equal- ize the thickness across the entire membrane sur- face (longitudinal and width directions) so that the chemical solution applied on the substrate would not leak. Toray’s technology development depart- ments of fibers and textiles and nonwoven fabrics, the Global Environment Research Laboratories, 35 the Membrane Technology Department and worked together to develop AXTERTM, a filament nonwoven fabric that can be used as a base mate- rial for RO membranes, through repeated facility modifications and trial evaluations, and were able to significantly strengthen the competitiveness of seawater RO membranes. MC Toray’s sales organization (GST), which grasps information on markets and customers and responds closely to them, and its technical service organization (GTST), which digs deeper into the activities of the GST from a technical perspective and identifies essential issues, have been creating new value by analyzing issues that have been obtained and by the technology development department, which creates new technologies and products, in cooperation with the internal value chain. Thanks to the accumulation of such value cre- ation, sales of RO membranes have expanded steadily, and in recent years, with the successive acquisition of large-scale seawater projects by Toray Membrane Middle East LLC (TMME) in the Middle East region, we have acquired a global market share of more than 60% for seawater RO membranes, and have expanded our business to compete for the top share in the world for brackish RO membranes. Let’s further strengthen these efforts and con- tinue to create new value, aiming to ensure world’s top share in RO during the current Medium-Term Management Program, AP-G 2022, as well as exceed 50% of world’s market share which is the target of the Long-Term Corporate Vision, VISION 2030, so that we can realize our determination of “providing safe, secure, and affordable water to people suffering from water shortages around the world” at a higher level. Sales of RO Element for Industrial Use (FY 2013 is set to an index of 100） 600 500 400 300 200 100 0 (FY) 2013 2016 2019 2022 Target VISION 2030 Brackish water Ultrapure water Wastewater reclamation Seawater Initiatives for Global Environmental Issues TOWARD ACHIEVING CARBON NEUTRALITY BY 2050 Toray Group is working to expand the Green society as a whole. Also, the expansion of these Innovation (GR) Business, which has been GR businesses will be returned to Toray Group engaged so far in renewable energy, hydrogen, as sustainable energy and raw materials to and materials related to electrification, and to reduce GHG emissions. In addition, the Group develop products that help absorb greenhouse will promote further reduction of GHG emis- gases (GHGs), such as CO2 separation mem- sions through innovative processes and carbon branes, in an effort to make a contribution to recycling technologies, aiming to become car- reducing GHG emissions throughout society bon neutral in its business operations in 2050. and in achieving carbon neutrality by 2050 for Increase the contribution to GHG reduction through GR Businesses Introduction of GHG reduction technologies in business operations Support the advancement of carbon-neutral tech- nologies in the GR Business, including renew- able energy, hydrogen, and materials related to electrification. Reduce total emissions through the use of sus- tainable energy and raw materials, innovative processes, carbon recycling technologies, etc. Return from GR businesses 36 Contribution to reduction GR Businesses • Commercial brand “& +TM,” utilizing used polyester (PET) bottles • Carbon fiber for compressed vessels • Carbon fiber for wind turbine blades • Battery separator- film for lithium-ion batteries Contribution to GR businesses i i s n o s s m e G H G e d w - y t e c o S i i i i s n o s s m e G H G s ’ p u o r G y a r o T • Maximize the use of zero emission electricity and fuel • Increase the efficiency of existing production processes • Develop innovative low GHG emission manufacturing technologies • Develop and maximize the use of recycling and biotechnology • Challenge for carbon recycling and CO2 absorption Contribution to absorption • CO2 separation membrane Present 2050 Present 2050 Return from GR businesses Contributing to the realization of a carbon-neutral society Aiming to become carbon neutral in the company’s business operations TCFD INITIATIVES Impact Analysis of Climate Change Upon announcing its support for the TCFD recommen- dations in May 2019, Toray Group took the opportunity to identify opportunities and risks related to climate change, which are both difficult to predict and uncer- tain. To determine how the opportunities and risks could impact Toray Group, a scenario analysis was conducted as per the TCFD recommendations. The Paris Agreement target is to limit global warm- ing to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels. Looking to help achieve this tar- get and build a decarbonized society, Toray Group pri- marily analyzed the 1.5°C increase scenario, but also considered the 2°C increase scenario. The Group also looked at the 4°C increase sce- nario assuming insufficient progress on efforts to ameliorate global climate change. The Toray Group Sustainability Vision outlines the KPIs for fiscal 2030 as interim targets toward the world it envisions for 2050. Accordingly, the scenario analysis covered the period from 2030 to 2050. Toray Group also broadly summarized the impacts of climate change on the Group and conducted analysis empha- sizing markets that are thought to have a particularly significant impact on the Group. These markets are synthetic fibers for apparel, electric vehicles, aircraft, wind power generation, lithium-ion batteries, next-gen- eration batteries, fuel cells, and water treatment. Results of Opportunity Analysis There are significant opportunities for businesses that mitigate climate change, focusing on GR businesses. There is a possibility that the business opportunities will increase as efforts to address climate change con- tinue to advance. There are also significant business opportunities related to adapting to climate change in segments such as water treatment. While there are significant opportunities in the scenario where efforts to address climate change make insufficient progress (world with a 4°C increase), there are expected to be ample business opportunities in the scenarios where progress is made on efforts to address climate change (world with a 1.5°C or 2°C increase). Furthermore, there are expected to be business opportunities for adapting to climate change in Life Innovation (LI) busi- nesses in segments such as infectious disease protec- tion garments. Results of Risk Analysis For the climate change risks, there is a particularly significant risk of carbon tax burdens and restrictions on GHG emissions. The carbon tax burden in the sce- nario where progress is made on efforts to address climate change was found to be around US$800 mil- lion (equivalent to approximately 85 billion yen).* Furthermore, Toray Group is engaged in a wide range of businesses worldwide and there is a possibility that some operating bases will be significantly impacted by water intake restrictions. Therefore, water usage restrictions were determined to be a significant risk. * Calculated by multiplying the fiscal 2019 GHG emissions (5.75 million tons-CO2) by the estimated carbon tax (US$140 per ton) under the 1.5°C and 2°C scenarios. 37 Main opportunities, risks, and responses related to climate change (excerpts*1) *1 Excerpts from Toray Group TCFD Report 2021 Social change Main risks, opportunities Responses by Toray Group Magnitude of opportunity, risk*2 1.5°C 2°C 4°C Increase in ratio of renewable energy Opportunities • Growth of renewable energy- related business • Growth of storage battery- related business • Carbon fiber for wind turbine blades • Battery separator film GR large Establishment and raising of carbon taxes and GHG emissions reduction targets Risks • Increased electricity costs • Energy conservation initiatives large Opportunities • Growth of energy conservation-related business • Lightweight materials GR • Insulating and heat shielding products • Functional garments LI large Risks • Carbon tax burden, increased procurement costs for fossil- based raw materials and fuels • Reduce GHG emissions large GR : GR products LI : LI products *2 The magnitude of the impact was assessed to be large, moderate or small. Where the magnitude of the impact on a given item varies according to the climate scenario, the gradient indicates the particular sce- nario where the impact is greater. TOWARD REALIZATION OF A CIRCULAR ECONOMY In addition to recycling of plastic products and using bio-based raw materials, and other carbon recycling technologies, Toray creates technologies designed to reuse water generated during manufacturing pro- cesses, technologies that utilize renewable energy and surplus power to enable hydrogen production, and technologies that utilize hydrogen. Development of these and other similar technologies is aimed at helping to achieve a circular economy and to reduce CO2 emissions as a result. In terms of recycling, Toray developed and released &+™, a recycled fiber made from used poly- ester (PET) bottles as a raw material. In addition, we more recently developed a new technology to strip various types of coating materials and resins from the surface of used PET films and a new technology to remove foreign matter during each manufacturing process. Toray released EcouseTM series of environ- mentally-friendly PET films made from raw materials recovered and recycled using these technologies. In addition to reducing fossil-based raw materials and waste plastic, this series of environmentally-friendly PET films is expected to decrease CO2 emissions by up to 50% compared to existing products. Along with developing materials made from plant-derived raw materials and applying mem- brane-integrated biotechnology to efficiently produce raw materials from biomass, Toray is also engaged in creating CO2 recovery technologies using gas sep- aration membranes. Based on an all-carbon material with a two-ply structure consisting of a hollow porous carbon fiber layer and a separation layer, Toray devel- oped a new separation membrane that combines a CO2 separation function with high durability. We envi- sion this membrane being deployed and put into prac- tical application for natural gas and biogas purification, as well as for hydrogen production and purification, and exhaust gas CO2 separation. 38 Contribute to initiatives including biomass plastics, recycling, promoting of enewable energy and the use of hydrogen, and water reuse Raw material Production, Use Recycling within operating processes, etc. Fossil resources Membrane- integrated biotechnology Biomass Toray materials (fibers & textiles, resins, films) Reuse Use of plant-derived raw materials (bio-PET, nylon raw material, etc.) Raw material Pellets Used plastics Waste Nylon fiber products PET (fibers & textiles, films), ABS resins Chemical recycling Material recycling Emission gas CO2 Gas separation membrane Thermal recycling Toray’s technologies related to energy and water that supports a circular economy Toray’s technologies, products Electric power from renewable energy Hydrogen from renewable energy Water treatment TOWARD REALIZATION OF DECARBONIZED HYDROGEN SOCIETY Hydrogen is considered a clean, next-generation energy that does not emit CO2 during the usage stage. Toray conducts R&D for various materials and technologies used in each phase of hydrogen produc- tion, transport, storage, and use in an effort to help achieve a carbon-free hydrogen society. For example, carbon paper (CP) and gas diffusion layers (GDL), both products made from Toray carbon fibers, are used in the cell stacks for the fuel cells that function as the heart of fuel cell vehicles. Similarly, high-strength carbon fibers and plastic tank liners that leverage the cutting-edge technologies Toray has accu- mulated in the aerospace field are incorporated into the high-pressure hydrogen tanks used to store hydrogen. The Group’s Germany-based subsidiary Greenerity is engaged in the R&D, production, and sale of the catalyst coated membranes (CCM) and membrane electrode assemblies (MEA) used for fuel cells and water electrolysis. Greenerity is currently the world’s largest supplier of CCM. In 2022, a second plant is scheduled to begin operations and will primarily sup- ply CCM and MEA for the fuel cells used in commer- cial vehicles and passenger cars, as well as for the water electrolyzers required to produce green hydro- gen, both of which are expected to see growth in demand throughout the world. In regard to reducing the costs of green hydro- gen as the greatest challenge in achieving a hydrogen society, Toray is collaborating with partner corpora- tions in Japan and abroad to develop and demonstrate a polymer electrolyte membrane (PEM) water elec- trolysis technology using our proprietary hydrocarbon (HC) type PEM. As part of the “P2G (Power-to-Gas) System Technology Development Project,” Toray worked with Hitachi Zosen Corporation to develop Japan’s first megawatt class PEM water electrolyzer. This project was commissioned by the New Energy and Industrial Technology Development Organization (NEDO) in partnership with Yamanashi Prefecture and Tokyo Electric Power Company Holdings, Inc., to produce green hydrogen using power from renew- able energy. The water electrolyzer that resulted from this project has been demonstrated to produce twice the volume of hydrogen as other technologies using conventional fluorine membranes with the same volt- age area. In April 2021, the project began delivering green hydrogen to factories and super markets in Yamanashi Prefecture. Having been selected as eligible for funding from NEDO under the Green Innovation Funding Project, in September, Toray formed the consortium Yamanashi Hydrogen Energy Society (H2-YES) with Yamanashi Prefecture and Tokyo Electric Power Company Holdings, Inc., and began a project involved in energy demand conversion and usage technology development based on a large-scale P2G system. In order to further expand upon the achievements of green hydrogen demon- strated thus far, the Project is planning to develop and implement a large-scale 16-megawatt class PEM water electrolyzer using Toray’s polymer electrolyte mem- brane, as well as demonstrate the potential to convert heat demand to carbon-free options, over the five-year period from fiscal 2021 to 2025. At the same time, in September, Toray also entered into a memorandum of understanding regarding the building of a Strategic Partnership with Siemens Energy AG. This partnership is intended to help achieve a carbon neutral society through the creation of hydrogen technologies leveraging innovative PEM water hydrolysis. Going forward, the partnership will provide optimum solutions to customers in countries and regions around the world by leveraging the hydro- gen and fuel cell related technologies and businesses owned and operated by both companies, as well as their global networks, in aims of capturing the global market, which is expected to expand dramatically. Likewise, the two companies will jointly advance the introduction and expansion of green hydrogen pro- duced using renewable energy and the deployment of a strategic global business. Promote R&D of various products for the realization of decarbonized hydrogen society Production Transportation, Storage Use Renewable Energy Wind power, Solar power, etc • Carbon fiber for wind turbine blades Electrolyzer Hydrogen • Polymer electrolyte membrane • CCM • CP • GDL • MEA Toray’s technologies, products Hydrogen compressor • Polymer electrolyte membrane • CCM • MEA Hydrogen gas station Hydrogen gas tank • Carbon fiber for tanks • Plastic liner CCM : Catalyst Coated Membrane CP: Carbon Paper GDL : Gas Diffusion Layer MEA : Membrane Electrode Assembly Hydrogen Industrial applications (heat generation, steel manufacturing, oil refineries) Fuel cell vehicles, buses, trucks, ships, airplanes • Polymer electrolyte membrane • CCM • MEA • • CP • GDL • Carbon fiber for tanks • Plastic liner 39 STATUS OF ENVIRONMENTAL MANAGEMENT INITIATIVES For detailed environmental data, please refer to the CSR Report on our website. https://www.toray.com/global/sustainability/download/ Promoting Life Cycle Management In addressing global environmental issues, it is vital to consider the entire life cycle of products and services in order to reduce environmental impact while also delivering improved economic and social value. In this respect, Toray Group practices life cycle manage- ment (LCM). LCM is the basis for Green Innovation (GR) products, and the Group has adopted life cycle assessment*1 and the Toray Eco-Efficiency Analysis (T-E2A)*2 tool and is working to establish LCM as a tool to measure CO2 reduction in the entire life cycle of products and services. Those products that are able to demonstrate objective evidence of providing an effective solution for global environmental issues are certified as GR products, only after the products are subjected to a two-stage screening process by the divisional committees and the group-wide Green Innovation Certification Committee. *1 Life cycle assessment is a method for quantitatively assessing the resources that have gone into a product and the impact the product will have on the environment and ecosystems over its life cycle. *2 T-E2A is an environmental analysis tool developed by Toray Industries, Inc. It produces a map of multiple products plotted along the axes of environmental impact and economic performance, enabling users to select the most environmentally-friendly and economical products. 40 Fifth Medium-Term Environmental Plan Target Environmental Accounting Toray has been practicing environmental account- ing since 1999, to track investments and gauge their cost effectiveness. In fiscal 2020, the Company’s environmental facility investment amounted to 1.52 billion yen, up 0.21 billion yen compared to the previous fiscal year. Environmental preserva- tion costs totaled 7.56 billion yen, up 0.43 billion yen compared to the previous fiscal year. Fifth Medium-Term Environmental Plan Toray Group implemented its Fifth Medium-Term Environmental Plan, which runs from fiscal 2016 to 2020. For the purpose of further reducing its environ- mental impact, Toray Group raised the following targets under the Toray Group Sustainability Vision in July 2018. • Toray Group: Achieve a 30% reduction of green- house gas emissions per unit of revenue by fis- cal 2030, compared with the fiscal 2013 level. • Toray Industries and plants in Japan: Achieve a 7% reduction in the absolute volume of green- house emissions by fiscal 2030, compared with the fiscal 2013 level. Since fiscal 2020, Toray Group has continued its efforts to reduce greenhouse gas emissions in aims of achieving the targets outlined in the Toray Group Sustainability Vision. In regard to reducing atmo- spheric VOC emissions and waste recycling, Toray Group is also taking action based on the numeric tar- gets outlined in the CSR Roadmap. Area Toray Group fiscal 2020 target Curb global warming Management of chemical substances Waste reduction Maintain greenhouse gas emissions at least 15% below the fiscal 1990 level (Toray Industries, Inc.) 15% or greater reduction in greenhouse gas emissions per unit of revenue compared to fiscal 1990 (Toray Group in Japan) Atmospheric emissions of PRTR Law-Specified substances: Maintain at least 70% below the fiscal 2000 level (Toray Group) Atmospheric emissions of volatile organic compounds (VOCs): Maintain at least 70% below the fiscal 2000 level (Toray Group) Fiscal 2020 results 35.0% reduction 29.7% reduction 69.7% reduction 73.8% reduction Zero emissions goal: Achieve at 45 or more Toray Group plants Achieved at 48 plants Simply disposed waste rate: 22.5% or lower (Toray Group) Recycling rate: Maintain at 86% or more (Toray Group) Landfill waste rate: 1.3% or lower (Toray Group in Japan) 20.8% 86.2% 2.4% For detailed environmental data, please refer to the CSR Report on our website. https://www.toray.com/global/sustainability/download/ Greenhouse Gas Emission Reduction Initiatives Toray has systematically worked to reduce green- house gas emissions, with the goal of maintaining greenhouse gas emissions at least 15% lower than the fiscal 1990 level by fiscal 2020. In fiscal 2020, the Company’s CO2 emissions decreased by 188,000 tons-CO2 year-on-year. Greenhouse gas emissions were down 10.9% year-on-year at 1.66 million tons-CO2, which was 35.0% below the fiscal 1990 level, continuing to meet the target. Toray and its group companies in Japan are addressing climate change under a goal of reduc- ing emissions by 15% on a per-unit-of-revenue basis by fiscal 2020 compared to the fiscal 1990 level. Greenhouse gas emissions for Toray and its group companies in Japan were down 10.4% in fiscal 2020 compared to the previous fiscal year. Although green- house gas emissions per unit of revenue rose by 3.1 points, emissions declined 29.7% below the baseline year. In addition, greenhouse gas emissions for Toray Group as a whole in fiscal 2020 declined 13.7% to 4.97 million tons-CO2 due to lower production vol- umes coinciding with the COVID-19 pandemic and to the achievements of initiatives purposed to reduce greenhouse gas emissions. On a per-unit-of-reve- nue basis, the Group achieved a 13.7% reduction compared with fiscal 2013 as the baseline year established in the Sustainability Vision and CSR Roadmap 2022. Moving forward, despite higher pro- duction volumes projected due to business growth, the Group will work to reduce per-unit energy con- sumption* by 2% annually at all manufacturing com- panies and plants operated by Toray Group, and will endeavor to reduce greenhouse gas emissions throughout the Group in an effort to achieve the reduction targets for fiscal 2030 as outlined in the Sustainability Vision. * Energy consumption per converted production volume Installing Renewable Energy Systems Toray Group is systematically installing renewable energy systems. The Group installed a solar power generation system at Toray Sakai Weaving & Dyeing (Nantong) Co., Ltd., in fiscal 2019, and at Toray Plastics Precision (Zhongshan) Ltd., in fiscal 2020. Both systems are currently in operation. In addi- tion, Toray Tokai Plant began co-combusting sludge fuel, which is carbon neutral, as boiler fuel from fis- cal 2017. Energy Conservation Measures Toray is vigorously working on energy conservation activities with the goal of reducing its per-unit energy consumption by 2% annually. In fiscal 2020, the Company’s energy consumption was down 9.3% year-on-year due mainly to a decrease in production volumes that resulted primarily from the COVID-19 pandemic. Meanwhile, its per-unit energy consump- tion deteriorated 4.6% as the ratio of fixed energy, which does not contribute to production, increased, due to lower production volumes. Biodiversity Initiatives Toray Group views conservation of biodiversity as a critical global environmental issue that is of equal importance to reducing greenhouse gas emissions. As one of its biodiversity conservation initiatives, the Group deploys and applies a set of rules formulated in fiscal 2015 for checking impact on biodiversity to all products. In particular, the Group views palm oil as a raw material that should be followed with priority given the growing amount of interest focused on the risk of its environmental impact. Over the three-year period from fiscal 2020 to 2022, the Group will inves- tigate whether each of its products uses certified raw materials and advance the switch to alternative mate- rials. In fiscal 2020, the Group investigated whether certified raw materials were used in regard to raw materials made from palm oil, and completed its investigation of 93% of relevant suppliers, although some suppliers did not respond. Going forward, the Group will continue to investigate those suppliers who did not respond, and determine the possibility of switching each raw material to a certified raw mate- rial, and advance this transition. 41 42 Advanced Business Management by Utilizing Digital Technologies The Group-wide Effort to Promote Digital Transformation A key focus in AP-G 2022 is promoting advancements in management through digi- tal transformation (DX), which will strengthen competitiveness and transform business through the effective use of data and digital technologies. In order to facilitate reviews and discussions regarding group-wide efforts to promote DX, Toray established the Toray Digital Transformation (TDX) Promotion Committee, chaired by the President, and under that the Technology Center DX Promotion Committee and the Business Division DX Promotion Committee. The Company is advancing the group-wide TDX Promotion Project in addition to conventional departmental initiatives. The Technology Center DX Promotion Committee streamlines R&D activities by leveraging material design prior to trials, rely- ing on simulations to shed light on the true nature of materials and informatics for pre- dictive design. It also works to enhance qual- ity and productivity through the utilization of AI-based automation, among other efforts. The Business Division DX Promotion Committee is engaged in operations with themes that can be applied horizontally, serving as leading examples across the Group, such as improving the sophistication and efficiency of global supply chain management (SCM), intro- duction of a customer relationship manage- ment (CRM) system to visualize the information communicated with customers, and marketing automation (MA)-driven digital marketing. In addition, the Information Systems Division is working to build out IT infrastructure and strengthen information security in support of global business expansion. Toray Digital Transformation (TDX) Promotion Committee Technology Center DX Promotion Committee Business Division DX Promotion Committee Drive advancement and streamlining by leverag- Visualize global management information in sales ing digital technology in research and technologi- & marketing, finance & accounting, and purchas- cal development(R&D), and production ing & logistics, and advance business management The Strengthening and Development of Digital Human Resources Based on its policy of “improving the digital skills of personnel with a good grasp of Genba (workplace) operations,” the Company’s DX program will immediately train dozens of experts with digital expertise and at least 100 key personnel who can utilize digital technol- ogy to proactively promote business, as well as research and technological development. These key people, being personnel engaged in research and technological development, as well as being active in on-site production activ- ities, will be educated in digital operations, by means including on-the-job training. To that end Toray has established in-house training pro- grams to develop such digital personnel, and are also actively pursuing the recruitment of personnel who possess an exceptional affinity with digital initiatives. Examples of DX Initiatives Advancement and Streamlining by Leveraging Digital Technology Example of Simulation The Company has successfully accomplished the highly accurate calculation of contact angles, which are the macro- scopic properties of polymer surfaces, by using microscopic molecular simulations. The results Toray achieved have been spotlighted as the cover story in a prestigious chemistry jour- nal in the U.S.A., and following that, received the 2020 CSJ Award for Technical Development from the Chemical Society of Japan. This has also been highly evaluated academically. Example of Informatics To design resin materials for automobiles, Toray built a model that uses machine learning to simulta- neously predict two types of characteristic values, searched for the optimal composition ratio utilizing inverse analysis, and discovered a new composi- tion that exceeds conventional limits. The product that resulted satisfies the characteristics required by automobile manufacturers and its adoption has been finalized. Characteristic value prediction scheme Chemical structure Process Composition ratio Higher order structure or Intermediate properties Prediction model Characteristic value Inverse analysis (optimal composition ratio exploration) Example of inverse analysis and prototype results 43 Exceeding conventional limits discovery of new composition Customer evaluation clear Decision to adopt for automotive parts application G o o p r o p e d p rtie h y s sic al 2 e u a v l y t r e p o r P past data area Past prototype results Prototype results with new composition Property value 1 Issue Defect detection camera Improving Production Sites (Enhancing Quality and Productivity) Example of AI Utilization Defect detectors are used in a variety of applica- tions, leveraging the ability to inspect products that are being transported. On the other hand, in line with the rising quality requirements of customers, it has become necessary to set stricter judgment criteria to prevent non-standard products from drifting outside of processes. As a result, there have been cases where defects that would nor- mally pass the testing process were determined to not meet specifications (over-detection). In the past, this was remedied by having such over-de- tected products be visually re-inspected to deter- mine whether they passed or failed. As a solution to this problem, by having AI learn the details of qualified products, it became possi- ble to determine a pass or fail grade for over-detec- tion while the product was being conveyed, which greatly improved efficiency. In this way, by apply- ing AI to various product inspections, Toray can realize improved productivity. Transportation n o i t c e t e d - r e v o Solution Defect NG NG OK Extract over-detected images Extract over-detected products The camera judgment is strictly set to prevent leakage. Over-detected products are visually rescued. Scrap disposal Defect Pass inspection Pass Visual inspection AI detects over-detection by inspection equipment and eliminates the visual inspection process. Scrap disposal Defect AI Pass inspection Pass AI inspection (inline) Application of AI to reduce the re-inspection process and achieve significant efficiency improvements 44 Human Resources Management Commitment to Human Rights We at Toray Group believe respect for human rights is a mandatory management principle for ensuring the con- tinuity of corporate activities and building positive rela- tionships with all of the Group’s stakeholders. Working to promote and raise awareness of human rights, the Group also has declared its commitment to the respect of human rights in its Corporate Guiding Principles and Ethics & 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 place- ment, treatment, training, and retirement. The Ethics & Compliance Code of Conduct also explic- itly states that sexual, maternity, and power harass- ment in the workplace shall not be tolerated. In addition, Toray has established a system for preventing and deal- ing with harassment in the workplace in its “Guidelines for Preventing Harassment in the Workplace,” which is thoroughly conveyed to all executives and employ- ees. The Group has also been tackling the issue of discrimination based on gender identification and sex- ual orientation. In January 2017, the Group established a dedicated hotline for LGBT (sexual minority) issues, Nijiiro Consultation Service. In addition, as a global enterprise, the Group respects international norms such as the Universal Declaration of Human Rights, the International Labor Organization’s conventions, and the UN Guiding Principles on Business and Human Rights. The Group has also established the Toray Group Policy for Human Rights, which lays out the Group’s commitment to ensuring that it is not com- plicit in any human rights violations in the overall supply chain, which includes not only itself, but also suppliers and contract processing destinations, and to promptly and appropriately addressing issues if and when they arise. In addition, Toray respects human rights upon pur- chase of raw materials, and makes sure that the pur- chase is in accordance with its CSR Procurement Guidelines and that there is no forced labor, slave labor, or unfair low-wage labor upon production. In the event it has tentative confirmation that there are any problems, Toray’s policy is to immediately suspend transactions. Identifying, Assessing, and Preventing Human Rights Risk Toray Group conducts surveys related to aware- ness, education, and other human rights promo- tion activities once per year at all offices and plants, major group companies in Japan, and overseas subsid- iaries and affiliated companies. 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 prob- lematic points, as well as points of concern, and inves- tigates and implements initiatives in accordance with the human rights promotion framework. Moreover, the Group has designed systems that enable group employ- ees 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. Implementation of Human Rights Training In order to promote a correct understanding and aware- ness of human rights, Toray conducts an annual human rights awareness campaign, and at each office and plant, the Company holds training sessions for person- nel in charge of operations and managers, as well as study sessions that utilize workplace meetings, in order to raise the human rights awareness of each and every employee. In fiscal 2020, remote training was provided to each office and plant in conjunction with the human rights awareness campaign. In addition, in March 2021, the Company held an annual e-learning program on corporate ethics and legal compliance, specifically on human rights, for all executives and employees (including temporary, part-time, and dispatched employ- ees), with 6,849 participants attending. Securing and Developing Human Resources Based on on-the-job training, Toray systematically imple- ments specialized training by grade and business field, and through personnel systems such as rotations and assessments, seeks to develop professional human resources who can perform globally. Toray also makes efforts to expand and raise the level of key personnel who are ready to put their strong capabilities to use in taking action on the frontlines, and strengthens their skills as future management candidates who can lead the next generation. The Company also dispatch person- nel to the world’s top universities and public institutions where they endeavor to acquire the foremost knowl- edge and techniques in various fields and to conduct joint research. In fiscal 2020, to prevent the spread of COVID-19, many internal training programs were cancelled, as was the dispatch of personnel to domestic and overseas uni- versities and public institutions, while participation in training and academic conferences was limited to those that were held online. As a result, the training expen- ditures per employee in fiscal 2020 was ¥36,092, com- pared to ¥96,821 in the previous fiscal year. On the other hand, as part of its efforts to secure employment at its production plants where production fell due to the worsening of market conditions, Toray provided education and training for approximately 2,200 personnel involved in production to improve var- ious skills that will be useful when production volume recovers. Toray Industries, Inc.Integrated Annual Report 2021 45 Initiatives for Career Development Utilizing New HR Information System Toray has introduced its “career sheet” as a human resources development tool to promote employee growth. By using the career sheet, employees reflect on their own past work experience and the level of skills required in their field, and in-depth career-focused dis- cussions take place between supervisors and their sub- ordinates. In fiscal 2020, 23% of employees had made use of the career sheet, exceeding the target of 20%. Systematically Securing, Developing and Promoting National Staff Outside Japan One of Toray Group’s management issues is to sys- tematically secure, train, and promote national staff at its affiliated companies outside Japan, and the Group is actively promoting them to the management level of each company. In addition, in fiscal 2020, two core per- sonnel from overseas affiliates were appointed as Toray’s Vice Presidents, and three as Toray’s direc- tors (a position equivalent to a senior management in terms of duties and responsibilities), and these execu- tives are participating in Toray Group management. Promoting Diversity Toray Group is endeavoring to promote diversity toward the creation of 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 Toray has long advanced the creation of workplace envi- ronments in which women will feel comfortable in per- forming their duties. The number of female employees in upper-level positions has increased steadily, and as of April 2021, women held 9.8% of unit manager or higher positions, and 5.6% of section manager or higher positions. In addition, in June 2015, Toray appointed its first female director (a position equivalent to a senior management in terms of duties and responsibil- ities). As of March 2021, there was one female director. In March 2021, the Company formulated and announced a five-year action plan (April 2021 to March 2026) with the aim of increasing the retention rate of female employees and the ratio of female employees in management positions. The targets set in this action plan are as follows. • Raise the ratio of female managers from the fiscal 2020 level of 5.1% to 6.5%. • For employees who have been with the Company for up to 10 years, the ratio of female to male employ- ees who continue to be employed shall be 1.0 for each human resources management category. Hiring Diverse Human Resources 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. In promoting globalization, Toray has been hiring regardless of nationality since 1998, and has hired 112 foreign nationals as full-time employ- ees by fiscal 2020. The Company is actively recruit- ing non-Japanese employees, mainly international students to Japan, as well as Japanese students who have graduated from overseas universities. Each of these hires is playing an active role by utilizing his/her outstanding abilities and individuality. Employment of Persons with Disabilities Toray Group hires and employs persons with disabilities, from those with physical challenges to persons with intellectual and mental challenges. The Group is making workplace improvements to remove physical barriers for persons with handicaps as well as instituting safety mea- sures. Additionally, the Group provides comprehensive training upon work placement and gathers feedback from persons with disabilities to make workplace improve- ments. Further, Toray meets Japan’s legal minimum of 2.2% persons with disabilities, as do 62.5% of Toray group companies in Japan. Group companies actively seek to hire persons with disabilities through public orga- nizations and job placement agencies. However, some individual group companies do not meet the mandated legal requirement due to hiring difficulties. Creating a Positive Workplace for Employees 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 life- style options for both men and women. In particular, the systems Toray provides for childcare, family care, and maternity protection exceed the legally mandated min- imums 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. From fiscal 2020, the Company is introducing an hourly annual paid leave system that allows employees to take hourly leave, an interoffice interval system, and hourly nursing and care leave. Employee Health Toray views employee health management as a man- agement priority, and thus actively implements mea- sures that encourage employee health, including sharing health information via in-house communica- tion tools, holding participatory events that utilize health related information sites, and organizing awareness seminars for the prevention of lifestyle-related diseases. Toray is also addressing mental health, and has been independently implementing employee stress check- ups through an external provider. Toray uses the results of these checkups in helping employees to recognize their own stress levels, supporting approaches to deal- ing with stress, and improving the workplace environ- ment. In recognition of these efforts, Toray has received consecutive Health and Productivity Management Organization certification. Toray Industries, Inc.Integrated Annual Report 2021 46 How to Inspire Team Spirit Mike Brandmeier President & CEO, Toray Plastics (America) Inc. Tell us about your leadership philosophy, which How does your leadership vision tie in with the helped you win a regional Strategic Leadership “Toray way” of business and innovation to build Award. How does it help you build successful solutions for humanity? And how do you impart teams focused on a common goal while also fos- a sense of being part of the wider Toray Group? tering individual talent? A former president of our largest client gave an inspi- There are many kinds of leadership style. Mine is rational speech on what he called “servant leader- to consult and to guide. Certainly, Toray’s success ship”. The corporation exists to serve society, not the in building great teams depends on hiring the best other way around. It’s a message I took to heart. people, but that’s only the beginning of the story. To To be a successful leader, you have to move inspire the best from the best, a leader must give his beyond the straight management-by-objectives teams a creative stake in their work and control over approach. Don’t misunderstand me; at Toray we’re their outcomes. That requires a lot of trust. It means goal-focused and our success hinges upon our meet- trusting your people to work things out and make the ing objectives. To meet targets, however, you have right calls. As the leader, I have to be the coach who to inspire people, make them believe that the team’s listens carefully, who creates an environment that objectives are truly important. By working together fosters success, and who then praises his people for as one, we achieve goals for the good of society. what they’ve accomplished. That’s the Toray way. Another core value is “safety first,” which is An excellent example of how the Toray spirit has especially important during these challenging times. flourished at Toray Plastics (America), or TPA, is We’re a manufacturing company, and we greatly found in our story. TPA was established in 1985 and value high output. What I tell my team, though, is not for the first ten years it was a manufacturing exten- at the sacrifice of safety. If something’s wrong, don’t sion of Toray Industries. That meant 100% of prod- run a broken process. Take a step back. Ask, “What ucts were designed in Japan and manufactured in do we need to do to fix the equipment or adjust the the U.S. Jump ahead to 2021, and 80% of what we environment so that no one on the team is injured?” produce is designed, developed and commercialized Our commitment to safety extends to our local com- based on our U.S. R&D team’s efforts. We’re proud of munities in the U.S. and to the global society, as well. that achievement, but it could never have happened without the support of our parent company. Investing heavily in R&D with the goal of contributing to soci- ety is in Toray’s genetic make-up, and it is what makes Toray Group, and TPA, the preferred partner of choice among our largest customers. We are a dynamic orga- nization that has entrusted its teams with creative responsibility, inspired by the common goal of work- ing for the benefit of humanity and the planet. Toray Industries, Inc.Integrated Annual Report 2021 47 Your team is focused on the R&D of eco-friendly contribute to society position us to tackle this com- plastics, and yet within the pursuit of that goal plex problem and be the innovator of new sustain- resides a paradox: the development of sustain- able products that we believe can have a positive able solutions may require the consumption of impact on the world in which we live. more resources than are affordable or even avail- able. How does TPA forge collaborative strate- In leading a firm with a Japanese parent com- gies for renewable innovation? pany, how do you in Rhode Island and Toray Industries in Japan foster team spirit across cul- It’s true that we face huge challenges across the tures that can be quite different? materials industry. According to recent research, the world needs as much as a tenfold improvement in I’m an admirer of President Theodore Roosevelt and the eco-efficiency of resources and materials by 2050 in particular his speech “Citizenship in a Republic.” so that an estimated population of nine billion will be It offers a message that transcends East and West able to live comfortably within the planet’s means. and captures the “never give up” spirit for which the At TPA, one of our greatest challenges is the devel- Japanese people and Toray are renowned. opment of food packaging that phases out hydrocar- In the speech, Roosevelt salutes the indomitable bons [compounds made from fossil fuels]. The final spirit of people who, no matter how difficult the chal- product must provide to the food the same protec- lenge, rise up time after time and continue to do their tion that we have today and simultaneously meet the best. Among them is that individual “whose face is long-term economic targets set by the current film marred by dust and sweat and blood; who strives val- options. It’s a big challenge! iantly; who errs, and comes short again and again, We believe that Toray is ideally positioned to because there is no effort without error and short- meet that challenge. Our winning will be based on coming; but who does actually strive to do the deeds; the same collaborative spirit that has driven all Toray who knows the great enthusiasms, the great devo- breakthroughs—from carbon fiber that reduces the tions; who spends himself in a worthy cause.” Boeing Dreamliner’s carbon footprint to biofuel made It is that kind of spirit, which I find every day in the from sugarcane waste in Thailand. men and women who work across the Toray Group, Our breakthroughs will be built on R&D synergies that leads our people and our teams to make such a between TPA and the entire Toray Group, as we work positive contribution to society. In cherishing it, we together as a team to devise cutting-edge packaging embody the best of both worlds—we share common solutions. Once again, global teamwork will enable traits of curiosity, perseverance, diversity, creativity the critical task of bringing viable products to mar- and, above all, commitment, which make a differ- ket. It also means collaborating with global food ence to humanity’s common journey. companies to understand their needs and objec- tives. The Toray Group’s fundamental understanding of “Innovation by Chemistry” and its commitment to Written by The Wall Street Journal Custom Studios, 2020-2021 https://partners.wsj.com/toray/essential-materials/ Toray Industries, Inc.Integrated Annual Report 2021 48 The Value of Developing Cultural Bridges in Business Gao Zhiwen Director of the Board & Vice President, Toray Industries (China), Co., Ltd. Can you explain why you believe that a profound under- standing and respect for local culture is so critical to build- ing a meaningful worldwide presence? Having worked at Toray for almost 30 years, I believe localization that organically links people and products through a deep under- standing of local cultures is the key to our company’s global suc- cess. From consumers to business partners to employees, local people are crucial to establishing strong foundations in a partic- ular market. Recognizing this has enabled Toray to understand the tastes and psychology of Chinese consumers, to respond to the needs of business partners and customers, and to improve motivation and productivity by strengthening internal communi- cation with employees. The Chinese market is huge and com- petition is intense, so global manufacturers must make it their mission to produce and sell high-spec, low-cost products that local manufacturers cannot match. There is a saying in Sun Tzu’s Art of War that I’m particularly fond of: “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” I constantly reflect on these words when seeking solutions to management prob- lems. I believe that if Toray can understand and respect the cul- ture of the country or region in which it operates, it will be able to fully understand the logic and philosophy that shape the mar- ket economy, policies and other factors, so that globalization can follow naturally. In your career with Toray, how have you personally built bridges between cultures and fostered inspirational local bonds to drive innovation and manufacturing excellence? As a high-tech company engaged in the manufacture of advanced materials, Toray has been actively pursuing business opportunities in China since the 1990s. At that time, China had not yet joined the World Trade Organization (WTO). As the head of our textile operations in Nantong, I realized that the level of technology at midstream and downstream manufacturers was still relatively low, and that Toray did not fully understand the needs of Chinese customers. Convinced that this was the key to success, I proposed a number of business reforms to make us more competitive, including greater use of locally produced materials and the streamlining of logistics. To better understand the business environment in China, I tried to get senior man- agement to engage more actively with the Chinese market. On one occasion, I drove my Japanese staff to an employee’s coun- try home far from our workplace where we ate dumplings and talked with the employee’s family to gain a deeper understand- ing of what Chinese consumers think. By gathering raw information through many channels, I’ve been able to get top management to better understand my pro- posals, while strengthening ties with Chinese customers has allowed us to achieve a better balance between the mix of standard, mass-produced products and differentiated, high val- ue-added products that we offer. Today, Toray Nantong’s textile business is stronger than ever. Please discuss your unique cultural take on leveraging ancient Chinese philosophy to drive a 21st-century corpo- rate mission. What are the lessons global businesspeople can learn from The Analects of Confucius or Records of the Three Kingdoms? China is rich in schools of thought and philosophies. We study the Records of the Three Kingdoms and The Water Margin in elementary school, and The Four Books and Five Classics and The Analects in junior high and high school. And we incorpo- rate the five cardinal Confucian virtues of benevolence, righ- teousness, propriety, wisdom and fidelity into our work and lives. These values have influenced my understanding of what it means to be a member of society and of the Toray organization. People in China often say that The Analects of Confucius enable you to rule the world because they contain countless management philosophies. The core philosophy of The Analects is harmony, which in terms of corporate management I under- stand to mean co-operation and integration with all stakehold- ers. The Records of the Three Kingdoms is another work that contains sound management advice. In a homogeneous market environment, I think the key to gaining market share is to grasp the needs and psychology of the target group and provide dif- ferentiated products that other companies cannot imitate. If we adapt these ancient precepts to today’s business world we can “strategize in our tent to win battles a thousand leagues away.” Cultural difference isn’t only about countries; it can also mean different perspectives between business strategists and researchers, or management and the factory floor. How do you deploy your bridge-building vision to foster com- mon purpose among different layers of the organization? I believe that diversity is what makes things interesting and that a company’s development can be accelerated by people who come up with outstanding ideas. I also believe that mak- ing good use of the different personalities in a hierarchy can be a driving force for the development of a company and for indi- vidual growth. Based on this thinking, and with a good under- standing of Japanese companies and business in China and Japan, I have been able to reliably serve as a bridge between Japanese and Chinese people by valuing three principles. First, understanding and respect: seeing things from the perspective of others, fulfilling one’s own role, and building mutual trust and co-operation. Second, knowledge of others: making the most of their strengths, boldly entrusting them with tasks, and providing strong backup. Finally, sharing and promoting: communicating the company’s vision and strategy correctly and sharing goals. These principles create an atmosphere where people and the organization are full of vitality and enthusiasm. I was born in Xi’an, where the Silk Road begins—the historical trade route connecting East and West, where both cultures were strongly connected and influenced one another, playing an import- ant role in the development of the global economy and social sys- tems. As such, this perspective is engrained in my DNA. Toray Industries, Inc.Integrated Annual Report 2021 49 How does your personal experience developing the RO-110 water membrane system influence your vision of corporate management—and your overall commitment to building teams that forge transformative sustainability solutions? Looking ahead to the sort of world the Toray Group wants to see in 2050, one of the greatest challenges is to ensure that every- one has access to safe water and air, and that the natural environ- ment around the world is restored. That’s why we’re promoting Green Innovation (GR) business activities across the company. As the lead inventor of the RO-110 system, I created a tool that enables end users to maintain stable reverse-osmo- sis membrane operations by employing a unique diagnostic method and Big Data processing to monitor RO membrane use and predict operational errors in advance. With the launch of this system, we’ve been able to establish a complete after- sales service network for RO membranes throughout China, and can advise customers on economical treatment methods, which has strengthened the bonds of trust we have with them. As one of the world’s leading manufacturers of water treat- ment membranes, Toray provides customers with more com- prehensive and efficient solutions. We also analyze operational data from all customer sites to ensure intelligent system man- agement and optimal membrane performance, delivering high added value to our customers that enhances the competitive- ness of our brand. Having led the development of the RO-110, I strongly believe that close collaboration between salespeople and the R&D team is necessary for the creation of any product or ser- vice. By enabling sales staff to communicate user requests to the R&D team in real time, research and development of dif- ferentiated products can proceed smoothly and new business opportunities can be realized. Can you share an anecdote of a creative or commercial breakthrough made possible through an approach of build- ing cultural bridges? In 1994, Toray secured an industrial site of one million square meters in the Economic and Technological Development Zone of Nantong City, Jiangsu Province, China, to prepare for the establishment of certain of our subsidiaries and the start of full- scale integrated textile products polymerization, yarn making, weaving and dyeing. But when China joined the WTO in 2001, transportation infrastructure in regional cities was still rather underdeveloped. Supervisory personnel often had to travel back and forth between Japan and Nantong to oversee con- struction of our project and they had to go through Shanghai, which was inconvenient. Toray’s then-president, Katsunosuke Maeda, suggested we call for the opening of direct flights between Nantong and Japan. Acting on this, I worked directly with relevant people inside and outside the company to call on local and central governments and encourage them to improve infrastructure access. As a result, there are now several flights a week between Nantong and Nagoya and Osaka. I believe that much of the region’s subsequent economic development owes a great deal to the foresight of Toray’s management at that time. How have you been able to deploy your principles of respect for difference, loyalty and sincerity, and motivation for innovation to attract the best Chinese talent to Toray? Toray currently has more than 46,000 employees, of which about 29,000 are overseas. As a truly global company, Toray respects the cultures and social norms of the countries and regions in which it operates. One of the basic management policies outlined in our corporate philosophy is to provide meaningful work and fair opportunities. In this way, Toray ensures that employees are loyal and faithful to each other, and able to communicate freely, which in turn enables them to build good relationships and work efficiently. I believe that creating such an environment is one of the key reasons we are able to attract so many excellent Chinese employees. What makes China such an important market, both from a business point of view and the broader perspective of Toray’s mission to innovate for the betterment of humanity in an age of COVID-19 and climate change? Toray’s business development in China started with the estab- lishment of a trading company in Hong Kong in 1955, and as of March 2021 it has invested approximately 20.1 billion RMB in facilities in China, and has 38 consolidated subsidiaries employ- ing close to 10,000 people. This is comparable to the number of employees at Toray’s headquarters in Japan. The Chinese economy is the second-largest in the world, and despite the impact of COVID-19 its GDP is expected to grow by 8% in 2021. It is an extremely important market for Toray, and the country’s rising standard of living and the sophistication of its industrial development coincide with the goals of our Green Innovation and Life Innovation business strategies. We will con- tinue to provide products and services that offer new value and high quality, while at the same time actively working to improve the global environment. Since the start of the pandemic, China has struck a balance between measures to control the virus and the resumption of economic activities. Toray’s protective cloth- ing, nonwoven fabrics for masks and hygienic air filtration, and materials for IT equipment have all played a role in helping China achieve that balance. Please discuss the future of Toray Industries (China) Co., Ltd. (TCH), especially in terms of exciting innovations and how your unique approach to globally-minded, locally-focused management will contribute to ongoing success. TCH conducts business in China worth more than 400 billion yen a year. We remain fully committed to expanding this busi- ness. Looking 10, 20, and even 30 years ahead, it’s clear that society will not be able to develop sustainably unless problems such as environmental issues, declining birth rates and aging populations, and the increasing sophistication of medical care are solved. At the same time, China is leading the world in the development of 5G and AI—technologies necessary for the bet- terment of human society, and in which dramatic progress will be possible if appropriate new materials can be made available. TCH’s mission is to “produce in the right place and sell in the right place” the materials necessary for the development of the Chinese economy. We are already using materials informat- ics (MI) and AI to research and develop electronic information materials that take into account the various characteristics and structures that those new materials will be required to offer. Projects related to 5G and AI materials are being steadily pro- moted to expand our business. On a personal level, I will continue to place the highest pri- ority on the realization of Toray’s corporate philosophy, and do my utmost to contribute to the further growth of our business in China by strengthening internal communication and deepen- ing external collaboration through the application of the philoso- phies I’ve described here today. Written by The Wall Street Journal Custom Studios, 2020-2021 https://partners.wsj.com/toray/essential-materials/ Toray Industries, Inc.Integrated Annual Report 2021 50 Organization (As of July 1, 2021) Board of Directors President and Representative Member of the Board, Representative Member of the Board Executive Committee Board of Corporate Auditors Corporate Auditors Corporate Auditors Office C orp orate G overn a nce Corporate Strategic Planning Division Representative from Overseas General Administration & Communications Division Legal & Compliance Division Human Resources Division Finance & Controller’s Division Quality Assurance Division Auditing Dept. 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 Toray Industries, Inc.Integrated Annual Report 2021 Members of the Board and Corporate Auditors (As of June 22, 2021) 51 Akihiro Nikkaku President and Representative Member of the Board Koichi Abe Representative Member of the Board Mitsuo Ohya Representative Member of the Board Satoru Hagiwara Member of the Board Kazuyuki Adachi Member of the Board Minoru Yoshinaga Member of the Board Yasuo Suga Member of the Board Masahiko Okamoto Member of the Board Kunio Ito Member of the Board (Outside) Ryoji Noyori Member of the Board (Outside) Susumu Kaminaga Member of the Board (Outside) Kazuo Futagawa Member of the Board (Outside) Toru Fukasawa Corporate Auditor Yoshiyuki Tanaka Corporate Auditor Toshio Nagai Corporate Auditor (Outside) Kazuya Jono Corporate Auditor (Outside) Hiroyuki Kumasaka Corporate Auditor (Outside) Toray Industries, Inc.Integrated Annual Report 2021 52 Management Team (As of June 22, 2021) Members of the Board President and Representative Member of the Board Akihiro Nikkaku Representative Member of the Board Koichi Abe Representative Member of the Board Mitsuo Ohya Member of the Board Satoru Hagiwara 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 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 Member of the Board 2014 Executive Vice President and Representative 2010 President and Representative Member of the Board 2020 President and Representative Member of the Board, Chief Executive Officer, Chief Operating Officer (incumbent) Member of the Board 2020 Executive Vice President (Representative Member of the Board) (incumbent) 1980 Joined the Company 2009 General Manager, Industrial & Textile Fibers 1981 Joined the Company 2012 General Manager, Industrial Films Division; 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) 2020 Executive Vice President (Representative Member of the Board) (incumbent) Chairman, Toray Films Europe S.A.S.; Chairman, Toray Plastics Europe S.A. 2012 Vice President (Member of the Board) 2014 Senior Vice President (Member of the Board) 2017 President and Representative Member of the Board, Toray Advanced Film Co., Ltd. 2020 Senior Vice President (Member of the Board) (incumbent) Member of the Board Kazuyuki Adachi Member of the Board Minoru Yoshinaga Member of the Board Yasuo Suga Member of the Board Masahiko Okamoto 1980 Joined the Company 2017 Director, Toray Industries (Thailand) Co., Ltd.; President, Luckytex (Thailand) Public Company Limited; Chairman, Thai Toray Textile Mills Public Company Limited 2018 Senior Vice President (Member of the Board) 2020 Senior Vice President (Member of the Board) (incumbent) 1979 Joined the Company 2008 General Manager, Manufacturing Division (Torayca & Prepreg Manufacturing, ACM Technology Dept.) 2011 Vice President (Member of the Board) 2015 Chief Executive Representative for the Americas; Chief Representative for the Americas; Chairman, Toray Holding (U.S.A.), Inc.; President, Toray Industries (America), Inc.; General Manager, Torayca & Advanced Technology and Manufacturing for the Americas 2019 General Manager, Torayca & Advanced Composites Division (Carbon Fiber Business Strategy) 2020 Senior Vice President (Member of the Board) (incumbent) 1980 Joined the Company 2013 Chairman and Representative Director, Toray Carbon Magic Co., Ltd. 2013 Vice President (Member of the Board) 2016 Senior Vice President (Member of the Board) 2019 Retired from Senior Vice President (Member of the Board) Chief Representative for Europe; President, Toray Industries Europe GmbH 2020 Senior Vice President 2021 Senior Vice President, Corporate Strategic Planning Division (incumbent) 1986 Joined the Company 2009 Vice President (Member of the Board), Toray Industries (Malaysia) Sdn. Berhad; Vice President (Member of the Board), Penfabric Sdn. Berhad; General Manager on Special Assignment, Finance & Controller’s Division (Finance & Controller’s Chief for Malaysia) 2011 General Manager on Special Assignment, International Division 2013 General Manager, Finance Dept. 2017 General Manager, Controller’s Dept. 2020 Corporate Vice President (Member of the Board) (incumbent) Member of the Board (Outside) Kunio Ito Member of the Board (Outside) Ryoji Noyori Member of the Board (Outside) Susumu Kaminaga Member of the Board (Outside) Kazuo Futagawa 2002 Dean, Graduate School of Commerce and 1997 Dean, Graduate School of Science and School 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 2018 Research Professor, Department of Business Administration, Hitotsubashi University Business School (incumbent) 2020 Member of the Board of the Company (incumbent) 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 2020 Member of the Board of the Company (incumbent) 1969 Joined Sumitomo Precision Products CO., LTD. 1995 Representative Director, Surface Technology Systems Ltd. 2000 Director, Sumitomo Precision Products CO., LTD. 2002 Managing Director, Sumitomo Precision Products CO., LTD. 2004 President, Sumitomo Precision Products CO., LTD. 2012 Senior Advisor, Sumitomo Precision Products CO., LTD.; Representative Director, SK Global Advisers Co., Ltd. (incumbent) 2012 Director, DEFTA Capital (incumbent) 2016 Outside Director, Olympus Corporation (incumbent) 2020 Member of the Board of the Company (incumbent) 1980 Joined the Ministry of Health and Welfare 2012 Director-General of Minister’s Secretariat, the Ministry of Health, Labour and Welfare 2014 Director-General, Health Policy Bureau, the Ministry of Health, Labour and Welfare 2015 Vice-Minister of Health, Labour and Welfare 2017 Retired from Vice-Minister of Health, Labour and Welfare 2018 Special Advisor on Policy, Social Security Reform Office, Cabinet Secretariat 2020 Member of the Board of the Company (incumbent) Corporate Auditors Corporate Auditor Toru Fukasawa Corporate Auditor Yoshiyuki Tanaka Outside Corporate Auditor Toshio Nagai Outside Corporate Auditor Kazuya Jono Outside Corporate Auditor Hiroyuki Kumasaka 1984 Joined the Company 2006 Executive Vice President, Toray Fluorofibers (America), Inc. 2014 General Manager, Okazaki Plant 2015 Vice President (Member of the Board) 2018 General Manager, Manufacturing Division (Fibers & Textiles Technology and Manufacturing) 2020 President and Representative Member of the Board, Toray Opelontex Co., Ltd. 2021 Corporate Auditor (incumbent) 1978 Joined the Company 2003 Executive Officer, Chori Co., Ltd. 2005 General Manager on Special Assignment, Corporate Strategic Planning Division; General Manager on Special Assignment, Investor Relations Dept. 2006 General Manager, Controller’s Dept. 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 and Member of the Executive Committee) 2020 Corporate Auditor (incumbent) 1977 Joined Mitsui Bank, Limited 2005 Executive Officer, Sumitomo Mitsui 1973 Joined FUSO Audit Corporation (later MISUZU Audit Corporation) 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) Banking Corporation 2007 Managing Executive Officer, Sumitomo Mitsui Banking Corporation 2010 Senior Managing Director, Sumitomo Mitsui Banking Corporation 2015 Outside Corporate Auditor of the 2012 Retired Company (incumbent) 2016 Outside Corporate Auditor, SUMITOMO CORPORATION (incumbent) Representative Director, President & CEO, Citibank Japan Ltd. 2014 Retired 2015 Outside Corporate Auditor of the Company (incumbent) 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. 2019 Outside Corporate Auditor of the 2019 Outside Corporate Auditor, Brother Company (incumbent) Industries (incumbent) Toray Industries, Inc.Integrated Annual Report 2021 53 President, Vice Presidents, and Executive Fellow President Akihiro Nikkaku President, Chief Executive Officer, Chief Operating Officer Executive Vice President Koichi Abe Executive Vice President Mitsuo Ohya Senior Vice President Hiroshi Otani Executive Vice President, Intellectual Property Division, Global Environment Business Strategic Planning Dept., and Life Innovation Business Strategic Planning Dept.; Technology Center; Toray Human Resources Development Center Executive Vice President, Legal & Compliance Division (Security Trade Administration Dept.); Marketing and Sales; Corporate Marketing Planning Dept., and branches; Affiliated Companies Division Senior Vice President, Water Treatment & Environment Division; Chairman, Toray Asia Pte. Ltd.; Chairman, Toray Membrane (Foshan) Co., Ltd. Senior Vice President Satoru Hagiwara Senior Vice President Kazuyuki Adachi Senior Vice President Minoru Yoshinaga Senior Vice President Yasuo Suga Senior Vice President, Films Division; Chairman, Toray Films Europe S.A.S. Senior Vice President, Purchasing & Logistics Division; Manufacturing Division Senior Vice President, Torayca & Advanced Composites Division; Chairman, Toray Carbon Fibers Europe S.A. Senior Vice President Kazuhiko Shuto Senior Vice President Hirofumi Kobayashi Senior Vice President Tetsuya Tsunekawa Senior Vice President, Chief Representative for China; Chairman and President, Toray Industries (China) Co., Ltd.; Chairman,Toray Sakai Weaving & Dyeing (Nantong) Co., Ltd. Senior Vice President, Pharmaceuticals & Medical Products Division; Pharmaceuticals & Medical Products Division (Technology & Manufacturing) Senior Vice President, Chief Representative for Europe; President, Toray Industries Europe GmbH Senior Vice President, Corporate Strategic Planning Division; Quality Assurance Division; HS Business Development Dept. Senior Vice President Shigeki Taniguchi Senior Vice President, Human Resources Division Senior Vice President Kenichiro Miki Corporate Vice President Satoru Nishino Corporate Vice President Hideki Hirabayashi Corporate Vice President Hiroshi Enomoto Senior Vice President, Fibers & Textiles Division; Osaka Head Office Corporate Vice President, Films Technology & Manufacturing Division Corporate Vice President, CSR & Investor Relations; Legal & Compliance Division; General Administration & Communications Division; Tokyo Head Office Corporate Vice President, Electronic & Information Materials Division Corporate Vice President Nobuyuki Inohara Corporate Vice President Hajime Ishii Corporate Vice President Hiroyuki Matsuda Corporate Vice President Masahiko Okamoto Corporate Vice President, Resins & Chemicals Division Corporate Vice President, Fibers & Textiles Division; Global SCM Division Corporate Vice President, Information Systems Division; Engineering Division Corporate Vice President, Electronic & Information Materials Division; Display & Graphic Materials Division Corporate Vice President Yuichiro Iguchi Vice President Young Kwan Lee Vice President Teh Hock Soon Vice President Yoshio Yamamoto Corporate Vice President, Research & Development Division; Basic Research Center Vice President, Chief Representative for the Republic of Korea; President, Toray Industries Korea Inc.; Chairman, Toray Advanced Materials Korea Inc. Vice President, Chief Representative for Malaysia; President,Toray Industries (Malaysia) Sdn. Berhad; Chairman, Penfabric Sdn. Berhad; Chairman, Toray Malaysia Systems Solution Sdn. Bhd.; Chairman, P.T. Century Textile Industry Tbk Vice President, Legal & Compliance Division; Compliance Dept. Vice President Kei Shimaji Vice President, Chief Representative for Americas; President, Toray Industries (America), Inc. Vice President Osamu Tsuneki Vice President, Purchasing & Logistics Division Vice President Kazuyuki Yakushiji Vice President Yasuo Fukuda Vice President, Composite Materials Technology & Manufacturing Division Vice President, Fibers & Textiles Technology & Manufacturing Division Vice President Masahide Matsumura Vice President, Chief Representative for Thailand; President, Toray Industries (Thailand) Co., Ltd.; Chairman, Toray Textiles (Thailand) Public Company Limited Executive Fellow Executive Fellow Akihiko Kitano Automotive & Aircraft Center; ACM Technology Division Toray Industries, Inc.Integrated Annual Report 2021 54 Roundtable Discussion of Outside Directors Towards Enhancing Toray’s Corporate Value Kunio Ito Outside Director Ryoji Noyori Outside Director Susumu Kaminaga Outside Director Kazuo Futagawa Outside Director In fiscal 2020, Toray reduced the number of Board discussion from this perspective. In addition, I think it is members from 19 to 12, while increasing the num- important to discuss medium- and long-term direction ber of outside directors from 2 to 4. The Company and issues. I believe that outside directors, in particular, also expanded the composition of the Governance must not only respond promptly to individual situations Committee, which, chaired by an outside direc- from an outside perspective, but also express their opin- tor, serves as an advisory board to the Board of ions more objectively and more fairly. Directors and acts as the nomination and remu- neration committee, to 3 internal members of the Kaminaga As a member of the Board of Directors, Board and 4 outside directors. In addition, the I believe that my fundamental role is to contribute to Company introduced an executive officer system the realization of Toray’s long-term corporate vision to make management execution more flexible and as outlined in the Toray Group Sustainability Vision, efficient. In this roundtable discussion, the 4 out- which sets out the world as envisioned by the Toray side directors exchanged their frank opinions on Group in 2050, and TORAY VISION 2030 (VISION the new governance structure, Toray’s issues, and 2030), which I see as an extension of all that Toray their expectations for the Company. has cultivated over the years since its founding. With this in mind, I strive to monitor and provide advice Ito How would you like to be involved and from the perspective of how each operational issue what role would you like to play in the Board of is positioned in the Company as a whole, and how it Directors and Governance Committee in which demonstrates comprehensive capabilities across the you participate as an outside director? entire Company, including horizontal expansion. Within the Governance Committee, I would like Noyori With the introduction of the executive officer to set out issues to be discussed on all governance system, I think the roles of the Board of Directors and the matters and raise them to the Board of Directors. In Executive Committee have become clearer. Companies addition, regarding its capacity as the nomination and must properly manage their businesses in accordance remuneration committee, I intend to provide advice with their respective philosophies and as public institu- on how we should utilize core personnel for business tions trusted by society. Directors are responsible for promotion and on incentive and compensation sys- weighing the appropriateness of various subjects for tems from my business experience globally. Toray Industries, Inc.Integrated Annual Report 2021 55 Futagawa Besides the essential role of deciding what been sorted and fine-tuned to an explainable level. is required by law and the Articles of Incorporation, As chair of the Governance Committee, I am very I believe that the Board of Directors must also dis- conscious of making sure that governance is not only cuss Toray’s overall direction. As a newcomer to a question of form but also has substance. Substance the Company, I actively attended not only Board of is about action; it is not something that can be writ- Directors meetings, but also Vice Presidents meet- ten into the rules of the Corporate Governance Code. ings, as well as other meetings, including research There is no rule book to guide us, that means, how do presentations, that I was invited to, in order to gain a we improve the quality and effectiveness of Toray’s better understanding of the Company. I think I prob- governance? In this respect, I think there have been ably qualify for a perfect attendance award (laughs). great improvements. One example is the succes- As I had been working as an office worker for a long sion plan, which is now being discussed along with time in the hierarchy of the Ministry of Health, Labour the names of candidates. I believe this is a reflec- and Welfare, I understand people tend to make com- tion of our collective efforts to make the Governance ments gauging their bosses’ feelings. Outside direc- Committee work. tors, on the other hand, are in a position to speak freely and independently of the organization, and I Ito How do you apply your expertise and expe- believe that discussions are becoming more active rience in the Board of Directors and Governance by raising issues from that perspective. I also think Committee? that the Governance Committee system is one that respects diverse ways of thinking, which I intend to Noyori My focus has been on education and bear in mind in my monitoring role. research for a long time, and I have been involved in science and technology policy, keenly interested Ito I attend Board of Directors meetings with the in the development of industrial technology. I do not motto “read the context, not the mood” about have any knowledge of business management. But agenda items. I know that it takes a long time to put we have people with vast experience and knowledge the agenda together. But my feeling is that if I try to in this field here, and I see my role as offering a dif- sense the mood of the people in charge and think too ferent perspective. In the first place, I understand much about their efforts, I will be unable to say any- that the Board of Directors is a public-spirited orga- thing, so I steer clear of trying to “read the mood.” nization consisting of people in leadership positions That is number one. with broad management skills and high-level exper- Number two is to make judgements on a medium- tise. The CEO is then required to comprehensively to long-term basis. As those who are engaged in synthesize this wisdom and make the final manage- practical business submit items to pass, some- ment decision. Under these circumstances, we can- times the medium- to long-term time perspective is not expect any individual to be omniscient Rather, overlooked. As an outsider, I’m very aware of this. each individual director must recognize issues from However, Toray is a company where “long-term con- their different perspectives, provide diverse opin- tinuity” has taken root, so we may not have to worry ions, and contribute to the overall judgment of the too much about it. Number three, I am conscious CEO. I hope that I can contribute to this. of whether or not the Company’s activities and the decisions made by the Board of Directors can be Kaminaga I have been in positions involving cor- explained to stakeholders, including shareholders porate management from a medium- to long-term and other investors, and whether or not they have perspective, gaining experience in global business Toray Industries, Inc.Integrated Annual Report 2021 56 development, from R&D to commercialization, and was selected as a best practice by the Tokyo Stock then to industrialization. Against that backdrop, I Exchange. think I can say my skills include technology, business From an ESG perspective, I have been paying par- management, and global experience. As Mr. Ito has ticular attention to the Task Force on Climate-related mentioned, Toray is engaging in unwavering man- Financial Disclosures (TCFD). Amid growing interest agement from a medium- to long-term perspective. in climate change issues globally, I would like to dis- However, if the medium- to long-term is the big pic- cuss TCFD at Board meetings. As digital transforma- ture, getting there also hinges on the details and the tion (DX) is also gaining traction, I hope to encourage here and now. Even if Toray has a medium-to long- efforts to raise Toray’s DX level even higher. term perspective, what must be done today and tomorrow should not be neglected and postponed. Ito In fiscal 2020, the number of members of the In doing so, any medium- to long-term vision will be Board of Directors was reduced and its composi- nothing more than a pie in the sky. From what I have tion was altered. What changes do you feel this seen over the past year, I do not think Toray has any has brought about? concerns here, but I will continue to monitor it firmly based on my own experience. Noyori With the introduction of the executive offi- cer system, I think the agenda of Board of Directors Futagawa I have been involved in public adminis- meetings has become much more organized. On the tration and have learned the importance of disclosing other hand, I think we should probably have discus- negative information such as scandals to the pub- sions on Toray’s long-term vision and future plans for lic as soon as possible to show how they are being the post-COVID-19 era. There are people of all ages dealt with. I am ashamed to say that I had an expe- working at Toray, and I see this as our duty to the rience where the situation got worse because of a younger generation. delay in the disclosure of information. Thinking of it as an example of how not to behave, I would like to Ito The reduction in the size of the Board of Directors help the Company in the area of information disclo- and the increase in the number of outside direc- sure and compliance. tors did not happen overnight, but were the result of the sincere efforts of President Nikkaku and the Ito I have continued to make frequent comments members of the Governance Committee to address based on my expertise in mainly governance, busi- related issues. The smaller scale has made discus- ness administration, accounting, and ESG theory. sions easier. The number of outside directors has From that standpoint, I would like Board members increased, but their comments have actually become to have a strong awareness of the cost of capital. more frequent, and I feel that outside corporate audi- However, just having that awareness is not enough; tors have also become more active in contributing I would like to participate in bringing this awareness comments. What I realized very keenly is that while into the Board’s deliberations and up to the deci- we may say that governance is not about form but sion-making process. As a result, for example, the about substance, the changes in Toray’s Board of term cost of capital was introduced upon the discus- Directors show that improving the form enhances sion of the reduction of strategic holdings. During the the substance. past year, one issue that came up for discussion was In addition to deliberations and reports, the that of listed subsidiaries. However, this issue was Governance Committee discussed the inclusion of properly discussed, and the content of the disclosure Discussion Items, which were promptly agreed to by Toray Industries, Inc.Integrated Annual Report 2021 57 President Nikkaku and others. us make better use of the Discussion Items section Rather than just throwing out a proposal like an during Board meetings. M&A deal and saying, “let’s discuss it and decide,” we should hold discussions on agenda items in Ito Moving on, what are your thoughts on advance that will be decided later. I think this has Toray’s value creation? really improved the level of the Board of Directors. Futagawa It is vital to acquire earnings power to Kaminaga I cannot say how things have changed meet the expectations of shareholders and to prop- as I did not know how things were last fiscal year. erly return profits. At the same time, I believe that However, I believe I had some understanding of we cannot create lasting value unless we man- Toray’s business from the outside, and I attended age our business from a medium- to long-term per- all the meetings where participation was voluntary, spective while taking into consideration our various as did Mr. Futagawa, to confirm my understand- stakeholders. In this respect, Toray has an excel- ing. As a result, my impression was that the Vice lent corporate philosophy: of “contributing to society Presidents Meetings functioned very well, and also through the creation of new value with innovative that cross-functional capabilities such as R&D and ideas, technologies and products.” I highly appreci- marketing operated admirably. ate this philosophy as a corporate culture that moti- To be honest, however, and as Mr. Noyori men- vates all employees to create new value. tioned, I feel that the Board of Directors has not yet fully discussed Toray’s future. I believe this to Kaminaga Toray has many businesses and its be an agenda item that should be taken up and strengths are disseminated in various ways, but discussed at Board of Directors’ meetings. I think they are all derived from its core technologies, and it is important for the Governance Committee to I believe that is its true strength. From what I have sort out those issues and bring them to the Board seen over the past year, I believe that Toray has estab- for discussion. The year 2030, which is the target lished an excellent system to demonstrate its com- year of VISION 2030, is just around the corner, and prehensive strengths through technological fusion. I think it is time for us to think more about what Corporate management means to develop strengths exactly we should do. and reduce weaknesses. With that in mind, I would I also think that the Toray Group Sustainability like to see the Company dig deeper into its strengths Vision, envisioned by Toray Group in 2050, is also and further expand them to create new value. not that far off considering the theme of the vision. I am raising an issue, rather than stating the rate of Noyori It is essential that Toray’s technological change from last fiscal year. capabilities, which are the lifeline of the Company, remain at the top level globally. All employees of Ito It is certainly hard to discuss things that are not on Toray, operating under the banner of leading-edge the agenda at Board meetings. I think it is very import- technologies, must commit themselves to this task. ant for the effectiveness of the Board of Directors to Industrial technologies are destined to continue the deliberate on matters including the agenda as much process of evolution and transformation through sci- as possible at the Governance Committee. Also, entific progress. There is no such thing as maintain- while resolutions need to be decided at the time ing the status quo. The fact that Toray has earned a they arise, Discussion Items do not. There is a lot deep trust from society as a technology-based mate- of flexibility in agenda setting and I would like to see rials company is due to the efforts of successive Toray Industries, Inc.Integrated Annual Report 2021 58 generations of technology leaders, and the combina- from Asia, Japanese companies, including Toray, will tion of a “pursuit of the ultimate limits” attitude and not be able to maintain global competitiveness if they technological fusion. Toray has identified the Green are on the defensive. Toray’s businesses span the Innovation (GR) and Life Innovation (LI) businesses large and small, and have a wide variety of products, as growth areas for the future, and I think this is the but I think there needs to be courage to exit those right direction. In addition, the Company has accumu- areas where the Company is not in the top five in the lated a wide range of technologies and knowledge world. And of course, new winning products need to that will enable it to grow in the medium- and long- be created. term, and I feel that it is maintaining a level of com- I believe that in the future, the emphasis will be petence that is unrivaled in the world. This is a great on functionality rather than the structural properties accomplishment, and I hope that the Company will of materials. We cannot break away from mass pro- continue to develop new technologies that contrib- duction and mass consumption by simply producing ute to the world without becoming overconfident. versatile structures such as fibers and plastics from petroleum raw materials. Looking to the future, we Ito Toray is a company that specializes in materials need materials that contribute to a circular economy, and is also very focused on value-added products. It such as those that will lead to a fundamental reduc- is also a treasure trove of new technologies. I think tion of plastic waste. At the same time, the phys- that “long-term continuity” is also a key feature and ical functions required for electronic materials and strength. The Company also has outstanding materi- the biological functions required for pharmaceuti- als from the perspective of environmental issues and cal materials are becoming evermore sophisticated, has affinity with the SDGs. Nowadays, the world is and highly useful materials that provide these func- focusing on “ambidextrous management” because tions are becoming more and more necessary. After it is essential to not only deepen existing technolo- all, we cannot create value without new materials. I gies but also to explore opportunities for new tech- believe that the world has very high expectations for nologies. I believe that Toray is doing this very well. Toray. I think the idea that materials have the power However, I am not sure that the Company has to fundamentally change society is absolutely true. done enough to get this across to investors, it seems To meet such expectations, I would like to see all of to be a bit of a waste. Ambidextrous management Toray’s people embrace “inner innovation” and focus is a difficult thing to pull off. Toray has been able to on inventing innovative materials with a view to the monetize its GR and LI businesses, and I hope the future, as the Company did with carbon fiber in the Company can communicate more about them in the past. To this end, we need the spirit of a researcher, dialogue with investors. and I would ask for patience and tolerance on the part of management. Ito Next, what are your views on the risks and issues facing Toray? Kaminaga As Mr. Noyori aptly pointed out, I am keenly aware that the “functional” aspects of mate- Noyori From the standpoint of risk, while it is easy rials is becoming more important than their “struc- to become complacent in light of past successes and tural” properties. In past business activities, I have fall into the trap of merely continuing existing busi- been engaged in the microfabrication of new materi- nesses, I think this is an issue that is common to all als. Now, the Company is facing a situation where it manufacturing industries in Japan. Again, technolo- needs to think of processing that enhances the func- gies continue to advance. With the rise of companies tionality of the material itself, rather than just saying, Toray Industries, Inc.Integrated Annual Report 2021 59 “we invented a new material, please process it.” For good a product is, to discussions about something example, the brightness of LEDs varies considerably that could be ready for commercialization in two to depending on how the material is processed as the three years. I have been excited and impressed. By material itself has its innate properties. This makes the same token, it would be a danger signal if there us think how we can bring materials to the fore, were only a handful of laboratory-level presentations. which is a golden opportunity, or conversely poses a In this regard, I think one of the issues and risks is risk if we make one false step. whether we can maintain the motivation of employ- Also, the business environment is changing at an ees who are trying to create something with their accelerated pace. To be honest, as we are coexisting unfettered thought. with COVID-19, anything can happen in this world. That is why I have often said that companies need Ito As I mentioned earlier, I think there is still room to have a medium- to long-term vision, and actions for improvement in such areas as the frequency of need to be taken swiftly. I have seen Toray facing the dialogue with investors. Even though we have had COVID-19 pandemic, and I think it has excellent risk very positive feedback, is it reflected in our corpo- tolerance. However, I believe that we should make rate value? Frankly, I think there is a gap between the ourselves more resilient by being prepared for the intrinsic value of Toray and the share price as set in unexpected to happen again. Also, given the diverse the capital markets. I do not think Toray has fallen into nature of the businesses, I am a little worried about a conglomerate discount because of its wide range sectionalism. I feel that everyone is very conscious of businesses, but I think there is room for improve- about avoiding this. But I think it can happen before ment in ensuring that investors really understand you know it. So, I think this is one of the points that Toray’s potential. Even if there is a little negative talk I should monitor as an outside director. One of the about Toray in the market, investors who believe issues is that there is a limit to what Toray alone can that Toray has outstanding capabilities will not sell do, even if it had materials with the power to change the Company’s shares, and even if the stock price society. So when it is better to work with a partner, I drops temporarily, it will soon bounce back. Dialogue think the question is how far we can proceed and still is important to increase such supportive investors. successfully secure commercial application. Another issue I see is the need to think more about our strategies regarding the balance between Futagawa With carbon fiber, Toray has reaped the prices and added value. In addition, as is often said, fruits of a sustained commitment over 50 years while strengths sometimes become risks. How do we deal never giving up. That represents nothing but long- with the fact that what we identified as value-added term continuity as most companies gave up halfway products see their potential erode in the face of mass through. However, we must not expect the same in production by price-competitive Chinese companies? all areas of our research. If we do that, the risk of Also, I would like the Board of Directors to discuss research items not bearing fruit is incalculable. It is how to allocate capital across the Company, and in important for us to think about a risk-taking approach particular how to position the pharmaceutical and appropriate for our size, and seek ways to reduce medical device fields in the overall business portfo- risks in every way possible, while maintaining our lio. Since Toray is engaged in such a wide range of long-term continuity. businesses, insufficient resources tend to be allo- Meanwhile over the past year, I have had the cated to each. How can we apply selection and focus opportunity to see a variety of research presenta- in this context? While focusing on long-term conti- tions, ranging from laboratory-level talks about how nuity, which is considered a strength, the Company Toray Industries, Inc.Integrated Annual Report 2021 60 must also renew its business from the perspective of the technology and business organizations, or are selection and focus. From this standpoint, I believe people being held back? I think we need to reevalu- that how we make management decisions will be a ate whether Toray’s internal organization is sufficiently major issue in the future. functional in terms of brainstorming between different Another point I would like to mention is that fields and agile activities as mentioned by Mr. Ito. whereas open innovation with university research DX should not be seen merely as improvement institutes has become very advanced, I feel that of business efficiency, but also as something that is efforts with startups are lagging. I think Toray needs important for cultivating co-creation capabilities. to learn to be agile in an entrepreneurial way by Also, we need to promote more open innovation actively collaborating with startups, and that we have in Japan and overseas. No matter how outstanding some issues in this area. Toray’s research or technological capabilities are, its Ito Lastly, what are your expectations for Toray pool of wisdom is too small to realize its global poten- in the future? tial. I also believe that the intellectual property and technologies we have accumulated should not be Noyori I only know about research and technol- locked up in a vault, but rather used to the fullest ogy. However, the Company needs to develop not extent for the benefit of Toray and the world. only its individual technological competitiveness, Toray has many technologies that are very attrac- but also the ability to work together with others tive to companies inside and outside of Japan. I hope within and outside the Company, both domestically that we can cultivate our technological diplomacy for and globally. I believe that comprehensive “knowl- Toray’s further development. edge integration” is essential for sustainable value creation. Kaminaga I think that Toray should have more A question in point is are there barriers between of a spirit of an entrepreneur. Mr. Ito talked about Toray Industries, Inc.Integrated Annual Report 2021 61 “ambidextrous management.” This might mean recognize the importance of fostering more of the feel- allocating 80% to profitable current businesses ing “I developed this new technology.” Another aspect and 20% to businesses with an eye on the future. of entrepreneurship is speed. Since “long-term conti- I would like to see Toray become a world class role nuity” is Toray’s strength, it may sound like a contradic- model that can demonstrate that this balance is sus- tion in terms, but I think Toray needs to enhance the tainable and leads to the realization of Toray’s cor- ability in terms of “long-term continuity with speed.” porate philosophy. To that end, it is important that In other words, I would like the Company to enhance each person plays their role with a shared aware- and upgrade what needs to be continued, while speed- ness of this. I would like to fulfill my responsibilities ily reviewing its businesses. I like to use the term “far as an outside director with that in mind. analogies” when referring to the knowledge inte- gration mentioned by Mr. Noyori. I would like to see Toray produce many people with “far analogies” who can create new technologies to solve social issues by Futagawa I believe that Toray has technologies that making full use of their knowledge and imagination in can change society in the areas of GR and LI, and I seemingly distant fields. I would like Toray to develop would like to see the Company contribute to society its future in the 21st century by promoting a human by fully exploring such technologies. In addition, just resources strategy from this perspective. as we improve the function of fibers & textiles for apparel-use every year, I would like to support com- Noyori Finally, a word of thanks. I would like to add panies that are always motivated to make improve- that all of the outside directors here highly appreciate ments in all their activities and work as one to realize the Chief of Investor Relations’ efforts in providing their philosophy. the Board of Directors with frank feedback from out- Ito I have often heard CEOs of startups say, “I created * Kunio Ito, Director, served as the facilitator for this roundtable my company to solve these social problems.” I also discussion. side parties, including investors. Toray Industries, Inc.Integrated Annual Report 2021 62 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 con- tribute to society. The Group has developed the Toray Philosophy that incorporates this principle. The Group systematizes the Toray Philosophy as a Corporate Philosophy, Corporate Missions, Corporate Guiding Principles, etc. The Corporate Missions clearly enun- ciate that the Group will practice “sincere and trust- worthy management” with regard to its shareholders. The Corporate Guiding Principles stipulate the Group’s commitment to “acting with fairness, high ethical stan- dards and a strong sense of responsibility while com- plying with laws, regulations and social norms to earn trust and meet social expectations.” When establishing the corporate governance structure, the Group seeks to realize these philosophies as its basic policy. Outline of Governance System and Reasons for Adopting the System Toray operates as a company with a Board of Corporate Auditors and Board of Directors. The Board of Directors, which includes outside directors, decides on the busi- ness execution and supervises the execution of duties by the members of the Board. The Board of Corporate Auditors includes outside corporate auditors and inde- pendently audits the execution of duties by the mem- bers of the Board, separately from the Board of Directors and the executing organization. This framework is designed to secure the transparency and fairness of Corporate Governance Structures decision made by the Board of Directors. In addition, there is a Governance Committee, which serves as a voluntary advisory body to the Board of Directors. The Governance Committee deliberates on all matters relat- ing to corporate governance, enhancing the effective- ness of governance by the Board of Directors. Toray Group operates in a broad spectrum of business fields at a global level. Business management and deci- sion-making, as well as oversight, require assessment of a wide variety of risks from multiple perspectives based on expertise related to the day-to-day operations of the Group’s worksites. To that end, the composition of the Board of Directors is designed to ensure that mem- bers bring a diverse range of perspectives to manage- ment oversight and decision-making. Meanwhile, outside directors are elected to the Board to ensure transparency and fairness, to ensure management oversight from an even broader perspective, and to obtain appropriate man- agerial advice from a medium- to long-term perspective. The Board of Corporate Auditors is entirely indepen- dent of the Board of Directors. Based on professional expertise in finance, accounting, and law, as well as an understanding of the Group's businesses, the Board of Corporate Auditors exercises oversight over directors' execution of their duties. Strengthening the Governance Framework In fiscal 2020, Toray Group set the number of members of the Board of Directors to 12 and the number of out- side directors to four in order to improve the effective- ness of the Board of Directors and to strengthen the business execution framework. The Group also intro- duced an executive officer system for the purpose of flexibly implementing management execution based on quick decision-making that accurately reflects the Election Election Election Decision-making, Oversight Functions General Meeting of Stockholders Independent Auditor Cooperation Audit Auditing Dept. Cooperation Board of Corporate Auditors 5 Corporate Auditors (3 outside corporate auditors) Audit Board of Directors 12 members of the Board (4 outside directors) Report Governance Committee 7 members (including 4 outside directors) Cooperation Audit Business Execution Functions Conference Organs Executive Committee President Company-wide Committees Ethics and Compliance Committee Sustainability Committee Risk Management Committee CSR Committee, etc. Internal audit Divisions, Departments, Subsidiaries Departmental Committees and Meetings Toray Industries, Inc.Integrated Annual Report 2021 63 business environment and changes therein. The Board of Directors both establishes the scope of business execution entrusted to the vice presidents and super- vises the execution of their duties. Moreover, the Group increased the number of Governance Committee mem- bers, which had consisted of one internal member of the Board and two outside directors until then, to three internal members of the Board and four outside direc- tors (the committee continues to be chaired by an outside director). As a result, this move ensures that dis- cussions and reports by the Committee are made from a variety of perspectives. Reduction in number of Members of the Board and change in its composition Year 2009 2012 2014 2015 2018 2020 Total number of Board members 30 28 26 25 19 Outside directors included Percentage of outside directors 1 3.8% 2 8.0% 10.5% 12 4 33.3% Status of Outside Directors/ Corporate Auditor Elections Toray ensures objectivity and transparency of corpo- rate governance by establishing and disclosing stan- dards for independence of outside directors and outside corporate auditors. Based on these standards, the Company elects four outside directors and three out- side corporate auditors, and submits notification regard- ing their status as independent officers to the Tokyo Stock Exchange. The following table outlines the basis for election of our outside directors/corporate auditors and details of their independence Kunio Ito Member of the Board Ryoji Noyori Member of the Board Mr. Ito was elected as an outside director and assigned independent officer status due to his highly specialized expertise in accounting and business administration as a university professor, and his extensive experience as a corporate outside director. Mr. Noyori was elected as an outside director and assigned independent officer status due to his extensive experience as a university professor, his highly specialized expertise in organic synthetic chemistry, which is a core Toray technology, and his experience as a corporate outside director. Susumu Kaminaga Member of the Board Mr. Kaminaga was elected as an outside director and assigned independent officer status due to his exten- sive experience as a member of top management, his international perspective, and his experience as a cor- porate outside director. Kazuo Futagawa Member of the Board Mr. Futagawa was elected as an outside director and assigned independent officer status due to his extensive experience, knowledge, and deep expertize as an administrative officer. Toshio Nagai Corporate Auditor Kazuya Jono Corporate Auditor Mr. Nagai was elected as an outside corporate auditor and assigned independent officer status due to his excellent track record of high standing in the legal profession, his solid character and judgment, and his ability to appropriately audit the Group from an objective standpoint. Mr. Jono was elected as an outside corporate auditor and assigned independent officer status due to his hav- ing held key positions in the business world, his solid character and judgment, and his ability to appropriately audit the Group from an objective standpoint. Hiroyuki Kumasaka Corporate Auditor Mr. Kumasaka was elected as an outside corporate auditor and assigned independent officer status due to his advanced knowledge in accounting, his wealth of experience and established track record as a certified pub- lic accountant, his impeccable character and deep insight, and his ability to appropriately audit the Group from an objective standpoint. Basic Policy on Internal Control System To realize the Toray Philosophy, the Company shall establish a structure to execute its business legally and effectively by improving its internal control system according to the following basic policy as a structure to enable it to appropriately establish organization, formu- late regulations, communicate information, and monitor the execution of operations. 1. System to ensure that the execution of duties by the 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 compliance, and shall take other measures to improve the required internal systems, including the establish- ment of dedicated organizations. Toray Industries, Inc.Integrated Annual Report 2021 64 • Toray shall establish the Ethics & 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 guidelines, 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 establish an organization dedicated to security export control. 2. System to ensure the efficient execution of duties by the members of the Board and employees • Toray shall establish the Authority of Top Management to stipulate matters with respect to which decision-mak- ing authority is reserved by the Board of Directors and matters with respect to which decision-making is del- egated to the President, general managers, etc., from among matters necessary for decision-making. • Toray shall establish the Executive Committee as deliberative organs for important matters decided by the Board of Directors or the President. The Executive Committee shall deliberate on the general direction of policy or issues related to implementation. 3. System for preserving and managing information pertaining to the execution of duties by the members of the Board and employees • Toray shall establish regulations for important doc- uments and important information related to man- agement, confidential 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 • In order to identify potential risks in business activi- ties, strive to mitigate such risks under normal busi- ness conditions, and prevent future crises, Toray shall establish the Risk Management Committee as one of the group-wide committees to promote compa- ny-wide risk management, and improve regulations 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 finan- cial 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 reg- ular 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 pertain- ing to controls over risks of loss for subsidiaries, the Company shall provide subsidiaries with guid- ance to help them to establish risk management sys- tems 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 execution of business operations. In addition, the Company shall endeavor to grasp man- agement information in a unified manner and provide assistance and guidance necessary 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 employ- ees of subsidiaries complies with laws and regula- tions and the Articles of Incorporation, the Company shall thoroughly familiarize its subsidiaries with the Company’s Ethics & Compliance Code of Conduct as a code of conduct in common for Toray Group. At the same time, the Company shall request the subsidiar- ies 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 respective countries. In addition, the Company shall direct its subsidiaries to establish systems under which the status of internal whistle-blowing by mem- bers of the Board, etc. and employees of the subsid- iaries 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. Toray Industries, Inc.Integrated Annual Report 2021 65 • Department in charge of the internal reporting system (whistle-blowing system) shall regularly report the sta- tus of internal 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 auditors shall not be subjected to any disad- vantageous 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 exe- cution 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 assis- tance if and when corporate auditors request assis- tance. The said employee shall exclusively follow the corporate auditors’ commands and instructions, and the Company shall consult with corporate auditors in Details of Remuneration (April 2020 - March 2021) advance with respect to the personnel arrangements for the said employee. 9. Other systems for ensuring effective implementation of audits by corporate auditors • Corporate auditors shall attend Board of Directors meetings 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 members of the Board and management and con- duct 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 which is a fixed amount as well as a performance-based remu- neration, including a bonus which takes into account the consolidated business results for each fiscal year, etc., and stock acquisition rights as stock options, which are linked to medium- to long- term business results. The Company undertakes reviews of the payment ratios of performance-based remuneration and remu- neration, etc. other than performance-based remuner- ation as appropriate, based on the results of a survey of other companies’ remuneration and deliberations at the Governance Committee, etc. Total remuneration by type (millions of yen) Position Total remuneration (millions of yen) Basic Performance-based remunerations Non-monetary remunerations Bonuses Members of the Board (excluding outside directors) Corporate auditors (excluding outside corporate auditors) Outside directors Outside corporate auditors 722 524 79 42 36 79 42 36 75 — — — Stock options as remunerations 123 — — — Recipients 20 3 4 3 Notes: 1. Recipients included twelve members of the Board (excluding outside directors) and one corporate auditor (excluding outside auditors) who retired during fiscal 2020. 2. Total amounts of remuneration do not include the ¥21 million paid in salaries to three employee-directors. Composition of Remuneration (April 2020 - March 2021) President and Representative Member of the Board Internal Member of the Board Basic: 70% Basic: 73% Performance-based remunerations Bonuses: 15% Stock options as remunerations: 15% Performance-based remunerations Stock options as remunerations: 17% Bonuses: 10% Toray Industries, Inc.Integrated Annual Report 2021 66 The provision and the total amount of bonuses are of Directors’ meeting held on June 16, 2021. The over- determined each time at a general meeting of stock- view of the results of the analysis and evaluation shown holders, with consideration given to the consolidated below describes the contents resolved at the Board of core operating income for each fiscal year that best rep- Directors’ meeting. resents the results of the Company’s global business (1) In fiscal 2020, the Board of Directors performed over- operations, plus the historical record, etc. The individual sight and decision-making based on a deep under- bonus for each member of the Board is determined by standing and sympathy with the Management the President according to each member’s performance Philosophy and Corporate Missions. As a result, we based on the Company’s internal regulations with a res- believe that the Board of Directors generally fulfilled olution at a Board of Directors’ meeting. its roles and responsibilities in indicating the direc- The maximum limit of total number of Stock tion of corporate strategies and other major courses Acquisition Rights as well as the limit of remuneration of action in an appropriate manner. relating to the granting of the Stock Acquisition Rights (2) In fiscal 2020, the Board of Directors held 14 meet- as stock options to members of the Board is resolved ings in total to perform oversight and decision-mak- at the general meeting of stockholders, and within ing in a timely and appropriate manner. Furthermore, that limit, the total number of Stock Acquisition Rights it promoted reviews on the scope of delegating deci- to be allocated to the members of the Board shall be sion-making authority. Through these initiatives, we decided at the Board of Directors meeting based on the believe that the Board of Directors generally fulfilled Company’s internal regulations. its roles and responsibilities in establishing an envi- Given their roles, remuneration for corporate audi- ronment conducive to appropriate risk-taking by the tors consists of basic remuneration only. Remuneration senior management in an appropriate manner. is set at a level that enables the Company to secure (3) With respect to the 14 Board of Directors meetings superior human resources, referring to the results of a held in fiscal 2020, the attendance rate of the mem- survey of other companies’ remuneration by an external bers of the Board was 99.6%. Outside directors third-party organization. made remarks mainly from their respective profes- With respect to basic remuneration, the maximum sional viewpoints. The opinions, etc. at the Board of limit of total remuneration is determined at general Directors meetings, including the abovementioned meetings of stockholders. Within the scope of the maxi- remarks, were appropriately reflected in measures mum limit, basic remuneration to each corporate auditor taken by the management. With respect to transac- is determined through consultation by corporate audi- tions causing possible conflicts of interest, internal tors based on the Company’s internal regulations. procedures to handle them were appropriately car- The Governance Committee continuously reviews ried out. In light of the above, we believe that the the remuneration system for members of the Board and Board of Directors generally fulfilled its roles and corporate auditors. Overview of the Results of the Analysis and Evaluation Toray’s Board of Directors conducted a “Questionnaire responsibilities in carrying out the effective oversight of members of the Board and the management from an independent and objective standpoint in an appro- priate manner. (4) Based on the above, we believe that the Board of Survey to Evaluate the Effectiveness of the Board of Directors generally fulfilled its roles and responsibili- Directors in the fiscal year ended March 31, 2021” ties in an effective manner in fiscal 2020. With regard among 17 survey respondents, who comprised all of to the matter, “further activating discussions at the the Board members and corporate auditors. In addition, Board of Directors meetings,” however, continuing the Company conducted interviews with seven outside from fiscal 2020, specific measures for improvement directors and outside corporate auditors to hear their must be taken in fiscal 2021 and thereafter to further opinions in relation to their responses to the question- improve the effectiveness of the Board of Directors. naire. The collection and tabulation of the questionnaire, In addition, we will promote the provision of opportu- and interviews were outsourced to a third-party organi- nities for communication with executives in order to zation to ensure transparency and objectivity. The survey demonstrate the functions of outside directors. results were analyzed and evaluated at the Governance (5) With respect to the opinions, etc. received from Committee held on May 21, 2021, and the results of the the members of the Board and corporate auditors analysis and evaluation were deliberated at the Board in the course of evaluating the effectiveness of the Toray Industries, Inc.Integrated Annual Report 2021 67 Board of Directors, the Governance Committee shall to ensure the independence of its management. deepen discussions based on those opinions with a • When exercising authority over the election and dis- view to further improving the effectiveness of the missal of the subsidiary’s outside and independent Board of Directors, as necessary. directors, the Company seeks to make an appropri- Measures to ensure the effectiveness of the governance framework for listed subsidiaries Chori Co., Ltd. ate decision for each agenda item, while serving the interests of the subsidiary’s shareholders in general. That decision depends on whether the candidate can oversee management from a broader perspective to further improve the transparency and fairness of • On March 25, 2020, Chori Co., Ltd. established the management, and can provide appropriate manage- Governance Committee, which is a voluntary com- ment advice from a mid- to long-term perspective, mittee, to strengthen the independence, objectiv- based on his/her sympathy with the management ity, and accountability of the functions performed by philosophies of Toray and the subsidiary and under- its Board of Directors regarding the nomination and standing of the businesses remuneration of members of the Board. The subsidi- • The transactions between the Company and the sub- ary’s Governance Committee also deliberates on mat- sidiary are entered into based on the negotiations with ters that become necessary to be addressed from the reference to the market price, etc. perspective of protecting the interests of its general shareholders. No former employees, directors, offi- cers, or other personnel of the Company serve as members of the Governance Committee, which is composed mainly of independent outside directors, hence the independence of the subsidiary in exer- cising authority over the election and dismissal of its directors is guaranteed. • When exercising authority over the election and dis- missal of the subsidiary’s independent outside direc- tors, the Company seeks to make an appropriate decision for each agenda item, while serving the interests of the subsidiary’s shareholders in general. That decision depends on whether the candidate can oversee management from a broader perspective to further improve the transparency and fairness of man- agement, and can provide appropriate management advice from a mid- to long-term perspective, based on his/her sympathy with the management philoso- phies of Toray and the subsidiary and understanding of the businesses. • The transactions between the Company and the sub- sidiary are entered into based on the negotiations with reference to the market price, etc. Suido Kiko Kaisha, Ltd. • The Company’s involvement in the appointment of director candidates in Suido Kiko Kaisha, Ltd. is lim- ited to a reasonable extent in the interest of main- taining parent-subsidiary cooperation, to leverage the Company’s knowledge and network so that the most suitable candidates can be elected for the enhance- ment of the subsidiary’s corporate value. In addition, the subsidiary shall reserve the power of appointment Toray Industries, Inc.Integrated Annual Report 2021 68 Compliance Basic Approach In order to contribute to society by leveraging innova- tive technologies and advanced materials in line with its corporate philosophy, as well as by working to resolve major global issues, Toray Group must build and main- tain relationships of trust with our various stakeholders. And in order to gain this trust, it is essential to com- ply with the laws and regulations related to our busi- ness activities in each country in which we operate and maintain the highest level of integrity in all our actions. Therefore, top management focuses on its leadership role in making compliance a priority, while both the Group and its suppliers are required to promote ethics and compliance. Ethics and Compliance Structure Toray has established an Ethics and Compliance Committee chaired by the President and consisting of vice presidents. At this committee, management and workers come together to consider and discuss pol- icies related to ethics and compliance. Moreover, this Committee reports on the operational status of the whistle-blowing system established by Toray Group, including the number of reports (consultations) and other details, to members of the Board. During fiscal 2020, this Committee met twice to deliberate and discuss Toray Group’s ethics and compli- ance activity results for fiscal 2019 and the activity plans and progress updates for fiscal 2020. This Committee also discussed individual measures, including revision of the Ethics & Compliance Code of Conduct and imple- mentation of Compliance Month. Acting as leaders, divisional and departmental general managers at each workplace adopt a top-down approach toward promot- ing initiatives. In initiatives for group companies around the world, Toray Group has established the Affiliate Companies’ Compliance Meeting and the Overseas Affiliate Companies’ Compliance Meetings under the Ethics and Compliance Committee. Through these committees, Toray Group is promoting compliance activities in each company, country and region. Ethics & Compliance Code of Conduct Toray reviewed the content of the Corporate Ethics and Legal Compliance Code of Conduct, and revised it as the Ethics & Compliance Code of Conduct in May 2020. The revised code summarizes the compliance helpline, the promotion framework for ethics and compliance, and codes of conduct, which serve as a series of core rules that must be observed in different areas of busi- ness by Toray group companies and all executives and employees, including contracted, part-time and tempo- rary workers, as a means of fully informing employees of these obligations and tools. 1. Compliance for safety and the environment (1) Building a safe working environment (2) Caring for the environment 2. Compliance for quality (1) Providing safe and satisfactory products to customers (2) Proper quality data management 3. Compliance for human rights (1) Respect for the character and individuality of employees (2) Preventing harassment and discrimination (3) Respect for the human rights of all stakeholders 4. Compliance for fair business activities (1) Competing fairly (2) Fair transaction and asset management (3) International trade control and security trade administration (4) Compliance with applicable laws in general 5. Compliance for intellectual property (1) Respect for intellectual property rights of others 6. Compliance for information management (1) Information management (2) Proper reporting and public disclosures Corporate Ethics and Legal Compliance Education Toray posts information on CSR and legal compliance on its corporate intranet. Toray Group circulates important information about legal and compliance matters that are highly relevant to its business in Japan and overseas. Group companies implement workshops to examine these matters and study cases of corporate misconduct in an effort to foster discussion in the workplace. Since fiscal 2012, Toray has provided e-learning courses on corporate ethics and legal compliance for all executives and employees, including contracted, part-time and temporary workers. In fiscal 2020, the Company covered the Ethics and Compliance Code of Conduct, which had been revised in May 2020, and human rights in training course themes. With regard to human rights issues, the Company used case studies based on actual reports and consultations within Toray Group as models to raise awareness among participants that issues can occur in their own departments. Group companies in Japan are using these materials to imple- ment their own training. Toray Industries, Inc.Integrated Annual Report 2021 69 Concerning trading subsidiary’s receipt of warning from Ministry of Economy, Trade and Industry’s Trade and Economic Cooperation Bureau Toray International, Inc. (TI) , a trading subsidiary of Toray Group, received a warning, which included a request to implement recurrence prevention mea- sures and strict security export controls, under the name of the director of the Ministry of Economy, Industry’s Trade and Economic Trade and Cooperation Bureau. The warning deemed that the carbon fiber for which TI had obtained an export license under the Foreign Exchange and Foreign Trade Act and exported to China had been sold to third parties that TI had not obtained the license for, and that as a background, there were deficiencies such as unproper examinations of transactions. With regard to what caused this situ- ation to arise, Toray Group will thoroughly address the export controls and compliance for the entire group to prevent any recurrence. Expanding the Whistle-Blowing System Toray established the Corporate Ethics and Legal Compliance Helpline as a whistle-blowing system in fis- cal 2003 and expanded the system to include all group companies in Japan in fiscal 2010. The Company has processed reports received based on internal rules. The number of inquiries (consultations) received through the hotline and the details of the cases are reported to the Board of Directors by the Ethics and Compliance Committee, which convenes twice a year. Reinforcing Compliance in Product Quality Assurance Toray Group is pursuing five major issues to reinforce product quality assurance compliance throughout the Group. 1. Reinforcement of structures related to quality assurance systems of the entire Toray Group The Group provides guidance to each division and group companies regarding their quality assurance system, and audits the effectiveness of these systems and the work done under them. Based on the formulated prod- uct quality assurance vision, the organizations design initiatives to close the gap between the vision and actual performance. 2. Development of human resources and creation of workplace culture not allowing any misconduct Toray has designated November as Quality Month. initiative, the Company has Coinciding with this conducted quality assurance compliance education since fiscal 2020. By providing educational materials to Toray Industries as well as Group companies in and out- side Japan, each department and company is taking the initiative in promoting training. 3. Understanding of actual state of agreements with customers and establishment of guidelines related to product quality (assurance) The Group is preparing guidelines for product qual- ity assurance agreements and will use them to assess agreements and review their provisions as necessary. 4. Appropriate maintenance or control and modernization or fulfillment of measuring equipment The Group prepared a risk assessment table for judging the necessity of upgrading or conducting maintenance on measuring equipment, and used them to identify devices in need of an upgrade. 5. Improvement of quality data management system to not allow any misconduct The Group is developing data management systems that minimize human involvement, such as by automat- ing measurement and transfer of measurement data, and issuance of inspection reports. Improving Security Trade Controls 1. Sharing the Latest Trends and Management Strategies for Security Trade Controls Concerns about the spread of conventional mass weap- ons of destruction and changes in the international security balance necessitate risk management address- ing security trade controls. Toray convenes a Security Trade Administration Committee comprising executives of divisions that are involved in exports and technology transfer. In fiscal 2020, the committee decided on measures to imple- ment for the fiscal year after considering pressing risks based on recent international circumstances and regu- latory trends. The committee members also convene a Divisional Security Trade Administration Committee that communicates corporate measures and implements sup- plementary programs, such as precautions to be taken by departments and group companies under its supervision. 2. Practically Addressing Risks 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 man- agement is necessary for TORAYCATM carbon fiber and Toray Industries, Inc.Integrated Annual Report 2021 70 its composite 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 imple- mented based on conditions in and outside of Japan. (1) Enhanced employees’ capacity for accurate judgment within Toray’s divisions and group companies To avoid the risk of COVID-19 infections, Toray reorga- nized the conventional education system, converting highly specialized on-the-job training to a Web confer- encing method and basic level specialized education to an e-learning method, which the Company then imple- mented. Toray conducted training to provide the nec- essary practical knowledge to the mid-level employees that play a central role in implementing security trade controls, as well as training to newly appointed manag- ers to encourage appropriate on-site management. (In the total of nine courses, 670 employees participated in Web conferences, and 4,758 via e-learning.) The Company also conducted a series of advanced courses for employees with specialized expertise. These hands-on courses were designed to better equip them with the skills necessary to conduct classifica- tions, export transactions and technology transfers. (A total of 176 employees participated in Web conferences in four courses.) In addition, the Company systematically encour- ages employees to take the exam authorized by the Center for Information on Security Trade Controls in Japan. A total of 166 Toray group employees passed the exam in fiscal 2020, bringing the cumulative num- ber of Toray Group employees who have passed the exam to 4,159 persons. (2) Conduct regular audits Toray carried out paper audits and onsite audits of group companies, and 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 Toray established a link between the security trade administration system and the sales backbone system as part of regular operations in order to improve the infrastructure for preventing mistaken shipments due to human error. Moreover, the Company supported inno- vative initiatives designed to improve the efficiency of administration through the use of these systems, and widely deployed cases that have produced results. Competition Law Compliance, Anti-Corruption, and Anti-Bribery 1. Competition Law Compliance The Ethics & Compliance Code of Conduct, revised in May 2020, defines the code of conduct related to competition laws that must be observed by all Toray Group executives and employees. Educational materi- als related to competition laws have been prepared in Japanese and English for all Toray Group employees. Within Japan, the Group prepares and utilizes compli- ance training materials and gathers examples of com- pliance violations related to competition laws. In fiscal 2020, no legal action was taken against Toray Group on the grounds of antitrust law violations. 2. Anti-Corruption and Anti-Bribery In January 2020, Toray Group formulated the Anti- Bribery Regulations that explicitly prohibit offering and accepting bribes to or from public officials and busi- ness partners, and established the rules for approval and reporting when offering or receiving money or other benefits to or from public officials and business part- ners. Similar rules have also been introduced at both domestic and overseas group companies. The Ethics & Compliance Code of Conduct defines the code of conduct related to anti-corruption and anti-bribery measures that must be observed by all Toray Group executives and employees. Accompanying guide- lines and educational materials covering to the anti-cor- ruption and anti-bribery measures have been prepared in Japanese and English for all Toray group employees and these are shared on a group-wide basis. In March 2020, Toray conducted e-learning training sessions for all executives and employees (including contracted, part- time and temporary workers) that covered the anti-brib- ery measures. Domestic affiliated companies also use similar teaching materials to provide education. No legal action was taken against Toray Group on anti-corruption or anti-bribery grounds in fiscal 2020. Protection of Personal Information In order to comply with Japan’s Act on the Protection of Personal Information, Toray has established Regulations Toray Industries, Inc.Integrated Annual Report 2021 71 for the Management of Personal Information, together with a management framework and practices to ensure each department manages personal information appro- priately. Audits are regularly conducted into the manage- ment conditions in each department. In fiscal 2020, the Company received no complaints concerning personal information and there were no data breaches. Major Toray Group companies in and out- side Japan appropriately conduct management in accor- dance with the management systems and methods specified by the internal rules of each company. Promotion of Mission B.E.A.R. Activities In fiscal 2018, Toray Group launched a new initiative with the slogan “Have the integrity to do the right thing in the right way.” The initiative includes the following four principles for taking more effective action to ensure compliance. Compliance Action Principles B: Be fair, be honest and have integrity E: Encourage respect and communication A: Adopt a genba (workplace) approach – Look to the facts! R: Responsibility as a member of our excellent company Under the name “Mission B.E.A.R.,” taking its acro- nym from the first word of each principle, Toray group companies formulate declarations and action plans related to compliance, and implement initiatives that cor- respond to their individual situations. Toray Group imple- ments periodic follow-ups for the initiatives of each company, shares the effective initiatives of each com- pany within the Group, and encourages each company to take the initiative in evolving their compliance activities. In fiscal 2020, Toray continued to assist each com- pany’s compliance promotion activities. Beginning with Compliance Promotion Month, steps were actively taken to share compliance-related initiatives, new edu- cational tools, and educational materials via video as a part of the Company’s remote work endeavors. Through these activities every effort is being made to strengthen risk response that emphasizes factors unique to each region and type of business while reinforcing Toray Group’s integrity-driven corporate culture. Implementing Internal Legal Audits In fiscal 2016, Toray Group adopted a group-wide system for self-inspections and mutual internal control audits. Designated divisions of Toray and designated group companies in and outside Japan must receive an inter- nal legal and compliance audit once in every three years. In fiscal 2019, internal legal compliance audits were implemented for the designated departments of Toray and its group companies in Japan. In fiscal 2020, the Company confirmed the improvement status of problems found in the audit, verifying that 100% of the companies had made improvements (including companies under improvement). To increase the effectiveness of audits related to high-priority items—including, antitrust law, bribery regulations, insider trading regulations, and entry into agreements—Toray reviewed the audit methods related to legal affairs and compliance in fiscal 2019 and implemented an internal legal audit in fiscal 2020. Nothing inappropriate was found in any of the items covered. Tax Compliance Toray Group is committed to meeting its tax responsi- bilities in accordance with local and national tax laws and related rules, as well as to meeting international standards such as OECD guidelines. With the growth of international transactions, transfer pricing is increas- ing in importance. The Group endeavors to suitably allo- cate its income by calculating transfer pricing based on the arm’s length principle. Under the awareness that it is important to fulfill its social responsibilities as a cor- poration by administering taxes in a highly transparent manner, the Group redefined its basic approach to tax policies with which each employee must comply, and established the Toray Group Tax Policy in order to reli- ably implement tax compliance related initiatives to a greater extent. This policy has been applied globally starting in May 2020. Basic Policy 1. Toray Group makes efforts to pay taxes appropri- ately by complying with the tax laws of each coun- try and international taxation rules. 2. Toray Group makes efforts to enhance corporate value and maximize shareholder value while mini- mizing tax risks and optimizing tax expenses. 3. Toray Group will not conduct arbitrary tax avoid- ance using tax havens or other methods. 4. Toray Group establishes good relationships with the tax authorities of each country. Toray Industries, Inc.Integrated Annual Report 2021 Results by Segment for Fiscal 2020 S e g m e n t I n f o r m a t i o n Segments Summary of Financial Results Fibers & Textiles Performance Chemicals The segment was affected by the stagnation in production activi- ties and consumption behavior caused by the COVID-19 in Japan and overseas. In the apparel applications, demand declined due to lockdown and excessive channel inventory in various coun- tries, while in industrial applications, general purpose materials remained weak and sales volume declined. Demand for nonwo- ven fabrics increased for the applications of medical gowns and masks and there have been signs of recovery in the automotive applications from the third quarter, but these factors fell short of offsetting the decline in the overall sales volume in the segment. The resins business was affected by the stagnation in produc- tion activities caused by the COVID-19, but demand has been strong since the third quarter with automobile manufacturers operating and the recovery of the Chinese economy. The chem- icals business saw a recovery trend in the basic chemicals mar- ket. In the films business, battery separator films for lithium-ion secondary batteries were affected by lower market prices, while polyester films for optical applications and electronic compo- nents performed strongly. In the electronic & information mate- rials business, OLED-related demand increased. Carbon Fiber Composite Materials While the sales of wind turbine blade applications remained strong in industrial applications, aerospace application was affected by the decline in the production rate of commer- cial aircraft. Environment & Engineering In the water treatment business, demand for reverse osmosis membranes and other products grew strongly on the whole, while shipment to some regions were affected by the COVID- 19. In the environment and amenity business, demand for air fil- ters was strong. Among domestic subsidiaries in the segment, an engineering subsidiary experienced decreases in the shipment of some elec- tronics related equipment. A construction subsidiary posted prof- its from completion of a real estate project. Life Science In the pharmaceutical business, sales of pruritus treatment REMITCHTM* were affected by the introduction of its generic ver- sions as well as by a major NHI drug price revision in April 2020. In the medical devices business, shipment of dialyzers grew strongly in Japan and overseas, despite the impact of medical institutions postponing non-urgent operations due to the spread of the COVID-19. *REMITCHTM is a registered trademark of Torii Pharmaceutical Co., Ltd. 72 Revenue 719.2 (38%) Revenue 720.4 (38%) Revenue 182.9 (10%) Revenue 193.5 (10%) Revenue 53.0 (3%) Core Operating Income 36.6 Core Operating Income 67.0 Core Operating Income 7.5 Core Operating Income 14.5 Core Operating Income 1.3 Performance (Billion yen) * The figures in parentheses of each segment are composition ratios by segment. Main Products Revenue 719.2 (38%) Revenue 720.4 (38%) Revenue 182.9 (10%) Revenue 193.5 (10%) Revenue 53.0 (3%) Core Operating Income 36.6 • Filament yarns, staple fibers, spun yarns, woven and knitted fabrics of nylon, polyester, acrylic, and others • Nonwoven fabrics • Nonwoven material created using ultra-fine fibers in an “Island in the Sea” configuration • Apparel products, etc. Core Operating Income 67.0 Core Operating Income 7.5 • 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 mate- rials, etc. • Carbon fibers, carbon fiber composite materials, and molded products from those materials, etc. Core Operating Income 14.5 • 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. Core Operating Income 1.3 • Pharmaceuticals • Medical devices, etc. * Excludes other businesses, equivalent to ¥14.6 billion (1%) in revenue and ¥2.9 billion in core operating income, and adjustment of core operating income of -¥24.6 billion. The composition ratio by segment of core operating income is calculated excluding the adjustment amount. 73 Fibers & Textiles Changes in Core Operating Income (Billion yen) Fiscal year 2019 2020 Changes 2021 (Forecast) 59.6 -31.8 Revenue (Billion yen) 831.0 719.2 -13.4% 842.0 59.6 36.6 -38.6% 49.0 Core Operating Income (Billion yen) Core Operating Margin 7.2% 5.1% FY 2019 Difference in quantity Net change in price FY 2020 Cost variance, etc. Difference from foreign currency translation of overseas subsidiaries’ results +6.7 +0.1 36.6 +2.1 -23.0 Revenue (Billion yen) 719.2 Core Operating Income (Billion yen) 36.6 Core Operating Margin 5.1% ROA (Core Operating Income/Assets) 4.5% TOPICS Effectiveness of MAKSPECTM V in Combating COVID-19 Confirmed Toray has developed the MAKSPECTM V antiviral textile which delivers exceptional durability when washed and comfort when worn. Having succeeded in absorbing the agent within the polyester fibers by means of our unique immobilization tech- nology, MAKSPECTM V received antiviral certification for envel- oped viruses from the Japan Textile Evaluation Technology Council. It also offers excellent commercial laundry washabil- ity. Furthermore, in a test conducted in accordance with the JIS standard antiviral test for textile products, for which COVID-19 (SARS-CoV-2) was used, the virus was attached to the surface. When, after two hours, the concentration of remaining virus was measured, it was confirmed that this had decreased by 99.9% or more, similar to the test results using other enveloped viruses. Taking advantage of these features, we are expanding into a wide range of fields which have high needs for this effect, from uniform applications, such as customer service clothing, nursing, and school uniforms, to sports, casual apparel, fashionwear, and children’s clothing. 74 Messages from the General Managers of the Business Divisions Fibers & Textiles Business General Manager, Fibers & Textiles Division Kenichiro Miki As for the business environment, there is a continued recovery trend in the market, mainly in Europe, U.S.A., and China, where progress has been made with anti-COVID-19 measures. In contrast, the demand structure in some fields, for example fibers and textiles for apparel use, has changed significantly compared with prior to COVID-19 due to changes in lifestyles and consumption brought about by the pandemic. In fiscal 2020, the fibers & textiles business in general had struggled due to the stagnation of the global economy. However, under the Medium- Term Management Program, Project AP-G 2022 (AP-G 2022) basic policies of the Fibers & Textiles Division—continuously strengthen the business structure; expand in growth regions and growth business fields; and enhance profitability by promoting a differentiation strategy and addressing sustainability—in the nonwoven fabric business, we responded to growing demand in the field of masks and protective clothing and also commenced operations at new PP spunbond bases in China and India. Also, we steadily addressed sustainability issues, such as our efforts with the &+TM brand that makes use of recycled polyester (PET) bottles. In fiscal 2021, the challenges of the Fibers & Textiles Division are to cap- ture demand that is recovering on a global basis and to return to the growth trajectory that the Division was aiming for under the medium-term man- agement program, by accurately responding to new market needs in an era in which the Company coexists with COVID-19. We will continue to promote AP-G 2022 initiatives such as business expansion in growth busi- ness fields and regions and enhancement of profitability by promoting a differentiation strategy, driven by airbags, nonwoven fabrics, nonwoven material created using ultra-fine fibers, and integrated business from fiber to textiles and further to garments. Also, we will promote business expan- sion by addressing sustainability, by the expansion of the GR businesses, which are centered on energy saving materials, biomass, and recycling, to help address global environmental problems, and the LI businesses cen- tered on the medical and healthcare fields. To all shareholders and investors: Going forward, by freely utilizing and combining the strengths of Toray’s fibers & textiles business of (1) tech- nological development capabilities and variety of products; (2) customer responsiveness in supply chains comprising of fibers, textiles, and gar- ments; and (3) global business network, we will provide solutions to our customers and aim for sustainable growth that adapts to changes in the world through the world’s only “three-dimensional business development.” 75 Performance Chemicals Fiscal year 2019 2020 Changes 2021 (Forecast) 54.5 +1.7 +2.5 +9.0 -0.6 67.0 Changes in Core Operating Income (Billion yen) Revenue (Billion yen) 761.2 720.4 -5.4% 890.0 Core Operating Income (Billion yen) Core Operating Margin 54.5 67.0 +22.8% 89.0 +12.4 7.2% 9.3% FY 2019 Difference in quantity Net change in price FY 2020 Cost variance, etc. Difference from foreign currency translation of overseas subsidiaries’ results Revenue (Billion yen) 720.4 Core Operating Income (Billion yen) 67.0 Core Operating Margin 9.3% ROA (Core Operating Income/Assets) 6.6% TOPICS Sales of Environmentally-Friendly EcouseTM Series PET Films Launched Toray has started sales of the EcouseTM series of environmentally- friendly films, for which polyester (PET) films from electronic component applications are collected and reused. Previously, the films from electronic components had been mainly treated as waste or used in thermal recycling. Now, by combining mechanical recycling* process technology, which removes a wide variety of coating materials and resins from film surfaces, with foreign matter removal technology for each manufactur- ing process, Toray is able to reuse the material in films with- out impairing its mechanical characteristics or reliability. Toray then collaborated with supply chain companies, built a system to collect and reuse used PET film from electronic component applications and commenced operations. This series of environ- mentally-friendly PET films could help to lower the consump- tion of raw materials derived from fossil fuels and waste plastics while reducing CO2 emissions by up to 50% compared with con- ventional Toray products. * A physical recycling method for recycling after crushing and cleaning plastic. 76 Messages from the General Managers of the Business Divisions Resins & Chemicals Business General Manager, Resins & Chemicals Division Nobuyuki Inohara Business environment: In addition to changes in social systems and industrial structure due to trends such as moves toward a sustainable soci- ety, the promotion of ICT applications, the ever-increasing global popula- tion, and aging populations, the prolonged COVID-19 pandemic has caused dramatic changes in people’s lifestyles. Major countries have declared that they will become carbon neutral by 2050, and moves toward that end are taking shape. These moves include examining the full-scale introduction of carbon taxes, accelerating the shift to electric vehicles (xEVs) by regu- lations covering the decarbonizing of automobiles, and installing environ- mentally-friendly materials in automobiles. Main initiatives: Our key initiatives concern the global expansion of high-performance products in growth areas (for example, next-generation mobility, 5G communications infrastructure, and the medical field), and our aim is to remain a true solutions provider that maintains an awareness that the success of our customers is of paramount importance. I think that the amount by which the Company contributes to the realization of a sustainable society will be the most important yardstick as an added value from now on. Medium-term management program: With regard to the progress we have made, in the field of resins, demand for electric vehicles and auton- omous driving support systems is rapidly increasing in the burgeoning next-generation mobility industry, and new applications for high-perfor- mance resins such as PPS are expanding globally. To strengthen prod- uct development tailored to local needs, we opened our fifth overseas resin technical center in Germany. In the case of transparent ABS res- ins, demand for which continues to grow, we expanded the facilities at Toray Plastics Malaysia Sdn. Berhad (TPM) and started operation in May. Demand for transparent ABS resins is also expanding for medical device applications. In the chemicals business, we are expanding the fine chemi- cals business and expanding the veterinary medicines business outside of Japan. As for measures to solve global environment issues, we are pro- moting further expansion of our resin recycling business, the reduction of GHG emissions at our plants, and giving consideration to CO2 reduction with an eye on the entire supply chain, including raw materials. To all shareholders and investors: We would like to contribute to the realization of a prosperous and sustainable future for all people through our businesses. 77 Messages from the General Managers of the Business Divisions Films Business General Manager, Films Division Satoru Hagiwara Business environment: The key points of the business environment sur- rounding the films business are sustainability represented by carbon neu- trality, which is a major trend of social change, and digital innovation in information and communication are the key points. In terms of sustainabil- ity, there are increasing demands for expanding the use of electric vehicles (xEVs), reducing waste plastics, and recycling. In digitalization, electronic circuit components have become more sophisticated and are of higher density due to the expansion of data communication capacity and the advancement of 5G, and demand for MLCC release films, film capacitors, and battery separator films is expanding also for automobiles, which rep- resents a huge market. Toray’s strengths lie in our films, which have con- tinued to hold the top share in the value-added field, and demand in fields where they can be utilized will continue to grow. Main initiatives: The key initiatives concern the realization of global expan- sion and the promotion of high added-value in growth business fields. To that end, we will enhance quality and strengthen development in anticipa- tion of market demand, and strengthen our efforts and initiatives in collab- oration with our customers with the aim of creating a sustainable society. Medium-term management program: As part of our capital investment to meet growing demand in growth business fields, we have increased the capacity of our polypropylene (OPP) film manufacturing equipment for auto- motive capacitors at our Tsuchiura Plant, lithium-ion battery separator man- ufacturing equipment in Hungary, and OPP film manufacturing equipment for food packaging in the U.S.A., and expanding our market share. On the development side, we installed a dedicated film development machine at the Mishima Plant to strengthen our ability to develop high-performance films. In order to realize a sustainable society, we are also building a recy- cling system with customers who collect and reuse used PET film, and developing the EcouseTM series of environmentally-friendly PET films. To all shareholders and investors: The Films Division will continue to contribute to the sustainability of society and innovation in digitalization by implementing in society in the form of products with the No. 1 tech- nological and development capabilities that have been cultivated over its 60-year history. 78 Messages from the General Managers of the Business Divisions Electronic & Information Materials Business General Manager, Electronic & Information Materials Division Hiroshi Enomoto Business environment: Against the backdrop of the spread of the COVID-19 infections and the prolonged trade friction between the U.S.A. and China, insufficient supplies of semiconductors and peripheral parts became apparent in some areas. However, due to the increase in global demand for electronic products brought about by factors that include the deployment of remote working methods as well as developments in IoT and DX, Toray recorded steady increases in sales of its advanced elec- tronic materials, which support the fields of information, communication, and electronics, including semiconductors, electronic components, and displays. Main initiatives: In addition to further sales expansion of products that are performing strongly, such as materials for OLED displays and mate- rials for semiconductors and electronic components, one key initiative is to steadily introduce high value-added applications and enter new growth fields. Other key initiatives are the promotion of drastic cost reductions by innovating production processes and the utilization of DX, and rapid and timely new product development that anticipates needs by the putting in place of flexible technological development capabilities. Medium-term management program: With regard to the progress we have made, in addition to materials related to OLED displays, which is a growth business field, sales of semiconductor and electronic component materials centered on the new 5G communications standard are steadily expanding. Also, we are focusing on expansion into the energy-related materials, environmentally-friendly products, and life innovation fields, and will further accelerate these efforts. To all shareholders and investors: The Electronic & Information Materials Division will utilize Toray Group’s advanced core technologies in the creation of high value-added electronic materials that meet new cus- tomer requests. Through the supply of these materials, we will strengthen the partnerships with its customers while realizing business expansion that is both sustainable and environmentally friendly. 79 Carbon Fiber Composite Materials Changes in Core Operating Income (Billion yen) Fiscal year 2019 2020 Changes 2021 (Forecast) 22.6 -46.6 Revenue (Billion yen) 236.9 182.9 -22.8% 213.0 Core Operating Income (Billion yen) Core Operating Margin 22.6 7.5 — 2.0 +3.9 -30.1 9.5% — FY 2019 Difference in quantity Net change in price +12.7 -0.1 7.5 FY 2020 Cost variance, etc. Difference from foreign currency translation of overseas subsidiaries’ results Revenue (Billion yen) 182.9 Core Operating Income (Billion yen) 7.5 Core Operating Margin — ROA (Core Operating Income/Assets) — TOPICS Concluded Agreements to Supply Carbon Fiber Composite Materials for “Flying Cars” Toray concluded an agreement to supply carbon fiber compos- ite materials for use in the Lilium Jet, which is under development by Lilium GmbH of Germany. One of the companies spearhead- ing the quest to develop Urban Air Mobility (UAM) vehicles, which are referred to as “flying cars,” Lilium is aiming to start commer- cial operations in 2025. They are promoting the development of the small, all-electric, five-seat, vertical take-off and landing (VTOL) air- craft Lilium Jet that will fly at speeds of 300 km/h or more. Carbon fiber composite materials will be employed for its fuselage, main wings, rotor vanes, and other structural components. In addition, Toray Advanced Composites, a Toray subsidiary, has signed a long- term supply contract for carbon fiber composite materials for the UAM being developed by Joby Aviation, Inc. in the U.S.A. This is also a small, all-electric, five-seat VTOL aircraft that will fly at speeds of 300 km/h or more. Carbon fiber composites are being used, for example, in its structures, propulsion system, and interior parts, with the goal of starting commercial operations in 2023 at the earliest. UAMs are expected to provide a new transportation system that will help to resolve the problems of traffic congestion, noise, and air pol- lution in urban areas. Toray is working on the development of innova- tive composite materials to enhance performance, conserve energy, and lower the cost of these “flying cars” while deepening its collab- oration with their manufacturers. 80 Messages from the General Managers of the Business Divisions Carbon Fiber Composite Materials Business General Manager, Torayca & Advanced Composites Division Minoru Yoshinaga Business environment: Due to a significant decrease in demand for com- mercial aircraft, the business environment has become severe. However, against the backdrop of increasing awareness of sustainability and environ- mental needs and the mobility revolution, developments in new growth areas, such as wind turbine blades, fuel cell vehicles and “flying cars” or Urban Air Mobility (UAM), are accelerating, and demand for carbon fiber in these areas is expanding. In addition, with increasing health conscious- ness, demand for sports applications, such as bicycles, fishing rods, and golf shafts, is steadily increasing. Main initiatives: As recovery in the aircraft market is expected around 2024, the key initiative for the time being will be to actively invest in appli- cations (including wind turbine blades, fuel cell electrodes, pressure ves- sels, UAM, rockets, and satellites, etc.) for which demand is expanding even during the COVID-19 pandemic. We will also promote strengthening of our business profitability and meeting market needs, through the devel- opment of high value-added products, material proposals that extend as far as the molding process for each application, the strengthening of tech- nical services, and further cost reductions, while continuing R&D focus- ing on next-generation, large-scale growth applications, including aircrafts. Medium-term management program: Our understanding of the medium- to long-term business environment and the basic strategies have not changed. Having completed facility expansion at the plant in Hungary of Zoltek Companies Inc., the Company is currently promoting the expan- sion of existing facilities at the company’s Mexico plant and will continue to respond to increasing demand in the years to come. In Japan, the pro- duction base of a new plant to manufacture fuel cell electrode substrates (carbon paper, gas diffusion layer) has been established. Progress is also being made with performance improvements and cost reductions in other expanding business fields. To all shareholders and investors: Toward the realization of a sustain- able future society and a mobility revolution, Toray will propose and pro- vide the most suitable materials for problem solving by making full use of the comprehensive strengths the Company possesses in regular and large-tow carbon fibers, thermoset and thermoplastic resins, to our cus- tomers worldwide. 81 Environment & Engineering Fiscal year 2019 2020 Changes 2021 (Forecast) +2.5 -0.6 +2.0 -0.0 14.5 Revenue (Billion yen) 190.8 193.5 +1.4% 208.0 10.6 Changes in Core Operating Income (Billion yen) Core Operating Income (Billion yen) Core Operating Margin 10.6 14.5 +37.5% 17.0 +4.0 5.6% 7.5% FY 2019 Difference in quantity Net change in price FY 2020 Cost variance, etc. Difference from foreign currency translation of overseas subsidiaries’ results Revenue (Billion yen) 193.5 Core Operating Income (Billion yen) 14.5 Core Operating Margin 7.5% ROA (Core Operating Income/Assets) 5.2% TOPICS Consecutive Orders Received for RO Desalination Plants in the Middle East Investing extensively in infrastructure against the backdrop of population growth, the Gulf states are in particular moving up their seawater desalination plant construction schedules to secure large amounts of drinking water. When newly construct- ing a seawater desalination plant, reduction of greenhouse gas emissions is taken into consideration, and there are increasing cases of the reverse osmosis (RO) membrane method being adopted over the distillation method, which consumes large amounts of energy. Under such circumstances, in addition to its track record, Toray was highly evaluated for its technical propos- als necessary for stable operation. For the Al Dur 2 Desalination Plant in the Kingdom of Bahrain and the Umm Al Quwain Desalination Plant in the United Arab Emirates, Toray received orders for RO membrane that will generate large-scale water production said to total 911,000 m3/day. Umm Al Quwain is one of the world’s largest seawater desalination plants using the RO membrane method. Product supply and technical services will be provided by Toray Membrane Middle East LLC (TMME), the Toray Group’s local subsidiary. The plants are scheduled to com- mence operations in 2022. 82 Messages from the General Managers of the Business Divisions Water Treatment Business General Manager, Water Treatment & Environment Division Hiroshi Otani Business environment: The global market for water treatment membranes temporarily shrank by about 5% in fiscal 2020 due to the impact of COVID- 19. In the early months of fiscal 2021, market conditions gradually recovered, mainly in China, Europe, and the U.S.A. Although risk factors remain, such as the spread of COVID-19 variants and soaring raw material prices, there is no change in the trend of strong demand for water treatment membranes in the medium- to long- term. Main initiatives: In our main business, reverse osmosis (RO) membrane business, we will increase our RO membrane production capacity by 1.7 times during the course of the medium-term management program. This increase comes against the backdrop of growing demand in China, where environmental regulations are becoming more stringent, and in the Middle East, where large-scale seawater desalination plants continue to be built. Our aim is to significantly increase revenue and profits and secure the No. 1 share of the global market through full production and maximum sales expan- sion. At the same time, we will thoroughly strengthen our competitiveness by continuously launching new high-performance products, promoting cost reductions, and building a strong supply chain. In both the Ultrafiltration (UF) membrane and Membrane Bio Reactor (MBR) module businesses, we will expand sales of new high-performance products launched in fiscal 2019 and reinforce our business foundation. Medium-term management program: We are aggressively operating the business in line with the basic policies and promoting business expansion as planned. In the RO membrane business in fiscal 2020, we achieved sig- nificant year-on-year increases in revenue and profits—in an environment in which the global market was shrinking—by making full use of production capacity that had been expanded 1.3 times from the previous fiscal year and by supplying high-performance membranes to large desalination project applications in the Middle East. In the UF and MBR membrane businesses, Toray is further strengthening our global sales structure and promoting sales expansion of new products as planned. To all shareholders and investors: Toray’s water treatment business has been helping to solve water shortages and reduce environmental impact by developing the world’s most advanced technologies, which are centered on seawater desalination and wastewater reuse applications. We will continue to expand and meet the diversifying demand for water treatment mem- branes, while contributing to the realization of a sustainable and prosperous planet Earth by improving water problems. 83 Life Science Fiscal year 2019 2020 Changes 2021 (Forecast) Changes in Core Operating Income (Billion yen) +1.7 -1.9 Revenue (Billion yen) 53.0 53.0 -0.1% 52.0 +1.0 -0.0 1.3 Core Operating Income (Billion yen) Core Operating Margin 0.5 1.3 +170.9% 1.0 0.5 3.8% 2.5% FY 2019 Difference in quantity Net change in price +0.8 FY 2020 Cost variance, etc. Difference from foreign currency translation of overseas subsidiaries’ results Revenue (Billion yen) 53.0 Core Operating Income (Billion yen) 1.3 Core Operating Margin 2.5% ROA (Core Operating Income/Assets) 1.8% TOPICS VR Platform for Catheter Ablation Procedural Training Developed Toray jointly developed HotBalloonTM Ablation: A VR Tour with Jolly Good Inc. This visual reality (VR) content is a high-definition version of the SATAKE-HotBalloonTM catheter procedure manu- factured and sold by Toray for the treatment of paroxysmal atrial fibrillation. An estimated 720,000 patients are said to undergo atrial fibrillation in Japan. The treatment generally necessitates advanced operative procedures. A physician inserts a catheter treatment device into the body and uses X-ray fluoroscopy to visually guide the instrument to the treatment site in the heart. The COVID-19 pandemic has made it difficult to observe the procedure at facilities that use the HotBalloonTM. In the med- ical field, there was a need for a tour tool that did not involve the movement of physicians and avoided people crowding in a clinical environment. Under such circumstances, the VR content developed on this occasion provides an opportunity for hands-on learning with a sense of realism—as if the participants were watching the actual operating procedure right next to the physi- cian—wherever and whenever they want and as many times as they like. The VR content fulfills the role of complementing the traditional on-site training at facilities where the physician uses the HotBalloonTM procedure. 84 Messages from the General Managers of the Business Divisions Pharmaceuticals & Medical Products Business General Manager, Pharmaceuticals & Medical Products Division Hirofumi Kobayashi Business environment: Due to the COVID-19 pandemic, responding to new lifestyles and improving infectious disease controls and medical systems have become major social issues. As the highest priority, we prioritize social contri- bution through the stable supply of products and services mainly in the dialysis and emergency field and through prompt responses to government requests. For the business as a whole, due to NHI drug price revisions and lower insur- ance reimbursement prices, the market entry and widespread acceptance of generic products, and the emergence of alternative drugs and treatments, the situation, including that of prices, remains severe. Also, we are promoting busi- ness structural reforms and medium- to long-term strategies (overseas busi- ness development, applications expansion, new businesses). Main initiatives: Based on the development of products and services with an eye on the end of the COVID-19 pandemic and for the era of co-existing with COVID-19, the key initiatives are: (1) in the pharmaceutical business, busi- ness development of existing products and expansion of indications outside Japan; (2) in the medical devices business, expanding and improving the appli- cations of existing products and reducing costs, launching and expanding sales of improved HotballoonTM Cathether (HBC) products; (3) sophistication and adding high-value to the dialysis business; and (4) in launching the diagnostic drug business as the next mainstay business, we will implement measures to increase the probability of success. At the same time, we are targeting a total solution business that utilizes DX and AI with the aim of improving the QOL of patients and reducing the burden on medical professionals. Medium-term management program: The development of our pharmaceu- tical business in China is progressing steadily amid delays in domestic and overseas clinical trials brought about by the COVID-19 pandemic. We have medical products in four areas—acute blood purification, cardiovascular, can- cer and interventional radiology, and optical. We made a contribution amidst the COVID-19 pandemic, expanded the applications of emergency and critical care medicine business, and started clinical trials of new products. The dialy- sis business is driving the entire business through its advanced dialysis perfor- mance and high added-value. In the next mainstay business of diagnostics, we are steadily promoting the measurement of cytokines, which has been attract- ing attention in the COVID-19 pandemic, and preparing approval applications for cancer diagnostics. To all shareholders and investors: While making social contributions to medical care with high-quality products and services following the end of the COVID-19 pandemic and for the era of co-existing with COVID-19, we will enhance the pharmaceutical, medical devices, and dialysis businesses and develop our business outside Japan. We will work to expand our business and improve profits over the medium- to long- term by launching our next mainstay diagnostic drug business. 85 R&D Fiscal 2020 R&D Expenditures (Billion yen) 62.8 R&D Expenditures (Billion yen) 66.2 66.4 66.9 62.8 59.2 Fiscal 2020 R&D Achievements Fibers & Textiles Using NANODESIGNTM, a pro- Toray has also created a non-po- rous separator for lithium-ion sec- prietary conjugate spinning tech- ondary batteries (LiBs) using nology that enables free and lithium metal as the anode. By highly precise control over the suppressing lithium dendrites for- cross-sectional geometry of con- mation and maintaining high ionic jugate fibers, Toray developed CamifuTM, a polyester filament conductivity, the non-porous sep- arator will increase the capacity textile that achieves the warmth and enhance the safety of Lithium and feel of hand-made Japanese paper. CamifuTM is environmen- tally-friendly, as one of its con- stituent polymers is made from recycled materials. The Company also developed the antiviral textile MAKSPECTM V, which Metal Anode Batteries. Carbon Fiber Composite Materials Toray has concluded an agree- ment with Lilium GmbH of Germany to supply carbon fiber delivers exceptional washing composite materials for the 16 17 18 19 20 (FY) durability and wearing comfort. Lilium Jet urban air mobility Toray Consolidated subsidiaries Percentage Breakdown of Total R&D Expenditures in Fiscal 2020 10% Fibers & Textiles 28% Performance Chemicals 14% Carbon Fiber Composite Materials In addition, Toray has developed LIVMOATM4000, a single-use (UAM) vehicle that the company is developing. The develop- protective clothing that has the ment of the UAM, which is also breathability to reduce stuffiness referred to as a “flying car,” is inside clothing while protecting progressing mainly in the small wearers from dust and water. electric motors that will enable Performance Chemicals Toray has developed Ultra-Thin and vertical takeoff and landing. Toray will help to resolve urban envi- ronmental issues by developing Flexible Tough Polymers which carbon fiber composite materi- retains the outstanding thermal als that cater to the unique chal- resistance, elastic modulus and lenges of UAM applications. strength of polyamide 6 resin, Toray has also jointly devel- while delivering an exceptional oped, with Tokyo-based MODEC, 7% 4% Environment & Engineering bending fatigue resistance 15 Inc., a carbon fiber reinforced plas- Life Science times higher than that of conven- tic (CFRP)-based repair technology 37% Corporate R&D tional polymers. The new material for oil and gas floating production, is expected to be used in automo- storage and offloading (FPSO) biles, home appliances, and sports and floating storage and offload- equipment with its superior bend- ing (FSO) facilities. Approval for ing fatigue resistance. the technology as a repair method 86 R&D Expenditures (Billion yen) 66.2 66.4 66.9 62.8 59.2 16 17 18 19 20 (FY) Toray Consolidated subsidiaries Percentage Breakdown of Total R&D Expenditures in Fiscal 2020 10% Fibers & Textiles 28% 14% 7% 4% Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science 37% Corporate R&D for sections corroded by rust has been obtained from the American Bureau of Shipping. Environment & Engineering Toray developed a new polyvi- nylidene fluoride (PVDF) ultra- filtration (UF) membrane with exceptional virus removal rate and high water permeability for water treatment. Since the mem- brane effectively removes viruses and does not reduce water per- meability, it can be expected to contribute to safe and economi- cal water supplies—treated with minimal energy at low cost—in a wide range of water treatment fields, from food and beverages to wastewater reuse. Life Science A new concept antibody drug that is expected to be effective in treating many types of can- cer, TRK-950 started Phase I clinical trials in the U.S.A. and France in March 2017. To date, the drug has been administered to more than 100 patients, and according to reports there have been no safety problems so far. The drug’s safety and efficacy is being confirmed and the aim is to apply for approval as a can- TOPICS Received Display Component of the Year Award for 2020 At the Society for Information Display (SID*), Toray received Display Industry Awards, the Display Component of the Year Award for its Spectrum Conversion by Organic Phosphor (SCO) sheet. This honor is in recognition of the sheet’s signif- icant contribution to the development of the display industry. Toray has developed an organic luminescent material that exhibits sharp emission spectra and successfully commer- cialized the product. It is the world first organic luminescent material that helps liquid crystal displays to deliver high color gamuts, enabling colorful displays that cannot be rendered by conventional inorganic phosphors. SID highly appreciated the SCO sheet, because the sheet is composed of organic materials with environmentally-friendly technology and thus free of heavy metals and other toxic substances. * Founded in 1962, SID is the world’s largest academic society for electronic displays. Received JCIA Technology Award for Anti-Thrombogenic Artificial Kidney Toray received the 53rd JCIA Technology Award from the Japan Chemical Industry Association (JCIA) for develop- ing and commercializing an anti-thrombogenic artificial kid- ney. This marked the sixth time for the Company to win that award, the previous occasion having been the 49th in fiscal 2016. The need to enhance the anti-thrombogenic performance of artificial kidneys in line with advances in dialysis treat- ment is growing year by year. Given that situation, Toray was acclaimed for having fully drawn on its nanotechnology and computational chemistry capabilities in succeeding in com- mercializing an artificial kidney, a polysulfone membrane, with significantly improved anti-thrombogenic properties. This development will lead to the commercialization of cer treatment drug at the earliest artificial kidneys to treat not only chronic but also acute renal possible time. failure, thereby contributing to improving patients’ quality of life (QOL) and ease burdens on medical professionals. 87 Intellectual Property Intellectual Property Strategies Management Strategies R&D Strategies Business Strategies Patents Filed 5,654 5,299 1,537 4,877 1,641 1,373 3,504 3,846 3,658 18 19 20 (FY) Domestic Overseas Patents Held 20,655 19,849 17,156 5,745 6,361 6,256 11,411 13,488 14,399 18 19 20 (FY) Domestic Overseas Basic Policies on Intellectual Property Toray Group has formulated and executes the following four intellectual property strategies as its basic policies on intellec- tual property. 1. Intellectual property strategies, as a part of the strategy trinity, that conform to management principles Toray Group regards intellectual property as one of its vital management resources. We integrate our intellectual property strat- egies 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 man- agement 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 property, we hold as many useful patent rights as possible and build patent portfolios. At the same time, we are committed to patent rights acquisi- tion made efficient by enhancing the qual- ity of individual patents. 3. Respecting the rights of others Toray has operated a system for com- prehensively investigating the relations between its own products and technol- ogies and patents owned by other com- panies, and we thoroughly educate employees to prevent infringement on pat- ent 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 circum- stances by exercising our patent rights, such as demanding that infringement cease, receiving monetary profits from licensing, and using our patent rights for cross-licensing with the patent rights of other parties. Intellectual Property Strategies in Line with Management Strategies Under Toray Group’s Medium-Term Man- agement Program, Project AP-G 2022, a medium-term management program was formulated not only for R&D, but also for intellectual property, and the following five measures are promoted. 1. Strengthening Toray Group’s intellectual property capabilities to address global business expansion Under the guidance of Toray’s Executive Vice President in charge, the Group is advancing intellectual property activi- ties through the construction of a frame- work in which the intellectual property for group companies in and outside of Japan are managed. Particular attention is paid to nurturing group companies that play a central role in respective regions, and to 88 supporting group companies that have newly joined the Group. 2. Strategic patent application and building barriers to entry by protecting knowhow Considering the risk of imitations that arises following the publication of applica- tions, a scheme where barriers to entry are put in place by creatively leveraging patent applications and the protecting our know- how is reinforced. Moreover, continuous efforts to further boost the quality of pat- ent specifications are made, as well as pro- motion of initiatives to strengthen patent applications and patenting of rights outside of Japan. 3. Promoting intellectual property strategies that contribute to the long- term corporate vision Intellectual property activities are pro- moted, in order to achieve sound, sustain- able growth espoused in the Long-Term Corporate Vision, TORAY VISION 2030. 4. Establishing an environment to support the promotion of efficient intellectual property strategies By digitizing and streamlining workflow for business tasks, such as internal and exter- nal contacts, queries and responses, or the paperwork involved in forms for circu- lar-type consultations, transition to paper- less offices and enhancement of efficiency in intellectual property operations are promoted. 5. Developing intellectual property-focused human resources Experts capable of promoting intellec- tual property strategies across the Group are being developed, specific to busi- ness areas and regions. In particular, the Group is elevating the intellectual prop- erty competency and capabilities of human resources at group companies, including national staff at group companies outside of Japan, while pursuing patent applica- tions and patenting of rights across the Group, and promoting effective and effi- cient infringement prevention activities. Toray Takes Top Spot on Patent Result’s Ranking for Fiber, Paper and Pulp Industry The “2020 Ranking of Capability to Prevent Other Companies from Obtaining Patent Rights,” published annually by Patent Result Co., Ltd., is an advanced patent application index that compiles the number of patents by a company that were cited as reasons for rejection of another company’s patent application in the course of the patent deliberation process, in any particular year. Toray was ranked No. 1 in the fiber, paper and pulp category for the eighth consecutive year. As the same index benchmarks are used, if “fiber, paper and pulp,” and “chemi- cals” categories are treated as a single industry, Toray’s ranking becomes No. 3. Financial Section CONTENTS 90 Selected Consolidated Financial Data 92 Management Discussion and Analysis 96 Consolidated Statement of Financial Position 98 Consolidated Statement of Profit or Loss 99 Consolidated Statement of Comprehensive Income 100 Consolidated Statement of Changes in Equity 101 Consolidated Statement of Cash Flows 102 Notes to the Consolidated Financial Statements 160 Independent Auditor’s Report Toray Industries, Inc. Integrated Annual Report 2021 89 財 務 情 報 F n a n c i a l S e c t i o n i 90 Selected Consolidated Financial Data Years ended March 31, Revenue*5 Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Other Plastics & Chemicals IT-related Products Core operating income*5 Profit before tax Profit attributable to owners of parent Cash flows from operating activities J-GAAP 2012 2013*1 2014 2015 1,588,604 1,592,279 1,837,778 2,010,734 638,375 632,150 755,474 856,676 — 69,914 170,247 55,554 13,295 397,815 243,404 107,721 101,091 64,218 104,410 — 77,620 178,355 56,599 14,127 395,835 237,593 83,436 77,828 48,477 — 113,342 180,197 58,205 14,277 470,542 245,741 105,253 97,760 59,608 100,815 161,455 — 158,365 179,988 57,039 14,321 496,370 247,975 123,481 114,469 71,021 141,282 Cash flows from investing activities (104,002) (107,525) (214,826) (140,662) Free cash flow Total assets 408 (6,710) (53,371) 620 1,581,501 1,731,933 2,119,683 2,357,925 Interest-bearing liabilities Equity attributable to owners of parent*5 481,906 627,111 532,002 724,161 654,163 859,001 700,258 985,668 Per share data: Basic earnings per share Diluted earnings per share Cash dividends per share Book value per share Ratios: Core operating margin*5 Return on assets Return on equity Equity ratio D/E ratio (times) Stock price range: High Low 39.41 37.46 10.00 29.75 28.90 10.00 36.59 35.70 10.00 44.33 44.28 11.00 384.90 444.45 527.32 616.70 6.8 6.8 10.5 39.7 0.77 631 511 5.2 5.0 7.2 41.8 0.73 654 421 5.7 5.5 7.5 40.5 0.76 6.1 5.5 7.7 41.8 0.71 786 584 1,057.5 626 Number of employees 40,227 42,584 45,881 45,789 *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 retrospectively 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. Toray Industries, Inc.Integrated Annual Report 2021 91 2016 2017*2 J-GAAP 2018*3 2019 2020 2020*4 2021 Millions of yen IFRS 2,104,430 2,026,470 2,204,858 2,388,848 2,214,633 2,091,166 1,883,600 892,039 — 186,196 183,324 55,841 14,720 521,238 251,072 154,480 137,808 90,132 196,142 856,124 724,648 161,608 212,548 54,150 17,392 — — 146,893 139,012 99,418 173,958 913,610 803,310 177,949 238,256 53,803 17,930 — — 156,464 136,612 95,915 129,180 974,265 868,847 215,913 257,673 53,653 18,497 — — 141,469 127,419 79,373 176,239 883,137 770,814 236,922 252,282 53,250 18,228 — — 131,186 94,046 55,725 225,767 (154,414) (135,242) (186,685) (260,247) (142,364) 41,728 38,716 (57,505) (84,008) 83,403 830,963 761,208 236,885 190,846 53,023 18,241 — — 125,532 123,304 84,230 238,262 (142,875) 95,387 719,239 720,418 182,884 193,524 52,965 14,570 — — 90,265 65,566 45,794 211,591 (97,872) 113,719 2,278,386 2,396,785 2,575,910 2,788,351 2,650,687 2,733,520 2,848,839 704,253 716,399 816,325 976,251 938,913 991,024 973,927 945,568 1,021,272 1,090,695 1,131,033 1,093,748 1,116,075 1,237,851 56.38 56.31 13.00 62.17 62.10 14.00 59.97 59.90 15.00 49.61 49.56 16.00 34.83 34.58 16.00 52.65 52.26 16.00 Yen 28.61 28.57 9.00 591.50 638.64 681.92 706.95 683.61 697.57 773.44 7.3 6.7 9.3 41.5 0.74 7.2 6.3 10.1 42.6 0.70 7.1 6.3 9.1 42.3 0.75 5.9 5.3 7.1 40.6 0.86 5.9 4.8 5.0 41.3 0.86 6.0 4.5 7.5 40.8 0.89 % 4.8 3.2 3.9 43.5 0.79 Yen 1,146.0 871.7 1,027.5 854.0 1,208.0 903.1 1,035.5 705.1 848.5 397.4 848.5 397.4 756.5 425.2 45,839 46,248 45,762 48,320 48,031 48,031 46,267 *4 Toray Group has adopted International Financial Reporting Standards (IFRS) instead of generally accepted accounting principles in Japan (J-GAAP) since the year ended March 31, 2021. Comparative information in accordance with IFRS is also presented for the year ended March 31, 2020. *5 For the figures prepared under J-GAAP, “Net sales,” “Operating income,” “Net assets less non-controlling interests and share acquisition rights” and “Operating income to net sales” are presented in place of “Revenue,” “Core operating income,” “Equity attributable to owners of parent” and “Core operating margin,” respectively. Toray Industries, Inc.Integrated Annual Report 2021 92 Management Discussion and Analysis Toray Group has adopted International Financial and followed by the U.S. and Europe. There were Reporting Standards (IFRS) instead of generally times when growth rate slowed, depending on the accepted accounting principles in Japan (J-GAAP) country, due to restrictions on economic activities since the year ended March 31, 2021. The figures for caused by the resurgence of COVID-19 infections, but the year ended March 31, 2020 are restated in accor- the global economy has been maintaining a recovery dance with IFRS for comparison and analysis in the trend in general. following analysis of financial performance, financial Under such circumstances, Toray Group in May position and cash flows. 2020 launched the new medium-term management program “Project AP-G 2022” aimed at achieving 1. Financial performance During the year ended March 31, 2021, the global sound, sustainable growth through the implementa- tion of basic strategies such as global expansion in economy was hit hard by the novel coronavirus growth business fields, strengthening competitive- (COVID-19) pandemic. The stagnation in production ness, and strengthening the management foundation. and consumption activities as well as the disruption As a result, consolidated revenue for the year ended to supply chains caused by the restrictions on inter- March 31, 2021, declined 9.9% compared with the national movement of people and goods resulted previous year to ¥1,883.6 billion, and core operating in chaos in both Japanese and overseas econo- income fell 28.1% to ¥90.3 billion. Operating income mies, causing a record-setting drop in the economy. declined 51.3% to ¥55.9 billion and profit attributable Subsequently, the global economy rebounded around to owners of parent declined by 45.6% to ¥45.8 billion July, as economic activities resumed, initially in China as a U.S. subsidiary recorded an impairment loss. Revenue Core operating income* Operating income Profit attributable to owners of parent 2020 2,091.2 125.5 114.7 84.2 Billions of yen 2021 Year-over-year (%) 1,883.6 90.3 55.9 45.8 (9.9) (28.1) (51.3) (45.6) * Core operating income is calculated by excluding income and expenses due to non-recurring factors from operating income. Revenue for the year ended March 31, 2021 in Fibers & Textiles and Carbon Fiber Composite dropped in all the reportable segments except Materials segments. Environment & Engineering segment compared with The following tables summarize revenue and core the previous year. Core operating income increased in operating income by segment and analysis of changes Performance Chemicals, Environment & Engineering in core operating income. and Life Science segments whereas it decreased Revenue Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Other*1 Consolidated total 2020 831.0 761.2 236.9 190.8 53.0 18.2 2,091.2 2021 719.2 720.4 182.9 193.5 53.0 14.6 1,883.6 Billions of yen Change (111.7) (40.8) (54.0) 2.7 (0.1) (3.7) (207.6) Toray Industries, Inc.Integrated Annual Report 2021 93 Billions of yen Core Operating Income 2020 2021 Change Core operating income Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Other and Reconciliations*1, 2 Consolidated total Total Difference in quantity Net change in price Cost variance and other Translation of foreign subsidiaries 59.6 54.5 22.6 10.6 0.5 (22.2) 125.5 36.6 67.0 (7.5) 14.5 1.3 (21.6) 90.3 (23.0) 12.4 (30.1) 4.0 0.8 0.6 (35.3) (31.8) 1.7 (46.6) 2.5 1.7 (1.9) (74.4) 2.1 2.5 3.9 (0.6) (1.9) — 5.9 6.7 9.0 12.7 2.0 1.0 2.5 33.9 0.1 (0.6) (0.1) (0.0) (0.0) (0.0) (0.7) *1 “Other” represents service-related businesses such as analysis, physical evaluation and research. *2 “Reconciliations” include intersegment eliminations and corporate expenses. • “Difference in quantity” caused a decrease of ¥74.4 (1) Fibers & Textiles billion in core operating income due to a decrease in The segment was affected by the stagnation in pro- sales and production with the impact of COVID-19. duction activities and consumption behavior caused by • “Net change in price” caused an increase of ¥5.9 the COVID-19 in Japan and overseas. In the apparel billion because of the decline in raw material prices applications, demand declined due to lockdown and compared with the year ended March 31, 2020. excessive channel inventory in various countries, while • “Cost variance and other” caused an increase of in industrial applications, general purpose materials ¥33.9 billion as a result of efforts to reduce oper- remained weak and sales volume declined. Demand ating expenses, production fixed costs and other for nonwoven fabrics increased for the applications of expenses. medical gowns and masks and there have been signs of recovery in the automotive applications from the Detailed discussion on the financial performance third quarter, but these factors fell short of offsetting by segment is as follows. the decline in the overall sales volume in the segment. Revenue by Segment (Billions of yen) 2,500 Revenue by Segment (Billions of yen) 2,500 2,388.8 2,388.8 2,204.9 2,214.6 2,204.9 2,091.2 2,026.5 2,026.5 2,000 2,000 2,214.6 2,091.2 1,883.6 1,883.6 1,500 1,500 1,000 1,000 500 0 500 Mar/ ‘17 ‘18 0 ‘19 Mar/ ‘17 Core Operating Income by Segment (Billions of yen) 200 Core Operating Income by Segment (Billions of yen) 200 156.5 156.5 146.9 141.5 146.9 141.5 131.2 125.5 131.2 125.5 90.3 90.3 150 100 50 0 -50 150 100 50 0 -50 ‘20 ‘18 ‘20 ‘19 ‘21 ‘20 ‘20 ‘21 Mar/ ‘17 ‘18 ‘19 Mar/ ‘17 ‘20 ‘18 ‘20 ‘19 ‘21 ‘20 ‘20 ‘21 J-GAAP J-GAAP IFRS IFRS J-GAAP J-GAAP IFRS IFRS ■ Fibers & Textiles ■ Performance Chemicals ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Other ■ Fibers & Textiles ■ Performance Chemicals ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Other ■ Fibers & Textiles ■ Performance Chemicals ■ Fibers & Textiles ■ Performance Chemicals ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Other ■ Reconciliations ■ Life Science ■ Other ■ Reconciliations * For the J-GAAP periods, net sales and operating income are presented in place of revenue and core operating income, respectively. Total Assets and Equity Attributable to Owners of Parent (Billions of yen) 3,000 Total Assets and Equity Attributable to Owners of Parent (Billions of yen) 3,000 2,788.4 (%) 80 2,788.4 2,848.8 2,733.5 2,650.7 2,733.5 2,650.7 2,848.8 (%) 80 Interest-bearing Liabilities and D/E Ratio (Billions of yen) 1,000 Interest-bearing Liabilities and D/E Ratio (Billions of yen) 1,000 991.0 973.9 976.3 976.3 991.0 973.9 (Times) 1.20 (Times) 1.20 938.9 938.9 2,575.9 2,575.9 2,396.8 2,396.8 2,250 2,250 60 60 750 0.90 0.90 816.3 816.3 716.4 716.4 750 0.86 0.86 0.89 0.86 0.86 0.89 0.79 0.79 0.75 0.70 0.75 0.70 0.60 0.60 42.6 42.3 40.6 42.6 41.3 42.3 40.8 40.6 43.5 41.3 40.8 43.5 1,500 1,500 40 1,237.9 40 500 1,237.9 1,090.7 1,131.0 1,093.7 1,090.7 1,116.1 1,131.0 1,093.7 1,116.1 1,021.3 1,021.3 750 750 20 20 250 0.30 0.30 0 0 0 0 0.00 0.00 Mar/ ‘17 ‘18 ‘19 Mar/ ‘17 ‘20 ‘18 ‘20 ‘19 ‘21 ‘20 ‘21 Mar/ ‘17 ‘18 ‘19 Mar/ ‘17 ‘20 ‘18 ‘20 ‘19 ‘21 ‘20 ‘20 ‘21 0 ‘20 J-GAAP J-GAAP IFRS IFRS J-GAAP J-GAAP IFRS IFRS ■ Total Assets ■ Equity Attributable to Owners of Parent ■ Total Assets ■ Equity Attributable to Owners of Parent ■ Interest-bearing Liabilities ■ Interest-bearing Liabilities —Equity Ratio —Equity Ratio —D/E Ratio —D/E Ratio 500 250 0 100 0 (84.0) -100 Cash Flows Cash Flows (Billions of yen) (Billions of yen) 300 300 238.3 225.8 211.6 225.8 211.6 238.3 200 174.0 200 176.2 174.0 176.2 129.2 129.2 38.7 83.4 38.7 95.4 83.4 95.4 113.7 113.7 (57.5) (57.5) (84.0) (135.2) (135.2) (142.4) (142.9) (142.4) (142.9) (97.9) (97.9) -200 (186.7) (186.7) Mar/ ‘17 ‘18 Mar/ ‘17 ‘19 ‘20 ‘18 ‘20 ‘19 ‘21 ‘20 ‘20 ‘21 (260.2) -300 (260.2) J-GAAP J-GAAP IFRS IFRS ■ Cash Flows from Operating Activities ■ Cash Flows from Operating Activities ■ Cash Flows from Investing Activities ■ Cash Flows from Investing Activities —Free Cash Flow —Free Cash Flow 100 0 -100 -200 -300 Toray Industries, Inc.Integrated Annual Report 2021 Core Operating Income by Segment (Billions of yen) 200 156.5 146.9 141.5 131.2 125.5 90.3 150 100 50 0 -50 500 250 0 Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 J-GAAP IFRS ■ Fibers & Textiles ■ Performance Chemicals ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Other ■ Reconciliations Interest-bearing Liabilities and D/E Ratio (Billions of yen) 1,000 976.3 991.0 973.9 (Times) 1.20 938.9 816.3 716.4 750 0.75 0.70 0.86 0.86 0.89 0.79 0.90 0.60 0.30 0.00 ■ Interest-bearing Liabilities —D/E Ratio 94 As a result, revenue of overall Fibers & Textiles (5) Life Science segment declined 13.4% to ¥719.2 billion compared with the previous year and core operating income fell 38.6% to ¥36.6 billion. (2) Performance Chemicals The resins business was affected by the stagnation in production activities caused by the COVID-19, but In the pharmaceutical business, sales of pruritus treat- ment REMITCH®* were affected by the introduction Revenue by Segment of its generic versions as well as by a major NHI drug (Billions of yen) price revision in April 2020. 2,500 2,388.8 In the medical devices business, shipment of dia- 2,204.9 2,214.6 lyzers grew strongly in Japan and overseas, despite 2,000 the impact of medical institutions postponing non-ur- 2,026.5 1,883.6 2,091.2 demand has been strong since the third quarter with gent operations due to the spread of the COVID-19. automobile manufacturers operating and the recovery of the Chinese economy. The chemicals business saw As a result, revenue of overall Life Science seg- 1,500 ment remained at the same level compared with the a recovery trend in the basic chemicals market. In the previous year, at ¥53.0 billion, and core operating films business, battery separator films for lithium-ion secondary batteries were affected by lower market income rose by ¥0.8 billion to ¥1.3 billion. 1,000 * REMITCH® is a registered trademark of Torii Pharmaceutical Co., Ltd. prices, while polyester films for optical applications and electronic components performed strongly. In the electronic & information materials business, OLED- related demand increased. As a result, revenue of overall Performance Chemicals segment declined 5.4% to ¥720.4 billion compared with the previous year while core operating income rose 22.8% to ¥67.0 billion. (3) Carbon Fiber Composite Materials While the sales of wind turbine blade applications remained strong in industrial applications, aerospace application was affected by the decline in the produc- tion rate of commercial aircraft. As a result, revenue of overall Carbon Fiber Composite Materials segment declined 22.8% to (6) Other 500 Revenue from other businesses declined 20.1% to ¥14.6 billion compared with the previous year and core operating income fell 18.2% to ¥2.9 billion. 0 Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 J-GAAP 2. Financial position ■ Fibers & Textiles ■ Performance Chemicals As of March 31, 2021, Toray Group’s total assets stood ■ Carbon Fiber Composite Materials ■ Environment & Engineering at ¥2,848.8 billion, up ¥115.3 billion from March 31, ■ Life Science ■ Other 2020. Current assets increased ¥29.1 billion as cash IFRS Total Assets and Equity Attributable to Owners of Parent (Billions of yen) 3,000 2,788.4 2,733.5 2,650.7 2,575.9 2,848.8 ¥182.9 billion compared with the previous year. The 2,396.8 segment posted core operating loss of ¥7.5 billion, a 2,250 decline of ¥30.1 billion from the previous year. (4) Environment & Engineering In the water treatment business, demand for reverse osmosis membranes and other products grew strongly on the whole, while shipment to some regions were affected by the COVID-19. In the environment and amenity business, demand for air filters was strong. Among domestic subsidiaries in the segment, an engineering subsidiary experienced decreases in the shipment of some electronics related equipment. A construction subsidiary posted profits from comple- tion of a real estate project. As a result, revenue of overall Environment & Engineering segment increased 1.4% to ¥193.5 bil- lion compared with the previous year and core operat- ing income rose 37.5% to ¥14.5 billion. (%) 80 60 40 1,237.9 20 0 42.6 42.3 40.6 41.3 40.8 43.5 1,500 750 1,090.7 1,131.0 1,093.7 1,116.1 1,021.3 ■ Total Assets ■ Equity Attributable to Owners of Parent —Equity Ratio *1 “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. *2 For the J-GAAP periods, net assets less non-controlling interests and share acquisition rights are presented in place of equity attributable to owners of parent. Cash Flows (Billions of yen) 300 238.3 225.8 211.6 200 174.0 176.2 113.7 83.4 95.4 129.2 38.7 (84.0) (57.5) (186.7) (260.2) 100 0 -100 -200 -300 (135.2) (142.4) (142.9) (97.9) Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 J-GAAP IFRS ■ Cash Flows from Operating Activities ■ Cash Flows from Investing Activities —Free Cash Flow 0 Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 J-GAAP IFRS Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 J-GAAP IFRS Toray Industries, Inc.Integrated Annual Report 2021 Revenue by Segment (Billions of yen) 2,500 2,388.8 2,204.9 2,214.6 2,026.5 2,000 2,091.2 1,883.6 Core Operating Income by Segment (Billions of yen) 200 156.5 146.9 141.5 131.2 125.5 90.3 1,500 1,000 500 0 95 Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 J-GAAP IFRS J-GAAP IFRS ■ Fibers & Textiles ■ Performance Chemicals ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Other ■ Fibers & Textiles ■ Performance Chemicals ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Other ■ Reconciliations and cash equivalents rose, and non-current assets also (1) Cash flows from operating activities rose ¥86.2 billion due primarily to increases in property, plant and equipment as well as other financial assets. Core Operating Income by Segment (Billions of yen) 2020 to ¥1,526.6 billion, owing mainly to declines in 200 Total liabilities declined ¥6.1 billion from March 31, bonds and borrowings. 146.9 141.5 156.5 Net cash provided by operating activities decreased Total Assets and Equity Attributable to by ¥26.7 billion (11.2%) compared with the previ- Owners of Parent ous year to ¥211.6 billion. This was primarily because (%) (Billions of yen) profit before tax decreased by ¥57.7 billion compared 3,000 80 with the previous year while decrease in inventories 2,733.5 2,650.7 2,788.4 2,848.8 Total equity rose by ¥121.4 billion compared with 131.2 increased by ¥27.4 billion. 125.5 2,575.9 2,396.8 150 March 31, 2020 to ¥1,322.3 billion, reflecting an increase in other components of equity. Equity attrib- 90.3 utable to owners of parent stood at ¥1,237.9 billion. 100 Equity ratio at March 31, 2021 came to 43.5%, a 2.6 percentage-point increase compared with the level at March 31, 2020. D/E ratio declined 0.10 compared 50 with the level at March 31, 2020 to 0.79. 0 3. Cash flows For the year ended March 31, 2021, net cash pro- 2,250 (2) Cash flows from investing activities 60 Net cash used in investing activities decreased by 42.3 42.6 ¥45.0 billion (31.5%) compared with the previous year 40.6 to ¥97.9 billion mainly because of decrease in pur- 1,500 40 chase of property, plant and equipment and intangi- 1,131.0 ble assets by ¥18.3 billion compared with the previous 1,021.3 1,116.1 1,237.9 1,093.7 1,090.7 43.5 40.8 41.3 year and increase in proceeds from sale and redemp- 20 750 tion of investments by ¥12.5 billion. vided by operating activities exceeded net cash used (3) Cash flows from financing activities in investing activities by ¥113.7 billion while net cash -50 used in financing activities came to ¥69.4 billion due Mar/ ‘17 ‘18 ‘21 ‘20 ‘20 ‘19 J-GAAP mainly to a decrease in interest-bearing liabilities. As ■ Fibers & Textiles ■ Performance Chemicals a result, cash and cash equivalents as of March 31, ■ Carbon Fiber Composite Materials ■ Environment & Engineering 2021 amounted to ¥236.4 billion, up by ¥52.7 billion ■ Life Science ■ Other ■ Reconciliations compared with March 31, 2020. IFRS Net cash used in financing activities came to ¥69.4 0 billion, down by ¥4.4 billion (6.0%) compared with the ‘20 ‘21 ‘19 ‘20 ‘18 0 Mar/ ‘17 J-GAAP previous year. Net increase in short-term borrowings ■ Total Assets ■ Equity Attributable to Owners of Parent increased by ¥33.6 billion compared with the previous —Equity Ratio year while redemption of bonds and repayments of IFRS long-term borrowings increased by ¥23.3 billion. Interest-bearing Liabilities and D/E Ratio (Billions of yen) 1,000 976.3 991.0 973.9 938.9 (Times) 1.20 Cash Flows (Billions of yen) 300 816.3 716.4 750 0.75 0.70 0.86 0.86 0.89 0.90 0.79 200 174.0 176.2 129.2 100 38.7 238.3 225.8 211.6 113.7 83.4 95.4 500 250 0 Mar/ ‘17 0.60 0 0.30 -100 -200 0.00 -300 (84.0) (57.5) (135.2) (142.4) (142.9) (97.9) (186.7) (260.2) ‘18 ‘19 ‘20 ‘20 ‘21 Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS ■ Total Assets ■ Equity Attributable to Owners of Parent —Equity Ratio ■ Interest-bearing Liabilities —D/E Ratio ■ Cash Flows from Operating Activities ■ Cash Flows from Investing Activities —Free Cash Flow 150 100 50 0 -50 500 250 0 Interest-bearing Liabilities and D/E Ratio (Billions of yen) 1,000 976.3 991.0 973.9 (Times) 1.20 938.9 816.3 716.4 750 0.75 0.70 0.86 0.86 0.89 0.79 0.90 0.60 0.30 0.00 Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 J-GAAP IFRS ■ Interest-bearing Liabilities —D/E Ratio Revenue by Segment (Billions of yen) 2,500 2,388.8 2,204.9 2,214.6 2,026.5 2,000 2,091.2 1,883.6 1,500 1,000 500 0 2,250 1,500 750 0 100 0 -100 -200 -300 Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 J-GAAP IFRS ■ Fibers & Textiles ■ Performance Chemicals ■ Carbon Fiber Composite Materials ■ Environment & Engineering ■ Life Science ■ Other Total Assets and Equity Attributable to Owners of Parent (Billions of yen) 3,000 2,575.9 2,396.8 2,788.4 2,733.5 2,650.7 2,848.8 42.6 42.3 40.6 41.3 40.8 43.5 40 1,237.9 1,090.7 1,131.0 1,093.7 1,116.1 1,021.3 (%) 80 60 20 0 Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 Cash Flows (Billions of yen) 300 200 174.0 176.2 129.2 38.7 (84.0) (57.5) 238.3 225.8 211.6 113.7 83.4 95.4 (135.2) (142.4) (142.9) (97.9) (186.7) (260.2) Mar/ ‘17 ‘18 ‘19 ‘20 ‘20 ‘21 J-GAAP IFRS ■ Cash Flows from Operating Activities ■ Cash Flows from Investing Activities —Free Cash Flow Toray Industries, Inc.Integrated Annual Report 2021 96 Consolidated Statement of Financial Position Date of Transition to IFRS (April 1, 2019) and March 31, 2020 and 2021 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Other financial assets Other current assets Total current assets Non-current assets Property, plant and equipment Right-of-use assets Goodwill Intangible assets Note April 1, 2019 March 31, 2020 March 31, 2021 Millions of yen 7 8 9 15 16 10 11 12 12 167,435 183,703 236,354 561,106 496,064 522,259 431,928 405,269 369,110 5,658 19,505 6,136 48,167 47,350 47,180 1,214,294 1,151,891 1,181,039 974,219 969,196 998,358 55,829 47,095 50,481 85,712 83,406 85,565 85,095 79,502 78,305 Investments accounted for using equity method 14 165,286 171,176 174,142 Other financial assets Deferred tax assets Retirement benefit asset Other non-current assets 15 17 21 16 231,940 183,984 217,341 17,917 16,844 14,414 19,608 15,806 34,879 19,457 14,620 14,315 Total non-current assets 1,655,063 1,581,629 1,667,800 Total assets 2,869,357 2,733,520 2,848,839 Toray Industries, Inc.Integrated Annual Report 2021 97 Liabilities and Equity Current liabilities Trade and other payables Bonds and borrowings Lease liabilities Other financial liabilities Income taxes payable Other current liabilities Total current liabilities Non-current liabilities Bonds and borrowings Lease liabilities Other financial liabilities Deferred tax liabilities Retirement benefit liability Other non-current liabilities Total non-current liabilities Total liabilities Equity Equity attributable to owners of parent Share capital Capital surplus Retained earnings Treasury shares Note April 1, 2019 March 31, 2020 March 31, 2021 Millions of yen 18 19 11 20 17 22 19 11 20 17 21 22 23 325,569 285,702 282,812 290,976 278,962 278,678 10,449 17,585 11,939 88,925 9,884 13,911 10,155 10,635 12,872 11,956 77,344 84,425 745,443 675,958 681,378 713,028 674,701 654,608 33,889 8,839 45,370 27,477 7,606 32,123 30,006 6,699 41,516 103,223 101,979 100,852 13,435 12,830 11,505 917,784 856,716 845,186 1,663,227 1,532,674 1,526,564 147,873 147,873 147,873 121,429 121,987 120,493 803,209 860,128 899,994 (20,358) (20,308) (19,985) Other components of equity 72,137 6,395 89,476 Total equity attributable to owners of parent 1,124,290 1,116,075 1,237,851 Non-controlling interests 81,840 84,771 84,424 Total equity 1,206,130 1,200,846 1,322,275 Total liabilities and equity 2,869,357 2,733,520 2,848,839 Toray Industries, Inc.Integrated Annual Report 2021 98 Consolidated Statement of Profit or Loss Years ended March 31, 2020 and 2021 Revenue Cost of sales Gross profit Millions of yen Note 25 2020 2021 2,091,166 1,883,600 (1,661,879) (1,506,100) 429,287 377,500 Selling, general and administrative expenses (300,651) (286,981) Other income Other expenses Operating income Finance income Finance costs Share of profit of investments accounted for using equity method Profit before tax Income tax expense Profit Profit attributable to: Owners of parent Non-controlling interests Earnings per share: Basic (Yen) Diluted (Yen) 26 27 28 28 14 7,533 5,388 (21,469) (40,028) 114,700 55,879 7,065 (9,166) 6,099 (9,224) 10,705 12,812 123,304 65,566 17 (29,461) (18,227) 93,843 47,339 84,230 9,613 93,843 45,794 1,545 47,339 30 52.65 52.26 28.61 28.57 Toray Industries, Inc.Integrated Annual Report 2021 99 Consolidated Statement of Comprehensive Income Years ended March 31, 2020 and 2021 Profit Note 2020 93,843 Millions of yen 2021 47,339 Other comprehensive income 29 Items that will not be reclassified to profit or loss Investments in equity instruments Remeasurements of defined benefit plans Share of other comprehensive income of investments accounted for using equity method Items that may be reclassified to profit or loss Cash flow hedges Deferred costs of hedging (19,933) (4,922) 35,002 10,249 (532) 663 (25,387) 45,914 404 (602) (389) 613 Exchange differences on translation (44,650) 54,941 Share of other comprehensive income of investments accounted for using equity method Total other comprehensive income Comprehensive income Comprehensive income attributable to: Owners of parent Non-controlling interests 2 2 (44,846) (70,233) 23,610 55,167 101,081 148,420 16,810 6,800 23,610 143,039 5,381 148,420 Toray Industries, Inc.Integrated Annual Report 2021 100 Consolidated Statement of Changes in Equity Years ended March 31, 2020 and 2021 Note Equity attributable to owners of parent 2020 Other components of equity Share capital Capital surplus Retained earnings Treasury shares Invest- ments in equity instruments Cash flow hedges Deferred costs of hedging Exchange differ- ences on translation Remea- surements of defined benefit plans Total other compo- nents of equity Total equity attributable to owners of parent Non-con- trolling interests Total equity Millions of yen At April 1, 2019 147,873 121,429 803,209 (20,358) 72,351 (602) — — 388 — — — — — 72,137 1,124,290 81,840 1,206,130 — 84,230 9,613 93,843 Profit Other comprehensive income Comprehensive income Exercise of share acquisition rights Share-based payment transactions Dividends Changes in ownership interest in subsidiaries Transfer from other components of equity to retained earnings Other changes Total transactions with owners and other 31 24 — — — — — — — — — — — — — (51) 325 84,230 — 84,230 — — — (25,612) 284 — — — — 51 — — — — — — — — — — — — (1,699) — (3,205) — 0 — 558 (27,311) (1) 50 — (3,205) (21) (21) (19,886) 406 (602) (42,434) (4,904) (67,420) (67,420) (2,813) (70,233) (19,886) 406 (602) (42,434) (4,904) (67,420) 16,810 6,800 23,610 — — — — — — — — — — — — — — — — — — — — — — 0 325 — — 0 325 (25,612) (3,312) (28,924) 284 (557) (273) 4,904 1,699 — (21) — (22) — — — (22) 4,904 1,678 (25,025) (3,869) (28,894) At March 31, 2020 147,873 121,987 860,128 (20,308) 49,260 (217) (214) (42,434) — 6,395 1,116,075 84,771 1,200,846 Note Equity attributable to owners of parent 2021 Other components of equity Share capital Capital surplus Retained earnings Treasury shares Invest- ments in equity instruments Cash flow hedges Deferred costs of hedging Exchange differ- ences on translation Remea- surements of defined benefit plans Total other compo- nents of equity Total equity attributable to owners of parent Non-con- trolling interests Total equity Millions of yen At April 1, 2020 147,873 121,987 860,128 (20,308) 49,260 (217) (214) (42,434) Profit Other comprehensive income Comprehensive income Exercise of share acquisition rights Share-based payment transactions Dividends Changes in ownership interest in subsidiaries Transfer from other components of equity to retained earnings Other changes Total transactions with owners and other 31 24 — — — — — — — — — — — — — (323) 355 45,794 — 45,794 — — — (20,012) (1,696) — — — — 323 — — — — — 34,806 (387) 34,806 (387) — — — — — — — — — 14,084 — (3,984) — 170 — (0) — (80) (1,494) (5,928) 323 (3,984) (80) — 613 613 — — — — — — — — — 6,395 1,116,075 84,771 1,200,846 — 45,794 1,545 47,339 — 52,113 10,100 97,245 97,245 3,836 101,081 52,113 10,100 97,245 143,039 5,381 148,420 — — — — — — — — — — — — — — — 0 355 — — 0 355 (20,012) (3,532) (23,544) (1,696) (2,196) (3,892) (10,100) (14,084) — (80) — 90 — — — 90 (10,100) (14,164) (21,263) (5,728) (26,991) At March 31, 2021 147,873 120,493 899,994 (19,985) 80,082 (684) 399 9,679 — 89,476 1,237,851 84,424 1,322,275 Toray Industries, Inc.Integrated Annual Report 2021 Consolidated Statement of Cash Flows Years ended March 31, 2020 and 2021 101 Note 2020 2021 Millions of yen Cash flows from operating activities Profit before tax Depreciation and amortization Impairment losses (reversal of impairment losses) Share of loss (profit) of investments accounted for using equity method Finance income and finance costs Decrease (increase) in trade and other receivables Decrease (increase) in inventories Increase (decrease) in trade and other payables Changes in retirement benefit asset and liability Other adjustments Subtotal Interest received Dividends received Interest paid Income taxes refund (paid) Net cash provided by operating activities Cash flows from investing activities Purchase of property, plant and equipment, and intangible assets Proceeds from sale of property, plant and equipment, and intangible assets Payments for acquisition of subsidiaries Purchase of investments Proceeds from sale and redemption of investments Other inflows (outflows) of cash Net cash used in investing activities Cash flows from financing activities 33 Net increase (decrease) in short-term borrowings Proceeds from issuance of bonds and long-term borrowings Redemption of bonds and repayments of long-term borrowings Repayments of lease liabilities Dividends paid to owners of parent Dividends paid to non-controlling interests Other inflows (outflows) of cash 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 Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 7 123,304 114,725 7,569 65,566 115,819 28,867 (10,705) (12,812) 2,149 54,081 19,270 (30,724) (4,104) (18,144) 257,421 2,389 14,031 (5,970) (29,609) 238,262 2,264 (13,916) 46,702 (7,247) (7,467) 9,819 227,595 1,538 14,669 (5,738) (26,473) 211,591 (140,738) (122,483) 6,018 (3,466) (7,405) 8,603 (5,887) (142,875) 1,459 — (2,126) 21,129 4,149 (97,872) (28,863) 87,024 4,731 75,042 (91,581) (114,916) (11,166) (25,612) (3,322) (275) (73,795) (5,324) 16,268 167,435 183,703 (11,615) (20,018) (3,532) 905 (69,403) 8,335 52,651 183,703 236,354 Toray Industries, Inc.Integrated Annual Report 2021 102 Notes to the Consolidated Financial Statements Date of Transition to IFRS (April 1, 2019) and Years ended March 31, 2020 and 2021 Note 1. Reporting Entity Toray Industries, Inc. (the Company) is a stock company domiciled in Japan and the registered address of its head office is Chuo-ku, Tokyo. The consolidated financial statements for the year ended March 31, 2021 (from April 1, 2020 to March 31, 2021) include the accounts of the Company and its subsidiaries (the Group) and the Group’s interests in associates and joint arrangements. The ultimate parent of the Group is the Company. The Group’s main businesses include “Fibers & Textiles,” “Performance Chemicals,” “Carbon Fiber Composite Materials,” “Environment & Engineering” and “Life Science” businesses (see “Note 6. Segment Information”). Note 2. Basis of Preparation 1. Statement of compliance with IFRS and matters related to first-time adoption The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) pursuant to Article 93 of the Regulation on Terminology, Forms, and Preparation Methods of Consolidated Financial Statements (Ministry of Finance Order No. 28 of 1976), as the Group meets the requirements for a “specified company complying with designated international accounting standards” set forth in Article 1-2 of the regulation. The Group has adopted IFRS starting from the year ended March 31, 2021, and the date of transition to IFRS is April 1, 2019. Upon transition to IFRS, the Group has applied IFRS 1 “First-time Adoption of International Financial Reporting Standards” (IFRS 1). The impact of the transition to IFRS on the Group’s financial position, financial performance and cash flows is stated in “Note 38. First-time Adoption.” 2. Approval of consolidated financial statements The Group’s consolidated financial statements were authorized for issue on June 22, 2021 by Akihiro Nikkaku, President and Representative Member of the Board. 3. Basis of measurement The Group’s consolidated financial statements have been prepared on a historical cost basis, except for certain items including financial instruments measured at fair value. 4. Presentation currency The Group’s consolidated financial statements are presented in Japanese yen (millions of yen, rounded off to the nearest million yen), which is the Company’s functional currency. Note 3. Significant Accounting Policies The following accounting policies have been applied consistently to all periods presented in these consolidated financial statements (including the consolidated statement of financial position at the date of transition to IFRS). 1. Basis of consolidation The consolidated financial statements of the Group are prepared based on uniform accounting policies. (1) Subsidiaries A subsidiary is an entity that is controlled by the Group. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements of the Group from the date on which the Company obtains control over the subsidiaries until the date on which the Company loses that control. Toray Industries, Inc.Integrated Annual Report 2021 103 All intragroup balances and transactions and any unrealized gains or losses arising from intragroup transac- tions are eliminated in preparing the consolidated financial statements. Any changes in the Company’s ownership interests in the consolidated subsidiaries that do not result in loss of control are accounted for as equity transactions. Any difference between the amount by which the non-con- trolling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity as equity attributable to owners of parent. If the Company loses control of a subsidiary, the Group measures and recognizes any investment retained at its fair value at the date when control is lost. Any gain or loss resulting from loss of control is recognized in profit or loss. Non-controlling interests in subsidiaries are identified separately from the Group’s interests. Total compre- hensive income of subsidiaries is attributed to owners of parent and to non-controlling interests, even if this results in the non-controlling interests having a deficit balance. If the fiscal year-end of a subsidiary is not the same as that of the consolidated financial statements, the subsidiary provisionally closes its accounts for consolidation purposes at the fiscal year-end of the consolidated financial statements. (2) Associates An associate is an entity over which the Group has significant influence but does not have control or joint con- trol in the entity’s decision-making on the financial and operating policies. If the Group holds 20 to 50 percent of the voting power of an entity, it is usually presumed that the Group has significant influence. Investments in associates are recognized at cost at the date of acquisition and accounted for using the equity method from the date on which the Group obtains significant influence over the associates to the date on which the Group loses that influence. Investments in associates include goodwill recognized upon acquisition. (3) Joint arrangements A joint arrangement is an arrangement where decisions about the relevant activities require the unanimous con- sent of the parties sharing control. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are accounted for using the equity method. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. For investments in joint oper- ations, the Group recognizes assets, liabilities, revenues and expenses according to the Group’s shares in the assets, liabilities, revenues and expenses of the joint operation. 2. Business combinations Business combinations are accounted for using the acquisition method. The consideration for an acquisition is measured as the sum of the acquisition-date fair values of the assets transferred in exchange for control of the acquiree, the liabilities incurred by former owners of the acquiree and the equity interests issued by the Group. When the Group acquires a business, the Group classifies and designates the identifiable assets acquired and lia- bilities assumed on the basis of the contractual terms, economic conditions and other pertinent conditions as they exist at the acquisition date. Those assets and liabilities are, in principle, measured at their acquisition-date fair values. Non-controlling interests in an acquiree are measured at the non-controlling interests’ proportionate share in the recognized amounts of the acquiree’s identifiable net assets. The excess of (a) the aggregate of the consideration for an acquisition, the amount of any non-controlling inter- est in the acquiree and the acquisition-date fair value of the Group’s previously held equity interest in the acquiree over (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed is recognized as goodwill. If (b) is in excess of (a), the gain is recognized in profit or loss. Toray Industries, Inc.Integrated Annual Report 2021 104 Acquisition-related costs incurred in a business combination are recognized as expenses in the periods in which the costs are incurred. 3. Foreign currency translation (1) Foreign currency transactions Each individual entity within the Group has its own functional currency, and their transactions are measured at their own functional currencies. Foreign currency transactions are translated into the functional currency at the spot exchange rate at the date of the transaction or at the rate that approximates the spot exchange rate. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities that are denom- inated in foreign currencies and measured at cost are translated to the functional currency using the spot exchange rate at the date of the transaction. Non-monetary assets and liabilities that are denominated in for- eign currencies and measured at fair value are translated into the functional currency at the spot exchange rate at the date when the fair value is determined. Exchange differences arising from the translation or settlement are recognized in profit or loss. However, exchange differences arising from equity instruments measured at fair value through other comprehensive income and cash flow hedges are recognized in other comprehensive income. (2) Foreign operations The assets and liabilities of foreign operations are translated into Japanese yen using the exchange rate at the end of the reporting period, and the income and expenses of foreign operations are translated into Japanese yen using the average exchange rate for the reporting period, except in cases where the exchange rate fluctu- ates significantly. Exchange differences arising from the translation of a foreign operation’s financial statements are recognized in other comprehensive income. On the disposal of a foreign operation, the cumulative exchange differences relating to the foreign operation are reclassified to profit or loss for the period of disposal. 4. Financial instruments (1) Non-derivative financial assets (a) Initial recognition and measurement The Group initially recognizes trade and other receivables on the date when they arise and other financial assets on the trade date when the Group becomes a party to the contract. Financial assets are classified as either of the followings at initial recognition: (i) Financial assets measured at amortized cost The Group classifies a financial asset as those measured at amortized cost only if both of the following conditions are met: • the financial asset is held within a business model with an objective of collecting contractual cash flows, and • the contractual terms of the financial asset give rise on specific dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. (ii) Debt instruments measured at fair value through other comprehensive income The Group classifies a financial asset as a debt instrument measured at fair value through other compre- hensive income only if both of the following conditions are met: • the financial asset is held within a business model with an objective of both collecting contractual cash flows and selling financial assets, and • the contractual terms of the financial asset give rise on specific dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Toray Industries, Inc.Integrated Annual Report 2021 105 (iii) Equity instruments measured at fair value through other comprehensive income Equity instruments such as shares held primarily for the purposes of strengthening business relation- ships with customers and expanding businesses are designated as those measured at fair value through other comprehensive income. This designation is applied consistently. (iv) Financial assets measured at fair value through profit or loss Financial assets that are not classified as any of the above are classified as those measured at fair value through profit or loss. Except for financial assets measured at fair value through profit or loss, financial assets are initially mea- sured at fair value plus transaction costs. Transaction costs of financial assets measured at fair value through profit or loss are recognized as profit or loss. (b) Subsequent measurement After initial recognition, financial assets are measured based on their classification as follows: (i) Financial assets measured at amortized cost Such assets are measured at amortized cost using the effective interest method. (ii) Debt instruments measured at fair value through other comprehensive income Such debt instruments are measured at fair value and subsequent changes in the fair value are recog- nized in other comprehensive income, except that foreign exchange gains or losses, impairment losses, and finance income based on the effective interest method are recognized in profit or loss. When these debt instruments are derecognized, cumulative gains or losses recognized in other comprehensive income are reclassified to profit or loss as reclassification adjustments. (iii) Equity instruments measured at fair value through other comprehensive income Such equity instruments are measured at fair value and subsequent changes in the fair value are recog- nized in other comprehensive income. When these equity instruments are derecognized, cumulative gains or losses recognized through other comprehensive income are reclassified from other components of equity to retained earnings. Dividends and interest income from these equity instruments are recognized as finance income in profit or loss. (iv) Financial assets measured at fair value through profit or loss Such financial assets are measured at fair value and subsequent changes in the fair value are recognized in profit or loss. (c) Derecognition The Group derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire or when the Group transfers substantially all the risks and rewards of ownership of the financial asset. (d) Impairment of financial assets Allowance for doubtful accounts is recognized for expected credit losses in respect of financial assets mea- sured at amortized cost. Accordingly, the Group assesses whether the credit risk on these financial assets has increased significantly since initial recognition at the end of each reporting period. If the credit risk on a financial asset has not increased significantly since initial recognition, the allowance for doubtful accounts for the financial asset is measured at an amount equal to the 12-month expected credit losses. If the credit risk on a financial asset has increased significantly since initial recognition, the allowance for doubtful accounts for the financial asset is measured at an amount equal to the lifetime expected credit losses. However, an allowance for doubtful accounts for trade receivables without any significant financing components is always measured at an amount equal to the lifetime expected credit losses. Whether the credit risk has increased significantly or not is determined mainly based on past due infor- mation and credit ratings. A financial asset is considered credit-impaired primarily when there is a substan- tial delay in payment or a significant financial difficulty of the borrower. The expected credit loss is measured by reflecting the time value of money on the difference between the total contractual cash flows that are due to the Group and the total cash flows that the Group expects to receive, and is recognized in profit or loss. Toray Industries, Inc.Integrated Annual Report 2021 106 (2) Non-derivative financial liabilities (a) Initial recognition and measurement Non-derivative financial liabilities are classified, at initial recognition, as financial liabilities measured at amor- tized cost and financial liabilities measured at fair value through profit or loss. All financial liabilities are ini- tially measured at fair value, except for financial liabilities measured at amortized cost, which are measured at fair value less directly attributable transaction costs. (b) Subsequent measurement (i) Financial liabilities measured at amortized cost Such liabilities are measured at amortized cost using the effective interest method. Amortization using the effective interest method and gains or losses on derecognition are recognized in profit or loss. (ii) Financial liabilities measured at fair value through profit or loss Such financial liabilities are measured at fair value and subsequent changes in the fair value are recog- nized in profit or loss. (c) Derecognition The Group derecognizes a financial liability when it is extinguished, i.e., when the obligation specified in the contract is performed, discharged, cancelled or expired. (3) Hedge accounting and derivatives (a) Qualifying hedging instruments and hedged items The Group enters into derivative transactions, including forward exchange contracts, cross-currency swaps and interest rate swaps, to manage currency risk and interest rate risk. As the prerequisite for application of hedge accounting, at the inception of a hedge, the Group formally designates and documents the rela- tionships between the hedging instruments and hedged items, and its risk management objectives and strategies. The documentation includes concrete items or transactions of hedging instruments and hedged items, the nature of the risks being hedged, and methods to assess effectiveness of hedging relationships. Furthermore, the Group evaluates on an ongoing basis whether a hedging instrument is highly effective during its term in offsetting changes in fair values or cash flows of the relevant hedged item. Derivatives for which hedge accounting is not applied are classified as “financial assets measured at fair value through profit or loss” or “financial liabilities measured at fair value through profit or loss” and accounted for based on their classification. (b) Cash flow hedges The effective portion of the gain or loss on hedging instruments is recognized in other comprehensive income as cash flow hedges and the cumulative gain or loss is included in other components of equity. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss. The portion of the foreign currency basis spread related to cross-currency swaps is excluded from hedging instruments and recognized in other comprehensive income as deferred costs of hedging, and the cumulative amount is included in other components of equity. The amount accumulated in other components of equity is reclassified to profit or loss as a reclassifica- tion adjustment in the same period when the hedged items affect profit or loss. However, if a hedged fore- cast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the amount accumulated in other components of equity is accounted for as an adjustment to the initial carrying amount of the asset or liability. If a hedging instrument expires or is sold, terminated or exercised, or ceases to meet the hedge account- ing criteria, the application of hedge accounting is discontinued prospectively. If a forecast transaction is no longer expected to occur, the accumulated gain or loss recognized through other comprehensive income is immediately reclassified to profit or loss. Toray Industries, Inc.Integrated Annual Report 2021 107 (c) Fair value hedges A gain or loss on a hedging instrument is recognized in profit or loss. Changes in the fair value of a hedged item attributable to the hedged risk is recognized in profit or loss after adjusting the carrying amount of the hedged item. If the hedged item is a financial instrument measured at amortized cost, amortization of the cumulative adjustment to the carrying amount of the hedged item begins when the application of hedge accounting is discontinued. 5. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits and short-term investments with a maturity of three months or less from the date of acquisition that are readily convertible to cash and which are subject to an insignificant risk of changes in value. 6. Inventories Inventories are measured at the lower of cost and net realizable value. Costs of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and con- dition, and are mainly determined using the moving-average cost method. Net realizable value is determined by the estimated selling price in the ordinary course of business less the estimated costs of completion and the esti- mated costs necessary to make the sale. 7. Property, plant and equipment The Group applies the cost model for measurement of property, plant and equipment. Property, plant and equip- ment are stated at cost less accumulated depreciation and accumulated impairment losses. Costs of property, plant and equipment include costs directly attributable to the acquisition of the asset, costs of dismantling and removing the asset and restoring the site on which it is located, and borrowing costs eligible for capitalization. Property, plant and equipment, except for land and construction in progress, are depreciated mainly using the straight-line method over the estimated useful lives. The estimated useful lives of major items of property, plant and equipment are as follows: • Buildings and structures: 3-60 years • Machinery and vehicles: 2-20 years The depreciation method, useful life and residual value of property, plant and equipment are reviewed at each fiscal year-end, and any changes, if necessary, are accounted for prospectively as changes in accounting estimates. 8. Goodwill and intangible assets (1) Goodwill The measurement of goodwill at initial recognition is described in “2. Business combinations.” Goodwill is stated at cost less accumulated impairment losses. Goodwill is not amortized and is tested for impairment annually and whenever there is an indication of impairment. (2) Intangible assets The Group applies the cost model for measurement of intangible assets. Intangible assets are stated at cost less accumulated amortization and accumulated impairment losses. Intangible assets acquired separately are measured at cost at initial recognition and those acquired in a busi- ness combination are measured at their fair value at the acquisition date. Expenditures generated internally at a research phase are recognized as expenses as incurred. Expenditures generated internally at a development phase are recognized as intangible assets only if all of the requirements for capitalization are met. Toray Industries, Inc.Integrated Annual Report 2021 108 Intangible assets with finite useful lives are amortized by the straight-line method over their estimated use- ful lives. The estimated useful lives of major intangible assets are as follows: • Customer-related intangible assets: 14-21 years • Technology-based intangible assets: 8-24 years • Software: Mainly 5 years The amortization method, useful life and residual value of an intangible asset are reviewed at each fiscal year-end, and any changes, if necessary, are accounted for prospectively as changes in accounting estimates. Intangible assets with indefinite useful lives and intangible assets not yet available for use are not amortized, and are tested for impairment annually and whenever there is an indication of impairment. 9. Leases The Group assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At the commencement date, a lease liability is measured at the present value of the lease payments that are not paid at that date. An incremental borrowing rate is used for a discount rate unless the interest rate implicit in the lease can be readily determined. A right-of-use asset is measured at the amount of the initial measurement of the lease liability, adjusted by initial direct costs and prepaid lease payments, plus an estimated cost of dismantling and removing the asset and restoring the site on which the asset is located. Right-of-use assets are depreciated mainly over the lease term after the commencement date of the lease. The lease term is determined by adding a period when it is reasonably certain to exercise an option to extend a lease, or not to exercise an option to terminate a lease, to the non-cancellable period of the lease. Lease payments are appor- tioned between finance costs and repayments of lease liabilities based on the effective interest method. For leases with a lease term of 12 months or less and leases for which the underlying asset is of low value, the related lease payments are recognized as expenses on a systematic basis over the lease term. 10. Impairment of non-financial assets At the end of each reporting period, the Group assesses whether there is any indication that non-financial assets, including property, plant and equipment, intangible assets and goodwill, may be impaired. If any such indication exists, the recoverable amount of the asset is estimated. For goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use, their recoverable amounts are estimated annually and whenever there is any indication of impairment. The recoverable amount is the higher of the asset’s fair value less costs of disposal or its value in use. When the recoverable amount of an individual asset cannot be estimated, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. The value in use is determined as the discounted present value of future cash flows to be derived from continuing use of the asset and from its ultimate disposal. The dis- count rate used for determining the value in use is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset, a cash-generating unit or a group of cash-generating units is less than its carrying amount, an impairment loss is recognized in profit or loss. An impairment loss recognized for a cash-gener- ating unit (group of units) is first allocated to reduce the carrying amount of any goodwill allocated to the cash-gen- erating unit (group of units) and is then allocated to the other assets pro rata on the basis of the carrying amount of each asset. At the end of each reporting period, the Group assesses whether there is any indication that an impairment loss recognized in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the recoverable amount of the individual asset or cash-generating unit is estimated. If the esti- mated recoverable amount exceeds the carrying amount of the asset, impairment losses are reversed to the extent that the carrying amount of the asset does not exceed the lower of its recoverable amount determined and the car- rying amount that would have been determined (net of amortization or depreciation) had no impairment loss been Toray Industries, Inc.Integrated Annual Report 2021 109 recognized for the asset in prior periods. The amount of reversal of impairment losses is recognized in profit or loss. Impairment losses recognized for goodwill are not reversed. 11. Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. When the effect of the time value of money is material, a provision is measured at the present value of the expenditure expected to be required to settle the obligation. The discount rate used for determining the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. 12. Employee benefits (1) Post-employment benefits The Group has defined contribution plans and defined benefit plans as retirement benefit plans for employees. (a) Defined contribution plans Contributions to defined contribution plans are recognized as expenses when services are rendered by employees. (b) Defined benefit plans The present value of defined benefit obligations and current service cost, as well as past service costs are determined using the projected unit credit method. The discount rate is determined based on market yields at the end of the reporting period on high quality corporate bonds for the corresponding period up to the esti- mated date of future benefit payments. The net defined benefit liability (asset) is recognized at the present value of defined benefit obligations net of the fair value of plan assets. Service costs and net interest on the net defined benefit liability (asset) are recognized in profit or loss. Remeasurements of the net defined benefit liability (asset) are recognized in other comprehensive income in the period when they occur and transferred immediately to retained earnings. Past service cost is recog- nized in profit or loss in the period when they are incurred. (2) Other employee benefits Short-term employee benefits are recognized as expenses when the associated services are rendered by employees at undiscounted amounts. When the Group has a legal or constructive obligation to make payments of bonuses and paid leave expenses and a reliable estimate can be made of the obligation, a liability is recognized for the estimated amount to be paid based on the respective programs. 13. Equity Common shares are recorded at issue value in share capital and capital surplus. Treasury shares are valued at cost and deducted from equity. When treasury shares are disposed of, the differ- ence between the carrying amount and the consideration received is recognized as capital surplus. 14. Share-based payments The Company has adopted a share option plan as an equity-settled share-based remuneration plan. The grant-date fair value of share options is recognized as an expense over the vesting period, and the corresponding amount is recognized as an increase in equity. The fair value of options granted is determined using the Black-Scholes model. Toray Industries, Inc.Integrated Annual Report 2021 110 15. Revenue recognition The Group’s revenue is recognized based on the following five-step model: 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 obligations in the contract Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation The Group operates Fibers & Textiles, Performance Chemicals, Carbon Fiber Composite Materials, Environment & Engineering, Life Science and other businesses and, with regard to sales of products of these businesses, the Group determines that its performance obligation is satisfied typically when a customer obtains control of the prod- uct upon the delivery. Accordingly, revenue is mainly recognized when the product is delivered. For engineering and other service contracts at certain subsidiaries operating the Environment & Engineering business, revenue is recog- nized over time based on the progress in satisfying the performance obligation because control of a product or ser- vice is transferred over time. The progress is measured by a ratio of the actual cost to the total estimated cost. Revenue is recognized at the consideration promised in a contract with a customer, less discounts, rebates, returned products and other items, and only to the extent that it is highly probable that a significant reversal will not occur. In addition, contracts do not contain a significant financing component because consideration is normally collected about within one year from the time when the performance obligation is satisfied. 16. Income taxes Income taxes consist of current taxes and deferred taxes. They are recognized in profit or loss, except for those related to business combinations and items recognized in other comprehensive income or directly in equity. Current taxes are measured at the amount expected to be paid to or recovered from the taxation authorities, using the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred taxes are recognized for temporary differences between the accounting carrying amount and the tax base of assets and liabilities and for the carryforward of unused tax credits and unused tax losses at the end of the reporting period. Deferred tax liabilities are, in principle, recognized for all taxable temporary differences. Deferred tax assets are recognized for deductible temporary differences to the extent that it is probable that tax- able profit will be available against which the deductible temporary differences can be utilized, and the recoverabil- ity of deferred tax assets is reassessed each period. Deferred tax assets and liabilities are not recognized for the following temporary differences: • temporary differences arising from the initial recognition of goodwill; • temporary differences arising from the initial recognition of assets and liabilities in transactions (excluding business combinations) which affect neither accounting profit nor taxable profit; • taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint arrangements, to the extent that the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future; and • deductible temporary differences associated with investments in subsidiaries and associates, and interests in joint arrangements, to the extent that it is not probable that the temporary difference will reverse in the foreseeable future or it is not probable that taxable profit will be available against which the temporary dif- ference can be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substan- tively enacted by the end of the reporting period. Deferred tax assets and liabilities are offset if the Group has a legally enforceable right to set off current tax assets against current tax liabilities, and income taxes are levied by the same taxation authority on the same tax- able entity. The Company and some of its subsidiaries file consolidated tax returns. Toray Industries, Inc.Integrated Annual Report 2021 111 17. Earnings per share Basic earnings per share are calculated by dividing profit or loss attributable to common shareholders of the par- ent entity by the weighted average number of common shares outstanding, adjusted for treasury shares, during the period. Diluted earnings per share are calculated by adjusting for the effects of all dilutive potential common shares. Note 4. Significant Accounting Estimates and Judgements In preparing the consolidated financial statements, management is required to make judgements, estimates and assumptions that affect the application of accounting policies and the amounts of assets, liabilities, income and expenses. These estimates and assumptions are based on management’s best judgements, but may differ from actual results. The estimates and underlying assumptions are reviewed on an ongoing basis. The effects of revisions to account- ing estimates are recognized in the period in which the estimates are revised and in future periods. Accounting judgements, estimates and assumptions that have a significant impact on the amounts recognized in the Group’s consolidated financial statements are principally as follows: 1. Impairment of non-financial assets At the end of each reporting period, the Group assesses whether there is any indication that non-financial assets, including property, plant and equipment, intangible assets and goodwill, may be impaired. If any such indication exists, the recoverable amount of the asset is estimated. For goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use, their recoverable amounts are estimated annually and whenever there is any indication of impairment. In determining the recoverable amount, certain assumptions are established for future cash flows, discount rates and other items. These assumptions are determined by management’s best estimates and judgements but may be affected by changes in future economic conditions and business plans. If it becomes necessary to review the assumptions, the consolidated financial statements may be materially affected. The relevant details are described in “Note 10. Property, Plant and Equipment” and “Note 12. Goodwill and Intangible Assets.” 2. Recoverability of deferred tax assets Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized, and their recoverability is reviewed every period. In determining the recoverability, the amount and timing of taxable profit generated are estimated based on business plans. These assumptions are determined by management’s best estimates and judgements but may be affected by changes in future economic conditions and other events. If it becomes necessary to review the assumptions, the consolidated financial statements may be materially affected. The relevant details are described in “Note 17. Income Taxes.” 3. Measurement of defined benefit obligations The net defined benefit liability (asset) is recognized at the present value of defined benefit obligations net of the fair value of plan assets. Defined benefit obligations are calculated based on actuarial assumptions, which include esti- mates of discount rates, employee turnover, mortality and future increases in salaries. These actuarial assumptions may be affected by changes in future economic climates or social conditions. If it becomes necessary to review the assumptions, the consolidated financial statements may be materially affected. The relevant details are described in “Note 21. Employee Benefits.” Toray Industries, Inc.Integrated Annual Report 2021 112 The Group makes accounting estimates, including valuation of non-financial assets, assuming that the global econ- omy will maintain a recovery trend backed by large-scale additional economic measures implemented by the U.S. and the rollout of coronavirus vaccines, but a full-scale recovery will be achieved in the year ending March 31, 2022 or thereafter due to the slow pace of recovery. Note 5. New Standards Not Yet Applied None of the new standards or interpretations that have been established or revised by the date of authorization for issue of the consolidated financial statements have a significant impact on the Group’s consolidated financial statements. Note 6. Segment Information 1. Overview of reportable segments The reportable segments of the Group are the components of the Group for which discrete financial information is available and which are subject to periodic review by the Board of Directors and other relevant bodies to determine the allocation of management resources and evaluate business performance. The Company identifies five reportable segments based on the product’s nature and market similarity: “Fibers & Textiles,” “Performance Chemicals,” “Carbon Fiber Composite Materials,” “Environment & Engineering” and “Life Science.” The main products belonging to each reportable segment are as follows: Reportable segment Main products Fibers & Textiles Filament yarns, staple fibers, spun yarns, woven and knitted fabrics of nylon, polyester, acrylic and others; nonwoven fabrics; nonwoven material created using ultra-fine fibers in an “Island in the Sea” configuration; apparel products Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Nylon, ABS, PBT, PPS and other resins and molded products; polyolefin foam; polyester, polyethylene, polypropylene and other films and processed film prod- ucts; raw materials for synthetic fibers and other plastics; fine chemicals; elec- tronic and information materials; and graphic materials Carbon fibers, carbon fiber composite materials and their molded products Comprehensive engineering; condominiums; industrial equipment and machin- ery; IT-related equipment; water treatment membranes and related equipment; materials for housing, building and civil engineering applications Life Science Pharmaceuticals, medical devices, etc. The accounting policies for each reportable segment are the same as described in “Note 3. Significant Accounting Policies.” Intersegment revenue is determined based mainly on market prices. Toray Industries, Inc.Integrated Annual Report 2021 113 2. Information on reportable segments Millions of yen 2020 Reportable segments Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Other*1 Total Reconcilia- tions*2, 3 Consolidated total Revenue Revenue from external customers Intersegment revenue 830,963 761,208 236,885 190,846 53,023 18,241 2,091,166 — 2,091,166 1,215 15,485 848 60,466 1 26,785 104,800 (104,800) — Total 832,178 776,693 237,733 251,312 53,024 45,026 2,195,966 (104,800) 2,091,166 Core operating income*4 59,589 54,523 22,598 10,567 478 3,593 151,348 (25,816) 125,532 Segment assets 800,830 959,550 613,893 261,796 68,437 86,270 2,790,776 (57,256) 2,733,520 (Other items) Depreciation and amortization 30,790 46,255 27,631 5,143 3,136 2,053 115,008 (283) 114,725 Impairment losses Capital expenditures*5 901 38,020 3,844 64,659 1,779 22,432 5 9 11,317 2,887 — 2,026 6,538 141,341 1,031 7,569 804 142,145 *1 “Other” represents service-related businesses such as analysis, physical evaluation and research. *2 “Reconciliations” of core operating income of ¥(25,816) million include intersegment eliminations of ¥(152) million and corporate expenses of ¥(25,664) million. The corporate expenses consist of the headquarters’ research expenses that are not allocated to each reportable segment. *3 “Reconciliations” of segment assets of ¥(57,256) million include intersegment eliminations of ¥(82,584) million and corporate assets of ¥25,328 mil- lion. The corporate assets consist of the headquarters’ research assets that are not allocated to each reportable segment. *4 Core operating income is calculated by excluding income and expenses due to non-recurring factors from operating income. *5 Capital expenditures do not include the increase in assets resulting from business combinations. 2021 Reportable segments Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Millions of yen Other*1 Total Reconcilia- tions*2, 3 Consolidated total 719,239 720,418 182,884 193,524 52,965 14,570 1,883,600 — 1,883,600 1,045 11,185 712 56,724 1 24,891 94,558 (94,558) — Revenue Revenue from external customers Intersegment revenue Total 720,284 731,603 183,596 250,248 52,966 39,461 1,978,158 (94,558) 1,883,600 36,565 66,963 (7,476) 14,532 1,295 2,939 114,818 (24,553) 90,265 808,565 1,075,600 564,046 297,697 72,943 86,689 2,905,540 (56,701) 2,848,839 Core operating income (loss)*4 Segment assets (Other items) Depreciation and amortization 30,729 44,982 28,765 5,871 Impairment losses Capital expenditures*5 2,903 23,240 864 74,905 25,100 19,899 — 11,104 3,328 — 2,787 2,401 116,076 (257) 115,819 — 2,434 28,867 134,369 — 28,867 (1,169) 133,200 *1 “Other” represents service-related businesses such as analysis, physical evaluation and research. *2 “Reconciliations” of core operating income of ¥(24,553) million include intersegment eliminations of ¥310 million and corporate expenses of ¥(24,863) million. The corporate expenses consist of the headquarters’ research expenses that are not allocated to each reportable segment. *3 “Reconciliations” of segment assets of ¥(56,701) million include intersegment eliminations of ¥(77,905) million and corporate assets of ¥21,204 mil- lion. The corporate assets consist of the headquarters’ research assets that are not allocated to each reportable segment. *4 Core operating income is calculated by excluding income and expenses due to non-recurring factors from operating income. *5 Capital expenditures do not include the increase in assets resulting from business combinations. Toray Industries, Inc.Integrated Annual Report 2021 114 Reconciliation of core operating income to profit before tax is as follows: Core operating income Gain on sale or disposal of fixed assets Loss on sale or disposal of fixed assets Impairment losses Other Operating income Finance income Finance costs Share of profit of investments accounted for using equity method Profit before tax 2020 125,532 3,031 (6,195) (7,569) (99) 114,700 7,065 (9,166) 10,705 123,304 Millions of yen 2021 90,265 288 (5,807) (28,867) — 55,879 6,099 (9,224) 12,812 65,566 3. Information about geographical areas The breakdown of revenue from external customers and non-current assets by geographical area is as follows: (1) Revenue from external customers Japan Asia China Other North America, Europe and other Total * Revenue is attributed to each area based on the location of customers. 2020 922,860 368,008 424,443 375,855 Millions of yen 2021 829,191 367,856 373,514 313,039 2,091,166 1,883,600 (2) Non-current assets (excluding financial instruments, deferred tax assets and retirement benefit asset) Japan Asia Republic of Korea Other North America, Europe and other U.S.A. Europe and other Total April 1, 2019 March 31, 2020 March 31, 2021 373,750 364,703 355,817 Millions of yen 230,429 180,642 277,723 157,768 1,220,312 213,901 173,802 268,438 172,975 1,193,819 234,735 183,300 245,105 208,067 1,227,024 Toray Industries, Inc.Integrated Annual Report 2021 115 Note 7. Cash and Cash Equivalents The breakdown of cash and cash equivalents is as follows: Millions of yen Cash on hand and demand deposits Time deposits and other short-term investments Total April 1, 2019 March 31, 2020 March 31, 2021 135,058 32,377 167,435 142,518 41,185 183,703 177,697 58,657 236,354 Note 8. Trade and Other Receivables The breakdown of trade and other receivables is as follows: Trade receivables Contract assets Other receivables Allowance for doubtful accounts Total April 1, 2019 March 31, 2020 March 31, 2021 Millions of yen 530,095 16,518 16,590 (2,097) 561,106 470,067 16,125 12,240 (2,368) 496,064 489,070 24,195 11,264 (2,270) 522,259 * Trade and other receivables, excluding contract assets, are classified as financial assets measured at amortized cost. Note 9. Inventories The breakdown of inventories is as follows: Merchandise and finished goods Work in process Raw materials and supplies Total Millions of yen April 1, 2019 March 31, 2020 March 31, 2021 237,811 88,372 105,745 431,928 219,906 86,332 99,031 405,269 195,221 76,093 97,796 369,110 * The amounts of write-down of inventories recognized as expenses for the years ended March 31, 2020 and 2021 were ¥4,714 million and ¥2,567 mil- lion, respectively. Toray Industries, Inc.Integrated Annual Report 2021 116 Note 10. Property, Plant and Equipment 1. Changes in property, plant and equipment Changes in carrying amount, acquisition cost, and accumulated depreciation and accumulated impairment losses are as follows: (1) Carrying amount At April 1, 2019 Additions Depreciation Impairment losses Disposal Exchange differences on translation Millions of yen Land Buildings and structures Machinery and vehicles Construction in progress Other Total 67,682 279,767 456,542 145,043 105 — — (39) 31,499 95,990 (3,973) (14,785) (72,001) (99) (670) (6,222) (1,346) — (546) (5) 25,185 9,140 (7,432) (701) (156) 974,219 132,761 (94,218) (7,568) (2,216) (2,185) (8,882) (18,828) (4,832) (649) (35,376) Other 550 2,003 (1,486) 561 At March 31, 2020 66,113 288,833 452,649 136,248 Additions Depreciation Impairment losses Disposal Exchange differences on translation 39 — — (190) 18,784 (15,038) (10,218) (450) 92,159 (72,627) (17,581) (1,489) (4,782) — (366) (553) 2,319 10,351 23,144 5,009 Other (446) (255) 696 363 (34) 25,353 7,528 (7,503) (589) (179) 780 256 1,594 969,196 113,728 (95,168) (28,754) (2,861) 41,603 614 At March 31, 2021 67,835 292,007 476,951 135,919 25,646 998,358 *1 Additions include the transfer from construction in progress to other accounts of property, plant and equipment. *2 Depreciation is included in “Cost of sales” and “Selling, general and administrative expenses” in the consolidated statement of profit or loss, and impairment losses are included in “Other expenses” in the consolidated statement of profit or loss. (2) Acquisition cost At April 1, 2019 At March 31, 2020 At March 31, 2021 Land 67,941 66,373 67,883 Buildings and structures Machinery and vehicles Construction in progress Other Total 645,113 2,044,822 661,816 2,051,461 693,912 2,181,505 147,605 139,266 139,257 111,644 3,017,125 113,339 3,032,255 119,282 3,201,839 Millions of yen (3) Accumulated depreciation and accumulated impairment losses Millions of yen Land Buildings and structures Machinery and vehicles Construction in progress Other Total At April 1, 2019 At March 31, 2020 At March 31, 2021 259 260 48 365,346 1,588,280 372,983 1,598,812 401,905 1,704,554 2,562 3,018 3,338 86,459 87,986 93,636 2,042,906 2,063,059 2,203,481 Toray Industries, Inc.Integrated Annual Report 2021 117 Note 11. Leases The Group leases land, buildings, production facilities and other assets. Some of the lease contracts contain exten- sion options and termination options. Amounts recognized in profit or loss and cash outflows related to leases and the breakdown of the carrying amount of right-of-use assets are as follows: 1. Amounts recognized in profit or loss and cash outflows related to leases Millions of yen 2020 2021 Depreciation charge for right-of-use assets Land Buildings and structures Machinery and vehicles Other Total Interest expense on lease liabilities Expense relating to short-term leases Expense relating to leases of low-value assets Total cash outflow for leases 398 8,391 2,218 663 11,670 510 1,233 1,231 14,140 455 8,579 2,266 609 11,909 470 1,362 881 14,328 2. Breakdown of carrying amount of right-of-use assets Land Buildings and structures Machinery and vehicles Other Total April 1, 2019 March 31, 2020 March 31, 2021 Millions of yen 11,102 29,532 13,067 2,128 55,829 10,551 22,769 11,923 1,852 47,095 10,847 27,602 10,694 1,338 50,481 Additions to right-of-use assets for the years ended March 31, 2020 and 2021 were ¥4,832 million and ¥14,464 million, respectively. The maturity analysis of lease liabilities is presented in “Note 32. Financial Instruments.” Toray Industries, Inc.Integrated Annual Report 2021 118 Note 12. Goodwill and Intangible Assets 1. Changes in goodwill and intangible assets Changes in carrying amount, acquisition cost, and accumulated amortization and accumulated impairment losses are as follows: (1) Carrying amount At April 1, 2019 Additions Amortization Exchange differences on translation Other At March 31, 2020 Additions Amortization Exchange differences on translation Other At March 31, 2021 Millions of yen Goodwill Intangible assets Customer- related intangible assets Technology- based intangible assets Other Total 85,712 — — 42,822 — (2,764) 26,810 — (1,339) 15,463 4,389 (4,455) 85,095 4,389 (8,558) (2,306) (942) (566) (420) (1,928) — 83,406 — — 2,159 — 85,565 — 39,116 — (2,246) 655 — 37,525 — 24,905 — (1,320) 393 — 23,978 504 15,481 4,854 (4,926) 408 985 16,802 504 79,502 4,854 (8,492) 1,456 985 78,305 *1 There were no significant internally generated intangible assets at April 1, 2019, March 31, 2020 and March 31, 2021. *2 Amortization of intangible assets is included in “Cost of sales” and “Selling, general and administrative expenses” in the consolidated state- ment of profit or loss. *3 Research and development expenses recognized as expenses for the years ended March 31, 2020 and 2021 were ¥66,798 million and ¥62,818 million, respectively. (2) Acquisition cost At April 1, 2019 At March 31, 2020 At March 31, 2021 Millions of yen Goodwill Intangible assets Customer- related intangible assets Technology- based intangible assets Other Total 85,712 83,406 85,565 52,001 49,630 50,879 34,693 33,508 34,609 57,008 57,994 65,720 143,702 141,132 151,208 (3) Accumulated amortization and accumulated impairment losses Millions of yen At April 1, 2019 At March 31, 2020 At March 31, 2021 Goodwill Intangible assets Customer- related intangible assets Technology- based intangible assets Other Total — — — 9,179 10,514 13,354 7,883 8,603 10,631 41,545 42,513 48,918 58,607 61,630 72,903 Toray Industries, Inc.Integrated Annual Report 2021 119 2. Material intangible assets The material intangible assets recorded in the consolidated statement of financial position are the customer-related intangible assets and technology-based intangible assets of TenCate Advanced Composites Holding B.V. (currently Toray TCAC Holding B.V.), which were acquired in July 2018. The carrying amounts of these assets are as follows: Customer-related intangible assets Technology-based intangible assets * The remaining useful life at March 31, 2021 was 19 to 22 years. April 1, 2019 March 31, 2020 March 31, 2021 38,192 24,881 35,161 23,357 33,932 22,706 Millions of yen 3. Impairment tests for goodwill Cash-generating units or groups of cash-generating units to which goodwill has been allocated are tested for impairment annually and whenever there is an indication of impairment. The carrying amounts of material good- will are as follows: Millions of yen Reportable segment Cash-generating unit or group of cash-generating units April 1, 2019 March 31, 2020 March 31, 2021 Carbon Fiber Composite Materials Carbon Fiber Composite Materials Toray TCAC Holding B.V. 60,459 59,285 60,309 Zoltek Companies, Inc. 11,610 11,384 11,580 The recoverable amount of each cash-generating unit was measured at value in use. The value in use was determined based on the business plan for the next five years approved by management combined with a termi- nal value, reflecting past experience and external information. The business plan is primarily affected by changes in sales volumes and sales prices. The terminal value was calculated using the growth rate based on the expected inflation rate of the country to which the cash-generating unit belonged (2.2 to 2.3% at April 1, 2019, March 31, 2020 and March 31, 2021). The discount rate used in the measurement of value in use was 8.1 to 8.3% at April 1, 2019, March 31, 2020 and March 31, 2021. As the recoverable amount is sufficiently higher than the carrying amount, it is considered unlikely that a signif- icant impairment loss would be incurred even if the key assumptions used in the impairment test were to change within a reasonably foreseeable range. Note 13. Impairment Losses The Group generally identifies cash-generating units on the basis of management accounting segmentation. The major assets for which impairment losses were recognized for the years ended March 31, 2020 and 2021 are as follows. The impairment losses are recorded in “Other expenses” in the consolidated statement of profit or loss. Reportable segment Location 2020 Use Class of asset Impairment losses (Millions of yen) Carbon Fiber Composite Materials Markgröningen, Germany and other Carbon fiber composite materials production facilities Machinery and vehicles Construction in progress Other Performance Chemicals Performance Chemicals Gyeongsangbuk-do, Republic of Korea Saint-Maurice-de- Beynost, France Film production facilities Film production facilities Machinery and vehicles Other Machinery and vehicles 905 180 645 1,331 4 1,266 — Tokai, Aichi, Japan Research and development facilities Machinery and vehicles 1,031 Toray Industries, Inc.Integrated Annual Report 2021 120 The carrying amounts of, mainly, operating assets with declining profitability and assets to be disposed of were reduced to their recoverable amounts. The recoverable amount was measured at fair value less costs of disposal or at value in use. The fair value less costs of disposal was estimated at appraisal value or by other valuation tech- niques for those available for sale, and was assumed to be zero for those that were difficult to convert to other uses or sell. The value in use was calculated by discounting the future cash flows at discount rates of 7.4 to 10.2%. Reportable segment Location 2021 Use Carbon Fiber Composite Materials Washington, U.S.A. and other Carbon fiber composite materials production facilities Fibers & Textiles Penang, Malaysia Fiber production facilities Class of asset Impairment losses (Millions of yen) Buildings and structures Machinery and vehicles Construction in progress Other Buildings and structures Machinery and vehicles Other 9,844 14,275 313 536 225 1,589 21 The carrying amounts of, mainly, operating assets with declining profitability were reduced to their recoverable amounts. The recoverable amount was measured at value in use. The value in use was calculated by discounting the future cash flows at discount rates of 7.8 to 9.0%. The carrying amount of the carbon fiber composite materials production facilities in Washington, U.S.A. and other was reduced to the recoverable amount due to a decline in profitability caused by sluggish demand for aircraft, and the recoverable amount was measured at value in use of ¥53,192 million. The value in use was calculated by discounting the future cash flows at a discount rate of 7.8%. The future cash flows were estimated based on the business plan for the next five years approved by management, reflecting past experience and external information, and for the years after the five years, estimated using the growth rate based on the expected inflation rate of the country to which the cash-generating unit belongs. The business plan is primarily affected by changes in sales vol- umes and sales prices. Note 14. Investments Accounted for Using Equity Method 1. Investments in joint ventures The aggregate information about the carrying amount of investments in joint ventures and the share of profit, other comprehensive income and comprehensive income is as follows: April 1, 2019 March 31, 2020 March 31, 2021 Millions of yen Carrying amount of investments in joint ventures 30,012 31,278 32,564 Share of profit Share of other comprehensive income Share of comprehensive income Millions of yen 2020 2021 2,566 96 2,662 5,123 (15) 5,108 Toray Industries, Inc.Integrated Annual Report 2021 121 2. Investments in associates The aggregate information about the carrying amount of investments in associates and the share of profit, other comprehensive income and comprehensive income is as follows: April 1, 2019 March 31, 2020 March 31, 2021 Millions of yen Carrying amount of investments in associates 135,274 139,898 141,578 Share of profit Share of other comprehensive income Share of comprehensive income Note 15. Other Financial Assets 1. Breakdown The breakdown of other financial assets is as follows: Millions of yen 2020 2021 8,139 (626) 7,513 7,689 680 8,369 April 1, 2019 March 31, 2020 March 31, 2021 Millions of yen Financial assets measured at amortized cost Time deposits and other short-term investments Leasehold and guarantee deposits Other Financial assets measured at fair value through profit or loss Derivative assets Other Financial assets measured at fair value through other comprehensive income Shares and investments in capital Total Current assets Non-current assets Total 2,841 9,697 8,977 16,127 300 199,656 237,598 5,658 231,940 237,598 7,071 9,175 12,591 12,488 300 161,864 203,489 19,505 183,984 203,489 3,390 9,311 10,689 7,363 411 192,313 223,477 6,136 217,341 223,477 Toray Industries, Inc.Integrated Annual Report 2021 122 2. Equity instruments measured at fair value through other comprehensive income The Group designates equity securities held mainly for the purpose of strengthening business relationships, facili- tating business alliances, and enhancing joint research and technological development as equity instruments mea- sured at fair value through other comprehensive income. The fair values of major equity instruments measured at fair value through other comprehensive income are as follows: Issue Issue Issue Mitsui Fudosan Co., Ltd. Kaken Pharmaceutical Co., Ltd. FUJIFILM Holdings Corp. Daiichi Sankyo Co., Ltd. Mitsui Chemicals, Inc. United Therapeutics Corp. Toyota Industries Corp. Sumitomo Mitsui Financial Group, Inc. Mitsubishi Heavy Industries, Ltd. Mitsui & Co., Ltd. Daiichi Sankyo Co., Ltd. FUJIFILM Holdings Corp. Kaken Pharmaceutical Co., Ltd. Mitsui Fudosan Co., Ltd. Toyota Industries Corp. Mitsui Chemicals, Inc. Daikin Industries, Ltd. Mitsui & Co., Ltd. MS&AD Insurance Group Holdings, Inc. Sumitomo Mitsui Financial Group, Inc. FUJIFILM Holdings Corp. Daiichi Sankyo Co., Ltd. Mitsui Fudosan Co., Ltd. Toyota Industries Corp. Kaken Pharmaceutical Co., Ltd. Daikin Industries, Ltd. Mitsui & Co., Ltd. Sumitomo Mitsui Financial Group, Inc. TBS Holdings, Inc. MS&AD Insurance Group Holdings, Inc. Millions of yen April 1, 2019 Fair value 13,596 11,543 11,150 10,199 7,973 7,816 6,342 5,855 5,772 5,388 Millions of yen March 31, 2020 Fair value 12,637 12,047 11,543 9,140 5,919 5,840 4,791 4,714 4,471 3,963 Millions of yen March 31, 2021 Fair value 14,555 13,544 12,282 11,267 9,948 8,120 7,217 6,052 5,038 4,802 Toray Industries, Inc.Integrated Annual Report 2021 123 3. Derecognition of equity instruments measured at fair value through other comprehensive income The Group sells (derecognizes) equity instruments measured at fair value through other comprehensive income mainly as a result of streamlining its assets and reviewing its business relationships. The fair value at the time of sale and the cumulative gain or loss (before tax) on the sale are as follows. The cumulative gain or loss (net of tax) recognized as other components of equity was reclassified to retained earnings upon sale. Fair value at time of sale Cumulative gain (loss) Note 16. Other Assets 2020 8,405 4,531 Millions of yen 2021 20,667 5,116 The breakdown of other current assets and other non-current assets is as follows: Prepayments Value-added taxes receivable Investment property Other Total Current assets Non-current assets Total April 1, 2019 March 31, 2020 March 31, 2021 Millions of yen 18,685 17,771 17,761 13,407 67,624 48,167 19,457 67,624 19,861 16,733 12,186 13,190 61,970 47,350 14,620 61,970 18,360 18,560 11,943 12,632 61,495 47,180 14,315 61,495 Toray Industries, Inc.Integrated Annual Report 2021 124 Note 17. Income Taxes 1. Deferred tax assets and deferred tax liabilities The breakdown of and changes in deferred tax assets and deferred tax liabilities by major cause are as follows: Deferred tax assets Property, plant and equipment and intangible assets Employee benefits Lease liabilities Other Total Deferred tax liabilities Property, plant and equipment and intangible assets Right-of-use assets Investments in subsidiaries, associ- ates and joint arrangements Financial assets measured at fair value through other comprehensive income Other Total At beginning of period Recognized in profit or loss 2020 Recognized in other comprehensive income Millions of yen Other At end of period 11,941 45,635 11,525 32,528 101,629 (47,486) (11,309) 734 642 (1,610) (1,561) (1,795) 1,419 1,332 (19,847) (1,397) — 145 — 1,568 1,713 — — 793 (505) 12,170 (264) (107) (201) (1,077) 46,158 9,808 32,334 100,470 1,212 (44,855) 111 (9,866) (1) (20,452) (38,304) — 8,468 (87) (29,923) (12,136) (129,082) (987) 367 2,566 11,827 (96) 1,139 (10,653) (115,749) At beginning of period Recognized in profit or loss 2021 Recognized in other comprehensive income Millions of yen Other At end of period Deferred tax assets Property, plant and equipment and intangible assets Employee benefits Lease liabilities Other Total Deferred tax liabilities Property, plant and equipment and intangible assets Right-of-use assets Investments in subsidiaries, associ- ates and joint arrangements Financial assets measured at fair value through other comprehensive income Other Total 12,170 46,158 9,808 32,334 100,470 (98) (110) (35) 2,147 1,904 — (400) — (4,007) (4,407) 182 133 143 519 977 12,254 45,781 9,916 30,993 98,944 (44,855) 5,823 (9,866) (44) — — (981) (143) (40,013) (10,053) (20,452) (2,752) (1,026) (2) (24,232) (29,923) — (8,658) (3) (38,584) (10,653) (115,749) 282 3,309 (2,805) (12,489) 12 (1,117) (13,164) (126,046) Toray Industries, Inc.Integrated Annual Report 2021 125 2. Deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognized The amounts (in income tax terms) of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognized are as follows: April 1, 2019 March 31, 2020 March 31, 2021 Millions of yen Deductible temporary differences*1 Unused tax losses and unused tax credits*2 13,524 15,178 12,446 15,302 13,807 20,383 *1 Deductible temporary differences related to investments in subsidiaries, associates and joint arrangements are not included. The aggregate amount (in taxable income terms) of deductible temporary differences associated with investments in subsidiaries, associates and joint arrangements for which no deferred tax asset was recognized were ¥113,116 million, ¥133,488 million and ¥125,673 million at April 1, 2019, March 31, 2020 and March 31, 2021, respectively. *2 The amounts by expiry date are as follows: Millions of yen 1 year or less Over 1 year to 5 years Over 5 years Total April 1, 2019 March 31, 2020 March 31, 2021 1,138 2,686 11,354 15,178 329 2,453 12,520 15,302 478 3,189 16,716 20,383 3. Taxable temporary differences for which deferred tax liabilities have not been recognized The aggregate amount (in taxable income terms) of taxable temporary differences associated with investments in subsidiaries, associates and joint arrangements for which deferred tax liabilities had not been recognized was ¥28,771 million, ¥27,208 million and ¥41,883 million at April 1, 2019, March 31, 2020 and March 31, 2021, respec- tively. Deferred tax liabilities are not recognized for these temporary differences because the Group is able to con- trol the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. 4. Breakdown of income tax expense The breakdown of income tax expense is as follows: Current tax expense Deferred tax expense Total 2020 28,033 1,428 29,461 Millions of yen 2021 23,440 (5,213) 18,227 5. Reconciliation of effective tax rate Reconciliation between the statutory effective tax rate and the actual average effective tax rate is as follows: Statutory effective tax rate Share of profit (loss) of investments accounted for using equity method Tax rate differences with foreign subsidiaries Changes in unrecognized deferred tax assets Other Actual average effective tax rate 2020 2021 % 30.6 (2.7) (4.6) 1.3 (0.7) 23.9 30.6 (6.0) (3.6) 6.2 0.6 27.8 Toray Industries, Inc.Integrated Annual Report 2021 126 Note 18. Trade and Other Payables The breakdown of trade and other payables is as follows: Trade payables Other payables and accrued expenses Total Millions of yen April 1, 2019 March 31, 2020 March 31, 2021 243,945 81,624 325,569 213,541 72,161 285,702 209,343 73,469 282,812 * Trade and other payables are classified as financial liabilities measured at amortized cost. Note 19. Bonds and Borrowings 1. Breakdown The breakdown of bonds and borrowings is as follows: April 1, 2019 March 31, 2020 March 31, 2021 Short-term borrowings 196,980 Commercial papers Long-term borrowings Bonds payable*3 Total Current liabilities Non-current liabilities Total — 466,917 340,107 1,004,004 290,976 713,028 1,004,004 154,888 10,000 498,588 290,187 953,663 278,962 674,701 953,663 143,135 30,000 469,993 290,158 933,286 278,678 654,608 933,286 Millions of yen Average interest rate (%) *2 Maturity 0.34 (0.06) 0.81 — — — 2021 - 2032 — *1 Bonds and borrowings are classified as financial liabilities measured at amortized cost. *2 The average interest rate represents the weighted average interest rate on the balance at March 31, 2021. *3 The schedule of bonds payable is as follows: Issuer Issue Toray Industries, Inc. Toray Industries, Inc. Toray Industries, Inc. Toray Industries, Inc. Toray Industries, Inc. Toray Industries, Inc. Toray Industries, Inc. Toray Industries, Inc. Toray Industries, Inc. 28th unsecured straight bonds 29th unsecured straight bonds 30th unsecured straight bonds 31st unsecured straight bonds 32nd unsecured straight bonds 33rd unsecured straight bonds 34th unsecured straight bonds Zero coupon convert- ible bonds due 2019 Zero coupon convert- ible bonds due 2021 Issue date July 20, 2012 July 17, 2013 July 19, 2017 July 19, 2017 July 18, 2018 July 18, 2018 July 18, 2018 June 9, 2014 June 9, 2014 April 1, 2019 March 31, 2020 March 31, 2021 Interest rate (%) Collateral Maturity Millions of yen 20,606 20,408 20,231 0.925 None 21,054 20,831 20,578 1.012 None 59,801 59,825 59,849 0.375 None 39,890 39,911 39,932 0.250 None 39,871 39,892 39,912 0.240 None 39,848 39,865 39,881 0.380 None 19,895 19,901 19,906 0.830 None July 20, 2022 July 14, 2023 July 16, 2027 July 19, 2024 July 18, 2025 July 18, 2028 July 16, 2038 49,902 — — 49,240 49,554 49,869 — — — — None August 31, 2021 Total 340,107 290,187 290,158 Toray Industries, Inc.Integrated Annual Report 2021 127 2. Assets pledged as collateral and liabilities with collateral Assets pledged as collateral are as follows: Property, plant and equipment Other financial assets Total Liabilities with collateral are as follows: Trade and other payables Bonds and borrowings Total Millions of yen April 1, 2019 March 31, 2020 March 31, 2021 1,191 2,548 3,739 247 2,799 3,046 183 3,718 3,901 Millions of yen April 1, 2019 March 31, 2020 March 31, 2021 8,279 1,853 10,132 4,547 1,339 5,886 5,345 1,279 6,624 Note 20. Other Financial Liabilities The breakdown of other financial liabilities is as follows: Financial liabilities measured at amortized cost Deposits received Other Financial liabilities measured at fair value through profit or loss Derivative liabilities Total Current liabilities Non-current liabilities Total April 1, 2019 March 31, 2020 March 31, 2021 Millions of yen 16,094 6,493 3,837 26,424 17,585 8,839 26,424 12,385 4,832 4,300 21,517 13,911 7,606 21,517 9,571 5,197 4,803 19,571 12,872 6,699 19,571 Note 21. Employee Benefits 1. Post-employment benefits The Company and some of its subsidiaries have defined benefit corporate pension plans, lump-sum retirement benefit plans and defined contribution pension plans. The Company’s defined benefit corporate pension plan is managed by a corporate pension fund (the Fund), which is legally separated from the Company in accordance with laws and regulations. The directors of the Fund and the pension fund trustee are required by laws and regulations to faithfully perform their duties for the Fund, and are responsible for managing the plan assets based on the prescribed policies. The amount of contributions to the defined benefit plan is reviewed regularly through financial recalculations to ensure that the pension plan maintains financial balance into the future. With respect to the investment of plan assets in the Fund, it seeks to secure the required total return over the long term with the aim of ensuring the payment of pension benefits and lump-sum benefits to the participants into the future. In addition, the Fund gives full consideration to the medium- to long-term trends in the ratio of income, including contributions, to expenditure, including benefit payments, as well as the impact of uncertainty in the plan assets on the financial balance of the pension plan and the degree of acceptable uncertainty in the rate of return on the plan assets. Toray Industries, Inc.Integrated Annual Report 2021 128 (1) Defined benefit plans (a) Amounts recognized in the consolidated statement of financial position The relationship of the net defined benefit liability (asset) recognized in the consolidated statement of finan- cial position with the defined benefit obligations and plan assets is as follows: Millions of yen April 1, 2019 March 31, 2020 March 31, 2021 Present value of defined benefit obligations Fair value of plan assets Net defined benefit liability (asset) 191,464 (107,849) 83,615 Amounts on the consolidated statement of financial position Retirement benefit liability Retirement benefit asset Net defined benefit liability (asset) 103,223 (19,608) 83,615 (b) Reconciliation of present value of defined benefit obligations Changes in the present value of defined benefit obligations are as follows: At beginning of period Current service cost Interest expense Remeasurements Actuarial gains and losses arising from changes in demo- graphic assumptions Actuarial gains and losses arising from changes in financial assumptions Actuarial gains and losses arising from experience adjustments Past service cost Benefits paid Other At end of period 184,417 (98,244) 86,173 101,979 (15,806) 86,173 2020 191,464 7,139 1,193 (186) (789) 409 285 (12,764) (2,334) 184,417 182,154 (116,181) 65,973 100,852 (34,879) 65,973 Millions of yen 2021 184,417 7,131 1,382 — 1 465 202 (12,771) 1,327 182,154 * The weighted average durations of the defined benefit obligations at April 1, 2019, March 31, 2020 and March 31, 2021 were 8.9 years, 8.6 years and 8.5 years, respectively. (c) Reconciliation of fair value of plan assets Changes in the fair value of plan assets are as follows: At beginning of period Interest income Remeasurements Return on plan assets Contributions by employer Benefits paid Other At end of period 2020 107,849 617 (7,554) 7,039 (7,958) (1,749) 98,244 Millions of yen 2021 98,244 691 15,253 7,296 (6,907) 1,604 116,181 * The amount of expected contributions to the defined benefit plans for the year ending March 31, 2022 is ¥7,696 million. Toray Industries, Inc.Integrated Annual Report 2021 129 (d) Breakdown by type of fair value of plan assets The breakdown by type of the fair value of plan assets is as follows: April 1, 2019 Quoted market prices in active markets March 31, 2020 Quoted market prices in active markets Millions of yen March 31, 2021 Quoted market prices in active markets Cash and cash equivalents Equity securities (mainly Japanese equity securities) Debt securities (mainly Japanese debt securities) General accounts of life insurance companies Other Total Available 17,003 48,635 Not available Total Available Not available Total Available Not available Total — 17,003 14,833 — 14,833 15,603 — 15,603 — 48,635 38,892 — 38,892 53,330 — 53,330 9,286 — 9,286 13,398 — 13,398 15,926 — 15,926 — 29,086 29,086 — 30,912 30,912 — 31,026 31,026 730 75,654 3,109 32,195 3,839 107,849 112 67,235 97 31,009 209 98,244 195 85,054 101 31,127 296 116,181 (e) Significant actuarial assumptions The significant assumptions used in the actuarial calculations are as follows: Discount rate Mainly 0.4% Mainly 0.5% Mainly 0.5% April 1, 2019 March 31, 2020 March 31, 2021 (f) Sensitivity analysis The effect of changes in discount rates, which are the significant actuarial assumptions, on the present value of defined benefit obligations is as follows. This sensitivity analysis assumes that all actuarial assumptions other than those subject to the analysis remain constant. March 31, 2020 March 31, 2021 Millions of yen Discount rate Increase by 0.5% Decrease by 0.5% (7,354) 6,562 (7,075) 5,860 (2) Defined contribution plans The amounts of expenses for the defined contribution plans recognized for the years ended March 31, 2020 and 2021 were ¥20,287 million and ¥20,763 million, respectively. 2. Employee benefit expenses Employee benefit expenses for the years ended March 31, 2020 and 2021 totaled ¥294,053 million and ¥285,945 million, respectively, and are included in “Cost of sales,” “Selling, general and administrative expenses” and “Other expenses” in the consolidated statement of profit or loss. Toray Industries, Inc.Integrated Annual Report 2021 130 Note 22. Other Liabilities The breakdown of other current liabilities and other non-current liabilities is as follows: Millions of yen April 1, 2019 March 31, 2020 March 31, 2021 Short-term employee benefits Contract liabilities Value-added taxes payable Other Total Current liabilities Non-current liabilities Total 47,451 24,031 7,899 22,979 102,360 88,925 13,435 102,360 45,335 14,799 8,609 21,431 90,174 77,344 12,830 90,174 50,901 17,189 9,874 17,966 95,930 84,425 11,505 95,930 Note 23. Share Capital and Other Equity Items 1. Share capital Changes in the number of authorized shares and the number of issued shares are as follows: Number of authorized shares Number of issued shares At beginning of period Changes during period At end of period Thousands of shares 2020 2021 4,000,000 4,000,000 1,631,481 1,631,481 — — 1,631,481 1,631,481 * All shares the Company is authorized to issue are common shares that have no par value. All issued shares are fully paid up. 2. Capital surplus and retained earnings (1) Capital surplus Capital surplus consists of amounts arising from equity transactions that are not included in share capital. The Companies Act of Japan stipulates that at least one-half of the amount paid or delivered for the issuance of shares shall be incorporated into share capital, and the remainder shall be recorded as legal capital reserve included in capital surplus. In addition, the amount of share acquisition rights issued under the Company’s share option plan and the amount classified as an equity element of bonds with share acquisition rights at the time of issuance are recorded in capital surplus. (2) Retained earnings Retained earnings consist of items recognized in profit or loss and items reclassified from other comprehensive income in the current year and prior years. The Company’s distributable retained earnings under the Companies Act is calculated based on the surpluses in the Company’s accounting books prepared in accordance with gener- ally accepted accounting principles in Japan. Accordingly, adjustments to the consolidated financial statements in accordance with IFRS do not affect the calculation of the distributable amount under the Companies Act. Toray Industries, Inc.Integrated Annual Report 2021 131 3. Treasury shares Changes in treasury shares are as follows: At beginning of period Exercise of share acquisition rights Other At end of period 2020 31,610 (80) 2 31,532 Thousands of shares 2021 31,532 (503) 1 31,030 * 824 thousand shares in the Company held by its associates were included in the balances at March 31, 2020 and 2021. Note 24. Dividends 1. Dividends paid Resolution Class of shares Total amount (Millions of yen) Dividend per share (Yen) Record date Effective date 2020 Ordinary general meeting of stockholders held on June 25, 2019 Common stock Board of directors meeting held on November 7, 2019 Common stock 12,806 12,806 2021 8.00 8.00 March 31, 2019 June 26, 2019 September 30, 2019 December 2, 2019 Resolution Class of shares Total amount (Millions of yen) Dividend per share (Yen) Record date Effective date Ordinary general meeting of stockholders held on June 23, 2020 Common stock Board of directors meeting held on November 6, 2020 Common stock 12,806 7,206 8.00 4.50 March 31, 2020 June 24, 2020 September 30, 2020 December 1, 2020 2. Dividends whose record dates fall in the year ended March 31, 2021 and whose effective dates fall in the year ending March 31, 2022 2021 Resolution Class of shares Total amount (Millions of yen) Dividend per share (Yen) Record date Effective date Ordinary general meeting of stockholders held on June 22, 2021 Common stock 7,206 4.50 March 31, 2021 June 23, 2021 Toray Industries, Inc.Integrated Annual Report 2021 132 Note 25. Revenue 1. Disaggregation of revenue As described in “Note 6. Segment Information,” the Group has five reportable segments: “Fibers & Textiles,” “Performance Chemicals,” “Carbon Fiber Composite Materials,” “Environment & Engineering” and “Life Science.” In addition, revenue is disaggregated by geographical area based on the location of the Group entities. The relationship between the disaggregated revenue and the revenue (revenue from external customers) of each reportable segment is as follows: 2020 Millions of yen Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Other Total 494,378 286,407 422,568 248,075 66,322 16,525 165,012 18,587 44,633 5,212 17,645 544 1,210,558 575,350 50,178 90,565 154,038 7,247 3,178 52 305,258 Japan Asia North America, Europe and other Total 830,963 761,208 236,885 190,846 53,023 18,241 2,091,166 2021 Millions of yen Fibers & Textiles Performance Chemicals Carbon Fiber Composite Materials Environment & Engineering Life Science Other Total 422,351 257,425 388,992 240,866 47,890 14,251 166,583 20,637 45,596 5,144 14,389 135 1,085,801 538,458 39,463 90,560 120,743 6,304 2,225 46 259,341 Japan Asia North America, Europe and other Total 719,239 720,418 182,884 193,524 52,965 14,570 1,883,600 2. Contract balances The balances of receivables, contract assets and contract liabilities from contracts with customers are as follows: At April 1, 2019 At March 31, 2020 At March 31, 2021 Receivables from contracts with customers Contract assets Contract liabilities 528,187 467,897 487,078 16,329 15,927 23,917 24,031 14,799 17,189 *1 The amount of revenue recognized that was included in the contract liabilities at the beginning of the period was ¥23,270 million and ¥13,667 million for the years ended March 31, 2020 and 2021, respectively. *2 The amount of revenue recognized from performance obligations satisfied in the prior years was not material for the years ended March 31, 2020 and 2021. Millions of yen Toray Industries, Inc.Integrated Annual Report 2021 133 3. Transaction prices allocated to the remaining performance obligations The transaction prices allocated to the remaining performance obligations and the expected timing of revenue rec- ognition are as follows. The Group applies the practical expedient in paragraph C5(d) of IFRS 15 “Revenue from Contracts with Customers” in accordance with the exemption in paragraph D34 of IFRS 1, and does not disclose the transaction prices allocated to the remaining performance obligations and the expected timing of revenue rec- ognition at March 31, 2020. 1 year or less Over 1 year Millions of yen March 31, 2021 39,201 35,722 *1 The Group has adopted the practical expedient and therefore the transactions that have an original expected duration of one year or less are not included in the table. *2 There is no significant amount of consideration from contracts with customers that is not included in the transaction prices. Note 26. Other Income The breakdown of other income is as follows: Gain on sale or disposal of fixed assets Other Total Note 27. Other Expenses The breakdown of other expenses is as follows: Loss on sale or disposal of fixed assets Impairment losses Other Total Note 28. Finance Income and Finance Costs 1. Finance income The breakdown of finance income is as follows: Millions of yen 2020 2021 3,031 4,502 7,533 288 5,100 5,388 2020 6,195 7,569 7,705 21,469 Millions of yen 2021 5,807 28,867 5,354 40,028 Millions of yen 2020 2021 Interest income Financial assets measured at amortized cost 2,152 1,537 Dividend income Equity instruments measured at fair value through other compre- hensive income Derecognized during period Held at end of period Other Total 42 4,837 34 7,065 613 3,770 179 6,099 Toray Industries, Inc.Integrated Annual Report 2021 134 2. Finance costs The breakdown of finance costs is as follows: Interest expenses Financial liabilities measured at amortized cost Lease liabilities Foreign exchange loss Other Total Millions of yen 2020 2021 7,256 510 973 427 9,166 5,209 470 1,348 2,197 9,224 Note 29. Other Comprehensive Income Reclassification adjustments and income taxes for each component of other comprehensive income are as follows: Millions of yen 2020 2021 Investments in equity instruments Gains (losses) for the period Income taxes Net of tax Cash flow hedges Gains (losses) for the period Reclassification adjustments Income taxes Net of tax Deferred costs of hedging Gains (losses) for the period Reclassification adjustments Income taxes Net of tax Exchange differences on translation Gains (losses) for the period Income taxes Net of tax Remeasurements of defined benefit plans Gains (losses) for the period Income taxes Net of tax Share of other comprehensive income of investments accounted for using equity method (29,889) 9,956 (19,933) 992 (409) (179) 404 (232) (636) 266 (602) (45,443) 793 (44,650) (6,988) 2,066 (4,922) (530) 50,194 (15,192) 35,002 (4,042) 3,474 179 (389) 1,374 (491) (270) 613 55,967 (1,026) 54,941 14,787 (4,538) 10,249 665 Total other comprehensive income (70,233) 101,081 Toray Industries, Inc.Integrated Annual Report 2021 135 Note 30. Earnings per Share 1. Basis for calculation of basic earnings per share Profit attributable to common shareholders of parent Profit attributable to owners of parent Profit not attributable to common shareholders of parent Profit used for calculation of basic earnings per share Millions of yen 2020 2021 84,230 — 84,230 45,794 — 45,794 Average number of common shares for the period (Thousands of shares) Basic earnings per share (Yen) 1,599,937 1,600,360 52.65 28.61 2. Basis for calculation of diluted earnings per share 2020 2021 Millions of yen Diluted profit attributable to common shareholders Profit used for calculation of basic earnings per share Adjustments to profit Profit used for calculation of diluted earnings per share 84,230 — 84,230 45,794 — 45,794 Average number of common shares for the period (Thousands of shares) Increase in common shares Bonds with share acquisition rights (Thousands of shares) Share acquisition rights (Thousands of shares) Average number of diluted common shares for the period (Thousands of shares) Diluted earnings per share (Yen) Summary of potential shares not included in the calculation of diluted earnings per share because they were antidilutive for the period Note 31. Share-based Payments 1,599,937 1,600,360 9,549 2,154 1,611,640 52.26 — 2,445 1,602,804 28.57 The Company’s Zero coupon convertible bonds due 2021 61,721 thousand shares The Company’s Zero coupon convertible bonds due 2021 62,282 thousand shares 1. Overview of share option plan The Company has introduced a share compensation-type share option plan (share acquisition rights) for the Company’s members of the Board, vice presidents, executive fellows and directors to enhance their motiva- tion and willingness to improve the Group’s performance and to promote sharing of share price benefits with the shareholders. The share acquisition rights allocated under this plan are vested depending on the number of months in office during the specified service period. Holders of share acquisition rights may exercise their rights only within ten days after the day on which they lose any of their positions as a member of the Board, vice president, executive fellow or director of the Company. The Company’s share option plan is accounted for as an equity-settled share-based payment transaction. The amounts of expenses recognized for the plan were ¥325 million and ¥355 million for the years ended March 31, 2020 and 2021, respectively. Toray Industries, Inc.Integrated Annual Report 2021 136 2. Number and weighted average exercise price of share options The number and weighted average exercise price of share options granted during the period are as follows. The number of share options is presented in terms of the number of shares to be issued upon exercise of the options. 2020 2021 Number of options (Thousands of shares) Weighted average exercise price (Yen) Number of options (Thousands of shares) Weighted average exercise price (Yen) Outstanding at beginning of period Granted Exercised Forfeited Outstanding at end of period Exercisable at end of period 1,969 500 (80) — 2,389 2,237 1 1 1 — 1 1 2,389 863 (503) (10) 2,739 2,502 1 1 1 — 1 1 *1 The weighted average share prices at the date of exercise of share options exercised were ¥824 and ¥508.1 for the years ended March 31, 2020 and 2021, respectively. *2 The exercise price of issued options remaining at the end of the period was ¥1 for both the years ended March 31, 2020 and 2021, and the weighted average remaining contractual years were 26.3 years and 26.5 years at March 31, 2020 and 2021, respectively. 3. Fair value and method of fair value measurement of share options granted during period The fair value of share options was measured using the Black-Scholes model with the following input assumptions: Name Fair value Share price at grant date Exercise price Expected volatility*1 Expected remaining life of the option*2 Expected dividend*3 Risk-free interest rate*4 2020 2021 Toray Industries, Inc. 9th share acquisition rights 684 yen/share 775.2 yen 1 yen/share 24.079% 6 years 16 yen/share (0.347)% Toray Industries, Inc. 10th share acquisition rights 421 yen/share 509.4 yen 1 yen/share 27.382% 6 years 16 yen/share (0.070)% *1 The expected volatility is determined as a historical volatility based on the share price over the past 6 years. *2 The expected remaining life is determined based on the number of years past officers were in office, due to difficulty in making other reasonable estimations. *3 The expected dividends for the years ended March 31, 2020 and 2021 are determined using the actual dividends in the years ended March 31, 2019 and 2020, respectively. *4 The risk-free interest rate is determined as the interest rate of the Japanese government bond with a remaining maturity corresponding to the expected remaining life of the option. Toray Industries, Inc.Integrated Annual Report 2021 137 Note 32. Financial Instruments 1. Capital management The Group’s basic capital management policy is to secure and maintain financial soundness in order to achieve sus- tainable growth. The Group monitors the debt-to-equity (D/E) ratio as the management indicator for capital manage- ment, and the status at April 1, 2019, March 31, 2020 and March 31, 2021 was as follows. The Company is not subject to any significant capital requirements (other than the general provisions of the Companies Act, etc.). Interest-bearing liabilities (Millions of yen) Owner’s equity (Millions of yen) D/E ratio * Interest-bearing liabilities: Bonds and borrowings + Lease liabilities Owner’s equity: Equity attributable to owners of parent D/E ratio: Interest-bearing liabilities / Owner’s equity April 1, 2019 March 31, 2020 March 31, 2021 1,048,342 1,124,290 0.93 991,024 1,116,075 0.89 973,927 1,237,851 0.79 2. Risks arising from financial instruments The Group conducts risk management based on the following policies to respond to credit risk, liquidity risk and market risk arising from financial instruments. (1) Credit risk management Trade receivables of the Group are exposed to customer credit risk. In order to mitigate the risk, under its inter- nal regulations, the Company carefully manages the due dates and outstanding balances of receivables from each customer and regularly monitors the credit standing of major customers. Consolidated subsidiaries also monitor and manage the credit standings of their customers. The Group is not exposed to any credit risk that is excessively concentrated on particular counterparties. (a) Maximum exposure to credit risk The maximum exposure to credit risk at each fiscal year-end is the carrying amount of financial assets, net of impairment. With regard to guarantee obligations, the Group’s maximum exposure to credit risk is the bal- ance of guarantee obligations shown in “Note 36. Commitments and Contingent Liabilities.” (b) Changes in allowance for doubtful accounts Changes in allowance for doubtful accounts are as follows. There was no significant change in the gross car- rying amounts of financial assets that would affect the changes in allowance for doubtful accounts for the years ended March 31, 2020 and 2021. Allowance for financial assets not credit-impaired Allowance for credit-im- paired financial assets At April 1, 2019 Net provision (reversal) Write-off Other At March 31, 2020 Net provision (reversal) Write-off Transfer to credit-impaired financial assets Other At March 31, 2021 1,457 248 (42) (81) 1,582 5,292 (278) (5,223) 14 1,387 3,705 94 (251) (20) 3,528 1,778 (1,115) 5,223 407 9,821 Millions of yen Total 5,162 342 (293) (101) 5,110 7,070 (1,393) — 421 11,208 *1 The allowance for financial assets that are not credit-impaired mainly relates to trade receivables, etc. to which the simplified approach is applied. *2 The net provision (reversal) related to trade receivables, etc. from contracts with customers was ¥5,181 million for the year ended March 31, 2021 and is included in “Selling, general and administrative expenses” in the consolidated statement of profit or loss. Other provisions and rever- sals mainly relate to loans receivable and are included in “Finance income” and “Finance costs” in the consolidated statement of profit or loss. Toray Industries, Inc.Integrated Annual Report 2021 138 (2) Liquidity risk management The Group raises funds by borrowing from banks and issuing corporate bonds and is accordingly exposed to the risk of facing difficulty in the repayment due to deterioration in the business climates and funding environ- ment. To mitigate the risk, the Group procures funds by determining the best timing, size and instruments after comprehensively taking into consideration the projected fund needs and the financial market trends. The Group also takes measures for effective use of excess cash within the Group by using the cash management system. In addition, the liquidity risk is managed by monitoring projected and actual cash flows. At the same time, to prepare for the urgent fund needs due to deterioration in operating results and cash flows and for the financial market turmoil, the Group secures liquidity by concluding overdraft agreements and other credit facilities with domestic and overseas financial institutions. The analysis of undiscounted contractual cash flows of financial liabilities by maturity is as follows: April 1, 2019 Millions of yen 1 year or less Over 1 year to 2 years Over 2 years to 3 years Over 3 years to 4 years Over 4 years to 5 years Over 5 years Total Non-derivative financial liabilities Trade and other payables 325,569 — — — — — 325,569 Bonds and borrowings 306,215 132,468 82,112 88,301 112,362 319,086 1,040,544 Lease liabilities 10,940 9,034 7,600 4,500 2,570 11,774 46,418 Other financial liabilities Deposits received 16,094 — — — — — 16,094 Derivative financial liabilities Other financial liabilities Derivative liabilities 7 (138) (485) (483) (488) 5,381 3,794 March 31, 2020 Millions of yen 1 year or less Over 1 year to 2 years Over 2 years to 3 years Over 3 years to 4 years Over 4 years to 5 years Over 5 years Total 285,702 — — — — — 285,702 Non-derivative financial liabilities Trade and other payables Bonds and borrowings 285,890 104,966 99,172 110,805 51,970 326,477 979,280 Lease liabilities 10,525 8,695 4,995 2,811 2,322 10,005 39,353 Other financial liabilities Deposits received 12,385 — — — — — 12,385 Derivative financial liabilities Other financial liabilities Derivative liabilities 781 (89) (100) (136) (172) 4,289 4,573 Toray Industries, Inc.Integrated Annual Report 2021 139 March 31, 2021 Millions of yen 1 year or less Over 1 year to 2 years Over 2 years to 3 years Over 3 years to 4 years Over 4 years to 5 years Over 5 years Total 282,812 — — — — — 282,812 283,643 11,114 123,263 8,937 127,250 7,241 67,863 4,253 72,827 2,258 276,004 9,414 950,850 43,217 9,571 — — — — — 9,571 2,269 (96) (239) (405) 3,260 — 4,789 Non-derivative financial liabilities Trade and other payables Bonds and borrowings Lease liabilities Other financial liabilities Deposits received Derivative financial liabilities Other financial liabilities Derivative liabilities * Contractual cash flows of derivative financial liabilities are presented on a net basis, as net cash inflow or outflow. (3) Market risk management The Group is exposed to the risk of fluctuations in fair value and future cash flows of financial instruments due to changes in market prices. Major market risks that the Group is exposed to include currency risk, interest rate risk and equity price risk. In order to mitigate these risks, the Group uses derivative transactions such as forward exchange contracts and interest rate swaps as necessary. Derivative transactions are executed and managed in accordance with internal regulations prescribing the authorizations for transactions. In addition, the Group carries out derivative transactions only with financial institutions with a high credit rating in order to miti- gate the credit risk associated with derivative transactions. The Group uses derivatives only for hedging market risks and does not enter into derivative transactions for speculative purposes. (a) Currency risk Trade receivables and payables denominated in foreign currencies that arise from the Group’s global busi- ness operations are exposed to the foreign currency exchange rate risk. The Group hedges this risk mainly through the use of forward exchange contracts against net positions of receivables and payables denomi- nated in the same foreign currencies. Likewise, the Group mainly uses cross-currency swaps to hedge the foreign currency exchange rate risk of borrowings denominated in foreign currencies. For financial instruments held by the Group at March 31, 2020 and 2021, the impact of a 1% apprecia- tion of each currency against the functional currencies on “Profit before tax” in the consolidated statement of profit or loss is as follows. The effects of translating financial instruments denominated in the functional currencies and the assets, liabilities, income and expenses of foreign operations into yen are not included. In addition, it is assumed that currencies other than that used in the calculation do not fluctuate and assumed that other variable factors remain constant. March 31, 2020 March 31, 2021 Millions of yen Impact on profit before tax 68 16 Toray Industries, Inc.Integrated Annual Report 2021 140 (b) Interest rate risk The Group’s interest-bearing liabilities are exposed to the risk of market interest rate fluctuation. Those with floating rates bear the risk of higher nominal interest expenses when market interest rates rise, whereas those with fixed rates bear the risk of higher real interest expenses when market interest rates fall. The Group uses interest rate swaps as necessary to mitigate the risk of interest rate fluctuation, taking into con- sideration the balance between fixed-rate liabilities and floating-rate liabilities. For interest-bearing liabilities with floating interest rates held by the Group at March 31, 2020 and 2021, the impact of a 1% increase in interest rates at the end of the period on “Profit before tax” in the consoli- dated statement of profit or loss is as follows. It is assumed that all other variables remain constant. Impact on profit before tax (2,318) (2,363) March 31, 2020 March 31, 2021 Millions of yen (c) Equity price risk The Group holds shares not for trading purposes but mainly for the purposes of strengthening business rela- tionships, smoothing business alliances and reinforcing joint research and technology development activ- ities. These shares are exposed to stock price fluctuation risk. The Group regularly monitors the financial positions of the issuing entities and reviews holding status by taking into consideration the relationships with customers. These are designated as equity instruments measured at fair value through other comprehen- sive income, and therefore there is no impact on profit or loss arising from stock price fluctuations. 3. Fair value of financial instruments (1) Fair value hierarchy of financial instruments The fair value hierarchy of financial instruments is categorized from Level 1 to Level 3 as follows: Level 1: Fair value measured by quoted prices in active markets Level 2: Fair value calculated, directly or indirectly, using observable prices other than Level 1 Level 3: Fair value calculated using valuation techniques including inputs not based on observable market data Transfers between levels of the fair value hierarchy are recognized as if they have occurred at the end of each reporting period. There were no transfers between Level 1 and Level 2 for the years ended March 31, 2020 and 2021. (2) Fair value of financial instruments measured at amortized cost The following table compares the fair value and the carrying amount of financial instruments measured at amor- tized cost. Financial instruments whose carrying amount is a reasonable approximation of the fair value and financial instruments with low materiality are not included in the following table. Millions of yen April 1, 2019 March 31, 2020 March 31, 2021 Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Financial liabilities Bonds and borrowings Bonds payable 340,107 342,788 290,187 290,682 290,158 291,255 Long-term borrowings 466,917 466,645 498,588 500,227 469,993 468,489 Total 807,024 809,433 788,775 790,909 760,151 759,744 * The fair value of the above financial instruments is categorized within Level 2. Toray Industries, Inc.Integrated Annual Report 2021 141 The fair value of major financial instruments measured at amortized cost is determined as follows: (a) Cash and cash equivalents, trade and other receivables Since these are settled in the short term, the fair value reasonably approximates the carrying amount. (b) Trade and other payables, short-term borrowings, commercial papers Since these are settled in the short term, the fair value reasonably approximates the carrying amount. (c) Bonds payable The fair value of a bond is determined based on the market price, if available. If a market price is not avail- able, the fair value is determined as the present value of total principal and interest amount discounted using an estimated interest rate reflecting the bond’s remaining term and credit risk. Such fair value is categorized within Level 2. (d) Long-term borrowings The fair value of a long-term borrowing is determined as the present value of total principal and interest amount discounted using an estimated interest rate of hypothetical, equivalent new borrowings. Such fair value is categorized within Level 2. (3) Financial instruments measured at fair value The breakdown of financial assets and liabilities measured at fair value on a recurring basis that are categorized by level of the fair value hierarchy is as follows: April 1, 2019 Millions of yen Level 1 Level 2 Level 3 Total Financial assets Other financial assets Shares and investments in capital Derivative assets Other Total Financial liabilities Other financial liabilities Derivative liabilities Total 180,446 — — 180,446 — — — 16,127 — 16,127 3,837 3,837 19,210 — 300 19,510 199,656 16,127 300 216,083 — — 3,837 3,837 Millions of yen Financial assets Other financial assets Shares and investments in capital Derivative assets Other Total Financial liabilities Other financial liabilities Derivative liabilities Total March 31, 2020 Level 1 Level 2 Level 3 Total 145,365 — — 145,365 — — — 12,488 — 12,488 4,300 4,300 16,499 — 300 16,799 161,864 12,488 300 174,652 — — 4,300 4,300 Toray Industries, Inc.Integrated Annual Report 2021 142 March 31, 2021 Millions of yen Level 1 Level 2 Level 3 Total Financial assets Other financial assets Shares and investments in capital Derivative assets Other Total Financial liabilities Other financial liabilities Derivative liabilities Total 174,614 — — 174,614 — — — 7,363 — 7,363 4,803 4,803 17,810 — 300 18,110 192,424 7,363 300 200,087 — — 4,803 4,803 The fair value of major financial instruments measured at fair value is determined as follows: (a) Shares and investments in capital The fair value of shares whose market prices in active markets are available is measured using market prices and is categorized within Level 1. The fair value of shares and investments in capital whose market prices in active markets are not available is measured using appropriate valuation techniques, such as the compa- rable company method, and is categorized within Level 3. Adjustments including certain illiquidity discounts are taken into account as necessary. (b) Derivative assets and derivative liabilities The fair value of forward exchange contracts is determined based on forward exchange rates or prices quoted by financial institutions, and the fair value of cross-currency swaps and interest rate swaps is deter- mined based on prices quoted by financial institutions. Both are categorized within Level 2. Reconciliation of the balance at the beginning and end of the period for recurring fair value measurement cat- egorized within Level 3 of the fair value hierarchy is as follows: At beginning of period Gains (losses) recognized in profit or loss Gains (losses) recognized in other comprehensive income Purchases Sales Transfer to Level 1 due to listing Other At end of period 2020 19,510 — (2,820) 462 (263) — (90) 16,799 Millions of yen 2021 16,799 7 3,699 766 (641) (2,614) 94 18,110 *1 Gains (losses) recognized in profit or loss is included in “Finance income” and “Finance costs” in the consolidated statement of profit or loss, and gains (losses) recognized in other comprehensive income is included in “Investments in equity instruments” in the consolidated statement of comprehensive income. *2 The method of measurement of financial instruments categorized within Level 3 is determined by the department in charge in accordance with the valuation policies and procedures for the fair value measurement approved by the appropriate authority. Fair value is measured by the said department and the results of the fair value measurement are approved by the appropriate persons in charge. Toray Industries, Inc.Integrated Annual Report 2021 143 4. Hedge accounting (1) Overview of hedges The Group enters into derivative transactions to reduce currency risk and interest rate risk, and applies hedge accounting to those that qualify as cash flow hedges or fair value hedges. Cash flow hedges are used primarily to reduce the risk of fluctuations in future cash flows related to forecast transactions and borrowings denom- inated in foreign currencies and borrowings with floating interest rates. Fair value hedges are used to convert the interest rates on borrowings to floating interest rates and accordingly reduce the risk of changes in the fair value of such borrowings. The currency basis spread of a cross-currency swap used to reduce currency risk is excluded from the hedg- ing instrument and recognized as a deferred cost of hedging in other comprehensive income. In addition, in applying hedge accounting, in principle, since the important conditions such as the quantity, term, and bench- mark interest rate for the hedged items and the hedging instruments are made almost the same, the ineffec- tive portion of hedging is immaterial. (2) Information on items designated as hedging instruments The nominal amount and its timing and the carrying amount of hedging instruments are as follows: April 1, 2019 Millions of yen Nominal amount Of which due over 1 year Carrying amount (fair value) Assets Liabilities Cash flow hedges Currency risk Forward exchange contracts Cross-currency swaps 30,334 142,071 40 138,425 186 13,102 99 2,827 Interest rate risk Interest rate swaps Fair value hedges Interest rate risk 40,504 40,000 29 Interest rate swaps 66,900 66,900 1,975 — — March 31, 2020 Millions of yen Nominal amount Of which due over 1 year Carrying amount (fair value) Assets Liabilities Cash flow hedges Currency risk Forward exchange contracts Cross-currency swaps*1 52,471 137,269 — 87,618 300 10,953 81 3,319 Interest rate risk Interest rate swaps*2 100,271 59,785 Fair value hedges Interest rate risk Interest rate swaps 26,900 26,900 223 186 — — Toray Industries, Inc.Integrated Annual Report 2021 144 March 31, 2021 Millions of yen Nominal amount Of which due over 1 year Carrying amount (fair value) Assets Liabilities Cash flow hedges Currency risk Forward exchange contracts Cross-currency swaps*1 37,421 87,647 299 86,870 Interest rate risk Interest rate swaps*2 Fair value hedges Interest rate risk 59,785 59,785 246 5,418 196 Interest rate swaps 26,900 26,900 130 840 2,439 — — *1 These are mainly contracts to borrow yen principal in exchange for U.S. dollar principal. The average rates of the contracts at March 31, 2020 and 2021 were ¥102.9 and ¥107.2 per U.S. dollar, respectively. *2 The average paying fixed interest rates at March 31, 2020 and 2021 were (0.17)% and (0.18)%, respectively, and the receiving floating interest rates were mainly yen LIBOR. *3 Derivatives used as hedging instruments are included in “Other financial assets” and “Other financial liabilities” in the consolidated statement of financial position. (3) Information on items designated as hedged items The impact of items designated as hedged items on the consolidated statement of financial position is as follows: (a) Cash flow hedges April 1, 2019 March 31, 2020 March 31, 2021 Cash flow hedge reserve (net of tax) Cash flow hedge reserve (net of tax) Cash flow hedge reserve (net of tax) Millions of yen Currency risk Principal and interest on bonds and borrowings Forecast operating transactions and other Interest rate risk Interest on bonds and borrowings (594) 11 (19) (504) 162 125 (364) (436) 116 * The amount of cash flow hedge reserve related to hedging relationships for which hedge accounting was discontinued is immaterial. (b) Fair value hedges April 1, 2019 Millions of yen Carrying amount of hedged items Accumulated fair value hedge adjustments included in carrying amount of hedged items Assets Liabilities Assets Liabilities Interest rate risk Bonds and borrowings — 68,781 — 1,975 Toray Industries, Inc.Integrated Annual Report 2021 145 March 31, 2020 Millions of yen Carrying amount of hedged items Accumulated fair value hedge adjustments included in carrying amount of hedged items Assets Liabilities Assets Liabilities — — 27,078 41,240 — — 186 1,291 March 31, 2021 Millions of yen Carrying amount of hedged items Accumulated fair value hedge adjustments included in carrying amount of hedged items Assets Liabilities Assets Liabilities — — 27,018 40,809 — — 130 843 Interest rate risk Bonds and borrowings Discontinued hedge (bonds and borrowings) Interest rate risk Bonds and borrowings Discontinued hedge (bonds and borrowings) (4) Impact of hedge accounting on the consolidated statement of profit or loss and the consolidated statement of comprehensive income The impact (before tax) of hedge accounting on the consolidated statement of profit or loss and the consoli- dated statement of comprehensive income is as follows: 2020 2021 Changes in value of hedging instruments recognized in other comprehensive income Reclassification adjustments to profit or loss Changes in value of hedging instruments recognized in other comprehensive income Reclassification adjustments to profit or loss Millions of yen Cash flow hedges Currency risk*1 Interest rate risk*2 735 257 (359) (50) (4,092) 50 3,537 (63) *1 Reclassification adjustments related to currency risk are included in “Revenue,” “Finance income” and “Finance costs” in the consolidated state- ment of profit or loss. *2 Reclassification adjustments related to interest rate risk are included in “Finance income” and “Finance costs” in the consolidated statement of profit or loss. *3 The amount recognized in profit or loss for the ineffective portion of hedges was immaterial for the years ended March 31, 2020 and 2021. (5) Uncertainty arising from interest rate benchmark reform The Group has floating interest rate liabilities linked to yen LIBOR or U.S. dollar LIBOR, which are hedged by interest rate swaps or cross-currency swaps. Of these hedging relationships, those with maturity dates subse- quent to the date of cessation of LIBOR publication are subject to uncertainties arising from the interest rate benchmark reform. The Group assumes that uncertainties will exist until an alternative benchmark rate is deter- mined and the cash flows based on the benchmark rate are confirmed. The nominal amount of the hedging instruments related to the affected hedging relationships was ¥172,585 million at March 31, 2020 and 2021. The Group is working with the financial institutions involved in such floating rate liabilities and hedging trans- actions to prepare for the transition to an alternative benchmark rate. Toray Industries, Inc.Integrated Annual Report 2021 146 5. Transfers of financial assets that do not qualify for derecognition The Group converts a portion of trade receivables into cash before the due date through such methods as dis- counting trade notes and liquidating accounts receivable. If these transferred receivables become uncollectible, the Group will be obligated to make payments to financial institutions. Therefore, the transferred receivables continue to be included in “Trade and other receivables” in the consolidated statement of financial position, and the amount received for the transfer is included in “Bonds and borrowings.” The carrying amount of transferred receivables that do not qualify for derecognition and related liabilities is as follows: Trade and other receivables Bonds and borrowings April 1, 2019 March 31, 2020 March 31, 2021 13,852 13,852 13,080 13,080 12,920 12,920 Millions of yen Note 33. Cash Flow Information Reconciliation of liabilities arising from financing activities is as follows: Millions of yen At beginning of period Changes from financing cash flows Changes in foreign exchange rates 2020 Non-cash changes Changes in fair value New leases Other At end of period Short-term borrowings 196,980 (38,863) (3,229) Commercial papers — Long-term borrowings 466,917 10,000 45,443 — (13,825) Bonds payable Lease liabilities 340,107 (50,000) 44,338 (11,166) — (539) — — — — — — — — — — 154,888 — 53 80 10,000 498,588 290,187 4,299 429 37,361 Derivatives used to hedge liabilities (12,052) — — 4,079 — — (7,973) Total 1,036,290 (44,586) (17,593) 4,079 4,299 562 983,051 At beginning of period Changes from financing cash flows Changes in foreign exchange rates Millions of yen 2021 Non-cash changes Changes in fair value New leases Other At end of period Short-term borrowings 154,888 (15,269) 3,516 Commercial papers 10,000 20,000 — Long-term borrowings 498,588 (39,874) 11,246 Bonds payable Lease liabilities Derivatives used to hedge liabilities 290,187 — 37,361 (11,615) (7,973) 4,906 — 675 — — — — — — — — — — — 143,135 — 33 30,000 469,993 (29) 290,158 14,550 (330) 40,641 (205) — — (3,272) Total 983,051 (41,852) 15,437 (205) 14,550 (326) 970,655 Toray Industries, Inc.Integrated Annual Report 2021 147 Note 34. Subsidiaries The major subsidiaries at March 31, 2021 were as follows: Company name Main business* Location Toray International, Inc. Chori Co., Ltd. Trading Trading Toray Engineering Co., Ltd. Environment & Engineering Toray Composite Materials America, Inc. Carbon Fiber Composite Materials Toray Plastics (America), Inc. Performance Chemicals Japan Japan Japan U.S.A. U.S.A. Toray Carbon Fibers Europe S.A. Carbon Fiber Composite Materials France P.T. Indonesia Toray Synthetics Thai Toray Synthetics Co., Ltd. Fibers & Textiles, Performance Chemicals Fibers & Textiles, Performance Chemicals Toray Plastics (Malaysia) Sdn. Berhad Performance Chemicals Toray Sakai Weaving & Dyeing (Nantong) Co., Ltd. Fibers & Textiles Indonesia Thailand Malaysia China Toray Advanced Materials Korea Inc. Fibers & Textiles, Performance Chemicals, Carbon Fiber Composite Materials, Environment & Engineering Republic of Korea * “Main business” shows segment names except for trading companies. Note 35. Related Parties Total key management personnel compensation of the Group is as follows: March 31, 2021 Ownership percentage of voting rights (%) 100.0 52.8 100.0 100.0 100.0 100.0 100.0 90.0 100.0 84.8 100.0 Basic remuneration and bonus Share compensation-type share option plan Total Millions of yen 2020 2021 1,105 188 1,293 777 123 900 Toray Industries, Inc.Integrated Annual Report 2021 148 Note 36. Commitments and Contingent Liabilities 1. Commitments for the acquisition of assets Commitments for the acquisition of assets are as follows: Property, plant and equipment Intangible assets Total March 31, 2020 March 31, 2021 Millions of yen 8,925 562 9,487 6,275 468 6,743 2. Guarantee obligations The amount of guarantee obligations related to bank loans, etc. of joint ventures, associates and third parties is as follows: Joint ventures and associates Customers in housing business and other Total Note 37. Subsequent Events Not applicable. March 31, 2020 March 31, 2021 Millions of yen 5,106 2,791 7,897 4,232 1,180 5,412 Toray Industries, Inc.Integrated Annual Report 2021 149 Note 38. First-time Adoption The Group started disclosing the consolidated financial statements in accordance with IFRS from the year ended March 31, 2021. The most recent consolidated financial statements prepared in accordance with generally accepted accounting principles in Japan (J-GAAP) are for the year ended March 31, 2020, and the date of transi- tion to IFRS is April 1, 2019. 1. Exemptions from retrospective application IFRS 1 requires in principle that first-time adopters retrospectively apply IFRS, but exceptionally permits exemptions from retrospective application for certain standards. The exemptions that the Group has adopted are as follows: (1) Business combinations Under IFRS 1, first-time adopters may elect not to apply IFRS 3 “Business Combinations” (IFRS 3) retrospec- tively to business combinations that occurred before the date of transition to IFRS. Adopting this exemption, the Group has elected not to apply IFRS 3 retrospectively to business combinations that occurred before April 1, 2019. As a result, the carrying amount of goodwill arising in business combinations that occurred before April 1, 2019 is based on the carrying amount in accordance with J-GAAP at that date. The goodwill was tested for impairment at April 1, 2019 regardless of whether there was an indication of impairment. (2) Exchange differences on translation of foreign operations Under IFRS 1, first-time adopters may elect to deem the cumulative exchange differences on translation of foreign operations to be zero at the date of transition to IFRS. The Group has elected to deem the cumulative exchange differences on translation of foreign operations to be zero at April 1, 2019. (3) Leases Under IFRS 1, first-time adopters may assess whether a contract existing at the date of transition to IFRS con- tains a lease on the basis of facts and circumstances existing at that date. In addition, when recognizing lease liabilities and right-of-use assets, first-time adopters may measure the lease liabilities and right-of-use assets at the date of transition to IFRS. Adopting this exemption, the Group has assessed whether a contract existing at April 1, 2019 contains a lease on the basis of facts and circumstances existing at that date. In addition, except for short-term leases and leases for which the underlying asset is of low value, the Group has measured the lease liability at the present value of the remaining lease payments at April 1, 2019, discounted using the lessee’s incremental borrowing rate at that date, and the right-of-use asset at an amount equal to the lease liability. (4) Designation of financial instruments recognized before the date of transition to IFRS Under IFRS 1, first-time adopters should determine the classification under IFRS 9 “Financial Instruments” (IFRS 9) on the basis of the facts and circumstances that exist at the date of transition to IFRS rather than at the date of initial recognition, and may designate investments in equity instruments as financial assets measured at fair value through other comprehensive income on the basis of the facts and circumstances that exist at that date. The Group has determined the classification under IFRS 9 on the basis of the facts and circumstances that exist at April 1, 2019, and has designated investments in equity instruments as financial assets measured at fair value through other comprehensive income. 2. Reconciliations The effects of the transition from J-GAAP to IFRS on the Group’s financial position, financial performance and cash flows are as follows. In these reconciliations, “Reclassification” mainly includes items that affect neither retained earnings nor comprehensive income, and “Recognition and measurement difference” mainly includes items that affect retained earnings and comprehensive income. Toray Industries, Inc.Integrated Annual Report 2021 150 I. Reconciliation of equity Millions of yen Item presented under J-GAAP J-GAAP April 1, 2019 Reclassifica- tion (11) Recognition and mea- surement difference IFRS Note Item presented under IFRS Assets Current assets Cash and time deposits 168,507 4,571 (5,643) 167,435 (6) Assets Current assets Cash and cash equivalents Trade and other receivables Notes and accounts receivable - trade Merchandise and finished goods 531,058 13,666 16,382 561,106 (1)(6) 228,480 191,047 12,401 431,928 (1) Inventories Work in process 85,880 (85,880) Raw materials and supplies 105,167 (105,167) — 5,148 Other current assets 74,517 (25,576) Allowance for doubtful accounts (2,280) 2,280 — — 510 (774) — — — 5,658 (6) Other financial assets 48,167 Other current assets — Total current assets 1,191,329 89 22,876 1,214,294 Total current assets 996,876 (21,871) (786) 974,219 Non-current assets Property, plant and equipment — 16,137 39,692 55,829 (2) Right-of-use assets Non-current assets Property, plant and equipment Intangible assets Goodwill Other Investments and other assets 85,712 85,537 — (438) — (4) — — 85,712 85,095 Goodwill Intangible assets — — Investment securities 333,670 (333,670) Long-term loans receivable 2,477 (2,477) — — 21,978 24,440 163,052 2,234 165,286 205,978 25,962 231,940 — — (4,061) 17,917 (4,832) 19,608 (7) (6) (8) (4) Investments accounted for using equity method Other financial assets Deferred tax assets Retirement benefit asset 49,113 (29,581) (75) 19,457 Other non-current assets (2,781) 2,781 — — Deferred tax assets Retirement benefit asset Other Allowance for doubtful accounts Total non-current assets 1,597,022 Total assets 2,788,351 (89) — 58,130 1,655,063 Total non-current assets 81,006 2,869,357 Total assets Toray Industries, Inc.Integrated Annual Report 2021 151 Item presented under J-GAAP J-GAAP April 1, 2019 Reclassifica- tion (11) Recognition and mea- surement difference IFRS Note Item presented under IFRS Millions of yen Liabilities Current liabilities Notes and accounts payable - trade 240,554 77,243 7,772 325,569 Short-term borrowings 175,567 101,602 13,807 290,976 Liabilities and equity Liabilities Current liabilities (6) (6) Trade and other payables Bonds and borrowings Long-term borrowings due within one year 44,094 (44,094) Bonds due within one year 50,000 (50,000) Income taxes payable 13,578 — — 380 13,307 (1,639) 22,029 (22,029) 179 (179) Reserve for employees’ bonuses Reserve for officers’ bonuses Other current liabilities Total current liabilities Non-current liabilities — — 10,069 4,278 — — — — — (2) (1) 10,449 17,585 11,939 — — Lease liabilities Other financial liabilities Income taxes payable 150,492 696,493 (74,475) 116 12,908 48,834 88,925 (5) Other current liabilities 745,443 Total current liabilities Non-current liabilities Bonds 290,000 412,761 10,267 713,028 (6) Bonds and borrowings Long-term borrowings 412,761 (412,761) Deferred tax liabilities 48,758 — — 3,379 6,018 — — 30,510 2,821 (3,388) — 33,889 8,839 45,370 (2) (6) (8) Lease liabilities Other financial liabilities Deferred tax liabilities Reserve for retirement benefits for officers Retirement benefit liability Other non-current liabilities 1,337 (1,337) — — 100,730 — 2,493 103,223 (4) 24,328 (8,176) (2,717) 13,435 Retirement benefit liability Other non-current liabilities Total non-current liabilities 877,914 (116) 39,986 917,784 Total non-current liabilities 1,574,407 — 88,820 1,663,227 Total liabilities Total liabilities Net assets Shareholders’ equity Share capital Capital surplus Retained earnings Treasury shares Accumulated other comprehensive income Share acquisition rights Non-controlling interests 147,873 117,760 817,263 (20,358) 68,495 1,338 81,573 Total net assets 1,213,944 Total liabilities and net assets 2,788,351 Equity Equity attributable to owners of parent — 1,338 — — — (1,338) — — — — 147,873 Share capital 2,331 121,429 (6) Capital surplus (14,054) 803,209 (10) Retained earnings — (20,358) Treasury shares 3,642 72,137 (4)(6)(9) Other components of equity — 267 — 81,840 Non-controlling interests (7,814) 1,206,130 Total equity 81,006 2,869,357 Total liabilities and equity Toray Industries, Inc.Integrated Annual Report 2021 152 Item presented under J-GAAP J-GAAP March 31, 2020 Reclassifica- tion (11) Recognition and mea- surement difference IFRS Note Item presented under IFRS Millions of yen Assets Current assets Cash and time deposits 173,698 9,983 22 183,703 Assets Current assets Cash and cash equivalents Trade and other receivables Notes and accounts receivable - trade Merchandise and finished goods 483,761 8,151 4,152 496,064 (1)(6) 214,957 178,698 11,614 405,269 (1) Inventories Work in process 79,520 (79,520) Raw materials and supplies 99,178 (99,178) — — — — Other current assets 79,907 (30,721) (1,836) 47,350 Other current assets — 13,017 6,488 19,505 (6) Other financial assets Allowance for doubtful accounts (2,569) 2,569 — — Total current assets 1,128,452 2,999 20,440 1,151,891 Total current assets Non-current assets Property, plant and equipment Intangible assets Goodwill Other Investments and other assets 1,006,509 (36,386) (927) 969,196 Non-current assets Property, plant and equipment — 26,054 21,041 47,095 (2) Right-of-use assets 71,950 78,741 — 11,456 83,406 (3) Goodwill (476) 1,237 79,502 Intangible assets Investment securities 284,696 (284,696) Long-term loans receivable 5,579 (5,579) — — — — — — 18,215 19,783 149,339 21,837 171,176 171,547 12,437 183,984 — — (1,371) 16,844 (3,977) 15,806 (7) (6) (8) (4) Investments accounted for using equity method Other financial assets Deferred tax assets Retirement benefit asset 39,253 (25,293) 660 14,620 Other non-current assets (2,491) 2,491 — — Deferred tax assets Retirement benefit asset Other Allowance for doubtful accounts Total non-current assets 1,522,235 (2,999) 62,393 1,581,629 Total non-current assets Total assets 2,650,687 — 82,833 2,733,520 Total assets Toray Industries, Inc.Integrated Annual Report 2021 153 Millions of yen IFRS Note Item presented under IFRS Liabilities and equity Liabilities Current liabilities Item presented under J-GAAP J-GAAP March 31, 2020 Reclassifica- tion (11) Recognition and mea- surement difference Liabilities Current liabilities Notes and accounts payable - trade Long-term borrowings due within one year 108,131 (108,131) Income taxes payable 11,185 — — 3,106 11,265 (1,043) 21,362 (21,362) 166 (166) Reserve for employees’ bonuses Reserve for officers’ bonuses Other current liabilities Total current liabilities Non-current liabilities Short-term borrowings 132,358 127,362 19,242 278,962 (6) Bonds and borrowings 212,323 70,918 2,461 285,702 Trade and other payables — 6,778 2,646 13 — — — 9,884 13,911 10,155 — — (2) (1) Lease liabilities Other financial liabilities Income taxes payable 145,250 630,775 (81,949) — 14,043 45,183 77,344 (5) Other current liabilities 675,958 Total current liabilities Non-current liabilities Bonds 290,000 383,068 1,633 674,701 (6) Bonds and borrowings Long-term borrowings 383,068 (383,068) Deferred tax liabilities 33,916 — — 12,200 4,287 — — 15,277 3,319 (1,793) — 27,477 7,606 32,123 (2) (6) (8) Lease liabilities Other financial liabilities Deferred tax liabilities Reserve for retirement benefits for officers Retirement benefit liability Other non-current liabilities 1,407 (1,407) — — 100,575 — 1,404 101,979 (4) 31,374 (15,080) (3,464) 12,830 Retirement benefit liability Other non-current liabilities Total non-current liabilities 840,340 Total liabilities Net assets 1,471,115 Shareholders’ equity Share capital Capital surplus Retained earnings Treasury shares Accumulated other comprehensive income Share acquisition rights Non-controlling interests 147,873 118,062 849,268 (20,308) (1,147) 1,602 84,222 Total net assets 1,179,572 Total liabilities and net assets 2,650,687 — — — 1,602 — — — (1,602) — — — 16,376 856,716 Total non-current liabilities 61,559 1,532,674 Total liabilities Equity Equity attributable to owners of parent — 147,873 Share capital 2,323 121,987 (6) Capital surplus 10,860 860,128 (10) Retained earnings — (20,308) Treasury shares 7,542 6,395 (4)(6)(9) Other components of equity — 549 — 84,771 Non-controlling interests 21,274 1,200,846 Total equity 82,833 2,733,520 Total liabilities and equity Toray Industries, Inc.Integrated Annual Report 2021 154 Notes on reconciliation of equity (1) Revenue recognition (a) Change in timing of revenue recognition Revenue from sale of goods transactions that was recognized upon shipment under J-GAAP is recog- nized upon delivery of goods under IFRS. As a result of this change, “Trade and other receivables” have decreased, and “Inventories” have increased. (b) Repurchase agreements in processing contracts Under J-GAAP, products and materials (inventories) supplied to contractors for a fee in a contract where the goods supplied are processed and sold back to the Group were derecognized at the time of supply to the processors. Under IFRS, such transactions are deemed as financing transactions, under which “Inventories” continue to be recognized and “Other financial liabilities” (current liabilities) are recognized. (c) Construction contracts Construction contracts that were accounted for using the completed contract method under J-GAAP are accounted for using the cost recovery method under IFRS. Accordingly, “Inventories” have decreased, and “Trade and other receivables” have increased. (2) Leases Under J-GAAP, a lessee classified leases as either a finance lease or an operating lease and accounted for oper- ating leases using the accounting method similar to that for ordinary rental transactions. Under IFRS, instead of making such classification, a lessee recognizes “Right-of-use assets” and “Lease liabilities” for all leases except for short-term leases and leases for which the underlying asset is of low value. (3) Goodwill Under J-GAAP, goodwill was amortized on a straight-line basis over a period for which goodwill is expected to have an effect with a maximum period of 20 years after recognition. Under IFRS, goodwill is not amortized. Accordingly, “Goodwill” increased at March 31, 2020. (4) Retirement benefits As a result of remeasuring defined benefit obligations based on the discount rate and other assumptions in accor- dance with IFRS, “Retirement benefit asset” has decreased, and “Retirement benefit liability” has increased. Under J-GAAP, actuarial gains and losses were recognized in other comprehensive income as incurred and subse- quently expensed over a certain number of years within the average remaining service period of employees. Under IFRS, remeasurements of defined benefit plans including actuarial gains and losses are recognized in other com- prehensive income as incurred and immediately reclassified to retained earnings. (5) Unused paid absences Unused paid absences of employees, which were not required to be recognized as liabilities under J-GAAP, are recognized as liabilities under IFRS. As a result, “Other current liabilities” have increased. (6) Financial instruments (a) Notes maturing at the fiscal year end and cash settlements due on the fiscal year end Under J-GAAP, notes maturing at the fiscal year end and cash settlements (limited to those settled on the same terms and conditions as notes) due on the fiscal year end were accounted for as if they had been settled at the maturity date even when the fiscal year end fell on a bank holiday. Under IFRS, they are derecognized on the actual clearing or settlement date. As a result of this change, “Cash and cash equivalents” have decreased, and “Trade and other receivables” and “Trade and other payables” have increased. Toray Industries, Inc.Integrated Annual Report 2021 155 (b) Accounts receivable factoring and securitization Of factored or securitized receivables that were derecognized at the time of transfer under J-GAAP, those that do not qualify for derecognition under IFRS are not derecognized and the considerations received are recognized as borrowings. As a result, “Trade and other receivables” and “Bonds and borrowings” (current liabilities) have increased. (c) Valuation of unlisted equity securities Unlisted equity securities were stated at cost using the moving-average cost method under J-GAAP, but are stated at fair value under IFRS. As a result, “Other financial assets” (non-current assets) and “Other com- ponents of equity” have increased. (d) Cross-currency swaps and interest rate swaps In applying hedge accounting, cross-currency swaps were accounted for using the allocation method and interest rate swaps were accounted for using the special accounting method under J-GAAP. Under IFRS, cross-currency swaps and interest rate swaps are accounted for using the cash flow hedge method or the fair value hedge method. Accordingly, “Other financial assets” (current assets and non-current assets), “Bonds and borrowings” and “Other financial liabilities” (non-current liabilities) have increased. (e) Bonds payable (bond issuance costs, convertible bonds) Bond issuance costs, which were expensed as incurred under J-GAAP, are deducted from the carrying amount of the bonds and expensed using the effective interest method under IFRS. Convertible bonds, which were recognized as liabilities in their entirety under J-GAAP, are separated into the bond component, which is recognized as a liability, and the share acquisition right component, which is recognized as an equity, under IFRS. As a result, “Bonds and borrowings” have decreased, and “Capital surplus” has increased. (7) Equity method (a) Change in scope of application of equity method Certain entities that were excluded from the scope of equity method in view of their immateriality at March 31, 2019 under J-GAAP are included in the scope of equity method effective from the date of transition to IFRS. As a result, “Investments accounted for using equity method” have increased at April 1, 2019. These entities are also included in the scope of equity method effective from the beginning of the year ended March 31, 2020 under J-GAAP. (b) Equity method goodwill Equity method goodwill, which was amortized under J-GAAP, is not amortized under IFRS. Accordingly, “Investments accounted for using equity method” have increased at March 31, 2020. (8) Tax effects Tax effects of the elimination of unrealized gains and losses were determined using the tax rates of sellers under J-GAAP, but are determined using the tax rates of buyers under IFRS. The recoverability is also reas- sessed under IFRS. In addition, the amounts of “Deferred tax assets” and “Deferred tax liabilities” have been adjusted for temporary differences as a result of the reconciliation from J-GAAP to IFRS. (9) Exchange differences on translation of foreign operations As a result of applying the exemptions provided in IFRS 1, the cumulative exchange differences on translation of foreign operations were all reclassified to retained earnings at April 1, 2019. Toray Industries, Inc.Integrated Annual Report 2021 156 (10) Retained earnings The effects of adjustments on retained earnings upon application of IFRS are as follows: Change in timing of revenue recognition (see (1)) Goodwill (see (3)) Retirement benefits (see (4)) Unused paid absences (see (5)) Bonds payable (see (6)) Change in scope of application of equity method (see (7)) Equity method goodwill (see (7)) Tax effects (see (8)) Exchange differences on translation of foreign operations (see (9)) Other Total (11) Reclassifications Millions of yen April 1, 2019 March 31, 2020 (1,622) — (2,229) (12,007) (1,571) 2,027 — 1,024 896 (572) (14,054) (1,906) 10,942 (5,489) (12,784) (2,123) — 21,599 972 896 (1,247) 10,860 In addition to the above, the Group has made certain reclassifications to comply with the provisions of IFRS. The major items of the reclassifications are as follows: • Time deposits with deposit terms exceeding three months, which were included in “Cash and time deposits” under J-GAAP, are reclassified and presented in “Other financial assets” (current assets) under IFRS. Short-term investments with a maturity of three months or less, which were included in “Other cur- rent assets” under J-GAAP, are reclassified and presented in “Cash and cash equivalents” under IFRS. • Other receivables included in “Other current assets” under J-GAAP are reclassified and presented in “Trade and other receivables” under IFRS. • Leased assets, which were included in “Property, plant and equipment” under J-GAAP, are separately pre- sented as “Right-of-use assets” under IFRS. Investment property, which was included in “Property, plant and equipment” under J-GAAP, is reclassified and presented in “Other non-current assets” under IFRS. • Of “Investment securities,” which were separately presented under J-GAAP, and investments in capital, which were included in “Other” of “Investments and other assets” under J-GAAP, investments subject to the equity method are separately presented as “Investments accounted for using equity method” and other items are presented in “Other financial assets” (non-current assets) under IFRS. • Other payables and accrued expenses included in “Other current liabilities” under J-GAAP are reclassified and presented in “Trade and other payables” under IFRS. • “Reserve for employees’ bonuses” and “Reserve for officers’ bonuses,” which were separately pre- sented under J-GAAP, are reclassified and presented in “Other current liabilities” under IFRS. • “Short-term borrowings,” “Long-term borrowings due within one year” and “Bonds due within one year,” which were separately presented in current liabilities under J-GAAP, are reclassified and pre- sented in “Bonds and borrowings” (current liabilities) under IFRS. “Bonds” and “Long-term borrowings,” which were separately presented in non-current liabilities under J-GAAP, are reclassified and presented in “Bonds and borrowings” (non-current liabilities) under IFRS. • Lease liabilities, which were included in “Other current liabilities” and “Other non-current liabilities” under J-GAAP, are separately presented as “Lease liabilities” in current and non-current liabilities, respectively, under IFRS. Toray Industries, Inc.Integrated Annual Report 2021 157 II. Reconciliation of profit or loss and comprehensive income Millions of yen Item presented under J-GAAP J-GAAP Reclassifica- tion (7) 2020 Recognition and mea- surement difference IFRS Note Item presented under IFRS Net sales Cost of sales Gross profit 2,214,633 — (123,467) 2,091,166 (1) Revenue (1,776,276) (9,451) 123,848 (1,661,879) (1)(3) Cost of sales 438,357 (9,451) 381 429,287 Gross profit Selling, general and administrative expenses (307,171) (4,144) 10,664 (300,651) (2)(3) Selling, general and administrative expenses Operating income 131,186 (27,653) 11,167 114,700 Operating income — — 7,147 386 7,533 Other income (21,205) (264) (21,469) Other expenses Non-operating income 11,237 (11,237) Non-operating expenses (39,068) 39,068 Special gains Special losses 7,691 (7,691) 17,000 11,218 (10,172) (17,000) — — — — — — — — — — — (4,153) 1,006 7,065 (9,166) (4) (4) Finance income Finance costs (10,805) 21,510 10,705 (5) Share of profit of investments accounted for using equity method Income before income taxes 94,046 (272) 29,530 123,304 Profit before tax Income taxes Net income (29,131) 64,915 272 — (602) (29,461) (6) Income tax expense 28,928 93,843 Profit Toray Industries, Inc.Integrated Annual Report 2021 158 Item presented under J-GAAP J-GAAP Reclassifica- tion (7) 2020 Recognition and mea- surement difference IFRS Note Item presented under IFRS Net income 64,915 — 28,928 93,843 Profit Millions of yen Other comprehensive income Net unrealized gains (losses) on securities Remeasurements of defined benefit plans (20,488) (5,083) — — 555 (19,933) (4) 161 (4,922) (3) — (520) (12) (532) Net deferred gains (losses) on hedges Foreign currency translation adjustments Share of other comprehensive income of investments accounted for using equity method 1,037 — (44,857) — — — (633) (602) 404 (602) 207 (44,650) (2,904) 520 2,386 2 Other comprehensive income Items that will not be reclassified to profit or loss Investments in equity instruments Remeasurements of defined benefit plans Share of other comprehensive income of investments accounted for using equity method Items that may be reclassified to profit or loss Cash flow hedges Deferred costs of hedging Exchange differences on translation Share of other comprehensive income of investments accounted for using equity method Total other comprehensive income Total other comprehensive income (72,295) Comprehensive income (7,380) — — 2,062 (70,233) 30,990 23,610 Comprehensive income Notes on reconciliation of profit or loss and comprehensive income (1) Revenue recognition For transactions undertaken as an agent, “Net sales” and “Cost of sales” were presented on a gross basis under J-GAAP, whereas they are presented on a net basis under IFRS. In addition, revenue from sale of goods transactions that was recognized upon shipment under J-GAAP is recognized upon delivery of goods under IFRS. As a result of these adjustments, “Revenue” has decreased. (2) Goodwill Under J-GAAP, goodwill was amortized on a straight-line basis over a period for which goodwill is expected to have an effect with a maximum period of 20 years after recognition. Under IFRS, goodwill is not amortized. Accordingly, “Selling, general and administrative expenses” have decreased. Toray Industries, Inc.Integrated Annual Report 2021 159 (3) Retirement benefits Under J-GAAP, actuarial gains and losses were recognized in other comprehensive income as incurred, subse- quently amortized over a certain number of years within the average remaining service period of employees and recognized in profit or loss. Under IFRS, remeasurements of defined benefit plans including actuarial gains and losses are recognized in other comprehensive income as incurred and immediately reclassified to retained earnings. As a result, “Cost of sales” and “Selling, general and administrative expenses” have been adjusted. (4) Financial instruments Under J-GAAP, gains and losses on sale and impairment losses of investments in equity instruments were rec- ognized in profit or loss. Under IFRS, for investments in equity instruments designated as measured at fair value through other comprehensive income, the amount of changes in the fair value is recognized in other compre- hensive income, and reclassified to retained earnings at the time of sale. Accordingly, “Finance income” and “Finance costs” have decreased. (5) Equity method goodwill Equity method goodwill, which was amortized under J-GAAP, is not amortized under IFRS. Accordingly, “Share of profit of investments accounted for using equity method” has increased. (6) Tax effects As a result of temporary differences arising from the reconciliation from J-GAAP to IFRS, the amount of income taxes has been adjusted. Tax effects of the elimination of unrealized gains and losses, which were determined using the tax rates of sellers under J-GAAP, are determined using the tax rates of buyers under IFRS. (7) Reclassifications In addition to the above, the Group has made certain reclassifications to comply with the provisions of IFRS. The major items of the reclassifications are as follows: • “Expenses related to start-up of new facilities” and “Expenses related to idle facilities,” which were presented in “Non-operating expenses” under J-GAAP, are included in “Selling, general and administra- tive expenses” and “Cost of sales,” respectively, under IFRS. Of the other items that were presented in “Non-operating income,” “Non-operating expenses,” “Special gains” and “Special losses” under J-GAAP, finance-related items and foreign exchange gains and losses are presented in “Finance income” or “Finance costs,” gains and losses related to the equity method in “Share of profit of investments accounted for using equity method” and other items in “Other income” or “Other expenses.” III. Reconciliation of cash flows Main differences between the consolidated statement of cash flows in accordance with J-GAAP and that in accordance with IFRS for the year ended March 31, 2020 are as follows: • Under J-GAAP, notes maturing at the fiscal year end and cash settlements (limited to those settled on the same terms and conditions as notes) due on the fiscal year end were accounted for as if they had been settled at the maturity date even when the fiscal year end fell on a bank holiday. Under IFRS, they are derecognized on the actual clearing or settlement date. As a result of this change, “Cash and cash equivalents at beginning of period” have decreased, and “Cash flows from operating activities” have increased. • Lease payments for operating leases, which were classified in “Cash flows from operating activities” under J-GAAP, are classified in “Cash flows from financing activities” as repayments of lease liabilities under IFRS. Toray Industries, Inc.Integrated Annual Report 2021 160 Independent Auditor’s Report The Board of Directors Toray Industries, Inc. Opinion We have audited the accompanying consolidated financial statements of Toray Industries, Inc. and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at March 31, 2021, and the con- solidated statements of profit or loss, comprehensive income, changes in equity, and cash flows for the year then ended, and notes to the consolidated financial statements. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the con- solidated financial position of the Group as at March 31, 2021, and its consolidated financial performance and its con- solidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs). Basis for Opinion We conducted our audit in accordance with auditing standards generally accepted in Japan. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Japan, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of the audit of the consolidated financial statements as a whole, and in forming the auditor’s opinion thereon, and we do not provide a separate opinion on these matters. Valuation of goodwill in the Carbon Fiber Composite Materials segment Description of Key Audit Matter Auditor’s Response As described in “Note 12. Goodwill and Intangible Assets” in the notes to the consolidated financial statements, the Company recorded goodwill of 85,565 million yen (3.0% of total assets) as of March 31, 2021. Of this amount, in the Carbon Fiber Composite Materials segment, 60,309 million yen (70.5% of total goodwill) was recorded for Toray TCAC Holding B.V. and 11,580 million yen (13.5% of total goodwill) was recorded for Zoltek Companies, Inc. The Company tests cash-generating units or groups of cash-generating units to which good- will has been allocated for impairment annually and whenever there is an indication of impairment, and measures the recoverable amount of each cash-generating unit at its value in use. The value in use was determined by combin- ing the discounted present value of the future cash flows based on the business plan for the next five years approved by management with a terminal value, reflecting past experience and external infor- mation. The business plan is primarily affected by We performed the following audit procedures in considering the valuation of goodwill in the Carbon Fiber Composite Materials segment, among others: • We verified the valuation method used in cal- culating value in use by involving valuation specialists of our network firms. • For sales volumes and sales prices set forth in business plans, we held discussions with management and analyzed the figures by com- paring them with past actual results. • We compared the Company’s demand out- look for its products, which is a premise used in estimating sales volumes, with market fore- casts and available external data. • We evaluated the effectiveness of the estima- tion process that management uses for the business plan by comparing business plans from prior fiscal years with the corresponding actual results. • We verified the consistency between future cash flows and the business plan approved Toray Industries, Inc.Integrated Annual Report 2021 161 by management. • We compared the growth rate and discount rate with estimates that were prepared by val- uation specialists of our network firms using available external data. • We performed a sensitivity analysis with regards to changes in key assumptions. changes in sales volumes and sales prices. The ter- minal value was calculated using the growth rate based on the expected inflation rate of the country to which the cash-generating unit belonged. The key assumptions used in estimating value in use are sales volumes and sales prices set forth in the business plan, as well as the growth rate and discount rate used in calculating the terminal value. Given that sales volumes and sales prices set forth in the business plan as well as the growth rate and discount rate, which are key assumptions under- lying estimates of the aforementioned goodwill, are subject to uncertainty and thus require manage- ment’s judgment and, further, considering that the balance of the goodwill is also material to the con- solidated financial statements, we determined the valuation of goodwill in the Carbon Fiber Composite Materials segment to be a key audit matter. Valuation of production facilities in the Carbon Fiber Composite Materials segment Description of Key Audit Matter Auditor’s Response As described in “Note 13. Impairment Losses” in the notes to the consolidated financial statements, the Company recorded impairment loss of 24,968 million yen on production facilities in the Carbon Fiber Composite Materials segment located in Washington, U.S.A. and other areas for the fiscal year ended March 31, 2021 due to a decline in prof- itability caused by sluggish demand for aircraft. The carrying amount after recording impairment loss is 53,192 million yen, which is included in property, plant and equipment and intangible assets. The Company estimates the recoverable amounts of property, plant and equipment and intangible assets when there is any indication that they may be impaired and records impairment loss when the esti- mated recoverable amounts of these assets are less than its carrying amounts. In considering the amount to record for impairment loss on production facili- ties in the Carbon Fiber Composite Materials seg- ment located in Washington, U.S.A. and other areas, the Company measures the recoverable amounts of cash-generating units at their value in use. The value in use was calculated by discounting the future cash flows at a discount rate of 7.8%. The future cash flows were estimated based on the business plan for the next five years approved We involved component auditors and performed the following audit procedures in considering impair- ment loss on production facilities in the Carbon Fiber Composite Materials segment located in Washington, U.S.A. and other areas, among others: • We verified the valuation method used in cal- culating value in use by involving valuation specialists of our network firms. • For sales volumes and sales prices set forth in the business plan, we held discussions with management and analyzed the figures by com- paring them with past actual results. • We compared the Company’s demand outlook for its products, which is a premise used in estimating sales volumes, with available exter- nal data. • We evaluated the effectiveness of the estima- tion process that management uses for the business plan by comparing business plans from prior fiscal years with the corresponding actual results. • We verified the consistency between future cash flows and the business plan approved by management. • We compared growth rate and discount rate with estimates that were prepared by valuation Toray Industries, Inc.Integrated Annual Report 2021 specialists of our network firms using avail- able external data. • We performed a sensitivity analysis with regards to changes in key assumptions. 162 by management, reflecting past experience and external information, and for years after the five years, estimated using the growth rate based on the expected inflation rate of U.S.A., the country to which the cash-generating unit belonged. The busi- ness plan is primarily affected by changes in sales volumes and sales prices. The key assumptions used in estimating value in use are sales volumes and sales prices set forth in the business plan, as well as the growth rate and discount rate used in calculating future cash flows after the five years. Given that sales volumes and sales prices set forth in the business plan as well as the growth rate and discount rate, which are key assumptions under- lying estimates of the aforementioned property, plant and equipment and intangible assets, are sub- ject to uncertainty and thus require management’s judgment and, further, considering that the balances of the property, plant and equipment and intangible assets are also material to the consolidated finan- cial statements, we determined that the valuation of production facilities in the Carbon Fiber Composite Materials segment to be a key audit matter. Responsibilities of Management, the Corporate Auditor and the Board of Corporate Auditors for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the prepa- ration of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s abil- ity to continue as a going concern and disclosing, as required by IFRSs, matters related to going concern. The Corporate Auditor and the Board of Corporate Auditors are responsible for overseeing the Group’s financial reporting process. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Misstatements can arise from fraud or error and are considered material if, individually or in the aggre- gate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with auditing standards generally accepted in Japan, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. • Consider internal control relevant to the audit in order to design audit procedures that are appropriate in the cir- cumstances for our risk assessments, while the purpose of the audit of the consolidated financial statements is not expressing an opinion on the effectiveness of the Group’s internal control. Toray Industries, Inc.Integrated Annual Report 2021 163 • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclu- sions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation in accordance with IFRSs. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activi- ties within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the Corporate Auditor and the Board of Corporate Auditors regarding, among other mat- ters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Corporate Auditor and the Board of Corporate Auditors with a statement that we have complied with the ethical requirements regarding independence that are relevant to our audit of the financial state- ments in Japan, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Corporate Auditor and the Board of Corporate Auditors, we deter- mine those matters that were of most significance in the audit of the consolidated financial statements of the cur- rent period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would rea- sonably be expected to outweigh the public interest benefits of such communication. Interest Required to Be Disclosed by the Certified Public Accountants Act of Japan Our firm and its designated engagement partners do not have any interest in the Group which is required to be dis- closed pursuant to the provisions of the Certified Public Accountants Act of Japan. Ernst & Young ShinNihon LLC Tokyo, Japan June 22, 2021 /s/ Kazuhiro Suzuki Designated Engagement Partner Certified Public Accountant /s/ Takeshi Isogai Designated Engagement Partner Certified Public Accountant /s/ Tsuyoshi Nakano Designated Engagement Partner Certified Public Accountant Toray Industries, Inc.Integrated Annual Report 2021 164 Stakeholder Engagement Toray Group has established the Basic Policies to Promote Dialogue with Stakeholders. The Group is communi- cating proactively with various stakeholders in all aspects of its corporate activities, and periodically report on and discuss the content of these activities with its management. With the goal of strengthening the system for engag- ing with stakeholders, a new organization was established to supervise communications in general in April 2018, and efforts are being made on centralizing the function of information transmission, both internally and externally. Engaging with Stockholders and Investors The Group actively communicates with institutional inves- tors and securities company analysts by providing infor- mation materials when requested and holding same-day results briefings when quarterly earnings are announced. In addition to IR materials, including integrated annual reports, the Group also provides a wide range of information on management policies and strategies, as well as financial and earnings information in the Investor Relations section of the Toray website. Briefings on business for stockholders are held in order to deepen their understanding of Toray Group. In fiscal 2020, Toray held four results briefings and held 468 meetings with investors and analysts. Engaging with Customers Toray Group believes that the customer comes first. Com- munication is carried out closely with the customers, mainly through the marketing and sales departments, and periodic customer satisfaction surveys. The results of these surveys are shared internally at Board meetings and through in-house newsletters as the Group strives to provide even higher qual- ity customer service. Showrooms were established 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 businesses 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 various prob- lems by creating and providing innovative technologies and cutting-edge materials. Engaging with Business Partners 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, 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 procurement, purchas- ing, and distribution are promoted. Engaging with Employees As one of the group-wide efforts in the Medium-Term Management Program, Project AP-G 2022, the Group pro- motes the Toray Philosophy Project (TP Project). In working to instill understanding of the Toray Philosophy among Toray Group employees, Toray Philosophy Book and the mini book- let version were published, and a range of activities were developed, such as the holding of in-house lectures by man- agement and roundtable discussions at each workplace. Using in-house newsletters, the group 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. Engaging with the Mass Media 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 information, even if it may cast the Company in a bad light, in a timely and appropriate manner. In fiscal 2020, the Company issued 152 press releases and responded to 236 media requests for information. Engaging with Local Communities In addition to holding informal gatherings for discussion regularly, Toray Group strives to engage in more active dia- logue with nearby residents in a variety of other settings, including by participating in events sponsored by local gov- ernments and inviting local residents onto plant grounds for summer festivals. In fiscal 2020, the various events that would previously have been held were largely canceled due to the impact of COVID-19 infections. However, the Group actively engaged in activities to assist local communities in com- bating COVID-19 infections, by donating items such as masks and protective clothing. Toray Industries, Inc.Integrated Annual Report 2021 165 External Evaluation Toray was included in the following SRI indices. Included in the Dow Jones Sustainability Index Asia Pacific Toray is included in the Asia Pacific Index of the Dow Jones Sustainability Indices (DJSI), an SRI index administered by U.S.-based S&P Dow Jones Indices and Switzerland-based RobecoSAM. AAA Evaluation Obtained from MSCI ESG Ratings Having obtained the highest AAA evaluation in the ESG ratings released by MSCI, which provides institutional investors (from pension funds to hedge funds) across the globe with various tools to support investment decisions, Toray was also selected for inclusion in the MSCI Japan Select Leaders Index. 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 implement outstanding ESG practices are selected for this index series. Selected as Constituent of S&P/JPX Carbon Efficient Index Toray has been selected as a constituent of the environ- mental stock index presented by S&P Dow Jones and the Tokyo Stock Exchange. Selected as S&P Global Sustainability Yearbook Member Toray has been selected for inclusion in The Sustainability Yearbook, by which S&P Global (USA), in cooperation with RobecoSAM (Switzerland), evaluates the sustainability of companies from three aspects—the economy, the environ- ment, and society—and lists the top companies. Selected as CDP “Water Security A List Company” In a survey conducted by the Carbon Disclosure Project (CDP), an international non-profit organization, Toray was selected as an A list company with the highest evaluation in the water security category. Toray also received a B evalua- tion in the climate change category. TORAY REPORT 2020 received the Silver Award during the 2021 International ARC Awards, the world’s largest annual report competition. received the TORAY REPORT 2020 Gold Award during the 2019/2020 Vision Awards, one of the U.S.’s two major report competitions. Toray Industries, Inc.Integrated Annual Report 2021Integrated Annual Report Award List 166 Toray Group Worldwide Network Toray Group operates businesses in 29 countries and regions including Japan. 308 subsidiaries and affiliates (267 subsidiaries and 41 affiliates, etc.) Japan France Indonesia Consolidated Subsidiaries Consolidated Subsidiaries Consolidated Subsidiaries n Toray Films Europe S.A.S. n Toray Carbon Fibers Europe S.A. l n P.T. Indonesia Toray Synthetics l P.T. Toray Polytech Jakarta China Thailand Consolidated Subsidiaries Consolidated Subsidiaries l n Ichimura Sangyo, Co., Ltd. n Toray Plastics Precision Co., Ltd. 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 Toray Co., Ltd. n Sanyo Chemical Industries, Ltd. United Kingdom Consolidated Subsidiaries l l Toray Fibers (Nantong) Co., Ltd. l Toray Sakai Weaving & Dyeing (Nantong) 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 l n n l Toray Advanced Materials Korea Inc. n Toray Battery Separator Film Korea Limited n STEMCO, Ltd. Affiliates Accounted for by Equity Method n STECO, Ltd. l Toray Textiles Europe Ltd. Malaysia Italy Consolidated Subsidiaries l Alcantara S.p.A. Consolidated Subsidiaries l Penfabric Sdn. Berhad l n Penfibre Sdn. Berhad n Toray Plastics (Malaysia) Sdn. Berhad l Toray Textiles (Thailand) Public Company Limited l n Thai Toray Synthetics Co., Ltd. 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. Others l Fibers & Textiles n Performance Chemicals n Carbon Fiber Composite Materials l Environment & Engineering n Life Science l Others n Trading Major Offices and Plants in Japan Overseas Offices Osaka Head Office Branches Nagoya, Hokuriku, Kyushu, Tohoku, Chugoku & Shikoku Plants Shiga, Seta, Ehime, Nagoya, Tokai, Aichi, Okazaki, Mishima, Chiba, Tsuchiura, Gifu, Ishikawa, Nasu U.S.A. Toray Industries (America), Inc. Republic of Korea Toray Industries Korea Inc. Germany Toray Industries Europe GmbH India Toray Industries (India) Private Limited China Toray Industries, Inc., Beijing Office Brazil Toray do Brasil Ltda. Toray Industries, Inc.Integrated Annual Report 2021 167 Investor Information (As of March 31, 2021) Common Stock: Issued: 1,631,481,403 shares (including treasury stock) Cash Dividends Per Share Total for the year Number of Stockholders: 215,278 Interim FY 2020 FY 2019 ¥9.00 4.50 ¥16.00 8.00 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 Principal Stockholders Shares held Percentage of shares held* The Master Trust Bank of Japan, Ltd. (Trust Account) 154,224,000 Custody Bank of Japan, Ltd. (Trust Account) 113,317,100 Nippon Life Insurance Co. Taiju Life Insurance Co., Ltd. Custody Bank of Japan, Ltd. (Trust 7 Account) 71,212,250 35,961,000 26,932,100 National Mutual Insurance Federation of Agricultural Cooperatives 26,593,000 Custody Bank of Japan, Ltd. (Trust 4 Account) Sumitomo Mitsui Banking Corporation State Street Bank West Client-Treaty 505234 Custody Bank of Japan, Ltd. (Trust 5 Account) 24,420,300 24,022,000 22,033,714 21,759,800 9.63 7.08 4.45 2.25 1.68 1.66 1.53 1.50 1.38 1.36 * Percentage of shares held is calculated excluding 30,205,694 shares of treasury stock. Stock Price Range Composition of Stockholders (Thousands of shares) (Yen) 1,500 1,200 900 600 300 0 2016 April Treasury Stock 30,206 1.85% Individuals and Others 338,866 20.77% Non-Japanese Investors 417,097 25.57% Japanese Financial Institutions 679,529 41.65% Japanese Securities Companies 31,221 1.91% Other Japanese Companies 134,563 8.25% 2017 April 2018 April 2019 April 2020 April 2021 March Corporate Data (As of March 31, 2021) 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: 46,267 7,420 Parent company: Japanese subsidiaries: 10,246 Overseas subsidiaries: 28,601 Toray Industries, Inc.Integrated Annual Report 2021 T o r a y I n t e g r a t e d A n n u a l R e p o r t 2 0 2 1 T o r a y I n d u s t r i e s , I n c . Printed in Japan Issued: November 2021 Toray Integrated Annual Report 2021

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