Annual Report 2008 - sdk.co.jp · 4 Annual Report 2008 As a result, the Group’s consolidated net sales in 2008 decreased 1.9%, to ¥1,003,876 million, and operating income fell

Interconnection of Inorganic , Aluminum,

and Organ ic Chemical T echnologies

A n n ua l R ep ort 2 0 0 8

SHOWA DENKO K.K.

WA

Al

Showa Denko AR08_0420_再.indd H2 09.4.22 10:44:59 AM

Ranking as one of Japan’s leading chemical

companies, Showa Denko K.K. operates in the five

major sectors of petrochemicals, chemicals, elec-

tronics, inorganics, and aluminum.

Following up on the accomplishments under the

Passion Project, the three-year consolidated busi-

ness plan that ran from 2006 through 2008, we

have worked out the “Passion Extension” for 2009

and 2010. While maintaining the basic concepts

under the Passion Project—development of “new

growth driver” businesses, continuous expansion

of profit, and improvement of financial strength—

we are adapting our production setup to diminished

demand and strengthening cost-competitiveness

in response to the drastic changes in the business

environment. Thus, we are accelerating structural

reform and laying the groundwork for long-term

sustainable growth.

Showa Denko aims to earn the full trust and

confidence of the market and society, always man-

aging operations based on the principles of corpo-

rate 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.

We at the Showa Denko Group will provide prod-

ucts and services that are useful and safe and

exceed our customers’ expectations, thereby

enhancing the value of the Group, giving satisfac-

tion to our shareholders, and contributing to the

sound growth of international society as a respon-

sible corporate citizen.

petrochemicals

Olefins (ethylene and propyl ene), organic chemicals (acetic acid, vinyl acetate monomer, and ethyl acetate), and plastic products

chemicals

Chemicals (caustic soda, chlorine, acrylonitrile, and ammonia), gases (hydrofluorocarbons, oxygen, nitrogen, and hydrogen), and specialty chemicals (amino acids, stabilized vitamin C, analytical columns, and specialty polymers)

electronics

Hard disks (HDs), compound semiconductors (LED chips), rare earth magnetic alloys, specialty gases, ceramic materials for semiconduc-tors, and fine carbons

PPROFILE

VVISION

SSHOWA DENKO AT A GLANCE


Showa Denko K.K. 1

inorganics

Ceramics (aluminum hydroxide, alumina, abrasives, and refractories) and carbons (graphite electrodes)

aluminum

Ingots, sheets, extruded products, high-purity foils for capacitors, and fabricated products (forged products, heat exchangers, aluminum cylinders for laser printers, and beverage cans)

Net Sales

2008

1,003.9billion yen

Olefins, Organic chemicals

petrochemicals

39.9%

Ceramics,Graphite electrodes

inorganics

8.8%

Ingots, Sheets, Extruded products, Foils for capacitors, Heat exchangers,

Printer parts, Beverage cans

aluminum

23.2%

Acrylonitrile, Ammonia, Industrial gases, Specialty chemicals

chemicals

9.3%HDs,

Compound semiconductors (LED chips),Rare earth magnetic alloys,

Specialty gases, Fine carbons

electronics

18.8%

NET SALES BY SEGMENT

CONTENTS

Forward-Looking StatementsThis 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 the Company’s product development program. The Company cannot guarantee that these expectations and pro-jections will be realized or correct. Actual results may differ material-ly from the results anticipated in the statements included herein due to a variety of factors, including such economic factors as fluctua-tions in foreign currency exchange rates as well as market supply and demand conditions. The timely commercialization of prod-ucts under development by the Company may be disrupted or delayed by a variety of factors, including market acceptance, the introduction of new products by competitors, and changes in regula-tions or laws. The foregoing list of factors is not inclusive. Please refer to page 28 for more information concerning risk factors.

Performance and StrategiesShowa Denko at a Glance 1

Consolidated Financial Highlights 2

Message from the Management 3

Passion Extension 8

Review of Operations 11

Research and Development 16

Management SystemCorporate Social Responsibility 18

Responsible Care Activities 19

Corporate Governance 20

Board of Directors 23

Financial SectionConsolidated Six-Year Summary 24

Management’s Discussion and Analysis 25

Risk Factors 28

Consolidated Balance Sheets 30

Consolidated Statements of Income 32

Consolidated Statements of Changes in Net Assets 33

Consolidated Statements of Cash Flows 34

Notes to Financial Statements 35

Report of Independent Certified Public Accountants 49

Corporate InformationMajor Subsidiaries and Affiliates 51

Corporate Data 52

Showa Denko AR08_0420_再.indd 1 09.4.22 10:45:07 AM

Thousands of Millions of yen U.S. dollars (Note 1)

2008 2007 2006 2008

For the year Net sales ................................................................................................................... ¥1,003,876 ¥1,023,238 ¥0,914,533 $11,027,972 Operating income ..................................................................................................... 26,792 76,671 68,727 294,319 Net income ............................................................................................................... 2,451 33,066 28,836 26,925 Depreciation and amortization ................................................................................... 60,439 49,761 38,049 663,945

At year-end Total assets ............................................................................................................... 962,010 1,029,629 1,037,823 10,568,052 Total net assets ......................................................................................................... 265,459 298,659 265,492 2,916,166

Yen U.S. dollars (Note 1)

Per share Net income—primary (Note 2) ................................................................................... ¥ 1.96 ¥ 27.52 ¥025.01 $0.022 Net income—fully diluted (Note 2) ............................................................................. — 26.50 23.48 — Net assets ................................................................................................................ 192.85 222.31 200.29 2.12 Cash dividends (applicable to the period) .................................................................. 5.00 5.00 4.00 0.055

Number of employees at year-end .......................................................................... 11,756 11,329 11,184 Notes: 1. Yen amounts have been translated into U.S. dollars, for convenience only, at the rate of ¥91.03 to US$1.00, the approximate rate of exchange at December 31, 2008. 2. 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.

Showa Denko K.K. and Consolidated SubsidiariesDecember 31, 2008, 2007, and 2006

CCONSOLIDATED FINANCIAL HIGHLIGHTS

2 Annual Report 2008

OPERATING INCOME BY SEGMENT

(Billions of yen)90

-10

0

10

20

30

40

50

60

70

80

HQ costs Electronics Petrochemicals

Chemicals Inorganics Aluminum

20082007200620052004

NET INCOME

(Billions of yen)40

0

10

20

30

20082007200620052004


Showa Denko K.K. 3

Business Results for 2008

The global financial crisis—triggered by the U.S. subprime

mortgage problem—resulted in the sharp appreciation of the

yen and steep declines in crude oil prices and stock markets.

As a result, the Japanese economy was deeply affected in the

second half of 2008, with drastic falls in production and capital

investment by corporations.

Under the circumstances, the Showa Denko Group imple-

mented the Passion Project with a view to laying the ground-

work for long-term sustainable growth. The Group took various

steps to expand growth businesses, while continuing its struc-

tural reform and cost reduction efforts.

Nevertheless, the business environment for the chemical and

nonferrous metals industries was very difficult, reflecting volatile

naphtha and aluminum metal prices that soared in the first half

of the year and sharply declined in the second half. The situa-

tion in the electronic parts/materials industry was also very diffi-

cult due to substantial inventory adjustments by customer

industries in the second half of the year.

Following up on the accomplishments under the Passion

Project, the three-year consolidated business plan that

ran from 2006 through 2008, the Showa Denko Group has

worked out the “Passion Extension” for 2009 and 2010.

While maintaining the basic concepts under the

Passion Project—development of “new growth driver”

businesses, continuous expansion of profit, and

improvement of financial strength—we will adapt our

production setup to diminished demand and strengthen

cost-competitiveness in response to the drastic changes

in the business environment. Thus, we will accelerate

reform and lay the groundwork for long-term sustainable

growth.

MMESSAGE FROM THE MANAGEMENT

Mitsuo Ohashi, Chairman of the Board (right), Kyohei Takahashi, President and CEO



As a result, the Group’s consolidated net sales in 2008

decreased 1.9%, to ¥1,003,876 million, and operating income

fell 65.1%, to ¥26,792 million. The drop in operating income

was mainly due to the fall in shipment volumes of petrochemi-

cals and the influence of the sharp fluctuations in naphtha

costs; the effect of a higher yen and increased depreciation

expenses in the Electronics segment; and low demand for

aluminum from the construction and automobile industries.

Net income decreased 92.6%, to ¥2,451 million.

Dividends of ¥5.00 per share, the same level as in the pre-

ceding year, were paid to shareholders on record at the end

of December 2008.

Our capital expenditures in 2008 totaled ¥54,799 million, a

decrease of ¥14,547 million from the previous year and falling

below the depreciation and amortization expenses of ¥60,439

million for 2008. The capital expenditures included those for the

expansion of indium-gallium-nitride (InGaN)-based blue LED

chip production capacity; for the expansion of hard disk (HD)

media production capacity; for the modernization of aluminum

casting facilities; and for further expansion, rationalization, pro-

duction maintenance, and environmental protection.

As a result of continued debt-reduction efforts, the outstand-

ing balance of interest-bearing debt as of the end of 2008

decreased ¥2,731 million, to ¥392,915 million.

Segment Performances

In terms of net sales for the year, the Petrochemicals

segment contributed 39.9%, Chemicals 9.3%, Electronics

18.8%, Inorganics 8.8%, and Aluminum and others 23.2%.

Operating income decreased in all segments, especially in the

Petrochemicals and Electronics segments. A breakdown of

net sales and operating income by segment is as follows:

In the Petrochemicals segment, sales rose 1.3%, to

¥400,173 million. Sales of olefins rose owing to higher selling

prices until the middle of the year, reflecting soaring raw

material costs, notwithstanding lower shipment volumes result-

ing from stagnant demand in the second half of the year. Sales

of organic chemicals were down due partly to substantially

decreased shipment volumes of acetic acid, notwithstanding

higher prices of organic chemicals, reflecting the rise in feed-

stock costs. The segment recorded an operating loss of

¥1,281 million, compared with operating income of ¥19,574

million for the previous year. The fall in the segment’s operating

income was due to lower demand in the second half; the fall in

selling prices, reflecting the sharp drop in naphtha prices; and

the influence of high-priced stock of naphtha.

In the Chemicals segment, sales rose 10.2%, to ¥93,319

million, due partly to the consolidation of Showa Tansan Co.,

Ltd. Sales of acrylonitrile were up owing to higher shipment

volumes, and sales of caustic soda, ammonia, and amino acids

increased due to the rise in selling prices. Sales of chloroprene

rubber slipped as a result of the fall in demand for automobile

applications in the second half. Operating income fell 28.3%, to

¥5,329 million, due mainly to sharp declines in the acrylonitrile

market prices.

In the Electronics segment, sales decreased 6.1%, to

¥188,778 million. Sales of HD media decreased owing to lower

shipment volumes in the second half of the year, centering on

aluminum-based HD media,

notwithstanding the rise in

sales in the first half. Sales of

compound semiconductors

were up, reflecting the rise in

shipment volumes of ultra-

bright LED chips. Sales of


HD media used in a hard disk drive

Passion Extension (2009-2010):Preparation for a new business plan

To establish Showa Denko as a unique chemical company with individualized products

Passion Project

PassionExtension

Targets for 2010Realizing our vision:

Contribution to the interests of all stakeholders

Contribution to the good of society on a global scale

20002001

2002

2004

2006

2005

2007

2010

2008

2009

2003

Passion Project (2006-2008) • Develop and establish new “Growth Drivers”

• Steadily improve profitability

• Improve financial strength

Strategic reduction in scale through

the Cheetah Project (2000-2002)

Growth strategy through

the Sprout Project (2003-2005)

BUSINESS PLANS


Showa Denko K.K. 5

semiconductor-processing

specialty gases decreased,

reflecting the fall in demand

for semiconductors.

Meanwhile, sales of rare earth

magnetic alloys increased

due to the rise in shipment

volumes and selling prices. Operating income decreased

64.2%, to ¥9,259 million, owing to the fall in shipment volumes

of aluminum-based HD media in the second half of the year,

the rise in depreciation expenses, and the influence of the

appreciation of the yen.

In the Inorganics segment, sales increased 5.0%, to ¥88,797

million. Sales of graphite electrodes increased due to the rise

in selling prices, reflecting higher raw material costs, notwith-

standing lower demand in the second half. Sales of ceramics

increased slightly. Operating income dropped 7.9%, to ¥19,244

million, due to the adverse effect of the appreciation of the yen

on the profit from the graphite electrode business in the United

States as well as the influence of higher raw material costs on

the ceramics business.

In the Aluminum segment, sales declined 9.7%, to ¥232,809

million. Sales from ingot marketing decreased owing to the fall

in shipment volumes. Sales of rolled products were down as a

result of our withdrawal from the commodity foils business in

the previous year and lower shipment volumes of high-purity

foils for capacitors in the second half of 2008. Sales of extru-

sions/specialty products dropped mainly due to decreases in

shipment volumes of extrusions for building materials. In the

heat exchanger business, sales rose in Asia and Europe, while

sales in Japan and the United States fell. Sales of Shotic™

forged products decreased because of the sharp drop in ship-

ments to the automobile industry in the second half of the year.

Sales of aluminum cans also decreased, reflecting lower ship-

ment volumes. The segment recorded an operating loss of

¥212 million, compared with operating income of ¥8,042 mil-

lion for the previous year, due to lower demand from the con-

struction and automobile industries as well as the influence of

higher fuel costs on our power generation business as an

independent power provider.

Strengthening Position in HD Media Business

In the “growth-driver” HD media business, we launched HD

media with higher storage capacities and strengthened our

position in the promising field of glass-based HD media. We

became the world’s first to commercialize the fourth-generation

PMR-technology-based HD media. Specifically, we launched

1.89-inch 120 gigabyte-per-disk HD media for mobile music

players, high-definition camcorders, and small notebook PCs;

2.5-inch 250 gigabyte-per-disk HD media for notebook PCs;

and 3.5-inch 500 gigabyte-per-disk HD media for desktop

PCs. We will continue to commercialize high-capacity HD

media ahead of competitors, fully utilizing our technical

strengths. We will also take the initiative in reorganizing the

industry by forming alliances. Thus, we will strengthen our

presence in the growing market for HD media for notebook

PCs and other mobile applications.

Developing “New Growth Driver” Businesses

Fully utilizing our wide-ranging material technologies centering

on inorganics and metals, we are making strenuous efforts to

develop new businesses that will drive our growth together with

the HD media business.

a) Launch of 80 lm/W AlGaInP ultrabright red LED chips

In May 2008, we started commercial shipments of AlGaInP

ultrabright red LED chips with a luminous efficiency of 80

lumen per watt. To the best of our knowledge, the product

had the world’s highest luminous efficiency for this type avail-

able on the market as of May 2008. AlGaInP ultrabright LED

chips are now used mainly in outdoor displays. However,

new applications are being developed, including automotive

parts (rear lights, interior lighting) and LCD backlight for flat-

panel TVs.

Ultrabright LED chips




b) Expansion of high-purity ammonia business

for electronics

In November 2008, we established a joint venture in China to

produce high-purity ammonia for semiconductor/LCD pro-

duction. The joint venture, in which we own a 51% stake, will

start operating a 500-ton-a-year high-purity ammonia plant

this year. Fully utilizing the new plant in China and existing

production sites in Japan (Kawasaki) and Taiwan, we will

strengthen our supply of high-purity ammonia to the growing

East Asian market. We decided to build a new production

facility for high-purity C4F6 gas in Kawasaki for completion in

the first half of 2009 in cooperation with Air Products and

Chemicals, Inc., of the United States. Demand for C4F6 is

expected to grow due to its improved processability and

selectivity and very low environmental impact.

c) Establishment of rare earth metal subsidiary

in Vietnam

In October 2008, we established Showa Denko Rare-Earth

Vietnam Co., Ltd. in Vietnam. In April 2010, the new compa-

ny will begin producing 800 tons a year in total of didymium

and dysprosium, which will be used as raw material for neo-

dymium-based, high-performance magnetic alloys. We are

now producing rare earth magnetic alloys at three plants—

one in Japan and two in China—with combined capacity

of 8,000 tons a year. With the establishment of the new

company in Vietnam, we will be able to ensure the stable

procurement of raw materials for our neodymium-based

high-performance magnetic alloy production and further

strengthen the business.

d) Start of SiC epitaxial wafer production

In December 2008, we took over ESICAT Japan, LLP’s busi-

ness in silicon carbide (SiC) epitaxial wafers for power device

applications. Owing to their superior electricity-saving prop-

erties, SiC-based semiconductors are expected to be

increasingly used in power

conversion devices and

inverter modules for the

electric power/automobile/

railroad/electric appliance

industries.

e) Commercialization of new grade of carbon nanotube

We decided to build a commercial production facility for

VGCF™-X, a new grade of carbon nanotube with an opti-

mized design for resin composite applications. Production will

begin in 2010 within the premises of the Oita Petrochemical

Complex. A small added amount of VGCF™-X can give

stable conductivity to resins. Thus, it will find applications in

static-free plastic cases for the carriage of semiconductor/

hard disk media parts in a clean room, contributing to better

quality of these parts. We concluded a patent cross-license

agreement with Hyperion Catalysis International, Inc., of the

United States, which owns

many key patents pertain-

ing to materials and appli-

cations in the area of

carbon nanotubes, includ-

ing for resin composites.

SiC epitaxial wafers for energy-saving power devices

Carbon nanofiber VGCF™


Showa Denko K.K. 7

The Showa Denko Group will aim to lay the groundwork for

long-term sustainable growth as well as enhance competitive-

ness and profitability by achieving the previously mentioned

goals under the “Passion Extension.” Furthermore, we will aim

to earn the full trust and confidence of the market and society,

always managing operations based on the principles of corpo-

rate social responsibility (CSR).

The Group attaches great importance to corporate gover-

nance, compliance, and risk management, taking various mea-

sures in these areas to ensure sustainable growth and higher

corporate value over the long term. The Group is contributing

to the sound growth of society by developing and providing

useful and safe technologies, products, and services. We will

ensure safety, conserve resources and energy, and reduce the

volume of industrial waste to be discharged and chemical sub-

stances to be emitted, thereby contributing to the protection of

the global environment.

We look forward to the continued support from our fellow

stockholders.

March 27, 2009

Mitsuo Ohashi, Chairman of the Board

Kyohei Takahashi, President and CEO

Passion Extension

In 2009, the business environment is forecast to remain severe,

reflecting the impact of the global recession on Japan’s exports,

production, and capital investment. Under these circum stances,

we have worked out the “Passion Extension” for the two-year

period of 2009 and 2010, maintaining the basic concepts of the

Passion Project and making adjustments in response to the

drastic changes in the business environment. Under the

“Passion Extension,” we will focus our attention on the following

six items in an effort to promote structural reform and lay the

groundwork for sustainable growth over the long term:

Major Tasks under “Passion Extension” (2009-2010)

a) Improve business portfolio by promoting growth strategies and structural reform

b) Allocate managerial resources efficiently by very carefully selecting investments

c) Carry out drastic cost reductions

d) Secure sufficient cash flows

e) Improve financial strength

f) Strengthen R&D to ensure future growth

Passion Extension(2009-2010)

Contribute to the good of society

By enhancing the Company value, we will contribute to the interests of all stakeholders.

Carry out drastic structural reform and focus on high-growth areas where we have competitive advantages

Companyimages

Unique chemical company with individualized products

Create individualized products by deepening and merging wide-ranging material technologies centering on inorganics and metals

Technology-orientedcompany

Establish financial strength by squeezing assets and reducing interest-bearing debt

Financial strength

Earn the full trust and confidence of the market and society

CSR

Original image

¥100.0 billion1.0 times

Revised image （2010）¥40.0 billion

1.4 times

Operating incomeD/E ratio

Images of the financial targets

(2010)

MAINTAIN BASIC CONCEPTS, BUT LOWER FINANCIAL TARGETS

CARRY OUT STRUCTURAL REFORMS IN RESPONSE TO DRASTIC CHANGES IN ENVIRONMENT



The Showa Denko Group has reviewed its accomplish-

ments under the three-year (2006-2008) consolidated

business plan, the Passion Project, and worked out the

“Passion Extension” for 2009 and 2010 in response to the

drastic changes in economic conditions in and after the

latter part of 2008.

During the two years, the Group will prepare itself for

the launch of a new consolidated business plan for 2011

and after. While maintaining the basic concepts of the

Passion Project, we will accelerate structural reform

under the Passion Extension by quickly adapting our

production setup to diminished demand. At the same

time, we will identify market areas of high growth and

allocate resources efficiently to these areas.

1. Passion Extension: Concepts and financial targets

(1) Contribution to sound growth of society

As under the Passion Project, we will continue aiming to

contribute to the sound growth of international society by

enhancing the corporate value and fulfilling the expectations

of all stakeholders. Specifically, we have the following “imag-

es” of the Company:

a) Unique chemical company with individualized products:

We will carry out drastic structural reform and focus on high-

growth areas where we have competitive advantages.

b) Technology-oriented company:

We will create individualized products by deepening and

merging wide-ranging material technologies, fully using our

rich stock of inorganic and metal technologies.

c) Financial strength:

We will establish financial strength by squeezing assets and

reducing interest-bearing debt.

d) CSR:

We will obtain full trust and confidence of the market and

society by managing all operations based on the principles

of corporate social responsibility (CSR).

During the two years of the Passion Extension, the Group

will prepare for its return to the growth track by carrying out

structural reform while making cost-reduction efforts with

immediate effect.

(2) Lowering financial targets in response to drastic changes

in economic environment

Our results in 2008—the final year under the Passion

Project—fell short of the goals due to the drastic changes in

the economic environment. In view of sharp production cuts

in various industries, implementation of stimulus packages by

respective countries, and progress of inventory adjustments,

we expect gradual recovery of demand in and after the sec-

ond half of 2009. Thus, we have lowered the financial targets

for 2010 from original figures as shown on page 7.

2. Major tasks under Passion Extension

With a view to responding to the drastic changes in the

economic environment and laying the groundwork for future

growth, we will focus our attention on the following six items

in 2009 and 2010 and speedily achieve these goals:

(1) Improve business portfolio by promoting

growth strategies and structural reform

Based on the accomplishments during the three years of

the Passion Project, and in response to the drastic changes

in the business environment, we will further improve and

strengthen our business portfolio. Specifically, we will

PPASSION EXTENSION

Growth businesses Base businesses

Growth driversNew growth drivers

Petro-chemicals

Chemicals

Specialty polymers

Life science

Fine chemicals

Ammonia

Basic chemicals

Olefins (improve facilities at Oita)

Organic chemicals

Specialty polymers

Cash cows

Concentrate on selected areas

Shift production to overseas sites

Drastic reform; consider alliances

Introduce new furnaces to reduce CO2 emissions and increase competitiveness

Develop and launch high-value-added products

Promote alliance to solidify business foundation

Electronics

Aluminum

Inorganics

Ultrabright LED chips

Semiconductor-processing materials

HD Conventional compound semiconductors

Rare earth magnetic alloysUse proprietary technologies to establish presence

Fine carbon Graphite electrodes

High-purity foil for capacitors

High-performance components

Heat exchangers

Aluminum cans

CeramicsAim to become the world leader in carbon nanotubes

Expand flourine chemical business

Expand overseas production bases

PORTFOLIO

FURTHER IMPROVEMENT IN BUSINESS PORTFOLIO IN 2009 AND 2010


Showa Denko K.K. 9

strengthen “growth driver” businesses, change some of the

“new growth driver” and “base” businesses into “growth

drivers,” and promote structural reform.

a) Structural reform of HD business

Shipment volumes of hard disk drives (HDDs) in 2009 are

expected to fall below the actual results in 2008. Demand for

HD media in 2009 is expected to be stagnant due partly to

inventory adjustments by the HDD industry. However, we

expect HDD demand will resume growth of 10% or more in and

after 2010, due to strong demand for use in notebook PCs.

Our basic strategy for the HD media business has been to

establish technological advantages and ensure stable supply.

We will continue developing and providing high-capacity HD

media, as witnessed by our world’s first commercialization of

the fourth-generation PMR media and our leadership in the

development of the fifth-generation PMR media.

We will continue to commercialize high-capacity HD media

ahead of competitors, fully utilizing our technical strengths.

We will also take the initiative in reorganizing the industry by

forming alliances. Thus, we will strengthen our presence in

the growing market for HD media for notebook PCs and

other mobile applications.

b) Expansion of unique businesses, such as inorganics

and metals

The Group has a rich stock of technologies pertaining to

aluminum and other metals as well as carbons and ceramics

that use high-temperature, high-pressure processes.

Specifically, the Group is the major supplier in the world of

graphite electrodes for electric arc furnace steelmaking; rare

earth magnetic alloys for motors in cars; and VGCF™ car-

bon nanotubes used as an additive in lithium ion batteries

and resin composites. Furthermore, we have launched

SCMG™ graphite anode material for lithium ion batteries

and started trial manufacture of new catalysts responsive

to visible light.

c) Reform of aluminum business

We have started the drastic reform of our aluminum business

to enhance its profitability. We are reforming the production

setup, and considering alliances as one of the alternatives.

(2) Ensure efficient allocation of managerial resources

by very carefully selecting investments

In 2009, we will concentrate our investments on strategically

selected areas of high growth. We will also give priority to

investments for rationalization and laborsaving measures.

Thus, our capital investments in 2009 will total ¥44 billion,

down from ¥54.8 billion in 2008.

(3) Carry out drastic cost reductions

In 2009, we aim to reduce costs by ¥12 billion. To achieve

the goal, we will reduce purchasing costs of raw and auxilia-

ry materials, establish an optimized production setup in

accordance with the present levels of plant utilization, and

increase productivity.

Graphite electrodes• World leader in 30- and 32-inch electrodes• Future capacity expansion is being considered.

Rare earth magnetic alloys• A leading maker in the world• Demand growing for use in HDDs and cars• Building a plant in Vietnam (already 2 in China)

VGCF TM

• World leader in lithium ion battery applications• Build a 400t/y plant for use in resin composites• World leader in carbon nanotubes

SCMG TM

• Graphite anode material for LIBs• Growing demand for use in PCs, mobile phones, and cars

AIMING TO BECOME A LEADER IN INORGANICS/METALS



(6) Strengthen R&D to ensure future growth

We will strengthen R&D to ensure our future growth in prep-

aration for the launch of a new consolidated business plan

for 2011 and thereafter.

3. New consolidated business plan for 2011 and thereafter:

Developing new technologies for environmental protec-

tion on a global scale

As a unique chemical company having inorganic and metal

technologies, the Group will strengthen its R&D to continuously

provide innovative environmental-protection and energy-con-

servation technologies to the three target markets of electron-

ics, automotive parts, and personal care/environmental goods.

We expect there will be increasing needs for further reduc-

tion of environmental impact, fulfillment of growing energy

demand, and provision of solutions to the depletion of natural

resources. In this connection, we will supply key materials for

environment-friendly cars, including anode materials for lithium

ion batteries and carbon separators for fuel cells. We will also

provide such energy-saving components as ultrabright LED

chips and SiC power devices. Furthermore, we will provide

new fuel-cell catalysts to replace platinum and produce chemi-

cals from used plastics, promoting resource conservation and

recycling.

(4) Secure sufficient cash flows

In 2009, the sum of operating income and depreciation

expenses is expected to be similar to the 2003 level. In

2010, the total figure is expected to increase again.

(5) Improve financial strength

Despite severe economic conditions, we will continue to

steadily improve our financial strength by drastically reduc-

ing inventory and very carefully selecting investments.

[Operating income before depreciation](Billions of yen)

(Forecast*)

* Announced on Feb. 9, 2009

(Revised Image)Operating incomeDepreciation expenses

20102009200820072006200520042003

Passion Project Passion Extension

Higher depreciation expenses due to HD capacity expansion, etc.

38.5

34.5

52.1

34.1

57.2

34.2

68.7

38.0

76.7

49.8

26.8

60.4

17.0

55.7

40.0

60.0

0

30

60

90

120

150

ENSURE SUFFICIENT CASH FLOWS

(Billions of yen) (Times)

Interest-bearing debtD/E ratio

(Forecast*) (Revised Image)

Passion Project Passion Extension

2010200920082007200620052004200320022001

622581

527502

449433

396 393 385360

4.46

3.87

3.182.83

2.171.84

1.431.63 1.60

1.40

Outstanding debt D/E ratio

¥385 billion 1.6 times

¥360 billion

2009 forecast

2010 revised images 1.4 times

* Announced on Feb. 9, 2009

1

0

2

3

4

5

0

100

200

300

400

500

600

700

800

IMPROVE FINANCIAL STRENGTH

Fully utilizing our position as the unique chemical companywith excellent inorganic/metal technologies

Future target areas: “image” in 2015

Environment/energy • Semiconductor devices • Energy devices • Lighting modulesIT Chemicals

New growth driver businesses in 2010Six SMU* projects (Environment/energy; semiconductor devices; energy devices; displays/illumination; IT chemicals; automotive parts)

Three major target segmentsElectronics, Automotive parts, Energy and environmental goods

Growing needsin the areas

of environmentand energy

Individualized technologies of Showa Denkoaccumulated over many yearsInterconnection of organic/inorganic chemical technologies

*SMU: Strategic Market Units

STRENGTHEN R&D TO REALIZE OUR “IMAGE”

UNDER THE NEW BUSINESS PLAN

PPASSION EXTENSION


Showa Denko K.K. 11

RREVIEW OF OPERATIONS

PETROCHEMICALSCONSOLIDATED BUSINESS RESULTS (Millions of yen)

2008 2007 Difference Rate of change (%)

Sales 400,173 395,105 +5,068 +1.3%

Operating income (1,281) 19,574 -20,855 —

The Petrochemicals segment’s sales for 2008 rose 1.3%, to

¥400,173 million. Sales of olefins increased due to the rise in

selling prices, reflecting soaring raw material costs up to the

middle of the year, notwithstanding the fall in shipment volumes

following the decrease in demand in the latter half. Sales of

organic chemicals decreased due mainly to the substantial fall

of acetic acid shipments, notwithstanding the rise in selling

prices that reflected soaring raw material costs. The segment

recorded an operating loss of ¥1,281 million, compared with

operating income of ¥19,574 million for the previous year. The

fall in the segment’s operating income was due to lower

demand in the second half; the fall in selling prices, reflecting

the sharp drop in naphtha prices; and the influence of the high-

priced stock of naphtha.

Olefins

Ethylene production in Japan totaled 6.88 million tons in 2008,

a decrease of 11.1% from the preceding year. Demand for

petrochemicals in Asia fell sharply as a result of the drastic

shrinkage of the global economy in the second half of the year,

forcing Japanese ethylene producers to substantially cut

production. Showa Denko’s ethylene production was 630,000

tons, a decrease of 68,000 tons from 2007. Sales of olefins

increased due to the rise in selling prices, reflecting soaring raw

material costs up to the middle of the year, notwithstanding the

fall in shipment volumes following the decrease in demand in

the latter half. However, the olefins business posted a sharp

decline in operating income due to

lower demand in the second half; the

fall in selling prices, reflecting the

sharp drop in naphtha prices; and the

influence of the high-priced stock of

naphtha.

Organic Chemicals

Sales and operating income of the organic chemicals business

decreased due mainly to the substantial fall in the shipment vol-

umes of acetic acid for purified terephthalic acid (PTA) applica-

tions. We stopped sales of acetic acid for PTA at the end of

2008. Acetic acid sales will continue only for small lot transac-

tions. We will hereafter focus on the production and sale of

vinyl acetate, ethyl acetate, and allyl alcohol.

Topics

We completed the expansion of our allyl alcohol production

facility, raising the capacity from 56,000 tons a year to 70,000

tons a year. Allyl alcohol is used as raw material for allyl ester

resin, whose applications include spectacle lenses.

We decided to commercialize n-propyl acetate that will be

used in solvents for ink for special gravure printing. Demand for

n-propyl acetate is expected to grow as it is safer and more

eco-friendly to use than conventional solvents. Plant construc-

tion is under way to start commercial production by early 2010.

CHEMICALSCONSOLIDATED BUSINESS RESULTS (Millions of yen)


Sales 93,319 84,709 +8,610 +10.2%

Operating income 5,329 7,431 -2,102 -28.3%

The Chemicals segment’s sales increased 10.2%, to ¥93,319

million. Sales of acrylonitrile were up due to the rise in full-year

shipment volumes. Sales of caustic soda, ammonia, and amino

acids increased due to the rise in selling prices. Sales of chloro-

prene rubber decreased slightly as a result of the fall in demand

for automobile applications in the second half. We consolidated

Showa Tansan Co., Ltd., a manufacturer of liquid carbon diox-

ide and dry ice, through the additional purchase of its shares.

The segment’s operating income fell 28.3%, to ¥5,329 million,

due mainly to sharp declines in the acrylonitrile market prices

in the second half of the year.

Ethylene plant (naphtha cracking furnace)



Topics

We will start up a greenhouse gas (GHG) decomposition unit at

the Kawasaki Plant in the first half of 2009. Through this and

other measures, we will achieve the goal of a 6% reduction in

GHG emissions under the Kyoto Protocol without resorting to

emissions trading.

We expanded our chloroprene rubber production capacity

from 20,000 tons a year to 23,000 tons a year.

Our subsidiary Nippon Polytech Corporation completed its

new plant for high-performance electrical insulating ink for use

in the manufacture of chip-on-film-technology-based electronic

parts in LCD panels for TVs, PCs, and mobile phones. The ink,

in which urethane-based thermoset resin is used, improves

image quality and extends the life of LCD panels.

We purchased all shares in F2 Chemicals Limited, of the

United Kingdom, making it our wholly owned subsidiary. We

aim to strengthen the business by expanding the lineup of our

fluorine compounds.

ELECTRONICSCONSOLIDATED BUSINESS RESULTS (Millions of yen)


Sales 188,778 201,013 -12,235 -6.1%


The Electronics segment’s sales decreased 6.1%, to ¥188,778

million. Sales of HD media decreased owing to lower shipment

volumes in the second half of the year, centering on aluminum-

based HD media, notwithstanding the rise in sales in the first

half. Sales of compound semiconductors were up, reflecting

the rise in shipment volumes of ultrabright LED chips. Sales of

semiconductor-processing specialty gases decreased, reflect-

ing the fall in demand for semiconductors. Meanwhile, sales of

rare earth magnetic alloys rose due to the rise in shipment vol-

umes and selling prices. Operating income of the segment fell

64.2%, to ¥9,259 million, owing to the fall in shipment volumes

of aluminum-based HD media in the second half of the year,

the rise in depreciation expenses, and the influence of the

appreciation of the yen.

Hard Disks

Sales increased in the first half of the year due to brisk demand

and the contribution of the expanded capacity in Singapore.

However, sales in the second half decreased as the HDD indus-

try started full-scale production adjustment amid the financial

crisis, resulting in the fall of our HD media shipments centering

on aluminum-based HD media. Operating income fell substan-

tially due mainly to lower shipments in the second half, the rise

in depreciation expens-

es, and the appreciation

of the yen.


Ammonia plant in Kawasaki

HD production lines at Showa Denko HD Trace


Showa Denko K.K. 13

Topics

In August, we became the world’s first company to commer-

cialize 1.89-inch HD media with storage capacity of 120 giga-

bytes per disk, using PMR technology. In the following month,

we began commercial shipments of 2.5-inch HD media with

storage capacity of 250 gigabytes per disk. Furthermore, in

January 2009, we began commercial shipments of 3.5-inch

HD media with storage capacity of 500 gigabytes per disk.

In February 2009, we started discussions with Fujitsu

Limited about acquisition of its HD media business. Through

these measures, we aim to increase our technical strengths

and enhance our competitive position as the world’s largest

independent HD media supplier. We will continue to commer-

cialize high-capacity HD media ahead of competitors, fully uti-

lizing our technical strengths. We will also take the initiative in

reorganizing the industry by forming alliances. Thus, we will

strengthen our presence in the growing market for HD media

for notebook PCs and other mobile applications.

Compound Semiconductors

Sales of compound semiconductors increased, owing to the

rise in shipment volumes of ultrabright LED chips. Operating

income decreased due to the rise in R&D expenses.

Topics

We started the commercial shipment of AlGaInP ultrabright

red LED chips with luminous efficiency of 80 lumen per watt.

AlGaInP ultrabright LED chips are now used mainly in outdoor

displays. However, new applications are being developed,

including automotive parts (rear lights, interior lighting) and LCD

backlight for flat-panel TVs.

Rare Earths

Sales of our rare earth mag-

netic alloys increased due to

the rise in shipment volumes

for use in automobiles,

including hybrid cars, and

the rise in selling prices.

Operating income slightly

increased.

Topics

In October, we established

Showa Denko Rare-Earth

Vietnam Co., Ltd. in Ha Nam

Province, Vietnam, as our

90%-owned subsidiary. In

April 2010, the new company will begin producing 800 tons a

year in total of didymium and dysprosium, which will be used

as raw material for neodymium-based high-performance mag-

netic alloys. The Showa Denko Group is producing rare earth

magnetic alloys at three plants—one in Japan and two in

China—with combined capacity of 8,000 tons a year. With the

establishment of the new company in Vietnam, the Group will

be able to ensure the stable procurement of raw materials for

its neodymium-based high-performance magnetic alloy pro-

duction and further strengthen the business.

Specialty Gases for Semiconductor Processing

Sales of specialty gases for semiconductor processing

decreased due to the fall in demand for semiconductors.

Operating income from the business also fell.

Topics

We decided to build a new production facility for high-purity

C4F6 gas in Kawasaki for completion in the first half of 2009

in cooperation with Air Products and Chemicals, Inc., of the

United States. Demand for C4F6 is expected to grow due to

its improved processability and selectivity as well as low

environmental impact.

Rare earth magnetic alloys and plant in China




In November, we established a joint venture in Quzhou,

Zhejiang Province, China to produce high-purity ammonia for

the electronics industry. The joint venture, Zhejiang Quzhou

Juhua Showa Electronic Chemical Materials Co., Ltd., owned

51% by Showa Denko, is now building a 500-ton-a-year high-

purity ammonia plant for start-up in the middle of 2009. In a

related move, we expanded the high-purity ammonia produc-

tion capacity at our subsidiary Taiwan Showa Chemicals

Manufacturing Co., Ltd., from 1,200 tons a year to 1,500 tons

a year. Fully utilizing the new plant in China and existing pro-

duction sites in Japan (Kawasaki) and Taiwan, we will strength-

en our supply of high-purity ammonia to the growing East Asian

market.

Fine Ceramics

Sales of electronic ceramics, including titanium oxide for

ceramic capacitors and Shorox™ polishing materials for LCDs

and glass-substrate HD media, were up.

Fine Carbons

Sales of fine carbons, including VGCF™ carbon nanofibers,

were up.

Topics

We decided to begin the commercial production of VGCF™-X,

a new grade of carbon nanotube with an optimized design

for resin composite applications, in the first quarter of 2010.

A small added amount of VGCF™-X can give stable electric

conductivity to resins. Thus, it will find applications in static-free

plastic cases for the carriage of semiconductor/HD media parts

in a clean room, contributing to securing good quality of these

parts. We concluded a patent cross-license agreement with

Hyperion Catalysis International, Inc., of the United States,

which owns many key patents pertaining to materials and appli-

cations in the area of carbon nanotubes, including for resin

composites.

INORGANICSCONSOLIDATED BUSINESS RESULTS (Millions of yen)


Sales 88,797 84,599 +4,198 +5.0%


The Inorganics segment’s sales increased 5.0%, to ¥88,797

million. Sales of graphite electrodes rose due to the rise in sell-

ing prices, reflecting higher raw material costs, notwithstanding

production cuts by electric arc furnace steelmakers in the latter

half of the year. Sales of ceramics increased slightly. However,

operating income dropped

7.9%, to ¥19,244 million,

due to the adverse effect of

the appreciation of the yen

on the profit from our U.S.

graphite electrode opera-

tions and the rise in raw

material costs for the

ceramics business.

Ceramics

Sales of ceramics increased slightly. However, operating

income fell, reflecting higher raw material costs.

Carbons

In the carbons business, sales in Japan and exports from

Japan increased due to the rise in selling prices, reflecting

higher raw material costs. As for Showa Denko Carbon, Inc.

(SDKC), of the United States, sales decreased due to the influ-

ence of the exchange rate, notwithstanding the rise in selling

prices. Overall, operating income from the carbons business

increased.

Topics

SDKC completed a series of debottlenecking measures,

expanding its capacity by 5,000 tons a year, to 45,000 tons a

year. As a result, the Showa Denko Group’s total graphite elec-

trode production capacity has reached 105,000 tons a year.

Graphite electrodes


Showa Denko K.K. 15

ALUMINUMCONSOLIDATED BUSINESS RESULTS (Millions of yen)


Sales 232,809 257,812 -25,003 -9.7%

Operating income (212) 8,042 -8,254 —

The Aluminum segment’s sales

decreased 9.7%, to ¥232,809 mil-

lion. Sales of aluminum ingots fell due

to lower shipment volumes. Sales of

rolled products were down due to

our withdrawal from the commodity

foils business in 2007 and the fall

in demand for high-purity foils for

capacitors in the second half of 2008. Sales of extrusions/spe-

cialty products decreased due to the fall in shipment volumes

of commodity extrusions for building materials. Sales of

Shotic™ forged products also decreased due to the substan-

tial decline in shipment volumes for automobile parts applica-

tions. Sales of heat exchangers fell, owing to lower sales in

Japan and the United States, notwithstanding increased sales

in Asia and Europe. Sales of aluminum cans decreased due to

the fall in shipment volumes. The Aluminum segment posted

an operating loss of ¥212 million, compared with operating

income of ¥8,042 million for the previous year, due mainly to

lower demand from the construction and automobile industries

and the impact of higher fuel costs on our power generation

business as an independent power provider.

Rolled Products

Sales of rolled products were down as we withdrew from the

commodity foils business in 2007 and cut production of high-

purity foils for capacitors in the second half of 2008 due to

stagnant demand. Operating income decreased.

Topics

In January, our subsidiary Showa Denko Sakai Aluminum K.K.

(SSK) completed a new line for refining aluminum slabs. With

the completion, SSK’s high-purity foil production capacity was

expanded from 1,500 tons a month to more than 1,800 tons a

month. High-purity aluminum foils are used in the production of

electrolytic capacitors. We are the leading supplier in the world

of high-purity aluminum foils for capacitors.

Extrusions & Specialty Products

Shipment volumes of commodity extrusions decreased,

reflecting stagnant demand from the construction industry.

Shipment volumes of aluminum cylinders for laser printers also

decreased, reflecting production adjustment by customers in

the latter half of the year. As a result, both sales and operating

income from the business decreased.

Topics

In June, we completed the modernization work of aluminum

casting facilities, installing new melting furnaces with the

capacity of producing 60,000 tons of billets a year.

Shotic

Sales of Shotic™ forged products

decreased due to the sharp fall in

shipment volumes, reflecting the

stagnation in the automobile industry.

Operating income also decreased.

Heat Exchangers

Sales of heat exchangers slipped due to lower sales in Japan

and the United States, notwithstanding higher sales in Asia and

Europe.

Aluminum Cans

Sales of aluminum cans decreased due to the fall in shipment

volumes of cans for beer. Operating income also decreased.

High-purity aluminum ingot production facility at Showa Denko Sakai Aluminum K.K.

Shotic™ products



Showa Denko and its Group companies are promoting R&D

in line with their medium-term consolidated business plan to

establish technological advantages in the fields of electronics,

fine chemicals, and new materials.

We are focusing on the three target markets of electronics,

automotive parts, and personal care/environmental goods, allo-

cating resources preferentially to growth driver businesses as

well as new businesses covered by the six strategic market unit

(SMU) projects for these market areas. We are continuing to

pursue and improve synergies through the interconnection of

our inorganic/aluminum and organic chemical technologies to

establish ourselves as a unique chemical company with individ-

ualized products and capture new business opportunities.

Showa Denko and its Group companies invested ¥20,072 mil-

lion (US$220 million) in R&D in 2008. A breakdown by segment

of R&D efforts and investments during the year is as follows:

PETROCHEMICALS

In this segment, we are fully utilizing our proprietary technologies for

catalysts, organic synthesis, and polymer synthesis to meet the needs

of manufacturers of printing ink, paint, electronic materials, and auto-

motive parts. We are improving catalysts for acetyl chemicals and allyl

alcohol to further strengthen our competitiveness and increase produc-

tion. As a result, our allyl alcohol production capacity has increased to

70,000 tons a year. We received

the Chemical Society of Japan

Award for Technical Development

for 2007 for our development of

acetic acid/ethyl acetate catalyst

technologies. As for n-propyl

acetate, an allyl alcohol deriva-

tive, we have completed its

developmental stage and started

commercial production. Furthermore, to meet growing demand for allyl

ester resin for use in optical materials, we are increasing production

efficiency and developing new grades. We are developing new prod-

ucts for use in optical/display materials and for other environment/

IT-related applications, and providing our

samples for customer evaluation. In line

with our project to enhance energy effi-

ciency at our ethylene plant through the

introduction of modern cracking furnaces

and the improvement of the waste heat

recovery system, we are developing tech-

nologies to increase the use of non-naph-

tha feedstock and enhance the value of

cracker products. The Petrochemicals

segment invested ¥1,890 million in R&D

in 2008.

CHEMICALS

To quickly meet wide-ranging customer

needs, we are developing photosensitive

materials, solder resists, high-perfor-

mance gels, organic intermediates, and

base materials for cosmetics.

Regarding photosensitive materials, we

are developing a new multifunctional-thiol-

based compound (Karenz MT™) and

functional isocyanate monomers (Karenz

MOI™-EG and Karenz AOI™) for addition

to photo-curing resins as well as photo

polymerization initiators to support the

production of high-performance LCDs.

We are developing performance polymer

materials based on our proprietary mono-

mers. Our new solder resist for flexible circuit boards in LCDs and

mobile phones has been well received by the market. Thus, we have

built a production facility for the new solder resists, while further devel-

oping its applications and new grades. We received the Tsukuba

Foundation for Chemical and Bio-Technology’s award for our environ-

ment-friendly, halogen-free insulating resin developed jointly with the

National Institute for Advanced Industrial Science and Technology (AIST)

based on the achievements under a national project. Furthermore, we

are working as a member of a national project for the development of

basic tech nologies for green sustainable chemical processes.

In high-performance gels, we are expanding the variety of liquid

chromatography columns. Development is under way for sample-

preparation cartridges for the analysis of trace amounts of chemical

substances. We are developing organic intermediates for agrochemi-

cals and disinfectants by fully utilizing our position in raw materials.

Meanwhile, we are developing new performance chemicals for use

as base materials for cosmetics. The Chemicals segment’s R&D

investment amounted to ¥1,510 million in 2008.

ELECTRONICS

We are accelerating the development of state-of-the-art technologies

to meet the increasingly sophisticated market requirements. As for

storage materials, we are continuing to develop new technologies as

the world’s largest independent HD media manufacturer. We are pro-

ducing HD media with higher performance using perpendicular mag-

netic recording (PMR) technology, which we have commercialized for

the first time in the world. At the same time, we are developing discrete

track media, the next-generation technology that will further increase

the recording density, and making preparations for their commercializa-

tion. Using fourth-generation PMR technology, we started commercial

shipments of 1.89-inch and 2.5-inch HD media with recording capacity

of 120 and 250 gigabytes per disk, respectively, which represented the

highest recording capacity for those sizes available on the market as of

September 2008. In January 2009, we started commercial production

of 3.5-inch, 500 gigabyte-per-disk HD media.

Allyl alcohol plant in Oita

RRESEARCH AND DEVELOPMENT

Karenz™ multifunctional-thiol-based compound

The Chemical Society of Japan Award for Technical Development for 2007

Solder resist


Showa Denko K.K. 17

In display elements and materials, we are continuing to develop LED

chips with higher brightness and power. As for indium gallium nitride

(InGaN) LED chips, we have developed a proprietary Hybrid PPD™

(plasma assisted physical deposition) process and introduced a four-

inch epitaxial wafer production line based on the process, thereby

substantially improving the productivity. As for aluminum-gallium-indium-

phosphide (AlGaInP) LED chips that emit red and yellow light, we are

now able to provide high-performance LED chips for all wavelengths,

ranging from ultraviolet to infrared. We will continue to improve their per-

formances, developing such new applications as backlighting for large

LCDs, large RGB displays, and white lighting. As for AlGaInP LED chips

that emit red light, we attained, to the best of our knowledge, the

world’s highest level of luminous efficiency as of May 2008.

We have been developing high-performance silicon carbide (SiC)

epitaxial wafers for promising power device applications utilizing the

results of joint R&D with AIST and the Central Research Institute of

Electric Power Industry, providing high-quality epitaxial wafers of up to

four inches in diameter through ESICAT Japan, LLP. To accelerate the

expansion of the market and of our operation, we took over ESICAT

Japan’s business at the end of 2008. We are developing high-capacity,

high-voltage polymer capacitors mainly for PC and power source appli-

cations. In the area of neodymium-iron-boron magnetic alloys, we are

meeting market requirements for high-performance magnets through

sophisticated casting technologies and the better control of alloy

microstructures. We are continuing to develop new materials that will

maintain high levels of magnetic force at high temperatures to meet

the needs of the automobile industry.

To serve the growing market for advanced displays and next-genera-

tion lighting, we are developing organic electroluminescent materials—

based on an innovative phosphorescent polymer—and device

structures. In semiconductor processing materials, we are developing

chemical mechanical polishing (CMP) slurries for metal polishing at very

small line widths and high-purity gases for etching, cleaning, and film

formation. We are also developing high-purity chemicals for detergents

and solvents as well as new charge dissipating agents for electron-

beam lithography processes. The Electronics segment invested

¥8,944 million in R&D in 2008.

INORGANICS

Our development efforts in this segment focus on nanotechnology-

based materials through the full utilization of our proprietary material/

process technologies. Having established the world’s first volume pro-

duction technology for VGCF™ carbon nanotubes, we are developing

new grades with optimized fiber diameter/length and applications of

the product in resin composites. Based

on our many years’ experience in graphi-

tizing, we have developed high-capacity

graphite anode material for use in lithium

ion batteries. The material is now being

evaluated for use in large lithium ion bat-

teries for automobiles. Meanwhile, we are

developing applications of nanoparticle

titanium oxide for use in multilayered

ceramic capacitors and as slurry paste

for dye-sensitized solar cells. We are also

developing its applications in a visible-

light-responsive photocatalyst for deodor-

ant and stain-proofing agents as part of

a national project. In addition, we are developing various functional

ceramic fillers for heat sink applications. The Inorganics segment spent

¥1,055 million on R&D in 2008.

ALUMINUM

We are developing light, strong, and high-performance materials,

parts, and products to meet market needs while conducting research

on basic technologies pertaining to their production. Our proprietary

forged alloys have been adopted by new customers in the automobile

industry for use in compressors owing to the alloys’ light weight, high

strength, and high formability. We are also developing new alloys jointly

with automobile parts manufacturers. In the area of heat exchangers

for car air conditioners, our NRT™ III con-

densers, using a new high-performance

refrigerant tube technology, are being

adopted increasingly in various new car

models. We are developing next-genera-

tion products to reduce environmental

impact. Furthermore, we are developing

innovative heat exchangers based on

new types of refrigerants to meet tighter

environmental regulations in the future.

We are developing high-efficiency heat sinks for IT equipment and

optical/power devices. We expect these heat sinks will develop into

multifunctional electric/electronic parts. At the Aluminum Technology

Center, we are improving our die technology for extrusion, forging,

drawing, and press working; our process technologies for purification,

fabrication, and bonding; as well as our simulation technology for struc-

tural and hot fluid studies. The Aluminum segment’s R&D investment

amounted to ¥2,786 million in 2008.

COMMON R&D PROJECTS

Showa Denko’s Corporate R&D Center conducts basic research into

new areas with a view to fostering new businesses and developing

technologies common to different segments. The Analysis & Physical

Properties Center and the Safety Evaluation Center support each

segment’s R&D efforts by conducting analyses and investigations.

In energy-related devices, we are

conducting collaborative research for

commercializing the carbon separators

for polymer electrolyte fuel cells and

platinum-substitute catalysts as part of

national projects. Common R&D expendi-

tures in 2008 totaled ¥3,887 million.

Titanium oxide for capacitors

NRT™ III condensers for car air-conditioning

Carbon/resin separators for fuel cells

SCMG™ graphite anode material



SHOWA DENKO VISION

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

We defined our vision in 2002 when we formulated the Sprout Project

and partially revised its wording in 2005 from the viewpoint of corpo-

rate social responsibility (CSR). The vision, though brief, clarifies our

mission of fulfilling the expectations of all our stakeholders, including

shareholders, customers, suppliers, citizens, and employees. We will

work hard to realize this vision and earn the full trust of all stakeholders

by providing excellent products and services.

CODE OF CONDUCT AND GUIDELINES

We established the code of conduct for Showa Denko Group employ-

ees in 1998. We then enacted its guidelines in the following year, clari-

fying the meaning of the code through details and examples. We then

partially revised the guidelines in 2005 to better reflect the principles of

CSR. In their daily activities, all officers and employees of the Showa

Denko Group are following the code and its guidelines to retain public

confidence, contribute to the prosperity of international society, and

ensure the continued growth of the Group.

The Code of ConductAs Showa Denko officers and employees,1. We will develop and provide useful and safe technologies, prod-

ucts, and services to contribute to the sound growth of society;2. We will observe the laws of Japan and of the foreign countries

in which we operate, abide by the Company rules, and strive to maintain the social order;

3. We will conduct business in Japan and abroad based on the principle of fair and free competition;

4. We will do our best to ensure safety and to protect the global environment;

5. We will make sure that we maintain good communications with the public and disclose accurate information on our Company in a timely manner;

6. We will respect human rights and create a cheerful and comfort-able working environment; and

7. We will act as a member of the international society and contrib-ute to the development of the regions in which we operate.

INVOLVEMENT IN COMMUNITY ACTIVITIES

Involvement with local schools

The Showa Denko Group has made efforts to deepen the interest of

young people in chemistry and environmental protection. To that end,

we have been providing them with opportunities for chemistry experi-

ments and environmental education since 2004 when researchers

at our Oita Petrochemical Complex began demonstrating chemistry

experiments at Oita elementary and junior high schools. In 2007,

we received the Japan Responsible Care Council (JRCC)’s first

Responsible Care Award for the close relations we have established

with local communities through these efforts. We are also providing

opportunities for plant tours and “open laboratory” events. In the Tokyo

metropolitan area, we have

been participating in “Dream -

Chemistry 21: Chemical

Experiment Show for Children

during Summer Vacation”

since 2005. At the show in

2008, we demonstrated

experiments to elementary

school pupils featuring power-

ful magnets made from our

rare earth magnetic alloys.

Aluminum can recycling activities

Showa Denko Group employees are actively engaged in the recycling

of aluminum cans. As part of this activity, the Group makes donations

to regional social welfare organizations. The employees also cooperate

with local residents, including shopkeepers, in the recycling of alumi-

num cans and then donate the resulting money to volunteer groups

that aid people with special needs.

Second Responsible Care Award

Since 2003, we have been producing chemicals from used plastic in

Kawasaki. The number of citizens that visited the plant by the end of

2008 totaled around 18,000. We received the JRCC’s Responsible

Care Award for 2008 for our contributions toward promoting recycling

and environmental awareness.

Ammonia produced at the

plant (trade name: Ecoann™)

has been adopted as a “green

purchase” product by our

customers.

Chemical Experiment Show for Children in Tokyo

CCORPORATE SOCIAL RESPONSIBILITY

Citizens visiting our plant that produces ammonia from used plastic


Showa Denko K.K. 19

RRESPONSIBLE CARE ACTIVITIES

Responsible Care is the chemical industry’s global voluntary

initiative, representing a commitment to work together to

continuously improve the environmental, health, and safety

performance of chemicals over their entire life cycles, namely,

their development, production, distribution, use, final consump-

tion, and disposal.

Showa Denko has been performing its Responsible Care

activities since 1995, when it established action guidelines to

implement the program. Responsible Care activities are con-

ducted within our six business segments (12 business divisions

and 14 regional offices), three branches, an R&D center, and 16

subsidiaries/affiliates, based on voluntary, specific action plans

prepared in line with the Responsible Care Committee’s basic

plan. The following are some examples of our activities:

ENERGY CONSERVATION

We are making our best efforts to conserve energy to contribute to the

prevention of global warming and protect natural resources. Our rate of

energy consumption by basic energy unit in 2007 was reduced to 79%

of the 1990 figure, due partly to improvement in production facilities

and the recovery of energy. Approximately 16% of our total electricity

requirements are now met by our hydroelectric power plants, a clean

source of energy.

REDUCTION OF GREENHOUSE GAS EMISSIONS

Our greenhouse gas (GHG) emissions in 2007 fell 5% from the 1990

figure. We are taking various measures, including the installation of

GHG decomposition facilities, to achieve the goal of a 6% reduction

from the 1990 figure within the time frame of 2008-2012 under the

Kyoto Protocol.

(Relative value: base year 1990)

’06 ’07’05’04’03’02’01’00’99’98’97’90

110

70

90

80

100

ENERGY CONSUMPTION

RATE TRANSITION

(Billions of yen)18

15

0

9

6

3

12

’06 ’07’05’04’03’02’01’00’99’98’97’90

ENVIRONMENTRELATED INVESTMENT

CUMULATIVE VALUE SINCE 1990

Emissions (Kt-CO2) (Base year 1990)3,500

2,000

2,500

3,000

’07’06 Target’90

TRENDS IN GREENHOUSE

GAS EMISSIONS

(Tons/year)25,000

20,000

0

10,000

5,000

15,000

’06 Target’07’05’04’03’02’01’00’99’98’97’90

TRENDS IN THE FINAL VOLUME

OF LANDFILL DISPOSAL

REDUCTION OF INDUSTRIAL WASTE

We are committed to effectively using industrial waste and to reducing

the volume of its discharge. As a result, the final volume of landfill dis-

posal in 2007 was reduced by 88% from the 1990 base level, due

partly to increased use of inorganic sludge (in cement, for example).

A large number of employees within the Showa Denko Group are

engaged in the recycling of aluminum cans. We are utilizing waste plas-

tic as feedstock at our Kawasaki Plant, gasifying it for use as synthesis

gas for ammonia production.

DEVELOPMENT OF TECHNOLOGIES AND PRODUCTS

Fully utilizing its core technologies, the Showa Denko Group is

continuing to develop new products and technologies to contribute to

sustainable growth of society. These efforts include the development

of carbon separators for use in polymer electrolyte fuel cells that can

provide households and cars with CO2-free energy. As a leading manu-

facturer of ultrabright LED chips covering the primary colors of red,

green, and blue, we are increasing production of these chips for use

in LCD backlight for flat-panel TVs and PCs, while developing new

products for use in the promising general lighting market.

COMMITMENT TO CHEMICAL SAFETY

Following the enforcement of the EU’s new chemical legislation

(Registration, Evaluation, Authorization and Restriction of Chemicals,

or REACH), we started up a special team involving members of relevant

staff sections at our head office, business sectors, operation sites within

the EU, and subsidiaries and affiliates. We are addressing the issue by

taking various measures, including pre-registration of chemicals and the

exchange of information along the supply chain,while actively participat-

ing in the chemical industry’s voluntary initiative focusing on REACH.



1. Basic concept regarding corporate governance

We fully recognize the importance of corporate governance as

a means to ensure the soundness, effectiveness, and transpar-

ency of management, and to earn the full trust and confidence

of the market and society, thereby enhancing corporate value

over the long term. The Company is, therefore, taking various

measures to strengthen compliance and management supervi-

sion, clarify management responsibility, ensure quick decision

making and effective execution, and improve disclosure. We

also aim to strengthen relations with our stakeholders, includ-

ing shareholders, customers, suppliers, citizens, and employ-

ees. Based on the above, we have clarified our mission in the

form of the Company vision stated below, working hard to

realize this vision.

VISION

We at the Showa Denko Group will provide products and

services that are useful and safe and exceed our customers’

expectations, thereby enhancing the value of the Group, giving

satisfaction to our shareholders, and contributing to the sound

growth of international society as a responsible corporate

citizen.

2. Situation of the Company’s decision-making

and supervision functions

The Company introduced the corporate officer system in March

2001 to clearly separate management supervision functions

from business execution functions. The number of directors

was substantially reduced accordingly, ensuring quick decision

making and lively discussions. Currently, the Company’s Board

of Directors consists of 12 members, including one outside

director. At Board meetings held once or twice a month, the

Board decides the Company’s basic policy, and deliberates

and decides on matters provided for in the Companies Act and

the Company’s Articles of Incorporation as well as important

matters for the execution of the Company’s operations. The

Chairman of the Board, who does not serve as a corporate

officer, presides over the Board meetings. In January 2007, the

Company abolished the system of officer directors except for

the Chairman and the President. Furthermore, the supervision

by auditors (including outside auditors) and mutual supervision

among directors work to ensure effective supervision and deci-

sion-making functions. To ensure a quick response to changes

in the business environment, the term of office of directors has

been shortened from two years to one year after the amend-

ment of the Company’s Articles of Incorporation at the ordinary

general meeting of shareholders in March 2007.

3. Situation of business execution

The Management Committee, which meets once a week

in principle and is chaired by the President, deliberates and

decides on matters to be referred to the Board of Directors’

meetings and important matters pertaining to overall manage-

ment of the Company. The decisions are made after delibera-

tions on two occasions. As for investment plans, their risks are

examined by task teams before referral to the Management

Committee, and their progress is monitored after authorization.

The Company’s medium-term business plans are decided not

only by the Management Committee but also by the participa-

tion of all corporate officers. The Company introduced the busi-

ness sector system in March 1999 to clarify responsibilities for

business execution. The Company evaluates performances of

respective business sectors to ensure the effective implemen-

tation of the performance-based evaluation system. The

Company has Risk Management, Corporate Ethics, Security

Export Control, Responsible Care, Safety Measures, and IR

committees to handle specific matters important for the execu-

tion of businesses. These committees investigate, study, and

deliberate on management issues under their jurisdiction.

CCORPORATE GOVERNANCE


Showa Denko K.K. 21

4. Situation of auditing functions

The Company’s Board of Auditors consists of five auditors,

including three outside auditors. The auditors attend the Board

of Directors’ meetings and other important internal meetings,

offering opinions as necessary. They audit the execution of

operations through such means as field investigations, hearing

sessions, and perusal of important documents, making pro-

posals and providing advice and recommendations to ensure

the sound management of the Company. They are committed

to strengthening the consolidated auditing system for the

benefit of Group companies. We have an office for internal

audit reporting directly to the President. The Internal Audit

Office investigates the overall execution of business, checking

for accuracy, propriety, and efficiency. It also investigates the

management policies, business plans, and their execution,

checking for consistency and soundness. While the Fuji

Accounting Office and KPMG AZSA & Co. had jointly conduct-

ed auditing of the Company based on respective auditing con-

tracts, the Fuji Accounting Office, whose term of office expired

at the close of the Company’s ordinary general meeting of

shareholders in March 2009, was not reappointed as account-

ing auditor at the said general meeting. KPMG AZSA will solely

conduct auditing of the Company as from fiscal 2009.

5. Compliance and risk management

The Company’s Board of Directors has decided to strengthen

compliance and promote risk management as key components

of its internal control system. The Board will continue to work

on these issues.

Compliance

The Company is working to strengthen compliance through the

code of conduct for its employees and the Corporate Ethics

Committee. Every January, we observe Corporate Ethics

Month to renew our awareness. Furthermore, compliance is

strengthened through various seminars provided by staff

sections and activities organized by respective business

sectors. In the event of transgressions, the Company takes

measures to prevent recurrence and takes disciplinary actions.

The performance evaluation of relevant sectors is to reflect

such transgressions. To prevent a transgression or detect it

early, we have established an internal check system and chan-

nels of communication for reporting the matter.

Risk management

The Management Committee examines important matters from

various angles. In particular, investment plans are examined

carefully from such viewpoints as strategic importance and risk

management. Furthermore, their progress is monitored and

their results are reviewed. Respective business sectors analyze

and evaluate their own business risks. The Risk Management

Committee, which is chaired by the Company’s Chief Risk

Management Officer, is under the CSR Committee chaired by

the President. The Risk Management Committee decides the

Company’s basic risk management policy, regularly evaluates

overall risks, works out measures regarding high-risk matters,

and checks how the measures are implemented by relevant

business sectors.

As to individual risks pertaining to environmental protection,

industrial safety, disaster prevention, chemical substances,

product quality, intellectual property, fair trade, export control,

and legal matters, relevant staff sections establish in-house

rules and manuals, provide seminars, and manage risks

through the review and authorization of proposals from busi-

ness sectors. In the event of an emergency, the Company will

set up crisis headquarters to take swift action and minimize

damage.

6. Reaction policy on large-scale purchases

of the Company’s stock certificates, etc.

The Company believes that its shareholders should be deter-

mined through the free movement of its shares in the market.

Although proposals regarding the large-scale purchases of the

Company’s shares are made by specific persons, the decision

whether to sell the Company’s shares in response to such a

proposal shall eventually be made based on the opinion of the



shareholders, which is reached after being given sufficient infor-

mation necessary for making an appropriate decision and suffi-

cient time for consideration.

However, the purposes of some large-scale purchases do

not contribute to the target company’s corporate value and the

common interests of shareholders, such as those that a) obvi-

ously damage the corporate value and common interests of

shareholders or b) do not provide sufficient time nor information

for the target company’s board of directors or shareholders

to examine the conditions of the purchase. The Company

believes that, ideally, its shareholders should make the decision

as to whether the large-scale purchases proposed by a specific

person or other entity secure and enhance the Company’s

corporate value and the common interests of shareholders,

by obtaining necessary and sufficient information from both

the purchaser and the Company’s Board of Directors. The

Company, therefore, decided to introduce a concrete reaction

policy on large-scale purchases of the Company’s stock cer-

tificates. The Company’s ordinary general meeting of share-

holders in March 2008 approved procedures for introducing,

amending, and abolishing the reaction policy and conditions

for taking counter measures.

7. Other

Remuneration, etc., to directors, auditors, and auditing corpo-

rations (for the period from January 1 through December 31,

2008)

Remuneration, etc., to directors and auditors Retirement benefits

Number of applicable

persons Paid amount

Number of applicable

persons Paid amount

Directors (including outside director)

14(1)

¥406 million (¥9 million)

1(—)

¥12 million(—)

Auditors (including outside auditors)

6(4)

¥94 million(¥31 million)

1(1)

¥19 million(¥19 million)

Total 20 ¥500 million 2 ¥31 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 ¥61 million.

Remuneration to the auditing corporations

Paid amount

Names of accounting auditors: KPMG AZSA & Co. The Fuji Accounting Office

Remuneration for the issuance of auditing certification based on the audit contracts ¥55 million

8. Personal/financial relations and interests

between the Company and outside directors/auditors

The Company has one outside director 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.

CCORPORATE GOVERNANCE

Shareholders’ Meeting

Board of Directors

Corporate Officers

Business Sectors

ManagementCommittee

R&D Committee

Execution of duty

Jobaudits

Decision makingand supervision

CSR Committee

CorporateEthics

Committee

RiskManagementCommittee

SecurityExportControl

Committee

IR Committee

Board ofAuditors

Auditors

AccountingAuditor

President & CEO

SafetyMeasures

Committee

ResponsibleCare

Committee

AuditOffice

Accounting audits

Links


Showa Denko K.K. 23

BBOARD OF DIRECTORS

From left to right: Shunichi Shiraishi, Kenji Tsukamoto, Toshio Ohi, Ichiro Nomura, Norikuni Imoto, Mitsuo Ohashi, Kyohei Takahashi, Tetsuo Tamada, Shinji Sakai, Takashi Miyazaki, Hideo Ichikawa, Tomofumi Akiyama

Chairman of the Board

Mitsuo Ohashi

Representative Director, President and Chief Executive Officer

Kyohei Takahashi

Representative Director and Senior Managing Corporate Officer

Norikuni ImotoChief Risk Management Officer; Director in charge of Internal Audit, Human Resources, General Affairs, Legal, CSR, and Purchasing offices

Director and Managing Corporate Officers

Tetsuo TamadaExecutive Officer, Inorganics Sector

Ichiro Nomura Chief Financial Officer; Director in charge of Internal Control Promotion, IR & PR, Accounting, Finance, and Information Systems offices

Shinji SakaiExecutive Officer, Director in charge of Corporate Strategy Office

Director and Corporate Officers

Toshio OhiExecutive Officer, Chemicals Sector

Takashi MiyazakiExecutive Officer, Petrochemicals Sector; General Manager, Olefins Division, Petrochemicals Sector

Kenji TsukamotoChief Technology Officer; Executive Officer, Technology Headquarters

Hideo IchikawaExecutive Officer, HD Sector, Director in charge of Electronics Sector

Shunichi ShiraishiExecutive Officer, Aluminum Sector

Director

Tomofumi AkiyamaOutside director

Note: All directors listed above, excluding the Chairman of the Board and the outside director, concurrently serve as corporate officers corresponding to their respective positions.

Standing Statutory Auditors

Hiroshi ItoKunio Kashiwada

Auditors

Shogo ItodaHideshi IwaiHiroyuki Tezuka

CORPORATE OFFICERS AND SENIOR CORPORATE FELLOWS

Corporate Officers

Yasumichi MurataGeneral Manager, General Affairs Office; Assistant to Director in charge of Legal Office

Toru TakeuchiGeneral Manager, Organic Chemicals Division, Petrochemicals Sector

Katsunobu SatoGeneral Manager, IR & PR Office; Assistant to Director in charge of Accounting and Information Systems offices

Naofumi KokajiGeneral Manager, Ceramics Division, Inorganics Sector

Akira EbinumaGeneral Manager, Rare Earth Division, Production & Technology Control Department, and Chichibu Plant, Electronics Sector

Akira KoinumaDeputy Executive Officer, Technology Headquarters; General Manager, Production Technology Office, Technology Headquarters

Yoshikazu SakaiGeneral Manager, Finance Office

Shunji FukudaExecutive Officer, Electronics Sector; General Manager, Electronics Materials Division, Electronics Sector

Hirokazu IwasakiGeneral Manager, Intellectual Property Office, Technology Headquarters

Masakazu MakiGeneral Manager, Shiojiri Plant, Ceramics Division, Inorganics Sector

Yoshiharu MizunoAssistant to Oita Complex Representative, Petrochemicals Sector

Masaru AmanoGeneral Manager, Human Resources Office; Assistant to Director in charge of CSR Office

Senior Corporate Fellows

Hisao TakamatsuGeneral Manager, Chemicals Division, Chemicals Sector

Toshio NishideGeneral Manager, Extrusions/Specialty Products Division, Aluminum Sector

Eiichi SatoOita Complex Representative, Petrochemicals Sector

Shigeru YanagimotoAluminum Technology Center, Aluminum Sector

Takumi UiDeputy Executive Officer, Aluminum Sector; General Manager, Heat Exchanger Division, Aluminum Sector

Akira Sakamoto General Manager, Carbons Division, Inorganics Sector

(As of March 27, 2009)


C


CONSOLIDATED SIXYEAR SUMMARY

Thousands of U.S. dollars Millions of yen (Note 1)

2008 2007 2006 2005 2004 2003 2008

For the year Net sales ............................................................ ¥1,003,876 ¥1,023,238 ¥0,914,533 ¥811,899 ¥740,706 ¥689,366 $11,027,972 Petrochemicals ............................................... 400,173 395,105 335,383 301,189 254,351 235,124 4,396,056 Chemicals ...................................................... 93,319 84,709 79,201 74,001 80,188 78,232 1,025,146 Electronics ..................................................... 188,778 201,013 165,541 133,902 112,455 94,735 2,073,800 Inorganics ...................................................... 88,797 84,599 74,301 61,882 55,295 50,969 975,470 Aluminum ....................................................... 232,809 257,812 260,107 240,925 238,417 230,306 2,557,500 Operating income .............................................. 26,792 76,671 68,727 57,191 52,071 38,546 294,319 Net income ........................................................ 2,451 33,066 28,836 15,647 7,596 10,317 26,925 R&D expenditures .............................................. 20,072 17,396 19,523 17,384 17,576 16,983 220,499 Capital expenditures .......................................... 54,799 69,346 90,841 41,218 29,916 40,848 601,990 Depreciation and amortization ............................ 60,439 49,761 38,049 34,203 34,115 34,543 663,945

At year-end Total assets ........................................................ 962,010 1,029,629 1,037,823 986,233 943,908 939,879 10,568,052 Total net assets .................................................. 265,459 298,659 265,492 206,738 177,701 166,087 2,916,166

U.S. dollars Yen (Note 1)

Per share Net income—primary (Note 2) ............................ ¥ 1.96 ¥027.52 ¥025.01 ¥013.70 ¥006.66 ¥009.07 $0.022 Net income—fully diluted (Note 2) ...................... — 26.50 23.48 12.82 6.35 — — Net assets ......................................................... 192.85 222.31 200.29 180.96 155.53 145.96 2.12 Cash dividends (applicable to the period) ........... 5.00 5.00 4.00 3.00 3.00 2.00 0.055

Number of employees at year-end ................... 11,756 11,329 11,184 11,118 11,166 10,623 Notes: 1. Yen amounts have been translated into U.S. dollars, for convenience only, at the rate of ¥91.03 to US$1.00, the approximate rate of exchange at December 31, 2008. 2. 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.

Showa Denko K.K. and Consolidated SubsidiariesDecember 31


M

Showa Denko K.K. 25

MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

Consolidated net sales in 2008 totaled ¥1,003,876 million (US$11,028

million), a decrease of ¥19,362 million, or 1.9%, from the previous year.

Sales increased in the Petrochemicals, Chemicals, and Inorganics seg-

ments, but decreased in the Electronics and Aluminum segments.

The cost of sales increased ¥27,711 million, or 3.2%, to ¥888,462

million (US$9,760 million), due mainly to higher raw material costs in

the Petrochemicals and Inorganics segments. Selling, general and

administrative expenses increased ¥2,806 million, or 3.3%, to ¥88,622

million (US$974 million), owing to the rise in R&D expenses.

Operating income decreased ¥49,879 million, or 65.1%, to ¥26,792

million (US$294 million). The decrease was due mainly to the fall in

shipments of petrochemicals and the influence of the sharp fluctuations

in naphtha costs; the effect of a higher yen and increased depreciation

expenses in the Electronics segment; and low demand for aluminum

from the construction and automobile industries.

R&D expenditures increased ¥2,676 million, or 15.4%, to ¥20,072

million (US$220 million).

INFORMATION BY BUSINESS SEGMENT

A breakdown of net sales and operating income by business segment

is as follows:

Petrochemicals

Sales of olefins rose owing to higher selling prices until the middle of

the year, reflecting soaring raw material costs, notwithstanding lower

shipment volumes in the second half owing to stagnant demand. Sales

of organic chemicals were down due partly to substantially decreased

shipment volumes of acetic acid, notwithstanding higher prices of

organic chemicals, reflecting the rise in feedstock costs.

Overall, the Petrochemicals segment’s sales rose 1.3%, to ¥400,173

million (US$4,396 million). However, the segment recorded an operat-

ing loss of ¥1,281 million (US$14 million), compared with operating

income of ¥19,574 million for the previous year. The fall in the seg-

ment’s operating income was due to lower demand in the second half;

the fall in selling prices, reflecting the sharp drop in naphtha prices; and

the influence of high-priced stock of naphtha.

Chemicals

Sales of acrylonitrile were up owing to higher shipment volumes, and

sales of caustic soda, ammonia, and amino acids increased due to the

rise in selling prices. Sales of chloroprene rubber slipped as a result of

the fall in demand for automobile applications in the second half. We

consolidated Showa Tansan Co., Ltd. in June 2008 by acquiring its

common stock by a tender offer.

As a result, the Chemicals segment’s sales rose 10.2%, to ¥93,319

million (US$1,025 million). However, operating income fell 28.3%, to

¥5,329 million (US$59 million), due mainly to sharp declines in the acry-

lonitrile market prices in the second half of the year.

Electronics

Sales of HD media decreased owing to lower shipment volumes in

the second half of the year, centering on aluminum-based HD media,

notwithstanding the rise in sales in the first half. Sales of compound

semiconductors were up, reflecting the rise in shipment volumes of

ultrabright LED chips. Sales of semiconductor-processing specialty

gases decreased, reflecting the fall in demand for semiconductors.

Meanwhile, sales of rare earth magnetic alloys rose due to the rise in

shipment volumes and selling prices.

As a result, the Electronics segment’s sales decreased 6.1%, to

¥188,778 million (US$2,074 million). Operating income decreased

64.2%, to ¥9,259 million (US$102 million), owing to the fall in shipment

volumes of aluminum-based HD media in the second half of the year,

the rise in depreciation expenses, and the influence of the appreciation

of the yen.

Inorganics

Sales of graphite electrodes increased due to the rise in selling prices,

reflecting higher raw material costs, notwithstanding lower demand in the

second half. Sales of ceramics increased slightly.

As a result, the Inorganics segment’s sales increased 5.0%, to ¥88,797

million (US$975 million). However, operating income fell 7.9%, to ¥19,244

million (US$211 million). The decrease in operating income was due to

the adverse effect of the appreciation of the yen on the profit from the

graphite electrode business in the U.S. as well as the influence of higher

raw material costs on the ceramics business.

NET SALES BY SEGMENT

(Billions of yen)1,200

0

200

400

600

800

1,000

Chemicals ElectronicsPetrochemicals Inorganics Aluminum

20082007200620052004

OPERATING INCOME

(Billions of yen)80

0

20

40

60

20082007200620052004


M


Aluminum

Sales from ingot marketing decreased owing to the fall in shipment vol-

umes. Sales of rolled products were down as a result of our withdrawal

from the commodity foils business in the previous year and lower ship-

ment volumes of high-purity foils for capacitors in the second half of

2008. Sales of extrusions/specialty products fell mainly due to decreas-

es in shipment volumes of extrusions for building materials. In the heat

exchanger business, sales rose in Asia and Europe, although sales in

Japan and the United States fell. Sales of Shotic™ forged products

decreased because of the sharp drop in shipments to the automobile

industry in the second half of the year. Sales of aluminum cans also

decreased, reflecting lower shipment volumes.

As a result, the Aluminum segment’s sales fell 9.7%, to ¥232,809

million (US$2,558 million). The segment recorded an operating loss of

¥212 million (US$2 million), compared with operating income of ¥8,042

million for the previous year. The fall in the segment’s operating income

was due to lower demand from the construction and automobile indus-

tries as well as the influence of higher fuel costs on our power genera-

tion business as an independent power provider.

INFORMATION BY GEOGRAPHIC AREA

Operations in Japan

Sales of olefins were up, owing to higher selling prices until the middle

of the year, reflecting soaring raw material costs, notwithstanding lower

shipment volumes in the second half as a result of stagnant demand.

Sales of organic chemicals were down due partly to substantially

decreased shipment volumes of acetic acid, notwithstanding higher

prices of organic chemicals, reflecting the rise in feedstock costs. In

the Chemicals segment, sales rose due partly to the consolidation of

Showa Tansan. Sales of aluminum fell due to the influence of lower

demand from the construction and automobile industries. As a result,

consolidated sales from operations in Japan decreased 1.2%, to

¥846,730 million (US$9,302 million), and consolidated operating

income from operations in Japan decreased 59.5%, to ¥24,937 million

(US$274 million). The decrease in operating income was due mainly to

the fall in demand for petrochemicals in the second half, the fall in sell-

ing prices of petrochemicals following the sharp drop in naphtha costs,

and the influence of high-priced stock of naphtha; low demand for alu-

minum from the construction and automobile industries; as well as the

influence of higher fuel costs on our power generation business as an

independent power provider.

Operations in Asia

Sales of HD media decreased owing to lower shipment volumes in the

second half of the year, centering on aluminum-based HD media, not-

withstanding the rise in sales in the first half. As a result, sales from

operations in Asia decreased 5.8%, to ¥98,734 million (US$1,085 mil-

lion). We posted an operating loss of ¥511 million (US$6 million) from

operations in Asia compared with operating income of ¥11,403 million

in the previous year. This was due to the fall in shipment volumes of

aluminum-based HD media in the second half of the year, the rise in

depreciation expenses, and the influence of the appreciation of the yen.

Operations in the Rest of the World

Sales of graphite electrodes by a U.S. subsidiary decreased due to the

influence of the higher yen. Sales of heat exchangers decreased in the

U.S., although those in Europe increased. As a result, sales from oper-

ations in the rest of the world decreased 4.9%, to ¥58,412 million

(US$642 million), and operating income fell 12.0%, to ¥6,941 million

(US$76 million). The decrease in operating income was due to the

adverse effect of the appreciation of the yen on the profit from the

graphite electrode business in the U.S. as well as the fall in profit of

the heat exchanger business in Europe.

OTHER INCOME EXPENSES AND NET INCOME

The gap between interest expense and interest and dividend income

decreased ¥585 million, to expenses of ¥6,263 million (US$69 million),

as a result of a decrease in interest-bearing debt. The gain on invest-

ments in non-consolidated subsidiaries and affiliates to which the equity

method is applied decreased ¥1,634 million, to ¥742 million (US$8 mil-

lion), due to lower profit at affiliates in resin-related operations. Owing to

MANAGEMENT’S DISCUSSION AND ANALYSIS

NET INCOME

(Billions of yen)40

0

10

20

30

20082007200620052004

TOTAL ASSETS

(Billions of yen)1,200

1,000

0

200

400

800

600

20082007200620052004


Showa Denko K.K. 27

the appreciation of the yen, exchange loss increased ¥3,517 million, to

¥5,126 million (US$56 million). The gain on the sale of marketable and

investment securities, net, increased ¥7,756 million, to ¥10,078 million

(US$111 million), as a result of asset reduction efforts.

We recorded a loss of ¥4,321 million (US$47 million) for the impair-

ment of fixed assets, up ¥2,604 million, and a loss of ¥3,895 million

(US$43 million) on the sale and disposal of fixed assets, almost at the

same level as in the previous year. We also recorded a loss of ¥2,324

million (US$26 million) on the write-down of investment securities, up

¥2,243 million. Overall, the total of other income (expenses) ended in

a loss of ¥20,500 million (US$225 million), up ¥165 million from the

previous year.

As a result, the Company posted pretax income of ¥6,292 million

(US$69 million), down ¥50,044 million from the previous year. After

income taxes, net, of ¥2,892 million (US$32 million) and minority inter-

ests of ¥949 million (US$10 million), the Company recorded net income

of ¥2,451 million (US$27 million), a decrease of ¥30,615 million, or

92.6%, over the previous year.

FINANCIAL POSITION

Total Assets

Total assets decreased ¥67,619 million, or 6.6%, from the end of the

previous year, to ¥962,010 million (US$10,568 million). Cash on hand

and in banks increased ¥9,060 million, to ¥40,954 million (US$450 mil-

lion), as we increased its amount in view of the current financial situa-

tion. Notes and accounts receivable decreased ¥59,729 million, to

¥132,640 million (US$1,457 million), due to a decrease in net sales

in the second half of the year. Inventories rose ¥8,414 million, to

¥117,749 million (US$1,294 million), as the effect of the rise in raw

material costs more than offset inventory reduction efforts. Tangible

fixed assets fell ¥27,650 million, to ¥531,633 million (US$5,840 million),

due partly to a decrease in capital investments in the Electronics seg-

ment. Total investments and other assets decreased ¥11,645 million,

to ¥105,209 million (US$1,156 million), due to the fall in appraised

value of investment securities, reflecting the stagnant stock market,

as well as the sale of investment securities.

Liabilities

Interest-bearing debt fell ¥2,731 million, or 0.7%, from the end of the

previous year, to ¥392,915 million (US$4,316 million), as a result of

continued debt reduction efforts. Total liabilities decreased ¥34,419 mil-

lion, to ¥696,551 million (US$7,652 million).

Total Net Assets

Total net assets decreased ¥33,200 million, or 11.1%, to ¥265,459 mil-

lion (US$2,916 million). The decrease was due mainly to the payment

of dividends for the previous year; the fall in the securities valuation sur-

plus, reflecting the stagnant stock market; and the fall in foreign curren-

cy translation adjustments, owing to the influence of the appreciation of

the yen.

Capital Expenditures

Capital expenditures decreased ¥14,547 million, to ¥54,799 million

(US$602 million), as a series of investments in HD media production

facilities was completed. Chief items were expansions of blue LED chip

and HD media production capacities.

Cash Flows

Net cash provided by operating activities decreased ¥6,223 million, to

¥61,099 million (US$671 million), due partly to lower income before

income taxes. Net cash used in investing activities decreased ¥25,618

million, to ¥44,035 million (US$484 million), due partly to a decrease

in payments for capital investments. Net cash used in financing activi-

ties decreased ¥16,734 million, to ¥3,818 million (US$42 million), not-

withstanding continued reductions in interest-bearing debt. This was

because we increased the balance of liquidity at hand, anticipating the

severe fund-raising environment in general due to the quickly worsen-

ing financial market. As a result, cash on hand and in banks at the end

of 2008 increased ¥9,062 million, to ¥40,949 million (US$450 million).

TOTAL NET ASSETS

(Billions of yen)300

250

0

50

100

200

150

20082007200620052004

INTEREST-BEARING DEBT

(Billions of yen)600

500

0

400

300

~~20082007200620052004


R


Operational and Other Risks

The Showa Denko Group is taking steps to minimize risks to its

operations. While we promoted the Passion Project for the 2006-2008

period, we reviewed it in response to the drastic changes in the global

economic environment and worked out the “Passion Extension” for the

two years of 2009 and 2010, maintaining the basic concepts of the

Passion Project and making adjustments to the changes in the envi-

ronment. We will hereafter pursue the goals defined in the “Passion

Extension.” We consider we face the risks, as explained below, that

could adversely affect our future performance and financial conditions.

The following covers important risk factors considered being present

as of this March 27, 2009. This list is not inclusive.

(a) Substantial Fluctuations in the Performances

of Individual Businesses

The Group is manufacturing and selling a wide variety of products,

such as petrochemicals, chemicals, electronics, inorganics, and alumi-

num. The following risks are expected in major business fields, but

those are not limited to the businesses mentioned below.

Petrochemicals

The Group purchases and imports a large amount of feedstock

naphtha. When the naphtha price rises due to an increase in crude oil

prices, tight supply or a weaker yen, and when we cannot absorb

the manufacturing cost increase in the form of higher product prices,

the Group’s performance and financial conditions can be affected.

Furthermore, earnings from petrochemicals largely depend on the

supply-demand balance. Construction of large plants by competitors

and resultant oversupply as well as a sharp decrease in demand due

to unfavorable changes in the Japanese or world economies can

affect the Group’s performance and financial conditions.

Aluminum

The Group imports a large amount of aluminum ingots from overseas

sources. When the aluminum ingot price rises due to fluctuations in

LME prices or a weaker yen, and when we cannot absorb the manu-

facturing cost increase in the form of higher product prices, the Group’s

performance and financial conditions can be affected. Furthermore,

sales to such industries as the automobile, electric appliance, and con-

struction sectors account for a large portion. Trends of those indus-

tries, which are beyond our control, can substantially affect such

businesses.

HD media

In the Group’s HD media business, the sales volume is largely influ-

enced by demand for electric appliances and PCs. The business

requires innovations at a rapid pace and involves fierce international

competition. These changes in demand and intensification in

competition can cause fluctuations in selling prices. The Group is pre-

pared to develop and provide products meeting the market require-

ments and has established a global production/marketing setup.

However, when customer requirements change more quickly than we

expected, when the supply-demand balance changes substantially,

and when the exchange rate fluctuates sharply, the Group’s perfor-

mance and financial conditions can be affected.

Overseas operations

The Group is producing and selling in Asia, North America, and Europe.

Operations overseas involve such special risks as unexpected changes

in laws and regulations, deterioration in political/economic situations,

and social disorder due to war and terrorism. Such risks can become

real and affect our overseas operations, resulting in an adverse impact

on the Group’s performance and financial conditions.

(b) Unexpected Fluctuations in Financial Conditions

and Cash Flows

Substantial fluctuations in exchange rates

The Group imports part of its feedstock requirements from overseas

and exports part of its domestic production to foreign countries. The

Group makes its best efforts to minimize relevant exchange rate fluctu-

ation risks, mainly through exchange contracts. However, substantial

fluctuations in exchange rates can affect the Group’s foreign-currency-

based transactions and assets/liabilities, affecting the Group’s perfor-

mance and financial conditions. In particular, a sharp appreciation of

the yen against other currencies can affect the Group’s performance.

Furthermore, the exchange rate fluctuations can affect the Group’s per-

formance and financial conditions through the conversion of overseas

subsidiaries’ financial statements into Japanese yen.

Trends in financial markets

The trends in the financial markets can change the fund-raising and

interest-rate situations, affecting the Group’s performance and financial

conditions.

Employees’ severance indemnities

The Group’s employees’ severance indemnities and expenses are cal-

culated based on various basic rates and the yield of pension assets

used in pension calculations. Fluctuations in the current price of pen-

sion assets, trends in interest rates and changes in the retirement ben-

efit/pension systems can affect the Group’s performance and financial

conditions.

Securities

As the Group owns securities with current prices, fluctuations in stock

prices can result in valuation losses, affecting the Group’s performance

and financial conditions.

RISK FACTORS


Showa Denko K.K. 29

Accounting for impairment of fixed assets

The Group has adopted the accounting standard regarding the impair-

ment of fixed assets. The Group may incur additional losses from the

impairment of fixed assets as a result of future changes in the current

prices of land and other fixed assets or a substantial change in the

business environment.

Deferred tax assets

The Group’s financial statements include deferred tax assets in relation

to temporary differences (differences between the assets/liabilities on

the consolidated financial statements and the assets/liabilities in the

calculation of taxable income). The calculation of deferred tax assets

is based on various projections for future taxable income. Thus, when

actual taxable income differs from the projections and when it becomes

necessary to revise deferred tax assets, that can affect the Group’s

performance and financial conditions.

(c) Specific Regulations

The Group’s businesses are subject to various restrictions as stipulated

by laws and regulations. The restrictions relate to industrial safety (such

as the Law for Prevention of Disasters at Petroleum Complexes, Etc.;

the Fire Service Law; and the High Pressure Gas Safety Law) and the

environment and chemical substances (such as the Basic Environment

Law; the Air Pollution Control Law; and the Law concerning the

Examination and Regulation of Manufacture, Etc. of Chemical

Substances). The Group observes these laws and regulations as it con-

ducts its respective businesses. In the event the Group fails to observe

any of the laws and regulations, the Group’s activities could be restrict-

ed. In case stricter regulations are introduced, resulting in higher costs,

the Group’s performance and financial conditions can be affected.

(d) Important Lawsuits

While the Group makes its best efforts to observe pertinent laws and

regulations, the Group may be sued as it conducts its wide-ranging

businesses.

(e) Others

R&D

In line with its policy of securing market orientation and establishing

technical advantages, the Group is engaged in continuous R&D to

improve its core inorganic, aluminum, and organic chemical technolo-

gies and achieve synergies in an effort to create individualized products

and high-value-added businesses. However, in case the actual results

materially differ from original plans, the Group’s performance and finan-

cial conditions could be affected.

Intellectual property

The Group is making its best efforts to protect its accumulated patent

rights and know-how in recognition of their ability to make the Group’s

businesses more competitive. However, in the event of failure to duly

protect any of the patent rights or know-how, infringement by a third

party, or if the Group is considered to have infringed on a third party’s

intellectual property, the Group’s operations can be hindered and the

Group’s performance and financial conditions could be affected.

Quality assurance and product liability

The Group has established its internal rules on quality assurance and

quality control, as well as organizations for managing and promoting

quality assurance. Furthermore, the Group has obtained certification

under ISO 9001 standards to ensure strict quality control. However, in

the event of a serious quality defect or being sued for product liability,

the Group’s reputation could be damaged and the Group may be

forced to pay compensation to customers. This could affect the

Group’s performance and financial conditions.

Accidents and disasters

The Group is committed to securing steady and safe operations. The

Group conducts regular inspections of all manufacturing facilities in an

effort to minimize any risk factors pertaining to the suspension of oper-

ations or accidents due to problems with manufacturing facilities. In the

event of injury or damage to property due to an accident or a natural

disaster, the Group’s reputation could be damaged and the Group may

incur substantial costs and lose business opportunities due to the sus-

pension of production. This could affect the Group’s performance and

financial conditions.

Impact on natural environment

The Group is committed to the principles of Responsible Care, which

means that we are working to ensure the health and safety of everyone

and to protect the environment from harm caused by chemical sub-

stances throughout their life cycles, namely, development, production,

distribution, use, and disposal. In the event of causing impact on the

natural environment, the Group’s reputation can be damaged. The

Group may incur substantial costs, including compensation, lose busi-

ness opportunities due to the suspension of production and/or pay

compensation to customers. These factors can affect the Group’s

performance and financial conditions.


C


CONSOLIDATED BALANCE SHEETS


ASSETS 2008 2007 2008

Current assets Cash on hand and in banks (Notes 2 and 5)............................................................................... ¥ 40,954 ¥ 31,894 $ 449,900 Notes and accounts receivable (Note 7) ..................................................................................... 132,640 192,369 1,457,102 Allowance for doubtful receivables (Note 2) ................................................................................ (950) (1,724) (10,435) Inventories (Note 2) .................................................................................................................... 117,749 109,335 1,293,515 Deferred tax assets—current (Note 10) ...................................................................................... 5,877 3,225 64,562 Other current assets .................................................................................................................. 25,387 13,270 278,886

Total current assets ......................................................................................................... 321,657 348,369 3,533,530

Property, plant and equipment (Notes 2 and 3) Land .......................................................................................................................................... 256,042 260,562 2,812,724 Buildings and structures ............................................................................................................. 238,001 235,145 2,614,535 Machinery and equipment .......................................................................................................... 711,759 697,799 7,818,947 Construction in progress ............................................................................................................ 17,333 17,261 190,405

...................................................................................................................................................... 1,223,135 1,210,767 13,436,611 Less: Accumulated depreciation ................................................................................................ (691,502) (651,484) (7,596,415)

Net property, plant and equipment .................................................................................. 531,633 559,283 5,840,196

Investments and other assets Investment securities (Notes 2 and 6) ......................................................................................... 65,623 86,765 720,893 Long-term loans ....................................................................................................................... 650 734 7,143 Deferred tax assets—non-current (Note 10) ............................................................................... 17,624 7,539 193,607 Other ......................................................................................................................................... 22,494 23,363 247,099 Allowance for doubtful accounts (Note 2) ................................................................................... (1,182) (1,547) (12,987)

Total investments and other assets ................................................................................. 105,209 116,854 1,155,755

Goodwill (Note 21) ....................................................................................................................... 3,511 5,123 38,571

Total assets ..................................................................................................................... ¥ 962,010 ¥1,029,629 $10,568,052

See notes to financial statements.

Showa Denko K.K. and Consolidated SubsidiariesAt December 31, 2008 and 2007


Showa Denko K.K. 31


LIABILITIES AND NET ASSETS 2008 2007 2008

Current liabilities Short-term debt (Note 8) ............................................................................................................ ¥100,717 ¥0,093,924 $ 1,106,415 Current portion of long-term debt (Note 8) ................................................................................. 59,448 63,433 653,059 Notes and accounts payable (Note 7) ........................................................................................ 152,851 175,803 1,679,122 Income taxes payable ................................................................................................................ 1,477 9,962 16,221 Reserve for restructuring expenses (Note 2) ............................................................................... 532 226 5,841 Reserve for periodic repairs (Note 2) .......................................................................................... 58 513 634 Reserve for bonus payment (Note 2) .......................................................................................... 2,063 2,096 22,664 Other current liabilities ................................................................................................................ 46,628 34,771 512,241

Total current liabilities....................................................................................................... 363,774 380,728 3,996,197

Long-term liabilities Long-term debt less current portion (Note 8) .............................................................................. 232,750 238,289 2,556,845 Deferred tax liabilities—non-current (Note 10) ............................................................................. 6,399 6,283 70,294 Accrued retirement benefits (Notes 2 and 9) ............................................................................... 28,659 31,176 314,826 Reserve for directors’ retirement benefits (Note 2) ...................................................................... — 35 — Reserve for periodic repairs (Note 2) .......................................................................................... 2,756 1,561 30,270 Deferred tax liabilities due to land revaluation ............................................................................. 45,994 46,508 505,266 Other long-term liabilities ............................................................................................................ 16,219 26,390 178,188

Total long-term liabilities .................................................................................................. 332,777 350,242 3,655,689

Contingent liabilities (Note 13)

Net assets (Note 14)Stockholders’ equity Common stock Authorized, 3,300,000,000 shares Issued, 2008— 1,248,236,801 shares .................................................................................... 121,904 — 1,339,161 Issued, 2007— 1,248,236,801 shares .................................................................................... — 121,904 — Capital surplus ........................................................................................................................... 37,945 37,892 416,838 Retained earnings ...................................................................................................................... 73,146 75,856 803,537 Less: Treasury stock at cost, 2008—525,151 shares ................................................................. (173) — (1,898) Less: Treasury stock at cost, 2007—610,452 shares ................................................................. — (199) —

Total stockholders’ equity ................................................................................................ 232,822 235,453 2,557,638

Valuations and adjustments Unrealized gains on available-for-sale securities, net of income taxes ......................................... 4,983 16,075 54,741 Unrealized gains (losses) on hedging derivatives, net of income taxes ........................................ (6,093) 436 (66,932) Land revaluation reserve (Note 15), net of income taxes ............................................................. 21,896 23,676 240,534 Foreign currency translation adjustments (Note 2) ...................................................................... (12,981) 1,722 (142,605)

Total valuations and adjustments ..................................................................................... 7,805 41,909 85,738

Minority interests ........................................................................................................................ 24,832 21,297 272,790

Total net assets ............................................................................................................... 265,459 298,659 2,916,166

Total liabilities and net assets ........................................................................................... ¥962,010 ¥1,029,629 $10,568,052


C


CONSOLIDATED STATEMENTS OF INCOME


2008 2007 2008

Net sales .................................................................................................................................. ¥1,003,876 ¥1,023,238 $11,027,972Cost of sales ........................................................................................................................... 888,462 860,751 9,760,102

Gross profit ............................................................................................................................ 115,414 162,487 1,267,870Selling, general and administrative expenses (Note 16) ...................................................... 88,622 85,816 973,551

Operating income .................................................................................................................. 26,792 76,671 294,319

Other income (expenses) Interest and dividend income ................................................................................................. 1,501 1,759 16,492 Equity in earnings of unconsolidated subsidiaries and affiliates ............................................... 742 2,376 8,154 Gain on sale of marketable and investment securities, net ...................................................... 10,078 2,322 110,706 Loss on write-down of investment securities .......................................................................... (2,324) (81) (25,527) Gain on business transfer ....................................................................................................... 426 340 4,685 Gain on sale of inventories ..................................................................................................... 1,592 1,673 17,489 Gain (loss) on sale of property, plant and equipment, net ........................................................ 546 (42) 6,003 Interest expense .................................................................................................................... (7,764) (8,607) (85,288) Loss on disposal of property, plant and equipment, net.......................................................... (4,441) (3,826) (48,787) Start-up expense ................................................................................................................... — (5,398) — Loss on impairment of fixed assets (Note 11) ......................................................................... (4,321) (1,717) (47,467) Special severance pay ........................................................................................................... (87) (332) (960) Reserve for restructuring expenses (Note 2) ........................................................................... (482) — (5,292) Allowance for doubtful receivables ......................................................................................... (89) (353) (982) Other, net ............................................................................................................................... (15,877) (8,449) (174,420)

Total ............................................................................................................................ (20,500) (20,335) (225,194)

Income before income taxes ................................................................................................. 6,292 56,336 69,125Income taxes (Notes 2 and 10) Current .................................................................................................................................. 5,343 17,624 58,703 Deferred ................................................................................................................................. (2,451) 3,419 (26,929)Minority interests .................................................................................................................... 949 2,227 10,426

Net income ................................................................................................................. ¥ 2,451 ¥ 33,066 $00,026,925

U.S. dollars Yen (Note 4)

Per share amounts Net income—primary ............................................................................................................. ¥1.96 ¥27.52 $0.022 —fully diluted ....................................................................................................... — 26.50 — Cash dividends (applicable to the period) ............................................................................... 5.00 5.00 0.055Note: 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.See notes to financial statements.

Showa Denko K.K. and Consolidated SubsidiariesFor the years ended December 31, 2008 and 2007


C

Showa Denko K.K. 33

Thousands Millions of yen

Unrealized Unrealized Number of gains on gains Foreign shares of available- (losses) on Land currency common Common Capital Retained Treasury for-sale hedging revaluation translation Minority stock stock surplus earnings stock securities derivatives reserve adjustments interests

Balance at December 31, 2006 ............ 1,175,820 ¥110,824 ¥26,883 ¥47,333 ¥(152) ¥19,285 ¥ 3,607 ¥23,996 ¥ 3,633 ¥30,083

Conversion of subscription warrants .... 72,417 11,080 11,007 — — — — — — — Cash dividends .................................... — — — (4,702) — — — — — — Net income for the year ........................ — — — 33,066 — — — — — — Treasury stock acquired ....................... — — — — (55) — — — — — Treasury stock sold .............................. — — 2 — 8 — — — — — Decrease due to exclusion from equity method ............................ — — — (10) — — — — — — Reversal of land revaluation .................. — — — 320 — — — — — — Decrease due to change of accounting method in overseas subsidiary ........... — — — (141) — — — — — — Other ................................................... — — — (10) — (3,210) (3,171) (320) (1,911) (8,786)

Balance at December 31, 2007 ............ 1,248,237 ¥121,904 ¥37,892 ¥75,856 ¥(199) ¥16,075 ¥ 436 ¥23,676 ¥ 1,722 ¥21,297

Cash dividends .................................... — — — (6,239) — — — — — — Net income for the year ........................ — — — 2,451 — — — — — — Treasury stock acquired ....................... — — — — (28) — — — — — Treasury stock sold .............................. — — 53 (12) 54 — — — — — Increase due to inclusion in consolidation .................................. — — — 6 — — — — — — Increase due to exclusion from consolidation .............................. — — — 15 — — — — — — Decrease due to inclusion in consolidation .................................. — — — (60) — — — — — — Decrease due to exclusion from consolidation .............................. — — — (250) — — — — — — Reversal of land revaluation .................. — — — 1,545 — — — — — — Other ................................................... — — — (166) — (11,092) (6,529) (1,780) (14,703) 3,535

Balance at December 31, 2008 ............ 1,248,237 ¥121,904 ¥37,945 ¥73,146 ¥(173) ¥ 4,983 ¥(6,093) ¥21,896 ¥(12,981) ¥24,832

Thousands Thousands of U.S. dollars (Note 4)

Balance at December 31, 2007 ........... 1,248,237 $1,339,161 $416,261 $833,308 $(2,184) $176,594 $ 4,786 $260,087 $ 18,917 $233,957

Cash dividends ................................... — — — (68,536) — — — — — — Net income for the year ....................... — — — 26,925 — — — — — — Treasury stock acquired ...................... — — — — (309) — — — — — Treasury stock sold ............................. — — 577 (128) 595 — — — — — Increase due to inclusion in consolidation ................................. — — — 61 — — — — — — Increase due to exclusion from consolidation ............................. — — — 164 — — — — — — Decrease due to inclusion in consolidation ................................. — — — (663) — — — — — — Decrease due to exclusion from consolidation ............................. — — — (2,748) — — — — — — Reversal of land revaluation ................. — — — 16,975 — — — — — — Other .................................................. — — — (1,821) (121,853) (71,718) (19,553) (161,522) 38,833

Balance at December 31, 2008 ........... 1,248,237 $1,339,161 $416,838 $803,537 $(1,898) $ 54,741 $(66,932) $240,534 $(142,605) $272,790


CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS



C


CONSOLIDATED STATEMENTS OF CASH FLOWS


2008 2007 2008

Cash flows from operating activities Income before income taxes .............................................................................................................. ¥ 6,292 ¥56,336 $ 69,125 Adjustments for: Depreciation and amortization ........................................................................................................ 60,439 49,761 663,945 Loss on impairment of fixed assets ................................................................................................. 4,321 1,717 47,467 Amortization of goodwill ................................................................................................................. 991 1,137 10,888 Increase (decrease) in reserve for business restructuring expenses ................................................. 306 (1,988) 3,359 Decrease in accrued retirement benefits ......................................................................................... (3,062) (3,887) (33,634) Interest and dividend income .......................................................................................................... (1,501) (1,759) (16,492) Interest expense ............................................................................................................................. 7,764 8,607 85,288 Equity in earnings of non-consolidated subsidiaries and affiliates .................................................... (742) (2,376) (8,154) Loss on sale and write-down of investment securities, net .............................................................. (7,754) (2,241) (85,179) Loss on disposal of property, plant and equipment, net .................................................................. 4,441 3,826 48,787 (Gain) loss on sale of property, plant and equipment, net ................................................................ (546) 42 (6,003) Decrease (increase) in trade receivables ............................................................................................. 62,520 (2,268) 686,804 Increase in inventories ........................................................................................................................ (14,613) (24,196) (160,532) (Decrease) increase in trade payables ................................................................................................ (28,138) 11,063 (309,109) Other ................................................................................................................................................. (8,107) (6,390) (89,053) Subtotal ......................................................................................................................................... 82,611 87,384 907,507 Interest and dividends received .......................................................................................................... 3,723 3,681 40,902 Interest paid ....................................................................................................................................... (7,860) (8,457) (86,343) Income taxes paid .............................................................................................................................. (17,375) (15,286) (190,866) Net cash provided by operating activities ............................................................................. 61,099 67,322 671,200

Cash flows from investing activities Payments for purchases of marketable securities ............................................................................... (300) — (3,296) Proceeds from sales of marketable securities ..................................................................................... 402 2 4,420 Payments for purchases of property, plant and equipment ................................................................. (54,086) (72,190) (594,155) Proceeds from sales of property, plant and equipment ....................................................................... 3,595 3,396 39,498 Proceeds from business transfer ........................................................................................................ 426 340 4,685 Payments for purchases of investment securities ............................................................................... (6,460) (1,791) (70,962) Proceeds from sales of investment securities ..................................................................................... 16,549 8,216 181,793 Proceeds from redemption of investment securities ........................................................................... — 1,000 — Payments for purchases of consolidated subsidiaries’ securities ........................................................ — (8,877) — Payments for purchases of consolidated subsidiaries ......................................................................... (1,403) — (15,417) Proceeds from purchases of consolidated subsidiaries ...................................................................... — 405 — Proceeds from sales of consolidated subsidiaries............................................................................... 418 1,302 4,589 Increase in short-term loans, net ........................................................................................................ (1,859) (17) (20,417) Payments for long-term loans ............................................................................................................ (89) (137) (976) Proceeds from collection of long-term loans....................................................................................... 153 315 1,675 Other ................................................................................................................................................. (1,381) (1,617) (15,176) Net cash used in investing activities ..................................................................................... (44,035) (69,653) (483,739)

Cash flows from financing activities Increase (decrease) in short-term debt, net ........................................................................................ 10,359 (22,117) 113,798 Proceeds from long-term debt ........................................................................................................... 57,900 81,958 636,054 Repayments of long-term debt........................................................................................................... (59,561) (85,987) (654,300) Proceeds from issuance of bonds ...................................................................................................... — 20,000 — Redemption of bonds ........................................................................................................................ (3,000) (8,670) (32,956) Proceeds from issuance of stock to minority shareholders ................................................................. — 230 — Cash dividends paid........................................................................................................................... (6,209) (4,672) (68,207) Cash dividends to minority shareholders ............................................................................................ (1,100) (743) (12,084) Other ................................................................................................................................................. (2,207) (551) (24,249) Net cash used in financing activities ..................................................................................... (3,818) (20,552) (41,944)

Effect of exchange rate changes on cash and cash equivalents .................................................. (5,336) (330) (58,615)Increase (decrease) in cash and cash equivalents ......................................................................... 7,910 (23,213) 86,902Cash and cash equivalents at beginning of the year ...................................................................... 31,887 55,100 350,286Effect of adjustment of newly consolidated subsidiaries on cash and cash equivalents at beginning of the year .............................................................................. 1,152 — 12,652Cash and cash equivalents at end of the year ................................................................................. ¥40,949 ¥31,887 $449,840




N

Showa Denko K.K. 35

1. BASIS OF REPORTING FINANCIAL STATEMENTSThe accompanying consolidated financial statements have been prepared in accordance with accounting principles and practices generally accepted in Japan, which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards, and from the consolidated financial statements which had been or will be filed with the Kanto Local Finance Bureau as required by the Financial Instruments and Exchange Law of Japan.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of ConsolidationThe consolidated financial statements for the years ended December 31, 2008 and 2007 include the accounts of the Company and its 40 and 38, respectively, significant subsidiaries (collectively “the Companies”). For the purposes of the consolidated financial statements, all sig-nificant intercompany transactions, account balances and unrealized profits among the Companies are entirely eliminated and the portions thereof attributable to minority interests are credited or charged to minority interests. Accounts of subsidiaries whose business year-ends differ by more than three months from December 31 have been included using appropriate interim financial information. In the initial consolidation, assets and liabilities of subsidiaries includ-ing those attributable to minority stockholders are recorded based on fair value in the accompanying consolidated financial statements. Goodwill which is the difference between acquisition cost and the underlying net assets at fair value at the date of acquisition is amor-tized within a period of 20 years on a straight-line basis.

(b) Investments in Non-Consolidated Subsidiaries and Affiliates The Company applied the equity method of accounting for invest-ments in 4 non-consolidated subsidiaries in 2008 and 2007, and 16 affiliates in 2008 and 18 affiliates in 2007. All underlying intercompany profits obtained from transactions among the Companies and non-consolidated subsidiaries and affili-ates to which the equity method is applied are eliminated in the consolidated financial statements.

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

NOTES TO FINANCIAL STATEMENTS

Showa Denko K.K. and Consolidated Subsidiaries

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

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

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

(g) InventoriesFinished goods are stated principally at the lower of cost or market, using the gross-average cost method. Other inventories are stated principally at cost as determined by the gross-average method.

(h) Property, Plant and EquipmentProperty, plant and equipment is stated at cost, in principle. With the adoption of the fixed asset impairment accounting standard from 2004, however, aggregated amounts of impairment losses are deducted directly from respective items. Depreciation of property, plant and equipment is computed principally by the straight-line method, but the declining-balance method is applied to certain fac-tories of the Company and some of the consolidated subsidiaries.Depreciation of the residual value of tangible fixed assets purchased on or before March 31, 2007Due to the amendment of the Corporation Tax Law of Japan, effec-tive April 1, 2007, when tangible fixed assets acquired before April 1, 2007 have been depreciated to their allowable depreciation limits (5% of acquisition costs), amounts of such depreciation limits are recognized as depreciation expense equally over five years com-mencing from 2008 or thereafter from the year immediately after the year in which the allowable depreciation limits have been reached. Certain consolidated domestic subsidiaries adopted this method in fiscal 2007. As a result, depreciation expense increased by ¥3,704 million, operating income decreased by ¥3,176 million and income before income taxes decreased by ¥3,216 million compared with the corre-sponding amounts under the previous method.

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


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5. CASH FLOW STATEMENTS(a) Cash as of December 31, 2008 and 2007 on the consolidated balance sheets and cash equivalents at December 31, 2008 and 2007 on the con-solidated statements of cash flows are reconciled as follows:

Thousands of Millions of yen U.S. dollars

2008 2007 2008

Cash on hand and in banks ............................................................................................................................. ¥40,954 ¥31,894 $449,900Original maturities of more than three months .................................................................................................. (5) (7) (60)

Cash and cash equivalents .............................................................................................................................. ¥40,949 ¥31,887 $449,840


(j) Reserve for Restructuring ExpensesThe Company and some of the consolidated subsidiaries record the reserve for restructuring expenses on an accrual basis to provide for expenses and losses resulting from their restructuring programs.

(k) Reserve for Bonus PaymentA reserve for bonus payment is provided at an amount estimated based on the bonus to be paid subsequent to the balance sheet date.

(l) Accrued Retirement BenefitsAccrued retirement benefits are provided based on the projected ben-efit obligation and fair value of plan assets at the end of the year. The figure is based on the amount of severance benefit obligations at the balance sheet date and the estimated amount of the pension fund. Prior service costs are amortized on a straight-line basis over certain periods (mainly 12 years) within the average remaining service periods. The unrecognized actuarial gain or loss is amortized starting the year after such actuarial loss is determined on a straight-line basis over certain periods (mainly 12 years) within the average remaining service periods.

(m) Reserve for Directors’ Retirement BenefitsSome of the consolidated subsidiaries provide for the retirement allowance for directors and statutory corporate auditors in an amount determined by those companies’ internal guidelines.

(n) Reserve for Periodic RepairsThe Company provides a reserve for periodic repairs in an amount estimated to be necessary for the maintenance schedule for produc-tion equipment.

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

(p) LeasesFinance leases other than those that are deemed to transfer the own-ership of the leased assets to the lessees are principally accounted for by the method that is applicable to ordinary operating leases.

(q) Reclassifications Certain reclassifications have been made in the 2007 financial state-ments to conform to the presentation of 2008.

3. CHANGES IN ACCOUNTING POLICIES

(a) Application of Standards and Methods for Valuation of InventoriesOn July 5, 2006, the Accounting Standards Board of Japan issued ASBJ Statement No. 9, “Accounting Standard for Measurement of Inventories” (the “New Accounting Standard”). Under the existing accounting standard, inventories are stated at market values or costs unless market values decline significantly and are not expected to recover to the cost, in such cases costs are reduced to such recov-erable amounts. The New Accounting Standard requires that inven-tories held for sale in the ordinary course of business be measured at the lower of cost or net selling value, which is defined as the selling price less additional estimated manufacturing costs and estimated direct selling expenses. The replacement cost may be used in place of the net selling value, if appropriate. The standard also requires that inventories held for trading purposes be measured at the market price. Certain consolidated subsidiaries adopted the New Accounting Standard in fiscal 2008. This change had no impact on income.

(b) Application of Accounting Standards for LeasesOn March 30, 2007, the Accounting Standards Board of Japan issued “Accounting Standard for Lease Transactions” (ASBJ Statement No. 13) and “Guidance on Accounting Standard for Lease Transactions” (ASBJ Guidance No. 16). The new accounting stan-dards require that all finance lease transactions must be capitalized. Certain consolidated domestic subsidiaries adopted the new accounting standards in fiscal 2008, and depreciated capitalized leased assets using the straight-line method over the lease term with no residual values. Previously, such subsidiaries accounted for finance leases that do not transfer ownership to the lessee in the same manner as operating leases. This change had no impact on income.

4. TRANSLATION INTO U.S. DOLLARSThe Companies’ accounting records are maintained in yen. The U.S. dollar amounts appearing in the accompanying financial statements and notes thereto represent the arithmetical results of translating yen into U.S. dollars at the rate of ¥91.03 to US$1.00, the approximate rate of exchange at December 31, 2008. The inclusion of such U.S. dollar amounts is solely for the convenience of readers; it does not carry with it any implication that yen amounts have been or could be converted into U.S. dollars at that rate.


Showa Denko K.K. 37

(b) Significant non-cash transactions were as follows:


2008 2007 2008

Convertible bonds with warrants attached Exercise of warrants Increase in common stock........................................................................................................................ — ¥11,080 — Increase in capital reserve ........................................................................................................................ — 11,007 —

Decrease in convertible bonds .................................................................................................................. — ¥22,087 —

Note: Each of the above includes the conversion of convertible bonds issued based on the former corporate code.

6. SECURITIESThe tables that follow summarize acquisition costs and book values of marketable securities as of December 31, 2008 and 2007.

(a) Securities are deemed to be “substantially declined” when their market values have declined 30% or more. When their market values have declined 50% or more, the impairment losses are recorded on those securities. When their market 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. The following tables summarize book values of marketable securities as of December 31, 2008 and 2007:Year ended December 31, 2008 Millions of yen

Acquisition Book costs value Difference

Securities whose book value exceeds their acquisition cost Equity securities .............................................................................................................................................. ¥15,111 ¥28,815 ¥13,704Other securities Equity securities .............................................................................................................................................. 12,002 9,626 (2,376) Corporate bond .............................................................................................................................................. 72 35 (37)

Total ................................................................................................................................................................ ¥27,185 ¥38,476 ¥11,291

Year ended December 31, 2007 Millions of yen


Securities whose book value exceeds their acquisition cost Equity securities .............................................................................................................................................. ¥22,417 ¥49,981 ¥27,564Other securities Equity securities .............................................................................................................................................. 2,444 1,929 (515) Corporate bond .............................................................................................................................................. 89 74 (15)

Total ................................................................................................................................................................ ¥24,950 ¥51,984 ¥27,034

Year ended December 31, 2008 Thousands of U.S. dollars


Securities whose book value exceeds their acquisition cost Equity securities ............................................................................................................................................ $166,000 $316,544 $150,544Other securities Equity securities ............................................................................................................................................ 131,847 105,745 (26,102) Corporate bond ............................................................................................................................................ 791 385 (406)

Total .............................................................................................................................................................. $298,638 $422,674 $124,036


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(b) The following tables summarize marketable securities sold in the years ended December 31, 2008 and 2007:Year ended December 31, 2008 Millions of yen

Sale Gross gain Gross loss

Equity securities ..................................................................................................................................................... ¥16,549 ¥9,789 ¥(12)



Equity securities .................................................................................................................................................... ¥7,864 ¥2,402 ¥(29)



Equity securities ................................................................................................................................................... $181,797 $107,536 $(132)

(c) The following table summarizes book values of securities with no quoted market values as of December 31, 2008 and 2007:


2008 2007 2008

Held-to-maturity debt securities Local bonds .............................................................................................................................................. ¥ 12 ¥00,014 $ 127

Available-for-sale securities Non-listed equity securities ....................................................................................................................... 4,445 10,192 48,830

Total .......................................................................................................................................................... ¥4,457 ¥10,206 $48,957

(d) The following tables summarize marketable securities with maturities and held-to-maturity debt securities at December 31, 2008 and 2007 (all securities have a matu rity of 10 years or less):Year ended December 31, 2008 Millions of yen

Over 1 year but Over 5 years but Within 1 year within 5 years within 10 years

Government bonds ...................................................................................................................... ¥2 ¥ 9 ¥0Corporate bond ........................................................................................................................... — 35 —

Total ......................................................................................................................................... ¥2 ¥44 ¥0



Government bonds ...................................................................................................................... ¥2 ¥09 ¥2Corporate bond ........................................................................................................................... — 75 —

Total ......................................................................................................................................... ¥2 ¥84 ¥2



Government bonds .................................................................................................................... $25 $101 $0Corporate bond ......................................................................................................................... — 382 —

Total ....................................................................................................................................... $25 $483 $0



Showa Denko K.K. 39

7. EFFECT OF YEAR-END DATE ON FINANCIAL STATEMENTSThe year-end date of 2008, namely, December 31, 2008, was a bank holiday. Although notes receivable and payable on this date were accordingly settled on January 5, 2009, the Companies accounted for those notes in their financial statements as if they had been settled on the earlier date. Notes outstanding at December 31, 2008 and 2007 dealt with in the above-mentioned manner were as follows:


2008 2007 2008

Notes receivable ..................................................................................................................................................... ¥276 ¥406 $3,032Notes payable ........................................................................................................................................................ 888 921 9,755

8. SHORT-TERM DEBT AND LONG-TERM DEBTAt December 31, 2008 and 2007, the short-term debt of the Companies consisted of the following:


2008 2007 2008

Bank loans at the average interest rate of 1.33% ...................................................................................... ¥100,717 ¥87,424 $1,106,415Commercial paper .................................................................................................................................... — 6,500 —

Total ...................................................................................................................................................... ¥100,717 ¥93,924 $1,106,415

At December 31, 2008 and 2007, the long-term debt of the Companies consisted of the following:


2008 2007 2008

TIBOR+1.05% bonds due 2008 ............................................................................................................. ¥ — ¥ 3,000 $ —1.36% bonds due 2010 .......................................................................................................................... 3,000 3,000 32,9561.32% bonds due 2010 .......................................................................................................................... 10,000 10,000 109,8541.81% bonds due 2012 .......................................................................................................................... 10,000 10,000 109,8541.49% bonds due 2012 .......................................................................................................................... 10,000 10,000 109,8542.05% bonds due 2011 .......................................................................................................................... 3,000 3,000 32,956Loans principally from banks and insurance companies due 2009 to 2016 at the average interest rate of 1.53% .................................................................................................... 256,198 262,722 2,814,430

.............................................................................................................................................................. 292,198 301,722 3,209,904Less: Current portion .............................................................................................................................. (59,448) (63,433) (653,059)

Total ................................................................................................................................................ ¥232,750 ¥238,289 $2,556,845

The aggregate annual maturities of the non-current portion of long-term debt are as follows:Years ending December 31 Thousands of Millions of yen U.S. dollars

2010............................................................................................................................................................................... ¥073,596 $0,808,4812011............................................................................................................................................................................... 63,777 700,6152012............................................................................................................................................................................... 65,131 715,4892013............................................................................................................................................................................... 14,343 157,5632014 and thereafter ........................................................................................................................................................ 15,903 174,697

Total ............................................................................................................................................................................ ¥232,750 $2,556,845


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At December 31, 2008 and 2007, the following assets were pledged as collateral for short-term debt and long-term debt:


2008 2007 2008

Assets pledged as collateral Investment securities........................................................................................................................... ¥ 1,213 ¥001,851 $ 13,325 Property, plant and equipment, less accumulated depreciation ........................................................... 183,769 190,702 2,018,774

Total ................................................................................................................................................ ¥184,982 ¥192,553 $2,032,099

Secured short-term debt and long-term debt Long-term debt (includes due within 1 year) ........................................................................................ ¥ 3,920 ¥ 10,272 $ 43,065 Other debt .......................................................................................................................................... 1,296 1,536 14,237

....................................................................................................................................................... ¥ 5,216 ¥ 11,808 $ 57,302

9. ACCRUED RETIREMENT BENEFITS(a) The plans’ funded status and amount recognized on the accompanying consolidated balance sheet as of December 31, 2008 and 2007 were as follows:


2008 2007 2008

Benefit obligation at the end of year ...................................................................................................... ¥(112,580) ¥(115,994) $(1,236,735)Fair value of plan assets at the end of year ........................................................................................... 59,707 76,980 655,905

Funded status ...................................................................................................................................... (52,873) (39,014) (580,830)Unrecognized actuarial loss .................................................................................................................. 29,807 14,115 327,442Unrecognized prior service costs .......................................................................................................... (5,480) (6,235) (60,200)

Net amount recognized ..................................................................................................................... (28,546) (31,134) (313,588)Prepaid pension expense ..................................................................................................................... 113 42 1,238

Accrued retirement benefits .............................................................................................................. ¥ (28,659) ¥ (31,176) $ (314,826)

(b) The components of net retirement benefit costs for the years ended December 31, 2008 and 2007 were as follows:


2008 2007 2008

Service cost ........................................................................................................................................................ ¥2,655 ¥2,754 $29,166Interest cost ....................................................................................................................................................... 2,392 2,473 26,277Expected return on plan assets .......................................................................................................................... (1,850) (1,857) (20,323)Recognized actuarial loss ................................................................................................................................... 2,249 2,155 24,706Prior service cost ................................................................................................................................................ (779) (789) (8,558)

Net periodic cost ............................................................................................................................................ 4,667 4,736 51,268

Cost for defined contribution plan ....................................................................................................................... 200 104 2,198

Total ................................................................................................................................................................ ¥4,867 ¥4,840 $53,466

(c) The assumptions and basis as of December 31, 2008 and 2007 were as follows:Year ended December 31, 2001 2008 2007

Discount rate .............................................................................................................................................. Mainly 2.0% Mainly 2.0%Expected rate of return on plan assets........................................................................................................ Mainly 2.5% Mainly 2.5%Amortization period for actuarial loss .......................................................................................................... Mainly 12 years Mainly 12 yearsAmortization period for prior service cost .................................................................................................... Mainly 12 years Mainly 12 years



Showa Denko K.K. 41

10. INCOME TAXES(a) At December 31, 2008 and 2007, significant components of deferred tax assets and liabilities were as follows:


2008 2007 2008

Deferred tax assets Accrued retirement benefits ...................................................................................................................... ¥11,526 ¥12,576 $126,618 Tax loss carryforwards .............................................................................................................................. 6,152 05,760 67,582 Write-down of marketable and investment securities ................................................................................. 9,008 8,975 98,956 Unrealized losses on hedging derivatives .................................................................................................. 4,179 — 45,908 Depreciation .............................................................................................................................................. 2,423 987 26,618 Write-down of inventories .......................................................................................................................... 1,471 312 16,160 Loss on impairment of fixed assets ........................................................................................................... 1,416 1,827 15,555 Unrealized earnings from the sale of fixed assets ...................................................................................... 1,315 1,328 14,446 Reserve for periodic repairs ....................................................................................................................... 1,138 810 12,501 Deduction of foreign corporation tax carried forward ................................................................................. 933 252 10,249 Reserve for bonus payment ...................................................................................................................... 796 687 8,744 Loss on valuation of golf course memberships .......................................................................................... 469 — 5,152 Allowance for doubtful accounts ............................................................................................................... 345 440 3,790 Directors’ retirement benefits payable ....................................................................................................... 230 286 2,527 Enterprise tax and business office tax payable .......................................................................................... — 1,068 — One-time write-off assets .......................................................................................................................... 227 226 2,494 Other ........................................................................................................................................................ 3,129 2,580 34,374

Subtotal of deferred tax assets .................................................................................................................. 44,757 38,114 491,674 Valuation allowance ................................................................................................................................... (13,856) (13,267) (152,214)

Total deferred tax assets ........................................................................................................................... 30,901 24,847 339,460

Deferred tax liabilities Amount of revaluation from the book value................................................................................................ (4,971) (4,675) (54,608) Unrealized gains on available-for-sale securities ........................................................................................ (4,652) (10,979) (51,104) Special depreciation reserve ..................................................................................................................... (1,582) (1,664) (17,379) Reserve for advanced depreciation of fixed assets .................................................................................... (1,121) (1,166) (12,315) Unrealized gains on hedging derivatives .................................................................................................... — (299) — Other ........................................................................................................................................................ (1,480) (1,587) (16,258)

Total deferred tax liabilities ......................................................................................................................... (13,806) (20,370) (151,664)

Net deferred tax assets ................................................................................................................................. ¥17,095 ¥ 4,477 $187,796

(b) The net deferred tax assets at December 31, 2008 and 2007 were included in the consolidated balance sheets as follows:


2008 2007 2008

Deferred tax assets—current .......................................................................................................................... ¥ 5,877 ¥3,225 $ 64,562Deferred tax assets—non-current ................................................................................................................... 17,624 7,539 193,607Other current liabilities .................................................................................................................................... (7) (4) (77)Deferred tax liabilities—non-current ................................................................................................................ (6,399) (6,283) (70,294)


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(c) Significant items in the reconciliation of the normal income tax rate to the effective rate at December 31, 2008 and 2007 were as follows:

2008 2007

Normal income tax rate in Japan ................................................................................................................................................... 40.7)% 40.7)%Increase in valuation allowances .................................................................................................................................................... 19.0 4.2Income (loss) of companies receiving preferential tax treatment for investment .............................................................................. 18.0 —Differences of statutory tax rate in subsidiaries ............................................................................................................................... 5.8 0.9Unrealized earnings from the sale of fixed assets ........................................................................................................................... (13.2) (0.8)Elimination of dividend income through subsidiaries and other ....................................................................................................... (9.1) 4.5Tax credit ....................................................................................................................................................................................... (7.6) (3.1)Equity in earnings of non-consolidated subsidiaries ....................................................................................................................... (4.8) (1.7)Unrealized income on inventories ................................................................................................................................................... (3.0) —Amortization of goodwill ................................................................................................................................................ — 0.8Permanently non-deductible expenses ............................................................................................................................ — 0.8Permanently non-taxable dividends received ................................................................................................................................. — (3.2)Valuation losses on shareholdings in consolidated subsidiaries ...................................................................................................... — (4.9)Other ............................................................................................................................................................................................. 0.2 (0.8)

Effective tax rate ............................................................................................................................................................................ 46.0)% 37.4)%

11. LOSS ON IMPAIRMENT OF FIXED ASSETSAt December 31, 2008, major losses on impairment of fixed assets were as follows:

Location Major use Asset category Millions of yen Thousands of U.S. dollars

Oita City, Oita Prefecture, etc. Idle assets Land ¥3,081 $33,841Oyama City, Tochigi Prefecture Welfare facilities, etc. Land and buildings, etc. 636 6,991Hikone City, Shiga Prefecture, etc. Idle assets, etc. Machinery and equipment, etc. 604 6,635

Total ............................................................................................................................................................... ¥4,321 $47,467

12. INFORMATION FOR CERTAIN LEASESAt December 31, 2008 and 2007, assets leased under non-capitalized financial leases were as follows:


2008 2007 2008

Machinery and equipment ............................................................................................................................... ¥22,516 ¥22,840 $247,347Other ............................................................................................................................................................... 346 373 3,798Less: Accumulated depreciation and amortization ........................................................................................... (10,823) (10,026) (118,896)

Total ............................................................................................................................................................. ¥12,039 ¥13,187 $132,249

At December 31, 2008 and 2007, future minimum lease payments for the remaining lease periods were as follows:


2008 2007 2008

Due within one year ......................................................................................................................................... ¥ 3,142 ¥ 3,167 $ 34,516Due over one year ........................................................................................................................................... 8,897 10,020 97,733

Total ............................................................................................................................................................. ¥12,039 ¥13,187 $132,249

At December 31, 2008 and 2007, paid lease fees and equivalent depreciation expense amounts were as follows:


2008 2007 2008

Paid lease fees .................................................................................................................................................... ¥3,630 ¥3,217 $39,873Equivalent depreciation expense fees .................................................................................................................. 3,630 3,217 39,873Note: 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.



Showa Denko K.K. 43

At December 31, 2008 and 2007, assets leased under non-capitalized operating leases were as follows:

Future minimum lease payments for the remaining lease periods:


2008 2007 2008

Due within one year ............................................................................................................................................. ¥1,070 ¥1,182 $11,752Due over one year ............................................................................................................................................... 950 1,768 10,440

Total ................................................................................................................................................................. ¥2,020 ¥2,950 $22,192

13. CONTINGENT LIABILITIESAt December 31, 2008, the Companies were guarantors for the borrowings below. The guarantees were principally for non-consolidated subsidiaries, affiliates and others.


2008 2007 2008

Guarantees ....................................................................................................................................................... ¥8,639 ¥14,498 $94,903

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

14. NET ASSETSThe Corporate Law of Japan (the “Law”) provides that the entire amount paid for new shares may be credited to the stated capital, with the provi-sion 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, respec-tively, which are potentially 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 non-consolidated financial statements of the Company in accordance with Japanese laws and regulations.

15. LAND REVALUATION RESERVEThe Company and some of its consolidated subsidiaries revalued the land they own for business in accordance with the Law concerning 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, 2008 was ¥55,742 million (US$612,348 thousand).

16. SELLING, GENERAL AND ADMINISTRATIVE EXPENSESSelling, general and administrative expenses for the years ended December 31, 2008 and 2007 were summarized as follows:


2008 2007 2008

Freight ............................................................................................................................................................. ¥19,355 ¥19,630 $212,622Employees’ compensation ............................................................................................................................... 18,658 19,064 204,965Other ............................................................................................................................................................... 50,609 47,122 555,964

Total ............................................................................................................................................................. ¥88,622 ¥85,816 $973,551

Research and development expenses included in this summary for the years ended December 31, 2008 and 2007 were ¥20,039 million (US$220,136 thousand) and ¥17,363 million, respectively.


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17. RESEARCH AND DEVELOPMENTResearch and development costs included in the cost of sales and selling, general and administrative expenses for the years ended December 31, 2008 and 2007 were ¥20,072 million (US$220,499 thousand) and ¥17,396 million, respectively.

18. DERIVATIVE FINANCIAL INSTRUMENTSThe Company and certain subsidiaries enter into forward exchange contracts, currency option tradings, currency swaps, interest rate swaps and commodity forwards for aluminum metal. The Company and its subsidiaries have a basic policy of using derivative financial instruments for risk hedg-ing within the limit of hedged receivables and payables and do not hold or issue derivative financial instruments for speculation purposes. Forward exchange contracts are used to hedge risk arising from future fluctuations of foreign currency exchange with respect to receivables and payables denominated in foreign currencies. Interest rate swaps are used to hedge risk arising from future fluctuations of interest rates and stabilize interest expenses. Commodity forwards for aluminum metal are used to hedge risk arising from future fluctuations of commodity market prices with respect to commodity transactions. At December 31, 2008, contract amounts, fair value and valuation gain on the derivative transactions, except those accounted for using hedge accounting, were as follows:Year ended December 31, 2008 Thousands of Millions of yen U.S. dollars

2008 2008

Contract Valuation Valuation Amount Fair Value Gain Gain

Currency swaps: Receipt Singapore dollar Payment U.S. dollar ................................................................................................................. ¥5,770 ¥117 ¥117 $1,289 Receipt yen Payment U.S. dollar ................................................................................................................. 6,372 8 8 87

19. SEGMENT INFORMATION(a) The operations of the Companies for the years ended December 31, 2008 and 2007 were summarized by business segment as follows:Year ended December 31, 2008 Millions of yen

Petrochemicals Chemicals Electronics Inorganics Aluminum Elimination Consolidated

Sales Outside customers ................................................ ¥400,173 ¥ 93,319 ¥188,778 ¥ 88,797 ¥232,809 ¥ — ¥1,003,876 Inter-segment ........................................................ 2,679 140 319 26 25,701 (28,865) —

Total .................................................................. 402,852 93,459 189,097 88,823 258,510 (28,865) 1,003,876 Operating costs .................................................... 404,133 88,130 179,838 69,579 258,722 (23,318) 977,084

Operating income (loss)......................................... ¥ (1,281) ¥ 5,329 ¥ 9,259 ¥ 19,244 ¥ (212) ¥ (5,547) ¥ 26,792

Assets ...................................................................... ¥205,663 ¥151,928 ¥196,253 ¥133,237 ¥235,917 ¥39,012 ¥ 962,010Depreciation and amortization .................................. 6,716 6,741 33,758 3,455 9,999 (230) 60,439Loss on impairment of fixed assets ........................... 3,007 — — 63 1,251 — 4,321Capital expenditures ................................................. 8,101 7,691 28,951 4,151 6,597 (692) 54,799

Due to the amendment of the Corporation Tax Law of Japan, effective April 1, 2007, when tangible fixed assets acquired before April 1, 2007 have been depreciated to their allowable depreciation limits (5% of acquisition costs), amounts of such depreciation limits are recognized as depreciation expense equally over five years commencing from 2008 or thereafter from the year immediately after the year in which the allowable depreciation lim-its have been reached. Certain consolidated domestic subsidiaries adopted this method in fiscal 2007. As a result, compared with the corresponding amounts under the previous methods, depreciation increased ¥1,042 million in Petrochemicals, ¥864 million in Chemicals, ¥261 million in Electronics, ¥501 million in Inorganics and ¥1,036 million in Aluminum; operating costs rose ¥1,030 million in Petrochemicals, ¥671 million in Chemicals, ¥225 million in Electronics, ¥340 million in Inorganics and ¥909 million in Aluminum; and operating income declined by the same amounts, respectively. In addition, assets decreased ¥1,034 million in Petrochemicals, ¥681 million in Chemicals, ¥235 million in Electronics, ¥340 million in Inorganics and ¥925 million in Aluminum.



Showa Denko K.K. 45



Sales Outside customers ................................................. ¥395,105 ¥084,709 ¥201,013 ¥084,599 ¥257,812 ¥ — ¥1,023,238 Inter-segment ......................................................... 2,564 318 166 57 24,562 (27,667) —

Total ................................................................... 397,669 85,027 201,179 84,656 282,374 (27,667) 1,023,238 Operating costs ..................................................... 378,095 77,596 175,346 63,762 274,332 (22,564) 946,567

Operating income .................................................. ¥019,574 ¥007,431 ¥025,833 ¥020,894 ¥008,042 ¥ (5,103) ¥00,76,671

Assets ....................................................................... ¥242,811 ¥137,798 ¥225,332 ¥125,542 ¥270,617 ¥27,529 ¥1,029,629Depreciation and amortization ................................... 5,656 5,011 27,687 2,802 8,799 (194) 49,761Loss on impairment of fixed assets ............................ 1,134 99 140 158 186 — 1,717Capital expenditures .................................................. 5,562 5,052 44,406 3,743 10,789 (206) 69,346

Effective from fiscal 2007, the method for calculating depreciation has been changed. As a result, compared with the corresponding amounts under the previous methods, depreciation increased ¥24 million in Petrochemicals, ¥21 million in Chemicals, ¥164 million in Electronics, ¥15 million in Inorganics and ¥118 million in Aluminum; operating costs rose ¥23 million in Petrochemicals, ¥18 million in Chemicals, ¥110 million in Electronics, ¥8 million in Inorganics and ¥110 million in Aluminum; and operating income declined by the same amounts, respectively. In addition, assets declined ¥23 million in Petrochemicals, ¥18 million in Chemicals, ¥154 million in Electronics, ¥8 million in Inorganics and ¥110 million in Aluminum. Due to the amendment of the Corporation Tax Law of Japan, effective April 1, 2007, when tangible fixed assets acquired before April 1, 2007 have been depreciated to their allowable depreciation limits (5% of acquisition costs), amounts of such depreciation limits are recognized as depreciation expense equally over five years commencing from 2007 or thereafter from the year immediately after the year in which the allowable depreciation limits have been reached. Certain consolidated domestic subsidiaries adopted this method in fiscal 2007. As a result, compared with the corre-sponding amounts under the previous methods, for Petrochemicals, depreciation increased ¥111 million, operating costs rose ¥103 million and operating income declined by the same amount as the increase in operating costs. In addition, for Petrochemicals, assets decreased ¥103 million.



Sales Outside customers ................................ $4,396,056 $1,025,146 $2,073,800 $ 975,470 $2,557,500 $ — $11,027,972 Inter-segment ........................................ 29,430 1,538 3,504 286 282,335 (317,093) —

Total .................................................. 4,425,486 1,026,684 2,077,304 975,756 2,839,835 (317,093) 11,027,972 Operating costs .................................... 4,439,558 968,142 1,975,590 764,352 2,842,164 (256,153) 10,733,653

Operating income (loss)......................... $ (14,072) $ 58,542 $ 101,714 $ 211,404 $ (2,329) $ (60,940) $ 294,319

Assets ...................................................... $2,259,288 $1,668,988 $2,155,916 $1,463,660 $2,591,640 $428,560 $10,568,052Depreciation and amortization .................. 73,778 74,053 370,845 37,955 109,843 (2,529) 663,945Loss on impairment of fixed assets ........... 33,033 — — 692 13,742 — 47,467Capital expenditures ................................. 88,993 84,489 318,038 45,600 72,471 (7,601) 601,990


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(b) The operations of the Companies for the years ended December 31, 2008 and 2007 were summarized by geographic area as follows:Year ended December 31, 2008 Millions of yen

Japan Asia Others Elimination Consolidated

Sales Outside customers ......................................................................................... ¥846,730 ¥ 98,734 ¥58,412 ¥ — ¥1,003,876 Inter-segment ................................................................................................. 32,379 7,195 714 (40,288) —

Total ........................................................................................................... 879,109 105,929 59,126 (40,288) 1,003,876 Operating costs ............................................................................................. 854,172 106,440 52,185 (35,713) 977,084

Operating income (loss).................................................................................. ¥ 24,937 ¥ (511) ¥ 6,941 ¥ (4,575) ¥ 26,792

Assets ............................................................................................................... ¥853,585 ¥ 98,047 ¥36,377 ¥(25,999) ¥ 962,010

Due to the amendment of the Corporation Tax Law of Japan, effective April 1, 2007, when tangible fixed assets acquired before April 1, 2007 have been depreciated to their allowable depreciation limits (5% of acquisition costs), amounts of such depreciation limits are recognized as depreciation expense equally over five years commencing from 2008 or thereafter from the year immediately after the year in which the allowable depreciation lim-its have been reached. Certain consolidated domestic subsidiaries adopted this method in fiscal 2007. As a result, compared with the corresponding amounts under the previous methods, operating costs in Japan were ¥3,176 million higher, operat-ing income was lower by the same amount and assets were ¥3,216 million lower.



Sales Outside customers ......................................................................................... ¥857,022 ¥104,805 ¥61,411 ¥ — ¥1,023,238 Inter-segment ................................................................................................. 33,453 5,314 638 (39,405) —

Total ........................................................................................................... 890,475 110,119 62,049 (39,405) 1,023,238 Operating costs ............................................................................................. 828,841 98,716 54,164 (35,154) 946,567

Operating income .......................................................................................... ¥ 61,634 ¥ 11,403 ¥ 7,885 ¥ (4,251) ¥ 76,671

Assets ............................................................................................................... ¥899,382 ¥129,052 ¥39,847 ¥(38,652) ¥1,029,629

Effective from fiscal 2007, the Company has changed its methods for depreciation. As a result, compared with the corresponding amounts under the previous methods, operating costs in Japan were ¥269 million higher, operating income was lower by the same amount, and assets were ¥313 million lower. Due to the amendment of the Corporation Tax Law of Japan, effective April 1, 2007, when tangible fixed assets acquired before April 1, 2007 have been depreciated to their allowable depreciation limits (5% of acquisition costs), amounts of such depreciation limits are recognized as depreciation expense equally over five years commencing from 2007 or thereafter from the year immediately after the year in which the allowable depreciation lim-its have been reached. Certain consolidated domestic subsidiaries adopted this method in fiscal 2007. As a result, compared with the corresponding amounts under the previous methods, operating costs in Japan were ¥103 million higher, operating income was lower by the same amount and assets were ¥103 million lower.



Sales Outside customers ................................................................................. $9,301,659 $1,084,631 $641,682 $ — $11,027,972 Inter-segment ......................................................................................... 355,696 79,040 7,844 (442,580) —

Total ................................................................................................... 9,657,355 1,163,671 649,526 (442,580) 11,027,972 Operating costs ..................................................................................... 9,383,412 1,169,285 573,276 (392,320) 10,733,653

Operating income (loss).......................................................................... $ 273,943 $ (5,614) $ 76,250 $ (50,260) $ 294,319

Assets ....................................................................................................... $9,376,966 $1,077,081 $399,616 $(285,611) $10,568,052



Showa Denko K.K. 47

Overseas sales, which represent sales to customers outside of Japan, of the Companies for the years ended December 31, 2008 and 2007 were summarized by geographic area as follows:Year ended December 31, 2008 Millions of yen

Asia Others Overseas sales

Overseas sales ......................................................................................................................................... ¥246,549 ¥70,920 ¥ 317,469Consolidated net sales ............................................................................................................................. — — 1,003,876Ratio of overseas sales to consolidated net sales ..................................................................................... 24.6% 7.1% 31.6%



Overseas sales ......................................................................................................................................... ¥266,913 ¥75,668 ¥0,342,581Consolidated net sales ............................................................................................................................. — — 1,023,238Ratio of overseas sales to consolidated net sales ..................................................................................... 26.1% 7.4% 33.5%



Overseas sales ...................................................................................................................................... $2,708,437 $779,084 $3,487,521

20. Business Combinations (Items relating to business combinations)

For the year ended December 31, 2008This was not applicable.

For the year ended December 31, 2007

(a) Name of the Company in the Relevant Business Combination, the Contents of Its Business, the Legal Form of the Business Combination, the Post-Merger Name of the Company, and a Description of the Transaction with the Purpose of Acquisition

(1) The name of the company in the relevant business combination and the contents of its business:a) Name of the acquiring company: Showa Denko K.K.Petrochemicals, chemicals, electronics, inorganics, and aluminum and otherb) Name of the company acquired: Showa Financing K.K.Provision of finance to Showa Denko Group companies

(2) Legal form of acquisition:A simplified merger pursuant to Article 796, Section 3 of the Company Law

(3) The post-merger name of the company:Showa Denko K.K.

(4) Description of the transaction with the purpose of acquisition:a) Purpose of the mergerSince its inception in 1983, Showa Financing K.K. has performed the role as a core financial company in the Showa Denko Group. However, Showa Financing’s financial scale has contracted sharply as the Group has reduced its consolidated interest-bearing liability. Through this merger, Showa Denko K.K. has taken over the Group’s financial function allowing for efficient administration and operation.

b) Effective date of mergerJuly 1, 2007

c) Method of mergerShowa Denko was the surviving entity in a merger by absorption, and Showa Financing was dissolved. Since Showa Denko owned all outstanding issued shares of Showa Financing, there were no new shares issued in effecting the merger and no allotment of new shares.


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(b) Description of Accounting TreatmentThe accounting treatment for this merger is in accordance with standards for combinations of businesses under common control set forth in Accounting Standards for Business Combinations (Accounting Standards Board of Japan; October 31, 2003) as well as the implementation guid-ance on accounting standards for business combinations and for business divestitures (Accounting Standards Board of Japan; December 22, 2006; Guidance No. 10 for Accounting Standards for Business Combinations).

21. PRESENTATION OF GOODWILL AND NEGATIVE GOODWILLGoodwill and negative goodwill are netted against each other. The pre-netted amounts as of December 31, 2008 and 2007 are shown below.


2008 2007 2008

Goodwill .......................................................................................................................................................... ¥11,207 ¥12,058 $123,113Negative goodwill ............................................................................................................................................ (7,696) (6,935) (84,542)

Net .............................................................................................................................................................. ¥ 3,511 ¥ 5,123 $ 38,571



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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


RREPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



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MAJOR SUBSIDIARIES AND AFFILIATES (As of December 31, 2008)

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

PT. Showa Esterindo Indonesia 67.0 Ethyl acetate

Shoko Co., Ltd.* (T8090) 43.3 General trading

Showa Tansan Co., Ltd.* (T4096) (Note 2) 50.6 Liquid carbon dioxide, dry ice

Showa Aluminum Can Corporation 100.0 Beer and soft drink cans

Showa Aluminum Corporation of America 100.0 Heat exchange equipment for automobiles, aluminum cylinders for laser beam printers

Showa Aluminum Czech, S.R.O. 100.0 Heat exchange equipment for automobiles

Grand Ocean—Showa Auto Air Conditioning (Dalian) Co., Ltd. 55.0 Heat exchange equipment for automobiles

Showa Denko Aluminum Trading K.K. 100.0 Aluminum products trading in western Japan

Showa Denko Carbon, Inc. 100.0 Graphite electrodes

Showa Denko Dalian Co., Ltd. 100.0 Aluminum cylinders for laser beam printers

Showa Denko HD Malaysia Sdn. Bhd. 100.0 Aluminum substrates for hard disks

Showa Denko HD Singapore Pte. Ltd. 100.0 Hard disks

Showa Denko HD Trace Corporation 98.3 Hard disks, aluminum substrates for 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

Showa Engineering Co., Ltd. 100.0 Engineering, construction, maintenance

Showa Highpolymer Co., Ltd. 100.0 Unsaturated polyester, vinyl ester, etc.

SUBSIDIARIES

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

Japan Polyethylene Corporation 42.0 High- and low-density polyethylene

SunAllomer Ltd. 50.0 Polypropylene and advanced polypropylene-based materials

Tokyo Liquefied Oxygen Co., Ltd. 35.0 Liquefied oxygen, nitrogen, argon

Union Showa K.K. 50.0 Molecular sieves

AFFILIATES

As of December 31, 2008, Showa Denko K.K. had 20 subsidiaries or affiliates to which the equity method was applied.

* Tokyo Stock Exchange listed company

As of December 31, 2008, Showa Denko K.K. had 40 consolidated subsidiaries, including the above.

Notes: 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. Showa Tansan Co., Ltd. was consolidated in June 2008 through the acquisition of shares by a tender offer.


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CORPORATE DATA

INVESTOR INFORMATION

Regular General MeetingThe regular general meeting of stockholders was held on March 27, 2009.

Number of Shares Outstanding1,248,236,801 at December 31, 2008

Number of Stockholders106,526 at December 31, 2008

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

Stock Transfer AgentMizuho Trust & Banking Co., Ltd. 2-1, Yaesu 1-chome,

Chuo-ku, Tokyo 103-8670, Japan

Stockholders by Sector (At December 31, 2008)

Number of sharesheld (thousands) %

Financial firms 544,948 43.66

Individuals 374,448 30.00

Foreign corporate entities, etc. 231,040 18.51

Japanese corporate entities 84,149 6.74

Securities firms 13,650 1.09

Total 1,248,237 100.00

Head OfficeShowa Denko K.K. 13-9, Shiba Daimon 1-chome,

Minato-ku, Tokyo 105-8518, JapanFax: +81-3-3431-6215

e-mail: [email protected]: http://www.sdk.co.jp/html/english/index.html

COMMERCIAL SUBSIDIARIES ABROAD

Showa Denko America, Inc. 420 Lexington Avenue, Suite 2850, New York, NY 10170U.S.A.Phone: +1-212-370-0033Fax: +1-212-370-4566

Showa Denko Europe GmbHKonrad-Zuse-Platz 4D-81829 MuenchenGermanyPhone: +49-89-939-9620Fax: +49-89-939-96250

Showa Denko Singapore (Pte.) Ltd.4 Shenton Way#16-01 SGX Centre 2Singapore 068807Phone: +65-6223-1889Fax: +65-6223-6007

Showa Denko (Shanghai) Co., Ltd.18F, WangWang Building, No. 211, Shimen Yi Road, Shanghai, 200041People’s Republic of ChinaPhone: +86-21-6217-5000Fax: +86-21-6217-9840


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nnual Report 2008

Printed in Japan

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


Documents

Annual Report 2008 - sdk.co.jp · 4 Annual Report 2008 As a result, the Group’s consolidated net sales in 2008 decreased 1.9%, to ¥1,003,876 million, and operating income fell