ANNUAL REPORT 2005 PDF TOTOについて : TOTO

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33

Financial Section Six-Year Summary of Selected Financial Data

Financial Section

Six-Year Summary of Selected Financial Data

TOTO LTD. and consolidated subsidiaries

Years ended March 31

2000 2001 2002 2003 2004 2005 2005

Millions of yen Thousands of Millions of yen (except per share amounts) (except per share U.S. dollars (Note 3)

amounts) (except per share amounts)

Net sales ¥391,903 ¥425,918 ¥424,097 ¥439,683 ¥467,925 ¥484,192 $4,508,725

Cost of sales 260,389 275,980 277,910 285,154 300,355 308,067 2,868,675

Cost of sales ratio 66.4% 64.8% 65.5% 64.9% 64.2% 63.6% —

Gross profit 131,514 149,938 146,187 154,529 167,570 176,125 1,640,050

Selling, general and

administrative (SG&A) expenses 126,623 135,490 134,565 136,909 140,136 145,706 1,356,793

SG&A ratio 32.3% 31.8% 31.7% 31.1% 29.9% 30.1% —

Operating income 4,891 14,448 11,622 17,620 27,434 30,419 283,257

Operating margin 1.2% 3.4% 2.7% 4.0% 5.9% 6.3% —

Income (loss) before income taxes

and minority interests (54,442) 8,058 3,691 10,807 24,463 23,455 218,410

Net income (loss) (33,794) 3,378 1,139 4,073 11,732 13,059 121,604

Capital investment 19,200 22,600 19,700 14,500 20,600 20,100 187,168

R&D expenses 12,319 12,770 12,259 11,298 11,366 11,786 109,750

R&D expenses ratio 3.1% 3.0% 2.9% 2.6% 2.4% 2.4% —

Cash flow* (535) 15,937 (14,597) 9,164 18,613 (15,448) (143,850)

Basic net income (loss) per share

(yen and U.S. dollars) ¥(90.93) ¥9.09 ¥ 3.08 ¥11.05 ¥33.63 ¥37.29 $0.35

Cash dividends per share applicable

to the year (yen and U.S. dollars) 9.00 9.00 10.00 10.00 11.00 11.50 0.11

Total assets ¥502,305 ¥504,934 ¥488,207 ¥471,482 ¥462,622 ¥460,950 $4,292,299

ROA –7.0% 0.7% 0.2% 0.8% 2.5% 2.8% —

Total current assets 249,829 234,548 215,729 219,919 224,075 218,598 2,035,553

Fixed assets 250,208 270,386 272,478 251,563 238,547 242,352 2,256,746

Net property, plant and equipment 170,181 174,123 183,199 172,994 164,492 163,126 1,519,005

Total investments and other assets 80,027 96,263 89,279 78,569 74,055 79,226 737,741

Total liabilities and minority interests ¥302,500 ¥305,157 ¥296,261 ¥293,170 ¥272,765 ¥261,578 $2,435,776

Total current liabilities 143,849 153,887 155,347 172,331 168,367 158,870 1,479,374

Total long-term liabilities 155,764 147,841 131,811 111,649 94,731 91,814 854,959

Net shareholders’ equity 199,805 199,777 191,946 178,312 189,857 199,372 1,856,523

ROE –15.8% 1.7% 0.6% 2.2% 6.4% 6.7% —

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35

Financial Section Management’s Discussion and Analysis of Operations

34

Financial Section Management’s Discussion and Analysis of Operations

Management’s Discussion and Analysis of Operations

Net Sales

Billions of yen

484.2

2005

2001 2002 2003

439.7

425.9 424.1

467.9

2004

Cost of Sales and Cost of Sales Ratio

Billions of yen %

100 75 50 25 0 308.1 2005

2001 2002 2003

285.2

276.0 277.9

300.4

2004

Operating Income and Operating Margin

Billions of yen %

8 6 4 2 0 30.4 2005

2001 2002 2003

17.6 14.4 11.6 27.4 2004 Net Income

Billions of yen

13.1

2005

2001 2002 2003

4.1

3.4

1.1

11.7

2004

Basic Net Income per Share

Yen

37.29

2005

2001 2002 2003

11.05

9.09 _3.08

33.63

2004

Net Sales

by Business Segment

(Year ended March 31, 2005) Scope of Consolidation

The TOTO Group’s consolidated financial statements reflect

the performance of TOTO LTD., 58 consolidated subsidiaries

(40 domestic, 18 overseas), and eight affiliated companies

(three domestic, five overseas) accounted for under the equity

method. Two new domestic subsidiaries and two Chinese

subsidiaries were included under consolidation during the fiscal

year under review, and six domestic companies were excluded

due to closures or mergers.

Market Environment

In the first half of the fiscal year ended March 31, 2005, the

Japanese economy showed signs of a gentle recovery

sup-ported by an improvement in corporate earnings and an

increase in capital investment, as well as positive signs in

con-sumer spending. In the second half, however, uncertainties

grew with a rise in crude oil prices and a tapering off in consumer

spending. Under these conditions, the number of new housing

starts, which strongly correlates to demand for the Company’s

products, increased by 19,000 to 1,193,000. Demand for

renovation was partly affected by some cancellations of

planned projects due to large-scale typhoons hitting Japan.

Revenues and Earnings

Net sales for TOTO LTD. and its consolidated companies (the

TOTO Group) during the fiscal year ended March 31, 2005,

increased 3.5% from the previous fiscal year to ¥484.2 billion,

a record-setting level. Sales increased in all business segments

comprising Restroom Products; Bath, Kitchen and Wash

Products; and Other. By category, sales related to new

hous-ing declined, but sales related to remodelhous-ing and overseas

operations increased.

Cost of sales increased 2.6% to a total of ¥308.1 billion. The

cost of sales ratio declined 0.6 percentage point, from 64.2%

to 63.6%. Gross profit rose 5.1% to ¥176.1 billion, and the

gross profit ratio improved by 0.6 percentage point, from

35.8% in the previous fiscal year to 36.4%. This was due to

strong sales of high-value-added products for remodeling,

higher productivity from improvements in manufacturing

processes, as well as cost reductions from expanded overseas

procurement of materials.

Selling, general and administrative (SG&A) expenses

increased 4.0% from the previous fiscal year to ¥145.7 billion.

This increase reflects investments to strengthen sales through

the establishment of the Marketing Center to enhance efficiency

in sales divisions, and investments in showrooms to stimulate

demand for remodeling. The ratio of SG&A expenses to net

sales edged up 0.2 percentage point, from 29.9% to 30.1%.

Operating income during the term increased 10.9% to ¥30.4

billion. The operating margin improved 0.4 percentage point,

from 5.9 % to 6.3%.

Other income and expenses worsened by ¥4.0 billion from

the previous fiscal year, for an expenditure excess of ¥7.0 billion.

The principal components of this were a ¥2.2 billion loss on

impairment of fixed assets as a result of applying impaired

asset accounting from the fiscal year under review, a ¥1.5 billion

loss on sales of investment in affiliates with the unwinding of

financing in Royal TOTO Co., Ltd., and a ¥1.5 billion loss on

business restructuring in accordance with consolidation of the

tile business. In addition, in the previous fiscal year the

Company recorded a ¥13.8 billion gain on return of the

substi-tutional portion of welfare pension fund plans, which was

absent in the fiscal year under review.

As a result of the above, income before income taxes and

minority interests declined 4.1% from the previous fiscal year

to ¥23.5 billion. Net income climbed 11.3% to ¥13.1 billion,

while return on sales improved 0.2 percentage point to 2.7%.

Basic net income per share was ¥37.29, up from ¥33.63 the

previous fiscal year. Diluted net income per share was ¥36.28,

an increase from ¥32.58 in the previous fiscal year. Annual

cash dividends were increased ¥0.5 per share to ¥11.50 per

share, including a ¥5.50 per share interim dividend.

Review by Segment

Restroom Products

TOTO received high praise for the functionality, cleanliness and

design of its NEOREST series of toilets that feature the latest

technologies such as rimless basins and Tornado flushing, and

its PureRest tank-style toilets that employ the same

cutting-edge technologies. Accordingly, sales volume for these products

grew steadily. In February 2005, TOTO upgraded all models in

the NEOREST series, further improving cleanliness and adding

features such as fragrances and music that help create a

pleasant atmosphere in the restroom. Moreover, sales volume

increased steadily for mainly the NEW Apricot N Series and the

NEW S Series of detachable-type Washlets. In particular, sales

were greater than expected for models that incorporated

auto-matic lid opening and closing features, and models able to

flush with a remote control. In overseas markets, sales

expanded for sanitary ware, especially in the United States and

China, as a result of efforts to bolster the marketing structure

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37

Financial Section

36

Financial Section Management’s Discussion and Analysis of Operations Management’s Discussion and Analysis of Operations

Restroom Products

Billions of yen

Sales Operating income

214.2

2005

2001 2002 2003

200.7

196.8 199.9

207.9

24.9

18.2

15.9 14.9 22.8

2004

Bath, Kitchen and Wash Products

Billions of yen

239.2

2005

2001 2002 2003

214.3

199.4 200.3

233.7

18.3

15.1

10.6 11.9 20.2

2004

Other

Billions of yen

30.7

2005

2001 2002 2003

24.7 29.7 23.9 26.3 0.9 – 2.2 0.8 –

1.2 –0.7

2004

Total Assets and ROA

Billions of yen %

4.0 3.0 2.0 1.0 0 461.0 2005

2001 2002 2003

471.5 504.9 488.2 462.6 2004 Current Ratio Times 2.0 1.5 1.0 0.5 0 2005

2001 2002 2003 2004

Shareholders’ Equity and ROE

Billions of yen %

8.0 6.0 4.0 2.0 0 199.4 2005

2001 2002 2003

178.3

199.8

191.9 189.9

2004

Restroom Products segment, excluding intra-group sales, rose

3.0% to ¥214.2 billion compared with the previous fiscal year.

Operating income rose 9.6% to ¥24.9 billion.

Bath, Kitchen and Wash Products

Sales of bath products were strong, owing to favorable

demand for unit bathrooms for single-unit housing that

incorporate the industry-leading quick-drying Karari Floor.

Moreover, demand was greater than expected for the Furopia

Mahobin Bath (thermal pot bath) Series, which features a

thermal structure that only allows bathwater to cool about 2ºC

in six hours even during the winter. In kitchen products, TOTO

enhanced functionality and kept prices at affordable levels after

changing product models for the Style F Series in September

2004. The Super Legacess Sit Easy Plan, which lets people

work sitting down or standing up in the kitchen, was added to

our product lineup in September 2004. Also during the same

month, we unveiled the Frame Kitchen with open storage that

uses aluminum frames instead of wooden cabinets. In washbasin

products, TOTO released well-designed products in the NEW

System J Series in June 2004. In October 2004, we released

to favorable demand the Fairy Series of washbasin/vanity units

based on the same concept as the Super Legacess Sit Easy

Plan. As a result, sales in the Bath, Kitchen and Wash

Products segment grew 2.4% year on year to ¥239.2 billion.

Operating income was ¥18.3 billion, a decrease of 9.3% from

the previous fiscal year due to higher material prices.

Other

Sales grew considerably for the ceramic air-bearing Air Slide,

electrostatic chucks and large precision ceramic components

as a result of developing new semiconductor and LCD-related

customers. Moreover, we reinforced the product features and

lineup for Sankanou, our bathroom ventilation, heating and

drying equipment for which customer needs are growing, and

Wash Up Eco, a tabletop dishwasher/dryer, leading to an

increase in sales. As a result, sales in the other segment

expanded 16.7% to ¥30.7 billion. Operating income was ¥0.9

billion, compared with an operating loss of ¥0.7 billion in the

previous fiscal year, returning to profitability after three fiscal

years of losses.

Financial Position

As of March 31, 2005, consolidated total assets amounted to

¥461.0 billion, a decline of ¥1.7 billion from the end of the

previous fiscal year.

Total current assets decreased by ¥5.5 billion to ¥218.6

bil-lion. Cash and cash equivalents declined ¥15.2 billion to ¥43.5

billion, inventories fell ¥4.5 billion to ¥58.8 billion. Short-term

investments increased ¥14.2 billion to ¥15.6 billion.

Net property, plant and equipment declined ¥1.4 billion to

¥163.1 billion. Land decreased ¥2.3 billion to ¥47.8 billion due

to losses on impaired assets.

Total investments and other assets rose ¥5.2 billion to ¥79.2

billion. Investment securities increased ¥5.9 billion, owing to

the purchase of stock.

Total current liabilities decreased ¥9.5 billion to ¥158.9

billion. Short-term bank loans declined ¥8.6 billion.

Commercial paper remained unchanged at ¥10.0 billion.

Total long-term liabilities decreased by ¥2.9 billion from the

previous fiscal year to ¥91.8 billion. Accrued retirement benefits

for employees declined by ¥2.4 billion to ¥57.7 billion.

As a result, interest-bearing debt (the total of short-term

bank loans, current portion of long-term debt, commercial paper

and long-term debt) declined by ¥9.7 billion to ¥84.9 billion.

Working capital at fiscal year-end totaled ¥59.7 billion, up

¥4.0 billion from the previous fiscal year. The current ratio rose

from 1.33 times to 1.38 times.

Total shareholders’ equity grew ¥9.5 billion from the previous

fiscal year to ¥199.4 billion, as a result of an increase in

retained earnings due to higher net income and an increase in

net unrealized holding gains on securities. The equity ratio rose

by 2.2 percentage points, from 41.0% to 43.2%. Return on

equity increased slightly by 0.3 percentage point, from 6.4%

the previous fiscal year to 6.7%. Equity per share, based on the

weighted-average number of shares outstanding during the

fiscal year under review, increased from ¥547.25 to ¥574.43.

R&D Expenses

The TOTO Group engages in R&D in line with its mission of

con-tributing to the development of society by proposing healthy

and comfortable living environments. TOTO aims to create

innovative products through the development of Eco-Products

that realize both convenience and environmental preservation,

as well as universal design products that are easy for anyone to

use. The Group also conducts basic research and development

in new technologies such as photocatalysts, fine ceramics and

fuel cells.

Research and development expenses (included in SG&A

expenses) grew by ¥0.4 billion from the previous fiscal year to

¥11.8 billion. The ratio of R&D expenses to net sales was

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39

Financial Section

38

Financial Section Management’s Discussion and Analysis of Operations Management’s Discussion and Analysis of Operations

R&D Expenses

Billions of yen

11.8

2005

2001 2002 2003

11.3 12.8 12.3 11.4 2004 Capital Investment

Billions of yen

20.1

2005

2001 2002 2003

14.5

22.6

19.7 20.6

2004

Cash Flow

Billions of yen

–15.4

2005

2001 2002 2003

9.2

15.9

–14.6

18.6

2004

expenses totaled ¥3.6 billion in the Restroom Products

seg-ment, ¥4.0 billion in the Bath, Kitchen and Wash Products

segment, and ¥2.4 billion in the Other segment. TOTO also

had R&D expenses of ¥1.8 billion that were unallocated to a

specific business segment.

Capital Investment and Depreciation

The TOTO Group’s capital investment totaled ¥20.1 billion,

down ¥0.6 billion from the previous fiscal year. Of this total,

investment was mainly for production facilities and molds at

domestic Group companies, the transfer of facilities with the

consolidation of the water faucet business to the Kokura Plant

No. 2, expansion of domestic showrooms, and IT infrastructure.

Depreciation and amortization was ¥18.7 billion, up ¥0.2 billion

from the previous fiscal year. For the fiscal year ending March

31, 2006, the Company anticipates capital investment of ¥22.0

billion, and depreciation and amortization of ¥22.0 billion.

Cash Flows

Net cash provided by operating activities increased ¥4.7 billion

from the previous fiscal year to ¥40.4 billion. In the fiscal year

under review, there was the absence of a gain of ¥13.8 billion

on the return of the substitutional portion of welfare pension

fund plans recorded as an item that reduced cash in the

previ-ous fiscal year. The main sources of cash were ¥23.5 billion

from income before income taxes and minority interests, ¥18.7

billion from depreciation and amortization, and a ¥2.9 billion

decline in inventories.

Net cash used in investing activities totaled ¥42.3 billion, up

¥36.8 billion from the previous fiscal year. The primary uses of

cash were ¥18.2 billion for purchases of property, plant and

equipment, ¥5.1 billion from an increase in marketable and

investment securities, and ¥14.8 billion from an increase in

time deposits with maturities over three months.

Net cash used in financing activities increased ¥2.6 billion

from the previous fiscal year to ¥13.4 billion. While TOTO

procured capital, this was offset by a decrease in bank loans

and the redemption of commercial paper.

As a result, cash and cash equivalents at end of year

declined ¥15.2 billion, from ¥58.7 billion at the end of the

previous fiscal year to ¥43.5 billion.

Business Risk

1. Risk of Change in Operating Environment

The TOTO Group’s main business activities are the production

and sale of facilities and equipment for buildings. As a result,

sudden changes in the operating environment from a decline in

the number of housing starts and construction of large-scale

buildings, intensified market competition, as well as consumer

spending trends that affect demand for new housing and

remodeling, may have an adverse impact on the financial position

and business performance of the TOTO Group.

2. Risk Related to Product and Service Quality Guarantees

The TOTO Group recognizes the importance of ensuring the

quality of its products and services, and bases its quality

assurance efforts on internal standards and national standards

such as Japanese Industrial Standards (JIS) for engineering,

development, production, sales and services. However, in the

event that a problem should occur with the quality of its

products and services, such as an accident or poor service,

the TOTO Group’s financial position and business performance

may be adversely affected.

3. Risk of Personal Information Leak

The TOTO Group discloses on its Web site its policies for

acquiring and using personal information, and clearly identifies

the purpose of using personal information prior to receiving

permission from the individual concerned to use their personal

information. The TOTO Group has taken steps to strengthen

security measures such as through user access rights

man-agement with IDs and passwords on information manman-agement

systems, and by preventing the output of large volumes of

data. For our employees, we have formulated guidelines for the

protection of personal information, and broadened awareness

of related issues through e-Learning, our system for individual

study on PCs. Despite these measures, in the event that

personal information possessed by the TOTO Group is

exter-nally leaked as a result of criminal intent or negligence on

behalf of a party associated with the TOTO Group, or obtained

through unauthorized access by a third party, the brand image

of the TOTO Group may deteriorate and adversely affect the

TOTO Group’s financial position and business performance.

4. Risk of Natural Disasters

To indemnify against damage from fire and typhoons, the

TOTO Group takes out property insurance to cover products,

buildings and other assets that are management resources.

We are making concerted efforts to improve problem areas at

all of our manufacturing facilities, and use external institutions to

periodically analyze the risk of natural disasters. As a precaution

against earthquakes, we have created a manual of earthquake

countermeasures for each manufacturing facility, and make

every effort to ensure the safety of employees, protect assets

such as products and buildings, resume operations and prevent

damage to surrounding areas in the event of an earthquake.

However, in the event of a major natural disaster of unforeseen

scale, the TOTO Group’s financial position and business

performance may be adversely affected.

5. Risk of War, Civil Unrest and Terrorism

The TOTO Group engages in business in many countries

around the world, primarily in the United States and Asian

countries. Accordingly, as a precaution against public instability

in these countries, we have created the TOTO Global Crisis

Management Manual, and are placing headquarters risk

managers and local base risk managers in charge of crisis

management, in an effort to ensure the safety of employees

and protect products, buildings and other assets. However, in

the event of a major war, civil unrest or terrorism in these

regions, the TOTO Group’s financial position and business

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41

Financial Section Consolidated Balance Sheets

40

Financial Section Consolidated Balance Sheets

Consolidated Balance Sheets

TOTO LTD. and consolidated subsidiaries

At March 31, 2004 and 2005

ASSETS 2004 2005 2005

Thousands of Millions of yen Millions of yen

U.S. dollars (Note 3)

Current assets:

Cash and cash equivalents ¥ 58,735 ¥ 43,537 $ 405,410

Short-term investments (Note 14) 1,436 15,592 145,190

Notes and accounts receivable:

Trade 83,185 85,729 798,296

Allowance for doubtful receivables (1,255) (1,007) (9,377)

81,930 84,722 788,919

Inventories (Note 4) 63,233 58,754 547,109

Deferred tax assets (Note 8) 5,714 4,301 40,050

Other current assets 13,027 11,692 108,875

Total current assets 224,075 218,598 2,035,553

Property, plant and equipment (Note 6):

Land 50,052 47,776 444,883

Buildings and structures 163,443 163,485 1,522,348

Machinery and equipment 137,208 139,045 1,294,767

Construction in progress 4,613 3,033 28,243

Other 55,390 54,142 504,162

410,706 407,481 3,794,403

Accumulated depreciation (246,214) (244,355) (2,275,398)

Property, plant and equipment, net 164,492 163,126 1,519,005

Investments and other assets:

Investment securities (Notes 6 and 14) 23,617 29,512 274,811

Investments in and loans to unconsolidated subsidiaries and affiliates 5,480 5,017 46,718

Long-term loans receivable 900 828 7,710

Guaranty money deposited 5,463 5,662 52,724

Deferred tax assets (Note 8) 21,593 20,779 193,491

Excess of cost over net assets acquired 186 117 1,089

Other 16,816 17,311 161,198

Total investments and other assets 74,055 79,226 737,741

¥462,622 ¥460,950 $4,292,299

See notes to consolidated financial statements.

LIABILITIES AND SHAREHOLDERS’ EQUITY 2004 2005 2005

Current liabilities:

Notes and accounts payable:

Trade ¥ 54,887 ¥ 56,014 $ 521,594

Property and equipment 3,259 3,814 35,515

58,146 59,828 557,109

Short-term bank loans (Notes 5 and 6) 50,218 41,572 387,112

Current portion of long-term debt (Notes 5 and 6) 1,232 731 6,807

Commercial paper (Note 5) 10,000 10,000 93,119

Other accounts payable 6,649 6,136 57,138

Accrued income taxes (Note 8) 2,786 4,790 44,604

Accrued expenses 19,157 18,736 174,467

Other current liabilities (Note 8) 20,179 17,077 159,018

Total current liabilities 168,367 158,870 1,479,374

Long-term liabilities:

Long-term debt (Notes 5 and 6) 33,138 32,628 303,827

Accrued retirement benefits for employees (Note 9) 60,118 57,674 537,052

Accrued retirement benefits for directors 513 538 5,010

Other (Note 8) 962 974 9,070

Total long-term liabilities 94,731 91,814 854,959

Minority interests 9,667 10,894 101,443

Shareholders’ equity(Notes 7 and 16):

Common stock, without par value:

Authorized—700,000,000 shares

Issued—371,662,595 shares in 2004, and

371,662,595 shares in 2005 35,579 35,579 331,306

Capital surplus 29,188 29,364 273,433

Retained earnings 139,341 148,516 1,382,959

Net unrealized holding gains on securities 4,221 4,505 41,950

Translation adjustments (4,693) (4,724) (43,989)

203,636 213,240 1,985,659

Less common stock in treasury, at cost;

24,854,360 shares in 2004 and 24,806,256 shares in 2005 (13,779) (13,868) (129,136)

Total shareholders’ equity 189,857 199,372 1,856,523

Contingent liabilities(Note 13)

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43

Financial Section Consolidated Statements of Shareholders’ Equity

42

Financial Section Consolidated Statements of Income

Consolidated Statements of Income

TOTO LTD. and consolidated subsidiaries

Years ended March 31, 2004 and 2005

2004 2005 2005

Net sales ¥467,925 ¥484,192 $4,508,725

Cost of sales 300,355 308,067 2,868,675

Gross profit 167,570 176,125 1,640,050

Selling, general and administrative expenses(Note 10) 140,136 145,706 1,356,793

Operating income 27,434 30,419 283,257

Other income (expenses):

Interest and dividend income 625 617 5,746

Interest expense (1,446) (1,214) (11,304)

Loss on sales and disposal of property, plant and equipment, net (860) (1,445) (13,456)

Loss on sales of investment in affiliates — (1,538) (14,322)

Gain on return of the substitutional portion of

welfare pension fund plans (Note 9) 13,800 — —

Loss on devaluation of fixed assets (4,171) — —

Loss on devaluation of securities (199) (9) (84)

Loss on disposal of inventories (2,911) (776) (7,226)

Foreign exchange loss, net (432) (114) (1,062)

Sales discounts (896) (956) (8,902)

Loss on impairment of fixed assets — (2,178) (20,281)

Loss on business restructuring (5,776) (1,503) (13,996)

Loss on devaluation of memberships (9) (26) (242)

Loss on repair of defective products (1,404) — —

Equity in earning of unconsolidated subsidiaries and affiliates 724 830 7,729

Other, net (16) 1,348 12,553

Income before income taxes and minority interests 24,463 23,455 218,410

Income taxes (Note 8):

Current 4,530 6,764 62,985

Deferred 6,440 1,902 17,711

10,970 8,666 80,696

Minority interests (1,761) (1,730) (16,110)

Net income (Note 11) ¥ 11,732 ¥ 13,059 $ 121,604

Consolidated Statements of Shareholders’ Equity

TOTO LTD. and consolidated subsidiaries

Years ended March 31, 2004 and 2005

2004 2005 2005

Common stock

Balance at beginning of year

(2004—371,663 thousand shares; 2005—371,663 thousand shares) ¥ 35,579 ¥ 35,579 $ 331,306

Balance at end of year

(2004—371,663 thousand shares; 2005—371,663 thousand shares) ¥ 35,579 ¥ 35,579 $ 331,306

Capital surplus

Balance at beginning of year ¥ 29,101 ¥ 29,188 $ 271,794

Gain on sales of treasury stock 87 176 1,639

Balance at end of year ¥ 29,188 ¥ 29,364 $ 273,433

Retained earnings

Balance at beginning of year ¥131,307 ¥139,341 $1,297,523

Net income 11,732 13,059 121,604

Cash dividends paid (3,646) (3,817) (35,544)

Bonuses to directors and statutory auditors (52) (67) (624)

Balance at end of year ¥139,341 ¥148,516 $1,382,959

Net unrealized holding gains on securities

Balance at beginning of year ¥ (1,123) ¥ 4,221 $ 39,305

Net changes during the year 5,344 284 2,645

Balance at end of year ¥ 4,221 ¥ 4,505 $ 41,950

Translation adjustments

Balance at beginning of year ¥ (2,929) ¥ (4,693) $ (43,701)

Adjustments arising from translation of foreign currency

financial statements (1,764) (31) (288)

Balance at end of year ¥ (4,693) ¥ (4,724) $ (43,989)

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45

Financial Section Notes to Consolidated Financial Statements

44

Financial Section Consolidated Statements of Cash Flows

Consolidated Statements of Cash Flows

TOTO LTD. and consolidated subsidiaries

Years ended March 31, 2004 and 2005

Notes to Consolidated Financial Statements

TOTO LTD. and consolidated subsidiaries

2004 2005 2005

Operating activities:

Income before income taxes and minority interests ¥24,463 ¥23,455 $218,410

Depreciation and amortization 18,480 18,726 174,374

Loss on impairment of fixed assets – 2,178 20,281

Interest and dividend income (625) (617) (5,746)

Interest expense 1,446 1,214 11,304

Employees’ retirement benefits paid, net of provision (3,903) (2,445) (22,767)

Directors’ retirement benefits paid, net of provision (6) 26 242

Loss on sales and disposal of property, plant and equipment, net 860 1,445 13,456

Loss on sales of investment in affiliates — 1,538 14,322

Loss on devaluation of securities 199 9 84

Loss on business restructuring 5,776 1,503 13,996

Loss on devaluation of memberships 9 26 242

Loss on devaluation of fixed assets 4,171 — —

Gain on return of the substitutional portion of welfare pension fund plans (13,800) — —

Notes and accounts receivable 1,912 (1,237) (11,519)

Inventories 2,050 2,901 27,014

Notes and accounts payable 69 1,134 10,559

Bonuses to directors and statutory auditors (52) (67) (624)

Other (588) (4,809) (44,781)

Subtotal 40,461 44,980 418,847

Interest and dividend income received 802 867 8,074

Interest expense paid (1,528) (1,184) (11,025)

Income taxes paid (3,973) (4,222) (39,315)

Net cash provided by operating activities 35,762 40,441 376,581

Investing activities:

Purchases of property, plant and equipment (12,429) (18,237) (169,820)

Proceeds from sales of property, plant and equipment 1,141 663 6,174

Decrease (increase) in marketable and investment securities 4,633 (5,149) (47,947)

Decrease (increase) in time deposits 6,319 (14,751) (137,359)

Acquisition of subsidiaries’ stock resulting in changes

in the scope of consolidation 355 (100) (931)

Other (5,554) (4,763) (44,353)

Net cash used in investing activities (5,535) (42,337) (394,236)

Financing activities:

Decrease in bank loans (4,934) (9,163) (85,325)

Proceeds from issuance of commercial paper 10,000 20,000 186,237

Redemption of commercial paper — (20,000) (186,237)

Cash dividends paid (3,644) (3,816) (35,534)

Purchases of treasury stock (129) (201) (1,872)

Redemption of bonds (11,781) — —

Other (344) (233) (2,169)

Net cash used in financing activities (10,832) (13,413) (124,900)

Effect of exchange rate changes on cash and cash equivalents (782) (139) (1,295) Net increase (decrease) in cash and cash equivalents 18,613 (15,448) (143,850) Cash and cash equivalents at beginning of year 39,575 58,735 546,932 Increase due to inclusion of subsidiaries in consolidation 547 250 2,328 Cash and cash equivalents at end of year ¥58,735 ¥43,537 $405,410

1. Basis of Preparation

TOTO LTD. (the “Company”) and its domestic subsidiaries maintain

their books of account in conformity with the financial accounting

standards of Japan, and its foreign subsidiaries maintain their books of

account in conformity with those of their countries of domicile.

The accompanying consolidated financial statements have been

compiled from the consolidated financial statements prepared by the

Company as required under the Securities and Exchange Law of

Japan and, therefore, have been prepared in accordance 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.

Certain amounts in the prior year’s financial statements have been

reclassified to conform to the current year’s presentation.

2. Summary of Significant Accounting Policies

(a) Principles of consolidation and accounting for investments in unconsolidated subsidiaries and affiliates

The accompanying consolidated financial statements include the

accounts of the Company and its significant companies controlled

directly or indirectly by the Company. Companies over which the

Company exercises significant influence in terms of their operating and

financial policies have been included in the consolidated financial

statements on an equity basis. All significant intercompany balances

and transactions have been eliminated in consolidation.

Investments in unconsolidated subsidiaries and affiliates not

accounted for by the equity method are carried at cost.

Certain foreign subsidiaries are consolidated on the basis of fiscal

periods ending December 31, which differ from that of the Company;

however, the significant effect of the difference in fiscal periods has

been properly adjusted in consolidation.

The difference between the cost and the underlying equity in the

net assets at fair value at the date of acquisition is being amortized

principally over a period of five years.

(b) Cash equivalents

All highly liquid investments with a maturity of three months or less

when purchased are considered to be cash equivalents.

(c) Securities

In general, securities other than those of subsidiaries and affiliates are

classified into three categories: trading, held-to-maturity or other

securities. Securities held by the Company and its consolidated

sub-sidiaries are all classified as other securities. Marketable securities

classified as other securities are carried at fair value with changes in

unrealized holding gain or loss, net of the applicable income taxes,

included directly in shareholders’ equity. Non-marketable securities

classified as other securities are carried at cost. Cost of securities sold

is determined by the moving average method.

(d) Inventories

Finished products, semifinished products and work in process are

stated at cost, determined by the first-in, first-out method.

Raw materials are principally stated at the lower of cost (by the

gross average cost method) or market.

Contracts in progress and supplies are stated at cost determined by

the specific identification method and the gross average cost method,

respectively.

(e) Allowance for doubtful receivables

The allowance for doubtful receivables is provided for possible bad debt

at the amount estimated based on the past bad debt experience for

normal receivables plus uncollectible amounts determined by reference

to the collectibility of individual accounts for doubtful receivables.

(f) Depreciation and amortization

Depreciation of property, plant and equipment of the Company and its

domestic consolidated subsidiaries is mainly calculated by the

declining-balance method at rates based on the estimated useful lives of the

respective assets. Depreciation of foreign consolidated subsidiaries is

mainly calculated by the straight-line method over the estimated useful

lives of the respective assets. The useful lives of property, plant and

equipment are summarized as follows:

Buildings and structures 3 to 50 years

Machinery and equipment 4 to 15 years

Significant renewals and additions are capitalized at cost.

Maintenance and repairs are charged to income.

Computer software capitalized is being amortized over a period of

five years.

(g) Foreign currency translation

Monetary assets and liabilities denominated in foreign currencies are

translated into yen at the exchange rates prevailing at the balance

sheet date. All revenues and expenses associated with foreign

curren-cies are translated at the rates of exchange prevailing when such

transactions were made. The resulting exchange gains and losses are

credited or charged to income.

The revenue and expense accounts of the foreign subsidiaries are

translated into yen at the rates of exchange in effect at the balance

sheet date. Except for the components of shareholders’ equity, the

balance sheet accounts are also translated into yen at the rates of

exchange in effect at the balance sheet date. The components of

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47

Financial Section

46

Financial Section Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements

(h) Research and development costs

Research and development costs are charged to income as incurred.

(i) Income taxes

Deferred tax assets and liabilities are determined based on the

differ-ences 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.

(j) Retirement benefits

Accrued retirement benefits for employees are provided mainly at an

amount calculated based on the retirement benefit obligation and the

fair value of the pension plan assets at the balance sheet dates, as

adjusted for unrecognized actuarial gain or loss and unrecognized

prior service cost. The retirement benefit obligation is attributed to

each period by the straight-line method over the estimated years of

service of the eligible employees. Actuarial gain and loss are amortized

in the year following the year in which the gain or loss is recognized

primarily by the straight-line method principally over 16 years. Prior

service cost is being amortized by the straight-line method principally

over 16 years.

See Note 9 for the method of accounting for the separation of the

substitutional portion of the benefit obligation from the corporate

portion of the benefit obligation under Welfare Pension Fund Plan.

In addition, directors and statutory auditors of the Company are

customarily entitled to lump-sum payments under an unfunded

retire-ment plan. Provisions for the retireretire-ment benefits for these officers are

made at estimated amounts.

(k) Leases

Noncancelable lease transactions are primarily accounted for as

oper-ating leases (whether such leases are classified as operoper-ating or finance

leases) except that lease agreements that stipulate the transfer of

ownership of the leased assets to the lessee are accounted for as

finance leases.

(l) Appropriation of retained earnings

Under the Commercial Code of Japan, the appropriation of retained

earnings with respect to a given financial period is made by resolution

of the shareholders at a general meeting to be held subsequent to the

close of such financial period. The accounts for that period do not,

therefore, reflect such appropriations. (See Note 16.)

(m) Adoption of new accounting standard

Effective the year ended March 31, 2005, the Company has early

adopted a new accounting standard for the impairment of fixed assets

that requires tangible and intangible fixed assets be carried at cost less

depreciation, and be reviewed for impairment whenever events or

changes in circumstances indicate that the carrying amount of an

asset may not be recoverable. Companies would be required to

recog-nize an impairment loss in their income statement if certain indicators

of asset impairment exist and the book value of an asset exceeds the

undiscounted sum of future cash flows of the asset.

As a result of the adoption of this new accounting standard, a loss

on impairment of property, plant and equipment in the amount of

¥2,178 million ($20,281 thousand) was recognized and income before

income taxes and minority interests decreased by the same amount for

the year ended March 31, 2005 as compared with the corresponding

amount under the previous method.

3. U.S. Dollar Amounts

The translation of yen amounts into U.S. dollar amounts is included

solely for convenience, as a matter of arithmetic computation only, at the

rate of ¥107.39 = US$1.00, the exchange rate prevailing on March 31,

2005. The translation should not be construed as a representation that

yen have been, could have been, or could in the future be, converted

into U.S. dollars at the above or any other rate.

4. Inventories

Inventories at March 31, 2004 and 2005 consisted of the following:

2004 2005 2005

U.S. dollars

Finished products ¥35,372 ¥32,797 $305,401

Semifinished products, work in process and

contracts in progress 18,170 14,941 139,128

Raw materials 6,287 7,537 70,184

Supplies 3,404 3,479 32,396

¥63,233 ¥58,754 $547,109

5. Short-Term Bank Loans, Commercial Paper

and Long-Term Debt

Short-term bank loans generally represent overdrafts and notes. The

weighted average annual interest rates applicable to such short-term

loans outstanding at March 31, 2004 and 2005 were 0.6% and 0.7%,

respectively. Commercial paper is due within one year with annual

interests of 0.038% and 0.019% as of March 31, 2004 and 2005,

respectively.

Long-term debt at March 31, 2004 and 2005 consisted of the

following:

2004 2005 2005

U.S. dollars

Unsecured convertible bonds:

2.7% due 2007 ¥29,998 ¥29,883 $278,266

Bank loans maturing through 2015 at interest rates ranging from 2.08% to 12.30%:

Secured 932 — —

Unsecured 3,440 3,476 32,368

34,370 33,359 310,634

Less current portion 1,232 731 6,807

¥33,138 ¥32,628 $303,827

At March 31, 2005, unsecured convertible bonds, unless previously

redeemed, were convertible at the option of the holders into shares

of common stock of the Company at the current conversion prices

as follows:

Conversion price

per share Conversion period

2.7% due 2007 1,295.50 June 1, 1995–September 27, 2007

Under the indentures and trust deeds of the convertible bonds, the

conversion price is subject to adjustment in certain cases which

include stock splits. A sufficient number of shares of common stock is

reserved for the conversion of all outstanding convertible bonds.

At March 31, 2005, if all the outstanding convertible bonds had

been converted at the then current conversion prices, 23,067 thousand

new shares of common stock would have been issuable.

The aggregate annual maturities of long-term debt subsequent to

March 31, 2005 are summarized as follows:

Thousands of Year ending March 31, Millions of yen U.S. dollars

2006 ¥ 731 $ 6,807

2007 573 5,336

2008 30,701 285,883

2009 276 2,570

2010 276 2,570

2011 and thereafter 802 7,468

¥33,359 $310,634

6. Pledged Assets

The assets pledged as collateral for short-term bank loans and long-term

debt at March 31, 2004 and 2005 were as follows:

2004 2005 2005

U.S. dollars

Property, plant and equipment,

at net book value ¥2,243 ¥1,147 $10,681

In addition to the above, investment securities in the amount of

¥9 million ($84 thousand) have been utilized as a security deposit at

March 31, 2005.

7. Capital Surplus and Retained Earnings

In accordance with the Commercial Code of Japan (the “Code”), the

Company has provided a legal reserve, which was included in retained

earnings. The Code provides that an amount equal to at least 10% of

the amount to be disbursed as a distribution of earnings be

appropriat-ed to the legal reserve until the total of such reserve and the capital

surplus account equals 25% of the common stock account. The legal

reserve amounted to ¥8,291 million ($77,205 thousand) as of both

March 31, 2004 and 2005.

The Code provides that neither capital surplus nor the legal reserve

is available for dividends, but both may be used to reduce or eliminate

a deficit by resolution of the shareholders or may be transferred to

common stock by resolution of the Board of Directors. The Code also

provides that if the total amount of capital surplus and the legal reserve

exceeds 25% of the amount of common stock, the excess may be

distributed to the shareholders either as a return of capital or as

dividends subject to the approval of the shareholders.

8. Income Taxes

Income taxes applicable to the Company and its domestic consolidated

subsidiaries comprised corporation tax, enterprise tax and inhabitants’

taxes which, in the aggregate, resulted in statutory tax rates of 41.7%

for 2004 and 40.4% for 2005. Income taxes of the foreign consolidated

subsidiaries are based generally on the tax rates applicable in their

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49

Financial Section

48

lump-sum or annuity payments, the amounts of which are determined by

reference to their basic rates of pay, length of service, and the conditions

under which termination occurs.

The following table sets forth the funded and accrued status of the

plans, and the amounts recognized in the consolidated balance sheets

as of March 31, 2004 and 2005 for the Company’s and the consolidated

subsidiaries’ defined benefit plans:

2004 2005 2005

U.S. dollars

Retirement benefit

obligation ¥(137,440) ¥(145,887) $(1,358,479)

Plan assets at fair value 65,365 70,250 654,158

Unfunded retirement

benefit obligation (72,075) (75,637) (704,321)

Unrecognized actuarial

gain or loss 16,048 21,798 202,980

Unrecognized prior

service cost (3,719) (3,449) (32,117)

Net retirement benefit

obligation (59,746) (57,288) (533,458)

Prepaid pension cost 372 386 3,594

Accrued retirement

benefits ¥(60,118) ¥(57,674) $(537,052)

On April 15, 2003, the Company received approval from the Minister

of Health, Labour and Welfare with respect to its application for an

exemption from the obligation for benefits related to future employee

services under the government-sponsored portion (“substitutional

portion”) of the WPFP.

In accordance with the transitional provision stipulated in “Practical

Guidelines for Accounting for Retirement Benefits,” the Company

accounted for the separation of the substitutional portion of the benefit

obligation from the corporate portion of the benefit obligation under its

WPFP as of the date of approval of its exemption assuming that the

transfer to the Japanese government of the substitutional portion of

the benefit obligation and related pension plan assets had been

com-pleted as of that date. As a result, the Company recognized a gain of

¥13,800 million for the year ended March 31, 2004. The pension

assets, which are to be transferred, were calculated at ¥39,490 million

at March 31, 2004.

On July 1, 2004, the Company received approval from the Minister

of Health, Labour and Welfare with respect to the transfer to the

Japanese Government of the substitutional portion of the benefit

obligation and related pension assets. The effective tax rates reflected in the consolidated statement of

income for the years ended March 31, 2004 and 2005 differ from the

statutory tax rates for the following reasons:

2004 2005

Statutory tax rate 41.7% 40.4%

Effect of:

Expenses not deductible for

income tax purposes 1.1 1.2

Dividend income deductible for

income tax purposes (0.4) (0.2)

Per capita taxes 1.0 0.8

Changes in valuation allowance 2.9 3.5

Tax credit for research and

development expenses (2.1) (4.9)

Other, net 0.6 (3.8)

Effective tax rate 44.8% 37.0%

The significant components of deferred tax assets and liabilities as

of March 31, 2004 and 2005 were as follows:

2004 2005 2005

U.S. dollars

Deferred tax assets:

Accrued bonus ¥ 3,538 ¥ 3,098 $ 28,848

Retirement allowances 21,775 22,034 205,177

Net operating loss

carry forwards 3,213 3,665 34,128

Other 8,641 7,496 69,802

Total gross deferred

tax assets 37,167 36,293 337,955

Valuation allowance (5,753) (6,784) (63,172)

Total deferred tax assets 31,414 29,509 274,783

Deferred tax liabilities: Net unrealized holding

gains on securities (2,790) (2,989) (27,833)

Reserve under Special

Taxation Measures Law (1,136) (1,104) (10,280)

Other (351) (488) (4,544)

Total deferred tax liabilities (4,277) (4,581) (42,657)

Net deferred tax assets ¥27,137 ¥24,928 $232,126

9. Retirement Benefit Plans

The Company and its domestic consolidated subsidiaries have defined

benefit plans, such as welfare pension fund plans (“WPFP”), tax-qualified

pension plans, lump-sum payment plans, and other types of defined

benefit plans covering substantially all employees who are entitled to

The components of retirement benefit expenses for the years ended

March 31, 2004 and 2005 are outlined as follows:

2004 2005 2005

U.S. dollars

Service cost ¥ 5,608 ¥4,742 $44,157

Interest cost 3,428 3,367 31,353

Expected return on

plan assets (1,670) (337) (3,138)

Amortization of actuarial

gain or loss 1,941 1,024 9,535

Amortization of prior

service cost (270) (270) (2,514)

Subtotal 9,037 8,526 79,393

Gain on return of the substitutional portion

of WPFP (13,800) — —

Total ¥(4,763) ¥8,526 $79,393

The assumptions used in the accounting for the above plans are

as follows:

2004 2005

Discount rate 2.5% 2.5%

Expected return on plan assets 1.0–3.5% 0.5–2.7%

10. Research and Development Costs

Research and development costs included in selling, general and

administrative expenses for the years ended March 31, 2004 and

2005 amounted to ¥11,366 million and ¥11,786 million ($109,750

thousand), respectively.

11. Amounts Per Share

Basic net income per share is computed 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 year, and diluted net income per share is computed based

on the net income available for distribution to the shareholders and the

weighted average number of shares of common stock outstanding

during each year after giving effect to the dilutive potential of shares of

common stock to be issued upon the conversion of convertible bonds.

Amounts per share of net assets is computed based on net assets

available for distribution to the shareholders and the number of shares

of common stock outstanding at the year end.

Cash dividends per share represent the cash dividends declared

as applicable to the respective years, together with the interim cash

dividends paid.

2004 2005 2005

Yen Yen U.S. dollars

Net income:

Basic ¥ 33.63 ¥ 37.29 $0.35

Diluted 32.58 36.28 0.34

Net assets 547.25 574.43 5.35

Cash dividends applicable

to the year 11.00 11.50 0.11

12. Leases

(a) Finance leases

The following pro forma amounts represent the acquisition costs

(including the interest portion), accumulated depreciation and net book

value of the leased property as of March 31, 2004 and 2005, which

would have been reflected in the consolidated balance sheets, if

finance lease accounting had been applied to the finance leases

currently accounted for as operating leases:

2004 2005 2005

U.S. dollars

Acquisition costs:

Machinery and equipment ¥ 532 ¥ 411 $ 3,827

Other assets 6,635 5,869 54,651

¥7,167 ¥6,280 $58,478

Accumulated depreciation:

Machinery and equipment ¥ 441 ¥ 317 $ 2,952

Other assets 3,912 3,966 36,931

¥4,353 ¥4,283 $39,883

Net book value:

Machinery and equipment ¥ 91 ¥ 94 $ 875

Other assets 2,723 1,903 17,720

¥2,814 ¥1,997 $18,595

Lease payments relating to finance leases accounted for as

operat-ing leases amounted to ¥1,335 million and ¥1,279 million ($11,910

thousand) for the years ended March 31, 2004 and 2005, respectively.

The depreciation expense of the leased assets computed by the

declining-balance method over the respective lease terms amounted

to ¥1,396 million and ¥1,372 million ($12,776 thousand) for the years

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14. Securities

a) Information regarding marketable securities classified as other securities as of March 31, 2004 and 2005 is as follows:

March 31, 2004

Gross unrealized Acquisition cost Carrying value

holding gains (losses) Millions of yen

Securities whose carrying value exceeds their acquisition cost:

Equity securities ¥ 9,659 ¥17,101 ¥7,442

Debt securities 4,415 4,453 38

Subtotal ¥14,704 ¥21,554 ¥7,480

Securities whose acquisition cost exceeds their carrying value:

Equity securities ¥ 2,934 ¥ 2,444 ¥ (490)

Debt securities 300 299 (1)

Subtotal ¥ 3,234 ¥ 2,743 ¥ (491)

Total ¥17,308 ¥24,297 ¥6,989

March 31, 2005

Gross unrealized Gross unrealized Acquisition cost Carrying value

holding gains (losses) Acquisition cost Carrying value holding gains (losses) Millions of yen Thousands of U.S. dollars

Securities whose carrying value exceeds their acquisition cost:

Equity securities ¥16,802 ¥24,589 ¥7,787 $156,458 $228,969 $72,511

Debt securities 3,314 3,352 38 30,860 31,214 354

Subtotal ¥20,116 ¥27,941 ¥7,825 $187,318 $260,183 $72,865

Securities whose acquisition cost exceeds their carrying value:

Equity securities ¥ 1,845 ¥ 1,482 ¥ (363) $ 17,180 $ 13,800 $ (3,380)

Subtotal ¥ 1,845 ¥ 1,482 ¥ (363) $ 17,180 $ 13,800 $ (3,380)

Total ¥21,961 ¥29,423 ¥7,462 $204,498 $273,983 $69,485

15. Segment Information

The Company and its consolidated subsidiaries are primarily engaged

in Japan in the manufacture and sale of products. The operations of

the Company and its consolidated subsidiaries have been classified

into three business segments: restroom products, bath kitchen and

wash products, and other. The restroom products segment includes

sanitary ware, toilets, toilet seats, tile and building materials; and the

bath, kitchen and wash products segment includes unit bathrooms,

faucets, water heaters, modular kitchens, modular vanity cabinets,

arti-ficial marble countertops and enameled cast-iron bathtubs. The other

segment includes new ceramics, bathroom ventilators and heaters and

dishwashers, and so forth.

The business segment information of the Company and its

consoli-dated subsidiaries for the years ended March 31, 2004 and 2005 is

as follows: Future minimum lease payments (including the interest portion

thereon) subsequent to March 31, 2005 for finance leases accounted

for as operating leases are summarized as follows:

2006 ¥1,017 $ 9,470

2007 and thereafter 2,156 20,077

Total ¥3,173 $29,547

(b) Operating leases

Future minimum operating lease payments subsequent to March 31,

2005 for non-cancelable operating leases are summarized as follows:

2006 ¥ 322 $ 2,998

2007 and thereafter 1,199 11,165

Total ¥1,521 $14,163

13. Contingent Liabilities

The Company and its consolidated subsidiaries had the following

contingent liabilities at March 31, 2005:

Thousands of Millions of yen U.S. dollars

Trade notes receivable discounted

with banks ¥ 130 $ 1,211

Trade notes receivable endorsed 21 196

Guarantor of indebtedness of others 3,783 35,227

b) Information regarding sales of securities classified as other securities

for the years ended March 31, 2004 and 2005 is as follows:

2004 2005 2005

U.S. dollars

Proceeds from sales ¥— ¥117 $1,089

Gains on sales — 52 484

Losses on sales — 0 0

c) The redemption schedule for securities with maturity dates classified as other securities as of March 31, 2005 is summarized as follows:

March 31, 2005

Due in one year Due after one year Due after five years Due in one year Due after one year Due after five years or less through five years through ten years or less through five years through ten years

Millions of yen Thousands of U.S. dollars

Bonds ¥806 ¥545 ¥2,001 $7,505 $5,075 $18,633

Total ¥806 ¥545 ¥2,001 $7,505 $5,075 $18,633

Year ended March 31, 2004

Restroom Bath, kitchen and Eliminations

products wash products Other Total or corporate Consolidated Millions of yen

I. Sales and operating income:

Sales to third parties ¥207,932 ¥233,665 ¥26,328 ¥467,925 ¥ — ¥467,925

Intra-group sales and transfers 566 463 3,931 4,960 (4,960) —

Total sales 208,498 234,128 30,259 472,885 (4,960) 467,925

Operating expenses 185,748 213,920 30,937 430,605 9,886 440,491

Operating income (loss) ¥ 22,750 ¥ 20,208 ¥ (678) ¥ 42,280 ¥(14,846) ¥ 27,434

II. Assets, depreciation and capital expenditures:

Assets ¥163,190 ¥164,785 ¥48,965 ¥376,940 ¥ 85,682 ¥462,622

Depreciation 7,610 7,289 2,233 17,132 1,348 18,480

Capital expenditures 7,578 6,992 1,472 16,042 1,257 17,299

50

Financial Section Notes to Consolidated Financial Statements

51

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53

Financial Section

52

products wash products Other Total or corporate Consolidated Millions of yen

Sales to third parties ¥214,226 ¥239,244 ¥30,722 ¥484,192 ¥ — ¥484,192

Intra-group sales and transfers 616 406 4,575 5,597 (5,597) —

Total sales 214,842 239,650 35,297 489,789 (5,597) 484,192

Operating expenses 189,915 221,329 34,402 445,646 8,127 453,773

Operating income ¥ 24,927 ¥ 18,321 ¥ 895 ¥ 44,143 ¥(13,724) ¥ 30,419

II. Assets, depreciation, loss on impairment of fixed assets and capital expenditures:

Assets ¥170,257 ¥171,651 ¥36,753 ¥378,661 ¥ 82,289 ¥460,950

Depreciation 7,804 7,518 2,079 17,401 1,325 18,726

Loss on impairment of fixed assets 314 595 718 1,627 551 2,178

products wash products Other Total or corporate Consolidated Thousands of U.S. dollars

Sales to third parties $1,994,841 $2,227,805 $286,079 $4,508,725 $ — $4,508,725

Intra-group sales and transfers 5,736 3,781 42,602 52,119 (52,119) —

Total sales 2,000,577 2,231,586 328,681 4,560,844 (52,119) 4,508,725

Operating expenses 1,768,460 2,060,984 320,347 4,149,791 75,677 4,225,468

Operating income $ 232,117 $ 170,602 $ 8,334 $ 411,053 $(127,796) $ 283,257

II. Assets, depreciation, loss on impairment of fixed assets and capital expenditures:

Assets $1,585,408 $1,598,389 $342,239 $3,526,036 $ 766,263 $4,292,299

Depreciation 72,670 70,007 19,359 162,036 12,338 174,374

Loss on impairment of fixed assets 2,924 5,540 6,686 15,150 5,131 20,281

As net sales and total assets of the foreign consolidated subsidiaries constituted less than 10% of the consolidated totals for the year ended

March 31, 2004, the disclosure of geographical segment information has been omitted.

The geographical segment information of the Company and its consolidated subsidiaries for the year ended March 31, 2005 is as follows:

Eliminations

Japan USA China Other Total or corporate Consolidated Millions of yen

Sales to third parties ¥448,888 ¥18,594 ¥12,151 ¥ 4,559 ¥484,192 ¥ — ¥484,192

Intra-group sales and transfers 8,022 16 8,524 6,360 22,922 (22,922) —

Total sales 456,910 18,610 20,675 10,919 507,114 (22,922) 484,192

Operating expenses 416,973 17,774 17,782 10,588 463,117 (9,344) 453,773

Operating income ¥ 39,937 ¥ 836 ¥ 2,893 ¥ 331 ¥ 43,997 ¥(13,578) ¥ 30,419

II. Assets ¥333,080 ¥10,546 ¥24,345 ¥12,796 ¥380,767 ¥ 80,183 ¥460,950

Eliminations

Japan USA China Other Total or corporate Consolidated Thousands of U.S. dollars

Sales to third parties $4,179,979 $173,145 $113,148 $ 42,453 $4,508,725 $ — $4,508,725

Intra-group sales and transfers 74,700 149 79,374 59,223 213,446 (213,446) –

Total sales 4,254,679 173,294 192,522 101,676 4,722,171 (213,446) 4,508,725

Operating expenses 3,882,792 165,509 165,583 98,594 4,312,478 (87,010) 4,225,468

Operating income $ 371,887 $ 7,785 $ 26,939 $ 3,082 $ 409,693 $(126,436) $ 283,257

II. Assets $3,101,592 $ 98,203 $226,697 $119,155 $3,545,647 $ 746,652 $4,292,299

Notes: Geographical segments are divided into categories based on their geographical proximity. “Other” includes Taiwan, Malaysia, Philippines, Korea, Vietnam and Singapore, etc.

Overseas sales of the Company and its consolidated subsidiaries constituted less than 10% of the consolidated net sales for both the years

ended March 31, 2004 and 2005.

16. Subsequent Event

The following appropriations of retained earnings of the Company,

which have not been reflected in the accompanying consolidated

financial statements for the year ended March 31, 2005, were

approved at a shareholders’ meeting held on June 29, 2005:

Thousands of Millions of yen U.S. dollars

Cash dividends

(¥6.00—$0.056 per share) ¥2,082 $19,387

Bonuses to directors and

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54

Financial Section Report of Independent Auditors

Report of Independent Auditors

The Board of Directors

TOTO LTD.

We have audited the accompanying consolidated balance sheets of TOTO LTD. and consolidated subsidiaries

as of March 31, 2004 and 2005, and the related consolidated statements of income, shareholders’ equity,

and cash flows for the years then ended, all expressed in yen. These financial statements are the responsibility

of the Company’s management. Our responsibility is to express an opinion on these financial statements

based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those

standards require that we plan and perform the audit to obtain reasonable assurance about whether the

financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence

supporting the amounts and disclosures in the financial statements. An audit also includes assessing the

accounting principles used and significant estimates made by management, as well as evaluating the overall

financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the

consoli-dated financial position of TOTO LTD. and consoliconsoli-dated subsidiaries at March 31, 2004 and 2005, and the

consolidated results of their operations and their cash flows for the years then ended in conformity with

accounting principles generally accepted in Japan.

Supplemental Information

As described in Note 2(m), effective the year ended March 31, 2005, the Company has adopted a new

accounting standard for the impairment of fixed assets.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year

ended March 31, 2005 are presented solely for convenience. Our audit also included the translation of yen

amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis described

in Note 3.

Fukuoka, Japan

June 29, 2005

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