Overview of Financial Statements

Overview of 2020 Financial Statements

Business Results

(Unit: billions of yen)
Net Sales Increase / decrease
- 63.0
Operating Income - 42.9
Ordinary Income - 41.0
Net Income Attributable to Owners of the Parent - 30.4
Net Income Attributable to Owners of the Parent per Share - ¥208.23

With regard to the Japanese economy in the first quarter of 2020 (January 1 - March 31), consumer spending deteriorated rapidly since February due to the increasing influence of the coronavirus disease 2019 (COVID-19). Corporate earnings are now greatly affected by the slowing down of the world economy caused by the pandemic of COVID-19, and there are also significant effects of the major slowdown in domestic consumer spending, the fast reduction in export and overseas production, and a sharp drop in crude-oil prices on corporate earnings. As a result, many companies have shown serious deterioration in their business sentiment. As countermeasures against such an economic downturn, the major powers including Japan, the Unites States and the European Union are now taking ambitious monetary and fiscal policies. However, business environment of the Showa Denko Group is expected to deteriorate further in and after the second quarter of 2020.

Taking the current situation into consideration and giving the highest priority to all stakeholders’ safety and health, the Showa Denko Group is implementing various measures to prevent further spread of the infectious disease. To be specific, we are taking various measures to give the highest priority to keeping our employees’ health and preventing the spread of COVID-19, including homeworking implemented by employees belonging to major plants, divisions and departments, and grant of special holidays. At the same time, in our production bases, we are making utmost efforts to fulfill our corporate social responsibility to continue providing our customers with products essential for infrastructural functions of society.

Medium-term business plan “The TOP 2021“

The Showa Denko Group set up its long-term vision and has been promoting its mediumterm consolidated business plan “The TOP 2021“ since January 2019. It is very important for the Showa Denko Group to enhance the value of the Group and satisfy all stakeholders including shareholders, customers, suppliers, local communities and employees in order that the Group continuously grows and becomes trusted and acclaimed by society. The Showa Denko Group defines this idea as the Group’s business philosophy, thereby promoting management to maximize shareholders’, customers’ and social value.

Furthermore, SDK made tender offer against Hitachi Chemical Company, Ltd. (Hitachi Chemical), and made Hitachi Chemical a consolidated subsidiary in April 2020. World’s industrial structure and competitive environment have been changing greatly, and the recent pandemic of COVID-19 will accelerate this trend. In particular, it is expected that the spread of digitalization of social activities will be accelerated, including the diffusion of telework and online businesses, acceleration of introduction of factory automation to production sites, and further strengthening of cyber security. To survive as a global toplevel functional chemical manufacturer while coping with such changes in business environment, the Showa Denko Group must evolve into the “One-stop Advanced Materials Partner“ for our customers which provides the customers with solutions beyond materials and components. The Group will strengthen its earning power and reduce the range of fluctuation in income through steady implementation of “The TOP 2021,“ enhance the value of the Group, realize substantial business integration with Hitachi Chemical as soon as possible, and establish a stable business foundation which will continuously support the Group’s growth far into the future.

The Group recorded consolidated net sales of ¥171,734 million in the first quarter of 2020, down 26.8% from the same period of the previous year. The sales in the Electronics segment increased due to an increase in shipment volumes of hard disk media. The sales in the Chemicals segment also increased. However, the sales in the Inorganics segment significantly decreased due to a decrease in shipment volumes of graphite electrodes. The sales in the Petrochemicals, Aluminum and Others segments also decreased due to a drop in market prices of products.

Operating income of the Group in the first quarter of 2020 decreased by 94.6%, to ¥2,469 million. Operating income in the Electronics segment increased due to an increase in shipment volumes. However, operating income in the Inorganics segment significantly decreased due to a decrease in shipment volumes of graphite electrodes. Operating income in the Petrochemicals, Chemicals, Aluminum and Others segments also decreased due to a drop in market prices of products. As a result, the Group recorded ordinary income of ¥3,221 million, down 92.7% from the same period of the previous year.

The Group recorded net income attributable to owners of the parent of ¥2,699 million in the first quarter of 2020, a significant decrease of 91.8% from the same period of the previous year.

 

Segment Information

Net sales by Segment

(Unit: billions of yen)
Petrochemicals Increase / decrease
- 7.7
Chemicals + 0.3
Electronics + 3.0
Inorganics - 51.0
Aluminum - 4.6
Others - 3.8

Operating Income by Segment

(Unit: billions of yen)
Petrochemicals Increase / decrease
- 4.1
Chemicals - 0.1
Electronics + 1.3
Inorganics - 38.7
Aluminum - 0.2
Others - 0.1

[Petrochemicals segment]

In the Petrochemicals segment, sales decreased 12.3%, to ¥55,025 million. In our olefin business, sales decreased due to a drop in market prices of products including ethylene and propylene resulting from a fall in prices of raw materials and softening supply-demand balance in East Asia caused by a slowdown in the Chinese economy. Sales of derivatives also decreased due to periodic maintenance of production facilities which took place in the first quarter of 2020. Sales of organic chemicals decreased due to a reduction in shipment volumes of ethyl acetate and vinyl acetate resulting from the periodic shutdown maintenance of facilities to produce these products, in addition to the effect of a drop in market prices of organic chemicals. As a result, the Petrochemicals segment recorded an operating loss of ¥156 million, a deterioration of ¥4,149 million from the same period of the previous year.

[Chemicals segment]

In the Chemicals segment, sales increased 0.8%, to ¥36,315 million. In the basic chemicals business, sales decreased. Sales of liquefied ammonia and acrylonitrile were at the same level of the year-before period. However, sales of chloroprene rubber decreased due to a reduction in export. Sales of functional chemicals decreased due to a fall in sales volumes in China. Sales of industrial gases were at the same level of the yearbefore period. Sales of electronic chemicals increased due to an increase in shipment volumes of products for the semiconductor industry. Consolidation of non-stick coating chemicals companies which took place in the second half of 2019 also increased the segment’s sales. However, operating income of the segment decreased 5.2%, to ¥2,286 million.

[Electronics segment]

In the Electronics segment, sales increased 14.6%, to ¥23,553 million. Sales of HD media increased due to an increase in shipment volumes of media for use in data centers, in addition to the steady shipment volumes of media for PCs, though the level is still lower than before. Sales of compound semiconductors increased due to an increase in export. Sales of lithium-ion battery (LIB) materials were at the same level of the year-before period because a decrease in shipment volumes of materials for use in on-board LIBs was compensated by an increase in shipment volumes of Showa Denko Packaging’s aluminum laminate film (SPALFTM) used as packaging material for LIBs built into tablets and smartphones. As for SiC epitaxial wafer business, sales slightly decreased due mainly to a decrease in export. Operating income of the segment increased ¥1,259 million, to ¥987 million.

[Inorganics segment]

In the Inorganics segment, sales decreased 70.5%, to ¥21,385 million. Sales of graphite electrodes significantly decreased due to a further reduction in the Company’s production and sales volumes of graphite electrodes aiming to respond to the weakening supplydemand situation of graphite electrodes in the market resulting from a global slowdown in steel production and partial-clearance of our customers’ graphite-electrode inventory. Sales of ceramics decreased due to a fall in sales volumes of abrasives and fine ceramics for electronics. Operating income of the segment decreased 97.9% from the year-before period, to ¥848 million.

[Aluminum segment]

In the Aluminum segment, sales decreased 19.3%, to ¥19,177 million. Sales of rolled products decreased due to a decline in shipment volumes of high-purity aluminum foil for capacitors resulting from adjustment of production in customer industries including industrial equipment and automotive parts industries. Sales of aluminum specialty components decreased due mainly to a decline in shipment volumes of those for use in automotive parts resulting from a reduction in production of cars in China, Europe and ASEAN countries. Sales of aluminum cans decreased due to a reduction in the Group’s domestic production capacity and, in the Vietnamese market, a significant fall in production of beer resulting from outing restrictions. Operating income of the segment decreased 81.0% from the yearbefore period, to ¥48 million.

[Others segment]

In the Others segment, sales decreased 11.8%, to ¥28,606 million. SHOKO CO., LTD.’s sales decreased due to a fall in market prices of products and reduced demand. Operating income of the segment decreased 36.7%, to ¥192 million.

 

Financial Conditions

(Unit: billions of yen)
Total Assets Increase / decrease
- 24.8
Total Equity - 25.8
Stockholders' Equity Ratio - 1.3p

Total assets at the end of the quarter amounted to ¥1,051,580 million, a decrease of ¥24,801 million from the level at December 31, 2019. Total assets decreased due partly to decreases in cash and deposits and notes and accounts receivable, despite an increase in inventories. Total liabilities increased ¥984 million, to ¥557,933 million, due partly to an increase in interest-bearing debt, despite a decrease in notes and accounts payable. Net assets at the end of the quarter decreased ¥25,786 million, to ¥493,647 million, due partly to a decrease in retained earnings resulting from payment of dividends for the previous year and a decrease in valuation difference on available-for-sale securities.

 

Business Results

(Unit: billions of yen)
Net Sales Increase / decrease
- 148.9
Operating Income - 111.3
Ordinary Income - 128.1
Net Income Attributable to Owners of the Parent - 120.4
Net Income Attributable to Owners of the Parent per share - ¥825.27

Regarding the Japanese economy in the first half of 2020 (January 1 - June 30), consumer spending deteriorated rapidly since February due to the increasing influence of the coronavirus disease 2019 (COVID-19). Corporate earnings were greatly affected by the slowing down of the world economy caused by the pandemic of COVID-19, and there were also significant effects of the major slowdown in domestic consumer spending, the fast reduction in export and overseas production, and a sharp drop in crude-oil prices on corporate earnings. As a result, many companies showed serious deterioration in their business sentiment. As countermeasures against such an economic downturn, the major powers including Japan, the Unites States and the European Union are now taking ambitious monetary and fiscal policies. Although business environment of the Showa Denko Group hit the bottom in the second quarter, the speed of economic recovery remains slow, and harsh economic situation is expected to continue due to many unclear factors including US-China trade friction.

Taking the current situation into consideration and giving the highest priority to the preservation of safety and health of our stakeholders including customers, business acquaintances and employees, the Showa Denko Group is implementing various measures to prevent further spread of the infectious disease. To be specific, we are taking various measures to give the highest priority to keeping our employees’ health and preventing the spread of COVID-19, including homeworking implemented by employees belonging to major plants, divisions and departments, and grant of special holidays. At the same time, in our production bases, we are making utmost efforts to fulfill our corporate social responsibility to continue providing our customers with products essential for infrastructural functions ofsociety.

Medium-term business plan “The TOP 2021”

The Showa Denko Group set up its long-term vision and has been promoting its mediumterm consolidated business plan “The TOP 2021&rdquo since January 2019. It is very important for the Showa Denko Group to enhance the value of the Group and satisfy all stakeholders including shareholders, customers, suppliers, local communities and employees in order that the Group continuously grows and becomes trusted and acclaimed by society. The Showa Denko Group defines this idea as the Group’s business philosophy, thereby promoting management to maximize shareholders', customers' and social value.

Furthermore, SDK made tender offer against Hitachi Chemical Company, Ltd. (Hitachi Chemical), and made Hitachi Chemical a consolidated subsidiary in April 2020. World's industrial structure and competitive environment have been changing greatly, and the recent pandemic of COVID-19 will accelerate this trend. In particular, it is expected that the spread of digitalization of social activities will be accelerated, including the diffusion of telework and online businesses, acceleration of introduction of factory automation to production sites, and further strengthening of cyber security. To survive as a global toplevel functional chemical manufacturer while coping with such changes in business environment, the Showa Denko Group must evolve into the “One-stop Advanced Materials Partner” for our customers which provides the customers with solutions beyond materials and components. The Group will strengthen its earning power and reduce the range of fluctuation in income through steady implementation of “The TOP 2021,” enhance the value of the Group, realize substantial business integration with Hitachi Chemical as soon as possible, and establish a stable business foundation which will continuously support the Group's growth far into the future.

The Group recorded consolidated net sales of ¥326,621 million in the first half of 2020, down 31.3% from the same period of the previous year. The sales in the Electronics segment was at the same level of the previous year. However, the sales in the Petrochemicals segment decreased due to a drop in market prices of products resulting from a sharp fall in crude-oil prices. The sales in the Inorganics segment also decreased due to a decline in shipment volumes and prices of graphite electrodes resulting from worldwide decrease in production of steel. The sales in the Chemicals, Aluminum, and Others segments also decreased due to a significant decrease in shipment volumes of products resulting from an enormous impact of the pandemic of COVID-19.

In the first half of 2020, the Group recorded operating loss of ¥25,795 million, a deterioration of ¥111,266 million from the same period of the previous year. Operating income in the Electronics segment increased due to an increase in shipment volumes of HD media. However, the Inorganics segment recorded a sharp decrease in operating income due to a drop in book value of inventory of graphite electrodes amounting to ¥21,683 million resulting from a decline in market prices of products and application of the lower of cost or market valuation accounting method, in addition to a decrease in shipment volumes of graphite electrodes. Operating income in the Petrochemicals segment also decreased due to a negative impact of the negative spread between purchase and shipment prices of raw naphtha inventory. Operating income in the Chemicals, Aluminum and Others segments also decreased due to a decrease in shipment volumes of products resulting from the impact of the pandemic of COVID-19. The Group recorded ordinary loss of ¥43,225 million, a deterioration of ¥128,055 million from the same period of the previous year, due not only to the recording of operating loss but also to the recording of non-operating loss of about ¥16,100 million incurred as temporary expenses pertaining to fund-raising for acquisition of shares in Hitachi Chemical.

The Group recorded net loss attributable to owners of the parent of ¥54,575 million in the first half of 2020, a deterioration of ¥120,388 million from the same period of the previous year, due partly to the posting of extraordinary loss of ¥4,741 million to cover expenses relating to closure of a graphite electrode plant in Germany.

Segment Information

Net sales by Segment

(Unit: billions of yen)
Petrochemicals Increase / decrease
- 31.7
Chemicals - 1.5
Electronics - 0.0
Inorganics - 99.7
Aluminum - 10.2
Others - 8.7

Operating Income by Segment

(Unit: billions of yen)
Petrochemicals Increase / decrease
- 12.1
Chemicals - 0.5
Electronics + 0.8
Inorganics - 94.7
Aluminum - 0.7
Others - 0.1

[Petrochemicals segment]

In the Petrochemicals segment, sales decreased 24.9%, to ¥95,743 million. In our olefin business, sales decreased due to a drop in market prices of products including ethylene and propylene resulting from a fall in prices of crude oil and raw naphtha and softening supplydemand balance in East Asia caused by a slowdown in the Chinese economy. Sales of derivatives also decreased due to periodic maintenance of production facilities which took place in the first half of 2020. Sales of organic chemicals decreased due to a reduction in shipment volumes of ethyl acetate and vinyl acetate resulting from the periodic shutdown maintenance of facilities to produce these products, in addition to the effect of a drop in market prices of organic chemicals. The Petrochemicals segment recorded an operating loss of ¥3,667 million, a deterioration of ¥12,131 million from the same period of the previous year due mainly to a negative impact of the negative spread between purchase and shipment prices of raw naphtha inventory caused by a fall in raw naphtha price.

[Chemicals segment]

In the Chemicals segment, sales decreased 2.0%, to ¥72,041 million. Sales of electronic chemicals increased due to an increase in shipment volumes resulting from a recovery of semiconductor industry's production. However, sales of basic chemicals decreased. Sales of liquefied ammonia decreased due to a decrease in shipment volumes caused by a decline in domestic demand resulting from the spread of COVID-19. Sales of acrylonitrile decreased due to a fall in market prices. Sales of chloroprene rubber decreased due to a reduction in export volumes. Sales of functional chemicals decreased due mainly to a fall in sales volumes in Japan and China. Sales of industrial gases decreased due to a decline in shipment volumes for use in production of beverages. Consolidation of non-stick coating chemicals companies took place in the second half of 2019. Operating income of the segment decreased 9.1%, to ¥5,020 million.

[Electronics segment]

In the Electronics segment, sales decreased 0.0%, to ¥44,574 million. Sales of HD media slightly increased due to an increase in shipment volumes of media for use in data centers, despite a decrease in shipment volumes of media for PCs. Sales of compound semiconductors increased due to an increase in export. Sales of lithium-ion battery (LIB) materials increased due to an increase in shipment volumes of Showa Denko Packaging's aluminum laminate film (SPALFTM) used as packaging material for LIBs built into tablets and smartphones, despite a decrease in shipment volumes of LIB materials for on-board use. As for SiC epitaxial wafer business, sales decreased due mainly to a decrease in export, despite steady shipment volumes of SiC epitaxial wafers for use in domestic railcars. Operating income of the segment increased 86.6% from the year-before period, to ¥1,768 million.

[Inorganics segment]

In the Inorganics segment, sales decreased 69.9%, to ¥43,004 million. Sales of graphite electrodes significantly decreased due to a further reduction in the Company's production and sales volumes of graphite electrodes aiming to respond to the weakening supplydemand situation of graphite electrodes in the market resulting from a global slowdown in steel production and partial-clearance of our customers' graphite-electrode inventory. Sales of ceramics decreased due to a fall in sales volumes of abrasives and other ceramics resulting from a decrease in production of automobiles and steel. Operating income of the segment recorded a decrease due to a drop in book value of inventory of graphite electrodes amounting to ¥21,683 million resulting from a decline in market prices of products and application of the lower of cost or market valuation accounting method. As a result, the segment recorded operating loss of ¥22,905 million, a deterioration of ¥94,742 million from the year-before period.

[Aluminum segment]

In the Aluminum segment, sales decreased 20.7%, to ¥38,848 million. Sales of rolled products decreased due to a decline in shipment volumes of high-purity aluminum foil for capacitors resulting from adjustment of production in customer industries including industrial equipment and automotive parts industries. Sales of aluminum specialty components decreased due mainly to a decline in shipment volumes of those for use in automotive parts resulting from a reduction in production of cars worldwide. Sales of aluminum cans decreased due to a reduction in the Group’s domestic production capacity and, in the Vietnamese market, a significant fall in production of beer in April and May resulting from outing restrictions as countermeasures against COVID-19. The segment recorded operating loss of ¥205 million, a deterioration of ¥685 million from the year-before period.

[Others segment]

In the Others segment, sales decreased 13.6%, to ¥55,561 million. SHOKO CO., LTD.'s sales decreased due to a fall in market prices of products and reduced demand. Operating income of the segment decreased 21.4%, to ¥481 million.

Financial Conditions

(Unit: billions of yen)
Total Assets Increase / decrease
+ 1,029.9
Total Equity + 208.1
Stockholders' Equity Ratio - 26.4p
Net Assets per share - ¥475.69

Showa Denko K.K. has made Hitachi Chemical Company, Ltd. a consolidated subsidiary through acquisition of shares in Hitachi Chemical, considering the end of this second quarter (June 30, 2020) as acquisition date, and consolidated Hitachi Chemical's financial results into Showa Denko's consolidated financial statements. This consolidation affected our consolidated balance sheets as follows.

Total assets: Increase of ¥1,100,249 million
Liabilities: Increase of ¥538,236 million
Non-controlling interests: Increase of ¥283,969 million

Total assets at June 30, 2020 amounted to ¥2,106,297 million, an increase of ¥1,029,915 million from the level at December 31, 2019. Total assets increased due mainly to an increase in cash and deposits, notes and accounts receivable-trade, inventories, tangible fixed assets, and goodwill resulting from consolidation of Hitachi Chemical Company, Ltd. and its subsidiaries. Total liabilities increased ¥821,847 million, to ¥1,378,795 million, due mainly to an increase in notes and accounts payable-trade, and an increase in interest-bearing debts resulting from acquisition of shares in Hitachi Chemical. Interestbearing debts increased ¥699,114 million, to ¥997,638 million. Net assets increased ¥208,068 million from the level at December 31, 2019, to ¥727,501 million, due mainly to an increase in non-controlling interests resulting from the issuance of preferred stock to be allocated to non-controlling shareholders following the acquisition of shares in Hitachi Chemical, despite a decrease in retained earnings resulting from the posting of net loss attributable to owners of the parent and payment of dividends for the previous year.

Cash Flow

(Unit: billions of yen)
Operating Activities Increase / decrease
- 35.3
Investing Activities - 774.7
Free Cash Flow - 810.0
Financing Activities +883.4
Others + 1.8
Net Increase in Cash + 75.2

Net cash provided by operating activities during the first half of 2020 amounted to ¥5,169 million, a decrease of ¥35,325 million from the same period of the previous year, due partly to a decrease in the income before income taxes and minority interests. Net cash used in investing activities increased ¥774,700 million from the same period of the previousyear, to ¥792,565 million, due partly to an expenditure for acquisition of shares in a subsidiary accompanied by additional consolidation. Thus, free cash flow ended up in the expenditure of ¥787,396 million, a decline in proceeds of ¥810,025 million. Cash flows from financing activities ended up in the proceeds of ¥864,740 million, an increase in the proceeds of ¥883,443 million from the same period of the previous year, due partly to an increase in proceeds resulting from a long-term borrowing. As a result, after the effects of exchange rate fluctuations are taken into account, cash and cash equivalents at the end of the first half year period increased ¥75,767 million from the level at December 31, 2019, to ¥197,501 million.

Business Results

(Unit: billions of yen)
Net Sales Increase / decrease
- 59.6
Operating Income - 124.7
Ordinary Income - 144.4
Net Income Attributable to Owners of the Parent - 138.6
Net Income Attributable to Owners of the Parent per Share - ¥950.23

With regard to the Japanese economy in the first three quarters of 2020 (January 1 - September 30), consumer spending deteriorated rapidly since February due to the influence of the coronavirus disease 2019 (COVID-19). Corporate earnings were greatly affected by a slowdown of the world economy caused by the pandemic of COVID-19, and there were also significant effects of a sudden slowdown in domestic consumer spending, a major reduction in export, a fast reduction in overseas production, and a sharp drop in crude-oil prices on corporate earnings. As a result, many companies showed serious deterioration in their business sentiment. As countermeasures against such an economic downturn, the major powers including Japan, the United States and the European Union are now taking stimulative monetary and fiscal policies, and there are signs of partial economic recovery. Although business environment of the Showa Denko Group hit the bottom in the second quarter, harsh economic situation and very slow recovery continues due to many unclear factors including US-China trade friction and the second wave of the spread of COVID-19 in Europe, the United States and other regions.

Taking the current situation into consideration and giving the highest priority to the preservation of safety and health of our stakeholders including customers, business acquaintances and employees, the Showa Denko Group is implementing various measures to prevent further spread of the infectious disease. To be specific, we are taking various measures to give the highest priority to keeping our employees’ health and preventing the spread of COVID-19, including homeworking implemented by employees belonging to major plants, divisions and departments, and grant of special holidays. At the same time, in our production bases, we are making utmost efforts to fulfill our corporate social responsibility to continue providing our customers with products essential for infrastructural functions of society.

Medium-term business plan “The TOP 2021“

The Showa Denko Group set up its long-term vision and has been promoting its medium-term consolidated business plan “The TOP 2021“ since January 2019. It is very important for the Showa Denko Group to enhance the value of the Group and satisfy all stakeholders including shareholders, customers, suppliers, local communities and employees in order that the Group continuously grows and becomes trusted and acclaimed by society. The Showa Denko Group defines this idea as the Group’s business philosophy, thereby promoting management to maximize shareholders’, customers’ and social value.

In April 2020, the Showa Denko Group made then Hitachi Chemical Company, Ltd. a consolidated subsidiary through tender offer. World’s industrial structure and competitive environment have been changing greatly, and the recent worldwide pandemic of COVID-19 will accelerate this change. In particular, it is expected that the spread of digitalization of social activities will be accelerated, including the diffusion of telework and online businesses, acceleration of introduction of factory automation to production sites, and further strengthening of cyber security. To survive as a global-top-level functional chemical manufacturer while coping with such changes in business environment, the Showa Denko Group must evolve into the “One-stop Advanced Material Partner” for our customers that provides the customers with solutions beyond materials and components.

The Group will strengthen its earning power and reduce the range of fluctuation in income through steady implementation of “The TOP 2021,“ enhance the value of the Group, realize substantial business integration with Hitachi Chemical Company, Ltd. (changed its name into Showa Denko Materials Co., Ltd. on October 1, 2020) as soon as possible, and establish a stable business foundation which will continuously support the Group’s growth far into the future. Now the Group is formulating a long-term vision for the future after the integration, and will have a briefing session to explain its management policy in December 2020.

The Group recorded consolidated net sales of ¥635,977 million in the first three quarters of 2020, down 8.6% from the same period of the previous year. Sales in the Showa Denko Materials segment increased due to consolidation which started at the beginning of the third quarter of 2020. However, sales in the Inorganics segment significantly decreased due to a decrease in shipment volumes and prices of graphite electrodes resulting from worldwide decrease in production of steel. The sales in the Petrochemicals segment decreased due to a drop in market prices of products resulting from a sharp fall in crude-oil prices. The sales in the Chemicals, Electronics, Aluminum, and others segments also decreased.

In the first three quarters of 2020, the Group recorded operating loss of ¥15,410 million, a significant deterioration of ¥124,723 million. In the Showa Denko Materials segment, operating income increased due to new consolidation. In the Electronics segment, operating income increased due to an increase in shipment volumes of HD media. However, the Inorganics segment recorded a sharp decrease in operating income due to a drop in book value of inventory of graphite electrodes resulting from a decline in market prices of products and application of the lower of cost or market valuation accounting method, in addition to a decrease in shipment volumes of graphite electrodes. Operating income in the Petrochemicals segment also decreased due to a negative impact of the negative spread between purchase and shipment prices of raw naphtha inventory. Operating income in the Chemicals, Aluminum, and Others segments also decreased due to a decrease in shipment volumes of products. The Group recorded ordinary loss of ¥36,776 million, a deterioration of ¥144,364 million from the same period of the previous year due not only to the recording of operating loss but also to the recording of non-operating loss of about ¥16,100 million incurred as temporary expenses pertaining to fund-raising for acquisition of shares in then Hitachi Chemical Company, Ltd.

The Group recorded net loss attributable to owners of the parent of ¥57,654 million in the first three quarters of 2020, a deterioration of ¥138,617 million from the same period of the previous year, due partly to the posting of extraordinary loss of ¥5,084 million to cover expenses related to closure of a graphite electrode plant in Germany.

Segment Information

Net sales by Segment

(Unit: billions of yen)
Petrochemicals Increase / decrease
- 47.0
Chemicals - 2.6
Electronics - 1.3
Inorganics - 128.8
Aluminum - 15.3
Showa Denko Materials + 144.8
Others - 15.8

Operating Income by Segment

(Unit: billions of yen)
Petrochemicals Increase / decrease
- 12.0
Chemicals - 0.2
Electronics + 1.8
Inorganics - 111.1
Aluminum - 1.7
Showa Denko Materials + 2.8
Others - 0.3

[Petrochemicals segment]

In the Petrochemicals segment, sales decreased 24.8% from the year-before period, to ¥142,547 million. In our olefin business, sales decreased due to a drop in market prices of products including ethylene and propylene resulting from a fall in prices of crude oil and raw naphtha and softening supply-demand balance in East Asia in the first quarter caused by a slowdown in the Chinese economy. Sales of organic chemicals decreased due to a reduction in shipment volumes of ethyl acetate and vinyl acetate resulting from the periodic shutdown maintenance of facilities to produce these products, in addition to the effect of a drop in market prices of organic chemicals. The demand for olefin products in East Asia has been recovering since the second quarter. The Petrochemicals segment recorded an operating income of ¥1,284 million, down 90.3% from the year-before period due mainly to a remaining impact of the negative spread between purchase and shipment prices of raw naphtha inventory caused by a fall in raw naphtha price.

[Chemicals segment]

In the Chemicals segment, sales decreased 2.2% from the year-before period, to ¥113,015 million. Sales of electronic chemicals increased due to an increase in shipment volumes resulting from a recovery of semiconductor industry’s production. Sales of coating materials, which was newly consolidated in the second half of 2019, also increased. However, sales of basic chemicals decreased. Sales of liquefied ammonia and acrylonitrile decreased due to a decrease in shipment volumes caused by a decline in domestic demand resulting from the spread of COVID-19. Sales of chloroprene rubber decreased due to a decline in the amount of export. Sales of functional chemicals decreased due mainly to a fall in sales volumes in Japan and China. Sales of industrial gases decreased due to a decline in shipment volumes for use in production of beverages. Operating income of the segment decreased 2.0% from the year-before period, to ¥9,324 million.

[Electronics segment]

In the Electronics segment, sales decreased 1.9% from the year-before period, to ¥68,721 million. Sales of lithium-ion battery (LIB) materials increased due to an increase in shipment volumes of Showa Denko Packaging's aluminum laminate film (SPALFTM) used as packaging materials for LIBs. Sales of compound semiconductors increased due to an increase in export. Sales of HD media decreased due to a decrease in shipment volumes of media for PCs, despite an increase in shipment volumes of media for use in data centers. As for SiC epitaxial wafer business, sales decreased due mainly to a decrease in export, despite steady shipment volumes in Japan mainly for use in railcars. Operating income of the segment increased 61.1% from the year-before period, to ¥4,802 million.

[Inorganics segment]

In the Inorganics segment, sales decreased 67.7% from the year-before period, to ¥61,315 million. Sales of graphite electrodes significantly decreased due to a further reduction in the Company’ s production and sales volumes of graphite electrodes aiming to respond to the weakening supply-demand situation of graphite electrodes in the market resulting from a global slowdown in steel production and partial-clearance of our customers’ graphite-electrode inventory. Sales of ceramics decreased due to a fall in sales volumes of abrasives and other products resulting from a decrease in production of automobiles and steel. Operating income of the segment recorded a decrease due to a drop in book value of inventory of graphite electrodes resulting from a decline in market prices of products and application of the lower of cost or market valuation accounting method. As a result, the segment recorded operating loss of ¥26,210 million, a deterioration of ¥111,113 million from the year-before period.

[Aluminum segment]

In the Aluminum segment, sales decreased 20.7% from the year-before period, to ¥58,438 million. Sales of rolled products decreased due to a decline in shipment volumes of high-purity aluminum foil for capacitors resulting from adjustment of production in customer industries for capacitors including the industrial equipment industry and the onboard equipment industry. Sales of aluminum specialty components decreased due mainly to a decline in sales volumes of those for use in the car industry resulting from a reduction in production of cars worldwide and those for use in office automation equipment and machine tools. Sales of aluminum cans decreased due to a reduction in the Group’s domestic production capacity and, in the Vietnamese market, a significant fall in production of beer resulting from outing restrictions as a countermeasure against COVID-19. The segment recorded operating loss of ¥277 million, a deterioration of ¥1,701 million from the year-before period.

[Showa Denko Materials segment]

We started to consolidate Showa Denko Materials Co., Ltd. and its subsidiaries in the second quarter of 2020, and therefore, we created a new segment for reporting, and started to incorporate sales figures and operating income of the new segment into SDK’s consolidated financial statements at the beginning of this third quarter. The Showa Denko Materials segment recorded net sales of ¥144,840 million in the third quarter. Sales of electronic materials including abrasives for chemical mechanical planarization of the surface of semiconductor chips (CMP slurry) and materials for circuit boards including copper clad laminates remained strong. However, sales of mobility components including molded resins and carbon anode materials for lithium ion batteries (LIBs) remained sluggish. As a result, the segment recorded operating income of ¥2,788 million. Operating income of this segment includes depreciation of the goodwill of the former Hitachi Chemical amounting to about ¥6,000 million. This goodwill was posted as a result of acquisition of shares in former Hitachi Chemical.

[Others segment]

In the Others segment, sales decreased 16.5% from the year-before period, to ¥80,045 million. SHOKO CO., LTD.’s sales decreased due to a fall in market prices of products and reduced demand. Operating income of the segment decreased 34.2%, to ¥617 million.

Financial Conditions

(Unit: billions of yen)
Total Assets Increase / decrease
995.6
Total Equity + 206.8
Stockholders' Equity Ratio - 26.2%

Total assets at September 30, 2020 amounted to ¥2,072,016 million, an increase of ¥995,634 million from the level at December 31, 2019. Total assets increased due mainly to an increase in cash and deposits, notes and accounts receivable-trade, inventories, tangible fixed assets, and goodwill resulting from consolidation of Showa Denko Materials Co., Ltd. and its subsidiaries. Total liabilities increased ¥788,883 million, to ¥1,345,831 million, due mainly to an increase in notes and accounts payable-trade, and an increase in interest-bearing debts resulting from acquisition of shares in Showa Denko Materials. Interest-bearing debts increased ¥694,463 million, to ¥997,655 million. Net assets increased ¥206,752 million from the level at December 31, 2019, to ¥726,185 million, due mainly to an increase in non-controlling interests resulting from the issuance of preferred stock to be allocated to non-controlling shareholders following the acquisition of shares in Showa Denko Materials, despite a decrease in retained earnings resulting from the posting of net loss attributable to owners of the parent and payment of dividends for the previous year.

Note: We started to include lease liabilities in interest-bearing debts in this third quarter, and retrospectively adjusted the balance of interest bearing debts as of the end of 2019 in the same way. SDK made former Hitachi Chemical Company, Ltd. a consolidated subsidiary through tender offer, considered June 30, 2020 as acquisition date, and consolidated former Hitachi Chemical’s financial results into SDK’s consolidated financial statements. For the impact of this consolidation on SDK’s consolidated balance sheet, please refer to SDK’s consolidated financial statements for the first half of 2020.

Business Results

(Unit: billions of yen)
Net Sales Increase / decrease
+ 67.2
Operating Income - 140.2
Ordinary Income - 163.3
Net Income Attributable to Owners of the Parent - 149.4
Net Income Attributable to Owners of the Parent per Share - ¥1,024.09

With regard to the Japanese economy in 2020, consumer spending deteriorated rapidly due to the influence of the international pandemic of the coronavirus disease 2019 (COVID-19). Corporate earnings were greatly affected by a slowdown of the world economy caused by the pandemic of COVID-19, and there were also significant effect of a sudden slowdown in domestic consumer spending, a major reduction in export, a fast reduction in overseas production, and a sharp drop in crude-oil prices on corporate earnings. As a result, many companies showed serious deterioration in their business sentiment around the middle of the year. As countermeasures against such an economic downturn, the major powers including Japan, the United States, and the European Union took stimulative monetary and fiscal policies, and there were signs of partial economic recovery. Although business environment of the Showa Denko Group had some unclear factors including resurgence of the spread of COVID-19, uncertainty about economic policy of the new administration of the United States, and US-China trade friction, the semiconductor industry continued to do well, and the automobile industry showed sign of recovery in the second half of 2020.

Taking the current situation into consideration, and giving the highest priority to the preservation of safety and health of our stakeholders including customers, business acquaintances and employees, the Showa Denko Group is implementing various measures to prevent further spread of the infectious disease. To be specific, we have introduced telework, which have been implemented by employees belonging to major plants, divisions, and departments. Especially in the headquarters, since the spread of the infectious disease, we have been taking measures to minimize the percentage of attendance of employees by thoroughly reviewing contents of duties. We have also started to grant special leave to employees who is suspected to be infected with COVID-19, and have been asking employees to refrain from eating in a group. Thus, we are taking various measures to give the highest priority to keeping our employees’ health and preventing the spread of COVID-19. At the same time, in our production bases, we have been making utmost efforts to fulfill our corporate social responsibility to continue providing our customers with products essential for infrastructural functions of society.

Medium-term business plan “The TOP 2021”

The Showa Denko Group set up its long-term vision and has been promoting its mediumterm consolidated business plan “The TOP 2021” since January 2019. It is very important for the Showa Denko Group to enhance the value of the Group and satisfy all stakeholders including shareholders, customers, suppliers, local communities and employees in order that the Group continuously grows and becomes trusted and acclaimed by society. The Showa Denko Group defines this idea as the Group’s business philosophy, thereby promoting management to maximize shareholders’, customers’ and social value.

In April 2020, the Showa Denko Group made then Hitachi Chemical Company, Ltd. a consolidated subsidiary through tender offer. World’s industrial structure and competitive environment have been changing greatly, and the recent worldwide pandemic of COVID-19 will accelerate this change. In particular, it is expected that the spread of digitalization of social activities including the diffusion of telework and online businesses, acceleration of introduction of factory automation to production sites, and further strengthening of cyber security will be accelerated. To survive as a global-top-level functional chemical manufacturer while coping with such changes in business environment, the Showa Denko Group must evolve into the “One-stop Advanced Material Partner” for our customers which provides the customers with solutions beyond materials and components.

The Group will strengthen its earning power and reduce the range of fluctuation in income and enhance the value of the Group through successful execution of “The TOP 2021,“ and aim to realize substantial business integration with Hitachi Chemical Company, Ltd. (changed its name into Showa Denko Materials Co., Ltd. on October 1, 2020) in July 2021 and integration of legal personalities in January 2023. On December 10, 2020, SDK announced “Long-term Vision (2021-2030) for Newly Integrated Company,“ which aims to establish the basis of business growth far into the future through integration of SDK and Showa Denko Materials Co., Ltd. (SDMC).

The Group recorded consolidated net sales of ¥973,700 million in 2020, up 7.4% from the previous year. Sales in the Inorganics segment significantly decreased due to a decrease in shipment volumes and reduction in prices of graphite electrodes resulting from worldwide decrease in production of steel. Sales in the Petrochemicals, Chemicals, Aluminum, and Others segments also decreased. However, sales in the Showa Denko Materials segment increased due to consolidation which started at the beginning of the third quarter of 2020. Sales in the Electronics segment slightly increased.

Operating income of the Group in 2020 significantly decreased, and the Group recorded operating loss of ¥19,449 million, a deterioration of ¥140,247 million from the previous year. In the Electronics segment, operating income increased due to an increase in shipment volumes of hard disk (HD) media and lithium-ion battery (LIB) materials. However, the Inorganics segment recorded a sharp decrease in operating income due to a decrease in shipment volumes of graphite electrodes and a drop in book value of inventory of graphite electrodes resulting from a decline in market prices of products and application of the lower of cost or market valuation accounting method. Operating income in the Petrochemicals segment also decreased due to a negative impact of the negative spread between purchase and shipment prices of raw naphtha inventory. Operating income in the Showa Denko Materials segment, which was newly consolidated, also decreased due to a reduction in the demand for cars resulting from the spread of COVID-19 and recording of other losses which amounted to about ¥28,000 million including amortization of goodwill. Chemicals, Aluminum and Others segments also recorded decreases in profit due to a reduction in shipment volumes of products. The Group recorded ordinary loss of ¥43,971 million, a deterioration of ¥163,264 million from the previous year due not only to the recording of operating loss but also to the recording of non-operating expenses of about ¥16,100 million which was incurred as temporary expenses pertaining to fund-raising for acquisition of shares in then Hitachi Chemical Company, Ltd.

The Group recorded net loss attributable to owners of the parent of ¥76,304 million in 2020,a significant deterioration of ¥149,392 million from the previous year, due partly to the posting of impairment loss of ¥16,602 million in the aluminum rolled products business and ceramics business, and posting of extraordinary loss of ¥5,142 million to cover expenses related to closure of a graphite electrode plant in Germany.

 

Segment Information

Net sales by Segment

(Unit: billions of yen)
Petrochemicals Increase / decrease
- 57.3
Chemicals - 1.7
Electronics + 1.0
Inorganics - 147.2
Aluminum - 17.4
Showa Denko Materials + 302.7
Others - 18.9

Operating Income by Segment

(Unit: billions of yen)
Petrochemicals Increase / decrease
- 12.3
Chemicals - 0.2
Electronics + 4.3
Inorganics - 121.6
Aluminum - 1.3
Showa Denko Materials - 6.3
Others - 0.6

[Petrochemicals segment]

In the Petrochemicals segment, sales decreased 22.9% from the previous year, to ¥193,385 million. In our olefin business, sales decreased due to a drop in market prices of products including ethylene and propylene resulting from a fall in prices of crude oil and raw naphtha and softening supply-demand balance in East Asia in the first quarter caused by a slowdown in the Chinese economy. Sales of organic chemicals decreased due to a reduction in shipment volumes of ethyl acetate and vinyl acetate resulting from the periodic shutdown maintenance of facilities to produce these products, in addition to the effect of a drop in market prices of organic chemicals. The demand for olefin products in East Asia has been recovering since the second quarter. The Petrochemicals segment recorded an operating income of ¥4,927 million, down 71.4% from the previous year due mainly to a remaining impact of the negative spread between purchase and shipment prices of raw naphtha inventory caused by a fall in raw naphtha price.

[Chemicals segment]

In the Chemicals segment, sales decreased 1.1% from the previous year, to ¥155,769 million. Sales of electronic chemicals increased due to an increase in shipment volumes resulting from a recovery of the semiconductor industry’s production. Sales of coating materials, which was newly consolidated in the second half of 2019, also increased. However, sales of basic chemicals decreased. Sales of liquefied ammonia and acrylonitrile decreased due to a decrease in shipment volumes caused by a decline in domestic demand resulting from the spread of COVID-19. Sales of chloroprene rubber decreased due to a decline in the amount of export. Sales of functional chemicals decreased due mainly to a fall in sales volumes in Japan and China. Sales of industrial gases decreased due to a decline in shipment volumes of carbonic acid gas for use in production of beverages. Operating income of the segment decreased 1.3% from the previous year, to ¥13,481 million.

[Electronics segment]

In the Electronics segment, sales increased 1.0% from the previous year, to ¥97,415 million. Sales of lithium-ion battery (LIB) materials increased due to an increase in shipment volumes of Showa Denko Packaging’s aluminum laminate film (SPALFTM) used as packaging material for LIBs. Sales of compound semiconductors increased due to an increase in export. Sales of HD media decreased due to a decrease in shipment volumes of media for PCs, despite an increase in shipment volumes of media for use in data centers. As for SiC epitaxial wafer business, sales increased due mainly to steady shipment volumes of wafers for use in railcars. Operating income of the segment increased 87.2% from the previous year, to ¥9,133 million.

[Inorganics segment]

In the Inorganics segment, sales decreased 64.0% from the previous year, to ¥82,899 million. Sales of graphite electrodes significantly decreased due to a further reduction in the Company’s production and sales volumes of graphite electrodes aiming to respond to the weakening supply-demand situation of graphite electrodes in the market resulting from a global slowdown in steel production and partial-clearance of our customers’ graphiteelectrode inventory. Sales of ceramics decreased due to a fall in sales volumes of abrasives and other products resulting from a decrease in production of automobiles and steel. Operating income of the segment recorded a decrease due to a drop in book value of inventory of graphite electrodes resulting from a decline in market prices of products and application of the lower of cost or market valuation accounting method. As a result, the segment recorded operating loss of ¥32,300 million, a deterioration of ¥121,556 million from the previous year.

[Aluminum segment]

In the Aluminum segment, sales decreased 17.8% from the previous year, to ¥80,185 million. Sales of rolled products decreased due to a decline in shipment volumes of high-purity aluminum foil for capacitors resulting from adjustment of production in customer industries for capacitors including the industrial equipment industry and the onboard equipment industry. Sales of aluminum specialty components decreased due mainly to a decline in sales volumes of those for use in the car industry resulting from a reduction in production of cars worldwide and those for use in office automation equipment and machine tools. Sales of aluminum cans decreased due to a reduction in the Group’s domestic production capacity and, in the Vietnamese market, a significant fall in production of beer resulting from outing restrictions as a countermeasure against COVID-19. The segment recorded operating income of ¥421 million, down 75.9% from the previous year.

[Showa Denko Materials segment]

We started to consolidate Showa Denko Materials Co., Ltd. and its subsidiaries in the second quarter of 2020, and therefore, we created a new segment for reporting, and started to incorporate sales figures and operating income of the new segment into SDK’s consolidated financial statements at the beginning of the third quarter. The Showa Denko Materials segment recorded net sales of ¥302,742 million in 2020. Sales of electronic materials including abrasives for chemical mechanical planarization of the surface of semiconductor chips (CMP slurry) and materials for circuit boards including copper clad laminates remained strong. However, sales of mobility components including molded resins remained sluggish. As a result, the segment recorded operating loss of ¥6,303 million. Operating loss of this segment includes amortization of the goodwill of the former Hitachi Chemical which was reckoned up as a result of acquisition of shares in former Hitachi Chemical and other losses amounting to about ¥28,000 million.

[Others segment]

In the Others segment, sales decreased 15.0% from the previous year, to ¥107,301 million. SHOKO CO., LTD.’s sales decreased due to a fall in market prices of products and reduced demand. Operating income of the segment decreased 34.1%, to ¥1,199 million.

 

Financial Conditions

(Unit: billions of yen)
Total Assets Increase / decrease
+ 1,127.2
Total Equity + 198.6
Stockholders' Equity Ratio - 28.0%
Total Equity per Share - ¥640.46

Consolidation of former Hitachi Chemical Company, Ltd. (currently Showa Denko Materials Co., Ltd.) and its subsidiaries had significant impact on total assets and liabilities. Total assets at the end of the year amounted to ¥2,203,606 million, an increase of ¥1,127,224 million from the level at December 31, 2019. Total assets increased due mainly to the increase in cash, deposits, accounts receivable-trade, inventories, tangible fixed assets, and intangible fixed assets. Total liabilities increased ¥928, 577 million, to 1,485,526 million, due mainly to the increase in accounts payable-trade, and the increase in interest-bearing debt resulting from acquisition of shares in former Hitachi Chemical Company, Ltd. Interest-bearing debt increased ¥756,954 million, to ¥1,060,146 million. Net assets at the end of the year amounted to ¥718,080 million, up ¥198,647 million, due mainly to an increase in non-controlling interests resulting from issuance of preferred stocks accompanying acquisition of shares in former Hitachi Chemical Company, Ltd., despite a decrease in retained earnings resulting from posting of net loss attributable to owners of the parent and the payment of dividends for 2019.

Note: We started to include lease liabilities in interest-bearing debts in this third quarter, and retrospectively adjusted the balance of interest bearing debts as of the end of 2019 in the same way. SDK made former Hitachi Chemical Company, Ltd. a consolidated subsidiary through tender offer, considered June 30, 2020 as acquisition date, and consolidated former Hitachi Chemical’s financial results into SDK’s consolidated financial statements. For the impact of this consolidation on SDK’s consolidated balance sheet, please refer to SDK’s consolidated financial statements for the first half of 2020.

 

Cash Flow

(Unit: billions of yen)
Operating Activities Increase / decrease
+ 30.7
Investing Activities - 881.9
Free Cash Flow - 851.2
Financing Activities + 915.1
Others + 3.4
Net Increase in Cash + 67.3

Net cash provided by operating activities increased ¥30,733 million from the previous year, to ¥109,286 million, due partly to a decrease in inventories. Net cash used in investing activities increased ¥881,891 million, to an expenditure of ¥930,047 million, due partly to the expenditure resulting from acquisition of shares in a subsidiary accompanying an expansion of the bounds of consolidation. As a result, free cash flow ended in an expenditure of ¥820,761 million, a decrease in proceeds of ¥851,159 million. Net cash provided by financial activities increased ¥915,067 million from the previous year, to the proceeds of ¥896,521 million due partly to an increase in proceeds resulting from an increase in long-term debt. As a result, cash and cash equivalents at December 31, 2020 increased ¥76,194 million from the end of the previous year, to ¥197,928 million, including the effect of exchange rate fluctuations.

Related Information

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Consolidated Financial Statements
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