Toyo Engineering Corporation Annual Report 2006

Address : 2-8-1, Akanehama,Narashino-shi, Chiba 275-0024, Japan
Tel: 81-47-451-1111
Fax: 81-47-454-1800
http://www.toyo-eng.co.jp/

Annual Report

20

Year ended March 31, 2006

PRINTED WITH

SOY INK

TMThis report was printed with soy ink and was produced with waterless printing methods.

쏘2006 Toyo Engineering Corp.
Printed in Japan

Corporate Profile

For more than four decades, Toyo Engineering Corporation (TOYO) has been serving clientsworldwide through its expertise in plant engineering. Flexibility has defined the Company’s
operations over the years; TOYO has flexibly responded to market needs, shifting quickly interms of market segments, operating regions, project types and contract schemes. To date,
TOYO has completed more than 1,400 projects around the world.
Comprehensive engineering technology and project management capabilities are our corestrengths. TOYO is further distinguished by expertise in leveraging cutting-edge technology,
adopting a global networking perspective and building optimum alliances. Backed by thesestrengths, we are dedicated to reflecting in each and every project our corporate philosophyof “providing total solutions that ensure the satisfaction and success of our clients.”

Contents
Consolidated Financial Highlights.................................1
To Our Shareholders.......................................................2
Management System .....................................................8
Review of Operations
EPC Solutions Business Operations (Overseas) ..............10
EPC Solutions Business Operations (Domestic) .............12
Business Solutions Operations .....................................14
HSSE＋Quality .............................................................16
Financial Section...........................................................17
Worldwide Network.....................................................40
Corporate Data.............................................................41
DEFINITION OF TERMS• Effective from the current fiscal year, TOYO has changed the fiscal year notation as follows:
Fiscal 2005 means the fiscal year ended March 31, 2006 (April 1, 2005 -March 31, 2006).
• The word, mark, logo or any sign with a symbol “TM” means that it is a registered trademark of Toyo Engineering Corporation in Japan.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This annual report includes certain “forward-looking statements.” These statements are based on management’s current expectations and are subject
to uncertainty and changes in circumstances. Actual results may differ due to changes in economic, business, competitive, technological, regulatory andother factors.

Consolidated Financial Highlights

Financial Summary

Thousands of
U.S. dollars

Millions of yen

Years ended March 31,

2006

2005

2006

Net sales............................................................................

¥195,584¥197,945 $1,664,824

New orders........................................................................

257,840

192,600

2,194,756

Backlog of contracts at end of the year..............................

373,518

337,760

3,179,414

Net income........................................................................

3,350

3,598

28,518

Total assets ........................................................................

202,662

209,564

1,725,077

Total shareholders’ equity...................................................

33,60828,442

286,077

Per share data (in yen and U.S. dollars):
Net income ....................................................................

¥

19.11

¥

20.51 $

0.16

* U.S. dollar amounts are stated at ¥117.48 to $1, the exchange rate prevailing on March 31, 2006.

Operational Summary>> Net sales, operating income and net income targets were cleared.
>> New orders reached ¥257.8 billion, 29% above fiscal 2005 target of ¥200.0 billion.
>> Interest-bearing debt was reduced by ¥6.7 billion.
Debt-to-equity ratio: 1.9 times → 1.4 times

373.5

337.8

307.8

350.6

300.6

257.8
192.6

241.5

’03

131.2

’02

(6.5)

(0.9)

(1.1)

195.2

’06

3.4

’05

3.6

195.6

(¥ billion)

197.9

Backlog of contracts(¥ billion)

170.5

New orders(¥ billion)

179.2

Net income (loss)(¥ billion)

159.0

Net sales

’02

’03

’04

’02

’03

’04

’05

’06

’02

’03

’04

’05

’06

’04

’05

’06

TOYO ENGINEERING CORPORATION Annual Report 2006

1

To Our Shareholders

In fiscal 2005, ended March 31, 2006, ToyoEngineering Corporation (TOYO) recorded its
second consecutive year of profitability as wellas the highest level of new orders since itbegan reporting consolidated financial results.
From April 2006, we started our new mediumterm corporate strategic plan under our corporate vision of “Global TOYO for Client Value
Enhancement.” In this corporate plan, we aim
to achieve sustainable growth by working
closely with Group companies worldwide andmaximizing consolidated earnings while offering greater value to our clients through providing our professional services.

August 2006
Yutaka Yamada
President and Chief Executive Officer

2

TOYO ENGINEERING CORPORATION Annual Report 2006

Fiscal 2005 Operating Environment and Results

Operating Environment

New Orders

During fiscal 2005, ended March 31, 2006, market

Consolidated new orders totaled ¥257.8 billion as

conditions remained favorable in Japan and overseas.

overseas orders were ¥183.6 billion and domestic

The primary reasons were burgeoning global demandorders were ¥74.1 billion. This was 29% higher thanfor energy sources and basic materials and growth inour target figure. Major new orders included an

capital expenditures. However, there were several

ethylene glycol plant in Saudi Arabia, an oil refinery

negative trends. The price of steel remained high andmodernization in Brazil, a liquefied natural gas (LNG)

the cost of special metals rose sharply. Deliveries ofreceiving terminal in India and a petrochemical plant inequipment were delayed at manufacturers because ofJapan. New orders were well balanced in terms of

the large volume of order backlogs. Other problems

regional and product categories. Significant sources ofwere a worldwide shortage of qualified workers andorders by region were Japan, the Middle East, India

the continued political instability in the Middle East. In

and Brazil and, by industry, petrochemicals, oil refining

response, TOYO concentrated on retaining its ability toand energy-related fields.

provide the highly reliable and specialized services thatthe market demands. To accomplish this goal, we con-

Revenue and Earnings

ducted business in an aggressive manner while quickly
adapting to changing client needs.

Consolidated net sales decreased from fiscal 2004 by
a marginal ¥2.4 billion to ¥195.6 billion, comprising¥63.1 billion in domestic sales and ¥132.5 billion inoverseas sales. Earnings were also down slightly.
Operating income declined from ¥4.5 billion to ¥4.2
billion and net income declined from ¥3.6 billion to¥3.4 billion. In spite of this short-term slip in performance, TOYO achieved its second consecutive
year of profitability and lowered the consolidated
debt-to-equity ratio to 1.4 times.

TOYO ENGINEERING CORPORATION Annual Report 20063

Mid-Term
The
Medium-Term
CorporateCorporate
Management
Strategic
Plan Plan for Fiscal 2006 to 2008

Financial targets in three-year time horizon

On April 1, 2006, TOYO started a new medium-term
corporate strategic plan under the new corporate vision“Global TOYO for Client Value Enhancement.” The

Net sales(¥ billion)

concept underpinning “Client Value Enhancement” is

Consolidation ratio

Consolidation ratio

the ability to combine our project management, engi-

1.2

1.4

neering and technological skills to deliver professional
260.0

want to work closely with clients so that we cantogether promote value creation that integrates quali190.0

250.0
190.0

220.0

185.0

161.9

195.6

services that boost value for clients. Furthermore, wety, cost and delivery (QCD); health, safety, security
and the environment (HSSE); and other elements.
“Global TOYO” expresses our goal of building aframework in which autonomous Group companies
worldwide work together to raise the Group’s consolidated earnings and the value of the TOYO Group.

FY2005
FY2006
FY2007
FY2008■Consolidated ■Non-Consolidated

Financial Targets
Gross profit(¥ billion)

FY2008
Consolidated
gross profit margin11.2%
Non-consolidated
gross profit margin
8.4%

we will work for over the next three years as a means
to raise consolidated earnings. The consolidation ratioof net sales is projected to rise from 1.2 in fiscal 2005
sales are expected to rise to ¥260.0 billion against¥195.6 billion in fiscal 2005. Consolidated gross profit

16.0

14.0

21.0
12.0

17.8
10.7

The accompanying graphs detail the financial targets

to 1.4 in fiscal 2008; in the same year, consolidated net

29.0

26.0

FY2005
Consolidated
gross profit margin9.1%
Non-consolidated
gross profit margin
6.6%

is targeting to rise from ¥17.8 billion to ¥29.0 billion
over the three-year period. The sources of this growth
are an increase in gross profit accompanying expected
growth in aggregated net sales at overseas Group com-

FY2005

FY2006

FY2007■Consolidated ■Non-Consolidated

4

TOYO ENGINEERING CORPORATION Annual Report 2006

FY2008

panies and an improvement in earnings due to the shift
in TOYO-Japan’s profit structure.

Market Trends

Key Initiatives

When executing our medium-term corporate strategic

TOYO is executing the following five key initiatives toplan, we will reflect our outlook for the operating

achieve its corporate vision. First, we will strengthen

environment over a time span of about five years. One

the global network for business development to pro-

key factor is that crude oil prices are likely to remain atvide strategic support in different regions and for all

their current high levels. When crude oil prices areclients. Second, we will shift to a framework that will

high, companies have an even broader range ofallow our overseas operating bases to take the leading

options with regard to energy-related investments.

role in all engineering, procurement and construction

Moreover, clients benefiting from the higher prices are(EPC) tasks for medium-sized EPC projects in fields

eager to invest aggressively. A second key factor is thewhere they have experience. Third, TOYO-Japan willrising interest in natural gas as a source of clean ener-

concentrate on large-scale and complex projects; newgy. There are growing numbers of projects for LNG

types of projects, such as infrastructure projects; andplants and LNG receiving terminal projects. We areprojects for clients in Japan. Fourth, we will place analso seeing numerous large-scale projects for gas toemphasis on HSSE, while prioritizing the three coreliquid (GTL) plants and gas pipelines. A third key factor

goals of every project—quality, cost and delivery—asis growth in demand for basic materials in China, India

in the past. All of these parameters are used world-and neighboring countries in East Asia. This demand is

wide to guide investment decisions. We are deter-

spawning massive investments. A fourth key factor ismined to continue to manage projects from thethe very high demand for social infrastructure projects

client’s perspective in order to achieve client satisfac-

in such areas as water, power and transportation.

tion. Fifth, we will reinforce our human capital in both

Infrastructure investments are strong especially in thenumbers and quality. People are undoubtedly the most

BRIC countries, where economic growth rates arevaluable capital for an engineering contractor like us.

high, and in energy-producing nations where popula-

Along with these actions, we will upgrade and enlarge

tion numbers are climbing. Industrialized nations will

our corporate infrastructure, including IT.

accelerate investments to meet this demand. A fifth
key factor is the high level of capital spending by manufacturers in Japan, who were reluctant to makeinvestments until the nation’s deflationary environment ended. Japan is also witnessing the realignmentof a number of industries, which is another source of
new investments. The TOYO Group is deeply involved
in all of these trends that influence investments byclients.

TOYO ENGINEERING CORPORATION Annual Report 2006

5

Creating a Global TOYO

Consolidated Profit Structure

Global TOYO EPC services delivery network

The transfer of EPC projects to Group companies is
expected to raise their contribution to consolidated
gross profit. TOYO-Japan plans to improve the grossprofit margin and contribute to growth in consolidated
gross profit. As the graph below shows, TOYO-JapanTEC HEMIPS

TOYO-CHINA
TOYO-KOREA

Middle East &South Asia

TOYO-JAPANwill in general handle large-scale, complex projects or

Americas
TOYO-CANADATOYO-U.S.A.

handle overseas service contracts that have a relatively
high gross profit margin and other businesses in Japan

East Asia
TOYO-MALAYSIA

TOYO-INDIA

new fields of business. In addition, TOYO-Japan willas the Group’s base load. We believe that these measTOYO-BRAZIL

TOYO-THAIures will improve our profit margin and raise the nonconsolidated gross profit of TOYO-Japan.
Consolidated gross profit structure

The central objective of the medium-term corporate(¥ billion)

29.0
26.0

strategic plan is to make TOYO a more global organization. The Group will be concentrating on the three
regional markets shown in the above map. We already

21.0
17.8

have Group companies in each region. TOYO-India,
TOYO-Korea, TOYO-Thai and other companies captureorders independently or in concert with their own
partners, and they have established a solid reputation
for reliability and overall excellence among theirclients. But we need to further enlarge our overseas
network to benefit from the substantial growth ininvestments foreseen in the coming years. A larger
network will enable us to conduct operations on a
global scale. Realizing this growth requires that weplan a 50% increase in our workforce at overseas
Group companies from the current 2,000 to 3,000.
Our plan is to raise the total Group workforce toabout 6,000 in fiscal 2008.

6

TOYO ENGINEERING CORPORATION Annual Report 2006

FY2005

FY2006

FY2007■ Subsidiaries ■ Domestic Business, IT■ Overseas Services ■ Overseas EPC

FY2008

Outlook for Fiscal 2006

Prospects for New Orders

Increase in Shareholders’ Equity due to Sale of Stock

Substantial investments are foreseen in fiscal 2006

On May 31, 2006, TOYO increased its capital by athat are associated with the ongoing growth in global

third-party allocation, which was all acquired by Mitsui

demand for energy and basic materials. We also antici-& Co., Ltd. A total of 17.1 million shares were issued,

pate significant investments for the integration of oil

which was almost 10% of all shares issued prior torefineries and petrochemical operations to further

this capital increase. Following this allocation, Mitsui &raise efficiency. In Japan, client companies are making

Co., Ltd. holds about 23% of TOYO’s equity. This

strategic investments to differentiate themselves from

capital increase was conducted to procure funds forcompetitors. As in recent years, many companies areworking capital requirements of large-scale projects

faced with the decision of either conducting verticallyand new investment in line with the medium-term

integrated production in Japan or moving manufactur-

corporate strategic plan as well as to enhance TOYO’s

ing bases to China or other overseas locations. We will

financial strength. Furthermore, TOYO intends toneed to pay close attention to the price hikes in spe-

reinforce the relationship with Mitsui & Co., Ltd. forcial metals and other raw materials and to the man-increasing orders and developing its sales activities byagement of equipment delivery. In addition, we willcapturing more synergies between the two companies.

continue to shield our earnings from foreign exchange
rate volatility by maintaining our policy of fully hedg-

As TOYO succeeded in achieving a normal level ofing foreign currency exposure.

profitability in fiscal 2005 under review, efforts willcontinue to reach fiscal 2006 earnings targets with

Outlook for Revenue and Earnings

the goal of building a sound base for stable sales andearnings.

We believe that energy-related projects will accountfor a large share of new orders for the time being.
However, we are working on raising orders in petrochemicals and other sectors where we can provide differentiated products. Our goal is to achieve a well-balanced composition of new orders. Based on this outlook, for fiscal 2006, we are targeting net sales of¥220.0 billion, operating income of ¥6.0 billion andnet income of ¥4.0 billion.

TOYO ENGINEERING CORPORATION Annual Report 2006

7

Management System

C o r p o r a t e

G o v e r n a n c e

TOYO is dedicated to contributing to shareholders,

Status of Internal Control Systemclients and all other stakeholders as well as to fulfilling

To provide an internal control system, the Auditing

its social obligations in Japan and worldwide. For thisDepartment, which is under the direct control of the

purpose, measures are taken to heighten manage-

president, performs audits concerning the execution

ment transparency from the standpoints of investorsof business activities by all divisions. In addition, there

and the public. TOYO places importance on building

are specialized units to perform other audits. Thea fair management system and ensuring the proper

Safety, Quality and Environment Management

operation of that system as well as the suitable disclo-

Division performs audits concerning safety, quality andsure of information.

environmental protection, and the Export Control
Administration Division carries out export control to

Corporate Governance Structure

verify that no prohibited materials are being exported.

By implementing structural reforms to enhance its
management systems, such as reducing the number of

Status of Risk Management System

directors and adopting the executive officer system,

For risk management concerning project profitability

TOYO has established a framework for making

and financial matters, all business operations aremanagement decisions smoothly and efficiently.

constantly monitored and supervised and reports are

In addition, TOYO has reinforced the auditing system,

submitted to the Board of Directors, the Executive

including an internal control system, to ensure that

Committee and the Board of Auditors. In addition,

management is transparent, sound and appropriate.

matters of particular importance concerning individual
bidding and projects undergo a risk analysis overseen by

Corporate Governance Structure

the Commission for Analysis and Evaluation of Project
General Meeting of Shareholders

Risks, and reports are submitted to the Executive
Committee. Also, efforts will be made to ensure that

Board of Directors

Auditors / Board of Auditors

our risk management system functions effectively by
reinforcing the system of inter-divisional checks andCorporate Planning Committee

Auditing
Department

Executive Officer System(Execution of Business
Operations)
President & CEO

Safety,Quality andEnvironment
Management
Division
Export Control
Administration
Division

Executive
Committee

Operating Divisionsbalances. The Company has drawn up the Crisis
Management Policy to clearly set forth risk manageCorporate
AuditorsCommission for
Analysis and
Evaluation of
Project Risks

Legal Counsel

ment procedures, increase risk awareness throughout
the Company and forestall crises that have the potential to seriously affect the operations of the Company.
In the event of a crisis, a Crisis Management Task
Team reporting directly to management is quickly
established. The Crisis Management Task Team takes
up the crisis as an issue affecting the entire Company
and implements measures to resolve the state of
emergency.

8

TOYO ENGINEERING CORPORATION Annual Report 2006

M a n a g e m e n t* Representative Director● Chairman

Yushi Nagata● President and Chief Executive Officer

Yutaka Yamada*● Executive Vice Presidents

Kazuhisa Marukawa *Yoshitaka Ogata (Chief Technical Officer) *● Directors and Senior Executive Officers

Takuichi Murachi *Kazuomi Nishihara*
Kuniaki Tsuyada
Hisashi Saigo
Kenji Soejima
Makoto Fusayama
Isao Ichikawa
Keiichi Matsumoto(The above directors also hold the position of executive officer.)● Senior Corporate Auditor

Kunimichi Gamo

● Corporate Auditors

Keiji Suda
Ryutaro Koyasu
Masato Shiode● Senior Executive Officers

Ken Wakazuki
Komei Ohta
Masahiro Suzuki
Yoshiaki Mizoguchi
Osamu Kawanobe● Executive Officers

Osamu Okura
Shuji Ueki
Akhilesh Kumar
Hidetsugu Fujii
Kiyoshi Nakao
Kenji Niwa
Makoto Shimagaki
Tatsuo Yasunaga(As of June 28, 2006)

TOYO ENGINEERING CORPORATION Annual Report 2006

9

Review of Operations

EPC Solutions Business Operations
Growing demand for energy andbasic materials around the world

OVERSEAS

Results of Operations
TOYO’s aggressive sales activities targeting energy-related

is stimulating large investments

and petrochemical fields raised the share of overseas

in numerous projects involving

projects to 71% of all new orders received in fiscal 2005.

oil, gas and other energy sources

Total overseas new orders were up 147% of fiscal 2004
to ¥183.6 billion, including orders from Japanese clientsand in basic chemicals, high-per-investing in shifting production bases to China, which

formance resins and other petro-were handled by Domestic Sales and Operations.

chemical fields. The outlook is

There were many significant events. In the energy-related field, large new orders included an oil refinery modern-particularly bright in the BRIC

ization for Petróleo Brasileiro S.A. (PETROBRAS), Brazil’s

countries, the Middle East andnational oil company; an LNG receiving terminal for
Petronet LNG Ltd. in India; and a plant for extracting

Asian countries.

natural gas liquids (NGL) from LNG for Oil and Natural
Gas Company Limited (ONGC) in India. Other significant
orders were for the topside modules of a floating production, storage and offloading (FPSO) facility in Australia anda large coal-based dimethyl ether (DME) plant in China.
In the petrochemical field, new orders included an ethylene glycol plant for Saudi Basic Industries Corporation(SABIC) and a basic design and engineering package for aworld-scale ethylene cracker for Shell Eastern Petroleum(Pte) Ltd. Significant project completions included twolarge fertilizer projects and a lead-free gasoline production facility in Indonesia and an oil refinery modernization
project in Russia. Three large overseas energy-related
projects are currently under way: the Sakhalin II LNG project; the Iran gas processing project; and the constructionof natural gas pipelines in Brazil.

10

TOYO ENGINEERING CORPORATION Annual Report 2006

Initiatives of Overseas Sales and Operations
TOYO will put emphasis on clean alternative energy that
replaces petroleum and other clean energy sources, a
response to the high cost of crude oil, in order to adapt
flexibly to changes in market demand. TOYO also aims to
expand its business to meet the growing demand for water,
power, transportation and other infrastructure projects.
Under the Global TOYO framework, TOYO Group companies in India, Thailand, Korea and other overseas locations
will take the leading position in conventional EPC projects

Start-up of 2nd EO / EG plant of Jubail United
Petrochemical Company in Saudi Arabia

involving energy, fertilizer, petrochemicals and other fields.
The first step toward the Global TOYO framework is thejoint award of contracts and execution of projects by TOYOJapan and TOYO Group companies. Through this process,
TOYO-Japan intends to increase its awards in large andcomplex EPC projects as well as new types of projects, suchas infrastructure projects. In EPC for power generation,water and utility centers, TOYO will cooperate with partnercompanies that can offer the necessary complementary
technology and skills.
TOYO also seeks to increase sales from overseas service

Ammonia / urea plant for PT Pupuk Kujang
in Indonesia

operations that can produce a steady stream of revenues
with low risk, such as front end engineering design (FEED),
engineering services, cost reimbursement jobs as part of
EPC work and services for new types of infrastructure projects, upstream projects and operations and maintenance(O&M). TOYO is dedicated to achieving excellence in quality,
cost and delivery as well as HSSE in every project. Potential
problems will be anticipated and quickly identified, so thatproper responses can be taken immediately. We will establish a global resource management system to reflect the

Oil refinery in Yaroslavl in Russia

further globalization of operations and a global IT infrastructure. These and other actions will reinforce TOYO’s
ability to compete successfully on a global scale.

TOYO ENGINEERING CORPORATION Annual Report 2006

11

EPC Solutions Business Operations
The domestic market is witnessing
robust investment activities by

DOMESTIC

Results of Operations
New orders received in Japan were well above the initial tar-

Japanese companies seeking toget, due to significant growth in operations that assist

execute differentiation strategies

Japanese companies in setting up plants and other bases inthat lever their respective

other countries. Total new orders in Japan rose 109% of fiscal 2004 to ¥74.1 billion and accounted for 29% of all newstrengths. One example is theorders in fiscal 2005. Orders included the second aniline

shift of the production of general-plant for Tosoh Corporation in the petrochemical category;

purpose products to China anda propylene splitter unit for the Sendai Refinery of Nippon
Petroleum Refining Co., Ltd. and naphtha desulfurization

other overseas locations. On theunits for Tonen General Sekiyu K.K. and Kyokuto Petroleum

other hand, companies are build-

Industries, Ltd. in the oil refining category; and an active
pharmaceutical ingredient (API) plant for Shiratori

ing vertically integrated produc-

Pharmaceutical Co., Ltd. in the industrial plant category. Intion systems for special products

the field of foreign direct investment, major new orders

in Japan, integrating oil refining

included a synthetic rubber plant for a Chinese affiliate ofBridgestone Corporation and a methanol derivatives pro-and petrochemical operations toduction plant for a Chinese company, Lingtian (Nanjing) Fine

achieve overall optimization andChemical Corporation, a joint venture of Mitsubishi Gas

investing in renovation of produc-

Chemical Co., Inc. and the ITOCHU Group.
During fiscal 2005, TOYO established business alliancetion facilities needed to meetagreements with economic development zones in China—changes in demand.

Jinan (Shandong Province), Tianjin and Shenyang (Liaoning
Province)—raising the number of such agreements to 11 intotal. Major project completions were a large vinyl chloride
monomer (VCM) plant for Tosoh Corporation, a propylene
splitter unit for the Mizushima Refinery of Nippon
Petroleum Refining Co., Ltd. and a fine chemicals plant for
the Chinese subsidiary of Otsuka Chemical Co., Ltd.

12TOYO ENGINEERING CORPORATION Annual Report 2006

Initiatives of Domestic Sales and Operations
Domestic Sales and Operations greatest strengths is teams ofexperts covering a wide range of fields, including hydrocarbon
plants, industrial plants, setting up of overseas operations,
nuclear and electric power, O&M, R&D and many other activities. The depth of its capabilities gives TOYO the flexibility
required to meet the needs of clients in Japan and overseas,
regardless of the scale, nature and location of the project. The
result has been steady growth in new orders.
In the oil refining and petrochemical field, part of the hydrocarbon plant category, TOYO will consolidate a more competitive
operating base. In the industrial plant category, the focus will beon expanding business with clients who consistently place orders

Mizushima Refinery of
Nippon Petroleum Refining Co., Ltd.
in Japanwith us and on raising the number of those clients. Regarding
assistance for clients shifting to overseas locations, TOYO willcontinue to concentrate on China while, at the same time,
preparing for the “Post-China” era of overseas investments by
Japanese companies. In the nuclear and electric power category,engineering services will remain the primary activity, as TOYO
explores possibilities for starting EPC operations in the future.
TOYO established the New Business Development Dept. in
April 2006 and aims to use this dedicated organization to create a new business model that encompasses R&D, O&M, sys-

Groundbreaking ceremony of methanol derivatives
plant for Lingtian (Nanjing) Fine Chemical Corporationin China

tems and integration, facilities, the environment and otherelements. Domestic Sales and Operations will set out tobecome a diversified player in terms of products and regions,avoiding an over-reliance on any particular product or market
sector, and to build trusted relationships with clients. Basedon the “Co-Creative” slogan, TOYO is dedicated to integrating its ideas with those of its clients. This process will makeit possible to work as one with clients and to engineer andbuild production facilities of the highest possible quality.
No. 3 VCM plant of Tosoh Corporation in Japan

TOYO ENGINEERING CORPORATION Annual Report 2006

13

Business Solutions Operations
As Japan’s economy recovers, an
upturn in capital expenditures isResults of Operations
There was a 150% increase in sales in the IT sector to

occurring that is driven mainly by¥20.1 billion due to the completion of the large logistics

the recurrence of Japan as thecenter for books at the Okegawa Logistics Complex of

manufacturing base for strategic

Tohan Co., Ltd. Fiscal 2005 new orders decreased about
25% of fiscal 2004 to ¥14.8 billion but sustained about

and value-added products. All

the same level as in recent years. TOYO and Toyo Businessprojects require the start of pro-Engineering Corporation have formed an alliance aimed

duction as quickly as possible.

at increasing sales and earnings. TOYO will offer consulting on production management and logistics that targets

With its expertise in raising pro-chiefly the manufacturing and distribution sectors. Underductivity and quality, TOYO can

the alliance, we will also strengthen measures to serve
clients in new fields, such as securities and finance.

meet these demands by offering
the integrated solutions requiredby complex and difficult issues.

There were several major orders in fiscal 2005. In the
supply chain management (SCM) field, orders werereceived from an electronic materials manufacturer for amanufacturing technology innovation project and from a
Tohan subsidiary, Book Liner Co., Ltd., for the rebuildingof an individual book shipping system. In the TOYO original IT solution field, TOYO received an order from Toppan
Printing Co., Ltd. for Komei™7, a production schedulingsystem, and associated systems. Knowledge Bank™, aknowledge management system for passing on technological skills to younger workers, was sold to companies
in the transportation industry. Other orders included business process improvement consulting for Tokyo ElectricPower Company; business process analysis consulting for
Mitsui Chemicals, Inc.; a project to raise operating efficiency to offset the shortage of workers in the manufacturing sector; and in the financial solutions sector, anorder from a large securities company for assistance inconstructing an IT system.

14

TOYO ENGINEERING CORPORATION Annual Report 2006

Initiatives of Business Solution Sales and Operations
Reflecting the need to meet increasingly complex clientdemands, the e-Solutions Business Operations was reorganized in April 2006 and renamed Business Solution
Sales and Operations. The new organization concentrates
on four business fields: SCM, which involves support forthe composite engineering of the production and logistics
activities of manufacturers; maintenance, where TOYO
will assist in execution of maintenance operations at electric power companies and petrochemical companies;

Azusa-no-Mori Plant of Suntory Limited in Japan,
where Komei TM 7 is in operation“own solutions,” based on providing optimized solutions
derived from two proprietary TOYO IT products, theKomei™7 production scheduling system and theKnowledge Bank™ knowledge management system; andfinance, where the focus of activity is the construction of
securities transactions systems. In each field, TOYO provides a variety of solutions that create value by meetingthe specific needs of clients’ business activities throughcollaboration with Toyo Business Engineering. The goal
is to gain recognition as a true partner for every client,constantly able to generate new approaches that create

Niigata Plant of Toppan Printing Co., Ltd. in Japan,
where Advanced Planning & Scheduling (APS) system
was delivered

value by solving specific problems.
To further enhance the quality of its solutions, TOYO
earned ISO 9001 certification in 2005 and, in the financial solutions field, received Information Security
Management System (ISMS) certification. These actions
reinforced TOYO’s ability to meet clients’ expectations foroverall reliability.

Automatic fast sorting line at Okegawa SCM Centerof Tohan Co.,Ltd. in Japan

TOYO ENGINEERING CORPORATION Annual Report 2006

15

HSSE + Quality
A review of our safety record for the year shows thatISO 9001 Certification

we completed a large number of projects without any
casualties or accidents. However, there were 24 acci-

TOYO passed the fourth Renewal Assessment in April

dents overseas that resulted in lost time, so clearly

2006. Also we added into ISO 9001 the approval area

there is room for improvement.

of “Development of information processing systems

We are responding by implementing a range of pro-for logistics, production controls and financial busi-

grams that will create a “safety–oriented culture.”

ness.” The original approval areas are “Project man-

Measures include raising awareness among all employ-agement, engineering, procurement, construction

ees of the importance of risk assessment and modify-

management and commissioning for the oil, gas,

ing work procedures and the work environment torefinery, chemical, petrochemical, power generation,

forestall accidents. Our clients and the society at large

nuclear energy, pharmaceutical and food processing

also demand that businesses give priority to a policy ofplants, and environmental protection facilities.”“safety first.” TOYO is convinced that it needs a deep,strong commitment to safety as a prerequisite forBS7799-2:2002 ISMS Certification

business continuity. Our motto is to keep safety firstand foremost. TOYO, its cooperating companies and

TOYO obtained the BS7799-2:2002 certificate forall employees involved in construction projects are

ISMS in relation to design, development and mainte-

committed to making every possible effort to forestallnance of computer systems for financial businesses

accidents and enhance safety.

from Lloyd's Register Quality Assurance in March2006.

TOYO’s safety record
Total Man-Hours

0.16

70,000,000

0.14

injuries and illnesses (LTI)*, as defined by OSHA, was60,000,000

0.12

0.06. This is a slight increase from the previous three

50,000,000

0.10

40,000,000

0.08

years. The incident rate covers both domestic and over-

30,000,000

0.06

20,000,000

0.04

10,000,000

0.02

0

0.00

’01

’02

■ Overseas and Domestic Total Man-Hours– TOYO’s LTI Rate

16

During year 2005, TOYO's incident rate for lost timeLTI

80,000,000

TOYO ENGINEERING CORPORATION Annual Report 2006

’03

’04

’05

seas projects. Head office and all construction site
offices are carrying out a proactive safety management
and awareness campaign to bring the LTI rate down.
*Number of persons per 200,000 man-hours

Financial Section
Contents
Consolidated Five-Year Summary ............................. 18
Management’s Discussion and Analysis .................... 20
Business Risk and Other Risks .................................. 21
Consolidated Balance Sheets .................................. 22
Consolidated Statements of Operations .................... 24
Consolidated Statements of Shareholders’ Equity ....... 25
Consolidated Statements of Cash Flows ................... 26
Notes to Consolidated Financial Statements .............. 27
Independent Auditors’ Report ................................. 39

TOYO ENGINEERING CORPORATION Annual Report 200617

Consolidated Five-Year Summary
Toyo Engineering Corporation and Consolidated Subsidiaries

Years ended March 31

Thousands of
U.S. dollars(Note 1)Millions of yen
2006

2005

2004

2003

2002

2006

Net sales...................................................................

¥195,584¥197,945¥170,529¥179,168¥158,963$1,664,824

Gross profit...............................................................

17,825

17,7708,640

17,291

14,415

151,727

Operating income (loss).............................................

4,195

4,540

(3,257)

5,424

2,961

35,710

Income (loss) before income taxes andminority interests....................................................

4,360

3,698

(3,714)657(1,370)37,111

Net income (loss).......................................................

3,350

3,598

(6,491)(923)(1,081)

28,518

Total assets...............................................................

202,662

209,564

201,133

199,494

196,177

1,725,077

Total shareholders’ equity .........................................

33,60828,442

24,72429,69430,906

286,077

Long-term debt ........................................................

19,99036,454

39,691

41,84046,038170,155

Purchases of property, plant and equipment .............

3,455

2,096

241

282

272

29,406

Depreciation and amortization..................................

1,701

1,453

1,315

1,347

1,339

14,478

Common stock .........................................................

13,01813,01813,01813,01813,018110,808

New orders...............................................................

257,840

192,600

241,528

195,160

131,2112,194,756

Backlog of contracts at end of the year.....................

373,518

337,760

350,574

307,817300,636

3,179,414
U.S. dollars(Note 1)Yen

Per share:
Net income (loss) ...................................................

¥19.11¥20.51¥(37.00)¥(5.27)¥(6.15)$0.16

Cash dividends.......................................................

3.00

3.00

—

—

—

0.03

Gross Profit

Operating Income (Loss)Net Income (Loss) Per Share(¥ billion)(¥ billion)(¥)

17.8 17.8

17.3

20.51 19.11

5.4

14.4

4.5

4.2

3.0
8.6

(6.15) (5.27)(3.3)(37.00)

’02

18

’03

’04

’05

TOYO ENGINEERING CORPORATION Annual Report 2006

’06

’02

’03

’04

’05

’06

’02

’03

’04

’05

’06

2006

2005

2004

2003

2002

Net sales by sector (%):
Chemical fertilizers ....................................................................

7.8%

15.8%

9.3%

7.1%

11.2%

Petrochemicals............................................................................

24.9

27.4

30.8

32.9

41.8

Refinery.....................................................................................

3.0

7.7

13.3

21.3

14.5

Energy-related ...........................................................................

44.2

29.5

27.3

19.2

11.9

General manufacturing facilities andinformation technology ..........................................................

14.9

14.7

11.5

12.2

16.4

Others .......................................................................................

5.2

4.9

7.8

7.3

4.2

(Overseas sales) .........................................................................

(68)

(72)

(78)

(79)

(74)

Number of employees ..................................................................

2,668

2,376

2,310

2,146

1,939

Total Assets

Total Shareholders’ Equity

Composition of
Net Sales by Sector (FY2005)(¥ billion)(¥ billion)

(%)

5.2
33.6
196.2 199.5 201.1

209.6 202.7

30.9

29.7

7.8
14.9

28.4

24.9

24.7

44.2

3.0

’02

’03

’04

’05

’06

’02

’03

’04

’05

’06

■Chemical Fertilizers■Petrochemicals■Refinery■Energy-Related■General Manufacturing Facilities
and Information Technology■Others

TOYO ENGINEERING CORPORATION Annual Report 2006

19

Management’s Discussion and Analysis

In fiscal 2005, ended March 31, 2006, TOYO reached its sales and earnings targets, although sales and earnings were lower
than in fiscal 2004. New orders reached the highest level since TOYO began reporting consolidated operating results in fiscal
1995. On a non-consolidated basis, TOYO was profitable as in fiscal 2004. The following items are particularly noteworthy
achievements of the fiscal year under review.
1. New orders far above our target
Fiscal 2005 consolidated new orders totaled ¥257.8 billion ($2,195 million), a reflection of overseas orders for oil refineries,
petrochemical plants and other large-scale projects and of a substantial increase in orders in Japan. The backlog of contracts
at the end of March 2006 was ¥373.5 billion ($3,179 million), which equates to about 1.7 years of forecasted fiscal 2006 net
sales. This provides an adequate backlog of contracts to give TOYO a stable base of operations.
2. Reduction in interest-bearing debt
Interest-bearing debt declined ¥6.7 billion compared with the previous fiscal year-end to ¥47.4 billion ($403 million) as TOYO
actively made loan repayments.
Sales and Earnings
Consolidated net sales decreased ¥2.4 billion to ¥195.6 billion ($1,665 million) because of delays in the completions of someprojects. The decline in sales caused operating income to decrease ¥0.3 billion to ¥4.2 billion ($36 million), which was slightly
below the level TOYO had planned for fiscal 2005. Net income was ¥3.4 billion ($29 million), which was less than one year
earlier but higher than the plan for the fiscal year under review.
Cash FlowsNet cash used in operating activities was ¥5.5 billion ($47 million). The principal source of cash was income before income
taxes and minority interests of ¥4.4 billion ($37 million). However, cash was used by an increase in contract work in progress,a decrease in notes and accounts payable and a decrease in deposits received at joint venture projects. Net cash used ininvesting activities was ¥4.6 billion ($39 million). This mainly represented purchases of property, plant and equipment. Net
cash used in financing activities was ¥7.5 billion ($64 million) as repayment of interest-bearing debt was made based on thedebt reduction plan. The net result of the above cash flows was a net decrease of ¥17.1 billion in cash and cash equivalents
compared with one year earlier to ¥28.3 billion ($241 million). This figure includes ¥5.9 billion ($50 million) of deposits
received in conjunction with joint venture projects.

20

TOYO ENGINEERING CORPORATION Annual Report 2006

Business Risk and Other Risks

The following is a list of potential risks associated with the information concerning TOYO’s consolidated operating results andfinancial condition in this annual report that may have a significant bearing on investors’ decisions. This is not intended to be
a complete list of these potential risks.
1. Overseas business risk
The nature of TOYO Group business activities, which mainly involve conducting projects outside Japan, is exposed to the following risks. (1) War, civil commotion, riots, revolutions, coup d’état, terrorism and other unusual events in the country where
the project is carried out or in a neighboring country. (2) Regional risks that occur particularly in an area near a project site,
such as a surge of political unrest and a serious outbreak of a contagious disease. (3) Extraordinary natural phenomenon, suchas earthquakes, floods, typhoons and other storms as well as unusual weather, such as extreme heat or cold. (4) Drasticchanges in industrial or financial policies in the host country affecting the permission, laws and regulations involving importduties, immigration, foreign exchange, telecommunications, taxation and other items. (5) A sudden and substantial reductionof investments globally in business fields where TOYO is active. Any interruption or suspension in work due to the above risks
could have an adverse effect on TOYO’s consolidated operating results and financial condition. The Group is aware of thepossibility that these risks may occur and is taking actions to reduce exposure to these risks by using export credit insurance,
maintaining a risk management system and taking other steps.
2. Foreign exchange fluctuation
For overseas plant construction contracts denominated in foreign currencies, the appreciation of the yen relative to the applicable foreign currency causes a reduction in the yen equivalent amount received. In addition, the yen’s appreciation makes
TOYO less price competitive when competing for new orders in foreign currencies. This could have an adverse effect on
TOYO’s consolidated operating results and financial condition. In response, the Group uses foreign exchange forward contracts, procures materials and equipment in foreign currencies, utilizes the resources of its overseas bases and takes all otherpossible steps to minimize exposure to foreign exchange risk.
3. Sudden increases in prices of equipment and materials
A large share of contracts signed with clients involves turnkey lump-sum projects. Therefore, the possibility exists of sudden
and steep rises in the cost of equipment and materials, transportation, labor and other items associated with a project, or of
problems caused by tight demand and supplies of these items, due to rapid change in the international situation. The possibility also exists of a supplier becoming insolvent. These events may deteriorate the profitability of a project affected by soaring
cost, delivery delay and other problems. Such events may therefore have a detrimental effect on TOYO’s consolidated operating results and financial condition. To reduce its exposure to these risks, TOYO utilizes its experience to enter into contracts
that incorporate measures to offset these risks and gathers information on market trends. To avoid an undue reliance on aparticular supplier, TOYO works on placing orders with a large number of suppliers and stringently monitors the financial
condition of suppliers.

TOYO ENGINEERING CORPORATION Annual Report 200621

Consolidated Balance Sheets
Toyo Engineering Corporation and Consolidated Subsidiaries

March 31, 2006 and 2005

Thousands of
U.S. dollars(Note 1)Millions of yen

Assets

2006

2005

2006

Cash and deposits.......................................................................................................

¥ 28,884¥ 45,972$ 245,868

Notes and accounts receivable (Note 3).......................................................................

29,22940,155

248,801

Less: Allowance for doubtful receivables ..................................................................

(2,735)(3,637)(23,284)

26,49436,518225,517

74,09061,788630,659

Current assets:

Contract work in progress.............................................................................................
Prepaid expenses and other current assets (Note 4) .....................................................

19,25014,742

163,860

Total current assets..................................................................................................

148,718

159,0201,265,904

Investment securities (Note 12)....................................................................................

7,437

5,648

63,308Investments in unconsolidated subsidiaries and affiliates (Note 12)..............................

5,149

3,717

43,830Long-term loans..........................................................................................................

214

1,394

1,818

Investments:

Other..........................................................................................................................

5,378

6,081

45,779Less: Allowance for doubtful receivables ..................................................................

(2,072)(3,654)(17,637)

Total investments..................................................................................................

16,106

13,186

137,098

Land (Note 3)..............................................................................................................

18,52819,408

157,708

Buildings and structures (Note 3).................................................................................

26,62826,411

226,658

Tools, furniture and fixtures ........................................................................................

3,573

3,418

30,410Construction in progress .............................................................................................

3,085

181

26,264

Property, plant and equipment, at cost:

Total.....................................................................................................................

51,81449,418441,040

Less: Accumulated depreciation (Note 3)..................................................................

(16,190)(15,186)(137,808)

Property, plant and equipment, net.......................................................................

35,624

34,232

303,232

Other assets (Note 4) ..................................................................................................

2,214

3,126

18,843¥202,662¥209,564$1,725,077

See notes to consolidated financial statements.

22

TOYO ENGINEERING CORPORATION Annual Report 2006

Millions of yen

Liabilities and Shareholders’ Equity
Current liabilities:
Short-term bank loans.................................................................................................
Current portion of long-term debt (Note 3).................................................................
Bonds due within one year (Note 3) ............................................................................
Notes and accounts payable........................................................................................
Income taxes payable....................................................................................................
Advance receipts on uncompleted contracts ...................................................................
Reserve for anticipated loss on contract work..............................................................
Other current liabilities (Note 4)....................................................................................
Total current liabilities...........................................................................................
Long-term debt (Note 3).............................................................................................
Accrued retirement benefits (Note 5)........................................................................
Other long-term liabilities (Note 4)............................................................................
Contingent liabilities (Note 7)
Minority interests........................................................................................................
Shareholders’ equity:
Common stock
Authorized: 500,000,000 shares
Issued: 175,692,539 shares .....................................................................................
Additional paid-in capital ............................................................................................
Retained earnings (Note 6)..........................................................................................
Net unrealized gain on securities.................................................................................
Foreign currency translation adjustments.....................................................................
Less: Treasury stock, at cost: 403,553 shares............................................................
Total shareholders’ equity .....................................................................................

Thousands of
U.S. dollars(Note 1)

2006

2005

2006

¥ 4,205
22,1781,000
22,679693
82,894
1,135
6,847
141,631¥ 6,514
11,109—31,715244
73,756
1,628
12,582
137,548

19,9902,727
2,665

36,4542,477
2,762

170,155
23,214
22,686

2,041

1,881

17,371

13,01813,01815,595
15,594
2,218
(606)
3,062
1,133
(167)
(638)
33,72628,501(118)(59)
33,60828,442¥202,662 ¥209,564

110,808
132,745
18,882
26,069(1,419)287,085(1,008)286,077$1,725,077$

35,793
188,784
8,512
193,042
5,895
705,603
9,664
58,281
1,205,574

TOYO ENGINEERING CORPORATION Annual Report 2006

23

Consolidated Statements of Operations
Toyo Engineering Corporation and Consolidated Subsidiaries

Years ended March 31, 2006 and 2005

Thousands of
U.S. dollars(Note 1)Millions of yen
2006

2005

2006

Net sales (Note 8)........................................................................................................

¥195,584¥197,945$1,664,824

Cost of sales.................................................................................................................

177,759

180,175

1,513,097

Gross profit...........................................................................................................

17,825

17,770151,727

Selling, general and administrative expenses (Note 9)............................................

13,63013,230116,017

Operating income.........................................................................................................

4,195

4,540

35,710Interest and dividend income.........................................................................................

1,301

1,225

11,075Gain on sales of investment securities.............................................................................

880

36

7,486

Other income:Gain on revision of pension plan....................................................................................

—

248

—

Other..........................................................................................................................

328

169

2,793

2,509

1,678

21,354

Interest expense..........................................................................................................

1,192

1,391

10,145

Foreign exchange loss .................................................................................................

204

406

1,741

Loss on valuation of investment securities ...................................................................

31

130

263

Loss on impairment of fixed assets ..............................................................................

616

—

5,242

Other (Note 10) ..........................................................................................................

301

593

2,562

2,344

2,520

19,953

4,360

3,698

37,111

786

407

6,688

76

(326)

648

862

81

7,336

Other expenses:

Income before income taxes and minority interests ...............................................
Income taxes (Note 4):
Current.......................................................................................................................
Deferred......................................................................................................................
Minority interests........................................................................................................

(148)

(19)

Net income ..................................................................................................................

¥ 3,350¥ 3,598

Per share of common stock:
Net income .................................................................................................................
See notes to consolidated financial statements.

24

TOYO ENGINEERING CORPORATION Annual Report 2006

28,518

U.S. dollars(Note 1)

Yen

¥ 19.11(1,257)$¥20.51$

0.16

Consolidated Statements of Shareholders’ Equity
Toyo Engineering Corporation and Consolidated Subsidiaries

Years ended March 31, 2006 and 2005

Thousands of
U.S. dollars(Note 1)Millions of yen
2006

2005

2006

Balance at beginning of the year.................................................................................

¥13,018¥13,018$110,808

Balance at end of the year.....................................................................................

¥13,018¥13,018$110,808¥15,594¥15,593$132,736

Common stock:

Additional paid-in capital:
Balance at beginning of the year....................................................................................
Add–gain on disposal of treasury stock...........................................................................

1

1

9

Balance at end of the year.......................................................................................

¥15,595¥15,594$132,745

Balance at beginning of the year.................................................................................

¥ (606)¥ (4,278)$ (5,157)

Add–net income .........................................................................................................

3,350

3,598

28,518–Increase due to newly consolidated subsidiaries..............................................

—

77

—

Deduct–Dividends .......................................................................................................

526

—

4,479

–Bonuses to directors .......................................................................................

—

3

—

Balance at end of the year.....................................................................................

¥ 2,218¥ (606)$ 18,882

Balance at beginning of the year.................................................................................

¥ 1,133¥ 1,231$ 9,649

Adjustment for the year...............................................................................................

1,929

(98)

16,420

Balance at end of the year.....................................................................................

¥ 3,062¥ 1,133$ 26,069¥ (638)¥ (805)$ (5,431)

Retained earnings (Note 6):

Net unrealized gain on securities:

Foreign currency translation adjustments:
Balance at beginning of the year.................................................................................
Adjustment for the year ..............................................................................................

471

167

4,012

Balance at end of the year.....................................................................................

¥ (167)¥ (638)$ (1,419)¥¥$

Treasury stock:
Balance at beginning of the year..................................................................................

(59)

Shares increased, net.................................................................................................

(59)

Balance at end of the year......................................................................................

¥ (118)

¥

(35)

(501)

(24)

(507)

(59)

$ (1,008)

See notes to consolidated financial statements.

TOYO ENGINEERING CORPORATION Annual Report 200625

Consolidated Statements of Cash Flows
Toyo Engineering Corporation and Consolidated Subsidiaries

Years ended March 31, 2006 and 2005

Millions of yen
2006

2005

2006

¥ 4,360¥ 3,698$ 37,111

1,701
616
(880)
31
(2,488)
(492)
(85)
237
1,443
(1,301)
1,192(1,192)(277)(6,564)

1,453
—
(36)
130
1,269
1,160
(18)
(19)
1,380
(1,225)
1,390(1,400)(968)(2,122)

14,478
5,242(7,486)263(21,175)(4,192)(721)
2,021
12,284(11,075)
10,145(10,148)(2,355)(55,877)

11,354(11,794)(9,359)7,964(5,534)(2,666)
1,281
1,358
11,287
15,95296,645(100,395)(79,660)
67,791(47,104)

Investing activities:
Purchases of property, plant and equipment ...............................................................
Purchases of other assets ............................................................................................
Purchases of investment securities...............................................................................
Proceeds from sales of marketable securities and investment securities........................
(Increase) decrease in loans, net ..................................................................................
Other, net...................................................................................................................
Net cash provided by (used in) investing activities..................................................

(3,455)
(787)
(5)
1,331
(2,007)353(4,570)(2,096)
(871)
(20)
99
600
189
(2,099)(29,406)(6,704)(40)
11,329(17,085)
3,005(38,901)

Financing activities:
Decrease in short-term bank loans, net .......................................................................
Proceeds from long-term debt.....................................................................................
Repayment of long-term debt .....................................................................................
Proceeds from issuance of bonds ................................................................................
Cash dividends paid....................................................................................................
Other..........................................................................................................................
Net cash provided by (used in) financing activities .................................................
Effect of exchange rate changes on cash and cash equivalents .............................
Net increase (decrease) in cash and cash equivalents..............................................
Cash and cash equivalents, beginning of the year...................................................
Increase in cash and cash equivalents due to newly consolidated subsidiaries ....
Cash and cash equivalents, end of the year..............................................................

(2,309)8,151(12,713)
—
(526)
(127)
(7,524)487(17,141)
45,447—¥28,306(5,401)
6,038(14,770)
2,000
—
(65)
(12,198)
121
1,776
43,615
56¥45,447(19,654)
69,382(108,210)—(4,479)(1,083)(64,044)
4,142(145,907)
386,849—$240,942

Operating activities:
Income before income taxes and minority interests .....................................................
Adjustments to reconcile income before income taxes andminority interests to net cash provided by operating activities:
Depreciation and amortization.................................................................................
Loss on impairment of fixed assets...........................................................................
Gain on sales of marketable and investment securities, net ......................................
Loss on valuation of investment securities.................................................................
Allowance for doubtful receivables ..........................................................................
Allowance for anticipated loss on contract work ......................................................
Equity in earnings of affiliated companies ................................................................
Increase (decrease) in retirement benefits.................................................................
Interest and dividends received.................................................................................
Interest and dividend income ...................................................................................
Interest expense.......................................................................................................
Interest paid.............................................................................................................
Income taxes paid....................................................................................................
Other, net................................................................................................................
Changes in operating assets and liabilities:(Increase) decrease in notes and accounts receivable.............................................
(Increase) decrease in contract work in progress....................................................
Increase (decrease) in notes and accounts payable ................................................
Increase (decrease) in advance receipts on uncompleted contracts ........................
Net cash provided by (used in) operating activities..............................................

See notes to consolidated financial statements.

26

Thousands of
U.S. dollars(Note 1)TOYO ENGINEERING CORPORATION Annual Report 2006

Notes to Consolidated Financial Statements
Toyo Engineering Corporation and Consolidated Subsidiaries

1

BASIS OF PREPARATION
The accompanying consolidated financial statements of Toyo Engineering Corporation (the “Company”) andconsolidated subsidiaries are prepared on the basis of accounting principles generally accepted in Japan, which
are different in certain respects as to application and disclosure requirements of International Financial ReportingStandards, and are compiled from the consolidated financial statements prepared by the Company as requiredby the Securities and Exchange Law of Japan.
The relevant notes and consolidated statements of shareholders’ equity have been added and certain reclassifications have been made to present the accompanying consolidated financial statements in a format that is familiar toreaders outside Japan. For the convenience of the readers, the accompanying consolidated financial statements
have also been presented in U.S. dollars by translating all Japanese yen amounts at the exchange rate of ¥117.48 to
U.S.$1.00 prevailing on March 31, 2006.

2

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its significant
subsidiaries. Investment in significant affiliates is accounted for by the equity method. Intercompany accounts
and transactions are eliminated in consolidation. The difference between the acquisition cost and the equity inthe net assets at the time of acquisition is amortized in principle over twenty years on a straight-line basis.
(b) Securities
All debt and equity securities are classified into one of three categories: trading, available-for-sale or held-tomaturity securities. Trading securities are bought and held principally for the purpose of selling them in the nearterm. Held-to-maturity securities are those securities in which the Company and its domestic subsidiaries have theability and intent to hold until maturity. All securities not included in trading or held-to-maturity are classified asavailable-for-sale.
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded atamortized cost, adjusted for the amortization or accumulation of premiums or discounts. Unrealized gains orlosses on trading securities are included in earnings. Unrealized gains or losses on available-for-sale securities are
excluded from earnings and are reported, net of the related tax effect, as a separate component of shareholders’equity.
Cost of securities sold is determined by the moving average-method.
(c) Contract Work in Progress
Contract work in progress is stated at cost, determined by the identified-cost method.
(d) Depreciation
Depreciation of property, plant and equipment is principally computed by the declining-balance method basedon the estimated useful lives of the assets.
(e) Leases
Noncancelable leases are primarily accounted for as operating leases except that leases which stipulate thetransfer of ownership of the leased assets to the lessee are accounted for as finance leases.
(f) Allowance for Doubtful Receivables
The Company and its domestic subsidiaries have provided an allowance for doubtful receivables principally at an
estimated amount of probable and reasonably possible bad debts plus an estimated amount computed on theactual percentage of credit losses.
(g) Advance Receipts on Uncompleted Contracts
Advance receipts on uncompleted contracts from customers are shown as a liability, not as a deduction from theamount of contract work in progress.

TOYO ENGINEERING CORPORATION Annual Report 200627

(h) Reserve for Anticipated Loss on Contract Work
Reserve for anticipated loss on contract work is provided in case the material loss is forecasted for a certain
large-scale contract work.
(i) Accrued Retirement Benefits
The accrued retirement benefits at the year-end are stated in accordance with the projected plan assets andthe projected retirement benefit obligation. The difference arising from the adoption of the new standard ofaccounting of ¥3,696 million ($31,460 thousand) is amortized over fifteen years on a straight-line basis.
Actuarial loss is amortized over mainly fifteen years starting following the year of recognition. Prior service
cost is amortized over fifteen years.
(j) Derivative Financial Instruments
Derivative financial instruments are carried at fair value with changes in unrealized gain or loss charged or
credited to operations, except for those which meet the criteria for deferral hedge accounting under which
unrealized gain or loss is deferred as an asset or a liability. Receivables and payables hedged by qualified forward foreign exchange contracts are translated at the corresponding foreign exchange contract rates.
(k) Foreign Currency Translation
Both short-term and long-term receivables in foreign currencies are translated at the exchange rates at thebalance sheet date. The balance sheet accounts of the consolidated foreign subsidiaries are translated at therate of exchange in effect at the balance sheet date, except for common stock and additional paid-in capital,
which are translated at their historical exchange rates. Revenues, expenses and net income for the year aretranslated at the rate of exchange in effect at the balance sheet date.
Differences arising from translation are presented as “Foreign currency translation adjustments” in theaccompanying consolidated balance sheets.
(l) Recognition of Revenues
Revenues are recognized on the completion of construction work and acceptance by the client, except for thefollowing contracts.
For contracts with prices equal to or in excess of ¥5 billion ($43 million) and construction periods in excess
of eighteen months, revenues are recognized by the percentage-of-completion method. According to thismethod, the revenue is computed by multiplying the contract price by the ratio of costs incurred at the balance sheet date to the total estimated cost.
Effective from April 1, 2005, the company changed its scope of contracts whose revenues are recognizedby the percentage-of-completion method with respect to the construction period from exceeding two years
to exceeding eighteen months.
The company made this change in accounting policy in order to achieve appropriate recognition of periodic
accounting profit and loss, in light of the recent trend that large construction contracts with short-term periods are increasing. (and in accordance with the international accounting standards.)
As a result of this change, net sales increased by ¥790 million ($6,728 thousands). Operating income andincome before income taxes and minority interests increased by ¥96 million ($824 thousands), comparedwith the amounts which would have been recognized under the previous method of accounting.
(m) Net Income per Share
Net income per share is computed based on the weighted average number of shares outstanding during eachyear. Diluted net income per share is not presented since there was no potential for dilution by the issuance ofcommon stock in 2006 or 2005.
(n) Income Taxes
Deferred tax assets and liabilities are determined based on the differences between carrying amounts of existing assets and liabilities in the financial statements and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates and laws which will be ineffect when the differences are expected to be reversed.
(o) Consolidated Tax Return
The Company files a consolidated tax return with certain domestic subsidiaries.

28

TOYO ENGINEERING CORPORATION Annual Report 2006

(p) Cash and Cash Equivalents
For the purposes of the consolidated statements of cash flows, the Company and its consolidated subsidiaries consider all
highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
(q) Impairment of Fixed Assets
Effective from April 1, 2005, the Company and its consolidated subsidiaries adopted the new accounting standard for impairment of fixed assets (“Opinion Concerning Establishment of Accounting Standard for Impairment of Fixed Assets” issued by
the Business Accounting Deliberation Council on August 9, 2002) and the implementation guidance for the accounting standard for impairment of fixed assets (the Financial Accounting Standard Implementation Guidance No. 6 issued by the
Accounting Standard Board of Japan on October 31, 2003). As a result, income before income taxes decreased by ¥616 million ($5,242 thousand) compared with the amounts which would have been recognized under previous methods of accounting. Accumulated losses are included in the accumulated depreciation.

3

LONG-TERM DEBT
Long-term debt at March 31, 2006 and 2005 is summarized as follows:
Millions of yen

Years ended March 31,
Secured Loans...................................................................................................
Unsecured Loans...............................................................................................
1.080% bonds, due 2007...................................................................................
1.470% bonds, due 2007...................................................................................
Total long-term debt .......................................................................................
Less: Current portion..........................................................................................

Thousands of
U.S. dollars

2006

2005

2006

¥19,149
21,0191,000
2,000
43,16823,178¥19,990¥22,955
21,6081,000
2,000
47,563
11,109¥36,454$163,000
178,9158,512
17,024367,451
197,296$170,155

The following assets at March 31, 2006 and 2005 were pledged as collateral principally for long-term debt:
Millions of yen

Thousands of
U.S. dollars

Years ended March 31,

2006

2005

2006

Notes and accounts receivable..........................................................................
Land and buildings, net of accumulated depreciation........................................

¥ 4,430
22,238¥26,668¥ 6,705
25,340¥32,045$ 37,706
189,294$227,000

The following schedule shows the maturities of long-term debt subsequent to March 31, 2006:
Years ending March 31,
2007 ..................................................................................................................................
2008 ..................................................................................................................................
2009 ..................................................................................................................................
2010 ..................................................................................................................................
2011 ..................................................................................................................................
2012 and thereafter ...........................................................................................................

Millions of yen

Thousands of
U.S. dollars¥23,178
9,179
5,502
1,986
1,491
1,832
¥43,168$197,296
78,132
46,837
16,906
12,68915,591$367,451

In order to maintain access to a stable and effective source of operating capital, the company has entered into commitment-line contracts with eight trading banks.
The balance of unused commitment-line based on these contracts at the end of the consolidated reporting period
is ¥11,960 million ($101,805 thousand) in 2006 and ¥10,000 million in 2005.

TOYO ENGINEERING CORPORATION Annual Report 2006

29

4

INCOME TAXESThe statutory tax rates applicable to the Company and its domestic subsidiaries for the year ended March 31, 2006
and 2005 were approximately 40.4%, respectively. Income taxes of the foreign consolidated subsidiaries are based
generally on the tax rates applicable in their countries of incorporation.
(1) The effective tax rates on income before income taxes in the accompanying consolidated statements ofoperations differed from the above-mentioned statutory tax rate for the following reasons:Year ended March 31, 2006
Statutory tax rate in Japan............................................................................................................................
Adjustments:
Permanently nondeductible expenses........................................................................................................
Permanently nontaxable dividends received ...............................................................................................
Effect on operating loss carryforwards, etc.................................................................................................
Other .....................................................................................................................................................
Effective tax rate............................................................................................................................................

40.4%
6.1
(0.7)
(28.0)
2.0
19.8%

Year ended March 31, 2005
Statutory tax rate in Japan............................................................................................................................
Adjustments:
Permanently nondeductible expenses........................................................................................................
Permanently nontaxable dividends received ...............................................................................................
Effect on operating loss carryforwards, etc.................................................................................................
Other .....................................................................................................................................................
Effective tax rate............................................................................................................................................

40.4%
7.3
(0.3)
(52.0)
6.8
2.2%(2) Significant components of the deferred income tax assets and liabilities at March 31, 2006 and 2005 are as follows:
Millions of yen
2006

2005

Thousands of
U.S. dollars
2006

Deferred tax assets:
Allowance for doubtful receivables ................................................................
¥ 379¥1,331$ 3,227
Accrued retirement benefits...........................................................................
998
838
8,499
Provision for anticipated loss on contract work ..............................................
410
588
3,494
Other............................................................................................................
2,067
1,151
17,594
Total deferred tax assets ...................................................................................
3,854
3,908
32,814
Deferred tax liabilities offset to deferred tax assets:(1,894)(680)(16,124)
Difference in net unrealized gain on securities................................................
Reserve for overseas investment losses...........................................................
(1)
(3)
(9)
Depreciation expense ....................................................................................
(111)
(113)
(945)
Other............................................................................................................
(60)
(46)
(516)
Total deferred tax liabilities ...............................................................................
(2,066)(842)(17,594)
Net deferred tax assets .....................................................................................
¥1,788¥3,066$15,220
Note: The Company and its subsidiaries had operating loss carryforwards equivalent to unrecognized tax assets of¥4,053 million ($34,498 thousand) and ¥5,005 million at March 31, 2006 and 2005, respectively, which areavailable to be offset against future taxable income.

30

TOYO ENGINEERING CORPORATION Annual Report 2006

(3) Net deferred tax assets at March 31, 2006 and 2005 are included in the consolidated balance sheets as follows:
Millions of yen

Current assets–prepaid expenses and other current assets ................................
Other assets......................................................................................................
Other current liabilities......................................................................................
Other long-term liabilities .................................................................................
Net deferred tax assets......................................................................................

5

Thousands of
U.S. dollars

2006

2005

2006

¥1,767193—(172)¥1,788¥2,112
1,113
(1)
(158)
¥3,066$15,039
1,642—(1,461)$15,220RETIREMENT BENEFITSThe Company and certain subsidiaries have defined benefit pension plans which provide for pension annuity payments or lump-sum payments to eligible employees upon retirement.
The Company also has defined contribution pension plan, which was transferred from a portion of defined benefit
pension plan in May, 2003.
(1) Accrued retirement benefits for employees at March 31, 2006 and 2005 consisted of the following:
Millions of yen

Projected benefit obligation..............................................................................
Plan assets........................................................................................................
Unreserved projected benefit obligation............................................................
Unamortized obligation at transition.................................................................
Unamortized actuarial loss................................................................................
Unrecognized prior service cost.........................................................................
Accrued retirement benefits for employees.......................................................

Thousands of
U.S. dollars

2006

2005

2006

¥(15,611)
9,193(6,418)2,226
3,491(1,845)¥ (2,546)¥(15,402)
8,212(7,190)2,476
4,408(1,997)¥ (2,303)$(132,887)
78,250(54,637)
18,94929,718(15,702)$ (21,672)

The consolidated balance sheet includes directors’ and statutory auditors’ retirement allowances of ¥181 million($1,543 thousand) and ¥174 million at March 31, 2006 and 2005, respectively, in addition to the accrued retirement
benefits for employees presented above. The retirement benefit plan for directors and statutory auditors had been
terminated at June 28, 2005. The balance of reserves recorded as of March 31, 2006 are the cumulative amounts up
to the period for the above termination of retirement benefit plan.
(2) Net periodic pension cost for the year ended March 31, 2006 and 2005 consisted of the following:
Millions of yen

Components of net periodic benefit cost:Service cost....................................................................................................
Interest cost...................................................................................................
Expected return on plan assets.......................................................................
Amortization of unrecognized retirement benefit obligation at transition.......
Amortization of unrecognized actuarial loss...................................................
Amortization of prior service cost...................................................................
Other.............................................................................................................
Net periodic pension cost..................................................................................
Payments of special retirement benefits ............................................................
Total..................................................................................................................

Thousands of
U.S. dollars

2006

2005

2006

¥ 646
293
(205)
246
368
(153)
121
1,316
98
¥1,414

¥ 568
298
(206)
250
383
(153)
120
1,260
(248)
¥1,012$ 5,500
2,493(1,749)2,097
3,135(1,299)1,025
11,202
838$12,040TOYO ENGINEERING CORPORATION Annual Report 200631

(3) Basis of calculation of projected benefit obligation for the year ended 2006 and 2005, respectively.
Method of allocation of estimated pension cost
Straight-line method
Discount rate
Mainly 2.0%
Expected rate of return on plan assets
Mainly 2.5%
Amortization period for unrecognized actuarial loss
Mainly 15 years
Amortization period for unrecognized obligation at transition
15 years
Amortization period for unrecognized prior service cost
15 years

6

RETAINED EARNINGSThe Commercial Code of Japan has provided that earnings in an amount equal to at least 10% of appropriations ofretained earnings to be paid in cash be appropriated as a legal reserve until total additional paid-in capital and legal
reserve equals 25% of stated common stock. Either additional paid-in capital or legal reserve may be available fordividends by resolution of the shareholders to the extent that the amount of total additional paid-in capital and legal
reserve exceeds 25% of stated common stock.

7

CONTINGENT LIABILITIESThe Company and its subsidiaries were contingently liable as guarantors of loans to others in the aggregate amountof ¥4,576 million ($38,953 thousand) and ¥2,770 million at March 31, 2006 and 2005, respectively.

8

NET SALESNet sales include revenues recognized by the percentage-of-completion method as described in Note 2 (l).
The following table shows net sales recognized by the percentage-of-completion method:
Millions of yen

Years ended March 31,

9Thousands of
U.S. dollars

2006

2005

2006

¥121,575¥126,496$1,034,854

RESEARCH AND DEVELOPMENT COSTS
Research and development costs included in selling, general and administrative expenses for the years ended March
31, 2006 and 2005 amounted to ¥550 million ($4,678 thousand) and ¥654 million, respectively.

10

OTHER EXPENSES“Other” in “Other expenses” for the years ended March 31, 2006 and 2005 consisted of the following:
Millions of yen

Years ended March 31,
Loss on prior-period adjustment .......................................................................
Loss on retirement of property, plant and equipment .......................................
Payments of special retirement benefits ............................................................
Other................................................................................................................
Total........................................................................................................

32

TOYO ENGINEERING CORPORATION Annual Report 2006

2006

¥ —
—
98
203
¥301

2005

¥162
179
—
252
¥593

Thousands of
U.S. dollars
2006

$

—
—
838
1,724
$2,562

11

LEASES(a) Finance Leases(a-1) Finance Leases (as Lessee)
The following pro forma amounts represent the acquisition costs, accumulated depreciation and net book value ofleased property as of March 31, 2006 and 2005 which would have been reflected in the balance sheets if financelease accounting had been applied to the finance leases currently accounted for as operating leases:
Thousands of
U.S. dollars

Millions of yen

Years ended March 31,
Acquisition costs:
Tools, furniture and fixtures...........................................................................
Accumulated depreciation:
Tools, furniture and fixtures...........................................................................
Net book value:
Tools, furniture and fixtures...........................................................................

2006

2005

2006

¥659

¥730

$5,605

347

397

2,952

312

333

2,653

Future minimum lease payments (including the interest portion thereon) subsequent to March 31, 2006 and 2005
for finance leases accounted for as operating leases are summarized as follows:
Thousands of
U.S. dollars

Millions of yen

Years ended March 31,
Within one year................................................................................................
Over one year...................................................................................................
Total........................................................................................................

2006

¥154
181
¥335

2005

¥174
193
¥367

2006

$1,3081,540$2,848

Lease payments relating to finance leases accounted for as operating leases for the years ended March 31, 2006 and2005 amounted to ¥176 million ($1,496 thousand) and ¥199 million, respectively, which were equal to the depreciation expense of the leased assets computed by the straight-line method over the respective lease terms.
(a-2) Finance Leases (as Lessor)
Future minimum lease receivables (including the interest portion thereon) subsequent to March 31, 2006 and 2005
for finance leases accounted for as operating leases are summarized as follows:
Thousands of
U.S. dollars

Millions of yen

Years ended March 31,
Within one year................................................................................................
Over one year...................................................................................................
Total........................................................................................................

2006

¥18
6
¥24

2005

¥19
15
¥34

2006

$153
49
$202

All the above lease receivables were derived from the subleasing business. As every subleased property was leased tothird parties through the Company’s subsidiary on approximately the same terms, approximately the same amountof future lease receivables as those presented above are included in Table (a-1) as the amount of the future sublease
payments.

TOYO ENGINEERING CORPORATION Annual Report 200633

(b) Operating Leases(b-1) Operating Leases (as Lessee)
Future minimum lease payments subsequent to March 31, 2006 and 2005 for noncancelable operating leases are
summarized as follows:
Thousands of
U.S. dollars

Millions of yen

Years ended March 31,

2006

Within one year................................................................................................
Over one year...................................................................................................
Total........................................................................................................

2005

¥2
3
¥5

2006

¥1
3
¥4

$21
25
$46

(b-2) Operating Leases (as Lessor)
Future minimum lease receivables subsequent to March 31, 2006 and 2005 for noncancelable operating leases are
summarized as follows:
Thousands of
U.S. dollars

Millions of yen

12Years ended March 31,

2006

2005

2006

Within one year................................................................................................
Over one year...................................................................................................
Total........................................................................................................

¥ 1,142
11,594¥12,736¥ 1,144
12,555¥13,699$

9,719
98,688$108,407

INVESTMENT SECURITIESThe cost, unrealized gain and loss and the related fair value of investment securities in Investments at March 31,
2006 are summarized as follows:
Millions of yen

At March 31, 2006

Cost

Investment securities classified as:
Available-for-sale:
Equity securities...........................................................................
Debt securities.............................................................................

¥5,171
412

Unrealized
Gain

Unrealized
Loss

Fair
Value

¥4,861
249

¥(14)
(93)

¥10,018
568

Millions of yen

Thousands of
U.S. dollars¥$

The contractual maturities of debt securities classified as available-for-sale were as follows:
At March 31, 2006
Due within one year ...........................................................................................................
Due after one year through five years.................................................................................
Due after five years through ten years ................................................................................
Due after ten years.............................................................................................................
Total .........................................................................................................................

34

TOYO ENGINEERING CORPORATION Annual Report 2006

2
46
107
413
¥568

15
395
911
3,510
$4,831

The cost, unrealized gain and loss and the related fair value of investment securities in Investments at March 31,
2005 are summarized as follows:
Millions of yen

At March 31, 2005

Cost

Investment securities classified as:
Available-for-sale:
Equity securities...........................................................................
Debt securities.............................................................................

¥5,250367

Unrealized
Gain

Unrealized
Loss

Fair
Value

¥1,656594¥(402)—¥6,504961

Millions of yen

Thousands of
U.S. dollars

The contractual maturities of debt securities classified as available-for-sale were as follows:
At March 31, 2005
Due within one year ...........................................................................................................
Due after one year through five years.................................................................................
Due after five years through ten years ................................................................................
Due after ten years.............................................................................................................
Total .........................................................................................................................

13

¥ 13
167
251
532
¥963

$ 118
1,560
2,338
4,953
$8,969DERIVATIVE TRANSACTIONSThe Company operates internationally in circumstances which give rise to exposure to market risks from fluctuations inforeign currency exchange rates and interest rates. In order to limit those risks, the Company enters into forward foreignexchange contracts, currency swaps and interest rate swaps, etc. in accordance with the Company’s own internal risk control rules. The Company does not have derivative positions for speculative trading purposes. The Company is subject tocredit risk incurred by the default of counter parties to the derivatives. As the Company enters into such agreement onlywith credible counter parties, the risk of any such default is deemed negligible. The Company’s Finance Division is incharge of entering into and monitoring the Company’s derivative positions in order to ensure risk control.
Forward foreign exchange contracts
The Company has entered into forward foreign exchange contracts to reduce its exposure to adverse fluctuations in foreign exchange rates relating to receivables and payables denominated in foreign currencies. The contract amounts and therelated market values of those contracts without firm commitments related to receivables or payables at March 31, 2006
and 2005 were as follows:
Thousands of
U.S. dollars

Millions of yen

At March 31,
Forward foreign exchange contracts to buy U.S. dollars:
Contract amounts..........................................................................................
Related market value .....................................................................................
Net gain ........................................................................................................

2006

¥38
38
¥ 0

2005

¥30
30
¥ 0

2006

$320
321
$ 1

The contract and related market value amounts above exclude forward foreign exchange contracts designated ashedges on forecasted transactions with a firm commitment to the hedged items since such contracts are accounted
for in the financial statements in conjunction with the computation of foreign exchange gain and loss by the deferral of gain and loss.
The contract and related market value amounts above do not directly indicate the level of market risk or credit risk
incurred, as these amounts do not indicate the potential risk of the forward foreign exchange contracts.

TOYO ENGINEERING CORPORATION Annual Report 200635

Interest rate swaps
The Company has entered into interest rate swap agreements to reduce its interest expense or its exposure toadverse fluctuations in interest rates relating to loans payable. The total notional amounts and related market valueof these interest rate swap agreements at March 31, 2006 and 2005 were as follows:
Thousands of
U.S. dollars

Millions of yen

At March 31,

2006

Notional amounts.............................................................................................
Related market value ........................................................................................
Net gain .......................................................................................................

¥600
1
¥ 1

2005

2006

¥800
2
¥ 2

$5,107
9$
9

The notional amounts and related market value amounts above exclude interest rate swaps agreements designatedas hedges on forecasted transactions with a firm commitment to the hedged items since such agreements are or will
be accounted for in the financial statements as interest on borrowings allocated periodically based on fixed rate.
Credit derivative swaps
The Company has entered into credit derivative swap agreement to reduce its credit exposure relating to collectionof receivables. The total notional amounts and related market value of credit derivative swap agreements at March
31, 2006 and 2005 were as follows:
Thousands of
U.S. dollars

Millions of yen

At March 31,

2006

Notional amounts.............................................................................................
Related market value ........................................................................................
Net loss .........................................................................................................

14

2005

¥940
1
¥ (6)

2006

¥—
—
¥—

$8,0000$ (55)

SEGMENT INFORMATION(1) Business Segments
Millions of yen

Year ended March 31, 2006
I Net sales and operating income:Net sales(1) Net sales to outside customers.................................
(2) Inter-segment net sales............................................
Total.............................................................................
Operating expenses.........................................................
Operating income.........................................................
II Assets, depreciation and capital expenditures:
Assets..............................................................................
Depreciation....................................................................
Capital expenditures........................................................

36

TOYO ENGINEERING CORPORATION Annual Report 2006

EPC
BusinessReal
EstateTotal

Eliminations
and Other Consolidated¥193,4183
193,421
190,297
3,124¥ 2,166
322
2,488
1,394
1,094

¥195,584
325
195,909
191,691
4,218¥¥173,826
1,284
1,448

¥18,327
418
2,794¥192,153
1,702
4,242

¥10,509 ¥202,662
(1)
1,701
(0)
4,242

— ¥195,584(325)—(325) 195,584(302) 191,389
(23)
4,195

Millions of yen

Year ended March 31, 2005

EPC
BusinessReal
EstateTotal

Eliminations
and Other Consolidated

I Net sales and operating income:Net sales¥195,654¥ 2,291 ¥197,945¥ — ¥197,945(1) Net sales to outside customers.................................
(2) Inter-segment net sales............................................
2
252
254
(254)
—
Total.............................................................................
195,656
2,543
198,199(254) 197,945
Operating expenses.........................................................
192,171
1,495
193,666(261) 193,405
Operating income.........................................................
3,485
1,048
4,533
7
4,540
II Assets, depreciation and capital expenditures:¥186,695¥15,804 ¥202,499¥7,065 ¥209,564
Assets..............................................................................
Depreciation....................................................................
1,067
394
1,461
(0)
1,461
Capital expenditures........................................................
1,115
1,842
2,957
(0)
2,957
Notes: 1.The classification of the business segments adopted is based on the Company segmentation which isdetermined by the similarity of each business.
2.The Companies’ reportable operating segments consist of the following two business groups:
EPC Business — Engineering, procurement and construction for chemical fertilizer and petrochemicalplants, energy-related businesses, general manufacturing facilities and information technology
Real Estate — Rent and administration of real estate
3.All administrative department expenses of the Company and consolidated subsidiaries are allocated to thecorresponding business segments.
4.Assets included in “Eliminations and Other” for the years ended March 31, 2006 and 2005 totaling¥10,923 million ($92,980 thousand) and ¥7,349 million primarily consisted of investment in securities.
5.The effect of the change on the scope of application of the percentage-of-completion method described inNote, 2 (l) was to increase Net sales to outside customers and Operating income of EPC Business for the year
ended March 31, 2006 by ¥790 million ($6,728 thousand) and ¥96 million ($824 thousand), respectively.
6.The impairment losses were recorded in EPC Business and Real estate for the year ended March 31, 2006by ¥445 million ($3,785 thousand) and ¥171 million ($1,457 thousand), respectively.
(2) Geographic Segments
Millions of yen

Year ended March 31, 2006
I Net sales and operating income:Net sales(1) Net sales to outside customers.................................
(2) Inter-segment net sales............................................
Total.............................................................................
Operating expenses.........................................................
Operating income ........................................................
II Assets:
Assets..............................................................................

Japan

OthersTotal¥181,837
425
182,262
178,598
3,664¥13,747
10,212
23,95923,529430¥195,584
10,637206,221202,127
4,094

190,327

17,714

208,041

Eliminations
and Other Consolidated¥— ¥195,584(10,637)—(10,637) 195,584(10,738) 191,389
101
4,195
(5,379)202,662

TOYO ENGINEERING CORPORATION Annual Report 2006

37

Millions of yen

Year ended March 31, 2005

Japan

OthersTotal

Eliminations
and Other Consolidated

I Net sales and operating income:Net sales¥190,447¥ 7,498 ¥197,945 ¥— ¥197,945(1) Net sales to outside customers.................................
(2) Inter-segment net sales............................................
83
15,802
15,885(15,885)—
Total.............................................................................
190,530
23,300213,830(15,885) 197,945
Operating expenses.........................................................
186,207
22,943
209,150(15,745) 193,405
Operating income ........................................................
4,323
357
4,680
(140)
4,540
II Assets:
Assets..............................................................................
200,823
17,338218,161(8,597) 209,564
Notes: 1.Geographic segmentation is according to geographic proximity.
2.Countries included in Others: Korea, Malaysia, India, Luxembourg, U.S.A. and PR China
3.Net sales and Assets included in “Eliminations and Other” are mainly due to inter-segment transaction.
(3) Sales to Foreign Customers
Millions of yen

Year ended March 31, 2006
Overseas sales (A) ..........................................
Consolidated sales (B) ....................................
Overseas sales ratio (A/B) ............................

Southeast
Southwest Asia,
Russia andCentral andAsia
Middle East and Africa Central Asia South America

OthersTotal¥132,482
195,584
67.7%¥8,420¥54,717¥44,890¥8,115¥16,340

4.3%

28.0%

23.0%

4.1%

8.3%

Millions of yen

Year ended March 31, 2005

Southeast
Southwest Asia,
Russia andCentral andAsia
Middle East and Africa Central Asia South America

Overseas sales (A) ..........................................
¥26,586¥44,151
Consolidated sales (B) ....................................
13.5%
22.3%
Overseas sales ratio (A/B) ............................
Each area represents the following countries:
Southeast Asia: Indonesia and Malaysia
Southwest Asia, Middle East and Africa: India, Saudi Arabia and Iran
Russia and Central Asia: Russia
Central and South America: Brazil
Others: U.S.A., PR China, Korea and European countries

15

OthersTotal¥143,444
197,94572.5%¥39,647¥8,690¥24,370

20.0%

4.4%

12.3%

SUBSEQUENT EVENT
Issue of new ordinary shares to third parties
At the Company’s Board of director’s meeting held on May 12, 2006, the Company resolved the issue of new ordinary shares to designated third parties, effective on May 31, 2006. Details are as follows.
(1) Number of shares to be issued
Ordinary shares, 17,100,000 shares(2) Issue price¥605 per share(3) Aggregate issue amount¥10,346 million ($88,062 thousand)

38

TOYO ENGINEERING CORPORATION Annual Report 2006

Independent Auditors’ Report

TOYO ENGINEERING CORPORATION Annual Report 2006

39

Worldwide Network
Jakarta

Kuala Lumpur

Indonesia● TECHNOLOGY RESEARCH CENTER
1818 Azafujimi, Togo, Mobara-shi,
Chiba 297-0017, Japan
Tel: 81-475-24-4551
Fax: 81-475-22-1338
Overseas Offices● Beijing
E. 7th Fl., Bldg. D, Fuhua Mansion,
Chaoyangmen North Avenue No. 8,
Beijing 100027, China
Tel: 86-10-6554-4515
Fax: 86-10-6554-3212● Shanghai
17th Fl., Shanghai Zhongrong Plaza,No. 1088 Pudong South Road, Pudong
New District, Shanghai 200122, China
Tel: 86-21-5888-9935
Fax: 86-21-5888-8864/8874● Jakarta
Midplaza, 8th Fl., Jl. Jendral Sudirman
Kav. 10-11, Jakarta 10220, Indonesia
Tel: 62-21-570-6217/5154
Fax: 62-21-570-6215● Moscow
Room No. 605, World Trade Center,
Krasnopresnenskaya Nab., 12,
Moscow 123610, Russia
Tel: 7-495-258-2064/1504
Fax: 7-495-258-2065● TehranWest Side / Grand Floor, No. 4 Alvand
Street, Argentine Square, Tehran, Iran
Tel: 98-21-8866-3088/4598
Fax: 98-21-8879-4019
MAJOR SUBSIDIARIESAND AFFILIATED COMPANIESDomestic● TEC Estate, Ltd.
Property development and real estate business
7-7-1 Yatsu, Narashino-shi,
Chiba 275-0026, Japan
Tel: 81-47-470-8381
Fax: 81-47-474-7381

40

MumbaiBangkok● HEAD OFFICE
2-8-1 Akanehama, Narashino-shi,
Chiba 275-0024, Japan
Tel: 81-47-451-1111
Fax: 81-47-454-1800
URL http://www.toyo-eng.co.jp/● TOKYO HEAD OFFICE
Kasumigaseki Bldg., 3-2-5 Kasumigaseki,
Chiyoda-ku, Tokyo 100-6007, Japan
Tel: 81-3-3592-7411
Fax: 81-3-3593-0749

Malaysia

India

Thailand

TehranIranShanghai
Beijing

China

China

Seoul
Korea

Japan

● Tecno Frontier Co., Ltd.
Environmental engineering andconstruction of facilities
2-8-1 Akanehama, Narashino-shi,
Chiba 275-0024, Japan
Tel: 81-47-454-1178
Fax: 81-47-454-1550【HEAD OFFICE】
2-2-7 Honcho, Funabashi-shi,
Chiba 273-0005, Japan
Tel: 81-47-433-7234● TEC Air Service Corporation
Travel and insurance services
2-6-7 Ginza, Chuo-ku, Tokyo 104-0061, Japan
Tel: 81-3-3564-0130
Fax: 81-3-3564-0530● Toyo Business Engineering Corporation
System consulting and solutions provider
17th / 20th Fl., KDDI Otemachi Bldg.,
1-8-1 Otemachi, Chiyoda-ku,
Tokyo 100-0004, Japan
Tel: 81-3-3510-1600
Fax: 81-3-3510-1624● Chiba Data Center Corporation
Data input service, documentation using
word processors and printing
6-5-3 Tendai, Inage-ku, Chiba-shi,
Chiba 263-0016, Japan
Tel: 81-43-284-3611
Fax: 81-43-284-3533● TEC Accounting & Consulting Ltd.
Business support and consulting foraccounting and accounting systemdevelopment
2-8-1 Akanehama, Narashino-shi,
Chiba 275-0024, Japan
Tel: 81-47-454-1690
Fax: 81-47-454-1289
Overseas● International Procurement &Service Corporation
Procurement services in Europe
25, Route d’Esch, L-1470, Luxembourg
Tel: 352-497511
Fax: 352-487555● Suntec Corporation
Real estate and building maintenance
2-2-7 Honcho, Funabashi-shi,
Chiba 273-0005, Japan
Tel: 81-47-433-4511
Fax: 81-47-433-4593● Toyo U.S.A., Inc.
Procurement services and market
development in the U.S.
15415 Katy Freeway, Suite 600,
Houston, TX 77094, U.S.A.
Tel: 1-281-579-8900
Fax: 1-281-599-9337● TEC Software &Technical Services Corporation
Staffing services, job placement services
and translation / interpretation
7-11-5 Honcho, Funabashi-shi,
Chiba 273-0005, Japan
Tel: 81-47-425-8461
Fax: 81-47-425-8464● Toyo do Brasil–Consultoria E
Construcoes Industriais Ltda.
Engineering and construction forplants and facilities
Praia de Botafogo, 228-Sala 801C-Ala B,
Botafogo, 22359-900, Rio de Janeiro-RJ, Brazil
Tel: 55-21-2551-1829
Fax: 55-21-2551-2048

TOYO ENGINEERING CORPORATION Annual Report 2006

Moscow
RussiaLuxembourg

Rio de Janeiro
BrazilHoustonU.S.A.

● Toyo Engineering Corporation, China
Engineering and construction forplants and facilities
17th Fl., Shanghai Zhongrong Plaza,No. 1088 Pudong South Road, Pudong
New District, Shanghai 200122, China
Tel: 86-21-5888-9935
Fax: 86-21-5888-8864/8874● Toyo Engineering Corporation(China) Procurement
Procurement services in China
17th Fl., Shanghai Zhongrong Plaza,No. 1088 Pudong South Road, Pudong
New District, Shanghai 200122, China
Tel: 86-21-5888-9935
Fax: 86-21-5888-8864/8874● Toyo Engineering India Limited
Engineering and construction forplants and facilities"Toyo House", L.B.S. Marg, Kanjurmarg(West), Mumbai-400 078, India
Tel: 91-22-2579-9001
Fax: 91-22-2579-9061/9062● Toyo Engineering Korea Limited
Engineering and construction forplants and facilities
Toyo Bldg., 677-17, Yeoksam-1 Dong,
Kangnam-ku, Seoul, 135-081, Korea
Tel: 82-2-2189-1619
Fax: 82-2-2189-1891● Toyo-Thai Corporation Ltd.
Engineering and construction forplants and facilities
22nd Fl., Serm-Mit Tower, 159 Soi Asoke,
Sukhumvit 21 Road, Bangkok 10110,
ThailandTel: 66-2-260-8505
Fax: 66-2-260-8525/8526● Toyo Engineering &Construction Sdn. Bhd.
Engineering and construction forplants and facilities
Suite 25.4, 25th Fl., Menara Haw Par,
Jalan Sultan Ismail, 50250 Kuala Lumpur,
Malaysia
Tel: 60-3-2078-5796
Fax: 60-3-2078-5798(As of June 28, 2006)

Corporate Data
(As of March 31, 2006)

Founded:May 1, 1961

Paid-in Capital:¥13,018 million

Number of Employees:

995

Stock Exchange Listing:Tokyo Stock Exchange

Authorized Shares:

500,000,000

Capital Stock Issued:

175,692,539

Number of Shareholders:

15,882Administrator of
Shareholders’ Register:

The Chuo Mitsui Trust and Banking Co., Ltd.
3-33-1 Shiba, Minato-ku, Tokyo 105-8574, Japan

Major Shareholders:Number of shares(thousands)

Percentage of total(%)

26,67015.17

Mitsui & Co., Ltd.
Mitsui Chemicals, Inc.

25,343

14.42

Japan Trustee Services Bank, Ltd.

18,000

10.24

The Chase Manhattan Bank,
N.A. London S.L. Omnibus Account

4,024

2.29

Taisei Corporation

4,000

2.27

Kanto Natural Gas Development Co., Ltd.

3,956

2.25

Bank of New York, GCM Client Accounts EISG

3,877

2.20

Japan Securities Finance Co., Ltd.

2,771

1.57

HSBC Bank Plc-Clients Nontax Treaty

2,750

1.56

Sumitomo Mitsui Banking Corporation

2,350

1.33

Note: On May 31, 2006, the Company increased its capital through a private placement of 17.1 million shares with Mitsui & Co., Ltd.

Others0.49

Financial institutions
22.54

Less than 5,000 shares
9.66
5,000–49,999 shares
14.48

Individuals
24.32

Number of
Shares Held

Type of
Shareholder

(%)

(%)

Foreign shareholders
15.65

Stock Price:

1,000,000 shares or more
62.30

Domestic companies
37.00

1,000

50,000–499,999 shares
9.78

500,000–999,999 shares
3.78

Stock Price Range(Yen)

Trading Volume(Thousands of Shares)

900
800
700
600
500
400
300
200
100
0

200,000
150,000
100,000
50,0000

4 5 6 7 8 9 10 11 12 1 2 3
FY20034 5 6 78 9 10 11 12 1
FY20042 3 4 5 6 7

8 9 10 11 12 1

2 3

FY2005TOYO ENGINEERING CORPORATION Annual Report 2006

41

Toyo Engineering Corporation Annual Report 2006

Address : 2-8-1, Akanehama,Narashino-shi, Chiba 275-0024, Japan
Tel: 81-47-451-1111
Fax: 81-47-454-1800
http://www.toyo-eng.co.jp/

Annual Report

20

Year ended March 31, 2006

PRINTED WITH

SOY INK

TMThis report was printed with soy ink and was produced with waterless printing methods.

쏘2006 Toyo Engineering Corp.
Printed in Japan