Annual Report 2012

ANNUAL REPORT 2012

Evolution into a Company that Creates Added Value Profile Contents

Ranking as one of Japan’s leading chemical companies, Showa Denko at a Glance 1 Showa Denko K.K. operates in the six major segments of Consolidated Five-Year Summary 2 petrochemicals, chemicals, electronics, inorganics, aluminum, Message from the Management 3 2012 Achievements of Medium-Term and others. Business Plan “PEGASUS” 7 The Showa Denko Group has been implementing its Research and Development 10 medium-term consolidated business plan “PEGASUS” since Review of Operations 14 January 2011. Despite the severe business environment owing Corporate Social Responsibility 18 to the slowdown in overseas economies centering on Europe Responsible Care Activities 19 and China, and prolonged appreciation of the yen, we took Board of Directors 20 Corporate Governance 21 various measures in 2012 under “PEGASUS.” Specifically, we Consolidated Six-Year Summary 24 promoted the capacity expansion project at our U.S. graphite Management’s Discussion and Analysis 25 electrode subsidiary, and decided to establish a new graphite Consolidated Balance Sheets 28 electrode production site in China. We also established an Consolidated Statements of Income 30 aluminum casting subsidiary in Malaysia for our Shotic Consolidated Statements of business. Comprehensive Income 31 Consolidated Statements of To establish ourselves as a chemical company with a strong Changes in Net Assets 32 presence on the global market, we will continue to promote Consolidated Statements of Cash Flows 33 growth strategies in which our HD media and graphite elec- Notes to Financial Statements 34 trode businesses serve as our “Wings.” We will also work to Report of Independent Certified improve our business portfolio and build up strong and diversi- Public Accountants 54 Major Subsidiaries and Affiliates 55 fied businesses on a global scale, thereby establishing leading Corporate Data 56 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 environment as well as health and safety.

Forward-Looking Statements This annual report contains statements relating to management’s projections of future profits, the possible achievement of the Company’s financial goals and objectives, and management’s expectations for Vision the Company’s product development program. The Company cannot guarantee that these expectations and projections will be realized or correct. Actual We at the Showa Denko Group will provide products and ser- results may differ materially from the results antici vices that are useful and safe and exceed our customers’ pated in the statements included herein due to a variety of factors, including such economic factors expectations, thereby enhancing the value of the Group, giving as fluctuations in foreign currency exchange rates satisfaction to our shareholders, and contributing to the sound as well as market supply and demand conditions. The timely commercialization of products under growth of international society as a responsible corporate development by the Company may be disrupted or citizen. 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

Petrochemicals Olefins (ethylene and propylene) and organic chemicals (vinyl acetate mono- 24.6% mer, ethyl acetate, and allyl alcohol)

Chemicals Functional polymers, industrial gases (liquefied carbon dioxide, dry ice, oxygen, 16.4% nitrogen, and hydrogen), basic chemicals (liquid ammonia, acrylonitrile, and chloro- prene rubber), and electronic chemicals (specialty gases)

Electronics Hard disks (HDs), compound semiconductors (LED chips), and rare earth magnetic 21.1% alloys

Net Sales 2012 ¥739.8 billion Inorganics Graphite electrodes and ceramics (aluminum hydroxide, and alumina) 8.5%

Aluminum Rolled products (high-purity foils for capacitors), extruded products (cylinders 11.9% for laser beam printers (LBPs)), forged products, heat exchangers, and beverage cans

Others Lithium-ion battery (LIB) materials, building products, and general trading 17.5%

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

Showa Denko K.K. 1 Consolidated Five-Year Summary

Showa Denko K.K. and Consolidated Subsidiaries Thousands of December 31 Millions of yen 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) 60 20 50 15 40

30 10 20 10 5 0 0 -10 -20 -40 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012

L Electronics L Petrochemicals L Electronics L Petrochemicals L Chemicals L Inorganics L Chemicals L Inorganics L Aluminum L HQ costs L Aluminum L Others L Adjustments See note 2.

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 Under these circumstances, the Showa Aluminum segment, which transferred the remained severe, with the Japanese econo- Denko Group is aiming to strengthen its automotive air-conditioner heat exchanger my facing a difficult situation due to the presence on the global market by imple- business. Operating income decreased slowdown in overseas economies amid the menting its medium-term consolidated busi- 40.6%, to ¥28,108 million, due to lower sovereign debt crisis in Europe, lower eco- ness plan PEGASUS launched in 2011. The profit in all segments except Electronics, in nomic growth in China, strong appreciation Group is promoting its growth strategies which profit increased due to higher ship- of the yen, and the resultant decline in with the hard disk (HD) media and graphite ment volumes of HD media. Net income exports. These factors combined to cause electrode businesses as its “Wings,” while decreased 44.8%, to ¥9,368 million. negative growth of the Japanese economy aiming to build up strong and diversified Dividends of ¥3.00 per share were paid to in the third quarter of 2012. In the petro- businesses on a global scale and establish shareholders on record at the end of Decem chemicals industry, severe production leading positions on the market. ber 2012. We made capital investments to adjustments continued, reflecting stagnant In 2012, the Group recorded consolidated ensure future growth, expanding the capacity demand in Japan and China. The electronic net sales of ¥739,811 million, down 13.4% for producing HD media, centering on our site parts/materials industry also experienced from the previous year. The decline in net in Singapore, and silicon carbide (SiC) epitax- substantial production adjustments in LCD sales reflected lower sales in the ial wafers for power devices. As a result, our panels, notwithstanding increases in smart- Petrochemicals segment, which experienced capital expenditures in 2012 amounted to phone production. trouble with equipment, and in the ¥42,503 million, up ¥3,709 million.

Showa Denko K.K. 3 Message from the Management

The outstanding balance of interest-bear- applications, notwithstanding the influence due to low demand for automotive applica- ing debt as of the end of 2012 fell ¥5,046 of production adjustments in the electric tions, notwithstanding higher shipment vol- million from the end of the previous year, to appliance industry. Meanwhile, sales of rare umes for smartphone applications. Shoko ¥342,262 million, as a result of continued earth magnetic alloys decreased significant- Co., Ltd.’s sales decreased due partly to reduction efforts. ly due to the influence of low magnet lower shipment volumes of metals. demand and inventory adjustments in the Operating income fell 95.2%, to ¥89 million, Segment Performances rare earth magnet industry. Operating due partly to the increase in fixed costs per- A breakdown of net sales and operating income rose 6.8%, to ¥32,311 million, taining to the LIB materials business. income by segment is as follows: reflecting steady conditions of the HD media In the Petrochemicals segment, sales business. Business Strategy for the Second- decreased 23.7%, to ¥190,939 million. In the Inorganics segment, sales half Period under PEGASUS Sales of olefins decreased owing to signifi- decreased 15.5%, to ¥65,573 million. This year, we will work out our business cantly lower shipment volumes, reflecting Although our U.S. subsidiary’s graphite elec- strategy for the second-half period under trouble with the ethylene plant that occurred trode sales increased due to higher selling PEGASUS. As for the HD media and graphite in the first half of 2012 and lasted for about prices, sales of graphite electrodes on a electrode businesses, which are our base 90 days, and production cuts due to the non-consolidated basis decreased due part- (growth) businesses, we will maintain their slackening supply-demand situation in the ly to lower volumes of shipments to the growth strategies. We will continue position- Asian market. Sales of organic chemicals Asian market. As a result, overall sales of ing them as “growth drivers,” preferentially also decreased due to lower shipment vol- graphite electrodes decreased. Sales of allocating managerial resources and taking umes of vinyl acetate and ethyl acetate. The ceramics decreased as shipment volumes various steps for expansion, including the segment recorded an operating loss of for electronic materials applications fell increase in production capacities. At the ¥977 million (down ¥4,461 million). sharply due to the slackening supply- same time, we will make sure that these In the Chemicals segment, sales slipped demand situation. Operating income businesses will play a key role in increasing 2.2%, to ¥127,376 million. Sales of func- decreased 69.4%, to ¥2,954 million. profit and cash flows for the Group. tional polymers, industrial gases, and elec- In the Aluminum segment, sales fell We have also decided that 2013 should tronic chemicals were maintained at the 25.8%, to ¥92,206 million. Sales of rolled be a year for redesigning the Group’s busi- previous year’s level. Sales of basic chemi- products declined sharply due to the fall in nesses. Our efforts will be focused on cals decreased despite higher liquefied shipment volumes of high-purity foils for strengthening the global supply chains and ammonia sales, as acrylonitrile sales capacitors, reflecting severe production/ improving the profitability of domestic oper- declined due to production cuts, reflecting inventory adjustments in the capacitor ations. lower demand, and a stagnant market. The industry. Sales of extrusions/specialty prod- segment recorded an operating loss of ¥875 ucts decreased due to the fall in shipment a) Strengthening the global supply million (down ¥2,911 million), reflecting the volumes of aluminum cylinders for laser chains slackening supply-demand situation of basic beam printers. Sales of Shotic™ forged The Showa Denko Group is currently estab- chemicals and the increase in electricity products and aluminum cans were main- lishing new operation sites in foreign coun- rates. tained at the previous year’s level. Sales of tries in several business areas. We will aim In the Electronics segment, sales heat exchangers decreased significantly due to catch new business opportunities and decreased 1.0%, to ¥163,306 million. Sales to the transfer of the automotive air- strengthen our presence, especially in the of HD media increased due to the contribu- conditioner heat exchanger business to ASEAN market. Furthermore, we will estab- tion of the capacity expansion and the Keihin Corporation in January 2012. Operat lish a distribution network covering our increase in shipment volumes of high- ing income fell 74.5%, to ¥1,581 million. domestic and overseas sites, as well as our capacity media. Sales of compound semi- In the Others segment, sales fell 10.2%, suppliers and customers. We will also make conductors increased slightly due to to ¥135,280 million. Sales of lithium-ion proposals on products and solutions. Thus, higher shipment volumes for LCD backlight battery (LIB) materials decreased slightly we will establish global supply chains,

4 A Unique Chemical Company integrating development, production, and shares in Sinosteel’s wholly owned subsid will continue developing SiC epitaxial wafers marketing. iary Sinosteel Sichuan Carbon Co., Ltd. with larger diameters, fewer defects, and (Sichuan Carbon). This is in accordance with higher uniformity. Specifically, we will accel- b) Improving the profitability our plan to expand operations in China and erate the development of six-inch SiC epi- of domestic operations other Asian countries to supply graphite taxial wafers for heavy-current, high-voltage We need to speedily improve the profitability electrodes used in electric steel production. applications. of production sites in Japan and of busi- We made Sichuan Carbon a consolidated nesses that depend largely on domestic subsidiary of ours in March 2013. With the 3. Constructing an aluminum casting demand. To accomplish this end, we are addition of Sichuan Carbon’s 22,000t/y plant in Malaysia promoting the redesigning of our business plant to its existing facilities in Japan and We established an aluminum casting sub- models, setting target costs, and developing the United States, the Group’s total graphite sidiary Shotic Malaysia Sdn. Bhd. in the new markets. From a medium- to long-term electrode production capacity has reached state of Johor, Malaysia. The new subsidiary point of view, we will consider consolidation 127,000t/y. After capacity expansion in the will start commercial production by the end and relocation of domestic sites. United States, the Group’s total capacity will of 2014. In addition to an integrated alumi- The world economy is increasingly uncer- further increase to 157,000t/y in 2014. num casting/forging facility at Kitakata, tain. Our business structure is undergoing Thus, we will establish ourselves as a lead- Japan, we are operating one plant each in substantial changes with the shift of mar- ing supplier of graphite electrodes in the Portugal and Singapore for producing forged kets and customers for the Group’s products world. aluminum parts. We have been selling the from Japan to foreign countries. Under these products (Shotic™) on the world market, circumstances, the Group will redesign its 2. Increasing SiC epitaxial wafer mainly for use in automotive parts. With the business models in response to the changes production capacity by 2.5 times scheduled construction of the new casting in competitive conditions for respective In August 2012, we increased our SiC epi- plant in Malaysia, we will aim to better meet operations, aiming to speedily return to a taxial wafer production capacity by 2.5 growing demand in the Asian market. By growth track. In the latter half of 2013, we times, to 1,500 units a month. The wafers securing casting capability at these two will announce our new business plans for are used in SiC power devices for a wide locations, we intend to ensure the security the second-half period under PEGASUS. range of applications, including automobiles, of supply. We will expand the Shotic busi- railcars, and home electric appliances. In ness as a key component of our Aluminum Measures Implemented particular, SiC power devices are expected segment. or Decided in 2012 to be used increasingly in inverters to con- 1. Investing in a graphite electrode trol the rotation of motors. Such inverters 4. Constructing a high-purity aluminum company in China are already commercialized in some home foil plant in China We signed an agreement with Sinosteel electric appliances, and used in subway rail- Our new subsidiary Showa Denko Aluminum Corporation, of China, to acquire 67% of cars. Following the capacity expansion, we (Nantong) Co., Ltd., is building a plant at a

Graphite electrodes SiC epitaxial wafers Shotic™

Showa Denko K.K. 5 Message from the Management

site in Nantong, Jiangsu Province, China. 6. Increasing LIB packaging material will work hard to redesign its business The new subsidiary forms part of our plan to production capacity structure to cope with the severe environ- expand the capacitor-grade, high-purity alu- In August 2012, our subsidiary Showa ment, aiming to speedily return to a growth minum foil business. The new plant in China, Denko Packaging Co., Ltd., decided to track. We will quickly respond to the chang- scheduled for start-up in the second half of increase its production capacity for alumi- es in the business environment and contin- 2013, will finish rolled foil supplied from our num laminated films used for packaging ue to carry out reforms. Sakai Plant, and supply final products to our LIBs. Specifically, Showa Denko Packaging customers in China. Aluminum electrolytic decided to double its annual production We look forward to the continued support capacitors are used widely in electric appli- capacity versus the 2010 level by the sec- from our fellow shareholders and all other ances and transport machinery. Demand for ond half of 2013. Compared with metallic stakeholders. aluminum electrolytic capacitors in China is LIBs, pouch-type LIBs based on aluminum expected to grow, reflecting continued eco- laminated films provide higher flexibility in March 27, 2013 nomic growth in that country. With the molding, lighter weight, and better heat dis- establishment of the new plant in China, we sipation. Thus, pouch-type LIBs are widely will aim to better meet the growing demand used as small LIBs for portable devices. for capacitor-grade, high-purity aluminum Reflecting the rapid growth of the market for Kyohei Takahashi, Chairman of the Board foil. smartphones and tablet PCs, demand for aluminum laminated film is expected to 5. Establishing joint venture grow, as it contributes toward the miniatur- for GaN LED chip business ization of LIBs. In December 2012, we transferred our busi- Hideo Ichikawa, President and CEO ness in gallium-nitride (GaN)-based blue The Group will continue contributing to the LED chips to TS Opto Co., Ltd., a joint ven- sound growth of society by developing and ture between Showa Denko K.K. and Toyoda providing useful and safe technologies, Gosei Co., Ltd. Through the joint venture, we products, and services. We will ensure safe- are aiming to achieve synergistic effects in ty, conserve resources and energy, and R&D, improving brightness and production reduce the volume of industrial waste to be efficiency. In the LED business other than the discharged and chemical substances to be GaN LED chips, such as aluminum-gallium- emitted, thereby contributing to the protec- indium-phosphide (AlGaInP), gallium-arsenide tion of the global environment. (GaAs), and gallium-phosphide (GaP), we will The business environment will continue to continue our independent operations. be challenging throughout 2013. The Group

High-purity aluminum foils for capacitors LIB packaging materials

6 A Unique Chemical Company 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 Two graphite electrode businesses— wings and powerful “legs”—Stable Graphite base businesses, growth businesses, new growth businesses electrodes for the next generation, and HD media strong R&D activities. By carrying out “PEGASUS,” the Group is building up strong and diversified businesses on a global scale, thereby establishing leading positions in various Strong market segments. R&D activities See page 10

Stable base businesses Four legs Trends in Capital Investments Our capital investments in 2012 were focused on projects in growth businesses, Petrochemicals centering on capacity expansions for HD Basic Chemicals media and SiC epitaxial wafers for power Aluminum Foils for Capacitors devices. In 2013, we will make major invest- Cylinders for LBPs ments in the Inorganics segment: full-scale expansion work at SDKC, of the United States, and capital investment at Showa Growth Denko Sichuan Carbon Inc., in China. Next- (Billions of yen) businesses 60 generation 50 growth 40 businesses 30 20 10 0 SiC Epi-wafers for Power Devices Battery Materials 2009 2010 2011 2012 2013 Forecast L Petrochemicals L Chemicals L Electronics Organic EL for Lighting High-purity Gases for L Inorganics L Aluminum L Others Notes: 1. See note 2 on page 2. Semiconductor Processing 2. The 2013 forecast was announced on February 14, 2013.

Showa Denko K.K. 7 1 Measures Implemented or Decided in 2012

Steadily implemented measures for growth, centering on the HD media and graphite electrode businesses Graphite Electrodes Road Map toward Higher Storage Capacity

• Acquired a stake in a Chinese company; • Expanding the capacity at Showa (GB/p) (Storage capacity per 2.5” media) Showa Denko Sichuan Carbon Inc. Denko Carbon, Inc., of the United became our subsidiary in March 2013 States, for completion in 2014 1,000 1TB 750GB 650GB 500 500GB Slowdown to 334GB 40% year a 20% year growth growth TAMR

PMR SMR

Showa Denko Sichuan Carbon Inc. Showa Denko Carbon, Inc. 2006 2008 2010 2012 2014 2016

HD Media • Contribution of the capacity expansion Showa Denko HD Yamagata K.K. implemented mainly at our site in Showa Denko Electronics K.K. (Ichihara) Singapore • Leading the industry in the supply of Showa Denko HD America Corp. Showa Denko HD Trace Corp. the sixth-generation, high-capacity media (2.5-inch, 500GB) Showa Denko HD (Malaysia) Sdn. Bhd.

Showa Denko HD Singapore Pte. Ltd.

4 Strengthening the Global Supply Chains

While strengthening our existing Nantong, China The new plant, scheduled for businesses in China, we will aim start-up in the second half of Sichuan, China 2013, will finish rolled foil sup- to catch new business opportu- plied from our Sakai Plant, and provide final products to our nities and strengthen our pres- customers in China. High-purity aluminum foil ence in the ASEAN market. Johor, Malaysia We will establish global sup- Under construction for start-up in 2014; Together with the Graphite electrodes ply chains covering our domestic existing forging plant in Singapore, the new plant will and overseas sites as well as contribute toward expanding overseas operations. our suppliers and customers, Shotic™ integrating development, pro- Tayan, Indonesia Building a 300,000t/y chemical duction, and marketing. alumina plant for start-up in 2015 (Our chemical alumina production in Japan will be ter- minated following the start-up P Chemicals of the new plant in Indonesia.) Chemical alumina P Inorganics P Aluminum 8 A Unique Chemical Company SiC Epi-wafers for Power Devices • Operating as the sole volume-producer of SiC Improving the Profitability epitaxial wafers for power devices 2 of Domestic Operations • Expanded the production capacity by 2.5 times in August 2012 • Strengthening operations by review- Business Sector and Headquarters sys- ing our business structure tems and the shift to a system of direct Battery Materials We will promote the redesigning of our supervision by the CEO, we now have a • Decided to double the production capacity business models, reviewing development/ “flat” and agile organization. for aluminum laminated films for LIB pack- production systems, setting target costs, (Effective January 4, 2013) aging, versus the 2010 level and developing new markets. CEO LEDs • Established a joint venture with Toyoda • Implementation of organizational

Gosei for the GaN blue LED business changes Staff Business Business sections at Development We have changed our organization to divisions (13) Plants (12) Head Office Center

High-purity Aluminum Foils ensure speedy and timely decision mak- Business strategy, Production, R&D marketing technology, SCM • Started constructing a new plant in ing. As a result of the abolishment of the Nantong, China, to strengthen the business in capacitor-grade, high-purity aluminum foil Improving Financial Strength Petrochemicals 3 • Aiming to increase the ratio of the use of Interest-bearing Debt and D/E Ratio (Billions of yen/times) non-naphtha feedstock, to 40% Interest-bearing debt decreased from the 392.9 • Developing acetaldehyde-process butadi- previous year as a result of continued 373.9 ene: Aiming to start commercial production reduction efforts. The D/E ratio also 1.48 in 2016 351.0 improved. 1.30 347.3 1.23 342.3 1.17 Shotic 1.09 • Building a new casting plant in Malaysia 2008 2009 2010 2011 2012 L Interest-bearing debt P D/E ratio

Korea Showa Chemicals Strategy for Specialty Gases (Specialty gases) We are strengthening our production/ distribution bases in Asia for business Shanghai Showa Chemicals Shanghai Showa Electronics Materials areas we have strengths, such as high- purity ammonia for compound semiconductors, nitrous oxide for deposition of Zhejiang Quzhou Juhua Showa Electronic nitride films, and hydrogen bromide for Chemical Materials (Specialty gases) etching and cleaning.

Showa Specialty Gas (Taiwan) Net Sales by Geographic Area Taiwan Showa Chemicals Manufacturing (Billions of yen) 900 (Chemical products)

600

Showa Specialty Gas Singapore 300

0 2009 2010 2011 2012 L Asia L Others L Japan

Showa Denko K.K. 9 Research and Development

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:

Petrochemicals electronic applications, we are distributing Chemicals a sufficient volume of samples from our In this segment, we are fully utilizing our To quickly meet wide-ranging customer pilot plant for evaluation by potential cus- proprietary technologies for catalysts, needs and make timely proposals on key tomers. We are concurrently promoting the organic synthesis, and polymer synthesis materials for new product development by development of other types of new films, to meet the needs of manufacturers of customers, we are developing semicon- utilizing the film production/evaluation printing ink, paint, electronic materials, ductor-processing materials, photofunc- technologies we obtained from the devel- and automotive parts. As the supply of tional materials, solder resists, opment of SHORAYAL™. While we are butadiene is expected to become tight due high-performance gels, organic intermedi- developing green sustainable chemical to the limitations of capacity increase ates, and base materials for cosmetics. processes under national projects, much despite globally growing demand, we are Regarding photofunctional materials progress has been made in applying basic vigorously examining a new butadiene that support the production of high- technologies to gas separation and recov- production process technology, utilizing performance LCDs, we worked to develop ery. We are now studying ways of using our technology/business base. We are markets for multifunctional-thiol-based such technologies on a commercial basis, improving the performance of existing cat- compounds for addition to photo-curing hoping to substantially cut energy con- alysts and developing new catalysts for resins as well as photo polymerization ini- sumption in our basic processes for man- acetyl chemicals and allyl alcohol to fur- tiators. Based on our new multifunctional- ufacturing petrochemicals. The ther strengthen our proprietary production thiol-based-compound plant completed in Petrochemicals segment invested ¥653 processes. As for n-propyl acetate, an allyl 2012, we are developing many new appli- million in R&D in 2012. alcohol derivative used as an environment- cations as additives in industrial resin friendly solvent, we are continuing steady compositions. Our solder resist for flexible production and developing new applica- circuit boards in TVs and other large LCDs tions. has been well received by the market. We Furthermore, to meet growing demand developed new grades that meet market for allyl ester resin for use in optical mate- requirements utilizing the information net- rials, we are developing new grades and work with customers, and started supply- making marketing efforts to expand mar- ing them to various markets. kets. In the area of heat-resistant trans- In the area of high-performance gels, parent film SHORAYAL™, which is we took a first step to enter a new busi- expected to be used in displays and other SHORAYAL™ ness field through a strategic partnership

10 A Unique Chemical Company with BIA Separations GesmbH, of Austria. volume production technologies for per disk, respectively, which represented We expect to achieve good synergistic high-purity carbonyl fluoride, a cleaning the highest recording capacity for those effect in purification technology for bio- gas with a very low level of global warm- sizes in December 2012. pharmaceuticals, a market area growing ing potential, and high-purity hydrogen We are continuing to develop LED chips very rapidly in recent years. As for selenide, used as a film deposition materi- with higher brightness and power. Using high-performance liquid chromatography al for solar cells. The Chemicals segment’s our proprietary light emitting layer tech- columns (Shodex™), in which we have R&D investment amounted to ¥3,176 mil- nology, we have developed aluminum- had a long history, we are developing new lion in 2012. gallium-indium-phosphide (AlGaInP) LED products meeting the needs in the emerg- chips that emit red light with a wavelength ing economies and providing analytical Electronics of 660 nm, the optimum light for acceler- know-how and technical service, in addi- We are accelerating the development of ating the growth of plants. These new LED tion to the development of columns for state-of-the-art technologies to meet the chips have been adopted at various facili- sophisticated analysis. We are developing increasingly sophisticated market require- ties and model plants. As for infrared LED organic intermediates, utilizing our propri- ments. As for storage materials, we are chips, we are developing reflection-type etary materials and strengths in precision continuing to develop new technologies as and point-light-source products based on organic synthesis technology. As for base the world’s largest independent HD media the metal organic chemical vapor deposi- materials for cosmetics, in addition to manufacturer. We are producing HD media tion (MOCVD) process, in addition to the high-performance vitamin C derivative with higher performance using perpendic- conventional liquid phase epitaxial pro- Apprecier™, we are making preparations ular magnetic recording (PMR) technology, cess. As for indium-gallium-nitride (InGaN) for launching various new compounds. We which we have commercialized for the LED chips, we established a joint venture are also developing new liquid electrolytes first time in the world. At the same time, with Toyoda Gosei Co., Ltd. to improve for LIBs. we are developing shingled write magnet- brightness and production efficiency. In semiconductor processing materials, ic recording media, the next-generation In the area of neodymium-iron-boron we are developing chemical mechanical technology that will further increase magnetic alloys, we are meeting market polishing (CMP) slurries for metal polish- recording density, as well as thermal requirements for high-performance mag- ing at very small line widths, high-purity assist recording and bit-patterned media nets through sophisticated casting tech- gases for etching, cleaning, and film depo- technologies. We are making preparations nologies and the better control of alloy sition, and high-purity chemicals for for commercialization of these new media microstructures. Furthermore, we are con- cleaning agents and solvents. We are also products. Using PMR technology, we are tinuing to develop a new composition with developing charge dissipating agents for making commercial shipments of 2.5-inch lower levels of added dysprosium (a kind electron-beam lithography processes. As and 3.5-inch HD media with recording of rare metal) that will maintain high levels part of these efforts, we have developed capacity of 500 gigabytes and 1 terabyte of magnetic force at high temperatures, to

CIM™ monolithic columns produced HDs Ultrabright LED chips by BIA Separations Showa Denko K.K. 11 Research and Development meet the needs of the automobile industry. Aluminum crystal defects. Compared with the main- The Electronics segment invested ¥5,013 stream silicon-based semiconductors, SiC We are developing light, strong, and million in R&D in 2012. power devices using SiC epitaxial wafers high-performance materials, parts, and have the advantage of being able to products to meet market needs while con- endure high voltage and heavy current ducting research on basic technologies and to operate at high temperatures. pertaining to their production. Utilizing our We developed a high-speed plant culti- proprietary pressurized continuous casting vation technology, the “Shigyo method,” in technology, pressurized horizontal com- cooperation with Yamaguchi University for pletely continuous casting technology, and use in plant growth facilities based on our forging technology, we are developing new proprietary high-brightness LED chips. We alloys and products. In view of the grow- are developing the market for this technol- ing automobile market in Asian countries, Neodymium-iron-boron magnetic alloys ogy. The technology has been adopted by we are developing aluminum cast rods Kawauchi Village, Fukushima Prefecture, and forgings with still higher performance Inorganics at its LED-based plant growth facility. for use in automotive parts. We are developing materials and applica- In the area of printed electronics, we We are improving our die technology for tions by fully utilizing our proprietary developed printable silver nanowire ink joint- extrusion, forging, drawing, and press material/process technologies. We are ly with Osaka University. The product enables working; our process technologies for developing fillers with high heat dissipation free formation of patterns through printing. purification, fabrication, and bonding; as and high electrical insulating properties to As common R&D activities, Showa well as our simulation technology for serve the needs for compact and high- Denko’s Corporate R&D Center conducted structural and hot fluid studies. The performance electronic and power devic- basic research into new areas with a view Aluminum segment’s R&D investment es. Based on our strengths in nanoparticle to fostering new businesses and develop- amounted to ¥2,102 million in 2012. technology, we developed, as part of a ing technologies common to different seg- national project that ended in February Others ments. The Analysis & Physical Properties 2012, a visible-light-responsive photocat- Center and the Safety Evaluation Center We are continuing to develop and market alyst for antibacterial/antiviral agents with supported each segment’s R&D efforts by materials and components that will ensure improved levels of indoor activity. We are providing expertise in computational sci- sufficient capacity, output, life, and low developing applications in final products in ence as well as conducting analyses and electrical resistance in large LIBs for vari- cooperation with former partners in the investigations. R&D expenditures in 2012 ous types of electric vehicles. We are pro- national project. The Inorganics segment in the Others segment, including common viding such solutions as SCMG™ graphite spent ¥386 million on R&D in 2012. activities, totaled ¥9,303 million. 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 Decahedral titanium oxide fine particles Silver-nanowire-ink-based film after curing

12 A Unique Chemical Company Progress in R&D Strategy under “PEGASUS”

As from January 2013, we have introduced departments at plants perform R&D func- relevant business divisions. The Analysis & a new R&D organization, establishing the tions. Specifically, in the areas of aluminum Physical Properties Center and the Safety Business Development Center as the focus and HD media, R&D functions continue to Evaluation Center continue to provide tech- of our R&D activities. The center consists of be performed under direct supervision of nical support to common R&D activities. two laboratories, projects for commercializa- Changes in R&D Organization tion, and technical assistance centers serv- Power-device Development in areas SiC Epi-wafer Project Growth & New growth sectors ing all business segments. Each unit, with a related to growth sectors (Electronics/Energy & Environment) specific R&D mission, works together and promotes personnel exchanges to establish Development Institute for Institute for Polymers departments Advanced and the Group’s technical advantages. and Chemicals at plants Core Technology Meanwhile, in areas where R&D and pro- Aluminum Nano Carbon HD Media Thin Film duction need to be integrated owing to the LIB Materials Catalysts specific culture of business, development Strengthen existing businesses Green Innovation Project

The Institute for Polymers and Chemicals The Institute for Advanced Mitsubishi Corporation in the business of The Institute for Polymers and Chemicals and Core Technology fullerene, a typical carbon nano material. The has been established to increase the effi- The Institute for Advanced and Core Institute for Advanced and Core Technology ciency and speed in the development of Technology is focused on two business/ will promote the development of this materi- functional materials that should be complet- development domains and three technology al. The institute has also started developing ed within a relatively short period, by assem- families: 1. Carbon materials and technolo- graphene in cooperation with Tohoku bling technical experts for specific areas gy, 2. Thin film materials and technology, University. Since we are already commercial- from plants, business divisions, and corpo- and 3. Catalytic materials and technology. ly producing VGCF ™ carbon nanotubes as rate R&D units. The new institute enables Through this institute, we are aiming to cre- additives in LIBs, we now cover all the three the integration of our experience and tech- ate new businesses by deepening our core major carbon nano materials. Based on our nology pertaining to wide-ranging organic/ material technologies, including nano car- experience as the world’s first commercial inorganic materials. Through efforts to coor- bon and other functional carbon materials. producer of carbon nanotubes, we will dinate different materials, we will be able to develop advanced applications in Electronics realize new properties that are not possible Focusing on Nano Carbon and Energy—major business domains under when we simply try to improve individual As from the beginning of this year, we have “PEGASUS”—creating businesses that will materials. Thus, we will provide solutions to entered into a strategic partnership with contribute to the Group’s profit. existing customers and new markets. Fur Search R&D Commercialization thermore, we will apply core functions of materials to different kinds of products, as Graphene Fullerene Carbon nanotube well as meet the needs of both high-end Collaborating with Japan Frontier Carbon Corp. (VGCF ™) Science and Technology (Joint venture with products with high performance and low-end Agency (JST) and Tohoku Mitsubishi Corp.) products in growing markets. The institute University will work together with business divisions to establish unique businesses and with a strong presence in areas that have relationships with existing operations and that have A model of graphene’s Use in organic Use in lithium-ion growth potential. molecular structure photovoltaic cells batteries

Showa Denko K.K. 13 Review of Operations

Petrochemicals also decreased due to lower shipment vol- (SDK)’s ethylene production in 2012 was umes of ethyl acetate, etc. 463,000 tons, a decrease of 191,000 tons As a result, the Petrochemicals segment’s from 2011. Our olefin plant utilization rate in sales decreased 23.7%, to ¥190,939 mil- the second half of 2012 was about 90% on lion. The segment recorded an operating average due to production cuts that reflect- loss of ¥977 million (down ¥4,461 million). ed the slackening supply-demand situation in the global market. Olefins As a result, sales of olefins slumped sig- Ethylene production in Japan totaled nificantly, and operating income from this Consolidated Business Results (Millions of yen) 6,146,000 tons in 2012, a decrease from business decreased. Rate of 2012 2011 Difference change 6,690,000 tons in the preceding year, owing Sales 190,939 250,396 -59,456 -23.7% partly to the depressed domestic demand Organic Chemicals Operating income -977 3,484 -4,461 — due to an economic slump, the decline of Sales of ethyl acetate decreased due to lower Outlook the export of ethylene’s derivatives due to shipment volumes in response to the sluggish Sales of olefins significantly decreased the soft global market and unprofitable demand for solvents. Sales of vinyl acetate also owing mainly to the influence of the trouble exports caused by the strong yen, and the decreased due to lower shipment volumes. with the ethylene plant that occurred in the increase in the import of ethylene’s deriva- first half of 2012. Sales of organic chemicals tives due to the strong yen. Showa Denko

Chemicals As a result, the Chemicals segment’s maintains high cesium-absorbing-volume sales slipped 2.2%, to ¥127,376 million. capacity even in contaminated cooling The segment recorded an operating loss of water. However, insoluble ferrocyanide is ¥875 million (down ¥2,911 million). easily decomposed by heat, resulting in the vaporization of cesium. Thus, an innovative Topics method of heat solidification that allows sta- In July 2012, SDK started using its wholly ble containment of cesium had been sought. owned subsidiary Shanghai Showa Union Showa, under the guidance of Electronics Materials Co., Ltd. (SSE), to Professor Hitoshi Mimura of Tohoku Consolidated Business Results (Millions of yen) strengthen its business in China related to University, succeeded in developing a new Rate of 2012 2011 Difference change high-purity gases for electronics. SSE pro- method of stable solidification by heat-treat- Sales 127,376 130,203 -2,827 -2.2% duces and sells equipment for treating used ing a mixture of used ferrocyanide and zeo- Operating income -875 2,035 -2,911 — high-purity gases resulting from the produc- lite. Under the method, zeolite traps cesium Outlook tion of semiconductors, etc. SSE will expand vaporized by heat treatment, preventing the Sales of functional polymers, industrial its operations in the future, covering produc- release of cesium into the air. gases, and electronic chemicals were main- tion, sales, and distribution of high-purity tained at the previous year’s level. Sales of gases for the Chinese electronics industry. basic chemicals decreased despite higher In July 2012, Union Showa K.K., a joint ven- liquefied ammonia sales, as acrylonitrile ture between SDK and UOP LLC, of the United sales declined due to the sluggish market States, announced that it successfully devel- and depressed demand for their main use as oped a new method of stable solidification of materials for acrylic fiber and acrylonitrile- insoluble ferrocyanide widely used to remove butadiene-styrene (ABS) resins. radioactive cesium. Insoluble ferrocyanide Molecular sieves (zeolites)

14 A Unique Chemical Company Electronics As a result, HD media’s sales and operat- the provision of LED chips that emit light with ing income in 2012 increased due to higher optimized wavelengths for plant growth and shipment volumes. the innovative “Shigyo method” technology. In January 2013, SDK’s LED-based lighting 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 Consolidated Business Results (Millions of yen) with Professor Masayoshi Shigyo, Faculty of Agriculture, Rate of Yamaguchi University. Compared with conventional LED- 2012 2011 Difference change based plant growth facilities, the new method shortens Sales 163,306 165,011 -1,705 -1.0% Showa Denko HD Singapore Pte. Ltd. shipment cycles and increases the amount of harvest through the irradiation of lights at optimized ratios for Operating income 32,311 30,242 2,069 6.8% plant growth, using LED chips produced by SDK. Compound Semiconductors Outlook Concerning compound semiconductors, Sales of hard disk (HD) media increased due sales increased slightly due to higher ship- to the contribution of the production capaci- ment volumes for LCD backlight applications, ty expansion carried out in the previous year. notwithstanding the influence of production Sales of compound semiconductors adjustments in the electric appliance indus- increased slightly. Meanwhile, sales of rare try. As a result, the operating income of com- earth magnetic alloys decreased significant- pound semiconductors increased. ly due to the influence of inventory adjust- Cultivation of vegetables using ments in the rare earth magnet industry. Topics LED light source As a result, the Electronics segment’s In December 2012, SDK transferred its busi- sales decreased 1.0%, to ¥163,306 million. ness in gallium-nitride (GaN)-based blue LED However, operating income rose 6.8%, to chips to its wholly owned subsidiary TS Opto ¥32,311 million, reflecting increased ship- Co., Ltd., through a company split, and trans- ment volumes of HD media. ferred 70% of its shares in TS Opto to Toyoda Gosei Co., Ltd., thereby making TS Opto a Hard Disks joint venture between SDK and Toyoda Gosei.

In the first half of 2012, the supply-demand Through the joint venture, SDK will aim to Kawauchi Village’s plant growth situation of HD media was tightened due to achieve synergistic effects in R&D, improving facility upon completion (Conceptu the smooth recovery of the hard disk drive brightness and production efficiency. In the al drawing provided by the village) (HDD) industry from the floods in Thailand in LED business other than the GaN LED chips, Rare Earths the previous year. The shipment volume of SDK will continue its independent operations. Sales of rare earth magnetic alloys decreased HD media, especially those of high density SDK decided to provide Kawauchi Village, significantly due to a major reduction in the 2.5-inch 500GB HD media, increased from Fukushima Prefecture, with a new cultivation shipment volumes and price reductions, the same period of the previous year as a method for LED-based plant growth facilities reflecting the inventory adjustments in the rare result of the production capacity expansion for free. The village is building an LED-based earth magnet industry on the rebound of the carried out in the previous year. plant growth facility, and is planning to start accelerated procurement of rare earth mag- In the second half of 2012, the shipment producing leaf lettuce and herbs by the end netic alloys as countermeasures against the volume of HD media was negatively affected of the first half of 2013. SDK will continue to strong appreciation of raw material prices in by the reduction of production by HDD man- contribute toward ensuring a stable supply of 2011. As a result, the operating income of rare ufacturers, reflecting the sluggish demand safe food and promoting agriculture through earth magnetic alloys decreased significantly. for PCs.

Showa Denko K.K. 15 Review of Operations

Inorganics As a result, the Inorganics segment’s graphite electrode business was almost the sales decreased 15.5%, to ¥65,573 million, same as that of the previous year, though and operating income decreased 69.4%, to the overall sales decreased. ¥2,954 million, due mainly to lower operating income of cerium oxide. Topics In March 2013, SDK acquired 67% of shares Ceramics in Sinosteel Sichuan Carbon Co., Ltd., a whol- Concerning the Ceramics business, sales ly owned subsidiary of Sinosteel Corporation, and operating income decreased due mainly of China, and made the company an SDK Consolidated Business Results (Millions of yen) to a major reduction in the shipment vol- subsidiary. This is in accordance with SDK’s Rate of 2012 2011 Difference change umes of cerium oxide, reflecting the prog- plan to expand operations in China and other Sales 65,573 77,564 -11,991 -15.5% ress in our customers’ efforts to reduce the Asian countries to supply graphite electrodes Operating income 2,954 9,640 -6,687 -69.4% consumption of cerium oxide as counter- used in electric steel production. When Outlook measures against the strong appreciation of Sichuan Carbon’s 22,000t/y plant is added to Although our U.S. subsidiary’s graphite elec- its prices, which was caused by the sub- the existing facilities in Japan and the United trode sales increased due to higher selling stantial appreciation of raw materials prices States, the Showa Denko Group’s total graph- prices, sales of graphite electrodes on a in 2011. ite electrode production capacity will reach non-consolidated basis decreased due part- 127,000t/y. After capacity expansion in the ly to lower volumes of shipments to the Carbons United States, the Group’s total capacity will Asian market. As a result, overall sales of Concerning the graphite electrode business, further increase to 157,000t/y in 2014. Thus, graphite electrodes decreased. Sales of although our U.S. subsidiary’s sales SDK will establish itself as a leading global ceramics decreased as shipment volumes increased, sales on a non-consolidated supplier of graphite electrodes. of cerium oxide for electronic material basis decreased due to stagnant demand of applications fell sharply due to the slacken- the Asian electric furnace steel industry. ing supply-demand situation. As a result, the operating income of our

Aluminum Outlook Rolled Products Sales of rolled products declined due to the Production of high-purity foils for capacitors fall in shipment volumes of high-purity foils decreased significantly due to severe inven- for capacitors. Sales of extrusions/specialty tory adjustments in the aluminum electro products decreased due to the fall in ship- lytic capacitor industry. ment volumes of aluminum cylinders for laser beam printers. Sales of heat exchang- Topics ers decreased significantly due to the trans- As part of our plan to expand the capacitor- fer of the automotive air-conditioner heat grade, high-purity aluminum foil business, Consolidated Business Results (Millions of yen) exchanger business to Keihin Corporation in SDK is now expanding the production Rate of 2012 2011 Difference change January 2012. Sales of Shotic™ forged capacity of rolled foils at the Sakai Plant and Sales 92,206 124,280 -32,074 -25.8% products and aluminum cans were main- constructing a plant in China to finish rolled Operating income 1,581 6,212 -4,630 -74.5% tained at the previous year’s level. foils. These measures will expand SDK’s As a result, the Aluminum segment’s sales production capacity of capacitor-grade, fell 25.8%, to ¥92,206 million, and operating high-purity aluminum foils from currently income fell 74.5%, to ¥1,581 million. 2,000t/month to 3,000t/month in 2013. In

16 A Unique Chemical Company March 2012, SDK held a groundbreaking Shotic Heat Exchangers ceremony for its subsidiary Showa Denko SDK has been producing and selling casted/ Sales of heat exchangers decreased signifi- Aluminum (Nantong) Co., Ltd., at a site in forged aluminum products (trade name: cantly due to the transfer of the automotive Nantong, Jiangsu Province, China. The new Shotic™) on the world market, mainly for air-conditioner heat exchanger business to plant in China, scheduled for start-up in the use in automotive parts. We maintained high Keihin Corporation in January 2012. SDK second half of 2013, will finish rolled foils shipment volumes in the Shotic business in will continue to focus its efforts in its heat supplied from SDK’s Sakai Plant, and supply 2012. As a result, sales and operating exchanger business on expanding the sales final products to customers in China. income of the Shotic business were main- of direct cooling devices for power control Aluminum electrolytic capacitors are used tained at the previous year’s level. units in hybrid cars and heat exchangers for widely in electric appliances and transport electrical and industrial machinery applica- machinery. Demand for aluminum electro Topics tions. lytic capacitors in China is expected to grow, SDK established an aluminum casting subsid- reflecting continued economic growth in that iary Shotic Malaysia Sdn. Bhd. in the state of Aluminum Cans country. With the establishment of the new Johor, Malaysia. The new subsidiary will start The scale of the aluminum cans market for plant in China, SDK aims to meet the grow- commercial production by the end of 2014. In the domestic beverage industry as a whole ing demand for capacitor-grade, high-purity addition to an integrated aluminum casting/ was maintained at the previous year’s level. aluminum foils in a timely manner. forging facility at Kitakata, Japan, SDK is oper- Shipment volumes of aluminum cans for the ating one plant each in Portugal and Singapore domestic beer industry have been decreas- Extrusions/Specialty Products for producing forged aluminum parts. With the ing continuously. However, the market of In the first half of 2012, demand for extru- scheduled construction of the new casting nonalcoholic beer has been expanding very sions from the automotive industry was plant in Malaysia, SDK aims to better meet rapidly, and total sales of beer and beerlike good. In the second half of 2012, however, growing demand in the Asian market. By beverages in 2012 were maintained at the extrusions recorded lower shipment volumes securing casting capability at these two loca- previous year’s level. In addition, the ship- due to an economic slump. In addition, the tions, SDK intends to ensure the security of ment volumes of aluminum cans for soft shipment volumes of aluminum cylinders for supply. SDK will expand the Shotic business as drinks increased. Reflecting these, SDK’s laser beam printers decreased due to the a key component of its Aluminum segment. sales of aluminum cans slightly increased, inventory adjustments in the laser beam and its operating income also slightly printer industry. As a result, sales and oper- increased due to cost reductions. ating income of extrusions and specialty products decreased.

Shotic™

Others Consolidated Business Results (Millions of yen) notwithstanding higher shipment volumes Rate of 2012 2011 Difference for smartphone applications. Shoko Co., change Sales 135,280 150,583 -15,303 -10.2% Ltd.’s sales decreased due partly to lower Operating income 89 1,860 -1,772 -95.2% shipment volumes of metals. As a result, the Others segment’s sales Outlook fell 10.2%, to ¥135,280 million. Operating Sales of lithium-ion battery (LIB) materials income fell 95.2%, to ¥89 million. decreased slightly due to lower shipment volumes for electric vehicle applications, Showa Denko K.K. 17 Corporate Social Responsibility

Our Code of Conduct pertaining to the environment and energy. In based on the number of aluminum cans and Its Practical Guide addition, fully utilizing their chemistry-relat- recovered mainly by its employees. This alu- In 2012, we completely revised the “Code of ed resources, many of the Group’s operation minum can recycling activity has a more Conduct” for the Showa Denko Group sites are contributing toward solving relevant than 40-year history. employees established in 1998 and the local communities’ issues, covering such For more information on our CSR activi- “Guidelines” enacted in the following year, areas as education, regional development, ties, please visit our website: put the new version out as “Our Code of and welfare. http://www.sdk.co.jp/english/csr.html Conduct and Its Practical Guide,” and dis- In particular, many of the Group’s opera- tributed the Japanese version of it to all tion sites in Japan and foreign countries are Our Code of Conduct employees of SDK and its affiliated compa- helping the chemical/environmental educa- As officers and employees of the nies in Japan. We also translated it into tion of young people. Many sites constantly Showa Denko Group, 1. We will act with integrity as a eight other languages corresponding to the provide classes on demand to elementary responsible citizen of the interna- foreign countries and areas where SDK’s schools in neighborhoods located near our tional society. overseas offices and overseas affiliated work sites. A considerable number of people 2. We will provide our customers with companies are located, put them and the have participated in the guided tours to satisfaction and safety. 3. We will develop corporate culture Japanese version in one volume as the observe the plastic containers recycling that helps every member of the “Global Version,” and distributed it to all plant in the Kawasaki Plant. The Head Office Group to fully display his/her ability. employees of relevant offices and overseas participated in the “Summer Chemistry 4. We will meet the expectations of affiliated companies in order to enable all Experiment Event for Children” sponsored by local communities. 5. We will make vigorous efforts to employees of the Group to act under com- the Japan Chemical Industry Association. maintain and improve the global mon norms. We are having “Our Code of The Head Office also held chemistry educa- environment. Conduct and Its Practical Guide” penetrate tion programs for school teachers. As a all employees of the Group through reading member of the chemical industry, which has sessions implemented during Corporate a substantial impact on the natural environ- Ethics Month, which we hold in January ment, we believe it is a part of our social every year. We are encouraging every responsibility to communicate the impor- employee to consider how the Group can tance of environmental protection and support various manufacturing industries by chemical technologies to the younger gener- fully utilizing the Group’s competence cen- ation who will lead the future, in addition to tering on chemical technologies, and to con- reducing environmental impact resulting Class on demand for making objects (Kitakata tribute to the sound growth of society. from our business activities. Plant) We also have positively taken part in Involvement in many Responsible Care (RC) Community Community Activities Dialogue Meetings organized by the Japan In line with its Vision that stresses contribu- Chemical Industry Association as part of its tion to society through business activities, RC activities, and exchange opinions proac- the Group is addressing global environmen- tively with local residents and administrative tal issues, such as the mitigation of climate staff members. change and biodiversity efforts, as important In the area of regional welfare, the Group Volunteers participating in a cleaning activity in matters for management. The Group, there- is supporting local communities through the Hirano district (As part of the RC Community Dialogue Meetings) (Tokuyama Plant) fore, is making strenuous efforts to reduce recycling of aluminum cans. The Group GHG emissions and develop technologies gives donations to welfare facilities, etc.,

18 A Unique Chemical Company Responsible Care Activities

Responsible Care is the chemical discharge. As a result, the final volume of Environment-related Investment industry’s global voluntary initiative, landfill disposal in 2011 was reduced by representing a commitment to work 89% from the 1990 base level, due partly to (Billions of yen) 50 together to continuously improve the inorganic sludge (in cement, for example). health, safety, and environmental per- We will continue working to reduce industrial 40 formance of chemicals over their entire waste. A large number of employees within 30 life cycles, namely, their development, the Group are engaged in the recycling of production, distribution, use, final con- aluminum cans. We are utilizing waste plas- 20 sumption, and disposal. tic as synthesis gas for ammonia production. 10 Showa Denko has been performing Thus, we are making contributions toward a its Responsible Care activities since recycling-based society. 0 ’90 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 1995, when it established action guide- Cumulative value since 1990 lines to implement the program. Development of Technologies (Showa Denko K.K.) The Showa Denko Group’s Responsi and Products ble Care activities are conducted within Fully utilizing its core technologies, the Group Energy Consumption Rate Transition our 13 business divisions/departments, is continuing to develop new products and 15 operation sites, 3 branches, the Busi technologies to contribute to sustainable growth of society. For example, we are accel- 100 ness Development Center, and 14 subsidiaries/affiliates, based on voluntary, erating our development and marketing specific action plans prepared in line efforts in the business field of plant factories. 90 with the CSR Committee’s basic plan. The market size of plant factories is expected The following are some examples of our to increase because plant factories have RC activities: many advantages, including realization of sta- 80 ble food production not affected by weather Energy Conservation and farming without insecticides due to their 70 We are making our best efforts to conserve insect-damage-free environment. To stimu- ’90 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 Relative value: base year 1990 energy to contribute to the prevention of late the market growth of plant factories, we (Showa Denko K.K.) global warming and protect natural resourc- have developed ultra-bright red LED chips es. Due mainly to the substantial influence of that emit red light of optimum wavelength for Trends in the Final Volume production troubles, the effect of improve- accelerating the growth of plants, and are of Landfill Disposal ments of production facilities in 2010, on our actively promoting equipment for plant facto-

(Tons/year) rate of energy consumption per unit produc- ries, including heat-insulating walls for clean 20,000 tion in 2011, was very limited. Our rate of rooms. On the other hand, our efforts to energy consumption per unit production in enhance environment-conscious manage- 15,000 2011, that was 91.4% of the 1990 figure, ment and business continuity management was almost the same as that of the previous 10,000 with disaster preparedness were highly rated year. We will continue promoting energy con- by the Development Bank of Japan (DBJ),

5,000 servation in a systematic manner. Moreover, and we have been given the highest ratings approximately 20% of our total electricity in the DBJ’s Environmental Responsibility 0 requirements are now met by our hydroelec- Ratings and Business Continuity ’90 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 tric power plants. We will continue to make Management Ratings. Base year 1990 (Showa Denko K.K.) the most of this clean source of energy. Reduction of Trends in Greenhouse Gas Emissions Greenhouse Gas Emissions Our greenhouse gas (GHG) emissions in

(Emissions: Kt-CO2) 3,500 2011 fell 20% from the base year (1990) figure. As for the commitment period (2008- 2011), our GHG emissions fell 15% on the 3,000 average. We are confident we will be able to Commitment to Chemical Safety achieve the goal of a 6% reduction from the Following the enforcement of the EU’s new chemical legislation (Registration, 2,500 1990 figure within the time frame of 2008- 2012 under the Kyoto Protocol. However, we Evaluation, Authorization and Restriction of are proceeding with further reduction efforts. Chemicals, or REACH), we completed the 2,000 registration of 10 substances in 2010. We ’90 ’07 ’08 ’09 ’10 ’11 ’08 –’12 Group’s are now making preparations for registration target Contribution to a Base year 1990 Recycling-based Society in 2013. We are also steadily addressing the (SDK and Consolidated Subsidiaries in Japan) We are committed to effectively using indus- EU’s rules of Classification, Labeling and Note: On this page, the term “year” refers to the period from April 1 of the trial waste and to reducing the volume of its Packaging (CLP). 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 Managing Corporate Officers Yoshiyuki Nishimura Takashi Miyazaki Officer in charge of Electronic Chemicals, Functional Chemicals, Representative Director, Chairman of the Board General Manager, Petrochemicals Division and Olefins Electronics Materials divisions, and Advanced Battery Materials Kyohei Takahashi Department Department Atsushi Mizutani Representative Director, President Shunichi Shiraishi Officer in charge of Aluminum Rolled Products, Aluminum General Representative in China, General Manager, Hideo Ichikawa Specialty Components, and Aluminum Can divisions China Office, Corporate Strategy Department, President of Showa Denko (Shanghai) Co., Ltd. Directors Akira Koinuma Saburo Muto Akira Koinuma Chief Technology Officer; Officer in charge of Production Technology, Energy & Electricity, SPS Innovation, and CSR General Manager, Finance & Accounting Department Yoshikazu Sakai departments, Chairman, Safety Measures Committee Shunji Fukuda Jiro Ishikawa General Manager, HD Division Hirokazu Iwasaki Corporate Officers Masaru Amano Yoshikazu Sakai Keiichi Kamiguchi Chief Financial Officer; Officer in charge of Finance & General Manager, Corporate Strategy Department Tomofumi Akiyama (Outside Director) Accounting and Information Systems departments Kanji Takasaki Akiyoshi Morita (Outside Director) Shunji Fukuda Assistant to President in charge of special assignment matters; Officer in charge of Industrial Gases, Basic Chemicals, and Executive Vice President of Keihin Thermal Technology Co., Ltd. Corporate Strategy departments Auditors Hitoshi Tanaka Hirokazu Iwasaki General Manager, Carbons Division Standing Statutory Auditors Officer in charge of complex and plants (Oita Complex and Kawasaki, Higashinagahara, Tokuyama, Isesaki, Tatsuno, Tatsuharu Arai Ichiro Nomura Yokohama, Shiojiri, Chichibu, Omachi, Oyama, and Kitakata Oita Complex Representative plants) Akira Sakamoto Nobuhiko Kawamura Auditors Yoshiharu Mizuno General Manager, Electronics Materials Division Officer in charge of Ceramics and Carbons divisions Hiroyuki Tezuka (Outside Auditor) Jun Tanaka Yukio Obara (Outside Auditor) Masaru Amano General Manager, Advanced Battery Materials Department; Chief Risk Management Officer; Officer in charge of Internal President, Showa Denko Packaging Co., Ltd. Kiyomi Saito (Outside Auditor) Audit, Legal & Intellectual Property, General Affairs & Human Resources, and Purchasing & SCM departments; Chairman, Kohei Morikawa Security Export Control Committee General Manager, Electronic Chemicals Division

Corporate Officers and Robert C. Whitten Senior Corporate Fellow Senior Corporate Fellow President and CEO, Showa Denko Carbon, Inc.; Assistant to Takashi Nakayama President in charge of special assignment matters (in charge of Chief Executive Officer Global Marketing) Assistant to President in charge of new business creation relating to chemicals Hideo Ichikawa Tetsuo Nakajo Officer in charge of Corporate R&D Department; General Manager, Business Development Center

20 A Unique Chemical Company Corporate Governance

1. Basic concept regarding the speed of decision making and vitalize pertaining to overall management of the corporate governance operations. Meanwhile, the Company has Company. The decisions are made after We fully recognize the importance of corpo- substantially reduced the number of direc- deliberations on two occasions. As for rate governance as a means to ensure the tors. In addition, we have strengthened the investment plans, their risks are examined soundness, effectiveness, and transparency supervision functions by appointing outside by task teams before referral to the of management, and to earn the full trust directors. At Board meetings held once or Management Committee, and their progress and confidence of the market and society, twice a month, the Board decides the Com is monitored after authorization. The Compa thereby enhancing corporate value over the pany’s basic policy and decides, after full ny’s medium-term business plans are decid- long term. The Company is, therefore, taking deliberation, on matters provided for in the ed not only by the Management Committee various measures to strengthen compliance Companies Act and the Company’s Articles but also by the participation of all corporate and management supervision, clarify man- of Incorporation as well as important matters officers. The Company considers that agement responsibility, ensure quick deci- for the execution of the Company’s opera- responsible execution forms the basis of sion making and effective execution, and tions, ensuring a speedy and vigorous deci- corporate activities. The Company evaluates improve disclosure. We also aim to strength- sion-making process. We appoint directors performances of respective business seg- en relations with our stakeholders, including from the viewpoint of strengthening corpo- ments to ensure the effective implementa- shareholders, customers, suppliers, citizens, rate governance, aiming to strengthen the tion of the performance-based evaluation and employees. Based on the above, we Board of Directors’ supervision functions system. The Company has Security Export have clarified our mission in the form of the and ensure the propriety of the decision- Control and Safety Measures committees Company vision stated below, working hard making process. We make sure that corpo- under the CSR Committee chaired by the to realize this vision. rate officers whose duties are primarily President. The Company also has Responsi business execution will not concurrently ble Care, Risk Management, Human Rights/ VISION serve as directors, in principle. Furthermore, Corporate Ethics, and IR promotion councils. We at the Showa Denko Group will provide we have abolished the system of officer These committees and councils investigate, products and services that are useful and directors except for the Chairman and the study, and deliberate on specific matters safe and exceed our customers’ expecta- President, while strengthening the super important for the execution of businesses. tions, thereby enhancing the value of the vision by auditors (including outside auditors) Group, giving satisfaction to our sharehold- and mutual supervision among directors. 4. Situation of auditing functions ers, and contributing to the sound growth of The term of office of directors has been The Company’s Board of Auditors consists of international society as a responsible corpo- shortened to one year to ensure a quick five auditors, including three outside auditors. rate citizen. response to changes in the business envi- The auditors attend the Board of Directors’ ronment and to clarify management respon- meetings and other important internal meet- 2. Situation of the Company’s sibility of directors. At the Company’s ings, offering opinions as necessary. They supervision and decision- ordinary general meeting of shareholders audit the execution of operations through making functions held on March 27, 2013, nine directors, such means as field investigations, hearing We have adopted the auditor system to including two outside directors, were sessions, and perusal of important docu- enhance the fairness and transparency of appointed. ments, making proposals and providing management, ensuring efficient manage- advice and recommendations to ensure the ment of the Company. To clearly separate 3. Situation of business sound management of the Company. They management supervision functions from execution are working to strengthen the consolidated business execution functions, we have intro- The Management Committee, which meets auditing system in cooperation with auditors duced the corporate officer system. The top once a week in principle and is chaired of major associated companies. We have management team, consisting of the Presi by the President, deliberates and decides on a department for internal audit reporting dent and corporate officers in charge of matters to be referred to the Board of directly to the President. The Internal Audit respective operations, is working to increase Directors’ meetings and important matters Department investigates the overall

Showa Denko K.K. 21 Corporate Governance

execution of business, checking for accura- and channels of communication for report- whether to sell the Company’s shares in cy, propriety, and efficiency. It also investi- ing the matter. response to such a proposal shall eventually gates the management policies, business be made based on the opinion of the share- plans, and their execution, checking for con- Risk management holders, which is reached after being given sistency and soundness. The results of The Management Committee examines the sufficient information necessary for internal auditing are reported to auditors to important matters from various angles. In making an appropriate decision and suffi- ensure consistency with audits by auditors. particular, investment plans are examined cient time for consideration. As for matters relating to the environment carefully from such viewpoints as strategic However, the purposes of some large- and safety, respective divisions in charge importance and risk management. Further scale purchases do not contribute to the tar- conduct Responsible Care audits. KPMG more, their progress is monitored and their get company’s corporate value and the AZSA LLC. conducts auditing of the Compa results are reviewed. Respective business common interests of shareholders, such as ny based on an auditing contract and an sectors analyze and evaluate their own busi- those that a) obviously damage the corpo- annual plan agreed upon with auditors, and ness risks. The Risk Management Promotion rate value and common interests of share- provides audit results to auditors. The Council, which is chaired by the Company’s holders or b) do not provide sufficient time accounting corporation and auditors Chief Risk Management Officer, is under the nor information for the target company’s exchange information and views from time CSR Committee chaired by the President. board of directors or shareholders to exam- to time to strengthen their cooperation. The Risk Management Promotion Council ine the conditions of the purchase. The decides the Company’s basic risk manage- Company believes that, ideally, its share- 5. Compliance and ment policy, regularly evaluates overall risks, holders should make the decision as to risk management works out measures regarding high-risk whether the large-scale purchases proposed The Company’s Board of Directors has matters, and checks how the measures are by a specific person or other entity secure decided to strengthen compliance and pro- implemented by relevant business sectors. and enhance the Company’s corporate value mote risk management as key components As to individual risks pertaining to envi- and the common interests of shareholders, of its internal control system. The Board will ronmental protection, industrial safety, by obtaining necessary and sufficient infor- continue to work on these issues. disaster prevention, chemical substances, mation from both the purchaser and the product quality, intellectual property, fair Company’s Board of Directors. Compliance trade, export control, and legal matters, rele- The Company’s Board of Directors has The Company is working to strengthen com- vant staff sections establish in-house rules determined that it is necessary to continue pliance through the Code of Conduct for its and manuals, provide seminars, and man- to have certain rules to prevent purchases employees and the Human Rights/Corporate age risks through the review and authoriza- which do not contribute to enhancing the Ethics Promotion Council, which is under the tion of proposals from business sectors. In Company’s corporate value and which are CSR Committee chaired by the President. the event of an emergency, the Company contrary to the common interests of share- Every January, we observe Corporate Ethics will set up crisis headquarters to take swift holders. Therefore, the Company has Month to renew our awareness. Further action and minimize damage. renewed its Reaction Policy on Large-scale more, compliance is strengthened through Purchases of the Company’s Stock various seminars provided by staff sections 6. Reaction policy on large-scale Certificates, which was approved and intro- and activities organized by respective busi- purchases of the Company’s duced at the Company’s ordinary general ness sectors. In the event of transgressions, stock certificates, etc. meeting of shareholders in March 2008, by the Company takes measures to prevent The Company believes that its shareholders modifying a portion of its contents and recurrence and takes disciplinary actions. should be determined through the free obtaining approval at the Company’s ordi- The performance evaluation of relevant sec- movement of its shares in the market. nary general meeting of shareholders in tors is to reflect such transgressions. To pre- Although proposals regarding the large- March 2011. vent a transgression or detect it early, we scale purchases of the Company’s shares have established an internal check system are made by specific persons, the decision

22 A Unique Chemical Company 7. Other Remuneration, 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/auditors The 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

Auditing Decision Making and Supervision Job Audits Board of Auditors Accounting Board of Directors Auditors Auditor

Execution of Duty Accounting Top Management Audits President Corporate Officers in Charge Links Internal Audit Department

CSR Committee Responsible Care Promotion Council

Risk Management Promotion Council

Human Rights/Corporate Ethics Promotion Council Internal Audits IR Promotion Council

Security Export Control Committee

Safety Measures Committee Business Divisions Staff Sections Management Committee

R&D Committee

Showa Denko K.K. 23 Consolidated Six-Year Summary

Showa Denko K.K. and Consolidated Subsidiaries Thousands of December 31 Millions of yen U.S. dollars (Note 1) 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

Yen U.S. dollars (Note 1) 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

24 A Unique Chemical Company Management’s Discussion and Analysis

Chemicals Results of Operations Sales of functional polymers, industrial gases, and electronic chemicals Consolidated net sales in 2012 totaled ¥739,811 million (US$8,545 mil- were maintained at the previous year’s level. Sales of basic chemicals lion), a decrease of ¥114,347 million, or 13.4%, from the previous year decreased despite higher liquefied ammonia sales, as acrylonitrile sales due to lower sales in the Petrochemicals segment, which experienced declined due to production cuts, reflecting lower demand and the trouble with equipment in the first half of the year, and in the Aluminum stagnant market. segment, which transferred the automotive air-conditioner heat exchang- As a result, the Chemicals segment’s sales slipped ¥2,827 million, er business. or 2.2%, to ¥127,376 million (US$1,471 million). The segment recorded The cost of sales decreased ¥90,694 million, or 12.6%, to ¥628,628 an operating loss of ¥875 million (US$10 million), down ¥2,911 million million (US$7,261 million), reflecting the decrease in net sales. from the previous year. Selling, general and administrative expenses decreased ¥4,403 million, or 5.0%, to ¥83,076 million (US$960 million), due partly to the fall Electronics in transportation expenses. Sales of HD media increased due to the contribution of the capacity We recorded operating income of ¥28,108 million (US$325 million), expansion and the increase in shipment volumes of high-capacity media. down ¥19,249 million, or 40.6%, due to the decrease in operating Sales of compound semiconductors increased slightly due to higher income in all segments except Electronics. shipment volumes for LCD backlight applications, notwithstanding the R&D expenditures decreased ¥964 million, to ¥20,633 million influence of production adjustments in the electric appliance industry. (US$238 million). Meanwhile, sales of rare earth magnetic alloys decreased significantly due to the influence of inventory adjustments in the rare earth magnet industry. Information by Business Segment As a result, the Electronics segment’s sales slipped ¥1,705 million, A breakdown of net sales and operating income by business segment or 1.0%, to ¥163,306 million (US$1,886 million). However, operating is as follows. income rose ¥2,069 million, or 6.8%, to ¥32,311 million (US$373 million). Petrochemicals Production of ethylene and propylene decreased significantly from the Inorganics previous year due to the influence of the trouble with the ethylene plant Although our U.S. subsidiary’s graphite electrode sales increased due to that occurred in the first half of 2012 as well as production cuts that higher selling prices, sales of graphite electrodes on a non-consolidated reflected the globally sluggish demand. Sales of olefins decreased owing basis decreased due partly to lower volumes of shipments to the Asian to significantly lower shipment volumes. Sales of organic chemicals also market. As a result, overall sales of graphite electrodes decreased. Sales decreased due to lower shipment volumes of vinyl acetate and ethyl of ceramics decreased as shipment volumes of cerium oxide for electric acetate. material applications fell sharply due to the slackening supply-demand As a result, the Petrochemicals segment’s sales decreased ¥59,456 situation. million, or 23.7%, to ¥190,939 million (US$2,205 million). The segment As a result, the Inorganics segment’s sales decreased ¥11,991 mil- recorded an operating loss of ¥977 million (US$11 million), down lion, or 15.5%, to ¥65,573 million (US$757 million), and operating ¥4,461 million from the previous year, reflecting the fall in shipment income decreased ¥6,687 million, or 69.4%, to ¥2,954 million volumes. (US$34 million).

Net Sales by Segment Operating Income

(Billions of yen) (Billions of yen) 1,200 50

1,000 40

800 30

600 20

400 10

200 0

0 -10 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 í Petrochemicals í Chemicals í Electronics í Inorganics í Aluminum í Others Showa Denko K.K. 25 Note: Regarding changes in the segmentation, see note 2 on page 24. Management’s Discussion and Analysis

Aluminum the rolled products business. Sales of the Others segment decreased Sales of rolled products declined sharply due to the fall in shipment owing to the reduction in Shoko Co., Ltd.’s sales due partly to lower volumes of high-purity foils for capacitors. Sales of extrusions/specialty shipment volumes of metals. products decreased due to the fall in shipment volumes of aluminum As a result, consolidated sales from operations in Japan decreased cylinders for laser beam printers. Sales of Shotic™ forged products and ¥78,357 million, or 14.0%, to ¥482,126 million (US$5,569 million). aluminum cans were maintained at the previous year’s level. Sales of heat exchangers decreased significantly due to the transfer of the auto- Sales in Asia (Excluding Japan) motive air-conditioner heat exchanger business to Keihin Corporation Sales of the Petrochemicals segment decreased owing to the lower ship- in January 2012. ment volumes of ethylene, etc., due to the slackening supply-demand As a result, the Aluminum segment’s sales fell ¥32,074 million, or situation in the Asian market. Sales of the Electronics segment 25.8%, to ¥92,206 million (US$1,065 million), and operating income fell decreased, though the shipment volume of HD media increased as a ¥4,630 million, or 74.5%, to ¥1,581 million (US$18 million). result of the production capacity expansion carried out in the previous year. Others As a result, sales from operations in Asia (excluding Japan) decreased Sales of lithium-ion battery (LIB) materials decreased slightly due to ¥23,530 million, or 9.7%, to ¥219,857 million (US$2,539 million). lower shipment volumes for electric vehicle applications, notwithstanding higher shipment volumes for smartphone applications. Shoko Co., Ltd.’s Sales in the Rest of the World sales decreased due partly to lower shipment volumes of metals. Sales of the Aluminum segment decreased owing to the decline in As a result, the Others segment’s sales fell ¥15,303 million, or the shipment volumes of heat exchangers to automotive industries in 10.2%, to ¥135,280 million (US$1,562 million), and operating income the United States and Europe due to the transfer of the automotive air- fell ¥1,772 million, or 95.2%, to ¥89 million (US$1 million). 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. Information by Geographic Area As a result, sales from operations in the rest of the world decreased Sales in Japan ¥12,460 million, or 24.8%, to ¥37,827 million (US$437 million). Sales of the Petrochemicals segment decreased owing to the decrease in shipment volumes due to the influence of the trouble with the ethylene Other Income (Expenses) and Net Income plant that occurred in the first half of 2012. Sales of the Chemicals segment declined due to the decrease in shipment volumes and the slug- The gap between interest expenses and interest and dividends income gish market that reflected the slackening supply-demand situation of decreased ¥785 million, to expenses of ¥3,499 million (US$40 million), acrylonitrile. Sales of the Electronics segment decreased due to the as a result of a decrease in interest-bearing debt. We recorded equity inventory adjustments in the rare earth magnet industry. Sales of the in earnings of unconsolidated subsidiaries and affiliates to which the Inorganics segment decreased due to a reduction in the shipment vol- equity method is applied in the amount of ¥289 million (US$3 million), umes of ceramics. Sales of the Aluminum segment decreased due to the down ¥761 million, due to lower profits at affiliates in synthetic resin- transfer of the automotive air-conditioner heat exchanger business and related operations. Foreign exchange gains improved ¥599 million, a reduction in the shipment volumes of high-purity foils for capacitors in to ¥195 million (US$2 million).

Net Income Total Assets

(Billions of yen) (Billions of yen) 20 1,000

15 900

10 800

5 700

0 600

-40 0 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012

26 A Unique Chemical Company We recorded a loss of ¥1,834 million (US$21 million), net, on sales Liabilities and retirement of noncurrent assets, deterioration of ¥435 million. We Interest-bearing debt decreased ¥5,046 million from the end of the pre- also recorded a loss of ¥3,481 million (US$40 million) for the impair- vious year, to ¥342,262 million (US$3,953 million), as a result of contin- ment loss, a decrease of ¥1,146 million, due mainly to structural reform ued debt reduction efforts. Total liabilities decreased ¥27,362 million, to in our carbon nanotube business, which produces vapor grown carbon ¥618,196 million (US$7,140 million), due partly to the fall in accounts fiber (VGCF ™-X ) mainly used as additives for plastics. Loss on valuation payable. of investment securities increased ¥2,497 million, to ¥2,973 million (US$34 million), due mainly to a valuation loss of our equity investment Net Assets in an aluminum smelting company in Venezuela. On the other hand, in Net assets increased ¥19,221 million from the end of the previous year, 2012, we did not record an extraordinary loss related to the Great East to ¥314,966 million (US$3,638 million), due partly to the posting of net Japan Earthquake in March 2011, which amounted ¥3,207 million income and the increase in the foreign currency translation adjustment. (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- Capital Expenditures ment of ¥4,462 million. Capital expenditures increased ¥3,709 million, to ¥42,503 million As a result, the Company posted income before taxes and minority (US$491 million), due partly to the production capacity expansion pro- interests of ¥11,288 million (US$130 million), down ¥14,787 million grams, one in our U.S. subsidiary in the graphite electrode business and from the previous year. After corporate income taxes, current, of ¥4,925 another in the business of SiC epitaxial wafers for power devices. million (US$57 million), corporate income taxes, deferred, of ¥(4,674) million (US$(54) million), and minority interests in income of ¥1,670 mil- Cash Flows lion (US$19 million), the Company recorded net income of ¥9,368 mil- Net cash provided by operating activities decreased ¥16,127 million lion (US$108 million), down ¥7,612 million over the previous year. 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 Financial Position million (US$464 million), due partly to the increase in purchase of plant, Total Assets property and equipment. Cash flows from financing activities ended up in Total assets decreased ¥8,141 million from the end of the previous year, net payment of ¥20,150 million (US$233 million), an increase of ¥2,854 to ¥933,162 million (US$10,778 million). Cash and deposits decreased million in payment, as a result of continued debt reduction efforts. As a ¥3,581 million, to ¥51,606 million (US$596 million). Inventories result, taking the effects of exchange rate fluctuations into account, cash decreased ¥1,954 million, to ¥121,761 million (US$1,406 million), and cash equivalents at the end of 2012 decreased ¥3,772 million, to reflecting the transfer of the automotive air-conditioner heat exchanger ¥51,254 million (US$592 million). business. Net property, plant and equipment decreased ¥9,111 million, to ¥473,253 million (US$5,466 million), as the amount of capital investment 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.

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

(Billions of yen) (Billions of yen) (Billions of yen) 400 400 80

300 60 350

200 40

300 100 20

0 0 0 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012

Showa Denko K.K. 27 Consolidated Balance Sheets

Showa Denko K.K. and Consolidated Subsidiaries Thousands of At December 31, 2012 and 2011 Millions of yen U.S. dollars (Note 6) 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.

28 A Unique Chemical Company Thousands of Millions of yen 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 Subsidiaries Thousands of For the years ended December 31, 2012 and 2011 Millions of yen U.S. dollars (Note 6) 2012 2011 2012 Net sales ...... ¥739,811 ¥854,158 $8,544,825 Cost of sales (Note 22) ...... 628,628 719,322 7,260,656 Gross profit ...... 111,183 134,836 1,284,169 Selling, 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 26,076 130,378 Income 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 19,672 127,482 Minority interests in income ...... 1,670 2,692 19,287 Net income ...... ¥ 9,368 ¥ 16,980 $ 108,196

Yen U.S. dollars (Note 5) 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. See notes to financial statements.

30 A Unique Chemical Company Consolidated Statements of Comprehensive Income

Showa Denko K.K. and Consolidated Subsidiaries Thousands of For the years ended December 31, 2012 and 2011 Millions of yen U.S. dollars (Note 6) 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

See notes to financial statements.

Showa Denko K.K. 31 Consolidated Statements of Changes in Net Assets

Showa Denko K.K. and Thousands Millions of yen Consolidated Subsidiaries Valuation Deferred For the years ended difference on gains or Foreign December 31, 2012 and 2011 Number of available- losses Revaluation currency Total shares of Capital Capital Retained Treasury for-sale on reserve translation Minority net capital stock stock surplus earnings stock securities hedges for land adjustment interests 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) 14,903 Balance 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) Valuation Deferred difference on gains or Foreign Number of available- losses Revaluation currency Total shares of Capital Capital Retained Treasury for-sale on reserve translation Minority net capital stock stock surplus earnings stock securities hedges for land adjustment interests 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) 172,128 Balance 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

See notes to financial statements.

32 A Unique Chemical Company Consolidated Statements of Cash Flows

Showa Denko K.K. and Consolidated Subsidiaries Thousands of For the years ended December 31, 2012 and 2011 Millions of yen U.S. dollars (Note 6) 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 69,437 615,729 Cash 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) 37,694 Net increase (decrease) in cash and cash equivalents ...... (3,786) 11,529 (43,726) Cash and cash equivalents at beginning of the year ...... 55,026 43,459 635,550 Increase in cash and cash equivalents from newly consolidated subsidiary ...... — 34 — Increase in cash and cash equivalents resulting from merger ...... 14 4 162 Cash and cash equivalents at end of the year (Notes 2 and 7) ...... ¥51,254 ¥55,026 $591,986 See notes to financial statements.

Showa Denko K.K. 33 Notes to Financial Statements

Showa Denko K.K. and Consolidated Subsidiaries

1. BASIS OF REPORTING AND FINANCIAL STATEMENTS Translation adjustments resulting from the process of translating the The accompanying consolidated financial statements have been financial statements of foreign subsidiaries into Japanese yen are accu- prepared in accordance with accounting principles and practices gener- mulated and reported as a component of net assets on the consolidated ally accepted in Japan, which are different in certain respects as to balance sheet. application and disclosure requirements from International Financial Reporting Standards, and restructured and translated into English from (d) Cash and Cash Equivalents the consolidated financial statements which have been filed with the Cash and cash equivalents in the consolidated statement of cash flows Kanto Local Finance Bureau as required by the Financial Instruments are composed of cash on hand, bank deposits available for withdrawal and Exchange Law of Japan. on demand and short-term investments with original maturities of three months or less and minor risk of value fluctuation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation (e) Securities The consolidated financial statements for the years ended December 31, Debt securities that are intended to be held to maturity (“held-to-maturi- 2012 and 2011 include the accounts of the Company and its 38 and 42, ty debt securities”) are stated at amortized cost on the balance sheet. respectively, significant subsidiaries (collectively “the Companies”). Available-for-sale securities with available fair market values are stated For the purposes of the consolidated financial statements, all signifi- at fair market values. Unrealized gains and unrealized losses on these cant intercompany transactions, account balances and unrealized profits available-for-sale securities are reported, net of applicable income taxes, among the Companies are entirely eliminated and the portions thereof as a separate component of the net assets. attributable to minority interests are credited or charged to minority Realized gains or losses on sale of the available-for-sale securities are interests. computed using primarily the moving-average cost. Accounts of subsidiaries whose business year-ends differ by more Available-for-sale securities with no available fair market values are than three months from December 31 have been included using appro- stated primarily at moving-average cost. priate interim financial information. In the initial consolidation, assets and liabilities of subsidiaries including (f) Allowance for Doubtful Accounts those attributable to minority stockholders are recorded based on fair To provide for losses from bad debts, the allowance is provided accord- value in the accompanying consolidated financial statements. ing to the actual rate of default for ordinary receivables and in view of Goodwill, which is the difference between the acquisition cost and the the probability of recovery for specific doubtful receivables. 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. (g) Inventories Inventories are stated at the lower of cost or market, using principally (b) Investments in Unconsolidated Subsidiaries and Affiliates the gross-average cost method. The carrying value on the consolidated The Company applied the equity method of accounting for investments balance sheets is stated by the devaluation method based on declines in 2 unconsolidated subsidiaries in both 2012 and 2011, and 17 affili- in profitability. ates in 2012 and 16 affiliates in 2011. All underlying intercompany profits obtained from transactions among (h) Property, Plant and Equipment the Companies and unconsolidated subsidiaries and affiliates to which Property, plant and equipment is stated at cost, in principle. Depreciation the equity method is applied are eliminated in the consolidated financial of property, plant and equipment is computed principally by the straight- statements. line method, but the declining- balance method is applied to certain factories of the Company and some of the consolidated subsidiaries. (c) Translation of Foreign Currency Accounts All receivables and payables denominated in foreign currencies at the (i) Intangible Assets balance sheet date are translated into Japanese yen at the current The Company and some of the consolidated subsidiaries principally apply exchange rates. the straight-line method over five years to amortize intangible assets. The resulting exchange gains or losses are credited or charged to income. (j) Leased Assets The financial statements of certain consolidated subsidiaries of Leased assets in finance lease transactions that do not transfer owner- foreign nationality are translated into Japanese yen at the year-end rate ship to the lessee are depreciated using the straight-line method on the for assets and liabilities, at historical rates for the other balance sheet assumption that the useful life is equal to the lease term and the residual accounts exclusive of the current year’s net income, and at the average value is equal to zero. For leases with a residual value guarantee, the annual rate for revenue and expense accounts and net income. contracted residual value is considered to be the residual value for financial accounting purposes.

34 A Unique Chemical Company Please note that finance lease transactions, other than those involving on Tentative Treatment of Tax Effect Accounting under the Consolidated the transfer of ownership and which commenced on or before December Taxation System (Part 1)” (ASBJ Practical Issues Task Force No. 5, issued 31, 2008, are accounted for by the same methods as for operating lease on March 18, 2011) and the “Practical Solution on Tentative Treatment of transactions. Tax Effect Accounting under the Consolidated Taxation System (Part 2)” (ASBJ Practical Issues Task Force No. 7 issued on June 30, 2010) under (k) Provision for Business Structure Improvement the assumption that it will apply a consolidated taxation system. The Company and some of the consolidated subsidiaries record the provision for business structure improvement on an accrual basis to provide (r) Derivative Financial Instruments and Hedge Accounting for expenses and losses resulting from their restructuring programs. The Company and certain subsidiaries state all derivative financial instruments at fair value and recognize changes in fair value as gains or (l) Provision for Bonuses losses unless the derivative financial instruments are used for hedging A provision for bonuses is provided at an amount estimated based on purposes. the bonus to be paid subsequent to the balance sheet date. If the derivative financial instruments meet certain hedging criteria, the Company and certain subsidiaries defer recognition of gains or loss- (m) Provision for Retirement Benefits es resulting from changes in fair value of derivative financial instruments A provision for retirement benefits is provided based on the projected until the related gains or losses on hedged items are recognized. benefit obligation and fair value of plan assets at the end of the year. However, when forward exchange contracts meet certain hedging Prior service costs are amortized on a straight-line basis over certain criteria, the hedged items are stated by the forward exchange contracts periods (mainly 12 years) within the average remaining service periods. rate. If interest rate swap contracts meet certain hedging criteria, the net The unrecognized actuarial gain or loss is amortized starting the year amount to be paid or received under the interest rate swap contracts is after such actuarial loss is determined on a straight-line basis over certain added to or deducted from interest on the assets or liabilities for which periods (mainly 12 years) within the average remaining service periods. the interest rate swap contracts were executed. Hedge accounting is not applied at some of the foreign subsidiaries. (n) Provision for Repairs The Company and some of the consolidated subsidiaries provide (s) Reclassifications a provision for repairs in an amount estimated to be necessary for Certain reclassifications have been made in the 2011 financial state- the scheduled maintenance for certain production equipment. ments to conform to the presentation of 2012.

(o) Provision for Niigata Minamata Disease 3. CHANGES IN ACCOUNTING POLICIES To provide for lump-sum payments pursuant to the Special Measures Changes in the Method of Depreciation Law Regarding Relief to Persons Suffering from Minamata Disease and The Company and certain domestic consolidated subsidiaries, accompany- Regarding Solutions to the Minamata Disease Problem, the Company ing the revisions in the Corporation Tax Act of Japan, have changed their makes a provision in the expected amount of such payments. accounting methods for depreciation based on the revised Corporation Tax Act for tangible fixed assets acquired on or after April 1, 2012. (p) Provision for Loss on the Great East Japan Earthquake Please note that the change in net income following these accounting The Company provides a provision for loss on the Great East Japan changes was not material. Earthquake to cover the damages of the subsidiary devastated by the earthquake. 4. THE “ACCOUNTING STANDARD FOR RETIREMENT BENEFITS” (ACCOUNTING STANDARDS BOARD OF JAPAN STATEMENT NO. 26, (q) Income Taxes ISSUED ON MAY 17, 2012) AND THE “GUIDANCE ON ACCOUNTING Income taxes consist of corporation, enterprise and inhabitants taxes. The STANDARD FOR RETIREMENT BENEFITS” (ACCOUNTING STANDARDS provision for income taxes is computed based on the pretax income of BOARD OF JAPAN GUIDANCE NO. 25, ISSUED ON MAY 17, 2012) each of the Company and its consolidated subsidiaries with certain adjust- (a) Overview ments required for consolidation and tax purposes. The asset and liability Revisions apply mainly to the accounting treatments for unrecognized approach is used to recognize deferred tax assets and liabilities for the actuarial gains and losses as well as unrecognized prior service costs, expected future tax consequences of temporary differences between the the calculation methods for retirement benefit obligations as well as ser- carrying amounts and the tax bases of assets and liabilities. (Valuation vice costs, and broadening disclosure taking into consideration improve- allowances are recorded to reduce deferred tax assets based on the ments to financial reporting and international trends. assessment of the realizability of the tax benefits.) (b) Scheduled Effective Date Application of the consolidated taxation system The revised Accounting Standard and Guidance are scheduled to take The Company and certain domestic consolidated subsidiaries have ap- effect from the end of each consolidated accounting period that com- plied for approval to adopt the consolidated taxation system from the year mences after January 1, 2014. However, revisions to the calculation ending December 31, 2013. As of the current fiscal year, the Company methods for retirement benefit obligations and service costs are sched- and certain domestic consolidated subsidiaries have implemented uled to take effect from the beginning of each consolidated accounting accounting treatment and presentation based on the “Practical Solution period that commences after January 1, 2015.

Showa Denko K.K. 35 Notes to Financial Statements

(c) The Impact of the Adoption of the Revised Accounting 6. JAPANESE YEN AND TRANSLATION INTO U.S. DOLLARS Standard and Guidance The Companies’ accounting records are maintained in yen. Yen amounts The impact of the adoption of the revised accounting standard and guid- included in the financial statements are rounded to the nearest one mil- ance on consolidated financial statements are currently under evaluation. lion unit. Therefore, the total and sub total amounts presented in the financial statements may not equal the exact sum of the individual bal- 5. SUPPLEMENTARY INFORMATION ances. The U.S. dollar amounts appearing in the accompanying financial Accounting changes and prior year error corrections that occurred after statements and notes thereto represent the arithmetical results of trans- the beginning of the year ended December 31, 2012, have been treated lating yen into U.S. dollars at the rate of ¥86.58 to US$1.00, the approx- in accord with the “Accounting Standard for Accounting Changes and imate rate of exchange at December 31, 2012. The inclusion of such Error Corrections” (ASBJ Statement No. 24, issued on December 4, U.S. dollar amounts is solely for the convenience of readers; it does not 2009) and the “Guidance on the Accounting Standard for Accounting carry with it any implication that yen amounts have been or could be Changes and Error Corrections” (ASBJ Guidance No. 24, issued converted into U.S. dollars at that rate. December 4, 2009).

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:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Cash and deposits ...... ¥51,606 ¥55,187 $596,054 Original 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 (2) Types of financial instruments and related risks fiscal year because of the business divestiture Operating receivables, such as notes and accounts receivable, are The breakdown of assets and liabilities that decreased because the exposed to credit risk. Foreign-currency-denominated accounts receiv- Company transferred the business of manufacturing its heat exchange able incurred through exports are exposed to foreign currency fluctuation components for use in automotive air conditioners business to Keihin risk. However, the Companies hedge the risk by utilizing forward Corporation is as follows: exchange contracts, currency options, and currency swaps based on Current assets: ¥10,012 million ($115,639 thousand) internal rules that set out foreign currency risk management principles. Fixed assets: ¥ 3,385 million ($ 39,097 thousand) Marketable securities and investment securities mainly consist of the Total assets: ¥13,396 million ($154,724 thousand) stocks of partner companies to maintain and strengthen their business relationships and are exposed to market fluctuation risk. Current liabilities: ¥ 3,991 million ($ 46,096 thousand) Operating payables, such as notes and accounts payable–trade and Noncurrent liabilities: ¥ 17 million ($ 196 thousand) other, are due within one year. Foreign-currency-denominated accounts Total liabilities: ¥ 4,008 million ($ 46,292 thousand) payable incurred through imports of raw materials are exposed to foreign currency fluctuation risk. The Companies hedge the risk by utilizing for- 8. FINANCIAL INSTRUMENTS ward exchange contracts following internal rules that set out the foreign (a) Overview currency risk management principles. Short-term debt and commercial (1) Management policy relating to financial instruments paper are mainly used to finance short-term operating funds, and long- The Companies finance necessary long-term funds by bank loans and term debts and bonds are mainly used to finance equipment funds. bond issues following the capital investment plans and finance short- Since some of long-term debt is made up of variable interest rate loans, term operating funds by bank loans and commercial paper. Temporary it is exposed to interest rate fluctuation risk. However, interest rate swaps excess funds are invested exclusively in financial instruments which have are used for most loans to hedge the risk. fixed returns and low risk of falling below par values. The Companies use The Companies utilize derivative transactions, such as forward derivative transactions to hedge the following risks and do not enter into exchange contracts, currency options, and currency swaps, to hedge the derivative transactions for speculative purposes. foreign currency fluctuation risk of operating receivables and payables denominated in foreign currencies and financing transactions denominated 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.

36 A Unique Chemical Company (3) Risk management relating to financial instruments The Company has internal management rules that set out the approv- (i) Credit risk management (risk of default by the counterparties) al authorities and procedures of the derivative transactions. The Company follows internal rules that set out accounts receivable The derivative transactions are carried out based on the appropriate management principles. The compliance department works with the approver set out in the internal rules. For currency-related derivative sales division in each sector and monitors the customers’ credit condi- transactions, each division and the treasury department perform and tions periodically and reviews the sales policy checking the sales volume manage transactions and report to the director in charge periodically. and balances. The Company takes measures to obtain information on For interest-related derivative transactions, the treasury department and minimize the credit risk that may arise due to the deterioration in the performs and manages the transactions and reports to the director in financial condition of their customers. Consolidated subsidiaries monitor charge periodically. For commodity-related derivative transactions, each their customers’ financial and credit conditions based on their internal division performs and manages the transactions and reports to the rules. director in charge periodically. Consolidated subsidiaries perform and There is no material credit risk of held-to-maturity debt securities manage derivative transactions based on their internal management as they are limited to only highly rated securities. standards. The Companies utilize derivative transactions only with creditworthy financial institutions and trading companies to minimize credit risk. (iii) Liquidity risk management (risk of default on payment The maximum credit risk as of December 31, 2012 is disclosed as due dates) the balance sheet amount of financial instruments exposed to credit risk. The Company manages liquidity risk by requiring the treasury department to prepare and update cash plans, based on the schedule for cash (ii) Market risk management (risk of fluctuations inflows and disbursements in each division. In addition, the Company in foreign currency and interest rates) signs commitment line contracts and makes other arrangements with For operating receivables and payables and loans denominated in financial institutions to secure the necessary liquidity. Consolidated foreign currencies, the Company and certain consolidated subsidiaries subsidiaries manage their liquidity risk through similar procedures. utilize forward exchange contracts, currency options, and currency swaps to hedge some of the foreign currency fluctuation risk, which is (4) Supplemental explanation on fair value of financial instruments categorized by currency and maturity date. The Company and certain As well as the values being based on market prices, fair value of finan- consolidated subsidiaries utilize currency swaps to hedge the interest cial instruments includes values which are reasonably calculated in case rate fluctuation risk of loans. market prices do not exist. As the calculation of those values uses cer- For marketable securities and investment securities, the Companies tain assumptions, those values may vary in the case of different assump- regularly review the fair value and issuers’ financial conditions and tions being applied. Also, for the contract amount and others regarding review the Companies’ portfolio on an ongoing basis, except for held- derivative transactions described in Note 10. DERIVATIVE FINANCIAL to-maturity debt securities, according to market conditions and the INSTRUMENTS, the contract amount itself does not indicate market risk business relationships with counterparties. 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 Notes to Financial Statements

Year ended December 31, 2011 Millions of yen Book value Fair value Difference (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 Book value Fair value Difference (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 market prices. • Derivative transactions Refer to Note 10. DERIVATIVE FINANCIAL INSTRUMENTS.

38 A Unique Chemical Company 2. Financial instruments for which fair value is extremely difficult to determine Thousands of Millions of yen U.S. dollars 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 Year ended December 31, 2012 Millions of yen Due in 1 year Due after 1 year Due after 5 years Due after or less through 5 years through 10 years 10 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...... 20 —— Total ...... ¥189,798 ¥ 0 ¥— ¥—

Year ended December 31, 2011 Millions of yen Due in 1 year Due after 1 year Due after 5 years Due after or less through 5 years through 10 years 10 years Cash and deposits ...... ¥ 55,187 ¥— ¥— ¥— Notes and accounts receivable–trade ...... 139,364 — — — Marketable securities and investment securities: Held-to-maturity debt securities Government and local bonds and others...... 2 2 — — Total ...... ¥194,553 ¥ 2¥—¥—

Year ended December 31, 2012 Thousands of U.S. dollars Due in 1 year Due after 1 year Due after 5 years Due after or less through 5 years through 10 years 10 years Cash and deposits ...... $ 596,054 $— $— $— Notes and accounts receivable–trade ...... 1,596,089 — — — Marketable securities and investment securities: Held-to-maturity debt securities Government and local bonds and others...... 23 0 — — 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

Year ended December 31, 2012 Millions of yen Book value Fair value Difference 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 Notes to Financial Statements

Year ended December 31, 2011 Millions of yen Book value Fair value Difference 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 ...... 5 5 (0) Total...... ¥ 5 ¥ 5 ¥ (0)

Year ended December 31, 2012 Thousands of U.S. dollars Book value Fair value Difference 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 ...... 26 26 (0) Total...... $26 $26 $ (0)

(b) Available-for-sale securities

Year ended December 31, 2012 Millions of yen Book value Acquisition cost Difference Available-for-sale securities whose book value exceeds their acquisition cost Equity securities ...... ¥21,984 ¥17,670 ¥4,314 Available-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

Year ended December 31, 2011 Millions of yen Book value Acquisition cost Difference Available-for-sale securities whose book value exceeds their acquisition cost 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)

Year ended December 31, 2012 Thousands of U.S. dollars Book value Acquisition cost Difference Available-for-sale securities whose book value exceeds their acquisition cost Equity securities ...... $253,915 $204,089 $49,827 Available-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

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

Year ended December 31, 2012 Millions of yen Sales Gross gain Gross loss Equity securities ...... ¥255 ¥145 ¥— Total ...... ¥255 ¥145 ¥—

Year ended December 31, 2011 Millions of yen Sales Gross gain Gross loss Equity securities ...... ¥338 ¥225 ¥(37) Corporate bonds ...... 71 — (13) Total ...... ¥409 ¥225 ¥(49)

Year ended December 31, 2012 Thousands of U.S. dollars Sales Gross gain Gross loss Equity securities ...... $2,948 $1,680 $— Total ...... $2,948 $1,680 $—

(d) Value of securities written off due to impairment For 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 Contract Contract Contract amount Fair Valuation Contract amount Fair Valuation Contract amount Fair Valuation amount over 1 year value gain (loss) amount over 1 year value gain (loss) amount over 1 year value gain (loss) (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—4343 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 Notes to Financial Statements

(b) Derivative Transactions to which Hedge Accounting Is Applied

Millions of yen Thousands of U.S. dollars 2012 2011 2012 Contract Contract Contract Contract amount Fair Contract amount Fair Contract amount Fair amount over 1 year value amount over 1 year value amount over 1 year 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 method Forward 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 method Interest 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 STATEMENTS The year-end date of 2012, namely, December 31, 2012, was a bank holiday. Although notes receivable and payable maturing on this date were accordingly 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:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Notes receivable ...... ¥1,754 ¥451 $20,264 Notes payable ...... 546 743 6,311

42 A Unique Chemical Company 12. SHORT-TERM DEBT AND LONG-TERM DEBT At December 31, 2012 and 2011, the short-term debt of the Companies consisted of the following:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Bank loans at the average interest rate of 0.63% ...... ¥63,741 ¥68,122 $ 736,207 Commercial 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:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 1.81% bonds due 2012 ...... ¥ — ¥ 10,000 $ — 1.49% bonds due 2012 ...... — 10,000 — 0.88% bonds due 2015 ...... 10,000 10,000 115,500 0.67% bonds due 2016 ...... 10,000 10,000 115,500 0.63% bonds due 2017 ...... 10,000 — 115,500 ¥24,000,000,000 subordinated convertible bonds due 2014 ...... 24,000 24,000 277,200 Loans 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 3,205,368 Elimination 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 Thousands of Millions of yen U.S. dollars 2014...... ¥ 41,279 $ 476,772 2015...... 78,613 907,978 2016...... 51,965 600,195 2017...... 30,441 351,599 2018 and thereafter ...... 4,600 53,130 Total ...... ¥206,898 $2,389,673

Showa Denko K.K. 43 Notes to Financial Statements

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

Thousands of Millions of yen U.S. dollars 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:

Thousands of Millions of yen U.S. dollars 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 18,091 132,990 Unrecognized 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:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Service cost ...... ¥2,263 ¥2,350 $26,138 Interest cost ...... 1,830 2,019 21,135 Expected return on plan assets ...... (1,012) (1,106) (11,684) Recognized actuarial loss ...... 3,807 4,041 43,972 Prior 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

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

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

Thousands of Millions of yen U.S. dollars 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:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Deferred tax assets—current ...... ¥ 5,733 ¥ 3,177 $ 66,215 Deferred tax assets—noncurrent ...... 27,494 27,533 317,556 Other current liabilities ...... (94) (14) (1,091) Deferred tax liabilities—noncurrent ...... (2,110) (2,460) (24,375)

Showa Denko K.K. 45 Notes to Financial Statements

(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:

Thousands of Location Major use Asset category Millions of yen U.S. dollars Aizuwakamatsu City, Fukushima Prefecture Idle assets Machinery and equipment, etc. ¥ 178 $ 2,055 Ichihara City, Chiba Prefecture Idle assets Machinery and equipment 393 4,540 Yokohama City, Kanagawa Prefecture Production facilities Machinery and equipment, etc. 709 8,187 Oita City, Oita Prefecture Production facilities Machinery and equipment, etc. 1,696 19,591 Guangdong, China Rent facilities Machinery and equipment 284 3,285 Other ...... 221 2,551 Total ...... ¥3,481 $40,208

46 A Unique Chemical Company 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 Thousands of Millions of yen U.S. dollars 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 ...... 19 Total...... 75 861 Total other comprehensive income ...... ¥17,172 $198,332

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

(1) Type of leased assets a) 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 Notes to Financial Statements

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

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Machinery and equipment ...... ¥6,228 ¥8,883 $71,933 Other ...... 27 65 312 Less: 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:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Due within one year ...... ¥ 596 ¥ 946 $ 6,886 Due 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:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Paid lease fees ...... ¥938 ¥1,458 $10,830 Amortization 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 Lessee At December 31, 2012 and 2011, assets leased under non-capitalized operating leases were as follows: Future minimum lease payments for the remaining lease periods:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Due within one year ...... ¥ 359 ¥ 364 $ 4,150 Due over one year ...... 1,726 1,663 19,933 Total ...... ¥2,085 ¥2,027 $24,083

(c) Operating Leases as a Lessor At 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:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Due within one year ...... ¥ 104 ¥ 152 $ 1,205 Due over one year ...... 1,053 1,760 12,157 Total ...... ¥1,157 ¥1,912 $13,362

48 A Unique Chemical Company 18. CONTINGENT LIABILITIES At December 31, 2012 and 2011, the Companies were guarantors for the borrowings below. The guarantees were principally for unconsolidated subsidiaries, affiliates and others.

Thousands of Millions of yen U.S. dollars 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 ASSETS The 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 statement s of the Company in accordance with Japanese laws and regulations.

20. REVALUATION RESERVE FOR LAND The Company and some of its consolidated subsidiaries revalued the land they own for business in accordance with the Law conc erning 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 EXPENSES Selling, general and administrative expenses for the years ended December 31, 2012 and 2011 were summarized as follows:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Freight ...... ¥18,033 ¥19,035 $208,278 Employees’ compensation ...... 19,988 20,550 230,859 Other ...... 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 DEVELOPMENT Research 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 Notes to Financial Statements

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

Year ended December 31, 2012 Millions of yen Petrochemicals Chemicals Electronics Inorganics Aluminum Others Total Adjustments Consolidated Sales Outside customers ...... ¥185,434 ¥118,504 ¥161,125 ¥ 57,191 ¥ 87,960 ¥129,597 ¥739,811 ¥ — ¥739,811 Inter-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 ¥933,162 Depreciation and amortization ...... 7,207 9,162 16,287 3,381 6,072 2,380 44,488 1,744 46,232 Amortization of goodwill ...... 6 (211) 90 1,368 (38) (20) 1,195 — 1,195 Investments 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 expenses 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.”

Year ended December 31, 2011 Millions of yen Petrochemicals Chemicals Electronics Inorganics Aluminum Others Total Adjustments Consolidated Sales Outside 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.”

50 A Unique Chemical Company Year ended December 31, 2012 Thousands of U.S. dollars Petrochemicals Chemicals Electronics Inorganics Aluminum Others Total Adjustments Consolidated Sales Outside customers ...... $2,141,763 $1,368,721 $1,860,999 $ 660,558 $1,015,943 $1,496,843 $ 8,544,825 $ — $ 8,544,825 Inter-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 $10,778,029 Depreciation and amortization ...... 83,236 105,820 188,111 39,048 70,131 27,488 513,832 20,143 533,975 Amortization of goodwill...... 66 (2,432) 1,034 15,804 (439) (230) 13,803 — 13,803 Investments in unconsolidated subsidiaries 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

Year ended December 31, 2012 Millions of yen Japan Asia Others Total Sales ...... ¥482,126 ¥219,857 ¥37,827 ¥739,811

Year ended December 31, 2011 Millions of yen Japan Asia Others Total Sales ...... ¥560,483 ¥243,387 ¥50,287 ¥854,158

Year ended December 31, 2012 Thousands of U.S. dollars Japan Asia Others Total Sales ...... $5,568,564 $2,539,354 $436,907 $8,544,825

Year ended December 31, 2012 Millions of yen Japan Others Total Property, plant and equipment ...... ¥419,879 ¥53,374 ¥473,253

Year ended December 31, 2011 Millions of yen Japan Others Total Property, plant and equipment ...... ¥431,546 ¥50,817 ¥482,363

Year ended December 31, 2012 Thousands of U.S. dollars Japan Others Total Property, plant and equipment ...... $4,849,609 $616,466 $5,466,075

Year ended December 31, 2012 Millions of yen 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 Notes to Financial Statements

Year ended December 31, 2011 Millions of yen Petrochemicals Chemicals Electronics Inorganics Aluminum Others Elimination Total Impairment loss on assets ...... ¥232 ¥176 ¥3,160 ¥798 ¥73 ¥188 ¥— ¥4,627

Year ended December 31, 2012 Thousands of U.S. dollars Petrochemicals Chemicals Electronics Inorganics Aluminum Others Elimination Total 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

Year ended December 31, 2012 Millions of yen Petrochemicals Chemicals Electronics Inorganics Aluminum Others Elimination Total Amortization ...... ¥ 6 ¥283 ¥122 ¥1,368 ¥ 22 ¥ 8 ¥— ¥1,810 Unamortized balance ...... 40 582 619 4,154 222 64 — 5,681

Year ended December 31, 2011 Millions of yen Petrochemicals Chemicals Electronics Inorganics Aluminum Others Elimination Total Amortization ...... ¥ 6 ¥284 ¥118 ¥1,368 ¥ 31 ¥ 8 ¥— ¥1,815 Unamortized balance ...... 46 866 737 5,522 376 70 — 7,617

Year ended December 31, 2012 Thousands of U.S. dollars Petrochemicals Chemicals Electronics Inorganics Aluminum Others Elimination Total Amortization ...... $ 66 $3,274 $1,410 $15,804 $ 256 $ 97 $— $20,905 Unamortized 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:

Year ended December 31, 2012 Millions of yen Petrochemicals Chemicals Electronics Inorganics Aluminum Others Elimination Total Amortization ...... ¥— ¥ 494 ¥ 33 ¥— ¥ 60 ¥ 28 ¥— ¥ 615 Unamortized balance ...... — 3,802 488 — 899 372 — 5,561

Year ended December 31, 2011 Millions of yen Petrochemicals Chemicals Electronics Inorganics Aluminum Others Elimination Total Amortization ...... ¥— ¥ 494 ¥ 33 ¥— ¥ 60 ¥ 28 ¥— ¥ 615 Unamortized balance ...... — 4,296 520 — 959 401 — 6,176

Year ended December 31, 2012 Thousands of U.S. dollars Petrochemicals Chemicals Electronics Inorganics Aluminum Others Elimination Total Amortization ...... $— $ 5,706 $ 376 $— $ 695 $ 327 $— $ 7,103 Unamortized 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, 2012 Business Divestitures

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

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

52 A Unique Chemical Company (3) Reason for the business divestiture The 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 emerging 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 divestiture January 1, 2012

(5) Outline of the divestiture, including the legal form of the separation With 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 Treatment The 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 liabilities Current 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 to Aluminum

(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 GOODWILL Goodwill and negative goodwill are netted against each other. The pre-netted amounts as of December 31, 2012 and 2011 are shown below.

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Goodwill ...... ¥5,681 ¥7,617 $65,612 Negative goodwill ...... 5,561 6,176 64,230 Net ...... ¥ 120 ¥1,441 $ 1,382

Showa Denko K.K. 53 Report of Independent Certified Public Accountants

54 A Unique Chemical Company 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

Equity Name Main Product(s) or Business(es) Participation (%) 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 Commercial Subsidiaries Abroad

Regular General Meeting Showa Denko America, Inc. The regular general meeting of shareholders was held on March 27, 420 Lexington Avenue, Suite #2335A 2013. New York, NY 10170 U.S.A. Number of Shares Outstanding Phone: +1-212-370-0033 1,497,112,926 at December 31, 2012 Fax: +1-212-370-4566

Number of Shareholders Showa Denko Europe GmbH 105,843 at December 31, 2012 Konrad-Zuse-Platz 4 81829 Munich Classification of Stock Germany All stock issued by Showa Denko is common stock. Phone: +49-89-939-9620 Fax: +49-89-939-96250 Stock Transfer Agent Mizuho Trust & Banking Co., Ltd. Showa Denko Singapore (Pte.) Ltd. 2-1, Yaesu 1-chome, 4 Shenton Way Chuo-ku, Tokyo 103-8670, #16-01 SGX Centre 2 Japan Singapore 068807 Phone: +65-6223-1889 Shareholders by Sector (At December 31, 2012) Fax: +65-6223-6007

Number of shares held % Showa Denko (Shanghai) Co., Ltd. (thousands) 18F, Wang-Wang Building Financial firms 629,448 42.04 No. 211, Shimen Yi Road, Shanghai, 200041 Individuals 436,051 29.13 People’s Republic of China Phone: +86-21-6217-5000 Foreign corporate entities, etc. 320,367 21.40 Fax: +86-21-6217-9840 Japanese corporate entities 84,791 5.66

Securities firms 26,456 1.77

Total 1,497,113 100.00

Head Office Showa 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

56 A Unique Chemical Company SHOWA DENKO K.K. 13-9, Shiba Daimon 1-chome, Minato-ku, Tokyo 105-8518, Japan

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