Epson Annual Report 2017

Plain-text annual report

ANNUAL REPORT 2017 SEIKO EPSON CORPORATION April 2016 - March 2017 Cautionary Statement This report includes forward-looking statements that are based on management’s view from the information available at the time of the announcement. These statements are subject to various risks and uncertainties. Actual results may be materially different from those discussed in the forward-looking statements. The factors that may affect Epson include, but are not limited to, general economic conditions, the ability of Epson to continue to quickly introduce new products and services, consumption trends, competition, technology trends, and exchange rate fluctuations. In this annual report, “Epson” or the “Group” refers to the Epson Group, while “the Company” may refer to the Group or the parent company, Seiko Epson Corporation. 1 Table of Contents Consolidated Financial Highlights ............................................................................................................... 3 Information on the Company ....................................................................................................................... 7 1. Overview of the business group............................................................................................................ 7 2. Major equipment and facilities .......................................................................................................... 11 3. Overview of capital expenditures ....................................................................................................... 13 4. Plans for new additions or disposals .................................................................................................. 14 5. Major management contracts ............................................................................................................ 15 Risks Related to Epson’s Business Operations ......................................................................................... 16 Business Conditions ..................................................................................................................................... 22 1. Overview of business results ............................................................................................................... 22 2. Manufacturing, orders received and sales......................................................................................... 25 3. Analysis of financial condition, results of operations and cash flows ............................................. 26 4. Research and development activities ................................................................................................. 29 5. Mangement policy, business environment and issues to be addressed, etc. ................................... 31 6. Dividend policy .................................................................................................................................... 35 Corporate Governance ................................................................................................................................ 36 1. Approach to corporate governance .................................................................................................... 36 2. Details of audit remuneration ............................................................................................................. 51 3. Basic policy regarding company control ........................................................................................... 52 Management ................................................................................................................................................ 54 Index to Consolidated Financial Statements ............................................................................................. 57 Consolidated Statement of Financial Position ...................................................................................... 58 Consolidated Statement of Comprehensive Income ............................................................................. 60 Consolidated Statement of Changes in Equity ...................................................................................... 62 Consolidated Statement of Cash Flows .................................................................................................. 64 Notes to Consolidated Financial Statements ......................................................................................... 65 Report of Independent Auditors .......................................................................................................... 125 Additional Information ............................................................................................................................. 126 1. Principal subsidiaries and affiliates ................................................................................................. 126 2. Distribution of ownership among shareholders .............................................................................. 130 3. Major shareholders ........................................................................................................................... 131 4. Employee stock ownership plans ..................................................................................................... 133 5. Epson stock price ............................................................................................................................... 135 6. Corporate data and investor information ....................................................................................... 136 2 Consolidated Financial Highlights Seiko Epson Corporation and Subsidiaries For the years ended March 31 Statement of Comprehensive Income Revenue Information-related equipment business segment Devices and precision products business segment Sensing and industrial solutions business segment Other Adjustments Printing Solutions business segment Visual Communications business segment Wearable & Industrial Products business segment Other Adjustments Gross profit Selling, general and administrative expenses Profit from operating activities Profit before tax Profit for the period attributable to owners of the parent company Total comprehensive income for the period Statement of Cash Flows Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Free cash flows Net cash provided by (used in) financing activities Statement of Financial Position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Equity attributable to owners of the parent company IFRS Millions of yen 2014 2015 2016 2017 Thousands of U.S. dollars 2017 1,008,407 1,086,341 1,092,481 1,024,856 9,135,003 841,228 907,296 148,779 156,297 16,174 23,396 1,333 891 1,390 (2,038) - - - - - - - - - - - - - - - - - - - - 730,867 736,369 686,619 6,120,154 177,186 184,033 179,682 1,601,586 173,478 170,415 158,548 1,413,209 1,390 3,418 1,404 257 1,509 (1,502) 13,450 (13,396) 362,589 395,924 397,660 365,974 3,262,091 (272,501) (294,648) (312,708) (300,167) (2,675,523) 79,549 77,977 84,203 131,380 132,536 112,560 94,026 91,530 45,772 67,892 67,470 48,320 605,151 601,390 430,698 120,480 145,483 (1,469) 55,982 498,992 114,859 108,828 113,054 96,873 863,472 (41,244) (32,735) (51,558) (75,759) (675,274) 73,615 76,093 61,495 21,114 188,198 (56,567) (55,392) (67,171) (26,691) (237,908) 560,645 348,245 908,890 336,087 208,045 362,371 650,383 355,898 1,006,282 355,442 153,531 494,325 601,451 339,888 941,340 325,019 145,644 467,818 602,446 371,940 974,387 351,389 128,275 5,369,872 3,315,278 8,685,150 3,132,088 1,143,382 492,196 4,387,164 3 IFRS Millions of yen 2014 2015 2016 2017 Thousands of U.S. dollars 2017 235.35 235.35 50.00 314.61 314.61 115.00 127.94 127.94 60.00 136.82 136.82 60.00 1,012.83 1,381.66 1,307.58 1,397.40 1.22 1.22 0.52 12.46 39.9 49.1 49.7 50.5 27.7 26.3 9.2 7.9 13.7 12.1 55,104 52,010 13,723 12,787 1,197 1,246 - - - - - - 252 2,895 73,171 306 3,529 69,878 9.5 9.7 8.6 - - - 10.1 7.1 6.6 - - - 41,051 44,789 10,041 10,973 13,312 340 2,861 67,605 13,092 337 3,229 72,420 Per Share Data (yen and U.S. dollars) Basic earnings per share (Note2) Diluted earnings per share (Note2) Cash dividends per share (Note4) Equity attributable to owners of the parent company, per share (Note2) Financial Ratios (%) Equity attributable to owners of the parent company, ratio ROE (Profit for the period attributable to owners of the parent company / Beginning and ending balance average equity attributable to owners of the parent company) ROA (Profit from operating activities / Beginning and ending balance average total assets) ROS (Profit from operating activities / Revenue) Number of Employees Information-related equipment business segment Devices and precision products business segment Sensing and industrial solutions business segment Printing Solutions business segment Visual Communications business segment Wearable & Industrial Products business segment Other Corporate Total Notes 1. The Consolidated Financial Statements have been prepared on the basis of International Financial Reporting Standards (IFRS) from the year ended March 31, 2014. 2. Seiko Epson Corporation (the “Company”) completed the Company’s ordinary shares split with an effective date of April 1, 2015. As a result, each share of the Company’s ordinary shares was split into two shares. Basic earnings per share, diluted earnings per share and equity attributable to owners of the parent company, per share were calculated under the assumption that the shares split took effect at the beginning of the year ended March 31, 2014. 3. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥112.19 = U.S. $1 as of March 31, 2017. 4. In this table, cash dividends per share refers to the amount paid for each share in each fiscal year. 5. Equity attributable to owners of the parent company is equity excluding non-controlling interest in subsidiaries. 4 For the years ended March 31 Statements of Income Net sales Information-related equipment business segment Devices and precision products business segment Other Eliminations and corporate Information-related equipment business segment Devices and precision products business segment Sensing and industrial solutions business segment Other Eliminations and corporate Gross profit Selling, general and administrative expenses Operating income Ordinary income Income (loss) before income taxes and minority interests Profit (loss) attributable to owners of parent Research and development costs Capital expenditures Depreciation and amortization Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Free cash flows Net cash provided by (used in) financing activities JGAAP Millions of yen 2013 2014 851,297 1,003,606 688,029 156,872 1,273 5,122 - - - - 685,862 836,436 140,790 148,956 11,413 16,181 1,273 11,957 234,439 213,184 21,255 17,629 (3,479) (10,091) 49,923 43,155 39,320 1,334 699 322,976 238,007 84,968 78,121 71,916 83,698 50,531 37,825 38,725 42,992 111,253 (39,511) 3,480 21,298 (39,519) 71,733 (56,567) 5 Balance Sheet Current assets Property, plant and equipment (net of accumulated depreciation) Total assets Current liabilities Non-current liabilities Net assets Number of Employees Information-related equipment business segment Devices and precision products business segment Sensing and industrial solutions business segment Other Corporate Total Per Share Data (Yen) Earnings per share (Note1) Cash dividends per share (Note3) Net assets per share (Note1) Financial Ratios (%) Shareholders’ equity ratio ROE (net income (loss) / average shareholders’ equity at beginning and end of year) ROA (ordinary income / average total assets at beginning and end of year) ROS (operating income / net sales) JGAAP Millions of yen 2013 2014 519,457 217,388 778,547 326,688 193,052 258,806 602,452 216,170 865,872 313,636 200,505 351,730 50,823 55,104 13,859 13,723 - 241 3,838 68,761 (56.41) 20.00 1,435.20 33.0 (4.0) 2.3 2.5 1,197 252 2,895 73,171 233.94 50.00 976.41 40.3 27.6 9.5 8.5 Notes 1. Seiko Epson Corporation (the “Company”) completed the Company’s ordinary shares split with an effective date of April 1, 2015. As a result, each share of the Company’s ordinary shares was split into two shares. Earnings per share and net assets per share were calculated under the assumption that the shares split took effect at the beginning of the year ended March 31, 2014. 2. Ordinary income is a common item on financial statements in Japan, which is calculated by adding to or subtracting from operating income items such as interest income, rent income, interest expenses and foreign exchange gains or losses. 3. In this table, cash dividends per share refers to the amount paid for each share in each fiscal year. 4. Shareholders’ equity is net assets excluding minority interests. 6 Information on the Company 1. Overview of the business group Epson is primarily engaged in developing, manufacturing, selling, and providing services for products in the printing solutions, visual communications, wearable and industrial products, and the other business. Epson is organized into operations divisions that come under global consolidated management. The majority of advanced R&D and product development is conducted in Japan (by Corporate R&D and R&D organizations in the various operations divisions), while manufacturing and sales activities are conducted around the world by Epson Group manufacturing and sales companies, both in Japan and abroad. A brief description of Epson’s various businesses is provided below along with a list of the main Epson Group companies involved in each segment. Printing Solutions Business Segment This segment comprises the printer business, professional printing business, and others. The businesses in this segment leverage Epson’s original Micro Piezo and other technologies to develop, manufacture, and sell products. The main activities of these businesses are described below. Printer business This business is primarily responsible for home and office inkjet printers, serial impact dot matrix (SIDM) printers, page printers, color image scanners, and related consumables, as well as office papermaking systems. Professional printing business This business is primarily responsible for large-format inkjet printers, industrial inkjet printing systems, printers for use in POS systems, label printers, and related consumables. Others This business sells PCs in the Japanese market through a domestic subsidiary. 7 The major Epson Group companies involved in this segment are listed in the table below. Business area Main products Main Epson Group companies Manufacturing companies Sales companies Printers Inkjet printers, serial impact dot matrix printers, page printers, color image scanners, and related consumables, office papermaking systems Professional printing Large-format inkjet printers, industrial inkjet printing systems, printers for use in POS systems, label printers, and related consumables, and others Tohoku Epson Corporation Akita Epson Corporation Epson Portland Inc. Epson Telford Ltd. Fratelli Robustelli S.r.l. Tianjin Epson Co., Ltd. Epson Engineering (Shenzhen) Ltd. P.T. Epson Batam P.T. Indonesia Epson Industry Epson Precision (Philippines), Inc. Others PCs and other equipment — Epson Sales Japan Corporation Epson America, Inc. Epson Europe B.V. Epson (U.K.) Ltd. Epson Deutschland GmbH Epson France S.A. Epson Italia S.p.A. For.Tex S.r.l. Epson Iberica, S.A. Epson (China) Co., Ltd. Epson Korea Co., Ltd. Epson Hong Kong Ltd. Epson Taiwan Technology & Trading Ltd. Epson Singapore Pte. Ltd. P.T. Epson Indonesia Epson (Thailand) Co., Ltd. Epson Philippines Corporation Epson Australia Pty. Ltd. Epson India Pvt. Ltd. Epson Sales Japan Corporation Epson Direct Corporation Visual Communications Business Segment The businesses in this segment leverage Epson’s original microdisplay and projection technologies to develop, manufacture, and sell 3LCD projectors for business, education, and the home; high-temperature polysilicon TFT LCD panels for 3LCD projectors; and smart eyewear. The major Epson Group companies involved in this segment are listed in the table below. Business area Main products Main Epson Group companies Manufacturing companies Sales companies Visual communications 3LCD projectors, high-temperature polysilicon TFT LCD panels for 3LCD projectors, smart eyewear, and others Epson Engineering (Shenzhen) Ltd. Epson Precision (Philippines), Inc. Epson Sales Japan Corporation Epson America, Inc. Epson Europe B.V. Epson (U.K.) Ltd. Epson Deutschland GmbH Epson France S.A. Epson Italia S.p.A. Epson Iberica, S.A. Epson (China) Co., Ltd. Epson Korea Co., Ltd. Epson Hong Kong Ltd. Epson Taiwan Technology & Trading Ltd. Epson Singapore Pte. Ltd. P.T. Epson Indonesia Epson (Thailand) Co., Ltd. Epson Philippines Corporation Epson Australia Pty. Ltd. Epson India Pvt. Ltd. 8 Wearable & Industrial Products Business Segment This segment comprises the wearable products business, robotics solutions business, and the microdevices business. The main activities of these businesses are described below. Wearable products business This business leverages its ultrafine and ultraprecision machining and processing technologies and its high-density mounting and assembly technologies to develop, manufacture and sell watches, as well as to develop, manufacture and sell useful products that use high-accuracy sensors to connect people and information. Watch business This business primarily develops, manufactures, and sells watches and watch movements. Effective April 1, 2017, Seiko Epson succeeded to the watch sales operations (excluding domestic sales operations in Japan) of Orient Watch Co., Ltd. via an absorption-type company split. Epson Sales Japan Corporation, a consolidated subsidiary of Seiko Epson, succeeded to the domestic sales operations of Orient Watch Co., Ltd. Sensing equipment business This business is primarily engaged in developing, manufacturing, and selling sensing equipment that have extremely accurate built-in sensors and that are used in the personal health and sports fields etc. Robotics solutions business This business uses advanced precision mechatronics and other technologies to develop, manufacture, and sell industrial robots, IC handlers and other production systems that dramatically increase productivity. Micro-devices and others business This business designs, manufactures, and sells small, accurate, energy-efficient electronic devices for external customers as well as for other businesses in the Epson Group. It also provides metal powders and surface finishing services. Quartz device business This business provides crystal units, crystal oscillators, and quartz sensors for consumer, automotive, and industrial equipment applications. Semiconductor business This business provides CMOS LSIs and other chips mainly for consumer electronics and automotive applications. Others This business develops, manufacturers, and sells a variety of high-performance metal powders for use as raw materials in the production of electronic components, etc. This business also provides high-value-added surface finishing in a wide variety of industrial fields. 9 The major Epson Group companies involved in this segment are listed in the table below. Business area Main products Main Epson Group companies Manufacturing companies Sales companies Wearable products Watches Wristwatches, watch movements, and others Akita Epson Corporation Epson Precision (Shenzhen) Ltd. Orient Watch (Shenzhen) Ltd. Epson Precision (Johor) Sdn. Bhd. Orient Watch Co., Ltd. Epson Hong Kong Ltd. Sensing equipment Akita Epson Corporation Epson Sales Japan Corporation Robotics solutions Industrial robots, IC handlers, and others Epson Engineering (Shenzhen) Ltd. Microdevices and others Quartz devices Crystal units, crystal oscillators, quartz sensors, and others Miyazaki Epson Corporation Epson Precision Malaysia Sdn. Bhd. Semiconductors CMOS LSIs, and others Tohoku Epson Corporation Singapore Epson Industrial Pte. Ltd. Others Metal powders, surface finishing Epson Atmix Corporation Singapore Epson Industrial Pte. Ltd. Epson Sales Japan Corporation Epson America, Inc. Epson Deutschland GmbH Epson (China) Co., Ltd. Epson Hong Kong Ltd. Epson Taiwan Technology & Trading Ltd. Epson Electronics America, Inc. Epson Europe Electronics GmbH Epson Hong Kong Ltd. Epson Taiwan Technology & Trading Ltd. Epson Singapore Pte. Ltd. Other Business Segment This segment comprises the businesses of Epson Group companies that offer services for and within the Epson Group. 10 2. Major equipment and facilities Epson’s major equipment and facilities are as follows. (1) Seiko Epson Corporation Name of plant (location) Business segment Type of facilities As of March 31, 2017 Book value (Millions of yen) Buildings and structures Machinery, equipment and vehicles Land (Area: m2) Other Total Number of employees (Persons) 1,201 (42,383) [2,136] – (–) 6,098 (198,152) [32,746] 3,764 (179,759) [1,758] 749 (75,912) [32,092] 1,443 (113,082) [28,909] 1,375 (160,528) 129 (39,943) [1,502] 1,996 (247,143) 2,177 (538,828) 7,627 (36,245) 1,047 (41,836) [5,764] 72 2,876 509 87 795 86 3,688 44,017 5,415 48 5,165 653 1,760 6,291 1,436 1,216 23,080 1,068 1,027 6,506 208 260 4,197 444 855 11,748 1,070 650 14,282 60 10,543 331 6,083 23 216 689 Head Office (Suwa-shi, Nagano) Tokyo Office (Shinjuku-ku, Tokyo) Hirooka Office (Shiojiri-shi, Nagano) Matsumoto Minami Plant (Matsumoto-shi, Nagano) Toyoshina Plant (Azumino-shi, Nagano) Suwa Minami Plant (Fujimi-machi, Suwa-gun, Nagano) Chitose Plant (Chitose-shi, Hokkaido) Ina Plant (Minowa-machi, Kamiina-gun, Nagano) Overall administration and other Overall administration and other Printing solutions Other Other facilities 1,450 151 Other facilities 708 – Printer development and design and component manufacturing facilities Research and development facilities 16,297 17,933 Other Other facilities 1,308 43 Visual communications Wearable & Industrial products Printing solutions Visual communications Other 3LCD projector, smart eyewear and factory automation development and design facilities Printer component and liquid crystal panel manufacturing facilities Research and development facilities 2,619 1,162 6,070 14,349 Visual communications Liquid crystal panel manufacturing facilities 2,030 2,072 Wearable & Industrial products Crystal device development and design facilities 1,849 1,958 Fujimi Plant (Fujimi-machi, Suwa-gun, Nagano) Wearable & Industrial products Other Wearable & Industrial products Wearable & Industrial products Sakata Plant (Sakata-shi, Yamagata) Hino Office (Hino-shi, Tokyo) Shiojiri Plant (Shiojiri-shi, Nagano) Sensing equipment and semiconductor development and design facilities Research and development facilities Semiconductor manufacturing facilities Other 6,948 1,948 7,256 4,197 Sales facilities 2,854 0 Wearable & Industrial products Watch development, design and manufacturing facilities 1,693 3,010 11 (2) Domestic subsidiaries Company name (location) Business segment Type of facilities As of March 31, 2017 Book value (Millions of yen) Buildings and structures Machinery, equipment and vehicles Land (Area: m2) Other Total Number of employees (Persons) Tohoku Epson Corporation (Sakata-shi, Yamagata) Printing solutions Wearable & Industrial products Printer component and semiconductor manufacturing facilities Akita Epson Corporation (Yuzawa-shi, Akita) Printing solutions Wearable & Industrial products Printer component, watch movements and sensing equipment manufacturing facilities 1 17 5,289 139 Epson Atmix Corporation (Hachinohe-shi, Aomori) Wearable & Industrial products Manufacturing facilities for metal powders, etc. 2,911 2,070 – (–) 650 (65,436) 409 (30,653) [34,208] 905 924 1,986 708 6,787 953 159 5,550 262 (3) Overseas subsidiaries Company name (location) Business segment Type of facilities As of March 31, 2017 Book value (Millions of yen) Buildings and structures Machinery, equipment and vehicles Land (Area: m2) Other Total Number of employees (Persons) Epson Engineering (Shenzhen) Ltd. (Shenzhen, China) Printing solutions Visual communications Wearable & Industrial products Singapore Epson Industrial Pte. Ltd. (Singapore) Printing solutions Wearable & Industrial products Printer, 3LCD projector and factory automation manufacturing facilities Printer consumables, watch component and semiconductor manufacturing facilities and surface finishing facilities 3,078 3,556 3,839 7,601 – (–) [64,104] 52 (41,065) [54,094] 3,710 10,345 9,329 1,086 12,580 5,716 6,021 4,935 Printing solutions Printer manufacturing facilities Printing solutions Visual communications P.T. Indonesia Epson Industry (Bekasi, Indonesia) Epson Precision (Philippines), Inc. (Lipa, Philippines) Epson Precision Malaysia Sdn. Bhd. (Kuala Lumpur, Malaysia) Notes 1. The above figures do not include consumption tax. 2. “Other” under the book value column includes tools, furniture and fixtures and other property, plant and – (–) [254,871] 513 (100,000) [130,000] Crystal device manufacturing facilities Printer and 3LCD projector manufacturing facilities Wearable & Industrial products 297 (32,437) 7,646 18,602 3,385 15,719 3,529 2,634 3,354 8,290 397 25 11,167 10,861 1,686 equipment, but does not include construction in progress. 3. Portions of land are leased from companies not included in consolidated accounts. The size of each area of leased land is indicated in brackets [ ]. 4. Tohoku Epson Corporation uses a portion of the facilities of the Sakata Plant. 5. Figures for Singapore Epson Industrial Pte. Ltd. and Epson Precision (Philippines), Inc., are included in consolidated business results. 6. The above book value amounts are after adjustments for consolidated accounts. 12 3. Overview of capital expenditures Capital expenditures for the fiscal year under review were concentrated in key strategic areas, primarily new products, increasing of production capacity, rationalizing, upgrading and maintaining equipment and facilities to help foster the development of new businesses and prepare for future growth. In addition, Epson continued to carefully select investments and efficiently utilize existing facilities in an effort to generate stable cash flow. As a result of these efforts, total capital expenditures (including property, plant and equipment, software and lease rights) amounted to ¥75.3 billion. No equipment with significant impact on production capacity was sold or removed. Capital expenditures in each business segment are discussed below. Printing solutions segment Investment used for commercializing new products such as printers, and for increasing of production capacity, rationalizing, upgrading and maintaining equipment and facilities amounted to ¥43.9 billion in the fiscal year under review. Visual communications segment Investment used for commercializing new products such as 3LCD projectors, and for rationalizing, upgrading and maintaining equipment and facilities amounted to ¥10.2 billion in the fiscal year under review. Wearable & Industrial products segment Investment used for commercializing new products such as watches, sensing equipment, factory automation products, crystal devices and semiconductors, and for rationalizing, upgrading and maintaining equipment and facilities amounted to ¥9.1 billion in the fiscal year under review. Other and overall Investment in R&D and other activities amounted to ¥11.9 billion in the fiscal year under review. 13 4. Plans for new additions or disposals Epson plans to allocate ¥76.0 billion to capital expenditures for the fiscal year ending March 31, 2018. Business segment Planned amount of capital expenditures (100 million yen) Main type and purpose of equipment and facilities Printing solutions Visual communications Wearable & Industrial products Other and overall 430 130 100 Commercializing new products; increasing of production capacity, rationalizing, upgrading and maintaining equipment and facilities, etc. Commercializing new products; increasing of production capacity, rationalizing, upgrading and maintaining equipment and facilities, etc. Commercializing new products; rationalizing, upgrading and maintaining equipment and facilities, etc. 100 Investment in research and development, etc. Total 760 – Notes 1. The above amounts do not include consumption tax. 2. Required funds will be covered by current funds in hand. 3. There are no plans to dispose of or sell major equipment and facilities with the exception of disposals and sales associated with regular and ongoing upkeep of equipment and facilities. 14 5. Major management contracts (1) Reciprocal technical assistance agreements Name of contracting company Name of other party Country Type of contract Contract period Seiko Epson Corporation Hewlett-Packard Company Seiko Epson Corporation International Business Machines Corporation U.S.A. U.S.A. Seiko Epson Corporation Seiko Epson Corporation Seiko Epson Corporation Microsoft Corporation U.S.A. Eastman Kodak Company U.S.A. Xerox Corporation U.S.A. Seiko Epson Corporation Texas Instruments Incorporated U.S.A. Canon Incorporated Japan Seiko Epson Corporation (2) Others License to use patents relating to information-related equipment License to use patents relating to information-related equipment License to use patents relating to information-related equipment and software used by such equipment License to use patents relating to information-related equipment License to use patents relating to electrophotography and inkjet printers License to use patents relating to semiconductors and information-related equipment License to use patents relating to information-related equipment May 1, 2012 until the expiry of the patents April 1, 2006 until the expiry of the patents September 29, 2006 until the expiry of the patents October 1, 2006 until the expiry of the patents March 31, 2008 until the expiry of the patents April 1, 2008 until March 31, 2018 August 22, 2008 until the expiry of the patents No major management contracts were decided or concluded during the fiscal year under review other than those stated in (1) above. On November 30, 2016, the Company and its consolidated subsidiary Epson Imaging Devices Corporation (EID) agreed on the absorption-type merger of EID and concluded a merger contract with the effective date of February 1, 2017. On January 31, 2017, the Company and its consolidated subsidiary Orient Watch Co., Ltd. (“Orient Watch”) agreed that the Company would succeed the watch sales business (excluding the Japan domestic sales business, etc.) of Orient Watch by an absorption-type split and concluded a company split contract with the effective date of April 1, 2017. The domestic sales business of Orient Watch was succeeded by Epson Sales Japan Corporation, another consolidated subsidiary of the Company. 15 Risks Related to Epson’s Business Operations At present, we have identified the following significant factors as risks that could have a materially adverse effect on our future business, financial condition or operating results and that should thus be taken into account by investors. We strive to recognize, prevent, and control potential risks and to address risks that materialize. Also, all forward-looking statements hereunder were made at Epson’s discretion as of the date this Annual Report was submitted. 1. Our financial performance could be adversely affected by fluctuations in printer sales. The ¥ 686.6 billion in revenue in the printing solutions segment in the year ended March 2017 accounted for slightly less than 70% of Epson’s ¥ 1,024.8 billion in consolidated revenue. Inkjet printers (including printer consumables) for the home, office, and for commercial and industrial applications accounted for a large majority of our revenue and profit. Consequently, a decrease in revenue from printers and printer consumables could have a materially adverse effect on our operating results. 2. Our financial performance could be adversely affected by competition. Adverse effects of competition on sales All of our products, including our core printer and projector products, are subject to the effects of vigorous competition, which could cause, among other things, prices to fall, demand to shift toward lower-priced products, and unit shipments to decline. We are taking strategic action to address the risk of declines in prices, a shift of demand toward lower-priced products, and unit shipments. On one hand, we must provide products tailored to customer needs in each market along with high-value products and services. On the other hand, we must reduce manufacturing costs by increasing design and development efficiency and by reducing fixed costs. However, there is no assurance we will succeed in these efforts, and if we are unable to effectively counteract downward pressure on prices, our operating results could be adversely affected. Adverse effects of competition on technology Some of the products that we sell contain technology that places Epson in competition against other companies. For example: - The Micro Piezo technology1 that we use in our inkjet printers competes with the thermal inkjet technologies2 of other companies; - The 3LCD technology3 that we use in our projectors competes with other companies’ DLP technologies4, and Epson’s projectors also compete against flat panel displays (FPDs)5 of other companies. We believe that the technologies we use in these products have competitive advantage over the alternative technologies of other companies. However, if consumer opinion with respect to our technologies changes, or if other revolutionary technologies appear on the market and compete with our technologies, we could lose our competitive advantage in technology and our operating results could be adversely affected. 1 Micro Piezo technology is an inkjet technology created by Epson that manipulates piezoelectric elements to fire small droplets of ink from nozzles. 2 Thermal inkjet technology (also known as bubble-jet technology) is a printer technology in which the ink is heated to create bubbles and the pressure from the bubbles is used to fire the ink. 3 3LCD technology uses high-temperature polysilicon TFT liquid-crystal panels as light valves. The light from the light source is divided into the three primary colors (red, green and blue) using special mirrors, the picture is created on separate LCDs for each color, and then the picture is recombined without loss and projected on the screen. 4 DLP technology uses a digital micro-mirror device (DMD) as a display device. A DMD is a semiconductor on which a large number of micro mirrors are arranged, each mirror directing light onto its own individual pixel. An image is formed by the light from the light source being reflected from the mirrors onto the screen. DLP and DMD are registered trademarks of Texas Instruments Incorporated. 5 FPD encompasses a variety of thin electronic display technologies. The emergence of new competitors We presently face competition from powerful companies that have advanced technological capabilities, abundant financial resources, or strong financial compositions. We also face competition from companies around the world that have market recognition, strong supply capacities, or the ability to compete on price. There is, therefore, a 16 possibility that other companies could use their brand power, technological strength, ability to procure funds, marketing power, sales skills, low-cost production ability, or other advantages to enter business areas where we are active. 3. Sudden changes in the business environment could affect Epson. Epson seeks to drive inkjet innovation, visual innovation, wearables innovation, and robotics innovation. We are looking to achieve our vision for each business by providing value to customers in the form of smart technologies, environmental benefits, and functional performance. Epson is executing plans and strategies based on a long-range corporate vision and a mid-range business plan that we believe will enable us to establish a competitive advantage in technology, which we believe will be crucial for increasing our competitiveness. We are driving further advances in our original core technologies, including Micro Piezo inkjet technology, microdisplays, sensing, and robotics, all of which arose from the efficient, compact, and precision technologies that have become a source of Epson’s strength over many decades. By combining these technologies to create platforms, we are developing, manufacturing, and selling products and providing services that match customer needs. However, in the product markets and businesses where Epson is concentrating its management resources the pace of technological innovation is typically rapid, and product life cycles are short. In addition, demand and investment trends in Epson’s major markets could change along with global economic conditions and could affect sales of Epson products. Moreover, there is no guarantee that Epson’s current mid-range business plan, business strategies, and actions specified therein will succeed or be realized. Epson will also strive to make rapid and smooth transition from existing products to new products by understanding market and customer needs, investing and conducting research and development from a medium- and long-range view based on product market forecasts, and creating development and design platforms. However, if Epson cannot suitably respond to technological innovations in its main markets, or if competition with other companies intensifies, or if economic downturns or other factors prevent a recovery in demand, or if Epson is unable to adequately meet sudden fluctuations in demand in a major market, its operating results could be adversely affected. 4. Our revenue and earnings could be adversely impacted by sales of third-party inkjet printer consumables. Ink cartridges etc., which comprise the bulk of consumables sold for inkjet printers, are an important source of revenue and profit for Epson. However, third parties also supply ink cartridges and other inkjet printer consumables that can be used in Epson printers. These alternative products are typically sold for less than genuine Epson brand consumables and are more prevalent in emerging markets compared to the markets of developed countries. To counter sales of third-party consumables for inkjet printers, we must emphasize the quality of genuine Epson products and must look to continuously realize customer value by further enhancing customer convenience with inkjet printers tailored to the needs of customers in each market. Printer models equipped with high-capacity ink tanks are an example of such products. We also take legal measures if any of the patent rights or trademark rights we hold over our ink cartridges are infringed upon. However, there is no assurance that any of these efforts will be effective, and if our ink cartridge revenue and profit declines because unit shipments of Epson brand ink cartridges shrink as sales of third-party alternative products expand and as we lose market share, or if we must lower the prices of Epson brand products to stay competitive, our operating results could be adversely affected. 5. Expanding businesses overseas entails risks for Epson. We continue to expand our businesses overseas, and overseas revenue accounted for approximately 75% of our consolidated revenue for the business year ended March 2017. We have production sites all over Asia, including China, Indonesia, Singapore, Malaysia and the Philippines, as well as in the United States, the United Kingdom, and other countries. We have also established many sales companies all over the world. As of the end of March 31, 2017, our overseas employees accounted for more than 70% of our total workforce. We believe that our global presence provides many advantages. For example, it enables us to undertake marketing activities aligned with the market needs of individual regions. It also makes us cost-competitive by reducing manufacturing costs and lead times. There are, however, unavoidable risks associated with overseas manufacturing and sales operations. There are, however, unavoidable risks associated with overseas manufacturing and sales operations. These include but are not limited to changes in national laws, ordinances, or regulations related to manufacturing and sales; social, political or economic changes; transport delays; damage to infrastructure such as electrical power and communications; currency exchange restrictions; insufficient skilled labor; changes in regional 17 labor environments; changes in tax systems overseas and uncertainty with regard to tax administration by tax authorities; protectionist trade regulations; geopolitical risks; and laws, ordinances, regulations or the like that could affect the import and export of Epson products. 6. Procuring products from certain suppliers entails risks for Epson. We procure some parts and materials from third parties, but we generally conduct ongoing transactions without entering into long-term purchase agreements. We try to have multi-source relating to parts and materials. However, certain parts and materials are procured from a single source because procuring them from an alternative supplier is not possible. We must have procurement operations that are stable and efficient, so we work with our suppliers to maintain product quality, improve products, and reduce costs. However, if our manufacturing and sales activities were to be disrupted due to things such as supplier’s parts shortages or supplier’s quality problems, our operating results could adversely be affected. 7. Problems could arise relating to quality issues. The existence of quality guarantees on Epson products and the details of those guarantees differ from one customer account to another, depending on the agreement we have entered into with them. If an Epson product is defective or does not conform to the required standard, it may have to be replaced or repaired or otherwise reworked at Epson’s expense. Or, if the product causes personal injury or property damage, we could bear product liability or hold other liability. We could also be liable to a customer and could incur expenses for repairs or corrections on the grounds that we did not adequately display or explain an Epson product’s features or performance. Furthermore, product quality problems could cause loss of trust in Epson products, and we could lose major accounts or see a drop in demand for our products, any of which might adversely affect our operating results. 8. Epson’s intellectual property rights activities expose Epson to certain risks. Patent rights and other intellectual property rights are extremely important for maintaining our competitiveness. We have independently developed many of the technologies we need, and we acquire patent rights, trademark rights, and other forms of intellectual property rights for them both in Japan and overseas. We also license the intellectual property rights for products and technologies by entering into agreements with other companies. We must strengthen our intellectual property portfolio by placing personnel in key positions to manage our intellectual property. If any of the situations envisioned below relating to intellectual property were to occur, our operating results could adversely be affected. - An objection might be raised to, or an application to invalidate might be filed with respect to, an intellectual property right of Epson, and as a result, that right might be recognized as invalid. - A third party to whom we originally had not granted a license could come to possess a license as a result of a merger with or acquisition by another party, potentially causing us to lose the competitive advantage conferred by that intellectual property. - New restrictions could be imposed on an Epson business as a result of a buyout or a merger with a third party, - and we could be forced to spend money to find a solution to those restrictions. Intellectual property rights that we hold might not give us a competitive advantage, or we might not be able to use them effectively. - We or any of our customers could be accused by a third party of infringing on intellectual property rights, which could force us to spend a large amount of time and money to resolve this and associated issues, or which could interfere with our efforts to focus our management resources. If a third-party’s claim of intellectual property right infringement were to be upheld, we could incur material damage if required to pay large amounts in compensation or royalties or if forced to stop using the applicable technology. - - A suit could be brought against Epson by an employee or other person seeking remuneration for an invention or the like, potentially forcing us to spend significant time and money to resolve the issue and, depending on the outcome, potentially requiring us to pay a large sum as remuneration. 9. Epson is vulnerable to environmental risks. Epson is subject, both in Japan and overseas, to various environmental regulations concerning industrial waste and emissions into the atmosphere that arise from manufacturing processes. In addition, with heightened concern about the response to global climate change accompanying the Paris Agreement, which was adopted at the 21st 18 Conference of the Parties to the United Nations Framework Convention on Climate Change, companies increasingly need to set more ambitious goals for emissions reductions and strive to accomplish these goals. Given this situation, Epson is proactively engage in environmental conservation efforts on multiple fronts in line with a mid-range action plan and “Environmental Vision 2050,” a document that states our long-term goals for reducing our CO2 emissions and other environmental impacts. For example, we have programs to develop and manufacture products that have a small environmental footprint. We also have programs to reduce energy use, promote the recovery and recycling of end-of-life products, ensure compliance with international substance regulations (primarily the RoHS Directive and REACH regulations in the EU), and improve environmental management systems. As a result of these efforts, Epson has reduced its CO2 emissions for the 2016 fiscal year to 590,000 tons. This represents an approximately 38% reduction since the 2006 fiscal year, which is the baseline year in “Environmental Vision 2050.” We have not had any serious environmental issues to date. In the future, however, it is possible that an environmental problem could arise that would require us to pay damages and/or fines, bear costs for cleanup, or force a halt of production. Moreover, new regulations could be enacted that would require major expenditures, and, if such a situation should occur, Epson’s operating results could be adversely affected. 10. Epson faces risks concerning the hiring and retention of personnel. We must hire and retain talented personnel both in Japan and overseas to develop advanced new technologies and manufacture advanced new products, but the competition for such personnel is becoming increasingly intense. We must hire and retain talented personnel by, for example, introducing compensation and benefit packages that are commensurate with roles and by proactively promoting people with the right skills overseas. If we are unable to continue to hire and keep enough of such employees, or if we are unable to pass along technologies and skills, we could find it difficult or impossible to execute our business plans. 11. Fluctuations in foreign currency exchanges create risks for Epson. A significant portion of our revenue is denominated in U.S. dollars or the euro. We expanded our overseas procurement and moved our production sites overseas, so our dollar-denominated expenses currently exceed our dollar-denominated revenue. On the other hand, our euro-denominated revenue is still significantly greater than our euro-denominated expenses. On the whole, our revenues in other foreign currencies also significantly exceed our expenses in those currencies. Also, although we use currency forwards and other means to hedge against the risks inherent in foreign currency exchanges, unfavorable movements in the exchange rates of foreign currencies such as the U.S. dollar, euro, or other foreign currencies against the yen could adversely affect our financial situation and financial results. 12. There are risks inherent in pension systems. We have a defined-benefit pension plan and a lump-sum payment on retirement as defined-benefit plans. We revised the defined-benefit retirement pension plan in April 2014 in response to a drop in the rate of return on pension assets and an increase in the number of beneficiaries. The revisions are designed to enable us to adapt to future market changes and maintain stable operations into the future. However, if there is a change in the operating results of the pension assets or in the ratio used as the basis for calculating retirement allowance liabilities, our financial position and operating results could be adversely affected. 13. Epson is vulnerable to proceedings relating to antitrust laws and regulations. With business operations that span the globe, Epson is subject in Japan and overseas to proceedings relating to antitrust laws and regulations, such as those prohibiting private monopolies and those protecting fair trade. Overseas authorities sometimes investigate or gather information on certain industries and, in conjunction with this, Epson’s market conditions and sales methods may come under investigation. Such investigations and proceedings, or violations of applicable statutes, could interfere with our sales activities. They could also potentially damage Epson’s credibility or result in a large civil fine. Any of these could adversely affect our operating results. Seiko Epson is currently under investigation by some competition authorities regarding allegations of involvement in a liquid crystal display price-fixing cartel. It is difficult at this time to predict the outcome of this investigation and when it may be settled. 14. Epson is at risk of material legal actions being brought against it. Epson conducts businesses internationally. We are engaged primarily in the development, manufacture and sales of 19 printing solutions, visual communications equipment, and wearable and industrial products, as well as the provision of services related thereto. Given the nature of these businesses, there is a possibility that an action could be brought or legal proceedings could be started against Epson regarding, for example, intellectual property rights, product liability, antitrust laws or environmental regulations. As of the date we submitted our Annual Securities Report, Epson was contending with the following material actions. In June 2010, Epson Europe B.V. (“EEB”), a consolidated subsidiary of Seiko Epson, brought a civil suit against La SCRL Reprobel (“Reprobel”), a Belgium-based group that collects copyright royalties, seeking restitution for copyright royalties for multifunction printers. With Reprobel subsequently filing a suit against EEB, the two lawsuits were adjoined. EEB’s claims were rejected at the first trial, but EEB, dissatisfied with the decision, intends to appeal. It is difficult at this time to predict the outcome of these civil actions and when they may be settled, but our operating results and future business could be affected, depending on the outcomes of suits and legal proceedings. 15. Epson is vulnerable to certain risks in internal control over financial reporting. We are building and using internal controls to ensure the reliability of financial reporting. With the establishment and operation of internal controls for financial reporting high on our list of important management issues, we have been pursuing a Group-wide effort to audit and improve corporate oversight of our Group companies. However, since there is no assurance that we will be able to establish and operate an effective internal control system on a continuous basis, and since there are inherent limitations to internal control systems, if the internal controls that Epson implements fail to function effectively, or if there are deficiencies in internal control over financial reporting or material weaknesses in the internal controls, it might adversely affect the reliability of our financial reporting. 16. Epson is vulnerable to risks inherent in its tie-ups with other companies. One of our business strategy options is to enter into business tie-ups with other companies. However, the parties may review the arrangements of tie-ups, and there is a possibility that tie-ups could be dissolved or be subject to changes. There is also no assurance that the business strategy of tie-ups will succeed or contribute to our operating results exactly as expected. 17. Epson could be severely affected in the event of a natural or other disaster. We have research and development, procurement, manufacturing, logistics, sales and service sites around the globe, and our operating results could be adversely affected by any number of unpredictable events, including but not limited to natural disasters, pandemics involving new strains of the influenza virus, infection by computer viruses, leaks or theft of customer data, reputational damage on social networking services (SNS), failures of mission-critical internal IT systems, supply chain disruptions, and acts of terrorism or war. The central region of Nagano Prefecture, home to some of our key plants and offices, is an area that is at comparatively high risk of earthquakes due to the presence of an active fault zone along the Itoigawa-Shizuoka geotectonic line. Accordingly, in addition to earthquake-proofing its equipment and facilities, Epson conducts disaster drills, has prepared earthquake disaster management and response plans, and has established business continuity plans to mitigate the effects of disasters to the extent possible. However, if a major earthquake occurs in the central region of Nagano Prefecture, it is possible that, despite these countermeasures, the effect on Epson could be extreme. Although Epson is insured against losses arising from earthquakes, the scope of indemnification is limited. 18. Laws, regulations, or licenses and the like pose risks for Epson. Epson is a multinational corporation with a variety of business operations around the globe. We ensure compliance with the laws and regulations of the countries in which we operate by building a robust compliance framework in each country and each business and by communicating the nature and importance of compliance requirements internally. To expand our businesses in the future, we must strengthen our sales and marketing activities that target new customers, including public institutions, and we plan to develop new areas, such as the health market, where greater adherence to all forms of relevant laws, regulations, and compliance (compliance with laws and regulations) is demanded. Compliance remains high on our list of important management issues, and we are developing measures to prevent and control potential issues as appropriate. However, if we were to violate or potentially violate laws and regulations relating to, among others, corruption, advertising and labeling, personal data and privacy protection, or export control, or if the authorities were to introduce stricter laws and regulations or impose more stringent laws, 20 we could see our credibility damaged, could become subject to the imposition of a large civil fine, or could see constraints placed on our business activities. We could also see the costs of complying with such laws and regulations increase, and any of the foregoing could adversely affect our financial performance and future business development. 21 Business Conditions 1. Overview of business results (1) Operating results On the whole, the global economy continued its gradual recovery during the year under review. Regionally, the U.S. economy continued to recover, fueled by an increase in consumer spending and an improved employment situation. The economic slowdown in Latin America, however, continued. In Europe the economy also gradually recovered, with a drop in the unemployment rate. Meanwhile, the Chinese economy showed signs of picking up. In Japan improved corporate earnings, an uptick in consumer spending, and an improvement in the employment situation signaled a continuation of a gradual economic recovery. The situation in the main markets of Epson was as follows. Total demand for inkjet printers was stagnant due to the continuing contraction of the Japanese consumer market and a shrinking of the North American and Western European markets. On the other hand, there was solid demand for high-capacity ink tank printers, as the entry of other companies had the effect of boosting recognition. Large-format inkjet printer demand was subdued in China and Latin America due to economic deceleration but remained firm in North America and Japan. Serial-impact dot-matrix (SIDM) printer demand in China in the first half of the year was driven by that country’s change from a business tax to a value added tax (B2V tax reform). However, demand continued to contract in the Americas and Europe. Projector demand increased in Europe ahead of major sporting events, but overall demand was subdued due to the effects of the economic slowdown in Latin America, a sluggish North American retail market, and weak demand for education projectors in some major European countries. However, signs of a slight recovery were seen throughout the second half of the year. Demand was mixed in the main markets for Epson’s electronic devices. In the mobile phone market, demand for feature phones continued to decline while demand for smart phones remained firm, owing primarily to growth of emerging market manufacturers in China and elsewhere. Demand in the digital camera market was subdued. Demand for watches fell sharply overall due to softening demand from tourists to Japan, declines in demand in China and North America, and a soft market for watch movements. Demand for industrial robots remained firm in the Americas and China, as well as in Japan, where sales to the automotive industry were firm. Against this backdrop, Epson began the 2016 fiscal year under the Epson 25 Phase 1 Mid-Range Business Plan (FY2016-18). The Phase 1 Plan delineates the first phase of work toward achieving the Epson 25 Corporate Vision, which sets forth a goal of “Creating a new connected age of people, things and information with efficient, compact and precision technologies.” During the three years of the Phase 1 Plan Epson will sustain the momentum it gained by strategically adopting new business models and developing new market segments under the previous corporate vision. At the same time, it will move forward on product development while aggressively investing as needed to provide a solid business foundation. The average exchange rates of the yen against the U.S. dollar and of the yen against the euro during the year were ¥108.38 and ¥118.79, respectively. This represents a 10% appreciation in the value of the yen against both the dollar and the euro compared to the previous fiscal year. The yen also continued to ride high against currencies other than the U.S. dollar and euro. The yen gained more against the Chinese yuan, British pound, and some Latin American currencies than it did against the U.S. dollar and euro due to the effects of an economic slowdown and other factors. Epson’s consolidated full-year financial results reflect the foregoing factors. Revenue was ¥1,024.8 billion, down 6.2% year on year. Business profit (Note) was ¥65.8 billion, down 22.5% year on year. Profit from operating activities was ¥67.8 billion, down 27.8% year on year. Profit before tax was ¥67.4 billion, down 26.3% year on year. Profit for the period was ¥48.4 billion, up 5.1% year on year. (Note) Business profit is calculated by subtracting cost of sales and selling, general and administrative expenses from revenue. A breakdown of the financial results in each reporting segment is provided below. 22 Printing Solutions Segment Printer business revenue decreased. Total inkjet printer revenue declined. High-capacity ink tank printer revenue continued to expand, as the entry of other companies into the high-capacity ink tank printer market boosted market recognition and helped to fuel a sharp increase in unit shipments. However, given the contracting market, unit shipments of ink cartridge models declined mainly in the home market. Revenue was dragged down also by foreign exchange effects. Although consumables unit volume decreased, the product mix is improving, with consumables for office printers, which have a higher unit price, accounting for a greater percentage of total consumables sales. However, revenue from consumables decreased due to foreign exchange effects. Page printer sales decreased due to a slump in consumables sales in addition to a decline in unit shipments, the result of Epson’s focus on selling high added value models. In SIDM printers, foreign exchange effects caused revenue to decline despite extra first-half demand in the Chinese tax collection system market. Revenue in the professional printing business decreased. Large-format inkjet printer total revenue decreased, partly due to foreign exchange effects. Sales of Epson’s new products in the growing signage market were strong, and sales expanded in the textile printing segment on heightened demand. However, a decrease in unit shipments in the existing photo and graphics markets resulted in a decline in total revenue in this category. Consumables sales also decreased on lower revenue, a result of a decline in printer unit sales and foreign exchange effects. POS system product revenue decreased. Although demand for low-end models was firm in Europe, total unit shipments declined due to a lack of large orders such as those received in the previous fiscal year in Japan and North America. Unit volume also decreased in China. Revenue was also hurt by foreign exchange effects. Segment profit in the printing solutions segment decreased even though profit rose on increased sales of high-capacity ink tank inkjet printers. The decrease in segment profit was due to a combination of factors, including a decrease in large-format inkjet printer sales, strategic investment and spending on medium-term growth, and foreign exchange effects. As a result of the foregoing factors, revenue in the printing solutions segment was ¥686.6 billion, down 6.8% year on year. Segment profit was ¥84.1 billion, down 19.7% year on year. Visual Communications Segment Visual communications revenue decreased. Total 3LCD projector revenue decreased. The education market contracted in some of the main countries of Europe. The North American and Latin American markets also continued to shrink. However, unit shipments and sales increased owing to the release of new projectors in the high-brightness category, expanded sales in Asia, and an increase in demand for models in the volume zone in Europe in advance of major sporting events. Nevertheless, revenue was hurt by foreign exchange effects. Segment profit in the visual communications segment increased. Although hurt by foreign exchange effects, segment profit increased thanks to unit shipment growth and the expansion of the high-brightness projector segment, which improved product mix. As a result of the foregoing factors, revenue in the visual communications segment was ¥179.6 billion, down 2.4% year on year. Segment profit was ¥16.1 billion, up 3.5% year on year. Wearable and Industrial Products Segment Revenue in the wearable products business as a whole decreased. Average selling prices for watches in the Japanese market rose due to the release of new watch products, but unit volume fell because purchases by foreign visitors to Japan decelerated and demand in overseas markets was subdued. Revenue was also hurt by a weak watch movements market and foreign exchange effects. Revenue in the robotics solutions business increased. Although hurt by foreign exchange effects, revenue increased primarily due to industrial robot unit shipment growth in China and because of a rise in IC handler revenue as a result of firm demand for smart phones in China. Revenue in the microdevices business decreased. Revenue from crystal devices decreased due to a decline in unit 23 shipments to manufacturers of cell phones and other personal electronics and because of foreign exchange effects. Semiconductor revenue increased despite a decline in volume to a major automotive account and foreign exchange effects. The increase was due to a rise in sales volume linked to growth in silicon foundry demand. The surface finishing business, which developed new customers, and the metal powders business, which reported firm sales of high-performance material powders for mobile equipment, both saw revenue decline due to foreign exchange effects. Segment profit in the wearable and industrial products segment decreased due to lower sales in the microdevices business and wearable products business. As a result of the foregoing factors, revenue in the wearable and industrial products segment was ¥158.5 billion, down 7.0% year on year. Segment profit was ¥7.8 billion, down 20.4% year on year. Other Other revenue amounted to ¥1.5 billion, up 7.4% year on year. Segment loss was ¥0.4 billion, compared to a segment loss of ¥0.5 billion in the previous fiscal year. Adjustments Adjustments to the total profit of reporting segments amounted to negative ¥41.7 billion. (Adjustments in the previous fiscal year were negative ¥44.6 billion.) The main components of the adjustment were basic technology research and development expenses that do not correspond to the reporting segments and expenses associated with things such as new businesses and corporate functions. (2) Cash Flow Performance Net cash provided by operating activities during the year totaled ¥96.8 billion (compared to ¥113.0 billion in the previous fiscal year). This was due to factors including an increase in depreciation and amortization totaled ¥ 43.6 billion, in addition to profit for the year of ¥ 48.4 billion. Net cash used in investing activities totaled ¥75.7 billion (compared to ¥51.5 billion in the previous fiscal year), mainly because Epson used ¥77.5 billion in the acquisition of property, plant, equipment and purchase of intangible assets. Net cash used in financing activities totaled ¥26.6 billion (compared to ¥67.1 billion in the previous fiscal year). While it had ¥49.7 billion in proceeds from issuance of bond issued, Epson also recorded net decrease in current borrowings of ¥14.3 billion, redemption of bonds issued of ¥30.0 billion, dividends paid of ¥21.2 billion, and purchase of treasury shares of ¥10.3 billion. As a result, cash and cash equivalents at the end of the fiscal year totaled ¥221.7 billion (compared to ¥230.4 billion at the end of the previous fiscal year). (3) Parallel disclosure Differences between the main items on IFRS consolidated financial statements and those on consolidated financial statements prepared based on Japanese accounting standards (Expenses associated with post-employment benefits) Under Japanese accounting standards, Epson wrote off actuarial gains and losses and past service costs over a certain period of time. Under IFRS, remeasurements of net defined benefit liabilities (assets) are recognized in full as other comprehensive income in the period in which they are incurred and transferred to retained earnings immediately. Past service costs are recognized in profit and loss either in the period when the plan is amended or curtailed, or in the period when associated restructuring costs or termination benefits are recognized, whichever is earlier. Due to these effects, the cost of sales and selling, general and administrative expenses, and finance costs in the previous fiscal year increased by ¥3.8 billion when calculated based on IFRS rather than Japanese standards. The cost of sales, selling, general and administrative expenses, and finance costs in the fiscal year increased by ¥0.4 billion. *Please refer to the following for Epson’s financial results for previous fiscal years: http://global.epson.com/IR/ 24 2. Manufacturing, orders received and sales (1) Actual manufacturing The following table shows actual manufacturing information by segment in the fiscal year under review. Business segment Year ended March 31, 2017 (From April 1, 2016, to March 31, 2017) (Millions of yen) Change compared to previous fiscal year (%) Printing solutions Visual communications Wearable & Industrial products Total for the reporting segments Other Total 679,644 175,504 147,542 1,002,692 595 1,003,287 96.4 105.3 90.0 96.8 117.8 96.8 Notes 1. The above figures are based on sales prices. Intersegment transactions are offset and therefore eliminated. 2. The above figures do not include consumption tax. 3. The above figures include outsourced manufacturing. (2) Orders received Epson’s policy is to manufacture products based on sales forecasts. Accordingly, this section does not apply. (3) Actual sales The following table shows actual sales information by segment in the fiscal year under review. Business segment Year ended March 31, 2017 (From April 1, 2016, to March 31, 2017) (Millions of yen) Change compared to previous fiscal year (%) Printing solutions Visual communications Wearable & Industrial products Total for the reporting segments Other Total Notes 1. Intersegment transactions are offset and therefore eliminated. 2. The above figures do not include consumption tax. 3. No customer accounts for more than 10% of the actual total sales. 686,353 179,642 150,674 1,016,671 787 1,017,458 93.3 97.6 91.7 93.8 104.5 93.8 25 3. Analysis of financial condition, results of operations and cash flows (1) Analysis of operating results Revenue Consolidated revenue was ¥1,024.8 billion, a year-over-year decrease of ¥67.6 billion (6.2%). Revenue for each reporting segment is discussed below. Revenue in the printing solutions segment was ¥686.6 billion, a year-over-year decrease of ¥49.7 billion (6.8%). The most significant factors that contributed to this change are as follows. Total inkjet printer revenue declined. High-capacity ink tank printer revenue continued to expand, as the entry of other companies into the high-capacity ink tank printer market boosted market recognition and helped to fuel a sharp increase in unit shipments. However, unit shipments in the contracting ink cartridge printer market declined mainly in the home segment. Revenue was also dragged down by foreign exchange effects. Although consumables unit volume decreased, the product mix is improving, with consumables for office printers, which have a higher unit price, accounting for a greater percentage of total consumables sales. However, revenue from consumables decreased due to the negative effects of foreign exchange. Page printer sales decreased due to a slump in consumables sales in addition to a decline in unit shipments, the result of Epson's focus on selling high added value models. In SIDM printers, foreign exchange effects caused revenue to decline despite extra first-half demand in the Chinese tax collection system market. Large-format inkjet printer total revenue decreased, partly due to foreign exchange effects. Sales of Epson’s new products in the growing signage market were strong, and sales expanded in the textile printing segment on heightened demand. However, a decrease in unit shipments in the existing photo and graphics markets resulted in a decline in total revenue in this category. Revenue from consumables also decreased due to a decline in printer unit sales and foreign exchange effects. POS system product revenue decreased. Although demand for low-end models was firm in Europe, unit shipments declined in China, as well as in Japan and North America due to a lack of large orders such as those received in the same period last year. Revenue was also hurt by foreign exchange effects. Revenue in the visual communications segment was ¥179.6 billion, a year-over-year decrease of ¥4.3 billion (2.4%). The most significant factors that contributed to this change are as follows. 3LCD projector revenue decreased. The education market contracted in some of the main countries of Europe. The North American and Latin American markets also continued to shrink. However, unit shipments and sales increased owing to the release of new projectors in the high-brightness category, expanded sales in Asia, and an increase in demand for models in the volume zone in Europe in advance of major sporting events. Nevertheless, revenue was hurt by foreign exchange effects. Revenue in the wearable and industrial products segment was ¥158.5 billion, a year-over-year decrease of ¥11.8 billion (7.0%). The most significant factors that contributed to this change are as follows. Watch and watch movement revenue decreased. Average selling prices for watches in the Japanese market rose due to the release of new watch products, but unit volume fell because purchases by foreign visitors to Japan decelerated and demand in overseas markets was subdued. Revenue was also hurt by a weak watch movements market and foreign exchange effects. Revenue from crystal devices decreased due to a decline in unit shipments to manufacturers of cell phones and other personal electronics and because of foreign exchange effects. Semiconductor revenue increased despite a decline in unit shipments to a major automotive account and foreign exchange effects. The increase was due to a rise in unit shipments linked to growth in silicon foundry demand. Industrial robot and IC handler revenue increased. Although hurt by foreign exchange effects, revenue increased primarily due to industrial robot unit shipment growth in China and because of a rise in IC handler revenue as a result of firm demand for smart phones in China. The surface finishing business developed new customers, and the metal powders business, which reported firm sales of high-performance material powders for mobile equipment, both saw revenue decline due to foreign exchange effects. Revenue in the “other” segment was ¥1.5 billion, a 7.4% increase compared to the previous fiscal year. Cost of sales and gross profit Cost of sales was ¥658.8 billion, a year-over-year decrease of ¥35.9 billion (5.2%). The decrease in cost of sales 26 is primarily associated with foreign exchange effects. As a result, gross profit was ¥365.9 billion, a year-over-year decrease of ¥31.6 billion (8.0%). Selling, general and administrative expenses and business profit Selling, general and administrative (SG&A) expenses were ¥300.1 billion, a year-over-year decrease of ¥12.5 billion (4.0%). The decrease in SG&A expenses was primarily associated with foreign exchange effects. As a result, business profit was ¥65.8 billion, a year-over-year decrease of ¥19.1 billion (22.5%). Segment profit (business profit) in each reporting segment was as follows. Segment profit in the printing solutions segment was ¥84.1 billion, a year-over-year decrease of ¥20.6 billion (19.7%). The decrease in segment profit was due to a combination of factors, including but not limited to a decrease in large-format inkjet printer sales and strategic investment and spending on medium-term growth. Segment profit in the visual communications segment was ¥16.1 billion, a year-over-year increase of ¥0.5 billion (3.5%). Although hurt by foreign exchange, segment profit increased mainly due to unit shipment growth and the expansion of the high-brightness projector segment, which improved the product mix. Segment profit in the wearable and industrial products segment was ¥7.8 billion, a year-over-year decrease of ¥2.0 billion (20.4%). The decrease was primarily associated with foreign exchange effects. Segment loss in the “other” segment was ¥0.4 billion, compared to a ¥0.5 billion loss in the previous fiscal year. As for adjustments, segment loss decreased to ¥41.7 billion compared to the ¥44.6 billion loss incurred in the previous fiscal year. Adjustments consisted primarily of patent royalties and R&D expenses for basic research that do not belong to a reporting segment, and SG&A expenses, primarily comprising expenses associated with new businesses and Head Office functions. Other operating income, other operating expenses, and profit from operating activities Other operating income was ¥5.4 billion, a year-over-year decrease of ¥9.3 billion (63.4%). Other operating income decreased mainly because the figure from the previous fiscal year included income from the sale of land. Other operating expenses totaled ¥3.3 billion, a year-over-year decrease of ¥2.3 billion (41.8%). Finance income and finance costs Finance income was ¥1.3 billion, a year-over-year decrease of ¥0.2 billion (16.3%). The decrease in finance income was primarily due to a decrease in interest income. Finance costs were ¥1.8 billion, a year-over-year decrease of ¥2.3 billion (56.3%). The decrease in finance costs was primarily due to a decrease in foreign exchange loss. Profit before tax The foregoing resulted in profit before tax of ¥67.4 billion, a year-over-year decrease of ¥24.0 billion (26.3%). Income taxes Income taxes were ¥18.4 billion, a year-over-year decrease of ¥26.9 billion (59.4%). The decrease is primarily because income taxes were higher in the previous fiscal year due to an increase in tax expenses resulting from the partial reversal of deferred tax assets arising from the carryforward of unused tax losses. Profit for the period Profit for the period was ¥48.4 billion, a year-over-year increase of ¥2.3 billion (5.1%). (2) Liquidity and capital resources Cash flow Net cash provided by operating activities was ¥96.8 billion, a year-over-year decrease of ¥16.1 billion. Although the increase in profit for the period and trade payables had a ¥2.3 billion and ¥19.8 billion positive impact, respectively, net cash provided by operating activities decreased mainly because of a ¥26.9 billion effect owing to lower income taxes, and a ¥17.3 billion effect resulting from an increase in inventories. Net cash used in investing activities totaled ¥75.7 billion, a year-over-year increase of ¥24.2 billion. This was primarily due to an ¥11.0 billion increase in cash used to acquire property, plant and equipment and a ¥12.8 27 billion decrease in income due to the sale of investment properties. Net cash used in financing activities totaled ¥26.6 billion, a year-over-year decrease of ¥40.4 billion. Although there was a ¥12.5 billion net decrease in short-term loans payable and a ¥10.3 billion increase in expenditure to purchase treasury shares, net cash used in financing activities decreased chiefly due to the effects of a ¥3.7 billion decrease in dividends paid, a ¥49.7 billion increase in proceeds from a bond issue, and a ¥10.0 billion decrease in payments due to redemption. As a result of the foregoing factors, cash and cash equivalents at the end of the fiscal year stood at ¥221.7 billion, a decrease of ¥8.7 billion compared to the end of the previous fiscal year, giving Epson sufficient liquidity. Interest-bearing liabilities totaled ¥146.5 billion, a year-over-year increase of ¥4.8 billion. Although the Company repaid short-term loans payable and redeemed bonds payable, interest-bearing liabilities increased because the Company issued bonds payable. Long-term loans payable (excluding the current portion) at the end of the period totaled ¥0.4 billion, at a weighted average interest rate of 0.28% due in 2022. These borrowings were obtained as unsecured bank loans. Financial condition Total assets were ¥974.3 billion, an increase of ¥33.0 billion compared to the end of the previous fiscal year. This increase was mainly due to a ¥34.1 billion increase in property, plant and equipment and intangible assets. Total liabilities were ¥479.6 billion, up ¥9.0 billion compared to the end of the last fiscal year. Although liabilities decreased due to a ¥30.0 billion redemption of bonds payable, a ¥14.9 billion reduction in short-term loans payable, and a ¥9.5 billion decrease in net defined benefit liabilities, total liabilities increased mainly because of an issue of ¥50.0 billion in bonds payable and an ¥11.0 billion increase in trade and other payables. The equity attributable to owners of the parent company totaled ¥492.1 billion, a ¥24.3 billion increase compared to the previous fiscal year end. The Company paid ¥21.2 billion in dividends and ¥10.3 billion to purchase treasury shares, but the equity attributable to owners of the parent company increased because retained earnings increased due to the recognition of ¥48.3 billion in profit for the year attributable to owners of the parent company. Working capital, defined as current assets less current liabilities, was ¥251.0 billion, a decrease of ¥25.3 billion compared to the end of the previous fiscal year. The ratio of interest-bearing liabilities to total assets was 15.0%, remaining essentially the same as at the end of the previous fiscal year, when the ratio was 15.1%. 28 4. Research and development activities Epson conducts research and development to create products and services that offer value that exceeds customer expectations. We seek to create value by driving advances in Micro Piezo printheads, microdisplays, sensors, and robotics, all of which are unique core technologies that evolved from the efficient, compact, and precision technologies that Epson has developed since its founding. Further value is added by developing technology platforms that meet the needs of a wide spectrum of customers. The corporate R&D division and the R&D units of the operations divisions are teaming up to develop core technologies and devices for the future and to strengthen manufacturing infrastructure. Together, they are laying a technological foundation to create new businesses, strengthen existing ones, and increase the competitiveness of all Epson products. Total R&D spending during the fiscal year was ¥52.7 billion. The printing solutions segment accounted for ¥21.5 billion, the visual communications segment for ¥9.4 billion, and the wearable and industrial products segment for ¥6.4 billion. The “other” segment and corporate segment accounted for the remaining ¥15.3 billion. The main R&D accomplishments in each segment are described below. Printing solutions segment In the printer business, Epson announced its first corporate color inkjet printers equipped with high-speed lineheads (launched in Japan in June 2017). These multifunction units offer greater productivity and higher quality output than ordinary color laser printers while using far less power. Epson’s unique inkjet systems employ piezoelectric actuators rather than heat to precisely deposit ink. The non-contact printing process and architecture are elegantly simple. And, since the printing process does not rely on heat, Epson’s inkjet systems offer outstanding environmental performance. The new products offer all of the traditional advantages of inkjet systems, and much more. The top-of-the-line model, powered by Epson’s latest PrecisionCore lineheads, delivers up to 100 A4 horizontal pages per minute. Epson also announced its smallest multifunction home printers to date. These products are 96 mm narrower and have a 42% smaller footprint than Epson’s comparable 2011 models. Outfitted with a newly developed six-color dye ink set that offers a wider green gamut, these printers reproduce scenes with even more lush and gorgeous greens. In the professional printing business, Epson released new large-format inkjet printers that feature newly developed UltraChrome GS3 Ink and UltraChrome GS3 Ink with Red for the signage and display industry. The new ink delivers superb printing quality, including a wider color gamut, brighter colors, and a glossier finish. These inks also have improved drying performance, increasing productivity up to winding time after printing which is important in practice and fully demonstrating the performance of high speed printing. Visual communications segment Epson upgraded and expanded its lineup of 3LCD projectors for business by releasing new mobile, meeting room, and large venue projectors. The nimble mobile models are bright yet lightweight. In fact, weighing just 1.8 kg and measuring a mere 44 mm tall, they are not only the lightest LCD projectors in their class but also the world’s slimmest projectors1. Despite their compact size and easy portability, they boast sharply higher basic performance than their predecessors, with every model offering 3,000 lumens of brightness or more and a 10,000:1 contrast ratio. The powerful meeting room models are loaded with features and shine bright even in large, well lit rooms. The lineup includes models that weigh less than 5 kg yet deliver up to 5,500 lumens of brightness, as well as models with WUXGA resolution and Full HD support. The new models come with a host of features. In addition to Epson’s popular automatic picture correction features, some of the new models have screen mirroring, Screen Fit, and a new feature that enables a presenter to move forward or backward through a slide presentation with the touch of a hand on the image. The high-lumen large venue models are ideal for permanent installation in auditoriums and other large spaces. All models offer 5,500 lumens of brightness and a 15,000:1 contrast ratio2, for bright, sharp images. All of these models are equipped with a wide range of lens shift capabilities in both the vertical and horizontal directions for installation flexibility. For the home theater market, Epson also released new projectors that feature a laser light source, 4K Enhancement Technology3, and high dynamic range (HDR) support4. By automatically detecting HDR signals and adjusting image brightness levels, these projectors render an unprecedented range of gradations, from the brightest highlights to the deepest shadows. They can deliver dynamic images with exquisite detail and more vivid color, without clipped whites and crushed blacks. 29 1 Slimmest among 3LCD projectors per Epson research conducted in November 2016 2 With Auto Iris turned on 3 4K Enhancement Technology shifts each pixel diagonally by 0.5 pixels to double the resolution to 3840 x 2160 and achieve ultra-high definition. 4 HDR technology expands the range of both contrast and color in video and still images. Wearable and industrial products segment In the wearable products business, Epson released new products in the WristableGPS (“Runsense” in some markets) series of sports watches. The new products feature a revamped design and dedicated applications. New additions to the lineup include models in the WristableGPS for Women series. Epson’s first monitors for female runners, these products have a clean, sporty design along with improved comfort and usability. The robotics solutions business released force sensors as optional accessories for Epson robots. Force sensors endow robots with the ability to sense extremely slight pressure—forces as small as 0.1 newton5. This ability enables robots to perform tasks that were previously impossible to automate, such as the assembly of delicate parts and the fitting together or insertion of parts with small tolerances. Epson also developed industrial SCARA robots that run off AC100V power. These robots save space with a controller that is built into the base of the robot. Meanwhile, a batteryless motor helps to keep running costs low. In the microdevices business, Epson developed a new, energy-efficient 32-bit microcontroller (MCU) that has an ARM® Cortex®-M0+ processor6 and built-in Flash memory. This was the world’s first7 MCU to feature a memory LCD8 controller and power supply IC integrated onto a single chip. This arrangement eliminates the need for external components and interface software development, so users are able to save time and effort while also reducing the size of their products. 5 A force approximately equal to the gravity acting on a 10g object 6 ARM and Cortex are registered trademarks of ARM Limited (or its subsidiaries) in the EU and other countries. All rights reserved. 7 World’s first among mass-produced general purpose microcontrollers per Epson research conducted in August 2016 8 Liquid crystal that can hold a display even after power is turned off 30 5. Mangement policy, business environment and issues to be addressed, etc. All forward-looking statements hereunder were made at Epson’s discretion at the end of the fiscal year. (1) Fundamental management policy Endowed with “efficient, compact, and precision technologies” that Epson has developed since its founding, Epson seeks to continuously create game-changing customer value and play a central role in creating a better world as an indispensable company by forging innovations through challenges that are bold, imaginative, and exceed our own vision. Using the Epson Management Philosophy and the global tagline below as guides, we will strive to achieve our vision with employees who embrace a common set of values, demonstrate teamwork, and exercise initiative to create value that exceeds customer expectations. Epson Management Philosophy Epson aspires to be an indispensable company, trusted throughout the world for our commitment to openness, customer satisfaction and sustainability. We respect individuality while promoting teamwork, and are committed to delivering unique value through innovative and creative solutions. EXCEED YOUR VISION As Epson employees, we always strive to exceed our own vision, and to produce results that bring surprise and delight to our customers. (2) Medium- and long-term corporate strategy and issues to be addressed Epson began the 2016 fiscal year under a new 10-year corporate vision and a new mid-range business plan. The Epson 25 Corporate Vision describes what Epson would like to achieve by the start of the 2025 fiscal year. Meanwhile, the Epson 25 Mid-Range Business Plan (FY2016-18) is a three-year plan for the first phase of work toward achieving the vision. Regarding the business environment surrounding Epson, although the global economy is on a gradual recovery trend in general, due to the occurrence of geopolitical risks and foreign exchange fluctuations, the impact on each country’s economy, consumption and investment trends is expected to continue, so it is necessary to keep an eye on continued gaze. Under these circumstances, Epson will look to sustain growth and increase corporate value over the medium- to long term by steadily executing the strategies described below. ① Epson 25 Corporate Vision The Epson 25 Corporate Vision (hereafter called “Epson 25”), which was created based on an understanding of the mega trends, changes, and other forces that will shape Epson’s business in the future, contains the following vision statement: “Creating a new connected age of people, things and information with efficient, compact and precision technologies.” “Efficient, compact and precision technologies” are original technologies that will create the value that Epson will provide to its customers in three areas: smart technologies, the environment, and performance. Smart technologies. Use advanced products and software so customers can easily, conveniently, and securely use our products anywhere and anytime. Environment. Contribute to the development of a sustainable society by leveraging efficient, compact and precision technologies to reduce the environmental impact of products and services across their life cycles. 31 Performance. Create new and higher value by providing outstanding products that contribute to customer productivity, accuracy and creativity. Advances in information and communication technology will interconnect vast amounts of information on the Internet, causing cyber space to expand indefinitely. As a manufacturing company that specializes in generating value in the real world, Epson will play an important role in “creating a new connected age of people, things and information” by using attractive, advanced products as leverage to collaborate with IT companies and increase the value of the technologies it provides to customers. In this “new connected age” Epson aims to free people from repetitive manual labor and from unnecessary wastes of time and energy. Epson’s goal is to heighten people’s creativity, and to create a sustainable and affluent society in which people enjoy safe and healthy lifestyles. In line with this vision, Epson will provide value in the form of smart technologies, the environment, and performance in four areas of innovation: inkjet innovation, visual innovation, wearables innovation and robotics innovation. Epson will drive innovations in these areas by achieving the vision in each of its businesses. To support the realization of Epson 25, Epson will further strengthen its business infrastructure and company-wide information systems in the areas of human resources, technology, manufacturing, sales, and the environment. Epson set out financial performance targets in Epson 25. Assuming exchange rates of 115 yen to the U.S. dollar and 125 yen to the euro, Epson will aim to achieve, by the 2025 fiscal year, ¥1,700 billion in revenue, ¥200 billion in business profit, a 12% return on sales (business profit*/revenue), and a 15% return on equity (profit for the period/equity attributable to owners of the parent company). * Business profit is very similar to operating income under Japanese accounting standards (J-GAAP), both conceptually and numerically. Epson began using business profit as an indicator after adopting International Financial Reporting Standards (IFRS) in FY2014 to facilitate comparisons with past results. Vision in Each Business Printing: inkjet innovation Refine original Micro Piezo technology, and expand into high-productivity segments. Improve environmental performance and create a sustainable printing ecosystem. Visual communications: visual innovation Refine original microdisplay and projection technologies, and create outstanding visual experiences and a natural visual communications environment for every aspect of business and lifestyles. Wearables: wearables innovation Leverage our watchmaking heritage, refine timekeeping and sensing accuracy, and offer a sense of status and fashion. Robotics: robotics innovation Combine our core technologies with sensing and smart technologies in manufacturing, expand applications, and create a future in which robots support people in a wide variety of situations. Microdevices: Support the four innovations Contribute to Epson’s finished products and to the development of smart communications, power, transportation and manufacturing systems with advanced Epson quartz timing and sensing solutions and low-power semiconductor solutions. ② Epson 25 Mid-Range Business Plan (FY2016-2018) The Epson 25 Mid-Range Business Plan (FY2016-2018) is a roadmap for the first phase of work toward achieving the Epson 25 vision. During this phase Epson will sustain the momentum it gained by strategically adopting new business models and developing new market segments under the previous corporate vision. At the same time, it will move forward on product development while aggressively investing as needed to provide a 32 solid business foundation. The basic strategy for achieving this will be to continue to grow by further increasing its competitive edge in businesses where SE15 strategic initiatives were successful, and to quickly address issues and establish a path to growth in businesses where Epson was unable to fully advance. Epson will look to ensure growth by creating products and services that generate customer value in smart technologies, the environment, and performance, as the Epson 25 aims to achieve. While taking care to grow profit over the short term, Epson will also invest management resources as appropriate, quickly establish new business models, and strengthen its sales organizations to achieve the Epson 25 vision. Epson will also position itself for future growth by pursing the business strategies below and by building up its business infrastructure. These moves will enable Epson to aim to achieve the following financial performance targets in FY2018, the final year of the phase 1 plan. Assuming exchange rates of 115 yen to the U.S. dollar and 125 yen to the euro, Epson will aim to achieve, by the 2018 fiscal year, ¥1,200 billion in revenue, ¥96 billion in business profit, an 8% return on sales, and a 10% or higher return on equity on a continuous basis. Strategies in Each Business  In the printer business, Epson will aim to establish a competitive advantage in the home printer market by boosting the attractiveness of its products and to getting office market development on track with linehead models. In professional printing, Epson will establish a competitive advantage with hardware, improve support and other organizational infrastructure, and achieve solid growth in new domains. In visual communications, Epson will further strengthen its presence in the projection market and use laser light sources to pave the way to rapid growth in new markets. In wearable products, Epson will lay the foundation for building wearables into a core business by refining watch resources and combining them with sensors to create families of differentiated products. In robotics solutions, Epson will create a framework for growth on top of its technology base. In microdevices, Epson will create a stable business platform in the quartz business by building competitive strength. The semiconductor business, meanwhile, will create new core technologies and devices.      Strengthening Business Infrastructure Technology. Refine our efficient, compact and precision technologies, advance our actuator, optical control, and sensor technologies, and bring in data communications technology to continue to create new customer value. Manufacturing. Provide timely products that others cannot easily imitate. Offer them at highly competitive costs and quality. Sales and support. Strengthen the office and industrial domains, establish optimum area sales organization, improve products quality with a market-driven (market-in) approach, and transform the brand image. Environment. Expand initiatives to reduce environmental impacts across product and service life cycles and supply chains. These strategies enabled Epson to launch sales of the PaperLab, the world’s first* office papermaking system to use a dry process, and announce the development of high-speed linehead inkjet multifunction and single-function printers during the fiscal year under review. PaperLab is designed to enhance security and reduce environmental impacts. It uses Epson’s proprietary dry fiber technology to securely destroy confidential documents and produce new paper from the recycled fibers, all on-site. The new linehead inkjet products will revolutionize office printing with their high speeds, outstanding image quality, and low power consumption. Epson also released a new laser projector for the promising high-brightness segment of the market, began a reorganization to accelerate growth in the wearable products business, and launched new products that will lower the barriers currently discouraging manufacturers from introducing robots into their production operations. 33 In addition, to build the business infrastructure needed to achieve future growth, Epson moved steadily forward on projects to increase production line efficiency and automation. It also began construction on new factories and started up operations at others. * PaperLab is the first office papermaking system to use a dry process, per Epson research conducted in November 2016. 34 6. Dividend policy The Company strives to sustain business growth through the creation of customer value and to generate stable cash flow by improving profitability and using management resources efficiently. While the top priority is on strategic investment in growth, the Company also actively returns profits in parallel with its efforts to build a robust financial structure that is capable of withstanding changes in the business environment. In line with this policy, the Company has set a consolidated dividend payout ratio in the range of 40% as a medium-term target, the ratio based on profit after an amount equivalent to the statutory effective tax rate is deducted from business profit, a profit category that shows profit from the Company’s main operations (and which is very similar to operating income under Japanese accounting standards, both conceptually and numerically). The Company intends to be more active in giving back to shareholders by agilely purchasing treasury shares as warranted by share price, the capital situation, and other factors. The Company’s dividend policy is to pay cash dividends twice a year. The year-end dividend is determined by resolution of the general shareholders’ meeting and the interim dividend is determined at a meeting of the board of directors. The Company’s full-year financial performance was in line with the outlook primarily as a result of strategic progress in the Company’s businesses and despite currency volatility. The Company therefore has paid an annual dividend of ¥60 per share, as forecast at the beginning of the fiscal year. In addition, between May and June 2016, the Company purchased ¥9.9 billion in treasury shares [the total acquisition price (maximum): ¥10 billion] as a way to optimize capital efficiency and further increase shareholder returns. The Company’s Articles of Incorporation allow the Company to issue an interim dividend with a record date of September 30 every year by resolution of the board of directors. The Company’s distribution of retained earnings for the fiscal year under review is as follows. Distribution of retained earnings for the fiscal year under review Date approved October 27, 2016, by resolution of the board of directors June 28, 2017, by resolution of the general shareholders’ meeting Cash dividends (Millions of yen) Cash dividend per share (Yen) 10,572 10,572 30 30 35 Corporate Governance 1. Approach to corporate governance (1) Basic corporate governance principles The general principles of corporate governance at Epson are as follows: ▪ Respect the rights of shareholders, and ensure equality. ▪ Bear in mind the interests of, and cooperate with, stakeholders, including shareholders, customers, local communities, business partners, and Epson personnel. ▪ Appropriately disclose company information and maintain transparency. ▪ Directors, Executive Officers, and Special Audit & Supervisory Officers shall be aware of their fiduciary duties and shall fulfill the roles and responsibilities expected of them. ▪ Engage in constructive dialogue with shareholders. To achieve the goals declared in the Management Philosophy, promote sustainable growth, and increase corporate value over the medium and long terms, Epson strives to continuously enhance and strengthen corporate governance so as to realize transparent, fair, fast, and decisive decision-making. Under a company with an Audit & Supervisory Committee, to further increase the effectiveness of corporate governance, Epson further improves the supervisory function of the Board of Directors, further enhances deliberation and speeds up management decision-making. (2) Corporate governance system Overview of and reasons for adopting the current system of corporate governance Epson is structured as a company with an Audit & Supervisory Committee. It has a Board of Directors, an Audit & Supervisory Committee, and a financial auditor. It has also voluntarily established an advisory committee for matters such as the Director nomination and compensation. This governance system was adopted to further increase the effectiveness of corporate governance by strengthening supervision over management and by enabling the Board of Directors to devote more time to discussions while speeding up decision-making by management. The main corporate management bodies and their aims are described below: Board of Directors The Board of Directors, with a mandate from shareholders, is responsible for realizing efficient and effective corporate governance, through which Epson will accomplish its social mission, sustain growth, and maximize corporate value over the medium and long terms. To fulfill these responsibilities, the Board of Directors will exercise a supervisory function over general management affairs, maintain management fairness and transparency, and make important business decisions, including decisions on things such as management plans, business plans, and investments exceeding a certain amount. The Board of Directors is composed of 11 Directors, including five Outside Directors. Meetings of the Board of Directors are, as a rule, held once per month and as needed. The Board of Directors makes decisions on basic business policies, important business affairs, and other matters that the Board of Directors is responsible for deciding as provided for in internal regulations. Business affairs that the Board of Directors is not responsible for deciding are delegated to executive management, and the Board monitors these. To speed up business decisions and increase business agility as a company with an Audit & Supervisory Committee, Epson expanded the scope of affairs delegated to executive management from the Board of Directors and limits board deliberations to only the most important issues. Corporate Governance Policy states that at least one-third of the board members should be outside directors. Audit & Supervisory Committee The Audit & Supervisory Committee, with a mandate from shareholders, is responsible for independently and objectively auditing and monitoring the execution of director duties and for ensuring the sound and sustained growth of Epson. The Audit & Supervisory Committee verifies the effectiveness of the internal control system and conducts audits primarily in cooperation with internal audit departments and the financial auditor. The Audit & Supervisory Committee has established basic guidelines for selecting outside financial auditors and criteria for evaluating their independence and expertise. Resolutions concerning financial auditors selected by the Committee per the guidelines are submitted for approval at a general meeting of shareholders. The Audit & Supervisory Committee also discusses the selection, dismissal, resignation, and compensation of Directors who 36 are not Audit & Supervisory Committee members and decides on the opinions to be presented at a general meeting of shareholders. The Audit & Supervisory Committee is composed of four Audit & Supervisory Committee members, three of whom are Outside Directors. It is chaired by a full-time member of the Audit & Supervisory Committee. Meetings are held once per month and as needed. Corporate Strategy Council The Corporate Strategy Council is an advisory body to the president whose purpose is to help ensure that the right decisions are made based on a range of opinions on the executive management side. Meetings of the Corporate Strategy Council are where Directors, Executive Officers, and Special Audit & Supervisory Officers exhaustively examine important business topics that affect the Epson Group as a whole and matters on the agenda for meetings of the Board of Directors. Compliance Committee The Compliance Committee’s function is to discuss the content of reports that it receives concerning important compliance activities, and report its findings and communicate its opinions to the Board of Directors in order to see that compliance activities are appropriately executed by line management. As an advisory body to the Board of Directors, the Compliance Committee is composed of Outside Directors and Directors who are Audit & Supervisory Committee members. The Compliance Committee is chaired by a full-time member of the Audit & Supervisory Committee. Meetings are held every half year and as needed. A Chief Compliance Officer (CCO) is elected by the Board of Directors and supervises and monitors compliance-related affairs on the whole. The CCO periodically reports the state of compliance affairs to the Compliance Committee. Nomination Committee and Compensation Committee Epson has created a Nomination Committee and a Compensation Committee as advisory bodies to the Board of Directors. These Committees, which are composed primarily of Outside Directors, are designed to ensure transparency and objectivity in the screening and nomination of candidates for Director, Executive Officer, and Special Audit & Supervisory Officer and in matters of Director compensation. Both Committees include Outside Directors, who comprise the majority of members, the Representative Director/President, and the Director in charge of human resources. Directors who are full-time members of the Audit & Supervisory Committee can attend meetings of either Committee as observers. Epson’s system of corporate governance is schematically represented below. 37 Internal control system Epson’s Board of Directors approved a basic policy on the internal control system (a system for ensuring that business is conducted suitably by the corporate group), and Epson has implemented the approved internal control system. The Company considers its Management Philosophy to be its most important business concept, and to realize it Epson has established “Principles of Corporate Behavior” that are shared across the Group, including at subsidiaries. The Company will establish the following basic policy regarding the internal control system (a system for ensuring that business is conducted suitably by the corporate group) and provide an improved internal control system for the Epson Group as a whole. Compliance (1) The Company will establish “Principles of Corporate Behavior” as a guide for putting the Management Philosophy into practice. The Company will also establish regulations that spell out things such as basic compliance requirements and the organizational framework. (2) The Company has created a Compliance Committee to serve as an advisory body to the Board of Directors. The Compliance Committee is chaired by a full-time member of the Audit & Supervisory Committee and is composed of Outside Directors and members of the Audit & Supervisory Committee. The Compliance Committee meets regularly and as needed to hear and discuss important matters concerning the Company’s compliance program. It reports its findings and offers opinions to the Board of Directors. Financial auditors can attend meetings of the Compliance Committee as observers. (3) A Chief Compliance Officer (CCO) is elected and supervises and monitors the execution of all compliance operations. The CCO periodically reports the state of compliance affairs to the Compliance Committee. (4) Compliance promotion and enforcement will be supervised by the president of Seiko Epson. Group-wide compliance programs will be carried out by Head Office supervisory departments with the cooperation of departments in the various operations divisions and subsidiaries. Compliance programs of the divisions and their related subsidiaries will be promoted by the respective chief operating officers of the divisions. The compliance management department helps to ensure the completeness and effectiveness of compliance programs by monitoring compliance across the Epson Group and by taking corrective action or making adjustments where needed. (5) The Corporate Strategy Council, an advisory body to the president comprised of members of the Board of Directors, etc. of the Company, will address important matters with respect to compliance promotion and enforcement in the Epson Group as a whole, including subsidiaries. The Council will strive to ensure the effectiveness of compliance by exhaustively discussing and analyzing the implementation of programs for assuring observance of statutes, internal regulations, business ethics, and initiatives in high-risk and other key areas. (6) The Company, including its subsidiaries, will strive to provide an effective whistleblowing system. Employees are encouraged and are able to easily and immediately report compliance violations using internal and external hotlines and e-mail addresses. Controls are in place to protect whistleblowers from reprisal, and allegations are reported to the Company’s Audit & Supervisory Committee, the Compliance Committee, and the Corporate Strategy Council in a way that whistleblowers cannot be identified. (7) The Company strives to enhance legal awareness by providing Epson Group employees with web-based training and other educational opportunities. (8) The president of Seiko Epson periodically reports important compliance-related matters to the Board of Directors and take measures as needed to respond to issues. (9) The Company’s “Principles of Corporate Behavior” states that the Company will have no association whatsoever with antisocial forces (i.e., organized crime groups). The Company takes a firm stance in rejecting any and all contact with antisocial forces that threaten social order and security. Business execution system (1) The Company formulates long-term corporate visions and mid-range business plans, and it sets clear medium-and long-range goals for the Epson Group as a whole. (2) The Company has instituted a system to ensure the appropriate and efficient execution of business. To that end, the Company has established regulations governing organizational management, levels of authority, the division of responsibilities, and the management of affiliated companies, thus distributing power and 38 authority across the entire Group. (3) Personnel responsible for business operations report the matters below to the Board of Directors at least once every three months. • Current business performance and performance outlook • Risk management responses • Status of key business operations Risk management (1) The Company has established a basic risk management regulation that stipulates the risk management system of the Company, including its subsidiaries, and that defines the organization, risk management methods and procedures, and other basic elements of this system. (2) Overall responsibility for risk management in the Epson Group, including subsidiaries, belongs to the president of Seiko Epson. Group-wide risk management is carried out by Head Office supervisory departments with the cooperation of the operations divisions and subsidiaries. Risks unique to an individual business are managed by the chief operating officer of that business, including at subsidiaries consolidated under them. The Company has also set up the risk management department, monitors overall risk management Group-wide, makes corrections and adjustments thereto, and ensures the effectiveness of risk management programs. (3) The Corporate Strategy Council strives to ensure effective management of serious risks that could have an egregious effect on society by dynamically and exhaustively discussing and analyzing ways to identify and control risks. Also, when major risks become apparent, the president leads the entire company in mounting a swift initial response in line with the Company’s prescribed crisis management program. (4) The president of Seiko Epson periodically reports critical risk management issues to the Board of Directors and formulates appropriate measures to respond to these issues, as needed. Ensuring the appropriateness of operations in the corporate group (1) The Group’s management structure helps to ensure that operations in the corporate group, including subsidiaries, are conducted appropriately. Essentially, the Company is organized into product-based divisions. Each division is headed by a chief operating officer who owns global consolidated responsibility for that business. Meanwhile, supervisory functions within the Head Office own global responsibility. Responsibility for providing the framework for business operations at subsidiaries is owned by the head of each business. Group-wide corporate functions are the responsibility of the heads of Head Office supervisory departments. (2) The Company has business processes that enable business to be controlled on a Group level. This is accomplished by regulations governing the management of affiliated companies that require subsidiaries to report or acquire pre-approval for certain business affairs from the parent company, Seiko Epson, and by requiring issues that meet certain criteria to be submitted to Epson’s Board of Directors for resolution. The Company has established regional head offices in certain regions to supervise local subsidiaries in order to ensure the suitability and efficiency of operations Group-wide. (3) Per the Basic Regulation for Internal Audits, internal audit departments serve as monitoring organizations that are independent from the management and supervisory functions of the operations divisions and the Head Office. Internal audit departments audit internal controls and the state of their implementation in all Epson Group companies, including subsidiaries. The findings of the internal audit departments are presented to the head of the audited organization along with requests for corrective action, where needed. This information is also regularly reported to the president of Seiko Epson and to the Audit & Supervisory Committee. In this way, Epson strives to optimize operations across the entire Group. Safeguarding and management of work-related information (1) Information on the performance of duties is safeguarded and managed in accordance with regulations governing, among other things, document control, management approval, and contracts. All directors are able to access this information at all times. (2) The Company strives to prevent the leak and loss of Epson Group internal information by managing confidential information according to the level of sensitivity, in accordance with internal information security regulations. 39 Audit system (1) The Audit & Supervisory Committee can interview Directors who are not members of the Audit & Supervisory Committee, executive officers, and other personnel whenever they deem necessary in the performance of duties based on the Audit & Supervisory Committee Audit Regulation. (2) Audit & Supervisory Committee members can attend Corporate Strategy Council sessions, corporate management meetings, and other important business meetings that will enable them to conduct audits based on the same information as that available to directors who are not members of the Audit & Supervisory Committee. Members of the Audit & Supervisory Committee also routinely review important documents related to management decision-making. (3) An Audit & Supervisory Committee Office was set up to assist the duties of the Audit & Supervisory Committee. The head of the Audit & Supervisory Committee Office serves as the Special Audit & Supervisory Officer and assigns full-time personnel to the Audit & Supervisory Committee Office. The head and personnel of the Audit & Supervisory Committee Office discharge their duties to assist the Audit & Supervisory Committee, obeying the orders of the Audit & Supervisory Committee alone and not orders from Directors who are not members of the Audit & Supervisory Committee. Matters relating to the personnel of the office must be approved in advance by the Audit & Supervisory Committee. (4) To ensure that audits by the Audit & Supervisory Committee are systematic and effective, a framework has been created to secure close cooperation between the internal audit departments and the Audit & Supervisory Committee. (5) If a situation involving the Audit & Supervisory Committee or cooperation with the internal audit departments or other organizations is observed to interfere with the effectiveness of audits by the Audit & Supervisory Committee, the Audit & Supervisory Committee can ask the representative director or Board of Directors to take corrective action. (6) The Audit & Supervisory Committee receives audit reports from internal audit departments and can issue specific instructions to internal audit departments as needed. If the instructions issued to internal audit departments by the Audit & Supervisory Committee and the president are in conflict, the president will have the internal audit departments honor the instructions of the Audit & Supervisory Committee. (7) Per the Audit & Supervisory Committee Audit Regulation, the Audit & Supervisory Committee can ask Directors who are not members of the Audit & Supervisory Committee, the compliance management department, and the risk management department, as well as others to report or explain the state of management within the Epson Group, including subsidiaries. It can also view supporting materials. The Audit & Supervisory Committee can also ask, as needed, subsidiary company directors, corporate auditors, internal audit departments, and other organizations to report the state of management of the subsidiary. (8) The Audit & Supervisory Committee shall strive to enhance the effectiveness of audits by holding regular discussions with financial auditors. (9) The Audit & Supervisory Committee and representative director regularly meet to enable the Committee to directly assess business operations. (10) Funds required by the Audit & Supervisory Committee to perform its duties are properly budgeted for in advance. However, funds required to perform the duties of the Audit & Supervisory Committee in emergency or extraordinary situations will be promptly paid in advance or refunded on each occasion. (3) Internal audits Audit & Supervisory Committee audits Epson’s Audit & Supervisory Committee is composed of four Directors, three of whom are Outside Directors. Noriyuki Hama was selected to serve as a Full-Time Audit & Supervisory Committee member to help ensure that the Audit & Supervisory Committee works effectively, as it was concluded that it would be necessary for someone to prepare an environment to facilitate audits, attend important internal meetings to smoothly collect internal information, work closely with groups such as the internal audit department, and monitor the internal control system. Audit & Supervisory Committee members can attend meetings of the Corporate Strategy Council and other important meetings as part of their efforts to properly monitor business affairs. They examine the legality and suitability of actions taken by the directors by checking and confirming compliance and by supervising and verifying things such as the state of the internal control system, including internal control over financial reporting. When they deem it necessary, Audit & Supervisory Committee members can ask internal audit departments to investigate affairs or can provide specific instructions regarding the performance of their duties. 40 In addition, the Audit & Supervisory Committee ordinarily conducts audits using internal audit departments but can exercise its investigation authority to conduct its own audits if the effectiveness of audits conducted by the internal audit departments is not being maintained. Full-Time Audit & Supervisory Committee member Noriyuki Hama has many years of experience in finance and general accounting, while Audit & Supervisory Committee member Chikami Tsubaki is a certified public accountant. Both have an appreciable degree of knowledge and insight into finance and accounting. Internal audits Epson’s internal compliance system guards against potential legal and internal regulatory violations in departmental operations. Internal audit departments serve as monitoring organizations that are independent from the management and supervisory functions of the operations divisions and the Head Office. They audit internal controls and the implementation of controls in all Epson Group companies, including subsidiaries. Internal audit departments conduct internal audits based on an annual audit plan. After conducting internal audits, they report their observations, including recommendations for improvements based on the facts, to the president and to the Audit & Supervisory Committee in a timely manner. Internal audit departments also regularly report the internal audit situation to the president and Audit & Supervisory Committee. Interconnections among Audit & Supervisory Committee audits, internal audits, and accounting audits, and the relationship of these audits to the internal control department In order to make Audit & Supervisory Committee audits systematic and efficient, Epson ensures close collaboration between internal audit departments and the Audit & Supervisory Committee. In relation to the structure of the Audit & Supervisory Committee Office and the coordination system with internal audit departments, if circumstances hindering the effectiveness of the audit by the Audit & Supervisory Committee are found, the Audit & Supervisory Committee requests the representative directors or the Board of Directors to rectify them. Epson’s internal audit departments regularly present their audit plans and audit results to the Audit & Supervisory Committee. In response, the Audit & Supervisory Committee can, when it deems necessary, ask internal audit departments to investigate affairs or can provide specific instructions regarding the performance of their duties. The Audit & Supervisory Committee ordinarily conducts audits using internal audit departments but can conduct its own audits if the effectiveness of audits conducted by the internal audit departments is not being maintained. Internal audit departments are seen as a keystone for internal control functions built by the president and operations departments. On the other hand, to ensure the effectiveness and independence of audits by the Audit & Supervisory Committee and internal audit departments, if the instructions issued to internal audit departments by the Audit & Supervisory Committee and the president are in conflict, the president must have internal audit departments honor the instructions of the Audit & Supervisory Committee. The Audit & Supervisory Committee and the internal audit departments will thus proactively cooperate going forward, but Epson set up an Audit & Supervisory Committee Office headed by the Special Audit & Supervisory Officer as an organization dedicated to supporting the Audit & Supervisory Committee. The Audit & Supervisory Committee Office is independent from executive management and supports the Audit & Supervisory Committee, with a direct reporting line to it. The Audit & Supervisory Committee and financial auditors enhance the effectiveness of audits by periodically discussing issues with one another. Financial auditors have the right to observe meetings of the Compliance Committee, which is made up of Outside Directors and a Director who is a member of the Audit & Supervisory Committee. (4) Overview of limited liability agreements The Company has executed agreements with non-executive directors Hideaki Omiya, Mari Matsunaga, Noriyuki Hama, Michihiro Nara, Chikami Tsubaki, and Yoshio Shirai that limit their liability for damages under Article 423 (1), pursuant to the provisions of Article 427 (1) of the Companies Act. The maximum amount of liability for damages under these agreements is limited to the amount provided for by laws and regulations. The liability of the non-executive directors shall be limited only if they have acted in good faith and without gross negligence in performing their duties. 41 (5) Outside Directors The role of Outside Directors To ensure that Outside Directors are independent from the Company’s management team, have a broad view, and are able to objectively supervise the making of important decisions, the Company has set forth the role of Outside Directors in the Corporate Governance Policy as below. In principle, Outside Directors should comprise at least one-third of the members of the Board of Directors. (i) Monitoring of the management - Monitoring of corporate executives through involvement in the officer election process and the compensation determination process based on an evaluation of the business as a whole - Monitoring of the business as a whole through the exercise of voting rights on important business decisions made by the Board of Directors (ii) Advisory function for improving business efficiency (iii) Monitoring of conflicts of interest - Monitoring of conflicts of interest between Epson and its Directors and Executive Officers - Monitoring of conflicts of interest between Epson and related parties Principle of independence The Company’s Board of Directors has established a “Standard of Outside Officers’ Independence” and, in compliance with this standard, elects director candidates who are unlikely to have conflicts of interest with general shareholders. The title of this standard and some of the content were amended at a meeting of the Board of Directors held on April 28, 2017. The amendments were made to help guarantee the independence of Outside Directors and to select Outside Directors from a broad range of qualified individuals who can be expected to contribute to the Company. All current Outside Directors satisfy the independence requirements of the amended standard. The content of the amended standard is described below. Criteria for Independence of Outside Directors The Company has established the criteria below to objectively determine whether potential Outside Directors are independent. 1. A person is not independent if: (1) The person considers the Company to be a major business partner1, or has served as an executive2 within the past five years in an entity for which the Company is a major business partner; (2) The person is a major business partner3 of the Company or has served as an executive within the past five years in an entity that is a major business partner of the Company. (3) The person is a business consultant, certified public accountant, or lawyer who has received a large sum of money or other forms of compensation4 (other than compensation as an officer) from the Company or has, within the past three years, performed duties equivalent to those of an executive as an employee of a corporation or group, such as a union, that has received a large sum of money or other forms of compensation from the Company; (4) The person is a major shareholder5 of the Company or has, within the past five years, been an executive or Audit & Supervisory Board Member of an entity that is a major shareholder of the Company; (5) The person is an executive or Audit & Supervisory Board Member of an entity in which the Company is currently a major shareholder; (6) The person is a major lender 6 to the Company or has been an executive of a major lender to the Company within the past five years; (7) The person has been employed by an auditing firm that has conducted a legal accounting audit of the Company within the past five years; (8) The person has been employed by a leading managing underwriter of the Company within the past five years; (9) The person has received a large donation7 from the Company or, within the past three years, has performed duties equivalent to those of an executive as an employee of a corporation or a group, such as a union, that has received a large donation from the Company; (10) The person came from an entity that employs someone from the Company as an Outside Director; or (11) The spouse or other immediate family member of a person to whom any of items (1) through (9) apply. 42 2. Even if any of the foregoing criteria apply to a potential Outside Director, the Company can elect that person as an Outside Director if that person satisfies the requirements for Outside Directors set forth in the Companies Act, and the Company deems the person suitable as an Outside Director of the Company in light of his or her personality, knowledge, experience, or other qualifications upon explaining and announcing the reasons thereof. Notes 1 A person (usually a supplier) considers the Company to be a major business partner if 2% or more of its consolidated net sales (consolidated revenue) has come from the Company in any fiscal year within the past three years. “Executive” means an executive officer, executive director, operating officer, or an employee occupying a senior management position of department manager or higher. 2 3 A person (usually a buyer) is a major business partner if 2% or more of the Company’s consolidated 4 5 6 7 revenue has come from that partner in any fiscal year within the past three years. “A large sum of money or other forms of compensation” means an average annual amount for the past three years that is: i) no less than 10 million yen for an individual; or ii) no less than 2% of the annual revenues in any fiscal year for a group. “Major shareholder” means a shareholder who directly or indirectly holds 10% or more of the voting rights. “A major lender” means a financial institution or other major creditor that is indispensable for the Company’s financing and on which the Company depends to the extent that it is irreplaceable in any fiscal year within the past three years. “Large donation” means a donation whose annual average amount for the past three years exceeds either; i) 10 million yen or ii) 30% of the annual expense of the group, whichever is higher. Number of outside directors, selection criteria, and human, capital, business or other interests between outside directors and the Company Epson had five outside directors (of whom three are Audit & Supervisory Committee members) as of the submission date of its the security report. (i) Hideaki Omiya Mr. Omiya has served as a Chairman of the Board of Mitsubishi Heavy Industries, Ltd. and has a wealth of experience and insight as a corporate manager and engineer. He has monitored corporate management appropriately by expressing opinions actively including findings and proposals regarding overall managerial issues from a perspective of a corporate manager well-versed in the global corporate management in the heavy industry, a different business field. Epson believes that he will appropriately monitor management to achieve sustained growth and increase medium-to long-term corporate value. Mr. Omiya was an executive of Mitsubishi Heavy Industries, Ltd. Although the Company has had transactions involving the purchase and sale of semiconductor manufacturing equipment with Mitsubishi Heavy Industries, Ltd. in the past three years, these transactions are immaterial, totaling less than 0.1% of the consolidated net sales of the Company and Mitsubishi Heavy Industries, Ltd. and thus does not fall under the category of “major business partner” as prescribed in the “Criteria for Independence of Outside Directors.” Epson has registered him as an Independent Director with the Tokyo Stock Exchange. He owns a small number of Epson shares, but there are no human, capital, business or other interests between him and the Company. (ii) Mari Matsunaga Ms. Matsunaga has created new business models and has a considerable insight and experiences through her involvement in the management of multiple companies as an Outside Officer. As an Outside Director of the Company, she has appropriately monitored management, actively pointing out business issues and offering recommendations particularly from a diversity and employee working environment perspective. Epson believes that she will monitor management appropriately to achieve sustained growth and increase medium-to long-term corporate value. Epson has engaged Ms. Matsunaga as a speaker in the past three years, but the speaking fee was less than 500,000 yen and thus does not fall under the category of “a large sum of money or other forms of 43 compensation” as prescribed in the “Criteria for Independence of Outside Directors.” Epson has registered her as an Independent Director with the Tokyo Stock Exchange. She owns a small number of Epson shares, but there are no human, capital, business or other interests between her and the Company. (iii) Michihiro Nara (Outside Director who is an Audit & Supervisory Committee member) Mr. Nara has a high level of expertise as an attorney. He has considerable insight and experience through his involvement in the management of multiple companies as an independent outside officer and achievements as an Outside Audit & Supervisory Board member of the Company. Epson believes that he will monitor management appropriately to achieve sustained growth and increase medium-to long-term corporate value. He has never been involved in corporate management except as an outside officer. However, given the reasons above, Epson believes that he can appropriately perform his duties as an Outside Director who is an Audit & Supervisory Committee member. As an Outside Director of the Company, Mr. Nara has actively pointed out business issues and offered recommendations from the perspective of a legal professional. The Company has not entered into a consulting agreement nor has it consigned any business under any individual agreement with Mr. Nara as an attorney-at-law or with the law office to which he belongs. Epson has registered him as an Independent Director with the Tokyo Stock Exchange. He owns a small number of Epson shares, but there are no human, capital, business or other interests between him and the Company. (iv) Chikami Tsubaki (Outside Director who is an Audit & Supervisory Committee member) Ms. Tsubaki has a high level of expertise as a certified public accountant. She has a considerable insight and experiences through her involvement in the management of multiple companies as independent outside officer. Epson believes that she will monitor management appropriately to achieve sustained growth and increase medium to long-term corporate value. She has never been involved in corporate management except as an outside officer. However, given the reasons above, Epson believes that she can appropriately perform her duties as an Outside Director who is an Audit & Supervisory Committee member. As an Outside Director of the Company, Ms. Tsubaki has actively pointed out business issues and offered recommendations from the perspective of a finance and accounting professional. Epson does not have a business relationship with Ms. Tsubaki, a certified public accountant, and has never engaged her based on an advisory agreement or other separate agreement. Epson has registered her as an Independent Director with the Tokyo Stock Exchange. She owns a small number of Epson shares, but there are no human, capital, business or other interests between her and the Company. (v) Yoshio Shirai (Outside Director who is an Audit & Supervisory Committee member) Mr. Shirai has served as a director at Toyota Motor Corporation, Hino Motors, Ltd., and Toyota Tsusho Corporation, and has considerable insight and a wealth of experience as a corporate manager. On his global perspective as well as his management experience in a different business field, automotive industry and trading company, Epson believes that he will monitor management appropriately to achieve sustained growth and increase medium-to long-term corporate value. As an Outside Director of the Company, Mr. Shirai has drawn on his global perspective as well as his management experience in a different business field to actively point out business issues and offer recommendations. Mr. Shirai has served as an executive at Hino Motors, Ltd. and Toyota Tsusho Corporation within the past five years. The Company has had no transactions with Hino Motors, Ltd. or Toyota Tsusho Corporation in the past three years, and neither company falls under the category of a “major business partner” as prescribed in the “Criteria for Independence of Outside Directors.” Epson has registered him as an Independent Director with the Tokyo Stock Exchange. He owns a small number of Epson shares, but there are no human, capital, business or other interests between him and the Company. (6) Officer compensation, etc. Basic policy The policy on director and executive officer compensation is as follows. (a) Compensation shall provide incentive to improve business performance in order to increase corporate value in the near, medium, and long terms. 44 (b) Compensation shall be sufficient to attract qualified persons both from within the Company and from outside. (c) Compensation shall be commensurate with period performance so that directors and executive officers can demonstrate their management capabilities to the fullest during their tenure. Compensation for non-executive officers (a) The composition of compensation shall guarantee independence so that these officers can suitably exert their general management supervisory function, etc. (b) Compensation shall be sufficient to attract qualified persons both from within the Company and from outside. Compensation system - Director and executive officer compensation of the Company consists of base compensation, bonuses, and stock compensation. Non-executive officers receive base compensation only, a fixed amount, from the standpoint independent from business execution, because their role is to supervise general management. They do not receive bonuses and stock compensation, which are forms of compensation that are linked to performance and share price. Base compensation Base compensation is a monetary amount that is determined by taking into account all factors such as an individual’s position and responsibilities. It is paid as a monthly compensation that reflects the results of annual performance evaluations based on criteria set according to the individuals’ roles. Bonus An annual bonus is monetary compensation in an amount that is determined by taking into account factors such as the financial performance for the year. The bonus reflects the results of annual performance evaluations based on criteria set according to the individuals’ roles. Stock compensation Under Epson’s stock-based compensation plan, a trust scheme is used to deliver Company shares to officers, the number of shares being based on points system, where in officers are awarded points depending on the level of achievement with respect to medium- and long-term operating performance targets, such as business profit, ROS and ROE. Procedure for determining compensation - Compensation is determined by an appropriate body, such as the general meeting of shareholders, the Board of Directors, or Audit & Supervisory Committee, after a fair, transparent, and rigorous review by the Director Compensation Committee, which is composed mainly of Outside Directors and which issues an opinion, to ensure transparency and objectivity. 45 Compensation paid Category Total compensation (millions of yen) Total compensation by type (millions of yen) Fixed compensation Variable compensation Base compensation Bonus Stock compensation Number of individuals Directors who are not Audit & Supervisory Committee members (amount accounted for by Outside Directors) Directors who are Audit & Supervisory Committee members (amount accounted for by Outside Directors) Audit & Supervisory Board members (amount accounted for by Outside Audit & Supervisory Board members) 433 (28) 61 (36) 17 (9) 287 (28) 61 (36) 17 (9) 11 (–) – (–) – (–) 97 (–) – (–) – (–) Total 512 365 11 97 36 (–) – (–) – (–) 36 12 (3) 4 (3) 4 (3) 20 Notes: 1. The amount of compensation, etc. to Directors who are not Audit & Supervisory Committee members includes the amount of compensation, etc. to Directors prior to the Company’s transition to a company with an Audit & Supervisory Committee. 2. The base compensation for Directors who are not Audit & Supervisory Committee members (excluding Outside Directors) consists of fixed compensation and variable compensation. Variable compensation refers to monetary compensation that reflects the results of annual performance evaluations based on criteria set according to their respective roles. 3. The Company has introduced an officer stock ownership plan to link compensation more closely to shareholders’ value. The acquisition of the Company’s shares accounts for a portion of the base compensation. 4. Upon the resolution at the annual general meeting of shareholders of June 28, 2016, the maximum base compensation was set to at 62 million yen per month for Directors who are not Audit & Supervisory Committee members (Outside Directors account for 10 million yen of this amount) and at 20 million yen for Directors who are Audit & Supervisory Committee members. 5. The amount above includes 97 million yen in bonuses to be paid to six Directors (excludes Outside Directors and Directors who are Audit & Supervisory Committee members), as approved by shareholders at the annual general meeting of shareholders on June 28, 2017. 6. From the current fiscal year, the Company introduced a performance-linked stock compensation plan (stock compensation) by employing a framework referred to as the officer compensation BIP (Board Incentive Plan) trust, for the purpose of showing its commitment to promoting sustainable growth and increasing its medium to long-term corporate value, in addition to strengthening the sense of sharing common interests with its shareholders. The stock compensation stated above represents the amount recorded for the current fiscal year based on Japanese Generally Accepted Accounting Principles (JGAAP). 7. The number of individuals above includes three Directors and four Audit & Supervisory Board members who retired at the conclusion of the annual general meeting of shareholders held on June 28, 2016. 8. The amount paid to Audit & Supervisory Board members is the amount paid for the period prior to the Company’s transition to a company with an Audit & Supervisory Committee. The amount paid to Directors who are Audit & Supervisory Committee members is the amount for the period after the transition to a company with an Audit & Supervisory Committee. In addition to the above, the Company paid a 15 million yen retirement allowance to an Audit & 9. 46 Supervisory Board member (Outside Audit & Supervisory Board member) who retired at the conclusion of the annual general meeting of shareholders held on June 28, 2016, pursuant to the discontinuation of the retirement allowance system for executives resolved at the annual general meeting of shareholders held on June 23, 2006. 10. Stock options are not granted. Total compensation paid to officers whose total consolidated compensation is 100 million yen or more Name Total consolidated compensation (millions of yen) Total consolidated compensation by type (millions of yen) Category Fixed compensation Variable compensation Base compensation Bonus Stock compensation Minoru Usui 116 Director 65 4 30 16 Note: The stock compensation stated above represents the amount recorded for the current fiscal year based on Japanese Generally Accepted Accounting Principles (JGAAP). 47 (7) Securities held by the Company a. Balance sheet total of stocks held for reasons other than pure investment: 18 companies ¥12,278 million b. Issuing company, number, and balance sheet total of stocks held for reasons other than pure investment Previous fiscal year Special investment securities Company NGK Insulators, Ltd. Shares (stock) 3,757,000 Balance sheet total (millions of yen) Reason held 7,810 To maintain and strengthen the Mizuho Financial Group, Inc. 15,008,880 2,522 To maintain and strengthen the business relationship with a supplier of key parts used in Epson products Seiko Holdings Corporation 1,644,080 Marubun Corporation 332,640 The Hachijuni Bank, Ltd. 489,500 Hakuto Co., Ltd. 190,000 King Jim Co., Ltd. 221,980 Otsuka Corporation 30,000 Joshin Denki Co., Ltd. 70,000 Nippon BS Broadcasting Corporation 33,200 Pixelworks, Inc. 100,000 business relationship with a source of steady funding and a provider of financial services 733 To maintain and strengthen the business relationship with a major buyer of Epson products 255 To maintain and strengthen the business relationship with a major buyer of Epson products 237 To maintain and strengthen the business relationship with a source of steady funding and a provider of financial services 188 To maintain and strengthen the business relationship with a major buyer of Epson products 186 To maintain and strengthen the business relationship with a major buyer of Epson products 178 To maintain and strengthen the business relationship with a major buyer of Epson products 60 To maintain and strengthen the business relationship with a major buyer of Epson products 35 To maintain and strengthen the business relationship with a company whose parent company is major buyer of Epson products 24 To maintain and strengthen the business relationship with a supplier of key parts used in Epson products 48 Current fiscal year Special investment securities Company NGK Insulators, Ltd. Shares (stock) 2,507,000 Balance sheet total (millions of yen) Reason held 6,317 To maintain and strengthen the business relationship with a supplier of key parts used in Epson products Mizuho Financial Group, Inc. 15,008,880 3,061 To maintain and strengthen the Seiko Holdings Corporation 1,644,080 Otsuka Corporation 60,000 The Hachijuni Bank, Ltd. 489,500 Marubun Corporation 332,640 Hakuto Co., Ltd. 190,000 King Jim Co., Ltd. 221,980 Joshin Denki Co., Ltd. 130,000 Pixelworks, Inc. 100,000 Nippon BS Broadcasting Corporation 33,200 c. Stocks held purely for investment purposes None business relationship with a source of steady funding and a provider of financial services 746 To maintain and strengthen the business relationship with a major buyer of Epson products 362 To maintain and strengthen the business relationship with a major buyer of Epson products 307 To maintain and strengthen the business relationship with a source of steady funding and a provider of financial services 237 To maintain and strengthen the business relationship with a major buyer of Epson products 195 To maintain and strengthen the business relationship with a major buyer of Epson products 193 To maintain and strengthen the business relationship with a major buyer of Epson products 147 To maintain and strengthen the business relationship with a major buyer of Epson products 52 To maintain and strengthen the business relationship with a supplier of key parts used in Epson products 35 To maintain and strengthen the business relationship with a company whose parent company is major buyer of Epson products 49 (8) Accounting audits 1) Names and other details of certified public accountants performing audits Name of CPA Audit company No. of successive years performing audits Designated and Engagement Partner, Certified Public Accountant Designated and Engagement Partner, Certified Public Accountant Designated and Engagement Partner, Certified Public Accountant Seiji Yamamoto Yoshiyuki Sakuma Yoshitomo Matsuura Ernst & Young ShinNihon LLC Ernst & Young ShinNihon LLC Ernst & Young ShinNihon LLC 4 1 4 2) Composition of auditing team The auditing team comprises 69 staff including 31 certified public accountants, 17 accountant examination passers, and 21 other accounting staff. (9) Number of directors Epson’s Articles of Incorporation provide for a maximum of nine directors who are not members of the Audit & Supervisory Committee and a maximum of five directors who are members of the Audit & Supervisory Committee. (10) Election and retirement of directors According to its Articles of Incorporation, Directors of the Company can be elected by a majority vote by at least one-third of shareholders with voting rights, and not through cumulative voting. Provisions regarding the retirement of directors do not vary from the provisions of the Companies Act. (11) Matters requiring resolutions of general meetings of shareholders that can be implemented by resolutions of the Board of Directors Treasury stock acquisition The Company’s Articles of Incorporation allow the Company to acquire treasury stock through stock market trade and other means by resolution of the Board of Directors. This enables a more flexible capital policy in response to a changing business environment. Director exemption from liability When liability falls under the requirements stipulated in Article 426, Paragraph 1 of the Companies Act, the Company’s Articles of Incorporation allow the Company to exempt the Directors from liability for damages in Article 423, Paragraph 1 of the Companies Act up to the amount remaining after the legal minimum liability is deducted from the total liability amount by resolution of the Board of Directors so that the Directors (excluding Executive Director) to fully apply themselves to their expected roles. Interim dividend The Company’s Articles of Incorporation allow the Company to declare an interim dividend with a date of record of September 30 every year by resolution of the board of directors. This provides the Company with flexibility in paying dividends to shareholders. (12) Special resolution requirements of the general meeting of shareholders The Company’s Articles of Incorporation set forth the requirements for a special resolution of the general meeting of shareholders stipulated in Article 309, Paragraph 2, of the Companies Act as a two-thirds majority vote by at least one-third of shareholders with voting rights. This policy is intended to ensure smooth operation of the general meeting of shareholders by relaxing the quorum requirements for special resolutions at the general meeting of shareholders. 50 2. Details of audit remuneration (1) Remuneration for audits by certified public accountants (Millions of yen) Category Filing company Consolidated subsidiaries Total Previous fiscal year Fiscal year under review Remuneration for audit certification work Remuneration for non-audit work Remuneration for audit certification work Remuneration for non-audit work 149 65 214 0 3 4 152 61 214 2 － 2 (2) Other important remuneration Previous fiscal year Total payments for audits carried out on behalf of 64 consolidated overseas subsidiaries by certified public accountants belonging to the Ernst & Young network for the fiscal year ended March 31, 2016, amounted to ¥590 million. Fiscal year under review Total payments for audits carried out on behalf of 64 consolidated overseas subsidiaries by certified public accountants belonging to the Ernst & Young network for the fiscal year ended March 31, 2017, amounted to ¥576 million. (3) Non-audit work performed by certified public accountant at filing company Previous fiscal year Remuneration paid for non-audit work performed by the certified public accountant was for various consultancy services. Fiscal year under review Remuneration paid for non-audit work performed by the certified public accountant was for various consultancy services. (4) Governing policy for audit remuneration This does not apply because remuneration for auditing services is determined according to the nature of the audit work. 51 3. Basic policy regarding company control Epson’s board of directors agreed on a basic policy governing persons who control our financial and business policy decisions (hereinafter the “basic policy”). (1) Overview Epson believes that its shareholders should be determined through free trade on the market. Therefore, the decision as to whether to accept a takeover offer that would allow another party to acquire a controlling share of Epson and thus gain power over the Company’s financial and business decisions should ultimately be put before the shareholders. To ensure and enhance the corporate value and common interests of shareholders, Epson believes it is essential for Epson’s directors, managers, and employees to work as a team to create value, to pursue the Epson tradition of creativity and challenge, and to earn and keep the trust of its customers. Not all large-scale acquisitions of shares enhance the value of the company whose shares are being acquired, nor do they always serve the common interests of shareholders. Epson recognizes the need to use all necessary and appropriate means to protect the Company’s corporate value and the common interests of its shareholders against persons seeking to improperly acquire large numbers of shares in an attempt to gain control over decisions concerning the Company’s financial and business policies. (2) Summary of measures in support of the basic policy 1) Specific actions in support of the basic policy In March 2016 the Company established the Epson 25 Corporate Vision, a document that describes Epson’s goals over the decade between the 2016 and 2025 fiscal years. At the same time, the Company established the Epson 25 Mid-Range Business Plan (FY2016-2018), a three-year plan for the first phase of work toward achieving the Epson 25 vision. Under the Phase 1 Mid-Range Business Plan, Epson will build a robust foundation for business by sustaining the results of successful strategic initiatives pursued to date, developing products for the future, and aggressively investing as needed. 2) Efforts to deter parties who are deemed inappropriate based on Epson’s basic policy in gaining control over the Company’s financial and business policy decision making To ensure and enhance corporate value and the common interests of its shareholders, Epson updated its measures to prevent large-scale acquisitions of Epson shares and received approval for them at the June 2014 Ordinary General Meeting of Shareholders. Epson revised these old measures to further enhance appropriateness and transparency. Shareholders approved the new measures at the June 28, 2017 Ordinary General Meeting of Shareholders. (The new measures are called “the Plan” below.) The purpose of the Plan is to prevent large-scale acquisitions of Epson stock certificates by having shareholders decide whether to allow such acquisitions and by giving the Epson board of directors the time and information they need to present shareholders with an alternative proposal and enable the board to negotiate with the acquirer on behalf of shareholders. Specifically, a party that intends to acquire or make a takeover bid for 20% or more of stock certificates outstanding shall be required to submit in advance to the Epson board of directors a statement of intent as well as sufficient and necessary information for decision making on the part of shareholders and for evaluation and consideration by a special committee. The party shall also be required to comply with the procedures defined in the Plan. Furthermore, the Plan allows for the activation of defensive measures if, for example, the proposed acquisition is not conducted in line with the Plan or it is deemed contrary to Epson’s corporate value or the common interest of its shareholders. To prevent the Epson board of directors from making arbitrary decisions about whether to activate takeover defense measures, a special committee composed entirely of highly independent outside directors shall assess the need for a defense. The special committee shall examine the nature of a proposed stock acquisition, request information from the Epson board of directors regarding alternative proposals, provide information to shareholders, and negotiate with a potential acquirer. The special committee shall recommend whether to active a defense to the Epson board of directors. The Epson board of directors shall accept the committee’s recommendation (unless the board concludes that doing so would violate the directors’ duty of care) and formally resolve in a prompt manner whether or not to activate a defense. 52 (3) Decisions made by the Epson board of directors regarding specific actions and the justification for those decisions Specifically, the Plan guarantees fairness and objectivity, is reasonable, and supports Epson’s corporate value and the common interests of its shareholders because, among other things, a) it was introduced (and updated) after being approved by shareholders at the general meeting of shareholders; b) it contains provisions for reasonable and objective implementation; c) a special committee composed solely of outside directors with a high degree of independence from Epson management was established and activation of defensive measures is subject to the assessment of that special committee; d) the special committee may solicit expert opinions from third parties at Epson’s expense; and e) the Plan was determined to be valid for approximately three years from the introduction and update and may be abolished by the board of directors at any time. The Plan is not for keeping Epson executive officers in their posts. 53 Management Directors, audit & supervisory committee members and executive officers of the Company as of the date when the annual securities report (yukashoken-houkokusho) was submitted and their functions are listed below. Current function Chief Operating Officer, Wearable Products & Industrial Solutions Operations Segment, Chief Operating Officer, Wearable Products Operations Division, and General Administrative Manager, Corporate Planning Division Chief Operating Officer, Printing Solutions Operations Division General Administrative Manager, Human Resources Division, and General Administrative Manager, CSR Management Office General Administrative Manager, Management Control Division Name Minoru Usui Shigeki Inoue Position President (Representative Director) Director, Senior Managing Executive Officer (Representative Director) Koichi Kubota Masayuki Kawana Director, Senior Managing Executive Officer Director, Executive Officer Tatsuaki Seki Hideaki Omiya Mari Matsunaga Noriyuki Hama Michihiro Nara Director, Executive Officer Outside Director Outside Director Director, Full-Time Audit & Supervisory Committee Member Outside Director, Audit & Supervisory Committee Member Chikami Tsubaki Outside Director, Audit & Supervisory Committee Member 54 Name Position Current function Yoshio Shirai Outside Director, Audit & Supervisory Committee Member Tadaaki Hagata Managing President, Epson Precision Executive Officer (Philippines), Inc. Motonori Okumura Managing Executive Officer Junichi Watanabe Managing Executive Officer Hideki Shimada Managing Executive Officer General Administrative Manager, Technology Development Division; Deputy Chief Operating Officer, Wearable Products & Industrial Solutions Operations Segment General Administrative Manager, Production Planning Division; Deputy Chief Operating Officer, Wearable Products & Industrial Solutions Operations Segment Deputy Chief Operating Officer, Printing Solutions Operations Division Yasumasa Kitamatsu Executive Officer Deputy General Akihiro Fukaishi Executive Officer President, Epson (China) Co., Ltd. Sunao Murata Executive Officer Deputy Chief Operating Administrative Manager, Technology Development Division Yoshiyuki Moriyama Executive Officer Toshiya Takahata Executive Officer Officer, Printing Solutions Operations Division Chairman and President, Epson Engineering (Shenzhen) Ltd. General Administrative Manager, Intellectual Property Division Tsuyoshi Kitahara Executive Officer Technology Development Naoyuki Saeki Executive Officer Nobuyuki Shimotome Executive Officer Division President, Epson Sales Japan Corporation Chief Operating Officer, Microdevices Operations Division Kazuyoshi Yamamoto Executive Officer President, Epson Europe B.V. 55 Name Munenori Ando Position Executive Officer Hitoshi Igarashi Executive Officer Keith Kratzberg Executive Officer Current function General Administrative Manager, Sales & Marketing Division Deputy Chief Operating Officer, Printing Solutions Operations Division President and Chief Executive Officer, Epson America, Inc. Isamu Otsuka Executive Officer President, Epson Atmix Corporation Yasunori Ogawa Executive Officer Chief Operating Officer, Eiichi Abe Executive Officer President, P.T. Indonesia Visual Products Operations Division Kazuhiro Ichikawa Executive Officer Keijiro Naito Executive Officer Epson Industry Deputy General Administrative Manager, Technology Development Division Deputy Chief Operating Officer, Visual Products Operations Division Taro Shigemoto Special Audit & Supervisory Officer General Administrative Manager, Audit & Supervisory Committee Office 56 Index to Consolidated Financial Statements Seiko Epson Corporation and Subsidiaries Consolidated Statement of Financial Position................................................................................................ 58 Consolidated Statement of Comprehensive Income ...................................................................................... 60 Consolidated Statement of Changes in Equity ............................................................................................... 62 Consolidated Statement of Cash Flows ........................................................................................................... 64 Notes to Consolidated Financial Statements .................................................................................................. 65 Report of Independent Auditors ................................................................................................................... 125 57 Consolidated Statement of Financial Position Years ended March 31, 2016 and 2017: 58 Thousands ofU.S. dollarsNotesMarch 31,2016March 31,2017March 31,2017Assets Current assets Cash and cash equivalents8,36230,498221,7821,976,842 Trade and other receivables9,36151,660155,7041,387,859 Inventories10201,608208,5121,858,561 Income tax receivables1,2322,47622,069 Other financial assets11,361,6747546,720 Other current assets1214,33513,176117,464 Subtotal601,010602,4065,369,515 Non-current assets held for sale44139357 Total current assets601,451602,4465,369,872 Non-current assets Property, plant and equipment13,15244,463275,1952,452,936 Intangible assets1418,17921,553192,111 Investment property171,9671,28811,480 Investments accounted for using the equity method1,6051,43812,817 Net defined benefit assets23-00 Other financial assets11,3621,96220,544183,117 Other non-current assets125,1225,48648,939 Deferred tax assets1846,58746,433413,878 Total non-current assets339,888371,9403,315,278 Total assets941,340974,3878,685,150Millions of yen 59 Thousands ofU.S. dollarsNotesMarch 31,2016March 31,2017March 31,2017Liabilities and equity Liabilities Current liabilities Trade and other payables19,36130,624141,6331,262,438 Income tax payables6,8307,26364,738 Bonds issued, borrowings and lease liabilities20,3661,65476,200679,204 Other financial liabilities368241,31811,747 Provisions2123,01921,981195,926 Other current liabilities22102,065102,992918,035 Total current liabilities325,019351,3893,132,088 Non-current liabilities Bonds issued, borrowings and lease liabilities20,3680,10070,371627,248 Other financial liabilities361,6401,58614,136 Net defined benefit liabilities2354,84545,281403,609 Provisions214,9416,20955,343 Other non-current liabilities223,1143,52131,423 Deferred tax liabilities181,0011,30411,623 Total non-current liabilities145,644128,2751,143,382 Total liabilities470,663479,6644,275,470 Equity Share capital2453,20453,204474,231 Capital surplus2484,32184,321751,591 Treasury shares24(20,471)(30,812)(274,641) Other components of equity2457,98953,176473,990 Retained earnings292,775332,3062,961,993 Equity attributable to owners of the parent company467,818492,1964,387,164 Non-controlling interests2,8582,52622,516 Total equity470,676494,7224,409,680 Total liabilities and equity941,340974,3878,685,150Millions of yen Consolidated Statement of Comprehensive Income Years ended March 31, 2016 and 2017: 60 Thousands of U.S.dollarsNotes20162017Revenue7,261,092,4811,024,8569,135,003Cost of sales10,13,14(694,821)(658,882)(5,872,912)Gross profit397,660365,9743,262,091Selling, general and administrative expenses13,14,27(312,708)(300,167)(2,675,523)Other operating income2914,8075,42148,319Other operating expense13,30(5,732)(3,335)(29,736)Profit from operating activities94,02667,892605,151Finance income311,6521,38312,327Finance costs31(4,252)(1,858)(16,560)Share of profit of investments accounted for using theequity method10453472Profit before tax91,53067,470601,390Income taxes18(45,421)(18,461)(164,551) 　　 Profit from continuing operations46,10949,009436,839Loss from discontinued operations32(42)(582)(5,197)Profit for the period46,06748,426431,642Profit for the period attributable to:Owners of the parent company45,77248,320430,698Non-controlling interests294106944Profit for the period46,06748,426431,642Millions of yenYear endedMarch 31,Year endedMarch 31,2017 61 Thousands of U.S.dollarsNotes20162017Other comprehensive income Items that will not be reclassified subsequently to profit or loss, net of taxRemeasurement of net defined benefit liabilities (assets)33(22,161)10,78596,131Net gain (loss) on revaluation of financial assetsmeasured at FVTOCI (Note)33(2,610)2,21919,788Subtotal(24,771)13,005115,919 Items that may be reclassified subsequently to profit or loss, net of taxExchange differences on translation of foreignoperations33(21,309)(5,477)(48,809)Net changes in fair value of cash flow hedges33(1,215)47418Share of other comprehensive income of investmentsaccounted for using the equity method33(240)(20)(178)Subtotal(22,765)(5,450)(48,569)Total other comprehensive income, net of tax(47,536)7,55567,350　 Total comprehensive income for the period(1,469)55,982498,992Total comprehensive income for the periodattributable to:Owners of the parent company(1,456)56,028499,402Non-controlling interests(12)(46)(410)Total comprehensive income for the period(1,469)55,982498,992 (Note) FVTOCI: Fair Value Through Other Comprehensive IncomeU.S. dollarsNotes20162017Earnings per share for the period:Basic earnings per share for the period34127.94136.821.22Diluted earnings per share for the period34127.94136.821.22Earnings per share from continuing operations for theperiod:Basic earnings per share for the period34128.06138.471.23Diluted earnings per share for the period34128.06138.461.23Earnings per share from discontinued operations for theperiod:Basic loss per share for the period34(0.12)(1.65)(0.01)Diluted loss per share for the period34(0.12)(1.65)(0.01)Millions of yenYear endedMarch 31,Year endedMarch 31,2017YenYear endedMarch 31,Year endedMarch 31,2017 Consolidated Statement of Changes in Equity Years ended March 31, 2016 and 2017: 62 NotesRemeasurement of netdefined benefitliabilities (assets)Net gain (loss) onrevaluation of financialassets measured atFVTOCI (Note)Exchange differenceson translation offoreign operationsNet changes in fairvalue of cash flowhedgesTotal othercomponents of equityAs of April 1, 201553,20484,321(20,464) -7,14974,8681,05583,073294,191494,3252,982497,308Profit for the period - - - - - - - -45,77245,77229446,067Other comprehensive income - - -(22,160)(2,600)(21,252)(1,215)(47,229) -(47,229)(307)(47,536)Total comprehensive income for the period - - -(22,160)(2,600)(21,252)(1,215)(47,229)45,772(1,456)(12)(1,469)Acquisition of treasury shares24 - -(6) - - - - - -(6) -(6)Dividends25 - - - - - - - -(25,044)(25,044)(111)(25,155)Share-based payment transactions35 - - - - - - - - - - - -Acquisition of subsidiaries - - - - - - - - - - - -Changes in intesets in subsidiaries - - - - - - - - - - - -Transfer from other components of equityto retained earnings - - -22,160(15) - -22,145(22,145) - - -Total transactions with the owners - -(6)22,160(15) - -22,145(47,189)(25,050)(111)(25,162)As of March 31, 201653,20484,321(20,471)-4,53353,616(160)57,989292,775467,8182,858470,676 (Note) FVTOCI: Fair Value Through Other Comprehensive IncomeMillions of yenEquity attributable to owners of the parent companyNon-controllinginterestsTotal equityShare capitalCapital surplusTreasury sharesOther components of equityRetainedearningsTotal equityattributable to ownersof the parentcompany 63 NotesRemeasurement of netdefined benefitliabilities (assets)Net gain (loss) onrevaluation of financialassets measured atFVTOCI (Note)Exchange differenceson translation offoreign operationsNet changes in fairvalue of cash flowhedgesTotal othercomponents of equityAs of April 1, 201653,20484,321(20,471)-4,53353,616(160)57,989292,775467,8182,858470,676Profit for the period - - - - - - - -48,32048,32010648,426Other comprehensive income - - -10,7902,221(5,351)477,707 -7,707(152)7,555Total comprehensive income for the period - - -10,7902,221(5,351)477,70748,32056,028(46)55,982Acquisition of treasury shares24 - -(10,340) - - - - - -(10,340) -(10,340)Dividends25 - - - - - - - -(21,299)(21,299)(237)(21,537)Share-based payment transactions35 -12 - - - - - - -12 -12Acquisition of subsidiaries - - - - - - - - - -2626Changes in interests in subsidiaries -(12) - -(10)0 -(9) -(21)(75)(97)Transfer from other components of equityto retained earnings - - -(10,790)(1,720) - -(12,510)12,510 - - -Total transactions with the owners -0(10,340)(10,790)(1,730)0 -(12,520)(8,789)(31,650)(285)(31,936)As of March 31, 201753,20484,321(30,812) -5,02448,265(112)53,176332,306492,1962,526494,722 (Note) FVTOCI: Fair Value Through Other Comprehensive IncomeNotesRemeasurement of netdefined benefitliabilities (assets)Net gain (loss) onrevaluation of financialassets measured atFVTOCI (Note)Exchange differenceson translation offoreign operationsNet changes in fairvalue of cash flowhedgesTotal othercomponents of equityAs of April 1, 2016474,231751,591(182,476)-40,405477,902(1,416)516,8912,609,6354,169,87225,4664,195,338Profit for the period - - ------430,698430,698944431,642Other comprehensive income - - -96,17619,805(47,695)41868,704-68,704(1,354)67,350Total comprehensive income for the period - - -96,17619,805(47,695)41868,704430,698499,402(410)498,992Acquisition of treasury shares24 - -(92,165) - - - - - -(92,165) -(92,165)Dividends25 - - - - - - - -(189,847)(189,847)(2,112)(191,959)Share-based payment transactions35 -106 - - - - - - -106 -106Acquisition of subsidiaries - - - - - - - - - -231231Changes in interests in subsidiaries -(106) - -(98)0 -(98) -(204)(659)(863)Transfer from other components of equityto retained earnings - - -(96,176)(15,331) - -(111,507)111,507 - - -Total transactions with the owners -0(92,165)(96,176)(15,429)0 -(111,605)(78,340)(282,110)(2,540)(284,650)As of March 31, 2017474,231751,591(274,641)-44,781430,207(998)473,9902,961,9934,387,16422,5164,409,680 (Note) FVTOCI: Fair Value Through Other Comprehensive IncomeThousands of U.S. dollarsEquity attributable to owners of the parent companyNon-controllinginterestsTotal equityShare capitalCapital surplusTreasury sharesOther components of equityRetainedearningsTotal equityattributable to ownersof the parentcompanyMillions of yenEquity attributable to owners of the parent companyNon-controllinginterestsTotal equityShare capitalCapital surplusTreasury sharesOther components of equityRetainedearningsTotal equityattributable to ownersof the parentcompany Consolidated Statement of Cash Flows Years ended March 31, 2016 and 2017: 64 Thousands of U.S. dollarsYear ended March 31,Notes201620172017Cash flows from operating activitiesProfit for the period46,06748,426431,642Depreciation and amortisation45,92343,679389,330Impairment loss and reversal of impairment loss(2,210)2392,130Finance (income) costs, net2,6004754,233Share of (profit) loss of investments accounted for using the equitymethod(104)(53)(472)Loss (gain) on sales and disposal of property, plant and equipment,intangible assets and investment property, net(6,886)96855Income taxes45,42118,461164,551Decrease (increase) in trade receivables10,661(3,691)(32,899)Decrease (increase) in inventories6,610(10,729)(95,632)Increase (decrease) in trade payables(8,915)10,89297,085Increase (decrease) in net defined benefit liabilities1,5141561,390Other, net(3,215)8,39974,884Subtotal137,468116,3521,037,097Interest and dividend income received1,6641,41412,603Interest expenses paid(1,218)(981)(8,744)Payments for loss on litigation(4,144)--Income taxes paid(20,715)(19,910)(177,484)Net cash provided by (used in) operating activities113,05496,873863,472Cash flows from investing activitiesProceeds from sales of investment securities513,10327,658Purchase of property, plant and equipment(59,614)(70,637)(629,619)Proceeds from sales of property, plant and equipment5827466,649Purchase of intangible assets(6,538)(6,899)(61,493)Proceeds from sales of intangible assets3124213Proceeds from sales of investment property13,9691,0889,697Purchase of investments in subsidiaries(500)(2,743)(24,449)Other, net460(441)(3,930)Net cash provided by (used in) investing activities(51,558)(75,759)(675,274)Cash flows from financing activitiesNet increase (decrease) in current borrowings(1,819)(14,374)(128,151)Proceeds from non-current borrowings-5004,456Repayment of non-current borrowings(86)(500)(4,456)Proceeds from issuance of bonds issued-49,759443,524Redemption of bonds issued(40,000)(30,000)(267,403)Payments of lease obligations(103)(101)(900)Dividends paid25(25,044)(21,299)(189,847)Dividends paid to non-controlling interests(111)(236)(2,103)Payments for purchase of subsidiaries’ equity from non-controllinginterests-(97)(863)Purchase of treasury shares(6)(10,340)(92,165)Net cash provided by (used in) financing activities(67,171)(26,691)(237,908)Effect of exchange rate changes on cash and cash equivalents(9,155)(3,139)(27,980)Net increase (decrease) in cash and cash equivalents(14,832)(8,716)(77,690)Cash and cash equivalents at beginning of period8245,330230,4982,054,532Cash and cash equivalents at end of period8230,498221,7821,976,842Millions of yenYear ended March 31, Notes to Consolidated Financial Statements 1. Reporting Entity Seiko Epson Corporation (the “Company”) is a stock corporation domiciled in Japan. The addresses of the Company’s registered head office and principal business offices are available on the Company’s website (http://global.epson.com/). The details of businesses and principal business activities of the Company and its affiliates (“Epson”) are stated in “7. Segment Information.” 2. Basis of Preparation (1) Compliance with IFRS Epson’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (hereinafter referred to as “IFRS”) as issued by the International Accounting Standards Board which are applied based on the provision of Article 93 of Ordinance on Terminology, Forms and Preparation Methods of Consolidated Financial Statements, as Epson meets the criteria of a “Specified Companies applying Designated IFRS” defined under Article 1-2 of Ordinance on Terminology, Forms and Preparation Methods of Consolidated Financial Statements. (2) Basis of Measurement Except for the financial instruments stated in “3. Significant Accounting Policies,” Epson’s consolidated financial statements are prepared on the cost basis. (3) Functional Currency and Presentation Currency Epson’s consolidated financial statements are presented in Japanese yen (hereinafter referred to as “yen” or “¥”), which is the functional currency of the Company. The units are in millions of yen unless otherwise noted, and figures less than one million yen are rounded down. 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 ¥112.19 to U.S. $1 as of March 31, 2017. (4) Reporting Period of Subsidiaries The fiscal year end date of certain overseas subsidiaries is December 31, and Epson consolidates financial results of those subsidiaries in conformity with the provisional settlement of accounts as of the consolidated fiscal year end. (5) Changes in Presentation The presentation of certain items in the consolidated financial statements has been changed from the fiscal year 2016. The changes are made to aim for improving the presentation clear and understandable for users of the consolidated financial statements. Other related presentation has been changed along with the changes of the consolidated financial statements. Comparative information in respect of the preceding period of the items has also been changed in presentation. Changes in presentation of financial liabilities in Consolidated Statement of Financial Position Before the changes After the changes Other financial liabilities Bonds issued, borrowings and lease liabilities Other financial liabilities 3. Significant Accounting Policies (1) Basis of Consolidation Consolidated financial statements of Epson include financial statements of the Company and subsidiaries, and interests in investments in associates and joint ventures. 65 (A) Subsidiaries A subsidiary is an entity that is controlled by Epson. Epson controls the entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The acquisition date of a subsidiary is the date on which Epson obtains control of the subsidiary, and the subsidiary is included in the consolidation from the date of acquisition until the date on which Epson loses control. All intergroup balances, transactions, unrealised profit or loss arising from intergroup transaction are eliminated on consolidation. Comprehensive income for subsidiaries is attributed to the owners of the parent company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. (B) Associates An associate is an entity over which Epson has significant influence that is the power to participate in the financial and operating policy decisions of the entity. Investments in associates are accounted for using the equity method from the date on which Epson has the significant influence until the date on which it ceases to have the significant influence. (C) Joint Ventures A joint venture is a joint arrangement whereby Epson and the other parties that have joint control of the arrangement have rights to the net assets of the arrangement. The joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities, that significantly affect the returns of the arrangement, require the unanimous consent of the parties sharing control. Epson accounts for that investment using the equity method. (2) Business Combinations Each business combination is accounted for by applying the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by Epson, the liabilities incurred by Epson to former owners of the acquiree and the equity interests issued by Epson. Goodwill is recognised in the consolidated statement of financial position, as the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the Epson’s previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If the difference is a negative monetary value, the resulting gain is immediately recognised as profit in the consolidated statement of comprehensive income. Acquisition-related costs incurred are recognised as expenses except for the costs to issue debt or equity securities. (3) Foreign Currency Translation Consolidated financial statements of Epson are presented in Japanese yen, which is the functional currency of the Company. Each company in Epson determines its functional currency and measures its results and financial position in that currency. A foreign currency transaction is translated into the functional currency at a spot exchange rate at the date of the transaction or a rate that approximates the actual rate at the date of the transaction. Foreign currency monetary items are translated using the closing rate. Exchange differences arising on the settlement of monetary items or on translating monetary items are recognised in profit or loss. However, exchange differences arising on financial instruments designated as hedging instruments for net investments in foreign operations, financial assets measured at fair value through other comprehensive income, and cash flow hedges are recognised in other comprehensive income. Assets and liabilities of foreign operations are translated into Japanese yen at the closing date, while income and expenses of foreign operations are translated into Japanese yen at exchange rates at the dates of the transactions or a rate that approximates the exchange rates at the dates of the transactions. All resulting exchange differences are recognised in other comprehensive income. On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation is recognised in profit or loss in the period of disposition. (4) Financial Instruments Epson accounts for financial instruments in accordance with IFRS 9 “Financial Instruments” (announced in November 2009, revised in October 2010), which Epson has early adopted. (A) Financial Assets (i) Initial Recognition and Measurement Financial assets are classified into financial assets measured at fair value and amortised cost at initial recognition. 66 Financial assets are classified as financial assets measured at amortised cost if both of the following conditions are met. Otherwise, they are classified as financial assets measured at fair value. (a) The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows. (b) The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. For financial assets measured at fair value, each equity instrument is designated as measured at fair value through profit or loss or as measured at fair value through other comprehensive income, except for equity instruments held for trading purposes that must be measured at fair value through profit or loss. Such designations are applied continuously. All financial assets are initially measured at fair value plus transaction costs that are directly attributable to the financial assets, except when classified in the category of financial assets measured at fair value through profit or loss. Epson recognises trade and other receivables on the date they are originated. All other financial assets are recognised on the trade date when Epson becomes a party to the contractual provisions of the instrument. (ii) Subsequent Measurement After initial recognition, financial assets are measured based on the classification as follows: (a) Financial Assets Measured at Amortised Cost Financial assets measured at amortised cost are measured at amortised cost using the effective interest method. (b) Financial Assets Measured at Fair Value Financial assets other than those measured at amortised cost are measured at fair value. Changes in fair value of financial assets measured at fair value are recognised in profit or loss. However, changes in fair value of equity instruments designated as measured at fair value through other comprehensive income are recognised in other comprehensive income and the cumulative change in fair value in other comprehensive income is transferred to retained earnings when equity instruments are derecognised or the decline in their fair value is significant. Dividends on the financial assets are recognised in profit or loss for each fiscal year. (iii) Derecognition Financial assets are derecognised when the contractual rights to the cash flows from them expire or when they are transferred in transactions in which substantially all the risks and rewards of ownership are transferred. (B) Impairment of Financial Assets At the end of each fiscal year, Epson assesses whether there is any objective evidence that financial assets measured at amortised cost are impaired. Evidence of impairment includes significant financial difficulty of the borrower or a group of borrowers, a default or delinquency in interest or principal payments, and bankruptcy of the borrower. Epson assesses whether objective evidence of impairment exists individually for financial assets that are individually significant and collectively for financial assets that are not individually significant. If there is any objective evidence that impairment losses on financial assets measured at amortised cost have been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. When impairment is recognised, the carrying amount of the financial asset is reduced by an allowance account and impairment loss is recognised in profit or loss. If the amount of the impairment loss provided decreases due to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed in profit or loss through the allowance account. (C) Financial Liabilities (i) Initial Recognition and Measurement Financial liabilities are classified into financial liabilities measured at fair value through profit or loss and financial liabilities measured at amortised cost. Epson determines the classification at initial recognition. 67 All financial liabilities are measured at fair value at initial recognition. However, financial liabilities measured at amortised cost are measured at cost after deducting transaction costs that are directly attributable to the financial liabilities. (ii) Subsequent Measurement After initial recognition, financial liabilities are measured based on the classification as follows: (a) Financial Liabilities Measured at Fair Value through Profit or Loss Financial liabilities measured at fair value through profit or loss include financial liabilities designated as measured at fair value through profit or loss at initial recognition. (b) Financial Liabilities Measured at Amortised Cost Financial liabilities measured at amortised cost are measured at amortised cost using the effective interest method. (iii) Derecognition Financial liabilities are derecognised when the obligation is discharged, canceled or expired. (D) Offsetting a Financial Asset and a Financial Liability A financial asset and a financial liability are offset and the net amount presented in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and Epson intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. (E) Derivatives Accounting Epson utilizes derivatives, including forward foreign exchange contracts and non-deliverable forwards, to hedge foreign exchange and interest rate risks. These derivatives are initially measured at fair value when the contract is entered into, and are subsequently remeasured at fair value. Changes in fair value of derivatives are recognised in profit or loss in the consolidated statement of comprehensive income. However, the gains or losses on hedging instruments relating to the effective portion of cash flow hedges and hedges of net investments in foreign operations are recognised in other comprehensive income in the consolidated statement of comprehensive income. (F) Hedge Accounting At the inception of a hedge, Epson formally designates and documents the hedging relationship to which hedge accounting is applied and the objectives and strategies of risk management for undertaking the hedge. The documentation includes identification of hedging instruments, the hedged items or transactions, the nature of the risks being hedged and how the hedging instrument’s effectiveness is assessed in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risks. Even though these hedges are expected to be highly effective in offsetting changes in fair value or cash flows, they are assessed on an ongoing basis and determined actually to have been highly effective throughout the financial reporting periods for which the hedges were designated. Epson classifies hedging relationships that meet the qualifying criteria for hedge accounting in the following categories and applies hedge accounting to the hedging relationships. (i) Fair Value Hedge The gain or loss on the derivative is recognised in profit or loss in the consolidated statement of comprehensive income. The hedging gain or loss on the hedged items attributable to the hedged risks adjust the carrying amount of the hedged item and is recognised in profit or loss in the consolidated statement of comprehensive income. (ii) Cash Flow Hedge The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income in the consolidated statement of comprehensive income, while the ineffective portion is recognised immediately in profit or loss in the consolidated statement of comprehensive income. The amounts of hedging instruments recognised in other comprehensive income are reclassified to profit or loss when the transactions of the hedged items affect profit or loss. In cases where hedged items result in the recognition of non-financial assets or liabilities, the amounts recognised in other comprehensive income are accounted for as adjustments to the initial carrying amount of non-financial assets or liabilities. When forecast transactions or firm commitments are no longer expected to occur, any related cumulative gains or losses that have been recognised in other comprehensive income are reclassified to profit or loss. When hedging instruments expire, are sold, terminated or exercised without the replacement or rollover of other hedging instruments, or when the hedge designation is revoked, amounts that have been recognised in other 68 comprehensive income continue to be recognised in equity until the forecast transactions or firm commitments occur. (iii) Hedges of a Net Investment in Foreign Operation Hedges of a net investment in foreign operation are accounted for similarly to cash flow hedges. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income in the consolidated statement of comprehensive income, while the ineffective portion is recognised in profit or loss in the consolidated statement of comprehensive income. On the disposal of the foreign operation, the cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge that has been recognised in other comprehensive income is reclassified from equity to profit or loss. (G) Fair Value of Financial Instruments Fair value of financial instruments that are traded in an active market as of the end of fiscal year refers to quoted market prices or dealer quotations. If there is no active market, fair value of financial instruments is determined using appropriate valuation models. (5) Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, demand deposits, and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value as such that has a short maturity of three months or less from the date of acquisition. (6) Inventories The cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Inventories are measured at the lower of cost or net realizable value, and the cost of inventories is assigned by using the weighted-average cost formula. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. (7) Property, Plant and Equipment The cost of property, plant and equipment includes any costs directly attributable to the acquisition of the asset and dismantlement, removal and restoration costs, as well as borrowing costs eligible for capitalisation. After recognition as an asset, property, plant, and equipment is measured by using the cost model and is carried at its cost less any accumulated depreciation and any accumulated impairment losses. Except for assets that are not subject to depreciation such as land, assets are depreciated using the straight-line method over their estimated useful lives. The estimated useful lives of major assets are as follows: • Buildings and structures: 10 to 35 years • Machinery and vehicles: 2 to 12 years The estimated useful lives, depreciation method and residual value are reviewed at each fiscal year end and, if expectations differ from previous estimates, the effect of changes in accounting estimates is recognised prospectively. (8) Intangible Assets (A) Goodwill Goodwill acquired in a business combination is measured at the amount recognised at the acquisition date less any accumulated impairment losses. Goodwill is not amortised and allocated to a cash-generating unit that is identified according to locations and types of businesses. The cash-generating unit to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired. An impairment loss is recognised in profit or loss in the consolidated statement of comprehensive income and not reversed in a subsequent period. (B) Intangible Assets The cost of a separately acquired intangible asset is measured initially at cost, and the cost of intangible asset acquired in a business combination is its fair value at the acquisition date. The cost of internally generated intangible asset is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria. After initial recognition, an intangible asset is measured by using the cost model and is carried at its cost less any accumulated amortisation and any accumulated impairment losses. An intangible asset with a finite useful life is amortised using the straight-line method over its estimated useful life. 69 The estimated useful life of major intangible asset with a finite useful life is as follows: • Software: 3 to 10 years The estimated useful lives and amortisation method are reviewed at each fiscal year end and, if expectations differ from previous estimates, the effect of changes in accounting estimates is recognised prospectively. An intangible asset with an indefinite useful life or an intangible asset not yet available for use are not amortised and tested for impairment annually, and whenever there is an indication that the intangible asset may be impaired. (9) Leases Epson classifies a lease as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an asset and a lease as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an asset. At the commencement of the lease term, finance leases are recognised as assets and liabilities in the consolidated statement of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The asset is depreciated using the straight-line method over the shorter of the lease term and its estimated useful life which is consistent with that for depreciable assets that are owned. Contingent rents are recognised as expenses in the periods in which they are incurred. Lease payments under an operating lease are recognised as an expense on a straight-line basis over the lease term in the consolidated statement of comprehensive income. Determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset) and the arrangement conveys a right to use the asset. (10) Investment Property Investment property is property held to earn rentals or for capital appreciation or both. After recognition as an asset, investment property is measured by using the cost model and is carried at its cost less any accumulated depreciation and any accumulated impairment losses. Except for assets that are not subject to depreciation such as land, investment property is depreciated using the straight-line method over its estimated useful life. The estimated useful life of major investment properties that are subject to depreciation is 35 years. (11) Impairment of Non-financial Assets Epson assesses whether there is any indication that an asset may be impaired. If any such indication exists, or irrespective of whether there is any indication of impairment, where impairment testing is required, the recoverable amount of the asset is estimated. If it is not possible to estimate the recoverable amount for each asset, the recoverable amount of the cash-generating unit to which the asset belongs is determined. The recoverable amount is measured at the higher of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use. If carrying amount of an asset or cash-generating unit exceeds its recoverable amount, an impairment loss is recognised and the carrying amount of the asset is reduced to its recoverable amount. The impairment loss is recognised in profit or loss. In determining an asset’s value in use, an estimate of the future cash flows expected to derive from the asset are discounted to the present value, using pretax discount rates that reflect current market assessments of the time value of money and the risks specific to the asset. An impairment loss for goodwill is recognised in profit or loss in the consolidated statement of comprehensive income and not reversed in a subsequent period. Epson assesses whether there is any indication that an impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the recoverable amount of that asset is estimated. If the recoverable amount exceeds the carrying amount of the asset, an impairment loss is reversed to the carrying amount that would have been determined (net of amortisation or depreciation) if no impairment loss had been recognised for the asset in prior years. (12) Non-current Assets Held for Sale and Discontinued Operations Epson classifies a non-current asset or disposal group as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. The non-current asset or disposal group as held for sale is available for immediate sale in its present condition and its sale is highly probable when Epson management commits to a plan to sell the asset or disposal group. Epson measures the non-current asset or disposal group classified as held for sale at the lower of its carrying amount and fair value less costs to sell. The non-current asset is not depreciated or amortised while it is classified as held for sale or while it is part of a disposal group classified as held for sale. A discontinued operation is a component of an entity, that is a cash-generating unit or a group of cash-generating 70 units, that either has been disposed of, or is classified as held for sale, and (a) represents a separate major line of business or geographical area of operations, (b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or (c) is a subsidiary acquired exclusively with a view to resale. (13) Post-employment Benefits Epson has defined benefit plans and defined contribution plans as post-employment benefits plans. For each defined benefit plan, Epson calculates the present value of defined benefit obligations and the related current service cost and past service cost, using the projected unit credit method. For a discount rate, a discount period is set based on the estimated timing of benefit payments in each period, and the discount rate is determined by reference to market yields as of the end of fiscal year on high quality corporate bonds for the period corresponding to the discount period. The net defined benefit liability (asset) is measured by deducting the fair value of any plan assets (including adjustments of the net defined benefit asset and the asset ceiling, if necessary) from the present value of the defined benefit obligation. Net interest on the net defined benefit liability (asset) is recognised in profit or loss. Remeasurements of the net defined benefit liability (asset) are recognised in other comprehensive income and transferred to retained earnings immediately. Past service cost is recognised as an expense at the earlier of when a plan amendment or curtailment occurs and when any related restructuring costs or termination benefits are recognised. The contribution payable to a defined contribution plan is recognised as an expense. (14) Share-based Payment The Company has employed a framework referred to as BIP (Board Incentive Plan) trust as performance-linked equity-settled share-based payment plan for eligible officers. The shares of the Company held by the trust are recognised as treasury shares. The Company measures the service received at the fair value of its shares granted at the grant date and recognises the consideration as expenses over the vesting period while the corresponding amount is recognised as an increase in equity. (15) Provisions Epson recognises a provision when it has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits is required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the effect of the time value of money is material, the amount of a provision is measured at the present value of the expenditures expected to be required to settle the obligation. (16) Revenue (A) Sale of Goods Epson recognises revenue from the sale of goods when the significant risks and rewards of ownership of the goods have been transferred to the buyers, Epson retains neither continuing managerial involvement nor effective control over the goods sold, it is probable that the economic benefits associated with the transaction will flow to Epson, and the amount of revenue and the costs incurred or to be incurred in respect of the transaction can be measured reliably. The risks and rewards of ownership of the goods are usually transferred at the time of delivery of the goods to customers. The amount of revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates. (B) Interest Interest is recognised using the effective interest method. (C) Dividends Dividends are recognised when the shareholder’s right to receive payment is established. (D) Royalties Royalties are recognised on an accrual basis in accordance with the substance of the relevant agreement. (E) Rendering of Services Revenues arising from the rendering of services are recognised by reference to the stage of completion of the transaction as of the end of fiscal year. (17) Government Grants A government grant is recognised at fair value when there is reasonable assurance that Epson will comply with the 71 conditions attaching to it, and that the grant will be received. Grants related to assets are deducted in calculating the carrying amount of the asset. Grants related to income are recognised in profit or loss on a systematic basis over the periods in which Epson recognises as expenses the related costs for which the grants are intended to compensate. (18) Borrowing Costs Borrowing costs are interest and other costs incurred in connection with the borrowing of funds. The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, that necessarily takes a substantial period of time to get ready for their intended use or sale, are capitalized as part of the cost of that asset. Other borrowing costs are recognised as an expense in the period when they are incurred. (19) Income Taxes Income taxes are presented as the total of current tax expense and deferred tax expense. Current tax is the amount of income taxes payable or recoverable and is recognised as an expense or income and included in profit or loss for the period, except to the extent that the tax arises from a transaction which is recognised either in other comprehensive income or directly in equity, or a business combination. For the calculation of the tax amount, Epson uses the tax rates and tax laws that have been enacted or substantively enacted by the end of fiscal year. Deferred tax expense is calculated based on a temporary difference that is the difference between the carrying amount of the assets or liabilities in the consolidated financial statements and their tax bases. A deferred tax asset is recognised for all deductible temporary differences, the carryforward of unused tax credits and unused tax losses to the extent that it is probable that future taxable profit will be available against which they can be utilized. A deferred tax liability is recognised for all taxable temporary differences. A deferred tax liability is not recognised for taxable temporary differences when the deferred tax liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction which is not a business combination and affects neither accounting profit nor taxable profit or loss at the time of the transaction. Also a deferred tax liability is not recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures to the extent that the timing of the reversal of the temporary difference is controlled and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is not recognised for deductible temporary differences arising from investments in subsidiaries and associates, and interests in joint ventures to the extent that it is not probable that the temporary difference will reverse in the foreseeable future and that taxable profit will be available against which the temporary difference can be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by the end of fiscal year. (20) Treasury Shares Treasury shares are measured at their cost and deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale or cancellation of the treasury shares. Any difference between the carrying amount and the consideration paid is recognised in equity. (21) Earnings per Share Basic earnings per share are calculated by dividing profit or loss attributable to ordinary shareholders of the Company by the weighted-average number of ordinary shares outstanding during the period, adjusting by the number of treasury shares. For the purpose of the calculation, the shares of the Company held by BIP trust are excluded because the shares are accounted as treasury shares. For the purpose of calculating diluted earnings per share, the rights for the treasury shares held by the trust to be received by eligible officers are adjusted. (22) Dividends Year-end dividend distributions to the shareholders of the Company are recognised as liabilities in the period in which the distribution is approved at the Annual Shareholders’ Meeting. Interim dividend distributions are recognised as liabilities in the period in which the distribution is approved by Epson’s Board of Directors. 72 4. Significant Accounting Estimates and Judgments The preparation of Epson’s consolidated financial statements includes management estimates and assumptions in order to measure income, expenses, assets and liabilities, and disclosed contingencies as of the fiscal year end date. These estimates and assumptions are based on the best judgment of management in light of historical experience and various factors deemed to be reasonable as of the fiscal year end date. Given their nature, actual results may differ from those estimates and assumptions. The estimates and assumptions are continuously reviewed by management. The effects of a change in estimates and assumptions are recognised in the period of the change and subsequent periods. Among the above estimates and assumptions, the following were items that may have a material effect on the amounts recognised in Epson’s consolidated financial statements: (1) Impairment of Property, Plant and Equipment, Goodwill, Intangible Assets and Investment Property Epson performs an impairment test for property, plant and equipment, goodwill, intangible assets and investment property when there is any indication that the recoverable amount has fallen below the carrying amount of the assets or when it is required annually. The impairment test is performed by comparing the carrying amount and the recoverable amount of assets. If the recoverable amount falls below the carrying amount, impairment losses are recognised. Recoverable amount is determined with certain assumptions of useful life, future cash flow of an asset, discount rate and long-term growth rate. These assumptions are based on the best estimates and judgments of management, but they could be affected by variable and uncertain future economic conditions. Any changes in these assumptions could have a material impact on Epson’s consolidated financial statements in future periods. The method for calculating the recoverable amount is stated in “13. Property, Plant and Equipment.” (2) Post-employment Benefits Epson has several types of post-employment benefit plans, including defined benefit plans. The present value of defined benefit obligations on each of these plans and the related service costs and others are calculated based on actuarial assumptions. These actuarial assumptions require estimates and judgments on variables, such as discount rates. The actuarial assumptions are determined based on the best estimates and judgments of management, but they could be affected by variable and uncertain future economic conditions. Any changes in these assumptions could have a material impact on Epson’s consolidated financial statements in future periods. These actuarial assumptions and related sensitivity analysis are stated in “23. Post-employment Benefits.” (3) Provisions Epson recognises various provisions, including provisions for product warranties and provisions for loss on litigation, in the consolidated statement of financial position. These provisions are recognised based on the best estimates of the expenditures required to settle the obligations, taking into account risks and uncertainty related to the obligations as of the fiscal year end date. Expenditures necessary for settling the obligations are calculated by taking all possible future results into account; however, they may be affected by unexpected events or changes in conditions which may have a material impact on Epson’s consolidated financial statements in future periods. The nature and amount of recognised provisions are stated in “21. Provisions.” (4) Income Taxes Epson, which conducts business around the world, makes reasonable estimates of income tax to be paid to local tax authorities in accordance with local laws and regulations, and recognises income taxes payable and current tax expense based on these estimates. Calculating income taxes payable and current tax expense requires estimates and judgments on various factors, including, for example, the interpretation of tax regulations by taxable entities and the tax authority in the jurisdiction or experience of prior tax investigation. Therefore, there may be differences between the amount recognised as income taxes payable and current tax expense and the amount of actual income taxes payable and current tax expense. These differences may have a material impact on Epson’s consolidated financial statements in future periods. In addition, deferred tax assets are recognised to the extent that it is probable that taxable income will be available against which deductible temporary differences can be utilised. In recognising the deferred tax assets, Epson judges the possibility of future taxable income and reasonably estimate the timing and amount of future taxable income 73 based on the business plan. The timing and amount of taxable income may be affected by variable and uncertain future economic conditions, and changes could have a material impact on Epson’s consolidated financial statements in future periods. The content and amounts related to income taxes are stated in “18. Income Taxes.” (5) Contingencies With regard to contingencies, any items that may have a material impact on business in the future are disclosed in light of all the available evidence as of the fiscal year end date and by taking into account the probability of these contingencies and their impact on financial reporting. The content of contingencies is stated in “40. Contingencies.” 5. Changes in Accounting Policies There is no application of standard and interpretation newly by Epson from the fiscal year 2016. 6. New Standards and Interpretations Not Yet Applied The new standards, amended standards and new interpretations that have been issued as of the date of approval of the consolidated financial statements, but have not yet been applied by Epson as of March 31, 2017 are as follows. The potential impacts that application of these standards and interpretations will have on the consolidated financial statements are currently evaluated by Epson. IFRS IFRS 9 Financial Instruments IFRS 15 Revenue from Contracts with Customers IFRS 16 Leases Date of mandatory application (from the fiscal year beginning on or after) January 1, 2018 Reporting periods of application by Epson (The reporting period ending) March 31, 2019 Amendments to hedge accounting Description of new and revised standards Limited changes to classification and measurement of financial assets, and introduction of an expected credit loss impairment model January 1, 2018 March 31, 2019 Amendments to accounting treatment for recognising revenue January 1, 2019 To be determined Amendments to the principles for the recognition, measurement, presentation and disclosure of leases Recognision of assets and liabilities for most leases by lessees Substantially unchanged in lessor accounting 74 7. Segment Information (1) Outline of Reportable Segments The reportable segments of Epson are determined based on the operating segments that are components of Epson about which separate financial information is available and are evaluated regularly by the Board of Directors in deciding how to allocate resources and in assessing performance. The reportable segments of Epson are composed of three segments: “Printing Solutions,” “Visual Communications” and “Wearable & Industrial Products.” They are determined by types of products, nature of products, and markets. Epson conducts development, manufacturing and sales within its reportable segments as follows: Reportable segments Printing Solutions Main products Inkjet printers, serial impact dot matrix printers, page printers, color image scanners, large-format inkjet printers, industrial inkjet printing systems, printers for use in POS systems, label printers and related consumables, office papermaking systems, personal computers and others. Visual Communications 3LCD projectors, HTPS-TFT panels for 3LCD projectors, smart eyewear and others. Wearable & Industrial Products Watches, watch movements, sensing equipment, industrial robots, IC handlers, crystal units, crystal oscillators, quartz sensors, CMOS LSIs, metal powders, surface finishing and others. 75 (2) Revenues and Performances for Reportable Segments Revenues and performances for reportable segments were as follows. Transactions between the segments were mainly based on prevailing market prices. FY2015: Year ended March 31, 2016 Millions of yen Printing Solutions Reportable segments Visual Communi- cations Wearable & Industrial Products Subtotal Other (Note 2) Adjustments (Note 3) Consolidated Revenue External revenue 736,033 183,997 164,384 1,084,415 Inter-segment revenue 336 35 6,031 6,403 753 651 7,312 1,092,481 (7,055) - Total revenue 736,369 184,033 170,415 1,090,819 1,404 257 1,092,481 Segment profit (loss) (Business profit) (Note 1) 104,740 15,593 9,817 130,150 (566) (44,632) 84,951 Other operating income Profit from operating activities (expense) Finance income (costs), net Share of profit of investments accounted for using the equity method Profit before tax 9,074 94,026 (2,600) 104 91,530 Other (Note 2) Adjustments (Note 4) Consolidated Printing Solutions Reportable segments Visual Communi- cations Wearable & Industrial Products Subtotal (24,183) (7,420) (8,171) (39,775) (21) (5,602) (45,399) (251) (406) (203) (861) - 3,071 2,210 Other items Depreciation and amortisation expense Impairment loss and Reversal of impairment loss on other than financial assets Segment assets Capital expenditures 36,623 10,763 10,293 348,610 108,097 130,867 587,576 57,680 638 353,125 941,340 40 11,701 69,423 (Note 1) Segment profit (loss) (Business profit) is calculated by subtracting Cost of sales and Selling, general and administrative expenses from Revenue. (Note 2) “Other” consists of the intra-group services. (Note 3) “Adjustments” to Segment profit (loss) (Business profit) of (¥44,632) million comprised “Eliminations” of ¥470 million and “Corporate expenses” of (¥45,102) million. “Corporate expenses” included expenses relating to research and development for basic technology, new businesses and general corporate expenses which are not attributed to reportable segments. (Note 4) “Adjustments” to Segment assets of ¥353,125 million comprised “Eliminations” of (¥3,999) million and “Corporate assets” of ¥357,124 million. 76 FY2016: Year ended March 31, 2017 Millions of yen Printing Solutions Reportable segments Visual Communi- cations Wearable & Industrial Products Subtotal Other (Note 2) Adjustments (Note 3) Consolidated Revenue External revenue 686,353 179,642 150,674 1,016,671 Inter-segment revenue 265 39 7,873 8,179 787 721 7,398 1,024,856 (8,901) - Total revenue 686,619 179,682 158,548 1,024,850 1,509 (1,502) 1,024,856 Segment profit (loss) (Business profit) (Note 1) 84,127 16,142 7,813 108,084 (482) (41,794) 65,807 (expense) Other operating income Profit from operating activities Finance income (costs), net Share of profit of investments accounted for using the equity method Profit before tax 2,085 67,892 (475) 53 67,470 Other items Depreciation and amortisation expense Impairment loss and Reversal of impairment loss on other than financial assets Segment assets Printing Solutions Reportable segments Visual Communi- cations Wearable & Industrial Products Subtotal Other (Note 2) Adjustments (Note 4) Consolidated (23,079) (7,885) (7,956) (38,920) (22) (4,272) (43,215) (45) (0) (161) (206) - (32) (239) 376,782 115,024 133,982 625,790 299 348,297 974,387 Capital expenditures 43,930 10,201 9,189 63,321 2 11,995 75,319 (Note 1) Segment profit (loss) (Business profit) is calculated by subtracting Cost of sales and Selling, general and administrative expenses from Revenue. (Note 2) “Other” consists of the intra-group services. (Note 3) “Adjustments” to Segment profit (loss) (Business profit) of (¥41,794) million comprised “Eliminations” of ¥496 million and “Corporate expenses” of (¥42,291) million. “Corporate expenses” included expenses relating to research and development for basic technology, new businesses and general corporate expenses which are not attributed to reportable segments. (Note 4) “Adjustments” to Segment assets of ¥348,297 million comprised “Eliminations” of (¥3,992) million and “Corporate assets” of ¥352,290 million. 77 FY2016: Year ended March 31, 2017 Thousands of U.S. dollars Printing Solutions Reportable segments Visual Communi- cations Wearable & Industrial Products Subtotal Other (Note 2) Adjustments (Note 3) Consolidated 6,117,791 1,601,230 1,343,025 9,062,046 7,014 65,943 9,135,003 2,363 356 70,184 72,903 6,436 (79,339) - 6,120,154 1,601,586 1,413,209 9,134,949 13,450 (13,396) 9,135,003 749,881 143,880 69,640 963,401 (4,305) (372,528) 586,568 Other operating income (expense) 18,583 Profit from operating activities 605,151 Finance income (costs), net (4,233) Share of profit of investments accounted for using the equity method Profit before tax 472 601,390 Other (Note 2) Adjustments (Note 4) Consolidated Printing Solutions Reportable segments Visual Communi- cations Wearable & Industrial Products Subtotal (205,714) (70,282) (70,915) (346,911) (196) (38,087) (385,194) (401) (0) (1,435) (1,836) - (294) (2,130) 3,358,447 1,025,260 1,194,241 5,577,948 2,665 3,104,537 8,685,150 Revenue External revenue Inter-segment revenue Total revenue Segment profit (loss) (Business profit) (Note 1) Other items Depreciation and amortisation expense Impairment loss and Reversal of impairment loss on other than financial assets Segment assets Capital expenditures 391,577 90,926 81,905 564,408 17 106,927 671,352 (Note 1) Segment profit (loss) (Business profit) is calculated by subtracting Cost of sales and Selling, general and administrative expenses from Revenue. (Note 2) “Other” consists of the intra-group services. (Note 3) “Adjustments” to Segment profit (loss) (Business profit) of ($372,528) thousand comprised “Eliminations” of $4,430 thousand and “Corporate expenses” of ($376,958) thousand. “Corporate expenses” included expenses relating to research and development for basic technology, new businesses and general corporate expenses which are not attributed to reportable segments. (Note 4) “Adjustments” to Segment assets of $3,104,537 thousand comprised “Eliminations” of ($35,582) thousand and “Corporate assets” of $3,140,119 thousand. 78 (3) Geographic Information The regional breakdowns of non-current assets and external revenues as of each fiscal year end were as follows: Non-current Assets Japan The Philippines Indonesia China Other Total Millions of yen March 31, 2016 2017 Thousands of U.S. dollars March 31, 2017 168,114 26,404 23,281 25,704 27,833 271,338 188,412 31,436 29,146 25,048 30,918 304,962 1,679,401 280,203 259,791 223,264 275,624 2,718,283 (Note) Non-current assets, excluding Other financial assets, Deferred tax assets and retirement benefits assets, are segmented by the location of the assets. External Revenue Japan The United States China Other Total Millions of yen Year ended March 31, 2017 2016 Thousands of U.S. dollars Year ended March 31, 2017 264,012 227,849 144,466 456,152 1,092,481 251,395 202,416 129,834 441,210 1,024,856 2,240,796 1,804,224 1,157,268 3,932,715 9,135,003 (Note) Revenue is segmented by country based on the location of the customers. (4) Major Customers Information Epson had no transactions with a single external customer amounting to 10% or more of total external revenue. 79 8. Cash and Cash Equivalents The breakdown of “Cash and cash equivalents” was as follows: Cash and deposits Short-term investments Total Millions of yen March 31, 2016 102,404 128,093 230,498 2017 105,188 116,593 221,782 Thousands of U.S. dollars March 31, 2017 937,588 1,039,254 1,976,842 9. Trade and Other Receivables The breakdown of “Trade and other receivables” was as follows: Notes and trade receivables Other receivables Allowance account for credit losses Total Millions of yen March 31, 2016 140,623 12,463 (1,426) 151,660 2017 143,060 14,071 (1,427) 155,704 Thousands of U.S. dollars March 31, 2017 1,275,158 125,420 (12,719) 1,387,859 Trade and other receivables are presented net of the allowance account for credit losses in the consolidated statement of financial position. Trade and other receivables are classified as financial assets measured at amortised cost. 10. Inventories The breakdown of “Inventories” was as follows: Merchandise and finished goods Work in process Raw materials Supplies Total Millions of yen March 31, 2016 122,013 52,256 20,363 6,975 201,608 2017 123,050 55,366 22,403 7,692 208,512 Thousands of U.S. dollars March 31, 2017 1,096,800 493,502 199,688 68,571 1,858,561 The amount of inventories included in cost of sales recognised as an expense totaled (¥687,289) million and (¥644,777) million (($5,747,187) thousand) for the years ended March 31, 2016 and 2017, respectively. Losses recognised as cost of sales as a result of valuations for the years ended March 31, 2016 and 2017 were (¥29,158) million and (¥31,275) million (($278,768) thousand), respectively. In addition, Epson has no inventories pledged as collateral. 80 11. Other Financial Assets (1) The breakdown of “Other financial assets” Derivative assets Equity securities Bonds receivable Time deposits Other Allowance account for credit losses Total Current assets Non-current assets Total Millions of yen March 31, 2016 2017 1,383 16,060 88 37 6,119 (53) 23,637 1,674 21,962 23,637 449 15,809 75 37 4,985 (57) 21,298 754 20,544 21,298 Thousands of U.S. dollars March 31, 2017 4,002 140,903 668 329 44,443 (508) 189,837 6,720 183,117 189,837 Derivative assets are classified as financial assets measured at fair value through profit or loss, excluding a case where hedge accounting is applied. Equity securities held for other than trading purposes are classified as financial assets measured at fair value through other comprehensive income, and bonds receivables and time deposits are classified as financial assets measured at amortised cost. (2) Names of major equity securities measured at fair value through other comprehensive income, their fair values and dividends received Equity securities are held mainly for strengthening relationships with investees. Therefore, they are designated as financial assets measured at fair value through other comprehensive income. In order to pursue the efficiency of assets held, sales of financial assets measured at fair value through other comprehensive income have been carried out (derecognition). The major description is as follows. 81 Fair valueDividendsreceived (Note)Fair valueFair valueDividendsreceived (Note)NGK Insulators, Ltd.7,8101236,31756,306891Mizuho Financial Group, Inc.2,5221163,06127,284998(Note) Dividends received from the derecognised financial assets during the reporting periods are not included.100112March 31, 2017Dividendsreceived (Note)Millions of yenThousands of U.S. dollarsMarch 31, 2016March 31, 2017FY2015: Year ended March 31, 2016Fair value at thedate of saleAccumulated gainsDividends receivedNGK Insulators, Ltd.---(Note) Accumulated gain or loss recognised as other comprehensive income is transferred to retained earnings when an equity instrument is sold or the decline in its fair value is significant.-Accumulated gainstransferred intoretained earnings(net of tax) (Note)Millions of yen 12. Other Assets The breakdown of “Other current assets” and “Other non-current assets” was as follows: Prepaid expense Advances to suppliers Other Total Current assets Non-current assets Total Millions of yen March 31, 2016 13,887 1,724 3,845 19,457 14,335 5,122 19,457 2017 13,840 1,502 3,319 18,663 13,176 5,486 18,663 Thousands of U.S. dollars March 31, 2017 123,362 13,388 29,653 166,403 117,464 48,939 166,403 82 FY2016: Year ended March 31, 2017Fair value at thedate of saleAccumulated gainsDividends receivedNGK Insulators, Ltd.2,8842,18350(Note) Accumulated gain or loss recognised as other comprehensive income is transferred to retained earnings when an equity instrument is sold or the decline in its fair value is significant.FY2016: Year ended March 31, 2017Fair value at thedate of saleAccumulated gainsDividends receivedNGK Insulators, Ltd.25,70619,458445(Note) Accumulated gain or loss recognised as other comprehensive income is transferred to retained earnings when an equity instrument is sold or the decline in its fair value is significant.Thousands of U.S. dollarsAccumulated gainstransferred intoretained earnings(net of tax) (Note)14,181Accumulated gainstransferred intoretained earnings(net of tax) (Note)1,591Millions of yen 13. Property, Plant and Equipment (1) Schedule of Property, Plant and Equipment The schedules of the cost, accumulated depreciation and accumulated impairment losses, and carrying amount of “Property, plant and equipment” were as follows: 83 CostLand, buildingsand structuresMachinery,equipment andvehiclesTools, furnitureand fixturesConstructionin progressOtherTotalAs of April 1, 2015468,469460,050184,6114,1433,1371,120,412Individual acquisition3,9977,6588,78743,87476465,083Acquisition of subsidiary71725362--1,033Transfer from (to) investmentproperty(182)----(182)Transfer from (to) non-currentassets held for sale(1,267)(40)(111)--(1,418)Sale or disposal(17,675)(10,000)(9,699)(79)(187)(37,641)Exchange differences ontranslation of foreign operations(5,173)(11,160)(7,430)(901)(11)(24,678)Transfer from constructionin progress9,26716,0386,112(31,418)--Other195(1,230)85(534)(1,210)(2,694)As of March 31, 2016458,348461,570182,41815,0842,4921,119,913Individual acquisition3,4777,0198,84250,63851670,494Acquisition of subsidiary31749126-29523Transfer from (to) investmentproperty(100)----(100)Sale or disposal(6,222)(11,908)(12,524)(120)(64)(30,840)Exchange differences ontranslation of foreign operations(1,693)(4,707)(1,244)286(9)(7,368)Transfer from constructionin progress9,75618,11510,832(38,704)--Other620(1,812)(558)(440)(28)(2,219)As of March 31, 2017464,504468,327187,89126,7442,9351,150,402CostLand, buildingsand structuresMachinery,equipment andvehiclesTools, furnitureand fixturesConstructionin progressOtherTotalAs of March 31, 20164,085,4624,114,1811,625,973134,45022,2139,982,279Individual acquisition30,99262,56378,812451,3594,618628,344Acquisition of subsidiary2,8254361,123-2774,661Transfer from (to) investmentproperty(891)----(891)Sale or disposal(55,459)(106,141)(111,632)(1,069)(589)(274,890)Exchange differences ontranslation of foreign operations(15,090)(41,955)(11,088)2,549(90)(65,674)Transfer from constructionin progress86,959161,46796,550(344,976)--Other5,535(16,142)(4,981)(3,932)(259)(19,779)As of March 31, 20174,140,3334,174,4091,674,757238,38126,17010,254,050Millions of yenThousands of U.S. dollars (Note) Depreciation expense for Property, plant and equipment was included in Cost of sales and Selling, general and administrative expenses in the consolidated statement of comprehensive income. 84 Accumulated Depreciation andAccumulated Impairment LossesLand, buildingsand structuresMachinery,equipment andvehiclesTools, furnitureand fixturesConstructionin progressOtherTotalAs of April 1, 2015(340,803)(391,441)(159,629)-(1,280)(893,155)Depreciation expense (Note)(8,797)(15,443)(13,888)-(38)(38,168)Impairment losses(725)(149)(357)(161)-(1,395)Acquisition of subsidiary(43)(79)(47)--(169)Transfer to (from) investmentproperty136----136Transfer to (from) non-currentassets held for sale83240106--979Sale or disposal17,4549,5559,373552736,466Exchange differences ontranslation of foreign operations2,3378,7186,393-917,459Other21,18484-1,1242,396As of March 31, 2016(329,606)(387,615)(157,965)(105)(157)(875,449)Depreciation expense (Note)(8,090)(16,441)(13,154)-(21)(37,708)Impairment losses(78)(33)(74)(20)-(206)Acquisition of subsidiary(42)(42)(62)-(17)(165)Transfer to (from) investmentproperty84----84Sale or disposal5,88311,73512,2661052130,011Exchange differences ontranslation of foreign operations8873,8881,032-95,818Other2171,7584370(5)2,406As of March 31, 2017(330,744)(386,751)(157,520)(20)(170)(875,207)Accumulated Depreciation andAccumulated Impairment LossesLand, buildingsand structuresMachinery,equipment andvehiclesTools, furnitureand fixturesConstructionin progressOtherTotalAs of March 31, 2016(2,937,926)(3,454,987)(1,408,013)(935)(1,410)(7,803,271)Depreciation expense (Note)(72,109)(146,546)(117,247)-(206)(336,108)Impairment losses(705)(294)(659)(178)-(1,836)Acquisition of subsidiary(374)(374)(552)-(170)(1,470)Transfer to (from) investmentproperty748----748Sale or disposal52,437104,599109,332935198267,501Exchange differences ontranslation of foreign operations7,90634,6559,198-9951,858Other1,95315,6623,8950(46)21,464As of March 31, 2017(2,948,070)(3,447,285)(1,404,046)(178)(1,535)(7,801,114)Millions of yenThousands of U.S. dollars The carrying amount of property, plant and equipment includes the carrying amount of the following leased assets: (2) Impairment Losses Epson’s business assets are generally grouped by business segment under the Company’s management accounting system, and their cash flows are continuously monitored. Assets planned to be sold and idle assets are separately assessed for impairment on the individual asset level. Impairment losses recognised in the years ended March 31, 2016 and 2017, represent the losses related to idle assets that Epson has no plan to use in the future, and the carrying amounts were reduced to the recoverable amounts. They were recognised as Other operating expense in the consolidated statement of comprehensive income. The recoverable amounts of these assets are determined using their fair values less disposal cost, which were assessed on the basis of reasonable estimates such as a valuation by an external real estate appraiser. The valuation is made in accordance with the income approach using Level 3 inputs which include the future cash flow. 85 Carrying AmountLand, buildingsand structuresMachinery,equipment andvehiclesTools, furnitureand fixturesConstructionin progressOtherTotalAs of April 1, 2015127,66568,60924,9824,1431,856227,257As of March 31, 2016128,74173,95524,45214,9782,335244,463As of March 31, 2017133,75981,57530,37126,7232,764275,195Carrying AmountLand, buildingsand structuresMachinery,equipment andvehiclesTools, furnitureand fixturesConstructionin progressOtherTotalAs of March 31, 20161,147,536659,194217,960133,51520,8032,179,008As of March 31, 20171,192,263727,124270,711238,20324,6352,452,936Millions of yenThousands of U.S. dollarsLeased AssetsLand, buildingsand structuresMachinery,equipment andvehiclesTools, furnitureand fixturesTotalAs of April 1, 20151099876284As of March 31, 20166318846298As of March 31, 20175717830267Leased AssetsLand, buildingsand structuresMachinery,equipment andvehiclesTools, furnitureand fixturesTotalAs of March 31, 20165611,6854102,656As of March 31, 20175081,6042672,379Thousands of U.S. dollarsMillions of yen 14. Intangible Assets The schedules of the cost, accumulated amortisation and accumulated impairment losses, and carrying amount of “Intangible assets” were as follows: 86 CostSoftwarePatent rightsProductdevelopmentassetsGoodwillOtherTotalAs of April 1, 201541,58616,3067,4212,3264,10471,744Individual acquisition5,809273571-116,665Acquisition of subsidiary1-23132320Sale or disposal(1,544)-(0)-(33)(1,578)Exchange differences ontranslation of foreign operations(792)-(11)(57)(320)(1,182)Other(303)0(2)-(1,770)(2,075)As of March 31, 201644,75616,5807,9802,5821,99473,894Individual acquisition4,957111,332-3256,627Acquisition of subsidiary4--2,1055942,704Sale or disposal(1,794)(0)--(7)(1,803)Exchange differences ontranslation of foreign operations(285)-(0)7417(194)Other1145910-11494As of March 31, 201747,65117,0509,3234,7612,93681,723CostSoftwarePatent rightsProductdevelopmentassetsGoodwillOtherTotalAs of March 31, 2016398,930147,78571,12923,01417,791658,649Individual acquisition44,1839811,872-2,91659,069Acquisition of subsidiary35--18,7635,30324,101Sale or disposal(15,990)(0)--(80)(16,070)Exchange differences ontranslation of foreign operations(2,540)-(0)659152(1,729)Other1164,09199-984,404As of March 31, 2017424,734151,97483,10042,43626,180728,424Millions of yenThousands of U.S. dollars (Note) Amortisation expense for Intangible assets was included in Cost of sales and Selling, general and administrative expenses in the consolidated statement of comprehensive income. 87 Accumulated Amortisation andAccumulated Impairment LossesSoftwarePatent rightsProductdevelopmentassetsGoodwillOtherTotalAs of April 1, 2015(30,678)(13,255)(5,130)-(3,509)(52,574)Amortisation expense (Note)(4,666)(1,037)(1,363)-(382)(7,449)Impairment losses(31)---(0)(32)Acquisition of subsidiary(0)-(0)-(0)(0)Sale or disposal1,538-0-81,546Exchange differences ontranslation of foreign operations563-9-308881Other142(0)--1,7711,913As of March 31, 2016(33,132)(14,293)(6,484)-(1,805)(55,715)Amortisation expense (Note)(3,714)(739)(1,362)-(79)(5,896)Impairment losses(5)(1)(23)-(1)(32)Acquisition of subsidiary(2)----(2)Sale or disposal1,6880---1,689Exchange differences ontranslation of foreign operations209-0-7217Other40(459)--(10)(429)As of March 31, 2017(34,916)(15,493)(7,870)-(1,888)(60,169)Accumulated Amortisation andAccumulated Impairment LossesSoftwarePatent rightsProductdevelopmentassetsGoodwillOtherTotalAs of March 31, 2016(295,320)(127,399)(57,794)-(16,099)(496,612)Amortisation expense (Note)(33,104)(6,587)(12,121)-(741)(52,553)Impairment losses(44)(8)(233)-(0)(285)Acquisition of subsidiary(17)----(17)Sale or disposal15,0540---15,054Exchange differences ontranslation of foreign operations1,862-0-721,934Other347(4,102)--(79)(3,834)As of March 31, 2017(311,222)(138,096)(70,148)-(16,847)(536,313)Millions of yenThousands of U.S. dollarsCarrying AmountSoftwarePatent rightsProductdevelopmentassetsGoodwillOtherTotalAs of April 1, 201510,9073,0502,2912,32659419,170As of March 31, 201611,6242,2861,4962,58218818,179As of March 31, 201712,7341,5561,4534,7611,04721,553Carrying AmountSoftwarePatent rightsProductdevelopmentassetsGoodwillOtherTotalAs of March 31, 2016103,61020,38613,33523,0141,692162,037As of March 31, 2017113,51213,87812,95242,4369,333192,111Thousands of U.S. dollarsMillions of yen 15. Finance Lease Transactions Epson leases host computers and computer terminals as a lessee. The total of future minimum lease payments, future finance costs and their present value for leased assets recognised based on the finance lease contracts by maturity were as follows: Not later than 1 year Total of future minimum lease payments Future finance costs Present value Later than 1 year and not later than 5 years Total of future minimum lease payments Future finance costs Present value Later than 5 years Total of future minimum lease payments Future finance costs Present value Total Total of future minimum lease payments Future finance costs Present value Millions of yen March 31, 2016 2017 Thousands of U.S. dollars March 31, 2017 92 (3) 88 150 (5) 145 0 (0) 0 242 (9) 233 89 (2) 87 131 (2) 128 0 (0) 0 221 (5) 216 793 (12) 781 1,156 (12) 1,144 0 (0) 0 1,949 (24) 1,925 88 16. Operating Lease Transactions (1) Future Minimum Lease Payments under Non-cancellable Operating Leases The total of future minimum lease payments under non-cancellable operating leases was as follows: Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total Millions of yen March 31, 2016 5,277 11,926 1,046 18,251 2017 5,581 9,989 903 16,474 Thousands of U.S. dollars March 31, 2017 49,745 89,047 8,048 146,840 (2) Total of Minimum Lease Payments and Contingent Rents The total of minimum lease payments and contingent rents of operating lease contracts recognised as an expense was as follows: Total of minimum lease payments Contingent rents Millions of yen Year ended March 31, 2016 8,264 120 2017 8,611 112 Thousands of U.S. dollars Year ended March 31, 2017 76,753 998 89 17. Investment Property (1) Schedule of Investment Property The schedule of the carrying amount of “Investment property” was as follows: Balance at the beginning of the year Expenditure after acquisition Transfer from (to) property, plant and equipment Depreciation expense Impairment losses and reversal of impairment losses Sale or disposal Exchange differences on translation of foreign operations Balance at the end of the year Breakdown of “Balance at the beginning of the year” Cost Accumulated depreciation and accumulated impairment losses Total Breakdown of “Balance at the end of the year” Cost Accumulated depreciation and accumulated impairment losses Total Millions of yen Year ended March 31, 2016 2017 Thousands of U.S. dollars Year ended March 31, 2017 4,758 - 45 (90) 3,637 (6,335) (46) 1,967 11,595 (6,837) 4,758 4,173 (2,205) 1,967 1,967 - 15 (75) - (610) (8) 1,288 4,173 (2,205) 1,967 2,694 (1,405) 1,288 17,532 - 143 (668) - (5,456) (71) 11,480 37,186 (19,654) 17,532 24,003 (12,523) 11,480 (2) Fair Value The carrying amount and the fair value of “Investment property” were as follows: Millions of yen March 31, 2016 March 31, 2017 Thousands of U.S. dollars March 31, 2017 Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Investment property 1,967 1,468 1,288 990 11,480 8,824 The fair value of Investment property is determined on the basis of a valuation conducted by an external real estate appraiser. The valuation is made in accordance with the income approach using Level 3 inputs which include the future cash flow. 90 18. Income Taxes (1) Deferred Tax Assets and Deferred Tax Liabilities The breakdown of “Deferred tax assets” and “Deferred tax liabilities” by major causes of their occurrence were as follows: Inter-company profits and write downs on inventories Carryforward of unused tax losses Net defined benefit liabilities Fixed assets (Note 1) Other Total deferred tax assets Undistributed profit Fixed assets (Note 1) Other Total deferred tax liabilities Net deferred tax assets (Note 2) Millions of yen March 31, 2016 2017 Thousands of U.S. dollars March 31, 2017 18,995 19,533 174,106 9,032 7,983 6,113 22,947 65,073 (12,922) (3,078) (3,486) (19,488) 45,585 10,828 7,237 5,912 21,582 65,093 (13,590) (2,668) (3,705) (19,965) 45,128 96,514 64,506 52,696 192,390 580,212 (121,133) (23,781) (33,043) (177,957) 402,255 (Note 1) “Fixed assets” include impairment losses and excess of depreciation of property, plant and equipment, intangible assets and investment property. (Note 2) The difference between the net amount of deferred tax assets recognised in the years ended March 31, 2016 and 2017, less the respective net amounts of deferred tax assets recognised directly in equity and in other comprehensive income, is mainly attributable to the impact of foreign exchange movements. Epson assesses its ability to utilize carryforward of unused tax losses in future periods based on the Mid-Range Business Plan and financial forecasts approved by the Board of Directors annually. This takes account of Epson’s medium and long-term strategy and financial plans and the expected future economic outlook. The ability to utilize carryforward of unused tax losses in future periods for recognising deferred tax assets also takes account of material tax adjusting items, the expected future taxable income and the period (if any) in which carryforward of unused tax losses might expire. Epson believes that the recognised deferred tax assets are probable and the tax benefits can be realised based on the prior taxable income and the expected future taxable income when the deferred tax assets can be recognised. Epson does not recognise deferred tax assets for some carryforward of unused tax losses and some deductible temporary differences. Epson reduces the amount of the deferred tax assets to the extent that it is no longer probable that the tax benefits can be realised based on an individual analysis of each company’s condition as a result of assessing the recoverability of the deferred tax assets. The amounts of carryforward of unused tax losses, for which deferred tax assets have not been recognised, as of March 31, 2016 and 2017, were ¥64,751 million and ¥57,903 million ($516,115 thousand), respectively. The amounts of deductible temporary differences, for which deferred tax assets have not been recognised, as of March 31, 2016 and 2017, were ¥324,150 million and ¥143,599 million ($1,279,962 thousand), respectively. The deductible temporary differences are not expired under present tax laws. The expiration schedule of carryforward of unused tax losses was as follows: 91 1st year 2nd year 3rd year 4th year 5th year and thereafter Total Millions of yen March 31, 2016 2017 - - - - 64,751 64,751 - - - - 57,903 57,903 Thousands of U.S. dollars March 31, 2017 - - - - 516,115 516,115 Epson has no taxable temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognised as of March 31, 2016 and 2017. (2) Tax Expense “Tax expense” recognised as an expense was as follows: Current tax expense Deferred tax expense Total Millions of yen Year ended March 31, 2016 (19,720) (25,700) (45,421) 2017 (18,433) (27) (18,461) Thousands of U.S. dollars Year ended March 31, 2017 (164,301) (250) (164,551) Deferred tax expense increased by ¥1,575 million and decreased by ¥1,791 million ($15,963 thousand) mainly due to the effect of changes in Japanese applicable tax rates for the years ended March 31, 2016 and 2017, respectively. Deferred tax expense includes the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of a prior period, and expenses or benefits arising from write-downs of deferred tax assets or the reversal of previous write-downs of deferred tax assets. Due to these effects, the deferred tax expense increased by ¥11,740 million and decreased by ¥5,737 million ($51,136 thousand) for the years ended March 31, 2016 and 2017, respectively. (3) Reconciliation of the Effective Tax Rate The breakdown of major items that caused differences between the effective statutory tax rate and the actual tax rate was as follows. Epson is subject mainly to corporate tax, inhabitant tax, and enterprise tax, and the effective statutory tax rates calculated based on these taxes were 32.8% and 30.7% for the years ended March 31, 2016 and 2017, respectively. Foreign subsidiaries are subject to income tax at their locations. Effective statutory tax rate Different tax rates applied to foreign subsidiaries Expenses not deductible for tax purposes Reassessment of recoverability of deferred tax assets Other Actual tax rate % Year ended March 31, 2016 Year ended March 31, 2017 32.8 (3.4) 1.0 16.7 2.5 49.6 30.7 (2.7) (0.3) (2.5) 2.2 27.4 92 19. Trade and Other Payables The breakdown of “Trade and other payables” was as follows: Notes and trade payables Other payables Total Millions of yen March 31, 2016 2017 Thousands of U.S. dollars March 31, 2017 69,972 60,651 130,624 81,651 59,981 141,633 727,792 534,646 1,262,438 Trade and other payables are classified as financial liabilities measured at amortised cost. 20. Bonds issued, Borrowings and Lease liabilities The breakdown of “Bonds issued, borrowings and lease liabilities” was as follows: (Note 1) The average interest rate is calculated using the interest rate and outstanding balance as of March 31, 2017. (Note 2) The summary of issuing conditions of the bonds issued was as follows: 93 Thousands ofU.S. dollarsMarch 31,201620172017Current borrowings31,10416,118143,6661.42-Current portion of non-currentborrowings50050,000445,6720.56-Current portion of bonds issued(Note 2)29,9899,99589,089--Non-current borrowings50,0004994,4470.282022Bonds issued (Note 2)29,92869,742621,653--Lease liabilities2332161,9252.402017 to 2022　　Total141,755146,5721,306,452Current liabilities61,65476,200679,204Non-current liabilities80,10070,371627,248　　Total141,755146,5721,306,452Millions of yen%DueMarch 31,Average interestrate (Note 1) *The figures in parentheses represent the current portion of bonds issued. Bonds issued, borrowings and lease liabilities were classified as financial liabilities measured at amortised cost. There were no financial covenants on bonds issued and borrowings that had a significant impact on Epson’s financing activities. 94 Thousands ofU.S. dollarsMarch 31,20162017201720,000(20,000)10,00089,134(10,000)(89,134)10,000(10,000)The CompanyThe 11th Series unsecuredstraight bonds issued (withinter-bond pari passu clause)Sep 11, 20130.57NonSep 11, 201810,00010,00089,134The CompanyThe 12th Series unsecuredstraight bonds issued (withinter-bond pari passu clause)Jun 13, 20140.35NonJun 13, 201910,00010,00089,134The CompanyThe 13th Series unsecuredstraight bonds issued (withinter-bond pari passu clause)Sep 21, 20160.10NonSep 21, 2021-20,000178,269The CompanyThe 14th Series unsecuredstraight bonds issued (withinter-bond pari passu clause)Sep 21, 20160.27NonSep 21, 2023-20,000178,269The CompanyThe 15th Series unsecuredstraight bonds issued (withinter-bond pari passu clause)Sep 21, 20160.34NonSep 18, 2026-10,00089,13460,00080,000713,074(30,000)(10,000)(89,134)--Millions of yeninterestrateMarch 31,Maturity dateNonNon-Jun 14, 2016-10,000Sep 9, 2016NonCompanyName of bonds issuedIssue date%CollateralThe CompanyThe 7th Series unsecuredstraight bonds issued (withinter-bond pari passu clause)Jun 14, 20110.72The CompanyThe 9th Series unsecuredstraight bonds issued (withinter-bond pari passu clause)Sep 12, 20120.67Sep 12, 2017The CompanyThe 10th Series unsecuredstraight bonds issued (withinter-bond pari passu clause)Sep 11, 20130.33 21. Provisions The breakdown and the schedule of “Provisions” were as follows: 95 FY2015: Year ended March 31, 2016Provision for productwarrantiesProvision forrebatesAsset retirementobligationsProvision forloss onlitigationOtherprovisionsTotalAs of April 1, 201511,3767,8231,4743,3266,46130,463Arising during the year11,72910,037824195,15427,765Utilised(10,831)(7,823)(66)(3,265)(6,038)(28,025)Unused amounts reversed(514)---(94)(608)Exchange differences ontranslation of foreignoperations(575)(965)(21)52(124)(1,634)As of March 31, 201611,1859,0722,2111335,35827,960Current liabilities9,8069,07229953,83523,019Non-current liabilities1,378-1,9111271,5224,941 　Total11,1859,0722,2111335,35827,960FY2016: Year ended March 31, 2017Provision for productwarrantiesProvision forrebatesAsset retirementobligationsProvision forloss onlitigationOtherprovisionsTotalAs of April 1, 201611,1859,0722,2111335,35827,960Arising during the year11,1039,3951,149214,46126,131Utilised(10,725)(9,072)(499)-(3,708)(24,005)Unused amounts reversed(460)-(320)-(171)(951)Exchange differences ontranslation of foreignoperations(203)(434)(16)(8)(281)(944)As of March 31, 201710,8998,9602,5241465,65828,190Current liabilities9,2958,96026263,67121,981Non-current liabilities1,604-2,4981191,9866,209 　Total10,8998,9602,5241465,65828,190FY2016: Year ended March 31, 2017Provision for productwarrantiesProvision forrebatesAsset retirementobligationsProvision forloss onlitigationOtherprovisionsTotalAs of April 1, 201699,69680,86219,7071,18547,770249,220Arising during the year98,95683,73210,23118739,811232,917Utilised(95,596)(80,862)(4,447)-(33,062)(213,967)Unused amounts reversed(4,100)-(2,852)-(1,524)(8,476)Exchange differences ontranslation of foreignoperations(1,809)(3,868)(142)(71)(2,535)(8,425)As of March 31, 201797,14779,86422,4971,30150,460251,269Current liabilities82,85079,86423123132,750195,926Non-current liabilities14,297-22,2661,07017,71055,343 　Total97,14779,86422,4971,30150,460251,269Millions of yenMillions of yenThousands of　U.S. dollars (1) Provision for product warranties Epson recognises an accrual for estimated future warranty costs based on the rate of historical service contract expenses to sales. Other specific warranty provisions are made for those products where future warranty expenses can be specifically estimated. Most of these expenses are expected to be incurred in the next fiscal year. (2) Provision for rebates Epson recognises provisions for rebates, related to sales made on or prior to the fiscal year end, that are paid to distributors or customers based on direct outcomes such as the sales performance or early payment. These expenses are expected to be paid in the next fiscal year. (3) Asset retirement obligations Epson recognises a provision for retirement costs of property, plant and equipment for which Epson is required to bear, and which derive from the acquisition, construction, development or normal use of such assets to the amount that it is probable that Epson will pay in light of historical experience. These expenses are expected to be paid mainly after five years or more. However, they may be affected by future business plans. (4) Provision for loss on litigation Epson recognises a provision for loss on litigation based on the estimated future compensation payment and litigation expenses which need to be provided at each fiscal year end. These expenses are expected to be paid after three years or more. 22. Other Liabilities The breakdown of “Other current liabilities” and “Other non-current liabilities” was as follows: Accrued expense Accrued bonus to employees Accrued employee’s unused paid vacations Other Total Current liabilities Non-current liabilities Total Millions of yen March 31, 2016 25,948 28,564 25,052 25,615 105,179 102,065 3,114 105,179 2017 28,948 25,543 24,847 27,175 106,514 102,992 3,521 106,514 Thousands of U.S. dollars March 31, 2017 258,026 227,676 221,472 242,284 949,458 918,035 31,423 949,458 96 23. Post-employment Benefits The Company and some Japanese subsidiaries have the following defined benefit plans: defined benefit corporate pension plans and lump-sum severance plans. In addition, they also have defined contribution plans. Some overseas subsidiaries have defined benefit plans and defined contribution plans. Epson’s major defined benefit plans are administrated by the Corporate Pension Fund (the “Fund”) in accordance with the Defined-Benefit Corporate Pension Act (Act No. 50 of 2001). The benefits of defined benefit plans are determined based on conditions, such as years of service, the salary proportional method based on average employee salaries for services or final base salaries for retirement benefits and a funded method based on the points employees have earned for each year of service. The Fund has a Board of Representatives consisting of representatives of the Company and its Japanese subsidiaries and representatives of the plan participants in accordance with the rules of the Fund. The Board of Representatives is responsible for changes in the rules of the Fund, dismissal of the board members including members who execute operations related to the administration and investment of pension reserves for the Fund, and resolutions of the business report and the closing of account. (1) Schedule of Defined Benefit Obligations The schedule of the defined benefit obligations was as follows: Balance at the beginning of the year Service cost Interest cost Remeasurement Actuarial gains and losses arising from changes in demographic assumptions Actuarial gains and losses arising from changes in financial assumptions Past service cost and losses (gains) arising from settlements Exchange differences on translation of foreign operations Benefits paid Effects of business combinations and disposals Millions of yen Year ended March 31, 2016 293,035 10,480 3,673 2017 311,452 11,550 2,284 Thousands of U.S. dollars Year ended March 31, 2017 2,776,111 102,950 20,358 (2,811) 1,341 11,952 20,008 (4,502) (40,128) (2,270) (290) (2,584) (2,039) (8,625) - (2,567) (10,358) 26 (22,890) (92,325) 231 Balance at the end of the year 311,452 308,935 2,753,675 97 (2) Schedule of Plan Assets The schedule of the plan assets was as follows. Epson’s major defined benefit plans are regulated by maintaining a balance between the pension obligations and plan assets through reviewing the financial condition of the fund that affects future benefits. Epson plans to pay contributions of ¥8,567 million ($76,361 thousand) for the year ending March 31, 2018. Balance at the beginning of the year Interest income Remeasurement Return on plan assets Gains (losses) arising from settlements Exchange differences on translation of foreign operations Contributions by the employer Contributions by plan participants Benefits paid Millions of yen Year ended March 31, 2016 261,808 2,972 2017 256,606 1,579 (4,993) (2,270) (1,310) 7,342 1,177 (8,119) 7,498 - (1,974) 7,149 1,169 (8,375) Thousands of U.S. dollars Year ended March 31, 2017 2,287,244 14,083 66,833 - (17,585) 63,722 10,419 (74,650) Balance at the end of the year 256,606 263,654 2,350,066 (3) Schedule of Right to Reimbursement As Epson’s major defined benefit plans are corporate defined benefit pension plans, there are no contributions from third parties. (4) Effect of Asset Ceiling There was no effect from the asset ceiling. (5) Reconciliation of Defined Benefit Obligations and Plan Assets The reconciliation of the defined benefit obligations and plan assets to the net defined benefit liabilities or assets recognised in the consolidated statement of financial position were as follows: Funded defined benefit obligations Plan assets Subtotal Unfunded defined benefit obligations Net defined benefit liabilities or assets recognised in the consolidated statement of financial position Net defined benefit liabilities Net defined benefit assets Net defined benefit liabilities and assets recognised in the consolidated statement of financial position Millions of yen March 31, 2016 305,438 (256,606) 48,831 6,014 2017 303,459 (263,654) 39,804 5,476 Thousands of U.S. dollars March 31, 2017 2,704,856 (2,350,066) 354,790 48,819 54,845 45,281 403,609 54,845 - 45,281 0 403,609 0 54,845 45,281 403,609 98 (6) Breakdown of Plan Assets The breakdown of plan assets by major category was as follows: Investments quoted in active markets Equity securities Bonds receivable Alternative investments (Note 1) Cash and deposits Other Total Investments unquoted in active markets Pooled funds (Equity securities) Pooled funds (Bonds receivable) General accounts of life insurance companies (Note 2) Alternative investments (Note 1) Other Total Millions of yen March 31, 2016 2017 Thousands of U.S. dollars March 31, 2017 19,923 48 6,926 4,630 3,196 34,725 29,647 62,220 93,829 36,183 - 221,881 16,319 6,795 2,990 3,477 3,223 32,806 33,011 57,939 102,648 36,840 408 230,848 145,458 60,566 26,651 30,992 28,747 292,414 294,241 516,436 914,947 328,371 3,657 2,057,652 (Note 1) Alternative investments are the investments through hedge funds, multi-asset funds, securitization funds and other funds. (Note 2) A certain interest rate and principal for the general accounts of life insurance companies are guaranteed by life insurance companies. (Note 3) In plan assets, there are no transferable financial instruments, real estate held by Epson or other assets used by Epson. The investment strategy for Epson’s plan assets was as follows: Epson’s plan assets under defined benefit plans are managed in accordance with the rules of the Fund for securing stable returns in the middle- and long-term in order to ensure the redemption of the defined benefit obligations. Epson sets a best qualified asset mix policy through performing pension ALM, which is combined management of assets and liabilities by an external agency to secure stable returns. Epson invests plan assets consistently with the asset mix policy which includes setting of the risk, target rate of return and composition ratio of plan assets by asset category. 99 (7) Matters Related to Actuarial Assumptions The major item of actuarial assumptions was as follows: Discount rate 0.8 0.9 March 31, 2016 March 31, 2017 % The valuation of defined benefit obligations reflects judgments on uncertain future events. The sensitivities of defined benefit obligations due to changes of 1% in the discount rate as of March 31, 2017 were as follows. Each of these sensitivities assumes that other variables remain fixed. Negative figures show a decrease in the defined benefit obligations, while positive figures show an increase. Discount rate (1% increase) Discount rate (1% decrease) Millions of yen March 31, 2017 (45,403) 54,313 Thousands of U.S. dollars March 31, 2017 (404,697) 484,116 The weighted-average duration of the defined benefit obligations at March 31, 2017 was 15.5 years. (8) Defined Contribution Plans Expenses for the defined contribution plans were ¥19,340 million and ¥18,781 million ($167,403 thousand) for the years ended March 31, 2016 and 2017, respectively. 100 24. Equity and Other Equity Items (1) Share Capital and Capital Surplus (A) Authorised Shares The number of authorised shares as of March 31, 2016 and 2017 was 1,214,916,736 ordinary shares. (B) Fully Paid Issued Shares The schedule of the number of issued shares, the amount of “Share capital” and “Capital surplus” was as follows: (Note1) The shares issued by the Company are non-par value ordinary shares that have no restriction on any content of rights. (Note2) Increase in the number of ordinary issued shares during the year ended March 31, 2016 resulted from the Company’s common shares split with an effective date of April 1, 2015. (2) Treasury Shares The schedule of the number of treasury shares and the corresponding amount was as follows: (Note1) Increase in the number of treasury shares during the year ended March 31, 2016 resulted from the purchase of odd shares and the Company’s common shares split with an effective date of April 1, 2015. (Note2) Increase in the number of treasury shares during the year ended March 31, 2017 resulted from: the purchase by the resolution of the board of directors the purchase by BIP trust the purchase of odd shares 5,370,000 shares 180,000 shares 1,261 shares (Note3) The number of treasury shares as of March 31, 2017 includes 180,000 shares held by BIP trust. 101 Number of ordinaryissued shares(Note1)Share capitalCapital surplusShare capitalCapital surplusAs of April 1, 2015199,817,38953,20484,321Increase (decrease) (Note2)199,817,389--As of March 31, 2016399,634,77853,20484,321474,231751,591Increase (decrease)--0-0As of March 31, 2017399,634,77853,20484,321474,231751,591Thousands of U.S. dollarsMillions of yena shareThousands ofU.S. dollarsNumber of sharesAmountAmountAs of April 1, 201520,928,65720,464Increase (decrease) (Note1)20,931,7396As of March 31, 201641,860,39620,471182,476Increase (decrease) (Note2)5,551,26110,34092,165As of March 31, 2017 (Note3)47,411,65730,812274,641a shareMillions of yen (3) Other Components of Equity (A) Remeasurement of net defined benefit liabilities (assets) Remeasurement of net defined benefit liabilities (assets) comprise actuarial gain and loss on the present value of defined benefit obligations and the return on plan assets excluding amounts included in net interest. The amount is recognised as other comprehensive income when occurred and is transferred immediately from other components of equity to retained earnings. (B) Net gain (loss) on revaluation of financial assets measured at fair value through other comprehensive income This is the valuation difference in fair value of financial assets measured at fair value through other comprehensive income. (C) Exchange differences on translation of foreign operations This is a foreign currency translation difference that occurs when consolidating financial statements of foreign operations are prepared in foreign currencies. (D) Net changes in fair value of cash flow hedges Epson uses derivatives for hedging to avoid the risk of fluctuation in future cash flows. This is the effective portion of changes in fair value of derivative transactions designated as cash flow hedges. 102 25. Dividends Dividends paid were as follows: (Note) The Company completed the Company’s ordinary shares split with an effective date of April 1, 2015 based on the resolution by the Company’s Board of Directors on January 30, 2015. Dividends per share for the dividends with a basis date on or before March 31, 2015 was stated by the actual dividends paid without adjusting the effect of the shares split. 103 FY2015: Year ended March 31, 2016Millions of yenYen(Resolution)Total dividendsDividendsper shareFY2016: Year ended March 31, 2017Millions of yenYen(Resolution)Total dividendsDividendsper shareFY2016: Year ended March 31, 2017Thousands of U.S.dollarsU.S. dollars(Resolution)Total dividendsDividendsper shareSeptember 30, 2016November 30, 2016Class of sharesBasis dateEffective dateBoard of Directors(October 27, 2016)Ordinary shares94,2320.26Annual Shareholders Meeting(June 28, 2016)Ordinary shares95,6680.26Class of sharesBasis dateEffective dateMarch 31, 2016June 29, 2016March 31, 2016June 29, 2016Class of sharesBasis dateEffective dateBoard of Directors(October 27, 2016)Ordinary shares10,57230Annual Shareholders Meeting(June 28, 2016)Ordinary shares10,73330September 30, 2016November 30, 201680March 31, 2015June 26, 2015Board of Directors(October 29, 2015)Ordinary shares10,733Annual Shareholders Meeting(June 25, 2015)Ordinary shares14,31130September 30, 2015December 4, 2015 Dividends whose basis dates were during the years ended March 31, 2016 and 2017, but whose effective dates were subsequent to March 31, 2016 and 2017 were as follows: 26. Revenue The breakdown of “Revenue” was as follows: Sale of goods Royalty income Other Total Millions of yen Year ended March 31, 2016 1,080,551 4,137 7,793 1,092,481 2017 1,012,810 4,174 7,871 1,024,856 Thousands of U.S. dollars Year ended March 31, 2017 9,027,631 37,204 70,168 9,135,003 104 FY2015: Year ended March 31, 2016Millions of yenYen(Resolution)Total dividendsDividendsper shareFY2016: Year ended March 31, 2017Millions of yenYen(Resolution)Total dividendsDividendsper shareFY2016: Year ended March 31, 2017Thousands of U.S.dollarsU.S. dollars(Resolution)Total dividendsDividendsper shareJune 29, 2017Annual Shareholders Meeting(June 28, 2017)Ordinary shares94,2320.26Annual Shareholders Meeting(June 28, 2017)Ordinary shares10,57230March 31, 201710,73330March 31, 2017June 29, 2017Class of sharesBasis dateEffective dateClass of sharesBasis dateEffective dateAnnual Shareholders Meeting(June 28, 2016)March 31, 2016June 29, 2016Class of sharesBasis dateEffective dateOrdinary shares 27. Selling, General and Administrative Expenses The breakdown of “Selling, general and administrative expenses” was as follows: Millions of yen Year ended March 31, 2016 (98,355) (53,172) (32,284) (22,624) (21,269) (16,590) (68,410) (312,708) 2017 (95,939) (52,735) (29,361) (21,053) (19,291) (16,097) (65,687) (300,167) Thousands of U.S. dollars Year ended March 31, 2017 (855,147) (470,050) (261,707) (187,654) (171,949) (143,479) (585,537) (2,675,523) Employee benefit expense Research and development expense Promotion expense Advertising expense Service contract expense Transportation expense Other Total 28. Employee Benefit Expenses The employee benefit expenses included in the consolidated statement of comprehensive income were as follows: Salaries and wages Legal welfare expense Welfare expense Expenses of post-employment benefits Expense for defined contribution plans Expense for defined benefit plans Total Millions of yen Year ended March 31, 2016 (211,849) (19,519) (11,188) (19,340) (32,334) (294,232) 2017 (203,531) (18,401) (10,372) (18,781) (1,140) (252,227) 29. Other Operating Income The breakdown of “Other operating income” was as follows: Foreign exchange gain Gain on sales of property, plant and equipment, intangible assets and investment property Income from reversal of impairment loss Other Total Millions of yen Year ended March 31, 2017 1,258 680 - 3,482 5,421 2016 931 7,733 3,828 2,314 14,807 105 Thousands of U.S. dollars Year ended March 31, 2017 (1,814,163) (164,016) (92,450) (167,403) (10,180) (2,248,212) Thousands of U.S. dollars Year ended March 31, 2017 11,213 6,061 - 31,045 48,319 30. Other Operating Expense The breakdown of “Other operating expense” was as follows: Loss on the disposal of property, plant and equipment and intangible assets Other Total Millions of yen Year ended March 31, 2016 2017 (755) (4,977) (5,732) (750) (2,584) (3,335) Thousands of U.S. dollars Year ended March 31, 2017 (6,685) (23,051) (29,736) 31. Finance Income and Finance Costs The breakdowns of “Finance income” and “Finance costs” were as follows: Finance Income Interest income Dividend income Other Total Finance Costs Interest expense Employee benefit expense Foreign exchange loss (Note) Other Total Millions of yen Year ended March 31, 2016 1,275 340 36 1,652 2017 1,007 364 11 1,383 Millions of yen Year ended March 31, 2016 (1,319) (700) (2,177) (55) (4,252) 2017 (826) (704) (301) (25) (1,858) Thousands of U.S. dollars Year ended March 31, 2017 8,985 3,244 98 12,327 Thousands of U.S. dollars Year ended March 31, 2017 (7,381) (6,275) (2,682) (222) (16,560) (Note) The increase or decrease in the fair value of currency derivatives is included in the foreign exchange gain (loss). 106 32. Discontinued Operations As of April 1, 2010, Epson transferred a part of its business and some assets in the field of small- and medium-sized liquid crystal displays to Sony Corporation and Sony Mobile Display Corporation and terminated the production operation at the end of December, 2010. The profit and loss related to allegations concerning a LCD price-fixing cartel that occurred during the years ended March 31, 2016 and 2017 was classified into “Discontinued operations.” (1) Reportable Segments Small- and medium-sized liquid crystal displays business: Other (2) The analysis of profit and loss of discontinued operations Selling, general and administrative expenses Other operating expense Loss from operating activities Loss before tax Loss from discontinued operations Millions of yen Year ended March 31, 2016 2017 (42) - (42) (42) (42) (16) (565) (582) (582) (582) Thousands of U.S. dollars Year ended March 31, 2017 (142) (5,055) (5,197) (5,197) (5,197) (3) The analysis of cash flow of discontinued operations Net cash provided by (used in) operating activities Total Millions of yen Year ended March 31, 2016 2017 Thousands of U.S. dollars Year ended March 31, 2017 (1,060) (1,060) (14) (14) (124) (124) 107 33. Other Comprehensive Income The amount arising during the year, reclassification adjustments to profit or loss and tax effects for each component of “Other comprehensive income” were as follows: 108 FY2015: Year ended March 31, 2016Amount arisingReclassificationadjustmentsBefore taxeffectsTax effectsNet oftax effectsRemeasurement of net defined benefit liabilities (assets)(22,465)-(22,465)304(22,161)Net gain (loss) on revaluation of financial assetsmeasured at FVTOCI (Note)(3,547)-(3,547)937(2,610)Exchange differences on translation of foreign operations(21,309)-(21,309)-(21,309)Net changes in fair value of cash flow hedges175(1,953)(1,777)561(1,215)Share of other comprehensive income of investmentsaccounted for using the equity method(240)-(240)-(240) Total(47,386)(1,953)(49,340)1,803(47,536) (Note) FVTOCI: Fair Value Through Other Comprehensive IncomeFY2016: Year ended March 31, 2017Amount arisingReclassificationadjustmentsBefore taxeffectsTax effectsNet oftax effectsRemeasurement of net defined benefit liabilities (assets)9,959-9,95982610,785Net gain (loss) on revaluation of financial assetsmeasured at FVTOCI (Note)2,768-2,768(548)2,219Exchange differences on translation of foreign operations(5,477)-(5,477)-(5,477)Net changes in fair value of cash flow hedges1,726(1,658)67(20)47Share of other comprehensive income of investmentsaccounted for using the equity method(20)-(20)-(20) Total8,956(1,658)7,2972577,555 (Note) FVTOCI: Fair Value Through Other Comprehensive IncomeFY2016: Year ended March 31, 2017Amount arisingReclassificationadjustmentsBefore taxeffectsTax effectsNet oftax effectsRemeasurement of net defined benefit liabilities (assets)88,769-88,7697,36296,131Net gain (loss) on revaluation of financial assetsmeasured at FVTOCI (Note)24,681-24,681(4,893)19,788Exchange differences on translation of foreign operations(48,809)-(48,809)-(48,809)Net changes in fair value of cash flow hedges15,375(14,778)597(179)418Share of other comprehensive income of investmentsaccounted for using the equity method(178)-(178)-(178) Total79,838(14,778)65,0602,29067,350 (Note) FVTOCI: Fair Value Through Other Comprehensive IncomeThousands of U.S. dollarsMillions of yenMillions of yen 34. Earnings per Share (1) Basis of calculating basic earnings per share (A) Profit attributable to ordinary shareholders of the parent company Profit from continuing operations attributable to owners of the parent company Loss from discontinued operations attributable to owners of the parent company Profit used for calculation of basic earnings per share Millions of yen Year ended March 31, 2016 2017 Thousands of U.S. dollars Year ended March 31, 2017 45,815 48,903 435,895 (42) (582) (5,197) 45,772 48,320 430,698 (B) Weighted-average number of ordinary shares outstanding during the period Thousands of shares Year ended March 31, 2016 Year ended March 31, 2017 Weighted-average number of ordinary shares 357,775 353,160 109 (2) Basis of calculating diluted earnings per share (A) Profit attributable to ordinary shareholders of the parent company Millions of yen Year ended March 31, 2016 2017 Thousands of U.S. dollars Year ended March 31, 2017 45,815 48,903 435,895 Profit from continuing operations attributable to owners of the parent company Adjustments - - - Profit from continuing operations attributable to owners of the parent company used for calculation of diluted earnings per share Loss from discontinued operations attributable to owners of the parent company Adjustments Loss from discontinued operations attributable to owners of the parent company used for calculation of diluted earnings per share Profit attributable to owners of the parent company 45,815 48,903 435,895 (42) - (42) (582) (5,197) - - (582) (5,197) 45,772 48,320 430,698 Adjustments - - - Profit used for calculation of diluted earnings per share 45,772 48,320 430,698 (B) Weighted-average number of ordinary shares outstanding during the period Weighted-average number of ordinary shares Effect of dilutive securities BIP trust for eligible officers Diluted outstanding shares Thousands of shares Year ended March 31, 2016 Year ended March 31, 2017 357,775 353,160 - 357,775 20 353,181 (Note) In the calculation of basic earnings per share and diluted earnings per share, because the shares of the Company held by BIP trust are accounted as treasury shares, the number of those shares are deducted from weighted-average number of common shares outstanding during the year. 110 35. Share-based Payment (1) Summary of Performance-Linked Stock Compensation Plan The Company has employed a framework referred to as BIP (Board Incentive Plan) trust as performance-linked equity-settled share-based payment plan for the Company’s directors and executive officers who have been engaged by the Company (collectively referred to hereafter as “Eligible Officers,” and excluding outside directors and persons such as Audit and Supervisory Committee members who are not directly engaged in the operations of the Company, and persons residing outside Japan) from the year ended March 31, 2017. The plan is intended to heighten directors’ sense of shared interest with shareholders and to show a commitment to sustaining growth and increasing corporate value over the mid- to long-term. The Eligible Officers are awarded a specific number of points each year based on their position and other factors (1 point = 1 share). Such points fluctuate depending on the levels of achievement of the mid- to long-term operating performance targets of Epson. The vesting condition is basically for the Eligible Officers to render services for three years to a vesting date after a grant date of points. (2) Number of Granted Points and Weighted Average Fair Value The fair values of granted points at the grant date are measured based on observable market prices. Moreover, the expected dividends are incorporated into the measurement of fair values. The number of granted points and weighted average fair value at the grant date were as follows: Number of granted points Weighted average fair value at the grant date Year ended March 31, 2016 - - 2017 41,954 ¥1,754 Year ended March 31, 2017 - $16 (3) Stock Compensation Expenses The total expense recognised from the performance-linked stock compensation plan was ¥12 million ($106 thousand) for the years ended March 31, 2017. 111 36. Financial Instruments (1) Capital Management Epson selects the most effective fund management method focusing on the preservation of funds in view of safeness and flexibility. In addition, Epson obtains financing from bank loans and bonds issued. Epson has a policy not to transact derivatives for speculation purposes, but for avoiding the risks stated below. Epson manages net interest-bearing debt, where cash and cash equivalents are deducted from interest-bearing debt, and capital (equity attributable to owners of the parent company). The amounts were as follows: Interest-bearing debt Cash and cash equivalents Net interest-bearing debt Capital (equity attributable to owners of the parent company) Millions of yen March 31, 2016 2017 141,755 (230,498) (88,743) 467,818 146,572 (221,782) (75,209) 492,196 Thousands of U.S. dollars March 31, 2017 1,306,452 (1,976,842) (670,390) 4,387,164 Epson monitors financial indicators in order to maintain a well-balanced capital structure that ensures an appropriate return on equity and a sound and flexible financial condition for future investment. Epson monitor credit ratings for financial soundness and flexibility, and ROE (return on equity) for profitability, while focusing on changes in the domestic and overseas environment. (2) Financial Risk Management Epson is exposed to financial risks (credit risks, liquidity risks, foreign exchange risks, interest rate risks, and market price fluctuation risks) in the process of its business activities; and it manages risks based on a specific policy in order to avoid or reduce said risks. The results of risk management are regularly reported by the financial and general accounting department to the Executive Committee of the Company. Epson’s policy limits derivatives to transactions for the purpose of mitigating risks from transactions based on actual demand. Therefore, Epson do not transact derivatives for speculation purposes or trading purposes. 112 (3) Credit Risk Receivables, such as notes and trade receivables, resulting from the operating activities of Epson are exposed to customer credit risks. Epson holds mainly bonds receivable as investments of surplus funds and equity securities of customers and suppliers to strengthen relationships with them; those securities are exposed to the issuers’ credit risks. In addition, through derivative transactions that Epson conducts in order to hedge foreign exchange fluctuation risks and interest rate fluctuation risks, Epson is exposed to the credit risks of the financial institutions which are counterparties to these transactions. In principle, Epson sets credit lines or transaction conditions with respect to trade receivables for counterparties based on Epson’s Credit Control Regulation in order to prevent credit risks relating to counterparties. In addition, the receivable balances of counterparties are monitored in order to mitigate the credit risks. The financial and general accounting department of the Company regularly monitors the status of the occurrence and collection of bad debts, and reports them to the Executive Committee of the Company. There is no over-concentrated credit risk for a single customer. With regard to the investment of cash surpluses and derivatives, Epson invests in bonds receivable and other financial instruments with a certain credit rating and transacts with financial institutions with a high credit rating in principle in order to prevent credit risks based on Epson’s Capital Management Regulation. In addition, the financial and general accounting department of the Company regularly monitors the performances of these transactions and reports the results to the Executive Committee of the Company. The analysis of the aging of “Trade and other receivables” and “Other Financial Assets” that are past due but not impaired as of March 31, 2017 was as follows. It includes amounts considered recoverable by credit insurance and collateral. Within 30 days Over 30 days, within 60 days Over 60 days, within 90 days Over 90 days Total Millions of yen March 31, 2017 Thousands of U.S. dollars March 31, 2017 8,034 533 48 273 8,889 71,621 4,750 427 2,433 79,231 Epson uses an allowance account for credit losses to record impairment losses on the uncollectible amounts of individually significant trade receivables at the end of the reporting period and to record impairment losses on trade receivables that are not individually significant at an amount based on the historical loan loss ratio at the end of the reporting period. The allowance account for credit losses against the financial assets is included in “Trade and other receivables” and “Other Financial Assets” in the consolidated statement of financial position. The schedule of the allowance account for credit losses of “Trade and other receivables” and “Other Financial Assets” was as follows: Balance as of April 1 Addition (Note) Decrease (utilised) Decrease (reversal) Other Balance as of March 31 Millions of yen March 31, 2016 2017 1,586 669 (724) (12) (39) 1,479 1,479 401 (355) (11) (28) 1,485 Thousands of U.S. dollars March 31, 2017 13,182 3,556 (3,164) (98) (249) 13,227 (Note) “Trade and other receivables” and “Other Financial Assets” for which impairment was recognised individually at March 31, 2016 and 2017 were ¥45 million and ¥33 million ($294 thousand), respectively; and their corresponding allowance account for credit losses were ¥45 million and ¥33 million ($294 thousand), respectively. 113 (4) Liquidity Risk Epson raises funds by borrowings and bonds issued; however, these liabilities are exposed to the liquidity risk that it would not be able to repay liabilities on the due date due to the deterioration of the financing environment. Epson establishes a financing plan based on the annual business plan and the financial and general accounting department of the Company regularly monitors and collects information on the balance of liquidity-in-hand and interest-bearing debt and reports it to the Executive Committee of the Company. In addition, Epson manages liquidity risks with the balance of liquidity-in-hand maintained at a proper level by working out the financing plan on a timely basis, and by taking into consideration the financial environment. The financial liability balance (including derivative financial instruments) by maturity was as follows: 114 FY2015: As of March 31, 2016CarryingamountContractualcash flowDue within1 yearDue after 1year through 2 yearsDue after 2years through3 yearsDue after 3years through4 yearsDue after 4years through 5 yearsDue after5 years Trade and other payables130,624130,624130,624----- Borrowings81,60481,60431,60450,000---- Bonds issued59,91760,00030,00010,00010,00010,000-- Lease obligations2332429276481940 Other1,6411,64106333734941,111 Total274,021274,112192,32260,14010,38610,053981,111Derivative financial liabilities Foreign exchange forward contract823823823----- Total823823823-----FY2016: As of March 31, 2017CarryingamountContractualcash flowDue within1 yearDue after 1year through 2 yearsDue after 2years through3 yearsDue after 3years through4 yearsDue after 4years through 5 yearsDue after5 years Trade and other payables141,633141,633141,633----- Borrowings66,61866,61866,118---500- Bonds issued79,73880,00010,00010,00010,000-20,00030,000 Lease obligations2162218969381840 Other1,7921,7922066942106841,282 Total289,998290,265218,04710,13810,08112520,58831,282Derivative financial liabilities Foreign exchange forward contract1,1121,1121,112----- Total1,1121,1121,112-----FY2016: As of March 31, 2017CarryingamountContractualcash flowDue within1 yearDue after 1year through 2 yearsDue after 2years through3 yearsDue after 3years through4 yearsDue after 4years through 5 yearsDue after5 years Trade and other payables1,262,4381,262,4381,262,438----- Borrowings593,785593,785589,338---4,447- Bonds issued710,742713,07489,13489,13489,134-178,269267,403 Lease obligations1,9251,949793615342164350 Other15,97915,9791,84861538095075911,427 Total2,584,8692,587,2251,943,55190,36489,8561,114183,510278,830Derivative financial liabilities Foreign exchange forward contract9,9119,9119,911----- Total9,9119,9119,911-----Non-derivative financial liabilitiesMillions of yenNon-derivative financial liabilitiesMillions of yenNon-derivative financial liabilitiesThousands of　U.S. dollars (5) Foreign Exchange Risk Epson operates businesses globally and, therefore, is exposed to the following risks due to foreign exchange fluctuation: (A) The risk that the profit or loss and cash flow in each functional currency of Epson is influenced by foreign exchange fluctuation as a result of external transactions and intergroup transactions, including the payment and receipt of dividends, in currencies that are different from each functional currency of Epson. (B) The risk that the equity of Epson is influenced by foreign exchange fluctuation when equity denominated in each functional currency of Epson is translated into Japanese yen and consolidated. (C) The risk that the profit or loss of Epson is influenced by foreign exchange fluctuation when profit or loss denominated in each functional currency of Epson is translated into Japanese yen and consolidated. Epson hedges against risk (A) using derivatives or foreign currency-denominated interest-bearing debt when future cash flow is projected or when receivables and payables are fixed. As a rule, the net of foreign currency-denominated operating receivables and payables is hedged mainly using forward foreign exchange contracts. Epson does not hedge against risk (B) and (C), in principle. In order to mitigate risks mentioned above resulting from the foreign exchange fluctuation, in accordance with Epson’s Foreign Exchange Management Regulation, Epson establishes a foreign currency hedge policy based on the current conditions and forecast of the foreign exchange market, implements the aforementioned hedges under the supervision of the Foreign Exchange Management Committee of the Company. The financial and general accounting department of the Company regularly reports the performances to the Executive Committee of the Company. The breakdown of currency derivatives was follows: (Note) Cash flow hedge is applied, and derivative transactions are measured at fair value in the consolidated statement of financial position. 115 Derivative transactions to which hedge accounting is not appliedContractamountOver oneyearFair valueContractamountOver oneyearFair valueContractamountOver oneyearFair valueForeign exchange forward contractBuying4,146-576,456-(9)57,545-(80)Selling32,978-73231,577-(345)281,460-(3,094)Non-Deliverable ForwardSelling2,754-(24)3,761-(163)33,523-(1,452) Total39,879-76541,794-(519)372,528-(4,626)Derivative transactions to which hedge accounting is appliedContractamountOver oneyearFair valueContractamountOver oneyearFair valueContractamountOver oneyearFair value(Note)Foreign exchange forward contractSelling35,755-2831,171-113277,841-1,007Non-Deliverable ForwardSelling7,504-(240)7,231-(256)64,453-(2,281) Total43,259-(212)38,402-(143)342,294-(1,274)Millions of yenThousands of U.S. dollarsMarch 31,March 31,201620172017Millions of yenThousands of U.S. dollarsMarch 31,March 31,201620172017 Foreign Exchange Sensitivity Analysis In cases where each currency other than the functional currency that denominates the financial instruments held by Epson as of March 31, 2017 increases by 10% in value against the functional currency, the impact on profit before tax in the consolidated statement of comprehensive income was as follows. The impact from the translation of functional currency-denominated financial instruments, and assets, liabilities, income and expenses of foreign operations into Japanese yen is not included. Also, it is based on the assumption that currencies other than the currencies used for the calculation do not fluctuate. Millions of yen March 31, 2017 Thousands of U.S. dollars March 31, 2017 Profit before tax 2,679 23,879 (6) Interest Rate Risk Epson’s interest rate risk arises from cash equivalents and interest-bearing debt. Borrowings and bonds issued with floating rates are subject to the effects of changes in future cash flows caused by the fluctuation of market interest rates; while, borrowings and bonds issued with fixed rates are subject to the effects of changes in the fair value caused by the fluctuation of market interest rates. In response to the fluctuation of market interest rates, Epson reduces the interest rate risk by implementing an interest rate swap and adjusting appropriate proportion of financing between floating rates and fixed rates. In accordance with Epson’s Capital Management Regulation, the interest rate swap is approved by the finance officer of the Company. Interest Rate Sensitivity Analysis In cases where the interest rate of financial instruments held by Epson as of March 31, 2017 increases by 100bp, the impact on profit before tax in the consolidated statement of comprehensive income was as follows: The analysis included financial instruments affected by interest rate fluctuation and based on the assumption that other factors, including the impacts of foreign exchange fluctuation, were constant. Millions of yen March 31, 2017 Thousands of U.S. dollars March 31, 2017 Profit before tax 661 5,891 (7) Market Price Fluctuation Risk With respect to equity securities, Epson regularly assesses the fair value and financial conditions of the issuers, and reviews the portfolio held by taking into account the relationship with counterparty entities in accordance with Epson’s Securities Operation Regulation. Epson intends to hold equity instruments not for short-term trading but for long-term investment. Therefore, Epson does not sell the instruments actively. The equity price fluctuation risks are calculated based on the price of equity instruments at the fiscal year end. In cases where the equity price changes by 5% in value, the impact on other comprehensive income before tax effects as of March 31, 2017 was ¥793 million ($7,068 thousand) due to the changes in the fair value. 116 (8) Fair Value of Financial Instruments (A) Fair value measurement The fair values of financial assets and liabilities are determined as follows: (Derivatives) The fair values are calculated based on prices obtained from financial institutions. (Equity securities and bonds receivable) When market values for equity securities and bonds receivable are available, such values are used as the fair values. The fair values of the equity securities and bonds receivable whose market values are unavailable are measured by using the discounted cash flow method, price comparison method based on the prices of similar types of securities and bonds and other valuation methods. (Borrowings) As current borrowings are settled on a short-term basis, the fair values approximate their carrying amounts. For non-current borrowings with floating rates, it is assumed that the fair value is equal to the carrying amounts, because the rates are affected in the short term by fluctuations in market interest rates, and because Epson’s credit status has not greatly changed since they were implemented. The fair values of non-current borrowings with fixed rates are calculated by the total sum of the principal and interest discounted using the interest rates that would be applied if similar new borrowings were conducted. (Bonds issued) The fair values are calculated based on prices obtained from financial institutions. (Lease obligations) The fair values are calculated based on the present value of the total amount discounted by the interest rate corresponding to the period to maturity and the credit risk per each lease obligation classified per certain period. (Other) Other financial instruments are settled mainly on a short-term basis, and the fair values approximate the carrying amounts. 117 (B) Fair value hierarchy The fair value hierarchy of financial instruments is categorized from Level 1 to Level 3 as follows: Level 1: Fair value measured at quoted prices in active markets for identical assets or liabilities Level 2: Fair value calculated using inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly Level 3: Fair value calculated using valuation techniques including unobservable inputs for the assets and liabilities Epson does not have any financial instruments for which there is significant measurement uncertainty and subjectivity which needs to subdivide each level stated above for disclosure. The transfers between levels in the fair value hierarchy are deemed to have occurred at the end of the reporting period. (i) Financial instruments measured at amortised cost The carrying amounts and the fair value hierarchy of financial instruments measured at amortised cost were as follows. The fair values of financial instruments that are not listed on the table below approximate the carrying amounts. There were no transfers of financial instruments between Level 1 and Level 2 of the fair value hierarchy at the end of each reporting period. (Note) Current portion is included. 118 FY2015: As of March 31, 2016Level 1Level 2Level 3TotalFinancial liabilities measured atamortised cost Borrowings (Note)81,604-81,728-81,728 Bonds issued (Note)59,917-60,297-60,297Total141,521-142,025-142,025FY2016: As of March 31, 2017Level 1Level 2Level 3TotalFinancial liabilities measured atamortised cost Borrowings (Note)66,618-66,674-66,674 Bonds issued (Note)79,738-79,838-79,838Total146,356-146,512-146,512FY2016: As of March 31, 2017Level 1Level 2Level 3TotalFinancial liabilities measured atamortised cost Borrowings (Note)593,785-594,295-594,295 Bonds issued (Note)710,742-711,632-711,632Total1,304,527-1,305,927-1,305,927Millions of yenMillions of yenFair value CarryingamountCarryingamountThousands of U.S. dollarsFair value CarryingamountFair value (ii) Financial instruments measured at fair value The fair value hierarchy of financial instruments measured at fair value was as follows: There were no transfers of financial instruments between Level 1 and Level 2 of the fair value hierarchy at the end of each reporting period. 119 FY2015: As of March 31, 2016Level 1Level 2Level 3TotalFinancial assets measured atfair value Derivative financial assets-1,383-1,383 Equity securities14,006-2,05416,060Total14,0061,3832,05417,444Financial liabilities measured atfair valueDerivative financial liabilities-823-823Total-823-823FY2016: As of March 31, 2017Level 1Level 2Level 3TotalFinancial assets measured atfair value Derivative financial assets-449-449 Equity securities13,310-2,49815,809Total13,3104492,49816,258Financial liabilities measured atfair valueDerivative financial liabilities-1,112-1,112Total-1,112-1,112FY2016: As of March 31, 2017Level 1Level 2Level 3TotalFinancial assets measured atfair value Derivative financial assets-4,002-4,002 Equity securities118,638-22,265140,903Total118,6384,00222,265144,905Financial liabilities measured atfair valueDerivative financial liabilities-9,911-9,911Total-9,911-9,911Fair value Millions of yenFair value Millions of yenFair value Thousands of U.S. dollars The movement of financial instruments categorized within Level 3 of the fair value hierarchy was as follows: Balance as of April 1 Gains and losses Other comprehensive income Sales Other Balance as of March 31 Millions of yen Year ended March 31, 2016 2,406 2017 2,054 Thousands of U.S. dollars Year ended March 31, 2017 18,308 (319 ) (32) - 2,054 550 (54) (51) 2,498 4,902 (481) (464) 22,265 120 37. Principal Subsidiaries Principal subsidiaries as of March 31, 2017 were as follows: Company name Location Main business Epson Sales Japan Corporation Epson Direct Corporation Shinjuku-ku, Tokyo Printing solutions, Visual communications, Wearable & Industrial products Matsumoto-shi, Nagano Printing solutions Orient Watch Co., Ltd. Shinjuku-ku, Tokyo Wearable & Industrial products Miyazaki Epson Corporation Tohoku Epson Corporation Akita Epson Corporation Epson Atmix Corporation Miyazaki-shi, Miyazaki Wearable & Industrial products Sakata-shi, Yamagata Yuzawa-shi, Akita Printing solutions, Wearable & Industrial products Printing solutions, Wearable & Industrial products Hachinohe-shi, Aomori Wearable & Industrial products U.S. Epson, Inc. Long Beach, U.S.A. Holding company Epson America, Inc. Long Beach, U.S.A. Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Epson Electronics America, Inc. San Jose, U.S.A. Wearable & Industrial products Epson Portland Inc. Portland, U.S.A. Printing solutions Epson El Paso, Inc. El Paso, U.S.A. Printing solutions Epson Europe B.V. Amsterdam, the Netherlands Epson (U.K.) Ltd. Hemel Hempstead, UK Epson Deutschland GmbH Epson Europe Electronics GmbH Dusseldorf, Germany Regional headquarters, Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications, Wearable & Industrial products Munich, Germany Wearable & Industrial products Epson France S.A. Levallois-Perret, France Epson Italia S.p.A. Milan, Italy Printing solutions, Visual communications Printing solutions, Visual communications For.Tex S.r.l. Como, Italy Printing solutions 121 Ownership percentage of voting rights (%) (Note) 100.0 100.0 (100.0) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) Company name Location Main business Epson Iberica, S.A. Cerdanyola, Spain Printing solutions, Visual communications Epson Telford Ltd. Telford, UK Printing solutions Fratelli Robustelli S.r.l. Como, Italy Printing solutions Ownership percentage of voting rights (%) (Note) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) Epson (China) Co., Ltd. Beijing, China Epson Korea Co., Ltd. Seoul, Korea Epson Hong Kong Ltd. Hong Kong, China Epson Taiwan Technology & Trading Ltd. Taipei, Taiwan Epson Singapore Pte. Ltd. Singapore P.T. Epson Indonesia Jakarta, Indonesia Epson (Thailand) Co., Ltd. Epson Philippines Corporation Epson Australia Pty. Ltd. Bangkok, Thailand Pasig, the Philippines North Ryde, Australia Epson India Pvt. Ltd. Bangalore, India Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Printing solutions, Visual communications Printing solutions, Visual communications, Wearable & Industrial products Printing solutions, Visual communications, Wearable & Industrial products Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications Tianjin Epson Co., Ltd. Tianjin, China Printing solutions Epson Precision (Hong Kong) Ltd. Epson Engineering (Shenzhen) Ltd. Epson Precision (Shenzhen) Ltd. Orient Watch (Shenzhen) Ltd. Singapore Epson Industrial Pte. Ltd. Hong Kong, China Shenzhen, China Printing solutions, Visual communications Printing solutions, Visual communications, Wearable & Industrial products Shenzhen, China Wearable & Industrial products Shenzhen, China Wearable & Industrial products Singapore Wearable & Industrial products P.T. Epson Batam Batam, Indonesia Printing solutions 122 100.0 100.0 100.0 100.0 100.0 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 100.0 (100.0) 80.0 (80.0) 100.0 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 100.0 (100.0) Company name Location Main business P.T. Indonesia Epson Industry Epson Precision (Philippines), Inc. Epson Precision Malaysia Sdn. Bhd. Epson Precision (Johor) Sdn. Bhd. Bekasi, Indonesia Printing solutions Lipa, the Philippines Kuala Lumpur, Malaysia Printing solutions, Visual communications Wearable & Industrial products Johor, Malaysia Wearable & Industrial products Ownership percentage of voting rights (%) (Note) 100.0 100.0 100.0 100.0 (100.0) (Note) Ownership percentage of voting rights indicated inside parentheses refers to indirect ownership percentage. 38. Related Parties Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated in consolidation and are not disclosed in this note. There were no significant transactions between the Company, its subsidiaries and other related parties. The remuneration for directors and other members of key management personnel was as follows: Short-term remuneration Stock compensation Total Millions of yen Year ended March 31, 2016 2017 550 - 550 475 6 481 Thousands of U.S. dollars Year ended March 31, 2017 4,234 53 4,287 (Note 1) The Company has introduced an officers’ shareholding association system to link compensation more closely to shareholders’ value. The acquisition of the Company’s shares accounts for a portion of the short-term remuneration. (Note 2) A statutory auditor (outside statutory auditor) who retired at the closing of the general shareholders’ meeting held on June 28, 2016 received a retirement benefit of ¥15 million ($133 thousand) based on the abolition of the retirement allowance system for executives resolved at the general shareholders’ meeting held on June 23, 2006. 39. Commitments Commitments for the acquisition of assets after the fiscal year end were as follows: Millions of yen March 31, 2016 2017 Thousands of U.S. dollars March 31, 2017 Acquisition of property, plant and equipment Acquisition of intangible assets Total 6,048 1,682 7,730 25,994 613 26,608 231,706 5,463 237,169 123 40. Contingencies Material litigation In general, litigation has uncertainties and it is difficult to make reliable judgments for the possibility of an outflow of resources embodying economic benefits and to estimate the financial effect. Provisions are not recognised either if an outflow of resources embodying economic benefits is not probable or to estimate the financial effect is not practicable. Epson was contending the following material actions. (1) The liquid crystal display price-fixing cartel The Company is currently under investigation by a certain anti-monopoly-related authority, regarding allegations of involvement in a liquid crystal display price-fixing cartel. (2) The civil action on copyright fee of ink-jet printers In June 2010, Epson Europe B.V. (“EEB”), a consolidated subsidiary of the Company, brought a civil suit against La SCRL Reprobel (“Reprobel”), a Belgium-based group that collects copyright royalties, seeking restitution for copyright royalties for multifunction printers. After that, Reprobel also brought a civil suit against EEB. As a result, these two lawsuits were adjoined. EEB’s claims were rejected at the first trial, but EEB, dissatisfied with the decision, intends to appeal. 41. Subsequent Events No material subsequent events were identified. 42. Approval of Consolidated Financial Statements The consolidated financial statements were approved by Minoru Usui (President and Representative Director) and Tatsuaki Seki (Director and General Administrative Manager, Management Control Division) on June 28, 2017. 124 Report of Independent Auditors 125 Additional Information 1. Principal subsidiaries and affiliates Company name Location Paid-in capital or amount invested Main business Ownership percentage of voting rights (%) Relationship between parent company and subsidiary (Consolidated subsidiaries) Epson Sales Japan Corporation * Shinjuku-ku, Tokyo 4,000 (million JPY) Printing solutions, Visual communications, Wearable & Industrial products 100.0 Sales of the Company’s products, Interlocking directors, Financial assistance, Rental of assets Epson Direct Corporation Matsumoto-shi, Nagano 150 (million JPY) Printing solutions 100.0 (100.0) Sales of PCs, etc., Rental of assets Orient Watch Co., Ltd. Shinjuku-ku, Tokyo 100 (million JPY) Wearable & Industrial products Miyazaki Epson Corporation Miyazaki-shi, Miyazaki 100 (million JPY) Wearable & Industrial products Tohoku Epson Corporation Sakata-shi, Yamagata 100 (million JPY) Printing solutions, Wearable & Industrial products Akita Epson Corporation Yuzawa-shi, Akita 80 (million JPY) Printing solutions, Wearable & Industrial products Epson Atmix Corporation Hachinohe-shi, Aomori 450 (million JPY) Wearable & Industrial products 100.0 Sales of watches, Interlocking directors, Rental and borrowing of assets 100.0 Manufacture of crystal devices 100.0 100.0 Manufacture of printer components and semiconductors Manufacture of printer components, watch movements and sensing equipment, Financial assistance 100.0 Manufacture and sales of metal powders, etc., Rental and borrowing of assets U.S. Epson, Inc. * Long Beach, U.S.A. 126,941 (thousand USD) Holding company 100.0 Holding company in Americas, Interlocking directors Regional headquarters in Americas, Sales of printers, 3LCD projectors, and factory automation products, etc., Interlocking directors Sales of electronic devices 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) Manufacture of printer consumables 100.0 (100.0) Distribution of printer consumables Epson America, Inc. * Long Beach, U.S.A. 40,000 (thousand USD) Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Epson Electronics America, Inc. Epson Portland Inc. Epson El Paso, Inc. San Jose, U.S.A. Portland, U.S.A. El Paso, U.S.A. 10,000 (thousand USD) Wearable & Industrial products 31,150 (thousand USD) 51,000 (thousand USD) Printing solutions Printing solutions 126 Company name Location Paid-in capital or amount invested Main business Ownership percentage of voting rights (%) Relationship between parent company and subsidiary Epson Europe B.V. * Amsterdam, the Netherlands 95,000 (thousand EUR) Regional headquarters, Printing solutions, Visual communications Epson (U.K.) Ltd. Hemel Hempstead, UK 1,600 (thousand GBP) Printing solutions, Visual communications Epson Deutschland GmbH Dusseldorf, Germany 5,200 (thousand EUR) Printing solutions, Visual communications, Wearable & Industrial products Epson Europe Electronics GmbH Munich, Germany 2,000 (thousand EUR) Wearable & Industrial products Epson France S.A. Epson Italia S.p.A. For.Tex S.r.l. Levallois- Perret, France Milan, Italy Como, Italy 4,000 (thousand EUR) 3,000 (thousand EUR) 80 (thousand EUR) Epson Iberica, S.A. Cerdanyola, Spain 1,900 (thousand EUR) Epson Telford Ltd. Fratelli Robustelli S.r.l. Telford, UK Como, Italy 8,000 (thousand GBP) 90 (thousand EUR) Epson (China) Co., Ltd. * Beijing, China 1,211 (million CNY) Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions Printing solutions, Visual communications Printing solutions Printing solutions Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Epson Korea Co., Ltd. Seoul, Korea 1,466 (million KRW) Printing solutions, Visual communications Epson Hong Kong Ltd. Hong Kong, China 2,000 (thousand HKD) Printing solutions, Visual communications, Wearable & Industrial products 127 100.0 Regional headquarters in Europe, Sales of printers and 3LCD projectors, etc., Interlocking directors, Guaranty of liabilities 100.0 (100.0) Sales of printers and 3LCD projectors, etc., Guaranty of liabilities 100.0 (100.0) Sales of printers, 3LCD projectors, and factory automation products, etc., Guaranty of liabilities 100.0 (100.0) Sales of electronic devices, Interlocking directors, Guaranty of liabilities 100.0 (100.0) Sales of printers and 3LCD projectors, etc. 100.0 (100.0) Sales of printers and 3LCD projectors, etc., Guaranty of liabilities 100.0 (100.0) Sales, etc. of printer consumables 100.0 (100.0) Sales of printers and 3LCD projectors, etc., Guaranty of liabilities 100.0 (100.0) 100.0 (100.0) 100.0 Manufacture of printer consumables, Interlocking directors Manufacture, etc. of printers Regional headquarters in China, Sales of printers, 3LCD projectors and factory automation products, etc., Interlocking directors 100.0 Sales of printers and 3LCD projectors, etc. 100.0 Sales of printers, 3LCD projectors, watch movements, factory automation products and electronic devices, etc. Company name Location Paid-in capital or amount invested Main business Ownership percentage of voting rights (%) Relationship between parent company and subsidiary Epson Taiwan Technology & Trading Ltd. Taipei, Taiwan 25,000 (thousand TWD) Epson Singapore Pte. Ltd. Singapore 200 (thousand SGD) P.T. Epson Indonesia Jakarta, Indonesia 918,000 (thousand IDR) Epson (Thailand) Co., Ltd. Bangkok, Thailand 103,000 (thousand THB) Epson Philippines Corporation Pasig, Philippines 50,000 (thousand PHP) Epson Australia Pty. Ltd. North Ryde, Australia 1,000 (thousand AUD) Epson India Pvt. Ltd. Bangalore, India 108,628 (thousand INR) Printing solutions, Visual communications, Wearable & Industrial products Regional headquarters, Printing solutions, Visual communications, Wearable & Industrial products Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications Printing solutions, Visual communications Tianjin Epson Co., Ltd. Tianjin, China 172,083 (thousand CNY) Printing solutions Epson Precision (Hong Kong), Ltd. * Epson Engineering (Shenzhen) Ltd. * Hong Kong, China 81,602 (thousand USD) Shenzhen, China 56,641 (thousand USD) Printing solutions, Visual communications Printing solutions, Visual communications, Wearable & Industrial products Epson Precision (Shenzhen) Ltd. Orient Watch (Shenzhen) Ltd. Shenzhen, China Shenzhen, China 25,000 (thousand USD) Wearable & Industrial products 100.0 100.0 Sales of printers, 3LCD projectors, factory automation products and electronic devices, etc., Interlocking directors, Guaranty of liabilities Regional headquarters in Asia-Pacific, Sales of printers, 3LCD projectors, and electronic devices, etc., Interlocking directors, Guaranty of liabilities 100.0 (100.0) Sales of printers and 3LCD projectors, etc. 100.0 (100.0) Sales of printers and 3LCD projectors, etc. 100.0 (100.0) Sales of printers and 3LCD projectors, etc. 100.0 100.0 (100.0) Sales of printers and 3LCD projectors, etc., Interlocking directors, Guaranty of liabilities Sales of printers and 3LCD projectors, etc., Interlocking directors, Guaranty of liabilities 80.0 (80.0) Manufacture of printer consumables, Interlocking directors 100.0 Management of components of printers and 3LCD projectors, etc. used for contract services 100.0 (100.0) Manufacture of printers, 3LCD projectors and factory automation products, etc. 100.0 (100.0) Manufacture of watches, etc., Interlocking directors 37,748 (thousand CNY) Wearable & Industrial products 100.0 (100.0) Manufacture of watches, etc. 128 100.0 Manufacture of semiconductors, and surface finishing, Guaranty of liabilities 100.0 (100.0) Manufacture of printer consumables, Guaranty of liabilities Company name Location Paid-in capital or amount invested Main business Ownership percentage of voting rights (%) Relationship between parent company and subsidiary Singapore Epson Industrial Pte. Ltd. Singapore 71,700 (thousand SGD) Wearable & Industrial products P.T. Epson Batam P.T. Indonesia Epson Industry * Batam, Indonesia Bekasi, Indonesia 7,000 (thousand USD) Printing solutions 23,000 (thousand USD Printing solutions 100.0 Manufacture of printers, Interlocking directors, Guaranty of liabilities Epson Precision (Philippines), Inc. * Lipa, Philippines 157,533 (thousand USD) Printing solutions, Visual communications 100.0 Manufacture of printers and 3LCD projectors, Guaranty of liabilities Epson Precision Malaysia Sdn. Bhd. Kuala Lumpur, Malaysia 16,000 (thousand MYR) Wearable & Industrial products Epson Precision (Johor) Sdn. Bhd. Johor, Malaysia 22,800 (thousand MYR) Wearable & Industrial products 100.0 Manufacture of crystal devices, Interlocking directors 100.0 (100.0) Manufacture of watch components, Guaranty of liabilities 42 other companies – – – – – (Equity method affiliates) Two companies Notes 1. Ownership percentage of voting rights indicated inside parentheses refers to indirect ownership percentage. 2. * indicates a specified subsidiary (tokutei-kogaisha). 3. The revenue (excluding revenues among consolidated subsidiaries) of Epson Sales Japan Corporation and Epson America, Inc. each amounts to more than 10% of the consolidated revenue. Key information on the operations of these subsidiaries is as follows. Company name Revenue Profit before tax Profit for the period Total equity Total assets (Millions of yen) Epson Sales Japan Corporation 182,091 Epson America, Inc. 284,341 3,208 9,990 2,289 7,298 15,297 65,498 39,714 126,100 The amounts for Epson America, Inc. are included in consolidated business results. 129 2. Distribution of ownership among shareholders Category Government and Japanese Japanese regional public financial securities bodies institutions companies Other Japanese corporations Foreign institutions and Japanese others individuals Total Institutions Individuals and others Shares less than one unit (Shares) Share ownership (100 shares per unit) As of March 31, 2017 Number of shareholders (Persons) Number of shares owned (Units) Percentage of shares owned (%) – 96 45 300 547 21 34,674 35,683 – – 935,190 138,340 546,946 1,206,892 192 1,167,565 3,995,125 122,278 – 23.41 3.46 13.69 30.21 0.01 29.22 100.00 – Notes 1. 47,231,657 shares of treasury stock are included as 472,316 units under “Japanese individuals and others” and 57 shares under “Shares less than one unit.” Treasury shares do not include the Company’s shares (180,000 shares) owned by the officer compensation BIP (Board Incentive Plan) trust. 2. Six units in the name of Japan Securities Depository Center, Inc. are included under “Other Japanese corporations.” 130 3. Major shareholders Name Address Number of shares held As of March 31, 2017 Shareholding ratio (%) Sanko Kigyo Kabushiki Kaisha Japan Trustee Services Bank, Ltd. (Trustee Account) The Master Trust Bank of Japan, Ltd. (Trust account) Seiko Holdings Corporation 6-1 Ginza 5-chome, Chuo-ku, Tokyo 8-11, Harumi 1-chome, Chuo-ku, Tokyo 11-3 Hamamatsu-cho 2-chome, Minato-ku, Tokyo 5-11 Ginza 4-chome, Chuo-ku, Tokyo Yasuo Hattori Minato-ku, Tokyo Noboru Hattori Minato-ku, Tokyo The Dai-ichi Life Insurance Company, Limited (Standing proxy: Trust & Custody Services Bank, Ltd.) Mizuho Trust & Banking Co., Ltd., Retirement benefit trust, Mizuho Bank, Ltd. account, Beneficiary of the re-trust, Trust & Custody Services Bank, Ltd. Seiko Epson Corporation Employees’ Shareholding Association Ichigo Trust Pte. Ltd. (Standing proxy: Custody Service Department, Tokyo Branch, The Hongkong and Shanghai Banking Corporation Limited) 13-1, Yurakucho 1-chome, Chiyoda-ku, Tokyo (Harumi Island Triton Square Office Tower Z, 8-12, Harumi 1-chome, Chuo-ku, Tokyo) Harumi Island Triton Square Office Tower Z, 8-12, Harumi 1-chome, Chuo-ku, Tokyo 3-5, Owa 3-chome, Suwa-shi, Nagano 1 North Bridge Road, 06-08 High Street Centre, Singapore 179094 (11-1 Nihonbashi 3-chome, Chuo-ku, Tokyo) 20,000,000 16,797,700 13,957,500 12,000,000 11,932,612 11,199,936 5.00 4.20 3.49 3.00 2.98 2.80 8,736,000 2.18 8,153,800 2.04 7,564,504 1.89 6,766,200 1.69 Total — 117,108,252 29.30 Notes 1. Although the Company holds 47,231,657 shares of treasury stock, the Company is excluded from the above list of major shareholders. (The ratio of the treasury shares held by the Company to the total number of shares issued is 11.81%.) Treasury shares do not include the Company’s shares (180,000 shares) owned by the officer compensation BIP trust. 2. The shares held by Mizuho Trust & Banking Co., Ltd., Retirement benefit trust, Mizuho Bank, Ltd. account, Beneficiary of the re-trust, Trust & Custody Services Bank, Ltd., were contributed by Mizuho Bank, Ltd. to the trust assets of the Retirement benefit trust. 3. Mizuho Bank, Ltd. and its joint holders submitted a Report of Change to the Director of the Kanto Local Finance Bureau as of October 21, 2016, claiming that they hold the Company’s shares as follows as of October 14, 2016. 131 However, we have not been able to confirm the number of shares they held at the end of the fiscal year under review. Therefore, they are not included in the above major shareholders. Name Address Number of shares held Shareholding ratio (%) Mizuho Bank, Ltd. Mizuho Securities Co., Ltd. Mizuho Trust & Banking Co., Ltd. Asset Management One Co., Ltd. 5-5, Otemachi 1-chome, Chiyoda-ku, Tokyo 5-1, Otemachi 1-chome, Chiyoda-ku, Tokyo 2-1, Yaesu 1-chome, Chuo-ku, Tokyo 8-2, Marunouchi 1-chome, Chiyoda-ku, Tokyo Total – 13,894,000 1,108,500 400,000 11,155,300 26,557,800 3.48 0.28 0.10 2.79 6.65 132 4. Employee stock ownership plans The Company has introduced a transparent & fair performance-linked stock compensation plan (hereinafter referred to as the “Plan”) for the Company’s directors and executive officers who have been engaged by the Company (hereinafter collectively referred to as the “Eligible Officers,” and excluding outside directors and persons such as Audit and Supervisory Committee members who are not directly engaged in the operations of the Company, and persons residing outside Japan). The Plan is intended to heighten directors’ sense of shared interest with shareholders and to show a commitment to sustaining growth and increasing corporate value over the mid- to long-term. (1) Summary of the Plan The Plan has employed a framework referred to as the officer compensation BIP (Board Incentive Plan) trust (hereinafter referred to as the “BIP Trust”). The BIP Trust is an incentive plan for officers modeled on the U.S. Performance Share and Restricted Stock systems. The Plan provides the officers with Epson’s own shares, which will be acquired through the BIP Trust based on the levels of achievement of operating performance targets. f o t n e m e r i t e r d n a r e f s n a r t s i t a r G ) 7 ( s t e s s a l a u d i s e r f o y r e v i l e D ) 8 ( s e r a h s l a u d i s e r Trustor Epson s t s o c f o t n e m y a P ) 3 ( s d n e d i v i D ) 4 ( i d s e r a h s n o s p E ) 3 ( Trustee t n e m h s i l b a t s e t s u r T ) 2 ( e r a h s f o t n e m h s i l b a t s E ) 1 ( s n o i t a l u g e r y r e v i l e d (6) Delivery of Epson shares and cash benefits (3) Epson shares Mitsubishi UFJ Trust and Banking Corp. (Joint trustee: The Master Trust Bank of Japan, Ltd.) Stock market BIP Trust Beneficiaries The Eligible Officers (3) Payment of costs (5) Instruction not to exercise voting rights Trust administrator 1) Epson will establish share delivery regulations related to the content of the Plan. 2) In accordance with the trust agreement, Epson contributes funds on the trustee’s behalf within the scope of approval by resolution at the General Meeting of Shareholders and establishes a trust with beneficiaries who are the Officers who satisfy the beneficiary requirements (hereinafter referred to as the “Trust”). 3) According to the trust administrator’s instructions, the Trust uses funds contributed as in 2) above as the source of funds to acquire Epson shares from Epson (disposal of treasury shares) or in the stock market. 4) The allocation of surplus funds for the Epson shares within the Trust for the Epson shares is handled in the same manner as for other Epson shares, and is appropriated for necessary expenses for the Plan. 5) Throughout the trust period, voting rights are not to be exercised on Epson shares within the Trust. 6) During the trust period, the Eligible Officers are awarded a specific number of points each year based on their position and other factors, in accordance with the share delivery regulations established in 1) above. Such points fluctuate depending on the levels of achievement of the mid- to long-term operating performance targets of Epson. Furthermore, Epson shares, which correspond to a certain proportion of such points, will be delivered to 133 the Eligible Officers, in principle, after the lapse of three years following the awarding of points. As regards Epson shares corresponding to the remaining portion of points, the Eligible Officers will receive cash equivalent to the amounts obtained through the conversion of such shares into cash within the Trust as prescribed in the trust agreement. 7) If residual shares remain in the Trust at the expiry of the trust period in the event that operating performance targets are not met during the trust period, Epson may continue to use the Trust by amending the trust agreement and making additional contribution. Otherwise, Epson will acquire such residual shares, through gratis transfer, and retire them by resolution of the Board of Directors. 8) Upon the termination of the Trust, residual assets remaining after allocation to beneficiaries are to be attributed to Epson within the scope of trust expense reserve after subtracting funds for acquiring shares from the trust money. The portion exceeding the trust expense reserve is planned to be donated to organization(s) having no interests with Epson and any of its officers. Note: The Trustor may continue the Plan by contributing additional money as funds for acquiring its own shares for the Trust within the scope of the funds for acquiring shares, of which the amount is subject to approval by resolution at the General Meeting of Shareholders. (2) Overview of the trust agreement 1) Type of Trust 2) Purpose of the Trust 3) Trustor 4) Trustee 5) Beneficiaries 6) Trust administrator 7) Date of trust agreement 8) Trust period 9) Plan launch date 10) Exercise of voting rights 11) Class of shares to be acquired 12) Amount of initial trust money 13) Maximum amount of trust money 14) Method of acquiring shares 15) Period for acquiring shares 16) Vested rightholder 17) Residual assets Monetary trust other than a designated individually operated monetary trust (third party benefit trust) Provide incentives to the Eligible Officers Epson Mitsubishi UFJ Trust and Banking Corporation (Joint trustee: The Master Trust Bank of Japan, Ltd.) The Eligible Officers who meet the beneficiary requirements A third-party specialist without relationship with Epson August 2, 2016 August 2, 2016 through August 31, 2019 (planned) October 1, 2016 Voting rights not to be exercised Common stock of Epson 320 million yen (including trust fees and expenses) 500 million yen (including trust fees and expenses) Acquisition in the stock market August 4, 2016 through August 31, 2016 Epson Residual assets that Epson may receive as the vested rightholder shall be within the scope of trust expense reserve after subtracting funds for acquiring shares from the trust money. (3) Content of trust/stock related business 1) Trust-related business 2) Stock-related business Mitsubishi UFJ Trust and Banking Corporation and The Master Trust Bank of Japan, Ltd. handle the trust-related business as trustees of the BIP Trust. Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. handles the business related to the delivery of Epson shares to the beneficiaries in accordance with a business consignment agreement. (4) Total number or total amount of shares to be acquired by the Eligible Officers 180,000 shares (5) Scope of beneficiaries and persons entitled to other rights under the Plan The Eligible Officers who meet the beneficiary requirements 134 5. Epson stock price (1) High and low stock prices for the previous five years Year Fiscal year 71st year March 2013 72nd year March 2014 73rd year March 2015 74th year March 2016 75th year March 2017 High (¥) Low (¥) 1,183 431 3,390 795 5,970 □2,333 2,752 □2,120 2,357 1,492 2,657 1,543 Notes 1. High and low stock prices noted above are based on Tokyo Stock Exchange (First Section) data. 2. The □ mark indicates the highest and lowest ex-rights prices after a stock split (the 2-for-1 stock split implemented on April 1, 2015). (2) High and low stock prices for the previous six months Month October 2016 November December January 2017 February March High (¥) Low (¥) Note 2,137 1,912 2,318 1,994 2,511 2,208 2,579 2,282 2,657 2,289 2,594 2,344 High and low stock prices noted above are based on Tokyo Stock Exchange (First Section) data. 135 6. Corporate data and investor information (1) Company name Seiko Epson Corporation (2) Founded (3) Head office May 1942 3-5 Owa 3-chome, Suwa, Nagano 392-8502, Japan Tel: +81-266-52-3131(main) (4) Tokyo office JR Shinjuku Miraina Tower, 4-1-6 Shinjuku, Tokyo 160-8801, Japan Tel: +81 3-5368-0700(main) (5) Investor information Closing of accounts Regular general shareholders’ meeting Date for confirmation to shareholders of March 31 June the cash dividend payment date March 31 Date for confirmation to shareholders of the interim cash dividend payment date September 30 Transfer agent Mitsubishi UFJ Trust and Banking Corporation 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo Agent’s business address Stock Transfer Agency Department Mitsubishi UFJ Trust and Banking Corporation 10-11, Higashisuna 7-chome, Koto-ku, Tokyo Tel: +81-3-6701-5000 http://www.tr.mufg.jp/english/ Intermediary offices Head Office and Branches of Mitsubishi UFJ Trust and Banking Corporation Posting of public notices Public notices will be posted electronically. In the event of accidents or other circumstances preventing the electronic posting of information, such information will be made available through the Nihon Keizai Shimbun newspaper (Japanese) Web address http://www.pronexus.co.jp/koukoku/6724/6724.html (Japanese) 136 3-3-5 Owa, Suwa, Nagano 392-8502, Japan TEL: +81-266-52-3131 http://global.epson.com

Continue reading text version or see original annual report in PDF format above