ANNUAL REPORT 2013 A N U
Transcription
ANNUAL REPORT 2013 A N U
ANNUAL REPORT 2013 Our Quest for Beauty In over six decades in Japan, KOSÉ has continually sought to offer a better-quality, superior level of beauty. We take the same stance toward corporate management. We are constantly moving forward, utilizing our current capabilities, while seeking a path that will provide future growth. We have and will continue to relentlessly pursue research in order to be a global company with a presence throughout the world. Corporate Message Wisdom and beauty for people and the earth Create a culture and values embodying a distinctive beauty through a sophisticated fusion of sensuousness and intelligence. Deeply devoted to all the people who believe in and support KOSÉ: Statement of Purpose Management Philosophy · Respect the values and skills of each employee. · Always aim for highest growth—never settle for stability. · Strive for the highest possible quality backed by exclusive technology. Action Guidelines · Meet and exceed the expectations of customers. Your actions shape the present and future KOSÉ: · Be sincere. Retain an intent focus on goals. · Go beyond the conventional. · Never lose your enthusiasm and the desire to improve. · Have the courage to communicate with others openly and honestly. · Build a stronger global presence. 13050711_copybook3 Contents We believe that our mission is to provide joy and comfort through cosmetics and to help everyone live a fuller life. 2 2013 Overview 4 Business Summary 2013 8 Interview with the President 12 Sources of KOSÉ’s Brand Power 20 Research and Development 22 Corporate Social Responsibility 24 Financial Section 56 Principal Consolidated Subsidiaries 57 Corporate Information Shareholder Information Forward-Looking Statements This annual report contains forward-looking statements about KOSÉ Corporation’s future plans, strategies, and performance that are not historical facts. Risks and uncertainties resulting from changes in the business environment may have a significant effect on the actual business results. Please also note that we shall not be held responsible for any omissions or errors in data and content in this document. Annual Report 2013 1 Highlights for the Year Ended March 2013 Net sales 2.5 + 왘 % Overseas 왘 sales ratio Operating 왘 income 12.6 KOSÉ pursued the optimal allocation of management resources, and made proactive efforts to improve management efficiency and enhance earnings capacity. As a result, net sales rose 2.5% from the previous fiscal year, with year-on-year gains in all business segments. Overseas sales rose slightly, with a ratio of 12.6% of total sales. % ¥11,864 million Net Sales Operating income rose 3.8% from the previous fiscal year as a result of the growth in sales and a reduction in the cost of sales ratio. Net income increased as a result of expansion in the foreign exchange gain from the weakening of the yen. Operating Income/ Operating Profitability (Billions of yen) Net Income (Billions of yen) (Billions of yen) Operating income 178.1 172.6 171.1 166.5 Operating Profitability (%) 13.8 170.7 12.3 6.7 11.4 5.2 10.1 5.0 4.7 8.1 6.9 7.0 2012 2013 6.9 6.7 11.9 5.9 2009 2010 2011 2012 2013 2009 2010 2009 2010 2011 2012 ROA Net Income per Share Cash Dividends per Share (%) (Yen) (Yen) 8.4 115.9 7.1 7.5 81.6 2009 2010 2013 117.2 40.0 40.0 40.0 40.0 41.0 2013 2009 2010 2011 2012 2013 7.0 6.4 2 2011 2011 2012 2013 2009 88.8 2010 86.5 2011 2012 7.1 Return on 왘 assets (ROA) Cash dividends 왘 per share % ¥ (Billions of yen) Cosmetaries Dividends amounted to ¥41 per share in fiscal 2013, comprising an interim dividend of ¥20 per share and a year-end dividend of ¥21 per share. For fiscal 2014, KOSÉ plans to pay a full-year dividend of ¥42 per share. 41.0 Net Sales by Reportable Segment Cosmetics ROA increased 0.1 percentage point year on year, to 7.1%. KOSÉ seeks to raise ROA through further business expansion and efficiency measures. Other Operating Profitability by Reportable Segment Overseas Sales/ Overseas Sales Ratio (%) (Billions of yen) Cosmetics 1.8 43.8 1.5 45.0 1.8 42.3 1.5 39.7 1.7 41.1 132.5 126.1 127.0 125.4 127.9 Cosmetaries 23.9 25.4 19.9 13.6 11.0 10.9 10.6 9.4 10.6 0.3 2009 2010 2011 2012 2013 Overseas Sales Other 2009 10.7 10.8 19.1 18.7 2009 2010 Overseas Sales Ratio (%) 12.3 12.7 12.6 21.0 21.2 21.5 2011 2012 2013 9.1 5.9 1.3 2010 2011 3.1 7.4 2012 2013 SG&A Expenses and SG&A Expenses to Net Sales Depreciation and Amortization and Capital Expenditures Interest-Bearing Debt/ Debt-to-Equity Ratio (Billions of yen) (Billions of yen) (Billions of yen) SG&A Expenses 120.5 67.7 118.0 68.4 SG&A Expenses to Net Sales (%) 113.9 66.6 113.1 116.7 67.9 68.3 Depreciation and Amortization 6.6 5.6 Capital Expenditures 6.5 Interest-Bearing Debt 4.6 5.9 5.2 5.4 5.6 4.9 4.7 4.6 Debt-to-Equity Ratio (%) 5.1 5.1 5.0 4.8 4.7 4.5 2011 2012 2013 4.5 4.4 3.8 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 Annual Report 2013 3 Business Summary 2013 Sales (Billions of yen) Cosmetics Cosmetaries Other 1.8 43.8 1.5 45.0 1.8 42.3 1.5 39.7 1.7 41.1 132.5 126.1 127.0 125.4 127.9 1.0% 24.1% 74.9% 2009 4 2010 2011 2012 2013 Boosting Brands to Meet Consumer Needs Prestige Brands Fiscal 2013 Results Sales in Japan rose 4% for prestige brands overall. In the SEKKISEI brand, KOSÉ achieved positive results through a pro- Sales (Million yen) Year-on-Year Growth 170,685 2.5% motional campaign featuring actress and model Yui Aragaki as the new face for the brand, which led to the capturing of a new customer segment of women in their 20s, while retaining the existing customer base. In the ESPRIQUE brand, the year- Business Results round use of foundation alleviated inventory risk and reduced The status of the global economy remains uncertain as a result returns, making a significant contribution to earnings. During of such concerns as the European debt crisis and slowing the second half of the fiscal period, KOSÉ launched a skin-care growth in emerging economies. In the Japanese economy, brand containing the high-function components in which the however, since the change of government at the end of 2012, Company specializes, expanding its sales and market share in expectations for large-scale supplementary budgets and other the highly competitive mass market category. economic policies have led to a weaker currency, rising stock prices, and improvement in consumer sentiment. The Japanese cosmetic market continues to be tight as Self-Selection Brands (Cosmetaries) Sales rose 3.6% overall. In the highly competitive sunscreen a result of market maturity, growth in online sales, and more- market, SUNCUT ® spray-type sunscreen that can also be used intense competition due to new entrants from different indus- on hair gained market acceptance. The Je l’aime series of tries, and product prices are declining. Overseas cosmetic non-silicone hair-care products, launched in March 2013, markets also pose challenges, particularly China, Taiwan, and became a major hit, making a significant contribution to perfor- other areas of the greater China region. In this operating envi- mance. Results were further boosted by steady growth through- ronment, the KOSÉ Group steadily expanded sales in Japan out the fiscal year of the FASIO and STEPHEN KNOLL series. by concentrating on strengthening the mass market segment, while taking steps to boost brands that meet changing market The KOSÉ Group has adopted “Aggressive Innovation,” and is and consumer needs. In the overseas business, which KOSÉ steadily moving forward in a concerted effort as a company to considers to be one of its growth drivers, revenue was up achieve the three basic strategies in its medium-term manage- slightly for overseas subsidiaries overall, but on the whole ment plan: 1) Concentrate on growth drivers, 2) Expand profit- conditions remained challenging. ability of core brands, and 3) Build a more-powerful operating framework. High-Prestige Brands For growth drivers, we established an e-commerce brand as Sales rose 3% overall. In the COSME DECORTE brand, unit a new business, and made initiatives in new markets and sales sales volume reached record highs on sales of MOISTURE channels, including launching a line of professional products LIPOSOME products in limited-edition bottles to mark the line’s for hair salons and introducing the PAUL STUART brand of 20th anniversary. The AQ MW product line was expanded with cosmetics for men. For core brands, we implemented swift the addition of Makeup in February 2012 and Base Makeup in product strategies to meet logistical and customer needs, August 2012, as the series grew to be one of the drivers for including joint development with a major distribution group, the COSME DECORTE brand. In the JILL STUART brand, we and expanded a non-silicone hair-care series popular with gained a new customer base with the introduction in October young women. KOSÉ also made a strong push to strengthen 2012 of the RELAX series as well as the expansion of product the operational framework by reducing costs Company-wide, lines for body care and fragrances. including in administrative divisions, and by lowering waste disposal costs and withdrawing from unprofitable businesses. Annual Report 2013 5 Aiming to Become a “Company with a Global Presence” Overseas Business Initiatives For its overseas business, KOSÉ conducts country-specific marketing aimed at establishing a global brand. In China, demand is recovering as a result of efforts to develop the luxury brand COSME DECORTE, the launch of the China-specific brand Bizenist, and growth in online sales. In Italy, sales volume is steadily rising for the AQ MELIORITY and AQ MW lines of the COSME DECORTE brand, launched in 2012. Overseas sales amounted to ¥21,511 million in fiscal 2013, accounting for 12.6% of total sales. We will continue to actively expand the cosmetics business globally, strengthen our overseas production structure, and bolster our worldwide organization, with the aim of becoming a “company with a global presence.” 6 Business Summary 2013 New Business Initiatives E-Commerce Business Initiatives For new business initiatives to adapt to the growing e-commerce market, in May 2011, KOSÉ launched an online site for the JILL STUART and AWAKE brands, which had previously only been available in department stores and specialty cosmetic stores. KOSÉ’s e-commerce business subsidiary PROVISION Co., Ltd., established its first brand, AQUALIVE, in December 2011, followed by the MAIHADA brand in June 2012. KOSÉ will seek to further increase sales by meeting the diversified purchasing styles of customers and launching cosmetics that take the fullest advantage of online sales. Pushing Ahead with “Aggressive Innovation” Future Outlook Market Environment and Earnings Forecasts Medium- to Long-Term Management Strategies The outlook for the market environment remains clouded by The KOSÉ Group, in addition to expanding its market share in such concerns as the risk of a worldwide economic downturn Japan, considers it important to accelerate its business devel- developing from the ongoing European debt crisis and other opment in growth markets, to expand business overall, and to factors, as well as the direction for employment and incomes. build strong management practices that will allow the corpo- However, we anticipate moves toward economic recovery rate Group to survive and prosper in the new era of competi- stemming from improvements in household budgets and cor- tion among firms. In the previous Medium-Term Management porate sentiment on the back of rising exports, along with the Plan (April 2008 to March 2011), we achieved a certain degree positive effects of economic and fiscal policies. In such an of success with such measures as eliminating waste to environment, the KOSÉ Group will continue to move forward enhance management efficiency. We further shifted manage- with strengthening its management foundations, and further ment practices to a stance of “Defensive Innovation” better solidifying the position of core brands in Japan, while at the able to cope with change, and implemented deep cost reduc- same time making proactive investments in overseas and new tions and operational improvements. Based on the three poli- businesses with growth potential. In consideration of such fac- cies designated as new management pillars (concentrate on tors, for the fiscal year ending March 2014, KOSÉ is forecast- growth drivers, expand profitability of core brands, and build a ing net sales of ¥175,000 million (up 2.5% year on year), with more-powerful operating framework), building on the success- operating income of ¥12,500 million (up 5.4%), and net income es of the preceding three years, we are continuing to pursue of ¥7,000 million (up 4.2%). By business segment, we are fore- “Aggressive Innovation” to put us on a growth track. casting net sales of ¥131,800 million in Cosmetics, ¥41,500 million in Cosmetaries, and ¥1,700 million in Other. Capital expenditures are anticipated to total ¥5,000 million, and depreciation expense ¥5,100 million. Annual Report 2013 7 Interview with the President Kazutoshi Kobayashi President 8 Q1 What is your analysis and impression of KOSÉ’s business performance in the fiscal year ended March 2013? Although the final results fell slightly short of plan, we achieved sales and earnings growth in all business segments. The Japanese cosmetic market was flat compared to the previous fiscal year in terms of both value and volume, but we were successful in our various strategies to invigorate core brands, establish new brands, and strengthen marketing. In high-prestige brands, for example, new and limited-edition products for COSME DECORTE and other core brands sold well. In prestige brands, we brought in a new celebrity as the face for the mainstay SEKKISEI brand, allowing us to cultivate a new customer segment. We also introduced new products for our high-function skin-care brand—one of KOSÉ’s specialties—which provided an additional boost to sales. Overseas, we managed only a slight increase in sales. However, in China, KOSÉ launched the China-specific brand Bizenist, and introduced 12 new skin-care items. Our online sales business in China was also positive, as we bolstered sales expansion strategies with a brand site on a major e-commerce service, and through TV shopping. In Italy, in March 2012, we introduced the high-end line COSME DECORTE for the Italian market, and successfully established a business model targeting wealthy customers. Q2 What is the status of business restructuring efforts and the current level of achievement for the Medium-Term Management Plan begun in April 2012? The business restructuring we had undertaken as a management issue is now nearly completed, and we are on track to achieving our goals of narrowing down brands, reforming the distribution system, and streamlining specialty cosmetic stores. For overseas business development, which we expect to provide future growth, I think that we need to further enhance our brand presence, particularly in Asian markets where latent demand is high. The Medium-Term Management Plan calls for “Aggressive Innovation,” and comprises the three basic strategies of 1) Concentrate on growth drivers, 2) Reinforce core brands, and 3) Build a more-powerful operating framework. We have made steady progress over the past year in achieving all three. In terms of new businesses, examples include a brand exclusively for e-commerce in Japan, a line of professional products for hair salons, and the launch of a cosmetic line for men. For our core brands, we are enhancing competitiveness by strengthening the marketing and sales Annual Report 2013 9 structure to fit the characteristics of each sales channel, accelerating product development in line with retail and customer needs, and other measures. To strengthen management foundations, we have concentrated management resources in core brands, and thoroughly streamlined corporate costs. We have also succeeded in reducing returns and disposals through such measures as promoting the year-round use of foundation, which has been a seasonal product. We plan to further step up measures from fiscal 2014. In particular, for core brands, based on the successes of the past year, we changed the wording of the strategy from “reinforce” to “expand profitability,” and adopted a more-proactive stance aimed at achieving both sustainable growth and earnings. Q3 What measures are you pursuing to achieve the targets for the fiscal year ending March 2014? We are expanding the overseas and new businesses that are our growth drivers, and accelerating growth around core brands, centered on the mass market business. For the expansion of the overseas business, we are prioritizing the greater China region centered on East Asia. We have high expectations in the greater China region for developing specialty cosmetic stores specializing in certain brands, and targeting middle-class consumers in those areas. Up to this point, we have focused on expanding the number of stores, but, going forward, will streamline our partner outlets to enhance profitability. In May 2013, we established a representative office in Hong Kong aimed at business expansion across greater China. For new markets, we are focusing on developing business in India and Europe. In India, in March 2013, KOSÉ agreed to establish a joint venture with a pharmaceutical company that manufactures and sells healthcare products and cosmetics in addition to drugs. India is an attractive market of 1.2 billion people, the majority of whom are young. We are currently formulating a specific business plan with our partner. In Europe, following the favorable response we have received in Italy, we are exploring the possibility of moving into other European countries with large markets. In terms of new businesses, our Japanese e-commerce business is still in the upfront investment stage, but the market has the potential for future growth, and we will continue to seek business expansion. For the hair salon products business, we will strengthen our brands and expand our network. To expand the profitability of core brands, over the next few years, we will deepen our partnerships with the major retail companies that comprise our key accounts. Going forward, we will make an effort to develop sales channels and our customer base. For the building of a more-powerful operating framework, we consider cost reductions to be a never-ending theme that we must constantly pursue, and plan to realize further management efficiency through such means as the globalization of ingredient procurement and shifting production overseas. Alongside these efforts, we will continue to optimize the value chain through waste and inventory control, and management of the product life cycle. Further, at stores and other points 10 Interview with the President of customer contact, from fiscal 2014, we plan to introduce sales support systems to centrally manage customer purchase records and inventory, as well as advanced skin diagnostic machines. Efforts such as these will further strengthen our counseling capabilities, and provide for moreefficient and effective store operations. For the fiscal year ending March 2014, we expect earnings to make a sharp recovery, and are forecasting net sales of ¥175,000 million, with operating income of ¥12,500 million and net income of ¥7,000 million. Q4 What is your vision for the future of KOSÉ? KOSÉ’s fundamental management spirit of coexistence and mutual prosperity with customers, business partners, and society, along with its focus on sustainable growth, is the cornerstone of the Company today. Our vision is to be a company with a global presence worthy of a century of history. We want to earn the satisfaction of customers by providing them with the best-quality products and service, and to bring the unique value we offer to countries and regions throughout the world. Going forward, we will make a concerted effort to further enhance the soundness and efficiency of our business management. At the same time, as a responsible corporate group, we will play an active role in realizing a sustainable society and global environment through environmental conservation, support for the protection of the natural environment, and the furthering of normalization. The Medium-Term Management Plan Annual Report 2013 11 Sources of KOSÉ’s Brand Power Brand Marketing —Attractive brands via optimal sales channels— KOSÉ utilizes a unique brand marketing approach of offer- brands at each stage, from the product itself to sales chan- ing each brand through the sales channel best suited to its nels and communication at the sales counter. particular characteristics. We strive to create attractive HighPrestige Brands Prestige Brands Cosmetaries Brands 12 To achieve this, KOSÉ assesses consumer needs in through a careful consideration of all its aspects, including terms of the sense of value brands offer as both a cosmetic texture, fragrance, potential and actual effectiveness, price, and lifestyle. Drawing on KOSÉ’s distinctive style of intelli- and package design, as well as the occasions and season gence and sensuousness, we then fashion the brand for use. The Highest Levels of Quality and Service KOSÉ high-prestige brands feature high quality made possible by bringing together the latest technologies. Befitting luxury brands, we sell them mainly in specialty cosmetic stores and department stores. Specially trained beauty advisers introduce and offer products after detailed advice sessions that include skin analysis. Cosmetics with High Added Value for a Wider Customer Segment Products in this category have high added value, but are sold through a broader range of sales channels: PRÉDIA through specialty cosmetic stores and INFINITY through general merchandise stores and drugstores, not to mention the SEKKISEI brand, now synonymous with KOSÉ. One Step Above the Rest In addition to cosmetics, self-selection brands include hair-care products, such as shampoos and conditioner, as well as other toiletries developed with a cosmetic bent. We refer to these as “cosmetaries.”* Consumers can purchase these quality products for a reasonable price at general merchandise stores, drugstores, and convenience stores. * The word is a fusion of “cosmetics” and “toiletries.” Annual Report 2013 13 COSME DECORTE For Women Seeking 14 13050711_copybook3 Sources of KOSÉ’s Brand Power A Global Brand Offering the Highest-Quality Cosmetics with the Finest Service COSME DECORTE was launched in 1970 as one of KOSÉ’s high-prestige brands, and has remained a ufavorite among many women seeking eternal beauty. The brand has earned the utmost trust of customers through our pursuit of the highest-quality products incorporating leading-edge technologies, along with the skin exams and meticulous, individual counseling provided by highly skilled beauty advisers at sales counters. metic stores The brand is sold mainly through specialty cosmetic and department stores that provide counseling services. In addition to Japan, COSME DECORTE has regular users around the world, including in Italy, China, Hong Kong, Taiwan, South Korea, Singapore, and Malaysia. Directly Managed Esthetic Salon Increasing Fans of COSME DECORTE A New Powder Foundation for a Youthful, Natural Complexion To further enhance customer satisfaction with the COSME The COSME DECORTE AQ MW skin-care line, launched in fall COSME DECORTE,” a directly managed, full-service facial 2010, was developed around the concept of “miracle wonder esthetic salon, in the Ginza area of Tokyo (Mode Annex of for the skin,” with the world-famous designer Marcel Wanders Printemps Ginza). This salon features private rooms that offer selected to serve as art director. The line articulates an edgy an elegant relaxation space for clients, where specialist advis- worldview that fuses elegance and art, and has become one ers provide skin-care and beauty advice. The salon is a con- of the series that symbolizes the COSME DECORTE brand. necting point for regular users of COSME DECORTE and new In fiscal 2013, KOSÉ added a new type of powder foundation and other items for the COSME DECORTE AQ MW line. DECORTE brand, in fall 2011 KOSÉ opened “salon de beaute customers, and helps to enhance trust in the brand, and create many additional fans. This new powder foundation is focused on providing a youthful, natural complexion, the latest trend in base makeup. The item includes a powder to give the skin a natural complexion, a powder to provide shine and transparency, and a foundation for a base. Using a blend of these three colors and sensationss provides the type of youthful, naturally beautiful color difficult to achieve with conventional powder foundations, and has made it one of the line’s more-popular items. Annual Report 2013 15 ADDICTION Winner of the 2012 VOGUE “Best of Beauty” Prize ADDICTION is a makeup brand targeting all women, regardless of age, who are seeking their own style. AYAKO, a Japanese makeup artist based in New York and active worldwide, determines the general direction for the brand, creating a style to maximize the individuality of each user. During fiscal 2013, KOSÉ once again offered select seasonal collections planned by AYAKO. One of the items from this series that was wildly popular with women, ADDICTION “Nail Polish Spring 2012,” was awarded the “Best of Beauty” prize (Makeup Division) by the fashion magazine Vogue Japan. JILL STUART asYourself Renewal of a Popular Body-Care Line The producer for this cosmetic brand is Jill Stuart, a fashion designer who is tremendously popular with young women around the world. The brand skillfully draws out the dual characteristics of “innocent” and “sexy” that exist side by side in young women to create the perfect blend of “kawaii” cuteness. During fiscal 2013, KOSÉ launched the renewed JILL STUART Relax line, a popular series of body-care products with a revamped product lineup and packaging design. The items that comprise the line allow the user to thoroughly enjoy the sweet fragrance of a comforting “aromatic white bouquet” at any time, while the lily-white container designs have also proved popular. 16 Kawaii in All Girls Sources of KOSÉ’s Brand Power SEKKISEI Skin-Beatifying Benefits Widely Recognized Overseas Marketing Focus to Expand Sales SEKKISEI is a long-selling skin-care brand that has remained aimed at winning new customers, and promoting the brand a favorite of customers of all generations since its launch among existing customers. Specifically, we engaged Yui in 1985. Containing a perfect combination of Chinese and Aragaki, an actress popular with women of all age-groups, as Japanese herbal extracts with highly effective moisturizing the new face for the brand, and ran a promotional campaign benefits, SEKKISEI aims to provide “skin as clear as snow.” highlighting SEKKISEI as expressing a fresh and transparent The brand includes a broad range of items, including face lotion, facial packs, emulsion, and moisturizing cream, and During fiscal 2013, KOSÉ conducted a marketing campaign feeling, and the attractiveness of adult women. Further, as part of its environmental conservation effort, has received broad customer support for its evident skin KOSÉ continued the “SAVE the BLUE®” campaign to donate a benefits and ease of use. In Japan, SEKKISEI has already portion of the sales from SEKKISEI to coral cultivation efforts become a brand that is regularly used by two generations, in Okinawa. and the brand name is becoming widely recognized around the world, centered on Taiwan, China, Hong Kong, South Korea, and other areas of Asia. Annual Report 2013 17 ASTABLANC A New Skin-Care Brand with High Functionality ASTABLANC is a new aging-care brand designed for adult Medicinal Whitening Essence Also Part of the Line women concerned about small wrinkles and spots. KOSÉ suc- For the launch of ASTABLANC, KOSÉ recruited the vibrant ceeded in combining “astaxanthin S” (moisturizer), the result of and recognized actress Yuki Amami as the face for the brand. KOSÉ’s 20 years of research on the natural pigment com- We are raising brand awareness through a diverse media mix pound astaxanthin, with components for moisture retention that includes television commercials and in-store promotions, and skin whitening, and incorporating these into face lotion, as well as web, magazine, and transportation advertising. emulsion, and other products. In February 2013, KOSÉ announced the launch of The products provide a gentle elasticity to smooth the tiny “Revolution White” for the ASTABLANC brand, a medicinal wrinkles caused by drying, and to control excessive melanin whitening essence combining the whitening agent “kojic acid” from ultraviolet light. Using the full product line provides and the moisturizing agent “astaxanthin S.” The item has 24-hour aging and whitening care. attracted much attention for providing both whitening and aging care at the same time. Aging Care for Adults 18 Sources of KOSÉ’s Brand Power STEPHEN KNOLL Entry into the Hair Salon Market and Efforts to Establish the Brand Jointly developed with the leading New York hair stylist Stephen Knoll, this is a total hair-care brand that offers a salon-quality finish. Fans of the product line are steadily increasing, mainly for shampoo and conditioner, with many regular users of hair coloring as well. During fiscal 2013, KOSÉ launched “Color Couture Hair Color,” a hair coloring that provides beautiful and long-lasting coloration comparable to a hair salon treatment. We also developed and launched “Stephen Knoll Professional,” a line of products exclusively for salons, and are working to further establish the brand along with existing consumer products. Total Hair-Care That Is a Step Above Je l’aime Hit Product with Sales Nearly Double Expectations The market for non-silicone shampoos is expanding, particularly among young women desiring natural products. Je l’aime is a new hair-care series to meet this demand, offering both shampoo and conditioner without the artificial compound silicone. In addition to being silicone-free, Je L’aime is also free of sodium laureth sulfate, commonly added to shampoos to enhance cleansing, providing gentle care for the hair and scalp. The line has earned a solid reputation from customers for its rich aroma from natural fragrances and its noticeable treatment effect. In the first two months since its launch in March 2013, Je l’aime became a hit product with total shipments of 3.13 million units, nearly twice our initial estimate. New Non-Silicone Hair-Care Series Annual Report 2013 19 Fundamentally speaking, our mission is to provide joy and comfort through cosmetics and to thereby help everyone live fuller lives. At heart, we believe we can epitomize the spirit of R&D at KOSÉ with the words “sensuousness,” “intelligence,” and “reliability.” Our foundational principle is to create values and a culture encouraging unique beauty through the high-level fusion of these three elements, thereby realizing a core concept embraced by KOSÉ’s founder, namely, “to conscientiously provide nothing but superior products.” R&D at KOSÉ is best characterized by its focus on the originality and speed needed to create the highvalue-added cosmetics that are the continuing growth drivers of KOSÉ. (1) Pursuit of market-creating research for the public We are committed to the pursuit of cosmetic research that creates new markets, reflecting a desire to develop industry-first cosmetics, and highly original cosmetics. Intelligence (2) Globalization of technologies and products We are committed to ensuring that many people around the world are able to use and enjoy the KOSÉ cosmetics that are trusted and acclaimed in Japan. (3) Challenging the status quo We are committed to securely clearing each new hurdle, without being content with the status quo. (4) Producing first-rate quality products with unique technologies We are committed to the creation of superior products that are appreciated in proportion to their value. (5) Establishing a research structure that draws the best out of individuals and the entire Group We are committed to ensuring a flexible research structure that thoroughly respects the individual. Sensuousness Reliability The Fusion of Intelligence, Sensuousness, and Reliability Leads to the Creation of Unique Value and Culture. R&D Structure Research Laboratory, which conducts research related to KOSÉ’s founder, Kozaburo Kobayashi, began his business base technologies and quality assurance; and the Technical with a boundless passion for cosmetics that offer people Research Center, which compiles and utilizes information beautiful dreams and hope. He believed strongly in creating pertaining to research, such as pharmaceutical and academic the best-quality cosmetics that deeply satisfy customers, and developments, and intellectual property. These three research providing them with the sense of personal, hand delivery. facilities are located within Tokyo’s 23 special wards, and this This ideal has been passed down through the Company, and close proximity to the Head Office in Nihonbashi, where the continues today. The founder’s ideals live on in many aspects marketing function is centered, provides for face-to-face com- of our corporate activity, including our commitment to quality, munication. To further global strategies, a China branch office and unique brand marketing. Of these, research and develop- was established in Shanghai. Including overseas offices, the ment play a key role as the driving force for KOSÉ’s growth. R&D structure comprises a total of four facilities. KOSÉ’s R&D structure comprises three main facilities, the KOSÉ Research Laboratory, which develops makeup, skincare, and a variety of other products; the KOSÉ Fundamental 20 KOSÉ’s Tales of World Firsts • The Revolution in Skin Care The first beauty serums began with the shift in focus KOSÉ KO SÉ’s s commitment to conscientious producttion is an from oil to water as a spi pira ira attiio on n forr “satisfaction that exceeds expec ctations.” c Skin care during the 1960s mainly involved protecting the skin This Th This s is th he pu ursuit of easier usability through R R&D oriented with an oil film. Skin research conducted in the 1970s, how- to oward ward wis sdom and sensuousness, as well as the desire ever, revealed that water, and specifically retaining moisture, for cu fo usttom omerrs to deeply feel joy and emotion n th hrough the is most important for beautiful skin. The skin components that steady adv d ance toward the ultimate ideal off be eauty. We retain this vital moisture at the molecular level are water-soluble anticipate the desires of women as they ch hang ge over time, compounds called natural moisturizing factor (NMF). Following continually striving to create new value, an nd prroducing this discovery, research themes cosmetics that had not existed before. shifted from oil to water, and the development of skin-care cos- • The Revolution in Foundation metics that utilize the special A foundation that began with a desire to answer characteristics of NMF. This led women’s calls for their ideal product to the creation of a new cate- Many women desire beautiful skin, while few think their own gory of product called beauty skin is perfect. KOSÉ’s foundation fulfills the wish of many serums, which sparked a women to hide their problem areas, and move a ste ep clo ep losse er to revolution in skin care. their ideal of beautiful skin. KOSÉ listene ed to women, n, an nd d after much research and development to cre eate more-satisfying products, created an entirely new type e of foundation. Produc uc u uct cts common today, such as “liquid founda ation for summer,” “p powder foundation,” and “two-way founda dation” that can be use ed ed with or without water, were three of the major revolutions in foundation pioneered by KOSÉ. Product Development Reflecting Market Needs light. KOSÉ discovered that astaxanthin is highly effective in eliminating free radicals, which affects aging. We have further Cosmetics are used directly on the skin. KOSÉ is continu- announced research showing that it inhibits the formation of ally expanding its lines of high-quality, high-function cos- wrinkles. Astaxanthin has a delicate nature, and becomes metics to meet a wide range of market needs for different ineffective when combined with cosmetics customer skin types, ways of use, and storage environ- as is. The material itself also has an orange ments, as well as to fulfill everyone’s wish for beauty. coloring, so ordinarily it would be considered an extremely difficult element to com- • Efforts to Offer Beauty to Seniors and People bine in cosmetics. KOSÉ was able to with Various Skin Problems overcome these many difficulties, however, The ingredient astaxanthin and ASTALUTION is now one of the Astaxanthin is a natural red pigment. It is the component that Company’s representative products. protects salmon and salmon roe, as well as shrimp, crab, and other forms of marine life, from the harmful effects of ultraviolet Annual Report 2013 21 Approach to Society and the Environment international standard for environmental management, under • Efforts for a Sustainable Global Environment which the Management Committee makes top-level manage- KOSÉ’s founder, Kozaburo Kobayashi, held “mind to follow the ment decisions regarding CSR activities, with implementation right path” as a personal motto throughout his life. The concept centered on the CSR Committee. of the “three benefits” (benefitting the seller, the buyer, and society) embraced by the Omi merchants during the Edo period (1603-1868) is well known, and Kozaburo followed a similar • Energy Conservation and Industrial Waste Reduction Measures basic management concept of harmonious coexistence among KOSÉ will maintain its basic stance during fiscal 2014 of customers, stores, and society. The ambition for sustainable eliminating unnecessary energy consumption and working development “together with society,” while continually providing as a company to prevent global warming. good cosmetics along with the beauty and satisfaction that customers demand, remains a cornerstone of KOSÉ today. In modern terms, efforts such as these are the aim to ensure • Current Status of Energy Use and Future Conservation Efforts compliance, and realize a sustainable social environment. We Energy use in the production division has continued to decline believe that for those of us alive today, who are facing such as a result of conservation efforts. One of the factors affecting environmental problems as the destruction of nature and global efforts to improve energy conservation for existing facilities and warming that have accompanied rapid economic development, office functions is that since utility costs necessary for factory as well as such difficult issues as the declining population in operations are fixed regardless of the production volume, ener- Japan resulting from the falling birthrate, these efforts carry gy usage per unit increases with a falloff in output. In 2008, the an even more-important responsibility. boiler at the Gunma Factory was converted from kerosene to natural gas, while energy conservation at the Sayama Factory • “Wisdom and Beauty for People and the Earth” was improved with the introduction of an inverter compressor. More than 20 years ago, with the implementation of corporate In 2011, a natural gas cogeneration system was introduced at identity in 1991, KOSÉ adopted as its corporate message the Gunma Factory. Power generators to further enhance ener- “Wisdom and Beauty for People and the Earth.” As a company gy efficiency at factories were put into operation in July 2012. that creates beauty, we desire to continually generate “wisdom We will make further efforts to eliminate waste, and reduce and beauty” to ensure that everyone, from our children and fixed energy costs, such as lighting and heating. grandchildren to those who will follow, will continue to live happily in society, and in a beautiful green earth. To achieve this, • Recycling Efforts and Industrial Waste Reduction along with persistent efforts to lighten the environmental load, All of the KOSÉ Group’s production facilities, centered on the we are proactively taking a variety of initiatives unique to KOSÉ. Sayama and Gunma factories, have actively undertaken recy- As a result of the 2011 earthquake disaster, issues such as our cling efforts. As a result, the volume of industrial waste that is coexistence in society as a corporate citizen, and harmony simply discarded has decreased significantly since fiscal 2001, with nature, have become more meaningful. Going forward, we and the recycling rate for industrial waste has exceeded will retain our focus on the corporate spirit of “mind to follow 99.9%. In fiscal 2005, KOSÉ introduced a new system to the right path” as our code of conduct, and make continual provide a Company-wide framework for production, sales, efforts toward realizing a sustainable society, and conserving and inventory, resulting in a temporary increase in the disposal the natural environment. of unnecessary materials during the preparation stage. From fiscal 2009, however, this system has had a positive effect Environmental Measures on reducing waste volume. We will continue to implement • Environmental Policy and Activities comprehensive measures in waste reduction and other areas. KOSÉ has introduced a unique environmental management system, based on the basic stance of the ISO 14001 22 TOPICS As You Become Beautiful, So Does the World • SEKKISEI SAVE the BLUE® Project The coral reefs around Okinawa are among the world’s few marine paradises, nurturing a great diversity of life. However, this coral is now being threatened with extinction by global warming. KOSÉ established the “SEKKISEI SAVE the BLUE® Project” in 2009 in an effort to save the coral and the beautiful blue ocean. SEKKISEI is a long-selling product that utilizes the bounty of nature in the form of Japanese and Chinese herbs. In appreciation, KOSÉ donates a portion of sales for coral cultivation efforts in Okinawa. Corporate Governance introduced an executive officer system to ensure efficient and • Corporate Governance Structure effective business execution, and have established a KOSÉ considers its mutual relationships with all stakeholders to Management Committee to deliberate on important manage- be an important management issue, and strives to ensure trans- ment matters. KOSÉ has also established a Risk Management parency, fairness, and good communication through strong and Compliance Committee to implement and ensure compli- corporate governance. Accordingly, we have adopted the ance throughout the Company, and two of the four corporate corporate auditor governance model, under which the Board of auditors are independent external auditors with no interest in the Directors and the Audit & Supervisory Board responsible for the Company. oversight and monitoring of business conduct. We have also General Meeting of Shareholders Supervision CSR Committee Audit Office Audit Supervision Resolution/ Approvals Proposals Risk Management and Compliance Committee Management Policy Review Committee Executive Committee (Directors and Executive Officers) Guidance and Instructions Departments/Subsidiaries Consultations Cooperation Management Committee Reporting Audit Resolution/Approvals Cooperation Resolution/Approvals Oversight Cooperation Accounting Auditor Management Oversight Board of Directors Audit Reporting Audit & Supervisory Board Election/Dismissal Business Execution Election/Dismissal Reporting Election/Dismissal Annual Report 2013 23 Financial Section Contents 25 Six-Year Summary 26 Management’s Discussion and Analysis 32 Consolidated Balance Sheets 34 Consolidated Statements of Income 35 Consolidated Statements of Comprehensive Income 36 Consolidated Statements of Changes in Net Assets 38 Consolidated Statements of Cash Flows 39 Notes to Consolidated Financial Statements 55 Independent Auditor’s Report 24 Six-Year Summary KOSÉ Corporation and Consolidated Subsidiaries Years ended March 31, 2013, 2012, 2011, 2010, 2009, and 2008 Thousands of U.S. dollars Millions of yen 2013 2012 2011 2010 2009 2008 2013 Performance: Net sales................................................ ¥170,685 ¥166,508 ¥171,071 ¥172,564 ¥178,121 ¥180,222 $1,815,798 Gross profit ............................................ 128,587 124,481 127,767 128,096 132,841 134,918 1,367,947 Selling, general and administrative expenses ....................... 116,722 113,053 113,929 117,964 120,538 119,730 1,241,723 Operating income .................................. 11,864 11,427 13,838 10,132 12,303 15,187 126,213 Interest and dividend income ................. 342 387 353 544 473 445 3,638 Income before income taxes and minority interests ........................... 12,813 11,728 12,387 9,418 11,261 14,477 136,309 Net income ............................................ 6,720 5,021 6,726 5,154 4,742 6,900 71,489 Comprehensive income ......................... 8,656 5,484 6,693 — — — 92,085 Cash and cash equivalents .................... 32,121 34,090 34,065 33,801 39,073 34,093 341,713 Current assets ....................................... 115,067 108,051 102,847 99,925 100,760 100,502 1,224,117 Total assets ............................................ 173,014 169,316 169,262 167,395 166,920 172,128 1,840,574 Current liabilities ..................................... 35,206 34,261 35,804 35,643 37,199 40,145 374,532 Long-term debt...................................... 18,497 20,187 — — — — 196,777 Shareholders’ equity .............................. 111,495 108,923 106,223 101,820 98,988 99,027 1,186,117 Interest-bearing debt.............................. 5,006 5,071 5,104 4,502 4,593 4,824 53,255 Depreciation and amortization ................ 4,607 4,882 5,162 5,892 5,593 5,452 49,011 Capital expenditures .............................. 5,599 3,821 5,421 6,446 6,622 5,804 59,564 Yen U.S. dollars Per Share Data: Net income: Basic .................................................. ¥ 117.22 ¥ 86.51 ¥ 115.87 ¥ 88.81 ¥ 81.55 ¥ 115.50 $ 1.25 Net assets ............................................. 1,964.85 1,858.91 1,813.28 1,746.59 1,699.92 1,693.55 20.90 Cash dividends ...................................... 41.00 40.00 40.00 40.00 40.00 40.00 0.44 % Financial Ratios: Shareholders’ equity ratio....................... 64.8 63.7 62.2 60.6 59.1 58.1 Debt-to-equity ratio ................................ 4.5 4.7 4.8 4.4 4.7 4.8 ROE ....................................................... 6.1 4.7 6.5 5.2 4.8 7.0 ROA....................................................... 7.1 7.0 8.4 6.4 7.5 9.1 Gross profit margin ................................ 75.3 74.8 74.7 74.2 74.6 74.9 Operating income margin ....................... 7.0 6.9 8.1 5.9 6.9 8.4 Net income to net sales ......................... 3.9 3.0 3.9 3.0 2.7 3.8 Payout ratio ........................................... 35.0 46.2 34.5 45.0 49.0 34.6 Note 1. The U.S. dollar amounts are translated, for convenience only, at the rate of ¥94 to US$1.00, the approximate rate of exchange on March 31, 2013. 2. For fiscal years ended before March 2009 capital expenditures include long-term prepaid expenses. 3. Shareholders’ equity ratio, net assets per share and debt-to-equity ratio are calculated including total valuation, translation, adjustments and other. ROE = Net income / (yearly average of total shareholders’ equity + yearly average of total valuation, translation adjustments and other) × 100 ROA = (Operating income + interest and dividend income) / yearly average of total assets × 100 Annual Report 2013 25 Management’s Discussion and Analysis SUMMARY Gross Profit and Gross Profit Margin (Billions of yen) During fiscal 2013 (ended March 31, 2013), the outlook for the global economy remained 128.6 uncertain, as concerns over economic slowdown persisted as a result of the European debt crisis and other issues. The Japanese economy, however, showed signs of recovery as the 75.3 yen weakened and stock prices rose amid disaster recovery-related demand, and rising expectations from economic policy following the change in government. In the Japanese cosmetic industry, fiscal 2013 statistics on cosmetic shipments (calendar year) compiled by FY ’09 ’10 ’11 ’12 the Ministry of Economy, Trade and Industry showed that sales value and volume were ’13 on a par with the previous year. Gross Profit Gross Profit Margin (%) In this market environment, the KOSÉ Group refined its brand marketing stance of “optimal brand in the optimal sales channel,” responding to diversifying market and customer needs with flexibility and speed. At the same time, we pursued the optimal allocation of manage- SG&A Expenses and SG&A Expenses to Net Sales (Billions of yen) ment resources, and made concerted efforts to improve management efficiency and enhance earnings capacity. 116.7 As a result, the KOSÉ Group achieved year-on-year increases in both revenue and earnings for fiscal 2013. Net sales rose 2.5% from the previous fiscal year, to ¥170.7 billion 68.3 (US$1,816 million), on gains in all business segments. The proportion of overseas sales as a total of consolidated net sales decreased 0.1 percentage point, to 12.6%, from 12.7% in the previous fiscal year. FY ’09 ’10 ’11 ’12 In terms of earnings, operating income increased 3.8%, to ¥11.9 billion (US$126 million), ’13 SG&A Expenses SG&A Expenses to Net Sales (%) as a result of the growth in sales and a reduction in the cost of sales ratio. The operating income margin improved by 0.1 percentage point, to 7.0%. Net income rose 33.8%, to ¥6.7 billion (US$71 million). Net income per share increased to ¥117.22 (US$1.25), from ¥86.51 in the previous fiscal year. Net Sales by Segment (Billions of yen) Results by Business Segment 1.7 41.1 Cosmetics Business 127.9 In Japan, KOSÉ developed existing brands, including COSME DECORTE and JILL STUART, and introduced effective new products. We also increased sales through advertising campaigns and sales promotions aimed at broadening our customer base, centered on the long-selling prestige brand SEKKISEI, and a new skin-care brand launched during the FY ’09 ’10 ’11 ’12 ’13 second half of the period. Cosmetics Cosmetaries Other Overseas, KOSÉ took steps to expand its business, focusing on Asia. Sales rose slightly, restrained by political tensions with neighboring countries and challenging market conditions. As a result, sales in the cosmetics business increased 2.0% from the previous fiscal year, Net Income and Net Income to Net Sales to ¥127.9 billion (US$1,361 million), while operating income declined 11.9%, to ¥11.7 billion (US$124 million). (Billions of yen) 6.7 Cosmetaries Business Performance in this segment was boosted by such factors as KOSÉ’s quick responses 3.9 to changes in market needs, new products launched by consolidated subsidiary KOSÉ COSMEPORT CORP., and a high-value-added hair-care brand. Sales increased 3.6% year on year, to ¥41.1 billion (US$437 million), with operating income up 149.5%, to ¥3.0 billion FY ’09 ’10 ’11 ’12 ’13 Net Income Net Income to Net Sales (%) 26 (US$32 million). Other Business Other business operations are centered on the contract manufacture of OEM products and Current Liabilities and Current Ratio (Billions of yen) sales of commercial products. Fiscal 2013 sales rose 16.7% from the previous fiscal year, to 35.2 ¥1.7 billion (US$18 million), with operating income up 19.8%, to ¥0.7 billion (US$8 million). 326.8 Cost of Sales and SG&A Expenses The cost of sales rose just ¥71 million, or 0.2%, in fiscal 2013, to ¥42.1 billion (US$448 million), as disposal costs fell due to a decline in returns. The ratio to net sales improved by 0.5 percentage point, to 24.7%. Selling, general and administrative (SG&A) expenses rose ¥3.7 billion, or 3.2%, from the previous fiscal year, to ¥116.7 billion (US$1,242 million), with the ratio to net sales increasing FY ’09 ’10 ’11 ’12 ’13 Current Liabilities Current Ratio (%) 0.4 percentage point, to 68.3%. Of this total, advertising and promotional expenses expanded ¥2.8 billion, or 6.6%, to ¥44.8 billion (US$477 million), in an effort to boost sales, with the ratio of advertising and sales promotion expenses to sales increasing 1.0 percentage point, to 26.2%. Interest-Bearing Debt and Debt-to-Equity Ratio (Billions of yen) 5.0 4.5 Other Income and Expenses The main factors affecting changes in other income and expenses during fiscal 2013 are as follows. The Company recorded ¥0.3 billion (US$4 million) in interest and dividend income and ¥2.1 billion (US$22 million) in foreign exchange gain, partially offset by ¥1.5 billion (US$15 million) in loss on liquidation of business related to the closure of the Ageo business office. As a result, other income and expenses amounted to income of ¥0.9 billion (US$10 million). FY ’09 ’10 ’11 ’12 ’13 Interest-Bearing Debt Debt-to-Equity Ratio (%) ROA (%) FINANCIAL CONDITION 7.1 Assets and Liabilities Current assets increased ¥7.0 billion, or 6.5%, from the end of the previous fiscal year, to ¥115.1 billion (US$1,224 million). This was due mainly to an increase of ¥10.7 billion in time deposits and short-term investments in securities, against a decrease of ¥2.0 billion in cash and cash equivalents. FY ’09 ’10 ’11 ’12 ’13 Investments and long-term loans advances decreased ¥2.9 billion, or 20.9%, to ¥10.8 billion (US$114 million). This was due mainly to a ¥2.6 billion decrease in investment securities. Property, plant and equipment increased ¥0.6 billion, or 1.7%, from the end of the previous fiscal year, to ¥35.7 billion (US$380 million). This was due mainly to accumulated depreciation offsetting investments related to molds and dies. Other assets decreased ¥1.1 billion, or Depreciation and Amortization and Capital Expenditures (Billions of yen) 8.4%, to ¥11.5 billion (US$122 million), due mainly to a reduction in deferred tax assets stemming from reversal of the provision for retirement benefits. 5.6 Current liabilities increased ¥0.9 billion, or 2.8%, from the end of the previous fiscal year, to 4.6 ¥35.2 billion (US$375 million). This was due mainly to a ¥0.7 billion increase in income taxes payable, stemming from the recording of a loss on business liquidation following the closure of the Ageo business office. Noncurrent liabilities decreased ¥1.7 billion, or 8.4%, to ¥18.5 billion (US$197 million), due mainly to a ¥1.7 billion decline in provision for retirement benefits. FY ’09 ’10 ’11 ’12 ’13 Depreciation and Amortization Capital Expenditures Annual Report 2013 27 Of note, the balance of interest-bearing debt at fiscal year-end stood at ¥5.0 billion (US$53 million), with a debt-to-equity ratio of 4.5%. As a result, the current ratio for fiscal 2013 was 326.8%, up 11.4 percentage points from the previous fiscal year-end, and the quick ratio was 252.3%, up 21.5 percentage points. Shareholders’ Equity Total shareholders’ equity at the end of fiscal 2013 stood at ¥111.5 billion (US$1,186 million), an increase of ¥2.6 billion from the end of the previous fiscal year. This was due mainly to an increase of ¥4.4 billion in retained earnings and a ¥1.8 billion increase in treasury stock. Key Performance Indicators The KOSÉ Group considers increases in the operating income margin and ROA to be key performance indicators. In fiscal 2013, the operating income margin rose 0.1 percentage point, to 7.0%, while ROA rose 0.1 percentage point, to 7.1%. Note: ROA = (Operating income + interest and dividend income)/yearly average of total assets x 100 Financing It is the KOSÉ Group’s understanding that it has secured sufficient funds to continue business operations. Regarding the use of funds going forward, retained earnings will be used to strengthen the Company’s financial position and fund capital expenditures as well as for mergers and acquisitions that can generate future cash flows and thereby improve the efficiency of capital utilization. Funds not required for the immediate needs of the business will be invested in a manner that places priority on the safety of the principal. Cash Flows Net cash provided by operating activities during fiscal 2013 amounted to ¥8.7 billion (US$93 million), a decrease of 11.2% from the previous fiscal year. This was due mainly to ¥12.8 billion (US$136 million) in income before income taxes and minority interests; ¥4.6 billion (US$49 million) in depreciation and amortization, a non-cash expense; ¥1.5 billion (US$15 million) in loss on liquidation of business; ¥1.7 billion (US$18 million) in decrease in provision for retirement benefits; ¥1.7 billion (US$18 million) in increase in inventories; ¥0.6 billion (US$6 million) in increase in notes and accounts receivable—trade; and ¥4.4 billion (US$47 million) in income taxes paid. Net cash used in investing activities amounted to ¥7.9 billion (US$84 million), an increase of 12.6% from the previous fiscal year. This was due mainly to ¥6.4 billion (US$68 million) in net income from time deposits and short-term investments in securities; ¥5.0 billion (US$53 million) in purchase of property, plant and equipment, including molds and dies; and ¥3.1 billion (US$33 million) in net expenditures from trading and redemption of investment securities. Net cash used in financing activities amounted to ¥4.5 billion (US$47 million), an increase of 76.7% from the previous fiscal year. This was due mainly to ¥2.5 billion (US$27 million) in cash dividends paid and ¥1.8 billion (US$20 million) in expenditures for the acquisition of treasury stock. 28 Management’s Discussion and Analysis BUSINESS AND OTHER RISKS The following explanations of risk factors in this annual report are presented with the objective of proactively disclosing information of material interest to investors for making investment decisions. From the standpoint of proactive disclosure, these explanations include factors that are not necessarily of this nature and factors associated with external matters that are beyond the control of KOSÉ that can influence the decision making of investors. This is not meant to be a complete list of potential risks. These risk factors could have a material influence on KOSÉ’s management performance and financial position. Please note that the forward-looking statements contained herein are based on the Company’s judgments, which were made as of June 27, 2013. Strategic investment activities The KOSÉ Group makes various investment decisions from a strategic perspective. The decision-making process is conducted after sufficient information has been gathered, but the investments may not produce the initially forecast results due to unforeseen changes in the business environment, and this could have a material influence on KOSÉ’s management performance and financial position. Cosmetic market 1) Japan’s cosmetic market In Japan’s cosmetic market, which is now mature, new entrants have entered from other industries in recent years, and, as a result, competition has intensified. Further challenges are posed in Japan by major changes in sales and distribution channels due to the shortage of successors for aging store owners among specialty cosmetic stores, the formation of alliances and realignment among large retail chains, and the expanding e-commerce market driven by the Internet. KOSÉ has made and implemented various proposals to cope with these changes, but if they prove ineffectual, it could see a material influence to its management performance and financial position. 2) Overseas market The KOSÉ Group conducts business in China and other overseas markets. These overseas businesses expose the Group to risks associated with unforeseen revisions to laws and regulations, political instability, an epidemic of a contagious disease, labor problems, infrastructure disruptions, social unrest caused by terrorism, natural disasters caused by abnormal or unseasonable weather, and other risks. These factors could have a material influence on KOSÉ’s management performance and financial position. 3) Adapting to market needs The development of new brands and the reinforcement and cultivation of existing brands in response to changing consumer needs, and related marketing activities, have a large influence on business performance. However, these business activities involve various uncertainties, and if results are not in line with initial plans, this could have a material influence on KOSÉ’s management performance and financial position. Annual Report 2013 29 Market risks 1) Procurement of raw materials The KOSÉ Group is moving forward with the diversification of procurement to include overseas sources in order to minimize market risk. It also maintains good relationships with suppliers to obtain necessary raw materials at appropriate prices and on a timely basis. However, changes in international circumstances or an inflow of speculative money could temporarily destabilize the supply-demand balance, thereby impacting purchase prices. Also, in the event that suppliers are unable to continue their operations (due to bankruptcy, suspension of business operations, or for other reasons), unexpected disasters or accidents, sudden increases in demand, or other factors, the Group may encounter difficulties in obtaining essential raw materials. These factors could have a material influence on KOSÉ’s management performance and financial position. 2) Foreign exchange The KOSÉ Group is subject to the risk of foreign exchange rate volatility at the time of settlement for transactions denominated in foreign currencies. The Group strives to limit the impact of this risk within the Group by building a structure of localized production to minimize import/ export transactions. However, these risks cannot be completely avoided. Also, the reported figures of overseas consolidated subsidiaries are denominated in local currencies, but converted to yen for the preparation of consolidated financial accounts. As a result, a sharp change in foreign exchange rates could have a material influence on KOSÉ’s management performance and financial position. 3) Marketable securities The KOSÉ Group holds marketable securities with market prices, and a sharp fluctuation in market prices presents the risk of valuation losses. Also, changes in the market prices of marketable securities could impact the pension assets held by the KOSÉ Group’s corporate pension fund, causing an increase/decrease in pension expenses which could have a material influence on KOSÉ’s management performance and financial position. 4) Laws and regulations The KOSÉ Group’s business activities are subject to various domestic and overseas laws and regulations including the Pharmaceutical Affairs Law, standards related to quality, safety, and the environment, the Companies Act, tax laws, labor-related laws, and transaction-related laws, among others. The Group strives to remain compliant with all these laws and regulations, but a change in the laws and regulations or the unforeseen enactment of new laws or regulations, particularly overseas, could temporarily restrict the Group’s business activities and have a material influence on KOSÉ’s management performance and financial position. 30 Management’s Discussion and Analysis 5) Intellectual property rights and important litigation The KOSÉ Group retains intellectual property rights including patents, trademarks, and design rights to maintain its competitive advantage vis-à-vis competitors, and takes appropriate measures to protect these rights. However, despite these measures, the Group’s market share could be eroded were third parties to make and distribute imitation products, ignoring the Group’s rights. This could impact the Group’s business. The KOSÉ Group conducts sufficient research to ensure that its business activities do not infringe upon the intellectual property rights of third parties, but were the Group to be sued by a third party for intellectual property rights infringement, the Group may be required to pay damages and indemnities, and its production and sales restricted. This could have a material influence on KOSÉ’s management performance and financial position. 6) Information management The KOSÉ Group manages personal, R&D, and other confidential information strictly by establishing internal rules, conducting internal audits, and taking other actions. For example, as prescribed by the Personal Information Protection Law and the Ministry of Economy, Trade and Industry guidelines, the Company has established its Personal Information Management Committee and internal rules. However, a leakage of confidential information due to whatever reason could adversely affect business operations, and such leakages may have a material influence on KOSÉ’s management performance and financial position. 7) Disasters The KOSÉ Group has instituted safety measures to minimize the adverse impact of a suspension of business activities due to natural disasters. However, the occurrence of a large earthquake, tsunami, or power outage that exceeds its expectations could cause production activities to be suspended, logistics systems to slow, and the information system to be disrupted, thereby materially influencing KOSÉ’s management performance and financial position. 8) Customer relations The KOSÉ Group manufactures products with its first priority on the delivery of secure and safe products to customers. The Group refers to its thinking about quality as its “quality policy,” and has stipulated a quality policy message and five declarations of activities. The Group bases its daily activities on this policy, but the occurrence of an unforeseen situation that impairs the satisfaction or trust of customers could have a material influence on KOSÉ’s management performance and financial position. Annual Report 2013 31 Consolidated Balance Sheets KOSÉ Corporation and Consolidated Subsidiaries At March 31, 2013 and 2012 Thousands of U.S. dollars (Note 3) Millions of yen Assets 2013 2012 2013 ¥ 34,090 $ 341,713 Current assets: Cash and cash equivalents (Note 5) ........................................................................ ¥ 32,121 Time deposits and short-term investments in securities (Notes 5 and 6).................. 31,875 21,194 339,096 Notes and accounts receivable—trade (Note 5) ...................................................... 24,828 23,799 264,128 Allowance for doubtful accounts ............................................................................. (250) (274) (2,660) Inventories (Note 4) ................................................................................................. 21,200 19,659 225,532 Deferred tax assets—current (Note 10) ................................................................... 4,093 4,270 43,543 Other ...................................................................................................................... 1,197 5,311 12,734 Total current assets .......................................................................................... 115,067 108,051 1,224,117 Investments in and advances to unconsolidated subsidiaries and affiliates .............. 30 30 319 Investment securities (Notes 5 and 6) ...................................................................... 7,530 10,178 80,106 Other ...................................................................................................................... 3,388 3,576 36,043 Allowance for doubtful accounts ............................................................................. (188) (173) (2,000) Total investments and long-term advances ...................................................... 10,760 13,610 114,468 16,935 16,591 180,160 Investments and long-term advances: Property, plant and equipment (Note 7): Land ...................................................................................................................... Buildings and structures ......................................................................................... 30,672 30,580 326,298 Machinery and equipment ....................................................................................... 43,297 41,517 460,606 Leased assets......................................................................................................... 1,049 925 11,160 Construction in progress ......................................................................................... 58 204 617 92,014 89,820 978,872 Accumulated depreciation....................................................................................... (56,315) (54,707) (599,096) Total property, plant and equipment ................................................................. 35,698 35,113 379,766 Other assets: 32 Intangible assets ..................................................................................................... 3,075 3,215 32,713 Deferred tax assets—noncurrent (Note 10).............................................................. 8,413 9,325 89,500 Total other assets............................................................................................. 11,489 12,540 122,223 Total assets .................................................................................................. ¥173,014 ¥169,316 $1,840,574 Thousands of U.S. dollars (Note 3) Millions of yen Liabilities and net assets 2013 2012 2013 Current liabilities: Short-term loans payable (Notes 8 and 9) ............................................................... ¥ 4,356 ¥ 4,379 $ 46,340 Notes and accounts payable – trade (Note 5).......................................................... 11,274 11,275 119,936 Income taxes payable (Note 10) .............................................................................. 3,181 2,470 33,840 Lease obligations .................................................................................................... 180 163 1,915 Other (Note 11) ....................................................................................................... 16,212 15,972 172,468 Total current liabilities ....................................................................................... 35,206 34,261 374,532 Long-term lease obligations .................................................................................... 464 521 4,936 Noncurrent liabilities: Provision for retirement benefits (Note 12) ............................................................... 14,985 16,658 159,415 Provision for directors’ retirement benefits ............................................................... 2,698 2,655 28,702 Other ...................................................................................................................... 349 352 3,713 Total noncurrent liabilities ................................................................................. 18,497 20,187 196,777 4,848 4,848 51,574 Commitments and contingent liabilities (Note 16) Net assets: Shareholders’ equity (Note 13): Common stock, without par value: Authorized —200,000,000 shares in 2013 and 2012 Issued — 60,592,541 shares in 2013 and 2012......................................... Capital surplus .................................................................................................... 6,390 6,390 67,979 Retained earnings ............................................................................................... 109,333 104,914 1,163,117 Treasury stock, at cost: 3,545,676 shares in 2013 and 2,545,525 shares in 2012 .............................................. (9,076) (7,229) (96,553) Total shareholders’ equity ................................................................................ 111,495 108,923 1,186,117 Valuation difference on available-for-sale securities .............................................. 799 146 8,500 Foreign currency translation adjustment .............................................................. (206) (1,165) (2,191) Total accumulated other comprehensive income .............................................. 592 (1,019) 6,298 Minority interests ................................................................................................. 7,221 6,962 76,819 Total net assets ................................................................................................ 119,310 114,867 1,269,255 Total liabilities and net assets ........................................................................ ¥173,014 ¥169,316 $1,840,574 Accumulated other comprehensive income See accompanying notes to consolidated financial statements. Annual Report 2013 33 Consolidated Statements of Income KOSÉ Corporation and Consolidated Subsidiaries Years ended March 31, 2013 and 2012 Thousands of U.S. dollars (Note 3) Millions of yen Net sales.................................................................................................................. 2013 2012 2013 ¥170,685 ¥166,508 $1,815,798 Cost of sales ........................................................................................................... 42,098 42,027 447,851 Gross profit ............................................................................................................ 128,587 124,481 1,367,947 Selling, general and administrative expenses (Notes 14 and 15) ........................ 116,722 113,053 1,241,723 Operating income .................................................................................................. 11,864 11,427 126,213 Other income (expenses): Interest expense .................................................................................................... (40) (42) (426) Interest and dividend income ................................................................................. 342 387 3,638 Foreign exchange gain (loss) .................................................................................. 2,069 (222) 22,011 Loss on sales or disposal of noncurrent assets ...................................................... (60) (146) (638) Impairment loss ..................................................................................................... — (249) — Gain on sales of investment securities (Note 6)....................................................... 4 59 43 Loss on liquidation of business .............................................................................. (1,453) (380) (15,457) Compensation income ........................................................................................... — 238 — Reversal of provision for loss on disaster ................................................................ — 405 — Other, net ............................................................................................................... Income before income taxes and minority interests........................................... 87 250 926 948 300 10,085 12,813 11,728 136,309 Income taxes (Note 10): Current .................................................................................................................. (5,092) (4,186) (54,170) Deferred ................................................................................................................. (717) (1,989) (7,628) Total income taxes.............................................................................................. (5,809) (6,176) (61,798) Income before minority interests .......................................................................... 7,003 5,552 74,500 Minority interests.................................................................................................... (282) (530) (3,000) Net income (Note 19) ...................................................................................... See accompanying notes to consolidated financial statements. 34 ¥ 6,720 ¥ 5,021 $ 71,489 Consolidated Statements of Comprehensive Income KOSÉ Corporation and Consolidated Subsidiaries Years ended March 31, 2013 and 2012 Thousands of U.S. dollars (Note 3) Millions of yen 2013 Income before minority interests ................................................................................... ¥7,003 2012 2013 ¥5,552 $74,500 Other comprehensive income: Valuation difference on available-for-sale securities .......................................................... 659 301 7,011 Foreign currency translation adjustment .......................................................................... 993 (369) 10,564 Total accumulated other comprehensive income (Note 17)....................................... 1,652 (67) 17,574 Comprehensive income (Note 17) ................................................................................... ¥8,656 ¥5,484 $92,085 ¥4,970 $86,638 514 3,436 Comprehensive income attributable to: Owners of the parent ...................................................................................................... ¥8,332 Minority interests ............................................................................................................. 323 See accompanying notes to consolidated financial statements. Annual Report 2013 35 Consolidated Statements of Changes in Net Assets KOSÉ Corporation and Consolidated Subsidiaries Years ended March 31, 2013 and 2012 Shareholders’ equity Common stock Capital surplus Retained earnings ¥4,848 ¥6,390 ¥102,215 Dividends from surplus........................................................................................... — — (2,321) Net income ............................................................................................................ — — 5,021 Purchase of treasury stock ..................................................................................... — — — Disposal of treasury stock ...................................................................................... — (0) — Transfer to capital surplus from retained earnings ................................................... — 0 (0) Net changes of items other than shareholders’ equity ............................................ — — — Total changes of fiscal year ended March 31, 2012 ............................................ — — 2,699 Balance as of March 31, 2012 ............................................................................... ¥4,848 ¥6,390 ¥104,914 Balance as of April 1, 2012 .................................................................................... 4,848 6,390 104,914 Dividends from surplus........................................................................................... — — (2,301) Net income ............................................................................................................ — — 6,720 Purchase of treasury stock ..................................................................................... — — — Disposal of treasury stock ...................................................................................... — — — Transfer to capital surplus from retained earnings ................................................... — — — Net changes of items other than shareholders’ equity ............................................ — — — Balance as of April 1, 2011 .................................................................................... Changes of fiscal year ended March 31, 2012: Changes of fiscal year ended March 31, 2013: Total changes of fiscal year ended March 31, 2013 ............................................ — — 4,419 Balance as of March 31, 2013 ............................................................................... ¥4,848 ¥6,390 ¥109,333 Shareholders’ equity Common stock Capital surplus Retained earnings $51,574 $67,979 $1,116,106 Dividends from surplus........................................................................................... — — (24,479) Net income ............................................................................................................ — — 71,489 Purchase of treasury stock ..................................................................................... — — — Disposal of treasury stock ...................................................................................... — — — Transfer to capital surplus from retained earnings ................................................... — — — Net changes of items other than shareholders’ equity ............................................ — — — Balance as of April 1, 2012 .................................................................................... Changes of fiscal year ended March 31, 2013: Total changes of fiscal year ended March 31, 2013 ............................................ — — 47,011 Balance as of March 31, 2013 ............................................................................... $51,574 $67,979 $1,163,117 See accompanying notes to consolidated financial statements. 36 Millions of yen Accumulated other comprehensive income Treasury stock Total shareholders’ equity Valuation difference on available-for-sale securities Foreign currency translation adjustment Total accumulated other comprehensive income Minority interests Total net assets ¥(7,230) ¥106,223 ¥(157) ¥ (811) ¥ (968) ¥6,541 ¥111,796 — (2,321) — — — — (2,321) — 5,021 — — — — 5,021 (0) (0) — — — — (0) 0 0 — — — — 0 — — — — — — — — — 303 (354) (50) 421 370 0 2,699 303 (354) (50) 421 3,070 ¥(7,229) ¥108,923 ¥ 146 ¥(1,165) ¥(1,019) ¥6,962 ¥114,867 (7,229) 108,923 146 (1,165) (1,019) 6,962 114,867 — (2,301) — — — — (2,301) — 6,720 — — — — 6,720 (1,846) (1,846) — — — — (1,846) — — — — — — — — — — — — — — — — 653 958 1,612 258 1,870 (1,846) 2,572 653 958 1,612 258 4,443 ¥(9,076) ¥111,495 ¥ 799 ¥ (206) ¥ 592 ¥7,221 ¥119,310 Thousands of U.S. dollars (Note 3) Accumulated other comprehensive income Treasury stock Total shareholders’ equity Valuation difference on available-for-sale securities Foreign currency translation adjustment Total accumulated other comprehensive income Minority interests Total net assets $(76,904) $1,158,755 $1,553 $(12,394) $(10,840) $74,064 $1,221,989 — (24,479) — — — — (24,479) — 71,489 — — — — 71,489 (19,638) (19,638) — — — — (19,638) — — — — — — — — — — — — — — — — 6,947 10,191 17,149 2,745 19,894 (19,638) 27,362 6,947 10,191 17,149 2,745 47,266 $(96,553) $1,186,117 $8,500 $ (2,191) $ 6,298 $76,819 $1,269,255 Annual Report 2013 37 Consolidated Statements of Cash Flows KOSÉ Corporation and Consolidated Subsidiaries Years ended March 31, 2013 and 2012 Thousands of U.S. dollars (Note 3) Millions of yen 2013 2012 2013 Net cash provided by (used in) operating activities: Income before income taxes and minority interests ................................................... ¥12,813 ¥11,728 $136,309 Depreciation and amortization ................................................................................... 4,607 4,882 49,011 Impairment loss ........................................................................................................ — 249 — Loss on liquidation of business ................................................................................. 1,453 — 15,457 Decrease in allowance for doubtful accounts ............................................................ (13) (42) (138) Decrease in provision for retirement benefits ............................................................. (1,673) (1,657) (17,798) Increase in provision for directors’ retirement benefits ............................................... 42 116 447 Loss on sales or disposal of noncurrent assets ......................................................... 60 146 638 Compensation income .............................................................................................. — (238) — (3,628) Interest and dividend income .................................................................................... (341) (387) Interest expense ....................................................................................................... 40 42 426 Foreign exchange (gain) loss ..................................................................................... (1,456) 62 (15,489) Gain on sales of investment securities ....................................................................... (4) (57) (43) Increase in notes and accounts receivable—trade..................................................... (596) (1,392) (6,340) Decrease (increase) in inventories.............................................................................. (1,657) 1,028 (17,628) Decrease in notes and accounts payable—trade ...................................................... (147) (363) (1,564) Other, net .................................................................................................................. (416) (678) (4,426) Subtotal ................................................................................................................ 12,710 13,438 135,213 Interest and dividend income received ...................................................................... 421 430 4,479 Interest expenses paid .............................................................................................. (37) (44) (394) Compensation income received ................................................................................ — 238 — Income taxes paid..................................................................................................... (4,388) (4,263) (46,681) Net cash provided by operating activities............................................................... 8,706 9,799 92,617 Decrease (increase) in time deposits and short-term investments in securities........... 6,363 (214) 67,691 Purchase of property, plant and equipment ............................................................... (4,995) (3,416) (53,138) Purchase of intangible assets .................................................................................... (559) (358) (5,947) Purchase of investment securities ............................................................................. (3,945) (3,852) (41,968) Proceeds from sales and redemption of investment securities ................................... 817 2,281 8,691 Increase in other investments .................................................................................... (5,579) (1,455) (59,351) Net cash used in investing activities ....................................................................... (7,899) (7,016) (84,032) Net increase in short-term loans payable................................................................... (69) — (734) Net decrease (increase) in treasury stock .................................................................. (1,846) 0 (19,638) Cash dividends paid and other, net ........................................................................... (2,544) (2,524) (27,064) Net cash used in financing activities ...................................................................... (4,459) (2,524) (47,436) Effect of exchange rate changes on cash and cash equivalents ......................... 1,682 (234) 17,894 Net increase (decrease) in cash and cash equivalents.......................................... (1,968) 24 (20,936) Net cash provided by (used in) investing activities: Net cash provided by (used in) financing activities: Cash and cash equivalents at beginning of period ................................................ 34,090 34,065 362,660 Cash and cash equivalents at end of period .......................................................... ¥32,121 ¥34,090 $341,713 See accompanying notes to consolidated financial statements. 38 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies a. Basis of Preparation The accompanying consolidated financial statements have been prepared from the accounts maintained by KOSÉ Corporation (the “Company”) and its consolidated subsidiaries in accordance with the provisions set forth in the Companies Act and in conformity with accounting principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards, and are compiled from the consolidated financial statements prepared by the Company as required by the Financial Instruments and Exchange Law of Japan. As permitted by the Financial Instruments and Exchange Law, amounts of less than one million yen have been omitted. Consequently, the totals shown in the accompanying consolidated financial statements (both in yen and U.S. dollars) do not necessarily agree with the sum of the individual amounts. Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. b. Basis of Consolidation The accompanying consolidated financial statements include the accounts of the Company and all significant subsidiaries controlled directly or indirectly by the Company. The accounts of the consolidated subsidiaries are included on the basis of fiscal periods which end on, or three months prior to, March 31. All significant intercompany items have been eliminated in consolidation. Investments in significant affiliates over which the Company exercises considerable influence in terms of their operating and financial policies are accounted for by the equity method. Goodwill arising from the cost of the Company’s investments in subsidiaries and affiliates over the equity in their net assets at the dates of acquisition is amortized on a straight-line basis over their estimated useful lives or over a period of five years if the Company cannot precisely estimate the useful life. In cases where the differences are immaterial, they are charged to income when incurred. Assets and liabilities at the overseas consolidated subsidiaries are revalued at market. Investments in other affiliates and unconsolidated subsidiaries, not significant in amount, are carried at cost or less. Where there has been permanent impairment in the value of its investments, the Company has written them down. c. Foreign Currency Translation Current and noncurrent monetary accounts denominated in foreign currencies of the Company and its domestic consolidated subsidiaries are translated into yen at the current exchange rates in effect at the balance sheet date. The revenue and expense accounts of the overseas consolidated subsidiaries are translated into yen at the average exchange rates in effect during the year. The balance sheet accounts of the overseas consolidated subsidiaries are translated into yen at the current exchange rates in effect at the balance sheet date except for the components of net assets excluding minority interests which are translated at their historical exchange rates. d. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents in the accompanying consolidated statements of cash flows exclude bank overdrafts of nil at March 31, 2013 and 2012, respectively, in accordance with current Japanese accounting standards. e. Inventories Inventories are stated at cost determined primarily by the average method. When their costs exceed the net realizable value, the costs over the net realizable value are recorded as cost. Annual Report 2013 39 f. Securities Securities, except for investments in unconsolidated subsidiaries and affiliates, are classified as trading securities, held-to-maturity securities or other securities. Trading securities are carried at fair value and held-to-maturity securities are carried at cost or amortized cost. Marketable securities classified as other securities are carried at fair value with any changes in unrealized holding gain or loss, net of the applicable income taxes, included directly in net assets. Non-marketable securities classified as other securities are carried at cost. Cost of securities sold is determined by the moving average method. g. Fixed Assets Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment excluding leased assets at the Company and its domestic consolidated subsidiaries is calculated by the declining-balance method at rates based on the estimated useful lives of the respective assets ranging from 8 to 65 years for buildings and structures, except for buildings acquired on or subsequent to April 1, 1998 on which depreciation is calculated by the straight-line method, and from 2 to 9 years for machinery and equipment. Depreciation of property, plant and equipment at the overseas consolidated subsidiaries is computed by the straight-line method. Maintenance and minor repairs are charged to income as incurred; major renewals and improvements are capitalized. Software development costs are amortized over an anticipated useful life of 5 years by the straight-line method. Intangible assets other than software development costs are amortized by the straight-line method over their respective estimated useful lives. Depreciation of leased assets where the ownership is not transferred to the lessee is calculated by the straight-line method over the terms of the respective leases. The declining-balance depreciation rates were 200% and 250% for the years ended March 31, 2013 and 2012, respectively (See Note 2). h. Leases Leases classified as finance leases of the Company and its domestic consolidated subsidiaries are accounted for as ordinary sales and purchases whether or not the ownership of the leased assets is transferred to the lessee. i. Reserve for Returned Unsold Goods The reserve for returned unsold goods included in “Other” under “Current liabilities” is provided at an estimated amount to cover anticipated losses on such goods at the Company and certain domestic consolidated subsidiaries. j. Retirement Benefits Accrued employees’ retirement benefits at the balance sheet date are provided primarily at an amount calculated based on the retirement benefit obligation and the fair value of the pension plan assets as of the balance sheet date as adjusted for unrecognized prior service cost and unrecognized actuarial gain or loss. The retirement benefit obligation has been allocated to each period by the straight-line method over the estimated remaining years of service of the eligible employees. Actuarial gain or loss is amortized in the year following the year in which the gain or loss is recognized primarily by the straight-line method over a period of 10 years which falls within the average remaining years of service of the participants in the plans. In addition, subject to the shareholders’ approval, directors and corporate auditors of the Company and a certain consolidated subsidiary are customarily entitled to lump-sum payments under their respective unfunded severance benefit plans. The provision for severance benefits for those officers has been made at estimated amounts. 40 Notes to Consolidated Financial Statements k. Income Taxes Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse. l. Research and Development Expenses Research and development expenses are charged to income when incurred. m. Derivative Financial Instruments The Company and certain consolidated subsidiaries enter into derivatives transactions in order to manage certain risks arising from adverse fluctuation in foreign currency exchange rates. Derivatives are carried at fair value with any changes in unrealized gain or loss charged or credited to income, except for those which meet the criteria for deferral hedge accounting under which unrealized gain or loss is deferred as an asset or a liability. Receivables and payables hedged by qualified forward foreign exchange contracts are translated at the corresponding foreign exchange contract rates. n. Standards Issued but Not Yet Effective On May 17, 2012, the ASBJ issued “Accounting Standard for Retirement Benefits” (ASBJ Statement No. 26) and “Guidance on Accounting Standard for Retirement Benefits” (ASBJ Guidance No. 25), which replaced the Accounting Standard for Retirement Benefits that had been issued by the Business Accounting Council in 1998 with an effective date of April 1, 2000 and the other related practical guidance, being followed by partial amendments from time to time through 2009. The major changes are as follows: (1) Treatment in the balance sheet—Actuarial gains and losses and prior service cost that have yet to be recognized in profit or loss shall be recognized within net assets (accumulated other comprehensive income), after adjusting for tax effects, and the deficit or surplus shall be recognized as a liability (liability for retirement benefits) or asset (asset for retirement benefits). (2) Treatment in the statement of income and the statement of comprehensive income— Actuarial gains and losses and prior service cost that arose in the current period and have yet to be recognized in profit or loss shall be included in other comprehensive income and actuarial gains and losses and prior service cost that were recognized in other comprehensive income in prior periods and then recognized in profit or loss in the current period shall be treated as reclassification adjustments. This standard and related guidance are effective as of the end of fiscal years beginning on or after April 1, 2013. Annual Report 2013 41 2. Accounting Changes a) Accounting Standard for Accounting Changes and Error Corrections Effective April 1, 2011, the Company and its consolidated subsidiaries adopted the “Accounting Standard for Accounting Changes and Error Corrections,” (Accounting Standard Board of Japan Statement No. 24, December 4, 2009) and the “Guidance on the Accounting Standard for Accounting Changes and Error Corrections.” (Accounting Standards Board of Japan Guidance No. 24, December 4, 2009). b) Depreciation Method for Property, Plant and Equipment In accordance with an amendment to the Corporation Tax Law effective April 1, 2012, the Company and its domestic consolidated subsidiaries have changed their depreciation method for property, plant and equipment acquired on or after April 1, 2012, other than certain buildings, to reflect the methods prescribed in the amended Corporation Tax Law. The previously applied 250% declining-balance method was changed to the 200% declining-balance method. The impact on operating income, income before income taxes and minority interests was immaterial for the year ended March 31, 2013. 3. U.S. Dollar Amounts The translation of yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan and has been made, as a matter of arithmetic computation only, at ¥94 =U.S.$1.00, the approximate rate of exchange in effect on March 31, 2013. The approximate rate of exchange prevailing at May 31, 2013 was ¥100=U.S.$1.00. The translation should not be construed as a representation that all amounts shown could be converted into U.S. dollars at such a rate. 4. Inventories Inventories at March 31, 2013 and 2012 consisted of the following: Millions of yen 2013 Merchandise and finished goods .................................................... ¥11,101 42 Thousands of U.S. dollars 2012 2013 ¥10,433 $118,096 1,137 13,745 Work in process ............................................................................. 1,292 Raw materials and supplies ............................................................ 8,806 8,088 93,681 Total ............................................................................................ ¥21,200 ¥19,659 $225,532 Notes to Consolidated Financial Statements 5. Financial Instruments a. Information on Financial Instruments The Company and its consolidated subsidiaries mainly utilize low-risk financial instruments. Notes and accounts receivable—trade are subject to customer credit risk. The Company and its consolidated subsidiaries manage this risk by monitoring the due dates and the outstanding balances for individual customers and by assessing credit risk every year. Investment securities mainly are composed of low-risk instruments classified as held-to-maturity securities, which are subject to possible changes in market price. The Company and its consolidated subsidiaries manage this risk by measuring the fair values every quarter. Notes and accounts payable— trade are subject to liquidity risk. The Company and its consolidated subsidiaries manage this risk by preparing cash-flow plans every month with payments made on a timely basis. b. Information on Fair Value of Financial Instruments Information on fair values of financial instruments at March 31, 2013 and 2012 is summarized as follows (excluding financial instruments for which it is difficult to assess the fair value): Millions of yen March 31, 2013 Carrying value Thousands of U.S. dollars Fair value Unrealized gain (loss) Carrying value Fair value Unrealized gain (loss) ¥32,120 ¥(0) $341,713 $341,702 $ (0) (0) Assets Cash and cash equivalents .... ¥32,121 Time deposits and short-term investments in securities....... 31,875 31,875 (0) 339,096 339,096 Notes and accounts receivable—trade ................. 24,828 24,828 — 264,128 264,128 — Investment securities.............. 4,850 4,850 — 51,596 51,596 — Total assets ........................ ¥93,675 ¥93,674 ¥(0) $996,543 $996,532 $ (0) Notes and accounts payable—trade .................... ¥11,274 ¥11,274 ¥— $119,936 $119,936 $— Total liabilities...................... ¥11,274 ¥11,274 ¥— $119,936 $119,936 $— Liabilities Millions of yen Fair value Unrealized gain (loss) Cash and cash equivalents .................................................................... ¥34,090 ¥34,090 ¥(0) Time deposits and short-term investments in securities ......................... 21,194 21,193 (0) Notes and accounts receivable—trade................................................... 23,799 23,799 — March 31, 2012 Carrying value Assets Investment securities.............................................................................. 9,000 9,000 — Total assets ........................................................................................ ¥88,084 ¥88,083 ¥(1) Notes and accounts payable—trade ...................................................... ¥11,275 ¥11,275 ¥— Total liabilities...................................................................................... ¥11,275 ¥11,275 ¥— Liabilities Determining fair values of financial instruments is as follows: a) Cash and cash equivalents, time deposits and notes and accounts receivable—trade Due to the short-term nature of these assets, the Company and its consolidated subsidiaries assessed fair value and carrying value as almost equal. b) Investment securities (included in short-term investments in securities) The Company and its consolidated subsidiaries recorded fair values at prices on stock exchanges or from correspondent financial institutions. c) Notes and accounts payable—trade The Company and its consolidated subsidiaries assessed the fair value as equal to carrying value because payments are settled in the short term. Annual Report 2013 43 The carrying value of financial instruments for which the fair value is not readily determinable at March 31, 2013 and 2012 is summarized as follows: Thousands of U.S. dollars Millions of yen 2013 2012 2013 Unlisted stock....................................................................................... ¥2,710 ¥2,710 $28,830 Total .................................................................................................. ¥2,710 ¥2,710 $28,830 The redemption schedule for monetary claims and marketable securities with maturities classified as other securities at March 31, 2013 and 2012 is summarized as follows: Millions of yen Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Cash and cash equivalents ......................... ¥31,988 ¥ — ¥ — ¥— Time deposits and short-term investments in securities ........................... 31,881 — — — Notes and accounts receivable—trade ....... 24,828 — — — Investment securities classified as held-to-maturity securities .................... — — — — Investment securities classified as other securities..................................... — 287 976 — Total ........................................................ ¥88,697 ¥287 ¥976 ¥— Due in one year or less Due after one year through five years March 31, 2013 Thousands of U.S. dollars March 31, 2013 Cash and cash equivalents ......................... $340,298 Time deposits and short-term investments in securities ........................... 339,160 Notes and accounts receivable—trade ....... Investment securities classified as held-to-maturity securities .................... $ Due after five years through ten years — $ Due after ten years — $— — — — 264,128 — — — — — — — Investment securities classified as other securities..................................... — 3,053 10,383 — Total ........................................................ $943,585 $3,053 $10,383 $— Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Millions of yen March 31, 2012 44 Cash and cash equivalents ......................... ¥33,339 Time deposits and short-term investments in securities ........................... 21,167 Notes and accounts receivable—trade ....... Investment securities classified as held-to-maturity securities .................... ¥ — ¥ — ¥— — — — 23,799 — — — — — — — Investment securities classified as other securities..................................... — 4,281 1,798 — Total ........................................................ ¥78,306 ¥4,281 ¥1,798 ¥— Notes to Consolidated Financial Statements 6. Securities Marketable securities classified as held-to-maturity securities at March 31, 2013 and 2012 are summarized as follows: Millions of yen March 31, 2013 Carrying value Fair value Thousands of U.S. dollars Unrealized gain (loss) Carrying value Fair value Unrealized gain (loss) Securities whose fair value exceeds their carrying value: Government bonds ................ ¥ — ¥— Corporate bonds ................... 1,499 — ¥ 1,499 0 $ 15,947 — $ 15,947 — $ — 0 Other ..................................... — — — — — — Subtotal ............................. 1,499 1,499 0 15,947 15,947 0 Securities whose fair value exceeds their carrying value: Government bonds ................ — — — — — — Corporate bonds ................... 6,467 6,466 (0) 68,798 68,787 (11) Other ..................................... 6,500 6,500 — 69,149 69,149 — Subtotal ............................. 12,967 12,966 (0) 137,947 137,936 (11) Total................................ ¥14,467 ¥14,466 ¥ (0) $153,904 $153,894 $(11) Millions of yen March 31, 2012 Carrying value Fair value Unrealized gain (loss) Securities whose fair value exceeds their carrying value: Government bonds .............................................................................. ¥ — ¥ — ¥— Corporate bonds ................................................................................. — — — Other ................................................................................................... — — — Subtotal ........................................................................................... — — — — — — (1) Securities whose fair value exceeds their carrying value: Government bonds .............................................................................. Corporate bonds ................................................................................. 7,908 7,906 Other ................................................................................................... 4,000 4,000 – Subtotal ........................................................................................... 11,908 11,906 (1) Total.............................................................................................. ¥11,908 ¥11,906 ¥(1) Annual Report 2013 45 Marketable securities classified as other securities at March 31, 2013 and 2012 are summarized as follows: Millions of yen March 31, 2013 Acquisition cost Carrying value ¥ 1,497 ¥ 2,007 Thousands of U.S. dollars Unrealized gain (loss) Acquisition cost Carrying value Unrealized gain (loss) ¥ 510 $ 15,926 $ 21,351 $ 5,426 Securities whose carrying value exceeds their acquisition cost: Stock ......................................... Debt securities............................ 5,149 5,836 686 54,777 62,085 7,298 Other.......................................... 2,032 2,146 113 21,617 22,830 1,202 Subtotal .................................. 8,679 9,990 1,311 92,330 106,277 13,947 Securities whose acquisition cost exceeds their carrying value: Stock ......................................... 21 18 (2) 223 191 (21) Debt securities............................ 3,101 3,100 (1) 32,989 32,979 (11) Other.......................................... 1,403 1,366 (37) 14,926 14,532 (394) Subtotal .................................. 4,526 4,485 (40) 48,149 47,712 (426) Total .................................... ¥13,205 ¥14,476 ¥1,270 $140,479 $154,000 $13,511 Millions of yen Acquisition cost March 31, 2012 Carrying value Unrealized gain (loss) Securities whose carrying value exceeds their acquisition cost: Stock ................................................................................................... ¥ 790 ¥ 1,003 ¥ 212 Debt securities...................................................................................... 6,227 6,519 291 Other.................................................................................................... 1,903 1,935 31 Subtotal ............................................................................................ 8,922 9,458 536 Securities whose acquisition cost exceeds their carrying value: Stock ................................................................................................... 704 574 (129) Debt securities...................................................................................... 6,923 6,819 (103) Other.................................................................................................... 2,444 2,386 (58) Subtotal ............................................................................................... 10,071 9,780 (291) Total ................................................................................................. ¥18,993 ¥19,238 ¥ 245 Sales of securities classified as other securities for the years ended March 31, 2013 and 2012 are summarized as follows: Millions of yen Thousands of U.S. dollars Sales of securities Aggregate gain on sales of securities Aggregate loss on sales of securities Sales of securities Aggregate gain on sales of securities Aggregate loss on sales of securities Stock ...................................... ¥— ¥— ¥— $— $— $— Debt securities........................ — — — — — — March 31, 2013 Other ...................................... 5 4 (0) 53 43 (0) Total .................................... ¥ 5 ¥ 4 ¥ (0) $53 $43 $(0) Millions of yen 2012 46 Sales of securities................................................................................................................ ¥742 Aggregate gain on sales of securities .................................................................................. 59 Aggregate loss on sales of securities ................................................................................ (1) Notes to Consolidated Financial Statements 7. Depreciation and Amortization Depreciation and amortization for the years ended March 31, 2013 and 2012 amounted to ¥4,607 million ($49,011 thousand) and ¥4,882 million, respectively. 8. Short-Term Loans Payable and Long-Term Loans Payable Short-term loans payable include overdrafts. The annual interest rates applicable to such borrowings at March 31, 2013 and 2012 ranged from 0.56% to 4.15% and from 0.53% to 3.85%, respectively. Long-term loans payable at March 31, 2013 amounted to ¥2 million ($32 thousand) and at March 31, 2012 was ¥5 million ($61 thousand). 9. Pledged Assets There were no pledged assets as collateral for short-term loans payable at March 31, 2013 and 2012. 10. Income Taxes Income taxes in Japan applicable to the Company and its domestic consolidated subsidiaries consist of corporate income taxes (national), enterprise taxes (local) and inhabitants’ per capita taxes (local), which resulted in statutory tax rates of approximately 38.0% and 40.4% for the years ended March 31, 2013 and 2012, respectively. Income taxes of the overseas consolidated subsidiaries are based generally on the tax rates applicable in their respective countries of incorporation. The effective tax rates reflected in the accompanying consolidated statements of income for the years ended March 31, 2013 and 2012 differ from the statutory tax rate for the following reasons: 2013 Statutory tax rate ...................................................................................................... 38.0% 2012 40.4% Effect of: Income of certain overseas consolidated subsidiaries whose statutory tax rates are lower than those of domestic consolidated subsidiaries ........................... (0.7) Expenses not deductible for income tax purposes ................................................... 2.6 2.3 Dividend income not deductible for income tax purposes......................................... (0.1) (0.1) (1.1) Tax on undistributed profit ........................................................................................ 1.0 0.8 Special deduction for income taxes.......................................................................... (2.3) (2.5) Increase in valuation allowance ................................................................................ 5.2 — Reduction of deferred tax asset by change in effective tax rate adapted from next year ................................................................................... — 10.2 Other, net ................................................................................................................. 1.6 Effective tax rates ........................................................................................................ 45.3% 2.7 52.7% Annual Report 2013 47 The significant components of deferred tax assets and liabilities as of March 31, 2013 and 2012 were as follows: Thousands of U.S. dollars Millions of yen 2013 2013 2012 Deferred tax assets: Allowance for doubtful accounts ................................................. ¥ 690 ¥ 672 $ 7,340 Provision for retirement benefits .................................................. 6,449 7,103 68,606 Deferred assets for tax purposes ................................................ 1,591 1,630 16,926 Inventories .................................................................................. 520 536 5,532 Fixed assets and inventory reserves ............................................ 688 863 7,319 Impairment loss .......................................................................... 1,218 1,274 12,957 Loss on valuation of investment securities ................................... 247 217 2,628 Accrued bonuses ........................................................................ 1,667 1,686 17,734 Accrued enterprise tax ................................................................ 286 208 3,043 Other .......................................................................................... 2,120 1,547 22,553 Gross deferred tax assets........................................................ 15,481 15,741 164,691 Less: Valuation allowance..................................................................... (2,297) (1,846) (24,436) Total deferred tax assets.......................................................... 13,183 13,894 140,245 (2,223) Deferred tax liabilities: Deferred gain on repurchased property ....................................... (209) (212) Valuation difference on available-for-sale securities ...................... (467) (85) (4,968) Total deferred tax liabilities ....................................................... (677) (298) (7,202) Net deferred tax assets ........................................................ ¥12,506 ¥13,596 $133,043 Changes in Accounting Policy “Act for Partial Revision of the Income Tax Act, etc. for the Purpose of Creating Taxation System Responding to Changes in Economic and Social Structures” (Act No. 114 of 2011) and “Act for Special Measures for Securing Financial Resources Necessary to Implement Measures for Reconstruction following the Great East Japan Earthquake” (Act No. 117 of 2011) were promulgated on December 2, 2011 and effective for the fiscal year beginning on or after April 1, 2012. Accordingly, the effective tax rate for income taxes of the Company and its domestic consolidated subsidiaries reduced and special tax rates for income taxes applied. As a result, the effective tax rates for deferred tax assets and liabilities will be changed from the current 40.41% to 38.01% and 35.64% for temporally differences which will be settled in the fiscal year beginning April 1, 2015 and after the fiscal year beginning April 1, 2016, respectively. 11. Reserve for Returned Unsold Goods 48 The reserve for returned unsold goods included in “Other” under “Current liabilities” amounted to ¥1,717 million ($18,266 thousand) and ¥1,778 million at March 31, 2013 and 2012, respectively. Notes to Consolidated Financial Statements 12. Retirement Benefit Plan The Company and its domestic consolidated subsidiaries have a defined benefit pension plan, known as a “cash balance plan,” which allows pension benefits to fluctuate in accordance with market interest rates. The following table sets forth the funded and accrued status of the plan and the amounts recognized in the accompanying consolidated balance sheets at March 31, 2013 and 2012 for the Company’s and its domestic consolidated subsidiaries’ defined benefit plan: Thousands of U.S. dollars Millions of yen 2013 Retirement benefit obligation ...................................................... ¥(47,712) 2012 2013 ¥(49,121) $(507,574) Plan assets at fair value .............................................................. 33,073 29,525 351,840 Unfunded retirement benefit obligation........................................ (14,638) (19,595) (155,723) Unrecognized actuarial gain ........................................................ (347) 2,937 (3,691) Provision for retirement benefits .............................................. ¥(14,985) ¥(16,658) $(159,415) The components of retirement benefit expenses for the years ended March 31, 2013 and 2012 are outlined as follows: Thousands of U.S. dollars Millions of yen 2013 2012 2013 $16,617 Service cost...................................................................................... ¥1,562 ¥1,588 Interest cost ..................................................................................... 736 745 7,830 Expected return on plan assets ........................................................ (442) (436) (4,702) Actuarial gain .................................................................................... (95) (126) (1,011) Total .............................................................................................. ¥1,761 ¥1,771 $18,734 The assumptions used in accounting for the above plans for the years ended March 31, 2013 and 2012 were as follows: Discount rate ............................................................................................................. 2013 2012 1.5% 1.5% 1.5% 1.5% Expected rate of return on pension plan assets: Defined benefit pension plan .................................................................................... 13. Shareholders’ Equity The Companies Act (the “Act”), which superseded most of the provisions of the Commercial Code of Japan, went into effect on May 1, 2006. The Act provides that an amount equal to 10% of the amount to be disbursed as distributions of capital surplus (other than the capital reserve) and retained earnings (other than the legal reserve) be transferred to the capital reserve and the legal reserve, respectively, until the sum of the capital reserve and the legal reserve equals 25% of the capital stock account. Such distributions can be made at any time by resolution of the shareholders, or by the Board of Directors if certain conditions are met. The retained earnings account in the accompanying consolidated balance sheets at March 31, 2013 included a legal reserve of ¥774 million ($8,234 thousand). 14. Research and Development Expenses Research and development expenses included in “Selling, general and administrative expenses” for the years ended March 31, 2013 and 2012 totaled ¥4,320 million ($45,957 thousand) and ¥4,158 million, respectively. Annual Report 2013 49 15. Selling, General and Administrative Expenses Selling, general and administrative expenses for the years ended March 31, 2013 and 2012 consisted of the following: 2013 Advertising and promotional expenses....................................... ¥ 44,800 16. Commitments and Contingent Liabilities Thousands of U.S. dollars Millions of yen 2012 2013 ¥ 42,014 $ 476,596 43,304 464,532 Personnel expenses .................................................................. 43,666 Other ......................................................................................... 28,256 27,734 300,596 Total ....................................................................................... ¥116,722 ¥113,053 $1,241,723 The Company and its consolidated subsidiaries had the following contingent liabilities at March 31, 2013: Millions of yen Thousands of U.S. dollars Renovation of stores by agents .............................................................. ¥16 $170 Total ................................................................................................... ¥16 $170 As guarantor of indebtedness in connection with: 17. Comprehensive Income Recycling and tax effect amount on other comprehensive income for the year ended March 31, 2013 was the following: Millions of yen Thousands of U.S. dollars ¥1,041 $11,074 Valuation difference on available-for-sale securities: Amount arising during the year............................................................... Recycling adjustments ........................................................................... — — Before-tax amount ................................................................................. 1,041 11,074 Tax ......................................................................................................... (382) (4,064) Balance at end of year........................................................................ 659 7,011 Amount arising during the year............................................................... 993 10,564 Balance at end of year ........................................................................... 993 10,564 Total ................................................................................................... ¥1,652 $17,574 Foreign currency translation adjustment: 18. Derivatives 50 Various derivatives transactions, including forward foreign exchange contracts and foreign currency option contracts utilized by the Company and certain of its consolidated subsidiaries, entail a certain degree of market risk. However, the Company and these consolidated subsidiaries do not anticipate significant risk resulting from these derivatives, all of which have been designated as hedges. The Company and its consolidated subsidiaries have adopted internal rules governing derivatives transactions which prescribe appropriate authorization and reporting policies. The Company is exposed to credit risk in the event of nonperformance by the counterparties to the derivatives positions, but any such loss would not be material because the Company enters into such transactions only with financial institutions with high credit ratings. Notes to Consolidated Financial Statements 19. Amounts per Share Yen U.S. dollars 2013 2012 2013 Net income: Basic ...................................................................................... ¥ 117.22 ¥ 86.51 $ 1.25 Cash dividends ........................................................................ 41.00 40.00 0.44 Net assets ................................................................................ 1,964.85 1,858.91 20.90 In accordance with the accounting standard for earnings per share which went into effect on April 1, 2002, net income per share for the years ended March 31, 2013 and 2012 was calculated based on the net income available for distribution to shareholders of common stock and the weighted-average number of shares of common stock outstanding during the respective years. Net assets per share at March 31, 2013 and 2012 were computed based on the net assets available for distribution to the shareholders and the number of shares of common stock outstanding at each respective year-end. Information used in the calculation of basic net income per share for the year ended March 31, 2013 was as follows: Millions of yen Thousands of U.S. dollars Net income .............................................................................................. ¥6,720 $71,489 Net income relating to common stock ................................................. ¥6,720 $71,489 Weighted-average number of shares of common stock: 57,338,279 Diluted net income per share has not been presented for the years ended March 31, 2013 and 2012 because the Company had no potentially dilutive shares outstanding as of these balance sheet dates. Cash dividends per share represent the cash dividends declared as applicable to the respective fiscal years together with the interim cash dividends paid. 20. Segment Information a) Summary of Reporting Segments Our reportable operating segments are business units which can provide separate financial information and are periodically monitored by the top decision-making body of the Company in order to determine the allocation of management resources and evaluate the operating results. In order to supply products which meet various needs of our customers, the Company is providing products which are planned and developed by our group with various brands. The Company is also running the business under a comprehensive business strategy including domestic and overseas markets. Accordingly, the Company consists of two reportable operating segments, which are “cosmetics” and “cosmetaries.” These are determined based on brands. The main brands of “cosmetics” segment are “KOSÉ,” “SEKKISEI,” “ESPRIQUE,” “COSME DECORTE,” “Prédia,” “INFINITY,” “JILL STUART,” “CRIE,” “ALBION” and so on. The main brands of “cosmetaries” segment are “FASIO,” “ELSIA,” “SALON STYLE,” “softymo,” “STEPHEN KNOLL collection,” “RIMMEL,” “adidas,” “Nature & Co” and so on. b) Method of Calculating Sales, Profit or Loss, Assets, Debts and Other Items on Each Reportable Operating Segment The Company adopted the above “Summary of Significant Accounting Policies” to calculate sales, profits (or losses), assets and other items on each reportable operating segment. The profits on each reportable operating segment are representing operating income. The intragroup sales and transfers between segments are based on the market price. Annual Report 2013 51 c) Information on amount of sales, profits (or losses), assets and debts and other items on each reportable operating segment Millions of yen Reportable operating segments Year ended March 31, 2013 Cosmetics Cosmetaries Total Other Total Adjustment ¥127,906 ¥41,078 ¥168,984 ¥1,700 ¥170,685 Consolidated Sales: Sales to third parties..................... ¥ — ¥170,685 Intragroup sales and transfers........... — 0 0 1,162 1,162 (1,162) — Total sales ............. 127,906 41,078 168,904 2,863 171,848 (1,162) 170,685 Segment profits ......... 11,678 3,034 14,712 727 15,440 (3,575) 11,864 Segment assets....... ¥ 79,642 ¥20,035 ¥ 99,677 ¥5,525 ¥105,203 ¥67,811 ¥173,014 Depreciation ............. ¥ 3,345 ¥ 617 ¥ 3,962 ¥ 200 ¥ 4,163 ¥ 444 ¥ 4,607 Impairment loss ........ — — — — — 401 401 4,341 644 4,986 220 5,206 392 5,599 Others: Amount of increase of tangible fixed assets and intangible fixed assets............. Thousands of U.S. dollars Reportable operating segments Year ended March 31, 2013 Cosmetics Cosmetaries Other Total Total Adjustment Consolidated $ — $1,815,798 Sales: Sales to third parties..................... $1,360,702 $437,000 $1,797,702 $18,085 $1,815,798 Intragroup sales and transfers........... — 0 0 12,362 12,362 (12,362) — Total sales ............. 1,360,702 437,000 1,797,702 30,457 1,828,170 (12,362) 1,815,798 Segment profits ......... 124,234 32,277 156,511 7,734 164,255 (38,032) 126,213 Segment assets....... $ 847,255 $213,138 $1,060,394 $58,777 $1,119,181 $721,394 $1,840,574 35,585 $ 6,564 $ $ 44,287 $ 4,723 $ — — — — — 4,266 4,266 46,181 6,851 53,043 2,340 55,383 4,170 59,564 Others: Depreciation ............. $ Impairment loss ........ Amount of increase of tangible fixed assets and intangible fixed assets............. 42,149 $ 2,128 49,011 Note: 1) “Other” segment includes rental on real estate and manufacturing and selling of amenity products. 2) “Adjustment” items in “Segment profits” contain elimination of transactions between segments amounted to ¥24 million ($255 thousand) and corporate costs amounted to ¥(3,550) million ($(37,766) thousand). The corporate costs mainly include the costs belonging to the department of management and the fundamental research costs. 3) “Adjustment” items in “Segment assets” contain elimination between segments amounted to ¥(342) million ($(3,638) thousand) and corporate assets amounted to ¥68,153 million ($725,032 thousand). The corporate assets mainly include financial assets, which are cash and deposits, securities and investment securities and so on, deferred tax assets of the Company and its consolidated subsidiaries. 4) “Adjustment” item in “Depreciation” contains depreciation costs of corporate assets. 5) “Adjustment” items in “Amount of increase of tangible fixed assets and intangible fixed assets” contain amounts of increase of corporate assets. 6) “Depreciation” contains the depreciation costs of long-term prepaid expenses. 7) “Segment profits” represent operating income reported on consolidated financial statements. 52 Notes to Consolidated Financial Statements Millions of yen Reportable operating segments Year ended March 31, 2012 Cosmetics Cosmetaries Total Other Total Adjustment Consolidated ¥ ¥166,508 Sales: Sales to third parties..................... ¥125,385 ¥39,664 ¥165,050 ¥1,457 ¥166,508 — Intragroup sales and transfers........... — 0 0 1,079 1,079 (1,079) — Total sales ............. 125,385 39,664 165,050 2,537 167,587 (1,079) 166,508 Segment profits ......... 13,253 1,216 14,469 607 15,076 (3,648) 11,427 Segment assets....... ¥ 77,951 ¥19,920 ¥ 97,872 ¥5,596 ¥103,468 ¥65,847 ¥169,316 ¥ ¥ ¥ ¥ ¥ Others: Depreciation ............. ¥ Impairment loss ........ Amount of increase of tangible fixed assets and intangible fixed assets............. 3,509 751 4,261 ¥ 225 4,486 396 4,882 — — — — — 249 249 2,877 524 3,401 145 3,547 274 3,821 Note: 1) “Other” segment includes rental on real estate and manufacturing and selling of amenity products. 2) “Adjustment” items in “Segment profits” contain elimination of transactions between segments amounted to ¥52 million and corporate costs amounted to ¥(3,596) million. The corporate costs mainly include the costs belonging to the department of management and the fundamental research costs. 3) “Adjustment” items in “Segment assets” contain elimination between segments amounted to ¥(430) million and corporate assets amounted to ¥66,278 million. The corporate assets mainly include financial assets, which are cash and deposits, securities and investment securities and so on, deferred tax assets of the Company and its consolidated subsidiaries. 4) “Adjustment” item in “Depreciation” contains depreciation costs of corporate assets. 5) “Adjustment” items in “Amount of increase of tangible fixed assets and intangible fixed assets” contain amounts of increase of corporate assets. 6) “Depreciation” contains the depreciation costs of long-term prepaid expenses. 7) “Segment profits” represent operating income reported on consolidated financial statements. d) Related Information 1) Information on Product and Service No information on product and service has been reported because segment relating to product and service is represented by reportable operating segment. 2) Geographical information Millions of yen March 31, 2013 Sales Japan Asia Other Total ¥149,174 ¥21,072 ¥439 ¥170,685 Thousands of U.S. dollars March 31, 2013 Sales Japan Asia Other Total $1,586,957 $224,170 $4,670 $1,815,798 Millions of yen March 31, 2012 Sales Japan Asia Other Total ¥145,326 ¥20,726 ¥455 ¥166,508 Annual Report 2013 53 Classification of the country or region is determined by customer’s location. The principal countries and regions belonging to geographical segment other than Japan are as follows: (1) Asia Taiwan, China, South Korea, Hong Kong and Singapore and so on. (2) Other Countries and regions other than Asia and Japan Fixed assets No information on geographical segments has been reported because the Company and its consolidated subsidiaries have conducted over 90% of the Company’s consolidated total fixed assets in Japan. Main customers No information on specific customers has been reported because the Company and its consolidated subsidiaries have not sold over 10% of consolidated sales to any specific customers. 3) Information relating to impairment loss of fixed assets in each reportable operating segment Refer to “c) Information on amount of sales, profits (or losses), assets and debts and other items on each reportable operating segment.” 4) Information relating to amount of amortization and amortized balance of goodwill in each reportable operating segment Since the amount of amortization and amortized balance of goodwill recognized by the Company and its domestic consolidated subsidiaries was nothing for the year ended March 31, 2013 and immaterial for the year ended March 31, 2012, this information has been omitted. 5) Information relating to profit on negative goodwill recognized in each reportable operating segment Not applicable for the years ended March 31, 2013 and 2012. 21. Rental Property Rental property includes investment properties and property which is being constructed, developed or renovated as well as idle property that is not expected to be used in the future. Since the total amount of rental property held by the Company and its domestic consolidated subsidiaries was immaterial for the years ended March 31, 2013 and 2012, this information has been omitted. 22. Subsequent Event Not applicable for the year ended March 31, 2013 54 Independent Auditor’s Report Annual Report 2013 55 Principal Consolidated Subsidiaries Production Related Subsidiaries Company Name Country Paid-in Capital ADVANCE CO., LTD. Japan ¥90 million 100.0% INTERCOSME INC. Japan ¥50 million 100.0% ALBION CO., LTD. Japan ¥760 million 79.5% TECHNOLABO CO., LTD. Japan ¥10 million 79.5% KOSÉ COSMETICS CO., LTD. (CHINA) China RMB88.7 million 100.0% Taiwan NT$180 million 100.0% Country Paid-in Capital KOSÉ SALES CO., LTD. Japan ¥300 million 100.0% KOSÉ COSMENIENCE CO., LTD. Japan ¥30 million 100.0% KOSÉ COSMEPORT CORP. Japan ¥30 million 100.0% CARTE LABORATORIES INC. Japan ¥10 million 100.0% COSMEDIC CO., LTD. Japan ¥30 million 100.0% CRIE CO., LTD. Japan ¥10 million 100.0% Dr. PHIL COSMETICS INC. Japan ¥40 million 100.0% PROVISION CO., LTD. Japan ¥30 million 100.0% KOSÉ COSMEPIA CO., LTD. Japan ¥10 million 100.0% KOSÉ INSURANCE SERVICE CO., LTD. Japan ¥10 million 100.0% COSME LABO CO., LTD. Japan ¥10 million 100.0% A • L DEVELOPMENT CO., LTD. Japan ¥109 million 44.2% KOSÉ (HONG KONG) CO., LTD. China HK$15.9 million 100.0% KOSÉ COSMETICS SALES (CHINA) CO., LTD. China RMB115.2 million 100.0% Singapore S$1.7 million 100.0% South Korea W25,000 million 100.0% KOSÉ (MALAYSIA) SDN. BHD. Malaysia RM1 million 100.0% KOSÉ (THAILAND) CO., LTD. Thailand BAHT5 million 49.0% ALBION COSMETICS (AMERICA) INC. U.S.A. US$2 million 79.5% ALBION COSMETICS (HK) LTD. China HK$71.8 million 79.5% ALBION COSMETICS (SHANGHAI) CO., LTD. China RMB37.5 million 79.5% Taiwan NT$10 million 79.5% TAIWAN KOSÉ CO., LTD. Ownership Marketing and Services Related Subsidiaries Company Name KOSÉ SINGAPORE PTE. LTD. KOSÉ KOREA CO., LTD. ALBION COSMETICS (TAIWAN) CO., LTD. Ownership (As of March 31, 2013) 56 Corporate Information (As of March 31, 2013) Corporate Name: KOSÉ Corporation Founding: March 2, 1946 Incorporation: June 11, 1948 Head Office: 3-6-2, Nihonbashi, Chuo-ku, Tokyo 103-8251, Japan Tel: +81-3-3273-1511 Web Site: http://www.kose.co.jp IR Site (English): http://www.kose.co.jp/jp/en/ir/ Number of Employees: 5,485 Fiscal Year-End: March 31 Board of Directors (As of June 27, 2013) Corporate Auditors Chairman Hiroyuki Tsutsumi Yasukiyo Kobayashi Tatsuya Etou President Masanori Odakura (External) Kazutoshi Kobayashi Minoru Murakami (External) Managing Directors Takao Kobayashi Kazumasa Hanagata Directors Noboru Naito Kiyoto Nagahama Kumi Arakane Atsuo Kumada Koichi Shibusawa Masanori Kobayashi Shareholder Information (As of March 31, 2013) Number of Shareholders Common Stock: Authorized: 200,000,000 shares Issued: 60,592,541 shares Capital: ¥4,848 million Number of Shareholders: 22,464 Stock Listing: Tokyo Stock Exchange, First Section (Code: 4922) Transfer Agent: Mizuho Trust & Banking Co., Ltd. Other Japanese Corporations: 146 Foreign Corporations and Individuals: 185 Financial Institutions: 69 Treasury Stock: 1 Japanese Individual Investors and Others: 22,063 FTSE Group confirms that KOSÉ Corporation has been independently assessed according to the FTSE4Good criteria, and has satisfied the requirements to become a constituent of the FTSE4Good Index Series. Created by the global index company FTSE Group, FTSE4Good is an equity index series that is designed to facilitate investment in companies that meet globally recognised corporate responsibility standards. Companies in the FTSE4Good Index Series have met stringent environmental, social and governance criteria, and are positioned to capitalise on the benefits of responsible business practice. Distribution of Shares Other Japanese Corporations: 2.6% Treasury Stock: 5.9% Japanese Individual Investors and Others: 63.2% Financial Institutions: 11.4% Foreign Corporations and Individuals: 16.9% Stock Data 쐽 Stock Price 쐽 Volume (Yen) 3,000 2,000 (Millions of shares) 4 3 1,000 2 1 0 0 ’12/4 ’12/5 ’12/6 ’12/7 ’12/8 ’12/9 ’12/10 ’12/11 ’12/12 ’13/1 ’13/2 ’13/3 Annual Report 2013 57 ANNUAL REPORT 2013 3-6-2, Nihonbashi, Chuo-ku, Tokyo 103-8251, Japan Tel: +81-3-3273-1511 http://www.kose.co.jp http://www.kose.co.jp/jp/en/ir/ KOSÉ Corporation Printed in Japan