Management’s Discussion and Analysis

Online and Catalog Sales and Retail Segment In the mail-order business, the KOKUYO Group is working through Kaunet to make it easier for customers when selecting office supplies and to provide the “inspiration” that leads to a host of solutions. Building on this experience, the Group attracted a favorable response from customers for its efforts to develop original products, which were launched under the new Kaucore brand name. In other areas, the With Kaunet office supply bulk purchasing system continued to exhibit positive trends.

In the Retail business (sales of interior and daily goods), ACTUS performed positively owing mainly to the opening of new stores.

As a result, segment net sales climbed 3.9% compared with the previous fiscal year, to ¥110.5 billion. Operating income, on the other hand, decreased 34.3% year on year, to ¥1.6 billion.

This largely reflected the allocation of Group management and operational fees effective from the fiscal year under review as well as the increase in expenses associated with the opening of new ACTUS stores.

Analysis of Financial Position

Assets, Liabilities, and Total Net Assets

Total assets as of December 31, 2013, amounted to ¥270.7 billion, an increase of ¥12.3 billion compared with the end of the previous fiscal year. Current assets were up ¥6.1 billion year on year, to ¥130.4 billion, due mainly to increases in short-term investment securities and merchandise and finished goods of ¥3.4 billion and ¥2.4 billion, respectively. Non-current assets climbed ¥6.2 billion, to ¥140.3 billion. The main compo-nent in this increase factor was investments and other assets, which rose ¥9.4 billion, and more than offset decreases in the balances of property, plant and equipment as well as intangible assets of ¥2.3 billion and ¥1.0 billion, respectively.

Total liabilities as of December 31, 2013, amounted to

¥105.1 billion, down ¥0.3 billion compared with the balance as of December 31, 2012. Current liabilities increased ¥6.3 billion, to ¥73.8 billion. The main factor contributing to this increase was the higher balance of long-term debt due within one year, which climbed ¥5.2 billion year on year. Long-term liabilities decreased ¥6.6 billion, to ¥31.3 billion. This was largely attrib-utable to the drop in long-term debt due after one year of

¥10.1 billion.

Net assets as of December 31, 2013, came to a total of

¥163.6 billion, ¥13.0 billion higher than the balance as of

Working Capital and Current Ratio

(Millions of yen) (%)

Interest Coverage

(Times) 60,000

0 20,000 40,000

240

0 80 160

2013 2012 2011 2010 2009

176.7 176.7

56,614 18

0 9

6 12

3 15

2013 2012 2011 2010 2009

15.6

쐽 Working Capital (Left Scale)

쐽 Current Ratio (Right Scale)

Annual Report 2013 43

December 31, 2012. The main contributory factors were net unrealized gains on securities and retained earnings, which rose ¥8.3 billion and ¥3.1 billion, respectively. Accounting for these factors, the ratio of shareholders’ equity to total assets was 60.4%, an improvement of 2.1 percentage points com-pared with the end of the previous fiscal year. At the same time, the Group’s return on assets rose 0.8 of a percentage point, to 1.8%, largely on the back of efforts to enhance the efficiency of assets by actively selling idle assets as well as investments in securities.

Cash Flow Analysis

As of December 31, 2013, cash and cash equivalents on a consolidated basis amounted to ¥37.4 billion, an increase of

¥1.8 billion compared with the end of the previous fiscal year.

Movements in components of cash flows were as follows.

Cash flows from operating activities

Net cash provided by operating activities amounted to ¥10.9 billion. This was primarily due to the major cash inflows of ¥7.8 billion in income before income taxes and minority interests and ¥6.9 billion in depreciation and amortization. These inflows more than offset the cash outflow due to an increase in inven-tories of ¥2.7 billion.

Cash flows from investing activities

Net cash used in investing activities was ¥2.2 billion. The major cash outflows were purchases of property, plant and equip-ment of ¥4.9 billion, purchases of investequip-ments in securities of ¥2.2 billion, and purchases of investments in consolidated subsidiaries and affiliates of ¥1.3 billion. Principal cash inflows for the period were proceeds from sales of property, plant and equipment of ¥3.1 billion and proceeds from sales of investments in securities of ¥3.1 billion.

Cash flows from financing activities

Net cash used in financing activities totaled ¥7.6 billion. This primarily reflects an outflow of ¥5.1 billion reflecting the repay-ment of long-term debt, ¥1.8 billion for cash dividends paid, and ¥1.0 billion for the repayment of lease obligations.

Business Risks

The Economic Situation and Business Climate in Japan

Nearly all of the KOKUYO Group’s revenues are derived from markets within Japan. Consequently, changes in the Japanese business climate may impact operating results.

Capital Expenditure and Depreciation

(Millions of yen) 8,000

0 4,000

2,000 6,000

2013 2012 2011 2010 2009

4,870 6,918

쐽 Capital Expenditure 쐽 Depreciation

Free Cash Flow

(Millions of yen) 15,000

-3,000 0 6,000

3,000 9,000 12,000

2013 2012 2011 2010 2009

8,730

Increases in Raw Material Prices

The main raw materials used by the KOKUYO Group include base paper, plastics, and steel products. The KOKUYO Group purchases its raw materials from manufacturers in Japan and overseas. Therefore, there is a risk that higher raw material prices resulting from sharp increases in crude oil prices, rapidly increasing demand in China, and other factors could affect the Group’s operating results.

Development of New Products

In its development of products and services, the KOKUYO Group aims to create new products, services, and businesses in both established and new business domains. However, it is not always possible to accurately predict which new products and technologies will be successful in such markets. If sales of such products are not supported by customers, there is a possibility that future growth and profitability may decline, with a negative impact on operating results.

Information Systems

Businesses such as the KOKUYO Group’s online and catalog sales business depend on communications networks linking computer systems. There is a risk, therefore, that a natural disaster or other unforeseen event could cause the networks to cease functioning, making it impossible to process product orders. In addition, there is a risk that KOKUYO’s internal com-puter system could be infiltrated by unauthorized means, and information on the website altered or important data fraudu-lently obtained. Infection by a computer virus could also lead to the loss of important data. If such a situation occurs, there is a risk of a negative impact on operating results.

Protection of Personal Information

KOKUYO takes all possible measures to ensure that personal information is managed properly, but there is a risk that infor-mation could leak due to unforeseen circumstances. Such an event could result in a decline in the Group’s brand value and give rise to significant financial liability.

Natural Disasters

In the event of a natural disaster, such as an earthquake or a typhoon, there is a risk that the KOKUYO Group’s production, retail, and logistics bases could sustain heavy damage.

Product Liability

There is a risk that defects could occur in the products or services provided by the KOKUYO Group. In the event of product liability compensation, product recalls, or other similar situations arising, a decline in the Group’s brand equity and significant financial liability could result.

Significant Changes in Overseas Economies

The KOKUYO Group sells, manufactures, and procures certain products internationally, particularly in Asia. There is a risk that changes in the political, economic, or social situation in any of these regions or changes in local regulations could have a detrimental impact on operating results.

Fluctuation in Foreign Exchange Levels

Some of the KOKUYO Group’s exports and imports of prod-ucts and imports of raw materials are denominated in foreign currencies. The KOKUYO Group also owns foreign currency- denominated assets. Consequently, large fluctuations in foreign exchange markets could impact operating results and other items in the financial statements.

Fluctuation in the Value of Marketable Securities The KOKUYO Group holds securities for investment purposes.

There is, therefore, a risk that a downturn in the securities markets could result in revaluation losses being incurred for such securities.

Environmental Regulations

The KOKUYO Group is subject to a number of statutory environmental regulations regarding the various types of waste generated by production processes and emissions into the atmosphere and water.

The Group has historically undertaken a range of activities aimed at environmental preservation, including compliance with such statutory environmental regulations. However, should additional obligations for compliance with environmental laws and environmental improvement give rise to additional costs, such expenses could impact operating results.

Annual Report 2013 45