annual report 2012 · profile vision ranking as one of japan’s leading chemical companies, showa...

ANNUAL REPORT 2012

Evolution into a Company that Creates Added Value

Profile

Vision

Ranking as one of Japan’s leading chemical companies, Showa Denko K.K. operates in the six major segments of petro chemicals, chemicals, electronics, inorganics, aluminum, and others. The Showa Denko Group has been implementing its medium-term consolidated business plan “PEGASUS” since January 2011. Despite the severe business environment owing to the slowdown in overseas economies centering on Europe and China, and prolonged appreciation of the yen, we took various measures in 2012 under “PEGASUS.” Specifically, we promoted the capacity expansion project at our U.S. graphite electrode subsidiary, and decided to establish a new graphite electrode production site in China. We also established an aluminum casting subsidiary in Malaysia for our Shotic business. To establish ourselves as a chemical company with a strong presence on the global market, we will continue to promote growth strategies in which our HD media and graphite elec-trode businesses serve as our “Wings.” We will also work to improve our business portfolio and build up strong and diversi-fied businesses on a global scale, thereby establishing leading positions in various market segments. Showa Denko aims to earn the full trust and confidence of the market and society, always managing operations based on the principles of corporate social responsibility. The Company is also committed to the principles of Responsible Care and is vigorously carrying out an action plan to protect the environ-ment as well as health and safety.

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

Contents

Showa Denko at a Glance 1

Consolidated Five-Year Summary 2

Message from the Management 3

2012 Achievements of Medium-Term Business Plan “PEGASUS” 7

Research and Development 10

Review of Operations 14

Corporate Social Responsibility 18

Responsible Care Activities 19

Board of Directors 20

Corporate Governance 21

Consolidated Six-Year Summary 24

Management’s Discussion and Analysis 25

Consolidated Balance Sheets 28

Consolidated Statements of Income 30

Consolidated Statements of Comprehensive Income 31

Consolidated Statements of Changes in Net Assets 32

Consolidated Statements of Cash Flows 33

Notes to Financial Statements 34

Report of Independent Certified Public Accountants 54

Major Subsidiaries and Affiliates 55

Corporate Data 56

Forward-Looking StatementsThis annual report contains statements relating to management’s projections of future profits, the pos-sible achievement of the Company’s financial goals and objectives, and management’s expectations for the Company’s product development program. The Company cannot guarantee that these expectations and projections will be realized or correct. Actual results may differ materially from the results antici-pated in the statements included herein due to a variety of factors, including such economic factors as fluctuations in foreign currency exchange rates as well as market supply and demand conditions. The timely commercialization of products under development by the Company may be disrupted or delayed by a variety of factors, including market acceptance, the introduction of new products by competitors, and changes in regulations or laws. The foregoing list of factors is not inclusive.

Showa Denko at a Glance

24.6%

PetrochemicalsOlefins (ethylene and propylene) and organic chemicals (vinyl acetate mono-mer, ethyl acetate, and allyl alcohol)

16.4%

ChemicalsFunctional polymers, industrial gases (liq-uefied carbon dioxide, dry ice, oxygen, nitrogen, and hydrogen), basic chemicals (liquid ammonia, acrylonitrile, and chloro-prene rubber), and electronic chemicals (specialty gases)

21.1%

ElectronicsHard disks (HDs), compound semiconduc-tors (LED chips), and rare earth magnetic alloys

8.5%

InorganicsGraphite electrodes and ceramics (alumi-num hydroxide, and alumina)

11.9%

AluminumRolled products ( high-purity foils for capacitors), extruded products (cylinders for laser beam printers (LBPs)), forged products, heat exchangers, and beverage cans

17.5%

OthersLithium-ion battery (LIB) materials, build-ing products, and general trading

Note: The above ratios of respective segments have been calculated after adding the amount of adjustments to net sales.

Net Sales 2012

¥739.8 billion

Showa Denko K.K. 1

Consolidated Five-Year Summary

Showa Denko K.K. and Consolidated SubsidiariesDecember 31 Millions of yen

Thousands of U.S. dollars (Note 1)

2012 2011 2010 2009 2008 2012

For the year Net sales ........................................................................... ¥739,811 ¥854,158 ¥797,189 ¥678,204 ¥1,003,876 $ 8,544,825 Operating income (loss) ...................................................... 28,108 47,357 38,723 (4,983) 26,792 324,646 Net income (loss) ............................................................... 9,368 16,980 12,706 (37,981) 2,451 108,196 Depreciation and amortization (Note 2) ................................ 46,232 49,413 50,678 54,358 60,439 533,975

At year-end Total assets ....................................................................... 933,162 941,303 924,484 958,303 962,010 10,778,029 Total net assets .................................................................. 314,966 295,745 284,965 286,722 265,459 3,637,863

Yen U.S. dollars (Note 1)

Per share Net income (loss)—primary (Note 3) ................................... ¥ 6.26 ¥ 11.35 ¥ 8.49 ¥ (29.44) ¥ 1.96 $0.07 Net income—fully diluted (Note 3) ...................................... — 11.20 — — — — Net assets ......................................................................... 182.24 168.33 161.47 163.11 192.85 2.10 Cash dividends (applicable to the period) ............................. 3.00 3.00 3.00 3.00 5.00 0.03

Number of employees at year-end ..................................... 9,890 11,542 11,597 11,564 11,756

Notes: 1. Yen amounts have been translated into U.S. dollars, for convenience only, at the rate of ¥86.58 to US$1.00, the approximate rate of exchange at December 31, 2012. 2. Effective from the year ended December 31, 2011, the Companies have applied “Accounting Standard for Disclosures about Segments of an Enterprise and Related

Information” (Accounting Standards Board of Japan (ASBJ) Statement No. 17, issued on June 30, 2010) and “Guidance on the Accounting Standard for Disclosures about Segments of an Enterprise and Related Information” (ASBJ Guidance No. 20, issued on March 21, 2008). The segment information for the year ended December 31, 2010, which is restated under the accounting standard, is disclosed for comparison purposes.

3. Net income per share has been computed based on the average number of shares of common stock outstanding during the respective fiscal year. Fully diluted net income per share additionally assumes the conversion of the convertible bonds. Diluted net income per share for 2012 and 2010 was not disclosed because the Company had no securities with dilutive effects. Although the potential for stock dilution exists, diluted net income per share for 2009 was not disclosed because the Company posted a net loss. Diluted net income per share in 2008 was not disclosed because there was no dilutive stock at December 31, 2008.

Operating Income by Segment Net Income

(Billions of yen) (Billions of yen)

20122011201020092008-20

-10

0

10

20

30

40

50

60

20122011201020092008-40

0

5

10

15

20

L Electronics L Petrochemicals L Chemicals L Inorganics L Aluminum L HQ costs

See note 2.

L Electronics L Petrochemicals L Chemicals L Inorganics L Aluminum L Others L Adjustments

2 A Unique Chemical Company

Message from the Management

Kyohei Takahashi, Chairman of the Board Hideo Ichikawa, President and CEO

Our business environment in 2012

remained severe, with the Japanese econo-

my facing a difficult situation due to the

slowdown in overseas economies amid the

sovereign debt crisis in Europe, lower eco-

nomic growth in China, strong appreciation

of the yen, and the resultant decline in

exports. These factors combined to cause

negative growth of the Japanese economy

in the third quarter of 2012. In the petro-

chemicals industry, severe production

adjustments continued, reflecting stagnant

demand in Japan and China. The electronic

parts/materials industry also experienced

substantial production adjustments in LCD

panels, notwithstanding increases in smart-

phone production.

Under these circumstances, the Showa

Denko Group is aiming to strengthen its

presence on the global market by imple-

menting its medium-term consolidated busi-

ness plan PEGASUS launched in 2011. The

Group is promoting its growth strategies

with the hard disk (HD) media and graphite

electrode businesses as its “Wings,” while

aiming to build up strong and diversified

businesses on a global scale and establish

leading positions on the market.

In 2012, the Group recorded consolidated

net sales of ¥739,811 million, down 13.4%

from the previous year. The decline in net

sa les ref lected lower sa les in the

Petrochemicals segment, which experienced

trouble with equipment, and in the

Aluminum segment, which transferred the

automotive air-conditioner heat exchanger

business. Operating income decreased

40.6%, to ¥28,108 million, due to lower

profit in all segments except Electronics, in

which profit increased due to higher ship-

ment volumes of HD media. Net income

decreased 44.8%, to ¥9,368 million.

Dividends of ¥3.00 per share were paid to

shareholders on record at the end of Decem-

ber 2012. We made capital investments to

ensure future growth, expanding the capacity

for producing HD media, centering on our site

in Singapore, and silicon carbide (SiC) epitax-

ial wafers for power devices. As a result, our

capital expenditures in 2012 amounted to

¥42,503 million, up ¥3,709 million.

Showa Denko K.K. 3


The outstanding balance of interest-bear-

ing debt as of the end of 2012 fell ¥5,046

million from the end of the previous year, to

¥342,262 million, as a result of continued

reduction efforts.

Segment PerformancesA breakdown of net sales and operating

income by segment is as follows:

In the Petrochemicals segment, sales


Sales of olefins decreased owing to signifi-

cantly lower shipment volumes, reflecting

trouble with the ethylene plant that occurred

in the first half of 2012 and lasted for about

90 days, and production cuts due to the

slackening supply-demand situation in the

Asian market. Sales of organic chemicals

also decreased due to lower shipment vol-

umes of vinyl acetate and ethyl acetate. The

segment recorded an operating loss of

¥977 million (down ¥4,461 million).

In the Chemicals segment, sales slipped

2.2%, to ¥127,376 million. Sales of func-

tional polymers, industrial gases, and elec-

tronic chemicals were maintained at the

previous year’s level. Sales of basic chemi-

cals decreased despite higher liquefied

ammonia sales, as acrylonitrile sales

declined due to production cuts, reflecting

lower demand, and a stagnant market. The

segment recorded an operating loss of ¥875

million (down ¥2,911 million), reflecting the

slackening supply-demand situation of basic

chemicals and the increase in electricity

rates.

In the Electronics segment, sales

decreased 1.0%, to ¥163,306 million. Sales

of HD media increased due to the contribu-

tion of the capacity expansion and the

increase in shipment volumes of high-

capacity media. Sales of compound semi-

conductors increased slightly due to

higher shipment volumes for LCD backlight

applications, notwithstanding the influence

of production adjustments in the electric

appliance industry. Meanwhile, sales of rare

earth magnetic alloys decreased significant-

ly due to the influence of low magnet

demand and inventory adjustments in the

rare earth magnet industry. Operating

income rose 6.8%, to ¥32,311 million,

reflecting steady conditions of the HD media

business.

In the Inorganics segment, sales


Although our U.S. subsidiary’s graphite elec-

trode sales increased due to higher selling

prices, sales of graphite electrodes on a

non-consolidated basis decreased due part-

ly to lower volumes of shipments to the

Asian market. As a result, overall sales of

graphite electrodes decreased. Sales of

ceramics decreased as shipment volumes

for electronic materials applications fell

sharply due to the slackening supply-

demand situation. Operating income


In the Aluminum segment, sales fell

25.8%, to ¥92,206 million. Sales of rolled

products declined sharply due to the fall in

shipment volumes of high-purity foils for

capacitors, reflecting severe production/

inventory adjustments in the capacitor

industry. Sales of extrusions/specialty prod-

ucts decreased due to the fall in shipment

volumes of aluminum cylinders for laser

beam printers. Sales of Shotic™ forged

products and aluminum cans were main-

tained at the previous year’s level. Sales of

heat exchangers decreased significantly due

to the transfer of the automotive air-

conditioner heat exchanger business to

Keihin Corporation in January 2012. Operat-

ing income fell 74.5%, to ¥1,581 million.

In the Others segment, sales fell 10.2%,

to ¥135,280 million. Sales of lithium-ion

battery (LIB) materials decreased slightly

due to low demand for automotive applica-

tions, notwithstanding higher shipment vol-

umes for smartphone applications. Shoko

Co., Ltd.’s sales decreased due partly to

lower shipment volumes of metals.

Operating income fell 95.2%, to ¥89 million,

due partly to the increase in fixed costs per-

taining to the LIB materials business.

Business Strategy for the Second- half Period under PEGASUSThis year, we will work out our business

strategy for the second-half period under

PEGASUS. As for the HD media and graphite

electrode businesses, which are our base

(growth) businesses, we will maintain their

growth strategies. We will continue position-

ing them as “growth drivers,” preferentially

allocating managerial resources and taking

various steps for expansion, including the

increase in production capacities. At the

same time, we will make sure that these

businesses will play a key role in increasing

profit and cash flows for the Group.

We have also decided that 2013 should

be a year for redesigning the Group’s busi-

nesses. Our efforts will be focused on

strengthening the global supply chains and

improving the profitability of domestic oper-

ations.

a) Strengthening the global supply

chains

The Showa Denko Group is currently estab-

lishing new operation sites in foreign coun-

tries in several business areas. We will aim

to catch new business opportunities and

strengthen our presence, especially in the

ASEAN market. Furthermore, we will estab-

lish a distribution network covering our

domestic and overseas sites, as well as our

suppliers and customers. We will also make

proposals on products and solutions. Thus,

we will establish global supply chains,


integrating development, production, and

marketing.

b) Improving the profitability

of domestic operations

We need to speedily improve the profitability

of production sites in Japan and of busi-

nesses that depend largely on domestic

demand. To accomplish this end, we are

promoting the redesigning of our business

models, setting target costs, and developing

new markets. From a medium- to long-term

point of view, we will consider consolidation

and relocation of domestic sites.

The world economy is increasingly uncer-

tain. Our business structure is undergoing

substantial changes with the shift of mar-

kets and customers for the Group’s products

from Japan to foreign countries. Under these

circumstances, the Group will redesign its

business models in response to the changes

in competitive conditions for respective

operations, aiming to speedily return to a

growth track. In the latter half of 2013, we

will announce our new business plans for

the second-half period under PEGASUS.

Measures Implemented or Decided in 20121. Investing in a graphite electrode

company in China

We signed an agreement with Sinosteel

Corporation, of China, to acquire 67% of

shares in Sinosteel’s wholly owned subsid-

iary Sinosteel Sichuan Carbon Co., Ltd.

(Sichuan Carbon). This is in accordance with

our plan to expand operations in China and

other Asian countries to supply graphite

electrodes used in electric steel production.

We made Sichuan Carbon a consolidated

subsidiary of ours in March 2013. With the

addition of Sichuan Carbon’s 22,000t/y

plant to its existing facilities in Japan and

the United States, the Group’s total graphite

electrode production capacity has reached

127,000t/y. After capacity expansion in the

United States, the Group’s total capacity will

further increase to 157,000t/y in 2014.

Thus, we will establish ourselves as a lead-

ing supplier of graphite electrodes in the

world.

2. Increasing SiC epitaxial wafer

production capacity by 2.5 times

In August 2012, we increased our SiC epi-

taxial wafer production capacity by 2.5

times, to 1,500 units a month. The wafers

are used in SiC power devices for a wide

range of applications, including automobiles,

railcars, and home electric appliances. In

particular, SiC power devices are expected

to be used increasingly in inverters to con-

trol the rotation of motors. Such inverters

are already commercialized in some home

electric appliances, and used in subway rail-

cars. Following the capacity expansion, we

will continue developing SiC epitaxial wafers

with larger diameters, fewer defects, and

higher uniformity. Specifically, we will accel-

erate the development of six-inch SiC epi-

taxial wafers for heavy-current, high-voltage

applications.

3. Constructing an aluminum casting

plant in Malaysia

We established an aluminum casting sub-

sidiary Shotic Malaysia Sdn. Bhd. in the

state of Johor, Malaysia. The new subsidiary

will start commercial production by the end

of 2014. In addition to an integrated alumi-

num casting/forging facility at Kitakata,

Japan, we are operating one plant each in

Portugal and Singapore for producing forged

aluminum parts. We have been selling the

products (Shotic™) on the world market,

mainly for use in automotive parts. With the

scheduled construction of the new casting

plant in Malaysia, we will aim to better meet

growing demand in the Asian market. By

securing casting capability at these two

locations, we intend to ensure the security

of supply. We will expand the Shotic busi-

ness as a key component of our Aluminum

segment.

4. Constructing a high-purity aluminum

foil plant in China

Our new subsidiary Showa Denko Aluminum

(Nantong) Co., Ltd., is building a plant at a

Graphite electrodes SiC epitaxial wafers Shotic™

Showa Denko K.K. 5


site in Nantong, Jiangsu Province, China.

The new subsidiary forms part of our plan to

expand the capacitor-grade, high-purity alu-

minum foil business. The new plant in China,

scheduled for start-up in the second half of

2013, will finish rolled foil supplied from our

Sakai Plant, and supply final products to our

customers in China. Aluminum electrolytic

capacitors are used widely in electric appli-

ances and transport machinery. Demand for

aluminum electrolytic capacitors in China is

expected to grow, reflecting continued eco-

nomic growth in that country. With the

establishment of the new plant in China, we

will aim to better meet the growing demand

for capacitor-grade, high-purity aluminum

foil.

5. Establishing joint venture

for GaN LED chip business

In December 2012, we transferred our busi-

ness in gallium-nitride (GaN)-based blue

LED chips to TS Opto Co., Ltd., a joint ven-

ture between Showa Denko K.K. and Toyoda

Gosei Co., Ltd. Through the joint venture, we

are aiming to achieve synergistic effects in

R&D, improving brightness and production

efficiency. In the LED business other than the

GaN LED chips, such as aluminum-gallium-

indium-phosphide (AlGaInP), gallium-arsenide

(GaAs), and gallium-phosphide (GaP), we will

continue our independent operations.

6. Increasing LIB packaging material

production capacity

In August 2012, our subsidiary Showa

Denko Packaging Co., Ltd., decided to

increase its production capacity for alumi-

num laminated films used for packaging

LIBs. Specifically, Showa Denko Packaging

decided to double its annual production

capacity versus the 2010 level by the sec-

ond half of 2013. Compared with metallic

LIBs, pouch-type LIBs based on aluminum

laminated films provide higher flexibility in

molding, lighter weight, and better heat dis-

sipation. Thus, pouch-type LIBs are widely

used as small LIBs for portable devices.

Reflecting the rapid growth of the market for

smartphones and tablet PCs, demand for

aluminum laminated film is expected to

grow, as it contributes toward the miniatur-

ization of LIBs.

The Group will continue contributing to the

sound growth of society by developing and

providing useful and safe technologies,

products, and services. We will ensure safe-

ty, conserve resources and energy, and

reduce the volume of industrial waste to be

discharged and chemical substances to be

emitted, thereby contributing to the protec-

tion of the global environment.

The business environment will continue to

be challenging throughout 2013. The Group

will work hard to redesign its business

structure to cope with the severe environ-

ment, aiming to speedily return to a growth

track. We will quickly respond to the chang-

es in the business environment and contin-

ue to carry out reforms.

We look forward to the continued support

from our fellow shareholders and all other

stakeholders.

March 27, 2013

Kyohei Takahashi, Chairman of the Board

Hideo Ichikawa, President and CEO

High-purity aluminum foils for capacitors LIB packaging materials


(Billions of yen)

0

40

10

50

60

20

30

2013Forecast

2012201120102009

L Petrochemicals L Chemicals L Electronics L Inorganics L Aluminum L Others

Notes: 1. See note 2 on page 2. 2. The 2013 forecast was announced on February 14, 2013.

2012 Achievements of Medium-Term Business Plan “PEGASUS”

The Showa Denko Group is carrying out “PEGASUS” for the 2011–2015 period.

The name “PEGASUS,” a Winged Horse from Greek mythology, is a symbol of the Group with two “wings”—The HD media and graphite electrode businesses—and powerful “legs”—Stable base businesses, growth busi-nesses, new growth businesses for the next generation, and strong R&D activities. By carrying out “PEGASUS,” the Group is building up strong and diversified businesses on a global scale, thereby establish-ing leading positions in various market segments.

SiC Epi-wafers for Power Devices

Organic EL for Lighting

Trends in Capital Investments

Our capital investments in 2012 were

focused on projects in growth businesses,

centering on capacity expansions for HD

media and SiC epitaxial wafers for power

devices. In 2013, we will make major invest-

ments in the Inorganics segment: full-scale

expansion work at SDKC, of the United

States, and capital investment at Showa

Denko Sichuan Carbon Inc., in China.

Petrochemicals

Basic Chemicals

Aluminum Foils for Capacitors

Cylinders for LBPs

Battery Materials

High-purity Gases for

Semiconductor Processing

Stable base

businesses

Next-generation

growth businesses

Strong R&D activities

See page 10

Growth businesses

Two wings

HD media

Four legs

Graphite electrodes

Showa Denko K.K. 7

R111Y4876

取り消し線

• Expanding the capacity at Showa

Denko Carbon, Inc., of the United

States, for completion in 2014

Measures Implemented or Decided in 2012

Strengthening the Global Supply Chains

While strengthening our existing

businesses in China, we will aim

to catch new business opportu-

nities and strengthen our pres-

ence in the ASEAN market.

We will establish global sup-

ply chains covering our domestic

and overseas sites as well as

our suppliers and customers,

integrating development, pro-

duction, and marketing.

Graphite Electrodes• Acquired a stake in a Chinese company;

Showa Denko Sichuan Carbon Inc.

became our subsidiary in March 2013

Steadily implemented measures for growth, centering on the HD media and graphite electrode businesses

HD Media• Contribution of the capacity expansion

implemented mainly at our site in

Singapore

• Leading the industry in the supply of

the sixth-generation, high-capacity

media (2.5-inch, 500GB)

1

4

Showa Denko Sichuan Carbon Inc.

High-purity aluminum foil

Chemical alumina

Shotic™

Showa Denko Carbon, Inc.

Road Map toward Higher Storage Capacity

2006 2008 2010 2012 2014 2016

(GB/p)

(Storage capacity per 2.5” media)

40% year growth

Slowdown to a 20% year growth

TAMR

SMRPMR

500GB

334GB

1TB750GB

650GB500

1,000

Showa Denko HD Yamagata K.K.

Showa Denko Electronics K.K. (Ichihara)

Showa Denko HD Trace Corp.

Showa Denko HD (Malaysia) Sdn. Bhd.

Showa Denko HD Singapore Pte. Ltd.

Showa Denko HD America Corp.

Sichuan, China

Graphite electrodes

P ChemicalsP InorganicsP Aluminum

Nantong, China The new plant, scheduled for start-up in the second half of 2013, will finish rolled foil sup-plied from our Sakai Plant, and provide final products to our customers in China.

Johor, MalaysiaUnder construction for start-up in 2014; Together with the existing forging plant in Singapore, the new plant will contribute toward expanding overseas operations.

Tayan, Indonesia Building a 300,000t/y chemical alumina plant for start-up in 2015 (Our chemical alumina production in Japan will be ter-minated following the start-up of the new plant in Indonesia.)


Improving the Profitability of Domestic Operations

Improving Financial Strength

• Strengthening operations by review-

ing our business structure

We will promote the redesigning of our

business models, reviewing development/

production systems, setting target costs,

and developing new markets.

• Implementation of organizational

changes

We have changed our organization to

ensure speedy and timely decision mak-

ing. As a result of the abolishment of the

Business Sector and Headquarters sys-

tems and the shift to a system of direct

supervision by the CEO, we now have a

“flat” and agile organization.

SiC Epi-wafers for Power Devices• Operating as the sole volume-producer of SiC

epitaxial wafers for power devices• Expanded the production capacity by 2.5

times in August 2012

Battery Materials• Decided to double the production capacity

for aluminum laminated films for LIB pack-aging, versus the 2010 level

LEDs• Established a joint venture with Toyoda

Gosei for the GaN blue LED business

High-purity Aluminum Foils• Started constructing a new plant in

Nantong, China, to strengthen the business in capacitor-grade, high-purity aluminum foil

Petrochemicals• Aiming to increase the ratio of the use of

non-naphtha feedstock, to 40%• Developing acetaldehyde-process butadi-

ene: Aiming to start commercial production in 2016

Shotic• Building a new casting plant in Malaysia

Strategy for Specialty Gases

We are strengthening our production/

distribution bases in Asia for business

areas we have strengths, such as high-

purity ammonia for compound semicon-

ductors, nitrous oxide for deposition of

nitride films, and hydrogen bromide for

etching and cleaning.

Interest-bearing debt decreased from the

previous year as a result of continued

reduction efforts. The D/E ratio also

improved.

2

3

Net Sales by Geographic Area(Billions of yen)

0

600

900

300

2012201120102009

L Asia L Others L Japan

(Effective January 4, 2013)

Business Development

Center

CEO

Business divisions (13) Plants (12)

Production,technology, SCM

Business strategy,marketing

R&D

Staffsections atHead Office

Interest-bearing Debt and D/E Ratio(Billions of yen/times)

342.3347.3351.0

392.9

373.9

1.48

1.301.23

1.171.09

20122011201020092008

L Interest-bearing debt P D/E ratio

Shanghai Showa ChemicalsShanghai Showa Electronics Materials

Korea Showa Chemicals(Specialty gases)

Zhejiang Quzhou Juhua Showa Electronic Chemical Materials (Specialty gases)

Showa Specialty Gas (Taiwan) Taiwan Showa Chemicals Manufacturing(Chemical products)

Showa Specialty Gas Singapore

Showa Denko K.K. 9

Research and Development

Petrochemicals

In this segment, we are fully utilizing our

proprietary technologies for catalysts,

organic synthesis, and polymer synthesis

to meet the needs of manufacturers of

printing ink, paint, electronic materials,

and automotive parts. As the supply of

butadiene is expected to become tight due

to the limitations of capacity increase

despite globally growing demand, we are

vigorously examining a new butadiene

production process technology, utilizing

our technology/business base. We are

improving the performance of existing cat-

alysts and developing new catalysts for

acetyl chemicals and allyl alcohol to fur-

ther strengthen our proprietary production

processes. As for n-propyl acetate, an allyl

alcohol derivative used as an environment-

friendly solvent, we are continuing steady

production and developing new applica-

tions.

Furthermore, to meet growing demand

for allyl ester resin for use in optical mate-

rials, we are developing new grades and

making marketing efforts to expand mar-

kets. In the area of heat- resistant trans-

parent f i lm SHORAYAL™, which is

expected to be used in displays and other

electronic applications, we are distributing

a sufficient volume of samples from our

pilot plant for evaluation by potential cus-

tomers. We are concurrently promoting the

development of other types of new films,

utilizing the film production/evaluation

technologies we obtained from the devel-

opment of SHORAYAL™. While we are

developing green sustainable chemical

processes under national projects, much

progress has been made in applying basic

technologies to gas separation and recov-

ery. We are now studying ways of using

such technologies on a commercial basis,

hoping to substantially cut energy con-

sumption in our basic processes for man-

u f a c t u r i n g p e t r o c h e m i c a l s . T h e

Petrochemicals segment invested ¥653

million in R&D in 2012.

Chemicals

To quickly meet wide-ranging customer

needs and make timely proposals on key

materials for new product development by

customers, we are developing semicon-

ductor-processing materials, photofunc-

t i ona l ma te r ia l s , so lde r res i s t s ,

high-performance gels, organic intermedi-

ates, and base materials for cosmetics.

Regarding photofunctional materials

that support the production of high-

performance LCDs, we worked to develop

markets for multifunctional-thiol-based

compounds for addition to photo-curing

resins as well as photo polymerization ini-

tiators. Based on our new multifunctional-

thiol-based-compound plant completed in

2012, we are developing many new appli-

cations as additives in industrial resin

compositions. Our solder resist for flexible

circuit boards in TVs and other large LCDs

has been well received by the market. We

developed new grades that meet market

requirements utilizing the information net-

work with customers, and started supply-

ing them to various markets.

In the area of high-performance gels,

we took a first step to enter a new busi-

ness field through a strategic partnership

Showa Denko and its Group companies are promoting R&D in line with their medium-term consolidated business plan PEGASUS, allocating resources preferentially to the two business domains of “Energy/Environment” and “Electronics.” We are pur-suing our strategy of promoting the interconnection of inorganic, metal, and organic chemical technologies, while attaching great importance to marketing activities. In particular, we are focusing on such promising areas as advanced battery materials, high-performance optical films, and silicon carbide (SiC) epitaxial wafers, aiming to speedily commercialize these products. Showa Denko and its Group companies invested ¥20,633 million (US$238 million) in R&D in 2012. A breakdown by segment of R&D efforts and investments during the year is as follows:

SHORAYAL™

10 A Unique Chemical Company10 A Unique Chemical Company

with BIA Separations GesmbH, of Austria.

We expect to achieve good synergistic

effect in purification technology for bio-

pharmaceuticals, a market area growing

very rapidly in recent years. As for

high-performance liquid chromatography

columns (Shodex™), in which we have

had a long history, we are developing new

products meeting the needs in the emerg-

ing economies and providing analytical

know-how and technical service, in addi-

tion to the development of columns for

sophisticated analysis. We are developing

organic intermediates, utilizing our propri-

etary materials and strengths in precision

organic synthesis technology. As for base

materials for cosmetics, in addition to

high-performance vitamin C derivative

Apprecier™, we are making preparations

for launching various new compounds. We

are also developing new liquid electrolytes

for LIBs.

In semiconductor processing materials,

we are developing chemical mechanical

polishing (CMP) slurries for metal polish-

ing at very small line widths, high-purity

gases for etching, cleaning, and film depo-

sition, and high-purity chemicals for

cleaning agents and solvents. We are also

developing charge dissipating agents for

electron-beam lithography processes. As

part of these efforts, we have developed

volume production technologies for

high-purity carbonyl fluoride, a cleaning

gas with a very low level of global warm-

ing potential, and high-purity hydrogen

selenide, used as a film deposition materi-

al for solar cells. The Chemicals segment’s

R&D investment amounted to ¥3,176 mil-

lion in 2012.

Electronics

We are accelerating the development of

state-of-the-art technologies to meet the

increasingly sophisticated market require-

ments. As for storage materials, we are

continuing to develop new technologies as

the world’s largest independent HD media

manufacturer. We are producing HD media

with higher performance using perpendic-

ular magnetic recording (PMR) technology,

which we have commercialized for the

first time in the world. At the same time,

we are developing shingled write magnet-

ic recording media, the next-generation

technology that will further increase

recording density, as well as thermal

assist recording and bit-patterned media

technologies. We are making preparations

for commercialization of these new media

products. Using PMR technology, we are

making commercial shipments of 2.5-inch

and 3.5-inch HD media with recording

capacity of 500 gigabytes and 1 terabyte

CIM™ monolithic columns produced by BIA Separations

HDs Ultrabright LED chips

per disk, respectively, which represented

the highest recording capacity for those

sizes in December 2012.

We are continuing to develop LED chips

with higher brightness and power. Using

our proprietary light emitting layer tech-

nology, we have developed aluminum-

gallium- indium-phosphide (AlGaInP) LED

chips that emit red light with a wavelength

of 660 nm, the optimum light for acceler-

ating the growth of plants. These new LED

chips have been adopted at various facili-

ties and model plants. As for infrared LED

chips, we are developing reflection-type

and point-light-source products based on

the metal organic chemical vapor deposi-

tion (MOCVD) process, in addition to the

conventional liquid phase epitaxial pro-

cess. As for indium-gallium-nitride (InGaN)

LED chips, we established a joint venture

with Toyoda Gosei Co., Ltd. to improve

brightness and production efficiency.

In the area of neodymium-iron-boron

magnetic alloys, we are meeting market

requirements for high-performance mag-

nets through sophisticated casting tech-

nologies and the better control of alloy

microstructures. Furthermore, we are con-

tinuing to develop a new composition with

lower levels of added dysprosium (a kind

of rare metal) that will maintain high levels

of magnetic force at high temperatures, to

Showa Denko K.K. 11Showa Denko K.K. 11

Research and Development

meet the needs of the automobile industry.

The Electronics segment invested ¥5,013

million in R&D in 2012.

Neodymium-iron-boron magnetic alloys

Inorganics

We are developing materials and applica-

tions by fully utilizing our proprietary

material/process technologies. We are

developing fillers with high heat dissipation

and high electrical insulating properties to

serve the needs for compact and high-

performance electronic and power devic-

es. Based on our strengths in nanoparticle

technology, we developed, as part of a

national project that ended in February

2012, a visible-light-responsive photocat-

alyst for antibacterial/antiviral agents with

improved levels of indoor activity. We are

developing applications in final products in

cooperation with former partners in the

national project. The Inorganics segment

spent ¥386 million on R&D in 2012.

Aluminum

We are developing light, strong, and

high-performance materials, parts, and

products to meet market needs while con-

ducting research on basic technologies

pertaining to their production. Utilizing our

proprietary pressurized continuous casting

technology, pressurized horizontal com-

pletely continuous casting technology, and

forging technology, we are developing new

alloys and products. In view of the grow-

ing automobile market in Asian countries,

we are developing aluminum cast rods

and forgings with still higher performance

for use in automotive parts.

We are improving our die technology for

extrusion, forging, drawing, and press

working; our process technologies for

purification, fabrication, and bonding; as

well as our simulation technology for

structural and hot fluid studies. The

Aluminum segment’s R&D investment

amounted to ¥2,102 million in 2012.

Others

We are continuing to develop and market

materials and components that will ensure

sufficient capacity, output, life, and low

electrical resistance in large LIBs for vari-

ous types of electric vehicles. We are pro-

viding such solutions as SCMG™ graphite

anode material, VGCF™ carbon nanotube,

SDX ™ carbon-coated aluminum foils, and

aluminum laminated films for packaging.

We increased our production capacity

of four-inch SiC epitaxial wafers for power

devices at the Chichibu Plant by 2.5 times,

to 1,500 units a month, through facility

expansion and improvement of production

technology. These epitaxial wafers have

high surface smoothness and fewer

crystal defects. Compared with the main-

stream silicon-based semiconductors, SiC

power devices using SiC epitaxial wafers

have the advantage of being able to

endure high voltage and heavy current

and to operate at high temperatures.

We developed a high-speed plant culti-

vation technology, the “Shigyo method,” in

cooperation with Yamaguchi University for

use in plant growth facilities based on our

proprietary high-brightness LED chips. We

are developing the market for this technol-

ogy. The technology has been adopted by

Kawauchi Village, Fukushima Prefecture,

at its LED-based plant growth facility.

In the area of printed electronics, we

developed printable silver nanowire ink joint-

ly with Osaka University. The product enables

free formation of patterns through printing.

As common R&D activities, Showa

Denko’s Corporate R&D Center conducted

basic research into new areas with a view

to fostering new businesses and develop-

ing technologies common to different seg-

ments. The Analysis & Physical Properties

Center and the Safety Evaluation Center

supported each segment’s R&D efforts by

providing expertise in computational sci-

ence as well as conducting analyses and

investigations. R&D expenditures in 2012

in the Others segment, including common

activities, totaled ¥9,303 million.

Decahedral titanium oxide fine particles Silver-nanowire-ink-based film after curing

12 A Unique Chemical Company12 A Unique Chemical Company

Progress in R&D Strategy under “PEGASUS”

As from January 2013, we have introduced

a new R&D organization, establishing the

Business Development Center as the focus

of our R&D activities. The center consists of

two laboratories, projects for commercializa-

tion, and technical assistance centers serv-

ing all business segments. Each unit, with a

specific R&D mission, works together and

promotes personnel exchanges to establish

the Group’s techn ica l advantages.

Meanwhile, in areas where R&D and pro-

duction need to be integrated owing to the

specific culture of business, development

departments at plants perform R&D func-

tions. Specifically, in the areas of aluminum

and HD media, R&D functions continue to

be performed under direct supervision of

relevant business divisions. The Analysis &

Physical Properties Center and the Safety

Evaluation Center continue to provide tech-

nical support to common R&D activities.

The Institute for Polymers and Chemicals

The Institute for Polymers and Chemicals

has been established to increase the effi-

ciency and speed in the development of

functional materials that should be complet-

ed within a relatively short period, by assem-

bling technical experts for specific areas

from plants, business divisions, and corpo-

rate R&D units. The new institute enables

the integration of our experience and tech-

nology pertaining to wide-ranging organic/

inorganic materials. Through efforts to coor-

dinate different materials, we will be able to

realize new properties that are not possible

when we simply try to improve individual

materials. Thus, we will provide solutions to

existing customers and new markets. Fur-

thermore, we will apply core functions of

materials to different kinds of products, as

well as meet the needs of both high-end

products with high performance and low-end

products in growing markets. The institute

will work together with business divisions to

establish unique businesses and with a

strong presence in areas that have relation-

ships with existing operations and that have

growth potential.

The Institute for Advanced

and Core Technology

The Institute for Advanced and Core

Technology is focused on two business/

development domains and three technology

families: 1. Carbon materials and technolo-

gy, 2. Thin film materials and technology,

and 3. Catalytic materials and technology.

Through this institute, we are aiming to cre-

ate new businesses by deepening our core

material technologies, including nano car-

bon and other functional carbon materials.

Focusing on Nano Carbon

As from the beginning of this year, we have

entered into a strategic partnership with

Mitsubishi Corporation in the business of

fullerene, a typical carbon nano material. The

Institute for Advanced and Core Technology

will promote the development of this materi-

al. The institute has also started developing

graphene in cooperation with Tohoku

University. Since we are already commercial-

ly producing VGCF ™ carbon nanotubes as

additives in LIBs, we now cover all the three

major carbon nano materials. Based on our

experience as the world’s first commercial

producer of carbon nanotubes, we will

develop advanced applications in Electronics

and Energy—major business domains under

“PEGASUS”— creating businesses that will

contribute to the Group’s profit.

Changes in R&D Organization

Development in areas related to growth sectors

Growth & New growth sectors(Electronics/Energy & Environment)

Strengthen existing businesses

Power-deviceSiC Epi-wafer Project

Development departments

at plants

Institute for Polymersand Chemicals

Institute for Advanced and

Core Technology

Nano CarbonThin FilmCatalysts

Green Innovation Project

AluminumHD Media

LIB Materials

Search R&D Commercialization

Graphene

Collaborating with Japan Science and Technology Agency (JST) and Tohoku

University

Fullerene

Frontier Carbon Corp.(Joint venture with Mitsubishi Corp.)

Carbon nanotube

(VGCF ™)

A model of graphene’s molecular structure

Use in organic photovoltaic cells

Use in lithium-ion batteries

Showa Denko K.K. 13

Review of Operations

Petrochemicals

Consolidated Business Results (Millions of yen)

2012 2011 Difference Rate of change

Sales 190,939 250,396 -59,456 -23.7%

Operating income -977 3,484 -4,461 —

Outlook

Sales of olefins significantly decreased

owing mainly to the influence of the trouble

with the ethylene plant that occurred in the

first half of 2012. Sales of organic chemicals

Chemicals



Sales 127,376 130,203 -2,827 -2.2%

Operating income -875 2,035 -2,911 —

Outlook

Sales of functional polymers, industrial

gases, and electronic chemicals were main-

tained at the previous year’s level. Sales of

basic chemicals decreased despite higher

liquefied ammonia sales, as acrylonitrile

sales declined due to the sluggish market

and depressed demand for their main use as

materials for acrylic fiber and acrylonitrile-

butadiene-styrene (ABS) resins.

also decreased due to lower shipment vol-

umes of ethyl acetate, etc.

As a result, the Petrochemicals segment’s

sales decreased 23.7%, to ¥190,939 mil-

lion. The segment recorded an operating

loss of ¥977 million (down ¥4,461 million).

Olefins

Ethylene production in Japan totaled

6,146,000 tons in 2012, a decrease from

6,690,000 tons in the preceding year, owing

partly to the depressed domestic demand

due to an economic slump, the decline of

the export of ethylene’s derivatives due to

the soft global market and unprofitable

exports caused by the strong yen, and the

increase in the import of ethylene’s deriva-

tives due to the strong yen. Showa Denko

As a result, the Chemicals segment’s

sales slipped 2.2%, to ¥127,376 million.

The segment recorded an operating loss of

¥875 million (down ¥2,911 million).

Topics

In July 2012, SDK started using its wholly

owned subsid iar y Shanghai Showa

Electronics Materials Co., Ltd. (SSE), to

strengthen its business in China related to

high-purity gases for electronics. SSE pro-

duces and sells equipment for treating used

high-purity gases resulting from the produc-

tion of semiconductors, etc. SSE will expand

its operations in the future, covering produc-

tion, sales, and distribution of high-purity

gases for the Chinese electronics industry.

In July 2012, Union Showa K.K., a joint ven-

ture between SDK and UOP LLC, of the United

States, announced that it successfully devel-

oped a new method of stable solidification of

insoluble ferrocyanide widely used to remove

radioactive cesium. Insoluble ferrocyanide

(SDK)’s ethylene production in 2012 was

463,000 tons, a decrease of 191,000 tons

from 2011. Our olefin plant utilization rate in

the second half of 2012 was about 90% on

average due to production cuts that reflect-

ed the slackening supply-demand situation

in the global market.

As a result, sales of olefins slumped sig-

nificantly, and operating income from this

business decreased.

Organic Chemicals

Sales of ethyl acetate decreased due to lower

shipment volumes in response to the sluggish

demand for solvents. Sales of vinyl acetate also

decreased due to lower shipment volumes.

maintains high cesium-absorbing- volume

capacity even in contaminated cooling

water. However, insoluble ferrocyanide is

easily decomposed by heat, resulting in the

vaporization of cesium. Thus, an innovative

method of heat solidification that allows sta-

ble containment of cesium had been sought.

Union Showa, under the guidance of

Professor Hitoshi Mimura of Tohoku

University, succeeded in developing a new

method of stable solidification by heat-treat-

ing a mixture of used ferrocyanide and zeo-

lite. Under the method, zeolite traps cesium

vaporized by heat treatment, preventing the

release of cesium into the air.

Molecular sieves (zeolites)


Electronics



Sales 163,306 165,011 -1,705 -1.0%

Operating income 32,311 30,242 2,069 6.8%

Outlook

Sales of hard disk (HD) media increased due

to the contribution of the production capaci-

ty expansion carried out in the previous year.

Sales of compound semiconductors

increased slightly. Meanwhile, sales of rare

earth magnetic alloys decreased significant-

ly due to the influence of inventory adjust-

ments in the rare earth magnet industry.

As a result, the Electronics segment’s

sales decreased 1.0%, to ¥163,306 million.

However, operating income rose 6.8%, to

¥32,311 million, reflecting increased ship-

ment volumes of HD media.

Hard Disks

In the first half of 2012, the supply-demand

situation of HD media was tightened due to

the smooth recovery of the hard disk drive

(HDD) industry from the floods in Thailand in

the previous year. The shipment volume of

HD media, especially those of high density

2.5-inch 500GB HD media, increased from

the same period of the previous year as a

result of the production capacity expansion

carried out in the previous year.

In the second half of 2012, the shipment

volume of HD media was negatively affected

by the reduction of production by HDD man-

ufacturers, reflecting the sluggish demand

for PCs.

As a result, HD media’s sales and operat-

ing income in 2012 increased due to higher

shipment volumes.

Showa Denko HD Singapore Pte. Ltd.

Compound Semiconductors

Concerning compound semiconductors,

sales increased slightly due to higher ship-

ment volumes for LCD backlight applications,

notwithstanding the influence of production

adjustments in the electric appliance indus-

try. As a result, the operating income of com-

pound semiconductors increased.

Topics

In December 2012, SDK transferred its busi-

ness in gallium-nitride (GaN)-based blue LED

chips to its wholly owned subsidiary TS Opto

Co., Ltd., through a company split, and trans-

ferred 70% of its shares in TS Opto to Toyoda

Gosei Co., Ltd., thereby making TS Opto a

joint venture between SDK and Toyoda Gosei.

Through the joint venture, SDK will aim to

achieve synergistic effects in R&D, improving

brightness and production efficiency. In the

LED business other than the GaN LED chips,

SDK will continue its independent operations.

SDK decided to provide Kawauchi Village,

Fukushima Prefecture, with a new cultivation

method for LED-based plant growth facilities

for free. The village is building an LED-based

plant growth facility, and is planning to start

producing leaf lettuce and herbs by the end

of the first half of 2013. SDK will continue to

contribute toward ensuring a stable supply of

safe food and promoting agriculture through

the provision of LED chips that emit light with

optimized wavelengths for plant growth and

the innovative “Shigyo method” technology.

In January 2013, SDK’s LED-based light-

ing system for plant growth facilities was

awarded the Nikkei Business Daily Awards

for Superiority in the 2012 Nikkei Superior

Products and Service Awards.

Note: SDK has developed the new cultivation method jointly with Professor Masayoshi Shigyo, Faculty of Agriculture, Yamaguchi University. Compared with conventional LED-based plant growth facilities, the new method shortens shipment cycles and increases the amount of harvest through the irradiation of lights at optimized ratios for plant growth, using LED chips produced by SDK.

Cultivation of vegetables using LED light source

Kawauchi Village’s plant growth facility upon completion (Conceptu-al drawing provided by the village)

Rare Earths

Sales of rare earth magnetic alloys decreased

significantly due to a major reduction in the

shipment volumes and price reductions,

reflecting the inventory adjustments in the rare

earth magnet industry on the rebound of the

accelerated procurement of rare earth mag-

netic alloys as countermeasures against the

strong appreciation of raw material prices in

2011. As a result, the operating income of rare

earth magnetic alloys decreased significantly.

Showa Denko K.K. 15

Review of Operations

Inorganics



Sales 65,573 77,564 -11,991 -15.5%

Operating income 2,954 9,640 -6,687 -69.4%

Outlook

Although our U.S. subsidiary’s graphite elec-

trode sales increased due to higher selling

prices, sales of graphite electrodes on a

non-consolidated basis decreased due part-

ly to lower volumes of shipments to the

Asian market. As a result, overall sales of

graphite electrodes decreased. Sales of

ceramics decreased as shipment volumes

of cerium oxide for electronic material

applications fell sharply due to the slacken-

ing supply-demand situation.

Aluminum



Sales 92,206 124,280 -32,074 -25.8%

Operating income 1,581 6,212 -4,630 -74.5%

As a result, the Inorganics segment’s

sales decreased 15.5%, to ¥65,573 million,

and operating income decreased 69.4%, to

¥2,954 million, due mainly to lower operat-

ing income of cerium oxide.

Ceramics

Concerning the Ceramics business, sales

and operating income decreased due mainly

to a major reduction in the shipment vol-

umes of cerium oxide, reflecting the prog-

ress in our customers’ efforts to reduce the

consumption of cerium oxide as counter-

measures against the strong appreciation of

its prices, which was caused by the sub-

stantial appreciation of raw materials prices

in 2011.

Carbons

Concerning the graphite electrode business,

although our U.S. subsidiary’s sales

increased, sales on a non-consolidated

basis decreased due to stagnant demand of

the Asian electric furnace steel industry.

As a result, the operating income of our

Outlook

Sales of rolled products declined due to the

fall in shipment volumes of high-purity foils

for capacitors. Sales of extrusions/specialty

products decreased due to the fall in ship-

ment volumes of aluminum cylinders for

laser beam printers. Sales of heat exchang-

ers decreased significantly due to the trans-

fer of the automotive air-conditioner heat

exchanger business to Keihin Corporation in

January 2012. Sales of Shotic™ forged

products and aluminum cans were main-

tained at the previous year’s level.

As a result, the Aluminum segment’s sales

fell 25.8%, to ¥92,206 million, and operating

income fell 74.5%, to ¥1,581 million.

graphite electrode business was almost the

same as that of the previous year, though

the overall sales decreased.

Topics

In March 2013, SDK acquired 67% of shares

in Sinosteel Sichuan Carbon Co., Ltd., a whol-

ly owned subsidiary of Sinosteel Corporation,

of China, and made the company an SDK

subsidiary. This is in accordance with SDK’s

plan to expand operations in China and other

Asian countries to supply graphite electrodes

used in electric steel production. When

Sichuan Carbon’s 22,000t/y plant is added to

the existing facilities in Japan and the United

States, the Showa Denko Group’s total graph-

ite electrode production capacity will reach

127,000t/y. After capacity expansion in the

United States, the Group’s total capacity will

further increase to 157,000t/y in 2014. Thus,

SDK will establish itself as a leading global

supplier of graphite electrodes.

Rolled Products

Production of high-purity foils for capacitors

decreased significantly due to severe inven-

tory adjustments in the aluminum electro-

lytic capacitor industry.

Topics

As part of our plan to expand the capacitor-

grade, high-purity aluminum foil business,

SDK is now expanding the production

capacity of rolled foils at the Sakai Plant and

constructing a plant in China to finish rolled

foils. These measures will expand SDK’s

production capacity of capacitor-grade,

high-purity aluminum foils from currently

2,000t/month to 3,000t/month in 2013. In


OthersConsolidated Business Results (Millions of yen)


Sales 135,280 150,583 -15,303 -10.2%

Operating income 89 1,860 -1,772 -95.2%

Outlook

Sales of lithium-ion battery (LIB) materials

decreased slightly due to lower shipment

volumes for electric vehicle applications,

March 2012, SDK held a groundbreaking

ceremony for its subsidiary Showa Denko

Aluminum (Nantong) Co., Ltd., at a site in

Nantong, Jiangsu Province, China. The new

plant in China, scheduled for start-up in the

second half of 2013, will finish rolled foils

supplied from SDK’s Sakai Plant, and supply

final products to customers in China.

Aluminum electrolytic capacitors are used

widely in electric appliances and transport

machinery. Demand for aluminum electro-

lytic capacitors in China is expected to grow,

reflecting continued economic growth in that

country. With the establishment of the new

plant in China, SDK aims to meet the grow-

ing demand for capacitor-grade, high-purity

aluminum foils in a timely manner.

Extrusions/Specialty Products

In the first half of 2012, demand for extru-

sions from the automotive industry was

good. In the second half of 2012, however,

extrusions recorded lower shipment volumes

due to an economic slump. In addition, the

shipment volumes of aluminum cylinders for

laser beam printers decreased due to the

inventory adjustments in the laser beam

printer industry. As a result, sales and oper-

ating income of extrusions and specialty

products decreased.

Shotic

SDK has been producing and selling casted/

forged aluminum products (trade name:

Shotic™) on the world market, mainly for

use in automotive parts. We maintained high

shipment volumes in the Shotic business in

2012. As a result, sales and operating

income of the Shotic business were main-

tained at the previous year’s level.

Topics

SDK established an aluminum casting subsid-

iary Shotic Malaysia Sdn. Bhd. in the state of

Johor, Malaysia. The new subsidiary will start

commercial production by the end of 2014. In

addition to an integrated aluminum casting/

forging facility at Kitakata, Japan, SDK is oper-

ating one plant each in Portugal and Singapore

for producing forged aluminum parts. With the

scheduled construction of the new casting

plant in Malaysia, SDK aims to better meet

growing demand in the Asian market. By

securing casting capability at these two loca-

tions, SDK intends to ensure the security of

supply. SDK will expand the Shotic business as

a key component of its Aluminum segment.

Shotic™

Heat Exchangers

Sales of heat exchangers decreased signifi-

cantly due to the transfer of the automotive

air-conditioner heat exchanger business to

Keihin Corporation in January 2012. SDK

will continue to focus its efforts in its heat

exchanger business on expanding the sales

of direct cooling devices for power control

units in hybrid cars and heat exchangers for

electrical and industrial machinery applica-

tions.

Aluminum Cans

The scale of the aluminum cans market for

the domestic beverage industry as a whole

was maintained at the previous year’s level.

Shipment volumes of aluminum cans for the

domestic beer industry have been decreas-

ing continuously. However, the market of

nonalcoholic beer has been expanding very

rapidly, and total sales of beer and beerlike

beverages in 2012 were maintained at the

previous year’s level. In addition, the ship-

ment volumes of aluminum cans for soft

drinks increased. Reflecting these, SDK’s

sales of aluminum cans slightly increased,

and its operating income also slightly

increased due to cost reductions.

notwithstanding higher shipment volumes

for smartphone applications. Shoko Co.,

Ltd.’s sales decreased due partly to lower

shipment volumes of metals.

As a result, the Others segment’s sales

fell 10.2%, to ¥135,280 million. Operating

income fell 95.2%, to ¥89 million.

Showa Denko K.K. 17

Corporate Social Responsibility

Our Code of Conduct and Its Practical GuideIn 2012, we completely revised the “Code of

Conduct” for the Showa Denko Group

employees established in 1998 and the

“Guidelines” enacted in the following year,

put the new version out as “Our Code of

Conduct and Its Practical Guide,” and dis-

tributed the Japanese version of it to all

employees of SDK and its affiliated compa-

nies in Japan. We also translated it into

eight other languages corresponding to the

foreign countries and areas where SDK’s

overseas offices and overseas affiliated

companies are located, put them and the

Japanese version in one volume as the

“Global Version,” and distributed it to all

employees of relevant offices and overseas

affiliated companies in order to enable all

employees of the Group to act under com-

mon norms. We are having “Our Code of

Conduct and Its Practical Guide” penetrate

all employees of the Group through reading

sessions implemented during Corporate

Ethics Month, which we hold in January

every year. We are encouraging every

employee to consider how the Group can

support various manufacturing industries by

fully utilizing the Group’s competence cen-

tering on chemical technologies, and to con-

tribute to the sound growth of society.

Involvement in Community ActivitiesIn line with its Vision that stresses contribu-

tion to society through business activities,

the Group is addressing global environmen-

tal issues, such as the mitigation of climate

change and biodiversity efforts, as important

matters for management. The Group, there-

fore, is making strenuous efforts to reduce

GHG emissions and develop technologies

pertaining to the environment and energy. In

addition, fully utilizing their chemistry-relat-

ed resources, many of the Group’s operation

sites are contributing toward solving relevant

local communities’ issues, covering such

areas as education, regional development,

and welfare.

In particular, many of the Group’s opera-

tion sites in Japan and foreign countries are

helping the chemical/environmental educa-

tion of young people. Many sites constantly

provide classes on demand to elementary

schools in neighborhoods located near our

work sites. A considerable number of people

have participated in the guided tours to

observe the plastic containers recycling

plant in the Kawasaki Plant. The Head Office

participated in the “Summer Chemistry

Experiment Event for Children” sponsored by

the Japan Chemical Industry Association.

The Head Office also held chemistry educa-

tion programs for school teachers. As a

member of the chemical industry, which has

a substantial impact on the natural environ-

ment, we believe it is a part of our social

responsibility to communicate the impor-

tance of environmental protection and

chemical technologies to the younger gener-

ation who will lead the future, in addition to

reducing environmental impact resulting

from our business activities.

We also have positively taken part in

many Responsible Care (RC) Community

Dialogue Meetings organized by the Japan

Chemical Industry Association as part of its

RC activities, and exchange opinions proac-

tively with local residents and administrative

staff members.

In the area of regional welfare, the Group

is supporting local communities through the

recycling of aluminum cans. The Group

gives donations to welfare facilities, etc.,

based on the number of aluminum cans

recovered mainly by its employees. This alu-

minum can recycling activity has a more

than 40-year history.

For more information on our CSR activi-

ties, please visit our website:

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

Our Code of ConductAs officers and employees of the Showa Denko Group,1. We will act with integrity as a

responsible citizen of the interna-tional society.

2. We will provide our customers with satisfaction and safety.

3. We will develop corporate culture that helps every member of the Group to fully display his/her ability.

4. We will meet the expectations of local communities.

5. We will make vigorous efforts to maintain and improve the global environment.

Class on demand for making objects (Kitakata Plant)

Volunteers participating in a cleaning activity in Hirano district (As part of the RC Community Dialogue Meetings) (Tokuyama Plant)


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

Responsible Care Activities

Responsible Care is the chemical industry’s global voluntary initiative, representing a commitment to work together to continuously improve the health, safety, and environmental per-formance of chemicals over their entire life cycles, namely, their development, production, distribution, use, final con-sumption, and disposal. Showa Denko has been performing its Responsible Care activities since 1995, when it established action guide-lines to implement the program. The Showa Denko Group’s Responsi-ble Care activities are conducted within our 13 business divisions/departments, 15 operation sites, 3 branches, the Busi-ness Develop ment Center, and 14 subsid-iaries/affiliates, based on voluntary, specific action plans prepared in line with the CSR Committee’s basic plan. The following are some examples of our RC activities:

Energy ConservationWe are making our best efforts to conserve energy to contribute to the prevention of global warming and protect natural resourc-es. Due mainly to the substantial influence of production troubles, the effect of improve-ments of production facilities in 2010, on our rate of energy consumption per unit produc-tion in 2011, was very limited. Our rate of energy consumption per unit production in 2011, that was 91.4% of the 1990 figure, was almost the same as that of the previous year. We will continue promoting energy con-servation in a systematic manner. Moreover, approximately 20% of our total electricity requirements are now met by our hydroelec-tric power plants. We will continue to make the most of this clean source of energy.

Reduction of Greenhouse Gas EmissionsOur greenhouse gas (GHG) emissions in 2011 fell 20% from the base year (1990) figure. As for the commitment period (2008-2011), our GHG emissions fell 15% on the average. We are confident we will be able to achieve the goal of a 6% reduction from the 1990 figure within the time frame of 2008-2012 under the Kyoto Protocol. However, we are proceeding with further reduction efforts.

Contribution to a Recycling-based SocietyWe are committed to effectively using indus-trial waste and to reducing the volume of its

discharge. As a result, the final volume of landfill disposal in 2011 was reduced by 89% from the 1990 base level, due partly to inorganic sludge (in cement, for example). We will continue working to reduce industrial waste. A large number of employees within the Group are engaged in the recycling of aluminum cans. We are utilizing waste plas-tic as synthesis gas for ammonia production. Thus, we are making contributions toward a recycling-based society.

Development of Technologies and ProductsFully utilizing its core technologies, the Group is continuing to develop new products and technologies to contribute to sustainable growth of society. For example, we are accel-erating our development and marketing efforts in the business field of plant factories. The market size of plant factories is expected to increase because plant factories have many advantages, including realization of sta-ble food production not affected by weather and farming without insecticides due to their insect-damage-free environment. To stimu-late the market growth of plant factories, we have developed ultra-bright red LED chips that emit red light of optimum wavelength for accelerating the growth of plants, and are actively promoting equipment for plant facto-ries, including heat-insulating walls for clean rooms. On the other hand, our efforts to enhance environment-conscious manage-ment and business continuity management with disaster preparedness were highly rated by the Development Bank of Japan (DBJ), and we have been given the highest ratings in the DBJ’s Environmental Responsibility Ra t i ngs and Bus iness Con t i nu i t y Management Ratings.

Commitment to Chemical SafetyFollowing the enforcement of the EU’s new chemica l l eg is la t ion (Reg is t ra t ion , Evaluation, Authorization and Restriction of Chemicals, or REACH), we completed the registration of 10 substances in 2010. We are now making preparations for registration in 2013. We are also steadily addressing the EU’s rules of Clas sification, Labeling and Packaging (CLP).

Environment-related Investment

(Billions of yen)

0

40

20

30

10

50

’10 ’11’09’08’07’06’05’04’03’02’90Cumulative value since 1990(Showa Denko K.K.)

Energy Consumption Rate Transition

70

90

80

100

’10 ’11’09’08’07’06’05’04’03’02’90Relative value: base year 1990(Showa Denko K.K.)

Trends in the Final Volume of Landfill Disposal

(Tons/year)

0

10,000

15,000

5,000

20,000

’10 ’11’09’08’07’06’05’04’03’02’90

Base year 1990(Showa Denko K.K.)

Trends in Greenhouse Gas Emissions

(Emissions: Kt-CO2)

2,000

3,000

2,500

3,500

’08 –’12Group’starget

’10 ’11’09’08’07’90

Base year 1990(SDK and Consolidated Subsidiaries in Japan)

Note: On this page, the term “year” refers to the period from April 1 of the relevant year through March 31 of the next year, except the graph “Environment-related Investment.”

Showa Denko K.K. 19

Board of Directors (As of March 27, 2013)

From left to right: Akiyoshi Morita, Masaru Amano, Shunji Fukuda, Akira Koinuma, Kyohei Takahashi, Hideo Ichikawa, Yoshikazu Sakai, Hirokazu Iwasaki, and Tomofumi Akiyama

BOARD OF DIRECTORS

Representative Director, Chairman of the Board

Kyohei Takahashi

Representative Director, President

Hideo Ichikawa

Directors

Akira KoinumaYoshikazu SakaiShunji FukudaHirokazu IwasakiMasaru AmanoTomofumi Akiyama (Outside Director)

Akiyoshi Morita (Outside Director)

AUDITORS

Standing Statutory Auditors

Ichiro NomuraAkira Sakamoto

Auditors

Hiroyuki Tezuka (Outside Auditor)

Yukio Obara (Outside Auditor)

Kiyomi Saito (Outside Auditor)

CORPORATE OFFICERS AND SENIOR CORPORATE FELLOW

Chief Executive Officer

Hideo Ichikawa

Managing Corporate Officers

Takashi MiyazakiGeneral Manager, Petrochemicals Division and Olefins Department

Shunichi ShiraishiOfficer in charge of Aluminum Rolled Products, Aluminum Specialty Components, and Aluminum Can divisions

Akira KoinumaChief Technology Officer; Officer in charge of Production Technology, Energy & Electricity, SPS Innovation, and CSR departments, Chairman, Safety Measures Committee

Corporate Officers

Yoshikazu SakaiChief Financial Officer; Officer in charge of Finance & Accounting and Information Systems departments

Shunji FukudaOfficer in charge of Industrial Gases, Basic Chemicals, and Corporate Strategy departments

Hirokazu IwasakiOfficer in charge of complex and plants (Oita Complex and Kawasaki, Higashinagahara, Tokuyama, Isesaki, Tatsuno, Yokohama, Shiojiri, Chichibu, Omachi, Oyama, and Kitakata plants)

Yoshiharu MizunoOfficer in charge of Ceramics and Carbons divisions

Masaru AmanoChief Risk Management Officer; Officer in charge of Internal Audit, Legal & Intellectual Property, General Affairs & Human Resources, and Purchasing & SCM departments; Chairman, Security Export Control Committee

Robert C. WhittenPresident and CEO, Showa Denko Carbon, Inc.; Assistant to President in charge of special assignment matters (in charge of Global Marketing)

Tetsuo NakajoOfficer in charge of Corporate R&D Department; General Manager, Business Development Center

Yoshiyuki NishimuraOfficer in charge of Electronic Chemicals, Functional Chemicals, Electronics Materials divisions, and Advanced Battery Materials Department

Atsushi MizutaniGeneral Representative in China, General Manager, China Office, Corporate Strategy Department, President of Showa Denko (Shanghai) Co., Ltd.

Saburo MutoGeneral Manager, Finance & Accounting Department

Jiro IshikawaGeneral Manager, HD Division

Keiichi KamiguchiGeneral Manager, Corporate Strategy Department

Kanji TakasakiAssistant to President in charge of special assignment matters; Executive Vice President of Keihin Thermal Technology Co., Ltd.

Hitoshi TanakaGeneral Manager, Carbons Division

Tatsuharu AraiOita Complex Representative

Nobuhiko KawamuraGeneral Manager, Electronics Materials Division

Jun TanakaGeneral Manager, Advanced Battery Materials Department; President, Showa Denko Packaging Co., Ltd.

Kohei MorikawaGeneral Manager, Electronic Chemicals Division

Senior Corporate Fellow

Takashi NakayamaAssistant to President in charge of new business creation relating to chemicals


Corporate Governance

1. Basic concept regarding corporate governanceWe fully recognize the importance of corpo-

rate governance as a means to ensure the

soundness, effectiveness, and transparency

of management, and to earn the full trust

and confidence of the market and society,

thereby enhancing corporate value over the

long term. The Company is, therefore, taking

various measures to strengthen compliance

and management supervision, clarify man-

agement responsibility, ensure quick deci-

sion making and effective execution, and

improve disclosure. We also aim to strength-

en relations with our stakeholders, including

shareholders, customers, suppliers, citizens,

and employees. Based on the above, we

have clarified our mission in the form of the

Company vision stated below, working hard

to realize this vision.

VISIONWe at the Showa Denko Group will provide

products and services that are useful and

safe and exceed our customers’ expecta-

tions, thereby enhancing the value of the

Group, giving satisfaction to our sharehold-

ers, and contributing to the sound growth of

international society as a responsible corpo-

rate citizen.

2. Situation of the Company’s super vision and decision- making functionsWe have adopted the auditor system to

enhance the fairness and transparency of

management, ensuring efficient manage-

ment of the Company. To clearly separate

management supervision functions from

business execution functions, we have intro-

duced the corporate officer system. The top

management team, consisting of the Presi-

dent and corporate officers in charge of

respective operations, is working to increase

the speed of decision making and vitalize

operations. Meanwhile, the Company has

substantially reduced the number of direc-

tors. In addition, we have strengthened the

supervision functions by appointing outside

directors. At Board meetings held once or

twice a month, the Board decides the Com-

pany’s basic policy and decides, after full

deliberation, on matters provided for in the

Companies Act and the Company’s Articles

of Incorporation as well as important matters

for the execution of the Company’s opera-

tions, ensuring a speedy and vigorous deci-

sion-making process. We appoint directors

from the viewpoint of strengthening corpo-

rate governance, aiming to strengthen the

Board of Directors’ supervision functions

and ensure the propriety of the decision-

making process. We make sure that corpo-

rate officers whose duties are primarily

business execution will not concurrently

serve as directors, in principle. Furthermore,

we have abolished the system of officer

directors except for the Chairman and the

President, while strengthening the super-

vision by auditors (including outside auditors)

and mutual supervision among directors.

The term of office of directors has been

shortened to one year to ensure a quick

response to changes in the business envi-

ronment and to clarify management respon-

sibility of directors. At the Company’s

ordinary general meeting of shareholders

held on March 27, 2013, nine directors,

including two outside directors, were

appointed.

3. Situation of business execution The Management Committee, which meets

once a week in principle and is chaired

by the President, deliberates and decides on

matters to be referred to the Board of

Directors’ meetings and important matters

pertaining to overall management of the

Company. The decisions are made after

deliberations on two occasions. As for

investment plans, their risks are examined

by task teams before referral to the

Management Committee, and their progress

is monitored after authorization. The Compa-

ny’s medium-term business plans are decid-

ed not only by the Management Committee

but also by the participation of all corporate

officers. The Company considers that

responsible execution forms the basis of

corporate activities. The Company evaluates

performances of respective business seg-

ments to ensure the effective implementa-

tion of the performance-based evaluation

system. The Company has Security Export

Control and Safety Measures committees

under the CSR Committee chaired by the

President. The Company also has Responsi-

ble Care, Risk Management, Human Rights/

Corporate Ethics, and IR promotion councils.

These committees and councils investigate,

study, and deliberate on specific matters

important for the execution of businesses.

4. Situation of auditing functions The Company’s Board of Auditors consists of

five auditors, including three outside auditors.

The auditors attend the Board of Directors’

meetings and other important internal meet-

ings, offering opinions as necessary. They

audit the execution of operations through

such means as field investigations, hearing

sessions, and perusal of important docu-

ments, making proposals and providing

advice and recommendations to ensure the

sound management of the Company. They

are working to strengthen the consolidated

auditing system in cooperation with auditors

of major associated companies. We have

a department for internal audit reporting

directly to the President. The Internal Audit

Department invest igates the overal l

Showa Denko K.K. 21

Corporate Governance

execution of business, checking for accura-

cy, propriety, and efficiency. It also investi-

gates the management policies, business

plans, and their execution, checking for con-

sistency and soundness. The results of

internal auditing are reported to auditors to

ensure consistency with audits by auditors.

As for matters relating to the environment

and safety, respective divisions in charge

conduct Responsible Care audits. KPMG

AZSA LLC. conducts auditing of the Compa-

ny based on an auditing contract and an

annual plan agreed upon with auditors, and

provides audit results to auditors. The

accounting corporation and auditors

exchange information and views from time

to time to strengthen their cooperation.

5. Compliance and risk managementThe Company’s Board of Directors has

decided to strengthen compliance and pro-

mote risk management as key components

of its internal control system. The Board will

continue to work on these issues.

Compliance

The Company is working to strengthen com-

pliance through the Code of Conduct for its

employees and the Human Rights/Corporate

Ethics Promotion Council, which is under the

CSR Committee chaired by the President.

Every January, we observe Corporate Ethics

Month to renew our awareness. Further-

more, compliance is strengthened through

various seminars provided by staff sections

and activities organized by respective busi-

ness sectors. In the event of transgressions,

the Company takes measures to prevent

recurrence and takes disciplinary actions.

The performance evaluation of relevant sec-

tors is to reflect such transgressions. To pre-

vent a transgression or detect it early, we

have established an internal check system

and channels of communication for report-

ing the matter.

Risk management

The Management Committee examines

important matters from various angles. In

particular, investment plans are examined

carefully from such viewpoints as strategic

importance and risk management. Further-

more, their progress is monitored and their

results are reviewed. Respective business

sectors analyze and evaluate their own busi-

ness risks. The Risk Management Promotion

Council, which is chaired by the Company’s

Chief Risk Management Officer, is under the

CSR Committee chaired by the President.

The Risk Management Promotion Council

decides the Company’s basic risk manage-

ment policy, regularly evaluates overall risks,

works out measures regarding high-risk

matters, and checks how the measures are

implemented by relevant business sectors.

As to individual risks pertaining to envi-

ronmental protection, industrial safety,

disaster prevention, chemical substances,

product quality, intellectual property, fair

trade, export control, and legal matters, rele-

vant staff sections establish in-house rules

and manuals, provide seminars, and man-

age risks through the review and authoriza-

tion of proposals from business sectors. In

the event of an emergency, the Company

will set up crisis headquarters to take swift

action and minimize damage.

6. Reaction policy on large-scale purchases of the Company’s stock certificates, etc.The Company believes that its shareholders

should be determined through the free

movement of its shares in the market.

Although proposals regarding the large-

scale purchases of the Company’s shares

are made by specific persons, the decision

whether to sell the Company’s shares in

response to such a proposal shall eventually

be made based on the opinion of the share-

holders, which is reached after being given

the sufficient information necessary for

making an appropriate decision and suffi-

cient time for consideration.

However, the purposes of some large-

scale purchases do not contribute to the tar-

get company’s corporate value and the

common interests of shareholders, such as

those that a) obviously damage the corpo-

rate value and common interests of share-

holders or b) do not provide sufficient time

nor information for the target company’s

board of directors or shareholders to exam-

ine the conditions of the purchase. The

Company believes that, ideally, its share-

holders should make the decision as to

whether the large-scale purchases proposed

by a specific person or other entity secure

and enhance the Company’s corporate value

and the common interests of shareholders,

by obtaining necessary and sufficient infor-

mation from both the purchaser and the

Company’s Board of Directors.

The Company’s Board of Directors has

determined that it is necessary to continue

to have certain rules to prevent purchases

which do not contribute to enhancing the

Company’s corporate value and which are

contrary to the common interests of share-

holders. Therefore, the Company has

renewed its Reaction Policy on Large-scale

Purchases of the Company’s Stock

Certificates, which was approved and intro-

duced at the Company’s ordinary general

meeting of shareholders in March 2008, by

modifying a portion of its contents and

obtaining approval at the Company’s ordi-

nary general meeting of shareholders in

March 2011.


7. OtherRemuneration, etc., to directors, auditors, and auditing corporation (for the period from January

1 through December 31, 2012)

Remuneration, etc., to directors and auditors

Number of applicable persons Paid amount

Directors (excluding outside directors) 8 ¥308 million

Auditors (excluding outside auditors) 3 ¥61 million

Outside directors and auditors 6 ¥52 million

Total 17 ¥421 million

Note: The above remuneration figures do not include salaries to some of the directors they receive in the capacity of employees. The amount of such salaries totaled ¥15 million.

Remuneration to the auditing corporation

Paid amount

Name of accounting auditor: KPMG AZSA LLC. Remuneration for the issuance of auditing certification based on the audit contract

¥152 million

8. Personal/financial relations and interests between the Company and outside directors/auditorsThe Company has two outside directors and three outside auditors. None of them has special

interests in the Company. An outline of the Company’s corporate governance system is as

shown below.

Shareholders’ Meeting

Execution of Duty

JobAudits

Decision Making and SupervisionAuditing

Board of Auditors

Auditors

Top Management

President Corporate Officers in Charge

Accounting Audits

Links

InternalAudits

Business Divisions

Staff Sections

Security Export Control Committee

Safety Measures Committee

Human Rights/Corporate Ethics Promotion Council

Responsible Care Promotion Council

Risk Management Promotion Council

IR Promotion Council

Board of Directors

Management Committee

R&D Committee

CSR Committee

Internal Audit Department

AccountingAuditor

Showa Denko K.K. 23

Consolidated Six-Year Summary

Showa Denko K.K. and Consolidated SubsidiariesDecember 31 Millions of yen


2012 2011 2010 2009 2008 2007 2012

For the year

Net sales ..................................................... ¥739,811 ¥854,158 ¥797,189 ¥678,204 ¥1,003,876 ¥1,023,238 $ 8,544,825

Petrochemicals (Note 2) ........................... 190,939 250,396 199,590 235,999 400,173 395,105 2,205,353

Chemicals (Note 2) .................................. 127,376 130,203 133,578 91,887 93,319 84,709 1,471,192

Electronics (Note 2) .................................. 163,306 165,011 147,988 127,807 188,778 201,013 1,886,190

Inorganics (Note 2) .................................. 65,573 77,564 77,958 53,711 88,797 84,599 757,370

Aluminum (Note 2) ................................... 92,206 124,280 130,084 168,799 232,809 257,812 1,064,984

Others (Note 2) ........................................ 135,280 150,583 154,084 — — — 1,562,489

Adjustments (Note 2) ............................... (34,870) (43,879) (46,093) — — — (402,753)

Operating income (loss) ................................ 28,108 47,357 38,723 (4,983) 26,792 76,671 324,646

Net income (loss) ......................................... 9,368 16,980 12,706 (37,981) 2,451 33,066 108,196

R&D expenditures ........................................ 20,633 21,597 20,670 20,743 20,072 17,396 238,314

Capital expenditures .................................... 42,503 38,794 58,035 38,666 54,799 69,346 490,907

Depreciation and amortization (Note 2) .......... 46,232 49,413 50,678 54,358 60,439 49,761 533,975

At year-end

Total assets ................................................. 933,162 941,303 924,484 958,303 962,010 1,029,629 10,778,029

Total net assets ............................................ 314,966 295,745 284,965 286,722 265,459 298,659 3,637,863


Per share

Net income (loss)—primary (Note 3) ............. ¥ 6.26 ¥ 11.35 ¥ 8.49 ¥ (29.44) ¥ 1.96 ¥ 27.52 $0.07

Net income—fully diluted (Note 3) ................ — 11.20 — — — 26.50 —

Net assets ................................................... 182.24 168.33 161.47 163.11 192.85 222.31 2.10

Cash dividends (applicable to the period) ............................ 3.00 3.00 3.00 3.00 5.00 5.00 0.03

Number of employees at year-end ............... 9,890 11,542 11,597 11,564 11,756 11,329

Notes: 1. Yen amounts have been translated into U.S. dollars, for convenience only, at the rate of ¥86.58 to US$1.00, the approximate rate of exchange at December 31, 2012.2. Effective from the year ended December 31, 2011, the Companies have applied “Accounting Standard for Disclosures about Segments of an Enterprise and Related

Information” (Accounting Standards Board of Japan (ASBJ) Statement No. 17, issued on June 30, 2010) and “Guidance on the Accounting Standard for Disclosures about Segments of an Enterprise and Related Information” (ASBJ Guidance No. 20, issued on March 21, 2008). The segment information for the year ended December 31, 2010, which is restated under the accounting standard, is disclosed for comparison purposes.

3. Net income per share has been computed based on the average number of shares of common stock outstanding during the respective fiscal year. Fully diluted net income per share additionally assumes the conversion of the convertible bonds. Diluted net income per share for 2012 and 2010 was not disclosed because the Company had no securities with dilutive effects. Although the potential for stock dilution exists, diluted net income per share for 2009 was not disclosed because the Company posted a net loss. Diluted net income per share in 2008 was not disclosed because there was no dilutive stock at December 31, 2008.


Management’s Discussion and Analysis

Results of Operations

Consolidated net sales in 2012 totaled ¥739,811 million (US$8,545 mil-

lion), a decrease of ¥114,347 million, or 13.4%, from the previous year

due to lower sales in the Petrochemicals segment, which experienced

trouble with equipment in the first half of the year, and in the Aluminum

segment, which transferred the automotive air-conditioner heat exchang-

er business.

The cost of sales decreased ¥90,694 million, or 12.6%, to ¥628,628

million (US$7,261 million), reflecting the decrease in net sales.

Selling, general and administrative expenses decreased ¥4,403 mil-

lion, or 5.0%, to ¥83,076 million (US$960 million), due partly to the fall

in transportation expenses.

We recorded operating income of ¥28,108 million (US$325 million),

down ¥19,249 million, or 40.6%, due to the decrease in operating

income in all segments except Electronics.

R&D expenditures decreased ¥964 million, to ¥20,633 million

(US$238 million).

Information by Business Segment

A breakdown of net sales and operating income by business segment

is as follows.

PetrochemicalsProduction of ethylene and propylene decreased significantly from the

previous year due to the influence of the trouble with the ethylene plant

that occurred in the first half of 2012 as well as production cuts that

reflected the globally sluggish demand. Sales of olefins decreased owing

to significantly lower shipment volumes. Sales of organic chemicals also

decreased due to lower shipment volumes of vinyl acetate and ethyl

acetate.

As a result, the Petrochemicals segment’s sales decreased ¥59,456

million, or 23.7%, to ¥190,939 million (US$2,205 million). The segment

recorded an operating loss of ¥977 million (US$11 million), down

¥4,461 million from the previous year, reflecting the fall in shipment

volumes.

ChemicalsSales of functional polymers, industrial gases, and electronic chemicals

were maintained at the previous year’s level. Sales of basic chemicals

decreased despite higher liquefied ammonia sales, as acrylonitrile sales

declined due to production cuts, reflecting lower demand and the

stagnant market.

As a result, the Chemicals segment’s sales slipped ¥2,827 million,

or 2.2%, to ¥127,376 million (US$1,471 million). The segment recorded

an operating loss of ¥875 million (US$10 million), down ¥2,911 million

from the previous year.

ElectronicsSales of HD media increased due to the contribution of the capacity

expansion and the increase in shipment volumes of high-capacity media.

Sales of compound semiconductors increased slightly due to higher

shipment volumes for LCD backlight applications, notwithstanding the

influence of production adjustments in the electric appliance industry.

Meanwhile, sales of rare earth magnetic alloys decreased significantly

due to the influence of inventory adjustments in the rare earth magnet

industry.

As a result, the Electronics segment’s sales slipped ¥1,705 million,

or 1.0%, to ¥163,306 million (US$1,886 million). However, operating

income rose ¥2,069 million, or 6.8%, to ¥32,311 million (US$373 mil-

lion).

InorganicsAlthough our U.S. subsidiary’s graphite electrode sales increased due to

higher selling prices, sales of graphite electrodes on a non-consolidated

basis decreased due partly to lower volumes of shipments to the Asian

market. As a result, overall sales of graphite electrodes decreased. Sales

of ceramics decreased as shipment volumes of cerium oxide for electric

material applications fell sharply due to the slackening supply-demand

situation.

As a result, the Inorganics segment’s sales decreased ¥11,991 mil-

lion, or 15.5%, to ¥65,573 million (US$757 million), and operating

income decreased ¥6,687 million, or 69.4%, to ¥2,954 million

(US$34 million).

Net Sales by Segment Operating Income


201220112010200920080

200

400

600

800

1,000

1,200

20122011201020092008-10

0

20

10

30

40

50

�� Petrochemicals �� Chemicals �� Electronics �� Inorganics �� Aluminum �� Others

Note: Regarding changes in the segmentation, see note 2 on page 24. Showa Denko K.K. 25

Management’s Discussion and Analysis

Net Income Total Assets


20122011201020092008-40

0

5

10

15

20

201220112010200920080

600

700

800

900

1,000

AluminumSales of rolled products declined sharply due to the fall in shipment

volumes of high-purity foils for capacitors. Sales of extrusions/specialty

products decreased due to the fall in shipment volumes of aluminum

cylinders for laser beam printers. Sales of Shotic™ forged products and

aluminum cans were maintained at the previous year’s level. Sales of

heat exchangers decreased significantly due to the transfer of the auto-

motive air-conditioner heat exchanger business to Keihin Corporation

in January 2012.

As a result, the Aluminum segment’s sales fell ¥32,074 million, or

25.8%, to ¥92,206 million (US$1,065 million), and operating income fell

¥4,630 million, or 74.5%, to ¥1,581 million (US$18 million).

OthersSales of lithium-ion battery (LIB) materials decreased slightly due to

lower shipment volumes for electric vehicle applications, notwithstanding

higher shipment volumes for smartphone applications. Shoko Co., Ltd.’s

sales decreased due partly to lower shipment volumes of metals.

As a result, the Others segment’s sales fell ¥15,303 million, or

10.2%, to ¥135,280 million (US$1,562 million), and operating income

fell ¥1,772 million, or 95.2%, to ¥89 million (US$1 million).

Information by Geographic Area

Sales in JapanSales of the Petrochemicals segment decreased owing to the decrease

in shipment volumes due to the influence of the trouble with the ethylene

plant that occurred in the first half of 2012. Sales of the Chemicals seg-

ment declined due to the decrease in shipment volumes and the slug-

gish market that reflected the slackening supply-demand situation of

acrylonitrile. Sales of the Electronics segment decreased due to the

inventory adjustments in the rare earth magnet industry. Sales of the

Inorganics segment decreased due to a reduction in the shipment vol-

umes of ceramics. Sales of the Aluminum segment decreased due to the

transfer of the automotive air-conditioner heat exchanger business and

a reduction in the shipment volumes of high-purity foils for capacitors in

the rolled products business. Sales of the Others segment decreased

owing to the reduction in Shoko Co., Ltd.’s sales due partly to lower

shipment volumes of metals.

As a result, consolidated sales from operations in Japan decreased

¥78,357 million, or 14.0%, to ¥482,126 million (US$5,569 million).

Sales in Asia (Excluding Japan)Sales of the Petrochemicals segment decreased owing to the lower ship-

ment volumes of ethylene, etc., due to the slackening supply-demand

situation in the Asian market. Sales of the Electronics segment

decreased, though the shipment volume of HD media increased as a

result of the production capacity expansion carried out in the previous

year.

As a result, sales from operations in Asia (excluding Japan) decreased

¥23,530 million, or 9.7%, to ¥219,857 million (US$2,539 million).

Sales in the Rest of the WorldSales of the Aluminum segment decreased owing to the decline in

the shipment volumes of heat exchangers to automotive industries in

the United States and Europe due to the transfer of the automotive air-

conditioner heat exchanger business to Keihin Corporation. Sales of the

Inorganics segment increased due to our U.S. subsidiary’s increased

shipment volumes of graphite electrodes.

As a result, sales from operations in the rest of the world decreased

¥12,460 million, or 24.8%, to ¥37,827 million (US$437 million).

Other Income (Expenses) and Net Income

The gap between interest expenses and interest and dividends income

decreased ¥785 million, to expenses of ¥3,499 million (US$40 million),

as a result of a decrease in interest-bearing debt. We recorded equity

in earnings of unconsolidated subsidiaries and affiliates to which the

equity method is applied in the amount of ¥289 million (US$3 million),

down ¥761 million, due to lower profits at affiliates in synthetic resin-

related operations. Foreign exchange gains improved ¥599 million,

to ¥195 million (US$2 million).


We recorded a loss of ¥1,834 million (US$21 million), net, on sales

and retirement of noncurrent assets, deterioration of ¥435 million. We

also recorded a loss of ¥3,481 million (US$40 million) for the impair-

ment loss, a decrease of ¥1,146 million, due mainly to structural reform

in our carbon nanotube business, which produces vapor grown carbon

fiber (VGCF ™-X ) mainly used as additives for plastics. Loss on valuation

of investment securities increased ¥2,497 million, to ¥2,973 million

(US$34 million), due mainly to a valuation loss of our equity investment

in an aluminum smelting company in Venezuela. On the other hand, in

2012, we did not record an extraordinary loss related to the Great East

Japan Earthquake in March 2011, which amounted ¥3,207 million

(US$37 million) in 2011. Overall, the total of other income (expenses)

amounted to a loss of ¥16,820 million (US$194 million), an improve-

ment of ¥4,462 million.

As a result, the Company posted income before taxes and minority

interests of ¥11,288 million (US$130 million), down ¥14,787 million

from the previous year. After corporate income taxes, current, of ¥4,925

million (US$57 million), corporate income taxes, deferred, of ¥(4,674)

million (US$(54) million), and minority interests in income of ¥1,670 mil-

lion (US$19 million), the Company recorded net income of ¥9,368 mil-

lion (US$108 million), down ¥7,612 million over the previous year.

Financial Position

Total AssetsTotal assets decreased ¥8,141 million from the end of the previous year,

to ¥933,162 million (US$10,778 million). Cash and deposits decreased

¥3,581 million, to ¥51,606 million (US$596 million). Inventories

decreased ¥1,954 million, to ¥121,761 million (US$1,406 million),

reflecting the transfer of the automotive air-conditioner heat exchanger

business. Net property, plant and equipment decreased ¥9,111 million,

to ¥473,253 million (US$5,466 million), as the amount of capital invest-

ment was lower than that of depreciation expenses. Total investments

and other assets increased ¥8,073 million, to ¥117,682 million

(US$1,359 million), due partly to the rise in valuation on available-

for-sale securities.

LiabilitiesInterest-bearing debt decreased ¥5,046 million from the end of the pre-

vious year, to ¥342,262 million (US$3,953 million), as a result of contin-

ued debt reduction efforts. Total liabilities decreased ¥27,362 million, to

¥618,196 million (US$7,140 million), due partly to the fall in accounts

payable.

Net AssetsNet assets increased ¥19,221 million from the end of the previous year,

to ¥314,966 million (US$3,638 million), due partly to the posting of net

income and the increase in the foreign currency translation adjustment.

Capital ExpendituresCapital expenditures increased ¥3,709 million, to ¥42,503 million

(US$491 million), due partly to the production capacity expansion pro-

grams, one in our U.S. subsidiary in the graphite electrode business and

another in the business of SiC epitaxial wafers for power devices.

Cash FlowsNet cash provided by operating activities decreased ¥16,127 million

from the previous year, to ¥53,310 million (US$616 million), due partly

to a decrease in income before income taxes and minority interests. Net

cash used in investing activities increased ¥1,538 million, to ¥40,209

million (US$464 million), due partly to the increase in purchase of plant,

property and equipment. Cash flows from financing activities ended up in

net payment of ¥20,150 million (US$233 million), an increase of ¥2,854

million in payment, as a result of continued debt reduction efforts. As a

result, taking the effects of exchange rate fluctuations into account, cash

and cash equivalents at the end of 2012 decreased ¥3,772 million, to

¥51,254 million (US$592 million).

Total Net Assets Interest-Bearing Debt Cash Flows from Operating Activities

(Billions of yen) (Billions of yen) (Billions of yen)

201220112010200920080

100

200

300

400

201220112010200920080

300

350

400

201220112010200920080

20

40

60

80

Showa Denko K.K. 27

Consolidated Balance Sheets

Showa Denko K.K. and Consolidated SubsidiariesAt December 31, 2012 and 2011 Millions of yen


ASSETS 2012 2011 2012

Current assets Cash and deposits (Notes 2, 7 and 8) ............................................................................... ¥ 51,606 ¥ 55,187 $ 596,054 Notes and accounts receivable (Notes 8 and 11) ............................................................... 151,417 153,271 1,748,873 Allowance for doubtful accounts (Note 2) .......................................................................... (107) (186) (1,237) Inventories (Note 2) ......................................................................................................... 121,761 123,715 1,406,345 Deferred tax assets (Note 14) .......................................................................................... 5,733 3,177 66,215 Other current assets ....................................................................................................... 11,697 12,726 135,099

Total current assets ................................................................................................ 342,108 347,890 3,951,349

Property, plant and equipment (Notes 2 and 3) Land (Note 20) ............................................................................................................... 254,257 254,851 2,936,667 Buildings and structures .................................................................................................. 244,473 240,574 2,823,661 Machinery, equipment and vehicles .................................................................................. 695,024 701,150 8,027,533 Construction in progress ................................................................................................. 15,469 12,475 178,672

1,209,222 1,209,049 13,966,533 Less: Accumulated depreciation ....................................................................................... (735,970) (726,686) (8,500,459)

Net property, plant and equipment ........................................................................... 473,253 482,363 5,466,075

Investments and other assets Investment securities (Notes 2, 8, 9, and 12) .................................................................... 67,778 59,570 782,838 Long-term loans ............................................................................................................ 196 1,700 2,267 Deferred tax assets (Notes 2 and 14) ............................................................................... 27,494 27,533 317,556 Other ............................................................................................................................. 22,755 21,697 262,822 Allowance for doubtful accounts (Note 2) .......................................................................... (542) (891) (6,259)

Total investments and other assets ......................................................................... 117,682 109,609 1,359,224

Goodwill (Notes 2 and 25) ................................................................................................. 120 1,441 1,382

Total assets ........................................................................................................ ¥ 933,162 ¥ 941,303 $10,778,029

See notes to financial statements.


Millions of yenThousands of

U.S. dollars (Note 6)

LIABILITIES AND NET ASSETS 2012 2011 2012

Current liabilities Short-term debt (Notes 8 and 12) .......................................................................................... ¥ 88,741 ¥ 68,122 $ 1,024,957 Current portion of long-term debt (Notes 8 and 12) ................................................................. 46,623 79,414 538,495 Notes and accounts payable (Notes 8 and 11) ........................................................................ 151,372 163,165 1,748,353 Income taxes payable ............................................................................................................ 2,363 2,511 27,292 Provision for repairs (Note 2) ................................................................................................. 76 264 883 Provision for bonuses (Note 2) ............................................................................................... 2,225 2,257 25,696 Provision for business structure improvement (Note 2) ............................................................ — 65 — Provision for Niigata Minamata Disease (Note 2) ..................................................................... 964 437 11,133 Other current liabilities (Note 14) ........................................................................................... 30,754 33,611 355,204

Total current liabilities ................................................................................................... 323,118 349,846 3,732,013

Noncurrent liabilities Long-term debt less current portion (Notes 8 and 12) ............................................................. 206,898 199,772 2,389,673 Lease obligations (Notes 2 and 17) ........................................................................................ 11,253 14,394 129,974 Deferred tax liabilities (Note 14) ............................................................................................. 2,110 2,460 24,375 Provision for retirement benefits (Notes 2 and 13) ................................................................... 23,433 24,720 270,648 Provision for repairs (Note 2) ................................................................................................. 2,351 1,412 27,156 Provision for loss on the Great East Japan Earthquake (Note 2) ................................................ — 778 — Deferred tax liabilities for land revaluation (Note 20) ................................................................ 39,905 40,025 460,909 Other noncurrent liabilities (Note 12) ...................................................................................... 9,127 12,150 105,418

Total noncurrent liabilities .............................................................................................. 295,078 295,711 3,408,153

Contingent liabilities (Note 18)

Net assets (Note 19)Shareholders’ equity Capital stock Authorized, 3,300,000,000 shares Issued, 2012—1,497,112,926 shares .............................................................................. 140,564 — 1,623,510 Issued, 2011—1,497,112,926 shares .............................................................................. — 140,564 — Capital surplus...................................................................................................................... 62,222 62,222 718,661 Retained earnings ................................................................................................................. 53,172 48,851 614,137 Less: Treasury stock at cost, 2012—509,457 shares ............................................................. (145) — (1,674) Less: Treasury stock at cost, 2011—493,166 shares ............................................................. — (143) —

Total shareholders’ equity .............................................................................................. 255,812 251,494 2,954,634

Accumulated other comprehensive income Valuation difference on available-for-sale securities ................................................................ 924 (4,939) 10,672 Deferred gains or losses on hedges ....................................................................................... (305) (913) (3,526) Revaluation reserve for land (Note 20) .................................................................................... 28,025 28,240 323,692 Foreign currency translation adjustment (Note 2) .................................................................... (11,722) (21,955) (135,385)

Total accumulated other comprehensive income ............................................................. 16,922 433 195,452

Minority interests .................................................................................................................. 42,232 43,819 487,777

Total net assets ............................................................................................................ 314,966 295,745 3,637,863

Total liabilities and net assets .................................................................................... ¥933,162 ¥941,303 $10,778,029

Showa Denko K.K. 29

Consolidated Statements of Income

Showa Denko K.K. and Consolidated SubsidiariesFor the years ended December 31, 2012 and 2011 Millions of yen


2012 2011 2012

Net sales ................................................................................................................................ ¥739,811 ¥854,158 $8,544,825Cost of sales (Note 22) ............................................................................................................ 628,628 719,322 7,260,656

Gross profit .......................................................................................................................... 111,183 134,836 1,284,169Selling, general and administrative expenses (Notes 21 and 22) .......................................... 83,076 87,479 959,523

Operating income ................................................................................................................. 28,108 47,357 324,646

Other income (expenses) Interest and dividends income ............................................................................................... 1,105 1,048 12,768 Equity in earnings of unconsolidated subsidiaries and affiliates ................................................ 289 1,050 3,339 Gain on sales of investment securities, net ............................................................................. 145 180 1,680 Loss on valuation of investment securities .............................................................................. (2,973) (475) (34,333) Rent income on noncurrent assets ......................................................................................... 1,403 1,152 16,203 Gain (Loss) on sales of noncurrent assets, net ........................................................................ (89) 530 (1,031) Interest expenses .................................................................................................................. (4,604) (5,332) (53,180) Loss on retirement of noncurrent assets ................................................................................. (1,745) (1,929) (20,158) Impairment loss (Note 15) ..................................................................................................... (3,481) (4,627) (40,208) Subsidy income .................................................................................................................... 1,443 198 16,668 Costs for temporary suspension of production ........................................................................ (1,233) (762) (14,236) Provision for Niigata Minamata Disease (Note 2) ..................................................................... (964) (437) (11,133) Compensation income ........................................................................................................... 145 — 1,677 Reversal of provision for loss on the Great East Japan Earthquake ........................................... 237 — 2,737 Reversal of provision for retirement benefits ........................................................................... — 660 — Residual gain on invested assets ........................................................................................... — 250 — Loss on the Great East Japan Earthquake (Note 2) .................................................................. — (3,207) — Other, net ............................................................................................................................. (6,499) (9,578) (75,061)

Total................................................................................................................................. (16,820) (21,281) (194,268)

Income before income taxes and minority interests ........................................................... 11,288 26,076 130,378Income taxes (Notes 2 and 14)

Current ................................................................................................................................ 4,925 4,683 56,881 Deferred ............................................................................................................................... (4,674) 1,720 (53,986)Income before minority interests .......................................................................................... 11,037 19,672 127,482Minority interests in income ................................................................................................. 1,670 2,692 19,287

Net income ...................................................................................................................... ¥ 9,368 ¥ 16,980 $ 108,196


Per share amounts Net income—primary ........................................................................................................... ¥6.26 ¥11.35 $0.07 Net income—fully diluted ...................................................................................................... — 11.20 — Cash dividends (applicable to the period) ................................................................................ 3.00 3.00 0.03

Note: Net income per share has been computed based on the average number of shares of common stock outstanding during the respective fiscal year. Fully diluted net income per share additionally assumes the conversion of the convertible bonds. Diluted net income per share for 2012 was not disclosed because the Company had no securities with dilutive effects.



Consolidated Statements of Comprehensive Income



2012 2011 2012

Income before minority interests .............................................................................................. ¥11,037 ¥19,672 $127,482

Other comprehensive income:

Valuation difference on available-for-sale securities .................................................................... 5,928 (1,313) 68,464

Deferred gains or losses on hedges ........................................................................................... 596 (1,172) 6,888

Revaluation reserve for land ...................................................................................................... — 5,682 —

Foreign currency translation adjustments ................................................................................... 10,573 (5,399) 122,120

Share of other comprehensive income of unconsolidated subsidiaries and affiliates accounted for using equity method ....................................................................... 75 (24) 861

Total other comprehensive income ..................................................................................... 17,172 (2,226) 198,332

Comprehensive income ............................................................................................................. ¥28,209 ¥17,446 $325,815

Comprehensive income attributable to:

Owners of the parent ............................................................................................................ ¥26,072 ¥15,076 $301,129

Minority interests .................................................................................................................. 2,137 2,370 24,686


Showa Denko K.K. 31

Consolidated Statements of Changes in Net Assets

Showa Denko K.K. and Consolidated SubsidiariesFor the years ended December 31, 2012 and 2011

Thousands Millions of yen

Number of shares of

capital stockCapitalstock

Capitalsurplus

Retainedearnings

Treasurystock

Valuation difference on

available-for-sale

securities

Deferredgains orlosses

onhedges

Revaluationreservefor land

Foreigncurrency

translationadjustment

Minorityinterests

Totalnet

assets

Balance at December 31, 2010 ............. 1,497,113 ¥140,564 ¥62,223 ¥36,916 ¥(178) ¥(3,749) ¥ 269 ¥22,373 ¥(16,778) ¥43,325 ¥284,965

Dividends from surplus ......... — — — (4,490) — — — — — — (4,490) Net income .......................... — — — 16,980 — — — — — — 16,980 Purchase of treasury stock ... — — — — (3) — — — — — (3) Disposal of treasury stock .... — — (1) — 38 — — — — — 37 Decrease by increase of consolidated subsidiaries ... — — — (334) — — — — — — (334) Reversal of revaluation

reserve for land ................. — — — (222) — — — — — — (222) Other .................................. — — — 1 — — — — — — 1 Net changes of items other

than shareholders’ equity ... — — — — — (1,190) (1,182) 5,867 (5,176) 494 (1,188)

Balance at December 31, 2011 ............. 1,497,113 ¥140,564 ¥62,222 ¥48,851 ¥(143) ¥(4,939) ¥ (913) ¥28,240 ¥(21,955) ¥43,819 ¥295,745

Dividends from surplus ......... — — — (4,490) — — — — — — (4,490) Net income .......................... — — — 9,368 — — — — — — 9,368 Purchase of treasury stock ... — — — — (3) — — — — — (3) Disposal of treasury stock .... — — (1) — 1 — — — — — 0 Decrease by decrease of consolidated subsidiaries ... — — — (758) — — — — — — (758) Reversal of revaluation

reserve for land ................. — — — 214 — — — — — — 214 Other .................................. — — — (14) — — — — — — (14) Net changes of items other

than shareholders’ equity ... — — — — — 5,863 608 (214) 10,233 (1,587) 14,903Balance at December 31, 2012 ............. 1,497,113 ¥140,564 ¥62,222 ¥53,172 ¥(145) ¥ 924 ¥ (305) ¥28,025 ¥(11,722) ¥42,232 ¥314,966

Thousands Thousands of U.S. dollars (Note 6)

Number of shares of

capital stockCapitalstock

Capitalsurplus

Retainedearnings

Treasurystock

Valuation difference on

available-for-sale

securities

Deferredgains orlosses

onhedges

Revaluationreservefor land

Foreigncurrency

translationadjustment

Minorityinterests

Totalnet

assets

Balance at December 31, 2011 ............. 1,497,113 $1,623,510 $718,667 $564,235 $(1,651) $(57,050) $(10,544) $326,168 $(253,578) $506,106 $3,415,863

Dividends from surplus ......... — — — (51,858) — — — — — — (51,858) Net income .......................... — — — 108,196 — — — — — — 108,196 Purchase of treasury stock ... — — — — (34) — — — — — (34) Disposal of treasury stock .... — — (6) — 11 — — — — — 5 Decrease by decrease of consolidated subsidiaries ... — — — (8,750) — — — — — — (8,750) Reversal of revaluation

reserve for land ................. — — — 2,476 — — — — — — 2,476 Other .................................. — — — (163) — — — — — — (163) Net changes of items other

than shareholders’ equity ... — — — — — 67,722 7,018 (2,476) 118,194 (18,329) 172,128Balance at December 31, 2012 ............. 1,497,113 $1,623,510 $718,661 $614,137 $(1,674) $ 10,672 $ (3,526) $323,692 $(135,385) $487,777 $3,637,863



Consolidated Statements of Cash Flows



2012 2011 2012

Cash flows from operating activities Income before income taxes and minority interests ..................................................................... ¥11,288 ¥26,076 $130,378 Adjustments for: Depreciation and amortization ............................................................................................... 46,232 49,413 533,975 Impairment loss .................................................................................................................... 3,481 4,627 40,208 Amortization of goodwill ........................................................................................................ 1,195 1,200 13,803 Increase (Decrease) in provision for business structure improvement ....................................... (65) (2) (751) Increase (Decrease) in provision for retirement benefits ........................................................... (1,292) (1,558) (14,919) Interest and dividends income ............................................................................................... (1,105) (1,048) (12,768) Interest expenses ................................................................................................................. 4,604 5,332 53,180 Equity in (earnings) losses of unconsolidated subsidiaries and affiliates .................................... (289) (1,050) (3,339) Loss (Gain) on sales and valuation of investment securities ..................................................... 2,827 296 32,654 Loss on retirement of noncurrent assets................................................................................. 1,745 1,929 20,158 Loss (Gain) on sales of noncurrent assets ............................................................................... 89 (530) 1,031 Decrease (Increase) in notes and accounts receivable–trade ....................................................... 2,746 (4,829) 31,716 Decrease (Increase) in inventories .............................................................................................. 1,808 (23,904) 20,886 Increase (Decrease) in notes and accounts payable–trade ........................................................... (10,281) 3,486 (118,745) Other, net ................................................................................................................................. (1,005) 18,532 (11,604) Subtotal ........................................................................................................................... 61,979 77,969 715,862 Interest and dividends income received ...................................................................................... 1,767 2,144 20,409 Interest expenses paid .............................................................................................................. (4,736) (5,416) (54,706) Income taxes paid ..................................................................................................................... (5,700) (5,260) (65,836) Net cash provided by (used in) operating activities .......................................................... 53,310 69,437 615,729Cash flows from investing activities Proceeds from sales and redemption of securities ...................................................................... 2 2 27 Purchase of property, plant and equipment ................................................................................. (41,366) (32,627) (477,777) Proceeds from sales of property, plant and equipment ................................................................. 1,876 716 21,671 Proceeds from transfer of business ............................................................................................ 3,506 92 40,499 Purchase of investment securities .............................................................................................. (2,735) (5,782) (31,594) Proceeds from sales of investment securities.............................................................................. 255 411 2,947 Purchase of investments in subsidiaries ..................................................................................... (347) — (4,013) Net decrease (increase) in short-term loans receivable ................................................................ 639 (340) 7,385 Payments of long-term loans receivable ..................................................................................... (938) (1,903) (10,836) Collection of long-term loans receivable ..................................................................................... 243 2,137 2,807 Other, net ................................................................................................................................. (1,345) (1,378) (15,536) Net cash provided by (used in) investing activities ........................................................... (40,209) (38,672) (464,419)Cash flows from financing activities Increase (Decrease) in short-term debt, net ................................................................................ 20,417 (11,404) 235,820 Proceeds from long-term loans payable ..................................................................................... 43,500 61,099 502,426 Repayments of long-term loans payable ..................................................................................... (59,432) (59,959) (686,441) Proceeds from issuance of bonds .............................................................................................. 10,000 10,000 115,500 Redemption of bonds ................................................................................................................ (20,000) (3,000) (231,000) Cash dividends paid .................................................................................................................. (4,475) (4,471) (51,685) Cash dividends paid to minority shareholders ............................................................................. (2,014) (2,171) (23,261) Other, net ................................................................................................................................. (8,146) (7,389) (94,089) Net cash provided by (used in) financing activities .......................................................... (20,150) (17,295) (232,730)Effect of exchange rate changes on cash and cash equivalents ............................................ 3,264 (1,941) 37,694Net increase (decrease) in cash and cash equivalents ........................................................... (3,786) 11,529 (43,726)Cash and cash equivalents at beginning of the year ............................................................... 55,026 43,459 635,550Increase in cash and cash equivalents from newly consolidated subsidiary ........................ — 34 —Increase in cash and cash equivalents resulting from merger ............................................... 14 4 162Cash and cash equivalents at end of the year (Notes 2 and 7) .................................................. ¥51,254 ¥55,026 $591,986


Showa Denko K.K. 33

Notes to Financial Statements

Showa Denko K.K. and Consolidated Subsidiaries

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a) Principles of ConsolidationThe consolidated financial statements for the years ended December 31, 2012 and 2011 include the accounts of the Company and its 38 and 42, respectively, significant subsidiaries (collectively “the Companies”). For the purposes of the consolidated financial statements, all signifi-cant intercompany transactions, account balances and unrealized profits among the Companies are entirely eliminated and the portions thereof attributable to minority interests are credited or charged to minority interests. Accounts of subsidiaries whose business year-ends differ by more than three months from December 31 have been included using appro-priate interim financial information. In the initial consolidation, assets and liabilities of subsidiaries including those attributable to minority stockholders are recorded based on fair value in the accompanying consolidated financial statements. Goodwill, which is the difference between the acquisition cost and the underlying net assets at fair value at the date of acquisition, is amortized over a period not exceeding 20 years on a straight-line basis.

(b) Investments in Unconsolidated Subsidiaries and Affiliates The Company applied the equity method of accounting for investments in 2 unconsolidated subsidiaries in both 2012 and 2011, and 17 affili-ates in 2012 and 16 affiliates in 2011. All underlying intercompany profits obtained from transactions among the Companies and unconsolidated subsidiaries and affiliates to which the equity method is applied are eliminated in the consolidated financial statements.

(c) Translation of Foreign Currency AccountsAll receivables and payables denominated in foreign currencies at the balance sheet date are translated into Japanese yen at the current exchange rates. The resulting exchange gains or losses are credited or charged to income. The financial statements of certain consolidated subsidiaries of foreign nationality are translated into Japanese yen at the year-end rate for assets and liabilities, at historical rates for the other balance sheet accounts exclusive of the current year’s net income, and at the average annual rate for revenue and expense accounts and net income.

Translation adjustments resulting from the process of translating the financial statements of foreign subsidiaries into Japanese yen are accu-mulated and reported as a component of net assets on the consolidated balance sheet.

(d) Cash and Cash EquivalentsCash and cash equivalents in the consolidated statement of cash flows are composed of cash on hand, bank deposits available for withdrawal on demand and short-term investments with original maturities of three months or less and minor risk of value fluctuation.

(e) SecuritiesDebt securities that are intended to be held to maturity (“held-to-maturi-ty debt securities”) are stated at amortized cost on the balance sheet. Available-for-sale securities with available fair market values are stated at fair market values. Unrealized gains and unrealized losses on these available-for-sale securities are reported, net of applicable income taxes, as a separate component of the net assets. Realized gains or losses on sale of the available-for-sale securities are computed using primarily the moving-average cost. Available-for-sale securities with no available fair market values are stated primarily at moving-average cost.

(f) Allowance for Doubtful AccountsTo provide for losses from bad debts, the allowance is provided accord-ing to the actual rate of default for ordinary receivables and in view of the probability of recovery for specific doubtful receivables.

(g) InventoriesInventories are stated at the lower of cost or market, using principally the gross-average cost method. The carrying value on the consolidated balance sheets is stated by the devaluation method based on declines in profitability.

(h) Property, Plant and EquipmentProperty, plant and equipment is stated at cost, in principle. Depreciation of property, plant and equipment is computed principally by the straight-line method, but the declining- balance method is applied to certain fac-tories of the Company and some of the consolidated subsidiaries.

(i) Intangible AssetsThe Company and some of the consolidated subsidiaries principally apply the straight-line method over five years to amortize intangible assets.

(j) Leased AssetsLeased assets in finance lease transactions that do not transfer owner-ship to the lessee are depreciated using the straight-line method on the assumption that the useful life is equal to the lease term and the residual value is equal to zero. For leases with a residual value guarantee, the contracted residual value is considered to be the residual value for finan-cial accounting purposes.


Please note that finance lease transactions, other than those involving the transfer of ownership and which commenced on or before December 31, 2008, are accounted for by the same methods as for operating lease transactions.

(k) Provision for Business Structure ImprovementThe Company and some of the consolidated subsidiaries record the pro-vision for business structure improvement on an accrual basis to provide for expenses and losses resulting from their restructuring programs.

(l) Provision for BonusesA provision for bonuses is provided at an amount estimated based on the bonus to be paid subsequent to the balance sheet date.

(m) Provision for Retirement BenefitsA provision for retirement benefits is provided based on the projected benefit obligation and fair value of plan assets at the end of the year. Prior service costs are amortized on a straight-line basis over certain periods (mainly 12 years) within the average remaining service periods. The unrecognized actuarial gain or loss is amortized starting the year after such actuarial loss is determined on a straight-line basis over certain periods (mainly 12 years) within the average remaining service periods.

(n) Provision for RepairsThe Company and some of the consolidated subsidiaries provide a provision for repairs in an amount estimated to be necessary for the scheduled maintenance for certain production equipment.

(o) Provision for Niigata Minamata DiseaseTo provide for lump-sum payments pursuant to the Special Measures Law Regarding Relief to Persons Suffering from Minamata Disease and Regarding Solutions to the Minamata Disease Problem, the Company makes a provision in the expected amount of such payments.

(p) Provision for Loss on the Great East Japan EarthquakeThe Company provides a provision for loss on the Great East Japan Earthquake to cover the damages of the subsidiary devastated by the earthquake.

(q) Income TaxesIncome taxes consist of corporation, enterprise and inhabitants taxes. The provision for income taxes is computed based on the pretax income of each of the Company and its consolidated subsidiaries with certain adjust-ments required for consolidation and tax purposes. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. (Valuation allowances are recorded to reduce deferred tax assets based on the assessment of the realizability of the tax benefits.)

Application of the consolidated taxation systemThe Company and certain domestic consolidated subsidiaries have ap-plied for approval to adopt the consolidated taxation system from the year ending December 31, 2013. As of the current fiscal year, the Company and certain domestic consolidated subsidiaries have implemented accounting treatment and presentation based on the “Practical Solution

on Tentative Treatment of Tax Effect Accounting under the Consolidated Taxation System (Part 1)” (ASBJ Practical Issues Task Force No. 5, issued on March 18, 2011) and the “Practical Solution on Tentative Treatment of Tax Effect Accounting under the Consolidated Taxation System (Part 2)” (ASBJ Practical Issues Task Force No. 7 issued on June 30, 2010) under the assumption that it will apply a consolidated taxation system.

(r) Derivative Financial Instruments and Hedge AccountingThe Company and certain subsidiaries state all derivative financial instruments at fair value and recognize changes in fair value as gains or losses unless the derivative financial instruments are used for hedging purposes. If the derivative financial instruments meet certain hedging criteria, the Company and certain subsidiaries defer recognition of gains or loss-es resulting from changes in fair value of derivative financial instruments until the related gains or losses on hedged items are recognized. However, when forward exchange contracts meet certain hedging criteria, the hedged items are stated by the forward exchange contracts rate. If interest rate swap contracts meet certain hedging criteria, the net amount to be paid or received under the interest rate swap contracts is added to or deducted from interest on the assets or liabilities for which the interest rate swap contracts were executed. Hedge accounting is not applied at some of the foreign subsidiaries.

(s) Reclassifications Certain reclassifications have been made in the 2011 financial state-ments to conform to the presentation of 2012.

3. CHANGES IN ACCOUNTING POLICIESChanges in the Method of DepreciationThe Company and certain domestic consolidated subsidiaries, accompany-ing the revisions in the Corporation Tax Act of Japan, have changed their accounting methods for depreciation based on the revised Corporation Tax Act for tangible fixed assets acquired on or after April 1, 2012. Please note that the change in net income following these accounting changes was not material.

4. THE “ACCOUNTING STANDARD FOR RETIREMENT BENEFITS” (ACCOUNTING STANDARDS BOARD OF JAPAN STATEMENT NO. 26, ISSUED ON MAY 17, 2012) AND THE “GUIDANCE ON ACCOUNTING STANDARD FOR RETIREMENT BENEFITS” (ACCOUNTING STANDARDS BOARD OF JAPAN GUIDANCE NO. 25, ISSUED ON MAY 17, 2012)(a) OverviewRevisions apply mainly to the accounting treatments for unrecognized actuarial gains and losses as well as unrecognized prior service costs, the calculation methods for retirement benefit obligations as well as ser-vice costs, and broadening disclosure taking into consideration improve-ments to financial reporting and international trends.

(b) Scheduled Effective DateThe revised Accounting Standard and Guidance are scheduled to take effect from the end of each consolidated accounting period that com-mences after January 1, 2014. However, revisions to the calculation methods for retirement benefit obligations and service costs are sched-uled to take effect from the beginning of each consolidated accounting period that commences after January 1, 2015.

Showa Denko K.K. 35


(c) The Impact of the Adoption of the Revised Accounting Standard and GuidanceThe impact of the adoption of the revised accounting standard and guid-ance on consolidated financial statements are currently under evaluation.

5. SUPPLEMENTARY INFORMATIONAccounting changes and prior year error corrections that occurred after the beginning of the year ended December 31, 2012, have been treated in accord with the “Accounting Standard for Accounting Changes and Error Corrections” (ASBJ Statement No. 24, issued on December 4, 2009) and the “Guidance on the Accounting Standard for Accounting Changes and Error Corrections” (ASBJ Guidance No. 24, issued December 4, 2009).

6. JAPANESE YEN AND TRANSLATION INTO U.S. DOLLARSThe Companies’ accounting records are maintained in yen. Yen amounts included in the financial statements are rounded to the nearest one mil-lion unit. Therefore, the total and sub total amounts presented in the financial statements may not equal the exact sum of the individual bal-ances. The U.S. dollar amounts appearing in the accompanying financial statements and notes thereto represent the arithmetical results of trans-lating yen into U.S. dollars at the rate of ¥86.58 to US$1.00, the approx-imate rate of exchange at December 31, 2012. The inclusion of such U.S. dollar amounts is solely for the convenience of readers; it does not carry with it any implication that yen amounts have been or could be converted into U.S. dollars at that rate.

7. CASH FLOW STATEMENTS(a) Cash and deposits as of December 31, 2012 and 2011 on the consolidated balance sheets and cash equivalents at December 31, 2012 and 2011 on the con solidated statements of cash flows were reconciled as follows:

Millions of yenThousands of U.S. dollars

2012 2011 2012

Cash and deposits ............................................................................................................................................ ¥51,606 ¥55,187 $596,054Original maturities more than three months ........................................................................................................ (352) (161) (4,068)

Cash and cash equivalents ................................................................................................................................ ¥51,254 ¥55,026 $591,986

(b) Breakdown of the assets and liabilities that decreased during the fiscal year because of the business divestitureThe breakdown of assets and liabilities that decreased because the Company transferred the business of manufacturing its heat exchange components for use in automotive air conditioners business to Keihin Corporation is as follows: Current assets: ¥10,012 million ($115,639 thousand) Fixed assets: ¥ 3,385 million ($ 39,097 thousand) Total assets: ¥13,396 million ($154,724 thousand)

Current liabilities: ¥ 3,991 million ($ 46,096 thousand) Noncurrent liabilities: ¥ 17 million ($ 196 thousand) Total liabilities: ¥ 4,008 million ($ 46,292 thousand)

8. FINANCIAL INSTRUMENTS(a) Overview (1) Management policy relating to financial instruments The Companies finance necessary long-term funds by bank loans and bond issues following the capital investment plans and finance short-term operating funds by bank loans and commercial paper. Temporary excess funds are invested exclusively in financial instruments which have fixed returns and low risk of falling below par values. The Companies use derivative transactions to hedge the following risks and do not enter into derivative transactions for speculative purposes.

(2) Types of financial instruments and related risks Operating receivables, such as notes and accounts receivable, are exposed to credit risk. Foreign-currency-denominated accounts receiv-able incurred through exports are exposed to foreign currency fluctuation risk. However, the Companies hedge the risk by utilizing forward exchange contracts, currency options, and currency swaps based on internal rules that set out foreign currency risk management principles. Marketable securities and investment securities mainly consist of the stocks of partner companies to maintain and strengthen their business relationships and are exposed to market fluctuation risk. Operating payables, such as notes and accounts payable–trade and other, are due within one year. Foreign-currency-denominated accounts payable incurred through imports of raw materials are exposed to foreign currency fluctuation risk. The Companies hedge the risk by utilizing for-ward exchange contracts following internal rules that set out the foreign currency risk management principles. Short-term debt and commercial paper are mainly used to finance short-term operating funds, and long-term debts and bonds are mainly used to finance equipment funds. Since some of long-term debt is made up of variable interest rate loans, it is exposed to interest rate fluctuation risk. However, interest rate swaps are used for most loans to hedge the risk. The Companies utilize derivative transactions, such as forward exchange contracts, currency options, and currency swaps, to hedge the foreign currency fluctuation risk of operating receivables and payables denominated in foreign currencies and financing transactions denomi-nated in foreign currencies. Interest rate swaps are utilized to hedge the interest rate fluctuation risk, and aluminum forward transactions are utilized to hedge the market fluctuation risk.


(3) Risk management relating to financial instruments (i) Credit risk management (risk of default by the counterparties) The Company follows internal rules that set out accounts receivable management principles. The compliance department works with the sales division in each sector and monitors the customers’ credit condi-tions periodically and reviews the sales policy checking the sales volume and balances. The Company takes measures to obtain information on and minimize the credit risk that may arise due to the deterioration in the financial condition of their customers. Consolidated subsidiaries monitor their customers’ financial and credit conditions based on their internal rules. There is no material credit risk of held-to-maturity debt securities as they are limited to only highly rated securities. The Companies utilize derivative transactions only with creditworthy financial institutions and trading companies to minimize credit risk. The maximum credit risk as of December 31, 2012 is disclosed as the balance sheet amount of financial instruments exposed to credit risk.

(ii) Market risk management (risk of fluctuations in foreign currency and interest rates)

For operating receivables and payables and loans denominated in foreign currencies, the Company and certain consolidated subsidiaries utilize forward exchange contracts, currency options, and currency swaps to hedge some of the foreign currency fluctuation risk, which is categorized by currency and maturity date. The Company and certain consolidated subsidiaries utilize currency swaps to hedge the interest rate fluctuation risk of loans. For marketable securities and investment securities, the Companies regularly review the fair value and issuers’ financial conditions and review the Companies’ portfolio on an ongoing basis, except for held-to-maturity debt securities, according to market conditions and the business relationships with counterparties.

The Company has internal management rules that set out the approv-al authorities and procedures of the derivative transactions. The derivative transactions are carried out based on the appropriate approver set out in the internal rules. For currency-related derivative transactions, each division and the treasury department perform and manage transactions and report to the director in charge periodically. For interest-related derivative transactions, the treasury department performs and manages the transactions and reports to the director in charge periodically. For commodity-related derivative transactions, each division performs and manages the transactions and reports to the director in charge periodically. Consolidated subsidiaries perform and manage derivative transactions based on their internal management standards.

(iii) Liquidity risk management (risk of default on payment due dates)

The Company manages liquidity risk by requiring the treasury depart-ment to prepare and update cash plans, based on the schedule for cash inflows and disbursements in each division. In addition, the Company signs commitment line contracts and makes other arrangements with financial institutions to secure the necessary liquidity. Consolidated subsidiaries manage their liquidity risk through similar procedures.

(4) Supplemental explanation on fair value of financial instruments As well as the values being based on market prices, fair value of finan-cial instruments includes values which are reasonably calculated in case market prices do not exist. As the calculation of those values uses cer-tain assumptions, those values may vary in the case of different assump-tions being applied. Also, for the contract amount and others regarding derivative transactions described in Note 10. DERIVATIVE FINANCIAL INSTRUMENTS, the contract amount itself does not indicate market risk related to derivative transactions.

(b) Fair Value of Financial Instruments At December 31, book value, fair value and difference were as follows. The financial instruments whose fair value is extremely difficult to determine are not included below.

Year ended December 31, 2012 Millions of yen

Book value Fair value Difference

(1) Cash and deposits ................................................................................................................................... ¥ 51,606 ¥ 51,606 ¥ —(2) Notes and accounts receivable–trade ....................................................................................................... 138,189 138,189 —(3) Marketable securities and investment securities ........................................................................................ 34,372 34,372 (0)

Total assets ............................................................................................................................................. ¥224,168 ¥224,168 ¥ (0)

(1) Notes and accounts payable–trade........................................................................................................... ¥107,241 ¥107,241 ¥ —(2) Short-term debt ...................................................................................................................................... 63,741 63,741 —(3) Current portion of long-term debt ............................................................................................................. 46,623 46,805 182 (4) Commercial paper ................................................................................................................................... 25,000 25,000 —(5) Accounts payable–other .......................................................................................................................... 56,492 56,492 —(6) Bonds..................................................................................................................................................... 30,000 30,239 239 (7) Long-term debt ....................................................................................................................................... 176,898 178,667 1,769

Total liabilities .......................................................................................................................................... ¥505,995 ¥508,185 ¥2,190

Derivative transactions* ............................................................................................................................ ¥ (1,000) ¥ (1,000) ¥ —

Showa Denko K.K. 37




(1) Cash and deposits ................................................................................................................................... ¥ 55,187 ¥ 55,187 ¥ —

(2) Notes and accounts receivable–trade ....................................................................................................... 139,364 139,364 —

(3) Marketable securities and investment securities ........................................................................................ 30,102 30,102 (0)

Total assets ............................................................................................................................................. ¥224,653 ¥224,653 ¥ (0)

(1) Notes and accounts payable–trade........................................................................................................... ¥117,152 ¥117,152 ¥ —

(2) Short-term debt ...................................................................................................................................... 68,122 68,122 —

(3) Current portion of long-term debt ............................................................................................................. 59,414 59,670 257

(4) Current portion of bonds .......................................................................................................................... 20,000 20,158 158

(5) Accounts payable–other .......................................................................................................................... 58,704 58,704 —

(6) Bonds..................................................................................................................................................... 20,000 20,017 17

(7) Long-term debt ....................................................................................................................................... 179,772 181,255 1,483

Total liabilities .......................................................................................................................................... ¥523,164 ¥525,079 ¥1,915

Derivative transactions* ............................................................................................................................ ¥ (1,832) ¥ (1,832) ¥ —

Year ended December 31, 2012 Thousands of U.S. dollars


(1) Cash and deposits ................................................................................................................................... $ 596,054 $ 596,054 $ —(2) Notes and accounts receivable–trade ....................................................................................................... 1,596,089 1,596,089 —(3) Marketable securities and investment securities ........................................................................................ 396,998 396,998 (0)

Total assets ............................................................................................................................................. $2,589,141 $2,589,141 $ (0)

(1) Notes and accounts payable–trade........................................................................................................... $1,238,640 $1,238,640 $ —(2) Short-term debt ...................................................................................................................................... 736,207 736,207 —(3) Current portion of long-term debt ............................................................................................................. 538,495 540,600 2,105(4) Commercial paper ................................................................................................................................... 288,750 288,750 —(5) Accounts payable–other .......................................................................................................................... 652,479 652,479 —(6) Bonds..................................................................................................................................................... 346,500 349,261 2,760(7) Long-term debt ....................................................................................................................................... 2,043,173 2,063,605 20,432

Total liabilities .......................................................................................................................................... $5,844,244 $5,869,543 $25,298

Derivative transactions* ............................................................................................................................ $ (11,552) $ (11,552) $ —

* Derivative assets and liabilities are on a net basis.

Notes: 1. Valuation method for financial instruments and information on marketable securities and derivative transactions

• Assets

Cash and deposits and Notes and accounts receivable–trade

The book value is deemed to approximate the fair value since these are scheduled to be settled in a short period of time.

Marketable securities and investment securities

Fair value of these securities is based on the price on stock exchanges. Refer to Note 9. SECURITIES regarding the securities categorized by holding purposes.

• Liabilities

Notes and accounts payable–trade, Short-term debt, Commercial paper, and Accounts payable–other

The book value is deemed to approximate the fair value since these are scheduled to be settled in a short period of time.

Current portion of long-term debt and Long-term debt

The fair value is measured as the net present value of estimated cash flows by discounting the principal and interest value using the interest rate applied to the new loans. Part of the long-term loans

are variable rate loans, and they are subject to special treatment of interest rate swaps (refer to Note 10. DERIVATIVE FINANCIAL INSTRUMENTS); the fair value is measured as the net present value

of estimated cash flows by discounting the total amount of principal and interest processed as interest rate swaps using the interest rate applied to the new loans.

Current portion of bonds and Bonds

As for bonds with short maturities, the book value is deemed to approximate the fair value since these are scheduled to be settled in a short period of time. For others, fair value is based on the mar-

ket prices.

• Derivative transactions

Refer to Note 10. DERIVATIVE FINANCIAL INSTRUMENTS.


2. Financial instruments for which fair value is extremely difficult to determine


2012 2011 2012

Non-listed equity securities ..................................................................................................................... ¥33,408 ¥29,470 $385,863

These securities are not included in the above Marketable securities and investment securities, as there was no quoted market value, estimating the future cash flows is deemed to be practically

impossible and it is extremely difficult to determine the fair value.

3. The redemption schedule for financial assets and securities with maturities


Due in 1 year or less

Due after 1 year through 5 years

Due after 5 years through 10 years

Due after10 years

Cash and deposits ..................................................................................................... ¥ 51,606 ¥— ¥— ¥—Notes and accounts receivable–trade .......................................................................... 138,189 — — —Marketable securities and investment securities:

Held-to-maturity debt securities

Government and local bonds and others.............................................................. 2 0 — —

Total ............................................................................................................. ¥189,798 ¥ 0 ¥— ¥—





Due after10 years

Cash and deposits ..................................................................................................... ¥ 55,187 ¥— ¥— ¥—

Notes and accounts receivable–trade .......................................................................... 139,364 — — —

Marketable securities and investment securities:



Total ............................................................................................................. ¥194,553 ¥ 2 ¥— ¥—





Due after10 years

Cash and deposits ..................................................................................................... $ 596,054 $— $— $—Notes and accounts receivable–trade .......................................................................... 1,596,089 — — —Marketable securities and investment securities:



Total ............................................................................................................. $2,192,166 $ 0 $— $—

4. The scheduled maturities of bonds and long-term debt after December 31, 2012 and 2011

Refer to Note 12. SHORT-TERM DEBT AND LONG-TERM DEBT.

9. SECURITIES(a) Held-to-maturity debt securities



Held-to-maturity debt securities whose fair value exceeds their book value

Local government bonds ........................................................................................................................................ ¥— ¥— ¥—Held-to-maturity debt securities whose fair value does not exceed their book value

Local government bonds ........................................................................................................................................ 2 2 (0)

Total.................................................................................................................................................................. ¥ 2 ¥ 2 ¥ (0)

Showa Denko K.K. 39





Local government bonds ........................................................................................................................................ ¥— ¥— ¥—

Held-to-maturity debt securities whose fair value does not exceed their book value


Total.................................................................................................................................................................. ¥ 5 ¥ 5 ¥ (0)




Local government bonds ........................................................................................................................................ $— $— $—Held-to-maturity debt securities whose fair value does not exceed their book value


Total.................................................................................................................................................................. $26 $26 $ (0)

(b) Available-for-sale securities


Book value Acquisition cost Difference

Available-for-sale securities whose book value exceeds their acquisition cost

Equity securities ......................................................................................................................................... ¥21,984 ¥17,670 ¥4,314Available-for-sale securities whose book value is less than their acquisition cost

Equity securities ......................................................................................................................................... 12,386 13,365 (979)

Total....................................................................................................................................................... ¥34,370 ¥31,035 ¥3,335




Equity securities ......................................................................................................................................... ¥11,065 ¥ 8,346 ¥ 2,719

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

Equity securities ......................................................................................................................................... 19,032 25,736 (6,704)

Total....................................................................................................................................................... ¥30,097 ¥34,082 ¥(3,985)




Equity securities ......................................................................................................................................... $253,915 $204,089 $49,827Available-for-sale securities whose book value is less than their acquisition cost

Equity securities ......................................................................................................................................... 143,058 154,366 (11,307)

Total....................................................................................................................................................... $396,974 $358,455 $38,519


(c) The following tables summarize available-for-sale securities sold in the years ended December 31, 2012 and 2011:


Sales Gross gain Gross loss

Equity securities ......................................................................................................................................................... ¥255 ¥145 ¥—

Total ...................................................................................................................................................................... ¥255 ¥145 ¥—



Equity securities ......................................................................................................................................................... ¥338 ¥225 ¥(37)

Corporate bonds ........................................................................................................................................................ 71 — (13)

Total ...................................................................................................................................................................... ¥409 ¥225 ¥(49)



Equity securities ......................................................................................................................................................... $2,948 $1,680 $—

Total ...................................................................................................................................................................... $2,948 $1,680 $—

(d) Value of securities written off due to impairmentFor the years ended December 31, 2012 and 2011, the Companies recorded an impairment loss of ¥2,973 million (US$34,333 thousand) on available-for-sale securities and ¥289 million on available-for-sale securities with fair market values, respectively. Securities are deemed to be “substantially declined” when their fair values have declined 30% or more. When their fair values have declined 50% or more, the impairment losses are recorded on those securities. When their fair values have declined between 30% and 50%, the impairment losses are recorded on those securities unless such values are considered to be recoverable on an individual basis.

10. DERIVATIVE FINANCIAL INSTRUMENTS(a) Derivative Transactions to which Hedge Accounting Is not Applied

Millions of yen Thousands of U.S. dollars

2012 2011 2012

Contract amount

Contract amount

over 1 yearFair

valueValuation gain (loss)

Contract amount

Contract amount

over 1 yearFair


Contract amount

Contract amount

over 1 yearFair


(1) Currency related:Forward exchange contracts:

Selling

U.S. dollar ......................................... ¥1,907 ¥ — ¥(149) ¥(149) ¥1,256 ¥ — ¥ 1 ¥ 1 $22,022 $ — $(1,719) $(1,719) Buying

U.S. dollar ......................................... 53 — 4 4 259 — 2 2 613 — 43 43

Currency swaps:

Receipt Singapore dollar

Payment U.S. dollar ........................... — — — — — — — — — — — —

(2) Interest rate related:Interest rate swaps:

Receipt—variable rate/ Payment—fixed rate ............................ 8,429 6,404 (333) (333) 9,387 7,569 (326) (326) 97,361 73,970 (3,841) (3,841)

(3) Commodity related:Aluminum forward transactions:

Buying .................................................. 119 — (7) (7) 300 — (15) (15) 1,373 — (81) (81)

Note: Fair value calculation method: Fair values of forward exchange contracts are stated by the forward exchange rates. Fair values of currency and interest rate swaps are measured at the quoted price

obtained from the financial institutions. Fair values of aluminum forward transactions are stated by forward quotations of the London Metal Exchange.

Showa Denko K.K. 41


(b) Derivative Transactions to which Hedge Accounting Is Applied

Millions of yen Thousands of U.S. dollars

2012 2011 2012

Contract amount

Contract amount

over 1 yearFair

valueContract amount

Contract amount

over 1 yearFair

valueContract amount

Contract amount

over 1 yearFair

value

(1) Currency related:Principle method Forward exchange contracts:

Buying

U.S. dollar ............................................................ ¥ 7,615 ¥ 292 ¥ 274 ¥ 7,230 ¥ 508 ¥ (304) $ 87,948 $ 3,367 $ 3,169 Euro ..................................................................... 21 — 1 12 — (0) 242 — 8 Selling

U.S. dollar ............................................................ 23,432 — (1,292) 13,039 — 59 270,637 — (14,921) Euro ..................................................................... 1,685 — (135) 567 — 20 19,466 — (1,562)

Allocation methodForward exchange contracts:

Buying

U.S. dollar ............................................................ ¥ 5,075 ¥ — ¥ — ¥ 4,624 ¥ — ¥ — $ 58,618 $ — $ — Euro ..................................................................... — — — 4 — — — — — Selling

U.S. dollar ............................................................ 11,173 430 — 9,315 — — 129,043 4,971 — Euro ..................................................................... 2,008 — — 1,877 — — 23,188 — — Thai baht .............................................................. — — — 0 — — — — —

(2) Interest rate related:Special methodInterest rate swaps:

Receipt—variable rate/Payment—fixed rate .............. ¥117,909 ¥98,154 ¥ — ¥122,078 ¥93,509 ¥ — $1,361,847 $1,133,677 $ —

(3) Commodity related:Principle method Aluminum forward contracts:

Buying ..................................................................... ¥ 17,872 ¥11,918 ¥ 636 ¥ 19,897 ¥12,657 ¥(1,213) $ 206,420 $ 137,659 $ 7,341 Selling ...................................................................... 1,541 — 1 1,744 — (57) 17,795 — 15

Notes: 1. Main items hedged by forward exchange contracts are accounts payable for buying, accounts receivable for selling and long-term debt by interest rate swaps. Main items hedged by aluminum

forward transactions are aluminum metal transactions.

2. Fair value calculation method: Fair values of forward exchange contracts are stated by the forward exchange rates. Fair values of currency swaps are measured at the quoted price obtained from the

financial institutions. Fair values of aluminum forward transactions are stated by forward quotations of the London Metal Exchange.

3. Fair values of forward exchange contracts that meet allocation method criteria are reflected in the fair values of accounts receivable and accounts payable of their hedged items.

4. Fair values of interest rate swaps that meet special treatment criteria are reflected in the fair values of long-term debt of their hedged item.

11. EFFECT OF YEAR-END DATE ON FINANCIAL STATEMENTSThe year-end date of 2012, namely, December 31, 2012, was a bank holiday. Although notes receivable and payable maturing on this date were accord-ingly settled on January 4, 2013, the Companies accounted for those notes in their financial statements as if they had been settled on the maturity date. Notes outstanding at December 31, 2012 and 2011 dealt with in the above-mentioned manner were as follows:


2012 2011 2012

Notes receivable ...................................................................................................................................................... ¥1,754 ¥451 $20,264Notes payable .......................................................................................................................................................... 546 743 6,311


12. SHORT-TERM DEBT AND LONG-TERM DEBTAt December 31, 2012 and 2011, the short-term debt of the Companies consisted of the following:


2012 2011 2012

Bank loans at the average interest rate of 0.63% .............................................................................................. ¥63,741 ¥68,122 $ 736,207Commercial paper........................................................................................................................................... 25,000 — 288,750

Total ........................................................................................................................................................... ¥88,741 ¥68,122 $1,024,957

At December 31, 2012 and 2011, the long-term debt of the Companies consisted of the following:


2012 2011 2012

1.81% bonds due 2012 .............................................................................................................................. ¥ — ¥ 10,000 $ —1.49% bonds due 2012 .............................................................................................................................. — 10,000 —0.88% bonds due 2015 .............................................................................................................................. 10,000 10,000 115,5000.67% bonds due 2016 .............................................................................................................................. 10,000 10,000 115,5000.63% bonds due 2017 .............................................................................................................................. 10,000 — 115,500¥24,000,000,000 subordinated convertible bonds due 2014 ........................................................................ 24,000 24,000 277,200Loans principally from banks and insurance companies due 2012 to 2018 at the average interest rate of 0.92% ......................................................................................................... 223,521 239,186 2,581,667

277,521 303,186 3,205,368Elimination of intercompany transactions ...................................................................................................... (24,000) (24,000) (277,200)Less: Current portion ................................................................................................................................... (46,623) (79,414) (538,495)

Total ....................................................................................................................................................... ¥206,898 ¥199,772 $2,389,673

Note: Information on bonds with stock acquisition rights is as follows:

Bonds ¥24,000,000,000 subordinated convertible bonds due 2014

Kind of stock The Company’s common stock

Issue price of rights (¥) No cost

Issue price (¥) ¥291 per share

Total amount of issue (¥) ¥24,000,000,000

Total amount of stock acquisition rights exercised (¥) —

Percentage of stock acquisition rights granted (%) 100

Exercisable period October 15, 2009 to October 21, 2014

Note: When stock acquisition rights are exercised, the corresponding bonds with such acquisition rights are all invested. The prices of such bonds are deemed to be their face value. The initial conversion price

was ¥291.

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

Years ending December 31


2014.................................................................................................................................................................................. ¥ 41,279 $ 476,7722015.................................................................................................................................................................................. 78,613 907,9782016.................................................................................................................................................................................. 51,965 600,1952017.................................................................................................................................................................................. 30,441 351,5992018 and thereafter ............................................................................................................................................................ 4,600 53,130

Total ............................................................................................................................................................................... ¥206,898 $2,389,673

Showa Denko K.K. 43


At December 31, 2012 and 2011, the following assets were pledged as collateral for long-term debt:


2012 2011 2012

Assets pledged as collateral

Investment securities .............................................................................................................................. ¥ 2,914 ¥ 2,925 $ 33,657 Property, plant and equipment, less accumulated depreciation ................................................................... 156,948 167,870 1,812,756

Total................................................................................................................................................... ¥159,862 ¥170,796 $1,846,413

Secured short-term debt and long-term debt

Long-term debt (includes due within 1 year) ............................................................................................. ¥ 154 ¥ 738 $ 1,779 Other debt .............................................................................................................................................. 487 676 5,625

Total................................................................................................................................................... ¥ 641 ¥ 1,414 $ 7,404

13. PROVISION FOR RETIREMENT BENEFITS(a) The plans’ funded status and amount recognized on the accompanying consolidated balance sheets as of December 31, 2012 and 2011 were as follows:


2012 2011 2012

Benefit obligation at the end of year ............................................................................................................. ¥(87,369) ¥(92,003) $(1,009,116)Fair value of plan assets at the end of year ................................................................................................... 54,896 52,426 634,051

Funded status ............................................................................................................................................. (32,473) (39,577) (375,066)Unrecognized actuarial loss ......................................................................................................................... 11,514 18,091 132,990Unrecognized prior service cost ................................................................................................................... (2,272) (3,024) (26,245)

Net amount recognized ........................................................................................................................... (23,231) (24,510) (268,321)Prepaid pension expense ............................................................................................................................. 202 210 2,327

Provision for retirement benefits .............................................................................................................. ¥(23,433) ¥(24,720) $ (270,651)

(b) The components of net retirement benefit costs for the years ended December 31, 2012 and 2011 were as follows:


2012 2011 2012

Service cost .......................................................................................................................................................... ¥2,263 ¥2,350 $26,138Interest cost ......................................................................................................................................................... 1,830 2,019 21,135Expected return on plan assets .............................................................................................................................. (1,012) (1,106) (11,684)Recognized actuarial loss ...................................................................................................................................... 3,807 4,041 43,972Prior service cost .................................................................................................................................................. (752) (778) (8,684)

Net periodic cost ............................................................................................................................................... 6,137 6,527 70,882

Cost for defined contribution plan ........................................................................................................................... 414 191 4,781

Total............................................................................................................................................................. ¥6,550 ¥6,718 $75,657

(c) The assumptions and basis as of December 31, 2012 and 2011 were as follows:

2012 2011

Discount rate ....................................................................................................................................................... Mainly 2.0% Mainly 2.0%

Expected rate of return on plan assets ................................................................................................................... Mainly 2.0% Mainly 2.0%

Amortization period for actuarial loss ..................................................................................................................... Mainly 12 years Mainly 12 years

Amortization period for prior service cost ............................................................................................................... Mainly 12 years Mainly 12 years


14. INCOME TAXES(a) At December 31, 2012 and 2011, significant components of deferred tax assets and liabilities were as follows:


2012 2011 2012

Deferred tax assets

Tax loss carryforwards ................................................................................................................................... ¥26,466 ¥21,883 $305,685 Provision for retirement benefits .................................................................................................................... 8,400 8,869 97,025 Write-down of marketable and investment securities ....................................................................................... 8,048 6,782 92,951 Impairment loss ............................................................................................................................................ 4,994 6,255 57,684 Loss on valuation of inventories ..................................................................................................................... 1,183 1,051 13,661 Depreciation and amortization ....................................................................................................................... 1,095 1,769 12,647 Unrealized earnings from the sale of fixed assets ............................................................................................ 997 1,076 11,518 Allowance for doubtful accounts .................................................................................................................... 920 700 10,620 Provision for repairs ...................................................................................................................................... 856 616 9,889 Write-down of golf club membership .............................................................................................................. 715 578 8,261 Provision for bonuses .................................................................................................................................... 644 754 7,443 Undetermined accrued liabilities .................................................................................................................... 313 2,319 3,611 Deferred gains or losses on hedges ............................................................................................................... 212 606 2,452 Other ........................................................................................................................................................... 2,739 2,136 31,632

Subtotal of deferred tax assets ...................................................................................................................... 57,583 55,394 665,079 Valuation allowance ...................................................................................................................................... (17,759) (18,180) (205,119)

Total deferred tax assets ................................................................................................................................ 39,823 37,214 459,960

Deferred tax liabilities

Amount of revaluation from the book value ..................................................................................................... (4,343) (4,343) (50,161) Foreign subsidiaries’ undistributed retained earnings ...................................................................................... (1,563) (2,102) (18,053) Valuation difference on available-for-sale securities ........................................................................................ (1,179) — (13,617) Special depreciation reserve .......................................................................................................................... (821) (1,150) (9,477) Reserve for advanced depreciation of fixed assets .......................................................................................... (483) (423) (5,581) Other ........................................................................................................................................................... (413) (959) (4,767)

Total deferred tax liabilities ............................................................................................................................ (8,801) (8,977) (101,655)

Allowance for doubtful accounts ........................................................................................................................ ¥31,022 ¥28,237 $358,304

(b) The net deferred tax assets at December 31, 2012 and 2011 were included in the consolidated balance sheets as follows:


2012 2011 2012

Deferred tax assets—current ............................................................................................................................ ¥ 5,733 ¥ 3,177 $ 66,215Deferred tax assets—noncurrent ....................................................................................................................... 27,494 27,533 317,556Other current liabilities ...................................................................................................................................... (94) (14) (1,091)Deferred tax liabilities—noncurrent .................................................................................................................... (2,110) (2,460) (24,375)

Showa Denko K.K. 45


(c) Significant items in the reconciliation of the normal income tax rate to the effective rate at December 31, 2012 and 2011 were as follows:

2012 2011

Normal income tax rate in Japan ......................................................................................................................................................... 40.7% 40.7%

Differences of statutory tax rate in subsidiaries .................................................................................................................................... (42.4) (19.9)

Deferred taxes on undistributed earnings of foreign subsidiaries ........................................................................................................... (5.5) 2.7

Unrealized earnings from the sale of fixed assets ................................................................................................................................. (4.6) (1.8)

Effect on the reexamination of recoverability ........................................................................................................................................ 5.9 (6.3)

Effects of changes in the effective statutory tax rate ............................................................................................................................. 3.9 8.2

Amortization of goodwill ..................................................................................................................................................................... 3.7 1.9

Other ................................................................................................................................................................................................ 0.5 (0.8)

Effective tax rate ............................................................................................................................................................................ 2.2% 24.6%

15. IMPAIRMENT LOSS At December 31, 2012, major losses on impairment of fixed assets were as follows:

Location Major use Asset category Millions of yenThousands of U.S. dollars

Aizuwakamatsu City, Fukushima Prefecture Idle assets Machinery and equipment, etc. ¥ 178 $ 2,055Ichihara City, Chiba Prefecture Idle assets Machinery and equipment 393 4,540Yokohama City, Kanagawa Prefecture Production facilities Machinery and equipment, etc. 709 8,187Oita City, Oita Prefecture Production facilities Machinery and equipment, etc. 1,696 19,591Guangdong, China Rent facilities Machinery and equipment 284 3,285Other ......................................................................................................................................................................................... 221 2,551

Total ....................................................................................................................................................................................... ¥3,481 $40,208


16. OTHER COMPREHENSIVE INCOME Reclassification adjustments and tax effects for components of other comprehensive income for the year ended December 31, 2012 are as follows:

Year ended December 31, 2012


Valuation difference on available-for-sale securities

Increase during the year ..................................................................................................................................................... ¥ 4,459 $ 51,496 Reclassification adjustments ............................................................................................................................................... 2,825 32,626

Amount before income tax effect ........................................................................................................................................ 7,283 84,122 Income tax effect ............................................................................................................................................................... (1,356) (15,659)

Total.............................................................................................................................................................................. 5,928 68,464

Deferred gains or losses on hedges

Decrease during the year ................................................................................................................................................... (723) (8,355) Reclassification adjustments ............................................................................................................................................... 341 3,943 Adjustments of acquisition cost of assets ............................................................................................................................ 1,361 15,718

Amount before income tax effect ........................................................................................................................................ 979 11,307 Income tax effect ............................................................................................................................................................... (383) (4,418)

Total.............................................................................................................................................................................. 596 6,888

Foreign currency translation adjustments

Increase during the year ..................................................................................................................................................... 10,101 116,666 Reclassification adjustments ............................................................................................................................................... 472 5,454

Amount before income tax effect ........................................................................................................................................ 10,573 122,120 Income tax effect ............................................................................................................................................................... — —

Total.............................................................................................................................................................................. 10,573 122,120

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

Increase during the year ..................................................................................................................................................... 74 852 Reclassification adjustments ............................................................................................................................................... 1 9

Total.............................................................................................................................................................................. 75 861

Total other comprehensive income .............................................................................................................................. ¥17,172 $198,332

17. INFORMATION FOR CERTAIN LEASES(a) Finance Leases as a LesseeFinance lease transactions other than those involving transfer of ownership to the lessee

(1) Type of leased assetsa) Tangible fixed assets: Principally equipment for manufacturing hard discs and steam-powered electric generation equipment (machinery and equipment)b) Intangible fixed assets: Software

Showa Denko K.K. 47


(2) Method of depreciation: The depreciation method of leased assets is described in the sub-section “2. (j) Leased Assets” within the sec-tion “Summary of Significant Accounting Policies.”

Please note that finance lease transactions, other than those involving the transfer of ownership and which commenced on or before December 31, 2008, are accounted for in the same manner as operating lease transactions. The content of such transactions is as follows: At December 31, 2012 and 2011, assets leased under non-capitalized financial leases were as follows:


2012 2011 2012

Machinery and equipment ..................................................................................................................................... ¥6,228 ¥8,883 $71,933Other ................................................................................................................................................................... 27 65 312Less: Accumulated depreciation and amortization ................................................................................................... (4,910) (6,602) (56,705)Less: Accumulated impairment loss ....................................................................................................................... — — —

Total ................................................................................................................................................................. ¥1,345 ¥2,346 $15,540

At December 31, 2012 and 2011, future minimum lease payments for the remaining lease periods were as follows:


2012 2011 2012

Due within one year .............................................................................................................................................. ¥ 596 ¥ 946 $ 6,886Due over one year ................................................................................................................................................. 749 1,400 8,654

Total ................................................................................................................................................................. ¥1,345 ¥2,346 $15,540

At December 31, 2012 and 2011, paid lease fees and equivalent depreciation expense amounts were as follows:


2012 2011 2012

Paid lease fees ........................................................................................................................................................ ¥938 ¥1,458 $10,830Amortization expense fees ........................................................................................................................................ — 34 —Equivalent depreciation expense fees ........................................................................................................................ 938 1,458 10,830

Note: Equivalent depreciation expense amounts are calculated using the straight-line method, with the lease period as the useful life and zero (0) as the residual value.

(b) Operating Leases as a LesseeAt December 31, 2012 and 2011, assets leased under non-capitalized operating leases were as follows: Future minimum lease payments for the remaining lease periods:


2012 2011 2012

Due within one year .............................................................................................................................................. ¥ 359 ¥ 364 $ 4,150Due over one year ................................................................................................................................................. 1,726 1,663 19,933

Total ................................................................................................................................................................. ¥2,085 ¥2,027 $24,083

(c) Operating Leases as a LessorAt December 31, 2012 and 2011, noncancellable operating lease receivables for the remaining lease periods were as follows: Future minimum lease receivables for the remaining lease periods:


2012 2011 2012

Due within one year .............................................................................................................................................. ¥ 104 ¥ 152 $ 1,205Due over one year ................................................................................................................................................. 1,053 1,760 12,157

Total ................................................................................................................................................................. ¥1,157 ¥1,912 $13,362


18. CONTINGENT LIABILITIESAt December 31, 2012 and 2011, the Companies were guarantors for the borrowings below. The guarantees were principally for unconsolidated subsid-iaries, affiliates and others.


2012 2011 2012

Guarantees ........................................................................................................................................................... ¥6,652 ¥2,346 $76,835

As the amounts include joint and several guarantors’ portions as well as the Companies’, the actual amounts that the Companies were contingently liable to pay were smaller than the above.

19. NET ASSETSThe Corporation Law of Japan (the “Law”) provides that the entire amount paid for new shares may be credited to the stated capital, with the provision that, by resolution of the Board of Directors, up to one-half of such amount paid for new shares may be credited to additional paid-in capital, which is included in capital surplus. The Law provides that an amount equal to 10% of cash appropriations of retained earnings shall be set aside as additional paid-in capital or a legal earnings reserve until the total of such reserve and additional paid-in capital equals 25% of the stated capital. Additional paid-in capital and the legal earnings reserve may be used to eliminate or reduce a deficit, if any, or be capitalized by resolution at the Ordinary General Meeting of Shareholders. All additional paid-in capital and the legal earnings reserve may be transferred to other capital surplus and retained earnings, respectively, which are poten-tially available for dividends. Additional paid-in capital and the legal earnings reserve are included in capital surplus and retained earnings, respectively. The Law does not have a definition about the classification of paid-in capital between common stock and preferred stock. Accordingly, the Company states its capital in the total amount paid by issuing common stock and preferred stock. The maximum amount that the Company can distribute as dividends is calculated based on the unconsolidated financial statements of the Company in accordance with Japanese laws and regulations.

20. REVALUATION RESERVE FOR LANDThe Company and some of its consolidated subsidiaries revalued the land they own for business in accordance with the Law con cerning Revaluation of Land. The difference between the revalued amount and the book value, after the deduction of applicable tax, is stated as a land revaluation reserve. The revaluation was conducted using methods stipulated in the ordinance for enforcement of the law, specifically, the method in Item 4 of Article 2 (Reasonable Adjustment of the Appraised Value Relating to Land Price Tax), and the method in Item 5 of Article 2 (Estimation by Experts). The excess of the carrying amount of the revalued land over the market value at December 31, 2012 was ¥70,678 million (US$816,332 thousand).

21. SELLING, GENERAL AND ADMINISTRATIVE EXPENSESSelling, general and administrative expenses for the years ended December 31, 2012 and 2011 were summarized as follows:


2012 2011 2012

Freight ............................................................................................................................................................. ¥18,033 ¥19,035 $208,278Employees’ compensation ................................................................................................................................. 19,988 20,550 230,859Other ............................................................................................................................................................... 45,055 47,894 520,386

Total ............................................................................................................................................................. ¥83,076 ¥87,479 $959,523

Research and development expenses included in this summary for the years ended December 31, 2012 and 2011 were ¥20,451 million (US$236,208 thousand) and ¥21,495 million, respectively.

22. RESEARCH AND DEVELOPMENTResearch and development costs included in manufacturing costs, general and administrative expenses for the years ended December 31, 2012 and 2011 were ¥20,633 million (US$238,314 thousand) and ¥21,597 million, respectively.

Showa Denko K.K. 49


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


Petrochemicals Chemicals Electronics Inorganics Aluminum Others Total Adjustments Consolidated

SalesOutside customers .................................. ¥185,434 ¥118,504 ¥161,125 ¥ 57,191 ¥ 87,960 ¥129,597 ¥739,811 ¥ — ¥739,811Inter-segment ......................................... 5,506 8,872 2,181 8,382 4,246 5,684 34,870 (34,870) —

Total ................................................... 190,939 127,376 163,306 65,573 92,206 135,280 774,681 (34,870) 739,811

Operating income (loss) ........................... ¥ (977) ¥ (875) ¥ 32,311 ¥ 2,954 ¥ 1,581 ¥ 89 ¥ 35,082 ¥ (6,975) ¥ 28,108

Assets .................................................... ¥142,973 ¥181,582 ¥164,469 ¥125,900 ¥151,024 ¥122,852 ¥888,799 ¥44,362 ¥933,162Depreciation and amortization .................. 7,207 9,162 16,287 3,381 6,072 2,380 44,488 1,744 46,232Amortization of goodwill .......................... 6 (211) 90 1,368 (38) (20) 1,195 — 1,195Investments in unconsolidated subsidiaries and affiliates accounted for using equity method ......................... 14,009 1,586 296 1,486 32 272 17,680 — 17,680

Increase in property, plant and equipment and intangible assets ............ 3,699 8,477 11,679 8,441 4,302 3,412 40,010 2,492 42,503

Notes: 1. Adjustments are as follows:

(1) Elimination of intersegment transactions of ¥204 million (US$2,357 thousand) and total corporate expenses of ¥7,179 million (US$82,914 thousand) which were not allocated to any reportable

segment were included in “Adjustments” for “Operating income” of ¥(6,975) million (US$(80,556) thousand). Total corporate expenses principally consist of total corporate common research expens-

es which are not attributable to any reportable segment.

(2) Elimination of intersegment receivables and payables and assets of ¥(23,546) million (US$(271,960) thousand) and total corporate assets of ¥67,909 million (US$784,346 thousand) which were

not allocated to any reportable segment were included in “Adjustments” for “Assets” of ¥44,362 million (US$512,386 thousand). Total corporate assets principally consist of surplus funds of the

Companies under management (in the form of cash and deposits), deferred tax assets and assets related to total corporate common research and development expenses.

2. Amortization of negative goodwill was included in “Amortization of goodwill.”



SalesOutside customers .................................. ¥243,569 ¥120,308 ¥163,119 ¥ 68,129 ¥118,369 ¥140,664 ¥854,158 ¥ — ¥854,158

Inter-segment ......................................... 6,827 9,895 1,892 9,435 5,911 9,919 43,879 (43,879) —

Total ................................................... 250,396 130,203 165,011 77,564 124,280 150,583 898,037 (43,879) 854,158

Operating income ................................... ¥ 3,484 ¥ 2,035 ¥ 30,242 ¥ 9,640 ¥ 6,212 ¥ 1,860 ¥ 53,473 ¥ (6,116) ¥ 47,357

Assets .................................................... ¥145,753 ¥183,728 ¥170,046 ¥120,731 ¥162,701 ¥121,244 ¥904,202 ¥37,100 ¥941,303

Depreciation and amortization .................. 7,082 9,417 19,164 3,505 6,874 2,107 48,148 1,265 49,413

Amortization of goodwill .......................... 6 (210) 86 1,368 (29) (20) 1,200 — 1,200

Investments in unconsolidated subsidiaries and affiliates accounted for using equity method ......................... 14,364 628 — 2,140 187 269 17,588 — 17,588

Increase in property, plant and equipment and intangible assets ............ 2,645 6,811 13,506 5,308 5,380 3,476 37,126 1,668 38,794

Notes: 1. Adjustments are as follows:

(1) Elimination of intersegment transactions of ¥178 million and total corporate expenses of ¥6,294 million which were not allocated to any reportable segment were included in “Adjustments” for

“Operating income” of ¥(6,116) million. Total corporate expenses principally consist of total corporate common research expenses which are not attributable to any reportable segment.

(2) Elimination of intersegment receivables and payables and assets of ¥(32,465) million and total corporate assets of ¥69,565 million which were not allocated to any reportable segment were

included in “Adjustments” for “Assets” of ¥37,100 million. Total corporate assets principally consist of surplus funds of the Companies under management (in the form of cash and deposits), deferred

tax assets and assets related to total corporate common research and development expenses.

2. Amortization of negative goodwill was included in “Amortization of goodwill.”




SalesOutside customers ...... $2,141,763 $1,368,721 $1,860,999 $ 660,558 $1,015,943 $1,496,843 $ 8,544,825 $ — $ 8,544,825Inter-segment ............. 63,590 102,472 25,192 96,812 49,041 65,647 402,753 (402,753) —

Total ....................... 2,205,353 1,471,192 1,886,190 757,370 1,064,984 1,562,489 8,947,579 (402,753) 8,544,825

Operating income (loss) ........................ $ (11,279) $ (10,111) $ 373,190 $ 34,114 $ 18,264 $ 1,024 $ 405,202 $ (80,556) $ 324,646

Assets ........................ $1,651,342 $2,097,272 $1,899,616 $1,454,152 $1,744,324 $1,418,938 $10,265,643 $512,386 $10,778,029Depreciation and amortization ....... 83,236 105,820 188,111 39,048 70,131 27,488 513,832 20,143 533,975Amortization of goodwill.................... 66 (2,432) 1,034 15,804 (439) (230) 13,803 — 13,803Investments in unconsolidated sub-sidiaries and affiliates accounted for using equity method ........... 161,807 18,322 3,417 17,163 365 3,136 204,210 — 204,210

Increase in property, plant and equipment and intangible assets ... 42,719 97,909 134,895 97,496 49,691 39,410 462,119 28,788 490,907

(b) Information about geographical areas


Japan Asia Others Total

Sales ................................................................................................................................................ ¥482,126 ¥219,857 ¥37,827 ¥739,811



Sales ................................................................................................................................................ ¥560,483 ¥243,387 ¥50,287 ¥854,158



Sales ................................................................................................................................................ $5,568,564 $2,539,354 $436,907 $8,544,825


Japan Others Total

Property, plant and equipment .................................................................................................................... ¥419,879 ¥53,374 ¥473,253


Japan Others Total

Property, plant and equipment .................................................................................................................... ¥431,546 ¥50,817 ¥482,363


Japan Others Total

Property, plant and equipment .................................................................................................................... $4,849,609 $616,466 $5,466,075

(c) Information about impairment loss on property, plant and equipment by reportable segment


Petrochemicals Chemicals Electronics Inorganics Aluminum Others Elimination Total

Impairment loss on assets ............................................................... ¥15 ¥256 ¥677 ¥2,417 ¥115 ¥2 ¥— ¥3,481

Showa Denko K.K. 51




Impairment loss on assets ............................................................... ¥232 ¥176 ¥3,160 ¥798 ¥73 ¥188 ¥— ¥4,627



Impairment loss on assets ............................................................... $169 $2,954 $7,825 $27,912 $1,324 $22 $— $40,206

(d) Information about amortization of goodwill and unamortized balance by reportable segment



Amortization .................................................................................. ¥ 6 ¥283 ¥122 ¥1,368 ¥ 22 ¥ 8 ¥— ¥1,810Unamortized balance ...................................................................... 40 582 619 4,154 222 64 — 5,681



Amortization .................................................................................. ¥ 6 ¥284 ¥118 ¥1,368 ¥ 31 ¥ 8 ¥— ¥1,815

Unamortized balance ...................................................................... 46 866 737 5,522 376 70 — 7,617



Amortization .................................................................................. $ 66 $3,274 $1,410 $15,804 $ 256 $ 97 $— $20,905Unamortized balance ...................................................................... 463 6,726 7,149 47,979 2,558 737 — 65,612

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



Amortization .............................................................................. ¥— ¥ 494 ¥ 33 ¥— ¥ 60 ¥ 28 ¥— ¥ 615Unamortized balance .................................................................. — 3,802 488 — 899 372 — 5,561



Amortization .............................................................................. ¥— ¥ 494 ¥ 33 ¥— ¥ 60 ¥ 28 ¥— ¥ 615

Unamortized balance .................................................................. — 4,296 520 — 959 401 — 6,176



Amortization .............................................................................. $— $ 5,706 $ 376 $— $ 695 $ 327 $— $ 7,103Unamortized balance .................................................................. — 43,912 5,634 — 10,383 4,301 — 64,230

24. BUSINESS COMBINATIONS (Items relating to business combinations)For the year ended December 31, 2012Business Divestitures

1. Outline of the Business Divestiture(1) Name of the company receiving the divested businessKeihin Corporation

(2) Activities of the business divestitureThe Showa Denko Group’s production of heat exchange equipment for use in automobile air conditioners


(3) Reason for the business divestitureThe Company manufactures aluminum condensers, evaporators, and other heat exchange components and supplies these to automobile manufacturers and producers of automobile air-conditioner systems. Going forward, the growth of the world automobile industry is expected to be driven by the emerg-ing countries, but, on the other hand, the operating environment for this business will be influenced by the need to develop eco-friendly products and growing competition along with the trend toward low-priced products in the emerging countries. In view of these circumstances, to provide for the growth of this business, the options for strengthening the competitiveness of this business will be limited if it continues to focus on heat exchange components, and it will be essential to take initiatives together with manufacturers of automobile air-conditioning systems. For this reason, the Company transferred this business to Keihin Corporation, which is a manufacturer of automobile air-conditioning systems and a major customer for this business.

(4) Date of the business divestitureJanuary 1, 2012

(5) Outline of the divestiture, including the legal form of the separationWith Showa Denko K.K. as the company conducting the divestiture, this business was divested and absorbed (physical divestiture) by wholly owned subsidiary Thermal Technology Co., Ltd. In addition, the Company transferred 60% of Thermal Technology Co., Ltd. shares to Keihin Corporation. Plans call for transferring the remaining 40% of that company’s shares to Keihin Corporation with a target date of two years from the date of the business divestiture.

2. Outline of Accounting TreatmentThe accounting treatment of this divestiture was based on the “Accounting Standard for Business Divestitures” (ASBJ Statement No. 7, revised on December 26, 2008) and the “Guidance for Accounting Standards for Business Combinations and Business Divestitures” (ASBJ Guidance No. 10, revised on December 26, 2008).

(1) Profit of the divestiture¥(89) million (US$(7,706) thousand)

(2) Outline of transfer of assets and liabilitiesCurrent assets: ¥10,012 million (US$ 866,839 thousand)Fixed assets: ¥ 3,385 million (US$ 293,073 thousand)Total assets: ¥13,396 million (US$1,159,826 thousand)

Current liabilities: ¥ 3,991 million (US$ 345,541 thousand)Fixed liabilities: ¥ 17 million (US$ 1,472 thousand)Total liabilities: ¥ 4,008 million (US$ 347,013 thousand)

(3) Reportable segment that the business that was divested belonged toAluminum

(4) Approximate estimate of the profit and loss accompanying the transfer of this business that was included in the calculations made in the preparation of the consolidated financial statements for the year ended December:Not applicable

25. PRESENTATION OF GOODWILL AND NEGATIVE GOODWILLGoodwill and negative goodwill are netted against each other. The pre-netted amounts as of December 31, 2012 and 2011 are shown below.


2012 2011 2012

Goodwill ............................................................................................................................................................... ¥5,681 ¥7,617 $65,612Negative goodwill .................................................................................................................................................. 5,561 6,176 64,230

Net .................................................................................................................................................................. ¥ 120 ¥1,441 $ 1,382

Showa Denko K.K. 53

Report of Independent Certified Public Accountants


Major Subsidiaries and Affiliates (As of December 31, 2012)

Subsidiaries

Name Ownership (%)*1 Main Product(s) or Business(es)

PT. Showa Esterindo Indonesia 67.0 Ethyl acetate

Shoko Co., Ltd.*2 (T8090) 44.0 General trading

Showa Aluminum Can Corporation 100.0 Beer and soft drink cans

Showa Denko Carbon, Inc. 100.0 Graphite electrodes

Showa Denko Gas Products Co., Ltd. 100.0 Liquefied carbon dioxide, dry ice, industrial gases, etc.

Showa Denko HD Singapore Pte. Ltd. 100.0 Hard disks

Showa Denko HD Trace Corporation 99.4 Hard disks, aluminum substrates for hard disks

Showa Denko HD Yamagata K.K. 100.0 Hard disks

Showa Denko Kenzai K.K. 100.0 Plaster materials, fireproofing pipe, wall siding, etc.

Showa Denko Packaging Co., Ltd. 100.0 Packaging/containers for food, medicine, and electronic parts

SD Preferred Capital Ltd. 100.0 Preferred securities capital

*1 Proportion of ownership interest (direct or indirect) by Showa Denko K.K. and its subsidiaries in terms of the number of shares with exercisable voting rights *2 Tokyo Stock Exchange listed company

As of December 31, 2012, Showa Denko K.K. had 38 consolidated subsidiaries, including the above.

Affiliates

NameEquity

Participation (%)Main Product(s) or Business(es)

Japan Polyethylene Corporation 42.0 High- and low-density polyethylene

SunAllomer Ltd. 50.0 Polypropylene and advanced polypropylene-based materials

Union Showa K.K. 50.0 Molecular sieves

As of December 31, 2012, Showa Denko K.K. had 19 subsidiaries or affiliates to which the equity method was applied.

Showa Denko K.K. 55

Corporate Data

Investor Information

Regular General MeetingThe regular general meeting of shareholders was held on March 27,

2013.

Number of Shares Outstanding1,497,112,926 at December 31, 2012

Number of Shareholders105,843 at December 31, 2012

Classification of StockAll stock issued by Showa Denko is common stock.

Stock Transfer AgentMizuho Trust & Banking Co., Ltd.

2-1, Yaesu 1-chome,

Chuo-ku, Tokyo 103-8670,

Japan

Shareholders by Sector (At December 31, 2012)

Number of shares held

(thousands)%

Financial firms 629,448 42.04

Individuals 436,051 29.13

Foreign corporate entities, etc. 320,367 21.40

Japanese corporate entities 84,791 5.66

Securities firms 26,456 1.77

Total 1,497,113 100.00

Head OfficeShowa Denko K.K.

13-9, Shiba Daimon 1-chome,

Minato-ku, Tokyo 105-8518,

Japan

Phone: +81-3-5470-3235

Fax: +81-3-3431-6215

e-mail: [email protected]

URL: http://www.sdk.co.jp/english

Commercial Subsidiaries Abroad

Showa Denko America, Inc. 420 Lexington Avenue, Suite #2335A

New York, NY 10170

U.S.A.

Phone: +1-212-370-0033

Fax: +1-212-370-4566

Showa Denko Europe GmbHKonrad-Zuse-Platz 4

81829 Munich

Germany

Phone: +49-89-939-9620

Fax: +49-89-939-96250

Showa Denko Singapore (Pte.) Ltd.4 Shenton Way

#16-01 SGX Centre 2

Singapore 068807

Phone: +65-6223-1889

Fax: +65-6223-6007

Showa Denko (Shanghai) Co., Ltd.18F, Wang-Wang Building

No. 211, Shimen Yi Road, Shanghai, 200041

People’s Republic of China

Phone: +86-21-6217-5000

Fax: +86-21-6217-9840


Printed in JapanPrinted in Japan

13-9, Shiba Daimon 1-chome, Minato-ku, Tokyo 105-8518, Japan

SHOWA DENKO K.K.

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