Annual Report 2017

Five-year Summary

Fiscal Years (ended March 31)
2013 2014 2015 2016 2017
Results of Operations (millions of yen)
  Net sales 668,494 772,272
  Operating income 24,464 41,573
     Operating income ratio (%) 3.7 534
  Net income attributable to owners of the parent company 16,867 29,564
  R&D expenses 12,208 12,513
  Capital expenditures 26,100
  Depreciation and amortization 36,943 34,677 32,789 31,788 29,976
Cash Flows (millions of yen)          
  Cash flows from operating activities 36,176  67,238 54,107 99,884 115,716
  Cash flows from investing activities -23,448 -26,066 -34,115 -27,917 -34,724
  Cash flows from financing activities -24,518 -45,534 -20,719 -50,827 -68,829
  Cash and cash equivalents at end of year 57,358 55,127 55,740 74,869 85,460
Financial Position (millions of yen)          
  Total assets 735,102  721,749 764,206 734,770 782,623
  Total equity 219,286 249,797 320,784 373,724 448,336
  Interest-bearing debt 325,995 286,205 271,500 199,572 139,844
Per Share Data (yen)          
  Net income per share 28.17 49.35 103.97 62.61 116.56 
  Total equity per share 315.15 365.85 482.25 524.23 636.43
  Dividends per share 6.00 6.00
14.00 24.00
Key Ratios          
  Return on equity (%) 9.5 14.5 24.5 12.6 20.1
  Return on assets (%) 2.3 4.1 8.2 5.4 9.7
  Total assets turnover (times) 0.93 1.06 1.06 1.03 0.95
  Equity ratio (%) 25.7 30.4 37.8 46.3 52.8
  Dividend payout ratio (%) 21.8 12.2 9.6 22.4 20.6
  Debt-to-equity ratio (%) 172.7 130.6 153.5 106.1 80.9
  Number of employees (consolidated) 11,268  11,421 11,594 12,037 12,292
Stock Indicators          
  Stock price (closing), end of year (yen) 262 398 606 473 978
  Market capitalization (millions of yen) 156,913 238,459 364,304 307,527 635,858
  Price earnings ratio (times) 9.3 8.1 5.8 7.6 8.4
  Price book-value ratio (times) 0.83 1.09 1.3 0.9 1.5


Management's Discussion and Analysis

Tosoh reported reduced sales but increased profit in fiscal 2017, ended March 31, 2017. Revenues declined from a year earlier because of lower prices for petrochemical products, the result of a drop in the price of naphtha and other feedstocks, and for exported products, whose pricing declines resulted from the yen’s appreciation. Operating income increased over fiscal 2016 levels substantially because lower feedstock prices improved the company’s terms of trade. Profit attributable to owners of the parent company consequently likewise increased.

The revenue decline was largely due to reduced sales by the Petrochemical Group. Sales by the Specialty Group and the Engineering Group rose but were insufficient to offset the drop in Petrochemical Group sales. Sales by the Chlor-alkali Group were largely unchanged from fiscal 2016. Operating income increased in all segments, led by a near doubling for the Petrochemical Group and a near trebling for the Chlor-alkali Group.

We achieved this performance amid a continued moderate recovery in Japan’s economy prompted by government economic policies that contributed to ongoing improvements in employment and incomes. However, the outlook for the Japanese and the global economy became less certain as the year progressed. Concerns arose over the consequences of the United Kingdom’s decision to leave the European Union, over the policy direction of a new US administration, and over heightened geopolitical risks in the Middle East and on the Korean peninsula.

Changes in Accounting Policies

Following a revision to Japan’s Corporation Tax Act, the company and its domestic subsidiaries adopted “Practical Solution on a Change in Depreciation Method due to Tax Reform 2016” (ASBJ Practical Issues Task Force No. 32, June 17, 2016) from fiscal year 2017. They also changed their depreciation method for facilities attached to buildings and structures acquired on or after April 1, 2016, from the declining-balance method to the straight-line method. The effect on operating income, ordinary income, and income before income taxes for the year ended March 31, 2017, is immaterial.

The company and its domestic subsidiaries also adopted “Revised Implementation Guidance on Recoverability of Deferred Tax Assets” (ASBJ Guidance No. 26, March 28, 2016 (hereinafter, Guidance No. 26).

Changes in Presentation

“Subsidy income,” which was presented separately in the previous fiscal year, is included in “Other, net” under “Other income (expenses)” from fiscal year 2017 because the item has decreased in importance. To reflect this change in reporting method, a reclassification of accounts has been made for the statements of income for the previous fiscal year.

The ¥90.0 million (US$0.8 million) in “Subsidy income” and the ¥1.1 billion (US$9.0 million) in “Other, net” under “Other income (expenses)” in the previous year’s statements of income have been reclassified as ¥1.1 billion (US$9.8 million) in “Other, net” under “Other income (expenses).”

Net Sales

Consolidated net sales decreased 1.4% from fiscal 2016, to ¥743.0 billion (US$6.6 billion).

Operating Expenses and Operating Income

Cost of sales decreased 9.4%, to ¥527.7 billion (US$4.7 billion). And gross profit rose 25.8%, to ¥215.3 billion (US$1.9 billion), for a 22.7% increase in the gross margin, to 28.9%.

Selling, general and administrative expenses increased 2.3%, to ¥104.1 billion (US$928.0 million). Research and development expenses climbed 4.6%, to ¥14.4 billion (US$128.1 million).

Operating income rose 60.2%, to ¥111.2 billion (US$991.3 million). Other expenses were ¥683.0 million (US$6.1 billion), compared with ¥7.5 billion a year earlier. The dramatic drop in other expenses was due to significantly lower foreign exchange and impairment losses and to lower interest expenses.

Income before income taxes rose 78.5%, to ¥110.5 billion (US$985.2 million).

Net Income

Profit (loss) attributable to non-controlling interests totaled a loss of ¥1.98 billion (US$18.0 million), compared with a loss of ¥2.2 billion a year earlier. Profit attributable to owners of the parent was thus ¥75.6 billion (US$674.4 million), an increase of 90.7% over fiscal 2016.

Net income per share, primary, was ¥116.56 (US$1.04), up from ¥62.61 a year earlier. Tosoh increased its cash dividends per share by ¥10.0 from fiscal 2016, to ¥24.00 (US$0.21).

Performance by Geographic Region

Export sales and sales outside Japan by overseas subsidiaries were ¥340.1 billion (US$3.0 billion) in fiscal 2017. This represented 45.7% of consolidated net sales, up 1.0 percentage point over fiscal 2016. Sales in Asia, excluding Japan, were ¥236.8 billion (US$2.1 billion) and represented 31.8% of net sales, virtually unchanged from the previous year.

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 2017, cash dividends per share were ¥24.00 (US$0.21). The consolidated payout ratio was 20.6%, compared with 22.4% in fiscal 2016. 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 2017, 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, 2017, were up 7.8% from a year earlier, to ¥448.0 billion (US$4.0 billion). Cash and cash equivalents were up 14.1%, to ¥85.5 billion (US$761.7 million). Trade receivables rose 9.9%, to ¥199.5 billion (US$1.8 billion). Inventories rose 1.8%, to ¥127.4 billion (US$1.1 billion).

Current liabilities decreased 4.6%, to ¥247.9 billion (US$2.2 billion).

Working capital therefore totaled ¥200.1 billion (US$1.8 billion), compared with ¥155.8 billion a year earlier. The current ratio was 1.80 times, up from 1.60 times in fiscal 2016.

Property, plant and equipment increased 3.5%, to ¥234.8 billion (US$2.1 billion). Total assets therefore rose 6.5%, to ¥782.6 billion (US$7.0 billion). Interest-bearing debt was ¥139.8 billion (US$1.2 billion) as of March 31, 2017, down from ¥199.6 billion at the previous fiscal year-end. Long-term debt, less current maturities, continued to decrease, contracting 24.1%, to ¥57.5 billion (US$512.2 million).

The company invested ¥37.7 billion (US$336.5 million) in facilities and equipment during the year under review, principally on environmental upgrades. That figure includes investments in intangible assets. Tosoh spent ¥4,337 million to add and upgrade capacity in the Petrochemical Group; ¥9.5 billion on the Chlor-alkali Group; ¥20.3 billion on the Specialty Group, including for the start of the construction of a manufacturing facility in Malaysia; ¥1.5 billion on the Engineering Group; ¥1.7 billion on other businesses; and ¥412 million on company-wide shared facilities.

Total shareholders’ equity increased 19.8% year on year, to ¥401.3 billion (US$3.6 billion), mainly because of a 28.1% rise in retained earnings, to ¥301.8 billion (US$2.7 billion). Net unrealized gains on securities rose 86.4%, to ¥13.0 billion (US$116.0 million).

Total net assets climbed 20.0% year on year, to ¥448.3 billion (US$4.0 billion). Total equity per share was ¥636.43 (US$5.67), up from ¥524.23 a year earlier. Return on average total net assets was 9.7%, up from 5.4% a year earlier. The equity ratio was 52.8%, up from 46.3%.

Capital Expenditures and Depreciation

Cash Flows

Net cash provided by operating activities amounted to ¥115.7 billion (US$1.0 billion), up from ¥99.9 billion in fiscal 2016. The principal sources of cash were income before income taxes, depreciation and amortization, and an increase in trade payables. The major uses of cash were interest paid and a decrease in trade receivables.

Net cash used in investing activities was ¥34.7 billion (US$309.5 million), up from ¥27.9 billion in the previous fiscal year, largely because of increased payments for purchases of property, plant and equipment.

Free cash flow therefore rose from ¥72.0 billion in fiscal 2016 to ¥81.0 billion (US$722.0 million) in fiscal 2017.

Net cash used in financing activities was ¥68.8 billion (US$613.5 million), compared with ¥50.8 billion in the previous year. A reduced net decrease in short-term bank loans was offset by the absence of the previous year’s proceeds from issuance of common shares. Cash and cash equivalents on March 31, 2017, were ¥85.5 billion (US$761.7 million), up 14.1% from a year earlier.

Projections for Fiscal 2018

We expect the Japanese economy to maintain its gradual recovery as employment and income conditions continue to improve. However, we have to be cautious given the potential for political and economic developments elsewhere in the world to pose numerous challenges.

The Tosoh Group pays close and constant attention to the various factors that affect its operations, including changes in overseas feedstock and product prices and economic conditions in emerging nations, particularly in Asia. We are determined to respond in a timely and flexible manner to any and all changes in our operating environment.

Our medium-term plan covering the three years to March 2019 is key to our ability to do this. By implementing the plan, we can build a business structure better capable of coping with changes in external conditions, of maintaining stable and safe operating environments, and of managing the Tosoh Group strategically and therefore effectively.

The medium-term plan targets net sales of ¥770 billion, operating income and ordinary income of ¥100 billion each, and net profit attributable to owners of the parent company of ¥68 billion in the year ending March 31, 2018. These objectives are based on a domestic naphtha price of ¥41,000 a kiloliter and an exchange rate of ¥110 to the US dollar.

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