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Tosoh Annual Report 2016: Financial Section

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SIX-YEAR SUMMARY


 

Fiscal Years Ended March 31
2011 2012 2013 2014 2015 2016
  Results of Operations (millions of yen)




    Net sales 684,399 687,131 668,494 772,272 809,684 753,736
    Operating Income 33,532 23,737 24,464 41,573 51,397 69,445
       Operating income ratio (%) 4.9 3.5 3.7 5.4 6.3 9.2
    Profit attributable to owners of the parent company 10,015 9,379 16,867 29,564 62,297 39,675
    Research and development expenses 13,427 12,880 12,208 12,513 12,877 13,743
    Capital expenditures 24,700 19,300 26,100 23,700 33,149 27,924
    Depreciation 50,317 44,481 36,943 34,677 32,789 31,788
  Cash Flows (millions of yen)





    Cash flows from operating activities 49,643
55,322 36,076 67,238 54,107 99,884
    Cash flows from investing activities
-26,986 -17,582 -23,448 -26,066 -34,115 -27,917
    Cash flows from financing activities
-25,907 -22,661 -24,518 -45,534 -20,719 -50,827
    Cash and cash equivalents at end of year 52,662 67,359 57,358 55,127 55,740 74,869
  Financial Position (millions of yen)





    Total assets 725,918 708,721 735,102 721,749 764,206 734,770
    Total equity 193,512 200,197 219,286 249,797 320,784 373,724
    Interest-bearing debt 364,173 343,559 325,995 286,205 271,500 199,572
  Per Share Data (yen)





    Net income per share 16.74 15.67 28.17 49.35 103.97 62.61
    Total equity per share 275.35 285.88 315.15 365.85 482.25 524.23
    Dividends per share 6.00 6.00
6.00
6.00
10.00 14.00
  Key Ratios





    Return on equity (%) 6.1 5.6 9.5 14.5 24.5 12.6
    Return on assets (%) 1.4 1.3 2.3 4.1 8.2 5.4
    Total assets turnover (times) 0.93 0.96 0.93 1.06 1.06 1.03
    Equity ratio (%) 22.7 24.1 25.7 30.4 37.8 46.3
    Dividend payout ratio (%) 35.9 38.3 21.8 12.2 9.6 22.4
    Debt-to-equity ratio (%) 221.0 200.8 172.7 130.6 153.5 106.1
    Number of employees 11,221 11,238 11,268 11,421 11,594 12,037
  Stock Indicators





    Stock price (closing), end of year (yen) 299 230 262 398 606 473
    Market capitalization (millions of yen) 178,902 137,633 156,913 238,459 364,304 307,527
    Price earnings ratio (times) 17.9 14.7 9.3 8.1 5.8 7.6
    Price book-value ratio (times) 1.09 0.80 0.83 1.09 1.3 0.9


Management's Discussion and Analysis

Tosoh experienced mixed results in fiscal 2016, ended March 31, 2016. Revenues declined amid lower petrochemical product prices in Japan and overseas, offsetting gains in sales of vinyl chloride resin from expanded vinyl chloride monomer (VCM) production. Operating income surged as a result of reduced raw materials and fuel costs, but profit attributable to owners of the parent company declined because of the impact of deferred tax assets related to a carryforward loss from a merger the previous fiscal year.

The majority of Tosoh’s business segments posted revenue decreases. But most saw a boost to their operating income on increased sales volumes and improved trade conditions.

The Japanese economy benefited from the economic and fiscal policies of the Japanese government and the Bank of Japan. Entering calendar 2016, however, downward pressure on the global economy weakened domestic stock prices and strengthened the yen. That and a resulting lack of business confidence amid increasingly negative consumer sentiment slowed Japan’s economic recovery.

Changes in Accounting Standards

Beginning in fiscal 2016, Tosoh and its domestic subsidiaries adopted the Accounting Standards Board of Japan (ASBJ)’s “Revised Accounting Standard for Business Combinations” (ASBJ Statement No. 21, September 13, 2013 [hereinafter, Statement No. 21]); “Revised Accounting Standard for Consolidated Financial Statements” (ASBJ Statement No. 22, September 13, 2013 [hereinafter, Statement No. 22]); and “Revised Accounting Standard for Business Divestitures” (ASBJ Statement No. 7, September 13, 2013 [hereinafter, Statement No. 7]). Together, these are referred to as the “Business Combination Accounting Standards."

As a result, the company changed its accounting policies to recognize in capital surplus the differences arising from the changes in its ownership interest of subsidiaries over which it maintains control and to record acquisition-related costs as expenses in the fiscal year in which the costs are incurred. In addition, the company changed its accounting policy for the reallocation of acquisition costs due to the completion of an acquisition following provisional accounting to reflect such reallocation in the consolidated financial statements for the fiscal year in which the business acquisition took place. Tosoh also changed its presentation of net income and now uses the term “non-controlling interests” in place of “minority interests.” The company subsequently reclassified certain amounts in the prior year comparative information to have them conform to its changed fiscal 2016 presentation.

In the consolidated statements of cash flows, cash flows from the acquisition or disposal of shares of subsidiaries with no changes in the scope of consolidation are included in “Cash flows from financing activities,” and cash flows from acquisition-related costs for shares of subsidiaries with changes in the scope of consolidation or costs related to the acquisition or disposal of shares of subsidiaries with no changes in the scope of consolidation are included in “Cash flows from operating activities.”

With regard to the application of the Business Combination Accounting Standards, Tosoh followed the provisional treatments in article 58-2 (4) of Statement No. 21, article 44-5 (4) of Statement No. 22, and article 57-4 (4) of Statement No. 7 from the beginning of fiscal 2016.

In the consolidated statement of cash flows, in accordance with the transitional treatment stipulated in article 26-4 of the “Practical Guideline for Preparation of the Consolidated Statement of Cash Flows,” comparative information was not reclassified.

The impact on operating income and income before income taxes in fiscal 2016 was immaterial.

Changes in Presentation

“Insurance income,” which was presented separately in the previous fiscal year, was included in “Other, net” under “Other income (expenses)” for fiscal year 2016 because the amount of the item decreased in importance. To reflect this change in reporting method, the reclassification of accounts has been made for the consolidated statements of income for fiscal year 2015.

“Proceeds from sales and redemption of investment securities,” which was included in “Other, net” under “Cash flows from investing activities” in the previous fiscal year, is presented separately beginning in fiscal year 2016 because the amount of the item increased in importance.

To reflect these changes in reporting method, a reclassification of accounts has been made for the consolidated statements of cash flows for fiscal year 2015.

Net Sales

Consolidated net sales decreased 6.9% from fiscal 2015, to ¥753.7 billion (US$6.7 billion).

Operating Expenses and Operating Income

Cost of sales decreased 11.5%, to ¥582.6 billion (US$5.2 billion). Gross profit rose 13.1%, to ¥171.2 billion (US$1.5 billion). The gross margin was 22.7%, up from 18.7% a year earlier.

Selling, general and administrative expenses increased 1.7%, to ¥101.7 billion (US$902.7 million). Research and development expenses climbed 6.7%, to ¥13.7 billion (US$122.0 million).

Operating income rose 35.1%, to ¥69.4 billion (US$616.3 million). Other expenses were ¥7.5 billion (US$66.7 million), down substantially from ¥7.6 billion in other income a year earlier. This reflected significant foreign exchange and impairment losses.

Income before income taxes advanced 5.0%, to ¥61.9 billion (US$549.6 million).

Net Income

Profit attributable to non-controlling interests totaled -¥2.2 billion (US$19.9 million), compared with -¥1.0 billion a year earlier. Profit attributable to owners of the parent was thus ¥39.7 billion (US$352.1 million), down 36.3% from fiscal 2015. The main factors in that decline were higher current income taxes and deferred income taxes relating to a carryforward loss from Tosoh’s merger with Nippon Polyurethane Industry Co., Ltd., in fiscal year 2015.

Net income per share, primary, was ¥62.61 (US$0.56), a decline from ¥103.97 a year earlier. Tosoh raised cash dividends per share by ¥4.0 from fiscal 2015, to ¥14.00 (US$0.12).

Performance by Geographic Region

Export sales and sales outside Japan by overseas subsidiaries were ¥337.1 billion (US$3.0 billion) in fiscal 2016. This represented 44.7% of consolidated net sales, up 2.1 percentage points over fiscal 2015. Sales in Asia, excluding Japan, were ¥238.8 billion (US$2.1 billion) and represented 31.7% of net sales, an increase of 0.8 percentage points.

Dividend Policy

Tosoh aims to maintain a balance between internal reserves for R&D, capital expenditures to support consistently high growth, and shareholder returns. The company intends to deliver stable dividends, subject to business conditions.

In fiscal 2016, cash dividends per share were ¥14.00 (US$0.12). The consolidated payout ratio for the year under review was 22.4%, compared with 9.6% in fiscal 2015. Tosoh will continue to invest its internal reserves in competitive product development and global business strategies in a bid to respond to anticipated changes in its business environment.

Financial Position and Liquidity

Fund Procurement and Liquidity Management

Tosoh raises working capital as necessary through short-term bank loans and other means. The company decides on the funding method for its long-term capital requirements, such as capital investment, after determining the investment recovery period and risk. In fiscal 2016, cash provided by operating activities was the prime source of funding for capital expenditures and R&D.

Assets, Liabilities, and Net Assets

Total current assets as of March 31, 2016, were down 3.4% from a year earlier, at ¥415.7 billion (US$3.7 billion). Cash and cash equivalents jumped 34.3%, to ¥74.9 billion (US$664.4 million). Trade receivables decreased 9.5%, to ¥181.5 billion (US$1.6 billion). Inventories were down 4.8%, to ¥125.2 billion (US$1.1 billion).

Current liabilities fell 18.3%, to ¥259.9 billion (US$2.3 billion).

Working capital therefore totaled ¥155.8 billion (US$1.4 billion), compared with ¥112.1 billion a year earlier. The current ratio was 1.60 times, up from 1.35 times in fiscal 2015.

Property, plant and equipment decreased 2.9%, to ¥226.8 billion (US$2.0 billion). Total assets thus declined 3.9%, to ¥734.8 billion (US$6.5 billion). Interest-bearing debt was ¥199.6 billion (US$1.8 billion) as of March 31, 2015, down from ¥271.5 billion at the previous fiscal year-end. Long-term debt, less current maturities, continued falling, contracting 21.9%, to ¥75.7 billion (US$671.5 million).

Total shareholders’ equity increased 22.4% year on year, to ¥334.9 billion (US$3.0 billion), mainly because of a 15.7% rise in retained earnings, to ¥235.5 billion (US$2.1 billion). Net unrealized gains on securities fell 36.4%, to ¥7.0 billion (US$61.9 million).

Total net assets climbed 16.5% year on year, to ¥373.7 billion (US$3.3 billion). Total equity per share was ¥524.23 (US$4.65), up from ¥482.25 a year earlier. Return on average total net assets was 11.4%, a drop from 21.8% a year earlier. The equity ratio was 46.3%, up from 37.8% in fiscal 2015.

Capital Expenditures and Depreciation

Cash Flows

Net cash provided by operating activities amounted to ¥99.9 billion (US$886.4 million), up from ¥54.1 billion in fiscal 2015. The principal sources of cash were income before income taxes, depreciation and amortization, and a decrease in trade receivables. The major uses of cash were interest paid and income taxes paid.

Net cash used in investing activities was ¥27.9 billion (US$247.7 million), down from ¥34.1 billion in the previous fiscal year, largely because of lower payments for purchases of property, plant and equipment.

Free cash flow thus rose from ¥20.0 billion in fiscal 2015 to ¥72.0 billion (US$638.7 million).

Net cash used in financing activities was ¥50.8 billion (US$451.1 million), compared with ¥20.7 billion in the previous year. The main reason for the rise was a greater net decrease in short-term bank loans. Cash and cash equivalents on March 31, 2016, were ¥74.9 billion (US$664.4 million), up 34.3% from a year earlier.

Projections for Fiscal 2017

Japan’s economy should steadily recover in fiscal 2017 as personal income and the employment situation continue to improve. That said, business downturns in China and in other Asian developing nations and in countries that provide raw materials make it difficult to be certain about trends in the global economy and financial markets.

Tosoh will therefore endeavor to raise profitability by expanding sales, maintaining an optimum pricing structure, and reducing costs. The company projects net sales of ¥720 billion, operating income of ¥72 billion, and profit attributable to owners of the parent company of ¥47 billion. These forecasts are based on a domestic standard price for naphtha of ¥40,000 per kiloliter and on an exchange rate of ¥110.00 to the US dollar.

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Forward-Looking Statements: Annual reports contain estimates, projections, and other forward-looking statements, which are subject to unforeseeable risks and uncertainties. Readers should understand that Tosoh’s business and financial results could differ significantly from management’s estimates and projections.

For reference purposes only, US dollar amounts have been translated, unless otherwise indicated, from yen at the rate of ¥112.68 = US$1, the prevailing exchange rate at the end of the fiscal year under review.

Tosoh Corporation’s 2016 fiscal year covers the period from April 1, 2015, to March 31, 2016.