ANNUAL REPORT

2018

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.

Ranked as one of Japan’s leading chemical companies, Showa Denko K.K. (SDK) operates in six
major segments: petrochemicals, chemicals, electronics, inorganics, aluminum, and others.
Aiming to achieve continuous growth of the Showa Denko Group through execution of
the medium-term business plan Project 2020+ (2016-2018), the Group reformed the businessstructure, strengthened the revenue base, and enhanced its corporate value.
The Group started the new medium-term business plan The TOP 2021 from January 2019.
It is very important for us to enhance the value of the Group and satisfy all stakeholders
including shareholders, customers, suppliers, local communities, and employees so that theGroup grows continually and becomes trusted and acclaimed by society. We define this idea
as the Group’s business philosophy, thereby promoting management to maximize value forshareholders, customers, and society.
The Group will change course toward long-term business growth, strengthen earning power,
and reduce the range of fluctuations in income through promotion of The TOP 2021, enhancethe value of the Group, and establish a stable foundation that will support the Group’s growth
far into the future.
The Group aims to earn the complete trust and confidence of the market and society,always managing operations based on the principles of corporate social responsibility. The Groupis also committed to the principles of Responsible Care and is vigorously carrying out an action
plan to protect the environment as well as health and safety.

Net sales 2018¥992.1billion

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

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), and electronic
chemicals (high-purity gases for electronics)
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.

10.3%

25.4%

Note: ‌The ratios for segments have been calculated after adding the amount ofadjustments to net sales.

Chemicals

Forward-Looking Statements:

13.7%

Showa Denko at a GlanceElectronics
Hard disk (HD) media, compound
semiconductors (LED chips), rare earth magnetic
alloys, and lithium-ion battery (LIB) materials

25.6%

14.9%
10.1 %

Inorganics
Graphite electrodes and ceramics(alumina and abrasives)

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

OthersBuilding materials, general trading, and SiC
epitaxial wafers for power devices** ‌SiC epitaxial wafers for power devices was transferred from Others
segment to Electronics segment from 2019.

See pages 10-11 for business segments.

About Annual Report 2018
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.
http://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 http://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 http://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 integrated report SHOWA DENKO REPORT(digest and full report) covering the general outline of the
Showa Denko Group and annual major topics. PDF andHTML versions of the above 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
High-purity gases for electronics

AluminumNo

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

1

The second largest manufacturer in Vietnam
and the fourth largest in Japan

No

1

No

2

Aluminum laminated film
for LIB packaging

Since 1971, we have been operating our aluminum
can business as a pioneer who produced the firstaluminum can for beverages in Japan.
Since 2014, we have been expanding ouraluminum can business in Vietnam and Thailand,
focusing on the rapidly growing Southeast Asianmarket. In 2018, we established our second plant incentral Vietnam. We also established a joint venturewith Carabao Group Company Limited and completed
construction of a factory in Thailand.
Our capacity to manufacture aluminum cansin Southeast Asia has been expanded to 3 billioncans a year.

2

No

2

Others*
SiC epitaxial wafers
for power devices
The second largest independent manufacturer
in the world

The second largest manufacturer in the world
We provide packaging materials for pouch-type
lithium-ion batteries (LIBs) used in smartphones
and tablet PCs. Demand for pouch-type LIBs is
growing due to such advantages as high levels ofheat dissipation and flexibility in molding.

Inorganics
The world’s largest manufacturer

No

Aluminum cans

The world’s largest independent manufacturer

Graphite electrodes

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.

Electronics

HD media, one of the major parts of HD drives (HDDs),
are used in notebook PCs, consumer electronics,
and external hard disk drives. Demand is expected
to grow further for use in servers for cloud computing.
In 2019, we announced the start of shipments of
newly developed 3.5-inch HD media based on
microwave assisted magnetic recording (MAMR)
technology for making next-generation HDDs. HD
media have a significant effect on HDD storage
capacity. We will continue contributing to the
expansion of storage capacities for HDDs using ourmotto “Best in Class.”

No

The world’s largest manufacturer

High-purity gases for electronics are used as etching
and cleaning gases, and materials for membrane
formation, which are necessary for production ofelectronic devices including semiconductors, LCD
panels, and solar batteries. In 2018, we expanded
annual production capacity of high-purity
hydrogen bromide (HBr) to 900 tons, 1.5 times asmuch as the previous level.

HD media

High-purity aluminum foil
for capacitors

No

1

Graphite electrodes are used in electric arc furnaces
for steel production. In 2017, we acquired a Germangraphite electrode company. We now have graphite
electrode production bases in Europe andSoutheast Asia, in addition to our existing basesin Japan, the United States, and China, and became
the leading supplier in the global graphite
electrode industry.

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 thosefor diodes. SiC-based power devices are attracting
attention due to their features that enable productionof smaller, lighter, and more energy-efficientnext-generation power control modules. We havebeen gradually expanding the capacity to produce“high-grade epi.” Our “high-grade epi” production
capacity reached 9,000 wafers** per month inFebruary 2019.

** Based on a conversion into SiC
epitaxial wafers for power devices
that can withstand 1,200 volts.

* SiC epitaxial wafers for power devices was transferredfrom Others segment to Electronics segment from 2019.
Note: The worldwide or global market positions shown on this page are SDK’s estimates.

Contents
1 Our Strengths

10 Business Segments

19 Management’s Discussion and Analysis

2 Consolidated 11-Year Summary

12 Management Team

22 Risk Factors

4 Message from the Management

14 Corporate Governance

24 Financial Data

6 The New Medium-Term Business Plan:
The TOP 2021

16 Research and Development

47 Corporate Data

18 Corporate Social Responsibility

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

Millions of yen

2008
For the year
Net sales¥1,003,876
Petrochemicals
400,173
Chemicals
93,319
Electronics
188,778
Inorganics
88,797
Aluminum
232,809
Others—Adjustments—
Operating income
26,792Petrochemicals(1,281)
Chemicals
5,329Electronics
9,259
Inorganics
19,244
Aluminum(212)
Others—Adjustments(5,547)
Net income attributable to owners of the parent
2,451
Net cash provided by operating activities
61,099Net cash provided by (used in) investing activities(44,035)
Free cash flow
17,065R&D expenditures
20,072
Capital expenditures
54,799Depreciation and amortization
60,439At year-end
Total assets
962,010
Total net assets
265,459
Interest-bearing debt
392,914
Debt/equity ratio (gross, times)
1.48

2009

2010 (Note 2)2011 (Note 2)

2012

2013

¥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
20,43544,37039,779958,303286,722373,9111.30

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¥ 11.35
11.20
168.33
3.00
11,542¥ 6.26—182.243.00
9,890¥ 6.06—201.27
3.00
10,234

December 31

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¥ 1.96—
192.855.00
11,756¥(29.44)—
163.11
3.00
11,564¥ 8.49—161.47
3.00
11,597

Notes: 1. Yen amounts have been translated into U.S. dollars, for convenience only, at the rate of ¥111.00 to US$1.00, the approximate rate of exchange at December 31, 2018.
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.

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

2014

Petrochemicals
Chemicals

2

2015

2016

Electronics
Inorganics

SHOWA DENKO K.K.

2017
Aluminum
Others2018
Adjustments

ANNUAL REPORT 2018

-50

90
60
30

2014

Petrochemicals
Chemicals

2015

2016

Electronics
Inorganics

2017
Aluminum
Others2018
Adjustments

0

2014

2015

2016

2017

2018

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

2018

2014

2015

2016 (Note 2)2017 (Note 3)¥ 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¥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(29,914)37,36918,53941,78738,454¥ 992,136
268,879
156,541
105,823
266,149
108,254
143,413(56,922)180,003
20,333
17,393
12,397
132,445
4,942
2,893(10,400)
111,503
149,785(49,338)
100,447
19,73541,72739,459$8,938,162
2,422,335
1,410,275
953,359
2,397,739
975,260
1,292,008(512,812)
1,621,649
183,178
156,696
111,686
1,193,195
44,52026,066(93,692)
1,004,535
1,349,415(444,487)
904,928
177,789375,921355,489

1,009,843
319,087
383,124
1.20

940,494308,142368,835
1.20

932,698
311,231359,929
1.16

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

1,075,746
465,340
287,9680.62

9,691,405
4,192,251
2,594,304

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¥ 1.99—209.76
3.00
10,577¥ 6.45—2,076.05
3.00
10,561¥ 86.27—
2,080.85—
10,146

U.S. dollars (Note 1)¥ 758.15—
3,057.16
120.0010,476¥ 234.84—
2,445.01
80.00
10,864$ 6.8327.54
1.08

3. T‌ he 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, theamounts 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 its 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

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

60

150

1.5

45

100

200

1.0

30

50

100

0.5

15

0

0

0

(Times)
2.0

300

0

2014

2015

2016

2017

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

2018

2014

2015

2016

Capital expenditures
Depreciation and amortization

2017

2018

-50

2014

2015

2016

2017

Cash flows from operating activities
Cash flows from investing activities

2018Free cash flow3

Message from the Management

Hideo Ichikawa
Representative Director,
Chairman of the Board“Project 2020+,” our medium-term business plan, reached its final
year in 2018. During the plan’s three years (2016 to 2018), we
steadily strengthened our earning power by improving the
profitability of our “Base-shaping” business, expanding our“Advantage-establishing” and “Growth-accelerating” businesses,
and pushing through structural reform in our “Rebuilding”
businesses, in order to create the sound present capable ofgenerating sufficient profits and shareholder returns for ourinvestors and other stakeholders.
In 2018, the Group’s operating income and net income both set
record highs for the second fiscal year in a row. This performance
was attributable to integration with SGL GE Holding GmbH in thegraphite electrodes business in Inorganics segment, a rise in market
prices of graphite electrodes caused by tightening supply anddemand situation, and an increase in earning power in ourPetrochemicals and Chemicals segments. Cumulative operating

4

SHOWA DENKO K.K.

ANNUAL REPORT 2018

Kohei Morikawa
Representative Director,
President and CEO

income for the three years covered by the Project 2020+ was ¥299.8
billion. As a result, we saw a considerable increase in income
compared with the previous three years, and we substantiallyexceeded the target we set in the Project 2020+.
Our D/E ratio, an indicator of financial strength, improved from
1.2 times at the end of 2015 to 0.6 times at the end of 2018. We
increased our dividend, an indicator of shareholder returns, from¥30 per share in 2015 to ¥120 per share in 2018. We also
repurchased the Company’s own shares equivalent of ¥10 billion in
December 2018.
In addition, high-purity gases for electronics and electronic
devices, SiC epitaxial wafers for power devices, and titanium oxides
for multilayer ceramic capacitors (MLCCs), grew sharply,
contributing to improved business performance. We will tie thismomentum into The TOP 2021, our next three-year medium-termbusiness plan (2019–2021) to forge a promising future.

Three-year Total Operating Income(Unit: Billions of yen)

Petrochemicals
ChemicalsElectronics
Inorganics

480.0

Aluminum
OthersResults
299.8

114.2

‘10-’1280.0’13-’15

Plan
143.0

’16-’18
Project 2020+’19-’21
The TOP 2021

2018 Performance
The Showa Denko Group recorded consolidated net sales of ¥992,136
million in 2018, up ¥211,749 million or 27.1% over the previous year.
Although sales declined in the Electronics segment due to a decreasein shipments of HD media for PCs, sales rose substantially in the
Inorganics segment as a result of integration in our graphite
electrodes business conducted in the second half of 2017 and a rise ininternational market prices of graphite electrodes. In the
Petrochemicals segment, although we cut back on production due tolarge periodic shutdown maintenance of ethylene production
equipment, sales went up as a result of a rise in market prices of
products due to an increase in the price of naphtha as raw material.
The Group’s operating income increased significantly, by¥102,295 million (up 131.6% year on year) to ¥180,003 million. While
income declined in the Electronics segment in addition to the
Petrochemicals segment, which was affected by large periodic
shutdown maintenance, income rose significantly in the Inorganics
segment as a result of the integration in our graphite electrodes
business and an increase in market conditions.
The Group recorded net income attributable to owners of theparent of ¥111,503 million in 2018, up ¥74,099 million or 198.1%
from the previous year despite an increase in extraordinary loss due
mainly to the posting of impairment loss in the domestic aluminumcans business and other businesses compared with the previous
year and an increase in corporate taxes.

Medium-Term Business Plan The TOP 2021
In January 2019, we started The TOP 2021, our new medium-termbusiness plan* for 2019–2021.
*For details, see: ‌http://www.sdk.co.jp/english/ir/library/irpresentation.html#midterm

Under The TOP 2021, we will establish a platform for growth, while
showing a promising future for the Showa Denko Group, and will
pursue progress and development toward becoming a Koseiha
Company (an individualized company), which is our vision toward
the year 2025.
The Showa Denko Group’s mission is that “We will satisfy all
stakeholders.” We will therefore focus on management that
continually enhances value for all stakeholders—that is, shareholders,customers, society, employees, and business connections.

Toward that end, the Showa Denko Group will aim to be a Koseiha
Company. A Koseiha Company is an aggregate of Koseiha Businesses, orbusinesses that we have established in the industry’s No. 1 position byearning operating income of around several billion yen, while posting
an operating margin in the double digits, in markets with a scale oftens of billions of yen to hundreds of billions of yen, the appropriate
market scale for our businesses. Our medium- to long-term management
objective is to make at least half of our existing businesses into
Koseiha Businesses in 2025 by laying a path for other businesses toreach Koseiha Business status following our HD media, high-purity
gases for electronics, and graphite electrodes businesses.
Under the new medium-term business plan, the Group intends
to achieve, cumulatively for the three years covered by the plan, net
sales of ¥3.4 trillion, operating income of ¥480 billion, and net incomeof ¥330 billion, greatly expanding each compared with the previous
medium-term business plan. Paying close attention to asset efficiency
in terms of ROA and ROE, we will make effective and aggressive
investments to achieve both high growth and high returns.

Contribution to SDGs
As a business operator, we have set out as our Group’s goal to develop,
manufacture, and sell products and services that contribute to the
SDGs. As a business group, we create stable returns over the longterm by promoting business that contributes to the creation of asustainable 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
with a medium- to long-term perspective and create excellent
Koseiha (individualized) products by deepening and fusing theGroup’s organic chemistry, aluminum, and inorganic chemistry
technologies. In this way, we aim to be a social contribution company
that helps to create a society where affluence and sustainability areharmonized.
Going forward, the Showa Denko Group will change significantly
in pursuit of growth. With the keyword “Act!,” our new corporate
message symbolizing the path forward, our management team andemployees will make concerted efforts to carry out our medium-termbusiness plan. As we push ahead, we ask for your continuing supportof the Showa Denko Group.
Finally, we sincerely appreciate and look forward to the continued
understanding, support, and encouragement of all our shareholders.
March 28, 20195

The New Medium-Term Business Plan: The TOP 2021

The TOP 2021
The TOP 2021 is a three-year business plan that aims to establish a base for growth byleveraging the earning power strengthened during the three years of the previous
medium-term plan (2016–2018) while laying emphasis on showing a “promising future”
to stakeholders. We have now launched The TOP 2021 for changing the Showa Denko
Group’s direction toward long-term growth, with the aim of achieving our vision of
becoming a Koseiha Company by 2025.

Group Management Policy
The overall outlook of the new medium-term business plansummarizes the strategy that the Group will use to achieve our
mission, vision, and value. First, we defined a new businessportfolio in which we categorized our existing businesses into
three business categories, namely “Enhance,” “Grow,” and“Change.” And, through the notions of “Create” and“Interdivisional cooperation,” we will produce discontinuous
growth and rapid progress in existing business, such as businesssegment expansion, or producing new businesses that are
different from existing ones. We will strengthen R&D, marketing,
AI/IoT initiatives, and production systems, which are thefoundations supporting these strategies. And at the base of all
our initiatives is the notion to contribute to Sustainable
Development Goals (SDGs), which is our corporate social
responsibility.

Our goal (Vision)

KOSEIHA Company

Means to realize
Vision (Value)”Maximization of CUSTOMER Experience”
Creation of new businesses throughorganic measures/M&A

4. Create

Pillars ofGroup strategy

1. Enhance

2. Grow

3. Change

Providehigher value

Accelerate
growth ofbusiness

Changebusiness model

Rapid progress in existing businesses/
Creation of new businesses

Interdivisional cooperation
Creation of cross border businesses throughcombination of existing technologies & businesses

Strengthen businessfoundation
Corporate social
responsibility

R&D

Marketingfunction

Firm production
system

AI/IoT

Contribution to SDGs

Business Philosophy: Mission
The Showa Denko Group’s mission is that “We will satisfy all
stakeholders.”
We will therefore focus on management that continuallyenhances value for all of our stakeholders: shareholders,customers, society, employees, and business connections. The
main actors in the creation of value are our employees andbusiness connections, who are also our stakeholders. We areaiming to be the kind of corporate group where employees andbusiness connections — who are also our partners—continually
improve shareholder, customer, and social value.

Partners in value
creation

Businessconnection

Shareholders’value

Customers’valueSocial value

Enhance the valueof the Group

Offer original value

Realize sustainable
society

Leaders in value creation

Employees

Stage with the soundpresent

Stage withpromising future

The Group provides stages full of prideand dreams for employees’ value creation activities

Showa Denko that has the sound present andpromising future

6

SHOWA DENKO K.K.

ANNUAL REPORT 2018

Vision: Koseiha Company
To be a Koseiha Company, the vision that the Group is pursuing,means being an aggregate of Koseiha Businesses that have establishedthe No. 1 position in markets with a scale of tens of billions of yen to
hundreds of billions of yen, which is the appropriate market scale
for the Showa Denko Group. A necessary condition for that goal isfor each business to set an optimal or ideal business segment.
Under the previous Project 2020+ business plan, each businessworked at establishing an optimal segment. Under the new
medium-term business plan, we will work on strengthening andexpanding business segments by reinforcing them with new products
and services around the established segments, while segmenting
some areas regionally. Our medium- to long-term management
objective is to make at least half of our existing businesses into
Koseiha Businesses by 2025 by laying down a path for otherbusinesses to reach that status following our HD media, high-purity
gases for electronics, and graphite electrodes businesses.

By 2025, make half or more “KOSEIHA Businesses”
Our global No.1 businesses
Market size (SDK’s share)

Operating margin

10% or more

HD media¥400 billion (25%)

Operating income

Billions of yen
or moreHigh-purity gases for electronics¥150 billion (25%)

Stable profitability
tolerant toenvironmental
changeGraphite electrodes (UHP)¥300 billion (Over 30%)~

Value: Maximization of Customer Experience
In the course of achieving our vision of becoming a Koseiha(individualized) Company, the important value that will lead tostrengthening and expansion of our business segments is “tomaximize the customer experience.” It is becoming more and moredifficult to differentiate ourselves by quality and price alone, so we
believe that business model innovation from a “goods-oriented
business model,” to “experience-oriented business model” will beessential. Our Group will strive to maximize the customer
experience, in this way satisfying customers, by providing excellent
solutions that integrate products and services. We will run ourbusiness under the Group-wide key phrase “Maximization ofcustomer experience” providing not only quality products but
services that are unique to Showa Denko Group.

Businesses Portfolio (Enhance, Grow, Change)

Portfolio of New
businesses

In matured market,
enhance offering value
by evolving business
model

Change businessmodel, considering
entry into downstream
sector

In growth markets,
accelerate businessgrowth at home andabroadEnhance 1

Enhance 2

Change 1

Grow 1

Rolled aluminum products(High-purity aluminum foil)

SiC epitaxial wafers
for power devices

Electronic materials(esp. Red LEDs)

Grow 2

Advanced battery materials(LIB materials)

Ceramics

Functional chemicals

Aluminum specialty components(including Shotic TM)

Change 2

Electronic chemicals(High-purity gases for electronics)

Grow

Aluminum cans

ChangeHD media

Enhance

Carbon(Graphite electrodes)

Portfolios ofexisting
businesses

Growth in sales

Higher profitability

Basic chemicals

Financial goal

Petrochemicals

These businesses are positioned as ones that should
simultaneously realize a high growth rate and high profitability. We
will accelerate their growth at home and overseas in growth markets.
We will aim to make our electronic chemicals business No. 1 globallyin terms of market share, growth rate, and profitability. We will also
aim for each of our advanced battery materials, electronics materials,
and SiC epitaxial wafers for power devices businesses to establish aleading presence in their respective target markets (i.e., establish
bases for rapid growth and high profitability).
Grow

Business Portfolio

Industrial gases

Enhance These businesses are positioned as ones that should
continually improve profitability. We will enhance the value they
offer customers by developing business models in mature markets.
We aim to make our petrochemicals, industrial gases, and basic
chemicals businesses No. 1 in specific regions/fields. At the sametime, we intend to make our HD media and graphite electrodebusinesses No. 1 globally by taking advantage of our superiority intechnology and quality, while deepening customer relations athome and abroad.

Create7

The New Medium-Term Business Plan: The TOP 2021 (cont.)
Change These businesses are positioned as ones that should
increase sales while maintaining profitability. We will change theirbusiness models, while considering downstream expansion. We will
expand overseas business in our aluminum can and aluminum rolled
products businesses. We will also shift each of our aluminum specialty
components, functional chemicals, and ceramics businesses tobecome solution-oriented businesses and make them high-value
added businesses.

Create There are two ways to create growth. One is to enablebusiness re-grow by creating discontinuous growth in existing
businesses. The other is to create new businesses in fields where
there is high compatibility with Showa Denko, allowing us toleverage our technical strengths. We will strive to create a base for
growth by making, more than ever, proactive R&D investments into
promising technology “seeds” and through M&As, for which wehave set aside ¥150 billion for the next three years.

Interdivisional Cooperation
We will propose packages that combine products, technology,
and services optimized for customers’ applications by making useof our broad range of products and technologies. In recent years,
the trend in advanced assembly industries, such as automobilesand electronics, has been to create optimized solutions together
with customers. In line with this trend, we will bolster ouractivities to propose the optimal solutions that customers wantby combining our Group’s diverse materials technologies—
ranging from aluminum to organic and inorganic materials—
with our value chain going from raw materials manufacturing tomolding, as well as thesimulations and analyticaltechnologies that we havecultivated up to now.
We will first of all focus on theautomotive field, where platformchanges are anticipated due tothe shift to electric vehicles. With
this move, we will start a project
to create new composite materials
for cars using aluminum.

Automotive Multi-material ProjectDue to progress in electric-power operation, electrification and weight
reduction of cars, car manufacturers require materials with higher performance.
Automotive Multi-material Project will develop new multi-material productsthat take advantages of our diverse materials and technologies centering on
aluminum, through back-casting of changes in market and customers’ needs.

Light weight/
High rigidity

Adhesion ofdifferent materials

Businesses/
Products

Organics

Heat radiation/
Heat storage

Electric insulation

Product design

Product design technology

Example)Next generation heatradiator as composite of
our aluminum laminate
technology and heatexchanger technology

Basic research

Computational science/
Physical property analysis

Image of radiator on LIB

Aluminum

Inorganics

Financial Strategy: Management Targets & Investment Policy (over three years)
Financial Targets
Under the new medium-term business plan, the Group will aim toachieve net sales of ¥3.4 trillion over three years and annual net
sales of ¥1.1 trillion. This is a challenge for growth, representing a
40% increase compared with the previous medium-term businessplan: Project 2020+. We will also substantially increase operating
income, by 1.6 times of the previous level, and earn net income of¥330 billion over the three years, namely ¥110 billion per year. In
pursuing this growth, we will pay close attention to asset
efficiency, especially ROA and ROE, making efficient, aggressive
investments to achieve both high growth and high returns.

Project 2020+

x1.4¥3,400.0 billion

Operating income¥299.8 billion

x1.6¥480.0 billion

Net income¥161.2 billion

x2.0¥330.0 billion

ROA

9.8%

+2.8pt

12.6%

ROE

14.5%

+5.0pt19.5%(Operating margin)(3-year simple average)

SHOWA DENKO K.K.

ANNUAL REPORT 2018(2019 - 2021)¥2,443.7 billion

Net sales(3-year simple average, O.I. base)

8

The TOP 2021

(2016 - 2018)(12.3%)(14.1%)

Capital investment and planned M&As
We are considering investing ¥150 billion over three years in M&As.
While the timing and target domains remain yet to be undecided, we
will make aggressive use of M&As not only to acquire new businesses
but also to make existing businesses into Koseiha Businesses.
Among those improvements, we consider returns to shareholders
as a highly important obligation, and under our new medium-termbusiness plan we are aiming for a dividend payout ratio of 30%. We
plan to invest ¥400 billion in total over the three years.
First, we anticipate making growth investments of ¥130 billion,
or double the previous medium-term business plan. We will invest
aggressively to increase production capacity, focusing on high-purity
gases for electronics, SiC epi-wafers for power devices, titaniumoxide for multilayer ceramic capacitors (MLCCs), and advanced
battery materials—markets that are expected to grow.
We anticipate making investments in facility renovations of¥120 billion to maintain and strengthen the competitiveness of
our production operations.

Set targets for D/E ratio, total return ratio and total investment,
and utilize earned cash for enhancing corporate value
Operating income

D/E ratio*(2019 – 2021 total)(2021)¥480 billion

0.5 times

About

Enhanced
shareholders
value

Growth ofbusinesses
Investment*Gross D/E ratio

Total return ratio(2019 – 2021 total)(2021)¥400 billion

About

30 %

Increase investment in facility improvement,
organic growth and M&As.
Project 2020+

The TOP 2021

(2016 - 2018)(2019 - 2021)

Aims of investment

Investment infacility
improvement¥61 billion¥120 billion• To strengthen competitiveness• Renewal• To strengthen BCP

Investment inorganic
growth¥64 billion¥130 billion• To increase production capacity• To improve productivity

Investment in
M&As¥25 billion¥150 billion• To‌ promote M&As, businesstie-up and equity investment

Shareholder return policy
We consider returns to shareholders as a highly important obligation,and under our new medium-term business plan we are aiming toachieve a total return ratio of 30% by 2021.

Contribution to SDGs
As a manufacturing company, we have set out as a Group goal thedevelopment, manufacture, and sale of products and services that
contribute to the SDGs. Here, we introduce some examples of ourbusinesses’ contributions to society and business administration
based on our view of society’s future. Chemical recycling ofplastics, or extracting hydrogen and CO2 from used plastics thenmaking use of them, and graphite electrodes, essential forrecycling of steel scrap, contribute to a recycling society. In
addition, we support energy efficiency in power devices that
improve the performance of power conversion by providing highquality SiC epi-wafers. Our aluminum products and technologies,
the key material for reducing the weight of cars, contribute toenergy savings and to reducing CO2 emissions.

Connect SDGs and Our Code of Conduct, and promote
integrated Group management• ‌Contribute to socialand economic
development• Communication• ‌Compliance• ‌Respect human rights• ‌Responsible Care• ‌Fair and free trade• ‌Corruption prevention

Respond to
expectations of local
communities

Act as a global
corporate citizen

Protect and improve
the global
environment

Our Code of
Conduct

Providecustomers withsatisfaction andpeace of mind

Let all Group employees
go all out• P‌ roducts/technologies contributing
to environmental protection (e.g.,
Graphite electrodes, ECOANN TM)• R‌ educing environmental burden(e.g., Recycling of aluminum cans)• ‌Providing products that
contribute to developmentof global society• C‌ ooperation with business
partners• ‌Respect individuality• ‌Safety first• ‌Work Style Reform / Corporate healthcare9

Business Segments
Consolidated Business Results (Millions of yen)

25.6%

Petrochemicals

Sales
Operating Income

The Oita Complex is the main manufacturing base of the Petrochemicals
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 are supplied not only to Showa Denko’s plants
producing organic chemicals, including vinyl acetate, ethyl acetate

2017

2018

Increase/decrease

Rate ofchange251,128
33,357

268,879
20,33317,751-13,024

7.1%-39.0%and other acetylic derivatives, but also to other companies’ plants inand around the Oita Complex producing plastics, synthetic rubber,and styrene monomer, including a plant producing polypropylenethat is operated by SunAllomer Ltd., a subsidiary of Showa Denko.
Showa Denko is expanding business to produce acetylic derivatives
by taking advantage of the Company’s advanced catalyst technology.

Consolidated Business Results (Millions of yen)

14.9%

Chemicals

Sales
Operating Income

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, carbonicacid, dry ice, and other industrial gases to a range of industries. The
Division especially contributes to a stable supply of food and foodsafety by providing of carbonic acid gas, mainly used for carbonateddrinks and dry ice to keep food cool.
The Basic Chemicals Division supplies ammonia, acrylonitrile,
caustic soda, hydrochloric acid, and other industrial chemicals. The

2017

2018

Increase/decrease

Rate ofchange148,758
16,474

156,541
17,393

7,782
919

5.2%
5.6%

Division also supplies amino acids, as well as elastomer products,
such as chloroprene rubber. ECOANN™ ammonia, which utilizes usedplastics as one of raw materials, is a product that contributes to thecreation of a recycling-oriented society and is mainly used as adenitration 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 of plastics,
including unsaturated polyester resin, which is light, strong and corrosionresisting, and molding compounds made by using the plastics. The
Specialty Chemicals Department offers innovative and unique products,
such as raw materials for cosmetics, resins for use as electronic materials,
and columns for high performance liquid chromatography (HPLC).

Consolidated Business Results (Millions of yen)

10.1%

Electronics

Operating Income

The Showa Denko Group is the largest independent HD media supplierin the world. The Device Solutions Division (former HD Division)
conducts HD media business from seven bases around the world,
including three in Japan. This division provides world-class high-quality
products for use in PCs and other consumer electronic products aswell as for use in data centers and other enterprise fields, where
demand is expected to grow due to the spread of cloud computing.
The Electronics Materials Division supplies compound
semiconductor materials and rare earth magnetic alloys. For
compound semiconductor materials, the Division has a wide lineup

10

SHOWA DENKO K.K.

Sales

ANNUAL REPORT 2018

2017

2018

Increase/decrease

Rate ofchange123,064
21,925

105,823
12,397-17,241-9,528-14.0%-43.5%

of high-output LEDs with industrial applications, including use indisplays and sensors.
The Advanced Battery Materials Division is promoting production
and sales of various materials for lithium-ion batteries, including
SCMG TM high-input/output long-life anode material, VGCF TM uniqueanode and cathode additive featuring high stability and quality, andSPALF TM aluminum laminated film. The demand for lithium-ion
batteries has been growing in recent years.
*HD Division was reorganized into Device Solutions Division at the beginning of 2019, when
epitaxial wafers business was transferred from the Others segment into this new division.

Consolidated Business Results (Millions of yen)

25.4%

Inorganics

Sales
Operating Income

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 arehighly 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 thisfield. The Division will enhance the development and marketing ofvolume zone products for fast growing markets in emerging countries,
while providing advanced markets with high-end products.

2017

2018

73,442
6,979

266,149
132,445

Increase/decrease

Rate ofchange192,707262.4%
125,466 1,797.8%

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, and refractories
where fused alumina, silicon carbide, and boron nitride are used.
As for ultrafine titanium oxide, used as the main material 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.

Consolidated Business Results (Millions of yen)

10.3%

Aluminum

Sales
Operating Income

The Aluminum Rolled Products Division provides high-purity aluminum
foils, which are carefully purified and manufactured for use in electrolytic
capacitors. These capacitors are widely used in a range of products,
including home electric appliances and automotive equipment.
The Aluminum Specialty Components Division provides aluminummaterials and processed products. The Division supplies thefollowing products not only in Japan but also in Europe, the UnitedStates, and Southeast Asia: aluminum cylinders (core component oflaser beam printers), large/complexly shaped extruded products,
continuously cast rods of aluminum alloys (SHOTIC™) made using
Showa Denko’s proprietary technologies, and forged products forautomobile parts including compressors for car air conditioners.
The Division also supplies a range of heat exchangers for home

2017

2018

Increase/decrease

Rate ofchange105,439
6,697

108,254
4,942

2,815
-1,7552.7%-26.2%

electric appliances and industrial equipment worldwide and isdeveloping and manufacturing power semiconductor coolingdevices 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 highquality aluminum cans for beverages through integrated
production, including pressing can bodies and can ends andprinting labels. Though the domestic market for aluminum cans has
matured, we will expand our aluminum can business in the ASEAN
market including Vietnam, a market that is expected to grow, by
establishing new business bases.

Consolidated Business Results (Millions of yen)

13.7%

OthersIncluded in this section are themes for future businesses as well as
the manufacture and sale of various chemical products, light metals,
and building and civil engineering materials.
SiC epitaxial wafers are used as materials for next generation
power semiconductors, which are expected to contribute to energy

Sales
Operating Income

2017

2018

Increase/decrease

Rate ofchange133,624633

143,413
2,893

9,789
2,260

7.3%
357.0%

conservation. The wafers are being increasingly used in powerdevices for EV chargers, photovoltaic generation, and servers.
*SiC epitaxial wafers business was reorganized into Device Solutions Division in the Electronics
segment at the beginning of 2019.

For details of business results, please see the “Management’s Discussion and Analysis” (p19).

11

Management Team

as of March 28, 2019

Kozo Isshiki, Masaharu Oshima, Keiichi Kamiguchi, Jun Tanaka, Hideo Ichikawa, Kohei Morikawa, Hidehito Takahashi, Motohiro Takeuchi, Kiyoshi Nishioka

Directors
HIDEO ICHIKAWA Representative Director, Chairman of the Board

MOTOHIRO TAKEUCHI

April 1975
January 2006
March 2008
September 2008
January 2010
January 2011
January 2017

April 1983
January 2015
January 2017

Joined the Company
Corporate Officer; General Manager, Ceramics DivisionCorporate Officer; General Manager, Corporate Strategy Department

January 2019

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

March 2019

Director; Corporate Officer, in charge of Information Systems Department;
General Manager, Finance & Accounting Department;
Chief Financial Officer (CFO) (incumbent)

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)

KOHEI MORIKAWA Representative Director, President
April 1982
January 2013
January 2016
March 2016
January 2017

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)

JUN TANAKA
April 1982
January 2013
January 2017
March 2017
January 2019

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)

HIDEHITO TAKAHASHI
April 1986

Joined The Mitsubishi Bank, Ltd. (currently MUFG Bank, Ltd.)

October 2004

Asia Pacific President, GE Sensing & Inspection Technologies,
GE Japan Holding Corporation

October 2008
January 2013
October 2015
January 2016
January 2017
March 2017
July 2017

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

January 2019

Director; Managing Corporate Officer, in charge of Ceramics Division, Yokohama and Shiojiriplants, and Corporate Strategy Department; General Manager, Carbon Division (incumbent)

KEIICHI KAMIGUCHI
April 1983
January 2011
January 2015
January 2017
March 2017
January 201912

Joined the Company
Corporate Officer; General Manager, Corporate Strategy Office
Corporate Officer
Corporate Officer; Chief Risk Management Officer (CRO)
Director; Corporate Officer; Chief Risk Management Officer (CRO)
Director; Corporate Officer, in charge of Internal Audit, Legal,
CSR & General Affairs, Human Resources, and Purchasing & SCM departments;
Chief Risk Management Officer (CRO) (incumbent)

SHOWA DENKO K.K.

ANNUAL REPORT 2018

MASAHARU OSHIMA Outside Director
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

Director, Synchrotron Radiation Research Organization, The University of Tokyo

October 2009
April 2013
May 2013

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

June 2013

Emeritus Professor, The University of Tokyo (incumbent)

April 2014

Project Researcher, Synchrotron Radiation Research Organization,
The University of Tokyo

March 2015

Director of the Company (incumbent)

April 2015

Special Professor, Tokyo City University (incumbent)

July 2016
December 2016

Project Researcher, School of Engineering, The University of Tokyo (incumbent)
Project Researcher, Institute for Solid State Physics, The University of Tokyo (incumbent)

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)

April 2017
March 2018

Visiting Professor, Ehime University (incumbent)
Director of the Company (incumbent)

KOZO ISSHIKI Outside Director
July 1969
June 2001
May 2005
July 2007
June 2009
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, Fukoku Mutual Life Insurance Company (Outside Director) (incumbent)
Auditor, Isuzu Motors Limited (Outside Auditor)
Director, Medical System Network Co., Ltd. (Outside Director) (incumbent)
Director of the Company (incumbent)Audit & Supervisory Board Members
TETSU MORIKI
April 1977
January 2010
January 2016
January 2018
March 2018

Joined the Company
Corporate Fellow; General Manager, Legal OfficeSenior Corporate Fellow; General Manager, Legal & Intellectual Property Department
Counselor, Assistant to President
Audit & Supervisory Board Member (incumbent)

TOSHIHARU KATO
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)

Setsu Onishi, Hiroyuki Tezuka, Tetsu Moriki, Toshiharu Kato, Kiyomi Saito

HIROYUKI TEZUKA Outside Member
April 1986

Registered with Dai-ichi Tokyo Bar Association
Joined Nishimura & Sanada Law Offices (currently Nishimura & Asahi)

September 1992
January 1993

Clearly, Gottlieb, Steen & Hamilton, New York
Admitted to the bar of the State of New York

June 1993
March 2008

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.)

Returned to Nishimura & Sanada Law Offices(currently Nishimura & Asahi) as Partner (incumbent)

April 2007

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

Audit & Supervisory Board Member, of the Company (incumbent)

April 2010

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

KIYOMI SAITO Outside Member

June 2010

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

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

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)

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

Corporate Officers
Chief Executive Officer

Corporate Officers

KOHEI MORIKAWA

KEIICHI KAMIGUCHIMASUNORI KAIHO

Senior Managing Corporate Officer

Chief Risk Management Officer (CRO); Officer in charge of Internal
Audit, Legal, CSR & General Affairs, Human Resources, andPurchasing & SCM departments

General Manager, Production Technology Department; Officer
in charge of Energy & Electricity, SPS Innovation andResponsible Care departments

KANJI TAKASAKIMASAO SHIBUYAManaging Corporate Officers

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

General Representative in China; General Manager, China Office,Corporate Strategy Department

JUN TANAKAYOUICHI TAKEUCHI

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

TAKAYUKI SATOJIRO ISHIKAWA
General Manager, Device Solutions Division; Officer in charge ofElectronics Materials Division

HIDEHITO TAKAHASHI
General Manager, Carbon Division; Officer in charge of Ceramics
Division, Yokohama and Shiojiri plants, and Corporate Strategy
Department

MASAMICHI YAGISHITA
General Manager, Electronic Chemicals Division; Officer incharge of Functional Chemicals Division, and Higashinagahara,
Tokuyama, Isesaki, and Tatsuno plants

Plant Manager, Kawasaki Plant

General Manager, Electronics Materials Division;
Deputy General Manager, Device Solutions Division; Officer incharge of Chichibu Plant

MOTOHIRO TAKEUCHI
Chief Financial Officer (CFO); General Manager, Finance &Accounting Department; Officer in charge of Information
Systems Department

AKIHIRO JIMBO
General Manager, Basic Chemicals Division

TESTUO WADA
General Manager, Institute for Integrated Product Development

HIROTSUGU FUKUDA
General Manager, Petrochemicals Division; Officer in charge ofOita Complex

EISHI WAKUTSU
General Manager, Corporate Strategy Department

TAICHI NAGAI
Oita Complex Representative

KOICHI NISHIMURA
General Manager, Industrial Gas Division; Officer in charge of
Basic Chemicals Division and Kawasaki Plant

13

Corporate Governance
Message from Hideo Ichikawa, Chairman of the Board
The Showa Denko Group views further strengthening of corporate governance as one of the top-priority
management issues. In December 2015, the Company established Corporate Governance Basic Policies, aiming topromote constructive dialogue with stakeholders, thereby increasing corporate value and shareholders’ common
interests. Guided by the Basic Policies, we updated our Corporate Governance Report, and we are promoting
constructive dialogue with investors and shareholders.
In 2018, we maintained a system under which outside directors accounted for three out of the nine membersof the Board of Directors, as we had in the previous year. For the Audit & Supervisory Board, three out of the fivemembers are outside members. Those outside board members are experts from the insurance and financial
industry, manufacturing, academia, and the Law. They give us valuable advice and comments from various
perspectives. Both boards have high attendance rates, and keenly discuss a wide variety of matters relating to theGroup’s management. Especially in 2018, during the process to formulate the new medium-term business plan,
members of the two boards keenly discussed various matters, including structural reforms, M&As, capital
investments, and improvement in return to shareholders.
Under the new medium-term consolidated business plan The TOP 2021, aiming to continue to be a corporategroup that has a sound present and a promising future, the Showa Denko Group will aggressively invest in plants
and equipment by making the best use of the fruits of the structural reforms that we have been conducting for along time, and will thereby expand the scale of business and improve profitability. Throughout the three-year
period of The TOP 2021, the Group will establish a solid foundation for growth, aiming to become a Koseiha
Company (individualized company) which is an aggregate of Koseiha Businesses (individualized businesses). We
will continue striving to further strengthen our corporate governance and enhance our value. With regard to
SDGs, on the basis of Our Code of Conduct which includes our pledge to “maintain and improve the global
environment,” the whole Showa Denko Group will positively develop, produce, and sell products and services
that contribute to achievement of the SDGs, thereby enhancing our value as a “company contributing to thesound growth of society.” We look forward to the continued support of our investors and shareholders.

1. ‌Basic Concept of Corporate Governance
We will promote corporate governance to ensure the soundness,
effectiveness, and transparency of management, and to continueenhancing our corporate value, thereby contributing to the soundgrowth 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, andemployees. Based on the above, we have clarified our mission in theform 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 thatare 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 of international society as a
responsible corporate citizen.
*‌‌Please visit our website (URL: http://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 thespeed of decision-making and to vitalize operations. At the same time,

14

SHOWA DENKO K.K.

ANNUAL REPORT 2018

Hideo Ichikawa
Chairman of the Board

the Company has substantially reduced the number of directors.
In addition, we have strengthened supervisory functions byappointing outside directors. To strengthen the independence andobjectivity of the Board of Directors, and accountability of the Board of
Directors, the Company has established the Nomination Advisory
Committee and the Remuneration 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 amonth, the board decides on the Company’s basic policy and decides,
after full deliberation, on matters provided for in the Companies Act andthe Company’s Articles of Incorporation as well as important matters forthe execution of the Company’s operations, ensuring a speedy andvigorous 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
business execution 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 ofoffice of directors has been shortened to one year to ensure 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 28, 2019, nine directors,
including three outside directors, were appointed.

3. Business Execution

period from January 1 through December 31, 2018) is as follows:

The Management Committee, which meets once a week in principle andis chaired by the President, deliberates and decides on matters to bereferred 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 basis of corporate activities. The Company evaluates theperformances of business segments to ensure the effective implementationof the performance-based evaluation system. The Company has Security
Export Control and Safety Measures committees under the directsupervision of the President. The Company also has Responsible Care,
Risk Management, Human Rights/Corporate Ethics, and IR promotion
councils under the Management Committee chaired by the President.
These committees and councils investigate, study, and deliberate on
specific matters important for the execution of business.

Remuneration, etc., for Board Members

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 tostrengthen 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 as wellas 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
upon with the Audit & Supervisory Board, and provides the board withaudit results. The auditing corporation and the Audit & Supervisory Board
exchange information and views from time to time to strengthen
cooperation.

Number ofapplicable persons

Paid amount

Members of the Board of Directors(excluding outside members)

6¥305 million

Members of the Audit & Supervisory Board(excluding outside members)

3¥ 56 million

8¥ 68 million

17¥429 million

Outside board members
Total

Remuneration for Auditing Corporation
Paid amount

Name of accounting auditor: KPMG AZSA LLC
Remuneration for issuing an auditing certification based on theauditing contract¥194 million

7. ‌Personal/Financial Relations and Interests among
the Company and Outside Board Members
The Company has three outside members each for both the Board of
Directors and the Audit & Supervisory Board. None of them has 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/
ReportRemuneration
Advisory
Committee

Audit &
Supervisory
Board
Audit &
Supervisory
Board
Members

Accounting
AuditorAccounting Audits

Execution of Duties
Top Management
President
Corporate Officers in Charge

Links

Internal Audit Department

Management Committee
Responsible Care Promotion Council

5. Compliance and Risk Management

Risk Management Promotion Council

The Company’s Board of Directors has decided to strengthen complianceand promote risk management as key components of the internal control
system. The Board will continue to work on these issues.
For the details of our policies on compliance and risk management,
please visit our websites:
http://www.sdk.co.jp/english/csr/compliance.html
http://www.sdk.co.jp/english/csr/risk_management.html

Human Rights/
Corporate Ethics Promotion Council
IR Promotion Council

Internal
AuditsR&D Committee
Security Export Control Committee
Safety Measures Committee

6. ‌Other Items
Remuneration, etc., to the members of the Board of Directors and the
Audit & Supervisory Board as well as the auditing corporation (for theBusiness Divisions
Staff Sections

15

Research and Development
Our R&D strategy in the new medium-term business plan The TOP 2021 is
to continue taking measures to make existing businesses Koseiha
Businesses (individualized businesses) and to give priority to establishingpipelines to create new businesses.
To promote the individualization of existing businesses, we havereorganized the Institute for Integrated Product Development, which
had been established in 2016, and will accelerate and expand the“deepening” and “fusion” of technologies, and share them in the whole
company. Besides, by making the Institute for Integrated ProductDevelopment function as an organization to pool technical engineers
for the whole company, we will promote the creation of innovativetechnologies and human resource development through a fusion ofdiverse engineers and technologies. In this way, we will strengthen oursystem to make the best use of human resources in terms of quality andquantity. We will also promote open innovation and M&As to introduce
necessary technologies from outside entities.
To accelerate the creation of new businesses through our value-added
pipelines, we will strengthen our marketing function to grasp market
and technology trends and identify targets for R&D, and invest our
R&D resources intensively in ten technical fields, which includes
multi-material / adhesion of different materials and the process to
produce next-generation semiconductors. The ten notable technicalfields correspond to seven business domains, transportation, energy,
lifestyle, electronics, construction/infrastructure, industrial equipment,
and life science & healthcare.
To execute these measures, we will increase R&D personnel by about
10% and R&D investment by about 30% during the period of The TOP 2021.
In addition, we have established the Advanced Technology
Laboratory whose mission is to search for and plan next-generation R&D
themes using a liberal way of thinking, free from trends in existing
business fields and industries.
Through these measures, we will create a culture of technology-based
corporate development represented by the key words “deepening(strengthening and handling down),” “fusion,” and “introduction.”

To realize the concept of The TOP 2021, we will establish a complex
called Stage for Fusion which will accelerate deepening, fusion and theintroduction of technologies inside and outside the company. Stage for
Fusion will be built next to the Yokohama Plant, and will come into
service in 2022.
By strengthening our R&D activities, we will create products andservices that “touch the heart,” and will act to offer solutions that makesociety better.
Under the medium-term business plan The TOP 2021, we plan toinvest ¥71.0 billion in R&D in the three years from 2019 through 2021.
We will continue to strengthen existing businesses and give priority tosetting up pipelines to create new businesses.

1. ‌Establishment of pipelines to create new businesses
To set up pipelines to create new businesses, we will invest our R&D
resources intensively in ten notable technical fields corresponding toseven business domains.
To support this R&D investment program, we will make the best useof 1) technical research activities including technical marketing, which is
to investigate trends in advanced technologies and help researchers to
set new R&D themes, 2) inter-business cooperation in which several
divisions cooperate to collect knowledge and suggest solutions to
produce target products, and 3) an in-house campaign to collect ideas
from employees. In addition, we will positively make effective use ofopen innovation and M&As, aiming to search for R&D themes byintroducing technologies from outside entities.

2. ‌Expanding the role of the Institute for Integrated
Product Development
The institute for Integrated Product Development (IIPD) has beendeveloping new products through the fusion of technologies in thefields of organics, polymers, aluminum, and inorganics, and has
successfully developed many products. On the other hand, we have

Priority Domains

7 Business Domains

5 Growth Drivers

Transportation
EnergyWeight reduction ofcars and application ofcomposite materials

Lifestyle

Digitization

Electronics
Construction/infrastructure

16

R&D 10 Notable Technical Fields

Spread of specialty
semiconductors

Surrounding fields (inter-business cooperation)
New fields

Next-generation electricity storage device
xEV
Multi-material/adhesion between different materials
Heat management
Process to produce next-generation semiconductor
Next-generation wide bandgap semiconductor
Energy conservation/renewable energy
Sensors/IoT

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 2018

3. New complex Stage for Fusion
Catalysts

Analysis

Nano carbon
Thin-film
manufacturing process

Computational
science

To realize the concept of The TOP 2021, we establish a complex Stage
for Fusion, which will accelerate deepening, fusion, and introduction oftechnologies inside and outside the Company. At Stage for Fusion, we
will 1) search for products and technologies that will become importantfor society in the future and pursue ways to put them into practical use,
2) improve technologies related to electronics materials and contribute to
the realization of Society 5.0*, and 3) create methods to accelerate
development of materials by making effective use of AI (artificial
intelligence). In this way, we will conduct R&D programs to develop
integrated products with the assistance of analytical technologies andcomputational science, thereby creating new value.

Advanced battery
materials

Organics, polymers, inorganics, aluminum

made so much progress in R&D themes pursued by the Institute forAdvanced and Core Technology (IACT), and now we can expect toobtain results. Therefore, we have decided to have IIPD take over thoseR&D themes pursued by IACT, and continue to strengthen existing
businesses. As a result of this change, IIPD can now additionally fusetechnologies for batteries, carbon and thin film, and will aim to strengthen
their R&D capability further. Moreover, we have integrated operation of
the Analysis & Physical Properties Center and Computational Scienceand Technology Information Center into that of IIPD, aiming toaccelerate our R&D processes and obtain results more swiftly.
The Advanced Technology Laboratory, which was newly organizedin January 2019 under a mission to research next-generation R&D
themes and state-of-the-art technologies, will research R&D themes
from the perspective of SDGs and ELSI (ethics, legal and social issues).

*‌Society 5.0 was proposed by the Japanese Government in the 5th Science and Technology
Basic Plan as a future society that Japan should aspire to. It follows the hunting society(Society 1.0), agricultural society (Society 2.0), industrial society (Society 3.0), andinformation society (Society 4.0).

New complex Stage for Fusion

R&D Expenditures in 2018

(Millions of yen)

Petrochemicals

ChemicalsElectronics

Inorganics

Aluminum

Others

Total

1,414

2,703

5,157

586

1,860

8,015

19,735

TOPICS

Expanded capacity to produce high-grade SiC epitaxial wafers

SDK expanded the capacity to produce high-quality-grade siliconcarbide (SiC) epitaxial wafers for power semiconductors, which had
been marketed under the trade name of High-Grade Epi (HGE), forthe third time in the last three years. SDK has been gradually
expanding the capacity to produce wafers*, which was 3,000 per
month in the first half of 2017. After the latest expansion work
completed in February 2019, SDK’s HGE production capacity
became 9,000 wafers per month, or three times as much as the firsthalf of 2017. SDK’s SiC epitaxial wafers business has been acclaimed
by power semiconductor manufacturers, our customers, for thelowest incidence of crystal defects and the highest homogeneity ofwafers in the world. SDK expanded the HGE production facilities to
respond to the growing need of our customers for HGE resulting
from the rapid growth of the market for SiC-based power
semiconductors. When compared with current mainstream siliconbased semiconductors, SiC-based power semiconductors canoperate high temperatures, high voltage, and high currents, whileconserving energy. These features enable device manufacturers to
produce smaller, lighter, and more energy-efficient next-generation
power control modules. In addition to use in power modules fordispersion power sources to utilize new energy sources, power
modules for servers in data centers, and inverter modules for railcars,
SiC-based power semiconductors are now replacing conventional
silicon-based semiconductors for use in on-board battery chargers
and rapid charging stations for EVs, in parallel with the rapid
expansion of the EV market. SDK will continue improving thequality of SiC epitaxial wafers products and supplying them to therapidly growing SiC power semiconductor market in timely andstable manner, while securing a top-level market share.
* ‌This number is based on a conversion into SiC epitaxial wafers for power devices
withstanding a voltage of 1,200 V.

17

Corporate Social Responsibility
Safe and stable operation provides the basis for our business
The Showa Denko Group, which is a chemical manufacturer, gives firstpriority to safety, deeming it the foundation of our business. Based on
this recognition, we launched the Active Safety activities* in 2007. We willfurther enhance the activities to prevent occupational accidents,
equipment-related incidents, and environmental problems.
We are also conducting Responsible Care activities to give due
consideration to the environment, safety, and human health throughout
the life cycle of chemical substances, including at the development,
manufacture, disposal, and recycling stages.
These activities are a core part of the Group’s CSR activities. We will
step up our Responsible Care, Active Safety, and other activities in thefour fields of Safety and disaster prevention, Occupational safety andhealth, Chemical substance safety, and Environmental safety to provide
society and customers with products, technologies, and services thatmeet their needs in a safe and stable way for use with peace of mind.

Toward the creation of a sustainable society
The Sustainable Development Goals (SDGs) are 17 goals to be attainedby the international community by 2030 to meet global social challenges.
The SDGs target all countries and are intended to create a society where“no one is left behind.” For the SDGs, greater public attention has been

focused on measures implemented by companies. The Showa Denko
Group has been supplying “products and services that are useful andsafe and exceed our customers’ expectations.” Toward the creation of asustainable society, we will continue to contribute to the solution of
global social issues, including climate change, depletion of resources,
demographic changes, urbanization, multipolarization of the world
economy, and changes in the feedstock/energy resource market.

Promoting dialogue with stakeholders
The public has recently been paying more attention to environmental,social, and governance (ESG) measures taken by companies. Amid rapidchanges in the social and economic environment, we need to meet the
expectations of all stakeholders, for which we need to foster direct
dialogue with stakeholders and identify what they expect of the Showa
Denko Group. We will attach importance not only to IR-related dialogues
but also to dialogues with Group employees in charge of CSR activities
in Japan and abroad. We will foster constructive dialogues withstakeholders through the Group’s aluminum can recycling and local
community contribution activities, thereby raising individual employees’
CSR awareness and improving the quality of our CSR activities.
*‌Active Safety activities: The Showa Denko Group’s unique activities in which we analyze past
accidents and problems, and take measures to prevent their reoccurrence.

Showa Denko Group’s Resource Use and Environmental Impact in 2017
Actual values of environmental loads for 2017

Input

OutputEnergyShowa Denko Group(Crude oil equivalent)Internal use

Showa Denko K.K. only

970 MI (-30 MI)

Showa Denko K.K. only

9,199 t (+6,194 t)

Group companies*1

230 MI (+40 MI)

Group companies

0t

Water

Waste Reduction

Showa Denko K.K. only

54.60 Mm (+0.49 Mm )33Group companies

Showa Denko K.K. only

61,690 t (-899 t)
Group companies

5.13 Mm (+0.52 Mm )38,726 t (+823 t)

3

Raw materials

Products
Emission of air pollutants:
Greenhouse gases (kt-CO2 )SDK onlyGroupcompanies

2,175 (-36)

570 (+95)

SOx (t)326 (+2)4 (0)NOx (t)1,324 (+69)

21 (-2)

Soot and dust (t)71 (+8)1 (0)JCIA PRTR-listed substances (t)145 (-3)

415 (+173)

JCIA Toxic atmospheric pollutants (t)*2

14 (+1)1 (0)Emission of water pollutants:

SDK onlyGroupcompanies

COD (t)346 (-14)

18 (+14)

Total nitrogen (t)457 (-23)

2 (+1)

8 (0)

0 (0)

15 (+1)1 (0)Total phosphorus (t)JCIA PRTR-listed substances (t)Wastewater volume (kt)

Emission of soil pollutants:

28,582 (+1,962) 4,475 (+742)
SDK onlyGroupcompanies

0 (0)

0 (0)

SDK onlyGroupcompanies

JCIA PRTR-listed substances (t)*1 S‌ cope of the Showa Denko Group: Total for the 10 consolidated manufacturing subsidiaries in Japan;
SunAllomer Ltd., (2017-), Showa Denko Gas Products Co., Ltd., Showa Denko Ceramics Co., Ltd.
(Toyama), Showa Aluminum Can Corp., Showa Denko Packaging Co., Ltd., Niigata Showa K.K., Nippon
Polytech Corp., Showa Denko Kenso Co., Ltd., Showa Denko HD Yamagata K.K., and Showa Fine
Ceramics Co., Ltd. GHG emissions include those for Showa Denko Electronics K.K., and Tsurusaki
Kyodo Doryoku Co., Ltd., and exclude those for Niigata Showa K.K., Nippon Polytech Corp., Showa
Denko Kenso Co., Ltd., and Showa Fine Ceramics Co., Ltd., which are not required to report emissions
as emitters designated under the Act on Promotion of Global Warming Countermeasures.
*2 Emissions of toxic atmospheric pollutants are included in emissions of PRTR-listed substances.
*3 ‌Final landfill disposal includes only waste generated from production activities during the year.

Please visit our websites

18

SHOWA DENKO K.K.

CSR site
Integrated reports

ANNUAL REPORT 2018

Industrial waste discharge:
Total waste discharged to outside (t)24,166 (+4,128) 13,145 (+3,785)

Reused by third parties (t)12,729 (+1,873) 8,893 (+3,119)

Volume reduction by consignee (t)11,082 (+2,154) 4,161 (+694)

Final landfill disposal (t)*3356 (+102)

92 (+23)

Figures in parentheses show increases or decreases relative to the previous year.

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

Management’s Discussion and Analysis
Results of Operations

Chemicals

The Group recorded consolidated net sales of ¥992,136 million(US$8,938 million) in 2018, up 27.1% from the previous year. The sales inthe Electronics segment decreased due to a lower shipment volumes of
HD media for mobile PCs. However, the sales in the Inorganics segment
considerably increased due partly to the effect of the business integrationin our graphite electrode business, which took place in the second halfof 2017, and a rise in market prices of graphite electrodes. In the
Petrochemicals segment, sales increased due to a rise in market prices of
products resulting from a rise in raw naphtha price, despite a decrease inproduction resulting from the large-scale periodic shutdown maintenanceof ethylene production facilities. Sales in the Chemicals, Aluminum, andOthers segments also increased due to higher shipment volumes.
The cost of sales went up ¥102,115 million, or 16.9%, to ¥705,003
million (US$6,351 million), reflecting the increase in net sales.
Selling, general and administrative expenses rose ¥7,340 million, or
7.4%, to ¥107,130 million (US$965 million), due partly to the higher
transportation cost. R&D expenditures rose ¥1,196 million to ¥19,735
million (US$178 million).
Operating income of the Group substantially increased by 131.6%, or¥102,295 million over the previous year, to ¥180,003 million (US$1,622
million). In the Petrochemicals segment, operating income decreased due
mainly to the large-scale shutdown maintenance. The Electronics andAluminum segments also recorded lower income. However, the Inorganics
segment recorded considerably higher income due to the effect of thebusiness integration in graphite electrode business and a rise in the market
prices of graphite electrodes. The Chemicals and Others segments also
recorded higher income.

Production of liquefied ammonia decreased slightly from the previous
year. However, production of high-purity gases for electronics
increased. In the basic chemicals business, sales of liquefied ammonia
dropped slightly due to a decrease in shipment volumes. However, salesof acrylonitrile and chloroprene rubber increased due to a rise in market
prices. Sales of electronic chemicals went up due to higher shipment
volumes of high-purity gases for electronics caused by an increase inproduction in the semiconductor and display panel industries. Sales ofindustrial gases increased due to higher shipment volumes of carbon
dioxide and dry ice. Sales of functional chemicals also rose due to higher
sales prices of products reflecting a rise in prices of raw materials.
As a result, sales in the Chemicals segment increased ¥7,782 million,
or 5.2% over the previous year, to ¥156,541 million (US$1,410 million).
The segment recorded operating income of ¥17,393 million (US$157
million), up ¥919 million, or 5.6% over the previous year.

Electronics

Information by Business Segment

Production of HD media in 2018 fell from the previous year due mainly
to a weakness in shipment volumes of HD media for use in PCs, though
the demand for HD media for use in servers for data centers remained
strong. Thus the sales of HD media dropped, reflecting a decrease insales volumes. Sales of compound semiconductors increased due tohigher shipment volumes. However, sales of rare earth magnetic alloys
fell due to reforms in business structure. Sales of lithium-ion battery (LIB)
materials increased due to higher shipment volumes to China.
As a result, the Electronics segment’s sales decreased ¥17,241 million,or 14.0% from the previous year, to ¥105,823 million (US$953 million).
The segment recorded operating income of ¥12,397 million (US$112
million), down ¥9,528 million, or 43.5% from the previous year.

A breakdown of net sales and operating income by business segment is
as follows.

Inorganics
Production of graphite electrodes increased from the previous year due
to a rise in output from the electric steel industry as the customer. Salesof graphite electrodes went up sharply due to consolidation of SHOWADENKO CARBON Holding GmbH in the second half of 2017, in addition
to a rise in sales prices of graphite electrodes in the global market
caused by higher production of electric steel in China resulting fromenforcement of stricter environmental policy, and the tight supplydemand situation resulting from an electric steel production on a global
scale, especially in the U.S. market. Sales of ceramics decreased due
mainly to a fall in shipment volumes of general-purpose alumina caused
by SDK’s withdrawal from PT. Indonesia Chemical Alumina (ICA), despite
higher shipment volumes of abrasives and fine ceramics for electronics.
As a result, sales in the Inorganics segment increased ¥192,707 million,
or 262.4% over the previous year, to ¥266,149 million (US$2,398 million).
This segment recorded operating income of ¥132,445 million (US$1,193
million), up ¥125,466 million over the previous year.

Petrochemicals
Production of ethylene and propylene decreased from the previous year
due to periodic shutdown maintenance of ethylene production facilities
which is conducted once every four years. Sales of olefins rose due to arise in the market prices of products resulting from a rise in raw naphtha
price, despite a decrease in production quantities resulting from thelarge-scale periodic shutdown maintenance of ethylene production
facilities. Sales of organic chemicals increased due to a rise in prices of
products including ethyl acetate and vinyl acetate.
As a result, sales in the Petrochemicals segment increased ¥17,751
million, or 7.1% over the previous year, to ¥268,879 million (US$2,422
million). However, this segment recorded operating income of ¥20,333
million (US$183 million), down ¥13,024, or 39.0% from the previous year
due mainly to the large-scale periodic shutdown maintenance and adecrease in spreads between raw naphtha price and market prices ofcracked fuel oil and the raw material for butadiene.

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

2014

Petrochemicals
Chemicals

2015

2016

Electronics
Inorganics

2017

Aluminum
Others2018
Adjustments

2014

Petrochemicals
Chemicals

2015

2016

Electronics
Inorganics

2017
Aluminum
Others2018
Adjustments

19

Management’s Discussion and Analysis (cont.)
Aluminum

Asia for the Chemicals segment increased. For the basic chemicals
business, sales of chloroprene rubber rose due to an increase in export
volumes. For the electronic chemicals business, sales went up due to anincrease in shipment volumes of high-purity gases for electronics causedby higher production in the semiconductor and display panel industries in
East Asia. For the functional chemicals business, sales increased due to arise in market prices of products resulting from a rise in raw material
prices. The Electronics segment’s sales went down due to lower
shipment volumes of HD media resulting from a decline in demand for
HDDs used in PCs. Sales in the Inorganics segment rose due mainly to arise in prices of graphite electrodes in the global market and the full-year
contribution from SHOWA DENKO CARBON Holding GmbH, which wasconsolidated in the fourth quarter of 2017, to the increase in sales. Sales
in the Aluminum segment increased due to higher shipment volumes ofaluminum cans recorded by Hanacans Joint Stock Company in Vietnam.
Sales in the Others segment decreased due to lower sales recorded by
Shoko Co., Ltd.
As a result, consolidated sales from operations in Asia (excluding
Japan) increased ¥9,241 million, or 4.0% over the previous year, to¥239,885 million (US$2,161 million).

Production of high-purity foil for aluminum electrolytic capacitors
increased from the previous year. Sales of rolled products went up due
to higher shipment volumes of high-purity foil for aluminum electrolytic
capacitors for use in industrial equipment and automotive applications.
Sales of aluminum specialty components increased slightly due to a risein product prices caused by higher price of aluminum ingots. Sales ofaluminum cans slightly fell due to lower shipment volumes to thedomestic market.
As a result, sales in the Aluminum segment increased ¥2,815 million,
or 2.7% over the previous year, to ¥108,254 million (US$975 million).
However, operating income of the segment decreased ¥1,755 million, or
26.2% from the previous year, to ¥4,942 million (US$45 million).

OthersSales in the Others segment increased ¥9,789 million, or 7.3% over theprevious year, to ¥143,413 million (US$1,292 million) due mainly to theincrease in Shoko Co., Ltd.’s sales and shipment volumes of SiC epitaxial
wafers for power devices. Operating income of the segment rose by¥2,260 million, or 357.0% over the previous year, to ¥2,893 million (US$26
million).

Sales in the Rest of the World

Information by Geographic Area

Sales in the rest of the world increased substantially due mainly to a risein sales in the Inorganics segment. Showa Denko Carbon Inc., our U.S.
subsidiary producing graphite electrodes, recorded higher sales due
mainly to a rise in graphite electrode prices in the global market.
SHOWA DENKO CARBON Holding GmbH, which was consolidated in the
fourth quarter of 2017, also contributed to the increase in sales in the
Inorganics segment throughout 2018.
As a result, consolidated sales from operations in the rest of theworld increased ¥155,338 million, or 340.8% over the previous year, to¥200,919 million (US$1,810 million).

Sales in Japan

Sales in the Petrochemicals segment increased due to a rise in market
prices of products resulting from higher raw naphtha prices. Sales in theChemicals segment went up due to an increase in shipment volumes ofhigh-purity gases for electronics caused by a production increase in thesemiconductor and display panel industries and a rise in the market
price of acrylonitrile. Sales figures of the Electronics segment fell due tolower shipment volumes of HD media, despite increased shipment
volumes and sales of compound semiconductors. In the Inorganics
segment, sales rose due to an increase in market prices and sales
volumes of graphite electrodes, and an increase in shipment volumes ofceramics for electronics including titanium oxide and thermoconductive fillers. Sales in the Aluminum segment rose due to higher
sales volumes of high-purity foil for aluminum electrolytic capacitors
and an increase in sales of aluminum specialty components resulting
from a rise in price of aluminum ingots. Sales figures of the Others
segment rose due to an increase in Shoko Co., Ltd.’s sales and higher
shipment volumes of SiC epitaxial wafers, for which we have been
increasing our productive capacity. As a result, consolidated sales fromoperations in Japan rose ¥47,170 million, or 9.4%, to ¥551,333 million(US$4,967 million).

Other Income (Expenses) and Net Income
Attributable to Owners of the Parent
The gap between interest expenses and interest and dividends income
improved ¥578 million to expenses of ¥629 million (US$6 million),
mainly from an increase in interest income.
We recorded a gain on the equity in earnings of unconsolidated
subsidiaries and affiliates to which the equity method is applied of¥1,253 million (US$11 million), an improvement of ¥8,942 million. This
gain was due mainly to a backlash from the previous year’s recording of an
impairment loss on the equity in earnings of unconsolidated subsidiaries
and affiliates to which the equity method is applied from ICA.
For foreign exchange gain (losses), the Group recorded foreignexchange losses of ¥347 million (US$3 million) in 2018, an improvementof ¥2,444 million from the previous year due mainly to the recording of aforeign exchange gain from a subsidiary manufacturing HD media in
Taiwan caused by the depreciation of the New Taiwan dollar against theSales in Asia (excluding Japan)
Sales in the Petrochemicals segment in Asia fell due to a decline in theexport of olefins resulting from periodic shutdown maintenance of
ethylene production facilities conducted once every four years. Sales in

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)
500

90

900

375

60

600

250

30

300

125

0

20

2014

2015

SHOWA DENKO K.K.

2016

2017

2018

ANNUAL REPORT 2018

0

2014

2015

2016

2017

2018

0

2014

2015

2016

2017

2018

U.S. dollar. In 2017, however, this HD media manufacturing subsidiary in
Taiwan recorded foreign exchange losses due to the appreciation of the
New Taiwan dollar against the U.S. dollar.
We recorded a loss of ¥4,993 million (US$45 million), net, on
retirement and sales of non-current assets, an increase of ¥563 million,
due mainly to the recording of retirement losses resulting from removalof old facilities that belonged to the Inorganics, Chemicals, andPetrochemicals segments.
We also recorded a loss of ¥22,573 million (US$203 million) for the
impairment loss on fixed assets, an increase of ¥15,369 million, duepartly to our recognition of an impairment loss amounting to ¥8,845
million from the business to manufacture aluminum can for beverages
operated by SDK and Showa Aluminum Can Corporation, ourconsolidated subsidiary, and another impairment loss amounting to¥4,641 million from the business to manufacture lithium-ion battery
materials, as a result of our review on the value of businesses taking theirbusiness perspectives into consideration. In addition, we recorded
impairment loss amounting to ¥5,967 million and ¥1,864 million on idle
properties: the Hikone Plant and the Institute for Advanced and CoreTechnology.
Gain on sales of investment securities increased ¥1,113 million, to¥1,521 million (US$14 million).
The sum of extraordinary losses, other than those mentioned above,
decreased ¥1,792 million from the previous year, to ¥7,626 million(US$69 million), which was due mainly to posting of a loss on valuationof investment securities.
Overall, the total of other income (expenses), net, i.e., the total of
non-operating income (expenses) and extraordinary income (expenses),
net, deteriorated by ¥7,317 million, to a loss of ¥34,494 million (US$311
million).
As a result, the Company recorded income before income taxes andnon-controlling interests of ¥145,509 million (US$1,311 million), up¥94,978 million from the previous year.
Income taxes increased ¥17,942 million to ¥28,756 million (US$259
million) due to the improvement in the Company’s performance.
Consequently, the Company recorded net income attributable toowners of the parent of ¥111,503 million (US$1,005 million), up ¥74,099
million over the previous year.

impairment loss. Total investments and other assets decreased by¥16,812 million, to ¥97,060 million (US$874 million), due partly to thedepreciation in the market valuation of investment securities.

Liabilities
Interest-bearing debt fell ¥58,758 million from the end of the previous
year, to ¥287,968 million (US$2,594 million), despite an increase inaccounts payable-trade caused by a rise in prices of raw materials forgraphite electrodes. Total liabilities fell ¥47,599 million, to ¥610,406
million (US$5,499 million).

Net Assets
Net assets at the end of 2018 amounted to ¥465,340 million (US$4,192
million), up ¥96,346 million over the previous year, due partly to theposting of net income attributable to owners of the parent.

Capital Expenditures
Capital expenditures decreased ¥60 million from the previous year, to¥41,727 million (US$376 million). Capital expenditures for the
Petrochemicals segment increased due to periodic shutdown
maintenance, and that for the Others segment increased due toinvestment in facilities to produce SiC epitaxial wafers for power devices.
However, in the Chemicals segment, the amount of capital investmentin the electronic chemicals business decreased due to the end of largescale investment in facilities in 2017 to produce etching gases, though
the amount of capital investment continued to be at a high level
throughout 2018. In the Electronics segment, investment in facilities to
produce HD media in 2018 decreased from the previous year.

Cash FlowsNet cash provided by operating activities increased ¥82,550 million overthe previous year to proceeds of ¥149,785 million (US$1,349 million),
due mainly to the increase in net income attributable to owners of theparent. Net cash used in investing activities increased ¥19,472 million,to ¥49,338 million (US$444 million), due partly to a decrease in proceedsfrom repayment of time deposits. Thus, free cash flow ended up withthe proceeds of ¥100,447 million (US$905 million), an improvement of¥63,078 million. Net cash used in financing activities increased ¥42,691
million due to the reduction in interest-bearing debt, and ended up withthe payment of ¥61,061 million (US$550 million). As a result, and due
partly to the influence of exchange rate fluctuations, cash and cash
equivalents at December 31, 2018 increased ¥36,002 million from theend of the previous year, to ¥112,835 million (US$1,017 million).

Financial Position
Total Assets
Total assets at the end of 2018 rose ¥48,747 million from the end of theprevious year, to ¥1,075,746 million (US$9,691 million), due mainly tothe increase in notes and accounts receivable and inventories resulting
from a rise in product and raw material prices in our graphite electrodebusiness. Cash and deposits increased ¥35,938 million from the end of
the previous year to ¥113,186 million (US$1,020 million).
Net property, plant and equipment decreased ¥27,527 million to¥478,406 million (US$4,310 million), due mainly to the recording ofInterest-Bearing Debt

Cash Flows from Operating Activities(Billions of yen)
400

(Billions of yen)
160

300

120

200

80

100

40

0

2014

2015

2016

2017

2018

0

2014

2015

2016

2017

2018

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 minimize impact on its operations.
The following covers important risk factors considered being present
as of March 28, 2019. This list is not inclusive.

1. ‌Substantial fluctuations in the performances ofindividual 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 supply-demand balance,or a currency fluctuation, and when we cannot secure sufficient spreads
between the manufacturing cost and selling prices of products, theGroup’s performance and financial conditions can be affected. Furthermore,earnings from petrochemicals largely depend on the supply-demandbalance. Construction of large plants by competitors and 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(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-up, businessreorganization and restructuring
The Group implements mergers, acquisitions, capital tie-up, businessreorganization and restructuring at home and abroad with the view of
expanding scope of businesses and improving profitability. If thesemeasures do not allow the Group to achieve desired results due tochanges in business environment surrounding the Group or othercompanies to which the Group invests money, these measures may
have bad influences upon the Group’s performance and financial
conditions. In addition, when the Group implements restructuring of its
businesses, including withdrawal from unprofitable businesses andrestructuring of affiliated companies, the Group’s performance andfinancial conditions can be affected.

2. ‌Unexpected fluctuations in financial conditions
and cash flows(1) Substantial fluctuations in exchange rates

In the Group’s HD media business, the sales volume is largely influenced
by demand for IT devices and electric appliances. The 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
and provide 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.

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

(3) Inorganics

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.

The Group produces graphite electrodes in Asia, North America, andEurope, 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 premium on aluminum, or a weaker yen, and when we cannot
absorb the manufacturing cost increase in the form of higher productprices, the Group’s performance and financial conditions can be affected.
Furthermore, most of our products are sold as materials and components
for the automobile, electric appliance, and electronics sectors. Trends of

22

those industries, which are beyond our control, can substantially affectsuch businesses.

SHOWA DENKO K.K.

ANNUAL REPORT 2018(2) ‌Trends in financial markets and changes in thefund-raising environment(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 inpension calculations. Fluctuations in the current price of pension assets,
trends in interest rates, and changes in the retirement benefit/pension
systems can affect 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
The Group has adopted the accounting standard regarding the impairmentof fixed assets. The Group may incur additional losses from the impairmentof fixed assets as a result of future changes in the current prices of landand other fixed assets or a substantial change in the business environment.

(6) Deferred tax assets
The Group’s financial statements include deferred tax assets in relation
to temporary differences (differences between the assets/liabilities on
the consolidated financial statements and the assets/liabilities incalculation of taxable income). The calculation of deferred tax assets isbased on various projections for future taxable income. Thus, when
actual taxable income differs from the projections or in case of a revisionof the taxation system (including tax rates), it becomes necessary torevise deferred tax assets. That situation could affect the Group’s
performance and 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 as it conducts its respective businesses.
In the event 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 andfinancial conditions can be affected.

4. Important lawsuits
While the Group makes its best efforts to observe laws and agreements,
the Group may be sued as it conducts its wide-ranging businesses.

5. Others(1) R&D

Making “Create new value by forging, polishing, and linking diverse
individualized technologies” as its basic policy in R&D, the Group
concentrates its R&D resources upon research and businessdevelopment that leads to strengthening of its core businesses andexpansion of businesses in their surrounding fields. On the other hand,
the Group also strives to create next-generation businesses that makethe most of open innovation and M&As. Through strengthening of its
core technologies that covers such diverse fields as inorganics, organics
and aluminum, and achievement of synergies among these technologies,
the Group promotes its R&D programs that aim to create individualized
products, technologies, and high-value-added businesses. However, incase the actual results materially differ from original plans, the Group’s
performance and financial conditions could be affected.

if the Group is considered to have infringed a third party’s intellectual
property, the Group’s operations can be hindered and the Group’s
performance and financial conditions could be affected.

(3) Quality assurance and product liability
The Group has established its 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 or a natural disaster, or by a shortage ofpower supply. These factors could affect the Group’s performance andfinancial conditions.

(5) Impact on 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 the environment, the Group’s reputation can be damaged.
The Group may incur costs, including compensation, lose business
opportunities due to the suspension of production, and/or pay
compensation to customers. These factors can affect the Group’s
performance and financial conditions.

(2) Intellectual property
The Group is making its best efforts to obtain, use, and protect intellectual
property, such as industrial property rights and know-how, in recognitionof their ability to make the Group’s businesses more competitive. The
Group also respects other companies’ rights. However, in the event of
failure to duly obtain or use the rights, infringement by a third party, or23Consolidated Balance Sheets
Showa Denko K.K. and Consolidated Subsidiaries
As at December 31, 2018 and 2017
Thousands of
U.S. dollars (Note 5)

Millions of yen

2018

ASSETS2017

2018

Current assets
Cash and deposits (Notes 6 and 7)
Notes and accounts receivable (Notes 7 and 10)
Allowance for doubtful accounts
Inventories¥ 113,186
217,200¥

77,248$ 1,019,692

194,404

1,956,761(1,386)(2,849)(12,482)

152,800

114,913

1,376,581

Deferred tax assets (Note 13)

3,747

6,898

33,760

Other current assets (Notes 7 and 9)

14,732

16,581

132,717500,280

407,194

4,507,029

234,987244,713

2,117,002

Total current assets

Property, plant and equipment (Note 11)
Land (Note 19)
Buildings and structures

283,303287,708

2,552,281

Machinery, equipment and vehicles

900,921

900,779

8,116,403

Construction in progress
Less : Accumulated depreciation
Net property, plant and equipment

11,106

16,548100,054

1,430,317

1,449,748

12,885,740(951,911)(943,815)(8,575,776)

478,406

505,933

4,309,964

71,886

89,167

647,618

71

1,217

643

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

249

232

2,243

Deferred tax assets (Note 13)

1,590

1,080

14,320

Other (Notes 7 and 9)

31,59632,405

284,650

Allowance for doubtful accounts(8,332)(10,229)(75,062)

97,060113,871874,412¥ 1,075,746¥ 1,026,999$ 9,691,405

Net defined benefit asset (Note 12)

Total investments and other assets

Total assets
See notes to financial statements.
24

SHOWA DENKO K.K.

ANNUAL REPORT 2018

Thousands of
U.S. dollars (Note 5)

Millions of yen

2018

LIABILITIES AND NET ASSETS

2018

2017

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

81,747¥

91,699$736,456

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

41,40357,432373,000

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

182,890

171,515

1,647,662

Income taxes payable

91,535

10,1605,748

Provision for repairs

64

4,143

574

Provision for bonuses

3,516

2,949

31,6785

5

46

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

129

137

1,161

Other current liabilities (Notes 7, 9, and 13)

42,26638,206

380,775

362,181

371,835

3,262,888

Total current liabilities
Non-current liabilities

164,818

197,594

1,484,847

Deferred tax liabilities (Note 13)

6,683

12,88060,211

Provision for repairs

1,102

117

9,926

156

96

1,407

2,876

3,574

25,906

—

2,640

—

Net defined benefit liability (Note 12)

22,01818,966

198,365

Deferred tax liabilities for land revaluation (Note 19)

32,32432,488291,208

Other non-current liabilities (Notes 7 and 9)

18,24817,814

164,397248,226

286,170

2,236,266

1,266,338

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

Provision for stock payments (Note 3)
Provision for business structure improvement
Provision for loss on guarantees

Total non-current liabilities
Contingent liabilities (Note 17)
Net assets (Note 18)
Shareholders' equity
Capital stock
Authorized, 330,000,000 shares
Issued , 2018–149,711,292 shares

140,564—

Issued , 2017–149,711,292 shares—

140,564—

Capital surplus

78,911

61,663710,911Retained earnings

197,717

100,076

1,781,230

Less: Treasury stock at cost, 2018–3,836,364 shares(11,659)—(105,038)

Less: Treasury stock at cost, 2017–7,187,545 shares
Total shareholders' equity—(10,503)—405,532

291,800

3,653,441

7,489

16,547

67,465

Accumulated other comprehensive income
Valuation difference on available-for-sale securities
Deferred gains or losses on hedges

836

3,781

7,535

Revaluation reserve for land (Note 19)

33,281

29,541

299,831

Foreign currency translation adjustments

7,069

15,516

63,681Remeasurements of defined benefit plans (Note 12)(8,244)(4,716)(74,270)

Total accumulated other comprehensive income

40,43160,670364,241

Non-controlling interests

19,377

16,524

174,568

Total net assets

465,340

368,994

4,192,251¥1,075,746¥ 1,026,999$ 9,691,405

Total liabilities and net assets

25Consolidated Statements of Income
Showa Denko K.K. and Consolidated Subsidiaries
For the years ended December 31, 2018 and 2017
Thousands of
U.S. dollars (Note 5)

Millions of yen

2018

2017

2018

Net sales¥ 992,136¥ 780,387$ 8,938,162

Cost of sales (Note 21)705,003602,888

6,351,379

287,133

177,498

2,586,784

Gross profit
Selling, general and administrative expenses (Notes 20 and 21)
Operating income

107,130

99,790965,135

180,00377,708

1,621,649

Other income (expenses)
Interest and dividends income

2,354

1,893

21,207

Equity in earnings (losses) of unconsolidated subsidiaries and affiliates (Note 22)

1,253(7,689)11,290Gain on sales of investment securities, net (Note 8)

1,521

408

13,703

Loss on valuation of investment securities (Note 8)(2,583)(50)(23,270)

Rent income on non-current assets

1,366

1,381

12,305Interest expenses(2,983)(3,100)(26,871)

Loss on retirement of non-current assets(4,851)(5,310)(43,706)

Impairment loss (Note 14)(22,573)(7,204)(203,362)

Gain on bargain purchase

—

7,141

—

Gain on liquidation of subsidiaries

361

15

3,254

Provision for loss on guarantees (Note 22)—(2,640)—

Other, net(8,359)(12,022)(75,309)

Total(34,494)(27,177)(310,759)

145,50950,531

1,310,890

Current

25,6698,053

231,255

Deferred

3,087

2,761

27,813

Net income

116,752

39,717

1,051,823

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

Net income attributable to non-controlling interests
Net income attributable to owners of the parent

5,249

2,313

47,287¥ 111,503¥ 37,404$ 1,004,535

Yen

U.S. dollars (Note 5)

Per share amounts
Net income – primary
Cash dividends (applicable to the period)¥ 758.15¥ 262.44$ 6.83120.00

80.00

1.08

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 2018 and 2017 were not disclosed because there were no dilutive shares.
See notes to financial statements.

26

SHOWA DENKO K.K.

ANNUAL REPORT 2018

Consolidated Statements of Comprehensive Income
Showa Denko K.K. and Consolidated Subsidiaries
For the years ended December 31, 2018 and 2017
Thousands of
U.S. dollars (Note 5)

Millions of yen

Net income

2018

2017

2018

¥ 116,752¥ 39,717$1,051,823(9,127)

12,133(82,228)

Other comprehensive income:
Valuation difference on available-for-sale securities
Deferred gains or losses on hedges(2,942)

3,479(26,508)

Foreign currency translation adjustments(7,667)1,519(69,070)

Remeasurements of defined benefit plans, net of tax(3,556)

6,294(32,034)

Share of other comprehensive income of unconsolidated subsidiaries
and affiliates accounted for using the equity method(1,405)22(12,655)¥ (24,697)¥ 23,447$ (222,495)¥ 92,055¥ 63,165$ 829,327

Owners of parent

87,46360,579787,953

Non-controlling interests

4,593

2,586

41,375

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, 2018 and 2017
Thousands

Balance as at December 31, 2016

Millions of yen

Number ofshares ofcapital stock

Capitalstock

CapitalsurplusRetainedearnings

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

149,711¥ 140,564¥ 62,033¥ 65,358¥ (10,502)¥ 320¥ 31,026¥ 14,239¥ (10,996)¥ 14,671¥ 311,231

Dividends from surplus

—

—

—

(4,285)

—

—

—

—

—

—

—

(4,285)

Net income (loss) attributable to owners of the parent

—

—

—

37,404

—

—

—

—

—

—

—

37,404Purchase of treasury stock

—

—

—

—

(11)

—

—

—

—

—

—

(11)

Disposal of treasury stock

—

—

0

—

10

—

—

—

—

—

—

10

Increase by increase of consolidated subsidiaries

—

—

—

229

—

—

—

—

—

—

—

229

Decrease by increase of consolidated subsidiaries

—

—

—

(97)

—

—

—

—

—

—

—

(97)

Change of scope of the equity method

—

—

—

—

—

—

—

—

—

—

—

—

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

—

—

(370)

—

—

—

—

—

—

—

—

(370)

Reversal of revaluation reserve for land

—

—

—

1,486

—

—

—

—

—

—

—

1,486

Other

—

—

—

(20)

—

—

—

—

—

—

—

(20)

Net changes of items other than shareholders' equity

—

—

—

—

—

12,0283,461(1,485)

1,277

6,281

1,854

23,416

149,711¥ 140,564¥ 61,663¥ 100,076¥ (10,503)¥ 16,547¥ 3,781¥ 29,541¥ 15,516¥ (4,716)¥ 16,524¥ 368,994

Balance as at December 31, 2017
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 the 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)

Other

—

—

—

—

—

—

—

—

—

—

—

—

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

CapitalsurplusRetainedearnings

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

Total
net assets$ 555,523$ 901,583$ (94,619)$ 3,324,270

Balance as at December 31, 2018

Thousands
Number ofshares ofcapital stock
Balance as at December 31, 2017

Thousands of U.S. dollars (Note 5)

Capitalstock

149,711 $ 1,266,338$ 149,072$ 34,067$ 266,138$ 139,783$ (42,484)$ 148,869

Dividends from surplus

—

—

—

(91,144)

—

—

—

—

—

—

—

(91,144)

Net income (loss) attributable to owners of the parent

—

—

—

1,004,535

—

—

—

—

—

—

—

1,004,535

Purchase of treasury stock

—

—

—

—

(90,229)

—

—

—

—

—

—

(90,229)

Disposal of treasury stock——

155,387—

79,810

—

—

—

—

—

—

235,197

Increase by increase of consolidated subsidiaries

—

—

—

—

—

—

—

—

—

—

—

—

Decrease by increase of consolidated subsidiaries

—

—

—

—

—

—

—

—

—

—

—

—

Change of scope of the equity method

—

—

—

(51)

—

—

—

—

—

—

—

(51)

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

—

—

1

—

—

—

—

—

—

—

—

1

Reversal of revaluation reserve for land

—

—

—

(33,693)

—

—

—

—

—

—

—

(33,693)

Other

—

—

—

—

—

—

—

—

—

—

—

—

Net changes of items other than shareholders' equity

—

—

—

—

—

(81,607)(26,532)

33,693(76,102)(31,786)

25,699(156,635)

149,711 $ 1,266,338 $ 710,911 $ 1,781,230 $ (105,038)$ 67,465$ 7,535$ 299,831$ 63,681

Balance as at December 31, 2018

See notes to financial statements.
28¥ 4,519

Total
net assets

SHOWA DENKO K.K.

ANNUAL REPORT 2018

$ (74,270) $ 174,568 $ 4,192,251

Consolidated Statements of Cash Flows
Showa Denko K.K. and Consolidated Subsidiaries
For the years ended December 31, 2018 and 2017
Thousands of
U.S. dollars (Note 5)

Millions of yen

2018
Cash flows from operating activities
Income before income taxes and non-controlling interests
Adjustments for:
Depreciation and amortization
Impairment loss
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

2017

2018

¥ 145,509¥ 50,531$ 1,310,890

39,45922,573(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

38,565
7,204
(12)
2,757
2,106
2,640
(10,610)(1,893)
3,100
7,689
(358)
5,310
(880)
(23,253)(12,005)
10,172(8,712)
72,351
4,410(2,828)(6,698)67,235355,489
203,362(167)(19,224)(6,339)(23,783)
31,732(21,207)
26,871(11,290)
9,567
43,706
1,274(266,509)(364,587)
183,757
55,5181,509,060
36,085(38,459)(157,270)
1,349,415

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 (Note 6)
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

(172)
210
(41,269)
392
(703)
3,975
—
197
(2,950)672(9,690)(49,338)(9,606)23,268(38,872)
1,067(1,646)15,086(14,827)(754)(1,045)609(3,145)(29,866)(1,547)1,890(371,792)
3,528(6,337)35,811—
1,776(26,575)
6,058(87,300)(444,487)

Cash flows from financing activities
Net increase (decrease) in short-term debt
Proceeds from long-term loans payable
Repayments of long-term loans payable
Redemption 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)(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

19,921
22,328(44,813)(10,000)(12)
0(4,277)(1,648)130(18,370)953
19,95256,186696—¥ 76,833(85,647)
299,149(734,768)—(90,238)
235,172(90,847)(21,302)(61,622)(550,104)(29,108)
325,716
692,193—(1,377)$ 1,016,532

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 financial statements of certain consolidated subsidiaries
of foreign nationality are translated into Japanese yen at the
year-end rate for assets and liabilities, at historical rates for theother balance 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.

2. SUMMARY‌
OF SIGNIFICANT ACCOUNTINGPOLICIES(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.

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 fromInternational Financial Reporting Standards, and restructured andtranslated into English from the consolidated financial statements
which have been filed with the Kanto Local Finance Bureau as
required by the Financial Instruments and Exchange Law of Japan.

(a) Principles of Consolidation
The consolidated financial statements for the years ended
December 31, 2018 and 2017 include the accounts of theCompany and its 58 and 62, 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 notexceed 20 years from booking. In addition, negative goodwill
arising from business combinations prior to April 1, 2010 isamortized on a straight-line basis over a period during which theeffect of such negative 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 2018 and 2 that ofin 2017, and 9 affiliates in 2018 and 9 affiliates in 2017.
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 thecurrent exchange rates.
The resulting exchange gains or losses are credited or charged
to income.

30

SHOWA DENKO K.K.

ANNUAL REPORT 2018(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 in view of the probability of recovery for specific doubtfulreceivables.
(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 is considered
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 andCorporate Officers, the provision is provided based on the Director
Share Payment Regulations.
(o) Provision for Loss on Guarantees
To provide for loss on guarantees, the Company makes a provisionin the expected amount of such losses based on the financial
conditions of the guaranteed companies.
(p) 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.

amounts payable for voluntary retirement related to retirement
benefits as retirement benefit obligations.
(q) Income Taxes
Income taxes consist of corporation, enterprise, and inhabitants
taxes. The provision for income taxes is computed based on thepretax 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.
(r) 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 therecognition of gains or losses resulting from changes in the fairvalue of derivative financial instruments until the related gains orlosses on hedged items are recognized.
However, when forward exchange contracts meet certain
hedging criteria, the hedged items are stated by the forward
exchange contracts 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 foreignsubsidiaries.
(s) Reclassifications
Certain reclassifications have been made in the 2017 financial
statements to conform to the presentation of 2018.

(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

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

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.
(1) Outline of the Transaction
In this Scheme, the shares of the Company are granted to its directors(excluding outside directors) and corporate officers pursuant to
the Director Share Grant Regulations set forth by the Company.
The Company grants performance-linked points to its directors
and corporate officers every year, and grants shares of the Company
to them based on the number of points granted when they resignfrom the Company. Provided that, however, with regard to a certain
portion of the points, an amount of money corresponding to theprevailing market price of the Company’s shares will be paid toany director or corporate officer meeting the relevant requirements
set forth in the Director Share Grant Regulations. The Company’s
shares that are granted to directors and corporate officers,
including those to be granted in the future, shall be acquired by
the trust using the entrusted funds and separately managed astrusted assets.
For accounting treatment concerning this trust agreement,
the Company applied the gross method in which the assets andliabilities of the trust are recorded as assets and liabilities in thebalance sheets by referring to the Practical Solution on Transactionsof Delivering the Company’s Own Stock to Employees etc. throughTrusts (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
and the number of such treasury stock were ¥327 million and
291,000 shares at the end of the fiscal year ended December 31,
2017, and ¥324 million (US$2,920 thousand) and 288,000 sharesat the end of the fiscal year ended December 31, 2018, respectively.

4. ‌‌NEW ACCOUNTING STANDARDS NOT YETAPPLIED“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)(a) 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

32

SHOWA DENKO K.K.

ANNUAL REPORT 2018

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,
and to add alternative treatments if there are any matters inJapanese practices as far as the comparability is not hindered.
(b) Scheduled Date of Application
The standard will be applied from the beginning of the fiscal year
2022.
(c) 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.

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 ¥111.00 to US$1.00, the approximate
rate of exchange as at December 31, 2018. The inclusion of such
U.S. dollar amounts is solely for the convenience of readers; itdoes 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, 2018 and 2017 on the
consolidated balance sheets and cash equivalents as at
December 31, 2018 and 2017 on the consolidated statements ofcash flows were reconciled as follows:
Thousands of
U.S. dollars

Millions of yen

Cash and deposits
Original maturities more than three months
Cash and cash equivalents

2018

2017

2018

¥ 113,186¥ 77,248$ 1,019,692

(351)

(415)

(3,160)¥ 112,835¥ 76,833$ 1,016,532

(b) Assets‌and Liabilities of Newly Consolidated Subsidiaries
through the Acquisition of Shares
Breakdown of the major assets and liabilities of the Company’s
newly consolidated subsidiary obtained through a shareacquisition as of December 31, 2017
A breakdown of the major assets and liabilities at the time of
the initial consolidation of SHOWA DENKO CARBON Holding GmbHand its 10 subsidiaries, obtained through a share acquisition, as
well as the acquisition values and expenditures for the acquisition(net amount) were as follows:
Millions of yen

Current assets¥ 23,233

Non-current assets

39,219Current liabilities(27,514)

Non-current liabilities(8,589)Negative goodwill(7,141)internal 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, andaluminum forward contracts are utilized to hedge the market
fluctuation risk.

(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 and financeshort-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.

(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 with the sales division in each sector and monitors thecustomers’ credit conditions periodically and reviews the sales
policy checking the sales volume and balances. The Company
takes measures to obtain information on and minimize the credit
risk that may arise due to the deterioration in the financial
condition of their customers. Consolidated subsidiaries monitor
their customers’ financial and credit conditions based on theirinternal rules.
The held-to-maturity debts are limited to only highly rated
securities.
The Companies utilize derivative transactions only withcreditworthy financial institutions and trading companies tominimize credit risk.
The maximum credit risk as of December 31, 2018 is disclosed
as the balance sheets amount of financial instruments exposed tocredit risk.

(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 consistof 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 following(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.

Acquisition value of shares of the acquired company
Accounts payables that are included in the acquisition value
Cash and cash equivalents of the acquired company
Less: Expenditures for the acquisition¥ 19,208(3,015)(1,535)¥ 14,658

The figures in this statement reflect the amount after
settlement of the provisional purchase price allocation for thebusiness combination.

7. FINANCIAL INSTRUMENTS

33

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

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.
(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
As well as 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, 2018 and 2017, 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, 2018

Millions of yen

Book value

Fair value

Difference(1) Cash and deposits¥113,186¥113,186¥ —(2) Notes and accounts receivable-trade203,730

203,730—(3) Investment securities

46,613

46,613—¥363,529¥363,529¥ —Total assets¥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—(1) Notes and accounts payable-trade

164,818

165,040

222

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

Derivative transactions*

¥

¥

¥ —

(5) Long-term debt less current portion

34

SHOWA DENKO K.K.

1,231

ANNUAL REPORT 2018

1,231

Millions of yen

Year ended December 31, 2017

Book value

Fair value

Difference(1) Cash and deposits¥ 77,248¥ 77,248¥ —(2) Notes and accounts receivable-trade

176,021

176,021—(3) Investment securities

60,78060,780—¥ 314,049¥ 314,049¥ —¥ 120,762¥ 120,762¥ —(2) Short-term debt

91,69991,699—(3) Current portion of long-term debt

57,43257,49967

Total assets(1) Notes and accounts payable-trade(4) Accounts payable-other

67,082

67,082—(5) Long-term debt less current portion

197,594

197,260(335)

Total liabilities¥ 534,570¥ 534,302¥ (268)Derivative transactions*

¥

¥

¥ —

Year ended December 31, 2018

5,354

5,354

Thousands of U.S. dollars

Book value

Fair value(1) Cash and deposits$ 1,019,692 $ 1,019,692(2) Notes and accounts receivable-trade

1,835,409

1,835,409

419,935

419,935(3) Investment securities
Total assets(1) Notes and accounts payable-trade

Difference
$

—
—
—

$ 3,275,036 $ 3,275,036$$ 1,256,039 $ 1,256,039$——(2) Short-term debt

736,456

736,456—(3) Current portion of long-term debt

373,000

373,073

72(4) Accounts payable-other508,751

508,751—

1,484,847

1,486,846

1,998

Total liabilities$ 4,359,094 $ 4,361,164$2,071

Derivative transactions*$(5) Long-term debt less current portion

11,090 $11,090$—*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 arevariable rate loans, and they are subject to special treatment of interest
rate swaps (refer to Note 9. DERIVATIVE FINANCIAL INSTRUMENTS); thefair value is measured as the net present value of the estimated cash
flows by discounting the total amount of principal and interest processed
as interest rate swaps using the interest rate applied to the new loans.
Current portion of bonds (included in the above Current portion of
long-term debt) and Bonds (included in the above Long-term debt lesscurrent portion)
As for bonds with short maturities, the book value is deemed toapproximate the fair value since these are scheduled to be settled
in a short period of time. For others, fair value is based on themarket prices.
Derivative transactions
Refer to Note 9. DERIVATIVE FINANCIAL INSTRUMENTS.

Notes: 2. ‌Financial instruments for which fair value is extremely difficult to determine
Thousands of
U.S. dollars

Millions of yen

Non-listed equity securities

2018

2017

2018

¥25,273¥28,387$227,683

These securities are not included in the above Investment securities, as it is extremely difficult to determine the fair value.
Because there was no quoted market value, and 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, 2018

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¥ 113,186¥—¥—

Notes and accounts receivable-trade203,730———¥ 316,916

¥—

¥—

¥—

Total

¥—

Millions of yen

Year ended December 31, 2017

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¥ 77,248¥—¥—

Notes and accounts receivable-trade

176,021———¥ 253,269

¥—

¥—

¥—

Total
Year ended December 31, 2018¥—

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$ 1,019,692$—$—

Notes and accounts receivable-trade

1,835,409———$ 2,855,101

$—

$—

$—

Total

$—

Notes: 4. Scheduled maturities of bonds and long-term debt after December 31, 2018 and 2017
Year ended December 31, 2018

Millions of yen

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(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 3 years
through 4 years

Due after 4 years
through 5 years

Due after 5 years

Total

¥

—

¥

—

¥

—

¥

—

¥

—

Millions of yen

Year ended December 31, 2017(1) Short-term debt

¥ 91,699(2) Long-term debt

57,432

41,406

31,60947,73735,632

41,210¥ 149,132¥ 41,406¥ 31,609¥ 47,737¥ 35,632¥ 41,210

Total

¥

—

¥

Year ended December 31, 2018

—

¥

—

¥

—

¥

—

Thousands of U.S. dollars

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

$ 736,456(2) Long-term debt

373,000

288,065

467,509413,847

168,584

146,842$ 1,109,457$ 288,065$ 467,509$ 413,847$ 168,584$ 146,842

Total

$

Due after 2 years
through 3 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, 2018 and 2017:(a) Available-for-sale Securities
Year ended December 31, 2018

Millions of yen

Book value

Acquisition
costYear ended December 31, 2018

Difference

Millions of yen

Sales

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

Equity securities

Equity securities
Other¥38,941¥24,834¥14,107

181

159

21

Total

Gross gain

Gross loss

¥1,552¥292¥(2)¥1,552¥292¥(2)Millions of yen

Year ended December 31, 2017

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

Sales

Equity securities
Total

7,491

9,567

(2,076)¥46,613¥34,561¥12,052

Equity securities
Total

Book value

Acquisition
cost

Total
¥54,675¥29,211¥25,465

Total
Year ended December 31, 2018

¥(3)

6,104

6,431

(326)

¥60,780¥35,641¥25,138

Gross gain

Gross loss

$13,980$2,634$(20)$13,980$2,634$(20)(c) Impairment of securities
For the year ended December 31, 2017, there were no impairment
losses. For the year ended December 31, 2018, the Companies
recorded an impairment loss of ¥2,581 million (US$23,250 thousand)on available-for-sale securities with fair market values.

Available-for-sale securities whose bookvalue is less than their acquisition cost
Equity securities¥218

Thousands of U.S. dollars

Equity securities

Available-for-sale securities whose bookvalue exceeds their acquisition cost
Equity securities¥(3)¥1,116

Sales

Difference

Gross loss

¥218

Year ended December 31, 2018

Millions of yen

Year ended December 31, 2017

Gross gain

¥1,116

Thousands of U.S. dollars

Book value

Acquisition
cost

Difference$350,818$223,730$127,088

1,627

1,433

194

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

67,49086,194(18,704)$419,935$311,357$108,578

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

Thousands of U.S. dollars

2018

2017

2018

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

¥6,344¥—$ 57,157

20
401

Currency related:
Forward exchange contracts:
Buying
Euro

¥ 9

¥ 9

¥

—

¥—

¥ —

¥ —

¥—

¥ 0

¥ 0

¥ 625

¥—

¥

¥

—

¥13

13

5,613

—

$—

$ 79

$ 79

181

$—

$

$

3,609

—

Selling
U.S. Dollar
Euro

¥

(2)
(113)

(2) $
(113)

3
118

3
118

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 priceobtained from the financial institutions.

36

SHOWA DENKO K.K.

ANNUAL REPORT 2018

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

Thousands of U.S. dollars

2018

2017

2018

Contract
amountContract
amountover 1 year

Contract
amountContract
amountover 1 year

Fair value

Contract
amountContract
amountover 1 year

¥ 11,309¥ 766

0¥ 7,861¥ 1,985¥ 118$101,881$ 6,905

37

—

(0)

29

—

0

335

—

(4)

6,736

—

106

9,108

—

29

60,683

—

955

—

—

—

306

—

(3)

—

—

—

Fair value

Fair value(1) Currency related:
Principle method
Forward exchange contracts:
BuyingU.S. Dollar
Euro

¥

$

2

Selling
U.S. Dollar
Euro
Allocation method
Forward exchange contracts:
Buying—¥ 3,212—$ 17,753

Euro

44

—

—

53

—

—

398

—

—

Canadian Dollar

—

—

—

3

—

—

—

—

—

U.S. Dollar

7,390

—

—

15,618——66,575

—

—

Euro

1,845

—

—

814

—

—

16,620——

Yuan Renminbi

1,041

—

—

640

—

—

9,375

—

—

¥ 7,900¥2,900¥—¥10,400¥ 6,900¥—$ 71,171$ 26,126$—¥ 7,168¥2,836¥—¥25,579¥ 7,181¥—$ 64,574$ 25,551$—

Buying¥ 18,235¥8,790¥1,070¥21,760¥11,367¥ 5,479$164,283$ 79,192$9,639Selling

1,025

—

34

2,093

—

(154)

9,238

—

302

U.S. Dollar¥ 1,971

¥

—

¥

¥

—

¥

$

—

$

—

Selling

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.
Notes: 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.
Notes: 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.
Notes: 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 2018, namely, December 31, 2018, was a bankholiday. Although notes receivable and payable maturing on thisdate were accordingly settled on January 4, 2019, 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, 2018 and 2017 dealt within the above-mentioned manner were as follows:

Thousands of
U.S. dollars

Millions of yen

2018

2017

2018

Notes receivable¥1,317¥938$11,868

Notes payable

901

891

8,116

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, 2018 and 2017, 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, 2018and 2017 was as follows:

Thousands of
U.S. dollars

Millions of yen

2018

2017

2018

Bank loans at the average interest rateof 0.88%¥61,747¥86,699$556,276

Commercial paper

20,0005,000

180,180¥81,747¥91,699$736,456

Total

As at December 31, 2018 and 2017, the long-term debt of theCompanies consisted of the following:Thousands of
U.S. dollars

Millions of yen

2018

2018

2017

¥ 15,000 $ 135,135

0.63% bonds due 2021

¥ 15,000

0.20% bonds due 2021

10,00010,00090,0900.734% bonds due 2022

10,00010,00090,0900.50% bonds due 2026

7,000

7,000

63,063

164,221

213,026

1,479,468

206,221

255,026

1,857,847(57,432)(373,000)

Loans principally from banks andinsurance companies due 2019 to 2027
at the average interest rate of 0.77%(41,403)

Less: current portion¥ 164,818

Total¥ 197,594 $ 1,484,847

Thousands of
U.S. dollars

Millions of yen

2017

2018

Balance of retirement benefit obligation
at the beginning of year
¥101,1542018¥ 99,169$911,294

Service cost

2,606

2,928

23,474

Interest cost

519

219

4,675

Actuarial gain and loss

1,428

(2,418)12,865Retirement benefits paid

(4,758)(6,979)(42,864)

72

24

646

Past service cost
Increase from changes in scope of
consolidation
Other
Balance of the retirement benefit
obligation at the end of year

—

8,943

—

(696)

(732)

(6,272)¥100,324¥ 101,154$903,823(2) Reconciliation‌of opening and closing balance of plan
assets for the years ended December 31, 2018 and 2017
was as follows:
Thousands of
U.S. dollars

Millions of yen

The aggregate annual maturities of the non-current portion of
long-term debt were as follows:ofMillions of yen Thousands
U.S. dollars

Years ending December 31¥ 31,975 $ 288,065

2020

Balance of plan assets at the beginningof year2017

2018$742,511¥82,419¥77,613

Expected return on plan assets

1,577

1,583

14,209Actuarial gain and loss

(5,463)

4,654(49,212)2021

51,893

467,509

Contribution from employer

4,554

4,519

41,0302022

45,937

413,847

Retirement benefits paid

(4,294)(7,270)(38,689)2023

18,713

168,584

2024 and thereafter

16,300146,842

Increase from changes in scope of
consolidation¥164,818 $ 1,484,847

Total

As at December 31, 2018 and 2017, the assets pledged as collateralfor long-term debt were as follows:
Thousands of
U.S. dollars

Millions of yen

2018

2018

2017

Other
Balance of plan assets at the end of year¥

Investment securities

361

¥

422 $

144,153

144,945

Total¥ 144,514¥ 145,367 $ 1,301,930

1,298,678

Secured short-term debt and longterm debt¥

Short-term debt

170

¥

— $

1,530

Long-term debt

240

320

2,162

Notes and accounts payable-trade

163

202

1,468

522 $

5,160

Total

¥

573

¥

ANNUAL REPORT 2018

—

(52)

(2,153)¥78,554¥82,419$707,696

Thousands of
U.S. dollars

2018

2017

2018

Funded retirement benefit obligations¥ 97,178¥ 98,015$ 875,479

Plan assets(78,554)(82,419)(707,697)

18,624

15,596

167,781

Unfunded retirement benefit obligations

3,146

3,139

28,341

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

21,77018,734

196,122Net defined benefit liability

22,01818,966

198,365

Net defined benefit asset

(249)

(232)

(2,243)

21,77018,734

196,122

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

SHOWA DENKO K.K.

1,372

Millions of yen

3,252

Property, plant and equipment, lessaccumulated depreciation

—
(239)

(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, 2018 and 2017 was as follows:

Assets pledged as collateral

38

2018

(4) Retirement‌benefit expenses and the components of theamounts thereof for the years ended December 31, 2018and 2017 were as follows:
Thousands of
U.S. dollars

Millions of yen

2018

2017

2018

Service cost

¥ 2,606¥ 2,928$ 23,474

Interest cost

519

219

4,675

Expected return on plan assets(1,577)(1,583)(14,209)

Amortization of actuarial gain and loss

1,641

2,019

14,787

78

26

702

¥ 3,267¥ 3,609$ 29,429

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, 2018 and 2017 were as follows:¥

Past service cost
Actuarial gain and loss
Total

¥

$

(1)

(2)
46,074¥5,114¥(9,072)$ 46,072

Thousands of
U.S. dollars

2018

2017

¥

¥

2018

(19)

$

2018

2017

2018

(177)

¥ 17,252¥ 10,616$ 155,420

Write-down of marketable andinvestment securities

16,657

15,218150,059

Tax loss carryforwards

5,681

10,64351,179Net defined benefit liability

5,423

4,360

48,852

Depreciation and amortization

4,869

3,789

43,867

Allowance for doubtful accounts

3,924

7,031

35,353

Loss on valuation of inventories

2,200

592

19,820

Provision for bonuses

791

693

7,128

Unrealized earnings from the sale of
fixed assets

543

629

4,890

Undetermined accrued liabilities

473

530

4,258

Impairment loss

108,204

Provision for repairs

356

1,307

3,203

¥ 11,991¥ 6,876$108,027

Deferred gains or losses on hedges

355

1,676

3,199

Write-down of golf club memberships

243

342

2,193

5,359

5,946

48,283

Other
Subtotal of deferred tax assets

64,12563,373

577,706

Valuation allowance(45,374)(46,471)(408,774)

Total deferred tax assets

18,751

16,902

168,932

Deferred tax liabilities:

Ratio

2018

2017

Bonds

42 %

30 %

Stocks

35

47

General accounts of life insurance company

22

21

Total

Thousands of
U.S. dollars

6,895(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, 2018 and 2017 were as follows:

Cash and deposits(b) Defined contribution pension plan
The amounts required to be contributed by consolidated
subsidiaries for the years ended December 31, 2018 and 2017 were¥657 million (US$5,917 thousand), and ¥443 million, respectively.

12,011

Unrecognized actuarial gain and loss
Total

Mainly 1.8% Mainly 2.0%

Deferred tax assets:(9,071)(20)

Long-term rate of expected return on plan assets

Millions of yen(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, 2018 and 2017 were as follows:

Unrecognized past service cost

Mainly 0.3% Mainly 0.4%(a) ‌As at December 31, 2018 and 2017, significant components
of deferred tax assets and liabilities were as follows:

5,114

Millions of yen

2017

Discount rate

13. INCOME TAXES

2018

2017
(0)

Ratio

2018

Thousands of
U.S. dollars

Millions of yen

2018(8) ‌Matters regarding the assumptions for actuarial calculations
Key assumptions for actuarial calculations as of December 31, 2018and 2017 were as follows:

Special depreciation reserve(5,058)(4,168)(45,563)

Amount of revaluation from the book value(4,233)(4,991)(38,136)

Valuation difference on available-forsale securities(3,678)(7,675)(33,131)(3,436)(1,981)(30,955)(371)(1,692)(3,344)12Foreign subsidiaries' undistributed
retained earnings

100 %

100 %

Deferred gains or losses on hedges(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.

Reserve for advanced depreciation of
fixed assets
Other

(231)

(207)

(2,085)(3,197)(1,255)(28,804)(182,019)

Total deferred tax liabilities(20,204)(21,969)

Net deferred tax assets (liabilities)¥ (1,453)¥ (5,067) $ (13,086)

39

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries(b) ‌The net deferred tax assets as at December 31, 2018 and 2017
were included in the consolidated balance sheets as follows:
Thousands of
U.S. dollars

Millions of yen

2018

2017

2018

¥ 3,747¥ 6,898$ 33,760

Deferred tax assets — non-current

1,590

1,080

14,320

Other current liabilities

(106)

(165)

(956)

(6,683)(12,880)(60,211)

Deferred tax assets — current

Deferred tax liabilities — non-current

15. CONSOLIDATED‌STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)
Reclassification adjustments and tax effects for components ofother comprehensive income (loss) for the year ended December
31, 2018, were as follows:ofMillions of yen Thousands
U.S. dollars

Valuation difference on available-for-sale securities
Increase during the year

¥ (12,897) $(116,192)

Reclassification adjustments(c) ‌Significant items in the reconciliation the statutory tax ratewith the effective as at December 31, 2018 and 2017 wereas follows:

Amount before income tax effect
Income tax effect
Total

2017

30.9 %

30.9 %

Increase during the year

Differences of statutory tax rate in subsidiaries

(5.7)

(3.9)

Reclassification adjustments¥ (2,785) $ (25,089)(115)(1,034)(12,255)(1.1)

Amount before income tax effect(4,260)(38,379)

(1.2)

(1.1)

Income tax effect

1,318

11,871(0.8)

0.1

Effect on the reexamination of recoverability
Unrealized earnings from the sale of fixed assets
Deferred taxes on undistributed earnings of foreignsubsidiaries

0.7

0.6

Other

(2.5)

(4.0)

19.8 %

21.4 %Total¥ (2,942) $ (26,508)

Foreign currency translation adjustments
Increase during the year

¥ (7,227) $ (65,107)

Reclassification adjustments
Amount before income tax effect
Income tax effect

14. IMPAIRMENT LOSS
As at December 31, 2018, major impairment losses on fixed assets
were as follows:ofMillions of yen Thousands
U.S. dollars

Location

Major use

Asset category

Oyama City, Tochigi
Prefecture, etc.

Production
facilities

Machinery andequipment, etc.

¥ 8,845$ 79,689

Omachi City, Nagano Production
Prefecture, etc.
facilities

Machinery andequipment, etc.

4,641

41,807

Total

(440)

(3,963)(7,667)(69,070)——¥ (7,667) $ (69,070)

Remeasurements of defined benefit plans, net of tax
Increase during the year

¥ (6,833) $ (61,561)

Reclassification adjustments

1,719

15,486

Amount before income tax effect(5,114)(46,075)

Income tax effect

1,559

14,041

Total¥ (3,556) $ (32,034)

Share of other comprehensive income ofunconsolidated subsidiaries and affiliates
accounted for using the equity method

Hikone City, Shiga
Prefecture

Idle assets andLand, etc.
land for rent

5,967

53,754Chiba City, Chiba
Prefecture

Idle assets

1,864

16,792

Increase during the year

1,257

11,321

Reclassification adjustments¥ 22,573$203,362

Total

36,007(1,360)

(1.6)

Other

3,997

¥ (9,127) $ (82,228)

Adjustments of acquisition cost of assets

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

Land, etc.

(2,043)(118,235)

Deferred gains or losses on hedges

2018
Statutory tax rate

Effective tax rate(227)
(13,124)

Total
Total other comprehensive income¥(83) $(1,322)(747)(11,908)¥ (1,405) $ (12,655)¥ (24,697) $(222,495)

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

40

SHOWA DENKO K.K.

ANNUAL REPORT 2018

(2) Method of depreciation
The depreciation method of leased assets is described in Note 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (j) Leased Assets.
(b) Operating Leases as a Lessee
As at December 31, 2018 and 2017, 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

respectively, which are potentially available for dividends. Additional
paid-in capital and the legal earnings reserve are included in capitalsurplus 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.

2018

2017

2018

Due within 1 year

¥ 678

¥ 366

$ 6,111

19. REVALUATION RESERVE FOR LAND

Due over 1 year

3,288

2,147

29,625¥3,967¥ 2,514$ 35,735

The 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 the ordinance 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, 2018 was ¥63,724 million(US$574,094 thousand).

Total(c) Operating Leases as a Lessor
As at December 31, 2018 and 2017, 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

2018

2017

2018

Due within 1 year

¥ 80

¥ 80

Due over 1 year

435

514

3,917

¥514

¥594

$4,634

Total

$ 717

20. SELLING,‌GENERAL AND ADMINISTRATIVE
EXPENSES

17. CONTINGENT LIABILITIESAs at December 31, 2018 and 2017, the Companies were guarantors
for the borrowings below. The guarantees were principally for
unconsolidated subsidiaries, affiliates and others.
Millions of yen

Guarantees

Selling, general and administrative expenses for the years ended
December 31, 2018 and 2017 were summarized as follows:
Millions of yen

Thousands of
U.S. dollars

Thousands of
U.S. dollars

2018

2017

2018
$252,126

2018

2017

2018

Freight¥ 27,986¥26,612¥2,137¥1,509$19,250

Employees' compensation

24,076

21,582

216,899

Other

55,06851,597496,111¥107,130¥99,790$965,135

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 as additional
paid-in capital or a legal earnings reserve until the total of suchreserve and additional paid-in capital equals 25% of the statedcapital. 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 the legal earnings reserve may
be transferred to other capital surplus and retained earnings,

Total

Research and development expenses included in selling, generaland administrative expenses for the years ended December 31,
2018 and 2017 were ¥19,623 million (US$176,784 thousand) and¥18,419 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, 2018 and 2017 were ¥19,735 million (US$177,789
thousand) and ¥18,539 million, respectively.

41

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

22. LOSSES‌FOR AFFILIATES¥2,648 million (US$23,433 thousand) in the provision of allowancefor doubtful accounts for the loans to ICA and ¥2,640 million(US$23,362 thousand) in the provision for loss on guarantees forguarantee liabilities for ICA’s borrowings.

Year ended December 31, 2018
The information as of December 31, 2018 was not disclosed
because there were no significant losses for affiliates.

23. BUSINESS COMBINATION

Year ended December 31, 2017
The Company discussed how to manage the alumina plant of PT.
Indonesia Chemical Alumina (ICA)—in which the Company held
a 20% share—in the future with ICA’s parent company, PT ANTAM
Tbk. However, the Company judged at its Board of Directors’
meeting held on July 24, 2017, that it would be difficult for thetwo parties to reach an agreement on terms and conditions to
restructure ICA.
As a result, a loss on investment to companies under theapplication of the equity method of ¥9,948 million (US$88,035
thousand) in connection with the impairment loss of ICA’s
alumina plant was recorded as the other expenses for the fiscal
year ended December 31, 2017.
In addition, in light of ICA’s current financial conditions as aresult of the above, the Company recorded losses including

Finalization of temporary accounting for a business combination
Temporary accounting was made for the business combination
between the Company and SGL GE Holding GmbH carried out on
October 2, 2017, for the previous fiscal year, the first quarter, andthe second quarter. The temporary accounting was finalized.
Due to the finalization of the temporary accounting, a material
review has been reflected in the initial allotment of the acquisitioncost. Mainly because of a decrease in deferred tax liability related
to the valuation of investment securities, the gain on negative
goodwill that was temporarily calculated during the previous
fiscal year (from January 1, 2017 through December 31, 2017)
increased by ¥4,026 million to ¥7,141 million, and net income
attributable to owners of the parent increased by ¥3,934 million to¥37,404 million.

24. SEGMENT INFORMATION(a) Information about sales, operating income, assets, and other items by reportable segment
Year ended December 31, 2018

Millions of yen

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

OthersTotal¥ 258,035¥ 104,351¥ 257,525¥ 99,078¥ 134,106 ¥ 992,136

Adjustments Consolidated

Sales
Outside customers¥ 139,041¥— ¥ 992,136

10,844

17,499

1,472

8,624

9,176

9,307

56,922(56,922)—

268,879

156,541

105,823

266,149

108,254

143,413

1,049,058(56,922)992,136

Operating income (loss)¥ 20,333¥ 17,393¥ 12,397¥ 132,445¥

Assets¥ 156,169¥ 218,256¥ 128,956¥ 300,197¥ 150,117

5,046

8,806

9,195

7,967

5,655

1,549

38,217

1,242

39,459

—

(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

8,397

8,127

5,521

4,092

39,2372,491

41,727

Inter-segment
Total

Depreciation and amortization
Amortization of goodwill

4,942

¥

2,893 ¥ 190,403¥ (10,400) ¥ 180,003¥ 164,695 ¥1,118,389¥ (42,643) ¥1,075,746

Notes: 1. Adjustments are as follows:(1) ‌Elimination of intersegment transactions of ¥(83) million (US$(750) thousand) and total corporate expenses of ¥(10,317) million (US$(92,942) thousand)that were not allocated to any reportable segment were included in “Adjustments” for “Operating income” of ¥(10,400) million (US$(93,692) thousand).
The total corporate expenses principally consist of the total corporate common research expenses which are not attributable to any reportable segment.
(2) ‌Elimination of intersegment receivables and payables and assets of ¥(67,798) million (US$(610,794) thousand) and total corporate assets of ¥25,155 million(US$226,619 thousand) that were not allocated to any reportable segment were included in “Adjustments” for “Assets” of ¥(42,643) million (US$(384,175)
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.
Notes: 2. Amortization of negative goodwill was included in “Amortization of goodwill.”

42

SHOWA DENKO K.K.

ANNUAL REPORT 2018

Millions of yen

Year ended December 31, 2017

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Others

Total

Adjustments Consolidated

Sales
Outside customers¥ 240,685¥ 131,540¥ 120,593¥ 65,199¥ 96,827¥ 125,544¥ 780,387

10,443

17,218

2,471

8,243

8,612

8,080

55,067

Inter-segment

251,128

148,758

123,064

Operating income (loss)

Total¥ 33,357¥ 16,474¥ 21,925¥

Assets¥ 146,608¥ 215,641¥ 144,939¥ 204,546¥ 169,561

6,850

8,460

9,598

5,574

5,356

Depreciation and amortization
Amortization of goodwill

73,442

105,439

6,979¥

133,624

6,697

¥

—

¥ 780,387(55,067)—

835,454(55,067)

86,065¥ (8,357)¥¥ 166,540¥1,047,835¥ (20,836)¥1,026,999

1,614

37,452

1,113

38,565¥633¥

780,387
77,708

—

(260)

12

8

228

(0)

(12)

—

(12)

Investments in unconsolidated subsidiaries
and affiliates

11,148

2,301

—

1,789

—

340

15,578—15,578

Increase in property, plant and equipment
and intangible assets

2,836

9,627

11,242

8,289

8,022

1,154

41,170617

41,787

Notes: 1. Adjustments are as follows:(1) ‌Elimination of intersegment transactions of ¥88 million (US$783 thousand) and total corporate expenses of ¥(8,445) million (US$(74,735) thousand) thatwere not allocated to any reportable segment were included in “Adjustments” for “Operating income” of ¥(8,357) million (US$(73,954) thousand). The total
corporate expenses principally consist of total corporate common research expenses that are not attributable to any reportable segment.
(2) ‌Elimination of intersegment receivables and payables and assets of ¥(51,071) million (US$(451,956) thousand) and total corporate assets of ¥30,235 million(US$267,566 thousand) that were not allocated to any reportable segment were included in “Adjustments” for “Assets” of ¥(20,836) million (US$(184,390)
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.
Notes: 2. Amortization of negative goodwill was included in “Amortization of goodwill.”Year ended December 31, 2018

Thousands of U.S. dollars

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum$ 2,324,641 $ 1,252,623$ 940,097$ 2,320,045$ 892,593

Others

Total

Adjustments Consolidated

Sales
Outside customers$ 1,208,162 $ 8,938,162$—$ 8,938,162

97,694

157,652

13,261

77,694

82,667

83,845

512,812(512,812)—

2,422,335

1,410,275

953,359

2,397,739

975,260

1,292,008

9,450,975(512,812)

8,938,162

Operating income (loss)$ 183,178 $ 156,696$ 111,686$ 1,193,195$

Assets$ 1,406,926 $ 1,966,266

Inter-segment
Total

Depreciation and amortization

44,520$26,066 $ 1,715,341$ (93,692) $ 1,621,649$ 1,483,739 $10,075,581$(384,175) $ 9,691,405$ 1,161,768$ 2,704,479$ 1,352,403

45,456

79,336

82,83571,77750,943

13,951

344,298

11,191

355,489—(2,344)

106

76

2,004

(9)

(167)

—

(167)

Investments in unconsolidated subsidiaries
and affiliates

96,56130,824—

16,435—

3,495

147,315—

147,315

Increase in property, plant and equipment
and intangible assets

45,50872,50675,64573,21849,73736,869353,483

22,438375,921

Amortization of goodwill(b) Information about geographical areas
Year ended December 31, 2018

Sales

Millions of yen

Japan

Asia

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

Millions of yen

Year ended December 31, 2017

Sales

Japan

Asia

OthersTotal¥504,162¥230,644¥45,580¥780,387

Year ended December 31, 2018

Sales

Thousands of U.S. dollars

Japan

Asia

OthersTotal$4,966,960$2,161,125$1,810,077$8,938,162

43

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

Year ended December 31, 2018

Property, plant and equipment

Millions of yen

Japan

OthersTotal¥379,577¥98,829¥478,406

Millions of yen

Year ended December 31, 2017

Property, plant and equipment

Japan

OthersTotal¥402,889¥103,045¥505,933

Year ended December 31, 2018

Property, plant and equipment

Thousands of U.S. dollars

Japan

OthersTotal$3,419,613$890,351$4,309,964(c) Information about impairment loss on property, plant and equipment by reportable segment
Year ended December 31, 2018

Millions of yen

Petrochemicals

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

Total

¥—

¥4,964¥79¥9,642¥6,016¥1,864¥22,573

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

Total

¥289

¥649

¥3,945¥2,312¥2¥7¥—

Petrochemicals

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

Total

$65

$—

$44,723$716$86,866$54,197$16,792$203,362

Total

¥7

Impairment loss on assets

Millions of yen

Year ended December 31, 2017

Petrochemicals
Impairment loss on assets
Year ended December 31, 2018

¥7,204

Thousands of U.S. dollars

Impairment loss on assets(d) Information about amortization of goodwill and unamortized balance by reportable segment
Year ended December 31, 2018

Millions of yen

Petrochemicals

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

Amortization

¥—

¥ 48

¥ 44

¥ 8

¥ 276

¥ 27

¥—

¥ 404

Unamortized balance

—

134

244

38

2,278

122

—

2,815

Millions of yen

Year ended December 31, 2017

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

Amortization

Petrochemicals
¥—

¥ 48

¥ 44

¥ 8

¥ 282

¥ 28

¥—

¥ 410

Unamortized balance

—

186

288

46

2,660

148

—

3,328

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

Year ended December 31, 2018

Thousands of U.S. dollars

Petrochemicals

44

Total

Total

Amortization

$—

$ 431

$ 399

$ 76

$ 2,487$ 246$—$ 3,638

Unamortized balance

—

1,208

2,195

341

20,5181,097—

25,359SHOWA DENKO K.K.

ANNUAL REPORT 2018

Amortization of negative goodwill arose from business combinations prior to April 1, 2010 and its unamortized balance are as follows:Year ended December 31, 2018

Millions of yen

Petrochemicals

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

Total

Amortization

¥—

¥ 308

¥ 33

¥—

¥ 54

¥ 28

¥—

¥ 422

Unamortized balance

—

1,780

293

—

486

17

—

2,575

Millions of yen

Year ended December 31, 2017

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

Amortization

Petrochemicals
¥—

¥ 308

¥ 33

¥—

¥ 54

¥ 28

¥—

¥ 422

Unamortized balance

—

2,088

325

—

540

231

—

3,184

ChemicalsElectronics

Inorganics

Aluminum

OthersElimination

Year ended December 31, 2018

Total

Thousands of U.S. dollars

Petrochemicals

Total

Amortization$—$ 2,774

$ 293

$—

$ 483

$255

$—

$ 3,805

Unamortized balance—

16,037

2,637

—

4,377

150

—

23,201

25. RELATED PARTY INFORMATION(a) Related party transactions
The information for the fiscal years ended December 31, 2018and 2017 was not disclosed because there were no significant
transactions with related parties.
(b) Summary financial statements of significant affiliates
The information as of December 31, 2018 was not disclosed
because there were no significant affiliates.
A significant affiliate as of December 31, 2017 was PT. Indonesia
Chemical Alumina (ICA), and the summary of its financial statements
was as follows:
Millions of yen

Balance Sheets
Total current assets¥ 3,078

Total non-current assets

43,128

Total current liabilities

11,310Total non-current liabilities

26,203

Total net assets

8,694

Statements of Income
Net sales

2,830

Income before income taxes(11,300)

Net income(11,702)

In addition, in the consolidated financial statements for the consolidated
fiscal year and as a result of recording impairment losses from the alumina
factory of this company, equity in losses of unconsolidated subsidiaries
and affiliates of ¥10,533 million was recorded as “other expenses.”45

Report of Independent Certified Public Accountants

46

SHOWA DENKO K.K.

ANNUAL REPORT 2018

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

Number of Shares Outstanding
149,711,292 at December 31, 2018

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

Number of Shareholders
70,471 at December 31, 2018

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 28, 2019.

Stock Transfer Agent

Shareholders (Top 10) (At December 31, 2018)

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

Number of
Shares Held(in thousands)

Rate of
Shareholding(%)

The Master Trust Bank of Japan Ltd. (T)

9,748

6.67

Securities companies

Treasury shares

Japan Trustee Services Bank Ltd. (T)

6,470

4.43

5,221 thousand

3,548 thousand

MSCO CUSTOMER SECURITIES

5,574

3.81

Fukoku Mutual Life Insurance Company

5,017

3.43

The Dai-ichi Life Insurance Company Limited

3,600

2.46

Japan Trustee Services Bank Ltd. (T9)

3,548

2.43

CDSIL AS DEPOSITARY FOR OLD MUTUALGLOBAL INVESTORS SERIES

3,418

2.34

NORTHERN TRUST CO. (AVFC) SUB A/C USLNON TREATY

3,218

2.20

Meiji Yasuda Life Insurance Company

2,645

1.81

Sompo Japan Nipponkoa Insurance Inc.

2,556

1.75

Shareholder

Shareholders by Sector (At December 31, 2018)

3.49%

2.37%

Japanese
corporate entities

Financialcompanies

6,120 thousand

58,457 thousand

4.09%

39.04%

Total numberof shares held

Individuals
28,327 thousand

18.92%

149,711thousandForeigncorporate
entities, etc.
48,039 thousand

32.09%

Note: ‌Each rate of shareholding was calculated after deducting the number of treasury
shares (3,548 thousand) from the number of shares outstanding.		

Stock Price and Trading Volume
Stock Price (JPY)
8,000

4,000
Volume(Shares)
100,000,000

50,000,000

2016
Jan

2016
Apr

2016
Jul

2016
Oct

2017
Jan

2017
Apr

2017
Jul

2017
Oct

2018
Jan

2018
Apr

2018
Jul

2018
Oct

0

47

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