Think Globally, Act Locally

Redefining the Future of Industrial Gases

Annual Report

2012Year Ended March 31, 2012

CONTENTS
Proﬁle1Management Philosophy

1Business Portfolio

2

To Our Stakeholders

10

New Medium-Term Business Plan
GEAR UP 10

12

Business Activities

16

Taiyo Nippon Sanso in Asia

18

Corporate Governance22

Corporate Social Responsibility

23

Board of Directors, Corporate Auditors andCorporate Ofﬁcers

24

Six-Year Summary

25

Management’s Analysis of Operating Resultsand Financial Position

26

Consolidated Financial Statements

30

Notes to Consolidated Financial Statements

35

Report of Independent Auditors

54

Investor Information

55

Disclaimer Regarding Forward-Looking Statements
This annual report contains forward-looking statements regarding the futureplans, strategies, activities and performance of Taiyo Nippon Sanso
Corporation. Forward-looking statements reﬂect management’s assumptions
and beliefs based on information available as of the date of this document’s
publication and inherently involve risks and uncertainties. Actual results may
thus differ substantially from these statements. Risks and uncertainties
include, but are not limited to, changes in general economic and speciﬁcmarket conditions, currency exchange rate ﬂuctuations and evolving trends indemands for the Company’s products and services.

Profile
Taiyo Nippon Sanso Corporation was created through the merger of
Nippon Sanso Corporation and Taiyo Toyo Sanso Co., Ltd., on October 1,
2004. Today, the Company continues to draw on the capabilities of its
two predecessors as it strives to become an Asian-born major player inthe global industrial gases industry.

Management Philosophy“Market-driven collaborative innovation:
improving the future through gases”

Taiyo Nippon Sanso Corporation | Annual Report 20121

Business Portfolio
Throughout our history, we have worked to diversify our operations bybuilding on our extensive experience as a provider of industrial gases andour state-of-the-art proprietary gas technologies, in the process creating abroad-based business model that centers on supporting the corporate
activities of customers in various industries worldwide. In this section, we
present information on our operations, focusing on the nature, competitive
advantages and market position of each of our business units.

2

Taiyo Nippon Sanso Corporation | Annual Report 2012

Industrial gas business
Outline of businessIn line with our commitment to provide industrial gases to customers when and where needed, we have gas production
and supply capabilities in Japan, the United States and across Asia, including in China and India. This enables us toensure safe, stable supplies of gases to customers in the manner that best suits their particular needs, as well as to help
customers enhance their quality and productivity. Our distinctive gas technologies continue to earn us high marks from
customers in a wide range of industries, including manufacturing and processing, materials, energy, chemicals,
agriculture, food, bioscience and aerospace.

Competitive advantages
Leading share of Japan’s market for industrial gases
Number 1 in oxygen, nitrogen and argon, number 1 in helium and carbon dioxide and number 2 in acetylene, we enjoy a 40% shareof the domestic market for industrial gases. In addition to approximately 30 liquid gas production bases and 200 filling stations
nationwide, we have an extensive network of shipping bases and a fleet of tanker trucks. At our liquid gas production bases, we are
steadily replacing equipment with state-of-the-art, energy-efficient air separation plants.

One of only six companies in the world with rights to conduct transactions directly with major helium producers
In the United States, subsidiary Matheson Tri-Gas, Inc., formed a joint venture with Air Products and Chemicals, Inc., thereby establishing itself as a helium producer. In China, India and elsewhere in Asia, we are pressing forward with the construction of helium
filling stations with the aim of expanding our supply capabilities.

Building air separation plants in the United States and Asia
In the United States, we are currently building new air separation plants in North Dakota and Florida, which are slated for completionin September 2012 and November 2012, respectively. In Asia, we completed an air separation plant in Vietnam in February 2012 andplan to complete additional units in November 2012 and within 2013, the former in the Philippines and the latter in India.

Taiyo Nippon Sanso Corporation | Annual Report 20123

Plants and engineering
Outline of businessAs a manufacturer of plants, which underpin our industrial gas business, we boast an extensive lineup, ranging fromultrahigh-purity manufacturing equipment for customers in the electronics industry to large-scale plants for steel
manufacturers and specialized containers for the cryogenic transport of helium, and enjoy a favorable reputation for
all products both in Japan and overseas. Our portfolio also includes space-simulation chambers, large-scale helium
refrigeration systems and other cutting-edge offerings, which we market primarily for use in space development andin R&D in the area of superconductive technologies.

Competitive advantages
Top share of the domestic market for air separation plants
Leveraging our wealth of accumulated cryogenic and adsorption technologies to reduce consumption ofelectricity and cost per unit of production, as well as to increase the quality and size of equipment
Capitalizing on simulation technologies to ensure the optimal operation of air separation plants in response todifferent requirements
One of only three helium container manufacturers worldwide and the only one in JapanWe are expanding our production capacity to accommodate rising demand for containers that facilitate the cryogenic transport ofhelium over long distances.

4

Taiyo Nippon Sanso Corporation | Annual Report 2012Electronics-related businesses
Outline of business
Manufacturers in the electronics industry face growing pressure to achieve higher product quality and production efficiency. We assist such firms by installing Total Gas Centers (TGCs), which feature ultrahigh-purity nitrogen manufacturing
equipment and facilities for producing and supplying electronics materials gases, adjacent to the production facilities ofmajor customers, thereby ensuring steady around-the-clock gas supplies.
We also supply metal organic chemical vapor deposition (MOCVD) equipment, used in the production of compound
semiconductors for light-emitting diodes (LEDs) and power devices and are the only company in the world that can provide integrated services, encompassing everything from the production of equipment through to the supply of electronicmaterials gases and the abatement of toxic exhaust gas. To date, we have delivered MOCVD equipment to customers
around the world for use in applications ranging from R&D to mass production, which uses large-scale MOCVD systems.

Competitive advantages
Total gas, equipment and quality control solutions
Supply structure encompassing key global markets
Our supply structure covers Japan, East Asia (South Korea, China and Taiwan), Southeast Asia, the United States and Europe.

Newly developed MOCVD system (UR-26K)
This system helps deliver world-class surface processing performance and boasts a yield rate of 10 six-inch or six eight-inch
substrates.

Upstream business strategy for electronics materials gases
We have commenced production of hydrogen compounds, essential to the manufacture of semiconductors, liquid crystal display(LCD) panels and solar cells in Japan and the United States.

Taiyo Nippon Sanso Corporation | Annual Report 20125

LP gasOutline of business
We wholesale LP gas to production facilities and for other industrial applications, and supply it to fueling stations for taxis
and other vehicles and a wide range of other customers, from restaurants and other commercial users to residential
users. We also sell related equipment and devices, including gas heat pumps, air conditioners, fuel cells for homes andhot water heaters, as well as design, build and provide maintenance services for LP gas supply facilities.

Competitive advantages
Ranked ninth in Japan in terms of market share, with an annual LP gas supply capacity of 410,000 tons
Providing a stable supply of LP gas to approximately 100,000 households that lack access to town gas services;
strengthening and improving the efficiency of our domestic network for supplying commercial users by integrating
and/or expanding sales and delivery sites

6

Taiyo Nippon Sanso Corporation | Annual Report 2012

Medical businesses
Outline of businessIn addition to providing stable supplies of high-quality medical gases, we develop, manufacture, sell and provide maintenance services for gas supply systems for hospitals, as well as home oxygen therapy (HOT) and other home healthcare
equipment. We also extend comprehensive support in the form of around-the-clock services, including remote monitoringof gas levels and follow-up services for home healthcare equipment, provided in cooperation with retailers. Applying ouradvanced gas technologies, we provide products for the biotechnology field, including cryopreservation containers forbioresources for research applications, as well as stable isotopes and specialty gases for use in advanced diagnostics
and medical treatment.

Competitive advantages
Expanding production facilities in response to growth in the global market for Water-18O, a pharmaceutical reagent
used in positron emission tomography (PET) cancer diagnostics, thereby enabling us to supply customers in morethan 20 countries, including the United States.
Japan’s leading name in cryopreservation containers for bioresources, which are crucial to the biotechnology
field, container management systems and cryopreservation and auto-pick-up systems (product name:CryoLibrary)
The largest number of production bases, filling facilities and distribution bases for medical gases in Japan,
facilitating stable supplies nationwide; a well-organized distribution and maintenance network that includes the
Medical Technical Center, a comprehensive facility for distribution and maintenance that helps ensure stablesupplies to hospitals and high product quality.
Have commenced sales of OXYMED-brand medical gas supply equipment and systems for hospitals, developed
through an integrated process that encompasses design, manufacturing, and testing and maintenance services.

Taiyo Nippon Sanso Corporation | Annual Report 2012

7

Thermos businesses
Outline of business
Thermos K.K. is recognized as a pioneer in the stainless steel vacuum bottle industry. Leveraging its outstanding vacuum
insulation and metal processing technologies, Thermos manufactures a wide range of stainless steel vacuum bottles,
vacuum insulated cooking pots and other items for home and commercial use. Trusted by customers the world over,Thermos has established its own stringent quality standards and an integrated production system that encompasses
planning, development, manufacturing and sales.

Competitive advantages
Products that are developed in Japan and manufactured in Malaysia and China, sales in approximately 120
countries and territories worldwide, a reputation for unconditional commitment to quality and a solid top global
market share
Reinforcing manufacturing facility in China in response to growth in markets for stainless steel vacuum bottles
worldwide
Named Product of the Year in the 2011 Eco Mark Awards, sponsored by the Japan Environment Association

8

Taiyo Nippon Sanso Corporation | Annual Report 2012

Hydrogen
Outline of business
Against a backdrop of growing interest in ways to reduce the impact of human life on the environment, we areparticipating in the Japan Hydrogen & Fuel Cell Demonstration Project (JHFC), a national project that is using ouradvanced gas technologies to promote the development of fuel cell-powered vehicles (FCVs), and the Hydrogen Supply
Utilization Technology (HySUT) project, the aim of which is to establish a hydrogen filling station infrastructure in Japan.
In both initiatives, we are sharing our know-how in the operation of hydrogen filling stations for servicing FCVs with aview to eventual commercialization.
Taking full advantage of petroleum refining complexes’ need to reinforce competitiveness by enhancing theiroperating efficiency and improving their environmental performance, we have begun developing a system that will enable
the efficient recovery and reuse of hydrogen gas emitted during refining.

Competitive advantages
Successful commercialization of a hydrogen filling station dispenser that achieves a filling pressure of
70 megapascals (MPa), a filling speed of 5.0 kg/three minutes and hydrogen cooling as low as −40° C.
Construction of the Narita Hydrogen Station, a packaged offsite hydrogen station, which will support the operationof FCVs between central Tokyo and Narita International Airport

Taiyo Nippon Sanso Corporation | Annual Report 20129

To Our Stakeholders

Hirosuke Matsueda
ChairmanYasunobu Kawaguchi
President

Despite signs of a recovery in the U.S. economy in fiscal year 2012, the year ended
March 31, 2012, the outlook for the global economy remained uncertain, owing to theworsening European sovereign debt crisis, slowing growth in emerging economies andthe disruption of supply chains caused by the devastating floods in Thailand. In Japan,
economic conditions deteriorated further, reflecting the protracted impact of the Great
East Japan Earthquake, which struck March 11, 2011, and the resulting nuclear power
plant disaster, which has put increasing pressure on electric power supplies, as well as
the rapid appreciation of the yen.

In such an environment, our overseas operations reported firm results, benefiting from a
gradual recovery in demand for industrial gases in North American markets, as well asfrom demand in Asian markets, particularly China, from principal customer industries.
Despite a steady recovery in production levels, which had fallen off in the wake of theearthquake, demand in the domestic market was weak overall, a consequence of dwindlingdemand from the electronics industry. In this environment, consolidated net sales
declined 1.3%, to ¥477,451 million, and operating income fell 12.4%, to ¥31,067 million.

10

Taiyo Nippon Sanso Corporation | Annual Report 2012

In fiscal year 2012, we embarked upon a new three-year medium-term business plan, underwhich we have set ambitious consolidated numerical targets for fiscal year 2014, notably, net
sales of ¥650 billion and operating income of ¥60 billion. While harsh operating conditions
caused us to fall short of our forecasts for the plan’s first year, we will maintain our focus on thebasic policies of the plan, which are tostrengthen compliance and ensure safety and quality control,
promote efficient management by rigorously pursuing cost and labor benefits,strengthen regional sales bases,
focus on our cylinder business,
strengthen R&D andcontinue proactive investment.

We will also continue advancing our key strategies, which are toconcentrate management resources in growing markets and regions,strengthen upstream strategies,
promote our M&A strategy,
implement cost reductions andstrengthen Group management.

With our operating environment expected to remain challenging for the foreseeable future, we
pledge to work as one toward our long-term target for consolidated net sales of ¥1,000 billion,
which we hope to achieve by 2020 at the latest. In these and all our efforts, we look forward to
the ongoing support of stakeholders.

July 2012

Hirosuke Matsueda, Chairman

Yasunobu Kawaguchi, President

Taiyo Nippon Sanso Corporation | Annual Report 201211

NEW MEDIUM-TERM BUSINESS PLAN

GEAR UP 10
With the aim of establishing Taiyo Nippon Sanso as an Asian-born major player
in the global industrial gases industry, we are taking decisive steps to strengthen
our domestic operating foundation and accelerate the expansion of our global
operations with the aim of building enhanced corporate value. In fiscal year
2012, we embarked upon a new medium-term business plan, dubbed
Gear Up 10, which will guide us through fiscal year 2014. This plan constitutes
the first phase of our medium- to long-term vision.

Net Sales: Results and Forecasts(Billions of Yen)

Operating Margin

600
500
400

7.8%

300
200

650.0
50.0

CAGR 10.4%/Year
483.6
Overseas
114.0

(%)

Return on Capital Employed (ROCE)

700

477.4
Overseas116.0

Overseas
180.0

10.8%
Strategic M&A
9.2%

10
9
8

7.0%

7

7.3%
Japan
369.6

11

Japan
361.4

6.5%

6

Japan
420.0

100

5

0

0

FY2011FY2014(Target)

FY2012

Operating Income: Results and Forecasts(Billions of Yen)
70

60.0
60

CAGR 19.2%/Year
Overseas
18.4

50
40
30
20
10

35.4
6.1
Japan
30.5

0

FY2011

12

Overseas31.0
5.0

Overseas
Japan
36.7

Japan
27.0
Eliminations(1.2)

FY2012Strategic M&A
Improving efﬁciency and cost reductions
Net Income +2.0

Eliminations(1.0)

FY2014(Target)Eliminations(1.1)

Taiyo Nippon Sanso Corporation | Annual Report 2012

Note: Total investment in strategic
M&A (fiscal year 2012 to fiscal
year 2014): ¥100 billion

Positioning of Plan
Build a strong operating base capable of supporting continued growth• A new start for our 101st year reviewing our origins• Solidify our foundation for further development and prepare us for the next 50–100
years

Principal Strategies
Ensure sustainable growth by improving efficiency and profitability• Concentrate management resources in growing markets and regions• Strengthen upstream strategies• Promote our M&A strategy• Implement cost reductions• Strengthen Group management

Quantitative Targets
Pursue ambitious performance targets in tandem with our “triple 10” medium-term
performance benchmarks

Capital Expenditures and Equity Investment(Billions of Yen)FY2011

Estimate for fiscal 2012–2014

%

Japan

19.5

83.0

48.8

U.S.A.

28.6

61.5

36.2

China

2.7

9.0

5.3

Asia

3.4

16.5

9.7

Total

54.2

170.0

100.0

Note: Does not include investments in strategic M&A

Taiyo Nippon Sanso Corporation | Annual Report 201213

NEW MEDIUM-TERM BUSINESS PLAN

Gear Up 10 sets out five principal strategies designed to help us build a strong operating
foundation capable of supporting continued growth and improving efficiency andprofitability, and ensure sustainable profitable growth. In these two pages, we look at anumber of timely initiatives currently in progress from the perspective of these strategies.
A Progress and Achievements

B New Strategic Directions

the state of Maharashtra. The plant, our first such facility inConcentrate management resources in growing markets

India, is scheduled to commence operations in 2013.

and regions

New air separation plants come on line in Vietnam

B In line with a $100 million investment plan that will run

A Our new air separation plant in the province of Hung Yen,

through fiscal year 2016, we will expand our supply

in northern Vietnam, commenced full production in April 2011.

capabilities in India beyond helium to include general industrial

This was followed in February 2012 by the completion of angases and electronics materials gases, with the aim of

air separation plant in Phu My, in the province of Ba Ria-Vung

increasing our share of the Indian industrial gases market.

Tau, near Ho Chi Minh City, in southern Vietnam. The newplants have reinforced our position as the market leader inIntroducing a next-generation MOCVD system (UR-26K)

Vietnam in terms of liquid gas production capacity.

A We recently launched the UR-26K, a state-of-the-art
large-scale metal organic chemical vapor deposition (MOCVD)B In 2011, we signed a contract to supply industrial gases

system that boasts yield rates of 10 six-inch or six eight-inchby pipeline to a major electric furnace steelmaker in southern

substrates and 1.5 times the production efficiency of its

Vietnam.

predecessor with no increase in footprint.

Expanding air separation plant capacity in the Philippines

B In January 2011, we established a joint venture in SouthA In fiscal year 2012, we began construction of an air

Korea with local partner PSK Inc. This move has enhanced

separation plant in the Philippines on the island of Mindanao.

our ability to serve customers in the rapidly growing Korean,

The new plant—our first liquid gas production facility on

Taiwanese and Chinese markets.

Mindanao—is scheduled for completion in November 2012
and will position us well to respond to the expansion of the

Production and supply of medical-use oxygen begins inlocal industrial gases market. We are also pushing forward

Shanghaiwith plans to expand our large-scale air separation plant north

A In fiscal year 2012, joint venture Taiyo Nippon Sanso

of Manila, from which we supply customers throughout theShenwei (Shanghai) Medical Gas Co., Ltd., commenced

island of Luzon, the principal market for industrial gases in theoperations at its medical-use oxygen production base in

Philippines.

Shanghai. This has positioned us to respond to soaring
demand for medical gases in China.

Taiyo Nippon Sanso Group’s first air separation plant in India

A Through subsidiary Matheson K-Air India Private Limited,
we are currently building an air separation plant near Pune, in

14

Taiyo Nippon Sanso Corporation | Annual Report 2012

Singapore

B Late in 2011, we made a tender offer for all shares ofStrengthen upstream strategies

Singapore-based Leeden Limited. In February 2012, Leeden

Taiyo Nippon Sanso to be the first Japanese company tobecame a consolidated subsidiary. In the months and years

produce helium

ahead, we will work to maximize synergies between Leeden

A Our joint venture with Air Products and Chemicals, Inc.,and our existing operations in Southeast Asia.

completed a new helium plant in the United States and is
expected to start producing in late 2012. Approximately 40%
Implement cost reductionsof our share of the output of this plant will be shipped for saleto customers in Japan.

Reinforcing operating foundation by optimizing and
Production of key gases to the electronics industry begins inenhancing the efficiency of operations

Japan and the United States

B At present, we are taking decisive steps to reduce costs at

A In the period under review, we commenced production of

all stages of the supply chain, including production,hydrogen compounds, essential to the manufacture of

distribution and procurement. Looking forward, we will work tosemiconductors, liquid crystal display (LCD) panels and solar

enhance our cost competitiveness by optimizing plant

cells, in Japan and the United States.

operations and periodically replacing equipment. We will also
focus on realigning our carbon dioxide production bases.

B Going forward, we intend to begin producing othermaterials gases, including boron trichloride (BCl3) and nitricStrengthen Group management

oxide (NO), which are expected to be used in increasing
volume in the manufacture of semiconductors and LCD
panels.

Enhancing our pivotal domestic operating foundation

B As part of a drive to increase front-line capabilities at ourapproximately 450 bases in Japan, we continue to use our
Promote our M&A strategy

cylinder business as a way of encouraging a sales approachthat is closely tailored to local needs. We are also reinforcing

United States

relations with our domestic sales agents. On another front, we

A We are currently working to ensure the early realization of

are renovating our filling stations.

benefits from M&A deals to date in the United States.

Providing medical gases to approximately 10,000 home

B Looking ahead, we will continue seeking to acquire small

healthcare patients nationwide

and mid-tier regional gas distributors to reinforce our U.S.

B Our priority here is to ensure a harmonious and mutuallyoperations.

beneficial relationship with local retailers. Our home healthcare
business is expanding and increasing the efficiency of its

China

operations, which are spearheaded by Group company

B We are currently pressing ahead with M&A plans involving

Nippon Megacare Corporation, particularly through its affiliates

local gas producers and distributors.

in the Kansai region, which centers on Osaka, and in the
Kanto region, home to the metropolis of Tokyo.

Taiyo Nippon Sanso Corporation | Annual Report 201215

Business Activities

Perception of the Business Climate
in Key Markets
Japan
Despite signs of a gradual recovery after the devastating impact of theGreat East Japan Earthquake, Japan’s economy was hampered by the
rapid appreciation of the yen in subsequent months, which pushed down

Total Sales and Operating Income in Japan
Years ended March 31 (Millions of yen)
500,000

CAGR
Total sales 8.7%
Operating income 12.1%

35,000exports, as well as by the severe flooding in Thailand in late 2011, as a

400,000

28,000consequence of which results in the electronics industry stagnated. In

300,000

21,000this environment, sales of core products, notably oxygen, nitrogen and

200,000

14,000100,000

7,000

argon, dipped below the previous year’s level, mainly to the steel andchemicals industries. In contrast, sales of specialty electronics materials

002004 2005 2006 2007 2008 2009 2010 2011

gases to customers in the electronics industry for use in semiconductors,
liquid crystal display (LCD) panels and solar cells declined sharply, as did
demand for high-purity gas supply facility installation and construction.

16

Total sales

2012

2013
(Estimate)

Operating income

Note: Compound annual growth is calculated based on actual total sales and operating
income ﬁgures for the years ended March 31, 2004—2012 and estimates for the year
ending March 31, 2013.

Taiyo Nippon Sanso Corporation | Annual Report 2012

North America

Total Sales and Operating Income in North America
As of July 2011 (Millions of yen)
100,000 CAGR

12,000Having positioned North America as an important growth region, we

Total sales 12.7%
Operating income 5.0%
80,0009,600

continue to capitalize actively on M&A opportunities and to press forward

60,0007,200

with the construction of air separation plants. In fiscal year 2012, we focused

40,0004,800

20,0002,400

on rationalization efforts aimed a maximizing the synergies of M&A deals to
date. We also proceeded with work on air separation plants in Florida and0

industrial gases from the shale gas and oil and the biofuel sectors. Our
helium joint venture with Air Products and Chemicals completed a new plant02004 2005 2006 2007 2008 2009 2010 2011

North Dakota. Going forward, we will take steps to secure demand for

Total sales

2012

2013
(Estimate)

Operating income

Note: Compound annual growth is calculated based on actual total sales and operating
income ﬁgures for the years ended March 31, 2004—2012 and estimates for the year
ending March 31, 2013.

in the United States, which is expected to start producing in late 2012.

Asia

Total Sales and Operating Income in Asia
Years ended March 31 (Millions of yen)In the Philippines and Vietnam, demand for industrial gases remains firm,

40,000 CAGR

2,500

Total sales 11.4%
32,000 Operating income 3.2%

2,000

24,0001,500

16,000

1,000

8,000

500

while in South Korea, Taiwan and China we continue to benefit from steadydemand for electronics materials gases. China, in particular, is emerging as ahuge market for industrial gases, and we are actively pursuing not only major
projects, but also M&A opportunities involving local gas producers anddistributors. We currently have operations in Malaysia, Singapore, Thailand,
the Philippines, Vietnam, South Korea, Taiwan, China and India. Recognizing
the potential for significantly higher sales growth in these markets than inJapan, we continue to seek out promising new business opportunities.

002004 2005 2006 2007 2008 2009 2010 2011

Total sales

2012

2013
(Estimate)

Operating income

Note: Compound annual growth is calculated based on actual total sales and operating
income ﬁgures for the years ended March 31, 2004—2012 and estimates for the year
ending March 31, 2013.

The market for industrial gases in India is estimated to be worth
approximately $1 billion annually. The compound annual growth rate (CAGR)
for the market is currently between 12% and 15%—higher than the rate at
which the country’s gross domestic product (GDP) is growing—while the
CAGR for the helium market has been between 25% and 30% for the past
three years. Through Matheson K-Air India Private Limited, we plan to invest$100 million between now and fiscal year 2016 to expand our supply
capabilities in India.

Taiyo Nippon Sanso Corporation | Annual Report 201217

Taiyo Nippon Sanso in Asia
Asia—including Southeast Asia, China and India—is one of Taiyo Nippon Sanso Group’s
most important geographic markets. In the industrial gases business, our first foray into
Asia came in 1982, when we set up a local subsidiary in Singapore.

In subsequent years, we took assertive steps to bolster our Asian presence,
establishing companies in Thailand, the Philippines, Vietnam, South Korea and othercountries and territories. Our expansion has primarily been through equity participationor the establishment of joint ventures, because of restrictions on foreign investment inmany countries of the region and because our goal has been to establish strong roots inthe market, producing and supplying locally, rather than simply shifting our production
offshore.

Our approach to expansion means choosing the right local partner, which is crucial to
the success of our endeavors. In instances where our partner is another producer or a
distributor of industrial gases, the network and personal contacts of our partners are ourway into the market.

We first set up operations in the Chinese market in 1993 with the establishment of anindustrial gases production and sales company in Dalian. We established an import andsales company for specialty gases in Shanghai in 2002, which was followed in 2003 byan industrial gases production and sales company. Four years later, in 2007, we signed
an agreement with the local executive committee giving us exclusive rights to produce
industrial gases for Dalian Changxing Island Harbor Industrial Zone, a new industrial
park, primarily for shipbuilding and petrochemicals firms, being planned for Dalian. The
selection of our bid reflected high marks given our production and sales records to datein Dalian and Shanghai. We established Dalian Changxing Island Taiyo Nippon Sanso
Gas Co., Ltd., in 2008 and commenced production at a new plant located inside thepark in 2010. However, owing to the global economic downturn triggered by thecollapse of Lehman Brothers, many companies scheduled to occupy space inChangxing Island Harbor Industrial Zone were forced to delay plans, a development thatdevastated the operating environment for our subsidiary. However, thanks to the hard
work and dedication of local staff, we succeeded in securing orders from local liquid gas
users, as a result of which the plant is currently operating at near its intended capacity.
In the years ahead, we will continue taking steps to bolster our operations in China.

18

Taiyo Nippon Sanso Corporation | Annual Report 2012In India, we are currently building an air separation plant at Matheson K-Air India
Private Limited, acquired in 2011 through U.S. subsidiary Matheson Tri-Gas. The plantis expected to be fully operational by 2013. Matheson K-Air India has its headquarters
and filling facilities in Pune, home to numerous educational facilities and research
institutes, which is in the process of building a major high-tech industrial park. The
company currently sources liquid gases from local suppliers, but with the start ofproduction at the new plant will establish itself as a producer of industrial gases. In
addition to its expanding automotive and steel industries, India is expected to see
growth in its electronics industry. Accordingly, we intend to continue investing assertively
in the country.

Expanding our Operations in Asia: Industrial Gases
Format of investment (initial stage)
Equity participation

Examples: Ingasco, Inc. (Philippines), Air Products Industry Co., Ltd. (Thailand)

Joint venture

Examples: National Oxygen Pte. Ltd. (Singapore),
Vietnam Japan Gas Co., Ltd. (Vietnam),
Dalian Taiyo Nippon Sanso Gas Co., Ltd. (China)

Independently established

Dalian Changxing Island Taiyo Nippon Sanso Gas Co., Ltd.

M&A

Matheson K-Air India Private Limited (India)

Milestones
National Oxygen Pte. Ltd. (Singapore)1980 Set up representative office in Singapore
1982 Established National Oxygen Pte. Ltd. in a joint venture with three local companies, including
a major steelmaker
2003 Bought out partners’ shares, transforming National Oxygen into a wholly owned subsidiary
Ceremony held in 2007 to mark the 25th anniversaryof National Oxygen’s establishment (Singapore)

Ingasco, Inc. (Philippines)
1994 Took equity stake in Ingasco
1998 Acquired new shares, securing 51% equity holding
2002 Entered into joint venture with major distributor
2006 Acquired founder’s share of company, increasing holding to 70%
Dalian Changxing Island Taiyo Nippon Sanso Gas Co., Ltd. (China)
2007 Signed agreement to supply industrial gases to the Dalian Changxing Island Harbor Industrial
Zone, thereby securing exclusive manufacturing rights for the complex
2008 Established Dalian Changxing Island Taiyo Nippon Sanso Gas Co., Ltd.
2010 Commenced operation of new air separation plant in the complex on schedule

Taiyo Nippon Sanso Corporation | Annual Report 2012

Tanker truck (Philippines)

19With Japan a mature market, we are stepping up efforts to expand our operations
elsewhere in Asia. In 2008, we launched a monosilane gas filling operation in Yangzhou,
China. Monosilane gas is an electronics materials gas crucial to the manufacture ofsemiconductors, solar cells and LCD panels.

In gases for electronics-related applications, a market characterized by rapid change, it
is crucial that we formulate strategies for expansion from a global perspective. We mustalso take steps to ensure our strategies are in line with the strategies of customers inlocal markets, as well as to ensure swift decision making. Accordingly, we arestrengthening our strategic focus on product management, with the aim of maximizing
the strength of our product portfolio, while maintaining our emphasis on accountmanagement.

In the metal organic chemical vapor deposition (MOCVD) equipment business, forexample, in January 2011 we established TNSK Corporation, a manufacturing andsales joint venture, in South Korea, a move that positioned us to respond to growing
demand in the Asian market for MOCVD equipment, particularly in South Korea. In
specialty materials gases, we established a germane production facility joint venture in
the United States with U.S. firm Gelest Technologies Inc., in 2010, and in June 2011 we
acquired a stake in NO gas producer Zenith Tech Co., Ltd., through subsidiary
Matheson Gas Products Korea, Co., Ltd.

In the area of gas supply equipment, we recently began supplying technologies toequipment manufacturing subsidiary Taiyo Nippon Sanso Engineering Taiwan, Inc., withthe aim of inaugurating production of gas purification systems in fiscal year 2013 andpositioning the company as our Asian supply base for gas-related equipment. Also in
Taiwan, subsidiary Nippon Sanso Taiwan, Inc., the second-largest player in the specialty
gases market in Taiwan in terms of market share, continues to achieve steady growthby providing stable supplies of specialty gases, building abatement and purification
systems, and designing and executing gas piping works.

20

Taiyo Nippon Sanso Corporation | Annual Report 2012

Expanding our Operations in Asia: Gases for Electronics Applications
Format of investment (initial stage)
Independently establishedTaiyo Nippon Sanso Trading (Shanghai) Co., Ltd.,
Shanghai Taiyo Nippon Sanso Gas Co., Ltd.

Acquisition

Yangzhou Taiyo Nippon Sanso Semiconductor Gases Co., Ltd.

Milestones
Supplying electronics manufacturers in China
2002 Established wholly owned subsidiary Taiyo Nippon Sanso Trading (Shanghai) Co., Ltd.
• Encouraged by market expansion in eastern China, attributable to increase in construction ofsemiconductor manufacturing facilities• Company commenced importing and selling specialty gases to Japanese and othersemiconductor manufacturers in the area
2003 Established wholly owned subsidiary Shanghai Taiyo Nippon Sanso Gas Co., Ltd.
• Entered market for general industrial gases business in eastern China, beginning with on-site
supplies to Chinese–Japanese joint venture LCD panel manufacturer

Air separation plant at Dalian Changxing Island Taiyo
Nippon Sanso Gas (China)• Having weathered changes in the operating environment, including downsizing of productionplans and eventual collapse of aforementioned joint venture, company is currently implementing
measures to restore profitability, including shifting focus to onsite supplies for local LCD panel
manufacturers
Yangzhou Taiyo Nippon Sanso Semiconductor Gases Co., Ltd.
2003 Acquired all outstanding shares in monosilane gas filling company Yangzhou Zhongyuan
Semiconductor Gases Co., Ltd., which changed its name to Yangzhou Taiyo Nippon Sanso
Semiconductor Gases Co., Ltd.
• Acquired company that supplies manufacturers of local thin-film solar cells and LCD panels

Taiyo Nippon Sanso Trading (Shanghai) (China)• Acquisition of company already licensed to manufacture monosilane gas in China facilitated
immediate market entry and the subsequent expansion of this business

As these developments indicate, the guiding policy behind the expansion of ouroperations in Asia is to remain flexible and adapt as necessary to changes in ouroperating environment and in conditions within the Taiyo Nippon Sanso Group, thereby
ensuring an optimal business configuration. In just three decades, our annual sales in
Asia have reached approximately ¥25 billion. With the aim of capitalizing on new growth
opportunities in this promising market, we will continue working to optimize our global

Ceremony marking the start of business at Yangzhou
Taiyo Nippon Sanso Semiconductor Gases (China)

production capacity.

Taiyo Nippon Sanso Corporation | Annual Report 201221

Corporate Governance

Basic Policy

Auditing Structure and Internal Control System

Having identified the purpose of corporate governance to be

To ensure adequate monitoring capabilities, our Board of

the assurance of effective, efficient decision making, thereby

Auditors consists of four auditors, two of whom satisfy thefacilitating the proper execution of business, while at the samerequirements of outside auditors, including one who istime guaranteeing the appropriate monitoring thereof, we have

independent. Auditors communicate with the independent

clarified responsibility and authority with respect to theaccountants—with whom they meet periodically to exchange

management monitoring function of directors and theopinions on key aspects of the auditing process and thebusiness execution function of corporate officers. We haveassessment of risks associated with auditing from thealso sought to enhance the transparency of management andperspective of internal controls—are briefed on audit plans

the effectiveness of corporate governance by promoting

and audit results by an internal auditing body (the Corporate

timely disclosure.

Audit Office), and oversee management appropriateness andefficiency.

Management Structure
Taiyo Nippon Sanso has adopted a system of internal

Remuneration for Directors

auditors. Our Board of Directors is composed of 15 directors.

In fiscal year 2011, remuneration for 18 directors totaled ¥723

To guarantee transparency, one of the directors satisfies themillion, while that for four auditors totaled ¥105 million.

requirements for an outside director. To clarify accountability

Remuneration for directors consists of monthly remuneration,

on a fiscal year basis, the term of office for directors is set at

performance-linked bonuses and dividend-linked bonuses.

one year. In fiscal year 2012, the Board of Directors met 14

Performance-linked bonuses are linked to consolidated

times. The outside director, Ryuichi Tomizawa, attended nine

operating results.

of the 14 meetings (64.3%).

Auditing and Risk Management Structure
General Meeting of Shareholders
Appointment/dismissal

Appointment/dismissal

Appointment/dismissal
Coordination

Board of Directors
Appointment /dismissal

Coordination

Independent auditors

Board of Auditors

Monitoring of auditors’ performance of their auditing duties (operational/accounts )Independent audit of accounts

Representative Director
Management Committee

Representative Directors’ Committee
Internal Control Committee
Compliance Taskforce
Risk Assessment Taskforce
Technological Risk Management Taskforce
Corporate Audit Ofﬁce
Internal audit

Divisions and Group companies

22

Taiyo Nippon Sanso Corporation | Annual Report 2012

Coordination

Corporate Social Responsibility

We recognize effective corporate social responsibility (CSR) as a crucial aspect of management. Through our CSR
program, we strive to reinforce the soundness of management, thereby ensuring Taiyo Nippon Sanso remains an entitythat exists in harmony with society and the natural environment and is deserving of the designation “good corporate
citizen,” as well as helping to realize sustainable growth.

Our CSR program is founded on the core concept behind ourAssisting in the Wake of the Great East Japan

corporate philosophy, “Market-driven collaborative innovation:

Earthquake

Improving the future through gases,” namely, our commitment

On March 11, 2011, our BCP Taskforce stepped into action

to working with our customers in different industries toapproximately 20 minutes after the Great East Japan

contribute, through the advancement of gas technologies, toEarthquake struck. Our first priority was to fulfill oura healthy and prosperous society.

responsibility to society as a producer of industrial gases by

To fulfill the responsibilities and effectively manage theshipping supplies of medical gases and of nitrogen for apractical risks implied in our corporate slogan, “The Gas

variety of applications aimed at preventing secondary

Professionals,” and in line with our belief that selling gas isdisasters.

commensurate with selling safety and peace of mind, we

Shipments of medical gases were organized based oncontinue to expand our operations in a manner that reflects

information from the BCP Taskforce, which enabled us tofive key priorities:

ascertain remaining supplies of such gases in stricken areas

1. Ensure stringent complianceand prioritize hospitals and filling stations where needs were

2. Enhance safety management

most urgent before dispatching tanker trucks. In areas where
regular lines of communication had been destroyed and3. Guarantee superior product quality

damage from the quake prevented in-person confirmation, our
4. Contribute to a healthy environment
THRUSH liquid gas remote monitoring and inventory
5. Make effective use of intellectual property

management system proved particularly effective, giving us
access to data on customers’ gas use and remaining supplies
up until the day before the earthquake, making it possible for
us to appropriately allocate emergency supplies. THRUSH iscurrently in use by 50% of our customers in Japan, but thanks
to a pilot program to promote its adoption the system had
been installed at approximately 80% of the hospitals in the
Tohoku region.
Going forward, we will continue to take pride in what we
do as gas professionals in both emergency situations andeveryday operations. In so doing, we will seek to ensure safe,

THRUSH terminal

stable supplies of industrial gases and to contribute to thesafety and security of society and the communities we serve.

THRUSH currently monitors and manages inventory for 600 tanks of medical gases acrossJapan. Drawing on lessons learned from the Great East Japan Earthquake, we are promoting
the expanded use of this system.

Taiyo Nippon Sanso Corporation | Annual Report 201223

Board of Directors, Corporate Auditors and Corporate Officers

Board of Directors

Corporate Auditors

Corporate Officers

Chairman

Shigeto Umatani

Takashi Fukano

Hirosuke Matsueda

Kiyoshi Fujita

Masahiko Kitabatake

Masahiro Sakamoto

Mikio Yamaguchi

Ichiro Yumoto*2

President

Kazuo Yoshida*2

Hiroyuki Tanizawa
Tadashi Higashino

Yasunobu Kawaguchi

Atsuhiro Fujita

Executive Vice President

Corporate Officers

Hiroshi Nagae

Fumio Hara

Takeki Hata

Executive Director/Advisor

Executive Corporate
Officers

Hiroshi Taguchi

Masanori Zaima

Norikazu Ishikawa

Kazushige Arai

Shin-ichiro Hiramine

Masayuki Taniguchi

Senior Managing Directors

Keiki Ariga

Masami Takaine

Shinji Tanabe

Tetsuya Nakayama

Kazunori Takeda

Kunishi Hazama

Yuki Hajikano

Shigeyuki Osawa

Tadashige Maruyama

Jun Ishikawa

Hirohisa Yanagida

Yujiro Ichihara

Takashi Tatsumi
Masami Sakaguchi

Managing Directors

Susumu Naka

Yoshikazu Yamano

Yoshihide Kenmochi

Shigeru Amada

Shigenobu Somaya

Hiroshi Katsumata
Kinji Mizunoe
Akihiko Umekawa

Executive Directors
Shotaro Yoshimura*1
William J. Kroll

Notes: *1 Outside Director
Notes: *2 Outside Corporate Auditor

24

Toshiaki Yamazaki

Taiyo Nippon Sanso Corporation | Annual Report 2012

(As of June 28, 2012)

Six-Year Summary
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries

Millions of yen
Years ended March 31

Net sales

2012

2011

2010

2009

2008

2007

¥477,451¥483,620¥433,390¥495,746¥507,718¥458,587

Operating income

31,06735,46827,55629,16438,78336,488Net income

21,20012,736

15,748

16,533

21,93020,094

Selling, general and administrative expenses/
Net sales (%)

26.3%

26.1%

27.5%

24.7%

23.1%

23.2%

Return on equity (%)

10.8%

6.5%

8.3%

8.6%

10.8%

10.6%

Return on assets (%)

3.5%

2.1%

2.4%

3.1%

4.0%

3.6%

Capital expenditures

31,452

31,99138,366

66,01036,26035,891

Depreciation and amortization

30,471

32,16730,14328,33925,506

21,210Research and development expenses

3,458

3,924

4,137

3,936

2,903

2,713

Interest-bearing debt

241,121250,409259,111

191,074

159,500

152,232

Total net assets

219,611

207,416

212,396

194,250

217,813

216,068

Total assets

607,024

617,676

617,215534,350547,237

547,791Yen

Per share data:
Net income1¥53.33¥31.86¥39.39¥41.21¥54.48¥49.93

Cash dividends

12.00

12.00

12.00

12.00

12.00

12.00

15.55

14.65

21.31

Times

Price earnings ratio

10.95

21.75

23.20

Note: Net income per share is computed based on the weighted average number of shares of common stock outstanding during each year, as adjusted retroactively
for free share distributions made during the period.

Taiyo Nippon Sanso Corporation | Annual Report 201225

Management’s Analysis of Operating Results andFinancial Position
Scope of Consolidation and Application of the Equity Method
As of March 31, 2012, Taiyo Nippon Sanso Corporation had
111 consolidated subsidiaries (46 based in Japan and 65
based overseas), including newly acquired Leeden Limited,which became a consolidated subsidiary in fiscal year 2012,
and 30 equity-method affiliates (10 based in Japan and 20
based overseas).

A total of 51 consolidated subsidiaries and 14 equitymethod affiliates are accounted for in the Industrial Gases
segment. The Electronics segment and the Energy segment
comprise 12 and four consolidated subsidiaries, respectively.
The Other segment encompasses eight consolidated subsidiaries and 11 equity-method affiliates.

Operating Results
In fiscal year 2012, ended March 31, 2012, consolidated
net sales declined 1.3%, to ¥477,451 million. Cost of sales
edged down 0.3%, to ¥320,857 million. Selling, general andadministrative expenses were also down, slipping 0.6%, to¥125,526 million, owing principally to the adoption of thestraight-line method of depreciation for assets accounted forin property, plant and equipment effective from the period
under review. Reflecting these and other factors, operating
income fell 12.4%, to ¥31,067 million. The operating margin
dipped by 0.8 percentage point, to 6.5%.
Other income rose ¥9,941 million, to ¥10,118 million,
attributable to a gain on transfer of business of ¥6,733
million—an extraordinary gain resulting from the transfer ofthe safe delivery source (SDS) and vacuum actuated cylinder(VAC) business outside Japan to a third party—and a gain onsale of noncurrent assets of ¥3,385 million. In contrast, other

Net Sales

Operating Income

Net Income(Billions of yen)(%)(Billions of yen)(%)(Billions of yen)

500

30

50

35

25

55

400

24

40

28

20

44

300

18

30

21

15

33

200

12

20

14

10

22

100

6

10

7

5

11

0

0

0

0

0

26

expenses totaled ¥5,913 million, a decrease of ¥1,680 million.
As a consequence, net income climbed 66.5%, to ¥21.2 billion. Net income per share was ¥53.33, while return on equity(ROE) was 10.8%, 4.3 percentage points higher than in theprevious fiscal year. At the general meeting of the Company’s
shareholders on June 28, 2012, a proposal to pay a full-term
dividend of ¥12.00 per share for the period under review wasapproved. The dividend payout ratio was 22.5%.
Capital expenditures, including the cost of construction,
totaled ¥31,452 million in the period under review, approximately ¥539 million lower than in fiscal year 2011. In contrast,
depreciation and amortization declined ¥1,696 million, to¥30,471 million. Investment in R&D, at ¥3,458 million, wasdown ¥466 million and equivalent to approximately 0.7% of
net sales.

(Yen)

0

2008 2009 2010 2011 20122008 2009 2010 2011 20122008 2009 2010 2011 2012

Industrial gas
Electronics
EnergyOther
Overseas sales as a percentage of
total (right scale)Industrial gas
Electronics
EnergyOther
Overseas operating income as apercentage of total (right scale)

Net income per share (right scale)Taiyo Nippon Sanso Corporation | Annual Report 2012Results by Segment
Industrial Gases
Owing partly to M&A activities in North America, which
expanded the scale of Taiyo Nippon Sanso’s operations,
results in the Industrial gas segment were firm. In Japan, salesof principal products—oxygen, nitrogen and argon—dippedslightly, owing to falling demand from steel and chemicals
companies, the principal users of these products, the steep
appreciation of the yen, which hampered exports, and to theimpact of the severe flooding that struck Thailand.
Sales of cutting and welding equipment were also
up. Sales in Japan were bolstered by brisk demand forplasma cutting equipment and other large items. Overseas,production adjustments by customers in North America
progressed and sales of hard goods, among others, rose in
the second half.
In machinery and equipment, sales of pressure swing
adsorption (PSA) gas generator plants were brisk, particularly
in Japan, while sales of air separation plants fell sharply, owing
to flagging demand for large-scale facilities.
As a consequence of these and other factors, segment
sales to third parties in the Industrial gas segment edged up
0.8%, to ¥291,057 million. Operating income declined 10.0%,
to ¥21,712 million.
Electronics
Demand for core electronics-related gases slackened fromour principal customers in Japan, notably manufacturersof semiconductors, liquid crystal display (LCD) panels andsolar cells, owing to the impact of the Great East Japan
Earthquake, which struck in March 2011, as well as thestrength of the yen and the flooding in Thailand. Despite firm
demand from customers in South Korea, Taiwan and China,
sales of electronics materials gases declined, a consequenceof falling domestic shipments.

Sales of electronics-related equipment and installation
projects also fell amidst weakening capital investment.
Although orders from customers in South Korea and Taiwan
were firm, sales of metal organic chemical vapor deposition(MOCVD) equipment fell sharply as principal customers in thedomestic market halted capital investment plans.
Owing to the aforementioned factors, segment sales tothird parties fell 8.9%, to ¥115,294 million. Operating income
fell 30.0%, to ¥5,914 million.
EnergyDespite a decline in shipments, sales of LP gas rose,bolstered by steadily rising import prices, as well as expanded
orders for related equipment and devices associated withefforts to conserve electricity and reduce consumption ofenergy. Accordingly, segment sales to third parties increased
3.3%, to ¥38,881 million. Operating income, at ¥1,667 million,
was up 19.1%.
Other
Sales in the Medical business increased, bolstered by firm
demand for medical care equipment, notably equipment for
use in home medical care. Sales in the Thermos businessfailed to rebound fully from a slump in the first half, finishing down from the previous fiscal year. Sales for the twobusinesses accounted for in this segment to third parties
amounted to ¥32,218 million, an increase of 4.5%, while
operating income declined 10.5%, to ¥2,723 million.

Financial Position
As of March 31, 2012, total assets amounted to ¥607,024
million, a decrease of 1.7%. Approximately ¥8,700 million of
the decline was attributable to a ¥3.75 increase in the value ofthe yen against the U.S. dollar as of the last day of the fiscal
year. The current ratio was 129%, up 7.0 percentage points
from the fiscal 2011 year-end.

Property, plant and equipment, net, edged down 0.4%, to¥255,499 million. Total investments and other assets declined
6.1%, to ¥132,316 million, owing to declines in investment
securities and goodwill, among other factors.

Taiyo Nippon Sanso Corporation | Annual Report 201227

Total current liabilities declined 6.0%, to ¥169,729 million,
reflecting an increase in notes and accounts payable–tradeand declines in provisions for loss on disaster and for government surcharge, the latter related to an alleged pricing cartel
for air separator gases. Total noncurrent liabilities were down
5.2%, to ¥217,683 million, attributable to declines in longterm loans payable. As a consequence, interest-bearing debt
fell ¥15,237 million, to ¥241,121 million.

Total net assets increased 5.9%, to ¥219,611 million. This
result reflected a variety of factors, including a ¥16,396 million
increase in retained earnings, adjusted for net income anddividends. The net asset ratio slipped 1.9 percentage points,
to 33.1%, while net assets per share rose ¥24.31, to ¥506.02.

Cash Flows
In fiscal year 2012, net cash provided by operating activities
amounted to ¥45,986 million, a decrease of ¥19,911 million.
Factors behind this result included changes in income before
income taxes and minority interests, depreciation and amortization and notes and accounts receivable–trade. The interest
coverage ratio weakened by 2.8 points, to 10.7 times.
Net cash used in investing activities, at ¥32,748 million,
was down ¥12,086 million. This result primarily reflected
the application of cash to purchases of property, plant andequipment.

Total Assets

Equity(Billions of yen)(Billions of yen)

(%)

(%)

750

250

40

15

600

200

32

12

450

150

24

9

300

100

16

6

150

50

8

3

0

0

0

0
2008 2009 2010 2011 201228

Net cash used in financing activities came to ¥23,536
million. Principal factors contributing to this result included a
decline in interest-bearing debt.
As a consequence of the Company’s operating, investing
and financing activities in fiscal year 2012, cash and cash
equivalents at end of period totaled ¥33,275 million, a declineof ¥10,602 million.

Return on Equity (ROE) and
Return on Assets (ROA)

2008 2009 2010 2011 20122008 2009 2010 2011 2012

Equity ratio (right scale)

ROE
ROA

Taiyo Nippon Sanso Corporation | Annual Report 2012

Business Risks
Management Policies, Business-Related Risks
Purchase of Property, Plant and Equipment
The Company maintains large-scale gas supply facilities for
major customers and needs to spend heavily to maintainand upgrade these facilities. Accordingly, interest rate trends
could have a material impact on the Company’s businessperformance.
Reliance on Specific Industries
The Company supplies gases to a wide range of industries
and its exposure to risks from reliance on specific industries
is thus low. Nevertheless, changes in key electronics markets(semiconductors, liquid crystal display (LCD) panels, solar
cells) could have a significant impact on the Company’sbusiness performance.
Manufacturing Costs
Electricity is the major component of the cost of manufacturing such core products as oxygen, nitrogen and argon.
Accordingly, a sharp increase in the price of crude oil could
result in a substantial increase in electricity charges, which
the Company may be unable to reflect in the pricing of its
products.
Overseas Factors
The Company maintains operations overseas, particularly in
the United States and in other parts of Asia, including China,
where the Company has substantial gas operations. Politicaland economic changes in countries where the Company
has operations may have an adverse impact on its businessperformance.
Technological and Safety Factors
Technological Development
The creation of new products and technologies entails various
uncertainties, owing to the Company’s reliance on technological development in such areas as compound semiconductors,
the environment and energy.
Intellectual Property
The Company’s business depends on proprietary technological development. The Company endeavors to obtain
intellectual property rights as necessary for its proprietary
technologies. However, there are no guarantees that its
technologies are completely protected.
Product Defects
The Company sells high-pressure gas-related products
and handles toxic and flammable gases used in electronics

manufacturing (semiconductors, LCD panels, solar cells).
While the Company strives to ensure the effective management of related risks, it cannot guarantee that all of its
products are free of defects.
Financial Risks and Other Factors
Foreign Exchange Risk
The Company exports products for sale outside of Japan. The
Company strives to hedge foreign exchange risks by entering
into forward exchange contracts and other derivatives transactions. However, the Company may not be able to respondto sudden fluctuations in currency rates, which therefore may
have an adverse impact on its business performance.
Retirement Benefit Liabilities
A sudden deterioration in retirement plan returns resulting in
an increase in retirement benefit costs may have an adverse
impact on the Company’s business performance.
Natural Disasters
The occurrence of earthquakes or other natural disasters inareas where the Company has manufacturing facilities may
damage facilities. In particular, damage to the Company’s
large-scale manufacturing facilities may lead to a significant
decline in production capacity and incur major recovery costs.
Such factors may adversely affect the Company’s businessperformance.
Legal Issues
Unanticipated changes to existing laws and the introductionof new laws—particularly in countries overseas where theCompany maintains operations—may adversely affect theCompany’s business performance. Revisions to environmental
laws that result in a tightening of restrictions may result in
an increase in costs to ensure compliance, which may also
adversely affect the Company’s business performance.
Because the Company does business both in Japanand overseas, there is a risk that it may become involvedin legal disputes or be the subject of investigations and/or
legal action by relevant authorities in the markets in which we
operate. Such legal and regulatory action may adversely affect
the Company’s operations, business performance, financial
condition, reputation and reliability.
Medium-Term Business Plan
A number of factors—including changes in the operating
environment—could render impossible the achievementof targets set forth in the Company’s medium-term
management plan.

Taiyo Nippon Sanso Corporation | Annual Report 201229

Consolidated Balance Sheets
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries

Millions of yen
March 31

2012

2011

AssetsCurrent assets:
Cash and deposits (Notes 15 and 23)
Notes and accounts receivable—trade (Notes 6 and 15)
Merchandise and finished goods
Work in process
Raw materials and supplies
Deferred tax assets (Note 10)
Other
Allowance for doubtful accounts
Total current assets¥ 34,596
132,176
23,462
7,827
6,439
5,216
10,332(842)
219,208¥ 44,549
126,207
16,750
9,295
7,848
6,390
9,873
(689)
220,227$

Property, plant and equipment (Notes 8, 9 and 22)
Accumulated depreciation
Property, plant and equipment, net

653,202(397,703)
255,499

635,455(378,961)
256,494

7,947,463(4,838,825)
3,108,639

Investments and other assets:
Investment securities (Notes 5 and 15)
Long-term loans receivable
Goodwill
Other intangible assets
Prepaid pension cost (Note 13)
Deferred tax assets (Note 10)
Other
Valuation allowance for investments
Allowance for doubtful accounts
Total investments and other assets
Total assets

50,871
5,103
39,735
16,376
10,790
2,105
9,089
(865)
(889)
132,316¥ 607,024

53,5695,387
43,34318,647
11,4272,221
8,475(1,277)(839)
140,953¥ 617,676

618,944
62,088483,453
199,246
131,281
25,611
110,585(10,524)(10,816)
1,609,880$ 7,385,619

See notes to consolidated financial statements.

30

Thousands of
U.S. dollars(Note 4)

Taiyo Nippon Sanso Corporation | Annual Report 20122012

420,927
1,608,176
285,461
95,231
78,34363,463
125,709(10,245)2,667,088

Millions of yen
March 31

Thousands of
U.S. dollars(Note 4)

2012

2011

2012

Liabilities and net assets
Current liabilities:
Notes and accounts payable—trade (Note 15)
Short-term loans payable (Notes 7 and 15)
Income taxes payable (Note 10)
Provision for loss on disaster (Note 20)
Provision for government surcharge
Other
Total current liabilities¥ 75,927
60,517
5,242——
28,040169,729¥ 66,896
64,002
8,173
1,263
5,193
34,997
180,527$ 923,799
736,306
63,779——341,161
2,065,081

Noncurrent liabilities:
Long-term loans payable (Notes 7 and 15)
Pension and severance indemnities (Note 13)
Deferred tax liabilities (Note 10)
Negative goodwill
Lease obligations (Note 7)
Other
Total noncurrent liabilities

172,469
4,948
26,398
335
6,030
7,500
217,683

182,398
5,003
27,740
757
6,563
7,268
229,732

2,098,418
60,202
321,183
4,076
73,367
91,252
2,648,534

Contingent liabilities (Note 14)
Total liabilities

387,413410,259

4,713,627

27,03944,909166,835

27,03944,910150,439

328,982
546,405
2,029,870(4,125)
234,659(2,321)
220,068(50,189)2,855,080

4,432
(26)
(38,035)(193)(33,823)
18,775
219,611¥607,024

6,428
(163)
(33,621)(140)(27,496)
14,845
207,416¥617,676

53,924(316)(462,769)(2,348)(411,522)
228,434
2,671,992$7,385,619

Net assets (Notes 11 and 24):
Shareholders’ equity:
Common stock:
Authorized—1,600,000,000 shares
Issued—403,092,837 shares
Capital surplus
Retained earnings
Treasury stock, at cost—
6,197,947 shares in 2012 and 3,326,579 shares in 2011
Total shareholders’ equity
Accumulated other comprehensive income:
Valuation differences on available-for-sale securities
Deferred gains or losses on hedges
Foreign currency translation adjustments
Pension liability adjustment of foreign subsidiaries
Total accumulated other comprehensive income (loss)
Minority interests
Total net assets
Total liabilities and net assets

Taiyo Nippon Sanso Corporation | Annual Report 201231

Consolidated Statements of Income
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries

Millions of yen
Years ended March 31

Net sales
Cost of sales (Note 17)
Gross profit
Selling, general and administrative expenses (Note 17)
Operating income
Other income (expenses):
Interest and dividend income
Interest expenses
Amortization of negative goodwill
Gain on sales of noncurrent assets (Note 18)
Loss on sales and retirement of noncurrent assets (Note 18)
Foreign exchange losses
Loss on valuation of investment securities
Loss on valuation of golf club memberships
Equity in earnings of affiliates
Impairment loss (Note 19)
Provision of valuation allowance for investments
Reversal of valuation allowance for investments
Loss on liquidation of subsidiaries and affiliates
Gain on transfer of business
Provision of allowance for government surcharge
Loss on disaster (Note 20)
Other
Income before income taxes and minority interests
Income taxes (Note 10):
Current
DeferredIncome before minority interests
Minority interests in income
Net income

2012

2011

2012

¥477,451
320,857
156,593
125,526
31,067¥483,620
321,885
161,734
126,265
35,468$5,809,113
3,903,845
1,905,256
1,527,266
377,990

1,036(4,292)507
3,385(5,206)
(6)
(312)
(48)
1,158
(213)
(70)
—
(215)
6,733
—
(429)
844
2,868
33,935

1,080(4,873)
616
57
(374)
(182)
(608)
(55)
1,541
(94)
(40)
120
—
—
(5,193)(1,600)891(8,717)26,751

12,605(52,220)
6,169
41,185(63,341)(73)(3,796)(584)
14,089(2,592)(852)—(2,616)
81,920—(5,220)10,26934,895412,885

9,428
2,106
11,53522,4001,199¥ 21,200

13,756(963)
12,792
13,9591,222¥ 12,736

114,710
25,624140,346
272,539
14,588$ 257,939
U.S. dollars(Note 4)

Yen

Amounts per share:
Net assets
Net income
Cash dividends

Thousands of
U.S. dollars(Note 4)¥506.02
53.33
12.00

¥481.71
31.86
12.00

$6.16
0.65
0.15

See notes to consolidated financial statements.

Consolidated Statements of Comprehensive Income
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries
Millions of yen
Year ended March 31

Income before minority interests
Other comprehensive income (Note 21):
Valuation differences on available-for-sale securities
Deferred gains or losses on hedges
Foreign currency translation adjustments
Pension liability adjustment of foreign subsidiaries
Share of other comprehensive income of associates accounted for using the equity method
Total other comprehensive income (loss)
Comprehensive income (loss)
Total comprehensive income (loss) attributable to:
Owners of the Company
Minority interests
See notes to consolidated financial statements.

32

Taiyo Nippon Sanso Corporation | Annual Report 2012

Thousands of
U.S. dollars(Note 4)

2012

2011

2012

¥22,400¥ 13,959$272,539(2,005)136(3,815)(53)(440)(6,177)¥16,222(4,433)(191)(9,137)(15)(631)(14,408)¥ (449)(24,395)
1,655(46,417)(645)(5,353)(75,155)$197,372¥14,874
1,348¥ (1,770)
1,320$180,971
16,401

Consolidated Statements of Changes in Net Assets
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries

Millions of yen
Shareholders’ equity

Number ofshares ofcommonstock

Balance atApril 1, 2010

Commonstock

403,092,837 ¥27,039

Accumulated other comprehensive income

Total
shareholders’equityValuationdifferenceonavailablefor-salesecurities

Deferred
gains orlosses onhedgesForeigncurrencytranslation
adjustments

PensionTotal
liability
accumulated
adjustment
otherof foreign comprehensive
subsidiaries income (loss)

CapitalsurplusRetainedearnings

Treasurystock

Minority
interests

Total net
assets¥44,910¥142,426¥(2,307)¥212,068¥10,880¥ 27¥(23,773)¥(124)¥(12,990)¥13,317¥212,396

—

15

15

—

—

—

—

—

—

15

Disposal oftreasury stock

—

—

0

Dividends fromsurplus———(4,798)—(4,798)

—

—

—

—

—

—

(4,798)Net income

—

—

—

12,736—

12,736

—

—

—

—

—

—

12,736

Purchase oftreasury stock

—

—

—

—

(30)

(30)

—

—

—

—

—

—

(30)

Change of scopeof consolidation

—

—

—

54

—

54

—

—

—

—

—

—

54

Increase bymerger

—

—

—

21

—

21

—

—

—

—

—

—

21

Net changes of
items other thanshareholders’equity

—

—

—

—

—

—

(4,452)(191)(9,847)(15)(14,506)

1,528(12,978)

Balance at
March 31, 2011

403,092,837 ¥27,039¥44,910¥150,439¥(2,321)¥220,068¥ 6,428¥(163)¥(33,621)¥(140)¥(27,496)¥14,845¥207,416

Disposal oftreasury stock

—

—

(0)

—

3

3

—

—

—

—

—

—

3

Dividends fromsurplus———(4,781)—(4,781)

—

—

—

—

—

—

(4,781)

Net income

—

—

—

21,200—21,200

—

—

—

—

—

—

21,200Purchase oftreasury stock

—

—

—

—

(1,807)(1,807)

—

—

—

—

—

—

(1,807)

Decrease bymerger

—

—

—

(23)

—

(23)

—

—

—

—

—

—

(23)

Net changes of
items other thanshareholders’equity

—

—

—

—

—

—

(1,995)136(4,413)(53)(6,326)

3,930(2,396)

403,092,837 ¥27,039¥44,909¥166,835¥(4,125)¥234,659¥ 4,432¥ (26)¥(38,035)¥(193)¥(33,823)¥18,775¥219,611

Minority
interests

Total net
assetsBalance at
March 31, 2012

Thousands of U.S. dollars (Note 4)
Shareholders’ equity

Balance atApril 1, 2011

Commonstock

Capitalsurplus

Total
shareholders’equityDeferred
gains orlosses onhedgesForeigncurrencytranslation
adjustments$328,982$546,417 $1,830,381 $(28,239) $2,677,552$78,209$(1,983)$(409,064)$(1,703)

37

—

—

—

—

—

—

Retainedearnings

Disposal oftreasury stock—(0)

Dividends fromsurplus—

Net income—

Purchase oftreasury stock
Decrease bymergerNet changes of
items other thanshareholders’equityBalance at
March 31, 2012

Accumulated other comprehensive income
Valuationdifferenceonavailablefor-salesecurities

Treasurystock

PensionTotal
liability
accumulated
adjustment
otherof foreign comprehensive
subsidiaries income (loss)$(334,542) $180,618 $2,523,616

—

37

—

(58,170)—(58,170)

—

—

—

—

—

—

(58,170)—

257,939—

257,939

—

—

—

—

—

—

257,939———(21,986)(21,986)

—

—

—

—

—

—

(21,986)

—

—

(280)

—

(280)

—

—

—

—

—

—

(280)

—

—

—

—

—

(24,273)

1,655(53,693)(645)(76,968)

47,816(29,152)$ 53,924 $ (316) $(462,769)$(2,348)$328,982$546,405 $2,029,870 $(50,189) $2,855,080

37$(411,522) $228,434 $2,671,992

See notes to consolidated financial statements.

Taiyo Nippon Sanso Corporation | Annual Report 201233

Consolidated Statements of Cash Flows
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries

Millions of yen
Years ended March 31
Operating activities
Income before income taxes and minority interests
Depreciation and amortization
Impairment loss
Amortization of goodwill
Gain from transfer of business
Interest and dividends income
Interest expense
Equity in earnings of affiliates
Loss on sales and retirement of noncurrent assets
Gain on sales of investment securities
Loss on sales of subsidiaries’ stocks
Loss on disaster
Provision of allowance for government surcharge(Increase) decrease in notes and accounts receivable—trade(Increase) decrease in accounts receivable—other
Decrease in advance payments(Increase) decrease in inventories
Increase (decrease) in notes and accounts payable—trade(Decrease) increase in accrued expenses
Increase (decrease) in advances received
Decrease in provision for retirement benefits
Decrease (increase) in prepaid pension costs
Other, net

2012

2011

2012

Interest and dividends income received
Interest expenses paid
Payments for loss on disaster
Payments for surcharges
Income taxes paid
Net cash provided by operating activities¥ 33,935
30,471
213
2,472(6,733)(1,036)
4,292(1,158)
1,686
(28)
—
429
—
(1,838)(958)
466(2,223)
7,196(2,500)
555
(204)
637
1,740
67,415
1,499(4,294)(1,560)(5,144)(11,929)45,986¥ 26,751
32,16794
3,635—(1,080)4,873(1,541)
244
(18)
6
1,600
5,193
4,869
816
1,657
1,891
(4,006)
2,121
(159)
(94)
(196)
3,409
82,237
1,410(4,864)——(12,885)
65,897$ 412,885
370,7392,592
30,077(81,920)(12,605)
52,220(14,089)
20,513
(341)
—
5,220
—
(22,363)(11,656)
5,670(27,047)
87,553(30,417)
6,753(2,482)
7,750
21,170820,234
18,238(52,245)(18,980)(62,587)(145,139)
559,508

Investing activities
Increase in short-term investments
Proceeds from sales of marketable securities
Purchases of property, plant and equipment
Proceeds from sales of property, plant and equipment
Purchases of intangible assets
Purchases of investment securities
Proceeds from sales of investment securities
Purchases of investments in subsidiaries resulting in change in scope of consolidation (Note 23)
Payments of loans receivable
Payments for assets purchase (Note 23)
Proceeds from transfer of business (Note 23)
Other, net
Net cash used in investing activities(530)—(35,101)
5,542
(166)
(2,683)75(4,151)(187)(1,013)
6,585(1,118)(32,748)(12)
390(29,915)496(474)(1,843)
42(10,672)(2,655)——(191)(44,834)(6,448)—(427,071)
67,429(2,020)(32,644)913(50,505)(2,275)(12,325)
80,119(13,603)(398,443)

Financing activities
Net (decrease) increase in short-term loans payable
Proceeds from long-term loans payable
Repayment of long-term loans payable
Proceeds from issuance of bonds
Redemption of bonds
Proceeds from issuance of common stock
Repayments of lease obligations
Purchase of treasury stock
Proceeds from sales of treasury stock
Cash dividends paid
Cash dividends paid to minority shareholders
Net cash used in financing activities
Effect of exchange rate change on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Increase in cash and cash equivalents resulting from change of scope of consolidation
Increase in cash and cash equivalents resulting from merger with unconsolidated subsidiaries
Cash and cash equivalents at end of period (Note 23)¥ (2,321)
18,727(24,642)
10,000(15,000)—(3,406)(1,811)
3(4,781)(303)(23,536)(394)(10,692)
43,877—90¥ 33,275¥ 6,561
27,106(30,157)——
10(1,678)(41)
1(4,799)(346)(3,343)583
18,302
23,723
1,343
508¥ 43,877$ (28,239)
227,850(299,817)
121,669(182,504)—(41,441)(22,034)
37(58,170)(3,687)(286,361)(4,794)(130,089)
533,848—
1,095$ 404,855

See notes to consolidated financial statements.

34

Thousands of
U.S. dollars(Note 4)

Taiyo Nippon Sanso Corporation | Annual Report 2012

Notes to Consolidated Financial Statements
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries

1. Basis of Consolidated Financial Statements
The accompanying consolidated financial statements of
TAIYO NIPPON SANSO CORPORATION (the “Company”)
and consolidated subsidiaries are prepared on the basis ofaccounting principles generally accepted in Japan (“Japanese
GAAP”), which are different in certain respects as to application and disclosure requirements of International Financial
Reporting Standards, and are compiled from the consolidated
financial statements prepared by the Company as requiredby the Financial Instruments and Exchange Act of Japan(the “FIEA”).

As permitted by the FIEA, amounts of less than one million
yen have been omitted. As a result, the totals shown in theaccompanying consolidated financial statements (both in yen
and U.S. dollars) do not necessarily agree with the sums of theindividual amounts.
Certain amounts previously reported have been reclassified
to conform to the current year presentation.

2. Summary of Significant Accounting Policies(a) Consolidation

The accompanying consolidated financial statements include
the accounts of the Company and its 111 significant subsidiaries (75 in 2011). All significant intercompany accounts andtransactions have been eliminated in consolidation.
In accordance with the regulations for the preparation of
consolidated financial statements under the FIEA, investments
in certain unconsolidated subsidiaries and significant affiliates
are accounted for by the equity method of accounting.
The differences at the dates of acquisition between thecost and the underlying net equity in investments in consolidated subsidiaries and the companies accounted for by theequity method are amortized equally over the years for which
their effect are reasonably estimated.
Investments in unconsolidated subsidiaries and affiliates
other than those which are accounted for by the equity
method are principally stated at cost.

net of the applicable income taxes, reported as a separate
component of net assets. Cost of marketable securities sold isdetermined by the moving-average method. Non-marketablesecurities classified as available-for-sale securities are carriedat cost determined by the moving-average method. Under theCompanies Act of Japan (the “Act”), unrealized gain or loss
on available-for-sale securities, net of the applicable income
taxes, is not available for distribution as dividends.
(d) Inventories

Inventories of the Company and its consolidated domestic
subsidiaries are stated at cost, determined by the averagemethod, specific identification method or the moving-averagemethod (lower than book value due to decline in profitability).
As for overseas consolidated subsidiaries, inventories arestated at the lower of cost or market, cost being determinedby the first-in first-out method.

(b) Cash equivalents(e) Property, plant and equipment (except for the leased assets)

For purposes of the statements of cash flows, the Company
considers all highly liquid instruments with maturity of threemonths or less when purchased to be cash equivalents.

Property, plant and equipment is stated at cost, and for theCompany and its consolidated domestic subsidiaries, depreciation is principally computed by the straight-line method.

(c) Investment securities

Investments in securities are classified into three categories:
trading securities, held-to-maturity securities and availablefor-sale securities. The Company and certain consolidated
subsidiaries have marketable securities classified as availablefor-sale securities, which are carried at fair value with any
changes in valuation difference on available-for-sale securities,

The useful lives are as follows:
Buildings
3 to 50 years
Machinery
4 to 20 years
As for consolidated overseas subsidiaries, depreciation is
also principally computed by the straight-line method basedon the estimated useful lives of the respective assets.

Taiyo Nippon Sanso Corporation | Annual Report 2012

35

(Change in accounting policy)
Effective from the beginning of fiscal year, April 1, 2011, theCompany changed its depreciation method from the decliningbalance method to the straight-line method for certain property, plant and equipment. Leased machinery and buildings(except for attachments) acquired on or after April 1, 1998
continue to be depreciated by the straight-line method.
Based on its new medium-term business plan, theCompany intends to concentrate management resources
and increase capital investments into growth markets suchas the electronics industry. In these circumstances, however,where the demands of existing users of industrial gas are
expected to grow steadily amid decreased investments by
new entrants, property, plant and equipment, which principallyconsists of small to medium-sized gas supply plants, whichwere depreciated by the declining balance method, areexpected to operate stably for long periods through replacement and renewal investments. The Company therefore
determined that matching annual profit or loss calculations
based on a cost allocation using the straight-line method ismore reasonable.
As a result of this change, depreciation included in costof sales and selling, general and administration expenses
decreased by ¥2,165 million ($26,341 thousand) and operating income and income before income taxes and minority
interests increased by the same amount.
(f) Intangible assets

Goodwill and other intangible assets are stated at cost. As
for the Company and its consolidated domestic subsidiaries,
goodwill is amortized by the straight-line method over 5 years
and software is amortized by the straight-line method over its
estimated useful life of 5 years. Consolidated overseas subsidiaries record goodwill according to Accounting Standards
Codification 350, issued by the Financial AccountingStandards Board of the USA (“Goodwill and Other Intangible
Assets”).
(g) Leases

Leased assets are initially accounted for at their acquisition
costs and depreciated over the leased term by the straightline method with no residual value.
Finance leases contracted on or before March 31,
2008 that do not deem to transfer ownership of the leased
property to the lessee are accounted for as operating leasetransactions.
(h) Translation of foreign currency transactions

All monetary assets and liabilities denominated in foreign
currencies other than receivables and payables hedged byqualified foreign exchange forward contracts, are translated
into yen at the exchange rates prevailing as of the fiscal yearend, and resulting gains and losses are included in income.
The accounts of the overseas consolidated subsidiaries
are translated into yen at the year-end exchange rates, except

36

for net assets, which are translated at historical rates, andincome statement items are translated into yen at averageexchange rates during the year. Differences arising from thetranslations are stated under “Foreign currency translation
adjustments” and “Minority interests” in the accompanying
consolidated balance sheets.
(i) Pension and severance indemnities

Allowance for employees’ retirement benefits is recognizedat the net total of the present value of the defined benefit
obligation at the balance sheet date, plus any actuarial gains(less any actuarial losses) not yet recognized, minus the fairvalue of plan assets (if any) at the balance sheet date out of
which the obligations are to be settled directly. If the amountdetermined above is negative (an asset), such asset should
be recorded as prepaid pension expenses.
Net retirement benefit expense or income is recognized at
the net total of current service cost and interest cost, minus
the expected return on any plan assets, minus any actuarial
gains (less any actuarial losses) and past service cost recognized during the year, plus any retirement benefits paid at alump sum.
To determine the present value of a defined benefit
obligation and the related current service cost and, whereapplicable, the past service cost, the project unit credit
method are used.
Actuarial gains or losses and past service cost arerecognized for each defined benefit plan over a period notexceeding the expected average remaining service years of
the employees participating in the plan. The Company and its
consolidated domestic subsidiaries recognize actuarial gains
or losses evenly over 12 to 16 years following the respective
fiscal years when such gains or losses are identified. Past
service cost is amortized using the straight-line method over
13 to 16 years.
The Company recognized the amount of unrecognized
past service cost due to the revision of the retirement rule atApril 1, 2003.
For transition benefit liability, the Company establishedthe pension and severance indemnity trust by contribution ofshares owned by the Company, and the remaining transition
benefit liability is being recognized over a period of 15 years.
(j) Allowance for directors’ and corporate auditors’ retirement
benefits

The allowance for directors’ and corporate auditors’ retirement benefits of the Company and certain consolidated
domestic subsidiaries is provided at the amount which would
have been required to be paid if all directors and corporate
auditors had voluntarily terminated their services as of the balance sheet date. This amount has been determined in accordance with the internal rules of the respective companies.
The allowance included ¥505 million ($6,144 thousand)and ¥439 million for corporate officers at March 31, 2012 and2011, respectively.

Taiyo Nippon Sanso Corporation | Annual Report 2012

(k) Research and development expenses

Research and development expenses are charged tooperations as incurred.
(l) Income taxes

Deferred tax assets and liabilities are determined based on the
differences between financial reporting and the tax bases ofassets and liabilities and are measured using the enacted tax
rates and laws which will be in effect when the differences are
expected to reverse.
(m) Amounts per share

Presentation of diluted net income per share is not applicableas there were no potentially dilutive securities for the years
ended March 31, 2012 and 2011.
(n) Allowance for doubtful accounts

To cover possible losses on collection of receivables, theCompany and its consolidated domestic subsidiaries provided
for an allowance with respect to specific debts of which recovery is doubtful, based on estimated write-off amounts, after
considering the likelihood of recovery on an individual basis.

denominated in foreign currencies, and have used interestrate swap agreements solely to hedge against risks offluctuations in interest rates relating to its long-term loans payable. Also, currency exchange swap agreements have beenused solely to hedge against risks of fluctuations in foreignexchange of long-term loans payable denominated in foreign
currencies, in compliance with the internal rules of respective
companies.
Under the “Accounting Standard for Financial Instruments”(Statement No. 10, issued by the Accounting Standards
Board of Japan (the “ASBJ”) on March 10, 2008) derivativetransactions are valued at market prices, except for hedging
transactions whose gains or losses are deferred and recordedin the balance sheet until the hedged transactions are settled.
Moreover, if interest-rate swaps in Japan are specifically tied
to the hedged loan transactions, unrealized gains or losses on
those swaps are not recognized in the consolidated financial
statements as such gains or losses are to be offset with thoseon the hedged transactions. Deferred hedge accounting isapplied to currency swaps.
Receivables and payables hedged by qualified foreignexchange forward contracts are translated at the corresponding foreign exchange forward contract rates.

(o) Valuation allowance for investments

To state the investment amount fairly, the allowance isprovided by considering the related parties’ assets and otherfactors.
(p) Derivative and hedging transactions

The Company and certain consolidated subsidiaries haveused foreign exchange forward contracts solely in orderto hedge against risks of fluctuations in foreign currency
exchange rates relating to its receivables and payables(q) Recognition of revenues and costs of construction contracts

Revenues and costs of construction contracts of which thepercentage of completion can be reliably estimated, arerecognized by the percentage-of-completion method. The
percentage of completion is calculated at the cost incurred
as a percentage of the estimated total cost. The completedcontract method continues to be applied for contracts forwhich the percentage of completion cannot be reliably
estimated.

3. Additional Information
Accounting changes and error corrections
Effective from the beginning of the fiscal year, April 1, 2011,
the Company has adopted the “Accounting Standard for
Accounting Changes and Error Corrections” (Statement
No. 24, issued by the ASBJ on December 4, 2009) and the“Guidance on Accounting Standard for Accounting Changes
and Error Corrections” (Guidance No. 24, issued by the ASBJ
on December 4, 2009).

4. U.S. Dollar Amounts
The translation of Japanese yen amounts into U.S. dollar
amounts is included solely for convenience, as a matter ofarithmetical computation only, at the rate of ¥82.19=U.S.$1,
the approximate rate of exchange at March 31, 2012.

The translation should not be construed as a representationthat Japanese yen have been, could have been, or could in
the future be converted into U.S. dollars at the above or any
other rate.

Taiyo Nippon Sanso Corporation | Annual Report 201237

5. Investment Securities
At March 31, 2012 and 2011, information with respect to available-for-sale securities for which market prices were available wassummarized as follows:

Carrying
amountUnrecognized gain items: Stock
Unrecognized loss items: Stock
Total¥19,305
10,147¥29,453

Carrying
amountUnrecognized gain items: Stock
Unrecognized loss items: Stock
Total¥31,902
2,078¥33,981

Proceeds from sales of securities classified as availablefor-sale securities amounted to ¥36 million ($438 thousand)and ¥59 million with an aggregate gain on sales of ¥8 million($97 thousand) and ¥18 million for the years ended March 31,

Millions of yen
2012
Acquisition
Unrecognized
costgain (loss)¥10,951
11,647¥22,599¥ 8,353(1,499)¥ 6,853

Thousands of U.S. dollars
2012
Carrying
UnrecognizedamountAcquisition cost gain (loss)$234,883
123,458$358,353$133,240
141,708$274,960$101,630(18,238)$ 83,380

Millions of yen
2011
Acquisition
Unrecognized
costgain (loss)¥20,4112,516¥22,927¥11,490(437)¥11,053

2012 and 2011, respectively, and an aggregate loss on salesof ¥1 million ($12 thousand) and ¥9 million for the years ended
March 31, 2012 and 2011, respectively.

6. Notes and Accounts Receivable(a) Notes and accounts receivable liquidated at March 31, 2012 and 2011 were as follows:
Millions of yen
2012
2011

Accounts receivable transferred by liquidation
Notes receivable transferred by liquidation¥3,809
6,177

Thousands of
U.S. dollars
2012¥4,074
1,399$46,344
75,155(b) Notes receivable discounted at March 31, 2012 and 2011 were as follows:
Millions of yen
2012
2011

Notes receivable discounted¥5

Thousands of
U.S. dollars
2012

¥70

$61

7. Short-Term Loans Payable, Long-Term Loans Payable and Lease Obligations
At March 31, 2012 and 2011, short-term loans payable and the current portion of long-term loans payable consisted of thefollowing:
Millions of yen
2012
2011

Bank loans
Current portion of long-term loans payable
Total¥20,699
29,818¥50,517¥23,356
25,645¥49,002

The average interest rates applicable to bank loans outstanding at March 31, 2012 and 2011 are 1.18% and 1.26%,
respectively.

38

Taiyo Nippon Sanso Corporation | Annual Report 2012

Thousands of
U.S. dollars
2012$251,843
362,794$614,637

Long-term loans payable at March 31, 2012 and 2011 consisted of the following:
Millions of yen
2012
2011

Loans from banks due through 2019 at average interest rates of 1.84% in 2012 and 1.89% in 2011
1.58% unsecured bonds, payable in yen, due 2012
1.13% unsecured bonds, payable in yen, due 2014
0.55% unsecured bonds payable in yen, due 2017

¥147,469—
15,00010,000¥172,469¥157,398
10,00015,000—¥182,398

Thousands of
U.S. dollars
2012$1,794,245—
182,504
121,669$2,098,418

Short-term lease obligations at March 31, 2012 and 2011 included in other current liabilities were ¥2,017 million ($24,541
thousand) and ¥3,392 million, respectively.
The annual maturities of long-term loans payable
subsequent to March 31, 2012 are summarized as follows:
Years ending March 31

Millions of yen

Thousands of
U.S. dollars

2013
2014
2015
2016
2017
2018 and thereafter¥ 29,818
50,78139,36822,60727,278
7,435¥177,287$ 362,794
617,849
478,988
275,058
331,890
90,461$2,157,039

The annual maturities of lease obligations subsequent toMarch 31, 2012 are summarized as follows:
Years ending March 31

Millions of yen

Thousands of
U.S. dollars

2013
2014
2015
2016
2017
2018 and thereafter¥2,103
2,422
924
670
520
1,494
¥8,133$25,587
29,648
11,242
8,152
6,327
18,177$98,954

8. Pledged Assets
Assets pledged as collateral for short-term loans payable of¥120 million ($1,460 thousand) and ¥191 million, long-termloans payable of ¥425 million ($5,171 thousand) and ¥643
million, accounts payable-trade of ¥142 million ($1,728

thousand) and ¥114 million and other of ¥53 million ($645
thousand) and ¥85 million at March 31, 2012 and 2011,
respectively, were as follows:
Millions of yen
2012
2011

Property, plant and equipment, at net book value¥982¥1,156

Thousands of
U.S. dollars
2012$11,948

9. Assets Replaced by National Subsidy
Assets replaced by national subsidy at March 31, 2012 and 2011 were as follows:
Millions of yen
2012
2011

Property, plant and equipment¥411

Taiyo Nippon Sanso Corporation | Annual Report 2012

¥411

Thousands of
U.S. dollars
2012$5,00139

10. Income Taxes
Income taxes applicable to the Company comprise corporation, enterprise and inhabitants’ taxes, which, in the aggregate, resulted in a statutory tax rate of 40.69% for the years
ended March 31, 2012 and 2011.

Significant components of the Company’s deferred tax
assets and liabilities at March 31, 2012 and 2011 were as
follows:

Current deferred tax assets and liabilities
Deferred tax assets:
Accrued bonus
Loss from valuation of inventory
Accrued expenses
Provision for loss on disaster
Other
Deferred tax assets—subtotal
Valuation allowance
Deferred tax assets—net
Deferred tax liabilities
Net deferred tax assets
Deferred tax liabilities:
Adjustment of allowance for doubtful accounts
Deferred tax liabilities—subtotal
Offset by deferred tax assets
Net deferred tax liabilities
Noncurrent deferred tax assets and liabilities
Deferred tax assets:
Depreciation
Reserve for retirement benefits
Net operating loss carryforward for tax purposes
Other
Deferred tax assets—subtotal
Valuation allowance
Deferred tax assets—net
Deferred tax liabilities
Net deferred tax assets
Deferred tax liabilities:
Valuation difference on available-for-sale securities
Reserve for replacement of fixed assets
Reserve for special depreciation
Reserve for replacement of fixed assets—special
Depreciation
Other
Deferred tax liabilities—subtotal
Offset by deferred tax assets
Net deferred tax liabilities

40

Taiyo Nippon Sanso Corporation | Annual Report 2012

Millions of yen
2012
2011

Thousands of
U.S. dollars
2012¥ 2,048
339
1,361
—
1,764
5,513
(250)
5,262
(46)
¥ 5,216¥ 2,509
334
1,755
513
1,928
7,041
(650)
6,391
(1)
¥ 6,390$ 24,918
4,125
16,559—21,462
67,076(3,042)64,022(560)$ 63,463

¥

¥

$

(112)
(112)
46
¥(66)

¥

(82)
(82)
1
(81)

$

(1,363)(1,363)560(803)¥ 1,451
1,295
—
8,085
10,832(4,983)
5,848(3,743)¥ 2,105¥ 1,551
1,305
58
8,617
11,533(5,195)
6,337(4,115)¥ 2,221$ 17,654
15,756—
98,370131,792(60,628)
71,152(45,541)$ 25,611¥ (2,445)(4,984)(68)(385)(11,811)(10,446)(30,142)
3,743¥(26,398)¥ (4,503)(5,082)(109)(365)(10,363)(11,432)(31,856)
4,115¥(27,740)$ (29,748)(60,640)(827)(4,684)(143,704)(127,096)(366,736)
45,541$(321,183)

Reconciliations between the normal effective statutory tax rate and the actual effective tax rates reflected in the accompanying
consolidated statements of income for the years ended March 31, 2012 and 2011 were as follows:
Statutory tax rate
Entertainment expenses and others not deductible permanently
Dividends received and others
Valuation allowance for deferred tax assets
Provision of allowance for loss on disaster
Provision of allowance for government surcharge
Income tax rate changes
Other
Effective tax rate

2012

2011

40.69%
0.98(5.08)(1.80)——(2.70)
1.90
33.99%

40.69%
1.15(7.48)
3.08
1.79
7.90
—
0.70
47.82%

Effects of changes in the corporate income tax rates to determine deferred tax assets and liabilities:
The “Act for Partial Revision of the Income Tax Act, etc. for
As a result, the effective statutory tax rate used to
the Purpose of Creating Taxation System Responding tomeasure the Company’s deferred tax assets and liabilities
Changes in Economic and Social Structures” (Act No. 114
was changed from 40.69% to 38.01% for the temporaryof 2011) and the “Act for Special Measures for Securing
differences expected to be realized or settled in the fiscal
Financial Resources Necessary to Implement Measures foryears beginning on April 1, 2012 to April 1, 2014 and from
Reconstruction following the Great East Japan Earthquake”
40.69% to 35.64% for the temporary differences expected to(Act No. 117 of 2011) were promulgated on December 2,
be realized or settled in the fiscal year beginning on April 1,
2011 and the staged reduction of the national corporate tax
2015 and thereafter. The effect of the announced reduction ofrate and a special reconstruction corporate tax will apply tothe effective statutory tax rate was to decrease net deferredcorporate taxes effective for fiscal years beginning on or after
tax liabilities and deferred income taxes by ¥1,263 million
April 1, 2012.
($15,367 thousand) and ¥916 million ($11,145 thousand),
respectively, and increase valuation difference on available-forsale securities by ¥346 million ($4,210 thousand) as of and forthe year ended March 31, 2012.
11. Shareholders’ Equity(a) Dividends

Under the Act, companies can pay dividends at any time
during the fiscal year in addition to the year-end dividend upon
resolution at the shareholders’ meeting. For companies thatmeet certain criteria, such as: (1) having a Board of Directors,(2) having independent auditors, (3) having a Board of
Corporate Auditors, and (4) the term of service of the directors
is prescribed as one year rather than two years of normal
term by its articles of incorporation, the Board of Directors
may declare dividends (except for dividends in kind) if theCompany has prescribed so in its articles of incorporation.
The Act permits companies to distribute dividends-in-kind(non-cash assets) to shareholders subject to a certain limitation and additional requirements.
Semiannual interim dividends may also be paid once a
year upon resolution by the Board of Directors if the articles ofincorporation of the Company so stipulate.
(b) Increases/decreases and transfer of common stock, reserveand surplus

The Act requires that an amount equal to 10% of dividends
must be appropriated as a legal reserve (a component ofretained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity accountcharged upon the payment of such dividends until the totalof aggregate amount of legal reserve and additional paid-in
capital equals 25% of the common stock. Under the Act, thetotal amount of additional paid-in capital and legal reserve
may be reversed without limitation.
The Act also provides that common stock, legal reserve,
additional paid-in capital, other capital surplus and retained
earnings can be transferred among the accounts undercertain conditions upon resolution of the shareholders.
(c) Treasury stock and treasury stock acquisition rights

The Act also provides for companies to purchase treasury
stock and dispose of such treasury stock by resolution of theBoard of Directors. The amount of treasury stock purchased
cannot exceed the amount available for distribution to theshareholders, which is determined by specific formula. Under
the Act, stock acquisition rights, which were previously
presented as a liability, are now presented as a separate
component of shareholders’ equity.
The Act also provides that companies can purchase bothtreasury stock acquisition rights and treasury stock. Suchtreasury stock acquisition rights are presented as a separate
component of shareholders’ equity or deducted directly fromstock acquisition rights.

Taiyo Nippon Sanso Corporation | Annual Report 201241

12. Leases(a) The following pro forma amounts represent the acquisition
costs, accumulated depreciation and net book value ofleased property at March 31, 2012 and 2011, which
would have been reflected in the consolidated balance

sheets if finance lease accounting had been applied to thefinance lease transactions currently accounted for as
operating leases:
Millions of yen
2012
2011

Acquisition costs:
Property, plant and equipment
Other assets
Accumulated depreciation:
Property, plant and equipment
Other assets
Net book value:
Property, plant and equipment
Other assets

Lease payments relating to finance lease transactions
accounted for as operating leases amounted to ¥692 million($8,420 thousand) and ¥718 million, which were equal to theThousands of
U.S. dollars
2012¥3,140235¥3,375¥4,448255¥4,704$38,204
2,859$41,063¥2,541228¥2,769¥3,288202¥3,491$30,916
2,774$33,690

¥ 598
7
¥ 606

¥1,15953¥1,212$ 7,27685$ 7,373

depreciation expense of the leased assets computed by thestraight-line method over the respective lease terms for theyears ended March 31, 2012 and 2011, respectively.

Future minimum lease payments (including the interest portion thereon) subsequent to March 31, 2012 and 2011 for financelease transactions accounted for as operating leases are summarized as follows:
Years ending March 31

2012
2013
2014 and thereafter
Total
2011
2012
2013 and thereafter
Total

Millions of yen

Thousands of
U.S. dollars

¥ 251
354
¥ 606

$3,054
4,307$7,373¥ 582
630¥1,212(b) Future minimum lease payments subsequent to March 31, 2012 and 2011 for non-cancelable operating leases are summarized
as follows:
Years ending March 31

2012
2013
2014 and thereafter
Total
2011
2012
2013 and thereafter
Total

42

Millions of yen

Thousands of
U.S. dollars¥ 1,355
8,613¥ 9,969$ 16,486
104,794$121,292¥ 1,904
10,896¥12,801

Taiyo Nippon Sanso Corporation | Annual Report 2012

13. Pension and Severance Indemnities
The Company has the cash balance plan (market rate-linked
pension plan) and the defined contribution benefit plan.
The Company’s consolidated domestic subsidiaries have,jointly or severally, defined benefit plans, including funded
non-contributory tax-qualified retirement pension plans anda lump-sum retirement benefits plan, which together coversubstantially all full-time employees who meet certain eligibility
requirements.

Certain consolidated overseas subsidiaries have a defined
contribution benefit plan.
The funded status and amounts recognized in the accompanying consolidated balance sheets at March 31, 2012 and2011 and the components of net retirement benefit expenses
recognized in the accompanying consolidated statements ofincome for the years ended March 31, 2012 and 2011 aresummarized as follows:(a) Retirement benefit liabilities

Projected benefit obligation
Plan assets at fair market value
Unfunded retirement benefit liabilities
Net unrecognized actuarial losses
Difference at change of accounting standard
Unrecognized prior service cost
Prepaid pension cost
Allowance for employees’ retirement benefits

Millions of yen
2012
2011

Thousands of
U.S. dollars
2012¥ 34,578(30,055)
4,523(11,940)(1,375)
1,585
10,790(3,583)$ 420,708(365,677)
55,031(145,273)(16,730)
19,285
131,281(43,594)¥ 34,610(29,454)5,156(12,779)(1,839)1,821
11,427(3,787)(b) Net retirement benefit expenses
Thousands of
U.S. dollars
2012

Millions of yen
2012
2011

Current service cost
Interest cost
Expected return on plan assets
Expense of actuarial loss
Net loss on change in accounting standard for employees’ retirement benefits
Adjustment for prior service cost
Total of retirement benefit expenses
Other
Total

¥1,346
597
(716)
1,364
461
(235)
¥2,817851¥3,668¥1,526
594
(693)
1,214
475
(237)
¥2,879843¥3,722$16,377
7,264(8,712)
16,596
5,609(2,859)$34,274
10,354$44,628(c) The principal assumptions used in determining retirement benefit obligations and other components for the Company andcertain consolidated domestic subsidiaries plans are shown below:
Discount rate
Rate of return on assets
Period of recognition of actuarial gains or losses
Period of recognition of transition gains or losses
Period of recognition of prior service costs
Allocation method of estimated retirement benefits

2012

2011

Mainly 2.0%
Mainly 3.0%
Mainly 12 to 16 years
Mainly 15 years
13 to 16 years
Evenly for period

Mainly 2.0%
Mainly 3.0%
Mainly 12 to 16 years
Mainly 15 years
13 to 16 years
Evenly for period

14. Contingent Liabilities
At March 31, 2012 and 2011, the Company and certain consolidated subsidiaries had contingent liabilities as guarantor ofindebtedness, amounting to ¥7,424 million ($90,327 thousand) and ¥6,686 million, which included reguarantees by joint

investors amounting to ¥489 million ($5,950 thousand) and¥458 million and commitments to guarantees amounting to¥181 million ($2,202 thousand) and ¥279 million, respectively.

Taiyo Nippon Sanso Corporation | Annual Report 201243

15. Financial Instruments(a) Policy for financial instruments

In consideration of plans for capital investment, the Company
and consolidated subsidiaries (collectively, the “Group”) raise
funds through bank loans or bond issues. The Group manages temporary cash surpluses through short-term deposits
and obtains necessary borrowings through short-term loans.
The Group uses derivatives only for the purpose of reducing
risk and does not enter into derivatives for speculative or
trading purposes.
(b) Types of financial instruments and related risk and risk
management

Notes and accounts receivable — trade are exposed to credit
risk in relation to customers. In accordance with the internal
policies of the Group for managing credit risk arising fromreceivables, each related division monitors credit worthiness of
their main customers periodically, and monitors due dates andoutstanding balances by individual customer.
Investment securities are exposed to market risk. Those
securities are composed of mainly the shares of common
stock of other companies with which the Group has business
relationships. The Group also reviews their fair value quarterly.
Notes and accounts payable — trade have payment due
dates within one year. Although the Group is exposed toliquidity risk arising from those payables the Group manages
the risk by preparing cash management plans monthly.
Short-term loans payable are raised mainly for short-term
capital and long-term loans are mostly taken out principallyfor the purpose of making capital investments and long-term

capital. Some of those loans with variable interest rates are
exposed to interest rate fluctuation risk. However, to reducesuch risk and fix interest expense for those loans bearing
interest at variable rates, the Group utilizes interest-rate swap
transactions for each loan contract to hedge such risks and to
fix interest expenses.
Regarding derivatives, the Group enters into forward
foreign exchange contracts to reduce the foreign currency
exchange risk arising from the trade receivables and payables
denominated in foreign currencies. The Group also enters into
interest-rate and foreign currency swap transactions to reduce
fluctuation risk deriving from interest payable for loans andbonds bearing interest at variable rates.
Information regarding the method of hedge accounting,hedging instruments and hedged items, hedging policy, andthe assessment of the effectiveness of hedging activities isfound in Note 2. (p). Derivative and hedging transactions.
In conducting derivative transactions, the division in
charge of each derivative transaction follows the internal
policies and the Group enters into derivative transactions onlywith financial institutions which have a sound credit profile.
(c) Fair value of financial instruments

The fair value of financial instruments is based on their market
price, if available. When there is no market price available,
fair value is reasonably estimated. In addition, the notionalamounts of derivatives in Note 16. “Derivative and Hedging
Activities” are not necessarily indicative of the actual market
risk involved in derivative transactions.

(1) Fair value of financial instruments
Carrying amount on the consolidated balance sheets as of March 31, 2012 and 2011 and estimated fair value and differences offinancial instruments were as follows:

Cash and deposits
Notes and accounts receivable—trade
Investment securities:
Available-for-sale securities
Total assets
Notes and accounts payable—trade
Short-term loans payable
Long-term loans payable
Total liabilities

44

Carrying
amountMillions of yen
2012
Fair
value

¥ 34,596
132,176¥ 34,596
132,176

29,453¥196,226¥ 75,927
20,699212,288¥308,914

29,453¥196,226¥ 75,927
20,699215,322¥311,950

Taiyo Nippon Sanso Corporation | Annual Report 2012

Difference¥

Thousands of U.S. dollars
2012
Carrying
Fair
amountvalue
Difference——$ 420,927
1,608,176$ 420,927
1,608,176

—
—
—
—
3,035
¥3,035358,353$2,387,468$ 923,799
251,8432,582,893$3,758,535

358,353$2,387,468$ 923,799
251,8432,619,808$3,795,474

¥
¥

$

—
—

—
—
—
—
36,927$36,927$$

Cash and deposits
Notes and accounts receivable—trade
Investment securities:
Available-for-sale securities
Total assets
Notes and accounts payable—trade
Short-term loans payable
Long-term loans payable
Total liabilities

Carrying
amountMillions of yen
2011
Fair
value

¥ 44,549
126,207¥ 44,549
126,207¥

33,981¥204,738¥ 66,896
23,356
223,044¥313,297

33,981¥204,738¥ 66,896
23,356226,030¥316,283

—
—
—
—
2,986
¥2,986

The table above does not include financial instruments forwhich it is extremely difficult to determine the fair value. For
information on those items, please refer to note (2) below.

Difference

—
—

¥
¥

The current portion of long-term loans payable shown as“Short-term loans payable” in consolidated balance sheets
are included in “Long-term loans payable” in the table above.

Valuation method of fair value of financial instruments and information on investment securities and derivative transactions
were as follows:
Cash and deposits and notes and accounts receivable—tradeLong-term loans payable

Since these items are settled in a short period of time, theircarrying amount approximates fair value.

The fair value of bonds is measured at the quoted market
price. The fair value of long-term loans payable other thanbonds is based on the present value of the total of principal
and interest discounted by the interest rate combined of therisk free rate and credit spread. Interest-rate swap transactions are utilized for most variable rate loans to fix interest
expense. All interest-rate swap transactions meet the criteria
for the short-cut method of interest-rate swap transactions
and are integrally processed with those loans. Therefore, thefair value of those loans is based on the present value of thetotal of principal and interest processed with interest-rate
swap discounted by the rate above.

Investment securities

The fair value of stocks is based on quoted market prices ofthe stock exchange. For information on securities classified
by holding purpose, please refer to Note 5. “Investment
securities.”
Notes and accounts payable—trade and short-term loans
payableSince these items are settled in a short period of time, theircarrying amount approximates fair value.

(2) Financial instruments as of March 31, 2012 and 2011 for which it is extremely difficult to determine the fair value:
Millions of yen
2012
2011

Unlisted stocks¥21,417¥19,588

Thousands of
U.S. dollars
2012$260,579(3) Redemption schedule for financial assets with maturities subsequent to March 31, 2012 and 2011
Thousands ofMillions of yen
U.S. dollars
2012
2011
2012
Due in one year or less

Cash and deposits
Notes and accounts receivable—trade¥ 34,596
132,176¥ 44,549
126,207$ 420,927
1,608,176(4) Redemption schedule for long-term loans payable is disclosed in Note 7. “Short- Term Loans Payable, Long-Term Loans
Payable and Lease Obligations.”(5) Unused overdraft agreements and loan commitment lines were ¥55,771 million ($678,562 thousand) and ¥49,556 million as ofMarch 31, 2012 and 2011, respectively.

Taiyo Nippon Sanso Corporation | Annual Report 201245

16. Derivative and Hedging Activities
Derivative transactions for which hedge accounting is applied for the years ended March 31, 2012 and 2011 were as follows:(a) Currency-related

Hedged item

Deferral hedge accounting
Foreign exchange forward contracts:
Sell:
USD
TWD
MYD
Buy:
USD
EUR
GBP
CHF
SGD
TWD
Foreign currency swaps:
Sell:
USD
Buy:
SGD
Total

Contract
amountMillions of yen
2012
Due after
one year

Fair
value

¥

¥

*

Accounts receivable—trade
80
25
754

—
—
—

Accounts payable—trade
2,899
300
12
184
76
747

—
—
—
—
—
—

863

863

704
¥6,648704¥1,568Long-term loans payable* The estimated fair value of the foreign exchange forward contracts and foreign currency swaps is included in the fair value of the receivables/payables as the hedged
items.

Hedged item

Deferral hedge accounting
Foreign exchange forward contracts:
Sell:
USD
TWD
MYD
Buy:
USD
EUR
GBP
CHF
TWD
Foreign currency swaps:
Sell:
USD
Buy:
SGD
Total

46

Contract
amountMillions of yen
2011
Due after
one year

Fair
value

¥

*

Accounts receivable—trade
¥ 147
3
1,079

—
—
—

Accounts payable—trade
3,111
157
10
40
703

—
—
—
—
—

975

975

931
¥7,161931¥1,907Long-term loans payable

Taiyo Nippon Sanso Corporation | Annual Report 2012

Thousands of U.S. dollars
2012
Contract
Due after
Fair
amountone yearvalue

Hedged item

Deferral hedge accounting
Foreign exchange forward contracts:
Sell:
USD
TWD
MYD
Buy:
USD
EUR
GBP
CHF
SGD
TWD
Foreign currency swaps:
Sell:
USD
Buy:
SGD
Total

Accounts receivable—trade
$

973
304
9,174

$

—
—
—

*

Accounts payable—trade35,272
3,650
146
2,239
925
9,089

—
—
—
—
—
—

10,50010,5008,566$80,886

8,566$19,078

Long-term loans payable* The estimated fair value of the foreign exchange forward contracts and foreign currency swaps is included in the fair value of the receivables/payables as the hedged
items.

(b) Interest-related
Millions of yen

Thousands of U.S. dollars

2012

Short-cut method
Interest-rate swap agreements:
Receive floating/Pay fix

Hedged item

Contract
amountDue after
one yearLong-term loans payable¥58,075 ¥45,873

2012
Fair
value

*

Contract
amountDue after
one year$706,594 $558,134

Fair
value

*

Millions of yen
2011

Short-cut method
Interest-rate swap agreements:
Receive floating/Pay fix

Hedged item

Contract
amountDue after
one yearLong-term loans payable¥66,453 ¥57,521

Fair
value

*

* The estimated fair value of the interest-rate swap agreements is included in the fair value of long-term loans payable as the hedged item.

Taiyo Nippon Sanso Corporation | Annual Report 201247

17. Research and Development Costs
Research and development costs included in cost of sales and selling, general and administrative expenses for the years ended
March 31, 2012 and 2011 totaled ¥3,458 million ($42,073 thousand) and ¥3,924 million, respectively.

18. Gain and Loss on Sales and Retirement of Noncurrent Assets
Significant components of the gain on sales of noncurrent
assets of ¥3,385 million ($41,185 thousand) and ¥57 million
for the years ended March 31, 2012 and 2011, respectively,
were as follows:
Millions of yen
2012
2011

Land

¥3,385¥57

Significant components of the loss on sales and retirement of noncurrent assets of ¥5,206 million ($63,341 thousand) and ¥374 million for the years ended March 31, 2012
and 2011, respectively, were as follows:

Thousands of
U.S. dollars
2012$41,185

Millions of yen
2012
2011

Land and buildings¥4,623¥—Thousands of
U.S. dollars
2012$56,248

19. Impairment Loss
The Company and its consolidated subsidiaries categorize
business assets by business segmentation and idle assets
without a specific future use are categorized separately. For
idle assets affected by a decrease in the fair market value ofland, the book values are written down to the recoverable
amount and such write-downs were recorded as impairment
loss of ¥213 million ($2,592 thousand) and ¥94 million for theyears ended March 31, 2012 and 2011, respectively, due tolack of recovery provability of market value or recovery provability in the near future. Recoverable amounts for relevant
assets are net selling price (selling price based on contract,
valuation by property tax or valuation by inheritance tax).

20. Loss on Disaster
The amount recorded in loss on disaster in the accompanying
consolidated statements of income corresponds to expenses
required for recovery of assets damaged by the Great East
Japan Earthquake, such as repair expenses of property, plantand equipment, and loss on disposal of inventories.

48

The amount includes ¥1,263 million recorded on theaccompanying consolidated balance sheet for an allowance
for loss on disaster as of March 31, 2011.

Taiyo Nippon Sanso Corporation | Annual Report 2012

21. Other Comprehensive Income
Reclassification adjustments and tax effects allocated to each component of other comprehensive income for the year ended
March 31, 2012 were as follows:

Valuation difference on available-for-sale securities:
Amount arising during the year
Reclassification adjustments for gains and losses included in net income
Amount before tax effects
Tax effects
Valuation difference on available-for-sale securities
Deferred gains or losses on hedges:
Amount arising during the year
Reclassification adjustments for gains and losses included in net income
Amount before tax effects
Tax effects
Deferred gains or losses on hedges
Foreign currency translation adjustments:
Amount arising during the year
Reclassification adjustments for gains and losses included in net income
Amount before tax effects
Tax effects
Foreign currency translation adjustments
Pension liability adjustment of foreign subsidiaries:
Amount arising during the year
Reclassification adjustments for gains and losses included in net income
Amount before tax effects
Tax effects
Pension liability adjustment of foreign subsidiaries
Share of other comprehensive income of associates accounted for using the equity method:Amount arising during the year
Total other comprehensive income (loss)

Millions of yen
2012

Thousands of
U.S. dollars
2012¥(3,794)
312(3,481)
1,476(2,005)$(46,161)
3,796(42,353)
17,958(24,395)

80
133
213
(77)
136

973
1,618
2,592
(937)
1,655

(4,167)253(3,914)99(3,815)(50,700)
3,078(47,621)1,205(46,417)

(124)
35
(89)
36
(53)

(1,509)426(1,083)
438
(645)

(440)
¥(6,177)(5,353)$(75,155)

22. Segment Information(a) Overview of reportable segments

The reportable segments of the Company are components
for which discrete financial information is available and whose
operating results are regularly reviewed by the Board of
Directors to make decisions about resource allocation and toassess performance.
The Company is made up of segments based on individual business headquarters classified by products, services
and sales markets. Therefore, the reportable segments of theCompany consist of “Industrial gas,” “Electronics,” “Energy”
and “Other.”The “Industrial gas” segment produces and sells gases
and related equipment used in the domestic and overseas
steel and chemical industry. The plant engineering business is
included in this segment considering the similarities of major
customers.

The “Electronics” segment produces and sells gases
and related equipment used in the domestic and overseas
electronics industry.
The “Energy” segment sells liquefied petroleum gas inJapan.
The “Other” segment mainly consists of the medicalrelated business which sells medial gas, and the thermos
business which produces and sells housewares.
(b) Method of calculating net sales, income (loss), assets,
liabilities and other items by reportable segment

Accounting policies of the reportable segments are consistent
to those described in Note 2. “Summary of Significant
Accounting Policies.” Segment income is based on operating income. Intersegment sales or transfers are based onprevailing market price.

Taiyo Nippon Sanso Corporation | Annual Report 201249

new entrants, property, plant and equipment, which principallyconsists of small to medium-sized gas supply plants, whichwere depreciated by the declining balance method, areexpected to operate stably for long periods through replacement and renewal investments. The Company therefore
determined that matching annual profit or loss calculations
based on a cost allocation using the straight-line method ismore reasonable.
As a result of this change, segment income for “Industrial
gas,” “Electronics,” “Energy,” “Other” and “Adjustments”
increased by ¥1,057 million ($12,860 thousand), ¥850 million($10,342 thousand), ¥34 million ($414 thousand), ¥115
million ($1,399 thousand) and ¥107 million ($1,302 thousand),
respectively.

(Change in depreciation method for significant property, plantand equipment)
Effective from the beginning of fiscal year, April 1, 2011, theCompany changed its depreciation method from the decliningbalance method to the straight-line method for certain property, plant and equipment. Leased machinery and buildings(except for attachments) acquired on or after April 1, 1998
continue to be depreciated by the straight-line method.
Based on its new medium-term business plan, theCompany intends to concentrate management resources
and increase capital investments into growth markets suchas the electronics industry. In these circumstances, however,where the demands of existing users of industrial gas are
expected to grow steadily amid decreased investments by(c) Net sales, income (loss), assets, liabilities and other items by reportable segment

Industrial gas

Net sales:
Sales to third parties
Intersegment sales or transfers
Total
Segment income (operating income)
Other item:
Depreciation expenses

Adjustments Consolidated¥115,294
107
115,402¥ 5,914¥38,8812,431
41,312¥ 1,667¥32,218
2,696
34,914¥ 2,723¥477,451
7,379
484,830¥ 32,018¥—(7,379)(7,379)¥ (950)¥477,451—
477,451¥ 31,067¥ 18,501¥ 10,360¥¥ 1,511¥ 30,907¥ (435)¥ 30,471

534

Millions of yen
2011
Reportable segments
Electronics
Energy
Other

Total

Adjustments Consolidated¥288,644
1,724
290,368¥ 24,128¥126,495
102
126,597¥ 8,453¥37,643
1,848
39,491¥ 1,400¥30,836
2,768
33,604¥ 3,041¥483,620
6,442
490,062¥ 37,024¥—(6,442)(6,442)¥(1,555)¥483,620—
483,620¥ 35,468¥ 19,594¥¥¥ 1,628¥ 31,668¥¥ 32,167

Industrial gas

Net sales:
Sales to third parties
Intersegment sales or transfers
Total
Segment income (operating income)
Other item:
Depreciation expenses

Total¥291,057
2,143
293,201¥ 21,712

Industrial gas

Net sales:
Sales to third parties
Intersegment sales or transfers
Total
Segment income (operating income)
Other item:
Depreciation expenses

Millions of yen
2012
Reportable segments
Electronics
Energy
Other

9,607

837

Thousands of U.S. dollars
2012
Reportable segments
Electronics
Energy
Other
Total

499

Adjustments Consolidated$3,541,270 $1,402,774
26,074
1,302
3,567,356 1,404,088$ 264,168 $ 71,955$473,062
29,578502,640$ 20,282$391,994 $5,809,113
32,802
89,780424,796 5,898,893$ 33,131 $ 389,561$— $5,809,113(89,780)—(89,780) 5,809,113$(11,559) $ 377,990$ 225,100 $ 126,049$ 6,497$ 18,384 $ 376,043$ (5,293) $ 370,739

Notes: 1. Adjustments for segment income of ¥(950) million ($(11,559) thousand) and ¥(1,555) million as of March 31, 2012 and 2011 include intersegment eliminationsof ¥85 million ($1,034 thousand) and ¥(186) million, and corporate general administration expenses which mainly consisted of basic research and development
expenses and are not allocable to each reportable segment of ¥(1,035) million ($(12,593) thousand) and ¥(1,369) million, respectively.
2. The Company does not allocate assets to reportable segments.

50

Taiyo Nippon Sanso Corporation | Annual Report 2012

(d) Information by geographical area

(1) Net sales

Japan(2) Property, plant and equipment
Millions of yen
2012
The United States
Others¥352,727Japan¥81,684

Millions of yen
2011
The United States
Others¥358,978Japan¥43,039¥78,586¥46,054

Thousands of U.S. dollars
2012
The United States
Others$4,291,605$993,844$523,653

Total

Japan

¥477,451¥160,907

Total

Japan

¥483,620¥167,331

Total

Japan

$5,809,113$1,957,744

Millions of yen
2012
The United States
Others¥69,122¥25,469

Millions of yen
2011
The United States
Others¥68,627¥20,535

Thousands of U.S. dollars
2012
The United States
Others$841,003$309,880

Total¥255,499

Total¥256,494

Total$3,108,639(e) Information about major customers

Information about major customers is not disclosed since there are no outside customers that make up more than 10% of net sales
on the consolidated statements of income.
(f) Information on impairment loss by reportable segments

Impairment loss

Impairment loss

Impairment loss

Industrial gas

Electronics

¥213

¥—

Industrial gas

Electronics

¥—

¥39

Industrial gas

Electronics$2,592$—Millions of yen
2012
Energy
Other

¥—

¥—

Millions of yen
2011
Energy
Other

¥—

¥—

Corporate/Eliminations

Total

¥—

¥213

Corporate/Eliminations

Total

¥55

¥94

Thousands of U.S. dollars
2012
EnergyOther
Corporate/Eliminations

$—

$—

$—

Total

$2,592(g) Information on amortization and unamortized balance of goodwill by reportable segments

Amortization
Unamortized balance

Amortization
Unamortized balance

Amortization
Unamortized balance

Industrial gas

Electronics¥ 2,735
39,383¥——

Industrial gas

Electronics¥ 3,996
42,831¥0
6

Industrial gas

Electronics$ 33,277
479,170$——

Millions of yen
2012
Energy
Other

¥243
351

¥—
—

Millions of yen
2011
Energy
Other

¥255
505

¥—
—

Corporate/Eliminations

Total

¥—
—

¥ 2,979
39,735

Corporate/Eliminations

Total

¥—
—

¥ 4,252
43,343Thousands of U.S. dollars
2012
EnergyOther
Corporate/Eliminations$2,9574,271

Taiyo Nippon Sanso Corporation | Annual Report 2012

$—
—

$—
—

Total

$ 36,245
483,45351

(h) Information on amortization and unamortized balance of negative goodwill which resulted from business combinations prior to April 1,2010 by reportable segments

Industrial gas

Electronics

¥371
226

¥30
34

Amortization
Unamortized balance¥25
35

Industrial gas

Electronics

¥538
570

¥30
65

Amortization
Unamortized balanceElectronics$4,514
2,750

$365
414

Corporate/Eliminations

Total

¥—
—

¥507
335

¥80
39

Millions of yen
2011
Energy
Other

¥25
60

Industrial gas

Amortization
Unamortized balance

Millions of yen
2012
EnergyOther

Corporate/Eliminations

Total

¥—
—

¥616
757

¥22
60

Thousands of U.S. dollars
2012
EnergyOther
Corporate/Eliminations

$304
426

$973
475

$—
—

Total

$6,1694,076

23. Supplementary Cash Flow Information
Cash and cash equivalents in the consolidated statementsof cash flows for the years ended March 31, 2012 and 2011were reconciled to cash and deposits reported in the

consolidated balance sheets at March 31, 2012 and 2011
as follows:
Millions of yen
2012
2011

Cash and deposits
Time deposits with maturities of more than three months
Cash and cash equivalents¥34,596(1,321)¥33,275¥44,549(672)¥43,877

Thousands of
U.S. dollars
2012$420,927(16,073)$404,855

The acquisition cost and net payments for assets and liabilities of Leeden Limited, acquired through stock purchase, for the year
ended March 31, 2012 were as follows:

Current assets
Noncurrent assets
Goodwill
Current liabilities
Noncurrent liabilities
Minority interests
Acquisition cost of assets
Cash and cash equivalents
Transferred shares
Purchase of investments in subsidiaries resulting in change in scope of consolidation

52

Taiyo Nippon Sanso Corporation | Annual Report 2012

Millions of yen

Thousands of
U.S. dollars¥ 9,864
5,941
591(5,963)(1,860)(2,217)(6,356)
1,163
1,041¥(4,151)$120,015
72,284
7,191(72,551)(22,630)(26,974)(77,333)
14,15012,666$ (50,505)

The acquisition cost and net payments for assets and liabilities of Quimby, acquired through assets purchase by Matheson
Tri-Gas, Inc., a consolidated subsidiary of the Company, for the year ended March 31, 2012 were as follows:
Millions of yen

Current assets
Noncurrent assets
Current liabilities
Acquisition cost of assets
Cash and cash equivalents
Payments for assets purchase

¥

221
947
(154)
(1,013)—¥(1,013)

Thousands of
U.S. dollars$ 2,689
11,522(1,874)(12,325)—$(12,325)

The decrease in assets due to the transfer of the SDS and VAC businesses of Matheson Tri-Gas, Inc., a consolidated subsidiaryof the Company, for the year ended March 31, 2012 was as follows:

Current assets
Noncurrent assets
Total assets

Millions of yen

Thousands of
U.S. dollars

¥20
3
¥24

$243
37
$292

The acquisition cost and net payments for assets and liabilities of Matheson K-Air India Pte. Ltd. and Western International Gas& Cylinders Inc. acquired through stock purchase, for the year ended March 31, 2011 were as follows:
Millions of yen

Current assets
Noncurrent assets
Goodwill
Current liabilities
Noncurrent liabilities
Acquisition cost of assets
Cash and cash equivalents
Purchase of investments in subsidiaries resulting in change in scope of consolidation¥ 1,944
6,680
4,451
(602)
(1,618)(10,855)
183¥(10,672)

24. Subsequent Events(a) Appropriation of retained earnings

The following appropriations of retained earnings, which have not been reflected in the accompanying consolidated financial
statements for the year ended March 31, 2012, were approved at the shareholders’ meeting held on June 28, 2012.

Cash dividends—¥6.00 ($0.073) per share

Millions of yen

Thousands of
U.S. dollars¥2,382$28,982(b) Issuance of domestic unsecured bonds

The Company approved a comprehensive resolution regarding the following issuance of domestic unsecured bonds at the Board of
Directors’ meeting held on May 9, 2012 and issued the bonds on June 14, 2012.
Total amount of issuance:
Issue price:
Interest rate:
Date of issue
Redemption price:
Maturity date:Purpose of issuance:¥10,000 million ($121,669 thousand)¥100 per ¥100 of the face value
0.437% per annum
June 14, 2012¥100 per ¥100 of the face value
June 14, 2017
Redemption of bonds

Taiyo Nippon Sanso Corporation | Annual Report 201253

Report of Independent Auditors

54

Taiyo Nippon Sanso Corporation | Annual Report 2012Investor Information(At March 31, 2012)

Head Office:Toyo Building, 1-3-26, Koyama, Shinagawa-ku, Tokyo 142-8558, Japan
Number of Employees:
11,588Date of Incorporation:
October 1910
Number of Shares:
Authorized—1,600,000,000

Issued—403,092,837

Minimum Trading Unit:
1,000 shares
Number of Stockholders:
24,113
Transfer Agent for Shares:
Mizuho Trust & Banking Co., Ltd.
Major Stockholders:Thousands ofShares Owned

Major Stockholders

Mitsubishi Chemical Corporation
JFE Steel Corporation
Taiyo Nippon Sanso Client Shareholding Society
Meiji Yasuda Life Insurance Company
Mizuho Corporate Bank, Ltd.
Japan Trustee Services Bank, Ltd. (Trust Account)
National Mutual Insurance Federation ofAgricultural Cooperatives
The Norinchukin Bank
The Master Trust Bank of Japan, Ltd. (Trust Account)
Dai-ichi Mutual Life Insurance Company

Percentage of
Total

60,94725,254
19,38516,007
14,484
14,45515.12%
6.26
4.80
3.97
3.59
3.58

12,031
10,000
9,397
7,537

2.98
2.48
2.33
1.86

189,49747.01%

Common Stock Price Range and Trading Volume:(Yen)(Thousand Shares)

1,000

100,000

800

80,000Common Stock Price Range

600

60,000400

40,000200

20,000
Trading Volume00
1st Quarter 2nd Quarter 3rd Quarter

4th Quarter

Fiscal year 2011

Taiyo Nippon Sanso Corporation | Annual Report 2012

1st Quarter 2nd Quarter 3rd Quarter

4th Quarter

Fiscal year 201255

Toyo Building, 1-3-26, Koyama,
Shinagawa-ku, Tokyo 142-8558, Japan
Tel: 81-3-5788-8000
www.tn-sanso.co.jp

Printed in Japan