Subaru Corporation Annual Report 2017

Plain-text annual report

Annual Report 2017 For the year ended March 31, 2017 From a company making things, to a company making people smile. Just a glance at our vehicles and you can imagine days filled with excitement. Just a glimpse of jet wings above and you can envision worlds yet unseen. But no matter the time or place, we are always by our customers’ sides. What is important is not how many cars we make, but how many smiles we can create. More than a century has passed since the founding of Aircraft Research Laboratory, the forerunner of SUBARU. Now, Fuji Heavy Industries Ltd. has been reborn as SUBARU CORPORATION. From making things to delivering value that shines in people’s hearts, SUBARU aims to touch the hearts of people and bring smiles to their faces. We constantly challenge ourselves to ensure that satisfaction with SUBARU is reflected in the happy faces of our customers. 01 SUBARU CORPORATIONANNUAL REPORT 201702 SUBARU CORPORATIONANNUAL REPORT 2017Vision for 2020 Not big in size, but a high-quality company with distinctive strengths For SUBARU, by no means a large automaker, the two strategies of uncompromising differentiation and added-value are essential for achieving sustained growth in a fierce competitive environment. We will narrow our focus to categories and markets in which we can leverage our strengths, practice selection and concentration in allocation of limited management resources, and further accelerate two initiatives: enhancing the SUBARU brand and building a strong business structure. And, we will seek to have a prominent presence in customers’ minds. Scale expansion is not a primary objective Focusing on categories and markets in which we can leverage our strengths Rather than make sales volume expansion an objective, Rather than doing business in all markets with a full SUBARU aims to steadily increase unit sales as a result model lineup, we will specialize in and focus our limited of adhering to a highly profitable business model. management resources on categories and markets in which we can leverage our strengths. As a result, in business development, our product focus is mainly on SUVs, and the market focus is on the U.S. and other developed countries in mature stages of motorization. 03 SUBARU CORPORATIONANNUAL REPORT 2017Not big in size, but a high-quality company with distinctive strengths Achieving an industry-leading profit margin While sales and profits are important, SUBARU is geared toward management that emphasizes a high operating margin. We will seek to achieve an industry- leading profit margin while continuing to invest in future sustained growth. Contents 03 05 10 11 13 15 22 23 27 33 41 45 47 49 56 Vision for 2020 Business Overview Global Network History Financial and Non-Financial Highlights Message from the CEO Messages from the CQO, CTO, and CIO Message from the CFO Special Feature: Raising the Curtain on the Next Generation of SUBARU Cars Corporate Governance CSR at SUBARU Consolidated Ten-Year Financial Summary Five-Year Automobile Sales Financial Review Corporate Data/Stock Information Disclaimer Regarding Forward-Looking Statements to various management strategies, Statements herein concerning plans and expectations or projections about the future, SUBARU’s efforts with regard 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 SUBARU’s products, SUBARU’s ability to continue to develop and market advanced products, raw material prices, and currency exchange rates. SUBARU disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. 04 SUBARU CORPORATIONANNUAL REPORT 2017Business Overview Automotive Business Unit SUBARU continues to develop cars that promise total driving enjoyment and safety for all passengers. The launch of the SUBARU 360 in 1958 marked SUBARU’s start as an Net Sales (Billions of yen) automaker. Ever since, we have contributed to the development of Japan’s automotive industry by creating a succession of distinctive cars equipped with creative technologies such as the horizontally opposed engine and Symmetrical All-Wheel Drive. We continue to take on new challenges in order to provide all of our customers with “Enjoyment and Peace of Mind.” For example, we continue to evolve the EyeSight driver assist system, have improved safety performance and driving performance by adopting the SUBARU Global Platform, our next-generation vehicle platform, and were the first Japanese 3,039.4 3,152.0 2,699.0 2,246.6 1,779.0 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 automaker to use a pedestrian protection airbag. Operating Income (Billions of yen) 94.8% Consolidated net sales contribution ratio of the Automotive Business Unit 309.0 111.0 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 543.6 400.9 397.7 SUBARU Proprietary Technologies Horizontally opposed engine (Boxer engine) Lightweight, compact, low center of gravity resembles the movement of a boxer’s fists, this engine is renowned for its excellent rotation balance and contributes to low vehicle center of gravity because of its low height, light The horizontally opposed engine is an ideal power unit that weight, and compact design. SUBARU has relied on for more than half a century. Called the “Boxer engine” because the horizontal movement of the pistons arranged symmetrically left and right along the crankshaft Symmetrical All-Wheel Drive (AWD) Superior longitudinal-transverse weight balance SUBARU Boxer Conventional In-Line Engine The low center of gravity provided by the horizontally opposed engine and superior longitudinal-transverse weight balance achieved by placing the transmission near the center of the vehicle combine to maximize all-wheel drive capability and deliver superb driving performance in various conditions. SUBARU has long relied on Symmetrical AWD as a core technology that drivers can depend on in every situation from day-to-day town use to high-speed highway driving. 05 SUBARU CORPORATIONANNUAL REPORT 2017Product Lineup Legacy Series Consolidated unit sales: 297,000 units Available markets: Japan, North America, Russia, Europe, Australia, China, Other Consolidated unit sales: 344,000 units Available markets: Japan, North America, Russia, Europe, Australia, China, Other Consolidated unit sales: 54,000 units Available markets: Japan, North America, Russia, Europe, Australia, Other Impreza Series Consolidated unit sales: 31,000 units Available markets: Japan, Europe, Australia, Other (SEDAN) (5 Door) Consolidated unit sales: 9,000 units Available markets: Japan, North America, Europe, Australia, China, Other Consolidated unit sales: 290,000 units Available markets: Japan, North America, Russia, Europe, Australia, China, Other Consolidated unit sales: 4,000 units Available markets: Japan OEM Models Consolidated unit sales: 32,000 units Available markets: Japan (OEM supply from Daihatsu Motor Co., Ltd.) *Period: April 1, 2016 to March 31, 2017 06 SUBARU CORPORATIONANNUAL REPORT 2017Business Overview Automotive Business Unit Focusing on safety to deliver the world’s highest level of peace of mind and safety to customers. Under the concept of all-around safety, meaning the pursuit of automobile safety performance from every perspective, SUBARU defines safety in automobile manufacturing using four criteria: primary safety, active safety, preventive safety, and passive safety. SUBARU All-Around Safety Primary Safety Active Safety Preventive Safety Passive Safety Safe situation Hazardous situation Accident Collision Spread of damage Preemptive accident avoidance Damage reduction during an accident Basic design features for avoiding accidents Primary Safety Increasing driving safety through basic design features such as car shape and controls l Visibility design l Driving position l Interface Active Safety The ultimate in driving performance for greater safety Facilitating hazard avoidance through performance improvement in the basic functions of a car: driving, turning, and stopping l Horizontally opposed engine l Symmetrical AWD Advanced technology that supports safe driving Preventive Safety Supporting safe driving by helping avoid collisions and reduce damage l EyeSight Passive Safety Extra precautions just in case Minimizing damage when an accident occurs l Engine layout l Pedestrian protection airbag l Next-generation platform Safety Performance Recognized Worldwide SUBARU undergoes safety performance testing and assessment conducted by the New Car Assessment Program (NCAP) in Japan, the U.S., Europe, and Australia, the Insurance Institute for Highway Safety (IIHS) in the U.S., and other public agencies in Japan and overseas and has received the highest ranking in many tests and assessments*. In Japan, the Impreza and SUBARU XV received the 2016–2017 Grand Prix Award for earning the highest safety score ever in the Japan New Car Assessment Program (JNCAP) crash safety evaluation tests. In addition, all models equipped with EyeSight received the top rating of Advanced Safety Vehicle ++ (ASV ++). *Please refer to evaluation organization websites for assessment details. 07 SUBARU CORPORATIONANNUAL REPORT 2017 What is EyeSight? EyeSight is a driver assist system that applies advanced technology. It controls alerts, braking, and steering in accordance with the vehicle’s driving situation to help avoid accidents, reduce damage, and alleviate driver burden. We currently offer EyeSight mainly in Japan, North America, Europe, Australia, and China and plan to offer it globally. Pre-collision braking Adaptive cruise control Pre-collision throttle management Active lane keep Lane sway warning Why Use Stereo Cameras? The use of two cameras positioned to the left and right, like human eyes, enables simultaneous three-dimensional recognition of multiple cars, motorcycles, bicycles, pedestrians, and other objects within the field of vision. A key feature of EyeSight is that it is capable of accurately recognizing the distance, shape, and speed of movement of objects. Although most Stereo cameras automakers use radar or a combination of radar and a camera as sensors to detect lead vehicles, pedestrians, and other potential hazards, EyeSight uses only stereo cameras. The high recognition performance of stereo cameras, continuously perfected over many years, is an advantage unavailable from other automakers. Stereo camera simulated image History of Driver Assist System Development The development of stereo cameras, the core of the EyeSight system, began in 1989 based on a concept of safety technology that was bold and futuristic at a time when the need for advanced safety technology wasn’t widely understood. Subsequently, as a result of persistent, dedicated research, in 2008 SUBARU introduced EyeSight, which realized the world’s first pre- collision braking function using stereo cameras only. SUBARU’s safety performance, which captures top-class ratings in safety performance testing and assessments around the world and has won high acclaim from countless customers, is underpinned by reliable technologies and a wealth of experience cultivated over many years. 1989 Start of system development World’s first Market introduction of Active Driving Assist (ADA), the forerunner of EyeSight 1999 Installation of the world’s first driver assist system using stereo cameras on production cars World’s first EyeSight released 2008 Commercialization of the world’s first pre-collision braking control function using stereo cameras only 2010 Release of EyeSight (ver. 2) 2014 Release of EyeSight (ver. 3) 2017 Addition of the Touring Assist function 08 SUBARU CORPORATIONANNUAL REPORT 2017Business Overview Aerospace Company Leveraging tradition and innovative technologies to develop and produce a wide variety of aircraft. SUBARU traces its roots back to Aircraft Research Laboratory, established in 1917 and later to become Nakajima Aircraft. The Net Sales (Billions of yen) Boeing 787 Aerospace Company, inheriting Nakajima Aircraft’s aircraft manufacturing technologies and spirit, leads Japan’s aerospace industry and has a strong track record in developing and producing a wide variety of aircraft. We mainly develop and produce center wing boxes, which require high precision and advanced assembly technology to support the main wings and fuselage at the center of aircraft. On the basis of unique and advanced technologies cultivated over the years, we aim to develop into an aircraft manufacturer with a global presence and will actively take on challenges in new fields. 4.2% Consolidated net sales contribution ratio of the Aerospace Company 152.8 142.8 138.8 124.4 89.1 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 Operating Income (Billions of yen) 18.9 18.2 9.1 14.1 6.8 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 A center wing box (Handa Plant) 09 SUBARU CORPORATIONANNUAL REPORT 2017Global Network SUBARU Main Business Sites Main Overseas Business Sites 4 2 1 3 5 6 1 12 11 10 9 7 8 1 8 North American SUBARU Inc. 7 SUBARU of America, Inc. 2 SUBARU Italia S.p.A. 3 N.V. SUBARU Benelux 9 10 4 SUBARU Vehicle Distribution B.V. Main production models: Legacy, Outback, Impreza 5 SUBARU of China Ltd. 11 SUBARU Canada, Inc. 6 SUBARU Technology Beijing Co. Ltd. 12 SUBARU Asia PTE. LTD. Main Domestic Business Sites 1 1 Gunma Manufacturing Division 4 2 2 3 Main production models: Levorg, Impreza, SUBARU XV, WRX, SUBARU BRZ Main production models: Legacy, Outback, Impreza, SUBARU XV, Forester, Exiga Main production items: automobile engines and transmissions 10 Aerospace Company 4 5 6 1 3 5 6 SUBARU Europe N.V./S.A.Head OfﬁceMain PlantUtsunomiya PlantHanda PlantHanda West PlantYajima PlantOizumi PlantTokyo OfﬁceSUBARU Research & Development, Inc.SUBARU of Indiana Automotive, Inc.Gunma Manufacturing DivisionSUBARU CORPORATIONANNUAL REPORT 2017History History of the SUBARU Group SUBARU, which can trace some of its roots to Aircraft Research Laboratory, has continuously nurtured highly creative technologies and increased corporate value by pursuing business alliances to respond to major changes in the times. Here we outline the history of the SUBARU Group to date. 1917 Establishment of Aircraft Research Laboratory 1931 Establishment of Nakajima Aircraft Co., Ltd. 1945 Change of company name from Nakajima Aircraft to Fuji Sangyo 1946 Production of the first Rabbit Scooter 1953 Establishment of Fuji Heavy Industries Ltd. Start of aircraft production and automobile development 1960 Opening of the Gunma Main Plant 1968 1968 Signing of a business alliance agreement with Nissan Motor Co., Ltd. Start of exports of Robin engines for snowmobiles to Polaris (USA) 1969 Start of operation of the Yajima Plant 1972 Release of the Leone 4WD Estate Van 1978 Conclusion of a 767 business agreement with Boeing 1983 Start of full-scale operation of the Oizumi Plant 1987 1987 Release of a Justy model equipped with the world's first electro-continuously variable transmission (ECVT) Establishment of SUBARU-Isuzu Automotive, Inc. (SIA) in the U.S. in a joint venture with Isuzu Motors Ltd. 1960 Listing of shares on the Tokyo Stock Exchange 1989 Establishment of SUBARU Canada, Inc. (SCI) 1966 Signing of a business alliance agreement with Isuzu Motors Ltd. 1968 Establishment of SUBARU of America (SOA) 1989 Completion of SUBARU Research & Testing Center (SKC) 1990 SUBARU of America (SOA) made a wholly owned subsidiary 1968 Dissolution of the business alliance with Isuzu Motors Ltd. 1991 Participation in the Boeing 777 program SUBARU Models through the Years 1966 1972 1984 SUBARU 1000 four-door sedan released Rex released Justy released 1958 1969 1977 1985 SUBARU 360 released R-2 released Brat released Alcyone released 1961 1971 1983 1989 SUBARU Sambar truck released Leone coupe released Domingo released Legacy series released 11 SUBARU CORPORATIONANNUAL REPORT 2017Origin of the SUBARU Name and Logo “SUBARU” is Japanese for the Pleiades star cluster in the constellation Taurus. These stars are also known as “six-star group.” The name reflects the fact that Fuji Heavy Industries was formed from capital contributions from five companies that sprang from Nakajima Aircraft. 1993 Start of operation of the Handa Plant 1998 1999 SIA is first automobile assembly plant in the U.S. to obtain ISO 14001 certification Capital and business alliance with General Motors Corporation (GM) (USA) 1999 Business alliance with Suzuki Motor Corporation 2000 2001 2001 2002 Dissolution of the business alliance with Nissan Motor Co., Ltd. Zero emissions achieved at the automobile manufacturing division (Gunma Manufacturing Division) Zero emissions achieved at the Utsunomiya Manufacturing Division, Utsunomiya Plant, and Saitama Plant Dissolution of the SIA joint venture with Isuzu and formal signing of a contract production agreement 2003 Legacy wins the Car of the Year Japan award 2003 2003 2005 Receipt of Boeing Supplier of the Year award (Major Structures category) SUBARU of Indiana Automotive, Inc. (SIA) made a wholly owned subsidiary Participation in the Boeing 787 program Delivery of main wings for next-generation transport aircraft and next-generation fixed-wing patrol aircraft 2005 Dissolution of the alliance with GM, agreement to enter into a business alliance with Toyota Motor Corporation 2007 Start of production of Toyota cars (Camry) at SIA 2010 2012 2012 2012 2012 2014 2015 Development of an EyeSight advanced driver assist system with greatly expanded range of driver assistance Receipt of Boeing Supplier of the Year award (Pathfinder category) Start of knockdown production of the SUBARU XV in Malaysia SIA becomes the first automobile production plant in the U.S. to obtain ISO 50001 certification Termination of production of mini-vehicles and shift to marketing on an OEM basis Signing of an agreement to participate in a project to develop and mass produce the Boeing 777X Cumulative production of 15 million horizontally opposed engines 2015 Formulation of the Corporate Governance Guidelines 2016 Cumulative production of 15 million AWD vehicles 2016 Termination of contract production of the Toyota Camry at SIA 1992 1998 2008 2014 Vivio released Pleo released Exiga released Levorg released 1992 2003 2012 2014 Impreza series released Outback released SUBARU BRZ released WRX released 1997 2005 2012 Forester released B9 Tribeca released SUBARU XV released 12 SUBARU CORPORATIONANNUAL REPORT 2017Financial and Non-Financial Highlights Financial Highlights SUBARU CORPORATION and its consolidated subsidiaries Net Sales (Billions of yen) 3,232.3 3,326.0 2.9% 2,877.9 2,408.1 1,913.0 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 Operating Income (Billions of yen) Operating Margin (%) 423.0 14.7 326.5 13.6 565.6 17.5 27.4% 410.8 5.1pt 12.4 ’14/3 100 ’15/3 108 ’16/3 121 ’17/3 108 Exchange Rate (Yen to the US dollar) 120.4 6.3 ’13/3 82 Capital Expenditures (Billions of yen) R&D Expenses (Billions of yen) Depreciation Expenses (Billions of yen) 158.5 135.7 16.8% 110.7 114.2 102.4 11.5% 83.5 70.2 68.5 55.9 54.9 64.8 65.0 77.0 18.5% 60.1 49.1 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 Non-Financial Highlights CO2 Emissions (Tons of CO2) n Overseas Group companies n Domestic Group companies n SUBARU 397,580 406,635 428,097 Waste Generation (Tons) n Overseas Group companies n Domestic Group companies n SUBARU 491,498 500,648 162,893 166,856 170,589 148,154 133,830 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 * Includes scrap metal sold 13 SUBARU CORPORATIONANNUAL REPORT 2017ROE (%) ROA (%) Interest-Bearing Debt (Billions of yen) D/E Ratio (Times) 307.2 269.7 0.52 0.35 211.2 12.8% 170.0 148.3 0.21 0.13 0.03pt 0.10 16.7pt 8.3pt ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 * ROA = Operating income / Total assets (average at the beginning and end of the term) Consolidated Unit Sales (Thousand units) 11.1% Free Cash Flow (Billions of yen) Ratio of Shareholders’ Equity to Total Assets (%) 279.1 40.5 46.5 138.8 37.7 95.3 358.6 51.8 52.8 1.0pt 74.6% 91.2 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 Volume of Water Use (Thousand m3) n Overseas Group companies n Domestic Group companies n SUBARU 4,072 4,256 4,367 4,401 4,462 Number of Employees (Persons) n Non-consolidated n Consolidated 27,509 28,545 29,774 31,151 32,599 12,717 13,034 13,883 14,234 14,708 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 *Excluding executive officers, advisors and dispatches 14 7248259119581,0658.218.820.723.615.322.930.429.336.920.2SUBARU CORPORATIONANNUAL REPORT 2017 Enhancing the SUBARU brand: “From a company making things, to a company making people smile.” Yasuyuki Yoshinaga Representative Director of the Board, President and CEO 15 Message from the CEOSUBARU CORPORATIONANNUAL REPORT 20171. The Transformation to SUBARU CORPORATION Although SUBARU’s consolidated automobile unit sales were in the 500,000 to 700,000 range until a few years ago, thanks to the loyal support of customers around the world, they passed the one million milestone for the first time in the FYE March 2017, reaching 1.065 million units. Although this is a highly gratifying achievement, SUBARU’s global market share in the automotive industry is a mere 1%. Even if we wanted to compete using the same management strategies as the major automakers, we would be no match for them due to business scale. I believe that the only path to survival for SUBARU is to practice selection and concentration of limited management resources, create added value that customers find appealing, and exhaustively pursue differentiation. We express these strategic imperatives using the phrase “Enhancing the SUBARU brand.” In “Prominence 2020,” the mid-term management vision announced in 2014, we articulated the objective of doing everything possible to promote differentiation and enhance the SUBARU brand. The recent unification of the company name and its brand name is one such initiative and a declaration of our resolve to showcase SUBARU as a brand that truly stands out and shines. To achieve this, all employees of the SUBARU Group will constantly consider what constitutes value to our customers as they provide products and services. When customers are satisfied, we know it from their smiling faces. All Group employees will work in unison to transform SUBARU from a company making things, to a company making people smile. 2. The Pursuit of “Enjoyment and Peace of Mind” What is SUBARU? In the pursuit of differentiation from competitors, we asked ourselves this question while reconsidering and discussing everything pertaining to SUBARU. The answer we finally arrived at is that SUBARU has its roots as an aircraft manufacturer. The most important thing in aircraft development is safety. The safety performance and technology standards required to guard against possible aviation accidents are extremely high, and safety is a given. This way of thinking has been handed down and imbues automobile development at SUBARU. We realized that the carrying on of the spirit and technologies of the aircraft business and the consistent pursuit of superior safety, superb driving performance, and functional packaging at all times is encoded in SUBARU’s DNA. Also, thinking that SUBARU can establish a prominent presence in the minds of customers when they are able to experience SUBARU’s quintessential “Enjoyment and Peace of Mind,” we defined “Enjoyment and Peace of Mind” as the core value SUBARU aspires to deliver to customers. We believe that peace of mind can exist only when there is trust in the SUBARU brand, not just safety, which is a functional attribute. Also, by enjoyment we mean not only the enjoyment of driving, but also the enjoyment of traveling by car and the enjoyment of a car lifestyle. Today, SUBARU receives top-class ratings in safety evaluations performed by third-party organizations around the world. In the U.S., all SUBARU models equipped with EyeSight technology received the Top Safety Pick award in the 2016 safety ratings of the Insurance Institute for Highway Safety (IIHS), a nonprofit insurance industry organization. Although in the past many people chose SUBARU cars because of our unique horizontally opposed engine and symmetrical AWD technologies, in recent years SUBARU has come to be strongly associated with safety, especially in the U.S. I think that for many customers, safety is a factor in SUBARU’s popularity. To further increase our world-class safety performance, last year we adopted the SUBARU Global Platform. By completely revamping the vehicle platform, which is the basic frame of an automobile, we have realized significant evolutions in overall performance—including safety performance—that would not have been achievable through the simple extension of existing technologies. We plan to introduce a plug-in hybrid vehicle (PHEV) in 2018 and an electric vehicle (EV) in 2021. Although the power source may change from an engine to an electric motor, we will continue to provide cars that are distinctively SUBARU through the pursuit of “Enjoyment and Peace of Mind.” 16 SUBARU CORPORATIONANNUAL REPORT 2017 Message from the CEO 3. Changes in the Business Environment SUBARU has grown rapidly during the past few years. Consolidated sales volume has increased from some 600,000 vehicles to more than 1,000,000, and consolidated net sales have risen from 1.5 trillion yen to more than 3 trillion yen. Income has increased as well. We have been able to achieve extraordinarily high operating margins thanks to a confluence of positive factors: namely, substantial growth in sales volume, mainly in the U.S. market, alleviation of the fixed cost burden, extraordinarily low sales incentives against a backdrop of supply shortages, low depreciation and amortization expenses and R&D expenses, and the benefits of a weak yen. However, changes in the market environment and the increase in company size have led to tremendous changes in the business arena. To deal with a prolonged supply shortage, we substantially increased production capacity at SIA, our production base in the U.S., from 218,000 to 394,000 units under standard operations, and the burden of depreciation and other fixed costs is increasing. Also, we will make appropriate R&D expenditures to cope with new technologies that I discuss in detail below. Although the automotive industry was previously an industry that saw little change from technological innovation, it has now entered a period of transformation. I consider the question of how to respond to a wave of technological innovations that has suddenly rolled over the industry, such as electrification, automated driving, connected car technology, and car sharing, to be a matter of urgent importance. Since our management resources are limited, unlike the major automakers, we cannot deal with all of these innovations simultaneously. We intend to address them in the following order of priority while taking advantage of alliances with other companies. Net Sales (Billions of yen) 1,913.0 1,517.1 3,232.3 3,326.0 3,420.0 2,877.9 2,408.1 ’12/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 (Planned) Operating Income (Billions of yen)/Operating Margin (%) n Operating income l Operating margin 565.6 423.0 14.7 326.5 13.6 410.8 410.0 17.5 12.4 12.0 6.3 120.4 2.9 44.0 ’12/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 (Planned) 17 SUBARU CORPORATIONANNUAL REPORT 2017 1) Electrification Since environmental regulations in various countries will be further tightened, we will move forward with automobile electrification as our highest priority. In the U.S., a key market, the scope of the Zero Emission Vehicle (ZEV) Regulations will be expanded to include medium-size automakers, including SUBARU, in 2018. We plan to launch a plug-in hybrid electric vehicle (PHEV) to coincide with this regulatory change, and are developing the PHEV with technical assistance obtained under an alliance. We also plan to launch an electric vehicle (EV) in 2021. In this new era of electrification, we will develop an EV that provides the distinctive “Enjoyment and Peace of Mind” that people expect from SUBARU. 2) Automated driving (See page 32) SUBARU’s approach to automated driving is to provide advanced driver assist technology that reduces the burden of driving, not driverless vehicles. We will press ahead with further evolution of EyeSight, our highly popular driver assist system, with the aim of achieving the ultimate in safety: the complete elimination of automobile accidents. 3) Connected car technology To accelerate our initiatives in the field of connected car technology and meet customer needs, which will only continue to grow, we established the position of Chief Information Officer (CIO) and the IT Strategy Division in April 2017 and will accelerate planning and development. 4) Car Sharing In light of factors such as SUBARU’s sales volume, company size, and the preferences of our customers, we consider this a social innovation that will have little impact on our business. Accordingly, we will prioritize the initiatives described in 1) to 3) above. Consolidated Unit Sales (Thousand units) n North America n Japan n China n Other 640 724 111 48 172 309 825 121 45 182 478 121 50 163 390 911 958 124 54 163 570 1,065 1,106 141 44 159 149 42 172 721 742 1,200 + 200 50 150 800 138 44 145 630 ’12/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 (Planned) ’21/3 (Forecast) Production Capacity Expansion Plan (Thousand units) n Yajima plant (Japan) n Main plant (Japan) n SIA (USA) 836 854 200 207 429 218 207 429 1,038 394 213 431 Production capacity at full operation: 1,276 thousand units 1,132 436 213 483 2015/9 2016/Spring 2016/12 FY2019/3 (Planned) *Production capacity under standard operations 18 SUBARU CORPORATIONANNUAL REPORT 2017Message from the CEO 4. Sales Trends in the U.S. Although the U.S. auto sales market is said to have peaked, so long as total demand of about 17 million units does not markedly deteriorate, I think that SUBARU’s current strong sales can be maintained into the future. We launched the all-new Impreza at the end of 2016 following a full model change. We plan to launch an all-new Crosstrek (called the SUBARU XV outside North America) in the summer of 2017, introduce the Ascent, a 3-row SUV for North America, in 2018, and implement full model changes of existing models. The Ascent, a vehicle that will complement the current model lineup, is being developed at the strong request of our U.S. dealers. By continuously introducing products that appeal to customers in this way, we will maintain sales momentum. Automakers are taking measures in response to a slowdown in the U.S. market, such as increasing incentives, and sales competition has intensified. SUBARU forecasts, for accounting purposes, incentives of U.S. $1,850 per vehicle, up $400 year on year, for FYE March 2018. The reasons for the projected increase are strengthening of a portion of the sales financing program, a higher rate of program use, and cost increases accompanying a policy interest rate increase in the U.S. Although an increase in incentives puts downward pressure on profits, we will carefully watch the industry trend in order to maintain relative competitiveness. We believe that opportunity awaits in the sunbelt (the southern U.S.). A breakdown of SUBARU’s 3.5% total share of the U.S. market in calendar year 2016 indicates that our share was 5.0% in the snowbelt and 1.8% in the sunbelt. For this reason, we see room for sales growth in the southern part of the country. To achieve growth, we will not increase the number of dealers, but rather increase unit sales per dealer through service improvement and model lineup expansion (introduction of the Ascent). U.S. Retail Unit Sales (Thousand units) (CY) n Legacy n Forester n Tribeca n Impreza n WRX n SUBARU BRZ U.S. Market Share (%) (CY) 670 514 8 1 25 160 129 191 583 5 34 175 156 213 615 4 33 179 151 248 336 4 2 76 89 165 425 9 2 124 131 160 2012 2013 2014 2015 2016 2017 (Planned) Number of Dealers in the U.S. (Dealers) Unit Sales per Dealer (Units) (CY) n Snowbelt n Sunbelt l Nationwide 4.0 3.5 2.8 1.2 2.4 0.9 4.9 5.0 4.6 n Unit sales per dealer l Number of dealers 932 976 1,064 3.2 1.4 3.4 3.5 1.6 1.8 827 621 621 625 630 630 621 684 542 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2017 (Planned) 19 SUBARU CORPORATIONANNUAL REPORT 2017 5. Sales Trends Outside the U.S. Although we planned for sales growth in China and Russia in “Prominence 2020,” the mid-term management vision, we are currently facing difficulties in these markets. In China, oversupply in the market continues, and sales competition is intensifying. Since SUBARU doesn’t have a local production base, we’re not forced to sell cars to keep a plant operating. We intend to distance ourselves from price competition and carefully maintain our sales network by engaging in meticulous sales activities targeting customers who appreciate SUBARU’s added value. Russia is a market where people have a natural affinity for SUBARU’s product characteristics, and we expect sales growth there in the future. However, since the current economic environment is unfavorable, including a weak ruble, we intend to wait for a recovery. In Southeast Asia, in addition to knockdown production (local assembly) of the SUBARU XV and Forrester in Malaysia, we plan to start knockdown production in Thailand beginning in 2019. Although this look at individual markets shows that our sales plan for China and Russia is behind schedule, we have not changed the FY 2020 consolidated unit sales forecast of upward of 1.2 million units announced in “Prominence 2020,” the mid-term management vision. Although, of course, it is important to achieve our sales and profit and loss plans, we will carefully adhere to our current business model and intensively focus on enhancing the SUBARU brand, placing the highest priority on paving the way to future success. Product Strategy CY 2016 2017 2018 FMC 2019 FMC 2020 FMC All-new Impreza All-new SUBARU XV Model plans The SUBARU Global Platform Sequentially introduced in all full model change (FMC) vehicles starting with the all-new Impreza in late 2016 Environmental initiatives 3-row SUV for North America* Expanded rollout of direct injection units 2019 Newly designed downsized turbo engine Plug-in hybrids Compliance with regulations in each region by combining significant efficiency gains for internal combustion engines with electrification 2021 Electric vehicles *The photo shows the SUBARU Ascent SUV Concept 20 SUBARU CORPORATIONANNUAL REPORT 2017 Message from the CEO 6. Strengthening Corporate Governance Effective April 1, 2017, SUBARU established the Corporate Administration Division to strengthen the business management system and business supervision function and established the positions of Chief Quality Officer (CQO), Chief Technology Officer (CTO), and Chief Information Officer (CIO). The CQO position was established for the purpose of promptly resolving quality-related issues and further increasing product quality and customer-service quality. The purpose of the CTO position is to respond to new technologies in the automotive industry, which is now in a period of transformation, and the purpose of the CIO position is to accelerate business process innovation and improvement as well as digital-related planning and development in the automotive business utilizing IT. Following approval at the Ordinary General Meeting of Shareholders of June 23, 2017, the Company changed the Board of Directors structure and revised the compensation structure for directors. The purpose of the change in the Board structure was to strengthen the oversight function and increase the speed of business execution by separating corporate management and business execution. Following a review of executive remuneration, we introduced a share-based compensation plan with transfer restrictions. The purpose of the revision of the compensation structure for directors was to provide an incentive to eligible directors to achieve sustained improvement in corporate value and to promote sharing of value between eligible directors and the shareholders. 7. Strengthening of CSR Initiatives At SUBARU, we believe that actively working toward and contributing to the sustainability of society in the pursuit of sustained growth is our corporate social responsibility (CSR). To more clearly express the aspirations of the SUBARU Group and our efforts to contribute to the environment and communities, on April 1, 2017, we established the CSR & Environment Department and revised the SUBARU Environmental Policies. In the Environmental Policies, we define the business fields of SUBARU, a company whose core businesses are automobiles and aerospace, as “The earth, the sky and nature.” We consider protecting the environment of the Earth a matter of the utmost importance for ensuring a sustainable future for society and SUBARU and strive to protect the environment in all business activities. As president, I intend to further promote SUBARU’s CSR activities and work to protect the global environment and contribute to local communities. 21 SUBARU CORPORATIONANNUAL REPORT 2017 Messages from the CQO, CTO, and CIO CQO (Chief Quality Officer) Jun Kondo Director of the Board Chairman For SUBARU, a company that provides “Enjoyment and Peace of Mind” to customers, quality is intrinsic to brand value. I think that boosting not only product quality, but also customer service quality and the quality of corporate activities themselves is important for making SUBARU a brand that delivers genuine value to customers. First of all, we will review every aspect of our manufacturing processes, right down to the current state of quality assurance for each individual part. In new car development, we will reinforce measures to prevent reoccurrence of past defects and strengthen the development step verification process. In this way, we will work to further improve product quality and, in particular, eliminate defects that lead to recalls and service campaigns. We will also strive to increase customer satisfaction by undertaking call center expansion, smooth provision of replacement parts, and efficiency improvement in service operations at sales agents/dealers. We will aim for world-class quality, and all Group employees will improve the business structure until passion for quality becomes a hallmark of SUBARU’s DNA. CTO (Chief Technology Officer) Takeshi Tachimori Representative Director of the Board Corporate Executive Vice President After spending more than twenty years in engineering divisions, I have worked in the Product & Portfolio Planning Division for eight years and a Sales and Marketing Division for six years. I want to be constantly attuned to the mood of customers and provide greater joy and satisfaction through new ideas and advanced technologies. In recent years, the automotive industry has been required to respond to increasingly serious environmental problems and traffic issues, and countermeasures have been devised through new technologies. It is necessary to actively adopt these solutions and provide them to customers in practical ways, and SUBARU will make appropriate investments and resource allocations to achieve this. The only path to survival for SUBARU is to continuously strengthen the brand while never betraying the trust of customers. We will constantly reexamine and continuously strengthen the brand position so that not only the products and services we provide, but also the SUBARU philosophy, resonate with customers. CIO (Chief Information Officer) Masaki Okawara Corporate Executive Vice President Information (and IT) connects division to division and person to person, and I want to support management quality improvement from an IT perspective by activating those connections. To that end, all Group employees must consider what we have been able to accomplish and unable to accomplish in the past and what we should do in the future, and my task is to lead the way. First of all, we will build an IT-conscious culture and prepare an environment where all employees can work dynamically in a safe and secure work environment with robust IT infrastructure. Then, we will develop an IT infrastructure built on a foundation of information security enhancement, promote true IT utilization based on the total optimization concept and the streamlining of objects and information, and explore IoT, AI, and connected technologies in preparation for business transformation and new value creation. In this way, I intend to play a part in enhancing value arising from deeper connections with customers, creating new value, and enhancing the SUBARU brand. 22 SUBARU CORPORATIONANNUAL REPORT 2017Message from the CFO We will move ahead with selection and concentration, differentiation, and a value-added strategy while maintaining our industry-leading profit margin and aiming for sustained growth. Toshiaki Okada Director of the Board, Corporate Executive Vice President and CFO Aspirations on Becoming CFO I became Chief Financial Officer (CFO) of SUBARU on April 1, 2017. I consider it my role as CFO to diligently apply myself to financial and business management to ensure that SUBARU, which is by no means a large automaker, is able to achieve sustained growth and high profits even in an adverse business environment. Although in my former post in the Corporate Planning Department I was involved in the formulation of “Prominence 2020,” the mid-term management vision, since becoming CFO I have been able to more directly keep my finger on the pulse of investor sentiment. I will work to enhance SUBARU’s corporate value by actively arranging opportunities for dialogue with our shareholders and other stakeholders, correctly communicating the situation at SUBARU, and listening to their thoughts and opinions. 23 SUBARU CORPORATIONANNUAL REPORT 2017Business Performance in FYE March 2017 Consolidated unit sales in FYE March 2017 increased by 107,000 units to 1,065,000 units as a result of the contribution from production capacity expansion at SUBARU of Indiana Automotive, Inc. (SIA), our production base in the U.S., and continued strong sales, mainly in North America. Consolidated net sales increased by 93.7 billion yen year on year to 3,326.0 billion yen. Consolidated operating income decreased by 154.8 billion yen to 410.8 billion yen, ordinary income was 394.3 billion yen, and net income attributable to owners of parent was 282.4 billion yen as a result of increases in SG&A expenses, mainly quality-related expenses stemming from airbag inflators, and R&D expenses and the impact of exchange rate differences, despite an increase in unit sales and progress with cost reduction. Outlook for FYE March 2018 and Future Business Direction We forecast continued strong sales in North America and other markets and have planned for consolidated unit sales of 1.106 million units in FYE March 2018. We forecast consolidated net sales of 3,420.0 billion yen, operating income of 410.0 billion yen, ordinary income of 410.0 billion yen, and net income attributable to owners of parent of 285.0 billion yen, to result from increases in SG&A expenses and R&D expenses coupled with lower cost reductions due to the impact of raw materials prices, despite the projected impact of an increase in unit sales and a weak yen. In the short term, we forecast a slowdown in the U.S. market, a key market for SUBARU, and accompanying intensification of competition. In these circumstances, although SUBARU sales remain strong, the all-new Impreza, which was introduced at the end of last year, will be the main sales driver in FYE March 2018. Since the Impreza is a comparatively low-profit model in the SUBARU lineup, it will be difficult to link sales volume growth to profit growth in FYE March 2018. Also, although SUBARU is maintaining a substantially lower level of sales incentives than the industry as whole, we plan no major change to the sales incentive program itself, such as leases or loans. However, there have been increases in market interest rates and the rate of program use, and we forecast a $400 increase year on year in incentives to $1,850. In addition to this model cycle impact and increase in selling expenses, we forecast sharply higher raw material prices and an increase in R&D expenses and are planning for profits to be nearly flat. FYE March 2017: Analysis of Increase and Decrease in Operating Income Changes (Consolidated) (Billions of yen) FYE March 2018: Analysis of Increase and Decrease in Operating Income Changes (Consolidated) (Billions of yen) Improvement of sales volume & mixture and others 137.7 Cost reduction 32.2 565.6 410.8 410.8 -169.1 SG&A -143.8 expenses and others Loss on currency exchange -11.8 R&D expenses Improvement of sales volume & mixture and others 32.8 Gain on currency exchange 21.1 410.0 -27.8 SG&A expenses and others -19.8 R&D expenses -7.1 Cost reduction ’16/3 Operating income -154.8 billion yen ’17/3 Operating income ’17/3 Operating income -0.8 billion yen ’18/3 Operating income (Planned) 24 SUBARU CORPORATIONANNUAL REPORT 2017 Message from the CFO During the past few years, sales volume has grown substantially, mainly in North America, and an extremely high capacity utilization rate has been maintained at our production facilities, which have been kept lean. Moreover, a confluence of conditions favorable to the Company, namely low inventory levels at a time of supply shortages, low sales incentives, and favorable exchange rates, has led to rapid profit growth. In these circumstances, we substantially expanded production capacity at SIA last year to respond to a supply shortage that was becoming excessive, and the burden of depreciation and other fixed costs is increasing. Also, it is necessary to review and increase R&D expenses to respond to increasingly strict environmental regulations and advanced safety technologies, a subject of growing interest. In this way, the changes in the fixed cost structure are lagging slightly behind volume growth. Because of these developments, although there is also a cycle of profitability associated with model changes, we must continue our initiatives to develop new technology while addressing the issue of maintaining a high profit margin, given a higher level of fixed costs. Our strategic direction for achieving this is unchanged from “Not big in size, but a high-quality company with distinctive strengths,” our vision for 2020 set out in “Prominence 2020,” the mid-term management vision. We will move ahead with selection and concentration and differentiation and create added value in quality that customers will recognize and appreciate. Furthermore, we will promptly identify changes in the external environment and act to ensure that SUBARU can withstand an increasingly adverse business environment without departing from our current business model based on this way of thinking. Financial and Capital Strategies The Company engages in day-to-day business management with return on capital, financial soundness, and shareholder returns as the three key indicators of capital policy. Specifically, the Company has declared a policy of providing appropriate shareholder returns while maintaining a high degree of balance between return on equity (ROE) and the equity ratio over the medium and long term, and skillfully balancing these objectives is the cornerstone of our capital policy. SUBARU has a history of extraordinarily high profits compared to the industry average, and in FYE Capital Expenditures (Billions of yen) Depreciation and Amortization Expenses (Billions of yen) n Capital expenditures n Depreciation and amortization expenses R&D Expenses (Billions of yen) 158.5 150.0 134.0 135.7 110.7 70.2 68.5 55.9 54.9 64.8 65.0 92.0 77.0 60.1 49.1 114.2 102.4 83.5 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 (Planned) 25 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 (Planned) SUBARU CORPORATIONANNUAL REPORT 2017 March 2017 ROE was an extremely high 20.2%. However, this figure is partly attributable to positive conditions such as the time difference between profit growth and cost increases, and we expect it to decline somewhat from the current level. We see strategic capital costs at approximately 8% and would like to maintain ROE of about twice that level for as long as possible. SUBARU’s management approach is to concentrate on developed countries, mainly the U.S., with a small model lineup. We recognize that this approach entails aggressively taking on more risk than competitors in terms of being subject to the impact of exchange rates and business fluctuations in the market. For this reason, we will continue to pay attention to increasing shareholders’ equity and building a stable financial base so that SUBARU can withstand any sudden changes in the business environment. At the same time, we intend to boost returns to our shareholders. The Company makes dividends the basis of shareholder returns and has a policy of paying continuous, performance-linked dividends. The annual dividend payment for FYE March 2017 was 144 yen per share (half-year dividend of 72 yen and year-end dividend of 72 yen), the same as for FYE March 2016. We plan to maintain a dividend of 144 yen per share (half-year dividend of 72 yen and year-end dividend of 72 yen) again in FYE March 2018. For FYE March 2018 and beyond, we have raised the consolidated dividend payout ratio range from the previous 20–40% to 30– 50%. The purpose of setting a dividend payout ratio range is to absorb fluctuations in business performance by adjusting the payout ratio and keep dividends as stable as possible. Of course, this does not mean that we will fix the amount of dividend per share. Rather, we will consider the amount of dividend payments while comprehensively taking into consideration business performance in each fiscal year, investment plans, and the business environment. In addition, we consider the buyback and retirement of shares an effective means of returning profit to shareholders and will consider buybacks as the situation warrants. SUBARU will accelerate two initiatives with the aim of achieving “Not big in size, but a high-quality company with distinctive strengths,” our vision for 2020 set out in “Prominence 2020,” the mid-term management vision: namely, enhancement of the SUBARU brand aimed at further promoting value-added management and building a strong business structure that increases resilience to changes in the business environment. We intend to further enhance corporate value and meet the expectations of our shareholders and other stakeholders by achieving sustained growth while maintaining our industry-leading profit margin. I request your further understanding and support in the coming years. Free Cash Flow (Billions of yen) Ratio of Shareholders’ Equity to Total Assets (%) n Free cash flow l Ratio of shareholders’ equity to total assets Dividend per Share (Yen) Dividend Payout Ratio (%) n Dividend per share l Dividend payout ratio 358.6 144 144 279.1 52.8 51.8 39.4 40.5 46.5 138.8 37.7 95.3 68 25.7 20.3 20.0 53 91.2 9.8 15 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 26 SUBARU CORPORATIONANNUAL REPORT 2017 Special Feature: Raising the Curtain on the Next Generation of SUBARU Cars Debut of the all-new Impreza! 27 The all-new Impreza is a strategically important vehicle positioned in “Prominence 2020,” the mid-term management vision as the first model in SUBARU’s next-generation product lineup. As the first model to use the new platform and the first to feature a new-concept design, the Impreza is the result of successfully overcoming various challenges and further evolution of the “Enjoyment and Peace of Mind” SUBARU value proposition. With the release of the all-new Impreza, SUBARU has raised the curtain on the next generation of SUBARU cars with a model that promises to set a new standard for excellence.SUBARU CORPORATIONANNUAL REPORT 2017All-around safety performance in pursuit of the world’s highest level of safety Primary Safety Basic design features for avoiding accidents • Wide field of vision, comfortable driving environment, etc. Active Safety • SUBARU Global Platform for excellent handling performance • Active Torque Vectoring for enhanced hazard avoidance performance* Preventive Safety • Newly evolved EyeSight (ver. 3) featured as standard equipment on all grades* • Equipped with Steering Responsive Headlights and High Beam Assist* Passive Safety • SUBARU Global Platform for outstanding shock absorption performance* • Pedestrian protection airbag featured as standard equipment* *Specifications may vary depending on the market. Quality feel that goes beyond its class Outstanding dynamic quality feel • The first model to use the SUBARU Global Platform, achieves both high performance and comfort through analysis techniques that strive to quantify emotions Static quality feel that goes beyond its class • A Dynamic x Solid design that embodies SUBARU’s “Enjoyment and Peace of Mind” value proposition fused with greatly enhanced interior and exterior finish Winner of the 2016–2017 Car of the Year Japan Award The Impreza was recognized for delivering higher quality driving performance through innovations such as the newly developed SUBARU Global Platform, for achieving the world’s highest level of safety with a wide array of standard safety equipment, including the first pedestrian protection airbag on a Japanese car and the EyeSight driver assist system, and for its affordable price. 28 SUBARU CORPORATIONANNUAL REPORT 2017Special Feature: Raising the Curtain on the Next Generation of SUBARU Cars The Development Chief Discusses the Appeal of the All-New Impreza Our objective was to deliver the ultimate in “Enjoyment and Peace of Mind” to all drivers and passengers. Senior General Manager Product & Portfolio Planning Division Kazuhiro Abe Innovative evolution of the “Enjoyment and Peace of Mind” value proposition to meet customer expectations to search for the answer to the question, “What sort of car should we create to fulfill that desire?” My answer as development chief was the development concept “Deliver the ultimate in “Enjoyment and Peace of Mind” to all drivers and From the start of the new Impreza’s development until today, passengers.” We would not merely make incremental the project team has been filled with a strong desire to more improvements for “Enjoyment and Peace of Mind,” SUBARU’s fully meet the expectations of customers and enable as many value proposition to customers, but rather undertake innovative people as possible to experience the day-to-day enjoyment of evolution. We would create a product with value that everyone owning and driving the Impreza. Our first development task was could clearly sense and recognize as appealing. Taking on the challenge of going beyond a full model change to build a foundation for a new generation of SUBARU cars For some fifteen years since the release of the fourth- generation Legacy, for which the current platform was developed, SUBARU engineers have accumulated a variety of technologies and expertise that contribute to improvement in Innovative evolution in safety performance and enjoyable driving safety performance and enjoyable driving performance. Our performance, which are overall strengths of SUBARU, were task in developing the new Impreza was to infuse these absolute requirements for making the development concept a advances into a newly developed platform completely and all at reality. This meant going beyond a complete redesign and full once. We also aimed to establish a new foundation for model change of the Impreza to conduct a complete review continuing to provide, on a global scale, the highest level of from the ground up, starting with the vehicle platform. In other “Enjoyment and Peace of Mind.” With this in mind, we named words, we would take on the daunting challenge of developing the newly developed platform the SUBARU Global Platform. a next-generation SUBARU platform. We thought that we could Development of this platform has not only resulted in create a platform for the next generation of SUBARU cars only substantially enhancing the dynamic quality feel and all-around if we accomplished significant evolution in two areas: “All- safety performance of the SUBARU vehicle lineup overall, it has around safety performance in pursuit of the world’s highest level also brought greater efficiency in development and flexibility in of safety” and “Quality feel that goes beyond its class.” The production processes as a design that takes into consideration entire project team approached development with an enormous not only gasoline engine cars, but also hybrids, plug-in hybrids, sense of responsibility and pressure, knowing that if we did not and electric vehicles. succeed with the first model of a new generation of SUBARU cars, we could not possibly succeed with subsequent models. 29 SUBARU CORPORATIONANNUAL REPORT 2017 All-around safety performance in pursuit of the world’s highest level of safety Safety performance is the most important consideration for achieving the highest level of “Enjoyment and Peace of Mind.” In keeping with SUBARU’s safety concept, we uncompromisingly increased safety performance to unparalleled levels in the areas of primary safety, active safety, preventive safety, and passive safety. In the area of primary safety, we further enhanced driver and passenger sense of security by realizing excellent visibility with few blind spots and a driving environment that reduces driver fatigue. Our efforts in the area of active safety led to top- of-class hazard avoidance performance resulting from outstanding handling performance made possible by the SUBARU Global Platform. In the area of preventive safety, we provide a sense of security supported by the top rating in preventive safety assessment earned through safety measures such as offering the EyeSight (ver. 3) driver assist system as standard equipment on all grades.*1 Achievements in the area of passive safety include the excellent shock absorption Collision tests of the first vehicle in Japan equipped with a pedestrian protec- tion airbag performance provided by the SUBARU Global Platform and the received the Grand Prix Award in collision safety performance first use of pedestrian protection airbags in a Japanese car*1, assessment. In the U.S. market, the Impreza received the 2017 which mitigate pedestrian injuries. Top Safety Pick+ award, the Insurance Institute for Highway The all-new Impreza, which has further enhanced safety for Safety’s highest award. I think these achievements are the driver, passengers, and pedestrians alike in this way, received result of the project team’s intense efforts to realize all-around the highest score ever in the FY 2016 new car assessment safety performance in pursuit of the world’s highest level of crash safety evaluation tests conducted by the Ministry of Land, safety. Infrastructure, Transport and Tourism (MLIT) and the National Agency for Automotive Safety and Victim’s Aid (NASVA) and *1 Specifications may vary depending on the market. Receipt of the 2016–2017 Japan New Car Assessment Program (JNCAP) Grand Prix Award Receipt of the 2017 Top Safety Pick+ Award, the Highest Award of the Insurance Institute for Highway Safety The Grand Prix is awarded to models receiving the JNCAP Five Star Award for collision safety performance that have exceeded a previous record-high score for collision safety performance. The Impreza received the highest scores ever in evaluation of passenger protection performance, pedestrian protection performance, and seatbelt reminder system. The Impreza was the only vehicle in the small car class to achieve top ratings for all Insurance Institute for Highway Safety (IIHS)*2 safety evaluation criteria. It received ratings of Good in all required crashworthiness tests, a rating of Superior in the front crash prevention test, a rating of Good in the newly introduced headlight performance test, and a rating of Good+ in the child seat anchors (latch) performance test. *2 The IIHS is a nonprofit organization supported by auto insurers in the U.S. 30 SUBARU CORPORATIONANNUAL REPORT 2017 Special Feature: Raising the Curtain on the Next Generation of SUBARU Cars Moving people’s hearts with a quality feel that goes beyond its class of Mind” value proposition. It infuses a high-quality look and feel that goes beyond its class. In this way, we achieved an interior and exterior that is attractive and deeply satisfying. The dynamic A second consideration in developing the all-new Impreza was quality feel and static quality feel of the new Impreza, as to create a quality feel that goes beyond its class, as defined by elements of a quality feel that goes beyond its class, realize size and other attributes, and elevate the sense of quality ownership appeal equal in importance to safety performance. people feel when viewing, touching, driving, and riding in the In addition to the new Impreza’s comprehensive pursuit of car to an emotional experience. With regard to dynamic quality the world’s highest level of safety and a quality feel that goes feel, the sensation of driving and riding in the car, we pursued beyond its class, other key product features are practicality, to driving performance that all drivers and passengers find safe further enhance the day-to-day ownership and driving experience, and secure, enjoyable, and comfortable. We elevated the the latest infotainment system, a high-grade interior, a comfortable dynamic quality feel imparted by the SUBARU Global Platform, passenger cabin, and fuel economy that owners can actually which has increased body and suspension rigidity by as much appreciate in everyday use. as 100% compared to previous models, to the level of The dream of every member of the development project excitement. With regard to static quality feel, the sensation of team is that the new Impreza becomes like a life partner to our viewing and touching a car, the Impreza is the first production customers as they experience a happier, more rewarding way model to adopt SUBARU’s Dynamic x Solid design philosophy, of life. which concretely expresses SUBARU’s “Enjoyment and Peace SUBARU Technologies for the Future The SUBARU Global Platform—Developed with Future Safety in Mind World-class hazard avoidance performance achieved by dramatically increasing vehicle driving stability. Leading the way in further evolution of collision safety performance with a 40% increase in collision energy absorption efficiency. One major objective in completely renewing the vehicle platform, The new platform has dramatically increased body strength and which is the basic foundation of a car, was to further evolve the has boosted collision energy absorption efficiency by about world-class level of safety performance that is one of the key 40% compared with current SUBARU models through means features of the SUBARU brand. With the new platform, we such as increasing the rigidity of the body and chassis, undertook evolution of the undercarriage through significant optimizing the frame construction, multiplying load transmission increases in body and chassis rigidity, further lowering of the routes, and expanding the use of high-strength materials. center of gravity, and a suspension design review. Internal In addition, looking ahead ten years, we are engaging in testing shows that as a result, we have achieved hazard design that can be expected to further improve performance by avoidance performance (the speed at which a hazard can be means such as adopting even stronger materials to enable safely avoided by swerving in an emergency) of 92.5 km/h, SUBARU vehicles to more effectively respond to more severe compared to 84.5 km/h for current models, a level of collisions expected in the future. performance that rivals high-end sports cars. 31 SUBARU CORPORATIONANNUAL REPORT 2017 SUBARU’s Concept of Environmental Technologies SUBARU will comply with local environmental regulations by combining significant efficiency gains for internal combustion engines with electrification. size automakers, including SUBARU, in 2018. We plan to introduce plug-in hybrids (PHEV) in 2018 to coincide with this regulatory change and also plan to introduce electric vehicles (EV) in 2021. Our basic policy is not to introduce dedicated PHEV and EV To improve gas mileage and reduce CO2 emissions, SUBARU is models, but rather to introduce PHEV and EV powertrains to making further improvements to the current direct-injection existing SUBARU models to take advantage of their individuality engine and engaging in development in preparation for and driving characteristics. In this way, we will deliver SUBARU’s introducing a newly designed turbo engine. quintessential “Enjoyment and Peace of Mind” even in the era of In the key U.S. market, the scope of the Zero Emission eco-friendly cars. Vehicle (ZEV) Regulations will be expanded to include medium- SUBARU’s Concept of Automated Driving Technology SUBARU aims not to replace human drivers with cars that drive themselves, but to pursue the complete elimination of traffic accidents by further evolving the EyeSight driver assist system. by automatically controlling acceleration, braking, and steering. The combined use of information on lane markings and preceding vehicles captured using SUBARU’s proprietary stereo camera technology realizes consistent operation in a wide range of real-world settings. Furthermore, in 2020 we plan to implement advanced driving assistance by adding radar, In 2017, SUBARU will introduce a version of the EyeSight digital maps, and other features to EyeSight to expand the driving assist system equipped with the new Touring Assist scope of driving situations subject to automatic control to function. Touring Assist extends the range of speeds at which include lane changing and rounding curves. Lane Tracing Control can operate to the entire speed range At SUBARU, we will further enhance the accident avoidance (previously 60 km/h and above), adds automated steering that performance of SUBARU cars by prioritizing development of follows the preceding vehicle in the same lane, and, by driver assist functions that target such situations in which combining this new feature with Adaptive Cruise Control, accidents are likely to occur. substantially reduces the driver burden on expressways driving 2017: Addition of the Touring Assist function l Extension of the operating range of speeds of Lane Tracing Control (From a minimum of 60 km/h to any speed) l Substantial reduction in the burden of driving through automatic control of handling, acceleration, and braking over the entire vehicle speed range EyeSight Stereo cameras 2020: Further evolution l Further reduction in driver burden through expansion of the scope of driving situations subject to automatic control to include lane changes and rounding curves (Realized with minimum addition of devices) EyeSight Stereo cameras Radar Map locator Radar Digital maps GPS 32 SUBARU CORPORATIONANNUAL REPORT 2017 Corporate Governance Front row, from the left: Takeshi Tachimori, Jun Kondo, Yasuyuki Yoshinaga, Masahiro Kasai Back row, from the left: Yoshinori Komamura, Toshiaki Okada, Yoichi Kato, Shigehiro Aoyama Directors of the Board Jun Kondo Director of the Board Chairman CQO (Chief Quality Officer) Apr. 1976 Joined the Company Apr. 1999 General Manager of 2nd Production Department, Gunma Plant Yasuyuki Yoshinaga Representative Director of the Board President CEO (Chief Executive Officer) Apr. 1977 Joined the Company Oct. 1999 General Manager of Sales Planning Department, Domestic Sales Division Takeshi Tachimori Representative Director of the Board Corporate Executive Vice President CTO (Chief Technology Officer) Apr. 1977 Joined the Company Jul. 2000 General Manager of Total Vehicle Performance Integration Department, SUBARU Engineering Division Jun. 2003 Corporate Vice President, Chief General Manager of Apr. 2005 Corporate Vice President, Senior General Manager of Jun. 2006 Corporate Vice President, Senior Project 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 Jun. 2004 Corporate Senior Vice President, Chief General Manager of SUBARU Cost Planning & Management Division Jun. 2006 Corporate Senior Vice President, Chief General Manager of SUBARU Cost Planning & Management Division and Senior General Manager of SUBARU Purchasing Division Apr. 2007 Corporate Senior Vice President, Chief General Manager of Strategy Development Division and Chief General Manager of SUBARU Cost Planning & Management Division Jun. 2008 Director of the Board and Corporate Executive Vice President, Chief General Manager of Strategy Development Division Apr. 2009 Director of the Board and Corporate Executive Vice President Jun. 2011 Representative Director of the Board and Deputy President Jun. 2017 Director of the Board and Chairman (to the present) Strategy Development Division and General Manager of Corporate Planning Department Jun. 2006 Corporate Vice President, Chief General Manager of Strategy Development Division Apr. 2007 Corporate Vice President, Chief General Manager of SUBARU Japan Sales & Marketing Division and General Manager of Sales Promotion Department SUBARU Product & Portfolio Planning Division Apr. 2009 Corporate Vice President, Chief General Manager and Senior Project General Manager of SUBARU Product & Portfolio Planning Division, President, SUBARU Tecnica International Inc. Apr. 2010 Corporate Senior Vice President, Chief General Manager of SUBARU Product & Portfolio Planning Division Jun. 2007 Corporate Senior Vice President, Chief General Manager of Apr. 2011 Corporate Senior Vice President, Chairman, President & CEO of SUBARU Japan Sales & Marketing Division SUBARU of America, Inc. (SOA) Jun. 2009 Director of the Board and Corporate Executive Vice President, Chief General Manager of SUBARU Japan Sales & Marketing Division Jun. 2011 Representative Director of the Board, President and COO Jun. 2012 Representative Director of the Board, President and CEO (to the present) Jun. 2011 Corporate Senior Vice President, Chief General Manager of SUBARU Overseas Sales & Marketing Division 1, Chairman, President & CEO of SUBARU of America, Inc. (SOA) Apr. 2013 Corporate Executive Vice President, Chief General Manager of SUBARU Overseas Sales & Marketing Division 1, Chairman & CEO of SUBARU of America, Inc. (SOA) Jun. 2013 Director of the Board and Corporate Executive Vice President, Chief General Manager of SUBARU Overseas Sales & Marketing Division 1, Chairman & CEO of SUBARU of America, Inc. (SOA) Apr. 2014 Director of the Board and Corporate Executive Vice President, Chief General Manager of SUBARU Global Marketing Division Apr. 2017 Director of the Board and Corporate Executive Vice President Jun. 2017 Representative Director of the Board and Corporate Executive Vice President (to the present) 33 SUBARU CORPORATIONANNUAL REPORT 2017Masahiro Kasai Director of the Board Corporate Executive Vice President Apr. 1978 Joined the Company Apr. 2000 Staff General Manager of Production Management Department, Corporate Planning Division Jun. 2007 Corporate Vice President, President, SUBARU of Indiana Automotive, Inc. (SIA) Apr. 2009 Corporate Vice President, Chief General Manager of SUBARU Manufacturing Division and Chief General Manager of Gunma Plant Apr. 2010 Corporate Senior Vice President, Chief General Manager of SUBARU Manufacturing Division and Chief General Manager of Gunma Plant Apr. 2014 Corporate Executive Vice President, Chief General Manager of SUBARU Purchasing Division Jun. 2015 Director of the Board and Corporate Executive Vice President, Chief General Manager of SUBARU Purchasing Division Apr. 2016 Director of the Board and Corporate Executive Vice President, President of Industrial Products Company Oct. 2016 Director of the Board and Corporate Executive Vice President, Chief General Manager of Industrial Products Division (to the present) Toshiaki Okada Director of the Board Corporate Executive Vice President CFO (Chief Financial Officer) Apr. 1984 Joined the Company Oct. 2004 General Manager in charge of Sales Planning Department and Manager of 1st Planning Section, SUBARU Marketing Division Apr. 2013 Corporate Vice President, General Manager of Corporate Planning Department Apr. 2015 Corporate Senior Vice President, General Manager of Corporate Planning Department Apr. 2017 Corporate Executive Vice President Jun. 2017 Director of the Board and Corporate Executive Vice President (to the present) Yoichi Kato Director of the Board Corporate Senior Vice President Apr. 1983 Joined the Ministry of International Trade and Industry, Japanese government (present Ministry of Economy, Trade and Industry) Jul. 2010 Director-General, Chubu Bureau of Economy, Trade and Industry, Ministry of Economy, Trade and Industry Aug. 2011 Director-General, Business Environment Department, Small and Medium Enterprise Agency, Ministry of Economy, Trade and Industry Sep. 2012 Councilor, Cabinet Secretariat Dec. 2012 Deputy Director-General for Policy Evaluation, Minister’s Secretariat, Ministry of Economy, Trade and Industry Jun. 2013 Director-General for Regional Economic and Industrial Policy, Ministry of Economy, Trade and Industry Oct. 2014 Corporate Vice President of the Company Apr. 2015 Corporate Vice President, General Manager of External Relations Department Apr. 2016 Corporate Senior Vice President, General Manager of External Relations Department Apr. 2017 Corporate Senior Vice President, General Manager of External Relations Department and Chief General Manager of Corporate Administration Division Jun. 2017 Director of the Board and Corporate Senior Vice President (to the present) Yoshinori Komamura Outside Director Apr. 1970 Joined Komatsu Ltd. Jun. 1999 Group CEO & Managing Director, Komatsu Europe International N.V. Jun. 2005 Director and Senior Executive Officer, President, Construction and Mining Equipment Marketing Division, Komatsu Ltd. Apr. 2007 Director and Senior Executive Officer, President, Construction and Mining Equipment Marketing Division, Komatsu Ltd. Jun. 2010 Representative Director and Executive Vice President, Komatsu Ltd. Jun. 2013 Senior Adviser, Komatsu Ltd. Jun. 2015 Outside Director of the Company (to the present) Jun. 2016 Adviser, Komatsu Ltd. (to the present) Shigehiro Aoyama Outside Director Apr. 1969 Joined Suntory Limited Mar. 1994 Director, Manager of the Board, Spirits Division, Suntory Limited Mar. 1999 Managing Director, Member of the Board, Sales Development & Marketing Promotion Division, Suntory Limited Mar. 2001 Managing Director, Member of the Board, Corporate Planning Division, Suntory Limited Mar. 2003 Senior Managing Director, Member of the Board, Corporate Planning Division, Suntory Limited Sep. 2005 Senior Managing Director, Member of the Board, President of Spirits, Wine & Beer Company, Suntory Limited Mar. 2006 Executive Vice President, Member of the Board, President of Spirits, Wine & Beer Company, Suntory Limited Feb. 2009 Executive Vice President, COO, Member of the Board, Suntory Holdings Limited Mar. 2010 Executive Vice President, COO, Member of the Board, Representative Director, Suntory Holdings Limited Oct. 2014 Vice Chairman of the Board, Representative Director, Suntory Holdings Limited Apr. 2015 Supreme Advisor, Suntory Holdings Limited (to the present) Jun. 2016 Outside Director of the Company (to the present) Auditors Akira Mabuchi Standing Corporate Auditor Apr. 1979 Joined the Company Apr. 2005 Corporate Vice President, Senior General Manager of SUBARU Engineering Division and General Manager of Engineering Administration Department Jun. 2007 Corporate Senior Vice President, Chief General Manager of SUBARU Engineering Division Apr. 2009 Corporate Senior Vice President, Chief General Manager of Strategy Development Division Shuzo Haimoto Standing Corporate Auditor Apr. 1978 Joined The Industrial Bank of Japan, Ltd. Mar. 2006 Executive Officer, General Manager of Human Resources, Mizuho Financial Group, Inc. Apr. 2007 Executive Managing Director, Mizuho Bank, Ltd. Jun. 2010 Corporate Auditor (full-time), Mizuho Financial Group, Inc. Jun. 2011 Corporate Executive Vice President of the Company Apr. 2012 Corporate Executive Vice President, General Manager of Business Planning Department of the Company Jun. 2010 Director of the Board and Corporate Executive Vice Apr. 2013 Corporate Executive Vice President, General Manager of President, Chief General Manager of Strategy Development Division Jun. 2011 Director of the Board and Corporate Executive Vice President Oct. 2011 Director of the Board and Corporate Executive Vice President, General Manager of China Project Office Apr. 2015 Director of the Board and Corporate Executive Vice President Jun. 2015 Standing Corporate Auditor of the Company (to the present) Business Planning Department, President of Industrial Products Company of the Company Apr. 2014 Corporate Executive Vice President, President of Industrial Products Company of the Company Apr. 2016 Corporate Executive Vice President Jun. 2016 Standing Corporate Auditor of the Company (to the present) Shinichi Mita Outside Corporate Auditor Apr. 1974 Joined Kao Soap Co., Ltd. (current Kao Corporation) Jun. 2004 Executive Officer, Global Accounting and Finance, Kao Corporation Jun. 2006 Executive Officer, Kao Corporation Jun. 2015 Corporate Auditor of the Company (to the present) Yasuyuki Abe Outside Corporate Auditor Apr. 1977 Joined Sumitomo Corporation Jun. 2002 President & CEO, Sumisho Electronics Co., Ltd. Apr. 2005 President & CEO, Sumisho Computer Systems Corporation (currently SCSK Corporation) Jun. 2009 Managing Executive Officer, Member of the Board, General Manager, Financial & Logistics Business Unit, Sumitomo Corporation Apr. 2010 Managing Executive Officer, Member of the Board, General Manager of New Industry Development & Cross-function Business Unit, Sumitomo Corporation Apr. 2011 Senior Managing Executive Officer, Member of the Board, General Manager, New Industry Development & Cross-function Business Unit, General Manager of Financial Services Division, Sumitomo Corporation Apr. 2013 Senior Managing Executive Officer, Member of the Board, General Manager, Corporate Planning & Coordination Group, Sumitomo Corporation Jun. 2015 Advisor, Sumitomo Corporation (to the present) Jun. 2016 Corporate Auditor of the Company (to the present) Executive Officers Corporate Executive Vice Presidents Tomomi Nakamura Kazuo Hosoya Masaki Okawara CIO (Chief Information Officer) 34 Corporate Senior Vice Presidents Yasunobu Nogai Satoshi Maeda Tetsuo Onuki Katsuyuki Mizuma Hideaki Matsuki Hiromi Tsutsumi Shoichiro Tozuka Toshiaki Tamegai Takuji Dai Fumiaki Hayata Corporate Vice Presidents Hiroki Kurihara Masayuki Uchida Atsushi Osaki Tatsuro Kobayashi Katsuo Saito Yasuhiro Hamanaka Eiji Ogino Yasushi Nagae Jinya Shoji SUBARU CORPORATIONANNUAL REPORT 2017Corporate Governance Our Basic Approach to Corporate Governance SUBARU works on the enhancement of corporate governance as one of the top priorities of management in order to gain the satisfaction and trust of all of our stakeholders by achieving sustainable growth and improving our corporate value in the medium and long term aiming to be “A Compelling Company with Strong Market Presence” based on the “Customers Come First” principle under the corporate philosophy outlined below. We aim to achieve efficient management by clearly separating management decision-making and oversight from business execution and increasing the speed of decision-making. Furthermore, through monitoring of business operations and advice provided by outside officers, we ensure appropriate management decision-making, oversight and business execution, and work to improve compliance and the risk management system. To increase management transparency, we provide timely and appropriate disclosure of information. Corporate Philosophy 1. We strive to create advanced technology on an ongoing basis and provide consumers with distinctive products with the highest level of quality and customer satisfaction. 2. We aim to continuously promote harmony between people, society, and the environment while contributing to the prosperity of society. 3. We look to the future with a global perspective and aim to foster a vibrant, progressive company. Company Organizational Bodies SUBARU has adopted a Board of Corporate Auditors system, and the Board of Directors and the Board of Corporate Auditors perform decision making, and oversight and auditing for the execution of important business operations. The Board of Directors is composed of eight directors, two of whom are highly independent outside directors to further strengthen governance. The Board of Corporate Auditors is composed of four corporate auditors, two of whom are outside corporate auditors to provide objective oversight of management. With regard to the system for the execution of business operations, important issues that require consultation with the Board of Directors are thoroughly discussed at the Executive Management Board Meeting, which deliberates on company-wide management strategy and the execution of key business operations. To clearly define responsibilities and increase the speed of business execution, we have adopted an executive officer system and established an Executive Meeting as a decision-making body for each business division and introduced an in-house company system for the Aerospace Company. System of Corporate Governance Election and dismissal Collaboration Reporting Collaboration Auditing s r o t i d u A g n i t n u o c c A General Meeting of Shareholders Election and dismissal Election and dismissal Board of Corporate Auditors: 4 Corporate auditors: 2 Outside corporate auditors: 2 Auditing Information exchange with outside officers Board of Directors: 8 Executive Nomination Meeting Directors: 6 Executive Compensation Meeting Outside directors: 2 Decision making Submission and reporting Executive Nomination Meeting and Executive Compensation Meeting composition Representative director, director in charge of Secretarial Office, outside directors Collaboration Internal Audit Department Reporting Reporting President Executive Management Board Meeting Auditing Instructions and oversight Corporate Vice Presidents Shared Corporate Operations Departments at HQ SUBARU Automobiles Division Executive Meeting Aerospace Company Executive Meeting Group companies Chairperson of CSR committee Reporting Reporting Election and dismissal Submission and reporting of important matters Policy instructions Approval of plans, etc. Plan proposal reports, etc. CSR Committee Quality Improvement Committee Central Safety and Health Committee Environmental Committee Compliance Committee Social Contribution Committee Corporate Governance Planning Committee etc. 35 d n a i g n k a m n o i s i c e D s n o i t c n u f t h g i s r e v o n o i t c n u f n o i t u c e x e s n o i t a r e p o s s e n i s u B SUBARU CORPORATIONANNUAL REPORT 2017 Development of Internal Control System SUBARU resolved its basic policy on the development of a system to ensure that the execution of the duties of the directors complies with laws and regulations and the Articles of Incorporation as well as the other systems stipulated by ordinance of Japan’s Ministry of Justice as necessary to ensure the proper operation of a stock company at a meeting of the Board of Directors in April 2015. Status of Development of Risk Management System At SUBARU, the Corporate Planning Department, which plays a central role in the common functions of each business, and other company-wide shared corporate operations departments maintain close links with each department and company to enhance risk management. In addition, the Audit Department performs planned audits of each department and Group company. SUBARU has also created and operates a system and organization to ensure compliance, which is the foundation of risk management, in order to assist with the development of the internal control system. First, we have established the Compliance Committee, which deliberates, discusses, determines, exchanges information, and liaises on important compliance issues to promote the implementation of company-wide compliance. In addition, we have assigned a compliance officer and compliance staff for each department and company to organize a system that meticulously implements compliance at each workplace. We also systematically provide education and training for officers and employees on a routine basis as well as raising awareness about compliance through such means as in-house publications as necessary. Furthermore, in order to promote the implementation of compliance in the SUBARU Group, we conduct education and training and provide information through in-house publications for Group companies in addition to raising the effectiveness of these activities through the participation of Group companies in the SUBARU internal reporting system (Compliance Hotline). Status of Internal Audits and Auditing by Corporate Auditors SUBARU’s standing corporate auditors (including the standing outside corporate auditors), attend meetings of the Board of Directors and other important meetings, visit work sites, investigate subsidiaries, hear opinions from the internal audit department, and audit the execution of duties by the directors and others based on the audit policy and audit plan established by the Board of Corporate Auditors. The non-standing outside corporate auditors attend meetings of the Board of Directors and other important meetings, hear opinions from the internal audit department and the standing corporate auditors, and audit the execution of duties by the directors and others based on the audit policy and audit plan established by the Board of Corporate Auditors. SUBARU has established the Audit Department as an internal auditing organization to implement planned audits of the execution of business operations in each in-house department as well as Group companies inside and outside Japan. At the beginning of the fiscal year, the department coordinates its internal audit plan for the fiscal year with the Board of Corporate Auditors’ policy in advance. The Audit Department reports the results of all internal audits to the corporate auditors and reports on the status of internal audit activities and exchanges opinions with them on a monthly basis to achieve collaboration. The Audit Department also endeavors to strengthen the auditing function in conjunction with audits by the Accounting Auditor. Evaluation of Internal Control System for Financial Reporting An evaluation of the internal control system related to financial reporting in connection with the internal control reporting system based on Japan’s Financial Instruments and Exchange Act is conducted using the final date of the fiscal year of the consolidated financial statements as the reference date. The evaluation conforms to the standards for evaluation of internal control related to financial reporting that are generally accepted to be fair and reasonable. The President & Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) evaluated the status of the development of the internal control system related to financial reporting as of March 31, 2017 and affirmed that it has been established properly and functions effectively and issued an internal control report audited by the Accounting Auditors to that effect. 36 SUBARU CORPORATIONANNUAL REPORT 2017 Corporate Governance Executive Compensation Classification Number Basic compensation Fixed amount Performance based amount Total compensation (millions of yen) Directors (excluding outside directors) Corporate auditors (excluding outside corporate auditors) Outside executive officers Total 6 2 7 15 283 49 52 383 240 0 0 240 523 49 52 624 * The above table includes one director and two auditors who resigned before the last day of the fiscal year under review. At the end of the fiscal year under review, there were 8 directors (including 2 outside directors) and 4 auditors (including 2 outside auditors). By a resolution passed at the 85th Ordinary General Meeting of Shareholders, held on June 28, 2016, the maximum total amount of annual compensation for directors is 1.2 billion yen (including 200 million yen for outside directors). By resolution of the Board of Directors following discussion at the Executive Compensation Meeting, compensation for directors consists of 1) basic compensation (a fixed portion, with the specific amount determined based on position, taking into consideration the business environment and other factors), 2) short-term performance-linked compensation (a performance-linked portion, with the specific amount determined based on consolidated ordinary profit for the current business year, taking into consideration improvement in ROE and the shareholders’ equity ratio, personnel development, and the business environment), and 3) long-term incentives (compensation to grant restricted stock for the purpose of providing an incentive for sustained improvement of the Company’s corporate value and further value sharing with the shareholders).* The level of each compensation type is set according to official responsibilities and status as inside or outside director utilizing survey data from external specialists. The maximum amount of long-term incentives is 200 million yen per year. Outside directors are not eligible for short-term performance linked compensation or long-term incentives. By a resolution passed at the 75th Ordinary General Meeting of Shareholders, held on June 27, 2006, the maximum total amount of annual compensation for corporate auditors is 100 million yen. An amount determined through discussion among the corporate auditors based on position, taking into consideration the business environment and other factors, is paid as basic compensation for corporate auditors. * The Board of Directors resolved at a meeting held on April 28, 2017 to introduce a restricted stock compensation plan, and a resolution to pay compensation to grant restricted stock to directors was passed at the 86th Ordinary General Meeting of Shareholders, held on June 23, 2017. Analysis and Evaluation of the Effectiveness of the Board of Directors In accordance with the Corporate Governance Guidelines, the Company’s Board of Directors analyzes and evaluates the effectiveness of the Board and considers measures to improve any issues identified. In FY2016, the Board performed analysis and evaluation focused on confirmation of measures to address issues recognized in the previous year’s evaluation. A report on the analysis results follows. Evaluation and Analysis Methods • Timing of implementation: March 2017 • Respondents: Directors and corporate auditors (12 in total, including outside directors) • Evaluation format: Self-evaluation using a questionnaire prepared by a third-party organization (same as last year) • Question format: Four-stage self-evaluation using questions concerning operation of the Board of Directors and questions concerning Board of Directors relationships and open answers about matters necessary for further improving the Board’s strong points and effectiveness in a questionnaire submitted directly to a third-party organization • Question content: Basically the same as last year to enable comparison with the prior-year results, with a question for inside directors concerning successor development added • Evaluation and analysis: Feedback of results compiled by the third party to all directors and corporate auditors for discussion and verification by the Board of Directors An overview of the analysis results is as follows. l The Board of Directors has an appropriate size and sufficient diversity for debate. The number, content, and amount of deliberation on proposals brought forth based on the Board of Directors’ Proposal Criteria are appropriate and the Board’s debate is open and unencumbered. 37 SUBARU CORPORATIONANNUAL REPORT 2017 l Board of Directors members understand the specialized expertise of each member, respect fellow members, and strive to understand, rather than exclude, opinions and values that do not agree with their own. In light of the above findings, the Company’s Board of Directors concluded that the Board was effective in FY2016, confirming that the Board is fulfilling the roles and responsibilities set out in the Corporate Governance Code in terms of both its decision-making and oversight and that improvement has been made with respect to the issues identified in last year’s results: enhancement of information provision and explanations to the outside officers, information sharing in IR activities, and activation of strategic debate. The Board of Directors will continue to perform effectiveness assessments to improve Board functions and continuously enhance corporate value. Reasons for Appointing the Outside Officers and Status of Principal Activities Name Independent Officer Status1 Reasons for Appointing and Status of Principal Activities in the Year under Review Significant Concurrent Positions2 Yoshinori Komamura p Outside directors Shigehiro Aoyama p Outside corporate auditors Shinichi Mita p Yasuyuki Abe p Mr. Yoshinori Komamura had served two years as an independent outside director of the Company at the conclusion of the 86th Ordinary General Meeting of Shareholders. During his tenure, he has drawn on his career in management as a representative director of Komatsu Ltd. to provide valuable advice on the management of the Company based on his abundant experience and extensive knowledge as a business manager and his deep insight into corporate social responsibility. The Company has appointed Mr. Komamura with the expectation that he will contribute to maintaining and improving management transparency and soundness and strengthening corporate governance by continuing to provide advice on all aspects of the Company’s management from an independent perspective as an outside director. Mr. Komamura attended all fifteen meetings of the Board of Directors held during FY2016 and fulfilled his role as a sound advisor on the Company’s management. He also served as a member of the Executive Nomination Meeting and Executive Compensation Meeting. Mr. Shigehiro Aoyama had served one year as an independent outside director of the Company at the conclusion of the 86th Ordinary General Meeting of Shareholders. During his tenure, he has drawn on his career in management as a representative director of Suntory Holdings Limited to provide valuable advice on the management of the Company based on his abundant experience and extensive knowledge as a business manager and his deep insight into corporate social responsibility. The Company has appointed Mr. Aoyama with the expectation that he will contribute to maintaining and improving management transparency and soundness and strengthening corporate governance by continuing to provide advice on all aspects of the Company’s management from an independent perspective as an outside director. Mr. Aoyama attended eleven of twelve meetings of the Board of Directors held from the time he assumed office on June 28, 2016 until the end of FY2016 and fulfilled his role as a sound advisor on the Company’s management. He also served as a member of the Executive Nomination Meeting and Executive Compensation Meeting. Mr. Shinichi Mita had served two years as an independent outside corporate auditor of the Company at the conclusion of the 86th Ordinary General Meeting of Shareholders. The Company has appointed him in the belief that he is well qualified as an outside corporate auditor since he has management experience and knowledge in both oversight and business into execution, and particularly extensive experience and accounting and finance in corporate activities, gained as a director and executive officer of Kao Corporation. Mr. Mita attended all fifteen meetings of the Board of Directors and all twelve meetings of the Board of Corporate Auditors held during FY2016 and fully performed his auditing function. insight Mr. Yasuyuki Abe had served one year as an independent outside corporate auditor of the Company at the conclusion of the 86th Ordinary General Meeting of Shareholders. The Company has appointed him in the belief that he is well qualified as an outside corporate auditor since he has a management career in both oversight and business execution and abundant experience and extensive knowledge as a business manager gained as a senior managing executive officer and member of the board of Sumitomo Corporation. Mr. Abe attended twelve meetings of the Board of Directors and ten meetings of the Board of Corporate Auditors held from the time he assumed office on June 28, 2016 until the end of FY2016 and fully performed his auditing function. Adviser, Komatsu Ltd. Member of the Board, Institute for Strategic Leadership (ISL) Supreme Advisor, Suntory Holdings Limited External Director, Takamatsu Construction Group Co., Ltd. President, The Distribution Economics Institute of Japan Director, Japan Marketing Association Adviser, Mizuho Capital Partners Co., Ltd. Member of the Board, Japan Association for Chief Financial Officers (JACFO) Advisor, Sumitomo Corporation Director of the Board (External), Chairman of the Board, JVC KENWOOD Corporation Advisor, ORANGE AND PARTNERS CO., LTD. 1 Outside directors and outside corporate auditors unlikely to have conflicts of interest with general shareholders as stipulated by the Tokyo Stock Exchange 2 As of March 31, 2017 * For the Corporate Governance Guidelines and the Corporate Governance Report, please visit the Corporate Governance page of the SUBARU website. (https://www.subaru.co.jp/en/outline/governance.html) 38 SUBARU CORPORATIONANNUAL REPORT 2017Corporate Governance Messages from the Outside Directors Yoshinori Komamura Outside Director My role as an outside director As I see it, my role as an outside director can be broadly divided into two parts. 1. With the objective of purely maximizing corporate value from the standpoint of an outside director unconstrained by internal conventional wisdom or human relationships, take part in meetings of the Board of Directors with the aim of ensuring execution of balanced management that is fair to all stakeholders. I believe that this leads to strengthening and enhancement of SUBARU’s corporate governance. 2. Contribute to SUBARU’s sustained growth by offering required advice from time to time based on global business experience and human assets. How does discussion take place at Board of Directors meetings? At meetings of the Board of Directors, deliberation and resolution and highly serious discussion and rapid decision-making concerning reports on important matters take place in accordance with the Board of Directors Agenda Criteria. For SUBARU to remain a high- quality company, it must continue to achieve high quality as well as high levels in the areas of safety, the environment, and compliance. From my standpoint as an outside director, I want to actively speak out and contribute as much as possible to SUBARU’s growth. I respect the fact that SUBARU’s Board of Directors has the flexibility to forthrightly accept the comments and opinions of outside directors and the tenacity to seriously discuss each and every one. The support system for outside directors and sufficiency of support Outside directors are provided sufficiently detailed Board of Directors’ materials equivalent to those available to inside directors. We are also provided with sufficient opportunities to understand company operations, such as participation in important internal meetings, new product and technology presentations, and test-ride events and visits to plants, dealers, and other sites. The support system for outside directors is excellent. Business challenges SUBARU is likely to face in the future I think that the greatest challenge will be to maintain and develop high-value-added management even if demand decreases in Japan, the U.S., and other key markets. To achieve this, even if profitability deteriorates temporarily, SUBARU must have the determination to make high quality the top priority and continue with high-quality, concentrated investment in R&D, production capacity, human resource development, and quality assurance. I am convinced that high-quality concentrated investment is certain to result in outcomes that will contribute to SUBARU’s future business. Some of these may be new outcomes in business fields beyond SUBARU’s current business domains and portfolio. I want to see SUBARU flexibly adopt these investment outcomes and continue to practice high-value-added management. I think that the phrase “Nothing is impossible” is well suited to SUBARU. 39 SUBARU CORPORATIONANNUAL REPORT 2017 Shigehiro Aoyama Outside Director My role as an outside director Outside directors are expected to engage in management oversight, provide multifaceted advice on improving business performance, and offer advice on scandal prevention and risk avoidance. We must also make judgments from the perspective of customers, shareholders, and other external stakeholders and perform the role of reforming company logic that has become entrenched in internal logic. I will utilize my experience in business planning, financial accounting, and marketing to offer advice at meetings of the Board of Directors and fulfill my role of overseeing and mentoring the management team. How does discussion take place at Board of Directors meetings? Frank discussion takes place. The outside directors are provided many opportunities to speak, and the meeting management of the chairman of the Board of Directors is excellent. Above all, discussions about production and technology, the most important core competences of SUBARU, take place in great detail. The most important point in corporate governance today is careful communication between inside and outside officers, and this is another area in which SUBARU’s Board of Directors excels. To further enhance discussion by the Board of Directors, I would like deliberation to extend to discussion of total optimization of business, not begin and end with discussion of individual optimization. The support system for outside directors and sufficiency of support Information provision from the Company to the outside directors is carried out in a timely manner. The system for providing support from internal organizations is also sufficient. Balanced information about the status of business execution is always available (joint meetings, etc.), and information sharing is sufficient to enable the outside directors to participate in discussion at Board of Directors meetings. Business challenges SUBARU is likely to face in the future SUBARU has achieved rapid growth and produced excellent business results in recent years. The Company currently faces an historic transition in automotive industry technologies and is confronted with the major challenge of how to respond. Considering SUBARU’s management resources, it is necessary to enhance the SUBARU Brand with surgical precision by means such as practicing selection and concentration, pursuing differentiation, and enhancing added value, not attempt an omnidirectional response. The most important thing is corporate brand building in preparation for a new era. To accomplish this, it is important to approach corporate management with a sense of urgency and alacrity, and further innovation in the management structure to enable SUBARU to undertake sustained growth will likely be necessary. 40 SUBARU CORPORATIONANNUAL REPORT 2017 CSR at SUBARU Achieving a Sustainable Society The SUBARU Group engages in CSR activities aimed at contributing to the creation of a better society and environment through our core business to achieve a sustainable society. Our Approach to CSR Challenges for society abound in Japan and overseas, such as global warming, human rights issues, and an aging and declining population, and there are rising expectations that corporations will help resolve them. The SUBARU Group’s business domain also requires initiatives on diverse themes such as reducing environmental impact, preventing traffic accidents, and alleviating traffic congestion. Therefore, naturally we develop, manufacture, and sell products with outstanding safety and environmental performance and quality, but as a corporate citizen we also work on CSR activities to meet the needs of society and address social challenges in good faith. We reviewed how we can contribute to society through our business and how to meet the expectations and needs of our stakeholders amid a constantly changing social environment. As a result, we have reaffirmed that the Eight Action Items we have established as the categories for our CSR activities to date form the basis for all of our business activities. Going forward, we will deliver “Enjoyment and Peace of Mind” to all of our stakeholders, including our customers, as a compelling company with strong market presence in addition to enhancing the corporate value of the SUBARU Group and contributing to the creation of a more affluent and sustainable society by ensuring that our business activities are based on the Eight CSR Action Items. Corporate Code of Conduct SUBARU CORPORATION sets down a corporate code of conduct to comply with laws and regulations and to fulfill its social responsibilities based on its corporate philosophy (See page 35). We will continue to strive to become a company Corporate Code of Conduct 1. We develop and provide creative products and services while paying sufficient attention to the environment and safety. 2. We respect the rights and characteristics of individuals. loved by all and contribute to making society more affluent by 3. We promote harmony with society and contribute to the respecting individuals and the corporate code of conduct and prosperity of society. acting on the same sense of values. 4. We meet social norms and act honestly and fairly. 5. We maintain global perspective and aim to be in harmony with international society. CSR Policy (Revised in June 2009) 1. We respect the laws and regulations, human rights, international standards of behavior and the rights and morals of stakeholders under the "Corporate Code of Conduct" of SUBARU CORPORATION. 2. We become involved as a corporate citizen in addressing social issues facing society today. CSR Policy The CSR Policy was revised with the approval of committees related to CSR to clearly indicate 1) the fundamental aspect of CSR focused on observance of the Corporate Code of Conduct and other vital rules, and 2) the strategic aspect of CSR focused on contribution to solving social issues as a corporate citizen through business activities, which requires the involvement of the whole corporate organization for a company which makes goods favored by customers. Our CSR activities are the mission of the SUBARU Group to contribute to the sustainable development of society through global business activities with the focus on the relationships with our various stakeholders. 41 SUBARU CORPORATIONANNUAL REPORT 2017 The Eight CSR Action Items SUBARU has set eight CSR action items to encourage individual employees to conduct CSR activities in an organizational manner as part of their business operations. For each of the eight categories, we have defined the specific CSR activities to be conducted by employees to meet requests from society. Customers and Products Compliance Corporate Governance Provide society useful and optimally safe products and services that earn customers’ satisfaction and confidence. Respect laws and moral standards; engage in fair, transparent, and free competition; and conduct business equitably. Honor confidentiality, carefully protecting and managing data, particularly personal information. Make it a key responsibility of management to ensure that appropriate CSR policies are adopted throughout the corporate group, and undertake appropriate initiatives to address any emergencies that may arise. Environment Social Contribution Address environmental issues proactively in recognition of their importance for all mankind. Maintain proactive social action programs as a good corporate citizen. Information Disclosure Procurement Employees Communicate transparently with stockholders and other stakeholders, disclosing corporate information proactively and fairly. Conduct procurement appropriately and work with suppliers to promote corporate social responsibility. Respect the diversity, individuality, and personality of employees and ensure that work environments are as safe and comfortable as possible. CSR Promotion System Previously, we had promoted CSR activities under the supervision of a CSR and Environmental Committee. In FY2010, the CSR Committee was newly established and headed by top management to more clearly identify and promote more systematically CSR-related activities in eight categories. Furthermore, in FY2017 we established the CSR & Environment Department Organization Chart The Eight CSR Action Items Customers and Products Compliance Domestic Quality Improvement Committee All Departments Compliance Committee Export Control Committee because of increasing societal expectations and Corporate Governance demands with respect to CSR and its increasing importance in management. Since FY2016, the CSR Committee has consisted of specialized committees and existing organizational units, each of which is closely linked to any one of the eight CSR-related categories. Furthermore, all organizational units engage in these activities acting on their own initiative under company-wide control. The e e t t i m m o C R S C Corporate Governance Planning Committee Corporate Planning Department General Administration Department Secretarial Office Environment Environmental Committee Social Contribution Social Contribution Committee Information Disclosure Corporate Communications Department General Administration Department Procurement Procurement Committee CSR Committee also has the North American CSR Employees Committee, which helps to carry out global promotion of CSR activities. Central Health and Safety Committee Human Resources Department Overseas North American CSR Committee 42 SUBARU CORPORATIONANNUAL REPORT 2017 CSR at SUBARU Promotion of CSR Activities Promoting Diversity For our company to continue offering customers value not found in competing products, each SUBARU employee needs to be able express his or her abilities as an individual with unique values. For this reason, SUBARU values differences in gender, nationality, culture, and lifestyles of employees and strives to create workplace environments in which everyone finds it easy to work. We also promote initiatives related to diversity at affiliated companies in Japan and overseas in accordance with regional characteristics and the business content of each company. Establishment of Diversity Promotion Office We established the Diversity Promotion Office in January 2015 in order to promote diversity at SUBARU even more proactively. Under the Diversity Promotion Office, we have designated “promoting active roles for female employees,” “employing people with disabilities,” “planning and promoting employment of non-Japanese,” and “promoting employment of the elderly” as priority themes. Among these themes, we have placed particular emphasis on efforts to promote active roles for female employees. For our efforts in FY 2016, we introduced our mentor system for female managers and manager candidates to create training plans that support career development for female employees, and began career advancement training for female team leaders to systematically cultivate the next generation of female manager candidates. SUBARU has formulated an employer action plan aimed at promoting active roles for women in accordance with the Act on Promotion of Women’s Participation and Advancement in the Workplace. In our action plan, which is based on the SUBARU policy of promotion through merit, based on demonstrated ability, we set a goal of increasing the number of female managers in 2020 by at least five times the number in 2014 (from 4 to 20). In FY 2017, we will continue to implement initiatives to achieve this target and undertake further qualitative improvement. Promoting Work-Life Balance SUBARU aims to create a group of highly engaged, autonomous employees, and we believe that it is important to establish an environment that allows individuals to fully express their unique abilities. We work on promoting diversity in work styles as well as enhancing our programs in order to respect the diversity of our employees and help them to achieve work-life balance. We promote initiatives to support work-life balance at affiliated companies in Japan and overseas in accordance with their regional characteristics and the business content of each company. The Kurumin Mark Supporting Each Employee’s Work and Household To support employees both at work and at home, SUBARU has established programs that exceed legal requirements to assist employees in balancing childcare or nursing care and work, including a childcare leave system that can be extended to the first April after a child becomes two years old, a short work-time system available until a child commences 4th grade, and a leave or short-work time system to allow for elderly care. We promote employee awareness and utilization of these programs by conducting lectures on program details in grade-specific training and posting a Maternity Leave and Child-Rearing Handbook on the company intranet. In addition, in accordance with the Next Generation Education and Support Promotion Act, we have formulated and implemented our own action plan. As a result of achieving the targets in previous action plans, we acquired Certification by the Minister of Health, Labor and Welfare (the Kurumin Mark) three times. We will implement the fifth phase of the action plan (April 2017 through March 2019) with the aim of receiving Platinum Kurumin certification. We will step up our support to enable employees to pursue career advancement while balancing childcare and work. 43 SUBARU CORPORATIONANNUAL REPORT 2017 Message from the Environmental Committee Chair Yoichi Kato Director of the Board Corporate Senior Vice President Environmental Committee Chair Aiming for a Sustainable Society On April 1, 2017, we changed our company name to SUBARU CORPORATION. In addition, the environmental policy was revised to become the “SUBARU Environmental Policy” at the same time as the corporate name change. The new SUBARU Environmental Policy is based on the concept that “‘the earth, the sky and nature’ are SUBARU’s fields of business” and considers preservation of the ecosystems of our planet, in which SUBARU’s automotive and aerospace industrial fields, or “the earth, the sky and nature,” are of utmost importance to ensure the future sustainability of both society and our organization. We align our business strategies to enhance these global goals in all our operations. We will strive in all of our corporate activities with this in mind. Specific activities include acquisition of ISO14001 and Eco Action 21 Value Chain certification, and also by evolving our efforts throughout the entire SUBARU Group, a highly efficient environmental management adapted to the industry will be achieved throughout the entire supply chain. At the same time, the SUBARU Environmental Policy focuses on initiatives aimed at co-existence with nature. The “SUBARU Forest Project” activity that we started as one of those initiatives takes place in SUBARU owned forests where forest maintenance and conservation activities are to be carried out with cooperation from local communities. The 2017 Environmental Report focused on our efforts to address environmental issues related to the entire corporate supply chain and product life cycles from the procurement of raw materials to the manufacturing, distribution, marketing and selling, recycling, and disposal of products. Please read through this information and feel free to share with us your frank opinions and impressions. We will continue to aim for a sustainable society through continuously improving corporate values and contributing to creating a better society and environment based on our management philosophy of aiming to be “a compelling company with a strong market presence.” * For details on CSR activities and Environmental Report 2017, please visit the CSR/Environment page of the SUBARU website. (https://www.subaru.co.jp/en/csr/report/) SUBARU Environmental Policies [Established: April 1998, Revised: April 2017] (SUBARU Sustainability Principles) “The earth, the sky and nature” are SUBARU’s fields of business. With the automotive and aerospace businesses as the pillars of SUBARU’s operations, our fields of business are the earth, the sky and nature. Preservation of the ecosystem of our planet, the earth, the sky and nature, is of utmost importance to ensure the future sustainability of both society and our organization. We align our business strategy to enhance these global goals in all of our operations. 1. We develop and deliver products to meet societal needs and contribute to the environment through advanced technologies. By striving to create advanced technologies that put the environment and safety first, we will develop and deliver products that can contribute to protecting the earth’s environment. 2. We focus on efforts aimed at coexistence with nature. Together with efforts to reduce carbon-dioxide emissions in all of our operations, we will promote active engagement with nature by stressing forest conservation. 3. We take on challenges as one through an all-SUBARU approach. Utilizing our unique organizational character that allows us to oversee the entire supply chain, all of us together will take on the challenges of environmental protection of our planet through an all-SUBARU approach. * For the full text of SUBARU Environmental Policies, please visit the CSR/Environment page of the SUBARU website. (https://www.subaru.co.jp/en/outline/Environmental_Policies.pdf) 44 SUBARU CORPORATIONANNUAL REPORT 2017 Consolidated Ten-Year Financial Summary SUBARU CORPORATION and its consolidated subsidiaries 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 ’08/3 ’09/3 ’10/3 ’11/3 ’12/3 ’13/3 ’14/3 ’15/3 ’16/3 ¥1,572,346 1,217,662 354,684 309,004 45,680 ¥1,445,790 1,164,564 281,226 287,029 (5,803) ¥1,428,690 1,152,763 275,927 248,577 27,350 ¥1,580,563 1,241,427 339,136 255,001 84,135 31,906 (21,517) (443) 63,214 52,879 93,082 328,865 392,206 619,003 394,695 3,517,781 Net income (loss) attributable to owners of parent Comprehensive income Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Free cash flow Net cash provided by (used in) financing activities 18,481 — 107,387 (44,920) 62,467 (45,110) (69,933) — (26,892) (72,385) (99,277) 80,449 (16,450) (13,416) 176,734 (62,656) 114,078 (18,560) 50,326 34,900 138,208 (51,109) 87,099 (39,408) At year-end: Net assets Shareholders’ equity Total assets Ratio of shareholders’ equity to total assets (%) ¥ 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% 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)2 Number of shareholders2 Number of employees2 Parent only Consolidated Non-consolidated exchange rate (yen to the US dollar) Unit sales: Consolidated automobile unit sales (thousand units) SUBARU vehicle unit production: Consolidated unit production (thousand units) Domestic SIA 45 ¥ 25.73 25.73 687.02 ¥ (91.97) — 505.59 ¥ (21.11) — 488.58 ¥ 64.56 — 528.88 ¥ 49.27 ¥ 153.23 ¥ 264.76 ¥ 335.57 ¥ 559.54 ¥ 365.77 $ 3.26 — 576.97 — 762.87 — — — — 980.98 1,310.15 1,721.90 1,902.56 — 16.96 ¥ 87,164 118,869 52,020 782,865 44,484 ¥ 74,036 95,153 42,831 782,865 40,839 ¥ 65,785 89,077 37,175 782,865 39,223 ¥ 56,062 67,378 42,907 782,865 34,240 11,909 26,404 12,137 27,659 12,483 27,586 12,429 27,296 116 102 93 86 79 82 100 108 121 597 555 563 657 640 724 825 911 958 1,065 490 109 474 92 453 104 459 165 465 171 511 181 609 164 681 207 693 236 698 335 ¥1,517,105 ¥1,912,968 ¥2,408,129 ¥2,877,913 ¥3,232,258 ¥3,325,992 $29,643,422 1,222,419 1,501,809 1,728,271 2,017,490 2,386,266 21,267,967 294,686 250,727 43,959 38,453 44,474 54,865 (26,602) 28,263 2,586 411,159 290,748 120,411 119,588 152,009 166,715 (71,370) 95,345 (60,766) 679,858 353,369 326,489 206,616 210,757 313,024 (33,903) 279,121 (63,011) 860,423 437,378 423,045 261,873 309,271 311,543 (172,780) 138,763 (110,546) 2,187,136 1,045,122 479,533 565,589 436,654 405,703 614,256 (255,676) 358,580 (126,190) (Millions of yen) (Thousands of U.S. dollars1) ’17/3 ’17/3 939,726 528,916 410,810 8,375,455 4,714,047 3,661,408 282,354 279,352 345,442 (254,252) 91,190 (189,044) 2,516,524 2,489,768 3,078,806 (2,266,061) 812,745 (1,684,884) ¥ 451,607 ¥ 596,813 ¥ 770,071 ¥1,030,719 ¥1,349,411 ¥1,464,888 $13,056,044 450,302 595,365 765,544 1,352,532 1,577,454 1,888,363 33.3% 37.7% 40.5% 1,022,417 2,199,714 46.5% 1,343,732 2,592,410 51.8% 1,458,664 2,762,321 52.8% 13,000,572 24,619,617 ¥ 58,611 ¥ 61,544 ¥ 61,486 ¥ 71,821 ¥ 72,938 ¥ 85,653 $ 763,396 67,035 48,115 782,865 33,139 12,359 27,123 94,986 49,141 782,865 28,890 12,717 27,509 98,537 60,092 782,865 51,386 13,034 28,545 135,346 83,535 782,865 70,942 13,883 29,774 168,338 102,373 782,865 79,594 14,234 31,151 1,752,371 1,017,959 196,616 114,215 769,175 76,471 14,708 32,599 108 SUBARU CORPORATIONANNUAL REPORT 2017For 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) attributable to owners of parent Comprehensive income Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Free cash flow Net cash provided by (used in) financing activities At year-end: Net assets Shareholders’ equity Total assets ¥1,572,346 ¥1,445,790 ¥1,428,690 ¥1,580,563 1,217,662 1,164,564 1,152,763 1,241,427 354,684 309,004 45,680 31,906 18,481 — 107,387 (44,920) 62,467 (45,110) 281,226 287,029 (5,803) (21,517) (69,933) — (26,892) (72,385) (99,277) 80,449 275,927 248,577 27,350 (16,450) (13,416) 176,734 (62,656) 114,078 (18,560) 339,136 255,001 84,135 50,326 34,900 138,208 (51,109) 87,099 (39,408) ¥ 494,423 ¥ 394,719 ¥ 381,893 ¥ 413,963 493,397 393,946 380,587 412,661 1,296,388 1,165,431 1,231,367 1,188,324 Ratio of shareholders’ equity to total assets (%) 38.1% 33.8% 30.9% 34.7% ’08/3 ’09/3 ’10/3 ’11/3 ’12/3 ’13/3 ’14/3 ’15/3 ’16/3 (Millions of yen) (Thousands of U.S. dollars1) ’17/3 ’17/3 ¥1,517,105 1,222,419 294,686 250,727 43,959 ¥1,912,968 1,501,809 411,159 290,748 120,411 ¥2,408,129 1,728,271 679,858 353,369 326,489 ¥2,877,913 2,017,490 860,423 437,378 423,045 ¥3,232,258 2,187,136 1,045,122 479,533 565,589 ¥3,325,992 2,386,266 939,726 528,916 410,810 $29,643,422 21,267,967 8,375,455 4,714,047 3,661,408 (443) 63,214 52,879 93,082 328,865 392,206 619,003 394,695 3,517,781 38,453 44,474 54,865 (26,602) 28,263 2,586 119,588 152,009 166,715 (71,370) 95,345 (60,766) 206,616 210,757 313,024 (33,903) 279,121 (63,011) 261,873 309,271 311,543 (172,780) 138,763 (110,546) 436,654 405,703 614,256 (255,676) 358,580 (126,190) 282,354 279,352 345,442 (254,252) 91,190 (189,044) 2,516,524 2,489,768 3,078,806 (2,266,061) 812,745 (1,684,884) ¥ 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% ¥1,349,411 1,343,732 2,592,410 51.8% ¥1,464,888 1,458,664 2,762,321 52.8% $13,056,044 13,000,572 24,619,617 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)2 Number of shareholders2 Number of employees2 Parent only Consolidated Non-consolidated exchange rate (yen to the US dollar) Unit sales: Consolidated automobile unit sales (thousand units) SUBARU vehicle unit production: Consolidated unit production (thousand units) Domestic SIA ¥ 25.73 ¥ (91.97) ¥ (21.11) ¥ 64.56 25.73 687.02 — 505.59 — 488.58 — 528.88 ¥ 49.27 — 576.97 ¥ 153.23 — 762.87 ¥ 264.76 — 980.98 ¥ 335.57 — 1,310.15 ¥ 559.54 — 1,721.90 ¥ 365.77 — 1,902.56 $ 3.26 — 16.96 ¥ 87,164 ¥ 74,036 ¥ 65,785 ¥ 56,062 118,869 52,020 782,865 44,484 11,909 26,404 95,153 42,831 782,865 40,839 12,137 27,659 89,077 37,175 782,865 39,223 12,483 27,586 67,378 42,907 782,865 34,240 12,429 27,296 ¥ 58,611 67,035 48,115 782,865 33,139 ¥ 61,544 94,986 49,141 782,865 28,890 ¥ 61,486 98,537 60,092 782,865 51,386 ¥ 71,821 135,346 83,535 782,865 70,942 ¥ 72,938 168,338 102,373 782,865 79,594 ¥ 85,653 196,616 114,215 769,175 76,471 $ 763,396 1,752,371 1,017,959 116 102 93 86 79 82 100 108 121 12,359 27,123 12,717 27,509 13,034 28,545 13,883 29,774 14,234 31,151 14,708 32,599 108 597 555 563 657 640 724 825 911 958 1,065 490 109 474 92 453 104 459 165 465 171 511 181 609 164 681 207 693 236 698 335 1. U.S. dollar figures have been translated from yen, for convenience only, at the rate of ¥112.20 to US$1.00, the approximate rate of exchange at March 31, 2017. 2. As of March 31 46 SUBARU CORPORATIONANNUAL REPORT 2017Five-Year Automobile Sales Consolidated Automobile Sales 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 Levorg WRX Tribeca SUBARU BRZ OEM Others Overseas total Grand total ’13/3 ’14/3 ’15/3 ’16/3 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 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 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 0 37,982 64 7,914 135 5 747,943 910,695 11,358 39,794 22,044 23,555 6,956 4,498 1,995 884 502 111,586 33,702 145,288 582,674 47,579 5,723 41,778 44,611 44,388 45,824 812,577 286,979 217,272 250,072 7,713 43,120 34 7,387 0 0 812,577 957,865 (Number of units) ’17/3 11,065 51,592 24,239 23,775 6,552 4,284 2,253 2,066 567 126,393 32,542 158,935 667,613 53,061 5,338 40,915 49,106 44,000 45,574 905,607 333,339 238,858 272,768 6,823 47,185 7 6,627 0 0 905,607 1,064,542 Consolidated Automobile Sales by Region Consolidated Automobile Sales by Model (Number of units) (Number of units) n Japan n United States n Canada n Russia n Others n Europe n Australia n China n Legacy n Impreza n Tribeca n WRX n Others n OEM n Forester n Exiga n Minicars n Levorg n SUBARU BRZ 1,064,542 1,064,542 910,695 957,865 910,695 957,865 825,098 724,466 825,098 724,466 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 47 SUBARU CORPORATIONANNUAL REPORT 2017Non-Consolidated Automobile Sales ’13/3 ’14/3 ’15/3 ’16/3 (Number of units) ’17/3 Domestic units: Legacy Impreza Forester Levorg WRX Exiga SUBARU BRZ OEM Passenger cars Minicars Domestic total Export units: Legacy Impreza Forester Levorg WRX Tribeca Exiga SUBARU BRZ OEM Export total U.S. retail sales1 Legacy Impreza Forester WRX Tribeca SUBARU BRZ U.S. total CKD overseas (SIA portion) 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 0 222 407 11,542 316 384,023 164,680 89,195 76,347 0 2,075 4,144 336,441 185,757 183,729 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 0 7,644 0 145 15,118 86 499,194 160,340 130,567 123,591 0 1,598 8,587 424,683 165,554 159,266 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 0 37,865 0 5 8,418 135 545,609 191,060 128,952 159,953 25,492 732 7,504 513,693 222,513 218,565 11,665 41,137 22,631 24,014 7,181 4,797 2,070 904 114,399 35,642 150,041 50,353 218,866 249,202 7,880 43,177 0 0 7,005 0 576,483 212,741 155,712 175,192 33,734 0 5,296 582,675 242,424 237,060 11,529 53,136 24,231 24,626 6,724 4,356 2,394 2,575 129,571 34,124 163,695 39,719 191,873 278,963 6,805 46,730 0 0 6,653 0 570,743 248,204 150,915 178,593 33,279 0 4,141 615,132 353,770 344,518 1. U.S. Retail Sales are the aggregate figures for the calendar year from January through December. Non-Consolidated Domestic Automobile Sales by Model (Number of units) n Legacy n Impreza n WRX n Minicars n Forester n SUBARU BRZ n OEM n Levorg n Exiga 185,841 166,710 167,147 163,695 150,041 Non-Consolidated Automobile Export Units by Model (Number of units) n Forester n Legacy n Impreza n Tribeca n WRX n Exiga l CKD Overseas n OEM n Levorg n SUBARU BRZ 545,609 576,483 570,743 499,194 384,023 353,770 185,757 165,554 222,513 242,424 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 48 SUBARU CORPORATIONANNUAL REPORT 2017Financial Review Business Segments and Scope of Consolidation The SUBARU Group (“the Group”) consists of three business Division in order to more effectively utilize management resources to further strengthen the competitiveness of the core automotive business. Also, on April 1, 2017, the Company changed its name segments: the core Automotive Business Unit, which accounts from Fuji Heavy Industries Ltd. to SUBARU CORPORATION. for more than 90% of consolidated net sales, the Aerospace In the fiscal year under review, the Company was able to Company, and Other Businesses, consisting of businesses that produce steady results from these initiatives. The North do not belong to either of the other two segments. In the fiscal American market, a key market for SUBARU, continued to drive year ended March 31, 2017 (April 1, 2016 to March 31, 2017; global sales, and automobile unit sales exceeded one million the “fiscal year under review”), SUBARU CORPORATION (“the vehicles for the first time. Company”), 77 subsidiaries, and 2 equity-method affiliated companies were included in the scope of consolidation. Summary of Business Performance Overview of Business Performance Business Environment As a result of the above factors, the Group absorbed a dip in sales revenue due to currency fluctuations, thanks in part to the increase in automobile unit sales, and recorded record-high consolidated net sales of 3,326.0 billion yen, up 93.7 billion yen During the fiscal year under review, although business conditions (2.9%) compared with the previous fiscal year. in Japan continued to recover gradually, uncertainty surrounding Consolidated operating income decreased 27.4% year on the global political and economic situation heightened due to year, and net income attributable to owners of parent decreased factors including the U.K.’s Brexit declaration and the 35.3%. inauguration of a new administration in the U.S. Against this backdrop, the yen appreciated sharply against the U.S. dollar in foreign exchange markets. Profit and Loss Operating Income In “Prominence 2020,” mid-term management vision, the Consolidated operating income was 410.8 billion yen, down Group has articulated “Not big in size, but a high-quality company 154.8 billion yen (27.4%) year on year. The operating margin was with distinctive strengths” as its vision for 2020. To achieve this 12.4%, down 5.1 points, reflecting the sales increase and business vision, the Group will implement measures centered on operating income decrease. The impact of factors that negatively two initiatives: first, enhancement of the SUBARU brand aimed at affected profits—including increases in SG&A expenses, mainly further promoting value-added management, and second, quality-related expenses stemming from airbag inflators and building a strong business structure that increases resilience to selling expenses following interest rate increases in the U.S., changes in the business environment. As part of this effort, as a exchange rate differences, and higher R&D expenses— result of comprehensive consideration of the business portfolio, exceeded the impact of factors contributing to higher profits, the Company decided to terminate the Industrial Products namely sales mix improvement and cost reduction. Net Sales (Billions of yen) 2,877.9 2,408.1 1,913.0 Operating Income (Billions of yen) Net Income Attributable to Owners of Parent (Billions of yen) n Operating income n Net income attributable to owners of parent 3,232.3 3,326.0 565.6 423.0 436.7 410.8 326.5 261.9 206.6 282.4 120.4 119.6 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 49 SUBARU CORPORATIONANNUAL REPORT 2017 Year-on-Year Analysis of Factors Affecting Operating Income (Consolidated) (Billions of yen) Improvement of sales volume & mixture and others 137.7 Cost reduction 32.2 Improvement of sales volume & mixture and others 58.8 Cost reduction 33.1 Gain on currency exchange 108.4 423.0 565.6 -39.0 SG&A expenses and others -18.8 R&D expenses -169.1 SG&A expenses and others 410.8 -143.8 Loss on currency exchange -11.8 R&D expenses ’15/3 Operating income +142.5 billion yen ’16/3 Operating income -154.8 billion yen ’17/3 Operating income Income before Income Taxes and Net Income Attributable Net income attributable to owners of parent, which is income to Owners of Parent after deducting income taxes and net income attributable to non- Income before income taxes was 394.7 billion yen, down 224.3 controlling interests from income before income taxes, was billion yen (36.2%) compared with the previous fiscal year. 282.4 billion yen, down 154.3 billion yen (35.3%). Segment Information Automotive Business Unit 33,000 units. Although the Chiffon, a new model, contributed to sales, sales of other minicar models declined. Net sales from the Automotive Business Unit were 3,152.0 billion yen, up 112.5 billion yen (3.7%) compared with the previous Overseas Markets fiscal year, and segment income was 397.7 billion yen, down Overseas unit sales increased by 93,000 units (11.4%) year on 146.0 billion yen (26.8%). year to 906,000 units. At a time of sustained strong sales of the Consolidated global unit sales reached a record high for the Outback in North America, an increase in production capacity at fifth consecutive year, increasing 107,000 vehicles (11.1%) year the production base in the U.S., SUBARU of Indiana Automotive, on year to 1,065,000 units. Inc. (SIA), contributed to the substantial increase in sales volume. Domestic Market In addition, sales of the Crosstrek (called the SUBARU XV outside North America) and the Forester remained strong throughout the Total automobile demand in Japan in the fiscal year under review fiscal year. increased 2.8% year on year to 5.078 million vehicles, with By region, sales volume increased by 90,000 units (14.3%) ordinary passenger car sales increasing 8.1% due to factors year on year to 721,000 units in North America, decreased by including the impact of new model introductions by automakers 1,000 units (2.6%) to 46,000 units in Europe and Russia, and mini car sales decreasing 5.1% due to the impact of an increased by 4,000 units (10.1%) to 49,000 units in Australia, and increase in the minicar tax, among other factors. was mostly unchanged at 44,000 units in China and 46,000 units In this business environment, the Group’s unit sales in Japan in other regions. Sales in North America reached a record high for increased by 14,000 units (9.4%) year on year to 159,000 units. the eighth consecutive year. As a result of strong sales of the Impreza, which was given a full model change, the Levorg, and the Forester, ordinary passenger car unit sales rose by 15,000 units (13.3%) year on year to 126,000 units. Sales of minicars fell by 1,000 units (3.4%) to 50 SUBARU CORPORATIONANNUAL REPORT 2017 Financial Review Aerospace Company Other Businesses Net sales from the Aerospace Company were 138.8 billion yen, Net sales from Other Businesses were 35.3 billion yen, down 4.8 down 14.0 billion yen (9.2%) compared with the previous fiscal billion yen (11.9%) compared with the previous fiscal year, and year, and segment income was 9.1 billion yen, down 9.1 billion segment income was 3.5 billion yen, up 0.5 billion yen (17.1%). yen (50.0%). Following a decision to terminate the industrial products Sales of products for the Ministry of Defense increased year business at a Board of Directors meeting held on November 2, on year due to factors including the start of full-scale 2016, that business has been included in the Other Businesses development under the new UH-X multipurpose helicopter segment beginning in the fiscal year under review. contract. Sales of products for the commercial sector declined because of a dip in sales revenue due to currency fluctuations and due to a decrease in production of the Boeing 777. Net Sales by Segment (Billions of yen) Operating Income by Segment (Billions of yen) n Automotive n Industrial products n Other n Aerospace n Automotive n Other n Aerospace n Corporate and elimination n Industrial products 3,232.3 3,326.0 565.6 2,877.9 2,408.1 423.0 410.8 1,913.0 326.5 120.4 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 (Billions of yen) Automotive 1,779.0 2,246.6 2,699.0 3,039.4 3,152.0 Aerospace 89.1 124.4 142.8 152.8 138.8 Industrial products 30.1 29.8 29.0 — — Other Total 14.7 7.3 7.1 40.0 35.3 1,913.0 2,408.1 2,877.9 3,232.3 3,326.0 Automotive Aerospace Industrial products Other Corporate and elimination Total (Billions of yen) ’13/3 111.0 6.8 0.6 1.6 ’14/3 309.0 14.1 0.6 2.1 ’15/3 400.9 18.9 0.8 1.9 ’16/3 543.6 18.2 — 3.0 ’17/3 397.7 9.1 — 3.5 0.4 0.6 0.6 0.8 0.5 120.4 326.5 423.0 565.6 410.8 * Accompanying the decision in November 2016 to terminate the Industrial Products business, the former Industrial Products reportable segment has been included in Other Businesses beginning in FYE March 2017. Figures for FYE March 2016 have been restated on the basis of the revised segments. Liquidity and Source of Funds Financial Position from the previous fiscal year-end. Trade payables (the sum of notes and accounts payable-trade and electronically recorded Total assets as of March 31, 2017 were 2,762.3 billion yen, an obligations-operating) and accrued expenses increased by increase of 169.9 billion yen compared with the previous fiscal 23.7 billion yen and 88.6 billion yen, respectively, while income year-end. taxes payable decreased by 86.4 billion yen. Current assets were 1,845.3 billion yen, up 61.2 billion yen The fiscal year-end balance of interest-bearing debt from the previous fiscal year-end, and noncurrent assets were decreased by 21.7 billion yen from the previous fiscal year-end 917.1 billion yen, up 108.8 billion yen. Under current assets, funds to 148.3 billion yen. The debt/equity ratio (interest-bearing debt in hand (the sum of cash and deposits and short-term investment over shareholders’ equity) was 0.10, remaining at a safe level. securities) decreased by 28.7 billion yen, while merchandise and Net assets were 1,464.9 billion yen, an increase of 115.5 finished goods increased by 13.3 billion yen, and short-term loans billion yen compared with the previous fiscal year-end. Retained receivable increased by 24.5 billion yen. Under noncurrent assets, earnings increased by 124.3 billion yen due to factors including property, plant and equipment increased by 84.6 billion yen. the recording of net income. The shareholders’ equity ratio Total liabilities were 1,297.4 billion yen, up 54.4 billion yen increased by 1.0 point year on year to 52.8%. 51 SUBARU CORPORATIONANNUAL REPORT 2017 Total Assets (Billions of yen)/Net Assets (Billions of yen)/ Ratio of Shareholders’ Equity to Total Assets (%) n Total assets l Ratio of shareholders’ equity to total assets n Net assets Interest-Bearing Debt (Billions of yen) D/E Ratio (Times) n Interest-bearing debt l D/E ratio 2,592.4 2,762.3 307.2 2,199.7 1,888.4 1,577.5 37.7 596.8 40.5 770.1 46.5 1,030.7 51.8 1,349.4 52.8 1,464.9 269.7 0.52 211.2 0.35 170.0 148.3 0.21 0.13 0.10 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 Cash Flows yen, and payments of loans receivable (net of collection) were In the fiscal year under review, net cash provided by operating 19.3 billion yen. activities was 345.4 billion yen, compared with 614.3 billion yen As a result, free cash flow was 91.2 billion yen, compared provided in the previous fiscal year. Income before income with 358.6 billion yen in the previous fiscal year. taxes and minority interests was 394.7 billion yen, accrued Net cash used in financing activities totaled 189.0 billion expenses increased 88.2 billion yen, and income taxes paid yen, compared with 126.2 billion yen in the previous fiscal year. were 208.2 billion yen. Repayments of long-term loans payable (net of proceeds) were Net cash used in investing activities was 254.3 billion yen in 21.7 billion yen, purchase of treasury stock was 52.7 billion yen, the fiscal year under review, compared with 255.7 billion yen and cash dividends paid were 111.4 billion yen. used in the previous fiscal year. Purchase of short-term As a result of the above cash flows, including the effect of investment securities (net of proceeds from sales of short-term translation adjustments, cash and cash equivalents at the end investment securities) was 36.9 billion yen, purchase of of the fiscal year under review were 728.6 billion yen. noncurrent assets (net of proceeds from sales) was 162.4 billion Cash Flows from Operating Activities and Investing Activities (Billions of yen) n Cash flows from operating activities n Cash flows from investing activities Free Cash Flow (Billions of yen) 614.3 358.6 313.0 311.5 345.4 279.1 166.7 -71.4 -33.9 -172.8 -255.7 -254.3 138.8 95.3 91.2 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 52 SUBARU CORPORATIONANNUAL REPORT 2017 Financial Review Research and Development Expenses In the fiscal year under review, R&D expenses increased by Capital Expenditures and Depreciation In the fiscal year under review the Group made capital 11.8 billion yen (11.5%) compared with the previous fiscal year expenditures of 158.5 billion yen, an increase of 22.8 billion yen to 114.2 billion yen. Of that amount, 111.2 billion yen was (16.8%) compared with the previous fiscal year. The main related to the automotive business. expenditures were related to production, R&D, and sales Automotive R&D was for the purpose of developing facilities in the automotive business. products that exceed customer expectations for enjoyment and The Company made investments of 65.1 billion yen in the peace of mind, and focused on six initiatives to enhance the automotive business, primarily for augmenting production SUBARU brand. In addition, the Group sought to strengthen the capacity accompanying an increase in unit sales and for foundation for product development capabilities through cost developing and expanding production facilities for new products, reduction, human resource development, and other measures R&D facilities, and sales networks. SUBARU of Indiana as part of eight initiatives for building a strong business structure. Automotive, Inc. (SIA) made investments of 48.4 billion yen, In October 2016 the Group began sales in Japan of the all- mainly for production facilities to boost production capacity. new Impreza, featuring the SUBARU Global Platform, Japan’s Depreciation expenses in the fiscal year under review first pedestrian protection airbags, and EyeSight (ver. 3) on all increased by 12.0 billion yen (18.5%) year on year to 77.0 billion models. Subsequently, the Group has begun sequentially yen. introducing the new Impreza in other countries around the Capital expenditures in FYE March 2018 are projected to world. The SUBARU Global Platform, a core technology that decrease by 8.5 billion yen (5.4%) year on year to 150.0 billion will underpin the next generation of SUBARU automobiles, will yen, and depreciation expenses are projected to increase by be incorporated in all new models brought to market. 15.0 billion yen (19.5%) to 92.0 billion yen. In the area of safety, the Group is evolving driver assist systems, focusing on EyeSight, with the aim of providing the ultimate in advanced safe driving assistance to completely eliminate traffic accidents. In terms of environmental initiatives, the Group is developing products including a new downsized turbo engine and plug-in hybrid (PHEV) and electric vehicles (EV) to comply with the Zero Emission Vehicle* (ZEV) Regulations* in California. In addition, the Group plans to introduce the Ascent, a 3-row crossover SUV for the North American market. To further accelerate development of future products, in FYE March 2018 the Group plans to boost R&D spending 19.8 billion yen (17.3%) year on year to 134.0 billion yen. * Regulations requiring that a certain proportion of the vehicles sold by an au- tomaker emit no greenhouse gases Research and Development Expenses (Billions of yen) 114.2 102.4 Capital Expenditures (Billions of yen) Depreciation Expenses (Billions of yen) n Capital expenditures n Depreciation expenses 158.5 135.7 110.7 70.2 55.9 68.5 54.9 64.8 65.0 77.0 ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 Basic Policy on Profit Distribution and Dividends for FYE 2017 and FYE 2018 The Company regards shareholder interests as an important management priority and applies a performance-linked approach to shareholder returns of maintaining a basic policy of paying continuous dividends while considering business performance, investment plans, and the business environment. 83.5 The Company determines dividend payments for each fiscal 60.1 49.1 year based on a consolidated dividend payout ratio range of 20–40%, taking a variety of conditions into consideration. In light of these considerations, the Company paid an annual dividend of 144 yen per share for the fiscal year under review, the same as the previous fiscal year. Internal reserves are allocated to investments for future growth, such as ’13/3 ’14/3 ’15/3 ’16/3 ’17/3 strengthening of R&D and production and sales systems for the 53 SUBARU CORPORATIONANNUAL REPORT 2017 purpose of offering appealing products, while bolstering the and achieve record-high automobile unit sales, forecasting financial position. consolidated net sales of 3,420.0 billion yen. With regard to For FYE March 2018, the Company plans to pay a dividend consolidated profit and loss, the Company forecasts operating of 144 yen per share (half-year and year-end dividends of 72 income of 410.0 billion yen, ordinary income of 410.0 billion yen), the same as for the year under review. The Company will yen, and net income attributable to owners of parent of 285.0 determine dividends for FYE 2018 and subsequent years based billion yen to result from increases in SGA expenses, R&D on a consolidated dividend payout ratio range of 30–50% after expenses, and other costs, despite the positive impact from the considering various circumstances. projected increase in automobile sales volume. The exchange Business Performance in FYE March 2018 The Company plans to increase consolidated sales volume in the domestic and overseas markets, mainly in North America, Forecast of Consolidated Business Performance Net sales Japan Overseas Operating income Ordinary income Income before income taxes Net income attributable to owners of parent Exchange rates (in yen) ¥/$ ¥/€ (Billions of yen) ’18/3 (plan) Change 3,420.0 668.0 2,752.0 410.0 410.0 94.0 17.6 76.4 -0.8 15.7 ’17/3 3,326.0 650.3 2,675.6 410.8 394.3 394.7 282.4 285.0 2.6 108 119 110 120 2 1 Forecast of Consolidated Automobile Sales rate assumptions used for the full-year forecast of consolidated business performance are 110 yen/US$1 (actual rate of 108 yen in FYE 2017) and 120 yen/€1 (119 yen in FYE 2017). Future Outlook To achieve sustained growth in preparation for realizing the corporate vision for 2020 articulated in “Prominence 2020,” the mid-term management vision announced in 2014, the SUBARU Group will implement measures centered on two initiatives: enhancement of the SUBARU brand and building a strong business structure. The Group aims to establish a highly profitable business model capable of sustaining its industry-leading profit margin while achieving consolidated global automobile sales of upward of 1.2 million vehicles in 2020 and continuing investments for sustained growth in areas such as R&D expenses and capital Factors Affecting Operating Income in FYE March 2018 (Consolidated) (Billions of yen) Improvement of sales volume & mixture and others 32.8 Gain on currency exchange 21.1 403.0 8.3 expenditures. (Thousand units) 410.8 ’17/3 ’18/3 (plan) Change 126.4 32.5 158.9 134.2 37.8 172.1 7.8 5.3 13.1 410.0 -27.8 SG&A expenses and others -19.8 R&D expenses -7.1 Cost reduction Domestic Passenger cars Minicars Subtotal Overseas United States 667.6 687.7 20.1 Canada Russia Europe Australia China Other Subtotal Total 53.1 5.3 40.9 49.1 44.0 45.6 54.6 6.6 39.2 52.6 42.3 50.5 905.6 1,064.5 933.4 1,105.5 1.5 1.3 -1.7 3.5 -1.7 4.9 27.8 41.0 54 ’17/3 Operating income -0.8 billion yen ’18/3 Operating income (Planned) SUBARU CORPORATIONANNUAL REPORT 2017 Financial Review Business Risks Operational and other risks that could significantly influence the (5) Dependence on Specific Suppliers, Raw Materials, and decisions of investors and impact the Company’s financial status Components are set out below. The Group procures raw materials, components and other items Based on information available to the Group as of the end of from numerous suppliers. However, there are cases in which the the consolidated fiscal year under review, the enumerated risks Group relies on certain items and/or a limited number of suppliers. include forward-looking statements, but do not encompass every Due to tightening supply and demand or other factors, the inability possible risk posed to the Group. As such, there are other risk to procure supplies in a manner that ensures stable costs, delivery factors which could influence investors and their decisions. dates and quality could seriously impact the Group’s business (1) Economic Trends performance and financial position. Economic trends in countries and regions that comprise important (6) Protection of intellectual property markets for the Group could potentially impact the Group’s The Group is strongly committed to protecting its intellectual business performance. In Japan and North America, key markets property in areas, such as technologies and expertise, that ensure for the Group, economic recession, decreasing demand or product differentiation. However, in cases where a third party increasing price competition could undermine the sales and makes unauthorized use of the Group’s intellectual property to profitability of the Group’s products and services. manufacture similar products and in cases where a dispute (2) Currency Exchange Rate Fluctuations relating to intellectual property arises and a decision The Group’s ratio of overseas net sales stood at 80.4%. The disadvantageous to the Company is made, the Group’s business Group’s consolidated financial statements, which are presented in results and financial condition may be significantly affected. Japanese yen, are affected by translation of overseas net sales, (7) Product Defects operating income and assets from local currencies, particularly The Group places the highest priority on the safety of the products U.S. dollars, into yen. Accordingly, in the event that discrepancies it develops, manufactures and sells. However, completely avoiding arise between projected exchange rates in full-year forecasts and defects and recalls, etc. regarding all products and services is actual rates at the time of account settlement, the Group’s impossible. The substantial cost, damage to our brand image, business performance and financial position may be adversely etc. associated with a major recall could significantly affect the affected when the yen appreciates or positively affected when the Group’s business performance and financial position. yen depreciates. (8) Retirement Benefits and Retirement Benefit Obligations The Company uses forward exchange rate contracts and The Group’s employee retirement benefit costs and obligations other circumstance-appropriate risk hedges to minimize the are calculated based on the following assumptions: retirement Group’s sensitivity to such currency exchange risks. However, the benefit obligation discount rates and the expected long-term effect of severe fluctuations in currency exchange rates at the end rate of return on pension assets, both of which are established of the fiscal year could result in a loss on valuation of derivatives based on mathematical calculations. However, in the event that and have a major impact on non-operating expenses. actual performance differs from the assumptions, the Group’s (3) Dependence on Certain Businesses business performance and financial position could be affected The Group is mainly comprised of the Automobiles and Aerospace over the long term. business segments. However, the Automobiles business segment (9) Environmental and Other Legal Regulations accounts for the overwhelming majority of the Group’s business The Group is subject to various domestic and overseas legal operations. Accordingly, in the event that automobile-related regulations in relation to such areas as exhaust emissions, energy demand, market conditions, price competition with other conservation, noise, recycling, the level of pollutants emitted from automakers, or other factors exceed projected levels, the entire manufacturing facilities, and safety of automobiles and other Group’s overall business performance and financial position could products. The Group’s business performance and financial be significantly affected. (4) Changes in Market Appraisal position could be affected by an increase in costs due to future regulatory changes. The Group develops, manufactures and releases new products (10) The Impact of Natural Disasters, War, Terror, Strikes and based on appropriate timing and pricing in line with product Other Events planning that reflects market demand and customer needs. Such The occurrence of natural disasters such as major earthquakes, actions are the most important factors in maintaining stable typhoons, etc., and diseases, wars, terrorist attacks or other increases in Group business performance. In the event that events, could impede the Group’s business activities as well as market appraisals of new model vehicles and other new products delay or suspend raw material/component purchases, production, do not meet sales plan expectations or that the obsolescence rate product sales/transport, and the provision of services. The Group’s of current products exceeds forecasts, the Group’s business business performance and financial position could be affected in performance and financial position could be significantly affected. the event that such delays or suspensions are prolonged. 55 SUBARU CORPORATIONANNUAL REPORT 2017 Corporate Data/Stock Information Corporate Data (as of March 31, 2017) Company Name Main Businesses SUBARU CORPORATION Automotive: The manufacture, sale, and repair of passenger cars and their components Established July 15, 1953 Paid-In Capital ¥153,795 million Fiscal Year-End March 31 Aerospace: The manufacture, sale, and repair of airplanes, aerospace-related machinery and their components Number of Affiliates 77 consolidated subsidiaries and 2 equity-method affiliated companies Number of Employees (excluding executive officers, advisors and dispatches) 14,708 (consolidated: 32,599) Website Addresses Accounting Auditors KPMG AZSA LLC Corporate website: https://www.subaru.co.jp/en/ Investor information website: https://www.subaru.co.jp/en/ir/ Stock Information (as of March 31, 2017) Common Stock Authorized Breakdown of Shareholders 1,500,000,000 shares Common Stock Issued 769,175,873 shares Number of Shareholders 82,017 Number of Shares per Trading Unit 100 shares Stock Exchange Listing Tokyo Stock Exchange Securities Code 7270 Transfer Agent Mizuho Trust & Banking Co., Ltd. 2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan Telephone: 0120-288-324 (toll-free) Securities companies 31,611,000 shares 4.1% Individuals and others 63,272,000 shares 8.2% Japanese corporations and others 157,382,000 shares 20.5% Major Shareholders Name Toyota Motor Corporation The Master Trust Bank of Japan, Ltd. (Trust account) Japan Trustee Services Bank, Ltd. (Trust account) Japan Trustee Services Bank, Ltd. (Trust account 5) Mizuho Bank, Ltd. MIZUHO SECURITIES ASIA LIMITED-CLIENT A/C 69250601 Sompo Japan Nipponkoa Insurance Inc. FHI’s Client Stock Ownership Nippon Life Insurance Company Tokio Marine & Nichido Fire Insurance Co., Ltd. Treasury stock 2,090,000 shares 0.3% Foreign institutions and others 261,315,000 shares 34.0% Financial institutions 253,502,000 shares 33.0% Number of Shares Held (in thousands) 129,000 50,011 43,621 11,406 10,078 9,902 9,726 9,635 9,511 9,265 Percentage of Total Shares Held 16.82 6.52 5.69 1.49 1.31 1.29 1.27 1.26 1.24 1.21 *The Percentage of Total Shares Held are calculated based on the number of shares excluding treasury stock. Contact for inquiries: Investor Relations, Corporate Communications Dept., SUBARU CORPORATION Address: Ebisu Subaru Bldg., 1-20-8, Ebisu, Shibuya-ku, Tokyo 150-8554 Telephone: +81-3-6447-8000 (switchboard) 56 SUBARU CORPORATIONANNUAL REPORT 2017Ebisu Subaru Bldg., 1-20-8, Ebisu, Shibuya-ku, Tokyo 150-8554 Phone&Fax: +81-3-6447-8000 http://www.subaru.co.jp/en/ir/ Consolidated Balance Sheets SUBARU CORPORATION AND CONSOLIDATED SUBSIDIARIES As of March 31, 2017 and 2016 112.2 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) 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 Millions of yen 2017 2016 Thousands of U.S. dollars (Note 1) 2017 ¥658,822 158,454 18,538 320,579 205,991 51,754 43,586 109,600 176,433 102,045 (551) 1,845,251 1,622,363 (937,015) (28,083) 657,265 24,905 104,278 4,006 931 20,922 108,074 (3,311) 259,805 ¥507,553 140,319 21,532 500,572 192,705 50,666 34,996 90,893 151,973 93,509 (625) 1,784,093 1,485,530 (886,905) (25,992) 572,633 20,989 106,987 5,415 1,774 16,339 87,607 (3,427) 235,684 $5,871,854 1,412,246 165,223 2,857,210 1,835,927 461,266 388,467 976,827 1,572,487 909,492 (4,912) 16,446,087 14,459,563 (8,351,292) (250,294) 5,857,977 221,970 929,394 35,704 8,298 186,471 963,226 (29,510) 2,315,553 ¥2,762,321 ¥2,592,410 $24,619,617 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) Provision for loss on business liquidation 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— Issued — 1,500,000,000 shares 769,175,873 shares Capital surplus Retained earnings Less－treasury stock, at cost, 2017— 2016— Total shareholders’ equity 2,490,224 shares 2,487,843 shares Accumulated other comprehensive income: Valuation difference on available-for-sale securities Foreign currency translation adjustments Remeasurements of defined benefit plans Remeasurements of other postretirement benefits of foreign consolidated subsidiaries Total accumulated other comprehensive income Non-controlling interests Total net assets Total liabilities and net assets The accompanying notes are an integral part of these balance sheets. Millions of yen 2017 2016 Thousands of U.S. dollars (Note 1) 2017 ¥349,737 92,098 43,205 44,443 221,328 23,678 59,259 13,858 3,317 162,815 1,013,738 60,612 18,615 29,802 174,666 283,695 ¥326,625 91,476 33,252 43,692 132,759 23,554 51,251 100,272 - 156,614 959,495 93,030 18,586 18,769 153,119 283,504 $3,117,086 820,838 385,071 396,105 1,972,620 211,034 528,155 123,512 29,563 1,451,113 9,035,097 540,214 165,909 265,615 1,556,738 2,528,476 153,795 160,178 153,795 160,071 1,370,722 1,427,612 1,173,277 1,049,016 10,457,015 (7,173) (1,402) (63,931) 1,480,077 1,361,480 13,191,418 8,099 (16,631) (10,996) (1,885) (21,413) 6,224 1,464,888 11,344 (13,415) (12,808) (2,869) (17,748) 5,679 1,349,411 72,183 (148,226) (98,003) (16,800) (190,846) 55,472 13,056,044 ¥2,762,321 ¥2,592,410 $24,619,617 Consolidated Statements of Income SUBARU CORPORATION AND CONSOLIDATED SUBSIDIARIES Years ended March 31, 2017 and 2016 Net sales (Note 2) Cost of sales (Note 14) Gross profit Selling, general and administrative expenses (Note 2 and 15) Operating income Other income (expenses): Interest and dividend income Interest expenses Equity in earnings of affiliates 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) Reversal of allowance for doubtful accounts Depreciation Cost of Settlement Impairment loss (Note 9) Loss on business liquidation Other, net Income before income taxes Income taxes (Note 12): Current Deferred Net income Net income (loss) attributable to non-controlling Interests Net income attributable to owners of the parent Per share data (Note 2) : Net income (loss) —Basic —Diluted * Net assets Cash dividends (Note 13) The accompanying notes are an integral part of these statements. 112.2 Millions of yen 2017 2016 Thousands of U.S. dollars (Note 1) 2017 ¥3,325,992 ¥3,232,258 $29,643,422 2,386,266 939,726 528,916 410,810 2,187,136 1,045,122 479,533 565,589 21,267,967 8,375,455 4,714,047 3,661,408 4,616 (1,846) 292 (4,800) (4,248) (3,270) 10,144 - (956) (7,659) (1,188) (5,122) (2,078) (16,115) 394,695 123,591 (12,448) 111,143 283,552 1,198 5,190 (2,499) 739 (2,056) 9,883 (4,530) 2,430 30,152 (981) - (11) - 15,097 53,414 619,003 191,168 (8,524) 182,644 436,359 (295) 41,142 (16,453) 2,602 (42,781) (37,861) (29,144) 90,410 - (8,520) (68,262) (10,588) (45,651) (18,521) (143,627) 3,517,781 1,101,523 (110,943) 990,580 2,527,201 10,677 ¥282,354 ¥436,654 $2,516,524 Yen ¥559.54 - 1,721.90 ¥144.00 U.S. dollars (Note 1) $3.26 - 16.96 $1.28 ¥365.77 - 1,902.56 ¥144.00 *For the year ended March 31, 2017 and 2016 diluted information is not presented because potentially dilutive securities do not exist. Consolidated Statements of Comprehensive Income(loss) SUBARU CORPORATION AND CONSOLIDATED SUBSIDIARIES Years ended March 31, 2017 and 2016 Net Income Other comprehensive income(loss) (Note 3) Valuation difference on available-for-sale securities Foreign currency translation adjustments Remeasurements of defined benefit plans Remeasurements of other postretirement benefits of foreign consolidated subsidiaries Share of other comprehensive income (loss) of associates accounted for using equity method Total other comprehensive income(loss) Comprehensive income(loss) Comprehensive income (loss) attributable to: Owners of the parent Non-controlling interests 2017 ¥283,552 (3,245) (2,968) 1,812 984 (783) (4,200) Millions of yen 2016 ¥436,359 (6,642) (23,777) (1,192) 1,007 (52) (30,656) Thousands of U.S. dollars (Note 1) 2017 $2,527,201 (28,922) (26,453) 16,150 8,770 (6,978) (37,433) ¥279,352 ¥405,703 $2,489,768 278,689 ¥663 406,387 (¥684) 2,483,859 $5,909 Consolidated Statements of Changes in Net Assets SUBARU CORPORATION AND CONSOLIDATED SUBSIDIARIES As of March 31, 2017 and 2016 112.2 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 Retirement of treasury shares Transfer to capital surplus from retained earnings Other Total changes of items during the period Balance at the end of current period Retained earnings Balance at the beginning of current period Changes of items during the period Dividends from surplus Net income attributable to owners of the parent Disposal of treasury stock Change of scope of equity method Transfer to capital surplus from retained earnings 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 Retirement of treasury shares 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 Changes of items during the period Dividends from surplus Net income attributable to owners of the parent Purchase of treasury stock Disposal of treasury stock Change of scope of equity method 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) 2017 2016 2017 ¥153,795 153,795 160,071 1 (46,973) 46,972 107 107 160,178 1,049,016 (111,446) 282,354 (1) 325 (46,972) 1 124,261 1,173,277 (1,402) (52,744) 0 46,973 - (5,771) (7,173) ¥153,795 153,795 $1,370,722 1,370,722 160,071 0 - - - 0 160,071 697,414 (85,105) 436,654 (1) - - 54 351,602 1,049,016 (1,382) (20) 0 - - (20) (1,402) 1,426,658 9 (418,654) 418,645 954 954 1,427,612 9,349,519 (993,280) 2,516,524 (9) 2,897 (418,645) 9 1,107,496 10,457,015 (12,496) (470,089) 0 418,654 - (51,435) (63,931) 1,361,480 1,009,898 12,134,403 (111,446) 282,354 (52,744) 0 325 108 118,597 ¥1,480,077 (85,105) 436,654 (20) (1) - 54 351,582 ¥1,361,480 (993,280) 2,516,524 (470,089) 0 2,897 963 1,057,015 $13,191,418 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 adjustments 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 Non-controlling 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 Changes of items during the period Dividends from surplus Net income attributable to owners of the parent Purchase of treasury stock Disposal of treasury stock Change of scope of equity method 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 Thousands of U.S. dollars (Note 1) 2017 2016 2017 ¥11,344 ¥17,986 $101,105 (3,245) (3,245) 8,099 (13,415) (3,216) (3,216) (16,631) (12,808) 1,812 1,812 (10,996) (2,869) 984 984 (1,885) (17,748) (3,665) (3,665) (21,413) 5,679 545 545 6,224 (6,642) (6,642) 11,344 10,025 (23,440) (23,440) (13,415) (11,616) (1,192) (1,192) (12,808) (3,876) 1,007 1,007 (2,869) 12,519 (30,267) (30,267) (17,748) 8,302 (2,623) (2,623) 5,679 (28,922) (28,922) 72,183 (119,563) (28,663) (28,663) (148,226) (114,153) 16,150 16,150 (98,003) (25,570) 8,770 8,770 (16,800) (158,181) (32,665) (32,665) (190,846) 50,615 4,857 4,857 55,472 1,349,411 1,030,719 12,026,837 (111,446) 282,354 (52,744) 0 325 108 (3,120) 115,477 ¥1,464,888 (85,105) 436,654 (20) (1) - 54 (32,890) 318,692 ¥1,349,411 (993,280) 2,516,524 (470,089) 0 2,897 963 (27,808) 1,029,207 $13,056,044 Consolidated Statements of Cash Flows SUBARU CORPORATION AND CONSOLIDATED SUBSIDIARIES Years ended March 31, 2017 and 2016 Net cash provided by (used in) operating activities Income before income taxes Depreciation and amortization Increase (decrease) in allowance for doubtful accounts Interest and dividends income Interest expenses Increase (decrease) in provision for loss on business liquidation 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 Increase (decrease) in accrued expenses Other, net Interest and dividends income received Interest expenses paid Proceeds from compensation for damage Income taxes paid Net cash provided by (used in) operating activities Sub-total 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 Purchase of treasury shares Cash dividends paid Dividends paid to non-controlling interests Other, net Effect of exchange rate change on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Net cash provided by (used in) financing activities Cash and cash equivalents at beginning of the period Increase (decrease) in cash and cash equivalents resulting from change of scope of consolidation Cash and cash equivalents at end of the period The accompanying notes are an integral part of these statements. 112.2 Millions of yen Thousands of U.S. dollars (Note 1) 2017 2016 2017 ¥394,695 85,653 (189) (4,616) 1,846 3,317 3,270 (9,322) (3,898) (19,684) (32,444) 24,458 88,159 19,003 550,248 5,236 (1,852) - (208,190) 345,442 (25,809) (135,061) 98,133 (163,774) 1,327 (48,705) 46,585 (137,006) 117,687 (7,629) (254,252) 9,939 12,930 (34,605) (10,000) (52,744) (111,435) (1,944) (1,185) (189,044) (2,991) (100,845) ¥619,003 72,938 (30,260) (5,190) 2,499 - 4,530 2,957 (6,540) 22,791 (1,342) 30,082 (11,792) 7,674 707,350 5,668 (2,528) 48,184 (144,418) 614,256 (101,631) (48,845) 47,032 (126,732) 975 (47,005) 25,240 (106,117) 108,636 (7,229) (255,676) (7,822) 11,760 (44,797) － (20) (84,938) － (373) (126,190) (14,887) 217,503 $3,517,781 763,396 (1,684) (41,141) 16,453 29,563 29,144 (83,084) (34,742) (175,437) (289,162) 217,986 785,731 169,367 4,904,171 46,667 (16,506) - (1,855,526) 3,078,806 (230,027) (1,203,752) 874,626 (1,459,661) 11,827 (434,091) 415,196 (1,221,087) 1,048,904 (67,996) (2,266,061) 88,583 115,241 (308,422) (89,127) (470,089) (993,182) (17,326) (10,562) (1,684,884) (26,658) (898,797) 829,461 612,085 7,392,701 - ¥728,616 (127) ¥829,461 - $6,493,904 Notes to Consolidated Financial Statements SUBARU CORPORATION AND CONSOLIDATED SUBSIDIARIES 1. Basis of Presentation of the Financial Statements The accompanying consolidated financial statements of SUBARU CORPORATION (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, 2017, which was ¥112.20 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 4 consolidated foreign subsidiaries in fiscal year 2017 and 4 consolidated foreign subsidiaries in fiscal year 2016, 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 2017 and 77 subsidiaries in fiscal year 2016, respectively. In addition, 2 affiliated companies were accounted for by the equity method in fiscal 2017, 1 non-consolidated subsidiary and 1 affiliated companies were accounted for by the equity method in fiscal 2016, respectively. Investments in insignificant non-consolidated subsidiary and affiliated companies not accounted for by the equity method are carried at cost. [2] Short-Term Investment Securities and Investment Securities Under the Japanese accounting standards for financial instruments, available-for-sale securities for which fair 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 1 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 facilities attached to buildings) acquired on or after April 1,1998, and facilities attached to buildings and structures acquired on or after April 1, 2016 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: 2–20 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. [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 "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] Provision for Loss on business liquidation The provision for losses on business liquidation is provided due to important business liquidation. 2 [12] 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 (13-18 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 2017 and 2016) 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. [13] 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 "Non-controlling interests" in the net assets section of the accompanying consolidated balance sheets. [14] 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. [15] 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. [16] 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. 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 3 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. [17] Goodwill Goodwill is principally amortized by the straight-line method over 5 years. [18] Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with original maturities of three 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. [19] Income 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. [20] Research and Development Expenses Research and development costs are expensed as incurred and amounted to 114,215 million yen (US$ 1,017,959 thousand) and 102,373 million yen for fiscal years 2017 and 2016, respectively. [21] 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. [22] Reclassification Certain reclassifications have been made in the consolidated financial statements for the year ended March 31, 2016 to conform to the presentation for the year ended March 31, 2017. [23] Changes in Accounting Policy Based on amendments in the CORPORATION Tax Act, "Practical Solution on a change in depreciation method due to Tax Reform 2016"(PITF No.32 issued on June 17, 2016) issued by Accounting Standards Board of Japan (ASBJ) was applied from the fiscal year ended on March 2017. The company changed depreciation method for facilities attached to buildings and for structures acquired on or after April 1, 2016 from the declining-balance method to the straight-line method. Since the impact of the change is immaterial, notes for the change was omitted. [24] Changes in Presentation (Consolidated Statements of Income) Consolidated Statements of Income for the fiscal year ended March 31, 2017 include the following reclassification. "State subsidy", which was presented as a separate account in the prior fiscal year, is included in “Other, net” in the current fiscal year due to its decreased financial materiality. To reflect this change, 2,999 million yen of 4 “State subsidy” separately stated under “Other income(expense)” in the prior fiscal year has been reclassified into “Other, net” in the consolidated statements of income for the prior fiscal year provided herein. "Loss on reduction of non-current assets” and “Loss on valuation of investment securities”, which were presented as separate accounts in “Other income(expense)” in the prior fiscal year, are included in “Other, net” in the current fiscal year due to its decreased financial materiality. To reflect these changes, 1,660 million yen of "Loss on reduction of non-current assets" and 5,387 million yen of “Loss on valuation of investment securities" have been reclassified into "Other, net". As a result, the account "Other, net" in “Other income (expense)” in the prior fiscal year has been 15,097 million yen. (Consolidated Statements of Cash Flows) Consolidated Statements of Cash Flows for the fiscal year ended March 31, 2017 include the following reclassifications. “Increase (decrease) in accrued expenses”, which was included in “Other, net” under “Net cash provided by (used in) operating activities” in the prior fiscal year, is presented as a separate item in the current fiscal year due to its increased financial materiality. In addition, “Other extraordinary income”, which was presented as a separate item in “Net cash provided by (used in) operating activities”, is included in “Other, net” in “Net cash provided by (used in) operating activities” in the current fiscal year due to its decreased financial materiality. To reflect these changes, 15,538 million yen of “Other, net” under “Net cash provided by (used in) operating activities” in Consolidated Statements of Cash Flows in the prior fiscal year has been split into 11,792 million yen of “Increase (decrease) in accrued expenses” and 27,330 million yen of “Other, net”. 19,656 million yen of “Other extraordinary income” has been reclassified into “Other, net”. As a result, “Other, net” in “Net cash provided by (used in) operating activities” is 7,674 million yen. “Purchase of treasury shares”, which was included in “Other, net“ under “Net cash provided by (used in) financing activities” in the prior fiscal year, is presented as a separate item in the current fiscal year due to its increased financial materiality. To reflect this change, 393 million yen of “Other, net” under “Net cash provided by (used in) financing activities” in the Consolidated Statements of Cash Flows” in the prior fiscal year, has been split into 20 million yen of ” Purchase of treasury shares” and 373 million yen of “Other, net”. [25] Additional Information The Company applied "Revised Implementation Guidance on Recoverability of Deferred Tax Assets" issued by ASBJ from the fiscal year ended March 2017. 5 3. Other comprehensive income Amounts reclassified to net income (loss) in fiscal 2017 and 2016, 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 2017 2016 Thousands of U.S. dollars 2017 Valuation difference on available-for-sale securities Increase(decrease) during the year Reclassification adjustments Before tax effect Tax effect Balance at the end of the period Foreign currency translation adjustments Increase(decrease) during the year Reclassification adjustments Before tax effect Tax effect Balance at the end of the period Remeasurements of defined benefit plans Increase(decrease) during the year Reclassification adjustments Before tax effect Tax effect Balance at the end of the period Remeasurements of other postretirement benefits of foreign consolidated subsidiaries Increase(decrease) during the year Reclassification adjustments Before tax effect Tax effect Balance at the end of the period Share of other comprehensive income of affiliated companies accounted for using equity method Increase(decrease) during the year Reclassification adjustments Before tax effect Tax effect Balance at the end of the period Total other comprehensive income(loss) ¥5,003 (9,572) (4,569) 1,324 (3,245) (2,968) - (2,968) - (2,968) (109) 2,553 2,444 (632) 1,812 1,595 - 1,595 (611) 984 (¥8,513) (2,288) (10,801) 4,159 (6,642) (23,670) (107) (23,777) - (23,777) (3,648) 2,406 (1,242) 50 (1,192) 1,548 - 1,548 (541) 1,007 $44,590 (85,312) (40,722) 11,800 (28,922) (26,453) - (26,453) - (26,453) (971) 22,754 21,783 (5,633) 16,150 14,216 - 14,216 (5,446) 8,770 (639) (144) (783) - (783) (¥4,200) (52) - (52) - (52) (¥30,656) (5,695) (1,283) (6,978) - (6,978) ($37,433) 6 4. Additional Cash Flow Information Cash and cash equivalents as of March 31, 2017 and 2016, consisted of the following: Millions of yen Cash and deposits Short-term investment securities Sub-total Less maturity over three months Short-term investment securities excluding cash equivalents Cash and cash equivalents 2017 ¥658,822 320,579 979,401 (151,924) (98,861) 2016 ¥507,553 500,572 1,008,125 (126,107) (52,557) Thousands of U.S. dollars 2017 $5,871,854 2,857,210 8,729,064 (1,354,046) (881,114) ¥728,616 ¥829,461 $6,493,904 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 SUBARU CORPORATION, its consolidated subsidiaries and affiliated companies (the "SUBARU Group") in their main operations of automobile manufacturing and sales, the SUBARU Group finances mainly from bank loans. 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 SUBARU 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 SUBARU 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 7 years after March 31, 2017 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, 2017 and 2016 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, 2017 Consolidated balance sheet amounts ¥658,822 158,454 (88) 158,366 18,538 (21) 18,517 176,433 (250) 176,183 122,272 1,134,160 349,737 92,098 43,205 44,443 - 13,858 221,328 60,612 825,281 Millions of yen Fair Value Difference ¥658,822 158,366 ¥- - 20,065 1,548 181,938 5,755 122,272 1,141,463 349,737 92,098 43,205 44,442 - 13,858 221,328 60,913 825,581 - 7,303 - - - 1 - - - (301) (300) - ¥- 2,911 ¥- 2,911 ¥- 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 Long-term loans payable Total Liabilities Derivative transactions (*2) hedge accounting is not applied hedge accounting is applied 10 As of March 31, 2017 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 Long-term loans payable Total Liabilities Derivative transactions (*2) hedge accounting is not applied hedge accounting is applied Thousands of U.S. dollars Fair Value Difference Consolidated balance sheet amounts $5,871,854 $5,871,854 1,412,246 (784) 1,411,462 165,223 (188) 165,035 1,572,487 (2,228) 1,570,259 $- - 1,411,462 178,832 13,797 1,621,551 51,292 1,089,768 1,089,768 10,108,378 10,173,467 3,117,086 820,838 385,071 396,096 3,117,086 820,838 385,071 396,105 - - 123,512 1,972,620 540,214 7,355,446 123,512 1,972,620 542,897 7,358,120 - 65,089 - - - 9 - - - (2,683) (2,674) 25,945 25,945 $- $- - $- *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, 2016 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 Long-term loans payable Total Liabilities Derivative transactions (*2) hedge accounting is not applied hedge accounting is applied Consolidated balance sheet amounts ¥507,553 140,319 (105) 140,214 21,532 (53) 21,479 151,973 (294) 151,679 118,565 939,490 326,625 91,476 33,252 33,692 10,000 100,272 132,759 93,030 821,106 Millions of yen Fair Value Difference ¥507,553 ¥- 140,214 - 23,095 1,616 155,038 3,359 118,565 944,465 326,625 91,476 33,252 33,807 10,011 100,272 132,759 93,673 821,875 - 4,975 - - - (115) (11) - - (643) (769) 7,159 ¥- 7,159 ¥- - ¥- *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 balance of Lease investment assets. 12 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 "6.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 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, 2017 and 2016: Other securities (available-for-sale securities) Stocks of non-consolidated subsidiary and affiliated companies Certificate of deposit Commercial paper Money management fund Unlisted stocks (excluding over-the-counter stocks) Medium Term Note Other Investments and other assets Investments in equity of affiliated companies and others 2017 ¥1,232 Millions of yen 2016 ¥2,817 Thousands of U.S. dollars 2017 $10,980 135,000 42,499 104,218 866 20,000 3 149,900 172,996 135,119 976 30,000 3 1,203,209 378,779 928,859 7,718 178,253 27 ¥1,661 ¥768 $14,804 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, 2017: Cash and deposits Notes and accounts receivable-trade Lease investment assets Short-term loans receivable Short-term investment securities, Investment securities and Other securities Government and municipal bonds Corporate bonds Other As of March 31, 2017: Cash and deposits Notes and accounts receivable-trade Lease investment assets Short-term loans receivable Short-term investment securities, Investment securities and Other securities Government and municipal bonds Corporate bonds Other As of March 31, 2016: Cash and deposits Notes and accounts receivable-trade Lease investment assets Short-term loans receivable Short-term investment securities, Investment securities and Other securities Government and municipal bonds Corporate bonds Other Within 1 Year ¥658,822 145,641 6,136 73,229 1 to 5 Years ¥- 12,813 12,393 101,058 Millions of yen 5 to 10 Years ¥- - 9 2,146 Over 10 years ¥- - - - 10,574 8,270 ¥197,517 17,959 25,433 ¥1,175 5,080 4,939 ¥917 3,594 4,265 ¥5,595 Thousands of U.S. dollars Within 1 Year $5,871,854 1,298,048 54,688 652,665 1 to 5 Years $- 114,198 110,455 900,695 5 to 10 Years $- - 80 19,127 Over 10 years $- - - - 94,242 73,708 $1,760,401 160,062 226,676 $10,472 45,276 44,020 $8,173 32,032 38,012 $49,866 Within 1 Year ¥507,553 130,484 6,555 48,205 1 to 5 Years ¥- 8,142 14,896 101,691 Millions of yen Over 10 years ¥- - - - 5 to 10 Years ¥- 1,693 81 2,077 8,595 3,440 ¥353,419 19,447 19,623 ¥1,006 2,585 3,317 ¥1,056 4,106 4,299 ¥4,189 14 [4] Amount of repayment for long-term debt and other interest-bearing debt As of March 31, 2017: Short-term loans payable Bonds payable Long-term loans payable As of March 31, 2017: Short-term loans payable Bonds payable Long-term loans payable As of March 31, 2016: Short-term loans payable Bonds payable Long-term loans payable Within 1 Year ¥43,205 - ¥44,443 1 to 5 Years ¥- - ¥58,774 Millions of yen Over 10 years ¥- - ¥- 5 to 10 Years ¥- - ¥1,838 Thousands of U.S. dollars Within 1 Year $385,071 - 1 to 5 Years 5 to 10 Years $- - $- - $396,105 $523,832 $16,382 Over 10 Years $- - $- Within 1 Year ¥33,252 10,000 ¥33,692 1 to 5 Years ¥- - ¥90,918 Millions of yen Over 10 years ¥- - ¥- 5 to 10 Years ¥- - ¥2,112 6. Short-Term Investment Securities and Investment Securities Information on the value of short-term investment securities and investment securities as of March 31, 2017 and 2016 was as follows: (1) Other securities (available-for-sale securities): As of March 31, 2017: 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 Sub-total Total As of March 31, 2017: Book value Acquisition cost Millions of yen Difference ¥33,393 ¥21,153 ¥12,240 17,369 21,851 3,370 75,983 17,259 21,694 3,329 63,435 1,062 3,566 19,837 21,056 4,334 46,289 ¥122,272 15 20,077 21,301 4,403 49,347 ¥112,782 110 157 41 12,548 (2,504) (240) (245) (69) (3,058) ¥9,490 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 Sub-total Total As of March 31, 2016: 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 Sub-total Total Book value Acquisition cost Difference Thousands of U.S. dollars $297,620 $188,529 $109,091 154,804 194,750 30,036 677,210 153,824 193,351 29,670 565,374 980 1,399 366 111,836 9,465 31,783 (22,318) 176,800 187,665 38,627 412,557 $1,089,767 178,939 189,848 39,242 439,812 $1,005,186 (2,139) (2,183) (615) (27,255) $84,581 Book value Acquisition cost Millions of yen Difference ¥39,363 ¥22,386 ¥16,977 28,450 21,151 5,307 94,271 28,019 20,835 5,229 76,469 431 316 78 17,802 7,020 8,100 (1,080) 6,282 9,527 1,465 24,294 ¥118,565 6,336 9,670 1,504 25,610 ¥102,079 (54) (143) (39) (1,316) ¥16,486 16 (2) Other securities (available-for-sale securities) sold during fiscal years 2017 and 2016: For the year ended March 31, 2017: Equity securities Debt securities Government and municipal bonds Corporate bonds Other Total For the year ended March 31, 2017: Equity securities Debt securities Sales amount Total gains Total losses Millions of yen ¥23,650 ¥9,968 28,576 9,586 82,906 ¥144,718 128 45 3 ¥10,144 ¥419 219 45 46 ¥729 Sales amount Total gains Total losses $210,784 $88,841 $3,734 Thousands of U.S. dollars Government and municipal bonds Corporate bonds Other Total $254,688 $85,437 $738,913 $1,289,822 $1,141 $401 $27 $90,410 $1,952 $401 $410 $6,497 For the year ended March 31, 2016: Sales amount Total gains Total losses Millions of yen Equity securities Debt securities Government and municipal bonds Corporate bonds Other Total ¥4,190 ¥2,571 27,456 38,575 2,051 ¥72,272 115 43 3 ¥2,732 ¥99 143 43 17 ¥302 17 7. Short-Term Loans Payable and Long-Term Debts Short-term loans payable as of March 31, 2017 and 2016, consisted of the following: Millions of yen 2016 Thousands of U.S. dollars 2017 2017 Bank loans with average interest rate of 1.40% and 1.48% per annum as of March 31, 2017 and 2016, respectively Unsecured 0.71% bonds due June 13, 2016 ¥43,205 ¥- ¥33,252 ¥10,000 $385,071 $- Long-term debts as of March 31, 2017 and 2016 consisted of the following: Loans principally from banks and insurance companies due through 2024 with average interest rate of 0.51% and 0.7% per annum as of March 31, 2017 and 2016, respectively Subtotal Less-Portion due within one year Total Millions of yen 2016 Thousands of U.S. dollars 2017 2017 ¥105,055 ¥126,722 $936,319 105,055 (44,443) ¥60,612 126,722 (33,692) ¥93,030 936,319 (396,105) $540,214 Annual maturities of long-term loans payable and bonds payable as of March 31, 2017 were as follows: 2018 2019 2020 2021 2022 2023 and thereafter Total Millions of yen ¥44,443 43,312 7,473 7,268 721 1,838 ¥105,055 Thousands of U.S. dollars $396,105 386,025 66,604 64,777 6,426 16,382 $936,319 18 Lease obligations as of March 31, 2017 and 2016 consisted of the following: Lease obligations due within one year as of March 31, 2017 Lease obligations due after one year as of March 31, 2017 Total Millions of yen 2016 ¥861 1,254 ¥2,115 2017 ¥1,189 1,765 ¥2,954 Thousands of U.S.dollars 2017 $10,597 15,731 $26,328 Annual maturities of lease obligations as of March 31, 2017 were as follows: 2018 2019 2020 2021 2022 2023 and thereafter Total Millions of yen ¥1,189 1,462 139 89 55 20 ¥2,954 Thousands of U.S. dollars $10,597 13,030 1,239 793 490 179 $26,328 The following assets as of March 31, 2017 and 2016 were pledged as collateral for certain loans: Property, plant and equipment Total 2017 ¥32,520 ¥32,520 Millions of yen 2016 ¥36,799 ¥36,799 Thousands of U.S. dollars 2017 $289,840 $289,840 To raise working capital efficiently, the SUBARU Group has entered into the commitment-line contracts. The maximum amount that can be made available under these contracts is 210,330 million yen (US$1,874,599 thousand) as of March 31, 2017. At the end of the fiscal year, 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, 2017 and 2016 was as follows: Derivative transactions to which hedge accounting is not applied (1) Foreign currency contracts: As of March 31, 2017 Notional Amount Millions of yen Valuation gain (loss) Fair value Thousands of U.S. dollars Valuation gain (loss) Fair value Notional Amount Foreign exchange forward contracts: Sell- U.S. dollar Euro Canadian dollar Total As of March 31, 2016 ¥262,186 3,421 21,521 ¥287,128 ¥2,585 11 315 ¥2,911 ¥2,585 $2,336,774 30,490 191,809 ¥2,911 $2,559,073 11 315 $23,039 98 2,808 $23,039 98 2,808 $25,945 $25,945 Foreign exchange forward contracts: Sell- U.S. dollar Euro Canadian dollar Total Notional Amount Fair value Millions of yen Valuation gain (loss) ¥287,156 3,254 22,516 ¥312,926 ¥7,975 (44) (772) ¥7,159 ¥7,975 (44) (772) ¥7,159 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, 2017 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 ¥1,000 ¥- (*) $8,913 $- (*) 20 As of March 31, 2016 Interest rate swap contracts: Receive floating rate pay fixed rate Millions of yen Notional Amount Over 1 year Fair value ¥3,000 ¥1,000 (*) 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. 9. Property, Plant and Equipment Property, plant and equipment as of March 31, 2017 and 2016 are summarized as follows: Buildings and structures Machinery, equipment and vehicles Vehicles and equipment on operating leases Other Subtotal Land Construction in progress Accumulated depreciation Accumulated impairment loss Total 2017 ¥407,758 603,416 15,391 354,599 1,381,164 195,783 45,416 (937,015) (28,083) ¥657,265 Millions of yen 2016 ¥381,255 540,376 11,221 312,029 1,244,881 193,698 46,951 (886,905) (25,992) ¥572,633 Thousands of U.S. dollars 2017 $3,634,207 5,378,039 137,175 3,160,419 12,309,840 1,744,947 404,777 (8,351,292) (250,294) $5,857,977 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, 2017 and 2016 was as follows: Total overdraft facilities and lending commitments Less amounts currently executed Unexecuted balance Millions of yen 2016 ¥4,800 801 ¥3,999 Thousands of U.S. dollars 2017 $42,781 11,257 $31,524 2017 ¥4,800 1,263 ¥3,537 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, 2017, the Company and 54 of its consolidated domestic subsidiaries, which add up to a total of 55 companies, have lump-sum retirement payment plans. Within the SUBARU Group, there are also 25 defined contribution plans, and 6 defined benefits pension plans. In addition, there are 3 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 Balance at the beginning of the period a. Service cost b. Interest cost c. Actuarial loss (gain) d. Benefits paid e. Amortization of prior service cost f. Other Balance at the end of the period 2017 ¥116,331 6,752 679 (3,149) (4,373) (15) (526) ¥115,699 Millions of yen 2016 ¥107,397 6,115 1,161 7,769 (5,791) 152 (472) ¥116,331 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. Payment for retirement benefits e. Other 2017 ¥105,917 1,953 (3,258) 3,290 (2,886) (188) Millions of yen 2016 ¥99,140 1,836 4,254 4,288 (3,601) - Balance at the end of the period ¥104,828 ¥105,917 Thousands of U.S. dollars 2017 $1,036,818 60,178 6,052 (28,066) (38,975) (134) (4,688) $1,031,185 Thousands of U.S. dollars 2017 $944,002 17,406 (29,037) 29,323 (25,722) (1,676) $934,296 22 Movement in net defined benefit liability in the plans applying the simplified method Balance at the beginning of the period a. Retirement benefit cost b. Benefits paid c. Contributions paid by the employer Balance at the end of the period 2017 ¥6,398 841 (383) (43) ¥6,813 Millions of yen 2016 ¥6,072 722 (357) (39) ¥6,398 Thousands of U.S. dollars 2017 $57,023 7,496 (3,414) (383) $60,722 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 h. Other Total retirement benefit costs for the fiscal year ended 2017 ¥105,901 (105,157) 744 16,940 Millions of yen 2016 ¥106,762 (106,162) 600 16,212 Thousands of U.S. dollars 2017 $943,859 (937,228) 6,631 150,980 17,684 16,812 157,611 18,615 (931) ¥17,684 18,586 (1,774) ¥16,812 165,909 (8,298) $157,611 2017 ¥6,752 679 (1,953) 2,560 (6) 225 841 (149) ¥8,949 Millions of yen 2016 ¥6,115 1,161 (1,836) 2,346 60 215 722 22 ¥8,805 Thousands of U.S. dollars 2017 $60,178 6,052 (17,406) 22,816 (53) 2,005 7,496 (1,329) $79,759 23 Adjustments for retirement benefit (before tax effect) a. Past service costs b. Actuarial gains and losses Total 2017 ¥21 (2,465) (¥2,444) Millions of yen 2016 (¥92) (1,150) (¥1,242) Accumulated adjustments for retirement benefit (before tax effect) Thousands of U.S. dollars 2017 $187 (21,970) ($21,783) Thousands of U.S. dollars 2017 $2,380 2017 ¥267 Millions of yen 2016 ¥246 15,498 17,963 138,128 ¥15,765 ¥18,209 $140,508 2017 47% 16% 28% 9% 100% Percentage 2016 49% 13% 28% 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 2017 2016 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 Primarily 0.7% Primarily 2.1% 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) 13 to 18 years Benefit formula method Primarily 0.6% Primarily 2.1% 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 4,698 million yen (US$41,872 thousand) and 4,844 million yen for the fiscal years 2017 and 2016, 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, 2017 and 2016) Plan assets Projected benefit obligation Funded status 2017 ¥10,660 11,320 (¥660) Millions of yen 2016 ¥49,530 58,015 (¥8,485) Thousands of U.S. dollars 2017 $95,009 100,891 ($5,882) (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 2017 and 2016 were 4% and 6% respectively. Other than the above, 27,795 million yen (US$247,727 thousand) and 26,943 million yen of postretirement benefit plan obligation for fiscal years 2017 and 2016 respectively is included in "Other" of accrued expense and long-term liabilities in some U.S. 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 30.7% and 32.9% for fiscal years 2017 and 2016, respectively. A reconciliation of the statutory income tax rates in Japan to the Company’s effective income tax rates for fiscal years 2017 and 2016 were as follows: Statutory income tax rate in Japan Increase (reduction) in taxes resulting from: Difference of applicable tax rate in subsidiaries Adjustment of deferred tax assets in the end of fiscal year 2016 by change of the tax rate Entertainment expenses not qualifying for deduction Changes in valuation allowance and tax benefits realized from loss carry forwards Deduction of research and development expense Other Effective income tax rate 2017 30.7% 2016 32.9% 2.4% - 0.1% 0.0% (4.7)% (0.3)% 28.2% 0.6% 0.5% 0.1% (1.9)% (3.1)% 0.4% 29.5% Significant components of the deferred tax assets and liabilities as of March 31, 2017 and 2016 , were as follows: Millions of yen 2016 Thousands of U.S. dollars 2017 2017 25 Deferred tax assets: Accrued expenses Unrealized profit on inventories Provision for product warranties Net defined benefit liability Depreciation and amortization expenses Long-term accounts payable-other Provision for bonuses Loss on valuation of inventories Other Total deferred tax assets Valuation allowance Total deferred tax assets, net of valuation allowance Deferred tax liabilities: Deferred revenue of foreign consolidated subsidiaries Depreciation and amortization expenses Valuation difference on available-for-sale securities Reserve for reduction entry Net defined benefit asset Other Total deferred tax liabilities Net deferred tax assets ¥53,348 22,748 19,875 15,082 11,307 10,858 7,493 2,247 21,300 164,258 (8,778) 155,480 (26,494) (22,466) (2,354) (1,770) (932) (744) (54,760) ¥100,720 ¥28,427 24,451 17,324 14,173 10,554 10,593 7,456 3,230 25,089 141,297 (8,714) 132,583 (22,045) (14,167) (4,280) (1,862) (966) (800) (44,120) ¥88,463 $475,472 202,745 177,139 134,421 100,775 96,774 66,783 20,027 189,839 1,463,975 (78,235) 1,385,740 (236,132) (200,232) (20,980) (15,775) (8,307) (6,631) (488,057) $897,683 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 2017 ¥109,600 20,922 Millions of yen 2016 ¥90,893 16,339 Thousands of U.S. dollars 2017 $976,827 186,471 (29,802) ¥100,720 (18,769) ¥88,463 (265,615) $897,683 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 26 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, 2017, the shareholders approved cash dividends amounting to 55,230 million yen (US$492,246 thousand). Such appropriations have not been accrued in the consolidated financial statements as of March 31, 2017. Such appropriations are recognized in the period in which they are approved by the shareholders. 14. Presentation of inventories and provision for loss on construction contracts "Provision for loss on construction contracts" included in "Cost of sales" for the fiscal years 2017 and 2016 is reversal of 579 million yen (US$ 5,160 thousand) and provision of 644 million yen, respectively. 15. Selling, General and Administrative Expenses Selling, general and administrative expenses for fiscal years 2017 and 2016 consisted of the following: Millions of yen 2016 ¥27,023 87,666 98,505 54,008 101,499 110,832 ¥479,533 2017 ¥27,813 80,780 137,209 55,123 113,490 114,501 528,916 Thousands of U.S. dollars 2017 $247,888 719,964 1,222,897 491,292 1,011,497 1,020,509 $4,714,047 Freightage and packing expenses Advertising expenses Sales incentives Salaries and bonuses Research and development expenses Other Total 16. Extraordinary income (Fiscal 2016) Reversal of allowance for doubtful accounts Reversal of allowance for doubtful account includes 29,624 million yen of the allowance for receivables of the initial investment fees associated with the AH-64D combat helicopter for the Japan Ministry of Defense was released because the lawsuit against the Government of Japan over the claims of the initial investment fees was concluded. Other extraordinary income Other extraordinary income includes 18,561 million yen of interest receivable recognized due to the conclusion of the lawsuit against the Government of Japan over the claims of the initial investment fees associated with the AH-64D combat helicopter for the Japan Ministry of Defense. 17. Extraordinary loss (Fiscal 2017) Loss on business liquidation The loss was recognized due to the decision to liquidate the Industrial Products business on November 2, 2016.The loss consists of 2,524 million yen (US$22,496 thousand) of loss on fixed assets, 2,127 million yen (US$18,957 thousand) on inventory valuation, and 471 million yen (US$4,198 thousand) on others. The loss on fixed assets above includes impairment losses on the following assets. 27 Use Location Category Production facilities Kitamoto City Saitama Prefecture and other locations Machinery, equipment and vehicles Impairment loss (millions of yen) 1,201 Production facilities that impairment losses are recognized on are grouped together with assets owned mainly by the Industrial Products business for impairment recognition and measurement purposes. Due to the decision to discontinue properties were recognized as follows the Industrial Products business, it is expected that future cash flows would fall below book values of related facilities, the book values of those assets were written down to the recoverable amounts accordingly. As a result, 1,201 million yen (US$10,704 thousand) of impairment losses were recognized and presented in Loss on business liquidation in the quarterly consolidated statements of income. The recoverable amounts are measured at value in use, calculated based on future cash flows discounted principally at 10.30%. Impairment loss In addition to the impairment loss on production facilities referred to above, impairment losses on rental properties were recognized as follows: Use Location Category Rental properties Konan City Shiga Prefecture Land Other Impairment loss (millions of yen) 1,175 10 Grouping unit for recognition and measurement of impairment loss is defined by each property for lease. Due to the declining profitability and significant decline in market value, it is expected that future cash flows would fall below book values of those properties, the book values of those properties were written down to the recoverable amounts accordingly. As a result, 1,185 million yen (US$10,561 thousand)of impairment losses were recognized. The recoverable amounts are measured at net realizable value, calculated based on real estate appraisal value. 18. Finance Leases As allowed under the Japanese accounting standards, the Company and its consolidated subsidiaries in Japan account for finance leases. Information as Lessor (1) The details of lease investment assets as of March 31, 2017 and 2016 were as follows: Lease revenue receivable Estimated residual value Interest income portion Lease investment assets 2017 ¥22,210 386 (4,058) ¥18,538 Millions of yen 2016 ¥25,716 363 (4,547) ¥21,532 Thousands of U.S. dollars 2017 $197,950 3,440 (36,167) $165,223 (2) Lease revenue related to lease investment assets Amounts of collections on lease receivable after the fiscal year ended March 31, 2017 and 2016 , were as follows: 28 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 2016 ¥7,878 6,804 5,374 3,705 1,851 ¥104 Thousands of U.S. dollars 2017 $65,553 53,672 40,909 23,512 14,207 $98 2017 ¥7,355 6,022 4,590 2,638 1,594 ¥11 29 19. Operating Lease Information as Lessee The future minimum lease/rent payments, excluding the portion of interest thereon, as of March 31, 2017 and 2016, were as follows: Operating leases: Due within one year Due after one year Total Millions of yen 2016 Thousands of U.S. dollars 2017 ¥2,937 20,570 ¥23,507 $31,105 152,415 $183,520 2017 ¥3,490 17,101 ¥20,591 Information as Lessor The future minimum lease/rent payments receivable, excluding the portion of interest thereon, as of March 31, 2017 and 2016, were as follows: Operating leases: Due within one year Due after one year Total 20. Contingent Liabilities Contingent liabilities as of March 31, 2017 and 2016, were as follows: Millions of yen 2016 Thousands of U.S. dollars 2017 ¥158 74 ¥232 $1,221 642 $1,863 2017 ¥137 72 ¥209 Thousands of Millions of yen U.S. dollars 2017 2016 2017 As guarantor of third-party indebtedness from financial institutions ¥28,555 ¥44,059 $254,501 (Fiscal 2016) Expenses with regard to the modified agreement contents between the U.S. subsidiary of Takata Co., Ltd. and NHTSA (The National Highway Traffic and Safety Administration of the United States) dated May 4, 2016, Notification “Extended schedule of the recalls of airbag inflators manufactured by Takata Co., Ltd.” released by MLIT (The Ministry of Land, Infrastructure, Transport and Tourism of Japan) dated May 27, 2016, and recalls in the other regions including China and Australia required by the U.S. and Japanese authorities are not accrued in the consolidated financial statements for the fiscal year ended March 31, 2016, since the amounts of these expenses can not be estimated reasonably at present. Expenses with regard to recall of airbag inflators manufactured by Takata Co., Ltd. which can be reasonably estimated were accrued in the consolidated financial statements for the fiscal year ended March 31, 2016. SUBARU group notified the regulators to take corresponding actions in North American Market on May 25, 2016 and decided to do it in Japan and the other regions including China and Australia by the end of June 2016, that cover a part of contingent liabilities mentioned above. (Fiscal 2017) 30 Expenses with regard to the modified agreement contents between the U.S. subsidiary of Takata Co., Ltd. and NHTSA (The National Highway Traffic and Safety Administration of the United States) dated May 4, 2016, Notification “Extended schedule of the recalls of airbag inflators manufactured by Takata Co., Ltd.” released by MLIT (The Ministry of Land, Infrastructure, Transport and Tourism of Japan) dated May 27, 2016, and recalls in the other regions including China and Australia required by the U.S. and Japanese authorities are accrued to the extent that the amount can be reasonably estimated in the consolidated financial statements for the fiscal year ended March 31, 2017. There is a possibility that additional expense may be accrued required due to events in the future. 21. The Amount of Discount of Export Bill The amount of discount of export bill as of March 31, 2017 and 2016, were as follows: The amount of discount of export bill Thousands of Millions of yen U.S. dollars 2017 2016 2017 ¥1,210 ¥1,718 $10,784 22. Transfer of Financial Assets to Special Purpose Company The balance of financial assets transferred to special purpose company as of March 31, 2017 and 2016, were as follows: Balance of financial assets transferred to special purpose company(loan receivable of Automobiles and accounts receivable-trade of Aerospace) Thousands of Millions of yen U.S. dollars 2017 2016 2017 ¥4,488 ¥4,508 $40,000 23. Segment Information (1)Outline of business segment 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 recognizes Automobile as its main business, and introduces an internal company system and recognizes Aerospace, and Other 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, and Other which does not belong to Automobile nor Aerospace. Automobile segment manufactures and sells vehicles and related products. Aerospace segment manufactures aircrafts, parts of space-related devices. (Changes in reporting segments) "Industrial Products", which had been formerly reported as a single segment, is included in "Other" segment from the fiscal year ended March 2017 due to the decision to liquidate the Industrial Products business at the Board of Directors meeting held on November 2, 2016. Segment information for the twelve months period ended March 31, 2016 is presented in conformity with the change. (2)Calculation method of sales, profit or loss, assets, liabilities and other items by reportable segments 31 Accounting method for reportable segments is almost the same as "2. Summary of Significant Accounting Policies". Segment incomes are calculated based on operating income. Net sales - Inter-segment are calculated based on current market prices. (3)Information on sales, income, assets and other items by reportable segments for the fiscal years ended March 31, 2017 and 2016 was summarized as follows Net Sales: Automobiles Outside customers Inter-segment Sub-total Aerospace Outside customers Inter-segment Sub-total Other (*1) Outside customers Inter-segment Sub-total Total Adjustment (*2) Consolidated total Segment income: Automobiles Aerospace Other (*1) Total Adjustment (*2) Consolidated total (*3) Millions of yen 2016 2017 Thousands of U.S. dollars 2017 ¥3,151,961 4,720 3,156,681 ¥3,039,424 4,752 3,044,176 $28,092,344 42,068 28,134,412 138,759 - 138,759 35,272 23,785 59,057 3,354,497 (28,505) ¥3,325,992 152,786 - 152,786 1,236,711 - 1,236,711 40,048 17,850 57,898 3,254,860 (22,602) ¥3,232,258 314,367 211,988 526,355 29,897,478 (254,056) $29,643,422 Millions of yen 2016 2017 Thousands of U.S. dollars 2017 ¥397,657 9,102 3,512 410,271 539 ¥410,810 ¥543,609 18,201 2,998 564,808 781 ¥565,589 $3,544,180 81,123 31,301 3,656,604 4,804 $3,661,408 32 Segment assets: Automobiles Aerospace Other (*1) Total Adjustment (*2) Consolidated total Other Items: Depreciation and amortization: Automobiles Aerospace Other (*1) Total Adjustment (*2) Consolidated total Investment to equity-method affiliates: Automobiles Aerospace Other (*1) Total Adjustment (*2) Consolidated total Increase of property, plant and equipment and intangible assets: Automobiles Aerospace Other (*1) Total Adjustment (*2) Consolidated total Millions of yen 2016 2017 Thousands of U.S. dollars 2017 ¥2,477,309 223,148 87,484 2,787,941 (25,620) ¥2,762,321 ¥2,298,942 220,786 97,376 2,617,104 (24,694) ¥2,592,410 $22,079,403 1,988,841 779,715 24,847,959 (228,342) $24,619,617 Millions of yen 2016 2017 Thousands of U.S. dollars 2017 ¥80,058 3,663 1,932 85,653 - 85,653 1,467 - - 1,467 - 1,467 180,469 14,699 1,448 196,616 - ¥196,616 ¥67,229 3,668 2,041 72,938 - 72,938 711 - 768 1,479 - 1,479 $713,529 32,647 17,220 763,396 - 763,396 13,075 - - 13,075 - 13,075 160,048 6,902 1,388 168,338 - ¥168,338 1,608,458 131,007 12,906 1,752,371 - $1,752,371 Note: *1. Other means the category which is not included into any business segment reported. It consists of Industrial product, 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 omitted since the same information is in the segment information (2)Information about geographic areas [1]Sales for the fiscal years ended March 31, 2017 and 2016 was summarized as follows: Sales: (*1) Japan North America [United States] (*2) Europe Asia Other Consolidated total Millions of yen 2016 2017 ¥650,343 2,192,260 [2,056,176] 112,602 211,325 159,462 ¥3,325,992 ¥605,401 2,104,498 [1,972,797] 126,201 237,297 158,861 ¥3,232,258 Thousands of U.S. dollars 2017 $5,796,283 19,538,859 [18,325,989] 1,003,583 1,883,467 1,421,230 $29,643,422 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, 2017 and 2016 was summarized as follows: Property, plant and equipment: (*1) Japan North America [United States] (*2) Europe Other Consolidated total Millions of yen 2016 2017 Thousands of U.S. dollars 2017 ¥489,383 166,665 [165,877] 425 792 ¥657,265 ¥440,019 131,654 [130,978] 462 498 ¥572,633 $4,361,702 1,485,428 [1,478,405] 3,788 7,059 $5,857,977 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 omitted because there were no outside sales to single customer with equal to or more than 10% of Net sales on the consolidated statements of income for the fiscal years ended March 31, 2017 and 2016 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, 2017 and 2016 was summarized as follows: Impairment loss in fixed assets: Automobiles Aerospace Other Total Adjustment Total Millions of yen 2016 Thousands of U.S. dollars 2017 ¥11 - - 11 - ¥11 $27 - 21,265 21,292 - $21,292 2017 ¥3 - 2,386 2,389 - ¥2,389 “Other” represents the business segments which are not included in any reportable business segments. It ncludes, Industrial products and Real estate lease, and other. 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, 2017 and 2016 was summarized as follows: Goodwill Millions of yen 2016 Thousands of U.S. dollars 2017 ¥241 - - 241 - 241 2,090 - - 2,090 - ¥2,090 $1,836 - - 1,836 - 1,836 16,640 - - 16,640 - $16,640 2017 ¥206 - - 206 - 206 1,867 - - 1,867 - ¥1,867 Amount written off of current period: Automobiles Aerospace Other Total Corporate and elimination Total Balance at the end of current period: Automobiles Aerospace Other Total Corporate and elimination Total Information on Negative Goodwill by Reportable segments No items to be reported. 35 24. 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 2017 and 2016, and fair value at the end of fiscal 2017 and 2016 were as follows: As of March 31, 2017 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, 2017 ¥29,243 (¥2,207) ¥27,036 ¥40,819 ¥14,495 (¥783) ¥13,712 ¥21,490 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, 2016 $260,633 ($19,670) $240,963 $363,806 $129,189 ($6,979) $122,210 $191,533 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 ¥29,248 (¥5) ¥29,243 ¥40,173 ¥15,228 (¥733) ¥14,495 ¥22,775 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 and rental property and properties that include portions used as investment and rental property during the fiscal 2017, principal increases were 1,337 million yen (US$11,916 thousand) of properties acquisitions, and principal decreases were 1,071 million yen (US$9,545 thousand) of depreciation, 1,203 million yen (US$10,722 thousand) of impairment losses, 568 million yen (US$5,062 thousand) of loss on sales and retirement, 928 million yen (US$8,271 thousand) of end of contracts, and 543 million yen (US$4,840 thousand) of other decreases. Among changes in the amount of investment and rental property and properties that include portions used as investment and rental property during the fiscal 2016, principal increases were 622 million yen 36 (US$5,520 thousand) of properties acquisitions, and principal decreases were 1,264 million yen (US$11,217 thousand) of depreciation, and 265 million yen (US$2,352 thousand) of loss on sale and retirement. 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 2017 and 2016 from investment and rental property and properties that include portions used as investment and rental property were as follows: As of March 31, 2017 Investment and rental property Properties that include portions used as investment and rental property As of March 31, 2017 Investment and rental property Properties that include portions used as investment and rental property As of March 31, 2016 Investment and rental property Properties that include portions used as investment and rental property Rental income Rental expenses Change Millions of yen Other profit and loss ¥3,909 ¥2,059 ¥1,850 (¥1,133) ¥775 ¥1,224 (¥449) ¥- Thousands of U.S. dollars Rental income Rental expenses Change Other profit and loss $34,840 $18,351 $16,489 ($10,098) $6,907 $10,909 ($4,002) $- Rental income Rental expenses Change Millions of yen Other profit and loss ¥3,862 ¥2,344 ¥1,518 (¥262) ¥855 ¥1,077 (¥222) ¥- 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. 25. Subsequent Events No items to be reported. 26. Other No items to be reported. 37

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