Annual Report2017

Showa Denko K.K.

Our Vision

We at the Showa Denko Group will provide products andservices that are useful and safe and exceed ourcustomers’ expectations, thereby enhancing the value of
the Group, giving satisfaction to our shareholders, andcontributing to the sound growth of international society
as a responsible corporate citizen.

ProfileRanked 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.
The Showa Denko Group has been proceeding with its medium-term businessplan “Project 2020+” since 2016. Under this business plan, the Group will expandand strengthen “Individualized businesses,” which are expected to maintain theirhigh-level profitability and stability, and promote these businesses in the global
market. The Group will enhance the capability to resist fluctuations in market prices
by providing customers with attractive products and services. Moreover, the Groupwill reform its business model, and improve existing businesses’ earning power.
Thus, the Group will enhance the corporate value.
In the business portfolio we aim to realize under “Project 2020+,” we classified
businesses into four categories: “Growth-accelerating,” “Advantage-establishing,”“Base-shaping,” and “Rebuilding.” We defined missions for each business category
in order to strengthen our businesses.
In addition, to promote the globalization of business activities and further expand
our “Individualized businesses,” we will implement strategic capital investment in thegrowing Asian/ASEAN market and pursue growth opportunities in developed
countries in Europe and North America.
In 2017, for the “Growth-accelerating” businesses, we increased our businessexpansion in the growing Asian market through several measures. For example, forthe aluminum can business, we decided to establish our second aluminum can plantin Vietnam to be located mid-country, and we established a joint corporation to
manufacture aluminum cans in Thailand with a large beverage manufacturer there.
Concerning our graphite electrode business, positioned as a “Base-shaping” business,
we acquired the graphite electrode manufacturing division of a German company
which is engaged in the carbon business. Through this acquisition, the Showa Denko
Group obtained manufacturing bases in Europe and Southeast Asia in addition to
the existing bases in Japan, the U.S., and China. Thus, the Group became the leadinggraphite electrode supplier in the global market.
Showa Denko aims to earn the full trust and confidence of the market andsociety, always managing operations based on the principles of corporate social
responsibility. The Company is also committed to the principles of Responsible Careand is vigorously carrying out an action plan to protect the environment as well as
health and safety.

Showa Denko at a Glance
Net sales 2017

¥780.4billionNote: ‌The ratios for segments havebeen calculated after adding
the amount of adjustments to
net sales.

16.0%
30.1%
12.6%
8.8%
14.7 %

17.8%

Petrochemicals
Olefins (ethylene and propylene), polymer(polypropylene), and organic chemicals (vinyl
acetate monomer, ethyl acetate, and allyl
alcohol)Chemicals
Functional chemicals (polymer emulsion andunsaturated polyester resin), industrial gases(liquefied carbon dioxide, dry ice, oxygen,nitrogen, and hydrogen), basic chemicals(liquefied ammonia, acrylonitrile, andchloroprene rubber), and electronic chemicals(high-purity gases for electronics)

Electronics
Hard disks (HDs), compound semiconductors(LED chips), rare earth magnetic alloys, andlithium-ion battery (LIB) materials

Inorganics
Graphite electrodes and ceramics(alumina and abrasives)

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

OthersGeneral trading and building materials

See pages 6-7 for segment performances.

Forward-Looking Statements:
This annual report contains statements relating to management’s projections of future profits, the possible 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 other raw
materials, demand for our products such as graphite electrodes and other commodities, market conditions, and foreign exchange rates. The timely commercialization of products underdevelopment by the Company may be disrupted or delayed by a variety 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.

Our Strengths
Showa Denko has many products maintaining high market shares in the world. Let us introduce some of the products of high priority in ourbusiness portfolio designed under the medium-term business plan “Project 2020+.”

Advantage-establishing

2

1

No.

Growth-accelerating

2

2

No.

6

No.

1

3

No.

2

4

No.

Base-shaping

1

No.

5

1

1

No.

7

Global positions are Showa Denko estimates.

4

5

6

7

Aluminum
SiC epitaxial
High-purity
laminated film
wafers for power gases forfor LIB packaging devices
electronics

1

2

AluminumcansGraphiteelectrodes

HD media

High-purity
aluminum foil
for capacitors

The second largest
manufacturer inthe world

The world’s largest
manufacturer

The world’s largest
independent
manufacturer

The world’s largest
manufacturer

We provide packaging
materials for pouchtype lithium-ion
batteries (LIBs) used insmartphones andtablet PCs. Demand forpouch-type LIBs is
growing due to such
advantages as highlevels of heatdissipation andflexibility in molding.

3

The second largest
independent
manufacturer in theworld

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

The second largest
manufacturer in
Vietnam and thefourth largest in Japan

We have been contributing
to the commercialization andmarket expansion of “full SiC”
power modules throughproduction of high-grade SiC
epi-wafers for powertransistors since 2015, in
addition to those for diodes.
SiC-based power devices are
attracting attention due totheir features that enableproduction of smaller, lighter,and more energy-efficientnext-generation power
control modules.

High-purity gases forelectronics are used as
etching and cleaninggases, as well as
materials formembrane formationnecessary for
production ofelectronic devices
includingsemiconductors, LCD
panels, and solar
batteries.

Since 1971, we have been
operating our aluminum canbusiness as the pioneer who
produced the first aluminum
can for beverages in Japan.
Since 2014, when we
acquired our first overseas
can production base in
Vietnam, we have been
expanding our aluminum
can business, focusing on the
rapidly growing Southeast
Asian market. In 2017, we
decided to establish our
second plant in Vietnam andset up a can manufacturing
company in Thailand.

Contents

Graphite electrodes areused in electric arc
furnaces for steel
production. In 2017,
we acquired a Germangraphite electrodecompany and became
the leading supplier inthe global graphite
electrode industry. We
now have graphite
electrode production
bases in Europe andSoutheast Asia, in
addition to our existingbases in Japan, the U.S.,
and China.

HD media, one of the
major parts of HD
drives, are used in
notebook PCs,consumer electronics,
and external hard disk
drives. Demand for
HDDs is expected to
grow further for use indata centers.

1 Our Strengths

14 Corporate Governance

2 Consolidated Five-Year Summary

16 Research and Development

4 Message from the Management

18 Corporate Social Responsibility

Segment Performances

19 Management’s Discussion and Analysis

Medium-Term Business Plan: "Project 2020+"

22 Risk Factors

10 About Graphite Electrode Integration

24 Financial Data

12 Management Team47 Corporate Data

We provide high-purity
aluminum foil foraluminum electrolytic
capacitors widely usedin air conditioners,
industrial equipment,
automotive parts, andsolar power generation.
Our proprietary
manufacturing process
has enabled us to realize
high productivity andquality.

1

Consolidated Five-Year Summary
Financial Highlights
Showa Denko K.K. and Consolidated Subsidiaries
2013

2014

2015

2016

2017

2017

¥ 847,803
286,732
130,402
136,548
65,91990,369176,516(38,684)
25,953
4,398
2,559
21,940
(838)
5,845
(626)
(7,324)
9,065
63,565(55,203)
8,362
20,43544,37039,779¥ 872,785
281,400
138,695
138,537
67,557
97,946
191,610(42,959)
20,551(4,930)5,460
25,770(300)
2,999(1,041)(7,406)2,929
66,996(46,876)
20,12020,36247,31840,673¥ 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)
77,81833,357
16,47421,925
7,089
6,697
633
(8,357)33,47067,284(29,914)37,36918,53941,27938,454$ 6,906,077
2,222,369
1,316,443
1,089,059
649,928
933,089
1,182,511(487,322)
688,658
295,192
145,787
194,030
62,73859,263
5,603(73,954)
296,198
595,432(264,729)
330,703
164,059
365,299
340,303

985,771
345,811353,686
1.02

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

940,494308,142368,835
1.20

932,698
311,231359,929
1.16

1,024,727
364,997346,726
0.95

9,068,380
3,230,060
3,068,371

December 31
For the year
Net sales
Petrochemicals
ChemicalsElectronics (Note 2)
Inorganics
Aluminum
Others (Note 2)
Adjustments
Operating income
Petrochemicals
ChemicalsElectronics (Note 2)
Inorganics
Aluminum
Others (Note 2)
Adjustments
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

Thousands of
U.S. dollars (Note 1)

Millions of yen

At year-end
Total assets
Total net assets
Interest bearing debt
Debt/equity ratio (gross, times)

U.S. dollars(Note 1)Yen

Per share (Note 3)
Net income — primary (Note 4)
Net income — fully diluted (Note 4)
Net assets
Cash dividends (applicable to the period) (Note 5)
Number of employees at year-end¥ 6.06—201.27
3.00
10,234¥ 1.99—209.76
3.00
10,577¥ 0.64—207.61
3.00
10,561¥ 86.27—2080.85—
10,146¥ 234.84—
2445.01
80.00
10,864$ 2.08
—
21.64
0.71

Notes: 1. Yen amounts have been translated into U.S. dollars, for convenience only, at the rate of ¥113.00 to US$1.00, the approximate rate of exchange as of December 31, 2017.
2. ‌From 2017 SDK changed the segmentation (LIB materials was transferred from “Others” to “Electronics”) . Figures for 2016 in the above table are based on the new segmentation.
3. ‌SDK consolidated every ten shares of common stock into one share on July 1, 2016. “Per share” indicators for 2016 are calculated on the basis of the number ofoutstanding shares after this consolidation.
4. ‌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 not disclosed because the Company had no securities with dilutive effects.
5. ‌SDK resolved the payment of dividends of ¥30.00 per share based on the record date of May 11, 2017 at the extraordinary general meeting of shareholders held in June 2017.

Non-Financial Highlights
2012

2013

2014

2015

2016

Environmental data*
Discharged amounts of greenhouse gases (kt-CO2) (Showa Denko Group)
Final landfill volumes of industrial waste (t) (Showa Denko Group)

2,504
2,085

2,673
1,360

2,675
1,158

2,687
851

2,687
323

Social data
Frequency rate of lost-time injuries (Showa Denko Group)

0.14

0.22

0.43

0.15

0.15

*Calculated for each environmental fiscal year from April 1 through March 31 of the following year.

2

SHOWA DENKO K.K.

ANNUAL REPORT 2017

Net Sales by Segment

Operating Income by Segment

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

100

750

75

500

50

250

25

0

0

40

30

20

-250

2013

2014

2015

2016

-25

2017

Aluminum
OthersAdjustments

Petrochemicals
ChemicalsElectronics
Inorganics

10

2013

2014

Petrochemicals
ChemicalsElectronics
Inorganics

Interest Bearing Debt
Debt/Equity Ratio(Billions of yen)

2015

2016

2017

0

2013

2014

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

60

90

(Times)
2.0

300

1.5

45

200

1.0

30

2016

2017

2015

2016

2017

Aluminum
OthersAdjustments

Capital Expenditures
Depreciation and Amortization

400

2015

60
30
0

100

0

2013

2014

2015

2016

2017

0.5

15

0

0

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

Trends in Greenhouse
Gas Emissions*

-30

2013

2014

2015

2016

2017

-60

Capital expenditures
Depreciation and amortization

2013

2014

Cash flows from operating activities
Cash flows from investing activities
Free cash flow

Trends in the Final Volumeof Landfill Disposal*

Environment-Related Investment(kt-CO2 )(t)(Billions of yen)

4,000

2,400

64

3,000

1,800

48

2,000

1,200

32

1,000

600

16

0

2005

2012 2013 2014 2015 2016

CO2 (Energy source origin)
6 GHGs other than CO2
CO2 (Non-energy source origin)

0

2012

2013

2014

2015

SDK
9 subsidiaries in Japan

2016

0

’91

’96

’01

’06

’11

’16

Cumulative value since 1991
(SDK)

Base: 2005
(SDK and 7 subsidiaries in Japan)*Calculated for each environmental fiscal year from April 1 through March 31 of the following year.

3Message from the Management

Hideo Ichikawa

Kohei Morikawa

Representative Director,
Chairman of the Board

Representative Director,
President and CEO

2017 Performance“Individualized businesses,” reform the business structure, andIn 2017, the Japanese economy continued to recover gradually.

strengthen the revenue base. In this way, we will enhance our

Production was maintained at a high level, due partly to an increase

corporate value.

in exports backed by strong overseas economies. Consumer spendingin 2017, up 16.3% from the previous year. Sales increased in all

Corporate earnings improved due to a relatively stable yen-dollar

segments. In the Petrochemicals segment, sales rose due toexchange rate.

higher product prices and the consolidation of SunAllomer Ltd.

In overseas economies, the U.S. economy continued to recover;in the second half of 2016. In the Inorganics segment, sales

the European economy recovered gradually; the economies ofincreased due to higher shipment volumes of graphite electrodes,

China and the ASEAN countries showed signs of recovery; andan improvement in the conditions of the graphite electrodethe economies of resource-rich and emerging countries, including

market in China in the second half of 2017, and the new

Russia and Brazil, bottomed out and showed some improvement.

consolidation of SHOWA DENKO CARBON Holding GmbH in the

In the petrochemicals industry, domestic plants that produce

fourth quarter of 2017.

ethylene and its derivatives maintained high operating rates due

Operating income of the Group increased substantially, by

to heavy demand from East Asia, including China. In the electronic

85.0% to ¥77,818 million. The Petrochemicals segment recorded

parts/materials industry, production of parts/materials maintained

higher income due to a strong market caused by a tight supply-high levels due to increasing production of semiconductors indemand balance in East Asia. The Inorganics segment also recorded

response to growing demand for electronic devices, including

higher income due to an increase in shipment volumes of graphite

smartphones and industrial equipment.

electrodes resulting from business integration and the firmer

Under these circumstances, the Showa Denko Group has been,

4

The Group recorded consolidated net sales of ¥780,387 million

also recovered gradually against a background of strong employment.

graphite electrode market in China, in addition to the effect of asince 2016, promoting the medium-term business plan “Project

reduction in the cost of graphite electrode production. The

2020+.” Under this business plan, for the Showa Denko Group to

Electronics, Chemicals, and Aluminum segments also recorded

achieve continual growth, we will expand and strengthen ourhigher income. We were able to exceed the ¥50.0 billion income

SHOWA DENKO K.K.

ANNUAL REPORT 2017

target for 2017 set out in “Project 2020+.”

to become a company that offers the promise of future growth,

The Group recorded net income attributable to owners of thewhile achieving profits that meet shareholders’ expectations. In

parent of ¥33,470 million in 2017, up 172% from the previous year.

addition to increasing the number of “Individualized businesses,”In the ceramics business within the Inorganics segment, we decided

we will formulate AI and IoT strategies focused on the future, andto sell our stake in a general-purpose alumina production joint

will promote management that improves the Group’s social

venture. This resulted in recording an extraordinary loss due to theperformance in terms of ESG (environmental, social, and governance)

posting of a loss on the provision of allowance for doubtful accounts

and SDGs (sustainable development goals).

related to PT. Indonesia Chemical Alumina (ICA). Also we posted thecost of refurbishment to make effective use of Yokohama Plant.

Conclusion

However, net income attributable to owners of the parent

As the standard of living improves in developing countries due tosubstantially increased in the end.

rapid economic growth, there is an increasing demand throughout

For dividends, in addition to a dividend per share of ¥30 payment

the globe for initiatives that will reduce growing environmentalof which was resolved at the extraordinary general meeting ofburdens. When viewing social trends from the perspective ofshareholders held in June 2017, we paid a year-end dividend of ¥50 per

marketability, there is a demand for the development andshare, an increase of ¥20 from the previous forecast of ¥30 per share.

commercialization of new technologies that respond to the issues

Major Initiatives in theSecond Year of “Project
2020+”

common to all people. These issues include more convenience andcomfort through improved quality, faster speeds, larger capacityand miniaturization in the electronics industry, the realization of ahealthy, safe society through development of countermeasures

The following is an overview of theagainst global warming and environmental protection, as well as amajor initiatives in each category

secure supply of energy through energy conservation and reducedof our business portfolio for the

dependence on fossil fuels.

second year of “Project 2020+.”

Under “Project 2020+,” which we have been proceeding withIn the “Growth-accelerating”

since 2016, we are expanding and strengthening “Individualizedbusinesses, we continued proactive

businesses” in global markets that sustainably maintain high levels

investment in the high-purity gasesof profitability and stability. We will take the initiative to improvefor electronics business, in line withour corporate value by providing customers with industry-leading

customer industry’s full-scale production of 3D-NAND flash memory.

components, materials and solutions in advanced and cutting-edge

In the aluminum can business, we started construction of the second

technological domains based on our competitive and proprietaryproduction plant in Vietnam, and in the functional chemicals

technologies. At the same time, we will contribute to the creation ofbusiness, we started operation of the second bulk molding

society where affluence and sustainability are harmonized. In addition

compound (BMC) plant in China. For the “Base-shaping“ businesses,

to making every effort to ensure safety, we will proactively protect

in the graphite electrode business, we improved profitability by

the global environment by promoting resource and energy

completing the procedure for acquisition of SGL GE Holding

conservation while striving to reduce industrial waste and chemicalGmbH, which we started in 2016, and by making the acquired

substance emissions.

company renamed as SHOWA DENKO CARBON Holding GmbH a

We will continue making every effort to strengthen our earning

consolidated subsidiary. In the “Rebuilding” businesses, we also

power and competitiveness through improvement of our businesspromoted structural improvements. For instance, in the ceramics

structure.

business, we decided to sell our stake in the general-purpose

The external environment in 2017 was favorable, and the structural

alumina production joint venture, ICA. This resulted in thereforms we carried through up to now have obtained results andrecording of an extraordinary loss on provision of allowance forcreated a profit structure that uses this favorable external

doubtful accounts related to ICA. We also posted the cost ofenvironment as a tailwind. Each of the Group’s businesses

refurbishment to make effective use of Yokohama Plant.

upgraded its business makeup to be so strong that we could

For details, please see pages 8-9. There is a special feature on
the graphite electrode business on pages 10-11.

significantly exceed the operating income targets set out in“Project 2020+.” Thus 2017 was a turning point for the Group. In

The current medium-term business plan, “Project 2020+,” was2018, the Group will validate the improvement in its earning power.

initially a five-year plan, but in line with the early achievement of

We sincerely appreciate the continued understanding, support

the three-year targets, we will retire this plan in 2018 and will shift

and encouragement of all our shareholders.

to a new three-year medium-term business plan to begin in 2019.
The new plan will be announced at the end of 2018. We are aiming

March 29, 20185

Message from the Management (cont.)
Segment Performances

Petrochemicals

30.1%

Consolidated Business Results (Millions of yen)
2016

2017

Increase/decrease

Rate ofchangeSales

185,783

251,128

65,345

35.2%

Operating Income

20,69033,357

12,667

61.2%

Electronics

14.7%

Consolidated Business Results (Millions of yen)
2016

2017

Increase/decrease

Rate ofchangeSales

120,461

123,064

2,602

2.2%

Operating Income

15,01521,925

6,910

46.0%

In the Petrochemicals segment, sales rose 35.2% to ¥251,128 million.

In the Electronics segment, sales increased 2.2% to ¥123,064 million.

Production of ethylene increased over the previous year. Sales for

Production of HD media in 2017 rose over the previous year due toolefins rose due to an increase in prices for products caused byhigher shipment volumes of media for data centers. Consequently,

higher raw naphtha prices and strong demand. Sales of organic

sales of HD media also grew. Sales of rare earth magnetic alloys

chemicals went up due to higher shipment volumes and higher

and compound semiconductors increased over the previous year

prices for products, including ethyl acetate and vinyl acetate. The

due to higher shipment volumes. Sales of lithium-ion battery (LIB)

consolidation of SunAllomer Ltd., in the second half of 2016, alsomaterials — transferred from the Others segment to the Electronics

boosted sales in this segment. Operating income for the segment

segment at the beginning of 2017 — decreased due to lower

improved 61.2% to ¥33,357 million.

shipment volumes to China caused by changes in the subsidy
policy for electric vehicles. Operating income of the segment
increased 46.0% to ¥21,925 million.

Chemicals

17.8 %

Consolidated Business Results (Millions of yen)

6

2016

2017

Increase/decrease

Sales

134,529

148,758

14,229

10.6%

Operating Income

13,824

16,474

2,650

19.2%

Inorganics

8.8 %Consolidated Business Results (Millions of yen)

Rate ofchange2016

2017

Increase/decrease

Rate ofchangeSales

50,87073,442

22,572

44.4%

Operating Income-5,758

7,089

12,848—In the Chemicals segment, sales grew 10.6% to ¥148,758 million.

In the Inorganics segment, sales increased 44.4% to ¥73,442 million.

Production of liquefied ammonia and high-purity gases for

Production of graphite electrodes in 2017 rose over the previous

electronics increased over the previous year. In basic chemicals,

year due to improvements from customers in the electric steel

sales of liquefied ammonia rose due to higher shipment volumes.

industry. Sales of graphite electrodes went up due to the acquisition

Sales of chloroprene rubber improved due to high-level shipment

and consolidation of SGL GE Holding GmbH (currently SHOWA

volumes and a strong market. Sales of acrylonitrile increased due

DENKO CARBON Holding GmbH) in the fourth quarter of 2017, in

to a rise in prices. Sales of electronic chemicals rose due to higher

addition to an increase in sales volume and higher prices forshipment volumes of high-purity gases for electronics caused bygraphite electrodes in the Chinese market during the second half

an increase in production in the semiconductor and display panelof 2017. Sales of ceramics increased due to higher shipment

industries. Sales of functional chemicals went up due to higher

volumes in the electronics industry. The segment recorded

shipment volumes for the domestic automotive industry. However,operating income of ¥7,089 million, an improvement of ¥12,848

sales of industrial gases decreased slightly. Operating income formillion, due mainly to the increase in operating income earned

the segment rose 19.2% to ¥16,474 million.

from graphite electrodes.

SHOWA DENKO K.K.

ANNUAL REPORT 2017

Earnings structure: Being improved to be “well balanced”
Operating income by segment(Billions of yen)
140.0
120.0
100.0
80.0
47.4
60.0
40.0
20.0
0.0
-20.0

110.0
77.8
28.1 26.0 20.6 33.5

42.1

Petrochemicals
ChemicalsElectronics *1
Inorganics
Aluminum
Others *1

2011 2012 2013 2014 2015 2016 2017 2018 2
forecast**1 LIB materials business was transferred from the Others segment to the Electronics
segment at the beginning of 2017. The above data for 2016 and 2017 are based on
this new segmentation.
*2 Announced on February 14, 2018.

Aluminum

The total does not match consolidated operating income since adjustments are not included.

12.6 %

Consolidated Business Results (Millions of yen)
2016

2017

Increase/decrease

Rate ofchangeSales

98,575

105,439

6,864

7.0%

Operating Income

4,416

6,697

2,281

51.6%

In the Aluminum segment, sales increased 7.0% to ¥105,439 million.
Production of high-purity foil for aluminum electrolytic capacitorsrose over the previous year. Shipment volumes and sales of rolled
products grew 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
rose due partly to higher shipment volumes of large aluminum extrusions
and aluminum cylinders for use in laser beam printers. Sales ofaluminum cans improved due to higher shipment volumes recorded
by Hanacans Joint Stock Company in Vietnam. Operating income forthe segment increased 51.6% to ¥6,697 million.

Measures Implemented or Decided in 2017
Chemicals Segment

Established a subsidiary to sell high-purity gases
for electronics in the U.S.
In July 2017, the Showa Denko Group established a wholly owned
subsidiary, Showa Chemicals of America Inc. (SCA), in Austin, Texas,
aimed at strengthening the sale of high-purity gases for electronics
in the U.S. American semiconductor manufacturers have a 15%
share of global production capacity for semiconductors. SDK
established SCA to further expand the high-purity gas business in
the U.S., to reinforce the relationship between SDK and major
semiconductor manufacturers in the U.S., and to gather information
about state-of-the-art semiconductor processing technologies.
Electronics Segment

Started shipments of “Best-in-Class” 2.5 and 3.5-inch HD media

Others

16.0 %

Consolidated Business Results (Millions of yen)

Sales
Operating Income

2016

2017

Increase/decrease

Rate ofchange128,740

133,624

4,884

3.8%

623

633

10

1.6%

In the Others segment, sales increased 3.8% to ¥133,624 million.
Shoko Co., Ltd.’s sales grew. Operating income for the segmentrose 1.6% to ¥633 million.

In September 2017, SDK started shipping 2.5-inch HD media with astorage capacity of 1 terabyte (TB; ninth-generation perpendicularmagnetic recording (PMR) technology) per platter, the world’s
largest storage capacity* for this size available on the market.
In December 2017, SDK also started shipping 3.5-inch HD media
with a storage capacity of 1.5-1.8 TB (ninth-generation PMR-technology)
per platter, the world’s largest storage capacity* for this size available
on the market.
In 2005, SDK became the first company in the world to manufactureand sell PMR-technology-based HD media, and is now the largest
independent supplier of HD media. SDK will continue to strengthen
the HD media business utilizing our “Best-in-Class” technologies.
*All information was current at the time of announcement, according to SDK research.

7

Message from the Management (cont.)
Medium-Term Business Plan: “Project 2020+”
Actively take strategic measures.
Realize rapid expansion of businessby preempting market growth.

To cope with prospective market
growth, establish business modelwith competitive advantage interms of business andtechnical development.
• LIB materials• ‌SiC epi-wafer for
power devices• Rare earths• Ceramics• ‌Aluminum specialty
components

Concentrate
management resources

Advantageestablishing

Growthaccelerating

Rebuilding

Baseshaping

Acceleratebusiness reform

Increase profit and cash flow by
rebuilding business environment,
profitability and business model.

• ‌High-purity gases forelectronics• Functional chemicals• Aluminum cans

• HD • Graphite electrodes• Petrochemicals• Basic chemicals• Industrial gases • ShoticTM• High-purity aluminum foil

Market and business have certain
scale. Have more power to resist
market fluctuation, and make stableprofit and cash flow.

Major Initiatives in the Second Year of the MediumTerm Business Plan “Project 2020+“• For the “Growth-accelerating“ and the “Advantage-establishing“
businesses sales and operating income increased substantially for theyear ended December 31, 2017.
For high-purity gases for electronics, we worked to increase
production capacity and expand overseas production bases to respondto the expansion of 3D-NAND flash production. In the aluminum cansbusiness, we decided to set up a second production base in Vietnam in
response to robust demand in that country and announced theestablishment of an aluminum can manufacturing joint corporation(equity method) with Carabao Group Public Company Limited, abeverage maker with the second largest market share in Thailand.
Construction is underway at both plants, which will start operations inthe second half of 2018. In the functional chemicals business, westarted full-scale production at the second thermoset bulk molding
compound (BMC) plant in Zhuhai, Guangdong Province, China.
• In the LIB materials business, which is positioned as an “Advantageestablishing” business, we expanded the production capacity for coreproducts. In the SiC epi-wafer for power devices business, in addition to
boosting production capacity for high-quality grades, we acquired SiCrelated assets from Nippon Steel & Sumitomo Metal Corporation.
• For the “Base-shaping“ businesses, margins in all these businesses
improved significantly. In the HD media business, we realized thebenefits of the manufacturing capacity optimization implemented in2016. In the graphite electrode business, in addition to optimizing
domestic production capacity and renovating hydropower facilities,
among other cost reduction measures, we acquired SGL GE Holding
GmbH. In the petrochemicals business, as well as maintaining fullproduction, we improved profitability due to contributions from thefull-year consolidation of the polypropylene business. In the basic

8

SHOWA DENKO K.K.

ANNUAL REPORT 2017

In January 2016, the Showa Denko Group started its
medium-term business plan “Project 2020+.” Under
this business plan, the Group will expand andstrengthen “Individualized businesses,” expected tomaintain their high levels of profitability and stability,
as well as promote these businesses in the global
market. The Group will become stronger to resist
fluctuations in market prices by providing customers
with attractive products and services and by
developing businesses that have top shares incompetitive markets on a global scale or definedmarket. Moreover, the Group will reform the businessmodel and strengthen the earning power of its
existing businesses. In these ways, the Group will
boost corporate value.

chemicals, industrial gases, and high-purity aluminum foil businesses,
we implemented measures to improve earnings, including new
product sales promotions and business expansions overseas, as well as
providing products at competitive costs, so that our products will haveenhanced resistance to market fluctuations.
• In the “Rebuilding” businesses, we posted an extraordinary loss in theceramics business due to the decision to sell our stake in the generalpurpose alumina production company ICA. As well, efforts to promote
structural reforms resulted in the recording of expenses for the
refurbishment to make effective use of Yokohama Plant. Going forward,
the ceramics business will focus on high value-added products, such astitanium oxides and filler materials.

Numerical Targets
In 2016 and 2017, we exceeded the numerical targets set out in the“Project 2020+.” In 2018, forecasted earnings should once again surpass
the targets in “Project 2020+.”(Billions of yen)

2016
results

2017
results

2018
forecast*

2018
plan**Net sales

671.2

780.4

900.0

855.0

Operating income

42.1

77.8

110.0

57.0

Net income attributable toowners of the parent

12.3

33.5

65.0

30.0

Free cash flow

15.2

37.4

30.0

ROA***

4.5%

8.0%

—

6.0%

ROE

4.1%

10.4%

—

9.0%

—

¥50

¥70

Year-end dividends* Announced on Feb. 14, 2018.
** Announced on Dec. 11, 2015.
*** ROA: Operating income/Total assets

Operating Income
2016
Project
2020+

36.0

20162017
results
2018
forecast*

42.1

0

2017
50.0

Expanding “Individualized Businesses“2018“Individualized Business” Candidates

100

110.0

229.9

143.0

57.0

77.8

50

Total

To achieve+61%
over target

150

Petrochemicals, industrial gases, basic chemicals,
high-purity aluminum foil, aluminum specialty components,
ShoticTM, ceramics, rare earths,
SiC epi-wafer for power devices, LIB materials

Total

200

Aluminum cans,
functional chemicals“Individualized
Businesses”

250 (Billions of yen)

* Announced on Feb. 14, 2018.

Taken together, the performances for 2016 and 2017, plus earnings
estimates for 2018, are expected to result in three-year cumulative
operating income of ¥229.9 billion, which is 61% higher than the targetof ¥143.0 billion announced in December 2015.

Capital Investment
In 2017, capital investment was ¥41.3 billion. We will make strategic
investments in aluminum cans and high-purity gases for electronics inthe “Growth-accelerating” businesses plus lithium-ion battery (LIB)
materials and SiC epi-wafer for power devices in the “Advantageestablishing” businesses, we will also invest in SHOWA DENKO CARBON
Holding GmbH (consolidated in 2017), and we will promote IT-related
capital investment. We expect these investments to be approximately
the same as the ¥130.0 billion announced in “Project 2020+” for thethree-year period started in 2016.

Cost Reductions
In 2016 and 2017, we reduced costs by ¥27.3 billion in total, which wasmore than the ¥20.0 billion set out in the three-year period covered by“Project 2020+.” In 2018, we plan to cut costs by ¥10.5 billion throughstronger yields and productivity as well as the effects of consolidation in
the graphite electrode business, resulting in ¥37.8 billion in cost reductions
for the cumulative three-year period.

Toward 2025: Expanding “Individualized Businesses”
To make it possible to generate stable operating income up to 2025,
we must expand “Individualized businesses,” as set out in “Project
2020+.” “Individualized businesses” are businesses meeting three
conditions: operating income margins of 10% or more; operating
income of several billion yen or more; plus tolerance to change in thebusiness environment.
Today, three of our businesses meet the criteria required for“Individualized businesses”: HD media, high-purity gases for electronics,
and graphite electrodes. From SDK’s point of view, these businesses
have the necessary market scale, have high market shares, are able toleverage their distinctive technologies and logistics, and have achieveda strong presence in the market.

“Individualizedbusinesses” will accountfor half or more of all
businesses in 2025HD,
high-purity gases for electronics,
graphite electrodes

In addition to these three businesses, we must also take the initiative
for transforming all of our businesses into “Individualized businesses.”
Recognizing the necessity of transforming half or more of our businesses
into “Individualized businesses” by 2025, we will set up businessstrategies in 2018 to identify which businesses can further increase sales
and which can further increase operating income margins.

TopicsIncorporated into ESG indexes for investment
In July 2017, SDK was included in three ESG indexes for investment: FTSE
Blossom Japan Index provided by FTSE International Limited and Frank
Russel Company (FTSE Russell, a member of London Stock ExchangeGroup); MSCI Japan ESG Select Leaders Index; and MSCI Japan
Empowering Women Index provided by MSCI Incorporated (MSCI).
FTSE Russell and MSCI are world-famous index providers, and ESG
stands for “environmental, social, and governance.” Government
Pension Investment Fund (GPIF) of Japan has adopted these three ESG
indexes as benchmarks to conduct full-scale ESG-conscious investment.
FTSE Blossom Japan Index is designed to provide market participants
with a tool to identify and measure the performance of Japanese companies
that demonstrate strong environmental, social and governance (ESG)
practices. MSCI Japan ESG Select Leaders Index is constructed using the
MSCI Japan IMI Top 500 Index (parent index) and targets best ESG performers
among issues included in the parent index. MSCI Japan Empowering Women
Index evaluates companies promoting and maintaining gender diversity.

THE INCLUSION OF SHOWA DENKO K.K. IN ANY MSCI INDEX, AND THE USE OF MSCI LOGOS, TRADEMARKS, SERVICEMARKS OR INDEX NAMES HEREIN, DO NOT CONSTITUTE A SPONSORSHIP, ENDORSEMENT OR PROMOTION OF
SHOWA DENKO K.K. BY MSCI OR ANY OF ITS AFFILIATES. THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI.
MSCI AND THE MSCI INDEX NAMES AND LOGOS ARE TRADEMARKS OR SERVICE MARKS OF MSCI OR ITS AFFILIATES.

9Showa Denko Integrates Operation of its Graphite
Electrode (GE) Plants Worldwide

Meitingen (Germany)

La Coruna (Spain)
Omachi (Japan)

Sichuan (China)
Steeg (Austria)

Banting (Malaysia)

Ongoing Integration Plan
We intend to achieve our “Big Integration Synergy” plan to gain $40
million in three years• ‌Enhance cost competitiveness by introducing the best practices ofboth companies• Reduce fixed costs by integrating headquarters functions• Establish an optimal global logistics and supply chain• ‌Build brand equity and attain the highest quality by integrating
technologies• ‌Optimize processes from procuring raw materials to final products

Steel Market Conditions• North America: Strong demand continues• China: Surplus production capacity is being scaled back(environmental regulations, prohibition of ground steel production)
Production of electric steel increases• ASEAN: Operating rate for electric arc furnaces has recovered
Increasing demand for GE

World EAF Production Trend(Million tons)
500

SHOWA DENKO K.K.

ANNUAL REPORT 2017

(%)
35

400

30

300

25

200

10

*WSA and SDK estimates.

Share of EAF in total production of crude steel (right)

2006

2008

2010

2012

2014

2016

2018

2020

20

Electric Arc Furnaces (EAF)

Our production capacity after integration

Approx. 250 kt/y
CO2 emissions during
production are much lower
than using a blast furnace

Ridgeville (U.S.A.)

Completed acquisition of SGL GE
Effective on October 2, 2017, SDK completed acquisition of SGL GE,

strive to generate synergies as early as possible, to pursue more costa graphite electrode production company, and made it a wholly

effectiveness and to achieve further growth in this market.

owned subsidiary of SDK. The acquired company’s name was changed
to SHOWA DENKO CARBON Holding GmbH as of that date.

At the same time, effective November 7, 2017, SDK completed thetransfer of the former SGL GE’s graphite electrode business in theThrough business integration, today SDK has graphite electrode

U.S. to Tokai Carbon Co., Ltd. This transfer was done to make theproduction plants in Europe and Southeast Asia, in addition toacquisition of the former SGL GE meet the conditions required byexisting bases in Japan, the U.S. and China, and has become thethe U.S. anti-competition regulators, a prerequisite for approval ofleading supplier in the global graphite electrode industry. SDK will

the acquisition.

GE Contributes to Steel Recycling
Steel scrap
Steel Products

Graphiteelectrodes
H bar

Bar

Steel
recycling

Rolling

Casting

Electric arc furnace

11

Management Team

as of March 29, 2018

Kiyoshi Nishioka, Tomofumi Akiyama, Keiichi Kamiguchi, Jun Tanaka, Hideo Ichikawa, Kohei Morikawa, Hidehito Takahashi, Toshiharu Kato, Masaharu Oshima

Directors
HIDEO ICHIKAWA Representative Director, Chairman of the Board

KOHEI MORIKAWA Representative Director, President

JUN TANAKA

April 1975

Joined the Company

January 2006

Corporate Officer; General Manager,
Corporate Strategy Office

April 1982
January 2013

Joined the Company
Corporate Officer; General Manager,
Electronic Chemicals Division

April 1982
January 2013

Joined the Company
Corporate Officer; General Manager,
Advanced Battery Materials Department

March 2008

Director; Corporate Officer;
General Manager,
Corporate Strategy Office

January 2016

Managing Corporate Officer;
Chief Technology Officer (CTO)

January 2017Managing Corporate Officer;
Chief Technology Officer (CTO)

March 2016

Director; Corporate Officer;
Executive Officer, HD Sector

Director; Managing Corporate Officer,
Chief Technology Officer (CTO)

January 2018

January 2010

Director; Managing Corporate Officer;
Executive Officer, HD Sector

Director; Managing Corporate Officer,
in charge of Electronic Chemicals andFunctional Chemicals divisions, Business
Development Center, Isesaki and Tatsuno
plants, and Corporate R&D Department;
Chief Technology Officer (CTO)

March 2017

September 2008

January 2011
January 2017

President and Chief Executive Officer (CEO)Chairman of the Board (incumbent)

Director; Managing Corporate Officer, in charge ofElectronic Chemicals and Functional Chemicals
divisions, Business Development Center,
Higashinagahara, Isesaki and Tatsuno plants,
Corporate R&D and Intellectual Property departments;
Chief Technology Officer (CTO) (incumbent)

January 2017

President and Chief Executive Officer (CEO)(incumbent)

HIDEHITO TAKAHASHIKEIICHI KAMIGUCHITOSHIHARU KATO

April 1986

April 1983
January 2011

Joined the Company
Corporate Officer; General Manager,
Corporate Strategy Office

April 1981
March 2001
January 2016

January 2015

Corporate Officer, in charge of Industrial
Gases and Basic Chemicals divisions,
Kawasaki and Higashinagahara plants

January 2017

Corporate Officer;
Chief Risk Management Officer (CRO)

January 2017
March 2017

March 2017

Director; Corporate Officer, in charge of Internal
Audit, Legal, General Affairs & Human Resources,and Purchasing & SCM departments; Chief Risk
Management Officer (CRO) (incumbent)

February 2002
January 2013
October 2015
January 2016
January 2017
March 2017
July 2017

Joined The Mitsubishi Bank, Ltd. (currently
MUFG Bank, Ltd.)
Joined GE Japan Holding Corporation
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, in charge ofCeramics division and Corporate Strategy Department;
General Manager, Carbon Division (incumbent)

TOMOFUMI AKIYAMA Outside Director

MASAHARU OSHIMA Outside Director

April 1959
July 1998
March 2008
July 2010

April 1974

Joined Fukoku Mutual Life Insurance Company
President, Fukoku Mutual Life Insurance Company
Director, of the Company (incumbent)
Chairman, Fukoku Mutual Life Insurance Company (incumbent)

KIYOSHI NISHIOKA Outside Director
April 1977
June 2005

Joined Nippon Steel Corporation (currently Nippon Steel & Sumitomo Metal Corporation)
Director; General Manager, Technology Development Planning Department,
Technology Development Headquarters, Nippon Steel Corporation
September 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 ofTokyo (incumbent)
April 2017
Visiting Professor, Ehime University (incumbent)
March 2018
Director, of the Company (incumbent)

12

January 2018

SHOWA DENKO K.K.

ANNUAL REPORT 2017

November 1995

Joined Showa Aluminum Corporation
Joined the Company
Corporate Officer; General Manager,
Finance & Accounting Department
Corporate Officer; Chief Financial Officer (CFO)
Director; Corporate Officer, General Manager,
Finance & Accounting Department; Chief
Financial Officer (CFO)
Director; Corporate Officer, in charge ofFinance & Accounting and Information
Systems Departments; Chief Financial Officer(CFO) (incumbent)

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

Chairman, The Japanese Society for Synchrotron Radiation Research

April 2013

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

May 2013

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)Audit & Supervisory Board Members
SABURO MUTO
April 1976
January 2011
January 2013
January 2014
March 2014
August 2014
January 2015
March 2017

Joined the Company
Corporate Officer; General Manager, Finance Office
Corporate Officer; General Manager, Finance & Accounting Department
Chief Financial Officer (CFO)
Director; Corporate Officer; General Manager, Finance & Accounting Department
Director; Corporate Officer
Director; Managing Corporate Officer, in charge of Finance & Accounting andInformation Systems departments; Chief Financial Officer (CFO)
Audit & Supervisory Board Member (incumbent)

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)

Setsu Onishi, Hiroyuki Tezuka, Saburo Muto, Tetsu Moriki, Kiyomi Saito

HIROYUKI TEZUKA Outside Member
April 1986
September 1992
January 1993
June 1993
March 2008

Registered with Dai-ichi Tokyo Bar Association
Joined Nishimura & Sanada Law Offices (currently Nishimura & Asahi)
Clearly, Gottlieb, Steen & Hamilton, New York
Admitted to the bar of the State of New York
Returned to Nishimura & Sanada Law Offices (currently Nishimura & Asahi) as Partner (incumbent)
Audit & Supervisory Board Member, of the Company (incumbent)

SETSU ONISHI Outside Member
April 1978
April 2005
April 2007
April 2010

KIYOMI SAITO Outside Member

June 2010

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

Joined Nikkei Inc.
Joined Sony Corporation
Joined Morgan Stanley investment bankExecutive Director, Morgan Stanley investment bankPresident, 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)

Joined The Industrial Bank of Japan, Ltd. (currently Mizuho Bank, Ltd.)
Corporate Officer; General Manager, 14th, Marketing Department,
Mizuho Corporate Bank, Ltd. (currently Mizuho Bank, Ltd.)Managing Corporate Officer, in charge of Global Syndication Unit and Global Products Unit
Vice President; Corporate Officer; General Manager, Internal Audit Division,
Mizuho Financial Group, Ltd.
Director; Vice President; Corporate Officer; General Manager,
Internal Audit Division, Mizuho Financial Group, Ltd.
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)

Corporate Officers and Senior Corporate Fellow
Chief Executive Officer

KOHEI MORIKAWA
Senior Managing Corporate Officer

JIRO ISHIKAWA
General Manager, HD Division; Officer in charge of Electronics
Materials and Advanced Battery Materials divisions, and Power
Semiconductor ProjectManaging Corporate Officers

JUN TANAKA
Chief Technical Officer (CTO); Officer in charge of Electronic
Chemicals and Functional Chemicals divisions, Business
Development Center, Higashinagahara, Isesaki and Tatsuno
plants, and Corporate R&D and Intellectual Property departments

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

Corporate Officers

KEIICHI KAMIGUCHI
Chief Risk Management Officer (CRO); Officer in charge of Internal
Audit, Legal, General Affairs & Human Resources, and Purchasing& SCM departments

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

YOUICHI TAKEUCHITAKUJI YAMAMOTO

Oita Complex Representative

Assistant to President in charge of AI Strategy Planning

TAKAYUKI SATOMASAO SHIBUYA

General Manager, Electronics Materials Division;
Officer in charge of Chichibu Plant

General Manager, Advanced Battery Materials Division

MOTOHIRO TAKEUCHI
General Manager, Corporate Strategy Department

TAICHI NAGAI
Officer in charge of Production Technology,
Energy & Electricity, SPS Innovation and CSR departments

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

AKIHIRO JIMBO
General Manager, Basic Chemicals Division

TETSUO WADA
General Manager, Business Development Center

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

KLAUS UNTERHARNSCHEIDTTOSHIHARU KATO

President, SHOWA DENKO CARBON Holding GmbH

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

Senior Corporate Fellow

MASAMICHI YAGISHITA
General Manager, Electronic Chemicals Division;
Officer in charge of Tokuyama Plant

HIROSHI SAKAI
General Manager,
Technology Development Control Department, HD Division

MASUNORI KAIHOGeneral Manager, Kawasaki Plant

HIROSHI DAIO
General Manager, Ceramics Division;
Officer in charge of Yokohama and Shiojiri plants

13Corporate Governance
Message from Hideo Ichikawa, Chairman of the Board

Hideo Ichikawa
Chairman of the Board

The Showa Denko Group views the strengthening of corporate governance as one of top-priority management
issues. In December 2015, the Company established “Corporate Governance Basic Policies,” aiming to promote
constructive dialogue with stakeholders, thereby increasing corporate value and shareholders’ common interests.
Based on the Basic Policies, we updated our Corporate Governance Report, and we are promoting constructive
dialogue with investors and shareholders.
In 2017, 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, the manufacturing industry, academia, and legal professionals. They give us valuable advice andcomments from various perspectives. Both boards have high attendance rates, and keenly discuss a wide variety
of matters relating to the Group’s management, including M&As, structural reforms and capital investments.
The Showa Denko Group is now achieving business expansion and an improvement in profitability as resultsof structural reforms we have been conducting for a long time and the integration of graphite electrodebusinesses we implemented in the second half of 2017 between Showa Denko and former SGL GE Holding
GmbH. We will continue striving to further strengthen our corporate governance and enhance our value. We
look forward to the continued support of our investors and shareholders.

1. ‌Basic Concept regarding 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,and employees. Based on the above, we have clarified our mission in
the form of the Group’s vision, as stated below, and we are working
hard to realize this vision.

VISIONWe at the Showa Denko Group will provide products and services
that are useful and safe and exceed our customers’ expectations,
thereby enhancing the value of the Group, giving satisfaction to ourshareholders, and contributing to the sound growth of internationalsociety 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. ‌Condition of the Company’s Supervisory andDecision-Making Functions
We have adopted the Audit & Supervisory Board system to enhance
the fairness and transparency of management, ensuring efficientmanagement of the Company. To clearly separate management
supervisory functions from business execution functions, we haveintroduced the corporate officer system. The top management team,consisting of the President and corporate officers in charge of respective
operations, is working to increase the speed of decision making andvitalize operations. Meanwhile, the Company has substantially reduced
the number of directors. In addition, we have strengthened thesupervisory functions by appointing outside directors. In order tostrengthen independence and objectivity of the function of the Board of

14

SHOWA DENKO K.K.

ANNUAL REPORT 2017

Directors, and accountability of the Board of Directors, the Company
has established the Nomination Advisory Committee and theRemuneration Advisory Committee as advisory bodies to the Board of
Directors, while the majority of each Committee consists of
independent outside directors and outside members of the Audit &Supervisory Board. At Board meetings held once or twice a month,
the Board decides the Company’s basic policy and decides, after fulldeliberation, on matters provided for in the Companies Act and theCompany’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 theviewpoint of strengthening corporate governance, aiming tostrengthen the Board of Directors’ supervisory functions and 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 haveabolished the positions of managing directors and senior managing
directors to put all directors (except for the Chairman, and thePresident) on an equal footing, while strengthening the supervision
by Audit & Supervisory Board members (including outside members)
and mutual supervision among directors. The term of office of
directors has been shortened to one year to ensure a quick responseto 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 29, 2018, nine
directors, including three outside directors, were appointed.

3. Condition of Business Execution
The Management Committee, which meets once a week in principle
and is chaired by the President, deliberates and decides on matters to
be referred to the Board of Directors’ meetings and important matterspertaining to the overall management of the Company. The decisions
are made after deliberations on two occasions. As for investment

plans, their risks are examined by task teams before referral to theManagement 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 theparticipation of all corporate officers.
The Company considers that responsible execution forms the basisof corporate activities. The Company evaluates performances ofrespective business segments to ensure the effective implementationof the performance-based evaluation system. The Company has
Security Export Control and Safety Measures committees under the
CSR Committee chaired by the President. The Company also has
Responsible Care, Risk Management, Human Rights/Corporate Ethics,
and IR promotion councils. These committees and councils
investigate, study, and deliberate on specific matters important for
the execution of businesses.

4. Condition of Audit & Supervisory Functions
The Company’s Audit & Supervisory Board consists of five members,
including three outside members. The members attend the Board of
Directors’ meetings and other important internal meetings, offering
opinions as necessary. They audit and supervise the execution ofoperations through such means as field investigations, hearing
sessions, and reading important documents, making proposals andproviding advice and recommendations to ensure the soundmanagement of the Company. They are working to strengthen the
consolidated audit & supervisory board system in cooperation withauditors 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 the management policies
as well as business plans and their execution, checking for consistency
and soundness. The results of internal auditing are reported to themembers of the Audit & Supervisory Board to ensure consistency with
their audits.
For matters relating to the environment and safety, the respective
divisions in charge conduct Responsible Care audits. KPMG AZSA LLC
conducts auditing of the Company based on an auditing contract andan annual plan agreed upon with the Audit & Supervisory Board, andprovides the board with audit results. The auditing corporation and
the Audit & Supervisory Board exchange information and views fromtime to time to strengthen their cooperation.

Remuneration, etc., to the board members
Number ofapplicable persons

Paid amount

Members of the Board of Directors(excluding outside members)

10¥231 million

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

3¥ 55 million

6¥ 68 million

19¥353 million

Outside board members
Total

Remuneration to the auditing corporation
Paid amount

Name of accounting auditor: KPMG AZSA LLC
Remuneration for the issuance of auditing certification based on
the auditing contract¥270 million

7. ‌Personal/Financial Relations and Interests between
the Company and Outside Board Members
The Company has three outside members each for its Board of Directors
and the Audit & Supervisory Board. None of them has special interestsin the Company. An outline of the Company’s corporate governancesystem is shown below.

Shareholders’ Meeting

Auditing

Decision Making
and Supervision

Board ofDirectors

Advisory/
ReportNomination
Advisory
Committee

Job
AuditsRemuneration
Advisory
Committee

Audit &
Supervisory
Board
Audit &
Supervisory
Board
Members

Accounting
AuditorAccounting Audits
Links

Execution of Duty
Top Management
President
Corporate Officers in Charge

Internal Audit Department

5. Compliance and Risk Management

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 theperiod from January 1 through December 31, 2017) is as follows:

Risk Management Promotion Council
CSR Committee

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 Audits

Responsible Care Promotion Council

Security Export Control Committee
Safety Measures Committee
Business Divisions
Management Committee

Staff Sections

R&D Committee

15

Research and Development

business plan “Project 2020+,” and 2018 is the final year of the

1. ‌Strengthening existing businesses / Expanding“Individualized businesses”

project. Under “Project 2020+,” the Group plans to invest ¥60

R&D programs to develop high-value-added products in this category

billion in R&D, aiming to contribute to the development of ainclude those to develop “Ammonia-based hydrogen stations,”

global society by providing high-value-added products and“Aqueous binder for anodes of LIBs,” and “Repairing materials forservices to five market domains: “Infrastructure,” “Energy,”

cold or humid areas.”

In 2016, the Showa Denko Group started the medium-term“Mobility,” “Living environment,” and “Electronics.”
In addition, aiming to make our R&D program substantial enoughAmmonia molecules contain many hydrogen atoms. Therefore,
Ammonia is expected to be used as an energy carrier. The Groupfor realization of the ideal image of the Showa Denko Group by 2025,

has successfully developed practical technology to produce

we made it our basic policy on R&D to “create new value by forging,high-purity hydrogen for fuel-cell vehicles from ammonia, the first

polishing, and linking diverse individualized technologies.” Underin the world, to be used in “hydrogen stations.” Using this technology,

this basic policy, we reorganized the Group’s R&D division in January

our Kawasaki Plant is now conducting a field test at a hydrogen2016, and have been accelerating implementation of specific measures

station with the capacity to supply 10Nm3/h of hydrogen.

to obtain successful results of our R&D activities since then.

“Aqueous binder for anodes of LIBs” has been adopted by many

This new R&D division of the Group has been promoting R&D

customers due to excellent properties of the resin originallyprograms, aiming to provide our customers with new value throughdesigned by the Group. We have started to develop binders of

pursuit of cross-divisional R&D themes, thereby responding toadvanced grades for creating LIBs with higher output and longer

diversified needs of the market. The new R&D division has been

life, suitable for use in EVs.

promoting this movement on the basis of our wide ranging material“Repairing materials for cold or humid areas” can be applied andtechnologies that cover organic, inorganic, and aluminum materials,

finished in a short period even under cold or wet conditions. We haveour processing technologies to treat these materials, and ouralready registered these materials in the New Technology Information

strategic technologies that consist of the world-top-level

System (NETIS) hosted by the Ministry of Land, Infrastructure,technologies we cultivated over many years. Here, we would like toTransport and Tourism, and are now conducting field tests of them tointroduce examples of the Group’s R&D activities in three strategic

confirm their performance, aiming to commercialize these materials.

categories, namely; from R&D programs promoted mainly by the

Field test of repairing material

Institute for Integrated Product Development, programs for

Higashinagahara (Waterway for Asahi
Dam); Fixing water leaks along a wall

“Strengthening existing businesses and expanding individualizedbusinesses” and “Surrounding growth fields;” and from R&D
programs promoted mainly by the Institute for Advanced and CoreTechnology, programs for development of “Strategic technologies.”

Strengthening existing businesses
Business expansion in surrounding growth fields

Strategic technologies
Accelerating R&D• Ammonia-based hydrogen station• Aqueous binder for anodes of LIBs
• Materials for infrastructure• Highly-bendable solder resist• Materials/components
for heat solutions• Carbon material (fullerene)• Redox flow batteries• Active use of AI technology

Organics,
Inorganics,
Aluminum

2. Surrounding growth fields / Heat solutions
Progress in electrification, downsizing and weight reduction ofindustrial equipment and automobiles has been stimulating

Diversebusinessdomains

Infrastructure,
Living environment,
Mobility, Energy,
Electronics

demand for high-performance materials for heat solutions. To
respond to this demand, the Group offers new-generation materials
including SiC epitaxial wafer for power devices, sealing resin withenhanced heat resistance, inorganic fillers, and aluminum

Deepening and fusion ofretained materials/
technologies
Institute for Integrated
Product DevelopmentCore
technologies

Elemental technologies withcompetitive advantage

16

SHOWA DENKO K.K.

Computational Scienceand Technology
Information Centercomposite materials. These materials have advantages in heat
resistance and heat radiation, and our customers have started
performance assessments of them. Aiming to respond to theincreasing demand for heat solutions for higher-output and lighter

Strategic
technologies(Nano-carbon/Thin-film/Catalyst)
Institute for Advanced
and Core Technology
World-top technologies
we cultivated over many years

ANNUAL REPORT 2017devices including power modules, the Group will continue
developing high-performance materials, parts and components,and offering multi-material components as combination of these
new-generation materials.

Enhanced heat
resistance

Enhanced heatradiation

3. Strategic technologies / Carbon materials

Power element:
SiC epi-wafer

Insulating sheet:
Inorganic filler

Advanced and CoreThe Institute forTechnology creates“Individualizedbusinesses” by using
next-generation
business models andSealing resin withenhanced heat-resistanceby deepening

Application example:
Silicon sheet forheat radiationworld-top-level strategic technologies. For fullerene, which arecarbon atoms in a football-like structure, the Institute examines its

Heat radiating panel:Composite material

properties, and explores technologies to make derivatives orthin-films, aiming to increase the rage of its use. Recently fullerene

Cooling device:
Aluminum components& frames

applications in the domain of “Energy” such as organic thin-film solar
batteries and additives for lubricant, have accelerated. The Institutealso has been striving to establish a system to mass-produce
high-quality fullerene, aiming to create a stable supply of thisHeat generation
analysis of a modulematerial.

R&D expenditures in 2017

(Millions of yen)

Petrochemicals

ChemicalsElectronics

Inorganics

Aluminum

Others

Total

1,245

2,478

5,335

322

1,737

7,422

18,539TOPICS
Received “2017 Top 100
Global Innovators” Award,
3 years in a row
In January 2018, SDK received “TheClarivate Analytics 2017 Top 100 Global
Innovators” award. Clarivate Analytics,
formerly the Intellectual Property & Science business of Thomson
Reuters, selected the top 100 global innovation-leading
companies and organizations by using strict and objective datacompiled from its value-added patent citation database, theworld’s largest in this category, its intellectual property
intelligence platform, and the company’s original basis forevaluation. In the screening process for the award, Clarivate
Analytics used scientific and objective methodology involving
four main criteria of “patent volume,” “application-to-grant
success,” “globalization” and “citation influence.” The Showa
Denko Group has designated the intellectual property strategy
as an important part of the overall business strategies. The
Group will continue this intellectual property strategy throughclose integration with business and R&D strategies.

Expanding capacity to produce high-grade
SiC epitaxial wafers
SDK is now expanding the capacity to produce high-quality-grade
silicon carbide (SiC) epitaxial wafers for power devices, which had
already been marketed under the trade name of “High-Grade Epi”
(HGE), from current 3,000 wafers per month to 5,000 wafers permonth* by April 2018. Moreover, to respond to a further increasein demand for HGE, SDK decided in January 2018 to re-expandthat capacity. After the re-expansion work which is to be finishedin September 2018, that capacity will be increased to 7,000 wafers
per month. The size of the market for SiC epitaxial wafers for
power devices is expected to grow very rapidly due partly to thatthe early use of SiC power devices in vehicles is under consideration.
SDK will continue meeting the need of the market for high-quality
SiC epitaxial wafers, aiming to contribute to the improvement inenergy efficiency of power devices.
* ‌This number is based on a conversion into SiC epitaxial wafers for power devices
having withstanding voltage of 1,200 V.

17

Corporate Social Responsibility
Realizing safe, stable operations as well assustainable development
As a corporate group producing and distributing chemicals, we give priority
to safety above all else and, by continuing to promote Active Safety*, wewill make every effort to prevent industrial accidents, equipment-related
incidents and environmental problems. Moreover, we consider our
Responsible Care program, in which we pay close attention to safety, healthand the environment at all stages of the life cycle of chemical substances, tobe one of our core CSR activities. Under our Responsible Care action plan, we
will implement and further improve activities specified for every category:safety and disaster prevention; occupational safety and health; chemical
substance safety; and environmental safety. In addition to these activities, wewill work hard to offer products, technologies and services that help solve
social issues as part of our initiative to achieve sustainable development.
*‌Active Safety: The Showa Denko Group’s unique activities that analyze past accidents and problems,then take action to prevent a reoccurrence.

Ensuring strict compliance with legislation andobserving social and corporate ethical norms
Observing social and corporate ethical norms is one of the most importantpriorities for the Showa Denko Group and is the foundation of ourmanagement. We will ensure that all employees behave with integrity
based on “Our Code of Conduct and Its Practical Guide” that gives employees
the guidelines on what to keep in mind and how to behave to realize our vision.

Promoting dialogue with stakeholders
The United Nations has adopted the Sustainable Development Goals(SDGs), or 17 goals to be attained by the international community by
2030. In response, the Japanese government launched the SDGs
Promotion Headquarters headed by the prime minister in 2016. So, more
attention will be paid to measures implemented by companies for theenvironment, society and governance (ESG). For our part, we need toprecisely identify what the public expects and which challenges we will
face, and then incorporate these findings into our corporate activities. A
dialogue with our stakeholders is indispensable for this process. In
addition to formal meetings with stakeholders organized under various
circumstances, we will work to create more informal opportunities tocommunicate with stakeholders through Group-wide aluminum canrecycling, participation in local events and on other occasions where wecan contribute to local communities.

Showa Denko Group’s Resource Use and Environmental Impact in 2016
Actual values of environmental loads for 2016 are as follows:

Input

OutputEnergyShowa Denko GroupShowa Denko K.K. onlyInternal Utilization(Crude oil equivalent)

1,000 MI (+10 MI)

Showa Denko K.K. only

2,805 t (–484 t)

Group Companies*1

190 MI (+10 MI)

Group Companies

0t

Water

Waste Reduction

Showa Denko K.K. only

54.11Mm (-1.24 Mm )33Group Companies

Showa Denko K.K. only

62,589 t (+16,466 t)
Group Companies

4.61 Mm (-0.08 Mm )37,903 t (–233 t)

3

Raw materials

Products
Emission of air pollutants:
Greenhouse gases (kt-CO2 )18

SHOWA DENKO K.K.

CSR site
CSR reports

ANNUAL REPORT 2017

2,211 (+8)

475 (-9)324 (-36)

4 (0)NOx (t)1,255 (-158)

23 (-1)

Soot and dust (t)63 (-24)1 (0)JCIA PRTR-listed substances (t)148 (-5)

242 (-20)

JCIA Toxic atmospheric pollutants (t)*2

14 (0)

1 (+1)

Emission of water pollutants:

SDK onlyGroup
Companies

COD (t)360 (-5)

4 (0)Total nitrogen (t)480 (-23)

1 (0)Total phosphorus (t)8 (-1)0 (0)JCIA PRTR-listed substances (t)14 (-5)1 (0)Wastewater volume (kt)

JCIA PRTR-listed substances (t)Please visit our websites

Group
Companies

SOx (t)Emission of soil pollutants:*1 ‌Scope of the Showa Denko Group: Total for the 9 consolidated manufacturing subsidiaries inJapan; 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.

SDK only

26,620 (-2,051) 3,733 (+29)
SDK onlyGroup
Companies

0 (0)

0 (0)

Industrial waste discharge:

SDK onlyGroup
Companies

Total waste discharged to outside (t)20,038 (-936)

9,360 (-1,308)

Reused by third parties (t)10,856 (+973)

5,774 (-90)

Volume reduction by consignee (t)8,928 (-1,411) 3,467 (-1,238)

Final landfill disposal (t)*3

254 (-498)

69 (-30)

The figures in parentheses represent 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

Consolidated net sales in 2017 totaled ¥780,387 million (US$6,906 million),
an increase of ¥109,228 million, or 16.3%, over the previous year. Sales
grew in all segments. In the Petrochemicals segment, sales rose due toincreases in the prices of products and the consolidation of SunAllomer
Ltd. in the second half of 2016. In the Inorganics segment, sales rose due
to an increase in shipment volumes of graphite electrodes, improved
market conditions for graphite electrodes in China in the second half of2017, and the new consolidation of SHOWA DENKO CARBON Holding
GmbH in the fourth quarter of 2017 following the acquisition andbusiness integration of former SGL GE Holding GmbH, a graphite
electrode manufacturer.
The cost of sales went up ¥57,784 million, or 10.6%, to ¥602,778 million(US$5,334 million), reflecting the increase in net sales.
Selling, general and administrative expenses rose ¥15,680 million, or
18.6%, to ¥99,791 million (US$883 million), due partly to the higher
transportation cost caused by the increase in net sales. R&D expendituresrose ¥1,225 million to ¥18,539 million (US$164 million).
Operating income for the Group increased substantially, by 85.0%, or¥35,765 million, to ¥77,818 million (US$689 million). The Petrochemicals
segment recorded higher income due to a strong market caused by atight supply-demand balance in East Asia. The Inorganics segment also
recorded higher income due to growth in shipment volumes forgraphite electrodes resulting from the business integration and thestiffening graphite electrode market in China, in addition to the effectsof lower production costs for graphite electrodes. The Electronics,
Chemicals, and Aluminum segments also recorded higher income.

The production of liquefied ammonia and high-purity gases for electronics
increased from the previous year. In the basic chemicals business, sales ofliquefied ammonia rose due to higher shipment volumes. Sales ofchloroprene rubber improved due to a high level of shipment volumes anda strong market. Sales of acrylonitrile increased due to a rise in prices. Salesof electronic chemicals rose due to higher shipment volumes of high-purity
gases for electronics caused by an increase in production in thesemiconductor and display panel industries. Sales of functional chemicals
went up due to higher shipment volumes for use in the domestic
automotive industry. However, sales of industrial gases decreased slightly.
As a result, sales for the Chemicals segment increased ¥14,229 million,or 10.6%, to ¥148,758 million (US$1,316 million). The segment recorded
operating income of ¥16,474 million (US$146 million), up ¥2,650 million,
or 19.2% over the previous year.

Electronics
Production of HD media in 2017 increased from the previous year due tohigher shipment volumes of media for use in data centers. As a result,sales of HD media went up. Sales of rare earth magnetic alloys andcompound semiconductors rose from the previous year due to higher
shipment volumes. Sales of lithium-ion battery (LIB) materials, which wastransferred from the Others segment to the Electronics segment at the
beginning of 2017, decreased due to lower shipment volumes to China
caused by changes in the subsidy policy for electric vehicles.
As a result, the Electronics segment’s sales rose ¥2,602 million, or2.2%, over the previous year to ¥123,064 million (US$1,089 million). The
segment recorded operating income of ¥21,925 million (US$194 million),up ¥6,910 million, or 46.0% over the previous year.

Information by Business Segment

Inorganics

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

Production of graphite electrodes in 2017 went up compared with theprevious year due to an improvement in the situation of the electric steel
industry as the customer. Sales of graphite electrodes rose due to theacquisition and consolidation of SGL GE Holding GmbH (currently SHOWADENKO CARBON Holding GmbH) in the fourth quarter of 2017, in addition
to higher sales volumes and a rise in prices for graphite electrodes in the
Chinese market during the second half of 2017. Sales of ceramics rosedue to an increase in shipment volumes for the electronics industry.
As a result, sales in the Inorganics segment increased ¥22,572 million,
or 44.4% over the previous year, to ¥73,442 million (US$650 million). The
segment recorded operating income of ¥7,089 million (US$63 million),
an improvement of ¥12,848 million from the previous year, due mainly
to higher operating income earned by the graphite electrode business.

Petrochemicals
Production of ethylene rose from the previous year. Sales of olefins
increased due to the higher prices for products caused by a rise in the
raw naphtha price and strong demand. Sales of organic chemicals
improved due to higher shipment volumes and a rise in prices of products,
including ethyl acetate and vinyl acetate. The consolidation of SunAllomer
Ltd. in the second half of 2016 also drove up sales in this segment.
As a result, sales in the Petrochemicals segment increased ¥65,345
million, or 35.2%, over the previous year to ¥251,128 million (US$2,222
million). This segment recorded operating income of ¥33,357 million(US$295 million), up ¥12,667 million, or 61.2% over the previous year.

Net Sales by Segment

Operating Income by Segment(Billions of yen)
1,000(Billions of yen)
100

750

75

500

50

250

25

0

0

-250

2013

2014

Petrochemicals
ChemicalsElectronics

2015

Inorganics
Aluminum
Others2016

2017

Adjustments

-25

2013

2014

Petrochemicals
ChemicalsElectronics

2015

Inorganics
Aluminum
Others2016

2017

Adjustments

19

Management’s Discussion and Analysis (cont.)
Aluminumrose. For the basic chemicals business, sales of chloroprene rubber rosedue to an increase in export volumes and higher market prices. For theelectronic chemicals business, sales went up due to an increase in
shipment volumes of high-purity gases for electronics caused by higher
production in the semiconductor and display panel industries in East
Asia. For the functional chemicals business, sales increased due to a surge
in shipment volumes of products to the Chinese market. The Electronics
segment’s sales rose due to higher shipment volumes of HD media
resulting from the bottoming out of demand for HDDs used in PCs andan increase in shipment volumes of HDDs for data centers. Sales in the
Inorganics segment rose due to higher market prices for graphite
electrodes in China. Sales in the Aluminum segment increased due tohigher shipment volumes recorded by Hanacans Joint Stock Company inVietnam. Sales in the Others segment decreased due to a lower sales at
Shoko Co., Ltd. and Shoko (Shanghai) Co., Ltd.
As a result, consolidated sales from operations in Asia (excluding
Japan) increased ¥22,018 million, or 10.6% over the previous year, to¥230,644 million (US$2,041 million).

Production of high-purity foil for aluminum electrolytic capacitors
increased from the previous year. Shipment volumes and sales of rolled
products rose due to higher shipment volumes of high-purity foil foraluminum electrolytic capacitors for industrial equipment andautomotive applications. Sales of aluminum specialty components wentup, due partly to higher shipment volumes of the large aluminum
extrusions and aluminum cylinders used in laser-beam-printers. Sales ofaluminum cans increased due to higher shipment volumes recorded by
Hanacans Joint Stock Company in Vietnam.
As a result, sales in the Aluminum segment increased ¥6,864 million,
or 7.0% over the previous year, to ¥105,439 million (US$933 million).
Operating income for the segment rose ¥2,281 million, or 51.6% overthe previous year, to ¥6,697 million (US$59 million).

OthersSales in the Others segment increased ¥4,884 million, or 3.8% over theprevious year, to ¥133,624 million (US$1,183 million) due mainly to improved
sales from Shoko Co., Ltd. Operating income for this segment rose by¥10 million, or 1.6% over the previous year, to ¥633 million (US$6 million).

Sales in the Rest of the World
Sales in the Inorganics segment rose sharply due mainly to the consolidationof SHOWA DENKO CARBON Holding GmbH in the fourth quarter of 2017and an increase in sales recorded by Showa Denko Carbon Inc. in the U.S.
As a result, consolidated sales from operations in the rest of theworld increased ¥13,687 million, or 42.9% over the previous year, to¥45,580 million (US$403 million).

Information by Geographic Area
Sales in Japan
Sales in the Petrochemicals segment increased due to a rise in market
prices of products, the result of higher raw naphtha prices and theconsolidation of SunAllomer Ltd. in the second half of 2016. 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, higher shipment volumes ofliquefied ammonia and a rise in the market price of acrylonitrile. Sales
figures for the Electronics segment were higher due to increased shipment
volumes of compound semiconductors, rare earth magnetic alloys and HD
media. In the Inorganics segment, sales rose due to an increase in sales
volumes for graphite electrodes and an increase in shipment volumes inceramics for electronics. Sales in the Aluminum segment increased due tohigher sales of high-purity foil for aluminum electrolytic capacitors andaluminum specialty components, including large extrusions. Sales figures
for the Others segment rose due to an increase in sales from Shoko Co., Ltd.
As a result, consolidated sales from operations in Japan rose ¥73,523
million, or 17.1%, to ¥504,162 million (US$4,462 million).

Other Income (Expenses) and Net Income
Attributable to Owners of the Parent
The gap between interest expenses and interest and dividends income
improved ¥384 million to expenses of ¥1,207 million (US$11 million),
mainly from an increase in interest income.
We recorded a loss on the equity in earnings of unconsolidated
subsidiaries and affiliates to which the equity method is applied of¥7,689 million (US$68 million), a fall of ¥12,017 million. This fall was due
mainly to the recording of a loss on the equity in earnings of unconsolidated
subsidiaries and affiliates to which the equity method is appliedamounting to ¥9,948 million from PT. Indonesia Chemical Alumina (ICA),
the result of impairment losses on ICA’s alumina plant following theCompany’s decision to sell all of its shares in ICA. The consolidation of
SunAllomer Ltd. also reduced the equity in earnings of unconsolidated
subsidiaries and affiliates to which equity method is applied.
For foreign exchange gain (losses), the group recorded foreignexchange losses of ¥2,791 million (US$25 million), a drop of ¥1,133

Sales in Asia (excluding Japan)
Sales in the Petrochemicals segment in Asia increased due to a rise inmarket prices for olefins. Sales in Asia for the Chemicals segment also

Net Income Attributable to Owners of the Parent

Total Assets(Billions of yen)
40

(Billions of yen)
1,000

30

750

20

500

10

250

0

20

2013

2014

SHOWA DENKO K.K.

2015

2016

2017

ANNUAL REPORT 2017

0

2013

2014

2015

2016

2017

Liabilities

million due mainly to the recording of a foreign exchange loss in a
subsidiary in Taiwan caused by the appreciation of the New Taiwan
dollar against the U.S. dollar.
We recorded a loss of ¥4,430 million (US$39 million), net, on retirement
and sales of noncurrent assets, a fall of ¥1,207 million, due mainly to therecording of expenses and retirement losses resulting from refurbishment
to make effective use of Yokohama Plant, which belongs to the Inorganics
segment. We also recorded a loss of ¥7,204 million (US$64 million) for
the impairment loss, an improvement of ¥8,439 million, due partly to
our recognition of an impairment loss amounting to ¥2,312 million as
the cost of refurbishment to make effective use of Yokohama Plant andrecognition of another impairment loss of ¥1,555 million from the
Chichibu Plant, which belongs to the Electronics segment.
Gain on sales of investment securities increased ¥336 million, to ¥408
million (US$4 million).
The sum of extraordinary losses, other than those mentioned above,came to ¥9,418 million (US$83 million), due mainly to posting of a loss onprovision of the allowance for doubtful accounts and others concerning ICA.
Overall, the total of other income (expenses), net, i.e., the total of
non-operating income (expenses) and extraordinary income (expenses),
net, fell by ¥6,678 million, to a loss of ¥31,202 million (US$276 million).
The total of the other expenses posted for Yokohama Plant, as mentioned
above, amounted to about ¥7,600 million.
As a result, the Company recorded income before taxes andnoncontrolling interests of ¥46,616 million (US$413 million), up ¥29,087
million from the previous year.
Income taxes increased ¥7,142 million to ¥10,833 million (US$96 million)
due to the improvement in the Company’s performance. Consequently,
the Company recorded net income attributable to owners of the parentof ¥33,470 (US$296 million), up ¥21,166 million over the previous year.

Interest bearing debt fell by ¥13,203 million from the end of the previous
year to ¥346,726 million (US$3,068 million). However, total liabilities rose
¥38,263 million, to ¥659,730 million (US$5,838 million), due partly to theincrease in accounts payable–trade resulting from the recent consolidationof SHOWA DENKO CARBON Holding GmbH.

Net Assets
Net assets rose ¥53,766 million from the end of the previous year, to¥364,997 million (US$3,230 million), due partly to the posting of net income
attributable to owners of the parent and an increase in the valuationdifference on available-for-sale securities resulting from a rise in stock prices.

Capital Expenditures
Capital expenditures increased ¥2,003 million from the previous year, to¥41,279 million (US$365 million). Capital expenditures for the electronic
chemicals business decreased from the previous year, though they werestill at a high level. However, we expanded production capacity to produce
lithium-ion battery materials and for Hanacans Joint Stock Company inVietnam to produce more aluminum cans. We also began construction
work for a variety of purposes, including production improvements,
greater efficiency, maintenance and environmental preservation.

Cash FlowsNet cash provided by operating activities decreased ¥1,666 million fromthe previous year with proceeds of ¥67,284 million (US$595 million), duepartly to the increase in working capital, despite the rise in operating
income. Net cash used in investing activities decreased ¥23,840 million
from the previous year for the payment of ¥29,914 million (US$265
million), due partly to a decrease in payments into time deposits and anincrease in proceeds from sales of investment securities. As a result, free
cash flow ended up with proceeds of ¥37,369 million (US$331 million),
an improvement of ¥22,174 million.
Net cash used in financing activities rose ¥5,151 million due to a
reduction from the previous year in interest bearing debt, and ended up
with the payment of ¥18,370 million (US$163 million).
Consequently, taking the effects of exchange rate fluctuations into
account, cash and cash equivalents at the end of 2017 increased ¥20,648
million to ¥76,833 million (US$680 million) over the end of the previous year.

Financial Position
Total Assets
Total assets at the end of 2017 rose ¥92,029 million from the end of theprevious year, to ¥1,024,727 million (US$9,068 million), due mainly tothe increase in notes and accounts receivable, inventories, and property,
plant and equipment resulting from the acquisition of a graphite
electrode company. Cash and deposits increased ¥7,334 million from theend of the previous year to ¥77,248 million (US$684 million).
Net property, plant and equipment increased ¥18,765 million to¥505,900 million (US$4,477 million), due mainly to the recent consolidationof SHOWA DENKO CARBON Holding GmbH. Total investments and otherassets increased by ¥3,000 million, to ¥113,486 million (US$1,004 million),due partly to the appreciation in the market valuation of investment securities.

Total Net Assets

Interest Bearing Debt

Cash Flows from Operating Activities(Billions of yen)
400

(Billions of yen)
400

(Billions of yen)
80

300

350

60

200

300

40

100

250

20

0

2013

2014

2015

2016

2017

0

2013

2014

2015

2016

2017

0

2013

2014

2015

2016

2017

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 this March 29, 2018. 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) Inorganics(3) Aluminum
The Group imports a large amount of aluminum ingots 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 ofthose industries, which are beyond our control, can substantially affectsuch businesses.

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 invest its 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 form unprofitable businesses andrestructuring of affiliated companies, the Group’s performance andfinancial conditions can be affected.

2. ‌Unexpected fluctuations in financial conditions
and cash flows
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.

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

(3) Employees’ severance indemnities(4) HD media
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

SHOWA DENKO K.K.

(5) Overseas operations(1) Substantial fluctuations in exchange rates

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.

22

rates sharply fluctuate, the Group’s performance and financial conditions
can be affected.

ANNUAL REPORT 2017

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&A. 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 aneffort to minimize any risk factors pertaining to the suspension ofoperations 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, etc., the Group’s reputation could be damaged. The Groupmay incur substantial costs in dealing with the situation and may losebusiness 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 not directly influenced,
the Group’s production activities may be restricted by trouble withprocurement or disruption of supply chains due to accidents at suppliers’sites or a natural disaster, or by a shortage of power supply. These factors
could affect the Group’s performance and financial 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
At December 31, 2017 and 2016
Thousands of
U.S. dollars (Note 4)

Millions of yen

2017

ASSETS2016

2017

Current assets
Cash and deposits (Notes 5 and 6)
Notes and accounts receivable (Notes 6 and 9)
Allowance for doubtful accounts¥

69,914$ 683,613

192,551

77,248157,846

1,703,992(2,849)(699)(25,216)
1,016,926¥

114,913

91,347

Deferred tax assets (Notes 3 and 12)

6,898

4,092

61,042Other current assets (Notes 6 and 8)

16,581

12,576

146,732

405,341

335,077

3,587,089

Inventories

Total current assets

Property, plant and equipment (Note 10)
Land (Note 18)

245,062

242,816

2,168,689

Buildings and structures

287,798

267,8892,546,887

Machinery, equipment and vehicles

900,779

791,398

7,971,499

Construction in progress

16,54849,575

146,438

1,450,187

1,351,678

12,833,513(944,287)(864,544)(8,356,525)

505,900

487,135

4,476,988

Investment securities (Notes 6, 7, and 10)

89,167

74,951

789,091

Long-term loans

1,217

6,922

10,770Net defined benefit asset (Note 11)

232

365

2,053

Deferred tax assets (Notes 3 and 12)

1,080

9,115

9,554

Other (Notes 6 and 8)

32,02027,940283,362

Allowance for doubtful accounts(10,229)(8,807)(90,526)

113,486

110,486

1,004,304¥1,024,727¥ 932,698$ 9,068,380

Less : Accumulated depreciation
Net property, plant and equipment

Investments and other assets

Total investments and other assets

Total assets
See notes to financial statements.

24

SHOWA DENKO K.K.

ANNUAL REPORT 2017

Thousands of
U.S. dollars (Note 4)

Millions of yen

LIABILITIES AND NET ASSETS

2017

2016

2017
$ 811,499

Current liabilities
91,699¥ 71,895

Current portion of long-term debt (Notes 6 and 10)

57,432

58,234508,250

Notes and accounts payable (Notes 6, 9, and 10)

171,719

143,556

1,519,642
65,260

Short-term debt (Notes 6 and 10)¥

Income taxes payable

7,374

3,890

Provision for repairs

4,143

38

36,661

Provision for bonuses

2,949

2,253

26,100

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

5

25

47

137

382

1,214

—

118

—

38,20630,402

338,110373,666

310,792

3,306,781

Long-term debt less current portion (Notes 6 and 10)

197,594

229,800

1,748,622

Deferred tax liabilities (Notes 3 and 12)

Provision for Niigata Minamata Disease
Other current liabilities (Notes 6, 8, and 12)
Total current liabilities
Noncurrent liabilities

12,7744,041

113,042

Provision for repairs

117

2,759

1,035

Provision for director retirement

—

73

—

Provision for stock payments (Note 3)

96

59

852
31,628Provision for business structure improvement

3,574

1,121

Provision for loss on guarantees

2,640

—

23,362

Net defined benefit liability (Note 11)18,96621,923

167,843

Deferred tax liabilities for land revaluation (Notes 3 and 18)

32,48833,144

287,507

Other noncurrent liabilities (Notes 6 and 8)

17,81417,754

157,646

286,064

310,675

2,531,539

1,243,925

Total noncurrent liabilities
Contingent liabilities (Note 16)
Net assets (Note 17)
Shareholders' equity
Capital stock
Authorized, 330,000,000 shares
Issued , 2017– 149,711,292 shares

140,564—

Issued , 2016– 149,711,292 shares—

140,564—

61,66362,033545,691

Retained earnings

96,14265,358850,814

Less: Treasury stock at cost, 2017– 7,187,545 shares(10,503)—(92,944)

Less: Treasury stock at cost, 2016– 7,192,815 shares—(10,502)—287,866

257,4532,547,486

Valuation difference on available-for-sale securities

16,547

4,519

146,433

Deferred gains or losses on hedges

3,781

320

33,464

Revaluation reserve for land (Note 18)

29,541

31,026

261,427

Foreign currency translation adjustments

15,452

14,239136,747

Remeasurements of defined benefit plans (Note 11)(4,716)(10,996)(41,732)

Total accumulated other comprehensive income

60,606

39,107536,340

Capital surplus

Total shareholders' equity
Accumulated other comprehensive income

Non-controlling interests

16,524

14,671

146,234

Total net assets

364,997311,2313,230,060¥1,024,727¥ 932,698$9,068,380

Total liabilities and net assets

25Consolidated Statements of Income
Showa Denko K.K. and Consolidated Subsidiaries
For the years ended December 31, 2017 and 2016
Thousands of
U.S. dollars (Note 4)

Millions of yen

2017

2016

2017

Net sales¥ 780,387¥ 671,159$6,906,077

Cost of sales (Note 20)602,778

544,994

5,334,317

177,609126,164

1,571,760

99,791

84,111

883,10277,81842,053

688,658

Interest and dividends income

1,893

1,641

16,755Equity in earnings (losses) of unconsolidated subsidiaries and affiliates (Note 21)(7,689)4,328(68,042)

408

72

3,611

Gross profit
Selling, general and administrative expenses (Notes 19 and 20)
Operating income
Other income (expenses)

Gain on sales of investment securities, net (Note 7)

(50)

(66)

(445)

Foreign exchange gains (losses)(2,791)(1,658)(24,702)

Rent income on noncurrent assets

1,381

1,506

12,225

880

808

7,787

Interest expenses(3,100)(3,231)(27,435)

Loss on retirement of noncurrent assets(5,310)(4,030)(46,990)

Impairment loss (Note 13)(7,204)(15,644)(63,753)

Gain on bargain purchase

3,115

686

27,571

Provision of allowance for doubtful accounts (Note 21)(2,648)—(23,433)

Provision for business structure improvement(2,656)(732)(23,506)

Provision for loss on guarantees (Note 21)(2,640)—(23,362)

Other, net(4,792)(8,205)(42,407)Total(31,202)(24,524)(276,128)

46,616

17,529412,531

8,053

3,168

71,264

Loss on valuation of investment securities (Note 7)

Gain (loss) on sales of noncurrent assets, net

Income before income taxes and non-controlling interests
Income taxes (Note 12)
Current
Deferred (Note 3)
Net income
Net income attributable to non-controlling interests
Net income attributable to owners of the parent

2,780

523

24,60035,783

13,838316,667

2,313

1,533

20,469¥ 33,470¥ 12,305$ 296,198

Yen

U.S. dollars (Note 4)

Per share amounts
Net income – primary
Net income – fully diluted
Cash dividends (applicable to the period)¥234.84¥86.27

—

—

—

80.00

—

0.71

Notes: ‌1. 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 2017 and 2016 were not disclosed because there were no dilutive shares.
Notes: 2. SDK determined the payment of the dividend of ¥30.00 (US$ 0.27) per share based on the record date of May 11, 2017.
This was done at the extraordinary general meeting of shareholders held on June 27, 2017, and is included in the dividends per share for the fiscal year ended December 31, 2017.
See notes to financial statements.

26

SHOWA DENKO K.K.

ANNUAL REPORT 2017$2.08

Consolidated Statements of Comprehensive Income
Showa Denko K.K. and Consolidated Subsidiaries
For the years ended December 31, 2017 and 2016
Thousands of
U.S. dollars (Note 4)

Millions of yen

2017

2016

2017

¥35,783¥13,838$316,667

Valuation difference on available-for-sale securities

12,133

516

107,369

Deferred gains or losses on hedges

3,479

629

30,791

Net income
Other comprehensive income:

—

1,824

—

Foreign currency translation adjustments

1,455(4,520)12,878Remeasurements of defined benefit plans, net of tax

6,294(6,167)55,700

22

41

197

Revaluation reserve for land

Share of other comprehensive income of unconsolidated subsidiaries
and affiliates accounted for using equity method¥23,384¥ (7,678)$206,937¥59,167¥ 6,160$523,604

Owners of parent

56,581

4,807

500,720

Non-controlling interests

2,586

1,353

22,884

Total other comprehensive income (loss) (Note 14)
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, 2017 and 2016
Thousands

Balance at December 31, 2015

Millions of yen

Number ofshares ofcapital stock

Capitalstock

CapitalsurplusRetainedearnings

1,497,113¥140,564¥62,221¥55,202

Valuation
Foreign
RemeasureDeferred
Nondifference
Revaluation
currency
Treasury
ments
gains
controllingon availablereserve fortranslation of definedstock
or losses
interests
for-salelandadjustments benefit planson hedges
securities¥(10,157)¥ (326)¥31,307¥18,611¥ (4,835)¥11,629¥308,142

Dividends from surplus

—

—

—

(4,285)

—

—

—

—

—

—

—

(4,285)

Net income (loss) attributable to owners of the parent

—

—

—

12,305

—

—

—

—

—

—

—

12,305Purchase of treasury stock

—

—

—

—

(345)

—

—

—

—

—

—

(345)

Disposal of treasury stock

—

—

(0)

—

0

—

—

—

—

—

—

0

Increase by increase of consolidated subsidiaries

—

—

—

70

—

—

—

—

—

—

—

70

Decrease by increase of consolidated subsidiaries

—

—

—

—

—

—

—

—

—

—

—

—

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

—

—

(188)

—

—

—

—

—

—

—

—

(188)

—

—

—

2,093

—

—

—

—

—

—

—

2,093

(1,347,402)

—

—

(27)

—

—

—

—

—

—

—

(27)

Reversal of revaluation reserve for land
Other
Net changes of items other than shareholders' equity

—

—

—

—

—

592

646

(281)

(4,372)(6,161)

3,042(6,535)

149,711¥140,564¥62,033¥65,358¥(10,502)¥4,519¥ 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

—

—

—

33,470

—

—

—

—

—

—

—

33,470Purchase of treasury stock

—

—

—

—

(11)

—

—

—

—

—

—

(11)

Balance at December 31, 2016

Disposal of treasury stock

—

—

0

—

10

—

—

—

—

—

—

10

Increase by increase of consolidated subsidiaries

—

—

—

229

—

—

—

—

—

—

—

229

Decrease by increase of consolidated subsidiaries

—

—

—

(97)

—

—

—

—

—

—

—

(97)

Change in treasury shares of 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)

1,214

6,281

1,854

23,353

149,711¥140,564¥61,663¥96,142¥(10,503)¥16,547¥3,781¥29,541¥15,452¥(4,716)¥16,524¥364,997

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

Balance at December 31, 2017

Thousands
Number ofshares ofcapital stock
Balance at December 31, 2016

Thousands of U.S. dollars (Note 4)
Capitalstock$ 548,968$ 578,390$ (92,938)$ 39,987$ 2,835$ 274,565$ 126,006$ (97,312)$ 129,831$ 2,754,256

Dividends from surplus

149,711 $ 1,243,925———(37,916)

—

—

—

—

—

—

—

(37,916)

Net income (loss) attributable to owners of the parent

—

—

—

296,198

—

—

—

—

—

—

—

296,198

Purchase of treasury stock

—

—

—

—

(98)

—

—

—

—

—

—

(98)

Disposal of treasury stock

—

—

0

—

91

—

—

—

—

—

—

91

Increase by increase of consolidated subsidiaries

—

—

—

2,022

—

—

—

—

—

—

—

2,022

Decrease by increase of consolidated subsidiaries

—

—

—

(856)

—

—

—

—

—

—

—

(856)

Change in treasury shares of parent arising fromtransactions with non-controlling shareholders——(3,277)

—

—

—

—

—

—

—

—

(3,277)

Reversal of revaluation reserve for land

—

—

—

13,152

—

—

—

—

—

—

—

13,152

Other

—

—

—

(175)

—

—

—

—

—

—

—

(175)

—

—

—

—

—

106,446

30,629(13,137)

10,741

55,58016,403

206,663

149,711 $ 1,243,925 $ 545,691$ 850,814$ (92,944) $ 146,433$ 33,464$ 261,427$ 136,747

Net changes of items other than shareholders' equity
Balance at December 31, 2017
See notes to financial statements.

28¥3,927Total
net assets

SHOWA DENKO K.K.

ANNUAL REPORT 2017

$ (41,732) $ 146,234 $ 3,230,060

Consolidated Statements of Cash Flows
Showa Denko K.K. and Consolidated Subsidiaries
For the years ended December 31, 2017 and 2016
Thousands of
U.S. dollars (Note 4)

Millions of yen

2017

2016

2017

¥46,616¥ 17,529$ 412,531

38,454
7,204
(12)
2,757
(10,610)(1,893)
3,100
7,689
(358)
5,310
(880)
(23,253)(12,005)
10,172
2,089

38,761
15,644(11)(6,441)
6,744(1,641)
3,231(4,328)
(6)
4,030
(808)
(2,380)20,112(10,315)(10,044)

340,30363,753(106)
24,394(93,889)(16,755)
27,43568,042(3,165)
46,990(7,787)(205,781)(106,235)
90,021
18,48574,38170,076658,235

4,410(2,828)(8,679)5,565(3,227)(3,466)39,030(25,029)(76,804)

67,28468,949595,432(9,606)23,268(38,872)
1,067(1,646)15,121(14,910)(754)(1,045)609(3,145)(29,438)
25,287(38,317)
1,724(3,163)173(2,132)(1,231)(4,077)322(2,903)(85,009)205,908(343,999)
9,441(14,565)
133,811(131,945)(6,676)(9,252)
5,386(27,830)(29,914)(53,754)(264,729)

19,921
22,328(44,813)—(10,000)(4,277)(1,648)118(7,242)42,288(49,273)
17,000(10,000)(4,267)(376)(1,350)176,295
197,590(396,574)—(88,496)(37,848)(14,581)1,044

Net cash provided by (used in) financing activities(18,370)(13,220)(162,570)

Effect of exchange rate changes on cash and cash equivalents

953

(523)

8,434

Net increase (decrease) in cash and cash equivalents

19,952

1,453

176,567

Cash and cash equivalents at beginning of the year

56,18654,597497,217

696

136

6,158

¥76,833¥ 56,186$ 679,942

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 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 noncurrent assets
Loss (gain) on sales of noncurrent 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
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 scope of consolidation (Note 5)
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
Cash flows from financing activities
Net increase (decrease) in short-term debt
Proceeds from long-term loans payable
Repayments of long-term loans payable
Proceeds from share issuance of bonds
Redemption of bonds
Cash dividends paid
Cash dividends paid to non-controlling shareholders
Other, net

Increase in cash and cash equivalents resulting from newly consolidated subsidiaries
Cash and cash equivalents at end of the year (Note 5)
See notes to financial statements.

29

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

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

2. SUMMARY‌
OF SIGNIFICANT ACCOUNTINGPOLICIES(a) Principles of Consolidation
The consolidated financial statements for the years ended
December 31, 2017 and 2016 include the accounts of the Company
and its 62 and 48, 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 are recorded
based on fair value in the accompanying consolidated financial
statements.
Goodwill is amortized on a straight-line basis over a period
during which the effect of such goodwill lasts but does not exceed
20 years from booking. In addition, negative goodwill arising frombusiness combinations prior to April 1, 2010 is amortized on astraight-line basis over a period during which the effect of suchnegative goodwill lasts but does not exceed 20 years from booking.
(b) Investments in Unconsolidated Subsidiaries and Affiliates
The Company applied the equity method of accounting forinvestments in 2 unconsolidated subsidiary in 2017 and 2 that ofin 2016, and 9 affiliates in 2017 and 10 affiliates in 2016.
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 2017

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.
(d) Cash and Cash Equivalents
Cash and cash equivalents in the consolidated statements of cash
flows are composed of cash on hand, bank deposits available forwithdrawal on demand and short-term investments with original
maturities of three months or less and minor risk of value fluctuation.
(e) Securities
Debt securities that are intended to be held to maturity (“heldto-maturity debt securities”) are stated at amortized cost on thebalance sheets. Available-for-sale securities with available fairmarket values are stated at fair market values. Unrealized gains
and unrealized losses on these available-for-sale securities arereported, net of applicable income taxes, as a separate componentof the net assets.
Realized gains or losses on sale of the available-for-sale securities
are computed using primarily the moving-average cost.
Available-for-sale securities with no available fair market values
are stated primarily at 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 computed by
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 with aresidual value guarantee, the contracted residual value is considered
to be the residual value for financial accounting purposes.
Please note that finance lease transactions, other than those
involving the transfer of ownership and which commenced on or
before December 31, 2008, are accounted for by the same methods
as for operating lease transactions.
(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.

such an actuarial loss is determined on a straight-line basis overcertain periods (mainly 12 years) within the average remaining
service periods.
Past service costs are amortized on a straight-line basis overcertain periods (mainly 12 years) within the average remaining
service periods.
(3) Application of a simplified method to small businesses
For the calculation of liabilities concerning retirement benefits
and retirement benefit expenses, some consolidated subsidiaries
have adopted a simplified method, which deems term-end
amounts payable for voluntary retirement related to retirement
benefits as retirement benefit obligations.
(r) Income Taxes
Income taxes consist of corporation, enterprise, and inhabitants
taxes. The provision for income taxes is computed based on thepretax income of each of the Company and its consolidated
subsidiaries with certain adjustments required for consolidationand tax purposes. The asset and liability approach is used torecognize deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
(Valuation allowances are recorded to reduce deferred tax assets
based on the assessment of the realizability of the tax benefits.)
Application of the Consolidated Taxation System
The Company and certain domestic subsidiaries adopt theconsolidated taxation system.

(q) 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 retirement benefit
obligations, is done on the benefit formula basis.

(s) Derivative Financial Instruments and Hedge Accounting
The Company and certain subsidiaries state all derivative
financial instruments at fair value and recognize changes in fairvalue as gains or losses unless the derivative financial instruments
are used for hedging purposes.
If the derivative financial instruments meet certain hedging
criteria, the Company and certain subsidiaries defer recognitionof gains or losses resulting from changes in fair value of derivative
financial instruments until the related gains or losses on hedged
items are recognized.
However, when forward exchange contracts meet certain
hedging criteria, the hedged items are stated by the forward
exchange 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 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.

(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(t) Reclassifications
Certain reclassifications have been made in the 2016 financial
statements to conform to the presentation of 2017.

(o) Provision for Niigata Minamata Disease
To provide for lump-sum payments pursuant to the Special
Measures Law Regarding Relief to Persons Suffering from
Minamata Disease and Regarding Solutions to the Minamata
Disease Problem, the Company makes a provision in the
expected amount of such payments.
(p) Provision for loss on guarantees
To provide for loss on guarantees, the Company makes aprovision in the expected amount of such losses based on thefinancial conditions of the guaranteed companies.

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 acertain portion of the points, an amount of money corresponding
to the prevailing market price of the Company’s shares will be
paid to any director 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 beacquired by the trust using the entrusted funds and separately
managed as trusted 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 sheet 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 ¥337 million and
300,000 shares at the end of the fiscal year ended December 31,
2016, and ¥327 million and 291,000 shares at the end of the fiscal
year ended December 31, 2017, respectively.
(b) ‌Application of Implementation Guidance on
Recoverability of Deferred Tax Assets
The Company applied the “Implementation Guidance on
Recoverability of Deferred Tax Assets” (ASBJ Guidance No.26,
issued on March 28, 2016) effective from the year ended
December 31, 2017.

4. 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

32

SHOWA DENKO K.K.

ANNUAL REPORT 2017

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 ¥113.00 to US$1.00, the approximate
rate of exchange at December 31, 2017. The inclusion of such U.S.
dollar amounts is solely for the convenience of readers; it does
not carry with it any implication that yen amounts have been or
could be converted into U.S. dollars at that rate.

5. CASH FLOW STATEMENTS(a) Cash and cash equivalents
Cash and deposits as of December 31, 2017 and 2016 on the
consolidated balance sheets and cash equivalents at December
31, 2017 and 2016 on the consolidated statements of cash flows
were reconciled as follows:
Millions of yen

Cash and deposits

2017

2016

2017

¥ 77,248¥ 69,914$ 683,613(415)(13,728)(3,671)¥ 76,833¥ 56,186$ 679,942

Original maturities more than three months
Cash and cash equivalents

Thousands of
U.S. dollars(b) Assets‌and liabilities of newly consolidated subsidiaries
through acquisition shares
Breakdown of the major assets and liabilities of the Company’s
newly consolidated subsidiary obtained through a share acquisition
A breakdown of the major assets and liabilities at the time of theinitial consolidation of SHOWA DENKO CARBON Holding GmbHand its ten subsidiaries, obtained through a share acquisition, as
well as the acquisition values and expenditures for the acquisition(net amount) ware as follows:ofMillions of yen Thousands
U.S. dollars

Current assets

2017

2017

¥ 23,233$ 205,605

Noncurrent assets

35,276

312,179

Current liabilities(27,514)(243,490)

Noncurrent liabilities(8,589)(76,005)

Negative goodwill(3,115)(27,571)

Acquisition value of shares of the acquired company¥ 19,291$ 170,717

Accounts payables that are included in the acquisition value(3,015)(26,684)

Cash and cash equivalents of the acquired company(1,535)(13,581)¥ 14,741$ 130,452

Less: Expenditures for the acquisition

6. FINANCIAL INSTRUMENTS(a) Overview(1) Management policy relating to financial instruments
The Companies finance necessary long-term funds by bank loans
and bond issues following the capital investment plans andfinance short-term operating funds by bank loans and commercial
paper. Temporary excess funds are invested exclusively infinancial 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 derivativetransactions for speculative purposes.
(2) Types of financial instruments and related risks
Operating receivables, such as notes and accounts receivable,
are exposed to credit risk. Foreign-currency-denominatedaccounts receivable incurred through exports are exposed toforeign currency fluctuation risk. However, the Companies
hedge the risk by utilizing forward exchange contracts, currency
options, and currency 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 followinginternal rules that set out the foreign currency risk management
principles. Short-term debt and commercial paper are mainly
used to finance short-term operating funds, and long-term debts
and bonds are mainly used to finance equipment funds. Sincesome of long-term debt is made up of variable interest rate loans,
it is exposed to interest rate fluctuation risk. However, interest
rate swaps are used for most loans to hedge the risk.
The Companies utilize derivative transactions, such as forward
exchange contracts, currency options, and currency swaps, tohedge the foreign currency fluctuation risk of operating receivables
and payables 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 transactions are utilized to hedge the market
fluctuation risk.
(3) Risk management relating to financial instruments(i) ‌Credit risk management (risk of default by the counterparties)
The Company follows internal rules that set out accounts receivable
management principles. The compliance department works withthe sales division in each sector and monitors the customers’ credit
conditions periodically and reviews the sales policy checking thesales volume and balances. The Company takes measures toobtain information on and minimize the credit risk that may arise
due to the deterioration in the financial condition of theircustomers. Consolidated subsidiaries monitor their customers’
financial and credit conditions based on their internal rules.
The held-to-maturity debt 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, 2017 is disclosed

as the balance sheet amount of financial instruments exposed tocredit risk.
(ii) ‌Market risk management (risk of fluctuations in foreign
currency and interest rates)
For operating receivables and payables and loans denominatedin foreign currencies, the Company and certain consolidated
subsidiaries utilize forward exchange contracts, currency options,and currency swaps to hedge some of the foreign currency
fluctuation risk, which is categorized by currency and maturity
date. The Company and certain consolidated subsidiaries utilize
currency swaps to hedge the interest rate fluctuation risk of loans.
For marketable securities and investment securities, theCompanies regularly review the fair value and issuers’ financial
conditions and review the Companies’ portfolio on an ongoingbasis, except for held-to-maturity debt securities, according tomarket conditions and the business relationships with counterparties.
The Company has internal management rules that set out theapproval authorities and procedures of the derivative transactions.
The derivative transactions are carried out based on theappropriate approver set out in the internal rules. For currencyrelated derivative transactions, each division and the treasury
department perform and manage transactions and report to thedirector in charge periodically. For interest-related derivativetransactions, the treasury department performs and manages thetransactions and reports to the director in charge periodically.
For commodity-related derivative transactions, each divisionperforms and manages the transactions and reports to thedirector in charge periodically. Consolidated subsidiaries perform
and manage derivative transactions based on their internalmanagement standards.
(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 theirliquidity risk through similar procedures.
(4) ‌Supplemental explanation on fair value of financial
instruments
As well as the values being based on market prices, fair value offinancial instruments includes values which 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 8. DERIVATIVE FINANCIAL INSTRUMENTS, thecontract amount itself does not indicate market risk related toderivative transactions.

33

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries(b) Fair Value of Financial Instruments
At December 31, 2017 and 2016 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, 2017

Millions of yen

Book value

Fair value

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

176,021

176,021——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(3) Investment securities
Total assets(1) Notes and accounts payable-trade—(4) Accounts payable-other

67,28767,287—(5) Long-term debt less current portion

197,594

197,260(335)

Total liabilities¥ 534,775¥ 534,507¥ (268)Derivative transactions*

¥

¥

¥

5,354

5,354

—

Millions of yen

Year ended December 31, 2016

Book value

Fair value

Difference(1) Cash and deposits¥ 69,914¥ 69,914¥ —(2) Notes and accounts receivable-trade143,816

143,816—(3) Investment securities

44,184

44,184—¥257,914¥257,914¥ —Total assets(1) Notes and accounts payable-trade¥104,005¥104,005¥ —(2) Short-term debt

71,89571,895—(3) Current portion of long-term debt

58,23458,352

118(4) Accounts payable-other

53,79053,790—(5) Long-term debt less current portion

229,800

230,003203

Total liabilities¥517,724¥518,045¥ 320

Derivative transactions*

¥

¥

¥ —

Year ended December 31, 2017

381

381

Thousands of U.S. dollars

Book value

Fair value

Difference(1) Cash and deposits$ 683,613$ 683,613$(2) Notes and accounts receivable-trade

1,557,704

1,557,704—

Derivative transactions
Refer to Note 8. DERIVATIVE FINANCIAL INSTRUMENTS.
Notes: 2. ‌Financial instruments for which fair value is extremely difficult todetermine

Non-listed equity securities

2017

2016

2017

¥28,387¥30,767$251,215

These securities are not included in the above Investment
securities, as there was no quoted market value, estimating thefuture cash flows is deemed to be practically impossible and it isextremely difficult to determine the fair value.
Notes: 3. ‌The redemption schedule for financial assets and securities withmaturities
Year ended December 31, 2017

Millions of yen

Due in 1 year Due after 1 year Due after 5 years
or less
through 5 years through 10 years—

Due after
10 years

537,876

537,876$2,779,193$—$1,068,693$1,068,693$—(2) Short-term debt

811,499

811,499—(3) Current portion of long-term debt

508,250

508,841592(4) Accounts payable-other595,458

595,458—

1,748,622

1,745,661(2,962)

Total liabilities$4,732,522$4,730,152$(2,370)

Cash and deposits¥ 69,914¥—¥—

Derivative transactions*

$

$

$

Notes and accounts receivable-trade143,802

14——¥213,716

¥ 14

¥—

¥—

Total assets(1) Notes and accounts payable-trade(5) Long-term debt less current portion

47,38547,385—

Thousands of
U.S. dollars

Millions of yen$2,779,193(3) Investment securities—*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 sincethese are scheduled to be settled in a short period of time.
Investment securities
Fair value of these securities is based on the price on stock
exchanges. Refer to Note 7. SECURITIES regarding thesecurities categorized by holding purposes.

34

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 sincethese are scheduled to be settled in a short period of time.
Current portion of long-term debt and Long-term debt (includedin the above Long-term debt less current portion)
The fair value is measured as the net present value of
estimated cash flows by discounting the principal and interest
value using the interest rate applied to the new loans. Part ofthe long-term loans are variable rate loans, and they are
subject to special treatment of interest rate swaps (refer toNote 8. DERIVATIVE FINANCIAL INSTRUMENTS); the fair value ismeasured as the net present value of estimated cash flows by
discounting the total amount of principal and interest
processed as interest rate swaps using the interest rateapplied to the new loans.
Current portion of bonds (included in the above Current portionof long-term debt) and Bonds (included in the above Long-term
debt less current portion)
As for bonds with short maturities, the book value is deemed
to approximate the fair value since these are scheduled to besettled in a short period of time. For others, fair value is basedon the market prices.

SHOWA DENKO K.K.

ANNUAL REPORT 2017

Cash and deposits¥ 77,248¥—¥—

Notes and accounts receivable-trade

176,021———¥253,269

¥—

¥—

¥—

Total

Millions of yen

Year ended December 31, 2016

Due in 1 year Due after 1 year Due after 5 years
or less
through 5 years through 10 years

Total

¥—

Year ended December 31, 2017

Due after
10 years¥—Thousands of U.S. dollars

Due in 1 year Due after 1 year Due after 5 years
or less
through 5 years through 10 years

Due after
10 years$ 683,613$—$—

Notes and accounts receivable-trade 1,557,704

—

—

—

$2,241,317

$—

$—

$—

Cash and deposits
Total

$—

Notes: 4. The scheduled maturities of bonds and long-term debt after December 31, 2017 and 2016
Year ended December 31, 2017

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

¥ 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¥41,210Due 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, 2016

(1) Short-term debt

¥ 71,895(2) Long-term debt

58,23457,80841,29329,227

41,676

59,796¥130,129¥ 57,808¥ 41,293¥ 29,227¥ 41,676¥ 59,796

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

¥

—

¥

Year ended December 31, 2017

—

¥

—

¥

—

¥

—

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

$ 811,499(2) Long-term debt

508,250

366,425

279,726

422,451

315,327

364,693$1,319,749$366,425$279,726$422,451$315,327$364,693

Total

—

—

—

—

—

7. SECURITIES(a) Available-for-sale securities
Year ended December 31, 2017(b) Available-for-sale‌
securities sold in the years ended
December 31, 2017 and 2016:

Millions of yen

Book value Acquisition cost Difference
Available-for-sale securities whose bookvalue exceeds their acquisition cost
Equity securities
Available-for-sale securities whose bookvalue is less than their acquisition cost
Equity securities
Total¥ 54,675¥ 29,211¥ 25,465

Total
Year ended December 31, 2017

6,104

6,431

(326)

¥ 60,780¥ 35,641¥ 25,138

Millions of yen

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

Gross gain

Gross loss

¥ 1,116

¥ 218

¥ (3)

¥ 1,116

¥ 218

¥ (3)

Millions of yen

Year ended December 31, 2016

Sales
Equity securities
Total

Gross gain

Gross loss

¥ 30

¥ 26

¥—

¥ 30

¥ 26

¥—

Year ended December 31, 2017

¥ 24,315¥ 14,341¥ 9,974
Equity securities

19,86922,027(2,158)¥ 44,184¥ 36,368¥ 7,816

Thousands of U.S. dollars

Book value Acquisition cost Difference
Available-for-sale securities whose bookvalue exceeds their acquisition cost
Equity securities

Equity securities
Total

Book value Acquisition cost Difference

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

Millions of yen

Sales

Year ended December 31, 2016

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

Year ended December 31, 2017

$483,851$258,501$225,350

54,021

56,909(2,888)$537,872$315,410$222,462

Total

Thousands of U.S. dollars

Sales

Gross gain

Gross loss

$ 9,877$ 1,927$ (27)$ 9,877$ 1,927$ (27)(c) Impairment of securities
For the year ended December 31, 2016, the Companies recorded
an impairment loss of ¥55 million on available-for-sale securities
with fair market values. For the year ended December 31, 2017,
there were no impairment losses.
Securities are deemed to be “substantially declined” when
their fair values have declined 30% or more. When their fairvalues have declined 50% or more, the impairment losses arerecorded on those securities. When their fair values have declined
between 30% and 50%, the impairment losses are recorded on
those securities unless such values are considered to be
recoverable on an individual basis.

35

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

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

Thousands of U.S. dollars

2017

2017

2016

Contract Contract
Valuation Contract Contract
Valuationamount Fair value gain
amount Fair value gain
amount over(loss) amount over(loss)
1 year
1 year(1) Currency related:
Forward exchange contracts:
BuyingU.S. Dollar
Selling
U.S. Dollar
Euro(2) Interest rate related:
Interest rate swaps:
Receipt-variable rate/
Payment-fixed rate¥

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

—

¥—

¥ —

¥ —

¥ 4

¥—

¥ (0)

¥ (0)

$

—

$—

$

¥ 625
5,613

¥—
—

¥ (2)
(113)

¥ (2)
(113)

¥616
42

¥—
—

¥(39)
(2)

¥ (39)(2)$ 5,535
49,674$——$ (16)(1,000)$ (16)(1,000)

¥

¥—

¥ —

¥ —

¥442

¥—

¥ (1)

¥ (1)

$

$—

$

$

—

—

—

$

—

—

—

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 thequoted price obtained from the financial institutions.

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

2017(1) Currency related:
Principle method
Forward exchange contracts:
BuyingU.S. Dollar
Euro
Selling
U.S. Dollar
Euro
Allocation method
Forward exchange contracts:
BuyingU.S. Dollar
Euro
Canadian Dollar
Selling
U.S. Dollar
Euro
Yuan Renminbi
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:
BuyingSelling

Contract
amountContract
amountover 1 year

¥ 7,861
29
9,108
306

¥ 3,21253
3

Thousands of U.S. dollars

2017

2016
Fair value

Contract
amountContract
amountover 1 year

¥ 1,985—¥ 118
0¥ 8,680
5

—
—

29
(3)

11,880211———¥16,1573————

13,307
1,567
1,296

—
—
—

¥

—
—
—

¥

Fair value

Contract
amountContract
amountover 1 year

Fair value¥ 1,250—¥ 154
0$ 69,566
260$ 17,565—$ 1,045
1

—
—

(842)
(5)

80,602
2,711

—
—

257
(26)

—
—
—

$ 28,423
472
25

—
—
—

138,210
7,204
5,666

—
—
—

¥

—
—
—

¥

$

—
—
—

$

—
—
—

15,618
814
640

—
—
—

—
—
—

¥ 10,400¥ 6,900¥—¥10,400¥10,400¥—$ 92,035$ 61,062$—¥ 25,579¥ 7,181¥—¥39,175¥29,990¥—$ 226,363$ 63,549$—¥ 21,760
2,093¥ 11,367—¥5,479(154)¥23,470
1,792¥16,392—¥ 1,118(4)$ 192,562
18,521$ 100,590—$ 48,488(1,359)Notes: 1. Main‌
items hedged by forward exchange contracts are accounts payable for buying, accounts receivable for selling and long-term debt by interest
rate swaps. Main items hedged by aluminum forward transactions are aluminum metal transactions.
Notes: 2. Fair value calculation method:
Fair values of forward exchange contracts are stated by the forward exchange rates. Fair values of currency swaps are measured at the quoted
price obtained from the financial institutions. Fair values of aluminum forward transactions are stated by forward quotations of the London
Metal Exchange.
Notes: 3. ‌Fair values of forward exchange contracts and currency swaps that meet allocation method criteria are reflected in the fair values of accounts receivable,accounts payable and debts of their hedged items.
Notes: 4. ‌Fair values of interest rate swaps that meet special treatment criteria are reflected in the fair values of long-term debt of their hedged item.

36

SHOWA DENKO K.K.

ANNUAL REPORT 2017

9. EFFECT‌
OF YEAR-END DATE ON FINANCIAL
STATEMENTS

At December 31, 2017 and 2016, the assets pledged as collateralfor long-term debt were as follows:

The year-end date of 2017, namely, December 31, 2017, was a bankholiday. Although notes receivable and payable maturing on thisdate were accordingly settled on January 4, 2018, the Companies
accounted for those notes in their financial statements as if they had
been settled on the maturity date.
Notes outstanding at December 31, 2017 and 2016 dealt with in
the above-mentioned manner were as follows:
Thousands of
U.S. dollars

Millions of yen

2017

2017

2016

Notes receivable

¥938

¥726

$8,301

Notes payable

891

816

7,881

Thousands of
U.S. dollars

Millions of yen

2017

2016

2017

Investment securities
Property, plant and equipment, lessaccumulated depreciation¥¥ 3,786

144,945

144,501

1,282,699

Total¥145,367¥148,288$1,286,434

¥

320
202

¥

400
121

$

2,832
1,788

¥

522

¥

521

$

4,619

Assets pledged as collateral

Secured short-term debt and longterm debt
Long-term debt (includes due
within 1 year)
Notes and accounts payable-trade
Total

422

$

3,735

10. SHORT-TERM DEBT AND LONG-TERM DEBT

11. RETIREMENT BENEFITSAt December 31, 2017 and 2016, the short-term debt of theCompanies consisted of the following:(a) Defined-benefit‌pension plan, includes the plans using
the simplified method(1) ‌Reconciliation of opening and closing balance of retirement
benefit obligation for the years ended December 31, 2017and 2016 was as follows:

Thousands of
U.S. dollars

Millions of yen

Bank loans at the average interest rateof 0.67%
Commercial paper
Total

2017

2016

2017

¥86,699¥66,895$767,251

5,000

5,000

44,248¥91,699¥71,895$811,499

At December 31, 2017 and 2016, the long-term debt of theCompanies consisted of the following:Thousands of
U.S. dollars

Millions of yen

2017—¥ 10,000

0.63% bonds due 2021

15,00015,000132,743

0.20% bonds due 2021

10,00010,00088,4960.734% bonds due 2022

10,00010,00088,496

0.50% bonds due 2026
Loans principally from banks andinsurance companies due 2018 to 2074
at the average interest rate of 0.93%

7,000

7,000

61,947

213,026

236,035

1,885,190

255,026

288,035

2,256,871

0.63% bonds due 2017

Less: current portion
Total

¥

2017

2016
$

—

(57,432)(58,234)(508,250)¥ 197,594¥229,800$1,748,622

The aggregate annual maturities of the noncurrent portion of
long-term debt were as follows:
Years ending December 31

ofMillions of yen Thousands
U.S. dollars

2019¥ 41,406$ 366,425

2020

31,609279,7262021

47,737422,4512022

35,632

315,3272023 and thereafter

41,210364,693¥ 197,594$1,748,622

Total

Thousands of
U.S. dollars

Millions of yen

Balance of retirement benefit obligation
at the beginning of year

2017

2016

2017

¥ 99,169¥ 92,752$ 877,602

Service cost

2,928

2,346

25,912

Interest cost

219

657

1,938

Actuarial gain and loss

(2,418)

9,513(21,398)

Retirement benefits paid

(6,979)(6,824)(61,761)

24

(686)

212

Increase from changes in scope of
consolidation

8,943

1,378

79,142

Other

(732)

33

(6,478)¥ 101,154¥ 99,169$ 895,168

Past service cost

Balance of the retirement benefit
obligation at the end of year(2) ‌Reconciliation of opening and closing balance of plan assets forthe years ended December 31, 2017 and 2016 was as follows:
Thousands of
U.S. dollars

Millions of yen

Balance of plan assets at the beginningof year

2017

2016

2017

¥ 77,613¥77,587$ 686,841

Expected return on plan assets

1,583

1,634

14,009Actuarial gain and loss

4,654

(1,021)

41,186

Contribution from employer

4,519

4,613

39,991Retirement benefits paid

(7,270)(6,695)(64,336)

Increase from changes in scope of
consolidation

1,372

1,458

12,142

(52)

38

(460)

¥ 82,419¥77,613$ 729,372

Other
Balance of plan assets at the end of year

(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, 2017 and 2016 was as follows:37

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

Thousands of
U.S. dollars

Millions of yen

Unfunded retirement benefit obligations

2017¥ 98,015(82,419)
15,5963,139

2016¥ 95,994(77,613)
18,381
3,176

2017$ 867,388(729,372)
138,016
27,774

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

18,734

21,557

165,790

Net defined benefit liability
Net defined benefit asset

18,966(232)

21,923(365)

167,843(2,053)

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

18,734

21,557

165,790

Funded retirement benefit obligations
Plan assets(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.
(8) ‌Matters regarding the assumptions for actuarial calculations
Key assumptions for actuarial calculations as of December 31, 2017and 2016 were as follows:
Ratio

2017

(4) Retirement‌benefit expenses and the components of theamounts thereof for the years ended December 31, 2017and 2016 were as follows:
Thousands of
U.S. dollars

Millions of yen

Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial gain and loss
Amortization of past service cost2017
¥ 2,928219(1,583)
2,019
26

2016
¥ 2,346657(1,634)990
0

2017$ 25,912
1,938(14,009)
17,867230

Retirement benefit expenses related tothe defined-benefit pension plan

¥ 3,609¥ 2,360$ 31,938(5) Remeasurements of defined benefit plans
The components of items (before tax) reported underremeasurements of defined benefit plans for the years ended
December 31, 2017 and 2016 were as follows:
Thousands of
U.S. dollars

Millions of yen

2017
¥
(1)
(9,071)¥ (9,072)

Past service cost
Actuarial gain and loss
Total

2017
$
(12)
(80,276)$(80,288)2016¥ (102)
8,983¥ 8,882(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, 2017 and 2016 were as follows:
Thousands of
U.S. dollars

Millions of yen

Unrecognized past service cost
Unrecognized actuarial gain and loss
Total

2017
¥ (19)
6,895¥6,8762016¥ (18)
15,966¥15,9482017$ (168)61,018$ 60,850(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, 2017 and 2016 were as follows:
Ratio

Bonds
StocksGeneral accounts of life insurance company
Cash and deposits
Total

38

SHOWA DENKO K.K.

ANNUAL REPORT 2017

2017
30 %
47
21
2
100 %

2016
29 %
44
24
3
100 %

2016

Discount rate

Mainly 0.4% Mainly 0.2%

Long-term rate of expected return on plan assets

Mainly 2.0% Mainly 2.0%(b) Defined contribution pension plan
The amounts required to be contributed by consolidated
subsidiaries for the years ended December 31, 2017 and 2016 were¥443 million (US$3,920 thousand), and ¥314 million, respectively.

12. INCOME TAXES(a) At‌ December 31, 2017 and 2016, significant components
of deferred tax assets and liabilities were as follows:
Thousands of
U.S. dollars

Millions of yen

2017

2016

2017

¥ 15,218
10,643
10,616
7,031
4,360
3,789
1,676
1,307
693

¥ 13,915
18,815
7,894
5,079
6,655
884
131
869
703

$ 134,673
94,186
93,94762,221
38,58433,531
14,832
11,566
6,133

629
592
530
342

693
529
753
352

5,566
5,239
4,690
3,028

199
5,747

407
3,256

1,762
50,858Subtotal of deferred tax assets
Valuation allowance

63,373(46,471)

60,935(41,653)

560,823(411,248)

Total deferred tax assets

16,902

19,282

149,575(7,675)(2,498)(67,924)(4,991)(4,168)(3,524)(1,558)(44,168)(36,883)(1,981)(1,692)(1,699)(250)(17,531)(14,974)

Deferred tax assets:
Write-down of marketable andinvestment securities
Tax loss carryforwards
Impairment loss
Allowance for doubtful accounts
Net defined benefit liabillity
Depreciation and amortization
Deferred gains or losses on hedges
Provision for repairs
Provision for bonuses
Unrealized earnings from the sale of
fixed assets
Loss on valuation of inventories
Undetermined accrued liabilities
Write-down of golf club memberships
Deduction of foreign corporation tax
carried forward
Other

Deferred tax liabilities:
Valuation difference on available-for-salesecurities
Amount of revaluation from the book value
Special depreciation reserve
Foreign subsidiaries' undistributed
retained earnings
Deferred gains or losses on hedges
Reserve for advanced depreciation of
fixed assets
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)(207)(1,149)(21,863)¥ (4,961)(158)(1,830)(524)(10,168)(10,211) (193,478)¥ 9,071 $ (43,905)

(b) ‌The net deferred tax assets at December 31, 2017 and 2016
were included in the consolidated balance sheets as follows:
Millions of yen

2017¥ 6,898
1,080(165)(12,774)

Deferred tax assets — current
Deferred tax assets — noncurrent
Other current liabilities
Deferred tax liabilities — noncurrent

Thousands of
U.S. dollars

2016
2017
¥ 4,092 $ 61,042
9,115
9,554
(95)
(1,458)(4,041) (113,042)(c) ‌Significant items in the reconciliation of the normal income
tax rate to the effective at December 31, 2017 and 2016 wereas follows:
Statutory tax rate
Differences of statutory tax rate in subsidiaries
Effect on the reexamination of recoverability
Consolidated adjustment for loss on valuation of investments
in capital of subsidiaries and associates, etc.
Effects of changes in the effective statutory tax rate, etc.
Deferred taxes on undistributed earnings of foreignsubsidiaries
Unrealized earnings from the sale of fixed assets
Other
Effective tax rate

2017
30.9 %
(4.2)
(1.2)

2016
33.1 %
(5.8)
(0.9)

(1.1)
(0.6)

(4.0)
1.2

0.6
0.1
(1.2)
23.2 %

(0.1)
0.0
(2.4)
21.1 %

Note: Amendment‌to the amount of deferred tax assets and deferred tax
liabilities due to a change in the income tax rate.
When the Tax Cuts and Jobs Act of 2017 became the law in the U.S.
on December 22, 2017, the federal corporate tax rate applicable to
the Company’s consolidated subsidiaries in the U.S. was reduced
from 35% to 21% for the consolidated fiscal year and subsequent
years. Since deferred tax assets and deferred tax liabilities arecalculated using the new federal corporate tax rate, income taxes–
deferred recorded in the current consolidated fiscal year fell by¥261 million (US$2,310 thousand).

13. IMPAIRMENT LOSSAt December 31, 2017, major impairment losses on fixed assets
were as follows:
Location

Major use

Asset category

Yokohama City,
Production
Kanagawa Prefecture facilities
Ichihara City,
Land of rent
Chiba refecture
Chichibu City,
Production
Saitama Prefecture facilities
Other
Total

Buildings andstructures, etc.
Land
Construction inprogress, etc.

ofMillions of yen Thousands
U.S. dollars¥2,312$ 20,459

2,311

20,453

1,555
1,027¥7,204

13,757
9,085$ 63,753

14. CONSOLIDATED‌STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)
Reclassification adjustments and tax effects for components ofother comprehensive income (loss) for the year ended December
31, 2017, were as follows:ofMillions of yen Thousands
U.S. dollars

Valuation difference on available-for-sale securities
Increase during the year
Reclassification adjustments
Amount before income tax effect
Income tax effect
Total
Deferred gains or losses on hedges
Increase during the year
Reclassification adjustments
Adjustments of acquisition cost of assets
Amount before income tax effect
Income tax effectTotal
Foreign currency translation adjustments
Increase during the year
Reclassification adjustments
Amount before income tax effect
Income tax effectTotal
Remeasurements of defined benefit plans, net of tax
Increase during the year
Reclassification adjustments
Amount before income tax effect
Income tax effect
Total
Share of other comprehensive income ofunconsolidated subsidiaries and affiliates
accounted for using equity method
Increase during the year
Reclassification adjustments
Total
Total other comprehensive income¥17,350(32)
17,318(5,186)¥12,133$153,542(281)
153,261(45,892)$107,369¥ 6,28060(1,296)
5,045(1,566)¥ 3,479$ 55,579
532(11,465)
44,646(13,855)$ 30,791¥ 1,455—
1,455—¥ 1,455$ 12,878—$ 12,878—$ 12,878¥ 7,027
2,045
9,072(2,778)¥ 6,294$ 62,190
18,09880,288(24,587)$ 55,700

22—¥
22¥23,384

$

¥

197
—
$
197
$206,937

15. 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 equipment for manufacturing
hard discs and steam-powered electric generation equipment(machinery and equipment)b) Intangible fixed assets: Software(2) Method of depreciation
The depreciation method of leased assets is described in Note 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (j) Leased Assets.
(b) Operating Leases as a Lessee
At December 31, 2017 and 2016, assets leased under noncapitalized
operating leases were as follows:
Future minimum lease payments for the remaining lease periods:

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

Thousands of
U.S. dollars

Millions of yen

Due within 1 year

2017

2016

2017

¥ 366

¥ 301

$ 3,242

2,147

2,460

19,004¥2,514¥ 2,761$ 22,246

Due over 1 year
Total(c) Operating Leases as a Lessor
At December 31, 2017 and 2016, noncancellable operating leasereceivables 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

2017

2016

2017

Due within 1 year

¥ 80

¥ 80

Due over 1 year

514

594

4,552

¥594

¥674

$5,256

Total

$ 704

16. CONTINGENT LIABILITIESAt December 31, 2017 and 2016, the Companies were guarantors
for the borrowings below. The guarantees were principally for
unconsolidated subsidiaries, affiliates and others.
Thousands of
U.S. dollars

Millions of yen

Guarantees

2017

2016

2017

¥1,509¥5,032$13,351

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.
The amount for 2016 in the above table included ¥3,963 million(US$34,019 thousand) of guarantee liabilities for PT. Indonesia
Chemical Alumina (ICA; an equity method affiliate owned 20% by
the Company). In addition to the guarantee liabilities, the Company
invested in and provided long-term loans to ICA as described
below. ICA did not pay back a loan due on December 15, 2016 toa syndicate of banks, and ICA was negotiating with them about
its request for rescheduling of debt. The above-mentioned
amount of guarantee liabilities (¥3,963 million, or US$34,019
thousand) was based on the Company’s investment ratio of 20% in
ICA, as agreed with the syndicate of banks.
Millions of yen

Investment securities¥4,109Long-term loans¥6,889

Other

1,134

Total

17. NET ASSETSThe Corporation Law of Japan (the “Law”) provides that the entire

SHOWA DENKO K.K.

18. REVALUATION RESERVE FOR LANDThe Company and some of its consolidated subsidiaries revalued
the land they own for business in accordance with the Law
concerning Revaluation of Land. The difference between therevalued amount and the book value, after the deduction of
applicable tax, is stated as a land revaluation reserve. The
revaluation was conducted using methods stipulated in theordinance for enforcement of the law, specifically, the method in
Item 4 of Article 2 (Reasonable Adjustment of the Appraised
Value Relating to Land Price Tax), and the method in Item 5 of
Article 2 (Estimation by Experts). The excess of the carrying
amount of the revalued land over the market value at December
31, 2017 was ¥66,722 million (US$590,462 thousand).

19. SELLING,‌GENERAL AND ADMINISTRATIVE
EXPENSES
Selling, general and administrative expenses for the years ended
December 31, 2017 and 2016 were summarized as follows:¥8,023

During the fiscal year ended December 31, 2017, ICA paid backloans due in December 2016, due in June 2017, and due in
December 2017.
In light of ICA’s financial condition, the Company posted a provision
for loss on guarantees of ¥2,640 million (US$23,362 thousand) for
the fiscal year ended December 31, 2017.

40

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 toadditional 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,
respectively, which are potentially available for dividends.
Additional paid-in capital and the legal earnings reserve areincluded in capital surplus and retained earnings, respectively.
The Law does not have a definition about the classification ofpaid-in capital between common stock and preferred stock.
Accordingly, the Company states its capital in the total amount
paid by issuing common stock and preferred stock.
The maximum amount that the Company can distribute as
dividends is calculated based on the unconsolidated financial
statements of the Company in accordance with Japanese laws
and regulations.

ANNUAL REPORT 2017

Millions of yen

Thousands of
U.S. dollars

2017

2016

2017

Freight¥26,612¥20,379$235,502

Employees' compensation

21,582

19,997

190,987

Other

51,59743,735456,613¥99,791¥84,111$883,102

Total

Research and development expenses included in selling, generaland administrative expenses for the years ended December 31,
2017 and 2016 were ¥18,419 million (US$163,000 thousand) and¥17,304 million, respectively.

20. RESEARCH AND DEVELOPMENT
Research and development costs included in manufacturing costs,
selling, general and administrative expenses for the years ended
December 31, 2017 and 2016 were ¥18,539 million (US$164,059
thousand) and ¥17,313 million, respectively.

21. LOSSES‌FOR AFFILIATESThe Company discussed how to manage the alumina plant of PT.
Indonesia Chemical Alumina (ICA)—in which the Company holds 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 the two 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
thousands) 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 a resultof the above, the Company recorded losses including ¥2,648 million(US$23,433 thousands) in the provision of allowance for doubtful
accounts for the loans to ICA and ¥2,640 million (US$23,362
thousands) in the provision for loss on guarantees for guarantee
liabilities for ICA’s borrowings.

22. BUSINESS COMBINATION(a) Outline of the business acquisition(1) ‌Name of acquired company and business description
Name of acquired company: SGL GE Holding GmbH
Description of major businesses: Manufacture, research,development, and sales of graphite electrodes
The Company obtained approval for the share acquisition from the
U.S. competition regulators based, as a prerequisite for approval,
on the condition that the U.S. business of SGL GE be transferred toa third party.
To meet this condition, the Company transferred all shares of
SGL GE Carbon Holding LLC which is operating SGL GE’s businessin the U.S., to Tokai Carbon US Holdings Inc., a wholly owned
subsidiary of Tokai Carbon Co., Ltd.
(2) Background of the business acquisition
Low growth (around 1% per year) in global steel demand was predicted
and the business environment in the graphite electrode industry
remained challenging due to weak demand and severe competition.
Under these circumstances, the Company decided to increase
the competitiveness of its graphite electrode business through amerger with SGL GE, which had a highly cost-competitive businessin three key regions: Europe, the U.S. and Southeast Asia.
(3) Date of business acquisition:
October 2, 2017(4) Legal form of business acquisition:
Cash acquisition of shares(5) Name of the company following business acquisition:
SHOWA DENKO CARBON Holding GmbH (SGL GE Holding GmbHwas renamed SHOWA DENKO CARBON Holding GmbH at the sametime as the share acquisition.)(6) Ratio of voting rights after acquisition:
100%(7) Determination of the main reason for acquiring the company:
The Company obtained 100% of the voting rights through the cash
acquisition of shares.
(b) ‌Period of operational results of the acquired company includedin the consolidated financial statements of the Company
From October 1, 2017 to December 31, 2017(c) Acquisition cost and breakdown of the consideration
Millions of yen

Thousands of U.S. dollars

Cash¥ 19,291 (provisional)$ 170,717 (provisional)

Acquisition cost

¥ 19,291 (provisional)$ 170,717 (provisional)

Share transfer price of SGL GE Carbon Holding LLC’s shares is¥13,945 million (US$123,410 thousand) (provisional).
(d) ‌Breakdown and amount of principal acquisition-related expensesofMillions of yen Thousands
U.S. dollars

Advisory fees, etc.

¥ 2,594$ 22,958(e) ‌The amount of goodwill incurred, reasons for the goodwill
and method and period of amortization(1) ‌Gain on negative goodwill¥3,115 million (US$27,571 thousand)
The amount of goodwill is calculated provisionally since theallocation of the acquisition cost has not been completed.
(2) Reasons for goodwill
As the net amount of received assets and assumed liabilities exceeded
the share acquisition cost, the difference is accounted for as gain on
negative goodwill.
(f) ‌‌Amount of assets acquired and liabilities assumed on thebusiness acquisition date and their breakdown:ofMillions of yen Thousands
U.S. dollars

Current assets¥ 23,233$ 205,605

Noncurrent assets

35,276

312,179

Total assets¥ 58,510$ 517,784

Current liabilities¥ 27,514$ 243,490

Noncurrent liabilities

8,589

76,005

Total liabilities¥ 36,103$ 319,495

41

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries(g) ‌Allocation of acquisition cost
Since the valuation of assets and liabilities at fair value was notavailable at the end of the consolidated fiscal year ended
December 31, 2017, the allocation of the acquisition cost has notbeen completed. Therefore, the Company used a provisional
accounting treatment based on reasonable information available
at the time.

ofMillions of yen Thousands
U.S. dollars

Net sales¥ 28,093$ 248,613

48
(110)

421
(970)

Ordinary income
Net income attributable to owners of the parent(Method of calculation for the estimated amount)
The differences between net sales and profit and loss amounts wascalculated based on the assumption that the business acquisition
was completed at the date of the beginning of the consolidated
fiscal year, and net sales and profit and loss amounts as stated in
the consolidated statements of income of the acquired company
are defined as the estimated amount of impact.
This note has not received audit certification.

(h) ‌Estimated amount of impact and the method of calculation of
the business acquisition on the consolidated statements ofincome for the consolidated fiscal year ended December 31,
2017, assuming that the business acquisition was completed
on the date of the beginning of the consolidated fiscal year

23. SEGMENT INFORMATION(a) Information about sales, operating income, assets, and other items by reportable segment
Year ended December 31, 2017

Millions of yen

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Others

Total

Adjustments Consolidated¥ 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(55,067)—

251,128

148,758

123,064

73,442

105,439

133,624

835,454(55,067)

780,387¥ (8,357) ¥77,818

Sales
Outside customers
Inter-segment
Total
Operating income (loss)¥ 33,357¥ 16,474¥ 21,925¥¥ 146,608¥ 215,641¥ 144,939¥ 202,274¥ 169,561

6,850

8,460

9,598

5,463

5,356

1,614

37,341

1,113

38,454

—

(260)

12

8

228

(0)

(12)

—

(12)

11,148

2,301

—

1,789

—

340

15,578—15,578

2,836

9,627

11,242

7,781

8,022

1,154

40,662617

41,279Depreciation and amortization
Investments in unconsolidated subsidiaries
and affiliates
Increase in property, plant and equipment
and intangible assets

¥

6,697

¥

633 ¥

86,175— ¥ 780,387

AssetsAmortization of goodwill

7,089

¥

¥ 166,540 ¥ 1,045,563¥ (20,836) ¥ 1,024,727

Notes: 1. Adjustments are as follows:(1) ‌Elimination of intersegment transactions of ¥88 million (US$779 thousand) and total corporate expenses of ¥8,445 million (US$74,735 thousand)which were not allocated to any reportable segment were included in “Adjustments” for “Operating income” of ¥(8,357) million (US$(73,954) thousand).
Total corporate expenses principally consist of total corporate common research expenses which 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$267,566 thousand) which were not allocated to any reportable segment were included in “Adjustments” for “Assets” of ¥(20,836)
million (US$(184,390) thousand). 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 total corporate common research and development expenses.
Notes: 2. Amortization of negative goodwill was included in “Amortization of goodwill.”
Millions of yen

Year ended December 31, 2016

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Others

Total

Adjustments Consolidated

Sales¥180,178¥118,433¥115,748¥ 43,776¥ 90,715¥122,309¥671,159

5,605

16,096

4,713

7,094

7,860

6,431

47,800(47,800)—

185,783

134,529

120,461

50,87098,575

128,740

718,958(47,800)

671,159

Operating income (loss)¥ 20,690¥ 13,824¥ 15,015¥ (5,758)¥ 4,416¥623¥ 48,811¥ (6,758)¥ 42,053

Assets¥135,411¥205,555¥148,218¥152,976¥148,415¥159,833¥950,408¥ (17,710)¥932,698

5,715

7,350

12,946

4,087

5,678

1,600

37,377

1,384

38,761

—

(261)

12

8

228

1

(11)

—

(11)

10,793

2,167

—

5,820

—

288

19,067—

19,067

3,397

12,937

7,636

8,221

5,193

1,046

38,430846

39,276

Outside customers
Inter-segment
Total

Depreciation and amortization
Amortization of goodwill
Investments in unconsolidated subsidiaries
and affiliates
Increase in property, plant and equipment
and intangible assets¥—¥671,159

Notes: 1. Adjustments are as follows:(1) ‌Elimination of intersegment transactions of ¥100 million (US$858 thousand) and total corporate expenses of ¥6,657 million (US$57,147 thousand)which were not allocated to any reportable segment were included in “Adjustments” for “Operating income” of ¥(6,758) million (US$(58,014) thousand).
Total corporate expenses principally consist of total corporate common research expenses which are not attributable to any reportable segment.

42

SHOWA DENKO K.K.

ANNUAL REPORT 2017

(2) Elimination‌of intersegment receivables and payables and assets of ¥59,133 million (US$507,623 thousand) and total corporate assets of ¥41,422
million (US$355,584 thousand) which were not allocated to any reportable segment were included in “Adjustments” for “Assets” of ¥(17,710) million(US$(152,030) thousand). Total corporate assets principally consist of surplus funds of the Companies under management (in the form of cash anddeposits), deferred tax assets and assets related to total corporate common research and development expenses.
Notes: 2. Amortization of negative goodwill was included in “Amortization of goodwill.”Year ended December 31, 2017

Thousands of U.S. dollars

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Others

Total

Adjustments Consolidated$2,129,954$1,164,069$1,067,192$ 576,981$ 856,877$1,111,005$6,906,077

92,416

152,374

21,867

72,94776,212

71,505487,322(487,322)—

2,222,369

1,316,443

1,089,059

649,928

933,089

1,182,511

7,393,399(487,322)

6,906,077

Operating income (loss)$ 295,192$ 145,787$ 194,030$

59,263$5,603$ 762,612$ (73,954) $ 688,658

Assets$1,297,415$1,908,327$1,282,644$1,790,034$1,500,543$1,473,805$9,252,770$ (184,390) $9,068,380

60,61974,86584,93848,34847,401

14,283

330,455

9,849

340,303—(2,304)

104

75

2,019

(0)

(106)

—

(106)

98,65520,362—

15,828—3,009

137,854—

137,854

25,09985,195

99,486

68,85870,991

10,211

359,840

5,458

365,298

Sales
Outside customers
Inter-segment
Total

Depreciation and amortization
Amortization of goodwill
Investments in unconsolidated subsidiaries
and affiliates
Increase in property, plant and equipment
and intangible assets

62,738$$—$6,906,077(b) Information about geographical areas
Year ended December 31, 2017

Sales

Asia

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

Japan

Asia

OthersTotal¥430,639¥208,626¥31,893¥671,159

Year ended December 31, 2017

Sales

Millions of yen

Property, plant and equipment

Millions of yen

Year ended December 31, 2016

Sales

Year ended December 31, 2017

Millions of yen

Japan

Japan

OthersTotal¥402,889¥103,011¥505,900

Millions of yen

Year ended December 31, 2016

Property, plant and equipment
Year ended December 31, 2017

Thousands of U.S. dollars

Japan

Asia

OthersTotal$4,461,614$2,041,097$403,365$6,906,077

Japan

OthersTotal¥410,099¥77,035¥487,135

Thousands of U.S. dollars

Property, plant and equipment

Japan

OthersTotal$3,565,388$911,600$4,476,988

OthersElimination

Total(c) Information about impairment loss on property, plant and equipment by reportable segment
Year ended December 31, 2017

Millions of yen

Petrochemicals Chemicals
Impairment loss on assets

Electronics

Inorganics

Aluminum¥ 649¥ 3,945¥ 2,312¥2

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum¥ 210¥ 6,401¥ 133¥ 8,569

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum$ 34,908$ 20,459

$ 14

¥ 289

¥ 31

Year ended December 31, 2017

Impairment loss on assets¥—¥ 7,204

Millions of yen

Year ended December 31, 2016

Impairment loss on assets¥7

Others¥ 299

Elimination
¥—

Total
¥ 15,644

Thousands of U.S. dollars$ 2,562$ 5,748

Others$ 62

Elimination
$—

Total
$ 63,753

43

Notes to Financial Statements
Showa Denko K.K. and Consolidated Subsidiaries(d) Information about amortization of goodwill and unamortized balance by reportable segment
Year ended December 31, 2017

Millions of yen

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

¥—

¥ 48

¥ 44

¥ 8

¥ 282

¥ 28

¥—

¥ 410

—

186

288

46

2,660

148

—

3,328

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Amortization
Unamortized balance

OthersElimination

Total

Millions of yen

Year ended December 31, 2016

Amortization

OthersElimination

Total

¥—

¥ 47

¥ 44

¥ 8

¥ 282

¥ 29

¥—

¥ 411

—

232

332

55

3,006

175

—

3,801

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Unamortized balanceYear ended December 31, 2017

Thousands of U.S. dollars

Amortization
Unamortized balance

OthersElimination

Total

$—

$ 421

$ 392

$ 75

$ 2,494

$ 250

$ —

$ 3,632

—

1,649

2,548

410

23,5401,310—

29,456

Amortization of negative goodwill arose from business combinations prior to April 1, 2010 and its unamortized balance are as follows:Year ended December 31, 2017

Millions of yen

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Total

¥ 308

¥ 33

¥—

¥ 54

¥ 28

¥—

¥ 422

—

2,088

325

—

540

231

—

3,184

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Millions of yen

Year ended December 31, 2016

Amortization

OthersElimination

Total

¥—

¥ 308

¥ 33

¥—

¥ 54

¥ 28

¥—

¥ 422

—

2,396

358

—

593

259

—

3,606

Petrochemicals Chemicals

Electronics

Inorganics

Aluminum

Unamortized balanceYear ended December 31, 2017

Thousands of U.S. dollars

Amortization
Unamortized balance

Total

$ 288

$—

$ 475

$ 250

$—

$ 3,738—

18,478

2,878

—

4,774

2,045

—

28,174(b) Summary financial statements of significant affiliates
A significant affiliate as of December 31, 2017 was PT. Indonesia
Chemical Alumina (ICA), and summary of its financial statements
was as follows:ofMillions of yen Thousands
U.S. dollars

ANNUAL REPORT 2017

Elimination$ 2,725(a) Related party transactions
The information for the fiscal years ended December 31, 2017and 2016 was not disclosed because there were no significant
transactions with related parties.

Balance Sheet
Total current assets
Total noncurrent assets
Total current liabilities
Total noncurrent liabilities
Total net assets
Statement of Income
Net sales
Income before income taxes
Net income

Others

$—24. RELATED PARTY INFORMATIONSHOWA DENKO K.K.

Elimination¥—

Amortization
Unamortized balance

44

Others¥ 3,078
43,128
11,31026,203
8,694$ 27,242
381,665
100,087
231,881
76,9392,830(11,300)(11,702)

25,043(100,003)(103,559)

In addition, in the consolidated financial statements for the current
consolidated fiscal year and as a result of recording impairment losses fromthe alumina factory of this company, equity in losses of unconsolidated
subsidiaries and affiliates of ¥10,533 million (US$93,212 thousand) wasrecorded as “other expenses.”

A significant affiliate as of December 31, 2016 was Japan
Polyethylene Corporation, and summary of its financial statements
was as follows:
Millions of yen

Balance Sheet
Total current assets
Total noncurrent assets
Total current liabilities
Total noncurrent liabilities
Total net assets
Statement of Income
Net sales
Income before income taxes
Net income¥ 41,536
14,161
32,348262
23,087
122,702
12,0278,503

25. SIGNIFICANT SUBSEQUENT EVENTS
Disposal of Treasury Stock through International Offering
The Company passed a resolution for the disposal of treasury stock
through an international offering at the meeting of the Board of
Directors held on March 6, 2018, for which payment was completed
on March 22, 2018. An outline of the disposal follows:(a) Disposal of treasury stock through international offering(1) Class and number of disposed treasury stock
6,000,000 shares of the Company’s common stock(2) Disposition price (amount to be paid)¥4,350.6 (US$38.5) per share(3) Total disposition value (amount to be paid)¥26,103,600,000 (US$231,005,310)(4) Payment date
March 22, 2018(5) Method of disposition
In the offering to be made in overseas markets, mainly in Europe
and Asia (provided that the U.S. and Canada are excluded), theunderwriters, for which Mizuho International plc. acts as the solebookrunner and lead manager, shall severally and not jointly
underwrite and purchase all of the shares.
(b) Use of funds
The Company plans to apply the funds acquired by the disposal oftreasury stock through the above-mentioned international offeringin the following ways:• ‌¥16 billion to be used by the end of December 2018 as funds for
repayment of debt in connection with the acquisition of shares of
SGL GE Holding GmbH (“SGL GE”) and for various investments forthe purpose of maximizing the synergistic effect of integration
with SGL GE;• ‌¥5 billion to be used by the end of December 2019 as funds forfacility investment for the purpose of increasing domestic andinternational production capacity of high-purity gases forelectronics;• ‌¥2 billion to be used by the end of December 2018 as funds forfacility investment for the purpose of increasing production
capacity of aluminum cans in Vietnam and Thailand; and• ‌¥3 billion to be used by the end of December 2019 as funds forfacility investment for the purposes of strengthening the businessfoundation of LIB materials and for increasing production capacityof SiC epitaxial wafers for power devices.

45

Report of Independent Certified Public Accountants

46

SHOWA DENKO K.K.

ANNUAL REPORT 2017

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

Number of Shares Outstanding
149,711,292 at December 31, 2017

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
60,531 at December 31, 2017Classification of Stock
All stock issued by Showa Denko is common stock.

Ordinary General Meeting

Stock Transfer AgentThe Ordinary General Meeting of Shareholders was held on
March 29, 2018.

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

Shareholders (Top 10) (At December 31, 2017)

Shareholders by Sector (At December 31, 2017)

Number of
Shares Held(in thousands)

Rate of
Shareholding(%)

The Master Trust Bank of Japan Ltd. (T)

9,166

6.42

Japan Trustee Services Bank Ltd. (T)

7,701

5.39

Fukoku Mutual Life Insurance Company

5,517

3.86

MORGAN STANLEY & CO. LLC

3,651

2.56

The Dai-ichi Life Insurance Company
Limited

3,600

2.52

MSCO CUSTOMER SECURITIES

3,321

2.33

Japan Trustee Services Bank Ltd. (T9)

3,028

2.12

Sompo Japan Nipponkoa Insurance Inc.

3,007

2.11

NORTHERN TRUST CO. (AVFC) SUB A/CNON TREATY

2,956

2.07

Japan Trustee Services Bank Ltd. (T5)

2,659

1.86

Shareholder

Treasury shares

Securities companies

6,897 thousand

3,401 thousand

4.61%

2.27%

Japanese
corporate entities

Financialcompanies

6,056 thousand

58,259 thousand

4.05%

Foreigncorporate
entities, etc.

Total numberof shares held

38.91%

149,711thousand

51,867 thousand

34.64%

Individuals
23,231 thousand

15.52%

Note: ‌Each rate of shareholding was calculated after deducting the number of treasury
shares (6,897 thousand) from the number of shares outstanding.

Overseas Trading Subsidiaries (As of December 31, 2017)
Showa Denko America, Inc.

Showa Denko Singapore (Pte.) Ltd.

420 Lexington Avenue, Suite #2335A,
New York, NY 10170, U.S.A.
Phone: +1-212-370-0033
Fax: +1-212-370-4566

2 Shenton Way #15-03/04, SGX Centre 1,
Singapore 068804
Phone: +65-6223-1889
Fax: +65-6223-6007

Showa Denko Europe GmbHShowa Denko (Shanghai) Co., Ltd.

Konrad-Zuse-Platz 3,81829 Munich, Germany
Phone: +49-89-939-9620
Fax: +49-89-939-96250

18F, Wang-Wang Building No. 211, Shimen Yi Road,
Jingan, Shanghai, 200041, People’s Republic of China
Phone: +86-21-6217-5000
Fax: +86-21-6217-9840

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