Harima Chemicals : Annual Report Year Ended March 31, 2023

Annual Report

Year Ended March 31, 2023

HARIMA CHEMICALS GROUP, INC.

Table of Contents
1.	Business Overview	1
2.	Consolidated Business Performance Trends	3
3.	Consolidated Financial Statements	4
4.	Independent Auditorʼs Report	40
5.	Corporate Overview	44
6.	Principal Subsidiaries	45
7.	Directors and Corporate Auditors	46

Business Overview

During the first half of the fiscal year ended March 31, 2023, the world economy followed a gradual recovery trend, with consumption and investment expanding mainly due to progress made by governments worldwide in balancing economic activities with measures to prevent COVID-19 infections. However, the second half of the year saw a moderate deceleration on account of Russia's invasion of Ukraine which caused a situation of ongoing instability such as with soaring energy and raw material prices. The Japanese economy also showed signs of a recovery in inbound consumption as economic activity normalized due to the easing of behavioral restrictions, although the global semiconductor shortage, high crude oil prices, yen depreciation and other factors increased upward pressure on prices, exerting a significant impact on economic activities.

Under these conditions, the Group endeavored to achieve further business growth in the first year of its new medium-term management plan, "NEW HARIMA 2026." In the Group's overseas business, net sales rose year on year with increased sales of adhesive resins in Europe and America, and brisk sales in the Paper Chemicals segment. Although sales increased, earnings declined year on year, buffeted by the impact of soaring prices of raw materials and energy. In the domestic business, net sales rose year on year, partly owing to efforts made to pass on surging raw material prices to sales prices. Earnings, on the other hand, declined from the previous fiscal year on the impact of steeply rising raw material and energy prices.

As a result of these conditions, the group's consolidated net sales for the current fiscal year increased by 18,417million Yen (up 24.2%) year-on-year to 94,510 million Yen. Operating income decreased by 1,544 million Yen (down 47.5%) to 1,706 million affected by soaring raw material prices. Ordinary income decreased by 892 million Yen (down 26.0%) to 2,541 million Yen. This result is because that equity method investment income was 1,042 million Yen, but foreign exchange loss was 207 million Yen. Net income attributable to Harima Chemicals Group, INC. in this fiscal year was 885 million Yen, decreased by 860 million Yen (down 49.3%). This result is due to several reasons. As income-generating matters, there was a gain on sale of investment securities of 193 million Yen and a gain on bargain purchase of 186 million Yen. However, as loss-generating matters, this was due to 492 million Yen provision for loss on litigation and 105 million Yen for dismantling and removal of fixed assets.

Status of Business Segments

(Resin & Tall Oil Products)

In this segment, due to a certain degree of progress in passing on the soaring raw material prices to sales prices, the sales increased by 1,685 million Yen (up 9.6%) to 19,251 million Yen and the operating income decreased by 55 million Yen (down 61.5%) to 35 million Yen due to the impact of increased manufacturing costs such as raw material prices,

・Sales volumes of paint resins decreased compared to the previous fiscal year because that there was a decline in construction-related demand due to sluggish demand for repainting of ordinary homes and factories which has been impacted by the soaring prices. Sales increased due to progress in passing on higher raw material prices to sales prices.

・Sales volumes of printing ink resins decreased compared to the previous fiscal year due to lower demand for inks used in commercial printing and newspapers. Sales increased due to progress in passing on higher raw material prices to sales prices.

・Sales volumes of synthetic rubber emulsifiers also decreased than the previous fiscal year. Because tire production volume decreased slightly, also because there was impact of synthetic rubber inventory adjustments. Sales increased due to progress in passing on higher raw material prices to sales prices.

(Paper Chemicals)

In this segment, because of passing on raw material price to sales prices and the impact of the weaker yen, the sales increased by 3,759 million Yen (up 17.8%) to 24,933 million Yen but the operating income decreased by 116 million Yen (down 7.0%) to 1,534 million Yen which was affected by increased manufacturing costs such as raw material prices.

・About Paper Strengthening Agents, though domestic demand for corrugated cardboards remained at the same level as the previous fiscal year, sales increased due to the passing on of a portion of the soaring raw material prices to sales prices and the expansion of demand in Southeast Asia. In China, although

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the production volume of paper and paperboard decreased compared to the previous fiscal year, sales increased due to the impact of the depreciation of the yen.

• About Sizing Agents, in the domestic market, sales increased as a certain degree of progress was made in passing on higher raw material prices to sales prices. In the USA, although the production volume of paper and paperboard decreased compared with the previous fiscal year, sales increased as market prices rose due to soaring raw material prices.

(Electronics Materials)

In this segment, by launching the acquired solder material business, the sales increased by 2,937 million Yen (up 46.6%) to 9,241 million Yen but the operating income decreased by 494 million Yen to 163 million Yen (down 75.1%) due to the soaring raw material prices and increased depreciation costs in the solder materials business.

・Sales of solder pastes increased due to the acquisition of the solder materials business and the passing on of higher raw material prices to selling prices.

・Aluminium brazing materials for automobile heat exchangers, which sales volume increased due to the passing on of higher raw material prices to selling prices.

・Sales of functional resin for semiconductors increased this current fiscal year because of the expanding demand for 5G communication infrastructure, etc.

(Lawter)

In this segment, although there were signs of a decline in demand due to concerns about a global economic recession, the increase in raw material prices was passed on to sales prices. As a result, the sales increased by 9,279 million Yen (up 31.4%) to 38,797 million Yen. But the operating income decreased by 405 million Yen to 1,315 million Yen (down 23.6%). This is because of the rise in manufacturing costs which was caused by the soaring energy prices and the global inflation.

・Overall, sales of adhesive resin increased steadily. Although sales volume decreased in South America and Oceania due to turmoil in logistics, thanks to market expansion of online shopping, demand for adhesive resin, which is used in the address label stickers, increased over the world. On the other hand, sales of resins used in road marking paint also increased steadily.

・Printing ink resin, demand for which has been sluggish on the background of digitization of information. However, demand recovered in all regions along with the economic recovery from the COVID-19, and sales volume increased. In addition, sales increased due to the passing on of soaring raw material prices to sales prices.

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Consolidated Business Performance Trends

(Millions of Yen unless otherwise stated)

	78th Fiscal Year	79th Fiscal Year	80th Fiscal Year	81th Fiscal Year
Category	(Fiscal year ended	(Fiscal year ended	(Fiscal year ended	(Fiscal year ended
	March 2020)	March 2021)	March 2022)	March 2023)
Net sales	71,799	62,851	76,093	94,511
Ordinary income	3,589	1,093	3,433	2,541
Net income attributable
to Harima Chemicals	2,218	1,091	1,746	886
Group, INC.
Net income per share	87.67	43.44	69.42	35.76
(Yen)
Total assets	71,395	69,390	78,905	92,439
Net assets	37,746	37,442	40,104	40,820

(Notes) 1. Net income per share is calculated based on the weighted average number of issued shares during the fiscal year after deducting treasury stocks.

2. We applied ASBJ Statement No.29, "Accounting Standard for Revenue Recognition" issued on March 31,2020 form the 80th Fiscal year. The information from the 80th Fiscal year is calculated based on the application of the new statement above.

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