ANNUAL REPORT

2019

Profile

Our Mission
We will satisfy all
stakeholders
We at the Showa Denko
Group will provide
products and services thatare useful and safe andexceed our customers’
expectations, thereby
enhancing the value of theGroup, giving satisfaction
to our shareholders, andcontributing to the soundgrowth of internationalsociety as a responsible
corporate citizen.

Showa Denko K.K. (SDK) was founded in 1939. Ranked as one of Japan’s leading chemicalcompanies, SDK operates in six major segments: petrochemicals, chemicals, electronics,
inorganics, aluminum, and others.
The Showa Denko Group noticed high potential for abundant hydro power, a major resource
in Japan. The Group began by focusing on the promising future of the electrochemical industry,
which can make the most of hydroelectric power, and expanded business domains to cover
inorganic chemicals, organic chemicals, and metallic materials. Today, the Group is a uniquechemical manufacturer that supplies petrochemicals, chemicals, electronics, inorganics, andaluminum. In these fields, SDK produces a broad spectrum of materials and parts, and has
wide-ranging technologies. By taking advantage of this uniqueness as well as by deepening
and fusing our inorganic, metal, and organic technologies, we will produce excellent Koseiha
products, aiming to become a “social contribution company” that helps to create a society where
wealth and sustainability are harmonized.
The Group will strengthen earning power and reduce fluctuations in income by promoting
The TOP 2021 medium-term business plan, which was launched in January 2019, by enhancing
the value of the Group, and by establishing a stable foundation that will always support theGroup’s growth far into the future.
The Group is also committed to the principles of Responsible Care and is vigorously carryingout an action plan to protect the environment as well as health and safety.

Net sales 2019¥906.5 billion

Note: ‌The ratios of respective segments have been calculated after adding the amountof adjustments to net sales.

Petrochemicals
Olefins (ethylene and propylene), organic
chemicals (vinyl acetate monomer, ethyl
acetate, and allyl alcohol), and polymer(polypropylene)

Chemicals

Forward-Looking Statements:
This annual report contains statements relating tomanagement’s projections of future profits, thepossible achievement of the Company’s financial
goals and objectives, and management’s expectations
for the Company’s product development program.
The Company cannot guarantee that these expectations
and projections will be realized or correct. Actual
results may differ materially from the results
anticipated in the statements included herein due
to a variety of factors, including, but not limited to,the economic conditions, costs of naphtha and otherraw materials, demand for our products such asgraphite electrodes and other commodities, market
conditions, and foreign exchange rates. The timely
commercialization of products under developmentby the Company may be disrupted or delayed by avariety of factors, including market acceptance,
the introduction of new products by competitors,
and changes in regulations or laws. The foregoing
list of factors is not inclusive. We undertake no
obligation to update the forward-looking statements
unless required by law.

13.2%

Showa Denko at a Glance

Functional chemicals (polymer emulsion
and unsaturated polyester resin), industrial
gases (liquefied carbon dioxide, dry ice,oxygen, nitrogen, and hydrogen), basic
chemicals (liquefied ammonia,
acrylonitrile, and chloroprene rubber),electronic chemicals (high-purity gases forelectronics), and coating materials

10.2%

26.1%

16.4%

24.0%
10.1 %

Inorganics
Graphite electrodes and ceramics (alumina,
abrasives, and ultrafine titanium oxide)

Aluminum
Rolled products (high-purity foils forcapacitors), specialty components(cylinders for laser beam printers [LBPs],
extrusions, forged products, and heatexchangers), and beverage cans

OthersBuilding materials and general trading

Electronics

See pages 8-9 for Business Segments.

Hard disks (HDs), SiC epitaxial wafers for powerdevices, compound semiconductors (LEDchips), and lithium-ion battery (LIB) materials

About Annual Report 2019
This report mainly covers the Showa Denko Group’s
financial information such as business strategies, outlineof businesses, and financial results.
PDF and online versions of this report are available on the Web.
https://www.sdk.co.jp/english/ir/library/annual.html
In addition, various materials which help you understandthe Group are available on our website. The latest
information is also available.
IR Information https://www.sdk.co.jp/english/ir.html

Financial statements (annual, quarterly), corporate
performance (performance forecasts and performancetrends), and stock price information are available at thissite. Taking advantage of the latest technology, we offer
interactive charts enabling you to see charts of indicatorsthat you choose.
ESG Information https://www.sdk.co.jp/english/csr.html
At this site, you can see our measures and performancedata for environment (E), social (S), and governance (G).

We issue the integrated report SHOWA DENKO REPORT
covering the general outline of the Showa Denko Groupand annual major topics. PDF and HTML versions of theabove are available on the Web.

Our Strengths

Showa Denko has many products maintaining high world market shares.
Some of our high-priority products in our business segments are shown here.

Chemicals

Inorganics
High-purity gases for electronics

Graphite electrodes

The world’s largest manufacturer of
specialty gases, such as C4F6, HBr, Cl2, NH3

The world’s largest manufacturer

High-purity gases for electronics are used as etching andcleaning gases as well as materials for making theNomembranes necessary for producing electronic devices,
including semiconductors, LCD panels, and solar batteries.
In 2020, we decided to establish the second plant in Shanghai to make high-purity nitrous oxide(N2O) with annual production capacity of 1,000 tons and high-purity octafluorocyclobutane (C 4F8)
with annual production capacity of 600 tons. The new plant will start operating in the second half of 2021.
In addition, we will establish a new production line in Taiwan to produce high-purity C4F8 with annual
production capacity of 150 tons. Startup of operations of the new line is scheduled for the spring of 2020.

1

Graphite electrodes are used in electric arc furnaces
for steel production. In 2017, we acquired a Germangraphite electrode company. We now have graphite
Noelectrode production bases in Europe and Southeast
Asia, in addition to our existing bases in Japan, theUnited States, and China, and became the leading supplier in the global graphite electrodeindustry. We are investing in plants and equipment to improve product quality and to realize
the effect of business integration as soon as possible, in this way strengthening thecompetitiveness of our graphite electrodes.

1

Aluminum

Electronics

High-purity aluminum foil
for capacitors

HD media
The world’s largest independent manufacturer
HD media, one of the major parts of hard disk drives(HDDs), are used in notebook PCs and consumer
electronics. Demand is expected to continue growingNofor use in largescale data centers. We are developing
next-generation recording technologies for HDDs,
including microwave-assisted magnetic recording (MAMR) technology and heat-assisted
magnetic recording (HAMR) technology. We started shipments of our newly developed
3.5-inch MAMR HD media in 2019 and have developed technology to manufacture HAMR HD
media in 2020. HD media have a significant effect on HDD storage capacity. We will continue
contributing to the expansion of storage capacities of HDDs using our motto “Best in Class.”

1

SiC epitaxial wafers
for power devices
The second largest independent
manufacturer in the world2

We have been contributing to the commercializationand market expansion of “full SiC” power modules
through production of high-grade SiC epi-wafers for
power transistors since 2015, in addition to those for diodes. SiC-based power devices are
attracting attention due to their features that enable production of smaller, lighter, andmore energy-efficient next-generation power control modules. In 2019, we developed asecond generation of high-grade SiC epitaxial wafers (HGE-2G) for power semiconductors.
No

Aluminum laminated film
for LIB packaging

The world’s largest manufacturer

1

We provide high-purity aluminum foil for aluminumelectrolytic capacitors, which are widely used in
air conditioners, automotive parts, and solar
power generation. Our proprietary manufacturing process has enabled us to realize
high productivity and quality.
No

Aluminum cans
The second largest manufacturer in
Vietnam and the fourth largest in Japan
Since 1971, we have been operating our aluminum
can business as a pioneer who produced the firstaluminum can for beverages in Japan.
We have been expanding our aluminum canbusiness in Vietnam and Thailand, focusing on the rapidly growing Southeast Asianmarket. In 2019, we decided to establish our third plant in Vietnam (in the southern part ofthe country) and we expanded the capacity of can-end production lines in the existing
factory in northern Vietnam. The Group will have three plants to cover all of Vietnam withthe capacity to produce 3.3 billion sets of can bodies and can ends per year. The newfacilities are scheduled to start production in July 2020.
No2

Note: The worldwide or global market positions shown on this page are SDK’s estimates.

The second largest manufacturer in the world
No

Contents2

We provide packaging materials for pouch lithium-ion
batteries (LIBs) used in smartphones and tablet PCs.
Demand for pouch LIBs is growing due to theiradvantages, such as high levels of heat dissipationand flexibility in molding.

1 Our Strengths
2 Consolidated 11-Year Summary
4 Message from the Management
6 The New Medium-Term Business
Plan: The TOP 2021
8 Business Segments

10 Mergers & Acquisitions
12 Management Team
14 Corporate Governance
16 Research and Development
18 Corporate Social
Responsibility

19 Management’s Discussion
and Analysis
22 Risk Factors
24 Financial Data
47 Corporate Data

1

Consolidated 11-Year Summary
Financial Highlights
Showa Denko K.K. and Consolidated Subsidiaries
December 31

For the year
Net sales
Petrochemicals
ChemicalsElectronics
Inorganics
Aluminum
OthersAdjustments
Operating income
Petrochemicals
ChemicalsElectronics
Inorganics
Aluminum
OthersAdjustments
Net income attributable to owners of the parent
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Free cash flow
R&D expenditures
Capital expenditures
Depreciation and amortization
At year-end
Total assets
Total net assets
Interest-bearing debt
Debt/equity ratio (gross, times)

Millions of yen

20092010 (Note 2)2011 (Note 2)

2012

2013

2014

¥678,204
235,999
91,887
127,80753,711
168,799——(4,983)
7,992
446(9,775)
3,603(4,217)—(3,032)(37,981)
19,846(26,595)(6,749)20,74338,66654,178¥797,189
199,590
133,578
147,988
77,958130,084
154,084(46,093)
38,723
2,278
5,618
14,90910,0858,543
2,041(4,752)
12,706
66,293(49,074)
17,21820,67058,03550,678¥854,158
250,396130,203
165,01177,564
124,280
150,583(43,879)
47,3573,484
2,035
30,242
9,640
6,212
1,860
(6,116)
16,98069,437(38,671)
30,766
21,59738,79449,413¥739,675
190,939
127,252
163,306
65,57392,194135,280(34,870)
28,108(977)(875)
32,311
2,954
1,581
89
(6,975)
9,368
53,310(41,741)
11,56920,63342,503
46,232¥847,803
286,732
130,402
136,548
65,91990,369176,516(38,684)
25,953
4,398
2,559
21,940
(838)
5,845
(626)
(7,324)
9,065
63,565(55,203)
8,362
20,43544,37039,779¥ 872,785
281,400
138,695
138,537
67,557
97,946
191,610(42,959)
20,551(4,930)5,460
25,770(300)
2,999(1,041)(7,406)2,929
66,996(46,876)
20,12020,36247,31840,673

958,303286,722373,9111.30

924,484
284,965
351,034
1.23

941,303295,745
347,308
1.17

933,162
314,966
342,262
1.09

985,771
345,811353,686
1.02

1,009,843
319,087
383,124
1.20¥ 6.26—182.243.00
9,890¥ 6.06—201.27
3.00
10,234¥ 1.99—209.76
3.00
10,577Yen

Per share (Note 4)
Net income—primary (Note 5)
Net income—fully diluted (Note 5)
Net assets
Cash dividends (applicable to the period) (Note 6)
Number of employees at year-end¥ (29.44)—
163.11
3.00
11,564¥ 8.49—161.47
3.00
11,597¥ 11.35
11.20
168.33
3.00
11,542

Notes: 1. Yen amounts have been translated into U.S. dollars, for convenience only, at the rate of ¥109.56 to US$1.00, the approximate rate of exchange at December 31, 2019.
2. Changing‌the segmentation
Effective from the year ended December 31, 2011, the Companies have applied “Accounting Standard for Disclosures about Segments of an Enterprise and Related Information” (AccountingStandards Board of Japan (ASBJ) Statement No.17, issued on June 30, 2010) and “Guidance on the Accounting Standard for Disclosures about Segments of an Enterprise and RelatedInformation” (ASBJ Guidance No. 20, issued on March 21, 2008). The segment information for the year ended December 31, 2010, which is restated under the accounting standard, is disclosed
for comparison purposes.
LIB materials was transferred from “Others” to “Electronics” from the year ended December 31, 2017. The segment information for the year ended December 2016 in the above table arebased on the new segmentation. SiC epitaxial wafers for power devices was also transferred from “Others” to “ “Electronics” from the year ended December 31, 2019. The segment information
for the year ended December 2018 in the above table are based on the new segmentation.

Net Sales by Segment

Operating Income by Segment

Net Income Attributable to
Owners of the Parent(Billions of yen)
1,000(Billions of yen)
200

(Billions of yen)
120

750

150

500

100

250

50

0

0

-250

2015

Petrochemicals
Chemicals

2

2016

2017

Electronics
Inorganics

SHOWA DENKO K.K.

2018
Aluminum
Others2019
Adjustments

ANNUAL REPORT 2019

-50

90
60
30

2015

Petrochemicals
Chemicals

2016

2017

Electronics
Inorganics

2018
Aluminum
Others2019
Adjustments

0

2015

2016

2017

2018

2019

Showa Denko K.K. and Consolidated Subsidiaries

December 31
For the year
Net sales
Petrochemicals
ChemicalsElectronics
Inorganics
Aluminum
OthersAdjustments
Operating income
Petrochemicals
ChemicalsElectronics
Inorganics
Aluminum
OthersAdjustments
Net income attributable to owners of the parent
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Free cash flow
R&D expenditures
Capital expenditures
Depreciation and amortization
At year-end
Total assets
Total net assets
Interest-bearing debt
Debt/equity ratio (gross, times)

Thousands of
U.S. dollars (Note 1)

Millions of yen

2019

2015

2016 (Note 2)2017 (Note 3)2018 (Note 2)¥775,732
231,288
142,292
131,492
63,476
100,756
147,233(40,805)
33,508
10,543
10,707
17,472(1,249)2,563
1,329(7,857)921
61,170(42,497)
18,674
20,28944,05942,137¥671,159
185,783
134,529
120,461
50,87098,575
128,740(47,800)
42,053
20,69013,82415,015(5,758)4,416
623(6,758)12,30568,949(53,754)
15,195
17,31339,276
38,761¥ 780,387
251,128
148,758
123,064
73,442
105,439
133,624(55,067)
77,70833,357
16,47421,925
6,979
6,697
633
(8,357)37,404
67,235(29,866)
37,36918,53941,78738,565¥ 992,136
268,879
156,541
111,912266,149
108,254
137,324(56,922)180,003
20,333
17,393
13,557
132,445
4,942
1,734(10,400)
111,503
149,785(49,338)
100,447
19,73541,72739,459¥ 906,454
250,678
157,480
96,445230,135
97,542
126,163(51,989)
120,798
17,201
13,656
4,880
89,256
1,746
1,819(7,759)73,08878,554(48,156)
30,397
20,60550,21637,704$8,273,583
2,288,046
1,437,386
880,295
2,100,536
890,308
1,151,542(474,529)
1,102,574
156,997
124,644
44,540814,673
15,93916,602(70,821)667,108
716,991(439,542)
277,449
188,069
458,343
344,141

940,494308,142368,835
1.20

932,698
311,231359,929
1.16

1,026,999
368,994
346,726
0.94

1,074,983
465,340
287,968
0.62

1,076,381
519,433
298,5240.60

9,824,584
4,741,082
2,724,750

Yen

Per share (Note 4)
Net income—primary (Note 5)
Net income—fully diluted (Note 5)
Net assets
Cash dividends (applicable to the period) (Note 6)
Number of employees at year-end

¥

6.45
—
2,076.05
3.00
10,561¥86.27—
2,080.85—
10,146¥ 262.44—
2,473.06
80.00
10,864

U.S. dollars (Note 1)¥ 501.03—
3,423.25
130.0010,813¥ 758.15—
3,057.16
120.0010,476$ 4.5731.25
1.19

3. ‌The tentative accounting policy applied to calculation of 2017 financial results due to consolidation of former SGL GE Holding GmbH was finalized when the Company settled accounts for the third
quarter of 2018. Accordingly, the amounts of depreciation and amortization and some other costs for the year ending December 2017 were changed. The amount in the above table includes those
retroactively changed numbers for the year ending December 2017.
4. ‌SDK consolidated every ten shares of common stock into one share on July 1, 2016. “Per share” indicators for 2015 and 2016 (except for cash dividends) are calculated on the basis of the number ofoutstanding shares after this consolidation.
5. ‌Net income per share has been computed based on the average number of shares of common stock outstanding during the respective fiscal year. Fully diluted net income per share additionally assumes
the conversion of the convertible bonds. Diluted net income per share for 2015 and 2014 were not disclosed because there were no dilutive shares. Diluted net income per share for 2013 was notdisclosed because the Company had no securities with dilutive effects.
6. S‌ DK resolved payment of dividends of Yen 30.00 per share based on the record date of May 11, 2017 at the extraordinary general meeting of shareholders held in June 2017. Cash dividends applicable to 2017 includes this amount.

Interest-Bearing Debt
Debt/Equity Ratio

Capital Expenditures
Depreciation and Amortization(Billions of yen)
400

(Times)2.0

Cash Flows(Billions of yen)(Billions of yen)

60

150

300

1.5

45

100

200

1.0

30

50

100

0.5

15

0

0

0

0

2015

2016

2017

2018

Interest-bearing debt (left axis)
Debt/Equity ratio (right axis, gross)

2019

2015

2016

2017

Capital expenditures
Depreciation and amortization

2018

2019

-50

2015

2016

2017

2018

Cash flows from operating activities
Cash flows from investing activities

2019

Free cash flow3

Message from the Management
The Showa Denko Group launched The TOP 2021, our medium-termbusiness plan, in January 2019. For the Group to grow continuously,
and to ensure that the Group is trusted and rated highly by society,
it is important for us to raise the value by ourselves to satisfy all
stakeholders, including shareholders, customers, suppliers, local
communities and employees. We clearly state in the Showa Denko
Group Vision that we will promote management that maximizes
shareholders’ value, customers’ value, and social value.
The Showa Denko Group will steadily implement The TOP 2021 tostrengthen earning power, control fluctuations in profits, increase
corporate value, and establish a solid base for growth toward the future.
In 2019, under the tough business environment caused by
US-China trade friction as well as the declining performance of theEuropean automotive industry, the Group recorded operating incomeof ¥120,798 million, down ¥59,205 million from the previous year,
while net income attributable to owners of the parent was ¥73,088
million, down ¥38,415 million from the previous year. At the sametime, we continued to invest in plants and equipment, aiming to
improve our performance in the future.
The sum of the dividends per share we paid for the year ending
December 31, 2019 was ¥130, up ¥10 from the previous year.
On December 18, 2019, we announced that we would launch atender offer for Hitachi Chemical Company, Ltd. In recent years, thestructure of the chemical industry and the competitive environment
have been changing dramatically. To cope with these changes inthe business environment and to win the competition as a leading
functional chemical company, we must evolve to become a “one-stop,advanced materials partner” for our customers, providing them not
only with materials and parts but also with solutions.
In 2020, we will promote growth strategies for the second year of
The TOP 2021, and accelerate our operations to realize substantial
integration with Hitachi Chemical.
We have now defined our Mission as “to satisfy all stakeholders.”
We will contribute to the sound growth of society by maximizing
shareholders’ value, customers’ value, and social value.
Note: For the details of our tender offer for Hitachi Chemical, please see Mergers andAcquisitions on page 10.

Structural businesses reforms implemented in 2019

Kohei Morikawa
Representative Director,
President and CEO

4

SHOWA DENKO K.K.

ANNUAL REPORT 2019

In 2019, Showa Denko put a range of structural businesses reforms
into practice.
For our graphite electrode business, we started investing more inplants and equipment, aiming to improve the quality of the graphite
electrodes produced in our plants in Europe. Through this investment,
we will expand our capacity to produce ultra-high-power (UHP)
graphite electrodes in Europe and to propose UHP graphite electrodes
to our customers. In this way, we will improve the productivity of
our customers’ electric arc furnaces and grow the market for UHP
graphite electrodes in Europe. In February 2020, we started labormanagement negotiations for the planned closure of the graphite
electrode production site in Meitingen, Germany, where the operating
rate had been declining due to a business slowdown in Europe.
For our functional chemicals business, in January 2020, we decided
to end producing unsaturated polyester resin and vinyl ester resin

at our Isesaki Plant, Gunma Prefecture and to concentrate productionof these materials at our Tatsuno Plant, Hyogo Prefecture, to copewith lower domestic demand for these products.
For our aluminum can business, in May 2019, we streamlined
production capacity by stopping some production lines in the
Oyama Plant, Tochigi Prefecture, and the Hikone Plant, Shiga
Prefecture, aiming to cope with a major reduction in domestic
demand for aluminum cans caused by beverage manufacturers
shifting from aluminum cans to PET bottles.
The Showa Denko Group has been aggressively promoting
structural reforms in all business segments in view of the integration
with Hitachi Chemical. Under these circumstances, we are making
every effort to achieve the goals stated in the current medium-termbusiness plan, The TOP 2021.

2019 Performance
The Showa Denko Group recorded consolidated net sales of¥906,454 million in 2019, down ¥85,682 million or 8.6% from theprevious year. Although sales increased slightly in the Chemicals
segment, sales declined in the Inorganics segment due to lower
sales volumes of graphite electrodes resulting from reduced
production to respond to an adjustment in inventories of graphite
electrodes conducted by our customers who operate electric arc
furnaces. Our sales in the Petrochemicals segment also declined
due to a sluggish market for petrochemical products.
The Group’s operating income substantially decreased by¥59,205 million (down 32.9% year on year), to ¥120,798 million.
Operating income fell in five segments including Inorganics, where
income fell due to lower production of graphite electrodes, andthe Electronics segment, where shipment volumes of HD media to
be used in PCs were reduced.
The Group recorded net income attributable to owners of theparent of ¥73,088 million, a significant drop of ¥38,415 million or
34.5% from the previous year despite lower corporate taxes andan extraordinary loss caused by posting an impairment loss.
The debt-equity ratio, which is a financial indicator, improved
from 0.62 times at the end of 2018 to 0.60 times at the end of 2019.
Total dividends per share for fiscal 2019 increased to ¥130 from¥120 for fiscal 2018.

Operating income: results/plan(Billions of yen)

480.0

299.8
120.8

80.0
2013-2015
cumulative
results

2016-2018
cumulative
results

2019-2021
The TOP 2021 plan2019
results

Medium-term business plan The TOP 2021
In January 2019, we started The TOP 2021, our medium-term businessplan for 2019–2021.
Under The TOP 2021, we will establish a platform for growth, whilebuilding a promising future for the Showa Denko Group, and we will
pursue progress and development toward becoming a Koseiha(individualized) Company, which is our vision toward the year 2025.
A Koseiha Company is an aggregate of Koseiha Businesses, orbusinesses that we have established in the industry’s No. 1 positionby earning operating income of around several billion yen, while
posting an operating margin in the double digits in markets with ascale of tens of billions of yen to hundreds of billions of yen as theappropriate market scale for our businesses. Our medium- to longterm management objective is to make at least half of our existing
businesses into Koseiha Businesses by 2025.

Corporate Social Responsibility (Contribution to SDGs)
In May 2019, we revised the Group’s CSR Policy. As a business operator,
we have set the Group’s goal: to develop, manufacture, and sell
products and services that contribute to the SDGs. We revised thisslightly by adding, as our important themes, “deepening risk
management to be safer and more compliant” and “attaching highimportance to CSR communication.” We will echo the valuable
information that we receive from stakeholders when we communicate
with them, in our CSR activities.
In May 2019, we also announced that we have endorsed the aimof the Financial Stability Board (FSB) to establish the Task Force on
Climate-related Financial Disclosures (TCFD). We will disclose theeffect of climate change on our business in a positive way, by promoting
cooperation among Group companies, business segments, plants,
and staff departments. In July 2019, we set the goal of an 11%
reduction in GHG (greenhouse gas) emissions from the Group’s
domestic bases by FY 2030, compared with FY 2013, and toannounce the amount of the Showa Denko Group’s GHG emissions
in conformity with a global standard, the GHG Protocol. In
addition, we will introduce an internal carbon pricing (ICP) system
to assess the suitability of our investment programs.
As a business group, we create stable returns over the long termby promoting businesses that contribute to the creation of a sustainable
society, and we will continue to evolve.

Conclusion
The Showa Denko Group is committed to satisfying all stakeholders,
including shareholders, our customers’ industries, suppliers, andemployees. Toward that end, we will conduct business operations
from a medium- to long-term perspective, and we will create
excellent Koseiha products by deepening and fusing together theGroup’s organic chemistry, aluminum, and inorganic chemistry
technologies. In this way, we aim to be business group that makes
a social contribution, helping to create a society where affluenceand sustainability are harmonized.
Going forward, the Showa Denko Group will change significantly
in pursuit of growth. Our management team and employees will
make concerted efforts to realize revolutionary changes in ourselves.
As we push ahead, we ask for your continuing support of the Showa
Denko Group.
Finally, we sincerely appreciate and look forward to the continued
understanding, support, and encouragement of all our shareholders.
March 26, 2020

5

The New Medium-Term Business Plan

The TOP 2021
Through The TOP 2021 medium-term business plan, we will focus on
showing all our stakeholders a “promising future,” while establishinga foundation for growth. With the aim of achieving our vision of
becoming a Koseiha company by 2025, this is a medium-term businessplan that turns the helm sharply in the direction of growth.

Vision: Koseiha Company
By 2025, make half or more Koseiha Businesses(Reference) Features ofKoseiha Businesses

Our global No.1 businesses
Market size (SDK’s share)

The Showa Denko Group’s Vision of becoming a Koseiha company
means becoming a federation of businesses that build No. 1
positions in markets of appropriate scale, ranging from tens ofbillions to hundreds of billions of yen. For each of the businessesof both Showa Denko and Hitachi Chemical, we will draw up andstrengthen roadmaps to becoming Koseiha businesses, with amedium- to long-term management target of making at least halfof existing businesses into Koseiha businesses by 2025.

Operating margin

HD media

10% or more

¥400 billion (25%)

Operating income

High-purity gases for electronics

Billions of yen
or more¥150 billion (25%)

Stable profitability
tolerant toenvironmental
changeGraphite electrodes (UHP)¥300 billion+ (over 30%)

Businesses Portfolio (Enhance, Grow, Change)
Pillars of Group strategy: Rapid progress in existing businesses

Change businessmodel, considering
entry into downstream
sector

In growth markets,
accelerate businessgrowth at home andabroadEnhance 1

Enhance 2

Change 1

Grow 1

Carbon(Graphite electrodes)

Rolled aluminum products(High-purity aluminum foil)

Portfolio ofNewbusinesses

6

SHOWA DENKO K.K.

CreateANNUAL REPORT 2019

SiC epitaxial wafer
for power devices

Electronic materials(esp. Red LEDs)

Grow 2

Advanced battery materials(LIB materials)

Ceramics

Functional chemicals

Aluminum specialty components(including ShoticTM)

Change 2

Electronic chemicals(High-purity gases for electronics)

In matured market,
enhance offering value
by evolving businessmodel

Aluminum cansGrow

HD media

ChangeBasic chemicals

Enhance

Petrochemicals

Portfolios ofexisting
businesses

Growth in sales
Higher profitability

Industrial gases

Financial goal

The medium-term business plan lays out a clear route to
becoming Koseiha businesses by classifying each business into
one of three categories: enhance, grow, or change. For enhance,
the addition of the European graphite electrode business has
resulted in a significant increase in net sales, but the theme inthis group is to target higher operating margins by improving
profitability. For grow businesses, the theme is growth in net
sales. With the shift to electric vehicles and increased use of
information, markets in this business domain will expand going
forward. We will build solid best-in-class positions inenvironments such as these, actively investing in anticipatedmarket growth. To ensure adequate profitability, we will aim for
1.5 times net sales of the previous years. For businesses in thechange category, the theme will be growing business segments,
for instance, by looking to expand into downstream sectors fromthe core business, with the objective of improving both growthand profitability.

Business Domains and Growth Drivers

unomm
telec Industrial

Transportation(CASE)

Industrial
Equipment

Or

Mainten

ga

s
nic
rga

Basic chemicals
Resin materials
Graphite electrodes

a nc

Metal

D i s t r i bu t i o n / R e t a i l / A f t e

r

es
-sal

S er

Petrochemicals

vic

1. Digitalization

Aluminum cansLife Science &Healthcare

Lifestyle

3. Improvement
in QOL(Living Environment)

Construction/
Infrastructure

Shift froShowa Denko
Hitachi Chemical

5. Shift from goods to experiences / XaaS

cemen

Electronics
ial tyt of ds emig

i co ndu ct orInorganics

OrganicseeConstruction/
Infrastructure

f spe cital
battery systems Rolled aluminum Electronic parts HD media
i zatio
CMP slurry SiC epitaxial wafer for power devicesn
Semiconductor gas LED Seal/packaging materials
Transparent conductive materials
Functional chemicals
Anode and carbon parts

Ino

nic
s

G
of 5
ad
pre

i c a t i o n t e c h n o l o g y a nd a d v a n

t r i fi c a t i o n o f
Ele c utomobilesaEnergyServices
Products
Parts
Materials

Spread o

EnergyS

Industrial
Equipments

4. Spread of specialty
semiconductors
2.
Weight reduction ofcars and application ofcomposite materials

Transportation

Industrial gas Powder metallurgy Automotive
battery systems
Friction materials
Molding materials
Metal Aluminum specialty components

Ceramics

Materials
Parts
Products
Services
Lifestyle

Regenerative medicine

LElectronics(5G/IoT)

By combining the core technologies of SDK and Hitachi Chemical,
the two companies will together aim to grow in 7 business areas including 5G,
semiconductors, and electrification of automobiles.

Diagnostic drugs

r
Imp

QO

We set 5 growth drivers in 7 business domains as presuppositionof the new medium-term business plan.

ove

me

nt

in

Life science& Healthcare

m goods to experiences

For Showa Denko to achieve further growth, it is important to extend our value chains to include the parts, products, and even services,rather than being confined to the core domain of materials. The medium-term business plan specifies seven business domains and fivegrowth drivers. For business domains that we are particularly focused on, we are beginning initiatives in Transportation, typified by CASE, andin Electronics, which includes such technologies as 5G and IoT. We are concentrating on the five growth drivers: digitalization in all domains;advances in materials spurred on by the weight reduction of cars in the Transportation domain; on improvements in QOL in Lifestyle and inLife Science & Healthcare; on the spread of specialty semiconductors, which affects Materials; the evolution of business models that will shift
from goods to experiences; and a focus on XaaS (delivering services).

Transportation Business Domain
Actions in the Transportation business domain

Strengthening marketing function

By looking at the future of the automobile industry, we
anticipate changes in the needs for materials

We set up Corporate Marketing
Team within the Corporate
Strategy Department, as a crossfunctional multitasking teamHeat radiation/
heat storage

Electricalinsulation

Adhesion between
different materials

Composite-material solution utilizing our original materials/technologies
Wide-ranging portfolio of materials / progressin technologies to produce materials
Aluminum•Designs for alloys•Plastic working•‌Surface/interface
reforming

Organics

Inorganics & Electronics•Nano-carbon materials•Crystallization/particles•‌Analysis of properties

SiC epitaxial wafer for
power devices
Optical semiconductors
Materials for capacitors•Designs for high polymers •••Forecast of properties

Process design /Evaluation technologies•‌Parts structure analysis /simulation•‌Heat radiation analysis /simulation•‌Development oftechnologies to bondmaterials

R&D

Sales

MarketingexpertPlanning

Corporate Marketing Team’s mission
Plan and implement cross-business marketingstrategy at the early stage of the market
Macromarket
analysis

Technical
trend
analysis

Crossbusinesspromotion

Examinecommercialization

Started marketing in the automotive market
Marke

ns

io
Reg
CHI

SEA

JPN

ts

US

EU Cars/EV

5G Battery......

Petrochemicals
Functional chemicals
Ceramics
Aluminum functional
components

Establish company-wide
marketing platform
Digitalmarketingstrategy

Booth at a cross-businessexhibition
The Battery Show 2019 in
Stuttgart

Introducecompanywide CRM

Rebuild
websiteWebsite to introduce newtechnologies
https://www.sdk.co.jp/
innovation/english/

Products

Light
weight/rigidity

Corporate Marketing

In the Transportation business domain, we have begun a project for automotive composite materials. By leveraging, to the fullest extent, theuniqueness of our materials and technology, we will move forward with initiatives to resolve the issues faced by the automotive industry. Because
the Showa Denko Group is spread across many product lines and business domains, we have set up a corporate marketing team within the Corporate
Strategy Department to take action with an emphasis on the market, and have built a platform that can be shared by the company as a whole.
7

Business Segments

Petrochemicals

26.1%

Consolidated Business Results (Millions of yen)

Sales
Operating Income

2018

2019

Increase/decrease

Rate ofchange268,879
20,333

250,678
17,201-18,201-3,132-6.8%-15.4%The Oita Complex is the main manufacturing base of thePetrochemicals Division and is equipped with a naphtha cracker.
The Complex produces olefins, including ethylene and propylene.
As its feature, the Complex has a well-balanced demand structure.
The basic raw materials manufactured within the Complex aresupplied not only to Showa Denko’s plants producing organic
chemicals, including vinyl acetate, ethyl acetate and other acetylic
derivatives, but also to other companies’ plants in and aroundthe Oita Complex producing plastics, synthetic rubber, andstyrene monomer, including a plant producing polypropylenethat is operated by SunAllomer Ltd., a subsidiary of Showa Denko.
In 2020, we will start commercial production at the Oita Complex
and sale of 1,3-BG, which is an odorless ingredient for cosmetics
to be used as a moisturizing component, by utilizing ethylene
produced in the Oita Complex.
Showa Denko is expanding business to produce acetylic
derivatives by taking advantage of the Company’s advanced
catalyst technology.

which utilizes used plastics as one of raw materials, is a productthat contributes to the creation of a recycling-oriented society
and is mainly used as a denitration agent at thermal power plants.
The Functional Chemicals Division consists of the Functional
Polymers Department and the Specialty Chemicals Department.
The Functional Polymers Department provides various types ofplastics, including unsaturated polyester resin, which is light,
strong and corrosion-resisting, and molding compounds madeby using the plastics. The Specialty Chemicals Department offers
innovative and unique products, such as raw materials forcosmetics, resins for use as electronic materials, and columns
for high performance liquid chromatography (HPLC). For
unsaturated polyester resin and vinyl ester resin, we have decided
to consolidate domestic production bases to streamline ourcapacity to produce these materials.
Coating Materials Department was organized in July 2019
following our acquisition of Industrielack AG (ILAG), a
nonstick coating chemicals manufacturer in Switzerland.
This department provides nonstick coating chemicals,
which are materials for surfaces of cookware, home
appliances, cars and industrial equipment that prevent
sticking and staining.

Electronics
Consolidated Business Results (Millions of yen)

Chemicals

16.4%

Consolidated Business Results (Millions of yen)

Sales
Operating Income

2018

2019

Increase/decrease

Rate ofchange156,541
17,393

157,480
13,656939-3,737

0.6%-21.5%The Electronic Chemicals Division supplies semiconductor
manufacturers in Japan and overseas with more than 20 kinds ofhigh-purity gases, including fluorinated etching gases, ammonia
and chlorine gases, chemicals, and equipment for use in the LCP,
LED, and solar cell manufacturing processes.
The Industrial Gases Division supplies oxygen, nitrogen, andargon separated from air as well as compressed hydrogen,carbonic acid, dry ice, and other industrial gases to wide-ranging
industries. The Division especially contributes to a stable supplyof food and food safety by providing carbonic acid gas, mainly
used for carbonated drinks and dry ice to keep food cool.
The Basic Chemicals Division supplies ammonia, acrylonitrile,
caustic soda, hydrochloric acid, and other industrial chemicals.
The Division also supplies amino acids, as well as elastomer
products, such as chloroprene rubber. ECOANN™ ammonia,

8

SHOWA DENKO K.K.

ANNUAL REPORT 2019

Sales
Operating Income

10.1%

2018

2019

Increase/decrease

Rate ofchange111,912
13,55796,445
4,880-15,467-8,677-13.8%-64.0%The Device Solutions Division provides data-recording media for
hard disk drives and SiC epitaxial wafers for power devices. The
Showa Denko Group is the largest independent HD media
supplier in the world, and the Device Solutions Division conducts
HD media business with production bases in Japan, Taiwan,
Singapore, and Malaysia. This division provides world-class highquality HD media for use in PCs and other consumer electronic
products as well as for use in data centers and other enterprisefields, where demand is expected to grow due to the spread ofcloud computing.
SiC epitaxial wafers are used as materials for next-generation
power semiconductors, which are expected to contribute toenergy conservation. The wafers are being increasingly used inquick chargers for EVs, photovoltaic generation, and servers. We
are expanding our capacity to produce SiC epi-wafers andimproving their quality in order to respond to fast growth of themarket for power control units for EVs.
The Electronics Materials Division supplies compound
semiconductor materials and rare earth magnetic alloys. For
compound semiconductor materials, the Division has a widelineup of high-output LEDs with industrial applications, including
use in displays and sensors.
The Advanced Battery Materials Division is promoting production
and sales of various materials for lithium-ion batteries, including
VGCF™ unique anode and cathode additive which prolongs thelife of batteries, and SPALF™ aluminum laminated film for LIBs
installed in smartphones, tablets, and EVs.

Inorganics
Consolidated Business Results (Millions of yen)

Sales
Operating Income

24.0%

2018

2019

Increase/decrease

Rate ofchange266,149
132,445

230,135
89,256-36,014-43,189-13.5%-32.6%The Carbon Division supplies graphite electrodes for electric
steelmaking furnaces. These electrodes are indispensable for therecycling of iron and steel. Showa Denko’s graphite electrodes
are highly acclaimed by customers around the world. The Division
integrated the graphite electrode business of German company
SGL GE GmbH in 2017 to become the world’s No.1 manufacturer
in this field. The Division will optimize the Showa Denko Group’s
capacity to produce graphite electrodes, invest in production
facilities in order to improve product quality, and realize the effectof business integration as soon as possible. Thus the Division
will improve profitability of this segment. The Division will provide
advanced markets with high-end products.
Capitalizing on long-accumulated high-temperature fusion
technology, high-temperature sintering technology, and thepulverization/classification technology, the Ceramics Division
manufactures and sells polishing materials, abrasives, andrefractories where fused alumina, silicon carbide, and boron
nitride are used. As for ultrafine titanium oxide, used as the mainmaterial to manufacture multilayer ceramic capacitors (MLCCs)
that are mounted on a range of electronic devices, the Division is
expanding sales for use in high-end products.

for use in electrolytic capacitors. These capacitors are widelyused in a range of products, including home electric appliances
and automotive equipment.
The Aluminum Specialty Components Division provides
aluminum materials and processed products. The Division supplies
the following products not only in Japan but also in Europe, theUnited States, and Southeast Asia: aluminum cylinders (corecomponent of laser beam printers), large/complexly shaped
extruded products, continuously cast rods of aluminum alloys(SHOTIC™) made using Showa Denko’s proprietary technologies,
and forged products for automobile parts including compressors
for car air conditioners.
The Division also supplies a range of heat exchangers forhome electric appliances and industrial equipment worldwide
and is developing and manufacturing power semiconductor
cooling devices used in hybrid cars, electric vehicles, and solar
power generation equipment.
The Showa Denko Group became the first company to
manufacture aluminum beverage cans in Japan in 1971. Since
then, the Aluminum Can Division has been supplying high-quality
aluminum cans for beverages through integrated production,
including pressing can bodies and can ends and printing labels.
In 2019, we streamlined our capacity to produce aluminum cansin Japan, where the market for cans has matured. On the other
hand, in July 2020, we will establish the third base in Vietnam toproduce aluminum cans in the suburbs of Ho Chi Minh City, inorder to respond rapid growth of the Vietnamese market. We
will expand our aluminum can business in the ASEAN market by
establishing new business bases.

OthersConsolidated Business Results (Millions of yen)

Sales
Operating Income

13.2%

2018

2019

Increase/decrease

Rate ofchange137,324
1,734

126,163
1,819-11,161
85

-8.1%
4.9%

Included in this section are themes for future businesses as wellas the manufacture and sale of various chemical products, lightmetals, and building and civil engineering materials.

Aluminum
Consolidated Business Results (Millions of yen)

Sales
Operating Income

10.2%

2018

2019

Increase/decrease

Rate ofchange108,254
4,942

97,542
1,746-10,712-3,195-9.9%-64.7%For details of business results, please see the Management’s Discussion and Analysis (p. 19).

The Aluminum Rolled Products Division provides high-purity
aluminum foils, which are carefully purified and manufactured

9Mergers and Acquisitions

On December 18, 2019, the Showa Denko Group announced thedecision to acquire shares in Hitachi Chemical Company, Ltd.
through a tender offer. Here we would like to give outlines of thetwo companies and the purpose of the tender offer.

About Showa Denko
The Showa Denko Group began with believing in the potential of theelectrochemical industry using the rich hydropower resources of Japan.
The Group’s expertise with technologies originated with electrochemistry,then evolved into technologies related to inorganic chemistry, organic
chemistry, and metallic materials. Today, making the most of thesetechnologies, the Group produces a wide range of products, including
materials and parts used in the information communication technology (ICT)industry, the automobile industry, and products necessary for daily life.

About Hitachi Chemical
Hitachi Chemical Company, Ltd., a consolidated listed subsidiary of
Hitachi, Ltd., has a long history and provides leading-edge parts andsystems. These include functional materials, such as electronic materials
and materials for printed wiring boards (PWBs); parts for the mobility
industry; materials for energy storage devices such as batteries; andproducts related to life science. Hitachi Chemical’s basis for growth is theinformation and communication business, mainly providing materials
and parts used by the semiconductor industry, including CMP slurries
and Copper-Clad Laminates, with the leading market share in the world.
At the same time, Hitachi Chemical considers certain products to be themedium- to long-term essential pillars of the company: the mobility
business (centering on plastic backdoor modules and carbon anodematerial for lithium ion batteries) and the life science business, whichhas promising regenerative medicine and diagnostic agents.

The Meaning of the Business Integration

By combining the core technologies of SDK and Hitachi Chemical,
the two companies will together aim to grow in seven business areas
including 5G, semiconductors, and electrification of automobiles.
Showa Denko
Hitachi Chemical

S p re a d

Energy
Sp

rea

do

f 5G

te

mun
l ec om

Hitachi Chemical

Value: “Maximizing customer experience”
Changing our business model to offer
solutions beyond the limits of amanufacturer

As one of the top global manufacturers ofhigh-performance materials it creates
innovative functions by combining material
technologies to deliver solutions that solve
problems faced by customers

Aspiration
Business strategy
Core technologies

High affinity
Strongcomplementary
relation

Koseiha Company
An aggregate of Koseiha Businesses that canmaintain high levels of profitability and stability

Surface and interface precise control
technologies in inorganic materials such asaluminum, ceramics, carbon and innovative
material design capability in a variety ofmaterials ranging from inorganic to organic(resin, etc.) materials≈

Niche and cluster strategy
Niche: high value-added products to aim
for high profitability
Cluster: product and business groups aiming
for the global top position in the market,
which provides total solutions to customers
and the market by grouping each product,business, technology and service

Semiconductor gas LED

Industrial
Equipment

Functional chemicals

Resin materials“Material design technology utilizing
characteristics of raw materials, ability toevaluate functions, ability to design
functions leading to process technology,
including module segmentation“ to linkcustomer needs to solutions

World’s leading solution company boasting an array of global top share businesses

Today, we cannot be very optimistic about the business environment
surrounding Showa Denko because there have been so many changes.

10

SHOWA DENKO K.K.

ANNUAL REPORT 2019

Inorganics

Organics
Petrochemicals

Aluminum cans

Construction/
Infrastructuren t of

ecia

dig i

Electronics
lt y stali

CMP slurry SiC epitaxial wafer for power devices

Graphite electrodes

≈

of sp

Industrial
battery systems Rolled aluminum Electronic parts HD media

Basic chemicals

SDK

Koseiha Business
A business in which we have a global top
market share in the market of appropriate
scale (tens of billions of yen to hundreds ofbillions of yen)i c a t i o n t e c h n o l o g y a n d ad v an c e me

Sh ift from

em

zat

i co

nd

ion

uc t

Transparent conductive materials
Anode and carbon parts

Industrial gas Powder metallurgy Automotive
battery systems
Friction materials
Molding materials
Metal Aluminum specialty components

Ceramics

Materials
Parts
Products
Services
Lifestylegoods to e xperien ces

orSeal/packaging materials

cation ofc t r i fi
Ele automobiles

Significance as strategic partners

Positioning of the New Business Portfolio
Business areas to pursue and notable growth driverss

The Showa Denko Group considers the tender offer for Hitachi Chemical as
the Group’s most important turning point in the more than 100 year history.
Showa Denko and Hitachi Chemical have taken the first step in carving
out a new history together.

For example, there were changes in the structure of our industry, including:revamped value chains caused by the rise of technology-oriented companies
such as GAFA; fiercer competition among global material manufacturers
caused by restructuring and mergers; and changes in societal requirements,
such as the need for reduced GHG (greenhouse gas) emissions.
To keep Showa Denko undefeated as a world-leading functional
chemical manufacturer, we feel it is necessary for us to maintain highfunctionality by combining our wide-ranging materials and technologies
and by offering solutions that exceed the simple supply of materials andcomponents. Therefore, we decided to acquire Hitachi Chemical.
We believe Showa Denko and Hitachi Chemical are companies thatcan play complimentary roles. Showa Denko aims to become “a solutionproviding company surpassing simple manufacturing.” As well, Hitachi
Chemical aims to become “a top global manufacturer of highly functional
materials through the creation of new functions and the provision ofsolutions.” These goals are parallel. Moreover, as strategies to realize eachcompany’s vision, Showa Denko’s Koseiha Business Strategy and Hitachi
Chemical’s Niche and Cluster Strategy have many points of similarity.
Moreover, the advantages of each company are complementary:Showa Denko’s advantage is “technologies to precisely control the surfaces
and interfaces” of inorganics (including aluminum, ceramics and carbon)
and Hitachi Chemical’s advantage is “power to develop functions startingfrom the design of ingredients making the most of the characteristics ofraw materials, going through the evaluation of functions, and ending in
the development of process technologies to apply those materials to theformation of modules.” Therefore, we believe that the integration of our
two companies will give rise to one of the world’s leading solution-providing
companies, having many businesses with top global market shares.

Transportation

Regenerative medicine
Diagnostic drugs

Im

em
prov

QO

L

Integration with Hitachi Chemical

ent

in

Life science& Healthcare

In the medium-term business plan The TOP 2021, we say that, to achieve more
growth, it is important for the Showa Denko Group to focus on seven businessdomains, including electronics and transportation, and five growth drivers,
including the spread of 5G telecommunication technology and advancements
in digitalization. Further, to achieve this growth, it is important for us toexpand our vision to not only cover materials—the essential pillar of eachbusiness domain—but also to cover the fields of parts, products, and services.
Our acquisition of Hitachi Chemical will enable us to grow our lineup oftechnologies and products to now include the many attractive technologies
and products owned by Hitachi Chemical. These technologies andproducts are not only in the field of electronics (including those for 5G,

semiconductors, and electrification of power sources for cars, where Hitachi
Chemical has real strengths and where powerful growth is expected), butalso in the fields of transportation, life science and healthcare. Our value
chain will be extended to cover not only materials but also products,
applications, and services. By combining the core technologies of Showa
Denko and Hitachi Chemical, we will see stronger growth of our businesses.

Steps to Becoming a One-Stop, Advanced Materials Partner
One-stop advanced materials partner
Technology companies will become more directly involved in each level of the value chain in
the future. SDK and Hitachi Chemical will fuse to acquire the ability to propose a consistentand total solution covering from the material level to design and evaluation.

In the future

Previously

HardwareMaterials

Formulation, dispersion,
addition, processing

Design, evaluation,
consulting

Material
supplier

Component/material supplier

Component
supplier

Development ofmaterials
Analysis technology

Structural design
Analysis technology
Molding technology

Module design
Process design
Prototyping/testing

Assemble

ODM
EMS

Application

Service

OEM/Tier1

One-stop, advanced materials partner

GAFA
OEM/Tier1

Strengths of SDK

Strengths of Hitachi Chemical

DigitalMaterial design, material analysis
and adhesion of different materials
for a wide range of materials

Material design leveraging material
properties, functional evaluation,
modulization of components andother process technologies

Next-generation
mobility

5G

In the conventional value chains of industries, information was conveyed
upstream step by step from end-customers. However, today technologyoriented companies, including GAFA, are prevailing. They are strengthening
their direct relationships with materials manufacturers, while skipping theconventional layers of value chains, and reinforcing their involvement not
only in designing but also in the definition of technical requirements andproduction technologies at the level of parts and materials. Relationships
are needed to achieve the optimal requirements for final products. From thispoint of view, materials manufacturers are now required to improve theirbusiness models to reduce bottlenecks in manufacturing leading-edge
materials and key devices from the level of materials, and to ensure thequality and characteristics of materials by responding flexibly to therequirements of end-customers.
As mentioned, Hitachi Chemical’s advantage is the power to developfunctions starting from the design of ingredients, making the most of thecharacteristics of raw materials, going through the evaluation of functions,and ending up with the development of process technologies that apply
those materials to the formation of modules. On the other hand, Showa
Denko’s advantage is that we have technologies to develop wide-ranging
materials, analyze those materials, and bond different materials together.
By combining the advantages of our two companies, we can verticallyintegrate our value chains, starting from the development of materials,
going through to designing product modules, and ending up in theevaluation of those modules. It will be possible for us to propose solutions
rapidly and flexibly in response to end-customers’ high-level and varied
requirements. We are certain that in this way we can establish ourselves asa “one-stop leading-edge materials providing partner” for end-customers.

Cash Creation
Cost synergy

Realignment ofbusiness portfolio

Cost structural reform

Ensure achievement of costsynergy

Accelerate realignment of thebusiness portfolios of the twocompanies

Take action to reform the cost
structure of SDK and Hitachi Chemicalfrom the first year of integration

Due to the need to finance this acquisition, Showa Denko‘s financial
leverage will temporarily become strained. However, we are aiming tohave our D/E ratio around the level of 1.0 in our medium-range plan.
We think it is important for us to speedily create cash flow, and we will
execute three measures. The first measure is to realize a synergistic effectto reduce costs. We expect that integration of the two companies will
enable us to reduce indirect costs and the cost of materials, and we will
aim to have cost reductions of more than 20 billion yen per year within
three years of completing the acquisition. The second measure is to steadily
review and revise our business portfolio. Through discussions in theSteering Committee (detailed below), we will promote the speedy review
and revision of the business portfolio. The third measure is aggressive
promotion of independent actions to improve the profitability of ourbusinesses, in addition to taking steps to realize synergistic effects forcost cutting (mentioned above).
By implementing these measures to stimulate cash flow, we will not only
accelerate improvements to our financial standing, but invest positively
in measures to create growth over the long term.

Financial Figures
These are the major financial figures extracted from Hitachi Chemical’s
financial results for the year ending on March 31, 2019 and the financial
results of Showa Denko for the year ending on December 31, 2019.
Hitachi Chemical’s revenues were 681.0 billion yen and total assets were708.7 billion yen. Showa Denko’s net sales were 906.5 billion yen andtotal assets were 1,076.4 billion yen. The integration of these two companies
will give birth to one of the leading chemical companies in Japan.

Financial data
Hitachi Chemical

Showa Denko

Business year ending on March 2019(consolidated, IFRS)Business year ending on December 2019(consolidated, Japanese GAAP)

Revenues

681.0 bil. yen

Net sales

906.5 bil. yen

Adjusted operating income

48.6 bil. yen

Operating income

120.8 bil. yen

Net income attributable toowners of the parent

28.7 bil. yen

Net income attributable toowners of the parent

73.1 bil. yen

Common stock

15.5 bil. yen

Capital stock140.6 bil. yen

Total equity

429.6 bil. yen

Total shareholder’s equity

519.4 bil. yen

Total assets

708.7 bil. yen

Total assets

1076.4 bil. yen

Number of employees

22,989Number of employees

10,813Operations after Acquisition
We established steering committees— staffed by the managements ofboth companies—to accelerate choosing which businesses will remain
and to concentrate resources on them that recognize nothing is off limits,
as well as to accelerate smooth business integration. To be specific, wehave established two committees. The first committee will make decisions
about managing the business portfolio, investments, budget, and financing.
The second committee will be in charge of monitoring and controlling
progress with the integration of the two companies. Through actions
taken by these two committees, we intend to substantially integrate bothcompanies within a year after the closing, in other words, the completionof Showa Denko’s acquisition of shares in Hitachi Chemical.
The new Showa Denko Group, after integration with Hitachi ChemicalGroup, will change dramatically. The management and entire staff of theGroup will work as one to put into practice all the measures needed forbusiness integration.
We ask for your continued support to the Showa Denko Group.

11

Management Team

as of March 26, 2020

Back row: Masaharu Oshima, Hideo Ichikawa, Hiroshi Sakai, Kiyoshi Nishioka
Front row: Kozo Isshiki, Motohiro Takeuchi, Kohei Morikawa, Hidehito Takahashi, Noriko Morikawa

Directors
KOHEI MORIKAWA Representative Director, President

MASAHARU OSHIMA Outside Director

April 1982
January 2013
January 2016
March 2016
January 2017

April 1974

Joined Nippon Telegraph and Telephone Public Corporation(currently Nippon Telegraph and Telephone Corporation)

November 1995

Professor, Applied Chemistry Department,
Graduate School of Engineering, The University of Tokyo

April 2006
October 2009
April 2013
May 2013
June 2013
April 2014
March 2015
April 2015
July 2016
December 2016

Director, Synchrotron Radiation Research Organization, The University of Tokyo
Chairman, The Japanese Society for Synchrotron Radiation Research
Project Professor, Synchrotron Radiation Research Organization, The University of Tokyo
Chairman, The Surface Science Society of Japan
Emeritus Professor, The University of Tokyo (incumbent)
Project Researcher, Synchrotron Radiation Research Organization, The University of Tokyo
Director of the Company (incumbent)Special Professor, Tokyo City University (incumbent)
Project Researcher, School of Engineering, The University of Tokyo (incumbent)
Project Researcher, Institute for Solid State Physics, The University of Tokyo (incumbent)

Joined the Company
Corporate Officer; General Manager, Electronic Chemicals Division
Managing Corporate Officer; Chief Technology Officer (CTO)
Director; Managing Corporate Officer; Chief Technology Officer (CTO)
President and Chief Executive Officer (CEO) (incumbent)

HIDEHITO TAKAHASHI Representative Director
April 1986
October 2004
October 2008
January 2013
October 2015
January 2016
January 2017
March 2017
July 2017
January 2020

Joined The Mitsubishi Bank, Ltd. (currently MUFG Bank, Ltd.)
Asia Pacific President, GE Sensing & Inspection Technologies, GE Japan Holding Corporation
President & CEO, Silicones Business, Momentive Performance Materials Japan Inc.
President and CEO, GKN Driveline Japan plc
Joined the Company, Senior Corporate Fellow, Assistant to President
Corporate Officer; General Manager, Corporate Strategy Department
Managing Corporate Officer
Director; Managing Corporate Officer
Director; Managing Corporate Officer, General Manager, Carbon Division
Director; Managing Corporate Officer, in charge of Carbon and Ceramics
divisions, Coating materials Department, Yokohama and Shiojiri plants, andCorporate Strategy Department; Chief Strategy Officer (CSO) (incumbent)

MOTOHIRO TAKEUCHI Representative Director
April 1983
January 2015
January 2017
January 2019
March 2019
January 2020

Joined the Company
Corporate Officer; General Manager, Ceramics DivisionCorporate Officer; General Manager, Corporate Strategy Department
Corporate Officer; Chief Financial Officer (CFO)
Director; Corporate Officer; General Manager, Finance & Accounting Department;
Chief Financial Officer (CFO)
Director; Managing Corporate Officer, in charge of Finance & Accounting andInformation Systems departments; Chief Financial Officer (CFO) (incumbent)

HIDEO ICHIKAWA Chairman of the Board
April 1975
January 2006
March 2008
September 2008
January 2010
January 2011
January 2017

Joined the Company
Corporate Officer; General Manager, Corporate Strategy OfficeDirector; Corporate Officer; General Manager, Corporate Strategy OfficeDirector; Corporate Officer; Executive Officer, HD Sector
Director; Managing Corporate Officer; Executive Officer, HD Sector
President and Chief Executive Officer (CEO)Chairman of the Board (incumbent)

HIROSHI SAKAI
April 1986
January 2015
January 2019
January 2020
March 2020

12

Joined the Company
Senior Corporate Fellow; General Manager, Technology Development Control
Department, HD DivisionCorporate Fellow; General Manager, Technology Development Control
Department, Device Solutions DivisionCorporate Officer; Chief Technology Officer (CTO)
Director; Corporate Officer, in charge of Advanced Battery Materials Division, Institute forIntegrated Product Development, Advanced Technology Laboratory, Corporate R&D, andIntellectual Property departments; Chief Technology Officer (CTO) (incumbent)

SHOWA DENKO K.K.

ANNUAL REPORT 2019

KIYOSHI NISHIOKA Outside Director
April 1977

Joined Nippon Steel Corporation

June 2005

Director; General Manager, Technology Development Planning Department,
Technology Development Headquarters, Nippon Steel Corporation

June 2009

Counselor, Nippon Steel Corporation

November 2012

Special Professor, Research Center for Advanced Science and Technology,
The University of Tokyo

April 2017

Adviser, Research Center for Advanced Science and Technology,
The University of Tokyo (incumbent)
Visiting Professor, Ehime University (incumbent)
Director of the Company (incumbent)
Director, VCRI Co., Ltd. (incumbent)

April 2017
March 2018
July 2019

KOZO ISSHIKI Outside Director
July 1969
June 2001
May 2005
June 2015
March 2019

Joined Japan Development Bank (currently Development Bank of Japan Inc.)
Executive Director, Development Bank of Japan Inc.
Chairman of the Board, Technology Alliance Investment, Ltd.
Director, Medical System Network Co., Ltd. (Outside Director) (incumbent)
Director of the Company (incumbent)

NORIKO MORIKAWA Outside Director
April 1981
August 1988
September 1991
March 1995

Joined CHORI CO., LTD.
Joined Daiwa Securities America Inc.
Joined Arthur Andersen
Joined Motorola Inc.

March 2005

Director, in charge of accounting and finance; General Manager, Accounting and
Finance Headquarters in Japan, Motorola Inc.

June 2009
August 2010
June 2018
March 2020

Joined Bosch Corporation
Director; Vice President, in charge of Administrative Headquarters, Bosch Corporation
Outside Director, CHORI CO., LTD. (incumbent)
Director of the Company (incumbent)Audit & Supervisory Board Members
TOSHIHARU KATO

KIYOMI SAITO Outside Member

April 1981
January 2016

Joined Showa Aluminum Corporation (currently Showa Denko K.K.)
Corporate Officer; General Manager, Finance & Accounting Department

January 2017

Corporate Officer; General Manager, Finance & Accounting Department;
Chief Financial Officer (CFO)

March 2017

Director; Corporate Officer, General Manager,
Finance & Accounting Department; Chief Financial Officer (CFO)

January 2018

Director; Corporate Officer, in charge of Finance & Accounting and Information
Systems departments; Chief Financial Officer (CFO)

January 2019
March 2019

Director, Assistant to President
Audit & Supervisory Board Member (incumbent)

April 1973
September 1975
August 1984
January 1990
April 2000
April 2011
March 2012
June 2015

Joined Nikkei Inc.
Joined Sony Corporation
Joined Morgan Stanley Investment Bank
Executive Director, Morgan Stanley Investment Bank
Director; President, JBond Co., Ltd. (currently JBond Totan Securities Co., Ltd.) (incumbent)
Director; President, The Totan Information Technology Co., Ltd.
Audit & Supervisory Board Member of the Company (incumbent)
Outside Director, Kajima Corporation (incumbent)

MASAKO YAJIMA Outside Member

JUN TANAKA

April 1994

Registered at Dai-Ichi Tokyo Bar Association Joined
Nishimura Law Office (currently Nishimura & Asahi)

April 1982
January 2013
January 2017
March 2017
January 2019

March 2001
April 2004
January 2006
April 2007
March 2020

Registered as a lawyer in the State of New York
Assistant Professor, Law School, Keio University
Partner, Nishimura & Tokiwa (currently Nishimura & Asahi) (incumbent)
Professor, Law School, Keio University (incumbent)
Audit & Supervisory Board Member of the Company (incumbent)

January 2020
March 2020

Joined the Company
Corporate Officer; General Manager, Advanced Battery Materials Department
Managing Corporate Officer; Chief Technology Officer (CTO)
Director; Managing Corporate Officer: Chief Technology Officer (CTO)
Director; Managing Corporate Officer, in charge of Advanced Battery Materials
Division, Institute for Integrated Product Development,
Advanced Technology Laboratory, Corporate R&D and Intellectual Property
departments; Chief Technology Officer (CTO) (incumbent)
Director, Assistant to President
Audit & Supervisory Board Member (incumbent)

SETSU ONISHI Outside Member
April 1978

Joined The Industrial Bank of Japan, Ltd. (currently Mizuho Bank, Ltd.)

April 2005

Corporate Officer; General Manager, 14th Marketing Department,
Mizuho Corporate Bank, Ltd. (currently Mizuho Bank, Ltd.)

April 2007

Managing Corporate Officer, in charge of Global Syndication Unit and Global
Products Unit

April 2010

Vice President; Corporate Officer; General Manager, Internal Audit Division,
Mizuho Financial Group, Ltd.

June 2010

Director; Vice President; Corporate Officer; General Manager,
Internal Audit Division, Mizuho Financial Group, Ltd.

April 2011
June 2011
April 2013
June 2016
April 2017
June 2017
March 2018

Director; Mizuho Financial Group, Ltd.
Director; Vice President, IBJ Leasing Company, Limited
Director; President, IBJ Leasing Company, Limited
Councilor, Mizuho Financial Group, Ltd.
Senior Counselor, Nippon Commercial Development Co., Ltd. (incumbent)
Director, NS United Kaiun Kaisha, Ltd. (incumbent)
Audit & Supervisory Board Member of the Company (incumbent)

Masako Yajima, Kiyomi Saito, Toshiharu Kato, Jun Tanaka, Setsu Onishi

Corporate Officers
Chief Executive Officer

Corporate Officers

KOHEI MORIKAWA

KEIICHI KAMIGUCHIHIROTSUGU FUKUDA

Senior Managing Corporate Officer

Chief Risk Management Officer (CRO); Officer in charge ofInternal Audit, Legal, CSR & General Affairs, Human Resources,and Purchasing & SCM departments

General Manager, Petrochemicals Division; Officer in charge ofOita Complex

JIRO ISHIKAWA
General Manager, Device Solutions Division; Officer in charge ofElectronics Materials Division and Chichibu Plant

YOUICHI TAKEUCHI
Plant Manager, Kawasaki Plant

EISHI WAKUTSU
General Manager, Corporate Strategy Department

KENJIRO YAMAMASUManaging Corporate Officers

TAICHI NAGAIHIDEHITO TAKAHASHI

Oita Complex Representative

General Manager, Electronic Chemicals Division; Officer incharge of Tokuyama Plant

KOICHI NISHIMURAHIROSHI SAKAI

Assistant to President for promotion of chemicals safety andenvironmental protection; Officer in charge of Industrial Gases,
Basic Chemicals, Electronic Chemicals, and Functional
Chemicals divisions, and Kawasaki, Higashinagahara, Isesaki,
and Tatsuno plants

Chief Technical Officer (CTO); Officer in charge of Advanced
Battery Materials Division, Institute for Integrated ProductDevelopment, Advanced Technology Laboratory, andCorporate R&D and Intellectual Property departments

Chief Strategy Officer (CSO); Officer in charge of Carbon andCeramics divisions, Coating materials Department, Yokohama
and Shiojiri plants, and Corporate Strategy Department

MOTOHIRO TAKEUCHI
Chief Financial Officer (CFO); Officer in charge of Finance &Accounting and Information Systems departments

MASUNORI KAIHOKAZUO HIRAKURA
General Manager, Industrial Gases Division

Officer in charge of Production Technology, Energy & Electricity,
SPS Innovation, and Responsible Care departments

HIROYUKI EDAAKIHIRO JIMBO
General Manager, Basic Chemicals Division

Officer in charge of Aluminum Rolled Products,
Aluminum Specialty Components, and Aluminum Can divisions
and Oyama and Kitakata plants

TESTUO WADA

MAKOTO TAKEDA

General Manager, Institute for Integrated Product Development

General Manager, Carbon Division

13

Corporate Governance
Message from Hideo Ichikawa,
Chairman of the Board
The Showa Denko Group views the further strengthening of corporate
governance as a top management priority. In December 2015, the Company
established Corporate Governance Basic Policies, aiming to promote
constructive dialogues with stakeholders, in this way increasing corporate
value and shareholders’ common interests. Guided by the Basic Principles,
we updated our Corporate Governance Report, and we are now promoting
constructive dialogues with shareholders.
In 2019, as in the previous year, we maintained a system where outside
directors accounted for three out of the nine members of the Board of
Directors. For the Audit & Supervisory Board, three out of the five members
were outside members. Those outside board members were experts fromthe financial and manufacturing industries, academia, and the legal
profession. They gave us valuable advice and comments from diverse
perspectives. Both boards had very high attendance rates.
In December 2019, the Company announced that it would start a tender
offer for shares of Hitachi Chemical Company, which would be the largestever M&A for the Company. As the chairman of the board, I would like to give
appropriate guidance to the Company, aiming for the new Showa Denko
Group to have a promising future after integration of the two companies.
In 2020, as a new measure to strengthen corporate governance within
the Company, we increased the number of outside directors from three tofour, while maintaining the total number of directors at nine. On the other
hand, in March 2020, I relinquished my appointment as Representative
Director and decided to concentrate my attention on my work as the
Chairman of the Board. I would like to stimulate discussions at the Board of
Directors’ meetings and take the leadership to have lively debates at our
meetings on the medium- to long-term course of the management of theCompany. At the Board of Directors’ meeting, we will also discuss importantmanagement policies of the Showa Denko Group, including ourmanagement philosophy, the new business strategy to be pursued after
acquiring shares in Hitachi Chemical, how the new business portfolio should
be structured, as well as policies on capital investment, reform of ourbusiness organization, and shareholder return.
Today, global demand is increasing for companies to contribute tosociety in line with the concepts of CSR and ESG. For SDGs (Sustainable
Development Goals), advocated by the United Nations as targets to beachieved by 2030, the whole Showa Denko Group will work on achieving
SDGs based on our Code of Conduct, which includes our pledge to“maintain and improve the global environment.” The Group will positively
develop, produce, and sell products as well as services that contribute to
the achievement of SDGs, inthis way enhancing our value
as a “company contributing to
the sound growth of society.”
We look forward to thecontinued support ofinvestors and shareholders.

Chairman of the Board

SHOWA DENKO K.K.

We will promote corporate governance to ensure the soundness,
effectiveness, and transparency of management, and to continue enhancing
our corporate value, thereby contributing to the sound growth of society
and earning its full trust and confidence. To that end, it is essential for us
to strengthen relations with our stakeholders, including shareholders,customers, suppliers, community residents, and employees. Based on
the above, we have clarified our mission in the form of the Group’s vision,
as stated below, and we are working hard to realize this vision.

VISIONWe at the Showa Denko Group will provide products and services
that are useful and safe and exceed our customers’ expectations,
thereby enhancing the value of the Group, giving satisfaction to
our shareholders, and contributing to the sound growth ofinternational society as a responsible corporate citizen.

*‌‌Please visit our website (URL: https://www.sdk.co.jp/english/about/governance.html) for
our Corporate Governance Basic Policies.

2. ‌Supervisory and Decision-Making Functions
We have adopted the Audit & Supervisory Board system to enhance thefairness and transparency of management, ensuring efficient managementof the Company. To clearly separate management supervision frombusiness execution, we have introduced a corporate officer system. The
top management team, consisting of the President and corporate officers
in charge of their respective operations, is working to increase the speed ofdecision-making and to vitalize operations. At the same time, the Company
has substantially reduced the number of directors.
In addition, we have strengthened supervisory functions by appointing
outside directors. To strengthen the independence and objectivity of
the Board of Directors, and accountability of the Board of Directors, theCompany has established the Nomination Advisory Committee and theRemuneration Advisory Committee as advisory bodies to the Board of
Directors. The majority of each committee consists of independent
outside directors and outside members of the Audit & Supervisory Board.
At board meetings held once or twice a month, the Board of Directors
decides on the Company’s basic policy and decides, after full deliberation,
on matters provided for in the Companies Act and the Company’s Articles ofIncorporation as well as important matters for the execution of the Company’s
operations, ensuring a speedy and vigorous decision-making process.
We appoint directors from the viewpoint of strengthening corporate
governance, aiming to strengthen the Board of Directors’ supervisory
functions and to ensure the propriety of the decision-making process.
We make sure that corporate officers whose duties are primarily businessexecution will not concurrently serve as directors, in principle. Furthermore,
we have abolished the positions of managing directors and senior managing
directors to put all directors (except for the Chairman, and the President) on
an equal footing, while strengthening the supervision by Audit & Supervisory
Board members (including outside members) and mutual supervision among
directors. The term of office of directors has been shortened to one year toensure a quick response to changes in the business environment and to clarify
the management responsibility of directors. At the Company’s ordinary
general meeting of shareholders held on March 26, 2020, nine directors,
including four outside directors were appointed. One of outside directors
is a female director.

3. Business Execution

Hideo Ichikawa

14

1. ‌Basic Concept of Corporate Governance

The Management Committee, which meets once a week in principle andis chaired by the President, deliberates and decides on matters to be

ANNUAL REPORT 2019referred to the Board of Directors’ meetings and important matters forthe overall management of the Company. The decisions are made after
deliberations on two occasions. For investment plans, their risks are
examined by task teams before referral to the Management Committee,
and their progress is monitored after authorization.
The Company’s medium-term business plans are decided not only by
the Management Committee but also by the participation of all corporate
officers. The Company considers that responsible execution forms the basisof corporate activities. The Company evaluates the performances of businesssegments to ensure the effective implementation of the performance-based
evaluation system. The Company has Security Export Control and Safety
Measures committees under the direct supervision of the President. The
Company also has Sustainability, Responsible Care, and IR promotion
councils under the Management Committee chaired by the President.
These committees and councils investigate, study, and deliberate on specificmatters important for the execution of business.

Remuneration, etc., for Board Members
Remuneration,
etc.
(Millions of yen)

Directors

Total Amount by Type of Remuneration, etc.
(Millions of yen)
Short-term
Stock
PerformanceCompensation
linkedCompensation

Basic
Compensation

Number ofapplicable
persons

402

261

121

20

11

Outside members
included in above

39

39

—

—

4

Audit & supervisory
Board Members

93

93

—

—

6

Outside members
included in above

33

33

—

—

3

20 Million yen is filed as Stock Compensation for Directors, not including outside Directors,
based on the performance-linked stock compensation plan resolved at the 107th ordinary
general meeting of shareholders held on March 30, 2016.

Remuneration for Auditing Corporation

4. Audit & Supervisory Functions
The Company’s Audit & Supervisory Board has five members, including
three outside members. The members attend the Board of Directors’
meetings and other important internal meetings, offering opinions asnecessary. They audit and supervise the execution of operations throughfield investigations, by hearing sessions, and by reading important
documents, making proposals and providing advice and recommendations
to ensure the sound management of the Company. They are working
to strengthen the consolidated audit & supervisory board system incooperation with auditors of major associated companies.
The Internal Audit Department reports directly to the President andinvestigates the overall execution of business, checking for accuracy,
propriety, and efficiency. It also investigates management policies aswell as business plans and their execution, checking for consistency andsoundness. The results of internal auditing are reported to the membersof the Audit & Supervisory Board to ensure consistency with their audits.
For matters relating to the environment and safety, the divisions incharge conduct Responsible Care audits. KPMG AZSA LLC audits theCompany based on an auditing contract and an annual plan agreed uponwith the Audit & Supervisory Board, and provides the board with audit
results. The auditing corporation and the Audit & Supervisory Board exchange
information and views from time to time to strengthen cooperation.

Paid amount

Name of accounting auditor: KPMG AZSA LLC
Remuneration for issuing an auditing certification basedon the auditing contract¥183 million

7. ‌Personal/Financial Relations and Interests among
the Company and Outside Board Members
The Company has four outside members in the Board of Directors andthree outside members in the Audit & Supervisory Board. None of themhas special interests in the Company. An outline of the Company’s
corporate governance system is shown below.

Shareholders’ Meeting
Auditing

Decision-Making
and Supervision

Board ofDirectors

Job
AuditsNomination
Advisory
Committee

Advisory/
ReportAudit &
Supervisory
Board
Audit &
Supervisory
Board
Members

Remuneration
Advisory
Committee

Accounting
AuditorAccounting Audits

5. Sustainability Promotion Council
The Sustainability Promotion Council examines the Showa Denko Group’s
important CSR issues in general, with a focus on compliance and risk
management. Specifically for compliance, the Council reviews mediumto long-term action plans and significant issues, then formulates measures
based on the action plans and evaluates the status of their implementation.
In addition, the Council regularly aggregates and evaluates risks, formulates
plans to mitigate critical risks that could affect the Group, and confirms
how risk mitigation procedures are being implemented.
For the details of our policies on compliance and risk management, please
visit our website: https://www.sdk.co.jp/english/csr/risk_compliance.html

Execution of Duties
Top Management
President
Corporate Officers in Charge

Links

Internal Audit Department

Management Committee
Sustainability Promotion Council
Responsible Care Promotion Council
IR Promotion Council
R&D Committee

Internal
AuditsSecurity Export Control Committee

6. O‌ ther Items
Remuneration, etc., to the members of the Board of Directors and the
Audit & Supervisory Board as well as the auditing corporation (for the period
from January 1 through December 31, 2019) is as follows:

Safety Measures Committee
Business Divisions
Staff Sections

15

Research and Development
In the course of promoting The TOP 2021, the medium-termbusiness plan, the Showa Denko Group aims to become aworld-leading manufacturer of functional chemicals. Based on the
key concepts of deepening, fusion, and introduction, the R&D
strategy focuses on creating “pipelines” for products that willcontribute to the next generation, while continuing to strengthen
existing operations with the aim of creating Koseiha businesses.
Our intent is to maximize customer experience (CX) by providing
our customers with first-class engineering, products, and services.
To strengthen the creation of these “pipelines,” we will
fundamentally reinforce our marketing programs to achieve afirmer grasp on market and technology trends when identifying
targets for R&D, and to invest our R&D resources intensively in 10
technical fields, including those that are multi-material or that
promote adhesion between different materials and for processes
to produce next-generation semiconductors. These 10 targets
correspond to our seven business domains: Transportation,
Energy, Lifestyle, Electronics, Construction/Infrastructure,
Industrial Equipment, and Life Science & Healthcare.
The Advanced Technology Lab, established in 2019, is
exploring and drafting proposals for next-generation research
themes, based on unrestricted thinking and perspectives that are
not constrained by the trends and “tides” of the industries servedby the Group and current business fields.
Our initiatives to strengthen existing operations—with the aimof creating Koseiha businesses—will be centered on the Institutefor Integrated Product Development, which was reorganized in
2019. At the same time, measures to “deepen” and “fuse” a varietyof human resources and technologies are being further

accelerated and expanded, then rolled out to the Company as awhole. In addition, computational science, analytical technology,
and evaluation technology will be positioned as basic research
themes that facilitate the fusion of the various technologies of theGroup, and these technologies will be further strengthened going
forward. Moreover, we will actively introduce any necessary
technologies from outside entities, through M&As and byadopting approaches such as open innovation.
As a base for embodying the concepts of The TOP 2021, we willbuild the new Stage for Fusion complex, providing a global center
for accelerating deepening, fusion, and introduction, both insideand outside the Company. The Stage for Fusion is scheduled to
begin operating in 2022 next to the Yokohama Plant.
Through R&D, the Group will create products and services thattouch the hearts of customers, and that offer solutions that makesociety better.

Priority Domains

R&D: 10 Notable Technical Fields

7 Business Domains

5 Growth Drivers

Transportation

Weight reduction ofcars and application ofcomposite materials

EnergyLifestyle

Digitalization

Electronics
Construction / Infrastructure

16

Surrounding fields (inter-business cooperation)
New fields

Next-generation electricity storage devices
xEV
Multi-material / Adhesion between different materials
Heat management
Process to produce next-generation semiconductors
Next-generation wide-bandgap semiconductors

Spread of specialty
semiconductors

Energy conservation / Renewable energy
Sensors / IoT / 5G

Industrial Equipment

Improvement in QOL

Smart testing/diagnostic techniques

Life Science & Healthcare

Shift from goods toexperiences / XaaS

Maintenance of infrastructure

SHOWA DENKO K.K.

ANNUAL REPORT 2019

R&D Topics
1

Established technology for directly bonding
aluminum alloys and polycarbonate resin

The Group has developed an innovative technology to directly join/bondaluminum alloys and polycarbonate resin (a general-purpose amorphousengineering plastic), without using an adhesive. Most current methods
for joining or bonding aluminum alloys and polycarbonate resin use
fasteners (bolts and screws) or adhesives. In recent years, much attention
has been focused on new technologies that directly join/bond resinmaterials to metallic materials at the time of injection molding. These newtechnologies are expected to bring advantages, such as the simplificationof processes, increased productivity, and enabling processing into complex
shapes. In many cases, however, these joints depend on the power of
mechanical bonding, such as the anchor effect resulting from applicationsof resin onto a roughened metal surface. For this reason, it had, up to now,
been believed that joining/bonding metallic materials to polycarbonate
resin and other amorphous engineering plastics was impractical using
conventional methods.
The Group has leveraged our expertise in aluminum alloys and polymer
chemistry—accumulated over many years—to directly join/bondaluminum alloys to polycarbonate resin, after the aluminum alloys haveundergone both a special surface treatment and the application of aprimer. The innovative joining/bonding technology that SDK has
developed consists not only of the anchor effect but also of a chemicalbond. Our experiments show that this technology can be used underordinary polycarbonate molding conditions to provide bonding strength
in excess of 25 MPa (megapascals), more than enough for practical use.
Neither special conditions nor additional equipment are required toachieve a strong bond.
Chemical bonding power

Resin
PrimerMechanical bonding power +Intermolecular force + Chemical bonding power2

Aluminum

Developed repair materials for concrete
structures that can be used in cold regions

The Group has developed the SHO-REPAIR TM CR-1000 series and the
RIPOXY TM CR-1500 series of repair materials for repairing various types ofconcrete infrastructure in low-temperature conditions, such as cold regions.
The infrastructure built up during Japan’s “high-speed growth” eracontinues to deteriorate, resulting in the increasing need for rebuilding
or repair. Because rebuilding is expensive, demand for repair is strong.

However, there is a problem: existing materials require heaters to curethem after they have been applied to repair concrete structures in
low-temperature environments. This makes it impractical to do repair
work during the winter months in cold regions. Both of our newly
developed repair materials can be used in subzero temperatures without
heat curing after application, and they harden to a level suitable fornormal use within 24 hours—less than one-third the time required forexisting products. Because of these advantages, the new materials are
expected to be used on construction during the winter in cold regions,
to reduce costs by shortening construction time, and to improve
convenience (faster turnaround at construction sites).

3

Built an AI-based patent interpretation
support system

In conjunction with IBM Japan, the Showa Denko Group has built a patentinterpretation support system for effectively and efficiently screening
patent information. Group-wide operation of this system began in July
2019. Using this system is intended to lead to a significant reduction in
the time taken by engineers to read and understand patents.
This patent interpretation support system uses cognitive technology
from IBM’s Watson Explorer, enabling the comprehensive and crosssectional collection of information, which is then subjected to sophisticatedclassification and analysis. By providing text analysis and search, as well
as functionality for building associations between documents, and concept
extraction specialized for patent use, this tool supports more efficientreading of patent information. Moreover, because this system is able tobuild associations between documents that has been optimized for thecharacteristics of chemical patents —the technology domain of theGroup— it provides an interface specialized for improving the readabilityof these types of patents.
This system gives structure to claims information in long and difficult
patent documents with complex dependencies, and enables thisinformation to be visually displayed, allowing engineers to understandthe content of patents more efficiently. In trials conducted within thecompany in 2019, the time taken to read and understand a single patent
was reduced by approximately 45% compared with not using this system.
To maximize the utility of intellectual property (IP) as a source of corporate
competitiveness, not only should rights be asserted over intellectual
property, but it is also important that an accurate understanding ofintellectual property is maintained at each stage, from searching forthemes to commercialization. Introducing this system throughout theGroup will not only open the way to more efficient research and reduce
the risk of infringing on the rights of other companies, but it will also
promote a more strategic approach to intellectual property activities,
allowing us to strengthen corporate competitiveness.

R&D Expenditures(Millions of yen)

Petrochemicals

ChemicalsElectronics

Inorganics

Aluminum

Others

Total

1,314

3,063

6,334

597

1,971

7,326

20,60517

Corporate Social Responsibility
Showa Denko Group’s CSR Policy (May 2019)
We at the Showa Denko Group will aim to make ourselves a social
contribution company that satisfies all stakeholders by contributing
to solving issues concerning SDGs through its business activities, andensuring all employees’ conduct conforming to “Our Code of Conduct.”

Main Theme
Creation of economic and social value through deepening of risk
management on the basis of safety and compliance, and throughcreation of business opportunities on the basis of CSR communication
Contribution to creation ofsociety where affluenceand sustainability areharmonized througheffective use of technologies,
products and services

Tackling environmental
issues in order to realize
sustainable society and asa mission of manufacturer

Development of humanresources that contributeto sustainable growth ofinternational society andthe Showa Denko Group

Revision of the CSR Policy
The Showa Denko Group has been working to contribute to the creationof a society where wealth and sustainability are in harmony based on our
long-standing belief that CSR is a fundamental to Group management.
In line with this recognition, we deliver products and services that meetthe needs of society. In May 2019, we revised the Showa Denko Group’s
CSR Policy to show to our stakeholders our long-term approach to contributeto the creation of a sustainable society and the priority issues we need toaddress in order to achieve this. In the new CSR Policy, we clearly state that
we will contribute to the achievement of the Sustainable Development
Goals (SDGs) through our business operations. We will sincerely face theissues that need to be overcome to ensure a sustainable future and proactively
work to meet challenges by capitalizing on the Group’s strengths.

Safety and Compliance – the Cornerstone ofBusiness Activities
The Showa Denko Group regards safety and compliance as thefoundation for our business activities and believes that these elements
are indispensable to ensure that the Group can make a meaningful
contribution to society, based on our CSR Policy.
Active Safety activities*, that we launched in 2007, have alreadytaken root in the Group. We will further enhance the activities to prevent
occupational accidents, equipment-related incidents and environmental
problems. Also, to ensure compliance and sincerely develop businessactivities, we will further enhance our awareness-raising and educational
activities regarding corporate ethics and update related in-house rules.
*‌Active Safety activities: The Showa Denko Group’s unique program for analyzing past accidents
and problems, and taking measures to prevent their reoccurrence.

CSR Promotion Framework
CSR activity-related policies, targets, and plans are deliberated on by theManagement Committee comprising the president, corporate officers
and Audit & Supervisory Board members. Such matters are then finalized
by the Board of Directors, which also supervises risk management andcompliance issues, the progress of contribution to the SDGs and measuresfor environmental problems, including climate change.
The Sustainability Promotion Council, the Responsible Care Promotion
Council and the IR Promotion Council make plans and proposals about
individual issues related to CSR. Priority issues are reflected in the CSR
plan and discussed by the Management Committee. The results are thenreported to the Board of Directors for their supervision.
Moreover, our divisions and plants make efforts regarding Responsible
Care, risk management, human rights, corporate ethics and complianceactivities with support from Responsible Care, CSR and General Affairs,

18

SHOWA DENKO K.K.

ANNUAL REPORT 2019

Human Resources and other departments. We conduct cross-functional(CF) activities concerning contribution to the SDGs, disclosure of climatechange related information in response to the activities of the TCFD andother issues to be tackled across the organization,.

Promoting Dialogue with Stakeholders
The Showa Denko Group conducts CSR activities to continue to be asustainable company and make contribution to the sustainability of theinternational community. Specifically, we work on what needs to bedone now from medium- to long-term viewpoints and share information
about the activities both inside and outside the company. It is essential
to foster dialogues with stakeholders to appropriately identify social
needs and ensure that we do not take a dogmatic approach in our
thinking. We will continue to give importance to communicating withstakeholders and increase opportunities to open dialogues with them.
We will proactively conduct CSR activities, receiving input for
improvements from stakeholders, thus boosting our corporate value.

CSR Topics
Endorsement of TCFD
Showa Denko has announced theendorsement of the Task Force on Climate-related Financial Disclosures(TCFD) established by the Financial Stability Board (FSB), and will takepart in the TCFD Consortium, which was established at the initial
meeting held on May 27, 2019. Going forward, we will actively disclosethe effects of climate change on our business based on, therecommendation of the TCFD.

Set 2030 GHG Reduction Target Conforming to
Global Standard
Showa Denko has set a medium-term target figure to reduce emissionsof greenhouse gases (GHGs) by 2030. In addition, recognizing theimportance of information disclosure to the global community, SDK
announced the Group’s GHG emissions in conformity with GHG
Protocol, the global standard, starting from FY2018 (April 2018 March 2019).
Under the business philosophy that “we will satisfy all stakeholders,”
the Showa Denko Group has been working on various social issues,
including environmental problems caused by our business activities.
The Group has set a goal of an 11% reduction in GHG emissions fromdomestic bases for FY2030 compared with FY2013. In FY2018, theShowa Denko Group began disclosing total GHG emissions from basesin Japan and abroad as well as direct GHG emissions from the Group’s
own facilities (Scope 1), indirect GHG emissions from purchased or acquired
electricity, steam and heat (Scope 2), and indirect GHG emissions fromthe company’s value chain (Scope 3), in accordance with GHG Protocol.
The data were released in our integrated report SHOWA DENKO REPORT,
on our website and through other media.
Moreover, the Group will introduce an Internal Carbon Pricing
mechanism and incorporate the reduction of GHG emissions into thedecision-making process for investment in order to promote measures
to mitigate global warming as a part of business strategy.
The Showa Denko Group will continue introducing environmentallyfriendly production equipment and technologies, promoting environmental
protection measures, and providing products that support a recyclingoriented society, thereby contributing to the creation of a society where
wealth and sustainability are in harmony.

Please visit the following pages on our website for more information
CSR
Integrated reports

https://www.sdk.co.jp/english/csr.html
https://www.sdk.co.jp/english/csr/report/csr_report.html

Management’s Discussion and Analysis
Results of Operations

Electronics Segment

The Group recorded consolidated net sales of ¥906,454 million(US$8,274 million) in 2019, down 8.6% from the previous year. Sales in
the Chemicals segment increased slightly. However, sales in the otherfive segments decreased. Sales in the Inorganics segment fell due to adecrease in the sales volume of graphite electrodes resulting fromreduced output. Sales in the Petrochemicals segment declined due tolower market prices for petrochemical products.
The cost of sales went down ¥33,846 million, or 4.8%, to ¥671,157
million (US$6,126 million), reflecting the decrease in net sales.
Selling, general and administrative expenses rose ¥7,369 million, or6.4%, to ¥114,499 million (US$1,045 million), due partly to the cost of
M&A of Industrielack (ILAG) Group.
R&D expenditures increased ¥2,115 million, or 10.3%, to ¥22,720
million (US$207 million).
Operating income of the Group in 2019 decreased by 32.9%, to¥120,798 million. Operating income in the Others segment increased.
However, operating income in the other five segments decreased. In the
Inorganics segment, operating income decreased due to a decrease inproduction volumes of graphite electrodes. In the Electronics segment,
operating income decreased due to a decline in shipment volumes of
HD media for use in PCs.

In the Electronics segment, sales decreased 13.8%, to ¥96,445 million(US$880 million). Sales of HD media fell, due partly to the bearish
shipment volumes of media for PCs. In addition, in the first half of 2019,
shipment volumes of HD media for data centers declined due to a global
slowdown in investment in information technology (IT). Sales of rareearth magnetic alloys decreased due to structural reforms. Sales ofcompound semiconductors decreased due to lower shipment volumes.
Sales of lithium-ion battery (LIB) materials decreased due to a lower
shipment volumes, partly from a stagnant EV market in China. For SiC
epitaxial wafers, sales declined due mainly to a falloff in exports, despite
higher sales volumes of products for use in electric railcars. Operating
income for this segment decreased 64.0%, to ¥4,880 million (US$45 million).
The SiC epitaxial wafer business was transferred from the Others
segment to the Electronics segment at the beginning of 2019. Figures of2018 are based on this new segmentation.

Inorganics Segment
In the Inorganics segment, sales decreased 13.5%, to ¥230,135 million(US$2,101 million). Sales of graphite electrodes fell due to a reduction in
the Company’s production and lower sales volumes of graphite
electrodes starting from the middle of 2019. We are responding to theweakening supply-demand situation for graphite electrodes (mainly in
the European market) that are the result of a slowdown in steel
production and the partial clearance of our customers’ graphite
electrode inventory. Sales of ceramics decreased due to a fall in
shipment volumes of fine ceramics for electronics resulting fromadjusted production in the electronic parts/materials industry, in
addition to lower shipment volumes for general-purpose alumina andabrasives. This segment recorded operating income of ¥89,256 million(US$815 million), down 32.6% from the previous year.

Information by Business Segment
Petrochemicals Segment

In the Petrochemicals segment, net sales fell 6.8%, to ¥250,678 million(US$2,288 million). In our olefin business, sales volumes of ethylene andpropylene increased from the previous year because once-in-four-year
maintenance (resulting in the large-scale shutdown of ethylene
production) did not take place, as it did in the first half of 2018. However,sales of olefin products fell due to lower market prices of petrochemical
products in Asia, a result of easing supply-demand conditions. Sales oforganic chemicals decreased due partly to a decline in market prices forvinyl acetate and ethyl acetate. Operating income for this segment
decreased 15.4%, to ¥17,201 million (US$157 million).

Aluminum Segment
In the Aluminum segment, sales fell 9.9%, to ¥97,542 million (US$890
million). Sales of rolled products decreased due to lower shipment
volumes of high-purity aluminum foil for capacitors, the result of
adjusting production in customer industries, including industrial
equipment and automotive parts. Sales of aluminum specialty
components decreased due mainly to a decline in shipment volumes ofthese components for use in automotive parts. Sales of aluminum cansremained at the same level as the previous year. Operating income forthis segment decreased 64.7%, to ¥1,746 million (US$16 million).

Chemicals Segment
In the Chemicals segment, sales increased 0.6%, to ¥157,480 million(US$1,437 million). For basic chemicals, sales decreased slightly.
Production of liquefied ammonia and chloroprene rubber maintained
the same level as the previous year. However, sales of acrylonitrile
slowed due to a fall in the market price. Shipment volumes and sales ofelectronic chemicals decreased due to adjustments in production in thesemiconductor and display industries. Sales of industrial gases andfunctional chemicals were at the same levels as the previous year. In
addition, the nonstick chemical coating companies that we haveacquired in recent years were consolidated by us. As a result, sales in theChemicals segment rose. However, operating income for this segment
decreased 21.5%, to ¥13,656 million (US$125 million).

Others Segment
In the Others segment, sales decreased 8.1%, to ¥126,163 million(US$1,152 million). Shoko Co., Ltd.’s sales decreased due to fallingmarkets for two divisions: Plastics and Metal Ceramics. However,operating income for this segment increased 4.9%, to ¥1,819 million(US$17 million).

Net Sales by Segment

Operating Income by Segment(Billions of yen)
1,000(Billions of yen)
200

750

150

500

100

250

50

0

0

-250

-50

2015

Petrochemicals
Chemicals

2016

2017

Electronics
Inorganics

2018

Aluminum
Others2019
Adjustments

2015

Petrochemicals
Chemicals

2016

2017

Electronics
Inorganics

2018
Aluminum
Others2019
Adjustments

19

Management’s Discussion and Analysis (cont.)
Sales in the Rest of the World

Information by Geographic Area

Sales in the rest of the world decreased due mainly to a decrease in sales
in the Inorganics segment. Though sales of graphite electrodes in the
U.S. market increased, sales of graphite electrodes in Europe significantly
decreased due to a reduction in the Group’s production volumes ofgraphite electrodes, especially those of our European bases, startingfrom the middle of 2019 aiming to respond to the weakening supplydemand situation of graphite electrodes mainly in the European market
resulting from a slowdown in steel production and partial-clearance ofour customers’ graphite-electrode inventory. In the Chemicals segment
we newly consolidated coating materials manufacturing companies.
As a result, consolidated sales from operations in the rest of theworld decreased ¥28,808 million, or 14.3% from the previous year, to¥172,111 million (US$1,571 million).

Sales in Japan

Sales in the Petrochemicals segment decreased due to a decline inmarket prices of petrochemical products resulting from lower raw
naphtha prices, despite an increase in shipment volumes of products
due to recovery from the impact of once-in-four-year large-scale
shutdown maintenance of ethylene production facilities, which took
place in the first half of 2018. Sales in the Chemicals segment decreased.
In the electronic chemicals business, sales decreased due to a decreasein shipment volumes of high-purity gases for electronics resulting fromadjustment of production in the semiconductor and display industries.
In the basic chemicals business, sales decreased due partly to a decline
in market price of acrylonitrile. In the Electronics segment, sales ofcompound semiconductors and rare earth magnetic alloys decreased
due to stagnant shipment volumes. In the Inorganics segment, sales ofgraphite electrodes increased due to a rise in market prices. However, inthe ceramics business, sales of titanium oxide for electronics and heatradiant filler decreased due to adjustment of production by customers.
In the Aluminum segment, sales of high-purity aluminum foil forcapacitors decreased due partly to a reduction in shipment volumes
resulting from production adjustment in the industrial equipment
manufacturers. Sales of aluminum specialty components also decreased
due to a reduction in shipment volumes of products for use as
automotive parts. In the Others segment, sales decreased due to a
decline in sales figures of Shoko Co., Ltd. Resulting from a decline inmarket prices of synthetic resins.
As a result, consolidated sales from operations in Japan decreased¥42,661 million, or 7.7%, to ¥508,672 million (US$4,643 million).

Other Income (Expenses) and Net Income
Attributable to Owners of the Parent
The gap between interest expenses and interest and dividends income
improved ¥941 million to the proceeds of ¥321 million (US$3 million),
due mainly to a decrease in interest expense.
We recorded a gain on the equity in earnings of unconsolidated
subsidiaries and affiliates to which the equity method is applied of ¥748
million (US$7 million), a deterioration of ¥505 million. This reduction wasdue mainly to a decrease in income of a synthetic-resin production
company resulting from a sluggish market.
For foreign exchange gain (losses), the Group recorded foreignexchange losses of ¥728 million (US$6 million) in 2019, a deterioration of¥381 million from the previous year due mainly to the recording of aforeign exchange loss from a subsidiary manufacturing HD media in
Taiwan caused by the appreciation of the New Taiwan dollar against the
U.S. dollar. In 2018, however, this HD media manufacturing subsidiary in
Taiwan recorded foreign exchange gain due to the depreciation of the
New Taiwan dollar against the U.S. dollar.
We recorded a loss of ¥4,455 million (US$41 million), net, on
retirement and sales of non-current assets, a decrease of ¥538 million,
due mainly to the recording of retirement losses resulting from removalof old facilities that belonged to the Inorganics and Chemicals segments.
We also recorded a loss of ¥15,662 million (US$143 million) for the
impairment loss on fixed assets, a decrease of ¥6,911 million, due partly
to our recognition of an impairment loss amounting to ¥2,812 million
from the integration of bases to manufacture unsaturated polyester
resin and vinyl ester resin in our functional chemicals business, another
impairment loss amounting to ¥10,418 million from the business to
manufacture aluminum specialty components for the automotive partsindustry, and another impairment loss amounting to ¥804 million fromthe business to manufacture aluminum cans for beverages in Oyama
and Hikone plants where the Group streamlined their production
capacities.
Gain on sales of investment securities increased ¥222 million from

Sales in Asia (excluding Japan)
Sales in the Petrochemicals segment in Asia increased because of anincrease in export of olefins due to recovery from the impact of once-infour-year large-scale shutdown maintenance of ethylene production
facilities, which took place in the first half of 2018.
In the Chemicals segment, sales of electronic chemicals decreased
due to a reduction in shipment volumes of high-purity gases forelectronics resulting from production adjustment in the semiconductor
and display industries in East Asia. Sales of functional chemicals
decreased due to a reduction in shipment volumes to China.
Consolidation of subsidiaries producing coating materials contributed
to an increase in sales of chemicals in Asia.
In the Electronics segment, sales of HD media decreased due to a
reduction in shipment volumes of media for PCs.
In the Inorganics segment, sales of graphite electrodes decreased
due to a decline in shipment volumes caused by reduction of production
aiming to cope with softening supply-demand situation.
As a result, consolidated sales from operations in Asia (excluding
Japan) decreased ¥14,214 million, or 5.9% from the previous year, to¥225,671 million (US$2,060 million).

Net Income Attributable to Owners of the Parent

Total Assets

Total Net Assets(Billions of yen)
120

(Billions of yen)
1,200(Billions of yen)
600

90

900

450

60

600

300

30

300

150

0

20

2015

2016

SHOWA DENKO K.K.

2017

2018

2019

ANNUAL REPORT 2019

0

2015

2016

2017

2018

2019

0

2015

2016

2017

2018

2019

the previous year, to ¥1,743 million (US$16 million).
The sum of extraordinary losses, other than those mentioned above,
decreased ¥4,104 million from the previous year, to ¥3,522 million(US$32 million), which was due mainly to a decrease in a loss on
valuation of investment securities.
Overall, the total of other income (expenses), net, i.e., the total of
non-operating income (expenses) and extraordinary income (expenses),
net, improved by ¥11,885 million, to a loss of ¥21,410 million (US$195
million).
As a result, the Company recorded income before income taxes andnon-controlling interests of ¥97,883 million (US$893 million), down
¥47,626 million from the previous year.
Income taxes decreased ¥6,174 million to ¥22,582 million (US$206
million) due to a decrease in the Company’s income before income taxes
and non-controlling interests. Consequently, the Company recorded net
income attributable to owners of the parent of ¥73,088 million (US$667
million), down ¥38,415 million from the previous year.

increased due to investment to improve facilities to produce graphite
electrodes in Europe. In addition, in the Aluminum segment, capital
expenditures rose due to investments to construct the third factory ofHanacans in Vietnam. However, in the Petrochemicals segment, theamount of capital investment fell due to the completion of large-scale
periodic shutdown maintenance in the first half of the previous year. In
the Electronics segment, capital expenditures for facilities to produce
HD media also decreased.

Cash FlowsNet cash provided by operating activities decreased ¥71,231 million
from the previous year, to ¥78,554 million (US$717 million), due partly to
lower income before income taxes and minority interests. Net cash used
in investing activities fell ¥1,182 million, to ¥48,156 million (US$440
million), due partly to an increase in proceeds from sales of investment
securities. Therefore, free cash flow was ¥30,397 million (US$277 million),a decrease in proceeds of ¥70,050 million. Net cash used in financing
activities decreased ¥42,516 million due partly to a lower level of
repayments of interest bearing debt, ending up at ¥18,546 million(US$169 million). As a result, and due partly to the influence of exchange
rate fluctuations, cash and cash equivalents at December 31, 2019
increased ¥8,899 million from the end of the previous year, to ¥121,734
million (US$1,111 million).

Financial Position
Total Assets
Total assets at the end of 2019 increased ¥1,398 million from the end of
the previous year, to ¥1,076,381 million (US$9,825 million), due mainly
to the increase in inventories resulting from a rise in prices of raw
materials for graphite electrodes, despite a decrease in accounts
receivable-trade. Cash and deposits increased ¥8,900 million from theend of the previous year, to ¥122,086 million (US$1,114 million).
Net property, plant and equipment decreased ¥5,238 million, to¥473,168 million (US$4,319 million), due mainly to the recording of
impairment loss. Total investments and other assets increased ¥6,112
million, to ¥106,156 million (US$969 million), due mainly to an increasein goodwill.

Liabilities
Interest-bearing debt increased ¥10,556 million from the end of theprevious year, to ¥298,524 million (US$2,725 million), However, accounts
payable-trade decreased due to a fall in price of naphtha as raw material.
As a result, total liabilities fell ¥52,695 million from the end of theprevious year, to ¥556,949 million (US$5,084 million).

Net Assets
Net assets at the end of 2019 amounted to ¥519,433 million (US$4,741
million), up ¥54,093 million over the previous year, due partly to therecording of net income attributable to owners of the parent.

Capital Expenditures
Capital expenditures increased ¥8,489 million from the previous year, to¥50,216 million (US$458 million). Capital expenditures for the Chemicals
segment increased due to investments to increase production capacityof electronic chemicals, capital expenditures for the Inorganics segment

Interest-Bearing Debt

Cash Flows from Operating Activities(Billions of yen)
400

(Billions of yen)
160

300

120

200

80

100

40

0

2015

2016

2017

2018

2019

0

2015

2016

2017

2018

2019

21

Risk Factors
We consider we face the risks, as explained below, that could adversely
affect our future performance, financial conditions, and cash flows. The
Showa Denko Group is taking steps to prevent the realization of theserisks and to minimize the impact on operations.
The following covers important risk factors considered being present
as of March 26, 2020. This list is not inclusive.

1

Substantial fluctuations in the performancesof individual businesses

The Group is manufacturing and selling a wide variety of products, suchas petrochemicals, chemicals, electronics, inorganics, and aluminum.
The following risks are expected in major business fields, but those are
not limited to the businesses mentioned below.

(1) Petrochemicals
The Group purchases and imports a large amount of feedstock, including
naphtha. When the price of naphtha or other types of feedstock fluctuates
due to a change in crude oil prices, a change in the supply-demandbalance, or a currency fluctuation, and when we cannot secure sufficientspreads between the manufacturing cost and selling prices of products,
the Group’s performance and financial conditions can be affected.
Furthermore, earnings from petrochemicals largely depend on the
supply-demand balance. Construction of large plants by competitors
and the resultant oversupply as well as a sharp decrease in demand due
to unfavorable changes in the Japanese or world economies can affect
the Group’s performance and financial conditions.

(2) HD media
In the Group’s HD media business, the sales volume is largely influenced
by demand for IT devices and electric appliances. This business requires
innovations at a rapid pace and involves fierce international competition.
Fluctuations in demand and intensification of competition will cause
fluctuations in selling prices. The Group is prepared to develop andprovide products meeting the market requirements and has
established a global production/marketing setup. However, whenmarket requirements change more quickly than we expected, when
supply-demand balance changes substantially, and when exchange
rates sharply fluctuate, the Group’s performance and financial conditions
can be affected.

(3) Inorganics
The Group produces graphite electrodes in Asia, North America, and Europe,and sells those products globally. When the demand for graphite
electrodes suddenly decreases due to unfavorable changes in the Japaneseor world economies, deterioration in supply-demand balance may notallow us to secure sufficient spreads between the manufacturing costand selling prices of products, and can affect the Group’s performanceand financial conditions.

(4) Aluminum
The Group imports a large amount of aluminum metal from overseas
sources. When the aluminum ingot price rises due to a rise in LME prices,a rise in the premiums on aluminum, or a weaker yen, and when wecannot absorb the manufacturing cost increase in the form of higher
product prices, the Group’s performance and financial conditions can beaffected. Furthermore, most of our products are sold as materials andcomponents for the automobile, electric appliance, and electronics

22

SHOWA DENKO K.K.

ANNUAL REPORT 2019sectors. Trends in those industries, which are beyond our control, cansubstantially affect our businesses.

(5) Overseas operations
The Group is producing and selling in Asia, North America, and Europe.
Operations overseas involve such special risks as unexpected changes inlaws and regulations, deterioration in political/economic situations, andsocial disorder due to war and terrorism. Such risks can become real andaffect our overseas operations, resulting in adverse impact on the Group’s
performance and financial conditions.

(6) ‌Mergers, acquisitions, capital tie-ups, businessreorganization and restructuring
The Group implements mergers, acquisitions, capital tie-ups, businessreorganization and restructuring at home and overseas to expand thescope of businesses and improve profitability. If these measures do notallow the Group to achieve the desired results due to changes in thebusiness environment surrounding the Group or other companies towhich the Group invests, these measures may have bad influences upon
the Group’s performance and financial conditions. In addition, when theGroup restructures businesses, including withdrawal from unprofitablebusinesses and restructuring of affiliated companies, the Group’s
performance and financial conditions can be affected.

2

Unexpected fluctuations in financial
conditions and cash flows(1) Substantial fluctuations in exchange rates
For foreign-currency-based transactions centering on exports/imports,
the Group makes best efforts to minimize exchange rate fluctuation
risks, mainly through exchange contracts. However, substantial
fluctuations in exchange rates can affect the Group’s performance andfinancial conditions. In particular, a sharp appreciation of the yen against
other currencies can affect the Group’s performance. Exchange rate
fluctuations can also affect the Group’s performance and financial
conditions through the conversion of overseas subsidiaries’ financial
statements into Japanese yen.

(2) ‌Trends in financial markets and changes in thefund-raising environment
The trends in the financial markets and deterioration in the Group’s
financial indexes can affect the Group’s fund-raising and interest expenses:
for example, in the form of prompt repayment of a loan owing to theterms of financial covenants. In that event, the Group’s performance andfinancial conditions could be affected.

(3) Employees’ severance indemnities
The Group’s employees’ severance indemnities and expenses are calculated
based on various basic rates and the yield of pension assets used in pension
calculations. Fluctuations in the current price of pension assets, trends ininterest rates, and changes in the retirement benefit/pension systems canaffect the Group’s performance and financial conditions.

(4) Securities
As the Group owns securities with current prices, fluctuations in stock
prices can result in valuation losses, affecting the Group’s performanceand financial conditions.

(5) Accounting for impairment of fixed assets(2) Intellectual property

The Group may incur additional losses from the impairment of fixed assets
including goodwill and land, due to deterioration in profitability resulting
from aggravation in the business environment, due to a considerable
reduction in the current prices of land and other fixed assets, or due toother factors. These losses can affect the Group’s performance andfinancial conditions.

The Group is making best efforts to obtain, use, and protect intellectual
property, such as industrial property rights and know-how, in recognitionof the ability to make the Group’s businesses more competitive. The Groupalso respects other companies’ rights. However, in the event of failure to
duly obtain or use the rights, infringement by a third party, or if the Groupis considered to have infringed a third party’s intellectual property, theGroup’s operations can be hindered and the Group’s performance andfinancial conditions could be affected.

(6) Deferred tax assets
The Group’s financial statements include deferred tax assets in relation totemporary differences (differences between the assets/liabilities on the
consolidated financial statements and the assets/liabilities in calculationof taxable income). The calculation of deferred tax assets is based on
various projections for future taxable income. Thus, when actual taxable
income differs from the projections or in case of a revision of thetaxation system (including tax rates), it becomes necessary to revise
deferred tax assets. That situation could affect the Group’s performanceand financial conditions.

3

Specific regulations

The Group’s businesses are subject to various restrictions as stipulated
by laws and regulations. The restrictions relate to industrial safety (suchas the Law for Prevention of Disasters at Petroleum Complexes, Etc.; theFire Service Law; and the High Pressure Gas Safety Law) and theenvironment and chemical substances (such as the Basic Environment Law;
the Air Pollution Control Law; and the Law concerning the Examination
and Regulation of Manufacture, Etc. of Chemical Substances). The Groupobserves these laws and regulations when conducting business. In theevent the Group fails to observe any of the laws and regulations, the Group’s
activities could be restricted. In case stricter regulations are introduced,
resulting in higher costs, the Group’s performance and financial
conditions can be affected.

4

Important lawsuits

While the Group makes best efforts to observe laws and agreements, theGroup may be sued when conducting a wide range of businesses.

5

Others(1) R&D
Making “Focus R&D resources on 10 technical fields corresponding to7 business domains, and accelerate creation of new businesses throughour value-adding pipelines.” as the basic strategy in R&D, the Group
continues R&D that leads to strengthening of core businesses andexpansion of businesses in surrounding fields. Concurrently, the Grouplays emphasis on creation of next-generation businesses that make themost of open innovation and M&A. Through strengthening coretechnologies that covers such diverse fields as inorganics, organics andaluminum, and achievement of synergies among these technologies,
the Group promotes R&D programs that aim to create Koseiha company.
However, in case the actual results materially differ from original plans,
the Group’s performance and financial conditions could be affected.

(3) Quality assurance and product liability
The Group has established internal rules on quality assurance andquality control, as well as organizations for managing and promoting
quality assurance. Furthermore, the Group has obtained certification
under ISO 9001 standards to ensure strict quality control. However, inthe event of a serious quality defect or being sued for product liability,
the Group’s reputation could be damaged and the Group may be forced
to pay compensation to customers. This could affect the Group’s
performance and financial conditions.

(4) Accidents and disasters
The Group is committed to securing steady and safe operations. The Group
conducts regular inspections of all manufacturing facilities in an effort tominimize any risk factors pertaining to the suspension of operations or
accidents due to problems with manufacturing facilities. In the event of
injury or damage to property due to an accident, a large-scale natural
disaster, a cyberattack, etc., the Group’s reputation could be damaged.
The Group may incur substantial costs in dealing with the situation andmay lose business opportunities due to the suspension of production.
This could affect the Group’s performance and financial conditions.
Furthermore, even when the Group’s manufacturing facilities are notdirectly influenced, the Group’s production activities may be restrictedby trouble with procurement or disruption of supply chains due toaccidents at suppliers’ sites, a natural disaster, or a pandemic of infectious
disease, or by a shortage of power supply. These factors could affect theGroup’s performance and financial conditions.

(5) Impact on the environment
The Group is committed to the principles of Responsible Care, whichmeans that we are working to ensure the health and safety of everyone
and to protect the environment from harm caused by chemical substances
throughout their life cycles, namely, the development, production,
distribution, use, and disposal. In the event of causing impact on theenvironment, the Group’s reputation can be damaged. The Group may
incur costs, including compensation, lose business opportunities due tothe suspension of production, and/or pay compensation to customers.
These factors can affect the Group’s performance and financial conditions.

23

Consolidated Balance Sheets
Showa Denko K.K. and Consolidated Subsidiaries
As at December 31, 2019 and 2018
Thousands of
U.S. dollars (Note 5)

Millions of yen

ASSETS

2019

2018

2019

¥ 122,086¥ 113,186$ 1,114,332

184,425

217,200

1,683,329

Current assets
Cash and deposits (Notes 6 and 7)
Notes and accounts receivable (Notes 7 and 10)
Allowance for doubtful accounts
Inventories(754)(1,386)(6,885)

173,667

152,800

1,585,135

17,632

14,732160,934

497,057

496,533

4,536,845

Land (Note 19)

226,514

234,987

2,067,488

Buildings and structures

288,591

283,3032,634,087

Machinery, equipment and vehicles

893,878

900,921

8,158,797

Construction in progress

18,794

11,106

171,543

1,427,777

1,430,317

13,031,915(954,608)(951,911)(8,713,108)

473,168

478,406

4,318,807

71,786

71,886655,220

Other current assets (Notes 7 and 9)
Total current assets

Property, plant and equipment (Notes 11 and 14)

Less : Accumulated depreciation
Net property, plant and equipment

Investments and other assets
Investment securities (Notes 7, 8, and 11)Long-term loans

334

71

3,049

Net defined benefit asset (Note 12)

244

249

2,227

Deferred tax assets (Note 13)

3,381

4,574

30,857

Other (Notes 7 and 9)

38,53731,596

351,744

Allowance for doubtful accounts
Total investments and other assets

Total assets
See notes to financial statements.

24

SHOWA DENKO K.K.

ANNUAL REPORT 2019(8,125)(8,332)(74,164)

106,156

100,044968,932¥1,076,381¥1,074,983$ 9,824,584

Thousands of
U.S. dollars (Note 5)

Millions of yen

2019

LIABILITIES AND NET ASSETS

2019

2018

Current liabilities
Short-term debt (Notes 7 and 11)¥

52,720¥81,747$ 481,194

Current portion of long-term debt (Notes 7 and 11)

31,943

41,403

291,560

Notes and accounts payable (Notes 7, 10, and 11)

133,730

182,890

1,220,611

Income taxes payable

6,864

10,16062,652

Provision for repairs

644

64

5,874

Provision for bonuses

3,050

3,516

27,834—

5—

Provision for stock payments (Note 3)
Provision for business structure improvement

1,686

129

15,389Other current liabilities (Notes 7 and 9)

32,23842,160294,254

262,875

362,074

2,399,368

Total current liabilities
Non-current liabilities

213,861

164,818

1,951,996

Deferred tax liabilities (Note 13)

7,950

6,027

72,563

Provision for repairs

2,021

1,102

18,448

200

156

1,823

Long-term debt less current portion (Notes 7 and 11)

Provision for stock payments (Note 3)

824

2,876

7,521

Net defined benefit liability (Note 12)

9,969

22,01890,990

Deferred tax liabilities for land revaluation (Note 19)

32,15032,324

293,449

Other non-current liabilities (Notes 7 and 9)

27,09918,248247,345

294,074

247,5692,684,135

140,564—

1,282,982

Provision for business structure improvement

Total non-current liabilities
Contingent liabilities (Note 17)
Net assets (Note 18)
Shareholders' equity
Capital stock
Authorized, 330,000,000 shares
Issued (2019): 149,711,292 shares—

140,564—

Capital surplus

78,912

78,911

720,263

Issued (2018): 149,711,292 shares
Retained earnings

249,246

197,717

2,274,973

Less: Treasury stock at cost (2019): 3,836,329 shares(11,664)—(106,465)

Less: Treasury stock at cost (2018): 3,836,364 shares—(11,659)—

457,057

405,532

4,171,753

Total shareholders' equity
Accumulated other comprehensive income

9,789

7,489

89,352

Deferred gains or losses on hedges

433

836

3,951

Revaluation reserve for land (Note 19)

33,06033,281

301,756

Foreign currency translation adjustments

4,140

7,069

37,786

Remeasurements of defined benefit plans (Note 12)(5,114)(8,244)(46,673)

Total accumulated other comprehensive income

42,30940,431

386,172

20,067

19,377

183,157

Valuation difference on available-for-sale securities

Non-controlling interests
Total net assets
Total liabilities and net assets

519,433

465,340

4,741,082¥1,076,381¥ 1,074,983$ 9,824,584

25

Consolidated Statements of Income
Showa Denko K.K. and Consolidated Subsidiaries
For the years ended December 31, 2019 and 2018
Thousands of
U.S. dollars (Note 5)

Millions of yen

Net sales
Cost of sales (Note 21)
Gross profit
Selling, general and administrative expenses (Notes 20 and 21)
Operating income

2019

2018

2019

¥ 906,454¥ 992,136$ 8,273,583

671,157

705,003

6,125,928

235,297

287,133

2,147,655

114,499

107,130

1,045,081

120,798

180,003

1,102,574

2,568

2,354

23,437

748

1,253

6,826

Other income (expenses)
Interest and dividends income
Equity in earnings (losses) of unconsolidated subsidiaries and affiliates
Gain on sales of investment securities, net (Note 8)

1,743

1,521

15,911

Loss on valuation of investment securities (Note 8)(9)(2,583)(78)

Foreign exchange gains (losses)

(728)

(347)

(6,644)

Rent income on non-current assets

1,351

1,366

12,327

615

(141)

5,614

Interest expenses(2,255)(2,983)(20,587)

Loss on retirement of noncurrent assets(5,070)(4,851)(46,279)

Impairment loss (Note 14)(15,662)(22,573)(142,956)

Environmental expenses(1,231)(462)(11,234)

Loss on mothballing of operation(1,444)(1,479)(13,176)

Gain on liquidation of subsidiaries

—

361

—

Gain (loss) on sales of noncurrent assets, net

312

—

2,850

Other, net(3,853)(5,931)(35,168)

Total(22,915)(34,494)(209,159)

97,883

145,509893,415

Current

22,196

25,669202,589

Deferred

386

3,087

3,527

Net income

75,300116,752

687,299

Net income attributable to non-controlling interests

2,212

5,249

20,190¥ 73,088¥ 111,503$ 667,108

Gain on sale of businesses

Income before income taxes and non-controlling interests
Income taxes (Note 13)

Net income attributable to owners of the parent

Yen

U.S. dollars (Note 5)

Per share amounts
Net income – primary
Cash dividends (applicable to the period)¥ 501.03¥ 758.15$ 4.57130.00120.001.19

Note: Net income per share has been computed based on the average number of shares of common stock outstanding during the respective fiscal year.
Diluted net income per share for 2019 and 2018 were not disclosed because there were no dilutive shares.
See notes to financial statements.

26

SHOWA DENKO K.K.

ANNUAL REPORT 2019

Consolidated Statements of Comprehensive Income
Showa Denko K.K. and Consolidated Subsidiaries
For the years ended December 31, 2019 and 2018
Thousands of
U.S. dollars (Note 5)

Millions of yen

Net income

2019

2018

2019

¥ 75,300¥116,752$ 687,299

2,333(9,127)

21,295

Other comprehensive income:
Valuation difference on available-for-sale securities(406)(2,942)(3,703)Foreign currency translation adjustments(2,992)(7,667)(27,309)

Remeasurements of defined benefit plans, net of tax

3,131(3,556)28,582(59)(1,405)(542)¥ 2,007¥ (24,697)$ 18,323¥ 77,308¥ 92,055$ 705,622

Owners of parent

75,18787,463686,267

Non-controlling interests

2,121

4,593

19,355

Deferred gains or losses on hedges

Share of other comprehensive income of unconsolidated subsidiaries
and affiliates accounted for using equity method
Total other comprehensive income (loss) (Note 15)
Comprehensive income
Comprehensive income attributable to:

See notes to financial statements.

27

Consolidated Statements of Changes in Net Assets
Showa Denko K.K. and Consolidated Subsidiaries
For the years ended December 31, 2019 and 2018
Thousands

Balance as at December 31, 2017

Millions of yen

Number ofshares ofcapital stock

Capitalstock

CapitalsurplusRetainedearnings

Valuation
Foreign
RemeasureDeferred
Nondifference
Revaluation
currency
ments
Treasury
gains
controllingon availablereserve fortranslationof definedstock
or losses
interests
for-salelandadjustments benefit planson hedges
securities

149,711¥ 140,564¥ 61,663¥ 100,076¥ (10,503)¥ 3,781¥ 29,541¥ 15,516¥ (4,716)¥ 16,524¥ 368,994

Dividends from surplus

—

—

—

(10,117)

—

—

—

—

—

—

—

(10,117)

Net income (loss) attributable to owners of the parent

—

—

—

111,503

—

—

—

—

—

—

—

111,503

Purchase of treasury stock

—

—

—

—

(10,015)

—

—

—

—

—

—

(10,015)

Disposal of treasury stock——

17,248

—

8,859

—

—

—

—

—

—

26,107

Increase by increase of consolidated subsidiaries

—

—

—

—

—

—

—

—

—

—

—

—

Decrease by increase of consolidated subsidiaries

—

—

—

—

—

—

—

—

—

—

—

—

Change of scope of equity method

—

—

—

(6)

—

—

—

—

—

—

—

(6)

Change in treasury shares of the parent arising fromtransactions with non-controlling shareholders

—

—

0

—

—

—

—

—

—

—

—

0

Reversal of revaluation reserve for land

—

—

—

(3,740)

—

—

—

—

—

—

—

(3,740)Net changes of items other than shareholders' equity

—

—

—

—

—

(9,058)(2,945)3,740(8,447)(3,528)2,853(17,387)

149,711¥ 140,564¥ 78,911¥ 197,717¥ (11,659)¥ 7,489¥ 836¥ 33,281¥ 7,069¥ (8,244)¥ 19,377¥ 465,340

Balance as at December 31, 2018
Dividends from surplus

—

—

—

(21,924)

—

—

—

—

—

—

—

(21,924)

Net income (loss) attributable to owners of the parent

—

—

—

73,088

—

—

—

—

—

—

—

73,088Purchase of treasury stock

—

—

—

—

(8)

—

—

—

—

—

—

(8)

Disposal of treasury stock

—

—

0

—

3

—

—

—

—

—

—

3

Increase by increase of consolidated subsidiaries

—

—

—

448

—

—

—

—

—

—

—

448

Decrease by increase of consolidated subsidiaries

—

—

—

(367)

—

—

—

—

—

—

—

(367)

Change of scope of the equity method

—

—

—

—

—

—

—

—

—

—

—

—

Change in treasury shares of the parent arising fromtransactions with non-controlling shareholders

—

—

1

—

—

—

—

—

—

—

—

1

Reversal of revaluation reserve for land

—

—

—

285

—

—

—

—

—

—

—

285

Net changes of items other than shareholders' equity

—

—

—

—

—

2,301

(404)

(221)

(2,929)

3,130

690

2,568

149,711¥ 140,564¥ 78,912¥ 249,246¥ (11,664)¥ 9,789¥ 433¥ 33,060¥ 4,140¥ (5,114)¥ 20,067¥ 519,433

Retainedearnings

Valuation
Foreign
RemeasureDeferred
Nondifference
Revaluation
currency
ments
Treasury
gains
controllingon availablereserve fortranslationof definedstock
or losses
interests
for-salelandadjustments benefit planson hedges
securities

Total
net assets$ (106,419)$ 176,863$ 4,247,352

Balance as at December 31, 2019

Thousands
Number ofshares ofcapital stock
Balance as at December 31, 2018

Thousands of U.S. dollars (Note 5)

Capitalstock

149,711 $ 1,282,982

Capitalsurplus$ 720,255 $ 1,804,642$ 68,352$ 7,634$ 303,772$ 64,518$ (75,246)

Dividends from surplus

—

—

—

(200,114)

—

—

—

—

—

—

—

(200,114)

Net income (loss) attributable to owners of the parent

—

—

—

667,108

—

—

—

—

—

—

—

667,108

Purchase of treasury stock

—

—

—

—

(72)

—

—

—

—

—

—

(72)

Disposal of treasury stock

—

—

0

—

25

—

—

—

—

—

—

25

Increase by increase of consolidated subsidiaries

—

—

—

4,089

—

—

—

—

—

—

—

4,089

Decrease by increase of consolidated subsidiaries

—

—

—

(3,353)

—

—

—

—

—

—

—

(3,353)

Change of scope of the equity method

—

—

—

—

—

—

—

—

—

—

—

—

Change in treasury shares of the parent arising fromtransactions with non-controlling shareholders

—

—

8

—

—

—

—

—

—

—

—

8

Reversal of revaluation reserve for land

—

—

—

2,600

—

—

—

—

—

—

—

2,600

Net changes of items other than shareholders' equity

—

—

—

—

—

21,001(3,683)(2,015)(26,732)

28,573

6,294

23,437

149,711 $ 1,282,982 $ 720,263 $ 2,274,973 $ (106,465)$ 89,352$ 3,951$ 301,756$ 37,786

Balance as at December 31, 2019

See notes to financial statements.

28¥ 16,547

Total
net assets

SHOWA DENKO K.K.

ANNUAL REPORT 2019

$ (46,673) $ 183,157 $ 4,741,082

Consolidated Statements of Cash Flows
Showa Denko K.K. and Consolidated Subsidiaries
For the years ended December 31, 2019 and 2018
Thousands of
U.S. dollars (Note 5)

Millions of yen

2019

2018

2019

¥ 97,883¥ 145,509$ 893,415

37,704
15,662
98
—
(700)
(494)
—
(11,757)(2,568)2,255(748)(1,735)5,070(615)
33,489(21,585)(21,898)(25,591)
104,472
3,431(2,326)(27,022)78,55439,45922,573—(19)(2,134)(704)(2,640)3,522(2,354)
2,983(1,253)
1,062
4,851
141
(29,583)(40,469)
20,397
6,162
167,506
4,005(4,269)(17,457)
149,785

344,141
142,956894—(6,390)(4,511)—(107,308)(23,437)
20,587(6,826)(15,833)
46,279(5,614)
305,671(197,020)(199,870)(233,577)
953,558
31,312(21,233)(246,646)
716,991

Cash flows from investing activities
Payments into time deposits
Proceeds from withdrawal of time deposits
Purchase of property, plant and equipment
Proceeds from sales of property, plant and equipment
Purchase of investment securities
Proceeds from sales of investment securities
Purchase of investments in subsidiaries resulting in change in the scope of consolidation
Proceeds from sales of investments in subsidiaries resulting in change in scope of consolidation
Net decrease (increase) in short-term loans receivable
Payments of long-term loans receivableCollection of long-term loans receivable
Other, net
Net cash provided by (used in) investing activities(53)
53(40,708)
1,251
(864)
5,677
(4,851)
529
450
(558)
289
(9,369)(48,156)(172)
210(41,269)
392
(703)
3,975
—
—
197
(2,950)672(9,690)(49,338)(484)
479(371,559)
11,414(7,888)51,814(44,278)
4,826
4,108
(5,097)
2,636(85,513)(439,542)

Cash flows from financing activities
Net increase (decrease) in short-term debt
Proceeds from long-term loans payable
Repayments of long-term loans payable
Proceeds from share issuance of bonds
Purchase of treasury stock
Proceeds from sales of treasury stock
Cash dividends paid
Cash dividends paid to non-controlling shareholders
Other, net
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Increase in cash and cash equivalents resulting from newly consolidated subsidiaries
Decrease in cash and cash equivalents resulting from change in scope of consolidation
Cash and cash equivalents at the end of the year (Note 6)(29,545)
64,396(47,206)
20,000(9)
0(21,861)(1,329)(2,992)(18,546)(2,388)9,464
112,835
310(875)¥ 121,734(9,507)
33,206(81,559)—(10,016)
26,104(10,084)(2,365)(6,840)(61,061)(3,231)
36,15476,833—(153)¥ 112,835(269,669)
587,768(430,873)
182,548(81)
1(199,531)(12,133)(27,306)(169,276)(21,792)
86,381
1,029,893
2,826(7,982)$ 1,111,118

Cash flows from operating activities
Income before income taxes and non-controlling interests
Adjustments for:
Depreciation and amortization
Impairment loss
Amortization of goodwill
Amortization of negative goodwill
Increase (decrease) in allowance for doubtful accounts
Increase (decrease) in provision for business restructuring
Increase (decrease) in provision for loss on guarantees
Increase (decrease) in net defined benefit liability
Interest and dividends income
Interest expenses
Equity in (earnings) losses of unconsolidated subsidiaries and affiliates
Loss (gain) on sales and valuation of investment securities
Loss on retirement of non-current assets
Loss (gain) on sales of non-current assets
Decrease (increase) in notes and accounts receivable-trade
Decrease (increase) in inventories
Increase (decrease) in notes and accounts payable-trade
Other, net
SubtotalInterest and dividends income received
Interest expenses paid
Income taxes (paid) refund
Net cash provided by (used in) operating activities

See notes to financial statements.

29

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries

1. BASIS‌OF REPORTING AND FINANCIAL
STATEMENTS

The accompanying consolidated financial statements have been
prepared in accordance with accounting principles and practices
generally accepted in Japan, which are different in certain respects
as to the application and disclosure requirements from International
Financial Reporting Standards, and restructured and translated
into English from the consolidated financial statements whichhave been filed with the Kanto Local Finance Bureau as requiredby the Financial Instruments and Exchange Law of Japan.

2. SUMMARY‌
OF SIGNIFICANT ACCOUNTINGPOLICIES(a) Principles of Consolidation
The consolidated financial statements for the years ended
December 31, 2019 and 2018 include the accounts of Showa Denko
K.K. (“the Company”) and its 61 and 58, respectively, significant
subsidiaries (collectively “the Companies”).
For the purposes of the consolidated financial statements, allsignificant intercompany transactions, account balances andunrealized profits among the Companies are entirely eliminatedand the portions thereof attributable to minority interests are
credited or charged to minority interests.
Accounts of subsidiaries whose business year ends differ bymore than three months from December 31 have been included
using appropriate interim financial information.
In the initial consolidation, assets and liabilities of subsidiaries
including those attributable to minority stockholders arerecorded based on fair value in the accompanying consolidated
financial statements.
Goodwill is amortized on a straight-line basis over a period
during which the effect of such goodwill lasts but does not exceed
20 years from booking. In addition, negative goodwill arisingfrom business combinations prior to April 1, 2010 is amortized ona straight-line basis over a period during which the effect of suchnegative goodwill lasts but does not exceed 20 years from booking.
(b) Investments in Unconsolidated Subsidiaries and Affiliates
The Company applied the equity method of accounting forinvestments in 2 unconsolidated subsidiaries in 2019 and 2 that ofin 2018, as well as 9 affiliates in 2019 and 9 that of in 2018.
All underlying intercompany profits obtained from transactions
among the Companies and unconsolidated subsidiaries andaffiliates to which the equity method is applied are eliminated in
the consolidated financial statements.
(c) Translation of Foreign Currency Accounts
All receivables and payables denominated in foreign currencies
at the balance sheet date are translated into Japanese yen at
the current exchange rates.
The resulting exchange gains or losses are credited or charged
to income.
The financial statements of certain consolidated foreign

30

SHOWA DENKO K.K.

ANNUAL REPORT 2019subsidiaries are translated into Japanese yen at the year-end
rate for assets and liabilities, at historical rates for the otherbalance sheet accounts exclusive of the current year’s net
income, and at the average annual rate for revenue and expense
accounts and net income.
Translation adjustments resulting from the process of translating
the financial statements of foreign subsidiaries into Japanese yen
are accumulated and reported as a component of net assets on
the consolidated balance sheets.
(d) Cash and Cash Equivalents
Cash and cash equivalents in the consolidated statements of cash
flows are composed of cash on hand, bank deposits available forwithdrawal on demand, and short-term investments with original
maturities of three months or less and minor risk of value fluctuation.
(e) Securities
Debt securities that are intended to be held to maturity (“heldto-maturity debt securities”) are stated at amortized cost on thebalance sheets. Available-for-sale securities with available fairmarket values are stated at fair market values. Unrealized gains
and unrealized losses on these available-for-sale securities arereported, net of applicable income taxes, as a separate componentof the net assets.
Realized gains or losses on the sale of the available-for-salesecurities are computed using primarily the moving-average cost.
Available-for-sale securities with no available fair market values
are stated primarily at the moving-average cost.
(f) Allowance for Doubtful Accounts
To provide for losses from bad debts, the allowance is provided
according to the actual rate of default for ordinary receivables and inview of the probability of recovery for specific doubtful receivables.
(g) Inventories
Inventories are stated at the lower of cost or market, using
principally the gross-average cost method. The carrying value on
the consolidated balance sheets is stated by the devaluation
method based on declines in profitability.
(h) Property, Plant and Equipment
Property, plant and equipment is stated at cost, in principle.
Depreciation of property, plant and equipment is computedby the straight-line method.
(i) Intangible Assets
The Company and some of the consolidated subsidiaries
principally apply the straight-line method over 5 years to amortize
intangible assets.
(j) Leased Assets
Leased assets in finance lease transactions that do not transfer
ownership to the lessee are depreciated using the straight-linemethod on the assumption that the useful life is equal to thelease term and the residual value is equal to zero. For leases witha residual value guarantee, the contracted residual value isconsidered to be the residual value for financial accounting
purposes.
(k) Provision for Business Structure Improvement
The Company and some of the consolidated subsidiaries record
the provision for business structure improvement on an accrualbasis to provide for expenses and losses resulting from theirrestructuring programs.
(l) Provision for Bonuses
A provision for bonuses is provided at an amount estimated basedon the bonus to be paid subsequent to the balance sheet date.
(m) Provision for Repairs
The Company and some of the consolidated subsidiaries provide
a provision for repairs in an amount estimated to be necessary
for the scheduled maintenance for certain production equipment.
(n) Provision for Stock Payments
To provide for the Company’s share payment to its Directors(excluding Outside Directors), Corporate Officers, and Councilors,
the provision is provided based on the Director Share Payment
Regulations.
(o) Accounting Policy for Retirement Benefits(1) Method of attributing expected benefits to periods
The attribution of expected benefits to periods up to the current
consolidated fiscal year, upon calculating the retirement benefit
obligations, is done on the benefit formula basis.
(2) ‌Method of amortization of actuarial gain or loss and past
service costs
The actuarial gain or loss is amortized starting from the year after
such an actuarial loss is determined on a straight-line basis overcertain periods (mainly 12 years) within the average remaining
service periods.
Past service costs are amortized on a straight-line basis overcertain periods (mainly 12 years) within the average remaining
service periods.
(3) Application of a simplified method to small businesses
For the calculation of liabilities concerning retirement benefits
and retirement benefit expenses, some consolidated subsidiaries
have adopted a simplified method, which deems term-end
amounts payable for voluntary retirement related to retirement
benefits as retirement benefit obligations.
(p) Income Taxes
Income taxes consist of taxes on corporations, enterprises, andinhabitants. The provision for income taxes is computed basedon the pretax income of the Company and each of its consolidated
subsidiaries with certain adjustments required for consolidationand tax purposes. The asset and liability approach is used torecognize deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
(Valuation allowances are recorded to reduce deferred tax assets
based on the assessment of the realizability of the tax benefits.)
Application of the Consolidated Taxation System
The Company and certain domestic subsidiaries adopt theconsolidated taxation system.
(q) Derivative Financial Instruments and Hedge Accounting
The Company and certain subsidiaries state all derivative financial
instruments at fair value and recognize changes in fair value as
gains or losses unless the derivative financial instruments areused for hedging purposes.
If the derivative financial instruments meet certain hedging
criteria, the Company and certain subsidiaries defer the recognitionof gains or losses resulting from changes in the fair value ofderivative financial instruments until the related gains or losses
on hedged items are recognized.
However, when forward exchange contracts meet certain
hedging criteria, the hedged items are stated by the forward
exchange contract rate. If interest rate swap contracts meetcertain hedging criteria, the net amount to be paid or received
under the interest rate swap contracts is added to or deductedfrom the interest on the assets or liabilities for which the interest
rate swap contracts were executed.
Hedge accounting is not applied at some of the foreign subsidiaries.
(r) Reclassifications
Certain reclassifications have been made in the 2018 financial
statements to conform to the presentation of 2019.

3. A‌ DDITIONAL INFORMATION(a) Board Benefit Trust (BBT)
Based on the resolution at the 107th ordinary general meeting ofshareholders held on March 30, 2016, the Company introduced a
new stock compensation plan called the Board Benefit Trust (BBT)(“the Scheme”) for Directors and Corporate Officers on May 11, 2016.
Following the resolution of the Board of Directors on March 5,2019, the Company decided to include its Councilors into thetargets of the Scheme and revises the maximum amount of funds
the Company will contribute to the trust, which are to be used by
the trust to acquire shares in the Company.
(1) Outline of the Transaction
In the Scheme, the shares of the Company are granted to its
Directors (excluding Outside Directors), Corporate Officers, andCouncilors pursuant to the Director Share Grant Regulations
set forth by the Company.

31

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries

The Company grants performance-linked points to its Directors,
Corporate Officers, and Councilors every year, and grants sharesof the Company to them based on the number of points granted
when they resign from the Company. Provided that, however,with regard to a certain portion of the points, an amount of money
corresponding to the prevailing market price of the Company’s
shares will be paid to any Director, Corporate Officer, or Councilor
meeting the relevant requirements set forth in the Director Share
Grant Regulations. The Company’s shares that are granted to
Directors, Corporate Officers, and Councilors including those to
be granted in the future, shall be acquired by the trust using theentrusted funds and separately managed as trusted assets.
For accounting treatment concerning this trust agreement, theCompany applied the gross method in which the assets and liabilitiesof the trust are recorded as assets and liabilities in the balance sheet
by referring to the Practical Solution on Transactions of Delivering
the Company’s Own Stock to Employees etc. through Trusts (ASBJ
Practical Issues Task Force [PITF] No. 30, issued on March 26, 2015).
(2) Residual Shares of the Company in the Trust
Residual shares of the Company in the trust have been recorded
as treasury stock under net assets at the book value in the trust(excluding the amount of ancillary expenses). The book value andthe number of such treasury stock were ¥324 million and 288,000
shares at the end of the fiscal year ended December 31, 2018,and ¥321 million (US$2,934 thousand) and 286,000 shares at theend of the fiscal year ended December 31, 2019, respectively.

4. ‌‌CHANGES IN ACCOUNTING POLICIES(a) New Accounting Standards Not Yet Applied“Accounting Standard for Revenue Recognition” (ASBJ
Statement No. 29, March 30, 2018. Accounting Standards
Board of Japan) and “Implementation Guidance on AccountingStandard for Revenue Recognition” (ASBJ Guidance No. 30,
March 30, 2018. Accounting Standards Board of Japan)(1) Overview
The International Accounting Standards Board (IASB) and the
Financial Accounting Standards Board (FASB) jointly developed acomprehensive accounting standard for revenue recognition,and published “Revenue from Contracts with Customers” (IFRS
15 at IASB, Topic 606 at FASB) in May 2014. Given that IFRS 15
will be applied to fiscal years starting on or after January 1, 2018
and Topic 606 will be applied to fiscal years starting on or after
December 15, 2017, the Accounting Standards Board of Japandeveloped a comprehensive accounting standard for revenue
recognition and published them together with implementation
guidance. The basic policy of the Accounting Standards Board ofJapan in developing the accounting standard for revenue
recognition is to establish an accounting standard with theincorporation of the basic principles of IFRS 15 as a starting pointfrom the perspective of comparability between financial statements,
which is one of the benefits of seeking consistency with IFRS 15,

32

SHOWA DENKO K.K.

ANNUAL REPORT 2019

and to add alternative treatments if there are any matters inJapanese practices as far as the comparability is not hindered.
(2) Scheduled Date of Application
The standard will be applied from the beginning of the fiscal year2022.
(3) Impact of Application
The impact of the application of the accounting standard andimplementation guidance for revenue recognition on the
consolidated financial statements is currently under review.
(b) Changes in Presentation
Adoption of “Partial Amendments to Accounting Standard forTax Effect Accounting””Partial Amendments to Accounting Standard for Tax EffectAccounting”(ASBJ Statement No. 28, February 16, 2018) havebeen applied, effective from the beginning of the current fiscal
year. Accordingly, deferred tax assets are presented underinvestments and other assets, and deferred tax liabilities arepresented under non-current liabilities, and related income tax
disclosures have been expanded.
As a result, in the consolidated balance sheet for the previous
fiscal year, deferred tax assets under current assets have decreasedby ¥3,747 million, while deferred tax assets under investments
and other assets have increased by ¥2,984 million. In addition,other current liabilities under current liabilities have decreasedby ¥106 million, while deferred tax liabilities under non-current
liabilities have decreased by ¥657 million. Deferred tax assets
and deferred tax liabilities for the same taxable entity are shown
to offset each other, therefore total assets have declined by ¥763
million when compared before the accounting changes.
Matters provided in explanatory Note 8 “Accounting Standard
for Tax Effect Accounting” (excluding the total amount of valuation
allowances) prescribed in paragraphs 3-5 of the “Partial Amendments
to Accounting Standard for Tax Effect Accounting” have been
described in Note 13. INCOME TAXES. However, in accordance withthe transitional measures in paragraph 7, the Company omitted
including comparative information for the previous fiscal year.

5. JAPANESE‌YEN AND TRANSLATION INTO
U.S. DOLLARSThe Companies’ accounting records are maintained in yen. Yenamounts included in the financial statements are rounded to thenearest one million unit. Therefore, the total and subtotal
amounts presented in the financial statements may not equal theexact sum of the individual balances. The U.S. dollar amounts
appearing in the accompanying financial statements and notes
thereto represent the arithmetical results of translating yen into
U.S. dollars at the rate of ¥109.56 to US$1.00, the approximate
rate of exchange as at December 31, 2019. The inclusion of such
U.S. dollar amounts is solely for the convenience of readers; itdoes not carry with it any implication that yen amounts havebeen or could be converted into U.S. dollars at that rate.

6. CASH FLOW STATEMENTS(a) Cash and Cash Equivalents
Cash and deposits as of December 31, 2019 and 2018 on the
consolidated balance sheets and cash equivalents as at
December 31, 2019 and 2018 on the consolidated statements ofcash flows were reconciled as follows:
Thousands of
U.S. dollars

Millions of yen

Cash and deposits

2019

2018

2019

¥ 122,086¥ 113,186$ 1,114,332

(352)

(351)

(3,214)¥ 121,734¥ 112,835$ 1,111,118

Original maturities more than three months
Cash and cash equivalents

7. FINANCIAL INSTRUMENTS(a) Overview(1) Management policy relating to financial instruments
The Companies finance necessary long-term funds by bank loans
and bond issues following the capital investment plans andfinance short-term operating funds by bank loans and commercial
paper. Temporary excess funds are invested exclusively in financial
instruments which have fixed returns and low risk of falling below
par values. The Companies use derivative transactions to hedge
the following risks and do not enter into derivative transactions
for speculative purposes.
(2) Types of financial instruments and related risks
Operating receivables, such as notes and accounts receivable, areexposed to credit risk. Foreign-currency-denominated accounts
receivable incurred through exports are exposed to foreign
currency fluctuation risk. However, the Companies hedge the risk
by utilizing forward exchange contracts, currency options, andcurrency swaps based on internal rules that set out foreign currency
risk management principles.
Marketable securities and investment securities mainly consist of
the stocks of partner companies to maintain and strengthen theirbusiness relationships and are exposed to market fluctuation risk.
Operating payables, such as notes and accounts payable-tradeand other, are due within one year. Foreign-currency-denominatedaccounts payable incurred through imports of raw materials are
exposed to foreign currency fluctuation risk. The Companies
hedge the risk by utilizing forward exchange contracts followinginternal rules that set out the foreign currency risk management
principles. Short-term debt and commercial paper are mainly
used to finance short-term operating funds, and long-term debts
and bonds are mainly used to finance equipment funds. Sincesome of long-term debt is made up of variable interest rate loans,
it is exposed to interest rate fluctuation risk. However, interest
rate swaps are used for most loans to hedge the risk.
The Companies utilize derivative transactions, such as forward
exchange contracts, currency options, and currency swaps, to hedge

the foreign currency fluctuation risk of operating receivables andpayables denominated in foreign currencies and financing transactions
denominated in foreign currencies. Interest rate swaps are utilized
to hedge the interest rate fluctuation risk, and aluminum forward
contracts are utilized to hedge the market fluctuation risk.
(3) Risk management relating to financial instruments(i) ‌Credit risk management (risk of default by the counterparties)
The Company follows internal rules that set out accounts receivable
management principles. The compliance department works withthe sales division in each sector and monitors the customers’ credit
conditions periodically and reviews the sales policy checking thesales volume and balances. The Company takes measures to obtain
information on and minimize the credit risk that may arise due tothe deterioration in the financial condition of their customers.
Consolidated subsidiaries monitor their customers’ financial andcredit conditions based on their internal rules.
The held-to-maturity debts are limited to only highly rated
securities.
The Companies utilize derivative transactions only with creditworthy
financial institutions and trading companies to minimize credit risk.
The maximum credit risk as of December 31, 2019 is disclosed
as the balance sheet amount of financial instruments exposed tocredit risk.
(ii) ‌Market risk management (risk of fluctuations in foreign
currency and interest rates)
For operating receivables and payables and loans denominatedin foreign currencies, the Company and certain consolidated
subsidiaries utilize forward exchange contracts, currency options,and currency swaps to hedge some of the foreign currency
fluctuation risk, which is categorized by currency and maturity date.
The Company and certain consolidated subsidiaries utilize currency
swaps to hedge the interest rate fluctuation risk of loans.
For marketable securities and investment securities, theCompanies regularly review the fair value and issuers’ financial
conditions, and review the Companies’ portfolio on an ongoingbasis, except for held-to-maturity debt securities, according tomarket conditions and the business relationships with counterparties.
The Company has internal management rules that set out theapproval authorities and procedures of the derivative transactions.
The derivative transactions are carried out based on theappropriate approver set out in the internal rules. For currencyrelated derivative transactions, each division and the treasury
department perform and manage transactions and report to thedirector in charge periodically. For interest-related derivativetransactions, the treasury department performs and manages thetransactions and reports to the director in charge periodically.
For commodity-related derivative transactions, each divisionperforms and manages the transactions, and reports to thedirector in charge periodically. Consolidated subsidiaries perform
and manage derivative transactions based on their internalmanagement standards.

33

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries(iii) Liquidity‌risk management (risk of default on payment
due dates)
The Company manages liquidity risk by requiring the treasury
department to prepare and update cash plans, based on theschedule for cash inflows and disbursements in each division. In
addition, the Company signs commitment line contracts andmakes other arrangements with financial institutions to secure
the necessary liquidity.
Consolidated subsidiaries manage their liquidity risk throughsimilar procedures.
(4) ‌Supplemental explanation on fair value of financial
instruments
Along with the values being based on market prices, the fair valueof financial instruments includes values that are reasonably
calculated in case market prices do not exist. As the calculationof those values uses certain assumptions, those values may varyin the case of different assumptions being applied. Also, for thecontract amount and others regarding derivative transactions
described in Note 9. DERIVATIVE FINANCIAL INSTRUMENTS, thecontract amount itself does not indicate market risk related toderivative transactions.
(b) Fair Value of Financial Instruments
As at December 31, 2019 and 2018, book value, fair value, anddifference were as follows.
The financial instruments whose fair value is extremely difficult
to determine are not included below.
Year ended December 31, 2019(1) Cash and deposits

Millions of yen

Book value

Fair value

Difference¥ 122,086¥ 122,086¥

170,293

170,293(2) Notes and accounts receivable-trade

46,81346,813¥ 339,192¥ 339,192¥¥ 117,510¥ 117,510¥(2) Short-term debt

52,72052,720(3) Current portion of long-term debt

31,943

31,952

8(4) Accounts payable-other

30,59730,597—(3) Investment securities
Total assets(1) Notes and accounts payable-trade

—
—
—
—

213,861

213,424(436)

Total liabilities¥ 446,631¥ 446,203¥ (428)Derivative transactions*

¥

¥

¥

(5) Long-term debt less current portion

608

608

—

(1) Cash and deposits

Fair value

Difference¥ 113,186¥ 113,186¥ —203,730

203,730—(3) Investment securities
Total assets(1) Notes and accounts payable-trade46,613

46,613—¥ 363,529¥ 363,529¥ —¥ 139,420¥ 139,420¥ —(2) Short-term debt

81,747

81,747—(3) Current portion of long-term debt

41,403

41,411

8(4) Accounts payable-other56,471

56,471—(5) Long-term debt less current portion

164,818

165,040

222

Total liabilities¥ 483,859¥ 484,089¥ 230

Derivative transactions*

¥

¥

¥ —

SHOWA DENKO K.K.

(1) Cash and deposits(2) Notes and accounts receivable-trade(3) Investment securities
Total assets(1) Notes and accounts payable-trade

1,231

ANNUAL REPORT 2019

1,231

Fair value$ 1,114,332 $ 1,114,332
1,554,334

1,554,334

427,285

427,285

Difference
$

—
—
—

$ 3,095,951 $ 3,095,951$—$ 1,072,563 $ 1,072,563$—(2) Short-term debt

481,194

481,194—(3) Current portion of long-term debt

291,560

291,63677

279,274

279,274—

1,951,996

1,948,012(3,984)

Total liabilities$ 4,076,587 $ 4,072,679$ (3,907)

Derivative transactions*$$(4) Accounts payable-other(5) Long-term debt less current portion

5,549 $

5,549—

*Derivative assets and liabilities are on a net basis.
Notes: 1. ‌Valuation method for financial instruments and information onmarketable securities and derivative transactions
AssetsCash and deposits and Notes and accounts receivable-trade
The book value is deemed to approximate the fair value since theseare scheduled to be settled in a short period of time.
Investment securities
The fair value of these securities is based on the price on stock
exchanges. Refer to Note 8. SECURITIES regarding the securities
categorized by holding purposes.
Liabilities
Notes and accounts payable-trade, Short-term debt, Commercial paper(included in the above Short-term debt), and Accounts payable-other
The book value is deemed to approximate the fair value since theseare scheduled to be settled in a short period of time.
Current portion of long-term debt and Long-term debt (included in
the above Long-term debt less current portion)
The fair value is measured as the net present value of the estimatedcash flows by discounting the principal and interest value using theinterest rate applied to the new loans. Parts of the long-term loans
are variable rate loans, and they are subject to special treatment ofinterest rate swaps (refer to Note 9. DERIVATIVE FINANCIAL
INSTRUMENTS); the fair value is measured as the net present valueof the estimated cash flows by discounting the total amount ofprincipal and interest processed as interest rate swaps using theinterest rate applied to the new loans.
Bonds (included in the above Long-term debt less current portion)
The fair value is based on the market prices.
Derivative transactions
Refer to Note 9. DERIVATIVE FINANCIAL INSTRUMENTS.
Notes: 2. ‌Financial instruments for which fair value is extremely difficult to determine
Millions of yen

Book value(2) Notes and accounts receivable-trade

Thousands of U.S. dollars

Book value

Millions of yen

Year ended December 31, 2018

34

—
—

Year ended December 31, 2019Non-listed equity securities

Thousands of
U.S. dollars

2019

2018

2019

¥ 24,973¥ 25,273$ 227,935

These securities are not included in the above Investment securities, as it isextremely difficult to determine the fair value. As there was no quoted market
value, estimating the future cash flows is deemed to be practically impossible.

Notes: 3. Redemption‌schedule for financial assets and securities with maturities
Year ended December 31, 2019

Millions of yen

Due in 1 year or lessDue after 1 year
through 5 years

Due after 5 years
through 10 years

Due after 10 years

Cash and deposits¥ 122,086¥—¥—

Notes and accounts receivable-trade170,293———¥ 292,379

¥—

¥—

¥—

Total

Millions of yen

Year ended December 31, 2018

Due in 1 year or less
Cash and deposits
Notes and accounts receivable-trade
Total

¥—

Due after 1 year
through 5 years

Due after 5 years
through 10 years

Due after 10 years¥ 113,186¥—¥—

203,730———¥ 316,916

¥—

¥—

¥—

Year ended December 31, 2019¥—

Thousands of U.S. dollars

Due in 1 year or lessDue after 1 year
through 5 years

Due after 5 years
through 10 years

Due after 10 years

Cash and deposits$ 1,114,332$—$—

Notes and accounts receivable-trade

1,554,334———$ 2,668,666

$—

$—

$—

Total

$—

Notes: 4. Scheduled maturities of bonds and long-term debt after December 31, 2019 and 2018Year ended December 31, 2019

Millions of yen

Due in 1 year or lessDue after 1 year
through 2 years—¥

Due after 3 years
through 4 years

—

¥

—

Due after 4 years
through 5 years¥—

Due after 5 years(1) Short-term debt

¥ 52,720(2) Long-term debt

31,94353,191

48,87032,30924,291

55,200¥ 84,663¥ 53,191¥ 48,870¥ 32,309¥ 24,291¥ 55,200

Due in 1 year or lessDue after 1 year
through 2 years

Due after 2 years
through 3 years

Due after 3 years
through 4 years

Due after 4 years
through 5 years

Due after 5 years

Total

¥

Due after 2 years
through 3 years¥—

Millions of yen

Year ended December 31, 2018

(1) Short-term debt

¥ 81,747(2) Long-term debt

41,403

31,97551,89345,937

18,713

16,300¥ 123,150¥ 31,975¥ 51,893¥ 45,937¥ 18,713¥ 16,300

Due in 1 year or lessDue after 1 year
through 2 years

Due after 2 years
through 3 years

Due after 4 years
through 5 years

Due after 5 years

Total

¥

—

¥

Year ended December 31, 2019

—

¥

—

¥

—

¥

—

Thousands of U.S. dollars(1) Short-term debt

$ 481,194(2) Long-term debt

291,560

485,497446,057

294,898

221,714503,831$ 772,753$ 485,497$ 446,057$ 294,898$ 221,714$ 503,831

Total

$

—

$

—

Due after 3 years
through 4 years
$

—

$

—

$

—

35

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries

8. SECURITIES(b) Available-for-sale‌Securities Sold in the Years Ended
December 31, 2019 and 2018:(a) Available-for-sale Securities
Year ended December 31, 2019Year ended December 31, 2019

Millions of yen

Book value

Acquisition
cost

Difference

Millions of yen

Equity securities

Available-for-sale securities whose bookvalue exceeds their acquisition cost

Total

Equity securities
Other¥ 39,905¥ 23,089¥ 16,817

176

154

22

Total

8,542

(1,810)¥ 46,813¥ 31,784¥ 15,029

Gross loss

¥ 1,669¥ (5)¥ 4,922¥ 1,669¥ (5)Millions of yen

Sales
Equity securities

6,732

Gross gain

¥ 4,922

Year ended December 31, 2018

Available-for-sale securities whose bookvalue is less than their acquisition cost
Equity securities

Sales

Total

¥ (2)

¥ 1,552

¥ 292

¥ (2)

Thousands of U.S. dollars

Sales

Gross gain

Gross loss

$ 44,925$ 15,236$ (47)$ 44,925$ 15,236$ (47)

Millions of yen

Book value

Acquisition
cost

Difference¥ 38,941¥ 24,834¥ 14,107

181

159

21

Equity securities
Total

Available-for-sale securities whose bookvalue exceeds their acquisition cost
Equity securities
Other(c) Impairment of securities
For the years ended December 31, 2019 and 2018, the Companies
recorded an impairment loss of ¥3 million (US$31 thousand) on
available-for-sale securities and ¥2,581 million on available-for-salesecurities with fair market values, respectively.
Securities are deemed to be “substantially declined” when theirfair values have declined 30% or more. When their fair values havedeclined 50% or more, the impairment losses are recorded on
those securities. When their fair values have declined between
30% and 50%, the impairment losses are recorded on thosesecurities unless such values are considered to be recoverable on
an individual basis.

Available-for-sale securities whose bookvalue is less than their acquisition cost
Equity securities
Total
Year ended December 31, 2019

7,491

9,567

(2,076)¥ 46,613¥ 34,561¥ 12,052

Thousands of U.S. dollars

Book value

Acquisition
cost

Difference$ 364,233$ 210,739$ 153,494

1,605

1,401

204

Available-for-sale securities whose bookvalue exceeds their acquisition cost
Equity securities
Other

Gross loss

¥ 292

Year ended December 31, 2019Year ended December 31, 2018

Gross gain

¥ 1,552

Available-for-sale securities whose bookvalue is less than their acquisition cost
Equity securities
Total

61,446

77,966(16,519)$ 427,285$ 290,106$ 137,179

9. DERIVATIVE FINANCIAL INSTRUMENTS(a) Derivative Transactions to Which Hedge Accounting is Not Applied
Millions of yen

Thousands of U.S. dollars

2019

2018

2019

Contract Contract
Valuationamount Fair value gain
amount over(loss)
1 yearContract Contract
Valuationamount Fair value gain
amount over(loss)
1 yearContract Contract
Valuationamount Fair value gain
amount over(loss)
1 year

¥ 184

¥ —

¥ 1

¥ 1

¥

2

—

0

0

¥ 198

¥ —

¥ (1)

¥ (1)

—

—

—

—

1,369

—

(16)

(16)

—

Currency related:
Forward exchange contracts:
BuyingU.S. Dollar
Euro

—

¥ —

¥ —

¥ —

$ 1,676

$ —

6,344

—

9

9

14

—

$

9

$

20

¥ —

¥ 0

¥ 0

$ 1,812

$ —

401

—

13

13

—

—

—

—

—

—

—

12,493

—

(142)

(142)

0

9
0

Selling
U.S. Dollar
Euro
Swiss Franc

¥

$

(5)

$

Note: Fair value calculation method:
Fair values of forward exchange contracts are stated by the forward exchange rates. Fair values of currency and interest rate swaps are measured at the quoted
price obtained from the financial institutions.

36

SHOWA DENKO K.K.

ANNUAL REPORT 2019(5)

(b) Derivative Transactions to Which Hedge Accounting is Applied
Millions of yen

Thousands of U.S. dollars

2019

2018

2019

Contract
amountContract
amountover 1 year

Fair value

Contract
amountContract
amountover 1 year

Contract
amountContract
amountover 1 year

Fair value$ 2,190

Fair value(1) Currency related:
Principle method
Forward exchange contracts:
Buying¥ 8,682¥ 3,109¥ 240¥ 11,309¥ 766

0$ 79,244$ 28,374

Euro

19

—

0

37

—

(0)

176

—

2

Canadian Dollar

3

—

0

—

—

—

26

—

0

Australian Dollar

1

—

(0)

—

—

—

11

—

(0)

5,594

—

(19)

6,736

—

106

51,058

—

(176)

201

—

(2)

—

—

—

1,837

—

(20)

—

¥ —

¥ 1,971——

44

U.S. Dollar¥

Selling
U.S. Dollar
Euro
Allocation method
Forward exchange contracts:
BuyingU.S. Dollar
Euro¥ 1,623
47

¥

¥

—

¥

—

—

$ 14,812

—

431

$

—

$

—

—
—

Selling
6,073

—

—

7,390

—

—

55,432

—

—

Euro

332

—

—

1,845

—

—

3,026

—

—

Yuan Renminbi

701

—

—

1,041

—

—

6,396

—

—

¥ 2,900¥ 2,000¥ —¥ 7,900¥ 2,900¥—$ 26,470$ 18,255$—¥ 5,433¥ 2,600¥ —¥ 7,168¥ 2,836¥—$ 49,589$ 23,731$—

Buying¥ 15,649¥ 5,993¥ 428¥ 18,235¥ 8,790¥ 1,070$ 142,839$ 54,698$ 3,907

Selling

1,538

—

(22)

1,025

—

34

14,034—(204)

U.S. Dollar

Currency swaps:
Receipt U.S. Dollar
Payment Yen(2) Interest rate related:
Special method
Interest rate swaps:
Receipt-variable rate/Payment-fixed rate(3) Commodity related:
Principle method
Aluminum forward contracts:

Notes: 1. ‌The main items hedged by forward exchange contracts are accounts payable for buying, accounts receivable for selling and long-term debt by interest rate swaps.
The main items hedged by aluminum forward transactions are aluminum metal transactions.
2. Fair value calculation method:
The fair values of forward exchange contracts are stated by the forward exchange rates. The fair values of currency swaps are measured at the quoted priceobtained from the financial institutions. The fair values of aluminum forward transactions are stated by forward quotations of the London Metal Exchange.
3. ‌The fair values of forward exchange contracts and currency swaps that meet the allocation method criteria are reflected in the fair values of accounts receivable,accounts payable and debts of their hedged items.
4. The fair values of interest rate swaps that meet the special treatment criteria are reflected in the fair values of long-term debt of their hedged item.

10. EFFECT‌
OF YEAR-END DATE ON FINANCIAL STATEMENTS
The year-end date of 2019, namely, December 31, 2019, was a bankholiday. Although notes receivable and payable maturing on thisdate were accordingly settled on January 6, 2020, the Companies
accounted for those notes in their financial statements as if they
had been settled on the maturity date.
Notes outstanding as at December 31, 2019 and 2018 dealt
with in the above-mentioned manner were as follows:

Thousands of
U.S. dollars

Millions of yen

2019

2018

2019

Notes receivable¥ 1,524¥ 1,317$ 13,906

Notes payable

1,074

901

9,803

37

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries

11. SHORT-TERM DEBT AND LONG-TERM DEBT

12. RETIREMENT BENEFITS

As at December 31, 2019 and 2018, the short-term debt of theCompanies consisted of the following:(a) Defined‌
benefit pension plan, including the plans using
the simplified method(1) ‌Reconciliation of opening and closing balance of retirement
benefit obligation for the years ended December 31, 2019and 2018 was as follows:

Thousands of
U.S. dollars

Millions of yen

2019Bank loans at the average interest rateof 0.66%

2018

2019

¥ 52,720¥ 61,747$ 481,194—

20,000—¥ 52,720¥ 81,747$ 481,194

Commercial paper
Total

As at December 31, 2019 and 2018, the long-term debt of theCompanies consisted of the following:Thousands of
U.S. dollars

Millions of yen

2019

2019

2018

¥ 15,000 $ 136,911

0.630% bonds due 2021

¥ 15,000

0.200% bonds due 2021

10,00010,00091,2740.734% bonds due 2022

10,00010,00091,2740.190% bonds due 2024

10,000—91,2740.500% bonds due 2026

7,000

7,000

63,8920.430% bonds due 2029

10,000—91,274Loans principally from banks andinsurance companies due 2019 to 2029
at the average interest rate of 0.55%

183,804

164,221

1,677,656

245,804

206,2212,243,556(31,943)(41,403)(291,560)

Less: current portion¥ 213,861

Total

Years ending December 31

ofMillions of yen Thousands
U.S. dollars

2021¥ 53,191 $ 485,497

2022

48,870446,0572023

32,309294,898

2024

24,291

221,714

55,200503,8312025 and thereafter¥ 213,861 $ 1,951,996

Total

2018

2019

Balance of retirement benefit obligation
at the beginning of year
¥ 100,324

2019¥ 101,154$ 915,699

2,677
487
3,646
(5,035)
30

2,606
519
1,428
(4,758)72

24,433
4,449
33,276(45,954)
270

1,630

—

14,868

(885)
(321)

—
(696)

(2,932)¥ 102,553¥ 100,324$ 936,035

Service cost
Interest cost
Actuarial gain and loss
Retirement benefits paid
Past service cost
Increase from changes in scope of
consolidation
Decrease from changes in scope of
consolidation
Other
Balance of the retirement benefit
obligation at the end of year

As at December 31, 2019 and 2018, the assets pledged as collateralfor long-term debt were as follows:
Thousands of
U.S. dollars

Millions of yen

2019

2018

¥

408

Property, plant and equipment, lessaccumulated depreciation

136,697

Total¥ 137,105

¥

361 $

2019

2018

2019

Balance of plan assets at the beginning of year
Expected return on plan assets
Actuarial gain and loss
Contribution from employer
Retirement benefits paid
Increase from changes in scope of
consolidation
Decrease from changes in scope of
consolidation
Other¥ 78,554
1,523
5,101
11,799(4,507)¥ 82,419
1,577(5,463)
4,554(4,294)$ 716,999
13,90046,557
107,693(41,138)

1,338—

12,212

(989)
9

—
(239)

(9,029)80

Balance of plan assets at the end of year

¥ 92,827¥ 78,554$ 847,273(3) Reconciliation‌of the ending balance of retirement benefit
obligations and plan assets, and the net defined benefit
liability and the net defined benefit asset for the years
ended December 31, 2019 and 2018 was as follows:

2019

144,153

3,724
1,247,691¥

Short-term debt

¥

170 $

836

160

240

1,460

Notes and accounts payable-trade

143

163

1,305

573 $

3,602

Total

38

92

Long-term debt

SHOWA DENKO K.K.

¥

395

¥

ANNUAL REPORT 2019

Thousands of
U.S. dollars

Millions of yen

2019

2018

2019

Funded retirement benefit obligations¥ 99,208¥ 97,178$ 905,512

Plan assets(92,827)(78,554)(847,273)

6,381

18,62458,240Unfunded retirement benefit obligations

3,344

3,146

30,523

Net amount of relevant liabilities and assets
on the consolidated balance sheets

9,725

21,77088,762¥ 144,514 $ 1,251,415

Secured short-term debt and longterm debt

Thousands of
U.S. dollars

Millions of yen

Assets pledged as collateral
Investment securities(8,074)(2) Reconciliation‌of opening and closing balance of plan
assets for the years ended December 31, 2019 and 2018
was as follows:¥ 164,818 $ 1,951,996

The aggregate annual maturities of the noncurrent portion of
long-term debt were as follows:

Thousands of
U.S. dollars

Millions of yen

Net defined benefit liability

9,969

22,01890,990Net defined benefit asset

(244)

(249)

(2,227)

Net amount of relevant liabilities and assets
on the consolidated balance sheets

9,725

21,77088,762

(4) Retirement‌benefit expenses and the components of theamounts thereof for the years ended December 31, 2019and 2018 were as follows:
Thousands of
U.S. dollars

Millions of yen

2019

2018

2019

Service cost

¥ 2,677¥ 2,606$ 24,433

Interest cost

487

519

4,449

Expected return on plan assets(1,523)(1,577)(13,900)

Amortization of actuarial gain and loss

2,234

1,641

20,393

30

78

272

¥ 3,906¥ 3,267$ 35,648

Amortization of past service cost
Retirement benefit expenses related tothe defined benefit pension plan(5) Remeasurements of defined benefit plans
The components of items (before tax) reported underremeasurements of defined benefit plans for the years ended
December 31, 2019 and 2018 were as follows:

Past service cost
Actuarial gain and loss
Total

¥

2019

2018
(0)

¥

$

(0)

(2)

(4,442)

5,114(40,551)¥ (4,443)¥ 5,114$ (40,553)

Millions of yen

Unrecognized actuarial gain and loss
Total

2018

Discount rate

Mainly 0.2% Mainly 0.3%

Long-term rate of expected return on plan assets

Mainly 1.8% Mainly 1.8%(b) Defined contribution pension plan
The amounts required to be contributed by consolidated subsidiaries
for the years ended December 31, 2019 and 2018 were ¥738 million(US$6,733 thousand), and ¥657 million, respectively.

13. INCOME TAXES(a) ‌As at December 31, 2019 and 2018, significant components
of deferred tax assets and liabilities were as follows:
Thousands of
U.S. dollars

Millions of yen

2019

2018

2019

Deferred tax assets:(6) Accumulated remeasurements of defined benefit plans
The components of items (before tax) reported under accumulated
remeasurements of defined benefit plans for the years ended
December 31, 2019 and 2018 were as follows:

Unrecognized past service cost

Ratio

2019

Thousands of
U.S. dollars

Millions of yen

2019(8) ‌Matters regarding the assumptions for actuarial calculations
Key assumptions for actuarial calculations as of December 31, 2019and 2018 were as follows:¥ 21,335¥ 17,252$ 194,729

Write-down of marketable andinvestment securities

14,56016,657

132,891

Tax loss carryforwards

3,898

5,681

35,578Net defined benefit liability

3,717

5,423

33,931

Allowance for doubtful accounts

3,380

3,924

30,848Depreciation and amortization

2,696

4,869

24,611

Loss on valuation of inventories

2,241

2,200

20,453

Undetermined accrued liabilities

1,227

473

11,199Impairment loss

Thousands of
U.S. dollars

Provision for repairs

814

356

7,430

2019

2018

2019

Provision for bonuses

747

791

6,819

¥

¥

$

(20)

(20)

(181)

7,568

12,011

69,076

Unrealized earnings from the sale of
fixed assets

487

543

4,442

¥ 7,548¥ 11,991$ 68,895

Write-down of golf club memberships

211

243

1,924

Deferred gains or losses on hedges

191

355

1,740

Other

4,142

5,359

37,810Subtotal of deferred tax assets

59,64564,125544,405

Valuation allowance related to tax loss
carryforwards(2,752)—(25,118)

Valuation allowance related to the totalof deductible temporary differences(39,423)—(359,830)

Total valuation allowance(42,175)(45,374)(384,949)

Total deferred tax assets

17,47018,751

159,460(7) Matters regarding plan assets( i ) Major content of the plan assets
The percentages of major asset types that account for the total
plan assets as of December 31, 2019 and 2018 were as follows:
Ratio

2019

2018

Bonds

41 %

42 %

Stocks

37

35

General accounts of life insurance company

19

22

Special depreciation reserve(4,990)(5,058)(45,549)

Cash and deposits

1

1

Other
Total

Deferred tax liabilities:

2—

Valuation difference on available-for-salesecurities(4,675)(3,678)(42,675)

100 %

100 %

Amount of revaluation from the book value(4,585)(4,233)(41,849)

Foreign subsidiaries' undistributed
retained earnings(4,054)(3,436)(37,003)

Reserve for advanced depreciation of
fixed assets

(240)

(231)

(2,188)Deferred gains or losses on hedges

(192)

(371)

(1,755)(3,303)(3,197)(30,148)(201,166)(ii) Method‌for setting the long-term rate of expected returnon plan assets
To determine the long-term rate of expected return on plan assets,
the current and anticipated long-term yield rates of various assetsthat constitute the plan assets as well as the current and projecteddistribution of plan assets, have been taken into account.

Other
Total deferred tax liabilities(22,040)(20,204)

Net deferred tax assets (liabilities)¥ (4,569)¥ (1,453) $ (41,706)

39

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries(b) Significant‌
items in the reconciliation of the statutory tax
rate with the effective tax rate as at December 31, 2019 and2018 were as follows:
2019

2018

Statutory tax rate

30.6 %

Differences of statutory tax rate in subsidiaries

(5.5)

(5.7)

Effect on the reexamination of recoverability

(2.4)

(1.2)

Deferred taxes on undistributed earnings of foreignsubsidiaries

0.6

0.7

Consolidated adjustment for loss on valuation of investments
in capital of subsidiaries and associates, etc.

(0.1)

(1.6)

Unrealized earnings from the sale of fixed assets

0.0

(0.8)

Other

(0.2)

(2.5)

23.1 %

19.8 %

Effective tax rate

30.9 %

As at December 31, 2019, major impairment losses on fixed
assets were as follows:
Major use

Oyama City, Tochigi
Prefecture, etc.

Production
facilities foraluminum
processed
products

Isesaki City, Gunma
Prefecture

Oyama City, Tochigi
Prefecture, etc.

Production
facilities forpolymer

Asset categoryofMillions of yen Thousands
U.S. dollarsofMillions of yen Thousands
U.S. dollars

Valuation difference on available-for-sale securities¥ 4,511$ 41,173

Reclassification adjustments(1,168)(10,665)

Amount before income tax effect3,342

30,508

Income tax effect(1,009)(9,213)¥ 2,333$ 21,295¥ (1,260)$ (11,503)

Increase during the year

Total
Deferred gains or losses on hedges
Reclassification adjustments

13

115

Adjustments of acquisition cost of assets

663

6,050

Amount before income tax effect(585)(5,338)

Income tax effect

179

1,635

(406)

$ (3,703)¥ (3,350)$ (30,578)

Total
Land, etc.

¥ 10,418$ 95,089¥

Foreign currency translation adjustments
Increase during the year
Reclassification adjustments

Land, etc.

Production
facilities for
Machinery andaluminum
equipment, etc.
beverage cans

Kawasaki City,
WelfareKanagawa Prefecture facilities

Reclassification adjustments and tax effects for components ofother comprehensive income (loss) for the year ended December
31, 2019, were as follows:

Increase during the year

14. IMPAIRMENT LOSS

Location

15. CONSOLIDATED‌STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)

Land, etc.

Other
Total

2,812

25,666

Amount before income tax effect

804

7,338

5,453

1,031

9,409

¥ 15,662$ 142,956(27,309)——$ (27,309)

Remeasurements of defined benefit plans, net of tax¥ 2,178$ 19,886

Reclassification adjustments

2,264

20,667

Amount before income tax effect

4,443

40,553

Income tax effect(1,312)(11,971)¥ 3,131$ 28,582

¥

$

(542)

$

(542)

Increase during the year
597

3,269

(2,992)¥ (2,992)

Income tax effect
Total

358

Total
Share of other comprehensive income ofunconsolidated subsidiaries and affiliates
accounted for using the equity method
Increase during the year
Total
Total other comprehensive income(59)—

Reclassification adjustments¥(59)¥ 2,007—$ 18,323

16. LEASES(a) Finance Leases as a Lessee
Finance lease transactions other than those involving transfer ofownership to the lessee(1) Type of leased assetsa) ‌Tangible fixed assets: Principally welfare facilities (buildings
and structures)b) Intangible fixed assets: Software(2) Method of depreciation
The depreciation method of leased assets is described in Note 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (j) Leased Assets.

40

SHOWA DENKO K.K.

ANNUAL REPORT 2019

(b) Operating Leases as a Lessee
As at December 31, 2019 and 2018, assets leased under non-capitalized
operating leases were as follows:
Future minimum lease payments for the remaining lease periods:
Thousands of
U.S. dollars

Millions of yen

Due within 1 year

2019

2018

2019

¥

$ 3,109

341

¥ 678

1,271

3,288

11,604¥ 1,612¥ 3,967$ 14,713

Due over 1 year
Total(c) Operating Leases as a Lessor
As at December 31, 2019 and 2018, non-cancellable operatinglease receivables for the remaining lease periods were as follows:
Future minimum lease receivables for the remaining lease periods:
Thousands of
U.S. dollars

Millions of yen

2019

2018

2019

Due within 1 year

¥ 80

¥ 80

Due over 1 year

364

435

3,325

¥ 445

¥ 514

$ 4,058

Total

$

733

17. CONTINGENT LIABILITIESAs at December 31, 2019 and 2018, the Companies were guarantors
for the borrowings below. The guarantees were principally for
unconsolidated subsidiaries, affiliates and others.
Millions of yen

2019
Guarantees¥ 867

Thousands of
U.S. dollars

2018

2019

¥ 2,137$ 7,913

As the amounts include joint and several guarantors’ portions
as well as the Companies’, the actual amounts that the Companies
were contingently liable to pay were smaller than the above.

18. NET ASSETSThe Corporation Law of Japan (the “Law”) provides that the entire
amount paid for new shares may be credited to the stated capital,
with the provision that, by resolution of the Board of Directors,
up to one-half of such amount paid for new shares may be credited
to additional paid-in capital, which is included in capital surplus.
The Law provides that an amount equal to 10% of cash
appropriations of retained earnings shall be set aside asadditional paid-in capital or a legal earnings reserve until the
total of such reserve and additional paid-in capital equals 25% of
the stated capital. Additional paid-in capital and the legal
earnings reserve may be used to eliminate or reduce a deficit, if
any, or be capitalized by resolution at the Ordinary General
Meeting of Shareholders. All additional paid-in capital and thelegal earnings reserve may be transferred to other capital surplus
and retained earnings, respectively, which are potentiallyavailable for dividends. Additional paid-in capital and the legal
earnings reserve are included in capital surplus and retained
earnings, respectively.

The Law does not have a definition about the classification ofpaid-in capital between common stock and preferred stock.
Accordingly, the Company states its capital in the total amount
paid by issuing common stock and preferred stock.
The maximum amount that the Company can distribute as
dividends is calculated based on the unconsolidated financial
statements of the Company in accordance with Japanese laws
and regulations.

19. REVALUATION RESERVE FOR LANDThe Company and some of its consolidated subsidiaries revalued
the land they own for business in accordance with the Law
concerning the Revaluation of Land. The difference between therevalued amount and the book value, after the deduction of
applicable tax, is stated as a land revaluation reserve. The
revaluation was conducted using methods stipulated in theordinance for enforcement of the law, specifically, the method in
Item 4 of Article 2 (Reasonable Adjustment of the Appraised
Value Relating to Land Price Tax), and the method in Item 5 of
Article 2 (Estimation by Experts). The excess of the carrying
amount of the revalued land over the market value as at
December 31, 2019 was ¥61,231 million (US$558,879 thousand).

20. SELLING,‌GENERAL AND ADMINISTRATIVE
EXPENSES
Selling, general and administrative expenses for the years ended
December 31, 2019 and 2018 were summarized as follows:
Millions of yen

2019
Freight¥ 27,446

2018

Thousands of
U.S. dollars

2019¥ 27,986 $ 250,512

Employees' compensation

26,55024,076242,331

Other

60,50355,068552,239

Total¥ 114,499¥ 107,130 $ 1,045,081

Research and development expenses included in selling, generaland administrative expenses for the years ended December 31,
2019 and 2018 were ¥20,591 million (US$187,943 thousand) and¥19,623 million, respectively.

21. RESEARCH AND DEVELOPMENT
Research and development costs included in manufacturing costs,
selling, general and administrative expenses for the years ended
December 31, 2019 and 2018 were ¥20,605 million (US$188,069
thousand) and ¥19,735 million, respectively.

41

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries

22. SEGMENT INFORMATION(a) Information about sales, operating income, assets, and other items by reportable segment
Year ended December 31, 2019

Millions of yen

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Others

Total

Adjustments Consolidated¥ 240,923¥ 140,158¥ 95,702¥ 221,453¥ 90,500¥ 117,717 ¥ 906,454

9,755

17,322

743

8,682

7,042

Sales
Outside customers
Inter-segment

250,678

157,480

Operating income (loss)¥ 17,201¥ 13,656¥

Assets¥ 137,504

51,989126,163

958,443¥— ¥ 906,454(51,989)—(51,989)

906,454

96,445230,135

4,880¥ 89,256¥¥ 230,932¥ 142,511¥ 281,757¥ 135,072

4,136

9,267

9,274

8,091

4,826

1,526

37,120584

37,704

—

(163)

12

8

217

24

98

—

98

Investments in unconsolidated subsidiaries
and affiliates

10,570

3,457

—

1,754

—

487

16,268—16,268

Increase in property, plant and equipment
and intangible assets

4,404

11,412

10,474

11,685

8,464

2,889

49,328888

50,216

Total

Depreciation and amortization
Amortization of goodwill

97,542

8,446

1,746

¥

1,819 ¥ 128,557¥ (7,759) ¥ 120,798¥ 160,063 ¥ 1,087,839¥ (11,458) ¥ 1,076,381

Notes: 1. Adjustments are as follows:(1) ‌Elimination of intersegment transactions of ¥302 million (US$2,754 thousand) and total corporate expenses of ¥(8,061) million (US$(73,575) thousand) thatwere not allocated to any reportable segment were included in “Adjustments” for “Operating income” of ¥(7,759) million (US$(70,821) thousand). The total
corporate expenses principally consist of the total corporate common research expenses that are not attributable to any reportable segment.
(2) ‌Elimination of intersegment receivables and payables and assets of ¥(46,101) million (US$(420,787) thousand) and total corporate assets of ¥34,644 million(US$316,206 thousand) that were not allocated to any reportable segment were included in “Adjustments” for “Assets” of ¥(11,458) million (US$(104,580)
thousand). The total corporate assets principally consist of surplus funds of the Companies under management (in the form of cash and deposits), deferred
tax assets and assets related to the total corporate common research and development expenses.
2. Amortization of negative goodwill was included in “Amortization of goodwill.”
Millions of yen

Year ended December 31, 2018

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Others

Total

Adjustments Consolidated

Sales
Outside customers
Inter-segment
Total¥ 258,035¥ 139,041¥ 110,440¥ 257,525¥ 99,078¥ 128,017¥ 992,136

10,844

17,499

1,472

8,624

9,176

9,307

56,922

268,879

156,541

111,912266,149

Operating income (loss)¥ 20,333¥ 17,393¥ 13,557¥ 132,445¥

Assets¥ 156,169¥ 218,256¥ 135,468¥ 300,197

5,046

8,806

9,845

7,967

Depreciation and amortization
Amortization of goodwill

108,254¥—¥ 992,136(56,922)—992,136

137,324

1,049,058(56,922)1,734¥ 190,403¥ (10,400) ¥ 180,003¥ 150,117¥ 158,183¥ 1,118,389¥ (43,406) ¥ 1,074,983

5,655

899

38,217

1,242

39,459

4,942

¥

—

(260)

12

8

222

(1)

(19)

—

(19)

Investments in unconsolidated subsidiaries
and affiliates

10,718

3,421

—

1,824

—

388

16,352—

16,352

Increase in property, plant and equipment
and intangible assets

5,051

8,048

10,083

8,127

5,521

2,406

39,2372,491

41,727

Notes: 1. Adjustments are as follows:(1) ‌Elimination of intersegment transactions of ¥(83) million and total corporate expenses of ¥(10,317) million that were not allocated to any reportable segment
were included in “Adjustments” for “Operating income” of ¥(10,400) million. The total corporate expenses principally consist of the total corporate common
research expenses that are not attributable to any reportable segment.
(2) Elimination‌of intersegment receivables and payables and assets of ¥(67,798) million and total corporate assets of ¥24,392 million that were not allocatedto any reportable segment were included in “Adjustments” for “Assets” of ¥(43,406) million. The total corporate assets principally consist of surplus funds of
the Companies under management (in the form of cash and deposits), deferred tax assets and assets related to the total corporate common research anddevelopment expenses.
2. Amortization of negative goodwill was included in “Amortization of goodwill.”

42

SHOWA DENKO K.K.

ANNUAL REPORT 2019Year ended December 31, 2019

Thousands of U.S. dollars

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Others

Total

Adjustments Consolidated

Sales
Outside customers$ 2,199,008 $ 1,279,278 $ 873,514 $ 2,021,295 $ 826,034 $ 1,074,455 $ 8,273,583
89,038158,108

6,782

79,24164,27477,087474,5292,288,046

1,437,386

880,295

2,100,536

890,308

1,151,542

8,748,112

Inter-segment
Total

44,540 $ 814,673 $

15,939 $$—$ 8,273,583(474,529)—(474,529)

8,273,583

Operating income (loss)$ 156,997 $ 124,644 $

16,602 $ 1,173,395$ (70,821) $ 1,102,574

Assets$ 1,255,059 $ 2,107,813 $ 1,300,759 $ 2,571,714 $ 1,232,857 $ 1,460,963 $ 9,929,165$ (104,580) $ 9,824,584

37,75084,587

84,64373,84944,052

13,930338,8115,330

344,141—(1,484)

107

77

1,978

216

894

—

894

Investments in unconsolidated subsidiaries
and affiliates

96,47931,554—16,010—4,442

148,484—

148,484

Increase in property, plant and equipment
and intangible assets

40,195

104,167

95,600106,653

77,253

26,372450,240

8,103

458,343

Japan

Asia

OthersTotal¥ 508,672¥ 225,671¥ 172,111¥ 906,454

Japan

Asia

OthersTotal¥ 551,333¥ 239,885¥ 200,919¥ 992,136

Depreciation and amortization
Amortization of goodwill(b) Information about geographical areas
Year ended December 31, 2019

Sales

Millions of yen

Millions of yen

Year ended December 31, 2018

Sales
Year ended December 31, 2019

Sales

Thousands of U.S. dollars

Japan

Asia

OthersTotal$ 4,642,861$ 2,059,792$ 1,570,930$ 8,273,583

Year ended December 31, 2019

Property, plant and equipment

Millions of yen

Japan

OthersTotal¥ 366,375¥ 106,793¥ 473,168

Millions of yen

Year ended December 31, 2018

Property, plant and equipment

Japan

OthersTotal¥ 379,577¥ 98,829¥ 478,406

Year ended December 31, 2019

Property, plant and equipment

Thousands of U.S. dollars

Japan

OthersTotal$ 3,344,061$ 974,746$ 4,318,807

43

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries(c) Information about impairment loss on property, plant and equipment by reportable segment
Year ended December 31, 2019

Millions of yen

Petrochemicals¥2

Impairment loss on assets

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

Total¥ 2,871

¥ 272

¥ 179

¥ 11,447

¥ 892

¥ —

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

Total

¥ —

¥ 4,964¥ 79¥ 9,642¥ 6,016¥ 1,864¥ 22,573

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination$ 26,203$ 2,482$ 1,637$ 104,479$ 8,139$ —¥ 15,662

Millions of yen

Year ended December 31, 2018

Petrochemicals
Impairment loss on assets¥7

Year ended December 31, 2019

Thousands of U.S. dollars

Petrochemicals$ 15

Impairment loss on assets

Total$ 142,956(d) Information about amortization of goodwill and unamortized balance by reportable segment
Year ended December 31, 2019

Millions of yen

Petrochemicals
Amortization
Unamortized balance

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

¥—

¥ 145

¥ 44

¥ 8

¥ 270

¥ 27

¥—

Total
¥ 496

—

3,241

199

29

1,960

94

—

5,524

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

¥—

¥ 48

¥ 44

¥ 8

¥ 276

¥ 27

¥—

¥ 404

—

134

244

38

2,278

122

—

2,815

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination$—$ 1,327

$ 404

$ 77

$ 2,467$ 249$—$ 4,524—

29,581

1,819

269

17,887862—

50,419Millions of yen

Year ended December 31, 2018

Petrochemicals
Amortization
Unamortized balanceYear ended December 31, 2019

Total

Thousands of U.S. dollars

Petrochemicals
Amortization
Unamortized balance

Total

Amortization of negative goodwill arose from business combinations prior to April 1, 2010 and its unamortized balance are as follows:Year ended December 31, 2019

Millions of yen

Petrochemicals
Amortization
Unamortized balance

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

¥—

¥ 308

¥ 33

¥—

¥ 54

¥ 4

¥—

¥ 398

—

1,472

260

—

432

13

—

2,178

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

¥—

¥ 308

¥ 33

¥—

¥ 54

¥ 28

¥—

¥ 422

—

1,780

293

—

486

17

—

2,575

Millions of yen

Year ended December 31, 2018

Petrochemicals
Amortization
Unamortized balanceYear ended December 31, 2019

Petrochemicals

Unamortized balance

SHOWA DENKO K.K.

Total

Thousands of U.S. dollars

Amortization

44

Total

ANNUAL REPORT 2019

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination$—$ 2,811

$ 297

$—

$ 489

$ 33

$—

$ 3,630

Total—

13,437

2,374

—

3,945

120

—

19,876

23. SIGNIFICANT SUBSEQUENT EVENTS
Tender Offer for Shares in Hitachi Chemical Company, Ltd.
On December 18, 2019, HC Holdings K.K. (a wholly owned subsidiaryof the Company); the “Tender Offeror”), decided to acquirecommon shares of Hitachi Chemical Company, Ltd. (the “Target
Company”) through a tender offer under the Financial
Instruments and Exchange Act (the “Tender Offer”). Consequently,
on March 23, 2020, the Company’s Board of Directors and theTender Offeror’s Representative Director decided to begin theTender Offer on March 24, 2020.
(a) Name, Scope and Scale of Business of the Target Company(1) Name
Hitachi Chemical Company, Ltd.
(2) Scope of Business‌Functional materials (electronics materials, printed wiringboard materials, electronics components),
advanced components and systems (mobility, energy storage
devices and systems, life sciences)(3) Common Stock¥15.5 billion (US$141 million)(b) Purpose of the Tender Offer
The Company believes that the Company can vertically integrate
the value chain from material development to product module
design and evaluation by combining the Company’s strengths ina wide range of “material design technology” and “material
analysis technology,” covering aspects from organic materials
such as resins, to inorganic materials, such as aluminum andcarbon, and “adhesion technology between different materials”
which connects multiple materials that the Company offers, with
the Target Company’s strengths in “material design technology
utilizing characteristics of raw materials,” “ability to evaluate
functions” for customer marketing, and “ability to design
functions leading to process technology, including module
segmentation” that realizes functions demanded by customers.
The Company believes that by making the Target Company awholly owned subsidiary of the Tender Offeror, the Company will
be able to quickly and flexibly propose solutions for thesophisticated and diverse demands of end-users, in this way
solidifying our position as a “one-stop, advanced materials
partner.” Accordingly, the implementation of the Tender Offer
was decided as part of the transactions for making the Target
Company a wholly owned subsidiary of the Tender Offeror.

(4) Number of Share Certificates to be Purchased, etc.
Number of Shares to be Purchased: 208,218,230 shares (nomaximum number of shares to be purchased)
Minimum Number of Shares to be Purchased: 138,812,200 shares
Purchase Price: ¥964,050,404,900 (US$8,799,291,757)
Equity Interest Ratio After Purchase: 100%
Note: In the Tender Offer, if the total number of share certificates,etc. tendered to the Tender Offer (the “Tendered Share
Certificates”) is less than the minimum number of shares tobe purchased, the Tender Offeror will not purchase any of
the Tendered Share Certificates.
If the Tender Offer has been successfully completed, but
the Tender Offeror is unable to acquire all of the shares of
the Target Company (excluding treasury shares owned by
the Target Company) as a result of the Tender Offer, theTender Offeror intends to acquire all of the shares of theTarget Company (excluding treasury shares owned by theTarget Company) and make the Target Company a wholly
owned subsidiary by demanding that all of the Target
Company’s shareholders sell all shares of the Target Company
they hold, or by carrying out a reverse split of the shares of
the Target Company.
(d) Fund Procurement
The Tender Offeror plans to procure the funds required for thesettlement of the Tender Offer by borrowing up to ¥400 billion(US$3,651 million) from Mizuho Bank, Ltd. (“Mizuho Bank”),
receiving an investment of up to ¥275 billion (US$2,510 million)
from Mizuho Bank and the Development Bank of Japan Inc. by
the subscription of Class A preferred shares of the Tender Offeror,
and receiving an investment of up to ¥295 billion (US$2,693
million) from the Company through the subscription of commonshares of the Tender Offeror.
The Company plans to borrow up to ¥295 billion (US$2,693
million) from Mizuho Bank for the purpose of executing thetender offer.

(c) Outline of the Tender Offer(1) Period of Tender Offer
From March 24, 2020 (Tuesday) to April 20, 2020 (Monday)(20 business days)(2) Settlement Commencement Date
April 28, 2020 (Tuesday)(3) Tender Offer Price¥4,630 (US$42.26) per share

45

Report of Independent Certified Public Accountants

46

SHOWA DENKO K.K.

ANNUAL REPORT 2019

Corporate Data
Investor Information
Head Office
Showa Denko K.K.

Number of Shares Outstanding
149,711,292 as of December 31, 2019

13-9, Shiba Daimon 1-chome, Minato-ku, Tokyo 105-8518, Japan
URL: https://www.sdk.co.jp/english
Phone: +81-3-5470-3235
Fax: +81-3-3431-6215
E-mail: sdk_prir@showadenko.com

Number of Shareholders
89,728 as of December 31, 2019

Classification of Stock
All stock issued by Showa Denko is common stock.

Ordinary General Meeting
The Ordinary General Meeting of Shareholders was held on
March 26, 2020.

Stock Transfer Agent

Shareholders (Top 10) (As of December 31, 2019)

Mizuho Trust & Banking Co., Ltd.
2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan

Rate of
Number of
Shares Held Shareholding(%)(in thousands)

Shareholder

The Master Trust Bank of Japan Ltd. (Trust Account)

7,078

4.84

Fukoku Mutual Life Insurance Company

4,517

3.09

Japan Trustee Services Bank, Ltd. (Trust Account)

3,751

2.57

The Dai-ichi Life Insurance Company, Limited

3,600

2.46

Japan Trustee Services Bank, Ltd. (Trust Account 5)

2,827

1.93

Meiji Yasuda Life Insurance Company

2,645

1.81

GOLDMAN SACHS INTERNATIONAL

2,451

1.68

Japan Trustee Services Bank, Ltd. (Trust Account 7)

2,425

1.66

JP MORGAN CHASE BANK 385151

2,283

1.56

Sompo Japan Nipponkoa Insurance Inc.

2,105

1.44

Shareholders by Sector (As of December 31, 2019)Japanese corporate
entities

Treasury shares
3,550 thousand

2.37%

6,305 thousand

4.21%

Security firms
8,976 thousand

6.00%

Foreign corporate
entities, etc.
42,425 thousand

28.34%

Total numberof shares held

Financial firms

149,711thousandIndividuals

49,796 thousand

33.26%

38,659 thousand

25.82%

Note: ‌Each rate of shareholding was calculated after deducting the number of treasury
shares (3,550 thousand) from the number of shares outstanding.		

Stock Price and Trading Volume
Stock Price (JPY)
7,000

3,500
Volume(Shares)
120,000,000

60,000,000

2017
Jan

2017
Apr

2017
Jul

2017
Oct

2018
Jan

2018
Apr

2018
Jul

2018
Oct

2019
Jan

2019
Apr

2019
Jul

2019
Oct

0

47

SHOWA DENKO K.K.
13-9, Shiba Daimon 1-chome,
Minato-ku, Tokyo 105-8518, Japan
https://www.sdk.co.jp/english
Printed in Japan