OSG

Corporation Annual R

eport 2014

Annual Report 2014Y e a r e n d e d N o v e m b e r 3 0 , 2 0 1 4

shaping your dreams

shaping your dreams

1 To Our Shareholders

2 Who is OSG?

4 Financial Highlights

5 An Interview with the President

10 Special Feature: Triple A—A Brand

12 Special Feature: Triple A—Automotive Industry

14 Special Feature: Triple A—Aerospace Industry

16 Social Contribution and Environmental Protection

17 Financial Section

51 Board of Directors

51 Investor Information

Contents

Cautionary StatementWe would like to advise you that some forward-looking plans, prospects, and strategies, etc., written in this Report that are not historical facts have the possibility of including risk and uncertainties caused by future changes of surrounding circumstances. We would appreciate your understanding that actual results may differ from plans, prospects, and strategies, etc.

New Brand Statement

The power of OSG lies in our assured innovative

technological know-how for producing high-quality

and high-performance products; our exceptional

services to respond to situations diligently; and our

out-of-the-box thinking to provide total solutions that

anticipate our customers’ needs.

As a comprehensive cutting tool provider with

operations spanning across the globe, we are

committed to contribute to the advancement of the

manufacturing industries by shaping our customers’

dreams into reality.

Teruhide OsawaChairman and CEO

A n n ua l R e p o r t 2 0 1 4 1

OSG’s corporate philosophy, “global presence” is reflected in the worldwide scope of our

activities as a comprehensive cutting tool manufacturer. We see each tool transaction as an

opportunity for dialog with our customers. This process of “tool communication” is the key to

our continuing ability to meet the needs of our customers on a global scale.

We recently adopted a new brand statement and tagline with the aim of further

strengthening our corporate brand in Japan and overseas. The tagline, “shaping your

dreams,” expresses OSG’s strong determination to help customers to achieve their dreams.

The word “shaping” was chosen to strongly link our tools’ primary function with our ongoing

commitment to supplying customers with the products and services that they need to

achieve total satisfaction through their manufacturing activities.

Our goal is to provide our customers and society with new value by ensuring that every

OSG employee shares in these promises as the basis for a heightened unity of purpose across

the entire OSG Group. We also aim to fulfill the expectations of our shareholders by earning

sound profits and achieving continual improvement in our corporate value.

in these endeavors, we look forward to the continuing support and understanding of

our customers and shareholders.

Forming new partnerships of valuePursuing sustainable growth by offering new value for our customers and society

To Our Shareholders

Who is OSG?

Business Concept

OSG listens to its customers, considers problems from the

customer’s perspective, and develops, designs, produces,

and delivers products that match the customer’s needs. We

also offer extensive after-delivery support and continually

use customer feedback to identify new needs. One of the

key strengths of our approach to business is our ability to

apply knowledge gained through communication with tool

users to the creation of new products under a global

business model based on the integration of sales,

engineering and manufacturing organizations.

TAPSTaps are tools for cutting internal screw threads. Taps have been a key product category for OSG throughout its history.

DrILLSDrills are tools for making holes. OSG is working to expand its sales of high-performance carbide drills.

END MILLSEnd mills are tools used to cut pieces of metal into specific shapes. They are also suitable for high-precision processing.

rOLLING DIESRolling dies are used mainly to produce external threads on bolts. They are also used in the processing of motor vehicle parts.

INDExAbLE TOOLSindexable tools are used to shape metal molds and machine parts. While end mills are used for finish-ing, indexable tools are intended for rough cutting.

GAUGES AND OTHEr PrODUCTSGauges are tools for checking the precision of bolts and holes, etc. They are essential for high-quality production.

Profile

OSG is a leading comprehensive cutting tool manufacturer.

We produce consumable tools, such as end mill, drills,

rolling dies and taps, used mainly in machine tools. OSG

continues to hold the largest share of the world market for

taps, which we have produced since our founding. By

supplying these tools, which play an unseen but vital role

in the manufacture of many essential products, OSG

makes an important contribution to the world’s

manufacturing industries. All high-quality, high-

performance OSG products are backed by reliable

technology and a commitment to working effectively with

customers. Our vision is to make OSG the global top

manufacturer of hole-making cutting tools.

Established

1938

Headquarters

Aichi Prefecture

Number of consolidated subsidiaries

46

Net capital

¥100.9 billion

Number of shareholders

8,285

Number of employees

5,233

Sharing in the manufacturing processProviding customers worldwide with high-quality, high-performance products and effective pre- and post-sale support.

OSG Corporation2

AsiaEurope The AmericasJapan

Geographic Sales Ratio

10%

18%

27%

45%

Sales by Industry

Automotive industryAerospace industryMold and die industryPrecision instrumentsOther

54%

8%

12%

7%

19%

% of Net Sales

TapsDrillsEnd millsRolling diesGauges and other products

34%

23%

23%

9%

11%

Business base

Manufacturing and business base

l1970 Taiho Tool (Taiwan)l1985 OSG Koreal1990 OSG Asia (Singapore)l1996 OSG THAIl1997 Dabao (Dongguan)

Tool (China)l2001 OSG Shanghai (China)

Asia

Europe

l1997 OSG Europe Logistics l1997 OSG Francel1997 OSG Nederland (Netherlands)l1999 OSG UKl2000 OSG Scandinavia (Denmark)l2002 OSG Comaher (Spain)l2003 OSG GmbH (Germany)l2003 OSG ITALIA (Italy)l2012 romsan International

(romania)l2012 OSG POLANDl2012 OSG TUrKEYl2013 OSG PN TOOLS (UK)l2014 OSG belux (belgium)l2014 WExO (Germany)

The Americas

l1968 OSG USAl1974 OSG Sulamericana de Ferramentas (brazil)l1988 OSG Canadal1994 OSG royco (Mexico)l2013 PrIMUS COATING (Mexico)

Expansion of Overseas Business

l2001 Carbide Cutting Tool (India)l2004 OSG Shanghai Plantl2005 OSG INDIAl2007 OSG INDONESIAl2007 Ningbo Taiho (China)l2007 TrADING SHANGHAI (China)l2008 OSG Vietnam

l2008 FUDIAN (China)l2008 KUNSHAN TAIHO

(China)l2008 OSG Philippinesl2011 TAIHO COATING

(Taiwan)

Sharing in the manufacturing process

(As of March, 2015)

A n n ua l R e p o r t 2 0 1 4 3

Overseas Business Development

OSG established its first overseas subsidiary in the United States in 1968.

Since then, we have worked to realize the OSG “global presence” philosophy

by building manufacturing, sales, and technical support networks that today

span 29 countries. Through this network, we provide customers worldwide

with high-quality, high-performance products and effective support services.

Today we can look back on a history of over 40 years of involvement in

international business. The experience that we have gained, as well as the

keen international insights of our personnel, will be key assets for OSG as we

work to expand our presence in world markets. 0

40,000

80,000

120,000

Sales by Geographic Area(Millions of yen/%)

’11 ’12 ’13 ’14

AsiaEurope The AmericasJapanOverseas sales ratio (%)

49.7 48.0 53.554.6

OSG Corporation4

80,959 84,084

101,03288,379

12,30513,954

17,416

12,827 17,96219,642

24,246

19,544

Operating IncomeOperating Income Margin

EBITDA EBITDA Margin

’10 ’11 ’12 ’13 ’14

69,513

’10 ’11 ’12 ’13 ’14

7,525

’10 ’11 ’12 ’13 ’14

12,831

10.8 18.515.2 22.2

16.623.414.5 22.1

17.224.0

Net Sales (Millions of yen)

Operating Income and Operating Income Margin (Millions of yen/%)

EbITDA and EbITDA Margin (Millions of yen/%)

* The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of US$1=¥118.

Financial Highlights

Millions of yenThousands of

U.S. dollars

For the Year: 2014 2013 2014

Net sales ¥ 101,032 ¥ 88,379 $ 856,203

Domestic 45,850 41,106 388,559

Overseas 55,182 47,273 467,644

Operating income 17,416 12,827 147,593

Net income 9,990 8,619 84,661

EBITDA 24,246 19,544 205,475

EBITDA margin 24.0% 22.1%

at Year-end:

Total assets ¥ 142,302 ¥ 134,503 $ 1,205,949

Total equity 100,943 87,622 855,449

Per Share: Yen U.S. dollars

Net income ¥ 105.20 ¥ 90.76 $ 0.89

Diluted net income 95.96 82.80 0.81

Cash dividends applicable to the year 34.00 30.00 0.29

Payout ratio 32.3% 33.1%

Equity ratio 64.3% 59.5%

Norio ishikawaPresident and COO

A n n ua l R e p o r t 2 0 1 4 5

Key trends in the business environment during fiscal 2014 (December 1,

2013–November 30, 2014) included sustained production growth in the

automotive industry, which is a major user of OSG products, and a surge of production

activity in the aerospace industry, especially in advanced countries. These factors were

reflected in generally strong demand for tools throughout the fiscal year. Within Japan,

OSG was not seriously impacted by the consumption tax increase implemented in April

2014, and demand for tools remained strong.

Fiscal 2014 was the first year of our new three-year management plan, which we have

called “The Next Stage 14.” Our targets for the year were net sales of ¥96 billion and

operating income of ¥15 billion. We also undertook to improve our competitiveness and

ability to win orders, and further expand our business base on a global scale.

As a result of these efforts, we set new records for both net sales and operating income.

Net sales were 14.3% higher year on year at ¥101 billion, while operating income increased

by 35.8% to ¥17.4 billion. Sales were higher across all major product areas, including our

mainstay tap category, as well as carbide tools, which are a priority area for future growth.

Profitability benefited from high operating rates at our four main plants in Japan and also at

our overseas plants, and from an improvement in export margins due to the correction of

the overvalued yen. i attribute these results to dynamic marketing and efficient production

activities by the entire OSG Group in Japan and overseas.

Our end targets under our “The Next Stage 14,” our three-year management plan, were net

Our tools come with assured satisfactionHaving reached net sales of ¥100 billion, OSG pushes boldly forward into a new growth phase

An Interview with the President

A.1How would you assess your financial results for the year ended November 2014?

Q.1

6

sales of ¥100 billion and operating income of ¥17 billion. Thanks to our worldwide

stakeholders, we were able to achieve these targets two years ahead of schedule in fiscal 2014.

Since i became President, OSG has overcome a variety of challenges, including the 2008

Lehman shock, and the yen’s climb to a historically high value in 2011–2012. i believe that

we were able to deal with these problems because of the potential of our high-added-value

products, which are backed by our advanced technology, and because of our efforts to

enhance our overseas expansion potential, including the steady expansion of our global

sales channels and production facilities under our global presence strategy.

Having achieved net sales of ¥100 billion, we decided to adopt new targets

designed to build OSG’s presence to an even higher level as we move forward toward

a new growth phase.

The new targets reflect our unchanging long-term vision, which is to

make OSG the global top manufacturer of hole-making cutting tools.

Our continuing goal is to become number one in the world in our core product

segments—taps, end mills, drills, and rolling dies. Another is to achieve an operating

income margin of 20% or higher.

Our medium-term vision was to become a global player, with net sales of ¥100 billion.

Having realized that vision, we are now preparing to move to a new growth phase by

reorienting our management roadmap in relation to the business environment and our own

initiatives. Through this process we have defined a specific future vision that incorporates a

growth strategy that plays out over a longer time frame. in keeping with that vision, we

revised our targets upward to net sales of ¥150 billion and operating income of ¥30 billion

by fiscal 2020. As a half-way point on our journey toward this vision, we have increased

management targets of net sales of ¥116 billion and operating income of ¥21 billion in fiscal

2016 under the current three-year management plan “The Next Stage 14”.

Our target for real annual growth in net sales, excluding adjustment for exchange rate

movements, is 6% or higher. We will consider various approaches, including mergers and

An Interview with the President

We realized our target of ¥100 billion in net

sales two years ahead of plan, thanks to the

response of stakeholders.“

”

A.2Would you say a few words about the new targets?

Q.2

A n n ua l R e p o r t 2 0 1 4 7

acquisitions that will be useful to OSG, and i believe that our vision is achievable in the

not-too-distant future. At the same time, we will prepare for a new growth phase by

further enhancing our presence to reflect our status as the global top manufacturer of

hole-making cutting tools.

Under the current three-year management plan “The Next Stage 14”

we have focused on the expansion of sales of both tailored and

catalog products. That focus remains unchanged in our basic strategy for achieving

the revised targets under the three-year management plan. We aim to achieve this by

further strengthening our core strategy of developing new customers and our flagship

product strategy.

We will build our customer base of major users by proposing optimally efficient

processing methods to customers that need large quantities of tools, and by offering tools

that reflect our technology advantage over our competitors. Our approach to the

development of new customers will include further enhancement of our ability to integrate

the resources of our sales, engineering and manufacturing organizations, both within Japan

and overseas, which is one of our key strengths.

As a comprehensive cutting tool manufacturer, we are uniquely able to offer our

customers a wide range of process suggestions, to provide services that more closely

reflect the needs of each customer, and to build close tool-based communication with

customers. We will use these capabilities to expand our sales of tailored tools and enhance

customer satisfaction.

A.3What measures will you use to achieve your new three-year management targets?

Q.3

Management Vision

FY2014–FY2016 Three-year Management Plan

The Next Stage 14

Long-term vision: The global top manufacturer of hole-making cutting tools

The global top market share in taps, end mills, drills, and rolling dies

Operating profit margin of 20%

Medium-term vision: The key global player with ¥150 billion in sales by FY2020*Upward revision, original goal was achieved 2 years ahead of schedule

Three-year vision:Sales of ¥116 billion and operating profit of ¥21 billion

Development of New Customers Flagship Product Strategy

Basic strategy:

Under our flagship product strategy, we established an “A Brand” group of products

consisting of flagship products that we have targeted for market share growth in the

volume zone. By creating a product line-up that will facilitate sales by our distributors, we

will expand our global distribution networks and expand sales of catalog products. in

addition to A Taps, which went on sale in 2013, we also added drills and indexable drills to

the line-up in 2014. We also plan to introduce A Brand end mills and more indexable tools

to the range. We are actively expanding our sales channels in overseas markets by

organizing A Brand distributors into the “A Club.” This initiative will lead to the expansion

of our global sales network.

We will continue to enhance the value of the OSG brand by raising customer

satisfaction levels and building trust. We will achieve that by further strengthening our

ability to provide services worldwide, not only to major users but also to general users,

including small and medium enterprises.

We expect the world’s automotive and aerospace industries to perform

strongly in fiscal 2015. We are determined to capture the largest possible

share of tool demand in these industries. For that reason, we will further expand our

production capacity by raising our capital investment in fiscal 2015 to ¥9 billion, an

increase of approximately 23% over the fiscal 2014 level.

First, aerospace manufacturers need tools with special coatings to provide increased

durability when used to process materials that are difficult to cut, such as carbon fiber

reinforced plastics (CFRPs) and titanium alloys. We will therefore expand capacity at our

coating facilities in Japan and North America. Within Japan, our consolidated subsidiary OSG

Coating Service will expand its facilities at the Shinshiro Factory, while in the United States

we will expand capacity at the Bensenville Factory in illinois. At both plants, production

capacity for diamond-coated tools manufactured using our patented ultra-fine diamond

coating technology will be increased to 1.5 times the current level.

We will also expand regrinding and recoating capacity, particularly for products used in

the automotive industry, at sites in six countries, including Germany, india, Thailand, and

indonesia. OSG’s regrinding and recoating services have earned a reputation for returning

products to the same reliable performance standard as new products. We aim to optimize

customer convenience in this area by providing services at locations close to customers’

facilities. We also plan to invest in a 20% increase in our production capacity for carbide

tools to meet the increasingly sophisticated needs of users in the automotive and

aerospace industries.

in fiscal 2014, we also began to strengthen our logistics network in Southeast Asia. We

have established inventory centers in Singapore, Thailand, and Taiwan, and in fiscal 2015

we plan to open a center in indonesia. We expect Japanese companies that have moved

manufacturing to Southeast Asia to transfer work increasingly to local small and medium

enterprises, so we will serve the local companies by installing inventory centers in this

OSG Corporation8

An Interview with the President

A.4What specific initiatives do you plan in fiscal 2015?

Q.4

region as a way to attract orders.

We also plan to move ahead with preparations for the next phase of capacity

expansion. Specifically, this will involve the start-up of production lines and the

implementation of efficiency improvements to ensure that we can quickly begin to

produce products with reliable quality when we relocate production from our mother

factories in Japan to overseas sites. Technical staff will be transferred from Japan to

overseas plants to carry out tasks that will include further improvements in the production

levels in overseas plants.

Finally, we will also continue to invest in the development of our face-to-face marketing

organization on a global basis. This will enable us to monitor the needs of our worldwide

customers more comprehensively, so that we can respond to those needs by further

enhancing the quality of our products and services. it will also allow us to expand our global

efforts to win new orders. We expect these initiatives to result in net sales of ¥109 billion and

operating income of ¥19.5 billion in the year ending November 2015.

The return of income to shareholders is an important priority for OSG,

although we must also take into account the amount of retained

earnings needed to ensure sustainable growth through capital investment and the

improvement and reinforcement of our financial position. Our basic policy calls for a

dividend payout equivalent to 30% or more of consolidated net income. in line with this

policy, we set the annual dividend for fiscal 2014 at ¥34 per share, consisting of an interim

dividend of ¥14 and a final dividend of ¥18, together with a ¥2 commemorative dividend.

in July 2014 we cancelled 3 million shares of treasury stock, or three-quarters of the total

number of shares held. We will continue our efforts to provide our shareholders with

appropriate returns while securing the funds needed to prepare for future business

operations, including mergers and acquisitions.

We look forward to the continuing guidance and support of our shareholders.

9

A.5What are your thoughts on capital policy?

Q.5

We will enhance brand value by strengthening

our ability to provide services worldwide, not

only to major users, but also to general users,

including small and medium enterprises.

“”

Special Feature: Triple A

A B ra n d

Further enhancing the OSG brand image with the establishment of the “A Brand”

In the market for cutting tools, demand for standard

catalog items for general users is far greater than demand

for the tailored products required by major users.

OSG adopted the “A Brand strategy” with the aim of

expanding sales of these general catalog items.

in general, “Triple A” is a superlative. OSG has prepared a superlative growth scenario: Triple A—A brand, Automotive and Aerospace.

OSG Corporation10

Launching new products to volume zone in target segment in order to increase market share

Implementing the A Brand Strategyin 2013, OSG commenced sales of the A Tap Series of

flagship products. Based on the concept of combining

high added value with highly competitive prices, these

products are targeted toward the volume zone of the

market. By expanding the concept from a series name

based on a single product type to a brand name

encompassing all product types, we created a strategy

that could be applied to other products. We call this the

“A Brand strategy.”

The A Brand consists of two categories: the A Line and

the Premium A Line. A Line products can be used with a

wide variety of materials and production facilities. They

provide high cost performance and are available in an

extensive range of sizes. The Premium A Line consists of

high-performance products for use with materials that are

difficult to process. By creating these two categories, we

will be able to supply our customers with highly efficient

products that they can use with confidence. in addition,

the adoption of clearly defined product concepts will

further enhance the speed of our marketing and product

development activities. As an example, our catalog

consists of tens of thousands of items. And, so, we have

established a system for dealers whereby likely-to-sell

products are recommended according to application.

Expansion of the A ClubWe are working to increase overseas sales of A Brand

products by expanding our marketing network. We have

established the A Club as a specialized sales organization

that focuses in particular on the expansion of A Brand

product sales in China, Europe and Mexico. There are

plans to extend the A Club system to Canada, Brazil and

Southeast Asia. We will continue to build closer

relationships with distributors while providing enhanced

value to customers.

Further enhancing the OSG brand image with the establishment of the “A Brand”

A LineA-TAP*Multi-purpose cutting tap designed to excel in a wide variety of materials and applications

Premium A LineWDO-SUSCoolant-through carbide drill designed for high efficiency and stable drilling in stainless steels and titanium alloys

A n n ua l R e p o r t 2 0 1 4 11

* *

Special Feature: Triple A

Automotive Industry

Continuing to develop new business with major high-volume tool users

OSG has spent many years building its customer base in

the automotive industry. We will use this advantage to

expand our sales by providing the best possible response

to the needs of customers around the world, and by

developing new customers in the automotive industry.

OSG Corporation12

Reinforcing after-sales service system for regrinding and recoating

OSG offers products tailored for the machining of automotive parts, such as the engine and transmission, etc.

Continuing to develop new business with major high-volume tool users

Germany

indonesia

Advanced Technology and Dependable Support CapabilitiesEngines require closer machining tolerances and more

advanced technology than any other automotive part,

and over 1,000 high-performance tools are used. Many of

OSG’s core products are involved in these processes, and

we supply over 70% of the taps used by Japanese

automotive manufacturers for engine machining

processes. We attribute this success to our commitment

to finding answers to the processing problems and needs

of our customers, often by visiting customers’ facilities.

OSG will apply this experience to the development of

new customers, by building close relationships so that

we hear from them whenever they have troubles and by

helping them to find solutions to problems that arise at

automotive production sites around the world.

Expansion of the Regrinding BusinessThrough its regrinding business, OSG reduces

environmental impacts while also helping its customers

to reduce costs. The tools used to process automotive

parts are frequently used on factory production lines and

must provide reliable performance in terms of processing

quantities, such as the number of holes that can be

drilled, and processing precision. We take great pride in

the outstanding quality of our regrinding services. After

regrinding, the tools provide extremely reliable

performance and can be used with confidence on

customers’ factory production lines.

A n n ua l R e p o r t 2 0 1 4 13

Aerospace Industry

Special Feature: Triple A

Further developing the customer base to expand our aerospace-related business

Aircraft contain many times more parts than automobiles.

Because these parts need to be both lightweight and very

strong, processing is extremely difficult. OSG aims to make

the aerospace industry its second major user segment

after the automotive industry by taking full advantage of

its strengths in terms of technologies and capabilities to

respond diligently in all situations.

OSG Corporation14

Expanding diamond coating capacity to correspond to the increase in aircraft production

OSG products developed specifically for the materials and machining tasks used in aerospace manufacturing raise productivity and finished quality.

New building at the Shinshiro factory

Bensenville factory in the U.S.

Further developing the customer base to expand our aerospace-related business

Improving the Processing of Difficult-to-machine New MaterialsAerospace manufacturers are increasingly using carbon

fiber reinforced plastics (CFRPs) in key components of

new aircraft models, including wings and fuselages, in

order to achieve significant improvements in fuel

efficiency. Manufacturers process these materials using

drills, end mills and other tools made possible by OSG’s

diamond coating technology, which is based on our

patented ultra-fine diamond crystallization technology.

OSG aims to strengthen its advantage in relation to

difficult-to-machine materials by developing advanced

applications, including the machining of CFRPs, heat-

resistant alloys, and titanium alloys, and high-speed

aluminum machining, and by expanding its size line-up.

in the future, materials that reduce weight and provide

enhanced durability are likely to be used increasingly in

many parts of aircraft, including interiors. We aim to

expand our business base by capturing new demand for

tools capable of processing difficult-to-machine materials

for use in aircraft.

Capturing Increased DemandWe expect the growth of world aircraft production to

continue in the future. We aim for a sales growth rate

that is higher than the aircraft production growth rate

by installing diamond-coating facilities and increasing

production capacity at our plants in Japan and

overseas. We will also increase our carbide tool

production capacity.

We will further build our customer base of major

users and enhance our ability to capture increased

demand for tools resulting from the expansion of aircraft

production, by actively participating in customers’

development and testing processes, and by raising our

capacity to supply test samples.

A n n ua l R e p o r t 2 0 1 4 15

Following the establishment of a three-point declaration in 1996, in which the Company set out to

become a “Global Presence,” an “Environment-friendly Company,” and a “Promoter of Total Employee

Health,” OSG has actively engaged in environmental protection activities.

Regrinding and Recoating

Used Tools restored to Same Sharpness as New ProductsTool reconditioning services provided by the OSG Group restore

used tools to the same sharpness as new products. Because

even worn cutting tools and rolling dies can be restored to new

condition, reconditioning is more economical for customers

than the purchase of new tools. Reconditioning also helps to reduce waste and ensure effective utilization of limited

natural resources, including the rare metals used in the manufacture of tools. With regrinding facilities in 14 overseas

countries, the OSG Group can respond to customer needs worldwide.

Before After

Promotion of Carbide Tool Recycling

Effective Utilization of Valuable resourcesRaw materials of carbide tools include rare metals such as tungsten and cobalt.

OSG Group promotes recycling of carbide tools. For customers’ CSR activities and

zero-emission promotion,

we utilize these resources by

collecting end-of-life tools

from our customers and

recycling rare metals.

Material Conservation

New Modular System reduces WasteOSG has developed PXD exchangeable head drills and PXM exchangeable

head end mills. Comparable to solid drills and end mills in terms of accuracy

and rigidity, they are configurable for various processes simply by selecting

heads and bodies. Because bodies are reusable, there is substantially less

waste compared with solid drills and end mills. These tools are also very

operator-friendly, thanks to the greater ease of mounting and removal.

OSG PHOENIX: PXMOSG PHOENIX: PXD

Social Contribution and Environmental Protection

OSG Corporation16

Materials ProductsCollection

Customers(Carbide tool users)

Re�neries and manufacturers

Nihon Hard Metal Co., Ltd.

(Cemented carbide material

manufacturer)

Rare metaltungsten

OSG(Carbide tool manufacturer)

Carbide Material recycling System

Financial Section

Contents

18 Five-year Summary

19 Corporate Governance

20 Business Risks and Other Risks

21 Management’s Discussion and Analysis

24 Consolidated Balance Sheet

26 Consolidated Statement of Income

27 Consolidated Statement of Comprehensive Income

28 Consolidated Statement of Changes in Equity

29 Consolidated Statement of Cash Flows

30 Notes to Consolidated Financial Statements

50 Independent Auditor’s Report

A n n ua l R e p o r t 2 0 1 4 17

Millions of yen Thousands ofU.S. dollars

FOr the Year 2010 2011 2012 2013 2014 2014

Net sales  ¥ 69,513 ¥ 80,959 ¥ 84,084 ¥ 88,379 ¥ 101,032 $ 856,203 Domestic 35,701 40,696 43,686 41,106 45,850 388,559 Overseas 33,812 40,264 40,398 47,273 55,182 467,644

Cost of sales 44,605 48,439 49,382 52,777 58,062 492,051 Selling, general and administrative expenses 17,383 20,215 20,748 22,775 25,554 216,559

Operating income 7,525 12,305 13,954 12,827 17,416 147,593 Net income 3,773 5,905 7,138 8,619 9,990 84,661

at Year-endTotal assets  105,636 104,374 121,690 134,503 142,302 1,205,949 Total equity 63,163 65,348 71,471 87,622 100,943 855,449

Per Share Yen U.S. dollars

Equity 601.44 625.14 679.01 842.71 963.15 8.16 Net income 39.34 62.18 75.16 90.76 105.20 0.89 Diluted net income — — 70.67 82.80 95.96 0.81 Cash dividends 12.00 18.00 23.00 30.00 34.00 0.29

eBItda Millions of yen Thousands of U.S. dollars

EBITDA 12,833 17,962 19,642 19,544 24,246 205,475 EBITDA margin (%) 18.5% 22.2% 23.4% 22.1% 24.0%

MajOr OPeratInG ratIOSEquity ratio (%) 54.1% 56.9% 53.0% 59.5% 64.3%Return on equity (%) 6.7% 10.1% 11.5% 11.9% 11.7%

SaleS BY PrOduCtSCutting tools:

Taps 23,159 28,906 29,379 28,924 34,655 293,686 End mills 16,199 17,838 18,473 20,858 22,886 193,949 Drills and other cutting tools 16,266 18,285 19,839 20,725 23,601 200,009

Total 55,624 65,029 67,691 70,507 81,142 687,644 Rolling dies 6,664 7,067 7,281 7,682 9,166 77,678 Gauges 1,085 1,137 1,176 1,232 1,419 12,025 Other products 6,140 7,726 7,936 8,958 9,305 78,856

Total ¥ 69,513 ¥ 80,959 ¥ 84,084 ¥ 88,379 ¥ 101,032 $ 856,203

Five-year Summary

OSG Corporation18

Corporate Governance

Basic Philosophy

Our fundamental management policy calls for fair and

transparent business activities in compliance with regulatory

requirements and guided by a social conscience. We believe that

this approach to business contributes to sustainable corporate

growth and the enhancement of corporate value.

Good corporate governance is essential to the achievement

of this goal, and we regard the continuing improvement of

governance as a vital management priority. Related policies

include the establishment of efficient and transparent

management structures, and the development of systems to

ensure the prompt and fair disclosure of accurate information.

One of the tools that we use to strengthen our corporate

governance is the OSG Philosophy, a specific code of conduct

designed to raise our corporate ethical standards. We improve

compliance awareness and contribute to society in general by

disseminating the OSG Philosophy to all directors, auditors,

executive officers and employees of OSG Group companies,

including OSG Corporation itself.

development of Corporate Governance and

Internal Control Systems

1. Corporate Governance Structure

OSG is structured as a company with auditors. We have 11

directors, including one appointed from outside of the Company,

and five corporate auditors, including three appointed from

outside of the Company. The Board of Directors normally

convenes once a month, but special meetings may be held if

required. Directors deliberate on important matters and make

management decisions. They also supervise the performance of

business operations. We have set the term of office for directors

at one year to maintain the vitality of the Board.

We have introduced an executive officer system to clarify

operational executive functions and responsibilities, ensure an

appropriate response to changing business conditions, and

improve speed and flexibility in the performance of business

operations.

Monthly meetings of the Management Committee, which

consists of directors, executive officers and heads of divisions, are

forums for lively discussion. The meetings are used to disseminate

management policies and business plans adopted by the Board

of Directors, and to receive reports about business operations

from executive officers and heads of divisions.

2. reasons for adopting this Structure

By establishing these systems, we have enhanced the decision-

making functions of the Board of Directors and its capacity to

supervise operational performance. The resulting structure has

also improved management efficiency and given us the capacity

to make management decisions that are both appropriate and

strategic.

Management supervision is provided by five corporate

auditors, who audit the performance of directors’ duties and

business operations, as well as the financial situation. Three of the

five auditors are appointed from outside of the Company. Both

have submitted notifications as independent officers under the

listing rules. The presence of these outside auditors creates an

environment in which there is effective management supervision

from outside of the Company. On this basis, we believe that our

corporate governance structure is capable of verifying and

ensuring appropriate and transparent management.

3. Internal Control Systems

To strengthen OSG’s internal control systems, in June 2006 we

established a Management Audit Section that reports directly to

the President. We have also taken steps to ensure compliance with

laws, regulations and the Articles of Incorporation by developing

internal regulations, including rules on corporate ethics and risk

management under the Basic Policy on Internal Control Systems,

which was adopted by the Board of Directors in May 2006. Through

these efforts, we maintain internal control systems capable of

earning and retaining the confidence of our stakeholders.

4. risk Management Systems

We strive to maintain high standards of management transparency

and fairness through timely disclosure. We have also established

risk management regulations as a framework for our efforts to

maintain financial soundness and good business ethics. To ensure

effective and efficient risk management under these regulations,

we have established a Risk and Compliance Management

Committee, which formulates basic risk management policies and

systems, assesses the significance and urgency of risks, and

considers, adopts and implements timely countermeasures.

Internal audits, audits

by Corporate auditors, Independent audits

1. Internal audits

The mission of the two-member Management Audit Section is to

verify that the business operations of the OSG Group are

performed in an appropriate manner. It regularly checks

compliance with management policies, internal regulations and

other requirements. The Management Audit Section also works

with the Corporate Auditors and independent auditors to

improve internal control functions by ensuring the soundness of

business activities and the reliability of financial reports.

A n n ua l R e p o r t 2 0 1 4 19

B u s i n e s s R i s k s a n d O t h e r R i s k s

demand risks arising

from the economic Situation in the Market

The products of the OSG Group are used in a wide range of

industries, and sold in Japan, other Asian countries, Europe and

the Americas. The Group’s business performance and financial

position could therefore be affected by reduced demand in the

relevant industries, and by economic recessions in Japan and

other parts of the world.

risks relating to exchange rate Fluctuations

The OSG Group uses forward exchange contracts to hedge

against the risk of exchange rate fluctuations. However, it is

possible that the Group’s business performance and financial

position could be affected by exchange rate fluctuations.

risks relating to Changes in raw Material Prices

The main products of the OSG Group are cutting tools, made

primarily from carbide alloys, high-speed steel and die steel. The

raw materials used include rare metals, such as cobalt, vanadium,

molybdenum and tungsten. Rare metals must be obtained from

a limited range of sources and suppliers, and market prices can

fluctuate dramatically. Such fluctuations may affect the

procurement costs of the OSG Group.

We endeavor to reflect raw material price increases in our

product prices. However, this could affect the Group’s business

performance, since there may be a time lag between increases in

raw material prices and adjustments to selling prices, and

because it is not always possible to fully pass on increases in raw

material prices.

risks relating to Overseas Business expansion

Major users in automotive industries and other sectors are

relocating operations overseas. The OSG Group is responding by

developing business operations in the Americas, Europe, Asia and

elsewhere, and by establishing production and sales systems in

optimal locations close to its markets. The business performance

and financial position of the OSG Group could be affected if its

operations are impeded as a result of changes to legal and tax

systems or shifts in social and political conditions in other

countries.

risks relating to Price Fluctuation of Marketable Securities

The OSG Group owns marketable securities, such as stock. The

business performance and fiscal position of the OSG Group could

be affected if the price of these securities falls.

risks relating to earthquakes and Other natural disasters

The head office and production and R&D facilities of the OSG

Group are concentrated in the Higashi-Mikawa district of Aichi

Prefecture. The business performance and fiscal position of the

OSG Group could be affected if this area is struck by a natural

disaster, such as a major earthquake.

2. audits by Corporate auditors

The corporate auditors attend important meetings, including

meetings of the Board of Directors, to audit decisions and

monitor the performance of directors. They formulate audit

policies and plans based on standards established by the Board

of Corporate Auditors and audit the Company’s operational and

financial situation. When necessary, the corporate auditors also

obtain business reports from subsidiaries.

The task of the three outside auditors is to strengthen

management supervision and ensure transparent and

appropriate management. They also enhance management

supervision by sharing information with the standing auditors

and independent auditors.

3. Independent audits

We have an audit agreement with Deloitte Touche Tohmatsu,

which provides independent audit services. In accordance with

the audit plan, the independent auditors audit the accounts of

the parent company and subsidiaries and discuss their findings

with management. Reports are regularly submitted to the

corporate auditors.

Outside director and Outside Corporate auditors

OSG has appointed an outside director, who is strengthening our

supervisory functions by providing appropriate opinions and

advice from an independent perspective concerning the

management of OSG. We have also appointed three outside

corporate auditors to ensure the independence and objectivity of

the audit activities of corporate auditors. These people bring

extensive experience and sophisticated insights to their work in

auditing the performance of duties by both the board of directors

and individual directors.

OSG Corporation20

Management’s Discussion and Analysis

net Sales (Billions of yen)

Cost of Sales (Billions of yen)

results of Operationsnet Sales

In fiscal 2014 (December 1, 2013 to November 30, 2014), the

world economy continued its mild recovery. China and the

emerging countries of Asia hit a slowdown but were able to

maintain a certain amount of growth. Economic performance

in the U.S. was strong, supported by consumer spending,

while Europe held on to a mild recovery although conditions

remained uncertain. In Japan, spending receded in the wake

of a consumption tax hike. Nevertheless, the recovery mood

did continue with signs of improvement in production and

investment, as growing export demand and the correction of the

overvalued yen took hold.

In this business environment, the OSG Group had generally

strong overseas demand for machine tools and was able to

maintain its recovery in domestic machine tool demand. In

addition, amidst the tailwind from the weakening yen, the Group

sought orders aggressively both at home and abroad.

As a result, net sales rose 14.3% year on year to ¥101,032

million, enabling the Group to achieve the ¥100 billion target in

its three-year management plan two years ahead of schedule. Net

sales received a boost from the currency translation of overseas

companies’ results, while still increasing on a local-currency basis,

except for certain regions. Sales were up across all major product

lines, particularly taps, fueled by demand for special tools from

major customers in the automotive and aerospace industries

and by steady channel sales of catalog tools by distributors. The

overseas sales ratio rose 1.1 percentage points from last fiscal

year to 54.6%.

Cost and Profits

Higher net sales were accompanied by higher cost of sales,

which rose 10.0% year on year to ¥58,062 million. The gross

profit margin improved by 2.2 percentage points to 42.5%, due

Operating Income (Billions of yen/%)

net Income (Billions of yen/%)

’12’10

69.581.0 84.1 88.4

101.0

’11

44.648.4 49.4

52.858.1

7.5

’13 ’14 ’12’10 ’11 ’13 ’14 ’12’10 ’11 ’13 ’14 ’12’10 ’11 ’13 ’14

5.4

3.87.3

5.9

8.5 9.89.9

7.1

8.6

10.0

Operating income ratio Net income ratio

10.8

12.314.0

12.8

15.2

17.4

16.6

14.5

17.2

primarily to higher operating rates at major production facilities

in Japan and a declining yen. Selling, general and administrative

expenses (SG&A) rose ¥2,780 million year on year to ¥25,554

million, driven by aggressive order activity and R&D spending.

The ratio of SG&A to net sales fell 0.5 percentage points to 25.3%.

In summary, these factors resulted in a 35.8% improvement in

operating income to ¥17,416 million.

regional Overview

Japan

Demand in the automotive industry, one of our major users,

underwent a reactive “snapback” following the increase in the

consumption tax. However, demand in the aerospace industry

and export demand continued to be strong. As a whole, market

conditions in Japan were strong. Sales grew across our major

product lines, including taps as well as carbide drills, which are

mainly directed towards the aerospace industry. In addition, the

correction from the high yen-driven prices in recent years found

strong footing, enabling improvements in export profits, so that

net sales and operating income both had increases over the

previous fiscal year.

Net sales in Japan rose 13.5% to ¥63,247 million and

operating income grew 37.2% to ¥9,312 million.

The Americas

In our key North American market, production increases by our

major customers in the automotive and aerospace industries

led to a healthy environment. However, the Brazilian economy

experienced a strong slowdown, so that the market continued to

decline and earnings also fell. In the Americas segment overall,

earnings improved as a result of increased sales of our mainstay

products—taps, carbide end mills, and carbide drills—and

received an additional boost from foreign currency translations,

so that net sales and operating income both grew year on year.

A n n ua l R e p o r t 2 0 1 4 21

Sales and Operating Income in japan (Billions of yen/%)

Net sales in the Americas increased 13.0% to ¥18,399 million

while operating income increased 21.9% to ¥2,005 million.

Europe

In Europe, which has been suffering from a long-term slowdown,

a recovery continued in the major markets of Germany, the

UK, and Belgium, especially in the automotive sector. Since the

Group has a relatively low share in this segment, we focused on

strengthening our sales capability by implementing initiatives

based on sales expansion of new tap products. Consequently,

net sales were up across all major product lines, particularly

taps, and results also benefitted from favorable foreign currency

translations, so that both net sales and operating income

increased from a year earlier.

Net sales in Europe were up 26.3% to ¥9,918 million and

operating income rose 47.0% to ¥1,126 million.

Asia

Earnings continued to show mixed strength on a regional basis. A

recovery continued in South Korea, Taiwan, and Singapore, where

sales rose for our core products, particularly taps, contributing

to stronger earnings results. However, in China, although we

secured stable demand from the automotive industry, our

largest set of customers in the country, the leveling off of growth

continued for electronic components, which are undergoing

sudden market changes. Elsewhere in the region, Thailand

showed signs of recovery over the second half, but results were

down year on year due in part to political instability. In the Asia

segment overall, earnings improved in the relatively large South

Korea business, and results also benefitted from favorable foreign

currency translations, so that both net sales and operating

income increased from a year earlier.

Net sales in Asia increased 17.3% to ¥27,935 million while

operating income increased 26.2% to ¥5,315 million.

Operating incomeSalesOperating income ratio

Operating incomeSalesOperating income ratio

Operating incomeSalesOperating income ratio

Operating incomeSalesOperating income ratio

47.2

6.1

6.32.9

55.5

11.4

7.8

59.0

13.2

6.8

55.7

12.2

9.3

63.2

14.7

1.0

11.5

9.0

1.4

12.9

10.7

1.6

13.8

11.6

1.6

16.3

10.1

2.0

18.4

10.9

0.5

5.5

9.4

0.70.9

6.6 6.512.9

10.2

0.8

7.9

9.81.1

9.9

11.4

3.1 4.3

17.2

21.3

20.3

4.3

20.9

20.5

4.2

23.8

17.75.3

27.9

19.0

17.9

’12’10 ’11 ’13 ’14 ’12’10 ’11 ’13 ’14 ’12’10 ’11 ’13 ’14 ’12’10 ’11 ’13 ’14

Sales and Operating Income in the americas (Billions of yen/%)

Sales and Operating Income in europe (Billions of yen/%)

Sales and Operating Income in asia (Billions of yen/%)

net Income

Net other income in fiscal 2014 was ¥4 million, compared to

¥1,610 million in fiscal 2013. The main causes of this decline were

a fall of ¥776 million in foreign currency translation adjustments

and the absence of gains on negative goodwill.

As a result, net income before income taxes was 20.7%

higher year on year at ¥17,420 million. Total income taxes

increased by ¥1,644 million to ¥6,053 million, while the effective

tax rate was 34.7%.

Minority interests, attributable to minority shareholdings

in Japanese and Asian subsidiaries, decreased ¥32 million to

¥1,377 million.

In result, net income for fiscal 2014 came to ¥9,990 million,

which represents a year-on-year increase of 15.9%. Net income

per share rose by ¥14.44 to ¥105.20, while return on equity (ROE)

fell 0.2 percentage points to 11.7%.

Financial Positionassets

Total assets as of November 30, 2014, were ¥142,302 million,

an increase of ¥7,799 million. Despite a decrease in cash and

deposits, current assets increased ¥3,223 million from a year

earlier to ¥75,460 million due to an increase in notes and

accounts receivable and other items. Increases in such items as

net property, plant, and equipment and construction in progress

contributed to an increase in fixed assets by ¥4,577 million to

¥66,843 million.

liabilities and equity

Total liabilities as of November 30, 2014, were ¥41,359 million, a

decrease of ¥5,523 million from a year earlier. Current liabilities

declined by ¥5,234 million to ¥22,236 million. A primary factor

was a decrease in the current portion of long-term debt. Long-

term liabilities were reduced by ¥289 million from a year earlier to

OSG Corporation22

total Shareholders’ equity (Billions of yen)

total equity (Billions of yen)

¥19,123 million. Reduction in long-term debt was a major cause.

Net assets as of November 30, 2014, were ¥100,943 million,

an increase of ¥13,322 million from a year earlier. Primary

contributors were foreign currency translation adjustments

and retained earnings from net income. Also, in July 2014, the

Company retired ¥3,635 million in treasury stock. This action

reduced the capital surplus by ¥2,146 million and retained

earnings by ¥1,489 million. As a result, the equity ratio rose by 4.8

percentage points from 59.5% to 64.3%.

Cash FlowsConsolidated cash and cash equivalents as of November 30,

2014, totaled ¥21,474 million, an increase of ¥4,671 million from

the end of fiscal 2013.

net Cash Provided by Operating activities

Net cash provided by operating activities amounted to ¥19,689

million, an addition of ¥3,517 million from the a year earlier.

Major factors included income before income taxes and minority

interests of ¥17,420 million, depreciation and amortization of

¥6,831 million, and income taxes-paid of ¥4,564 million.

net Cash used in Investing activities

Net cash used in investing activities was ¥3,119 million, an

increase of ¥147 million from a year earlier. The main factors

consist of outflows for ¥7,327 million in acquisition of plant,

property, and equipment; ¥1,109 million in payments for

purchases of subsidiaries’ stock; and ¥1,501 million in payments

for time deposits, which were partially offset by ¥7,636 million in

proceeds from refunds of time deposits.

net Cash used in Financing activities

Net cash used in financing activities was ¥12,814 million, an

increase of ¥3,390 million from a year earlier. Major factors include

equity ratio (%)

eBItda (Billions of yen/%)

DepreciationOperating incomeEBITDA margin

57.1 59.4 63.2 65.364.5

80.091.5

71.5

87.6100.9

54.156.9

53.0

59.5

64.3

12.8

18.0

7.5

5.7

12.3

5.3

18.522.2

19.6

5.7

14.0

23.4

19.5

6.7

12.8

22.1

24.2

6.8

17.4

24.0

’12’10 ’11 ’13 ’14 ’12’10 ’11 ’13 ’14 ’12’10 ’11 ’13 ’14 ’12’10 ’11 ’13 ’14

outflows of ¥10,083 million in repayments of long-term debt and

¥3,224 million in dividends paid.

dividend Policy We recognize the distribution of income to shareholders is an

important management priority. When setting dividends, we take

cash flows, our financial position and other factors into account,

and we aim to maintain a consolidated payout ratio of 30% or

higher.

When making decisions about the investment of free cash

flow, we give priority to business activities with the potential

to enhance our corporate value, such as the expansion of

existing core businesses and the development of our global

business operations. We also make flexible use of share buyback

schemes as a way of returning profits to shareholders while

optimizing investment efficiency from a long-term perspective.

Internal reserves are used for new product development, the

reinforcement and expansion of production and sales in Japan

and overseas, and the strengthening of our financial position and

management infrastructure from a long-term perspective.

For the fiscal 2014 final dividend, we paid an ordinary

dividend of ¥18 per share plus a special dividend of ¥2 yen

per share to commemorate the achievement of ¥100 billion in

consolidated sales, for a total of ¥20 per share. Combining this

amount with the interim dividend of ¥14 per share brings the

annual total to ¥34 yen per share, an increase of ¥4 per share.

For fiscal 2015, we plan to pay cash dividends of ¥36 per

share, consisting of an interim dividend of ¥16 per share and a

final dividend of ¥20 yen per share.

A n n ua l R e p o r t 2 0 1 4 23

OSG Corporation and Consolidated SubsidiariesNovember 30, 2014

Consolidated Balance Sheet

Millions of yenThousands of

U.S. dollars (Note 1)

2014 2013 2014

aSSetSCurrent aSSetS:

Cash and cash equivalents (Note 12) ¥ 21,474 ¥ 16,803 $ 181,983 Time deposits (Notes 6 and 12) 1,074 7,073 9,102 Notes and accounts receivable (Note 12):

Trade notes 3,603 3,674 30,534 Trade accounts 18,026 15,578 152,762 Other 560 506 4,746 Allowance for doubtful accounts (209) (192) (1,771)

Total 21,980 19,566 186,271 Inventories (Note 4) 26,721 25,622 226,449 Deferred tax assets (Note 9) 1,807 1,457 15,314 Prepaid expenses and other current assets (Note 3) 2,404 1,716 20,373

Total current assets 75,460 72,237 639,492

PrOPertY, Plant, and equIPMent (Notes 6 and 17) :Land 13,578 12,984 115,068 Buildings and structures 39,248 37,342 332,610 Machinery and equipment 93,492 87,146 792,305 Tools, furniture, and fixtures 6,509 5,989 55,161 Construction in progress 2,240 821 18,983 Other 39 51 330

Total 155,106 144,333 1,314,457 Accumulated depreciation (98,916) (91,865) (838,271)

Net property, plant, and equipment 56,190 52,468 476,186

InveStMentS and Other aSSetS:Investment securities (Notes 3 and 12) 5,432 4,996 46,034 Investments in unconsolidated subsidiaries and associated companies 1,621 865 13,737 Goodwill 193 251 1,636 Other intangible assets 1,110 1,458 9,407 Deferred tax assets (Note 9) 460 538 3,898 Other assets (Note 6) 1,836 1,690 15,559

Total investments and other assets 10,652 9,798 90,271 tOtal ¥ 142,302 ¥ 134,503 $ 1,205,949

OSG Corporation24

Millions of yenThousands of

U.S. dollars (Note 1)

2014 2013 2014

lIaBIlItIeS and equItYCurrent lIaBIlItIeS:

Short-term borrowings (Notes 5 and 12) ¥ 3,934 ¥ 2,982 $ 33,339 Current portion of long-term debt (Notes 5, 6 and 12) 602 10,131 5,102 Notes and accounts payable (Notes 6 and 12):

Trade notes 816 722 6,915 Trade accounts 3,344 2,979 28,339 Other 1,193 1,132 10,110

Total 5,353 4,833 45,364 Income taxes payable (Note 12) 3,751 2,020 31,788 Accrued expenses 7,168 6,100 60,746 Other current liabilities 1,428 1,404 12,102

Total current liabilities 22,236 27,470 188,441

lOnG-terM lIaBIlItIeS:Long-term debt (Notes 5, 6 and 12) 16,795 17,242 142,331 Liability for employees’ retirement benefits (Note 7) 262 296 2,220

Retirement allowances for directors and Audit & Supervisory Board members 46 55 390

Deferred tax liabilities (Note 9) 945 678 8,008 Other long-term liabilities 1,075 1,140 9,110

Total long-term liabilities 19,123 19,411 162,059

COntInGent lIaBIlItIeS (Note 14)

equItY (Notes 5, 8 and 18) :Common stock:

Authorized— 200,000 thousand shares at November 30, 2014 and 2013Issued—

95,955 thousand and 98,955 thousand shares at November 30, 2014 and 2013, respectively 10,404 10,404 88,169

Capital surplus 12,052 14,198 102,136 Retained earnings 66,838 61,566 566,424 Treasury stock—at cost

998 thousand and 3,994 thousand shares at November 30, 2014 and 2013, respectively (1,210) (4,838) (10,254)

Accumulated other comprehensive income:Unrealized gain on available-for-sale securities 2,045 1,728 17,330 Foreign currency translation adjustments 1,329 (3,033) 11,263

Total 91,458 80,025 775,068 Minority interests 9,485 7,597 80,381

Total equity 100,943 87,622 855,449 tOtal ¥ 142,302 ¥ 134,503 $ 1,205,949 See notes to consolidated financial statements.

A n n ua l R e p o r t 2 0 1 4 25

OSG Corporation and Consolidated SubsidiariesYear Ended November 30, 2014

Consolidated Statement of Income

Millions of yenThousands of

U.S. dollars (Note 1)

2014 2013 2014

net SaleS ¥ 101,032 ¥ 88,379 $ 856,203 COSt OF SaleS (Note 10) 58,062 52,777 492,051

Gross profit 42,970 35,602 364,152

SellInG, General, and adMInIStratIve exPenSeS (Note 10) 25,554 22,775 216,559 Operating income 17,416 12,827 147,593

Other InCOMe (exPenSeS):Interest and dividend income 276 225 2,339 Interest expense (249) (340) (2,110) Foreign exchange gain 650 1,427 5,508 Sales discounts (631) (540) (5,347) Gain on sales of property, plant, and equipment—net — 89 —Write down of investments in unconsolidated subsidiaries (Note 3) (110) — (932) Loss on liquidation of a subsidiary (31) — (263) Equity in earnings of associated companies 4 5 34 Gain on negative goodwill — 443 —Other—net 95 301 805

Other income—net 4 1,610 34 InCOMe BeFOre InCOMe taxeS and MInOrItY IntereStS 17,420 14,437 147,627

InCOMe taxeS (Note 9) :Current 6,191 4,072 52,466 Deferred (138) 337 (1,170)

Total income taxes 6,053 4,409 51,296

net InCOMe BeFOre MInOrItY IntereStS 11,367 10,028 96,331 MInOrItY IntereStS In net InCOMe 1,377 1,409 11,670 net InCOMe ¥ 9,990 ¥ 8,619 $ 84,661

Yen U.S. dollars

Per Share OF COMMOn StOCk (Notes 2(t) and 16) :Basic net income ¥ 105.20 ¥ 90.76 $ 0.89 Diluted net income 95.96 82.80 0.81 Cash dividends applicable to the year 34.00 30.00 0.29

See notes to consolidated financial statements.

OSG Corporation26

OSG Corporation and Consolidated SubsidiariesYear Ended November 30, 2014

Consolidated Statement of Comprehensive Income

Millions of yenThousands of

U.S. dollars (Note 1)

2014 2013 2014

net InCOMe BeFOre MInOrItY IntereStS ¥ 11,367 ¥ 10,028 $ 96,331

Other COMPrehenSIve InCOMe (Note 15) :Unrealized gain on available-for-sale securities 321 1,268 2,720 Deferred loss on derivatives under hedge accounting — (2) —Foreign currency translation adjustments 5,318 9,264 45,068 Share of other comprehensive income in associates 2 7 17 Total other comprehensive income 5,641 10,537 47,805

COMPrehenSIve InCOMe ¥ 17,008 ¥ 20,565 $ 144,136

tOtal COMPrehenSIve InCOMe attrIButaBle tO:Owners of the parent ¥ 14,669 ¥ 17,733 $ 124,314 Minority interests 2,339 2,832 19,822

See notes to consolidated financial statements.

A n n ua l R e p o r t 2 0 1 4 27

OSG Corporation and Consolidated SubsidiariesYear Ended November 30, 2014

Consolidated Statement of Changes In Equity

Thousands Millions of yen

Outstanding Number of Shares of Common Stock

CommonStock

CapitalSurplus

RetainedEarnings

Treasury Stock

BalanCe, deCeMBer 1, 2012 94,965 ¥ 10,404 ¥ 14,198 ¥ 55,131 ¥ (4,832)Net income — — — 8,619 —Cash dividends, ¥23 per share — — — (2,184) —Net change in unrealized gain on available-for-sale securities — — — — —Net change in foreign currency translation adjustments — — — — —Purchase of treasury stock (4) — — — (6) Other — — — — —Net change in the year — — — — —

BalanCe, nOveMBer 30, 2013 94,961 10,404 14,198 61,566 (4,838)Net income — — — 9,990 —Cash dividends, ¥34 per share — — — (3,229) —Net change in unrealized gain on available-for-sale securities — — — — —Net change in foreign currency translation adjustments — — — — —Purchase of treasury stock (4) — — — (7) Retirement of treasury stock — — (2,146) (1,489) 3,635 Net change in the year — — — — —

BalanCe, nOveMBer 30, 2014 94,957 ¥ 10,404 ¥ 12,052 ¥ 66,838 ¥ (1,210)

Millions of yenAccumulated Other Comprehensive Income

Total MinorityInterests

Total Equity

Unrealized Gain on Available-for-sale

Securities

Deferred Gain on Derivatives under

Hedge Accounting

Foreign Currency Translation

Adjustments

BalanCe, deCeMBer 1, 2012 ¥ 482 ¥ 2 ¥ (10,903) ¥ 64,482 ¥ 6,989 ¥ 71,471 Net income — — — 8,619 — 8,619 Cash dividends, ¥23 per share — — — (2,184) — (2,184)Net change in unrealized gain on available-for-sale securities 1,246 — — 1,246 — 1,246 Net change in foreign currency translation adjustments — — 7,870 7,870 — 7,870 Purchase of treasury stock — — — (6) — (6)Other — (2) — (2) — (2)Net change in the year — — — — 608 608

BalanCe, nOveMBer 30, 2013 1,728 — (3,033) 80,025 7,597 87,622 Net income — — — 9,990 — 9,990 Cash dividends, ¥34 per share — — — (3,229) — (3,229)Net change in unrealized gain on available-for-sale securities 317 — — 317 — 317 Net change in foreign currency translation adjustments — — 4,362 4,362 — 4,362 Purchase of treasury stock — — — (7) — (7)Retirement of treasury stock — — — — — —Net change in the year — — — — 1,888 1,888

BalanCe, nOveMBer 30, 2014 ¥ 2,045 ¥ — ¥ 1,329 ¥ 91,458 ¥ 9,485 ¥ 100,943

Thousands of U.S. dollars (Note 1)

CommonStock

CapitalSurplus

RetainedEarnings

Treasury Stock

BalanCe, nOveMBer 30, 2013 $ 88,169 $ 120,322 $ 521,746 $ (41,000)Net income — — 84,661 —Cash dividends, $0.29 per share — — (27,364) —Net change in unrealized gain on available-for-sale securities — — — —Net change in foreign currency translation adjustments — — — —Purchase of treasury stock — — — (59)Retirement of treasury stock — (18,186) (12,619) 30,805 Net change in the year — — — —

BalanCe, nOveMBer 30, 2014 $ 88,169 $ 102,136 $ 566,424 $ (10,254)

Thousands of U.S. dollars (Note 1)Accumulated Other Comprehensive Income

Total MinorityInterests

Total Equity

Unrealized Gain on Available-for-sale

Securities

Deferred Gain on Derivatives under

Hedge Accounting

Foreign Currency Translation

Adjustments

BalanCe, nOveMBer 30, 2013 $ 14,644 $ — $ (25,703) $ 678,178 $ 64,381 $ 742,559 Net income — — — 84,661 — 84,661 Cash dividends, $0.29 per share — — — (27,364) — (27,364)Net change in unrealized gain on available-for-sale securities 2,686 — — 2,686 — 2,686 Net change in foreign currency translation adjustments — — 36,966 36,966 — 36,966 Purchase of treasury stock — — — (59) — (59)Retirement of treasury stock — — — — — —Net change in the year — — — — 16,000 16,000

BalanCe, nOveMBer 30, 2014 $ 17,330 $ — $ 11,263 $ 775,068 $ 80,381 $ 855,449

See notes to consolidated financial statements.

OSG Corporation28

OSG Corporation and Consolidated SubsidiariesYear Ended November 30, 2014

Consolidated Statement of Cash Flows

Millions of yenThousands of

U.S. dollars (Note 1)

2014 2013 2014

OPeratInG aCtIvItIeS:Income before income taxes and minority interests ¥ 17,420 ¥ 14,437 $ 147,627 Adjustments for:

Income taxes—paid (4,564) (3,847) (38,678)Income taxes—refund — 119 —Depreciation and amortization 6,831 6,717 57,890 Amortization of goodwill, net of negative goodwill 64 72 542 Gain on sales of property, plant, and equipment—net — (89) —Gain on negative goodwill — (443) —Write down of investments in unconsolidated subsidiaries 110 — 932 Loss on liquidation of a subsidiary 31 — 263 Equity in earnings of an associated company (4) (5) (34)Changes in assets and liabilities:

(Increase) decrease in notes and accounts receivable (934) 425 (7,915)Decrease in inventories 527 342 4,466 Decrease in notes and accounts payable (269) (1,618) (2,279)Increase in accrued expenses 787 237 6,669 Decrease in liability for employees’ retirement benefits (41) (22) (347)(Decrease) increase in retirement allowances for directors and Audit & Supervisory Board members (9) 2 (76)

Decrease in interest and dividends receivable 11 42 93 Increase (decrease) in allowance for doubtful accounts 24 (24) 203 Decrease in interest payable (31) (6) (263)

Other—net (264) (168) (2,237)Net cash provided by operating activities 19,689 16,171 166,856

InveStInG aCtIvItIeS:Payments for time deposits (1,501) (987) (12,720)Proceeds from refunds of time deposits 7,636 5,159 64,711 Purchases of investment securities (7) (438) (59)Acquisitions of property, plant, and equipment (7,327) (5,877) (62,093)Acquisitions of intangible assets (299) (101) (2,534)Proceeds from sales of property, plant, and equipment 66 248 559 Payments for purchases of subsidiaries’ stock (1,109) (1,198) (9,398)Other-net (578) 222 (4,898)

Net cash used in investing activities (3,119) (2,972) (26,432)FInanCInG aCtIvItIeS:

Increase (decrease) in short-term borrowings—net 679 (2,776) 5,754 Proceeds from long-term debt 20 — 169 Repayments of long-term debt (10,083) (3,663) (85,449)Dividends paid (3,224) (2,182) (27,322)Dividends paid to minority shareholders (200) (799) (1,694)Purchases of treasury stock (7) (6) (59)Other—net 1 2 8

Net cash used in financing activities (12,814) (9,424) (108,593)FOreIGn CurrenCY tranSlatIOn adjuStMentS On CaSh and CaSh equIvalentS 915 1,358 7,754

net InCreaSe In CaSh and CaSh equIvalentS 4,671 5,133 39,585 CaSh and CaSh equIvalentS, BeGInnInG OF Year 16,803 11,670 142,398 CaSh and CaSh equIvalentS, end OF Year ¥ 21,474 ¥ 16,803 $ 181,983 See notes to consolidated financial statements.

A n n ua l R e p o r t 2 0 1 4 29

OSG Corporation and Consolidated SubsidiariesYear Ended November 30, 2014

Notes to Consolidated Financial Statements

1. BaSIS FOr the PreSentatIOn OF COnSOlIdated FInanCIal StateMentSThe accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations, and in accordance with accounting principles generally accepted in Japan (“Japanese GAAP”), which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards (IFRS). In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. In addition, certain reclassifications have been made in the 2013 consolidated financial statements to conform to the classifications used in 2014. The consolidated financial statements are stated in Japanese yen, the currency of the country in which OSG Corporation (the “Company”) is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥118 to $1, the approximate rate of exchange at November 30, 2014. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate.

2. SuMMarY OF SIGnIFICant aCCOuntInG POlICIeS(a) Consolidation The consolidated financial statements as of November 30, 2014, include the accounts of the Company and its 46 significant (46 in 2013) subsidiaries (together, the “Group”). Under the control or influence concept, those companies in which the Company, directly or indirectly, is able to exercise control over operations are fully consolidated, and those companies over which the Group has the ability to exercise significant influence are accounted for by the equity method. Investments in three (three in 2013) associated companies were accounted for by the equity method in 2014. Investments in the remaining 20 (14 in 2013) unconsolidated subsidiaries are stated at cost. If the equity method of accounting had been applied to the investments in these companies, the effect on the accompanying consolidated financial statements would not be material. The differences between the cost and the fair value of the net assets of the acquired subsidiaries at the date of the acquisition are accounted for as goodwill. Goodwill arising from domestic consolidated companies is amortized by the straight-line method over five years and that from foreign consolidated companies over 10 years. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is also eliminated. The accounts of those subsidiaries that have fiscal periods differing from that of the parent company have been adjusted for significant transactions to properly reflect their financial positions at November 30 of each year and their results of operations for the years then ended.

(b) unification of accounting Policies applied to Foreign Subsidiaries for the Consolidated Financial StatementsIn May 2006, the Accounting Standards Board of Japan (the “ASBJ”) issued ASBJ Practical Issues Task Force (PITF) No. 18, “Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements.” PITF No. 18 prescribes that the accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should in principle be unified for the preparation of the consolidated financial statements. However, financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United States of America tentatively may be used for the consolidation process, except for the following items that should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in equity; (c) expensing capitalized development costs of research and development (“R&D”); (d) cancellation of the fair value model accounting for property, plant, and equipment and investment properties and incorporation of cost model accounting; and (e) exclusion of minority interests from net income, if contained in net income.

(c) unification of accounting Policies applied to Foreign associated Companies for the equity MethodIn March 2008, the ASBJ issued ASBJ Statement No. 16, “Accounting Standard for Equity Method of Accounting for Investments.” The new standard requires adjustments to be made to conform the associate’s accounting policies for similar transactions and events under similar circumstances to those of the parent company when the associate’s financial statements are used in applying the equity method, unless it is impracticable to determine such adjustments. In addition, financial statements prepared by foreign associated companies in accordance with either International Financial Reporting Standards or the generally accepted accounting principles in the United States of America tentatively may be used in applying the equity method if the following items are adjusted so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in the equity; (c) expensing capitalized development costs of R&D; (d) cancellation of the

OSG Corporation30

fair value model accounting for property, plant, and equipment and investment properties and incorporation of the cost model accounting; and (e) exclusion of minority interests from net income, if contained in net income.

(d) Cash equivalentsCash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits and short-term investments, all of which mature or become due within three months of the date of acquisition.

(e) InventoriesThe inventories of the Company and domestic consolidated subsidiaries are stated at the lower of cost, as determined principally by the average method, or net selling value. The inventories of foreign consolidated subsidiaries are stated at the lower of cost, determined principally by the average method or first-in first-out method, or net selling value.

(f) Marketable and Investment SecuritiesMarketable and investment securities are classified and accounted for, depending on management’s intent, as follows: i ) Held-to-maturity debt securities, for which there is a positive intent and ability to hold to maturity, are reported at amortized costii) Available-for-sale securities, which are not classified as the aforementioned securities, are reported at fair value, with unrealized gains

and losses, net of applicable taxes, reported as a separate component of equity

Nonmarketable available-for-sale securities are stated at cost determined by the moving-average method. For other-than-temporary declines in fair value, investment securities are reduced to net realizable value by a charge to income.

(g) allowance for doubtful accounts To provide for the loss from doubtful accounts, the Company and domestic consolidated subsidiaries determine allowance for doubtful accounts using the historical rate of actual losses for normal receivables and the estimated irrecoverable amount for specific doubtful receivables after considering the recoverability of each account. Foreign consolidated subsidiaries record allowance for doubtful accounts based on the estimated bad debt expense.

(h) Property, Plant, and equipment Property, plant, and equipment are stated at cost. Depreciation of property, plant, and equipment of the Company and domestic consolidated subsidiaries is computed by the declining-balance method, while the straight-line method is applied to buildings acquired after April 1, 1998. Foreign consolidated subsidiaries mainly utilize the straight-line method. The range of useful lives is principally three to 50 years for buildings and structures and principally four to 12 years for machinery and equipment.

( i ) long-lived assets The Group reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. An impairment loss would be recognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition. In 2014 and 2013, the Group did not recognize any impairment losses.

(j) Other Intangible assetsIntangible assets are amortized by the straight-line method.

(k) Bonuses to directors and audit & Supervisory Board MembersBonuses to directors and the audit and supervisory board (“Audit & Supervisory Board”) members are accrued at the year-end to which such bonuses are attributable.

( l ) liability for employees’ retirement BenefitsThe Company has a defined contribution plan for a majority of employees and an unfunded retirement benefit plan for certain employees. Subsidiaries have noncontributory funded defined benefit pension plans, unfunded retirement benefit plans, and defined contribution plans. The Company applied the simplified method to record the liability at the amount that would be paid if the employees retired at the balance

A n n ua l R e p o r t 2 0 1 4 31

sheet date. Certain subsidiaries, which have defined benefit pension plans, account for the liability for retirement benefits based on projected benefit obligations and plan assets at the balance sheet date and apply the corridor approach when recognizing actuarial gain/loss. In May 2012, the ASBJ issued ASBJ Statement No. 26, “Accounting Standard for Retirement Benefits” and ASBJ Guidance No. 25, “Guidance on Accounting Standard for Retirement Benefits,” which replaced the accounting standard for retirement benefits that had been issued by the Business Accounting Council in 1998 with an effective date of April 1, 2000, and the other related practical guidance, and were followed by partial amendments from time to time through 2009. Under the revised accounting standard, actuarial gains and losses and past service costs that are yet to be recognized in profit or loss are recognized within equity (accumulated other comprehensive income), after adjusting for tax effects, and any resulting deficit or surplus is recognized as a liability (liability for retirement benefits) or asset (asset for retirement benefits). This accounting standard and the guidance above are effective for the end of annual periods beginning on or after April 1, 2013, with earlier application being permitted from the beginning of annual periods beginning on or after April 1, 2013. However, no retrospective application of this accounting standard to consolidated financial statements in prior periods is required. The Group applied the revised accounting standard and guidance for retirement benefits above, effective November 30, 2014. As a result, liability for employees’ retirement benefits of ¥262 million ($2,220 thousand) was recorded as of November 30, 2014.

(m) retirement allowances for directors and audit & Supervisory Board Members Certain domestic consolidated subsidiaries provide for retirement allowances to directors and Audit & Supervisory Board members. The liability is recorded at the amount that would be paid if they retired at the balance sheet date in accordance with internal policies.

(n) r&d CostsR&D costs are charged to costs and expenses as incurred.

(o) leases In March 2007, the ASBJ issued ASBJ Statement No. 13, “Accounting Standard for Lease Transactions,” which revised the previous accounting standard for lease transactions issued in June 1993. The revised accounting standard for lease transactions was effective for fiscal years beginning on or after April 1, 2008. Under the previous accounting standard, finance leases that were deemed to transfer ownership of the leased property to the lessee were capitalized. However, other finance leases were permitted to be accounted for as operating lease transactions if certain “as if capitalized” information was disclosed in the notes to the lessee’s financial statements. The revised accounting standard requires that all finance lease transactions be capitalized by recognizing lease assets and lease obligations in the balance sheet. In addition, the accounting standard permits leases that existed at the transition date and do not transfer ownership of the leased property to the lessee to continue to be accounted for as operating lease transactions. The Group applied the revised accounting standard effective December 1, 2008. In addition, the Group continues to account for leases that existed at the transition date and do not transfer ownership of the leased property to the lessee as operating lease transactions. All other leases are accounted for as operating leases.

(p) Income taxes The provision for income taxes is computed based on the pretax income included in the consolidated statement of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently enacted tax rates to the temporary differences.

(q) Foreign Currency transactionsAll short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rates at the balance sheet date. The foreign exchange gains and losses from translation are recognized in the consolidated statement of income to the extent that they are not hedged by forward exchange contracts.

(r) Foreign Currency Financial StatementsThe balance sheet accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date except for equity, which is translated at the historical exchange rate. Differences arising from such translation are shown as “Foreign currency translation adjustments” under accumulated other comprehensive income in a separate component of equity. Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the average exchange rates.

(s) derivatives and hedging activitiesThe Company and certain subsidiaries use derivative financial instruments to manage their exposure to fluctuations in foreign exchange.

OSG Corporation32

The Group does not enter into derivatives for trading or speculative purposes. Derivative financial instruments and foreign currency transactions are classified and accounted for as follows: a) all derivatives are recognized as either assets or liabilities and measured at fair value and gains or losses on derivative transactions are recognized in the consolidated statement of income, and b) for derivatives used for hedging purposes, if such derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on those derivatives are deferred until the maturity of the hedged transactions. Foreign currency exchange forward contracts employed to hedge foreign exchange exposures for export sales and import purchases are measured at fair value and the unrealized gains/losses are recognized in income.

(t) Per Share InformationBasic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period, retroactively adjusted for stock splits. Diluted net income per share reflects the potential dilution that could occur if securities were exercised or converted into common stock. Diluted net income per share of common stock assumes full conversion of the outstanding convertible bonds at the beginning of the year (or at the time of issuance) with an applicable adjustment for related interest expense, net of tax, and full exercise of outstanding stock acquisition rights. Cash dividends per share presented in the accompanying consolidated statement of income are dividends applicable to the respective years, including dividends to be paid after the end of the year.

(u) accounting Changes and error CorrectionsIn December 2009, the ASBJ issued ASBJ Statement No. 24, “Accounting Standard for Accounting Changes and Error Corrections” and ASBJ Guidance No. 24, “Guidance on Accounting Standard for Accounting Changes and Error Corrections.” Accounting treatments under this standard and guidance are as follows: (1) Changes in Accounting Policies—When a new accounting policy is applied with revision of accounting standards, the new policy is applied retrospectively, unless the revised accounting standards include specific transitional provisions, in which case the entity shall comply with the specific transitional provisions. (2) Changes in Presentation—When the presentation of financial statements is changed, prior-period financial statements are reclassified in accordance with the new presentation. (3) Changes in Accounting Estimates—A change in an accounting estimate is accounted for in the period of the change if the change affects that period only, and is accounted for prospectively if the change affects both the period of the change and future periods. (4) Corrections of Prior-Period Errors—When an error in prior-period financial statements is discovered, those statements are restated.

(v) new accounting Pronouncementsaccounting Standards for Business Combinations and Consolidated Financial Statements—On September 13, 2013, the ASBJ issued revised ASBJ Statement No. 21, “Accounting Standard for Business Combinations,” revised ASBJ Guidance No. 10, “Guidance on Accounting Standards for Business Combinations and Business Divestitures,” and revised ASBJ Statement No. 22, “Accounting Standard for Consolidated Financial Statements.”

Major accounting changes are as follows:Transactions with noncontrolling interestA parent’s ownership interest in a subsidiary might change if the parent purchases or sells ownership interests in its subsidiary. The carrying amount of minority interest is adjusted to reflect the change in the parent’s ownership interest in its subsidiary while the parent retains its controlling interest in its subsidiary. Under the current accounting standard, any difference between the fair value of the consideration received or paid and the amount by which the minority interest is adjusted is accounted for as an adjustment of goodwill or as profit or loss in the consolidated statement of income. Under the revised accounting standard, such difference shall be accounted for as capital surplus as long as the parent retains control over its subsidiary.

Presentation of the consolidated balance sheetIn the consolidated balance sheet, “minority interest” under the current accounting standard will be changed to “noncontrolling interest” under the revised accounting standard.

Presentation of the consolidated statement of incomeIn the consolidated statement of income, “income before minority interest” under the current accounting standard will be changed to “net income” under the revised accounting standard, and “net income” under the current accounting standard will be changed to “net income attributable to owners of the parent” under the revised accounting standard.

Provisional accounting treatments for a business combinationIf the initial accounting for a business combination is incomplete by the end of the reporting period in which the business combination

A n n ua l R e p o r t 2 0 1 4 33

occurs, an acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. Under the current accounting standard guidance, the impact of adjustments to provisional amounts recorded in a business combination on profit or loss is recognized as profit or loss in the year in which the measurement is completed. Under the revised accounting standard guidance, during the measurement period, which shall not exceed one year from the acquisition, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and that would have affected the measurement of the amounts recognized as of that date. Such adjustments shall be recognized as if the accounting for the business combination had been completed at the acquisition date.

Acquisition-related costsAcquisition-related costs are costs, such as advisory fees or professional fees, which an acquirer incurs to effect a business combination. Under the current accounting standard, the acquirer accounts for acquisition-related costs by including them in the acquisition costs of the investment. Under the revised accounting standard, acquisition-related costs shall be accounted for as expenses in the periods in which the costs are incurred. The above accounting standards and guidance for “transactions with noncontrolling interest,” “acquisition-related costs,” and “presentation changes in the consolidated financial statements” are effective for the beginning of annual periods beginning on or after April 1, 2015. Earlier application is permitted from the beginning of annual periods beginning on or after April 1, 2014, except for the presentation changes in the consolidated financial statements. In the case of earlier application, all accounting standards and guidance above, except for the presentation changes, should be applied simultaneously. Either retrospective or prospective application of the revised accounting standards and guidance for “transactions with noncontrolling interest” and “acquisition-related costs” is permitted. In retrospective application of the revised standards and guidance for “transactions with noncontrolling interest” and “acquisition-related costs,” accumulated effects of retrospective adjustments for all “transactions with noncontrolling interest” and “acquisition-related costs,” which occurred in the past shall be reflected as adjustments to the beginning balance of capital surplus and retained earnings for the year of the first-time application. In prospective application, the new standards and guidance for “transactions with noncontrolling interest” and “acquisition-related costs” shall be applied prospectively from the beginning of the year of the first-time application. The changes in presentation shall be applied to all periods presented in financial statements containing the first-time application of the revised standards and guidance. The revised standards and guidance for “provisional accounting treatments for a business combination” is effective for a business combination which will occur on or after the beginning of annual periods beginning on or after April 1, 2015. Earlier application is permitted for a business combination which will occur on or after the beginning of annual periods beginning on or after April 1, 2014. The Company expects to apply the revised accounting standards and guidance from the beginning of the annual period beginning on December 1, 2015, and is in the process of measuring the effects of applying the revised accounting standards and guidance in future applicable periods.

3. MarketaBle and InveStMent SeCurItIeSMarketable securities, which were included in other current assets, and investment securities at November 30, 2014 and 2013, consisted of the following:

Millions of yen Thousands of U.S. dollars

2014 2013 2014Current:

Debt securities ¥ 1 ¥ 2 $ 8 Total ¥ 1 ¥ 2 $ 8

Noncurrent:Equity securities ¥ 5,248 ¥ 4,822 $ 44,475 Debt securities 184 174 1,559

Total ¥ 5,432 ¥ 4,996 $ 46,034

The costs and aggregate fair values of securities at November 30, 2014 and 2013, were as follows:Millions of yen

November 30, 2014 Cost Unrealized Gains Unrealized Losses Fair Value

Available-for-sale:Equity securities ¥ 2,546 ¥ 2,659 ¥ 69 ¥ 5,136Debt securities 183 2 — 185

OSG Corporation34

Millions of yen

November 30, 2013 Cost Unrealized Gains Unrealized Losses Fair Value

Available-for-sale:Equity securities ¥ 2,538 ¥ 2,254 ¥ 80 ¥ 4,712Debt securities 176 0 — 176

Thousands of U.S. dollars

November 30, 2014 Cost Unrealized Gains Unrealized Losses Fair Value

Available-for-sale:Equity securities $ 21,576 $ 22,534 $ 584 $ 43,526 Debt securities 1,551 16 — 1,567

Information on available-for-sale securities which were sold during the year ended November 30, 2013, is as follows:Millions of yen

November 30, 2013 Proceed Realized Gains Realized Losses

Available-for-sale:Equity securities ¥ 1 ¥ 1 ¥ —

Total ¥ 1 ¥ 1 ¥ —

No available-for-sale securities were sold during the year ended November 30, 2014. Impairment losses on investments in unconsolidated subsidiaries for the years ended November 30, 2014 and 2013, were ¥110 million ($932 thousand) and nil, respectively.

4. InventOrIeSInventories at November 30, 2014 and 2013, consisted of the following:

Millions of yen Thousands of U.S. dollars

2014 2013 2014Merchandise ¥ 5,099 ¥ 5,007 $ 43,212 Finished products 10,948 10,748 92,780Work in process 4,874 4,056 41,305Raw materials 4,703 4,737 39,856Supplies 1,097 1,074 9,296

Total ¥ 26,721 ¥ 25,622 $ 226,449

5. ShOrt-terM BOrrOWInGS and lOnG-terM deBtShort-term borrowings at November 30, 2014 and 2013, mainly consisted of notes to banks and bank overdrafts. The weighted-average interest rates on short-term borrowings were 1.3% as of November 30, 2014, and 1.8% as of November 30, 2013.

Long-term debt at November 30, 2014 and 2013, consisted of the following:Millions of yen Thousands of U.S. dollars

2014 2013 2014Unsecured zero-coupon convertible bonds with stock acquisition rights, due 2022 ¥ 15,000 ¥ 15,000 $ 127,119

Borrowings from banks and other financial institutions, due serially to 2017 with weighted-average interest rates of 2.1% (2014) and 1.6% (2013) 1,075 11,082 9,110

Other 1,322 1,291 11,204 Total 17,397 27,373 147,433

Less: Portion due within one year (602) (10,131) (5,102)Long-term debt, less current portion ¥ 16,795 ¥ 17,242 $ 142,331

The stock acquisition rights issued with the zero-coupon convertible bonds entitle the holders to acquire shares of the Company’s common stock through March 21, 2022, at the conversion price of ¥1,640.6 ($13.90) per share at November 30, 2014. If all these outstanding stock

A n n ua l R e p o r t 2 0 1 4 35

acquisition rights had been exercised at November 30, 2014, 9,142,996 shares of common stock would have been issued. However, prior to October 4, 2021, the stock acquisition rights may be exercised by the holder of a bond during any particular calendar quarter (or, in case of a calendar quarter commencing on October 1, 2021, until October 3, 2021) only if the closing price of the shares for any 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 120% of the conversion price in effect on the last trading day of such immediately preceding calendar quarter. The conversion price is subject to adjustments to reflect stock splits and certain other events.

The annual maturities of long-term debt at November 30, 2014, for the next five years and thereafter were as follows:Years ending November 30 Millions of yen Thousands of U.S. dollars

2015 ¥ 602 $ 5,102 2016 516 4,3732017 172 1,4582018 69 5852019 70 5932020 and thereafter 15,968 135,322

Total ¥ 17,397 $ 147,433

6. PledGed aSSetSThe carrying amounts of assets pledged as collateral for notes and accounts payable of ¥342 million ($2,898 thousand) and long-term debt (including current portion) of ¥1,805 million ($15,297 thousand), as of November 30, 2014, were as follows:

Millions of yen Thousands of U.S. dollars

Time deposits ¥ 987 $ 8,364 Property, plant, and equipment

Land 3,681 31,195Buildings and structures 5,434 46,051Machinery and equipment 1,098 9,305Tools, furniture, and fixtures 105 890

Other assets 46 390Total ¥ 11,351 $ 96,195

7. lIaBIlItY FOr eMPlOYeeS’ retIreMent BeneFItSThe Company and certain subsidiaries have defined contribution plans for the majority of employees. Other subsidiaries have noncontributory- and contributory-funded defined benefit pension plans and unfunded retirement benefit plans. Contributions to the defined contribution plans for the years ended November 30, 2014 and 2013, were ¥617 million ($5,229 thousand) and ¥536 million, respectively. The contributory-funded defined benefit pension plan is a multiemployer plan and the Company and domestic subsidiaries recognize as net pension cost the required contribution for the period. Contributions for the years ended November 30, 2014 and 2013, for this plan were ¥566 million ($4,797 thousand) and ¥574 million, respectively.

Year ended november 30, 2014 (1) The changes in defined benefit obligation for the year ended November 30, 2014, were as follows:

Millions of yen Thousands of U.S. dollars

Balance at beginning of year ¥ 215 $ 1,822 Current service cost 8 68Interest cost 4 34Actuarial losses 1 8Benefits paid (15) (127)Others 18 153

Balance at end of year ¥ 231 $ 1,958

OSG Corporation36

(2) The changes in plan assets for the year ended November 30, 2014, were as follows:Millions of yen Thousands of U.S. dollars

Balance at beginning of year ¥ 214 $ 1,814Expected return on plan assets 5 42 Actuarial losses 0 0 Contributions from the employer 41 348 Benefits paid (15) (127)Others 20 169

Balance at end of year ¥ 265 $ 2,246

(3) The changes in liability for retirement benefits for which the simplified method was applied to record the liability for the year ended November 30, 2014, were as follows:

Millions of yen Thousands of U.S. dollars

Balance at beginning of year ¥ 296 $ 2,508 Retirement benefit costs 152 1,288Benefits paid (26) (220)Contributions to pension funds (167) (1,415)Others 7 59

Balance at end of year ¥ 262 $ 2,220

(4) Reconciliation between the liability recorded in the consolidated balance sheet and the balances of defined benefit obligation and plan assets

Millions of yen Thousands of U.S. dollars

Funded defined benefit obligation ¥ 940 $ 7,966 Plan assets (794) (6,729)

146 1,237 Unfunded defined benefit obligation 82 695 Net liability arising from defined benefit obligation ¥ 228 $ 1,932

Millions of yen Thousands of U.S. dollars

Liability for retirement benefits ¥ 262 $ 2,220Asset for retirement benefits (34) (288)Net liability arising from defined benefit obligation ¥ 228 $ 1,932

(5) The components of net periodic benefit costs for the year ended November 30, 2014, were as follows:Millions of yen Thousands of U.S. dollars

Service cost ¥ 8 $ 68 Interest cost 4 34Expected return on plan assets (4) (34)Recognized actuarial losses 0 0Retirement benefit costs calculated by the simplified method 152 1,288Net periodic benefit costs ¥ 160 $ 1,356

(6) Plan assetsa. Components of plan assetsPlan assets consisted of the following:

Debt investments and investment trusts 51.30%Equity investments 10.04%Cash and cash equivalents 22.22%Others 16.44%Total 100.00%

A n n ua l R e p o r t 2 0 1 4 37

b. Method of determining the expected rate of return on plan assetsThe expected rate of return on plan assets is determined considering the long-term rates of return which are expected currently and in the future from the various components of the plan assets.

(7) Assumptions used for the year ended November 30, 2014, were set forth as follows:

Discount rate 2.25%Expected rate of return on plan assets 2.00%

The funded status of the multiemployer plan at November 30, 2014, to which contributions paid by the Company and certain domestic subsidiaries were recorded as net periodic retirement benefit costs, was as follows:

Millions of yen Thousands of U.S. dollars

Fair value of plan assets ¥ 126,998 $ 1,076,254 Pension obligation recorded

by pension fund (146,473) (1,241,297)Difference ¥ (19,475) $ (165,043)

The Group’s contribution percentage for contributory funded pension plans 8.71%

Notes:1. Difference as of November 30, 2014, mainly resulted from past service liability in the pension fund of ¥21,774 million ($184,526 thousand), and surplus of

¥2,299 million ($19,483 thousand).2. Prior service cost is amortized over 20 years.

Year ended november 30, 2013The liability for employees’ retirement benefits at November 30, 2013, consisted of the following:

Millions of yen

Projected benefit obligation ¥ 728Fair value of plan assets (602)

Net liability 126Prepaid pension cost 170Amount recognized as liability ¥ 296

The components of net periodic retirement benefit costs for the year ended November 30, 2013, were as follows:Millions of yen

Service cost ¥ 120

The funded status of the multiemployer plan at November 30, 2013, to which contributions paid by the Company and certain domestic subsidiaries were recorded as net periodic retirement benefit costs, was as follows:

Millions of yen

Fair value of plan assets ¥ 116,171Pension obligation recorded

by pension fund (140,708)Difference ¥ (24,537)

The Group’s contribution percentage for contributory funded pension plans 9.05%

Notes:1. Difference as of November 30, 2013, mainly resulted from past service liability in the pension fund of ¥23,841 million, and deficit of ¥695 million.2. Prior service cost is amortized over 20 years.

8. equItYJapanese companies are subject to the Companies Act of Japan (the “Companies Act”). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below:

(a) dividendsUnder the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders’ meeting. For companies that meet certain criteria, including (1) having a board of directors, (2) having independent auditors, (3) having an Audit & Supervisory Board, and (4) the term of service of the directors is prescribed as one year rather

OSG Corporation38

than two years of normal term by its articles of incorporation, the board of directors may declare dividends (except for dividends in kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. However, the Company cannot do so because it does not meet all the above criteria. The Companies Act permits companies to distribute dividends-in-kind (noncash assets) to shareholders subject to a certain limitation and additional requirements. Semiannual interim dividends may also be paid once a year upon resolution by the board of directors if the articles of incorporation of the company so stipulate. The Companies Act also provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3 million.

(b) Increases/decreases and transfer of common stock, reserve, and surplusThe Companies Act requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus), depending on the equity account charged upon the payment of such dividends until the total aggregate amount of the legal reserve and additional paid-in capital equals 25% of common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, other capital surplus, and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders.

(c) treasury stock and treasury stock acquisition rightsThe Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the board of directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders, which is determined by a specific formula. Under the Companies Act, stock acquisition rights are presented as a separate component of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights.

9. InCOMe taxeSThe Company and its domestic subsidiaries are subject to Japanese national and local income taxes, which, in the aggregate, resulted in a normal effective statutory tax rate of approximately 37.3% for the years ended November 30, 2014 and 2013. The tax effects of significant temporary differences and tax loss carryforwards, which resulted in deferred tax assets and liabilities at November 30, 2014 and 2013, were as follows:

Millions of yen Thousands of U.S. dollars

2014 2013 2014deferred tax assets:

Retirement benefits for employees ¥ 128 ¥ 126 $ 1,085 Retirement allowances for directors and Audit & Supervisory Board members 15 20 127Unrealized gains on inventories and property, plant, and equipment 1,183 1,021 10,025Tax loss carryforwards 145 137 1,229Enterprise taxes payable 237 118 2,009Bad debt allowance 124 99 1,051Depreciation 81 82 686Write-down of inventories 333 314 2,822Write-down of memberships 42 45 356Write-down of securities 520 519 4,407Other 706 686 5,983Deferred tax assets subtotal 3,514 3,167 29,780Less valuation allowance (797) (827) (6,754)Total 2,717 2,340 23,026

deferred tax liabilities:Deferred gains on property, plant, and equipment 104 103 881Unrealized gains on available-for-sale securities 461 366 3,907Other 830 554 7,034Total 1,395 1,023 11,822

Net deferred tax assets ¥ 1,322 ¥ 1,317 $ 11,204

A n n ua l R e p o r t 2 0 1 4 39

A reconciliation between the normal effective statutory tax rates and the actual effective tax rates reflected in the accompanying consolidated statement of income for the year ended November 30, 2014, with the corresponding figures for 2013, is as follows:

2014 2013

Normal effective statutory tax rate 37.3% 37.3%Expenses not deductible for income tax purposes 1.9 1.3Income not taxable for income tax purposes (0.2) (0.2)Per capita tax 0.3 0.3Lower income tax rates applicable to income in certain foreign countries (5.1) (5.6)Amortization of goodwill 0.1 0.2 Unrecognized deferred taxes on unrealized intercompany profit 0.3 (2.6)Net change in valuation allowance 0.3 0.1 Gain on negative goodwill — (1.1)Other—net (0.2) 0.8 Actual effective tax rate 34.7% 30.5%

New tax reform laws enacted in 2014 in Japan changed the normal effective statutory tax rate for the fiscal year beginning on or after April 1, 2014, from approximately 37.3% to 34.9%. The effect of this change on the consolidated statement of income for the year ended November 30, 2014 was immaterial.

10. r&d COStSR&D costs charged to costs and expenses were ¥1,460 million ($12,373 thousand) and ¥1,373 million for the years ended November 30, 2014 and 2013, respectively.

11. leaSeS(as lessee)The Group leases certain machinery, equipment, tools, furniture, and fixtures as a lessee.

Minimum rental payments under noncancelable operating leases subsequent to November 30, 2014 and 2013, were as follows:Millions of yen Thousands of U.S. dollars

2014 2013 2014Due within one year ¥ 136 ¥ 79 $ 1,153 [amount of sublease] [9] [9] [76]Due after one year 294 85 2,491[amount of sublease] [16] [15] [136]Total ¥ 430 ¥ 164 $ 3,644 [amount of sublease] [25] [24] [212]

Pro forma Information of leased Property Whose lease Inception Was before november 30, 2008ASBJ Statement No. 13, “Accounting Standard for Lease Transactions” requires that all finance lease transactions be capitalized to recognize lease assets and lease obligations in the balance sheet. However, ASBJ Statement No. 13 permits leases without ownership transfer of the leased property to the lessee and whose lease inception was before November 30, 2008, to continue to be accounted for as operating lease transactions if certain “as if capitalized” information is disclosed in the note to the financial statements. The Company applied ASBJ Statement No. 13 effective December 1, 2008, and accounted for such leases as operating lease transactions. Pro forma information of leased property whose lease inception was before November 30, 2008, was as follows:

Millions of yen

November 30, 2014Machinery and

EquipmentTools, Furniture

and Fixtures Total

Acquisition cost ¥ 179 ¥ — ¥ 179Accumulated depreciation 148 — 148Net leased property ¥ 31 ¥ — ¥ 31

OSG Corporation40

Millions of yen

November 30, 2013Machinery and

EquipmentTools, Furniture

and Fixtures Total

Acquisition cost ¥ 404 ¥ 6 ¥ 410Accumulated depreciation 313 6 319Net leased property ¥ 91 ¥ 0 ¥ 91

Thousands of U.S. dollars

November 30, 2014Machinery and

EquipmentTools, Furniture

and Fixtures Total

Acquisition cost $ 1,517 $ — $ 1,517 Accumulated depreciation 1,254 — 1,254Net leased property $ 263 $ — $ 263

Obligations under finance leases:Millions of yen Thousands of U.S. dollars

2014 2013 2014Due within one year ¥ 32 ¥ 63 $ 271 Due after one year — 32 —Total ¥ 32 ¥ 95 $ 271

Depreciation expense and interest expense under finance leases:Millions of yen Thousands of U.S. dollars

2014 2013 2014Depreciation expense ¥ 25 ¥ 54 $ 212 Interest expense 2 5 17

Depreciation expenses are computed by the straight-line method and interest expenses are computed by the interest method. Total lease payments under finance leases accounted for as operating lease transactions for the years ended November 30, 2014 and 2013, were ¥30 million ($254 thousand) and ¥71 million, respectively.

(as lessor)Expected lease revenues to be received under the noncancelable operating lease subsequent to November 30, 2014 and 2013, were as follows:

Millions of yen Thousands of U.S. dollars

2014 2013 2014Due within one year ¥ 74 ¥ 70 $ 627 [amount of sublease] [74] [70] [627]Due after one year 127 125 1,076[amount of sublease] [127] [125] [1,076]Total ¥ 201 ¥ 195 $ 1,703 [amount of sublease] [201] [195] [1,703]

12. FInanCIal InStruMentS and related dISClOSureS (1) Group Policy for Financial InstrumentsThe Group uses financial instruments, mainly long-term debt, including bank loans and bonds, based on its capital-financing plan. Cash surpluses, if any, are invested in low-risk financial assets. Derivatives are used not for speculative purposes, but to manage exposure to financial risks as described in (2) below.

(2) nature and extent of risks arising from Financial InstrumentsReceivables, such as trade notes and trade accounts, are exposed to customer credit risk. Although receivables in foreign currencies are exposed to the risk of fluctuation in foreign currency exchange rates, the positions are hedged by using forward foreign currency contracts. Marketable and investment securities, mainly equity instruments of customers and suppliers of the Group, are exposed to the risk of market price fluctuations.

A n n ua l R e p o r t 2 0 1 4 41

Payment terms of payables, such as trade notes and trade accounts, are less than one year. Although payables in foreign currencies are exposed to the risk of fluctuation in foreign currency exchange rates, those risks are hedged by using forward foreign currency contracts. Derivatives mainly include forward foreign currency contracts, which are used to manage exposure to market risks from changes in foreign currency exchange rates of receivables and payables. Please see Note 13 for more details about derivatives.

(3) risk Management for Financial InstrumentsCredit risk managementCredit risk is the risk of economic loss arising from a counterparty’s failure to repay or service debt according to the contractual terms. The Group manages its credit risk from receivables on the basis of internal guidelines, which include monitoring of payment terms and balances of customers to identify default risk of customers at an early stage. Please see Note 13 for more details about derivatives. The maximum credit risk exposure of financial assets is limited to their carrying amounts as of November 30, 2014.

Market risk management (foreign exchange risk and interest rate risk)Foreign currency trade receivables and payables are exposed to risks resulting from fluctuations in foreign currency exchange rates. Such foreign exchange risks are hedged principally by forward foreign currency contracts. In addition, when foreign currency trade receivables and payables are expected from forecasted transactions, forward foreign currency contracts may be used under the limited contract term of one year. Marketable and investment securities are managed by monitoring market values and the financial position of issuers on a regular basis. Internal guidelines stating the basic principles for derivative transactions have been prepared and are required to be followed. Reconciliation of the transactions and balances with customers is made, and the transaction data is reported to the director in charge of the operations and the management meeting on a monthly basis.

liquidity risk managementLiquidity risk comprises the risk that the Group cannot meet its contractual obligations in full on maturity dates. The Group manages its liquidity risk by holding adequate volumes of liquid assets along with adequate financial planning by the finance group.

(4) Fair values of Financial InstrumentsFair values of financial instruments are based on quoted prices in active markets. If quoted prices are not available, other rational valuation techniques are used instead. Please see Note 13 for details of the fair value of derivatives.

(a) Fair value of financial instrumentsMillions of yen

November 30, 2014 Carrying Amount Fair Value Unrealized Gain (Loss)

Cash and cash equivalents ¥ 21,474 ¥ 21,474 —Time deposits 1,074 1,074 —Trade notes and accounts receivable 21,629 21,629 —Marketable and investment securities 5,321 5,321 —Total ¥ 49,498 ¥ 49,498 —

Short-term borrowings ¥ 3,934 ¥ 3,934 —Trade notes and accounts payable 4,160 4,160 —Income taxes payable 3,751 3,751 —Long-term debt, including current portion 17,397 21,312 ¥ (3,915)Total ¥ 29,242 ¥ 33,157 ¥ (3,915)

OSG Corporation42

Millions of yen

November 30, 2013 Carrying Amount Fair Value Unrealized Gain (Loss)

Cash and cash equivalents ¥ 16,803 ¥ 16,803 —Time deposits 7,073 7,073 —Trade notes and accounts receivable 19,252 19,252 —Marketable and investment securities 4,888 4,888 —Total ¥ 48,016 ¥ 48,016 —

Short-term borrowings ¥ 2,982 ¥ 2,982 —Trade notes and accounts payable 3,701 3,701 —Income taxes payable 2,020 2,020 —Long-term debt, including current portion 27,373 30,651 ¥ (3,278)Total ¥ 36,076 ¥ 39,354 ¥ (3,278)

Thousands of U.S. dollars

November 30, 2014 Carrying Amount Fair Value Unrealized Gain (Loss)

Cash and cash equivalents $ 181,983 $ 181,983 —Time deposits 9,102 9,102 —Trade notes and accounts receivable 183,296 183,296 —Marketable and investment securities 45,093 45,093 —Total $ 419,474 $ 419,474 —

Short-term borrowings $ 33,339 $ 33,339 —Trade notes and accounts payable 35,254 35,254 —Income taxes payable 31,788 31,788 —Long-term debt, including current portion 147,433 180,611 $ (33,178)Total $ 247,814 $ 280,992 $ (33,178)

Cash and Cash equivalents and time depositsThe carrying values of cash and cash equivalents approximate fair value because of their short maturities.

Marketable and Investment SecuritiesThe fair values of equity securities are measured at the quoted market price of the stock exchange for the equity instruments. Information about the fair value of marketable and investment securities by classification is included in Note 3.

trade notes and accounts receivable and Payable, Short-term Borrowings, and Income taxes PayableThe carrying values of trade notes and accounts receivable and payable, short-term borrowings, and income taxes payable approximate fair value because of their short maturities.

long-term debtThe fair value of long-term debt is determined by discounting the cash flows related to the debt at the Group’s assumed corporate borrowing rate. The fair value of convertible bonds is measured at the market price obtained from financial institutions.

derivativesFair value information for derivatives is included in Note 13.

(b) Carrying amount of financial instruments whose fair value cannot be reliably determinedMillions of yen Thousands of U.S. dollars

2014 2013 2014Investments in equity instruments that do not have a quoted market price in an active market ¥ 112 ¥ 110 $ 949

Investments in unconsolidated subsidiaries and associated companies 1,621 865 13,737

A n n ua l R e p o r t 2 0 1 4 43

(5) Maturity analysis for Financial assets and Securities with Contractual MaturitiesMillions of yen

November 30, 2014 Due in One Year or LessDue After One Year Through Five Years

Due After Five Years Through 10 Years Due After 10 Years

Cash and cash equivalents ¥ 21,474 ¥ — ¥ — —Time deposits 1,074 — — —Trade notes and accounts receivable 21,629 — — —Available-for-sale securities with contractual maturities 1 77 100 —Total ¥ 44,178 ¥ 77 ¥ 100 —

Thousands of U.S. dollars

November 30, 2014 Due in One Year or LessDue After One Year Through Five Years

Due After Five Years Through 10 Years Due After 10 Years

Cash and cash equivalents $ 181,983 $ — $ — —Time deposits 9,102 — — —Trade notes and accounts receivable 183,296 — — —Available-for-sale securities with contractual maturities 8 653 847 —Total $ 374,389 $ 653 $ 847 —

Please see Note 5 for annual maturities of long-term debt and Note 11 for obligations under finance leases.

13. derIvatIveSThe Company and certain subsidiaries enter into foreign currency forward contracts to hedge foreign exchange risk associated with certain assets and liabilities denominated in foreign currencies. All derivative transactions are entered into to hedge foreign currency exposures incorporated within its business. Accordingly, market risk in these derivatives is basically offset by opposite movements in the value of hedged assets or liabilities. Because the counterparties to these derivatives are limited to major international financial institutions, the Company and subsidiaries do not anticipate any losses arising from credit risk. Derivative transactions entered into by the Company and subsidiaries have been made in accordance with internal policies, which regulate the authorization and credit limit amount.

derivative transactions to Which hedge accounting is not appliedMillions of yen

November 30, 2014 Contract AmountContract Amount Due

After One Year Fair Value Unrealized Losses

Foreign currency forward contracts:Buying Yen ¥ 312 — ¥ (5) ¥ (5)Selling U.S. dollars 1,173 — (126) (126)

Millions of yen

November 30, 2013 Contract AmountContract Amount Due

After One Year Fair Value Unrealized Losses

Foreign currency forward contracts:Buying Yen ¥ 1,292 — ¥ (154) ¥ (154)Selling U.S. dollars 1,592 — (45) (45)

Thousands of U.S. dollars

November 30, 2014 Contract AmountContract Amount Due

After One Year Fair Value Unrealized Losses

Foreign currency forward contracts:Buying Yen $ 2,644 — $ (42) $ (42)Selling U.S. dollars 9,941 — (1,068) (1,068)

OSG Corporation44

14. COntInGent lIaBIlItIeS At November 30, 2014, the Group had contingent liabilities for notes endorsed with recourse of ¥56 million ($475 thousand).

15. COMPrehenSIve InCOMeThe components of other comprehensive income for the years ended November 30, 2014 and 2013, were as follows:

Millions of yen Thousands of U.S. dollars

2014 2013 2014Unrealized gain on available-for-sale securities:

Gains arising during the year ¥ 417 ¥ 1,578 $ 3,534 Reclassification adjustments to profit or loss — (1) —Amount before income tax effect 417 1,577 3,534Income tax effect (96) (309) (814)Total ¥ 321 ¥ 1,268 $ 2,720

Deferred loss on derivatives under hedge accounting:Gains arising during the year ¥ — ¥ 8 $ —Reclassification adjustments to profit or loss — (11) —Amount before income tax effect — (3) —Income tax effect — 1 —Total ¥ — ¥ (2) $ —

Foreign currency translation adjustments:Adjustments arising during the year ¥ 5,318 ¥ 9,264 $ 45,068 Total ¥ 5,318 ¥ 9,264 $ 45,068

Share of other comprehensive income in associates:Gains arising during the year ¥ 2 ¥ 7 $ 17 Total ¥ 2 ¥ 7 $ 17

Total other comprehensive income ¥ 5,641 ¥ 10,537 $ 47,805

16. net InCOMe Per ShareReconciliation of the differences between basic and diluted net income per share (“EPS”) for the years ended November 30, 2014 and 2013, is as follows:

Millions of yen Thousands of shares Yen U.S. dollars

For the year ended November 30, 2014 Net Income Weighted-Average Shares EPS

Basic EPSNet income available to common shareholders ¥ 9,990 94,959 ¥ 105.20 $ 0.89

Effect of dilutive securities:Convertible bonds — 9,143

Diluted EPSNet income for computation ¥ 9,990 104,102 ¥ 95.96 $ 0.81

Millions of yen Thousands of shares Yen

For the year ended November 30, 2013 Net Income Weighted-Average Shares EPS

Basic EPSNet income available to common shareholders ¥ 8,619 94,963 ¥ 90.76

Effect of dilutive securities:Convertible bonds — 9,130

Diluted EPSNet income for computation ¥ 8,619 104,093 ¥ 82.80

A n n ua l R e p o r t 2 0 1 4 45

17. related-PartY tranSaCtIOnSThe Company’s Audit & Supervisory Board member is a representative director of ONOCOM Co., Ltd., which engages in the construction business. The Company purchased properties and repair and maintenance services from ONOCOM Co., Ltd. for the years ended November 30, 2014 and 2013, in the amount of ¥1,049 million ($8,890 thousand) and nil, respectively. The amount was determined based on a quotation and the past experience with construction, and the payment term was determined considering the construction period. The balance of accounts payable to ONOCOM Co., Ltd at November 30, 2014 was ¥69 million ($585 thousand).

18. SuBSequent eventThe following appropriations of retained earnings at November 30, 2014, were approved at the Company’s shareholders’ meeting held on February 21, 2015:

Millions of yen Thousands of U.S. dollars

Year-end cash dividends, ¥20 ($0.17) per share ¥ 1,899 $ 16,093

19. SeGMent InFOrMatIOnUnder ASBJ Statement No. 17, “Accounting Standard for Segment Information Disclosures” and ASBJ Guidance No. 20, “Guidance on Accounting Standard for Segment Information Disclosures,” an entity is required to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available and such information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, segment information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments.

1. Description of Reportable Segments The Group is engaged in the manufacture and sale of cutting tools for industrial applications and has key entities in each region in Japan, the Americas (USA, Canada, Mexico, Brazil, and Argentina), Europe (UK, Belgium, France, Netherlands, Denmark, Spain, Germany, and Italy), and Asia (China, Singapore, Thailand, Taiwan, South Korea, and India). Such key entities are independent management units, which develop and execute a comprehensive regional product strategy. Therefore, the Group consists of four regional segments (Japan, the Americas, Europe, and Asia).

2. Methods of Measurement for the Amounts of Sales, Profit, Assets, and Other Items for Each Reportable SegmentThe accounting policies of each reportable segment are consistent with those disclosed in Note 2, “Summary of Significant Accounting Policies.”

3. Information about Sales, Profit, Assets, and Other ItemsMillions of yen

Reportable SegmentReconciliations Consolidated

2014 Japan The Americas Europe Asia Total

SalesSales to external customers ¥ 46,660 ¥ 18,236 ¥ 9,879 ¥ 26,257 ¥ 101,032 — ¥ 101,032Intersegment sales or transfers 16,587 163 39 1,678 18,467 ¥ (18,467) —

Total ¥ 63,247 ¥ 18,399 ¥ 9,918 ¥ 27,935 ¥ 119,499 ¥ (18,467) ¥ 101,032

Segment profit ¥ 9,312 ¥ 2,005 ¥ 1,126 ¥ 5,315 ¥ 17,758 ¥ (342) ¥ 17,416Segment assets 87,151 19,894 8,320 47,439 162,804 (20,502) 142,302Other:

Depreciation and amortization 3,890 655 225 2,174 6,944 (113) 6,831Amortization of goodwill 24 — 58 — 82 — 82Amount of investment in equity of affiliates 131 (1) — — 130 — 130

Increase in property, plant, and equipment and intangible assets 5,007 918 167 1,563 7,655 (88) 7,567

OSG Corporation46

Millions of yen

Reportable SegmentReconciliations Consolidated

2013 Japan The Americas Europe Asia Total

SalesSales to external customers ¥ 41,922 ¥ 16,094 ¥ 7,828 ¥ 22,535 ¥ 88,379 — ¥ 88,379Intersegment sales or transfers 13,794 189 24 1,270 15,277 ¥ (15,277) —

Total ¥ 55,716 ¥ 16,283 ¥ 7,852 ¥ 23,805 ¥ 103,656 ¥ (15,277) ¥ 88,379

Segment profit ¥ 6,788 ¥ 1,644 ¥ 766 ¥ 4,212 ¥ 13,410 ¥ (583) ¥ 12,827Segment assets 90,710 17,332 8,037 40,934 157,013 (22,510) 134,503Other:

Depreciation and amortization 4,103 605 176 1,945 6,829 (112) 6,717Amortization of goodwill — — 59 31 90 — 90Amount of investment in equity of affiliates 117 8 — — 125 — 125

Increase in property, plant, and equipment and intangible assets 2,381 923 455 1,898 5,657 (103) 5,554

Thousands of U.S. dollars

Reportable SegmentReconciliations Consolidated

2014 Japan The Americas Europe Asia Total

SalesSales to external customers $ 395,424 $ 154,542 $ 83,720 $ 222,517 $ 856,203 — $ 856,203 Intersegment sales or transfers 140,568 1,381 331 14,220 156,500 $ (156,500) —

Total $ 535,992 $ 155,923 $ 84,051 $ 236,737 $ 1,012,703 $ (156,500) $ 856,203

Segment profit $ 78,915 $ 16,992 $ 9,542 $ 45,042 $ 150,491 $ (2,898) $ 147,593 Segment assets 738,568 168,593 70,509 402,025 1,379,695 (173,746) 1,205,949Other:

Depreciation and amortization 32,966 5,551 1,907 18,423 58,847 (957) 57,890Amortization of goodwill 203 — 492 — 695 — 695Amount of investment in equity of affiliates 1,110 (8) — — 1,102 — 1,102

Increase in property, plant, and equipment and intangible assets 42,432 7,780 1,415 13,246 64,873 (746) 64,127

Notes:1. The reconciliation amount for segment profit, segment assets, depreciation and increase in property, plant, equipment, and intangible assets is the

elimination of intersegment transactions.2. Segment profit is reconciled to operating income in the consolidated statement of income.

associated Information1. Information about products and services

Millions of yen

2014Taps End mills Drills and other Rolling dies Gauges Other Total

Sales to external customers ¥ 34,655 ¥ 22,886 ¥ 23,601 ¥ 9,166 ¥ 1,419 ¥ 9,305 ¥ 101,032

Millions of yen

2013Taps End mills Drills and other Rolling dies Gauges Other Total

Sales to external customers ¥ 28,924 ¥ 20,858 ¥ 20,725 ¥ 7,682 ¥ 1,232 ¥ 8,958 ¥ 88,379

Thousands of U.S. dollars

2014Taps End mills Drills and other Rolling dies Gauges Other Total

Sales to external customers $ 293,686 $ 193,949 $ 200,009 $ 77,678 $ 12,025 $ 78,856 $ 856,203

A n n ua l R e p o r t 2 0 1 4 47

2. Geographical information(1) Sales

Millions of yen

2014Japan USA Other Americas Europe China Other Asia Other Total

¥ 45,850 ¥ 13,351 ¥ 4,802 ¥ 9,998 ¥ 11,569 ¥ 15,461 ¥ 1 ¥ 101,032

Millions of yen

2013Japan USA Other Americas Europe China Other Asia Other Total

¥ 41,106 ¥ 11,355 ¥ 4,674 ¥ 7,881 ¥ 10,352 ¥ 13,007 ¥ 4 ¥ 88,379

Thousands of U.S. dollars

2014Japan USA Other Americas Europe China Other Asia Other Total

$ 388,559 $ 113,144 $ 40,695 $ 84,729 $ 98,042 $ 131,026 $ 8 $ 856,203

Note: Sales are classified by country or area based on the location of customers.

(2) Property, plant, and equipmentMillions of yen

2014Japan The Americas Europe Korea Other Asia Total

¥ 31,455 ¥ 5,145 ¥ 1,522 ¥ 7,983 ¥ 10,085 ¥ 56,190

Millions of yen

2013Japan The Americas Europe Korea Other Asia Total

¥ 29,859 ¥ 4,882 ¥ 1,471 ¥ 6,831 ¥ 9,425 ¥ 52,468

Thousands of U.S. dollars

2014Japan The Americas Europe Korea Other Asia Total

$ 266,568 $ 43,602 $ 12,898 $ 67,652 $ 85,466 $ 476,186

3. Information about goodwill and negative goodwill by reportable segmentMillions of yen

2014

Japan The Americas Europe Asia Corporate/Elimination Total

Amortization of goodwill ¥ 24 — ¥ 58 — — ¥ 82Amount of goodwill at November 30, 2014 — — ¥ 193 — — ¥ 193

Millions of yen

2013

Japan The Americas Europe Asia Corporate/Elimination Total

Amortization of goodwill — — ¥ 59 ¥ 31 — ¥ 90Amount of goodwill at November 30, 2013 — — ¥ 251 — — ¥ 251

Thousands of U.S. dollars

2014

Japan The Americas Europe Asia Corporate/Elimination Total

Amortization of goodwill $ 203 — $ 492 — — $ 695 Amount of goodwill at November 30, 2014 — — $ 1,636 — — $ 1,636

OSG Corporation48

The amount and amortization of negative goodwill allocated by business combinations completed before April 1, 2010, are as follows:Millions of yen

2014

Japan The Americas Europe Asia Corporate/Elimination Total

Amortization of negative goodwill — ¥ 2 — ¥ 16 — ¥ 18Amount of negative goodwill at November 30, 2014 — ¥ 9 — ¥ 48 — ¥ 57

Millions of yen

2013

Japan The Americas Europe Asia Corporate/Elimination Total

Amortization of negative goodwill — ¥ 2 — ¥ 16 — ¥ 18Amount of negative goodwill at November 30, 2013 — ¥ 11 — ¥ 64 — ¥ 75

Thousands of U.S. dollars

2014

Japan The Americas Europe Asia Corporate/Elimination Total

Amortization of negative goodwill — $ 17 — $ 136 — $ 153 Amount of negative goodwill at November 30, 2014 — $ 76 — $ 407 — $ 483

A n n ua l R e p o r t 2 0 1 4 49

Independent Auditor’s Report

OSG Corporation50 OSG Corporation50

(November 30, 2014)(February 21, 2015)

Board of Directors Investor Information

Corporate Data

Date Established:March 26, 1938

Capital:¥10,404,381,114

Headquarters:3-22, Honnogahara, Toyokawa, Aichi Prefecture 442-8543, Japan URL: http://www.osg.co.jp/ http://www.osg-global.jp/Telephone: (+81) 533-82-1113 Fax: (+81) 533-82-1131

Number of Employees:5,233 (Consolidated)

Number of Shares of Common Stock Issued and Outstanding:95,955,226 shares

Minimum Purchasing Unit of Shares:100 shares

Number of Shareholders:8,285

Transfer Agent for Shares:Sumitomo Mitsui Trust Bank, Limited

Major ShareholdersNumber of

Shares Held (Thousands)

Percent Ownership

(%)

The Master Trust Bank of Japan, Co., Ltd. (Trust Account) 3,661 3.86

OSG Agent Association 2,880 3.03

NORTHERN TRUST CO. (AVFC) ACCOUNT NON TREATY 2,652 2.79

State Street Bank and Trust Company 2,499 2.63

OSG Stock Holding Association 2,493 2.63

JUNiPER 2,324 2.45

Japan Trustee Services Bank, Ltd.(Trust Account) 2,316 2.44

The Nomura Trust and Banking Co., Ltd. (investment Trust Account) 2,281 2.40

Sumitomo Mitsui Banking Corporation 2,100 2.21

Toyota Motor Corporation 2,100 2.21

Stock Listings

Tokyo Stock Exchange, Nagoya Stock Exchange

Executive OfficersExecutive Officer Taeil Chung

Executive Officer Koji Takeo

Executive Officer Mike Grantham

Executive Officer Kazumasa Koike

Executive Officer Mitsuyoshi Hikosaka

Executive Officer Jeffrey Tennant

Executive Officer Yasutaka Yoneda

Executive Officer Hiromi Ohno

Executive Officer Hitoshi Masuoka

Directors

ChairmanChief Executive Officer Teruhide Osawa

PresidentChief Operating Officer Norio Ishikawa

Managing Director Masatoshi Sakurai

Managing Director Koji Sonobe

Managing Director Toru Endo

Managing Director Nobuaki Osawa

Managing Director Tetsuro Hayasaka

Managing Director Jiro Osawa

Managing Director Toshitaka Yoshizaki

Managing Director Hideaki Osawa

Director Takeo Nakagawa*1, *3

Corporate AuditorsStanding Corporate Auditor Gohei Osawa

Corporate Auditor Koji Kato

Corporate Auditor Hiroyuki Ohmori*2, *3

Corporate Auditor Kyoshiro Ono*2, *3

Corporate Auditor Yoshiyuki Sakaki*2, *3

*1 Outside Director*2 Outside Auditor*3 independent Executive

A n n ua l R e p o r t 2 0 1 4 51

OSG

Corporation Annual R

eport 2014

3-22, Honnogahara, Toyokawa, Aichi Prefecture 442-8543, JapanURL: http://www.osg.co.jp/

http://www.osg-global.jp/

Printed in Japan