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Review and Analysis of Consolidated Results for Fisical Year 2015

Business Environment


During fiscal 2015, trends in the global economy were mixed. Throughout 2014, economic growth in most developed countries stalled following the worldwide financial crisis. In contrast, emerging markets including China and Asia as well as such resource-rich countries as Brazil and Russia provided the impetus for a recovery. Entering 2015, the table was reversed. Economic conditions in the United States enjoyed a positive trnaround. The slowdown in the rate of economic growth in China, however, placed downward pressure on the economies of emerging markets in Asia. Accounting for these factors, the global economy as a whole was held to a modest recovery. Over the ensuing period, economic conditions throughout the world as a whole have remained subdued with the outlook for the future shrouded in uncertainty. This largely reflects the downside risk of a prolonged slowdown in the economies of China and resource-rich countries..

Turning to the domestic economy, Japan has been unable to break free from the market correction that following the rush in demand prior to the consumption tax rate hike. As a result, private consumption has remained weak since autumn 2013. On a positive note, export activity by the manufacturing industry including the automobile and electric appliance sectors has been robust, buoyed by the favorable flow on effects of movements in foreign currency exchange rates and in particular depreciation in the value of yen compared with fiscal 2014. Accounting for these factors, the underlying strengths of the corporate sector has remained intact.

Looking at the market environment from each of the Company’s individual business segment perspectives, the housing business field in Japan enjoyed a gradual improvement in new housing starts following the market correction in the wake of the rush in demand leading up to Japan's consumption tax rate hike. As a result, the number of construction starts in fiscal 2015 rebounded after a hiatus of two business terms and increased 4.6% to 920,537 units.

Trends in the Water Infrastructure field, which includes PVC piping materials, were also relatively firm. This was largely due to new condominium construction starts, which experienced a positive turnaround for the first time in three business terms. Overall trends remained relatively firm. Meanwhile, construction labor costs continued to hover at a high level. As a result, demand for public works continued to languish at a low level.

Overseas business conditions by industry were patchy. In the Electronics field, demand stalled negatively impacting the pace of smartphone growth, which had driven market in recent years. In the Automobiles and Transportation fields, trends in the mainstay automobile market in the United States were firm despite signs of stagnant conditions in certain developing countries. Turning to the Life science field, which in relative terms is less affected by movements in economic conditions, demand for diagnostic reagents in emerging markets grew in line with the upswing in living standards. At the same time, demand in developed countries was generally stable.

As far as foreign currency exchange rates are concerned, the yen/U.S. dollar rate which continued to hover around 120 yen throughout 2015, saw a sudden and rapid rise in the value of the yen entering 2016. As of March 31, 2016, the value of the yen had appreciated to the 112 yen level. Taking into consideration the annual average foreign currency exchange rates of 120 yen to the U.S. dollar and 133 yen to the euro in fiscal 2015, the value of the yen to the U.S. dollar has depreciated around 10 yen compared with the previous fiscal year.


Housing starts

Exchange rate


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Analysis of Business Results and Financial Position

1. Analysis of Business Results for Fiscal Year 2015


1) Net sales

Net Sales

Net sales in fiscal 2015 came to 1,096,317 million yen, a decrease of 16,430 million yen, or 1.5%, compared with the previous fiscal year..

Of this total, the Housing Company accounted for 473,441 million yen, down 4.2%. In the fiscal year under review, sales and profit declined. This was largely due to the drop off in the market in fiscal 2014, which led to a downturn in the order backlog at the start of the term. Sales in the second half, however, were improved to even with the corresponding period of the previous fiscal year. As a result, the Housing Company experienced an improvement in profit. In the Housing Company's new housing construction business, the number of orders was unchanged compared with the previous fiscal year. Despite steady trends in built-for-sale housing orders, this result was mainly due to the substantial drop off in orders for detached houses in the first half of fiscal 2015.

Under these circumstances, the Housing Company focused its efforts on promoting the Smart Power Station series of homes that answer the market’s calls for integrated solar power generation systems and storage batteries. Over and above increasing sales through the launch of the new wood-frame GRAND TO YOU f series, which in addition to complying with the Net Zero Energy House (ZEH) standards offers superior energy efficiency at a low cost, steps were taken to strengthen built-for-sale housing activities. For its part, the Living Environment business worked to bolster points of contact with customers through periodic diagnoses. At the same time, energies were directed toward rolling out original renovation menus that help to improve the thermal environments of homes.

The UIEP Company posted net sales of 226,279 million yen in fiscal 2015. This was 0.6% lower than the amount recorded in fiscal 2014. The company’s domestic business sales were essentially unchanged from the previous fiscal year. This largely reflected inventory adjustments by distributors in line with restrained shipments in the Pipeline Rehabilitation business and efforts to standardize shipments of general products. In the fiscal year under review, the UIEP Company took steps to reorganize its overall structure. Rather than focus on business fields, the company transitioned to a structure that is based on products. In addition to strengthening profit management by product, considerable weight was also placed on increasing the profitability of general products. While the company’s overseas business struggled under the burden of expenses attributable to structural reforms implemented in the Pipeline Rehabilitation business in the United States as well as the deterioration in market conditions in the Water Infrastructure business in China, every effort was made to promote drastic structural reforms including the transfer of the Pipeline Rehabilitation business in Europe.

Net sales in the HPP Company amounted to 378,552 million yen in fiscal 2015, an increase of 1.7% compared with the previous fiscal year. Despite difficult conditions in the Electronics field, the HPP Company reported a fourth consecutive fiscal year of increased sales and profit due mainly to profit growth in the three Automobiles and Transportation, Building and Infrastructure, and Life Science fields. In specific terms, sales of liquid-crystal materials including fine particles and sealants as well as double-sided tapes and other products declined. This was mainly due to the impact of adjustments in the production of such mobile devices as smartphones and tablets reflecting the downturn in the pace of economic growth in China and other factors in the Electronics field. In the Automobiles and Transportation field, results were positively affected by such factors as stable overseas demand and especially Europe and the United States. As a result, sales of high-performance products were particularly high. In the Building and Infrastructure field, construction work was completed on facilities in Thailand. In the fiscal year under review, operations at a chlorinated polyvinyl chloride (CPVC) resin factory and a resin compound factory commenced in earnest. Focusing mainly on diagnostic reagents and testing equipment, net sales in the life science field increased substantially in Japan and overseas.

Net sales in Other Businesses in fiscal 2015 declined 1.6% compared with the previous fiscal year, to 38,300 million yen.


2) Operating income

Operating income in fiscal 2015 amounted to 89,823 million yen, an increase of 4,058 million yen, or 4.7%, compared with the previous fiscal year.


3) Non-operating income and expenses

Non-operating income decreased 8,763 million yen compared with the previous fiscal year. In addition to the absence of the foreign exchange gain posted in the previous fiscal year, this decrease was mainly attributable to the drop in dividend income of 309 million yen. Non-operating expenses increased 2,059 million yen compared with the previous fiscal year, primarily owing to a 3,155 million yen increase in foreign exchange loss.


4) Extraordinary income and loss

The Company recorded a gain on sales of investments in securities of 10,769 million yen as extraordinary income in the fiscal year under review. The Company also incurred various extraordinary losses including a loss on transfer of business totaling 6,638 million yen, the provision for loss on transfer of business of 3,241 million yen, a loss on impairment of fixed assets and goodwill of 2,313 million yen, and a loss on sales or disposal of property, plant and equipment of 1,838 million yen. As a result, the Company posted a total extraordinary loss of 14,032 million yen, up 5,201 million yen, or 58.9%, compared with the previous fiscal year.


5) Net income attributable to owners of parent

Accounting for each of these factors, income before income taxes came to 77,950 million yen, a decrease of 6,281 million yen compared with the previous fiscal year. After deducting taxes and net income attributable to non-controlling interests, net income attributable to owners of parent came in at 56,653 million yen, up 3,658 million yen, or 6.9%, compared with the previous fiscal year. Effective from the fiscal year under review, the Company has adopted the Accounting Standard for Business Combinations (Accounting Standards Board of Japan (ASBJ) Statement No. 21 issued on September 13, 2013) and reclassified net income as net income attributable to owners of parent.



Operating Income and Operating Income Ratio

Net Income Attributable to Owners of Parent



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2. Financial Position


1) Assets, liabilities, and net assets

Total assets as of March 31, 2016 stood at 936,043 million yen, a decrease of 31,967 million yen compared with the end of the previous fiscal year.

Total Assets and ROA

(Assets)

Current assets stood at 434,513 million yen as of the end of fiscal 2015, 31,651 million yen lower than the balance as of the previous fiscal year-end. The main factor was a 19,162 million yen decrease in the balance of cash and deposits. Non-current assets declined 316 million yen to 501,530 million yen.

(Liabilities)

Liabilities declined 40,831 million yen year on year to 391,887 million yen as of the end of fiscal 2015. The main components were decreases of a combined 8,939 million yen in notes payable, electronically recorded obligations, accounts payable, and accrued expenses, 7,498 million yen in accrued income taxes and other taxes, and 2,669 million yen in advances received along with a decrease of 10,782 million yen in interest-bearing debt.

(Net assets)

Net assets stood at 544,156 million yen as of the end of fiscal 2015, an increase of 8,863 million yen compared with the previous fiscal year-end. The main factors were a 30,413 million yen increase in retained earnings due largely to net income attributable to owners of parent of 56,653 million yen and a decrease of 13,836 million yen from dividend payments. Appreciation in the value of the yen led to downward translation adjustments of 10,600 million yen.



Interest-bearing Debt and Debt/Equity Ratio

Shareholder's Equity and ROE




2) Cash flows

Cash and cash equivalents on a consolidated basis amounted to 67,104 million yen as of the end of fiscal 2015, an increase of 4,323 million yen compared with the end of the previous fiscal year

.

Factors influencing fiscal 2015 cash flow accounts were as follows.

(Operating activities)

Net cash provided by operating activities came to 71,389 million yen, up from 67,760 million yen compared with the previous fiscal year. This increase in net cash provided by operating activities was largely because principal cash outflows, which included income taxes paid of 30,707 million yen and decrease in deposits of 10,801 million yen were more than offset by major cash inflows, which comprised income before income taxes of 77,950 million yen, depreciation and amortization of 34,735 million yen, and loss on transfer of business of 6,638 million yen.

(Investing activities)

Net cash used in investing activities totaled 23,715 million yen in fiscal 2015. This was compared with net cash provided by investing activities of 4,127 million yen in fiscal 2014. Major cash inflows came from proceeds from sales or redemption of investments in securities of 21,408 million yen, which included a portion of shareholders in Sekisui House, Ltd., and a 23,412 million yen net decrease in time deposits. Cash outflows primarily comprised 39,444 million yen for purchases of property, plant and equipment focused on priority and growth fields, 12,232 million yen for the acquisition of investments in a subsidiary resulting in change in scope of consolidation following the purchase of shares of EIDIA Co., Ltd., a company which engages in the manufacture and sale of clinical diagnostic reagents, and its inclusion in the Company's scope of consolidation as a subsidiary company, and 8,314 million yen for purchases of investments in securities.

(Financing activities)

Net cash used in financing activities amounted to 41,726 million yen compared with 63,856 million yen for the previous fiscal year. The principal cash outflows comprised 16,783 million yen for purchases of treasury stock, 14,299 million yen for cash dividends paid including cash dividends paid to noncontrolling shareholders of consolidated subsidiaries, and a net decrease in interest-bearing debt of 11,360 million yen.



Cash Flows

Fee Cash Flow