consolidated financial results for the fiscal year march ... · financial results presentation...

KITZ Corporation (6498) Financial Results for FY Mar. 2016

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Consolidated Financial Results for the Fiscal Year March 2016

(Japanese Accounting Standards)

May 9, 2016

Company Name: KITZ CORPORATION Stock Listing: Tokyo Stock Exchange Stock Code: 6498 URL http://www.kitz.co.jp/english/index.html President and Chief Executive Officer: Yasuyuki Hotta Inquiries: Tadaaki Kawaguchi, General Manager, Accounting Department Telephone: +81-43-299-0114 Date of General Meeting of Shareholders (Planned): June 29, 2016 Date of Dividend Payment (Planned): June 6, 2016 Date of Financial Statement Filing (Planned): June 29, 2016 Availability of Financial Results Supplementary Presentation Materials: Yes Financial Results Presentation Meeting: Yes (For institutional investors and analysts)

(Figures of less than one million yen are rounded down to the nearest decimal)

1. Consolidated Financial Results (Apr. 1, 2015 – Mar. 31, 2016)

(1) Consolidated Operating Results (% figures represent year-over-year change)

Net Sales Operating Income Ordinary Income

Net Income attributable to owners of the parent

Million yen ％ Million yen ％ Million yen ％ Million yen ％

FY March 2016 117,278 0.2 7,245 5.2 7,300 (3.7) 4,915 (28.6)FY March 2015 117,036 (0.3) 6,886 6.4 7,581 16.6 6,881 93.1(Note) Comprehensive Income: ¥2,712 million in FY Mar. 2016 (down 74.5%) ¥10,624 million in FY Mar. 2015 (up 42.1%)

Net Income per

Share

Net Income per Share

(Diluted) Return on Equity

Ratio of Ordinary Income to Total Assets

Ratio of Operating Income to Net

Sales Yen Yen ％％％

FY March 2016 45.50 ― 6.6 6.2 6.2

FY March 2015 63.22 ― 9.8 6.8 5.9(Reference) Gain from investments in subsidiaries and affiliates accounted for by the equity method: FY Mar. 2016: — FY Mar. 2015: —

(2) Consolidated Financial Position Total Assets Net Assets Equity Ratio Net Assets per Share Million Yen Million Yen % Yen

FY March 2016 119,422 76,096 62.9 700.17FY March 2015 115,790 75,493 64.2 686.47

(Reference) Equity: ¥75,069 million in FY Mar. 2016 ¥74,288 million in FY Mar. 2015

(3) Consolidated Cash Flows

Net Cash Provided by Operating Activities

Net Cash Used in Investing Activities

Net Cash Provided by (Used in) Financing

Activities

Cash and Cash Equivalents at End of

Fiscal Year

Million Yen Million Yen Million Yen Million Yen

FY March 2016 9,592 (9,763) 796 13,050

FY March 2015 8,923 (1,010) (3,706) 12,575

2. Dividends

Annual Dividend Total Dividends

from Surplus (Annual)

Payout Ratio (Consolidated)

Dividends to Net Assets Ratio

(Consolidated) 1Q 2Q 3Q 4Q Total Yen Yen Yen Yen Yen Million Yen % %

FY March 2015 ― 6.00 ― 7.00 13.00 1,412 20.6 2.0FY March 2016 ― 6.00 ― 7.00 13.00 1,399 28.6 1.9

FYMarch2017(Planned) ― 6.00 ― 7.00 13.00 27.9

This document has been prepared as a guide for non-Japanese investors and contains forward-looking statements that are based on managements’estimates, assumptions and projections at the time of publication. A number of factors could cause actual results to differ materially from expectations. This document is a translation of excerpts taken from the Japanese language original. All numbers are rounded down to the nearest until in accordance with standard Japanese practice. Please be advised that the Company cannot accept responsibility for investment decisions made based on the information contained in this report.


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3. Consolidated Financial Forecasts for the Fiscal Year March 2017 (Apr. 1, 2016–Mar. 31, 2017)

(% figures represent year-over-year change)

Net Sales Operating Income Ordinary Income

Net Income attributable to owners of the

parent


Million Yen ％ Million Yen ％ Million Yen ％ Million Yen ％ Yen

2H FY March 2017 54,000 (10.1) 3,500 (3.0) 3,300 (4.2) 2,200 (7.9) 20.51

FY March 2017 111,500 (4.9) 8,000 10.4 7,700 5.5 5,000 1.7 46.63

※ Annotation (1) Changes in significant subsidiaries (Changes in subsidiaries affecting the scope of consolidation): None

Newly consolidated: None Removed from consolidation: None

(2) Changes in accounting methods, procedures and presentations concerning preparation of consolidated financial statements 1. Changes accompanying revisions in accounting standards: Yes 2. Other changes: None 3. Changes in accounting estimates: None 4. Redisplay of revisions: None

(3) Number of shares outstanding (Common stock)

1. Shares issued as of term end (including treasury stock):

2. Treasury stock as of term end: 3. Average during the term:

Reference: Fiscal Year March 2016 Non-Consolidated Financial Results (Apr. 1, 2015 – Mar. 31, 2016) (1) Non-Consolidated Operating Results

Net Sales Operating Income Ordinary Income Net Income

Million yen ％ Million yen ％ Million yen ％ Million yen ％

FY March 2016 64,159 (3.6) 2,902 (13.6) 3,557 (20.1) 2,494 (47.2)

FY March 2015 66,569 3.3 3,361 32.2 4,450 35.9 4,728 165.2


Net Income per Share (Diluted)

Yen Yen

FY March 2016 23.09 ―

FY March 2015 43.44 ― (2)Non-Consolidated Financial Position

Total Assets Net Assets Equity Ratio Net Assets per Share Million Yen Million Yen % Yen

FY March 2016 94,407 57,229 60.6 533.78

FY March 2015 91,441 57,217 62.6 528.72

(Reference) Equity: ¥57,229 million in FY Mar. 2016 ¥57,217 million in FY Mar. 2015 ※ Information about review procedure These financial results are exempt from the review procedure prescribed in the Financial Instruments and Exchange Law. The review procedure for financial results prescribed in the Financial Instruments and Exchange Law had not been completed when this report was released. ※ Explanation regarding the appropriate use of forecasts of business results and other information The forecasts were prepared using information that was available on the announcement date. Actual performance may differ from the forecasts for a number of reasons.

FY March 2016 110,396,511 shares FY March 2015 120,396,511 shares

FY March 2016 3,181,222 shares FY March 2015 12,179,522 shares

FYMarch2016 108,030,081 shares FYMarch2015 108,843,060 shares


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CONTENTS

1. ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION .................................... 4

(1) ANALYSIS OF RESULTS OF OPERATIONS ................................................................................................................ 4

(2) ANALYSIS OF FINANCIAL CONDITION ................................................................................................................... 5

(3) FUNDAMENTAL POLICY FOR EARNINGS DISTRIBUTIONS AND DIVIDEND IN CURRENT AND NEXT FISCAL YEARS. 6

2. MANAGEMENT POLICIES .................................................................................................................. 8

3. BASIC PERSPECTIVE OF SELECTION OF ACCOUNTING STANDARDS ....................................... 10

4. CONSOLIDATED FINANCIAL STATEMENTS .................................................................................. 11

(1) CONSOLIDATED BALANCE SHEETS ..................................................................................................................... 11

(2) CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME ......................................................... 13

Consolidated Statements of Income ........................................................................................................ 13 Consolidated Statements of Comprehensive Income ................................................................................. 14

(3) CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS ............................................................................... 15

(4) CONSOLIDATED STATEMENTS OF CASH FLOWS .................................................................................................. 17

(5) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .......................................................................................... 19

(Notes regarding Going Concern Assumptions) ....................................................................................... 19 (Changes in Accounting Policy) ............................................................................................................. 19 (Business Combinations, etc.) ................................................................................................................ 19 (Segment Information, etc.) .................................................................................................................... 21


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1. Analysis of Results of Operations and Financial Condition (1) Analysis of Results of Operations

1) Results of Operations

During the fiscal year ended March 31, 2016, the Japanese economy showed signs of gradual economic recovery, evident in

stronger exporter earnings due to continued yen depreciation and growth in capital investment and improvements in

employment conditions resulting from government economic stimulus and Bank of Japan’s monetary easing policy.

Overseas, the U.S. economy remained robust, supported by favorable employment conditions, while exports slumped in the

European economy. There were concerns over the economic slowdown in developing and resource-rich countries due to

stagnation in the Chinese economy.

Operating amid these conditions, in the pipe materials industry where the Company develops business, cargo

movement in Japan was sluggish, while the drop in oil prices overseas suppressed investment, creating a challenging

business environment. At the same time, the Company recorded a 0.2% increase in total net sales compared with the

preceding fiscal year, to ¥117,278 million. Contributing to these results, sales of products for use in semiconductor

manufacturing equipment increased substantially. Also, sales from the India subsidiary purchased in the previous fiscal year

contributed to earnings in the fiscal year under review, causing sales in the valve manufacturing business to increase despite

a decline in sales in the brass bar manufacturing business and other business.

On the profit front, operating income rose 5.2%, to ¥7,245 million, due to increased sales of products for use in

semiconductor manufacturing equipment and improved earnings in Thailand and other overseas manufacturing subsidiaries

in the valve manufacturing business. Ordinary income dropped 3.7%, to ¥7,300 million, due to a decrease in exchange gains

and other factors. Net income attributable to owners of the parent was down 28.6%, to ¥4,915 million, a decrease in gain

attributable to the transfer of shares in KITZ Wellness Co., Ltd. recorded in the previous fiscal year.

Segment results are as follows:

・Valve manufacturing business

In the valve manufacturing business, sales to external customers grew 3.8%, to ¥93,579 million. Although affected to some

extent by distribution inventory adjustments for building facility , demand for use in semiconductor manufacturing

equipment and industrial filters was firm in Japan, and also for overseas markets, the effect of weaker yen exchange rates

and sales from Indian subsidiary Micro Pneumatics Pvt., Ltd., from this consolidated fiscal year were positive to sales.

Segment operating income rose 9.2%, to ¥10,384 million. Despite cost increases in software-related expenses associated

with the development of technology information systems and M&A-related expenses, the effect of cost reductions, higher

sales of products for use in semiconductor manufacturing equipment, the ongoing conversion to highly profitable

earthquake-resistant valves in the water supply valve area and local currency depreciation, coupled with a decline in the

market for copper, a raw material for the Thailand manufacturing subsidiary, led to increased earnings.

・Brass bar manufacturing business

Despite the inclusion of newly consolidated Hokutoh Giken Kogyo Corporation in the second quarter, copper market

conditions impacting the sales price of brass bar declined throughout the fiscal year. Accordingly, sales to external

customers in the brass bar manufacturing business dipped 2.2%, to ¥20,557 million. The segment posted an operating loss

of ¥16 million, compared with operating income of ¥248 million in the preceding fiscal year, owing to declining sales

prices.

・Other

Sales in the hotel business increased due to a rise in service area-related sales. However, the exclusion of the fitness

business from the scope of consolidation in the preceding fiscal year caused segment sales and income to drop substantially.

Accordingly, external sales in other businesses fell 46.4%, to ¥3,141 million, and operating income was down 67.6%, to ¥75

million.


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2) Outlook for the Fiscal Year Ending March 31, 2017

KITZ expects the Japanese economy to remain unchanged due to weak capital investment despite various economic

stimulus measures and improved employment conditions. Similarly, conditions overseas remain unclear due to deceleration

in developing Asian nations and resource-rich economies caused by slumping oil prices, the economic slowdown in China

and the normalization of U.S. monetary policy.

Next fiscal year marks the start of the third phase of the medium-term management plan, which involves the

implementation of the following measures:

In the mainstay valve manufacturing business, focus market areas will be narrowed down to three categories: building

facilities, petrochemicals and general chemicals and clean energy (hydrogen and LNG). The Company will attempt to

expand sales by introducing new products specialized for each of these three areas. Also, to ensure the quick and timely

launch of an entire line of necessary products strategically based on the aforementioned focus market areas, KITZ

established the Product Management Center organized according to function in a Company-wide matrix structure and

manage the responsibility for achievement.

KITZ is moving forward to consolidate activities at multifunctional bases, including focused areas comprising three

regional headquarters (Europe, the Americas and the ASEAN region) and in two hub markets (China and India). While

attempting to expand the share of sales through more rapid management decision-making onsite and strengthening the

maintenance, repair and operations (MRO) business, the KITZ Group will work to meet redevelopment project demand in

the Tokyo metropolitan area, driven by its Tokyo office, and continue cultivating new end-users.

On the production front, KITZ is strengthening the Group cost improvement promotion structure mainly within

procurement and purchasing, and will realize a globally competitive cost structure through the establishment of the

Engineering Center in which estimation / design work is aggregated and attempts to increase special order product

profitability.

In development, KITZ aims to pare the number of components through the use of modular designs, helping to cut costs

and reduce administration man-hours. The Company will also continue moving toward the goal of adopting a product life

cycle management (PLM) system to reduce the time needed to deliver products to customers and improve the efficiency of

design and development operations.

In the brass bar manufacturing business, KITZ will strive to increase earnings by attempting to expand production of

machine-processed products comprising brass bar raw materials and forged and other high added-value products, as well as

expanding sales of brass bar and improving production efficiency.

Within the other business segment, in the hotel business KITZ will provide “sincere service” to increase foreign tourist

bookings and make an effort to improve its online reservation system. In the new water business, KITZ aims to quickly

establish a closed circulation on land fish cultivation business.

(2) Analysis of Financial Condition

1) Assets, liabilities and net assets

As of March 31, 2016, total assets amounted to ¥119,422 million, up ¥3,632 million from the previous fiscal year-end, owing

to a decline in receivables and an increase in tangible fixed assets and intangible fixed assets including goodwill in line with

the incorporation of two companies via M&A and other activities. Total liabilities at fiscal year-end were ¥43,325 million, up

¥3,028 million from a year earlier, reflecting income taxes payable within current liabilities, a ¥6,700 million decline

compared with the previous year due to a ¥6.0 billion redemption of its second issue of unsecured corporate bonds. At the same

time, long-term liabilities increased ¥9,728 million compared with the previous year from the issue of the third series of

unsecured public corporate bonds amounting to ¥10 billion yen.

Net assets came to ¥76,096 million, up ¥603 million. Behind this increase was ¥4,915 million in net income attributable to

owners of the parent, although translation adjustments decreased ¥1,590 million, and despite dividend payments and the

acquisition of treasury stock. The Company cancelled 10 million shares of treasury stock in February 2016.

2) Cash flows

As of March 31, 2016, cash and cash equivalents amounted to ¥13,050 million, up ¥475 million compared with March 31,


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2015. The reasons for cash flow changes during the year are outlined below.

Cash flows from operating activities Net cash provided by operating activities amounted to ¥9,592 million, compared with ¥8,923 million provided by these

activities in the previous fiscal year. Major sources of cash included income before income taxes and minority interests of

¥7,488 million and depreciation of ¥4,019 million, while principal uses of cash included income taxes paid of ¥3,105

million.

Cash flows from investing activities

Net cash used in investing activities totaled ¥9,763 million, compared with ¥1,010 million in the preceding fiscal year.

The principal use of cash was ¥4,343 million for the acquisition of tangible fixed assets centered on the valve

manufacturing business and ¥3,732 million in purchase of shares of subsidiaries resulting in change in scope of

consolidation related to the purchase of a Brazilian company.

Cash flows from financing activities

Net cash provided in financing activities during the year came to ¥796 million, compared with ¥3,706 million used by

these activities in the preceding term. Major uses of cash included ¥3,219 million in repayment of long-term debt, ¥6,630

million in payments for redemption of bonds, ¥1,406 million in cash dividends paid and ¥510 million in payments for

acquisition of treasury stock. Major sources of cash were a third unsecured corporate bond issue of ¥10 billion and

proceeds from ¥900 million in long-term debt.

Note: To be prepared for the demand for short-term working capital, KITZ has entered into commitment line contract with

its banks for a total of ¥4.0 billion. There were no loans outstanding under this commitment line contract as of March 31, 2016.

(Reference) Trend of cash flow indicators

FY3/14 FY3/15 FY3/16

Equity ratio (%) 61.1 64.2 62.9

Equity ratio based on market value (%) 51.3 55.5 43.7

Interest-bearing liabilities/cash flow ratio (%) 508.4 240.1 260.7

Interest coverage ratio (times) 16.8 37.9 44.1

Equity ratio: Equity divided by total assets Equity ratio based on market value: Market capitalization divided by total assets Interest-bearing liabilities/cash flow ratio: Interest-bearing debt divided by cash flows Interest coverage ratio: Cash flows divided by interest expenses Notes: 1. Consolidated financial data is used to calculate all figures. 2. Market capitalization is based on issued shares less treasury stock. 3. Cash flows are net operating cash flows. 4. Interest-bearing liabilities are the sum of all liabilities shown on the balance sheet on which interest is paid.

(3) Fundamental Policy for Earnings Distributions and Dividend in Current and Next Fiscal Years

Returning profits to shareholders by cash dividend is one of the highest priorities of KITZ. The Company’s stance is to place

importance on the consistency and stability of the dividend while taking into account a number of factors. These factors

include current results of operations and the need for funds for capital investment, development, M&A and other activities

needed for growth. Another factor is the need to increase retained earnings to provide funds for repaying loans and redeeming

bonds.

At present, based on the above-stated considerations KITZ believes that a dividend payout ratio of about 25% of net

income attributable to owners of the parent is appropriate. KITZ aims to distribute approximately one-third of net income

attributable to owners of the parent to shareholders, including the purchase of treasury stock.

Taking the above-stated policy into consideration, KITZ expects to pay a year-end dividend for fiscal year under review

of ¥7 per share. This amount would bring the total for the year (including an interim dividend of ¥6 per share) to ¥13 per

share. The resulting consolidated dividend payout ratio is 28.6%. Based on a Board of Directors resolution passed at a meeting

on December 11, 2015, the Company acquired ¥509 million of treasury stock. Total shareholder returns during the year,

including this acquisition, came to ¥1,909 million, for a total consolidated payout ratio of 38.8%.


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Assuming that net income attributable to owners of the parent for the upcoming fiscal year is in line with our

consolidated forecasts, we plan to pay a dividend of ¥13 per share for the fiscal year ending March 31, 2017.

Furthermore, KITZ acquired one million shares of treasury stock in fiscal 2014 and again in fiscal 2015. In line with the

formulation of a new medium-term management plan, the Company will endeavor to further enhance shareholder value

through a more aggressive acquisition of treasury stock compared to the traditional goal of about 1/3 of the total consolidated

payout ratio.


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2. Management Policies (1) Fundamental Management Policy

1) Corporate Philosophy

KITZ’ Statement of Corporate Mission: To contribute to the global prosperity, KITZ is dedicated to continually

enriching its corporate value by offering originality and quality in all products and services.

2) Action Guide (Do it KITZ Way)

Do it True

Do it Now

Do it New

(2) Since formulating the “KITZ Global Vision 2020” in May 2010, we have been striving to implement policies for growth so

that we can achieve its numerical targets with expecting economic recovery after Lehman shock.

In overseas market, the effects of slowing Chinese economic growth have caused stagnation not only in China but also in

other emerging countries. Because of the sharp drop in the crude oil price, capital investments by energy-related companies

have significantly decreased.

In domestic market, we can expect some demand of building facilities for Olympic / Paralympic games Tokyo in 2020, but

with the effect of global stagnation, financial outlook of companies is uncertain and we cannot expect aggressive capital

investments.

Based on the above situation, we judged that it is difficult to optimistically anticipate rapid increase of sales in next few

years. Having reviewed the results of the second phase of the Medium-Term Management Plan (2013-2015) and considering

the changing market environment, we formulated the following third phase of the Medium-Term Management Plan to fiscal

2018 and revised the targets of Long-Term Management Plan.

1) Basic Policies

a. Concentrate management resources in the focused market fields (Building facility, Petrochemistry, General

Chemistry, and Clean Energy) where we can make use of our advantages. Introduce new products and concentrate

capital / R&D investment in those fields. Strengthen strategic implementation structure by following PDCA cycle of

prioritized measures.

b. Improve cost by global procurement, self-manufacture, and increasing productivity. Aggressively make capital

investments which generate profit. Reorganize the business and eliminate waste. Aim for thorough implementation

of the profit/cash flow-oriented policy and 8% or more of ROE.

c. Aim for achieving 10 billion yen or more of the operating profit in the fiscal 2018 and the record-high profit in the

fiscal 2020.

d. To enhance return of profits to shareholders, we have set a target dividend payout ratio of about 25% of the

consolidated Net Income attributable to owners of parent and will take a proactive stance for the acquisition of

treasury stock.

2) Strategy:

Valve Manufacturing Business

a. Narrowing down of the focused market fields and focused areas Narrow down the focused market fields to building

facility, petrochemistry and general chemistry, and clean energy (hydrogen and LNG) and move forward with the

introduction of new specialized products to dig the market deeply and try to expand our market share. Also narrow

down the focused areas to Japan + 3 Regional HQs (Europe/The Americas/ASEAN), two hub markets (China and

India) and reinforce their multifunctionalization: Sales, Marketing, Engineering, Stock, Maintenance and Service.

Especially, our prioritized areas are ASEAN and The Americas.


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b. The Matrix structure with vertical (organizations by functions) and horizontal (company-wide horizontally-based

organization) by which we implement business strategy with enhancement of management of both “organization”

and “product”.

By enhancement of function and authority of Business Planning Dept. , try to thorough management of important

measures for existing organization and following PDCA cycle.

Newly establish the Product Management Center, comprehensively introduce the product group based on the strategy

in a timely/expeditious manner, and implement the product management. Try to expand the sales and share in the

focused market fields and take responsibility for achievement (figures).

c. Realization of the cost to be able to compete globally by utilizing existing resources with economy and thoroughly to

expand sales and profit.

Enhance the cost improvement promotion system as anchored by the Production Head Office. Put effort into global

procurement, self-manufacture, and improvement of productivity. Newly establish the Engineering Center in which

estimation/design work is aggregated within the Engineering Head Office and try to improve profitability of the

special order products.

1) Consolidate Performance Targets

Financial Indicators (Millions of yen)

FY2015

Results

FY2016 FY2017 FY2018 FY2020

Revised

Net sales 117,278 111,500 115,000 120,000 135,000

Operating income 7,245 8,000 9,000 10,000 12,500

Ordinary income 7,300 7,700 8,700 9,700 12,200

Net income attributable to

owners of the parent

4,915 5,000 5,700 6,300 8,000

Operating income ratio 6.2% 7.2% 7.8% 8.3% 9.3%

Overseas sales ratio 31.7% 31.8% 32.7% 34.2% 37.7%

ROE 6.6% 6.6% 7.2% 7.7% 9.0%

Equity ratio 62.9% 63.9% 64.7% 64.0% 62.9%

EPS (yen) 45.5 46.6 54.0 61.0 81.0

BPS (yen) 700.17 736.00 778.00 825.00 938.00

Sales by Segment (Millions of yen)

FY2015

Results

FY2016 FY2017 FY2018 FY2020

Revised

Valve manufacturing

business

93,579 92,000 95,000 100,000 113,000

Brass bar manufacturing

business

20,557 16,400 16,500 16,500 17,800

Other 3,141 3,100 3,500 3,500 4,200

Total 117,278 111,500 115,000 120,000 135,000


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Operating Income by Segment (Millions of yen)

FY2015

Results FY2016 FY2017 FY2018

FY2020

Revised

Valve manufacturing

business

10,384 11,000 11,900 13,150 15,150


business

(16) 250 350 100 500

Other 75 100 150 150 250

Company-wide expenses,

etc.

(3,197) (3,350) (3,400) (3,400) (3,400)

Total 7,245 8,000 9,000 10,000 12,500

Revised “KITZ Global Vision 2020” Long-Term Management Plan Targets

FY2020

After Before

Net sales ¥135.0 billion ¥250.0 billion

Operating income ¥12.5 billion ¥20.0 billion

Operating income ratio 9.3% 8.0%

Overseas sales ratio 37.7% 50.0%

ROE 9.0% 7.0%

Equity ratio 62.9% 70.0%

For the above, please also refer to “Formulation of the Third Phase of the Medium-term Management Plan (Fiscal

2016-2018) and Revisions to the KITZ Group Long-Term Management Plan ‘KITZ Global Vision 2020’” released today.

3. Basic Perspective of Selection of Accounting Standards

The KITZ Group employs Japanese accounting standards to facilitate comparison of consolidated financial statements of

different fiscal terms and companies. However, the Company intends to consider the adoption of the International Financial

Reporting Standards (IFRS) by taking into account requests for international comparability and the adoption of IFRS by other

companies in Japan.


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4. Consolidated Financial Statements (1) Consolidated Balance Sheets

(Units: Millions of yen)

End of FY3/15 End of FY3/16 (March 31, 2015) (March 31, 2016)

Assets

Current assets

Cash in hand and in banks 14,036 14,649

Notes, accounts receivable–trade 21,417 18,832Electronically recorded monetary claims 5,044 6,657Merchandise and finished goods 9,342 9,291Work in process 4,296 4,532Raw materials and supplies 7,245 7,088Deferred income tax assets 1,160 1,074Other 1,370 1,442Less: Allowance for doubtful accounts (29) (68)Total current assets 63,884 63,501

Fixed assets Property, plant and equipment

Buildings and structures 37,357 38,885Less: Accumulated depreciation (26,176) (26,795)Buildings and structures, net 11,180 12,090

Machinery, equipment and vehicles 41,028 42,577Less: Accumulated depreciation (32,727) (32,969)Machinery, equipment and vehicles, net 8,300 9,608

Tools, furniture and fixtures 14,249 14,603Less: Accumulated depreciation (9,122) (9,381)Tools, furniture and fixtures, net 5,127 5,222

Land 10,944 11,063Construction in progress 827 570Other 392 449

Less: Accumulated depreciation (154) (215)Other, net 237 233

Total property, plant and equipment 36,617 38,788

Intangible assets Goodwill 1,459 2,396Other 2,235 3,149Total intangible assets 3,695 5,545

Investments and other assets Investments in securities 8,887 8,505Retirement benefit assets 99 99Deferred income tax assets 125 101Other 2,485 2,884Less: Allowance for doubtful accounts (5) (4)

Total investments and other assets 11,593 11,586

Total fixed assets 51,905 55,920

Total assets 115,790 119,422


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End of FY3/15 End of FY3/16 (March 31, 2015) (March 31, 2016)

Liabilities

Current liabilities

Accounts payable–trade 6,606 6,405

Current portion of corporate bonds 6,630 799Short-term borrowings 1,658 2,025Current portion of long-term debt 2,942 2,788Income taxes payable 1,711 864Consumption tax payable 515 280Accrued bonuses to employees 1,772 1,697Accrued bonuses to directors and corporate auditors 159 169

Other 3,745 4,009

Total current liabilities 25,740 19,040

Long-term liabilities Corporate bonds 1,680 12,680Long-term debt 8,515 6,714Deferred income tax liabilities 1,454 1,477Accrued retirement benefits to directors, corporate 309 282Retirement benefit liabilities 295 344Asset retirement obligations 463 424Other 1,837 2,360

Total long-term liabilities 14,556 24,284

Total liabilities 40,296 43,325

Net assets Shareholders’ equity

Common stock 21,207 21,207Capital surplus 9,430 5,743Retained earnings 41,618 45,118Treasury stock (4,407) (1,193)

Total shareholders’ equity 67,849 70,875

Accumulated other comprehensive income Net unrealized gains on other securities 3,321 2,745Translation adjustments 2,811 1,220

Cumulative adjustments related to retirement benefits 306 228

Total accumulated other comprehensive income 6,439 4,194

Non-controlling interests 1,204 1,027

Total net assets 75,493 76,096

Total liabilities and net assets 115,790 119,422


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(2) Consolidated Statements of Income and Comprehensive Income Consolidated Statements of Income


FY3/15 FY3/16 (April 1, 2014- (April 1, 2015-

March 31, 2015) March 31, 2016)

Net sales 117,036 117,278

Cost of sales 88,662 87,356

Gross profit 28,374 29,922

Selling, general and administrative expenses 21,487 22,676

Operating income 6,886 7,245

Non-operating income Interest income 25 39Dividend income 155 179Insurance income 177 131Settlement money received 259 -Exchange gains 401 82Other 371 458

Total non-operating income 1,389 891

Non-operating expenses Interest expenses 233 219Sales discount 330 386Losses on sales of notes receivable 24 23Other 107 206

Total non-operating expenses 695 836

Ordinary income 7,581 7,300

Extraordinary income Gains on sales of property, plant and equipment 34 85Gains on sales of investment securities 0 75Gain on sales of shares of affiliated companies 2,156 -Gains on business transfer - 170Other 0 6

Total extraordinary income 2,191 338

Extraordinary loss Losses on sales or disposal of property, plant and equipment 71 119

Impairment loss 167 -Other 14 31

Total extraordinary loss 253 151

Net income before income taxes and minority interests 9,519 7,488

Income taxes (income, residential and enterprise taxes) 2,589 2,198Income tax adjustment (24) 284

Total income taxes 2,564 2,483

Net income 6,954 5,005

Net income attributable to non-controlling interests 73 90

Net income attributable to owners of the parent 6,881 4,915


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Consolidated Statements of Comprehensive Income


FY3/15 FY3/16 (April 1, 2014– (April 1, 2015–

March 31, 2015) March 31, 2016)

Net income 6,954 5,005

Other comprehensive income Net unrealized gains on other securities 1,186 (576)Translation adjustment 2,362 (1,639)Remeasurements of retirement benefits 120 (77) Total other comprehensive income 3,670 (2,293)

Comprehensive income 10,624 2,712

(Breakdown) Comprehensive income attributable to owners of the parent 10,484 2,670

Comprehensive income attributable to non-controlling interests 140 41


15

(3) Consolidated Statements of Changes in Net Assets Previous fiscal year (April 1, 2014 to March 31, 2015) (Units: Millions of yen)

Shareholders’ equity

Common stockAdditional

paid-in capitalRetained earnings

Treasury stock Total

shareholders’ equity

Balance as of start of current fiscal year 21,207 9,430 36,147 (3,919) 62,865Cumulative impact of changes in accounting methods

(208)

(208)

Balance as of beginning of fiscal year, reflecting changes in accounting methods

21,207 9,430 35,938 (3,919) 62,657

Changes during fiscal year Dividends from surplus (1,201) (1,201)Net income attributable to owners of

the parent 6,881 6,881

Acquisition of treasury stock (488) (488)Sales of treasury stock 0 0 0Items other than changes in

shareholders’ equity, net

Total change during fiscal year - 0 5,680 (488) 5,191Balance as of end of current fiscal year 21,207 9,430 41,618 (4,407) 67,849 Accumulated other comprehensive income

Non-controlling

interests

Total net assets

Net unrealized gains on

other securities

Translation adjustments

Cumulative adjustments

related to retirement benefits

Total accumulated

other comprehensive

incomeBalance as of start of current fiscal year 2,134 516 185 2,836 1,075 66,777

Cumulative impact of changes in accounting methods

(208)

Balance as of beginning of fiscal year, reflecting changes in accounting methods

2,134 516 185 2,836 1,075 66,569

Changes during fiscal year Dividends from surplus (1,201)Net income attributable to owners of

the parent 6,881

Acquisition of treasury stock (488)Sales of treasury stock 0Items other than changes in

shareholders’ equity, net 1,186 2,294 120 3,602 129 3,731

Total change during fiscal year 1,186 2,294 120 3,602 129 8,923Balance as of end of current fiscal year 3,321 2,811 306 6,439 1,204 75,493


16

Current fiscal year (April 1, 2015 to March 31, 2016) (Units: Millions of yen) Shareholders’ equity

Common stockAdditional

paid-in capitalRetained earnings

Treasury stock Total

shareholders’ equity

Balance as of start of current fiscal year 21,207 9,430 41,618 (4,407) 67,849Changes during fiscal year

Dividends from surplus (1,406) (1,406)Net income attributable to owners of the parent

4,915 4,915

Acquisition of treasury stock (510) (510)Sales of treasury stock 0 0 0Cancellation of treasury stock (3,715) (9) 3,724 -Changes in equity of the parent

company related to transactions with non-controlling shareholder

27 27

Items other than changes in shareholders’ equity, net

Total change during fiscal year - (3,687) 3,499 3,214 3,026Balance as of end of current fiscal year 21,207 5,743 45,118 (1,193) 70,875 Accumulated other comprehensive income

Non-controlling

interests

Total net assets

Net unrealized gains on

other securities

Translation adjustments

Cumulative adjustments

related to retirement benefits

Total accumulated

other comprehensive

incomeBalance as of start of current fiscal year 3,321 2,811 306 6,439 1,204 75,493Changes during fiscal year

Dividends from surplus (1,406)Net income attributable to owners of the parent

4,915

Acquisition of treasury stock (510)Sales of treasury stock 0Cancellation of treasury stock -Changes in equity of the parent

company related to transactions with non-controlling shareholder

27

Items other than changes in shareholders’ equity, net

(576) (1,590) (77) (2,244) (177) (2,422)

Total change during fiscal year (576) (1,590) (77) (2,244) (177) 603Balance as of end of current fiscal year 2,745 1,220 228 4,194 1,027 76,096


17

(4) Consolidated Statements of Cash Flows


FY3/15 FY3/16 (April 1, 2014– (April 1, 2015– March 31, 2015 March 31, 2016)

Cash flows from operating activities

Net income before income taxes and minority interests 9,519 7,488

Depreciation 3,639 4,019Amortization of goodwill 215 327Exchange (gains) losses (96) 79Write-down of investments in securities 0 0Increase (decrease) in provision for allowance for doubtful accounts (2) 12Increase (decrease) in accrued bonuses to employees 14 (66)Increase (decrease) in retirement benefit liabilities (60) (60)Increase (decrease) in accrued retirement benefits to directors, corporate auditors and operating officers

18 (111)

Increase (decrease) in provision of accrued bonuses to directors 18 11Interest income and dividend income (180) (219)Interest expenses 233 219(Gains) losses on sales or disposal of property, plant and equipment 37 33Impairment losses of fixed assets 167 -(Gains) losses on sale of shares of affiliated companies (2,156) -(Gains) losses on transfer of business - (170)(Increase) decrease in notes and accounts receivable (206) 835(Increase) decrease in inventories (782) 710(Increase) decrease in other current assets (32) (28)(Increase) decrease in accounts payable 352 (167)Increase (decrease) in other current liabilities 493 (62)Other (40) (149)

Subtotal 11,152 12,701

Interest and dividend income received 178 212Interest expenses paid (235) (217)Income taxes paid (2,173) (3,105)Cash flows from operating activities 8,923 9,592

Cash flows from investing activities

Payments for purchase of property, plant and equipment (3,489) (4,343)

Proceeds from sales of property, plant and equipment 37 222Payments for purchase of intangible assets (705) (1,125)Payments for purchase of investments in securities (22) (470)Proceeds from collections of long-term loans receivable 0 1Proceeds from sales of subsidiaries’ shares resulting from changes in scope of consolidation 3,890 -

Payments for acquisition of subsidiaries’ shares resulting from changes in scope of consolidation (649) (3,732)

Proceeds from transfer of business - 170

Other (73) (485)

Cash flows from investing activities (1,010) (9,763)


18


FY3/15 FY3/16 (April 1, 2014– (April 1, 2015– March 31, 2015 March 31, 2016)

Cash flows from financing activities Increase (decrease) in short-term borrowings, net (1,715) 418Proceeds from long-term debt 4,460 900Repayment of long-term debt (3,425) (3,219)Proceeds from issuance of bonds - 11,520Payments for redemption of bonds (1,202) (6,630)Proceeds from sales of treasury stock 0 0Payments for acquisition of treasury stock (488) (510)Cash dividends paid (1,201) (1,406)Cash dividends paid to non-controlling interests (17) (22)Other (116) (252)Cash flows from financing activities (3,706) 796

Effect of exchange rate changes on cash and cash equivalents 445 (149)

Net increase (decrease) in cash and cash equivalents 4,651 475

Cash and cash equivalents at the beginning of the year 7,923 12,575Cash and cash equivalents at the end of the year 12,575 13,050


19

(5) Notes to Consolidated Financial Statements (Notes regarding Going Concern Assumptions)

None (Changes in Accounting Policy)

Effective from the consolidated fiscal year ended March 31, 2016, the Company has applied the “Accounting Standard for Business Combinations” (ASBJ Statement No. 21, September 13, 2013), the “Accounting Standard for Consolidated Financial Statements” (ASBJ Statement No. 22, September 13, 2013), the “Accounting Standard for Business Divestitures” (ASBJ Statement No. 7, September 13, 2013), etc. As a result, the method of recording the amount of difference caused by changes in the Company’s ownership interests in subsidiaries in the case of subsidiaries under ongoing control of the Company was changed to one in which it is recorded as capital surplus, and the method of recording acquisition-related costs was changed to one in which they are recognized as expenses for the fiscal year in which they are incurred. Furthermore, for business combinations carried out on or after the beginning of the consolidated fiscal year ended March 31, 2016, the accounting method was changed to one in which the reviewed acquisition cost allocation resulting from the finalization of the provisional accounting treatment is reflected in the consolidated fiscal year financial statements for the period to which the date of business combination belongs. In addition, the presentation method for “net income” and other related items was changed, and the presentation of “minority interests” was changed to “non-controlling interests.” To reflect these changes, the Company has reclassified its consolidated financial statements for the previous fiscal year. Application of the Accounting Standard for Business Combinations, etc. is subject to the tentative treatment provided for in paragraph 58-2 (4) of the Accounting Standard for Business Combinations, paragraph 44-5 (4) of the Accounting Standard for Consolidated Financial Statements and paragraph 57-4 (4) of the Accounting Standard for Business Divestitures. The Company is applying the said standard, etc. prospectively from the beginning of the fiscal year ended March 31, 2016. These changes in accounting policies have caused operating income, ordinary income and net income before income taxes for the current fiscal year to each decrease by ¥195 million. In addition, the impact on capital surplus at the end of the consolidated fiscal year is immaterial.

Under the consolidated statement of cash flow for the fiscal year ended march 31, 2016 cash flows associated with the acquisition or disposal of stocks of subsidiaries which cause no change in the scope of consolidation are included in the category of “cash flows from financing activities.” Cash flows associated with the costs related to the acquisition of stocks of subsidiaries which cause change in the scope of consolidation or the costs incurred with respect to acquisition or disposal of stocks of subsidiaries which cause no change in the scope of consolidation are included in the category of “cash flows from operating activities.” There is no material impact on the fiscal year-end capital surplus balance on the consolidated statement of changes in net assets. In addition, information on the impact per share is provided in the relevant sections.

(Business Combinations, etc.)

Business combination through acquisition

1. Overview of business combinations

(1) Acquired company name and business details

Acquired company name Metalúrgica Golden Art's Ltda.

Business details Manufacture and sales of industrial ball valves

(2) Main purpose of the business combination

Metalúrgica Golden Art's Ltda. (hereinafter, MGA), is a locally capitalized manufacturer located in Brazil, which accounts for approximately 50% of South America’s GDP and population. In acquiring MGA as its subsidiary, the KITZ Group will secure a new development, manufacturing and sales base in the major South American market of Brazil. MGA specializes in the manufacture of industrial ball valves, and like KITZ, is engaged in integrated manufacturing, from raw materials to finished products. With its technical strength and demonstrated quality, MGA has captured a more than 20% share in its core market segment. Additionally, MGA has an extensive sales network throughout Brazil contributing to the company’s continued and significant growth despite challenging economic conditions. The acquisition of MGA and the integration of compatible technologies will enable the KITZ Group to accelerate the speed of development and manufacturing of products targeted at Brazilian and other South American markets. KITZ will also be able to meet local needs through the local production and launch of its wide-ranging product lineup in Brazil. It is significant for KITZ to establish a presence in South America. The Company strongly believe the addition of MGA to the KITZ Group will successfully further its international business development.

(3) Date of the business combination

November 5, 2015

(4) Business combination method


20

Cash compensation for acquisition of shares

(5) Company name after business combination

Metalúrgica Golden Art's Ltda.

(6) Percentage of voting rights acquired

100%

(7) Grounds for determining acquiring company

KITZ acquired shares through cash compensation

2. Acquired company earnings periods included in the consolidated financial statements

As MGA was deemed acquired on December 31, 2015, its earnings are not included on the consolidated income statement in this consolidated fiscal year.

3. Breakdown of acquired company acquisition cost and method of compensation

Acquisition compensation Cash (including accounts payable) ¥3,965 million

Acquisition cost ¥3,965 million

4. Breakdown of major acquisition-related expenses and amounts

Advisory and other expenses ¥180 million

5. Goodwill amount and reason, amortization method and period

(1) Amount of goodwill

¥1,185 million

(2) Reason for goodwill

Reflection of expected future earning power

(3) Amortization method and period

Uniform amortization over a 10-year period

6. Amount and breakdown of assets received and liabilities assumed on day of business combination

Current assets: ¥1,628 million

Fixed assets: ¥1,505 million

Total assets: ¥3,134 million

Current liabilities: ¥242 million

Long-term liabilities: ¥281 million

Total liabilities: ¥523 million

7. Estimated amount and calculation method of impact on consolidated income statement assuming the business combination had occurred on the first day of the consolidated fiscal year under review

Net sales ¥2,426 million

Operating income ¥317 million

Ordinary income ¥386 million

Income before income taxes and minority interests

¥377 million

Net income attributable to owners of the parent

¥220 million

(Estimated amount calculation method)

The impact of the estimated amount is based on the difference between net sales and P&L information calculated assuming business combination had occurred on the first day of the consolidated fiscal year under review and net sales and P&L information on the acquired company’s consolidated income statement. These notes have not received audit certification.


21

(Segment Information, etc.) Segment Information

1. Summary of reportable segments Reportable segments of the KITZ Group are the constituent business units of the Group for which separate financial data

are available and that are examined on a regular basis for the purpose of enabling the Group’s Board of Directors to

determine the allocation of management resources and evaluate results of operations.

The KITZ Group establishes comprehensive strategies and conducts business activities in Japan and overseas separately

for each product and service category. Operations include the valve manufacturing business, brass bar manufacturing

business, hotel and restaurant business, and other activities. The Group transferred its fitness club business on October 1,

2014.

Consequently, the operations of the Group are divided into business segments based on products and services. This

results in two reportable business segments: valve manufacturing business and brass bar manufacturing business.

The valve manufacturing business is engaged in the manufacture and sale of bronze valves, steel valves, and other

valve-related products, filtering-related products and accessories. The brass bar manufacturing business is engaged in the

manufacture and sale of brass bar products and processed brass bar products.

2. Method used for calculating sales, earnings or losses, assets, liabilities and other items for each reporting segment

The methods employed in the accounting treatment of reportable business segments are the same as the methods used to

prepare the consolidated financial statements.

Earnings for reporting segments are based on operating income. Intersegment earnings and transfers are based on

prevailing market prices.

(Application of accounting standards related to the business combination)

As indicated in “Changes to accounting policies,” effective from the consolidated fiscal year ended March 31, 2016, KITZ has

applied changes in accounting standards. As a result, the method of recording the amount of difference caused by changes in the

Company’s ownership interests in subsidiaries in the case of subsidiaries under ongoing control of the Company was changed

to one in which it is recorded as capital surplus, and the method of recording acquisition-related costs was changed to one in

which they are recognized as expenses for the fiscal year in which they are incurred. Furthermore, for business combinations

carried out on or after the beginning of the consolidated fiscal year ended March 31, 2016, the accounting method was changed

to one in which the reviewed acquisition cost allocation resulting from the finalization of the provisional accounting treatment is

reflected in the consolidated fiscal year financial statements for the period to which the date of business combination belongs. In

accordance with these changes, when compared to traditional methods, segment profits this consolidated fiscal year decreased

by ¥184 million in the valve manufacturing business and by ¥11 million in the brass bar manufacturing business.


22

3. Information concerning reporting segment sales, earnings or losses, assets, liabilities and other items:

Previous fiscal year (April 1, 2014 to March 31, 2015) (Units: Millions of yen)

Valve

manufacturing business


business

Other (Note 1)

Adjustments (Notes 2, 4)

Amount in consolidated financial statements (Note 3)

Net sales Sales—outside customers Sales and transfer—intersegment

90,152217

21,0212,738

5,86332

-

(2,988) 117,036

-

Total 90,369 23,759 5,895 (2,988) 117,036

Segment income 9,506 248 231 (3,099) 6,886

Segment assets (Note 4) - - - 115,790 115,790

Other items Depreciation Amortization of goodwill

2,930203

272-

18012

217

- 3,601

215

Current fiscal year (April 1, 2015 to March 31, 2016) (Units: Millions of yen)

Valve

manufacturing business


business

Other (Note 1)

Adjustments (Notes 2, 4)

Amount in consolidated financial statements (Note 3)

Net sales Sales—outside customers Sales and transfer—intersegment

93,579209

20,5572,094

3,14126

-

(2,329) 117,278

-

Total 93,789 22,651 3,167 (2,329) 117,278

Segment income or loss 10,384 (16) 75 (3,197) 7,245

Segment assets (Note 4) - - - 119,422 119,422

Other items Depreciation Amortization of goodwill

3,240305

36022

120-

251

- 3,972

327

Notes: 1. The “other” category is a business segment that is not included in the reporting segments. In previous consolidated fiscal years, this category included the fitness club business, the hotel and restaurant business, and other activities. The Group transferred the fitness club business on October 1, 2014. Amounts for this business are included for the first half of the previous fiscal year. This consolidated fiscal year, this category mainly comprises the hotel and restaurant businesses.

2. Adjustments are as follows:

Segment income (Units: Millions of yen)

Previous fiscal year Current fiscal year

Sales and transfer—intersegment

Corporate expenses*

0

(3,100)

4

(3,201)

Total (3,099) (3,197)

Depreciation (Units: Millions of yen)

Previous fiscal year Current fiscal year

Corporate expenses* 217 251

Total 217 251

* Corporate expenses are mainly expenses for head office general affairs, personnel, accounting, corporate planning and other departments and also include maintenance costs for the head office building located in the Makuhari area of Chiba City.

3. Segment earnings are adjusted to match operating income in the consolidated statements of income. 4. Only totals are shown for segment assets because each individual company (the parent company and consolidated

subsidiaries) is managed separately. 5. Figures for segment liabilities are not provided or used periodically by the Company’s Board of Directors.

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