Taiyo Nippon Sanso will change

Annual Report

2013
Year Ended March 31, 2013

CONTENTS
Profile1

Management Philosophy

1Business Portfolio

2

To Our Stakeholders

10

Bold Reforms and Unyielding Determination

11

Business Activities

20

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 thefuture plans, 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 anduncertainties include, but are not limited to, changes in general economic
and speciﬁc market conditions, currency exchange rate ﬂuctuations andevolving trends in demands 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 in the global industrial gases industry.

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

Taiyo Nippon Sanso Corporation | Annual Report 2013

1

BUSINESSPORTFOLIO
This section presents information on Taiyo Nippon Sanso’s
operations, focusing on the nature, competitive advantages andmarket position of each of the Company’s businesses.

Industrial Gas Business

Thermos Business

Plants and Engineering BusinessResearch andDevelopment

Medical BusinessElectronics-related Business

Lp Gas Business2

Taiyo Nippon Sanso Corporation | Annual Report 2013

Industrial Gas BusinessIn line with our commitment to provide industrial gases toour customers when and where needed, we have gas production
and supply capabilities in Japan, the United States and acrossAsia, including in China and India. This enables us to ensure
safe, stable supplies of gases to customers in the manner thatbest suits their particular needs, thereby contributing toenhanced quality and productivity, as well as to the safety andsecurity of their operations. 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 andaerospace.

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% share of Japan’s 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
We have established an extensive customer base in North America. In the United States, subsidiary Matheson Tri-Gas, Inc., formed a helium production joint venture with
Air Products and Chemicals, Inc., that is scheduled to commence operations within the current year. In China, India and elsewhere in Asia, we are pressing forward withthe construction of helium filling stations with the aim of expanding our supply capabilities.

Growing network of air separation plants in the United States and Asia
In the United States, we completed new air separation plants in North Dakota and Florida, the first commencing operations in May 2012 and the second in March 2013.
In Asia, we completed air separation plants in southern Vietnam and on the island of Mindanao in the Philippines, which began operating in February 2012 and January
2013, respectively, and plan to complete another unit, near Pune, India, by the end of 2013.

Expanded market coverage in the United States thanks to key U.S. distributor acquisitions
In fiscal year 2013, we acquired the businesses and assets of four industrial gas distributors in the United States: US Airweld, Inc. (Arizona and New Mexico), A&F Welding
Supply, Inc. (Texas), Whitmer Welding Supplies, Inc. (Nebraska) and Evergreen Supply, Inc. (South Dakota).

Taiyo Nippon Sanso Corporation | Annual Report 20133

Plants and Engineering BusinessWe have built an extensive lineup of plants, which
underpin our industrial gas business, that ranges
from ultrahigh-purity manufacturing equipment forcustomers in the electronics industry to large-scale
plants for steelmakers and specialized containers forthe cryogenic transport of helium, and enjoy afavorable reputation for all products both in Japanand overseas. Our offerings also include spacesimulation chambers, large-scale helium
refrigeration systems and other cutting-edgeofferings, which we market primarily foruse in space development and in R&D in
the area of superconductive technologies.

Competitive advantages
Top share of Japan’s market for air separation plants
A wealth of accumulated cryogenic and adsorption technologies, which we are leveraging to reduce consumption of electricity and cost per unitof production, as well as to increase the quality and size of plants
Cutting-edge simulation technologies that ensure the optimal operation of air separation plants in response to different 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 of helium over long distances.

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Taiyo Nippon Sanso Corporation | Annual Report 2013

Electronics-related Business
Operating in an industry that is increasingly characterized
by global-scale competition and cooperation, electronics
manufacturers face growing pressure to ensure the efficiency
and stability of production. Such firms look to us forreliable supplies of high-grade materials gases, as well as
for technologies that facilitate the safe and efficient use ofsuch gases.
To provide electronics manufacturers with a wide
range of materials gases, as well as with a huge volume ofhigh-purity nitrogen gases, we install Total Gas Centers(TGCs), which facilitate stable, around-the-clock
supplies. We also manufacture and sell refining andexhaust gas abatement equipment, and metal organic
chemical vapor deposition (MOCVD) systems, used in
the production of compound semiconductors, as well as
construct piping to deliver high-purity gases.

Competitive advantages
World-class total gas and equipment solutions made possible by stringent quality control and clean technologies
Solutions include high-purity piping systems.

Supply structure encompassing key global markets
Our supply structure covers Japan, East Asia (South Korea, China and Taiwan), Southeast Asia, and the United States. Our global network enables us to optimize
production, procurement and transport.

Increasing sales of UR-26K MOCVD system
This system realizes world-class surface processing performance and a yield rate of 10 six-inch or six eight-inch wafers.

Taiyo Nippon Sanso Corporation | Annual Report 20135

LP Gas Business
We wholesale LP gas to production facilities and for otherindustrial applications, and supply it to fueling stations fortaxis and other vehicles, as well as to a wide range of othercustomers, from restaurants and other commercial users toresidential users. We also sell related equipment and devices,
including gas heat pumps, air conditioners, fuel cells for homes
and hot water heaters, as well as design, build and provide
maintenance services for LP gas dispensers and other supply
facilities.

Competitive advantages
Ranked ninth in Japan in terms of market share, with an annual LP gas supply capacity of 410,000 tons
Ability to provide stable LP gas supplies to approximately 100,000 households that lack access to town gas services; increasingly strong andefficient network in Japan for supplying commercial users thanks to the integration and/or expansion of sales and delivery sites

6

Taiyo Nippon Sanso Corporation | Annual Report 2013

Medical BusinessIn addition to providing stable supplies of high-quality medical
gases, we develop, manufacture, sell and provide maintenanceservices for gas supply systems for hospitals, as well as homeoxygen therapy (HOT) and other home healthcare equipment.
We also extend comprehensive support in the form of aroundthe-clock services, including remote monitoring of gas levels
and follow-up services for equipment, which are provided incooperation with retailers. Applying our advanced gas
technologies, we provide products for the biotechnology field,
including cryopreservation containers for bioresources used inresearch, as well as stable isotopes and specialty gases for use inadvanced diagnostics and medical treatment.

Competitive advantages
200 kg increase in annual production capacity for Water-18O, a starting material for diagnostic agents used in positron emission tomography(PET) diagnostics in the fourth quarter of fiscal year 2013, bringing our total annual production capacity (combined capacities of new and existing
plants) to a world-class 300 kg. A third plant (annual capacity: 300 kg) planned in Japan will double our capacity.
The reliability and quality of Water-18O is highly valued by customers in more than 20 countries, including in the United States. We are working to contribute to the growing
market for PET diagnostics by ensuring stable supplies of high-grade Water-18O.

Leading market position in Japan for liquid nitrogen dewars for cryopreservation, which are crucial to the biotechnology field, as well as for cellbanking systems and auto-pick-up cryopreservation systems (trade name: CryoLibrary), used in cutting-edge areas such as iPS cell therapies.
Japan’s largest network of production bases, filling facilities and distribution bases for medical gases, facilitating stable supplies nationwide
A well-organized distribution and maintenance network that includes the Medical Technical Service Center, which helps ensure stable supplies
to patients’ homes and maintain superior product quality
Rising sales of OXYMED-brand medical gas supply equipment and systems for hospitals, developed through an integrated process thatencompasses design, manufacturing, and testing and maintenance services

Taiyo Nippon Sanso Corporation | Annual Report 2013

7

Thermos Business
Thermos K.K., a subsidiary in Japan, 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 andcommercial use. Trusted by customers the world over, Thermos has established its
own stringent quality standards and created an integrated production system thatencompasses planning, development, manufacturing and sales.

Competitive advantages
Products that are developed in Japan, manufactured in Malaysia and China and sold in approximately 120 countries and territories worldwide,a reputation for unconditional commitment to quality and a solid top global market share
An expanded manufacturing base in China, facilitating responsiveness to growth in the market for stainless steel vacuum bottles worldwide
Ultralight insulated mug (released in the fall of 2012) that swept markets worldwide thanks to its lightness, compact size and superb design andnew food containers for soup and other hot liquids that are credited with creating and driving the expansion of a new market by offering a brandnew way to enjoy lunch

8

Taiyo Nippon Sanso Corporation | Annual Report 2013

Research and Development
As a pioneering provider of industrial gases with a proud history anchored by ourcore cryogenic air separation technologies, we work continuously to enhance ourcryogenic, high-pressure, air separation, vacuum, gas control technologies, enabling
us to support the activities of companies in a wide variety of industries around theworld. In addition to research in advanced areas that draws on proprietary knowhow accumulated over more than a century, we work to develop technologies thatfacilitate the application of gases in new fields. This dual approach enables us torespond promptly to evolving customer needs and to foster new demand.

Competitive advantages
Tsukuba Laboratory in Ibaraki Prefecture in Japan: Promotes R&D focused on ultrahigh-sensitivity gas analysis, the synthesis of stable isotope
compounds, cryogenic separation and isotope separation, as well as cutting-edge research in the electronics field
Yamanashi Laboratory in Yamanashi Prefecture in Japan: Emphasizes the development of cryogenics, adsorption and other air separation-related
technologies, as well as research in and the development of basic technologies in such areas as safety, physical properties and new materials
Yamanashi Laboratory Gas Application Technology Center: Concentrates on research in and the development of industrial gas application
technologies that respond to the needs of customers

Taiyo Nippon Sanso Corporation | Annual Report 20139

To Our Stakeholders

Hiroshi Taguchi, Chairman (left)
Shinji Tanabe, President (right)

The global economy remained fragile in fiscal year 2013,

demand, shortly after the joint venture began shipping

ended March 31, 2013, despite signs of a modest recovery inproducts in 2011, and by our realization that market

the United States powered largely by consumer spending.

conditions were likely to remain unfavorable for some time.

Overall weakness was due to a variety of factors, including

As a consequence of our withdrawal from the joint venture,sluggish conditions in Europe, attributable to a lack of progress

we posted an extraordinary loss of approximately ¥23,300

in resolving the region’s prolonged financial crisis, and hints ofmillion in fiscal year 2013.

a slowdown in key emerging economies, particularly China

In light of this occurrence, a new management team wasand India, after years of unprecedented growth. In Japan,

installed with the aim of rebuilding our operating foundation

stagnation persisted, reflecting a strong yen and deflation, but

and growing our existing businesses. Nonetheless, operating

ambitious measures implemented late in the period by the newconditions remained harsh throughout the period, as agovernment, which came into power in December 2012, andconsequence of which we reported declines in consolidated

the Bank of Japan, yielded indications of a gradual upturn.

net sales and operating income. We acknowledge theIn this environment, we saw a moderate improvement inseriousness of this situation. Placing the highest priority

demand for industrial gases in North America. In Asia, theon achieving a prompt improvement in our operating results,

impact of declining production in the electronics industry in

we pledge to respond flexibly, swiftly and accurately

Taiwan was offset by solid results in other markets and theto the dramatic changes taking place in our operating

expansion of our operations in the region following theenvironment. In these and all of our efforts, we look forward

acquisition in March 2012 of a company in Singapore. In

to the ongoing support of our stakeholders.

contrast, results in Japan flagged, owing to a decline indemand from our principal customers, particularly those in

July 2013

the electronics industry.
In September 2012 we withdrew from a monosilane gas
production joint venture in Japan. This difficult decision wasprompted by a sudden dramatic change in the structure of the
global monosilane gas market, resulting in a sharp decline in

10

Hiroshi Taguchi, Chairman

Taiyo Nippon Sanso Corporation | Annual Report 2013

Shinji Tanabe, President

BOLD REFORMS
AND UNYIELDINGDETERMINATION
Taiyo Nippon Sanso will change
In fiscal year 2013, Taiyo Nippon Sanso reported its first-ever net loss.
Having acknowledged the gravity of this situation, the companies of the
Taiyo Nippon Sanso Group pledge to work together to respond flexibly,
swiftly and accurately to dramatic changes in its operating environment
both in Japan and overseas, thereby driving the Group forward toward
new growth. Guided by its corporate philosophy—“Market-driven
collaborative innovation: improving the future through gases”—theCompany is taking decisive steps to reorganize its operations with theaim of ensuring sustainable growth in corporate value.

Taiyo Nippon Sanso Corporation | Annual Report 201311

An Interview with the President

Shinji Tanabe, President

Part I:A New Management Team Takes the Helm

Q
What are your plans andgoals as the newpresident of Taiyo
Nippon Sanso?

“Owing to our withdrawal from a monosilane gas production joint venture, we posted an
extraordinary loss of approximately ¥23,300 million, as a consequence of which in fiscal
year 2013 we reported our first-ever net loss. As a result, a decision was taken to elect a
new president to provide the focus necessary to ensure our ability to respond todramatic changes in the operating environment. I am keenly aware of the weight of
responsibility that comes with this position.”A

As president, I must take steps to reinforce our operating foundation and ensure it iscapable of supporting future growth. I must also implement decisive structural reforms

that will enable us to cultivate new businesses that will sustain that growth.
From a cost perspective, it is crucial that we realign our corporate structure andproduction system to better suit our current operating environment. Another key challenge
will be responding to the needs of major customers in Japan who are increasingly shifting
manufacturing bases offshore.

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Taiyo Nippon Sanso Corporation | Annual Report 2013

Q
Can you tell us a little
about your career up
to now?

“I joined Nippon Sanso Corporation—Taiyo Nippon Sanso’s predecessor—in 1972 as
an engineer in the plants and engineering business, after which I spent eight years
overseeing a subsidiary’s plant engineering and on-site operations in the United States.
After returning to Japan, I served as managing director of the On-Site & Plant,
Development & Engineering and Technological Affairs divisions.”A

In the United States, I was involved in procurement, which gave me some understandingof the user side. In my experience, our focus has always been weighted heavily toward

producing and supplying gases, and as a result we lack awareness of the customer’s
perspective. Success depends on accurately grasping our customers’ needs and providing
products and services that respond to those needs at a reasonable cost. It’s only common
sense, but it is really important.
Part II:

Assessment of Operating Results in Fiscal Year 2013 and Reasons for Shelving the Medium-TermBusiness PlanQ
How do you evaluate
your performance inJapan in fiscal year
2013? What was yourstrategic focus?

“In Japan, on-site gas supplies to steelmakers yielded solid results. However, further
measures to strengthen profitability are needed in the electronics-related business.”A

In the Electronics segment, demand from manufacturers of semiconductors, liquid
crystal display (LCD) panels and solar cells fell. In light of deteriorating market conditions,in September 2012 we withdrew from a monosilane gas production joint venture. We closed a
new monosilane gas production facility, which had taken three years to complete but had only
been in operation for one year. As a consequence, we posted an extraordinary loss. We also
saw a substantial decline in gas supply facility installations, notably in Japan, further
underscoring the need to undertake a fundamental reorganization of our electronics-related
business.
In the Industrial Gas segment, our core on-site gas business benefited from firm demand
from steelmakers, which are its main customers. Demand from customers in the chemicals
industry, the principal users of these products, was down slightly for oxygen and nitrogen.
In the Energy segment, import prices to Japan for LP gas continued to rise, but we weresuccessful in revising sales prices accordingly. As a result, both sales and operating income
were solid.
In our fourth segment, called Other, the launch of new products contributed to sturdy
sales in the Thermos business, which specializes in stainless steel vacuum bottles. In the
medical business, we saw brisk sales of medical care equipment.

Taiyo Nippon Sanso Corporation | Annual Report 201313

An Interview with the President

BOLD REFORMS AND UNYIELDING DETERMINATION

Q
What were results likeoverseas, particularly in
the United States andelsewhere in Asia?

“In the United States, sales in the industrial gas business were steady, reflecting a
gradual improvement in market conditions. In other Asian markets, sales in theelectronics-related business were sluggish, just as they were in Japan, althoughsales in the industrial gas business were firm.”

A

In the United States, sales in the industrial gas business were steady, bolstered by signsof market recovery. Sales in the electronics-related business were sluggish as demand

flagged, as a result of which sales in remaining businesses were insufficient to offset theabsence of contributions from our U.S. safe delivery source (SDS) business—part of our
specialty gases business—which was transferred to a third party in fiscal year 2012.
Sales were firm in other Asian markets, bolstered by the consolidation of Singapore-based
Leeden Limited, acquired in March 2012. During the period, we sought to capitalize on
Leeden’s market presence to further expand our operations in Southeast Asia. To grow ourexisting industrial gas operations and increase our leading market shares in the Philippines andVietnam, we commenced the expansion of our air separation plants near Hanoi in northern
Vietnam and on the Philippine island of Luzon, in an industrial development on the site of theformer Clark Air Base. Also in the Philippines, in January 2013 we commenced operations at
our first liquid gas plant on the island of Mindanao. In China, we proceeded with efforts toboost operating rates at existing air separation plants.

Q
What prompted you to
shelve your previous
medium-term businessplan in October 2012?

“In response to dramatic changes in our operating environment, we recognize that wemust rally our collective capabilities to reinforce our operating foundation, principally by
rebuilding our operations in Japan and promoting further global expansion, to restore
our growth trajectory.”A

We launched our previous business plan, dubbed GEAR UP 10, in April 2011. The plancontained three medium-term quantitative targets for critical management benchmarks—

a 10% share of the global industrial gases market, an operating margin of 10% and a return on
capital employed (ROCE) of 10%—and set forth strategies for reinforcing our operating
foundation and driving growth. However, with the deterioration of economic conditions inJapan, exacerbated by yen appreciation, rising electricity rates and emerging risks in China,
customers in major end-user industries such as electronics, steel and chemicals werecompelled to revamp their operations and realign their business portfolios.
Realizing that survival and prosperity in such an environment depends on being able torespond flexibly and swiftly to change, we made the decision to shelve GEAR UP 10 andnarrow our focus to two basic strategies, which are to further enhance our pivotal operating
foundation in Japan and to expand operations in overseas markets, which we see as being
especially promising. When we announced this decision last October, we identified four key
challenges and a fundamental short-term goal of increasing profit by ¥5 billion.

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Taiyo Nippon Sanso Corporation | Annual Report 2013

Part III:Key Challenges and Basic Strategies

Q
Please explain therationale behind thestructural reforms you
have already
implemented in Japan,
particularly in theindustrial gas andelectronics-related
businesses?

“The impetus for the structural reforms we have made was our need to streamline ourorganization, increase efficiency, reduce costs and enhance our responsiveness tocustomers to better suit our current operating environment.”A

In April 2013, we reorganized our Industrial Gases and Electronics divisions.
In the industrial gas business, cost management for production and distribution has

traditionally been the responsibility of the Business Administration division. To centralize costmanagement at all stages, from production through to sales, we created a product planningand management department within the Industrial Gases division. We also established amarketing department, which is tasked with devising and implementing strategies for our global
industrial gas business. We are confident that these changes will facilitate the creation of a new
business model, as well as the geographic expansion of our operations.
In the electronics-related business, we responded to the rapid contraction of theJapanese market by streamlining individual sections within the Electronics division, as well as
the division’s staff. Personnel were reassigned to positions closer to the front line of sales toimprove our responsiveness to customer needs. To accelerate the expansion of our overseas
operations, notably in Asia, we established a new global business department. The department
will work closely with U.S. subsidiary Matheson Tri-Gas, Inc., to direct planning and sales in
global markets. In light of the steady decline in gas supply facility installations in the electronicsrelated business in Japan, we have also embarked on an extensive reorganization of anengineering subsidiary. Transforming the company into an appropriately lean and efficient entity
will require personnel reductions.

Q
Can you tell us about
your plans for expanding
overseas businesses,
including those forboosting the earnings
capacity of your North
American business?

“We will expand our operations in overseas markets, which offer considerable growthpotential. Our goal is to boost overseas sales outside of Japan to 50% of net sales, from
30% at present.”

A

Having acknowledged the unlikelihood of significant growth in the Japanese industrial
gas market, we see North America and the rest of Asia offering greater potential for ourindustrial gas business.
In North America, for example, we havecapitalized actively on a variety of small- andlarge-scale M&A opportunities, as a result of
which our sales of industrial gases in thatmarket have tripled over the past decade. In
contrast, increasingly intense competition has
depressed margins in the electronics-related
business. For these reasons, our focus in North
America will be on implementing stringent
rationalization measures to shore up profitability,
purchasing small and mid-sized gas distributors

Taiyo Nippon Sanso Corporation | Annual Report 201315

An Interview with the President

BOLD REFORMS AND UNYIELDING DETERMINATION

Milestones in the United States (2000–2014)
2002
2004
2006
2007
2008
2009
2009
2010
2011
2012

Builds air separation plant in Irving, Texas
Acquires six air separation plants from the Air Liquide GroupAcquires helium business of the former BOC Group plc and Linweld Inc.
Builds air separation plant in Vernon, California; acquires Polar Cryogenics Inc.
Acquires Aeris, Inc., Five Star Gas & Gear, Inc. and Advanced Gas Technologies
Builds air separation plants in San Antonio, Texas and Grimes, Iowa
Acquires ETOX, Inc. and Valley National Gases, Inc.
Acquires Western International Gas & Cylinders Inc.
Acquires Quimby Welding Supplies, Inc.
Acquires US Airweld, Inc., A&F Welding Supply, Inc., Whitmer Welding Supplies,
Inc. and Evergreen Supply, Inc.
2013 Builds air separation plants in Dickinson, North Dakota and Lakeland, Florida
2014 Builds air separation plant in Mesa, Arizona (under construction)

Since 2000, we have expanded our presence in the United States through an active program of acquisitions.
As a result, we currently have 270 bases in 41 states.
and proceeding with the expansion of our air separation plants in the region.
In 2012, we acquired four North American gas distributors. These included Evergreen
Supply, Inc., which we acquired in December, giving us a service base in South Dakota,
thereby positioning us well to benefit from demand growth in the state fueled by the shale gas
revolution. We also completed construction of two new air separation plants, one each in
Dickinson, North Dakota, and Lakeland, Florida, and are in the process of building a third in
Mesa, Arizona. Going forward, the rapid expansion of shale gas and oil production in North
America is expected to boost regional demand for nitrogen and other industrial gases. We willseek to capture that demand by expanding our network of liquid gas bases. Our efforts toextend our on-site hydrogen plant business are also progressing well.
In Asia, we further fortified our already-high market share by increasing our stake in a joint
venture in Vietnam. In Singapore, the Philippines and other markets where we have built astrong market presence, we will work to foster additional growth. In recent years, our annual
sales of industrial gases in Asia have been in the area of ¥40,000 million. Our medium-termgoal is to lift that to ¥100,000 million. We will also actively expand into new markets, includingIndonesia.

Q
How will you strengthen
responsiveness in theplants and engineeringbusiness?

“This is a task we will address through unremitting efforts to reduce costs and toenhance quality and performance.”A

We will standardize plant designs and automate processes such as welding to shorten
lead times and cut costs. Additionally, we will consign the fabrication of cold boxes andother plant components to manufacturers overseas. In North America and Southeast Asia, wewill strive to take advantage of increasing demand for new plants and increase our share ofeach individual market. In Japan, our emphasis will be on building highly efficient small andmid-sized air separation plants to fill gaps in our production network, thereby lower distribution
costs and bolster our market share.

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Taiyo Nippon Sanso Corporation | Annual Report 2013

Q
Earlier you spoke about
cultivating new
businesses that will help
sustain growth. Whatsorts of businesses are
you considering?

“Between now and fiscal year 2017, the companies of the Taiyo Nippon Sanso Group will
work together to cultivate new demand that will add ¥20,000 million to annual net sales.”A

Hydrogen filling stations will be of particular importance. In Japan, the Ministry of Economy,
Trade and Industry is supporting a project to establish a nationwide hydrogen filling station

infrastructure, as part of which it intends to build 100 hydrogen filling stations across the country
by 2015, when fuel cell vehicles (FCVs) are expected to become available to the general public.
Leveraging our proprietary compact facility engineering capabilities, we have developed apackaged off-site hydrogen station that can be built for approximately half the cost of aconventional station. Thanks to our technologies, we have set a goal of establishing a dominantposition in this new sector in Japan and securing orders for 30 of the 100 planned stations.
We also have high expectations for our cryopreservation system, which facilitates theautomated freezing, storage and thawing of induced pluripotent stem (iPS) cells. Significant
demand for the system is expected from universities, research facilities and pharmaceuticalmanufacturers. We are also promoting the development of a new refrigeration system for hightemperature superconductors that uses liquid nitrogen as a refrigerant instead of liquid helium.

Hydrogen filling station

Other key development areas include carbon nanotubes and other innovative materials andnew specialty electronics materials gases.

Q
What specific strategies
have you formulated toadd ¥5 billion to profit?

“In October 2012, we set a target for a ¥5 billion increase in profit, which we aim toachieve within two years.”A

To achieve this target, we have further broken down our four key challenges into fiveconcrete efforts.
The first is to revise sales prices of our industrial gases in Japan. In fiscal year 2013, rate

hikes by Tokyo Electric Power Company, Incorporated (TEPCO) drove up production costs.
Owing to delays in negotiating price increases for liquid gases sold to customers in TEPCO’s
service area, the actual positive impact of gas price increases fell short of our expectations.
Accordingly, we are determined to make up the difference in fiscal year 2014. We have alreadytaken prompt steps to revise sales prices to customers in areas other than those served by
TEPCO, where electricity rate hikes are expected in fiscal 2014.
The second is to fortify collaboration with our official dealers, stepping up cooperation
between our salespeople and official dealers to cultivate new markets and raising the profile ofour products at official dealers’ retail locations. Through such efforts, we will endeavor to raiseannual sales via official dealers, currently approximately ¥80,000 million, by 10%.
Third, we will improve the profit structure of our electronics-related business. In light of thedecline in gas supply facility installations in Japan, we will focus on rightsizing our engineering
operations and modifying the functions of our Electronics Division with the aim of increasing
operating efficiency and reduce costs.
Fourth, we will also improve the profit structure of our North American operations. This is atask we have sought to address since 2011 through rationalization and other measures. As partof this effort, we have created a new organization that centers on four regional divisions, rather
than six. We also merged several previously acquired local subsidiaries. Additionally, we havetransferred back-office departments, including those of subsidiary Matheson Tri-Gas, to our newly

Taiyo Nippon Sanso Corporation | Annual Report 201317

An Interview with the President

BOLD REFORMS AND UNYIELDING DETERMINATION

established a Back-office Center in Dallas, Texas. These moves have enhanced efficiency, which
has in turn enabled us to strengthen our sales capabilities and trim support staff.
Fifth, we will expand our operations in Asia. We have already taken several steps to thisend, transforming our joint venture in Vietnam into a consolidated subsidiary, while subsidiary
National Oxygen Pte. Ltd., in Singapore, has launched sales of standard gases in Saudi Arabia.

Efforts to Strengthen Sales Capabilities and Enhance Efficiency in the U.S.
Realignment Accomplished
Operating structure of U.S. industrial gases business• U.S. industrial gas operations reorganized into four regional
divisions, each responsible for packaged gases and bulk gases,
down from six• Integration of acquired businesses and rationalization of
back-office departments completed

North
Zone

West
Zone
West
Zone

North East
Zone

North Central
Zone

Back-ofﬁce Center

Midwest
Zone
South
Zone

East
Zone
South
Zone

South East
Zone

Part IV:Management’s Perceptions of the Current Operating Environment

Q
What positive trends doyou see in your main
geographic markets thatyou expect to bolster
operating results infiscal year 2014? Whatrisks do you anticipate?

“In Japan, stimulus policies introduced by the new government, which took power lastyear, and the Bank of Japan have sparked a turnaround in the domestic economy.”A

For the past several years, manufacturers in Japan have operated in a harshenvironment, owing to the relentless strength of the yen, electricity rate hikes and otherfactors. As a consequence, many manufacturers have shifted production offshore and closed
down or integrated domestic production facilities. Companies were forced to form alliances as
almost a last resort. Since the new government took power last year, stimulus policies
introduced by the new government and the Bank of Japan have sparked a turnaround in thedomestic economy. The steel industry, one of our principal customer industries in Japan,
continues to see robust demand for exports to automakers and to maintain high operating
rates. Efforts to reduce costs, including through the use of low-grade coal, have pushed up
demand for oxygen. However, excess capacity in China’s steel industry is likely to persist,
which is certainly a cause for some concern.
In the chemical industry in Japan, the yen correction continues to support a recovery inproduction of general-purpose ethylene derivatives, particularly for export. Nonetheless, in lightof ongoing structural issues, notably the high cost of raw materials, one can only assume thatchemical companies will start looking to shift production offshore. Over the medium to longterm, we will position ourselves to support customers in this industry in overseas markets.

18

Taiyo Nippon Sanso Corporation | Annual Report 2013

Plunging demand from the Japaneseelectronics industry has had a particularly harsh
impact on our performance in recent years.
Demand does appear to have finally bottomedout, but the likelihood of a return to anythingnear peak level is extremely low. Accordingly,
our focus will remain on rationalization andstreamlining our operations.
In the United States, conditions remainharsh, owing to steadily declining demand forelectronics-related gases. Having concluded
efforts to build a leaner organization, including
through the integration and closure of specialty gases production facilities, in fiscal year 2013,and given the promising outlook for shale gas development in North America, we are guardedly
optimistic. However, with a glut of plants slated for construction by chemicals manufacturers
looking to take advantage of the shale gas revolution, we see this primarily as an opportunity forour on-site gas business, and will take ambitious steps to use this opportunity to our advantage.
In Asia, we will continue to invest actively in promising markets, notably in Southeast Asia,
focusing on areas where we have already established a strong presence, including thePhilippines and Vietnam, to enhance our supply capabilities. This will situate us to capitalize onmarket growth going forward. We will also actively expand into new markets, including Indonesia.
Part V:

Outlook for Fiscal Year 2014

Q
Can you explain theassumptions underlying
your operating results
forecasts for fiscal year
2014?

“Our forecasts include a ¥6.6 billion increase in operating income.”A

We currently expect consolidated net sales in fiscal year 2014 to be up 9.7% from fiscal
year 2013. If we disregard the impact of favorable currency rates and an increase in thescope of consolidation, the increase would be 7.0%. This reflects our outlook for a gradual
recovery in the industrial gas business in Japan, although we expect sales in the electronicsrelated business to be level. In North America, we expect to see brisk growth in our cylinderbusiness, the recovery of which had been delayed. We predict firm results in the industrial gas
business elsewhere in Asia. We also forecast consolidated operating income to rise 26.6%, or¥6.6 billion, owing to the positive impact of higher net sales and the other aforementioned factors.

Q
In closing, is there
anything that you would
like to say directly toshareholders?

“I remain unyielding in my determination to increase corporate value.”A

The entire Taiyo Nippon Sanso Group is committed to working as one to rebuild ouroperating foundation as swiftly as possible and to secure sustainable growth. My

personal motto has always been “Never give up.” As president, I will to continue to lead to theabsolute best of my ability and will be unyielding in my determination to increase corporate
value. In all of our efforts, I look forward to the ongoing support and guidance of shareholders
and investors.

Taiyo Nippon Sanso Corporation | Annual Report 201319

Business Activities

Perception of the Business Climate
in Key Markets
Japan
Owing to the launch of a decisive fiscal stimulus package by

Total Sales and Operating Income in Japan
Years ended March 31 (Millions of yen)Japan’s new government, which came to power in December
500,000

CAGR Total sales 6.8%
Operating income 8.9%

35,0002012, the yen finally began to weaken toward the end of fiscal
400,000

28,000300,000

21,000200,000

14,000100,000

7,000

year 2013. Nonetheless, with the Japanese currency robust
through most of the period, the manufacturing sector stagnated.
While demand from steel manufacturing, our largest customer
industry, was firm, and automotive production remained high,2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(Estimate)customer industries, including chemicals, nonferrous metals
and shipbuilding. Demand from the electronics industry was hit

Total sales

Operating income

Note: Compound annual growth is calculated based on actual total sales and operating
income ﬁgures for the years ended March 31, 2004—2013 and estimates for the year
ending March 31, 2014.

particularly hard, reflecting visible declines in operating rates
and efforts to curb capital expenditures.

20

0

0

the strength of the yen discouraged demand from other major

Taiyo Nippon Sanso Corporation | Annual Report 2013

North America
Total Sales and Operating Income in North America

Modest economic recovery continued in North America, stimulatedYears ended March 31 (Millions of yen)by another round of quantitative easing in the United States and120,000

supported by falling unemployment rates and increased consumer
spending. Sales of packaged gases rose, but not enough to offset

CAGR Total sales 12.2%
Operating income 7.5%

9,600

90,000

7,200
60,0004,800

the impact of waning sales to the electronics industry. With the aim
30,0002,400

of securing solid growth in North America, we acquired four smaller
U.S. industrial gas distributors and proceeded with the constructionof three new air separation plants. Concurrently, we sought toreinforce our earnings foundation by realigning our North American

12,000002004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(Estimate)
Total sales

Operating income

Note: Compound annual growth is calculated based on actual total sales and operating
income ﬁgures for the years ended March 31, 2004—2013 and estimates for the year
ending March 31, 2014.

business portfolio and streamlining our labor force.

Asia

Total Sales and Operating Income in Asia
Years ended March 31 (Millions of yen)
50,000

Economic growth in Asia slowed, a consequence of falling exports to
Europe, but remained firm. During the period, we pressed ahead with
ambitious efforts to expand our presence in China, Taiwan, South
Korea, Singapore, Vietnam, the Philippines, Thailand and Malaysia.
We proceeded with the construction of two new air separation
plants, one each in the Philippines and Vietnam, where we alreadyenjoy a leading market share in terms of liquid gas production
capacity. We also continued working to expand our market coverage.

Taiyo Nippon Sanso Corporation | Annual Report 2013

CAGR Total sales 16.0%
Operating income 9.6%

3,000

40,0002,400

30,0001,800

20,000

1,200

10,000600

002004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(Estimate)

Total sales

Operating income

Note: Compound annual growth is calculated based on actual total sales and operating
income ﬁgures for the years ended March 31, 2004—2013 and estimates for the year
ending March 31, 2014.

21

Corporate Governance

Basic Policy

Auditing Structure and Internal Control System

To earn the trust and respond to the expectations of our many

To ensure adequate monitoring capabilities, our Board of

stakeholders, including our shareholders, customers, local

Auditors consists of four auditors, three of whom satisfy thecommunities and employees of Taiyo Nippon Sanso Grouprequirements of outside auditors, including two who arecompanies, we work continuously to create a management

independent. Auditors communicate with the independent

system that ensures transparency and efficiency, as well as

accountants, with whom they meet to exchange opinions on

the effectiveness of business execution.

key aspects of the auditing process and the assessment ofrisks associated with auditing from the perspective of internal
controls. They are briefed on audit plans and audit results byManagement Structure

the Internal Control Committee (an internal auditing body), asTaiyo Nippon Sanso has adopted a system of internal

well as by the Technical Audit Office on annual safety plans

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

and their implementation, and oversee management

To guarantee transparency, one of the directors satisfies theappropriateness and efficiency.

requirements for an outside director. To clarify accountability
on a fiscal year basis, the term of office for directors is set at
one year. In fiscal year 2013, the Board of Directors met 12

Remuneration for Directors

times. The outside director, Shotaro Yoshimura, attended all

In fiscal year 2013, remuneration for 19 directors totaled ¥629

10 of the meetings held subsequent to his appointment

million, while that for six auditors totaled ¥105 million.

(100.0%).

Remuneration for directors consists of monthly remuneration,
performance-linked bonuses and dividend-linked bonuses.
Performance-linked bonuses are tied to consolidated
operating results.

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

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 2013

Coordination

Corporate Social Responsibility

We recognize effective corporate social responsibility (CSR) as a crucial aspect of management. Through our CSR
program, which emphasizes contributing to society and to environmental preservation, among others, we strive forsound management, thereby ensuring Taiyo Nippon Sanso remains an entity that exists in harmony with society andthe 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 our corporate philosophy, “Marketdriven collaborative innovation: improving the future through gases,” namely, our commitment to working with ourcustomers in different industries to contribute, through the advancement of gas technologies, to a healthy andprosperous society.

To fulfill the responsibilities and effectively manage theto reduce their working hours can adjust their starting and/or

technical risks implied in our corporate slogan, “The Gas

finishing times in either direction in 30-minute increments. We

Professionals,” and in line with our belief that selling gas isalso offer a special leave system that enables employees tocommensurate with selling safety and peace of mind, we

use expired annual vacation days to care for children ofcontinue to expand our operations in a manner that reflects

elementary school age or younger, undergo treatment for non-five key priorities:

work-related illness or injuries requiring more than three days,

1. Ensure stringent complianceprovide nursing care for another family member or receive
prenatal care. Recognizing that the rapid aging of society will

2. Enhance safety management

mean employees are increasingly required to provide nursing

3. Guarantee superior product quality

care for elderly family members, we have also established a

4. Contribute to a healthy environment

nursing care leave system that enables employees to take up

5. Make effective use of intellectual property

to 365 days off for this purpose.
Looking ahead, we will continue to develop innovative

Creating a Positive Work Environment

working arrangements that respond flexibly to the needs

We view our employees as our most important asset. To

resulting from Japan’s changing population dynamics.

maximize this asset, which is also our biggest competitive

Through such efforts, we will endeavor to create a positive

advantage, we strive to create a positive work environment

work environment for all employees.

that enables all employees to realize their full potential. To thisend, we have developed a variety of employee leave systems
that accommodate a diverse range of individual needs.
One of the principal challenges facing Japan today isdemographic change, a consequence of falling birth rates andthe increasing proportion of the population accounted for byseniors. As part of our effort to support employees rearing
children, we have developed a child-care leave system thatenables employees to shorten their working day by choosing
either reduced working hours or flextime. Employees opting

Taiyo Nippon Sanso Corporation | Annual Report 201323

Board of Directors, Corporate Auditors and Corporate Officers

Board of Directors

Corporate Auditors

Corporate Officers

Chairman and
Representative Director

Kiyoshi Fujita
Yasufumi Miyazaki

Hiroyuki Tanizawa

Hiroshi Taguchi

Ichiro Yumoto

Tadashi Higashino

Masahiro Sakamoto
Masahiko Kitabatake*2*2

Kazuo Yoshida*2

Atsuhiro Fujita
Hiroshi Nagae

President andRepresentative Director

Takeki Hata
Norikazu Ishikawa

Shinji Tanabe

Corporate Officers

Vice President andRepresentative Director

Executive Corporate
Officers

Masami Takaine

Kunishi Hazama

Tetsuya Nakayama

Shigeyuki Osawa

Masayuki Taniguchi
Kazunori Takeda

Yuki Hajikano

Hirohisa Yanagida

Vice Presidents

Jun Ishikawa

Kou Matsumoto

Tadashige Maruyama

Masami Sakaguchi

Masahisa Kanzaki

Yujiro Ichihara

Yoshihide Kenmochi

Haruhiko Yasuga

Shigenobu Somaya

Masahiro Uehara

Senior Managing Directors

Mikio Yamaguchi

Kenji Nagata

Yoshikazu Yamano

Kazushige Arai

Kunihiro Kobayashi

Shigeru Amada
William J. Kroll(As of June 27, 2013)

Managing Directors
Hiroshi Katsumata
Kinji Mizunoe
Akihiko Umekawa
Shin-ichiro Hiramine
Keiki Ariga

Executive Directors
Yasunobu Kawaguchi
Shotaro Yoshimura*1

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

24

Taiyo Nippon Sanso Corporation | Annual Report 2013

Six-Year Summary
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries

Millions of yen
Years ended March 31

Net sales

2013

2012

2011

2010

2009

2008

¥468,387¥477,451¥483,620¥433,390¥495,746¥507,718

Operating income

24,88431,06735,46827,55629,16438,783

Net income (loss)(2,071)

21,20012,736

15,748

16,533

21,930

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

26.8%

26.3%

26.1%

27.5%

24.7%

23.1%

Return on equity (%)(1.0)%

10.8%

6.5%

8.3%

8.6%

10.8%

Return on assets (%)(0.3)%

3.5%

2.1%

2.4%

3.1%

4.0%

Capital expenditures

31,71531,452

31,99138,366

66,01036,260Depreciation and amortization

29,40030,471

32,16730,14328,33925,506

Research and development expenses

3,177

3,458

3,924

4,137

3,936

2,903

Interest-bearing debt

253,424

241,121250,409259,111

191,074

159,500

Total net assets

224,253

219,611

207,416

212,396

194,250

217,813

Total assets

615,820

607,024

617,676

617,215534,350547,237

Yen

Per share data:
Net income (loss)1¥ (5.25)¥53.33¥31.86¥39.39¥41.21¥54.48Cash dividends

12.00

12.00

12.00

12.00

12.00

12.00

23.20

15.55

14.65

Times

Price earnings ratio
1

—

10.95

21.75

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

Taiyo Nippon Sanso Corporation | Annual Report 201325

Management’s Analysis of Operating Results and Financial Position

Scope of Consolidation and Application of the Equity Method
As of March 31, 2013, Taiyo Nippon Sanso Corporation had
110 consolidated subsidiaries (46 based in Japan and 64
based overseas) and 30 equity-method affiliates (10 basedin Japan and 20 based overseas).

A total of 86 consolidated subsidiaries and 19 equitymethod affiliates are accounted for in the Industrial Gas
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 2013, ended March 31, 2013, consolidated
net sales declined 1.9%, to ¥468,387 million. Cost of sales
slipped 0.9%, to ¥317,999 million. Selling, general and administrative expenses edged down ¥22 million, to ¥125,503 million. Reflecting these and other factors, operating income fell
19.9%, to ¥24,884 million. The operating margin decreased
1.2 percentage points, to 5.3%.
Owing to our withdrawal from a monosilane gas production joint venture, we posted an extraordinary loss of ¥23,276
million. As a consequence, we reported a net loss of ¥2,071
million, compared with net income of ¥21,200 million in theprevious fiscal year. Net loss per share was ¥5.25, while return

Net Sales

Operating Income

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

500

30

40

40

24

60

400

24

30

30

18

45

300

18

20

20

12

30

200

12

10

10

6

15

100

6

0

0

0

0

0

–10

0

2009

2010

2011

2012

2013

Industrial gas
Electronics
EnergyOther
Overseas sales as a percentage of
total (right scale)26

on equity (ROE) was -1.0%, down from 10.8% in fiscal year
2012. At the general meeting of the Company’s shareholders
on June 27, 2013, a proposal to pay a year-end dividendof ¥6.00 per share was approved by shareholders, bringing
cash dividends for the term, comprising interim and year-end
dividends, to ¥12.00 per share.
Capital expenditures, including the cost of construction,
totaled ¥31,715 million, an increase of ¥263 million from theprevious fiscal year. In contrast, depreciation and amortization
declined ¥1,071 million, to ¥29,400 million. Research anddevelopment costs, which totaled ¥3,177 million, were down
¥281 million, equivalent to approximately 0.7% of net sales.

2009

2010

2011

2012

2013

Industrial gas
Electronics
EnergyOther
Overseas operating income as apercentage of total (right scale)Taiyo Nippon Sanso Corporation | Annual Report 2013

–6

2009

2010

(Yen)

2011

2012

2013

Net income per share (right scale)–15

Results by Segment
Industrial Gas
Sales of oxygen rose in Japan, shored up by firm demand
from steelmakers, the principal users of these gases.
However, sales of nitrogen edged down, owing primarily to
lower operating rates in the chemicals industry. Sales of air
separation plants were down from fiscal year 2012, as weresales of cutting and welding equipment, owing primarily tothe strong yen. Sales in North America increased, against
a backdrop of gradual economic recovery. In Asia, sales
climbed substantially, bolstered by an increase in the scopeof consolidation. Owing to these and other factors, sales in
the Industrial Gas segment rose 2.4%, to ¥298,073 million.
Nonetheless, operating income slipped 1.8%, to ¥21,322
million, owing to an increase in costs attributable to higher
electricity rates and other charges.

EnergyDespite a decline in the volume of LP gas shipments, we
continued to focus on efforts to revise sales prices in linewith higher import prices and reduce costs, among others.
As a consequence, sales in this segment advanced 3.0%,
to ¥40,031 million, and operating income increased 8.4%,
to ¥1,808 million.
Other
In the medical business, shipments of medical devices
and equipment were brisk. Sales in the Thermos businessadvanced, thanks to contributions from sales of ultralightcompact insulated mugs and food containers. As a result,sales in the Other segment rose 4.7%, to ¥33,736 million,
and operating income climbed 20.9%, to ¥3,291 million.

Electronics
Sales to the electronics industry were weak, reflecting sluggish
demand for semiconductors, liquid crystal display (LCD) panels, solar cells and other products. Sales of electronics materials gases and electronics-related equipment and installations
fell sharply. Sluggish capital investment by key domestic
customers pushed down sales of MOCVD systems, used in
the fabrication of semiconductors. As a result, the Electronics
segment reported a 16.3% drop in sales, to ¥96,546 million,
and an operating loss of ¥536 million.

Financial Position
As of March 31, 2013, total assets amounted to ¥615,820
million. Approximately ¥29,300 million of this was attributable
to the declining value of the yen, which was ¥8.84 lower
against the U.S. dollar on March 31, 2013, than on the same
day a year earlier. The current ratio was 115%, down 14.0
percentage points from the end of fiscal year 2012.

Property, plant and equipment, less accumulated depreciation, rose 6.5%, to ¥272,142 million, bolstered mainly byincreases in gas supply facilities and transport equipment.
Total investments and other assets rose 6.0%, to ¥140,301
million, due largely to an increase in investment securities.

Taiyo Nippon Sanso Corporation | Annual Report 201327

Total current liabilities, at ¥176,242 million, were up 3.8%,
owing primarily to an increase in short-term loans payable.
Total noncurrent liabilities declined 1.1%, to ¥215,324 million.
Total interest-bearing debt thus amounted to ¥253,424 million,
an increase of ¥12,303 million.

Total net assets rose 2.1%, to ¥224,253 million. This
increase occurred despite the adverse impact of the net loss
on retained earnings, which fell ¥6,836 million, and reflected
such factors as a ¥13,015 million decrease in the deduction
for foreign currency translation adjustments. As a consequence, the equity ratio was 33.1%, essentially level withfiscal year 2012, while net assets per share rose ¥19.36,
to ¥525.38.

Cash FlowsNet cash provided by operating activities in fiscal year 2013
amounted to ¥33,964 million, a decline of ¥12,022 million
from fiscal year 2012. Principal factors behind this result
included a loss before income taxes and minority interests andchanges in depreciation and amortization, notes and accounts
receivable–trade and notes and accounts payable–trade. Theinterest coverage ratio weakened by 2.5 points, to 8.2 times.
Net cash used in investing activities came to ¥37,225
million, up ¥4,477 million. This was primarily attributable topurchases of property, plant and equipment.

Net cash used in financing activities, at ¥8,181 million,
was down ¥15,355 million. Principal applications of cash
included cash dividends paid and the purchase of treasury
stock.
After factoring in the effect of exchange rate fluctuations,operating, investing and financing activities in fiscal year 2013
yielded cash and cash equivalents at end of period of ¥22,721
million, down ¥10,554 million from the end of fiscal year 2012.

Total Assets

Equity(Billions of yen)(Billions of yen)

(%)

(%)

750

250

40

12

600

200

32

9

450

150

24

6

300

100

16

3

150

50

8

0

0

–3

0

2009

2010

2011

2012

2013

0

2009

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

2010

2011

2012

2013

Equity ratio (right scale)28

Taiyo Nippon Sanso Corporation | Annual Report 2013

2009
ROE
ROA

2010

2011

2012

2013

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 maintain andupgrade these facilities. Accordingly, interest rate trends could
have a material impact on the Company’s businessperformance.

Product Defects
The Company sells high-pressure gas-related products andhandles toxic and flammable gases used in electronics manufacturing (semiconductors, LCD panels, solar cells). While theCompany strives to ensure the effective management ofrelated risks, it cannot guarantee that all of its products arefree of defects.

Reliance on Specific Industries
The Company supplies gases to a wide range of industries
and its exposure to risks from reliance on specific industries isthus low. Nevertheless, changes in the crucial semiconductor
market could have a significant impact on the Company’sbusiness performance.

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.

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 theCompany 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.

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 Japan andoverseas, there is a risk that it may become involved in legal
disputes or be the subject of investigations and/or legal action
by relevant authorities in the markets in which it operates.
Such legal and regulatory action may adversely affect theCompany’s operations, business performance, financial
condition, reputation and reliability.

Taiyo Nippon Sanso Corporation | Annual Report 201329

Consolidated Balance Sheets
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries

Millions of yen
March 31

2013

2012

AssetsCurrent assets:
Cash and deposits (Notes 15 and 24)
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¥ 24,743
123,282
22,716
7,100
8,092
7,285
11,007(850)
203,376¥ 34,596
132,176
23,462
7,827
6,439
5,216
10,332(842)
219,208$

Property, plant and equipment (Notes 8, 9,12 and 23)
Accumulated depreciation
Property, plant and equipment, net

698,083(425,941)
272,142653,202(397,703)
255,499

7,422,467(4,528,878)
2,893,589

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

60,110642
43,561
17,213
9,804
2,057
8,532
(1,000)(618)
140,301¥ 615,820

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

639,128
6,826
463,169
183,020
104,242
21,87190,718(10,633)(6,571)
1,491,770$ 6,547,794

See notes to consolidated financial statements.

30

Thousands of
U.S. dollars(Note 4)

Taiyo Nippon Sanso Corporation | Annual Report 20132013

263,083
1,310,813
241,53175,492
86,03977,459117,033(9,038)2,162,424

Millions of yen
March 31

Thousands of
U.S. dollars(Note 4)

2013

2012

2013

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)
Other
Total current liabilities¥ 70,785
75,062
2,716
27,676
176,242¥ 75,927
60,517
5,242
28,040169,729$ 752,632
798,107
28,878294,269
1,873,918

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

170,806
4,641
27,229
106
5,061
7,478
215,324

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

1,816,119
49,346
289,516
1,127
53,81279,5112,289,463

Contingent liabilities (Note 14)
Total liabilities

391,566

387,413

4,163,381

27,03944,909159,999

27,03944,909166,835

287,496477,501
1,701,212(9,161)
222,787(4,125)
234,659(97,406)
2,368,814

6,322
(120)
(25,020)(197)(19,016)
20,481
224,253¥615,820

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

67,220(1,276)(266,029)(2,095)(202,190)
217,767
2,384,402$6,547,794

Net assets (Notes 11 and 25):
Shareholders’ equity:
Common stock:
Authorized—1,600,000,000 shares
Issued—403,092,837 shares
Capital surplus
Retained earnings
Treasury stock, at cost—
15,237,498 shares in 2013 and 6,197,947 shares in 2012
Total shareholders’ equity
Accumulated other comprehensive income:
Valuation difference 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 201331

Consolidated Statements of Operations
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
Gain on sales 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
Loss on liquidation of subsidiaries and affiliates
Gain on transfer of business
Loss on disaster (Note 20)
Loss on liquidation of business (Note 21)
Other
Income (loss) before income taxes and minority interests
Income taxes (Note 10):
Current
DeferredIncome (loss) before minority interests
Minority interests in income
Net income (loss)

2013

2012

2013

¥468,387
317,999
150,388
125,503
24,884¥477,451
320,857
156,593
125,526
31,067$4,980,191
3,381,170
1,599,022
1,334,428
264,583970(4,110)273
31(1,497)
—
(89)
78
(68)
1,284
(50)
(135)
—
—
—
(23,276)
1,256(25,334)
(450)

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

10,314(43,700)
2,903
330(15,917)
—
(946)
829
(723)
13,652(532)(1,435)———(247,485)
13,355(269,367)(4,785)

4,588(4,306)
281
(731)
1,339
¥ (2,071)

9,428
2,106
11,53522,4001,199¥ 21,200

48,783(45,784)
2,988(7,772)
14,237(22,020)¥525.38(5.25)
12.00$

U.S. dollars(Note 4)

Yen

Amounts per share:
Net assets
Net income (loss)
Cash dividends

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

$ 5.59(0.06)
0.13

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

2013

Income (loss) before minority interests
Other comprehensive income (loss) (Note 22):
Valuation difference 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
Total comprehensive income attributable to:
Owners of the Company
Minority interests
See notes to consolidated financial statements.

32

Taiyo Nippon Sanso Corporation | Annual Report 2013

Thousands of
U.S. dollars(Note 4)

2012

2013

(731)

¥22,400$ (7,772)

1,853
(93)
11,075(3)
1,134
13,966¥13,234(2,005)136(3,815)(53)(440)(6,177)¥16,222

19,702(989)
117,757(32)
12,057
148,495$140,712¥12,735
498¥14,874
1,348$135,407
5,295¥

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, 2011

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¥150,439¥(2,321)¥220,068¥ 6,428¥(163)¥(33,621)¥(140)¥(27,496)¥14,845¥207,416

—

3

3

—

—

—

—

—

—

3

Disposal oftreasury stock

—

—

(0)

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)

Balance at
March 31, 2012

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

Disposal oftreasury stock

—

—

(0)

—

1

1

—

—

—

—

—

—

1

Dividends fromsurplus———(4,764)—(4,764)

—

—

—

—

—

—

(4,764)

Net loss———(2,071)—(2,071)

—

—

—

—

—

—

(2,071)

Purchase oftreasury stock

—

—

—

—

(5,036)(5,036)

—

—

—

—

—

—

(5,036)

Net changes of
items other thanshareholders’equity

—

—

—

—

—

—

1,889

(93)

13,015(3)

14,807

1,706

16,513403,092,837 ¥27,039¥44,909¥159,999¥(9,161)¥222,787¥ 6,322¥(120)¥(25,020)¥(197)¥(19,016)¥20,481¥224,253

Minority
interests

Total net
assetsBalance at
March 31, 2013

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

Balance atApril 1, 2012

Accumulated other comprehensive income

Commonstock

Capitalsurplus

Total
shareholders’equityValuationdifferenceonavailablefor-salesecurities

Deferred
gains orlosses onhedgesForeigncurrencytranslation
adjustments$287,496$477,501 $1,773,897 $(43,860) $2,495,045$47,124$ (276)$(404,413)$(2,052)

Retainedearnings

Treasurystock

PensionTotal
liability
accumulated
adjustment
otherof foreign comprehensive
subsidiaries income (loss)$(359,628) $199,628 $2,335,045

Disposal oftreasury stock

—

(0)

—

11

11

—

—

—

—

—

—

11

Dividends fromsurplus——(50,654)—(50,654)

—

—

—

—

—

—

(50,654)

Net loss——(22,020)—(22,020)

—

—

—

—

—

—

(22,020)

Purchase oftreasury stock

—

—

—

(53,546)(53,546)

—

—

—

—

—

—

(53,546)

Net changes of
items other thanshareholders’equity

—

—

—

—

—

20,085(989)

138,384(32)

157,438

18,139175,577$67,220 $(1,276) $(266,029)$(2,095)

Balance at
March 31, 2013

$287,496$477,501 $1,701,212 $(97,406) $2,368,814$(202,190) $217,767 $2,384,402

See notes to consolidated financial statements.

Taiyo Nippon Sanso Corporation | Annual Report 201333

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

Millions of yen
Years ended March 31
Operating activities
Income (loss) 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 disaster
Loss on liquidation of business
Decrease (increase) in notes and accounts receivable—trade
Increase in accounts receivable—other(Increase) decrease in advance payments
Decrease (increase) in inventories(Decrease) increase in notes and accounts payable—trade
Decrease in accrued expenses(Decrease) increase in advances received
Decrease in provision for retirement benefits
Decrease in prepaid pension costs
Other, net

2013

2012

¥

¥ 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$

Interest and dividends income received
Interest expenses paid
Payments for loss on disaster
Payments for surcharges
Payments for loss on liquidation of business
Income taxes paid
Net cash provided by operating activities(450)
29,400
50
2,719
—
(970)
4,110
(1,284)
1,262
(68)
—
23,276
12,403
(921)
(14)
2,376
(6,930)(1,124)
(266)
(255)
985
(2,330)61,965
1,151(4,122)——(17,059)(7,970)33,964

Investing activities
Increase in short-term investments
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 24)
Payments of loans receivable
Payments for assets purchase (Note 24)
Proceeds from transfer of business (Note 24)
Other, net
Net cash used in investing activities(477)(31,096)
1,408
(445)
(2,139)
152
(513)
(601)
(2,417)—(1,094)(37,225)(530)(35,101)
5,542
(166)
(2,683)75(4,151)(187)(1,013)
6,585(1,118)(32,748)(5,072)(330,633)
14,971(4,732)(22,743)
1,616(5,455)(6,390)(25,699)—(11,632)(395,800)¥¥ (2,321)
18,727(24,642)
10,000(15,000)(3,406)(1,811)
3(4,781)(303)(23,536)(394)(10,692)
43,87790¥ 33,275$

Financing activities
Net increase (decrease) 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
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 in cash and cash equivalents
Cash and cash equivalents at beginning of period
Increase in cash and cash equivalents resulting from merger with unconsolidated subsidiaries
Cash and cash equivalents at end of period (Note 24)
See notes to consolidated financial statements.

34

Thousands of
U.S. dollars(Note 4)

Taiyo Nippon Sanso Corporation | Annual Report 2013

349
34,108(30,104)
10,000(10,000)(2,339)(5,011)
1(4,764)(421)(8,181)
888(10,554)
33,275—¥ 22,721

2013(4,785)
312,600
532
28,910—(10,314)43,700(13,652)
13,418(723)—
247,485
131,877(9,793)(149)
25,263(73,684)(11,951)(2,828)(2,711)
10,473(24,774)
658,852
12,238(43,828)——(181,382)(84,742)
361,127

3,711
362,658(320,085)
106,326(106,326)(24,870)(53,280)11(50,654)(4,476)(86,986)
9,442(112,217)
353,801—$ 241,584

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
the individual 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 110 significant subsidiaries (111 in 2012). 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 201335

(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 overits estimated useful life of 5 years. Consolidated subsidiaries in the United States apply the Accounting Standards
Codification 350, issued by the Financial AccountingStandards Board (“Intangibles-Goodwill and Other”).
(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
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 recognized at
the net total of the present value of the defined benefit obligation at the balance sheet date, plus any actuarial gains (lessany actuarial losses) not yet recognized, minus the fair value ofplan assets (if any) at the balance sheet date out of which the
obligations are to be settled directly. If the amount determined
above is negative (an asset), such asset should be recorded
as prepaid pension expenses.
Net retirement benefit expense or income is recognizedat 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 prior service cost
recognized during the year, plus any retirement benefits paid
at a lump sum.
To determine the present value of a defined benefit
obligation and the related current service cost and, whereapplicable, the prior service cost, the project unit credit
method are used.
Actuarial gains or losses and prior service cost arerecognized for each defined benefit plan over a period not

36

exceeding 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. Prior
service cost is amortized using the straight-line method over
13 to 16 years.
The Company recognized the amount of unrecognizedprior 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 ¥550 million ($5,848 thousand)and ¥505 million for corporate officers at March 31, 2013 and2012, respectively.
(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 basesof assets 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 (loss) per share is notapplicable as there were no potentially dilutive securities forthe years ended March 31, 2013 and 2012.
(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.
(o) Valuation allowance for investments

To state the investment amount fairly, the allowance isprovided by considering the related parties’ assets and otherfactors.

Taiyo Nippon Sanso Corporation | Annual Report 2013

(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
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
foreign exchange forward contracts are translated at thecorresponding foreign exchange forward contract rates.
(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. Accounting Standards Issued but Not Yet Effective
On May 17, 2012, the ASBJ issued “Accounting Standard for
Retirement Benefits” (ASBJ Statement No.26) and “Guidanceon Accounting Standard for Retirement Benefits” (ASBJ
Guidance No.25), which replaced the Accounting Standard
for Retirement Benefits that had been issued by the BusinessAccounting Council in 1998 with an effective date of April 1,
2000 and the other related practical guidance, being followedby partial amendments from time to time through 2009. The
major changes are as follows:(b) Treatment in the consolidated statement of operations andthe consolidated statement of comprehensive income(1) Overview(a) Treatment in the consolidated balance sheets(2) Expected application date

Actuarial gains and losses and prior service costs that have
yet to be recognized in profit or loss shall be recognized within
net assets (accumulated other comprehensive income), after
adjusting for tax effects, and the deficit or surplus shall berecognized as a liability or asset.

Actuarial gains and losses and prior service cost that arosein the current period and have yet to be recognized in profit
or loss shall be included in other comprehensive income andactuarial gains and losses and prior service costs that wererecognized in other comprehensive income in prior periods
and then are recognized in profit or loss in the current period
shall be treated as reclassification adjustments.

This standard and related guidance are effective as of the endof fiscal years beginning on or after April 1, 2013. However,no retrospective application of this accounting standard toconsolidated financial statements in prior periods is required.
(3) Effects of the adoption of the standard and the guidance

The Company is currently evaluating the effect that thesemodifications will have on its consolidated results ofoperations and financial position.

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 ¥94.05=U.S.$1,
the approximate rate of exchange at March 31, 2013. The
approximate rate of exchange prevailing at May 31, 2013 was¥101.18=U.S.$1. The translation should not be construed asa representation that Japanese yen have been, could havebeen, or could in the future be converted into U.S. dollars at
the above or any other rate.

Taiyo Nippon Sanso Corporation | Annual Report 201337

5. Investment Securities
At March 31, 2013 and 2012, 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¥23,869
9,492¥33,361

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

Proceeds from sales of securities classified as availablefor-sale securities amounted to ¥142 million ($1,510 thousand) and ¥36 million with an aggregate gain on sales of ¥78
million ($829 thousand) and ¥8 million for the years ended

Millions of yen
2013
Acquisition
Unrecognized
costgain (loss)¥12,746
10,932¥23,679¥11,122(1,440)¥ 9,681

Thousands of U.S. dollars
2013
Carrying
UnrecognizedamountAcquisition cost gain (loss)$253,791
100,925$354,716$135,524
116,236$251,770$118,256(15,311)$102,935

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

March 31, 2013 and 2012, respectively, and an aggregate
loss on sales of ¥9 million ($96 thousand) and ¥1 million forthe years ended March 31, 2013 and 2012, respectively.

6. Notes and Accounts Receivable(a) Notes and accounts receivable liquidated at March 31, 2013 and 2012 were as follows:
Thousands of
U.S. dollars
2013

Millions of yen
2013
2012

Accounts receivable transferred by liquidation
Notes receivable transferred by liquidation¥4,376
5,665¥3,8096,177$46,528
60,234(b) Notes receivable discounted at March 31, 2013 and 2012 were as follows:
Thousands of
U.S. dollars
2013

Millions of yen
2013
2012

Notes receivable discounted

¥9

¥5

$96

7. Short-Term Loans Payable, Long-Term Loans Payable and Lease Obligations
As of March 31, 2013 and 2012, short-term loans payable and the current portion of long-term loans payable consisted of
the following:
Millions of yen
2013
2012

Bank loans
Current portion of long-term loans payable
1.58% unsecured bonds, payable in yen, due 2012
Total

¥23,575
51,487—¥75,062¥20,699
29,81810,000¥60,517

The average interest rates applicable to bank loans outstanding at March 31, 2013 and 2012 are 1.25% and 1.18%,
respectively.

38

Taiyo Nippon Sanso Corporation | Annual Report 2013

Thousands of
U.S. dollars
2013$250,665
547,443—$798,107

Long-term loans payable at March 31, 2013 and 2012 consisted of the following:
Millions of yen
2013
2012

Loans from banks due through 2019 at average interest rates of 1.56% in 2013 and 1.84% in 2012
1.13% unsecured bonds, payable in yen, due 2014
0.55% unsecured bonds, payable in yen, due 20170.44% unsecured bonds, payable in yen, due 2017

¥135,806
15,00010,00010,000¥170,806¥147,469
15,00010,000—¥172,469

Thousands of
U.S. dollars
2013$1,443,977
159,490
106,326
106,326$1,816,119

Short-term lease obligations at March 31, 2013 and 2012 included in other current liabilities were ¥2,493 million ($26,507 thousand) and ¥2,103 million, respectively.
The annual maturities of long-term loans payable
subsequent to March 31, 2013 are summarized as follows:
Years ending March 31

Millions of yen

Thousands of
U.S. dollars

2014
2015
2016
2017
2018
2019 and thereafter¥ 51,487
41,18025,181
37,341
21,978
10,124¥187,293$ 547,443
437,852
267,741
397,033
233,684
107,645$1,991,419

The annual maturities of lease obligations subsequent toMarch 31, 2013 are summarized as follows:
Years ending March 31

Millions of yen

Thousands of
U.S. dollars

2014
2015
2016
2017
2018
2019 and thereafter¥2,493
1,420
1,166
826
964
685
¥7,554$26,507
15,09812,398
8,783
10,2507,283$80,319

8. Pledged Assets
Assets pledged as collateral for short-term loans payable of¥96 million ($1,021 thousand) and ¥120 million, long-termloans payable of ¥308 million ($3,275 thousand) and ¥425
million, accounts payable-trade of ¥132 million ($1,404

thousand) and ¥142 million and other of ¥91 million ($968
thousand) and ¥53 million at March 31, 2013 and 2012,
respectively, were as follows:
Millions of yen
2013
2012

Property, plant and equipment, at net book value

¥799

¥982

Thousands of
U.S. dollars
2013$8,495

9. Assets Replaced by National Subsidy
Assets replaced by national subsidy at March 31, 2013 and 2012 were as follows:
Millions of yen
2013
2012

Property, plant and equipment¥411

Taiyo Nippon Sanso Corporation | Annual Report 2013

¥411

Thousands of
U.S. dollars
2013$4,37039

10. Income Taxes
Income taxes applicable to the Company comprise corporation, enterprise and inhabitants’ taxes, which, in the aggregate, resulted in statutory tax rates of 38.01% and 40.69% for
the years ended March 31, 2013 and 2012, respectively.

Significant components of the Company’s deferred tax
assets and liabilities at March 31, 2013 and 2012 were as
follows:

Current deferred tax assets and liabilities
Deferred tax assets:
Accrued bonus
Loss from valuation of inventory
Accrued expenses
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:
Adjustment of allowance for doubtful accounts
Deferred tax liabilities – subtotal
Offset by deferred tax assets
Net deferred tax liabilities

Thousands of
U.S. dollars
2013¥ 1,998
587
1,618
2,454
1,020
7,678
(389)
7,289
(4)
¥ 7,285¥ 2,048
339
1,361
—
1,764
5,513
(250)
5,262
(46)
¥ 5,216$ 21,244
6,241
17,20426,093
10,845
81,637(4,136)77,501(43)$ 77,459

¥

¥

$

¥

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

Millions of yen
2013
2012

Taiyo Nippon Sanso Corporation | Annual Report 2013

(71)
(71)
4
(66)

¥

(112)
(112)
46
(66)

$

(755)
(755)
43
(702)

¥ 1,711
1,215
2,860
7,675
13,463(4,444)
9,018(6,960)¥ 2,057¥ 1,451
1,295
—
8,085
10,832(4,983)
5,848(3,743)¥ 2,105$ 18,192
12,91930,40981,606
143,147(47,251)
95,885(74,003)$ 21,871¥ (3,471)(4,460)(34)(389)(13,307)(12,528)(34,190)
6,960¥(27,229)¥ (2,445)(4,984)(68)(385)(11,811)(10,446)(30,142)
3,743¥(26,398)$ (36,906)(47,422)(362)(4,136)(141,489)(133,206)(363,530)
74,003$(289,516)

Reconciliation between the normal effective statutory tax rate and the actual effective tax rates reflected in the accompanying
consolidated statements of operations for the year ended March 31, 2012 was as follows:
2012

Statutory tax rate
Entertainment expenses and others not deductible permanently
Dividends received and others
Valuation allowance for deferred tax assets
Income tax rate changes
Other
Effective tax rates

40.69%
0.98(5.08)(1.80)(2.70)
1.90
33.99%The reconciliation of the difference between the statutory tax rate and the effective tax rate for the year ended March 31, 2013 was
not presented since the Company recorded loss before income taxes and minority interests.

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 201341

12. Leases(a) The following pro forma amounts represent the acquisition
costs, accumulated depreciation and net book value ofleased property at March 31, 2013 and 2012, 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
2013
2012

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 ¥211 million($2,243 thousand) and ¥692 million, which were equal to theThousands of
U.S. dollars
2013¥1,95162¥2,014¥3,140235¥3,375$20,744659$21,414¥1,63362¥1,697¥2,541228¥2,769$17,363659$18,044

¥ 317
—
¥ 317

¥ 598
7
¥ 606

$ 3,371—$ 3,371

depreciation expense of the leased assets computed by thestraight-line method over the respective lease terms for theyears ended March 31, 2013 and 2012, respectively.

Future minimum lease payments (including the interest portion thereon) subsequent to March 31, 2013 and 2012 for financelease transactions accounted for as operating leases are summarized as follows:
Years ending March 31

2013
2014
2015 and thereafter
Total
2012
2013
2014 and thereafter
Total

Millions of yen

Thousands of
U.S. dollars

¥ 132
185
¥ 317

$1,404
1,967$3,371

¥ 251
354
¥ 606

(b) Future minimum lease payments subsequent to March 31, 2013 and 2012 for non-cancelable operating leases are summarized
as follows:
Years ending March 31

2013
2014
2015 and thereafter
Total
2012
2013
2014 and thereafter
Total

42

Millions of yen

Thousands of
U.S. dollars¥ 1,551
8,639¥10,191$ 16,491
91,855$108,357¥ 1,355
8,613¥ 9,969

Taiyo Nippon Sanso Corporation | Annual Report 2013

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, 2013 and2012 and the components of net retirement benefit expenses
recognized in the accompanying consolidated statements ofoperations for the years ended March 31, 2013 and 2012 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
2013
2012

Thousands of
U.S. dollars
2013¥ 32,019(32,616)(597)(6,200)
(916)
1,238
9,804
(3,327)$ 340,447(346,794)(6,348)(65,922)(9,740)13,163
104,242(35,375)¥ 34,578(30,055)
4,523(11,940)(1,375)
1,585
10,790(3,583)(b) Net retirement benefit expenses
Thousands of
U.S. dollars
2013

Millions of yen
2013
2012

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

¥1,368
590
(729)
1,406
461
(226)
¥2,871951¥3,822¥1,346
597
(716)
1,364
461
(235)
¥2,817851¥3,668$14,545
6,273(7,751)
14,9494,902(2,403)$30,526
10,112$40,638(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 cost
Allocation method of estimated retirement benefits

2013

2012

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

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

14. Contingent Liabilities
At March 31, 2013 and 2012, the Company and certain consolidated subsidiaries had contingent liabilities as guarantor ofindebtedness, amounting to ¥6,173 million ($65,635 thousand) and ¥7,424 million, which included reguarantees by joint

investors amounting to ¥747 million ($7,943 thousand) and¥489 million and commitments to guarantees amounting to¥93 million ($989 thousand) and ¥181 million, respectively.

Taiyo Nippon Sanso Corporation | Annual Report 201343

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, 2013 and 2012 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
2013
Fair
value

¥ 24,743
123,282¥ 24,743
123,282

33,361¥181,386¥ 70,785
23,575222,293¥316,654

33,361¥181,386¥ 70,785
23,575
225,607¥319,968

Taiyo Nippon Sanso Corporation | Annual Report 2013

Difference¥

Thousands of U.S. dollars
2013
Carrying
Fair
amountvalue
Difference——$ 263,083
1,310,813$ 263,083
1,310,813

—
—
—
—
3,313
¥3,313354,716$1,928,612$ 752,632
250,665
2,363,562$3,366,869

354,716$1,928,612$ 752,632
250,665
2,398,799$3,402,105

¥
¥

$

—
—

—
—
—
—
35,226$35,226$$

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
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

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. The

Difference

¥

—
—

—
—
—
—
3,035
¥3,035¥¥current portion of long-term loans payable shown as “Shortterm loans payable” in consolidated balance sheets areincluded 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, 2013 and 2012 for which it is extremely difficult to determine the fair value
Millions of yen
2013
2012

Unlisted stocks¥26,749¥21,417

Thousands of
U.S. dollars
2013$284,413(3) Redemption schedule for financial assets with maturities subsequent to March 31, 2013 and 2012
Thousands ofMillions of yen
U.S. dollars
2013
2012
2013
Due in one year or less

Cash and deposits
Notes and accounts receivable—trade¥ 24,743
123,282¥ 34,596
132,176$ 263,083
1,310,813(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 ¥47,295 million ($502,871 thousand) and ¥55,771 million as ofMarch 31, 2013 and 2012, respectively.

Taiyo Nippon Sanso Corporation | Annual Report 201345

16. Derivative and Hedging Activities
Derivative transactions for which hedge accounting is applied for the years ended March 31, 2013 and 2012 were as follows:(a) Currency-related

Hedged item

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

Contract
amountMillions of yen
2013
Due after
one year

Fair
value

¥

*

Accounts receivable—trade¥1,166
3
478

—
—
—

Accounts payable—trade
975
269
169
1
1,418

—
—
—
—
—

1,002

85

395
¥5,879169¥255

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.

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.

46

Taiyo Nippon Sanso Corporation | Annual Report 2013

Thousands of U.S. dollars
2013
Contract
Due after
Fair
amountone yearvalue

Hedged item

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

Accounts receivable—trade$12,398
32
5,082

$

—
—
—

*

Accounts payable—trade
10,367
2,860
1,797
11
15,077—————

10,654904

4,200$62,509

1,797$2,711Long-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

2013

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

Hedged item

Contract
amountDue after
one yearLong-term loans payable¥53,646 ¥38,028

2013
Fair
value

*

Contract
amountDue after
one year$570,399 $404,338

Fair
value

*

Millions of yen
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

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 201347

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, 2013 and 2012 totaled ¥3,177 million ($33,780 thousand) and ¥3,458 million, respectively.

18. Gain and Loss on Sales and Retirement of Noncurrent Assets
Significant components of the gain on sales of noncurrent
assets of ¥31 million ($330 thousand) and ¥3,385 million forthe years ended March 31, 2013 and 2012, respectively,
were as follows:

Land and buildings

Millions of yen
2013
2012

Thousands of
U.S. dollars
2013¥31 ¥3,385$330

Significant components of the loss on sales and retirement of noncurrent assets of ¥1,497 million ($15,917 thousand) and ¥5,206 million for the years ended March 31,
2013 and 2012, respectively, were as follows:

Land and buildings

Millions of yen
2013
2012

Thousands of
U.S. dollars
2013¥— ¥4,623$—

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 ¥50 million ($532 thousand) and ¥213 million for theyears ended March 31, 2013 and 2012, respectively, due tolack of recovery provability of market value or recovery provability in the near future. Recoverable amounts for relevant
assets are estimated net selling price (considerable declared
price based on valuation by property tax).

20. Loss on Disaster
The amount recorded in loss on disaster in the accompanying
consolidated statement of operations corresponds toexpenses required for recovery of assets damaged by theGreat East Japan Earthquake, such as repair expenses ofproperty, plant and equipment, and loss on disposal of
inventories. For the year ended March 31, 2013, no loss
on disaster was recognized.

21. Loss on Liquidation of Business
The amount recorded in loss on liquidation of business in theaccompanying consolidated statement of operations corresponds to expenses to terminate the joint activities with
Evonik Degussa Japan Co., Ltd. for the manufacturing of48

monosilane gas, which consisted of early termination costs of¥19,800 million ($210,526 thousand) and losses from theliquidation of the joint venture and others of ¥3,476 million($36,959 thousand) for the year ended March 31, 2013.

Taiyo Nippon Sanso Corporation | Annual Report 2013

22. Other Comprehensive Income
Reclassification adjustments and tax effects allocated to each component of other comprehensive income for the years ended
March 31, 2013 and 2012 were as follows:
Millions of yen
2013
2012

Valuation difference on available-for-sale securities:
Amount arising during the year
Reclassification adjustments for gains and losses included in net income (loss)
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 (loss)
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 (loss)
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 (loss)
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)

Thousands of
U.S. dollars
2013¥ 2,86925
2,894(1,041)
1,853¥(3,794)
312(3,481)
1,476(2,005)$ 30,505
266
30,771(11,069)
19,702

58
(199)
(140)
47
(93)

80
133
213
(77)
136

617
(2,116)(1,489)500(989)

11,075—
11,075—
11,075(4,167)253(3,914)99(3,815)

117,757—
117,757—
117,757

(34)
42
8
(11)
(3)

(124)
35
(89)
36
(53)

(362)
447
85
(117)
(32)

1,134
¥13,966(440)¥(6,177)

12,057$148,495

23. 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 201349

(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¥96,546
157
96,703¥ (536)¥40,031
1,985
42,016¥ 1,808¥33,7362,552
36,289¥ 3,291¥468,387
6,437
474,825¥ 25,885¥—(6,437)(6,437)¥(1,000)¥468,387—
468,387¥ 24,884¥ 17,977¥ 9,806¥¥ 1,493¥ 29,724¥ (323)¥ 29,400

446

Millions of yen
2012
Reportable segments
Electronics
Energy
Other

Total

Adjustments Consolidated¥291,057
2,143
293,201¥ 21,712¥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

Industrial gas

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

Total¥298,073
1,742
299,816¥ 21,322

Industrial gas

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

Millions of yen
2013
Reportable segments
Electronics
EnergyOther

534

Thousands of U.S. dollars
2013
Reportable segments
Electronics
EnergyOther
Total

Adjustments Consolidated$3,169,304 $1,026,539
18,522
1,669
3,187,836 1,028,208$ 226,709 $ (5,699)$425,635
21,106446,741$ 19,224$358,703 $4,980,191
27,13568,442385,848 5,048,644$ 34,992 $ 275,226$— $4,980,191(68,442)—(68,442) 4,980,191$(10,633) $ 264,583$ 191,143 $ 104,264$ 4,742$ 15,875 $ 316,045$ (3,434) $ 312,600

Notes: 1. Adjustments for segment income of ¥(1,000) million ($(10,633) thousand) and ¥(950) million for the years ended March 31, 2013 and 2012 include intersegment eliminations of ¥383 million ($4,072 thousand) and ¥85 million, and corporate general administration expenses which mainly consisted of basic researchand development expenses and are not allocable to each reportable segment of ¥(1,384) million ($(14,716) thousand) and ¥(1,035) million, respectively.
2. The Company does not allocate assets to reportable segments.

50

Taiyo Nippon Sanso Corporation | Annual Report 2013

(d) Information by geographical area

(1) Net sales

Japan(2) Property, plant and equipment
Millions of yen
2013
The United States
Others¥329,771

Japan¥81,024

Millions of yen
2012
The United States
Others¥352,727

Japan¥57,592¥81,684¥43,039

Thousands of U.S. dollars
2013
The United States
Others$3,506,337$861,499$612,355

Total

Japan

¥468,387¥159,074

Total

Japan

¥477,451¥160,907

Total

Japan

$4,980,191$1,691,377

Millions of yen
2013
The United States
Others¥82,994¥30,073

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

Thousands of U.S. dollars
2013
The United States
Others$882,446$319,755

Total¥272,142

Total¥255,499

Total$2,893,589(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 statement of operations.
(f) Information on impairment loss by reportable segments

Impairment loss

Impairment loss

Impairment loss

Industrial gas

Electronics

¥45

¥—

Industrial gas

Electronics

¥213

¥—

Industrial gas

Electronics

$478

$—

Millions of yen
2013
Energy
Other

¥—

¥4

Millions of yen
2012
Energy
Other

¥—

¥—

Corporate/Eliminations

Total

¥—

¥50

Corporate/Eliminations

Total

¥—

¥213

Thousands of U.S. dollars
2013
EnergyOther
Corporate/Eliminations

Total

$—

$532

$43

$—

(g) Information on amortization and unamortized balance of goodwill by reportable segments

Amortization
Unamortized balance

Amortization
Unamortized balance

Amortization
Unamortized balance

Industrial gas

Electronics¥ 2,769
43,329¥——Industrial gas

Electronics¥ 2,735
39,383¥——

Industrial gas

Electronics$ 29,442
460,702$——

Millions of yen
2013
Energy
Other

¥223
231

¥—
—

Millions of yen
2012
Energy
Other

¥243
351

¥—
—

Corporate/Eliminations

Total

¥—
—

¥ 2,992
43,561

Corporate/Eliminations

Total

¥—
—

¥ 2,979
39,735

Thousands of U.S. dollars
2013
EnergyOther
Corporate/Eliminations$2,371
2,456

Taiyo Nippon Sanso Corporation | Annual Report 2013

$—
—

$—
—

Total

$ 31,813
463,16951

(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

¥215
54

¥11
22

Amortization
Unamortized balance¥25
10

Industrial gas

Electronics

¥371
226

¥30
34

Amortization
Unamortized balanceElectronics$2,286
574

$117
234

Corporate/Eliminations

Total

¥—
—

¥273
106

¥20
19

Millions of yen
2012
Energy
Other

¥25
35

Industrial gas

Amortization
Unamortized balance

Millions of yen
2013
EnergyOther

Corporate/Eliminations

Total

¥—
—

¥507
335

¥80
39

Thousands of U.S. dollars
2013
EnergyOther
Corporate/Eliminations

$266
106

$213
202

$—
—

Total

$2,903
1,127

24. Supplementary Cash Flow Information
Cash and cash equivalents in the consolidated statementsof cash flows for the years ended March 31, 2013 and 2012were reconciled to cash and deposits reported in the

consolidated balance sheets as of March 31, 2013 and2012 as follows:
Millions of yen
2013
2012

Cash and deposits
Time deposits with maturities of more than three months
Cash and cash equivalents¥24,743(2,022)¥22,721¥34,596(1,321)¥33,275

Thousands of
U.S. dollars
2013$263,083(21,499)$241,584

The acquisition cost and net payments for assets and liabilities of RASIRC, Inc., acquired through a stock purchase, for the year
ended March 31, 2013 were as follows:
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

52

Taiyo Nippon Sanso Corporation | Annual Report 2013

Millions of yen

Thousands of
U.S. dollars

¥ 141
616
713
(220)
(698)
(549)
36
¥(513)$ 1,499
6,550
7,581(2,339)(7,422)(5,837)383$ (5,455)

The acquisition cost and net payments for assets and liabilities of US Airweld, Inc., A&F Welding Supply, Inc., Whitmer Welding
Supplies, Inc. and Evergreen Supply, Inc., acquired through an assets purchase by Matheson Tri-Gas, Inc., a consolidated subsidiaryof the Company, for the year ended March 31, 2013 were as follows:
Millions of yen

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

¥

341
1,153
974
(51)
(2,417)—¥(2,417)

Thousands of
U.S. dollars$ 3,626
12,25910,356(542)(25,699)—$(25,699)

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

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¥ 9,864
5,941
591(5,963)(1,860)(2,217)(6,356)
1,163
1,041¥(4,151)

The acquisition cost and net payments for assets and liabilities of Quimby, acquired through an 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)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:
Millions of yen

Current assets
Noncurrent assets
Total assets

¥20
3
¥24

25. Subsequent Events
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, 2013, were approved at the shareholders’ meeting held on June 27, 2013.
Cash dividends—¥6.00 ($0.064) per share

Taiyo Nippon Sanso Corporation | Annual Report 2013

Millions of yen

Thousands of
U.S. dollars¥2,328$24,753

53

Report of Independent Auditors

54

Taiyo Nippon Sanso Corporation | Annual Report 2013

Investor Information(At March 31, 2013)

Head Office:Toyo Building, 1-3-26, Koyama, Shinagawa-ku, Tokyo 142-8558, Japan
Number of Employees:
11,468Date 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:
15,768Transfer 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
National Mutual Insurance Federation ofAgricultural Cooperatives
Mizuho Corporate Bank, Ltd.
The Master Trust Bank of Japan, Ltd. (Trust Account)
Japan Trustee Services Bank, Ltd. (Trust Account)
The Norinchukin Bank
Dai-ichi Mutual Life Insurance Company

Percentage of
Total

60,94725,254
20,73516,007

15.12%
6.27
5.14
3.97

15,194
14,484
11,799
11,212
10,000
7,537

3.77
3.59
2.93
2.78
2.48
1.87

193,169

47.92%

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

1,000

100,000
Common Stock Price Range

800

80,000600

60,000400

40,000200

Trading Volume

20,00000
1st Quarter 2nd Quarter 3rd Quarter

4th Quarter

Fiscal year 2012

Taiyo Nippon Sanso Corporation | Annual Report 2013

1st Quarter 2nd Quarter 3rd Quarter

4th Quarter

Fiscal year 201355

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