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Review and Analysis of Consolidated Results for Fiscal 2016Last updated: Oct 19, 2017
Fiscal Year Ended March 31, 2017

Business Environment

From a peak in 2010, the rate of global growth continues to exhibit a downward trend. With the Chinese economy accounting for nearly 30% of the world’s economic growth, trends in China are having a significant impact on the economies of other countries. After implementing large-scale economic measures, China is currently in an adjustment phase with corrections being made to such key commercial indicators as inventories as well as equipment. As a result, China is experiencing a moderate slowdown in its rate of economic growth. Meanwhile, the United States is enjoying a positive turnaround in private consumption on the back of improvements in employment and disposable incomes. Europe is also experiencing a modest recovery. Looking further abroad, certain emerging countries are showing signs of weakness. This includes the aforementioned slowdown in the rate of economic growth in China. Crude oil prices are sluggish owing mainly to prolonged excess supply across worldwide markets. This is having a negative effect on the global economy with a deterioration in the earnings of energy-related companies in Europe and the United States while triggering various trends including risk-off moves in international financial and capital markets.

Looking at major trends throughout 2016, several advanced countries adopted an increasingly protective stance. In addition to the national referendum in the United Kingdom and the decision to withdraw from the European Union (Brexit), the election of Donald Trump as president heralded that start of an “America First” approach in the United States. Taking each of these factors into consideration, future conditions throughout the global economy are becoming increasingly uncertain.

Turning to the domestic economy, there are indications of an improvement in employment and disposable incomes in Japan. Buoyed by an upswing in business sentiment, conditions remain fixed in a recovery trend led mainly by the manufacturing sector. In contrast, corporate sector capital investment and private consumption continue to lack strength.

As far as the market environments for each of the Company’s individual business segments are concerned, the Housing business field in Japan enjoyed an ongoing positive trend as the effects of corrections to the rush in demand leading up to Japan’s consumption tax rate hike dissipated in full. As a result, the number of construction starts in fiscal 2016 grew 5.8% compared with the previous fiscal year, to 974,137 units, representing a second consecutive fiscal year of increase. Meanwhile, in the Water Infrastructure field, which includes PVC piping materials, new condominium starts declined for the first time in two business terms. On a positive note, trends in public investment were firm owing to the implementation of the fiscal 2015 supplementary budget and the early implementation of the initial fiscal 2016 budget.

Overseas business conditions remained patchy by industry. In the Electronics field, demand stalled negatively impacting the pace of smartphone growth, which had driven the market in recent years. Weak conditions also reflected such factors as LCD inventory adjustments. In the Automobiles and Transportation fields, trends in the mainstay automobile markets of developed countries led by Europe and the United States remained firm. Turning to the Life Science field, which in relative terms is less affected by movements in economic conditions, activity expanded mainly in China. This was largely attributable to the upswing in the standards of living in developing countries. As far as developed countries were concerned, trends in demand remained stable.

From a foreign currency exchange rate perspective, the yen/U.S. dollar rate saw minimal movement on overall terms. Beginning with a rate of 112 yen at the start of the fiscal year in April 2016, the yen/U.S. dollar rate came in at 111 yen as of the end of the fiscal year under review in March 2017. During the period, however, the value of the yen continued to appreciate against the U.S. dollar reaching close to 100 yen from June to September. Based on this and other movements, the value of the yen exhibited marked strong trends compared with the previous fiscal year. In fiscal 2016, the annual average foreign currency exchange against the U.S. dollar was 108 yen and 119 yen against the euro.

Exchange Rate Naphtha Price (Petrochemical Naphtha, Import CIF)

Analysis of Business Results and Financial Position

1. Analysis of Business Results for Fiscal 2016

(1) Net sales

Net sales in fiscal 2016 came to 1,065,776 million yen, a decrease of 2.8% compared with the previous fiscal year.

Of this total, the Housing Company accounted for 484,975 million yen, up 2.4% year on year in fiscal 2016. In the fiscal year under review, sales and profits were up owing mainly to firm trends in new housing construction orders. In the Housing Company’s new housing construction business, the number of orders exceeded the level recorded in the previous fiscal year. In addition to robust results in the rebuilding market thanks in part to the G Series released in April 2016, this year-on-year improvement was largely due to steady trends in built-for-sale housing. Spearheaded by the Smart Power Station homes “100% Edition,” which makes 100% energy self-sufficiency a possibility, further efforts were made to promote houses that answer the market’s calls for integrated solar power generation systems and storage batteries. At the same time, particular emphasis was placed on strengthening sales of large-scale lots for subdivision housing nationwide.

In the Renovation business, the Company adhered strictly to the periodic diagnosis of houses sold. At the same time, energies were directed toward promoting product packages to customers living in homes that are 15 to 25 years old. As a result, menus for high durability and external renewal work as well as plumbing and related equipment expanded. Despite these favorable trends, performance in the Renovation business suffered under the impact of repair measures in the wake of the Kumamoto earthquake and weak sales of solar power generation systems. Taking into account each of these factors, net sales in the Renovation business fell below the levels recorded in the previous fiscal year.

In the fiscal year under review, net sales in the UIEP Company up 6.2% compared with the previous fiscal year, to 240,332 million yen. Operating income hit a record high. This was largely due to the boost received as measures to improve profitability in domestic business activities took hold and the positive flow-on effects of overseas business structural reforms. The company’s domestic sales and earnings increased. This mainly reflected the benefits to accrue from the introduction of the total production cost method as well as successful efforts to level out shipments, which helped cutback manufacturing costs. Sales in the company’s overseas business decreased owing mainly to the impact of structural reforms. In contrast, earnings improved substantially on the back of the favorable effects attributable to the aforementioned structural reforms and an increase in sales volumes as operations at a new thermoplastic sheet plant in the U.S. commenced in earnest.

Net sales in the HPP Company amounted to 357,526 million yen in the fiscal year under review, down 5.6% compared with the previous fiscal year. The downturn in sales was largely attributable to movements in foreign currency exchange rates and difficult conditions in the electronics field. From a profit perspective, earnings increased for a fifth consecutive business term to reach a record high. This upswing in earnings mainly reflected the growth in sales of high-performance products in other strategic fields. Turning to the Electronics field, results were mixed. While there were signs of a recovery trend from the third quarter of the fiscal year under review, sales of such products as double-sided tape declined as a result of adjustments to the production of mobile devices including smartphones and tablets up to the first half. In the Automobiles and Transportation field, trends in overseas demand were generally stable especially in China, Europe, and the U.S. While sales of mainly high-performance products expanded as a result, overall results declined due to the impact of the strong yen. As far as the Building and Infrastructure field is concerned, sales of chlorinated polyvinyl chloride (CPVC) resin and fire-resistant materials were firm. Meanwhile, sales of diagnostic reagent systems and testing equipment in the Life Science field were sound in Japan and overseas.

Net Sales

(2) Operating income

Operating income in fiscal 2016 amounted to 96,476 million yen, an increase of 6,653 million yen, or 7.4%, compared with the previous fiscal year.

Operating Income and Operating Income Ratio

(3) Non-operating income and expenses

Non-operating income increased 2,402 million yen compared with the previous fiscal year. This was mainly due to the increase of 259 million yen in equity in earnings of affiliates. Non-operating expenses decreased 1,244 million yen compared with the previous fiscal year. In addition to the downturn in interest expenses of 537 million yen, this drop in non-operating expenses is mainly due to the decline in net foreign exchange loss of 2,346 million yen.

(4) Extraordinary income and loss

The Company recorded a gain on sales of investments in securities of 6,935 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 4,988 million yen, a loss on devaluation of investment in securities of 4,534 million yen, a loss on impairment of fixed assets and goodwill of 3,573 million yen, and a loss on sales or disposal of property, plant and equipment of 2,500 million yen. As a result, the Company posted a total extraordinary loss of 15,596 million yen, up 1,564 million yen, or 11.1%, compared with the previous fiscal year

(5) Net income attributable to owners of the parent

Accounting for each of the aforementioned factors, income before income taxes came to 82,851 million yen, an increase of 4,900 million yen compared with the previous fiscal year. After deducting taxes and net income attributable to noncontrolling interests, net income attributable to owners of the parent amounted to 60,850 million yen, up 4,196 million yen, or 7.4%, compared with the previous fiscal year.

Net Income Attributable to Owners of the Parent

2. Financial Position

(1) Assets, liabilities, and net assets

Total assets as of March 31, 2017 stood at 943,640 million yen, an increase of 7,596 million yen compared with the end of the previous fiscal year.

(Assets)

Current assets stood at 466,101 million yen as of the end of fiscal 2016, 31,588 million yen higher than the balance as of the previous fiscal year-end. The main factor was a 41,884 million yen increase in the balance of cash and deposits. Non-current assets declined 23,992 million yen to 477,538 million yen.

Total Assets and Return on Total Assets

(Liabilities)

Liabilities declined 18,797 million yen compared with the previous fiscal year-end to 373,090 million yen as of the end of fiscal 2016. The main components were decreases of a combined 4,041 million yen in notes payable, electronically recorded obligations, accounts payable, and accrued expenses as well as a downturn in the balance of interest-bearing dent of 8,603 million yen.

Interest-bearing Debt and Debt/Equity Ratio

(Net assets)

Net assets stood at 570,549 million yen as of the end of fiscal 2016, an increase of 26,393 million yen compared with the end of the previous fiscal year. The main movements were a 45,349 million yen increase in retained earnings due largely to net income attributable to owners of the parent of 60,850 million yen and a decrease of 15,541 million yen from dividend payments. Appreciation in the value of the yen led to downward translation adjustments of 4,876 million yen.

Shareholders’ Equity and Return on Equity

(2) Cash flows

Cash and cash equivalents on a consolidated basis amounted to 89,856 million yen as of the end of fiscal 2016, an increase of 22,752 million yen compared with the end of the previous fiscal year.

Factors influencing fiscal 2016 cash flow accounts were as follows.

(Operating activities)

Net cash provided by operating activities came to 108,229 million yen, up from 71,389 million yen in 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 16,395 million yen, an increase in inventories of 7,466 million yen, and decrease in gain on sales of investments in securities of 6,935 million yen were more than offset by major cash inflows, which comprised income before income taxes of 82,851 million yen, depreciation and amortization of 34,843 million yen, loss on transfer of business of 4,988 million yen, and loss on devaluation of investment in securities of 4,534 million yen.

(Investing activities)

Net cash used in investing activities totaled 44,057 million yen in fiscal 2016, up from 23,715 million yen in the previous fiscal year. The major cash inflow came from proceeds from sales or redemption of investments in securities of 18,165 million yen, which included a portion of shareholders in Sekisui House, Ltd. Meanwhile, cash outflows primarily comprised 35,241 million yen for purchases of property, plant and equipment focused on priority and growth field, and a net increase in time deposits of 19,103 million yen.

(Financing activities)

Net cash used in financing activities amounted to 39,633 million yen compared with 41,726 million yen in the previous fiscal year. The principal cash outflows comprised 16,356 million yen for purchase of treasury stock, 16,063 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 9,232 million yen.

Cash Flows Free Cash Flow

Business Risks

The following factors related to our business and accounting practices may materially influence investment decisions. The Company is endeavoring to establish a system for anticipating potential risks for the Group, preventing their occurrence, and promptly and appropriately dealing with them if they occur.

Forward-looking statements contained herein are based upon assessments made by the Sekisui Chemical Group at the end of consolidated fiscal year 2016.

1) Foreign Currency Fluctuations

Exchange rates may affect the value of the Group’s overseas assets held in foreign currencies when converted into yen. The Group employs hedging strategies as needed in response to currency fluctuations. However, the business results and the financial position of the Group may be affected if the exchange rates diverge significantly from the forecasted levels.

2) Raw Material Price Volatility

The Group’s business results and financial position may be affected in the event that the Group, especially the High Performance Plastics Company and the Urban Infrastructure & Environmental Products Company, is unable to transfer changes in prices of polyvinyl chloride, olefin, steel, or other raw materials to product prices in a timely manner and is unable to maintain sufficient margin.

3) Overseas Business Activities

Unforeseeable changes in laws and regulations, fragility in the industrial base, and social or political turmoil such as terrorism, war, or other factors may affect the Group’s overseas business activities. The emergence of such risks may disrupt the Group’s overseas business activities, which would affect the business results and future plans of the Group.

4) Housing Related Tax and Interest Rate Trends

The Group’s housing-related businesses are affected by domestic taxes and consumption taxes on house purchases and by interest rate trends. These trends may impact our housing-related businesses and affect the Group’s business results and financial position.

5) Electronics Market Trends

The electronics industry, a market for the Group’s High Performance Plastics Company, is characterized by severe fluctuations in demand. A rapid drop in demand within a short period could affect the Group’s business results and financial position.

6) Trends in Public Works

The Group’s Urban Infrastructure & Environmental Products Company includes products used in the public sector. Trends in public works therefore influence the Company’s business performance. Public investment is determined by government policy at the national and local levels, and decisions to reduce public investment may impact the Group’s business performance and financial position.

7) Industrial Accidents and Disasters

A fire, explosion, or other industrial accident at one of the Group’s facilities that causes a major impact on the Group’s business capability and on the local community could damage society’s trust in the Company and incur response costs, including compensation costs directly related to the accident, business opportunity costs from the stoppage of production activity, and compensation costs from payments to customers. Such an event may affect the Group’s business results and financial position.

8) Intellectual Property and Product Liability

In the event that a dispute arises concerning the Group’s intellectual property, the dispute resolution may not be favorable to the Group. The discovery of defects in the Group’s products may require large-scale product recalls and compensation for damages. The possibility exists that insurance may not be able to cover associated costs, which could impact the Group’s business results and financial position.

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