Subaru Corporation
Annual Report 2015

Plain-text annual report

Fuji Heavy Industries Ltd. Ebisu Subaru Bldg., 1-20-8, Ebisu, Shibuya-ku, Tokyo 150-8554 Phone: +81-3-6447-8000 Fax: +81-3-6447-8184 http://www.fhi.co.jp/english/ir/ Annual Report 2015 For the year ended March 31, 2015 Introduction THE SUBARU “SAFETY” JOURNEY Having roots in the aircraft industry, FHI considers safety to be the most important feature underpinning automobiles. Since we launched the Subaru 360 over a half-century ago, we have engaged in automotive manufacturing to this day with a philosophy of “All-Around Safety” and maximum emphasis on safety performance. SINCE 1917 Ensuring safety for pilots Our DNA of safety is inherited from aircraft development. At the core of Subaru’s safety development exper- tise lies traits acquired from developing aircrafts. Given the lethal ramifications of a crash, aircraft development requires designs that consider all manner of possible emergency situations, hence the implementation of ideas and countermeasures within the aircraft’s basic structure to prevent the onset of danger. In addition, one of the indispensable safety features of smaller aircraft is the ability for the pilot to be able to secure an all-around unobstructed line of sight. This approach to safety has not diminished after we moved into automobile manufacturing. Since we released the Subaru 360, all of our vehicles have been developed with an emphasis on safety features, starting with unobstructed visibility. Developing a vehicle body for collision safety based on All-Around Safety that is ahead of the times. The Subaru 360, launched in 1958, fulfilled a key role in helping the spread of automobiles during Japan’s high growth period. Since that period, Subaru has dedicated itself to developing vehicle bodies for collision safety following our principle of All-Around Safety—effectively absorbing shock from collisions in all directions and protecting passen- gers with a cabin structure of robust strength. Early on, safety was not yet emphasized as part of the value of vehicles and there were no crash test dummies in existence. Subaru’s development team, however, pushed forward independent research on car body structure and how it affects human passengers. Through trial and error, we pursued superior collision safety technologies ahead of their time. SI N C E 19 6 0 SI N C E 19 6 0 Ensuring safety for drivers Horizontally-opposed SUBARU BOXER engine SINCE 1970 SINCE 1970 Ensuring safe driving, turning, and braking Developing proprietary technologies for enhanced driving safety, such as the horizontally-opposed engine and AWD. Fundamental automobile performance in terms of driving, turning, and braking differs depending on the vehicle's structure. In particular, the location of the center of gravity and the type of drive train have a significant effect. The lower the center of gravity, the more stable the cornering, while a drive train that delivers power to all of the wheels gives constant stability when driving. This is the perspective that led Subaru, in 1966, to launch the Subaru 1000—a FWD vehicle with a horizontally-opposed engine—and, in 1972, the 4WD Subaru Leone. Since that time, we have further honed our proprietary technologies and continued to pursue safe and stable driving performance. Subaru 360 Leone 4WD Subaru 1000 FUJI HEAVY INDUSTRIES LTD. 01 ANNUAL REPORT 2015 Introduction THE SUBARU “SAFETY” JOURNEY Having roots in the aircraft industry, FHI considers safety to be the most important feature underpinning automobiles. Since we launched the Subaru 360 over a half-century ago, we have engaged in automotive manufacturing to this day with a philosophy of “All-Around Safety” and maximum emphasis on safety performance. Ensuring safety for pilots Our DNA of safety is inherited from aircraft development. At the core of Subaru’s safety development exper- tise lies traits acquired from developing aircrafts. Given the lethal ramifications of a crash, aircraft development requires designs that consider all manner of possible emergency situations, hence the implementation of ideas and countermeasures within the aircraft’s basic structure to prevent the onset of danger. In addition, one of the indispensable safety features of smaller aircraft is the ability for the pilot to be able to secure an all-around unobstructed line of sight. This approach to safety has not diminished after we moved into automobile manufacturing. Since we released the Subaru 360, all of our vehicles have been developed with an emphasis on safety features, starting with unobstructed visibility. Developing a vehicle body for collision safety based on All-Around Safety that is ahead of the times. The Subaru 360, launched in 1958, fulfilled a key role in helping the spread of automobiles during Japan’s high growth period. Since that period, Subaru has dedicated itself to developing vehicle bodies for collision safety following our principle of All-Around Safety—effectively absorbing shock from collisions in all directions and protecting passen- gers with a cabin structure of robust strength. Early on, safety was not yet emphasized as part of the value of vehicles and there were no crash test dummies in existence. Subaru’s development team, however, pushed forward independent research on car body structure and how it affects human passengers. Through trial and error, we pursued superior collision safety technologies ahead of their time. Ensuring safety for drivers Horizontally-opposed SUBARU BOXER engine Launching our flagship Legacy. Embarking on development of driving support systems. Our flagship Legacy model, launched in 1989, demonstrated both reliable driving performance and mechanical endurance when it set a world speed record in January of that same year for 100,000 km of continu- ous driving. Furthermore, around this period, we started development of a driving support system using stereo cameras. In 1999, we commer- cialized ADA, Active Driving Assist, which was the predecessor of our current EyeSight technology. IN THE 1980s & 1990s Ensuring safety for drivers and passengers Ensuring safe driving, turning, and braking Developing proprietary technologies for enhanced driving safety, such as the horizontally-opposed engine and AWD. Fundamental automobile performance in terms of driving, turning, and braking differs depending on the vehicle's structure. In particular, the location of the center of gravity and the type of drive train have a significant effect. The lower the center of gravity, the more stable the cornering, while a drive train that delivers power to all of the wheels gives constant stability when driving. This is the perspective that led Subaru, in 1966, to launch the Subaru 1000—a FWD vehicle with a horizontally-opposed engine—and, in 1972, the 4WD Subaru Leone. Since that time, we have further honed our proprietary technologies and continued to pursue safe and stable driving performance. Commercializing EyeSight—Levorg with the latest EyeSight (ver. 3) technology earns the highest ratings in preventative safety tests. In 2008, we commercialized our EyeSight technology with stereo cameras constantly surveying the area forward of the vehicle, and warnings and pre-crash braking functions for preventing accidents or mitigating damage from accidents. Furthermore, in 2014, we achieved a new level of high performance and function with the launch of EyeSight Ver. 3. The Levorg with this latest EyeSight technology has garnered the highest ratings in a host of preventative safety performance tests. I N TH E 2 0 0 0 s & 20 1 0 s Ensuring safety for everyone INT O T HE F UT URE Working toward achieving a safer society The future of safety according to Subaru. Going forward, Subaru is working on development themes, including heavy traffic autopilot and automat- ed freeway driving, as we further evolve the EyeSight technology. Under our philosophy of All-Around Safety, we will continue to pursue safety from many diverse perspectives and contribute to realizing a society with automobiles that anyone can drive with peace of mind. Subaru 360 Leone 4WD Subaru 1000 FUJI HEAVY INDUSTRIES LTD. 02 ANNUAL REPORT 2015 Contents 01 04 05 06 07 14 17 27 29 31 THE SUBARU “SAFETY” JOURNEY At a Glance Business Highlights Consolidated Financial and Non-Financial Highlights A Message to Our Shareholders A Message from CFO Special Feature: PROMINENCE BY LEGACY 18 Introduction 19 Project General Manager (PGM) Interview 23 Leveraging Production to Stand Above the Crowd 25 Leveraging Marketing to Stand Above the Crowd Corporate Governance Board Directors / Executive Officers Financial Information 31 Consolidated Ten-Year Financial Summary 32 Five-Year Automobile Sales 34 Management’s Discussion and Analysis of Results of Operations and Financial Position 42 Corporate Data / Stock Information Disclaimer Regarding Forward-Looking Statements Statements herein concerning plans and strategies, expectations or projections about the future, FHI’s efforts with regard to various management issues, and other statements, except for historical facts, are forward-looking statements. These forward-looking statements are subject to uncertainties that could cause actual results to differ materially from those anticipated. These uncertainties include, but are not limited to, general economic conditions, demand for and prices of FHI’s products, FHI’s ability to continue to develop and market advanced products, raw material prices, and currency exchange rates. FHI disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. Confidence in Motion Confidence in Motion is a unified global brand statement that encapsulates the aim of the Subaru brand. Confidence reflects our approach towards reliable automobile manufacturing dating back to the Subaru 360 and the relationship of trust that we have built with customers by providing enjoyment and peace of mind. In Motion expresses Subaru’s resolve to enhance customer trust by proactively staying abreast of changing trends. Through Confidence in Motion, Subaru aims to meet customer expectations for the freedom and fulfillment enabled by Subaru’s uniquely satisfying driving experience. FUJI HEAVY INDUSTRIES LTD. 03 ANNUAL REPORT 2015 Confidence in Motion Confidence in Motion is a unified global brand statement that encapsulates the aim of the Subaru brand. Confidence reflects our approach towards reliable automobile manufacturing dating back to the Subaru 360 and the relationship of trust that we have built with customers by providing enjoyment and peace of mind. In Motion expresses Subaru’s resolve to enhance customer trust by proactively staying abreast of changing trends. Through Confidence in Motion, Subaru aims to meet customer expectations for the freedom and fulfillment enabled by Subaru’s uniquely satisfying driving experience. 01 04 05 06 07 14 17 27 29 31 THE SUBARU “SAFETY” JOURNEY At a Glance Business Highlights Consolidated Financial and Non-Financial Highlights A Message to Our Shareholders A Message from CFO Special Feature: PROMINENCE BY LEGACY 18 Introduction 19 Project General Manager (PGM) Interview 23 Leveraging Production to Stand Above the Crowd 25 Leveraging Marketing to Stand Above the Crowd Corporate Governance Board Directors / Executive Officers Financial Information 31 Consolidated Ten-Year Financial Summary 32 Five-Year Automobile Sales 34 Management’s Discussion and Analysis of Results of Operations and Financial Position 42 Corporate Data / Stock Information Disclaimer Regarding Forward-Looking Statements Statements herein concerning plans and strategies, expectations or projections about the future, FHI’s efforts with regard to various management issues, and other statements, except for historical facts, are forward-looking statements. These forward-looking statements are subject to uncertainties that could cause actual results to differ materially from those anticipated. These uncertainties include, but are not limited to, general economic conditions, demand for and prices of FHI’s products, FHI’s ability to continue to develop and market advanced products, raw material prices, and currency exchange rates. FHI disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. Contents At a Glance Years ended March 31 SUBARU Automotive Business Aerospace Company Industrial Products Company Percentage by business FYE March 2015 Net Sales 2,877.9 billion yen SUBARU Automotive Business 93.8% 5.0% Aerospace Company Industrial Products Company 1.0% 0.2% Other Net sales for this division stood at ¥2,699.0 billion, an increase of ¥452.4 billion, or 20.1%, year on year. Segment income also increased ¥91.9 billion, or 29.7%, year on year to ¥400.9 billion. The number of units sold worldwide increased by 86 thousand units, or 10.4%, year on year to 911 thousand units, owing to the strength in the North American market. Vehicle unit sales posted a record for the third consecutive year both globally and outside Japan, and for the sixth consecutive year in the North American market. Net sales in this division increased ¥18.4 billion, or 14.8%, compared to the previous fiscal year, to ¥142.8 billion. Segment income also rose ¥4.8 billion, or 33.7%, year on year to ¥18.9 billion. Sales of the C-2 transport aircraft to the Ministry of Defense exceeded that of the previous fiscal year, while sales to the commercial sector increased over the previous fiscal year thanks to net sales-boosting factors such as the exchange rate and a surge in production of the Boeing 787, among others. Net sales in the Industrial Products division were down ¥0.7 billion, or 2.5%, from the previous fiscal year, to ¥29.0 billion. Segment income increased ¥0.1 billion, or 23.3%, year on year to ¥0.8 billion. Sales were higher for leisure-related engines in North America, and sales were markedly higher for pressure washer engines for North American big box hardware stores. Sales for general purpose engines for Japan and other products, however, were lower. Net Sales (Billions of yen) 2,246.6 2,699.0 Operating Income (Billions of yen) 400.9 309.0 Net Sales (Billions of yen) 124.4 142.8 Operating Income (Billions of yen) 18.9 Net Sales (Billions of yen) 29.8 29.0 Operating Income (Billions of yen) 0.8 14.1 0.6 + 20.1% + 29.7% 2014 2015 2014 2015 + 14.8% 2014 2015 + 33.7% 2014 2015 Points • Sales were strong outside Japan for Legacy/Outback, and WRX, and following on from last year, for Forester as well. • Increase in costs, such as R&D expenses, was offset by increase in units sold, improvement in exchange rates, and progress in reducing prime costs. Point • Products for the commercial sector saw increased sales as the exchange rate improved, and production units of the Being 787 increased. FUJI HEAVY INDUSTRIES LTD. 04 ANNUAL REPORT 2015 – 2.5% 2014 2015 + 23.3% 2014 2015 Point • Sales grew for leisure-related engines and general purpose engines in North America. Business Highlights Subaru Levorg Wins “Good Design Award 2014” The Subaru Levorg has won the “Good Design Award 2014” from the Japan Institute of Design Promotion (JDP). Following the 2013 award for the Forester and 2012 award for the Impreza and Subaru XV, this marks the 3rd consecutive year that Subaru has been honored with the Good Design Award, which reflects JDP’s high praise for the Subaru design that fuses together style and functionality. Subaru Posts Record Sales in the U.S., Canada, and Australia in 2014 Subaru’s 2014 calendar year retail sales have posted all-time records in its key markets of the U.S., Canada, and Australia. Subaru’s U.S. sales in partic- ular have exceeded a 500,000 unit milestone for the first time in its history, while also achieving six consecutive years of record sales and becoming the only manufacturer in the U.S. to post seven consec- utive years of sales growth. Subaru Debuts “EyeSight” Driving Support System in Europe The all-new Outback launched in Europe during 2014 was the first Subaru model built to European specifi- cations that featured our proprietary EyeSight driving support system. EyeSight’s launch on the European market, following on from its introduction to the Jap- anese, Australian, and North American markets, en- ables FHI to extend EyeSight’s deployment across markets globally. The New Subaru WRX’s Horizontally- Opposed “DIT” Engine Named to 2015 Ward’s “10 Best Engines” The U.S. automotive industry trade journal Ward’s has named Subaru’s “FA20” 2.0-liter 4-cylinder hori- zontally-opposed direct injection turbo “DIT” engine in the U.S.-specification 2015 Subaru WRX a winner of its 2015 Ward’s “10 Best Engines” award. This is the fourth time, coming after a two-year hiatus, that Subaru has won a prestigious Ward's “10 Best En- gines” accolade. FUJI HEAVY INDUSTRIES LTD. 05 ANNUAL REPORT 2015 Cumulative Production of Horizontally- Opposed SUBARU BOXER Engine Reaches 15 Million Units The cumulative total of horizontally-opposed SUBARU BOXER engines produced has reached 15 million units. The achievement has come in the 49th year since our water-cooled 4-cylinder horizontal- ly-opposed aluminum engine was developed in 1966 and installed for the first time in the compact passen- ger car Subaru 1000 in May of the same year. Plant Constructed for Assembly of Center Wing Boxes for Boeing’s 777X FHI has begun construction of its third assembly facility for aircraft parts on the premises of its Handa Plant located in Handa City, Aichi Prefecture, Japan. At the new facility, FHI plans to assemble center wing boxes for the U.S.’s Boeing Co.’s next-genera- tion passenger jet, the Boeing 777X. The new facili- ty is scheduled to be completed in 2016. FHI Subaru Visitor Center Sees One Million Visitors Visitors to the Subaru Visitor Center, located within the Yajima Plant of the Gunma Manufacturing Division, reached a cumulative total of 1 million people on September 8, 2014. The Center was opened on July 15, 2003 to commemorate FHI's 50th anniversary and hosts factory tours, mainly for elementary school students visiting as part of their social studies classes. During tours, visitors are given the opportunity to view automobile manufacturing processes. 5 Subaru Models Awarded 2015 TOP SAFETY PICK+ (TSP+) by IIHS in the U.S. The Insurance Institute for Highway Safety (IIHS) in the U.S. has awarded the best possible ranking of TSP+ in 2015 safety assessments of EyeSight-equipped 2015 models of Legacy, Outback, Forester, Impreza, and Subaru XV currently sold in the North American region. Business Highlights Consolidated Financial and Non-Financial Highlights FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES Years ended March 31 2011 2012 2013 2014 　　(Billions of yen) 2015 Net Sales 3,000 (Billions of yen) For the Year: Net sales Operating income Net income (loss) Capital expenditures Depreciation expenses R&D expenses Automobiles sales volume (thousand units) Exchange rate (¥/$, non-consolidated) At Year-End: Total assets Net assets Interest-bearing debt Number of employees Financial Ratios: ROE (%) ROA1 (%) ¥ 1,580.6 ¥ 1,517.1 ¥ 1,913.0 ¥ 2,408.1 ¥ 2,877.9 84.1 50.3 43.1 49.8 42.9 657 86 1,188.3 414.0 330.6 27,296 12.7 7.0 44.0 38.5 54.3 53.7 48.1 640 79 1,352.5 451.6 341.0 27,123 8.9 3.5 120.4 119.6 70.2 55.9 49.1 724 82 1,577.5 596.8 307.2 27,509 22.9 8.2 326.5 206.6 68.5 54.9 60.1 825 100 1,888.4 770.1 269.7 28,545 30.4 18.8 423.0 261.9 110.7 64.8 83.5 911 108 2,199.7 1,030.7 211.2 29,774 29.3 20.7 1. ROA was calculated as “operating income / (average of assets at the beginning and end of the term)” FUJI HEAVY INDUSTRIES LTD. 06 ANNUAL REPORT 2015 2,877.9 2,408.1 2,500 2,000 1,500 1,000 500 0 1,913.0 1,580.6 1,517.1 2011 2012 2013 2014 2015 Operating Income & Net Income (Loss) (Billions of yen) Operating Income Net Income (Loss) 500 400 300 200 423.0 326.5 261.9 206.6 120.4 119.6 100 84.1 50.3 44.0 38.5 0 2011 2012 2013 2014 2015 Subaru Levorg Wins “Good Design Award 2014” The Subaru Levorg has won the “Good Design Award 2014” from the Japan Institute of Design Promotion (JDP). Following the 2013 award for the Forester and 2012 award for the Impreza and Subaru XV, this marks the 3rd consecutive year that Subaru has been honored with the Good Design Award, which reflects JDP’s high praise for the Subaru design that fuses together style and functionality. Subaru Posts Record Sales in the U.S., Canada, and Australia in 2014 Subaru’s 2014 calendar year retail sales have posted all-time records in its key markets of the U.S., Canada, and Australia. Subaru’s U.S. sales in partic- ular have exceeded a 500,000 unit milestone for the first time in its history, while also achieving six consecutive years of record sales and becoming the only manufacturer in the U.S. to post seven consec- utive years of sales growth. Subaru Debuts “EyeSight” Driving Support System in Europe The all-new Outback launched in Europe during 2014 was the first Subaru model built to European specifi- cations that featured our proprietary EyeSight driving support system. EyeSight’s launch on the European market, following on from its introduction to the Jap- FHI Subaru Visitor Center Sees One Million Visitors Visitors to the Subaru Visitor Center, located within the anese, Australian, and North American markets, en- Yajima Plant of the Gunma Manufacturing Division, ables FHI to extend EyeSight’s deployment across reached a cumulative total of 1 million people on markets globally. September 8, 2014. The Center was opened on July 15, 2003 to commemorate FHI's 50th anniversary and hosts factory tours, mainly for elementary school students visiting as part of their social studies classes. During tours, visitors are given the opportunity to view automobile manufacturing processes. 5 Subaru Models Awarded 2015 TOP SAFETY PICK+ (TSP+) by IIHS in the U.S. The Insurance Institute for Highway Safety (IIHS) in the U.S. has awarded the best possible ranking of TSP+ in 2015 safety assessments of EyeSight-equipped 2015 models of Legacy, Outback, Forester, Impreza, and Subaru XV currently sold in the North American region. Cumulative Production of Horizontally- Opposed SUBARU BOXER Engine Reaches 15 Million Units The cumulative total of horizontally-opposed SUBARU BOXER engines produced has reached 15 million units. The achievement has come in the 49th year since our water-cooled 4-cylinder horizontal- ly-opposed aluminum engine was developed in 1966 and installed for the first time in the compact passen- ger car Subaru 1000 in May of the same year. Plant Constructed for Assembly of Center Wing Boxes for Boeing’s 777X The New Subaru WRX’s Horizontally- Opposed “DIT” Engine Named to 2015 Ward’s “10 Best Engines” The U.S. automotive industry trade journal Ward’s has named Subaru’s “FA20” 2.0-liter 4-cylinder hori- FHI has begun construction of its third assembly zontally-opposed direct injection turbo “DIT” engine facility for aircraft parts on the premises of its Handa in the U.S.-specification 2015 Subaru WRX a winner Plant located in Handa City, Aichi Prefecture, Japan. of its 2015 Ward’s “10 Best Engines” award. This is At the new facility, FHI plans to assemble center the fourth time, coming after a two-year hiatus, that wing boxes for the U.S.’s Boeing Co.’s next-genera- Subaru has won a prestigious Ward's “10 Best En- tion passenger jet, the Boeing 777X. The new facili- gines” accolade. ty is scheduled to be completed in 2016. A Message to Our Shareholders We pursue sustainable growth as a compelling company with strong market presence and continued focus on our differentiation strategy. Yasuyuki Yoshinaga Representative Director of the Board, President and CEO 07 FUJI HEAVY INDUSTRIES LTD.ANNUAL REPORT 2015A Message to Our Shareholders A Message to Our Shareholders We pursue sustainable growth as a compelling company with strong market presence and continued focus on our differentiation strategy. Yasuyuki Yoshinaga Representative Director of the Board, President and CEO What is your evaluation of results for FYE March 2015? Q1 A1 We posted record high results for a third straight year thanks to tireless effort by all divisions and subsidiaries in our Group. Consolidated results for FYE March 2015 were 910,700 vehicles sold (an increase of 10.4 percent compared with the previous fiscal year), net sales of 2,877.9 billion yen (up 19.5 percent), operating income of 423.0 billion yen (up 29.6 percent), and net income of 261.9 billion yen (up 26.7 percent), all of which were record numbers for the third year in a row. Our operating margin also increased to 14.7% from 13.6% last year. It is clear that continued weakness in the yen’s exchange rate was a substantial factor in these improved results. However, I think that behind this three-year achievement of record performance are compounded efforts by all subsidiaries, affiliated companies, and divisions in our Group who seized this tail wind and did not rest on their laurels. Our Development units delivered new, extremely competitive models, such as Legacy/Outback, to market this fiscal year. In addition, all manufacturing departments continuously operated at near-maximum capacity in order to respond to robust demand. Not only our Automotive Business, but also our Aerospace Company and Industrial Products Company each steadily grew their results. Q2 What do you see as the reason for strong sales in the U.S.? A2 Rapid growth continues as we garner high evaluations for our safety performance. Last year, in 2014, the approximately 510,000 new vehicles sold in the U.S. market represented nearly a three-fold increase over the 180,000 or so recorded in 2008. This growth cannot be solely explained by the strength of the U.S. business environment and the expanding demand for new vehicles. During this period, there has been increased demand in the U.S. market for SUVs, where Subaru is strong. However, I believe that the greatest factor leading to our increased sales has been many Subaru models receiving top marks in safety tests by U.S. rating agencies, solidifying an image in American consumers' minds that Subaru is committed to safety. Normally, this level of rapid growth would start to show signs of tapering off, but we have been seeing increasing momentum since launching our new Legacy/Outback models last year. Minimal weakness in sales of models that have not been recently revamped, as well as our ability to hold sales incentives to the lowest level in the industry, is proof that the Subaru brand is extensively supported in the U.S. market. We have set a target of 540,000 units in the U.S. market in 2015, yet our local dealers have requested supply increases, reporting that they can aim for a higher target. FUJI HEAVY INDUSTRIES LTD. 08 ANNUAL REPORT 2015 A Message to Our Shareholders Q3 How do you plan to grow your business in the U.S. in the future? A3 We will aim to build a solid customer base in the U.S. market by expanding production capacity, introducing PHEV that meet environmental regulations, and strengthening our after-sales service. Under Subaru of America, Inc. (SOA), our local subsidiary in the U.S. market, we are continuing to enhance the quality of our sales network, with a total of 625 dealers at present. Our growth strategy is not to increase the number of dealers, but rather to increase the number of units sold at each dealer. The result has led to an estab- lished understanding that “becoming a Subaru franchise will increase sales,” which fuels a positive cycle of competent dealers gathering around us. In order to further accelerate our business in the U.S., three policy measures are built into our mid-term management vision, “Prominence 2020,” announced in May 2014. The first is introducing a new multi passenger three-row model, which we currently have under development and is strongly requested by local dealers. The second is expanding production capacity at our subsidiary Subaru of Indiana Automotive, Inc. (SIA) to take our current 200,000-unit production to nearly 400,000 units by the end of 2016. And the third is support for the environment. In response to the ZEV regulations in the U.S. that will be applied to new models starting in the 2018MY, we have announced plans for a plug-in hybrid electric vehicle (PHEV) featuring the compelling driving expe- rience that is Subaru’s hallmark. This year, SOA announced these policy measures at the gath- ering for our U.S. dealers held in Indianapolis and received a spirited reaction from those in attendance. These measures are a message to our U.S. dealers that “Subaru will pour its full support into the U.S. market, so please feel no anxiety about investing in your dealer- ship.” Of particular importance is strengthening our after-sales service. Even in the continually robust U.S. market, there will be an economic pullback at some point. Until that time, it is all the more important to build a solid customer base, for which enhancing after-sales service is indispensable. Therefore we plan to offer, along- side SOA, our full investment support for dealers’ service facilities going forward. FUJI HEAVY INDUSTRIES LTD. 09 ANNUAL REPORT 2015 Q3 How do you plan to grow your business in the U.S. in the future? A3 We will aim to build a solid customer base in the U.S. market by expanding production capacity, introducing PHEV that meet environmental regulations, and strengthening our after-sales service. Under Subaru of America, Inc. (SOA), our local subsidiary in the U.S. to the ZEV regulations in the U.S. that will be applied to new models market, we are continuing to enhance the quality of our sales starting in the 2018MY, we have announced plans for a plug-in network, with a total of 625 dealers at present. Our growth strategy hybrid electric vehicle (PHEV) featuring the compelling driving expe- is not to increase the number of dealers, but rather to increase the rience that is Subaru’s hallmark. number of units sold at each dealer. The result has led to an estab- This year, SOA announced these policy measures at the gath- lished understanding that “becoming a Subaru franchise will ering for our U.S. dealers held in Indianapolis and received a spirited increase sales,” which fuels a positive cycle of competent dealers reaction from those in attendance. These measures are a message gathering around us. to our U.S. dealers that “Subaru will pour its full support into the U.S. In order to further accelerate our business in the U.S., three market, so please feel no anxiety about investing in your dealer- policy measures are built into our mid-term management ship.” Of particular importance is strengthening our after-sales vision, “Prominence 2020,” announced in May 2014. The first is service. Even in the continually robust U.S. market, there will be an introducing a new multi passenger three-row model, which we economic pullback at some point. Until that time, it is all the more currently have under development and is strongly requested important to build a solid customer base, for which enhancing by local dealers. The second is expanding production capacity after-sales service is indispensable. Therefore we plan to offer, along- at our subsidiary Subaru of Indiana Automotive, Inc. (SIA) to take our side SOA, our full investment support for dealers’ service facilities current 200,000-unit production to nearly 400,000 units by the end going forward. of 2016. And the third is support for the environment. In response A Message to Our Shareholders A Message to Our Shareholders Please share your outlook for FYE March 2016. Q4 A4 We forecast consolidated net sales of 3,030 billion yen and consolidated operating income of 503.0 billion yen on the back of increasing sales in a consistently strong U.S. market. In terms of consolidated results for FYE March 2016, we are planning for 928,300 units for the number of vehicles sold, net sales of 3,030 billion yen, and operating income of 503.0 billion yen. These figures were not created a priori, but rather were calculated from budgets based on diligent analysis of conditions by each division. Our initial decisions were made with calculations assuming an exchange rate of 115 yen/US$. Afterwards, however, as the yen moved further downward relative to the dollar, we announced final forecast numbers assuming 118 yen/US$. Reassessing conditions in each region, we see stronger sales in the U.S. than expected, and we may even be able to post results exceeding forecasts. At the same time, conditions in Russia and other regions are more severe than they were when we set our plans. In the Japan market, our plan was for decreased sales with the prospect that the “new model effect” has run its course and the outlook shows demand settling down, but April and May of this year have continued to bring higher sales than expected, which may lead to results exceeding forecasts. Although there are these regional differences, our largest market, the U.S., remains strong and I am confident that we will be able to achieve our targets overall. How are you putting effort into initiatives to maintain sustainable growth going forward? Q5 A5 We are working on thorough differentiation of our products and businesses, aiming for a “prominent” presence in the minds of our customers. In order for FHI, which is a small automaker, to survive in this market, it is indispensable for us to focus our business resources on specific markets and products, while clearly standing apart from competitors. This strategy of ”differentiation” forms the core of our business strategy and is the principle behind our concept of “promi- nence,” which is the key word in the title of our mid-term manage- ment vision guiding us to stand above the crowd. The concept is not simply prominence with respect to other companies; the simple word encapsulates our aim for “Subaru to have a prominent presence in the minds of our customers,” which makes it a very high hurdle indeed. This objective does not stop where the slogan ends. Each and every member of all divisions is called upon to thoroughly consider what it means to be “prominent in the minds of our customers” and how to implement that in their work. A specific approach to this is embodied in our efforts to focus on the two key activities of “Enhancing the Subaru brand” and “Building a strong business structure.” In order for the Subaru brand to be prominent in the hearts and minds of our customers, we must continue to stay one step ahead of competitors with respect to our greatest strengths: safety features and drivability. Also, in order to improve our market competitiveness and continue to meet the expectations of our shareholders, it is absolutely necessary to take cost reductions to a new level, push operating efficiencies forward, and strengthen our business platform. Even though business results are as favorable as they are, now is the very time for all FHI employees to redouble our efforts and continue to have a positive sense of urgency and even anxiety as we work to further strengthen our brand and our business competitiveness. FUJI HEAVY INDUSTRIES LTD. 10 ANNUAL REPORT 2015 A Message to Our Shareholders What increased amounts are you targeting for your R&D expenses and capital expenditures? Q6 A6 We will continue to pursue stronger R&D, increased production capacity, and improved workplace environments to respond to safety and environmental requirements. In our consolidated three-year investment plan from FYE March 2015 to 2017, we initially allocated 250.0 billion yen to our R&D expenses and 330.0 billion yen to capital expenditures. Subsequent upward revisions, however, have taken into account the trend of positive results since announcing the plan. Our new allocations are for 280.0 billion yen and 400.0 billion yen in R&D expenses and capital expenditures respectively. In recent years, as each company launches vehicles with automatic brake assist and other features, development competition for safety technologies has reached a new, more challenging level. Against this backdrop, Subaru’s EyeSight has garnered the highest safety test approval ratings in the industry and we will continue to actively push our R&D forward so that we can maintain this superiority in safety features into the future. In addition, as environmental regulations strengthen in regions across the globe, we will dedicate effort toward ever greater fuel efficiency for internal combustion systems, as well as toward developing PHEV. And furthermore, we are actively hiring new and experienced engineers in order to further strengthen our R&D programs. At the same time, with regard to investing in facilities, our focus has centered on building out production facilities so that we can relieve our backlog of undelivered vehicles, though we would also like to invest in the as yet unaddressed need to gradually renovate aged facilities and enhance the workplace environment at our business sites. FUJI HEAVY INDUSTRIES LTD. 11 ANNUAL REPORT 2015 A Message to Our Shareholders A Message to Our Shareholders Q6 What increased amounts are you targeting for your R&D expenses and capital expenditures? A6 We will continue to pursue stronger R&D, increased production capacity, and improved workplace environments to respond to safety and environmental requirements. In our consolidated three-year investment plan from FYE March in safety features into the future. In addition, as environmental 2015 to 2017, we initially allocated 250.0 billion yen to our R&D regulations strengthen in regions across the globe, we will dedicate expenses and 330.0 billion yen to capital expenditures. Subsequent effort toward ever greater fuel efficiency for internal combustion upward revisions, however, have taken into account the trend of systems, as well as toward developing PHEV. And furthermore, we positive results since announcing the plan. Our new allocations are are actively hiring new and experienced engineers in order to further for 280.0 billion yen and 400.0 billion yen in R&D expenses and strengthen our R&D programs. capital expenditures respectively. At the same time, with regard to investing in facilities, our focus In recent years, as each company launches vehicles with has centered on building out production facilities so that we can automatic brake assist and other features, development competition relieve our backlog of undelivered vehicles, though we would also for safety technologies has reached a new, more challenging level. like to invest in the as yet unaddressed need to gradually renovate Against this backdrop, Subaru’s EyeSight has garnered the highest aged facilities and enhance the workplace environment at our safety test approval ratings in the industry and we will continue to business sites. actively push our R&D forward so that we can maintain this superiority Please tell us about your initiatives for diversity and fostering leaders of the next generation. Q7 A7 While working to cultivate human capital with diverse skills and business acumen, we are also dedicating effort to creating workplace environments that support the active contribution of female employees. Needless to say, it is important to continually train employees who will be potential candidates for next-generation leaders, and to also ensure smooth transitions from one leadership generation to the next, so that our business can realize sustainable growth. Consequently, FHI will foster not just one or two employees, but a sizeable group, whose members are candidates for next-generation leaders, while we select exceptional employees from the ranks of middle managers to assume executive roles so that the management can stay fresh and nimble. One link in this approach is to actively implement job rotation across divisions for mid-career employees and middle managers, where they are moved from domestic positions to overseas positions, or from technical positions to sales positions, and so on. We are striving to train a team of employees with a broad range of work skills and business instincts. Moreover, in order for our Company to maintain a robust level of business going forward, diversity promotion, in addition to our training of next-generation leaders, is indispensable. FHI established a Diversity Promotion Office in 2014 and is chiefly devoting effort to establishing an environment supportive of female employees' contribution to the company, while also providing training support for female managers. Also, since April 2015, a career-long FHI female executive has served as director of the Human Resources Depart- ment, which is in charge of the Diversity Promotion Office. As we continue into the future, we hope to actively promote excellent human capital regardless of age, gender, or nationality, so that we will be able to grow as an organization with an even higher level of active employee involvement. Please explain a bit about the Subaru Next Story Project started in April 2015. Q8 A8 We are utilizing the Internet, social networking services, etc. to roll out a diverse array of projects to support the active lifestyles of Subaru drivers. In our mid-term management vision, “Prominence 2020,” we indicated our goal to “elevate the brand-customer relationship to a new level” as one of our initiatives toward focusing on “enhancing the Subaru brand.” We started the Subaru Next Story Project, led by young and mid-career employees, in order to put this sentiment into action. The project takes advantage of the Internet and social networking services to encourage customers to enjoy their Subaru even more and to have a fulfilling lifestyle thanks in part to their Subaru vehicle. At the same time, the project is also an initiative to deepen our connection to customers and to introduce activities that we can enjoy together with them. In this project, we develop and implement a variety of ideas to encourage the active lifestyles of our customers. To be specific, we use a website to provide information on driving lessons, sports and outdoor events, and other activities organized by Subaru; and we use social networking services to facilitate exchange between users. FUJI HEAVY INDUSTRIES LTD. 12 ANNUAL REPORT 2015 A Message to Our Shareholders Q9 Please provide some information on your initiatives to strengthen corporate governance. A9 While incorporating outside counsel and listening to feedback from society, we strive for suitable information disclosure practices and increased business transparency. FHI has followed a practice of appointing professionals and experts with business experience as outside directors and auditors, and accepting valuable advice and instruction from external perspectives. Going forward, we will implement measures, including increasing our number of outside directors and auditors, to strive to more conscientiously reflect outside opinions and community input in our business decisions. Additionally, we will devote effort to prompt and appropriate information disclosure and further business transparency following the content of each provision of the Tokyo Stock Exchange’s Corporate Governance Code taking effect from June 1, 2015. At present, we are putting particular effort into more extreme quality control as one of our thematic focuses regarding governance and CSR management. Amid continuing robust sales, each of our production sites has been operating at near-maximum capacity in recent years. However, it is absolutely inexcusable for quality control to suffer as production excels. Our Production units are being made thoroughly aware of their responsibility to stop the line if they are not absolutely confident in the quality of products. In FYE March 2015, FHI posted an operating income of 423.0 billion Although this fiscal year, excluding the boost from exchange had to be shipped by air on short notice in order to work around the yen, a 96.6 billion yen increase year on year, and a record high profit rates, showed a drop in profit of 7.1 billion yen, this result, in cargo delays in U.S. ports. Furthermore, as weakness in the yen level for the third straight year. In addition, our operating margin of comparison to the previous fiscal year's 35.9 billion yen increase in exceeded expectations this fiscal year, we intentionally chose not 14.7% maintained its place among the highest in our industry. The profit, also excluding the benefit from exchange rates, does not at to book the increase as additional profit and instead funneled main driver of our profit increase was 103.7 billion yen from foreign all indicate a decrease in profit generating capability year on year. exchange gain, in addition to 70.3 billion yen from an improved sales The special temporary factor this fiscal year was 10.5 billion yen volume and mixture and 12.4 billion yen from cost reduction. in logistics expenses for local production vehicle components that Do you have a closing message for shareholders? Q10 A10 FHI is committed to thorough and reliable automobile development and manufacturing, while striving for sustainable growth and preservation of the highest profit margins in the industry. Aiming to be “A Compelling Company with Strong Market Presence”—that is the management philosophy of FHI. In order to realize this goal, we will continue to follow our principle that “Customers Come First,” while demonstrating thorough and reliable automobile development and manufacturing, and delivering enjoyment and peace of mind to customers. At the same time, we will continue to earn the trust of our shareholders by bringing about sustainable growth while securing our industry-leading high operating margin. Thank you for your support and feedback going forward. FUJI HEAVY INDUSTRIES LTD. 13 ANNUAL REPORT 2015 free cash flows within a range of 150.0 billion to 200.0 billion yen going forward. it toward R&D expenses and capital expenditures as a way to realize sustainable growth through proactive investments for the future. Next, I will explain our finances. FHI’s free cash flows in FYE At present, FHI is enjoying favorable sales centered on the March 2015 amounted to 138.8 billion yen. Since we posted cash U.S. market. Going forward, however, we expect environmental flows of 279.1 billion yen in FYE March 2014, this appears to be regulations in markets around the world to strengthen, including a reduction by half, unless special temporary factors are taken ZEV regulations in California and other states, and we predict into account. As I also noted last year, the first special factor was more intense competition in the development of advanced an almost 50 billion yen cash inflow in FYE March 2014 due to safety technology with the prospect of automated driving in the the sale of Polaris stock, a U.S. company of which FHI was the future. At FHI, we plan to continue boosting R&D expenses and largest shareholder. Another factor was due to the timing of tax capital expenditures, taking advantage of the current tail wind payments. In FYE March 2014, we had an unrecorded expense of from favorable financial results in order to survive this highly approximately 90 billion yen cash-out for corporate tax, due to net competitive environment. operating loss carryforwards from past terms. This affected FYE Under our new mid-term management vision, “Prominence March 2015 with an inflated 190.0 billion yen cash-out, equivalent 2020,” announced in May 2014, we outlined a consolidated profit to a year and half of corporate taxes, due to the previous fiscal plan (see table on this page) targeting total net sales, total operating year’s corporate and other taxes on top of the interim payment of income, total R&D expenses, and total capital expenditures over the half our annual corporate and other taxes, as required by the three years from FYE March 2015 to 2017. When preparing the plan, taxation system that bases payments on previous fiscal year we assumed an exchange rate of 95 yen/US$, targeting three-year performance. total net sales of 8,000 billion yen and total operating income of Excluding these special factors, our actual free cash flows 1,000 billion yen. Current exchange rate expectations, however, were approximately 140.0 billion yen in FYE March 2014 and show a large shift in the direction of a weaker yen and prospects approximately 200.0 billion yen in FYE March 2015, reflecting for significantly exceeding those targets. We have decided on steady improvement in cash flow generation accompanying a policy for taking surplus profits from favorable exchange rates expansion in business. From FYE March 2016 and beyond, and proactively channeling them to R&D expenses and capital we plan to increase the previously mentioned R&D expenses expenditures, raising the three-year total of R&D expenses from the and boost capital expenditures as proactive investment for initial 250.0 billion yen to 280.0 billion yen, and likewise the total of the future. Since we also forecast increased levels of sales, I capital expenditures from 330.0 billion yen to 400.0 billion yen. believe that even with this investment policy we can maintain A Message to Our Shareholders A Message from the CFO Q9 Please provide some information on your initiatives to strengthen corporate governance. A9 While incorporating outside counsel and listening to feedback from society, we strive for suitable information disclosure practices and increased business transparency. FHI has followed a practice of appointing professionals and experts At present, we are putting particular effort into more extreme with business experience as outside directors and auditors, quality control as one of our thematic focuses regarding governance and accepting valuable advice and instruction from external and CSR management. Amid continuing robust sales, each of our perspectives. Going forward, we will implement measures, production sites has been operating at near-maximum capacity in including increasing our number of outside directors and auditors, to recent years. However, it is absolutely inexcusable for quality strive to more conscientiously reflect outside opinions and control to suffer as production excels. Our Production units are community input in our business decisions. Additionally, we will being made thoroughly aware of their responsibility to stop the line devote effort to prompt and appropriate information disclosure and if they are not absolutely confident in the quality of products. further business transparency following the content of each provision of the Tokyo Stock Exchange’s Corporate Governance Code taking effect from June 1, 2015. Q10 Do you have a closing message for shareholders? A10 FHI is committed to thorough and reliable automobile development and manufacturing, while striving for sustainable growth and preservation of the highest profit margins in the industry. Aiming to be “A Compelling Company with Strong Market delivering enjoyment and peace of mind to customers. At the Presence”—that is the management philosophy of FHI. In order same time, we will continue to earn the trust of our shareholders to realize this goal, we will continue to follow our principle that by bringing about sustainable growth while securing our “Customers Come First,” while demonstrating thorough industry-leading high operating margin. Thank you for your support and reliable automobile development and manufacturing, and and feedback going forward. We will keep high profit levels while making aggressive and proactive investments for the future in order to realize sustainable growth as well as stable and continuous return of profit to shareholders. Mitsuru Takahashi Director of the Board Corporate Executive Vice President and CFO Boosting R&D expenses and capital expenditures to further improve our market competitiveness In FYE March 2015, FHI posted an operating income of 423.0 billion In FYE March 2015, FHI posted an operating income of 423.0 billion yen, a 96.6 billion yen increase year on year, and a record high profit yen, a 96.6 billion yen increase year on year, and a record high profit level for the third straight year. In addition, our operating margin of level for the third straight year. In addition, our operating margin of 14.7% maintained its place among the highest in our industry. The 14.7% maintained its place among the highest in our industry. The main driver of our profit increase was 103.7 billion yen from foreign main driver of our profit increase was 103.7 billion yen from foreign exchange gain, in addition to 70.3 billion yen from an improved sales exchange gain, in addition to 70.3 billion yen from an improved sales volume and mixture and 12.4 billion yen from cost reduction. volume and mixture and 12.4 billion yen from cost reduction. Although this fiscal year, excluding the boost from exchange Although this fiscal year, excluding the boost from exchange rates, showed a drop in profit of 7.1 billion yen, this result, in rates, showed a drop in profit of 7.1 billion yen, this result, in comparison to the previous fiscal year's 35.9 billion yen increase in comparison to the previous fiscal year's 35.9 billion yen increase in profit, also excluding the benefit from exchange rates, does not at profit, also excluding the benefit from exchange rates, does not at all indicate a decrease in profit generating capability year on year. all indicate a decrease in profit generating capability year on year. The special temporary factor this fiscal year was 10.5 billion yen The special temporary factor this fiscal year was 10.5 billion yen in logistics expenses for local production vehicle components that in logistics expenses for local production vehicle components that had to be shipped by air on short notice in order to work around the had to be shipped by air on short notice in order to work around the cargo delays in U.S. ports. Furthermore, as weakness in the yen cargo delays in U.S. ports. Furthermore, as weakness in the yen exceeded expectations this fiscal year, we intentionally chose not exceeded expectations this fiscal year, we intentionally chose not to book the increase as additional profit and instead funneled to book the increase as additional profit and instead funneled Three-Year Changes in Operating Income +70.3 +12.4 -66.6 +103.7 -23.2 423.0 +19.7 -24.0 +51.1 -10.9 326.5 +170.2 +29.3 -65.0 +31.5 +81.7 -1.0 120.4 44.0 Operating income FYE March 2012 Improvement of sales volume & mixture and others Cost reduction Gain on currency exchange SG&A expenses and others R&D expenses Operating income FYE March 2013 Gain on currency exchange Improvement of sales volume & mixture and others Cost reduction SG&A expenses and others R&D expenses Operating income FYE March 2014 Gain on currency exchange Improvement of sales volume & mixture and others Cost reduction SG&A expenses and others R&D expenses Operating income FYE March 2015 +76.4 billion yen +206.1 billion yen +96.6 billion yen FUJI HEAVY INDUSTRIES LTD. 14 ANNUAL REPORT 2015 free cash flows within a range of 150.0 billion to 200.0 billion free cash flows within a range of 150.0 billion to 200.0 billion yen going forward. yen going forward. it toward R&D expenses and capital expenditures as a way to it toward R&D expenses and capital expenditures as a way to realize sustainable growth through proactive investments for realize sustainable growth through proactive investments for the future. the future. Next, I will explain our finances. FHI’s free cash flows in FYE Next, I will explain our finances. FHI’s free cash flows in FYE At present, FHI is enjoying favorable sales centered on the At present, FHI is enjoying favorable sales centered on the March 2015 amounted to 138.8 billion yen. Since we posted cash March 2015 amounted to 138.8 billion yen. Since we posted cash U.S. market. Going forward, however, we expect environmental U.S. market. Going forward, however, we expect environmental flows of 279.1 billion yen in FYE March 2014, this appears to be flows of 279.1 billion yen in FYE March 2014, this appears to be regulations in markets around the world to strengthen, including regulations in markets around the world to strengthen, including a reduction by half, unless special temporary factors are taken a reduction by half, unless special temporary factors are taken ZEV regulations in California and other states, and we predict ZEV regulations in California and other states, and we predict into account. As I also noted last year, the first special factor was into account. As I also noted last year, the first special factor was more intense competition in the development of advanced more intense competition in the development of advanced an almost 50 billion yen cash inflow in FYE March 2014 due to an almost 50 billion yen cash inflow in FYE March 2014 due to safety technology with the prospect of automated driving in the safety technology with the prospect of automated driving in the the sale of Polaris stock, a U.S. company of which FHI was the the sale of Polaris stock, a U.S. company of which FHI was the future. At FHI, we plan to continue boosting R&D expenses and future. At FHI, we plan to continue boosting R&D expenses and largest shareholder. Another factor was due to the timing of tax largest shareholder. Another factor was due to the timing of tax capital expenditures, taking advantage of the current tail wind capital expenditures, taking advantage of the current tail wind payments. In FYE March 2014, we had an unrecorded expense of payments. In FYE March 2014, we had an unrecorded expense of from favorable financial results in order to survive this highly from favorable financial results in order to survive this highly approximately 90 billion yen cash-out for corporate tax, due to net approximately 90 billion yen cash-out for corporate tax, due to net competitive environment. competitive environment. operating loss carryforwards from past terms. This affected FYE operating loss carryforwards from past terms. This affected FYE Under our new mid-term management vision, “Prominence Under our new mid-term management vision, “Prominence March 2015 with an inflated 190.0 billion yen cash-out, equivalent March 2015 with an inflated 190.0 billion yen cash-out, equivalent 2020,” announced in May 2014, we outlined a consolidated profit 2020,” announced in May 2014, we outlined a consolidated profit to a year and half of corporate taxes, due to the previous fiscal to a year and half of corporate taxes, due to the previous fiscal plan (see table on this page) targeting total net sales, total operating plan (see table on this page) targeting total net sales, total operating year’s corporate and other taxes on top of the interim payment of year’s corporate and other taxes on top of the interim payment of income, total R&D expenses, and total capital expenditures over the income, total R&D expenses, and total capital expenditures over the half our annual corporate and other taxes, as required by the half our annual corporate and other taxes, as required by the three years from FYE March 2015 to 2017. When preparing the plan, three years from FYE March 2015 to 2017. When preparing the plan, taxation system that bases payments on previous fiscal year taxation system that bases payments on previous fiscal year we assumed an exchange rate of 95 yen/US$, targeting three-year we assumed an exchange rate of 95 yen/US$, targeting three-year performance. performance. total net sales of 8,000 billion yen and total operating income of total net sales of 8,000 billion yen and total operating income of Excluding these special factors, our actual free cash flows Excluding these special factors, our actual free cash flows 1,000 billion yen. Current exchange rate expectations, however, 1,000 billion yen. Current exchange rate expectations, however, were approximately 140.0 billion yen in FYE March 2014 and were approximately 140.0 billion yen in FYE March 2014 and show a large shift in the direction of a weaker yen and prospects show a large shift in the direction of a weaker yen and prospects approximately 200.0 billion yen in FYE March 2015, reflecting approximately 200.0 billion yen in FYE March 2015, reflecting for significantly exceeding those targets. We have decided on for significantly exceeding those targets. We have decided on steady improvement in cash flow generation accompanying steady improvement in cash flow generation accompanying a policy for taking surplus profits from favorable exchange rates a policy for taking surplus profits from favorable exchange rates expansion in business. From FYE March 2016 and beyond, expansion in business. From FYE March 2016 and beyond, and proactively channeling them to R&D expenses and capital and proactively channeling them to R&D expenses and capital we plan to increase the previously mentioned R&D expenses we plan to increase the previously mentioned R&D expenses expenditures, raising the three-year total of R&D expenses from the expenditures, raising the three-year total of R&D expenses from the and boost capital expenditures as proactive investment for and boost capital expenditures as proactive investment for initial 250.0 billion yen to 280.0 billion yen, and likewise the total of initial 250.0 billion yen to 280.0 billion yen, and likewise the total of the future. Since we also forecast increased levels of sales, I the future. Since we also forecast increased levels of sales, I capital expenditures from 330.0 billion yen to 400.0 billion yen. capital expenditures from 330.0 billion yen to 400.0 billion yen. believe that even with this investment policy we can maintain believe that even with this investment policy we can maintain In FYE March 2015, FHI posted an operating income of 423.0 billion Although this fiscal year, excluding the boost from exchange had to be shipped by air on short notice in order to work around the yen, a 96.6 billion yen increase year on year, and a record high profit rates, showed a drop in profit of 7.1 billion yen, this result, in cargo delays in U.S. ports. Furthermore, as weakness in the yen level for the third straight year. In addition, our operating margin of comparison to the previous fiscal year's 35.9 billion yen increase in exceeded expectations this fiscal year, we intentionally chose not 14.7% maintained its place among the highest in our industry. The profit, also excluding the benefit from exchange rates, does not at to book the increase as additional profit and instead funneled main driver of our profit increase was 103.7 billion yen from foreign all indicate a decrease in profit generating capability year on year. exchange gain, in addition to 70.3 billion yen from an improved sales The special temporary factor this fiscal year was 10.5 billion yen volume and mixture and 12.4 billion yen from cost reduction. in logistics expenses for local production vehicle components that A Message from the CFO Three-Year Business Operation / Profit Plan (Total of FYE2015–2017) Net sales Operating income Currency rate assumption: 95 yen/US$ 8 trillion yen 1 trillion yen Revised Three-Year Investment Plan (Total of FYE2015–2017) R&D expenses Capital expenditures Depreciation & amortization Original plan Revised plan 250 billion yen (+59%) 280 billion yen (+78%) 330 billion yen (+71%) 200 billion yen (+22%) 400 billion yen (+107%) 210 billion yen (+28%) ( ): vs. previous 3 fiscal-year (FYE2012–FYE2014) period it toward R&D expenses and capital expenditures as a way to realize sustainable growth through proactive investments for the future. At present, FHI is enjoying favorable sales centered on the U.S. market. Going forward, however, we expect environmental regulations in markets around the world to strengthen, including ZEV regulations in California and other states, and we predict more intense competition in the development of advanced safety technology with the prospect of automated driving in the future. At FHI, we plan to continue boosting R&D expenses and capital expenditures, taking advantage of the current tail wind from favorable financial results in order to survive this highly competitive environment. Under our new mid-term management vision, “Prominence 2020,” announced in May 2014, we outlined a consolidated profit plan (see table on this page) targeting total net sales, total operating income, total R&D expenses, and total capital expenditures over the three years from FYE March 2015 to 2017. When preparing the plan, we assumed an exchange rate of 95 yen/US$, targeting three-year total net sales of 8,000 billion yen and total operating income of 1,000 billion yen. Current exchange rate expectations, however, show a large shift in the direction of a weaker yen and prospects for significantly exceeding those targets. We have decided on a policy for taking surplus profits from favorable exchange rates and proactively channeling them to R&D expenses and capital expenditures, raising the three-year total of R&D expenses from the initial 250.0 billion yen to 280.0 billion yen, and likewise the total of capital expenditures from 330.0 billion yen to 400.0 billion yen. FUJI HEAVY INDUSTRIES LTD. 15 ANNUAL REPORT 2015 A certain amount of free cash flows maintained while expanding proactive investments for the future Next, I will explain our finances. FHI’s free cash flows in FYE March 2015 amounted to 138.8 billion yen. Since we posted cash flows of 279.1 billion yen in FYE March 2014, this appears to be a reduction by half, unless special temporary factors are taken into account. As I also noted last year, the first special factor was an almost 50 billion yen cash inflow in FYE March 2014 due to the sale of Polaris stock, a U.S. company of which FHI was the largest shareholder. Another factor was due to the timing of tax payments. In FYE March 2014, we had an unrecorded expense of approximately 90 billion yen cash-out for corporate tax, due to net operating loss carryforwards from past terms. This affected FYE March 2015 with an inflated 190.0 billion yen cash-out, equivalent to a year and half of corporate taxes, due to the previous fiscal year’s corporate and other taxes on top of the interim payment of half our annual corporate and other taxes, as required by the taxation system that bases payments on previous fiscal year performance. Excluding these special factors, our actual free cash flows were approximately 140.0 billion yen in FYE March 2014 and approximately 200.0 billion yen in FYE March 2015, reflecting steady improvement in cash flow generation accompanying expansion in business. From FYE March 2016 and beyond, we plan to increase the previously mentioned R&D expenses and boost capital expenditures as proactive investment for the future. Since we also forecast increased levels of sales, I believe that even with this investment policy we can maintain free cash flows within a range of 150.0 billion to 200.0 billion yen going forward. In FYE March 2015, FHI posted an operating income of 423.0 billion In FYE March 2015, FHI posted an operating income of 423.0 billion Although this fiscal year, excluding the boost from exchange Although this fiscal year, excluding the boost from exchange had to be shipped by air on short notice in order to work around the had to be shipped by air on short notice in order to work around the yen, a 96.6 billion yen increase year on year, and a record high profit yen, a 96.6 billion yen increase year on year, and a record high profit rates, showed a drop in profit of 7.1 billion yen, this result, in rates, showed a drop in profit of 7.1 billion yen, this result, in cargo delays in U.S. ports. Furthermore, as weakness in the yen cargo delays in U.S. ports. Furthermore, as weakness in the yen level for the third straight year. In addition, our operating margin of level for the third straight year. In addition, our operating margin of comparison to the previous fiscal year's 35.9 billion yen increase in comparison to the previous fiscal year's 35.9 billion yen increase in exceeded expectations this fiscal year, we intentionally chose not exceeded expectations this fiscal year, we intentionally chose not 14.7% maintained its place among the highest in our industry. The 14.7% maintained its place among the highest in our industry. The profit, also excluding the benefit from exchange rates, does not at profit, also excluding the benefit from exchange rates, does not at to book the increase as additional profit and instead funneled to book the increase as additional profit and instead funneled main driver of our profit increase was 103.7 billion yen from foreign main driver of our profit increase was 103.7 billion yen from foreign all indicate a decrease in profit generating capability year on year. all indicate a decrease in profit generating capability year on year. exchange gain, in addition to 70.3 billion yen from an improved sales exchange gain, in addition to 70.3 billion yen from an improved sales The special temporary factor this fiscal year was 10.5 billion yen The special temporary factor this fiscal year was 10.5 billion yen volume and mixture and 12.4 billion yen from cost reduction. volume and mixture and 12.4 billion yen from cost reduction. in logistics expenses for local production vehicle components that in logistics expenses for local production vehicle components that A Message from the CFO A Message from the CFO Three-Year Business Operation / Profit Plan (Total of FYE2015–2017) Net sales Operating income Currency rate assumption: 95 yen/US$ 8 trillion yen 1 trillion yen Revised Three-Year Investment Plan (Total of FYE2015–2017) R&D expenses Capital expenditures Depreciation & amortization Original plan Revised plan 250 billion yen 280 billion yen (+59%) (+78%) 330 billion yen 400 billion yen (+71%) (+107%) 200 billion yen 210 billion yen (+22%) (+28%) ( ): vs. previous 3 fiscal-year (FYE2012–FYE2014) period it toward R&D expenses and capital expenditures as a way to it toward R&D expenses and capital expenditures as a way to realize sustainable growth through proactive investments for realize sustainable growth through proactive investments for the future. the future. A certain amount of free cash flows maintained while expanding proactive investments for the future Next, I will explain our finances. FHI’s free cash flows in FYE Next, I will explain our finances. FHI’s free cash flows in FYE At present, FHI is enjoying favorable sales centered on the At present, FHI is enjoying favorable sales centered on the March 2015 amounted to 138.8 billion yen. Since we posted cash March 2015 amounted to 138.8 billion yen. Since we posted cash U.S. market. Going forward, however, we expect environmental U.S. market. Going forward, however, we expect environmental flows of 279.1 billion yen in FYE March 2014, this appears to be flows of 279.1 billion yen in FYE March 2014, this appears to be regulations in markets around the world to strengthen, including regulations in markets around the world to strengthen, including a reduction by half, unless special temporary factors are taken a reduction by half, unless special temporary factors are taken ZEV regulations in California and other states, and we predict ZEV regulations in California and other states, and we predict into account. As I also noted last year, the first special factor was into account. As I also noted last year, the first special factor was more intense competition in the development of advanced more intense competition in the development of advanced an almost 50 billion yen cash inflow in FYE March 2014 due to an almost 50 billion yen cash inflow in FYE March 2014 due to safety technology with the prospect of automated driving in the safety technology with the prospect of automated driving in the the sale of Polaris stock, a U.S. company of which FHI was the the sale of Polaris stock, a U.S. company of which FHI was the future. At FHI, we plan to continue boosting R&D expenses and future. At FHI, we plan to continue boosting R&D expenses and largest shareholder. Another factor was due to the timing of tax largest shareholder. Another factor was due to the timing of tax capital expenditures, taking advantage of the current tail wind capital expenditures, taking advantage of the current tail wind payments. In FYE March 2014, we had an unrecorded expense of payments. In FYE March 2014, we had an unrecorded expense of from favorable financial results in order to survive this highly from favorable financial results in order to survive this highly approximately 90 billion yen cash-out for corporate tax, due to net approximately 90 billion yen cash-out for corporate tax, due to net competitive environment. competitive environment. operating loss carryforwards from past terms. This affected FYE operating loss carryforwards from past terms. This affected FYE Under our new mid-term management vision, “Prominence Under our new mid-term management vision, “Prominence March 2015 with an inflated 190.0 billion yen cash-out, equivalent March 2015 with an inflated 190.0 billion yen cash-out, equivalent 2020,” announced in May 2014, we outlined a consolidated profit 2020,” announced in May 2014, we outlined a consolidated profit to a year and half of corporate taxes, due to the previous fiscal to a year and half of corporate taxes, due to the previous fiscal plan (see table on this page) targeting total net sales, total operating plan (see table on this page) targeting total net sales, total operating year’s corporate and other taxes on top of the interim payment of year’s corporate and other taxes on top of the interim payment of income, total R&D expenses, and total capital expenditures over the income, total R&D expenses, and total capital expenditures over the half our annual corporate and other taxes, as required by the half our annual corporate and other taxes, as required by the three years from FYE March 2015 to 2017. When preparing the plan, three years from FYE March 2015 to 2017. When preparing the plan, taxation system that bases payments on previous fiscal year taxation system that bases payments on previous fiscal year we assumed an exchange rate of 95 yen/US$, targeting three-year we assumed an exchange rate of 95 yen/US$, targeting three-year performance. performance. total net sales of 8,000 billion yen and total operating income of total net sales of 8,000 billion yen and total operating income of Excluding these special factors, our actual free cash flows Excluding these special factors, our actual free cash flows 1,000 billion yen. Current exchange rate expectations, however, 1,000 billion yen. Current exchange rate expectations, however, were approximately 140.0 billion yen in FYE March 2014 and were approximately 140.0 billion yen in FYE March 2014 and show a large shift in the direction of a weaker yen and prospects show a large shift in the direction of a weaker yen and prospects approximately 200.0 billion yen in FYE March 2015, reflecting approximately 200.0 billion yen in FYE March 2015, reflecting for significantly exceeding those targets. We have decided on for significantly exceeding those targets. We have decided on steady improvement in cash flow generation accompanying steady improvement in cash flow generation accompanying a policy for taking surplus profits from favorable exchange rates a policy for taking surplus profits from favorable exchange rates expansion in business. From FYE March 2016 and beyond, expansion in business. From FYE March 2016 and beyond, and proactively channeling them to R&D expenses and capital and proactively channeling them to R&D expenses and capital we plan to increase the previously mentioned R&D expenses we plan to increase the previously mentioned R&D expenses expenditures, raising the three-year total of R&D expenses from the expenditures, raising the three-year total of R&D expenses from the and boost capital expenditures as proactive investment for and boost capital expenditures as proactive investment for initial 250.0 billion yen to 280.0 billion yen, and likewise the total of initial 250.0 billion yen to 280.0 billion yen, and likewise the total of the future. Since we also forecast increased levels of sales, I the future. Since we also forecast increased levels of sales, I capital expenditures from 330.0 billion yen to 400.0 billion yen. capital expenditures from 330.0 billion yen to 400.0 billion yen. believe that even with this investment policy we can maintain believe that even with this investment policy we can maintain Free Cash Flows & Shareholders’ Equity to Total Assets (Billions of yen) Free cash flows Shareholders’ equity to total assets 300 240 180 120 60 0 279.1 40.5 46.5 138.8 37.7 95.3 34.7 33.3 87.1 28.3 2011 2012 2013 2014 2015 (FY) (%) 50 40 30 20 10 0 operating environment and performance forecasts as close to the payout date as possible. With this in mind, we have not decided on our dividend plans for FYE March 2016 at this point. Furthermore, we expect ROE (return on equity) to go down in the future as shareholders’ equity increases. FHI does not directly base dividend payout determinations on ROE. Going forward, however, we want to both strengthen our financial position and make continuous and stable returns of profit to shareholders while keeping in mind the balance of our shareholders’ equity ratio and ROE. Although we are not large among automobile manufacturers, we have built a position as a company with distinct individuality in major markets inside and outside Japan by concentrating our limited resources on limited markets and products. With our mid-term management vision “Prominence 2020,” FHI aims to achieve sustainable growth through proactive and future-oriented investment and the securing of a fundamentally high level of profitability. Thank you for your understanding and ongoing support for the future. free cash flows within a range of 150.0 billion to 200.0 billion free cash flows within a range of 150.0 billion to 200.0 billion yen going forward. yen going forward. Entering a new stage of shareholder returns while striving to further enhance our financial position Last, let me explain our policy of returning profits to shareholders. FHI's basic dividend policy is to have stable and continuous payouts while considering performance-linked benefits. We have announced that the consolidated payout ratio would be between 20 and 40 percent in order to link dividends to performance. This leeway in dividend payout ratio is to absorb a drop in dividends within this 20-point range whereby a 20 percent level is set as the basis for the income increase and a maximum of 40 percent is set for the income decrease. Compared to larger automakers, FHI's financial position has not been especially airtight. Consequently, we have focused on retained earnings up to this point and have tried to hold a 20% minimum payout ratio. At the same time, however, our financial position has steadily improved in line with increased business in the last several years. Shareholders’ equity to total assets reached 46.5% in FYE March 2015 and it might very well top 50% within FYE March 2016. So we see our operations as having entered a new stage in FYE March 2016 and beyond and we plan to return profits to shareholders without overly emphasizing a 20% payout ratio, even though profits continue to increase. However, we will carefully determine what ratio is appropriate within the 20-40% range after closely judging our FUJI HEAVY INDUSTRIES LTD. 16 ANNUAL REPORT 2015 Special Feature PROMINENCE BY LEGACY Leveraging Safety to Stand Out in the World Subaru pursues automotive safety through development, design, production, and sales, for which we have won praise throughout the world. At Subaru, we design vehicles that reflect the voices of our customers; we build production capabilities that deliver quality and meet demand; and we constantly review and re-commit ourselves to the value that we offer. 17 FUJI HEAVY INDUSTRIES LTD.ANNUAL REPORT 2015Introduction Subaru pushes the evolution of its safety performance from all directions and continues to devote effort to reliable automobile manufacturing that delivers enjoyment and peace of mind to our customers. EyeSight® The new Legacy/Outback models garnered the highest performance ratings in Japanese, U.S., and European safety tests Under its brand statement of “Confidence in Motion,” FHI is committed to reliable automobile manufacturing that delivers enjoyment and peace of mind to our customers. In order to spur the evolution of the vehicle safety features that support this “enjoyment and peace of mind,” we follow a philosophy of “All-Around Safety” and strive for revolutionary safety technology from all fronts: active safety, passive safety, and pre-crash safety. Amongst these technologies, the state-of-the-art Eye- Sight on board new Legacy/Outback earned full marks in preventative safety performance assessments conducted by NASVA1 and the Ministry of Land, Infrastructure, Trans- port and Tourism. Like Levorg, Forester, and Subaru XV Hybrid, these new models were selected to receive the top JNCAP ASV+ rating. In addition, new Outback outfitted with EyeSight earned the highest marks in the 2014 Euro- pean New Car Assessment Program. Furthermore, all five models with EyeSight on board sold in the U.S. market received 2015 Top Safety Pick+ awards, the highest evalu- ation possible by the IIHS.2 These industry-leading safety features recognized and awarded by ratings agencies throughout the world are what bring the Subaru brand the trust and support of its customers. 1 NASVA = National Agency for Automobile Safety and Victims' Aid 2 IIHS = Insurance Institute for Highway Safety Control & Braking Systems Symmetrical All-Wheel Drive Active Torque Vectoring SUBARU ALL AROUND SAFETY Visibility & Child Safety Protective Systems SUBARU Rear Vehicle Detection 18 Special Feature PROMINENCE BY LEGACY Leveraging Safety to Stand Out in the World Subaru pursues automotive safety through development, design, production, and sales, for which we have won praise throughout the world. At Subaru, we design vehicles that reflect the voices of our customers; we build production capabilities that deliver quality and meet demand; and we constantly review and re-commit ourselves to the value that we offer. FUJI HEAVY INDUSTRIES LTD.ANNUAL REPORT 2015the driving force behind our growth has been trust in our brand, such that “Subaru = a vehicle with outstanding safety performance,” which comes from Subaru safety features being highly rated in safety assessments in countries After taking charge of development for the new Legacy/Out- throughout the world. The second pillar is our pursuit of back, I first dedicated effort to incorporating customer advanced safety technologies, as exemplified by EyeSight. At feedback as completely as possible. Part of that process was present, automakers have brought vehicles to market with visiting the homes of owners, mainly in the U.S. market, various kinds of driver support technologies, such as brake which has shown the strongest demand for these models. I assist. Despite the crowded field, EyeSight has garnered the also considered how to gain further support for Legacy/Out- highest level of assessments in various safety tests. back and how to provide a reliable vehicle of course for the Needless to say, we continued our pursuit of safety U.S. market, but also globally. While lending an ear to a performance from every angle in the development of the variety of opinions and requests, we thoroughly researched, new Legacy/Outback, including the adoption of the most up and implemented the results, regarding what kind of vehicle to date EyeSight ver. 3. If our cars are not reassuring enough would bring the most enjoyment and fulfillment to our so that anyone can ride in them with peace of mind, they will customers’ lifestyles. not be able to act as a partner for supporting enjoyable and Of the stories that I learned from customers, I was fulfilling lives for our customers. particularly impressed by those regarding safety, including comments like, “Although the car was badly damaged in an accident, I avoided serious harm thanks to the reliable collision safety performance.” Every time that I came in contact with these examples of customer gratitude and appreciation, it reaffirmed my awareness of the importance of safety performance and of our great social responsibility as an automaker. Development of the new Legacy/Outback strove for “emo- step further by envisioning a design that positively presents There are two pillars to Subaru’s safety performance tional value” in the new design and driving experience, in initiatives. The first is our policy for “achieving a high level of addition to Subaru’s already established competence in safety performance for all vehicle models.” In actual practice, functional value from safety performance, drivability, and the vehicle’s achievement of high functionality and perfor- mance while keeping the importance of emphasizing function- al aesthetics. As our flagship models, the new Legacy/Out- user friendliness. The concept of “emphasizing function and performance for a real-world tool, with the design represent- ing the results of that emphasis” was dominant in the minds of our development team. Our recent approach has gone one Special Feature: PROMINENCE BY LEGACY Project General Manager (PGM) Interview Development of the new Legacy/Outback started with careful consideration of what kind of vehicle will bring more fulfillment to our customers’ lifestyles. Masayuki Uchida Corporate Vice President, Senior General Manager of the Subaru Engineering Division (Previously Senior Project General Manager of the Subaru Product & Portfolio Planning Division) Professional Background Joined Fuji Heavy Industries Ltd. April 1981: November 2003: General Manager, Body Design Department, Subaru Engineering Division April 2005: March 2008: April 2010: April 2011: April 2015: General Manager, Exterior Design Department, Subaru Engineering Division General Manager, Subaru Engineering Division PGM, Subaru Product & Portfolio Planning Division Senior PGM, Subaru Product & Portfolio Planning Division Corporate Vice President, Senior General Manager, Subaru Engineering Division FUJI HEAVY INDUSTRIES LTD. 19 ANNUAL REPORT 2015 back feature superior drivability, safety, and reliability expressed quality venturing into the domain of human sensibilities, or of the development team argue that “we can settle for this in the dynamic and powerful body, and emphasize quality “emotional value” in other words. We strove for a vehicle that level.” The entire team was committed to thoroughly pursuing that appeals to all five senses. We have thoroughly polished would heighten satisfaction for drivers and act as a partner for the performance customers demand, which is the Subaru every small detail, from the feel of the interior and other supporting their fulfilling lifestyle. way that development is done. tactile surfaces, to the sounds of the engine and the various Of course, aspects such as dynamic feel and inspirational moving parts. value differ from a vehicle's physical performance and cannot In terms of the driving experience, our work did not stop at be captured in numbers or figures. Our development process physical driving performance, but extended to "dynamic feel" had to use repeated road tests with prototypes to verify the that would stimulate drivers to notice the comfort and smooth- finer points of the driving feel, including steering and braking ness of the ride, hopefully reacting with the sentiment, “I would response, as well as running noise and vibration, etc. There like to keep driving this forever.” Hence, our work on both the were moments in the process when we were stuck and design and the driving experience pursued a high level of unable to attain our target results, but never once did members Subaru’s commitment to automobile manufacturing from the customer's perspective is also present in our approach to fuel efficiency. To be sure, it is important to improve the adver- tised catalog value for fuel efficiency, but we also emphasize the actual mileage that customers will attain in normal driving circumstances. Our way of thinking with regard to an environmentally conscious driving experience is not to impose restrictions on the driver, but rather to achieve both efficiency and comfortable drivabil- ity. Therefore, we have adopted an AWD system in order to deliver safety and comfort under a wide variety of road surfaces, even though it is disadvantageous for fuel efficiency due to increased weight and mechanical loss compared with FWD vehicles. To compensate, we improved engine and transmission efficiency, boosted aerodynamic performance, and introduced “idling stop” features to achieve best-in-class results for actual fuel efficiency even compared to FWD vehicles. Indeed, customers of the new Legacy/Outback have approved by remarking, “The fuel Special Feature: PROMINENCE BY LEGACY Project General Manager (PGM) Interview Special Feature: PROMINENCE BY LEGACY Project General Manager (PGM) Interview If our cars are not reassuring enough so that anyone can ride in them with peace of mind, they will not be able to act as a partner for supporting customers' lifestyles. Development of the new Legacy/Outback started with careful consideration of what kind of vehicle will bring more fulfillment to our customers’ lifestyles. Masayuki Uchida Corporate Vice President, Senior General Manager of the Subaru Engineering Division (Previously Senior Project General Manager of the Subaru Product & Portfolio Planning Division) Professional Background April 1981: Joined Fuji Heavy Industries Ltd. November 2003: General Manager, Body Design Department, Subaru Engineering Division April 2005: General Manager, Exterior Design Department, Subaru Engineering Division March 2008: General Manager, Subaru Engineering Division April 2010: April 2011: April 2015: PGM, Subaru Product & Portfolio Planning Division Senior PGM, Subaru Product & Portfolio Planning Division Corporate Vice President, Senior General Manager, Subaru Engineering Division We have thoroughly pursued safety performance more than anything else in order to support fulfilling lifestyles for our customers After taking charge of development for the new Legacy/Out- After taking charge of development for the new Legacy/Out- back, I first dedicated effort to incorporating customer back, I first dedicated effort to incorporating customer feedback as completely as possible. Part of that process was feedback as completely as possible. Part of that process was visiting the homes of owners, mainly in the U.S. market, visiting the homes of owners, mainly in the U.S. market, which has shown the strongest demand for these models. I which has shown the strongest demand for these models. I also considered how to gain further support for Legacy/Out- also considered how to gain further support for Legacy/Out- back and how to provide a reliable vehicle of course for the back and how to provide a reliable vehicle of course for the U.S. market, but also globally. While lending an ear to a U.S. market, but also globally. While lending an ear to a variety of opinions and requests, we thoroughly researched, variety of opinions and requests, we thoroughly researched, and implemented the results, regarding what kind of vehicle and implemented the results, regarding what kind of vehicle would bring the most enjoyment and fulfillment to our would bring the most enjoyment and fulfillment to our customers’ lifestyles. customers’ lifestyles. Of the stories that I learned from customers, I was Of the stories that I learned from customers, I was particularly impressed by those regarding safety, including particularly impressed by those regarding safety, including comments like, “Although the car was badly damaged in an comments like, “Although the car was badly damaged in an accident, I avoided serious harm thanks to the reliable accident, I avoided serious harm thanks to the reliable collision safety performance.” Every time that I came in collision safety performance.” Every time that I came in contact with these examples of customer gratitude and contact with these examples of customer gratitude and appreciation, it reaffirmed my awareness of the importance appreciation, it reaffirmed my awareness of the importance of safety performance and of our great social responsibility as of safety performance and of our great social responsibility as an automaker. an automaker. There are two pillars to Subaru’s safety performance There are two pillars to Subaru’s safety performance initiatives. The first is our policy for “achieving a high level of initiatives. The first is our policy for “achieving a high level of safety performance for all vehicle models.” In actual practice, safety performance for all vehicle models.” In actual practice, the driving force behind our growth has been trust in our the driving force behind our growth has been trust in our brand, such that “Subaru = a vehicle with outstanding safety brand, such that “Subaru = a vehicle with outstanding safety performance,” which comes from Subaru safety features performance,” which comes from Subaru safety features being highly rated in safety assessments in countries being highly rated in safety assessments in countries throughout the world. The second pillar is our pursuit of throughout the world. The second pillar is our pursuit of advanced safety technologies, as exemplified by EyeSight. At advanced safety technologies, as exemplified by EyeSight. At present, automakers have brought vehicles to market with present, automakers have brought vehicles to market with various kinds of driver support technologies, such as brake various kinds of driver support technologies, such as brake assist. Despite the crowded field, EyeSight has garnered the assist. Despite the crowded field, EyeSight has garnered the highest level of assessments in various safety tests. highest level of assessments in various safety tests. Needless to say, we continued our pursuit of safety Needless to say, we continued our pursuit of safety performance from every angle in the development of the performance from every angle in the development of the new Legacy/Outback, including the adoption of the most up new Legacy/Outback, including the adoption of the most up to date EyeSight ver. 3. If our cars are not reassuring enough to date EyeSight ver. 3. If our cars are not reassuring enough so that anyone can ride in them with peace of mind, they will so that anyone can ride in them with peace of mind, they will not be able to act as a partner for supporting enjoyable and not be able to act as a partner for supporting enjoyable and fulfilling lives for our customers. fulfilling lives for our customers. Our development staff, to the person, have endeavored to improve and refine designs and the quality of drivability from our customers’ point of view Development of the new Legacy/Outback strove for “emo- Development of the new Legacy/Outback strove for “emo- tional value” in the new design and driving experience, in tional value” in the new design and driving experience, in addition to Subaru’s already established competence in addition to Subaru’s already established competence in functional value from safety performance, drivability, and functional value from safety performance, drivability, and user friendliness. The concept of “emphasizing function and user friendliness. The concept of “emphasizing function and performance for a real-world tool, with the design represent- performance for a real-world tool, with the design represent- ing the results of that emphasis” was dominant in the minds ing the results of that emphasis” was dominant in the minds of our development team. Our recent approach has gone one of our development team. Our recent approach has gone one step further by envisioning a design that positively presents step further by envisioning a design that positively presents the vehicle’s achievement of high functionality and perfor- the vehicle’s achievement of high functionality and perfor- mance while keeping the importance of emphasizing function- mance while keeping the importance of emphasizing function- al aesthetics. As our flagship models, the new Legacy/Out- al aesthetics. As our flagship models, the new Legacy/Out- FUJI HEAVY INDUSTRIES LTD. 20 ANNUAL REPORT 2015 back feature superior drivability, safety, and reliability expressed back feature superior drivability, safety, and reliability expressed quality venturing into the domain of human sensibilities, or quality venturing into the domain of human sensibilities, or of the development team argue that “we can settle for this of the development team argue that “we can settle for this in the dynamic and powerful body, and emphasize quality in the dynamic and powerful body, and emphasize quality “emotional value” in other words. We strove for a vehicle that “emotional value” in other words. We strove for a vehicle that level.” The entire team was committed to thoroughly pursuing level.” The entire team was committed to thoroughly pursuing that appeals to all five senses. We have thoroughly polished that appeals to all five senses. We have thoroughly polished would heighten satisfaction for drivers and act as a partner for would heighten satisfaction for drivers and act as a partner for the performance customers demand, which is the Subaru the performance customers demand, which is the Subaru every small detail, from the feel of the interior and other every small detail, from the feel of the interior and other supporting their fulfilling lifestyle. supporting their fulfilling lifestyle. way that development is done. way that development is done. tactile surfaces, to the sounds of the engine and the various tactile surfaces, to the sounds of the engine and the various Of course, aspects such as dynamic feel and inspirational Of course, aspects such as dynamic feel and inspirational moving parts. moving parts. value differ from a vehicle's physical performance and cannot value differ from a vehicle's physical performance and cannot In terms of the driving experience, our work did not stop at In terms of the driving experience, our work did not stop at be captured in numbers or figures. Our development process be captured in numbers or figures. Our development process physical driving performance, but extended to "dynamic feel" physical driving performance, but extended to "dynamic feel" had to use repeated road tests with prototypes to verify the had to use repeated road tests with prototypes to verify the that would stimulate drivers to notice the comfort and smooth- that would stimulate drivers to notice the comfort and smooth- finer points of the driving feel, including steering and braking finer points of the driving feel, including steering and braking ness of the ride, hopefully reacting with the sentiment, “I would ness of the ride, hopefully reacting with the sentiment, “I would response, as well as running noise and vibration, etc. There response, as well as running noise and vibration, etc. There like to keep driving this forever.” Hence, our work on both the like to keep driving this forever.” Hence, our work on both the were moments in the process when we were stuck and were moments in the process when we were stuck and design and the driving experience pursued a high level of design and the driving experience pursued a high level of unable to attain our target results, but never once did members unable to attain our target results, but never once did members Subaru’s commitment to automobile manufacturing from Subaru’s commitment to automobile manufacturing from the customer's perspective is also present in our approach to the customer's perspective is also present in our approach to fuel efficiency. To be sure, it is important to improve the adver- fuel efficiency. To be sure, it is important to improve the adver- tised catalog value for fuel efficiency, but we also emphasize tised catalog value for fuel efficiency, but we also emphasize the actual mileage that customers will attain in normal driving the actual mileage that customers will attain in normal driving circumstances. circumstances. Our way of thinking with regard to an environmentally Our way of thinking with regard to an environmentally conscious driving experience is not to impose restrictions on the conscious driving experience is not to impose restrictions on the driver, but rather to achieve both efficiency and comfortable drivabil- driver, but rather to achieve both efficiency and comfortable drivabil- ity. Therefore, we have adopted an AWD system in order to deliver ity. Therefore, we have adopted an AWD system in order to deliver safety and comfort under a wide variety of road surfaces, even safety and comfort under a wide variety of road surfaces, even though it is disadvantageous for fuel efficiency due to increased though it is disadvantageous for fuel efficiency due to increased weight and mechanical loss compared with FWD vehicles. To weight and mechanical loss compared with FWD vehicles. To compensate, we improved engine and transmission efficiency, compensate, we improved engine and transmission efficiency, boosted aerodynamic performance, and introduced “idling stop” boosted aerodynamic performance, and introduced “idling stop” features to achieve best-in-class results for actual fuel efficiency features to achieve best-in-class results for actual fuel efficiency even compared to FWD vehicles. Indeed, customers of the even compared to FWD vehicles. Indeed, customers of the new Legacy/Outback have approved by remarking, “The fuel new Legacy/Outback have approved by remarking, “The fuel the driving force behind our growth has been trust in our brand, such that “Subaru = a vehicle with outstanding safety performance,” which comes from Subaru safety features being highly rated in safety assessments in countries After taking charge of development for the new Legacy/Out- throughout the world. The second pillar is our pursuit of back, I first dedicated effort to incorporating customer advanced safety technologies, as exemplified by EyeSight. At feedback as completely as possible. Part of that process was present, automakers have brought vehicles to market with visiting the homes of owners, mainly in the U.S. market, various kinds of driver support technologies, such as brake which has shown the strongest demand for these models. I assist. Despite the crowded field, EyeSight has garnered the also considered how to gain further support for Legacy/Out- highest level of assessments in various safety tests. back and how to provide a reliable vehicle of course for the Needless to say, we continued our pursuit of safety U.S. market, but also globally. While lending an ear to a performance from every angle in the development of the variety of opinions and requests, we thoroughly researched, new Legacy/Outback, including the adoption of the most up and implemented the results, regarding what kind of vehicle to date EyeSight ver. 3. If our cars are not reassuring enough would bring the most enjoyment and fulfillment to our so that anyone can ride in them with peace of mind, they will customers’ lifestyles. not be able to act as a partner for supporting enjoyable and Of the stories that I learned from customers, I was fulfilling lives for our customers. particularly impressed by those regarding safety, including comments like, “Although the car was badly damaged in an accident, I avoided serious harm thanks to the reliable collision safety performance.” Every time that I came in contact with these examples of customer gratitude and appreciation, it reaffirmed my awareness of the importance of safety performance and of our great social responsibility as an automaker. Development of the new Legacy/Outback strove for “emo- step further by envisioning a design that positively presents There are two pillars to Subaru’s safety performance tional value” in the new design and driving experience, in initiatives. The first is our policy for “achieving a high level of addition to Subaru’s already established competence in safety performance for all vehicle models.” In actual practice, functional value from safety performance, drivability, and the vehicle’s achievement of high functionality and perfor- mance while keeping the importance of emphasizing function- al aesthetics. As our flagship models, the new Legacy/Out- user friendliness. The concept of “emphasizing function and performance for a real-world tool, with the design represent- ing the results of that emphasis” was dominant in the minds of our development team. Our recent approach has gone one Special Feature: PROMINENCE BY LEGACY Project General Manager (PGM) Interview The entire team was committed to thoroughly pursuing the performance customers demand, which is the Subaru way that development is done. back feature superior drivability, safety, and reliability expressed in the dynamic and powerful body, and emphasize quality that appeals to all five senses. We have thoroughly polished every small detail, from the feel of the interior and other tactile surfaces, to the sounds of the engine and the various moving parts. In terms of the driving experience, our work did not stop at physical driving performance, but extended to "dynamic feel" that would stimulate drivers to notice the comfort and smooth- ness of the ride, hopefully reacting with the sentiment, “I would like to keep driving this forever.” Hence, our work on both the design and the driving experience pursued a high level of quality venturing into the domain of human sensibilities, or “emotional value” in other words. We strove for a vehicle that would heighten satisfaction for drivers and act as a partner for supporting their fulfilling lifestyle. Of course, aspects such as dynamic feel and inspirational value differ from a vehicle's physical performance and cannot be captured in numbers or figures. Our development process had to use repeated road tests with prototypes to verify the finer points of the driving feel, including steering and braking response, as well as running noise and vibration, etc. There were moments in the process when we were stuck and unable to attain our target results, but never once did members of the development team argue that “we can settle for this level.” The entire team was committed to thoroughly pursuing the performance customers demand, which is the Subaru way that development is done. We strove toward the dual goals of environmental performance and a comfortable driving experience, and were able to achieve high fuel efficiency in an AWD vehicle Subaru’s commitment to automobile manufacturing from the customer's perspective is also present in our approach to fuel efficiency. To be sure, it is important to improve the adver- tised catalog value for fuel efficiency, but we also emphasize the actual mileage that customers will attain in normal driving circumstances. Our way of thinking with regard to an environmentally conscious driving experience is not to impose restrictions on the driver, but rather to achieve both efficiency and comfortable drivabil- ity. Therefore, we have adopted an AWD system in order to deliver safety and comfort under a wide variety of road surfaces, even though it is disadvantageous for fuel efficiency due to increased weight and mechanical loss compared with FWD vehicles. To compensate, we improved engine and transmission efficiency, boosted aerodynamic performance, and introduced “idling stop” features to achieve best-in-class results for actual fuel efficiency even compared to FWD vehicles. Indeed, customers of the new Legacy/Outback have approved by remarking, “The fuel FUJI HEAVY INDUSTRIES LTD. 21 ANNUAL REPORT 2015 the driving force behind our growth has been trust in our the driving force behind our growth has been trust in our brand, such that “Subaru = a vehicle with outstanding safety brand, such that “Subaru = a vehicle with outstanding safety performance,” which comes from Subaru safety features performance,” which comes from Subaru safety features being highly rated in safety assessments in countries being highly rated in safety assessments in countries After taking charge of development for the new Legacy/Out- After taking charge of development for the new Legacy/Out- throughout the world. The second pillar is our pursuit of throughout the world. The second pillar is our pursuit of back, I first dedicated effort to incorporating customer back, I first dedicated effort to incorporating customer advanced safety technologies, as exemplified by EyeSight. At advanced safety technologies, as exemplified by EyeSight. At feedback as completely as possible. Part of that process was feedback as completely as possible. Part of that process was present, automakers have brought vehicles to market with present, automakers have brought vehicles to market with visiting the homes of owners, mainly in the U.S. market, visiting the homes of owners, mainly in the U.S. market, various kinds of driver support technologies, such as brake various kinds of driver support technologies, such as brake which has shown the strongest demand for these models. I which has shown the strongest demand for these models. I assist. Despite the crowded field, EyeSight has garnered the assist. Despite the crowded field, EyeSight has garnered the also considered how to gain further support for Legacy/Out- also considered how to gain further support for Legacy/Out- highest level of assessments in various safety tests. highest level of assessments in various safety tests. back and how to provide a reliable vehicle of course for the back and how to provide a reliable vehicle of course for the Needless to say, we continued our pursuit of safety Needless to say, we continued our pursuit of safety U.S. market, but also globally. While lending an ear to a U.S. market, but also globally. While lending an ear to a performance from every angle in the development of the performance from every angle in the development of the variety of opinions and requests, we thoroughly researched, variety of opinions and requests, we thoroughly researched, new Legacy/Outback, including the adoption of the most up new Legacy/Outback, including the adoption of the most up and implemented the results, regarding what kind of vehicle and implemented the results, regarding what kind of vehicle to date EyeSight ver. 3. If our cars are not reassuring enough to date EyeSight ver. 3. If our cars are not reassuring enough would bring the most enjoyment and fulfillment to our would bring the most enjoyment and fulfillment to our so that anyone can ride in them with peace of mind, they will so that anyone can ride in them with peace of mind, they will customers’ lifestyles. customers’ lifestyles. not be able to act as a partner for supporting enjoyable and not be able to act as a partner for supporting enjoyable and Of the stories that I learned from customers, I was Of the stories that I learned from customers, I was fulfilling lives for our customers. fulfilling lives for our customers. particularly impressed by those regarding safety, including particularly impressed by those regarding safety, including comments like, “Although the car was badly damaged in an comments like, “Although the car was badly damaged in an accident, I avoided serious harm thanks to the reliable accident, I avoided serious harm thanks to the reliable collision safety performance.” Every time that I came in collision safety performance.” Every time that I came in contact with these examples of customer gratitude and contact with these examples of customer gratitude and appreciation, it reaffirmed my awareness of the importance appreciation, it reaffirmed my awareness of the importance of safety performance and of our great social responsibility as of safety performance and of our great social responsibility as an automaker. an automaker. Development of the new Legacy/Outback strove for “emo- Development of the new Legacy/Outback strove for “emo- step further by envisioning a design that positively presents step further by envisioning a design that positively presents There are two pillars to Subaru’s safety performance There are two pillars to Subaru’s safety performance tional value” in the new design and driving experience, in tional value” in the new design and driving experience, in initiatives. The first is our policy for “achieving a high level of initiatives. The first is our policy for “achieving a high level of addition to Subaru’s already established competence in addition to Subaru’s already established competence in safety performance for all vehicle models.” In actual practice, safety performance for all vehicle models.” In actual practice, functional value from safety performance, drivability, and functional value from safety performance, drivability, and the vehicle’s achievement of high functionality and perfor- the vehicle’s achievement of high functionality and perfor- mance while keeping the importance of emphasizing function- mance while keeping the importance of emphasizing function- al aesthetics. As our flagship models, the new Legacy/Out- al aesthetics. As our flagship models, the new Legacy/Out- user friendliness. The concept of “emphasizing function and user friendliness. The concept of “emphasizing function and performance for a real-world tool, with the design represent- performance for a real-world tool, with the design represent- ing the results of that emphasis” was dominant in the minds ing the results of that emphasis” was dominant in the minds of our development team. Our recent approach has gone one of our development team. Our recent approach has gone one Special Feature: PROMINENCE BY LEGACY Project General Manager (PGM) Interview Special Feature: PROMINENCE BY LEGACY Project General Manager (PGM) Interview The entire team was committed to thoroughly pursuing the performance customers demand, which is the Subaru way that development is done. We will continue our quest to develop high quality vehicles that exceed customers' expectations. Imperatives to consider during design and development • Following the quality management cycle • Handling recalls • Pursuing safety features with our concept of “ALL-AROUND SAFETY” • Addressing fuel efficiency standards • Improving and proliferating certified low-emission vehicles • Recycling vehicles Please see our CSR website for details. • Customers and Products (http://www.fhi.co.jp/english/envi/csr/csr/consumers/) • Environment (http://www.fhi.co.jp/english/envi/csr/csr/environment/environment.html) back feature superior drivability, safety, and reliability expressed back feature superior drivability, safety, and reliability expressed quality venturing into the domain of human sensibilities, or quality venturing into the domain of human sensibilities, or of the development team argue that “we can settle for this of the development team argue that “we can settle for this in the dynamic and powerful body, and emphasize quality in the dynamic and powerful body, and emphasize quality “emotional value” in other words. We strove for a vehicle that “emotional value” in other words. We strove for a vehicle that level.” The entire team was committed to thoroughly pursuing level.” The entire team was committed to thoroughly pursuing that appeals to all five senses. We have thoroughly polished that appeals to all five senses. We have thoroughly polished would heighten satisfaction for drivers and act as a partner for would heighten satisfaction for drivers and act as a partner for the performance customers demand, which is the Subaru the performance customers demand, which is the Subaru every small detail, from the feel of the interior and other every small detail, from the feel of the interior and other supporting their fulfilling lifestyle. supporting their fulfilling lifestyle. way that development is done. way that development is done. tactile surfaces, to the sounds of the engine and the various tactile surfaces, to the sounds of the engine and the various Of course, aspects such as dynamic feel and inspirational Of course, aspects such as dynamic feel and inspirational moving parts. moving parts. value differ from a vehicle's physical performance and cannot value differ from a vehicle's physical performance and cannot In terms of the driving experience, our work did not stop at In terms of the driving experience, our work did not stop at be captured in numbers or figures. Our development process be captured in numbers or figures. Our development process physical driving performance, but extended to "dynamic feel" physical driving performance, but extended to "dynamic feel" had to use repeated road tests with prototypes to verify the had to use repeated road tests with prototypes to verify the that would stimulate drivers to notice the comfort and smooth- that would stimulate drivers to notice the comfort and smooth- finer points of the driving feel, including steering and braking finer points of the driving feel, including steering and braking ness of the ride, hopefully reacting with the sentiment, “I would ness of the ride, hopefully reacting with the sentiment, “I would response, as well as running noise and vibration, etc. There response, as well as running noise and vibration, etc. There like to keep driving this forever.” Hence, our work on both the like to keep driving this forever.” Hence, our work on both the were moments in the process when we were stuck and were moments in the process when we were stuck and design and the driving experience pursued a high level of design and the driving experience pursued a high level of unable to attain our target results, but never once did members unable to attain our target results, but never once did members Subaru’s commitment to automobile manufacturing from Subaru’s commitment to automobile manufacturing from We will continue to work as a team with our subsidiaries, affiliated companies, and local partners to deliver vehicles that exceed the expectations of customers When building our production facilities in the U.S., we dispatched a large number of engineers to our local production subsidiary, Subaru of Indiana Automotive, Inc. (SIA), and cooperated across divisions, from development, to production and quality control, in our efforts preparing for mass produc- tion. Local employees were also proactive in providing ideas, which helped everyone work as a team to achieve high quality and high value for our users. In addition, expectations were very high from Subaru of America Inc. (SOA), our U.S. sales subsidiary, and from local dealers. During development, key persons from SOA and local dealers reviewed the design, were actively involved in test drives, and helped us toward the final product with their candid input. This demonstrates the comprehensive and collective effort that went into developing the new Legacy/Outback, which have garnered very high praise for their safety and driving performance, as well as their design and overall feel. Conse- quently, since the models debuted, strong sales numbers have outstripped our expectations not only in the U.S. and Japan, but in other parts of the world as well. To our delight, a consid- erable number of buyers have chosen the new Legacy/Out- back over premium European brands. In response to this trust, and in order to further solidify Subaru’s brand strength in the global car market, we will continue our quest to develop high quality vehicles that exceed customers’ expectations. We strove toward the dual goals of environmental performance and a comfortable driving experience, and were able to achieve high fuel efficiency in an AWD vehicle the customer's perspective is also present in our approach to the customer's perspective is also present in our approach to fuel efficiency. To be sure, it is important to improve the adver- fuel efficiency. To be sure, it is important to improve the adver- tised catalog value for fuel efficiency, but we also emphasize tised catalog value for fuel efficiency, but we also emphasize the actual mileage that customers will attain in normal driving the actual mileage that customers will attain in normal driving circumstances. circumstances. Our way of thinking with regard to an environmentally Our way of thinking with regard to an environmentally conscious driving experience is not to impose restrictions on the conscious driving experience is not to impose restrictions on the driver, but rather to achieve both efficiency and comfortable drivabil- driver, but rather to achieve both efficiency and comfortable drivabil- ity. Therefore, we have adopted an AWD system in order to deliver ity. Therefore, we have adopted an AWD system in order to deliver safety and comfort under a wide variety of road surfaces, even safety and comfort under a wide variety of road surfaces, even though it is disadvantageous for fuel efficiency due to increased though it is disadvantageous for fuel efficiency due to increased weight and mechanical loss compared with FWD vehicles. To weight and mechanical loss compared with FWD vehicles. To compensate, we improved engine and transmission efficiency, compensate, we improved engine and transmission efficiency, boosted aerodynamic performance, and introduced “idling stop” boosted aerodynamic performance, and introduced “idling stop” features to achieve best-in-class results for actual fuel efficiency features to achieve best-in-class results for actual fuel efficiency even compared to FWD vehicles. Indeed, customers of the even compared to FWD vehicles. Indeed, customers of the new Legacy/Outback have approved by remarking, “The fuel new Legacy/Outback have approved by remarking, “The fuel 22 FUJI HEAVY INDUSTRIES LTD.ANNUAL REPORT 2015 Special Feature: PROMINENCE BY LEGACY Leveraging Production to Stand Above the Crowd Gunma Manufacturing Division (Main Plant & Yajima Plant) U.S. (SIA Plant) U.S. (SIA Plant) Dedicating effort toward expanding capacity and ensuring efficient operations to meet continually growing North American demand. After the launch of new Legacy/Outback in 2014, sales of Subaru vehicles in the North American market jumped to a new level. In order to meet this increased demand in North America, we decided to move forward plans for expanding capacity at our local production subsidiary Subaru of Indiana Automotive, Inc. (SIA), whose facilities will be built out to handle some 390,000 vehicles annually by the end of 2016. Moving into the future, we will also efficiently run our production lines, a total of five in the U.S. and Japan, to meet demand in the global marketplace. Overseas U.S. (SIA Plant) Japan Gunma Manufacturing Division (Main Plant & Yajima Plant) 829,000 vehicles 200,000 vehicles 850,000 vehicles 218,000 vehicles 960,000 vehicles 328,000 vehicles 66,000 vehicle increase 1,026,000 vehicles 394,000 vehicles 629,000 vehicles 632,000 vehicles 632,000 vehicles 632,000 vehicles End of 2014 Spring 2016 End of 2016 (initial plan) End of 2016 (revised plan) FUJI HEAVY INDUSTRIES LTD. 23 ANNUAL REPORT 2015 Special Feature: PROMINENCE BY LEGACY Leveraging Production to Stand Above the Crowd Special Feature: PROMINENCE BY LEGACY Leveraging Production to Stand Above the Crowd Imperatives to consider during production • Following the quality management cycle • Aiming for zero disasters and accidents (holding a Health and Safety Kickoff Meeting at each business site at the beginning of each fiscal year) • Risk assessment activities • 5th Voluntary Plan for the Environment (FY2012–16) • Primary environmental performance (amounts of CO2 emission, waste generation (including scrap metal sold for profit) and PRTR materials) • Communication with business partners (holding Purchasing Policy Briefings every spring; collaborating with Cooperation Meetings composed of our business partners) Please see our CSR website for details. • Customers and Products (http://www.fhi.co.jp/english/envi/csr/csr/consumers/) • Environment (http://www.fhi.co.jp/english/envi/csr/csr/environment/environment.html) Dedicating effort toward expanding capacity and ensuring efficient operations to meet continually growing North American demand. After the launch of new Legacy/Outback in 2014, sales of Subaru vehicles in the North American market jumped to a new level. In order to meet this increased demand in North America, we decided to move forward plans for expanding capacity at our local production subsidiary Subaru of Indiana Automotive, Inc. (SIA), whose facilities will be built out to handle some 390,000 vehicles annually by the end of 2016. Moving into the future, we will also efficiently run our production lines, a total of five in the U.S. and Japan, to meet demand in the global marketplace. In addition to popular new models, strong sales continue for existing models Subaru sales in the U.S. in 2014 posted a year-on-year gain of 21.0%, reaching approximately 510,000 vehicles. In addition to seeing record high unit sales for six years running, Subaru is the only automaker to beat previous-year U.S. results for seven years in a row. On top of this, sales in Canada, with approximate- ly 42,000 vehicles (up 14.3% year on year), have seen record highs for three years in a row. Proof that the Subaru brand is maintaining high approval in the North American market lies not only in the strong sales growth for Legacy/Outback—last year’s recipients of a full model change—but also in the steady sales of Impreza and Forester, which have not been revamped as recently. 829,000 vehicles 200,000 vehicles 850,000 vehicles 218,000 vehicles 960,000 vehicles 328,000 vehicles 66,000 vehicle increase 1,026,000 vehicles 394,000 vehicles 629,000 vehicles 632,000 vehicles 632,000 vehicles 632,000 vehicles End of 2014 Spring 2016 End of 2016 (initial plan) End of 2016 (revised plan) Bringing SIA expansion plans ahead by four years and building capacity for some 390,000 vehicles by the end of 2016 In FHI’s mid-term management vision, announced in May 2014, we explained plans to expand capacity at our U.S. production subsidiary Subaru of Indiana Automotive, Inc. (SIA), in order to meet growing demand in North America. Originally, we had targeted staggered increases, starting from approximately 170,000 units initially and moving toward 310,000 in FY2017, then 400,000 in FY2021. Increasingly robust North American sales buoyed by the subsequent launch of new models, however, led us to greatly expedite plans and announce a target of 394,000 units by the end of 2016. Simultaneous with this capacity expansion will be the shift of production of Impreza vehicles for North America from Japan-based production to production on a newly built line at SIA. Our plans for boosting production will give us, by the end of 2016, a total of five production lines: three in Japan and two at SIA. Going forward, we will continue to dedicate effort to flexible operations so that each plant will be able to promptly handle increased sales of any of our models, and so that we can efficiently run these five production lines at their maximum capacity. FUJI HEAVY INDUSTRIES LTD. 24 ANNUAL REPORT 2015 Special Feature: PROMINENCE BY LEGACY Special Feature: PROMINENCE BY LEGACY Leveraging Marketing to Stand Above the Crowd Focusing on the inspirational and emotional value of cars supported by exceptional utility and safety Subaru is esteemed in the global automobile market as a company with distinct individuality. Part of that is our use of proprietary technologies such as the horizontally-opposed engine and Symmetrical All-Wheel Drive, which stem from our pursuit of stability and control under a variety of road conditions. Additionally, a significant Subaru characteristic is our thorough effort to build cars that prioritize safety from every angle, from primary safety (such as visibility) to collision safety. This reliability with regard to safety and basic driving performance had previously won Subaru acclaim from U.S. customers who value cars as practical driving machines. Furthermore, results of SOA’s surveys of owner awareness and behavior have shown strong trust and affection from many owners toward the Subaru brand and cars. Survey results indicated that Subaru vehicles are actively utilized not only in daily life, but also as part of owners’ lifestyles, be it through hobbies, sports, leisure, or other pursuits. Amidst this context, SOA started, from 2007, the LOVE Campaign to showcase owners‘ enjoyment of the inspirational and emotional value, over and above the functions and performance, of our cars. The campaign seeks to effectively convey Subaru’s characteristic individuality to a wide range of customers. Following a marketing strategy localized for Subaru of America, and communicating the appeal of the Subaru brand from a thoroughly customer-centric standpoint Sales of Subaru vehicles in the U.S. market have continued to grow well above the demand for new vehicles and Subaru has continued to increase its brand presence since 2008. One of the approaches that played a key role in enabling this rapid progress in the U.S. was the LOVE Campaign, a marketing strategy started in 2007 by local subsidiary Subaru of America, Inc. (SOA). FUJI HEAVY INDUSTRIES LTD. 25 ANNUAL REPORT 2015 Special Feature: PROMINENCE BY LEGACY Leveraging Marketing to Stand Above the Crowd Special Feature: PROMINENCE BY LEGACY Leveraging Marketing to Stand Above the Crowd SOA Initiatives • Strengthening customer service through telephone support and through the website. Please see our CSR website for details. • Customers and Products (http://www.fhi.co.jp/english/envi/csr/csr/consumers/) Following a marketing strategy localized for Subaru of America, and communicating the appeal of the Subaru brand from a thoroughly customer-centric standpoint Sales of Subaru vehicles in the U.S. market have continued to grow well above the demand for new vehicles and Subaru has continued to increase its brand presence since 2008. One of the approaches that played a key role in enabling this rapid progress in the U.S. was the LOVE Campaign, a marketing strategy started in 2007 by local subsidiary Subaru of America, Inc. (SOA). Focusing on the inspirational and emotional value of cars supported by exceptional utility and safety Subaru is esteemed in the global automobile market as a company with distinct individuality. Part of that is our use of proprietary technologies such as the horizontally-opposed engine and Symmetrical All-Wheel Drive, which stem from our pursuit of stability and control under a variety of road conditions. Additionally, a significant Subaru characteristic is our thorough effort to build cars that prioritize safety from every angle, from primary safety (such as visibility) to collision safety. This reliability with regard to safety and basic driving performance had previously won Subaru acclaim from U.S. customers who value cars as practical driving machines. Furthermore, results of SOA’s surveys of owner awareness and behavior have shown strong trust and affection from many owners toward the Subaru brand and cars. Survey results indicated that Subaru vehicles are actively utilized not only in daily life, but also as part of owners’ lifestyles, be it through hobbies, sports, leisure, or other pursuits. Amidst this context, SOA started, from 2007, the LOVE Campaign to showcase owners‘ enjoyment of the inspirational and emotional value, over and above the functions and performance, of our cars. The campaign seeks to effectively convey Subaru’s characteristic individuality to a wide range of customers. Marketing a fulfilling lifestyle achieved by driving a Subaru Prior to 2007, Subaru advertising in the U.S. had been short-term in focus, targeting groups of prospective buyers by showing the specific functions and performance of each model—such as price or fuel economy. Consequently, the overall brand image was vague and market awareness of Subaru idled at a low level. To address this, the LOVE Campaign chose a unique marketing strategy to express the brand value from an owner's standpoint, including the owner‘s trust and love of their Subaru and the fulfilling lifestyle they are able to create with their family because they drive a Subaru. The campaign struck a chord with U.S. buyers and successfully expanded the customer demographic of the Subaru brand. Furthermore, the revolutionary EyeSight advanced driving support system made its debut, while at the same time all Subaru models garnered the highest approval ratings from U.S. safety agencies. These awards allowed us to further prove the high level of safety that underscores owners’ “love for Subaru,” boosting the campaign’s persuasiveness in the process. Devoting effort to social contribution activities while aiming to be the most loved company in local communities As part of the LOVE Campaign, SOA inaugurated “Share the Love,” a program through which $250 is donated to a charitable organization for each Subaru vehicle sold. The program was very well received by customers, with many voicing opinions such as, “I am glad that I can support society by purchasing a Subaru.” Furthermore, SOA is currently rolling out a project called “The Subaru Love Promise,” and is being run in collaboration with dealers all across the U.S. Specifically, The Subaru Love Promise is a variety of initiatives to contribute to local communi- ties and societies through activities and charitable causes such as environmental conservation, education, animal protection, and similar activities. VOICE Through these types of activities, SOA and Subaru dealers in each part of the U.S. hope to become objects of trust and love in the eyes of owners and local communities, much the same as the Subaru brand and cars. To that end, we are striving to further increase the number of devotees to vehicles under the Subaru brand, while also helping each dealer grow toward being No. 1 in their region. Providing cars that precisely reflect market demands, while continuing to build relationships of long-term trust with customers Subaru has won trust from its customers by continuing to provide vehicles to the U.S. market with superior quality and the industry’s most advanced safety features. Additionally, by becoming a partner in the active lifestyles of owners, including responding to diverse customer demands such as “wanting to safely navigate snowy roads” and “wanting to enjoy long-distance family road trips,” the Subaru brand has come to enjoy devotion and love from its owners. Of course, it is indispensable to introduce models that deftly perceive the needs of the marketplace in order to keep customers choosing Subaru. This is why the Subaru models in our current lineup are all situated in growth segments of the U.S. marketplace and reflect customer demands in terms of size, price point, etc. We are proud to declare that our success today in the U.S. is the result of collaboration FUJI HEAVY INDUSTRIES LTD. 26 ANNUAL REPORT 2015 utilizing Fuji Heavy Industries’ advanced technological development plus SOA’s market analysis and marketing acumen. Going forward, we will continue to build long-term relationships of trust with owners by providing them with special experiences that are part of what make a Subaru a Subaru. Thomas J. Doll President Chief Operating Officer Corporate Governance Corporate Governance Corporate Governance System for the selection of corporate officer candidates, and the Execu- take various measures to further strengthen internal control, tive Compensation Meeting is responsible for evaluating the and will also disclose information fairly and in a timely manner performance and determining the compensation of executives. in order to increase management transparency. Also, the execution of important business operations is decided and supervised by the board of directors and audited Since June 1999, FHI has employed an executive officer by the board of corporate auditors. The board of directors Internal Controls System system that clarifies the managerial responsibilities of execu- consists of eight members with two of them invited from the tives in each division. In June 2003, we reduced the term of outside as independent members to enhance governance. Internal controls are an indispensable mechanism for achieving directors and executive officers from two years to one. More- The board of corporate auditors consists of four members corporate objectives, and management is responsible for over, since June 2004, based on a decision of the Board of with three of them invited from the outside for higher objec- establishing them and maintaining their effectiveness and Directors, the Executive Nomination Meeting is responsible tivity to monitor business management. In addition, we will efficiency. At FHI, the Corporate Planning Department (which System of Corporate Governance General Meeting of Shareholders Board of Corporate Auditors Meeting 4 Auditors (Incl. 3 Outside Corporate Auditors) Accounting Auditors Committees Board of Directors Meeting 8 Directors (Incl.2 Outside Directors) Executive Compensation Meeting plays a central role in the common functions of each busi- ness) and other company-wide departments maintain close links with other departments and companies to enhance risk management. In addition, the Audit Department performs planned Executive Nomination Meeting audits of each department and Group company. To support internal controls, FHI has created a system and organization to ensure compliance, which is the foundation of risk manage- ment. Further, in compliance with the Standards for Manage- ment Assessment and Audit Concerning Internal Control Over Financial Reporting issued by the Business Accounting Internal Audit Department (Audit Department) President / Representative Directors CSR Committee Deliberation Council of the Financial Services Agency on February 15, 2007, we work to continuously strengthen the Environmental Committee internal controls system of the entire Group so as to achieve Compliance Committee the following: 1. Effective and efficient operations 2. Reliable financial reporting Executive Management Board Meeting Recall Committee 3. Compliance with laws and regulations in all business Corporate Vice Presidents Export Control Committee activities 4. Safeguarding of assets Corporate Operations at HQ, Automotive BU, Each Company and Affiliate of the Group FUJI HEAVY INDUSTRIES LTD. 27 ANNUAL REPORT 2015 Corporate Governance Executive Compensation Risk Management Location-Specific Business Continuity Plans (BCPs) As approved by the Ordinary General Meeting of Share- We define risk as uncertain elements with the potential for With the goal of minimizing any reduction of service to holders in June 2006, the total amount of yearly compensa- negative impact on our business operations. While there are customers and preventing loss of market share and corpo- tion paid to directors and corporate auditors is limited to ¥600 many types of risk, we call those risks that are particularly rate value, we have created a BCP for each business unit to million and ¥100 million, respectively. The compensation paid dangerous to our business operations and that we cannot maintain business operations or restore them as quickly as to directors must be approved by the Board of Directors and handle through regular decision-making channels “crisis-level possible in the event of an emergency. Should our resources is divided into a fixed amount (based on position, the busi- risks” and categorize them as follows: natural disaster, acci- (employees, physical assets, monetary assets) be affected ness environment, and other factors) and a performance- dent, internal human factors, external human factors, social by an emergency, we will leverage our remaining resources based amount (based on consolidated ordinary income for factors (domestic, overseas), and compliance. We have to minimize the shutdown of priority operations and restore the fiscal year under review, the business environment, and created manuals for dealing with each type of emergency, all operations to their original state as quickly as possible. other factors). In fiscal 2015, compensation for directors and which delineate what communication channels are to be We have also established an Emergency Response Policy, corporate auditors was as follows: used once a risk is recognized, how to form crisis manage- in accordance with which we strive to maintain operations Total compensation (millions of yen) optimally to the situation. ment headquarters, and other methods to follow to respond in the event of an emergency. Classification Number Basic compensation Directors (excluding outside directors) Corporate auditors (excluding outside corporate auditors) Outside executive officers 7 2 3 Fixed amount 241 30 44 Performance- based amount 229 470 − − 30 44 Total Note: 12 315 229 544 This table includes one corporate auditor who retired by the end of the fiscal year. As of March 31, 2015, the Company maintains seven directors (including one outside director) and four corporate auditors (including two outside corporate auditors). Emergency Response Policy 1 Give first priority to people’s survival and physical safety. 2 Minimize loss of stakeholder interests and corporate value. 3 Act always with honesty, fairness, and transparency, even in an emergency. FHI emergency response procedure manual and crisis management (disaster prevention) guidelines FUJI HEAVY INDUSTRIES LTD. 28 ANNUAL REPORT 2015 Board Directors / Executive Officers FUJI HEAVY INDUSTRIES LTD. 29 ANNUAL REPORT 2015 Board Directors / Executive Officers Directors of the Board Yasuyuki Yoshinaga 1 Representative Director of the Board President & CEO April 1977 Joined the Company April 2005 Corporate Vice President, Senior General Manager of Strategy Development Division, and General Manager of Corporate Planning Department June 2006 Corporate Vice President and Chief General Manager of Strategy Development Division April 2007 Corporate Vice President, Chief General Manager of Subaru Japan Sales & Marketing Division, and General Manager of Sales Promotion Department June 2007 Corporate Senior Vice President and Chief General Manager of Subaru Japan Sales & Marketing Division June 2009 Director of the Board and Corporate Executive Vice President June 2011 Representative Director of the Board, President & CEO 2 Jun Kondo Representative Director of the Board Deputy President April 1976 Joined the Company June 2003 Corporate Vice President, Chief General Manager of Subaru Manufacturing Division, and Chief General Manager of Gunma Plant May 2004 Corporate Vice President, Chief General Manager of Subaru Cost Planning & Management Division, and General Manager of Cost Planning Department June 2004 Corporate Senior Vice President and Chief General Manager of Subaru Cost Planning & Management Division June 2006 Corporate Senior Vice President, Chief General Manager of Subaru Cost Planning & Management Division, and Senior General Manager of Subaru Purchasing Division April 2007 Corporate Senior Vice President, Chief General Manager of Strategy Development Division, and Chief General Manager of Subaru Cost Planning & Management Division June 2008 Director of the Board and Corporate Executive Vice President June 2011 Representative Director of the Board and Deputy President 3 Naoto Muto Director of the Board Corporate Executive Vice President April 1977 Joined the Company April 2005 Corporate Vice President, Senior General Manager of Subaru Product & Portfolio Planning Division, and General Manager of Subaru Product & Portfolio Planning Division June 2006 Corporate Vice President and Chief General Manager of Subaru Product & Portfolio Planning Division June 2007 Corporate Senior Vice President and Chief General Manager of Subaru Product & Portfolio Planning Division April 2009 Corporate Senior Vice President and Chief General Manager of Subaru Purchasing Division June 2010 Corporate Executive Vice President and Chief General Manager of Subaru Purchasing Division June 2011 Director of the Board and Corporate Executive Vice President 4 Mitsuru Takahashi Director of the Board Corporate Executive Vice President April 1978 Joined the Company June 2006 Corporate Vice President and General Manager of Finance & Accounting Department April 2009 Corporate Senior Vice President, CFO, and General Manager of Finance & Accounting Department April 2010 Corporate Senior Vice President, CFO, General Manager of Finance & Accounting Department, and President of Eco Technologies Company June 2010 Corporate Executive Vice President, CFO, General Manager of Finance & Accounting Department, and. President of Eco Technologies Company April 2011 Corporate Executive Vice President, CFO, and President of Eco Technologies Company June 2012 Director of the Board, Corporate Executive Vice President, CFO, and President Executive Officers Outside Directors The Company has appointed Toshio Arima to the position of outside director. Possessing considerable experience as an executive and a high degree of expertise in the area of CSR, Mr. Arima offers sound advice to and ensures the independent monitoring of the Board of Directors and other bodies. The Company has appointed Nobushige Imai to the position of outside auditor. Mr. Imai is fully qualified for this po- sition owing to the wealth of management experience and knowledge he acquired as an executive in the financial industry, and he has the character and ability needed to undertake audits in an objective manner. In addition, the Company has appointed Takatoshi Yamamoto to the position of outside auditor. Mr. Yamamoto is fully quali- fied for this position owing to the wealth of knowledge of corporate activities he gained as a securities analyst and the corporate management experience he gained as an executive in the manufacturing industry. Further, since they possess exemplary backgrounds and no conflict with the interests of ordinary shareholders can be foreseen, the Company has appointed Mr. Arima and Mr. Yamamoto as independent directors under Tokyo Stock Exchange (TSE) regulations. Corporate Executive Vice President Shuzo Haimoto Hisashi Nagano Nobuhiko Murakami Corporate Senior Vice President Yasuo Kosakai Tomomi Nakamura Kazuo Hosoya Masaki Okawara Yasunobu Nogai Satoshi Maeda Toshiaki Okada Corporate Vice President Masashi Takahashi Masami Iida Hiromi Tsutsumi Shoichiro Tozuka Toshiaki Tamegai Hiroki Kurihara Tetsuo Onuki Yoichi Katou Masayuki Uchida Takuji Dai Fumiaki Hayata Auditors Standing Corporate Auditor Akira Mabuchi Nobushige Imai Corporate Auditor Takatoshi Yamamoto Shinichi Mita 5 Takeshi Tachimori Director of the Board Corporate Executive Vice President April 1977 Joined the Company June 2006 Corporate Vice President and Senior General Manager of Subaru Product & Portfolio Planning Division April 2009 Corporate Vice President, Chief General Manager of Subaru Product & Portfolio Planning Division, and President of Subaru Tecnica International Inc. April 2010 Corporate Senior Vice President and Chief General Manager of Subaru Product & Portfolio Planning Division April 2011 Corporate Senior Vice President and Chairman, President & CEO of Subaru of America, Inc. June 2011 Corporate Senior Vice President; Chairman, President & CEO of Subaru of America, Inc.; and Chief General Manager of Subaru Overseas Sales & Marketing Division 1 April 2013 Corporate Executive Vice President, Chairman & CEO of Subaru of America, Inc., and Chief General Manager of Subaru Overseas Sales & Marketing Division 1 June 2013 Director of the Board and Corporate Executive Vice President 6 Masahiro Kasai Director of the Board Corporate Executive Vice President April 1978 Joined the Company June 2007 Corporate Vice President and President & CEO of Subaru of Indiana Automotive, Inc. April 2009 Corporate Vice President, Chief General Manager of Subaru Manufacturing Division, and Chief General Manager of Gunma Plant April 2010 Corporate Senior Vice President, Chief General Manager of Subaru Manufacturing Division, and Chief General Manager of Gunma Plant April 2014 Corporate Executive Vice President and Chief General Manager of Subaru Purchasing Division June 2015 Director of the Board and Corporate Executive Vice President Toshio Arima Outside Director June 2011 Outside Director 7 Yoshinori Komamura 8 Outside Director June 2015 Outside Director 7 5 3 1 6 2 8 4 FUJI HEAVY INDUSTRIES LTD. 30 ANNUAL REPORT 2015 Consolidated Ten-Year Financial Summary FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES Years ended March 31 (Millions of yen) (Thousands of U.S. dollars1) Consolidated Automobile Sales by Region (Number of units) Consolidated Automobile Sales (Number of units) For the year: Net sales Cost of sales Gross profit Selling, general and administrative expenses Operating income (loss) Income (loss) before income taxes and minority interests Net income (loss) Comprehensive income At year-end: Net assets2 Shareholders’ equity Total assets Ratio of shareholders’ equity to total assets (%) Per share: (in yen and U.S. dollars) Net income (loss): Basic Diluted Net assets Other information: Depreciation/amortization Capital expenditures (addition to fixed assets) Research and development expenses Number of shares issued (thousands of shares)3 Number of shareholders3 Number of employees3 Parent only Consolidated 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015 ¥ 1,476,368 1,125,293 351,075 292,736 58,339 28,674 15,611 — ¥ 1,494,817 1,142,674 352,143 304,237 47,906 45,589 31,899 — ¥ 1,572,346 1,217,662 354,684 309,004 45,680 31,906 18,481 — ¥ 1,445,790 1,164,564 281,226 287,029 （5,803） （21,517） （69,933） — ¥ 1,428,690 1,152,763 275,927 248,577 27,350 （443） （16,450） （13,416） ¥ 1,580,563 1,241,427 339,136 255,001 84,135 63,214 50,326 34,900 ¥ 1,517,105 1,222,419 294,686 250,727 43,959 52,879 38,453 44,474 ¥ 1,912,968 1,501,809 411,159 290,748 120,411 93,082 119,588 152,009 ¥ 2,408,129 1,728,271 679,858 353,369 326,489 328,865 206,616 210,757 ¥ 2,877,913 2,017,490 860,423 437,378 423,045 392,206 261,873 309,271 $ 23,928,769 16,774,674 7,154,095 3,636,634 3,517,461 3,261,046 2,177,376 2,571,473 ¥ 467,786 465,522 1,348,400 34.5% ¥ 495,703 494,004 1,316,041 37.5% ¥ 494,423 493,397 1,296,388 38.1% ¥ 394,719 393,946 1,165,431 33.8% ¥ 381,893 380,587 1,231,367 30.9% ¥ 413,963 412,661 1,188,324 34.7% ¥ 451,607 450,302 1,352,532 33.3% ¥ 596,813 595,365 1,577,454 37.7% ¥ 770,071 765,544 1,888,363 40.5% ¥ 1,030,719 1,022,417 2,199,714 46.5% $ 8,570,042 8,501,104 18,289,798 ¥ ¥ 20.66 20.66 649.41 80,073 119,289 46,893 782,865 46,367 11,998 26,115 ¥ ¥ 44.46 44.44 687.81 81,454 126,329 50,709 782,865 42,920 11,752 25,598 ¥ ¥ 25.73 25.73 687.02 87,164 118,869 52,020 782,865 44,484 11,909 26,404 ¥ ¥ ¥ ¥ （91.97） — 505.59 74,036 95,153 42,831 782,865 40,839 12,137 27,659 （21.11） — 488.58 65,785 89,077 37,175 782,865 39,223 12,483 27,586 ¥ ¥ 64.56 — 528.88 56,062 67,378 42,907 782,865 34,240 12,429 27,296 ¥ ¥ 49.27 — 576.97 58,611 67,035 48,115 782,865 33,139 12,359 27,123 ¥ ¥ 153.23 — 762.87 61,544 94,986 49,141 782,865 28,890 12,717 27,509 ¥ ¥ 264.76 — 980.98 61,486 98,537 60,092 782,865 51,386 13,034 28,545 ¥ ¥ 335.57 — 1,310.15 71,821 135,346 83,535 782,865 70,942 13,883 29,774 $ $ 2.79 — 10.89 597,165 1,125,351 694,562 1. U.S. dollar figures have been translated from yen, for convenience only, at the rate of ¥120.27 to US$1.00, the approximate rate of exchange at March 31, 2015. 2. Prior year amounts have been reclassified to conform to the current year presentation. 3. As of March 31 FUJI HEAVY INDUSTRIES LTD. 31 ANNUAL REPORT 2015 2011 2012 2013 2014 2015 United States Canada Russia Europe Australia Japan China Others 1,000,000 910,695 825,098 724,466 656,964 639,862 2011 2012 2013 2014 2015 Overseas units by region: Consolidated Automobile Sales by Model (Number of units) Impreza Tribeca Others Forester Exiga Minicars Levorg SUBARU BRZ 910,695 825,098 724,466 656,964 639,862 Overseas units by model: Domestic units: Legacy Impreza Forester Levorg WRX Exiga OEM Others SUBARU BRZ Passenger cars Minicars Domestic total U.S. Canada Russia Europe Australia China Others Overseas total Legacy Impreza Forester WRX Tribeca OEM Others SUBARU BRZ Overseas total Grand total 2011 22,673 20,184 12,685 0 0 0 7,859 4,430 303 68,134 89,971 158,105 278,959 28,059 11,320 48,244 41,150 62,412 28,715 498,859 225,388 87,066 176,453 5,643 0 0 3,865 444 498,859 656,964 2012 22,812 29,122 13,803 0 0 8,020 249 5,844 303 80,153 92,189 172,342 280,356 28,239 15,860 39,075 36,928 48,323 18,739 467,520 210,194 90,149 157,833 0 5,702 38 3,372 232 467,520 639,862 2013 24,207 53,250 18,044 0 0 7,392 6,711 2,778 368 112,750 50,372 163,122 357,569 32,644 14,719 46,382 38,120 50,185 21,725 561,344 207,460 190,864 147,679 0 4,243 10,100 591 407 561,344 724,466 2014 18,961 61,071 36,572 0 0 3,853 3,380 1,857 453 126,147 55,454 181,601 441,799 36,013 15,314 31,756 39,515 44,807 34,293 643,497 182,712 210,828 231,173 0 2,561 15,822 256 145 643,497 825,098 2015 13,845 39,462 21,103 40,559 7,514 1,937 1,890 1,127 439 127,876 34,876 162,752 527,630 42,439 11,559 35,730 38,889 53,821 37,875 747,943 235,791 196,403 269,649 37,982 64 7,914 135 5 747,943 910,695 800,000 600,000 400,000 200,000 0 Legacy WRX OEM 1,000,000 800,000 600,000 400,000 200,000 0 Five-Year Automobile Sales Years ended March 31 (Millions of yen) (Thousands of U.S. dollars1) Consolidated Automobile Sales by Region (Number of units) Consolidated Automobile Sales (Number of units) Selling, general and administrative expenses Operating income (loss) Income (loss) before income taxes and minority interests For the year: Net sales Cost of sales Gross profit Net income (loss) Comprehensive income At year-end: Net assets2 Shareholders’ equity Total assets Per share: (in yen and U.S. dollars) Net income (loss): Basic Diluted Net assets Other information: Depreciation/amortization Capital expenditures (addition to fixed assets) Research and development expenses Number of shares issued (thousands of shares)3 Number of shareholders3 Number of employees3 Parent only Consolidated 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015 ¥ 1,476,368 ¥ 1,494,817 ¥ 1,572,346 ¥ 1,445,790 ¥ 1,428,690 ¥ 1,580,563 ¥ 1,517,105 ¥ 1,912,968 ¥ 2,408,129 ¥ 2,877,913 $ 23,928,769 1,125,293 1,142,674 1,217,662 1,164,564 1,152,763 1,241,427 1,222,419 1,501,809 1,728,271 2,017,490 16,774,674 351,075 292,736 58,339 28,674 15,611 — 352,143 304,237 47,906 45,589 31,899 — 354,684 309,004 45,680 31,906 18,481 — 281,226 287,029 （5,803） （21,517） （69,933） — 275,927 248,577 27,350 （443） （16,450） （13,416） 339,136 255,001 84,135 63,214 50,326 34,900 294,686 250,727 43,959 52,879 38,453 44,474 411,159 290,748 120,411 93,082 119,588 152,009 679,858 353,369 326,489 328,865 206,616 210,757 860,423 437,378 423,045 392,206 261,873 309,271 7,154,095 3,636,634 3,517,461 3,261,046 2,177,376 2,571,473 Ratio of shareholders’ equity to total assets (%) 34.5% 37.5% 38.1% 33.8% 30.9% 34.7% 33.3% 37.7% 40.5% ¥ 467,786 ¥ 495,703 ¥ 494,423 ¥ 394,719 ¥ 381,893 ¥ 413,963 ¥ 451,607 ¥ 596,813 ¥ 770,071 ¥ 1,030,719 $ 8,570,042 465,522 494,004 493,397 393,946 380,587 412,661 450,302 595,365 765,544 1,348,400 1,316,041 1,296,388 1,165,431 1,231,367 1,188,324 1,352,532 1,577,454 1,888,363 1,022,417 2,199,714 46.5% 8,501,104 18,289,798 ¥ ¥ ¥ ¥ （91.97） ¥ （21.11） ¥ 64.56 ¥ 49.27 ¥ 153.23 ¥ 264.76 ¥ 335.57 $ — 505.59 — 488.58 — 528.88 — 576.97 — 762.87 — — 980.98 1,310.15 20.66 20.66 649.41 44.46 44.44 687.81 25.73 25.73 687.02 ¥ 80,073 ¥ 81,454 ¥ 87,164 ¥ ¥ ¥ ¥ ¥ ¥ ¥ 71,821 $ 597,165 119,289 46,893 782,865 46,367 11,998 26,115 126,329 50,709 782,865 42,920 11,752 25,598 118,869 52,020 782,865 44,484 11,909 26,404 74,036 95,153 42,831 782,865 40,839 12,137 27,659 65,785 89,077 37,175 782,865 39,223 12,483 27,586 56,062 67,378 42,907 782,865 34,240 12,429 27,296 58,611 67,035 48,115 782,865 33,139 12,359 27,123 61,544 94,986 49,141 782,865 28,890 12,717 27,509 61,486 98,537 60,092 782,865 51,386 13,034 28,545 135,346 83,535 782,865 70,942 13,883 29,774 2.79 — 10.89 1,125,351 694,562 1. U.S. dollar figures have been translated from yen, for convenience only, at the rate of ¥120.27 to US$1.00, the approximate rate of exchange at March 31, 2015. 2. Prior year amounts have been reclassified to conform to the current year presentation. 3. As of March 31 Japan China United States Others 1,000,000 Canada Russia Europe Australia 910,695 825,098 800,000 600,000 400,000 200,000 0 724,466 656,964 639,862 2011 2012 2013 2014 2015 Consolidated Automobile Sales by Model (Number of units) Legacy WRX OEM 1,000,000 800,000 600,000 400,000 200,000 0 Impreza Tribeca Others Forester Exiga Minicars Levorg SUBARU BRZ 910,695 825,098 724,466 656,964 639,862 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Domestic units: Legacy Impreza Forester Levorg WRX Exiga SUBARU BRZ OEM Others Passenger cars Minicars Domestic total Overseas units by region: U.S. Canada Russia Europe Australia China Others Overseas total Overseas units by model: Legacy Impreza Forester WRX Tribeca SUBARU BRZ OEM Others Overseas total Grand total 22,673 20,184 12,685 0 0 7,859 0 4,430 303 68,134 89,971 158,105 278,959 28,059 11,320 48,244 41,150 62,412 28,715 498,859 225,388 87,066 176,453 0 5,643 0 3,865 444 498,859 656,964 FUJI HEAVY INDUSTRIES LTD. 32 ANNUAL REPORT 2015 22,812 29,122 13,803 0 0 8,020 249 5,844 303 80,153 92,189 172,342 280,356 28,239 15,860 39,075 36,928 48,323 18,739 467,520 210,194 90,149 157,833 0 5,702 38 3,372 232 467,520 639,862 24,207 53,250 18,044 0 0 7,392 6,711 2,778 368 112,750 50,372 163,122 357,569 32,644 14,719 46,382 38,120 50,185 21,725 561,344 207,460 190,864 147,679 0 4,243 10,100 591 407 561,344 724,466 18,961 61,071 36,572 0 0 3,853 3,380 1,857 453 126,147 55,454 181,601 441,799 36,013 15,314 31,756 39,515 44,807 34,293 643,497 182,712 210,828 231,173 0 2,561 15,822 256 145 643,497 825,098 13,845 39,462 21,103 40,559 7,514 1,937 1,890 1,127 439 127,876 34,876 162,752 527,630 42,439 11,559 35,730 38,889 53,821 37,875 747,943 235,791 196,403 269,649 37,982 64 7,914 135 5 747,943 910,695 Non-consolidated Automobile Sales (Number of units) Non-consolidated Domestic Automobile Sales by Model (Number of units) Domestic units: Legacy Impreza Forester Levorg WRX Exiga SUBARU BRZ OEM Passenger cars Minicars Domestic total Export units: Legacy Impreza Forester WRX Tribeca Exiga SUBARU BRZ OEM Others Export total U.S. retail sales1 Legacy Impreza Forester WRX Tribeca SUBARU BRZ U.S. total CKD 2 overseas (SIA portion) SIA production units 3 Legacy Tribeca 2011 23,212 20,859 13,160 0 0 8,150 0 5,313 70,694 92,752 163,446 67,926 83,921 174,541 0 0 374 0 3,865 70 330,697 131,873 44,395 85,080 0 2,472 0 263,820 163,469 163,469 159,215 5,558 2012 23,968 30,566 13,990 0 0 8,477 585 5,993 83,579 96,457 180,036 48,304 100,350 162,199 0 331 232 211 3,372 0 314,999 146,806 41,196 76,196 0 2,791 0 266,989 175,256 175,256 164,968 5,661 2013 25,424 54,306 18,951 0 0 7,845 6,850 2,953 116,329 50,381 166,710 30,559 198,232 142,745 0 222 407 11,542 316 0 384,023 164,680 89,195 76,347 0 2,075 4,144 336,441 185,757 183,729 177,471 3,713 2014 19,272 62,519 37,124 0 0 3,869 3,334 1,944 128,062 57,779 185,841 22,817 206,022 247,362 7,644 0 145 15,118 86 0 499,194 160,340 130,567 123,591 0 1,598 8,587 424,683 165,554 159,266 161,204 2,307 2015 14,734 40,277 21,569 41,832 7,991 2,016 1,941 1,224 131,584 35,563 167,147 34,344 199,770 265,072 37,865 0 5 8,418 135 0 545,609 191,060 128,952 159,953 25,492 732 7,504 513,693 222,513 218,565 206,681 0 Legacy Exiga 200,000 150,000 100,000 50,000 0 Impreza SUBARU BRZ Forester OEM Levorg Minicars WRX 180,036 185,841 163,446 166,710 167,147 2011 2012 2013 2014 2015 Non-consolidated Automobile Export Units by Model (Number of units) Legacy Exiga Impreza SUBARU BRZ Forester OEM WRX Others Tribeca CKD Overseas 545,609 499,194 600,000 450,000 300,000 384,023 330,697 314,999 150,000 163,469 175,256 185,757 165,554 222,513 1. U.S. Retail Sales are the aggregate figures for the calendar year from January through December. 2. Completely Knocked Down 3. SIA Production Units are the aggregate figures for the calendar year from January through December until 2009. FUJI HEAVY INDUSTRIES LTD. 33 ANNUAL REPORT 2015 0 2011 2012 2013 2014 2015 Non-consolidated Automobile Sales (Number of units) Domestic units: Legacy Impreza Forester Levorg WRX Exiga SUBARU BRZ OEM Passenger cars Minicars Domestic total Export units: Legacy Impreza Forester WRX Tribeca Exiga SUBARU BRZ OEM Others Export total U.S. retail sales1 Legacy Impreza Forester WRX Tribeca SUBARU BRZ U.S. total CKD 2 overseas (SIA portion) SIA production units 3 Legacy Tribeca 2011 23,212 20,859 13,160 0 0 0 8,150 5,313 70,694 92,752 163,446 67,926 83,921 174,541 0 0 0 374 3,865 70 330,697 131,873 44,395 85,080 2,472 0 0 263,820 163,469 163,469 159,215 5,558 2012 23,968 30,566 13,990 0 0 8,477 585 5,993 83,579 96,457 180,036 48,304 100,350 162,199 0 331 232 211 3,372 0 314,999 146,806 41,196 76,196 2,791 0 0 266,989 175,256 175,256 164,968 5,661 2013 25,424 54,306 18,951 0 0 7,845 6,850 2,953 116,329 50,381 166,710 30,559 198,232 142,745 0 222 407 316 0 11,542 384,023 164,680 89,195 76,347 0 2,075 4,144 336,441 185,757 183,729 177,471 3,713 2014 19,272 62,519 37,124 0 0 3,869 3,334 1,944 128,062 57,779 185,841 22,817 206,022 247,362 7,644 15,118 0 145 86 0 499,194 160,340 130,567 123,591 0 1,598 8,587 424,683 165,554 159,266 161,204 2,307 2015 14,734 40,277 21,569 41,832 7,991 2,016 1,941 1,224 131,584 35,563 167,147 34,344 199,770 265,072 37,865 0 5 0 8,418 135 545,609 191,060 128,952 159,953 25,492 732 7,504 513,693 222,513 218,565 206,681 0 Legacy Exiga 200,000 150,000 100,000 50,000 0 600,000 450,000 300,000 Non-consolidated Domestic Automobile Sales by Model (Number of units) Impreza SUBARU BRZ Forester OEM Levorg Minicars WRX 180,036 185,841 163,446 166,710 167,147 2011 2012 2013 2014 2015 Non-consolidated Automobile Export Units by Model (Number of units) Legacy Exiga Impreza SUBARU BRZ Forester OEM WRX Others Tribeca CKD Overseas 545,609 499,194 384,023 330,697 314,999 150,000 163,469 175,256 185,757 165,554 222,513 1. U.S. Retail Sales are the aggregate figures for the calendar year from January through December. 2. Completely Knocked Down 3. SIA Production Units are the aggregate figures for the calendar year from January through December until 2009. 0 2011 2012 2013 2014 2015 Management’s Discussion and Analysis of Results of Operations and Financial Position The Fuji Heavy Industries Ltd. Group The Fuji Heavy Industries Ltd. Group ("the Group") is engaged in activities conducted under four business divi- sions: Automobiles (the Group’s core operating domain, which accounts for over 90% of consolidated net sales), Aerospace, Industrial Products, and Other. On a consolidated settlement of accounts basis, FHI ("the Company") and 77 subsidiaries, as well as 2 equity- method affiliated companies, were included in the scope of the FHI Group’s consolidation as of March 31, 2015, the end of the fiscal year under review. Overview Business Environment During the fiscal year under review, the economy in Japan displayed signs of a modest recovery mainly shown in improved corporate profits, despite the effects of an increase in the consumption tax rate. In the global economy, although there was evidence of a loss of growth momentum in Europe, China, and in emerging markets, there was a moderate but steady recovery driven by the favorable U.S. economy. The Group formulated its mid-term management vision in May of last year. The FY2015-FY2021 vision, “Prominence 2020,” has a growth strategy that places our Subaru Automobiles Division at the core as we move forward with initiatives specifically focused on enhancing the Subaru brand and building a strong business structure. In the fiscal year under review, annual unit sales of Subaru vehicles reached a new record, with the United States, our most important market, continuing to lead global sales. In addition, Group efforts steadily bore fruit as Forester sales remained strong and new models were launched for Legacy, Outback, Levorg, and WRX. Vehicles with version 3 of EyeSight garnered approval— a further step in the evolution of our preventative safety and driving assistance features. We also worked to expand and enhance capacity at complete vehicle assembly plants inside and outside Japan in order to relieve the backlog of customers waiting for a vehicle. Performance Review In light of the above factors, the FHI Group recorded historically high levels of consolidated net sales as well as all income categories for the third consecutive fiscal year. Major consolidated performance figures were as follows. Net sales amounted to ¥2,877.9 billion, up ¥469.8 billion, or 19.5%, year on year, owing to such factors as higher unit sales in our core Automobiles Division and increased net sales accompanying exchange rate fluctuations. In terms of profitability, operating income followed increased net sales, coming to ¥423.0 billion, an increase of ¥96.6 billion, or 29.6%, compared with the previous fiscal year, while net income was up ¥55.3 billion, or 26.7%, from the previous fiscal year, to ¥261.9 billion. Cost of Sales, Expenses and Operating Income Operating Income Operating income, as mentioned above, came to ¥423.0 billion, an increase of ¥96.6 billion, or 29.6%. Revenue decreasing factors, namely a ¥66.6 billion increase in SG&A expenses and a ¥23.2 billion increase in R&D expenses, were greatly outweighed by revenue increasing factors, mostly ¥103.7 billion in exchange rate differences, a ¥70.3 billion improvement in sales mix, and ¥12.4 billion in progress on cost reduction. Conse- quently, operating margin was able to achieve a high level at 14.7%. FUJI HEAVY INDUSTRIES LTD. 34 ANNUAL REPORT 2015 Net Sales (Billions of yen) Years ended March 31 3,000 2,500 2,000 1,500 1,000 500 0 2,877.9 2,408.1 1,913.0 1,580.6 1,517.1 2011 2012 2013 2014 2015 Operating Income (Loss) / Net Income (Loss) (Billions of yen) Years ended March 31 Operating Income (Loss) Net Income (Loss) 500 400 300 200 423.0 326.5 261.9 206.6 120.4 119.6 100 84.1 50.3 44.0 38.5 0 2011 2012 2013 2014 2015 Income before Income Taxes and Minority Interests, and Net Income Income before income taxes and minority interests rose ¥63.3 billion, or 19.3%, compared with the previous fiscal year, to ¥392.2 billion. Net income after total income taxes and minority interests rose ¥55.3 billion, or 26.7%, compared with the previous fiscal year, to ¥261.9 billion. Total income taxes this fiscal year rose ¥6.2 billion year on year (5.1%) to ¥127.1 billion yen, due to the increase in net income before total income taxes and minority interests. Segment Information Automobiles Division Net sales for this division stood at ¥2,699.0 billion, an increase of ¥452.4 billion, or 20.1%, year on year. Segment income also increased ¥91.9 billion, or 29.7%, year on year to ¥400.9 billion. The number of units sold worldwide increased by 86,000 units, or 10.4%, year on year to 911,000 units, owing to the strength in the North American market. Vehicle unit sales posted a record for the third consecutive year both globally and outside Japan, and for the sixth consec- utive year in the North American market. Domestic Market In Japan, individual consumption fell in reaction to the last-minute demand prior to the increase in the consump- tion tax rate, which dampened demand for vehicles. Unit sales of passenger and mini vehicles decreased year on year by 8.9% and 3.9% respectively, for a combined 6.9% dip, with overall unit sales of 5,297,000 units nationwide. Amidst these market conditions, FHI's unit sales of vehicles decreased by 19,000 units, or 10.4%, year on year to 163,000 units. Unit sales of passenger vehicles rose by 2,000 units, or 1.4%, year on year to 128,000 units, thanks primarily to the favorable launch of the new model Levorg, among other new models. At the same time, unit sales of mini vehicles were down 21,000 units, or 37.1% year on year, to 35,000 units, impacted by reduced demand after the rush ahead of the consump- tion tax increase, as well as bearing the brunt of intensi- fying competition due to the launch of new models by our competitors. Overseas Market Overseas unit sales amounted to 748,000 units, an increase of 104,000 units, or 16.2%, year on year. In our key market of North America, sales were strong for Forester, Legacy, and Outback, while the new WRX model offered an added boost to results. By region, units sold in North America increased 92,000 units, or 19.3%, year on year to 570,000 units. In Europe and Russia, sales volume was relatively unchanged at 47,000 units. China saw an increase of 9,000 units, or 20.1%, to 54,000 units, while unit sales in Australia dipped 1,000 units, or 1.6%, to 39,000 units, with other regions up 4,000 units, or 10.4%, to 38,000 units. FUJI HEAVY INDUSTRIES LTD. 35 ANNUAL REPORT 2015 Analysis of Increases and Decreases in Operating Income (Consolidated, Three-Year YoY Comparison) (Billions of yen) 51.1 19.7 326.5 170.2 -24.0 -10.9 120.4 Operating income FYE March 2013 Gain on currency exchange Improvement of mixture and others sales volume & Cost reduction SG&A expenses and others R&D expenses Operating income FYE March 2014 70.3 12.4 103.7 326.5 -66.6 -23.2 423.0 Operating income FYE March 2014 Gain on currency exchange Improvement of mixture and others sales volume & Cost reduction SG&A expenses and others R&D expenses Operating income FYE March 2015 30.6 13.3 82.7 503.0 -33.1 -13.5 423.0 Operating income FYE March 2015 Gain on currency exchange Improvement of mixture and others sales volume & Cost reduction SG&A expenses and others R&D expenses Operating income FYE March 2016 (plan) Aerospace Division Net sales in this division increased ¥18.4 billion, or 14.8%, compared to the previous fiscal year to ¥142.8 billion. Segment income also rose ¥4.8 billion, or 33.7%, year on year to ¥18.9 billion. Sales of the C-2 transport aircraft to the Japanese Ministry of Defense exceeded that of the previous fiscal year, while sales to the commercial sector increased over the previous fiscal year thanks to net sales-boosting factors such as the exchange rate and a surge in produc- tion of the Boeing 787, among others. Industrial Products Division Net sales in the Industrial Products division were down ¥0.7 billion, or 2.5%, from the previous fiscal year to ¥29.0 billion. Segment income increased ¥0.1 billion, or 23.3% year on year, to ¥0.8 billion. Sales were higher for leisure-related engines in North America, and sales were markedly higher for pres- sure washer engines for North American big box hard- ware stores. Sales for general purpose engines for Japan and other products, however, were lower. Other Division Net sales in this division were down ¥0.2 billion, or 2.5%, year on year to ¥7.1 billion. Segment income was also down, posting a ¥0.2 billion dip, or 10.2%, from the previous fiscal year to ¥1.9 billion. Liquidity and Financing Financial Position Total assets as of March 31, 2015 stood at ¥2,199.7 billion, an increase of ¥311.4 billion compared with the previous fiscal year-end. Of this total, current assets stood at ¥1,473.3 billion, up ¥199.5 billion compared with March 31, 2014. This is primarily due to rises in funds in hand plus securities by ¥88.7 billion that include cash and deposits, as well as products and goods by ¥43.8 billion. Meanwhile, total property, plant and equipment rose ¥111.9 billion to ¥726.4 billion compared to the previous fiscal year-end. This was mainly attributable to an increase in noncurrent assets of ¥53.9 billion and investment securities of ¥34.8 billion. Total liabilities were up ¥50.7 billion year on year, to ¥1,169.0 billion. The main factors behind this increase were a ¥44.7 billion rise in accounts payable with accounts Net Sales by Segment (Billions of yen) Years ended March 31 Operating Income by Segment (Billions of yen) Years ended March 31 Automobiles Aerospace Industrial Products Other Automobiles Aerospace Industrial Products Other Corporate and Elimination 2,408.1 1,913.0 1,580.6 1,517.1 3,000 2,500 2,000 1,500 1,000 500 0 2,877.9 450 423.0 326.5 300 150 0 120.4 84.1 44.0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Net Sales by Segment (Billions of yen) Operating Income by Segment (Billions of yen) 2011 2012 2013 2014 2015 Automobiles ¥1,452.2 ¥1,389.1 ¥1,779.0 ¥2,246.6 ¥2,699.0 Aerospace Industrial Products Other Total 82.8 30.1 15.5 80.3 33.6 14.2 89.1 30.1 14.7 124.4 142.8 29.8 7.3 29.0 7.1 ¥1,580.6 ¥15,17.1 ¥1,913.0 ¥24,08.1 ¥2,877.9 Total Automobiles Aerospace Industrial Products Other Corporate and Elimination 2011 ¥80.4 2.3 (0.1) 1.5 0.1 ¥84.1 2012 ¥39.4 2.9 0.5 1.0 2.0 ¥44.0 2013 ¥111.0 6.8 0.6 1.6 0.4 ¥120.4 2014 ¥309.0 14.1 0.6 2.1 0.6 ¥326.5 2015 ¥400.9 18.9 0.8 1.9 0.6 ¥423.0 FUJI HEAVY INDUSTRIES LTD. 36 ANNUAL REPORT 2015 payable-trade and electronically recorded monetary obliga- tions, and a rise in accrued expenses of ¥34.1 billion, despite a decrease in long-term borrowings of ¥38.4 billion. Note that the fiscal year-end balance of interest- bearing debt decreased ¥58.5 billion to ¥211.2 billion. The debt/equity ratio (interest-bearing debt over shareholders' equity) remained at a safe level of 0.21. Net assets totaled ¥1,030.7 billion, up ¥260.6 billion compared with the end of the previous fiscal year. This was primarily due to an increase in retained earnings of ¥213.5 billion, reflecting the recording of net income in the fiscal year under review. The increase in net assets boosted the shareholders' equity ratio to 46.5%, a 6-point increase year on year. Cash Flows In the fiscal year under review, net cash provided by oper- ating activities was ¥311.5 billion compared with ¥313.0 billion in the previous fiscal year. Income before income taxes and minority interests stood at ¥392.2 billion, and total income taxes at ¥193.1 billion. Net cash used in investing activities was ¥172.8 billion in the fiscal year under review compared with ¥33.9 billion used in the previous fiscal year. This figure primarily reflects ¥25.5 billion in expenditures (net) due to acquisition of investment securities and ¥113.6 billion in expenditures (net) due to acquisition of noncurrent assets. As a result, free cash flow amounted to ¥138.8 billion, compared to ¥279.1 billion provided in the previous fiscal year. Net cash used in financing activities totaled ¥110.5 billion in the fiscal year ended March 31, 2015, compared with ¥63.0 billion in the preceding fiscal year. This is mainly attributable to ¥36.7 billion in expenditures (net) for the repayment of long-term borrowings and ¥49.9 billion in dividend payments. Accounting for the aforementioned activities and the effect of translation adjustments, cash and cash equiva- lents as of the end of the fiscal year under review stood at ¥612.1 billion. Research and Development Expenses During the fiscal year under review, R&D expenses increased ¥23.4 billion, or 38.9%, year on year to ¥83.5 billion. Of that amount, ¥82.4 billion was related to the Automobiles Division. Our vehicle R&D is dedicated to comprehensive performance, safety, design, environmentally conscious features, and quality improvement as part of the "Six initiatives to enhance the Subaru brand" announced in our mid-term management vision, Prominence 2020. In the same vein, we are advancing product development to exceed customer expectations for safety and comfort. The next generation Subaru Global Platform (SGP) is compliant with the most recent collision safety standards worldwide and has entered the final development stage before commercialization. We will use this platform to manufacture new Subaru products from 2016 onward. In addition, our EyeSight advanced driving support system continues to undergo research and development, with automated highway driving, including lane change features, targeted for 2020. FUJI HEAVY INDUSTRIES LTD. 37 ANNUAL REPORT 2015 Total Assets, Shareholders’ Equity & Ratio of Shareholders’ Equity to Total Assets (Billions of yen) Years ended March 31 Total Assets Shareholders’ Equity Ratio of Shareholders’ Equity to Total Assets 2,500 2,000 2,199.7 1,888.4 46.5% 1,500 34.7% 1,352.5 1,577.5 37.7% 40.5% 1,188.3 33.3% 60.0 48.0 36.0 1,000 500 414.0 451.6 1,030.7 24.0 770.1 596.8 12.0 0 1.00 0.75 0.50 0 2011 2012 2013 2014 2015 Interest-Bearing Debt Balance & D/E Ratio Years ended March 31 (Billions of yen, Times) Interest-Bearing Debt Balance D/E Ratio 400 300 200 100 0 330.6 341.0 0.80 0.76 307.2 269.7 0.52 211.2 0.35 0.25 0.21 2011 2012 2013 2014 2015 0 Capital Expenditures and Depreciation Capital expenditures rose ¥42.2 billion, or 61.6%, compared with the previous fiscal year, to ¥110.7 billion. The main expenditure was investing in facilities related to production, R&D, and sales in the Automobiles Division. In this Division, ¥42.5 billion was spent primarily on building out production capacity accompanying the increase in vehicle sales, building production facilities for new models, building R&D facilities, and expanding and enhancing our sales network. In addition, ¥39.6 billion was spent at Subaru of Indiana Automotive, Inc. (SIA), our production base in the U.S., primarily on production facili- ties and production capacity expansion. Depreciation increased ¥9.9 billion, or 18.0%, year on year, to ¥64.8 billion. Basic Policy Regarding the Distribution of Profits FHI views the interest of shareholders as a critical task for management. Regarding the return of profits to shareholders, based on maintaining continual dividend payments, we apply a results-linked approach that takes into consideration such factors as earnings, investment plans, and operating conditions of each fiscal year. The divi- dend each fiscal year is determined based on a 20-40% consolidated dividend payout ratio and takes a variety of conditions into consideration. During the fiscal year under review, FHI distributed a total dividend of ¥68 per share, a ¥15 increase over the previous fiscal year. Retained earnings are allocated toward bolstering our financial position and investing in future growth and progress, including strengthening R&D and our production and sales frameworks. The dividend for the next fiscal year is undetermined at present. We are aware that FHI is entering a new stage now that our financial standing has improved, but our policy is to comprehensively consider and review future operating conditions, external factors, changes in ROE, etc. Cash Flows from Operating Activities & Cash Flows from Investing Activities Years ended March 31 (Billions of yen) Cash Flows from Operating Activities Cash Flows from Investing Activities Outlook Results for FYE March 2016 For the fiscal year ending March 31, 2016, we are fore- casting a new all-time-high consolidated unit sales figure, for the fourth year in a row, of 928,000 units, an increase of 18,000 units, or 1.9%, compared with the fiscal year under review. Along with the unit sales target, we are also aiming to post new historical records for net sales and all income categories for a fourth year running. At present (July 2015), targets for the consolidated financial results of the fiscal year ending March 31, 2016 are as follows. For net sales, FHI plans to achieve ¥3,030.0 billion, representing an increase of ¥152.1 billion, or 5.3%, compared with the previous fiscal year, thanks to a ¥19.0 billion improvement in sales mix resulting from increasing unit sales outside Japan, and a ¥131.1 billion gain on currency exchange. For operating income, despite increases in R&D expenses and SG&A expenses, we anticipate posting ¥503.0 billion, an increase of ¥80.0 billion, or 18.9%, year on year thanks to the positive effects of ¥82.7 billion from currency fluctuations and ¥30.6 billion from improved sales mix, among other gains. Net income* is slated to climb ¥75.1 billion, or 28.7%, year on year to ¥337.0 billion. These forecasts are based on average annual exchange rates of ¥118/US$ (previously ¥108/US$) and ¥125/€ (previously ¥140/€). 400 300 200 100 0 -100 -200 313.0 311.5 138.2 166.7 54.9 -26.6 -51.1 -33.9 -71.4 2011 2012 2013 2014 2015 -172.8 Free Cash Flow (Billions of yen) Years ended March 31 300 200 100 87.1 95.3 279.1 138.8 *Expected net income for the consolidated fiscal year ending March 31, 2016 is the fiscal year net income attributable to shareholders of the parent company. 0 2011 28.3 2012 2013 2014 2015 FUJI HEAVY INDUSTRIES LTD. 38 ANNUAL REPORT 2015 Research and Development Expenses Years ended March 31 (Billions of yen) 100 80 60 40 20 0 83.5 60.1 48.1 49.1 42.9 2011 2012 2013 2014 2015 Capital Expenditures, Depreciation Expenses Years ended March 31 (Billions of yen) Capital Expenditures Depreciation Expenses 110.7 70.2 68.5 64.8 54.3 53.7 55.9 54.9 49.8 43.1 120 90 60 30 0 Reassessing the Three-Year Investment Plan We have decided to reassess our consolidated three- year investment plan (FYE March 2015 to 2017), which was announced last year, as automobiles sales, mainly in North America, continue their strength. This invest- ment will help considerably to relieve supply shortfalls and further bolster our environmental and safety tech- nologies. We increased the initially allocated amount of capital expenditures by ¥70.0 billion, to ¥400.0 billion, and the initial amount of R&D expenses by ¥30.0 billion, to ¥280.0 billion. These investment plan revisions will allow us to bring Subaru of Indiana Automotive, Inc. (SIA) expansion plans ahead by four years and build out global produc- tion capacity to 1,026,000 vehicles by the end of 2016. In addition, we are renovating our painting facility in Japan, slated to be operational in 2018, as we strive for the dual objectives of improved quality and stronger environ- mental responsiveness. Scheduled FYE March 2016 increases over the fiscal year under review are: capital expenditures up ¥19.3 billion, to ¥130.0 billion; R&D expenses up ¥13.5 billion, to ¥97.0 billion; and depreciation up ¥2.2 billion, to ¥67.0 billion. Performance forecasts and medium- to long-term management strategies are based on information available to management as of the date of this report. Accord- ingly, actual results may differ materially due to a variety of factors. Business Risks Operational and other risks that could significantly influ- ence the decisions of investors and impact the Compa- ny’s financial status are set out below. Forecast for Consolidated Results (Billions of yen) Net sales Japan Overseas Operating income Income before income taxes and minority interest Net income Exchange rate (in yen) ¥/$ ¥/€ 2015 2,877.9 652.9 2,225.0 423.0 392.2 261.9 10.8 14.0 2016 (plan) 3,030.0 565.5 2,464.5 503.0 485.0 337.0 Change 152.1 (87.4) 239.5 80.0 92.8 75.1 11.8 12.5 1.0 (1.5) Forecast for Global Automobile Sales (Thousand units) Japan: Passenger cars Minicars Subtotal Overseas: United States Canada Russia Europe Australia China Other Subtotal Total 2015 2016 (plan) Change 127.9 34.9 162.8 527.6 42.4 11.6 35.7 38.9 53.8 37.9 747.9 910.7 106.7 37.6 144.2 554 46.2 12.8 37.7 42.3 49.7 41.4 784.1 928.3 (21.2) 2.7 (18.5) 26.4 3.8 1.2 2.0 3.4 (4.1) 3.5 36.2 17.6 2011 2012 2013 2014 2015 Based on information available to the FHI Group as FUJI HEAVY INDUSTRIES LTD. 39 ANNUAL REPORT 2015 or a limited number of suppliers. Due to tightening supply and demand or other factors, the inability to procure supplies in a manner that ensures stable costs, delivery dates and quality could seriously impact the Group’s busi- ness performance and financial position. (6) Protection of Intellectual Property The FHI Group works to protect its intellectual property through the use of patents, designs, and trademarks in such areas as technologies and expertise that ensure product differentiation. However, the Group could experi- ence a decrease in sales or the need for litigation proce- dures in cases where a third party makes unauthorized use of the Group’s intellectual property to manufacture similar products, as well as in specific regions where intel- lectual property right protection is limited. Such factors could impact the Group’s profitability. of the submission date of our financial report (June 24, 2015), the enumerated risks include forward-looking state- ments, but do not encompass every possible risk posed to the FHI Group. As such, there are other risk factors which could influence investors and their decisions. (1) Economic Trends Economic trends in countries and regions that comprise important markets for the FHI Group could potentially impact the Group’s business performance. In Japan and North America, key markets for the Group, economic recession, decreasing demand or increasing price compe- tition could undermine the sales and profitability of the Group’s products and services. (2) Currency Exchange Rate Fluctuations The FHI Group’s ratio of overseas net sales stood at 77.3%. The Group’s consolidated financial statements, which are presented in Japanese yen, are affected by translation of overseas net sales, operating income and assets from local currencies, particularly U.S. dollars, into yen. Accordingly, in the event that discrepancies arise between projected exchange rates in full-year forecasts and actual rates at the time of account settlement, the Group’s business perfor- mance and financial position may be adversely affected when the yen appreciates or positively affected when the yen depreciates. The Company uses forward exchange rate contracts and other risk hedges to minimize the Group’s sensitivity to such currency exchange risks. However, the effect of severe fluctuations in currency exchange rates at the end of the fiscal year could result in a loss on valuation of derivatives and have a major impact on non-operating expenses. (3) Dependence on Certain Businesses The FHI Group is mainly comprised of the Automobiles, Industrial Products and Aerospace business segments. However, the Automobiles business segment accounts for the overwhelming majority of the Group’s business operations. Accordingly, in the event that automobile- related demand, market conditions, price competition with other automakers, or other factors exceed projected levels, the entire Group’s overall business performance and financial position could be significantly affected. (4) Changes in Market Appraisal The FHI Group develops, manufactures and releases new products based on appropriate timing and pricing in line with product planning that reflects market demand and customer needs. Such actions are the most important factors in maintaining stable increases in Group busi- ness performance. In the event that market appraisals of new model vehicles and other products do not meet sales plan expectations or that the obsolescence rate of current products exceeds forecasts, the Group’s busi- ness performance and financial position could be signifi- cantly affected. (5) Dependence on Suppliers for Raw Materials and Components The FHI Group procures raw materials, components and other items from numerous suppliers. However, there are cases in which the Group relies on certain items and/ FUJI HEAVY INDUSTRIES LTD. 40 ANNUAL REPORT 2015 (7) Product Defects The FHI Group places the highest priority on the safety of the products it develops, manufactures and sells. However, completely avoiding defects and recalls regarding all prod- ucts and services is impossible. The substantial costs associated with a major recall could significantly affect the Group’s business performance and financial position. In addition, although the Group purchases product liability insurance, the risk of incomplete coverage exists. (8) Retirement Benefit Obligations The FHI Group’s employee retirement benefit costs and obligations are calculated based on the following assumptions: retirement benefit obligation discount rates and the expected rate of return on pension assets, both of which are established based on mathematical calculations. However, in the event that actual perfor- mance differs from the assumptions, the Group’s busi- ness performance and financial position could be affected over the long term. (9) Environmental and Other Legal Regulations The FHI Group is subject to various domestic and over- seas legal regulations in relation to such areas as exhaust emissions, energy conservation, noise, recycling, the level of pollutants emitted from manufacturing facilities and automobile safety. The Group’s business perfor- mance and financial position could be affected by an increase in costs due to future regulatory changes. (10) The Impact of Natural Disasters, War, Terror, Strikes and Other Events The occurrence of major earthquakes, diseases, wars, terrorist attacks or other events could impede the FHI Group’s business activities as well as delay or suspend raw material/component purchases, production, product sales/ transport, and the provision of services. The Group’s busi- ness performance and financial position could be affected in the event that such delays or suspensions are prolonged. FUJI HEAVY INDUSTRIES LTD. 41 ANNUAL REPORT 2015 Corporate Data (as of March 31, 2015) Stock Information (as of March 31, 2015) Company Name Fuji Heavy Industries Ltd. Established July 15, 1953 Paid-in Capital ¥153,795 million Number of Employees 13,883 (consolidated: 29,774) Website Address http://www.fhi.co.jp/english/ir/ Head Office Ebisu Subaru Bldg., 1-20-8, Ebisu, Shibuya-ku, Tokyo 150-8554, Japan Phone: +81-3-6447-8000 Fax: +81-3-6447-8184 Investor Relations Office Ebisu Subaru Bldg., 1-20-8, Ebisu, Shibuya-ku, Tokyo 150-8554, Japan Phone: +81-3-6447-8878 Fax: +81-3-6447-8107 Domestic Manufacturing Divisions Gunma Manufacturing Division (Automobiles Division) Utsunomiya Manufacturing Division (Aerospace Division) Saitama Manufacturing Division (Industrial Products Division) Common Stock Authorized 1,500,000,000 shares Common Stock Issued 782,865,873 shares Number of Shareholders 76,446 Stock Exchange Listing Tokyo Stock Exchange Transfer Agent Mizuho Trust & Banking Co., Ltd. 2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-0028, Japan Major Shareholders Name Toyota Motor Corporation The Master Trust Bank of Japan, Ltd. (Trust account) Japan Trustee Services Bank, Ltd. (Trust account) Mizuho Bank, Ltd. Suzuki Motor Corporation Sompo Japan Nipponkoa Insurance Inc. FHI's Client Stock Ownership Tokio Marine & Nichido Fire Insurance Co., Ltd. THE BANK OF NEW YORK MELLON SA/NV 10 MIZUHO SECURITIES ASIA LIMITED-CLIENT A/C 69250601 Number of Shares Held (in thousands) Percentage of Total Shares 129,000 16.48 42,266 34,282 16,078 13,690 12,157 10,962 10,295 10,251 9,905 5.40 4.38 2.05 1.75 1.55 1.40 1.32 1.31 1.27 Principal Consolidated Subsidiaries and Affiliates Quarterly Common Stock Price Range (Tokyo Stock Exchange) (Yen) Company Name Percentage of Voting Rights Main Business Activities Japan Fuji Machinery Co., Ltd. Ichitan Co., Ltd. Kiryu Industrial Co., Ltd. 100.0% 100.0% 97.7% Manufacture and sales of automobile parts and industrial product parts Manufacture and sales of forged automobile / industrial product parts Manufacture of Subaru specially equipped automobiles and distribution of Subaru automobile parts Subaru Tecnica International Inc. 100.0% Management of SUBARU Motorsport Activities, Development and manufacture of competition parts, tuning parts and accessories for SUBARU cars Subaru Kohsan Co., Ltd. Subaru Finance Co., Ltd. Yusoki Kogyo K.K. TOKYO SUBARU INC. Overseas Subaru of America, Inc. Fuji Heavy Industries U.S.A., Inc. Subaru Research & Development, Inc. Subaru of Indiana Automotive, Inc. Subaru Canada, Inc. Subaru Europe N.V./S.A. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Leasing of real estate, shopping mall management and travel agency operations Lease & credit facilities provider for Subaru automobiles, financing for FHI subsidized companies, lease for various facility equipment, rolling stock & FHI made garbage trucks and sales of insurance Manufacture and sales for aircraft parts Distribution, sales and services of Subaru automobiles (including 32 other dealerships) Distribution and sales of Subaru automobiles and parts Engineering research of Subaru automobiles in North America Market Research and development of automobiles Manufacture of Subaru automobiles and contracted manufacture of Toyota automobiles Distribution and sales of Subaru automobiles and parts Distribution, sales and marketing of Subaru automobiles and parts 5,000 4,000 3,000 2,000 1,000 0 High Low 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2011 758 435 2012 697 402 2013 1,609 545 2014 3,015 1,330 2015 4,617 2,380 FUJI HEAVY INDUSTRIES LTD. 42 ANNUAL REPORT 2015 Fuji Heavy Industries Ltd. Ebisu Subaru Bldg., 1-20-8, Ebisu, Shibuya-ku, Tokyo 150-8554 Phone: +81-3-6447-8000 Fax: +81-3-6447-8184 http://www.fhi.co.jp/english/ir/ Annual Report 2015 For the year ended March 31, 2015 Consolidated Balance Sheets FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES As of March 31, 2015 and 2014 ASSETS Current assets: Cash and deposits (Note 4 and 5) Notes and accounts receivable-trade (Note 5) Lease investment assets (Note 5 and 18) Short-term investment securities (Notes 4, 5 and 6) Merchandise and finished goods Work in process Raw materials and supplies Deferred tax assets (Note 12) Short-term loans receivable (Note 5, 23) Other current assets Allowance for doubtful accounts Total current assets Property, plant and equipment (Notes 7 and 9) Accumulated depreciation Accumulated impairment loss Total property, plant and equipment Investments and other assets: Intangible assets Investment securities (Note 5 and 6) Investments in non-consolidated subsidiaries and affiliated companies Net defined benefit assets(Note 11) Deferred tax assets (Note 12) Other assets Allowance for doubtful accounts Total investments and other assets Total assets LIABILITIES AND NET ASSETS Current liabilities: Notes and accounts payable-trade (Note 5) Electronically recorded obligations-operating (Note 5) Short-term loans payable (Note 5 and 7) Current portion of long-term debts (Note 5 and 7) Accrued expenses (Note 5) Provision for bonuses Provision for product warranties Accrued income taxes (Note 5 and 12) Other current liabilities (Note 5, 7 and 12) Total current liabilities Long-term liabilities: Long-term debts (Note 5 and 7) Net defined benefit liability(Note 11) Deferred tax liabilities (Note 12) Other long-term liabilities (Note 7) Total long-term liabilities Contingent liabilities (Note 20) Net assets: (Note 13) Shareholders' equity: Capital stock Authorized— 1,500,000,000 shares 782,865,873 shares Issued — Capital surplus Retained earnings Less－treasury stock, at cost, 2015— 2014— Total shareholders’ equity 2,483,395 shares 2,477,430 shares Accumulated other comprehensive income: Valuation difference on available-for-sale securities Foreign currency translation adjustment Remeasurements of defined benefit plans Remeasurements of other postretirement benefits Total accumulated other comprehensive income Minority interests Total net assets Total liabilities and net assets The accompanying notes are an integral part of these balance sheets. 120.27 Thousands of U.S. dollars (Note 1) Millions of yen 2015 2014 2015 ¥228,821 164,540 24,098 444,737 203,347 52,734 39,569 78,789 157,070 80,796 (1,233) 1,473,268 1,423,977 (882,752) (26,528) 514,697 16,850 104,157 10,678 3,659 13,113 96,371 (33,079) 211,749 ¥2,199,714 ¥351,125 181,646 23,633 233,766 159,536 51,659 33,008 64,214 122,681 53,375 (862) 1,273,781 1,305,951 (817,421) (27,717) 460,813 14,712 75,647 4,479 1,222 18,332 72,974 (33,597) 153,769 ¥1,888,363 Millions of yen 2015 2014 ¥317,801 74,420 41,443 44,329 126,007 21,668 49,708 54,987 142,693 873,056 125,420 17,963 13,996 138,560 295,939 ¥279,926 67,637 59,193 46,617 91,921 20,446 39,494 110,426 117,248 832,908 163,844 22,852 9,827 88,861 285,384 $1,902,561 1,368,088 200,366 3,697,822 1,690,754 438,463 329,001 655,101 1,305,978 671,788 (10,252) 12,249,672 11,839,835 (7,339,752) (220,570) 4,279,513 140,101 866,026 88,784 30,423 109,030 801,289 (275,039) 1,760,614 $18,289,798 Thousands of U.S. dollars (Note 1) 2015 $2,642,396 618,774 344,583 368,579 1,047,701 180,161 413,303 457,196 1,186,439 7,259,134 1,042,820 149,356 116,371 1,152,074 2,460,622 153,795 160,071 697,414 (1,382) 153,795 160,071 483,910 (1,395) 1,278,748 1,330,930 5,798,736 (11,491) 1,009,898 796,381 8,396,924 17,986 10,025 (11,616) (3,876) 12,519 8,302 10,629 (26,661) (13,886) (919) (30,837) 4,527 149,547 83,354 (96,583) (32,227) 104,091 69,028 1,030,719 770,071 8,570,042 ¥2,199,714 ¥1,888,363 $18,289,798 Consolidated Statements of Income FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES Years ended March 31, 2015 and 2014 120.27 Net sales (Note 2) Cost of sales (Note 14) Gross profit Selling, general and administrative expenses (Note 2 and 15) Operating income (loss) Other income (expenses): Interest and dividend income Interest expenses Equity in earnings of affiliates Real estate rent Foreign exchange gains (losses) Gain (loss) on valuation of derivatives Gain (loss) on sales and retirement of noncurrent assets Gain (loss) on sales of investment securities (Note 6 and 16) Loss on valuation of investment securities (Note 6) Depreciation Impairment loss (Note 9) Provision of allowance for doubtful accounts(Note 17) Other, net Income (loss) before income taxes and minority interests Income taxes (Note 12): Current Deferred Income (loss) before minority interests Minority interests in income (loss) Net income (loss) Per share data (Note 2) : Net income (loss) —Basic —Diluted * Net assets Cash dividends (Note 13) Millions of yen Thousands of U.S. dollars (Note 1) 2015 2014 2015 ¥2,877,913 2,017,490 860,423 437,378 423,045 ¥2,408,129 1,728,271 679,858 353,369 326,489 $23,928,769 16,774,674 7,154,095 3,636,634 3,517,461 4,127 (2,903) 499 532 (24,277) (2,003) (3,305) 953 - (985) (38) - (3,439) (30,839) 392,206 133,256 (6,199) 127,057 265,149 3,276 ¥261,873 2,914 (2,804) 320 541 (16,924) 7,414 (2,696) 47,155 (6) (1,024) (35) (29,624) (2,855) 2,376 328,865 134,315 (13,435) 120,880 207,985 1,369 ¥206,616 ¥335.57 - 1,310.15 68.00 ¥264.98 - 980.98 53.00 34,314 (24,137) 4,149 4,423 (201,854) (16,654) (27,480) 7,924 - (8,190) (316) - (28,594) (256,415) 3,261,046 1,107,974 (51,542) 1,056,432 2,204,615 27,239 $2,177,376 U.S. dollars $2.79 - 10.89 0.57 120.27 The accompanying notes are an integral part of these statements. *For the year ended March 31, 2015 and 2014 diluted information is not presented because potentially dilutive securities do not exist. Consolidated Statements of Comprehensive Income FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES Years ended March 31, 2015 and 2014 Income (loss) before minority interests Other comprehensive income (Note 3) Valuation difference on available-for-sale securities Foreign currency translation adjustment Remeasurements of defined benefit plans Remeasurements of other postretirement benefits of foreign consolidated subsidiaries Share of other comprehensive income of associates accounted for using equity method Total other comprehensive income Comprehensive income (Comprehensive income attributable to) Comprehensive income attributable to owners of the parent Comprehensive income attributable to minority interests Millions of yen Thousands of U.S. dollars (Note 1) 2015 2014 2015 ¥265,149 ¥207,985 $2,204,615 7,357 37,321 2,270 (2,957) 131 44,122 (17,253) 19,855 － － 170 2,772 61,171 310,310 18,874 (24,586) 1,089 366,858 309,271 210,757 2,571,473 305,229 4,042 209,150 1,607 2,537,865 33,608 Consolidated Statements of Changes in Net Assets FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES As of March 31, 2015 and 2014 Shareholders' equity 　Capital stock 　　Balance at the beginning of current period 　　Balance at the end of current period 　Capital surplus 　　Balance at the beginning of current period 　　Changes of items during the period 　　　Disposal of treasury stock 　　　Total changes of items during the period 　　Balance at the end of current period 　Retained earnings 　　Balance at the beginning of current period Cumulative effects ofchanges in accounting policies 　　　Restated balance 　 Changes of items during the period 　　　Dividends from surplus 　　　Net income (loss) 　　　Disposal of treasury stock 　　　Other 　　　Total changes of items during the period 　　Balance at the end of current period 　Treasury stock 　　Balance at the beginning of current period 　　Changes of items during the period 　　　Purchase of treasury stock 　　　Disposal of treasury stock 　　 　　 Other 　　　Total changes of items during the period 　　Balance at the end of current period 　Total shareholders' equity 　　Balance at the beginning of current period Cumulative effects ofchanges in accounting policies 　　　Restated balance 　 Changes of items during the period 　　　Dividends from surplus 　　　Net income (loss) 　　　Purchase of treasury stock 　　　Disposal of treasury stock 　　　Other 　　　Total changes of items during the period 　　Balance at the end of current period Millions of yen Thousands of U.S. dollars (Note 1) 2015 2014 2015 ¥153,795 153,795 ¥153,795 153,795 $1,278,748 1,278,748 160,071 160,071 1,330,930 0 0 160,071 483,910 1,385 485,295 (49,970) 261,873 - 216 212,119 697,414 (1,395) (22) - 35 13 (1,382) 796,381 1,385 797,766 (49,970) 261,873 (22) - 251 212,132 ¥1,009,898 0 0 160,071 301,357 - - (23,424) 206,616 - (639) 182,553 483,910 (1,292) (103) 0 - (103) (1,395) 613,931 - - (23,424) 206,616 (103) 0 (639) 182,450 ¥796,381 0 0 1,330,930 4,023,530 11,516 4,035,046 (415,482) 2,177,376 - 1,796 1,763,690 5,798,736 (11,599) (183) - 291 108 (11,491) 6,621,610 11,516 6,633,125 (415,482) 2,177,376 (183) - 2,087 1,763,799 $8,396,924 　　　 　　　 Accumulated other comprehensive income 　Valuation difference on available-for-sale securities 　 Balance at the beginning of current period 　　Changes of items during the period 　　　Net changes of items other than shareholders' equity 　　　Total changes of items during the period 　　Balance at the end of current period 　Foreign currency translation adjustment 　　Balance at the beginning of current period 　　Changes of items during the period 　　　Net changes of items other than shareholders' equity 　　　Total changes of items during the period 　　Balance at the end of current period 　 Remeasurements of defined benefit plans 　　Balance at the beginning of current period 　　Changes of items during the period 　　　Net changes of items other than shareholders' equity 　　　Total changes of items during the period Balance at the end of current period 　Remeasurements of other postretirement benefits of foreign consolidated subsidiaries 　　Balance at the beginning of current period 　　Changes of items during the period 　　　Net changes of items other than shareholders' equity 　　　Total changes of items during the period Balance at the end of current period 　Total accumulated other comprehensive income 　　Balance at the beginning of current period 　　Changes of items during the period 　　　Net changes of items other than shareholders' equity 　　　Total changes of items during the period 　　Balance at the end of current period Minority interests 　Balance at the beginning of current period 　 Changes of items during the period 　　Net changes of items other than shareholders' equity 　　Total changes of items during the period 　 Balance at the end of current period Total net assets 　 Balance at the beginning of current period Cumulative effects of changes in accounting policies 　 Restated balance 　Changes of items during the period 　　Dividends from surplus 　　Net income (loss) 　 　Purchase of treasury stock 　 　Disposal of treasury stock 　　Other 　　Net changes of items other than shareholders' equity 　　Total changes of items during the period 　 Balance at the end of current period The accompanying notes are an integral part of these statements. Millions of yen 2015 2014 Thousands of U.S. dollars (Note 1) 2015 ¥10,629 ¥27,882 7,357 7,357 17,986 (17,253) (17,253) 10,629 $88,376 61,171 61,171 149,547 (26,661) (46,448) (221,676) 36,686 36,686 10,025 (13,886) 2,270 2,270 (11,616) (919) (2,957) (2,957) (3,876) 19,787 19,787 (26,661) 305,030 305,030 83,354 - (115,457) (13,886) (13,886) (13,886) - (919) (919) (919) 18,874 18,874 (96,583) (7,641) (24,586) (24,586) (32,227) (30,837) (18,566) (256,398) 43,356 43,356 12,519 4,527 3,775 3,775 8,302 770,071 1,385 771,456 (49,970) 261,873 (22) - 251 47,131 259,263 ¥1,030,719 (12,271) (12,271) (30,837) 1,448 3,079 3,079 4,527 596,813 - 596,813 (23,424) 206,616 (103) 0 (639) (9,192) 173,258 ¥770,071 360,489 360,489 104,091 37,640 31,388 31,388 69,028 6,402,852 11,516 6,414,368 (415,482) 2,177,376 (183) - 2,087 391,877 2,155,675 $8,570,042 Consolidated Statements of Cash Flows FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES As of March 31, 2015 and 2014 Net cash provided by (used in) operating activities 　Income (loss) before income taxes 　Depreciation and amortization 　Increase (decrease) in allowance for doubtful accounts 　Interest and dividends income 　Interest expenses 　Loss (gain) on sales and retirement of noncurrent assets 　Loss (gain) on sales and valuation of investment securities 　Decrease (increase) in operating loans receivable 　Decrease (increase) in notes and accounts receivable-trade 　Decrease (increase) in inventories 　Increase (decrease) in notes and accounts payable-trade 　Other, net Sub total 　Interest and dividends income received 　Interest expenses paid 　Income taxes paid Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net decrease (increase) in time deposits Purchase of short-term investment securities Proceeds from sales of short-term investment securities Purchase of non-current assets Proceeds from sales of non-current assets Purchase of investment securities Proceeds from sales of investment securities Payments of loans receivable Collection of loans receivable 　　 Other, net Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities 　 Net increase (decrease) in short-term loans payable 　Proceeds from long-term loans payable 　 Repayments of long-term loans payable 　Redemption of bonds 　Cash dividends paid 　Proceeds from stock issuance to minority shareholders 　Other, net Net cash provided by (used in) financing activities Effect of exchange rate change on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Increase (decrease) in cash and cash equivalents resulting from change of scope of consolidation Cash and cash equivalents at end of period The accompanying notes are an integral part of these statements. Millions of yen Thousands of U.S. dollars (Note 1) 2015 2014 2015 ¥392,206 71,821 (146) (4,127) 2,903 3,305 (953) (23,112) 19,283 (27,180) 38,223 30,920 503,143 4,361 (2,839) (193,122) 311,543 (11,944) (43,424) 17,905 (115,173) 1,540 (47,031) 26,364 (104,891) 108,065 (4,191) (172,780) (18,811) 6,190 (42,858) (4,060) (49,887) － (1,120) (110,546) 25,998 54,215 ¥328,865 61,486 29,512 (2,914) 2,804 2,696 (47,149) (25,478) (49,129) 16,095 39,814 (10,304) 346,298 2,936 (2,742) (33,468) 313,024 (7,215) (12,408) 19,237 (72,855) 1,643 (28,687) 65,344 (95,589) 97,409 (782) (33,903) (2,893) 8,995 (45,893) (10) (23,350) 1,280 (1,140) (63,011) 12,691 228,801 $3,261,046 597,165 (1,214) (34,314) 24,137 27,480 (7,924) (192,168) 160,331 (225,992) 317,810 257,088 4,183,446 36,260 (23,605) (1,605,737) 2,590,363 (99,310) (361,054) 148,873 (957,620) 12,805 (391,045) 219,207 (872,129) 898,520 (34,847) (1,436,601) (156,406) 51,468 (356,348) (33,757) (414,792) － (9,312) (919,149) 216,164 450,777 557,870 328,947 4,638,480 - ¥612,085 122 ¥557,870 － $5,089,258 Notes to Consolidated Financial Statements FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES 1. Basis of Presentation of the Financial Statements The accompanying consolidated financial statements of Fuji Heavy Industries Ltd. (the "Company") have been prepared in accordance with the provisions set forth in the Financial Instruments and Exchange Law and its related accounting regulations, and in conformity with accounting principles generally accepted in Japan ("Japanese GAAP"), which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards. The accompanying consolidated financial statements have been restructured and translated into English from the consolidated financial statements of the Company prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance, as required by the Financial Instruments and Exchange Law. Certain supplementary information included in the statutory Japanese-language consolidated financial statements, but not considered necessary for fair presentation, is not presented in the accompanying consolidated financial statements. The translations of the Japanese yen amounts into U.S. dollars in the accompanying consolidated financial statements are included solely for the convenience of readers outside Japan, using the prevailing exchange rate at March 31, 2015, which was ¥120.27 to U.S.$1. The convenience translation should not be construed as a representation that the Japanese yen amounts have been, could have been, or could in the future be converted into U.S. dollars at this or any other rate of exchange. 2. Summary of Significant Accounting Policies [1] The Scope of Consolidation and Application of the Equity Method The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The fiscal year-end of consolidated subsidiaries is the same as that of the parent company, except for 5 consolidated foreign subsidiaries in fiscal year 2015 and 5 consolidated foreign subsidiaries in fiscal year 2014, respectively, the fiscal year-end of those subsidiaries is December 31. The operating results of those subsidiaries that have different fiscal year-end are consolidated by using the financial statements as of each subsidiary’s respective fiscal year-end, the necessary adjustments being made in consolidation if there are any significant transactions between January 1 and March 31. The consolidated financial statements include the accounts of the Company and 77 subsidiaries in fiscal year 2015 and 77 subsidiaries in fiscal year 2014, respectively. In addition, 1 non-consolidated subsidiary and 1 affiliated company were accounted for by the equity method in fiscal 2015; 1 non-consolidated subsidiary and 1 affiliated company were accounted for by the equity method in fiscal 2014, respectively. Investments in insignificant non-consolidated subsidiaries and affiliated companies not accounted for by the equity method are carried at cost. The difference between the cost and the underlying net equity of investments in subsidiaries and affiliated companies is allocated to identifiable assets based on their fair value at the date of acquisition. The unallocated residual value of the excess of the cost over the fair value of the underlying net assets is recognized as goodwill and amortized over a period of five years on a straight-line basis. All assets and liabilities of subsidiaries, which include not only the Company’s interest in the subsidiaries but also the minority interest portion, are valued based on their fair value at the time the Company first consolidates the subsidiary. [2] Short-Term Investment Securities and Investment Securities Under the Japanese accounting standards for financial instruments, available-for-sale securities for which fair 1 values are available are stated at their fair value as of the balance sheet dates with unrealized holding gains and losses included as a separate component of net assets until realized, while securities for which fair values are not readily available are stated at cost, as determined by the moving-average method, after taking into consideration devaluation, if any, for permanent impairment. Held-to-maturity debt securities are stated using the amortized cost method. [3] Inventories Inventories for regular sales are stated at cost, determined mainly by the moving-average cost method. (Book value on the balance sheet is measured based on the lower of cost or market value.) [4] Property, Plant and Equipment (Excluding Leased Assets) Property, plant and equipment are stated at cost. Significant renewals and additions are capitalized; ordinary maintenance, ordinary repairs, minor renewals and minor improvements are charged to the consolidated statements of income as incurred. Depreciation of the property, plant and equipment of the Company and its consolidated domestic subsidiaries is principally calculated by the declining-balance method, except for those buildings (excluding building improvements) acquired on or after April 1, 1998, for which the straight-line method is applied. Depreciation of the property, plant and equipment of consolidated foreign subsidiaries is calculated by the straight-line method over the estimated useful lives of the assets. Estimated useful lives for depreciable assets are as follows: Buildings and structures: 7–50 years Machinery, equipment and vehicles: 2–11 years [5] Intangible Assets (Excluding Leased Assets) Computer software used internally by the Company and its consolidated subsidiaries is amortized by the straight-line method over the relevant economic useful lives of 3 or 5 years. [6] Leased Assets For leased assets under finance lease transactions in which the ownership is transferred to the lessee: The leased assets are depreciated by the same method as used for other property, plant and equipment. For leased assets under finance lease transactions in which the ownership is not transferred to the lessee: The leased assets are depreciated by the straight-line method over the leased period and the residual value is zero. In addition, finance lease transactions in which the ownership is not transferred to the lessee on or before March 31, 2008 are recorded as regular rental transactions. [7] Allowance for Doubtful Accounts Allowance for doubtful accounts is provided based on the amount calculated from the historical ratio of bad debt for ordinary receivables, and estimated amounts of uncollectible accounts for specific overdue receivables. [8] Provision for Bonuses Employees' bonuses are recognized as expenses for the period in which those are incurred. [9] Provision for Product Warranties The Company and its consolidated subsidiaries provide for accrued warranty claims on products sold based on their past experiences of warranty services and estimated future warranty costs, which are included in 2 "Accrued expenses" in the accompanying consolidated balance sheets. [10] Provision for Loss on Construction Contracts The provision for losses on uncompleted construction of contracts in the Aerospace segment is provided when substantial losses on the contracts are anticipated at the fiscal year-end for the next fiscal year and beyond and such losses can be reasonably estimated. [11] Accounting method for Retirement Benefits Net defined benefit liability (assets) for employees is provided based on the estimated amounts of projected pension and severance obligation and the fair value of plan assets at the end of the fiscal year. In determining retirement benefit obligations, the straight-line basis is used for attributing expected benefit to periods. Unrecognized prior service cost is being amortized on the straight-line method over a period (10-19 years) that is shorter than the average remaining service period of the eligible employees. Unrecognized net actuarial gain or loss is amortized from the following fiscal year on the straight-line method over a period (primarily 16 years for fiscal years 2015 and 2014) that is shorter than the average remaining service period of the eligible employees. Directors and statutory auditors of the Company and its consolidated domestic subsidiaries are entitled to receive a lump-sum payment at the time of severance or retirement, subject to shareholder approval. The liabilities for such benefits, which are determined based on the Company’s and its consolidated subsidiaries’ internal rules, are included in "Other long-term liabilities" in the accompanying consolidated balance sheets. [12] Translation of Foreign Currency-Denominated Accounts Under the Japanese accounting standards for foreign currency translation, monetary assets and liabilities denominated in foreign currencies are translated into Japanese yen at the exchange rates prevailing at each balance sheet date with the resulting gain or loss included currently in the statement of income. The assets and liabilities of foreign subsidiaries and affiliated companies are translated into Japanese yen at the exchange rates in effect at the balance sheet dates of the foreign subsidiaries and affiliated companies, except for common stock and capital surplus, which are translated at historical rates. Revenue and expense accounts are translated at the average exchange rates during the respective years. The resulting foreign currency translation adjustments are included in "Foreign currency translation adjustments" and "Minority interest" in the net assets section of the accompanying consolidated balance sheets. [13] Revenue Recognition The percentage-of-completion method is applied to revenue from construction contracts of Aerospace division productions where certain elements are determinable with certainty at the end of fiscal year. (The percentage of completion is estimated using the proportion-of-cost method). The completed-contract method is applied to other works. [14] Accounting for Lease Transactions Sales and corresponding cost of sales under finance lease transactions conducted by certain domestic consolidated subsidiaries are recognized on the effective date of each lease contract. [15] Derivative Financial Instruments and Hedge Accounting The Japanese accounting standards for financial instruments require that the Company and its consolidated domestic subsidiaries state derivative financial instruments at their fair value and recognize changes in the fair value as a gain or loss, unless such derivative financial instruments are used for hedging purposes. For interest rate swap contracts used as a hedge that meet certain hedging criteria, the net amount to be paid or received under the interest rate swap contract is added to or deducted from the interest on the assets or liabilities for which the swap contract is executed. 3 Derivative financial instruments qualifying as a hedge, along with the underlying transactions, assets and liabilities are as follows: Financial Instrument Interest swaps Transactions, assets and liabilities Borrowings The risk exposures to movements in interest rates are hedged according to the Company’s and its consolidated subsidiaries’ risk management policy. An evaluation of hedge effectiveness is not considered necessary as the terms and notional amounts of these hedging instruments are the same as those of the underlying transactions, assets and liabilities, and therefore they are presumed to be highly effective in offsetting the effect of movements in interest rates at their inception as well as during their terms. [16] Goodwill Goodwill is principally amortized by the straight-line method over 5 years. [17] Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with original maturities of 3 months or less that are readily convertible to known amounts of cash and have negligible risk of changes in value due to their short maturities. [18] Income Taxes Income taxes are comprised of corporation, enterprise, and inhabitants taxes. The provision for income taxes is computed based on the pretax income for financial reporting purposes. Deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. [19] Research and Development Expenses Research and development costs are expensed as incurred and amounted to ¥83,535million (US$ 694,562 thousand) and ¥60,092 million for fiscal years 2015 and 2014, respectively. [20] Net Income per Share Basic net income per share (EPS) is computed based on the average number of shares of common stock outstanding during each year. Diluted EPS assumes the potential dilution that occurs if all the convertible securities are converted or other contracts to issue common stock are exercised to the extent that they are not anti-dilutive. [21] Reclassification Certain reclassifications have been made in the consolidated financial statements for the year ended March 31, 2014 to conform to the presentation for the year ended March 31, 2015.” [22] Changes in Accounting Policy The Company has applied Accounting Standard for Retirement Benefits (ASBJ Statement No. 26, May 17, 2012 (hereinafter, the “Statement No.26”)) and Guidance on Accounting Standard for Retirement Benefits (ASBJ Guidance No. 25, May 17, 2012 (hereinafter, the “Guidance No.25”)) from the first quarter of fiscal year 2015 in accordance with the article 35 of the Statement No.26 and the article 67 of the Guidance No.25. The Company has reviewed the method of calculating retirement benefit obligations and current service costs and has changed the method of attributing expected benefits to periods from a straight-line basis to a benefit formula basis, and the method of determination of discount rate from the method using discount rate based 4 on the average remaining service period for employees to the method using a single weighted average discount rate reflecting the expected payment periods and the amounts for each expected payment period. In accordance with the article 37 of the Statement No.26, the effect of changes in the calculation method of retirement benefit obligations and current service costs has been recognized in retained earnings at the beginning of the first quarter of fiscal year 2015. The effect of application of the Statement No.26 and the Guidance No.25 is not material. In addition, the influence to Per share information refers to the concerned note. [23] Changes in Presentation Method (Consolidated Statements of Cash Flows) In the fiscal year ended March 31, 2015, the presentation method in the Consolidated Statements of Cash Flows was changed to raise the clarity as follows. In the fiscal year ended March 31, 2014, “Impairment loss,” “Increase (decrease) in provision for bonuses,” “Increase (decrease) in provision for product warranties,” “Increase (decrease) in provision for loss on construction contracts,” “Increase (decrease) in net defined benefit liability,” “Increase (decrease) in provision for loss on litigation,” “Loss (gain) on valuation of derivatives,” “Equity in (earnings) losses of affiliates,” “Decrease (increase) in lease investment assets" “Decrease (increase) in vehicles and equipment on operating leases" "Increase (decrease) in deposits received" which had been listed in separately under “Net cash provided by (used in) operating activities,” was included in "Other," in the fiscal year ended March 31, 2015 . In the fiscal year ended March 31, 2014, “Purchase of property, plant and equipment,” “Purchase of intangible assets,” which had been listed in separately under “Net cash provided by (used in) investing activities,” was included in "Purchase of non-current assets" and "Net decrease (increase) in time deposits" which had been included in "Other" was listed in separately in the fiscal year ended March 31, 2015. In the fiscal year ended March 31, 2014, “Repayment of lease obligations,” which had been listed in separately under “Net cash provided by (used in) financing activities,” was included in "Other" in the fiscal year ended March 31, 2015. As a result, in Consolidated Statements of cash Flows for the fiscal year ended March 31, 2014, the following items that had been shown separately under “ Net cash provided by (used in) operating activities,” were reclassified as "Other,". “Impairment loss,” ¥35 million “Increase (decrease) in provision for bonuses,” ¥2,391 million “Increase (decrease) in provision for product warranties,” ¥3,116 million “Increase (decrease) in provision for loss on construction contracts,” ¥114 million “Increase (decrease) in net defined benefit liability,”( ¥17,692 million) “Increase (decrease) in provision for loss on litigation,”(¥369 million) “Loss (gain) on valuation of derivatives,” (¥7,414 million) “Equity in (earnings) losses of affiliates,” (¥320 million) “Decrease (increase) in lease investment assets" (¥1,488 million) “Decrease (increase) in vehicles and equipment on operating leases" (¥400 million) "Increase (decrease) in deposits received" (¥2,240 million) In the fiscal year ended March 31, 2014, “Purchase of property, plant and equipment,”(¥67,409 million) “Purchase of intangible assets,”(¥5,446 million) which had been listed in separately under “Net cash provided by (used in) investing activities,” was included in "Purchase of non-current assets"(¥72,855 million) in the fiscal year ended March 31, 2015."Other"(¥7,997 million) was reclassified as "Net decrease (increase) in time deposits"(¥7,215 million) and "Other"(¥782 million). In the fiscal year ended March 31, 2014, “Repayments of lease obligations,”(¥1,036million) which had been listed in separately under “Net cash provided by (used in) financing activities,” was reclassified as "Other" in the fiscal year ended March 31, 2015. 5 3. Other comprehensive income Amounts reclassified to net income (loss) in fiscal 2015 and 2014, which were recognized in other comprehensive income in the current or previous periods and tax effects for each component of other comprehensive income were as follows: Millions of yen 2015 2014 Thousands of U.S. dollars 2015 Valuation difference on available-for-sale securities Increase(decrease) during the year Reclassification adjustments Sub-total, before tax Tax (expense) or benefit Sub-total, net of tax Foreign currency translation adjustment Increase during the year Reclassification adjustments Sub-total, before tax Tax (expense) or benefit Balance at end of year, net of tax Remeasurements of defined benefit plans Increase(decrease) during the year Reclassification adjustments Sub-total, before tax Tax (expense) or benefit Balance at end of year, net of tax Remeasurements of other postretirement benefits of foreign consolidated subsidiaries Increase(decrease) during the year Reclassification adjustments Sub-total, before tax Tax (expense) or benefit Balance at end of year, net of tax Share of other comprehensive income of associates accounted for using equity method Increase during the year Total other comprehensive income ¥10,660 (953) 9,707 (2,350) 7,357 37,321 - 37,321 - 37,321 1,246 3,035 4,281 (2,011) 2,270 (4,642) - (4,642) 1,685 (2,957) (¥90,720) 47,266 (43,454) 26,201 (17,253) 19,691 164 19,855 - 19,855 - - - - - - - - - - $88,634 (7,924) 80,710 (19,539) 61,171 310,310 - 310,310 - 310,310 10,360 25,235 35,595 (16,721) 18,874 (38,596) - (38,596) 14,010 (24,586) 131 ¥44,122 170 ¥2,772 1,089 $366,858 6 4. Additional Cash Flow Information Cash and cash equivalents as of March 31, 2015 and 2014, consisted of the following: Millions of yen Cash and deposits Short-term investment securities Short-term loans receivable Sub-total Less maturity over three months Short-term investment securities excluding cash equivalents Short-term loans receivable excluding repurchase agreement Cash and cash equivalents 2015 ¥228,821 444,737 157,070 830,628 (25,911) (45,562) 2014 ¥351,125 233,766 122,681 707,572 (13,756) (13,265) Thousands of U.S. dollars 2015 $1,902,561 3,697,822 1,305,978 6,906,361 (215,440) (378,831) (147,070) (122,681) (1,222,832) ¥612,085 ¥557,870 $5,089,258 7 5. Financial Instruments (1) Summary of Financial Instruments Status [1] Action Policy with Regard to Financial Instruments With regard to planned capital expenditure to support Fuji Heavy Industries Ltd., its consolidated subsidiaries and affiliated companies (the "FHI Group") in their main operations of automobile manufacturing and sales, the FHI Group finances mainly from bank loans and the issue of corporate bonds. Temporary surpluses are invested in highly secure financial assets. Bank loans and liquidation of accounts receivable are utilized to provide short-term working capital. It is the FHI Group's policy to use derivatives as a way to avoid the risks stated below and not to conduct speculative transactions. [2] Details of Financial Instruments and Respective Risks Notes and accounts receivable-trade and Lease investment assets are subject to customer credit risks. In addition, operating receivables denominated in foreign currencies due to globalized business of the FHI Group are subject to the risk of changes in foreign exchange rates. As a general rule, however, forward foreign exchange contracts are utilized to hedge the foreign exchange rate risk, considering the net amount of operating receivables denominated in foreign currencies that exceed foreign currency denominated operating liabilities. Available-for-sale securities and investment securities are mainly stocks associated with business and capital alliances with principal business partners, and are subject to risk of market price fluctuation. Majority of payables included in Notes and accounts payable-trade and Electronically recorded obligations-operating are due within one year. A certain portion of such liabilities involve foreign currency denominated transactions associated with the import of raw materials and is subject to exchange rate fluctuation risk, although it is consistently less than accounts receivable balance denominated in the same foreign currency. Funds financed by bank loans and corporate bonds are primarily used for capital expenditure, whose repayment or redemption dates will come within 9 years after March 31, 2015 at the latest. A certain portion of those liabilities may have variable interest rates and are subject to the risk of changes in interest rates, although such risk is mitigated using derivative transactions (interest rate swap transactions). Derivative transactions include foreign exchange forward contracts to hedge against exchange rate fluctuations associated with trade accounts receivables and liabilities denominated in foreign currencies, and interest rate swap contracts to hedge against the risk of change in interest rates on bank loans. With regard to hedging instruments and hedged items, hedge policy, the method of evaluation of hedge effectiveness and other related items, please refer to "2-[15] Derivative Financial Instruments and Hedge Activities". [3] Risk Management System with Regard to Financial Instruments (a) Credit Risk management (Risks Associated with Business Partner’s Breach of Contract) The Company and its consolidated subsidiaries have credit control function and regularly monitor the financial status of key customers with regard to accounts receivables and lease investment assets. In addition to keeping track of payment due dates and balances of each customer, such credit control function identifies and mitigates the potential risk of uncollectibility due to deterioration in financial status or other factors of customers. (b) Market Risk Management (Risks Associated with Fluctuations in Foreign Exchange and Interest Rates) With regard to operating assets and liabilities denominated in foreign currencies, as a general rule, the Company uses foreign exchange forward contracts to hedge against risks of exchange rate fluctuation on a monthly basis by each currency. Depending on the status of exchange rates, foreign exchange forward contracts with no longer than six months term are used to hedge against the risk of exchange rate fluctuation to the extent that net position of accounts receivable and accounts payable dominated in foreign currency is exposed. In addition, the Company and certain consolidated subsidiaries use interest rate swap transactions to mitigate the risk of fluctuation in interest rates on bank loans and corporate bonds. 8 The Company also regularly monitors the market values of investments included in Short-term investment securities and Investment securities as well as the financial conditions of issuers (business partner companies), and continuously reviews its investment portfolio taking into consideration its relationships with respective business partner companies. Basic policies with regard to derivative transactions are approved by the Executive Management Board. Finance & Accounting Department engages in derivative transactions in line with the applicable the Company’s rule. The results of these transactions are reported to the Finance Officer every time the transactions are conducted. (c) Liquidity Risk Management (Risk of Becoming Unable to Make Payments by the Due Date) The Company secures liquidity at a level sufficient to satisfy its current needs with commitment lines contracted with major banks in combination with keeping cash and cash equivalents balance at a certain level. [4] Supplemental Explanation of Items with Regard to Fair Value of Financial Instruments Fair value of financial instruments includes quoted prices of financial instruments in the market and, in the event market prices are not available, prices that are calculated based on the underlying assumptions under the appropriate valuation model. Because the factors incorporated into the valuation model are subject to change, calculated fair value may differ. The values of derivative transactions contracts stated in "(2) Items with Regard to Fair Value of Financial Instruments" do not by themselves indicate the market risk associated with the respective derivative transactions. 9 (2) Items with Regard to Fair Value of Financial Instruments The consolidated balance sheet amounts, the fair value and difference as of March 31, 2015 and 2014 were as follows: The items whose fair values were extremely difficult to measure were not included in the table below (refer to Note [2] ). As of March 31, 2015 Cash and deposits Notes and accounts receivable-trade Allowance for doubtful accounts (*1) Lease investment assets Allowance for doubtful accounts (*1) Short-term loans receivable Allowance for doubtful accounts (*1) Short-term investment securities, Investment securities and Other securities Total Assets Notes and accounts payable-trade Electronically recorded obligations-operating Short-term loans payable Current portion of long-term loans payable Current portion of bonds Accrued income taxes Accrued expenses Bonds payable Long-term loans payable Total Liabilities Derivative transactions (*2) hedge accounting is not applied hedge accounting is applied Consolidated balance sheet amounts ¥228,821 164,540 (640) 163,900 24,098 (66) 24,032 157,070 (341) 156,729 118,702 692,184 317,801 74,420 41,443 44,329 - 54,987 126,007 10,000 115,420 784,407 (2,725) ¥- Millions of yen Fair Value Difference ¥228,821 163,900 - - 28,794 4,762 158,313 1,584 118,702 698,530 317,801 74,420 41,443 44,441 - 54,987 126,007 10,059 116,074 785,232 (2,725) ¥- - 6,346 - - - (112) - - - (59) (654) (825) - ¥- 10 As of March 31, 2015 Cash and deposits Notes and accounts receivable-trade Allowance for doubtful accounts (*1) Lease investment assets Allowance for doubtful accounts (*1) Short-term loans receivable Allowance for doubtful accounts (*1) Short-term investment securities, Investment securities and Other securities Total Assets Notes and accounts payable-trade Electronically recorded obligations-operating Short-term loans payable Current portion of long-term loans payable Current portion of bonds Accrued income taxes Accrued expenses Bonds payable Long-term loans payable Total Liabilities Derivative transactions (*2) hedge accounting is not applied hedge accounting is applied Consolidated balance sheet amounts $1,902,561 1,368,088 (5,321) 1,362,767 200,366 (549) 199,817 1,305,978 (2,835) 1,303,143 986,963 5,755,251 2,642,396 618,774 344,583 368,579 - 457,196 1,047,701 83,146 959,674 6,522,049 Thousands of U.S. dollars Fair Value Difference $1,902,561 1,362,767 $- - 239,411 39,594 1,316,313 13,170 986,963 5,808,015 2,642,396 618,774 344,583 369,510 - 457,196 1,047,701 83,637 965,112 6,528,909 - 52,764 - - - (931) - - - (491) (5,438) (6,860) (22,657) $- (22,657) $- - $- *1. Allowance for doubtful accounts corresponding to Notes and accounts receivable-trade, Lease investment assets and Short-term loans receivable is deducted. *2. Indicated are the net amounts of assets and liabilities results from derivative transactions, with the total net liabilities indicated in ( ). 11 As of March 31, 2014 Cash and deposits Notes and accounts receivable-trade Allowance for doubtful accounts (*1) Lease investment assets Allowance for doubtful accounts (*1) Short-term loans receivable Allowance for doubtful accounts (*1) Short-term investment securities, Investment securities and Other securities Total Assets Notes and accounts payable-trade Electronically recorded obligations-operating Short-term loans payable Current portion of long-term loans payable Current portion of bonds Accrued income taxes Accrued expenses Bonds payable Long-term loans payable Total Liabilities Derivative transactions (*2) hedge accounting is not applied hedge accounting is applied Consolidated balance sheet amounts ¥351,125 181,646 (275) 181,371 23,633 (44) 23,589 122,681 (397) 122,284 84,077 762,446 279,926 67,637 59,193 42,557 4,060 110,426 91,921 10,000 153,844 819,564 (722) ¥- Millions of yen Fair Value Difference ¥351,125 181,371 ¥- - 27,792 4,203 123,209 925 84,077 767,574 279,926 67,637 59,193 42,753 4,085 110,426 91,921 10,091 154,823 820,855 (722) ¥- - 5,128 - - - (196) (25) - - (91) (979) (1,291) - ¥- *1. Allowance for doubtful accounts corresponding to Notes and accounts receivable-trade, Lease investment assets and Short-term loans receivable is deducted. *2. Indicated are the net amounts of assets and liabilities results from derivative transactions, with the total net liabilities indicated in ( ). [1] The calculation methods of financial instrument fair value together with securities and derivative transactions Assets Cash and deposits and Notes and accounts receivable-trade Because these are settled in the short-term, the fair value is mostly the same as the book value and as such the book value is deemed as fair value. Lease investment assets and Short-term loans receivable Fair value is the present value calculated by discounting relevant cash flows by each category of the assets and timing of cash flow, where discount rates were adopted taking into consideration the period until maturity and credit risks. In addition, the estimated residual value is included in the 12 balance of Lease investment assets. Short-term investment securities and investment securities Fair value is determined by the stock exchange price, while bonds are determined by the stock exchange price or by quotations received from financial institutions. Please refer to the note entitled "5.Short-term investment securities and investment securities" regarding to respective objectives for holding securities. Liabilities Notes and accounts payable-trade, Short-term loans payable, Accrued income taxes and Accrued expenses Because these are settled in the short-term, the fair value is mostly the same as the book value and as such the book value is deemed as fair value. Current portion of long-term loans payable and Long-term loans payable Fair value is measured based on the present value that is calculated as discounted cash flow of the total amount of principal and interest, where the interest would be set, if the Company concluded a brand new loan agreement with the same condition at the date of measurement. Current portion of bonds and Bonds payable The fair value of bonds issued by the Company is based on market prices if available. For bonds with no available market price, fair value is calculated using the present value that is calculated as discounted cash flow of the total amount of principal and interest by, where discount rates are adopted taking into consideration the remaining redemption period and credit risks. Derivative transactions Fair value of interest rate swap that meets certain hedging criteria is included in the fair value of long-term debt as a hedged item. [2] Financial instruments which fair value is extremely difficult to measure Consolidated balance sheet amount as of March 31, 2015 and 2014: Other securities (available-for-sale securities) Millions of yen Certificate of deposit Commercial paper Money management fund Unlisted stocks (excluding over-the-counter stocks) Medium Term Note Other 2015 ¥140,000 144,982 114,192 1,015 30,000 ¥3 2014 ¥90,000 79,987 50,515 4,832 - ¥3 Thousands of U.S. dollars 2015 $1,164,048 1,205,471 949,464 8,439 249,439 $25 These have no available market prices and are expected to entail excessive costs in the estimation of future cash flows. Consequently, estimating their fair value is recognized as extremely difficult and they are not included in "Short-term investment securities, Investment securities and Other securities". 13 [3] Scheduled redemption of monetary assets and securities with maturity As of March 31, 2015: Cash and deposits Notes and accounts receivable-trade Lease investment assets Short-term investment securities, Investment securities and Other securities Government and municipal bonds Corporate bonds Other Short-term loans receivable As of March 31, 2015: Cash and deposits Notes and accounts receivable-trade Lease investment assets Short-term investment securities, Investment securities and Other securities Government and municipal bonds Corporate bonds Other Short-term loans receivable As of March 31, 2014: Cash and deposits Notes and accounts receivable-trade Lease investment assets Short-term investment securities, Investment securities and Other securities Government and municipal bonds Corporate bonds Other Short-term loans receivable Within 1 Year ¥228,821 158,147 7,002 1 to 5 Years ¥- 6,393 16,864 Millions of yen Over 10 years ¥- - - 5 to 10 Years ¥- - 232 11,186 3,930 345,429 ¥58,335 14,963 17,001 1,571 ¥96,412 2,226 2,762 829 ¥2,323 3,838 2,392 4,437 ¥- Within 1 Year $1,902,561 1,314,933 58,219 Thousands of U.S. dollars Over 10 years $- - - 5 to 10 Years $- - 1,929 1 to 5 Years $- 53,155 140,218 93,007 32,676 2,872,113 $485,034 124,412 141,357 13,062 $801,630 18,508 22,965 6,893 $19,315 31,912 19,889 36,892 $- Within 1 Year ¥351,125 174,668 7,097 1 to 5 Years ¥- 6,978 16,303 Millions of yen Over 10 years ¥- - - 5 to 10 Years ¥- - 233 11,240 2,024 169,987 ¥42,364 8,418 11,977 384 ¥77,592 1,774 1,329 454 ¥2,725 3,290 732 2,625 ¥- 14 [4] Amount of repayment for long-term debt and other interest-bearing debt As of March 31, 2015: Short-term loans payable Bonds payable Long-term loans payable As of March 31, 2015: Short-term loans payable Bonds payable Long-term loans payable As of March 31, 2014: Short-term loans payable Bonds payable Long-term loans payable Within 1 Year ¥41,443 - ¥44,329 1 to 5 Years ¥- 10,000 ¥113,022 Millions of yen Over 10 years ¥- - ¥- 5 to 10 Years ¥- - ¥2,398 Within 1 Year $344,583 - $368,579 1 to 5 Years $- 83,146 $939,736 Thousands of U.S. dollars Over 10 years $- - $- 5 to 10 Years $- - $19,938 Within 1 Year ¥59,193 4,060 ¥42,557 1 to 5 Years ¥- 10,000 ¥150,028 Millions of yen Over 10 years ¥- - ¥- 5 to 10 Years ¥- - ¥3,816 6. Short-Term Investment Securities and Investment Securities Information on the value of short-term investment securities and investment securities as of March 31, 2015 and 2014 was as follows: (1) Other securities (available-for-sale securities): As of March 31, 2015: Book value exceeding acquisition cost: Equity securities Debt securities Government and municipal bonds Corporate bonds Other Sub-total Book value not exceeding acquisition cost: Equity securities Debt securities Government and municipal bonds Corporate bonds Other Other Sub-total Total Book value Acquisition cost Millions of yen Difference ¥50,341 ¥24,170 ¥26,171 20,802 21,366 6,139 98,648 20,471 21,067 6,013 71,721 2,778 2,918 11,411 4,719 - 1,146 20,054 ¥118,702 15 11,479 4,768 - 1,165 20,330 ¥92,051 331 299 126 26,927 (140) (68) (49) - (19) (276) ¥26,651 As of March 31, 2015: Book value exceeding acquisition cost: Equity securities Debt securities Government and municipal bonds Corporate bonds Other Sub-total Book value not exceeding acquisition cost: Equity securities Debt securities Government and municipal bonds Corporate bonds Other Other Sub-total Total As of March 31, 2014: Book value exceeding acquisition cost: Equity securities Debt securities Government and municipal bonds Corporate bonds Other Sub-total Book value not exceeding acquisition cost: Equity securities Debt securities Government and municipal bonds Corporate bonds Other Other Sub-total Total Book value Acquisition cost Difference Thousands of U.S. dollars $418,567 $200,964 $217,603 172,961 177,650 51,043 820,221 170,209 175,164 49,996 596,333 2,752 2,486 1,047 223,888 23,098 24,262 (1,164) 94,878 39,237 - 9,529 166,742 $986,963 95,444 39,644 - 9,687 169,038 $765,371 (566) (407) - (158) (2,296) $221,592 Book value Acquisition cost Millions of yen Difference ¥37,854 ¥21,503 ¥16,351 6,894 10,014 2,353 57,115 6,798 9,806 2,297 40,404 1,615 1,616 17,829 6,361 49 1,108 26,962 ¥84,077 17,990 6,404 50 1,126 27,186 ¥67,590 96 208 56 16,711 (1) (161) (43) (1) (18) (224) ¥16,487 16 (2) Other securities (available-for-sale securities) sold during fiscal years 2015 and 2014: For the year ended March 31, 2015: Equity securities Debt securities Government and municipal bonds Corporate bonds Other Other Total For the year ended March 31, 2015: Equity securities Debt securities Government and municipal bonds Corporate bonds Other Other Total For the year ended March 31, 2014: Sales amount Total gains Total losses Millions of yen ¥3,300 ¥741 32,673 6,626 1,529 119 ¥44,247 190 116 5 - ¥1,052 ¥12 50 17 20 - ¥99 Sales amount Total gains Total losses Thousands of U.S. dollars $27,438 $6,161 271,664 55,093 12,713 989 $367,897 1,580 964 42 - $8,747 $100 416 141 166 - $823 Sales amount Total gains Total losses Millions of yen Equity securities Debt securities Government and municipal bonds Corporate bonds Other Total ¥49,172 ¥47,148 23,566 9,902 1,972 ¥84,612 127 50 8 ¥47,333 ¥2 133 21 14 ¥170 17 7. Short-Term Loans Payable and Long-Term Debts Short-term loans payable as of March 31, 2015 and 2014, consisted of the following: Millions of yen 2014 Thousands of U.S. dollars 2015 2015 Bank loans with average interest rate of 1.49% and 0.43% per annum as of March 31, 2015 and 2014, respectively ¥41,443 ¥59,193 $344,583 Long-term debts as of March 31, 2015 and 2014 consisted of the following: Loans principally from banks and insurance companies due through 2025 with average interest rate of 0.82% and 0.93% per annum as of March 31, 2015 and 2014, respectively Unsecured 0.71% bonds due June 13, 2016 Subtotal Less-Portion due within one year Total Millions of yen 2014 Thousands of U.S. dollars 2015 2015 ¥159,749 ¥196,401 $1,328,253 10,000 169,749 (44,329) ¥125,420 10,000 210,461 (46,617) ¥163,844 83,146 1,411,399 (368,579) $1,042,820 Annual maturities of long-term loans payable and bonds payable as of March 31, 2015 were as follows: 2016 2017 2018 2019 2020 2021 and thereafter Total Millions of yen ¥44,329 41,496 43,798 36,038 1,690 2,398 ¥169,749 Thousands of U.S. dollars $368,579 345,024 364,164 299,642 14,052 19,938 $1,411,399 18 Lease obligations as of March 31, 2015 and 2014 consisted of the following: Lease obligations due within one year as of March 31,2015 and 2014 Millions of yen 2014 ¥882 2015 ¥1,016 Thousands of U.S. dollars 2015 $8,448 Lease obligations due after one year as of March 31,2015 and 2014 Total 1,065 1,099 8,855 ¥2,081 ¥1,981 $17,303 Annual maturities of lease obligations as of March 31, 2015 were as follows: 2016 2017 2018 2019 2020 2021 and thereafter Total Millions of yen ¥1,016 903 114 39 9 - ¥2,081 Thousands of U.S. dollars $8,448 7,508 948 324 75 - $17,303 The following assets as of March 31, 2015 and 2014 were pledged as collateral for certain loans: Property, plant and equipment Total Millions of yen 2014 ¥41,358 ¥41,358 Thousands of U.S. dollars 2015 $294,629 $294,629 2015 ¥35,435 ¥35,435 To raise working capital efficiently, the FHI Group has entered into the commitment-line contracts. The maximum amount that can be made available under these contracts is ¥127,041 million (US$1,056,298 thousand) as of March 31, 2015. At the end of the fiscal year under review, there were no borrowings under the commitment line. 19 8. Derivative transactions In the normal course of business, the Company and its consolidated subsidiaries employ derivative financial instruments, including foreign exchange forward contracts, foreign currency options and interest rate swaps, to manage their exposures to fluctuations in foreign currency exchange rates and interest rates. The Company and its consolidated subsidiaries do not use derivatives for speculative or trading purposes. The fair value information of derivative financial instruments as of March 31, 2015 and 2014 was as follows: Derivative transactions to which hedge accounting is not applied (1) Foreign currency contracts: As of March 31, 2015 Notional Amount Millions of yen Valuation Fair value gain (loss) Thousands of U.S. dollars Valuation Fair value gain (loss) Notional Amount Foreign exchange forward contracts: Sell- U.S. dollar Euro Canadian dollar As of March 31, 2014 ¥313,502 4,488 23,102 (¥2,955) 55 175 (¥2,955) $2,606,652 37,316 192,084 55 175 ($24,570) 457 1,455 ($24,570) 457 1,455 Foreign exchange forward contracts: Sell- U.S. dollar Euro Canadian dollar Notional Amount Fair value Millions of yen Valuation gain (loss) ¥218,776 6,134 20,782 (¥686) (36) 0 (¥686) (36) 0 Note: The method to determine the fair value is based on quotations obtained from financial institutions. Derivative transactions to which hedge accounting is applied (1) Interest rate contracts: Accounting treatment: Exception processing of interest rate swap Hedge item: Long-term loans payable As of March 31, 2015 Interest rate swap contracts: Receive floating rate pay fixed rate Millions of yen Thousands of U.S. dollars Notional Amount Over 1 year Fair value Notional Amount Over 1 year Fair value ¥10,105 ¥3,000 (*) $84,019 $24,944 (*) 20 As of March 31, 2014 Interest rate swap contracts: Receive floating rate pay fixed rate Millions of yen Notional Amount Over 1 year Fair value Note *Fair value of interest rate swap that meets certain hedging criteria is included in the fair value of long-term debt as a hedged item. ¥23,395 ¥10,105 (*) 9. Property, Plant and Equipment Property, plant and equipment as of March 31, 2015 and 2014 are summarized as follows: Buildings and structures Machinery, equipment and vehicles Vehicles and equipment on operating leases, net Other Subtotal Accumulated depreciation Accumulated impairment loss Land Construction in progress Total 2015 ¥348,685 526,302 13,181 318,806 1,206,974 (882,752) (26,528) 188,392 28,611 ¥514,697 Millions of yen 2014 ¥327,549 485,990 14,666 265,699 1,093,904 (817,421) (27,717) 187,931 24,116 ¥460,813 Thousands of U.S. dollars 2015 $2,899,185 4,376,004 109,595 2,650,752 10,035,536 (7,339,752) (220,570) 1,566,409 237,890 $4,279,513 10. Unexecuted Balance of Overdraft Facilities and Lending Commitments The unexecuted balance of overdraft facilities and lending commitments at a consolidated subsidiary (Subaru Finance Co., Ltd.) as of March 31, 2015 and 2014 was as follows: Total overdraft facilities and lending commitments Less amounts currently executed Unexecuted balance Millions of yen 2014 ¥4,150 569 ¥3,581 Thousands of U.S. dollars 2015 $39,910 4,132 $35,778 2015 ¥4,800 497 ¥4,303 A portion of the overdraft facilities and lending commitments above is subject to credit considerations as documented in the customer contracts. Therefore, the total balance above is not always available. 21 11. Pension and Severance Plans The Company and its consolidated domestic subsidiaries have lump-sum retirement payment plans, contributory defined benefit employees’ welfare pension funds, defined benefit pension plan, and certain domestic subsidiaries have defined contribution pension plans. In addition, in certain occasions, additional retirement payments are made to employees for their retirement. Consolidated foreign subsidiaries primarily have defined contribution plans. As of March 31, 2015, the Company and 53 of its consolidated domestic subsidiaries, which add up to a total of 54 companies, have lump-sum retirement payment plans. Within the FHI Group, there are also 20 defined contribution plans, and 5 defined benefits pension plans. In addition, there are 7 single-employer employees’ welfare pension funds subject to the provisions of Article 33 of "Accounting Standard for Retirement Benefits." Certain insignificant consolidated subsidiaries calculated their pension liability using the simplified method. Under the simplified method, an accrued pension and net defined benefit liability is provided at the amount that would have been payable had all the employees voluntarily retired at the end of the fiscal year, less an amount to be covered from the plan assets, while the Company and significant subsidiaries provide an accrued pension and net defined benefit liability based on the estimated amount of pension and severance obligation (projected benefit obligations), less the fair value of plan assets at the end of the fiscal year under the actuarial method. Defined benefit pension plans (including the multi-employer pension plan of contributory defined benefit employees’ welfare pension funds settled as defined benefit pension plan.) Movement in retirement benefit obligation, except plans applied simplified method Millions of yen 2014 ¥101,700 - Thousands of U.S. dollars 2015 $854,901 (20,629) Balance at the beginning of the period Cumulative effects of changes in accounting policies Restated balance a. Service cost b. Interest cost c. Actuarial loss (gain) d. Benefits paid e. Other Balance at the end of the period 2015 ¥102,819 (2,481) 100,338 5,508 1,397 4,520 (4,366) - ¥107,397 101,700 5,565 1,173 (1,569) (4,049) (1) ¥102,819 Movements in plan assets, except plans applied simplified method Balance at the beginning of the period a. Expected return on plan assets b. Actuarial loss (gain) c. Contributions paid by the employer d. Benefits paid Balance at the end of the period 2015 ¥87,069 1,913 4,961 8,330 (3,133) ¥99,140 Millions of yen 2014 ¥66,714 1,697 (1,628) 23,029 (2,743) ¥87,069 Movement in net defined benefit liability in the plans applying the simplified method 22 834,273 45,797 11,616 37,582 (36,302) - $892,996 Thousands of U.S. dollars 2015 $723,946 15,906 41,249 69,261 (26,050) $824,312 Balance at the beginning of the period a. Increase due to the change of scope of consolidation b. Retirement benefit cost c. Benefits paid d. Contributions paid by the employer Balance at the end of the period 2015 ¥5,880 - 703 (482) (29) ¥6,072 Millions of yen 2014 ¥5,399 203 720 (417) (25) ¥5,880 Thousands of U.S. dollars 2015 ¥48,890 - 5,845 (4,008) (241) $50,486 Reconciliation from retirement benefit obligations and plan assets to net defined benefit liability (asset), include plans applied simplified method a. Funded retirement benefit obligations b. Plan assets Sub total c. Unfunded retirement benefit obligations a+b+c. Total Net liability (asset) for retirement benefits d. Net defined benefit liability e. Net defined benefit asset d+e. Total Net liability (asset) for retirement benefits Retirement benefit costs a. Service cost b. Interest cost c. Expected return on plan assets d. Net actuarial loss amortization e. Past service costs amortization f. Additional retirement payments g. Retirement benefit cost of the plan applying the simplified method Total retirement benefit costs for the fiscal year ended 2015 ¥97,944 (99,346) (1,402) 15,706 Millions of yen 2014 ¥93,446 (87,248) 6,198 15,432 Thousands of U.S. dollars 2015 $814,368 (826,025) (11,657) 130,590 14,304 21,630 118,932 17,963 (3,659) ¥14,304 22,852 (1,222) ¥21,630 149,356 (30,423) $118,932 2015 ¥5,508 1,397 (1,913) 2,377 58 379 703 Millions of yen 2014 ¥5,565 1,173 (1,697) 2,429 42 311 720 Thousands of U.S. dollars 2015 ¥45,797 11,616 (15,906) 19,764 482 3,151 5,845 ¥8,509 ¥8,543 ¥70,749 23 Adjustments for retirement benefit (before tax effect) a. Past service costs b. Actuarial gains and losses Total 2015 ¥249 4,032 ¥4,281 Millions of yen 2014 ¥ - - ¥ - Accumulated adjustments for retirement benefit (before tax effect) Thousands of U.S. dollars 2015 $2,070 33,525 $35,595 Thousands of U.S. dollars 2015 $1,280 2015 ¥154 Millions of yen 2014 ¥403 16,813 20,845 139,794 ¥16,967 ¥21,248 $141,074 2015 51% 14% 25% 10% 100% Percentage 2014 54% 13% 23% 10% 100% a. Past service costs that are yet to be recognized b. Actuarial gains and losses that are yet to be recognized Total Plan assets Plan assets comprise: a.Bonds b.Equity securities c.Cash and deposit d.Other Total Long-term expected rate of return Current and target asset allocations, historical and expected returns on various categories of plan assets have been considered in determining the long-term expected rate of return. Actuarial assumptions The principal actuarial assumptions 2015 2014 a. Attribution of expected benefit obligation Benefit formula method b. Discount rate c. Long-term expected rate of return d. Amortization of actuarial gain/loss 0.8%–1.4% 1.4%–3.5% Primarily 16 years (amortized by the straight-line method starting from the following fiscal year, over a period shorter than the average remaining service periods of the eligible employees) 10 to 19 years The straight-line method 0.6%–1.5% 1.4%–3.5% Primarily 16 years (amortized by the straight-line method starting from the following fiscal year, over a period shorter than the average remaining service periods of the eligible employees) 10 to 19 years e. Amortization of past service cost 24 Defined contribution pension plan The amount required to contribute to defined contribution plans was 4,414 million (US$36,701 thousand) and 4,127 million for fiscal years 2015 and 2014 respectively which included the multi-employer pension plan of contributory defined benefit employees’ welfare pension funds settled as defined contribution plans. Certain information concerning the multi-employer pension plan, which requires contributions that are expensed as they become due as pension and severance costs, was as follows: (1) Overall funded status of the multi-employer pension plan (mainly as of March 31, 2015 and 2014) Plan assets Projected benefit obligation Funded status 2015 ¥83,089 94,207 (¥11,118) Millions of yen 2014 ¥91,753 100,556 (¥8,803) Thousands of U.S. dollars 2015 $690,854 783,296 ($92,442) (2) Contributions by the Company and its consolidated domestic subsidiaries as a percentage of total contributions to the multi-employer pension plan for fiscal years 2015 and 2014 respectively: 5% Other than the above, ¥27,203 million (US$226,183 thousand) and ¥17,403 million of postretirement benefit plan obligation for fiscal years 2015 and 2014 respectively is included in "Other" of accrued expense and long-term liabilities in some American subsidiaries. 12. Income Taxes The Company and its consolidated subsidiaries were subject to a number of taxes based on income, which in the aggregate resulted in a normal statutory income tax rate of approximately 35.4% and 37.8% for fiscal years 2015 and 2014, respectively. A reconciliation of the statutory income tax rates in Japan to the Company’s effective income tax rates for fiscal years 2015 and 2014 were as follows: 2015 35.4% 2014 - Statutory income tax rate in Japan Increase (reduction) in taxes resulting from: Adjustment of deferred tax assets in the end of fiscal year 2015 by change of the tax rate Deduction of research and development expense Entertainment expenses not qualifying for deduction Changes in valuation allowance and tax benefits realized from loss carry forwards Adjustment to past corporate income taxes payable and corporate income taxes refundable Equity in earnings of affiliates Difference of applicable tax rate in subsidiaries Other Effective income tax rate Note:The note for fiscal year 2014 is omitted because the difference between the statutory income tax rates in Japan and the Company’s effective income tax is 5% or less of the statutory income tax rates. 0.7% (3.6)% 0.1% (0.5)% 0.2% 0.1% 35.4% 0.3% 32.4% - - - - - - - - 25 Significant components of the deferred tax assets and liabilities as of March 31, 2015 and 2014, were as follows: Deferred tax assets: Accrued expenses Provision for product warranties Net defined benefit liability Depreciation and amortization expenses Long-term accounts payable-other Provision for bonuses Unrealized profit on inventories Loss on valuation of inventories Net operating loss carryforwards Other Total deferred tax assets Valuation allowance Total deferred tax assets, net of valuation allowance Deferred tax liabilities: Valuation difference on available-for-sale securities Depreciation and amortization expenses Reserve for reduction entry Net defined benefit asset Other Total deferred tax liabilities Net deferred tax assets Millions of yen 2014 Thousands of U.S. dollars 2015 2015 ¥18,569 17,549 13,534 10,938 10,919 7,241 25,954 2,079 860 31,253 138,896 (20,018) 118,878 (8,668) (11,246) (2,072) (1,006) (17,980) (40,972) ¥77,906 ¥15,409 13,804 15,077 10,559 7,069 7,265 15,894 2,011 1,274 32,574 120,936 (23,669) 97,267 (5,822) (4,821) (2,389) (441) (11,075) (24,548) ¥72,719 $154,394 145,913 112,530 90,945 90,787 60,206 215,798 17,286 7,151 259,857 1,154,868 (166,442) 988,426 (72,071) (93,506) (17,228) (8,365) (149,497) (340,667) $647,759 The net deferred tax assets are included in the following line items in the accompanying consolidated balance sheets. Current assets—Deferred tax assets Investments and other assets—Deferred tax assets Current liabilities—Deferred tax liabilities (Other current liabilities) Long-term liabilities—Deferred tax liabilities Total net deferred tax assets Millions of yen 2014 ¥64,214 18,332 Thousands of U.S. dollars 2015 $655,101 109,030 - (9,827) ¥72,719 - (116,371) $647,759 2015 ¥78,789 13,113 - (13,996) ¥77,906 26 (Adjustment of deferred tax assets and liabilities for enacted changes in tax laws and rates) (Fiscal 2014) On March 31, 2014, amendments to the Japanese tax regulations were enacted into law, and the statutory income tax rate for years beginning on or after April 1, 2014 will be changed. As a result of these amendments, the statutory income tax rates utilized for the measurement of deferred tax assets and liabilities expected to be settled for years beginning on April 1, 2014 has been changed from 37.8% to 35.4%. Due to these changes in statutory income tax rates, net deferred tax assets as of March 31, 2014 decreased by ¥1,861million and deferred income tax expense recognized for the year ended March 31, 2014 increased by the same amount. (Fiscal 2015) On March 31, 2015, amendments to the Japanese tax regulations were enacted into law. Based on the amendments, the statutory income tax rates utilized for the measurement of deferred tax assets and liabilities expected to be settled or realized from April 1, 2015 to March 31, 2016 and on or after April 1, 2016 are changed from 35.4% for the fiscal year ended March 31, 2015 to 32.9% and 32.1%, respectively, as of March 31, 2015. Due to these changes in statutory income tax rates, net deferred tax assets (after deducting the deferred tax liabilities) decreased by ¥2,375 million (US$19,747 thousand) as of March 31, 2015, deferred income tax expense recognized for the fiscal year ended March 31, 2015 increased by ¥2,826 million (US$23,497 thousand), evaluation differences of other securities increased by ¥765 million (US$6,361 thousand) and accumulated adjustments for employee retirement benefits increased by minous ¥529 million (minous US$4,398 thousand). 13. Net Assets Under Japanese laws and regulations, the entire amount paid for new shares is required to be designated as common stock. However, a company may, by a resolution of its Board of Directors, designate an amount not exceeding one half of the price of the new shares as additional paid-in capital, which is included in capital surplus. Under the Japanese Companies Act (“the Act”), in cases where a dividend distribution of surplus is made, the smaller of an amount equal to 10% of the dividend or the excess, if any, of 25% of common stock over the total of additional paid-in capital and legal earnings reserve must be set aside as additional paid-in capital or legal earnings reserve. Legal earnings reserve is included in retained earnings in the accompanying consolidated balance sheets. Under the Act, both legal earnings reserve and additional paid-in capital used to eliminate or reduce a deficit generally require a resolution of the shareholders’ meeting. Additional paid-in capital and legal earnings reserve may not be distributed as dividends. Under the Act, all additional paid-in capital and all legal earnings reserve may be transferred to other capital surplus and retained earnings, respectively, which are potentially available for dividends. The maximum amount that the Company can distribute as dividends is calculated based on the non-consolidated financial statements of the Company in accordance with the Act. At the annual shareholders’ meeting held on June 23, 2015, the shareholders approved cash dividends amounting to ¥28,889 million (US$240,201 thousand). Such appropriations have not been accrued in the consolidated financial statements as of March 31, 2015. Such appropriations are recognized in the period in which they are approved by the shareholders. 14. Presentation of inventories and provision for loss on construction contracts ¥Minus 988 million (US$ Minus 8,215 thousand) and ¥70 million as "Provision for loss on construction contracts" is included in "Cost of sales" for fiscal years 2015 and 2014, respectively. 27 15. Selling, General and Administrative Expenses Selling, general and administrative expenses for fiscal years 2015 and 2014 consisted of the following: Freightage and packing expenses Advertising expenses Sales incentives Salaries and bonuses Research and development expenses Other Total Millions of yen 2014 ¥26,523 64,332 65,425 50,274 59,896 86,919 ¥353,369 2015 ¥34,856 81,538 82,597 49,894 83,104 105,389 ¥437,378 Thousands of U.S. dollars 2015 $289,815 677,958 686,763 414,850 690,979 876,270 $3,636,634 16. Gain on sales of investment securities (Fiscal 2014) Gain on sales of investment securities includes ¥47,118 million, the profit related to the sales of stock of Polaris Industries Inc. owned by FHI. 17. Allowances for doubtful accounts (Fiscal 2014) Allowances for doubtful accounts, the loss is associated with initial investment fees related to the AH-64D combat helicopter for the Japan Ministry of Defense as a precaution for the case that the ruling is upheld. 18. Finance Leases As allowed under the Japanese accounting standards, the Company and its consolidated subsidiaries in Japan account for finance leases. Information as Lessee (1) Transfer of title through finance lease transaction [1] Leased assets Mainly implements of production in the automotive business [2] Depreciation method for leased assets Leased assets are depreciated by the same method as used for other property, plant and equipment. (2) Finance leases which do not transfer ownership title [1] Leased assets Mainly network equipment and terminal units (Other tangible assets) in the automotive business [2] Depreciation method for leased assets Leased assets are depreciated by the straight-line method over the leased period and the residual value is zero. 28 Information as Lessor (1) The details of lease investment assets as of March 31, 2015 and 2014 were as follows: Obligation of lease fee receivable Estimated residual value Interest expense portion Lease investment assets Millions of yen 2014 ¥28,363 322 (5,052) ¥23,633 Thousands of U.S. dollars 2015 $239,145 2,844 (41,623) $200,366 2015 ¥28,762 342 (5,006) ¥24,098 (2) Lease revenue related to lease investment assets Amounts of collections on lease receivable after the fiscal year ended March 31, 2015 and 2014, were as follows; Within 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years Over 5 years Millions of yen 2014 ¥8,510 6,924 5,510 4,276 2,840 ¥303 Thousands of U.S. dollars 2015 $69,835 58,743 49,464 35,528 23,223 $2,353 2015 ¥8,399 7,065 5,949 4,273 2,793 ¥283 29 19. Operating Lease Information as Lessee The future minimum lease/rent payments, excluding the portion of interest thereon, as of March 31, 2015 and 2014, were as follows: Operating leases: Due within one year Due after one year Total Millions of yen 2014 Thousands of U.S. dollars 2015 ¥2,130 12,241 ¥14,371 $20,279 116,654 $136,934 2015 ¥2,439 14,030 ¥16,469 Information as Lessor The future minimum lease/rent payments receivable, excluding the portion of interest thereon, as of March 31, 2015 and 2014, were as follows: Operating leases: Due within one year Due after one year Total 20. Contingent Liabilities Contingent liabilities as of March 31, 2015 and 2014, were as follows: Millions of yen 2014 Thousands of U.S. dollars 2015 ¥212 101 ¥313 $1,580 765 $2,345 2015 ¥190 92 ¥282 Thousands of Millions of yen U.S. dollars 2015 2014 2015 As guarantor of third-party indebtedness from financial institutions ¥45,214 ¥40,284 $375,937 21. The Amount of Discount of Export Bill The amount of discount of export bill as of March 31, 2015 and 2014, were as follows: The amount of discount of export bill Thousands of Millions of yen U.S. dollars 2015 $24,345 2014 ¥812 2015 ¥2,928 22. Transfer of Financial Assets to Special Purpose Company The balance of financial assets transferred to special purpose company as of March 31, 2015 and 2014, were as follows: Balance of financial assets transferred to special purpose company(loan receivable of Automobiles and accounts receivable-trade of Aerospace) 30 Thousands of Millions of yen U.S. dollars 2015 2014 2015 ¥5,037 ¥7,073 $41,881 23. Fair value of collateral financial assets with free disposal right Collateral investment securities Thousands of Millions of yen U.S. dollars 2015 $83,146 2014 - 2015 ¥10,000 The above relates transaction with repurchase agreement and the same amount is included in short-term loans receivable of current assets. 24. Segment Information (1)General information about reportable segments The business segments the Company reports are the business units for which the Company is able to obtain respective financial information separately in order for the Board of Directors to conduct periodic investigation to determine distribution of management resources and evaluate their business result. The Company places Automobile at the center of the whole businesses, and introduces an internal company system into Aerospace and Industrial products divisions. This framework makes clearer the responsibility of each division and accelerates business execution. The Company manages the subsidiaries on the basis of this classification. Therefore, the business segments consist of Automobile, Aerospace, Industrial products, and Other which does not belong to any division. Automobile segment manufactures and sells vehicles and related products. Aerospace segment manufactures aircrafts, parts of space-related devices. Industrial products segment manufactures and sells Robin engines and related products. (2)Calculation method of sales, profit or loss, assets, liabilities and other items by reportable segments Accounting method for reportable segments is almost the same as "2. Summary of Significant Accounting Policies". Segment income are calculated based on operating income. Net sales - Inter-segment are calculated based on current market prices. 31 (3)Information on sales, income, assets and other items by reportable segments for the fiscal years ended March 31, 2015 and 2014 was summarized as follows Net Sales: Automobiles Outside customers Inter-segment Sub-total Aerospace Outside customers Inter-segment Sub-total Industrial products Outside customers Inter-segment Sub-total Other (*1) Outside customers Inter-segment Sub-total Total Adjustment (*2) Consolidated total (*3) Segment income: Automobiles Aerospace Industrial products Other (*1) Total Adjustment (*2) Consolidated total (*3) Millions of yen 2014 2015 Thousands of U.S. dollars 2015 ¥2,698,974 4,236 2,703,210 ¥2,246,624 3,261 2,249,885 $22,440,958 35,221 22,476,179 142,801 - 142,801 29,029 207 29,236 124,436 - 124,436 29,776 567 30,343 7,109 15,744 22,853 2,898,100 (20,187) ¥2,877,913 7,293 14,642 21,935 2,426,599 (18,470) ¥2,408,129 Millions of yen 2014 2015 ¥400,874 18,912 779 1,884 422,449 596 ¥423,045 ¥308,973 14,148 632 2,099 325,852 637 ¥326,489 1,187,337 - 1,187,337 241,365 1,721 243,086 59,109 130,905 190,014 24,096,616 (167,847) $23,928,769 Thousands of U.S. dollars 2015 $3,333,117 157,246 6,477 15,665 3,512,505 4,956 $3,517,461 32 Segment assets: Automobiles Aerospace Industrial products Other (*1) Total Adjustment (*2) Consolidated total (*3) Other Items: Depreciation and amortization: Automobiles Aerospace Industrial products Other (*1) Total Adjustment (*2) Consolidated total (*3) Investment to equity-method affiliates: Automobiles Aerospace Industrial products Other (*1) Total Adjustment (*2) Consolidated total (*3) Increase of property, plant and equipment and intangible fixed assets: Automobiles Aerospace Industrial products Other (*1) Total Adjustment (*2) Consolidated total (*3) Millions of yen 2014 2015 ¥1,944,178 186,292 32,926 59,735 2,223,131 (23,417) ¥2,199,714 ¥1,639,760 182,123 29,692 53,533 1,905,108 (16,745) ¥1,888,363 Millions of yen 2014 2015 ¥65,342 4,583 429 1,467 71,821 - ¥71,821 ¥589 - 775 - 1,364 - ¥1,364 ¥122,689 4,509 985 7,163 135,346 - ¥135,346 ¥56,265 3,758 411 1,052 61,486 - ¥61,486 ¥6 - 520 - 526 - ¥526 ¥90,782 4,074 533 3,148 98,537 - ¥98,537 Thousands of U.S. dollars 2015 $16,165,112 1,548,948 273,767 496,674 18,484,502 (194,703) $18,289,798 Thousands of U.S. dollars 2015 $543,294 38,106 3,567 12,198 597,165 - $597,165 $4,897 - 6,444 - 11,341 - $11,341 $1,020,113 37,491 8,190 59,558 1,125,351 - $1,125,351 Note: *1. "Other" means the category which is not included into any reportable segments. It consists of garbage collection vehicles, specialized vehicles, real estate lease, etc. *2. Adjustment of segment income refers to elimination of intersegment transaction. *3.Segment income is adjusted on operating income on the consolidated statements of income. 33 Related Information (1)Products and services information Products and services information is not shown since the same information is in the segment information. (2)Information about geographic areas [1]Sales for the fiscal years ended March 31, 2015 and 2014 was summarized as follows: Sales: (*1) Japan North America [United States] (*2) Europe Asia Other Consolidated total Millions of yen 2014 2015 ¥652,894 1,730,947 [1,607,897] 123,250 238,749 132,073 ¥2,877,913 ¥672,060 1,322,760 [1,220,961] 134,680 154,392 124,237 ¥2,408,129 Thousands of U.S. dollars 2015 $5,428,569 14,392,176 [13,369,061] 1,024,778 1,985,109 1,098,138 $23,928,769 Note: *1 Sales is categorized by country or area which is based on customer location. *2 Sales of the United States is included in North America area. [2]Property, plant and equipment for the fiscal years ended March 31, 2015 and 2014 was summarized as follows: Property, plant and equipment: (*1) Japan North America [United States] (*2) Europe Asia Other Consolidated total Millions of yen 2014 2015 Thousands of U.S. dollars 2015 ¥412,623 101,042 [100,274] 481 - 551 ¥514,697 ¥394,163 65,987 [65,233] 486 - 177 ¥460,813 $3,430,806 840,126 [833,741] 3,999 - 4,581 $4,279,513 Note: *1 Property, plant and equipment is categorized by country or area according to geographic adjacent level. *2 Property, plant and equipment of the United States is included in North America area. [3]Major customers Information Information about major customers is not shown because outside sales for major customers accounted for less 10% of operating revenue on the consolidated statements of income for the fiscal years ended March 31, 2015 and 2014. 34 Information on Impairment Loss in Fixed Assets by Reportable segments Impairment loss in fixed assets by reportable segments for the fiscal years ended March 31, 2015 and 2014 was summarized as follows: Impairment loss in fixed assets: Automobiles Aerospace Industrial products Other Total Adjustment Total Millions of yen 2014 2015 Thousands of U.S. dollars 2015 ¥38 - - - 38 - ¥38 ¥35 - - - 35 - ¥35 $316 - - - 316 - $316 Information on Amortization of Goodwill and Unamortized Balance by Reportable segments Information on amortization of goodwill and unamortized balance by reportable segments for the fiscal years ended March 31, 2015 and 2014 was summarized as follows: Goodwill Millions of yen 2014 Thousands of U.S. dollars 2015 ¥258 - - - 258 - ¥258 ¥2,369 - - - 2,369 - ¥2,369 $2,212 - - - 2,212 - ¥2,212 $20,554 - - - 20,554 - $20,554 2015 ¥266 - - - 266 - ¥266 ¥2,472 - - - 2,472 - ¥2,472 Amount written off of current period: Automobiles Aerospace Industrial products Other Total Corporate and elimination Total Balance at the end of current period: Automobiles Aerospace Industrial products Other Total Corporate and elimination Total Information on Negative Goodwill by Reportable segments No items to be reported. 35 25. Fair Value of Investment and Rental Property The Company and certain consolidated subsidiaries own rental office buildings and rental commercial facilities with the objective of generating rental income in Saitama prefecture and other locations. Certain domestic rental office buildings in Japan are classified as properties that include portions used as investment and rental property, because part of them are used by the Company and certain consolidated subsidiaries. The consolidated balance sheet amounts, principal changes during fiscal 2015 and 2014, fair value at the end of fiscal 2015 and 2014 were as follows: As of March 31, 2015 beginning balance Consolidated balance sheet amounts Increase(dec rease) during the year ending balance Millions of yen Fair value as the end of the fiscal year Investment and rental property Properties that include portions used as investment and rental property As of March 31, 2015 ¥30,343 (¥1,095) ¥29,248 ¥37,704 ¥9,206 ¥6,022 ¥15,228 ¥19,537 Thousands of U.S. dollars beginning balance Consolidated balance sheet amounts Increase(dec rease) during the year ending balance Fair value as the end of the fiscal year Investment and rental property Properties that include portions used as investment and rental property As of March 31, 2014 $252,291 ($9,105) $243,186 $313,495 $76,544 $50,071 $126,615 $162,443 beginning balance Consolidated balance sheet amounts Increase(dec rease) during the year ending balance Millions of yen Fair value as the end of the fiscal year Investment and rental property Properties that include portions used as investment and rental property ¥30,410 (¥67) ¥30,343 ¥36,779 ¥6,830 ¥2,376 ¥9,206 ¥13,569 Note 1. The amounts of consolidated balance sheet excludes accumulated depreciation and accumulated impairment loss from acquisition costs. 2. Among changes in the amount of investment, rental property and properties that include portions used as investment and rental property during the fiscal 2015, principal increases were properties acquisitions etc, which amounted to ¥7,263 million (US$60,389 thousand), and principal decreases were depreciation, which amounted to ¥1,009 million (US$8,389 thousand), loss on sales and retirement, which amounted to ¥1,408 million (US$11,707 thousand). Among changes in the amount of investment, rental property and properties that include portions used as investment and rental property during the fiscal 2014, principal increases were properties acquisitions etc, which amounted to ¥3,370 million, and principal decreases were depreciation, which amounted to ¥612 million, loss on sales and retirement, which amounted to ¥450 million. 36 3. Fair value of a part of main investment and rental property is the amount estimated by based value of real-estate appraiser, and fair value of a part of other investment and rental property is the amount estimated by the Company based principally on land assessment value. Profit and loss in fiscal 2015 and 2014 concerning investment and rental property and properties that include portions used as investment and rental property were as follows: As of March 31, 2015 Investment and rental property Properties that include portions used as investment and rental property As of March 31, 2015 Investment and rental property Properties that include portions used as investment and rental property As of March 31, 2014 Rental income Rental expenses Change Millions of yen Other profit and loss ¥3,868 ¥2,167 ¥1,701 (¥418) ¥394 ¥1,265 (¥871) ¥- Thousands of U.S. dollars Rental income Rental expenses Change Other profit and loss $32,161 $18,018 $14,143 ($3,476) $3,276 $10,518 ($7,242) $- Rental income Rental expenses Change Millions of yen Other profit and loss Investment and rental property Properties that include portions used as investment and rental property ¥3,476 ¥2,074 ¥1,402 ¥392 ¥221 ¥171 ¥44 ¥- Note:1. Rental income (from the properties that include portions used as investment and rental property) does not include the portion that the Company or certain subsidiaries use as the provision of services and business administration purposes. Rental expenses, however, include all portions of the expenses (costs related to depreciation, repairs, insurance and taxes). 2. Other profit and loss include in gain on sale and impairment loss. 26.Subsequent Event None identified. 27.Other On January 15, 2010, the Company filed a lawsuit with the Tokyo District Court against the Government of Japan for the payment totaling ¥35,124 million (US$ 292,043 thousand) of uncollected initial investment fees (amount paid for customization to the Japanese specifications) for the manufacture of the AH-64D combat helicopters for the Japan Ministry of Defense. On February 28, 2014, the Tokyo District Court rejected the case. On March 13, 2014, the Company appealed against the Tokyo District Court’s decision to the Tokyo High Court. On January 29, 2015, the Tokyo High Court upheld the Company’s claims in almost all respects. However, the Government of Japan filed a petition of objection to the Supreme Court of Japan on February 10, 2015. 37 On April 6, 2015, the Company made an additional appeal to the Supreme Court of Japan in order to have the Company’s claims rejected at the Tokyo High Court upheld. 38 

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