_Auditor's Report（EN）2018

－ 1 － Annual Securities Report ( T he 105 th business term ) From Jan uary 1, 2018 to Dec ember 31, 2018 23 - 1 4 - Chome, Bunkyo, Fukui - City , 910 - 8670 Japan NICCA CHEMICAL CO.,LTD. (Translation purposes only) － 2 － 1 Non - consolidated Financial statements, other Non - consolidated Financial statements 1) Balance sheet (Millions of yen) As of December 31, 2017 As of December 31, 2018 Assets Current assets Cash and deposits 411 1,147 Notes receivable – trade ※ ２ 405 ※ ２ 387 Accounts receivable – trade ※ １ 4,970 ※ １ 5,183 Merchandise and finished goods 2,266 2,619 Work in process 394 383 Raw materials and supplies 797 1,120 Prepaid expenses 130 144 Deferred tax assets 476 362 Short - term loans receivable from subsidiaries and associates ※ １ 4,367 ※ １ 2,588 Accounts receivable – other ※ １ 509 ※ １ 239 Other ※ １ 183 ※ １ 184 Allowance for doubtful accounts △ 3 △ 0 Total current assets 14,909 14,361 Non - current assets Property, plant and equipment Buildings 6,225 6,093 Structures 657 604 Machinery and equipment 1,086 1,235 Vehicles 10 6 Tools, furniture and fixtures 278 227 Land 3,372 3,375 Leased assets 59 55 Construction in progress 31 2,134 Total property, plant equipment 11,722 13,733 Intangible assets Software 386 343 Soft ware in progress 21 13 Trademark right 1 1 Telephone subscription right 9 9 Right of using facilities 7 6 Total intangible assets 426 374 － 3 － (Millions of yen) As of December 31, 2017 As of December 31, 2018 Investment and other assets Investment securities 1,569 1,285 Share s of subsidiaries and associates 6,596 6,520 Investment in capital 2 2 Investments in capital of subsidiaries and associates 731 731 Long - term loans receivable from subsidiaries and associates － 111 Long - term prepaid expenses 44 74 Claims provable in bankruptcy, claims provable in rehabilitation and other 3 1 Deferred tax assets 586 774 Corporation insurance 3 3 Guarantee deposits 148 148 Other 8 8 Allowance for doubtful accounts △ 3 △ 1 Total investment and other assets 9,690 9,659 Total non - current assets 21,839 23,768 Total assets 36,748 38,129 Liabilities Current liabilities Accounts payable – trade ※ １ 2,395 ※ １ 2,666 Short - term loans payable ※ ３ , ※ ４ 15,232 ※ ３ 7,071 Current portion of long - term loans payable 390 ※ ４ 2,290 Short - term loans payable to subsidiaries and associates ※ １ 589 ※ １ 333 Lease obligations 9 10 Accounts payable – other ※ １ 1,274 ※ １ 1,297 Accrued expenses 330 ※ １ 309 Income tax payable 67 35 Accrued consumption taxes 17 136 Deposits received 165 117 Provision for bonuses 562 629 Provision for loss on dissolution of employees’ pension fund 494 － Other － 49 Total current liabilities 21,529 14,945 Non - current liabilities Long - term loans payable 1,045 ※ ４ 7,955 Long - term loans payable to subsidiaries and associates － 500 Lease obligations 48 42 Long - term accounts payable – other 39 39 Provision for retirement benefits 2,461 2,453 Long - term deposits received 746 804 Provision for share - based compensation 40 69 Total non - current liabilities 4,382 11,865 Total liabilities 25,911 26,810 － 4 － (Millions of yen) As of December 31, 2017 As of December 31, 2018 Net assets Shareholder’s equity Capital stock 2,898 2,898 Capital surplus Legal capital surplus 3,039 3,039 Other capital surplus Gain on disposal of treasury shares 14 14 Total capital surpluses 3,054 3,054 Retained earnings Legal retained earnings 727 727 Other retained earnings Reserve for advanced depreciation of non - current assets 4 3 Retained earnings brought forward 5,012 5,695 Total retained earnings 5,744 6,425 Treasury shares △ 1,479 △ 1,476 Total shareholder’s equity 10,217 10,902 Valuation and translation adjustments Valuation difference on available - for - sales securities 619 417 Total valuation and translation adjustment 619 417 Total net assets 10,837 11,319 Total liabilities and net assets 36,748 38,129 － 5 － 2) Statement of income (Millions of yen) Fiscal year ended December 31, 2017 Fiscal year ended December 31, 2018 Net sales ※ １ 22,500 ※ １ 23,287 Cost of sales ※ １ 14,573 ※ １ 15,329 Gross profit 7,927 7,958 Selling, general and administrative expenses ※ １ , ※ ２ 8,002 ※ １ , ※ ２ 8,284 Operating profit △ 75 △ 326 Non - operating income Interest income ※ １ 28 ※ １ 25 Dividend income ※ １ 604 ※ １ 1,288 Rental income 125 124 Foreign exchange gains 17 － Miscellaneous income ※ １ 98 ※ １ 101 Total non - operating income 873 1,539 Non - operating expenses Interest expenses ※ １ 61 ※ １ 70 Sales discounts 84 85 Foreign exchange losses － 47 Rental expenses 119 127 Miscellaneous loss ※ １ 8 ※ １ 13 Total non - operating expenses 274 344 Ordinary profit 523 868 Extraordinary income Gain on sales of non - current assets ※ ３ 0 － Gain on sales of investment securities 108 5 Gain on sales of shares of subsidiaries and associates － 135 Subsidy income 72 109 Reversal of provision for loss on dissolution of employees’ pension fund － 32 Total extraordinary income 181 283 Extraordinary losses Loss on retirement of non - current assets ※ １ , ※ ４ 78 ※ １ , ※ ４ 25 Loss on sales of non - current assets ※ ５ 0 － Loss on valuation of investment securities － 0 Loss on valuation of investment in capital of subsidiaries and associates 64 － Directors ’ retirement benefit 2 － Impairment loss ※ ６ 22 － Total extraordinary losses 168 25 Profit before income taxes 536 1,125 Income taxes – current 160 178 Income taxes – deferred △ 6 14 Total income taxes 154 193 Profit 381 932 － 6 － 3) Statement of changes in equity Fis cal year ended December 31, 2017 (Millions of yen) Shareholder’s equity Capital stock Capital surplus Retained earnings Legal capital surplus Other capital surplus Total capital surplus Legal retained earnings Other retained earnings Total retained earnings Reserve for advanced depreciatio n of non - current assets Retained earnings brought forward Balance at beginning of current period 2,898 3,039 14 3,054 727 6 4,911 5,644 Changes of items during the period Provision of reserve for advanced depreciation of non - current assets △ 1 1 － Dividends of surplus △ 282 △ 282 Net income 381 381 Purchase of treasury stock － Disposal of treasury stock － Net changes of items other than shareholder’s equity － Total changes of items during period － － － － － △ 1 100 99 Balance at end of current period 2,898 3,039 14 3,054 727 4 5,012 5,744 Shareholder’s equity Valuation and translation adjustments Total net assets Treasury stock Total shareholder’s equity Valuation difference on available - for - sale securities Total valuation and translation adjustments Balance at beginning of current period △ 1,478 10,119 422 422 10,542 Changes of items during the period Provision of reserve for advanced depreciation of non - current assets － － － Dividends of surplus △ 282 － △ 282 Net income 381 － 381 Purchase of treasury stock △ 1 △ 1 － △ 1 Disposal of treasury stock － － － Net changes of items other than shareholder’s equity － 196 196 196 Total changes of items during period △ 1 98 196 196 295 Balance at end of current period △ 1,479 10,217 619 619 10,837 － 7 － Fis cal year ended December 31, 2018 (Millions of yen) Shareholder’s equity Capital stock Capital surplus Retained earnings Legal capital surplus Other capital surplus Total capital surplus Legal retained earnings Other retained earnings Total retained earnings Reserve for advanced depreciatio n of non - current assets Retained earnings brought forward Balance at beginning of current period 2,898 3,039 14 3,054 727 4 5,012 5,744 Changes of items during the period Provision of reserve for advanced depreciation of non - current assets △ 1 1 － Dividends of surplus △ 251 △ 251 Net income 932 932 Purchase of treasury stock － Disposal of treasury stock － Net changes of items other than shareholder’s equity － Total changes of items during period － － － － － △ 1 683 681 Balance at end of current period 2,898 3,039 14 3,054 727 3 5,695 6,425 Shareholder’s equity Valuation and translation adjustments Total net assets Treasury stock Total shareholder’s equity Valuation difference on available - for - sale securities Total valuation and translation adjustments Balance at beginning of current period △ 1,479 10,217 619 619 10,837 Changes of items during the period Provision of reserve for advanced depreciation of non - current assets － － － Dividends of surplus △ 251 － △ 251 Net income 932 － 932 Purchase of treasury stock △ 0 △ 0 － △ 0 Disposal of treasury stock 3 3 － 3 Net changes of items other than shareholder’s equity － △ 202 △ 202 △ 202 Total changes of items during period 3 684 △ 202 △ 202 482 Balance at end of current period △ 1,476 10,902 417 417 11,319 － 8 － 2 Notes to Financial Statements Significant Accounting Policies 1. Valuation standards and methods for assets (1 ） Valuation standards and methods for securities Held - to - maturity debt securities Stated at amortized cost (straight - line method). Stocks of subsidiaries and affiliates Stated at cost determined mainly by the moving - average method Other securities With market value Stated at fair value based on the market price as of the balance sheet date. (Unrealized gains or losses are included dir ectly in net assets. Cost of securities sold is determined by the moving - average method.) Without market value Stated at cost determined mainly by the moving - average method (2 ） Derivatives Stated at fair value (3 ） The basis and method of valuation for inventories; Raw materials Stated at cost determined by the moving - average method. (The carrying amount on the balance sheet is written down to reflect the decline in profitability.) Merchandise and finished goods and work in process Stated at cost determined by the gross average method. (The carrying amount on the balance sheet is written down to reflect the decline in profitability.) Supplies Stated at cost determined by the last purchase price method. (The balance sh eet value is calculated by writing down the book value based on a decline in profitability.) 2. Depreciation method for fixed assets (1 ） Property, plant and equipment (excluding leased assets) Buildings (excluding facilities attached to buildings) are depreciated using the straight - line method and other than buildings are depreciated using the declining - balance method. However, facilities attached to buildings and structures acquired on or after April 1, 2016 are depreciated using the straight - line method. Useful life for primary assets is as follows: Buildings (excluding building fixtures) 7 - 50 years Other than buildings 2 - 45 years (2 ） Intangible assets (excluding leased asset s) Software for internal use is amortized by the straight - line method over its estimated useful life (5 years), and other intangible assets are amortized by the straight - line method. (3 ） Leased assets The straight - line method is used with the lease term a s the useful life and the residual value as zero. 3. Accounting standards for allowances (1 ） Allowance for doubtful accounts The allowance for doubtful receivables is provided for possible losses on doubtful receivables based on the historical write - off r atio for general receivables and on an estimate of uncollectible amounts based on the individual collectability of specific doubtful receivables. (2 ） Provision for bonuses Provision for employee bonuses is provided based on the estimated amount to be paid. (3 ） Provision for retirement benefits Provision for retirement benefits for employees is provided based on the estimated retirement benefit obligation at the end of the fis cal year under review. In calculating retirement benefit obligations, the benefit formula basis is used to attribute expected retirement benefits to the period up to the end of the current fiscal year. － 9 － (4 ） Provision for share - based compensat ion In order to prepare for the issuance of our shares under the performance - based stock compensation system for directors and executive officers, the estimated amount of shares to be paid in accordance with the points allocated to directors and other officers is recorded in accordance with the stock issuance rules. ４． Other important matters forming the basis for the preparation of financial statements (1) Accounting for retirement benefits The method of accounting for unrecognized actuarial gains and losses r elated to retirement benefits differs from these methods of accounting in the consolidated financial statements. (2) Accounting method for consumption taxes All accounting transactions are booked exclusive of any national or local consumption taxes. (3) Standards for translating assets and liabilities denominated in foreign currencies into Japanese yen Monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the spot exchange rate prevailing at the end of the fiscal year. Translation differences are accounted for as gains or losses. (4) Significant hedge accounting methods ① Method of hedge accounting Deferred hedge accounting is applied. Special accounting is applied when the conditions for special treatment o f interest rate swaps are met. ② Hedging instruments and hedged items Hedging instruments: Interest rate swaps Hedged items: Interest on borrowings ③ Hedging policy For the Reduction of interest rate exposures, only variable interest rates are hedged. ④ Method of assessing the effectiveness of hedging Effectiveness is assessed for each individual transaction. The evaluation of effectiveness is omitted for transactions to which the special treatment for interest rate swaps is applied. (Notes to Balance Sheet) ※ 1 Affiliated company items Monetary claims and liabilities to affiliated companies (Millions of yen) As of December 31, 2017 As of December 31, 2018 Short - term loans receivable 5,738 4,327 Short - term loans payable 1,186 866 ※ 2 Notes due at the end of the period Accounting for notes maturing at the end of the fiscal year is settled on the date of bill clearing. As the last day of the fiscal year was a holiday for financial institutions, the following notes due at the end of t he fiscal year are included in the balance at the end of the fiscal year. (Millions of yen) As of December 31, 2017 As of December 31, 2018 Notes receivable 87 86 ※ 3 Overdraft agreements and loan commitments We enter into overdraft agreements and loan commitment agreements with banks to efficiently procure working capital. The balance of undrawn lines of credit related to overdraft agreements and loan commitments at the end of the fiscal year under these agree ments is as follows: (Millions of yen) － 10 － As of December 31, 2017 As of December 31, 2018 Total overdraft limit and loan commitments 19,000 11,800 Loan balance 15,232 5,771 Net amount 3,768 6,028 ※ 4 Financial covenants Previous fisc al year (ended December 31, 2017 ) S hort - term borrowings amounting to ¥ 7,700 million is subject to the following financial restrictions. (Financial covenants) ① Maintain the amount of net assets in the consolidated balance sheet as of the last day of the accounting period and the last day of the second quarter of each fiscal year at 75% or more of the amount of net assets in the consolidated balance sheet as of th e last day of the immediately preceding accounting period from the second quarter of June 2016 onward. ② For the two consecutive fiscal years in which the fiscal year ending after the fiscal year ending December 31, 2016 is the first fiscal year, ensure tha t the ordinary profit and loss shown in the consolidated profit and loss statement for the fiscal year ending in each fiscal year will not result in a loss for two consecutive fiscal years. Current fisc al year (ended December 31, 2018 ) S hort - term borrowin gs am ounting to ¥ 1,600 million and Long - term borrowings amounting to ¥ 5,200 million are subject to the following financial restrictions. (Financial covenants) ① Maintain the amount of net assets in the consolidated balance sheet as of the last day of the ac counting period and the last day of the second quarter of each fiscal year at 75% or more of the amount of net assets in the consolidated balance sheet as of the last day of the immediately preceding accounting period from the second quarter of June 2016 o nward. ② For the two consecutive fiscal years in which the fiscal year ending after the fiscal year ending December 31, 2016 is the first fiscal year, ensure that the ordinary profit and loss shown in the consolidated profit and loss statement for the fisca l year ending in each fiscal year will not result in a loss for two consecutive fiscal years. － 11 － (Notes to Statements of Income) ※ 1 Transactions with affiliated companies (Millions of yen) Fiscal year ended December 31, 2017 Fiscal year ended December 31, 2018 Turnover with business transaction Net sales 3,823 4,498 Purchases 2,001 2,294 Other operating expenses 206 223 Non - operating transactions 778 1,431 ※ 2 Approximately 47% of the e xpenses belonging to selling, 47 % of the expenses belonging to the current fiscal year, 53% of the expenses belonging to general and administrative expenses in the previous fiscal year, and 53 % of the expenses in the current fi scal year. Main selling, general and administrative expense i tems (Millions of yen) Fiscal year ended December 31, 2017 Fiscal year ended December 31, 2018 Freight and packing costs 867 963 Remuneration and salaries for directors and corporate auditors 1,760 1,843 Provision for stock - based compensation 40 28 Provision for bonuses 320 418 Retirement benefit expenses 169 126 Depreciation and amortization 202 273 Provision of allowance for doubtful accounts 2 0 Research and development costs 1,289 1,462 ※ 3 Details of gain on sales of non - current assets are as follows. (Millions of yen) Fiscal year ended December 31, 2017 Fiscal year ended December 31, 2018 Tools, furniture and fixtures 0 － Total 0 － ※ 4 Details of loss on retirement of non - current assets are as follows. (Millions of yen) Fiscal year ended December 31, 2017 Fiscal year ended December 31, 2018 Buildings 72 18 Structures 5 1 Machinery and equipment 1 4 Vehicles 0 － Tools, furniture and fixtures 0 0 Total 78 25 ※ 5 Details of loss on sales of non - current assets are as follows. (Millions of yen) － 12 － Fiscal year ended December 31, 2017 Fiscal year ended December 31, 2018 Machinery and equipment 0 － Total 0 － ※ 6 Impairment loss Previous f iscal year (from January 1, 2017 to December 31, 2017 ) We recorded impairment losses on the following asset groups. Location Application Type Fukui City, Fukui Warehouse Buildings and structures In applying impairment accounting, we group our assets based on the reportable segments (Chemicals and Cosmetics) and determine indicators of impairment for idle assets by individual asset. For buildings and structures related to Warehouse in Fukui City, Fukui Prefecture, for which demolition was decided in the current fiscal year, the book value of the asset was reduced to the recoverable amount, and the reduction amount of ¥ 22 million was recorded as extraordinary loss. The recoverable amount of these assets is determined to be zero as there is no possibility of their co nversion to other companies or sale. Current f iscal year (from January 1, 2018 to December 31, 2018 ) Not applicable. (No tes to Securities) Share s of subsidiaries and associates (shares of subsidiaries and associates in the fiscal year u nder review is ¥ 6 .485 million for share of subsid iaries and ¥34 million for share of associates , and share of subsidiaries a nd associates in the previous fiscal year is ¥6.485 million for share of subsid iaries and ¥110 million for share of and associates ) are not presented because they do not have a market price and it is extremely difficult to determine a market value. － 13 － (Deferred Tax Accounting) １． Breakdown of major causes of deferred tax assets and deferred tax liabilities (Millions of yen) Fiscal year ended December 31, 2017 Fiscal year ended December 31, 2018 Deferred tax assets Provision for retirement benefits 749 747 Impairment loss 233 229 Provision for bonuses 172 191 P rovision for loss on dissolution of employees’ pension fund 151 － Loss carried forwards － 119 Accrued expenses 82 73 Loss on val uation of shares of subsidiaries and associates 63 63 Loss on valuation of Inventories 52 89 Loss on valuation of investments in capital of subsidiaries and associates 40 40 Patent rights 34 29 Deferred assets 31 25 Provision for share - based compensation 12 21 Accrued enterprise tax 15 5 Other 40 33 Subtotal deferred tax assets 1,680 1,670 Valuation allowance △ 345 △ 350 Total deferred tax assets 1,335 1,320 Deferred tax liabilities Valuation difference on available - for - sale securities △ 271 △ 182 Reserve for advanced depreciation of non - current assets △ 2 △ 1 Total deferred tax liabilities △ 273 △ 184 Net deferred tax assets 1,062 1,136 2. Breakdown of significant differences between the statutory effective tax rate and the effective tax rate after application of tax effect accounting by major items that caused such differences Fiscal year ended December 31, 2017 Fiscal year ended December 31, 2018 Statutory tax rate 30.69% 30.69% (Adjustments) Expenses not deductible for income tax purposes 3.53 1.95 Local tax on per capita basis 4.07 1.94 Income not taxable permanently such as dividend income △ 30.80 △ 32.31 Valuation allowance 5.98 0.48 Income taxes for prior periods 15.55 － Tax credit △ 10.58 － Foreign tax credit 9.47 13.90 Other 0.88 0.53 Effective tax rate after tax effect accounting is applied 28.79 17.18 － 14 － (Significant Subsequent Events) Not applicable. － 15 － Independent Auditors' Audit Report March 27 , 20 19 To the Board of Directors of Nicca Chemical Co., Ltd. KPMG AZSA LLC Designated Limited Liability Partner Engagement Partner Certified Public Accountant Kentaro Yamamoto SEAL Designated Limited Liability Partner Engagement Partner Certified Public Accountant Yuichi Ishibashi SEAL For the purpose of audit certification in compliance with the provision s of Article 193 - 2 (1) of the Financial Instruments and Exchange Act, we audited the consolidated financial statements of Nicca Chemical Co., Ltd. , described in the "Accoun ting Status" section for the 105 th bu siness year from January 1, 2018 , to December 31 , 2018 , namely the balance sheets, income statements, statement s of changes in shareholders' equity, significant accounting policies, other related notes , and the supplementary schedul es of Nicca Chemical Co., Ltd. Responsibility of Management for Financial Statements The Company's management is responsible for preparing and properly presenting financial statements in accordance with the business accounting standards generally accepte d in Japan. This includes the development and operation of the internal control , which was determined by management to be necessary for preparing and properly presenting financial statements free of material misstatement by fraud or error. Responsibility of Auditor Our responsibility is to express an opinion on these financial statements from an independent perspective based on the audit conducted by us. We conducted our audit in accordance with audit standards generally accepted in Japan. Those audit sta ndards require that we establish an audit plan and perform the audit based on that plan to obtain reasonable assurance as to whether the financial statements are free from material misstatement. An audit involves performing the procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The auditing procedures are selected and applied at our discretion based on the assessment of the risks of material misstatements due to fraud or errors in the financial statements. Th e purpose of an audit of the consolidated financial statements is not to express an opinion on the effectiveness of the entity's internal control, but in conducting these risk assessments , we examine the internal controls relevant to the preparation and fa ir presentation of the financial statements in order to design audit procedures that are appropriate to the circumstances. An audit also includes deliberation on the overall presentation of the financial statements , as well as an evaluation of the accounting policies applied and its method of application, in addition to the reasonableness of accounting estimates made by the management. We believe that the audit evidence we obtained is sufficient and appropriate to provide the basis for our audit opinion. Audit Opinion We acknowledge that the financial statements above properly present the financial status of Nicca Chemical Co., Ltd. , a s of December 31, 2018 , in all important respects, as well as the operating results for the fisc al year ending December 31, 2018 , in accordance with the business accounting standards generally accepted in Japan. Conflicts of Interest There are no interest relationships between the Company and us or our engagement partners that are required to be reported by the regulation of the Certified Public Accountant Act. End of document (Note) 1. The above is the digitized form of the matters described in the original audit report, and the original copy is separately in the custody of the Company (submitting company o f the securities report). 2. XBRL data is excluded from the scope of the audit.