EBARA CORPORATION Annual Report For the Year Ended March 31, 2013

Transcription

1 EBARA CORPORATION Annual Report 2013 For the Year Ended March 31, 2013

2 Founded in 1912, EBARA Corporation has grown to become one of the world s principal manufacturers of industrial machinery, based especially on its fluid machinery and systems business, with particularly strong positions in pumps and compressors as well as other related products. With its origins in the fluid machinery and systems business, the Company expanded into the environmental engineering business centered around incinerators and gasification technology as well as into the precision machinery business, which produces semiconductor manufacturing equipment and other equipment. The EBARA Group is constantly thinking of what will be required in the future and is seeking to accurately grasp the current and future needs of its customers, while it continues to pursue the development of superior technologies and products in all its businesses. In the years to come, as in the past, the EBARA Group will continue to achieve further development and contribute to society by excelling in the development of technologies as well as the manufacturing and marketing of products and by providing high-quality support and services. Our Next Stage in Growth: On the Cover: Upward Flow Cryogenic Liquid Expanders Cryogenic liquid expanders have become an important component in the liquefaction process train. Used in lieu of a Joule-Thomson valve, this product typically increases LNG production by 3%-5%. This machine is an upward flow configuration (bottom inlet, top outlet), and several advantages can be gained by changing the direction of the flow. Cautionary Statement with Regard to Forward-Looking Statements Certain of the statements made in this annual report are forward- looking statements, which involve certain risks and uncertainties that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date thereof. EBARA undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date thereof or to reflect the occurrence of unanticipated events.

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4 Financial Highlights EBARA CORPORATION and Consolidated Subsidiaries Thousands of U.S. dollars* Fiscal years ended March Net sales 426, ,077 $4,532,716 Operating income 25,084 23, ,709 Net income 15,303 2, ,711 Depreciation and amortization 12,356 12, ,377 Capital expenditures 12,302 12, ,802 Shareholders equity and accumulated other comprehensive income 186, ,063 1,987,060 Total net assets 191, ,656 2,039,192 Total assets 504, ,964 5,364,976 Interest-bearing debt 138, ,617 $1,477,023 Shareholders equity and accumulated other comprehensive income to total assets (%) Dividend payout ratio (%) Free cash flow 883 3,751 9,389 Per share data: Net income (yen and U.S. dollars) $ Cash dividends (yen and U.S. dollars) Total net assets (yen and U.S. dollars) ROIC (%)** ROE (%)*** Debt/equity ratio * The U.S. dollar amounts are included solely for convenience and have been translated as a matter of arithmetical computation only at the rate of 94.05=US$1, the rate of exchange prevailing on March 31, ** ROIC: Net income/(interest-bearing debt (Average between beginning and end of period) + Shareholders equity and accumulated other comprehensive income (Average between beginning and end of period)) *** ROE: Net income/shareholders equity and accumulated other comprehensive income (Average between beginning and end of period) Net Sales () 600, , , , , ,000 Net Income (Loss) () 30,000 15,000 0 Net Income (Loss) per Share (Yen) , Shareholders Equity and Accumulated Other Comprehensive Income, ROIC (, %) 200, Free Cash Flow () 40,000 Total Net Assets per Share (Yen) , ,000 50, ,000 20,000 10, Shareholders Equity and Accumulated Other Comprehensive Income ROIC (right scale)

5 Message from the Management EBARA will continue to make extensive contributions to society as a manufacturer of industrial equipment by providing superior technologies and the best possible service. would like to express my profoundest thanks for your understanding and I support of EBARA s business activities. In April 2013, I assumed the office of President and Representative Director. I am committed to drawing fully on my experience over the years with EBARA and doing my very best to ensure its further development. I, therefore, request your advice and cooperation in the years ahead as we embark on EBARA s second century of contributing to sustainable development. During the fiscal year ended March 31, 2013, among overseas economies, the United States showed gradual recovery, but Europe experienced continued stagnation. The economies of Asia reported a slight improvement in the pace of recovery, but relatively low growth is forecast in the region for the time being. In Japan, the outlook is for the economy to show moderate improvement. Amid these economic conditions, the EBARA Group (the Group ) entered the second fiscal year of its three-year, Medium- Term Management Plan E-Plan2013, and worked to establish a more-solid and stabler business structure. As a result of these activities, consolidated net sales for the fiscal year amounted to billion, operating income amounted to 25.0 billion, ordinary income was 25.6 billion, and net income amounted to 15.3 billion. The Group will continue to strengthen its management base through the implementation of E-Plan2013 as well as, with the aim of establishing a more-solid and stabler business structure, will strengthen its global competitiveness and work to maximize the value of its core businesses. We would highly appreciate your continuing support and understanding. Toichi Maeda President and Representative Director 3

6 An Interview with the President New Policies as President Q1 You became president of EBARA on April 1, Could you please outline your plans for managing EBARA in the future? The previous president of EBARA, Mr. Natsunosuke Yago, was successful in bringing a major increase in profitability. He accomplished this by adopting a policy of selection and concentration in the use of resources, especially by withdrawing from unprofitable businesses and finding solutions to pending issues related to one of our overseas projects. Under the Medium-Term Management Plan E-Plan 2013 (covering April 2011 to March 2014), which Mr. Yago began to implement in the fifth year after becoming president of EBARA, we moved steadily forward despite such setbacks as the appreciation of the yen and the natural disaster and addressed important issues forthrightly. These included adopting a policy of regional production for regional supply, strengthening EBARA s profitable service and support business, and innovating in manufacturing processes. Most recently, in March 2013, EBARA raised the financial resources needed for its growth strategy by securing a total of 35 billion through a 15 billion public offering of new shares and a 20 billion issue of convertible bonds. I have become president in the midst of the implementation of E-Plan2013. I intend to move forward with business activities based on the concepts of E-Plan2013, which embodies Mr. Yago s management policies. Professional Profile Date of Birth: December 24, 1955 April 1981 Entered the Company April 2007 Executive Officer Deputy Division Executive, Custom Pump Division, Fluid Machinery & Systems Company May 2008 Executive General Manager, Haneda District April 2009 April 2010 April 2011 June 2011 April 2012 April 2013 Executive General Manager, Futtsu District Managing Executive Officer Head of Business Unit, Custom Pump Business Unit, Fluid Machinery & Systems Company Member, Board of Directors President, Fluid Machinery & Systems Company President and Representative Director (to present) 4

7 On the other hand, it will be necessary for EBARA to change the concepts of its business activities. Though our business is manufacturing, at the same time, I am clearly aware that our business is also providing service over the entire life cycles of our products, and that we must implement reforms in our business systems. Delivering products to our customers is the first event in their product life cycles. We need a renewed awareness that our business activities should extend until these products fulfill their missions. An urgent task for us is to make reforms and become a company that not only manufactures but also provides service. I also think that, as a manufacturer, we must continue to raise the level of our technology, which is our core competence, and I would like to lead EBARA to grow to be a top-tier industrial machinery manufacturer. Toichi Maeda President and Representative Director 5

8 The Current Business Environment Q2 What are your views of the business environment? Let me answer your question by business segment. First, our Fluid Machinery & Systems (FMS) Company is responsible for a major business domain accounting for about 70% of EBARA s total sales. Moreover, the FMS Company responds to the needs of several different industries. For example, the oil and gas sector accounts for about one-third of its sales and the building equipment for the construction industry for another one-third. The remainder is accounted for by the domestic public sector and other sectors. Of these various industries served by the FMS Company, the oil and gas industry is drawing attention because of the expansion in investment in nonconventional energy projects, such as the development of shale gas resources in the United States. At the same time, investment plans for conventional energy sources are coming under review, and we are at a turning point where, from a global perspective, the energy resources that are being supplied and the composition of energy demanded are changing. Responding to these changes, the key to future growth will be how quickly we can provide the necessary equipment for these various sectors. In addition, worldwide demand for energy continues rising on an upward trend, particularly in emerging countries, and energy-related investments are expected to continue to expand. In Asia in particular, the implementation of investment plans is in progress, including projects related to LNG, refineries, petrochemicals, including Questions Investors Ask Frequently We have selected a few of the questions that investors ask us frequently and provided our responses. About the Pumps Business What kinds of pumps does EBARA manufacture? Where are these used? Since the time EBARA began operations in 1912 as a pumps manufacturer, it has provided the world with a wide range of pumps. Most of these have been so-called centrifugal pumps 6

9 ethylene, and other areas. As a consequence, we still foresee that these markets will continue to grow. In the field of building equipment for construction projects, construction starts in Japan have shown only slight recovery, and the market is not expected to show major growth. For this reason, the main issue is how to improve profitability. Turning next to our Environmental Engineering (EE) segment, most projects of EBARA s EE Company in Japan are commissioned by the public sector, and, during the fiscal year ended March 31, 2013, sales from this source accounted for about 20% of EBARA s total sales. Views of demand from the public sector in Japan are becoming somewhat more optimistic as concrete progress is being made in implementing Japan s plans for Building National Resilience that have been introduced following the change of government administration. Specific activities expected to receive priority in budgetary allocations include measures to deal with major disasters as well as repairing and replacing Japan s aging social infrastructure. EBARA s third business segment, the Precision Machinery (PM) Company, makes most of its sales to the semiconductor industry. Some sales are also made to the LED, FPD (flat panel display), and PV (photovoltaic) industries, but market conditions in these industries are lackluster. During the fiscal year ending March 31, 2014, capital investment by the semiconductor industry is not expected to show a major movement toward improvement in comparison with the previous year, but demand is viewed as likely to begin to recover in the latter half of the fiscal year. that make use of centrifugal force to convey liquids and gases. Our pumps are used in a wide variety of applications. For example, our compact pumps are used in such applications as the supplying and discharging of water in buildings and condominiums as well as in firefighting situations. Our high-pressure customized pumps find application in electric power, petrochemical, and other industrial plants, while largescale customized pumps are used in pumping stations to provide water for irrigation purposes. 7

10 Medium- to Long-Term Management Strategy Q3 We understand that you will be making strategic investments to strengthen the profitability of the pumps business. Could you describe the measures you will be taking to increase profits and your views of the future of the pumps business? As I previously mentioned, in March 2013, we raised a total of 35 billion in funds to finance our growth strategies and strengthen our financial position through a 15 billion public offering and a 20 billion issue of convertible bonds. These funds will be used for strategic investments that include the rapid expansion of our sales network and service shops to capture demand for service and support in the pumps business. The issues we are addressing in our pumps business are excessive dependence on domestic sales and a low ratio of sales generated from service and support activities. At present, the driving force for growth in the FMS Company is the compressors and turbines business, and we have achieved growth and stabilized profitability through globalization and capturing demand for service and support business. The background for these measures in the compressors and turbines business is that, as part of our business strategy, we have built a service and support network that properly covers important regions. Among service and support bases, looking at repair shops alone, we have about 20 bases around the world. On the other hand, in the pumps business, overseas sales account for about 30% of the total, while the ratio of revenues from service and support is only about 20%. Also, we have only several global bases for providing service and support. Therefore, service coverage for pumps is not up to the level of coverage for the compressors and turbines business. As these comments suggest, to improve profitability in the pumps business, we must strengthen our service and support capability overseas and bring it up to the same level as the compressors and turbines business. To realize this, over the coming one to two years, we will set up service and support bases in regions where we have already delivered a significant number of pumps. For example, in Asia and the Middle East, where the cumulative number of custom pumps we have delivered is high, we Questions Investors Ask Frequently We have selected a few of the questions that investors ask us frequently and provided our responses. About the Compressors Business Could you describe the development of the compressors and turbines business? To make a full-scale entry into the market for equipment of the oil & gas industry, EBARA concluded a technical alliance with Elliott Company, a compressors manufacturer based in the 8

11 will put service and support capabilities in place. When we establish service and support bases, we will consider a number of options appropriate for various regions, ranging from setting up new facilities to making use of existing production facilities for this purpose, and acquiring local manufacturers and service companies. Difference between Pumps Business and Compressors & Turbines Business Compressors & Turbines Business Pumps Business Leading Brands Leading Brands High share of overseas business High percentage of aftermarket revenues Increase share of overseas business Increase share of aftermarket demand Overseas Business Aftermarket Overseas Business Aftermarket Domestic Service & Support Overseas Service & Support Overseas Products Domestic Products % of Revenues % of Revenues % of Revenues % of Revenues Strengths: Achieved high growth and stable profitability through further expanding overseas business and capturing additional aftermarket demand Objectives: Attain higher growth and stabilize profitability by substantially expanding overseas business and capturing more aftermarket demand Returns to Shareholders Q4 What will be your policy for providing a return to shareholders? We position providing a return to our shareholders as one of our most-important management priorities. Our basic policy is to provide returns on a continuous and stable basis, taking our performance into account. For the fiscal year ended March 31, 2013, we paid a dividend of 2.5 per share for the interim period and 5 per share for the full fiscal year. United States, and began manufacturing compressors and turbines. Thereafter, as this business grew, EBARA made step-bystep investments in Elliott, and that company became a wholly owned subsidiary of EBARA in Subsequently, the compressors business of EBARA was split off to become Elliott Ebara Turbomachinery Corporation, and, currently, we are operating two compressor manufacturing facilities, one in Japan and the other in the United States. Operations of these two companies were integrated in 2011 under a holding company structure. Our Group has a major presence in the market for equipment used in oil and gas applications, especially downstream in refineries and further downstream in petrochemical plants. 9

12 At a Glance Precision Machinery 16% Components Vacuum pumps Gas abatement systems CMP Systems Chemical mechanical polishing (CMP) systems Others Plating systems Sales by Region Sales by Industry Overseas Japan Other Semiconductor Environmental Engineering 12% Environmental Plants Municipal waste incineration facilities Industrial waste incineration facilities Energy-related plants Sales by Region Overseas Sales by Industry Other Japan Public Works 10

13 Fluid Machinery & Systems 72% Pumps Pumps (Custom pumps, Standard pumps) Sales by Region Sales by Industry Electric Power Other Overseas Japan Public Works Oil and Gas Building Equipment Compressors and Turbines Compressors Turbines Sales by Region Japan Sales by Industry Other Overseas Oil and Gas Chillers Chillers Cooling Towers Sales by Region Sales by Industry Other Overseas Japan Building Equipment Composition of Net Sales Fiscal year ended March 31, 2013 Net Sales: Billion Others Fans 11

14 Review and Outlook Fluid Machinery & Sy Net Sales 310 Billions of Yen Operating Income/ Operating Income Ratio 20 Billions of Yen 6.4% Atsuo Ohi Company President Year ended/ending March 31 Forecast for 2014: Net sales of 310 billion Actual Forecast Year ended/ending March 31 Forecast for 2014: Operating income ratio of 6.4% Actual Forecast Overview In the FMS Company, in the pumps business, inquiries regarding electric power generation plant projects in the electric power market, mainly in the emerging countries, fertilizer plant projects in the chemical market, and oil refinery plant projects in the oil and gas market were active, and conditions overseas remained strong. In Japan also, portions of the private-sector market for building equipment recovered. In addition, although conditions in the public sector have not recovered to the level prevailing prior to the 2011 earthquake disaster, orders for large-scale projects held firm. In the compressors and turbines business, backed by increases in energy demand and expansion in shale gas production, projects in the oil and gas market increased and remained firm in North America, the Middle East, and Asia, including China, India, and certain other markets. In the chillers business, conditions were severe in the domestic market, but conditions in the Chinese market were favorable. Sales in the FMS Company for the fiscal year amounted to 305,586 million (an increase of 6.8% year on year). The segment income amounted to 15,942 million (an increase of 2.3% year on year). In the domestic pumps business, to manage the Group s corporate resources more efficiently and increase profitability, three consolidated subsidiaries namely, Ebara Techno-serve Co., Ltd., Ebara Yoshikura Hydro-Tech Co., Ltd., and Ebara Environmental Technologies Hokkaido Co., Ltd. were merged with the Company on April 1, Market Trends and Basic Strategies In the FMS Company, although conditions in China and some areas of Europe are uncertain, demand is expected to show moderate recovery as a result of the expansion in worldwide demand for energy and other factors. In the pumps business, the outlook is for continued active construction of largescale thermal power generation plants and LNG combined cycle thermal power plants, principally in China, the Middle East, Southeast Asia, and India. In addition, demand in the markets for general machinery and building equipment is expected to continue to expand, especially in the emerging countries. In the LNG plants business, a number of projects have begun, and demand for cryogenic pumps and related equipment for use in liquefaction plants, LNG storage bases, and transport vessels is expected. Also, demand is expected for pumps used in fertilizer plants, along with growth in the production of shale gas. In the compressors and turbines business, expansion in demand is anticipated for 12

15 stems Company EBARA s largest size (4,200mm) tubular pump installed in a pumping station of the Hokuriku Regional Agricultural Administration, in Japan compressors for use in LNG plants; ethylene plants, especially in North America, where shale gas is being used as a raw material; and for use in propane dehydrogenation (PDH) plants. In the chillers business, in addition to growth in demand for heat pumps in China, expansion in demand in the markets of Southeast Asia is also anticipated. Amid these conditions, overseas, the Group is pursuing the development of products suited to the needs of individual regions, and the Group is moving forward with expanding the scope of its business activities by strengthening its global production and sales systems as well as its service and support capabilities. Moreover, in Japan, the Group will continue to give highest priority to business related to recovery from the 2011 earthquake, as well as expand and upgrade its sales and service systems to meet customer needs. Issues to Be Addressed In the pumps business, the FMS Company is upgrading and expanding its sales and service network to fill demand for products and after-sales service. In parallel with this, activities are under way to strengthen cooperation among FMS Company production facilities located around the globe. In the sales and service network area, the FMS Company is working to raise profitability and broaden sales activities for new products by responding to demand for after-sales service. To this end, the FMS Company is strengthening its service systems with close ties to local areas, principally in such priority regions as China, Southeast Asia, the Middle East, North America, and South America. Moreover, in Japan, the FMS Company is collaborating with its overseas production centers to expand offerings of products meeting customer needs and, thereby, respond to replacement demand. Also, by realigning and optimizing sales and service systems, the FMS Company is planning to gain market share and increase profitability. Through strengthening collaboration among production centers, the FMS Company is expanding its product supply capabilities by providing products from Group production centers to areas around the world based on systematic, strategic marketing activities led by the Head Office. Also, by developing products meeting the needs of various regions and applying productivity innovation to Group production facilities, the FMS Company is striving to increase the competitiveness of Group products as a whole. In the compressors and turbines business, the FMS Company is taking measures to strengthen collaboration between the Elliott Group products business and its global service organization, and thereby make thoroughgoing efforts 13

16 High- efficiency turbo chiller (RTBF-type) to capture all possible demand for products and services. Among product businesses, the FMS Company is focusing on the North American market, where the number of projects using shale gas is increasing, and the Chinese market, where investments in coal chemical plants are rising, as well as on the Indian market, where petrochemical and oil refining projects are active. In undertaking these projects, the FMS Company is concentrating not only on pricing but also especially on making value-added proposals for after-sales service, delivery timing, and other aspects. In the global service business, the FMS Company is increasing its service facilities such as those in China, the Middle East, and India. Other initiatives include expansion into the engineered solution field aimed at not only our products but also those of other companies. Also, to structure global supply chains, the FMS Company is developing relationships with new suppliers and working to strengthen the management of quality and delivery for its supplier group. Moreover, the FMS Company is upgrading its R&D functions and working to enhance its competitiveness in terms of technology and price. In the chillers business, the FMS Company is working to coordinate the operation of its production facilities located in Japan and China as well as improve business growth and profitability in priority regions, such as Japan, China, and Southeast Asia. 14

17 Installation of world s largest class Elliott 110M propylene compressor Also, the FMS Company is implementing measures to strengthen the competitiveness of its products by shortening lead times, lowering procurement costs, and reducing costs of design. Other measures being implemented include strengthening after-sales service business by raising the quality of maintenance technology and conducting marketing activities in close contact with customers and end users. In this business, the FMS Company will increase capacity for the production of large-scale absorption chillers in China to respond to the expansion of the absorption heat pumps market in that country. Moreover, the FMS Company is focusing on expansion of sales of centrifugal chillers in China and Southeast Asia. For the cooling towers business, the FMS Company will strengthen sales activities for large-scale cooling towers for industrial use in Japan. In addition, in those regions where expansion in demand is expected, sales systems will be enhanced in China, and sales organizations will be established in Southeast Asia. 15

18 Environmental Engin Net Sales Operating Income/ Operating Income Ratio 5 Billions of Yen 10.4% 48 Billions of Yen Tetsuji Fujimoto Company President Year ended/ending March 31 Forecast for 2014: Net sales of 48 billion Actual Forecast Year ended/ending March 31 Forecast for 2014: Operating income ratio of 10.4% Actual Forecast Overview In the EE Company, in domestic public works projects, the Group secured roughly the same level of orders for operation and maintenance ( O&M ) business for waste incineration facilities, while in the engineering, procurement, and construction ( EPC ) and other fields, demand for the replacement of facilities is increasing. In such a situation, the Group received orders for the construction and operation of temporary waste incineration facilities to deal with the disaster waste left behind by the Great East Japan Earthquake, the construction of a general waste incineration facility for a local authority, and design, build, and operate ( DBO ) projects, including those covering services ranging from the construction of facilities to operation and business management services. Sales in the EE Company for the fiscal year amounted to 52,496 million (an increase of 4.7% year on year). The segment income amounted to 5,177 million (an increase of 1,506.4% year on year). Market Trends and Basic Strategies In the market for general waste processing facilities in Japan, as in the previous year, the number of new plant construction projects, especially those involving all stages, from construction through operational management and operation, is increasing. In addition, demand for service and support is expected to rise; specifically, this will include expansion in the scope of O&M projects, construction for the replacement and renovation of existing facilities, and work related to the improvement of core facilities. Also, accompanying the introduction of a system for purchasing electric power generated from renewable energy at fixed rates, the market for biomass power generating plants is expanding. Amid this business environment, the EE Company worked to develop business with new customers, obtained additional orders for O&M services for plants delivered previously by EBARA, and worked to secure stable income flows based on the provision of service and support. Moreover, the EE Company is endeavoring to strengthen its technological capabilities and its abilities for providing comprehensive proposals for reducing costs over the full life cycle of facilities. Issues to Be Addressed Amid this business environment, the EE Company focused on its most-significant issues of securing orders for EPC projects and profitability in its O&M projects. To address these issues, the EE Company is implementing the following policies. 16

19 eering Company The EBARA Group received an order for the DBO project of this waste incinerating plant to be built in Funabashi City, Japan. (architect s drawing of the completed facility) 1. In the O&M business, the EE Company is working to expand O&M orders and sales, including maintenance and management as well as overhaul work for existing waste incineration facilities in Japan. Efforts are also being directed toward lowering expenses, reducing fixed costs, and other activities to substantially raise profitability. 2. In recent years, municipal governments, which are the principal customers for environmental engineering projects, have increasingly requested comprehensive services for the operation and management of existing incineration facilities. Accordingly, the EE Company is working to expand orders for these comprehensive services. In parallel, efforts are being made to increase the profitability of these projects by drawing on the know-how accumulated thus far and make these activities one of the EE Company s mainstay sources of earnings. 3. To secure increased profitability in the O&M business, the EE Company continues to present proposals, based on plans for lengthening the useful lifetimes of facilities to increase the efficiency of their use, for plant renewal work, and for improvement in core plant functions to substantially reduce CO 2 emissions by applying the latest EPC technology to the O&M business. 4. In the EPC business, to enhance profitability, the EE Company is substantially strengthening its project management functions for municipal waste incineration facility projects that are currently under construction. In addition, the EE Company is striving to prevent the incidence of additional costs arising from issues related to contract fulfillment. In addition, the EE Company is endeavoring to identify potential plant rebuilding projects by sharing its plans for lengthening useful lifetimes of facilities in its O&M business with other divisions of EBARA. When certain facilities are expected to be rebuilt, the EE Company presents timely proposals based on the latest EPC technology at customer request. 5. In the market for newly constructed municipal waste incineration facility projects, municipal government agencies increasingly tend to request such projects on a DBO basis. To win orders for these projects, the EE Company is, therefore, offering customers proposals that best meet their needs based on the know-how accumulated thus far in the EPC and O&M businesses. To facilitate these activities, the EE Company is coordinating its O&M and EPC businesses more closely, including the sharing of information on facilities management available in the O&M business with the EPC-related divisions. This makes it possible to differentiate the EE Company s proposals from those of competitors by promoting plans for greenhouse gas emissions reductions through increasing the amount of electric power generated and the promotion of energy conservation and by major reductions in the life-cycle cost of plants. Through the implementation of these policies, the EE Company will strengthen its competitiveness based on its footprint as well as product and service capabilities and work to improve its ability to provide solutions to customers. 17

20 Precision Machinery Net Sales 62 Billions of Yen Operating Income/ Operating Income Ratio 4 Billions of Yen 6.4% Manabu Tsujimura Company President Year ended/ending March 31 Forecast for 2014: Net sales of 62 billion Actual Forecast Year ended/ending March 31 Forecast for 2014: Operating income ratio of 6.4% Actual Forecast Overview In the PM Company, in the semiconductor market, although the market for smartphones and tablet-type portable terminals drove the market as a whole, growth in the personal computers and servers markets weakened as in the previous year, and conditions remained lackluster overall through the fiscal year. Thus, with the exception of some leading foundries, capital investments by most semiconductor manufacturers continued to be postponed, and major differences were seen among semiconductor manufacturers in their stances toward making capital investments. Further, demand from relevant markets other than semiconductors, such as the flat panel display, photovoltaic cell, and LED markets, continued to remain sluggish. Sales in the PM Company for the fiscal year amounted to 66,504 million (a decrease of 2.7% year on year). The segment income amounted to 3,306 million (a decrease of 49.9% year on year). Market Trends and Basic Strategies In the semiconductor business, the PM Company will work to ensure that its market share in the foundry sector, which is expected to make capital investments during the fiscal year ending March 31, 2014, is solid. In the photovoltaic cell, LED, and its other markets, the PM Company will endeavor to expand its market share by identifying accurately the timing of the resumption of capital investments. Also, to secure stable earnings, the PM Company will work to shorten lead times, further optimize its manufacturing processes with the aim of lowering costs, and take measures to further strengthen its service and support business. In the components business, the PM Company will also make its best efforts to maintain and strengthen its base as a major supplier to companies in the semiconductor industry, which is its core customer industry. The PM Company is making preparations to accurately identify the timing of the resumption of capital investment in the photovoltaic cell, LED, and other industries as well as expand into the markets for vacuum process equipment among other industries. In the chemical mechanical polishing (CMP) business, the PM Company is pursuing development together with its customer companies to meet even more-active launching and extension of applications of new processes, including those for miniaturization and larger wafer diameter as well as 3D integrations and the introduction of new materials. The PM Company has taken full measures to deal with risks, including the maintaining of its plants in Kumamoto and Fujisawa. Going forward, the PM Company is also aiming to expand its 18

21 Company CMP systems market share and increase profitability by establishing a global supply chain, shortening lead times, and innovating in production activities to reduce costs and attain other related objectives. New product development is proceeding smoothly, including the development of processing equipment for 3D integrations and equipment for improving process yields. The goal is to have these businesses take their place along with components and the CMP business as major supports of the PM Company s performance. The PM Company is seeking to lower costs by reducing lead times through its production innovation activities and by taking further steps to manufacture and procure overseas. Through these activities and the strengthening of its customer service and support systems, the PM Company is aiming to create a stable earnings structure. In addition, with the aim of further increasing market share, the PM Company will continue its development activities to respond to customer needs, including further miniaturization, new devices, 3D integration, and larger wafer diameter. Issues to Be Addressed In the PM Company, the semiconductor market is believed likely to remain stagnant for the time being. However, viewed in the medium-to-long term, demand will grow going forward, and our assumption is that capital investment to respond to this future demand will emerge gradually in the latter half of the current fiscal year. In addition, we anticipate that the markets for flat panel displays, solar batteries, LEDs, and other products will begin to recover step by step from 2014 onward. Amid these conditions, the Group will work to stabilize its earnings structure through lowering its manufacturing costs by shortening lead times through reforms in production and procuring more from overseas sources. In parallel with this, the Group will also adopt measures to build stronger service and support systems that have close ties with customers. Also, the Group will endeavor to expand its business activities by continuing its development activities to respond to customer needs, such as further miniaturization, the launching of new devices, 3D integration, and larger wafer diameter. Plug and run compact air-cooled dry pumps 19

22 Governance Structure and Management Systems EBARA s corporate philosophy is Extensive contribution to society by providing superior technologies and services related to water, air, and the environment. Under this corporate philosophy, EBARA is set to enhance its corporate value and returning profit to shareholders as its highest-priority management issues. To address these issues, it is indispensable to increase the transparency and objectivity of management activities. Accordingly, EBARA is working to strengthen its corporate governance. Additionally, EBARA has established in-house rules that include the EBARA Group Code of Conduct to provide basic guidelines for the conduct of corporate activities. Corporate Governance Based on Japan s Companies Act, EBARA has established a governance structure comprising the Board of Directors, the Audit & Supervisory Board, and the Independent Auditor. Board of Directors Under the rules for the activities of the Board of Directors established by the Company, members of the Board of Directors are required to execute their duties in compliance with laws and regulations and the Company s Articles of Incorporation. Also under these rules, the Board of Directors holds regular monthly meetings and special sessions when necessary. The Chairman of the Board of Directors is appointed from among Board members who do not have the status of Representative Director with the objective of separating management oversight functions from final decision-making authority. In addition, the Board of Directors is composed of 12 members, and 4 of these are independent Outside Directors who have no special interest in EBARA. At present, all Board members are Japanese men, but from the standpoint of diversity, the Company is considering the appointment of women and persons of foreign nationality to its Board in several years. Audit & Supervisory Board The Audit & Supervisory Board comprises five members, three of whom are Outside Audit & Supervisory Board Members who have no special interest in EBARA. Based on auditing plans and auditing principles drawn up by the Audit & Supervisory Board, it audits the conduct of management duties by the Directors. At the same time, it exchanges information and opinions with the Representative Director and with the Independent Auditor to ensure the effectiveness of auditing activities. Independent Auditor The Company s Independent Auditor, Ernst & Young ShinNihon LLC, audits the Company s accounts and other matters as required under the Companies Act and Japan s Financial Instruments and Exchange Act. Discretionary Governance Structure In addition to the previously mentioned organizational units required by law, the Company has established the following units on its own initiative. Outline of EBARA s Corporate Governance Framework General Meeting of Shareholders Reporting Advice, Directions for Improvement Nominations Committee Compensation Committee Corporate Audit Department Management Meeting Management Planning Committee Disclosure Committee Risk Management Panel CSR Committee Internal Audits Reporting Guidance Reporting Support for Management and Execution Reporting Selection/Dismissal/Surveillance Board of Directors Presided over by Chairman President and Representative Director Company/ Corporate Guidance/ Transmission of Information Subsidiaries and Selection/Dismissal Auditing/Reporting Auditing Exchange of Opinions Auditing Reporting Audit & Supervisory Board Reporting Selection/Dismissal Supplementary Assistance Department of Audit & Supervisory Board Members Staff Exchange of Information and Opinions Independent Auditor Selection/ Dismissal Exchange of Information and Opinions 20

23 1. Executive Officer System The Company has separated the decision-making and management oversight functions of the Board of Directors on the one hand and functions of the Executive Officers, who are in charge of the conduct of operations of business divisions, on the other. Moreover, those executives of the principal EBARA Group companies, who have been certified to meet the personnel conditions for being Executive Officers of the parent company, are appointed to the status of EBARA Group Executive Officers. In addition to performing their duties in their respective Group companies, they also perform roles in the management of the Group from an overall optimal perspective. At present, there are 39 Executive Officers, including the Group Executive Officers, and all of these are Japanese men, but from the standpoint of diversity, the Company is considering the appointment of women and persons of foreign nationality to Executive Officer positions in several years. 2. Management Meeting In addition to the discussion of management policy and corporate strategy in the meetings of the Board of Directors, the Management Meeting is convened monthly to provide management members with the chance to broadly discuss various issues related to policy and strategy. 3. Nominations Committee and Compensation Committee To ensure the transparency and objectivity in the selection of Directors and Executive Officers as well as in the determination of their compensation, the Company has established the Nominations Committee and the Compensation Committee. Both of these committees have a majority of Outside Directors as members, and their decisions are made on a majority basis. Executive Compensation Regarding the compensation of Directors and Audit & Supervisory Board Members, basic upper limits on the total compensation of Directors and the total compensation of Audit & Supervisory Board Members are approved by the General Meeting of Shareholders. Policies regarding compensation of Directors are discussed in the Compensation Committee and put to a vote in the Board of Directors meeting. For the compensation of Audit & Supervisory Board Members, discussions are held and final recommendations are approved in the Audit & Supervisory Board. Note that all Directors, other than Outside Directors, are encouraged to abide by and monitor compliance with the Company s corporate philosophy. Also, to provide a strong motivation to attain medium- to long-term management goals, the Company has established a compensation system that is closely linked to Company performance. For Audit & Supervisory Board Members, in setting compensation, consideration is given to the workload assigned to full-time versus part-time Audit & Supervisory Board Members, and the amount of compensation for individual Auditors is determined in discussions among Audit & Supervisory Board Members. Total Amounts of Compensation for Directors and Audit & Supervisory Board Members (Year ended March 31, 2013) Executive position Total (Number of persons) compensation Basic Bonus compensation Stock options Directors (17) Outside Directors (6) None None Audit & Supervisory Board Members (5) None None 4. Corporate Social Responsibility (CSR) Committee The CSR Committee is composed of all members of the Board of Directors, including Outside Directors and all standing Audit & Supervisory Board Members (as observers). The committee hears periodic reports from the Corporate Audit Department and the Internal Control Department and provides a forum for the exchange of information and opinions among the Outside Directors, Audit & Supervisory Board Members, the Corporate Audit Department, and others. Outside Audit & Supervisory Board Members (3) None None 21

24 Directors of the Board, Audit & Supervisory Board Members, and Executive Officers (As of June 27, 2013) Directors of the Board Natsunosuke Yago Director of the Board Chairman Toichi Maeda* President and Representative Director Tetsuji Fujimoto* Director of the Board Manabu Tsujimura* Director of the Board Atsuo Ohi* Director of the Board Akira Ogata* Director of the Board Masaru Shibuya* Director of the Board Nobuharu Noji* Director of the Board Akio Mikuni Outside Director Sakon Uda Outside Director Masao Namiki Outside Director Shiro Kuniya Outside Director Directors of the Board marked with * hold the post of Executive Officer concurrently. Masao Namiki Akio Mikuni Natsunosuke Yago Toichi Maeda Sakon Uda Shiro Kuniya Masaru Shibuya Manabu Tsujimura Tetsuji Fujimoto Atsuo Ohi Akira Ogata Nobuharu Noji 22

25 Audit & Supervisory Board Members Toshihiro Yamashita Akira Hashimoto Yoshihiro Machida* Fumio Takahashi* Tadashi Urabe* Individuals marked with * are Outside Audit & Supervisory Board Members. Executive Officers Senior Managing Executive Officers Tetsuji Fujimoto Responsible for Group Management, Finance & Accounting, Internal Control, President, Environmental Engineering Company Manabu Tsujimura President, Precision Machinery Company, Responsible for Technologies, R&D, Intellectual Property Managing Executive Officers Atsuo Ohi President, Fluid Machinery & Systems Company, Head of Business Unit, Global Pump Business Unit Akira Ogata Head of Business Unit, Operations of Technology and Production, Fluid Machinery & Systems Company, Responsible for Production Process Innovation, Information & Communication System, Division Executive, Production Process Innovation Division Masaru Shibuya Responsible for Human Resources, Legal, Public Relations & General Affairs, Division Executive, Human Resources, Legal & Public Relations Division Nobuharu Noji Division Executive, Standard Pump Business Division, Operations of Technology and Production, Fluid Machinery & Systems Company, Executive General Manager, Fujisawa Plant Akira Itoh Division Executive, Enterprise Risk Control Division Shotaro Kuryu Head of Business Unit, Domestic Sales, Marketing & Service Business Unit, Fluid Machinery & Systems Company Akio Teragaki Division Executive, Custom Pumps Division, Operations of Technology and Production, Fluid Machinery & Systems Company, Executive General Manager, Futtsu Plant, Executive General Manager, Futtsu District Executive Officers Koji Ota Division Executive, Administration Division, Precision Machinery Company Kiyoshi Hirono Executive General Manager, Osaka Branch, Domestic Sales, Marketing & Service Business Unit, Fluid Machinery & Systems Company Takao Inoue Division Executive, Marketing & Sales Division, Global Pump Business Unit, Fluid Machinery & Systems Company Seiji Katsuoka Division Executive, CMP Division, Precision Machinery Company Norio Kimura Division Executive, Components Division, Precision Machinery Company Susumu Shiga General Manager, Ebara Boshan Pumps Co., Ltd., Fluid Machinery & Systems Company Masao Asami Division Executive, Sales and Marketing Division, Precision Machinery Company Minoru Takano Division Executive, General Affairs Division, Executive General Manager, Haneda Office Kazuhiro Ogawara Head of Unit, Planning & Administration Unit, Fluid Machinery & Systems Company Kengo Choki Division Executive, Finance & Accounting Division Akihiro Kida Deputy Head of Business Unit, Domestic Sales, Marketing & Service Business Unit, Fluid Machinery & Systems Company Yoshiaki Okiyama Division Executive, China & East Asia Division, Global Pump Business Unit, Division Executive, Business Planning & Administration Division, Executive General Manager, China & East Asia Regional Office, Fluid Machinery & Systems Company Mitsuhiko Shirakashi Division Executive, Production & Assurance Division, Precision Machinery Company, Executive General Manager, Fujisawa District Hisao Matsumoto Deputy Division Executive, Standard Pump Business Division, Operations of Technology and Production, Fluid Machinery & Systems Company Takafumi Maehara Division Executive, Middle East Division, Executive General Manager, Middle East Regional Office, Fluid Machinery & Systems Company Kazuo Toriumi Deputy Head of Business Unit, Domestic Sales, Marketing & Service Business Unit, Division Executive, Infrastructure Project Engineering Division, Domestic Sales, Fluid Machinery & Systems Company Hidenori Iwanaga Division Executive, Southeast Asia Division, Global Pump Business Unit, Executive General Manager, Southeast Asia Regional Office, Fluid Machinery & Systems Company Hideki Yamada Division Executive, Procurement Division, Operations of Technology and Production, Fluid Machinery & Systems Company 23

26 Internal Controls EBARA s Board of Directors has approved its Basic Policy on Internal Control. Based on this policy, EBARA has been operating internal control systems to ensure that directors and employees conduct their assignments in compliance with laws and rules, to manage risks, to conduct proper operations in Group companies, and to prepare reliable financial reports. The EBARA Group Code of Conduct has been established, and training programs are being implemented to raise awareness of compliance. In addition, the status of implementation of compliance is monitored, and surveillance is conducted for the design and operation of internal controls. Also, the CSR Committee has been appointed as the organizational unit to issue directives for making improvements when necessary. Moreover, both internal and external advisory units have been established as a whistle blower system, with consulting services regarding violations of laws and ethics. The EBARA Group s risk management systems oversee risk-related activities, and a Risk Management Panel has been formed as the organizational unit in charge of deliberating and giving guidance and support for making improvements in risk management. The EBARA Group has divided its risk management activities broadly into two types. The first type comprises risks that might impair the continuing development of the operations of EBARA Corporation and its Group companies. The other type is business continuity strategy for risks that might emerge during times of crisis. Through these two types of risk management activities, the major risks have been identified, and countermeasures to deal with them have been prepared. As a part of business continuity strategy in crisis situations, EBARA has developed business continuity management systems for dealing with such risks during times of major disasters or epidemics. Regarding internal audit systems, the Corporate Audit Department, which reports directly to the president of EBARA, has been formed. It has the responsibility for identifying major issues and themes related to the status of Group company compliance and risk management systems. This department then implements internal audits from a perspective that is independent of the business execution departments where these issues and themes may arise. To ensure the reliability of financial reporting, the Committee for Proper Accounting has been formed consisting of representatives of the internal control departments as well as the accounting departments of Group companies. This committee works to promote the efficacy of the Group s internal controls under Japan s Financial Instruments and Exchange Act, and strives to ensure the reliability of financial reporting, through the implementation of assessments of internal controls by assessment teams, which are formed by the Corporate Audit Department. Compliance System The Company is fully aware that unethical behavior due to the lack of compliance may damage its management foundations. Accordingly, its approach to securing thorough compliance includes five approaches. These are the preparation of the Board of Directors Compliance Action Plan, the formation of a CSR Committee, the establishment of a Group Compliance Network, the creation of a Compliance Liaison System, and the offering of consultation functions, or a whistle-blower system. The Board of Directors Compliance Action Plan for taking specific action to promote compliance is prepared each year by the Board of Directors. The content of this plan is announced to employees to clarify what Directors should be doing to secure compliance. The results of the activities of Directors are assessed at the end of the year, and used as a basis for a plan-do-check-action (PDCA) cycle aimed at improving the effectiveness of these activities year by year. The CSR Committee is chaired by the President of EBARA Corporation and comprises all Directors and Full-Time Corporate Auditors. In addition, the outside legal counsel responsible for the outside compliance-related consultation function participates to offer advice. In the CSR Committee meetings, deliberations are conducted concerning how the Company should perform its social responsibilities on a day-to-day basis. In addition, this committee invites the presidents and representatives of Group companies to confirm the status of compliance in each of these companies, and, by conducting periodic checks on the status of compliance throughout the Group, verifies the proper conduct of business activities and promotes improvements in Group activities. The Group Compliance Network is composed of the officers in charge of corporate ethics in each of the Group companies, and, to ensure that the various measures decided by the CSR Committee are properly implemented in the Group, this network serves as a forum for introducing the related training activities and initiatives being taken by Group companies. The Compliance Liaison System provides for the stationing of liaison personnel at the workplace level. Its objectives include promoting the development of a compliance culture in the workplace as well as discovering and correcting compliance risks that may exist. Training courses for liaison personnel are conducted twice a year to sharpen their awareness of the objectives of liaison activities and enhance their skills. As part of compliance-related consultation functions, the Company offers access to advisory services provided by outside legal counsel as well as the Harassment Consultation Service, offered by the Human Rights and Compliance Department. Together, these consultation functions deal with between 20 and 30 compliance-related cases each year. In addition, the Human Rights and Compliance Department conducts a questionnaire survey each year to gain input for assessing and implementing improvements in the Company s compliance system. 24

27 Corporate Social Responsibility (CSR) The EBARA Group conducts business with a strong sense of ethics and works to build relationships of trust with its stakeholders. EBARA s CSR activities have been highly appreciated from outside of the Company, and its stock continues to be selected for inclusion in the Dow Jones Sustainability Asia Pacific Index and FTSE4Good Index Series, which are the world s leading social responsibility investment (SRI) indexes. Moreover, EBARA is a signatory to the United Nations Global Compact and practices its 10 principles in the four categories of human rights, labor, environment, and anti-corruption. The activities of the EBARA Group are covered in the EBARA Group CSR Report, which is published annually. EBARA Group CSR Policy The EBARA Group has established its EBARA Group CSR Policy to indicate its basic stance toward the conduct of business around the world. The Group s CSR policy charges the EBARA Group with the responsibilities of maintaining a high standard of ethics and fulfilling its responsibilities to its stakeholders as it works to build strong relationships of trust with them. It is the Group s policy to share EBARA s founding spirit in its business activities around the world and to conduct its operations taking pride in its mission, which is to make Extensive contributions to society by providing superior technologies and services. EBARA Framework for Corporate Ethics 25

28 Respect for Human Rights and Diversity Based on global human rights standards (including the Universal Declaration of Human Rights and International Human Covenants on Human Rights), EBARA works to protect and respects the human rights of its stakeholders, including customers, business partners, community citizens, and employees. EBARA s initiatives to respect diversity include creating opportunities for persons with physical and other challenges to work and achieve independence and to be participating members of society. In November 2012, EBARA established a subsidiary, EBARA Earnest Co., Ltd., with the objective of raising the ratio of persons with physical and other challenges who work in the EBARA Group. In April 2013, five intellectually challenged persons entered the newly formed subsidiary. Also, the CSR study program, which EBARA has conducted for its employees since fiscal 2009, takes up the themes of human rights and diversity each year and aims to deepen understanding of these issues. Labor Practices To develop its businesses around the world, the EBARA Group is taking initiatives in expanding the recruitment of non-japanese personnel, conducting programs to enable employees hired in Japan to gain international experience, and developing human resources from a global perspective. Also, to maintain the physical and mental health of its employees, the Group is working to strengthen measures for the maintenance of mental health. A consulting function for mental health issues has been put in place, and it is possible for employees to undergo diagnoses by a neuropsychiatric specialist. In addition, employee mental health training sessions are also conducted on a continuing basis. Environmental Preservation EBARA has an environmental management system based on ISO In Japan and overseas, a total of 19 organizations belonging to the EBARA Group had qualified for ISO certification as of April 1,

29 In addition, concerning regulations requiring disclosure related to conflict minerals, which were enacted in August 2012 under Article 1502 of the Dodd-Frank Act, the EBARA Group regards conflict minerals disclosure as a major issue, and, going forward, will request the cooperation of its business partners and move forward with specific initiatives. Fair and Impartial Transactions With the objective of conducting fair and impartial transactions, in September 2012, the EBARA Group issued its Basic Policy on Anti-Corruption. Bribery, unfair trade practices, and relationships with Anti-Social Forces have been defined to be within the scope of corruption, and the EBARA Group is working to prevent such corrupt practices. Moreover, as a part of its procurement activities, the EBARA Group is aiming for co-existence and mutual prosperity with its business partners by building long-term relationships with them, while also working to increase its corporate value, to achieve sustainable growth through its CSR activities, and to create value for society. To accomplish these objectives, the EBARA Group has issued its CSR Procurement Guidelines and is moving ahead with CSR activities together with its business partners. Contributing to Society As a good corporate citizen, the EBARA Group is making steady efforts to contribute to society mainly in five areas (see diagram below). Among these activities, in the area of promotion of technology, the EBARA Hatakeyama Memorial Fund (EHMF) has held seminars to transfer EBARA s technology for engineers and students, mainly in the countries of Southeast Asia, for more than 20 years. Lecturers at these seminars have been drawn from among EBARA Group employees, and, in 2011 and 2012, a staff member of Ebara Vietnam Pump Company Limited, one of the EBARA Group companies, also acted as lecturer. The content of the seminars focused on not only on basic technologies for fluid machinery and pumps but also on subjects that met the needs of the local communities. Interaction with the community Social welfare Technology and arts promotion Five areas of the social con tribution activities Environmental conservation Sports promotion CSR Information More-detailed information on the EBARA Group s CSR activities, is published on the website. English-language website: The EBARA Group CSR Report 2013 contains indexes of EHMF seminar in progress EBARA s core CSR activities that are undertaken in response to ISO (Guidance on social responsibility). In addition, this report provides information and related tables that are based on the reporting framework set forth under the GRI Sustainability Reporting Guidelines, version 3.1. The report may be accessed at 27