Kyosan Electric Manufacturing : CORPORATE REPORT 2023 (4MB）

CORPORATE

REPORT 2023

Kyosan Electric Manufacturing Co., Ltd.

VISION

KYOSAN VISION

Continuously ensuring safety and peace of mind for the future

Corporate Philosophy

Based on the themes of "Safety and Reliability" and "Global Environment Conservation,"

we will contribute to "the development of society and a better quality of life"

with our advanced technologies and high-quality assurance.

Management Objectives

Perpetual growth of the Kyosan Group

Happiness of all the people who work hand in hand with us

Appropriate returns to stakeholders

Corporate Vision

Envisioned corporate image:

First and Foremost in Reliability - KYOSAN

Kyosan Corporate Code of Conduct / Action Guideline

Kyosan Electric Mfg. Co. and its affiliates aim to become a reliable company that creates and improves safety and security for the people. Toward this end, we will contribute in the improvement of social comfort through constant dedication to the development of new technologies, and attain traffic and lifeline safety through providing products and services that match the needs of our customers.

As good corporate citizens, we will always maintain "honesty, high ethics," and a "strong sense of responsibility and involvement" in all of our business dealings, and we will act proactively with the awareness for "innovative ideas meeting challenge" and "speed and consistency." We shall execute the practice of this corporate code of conducts by leading by example as one of our most important responsibilities, and will promulgate these principles to all employees, thereby infusing a spirit of cooperation and harmony throughout the organization. We will strive to build a corporate foundation that is flexible in its response to various management crises through full internal control, while exerting the utmost effort toward the permanent ongoing development of the enterprise, making positive contributions to the community and maintaining the confidence of our customers.

We shall therefore

1. Put our customers first We shall do everything in our power to provide products and implement services that will achieve a high degree of customer satisfaction. All of our business activities shall be constantly steeped in the concept of 'put our customers first'.

2. Constantly Innovate	We shall constantly strive to develop and advance leading edge technologies that will
	help to make products that are highly functional, of the highest quality, and that are
	friendly to the environment and people, while protecting and enhancing our intellectual
	properties.
3. Comply to Law	We shall engage only in business activities that are fair, sound, legal and ethical, and
	fully compliant with the applicant laws and regulations and the highest principles of
	ethics and social mores.
4. Engage in Fair	We shall endeavor to follow sound business practices in all of our business areas, to be
Business Practices	fair and transparent at all times, and to conduct appropriate business dealings. We shall
	maintain sound and normal relationships with politicians and government
	administrations and take a firm stand against antisocial forces.

Leading company that provides safety and peace of mind

Global corporation that respects the cultures of all countries Effective corporate governance

Honesty and
high ethical	Speed
standards

Code of

Action

1. Provide Proactive Disclosure
2. Respect Individual Employee
3. Be a Good Corporate Citizen
4. Manage Risk

We shall provide proactive disclosure of all our business activities to our shareholders and to everyone affiliated with our company in a timely manner, in order to be an "open and trustworthy company."

We shall endeavor to ensure that all employees are respected as individuals and, by so doing, create a rich, abundant, workplace that provides satisfaction and a deep sense of fulfillment for all employees.

We shall contribute to society through first and foremost being a good corporate citizen in all of our business undertakings.

In regard to significant management risks including catastrophic disasters and accidents, we shall endeavor to take preventive and predictive measures; and at the same time, to build a structure to prevent the occurrence and expansion of loss.

Conduct			Guidelines
Strong sense of
responsibility and	Diversity	Challenge	Innovation
involvement

9. Protect the Environment	We shall endeavor to implement eco-friendly policies that will help bring about a
and the Planet	society that is gentle to the earth and to the people living in it.

We will always strive for continuous improvement in accordance with the Code, and will review the Kyosan Corporate Code of Conduct in response to changes in the conditions in society and the economy, and in the business environment.

VISION

1 Growth Strategy

3

Sustainability 17

31 Human Capital Management Initiatives

Governance	45		Data Section	55	Scope of Report
						In principle, this report covers Kyosan Electric Manufacturing Co., Ltd. and its affiliates.

1	KYOSAN VISION	3	Top Message
2	Kyosan Corporate Code of	7	Medium-Term Management
	Conduct / Action Guideline		Plan 2025
		11	Looking Back at the First Year
			of the Plan
		13	Financial Strategies
		15	R&D/Intellectual Property

1. Value Creation Process

1. Sustainability Initiatives
2. Initiatives for SDGs

21 Material Issues

(Key Management Themes)

23 Response to Climate Change Issue

26 Initiatives to Improve Quality and Reduce Environmental Load

33 Social Engagement Initiatives

Corporate Profile

35

35 History of Kyosan

37 Kyosan's Business Areas

39 Message from the General Managers

45	Executive Members	55	Financial Highlights
49	Corporate Governance	56	Non-Financial Highlights
53	Risk Management	57	Financial Data and
54	Dialogue with Shareholders		Non-Financial Data
59	Corporate Data
		60	Stock Information
		61	Offices/Group Companies

Period Covered by Report

This report covers the fiscal year ended March 31, 2023 (April 2022 to March 2023), but also includes some information from before and after that period.

Caution Regarding Forward-looking Statements

Forecasts regarding future performance contained in this report are based on judgments and assumptions using information currently available to the Company.

Accordingly, please be advised that actual performance may differ substantially from stated forecasts, due to uncertainty inherent in such judgments and assumptions, as well as changes in business operations and internal or external circumstances.

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1. Human Rights Policy
2. Ensuring Diversity

41 Kyosan in Daily Life

43 Expansion of Overseas Business

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Growth Strategy

Top Message

Looking Back at the Past Year

Aiming for corporate value that will be recognized as "Kyosan Electric

Manufacturing as expected"

Since assuming the presidency in 2022, I have been communicating to our employees that the achievement of lasting growth for the Kyosan Group depends on our ability to change the way we have worked in the past, and eliminate our reliance on precedent. For the fiscal year ended March 31, 2023, we adopted the theme of "innovation" and established the management policy of "achieving the Kyosan Group's perpetual growth through innovation." One year has passed, and although we have achieved innovation in some areas, there are other areas in which continued progress is necessary. Although we are seeing positive effects in certain areas, I have the feeling that we have not yet seen companywide permeation. I hope that each individual employee will sense the changes in the environment, and raise their awareness to independently accomplish innovation. By FY2022, we had almost completely recovered from the fire that occurred in 2021. I am confident

that if we can leverage all employees' best efforts and teamwork at this time as a driving force, we will succeed in achieving innovation.

Moreover, even prior to being appointed as president, I have always felt that the middle management level of our company needed reinforcement. Management at this level is challenging-often struggling with dilemma in organization and their duties still involve a lot of practical tasks-but we believe that, if mid-level management is robust and energetic, it will maximize the company's on-site execution capability. To this end, I thought it was important to convey my thoughts directly to the middle management level, so in my own words I explained material issues (key management issues) and our financial results to all employees. We will continue working to communicate management's thinking directly to all employees.

Progress of Medium-Term Management Plan 2025

KUNISAWA Ryoji

Representative Director President & CEO

In April 2022, the Group launched its three-yearMedium-Term Management Plan 2025 founded on the basic policies of growth and sustainability, and has promoted initiatives such as the sustainable growth of business and society and the strengthening of its financial foundation. We believe that, in the first year of the plan, we have established a sound foundation for innovation, including the establishment of a business foundation and the formulation of the Basic Approach to Sustainability.

Looking at business, FY2022 became a year which we spent responding to various challenges. We were significantly impacted by the global part and material shortage and the spread of COVID-19, as well as the semiconductor market downturn. Although to an extent we give credit to the fact that we succeeded in building a solid foundation despite the difficult circumstances, results for the numerical targets of the medium-term management plan varied between orders received and other figures. While the pace of orders for overseas projects was robust, we were unable to achieve our net sales and profit targets. I do not believe, however, that the impact of the material shortage, the pandemic, and semiconductor market conditions was the sole culprit. We feel that, despite conditions, we could have acted more rapidly with

regard to factors such as production efficiency. There is a limit to how much human power we can apply to addressing the issue of increasing production efficiency, so we will accelerate the IT reforms currently in progress. And we recognize that progress in profits is being restricted by poor capital efficiency. We have not seen improvement in profit levels over the past decade, and we need to turn this around as soon as possible.

Meanwhile, from a societal perspective, the importance of the practice of sustainability management has grown, and we recognize that adopting this style of management will enable sustainable corporate growth. In FY2022, we established the Basic Approach to Sustainability, identified material issues, and clarified the steps we needed to take. We also declared our support for the Task Force on Climate-related Financial Disclosures (TCFD) and initiated information disclosure in line with its recommendations. Based on the belief that these initiatives are essential for a global company, we will strengthen our response.

We will also work determinedly to reinforce groupwide governance knowing we cannot afford to neglect governance, as we make quality and safety our highest priorities.

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Growth Strategy

Changes in the Environment Surrounding Our Business

Achieving Management That is Conscious of Cost of Capital and Stock Prices

Going forward, we cannot expect to satisfy customers in the railway signal field simply by updating existing equipment. In recent years, orders for platform doors have been robust. Furthermore, we will strive to create new added value for our signaling facility products. The key will be how much we can contribute to improving customers' value with our products.

In the road traffic signal field, while continuing to grow sales of existing products, we have established the Mobility Innovation Project Office to take the lead in new technology development.

The Power Electronics Business is now significantly influenced by global market conditions, including semiconductors. For future business growth, however, the business must be strong enough to generate profit at a certain level even when market conditions are less than favorable. We will work to remain abreast to changes in the external environment by continuing to develop technologies and expanding our business fields.

The level of our capital profitability indicators remains below the market's expected cost of capital. In other words, the market evaluates the Company as continuously damaging its corporate value, and we are aware that this is a crucial management issue for the Company.

After an analysis and evaluation of the present situation and considering policies and specific initiatives toward improvement, we will concentrate on raising the profit level and improving ROE and ROIC in line with our medium-term management plan, and

realizing the plan's targets. This is because the plan's ROIC and ROE targets are at reasonable levels that are equal to or exceed the weighted average cost of capital (WACC) and cost of shareholders' equity, respectively, as of March 31, 2023. We have determined that increasing capital profitability is the most important factor in boosting corporate value and thus the stock price. We have already committed to this policy as a company and are pushing forward with our efforts.

Current Situation

Future Policies

Overseas Development

We established a local subsidiary in India 10 years	and regions, such as Poland, where we have set up a
ago, and our business in the country has steadily	local subsidiary. To achieve this, we need to secure
expanded since its founding. Our products have a	and cultivate global human resources, and we plan to
high reputation for superior quality, and we will push	actively find and promote young employees who are
our business even further forward. We also see	interested in and have aspirations for international
business expansion opportunities in new countries	business and affairs.

Human Capital

Capital profitability indicators (as of March 31, 2023)

ROIC: 2.2% (WACC: 4.9%)

ROE: 4.5%

(cost of shareholders' equity: 9.0%)

Market evaluation

PBR

(average of past 10 years): 0.7x

Most recent year: 0.6x

Enhance profitability through overall business process optimization (BPO) and increased production efficiency (achieve profit target)

Undertake fund procurement while striking a balance between interest-bearing debt and net assets

Achieve stable shareholder returns and growth investment commensurate with medium- to long-term profit levels

Aim to continuously increase corporate value by achieving the medium-term management plan targets and improving capital efficiency

Targets for final year of Medium-Term Management Plan 2025

The importance of human capital in corporate management is on the rise. Based on the belief that applying the strategy for human resources as a management strategy will also lead to corporate growth, we will promote management that capitalizes on diversity, not to mention the active participation of women. In addition to advancing diverse human

resources, we would like to foster a work environment in which individuals are able to actively express their opinions.

We are also aware that human capital is a key management issue in the expansion of our overseas business, one of the objectives laid out in our medium-term management plan.

	5.0
ROIC exceeding WACC	% or higher
	9.0
ROE exceeding cost of equity	% or higher

To Our Stakeholders

Strengths of Kyosan Electric Manufacturing

Our strength is that we contribute to the creation of	reinforcing our sales capabilities to enable us to
customer value through our products. We will	ascertain customer needs more accurately; enhanced
continue to do so, while developing and offering	technical capabilities to respond to those needs, and
valuable products that respond to changes in the	human capabilities such as the leadership and
environment surrounding our customers. To achieve	communication skills of individual employees.
this, we will strive to create further customer value by

As a company now in our second century of	us a company whose existence is valued by our
operations, we have a strong desire to be a company	stakeholders. We will strive to build corporate value
that can grow sustainably over the next 100 years.	that all our stakeholders will recognize as "Kyosan
We believe that bringing this to fruition is what makes	Electric Manufacturing as expected."

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6

Growth Strategy

Medium-Term Management Plan 2025

Growth strategies

Overview of Medium-Term Management Plan 2025

We launched a new three-yearmedium-term management plan in April 2022.

We have determined where we would like the Group to be in 10 years' time based on our assessment of the business environment surrounding our company, and have formulated a plan founded on this long-term vision. The basic policies of this plan are growth and sustainability, and to realize the aims of these policies, our focus will be on the areas of new business, R&D and intellectual property, human resources, IT and digital, and finance.

Recognition of business environment

Overseas business expansion of signaling solutions

Expansion of Power Electronics Business

Strengthening of cooperation with overseas offices, engineering companies, and trading companies

Development of products compliant with overseas standards Strengthening of human resources adapted to globalization

Strengthening of development capabilities; establishment and deployment of new technologies to expand areas of business

Business expansion and enhancement of systems and quality to meet semiconductor industry requirements; restructuring of supply chain management and production efficiency

With the domestic market for the Signaling Solutions Business, our largest business segment, trending toward contraction and the changing nature of the railway business in this post-COVID-19 pandemic world, if we are to achieve our management objective of "perpetual growth of the Kyosan Group," we must focus on:

Expanding the Signaling Solutions Business overseas and develop new related products and services Expanding the fields and areas in the Power Electronics Business where our products can contribute by developing new technologies and products that are not limited to the existing areas of existing customers, but and meet the timelines demanded by the market and customers.

It is also essential to take on the challenge of new businesses that will become new pillars.

Vision for 10 years from now

Through overseas expansion of the Signaling Solutions Business, expansion of the Power Electronics Business, and businesses that become new pillars, we are achieving sustainable growth by contributing to "safety and reliability," "global environmental conservation," and "the development of society and a better quality of life."

We are able to achieve profitability and financial strength to sustain appropriate returns to stakeholders (dividends, salaries, community contributions, etc.) after sufficient investment in the development of technology, human resources, and IT for business growth and global environmental conservation.

Diverse employees with a variety of characteristics grow, work with diverse people in a wide world, and play active roles.

Basic policies of Medium-Term

Management Plan 2025

Measures toward	Measures supporting
growth	growth
Overseas business expansion of	Improvement of profitability	Sustainability
signaling solutions	Strengthening of financial	initiatives
Expansion of Power Electronics
foundation
Business	Developing and strengthening of
Challenge to new businesses	human resources

	Challenge to new businesses		Challenge to new business areas for sustainable growth
					Implementation of enterprise resource planning (ERP) and overall
					optimization of business processes
	Improvement of profitability		Improvement of production efficiency through manufacturing
		reforms
					Development of a digital infrastructure for business growth and
					productivity enhancement
	Strengthening of financial		Improvement of cash flow by shortening production lead time
		Conducting of financing while achieving a balance between
	foundation
				interest-bearing debt and net assets
					Establishment and operation of a flexible personnel system
	Developing and				responsive to job duties and skills
	strengthening human				Securing of human capital to realize Medium-Term Management
				Plan 2025
	resources
				Improvement of engagement that contributes to maximizing human
					capital
		Sustainable strategies
	Contribute to decarbonization		Reduction of greenhouse gas emissions in business activities
	and respond appropriately to		Promotion of development of products with low environmental load
	risks related to climate				Identification of risks and opportunities and necessary actions
	E
			based on the TCFD (Task force on Climate-related Financial
	change	Environ-			Disclosures) framework
	ment
	Participation in the
	S
	sustainable growth			Contribution to society by providing safety and security
	Society
	of society
	Strengthening			Strengthening of group governance
	G
	governance	Governance			Formulation of Basic Approach to Sustainability

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Growth Strategy

Strategies by business

Signaling Solutions Business

		Expansion of orders received in overseas markets and development of products meeting overseas standards
Solutions	Growth	New products for labor-saving operation and maintenance
	Develop new services such as subscription models
Sustainability	Development of products and services that help resolve social issues
Signaling	(achieving SDGs and CO2 emissions reduction)
	Manufacturing reforms: Technology and design innovation and establishment of production and quality assurance
	processes
Railway
Establishing a	Sustainable evolution of products: Creation of added value that leads to customer value and cost reduction
business foundation	Strengthening of sales capabilities: Create customer value and develop sales by augmenting marketing

	Strategies	Desired direction
	Building an IT environment (including ERP	Efficiently providing maximum value to customers by accelerating
Digital	management decision-making and achieving total optimization of
implementation) that digitally consolidates and	business processes
strategy
effectively utilizes internal and external data	Creating new customer value and improving competitive advantage
		by integrating internal and external data

	Improvement of cash flow by shortening production lead time
Financial	Improving capital efficiency (company-wide ROIC and ROE) by enhancing ROIC with an awareness of the balance
sheet by business
strategies
Conducting financing while achieving a balance between interest-bearing debt and net assets
	Steady reduction of cross-shareholdings

		Human resource development: Development of human resource capabilities that contribute to the formation of
		career paths; appropriate human resource allocation
Solutions	Growth	Acquisition, development, and commercialization of new technologies for mobility transformation
Optimization of business structure and overseas business expansion of signaling solutions
Management	Sustainability	Reduction of CO2 emissions by upgrading proprietary autonomous distributed control traffic signal systems
Development of products for disaster prevention and recovery
Establishing a	Review of internal systems and human resource development
Traffic
business foundation	Proactive use of open innovation

Power Electronics Business

Shareholder return policy

The Group is engaged in businesses of a highly social and public nature, including the Signaling Solutions Business for railways and road traffic, and believes that it is responsible for providing a stable supply of high-quality products. Therefore, the Group will continue its efforts to establish a stable management foundation on a long-term, continuous basis and to boost shareholders' equity.

The Group has formulated a three-yearmedium-term management plan starting in April 2022. The basic policies of the plan are "growth strategy" and "sustainability strategy," and to achieve this, we have decided to focus on each issue of "new businesses," "R&D and intellectual property," "human resources," "IT and digital," and "finance."

By achieving a balance between the allocation of necessary investments in each field to promote this basic policy and stable shareholder returns in accordance with the medium- to long-term profit level, we will ensure appropriate shareholders' equity and sound, appropriate shareholder returns.

	Technology: Development and deployment of products for semiconductor manufacturing equipment and
Growth	expansion of business domain through next-generation technology R&D
Business operations: Restructuring of supply chain management, improvement of production efficiency,
	enhancement of quality, and meeting industry and customer requirements
Sustainability	Sustainable evolution of business and efforts to resolve social issues
(achieving SDGs and reducing CO2 emissions)
Establishing a business	Business management: Management of financial targets tailored to market characteristics
Human resources and organization: Strengthening and collaboration among offices, strengthening of the
foundation
organization and structure (organizational changes, resource enhancement)

Various strategies

	Strategies	Desired direction
	Establishing a structure for new projects	Establishing a system to investigate, research, and develop new
New business	businesses
Engaging in the search for and taking on the
strategies	Selecting a business area to tackle, and engage in new business
challenge of new businesses
	investigation and R&D
	Focus on R&D that contributes to business	Identifying businesses to become new pillars
R&D and	growth, global environmental conservation, and	Participating in the sustainable growth of society
intellectual	innovation.	Continuing basic research with an eye to the future
property	Establish intellectual property/intangible asset	Building an intellectual property portfolio
strategy	governance to utilize and enhance such assets	Enhancing corporate value through investment and utilization of
	as a resource	intellectual property and intangible assets
		Establishment and operation of a flexible personnel system
Human		responsive to job duties and skills
Establishing a personnel system aimed at	Securing human capital to realize targets of Medium-Term
resources
maximizing customer value.	Management Plan 2025
strategy
	Improving engagement with the aim of maximizing human capital
		Promoting diversity and inclusion

Numerical targets

				(Millions of yen)
	FY03/22 Results	FY03/23 Plan	FY03/24 Plan	FY03/25 Plan
Orders received	75,441	71,000	73,000	85,000
Signaling solutions overseas	8,647	9,800	11,550	14,200
Net sales	72,916	75,000	78,000	85,000
Signaling solutions overseas	7,359	5,400	9,050	12,200
Operating income	2,969	3,800	4,800	6,000
Operating income margin	4.1%	5.1%	6.2%	7.1%
ROIC	2.9%	3.7% or higher	4.5% or higher	5.0% or higher
ROE	29.5%*	6.5% or higher	7.5% or higher	9.0% or higher

*Insurance claim income of ¥12,774 million related to the fire at the head factory was recorded as extraordinary income.

						(Billions of yen)
	FY03/22 Results	FY03/23 Plan		FY03/24 Plan	FY03/25 Plan
Research and development	4.1	5.2	5.8		6.0
expenses, etc.
Capital investment amount	2.7	1.7	2.0		2.0
Human resources investment amount	20.8	20.4	20.7		20.8
(total of personnel expenses, recruiting expenses, and educational expenses)
Targets by segment (Fiscal Year Ending March 31, 2025)			(Millions of yen)
Signaling Solutions Business Power Electronics Business		New businesses
Orders received	62,000	22,000	1,000
Net sales	62,500	22,000	500

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Growth Strategy

Looking Back at the First Year of the Plan

Difference from numerical targets (consolidated)

(Millions of yen)

	Numerical targets for first year of the plan	FY03/23 Results
Orders received	71,000	77,377
Signaling solutions overseas	9,800	13,518
Net sales	75,000	72,327
Signaling solutions overseas	5,400	4,869
Operating income	3,800	2,207
Operating income margin	5.1%	3.1%
ROIC	3.7% or higher	2.2%
ROE	6.5% or higher	4.5%

	Strategy	Progress in the First Year
		Determined a policy for the creation of new businesses. The
Challenge to	Take on the challenge in new	task force developed research themes for new businesses.
new	business areas for sustainable	Reviewed the process for creating future-oriented R&D themes
businesses	growth	for elemental technologies, and moved the completion of specific
		candidate project selection to the second year to promote efforts
	Implement enterprise resource
	planning (ERP), and optimize	Changed priority of measures for optimal ERP
	business processes overall
	implementation, and moved requirement specification
Improving	Improve production efficiency
finalization to the second year to promote efforts
profitability	through manufacturing reforms
Failed to achieve total lead time reduction due to longer
	Develop a digital infrastructure for
	part and material delivery times
	business growth and productivity
	enhancement
	Improve cash flow by shortening	Pursued optimal inventory balance, but parts
	procurement environment contributed to inventory
Strengthening	production lead time
balance remaining high
of financial	Procure fund while striking a balance
Steady procurement of working capital led to
foundation	between interest-bearing debt and
maintenance of debt-to-equity ratio at essentially the
	net assets
	same level as the previous year
	Establish and operate a flexible personnel
Developing	system responsive to job duties and skills	Implemented preparations for the introduction of a
and	Secure human capital to realize	flexible personnel system responsive to job duties and
reinforcing	objectives of Medium-Term	skills as planned

External factors in failure to achieve plan

Despite predictions of the semiconductor market trending upward, it actually suffered a downturn.

The continued impact of the COVID-19 pandemic on the business environment, delays in part and material supply due to supply chain disruptions, and a sharp rise in raw material prices caused significant impacts

Internal factors in failure to achieve plan

The greater-than-expected impact of the global supply shortage of semiconductor and electric component resulted in reduced production efficiency and a higher cost ratio.

The company recorded additional retirement benefit expense due to a change in the method of calculating

human	Management Plan 2025	Established diversity promotion plan and implemented
resources	Improve engagement to contribute	measures as planned
	to maximizing human capital

Progress of Sustainability Strategy

such as the deferral of sales timing and an increase in the cost ratio.

consolidated subsidiaries' retirement benefit obligations from the simple method to the principle method.

Strategy

Progress in the First Year

Progress of Growth Strategy

	Strategy		Progress in the First Year
	Strengthen cooperation with	Achieved targets for overseas order volume through
Overseas	overseas offices as	well as
collaboration with overseas bases and strengthening
engineering and trading companies
business

Contributing to decarbonized society and responding appropriately to risks related to climate change

E

Environment

Reduce greenhouse gas (GHG) emissions from business activities

Promote development of products with low environmental load

Identify risks and opportunities, and take necessary actions based on TCFD framework

Switched 100% of electricity consumption at head factory to electricity with non-fossil certificate as planned

Changed design and parts employed to reduce power consumption and extend product life cycle, and made further shift to rail container transportation as planned

Defined climate change risks to business, revenue opportunities, and countermeasures, and declared support for TCFD recommendations and disclosed information as planned

expansion	Develop products in compliance with	cooperative relationships with engineering and trading
companies
for signaling	overseas standards
Completed acquisition of overseas certification for
solutions	Reinforce human resources with an
certain mainstay solutions products
	eye toward globalization
	Augment development capabilities,
	develop and deploy new	Achieved progress as planned in development of
	technologies to expand areas of
Expansion of	business	products for deployment in a wide range of
the power	Strengthen systems and quality,	manufacturing equipment
electronics	restructure supply chain	Completed establishment of system structure to
business	management, and enhance	manage chemical substances contained in products
	production efficiency commensurate	and a supplier structure, and launched partial operation
	with business expansion and
	semiconductor industry requirements

Participating
in sustainable
growth of	Contribute to society by providing	Contributed to society by providing safety and security
society
safety and security	as planned
	S
	Environment
Strengthening		Established Basic Approach to Sustainability and
Strengthen group governance	promotion system as planned
governance
Formulate Basic Approach to	Identified material issues, established KPIs, reflected
	G
	Sustainability	them in the second-year management plan, and
	Governance		disclosed them as planned

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Growth Strategy

Financial Strategies

Toward Further Strengthening the Financial Foundation

KANZAWA Kenjiro

Director, Managing Executive Officer,

General Manager of Finance & Accounting Dept.

fell short of the plan, primarily due to us not meeting our	improvement measures and targets by business and
operating income target.	division. The aims are to achieve the profit targets
In the current fiscal year (ending March 31, 2024), we	disclosed in the earnings forecast, and to control
are working in a unified manner to improve capital	increases in interest-bearing debt and other invested
efficiency by establishing and managing concrete ROIC	capital.

Conducting financing while achieving a balance between interest-bearing debt and net assets

In Medium-Term Management Plan 2025, the Group is focusing on the following four points as its financial strategy.

1. Improvement of cash flow by shortening production lead time
2. Improvement of capital efficiency (company-wide ROIC and ROE) by improving ROIC with an awareness of the balance sheet by business
3. Conducting financing while achieving a balance between interest-bearing debt and net assets
4. Steady reduction of cross-shareholdings

The following outlines the achievements in the first year of the medium-term management plan and initiatives for the future.

Improvement of cash flow by shortening production lead time

The Group's net assets, which suffered a significant loss from the fire at the head factory in January 2021, have recovered to the level of the fiscal year ended March 2020, prior to the occurrence of the fire. The recovery is attributable to the subsequent receipt of insurance claim income and the recording of profits, but we still do not consider the level of equity capital to be sufficient.

In the fiscal year ended March 31, 2023, the recording of profits led to an increase in net assets, with the equity ratio having recovered to the pre-fire level of 40%, and the debt-to-equity ratio remaining virtually unchanged from the previous fiscal year, at 0.59x.

Going forward, we will pay due attention to improving our financial leverage and equity ratio by procuring funds necessary for investment in growth and shareholder

Interest-bearing debt (Billions of yen) / Net assets (Billions of yen) / D/E ratio (times)

	Interest-bearing debt		Net assets	D/E ratio

600					1.50
	454			449	462
400	309	376	373		1.00
	1.01	251	272
200	0.68				0.50
			0.56	0.59
0					0.00
	FY2019	FY2020	FY2021	FY2022

Equity ratio (%)

60.0

The Group tends to have long lead times, primarily in the Signaling Solutions Business, with multiple years between order receipt and sales. While we have paid sufficient attention to production management, we will improve cash

free cash flow by increasing earnings before taxes and depreciation by increasing operating profit and controlling inventory increases based on part and material procurement status.

returns, taking into consideration the balance between interest-bearing debt and net assets, not to mention cash flows.

42.5	36.4	39.8	40.4
40.0
20.0

flow by reducing production lead times through further review of production processes. This includes measures such as standardization of parts used and products and units, and increased accuracy in parts order management, considering the recent part procurement situation.

For the fiscal year ended March 31, 2023, although earnings before taxes and depreciation totaled ¥4.7 billion, net cash (used in) operating activities was negative, at ¥2.9 billion, mainly due to income taxes paid of ¥4.9 billion following the large increase in insurance claim income in the fiscal year ended March 31, 2022. The company recorded a negative cash flow of ¥4.3 billion, including a loss of ¥1.4 billion in net cash used in investing activities.

Therefore, in the fiscal year ending March 31, 2024, we will improve cash flows from operating activities as well as

Cash flow trends (Billions of yen)

Cash flows from operating activities Cash flows from investment activitiesFree cash flow

50
25		21*	21*
12
0
(15)			(0)
-25	(14)			(14)
(27)	(27)			(29)
-50	(42)			(43)
FY2019	FY2020	FY2021	FY2022

*Excluding insurance claim income of ¥12.7 Billion related to the fire at the head factory.

0.0

FY2019

FY2020

FY2021

FY2022

Steady reduction of cross-shareholdings

As stated in the corporate governance report, the Group	In the fiscal year ended March 31, 2023, we sold shares
will strive to further improve asset and capital efficiency by	in four stocks, and we will continue our reduction efforts in
reducing strategic shareholdings-which account for a	the fiscal year ending March 31, 2024.
certain proportion of our total assets-through dialogue
with investees as well as by making its own decisions on
the appropriateness of holding such shares.

Balanced profit distribution between investments necessary for growth and stable shareholder returns

Improve capital efficiency (company-wideROIC and ROE) by improving ROIC with an awareness of the balance sheet by business

In Medium-Term Management Plan 2025, we plan to allocate ¥17.0 billion to research and development

shareholder returns, and satisfy the expectations of our stakeholders by further enhancing corporate value.

We aim to secure and further improve return on invested capital (ROIC) above weighted average cost of capital (WACC) and ROE above cost of shareholders' equity by setting KPIs that are compatible and convincing for each business, and improving ROIC with an awareness of the balance sheet for each business based on order patterns, production processes, inventory levels, etc. in each business, namely Railway Signaling Solutions, Traffic Management Solutions, and Power Electronics (power supplies).

In the fiscal year ended March 31, 2023, invested capital-the denominator of the ROIC calculation formula-was almost in line with the plan. ROIC itself also

Medium-term management plan targets

	29.5%*			ROIC ROE
30.0
10.0			7.5% higher	9.0% higher
5.0		4.5%
	2.9%		4.5% higher 5.0% higher
		2.2%
0.0
	FY2021	FY2022	FY2023	FY2024
	Results	Results	Plan	Plan

*Insurance claim income of ¥12.7 Billion related to the fire at the head factory was recorded as extraordinary income.

investments and ¥5.7 billion to capital investments over a three-year period, while promoting the above financial strategies as the foundation of our management objective of the perpetual growth of the Kyosan Group.

Both the sum of the actual results for the fiscal year ended March 31, 2023 and the forecast for the fiscal year ending March 31, 2024, are in line with the planned figures outlined in the medium-term management plan.

By balancing investments in growth, the source of future earnings, with stable shareholder returns based on the medium- to long-term profit level, we will ensure appropriate shareholder equity and sound, reasonable

Medium-term management plan targets (Billions of yen)

Capital investments Research and development expenses, etc.

90

60
41	66	58	60
30
27	14	20	20
0
FY2021	FY2022	FY2023	FY2024
Results	Result	Plan	Plan

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Growth Strategy

R&D/Intellectual Property Strategy

1 R&D

To achieve the management objective of perpetual growth of the Kyosan Group, it is essential to expand existing businesses and take on the challenge of new businesses that will become our new pillars. Specifically, the new business strategy and the R&D and intellectual property strategy of Medium-Term Management Plan 2025 will address the following.

Systems concept

New business strategies

Establishing a system for new projects

Engaging in the search for and challenge of taking on new businesses

Desired direction

R&D and intellectual property

Focusing on R&D that contributes to business growth, global environmental conservation, and innovation

Build IP and Intangible Asset Governance to utilize and enhance "intellectual properties and intangible assets" as a source of resources.

Desired direction

Global Navigation Satellite System (GNSS)	10 : 00 : 00
Position
time synchronization for each device
information
Information sharing based on GNSS clock
No delay for information

Establish a system to investigate, research, and develop

Identifying businesses to become new pillars

Center	10 : 03 : 00
Close the crossing barriers	Automated

10 : 01 : 00

Yellow light

new businesses

Selecting a business area to tackle, and engage in new business investigation and R&D

Participating in the sustainable growth of society

Continuing basic research with an eye to the future

Building an intellectual property portfolio

Enhancing corporate value through investment and utilization of intellectual property and intangible assets

10 : 04 : 00	Level crossing	driving vehicle
Lift the crossing barriers
control equipment
	10 : 03 : 00	10 : 00 : 00
	Close the crossing barriers
	Position
	10 : 04 : 00	information
Center processing equipment	Lift the crossing barriers

10 : 02 : 00

Red light

10 : 04 : 00

Green light

Medium- to long-term perspective; specifically,	will undertake the development of new technologies that
(1) promoting the development of new and basic	fully leverage AI, IoT, high-speed communications, and
technologies, (2) strengthening market and new	the like in areas in which we excel with the aim of solving
technology research capabilities, and (3) strengthening	social issues that contribute to the development of society
research organization management.	and a better quality of life from the perspective of mobility.
In April 2023, we launched the Mobility Innovation
Project Office under the purview of the R&D Center. We

Research Examples: Integrated Traffic Control System

		10 : 01 : 00
		Yellow light
Communication lines		10 : 02 : 00
Antenna	Red light
(cell phone lines, etc.)
	10 : 04 : 00
		Green light

Signal controller equipment and

optical communication control equipment

Conventional vehicle (with optical beacon)

Patent No. 7054666 et al.

The integrated traffic control system restructures the system in a vertically independent configuration for each device as follows:

Functional layer: Function integration and elimination of duplication for each device and reduction of interfaces between devices

Network layer: Choosing communication technology with consideration paid to the actual situation and technological progress of the applicable section of the line without reliance on a specific method of communication

Terminal layer: Smaller, lighter, and single-function

This new concept system is designed to flexibly meet future needs by working on the above initiatives.

2 Intellectual Property Strategy

We will promote an intellectual property strategy as part of the trinity with our business and R&D strategies. By ensuring we obtain rights to the results of R&D and other activities and utilizing these rights, we will strengthen the competitiveness of our business and achieve perpetual growth of the company.

Since railway crossings as seen from trains are the same as crossing roads and intersection as seen from automobiles, this system is designed to realize the mobility society of tomorrow by linking autonomous vehicles and road traffic signals to rail safety and security technologies.

Based on the knowledge and technologies obtained through R&D, the Mobility Innovation Project Office will

play a central role in how products and services are used in the real world.

Target for this initiative

using railway safety and

Fail safe: Signal control via control computer (fail-safe CPU) with asymmetric failure characteristics*

security technologies

Autonomous driving: Protected signal transmission system between fail-safe CPUs based on fail-safe CPU

Rail Safety and

monitoring

Security

Signal communication: Signaling system for new transport systems (unattended type) built using signaling

Technologies

solutions

Automobile

0

1

2

3

4

5

Levels of Automated Driving

Overall monitoring and response

Driver assistance

Automated driving

related to safe operation

Driver

System

*Asymmetric failure characteristics: Characteristics that bias the state of the system one way or the other should a failure or error occur

The above figure was drawn with reference to Public-Private ITS Initiative/Roadmaps 2018

Strengthening barriers to entry through applications and rights with an eye to future business and technology

While utilizing tools such as patent maps to identify our technological strengths, expanding intellectual property that is in line with our business and R&D strategies, we will promote global patent applications-including overseas applications-to build a strategic patent network.

To realize the future mobility society, we will move forward with the development of technologies to solve social issues that contribute to the development of society and a better quality of life and promote the acquisition of rights to these technologies.

Developing an intellectual property governance system

Intellectual property strategies are deliberated by the R&D Council in conjunction with the medium- to long-termcompany-wide R&D policy.

The Intellectual Property Headquarters, together with the R&D Center, which oversees company-wide R&D, promotes intellectual property strategies in tandem with medium- to long-term R&D strategies.

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Sustainability

Value Creation Process

Guided by our corporate philosophy, "Based on the themes of 'Safety and Reliability' and 'Global Environment Conservation,' we will contribute to 'the development of society and a better quality of life' with our advanced technologies and high-quality assurance," we provide a variety of values to society through business activities, in line with our material issues.

Corporate Philosophy

"Based on the themes of 'Safety and Reliability' and 'Global Environment Conservation,' we will contribute to 'the

development of society and a better quality of life' with our advanced technologies and high-quality assurance."

External environment

Input

Natural capital

Materialities

(management-critical issues)

Contributing to

decarbonized society

Business activities

New

businesses

Output

Outcome

Railway Signaling Solutions

Transition to a decarbonized society

Changing work- life balance

Accelerated digitalization

Heightened awareness of SDGs, ESG

Impact of geopolitical risks

Low birthrate, aging population, and declining workforce

Manufacturing capital

Intellectual capital

Financial capital

Social/relationship capital

Human capital

Innovative product

development

Strengthening the

management base and

governance

Enhancement of

human capital

Railway

Signaling

Solutions

Traffic

Management

Solutions

Power

Conversion

Solutions

Main products page 37

Traffic Management Solutions

Main products page 37

Power Conversion Solutions

Main products page 38

Addressing social challenges through business activities

Providing safe and stable railway transportation system

Developing human-friendly products

Reducing traffic congestion and environmental loads

Promoting infrastructure projects overseas

Improving social infrastructure across the world Sustainable growth of society through the creation of new value

Addressing social challenges through social engagement initiatives

Healthy life of people

High quality education, including advanced technical and vocational education for children and education through sports

Sustainable management base

Ensuring peaceful and motivating work environment

Promoting diversity

Improving quality and reducing environmental load

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