year ended march 31, 2007 - kansai.co.jp · a room for checking colors under ... r&d center....

KA

NSA

I PAIN

T CO

., LTD. A

nnual Repor t 2007

3-6, Fushimi-machi 4-chome, Chuo-ku,Osaka 541-8523, JapanTel: 81-6-6203-5531Fax: 81-6-6203-5018

Printed in JapanPrinted on recycled paper

Annual Report 2007 Year Ended March 31, 2007

http://www.kansai.co.jp

Dear Shareholders,At Kansai Paint Co., Ltd. and its Group companies, wetake the concept of “contributing to society by provid-ing products and services that satisfy our customers” asour fundamental business philosophy. Indeed, at thevery foundation of the existence of the Kansai PaintCo., Ltd. Group is the idea of continuously working toimprove our level of customer satisfaction, and throughthis, we strive to increase the value of our stock,strengthen our operational foundation, and contributewidely to society.

Overview of the Fiscal Period EndingMarch 2007

Detailed figures for the consolidated fiscal year (thefiscal year ending March 31, 2007) are included in thelatter half of this annual report. To summarize, weachieved a net sales of ¥231,213 million (approxi-mately US $1,959 million, a year-over-year increase of9.6%), a consolidated operating income of ¥22,089million (approximately US $187 million, a year-over-year increase of approximately 16.9%), and a netincome of ¥13,267 million (US $112 million, a year-over-year increase of approximately 10.1%). Thanks toyour support, we have been able to realize bothincreased income and increased profits for the past fiveyears, setting new records for the profitability of ourcompany. These results are certainly due to the effortsof the entire Group to make maximum use of ourbusiness resources to strengthen Group operations,promote total cost reduction, and reinforce our globalstrategies, as well as to our customers who haverecognized and appreciated our efforts in theseareas. With our increased profits, we have alsobeen able to increase dividends by ¥1, from ¥10 to¥11 per share.

Although the Japanese economy is becomingstronger, unprecedented oil prices have led

to sharp increases in material costs, creat-ing extremely severe problems for paintindustries. Still, backed by a high level of

—Constant dropping wears away a stone—

Shoju Kobayashi, President

Message from the President

Kansai Paint Co., Ltd. Annual Report 2007 1

Profile

The ALESCO logo was designed to symbolizethe three basic key words that express Kansai Paint’s

image: science, growth, and reliability.The square blue field embodies the rationality andcertainty of scientific advancement, while the A’s without

crossbars represent growth in the sense ofspread wings soaring into the sky.

Reliability is portrayed through the overall balance andstability of the design.

Message from the President ................................................. 1

ALESCO At a Glance ............................................................ 4

Corporate Activities

Overseas Business ............................................................ 6

Research & Development ................................................. 8

Environmental Conservation and Social Contributions ... 10

Board of Directors .............................................................. 12

Financial Section

Five-year Summary of Selected Financial Data ................ 13

Financial Review ............................................................ 14

Consolidated Balance Sheets ......................................... 16

Consolidated Statements of Income .............................. 18

Consolidated Statements of Changes in Net Assets ............ 19

Consolidated Statements of Cash Flows ........................ 20

Notes to Consolidated Financial Statements .................. 21

Independent Auditors' Report ....................................... 31

Directory ............................................................................ 32

Topics ................................................................................. 33

A room for checking colors underdifferent light sources. This room islocated in our CD Laboratory of theR&D Center. The shade and appear-ance of a color can change underdifferent light sources. Thisroom provides six differenttypes of lighting conditions.

Established in 1918, Kansai Paint Co., Ltd. has grown into Japan’slargest paint manufacturer as well as one of the country’s mostprogressive businesses. Today, the company enjoys a well-establishedposition as one of the world’s leading paint manufacturers. Thevarious products provided by the Kansai Paint Group play importantroles in protecting and beautifying all types of goods and products,and some coatings even instill the products they coat with specialfunctionality. As such, our products are highly revered and trusted ina wide range of fields for applications that include automobiles,architectural structures, and all types of industrial products. Also, asglobal environmental problems continue to grow in severity, KansaiPaint is working to create many types of products that can contributeto environmental conservation.

Our products are highly valued by customers not only in Japan, butaround the world as well, including Europe, the United States, andAsian countries such as China and India. Kansai Paint is dedicated tocontinuing to uphold its corporate social responsibilities as a leadingcompany in the paint and coating industry as we strive to meet theneeds of the global market.

Contents

Kansai Paint Co., Ltd. Annual Report 2007 3Kansai Paint Co., Ltd. Annual Report 2007 2

Message from the President

corporate revenue, there were increases in capitalinvestments and exports to regions where economicgrowth is continuing, resulting in a gradual expansionof business activity. In the area of automotive coatingsfor new cars in particular, the number of four-wheeledvehicles produced in Japan has increased over theprevious year due to an increase in the number ofautomobiles being exported. By providing highlyfunctional paint and coating materials of excellentcolor and appearance, and by expanding the use ofour Waterborne 3-Wet Metallic Finish System that cansimultaneously reduce the emissions of both VOC(volatile organic compounds) and CO2, we have beenable to achieve increased business results. We havealso realized increase sales in the area of industrialcoatings, as a result of an increase in demand forpaints and coatings for industrial machinery, and toour ongoing efforts to introduce new environment-friendly products to the market, such as water-basedpaint materials with low levels of VOC emission, and*Green polymer coatings that contribute to a reduc-tion in CO2 emissions.

*Green polymer coatings: A single-component urethane coating made frombio-polymer derived from corn starch. These coatings are used as plasticcoatings.

Overall, the world economy has been undergoingstrong and steadychanges, despite theeffects of crude oil pricefluctuations and thedeceleration of the USeconomy on the econo-mies of other countriesaround the world.Overseas production byJapanese automobilemanufacturers is increas-ing, and sales of ourproducts in the Asianregion, including India,Thailand, and China,have been excellent. Wehave also constructednew factories withequipment for manufac-turing water-based paint

for automobiles in Thailand and China, furtherstrengthening our production system. In the area ofdecorative coatings, sales by Kansai Nerolac Paints, oursubsidiary in India, have also been excellent.

Corporate Governance

In the Company’s view, strengthening corporategovernance is a crucial management task that pavesthe way for the ongoing enhancement of corporatevalue. To implement this task, the Board of Directorsmeets at least once per month, makes decisions onimportant matters determined by laws and ordinances,Board rules, and the Articles of Association, andreports on the progress of management plans. Afterthorough discussions, the Board makes resolutions onsignificant business-related issues and the decisions areimplemented. I myself am the chairman of our Corpo-rate Governance Committee, which works to promotecompliance and ensure that it sticks; handling of crisismanagement strategy formulation and response; andto develop internal control of business, and activedisclosure and management of information related tocorporate activity. In a related move, we are working tobroaden our information disclosure system throughstepping up the issuance of press releases and upgrad-ing our website to enhance corporate transparency.

Shoju Kobayashi, President

3. GlobalizationTo ensure our competitive advantage in the globalmarket, we are strengthening our cooperation withoverseas Group companies and business partners inIndia, Southeast Asia, China, Europe, and the UnitedStates, and in Japan as well, and are working toincrease the level of contributions we make to theachievements of our affiliated overseas businesses.

4. Carrying out Our Corporate Social Respon-sibilitiesOur corporate existence itself is dependent on ourability to meet our corporate responsibilities. Theessential role of paint is to protect resources, and toprotect the environment. Kansai Paint and its Groupcompanies shall continue to put full effort into theprotection and preservation of the environment, safety,and health through the development of environment-friendly products. We are dedicated to realizing ourcorporate responsibilities, including the achievement ofthorough compliance and the promotion of suitableinformation disclosure.

The indispensable factor that enables a corporation tofulfill its social responsibilities is the conducting ofbusiness in a sound manner. Kansai Paint and itsGroup companies, as a paint manufacturer, are makingeffort to contribute to society through the provision ofexcellent products and services with the spirit of“constant dropping water wears away a stone.” Tothat end, we are striving to reinforce our research anddevelopment activities, and expand our global opera-tion system as we proceed on our path of growth.

We hope that this annual report will provide you withuseful information pertaining to these activities ofKansai Paint Co., Ltd.

Outlook for the Current Fiscal Year

As for the outlook for the Asian economy for thecoming fiscal year, although there is concern about theeffects on the economy as a whole resulting fromfurther sharp rises in the price of crude oil, exchangerate fluctuations, interest rate trends, etc., steadyeconomic improvement is expected to continue. Inparticular, we can expect to see strong contributionsfrom our overseas operations in the Asian region, forwhich our company has been working at a rapid rateto enhance our production capacities.

In accordance with the operational strategies describedbelow, the Kansai Paint and its Group companies shallwork to fully utilize its resources, promoting businessdevelopment that emphasizes profits and working tostrengthen our operational foundation. To fortify thisfoundation, we are aiming for even greater businessresults in fiscal 2007, and shall strive to achieve con-solidated net sales of ¥260,000 million (approx. US$2,203 million), a consolidated operating income of¥26,500 million (approx. US $225 million), and aconsolidated net income of ¥15,500 million (approx.US $131 million).

Outlook for the Future—Business Opera-tion Strategies and Issues to Be Dealtwith

1. Boosting Competitive StrengthIn order to develop products that conform to marketneeds, are globally competitive, and appealing to ourcustomers, we are working to enrich our technologicaldevelopment capabilities. We are also working tostrengthen our earning capacity by reducing total costin order to make our business operations more effi-cient.

2. Reinforcing Group BusinessWe are continuing to make improvements to thebusiness structure of Kansai Paint and its Groupcompanies as a whole, to concentrate our businessresources, and to make investments that emphasizeour paints and coatings business and related fields.Through these efforts, we work to promote a sharedsense of value and Group strategies, maximizing thesynergistic effects of the Group.

Corporate Governance Organization

This internal control organization assures healthy business administration and audits.

* Corporate Governance Committee: has the President as chairman and Directors in charge of company divisions, and oversees matters such as internal control functions, compliance, risk management, and information management.

Appointments/Dismissals

Appointments/AuditsAudits

Financial Audits

Internal Audits

Board of Auditors

AuditorAffiliate

Administration Office

Company Departments and

Affiliate Companies

President

Board of Directors

Management Committee

Corporate Governance Committee*

General Shareholders’ Meeting

Appointments/Appointments/DismissalsDismissalsAppointments/Dismissals


Segment

AutomotiveCoatings

Main Products and Services Topics

IndustrialCoatings

DecorativeCoatings

Marine andProtectiveCoatings

New Business

Automotive coatings include coatings for newautomobiles and automotive refinish paints forauto body shops. Automotive coatings for newcars include paint for use in production lineapplications at automobile manufacturing plants,and consist primarily of finish paints baked at hightemperatures. Automotive refinishes are intendedfor use as repair paints in body shops, and dry atroom temperature or at temperatures of approxi-mately 60ºC.

There has been favorable growth in the sales ofautomotive coatings for new cars in Japan dueto increases in production brought about byfavorable exporting conditions.

Overseas as well, Japanese automobile manu-facturers are expanding their local production inIndia, China and various other Asian countries,resulting in increased sales of our paint prod-ucts.

Industrial coatings are used in a wide range ofapplications, and we offer a diverse range ofcoating materials for these applications. Applica-tions include pre-coated metals, beverage cans,construction vehicles, industrial machines, electricappliances, and building materials for windowsashes, doors, etc., for residential housing and otherstructures. Because these coating materials areprimarily used in factories, we provide outstandingservice and a wide range of paints with the coatingperformance required of all types of factory lines.

In Japan, sluggishness in production forbeverage cans resulted in a decline in net salesfor can coating materials. However, there wasalso favorable growth in the production oflarge-scale construction vehicles, forklifts,industrial machines, etc., backed by favorableexports, and this has resulted in an increase inthe net sales of industrial machinery coatings.

Decorative coatings include paints and coatingsfor the exteriors and interiors of residentialhousing and other types of buildings. There aretwo types of primary applications for theseproducts, coatings for new structures andcoatings for repairs. In both cases, these productsare used in close proximity to the human livingenvironment, so there has been a growingdemand recently for eco-friendly products in thisarea.

In the Japanese market, there has been aslowdown in the growth of demand for decora-tive coatings accompanied by increased competi-tiveness. However, we continue to make effortsto expand sales with eco-friendly products,through, for example, the introduction ofproducts with high added value, such as exteriorcoatings that provide dirt-and-stain resistancefunctions, interior coatings providing eco-friendly functions, and water-based heat barrier

Marine coatings include paints used for anti-corrosion and anti-fouling coatings in the con-struction of marine vessels in shipyards, paintsused for maintenance during voyages andrepainting while vessels are docked, and paints formarine containers. Protective coatings includepaints used for new buildings, and maintenancecoatings to provide long-term rust protection forbridges, tanks, and other types of large steelstructures.

In the area of coatings for ships, shipbuilders inJapan are operating at a high level, but themarket is highly competitive, and businessconditions are exceptionally severe. As such, ourcompany is putting major effort into expandingthe sales of high-value-added coatings for thismarket.

In the area of coatings for steel structures, therehas been a decline in the demand for newbridge construction, so we have concentrated

In the area of new business, Kansai Paint is nowproviding functional materials that have beendeveloped using technologies fostered throughour research related to paints and coatings. Wehave been working in the business of photo-resistmaterials for electronics and communications, andin the business of micro-organism biocatalysts inenvironmental and biotechnological related-areas.We are also creating a business for films used toprotect cars from dirt and scratches duringshipping and transportation.

In the area of telecommunications and electron-ics, although sales quantities increased forphotoresist materials, net sales were lowercompared with the previous year due to factorssuch as falling retail prices. There was also adecrease in the net sales of micro-organismcarriers for waste-water treatment in septictanks.

In the area of automotive refinishes, althoughthe market in Japan is sluggish, we have beenable to develop new demand through theexpanded sales of our environment-friendlyproducts, and we have also entered into anexclusive contract for selling PPG Japan paintproducts in Japan. These and other efforts haveresulted in increased sales for paints for repairs.

In 2006, we were also able to successfully createenvironment-friendly *Green polymer coatingsfor use as a coating base material. Overall, salesof coatings for plastics have increased.

* Green polymer coatings: A single-component urethanecoating made from “Green polymer” derived from cornstarch.

coatings for roofs, balconies and outer walls thatare an effective countermeasure to the urbanheat island phenomenon.

Overseas, our subsidiaries in India enjoyedfavorable sales thanks to a high rate of economicgrowth. We also bought our Malaysian paintmanufacturer of decorative coatings and made ita consolidated subsidiary of the Group. Overall,sales increased for our overseas affiliates.

our efforts on the area of new facility construc-tion by private companies, allowing us to realizea recovery of business performance. Improve-ments in the business performance of privateindustries have led to an increase in demand forproducts for new factories. Additionally, ourprocess-saving products have been selected foruse by a major electric power company.

As a result, sales in this area have also increased.

However, there was an increase in the export ofautomobiles manufactured in Japan and a rise indemand overseas, resulting in an increase in thesales of protective films. Overall, net salesincreased for new business.

Product Sales Ratios

(Sales for areas other than paints and coatings account for 7% of total sales.)

ALESCO At a Glance

Kansai Paint Co., Ltd. Annual Report 2007 6 Kansai Paint Co., Ltd. Annual Report 2007 7


ASIAEUROPE

AMERICAS

Tianjin Winfield Kansai Paint &Chemicals Co., Ltd.

Guangzhou Kansai Paint Co., Ltd. Kansai Coatings Malaysia Sdn. Bhd.

Thai Kansai Paint Co., Ltd.Kansai Nerolac Paints Ltd. Kansai Paint (Singapore) Pte. Ltd.

Americas● KANSAI PAINT (AMERICA), INC.● PPG KANSAI AUTOMOTIVE FINISHES U.S., LLC● PPG KANSAI AUTOMOTIVE FINISHES CANADA, LP● PPG ALESCO AUTOMOTIVE FINISHES MEXICO,

S.de.R.L.de C.V.

Asia● KDK AUTOMOTIVE COATINGS CO., LTD.● TAIWAN KANSAI PAINT CO., LTD.● KANSAI PAINT H. K. LTD.● COSCO KANSAI PAINT & CHEMICALS (SHANGHAI) CO., LTD.● COSCO KANSAI PAINT & CHEMICALS (TIANJIN) CO., LTD.● CHONGQING KANSAI PAINT CO., LTD.● SHENYANG KANSAI PAINT CO., LTD.● TIANJIN WINFIELD KANSAI PAINT & CHEMICALS CO., LTD.● HUNAN XIANGJIANG KANSAI PAINT CO., LTD.● GUANGZHOU KANSAI PAINT CO., LTD.● SUZHOU KANSAI PAINT CO., LTD.● KANSAI PAINT PHILIPPINES, INC.● THAI KANSAI PAINT CO., LTD.● KANSAI RESIN (THAILAND) CO., LTD.● P.T. KANSAI PAINT INDONESIA● P.T.GDJAH TUNGGAL PRAKARSA● SIME KANSAI PAINTS SDN. BHD.● KANSAI COATINGS MALAYSIA SDN. BHD.● KANSAI PAINT (SINGAPORE) PTE. LTD.● KANSAI PAINT (ASIA) PTE. LTD.● KANSAI NEROLAC PAINTS LTD.

Europe● KANSAI PAINT EUROPE LIMITED.● PPG KANSAI AUTOMOTIVE FINISHES UK, LLP

Overseas Business

While striving to maintain an appro-priate balance in three areas show-ing remarkable economic growth—India, China, and the ASEAN nations,we are also working to develop ouroverseas business with a focus onAsia, a region for which majorgrowth is being forecast.

In North America and Europe, wehave established a solid supplysystem for automotive coatings, ourprimary product type in this area,through PPG Kansai AutomotiveFinishes (PKAF), a joint venturecompany with PPG Industries, andbusiness in this area is operatingsmoothly. The following is a break-down of our business achievementsin each region.

In India, an area undergoing remark-able economic development, de-mand continues to grow for prod-ucts related to residential housingand automobiles. Favorable results inthe areas of decorative coatings,automotive coatings, and industrialcoatings have resulted in a largeincrease in revenue. We have alsochanged the name of our subsidiaryin India from Goodlass Nerolac Paints

Ltd. to Kansai Nerolac Paints Ltd. inorder to promote the appeal of thetechnical capabilities of the companyin the areas of industrial coatings,including automotive coatings. Weare also actively working to expandbusiness in order to further increasesales through, for example, a mergerwith Polycoat Powder Ltd., a 100%-owned subsidiary of Kansai PaintCo., Ltd. working in the area ofpowder coatings.

In China, we have constructed anew automotive coatings plant inGuangzhou, and have created asystem to respond to the expandingautomobile market in China for thearea ranging from Shenyang andTianjin in the north to theGuangzhou region in the south. Wehave also seen a recovery in ourproduction of marine containers,resulting in increased revenue andincreased profit for China as awhole.

Favorable business results have beenseen in other Asian regions as well.In Thailand, favorable automobilemanufacturing conditions havesupported an active demand for

automotive coatings, allowing us toachieve increased revenue andincreased profits. We have alsocompleted our second plant in thecountry and have begun operationsthere, which are going well. InIndonesia, high interest policiesimplemented by the governmenthave resulted in a decrease inautomobile manufacturing, leadingto a decrease in both revenue andprofits. However, automobilemanufacturing is making a recoveryin the country, so the outlook isgood for conditions to improve. InMalaysia, there has been a decelera-tion in automobile manufacturing,resulting in sluggish performance inthe area of automotive coatings.However, Kansai Coatings MalaysiaSdn. Bhd., which was purchased lastyear, enjoyed increased sales forboth decorative coatings andindustrial coatings, resulting incontinued increased revenue andincreased profit for Malaysia as awhole.

Through these business results, wehave achieved increased revenue andincreased profit for our overseasinvesting companies as a whole.



Research & Development

The most important objective forKansai Paint and its Group companiesis the timely development of tech-nologies and products based onmarket needs, and as such, we areconducting a wide range of researchand development activities related tonew technologies from a globalstandpoint. For the consolidated termunder review, we have been able tofurther increase the efficiency of ourdevelopment efforts and to increasethe speed of development by cross-functional communication within ourR&D center, and through cooperativecollaboration between our CoatingBusiness headquarters and ProductionDivision. We have also been activelypromoting cooperation with researchorganizations such as universities andexternal companies as we work todevelop new technologies andmethods. Through these activities, weare working to foster human re-sources capable of participating inwork on a global scale.

During the consolidated term underreview, the total R&D expenditures ofKansai Paint and its Group companiesamounted to ¥5,271 million (approx.US$45 million), and a total of 564people have been involved in R&Dactivities in the Kansai Paint Group asa whole. The following is an overview of thecompany’s R&D activities by businesssegment.

1. CoatingsIn our basic research, we are selectingsubjects with the potential forbecoming the fundamental technolo-gies of coating development, andthen working to aggressively developthese projects. We are also promotingefforts to find applications in the fieldof coatings for technologies, such asnanotechnology and biotechnology.

Meanwhile, in the area of observa-tional and analytical research, we areworking to further improve thequality of our coatings amidst thecurrent trend toward a dramaticincrease in the use of water-basedproducts. To achieve these, we areworking on developing evaluative andanalytical technologies related to thephysical, organizational, and morpho-logical aspects of the various phe-

nomena occurring in the process ofpaint production, application, andfilm formation, thus proceeding withappropriate product development. Inaddition, in relation to laws pertain-ing to environmental substances, weare developing precise analyticaltechnologies that can detect sub-stance levels lower than thosestipulated in regulations, and we arepromoting compliance to ensure thatall of our products exhibit minimumstress on the environment. Throughthese efforts, we are developing andenhancing our global support net-work.

In the area of color design research,we have been researching the latestcolor trends at motor shows and inthe markets of various materials, andhave proposed brand new colors inwater-based coatings for automo-biles. We plan to begin marketingthese colors to automobile manufac-turers within two years. We have alsoconducted research of the colors andappearance of traditional Japanesecraftwork to develop compositecolors that reflect a Japanese sense oftaste. For the area of decorativecoatings, we have been studyingguidelines related to the landscapelaw, and our findings are beingreflected in our color planning forhouses, buildings, other structures,and even urban landscapes. In thearea of color science, we havedeveloped an application for digitalcolor simulation that makes it pos-sible to change the color and designof coatings by modifying the colorelements in metallic colors andmulticolor patterns.

In coatings resources, we havecontinued from the previous termwith the development of high-value-added materials fusing future-oriented paints and painting systems,with the objectives of enhancing eco-friendliness, saving resources andenergy, streamlining processes, andimproving performance.

In the area of automotive coatings aswell, we have developed the nextgeneration of coatings that targethigher performance and even greaterreductions in VOC than our existingwater-based coating products andhigh solid coating products.In the area of industrial coatings, wehave reached the stage of practicalapplication for coatings that utilize“Green polymer coating” developedwith the goal of reducing CO2

emissions. In the area of decorativecoatings, we have developed a newwater-based multicolor coating, andare applying this to commercialproducts.

During the term under review, KansaiPaint’s expenditures on research anddevelopment in the paint businessamounted to ¥4,881 million (approx.US$41 million).

2. Other BusinessIn the area of electronics and com-munications and in environmentaland biotechnological related-areas,we have been promoting the devel-opment of new technologies andnew products. In the area of elec-tronics and communications, we havebeen working in the development ofphoto-resist materials that arecompatible with various types ofdirect laser plotting methods, and ourresearch has advanced to the point atwhich we can form high definitionpatterns in photo-resist material that

is compatible with 405 nm wave-length lasers. We have found that thisprocess is well suited to the formationof electrodes on flat display panels.We have also been promoting thedevelopment of resist ink materialsfor high definition screen-printing,and have been able to form patternsof 30 µm and smaller on reel-to-reelsystems with polyimide flexible circuitboards.

In environmental and biotechnologi-cal related-areas, we have beenworking in collaboration with Insti-tute of Microchemical Technology Co.Ltd. to establish basic technologiesfor a visible immunity analysis micro-chip with high reaction efficiency, andare continuing in our studies that aimto further increase sensitivity and toexpand the scope of applications forthis technology.

For the carriers applied to high-concentration BOD waste-waterprocessing, which were developedduring the year in review, we havediscovered that the carriers areeffective in greatly reducing wastesludge.

During the term under review, KansaiPaint’s expenditures on research anddevelopment in other businessamounted to ¥390 million (approx.US$3 million).





In addition to taking an affirmative,proactive stance toward environmen-tal conservation, Kansai Paint and itsGroup companies are fully aware oftheir social responsibilities, andeagerly make contributions to societyand their host communities. Theinformation below is covered morefully in our “Environmental & SocialReport 2007”, which you are wel-come to read. This report is alsoavailable from our corporate web site.

Environmental Conserva-tion EffortsBasic Corporate PolicyWorking to preserve the globalenvironment while ensuring product-related safety and health, Kansai Paintand its Group companies haveadopted the following basic policies

for the purpose of retaining theconfidence of society.

1. To supply products after fullconsideration of their potentialimpact on people and the environ-ment.

2. To undertake proactive counter-measures to cope with the poten-tial effects of products on peopleand the environment.

3. To cooperate with external organi-zations to raise awareness con-cerning the environment, safety,and health.

4. To disclose and provide informa-tion related to the environment,safety, and health.

The status of each of these activitiesfor the year in review is describedbelow.

1. Environmental AccountingWe introduced environmental ac-counting in 1999 in an effort toreconcile the expenses and benefits ofsafeguarding the environment withour business activities. During theterm under review, our fundamentalprotection-related costs included¥599 million for investments in plantsand equipment, and ¥4,469 million

for overhead expenses, totaling¥5,068 million (an increase of 7.7%from the previous year). The eco-nomic effects brought about by ourenvironment protection measurestotaled ¥49 million.

2. Acquisition and Mainte-nance of ISO14001 Certifica-tion

During the term under review, eightof our major facilities earned re-newed ISO14001:2004 certification.We are also further committed toearning the certification for ouraffiliates which are not yet certified,both in Japan and abroad. During thisterm, one overseas affiliate acquiredcertification. As a result, a total of 14affiliates (six in Japan, and eightcertifications at seven companiesoverseas) now have certification.Additionally, four overseas affiliatesare currently working to acquirecertification. Working steadily toacquire certification for those affili-ates in Japan and overseas whichhave yet to be certified, Kansai Paintand its Group members are strength-ening the Group’s environmentalmanagement system through ongo-ing activities to maintain the stan-dards set by ISO14001.

3. Safe Management of Chemi-cals

In addition to observing the lawsrelated to chemical substancesalready in place, we have alreadyimposed voluntary limits in the formof official internal rules on the use ofchemicals that are not yet regulatedby laws. We are striving to see to itthat these rules are observed, startingwith the research and developmentstage, to ensure the protection of theenvironment as well as health andsafety.

4. The ALES ECO PLAN 20074-1. Reducing Harmful Substances

in Our ProductsWe have set reduction targets forcertain hazardous substances such asPb compounds, Cr compounds,toluene, xylene, and other volatileorganic compounds.

For the year in review, although wehave realized reductions in thesesubstances, we have been unable toachieve our targets due to increasesin production volume. Still, we shallcontinue to make effort in this areaso that we can achieve our targetsduring fiscal 2007, the final year ofthis plan.

4-2. Reducing Stress on the Envi-ronment Incurred duringProduction

We have set reduction targets for CO2

and other waste emissions, and areworking towards those targets. Weachieved “zero emission status” (i.e. arecycling rate of 99.0% or more) forall of our facilities in March 2005, andhave maintained that standardcontinuously, keeping our zeroemission status for the year underreview as well. With the increase inproduction volume for the year underreview, the volume of waste also roseslightly (totaling 30,770 tons, anincrease of 2% from the previousyear). CO2 emissions, however, werereduced to 33.8 kg t-CO2, a reductionof approximately 1% from theprevious year. Kansai Paint shallcontinue in its endeavors to reduceproduction-induced stress on theenvironment.

4-3. Safety and SanitationBased on our strong philosophy ofnot allowing even one safety failure,we continuously strive for zeroaccidents. For the year under review,we had fewer work-related injuriesthan in the previous year, but unfortu-nately we had one very unexpecteddeath due to an employee falling in aconference room. Through trainingprograms that instill workers with thecapabilities of anticipating andpreventing accidents in their dailywork, Kansai Paint strives to promotethe assurance of safety and sanita-tion, including efforts to increase thecapacity of our workers to sense andbe aware of potential risks.

Social ContributionsKansai Paint and its Group companiesare thoroughly aware of their corpo-rate social responsibilities, and areeager to make contributions tobenefit society.

During the term under review, weconducted the following support,assistance, and communicationactivities as part of our effort to makesocial contributions.

Since 1999, The Kansai Paint Scholar-ship program was established toassist Asian foreign-exchange stu-dents. This year marked the eighthyear of the program, which hasassisted a total of 38 students todate.

In other areas, many of our employ-ees took part in volunteer activitiessuch as wall painting projects tobeautify cityscapes throughout theregion. As a member of the regionalenvironmental protection group, ourcompany cooperated in variousenvironmental improvement activitiesas well. We also conducted tours ofour plants and development centers.

Encouraged by the successes thus far,we shall continue to move forwardon this path of social responsibility.

Environmental Conservation andSocial Contributions

©MOTOPIA in SUZUKA CIRCUIT



Board of Directors

(as of June 28, 2007)

President

Shoju Kobayashi

Executive Vice President

Toshinobu Otani

Senior Managing Directors

Kazuhiro Fujita

Shinichi HamamatsuKoichi ImadaYuzo Kawamori

Managing Directors

Osamu Isozaki

Kouji Yamamoto

Directors

Hiroshi MiuraShigeru NakamuraMitsuhiro Fukuda

Hiroshi IshinoYasuo YoshizawaMasanobu Ota

Full-time Corporate Auditors

Teruhiko SasaiAkifumi Fujita

Corporate Auditors

Mineo ImamuraYoko Miyazaki

Shoju KobayashiPresident

Toshinobu OtaniExecutive Vice President

Five-year Summary of Selected Financial DataYears ended March 31, 2007, 2006, 2005, 2004, and 2003

Consolidated BasisThousands of

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

2007 2006 2005 2004 2003 2007For the year:Net sales ........................................ ¥ 231,214 ¥ 210,965 ¥ 196,786 ¥ 185,777 ¥ 180,133 $ 1,958,611Operating income .......................... 22,090 18,903 17,528 12,408 11,930 187,124Income before income taxes .......... 24,287 22,284 17,249 15,239 8,671 205,735Net income .................................... 13,267 12,049 10,196 9,051 4,761 112,385

At year-end:Total assets ..................................... ¥ 299,299 ¥ 266,887 ¥ 219,739 ¥ 208,733 ¥ 189,879 $ 2,535,358Total net assets .............................. 164,131 152,176 125,967 116,599 101,459 1,390,352

Per share amounts(in yen and U.S. dollars):Net income .................................... ¥ 48.98 ¥ 44.04 ¥ 37.24 ¥ 33.07 ¥ 17.13 $ 0.41

For convenience only U.S. dollar amounts in this report have been translated from Japanese yen at the rate of ¥118.05 to US$1, the exchange rate at March 31, 2007.Net income per share is computed based on the weighted average number of shares outstanding during the respective years.From the year ended March 31, 2003, the portion of net income unavailable to common shareholders, such as directors’ bonuses, which is included in the appropria-tion of retained earnings, is deducted from net income for the calculation of net income per share.


OverviewFor the year in review, although fluctuating crude oil price and adeceleration of the US economy have affected the economies ofcountries around the world, the global economy as a whole hasbecome stronger. In the Japanese economy as well, we haveseen material prices rising due to sharp increase in the cost ofcrude oil as well as sluggish growth in consumers’ spending, butthere have also been increases in capital investments backed byhigh levels of corporate revenue, and an increase in export toregions where economic growth is continuing, and these haveresulted in a moderate growth of business activity.

In this transitional economic environment, our corporateGroup continued to fulfill the corporate social responsibilities,while making maximum utilization of our business resources to“Strengthen Group Business,” “Promote Total Cost Reduction,”and “Reinforce Global Strategies” in order to realize greaterbusiness achievements.

As a result of these efforts, consolidated net sales postedterm-on-term growth of 9.6%, consolidated operating incomesurged 16.9%, and consolidated net income rose 10.1%.

Status of Sales● Paints and Coatings BusinessNet sales for our paints and coatings business as a whole totaled¥224,675 million, an increase of ¥19,943 million (9.7%) overthe previous term.

• Automotive CoatingsIn the area of automotive OEM coatings, the number of four-wheeled vehicles manufactured in Japan increased over theprevious term thanks to an increase in export. In addition todeveloping the market for coating materials that offer excel-lently designed performance and high functionality, and whichrealize superb coating quality, we have also worked to expandthe sales of our Waterborne 3-Wet Metallic Coating System thatgreatly reduces both the emission of volatile organic compounds(VOC), which contributes to atmospheric pollution, and theemission of carbon dioxide (CO2), a greenhouse gas. Overseas,the local production of automobiles by Japanese manufacturerscontinues to increase, and our company has been putting majorefforts into developing our business in these areas. As a result,we have seen a favorable transition in sales by our subsidiaries incountries such as India, Thailand, and China. Also, in order torespond to increasing demand, we constructed new plants formanufacturing water-based coating materials in Thailand andChina, finally have scaled-up our production system. Due tothese efforts, our company has been able to increase its netsales of automotive OEM coatings compared with the previousterm.

In the area of automotive refinishes, while there has been adecline in demand throughout the market in Japan, our com-pany has been able to acquire new customers by featuring ourmain eco-friendly coating products. While we have been puttingconsiderable efforts into converting existing customers to theuse of these products, we have also been working to developproducts such as a polyurethane topcoat clear that can reduceVOC emission. We have also formed a partnership with PPGJapan, and have entered into an exclusive contract with thatcompany for the sales of its products in Japan. These effortshave resulted in increased net sales in this area over the previousterm.

Consequestly, net sales for automotive coatings surpassedthe level of the previous term.

• Industrial CoatingsIn Japan, the sluggishness of production for coated metal cansfor beverages resulted in a decline in net sales for can coatingmaterial. However, there was growth in the production ofconstruction machinery supported by favorable exports, whichresulted in increased net sales of industrial machinery coatings.Our company was also able to consistently introduce productsaiming at the concepts of “Environment Protection,” “ResourceSavings,” and “Energy Savings.” These include baking typewaterborne coatings and air-drying type waterborne polyure-thane coatings, both of which also reduce VOC emission, one-component vegetable resin coatings that contribute to areduction in emission of gasses such as CO2, and electrodeposi-tion coatings that reduce running cost. Overseas, demands havegrown in Asia, where brisk business continues, and our subsid-iaries enjoyed favorable sales.

Thus, net sales for industrial coatings surpassed the level ofthe previous term.

• Decorative CoatingsIn Japan, market conditions have leveled off, and there has beena downward tendency in the unit prices for constructioncontract. Despite these conditions, we have been working toexpand sales by introducing products with highly added value,such as exterior coatings that provide waterproof and stainresistance, interior coatings providing eco-friendly functions, andheat barrier coatings for concrete and asphalt that are aneffective countermeasure to the heat island phenomenon. Wehave also negotiated with our clients and their contractorsthrough the utilization of the collective strengths of the Group.Overseas, our subsidiaries in India enjoyed favorable sales. InMalaysia, Kansai Coatings Malaysia has joined consolidatedsubsidiaries of the Group.

As a result, net sales for decorative coatings surpassed thelevel of the previous term.

• Marine and Protective CoatingsIn the area of marine coatings, the shipbuilding industry in Japanis operating at a high level thanks to secure orders for shipbuild-ing over the next several years, and our company is puttingmajor efforts into expanding the sales of highly-value-addedcoatings. In the area of protective coatings, while there has beena decline in the demand for new bridge construction, recoveryof the customers’ business situation has helped us to enjoyorders for their new plants.

Another factor that has contributed to our achievements inthis area is the adoption of our process-saving products in amajor construction project by an electric power company thatwe have been negotiating with through years.

As a result, net sales for the marine and protective coatingssurpassed those of the previous term.

● Other BusinessNet sales for other business as a whole totaled ¥6,538 million,an increase of ¥306 million (4.9%) over the previous term.

In the area of telecommunications and electronics, althoughsales quantities for photoresist materials increased, net sales didnot reach the same level as in the previous term due to factorssuch as retail prices falling. In environmental and biotechnologyareas, net sales decreased due to factors such as stagnation inthe sales of carriers for the advanced sewage treatment ofwastewater. In the area of films, however, increases in automo-bile production in Japan as well as those in overseas demandhave pushed up the sales of protective films.

Cost of Sales, SG & A, and Operating IncomeThe cost of sales amounted to ¥160,757 million, an increase of¥14,634 million (10%) over the previous term. Although salesincreased, the increase in the cost of sales was greater than thatin sales themselves. Consequently, the ratio of gross profit tosales was 30.5%, down from 30.7% in the previous term.Selling, general and administrative expenses amounted to¥48,367 million, an increase of ¥2,428 million (5.3%) over theprevious term. As a result, operating income rose to ¥22,090million, an increase of ¥3,187 million (16.9%) from the previousterm. The ratio of operating income to sales also rose to 9.6%,up from 9.0% in the previous term.

Non-operating Income and ExpensesWith respect to non-operating income and expenses, theCompany reported a non-operating income (net total of profitand expenses) of ¥2,197 million, down from ¥3,381 million inthe previous term. These results were due to a decrease in equityin earning of affiliated companies because of the consolidationof the companies that had been treated under the equitymethod in the previous term, while there was an improvementin net financial income thanks to an increase in dividendsreceived.

Net IncomeNet income amounted to ¥13,267 million, up ¥1,218 million(10.1%) over the previous term. Return on sales (ROS) heldsteady at 5.7%. There was also a favorable increase in earningsper share (EPS), rising to ¥48.98 from ¥44.04 in the previousterm.

DividendsThe Company’s basic policy is to share profits according tobusiness results, striving to make stable and continuous distribu-tions of dividends to shareholders while enhancing theCompany’s profitability by firming its business constitution.

With respect to internal reserves, our policy is to use thereserves effectively for investment in R&D, as well as in ourproduction and sales systems, both in Japan and overseas, withthe objective of establishing stable, long-term business founda-tions while striving to achieve further growth.

The Company is maintaining its policy that calls for dividendsto be paid biannually, on the basis of each last day of the interimterm and the full fiscal term for payment.

For the term under review, the annual dividends were set at¥11 per share, an increase of ¥1 from the previous term.

Financial PositionCurrent assets increased to ¥150,146 million, up ¥19,104million (14 .6%) from the level at the end of the previous term.This growth was largely attributed to increases in trade notesand accounts receivable in keeping with rising net sales,increases in cash and cash equivalents resulting from the factthat the last day of the term under review was a businessholiday for financial institutions, and increases in inventories.

Tangible fixed assets, intangible fixed assets, investmentsand other assets amounted to ¥149,153 million, an increase of¥13,308 million (9.8%) over the level at the end of the previousterm. The main factor involved herein was increases in tangible

fixed assets resulting from the construction of new factories,etc., in the Asian region.

Current liabilities amounted to ¥90,011 million, a largeincrease of ¥21,035 million (30.5%) over the level at the endof the previous term. The main factors involved herein wereincreases in trade notes and accounts payable resulting fromincreases in purchases and the effects of a business holiday forfinancial institutions, and increases in long-term debts payablewithin one year. Fixed liabilities amounted to ¥30,685 million,a decrease of ¥3,649 million (10.6%) from the level at the endof the previous term. The main factor herein was a decrease inlong-term debts due to maturity within one year.

Total shareholders’ equity (net of minority interests)amounted to ¥164,131 million, an increase of ¥11,955 million(7.9%) over the level at the end of the previous term. Theshareholders’ equity ratio fell from 57.0% in the previous termto 54.8%. The return on equity (ROE) also decreased from8.7% in the previous term to 8.4%, and the return on assets(ROA) decreased from 5.0% to 4.7%.

Cash FlowsCash generated by operating activities was ¥17,586 million,while net cash consumed by investment activities and byfinancing activities was ¥11,426 million and ¥3,820 million,respectively. As a result, cash and cash equivalents at term-endstood at ¥40,096 million, an increase of ¥3,827 million(10.6%) from the level at the end of the previous term.

OutlookWhile concern remains about the outlook for the economydue to the current trends in the prices of crude oil and rawmaterials, fluctuating exchange rates, the effects of interestrate variation, etc. on economies as a whole in Japan andabroad, and the effects of economic deceleration in the UnitedStates, we should still be able to expect to see a moderateexpansion of the economy.

Aware of this situation, Kansai Paint and its Groupcompanies have entered into the final year of our three-yearmid-term management plan launched in fiscal year 2005,which prioritizes our key policies of “Reinforce CompetitiveStrength,” “Strengthen Group Business,” “Promote Globaliza-tion,” and “Carry out the Company’s Social Responsibilities.”Making maximum use of the business resources of our Groupcompanies, we shall continue working to expand andstrengthen our business foundations by promoting thedevelopment of business projects that emphasize profitabilitywhile also encouraging business reforms.

Although the effects of fluctuations in the price of crudeoil are expected to continue, we can also expect to seecontinuous growth in demand in the Asian region, resulting inincreased revenue and profit, and in Japan, efforts will becontinued to reduce costs. Therefore, for the next term, weforecast consolidated net sales of ¥260,000 million, anincrease of 12.5% from the term under review, and a consoli-dated net income of ¥15,500 million, an increase of 16.8%.

Financial Review


Consolidated Balance SheetsKansai Paint Co., Ltd. and Consolidated SubsidiariesMarch 31, 2007 and 2006

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

Assets 2007 2006 2007

Current assets:Cash and cash equivalents ...................................................................................... ¥ 40,096 ¥ 36,269 $ 339,653Marketable securities (Note 4) ................................................................................ 800 807 6,777Receivables: Trade notes and accounts (Note 12): Unconsolidated subsidiaries and affiliates ....................................................... 14,886 16,550 126,099 Other (Note 6) ................................................................................................ 65,626 50,503 555,917 Loans .................................................................................................................. 999 1,410 8,462 Other .................................................................................................................. 997 1,198 8,446 Allowance for doubtful receivables .................................................................... (709) (1,106) (6,006)

81,799 68,555 692,918

Inventories (Note 6): Finished goods .................................................................................................... 12,166 10,187 103,058 Work in process .................................................................................................. 3,910 3,271 33,122 Raw materials and supplies ................................................................................. 6,119 6,294 51,834

22,195 19,752 188,014

Deferred income tax assets (Note 11) .................................................................... 3,265 3,260 27,657Other current assets (Note 6) ................................................................................. 1,991 2,399 16,866 Total current assets ................................................................................ 150,146 131,042 1,271,885

Property, plant and equipment (Note 6):Land ........................................................................................................................ 12,169 9,969 103,083Buildings, machinery and equipment ...................................................................... 154,435 140,916 1,308,217Construction in progress ......................................................................................... 1,401 1,156 11,868

168,005 152,041 1,423,168Accumulated depreciation ...................................................................................... (113,173) (106,058) (958,687)

54,832 45,983 464,481

Investments and other assets:Investments in and loans to unconsolidated subsidiaries and affiliates .................... 14,100 13,914 119,441Investment securities (Notes 4 and 6) ...................................................................... 73,732 71,661 624,583Loans receivable ...................................................................................................... 114 113 966Prepaid pension costs (Note 10) ............................................................................. 1,192 394 10,097Deferred income tax assets (Note 11) .................................................................... 1,151 1,085 9,750Other ...................................................................................................................... 2,752 2,246 23,312Allowance for doubtful receivables ......................................................................... (351) (504) (2,973)

92,690 88,909 785,176Intangible assets ................................................................................................. 1,631 953 13,816

¥ 299,299 ¥ 266,887 $ 2,535,358

See accompanying notes.


Liabilities and Net Assets 2007 2006 2007

Current liabilities:Short-term borrowings (Note 5) ............................................................................. ¥ 2,043 ¥ 2,140 $ 17,306Long-term debt due within one year (Note 5) ......................................................... 7,691 38 65,150Payables: Trade notes and accounts (Note 12): Unconsolidated subsidiaries and affiliates ....................................................... 2,054 1,965 17,400 Other .............................................................................................................. 58,201 46,604 493,020 Other .................................................................................................................. 4,918 3,226 41,660

65,173 51,795 552,080

Income and enterprise taxes payable ...................................................................... 3,959 5,542 33,537Accrued expenses ................................................................................................... 7,637 7,232 64,693Deferred income tax liabilities (Note 11) ................................................................ 18 18 152Other current liabilities (Note 12) ............................................................................ 3,490 2,211 29,564 Total current liabilities ............................................................................ 90,011 68,976 762,482

Long-term debt due after one year (Note 5) ...................................................... 1,579 7,028 13,376Employees’ severance and retirement benefits (Note 10) ................................. 7,338 7,706 62,160Retirement benefits for directors and corporate auditors ............................. 599 389 5,074Deferred income tax liabilities (Note 11) ............................................................ 18,387 16,398 155,756Negative goodwill .............................................................................................. 168 61 1,423Other long-term liabilities ................................................................................. 2,614 2,752 22,143Contingent liabilities (Note 7)

Net Assets (Note 9):Shareholders’ equity:Common stock: Authorized — 793,496,000 shares in 2007 and 2006 Issued — 272,623,270 shares in 2007 and 2006 ............................................... 25,659 25,659 217,357Capital surplus ....................................................................................................... 27,164 27,157 230,106Retained earnings ................................................................................................... 80,795 70,664 684,413Treasury stock, at cost: 1,821,617 shares in 2007 1,745,147 shares in 2006 ................................................................................... (799) (656) (6,768) Total shareholders’ equity .................................................................... 132,819 122,824 1,125,108

Valuation and translation adjustments:Net unrealized holding gains on securities .............................................................. 31,187 30,643 264,185Foreign currency translation adjustments ................................................................ 125 (1,291) 1,059 Total valuation and translation adjustments ........................................ 31,312 29,352 265,244

Minority interests ................................................................................................ 14,472 11,401 122,592 Total net assets ...................................................................................... 178,603 163,577 1,512,944

¥ 299,299 ¥ 266,887 $ 2,535,358



Consolidated Statements of Changes in Net AssetsConsolidated Statements of Income


2007 2006 2007

Net sales ............................................................................................................... ¥ 231,214 ¥ 210,965 $ 1,958,611Cost of sales ......................................................................................................... 160,757 146,123 1,361,771Selling, general and administrative expenses .................................................. 48,367 45,939 409,716Operating income .............................................................................................. 22,090 18,903 187,124

Other income (expenses):Interest and dividend income ................................................................................. 1,115 961 9,445Interest expense ...................................................................................................... (226) (177) (1,914)Gain on sale of marketable and investment securities, net ..................................... 158 274 1,339Write-down of marketable and investment securities ............................................. – (13) –Write-down of inventories ...................................................................................... (210) (274) (1,779)Loss on disposal of inventories ................................................................................ (380) (417) (3,219)Loss on sale or disposal of property, plant and equipment, net .............................. (252) (143) (2,135)Equity in earnings of affiliates ................................................................................. 1,452 1,467 12,300Impairment loss ...................................................................................................... – (51) –Other, net ............................................................................................................... 540 1,754 4,574

2,197 3,381 18,611Income before income taxes ............................................................................. 24,287 22,284 205,735

Income taxes (Note 11):Current ................................................................................................................... 7,617 8,438 64,524Deferred .................................................................................................................. 1,111 (257) 9,411Income before minority interests ....................................................................... 15,559 14,103 131,800

Minority interests in net income of consolidated subsidiaries ........................ (2,292) (2,054) (19,415)Net income ........................................................................................................... ¥ 13,267 ¥ 12,049 $ 112,385

Yen U.S. dollars(Note 1)

2007 2006 2007Net income per share .......................................................................................... ¥ 48.98 ¥ 44.04 $ 0.41Cash dividends per share .................................................................................... ¥ 11.00 ¥ 10.00 $ 0.09


Millions of yen

Shareholders’ equity Valuation and translation adjustments

Total Net Foreign Total Common Capital Retained Treasury shareholders’ Revaluation unrealized currency valuation and Minority Total net

stock surplus earnings stock equity surplus holding gains translation translation interests assetson securities adjustments adjustments

Balance at March 31, 2005 .................. ¥25,659 ¥27,157 ¥61,018 ¥(537) ¥113,297 ¥342 ¥15,563 ¥(3,235) ¥12,670 ¥ 9,209 ¥135,176Cash dividends paid — ¥8.50 per share ................................... (2,312) (2,312) (2,312)Bonuses to directors ................................ (102) (102) (102)Contribution under government rules to welfare fund for employees of overseas subsidiaries ....................... (5) (5) (5)Net income .............................................. 12,049 12,049 12,049Treasury stock .......................................... 0 (119) (119) (119)Effect of merger on and changes in equity method companies ................... 16 16 16Net changes of items other than shareholders’ equity ............................ (342) 15,080 1,944 16,682 2,192 18,874

Balance at March 31, 2006 .................. ¥25,659 ¥27,157 ¥70,664 ¥(656) ¥122,824 – ¥30,643 ¥(1,291) ¥29,352 ¥11,401 ¥163,577Cash dividends paid — ¥11.00 per share ................................. (2,991) (2,991) (2,991)Bonuses to directors ................................ (114) (114) (114)Contribution under government rules to welfare fund for employees of overseas subsidiaries ....................... (3) (3) (3)Net income .............................................. 13,267 13,267 13,267Purchase of treasury stock ....................... (175) (175) (175)Disposal of treasury stock ........................ 7 10 17 17Decrease in retained earnings due to exclusion of equity method companies ........................................... (28) (28) (28)Decrease in treasury stock due to exclusion of equity method companies ........................................... 22 22 22Net changes of items other than shareholders’ equity ............................ 544 1,416 1,960 3,071 5,031

Balance at March 31, 2007 .................. ¥25,659 ¥27,164 ¥80,795 ¥(799) ¥132,819 – ¥31,187 ¥ 125 ¥31,312 ¥14,472 ¥178,603

Thousands of U.S. dollars (Note 1)

Shareholders’ equity Valuation and translation adjustments

Total Net Foreign TotalCommon Capital Retained Treasury shareholders’ Revaluation unrealized currency valuation and Minority Total net

stock surplus earnings stock equity surplus holding gains translation translation interests assetson securities adjustments adjustments

Balance at March 31, 2006 ................. $217,357 $230,047 $598,593 $(5,557) $1,040,440 – $259,577 $(10,936) $248,641 $96,578 $1,385,659Cash dividends paid — ¥11.00 per share ................................ (25,337) (25,337) (25,337)Bonuses to directors ............................... (966) (966) (966)Contribution under government rules to welfare fund for employees of overseas subsidiaries ...................... (25) (25) (25)Net income ............................................. 112,385 112,385 112,385Purchase of treasury stock ...................... (1,482) (1,482) (1,482)Disposal of treasury stock ....................... 59 85 144 144Decrease in retained earnings due to exclusion of equity method companies .......................................... (237) (237) (237)Decrease in treasury stock due to exclusion of equity method companies .......................................... 186 186 186Net changes of items other than shareholders’ equity ........................... 4,608 11,995 16,603 26,014 42,617

Balance at March 31, 2007 ................. $217,357 $230,106 $684,413 $(6,768) $1,125,108 – $264,185 $1,059 $265,244 $122,592 $1,512,944


Kansai Paint Co., Ltd. and Consolidated SubsidiariesYears ended March 31, 2007 and 2006

Kansai Paint Co., Ltd. and Consolidated SubsidiariesYears ended March 31, 2007 and 2006


The accompanying consolidated financial statements ofKansai Paint Co., Ltd. (the “Company”) and its consolidatedsubsidiaries (together the “Companies”) have been preparedin accordance with the provisions set forth in the JapaneseSecurities and Exchange Law and its related accountingregulations and in conformity with accounting principlesgenerally accepted in Japan (“Japanese GAAP”), which aredifferent in certain respects as to application and disclosurerequirements of International Financial Reporting Standards. The accounts of the Company’s overseas subsidiaries arebased on their accounting records maintained in conformitywith generally accepted accounting principles prevailing inthe respective countries of domicile. The accompanyingconsolidated financial statements have been restructured andtranslated into English, with some expanded descriptions andthe inclusion of the consolidated statement of changes in netassets for 2006, from the consolidated financial statements

of the Company prepared in accordance with JapaneseGAAP and filed with the appropriate Local Finance Bureauof the Ministry of Finance as required by the Securities andExchange Law. Some supplementary information included inthe statutory Japanese language consolidated financialstatements, but not required for fair presentation, is notpresented in the accompanying consolidated financialstatements. The translations of the Japanese yen amounts into U.S.dollars were included solely for the convenience of readersoutside Japan, using the prevailing exchange rate at March31, 2007, which was ¥118.05 to US$1.00. The translationsshould not be construed as representations that the Japa-nese yen amounts have been, could have been, or could inthe future be converted into U.S. dollars at this or any otherrate of exchange.

Principles of consolidationThe consolidated financial statements include the accountsof the Company and its 33 (32 in the fiscal year endedMarch 31, 2006) significant subsidiaries. Intercompanytransactions and accounts have been eliminated. Investments in 15 (14 in the fiscal year ended March 31,2006) unconsolidated subsidiaries and 38 (40 in the fiscalyear ended March 31, 2006) affiliates are stated at cost,adjusted for equity in undistributed earnings and losses sinceacquisition. The accounts of 13 (12 in the fiscal year ended March 31,2006) consolidated subsidiaries are included on the basis oftheir respective fiscal years, one of which ends on February28 and the others end on December 31. These subsidiariesdo not prepare for consolidation purposes statements whichcorrespond with the fiscal year of the Company, which endsMarch 31. For these consolidated subsidiaries, when thereare significant transactions between their respective fiscalyear ends and the Company’s, adjustments are made toreflect such transactions in the accompanying consolidatedfinancial statements. In the elimination of investments in subsidiaries, theassets and liabilities of the subsidiaries, including the portionattributable to minority shareholders, are evaluated using fairvalues at the time the Company acquired control of therespective subsidiary. The difference between the cost of investments insubsidiaries and the equity in their net assets at the date ofacquisition is amortized over five years in principle.

Cash and cash equivalentsIn preparing the consolidated statements, cash on hand,readily available deposits and short-term highly liquidinvestments with maturities not exceeding three months atthe time of purchase are considered to be cash and cashequivalents.

Allowance for doubtful receivablesWith respect to the domestic consolidated subsidiaries (the“Domestic Companies”), the allowance for doubtful receiv-ables is determined by adding individually estimated uncol-lectible amounts to an amount calculated using the provision

rate based on past experience. The allowance for doubtfulreceivables of overseas consolidated subsidiaries is deter-mined by estimates of management in amounts sufficient tocover possible losses on future collection.

SecuritiesThe Companies do not hold trading securities. Held-to-maturity debt securities are stated at amortized cost. Equitysecurities issued by subsidiaries and affiliated companieswhich are not consolidated or accounted for using the equitymethod are stated at moving average cost. Available-for-salesecurities with available fair market values are stated at fairmarket value. Unrealized gains and losses on these securitiesare reported, net of applicable income taxes, as a separatecomponent of net assets. Realized gains and losses on thesale of such securities are computed using moving averagecost. Securities with no available fair market value are mainlystated at moving average cost.

If the market value of equity securities issued by uncon-solidated subsidiaries or affiliated companies not on theequity method or the market value of available-for-salesecurities declines significantly, such securities are stated atfair market value, and the difference between fair marketvalue and the carrying amount is recognized as loss in theperiod of the decline.

If the fair market value of equity securities issued byunconsolidated subsidiaries or affiliated companies not on theequity method is not readily available, such securities shouldbe written down to net asset value with a correspondingcharge in the consolidated statements of income in the eventthe net asset value declines significantly. In these cases, thefair market value or the net asset value will be the carryingamount of the securities at the beginning of the next year.

InventoriesInventories of the Domestic Companies are primarily stated atmoving average cost. Inventories of overseas subsidiaries arestated principally at the lower of cost or market.

Property, plant and equipment and depreciationProperty, plant and equipment are carried at cost. Deprecia-tion is computed primarily using the declining balance

1. Basis of Presenting Consolidated Financial Statements

2. Summary of Significant Accounting Policies


2007 2006 2007

Cash flows from operating activities:Income before income taxes ................................................................................... ¥ 24,287 ¥ 22,284 $ 205,735Depreciation and amortization ................................................................................ 5,645 5,495 47,819Impairment loss ...................................................................................................... – 51 –Amortization of negative goodwill ......................................................................... (38) (27) (322)Provision for severance and retirement benefits ...................................................... (1,626) (741) (13,774)Decrease in allowance for doubtful receivables ....................................................... (706) (61) (5,980)Interest and dividend income ................................................................................. (1,115) (961) (9,445)Interest expense ...................................................................................................... 226 177 1,914Equity in earnings of affiliates ................................................................................. (1,452) (1,467) (12,300)Write-down of marketable and investment securities ............................................. – 13 –Loss on sale or disposal of property, plant and equipment, net .............................. 252 143 2,135Incerase in trade receivables ................................................................................... (10,032) (4,316) (84,981)Increase in inventories ............................................................................................. (1,128) (2,290) (9,555)Increase in trade payables ...................................................................................... 8,705 2,136 73,740Other ...................................................................................................................... 2,513 2,247 21,287

25,531 22,683 216,273Interest and dividends received ............................................................................... 1,928 1,924 16,332Interest paid ........................................................................................................... (226) (177) (1,914)Income taxes paid ................................................................................................... (9,647) (4,255) (81,720)Net cash provided by operating activities ................................................................ 17,586 20,175 148,971

Cash flows from investing activities:Purchase of marketable securities ........................................................................... (8,351) (2,888) (70,741)Proceeds from sales of marketable securities .......................................................... 6,345 2,895 53,749Purchase of property, plant and equipment ............................................................ (9,403) (7,168) (79,653)Proceeds from sales of property, plant and equipment ........................................... 226 238 1,915Purchase of intangible assets ................................................................................. (702) (319) (5,947)Purchase of investment securities ............................................................................ (5,424) (9,936) (45,947)Proceeds from sales of investment securities ........................................................... 4,924 6,874 41,711Loans receivable advanced ...................................................................................... (3,627) (2,752) (30,724)Collection on loans receivable ................................................................................. 4,127 2,885 34,960Other ...................................................................................................................... 459 (498) 3,888Net cash used in investing activities ........................................................................ (11,426) (10,669) (96,789)

Cash flows from financing activities:Proceeds from short-term debt ............................................................................... 4,997 6,261 42,330Payment of short-term debt .................................................................................... (5,488) (5,854) (46,489)Proceeds from long-term debt ................................................................................ 1,119 – 9,479Payment of long-term debt ..................................................................................... (454) (405) (3,846)Purchase of treasury stock ...................................................................................... (175) (136) (1,482)Disposal of treasury stock ...................................................................................... 16 1 136Cash dividends paid ................................................................................................ (2,991) (2,312) (25,337)Cash dividends paid to minority shareholders ......................................................... (844) (730) (7,150)Net cash used in financing activities ........................................................................ (3,820) (3,175) (32,359)

Effect of exchange rate changes on cash and cash equivalents ..................... 621 381 5,260Increase in cash and cash equivalents ............................................................... 2,961 6,712 25,083Cash and cash equivalents at beginning of year .............................................. 36,269 29,317 307,234Increase in cash and cash equivalents due to change in scope of consolidation .................................................................................... 836 213 7,082Increase in cash and cash equivalents due to merger of consolidated subsidiaries ................................................................................ 30 27 254Cash and cash equivalents at end of year ......................................................... ¥ 40,096 ¥ 36,269 $ 339,653


Consolidated Statements of Cash Flows Notes to Consolidated Financial StatementsKansai Paint Co., Ltd. and Consolidated SubsidiariesKansai Paint Co., Ltd. and Consolidated Subsidiaries

Years ended March 31, 2007 and 2006


Under the New Accounting Standards, the balance sheetcomprises three sections, which are the assets, liabilities andnet assets sections. Previously, the balance sheet comprisedthe assets, liabilities, minority interests, as applicable, andshareholders’ equity sections.

The net assets section comprises four subsections, whichare shareholders’ equity, valuation and translation adjust-ments, share subscription rights and minority interests.

The previously presented shareholders’ equity andcertain other balance sheet items for March 31, 2006 havebeen restated to conform to the March 31, 2007 presenta-tion. As a result, minority interests in consolidated subsidiar-ies amounting to ¥11,401 million are included in the netassets section as of March 31, 2006.

If the New Accounting Standards had not been adoptedand the previous presentation method for shareholders’equity had been applied, shareholders’ equity at March 31,2007 would have been ¥164,131 million ($1,390,352thousand).

Accounting standard for statement of changes innet assetsEffective from the year ended March 31, 2007, the Companyand its consolidated subsidiaries adopted the new account-ing standard, “Accounting Standard for Statement ofChanges in Net Assets” (Statement No. 6 issued by theAccounting Standards Board of Japan on December 27,2005) and the implementation guidance for the accountingstandard for statement of changes in net assets (the Finan-

cial Accounting Standard Implementation Guidance No. 9issued by the Accounting Standards Board of Japan onDecember 27, 2005), (collectively, the “Additional NewAccounting Standards”).

Accordingly, the Company prepared the statement ofchanges in net assets for the year ended March 31, 2007 inaccordance with the Additional New Accounting Standards.Also, the Company voluntarily prepared the consolidatedstatement of changes in net assets for the year ended March31, 2006 in accordance with the Additional New AccountingStandards. Previously, consolidated statements of sharehold-ers’ equity were prepared for the purpose of inclusion in theconsolidated financial statements although not requiredunder Japanese GAAP.

Reclassification and restatementCertain prior year amounts have been reclassified to conformto the current year presentation. As described above, theconsolidated balance sheet for March 31, 2006 has beenadapted to conform to new presentation rules for March 31,2007. In lieu of the consolidated statement of shareholders’equity for the year ended March 31, 2006, which wasprepared on a voluntary basis for inclusion in the consoli-dated financial statements for the year ended March 31,2006, the Company prepared the consolidated statement ofchanges in net assets for the year ended March 31, 2006 aswell as for the year ended March 31, 2007.

These reclassifications had no impact on previouslyreported results of operations or retained earnings.

3. Finance LeasesInformation regarding non-capitalized finance leases at March 31, 2007 and 2006 was as follows:

Millions of yen

2007 Machinery, equipment Tools and fixtures Totaland vehicles

Original lease obligations (including finance charges) ......................................... ¥ 873 ¥ 842 ¥ 1,715Payments remaining: Payments due within one year ........................................................................ ¥ 135 ¥ 139 ¥ 274 Payments due after one year .......................................................................... 216 219 435

¥ 351 ¥ 358 ¥ 709



Original lease obligations (including finance charges) ......................................... $ 7,395 $ 7,133 $14,528Payments remaining: Payments due within one year ........................................................................ $ 1,143 $ 1,178 $ 2,321 Payments due after one year .......................................................................... 1,830 1,855 3,685

$ 2,973 $ 3,033 $ 6,006

Millions of yen


Original lease obligations (including finance charges) ......................................... ¥ 852 ¥ 1,041 ¥ 1,893Payments remaining: Payments due within one year ........................................................................ ¥ 143 ¥ 176 ¥ 319 Payments due after one year .......................................................................... 219 315 534

¥ 362 ¥ 491 ¥ 853

Lease payments under non-capitalized finance leases for the years ended March 31, 2007 and 2006 were ¥353 million ($2,990thousand) and ¥364 million, respectively.

method for Domestic Companies and the straight-linemethod for overseas subsidiaries. For Domestic Companies,buildings acquired after March 31, 1998 are depreciatedusing the straight-line method. Depreciation of assets whoseacquisition costs are between ¥100 thousand and ¥200thousand is provided by the straight-line method over threeyears.

Software costsInternal use software in intangible assets is amortized usingthe straight-line method over the estimated useful life of fiveyears.

Research and development expensesResearch and development expenses are charged to incomeas incurred. Research and development expenses for theyears ended March 31, 2007 and 2006 were ¥5,271 million($44,651 thousand) and ¥5,275 million, respectively.

Income taxesIncome taxes comprise corporation tax, prefectural andmunicipal inhabitants’ taxes and enterprise tax. Enterprise taxis deductible from taxable income when paid.

The asset and liability approach is used to recognizedeferred tax assets and liabilities for the expected future taxconsequences of temporary differences between the carryingamounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes.

Finance leasesFinance leases which do not transfer ownership are ac-counted for in the same manner as operating leases underJapanese GAAP.

Retirement benefits(1) Employees’ severance and retirement benefits

Under the terms of the Domestic Companies’ retirementplans, substantially all employees are entitled to a lump-sum payment at the time of retirement. The amount ofthe retirement benefit is, in general, based on the lengthof service, basic salary at the time of retirement andcause of retirement. Liabilities and expenses for severance and retirementbenefits are determined based on the amounts actuariallycalculated using certain assumptions. The Domestic Companies provide for employees’severance and retirement benefits based on the esti-mated amounts of projected benefit obligation and thefair value of the plan assets. Actuarial gains and losses and prior service costs arerecognized in expenses using the straight-line methodmainly over 13 years which is within the average of theestimated remaining service years of the employees.

(2) Retirement benefits for directors and corporate auditorsRetirement benefits for directors and corporate auditorsof the Company and certain consolidated domesticsubsidiaries are provided on the accrual basis in accor-dance with the companies’ established rules.

Derivatives and hedge accountingThe Companies state derivative financial instruments at fairvalue and recognize changes in the fair value as gains orlosses, unless the derivative financial instruments are used forhedging purposes.

If derivative financial instruments are used as hedges andmeet certain hedging criteria, the Domestic Companies deferrecognition of gains or losses resulting from changes in fairvalue of the derivative financial instruments until the relatedlosses or gains on the hedged items are recognized.

However, in cases where forward foreign exchangecontracts are used as hedges and meet certain hedgingcriteria, forward foreign exchange contracts and hedgeditems are accounted for in the following manner:

(1) If a forward foreign exchange contract is executed tohedge an existing foreign currency receivable or payable,(a) the difference, if any, between the Japanese yen

amount of the hedged foreign currency receivable orpayable translated using the spot rate at the inceptiondate of the contract and the book value of thereceivable or payable is recognized in the incomestatement in the period which includes the inceptiondate, and

(b) the discount or premium on the contract (the differ-ence between the Japanese yen amount of thecontract translated using the contracted forward rateand that translated using the spot rate at the incep-tion date of the contract) is recognized over the termof the contract.

(2) If a forward foreign exchange contract is executed tohedge a future transaction denominated in a foreigncurrency, the future transaction will be recorded using thecontracted forward rate, and no gains or losses on theforward foreign exchange contract will be recognized.

Also, if interest rate swap contracts are used as hedgesand meet certain hedging criteria, the net amount to be paidor received under the interest rate swap contract is added toor deducted from the interest on the assets or liabilities forwhich the swap contract was executed.

Net income and dividends per shareThe computation of net income per share is based on theweighted average number of shares outstanding during theperiod. Diluted net income per share of common stock forthe years ended March 31, 2007 and 2006 is not shownsince there were no outstanding convertible bonds or othercommon stock equivalents.

In accordance with the Japanese Corporate Law, thedeclaration of dividends and appropriations of retainedearnings are approved at the general meeting of sharehold-ers held after the end of the fiscal year. Therefore, cashdividends per share shown in the consolidated statements ofincome reflect interim dividends and the final dividendsapproved after the end of the relevant fiscal year.

Accounting standard for presentation of netassets in the balance sheetEffective from the year ended March 31, 2007, the Companyand its consolidated subsidiaries adopted the new accountingstandard, “Accounting Standard for Presentation of NetAssets in the Balance Sheet” (Statement No. 5 issued by theAccounting Standards Board of Japan on December 9, 2005)and the implementation guidance for the accountingstandard for presentation of net assets in the balance sheet(the Financial Accounting Standard Implementation GuidanceNo. 8 issued by the Accounting Standards Board of Japan onDecember 9, 2005), (collectively, the “New AccountsStandards”).


4. Securities(1) Information on securities of the Companies at March 31, 2007 was as follows:(a) The following table summarizes acquisition costs, book values and fair values of held-to-maturity and available-for-sale

securities with available fair values as of March 31, 2007:

Held-to-maturity Millions of yen

Securities with fair values exceeding book values: Book value Fair value Difference

Other .............................................................................................................. ¥ 400 ¥ 400 ¥ 0 Total ................................................................................................................ ¥ 400 ¥ 400 ¥ 0

Securities with fair values not exceeding book values:

Bonds ............................................................................................................. ¥ 300 ¥ 300 ¥ (0) Other .............................................................................................................. 100 100 (0) Total ................................................................................................................ ¥ 400 ¥ 400 ¥ (0)

Available-for-sale Millions of yen

Securities with book values exceeding acquisition costs: Acquisition cost Book value Difference

Equity securities .............................................................................................. ¥ 15,050 ¥ 65,461 ¥ 50,411 Total ................................................................................................................ ¥ 15,050 ¥ 65,461 ¥ 50,411Securities with book values not exceeding acquisition costs: Equity securities .............................................................................................. ¥ 474 ¥ 381 ¥ (93) Bonds ............................................................................................................. 3,000 2,993 (7) Investment funds ............................................................................................ 193 188 (5) Total ................................................................................................................ ¥ 3,667 ¥ 3,562 ¥ (105)

Held-to-maturity Thousands of U.S. dollars (Note 1)


Other .............................................................................................................. $ 3,388 $ 3,388 $ 0 Total ................................................................................................................ $ 3,388 $ 3,388 $ 0Securities with fair values not exceeding book values: Bonds ............................................................................................................. $ 2,541 $ 2,541 $ (0) Other .............................................................................................................. 847 847 (0) Total ................................................................................................................ $ 3,388 $ 3,388 $ (0)Available-for-sale Thousands of U.S. dollars (Note 1)


Equity securities .............................................................................................. $ 127,488 $ 554,519 $ 427,031 Total ................................................................................................................ $ 127,488 $ 554,519 $ 427,031Securities with book values not exceeding acquisition costs: Equity securities .............................................................................................. $ 4,015 $ 3,227 $ (788) Bonds ............................................................................................................. 25,413 25,354 (59) Investment funds ............................................................................................ 1,635 1,593 (42) Total ................................................................................................................ $ 31,063 $ 30,174 $ (889)

(b) The following table summarizes book values of available-for-sale securities with no available fair values as ofMarch 31, 2007:

Available-for-sale securities Thousands ofMillions of yen U.S. dollars

(Note 1)

Non-listed equity securities ....................................................................................................... ¥ 1,248 $ 10,572Investment funds ...................................................................................................................... 3,324 28,157Other ........................................................................................................................................ 136 1,152Total .......................................................................................................................................... ¥ 4,708 $ 39,881

(c) Total sales of available-for-sale securities in the year ended March 31, 2007 amounted to ¥11,269 million ($95,460thousand) and the related gains amounted to ¥158 million ($1,338 thousand).

(d) The following table summarizes carrying values of bonds and other securities by contractual maturities classified asavailable-for-sale and held-to-maturity as of March 31, 2007:

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

Within 1 year Within 1-5 years Within 1 year Within 1-5 years

Bonds ........................................................................................... ¥ 300 ¥ 3,000 $ 2,541 $ 25,413Other ........................................................................................... 500 – 4,236 –Total ............................................................................................. ¥ 800 ¥ 3,000 $ 6,777 $ 25,413

(2) Information on securities of the Companies at March 31, 2006 was as follows:(a) The following table summarizes acquisition costs, book values and fair values of held-to-maturity and available-for-sale

securities with available fair values as of March 31, 2006:

Held-to-maturity Millions of yen


Bonds ............................................................................................................. ¥ 808 ¥ 806 ¥ (2) Other .............................................................................................................. 201 201 (0) Total ................................................................................................................ ¥ 1,009 ¥ 1,007 ¥ (2)Available-for-sale Millions of yen


Equity securities .............................................................................................. ¥ 14,022 ¥ 63,148 ¥ 49,126 Bonds ............................................................................................................. 190 192 2 Total ................................................................................................................ ¥ 14,212 ¥ 63,340 ¥ 49,128Securities with book values not exceeding acquisition costs:

Equity securities .............................................................................................. ¥ 134 ¥ 108 ¥ (26) Investment funds ............................................................................................ 2,999 2,985 (14) Total ................................................................................................................ ¥ 3,133 ¥ 3,093 ¥ (40)

(b) The following table summarizes book values of available-for-sale securities with no available fair values as of March 31, 2006:

Available-for-sale securities Millions of yen

Non-listed equity securities .................................................................................................................................... ¥ 1,046 Investment funds ................................................................................................................................................... 3,791 Other ..................................................................................................................................................................... 187 Total ....................................................................................................................................................................... ¥ 5,024

(c) Total sales of available-for-sale securities in the year ended March 31, 2006 amounted to ¥9,769 million and the related gainsamounted to ¥274 million.

(d) The following table summarizes carrying values of bonds and other securities by contractual maturities classified asavailable-for-sale and held-to-maturity as of March 31, 2006:

Millions of yen Within 1 year Within 1-5 years

Bonds ................................................................................................................................... ¥ 700 ¥ 3,100 Other .................................................................................................................................... 100 100 Total ...................................................................................................................................... ¥ 800 ¥ 3,200

5. Short-Term Borrowings and Long-Term DebtShort-term borrowings are principally represented by bank loans with interest rates ranging from 0.58% to 12.00% atMarch 31, 2007 and from 0.05% to 11.00% at March 31, 2006.Long-term debt at March 31, 2007 and 2006 consisted of the following:


2007 2006 2007

Banks and insurance companies, 0.10% - 6.10% in 2007 (1.00% - 6.10% in 2006),maturing through 2028 ..................................................................................... ¥ 9,251 ¥ 7,047 $ 78,365

Other long-term debt .............................................................................................. 19 19 1619,270 7,066 78,526

Less amounts due within one year ........................................................................... 7,691 38 65,150¥ 1,579 ¥ 7,028 $ 13,376


8. Derivative TransactionsThe Companies enter into forward foreign exchange con-tracts, and interest rate swap transactions to control risksrelated to foreign currencies and interest rates. Forwardforeign exchange contracts are used to hedge the risk offluctuations in foreign currency exchange rates with respectto monetary receivables and payables, including futuretransactions, denominated in foreign currencies resultingfrom import and export transactions, and the interest rateswaps are used to hedge the risk of fluctuations in interestrates. The Companies principally use derivative transactionsin connection with managing their market risk and not for

speculation purposes. The Companies deal with highly ratedinternational financial institutions as counterparts to thesetransactions to minimize credit risk exposure. The FinanceDivisions enter into the derivative transactions and controlthe transactions, including the processing of the transac-tions, such as with settlements, in accordance with estab-lished policies approved by the Board of Directors.

Hedge accounting applies to all derivative transactions ofKansai Paint and its consolidated subsidiaries, consequently,these transactions are not disclosed in these notes.

9. Net AssetsThe Japanese Corporate Law (“the Law”) became effectiveon May 1, 2006, replacing the Japanese Commercial Code(“the Code”). The Law is generally applicable to events andtransactions occurring after April 30, 2006 and for fiscalyears ending after that date.

Under Japanese laws and regulations, the entire amountpaid for new shares is required to be designated as commonstock. However, a company may, by a resolution of the Boardof Directors, designate an amount not exceeding one-half ofthe price of the new shares as additional paid-in capital,which is included in capital surplus.

Under the Law, in cases where a dividend distribution ofsurplus is made, a smaller of an amount equal to 10% of thedividend or the excess, if any, of 25% of common stock overthe total of additional paid-in capital and legal earningsreserve must be set aside as additional paid-in capital or legalearnings reserve. Legal earnings reserve is included inretained earnings in the accompanying consolidated balancesheets.

Under the Code, companies were required to set asidean amount equal to at least 10% of the aggregate amountof cash dividends and other cash appropriations as legalearnings reserve until the total of legal earnings reserve andadditional paid-in capital equaled 25% of common stock.

Under the Code, legal earnings reserve and additional

paid-in capital could be used to eliminate or reduce a deficitby a resolution of the shareholders’ meeting or could becapitalized by a resolution of the Board of Directors. Underthe Law, both of these appropriations generally require aresolution of the shareholders’ meeting.

Additional paid-in capital and legal earnings reserve maynot be distributed as dividends. Under the Code, however,on condition that the total amount of legal earnings reserveand additional paid-in capital remained equal to or exceeded25% of common stock, they were available for distributionby resolution of the shareholders’ meeting. Under the Law,all additional paid-in capital and all legal earnings reservemay be transferred to other capital surplus and retainedearnings, respectively, which are potentially available fordividends.

The maximum amount that the Company can distributeas dividends is calculated based on the unconsolidatedfinancial statements of the Company in accordance withJapanese laws and regulations.

At the annual shareholders’ meeting held on June 28,2007, the shareholders approved cash dividends amountingto ¥1,630 million ($13,808 thousand). This appropriationwas not accrued in the consolidated financial statements asof March 31, 2007. Such appropriations are recognized inthe period in which they are approved by the shareholders.

6. Pledged AssetsPledged assets at March 31, 2007 and 2006 were as follows:

Thousands ofMillions of yen U.S. dollars

(Note 1)

2007 2007

Trade notes and accounts pledged for 4.18% short-term borrowings of ¥7 million ($59 thousand) ...... ¥ 7 $ 59Inventories pledged for 11.5% - 12.0% short-term borrowings of ¥188 million ($1,593 thousand) ..... 1,632 13,825Other current assets pledged for certain trade notes and accounts ........................................................ 20 169Property, plant and equipment pledged for 0.985% - 1.015% short-term borrowings of ¥100 million ($847 thousand), 0.0997% - 3.62% long-term debt due within one year of ¥668 million ($5,659 thousand), 0.80% - 3.62% long-term debt due after one year of ¥1,006 million ($8,522 thousand) and other long-term liabilities of ¥439million ($3,719 thousand) ......................... 2,952 25,006Investment securities pledged for certain trade notes and accounts ....................................................... 12 102

¥ 4,623 $ 39,161

Millions of yen

2006

Inventories pledged for 10.00% - 11.00% short-term borrowings of ¥267 million ....................................................... ¥ 1,602Other current assets pledged for certain trade notes and accounts ............................................................................... 15Property, plant and equipment pledged for payables other of ¥173 million and other long-term liabilities of ¥589 million .................................................................................................................. 1,068Investment securities pledged for certain trade notes and accounts .............................................................................. 12

¥ 2,697

7. Contingent LiabilitiesInformation on contingent liabilities of the Company at March 31, 2007 and 2006 is as follows:


(Note 1)

2007 2007

As endorser of notes endorsed ................................................................................................................ ¥ 204 $ 1,728As guarantor of indebtedness of unconsolidated subsidiaries and affiliates ............................................. 5 42

¥ 209 $ 1,770

Millions of yen

2006

As endorser of notes endorsed ........................................................................................................................................ ¥ 142As guarantor of indebtedness of unconsolidated subsidiaries and affiliates ..................................................................... 7

¥ 149

10. Employees’ Severance and Retirement BenefitsThe liabilities for severance and retirement benefits included in the liability section of the consolidated balance sheets as ofMarch 31, 2007 and 2006 consisted of the following:


(Note 1)

2007 2006 2007

Projected benefit obligation ................................................................................ ¥ 48,682 ¥ 48,834 $ 412,385Unrecognized prior service costs ......................................................................... 2,347 2,647 19,881Unrecognized actuarial differences ..................................................................... (4,928) (6,420) (41,745)Prepaid pension costs ......................................................................................... 1,192 394 10,097Less fair value of pension assets .......................................................................... (39,955) (37,749) (338,458) Liability for severance and retirement benefits ................................................ ¥ 7,338 ¥ 7,706 $ 62,160

Included in the consolidated statements of income for the years ended March 31, 2007 and 2006 were severance andretirement benefit expenses that comprised the following:


(Note 1)

2007 2006 2007

Service costs - benefits earned during the year ................................................... ¥ 1,462 ¥ 1,482 $ 12,385Interest cost on projected benefit obligation ....................................................... 866 861 7,336Expected return on plan assets ........................................................................... (796) (637) (6,743)Amortization of prior service costs ...................................................................... (300) (300) (2,541)Amortization of actuarial differences .................................................................. 935 1,487 7,920 Severance and retirement benefit expenses .................................................... ¥ 2,167 ¥ 2,893 $ 18,357

The discount rate and the rate of expected return on plan assets used by the Company are mainly 1.8% and 2.5%, respectively, for theyear ended March 31, 2007 and mainly 1.8% and 2.5%, respectively, for the year ended March 31, 2006.The estimated amount of all retirement benefits to be paid at future retirement dates is allocated equally to each service year using theestimated number of total service years.


As financial institutions in Japan were closed on March 31,2007, amounts that would normally be settled on March 31,2007 were collected or paid on the following business day,April 2, 2007. As a result, notes and accounts receivableincreased by approximately ¥6,648 million ($56,315

thousand), notes and accounts payable increased byapproximately ¥4,850 million ($41,084 thousand), and othercurrent liabilities increased by approximately ¥23 million($195 thousand).

13. Segment InformationAs most of the Companies’ activities are in the manufacture and sale of paints and coatings, industrial segment information isnot disclosed.Regional segment information for the years ended March 31, 2007 and 2006 was as follows:

Millions of yen

2007 Total sales to Intersegment Operating Operatingexternal sales or transfer Net sales expenses income Assets

customers amounts

Japan ................................................. ¥ 162,014 ¥ 7,867 ¥ 169,881 ¥ 155,493 ¥ 14,388 ¥ 258,345Asia .................................................... 67,128 68 67,196 59,432 7,764 51,429Americas ............................................ 1,114 6 1,120 1,005 115 801Europe ............................................... 958 68 1,026 952 74 477Total ................................................... 231,214 8,009 239,223 216,882 22,341 311,052Elimination and corporate .................. – (8,009) (8,009) (7,758) (251) (11,753)Consolidated basis ............................. ¥ 231,214 ¥ – ¥ 231,214 ¥ 209,124 ¥ 22,090 ¥ 299,299

Millions of yen


customers amountsJapan ................................................. ¥ 152,859 ¥ 5,283 ¥ 158,142 ¥ 145,723 ¥ 12,419 ¥ 232,829Asia .................................................... 56,206 141 56,347 49,985 6,362 43,081Americas ............................................ 1,185 0 1,185 1,082 103 765Europe ............................................... 715 97 812 758 54 449Total ................................................... 210,965 5,521 216,486 197,548 18,938 277,124Elimination and corporate .................. – (5,521) (5,521) (5,486) (35) (10,237)Consolidated basis ............................. ¥ 210,965 ¥ – ¥ 210,965 ¥ 192,062 ¥ 18,903 ¥ 266,887



customers amounts

Japan ................................................. $ 1,372,419 $ 66,641 $1,439,060 $ 1,317,179 $ 121,881 $ 2,188,437Asia .................................................... 568,640 576 569,216 503,447 65,769 435,654Americas ............................................ 9,437 51 9,488 8,514 974 6,785Europe ............................................... 8,115 576 8,691 8,065 626 4,041Total ................................................... 1,958,611 67,844 2,026,455 1,837,205 189,250 2,634,917Elimination and corporate .................. – (67,844) (67,844) (65,718) (2,126) (99,559)Consolidated basis ............................. $ 1,958,611 $ – $1,958,611 $ 1,771,487 $ 187,124 $ 2,535,358

Overseas sales for the years ended March 31, 2007 and 2006 were as follows:


(Note 1)

2007 2006 2007

Asia ...................................................................................................................... ¥ 74,193 ¥ 63,406 $ 628,488Americas .............................................................................................................. 2,800 2,639 23,719Europe ................................................................................................................. 2,618 2,430 22,177Overseas sales ...................................................................................................... ¥ 79,611 ¥ 68,475 $ 674,384

Overseas sales include overseas subsidiaries’ sales to overseas third parties as well as the Domestic Companies’ export sales tothird parties.The regions include the following countries:(1) Asia: India, Thailand and Taiwan etc.(2) Americas: United States etc.(3) Europe: United Kingdom etc.

11. Deferred Income TaxesThe following table summarizes the significant differences between the statutory tax rate and the Companies’ effective incometax rate for financial statement purposes for the years ended March 31, 2007 and 2006.

2007 2006 Statutory tax rate .............................................................................................................................. 40.0% 40.0% Nondeductible expenses ................................................................................................................... 0.4 0.5 Nontaxable dividend income............................................................................................................. (0.8) (0.6) Equity in earnings of affiliates ........................................................................................................... (2.4) (2.6) Deductible taxes and other ............................................................................................................... (1.3) (0.6) Effective tax rate ............................................................................................................................... 35.9% 36.7%

Significant components of the Companies’ deferred tax assets and liabilities as of March 31, 2007 and 2006 were as follows:


(Note 1)

2007 2006 2007

Deferred tax assets: Valuation loss on inventories .......................................................................... ¥ 162 ¥ 145 $ 1,372 Elimination of unrealized profit on inventories ................................................ 635 561 5,379 Excess allowance for doubtful receivables ....................................................... 136 92 1,152 Excess accrued expenses ................................................................................. 224 224 1,898 Accrued enterprise tax .................................................................................... 306 416 2,592 Excess bonuses accrued .................................................................................. 1,501 1,480 12,715 Retirement benefits ........................................................................................ 3,282 3,642 27,802 Other .............................................................................................................. 2,146 2,748 18,179 Subtotal .......................................................................................................... 8,392 9,308 71,089 Valuation allowance ........................................................................................ (262) (196) (2,220) Total deferred tax assets ................................................................................. 8,130 9,112 68,869

Deferred tax liabilities: Adjustments in allowance for doubtful accounts in the consolidation elimination of receivables and payables ...................................................... 18 13 152 Adjustments to fixed assets based on corporate tax laws ............................... 379 298 3,211 Unrealized holding gains on securities ............................................................ 20,122 19,635 170,453 Tax effect of foreign subsidiaries’ undistributed earnings ................................ 1,599 1,237 13,545Total deferred tax liabilities ................................................................................. 22,118 21,183 187,361Net deferred tax assets (liabilities) ....................................................................... ¥ (13,988) ¥ (12,071) $(118,492)

12. Effect of Bank Holidays on March 31, 2007


14. Related Party TransactionsSales to unconsolidated subsidiaries and affiliates for the years ended March 31, 2007 and 2006 were as follows:


(Note 1)

2007 2006 2007Sales to unconsolidated subsidiaries and affiliates .............................................. ¥ 20,226 ¥ 24,678 $ 171,334

Receivables from unconsolidated subsidiaries and affiliates at March 31, 2007 and 2006 were as follows:


(Note 1)

2007 2006 2007Receivables from unconsolidated subsidiaries and affiliates ................................ ¥ 12,836 ¥ 11,436 $ 108,734

15. Subsequent Event(1) On May 18, 2007, the Company’s Board of Directors approved a resolution for the acquisition of the Company’s own shares

of common stock under Article 156 and Article 165, Section 3 of the Japanese Corporate Law.(a) The reason for acquiring its own shares of common stock is to implement a flexible capital policy in order to adapt to the

change in the Company’s business environment.(b) Details of acquisition:

1. Type of shares to be acquired .......................... Common stock2. Number of shares to be acquired ..................... 5,000,000 shares (maximum)3. Schedule for acquisition of the shares ............. May 22, 2007 to October 31, 20074. Total amount of shares to be acquired ............. ¥5,500 million ($46,590 thousand) (maximum)

(2) The following appropriations of retained earnings, which were not reflected in the accompanying consolidated financialstatements for the year ended March 31, 2007, were approved at the annual general meeting of the shareholders of theCompany held on June 28, 2007.


(Note 1)Appropriations:Cash dividends, ¥6 ($0.05) per share .......................................................................................... ¥ 1,630 $ 13,808


KANSAI PAINT (AMERICA), INC.5455 Corporate Drive, Suite 205 Troy,MI 48098, U.S.A.Tel: 1-248-952-0533Fax: 1-248-952-0538

PPG KANSAI AUTOMOTIVE FINISHESU.S., LLCTroy-Automotive Technical Center, 5875New King Court Troy, MI 48098, U.S.A.Tel: 1-248-641-2010Fax: 1-248-641-2266

PPG KANSAI AUTOMOTIVE FINISHESCANADA, LP834 Caledonia Road Toronto, Ontario M6B3X9, CanadaTel: 1-905-855-5667Fax: 1-905-823-4190

PPG ALESCO AUTOMOTIVE FINISHESMEXICO, S.de.R.L.de C.V.Libramiento a Tequisquiapan #66 ZonaIndustrial, San Juan del Rio, 76800Queretaro, MexicoTel: 52-427-2710124Fax: 52-427-2719195

KANSAI PAINT EUROPE LIMITED.20th Floor, Wembley Point, 1 Harrow RoadWembley Middlesex HA9 6DE UKTel: 44-20-8900-5933Fax: 44-20-8900-5966

PPG KANSAI AUTOMOTIVE FINISHESUK, LLP4th Floor, Trigate 210-222 Hagley RoadWest Birmingham, B68 ONP UKTel: 44-12-1423-7300Fax: 44-12-1434-5386

KDK AUTOMOTIVE COATINGS CO., LTD.264-1 Dangjeong-Dong, Gunpo-ShiGyunggi-Do 435-030, KoreaTel: 82-31-456-8314Fax: 82-31-456-8319

TAIWAN KANSAI PAINT CO., LTD.No.6, Yungkong 2nd Road, Yung-anIndustrial District, Yung-an HsiangKaohsiung Hsien, Taiwan R.O.C.Tel: 886-7-622-3171Fax: 886-7-623-0155

KANSAI PAINT H. K. LTD.Suite 1018, 10th Floor, Ocean CentreHarbour City, No.5 Canton Road, Kowloon,Hong KongTel: 852-2891-1280Fax: 852-2891-0890

COSCO KANSAI PAINT & CHEMICALS(SHANGHAI) CO., LTD.No.5589-5689 Hutai Road, Shanghai201907, ChinaTel: 86-21-5602-5077Fax: 86-21-5602-0852

COSCO KANSAI PAINT & CHEMICALS(TIANJIN) CO., LTD.42, 5th Avenue, TEDA, Tianjin, 300457,ChinaTel: 86-22-2529-2009Fax: 86-22-2532-0902

CHONGQING KANSAI PAINT CO., LTD.9 Danlong Road, Nanping, Nan‘an District,Chongqing, 400060, ChinaTel: 86-23-6283-4824Fax: 86-23-6283-7094

SHENYANG KANSAI PAINT CO., LTD.69 Kunshan West Road, Huanggu District,Shenyang 110035 ChinaTel: 86-24-8602-8669Fax: 86-24-8602-5068

TIANJIN WINFIELD KANSAI PAINT &CHEMICALS CO., LTD.No.95 Taihua Road, TEDA, Tianjin, 300457,ChinaTel: 86-22-6623-0159Fax: 86-22-6623-0152

HUNAN XIANGJIANG KANSAI PAINTCO., LTD.790, Deya Road, Changsha 410003, ChinaTel: 86-731-422-3747Fax: 86-731-422-0181

GUANGZHOU KANSAI PAINT CO., LTD.26 Huangge East 2nd Road, Huangge,Nansha, Guangzhou, Guangdong, ChinaTel: 86-20-3468-4900Fax: 86-20-3468-4930

SUZHOU KANSAI PAINT CO., LTD.Chengtai International Business Square#410, Renming Road #93, Kunshan,Jiangsu, ChinaTel: 86-512-5756-3372Fax: 86-512-5756-3374

KANSAI PAINT PHILIPPINES, INC.1st Street, Meridian Industrial Complex BO.Balibago, Sta. Rosa, Laguna, PhillippinesTel: 63-2-699-2028Fax: 63-2-699-2029

HEAD OFFICE3-6, Fushimi-machi 4-chome, Chuo-kuOsaka 541-8523, JapanTel: 81-6-6203-5531Fax: 81-6-6203-5018

THAI KANSAI PAINT CO., LTD.180 Moo 3 Taparuk Road, Amphur Muang,Samutprakarn 10270, ThailandTel: 66-2-753-2377Fax: 66-2-753-2774

KANSAI RESIN (THAILAND) CO., LTD.34 Moo 4, Eastern Seaboard Industrial Estate(Rayong), Yudhasart Road, TumbolPluakdaeng, Amphur Pluakdaeng, Rayong21140, ThailandTel: 66-38-954-747Fax: 66-38-954-751

P.T. KANSAI PAINT INDONESIAMM 2100 Industrial Town, Blok DD-7, JalanIrian No.9D, Cibitung-Bekasi 17520,IndonesiaTel: 62-21-8998-2370Fax: 62-21-8998-2369

P.T.GDJAH TUNGGAL PRAKARSAJl. Hayam Wuruk, 28 Jakarta 10120,IndonesiaTel: 62-21-385-4121Fax: 62-21-381-0929

SIME KANSAI PAINTS SDN. BHD.2 Solok Waja 2, Kawasan Perindustrian,Bukit Raja 41710 Klang, Selangor D.E.,MalaysiaTel: 60-3-3348-7805Fax: 60-3-3348-7806

KANSAI COATINGS MALAYSIA SDN. BHD.4 Solok Waja 2, Kawansan PerindustrianBukit Raja, P.O. Box 159, 41710 Klang,Selangor D.E., MalaysiaTel: 60-3-3341-5333Fax: 60-3-3342-7223

KANSAI PAINT (SINGAPORE) PTE. LTD.57 Penjuru Road, Jurong, Singapore 609141,SingaporeTel: 65-6261-8621Fax: 65-6265-0301

KANSAI PAINT (ASIA) PTE. LTD.16 Raffles Quay #42-02 Hong LeongSingapore 048581, SingaporeTel: 65-6222-1192Fax: 65-6222-1156

KANSAI NEROLAC PAINTS LTD.Ganpatrao Kadam Marg, Lower Parel,Mumbai 400013, IndiaTel: 91-22-2493-4001Fax: 91-22-2493-6296

Directory

TOKYO OFFICE24-15, Higashi-Ohi 5-chome, Shinagawa-ku,Tokyo 140-8520, JapanTel: 81-3-3472-3131Fax: 81-3-3472-0525

R&D CENTER17-1, Higashi-Yawata 4-chome, Hiratsuka-shi, Kanagawa 254-8562, JapanTel: 81-463-23-2100Fax: 81-463-24-0637

Overseas

Building,

Topics

Paint for Towers

Kansai Paint products are beingused on many of the famous towerstructures of Japan. Tokyo Tower, a symbol of Tokyo,is repainted once every five years tomaintain the beauty of the struc-ture. Because the tower is paintedevery five years, the workability ofthe paint is more important than itscorrosion resistance properties. Last year, in accordance with arequest from the Metropolis ofTokyo, we begantesting water-basedcoating material for useon the tower.

Expected Durability:5 yearsUndercoating:AQUAMAX IITop coating:ALES AQUA GLOSS

On the other hand,Kyoto Tower, whichrises above theancient capital city ofKyoto, is primarilywhite, to blend inwith the traditionalsurroundings of thecity. Because whiteshows dirt easily, apollution-resistant paint is used. Thetower was repainted from Januaryto April of 2007.

Expected Durability: 15 yearsUndercoating: SUPER ZAURUSTop coating: CERA M RETAN

Saie was developed to re-create thedeep, rich colors seen in traditionalcraft work. Saie is a multi-colorpattern coating technology in whichmultiple colors are interwoven intoa beautiful finish. By combining amulti-nozzle spray gun with special-ized paints, Kansai Paint hassuccessfully developed this new andunique design system.

(Saie) Multi-colorMother-of-Pearl Technique

HIRM A Heat BarrierCoating for Concrete

HIRM A is a revolutionary water-based heat barrier coating forconcrete developed to reduce theheat island phenomenon. Specialpigments in the HIRM A coatingreflect infrared rays, and “hollowballoons” in the particles of thecoating material reduce heattransmission. Compared withunpainted surfaces, surfaces coatedwith HIRM A store approximately30% less thermal energy under thehot summer sun, keeping thesurface temperature roughly 10ºCto 15ºC cooler. HIRM A can also be applied easilyusing rollers, providing outstandingworkability. As such, HIRM A can beused in a wide range of applica-tions, including parking lots,pedestrian malls, verandas, andaround swimming pools.

Electrical towers, however, can belocated in isolated mountainousregions as well as in denselypopulated areas, which can makemaintenance work extremelydifficult. Accordingly, there is astrong need to minimize towermaintenance. To meet this need,Kansai Paint has developed theTOWER BARRIER system thatprovides an extremely thick, longlife coating. This system uses a 50

µm undercoatingwith excellentadhesion to thestructural material,and a 350 µm thicktop coating thatcreates a strongbarrier against

moisture and salt. Thiscoating is expected toprovide 50 years of corro-sion resistance.

Expected Durability: 50 yearsUndercoating: TOWER BARRIER

UndercoatTop Coating: TOWER BARRIER Top coat

Awards

Good Painting Color:Special PrizeNAGAMINE Mori no 5 bangai

Auto color Award 2007:FASHION COLOR PRIZELEXUS LSWhite Pearl Crystal Shine

KA

NSA

I PAIN

T CO

., LTD. A

nnual Repor t 2007

3-6, Fushimi-machi 4-chome, Chuo-ku,Osaka 541-8523, JapanTel: 81-6-6203-5531Fax: 81-6-6203-5018

Printed in JapanPrinted on recycled paper

Annual Report 2007 Year Ended March 31, 2007

http://www.kansai.co.jp

year ended march 31, 2007 - kansai.co.jp · a room for checking colors under ... r&d center....

Documents