Subaru Corporation Annual Report 2018

Plain-text annual report

Annual Report 2018 For the year ended March 31, 2018 SUBARU Business Style Vision for 2025 From a company making things, to a company making people smile. SUBARU, by no means a large automaker, is implementing a business model centered on selection and concentration of limited management resources, creating added value, and pursuing uncompromised differentiation. We have made “Enhance corporate quality” the cornerstone of the mid-term management vision announced in July 2018. By swiftly transforming what needs to be changed, including aspects of corporate culture, we will work to bring smiles to the faces of ever greater numbers of customers. Strengthening of the management foundation Focus business strategy to enhance strengths We will strengthen the management foundation by pursuing qualitative improvement in every aspect of the company, including products, services, culture, human resources, organizations, ﬁ nance, and operations. Rather than pursue an omnidirectional business strategy, we have chosen to optimally focus our limited management resources on categories and markets in which we can leverage our strengths. In business development, our product focus is mainly on SUVs and sports models, and our market focus is on the U.S. and other developed countries in mature stages of motorization. 01 Annual Report 2018 Achieve an industry-leading proﬁ t margin While continuously making strategic investments for future sustained growth, we will pursue a management approach that emphasizes a high operating margin, focusing on differentiation and value-added strategies. On that basis, we will aim for steady volume growth. CONTENTS 01 SUBARU Business Style 03 Message from the CEO 09 Message from the Chairman 11 Message from the CFO 15 17 Messages from the CQO, CTO, and CIO Financial and Non-Financial Highlights 19 Business Overview 27 History 29 Directors, Auditors, and Executive Officers 31 Corporate Governance 39 CSR in the SUBARU Group 47 Consolidated Ten-Year Financial Summary 49 Five-Year Unit Sales 51 Financial Review 57 Corporate Information Disclaimer Regarding Forward-Looking Statements Statements herein concerning plans and strategies, expectations or projections about the future, SUBARUʼs efforts with regard to various management issues, and other statements, except for historical facts, are forward- looking statements. These forward-looking statements are subject to uncertainties that could cause actual results to differ materially from those anticipated. These uncertainties include, but are not limited to, general economic conditions, demand for and prices of SUBARUʼs products, SUBARUʼs 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. Annual Report 2018 02 Message from the CEO Representative Director of the Board, President and CEO Tomomi Nakamura Steadily build up intrinsic strengths and take strong steps in preparation for a future jump to overcome social changes. 03 Annual Report 2018 Aspirations upon Becoming President Allow me to begin by introducing myself. I am Tomomi Nakamura. I assumed office as Representative Director, President and CEO of SUBARU CORPORATION in June 2018. Having assumed management of the Company during a period of transformation in todayʼs mobility society, I feel a great weight of responsibility. In keeping with SUBARUʼs unchanging management philosophy of “Aiming to be a compelling company with a strong market presence built upon its customer- first principle,” I intend to assess this sweeping change in the business environment and respond with a sense of urgency and alacrity. Issues accompanying SUBARUʼs rapid growth have come to light since the end of 2017, but I consider it my mission as president to cultivate SUBARUʼs true capabilities, and I will make every effort to achieve sustained growth. I consider SUBARUʼs current difﬁ culties an opportunity to bring genuine change to the Company and accomplish transformation in a number of areas. I will carefully ascertain what needs to be changed and what should not be changed and implement reforms together with the new management team. For four years beginning in 2014, I served as chairman and CEO of U.S. sales and marketing subsidiary Subaru of America, Inc., where I spearheaded management and experienced firsthand the growth momentum of the U.S. market. At the same time, I constantly watched SUBARU from the outside with a sense of impending crisis, wondering what might occur to stop ongoing growth and what would be necessary to sustain it. One solution that occurred to me was pushing quality in products, services, operations, and every other aspect of the business, and another was fundamental reform of car-making. In formulating the mid-term management vision, we made these two solutions key priorities. Response to Improprieties Relating to Final Vehicle Inspections Inappropriate practices, such as the performance of ﬁ nal vehicle inspections by persons not certiﬁ ed as ﬁ nal inspectors, and inappropriate conduct in fuel economy and emissions sampling in the ﬁ nal vehicle inspection process and other ﬁ nal vehicle inspection work at the SUBARU Gunma Manufacturing Division have been identiﬁ ed. I sincerely apologize for the signiﬁ cant trouble and inconvenience we have caused our customers, partners, and all other stakeholders. An investigative report by a team of external experts cited not only organizational issues relating to the corporate climate and poor employee awareness of applicable standards but also the inadequacy of SUBARU managementʼs stance on quality assurance, as causes of the long-term, various, and wide-ranging repeated incidents of nonconforming and inappropriate conduct, and we take a very serious view of managementʼs responsibility. It is the responsibility of senior management to prevent any reoccurrence of such issues and produce results, and we will spearhead efforts to restore trust in SUBARU step by step. A Review of Prominence 2020 Through initiatives set out in Prominence 2020, the mid-term management vision announced in 2014, SUBARU has implemented a business strategy aimed at establishing a prominent presence in the minds of customers. Growth in sales volume in the North American market became a major pillar of business growth. We pursued a course of practicing selection and concentration to focus allocation of limited management resources and leverage strengths. Our product focus was mainly on SUV and sports models, and our market focus was on the U.S. and other developed countries in mature stages of motorization. At the same time, in the U.S. market, a combination of products, sales network restructuring, and marketing measures featuring the word “Love” became a powerful driving force that resulted in sales of 671,000 units in the fiscal year ended (FYE) March 2018, with sales reaching a record high for the ninth consecutive year. Although we may take a measure of satisfaction in our recent business growth, the fact is that issues remain. In Prominence 2020, we articulated our vision for 2020, consisting of four goals: No. 1 for customer trust; strong brand; industry-leading high profitability; and vehicle sales of 1.2 million-plus units. With regard to the goals No.1 for customer trust and strong brand, we recognize that we have lost the trust of customers and society due to recent quality-related problems and issues stemming from the corporate culture. Although at present we have achieved our goal of an industry-leading proﬁ t margin, proﬁ tability is trending down due to changes in the sales environment and deteriorating cost structures. On the whole, we are still halfway to achieving the management vision. From a quantity and quality perspective, qualitative growth has not kept pace with quantitative growth, and we realize that restoration of trust and improvement of SUBARUʼs fundamental capabilities are indispensable for achieving sustained growth. Annual Report 2018 04 Message from the CEO STEP: the New Mid-term Management Vision In July 2018, SUBARU announced STEP, which is our new mid-term management vision to make SUBARU a company that is trusted by, and resonates with, customers through providing “Enjoyment and Peace of Mind.” Speed Trust Engagement Peace of mind & enjoyment Speedily advance initiatives Restore trust Engage and resonate with customers Provide “Peace of Mind and Enjoyment” to customers Vision for 2025 Our vision for 2025 is “From a company making things, to a company making people smile.” We want more and more customers to love SUBARU. To make this happen, we intend to provide products and services that will make customers smile by constantly thinking about customer value. Accordingly, we have established three speciﬁ c visions for 2025. 1. Become a brand that is “different” from others by enhancing distinctiveness. We often hear from customers and SUBARU dealers comments such as “I like that SUBARU is different from other automakers” and “SUBARU enables my life.” We take pride in our reputation for being different and want to establish a unique presence in the minds of customers. 2. Engage in business activities that resonate with customers by putting them center-stage. At SUBARU, we always put customers center-stage and sincerely engage with each individual customer. SUBARU cars reflect not only an automakerʼs passion for cars, but also our commitment to remain a company that engages with customers, makes cars that people want to buy, and engages in business activities that resonate with people. 3. Fulﬁ ll corporate social responsibilities by contributing to diversifying social needs. Having reﬂ ected on the fact that, at a time of rapid corporate growth, we have been insufﬁ ciently mindful of the social responsibilities of a company of SUBARUʼs size, we will squarely face up to and fulﬁ ll our social responsibilities, including in the area of governance. Corporate Culture Reforms and Three Key Pillars of Initiatives We have made corporate culture reforms the centerpiece of speciﬁ c initiatives. We will strengthen efforts to enhance corporate quality with the aim of becoming a company that can respond swiftly and flexibly to change by being more sensitive to the times and the outside world while preserving SUBARUʼs DNA. First of all, we will strengthen compliance by undertaking a comprehensive compliance check covering all operations and internal regulations and correcting issues and by bolstering internal compliance education. We will also work to further reinforce groupwide governance systems and their operation. By changing our management to administer these governance systems, we will then accelerate reinforcement of the corporate structure. Next, we will create a culture that enables employees to work with greater energy. To accomplish this, individual employees must raise their own awareness and cultivate the ability to think and act autonomously, and I want top management to take the lead in developing policies and systems to support this effort. These corporate culture reforms cannot be accomplished overnight, and we will take our time and continuously 05 Annual Report 2018 implement reform efforts. On the basis of this new culture, we will aim to realize our corporate vision. Three key pillars of initiatives are described below. Initiatives overview (9 Boxes + 1) 0 “Change the Culture” Corporate culture reforms Accelerate efforts to become “a company that does the right thing in the right way.” Continuous efforts aimed at corporate culture reforms. “Monozukuri” (Car-making) Sales and service New mobility domain 1 Enhance corporate quality Quality reforms Build a strong brand More enjoyment, more peace of mind Enhance quality at customer contact points From “A car you can love” to “A car, a brand, and people you can love” Alliance enhancement Generate new value through connected car technologies Sustainable growth based on a focus strategy Launch “Make-a-Subaru” project – Target 5% share in the U.S. – Steady growth in each region Initiatives to create new technologies and businesses 2 3 1. Enhance corporate quality We have made quality the centerpiece of this mid-term management vision. In addition to the recent ﬁ nal vehicle inspection and airbag problems, other market quality issues have arisen, and we are keenly aware that fundamentally improving quality, which is the foundation of customer trust, is an urgent priority. We consider quality something customers expect of SUBARU, and believe that it is essential to transform SUBARU into a company that makes quality the highest priority, from senior management right down to the workplace level, and we will work to achieve this transformation. 2. Build a strong brand SUBARU defines “Enjoyment and Peace of Mind” as the core value we deliver to customers through all processes from product development to sales and service. Reliable automobile manufacturing based on functionality, safety, and reliability is indelibly encoded in SUBARUʼs DNA, and we will redouble our efforts in pursuit of automobile safety performance. We are committed to the uncompromising pursuit of protecting peopleʼs lives and aim to eliminate fatal trafﬁ c accidents* by 2030. We will not settle for ordinary automation, but rather think in terms of ensuring safety of mobility by assisting with tasks people find difficult while respecting tasks at which people excel. At first, we will place the highest priority on enhancing Level 2 driving assist technologies. At the same time, we will accelerate efforts to enable drivers and passengers to feel peace of mind by adding connected car technologies and intelligent technologies. SUBARU places importance on connections between people, and SUBARU, dealers, customers, and communities will join together in activities unique to SUBARU at every touch point to make SUBARU a brand that is trusted and loved by customers. SUBARU, like other automakers, tends to be car-centric in its thinking. Going forward, we will create new added value by collaborating with external partners from different industries, utilizing connectivity services, and deepening communication with individual customers. We want to develop SUBARU into an inimitable brand that is slightly different from other brands. * Elimination of accidents resulting in the death of drivers or passengers in SUBARU vehicles and accidents resulting in the death of pedestrians, cyclists, or other persons due to collision with SUBARU vehicles 3. Sustainable growth based on a focus strategy To SUBARU, a small automaker with global sales share of 1%, an important management challenge is to overcome the current period of transformation in the automotive industry and somehow maintain our earning power. We realize that the most important thing for accomplishing this is for customers to recognize value unique to SUBARU. We will reinforce efforts to enhance the customer value SUBARU delivers through high quality, high added value, and low cost, not only in manufacturing, but in all aspects of the products and service we provide. These days, enormous costs and investments are necessary for environmental initiatives and regulatory response as well as for meeting customer needs for advanced safety technologies and connected car technologies. However, at present it is no simple matter to convince customers to pay prices that fully cover these outlays. We will review our conventional ways of doing things and, making quality the cornerstone, steadily enhance value by coherently tying together all of our technology, product, Annual Report 2018 06 Message from the CEO and cost strategies from a medium- to long-term perspective and ensuring mutual collaboration among the divisions. With regard to market strategy, we will aim for steady overall growth, centered on a higher level of growth in the U.S., and plan to achieve sales of more than 1.3 million units worldwide in 2025. In the U.S. market, we will aim for market share of 5%. If, for instance, total demand in the U.S. is 17 million units, this means we will aim for U.S. sales of 850,000 units. Although Japan remains an extremely difﬁ cult market, we want to reliably maintain the current level of sales of 10,000 passenger cars per month in our home market. In Asia, we will begin knockdown production (local assembly) of an all-new Forester at a complete knockdown (CKD) plant in Thailand in 2019 and aim to take advantage of this capacity to further increase sales. Although trends in Russia are highly uncertain, we consider it a market with high afﬁ nity for SUBARU products and want to grow our sales there. In Europe and China, we aim to maintain our current business scale and will review our strategies while closely observing changes in markets and government policies. As we execute our sales strategies, a major issue is how to deal with local environmental regulations. There is currently a gap between markets and environmental regulatory trends, and the future direction is uncertain. We intend to take appropriate measures while ascertaining the balance between the market formation process and the progress of environmental regulations. Sales plans (FYE 2019 vs FYE 2026) (10 thousand units) Production capacity (FYE 2021) (10 thousand units) Japan North America Other Total FYE 2019 (plan) FYE 2026 (plan) 15 15 77 92 18 23 110 130 Change ±0% ＋20% ＋27% ＋18% Japan Overseas Gunma SIA 69.6 43.6 77.9 49.7 Standard operations At full capacity Asia CKD 1.4 Global Total 115 129 Sales Strategy for the U.S. We expect total automobile demand in the U.S. market to remain at about 17 million vehicles and aim to achieve a higher level of growth by increasing competitiveness, with a strategic focus on our products, marketing, and sales network. We believe that there is room for sales growth in the Sun Belt (the southern U.S.) in particular. With regard to products, we introduced the Ascent, a 3-row SUV for North America, this summer and plan to introduce an all-new Forester in the second half of the ﬁ scal year. We will continue to engage in product development with the U.S. market in mind and enhance the product appeal of existing models to the maximum extent possible. In sales network development, we plan to appoint dealers to ﬁ ll open points (areas with no dealers), mainly in the Sun Belt, and increase the number of dealers from the current 631 to about 650. In the Sun Belt, we have ﬁ nally achieved market share of 2% (up 0.2 points year on year) and reached the point where we can expect income from service in addition to new vehicle sales. To ensure customer satisfaction, we intend to work together with dealers to increase the number of service facilities and parking lots, enhance facilities such as customer lounges, and upskill dealer sales and service representatives. Product Strategy Our product strategy is in principle to release a fully redesigned version of a key model every year. In addition, we aim to enhance the lineup of distinctive SUV and sports models and model variations. We will also evolve SUBARUʼs “Dynamic x Solid” design identity toward a bolder direction. With the automotive industry having entered a period of transformation, responding to technological innovations in the areas of electriﬁ cation, automated driving, connected car technology, and car sharing is a matter of urgent importance. However, since the outlook for the future is uncertain and our management resources are limited, we cannot adopt an omnidirectional business strategy. We realize that it is essential to chart a course forward while carefully ascertaining market trends. We will meet high customer expectations with vehicles that only SUBARU can offer, such as electrified vehicles that go beyond conventional with features like go-anywhere packages in addition to driving stability and safety performance. 07 Annual Report 2018 Product Strategy New model Existing model Sports Platform Environmental initiatives 2018 2021 2025 Global strategic SUV Continuous launch of new models Expansion of SUV variations Enhance sports models incl. STI models Enhance Subaru Global Platform Plug-in Hybrid Redesigned horizontally-opposed DST* Global launch of EV New HEV *DST: Downsized turbo engine Strategy for the Aerospace Business In FYE March 2018, SUBARU completed withdrawal from the industrial products business and established a corporate structure focused on two businesses: automotive and aerospace. In the aerospace business, as in the automotive business, we are at the stage of enhancing the SUBARU brand. However, aerospace is a business with a very long timescale, and the outlook until 2025 has to some extent taken shape. We do not anticipate dramatic change or evolution and will continue efforts to shift from independence to stable growth. We will also press ahead with verification of technologies as a part of the development of next- generation products and implement a partnering strategy focusing on broad-based collaboration with other companies. In addition, the automotive and aerospace businesses will utilize each otherʼs strengths and work to compensate for their weaknesses and generate new synergies. CSR Initiatives We have organized CSR activities identiﬁ ed in light of our business domains into the following six priority areas from the perspective of what society requires from SUBARU : 1) People-oriented Car Culture, 2) Resonance and Coexistence, 3) Peace of Mind, 4) Diversity, 5) Environment, and 6) Compliance. Our environmental policy is to make environmental contributions throughout the entire value chain and across the entire business in addition to improving the environmental performance of our products by means such as boosting fuel economy and reducing CO2 emissions. Since SUBARU is an automaker, of course our products have outsized influence on environmental impacts across the full range of business activities in the areas of purchasing, production, logistics, sales, products, and management. We will work to reduce total waste in society through product attributes such as reliability, longevity, safety, and utility. Speciﬁ cally, in addition to proceeding as planned with introductions of plug-in hybrid vehicle (PHEV) and electric vehicle (EV), we will improve the fuel economy of our models through measures such as further expansion of the electric vehicle lineup and introduction of a downsized turbo engine and weight-reduction technologies. To comply with local regulations in each market, we will utilize available development resources to maximum effect, including collaboration through alliances, to develop an optimal product lineup for each market that is adapted to market needs and customer preference. *Please refer to the SUBARU corporate website for details on the STEP mid-term management vision. WEB STEP: the Mid-term Management Vision https://www.subaru.co.jp/en/ir/management/plan/ Annual Report 2018 08 Message from the Chairman Director of the Board, Chairman Yasuyuki Yoshinaga We will resolutely implement a corporate culture transformation to ensure the rebirth of SUBARU as “a company that does the right thing in the right way.” Summary of My Tenure as President I retired as President and CEO at the General Meeting of Shareholders held in June 2018. Ever since becoming president in June 2011, I have thought that SUBARU, which has only a 1% global share in the automotive industry, will be unable to survive in this harsh competitive environment if it doesnʼt compete as only a small company can. As president, I believed that the only path to growing in a sustained manner is to create added value that customers will find appealing and pursue uncompromising differentiation. Rather than offering a full model lineup and doing business in all markets, we specialized and focused our limited management resources on categories and markets in which we can leverage our strengths. We worked to build a strong business structure by focusing on SUVs and sports models and doing business mainly in the U.S. and other developed countries in mature stages of motorization. As a result, many customers in North America and other markets purchased our products, global unit sales grew, ﬁ nancial performance improved substantially, and we were able to increase corporate value. On the other hand, I feel that SUBARUʼs corporate strengths failed to keep up with the Companyʼs dramatic growth, as indicated by the recent inappropriate incidents and an increase in quality issues. 09 Annual Report 2018 Objectives of Changes in the Management Structure Four objectives prompted the complete change of management structure, including the change of CEO: 1) Rejuvenation of the management team and boosting of organizational vitality, and strengthening of a can-do attitude; 2) Qualitative improvement of the management structure; 3) Enhancement of market responsiveness; and 4) Enhancement of technologies and technology management. President Nakamura has served in a succession of important posts involving groupwide management strategy, most recently serving as chairmen and CEO of the U.S. sales and marketing subsidiary Subaru of America for four years. He has thorough knowledge of the U.S. market, SUBARUʼs most important market, has gained the full trust of U.S. dealers, and has a stellar reputation. Since President Nakamura and I are of one mind with regard to SUBARUʼs management strategy and business model to date, I will entrust practical management of the Company to him and devote myself to corporate culture reforms and compliance. I made sure that my successor was elected through a deliberately open and fair process. At a session of the Executive Nomination Meeting held in February 2018, the participants, including the outside directors, discussed the matter and agreed to elect Tomomi Nakamura as SUBARUʼs next president. The decision was announced in March 2018. To be “a Company that does the Right Thing in the Right Way” I sincerely apologize for the signiﬁ cant trouble and inconvenience we have caused our customers and other stakeholders due to the repeated improprieties in final vehicle inspections at the SUBARU Gunma Manufacturing Division. In April 2018, SUBARU established the “Tadashii-Kaisha” Promotion Department and Compliance Ofﬁ ce as organizations to reform the corporate culture, one cause of the repeated improprieties. The “Tadashii- Kaisha” Promotion Department will plan and thoroughly implement companywide activities to earn the trust of customers and society and make SUBARU “a company that does the right thing in the right way,” execute measures to prevent any reoccurrence of the improprieties, and work toward solving fundamental problems. The Compliance Office will plan and implement activities that will lead to further strengthening of companywide compliance efforts and transformation of the compliance awareness of all employees. Toward Sustained Corporate Value Enhancement I think that sustained corporate value enhancement at SUBARU depends on increasing added value. This is a question of how to increase the appeal of the SUBARU brand over time. SUBARUʼs brand power has increased substantially in recent years. However, additional effort is required to enhance corporate strengths and further develop SUBARU into a trusted brand. Under the new management structure, everyone at SUBARU will engage in steady, diligent activities to put the Company on a solid footing. I ask your continued support for SUBARU in the coming years. Reference information on improprieties relating to ﬁ nal vehicle inspections and fuel economy and emissions measurements Investigative reports about the repeated improprieties that SUBARU has published to date are as follows. For details, please see the individual news releases and reports. 1) December 19, 2017 Investigation Report and Countermeasures to Prevent Recurrence of Nonconforming Final Vehicle Inspection Works at Gunma Manufacturing Division https://www.subaru.co.jp/press/news-en/2017_12_19_5237/ 2) April 27, 2018 Investigation Report on Measurement of Fuel Economy and Emissions During Final Vehicle Inspections at Gunma Manufacturing Division https://www.subaru.co.jp/press/news-en/2018_04_27_5714/ 3) September 28, 2018 Results of Investigation into Improper Conduct during Final Vehicle Inspections at Gunma Manufacturing Division https://www.subaru.co.jp/press/news-en/2018_09_28_6349/ Annual Report 2018 10 Message from the CFO Director of the Board, Executive Vice President and CFO Toshiaki Okada We will increase strategic investments and R&D expenses to boost competitiveness for the future, maintain an industry-leading proﬁ t margin, and aim for sustained growth. A Look Back at My First Year as CFO During the past year since I became Chief Financial Ofﬁ cer (CFO), at a time when the entire automotive industry has entered a period of transformation, I have always made sure to appropriately disseminate corporate information on matters such as SUBARUʼs current position and thinking, as well as our growth opportunities and potential. I also consider it my role to serve as a point of contact between external and internal stakeholders by appropriately feeding back to SUBARU information and opinions from outside the Company and communicating the needs of external stakeholders. For SUBARU, which is by no means a large automaker, to achieve sustained growth, it is essential to build the business by focusing on a differentiation strategy and value-added strategy based on making original, distinctive cars. To prepare for sustained growth, I will consider matters such as how SUBARU uses funds and capital and how we allocate management resources. 11 Annual Report 2018 Business Performance in FYE March 2018 Consolidated unit sales in FYE March 2018 increased by some 2,000 units year on year and reached a record high of 1,067,000 units, with North America, a key market, continuing to drive global sales. Consolidated net sales increased by 2.4% to a record high of 3,405.2 billion yen as a result of factors including currency ﬂ uctuations and the increase in unit sales. Unit sales in North America reached a record high for the ninth consecutive year, and global unit sales and consolidated net sales reached record highs for the sixth consecutive year. Consolidated operating income decreased by 7.6% to 379.4 billion yen as a result of the impact of an increase in SG&A expenses accompanying rising interest rates in the U.S. and market conditions for raw materials coupled with an increase in R&D expenses, despite a positive impact on profits from currency ﬂ uctuations. Ordinary income decreased by 3.7% to 379.9 billion yen, and net income attributable to owners of parent decreased by 22.0% to 220.4 billion yen as a result of factors including the recording of airbag- related losses of 81.3 billion yen as an extraordinary loss. Outlook for FYE March 2019 We forecast continued strong sales in North America and other markets and a 3.1% year-on-year increase in consolidated unit sales to 1.104 million units in FYE March 2019. Although we forecast an increase in unit sales, we have incorporated into our forecast a negative impact on sales from currency ﬂ uctuations and the impact of a change in accounting policy (deduction of sales incentives from net sales totaling approximately 180.0 billion yen) and have planned for a 0.5% year-on-year increase* in consolidated net sales to 3,250.0 billion yen. We forecast a 20.9% decrease in operating income to 300.0 billion yen, a 19.7% decrease in ordinary income to 305.0 billion yen, and a 0.2% decrease in net income attributable to owners of parent to 220.0 billion yen, to result from the impact of an increase in SG&A expenses accompanying rising interest rates in the U.S. and raw materials prices, despite the projected increase in unit sales. Although we can expect improved business performance in FYE March 2019 as a result of the introduction of the Ascent, a 3-row SUV, and an all-new Forester following a full model change, we expect the full-scale contribution from these models to occur in the second half and beyond. The ﬁ rst half of the year will also be a lean season from a product perspective, with the new-model effect of the Impreza and Crosstrek (known as the SUBARU XV outside North America) running its course and other highly proﬁ table models entering the second half of their model lives. Accordingly, we forecast a difﬁ cult ﬁ rst half in terms of business performance and have planned for operating income of 110.0 billion yen in the ﬁ rst half and 190.0 billion yen in the second half, for full-year operating income of 300.0 billion yen. *Consolidated net sales for FYE March 2018 have been recalculated using the new accounting policy for comparison purposes. FYE March 2018: Analysis of Increase and Decrease in Operating Income Changes (Consolidated) (Billions of yen) FYE March 2019: Analysis of Increase and Decrease in Operating Income Changes (Consolidated) (Billions of yen) Gain on currency exchange 32.7 410.8 -44.2 -7.7 Cost reduction -6.9 379.4 -5.3 Sales volume & mixture and others SG&A expenses and others R&D expenses Sales volume & mixture and others 12.0 1.1 379.4 R&D expenses -58.4 Loss on currency exchange -19.4 300.0 -14.7 Cost reduction SG&A expenses and others ’17/3 Operating income -31.4 billion yen ’18/3 Operating income ’18/3 Operating income -79.4 billion yen ’19/3 Operating income (Planned) Annual Report 2018 12 Message from the CFO Although business conditions continue to recover gradually in North America, a key market for SUBARU, overall demand for automobiles has peaked, leading to intensiﬁ cation of sales competition. We consider incentive program management extremely important for maintaining competitiveness in such an environment. Although there has been no major change in the ﬁ nancing program we provide to customers, we are maintaining a lower level of incentives per vehicle than the industry average by carefully and meticulously managing interest rates, payment periods, and other ﬁ nancing terms and conditions for each model while carefully monitoring market conditions and the competitive environment. However, the impact of increases in the interest rate on borrowings is signiﬁ cant, and interest rates are currently trending up. We plan to take advantage of new model introductions to curb expenses. STEP: the New Mid-term Management Vision In July 2018, SUBARU announced STEP, our new mid-term management vision. Although we have achieved rapid quantitative growth during the past few years, we recognize that there are many qualitative issues. Fundamentally improving quality, which is the foundation of customer trust, is an urgent priority, and we have made quality enhancement initiatives the centerpiece of STEP. We will review all quality- related processes from product planning to production, set a ﬁ ve-year investment framework of 150.0 billion yen for improvement of total quality, and to undertake improvements including upgrading the quality level of manufacturing plants, reinforcing quality management systems, and developing customer service infrastructure. Financial and Capital Strategies The Company engages in business management with return on capital, ﬁ nancial 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 there is no change in this basic policy. On that basis, in our capital control, I intend to emphasize cash. SUBARUʼs management approach is characterized by the practice of selection and concentration, and we concentrate on developed countries, mainly the U.S., offering a limited 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 ﬂ uctuations in the market. For this reason, to prepare against sudden changes in the business environment, we have set a minimum level of cash reserves equivalent to two monthsʼ sales and a minimum equity ratio of 50% and will practice appropriate financial management, including shareholder returns, taking into consideration the business environment. We have set a target of maintaining ROE of 10% and will aim for ROE of 15% or higher. Capital Expenditures／ Depreciation Expenses Capital expenditures Depreciation expenses (Billions of yen) 200 158.5 135.7 141.4 130.0 110.7 68.5 54.9 64.8 65.0 89.8 93.0 77.0 150 100 50 0 R&D Expenses (Billions of yen) 121.1 120.0 114.2 102.4 83.5 60.1 150 120 90 60 30 0 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’19/3 (Planned) ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’19/3 (Planned) 13 Annual Report 2018 With a view to future growth, we will increase strategic investment and R&D investment for the purpose of boosting future competitiveness. We will invest in areas including improvement of our management foundation centered on quality and responding to transformation of the automotive industry, which is an urgent priority. For the three-year period from FYE 2019 to FYE 2021, we plan total capital expenditures of 450.0 billion yen and R&D expenses of 400.0 billion yen. On that basis, we plan to achieve an industry- leading proﬁ t margin of 9.5% and will aim for an operating income ratio of 10% or higher. Our basic policy is to ensure balanced distribution of profits to all stakeholders and to provide continuous, stable shareholder returns, with dividend payments as the primary component of returns. The annual dividend payment for FYE March 2018 was 144 yen per share (half-year dividend of 72 yen and year- end dividend of 72 yen), the same as for FYE March 2017. 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 2019. For this three- year period, our policy is to make a dividend payment of 144 yen the basis of shareholder returns and ﬂ exibly purchase treasury stock in accordance with cash ﬂ ow. STEP, the new mid-term management vision, embodies our desire to improve our ability to respond to changes in the external environment, correct distortions that have accompanied rapid growth, and cultivate fundamental corporate strengths. We realize that a change of employee awareness is a matter of urgent importance for SUBARU to become a company that is trusted by, and resonates with, customers. In speedily implementing various initiatives, in my role as CFO I will observe laws and regulations and dedicate myself to creating systems that enable SUBARU to ensure quality. This is a crucial time for SUBARU to solidify its footing in preparation for the next leap forward. We will achieve sustained growth and meet the expectations of our shareholders and other stakeholders by accelerating initiatives to create “a company that does the right thing in the right way” and cultivating fundamental corporate strengths as quickly as possible. I request your further understanding and support in the coming years. Proﬁ t Plan for FYE 2019–2021 (3 years) Capital Policy (105 yen/USD) Net sales 10 trillion yen Operating income 950 billion yen Operating margin 9.5% Net cash Equity ratio Two monthsʼ worth of net sales at minimum 50% at minimum R&D expenses 400 billion yen (+18%) ROE Capital expenditures 450 billion yen (+3%) Depreciation and amortization 300 billion yen (+29%) Shareholder returns Minimum Target Yearly dividend per share 10% 15% 144 yen Share repurchases To conduct ﬂ exibly ( ): Percent change from previous 3-year period (FYE 2016–2018) Free Cash Flow／ Ratio of Shareholders’ Equity to Total Assets Dividend per Share／ Dividend Payout Ratio Free cash flow (Left) Ratio of shareholders’ equity to total assets (Right) Dividend per share (Left) Dividend payout ratio (Right) (Billions of yen) 400 358.6 279.1 40.540.5 46.5 51.851.8 52.8 53.8 215.6 138.8 91.2 300 200 100 0 (%) 80 60 40 20 0 (Yen) 160 120 80 40 0 144 144 144 68 53 39.439.4 20.020.0 20.320.3 25.725.7 50.150.1 (%) 80 60 40 20 0 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 Annual Report 2018 14 Messages from the CQO, CTO, and CIO CQO (Chief Quality Ofﬁ cer) SUBARU deﬁ nes “Enjoyment and Peace of Mind” as the value we deliver to customers. The foundation of this core value is quality, and we consider quality to be one of our most fundamental responsibilities to our customers. Quality can be broadly deﬁ ned to include everything from product quality to customer service quality, the quality of the day-to-day work of individual employees, and the quality of corporate activities, and I realize that itʼs important to steadily improve these dimensions of quality. I am determined to play a leading role in creating a quality standard by which all Group employees make quality the highest priority above all else. Airbag defects and other problems that lead to recalls and service campaigns have continued to occur, and I deeply regret that we have caused concern and inconvenience to customers and many other stakeholders. Although we have seen steady improvement in the results of third-party quality assessments for the U.S. market, our relative quality ratings in competition with other automakers have regrettably declined, and I consider this a critical issue. In response to these problems and issues, in new vehicle development we aim to eliminate recalls and service campaigns by further reinforcing milestone management at each stage of development and systematically working to prevent any reoccurrence of past defects. Taking into account customer usage conditions, we will make high-quality products that are easy for customers to understand and use, and simultaneously work to minimize vehicle downtime and increase customer satisfaction by undertaking call center expansion, building a system for the smooth provision of replacement parts and repair parts, and improving efficiency in service operations. We acknowledge that quality reforms are the top-priority issue in the new mid-term management vision. To achieve reforms, we will review all existing processes for achieving quality, from product planning to production. In conducting this review, to ensure that the business units involved in these processes do not waver in the philosophy that quality is key, we will strengthen the authority of the CQO and rigorously reinforce quality management systems across all product development and manufacturing functions. We will also invest in facilities for quality-related technology development, in simulators and other control-related evaluation facilities, and in facilities with modifiable temperature and atmospheric pressure control for environmental and durability evaluation. In manufacturing, whereas until now we have made capital expenditures mainly for the purpose of increasing capacity, from now on we will invest heavily in renewal of aging facilities and traceability enhancement to raise the level of quality. We will actively invest in areas that contribute to quality improvement, including human resources investment, and aim to be No. 1 in the kind of quality that makes our products suitable for long-term use with peace of mind. Senior Vice President Atsushi Osaki 15 Annual Report 2018 CTO (Chief Technology Ofﬁ cer) Director of the Board Executive Vice President Tetsuo Onuki CIO (Chief Information Ofﬁ cer) Representative Director of the Board Executive Vice President Masaki Okawara Even in a time of industry transformation, when what people value in cars is said to be changing, SUBARU intends to place the utmost importance on delivering “Enjoyment and Peace of Mind.” I want to be able to provide support for the enjoyment of driving, the enjoyment of freely traveling by car whether in youth or old age, and the enjoyment of a car lifestyle̶in other words, the enrichment of peopleʼs lives̶with SUBARU cars and related services. As we continue to evolve the Subaru Global Platform over time, major challenges are safety and environmental response. We will further enhance all-around safety technologies and aim to eliminate fatal accidents involving SUBARU cars by adding connected car technologies. To comply with local environmental regulations, we will introduce electric vehicles and hybrids and engage in tireless technological development. We want to create and propose products that combine environmental consideration with “Enjoyment and Peace of Mind.” In April 2018, SUBARU established the Engineering Management Division. For an automaker the size of SUBARU to maintain a presence in the global market even at a time when automobiles are undergoing transformation, I want to give the Engineering Management Division the capability to increase the mobility of the resources of our engineering departments so that we can speedily create and propose products and services that are unique to SUBARU and different from those of other automakers. Information (and IT) connects individuals to each other and one division to another, and I want to support improvement of management quality from an IT perspective by activating those connections. These days, this is called digital transformation (DX), which we define as 1) business process transformation and 2) new business creation. To realize DX at a high level, we are examining from various perspectives matters such as the use and application of scattered data and the suitability of services for the speciﬁ c needs of SUBARUʼs customers. The development of our IT infrastructure going forward must rest on a foundation of information security enhancement and the creation of an IT-conscious culture with the participation of all employees. To establish a ﬁ rm footing, beginning this year we will gradually realize initiatives in which we have engaged since last year. Although there are probably various contributing factors behind the inappropriate incidents that have occurred since last year, I consider improvement of poor communication and insufﬁ cient mutual understanding a matter of urgent importance. Creation of workplaces where people are considerate of one another is essential for this, and we will deploy IT tools as a means of compensating for deﬁ ciencies in communication and mutual understanding. I intend to continue to play a part in activities to deepen connections with customers, enhance the SUBARU brand, and bring smiles to the faces of customers. Annual Report 2018 16 Financial and Non-Financial Highlights Years ended March 31 Financial Highlights SUBARU CORPORATION and its consolidated subsidiaries Net Sales (Billions of yen) 4,000 3,000 2,000 1,000 0 3,232.3 3,326.0 3,405.2 2,877.9 2,408.1 Operating Income／Operating Margin Operating income (Left) Operating margin (Right) (Billions of yen) 565.6 423.0 410.8 379.4 17.517.5 326.5 13.613.6 14.714.7 12.412.4 11.111.1 600 500 400 300 200 100 0 (%) 30 25 20 15 10 5 0 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 Capital Expenditures／Depreciation Expenses R&D Expenses 100 108 121 Exchange rate (Yen to the U.S. dollar) 108 111 Capital expenditures Depreciation expenses (Billions of yen) 200 150 100 50 0 158.5 141.4 135.7 110.7 68.5 54.9 64.8 65.0 89.8 77.0 (Billions of yen) 150 120 90 60 30 0 121.1 114.2 102.4 83.5 60.1 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 Non-Financial Highlights CO2 Emissions Waste Generation Overseas Group companies Domestic Group companies SUBARU Overseas Group companies Domestic Group companies SUBARU (Tons of CO2) 800,000 600,000 587,686 614,940 657,886 675,960 691,590 (Tons) 200,000 150,000 148,154 162,893 166,856 170,589 190,924 400,000 200,000 0 100,000 50,000 0 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 *Includes scrap metal sold 17 Annual Report 2018 Interest-Bearing Debt／D/E Ratio Interest-bearing debt (Left) D/E ratio (Right) (Billions of yen) 300 250 200 150 100 50 0 269.7 0.350.35 211.2 0.210.21 170.0 148.3 0.130.13 0.100.10 86.2 0.060.06 ROE／ROA ROE ROA (Times) 0.6 0.5 0.4 0.3 0.2 0.1 0 (%) 40 30 20 10 0 36.9 23.6 30.4 29.3 20.7 18.8 20.2 15.3 14.6 13.4 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 *ROA = Operating income / Total assets (average at the beginning and end of the term) Free Cash Flow／ Ratio of Shareholders’ Equity to Total Assets Consolidated Unit Sales Free cash flow (Left) Ratio of shareholders’ equity to total assets (Right) (Billions of yen) 400 300 200 100 0 358.6 279.1 51.851.8 52.852.8 46.546.5 53.853.8 215.6 40.540.5 138.8 91.2 (%) 80.0 60.0 40.0 20.0 0 (Thousand units) 1,200 900 600 300 0 1,065 1,067 911 958 825 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 *Automobile unit sales of SUBARU CORPORATION and its consolidated subsidiaries Water Consumption Overseas Group companies Per unit of consolidated net sales (Right) Domestic Group companies SUBARU (Thousand m3) 5,000 4,252 4,367 4,401 4,462 4,673 (Thousand m3/100 million yen) 0.30 4,000 3,000 2,000 1,000 0 0.180.18 0.150.15 0.140.14 0.130.13 0.140.14 0.24 0.18 0.12 0.06 0.00 Number of Employees Non-consolidated Consolidated (Persons) 40,000 30,000 20,000 10,000 0 28,545 29,774 31,151 32,599 33,544 13,034 13,034 13,883 13,883 14,234 14,234 14,708 14,879 14,879 14,708 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 *Excluding executive ofﬁ cers, advisors and dispatches Annual Report 2018 18 Business 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 SUBARUʼs start as an automaker. Ever since, we have contributed to the development of Japanʼs 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 automaker to use a pedestrian protection airbag. Consolidated Net Sales Contribution Ratio of the Automotive Business Unit 95.0% Net Sales (Billions of yen) Operating Income (Billions of yen) 600 543.6 3,234.9 3,152.0 3,039.4 2,699.0 2,246.6 400 400.9 397.7 361.5 309.0 200 0 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 4,000 3,000 2,000 1,000 0 Overview of FYE March 2018 Consolidated Automobile Sales by Region (Thousand units) ■ Consolidated global unit sales increased by 0.2% year on year to 1,067,000 vehicles, reaching a record high for the sixth consecutive year. ■ Sales in Japan were 163,000 units. Overseas sales were 903,000 units, and unit sales in North America reached a record high for the ninth consecutive year. 19 Annual Report 2018 Japan .....................163 United States ........671 Canada ....................57 Russia.........................8 Europe .....................40 Australia ..................56 China .......................27 Others .....................45 Total .......................1,067 Product Lineup Legacy Series Consolidated unit sales: 279,000 units Sales regions: Japan, North America, Russia, Europe, Australia, China, and other Consolidated unit sales: 291,000 units Sales regions: Japan, North America, Russia, Europe, Australia, China, and other Consolidated unit sales: 51,000 units Sales regions: Japan, North America, Russia, Europe, Australia, and other Impreza Series (SEDAN) （5 Door） Consolidated unit sales: 25,000 units Sales regions: Japan, Europe, Australia, and other Consolidated unit sales: 9,000 units Sales regions: Japan, North America, Europe, Australia, China, and other (North America: CROSSTREK) Consolidated unit sales: 373,000 units Sales regions: Japan, North America, Russia, Europe, Australia, China, and other Consolidated unit sales: 3,000 units Sales region: Japan OEM Models Consolidated unit sales: 34,000 units Sales region: Japan (OEM supply from Daihatsu Motor Co., Ltd.) *For the period from April 1, 2017 to March 31, 2018 *Automobile sales of SUBARU CORPORATION and its consolidated subsidiaries Annual Report 2018 20 Business Overview Automotive Business Unit The SUBARU Concept of All-Around Safety Aiming for the highest level of peace of mind and safety for all passengers SUBARU pursues automobile safety performance from every perspective and is refining and perfecting core technologies on the basis of four safety criteria: primary safety, active safety, preventive safety, and passive 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 Primary Safety Basic design features for avoiding accidents Increasing driving safety through basic design features such as car shape and controls Visibility design Driving position 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 Horizontally opposed engine Symmetrical AWD Preventive Safety Advanced technology that supports safe driving Supporting safe driving by helping avoid collisions and reduce damage EyeSight Passive Safety Extra precautions just in case Minimizing damage when an accident occurs Engine layout Pedestrian protection airbag Subaru Global Platform Safety Performance Recognized Worldwide SUBARU has received the highest rating in the NCAP1 conducted by the authorities in Japan, the U.S., Australia, and other countries, as well as in the safety performance assessment conducted by the IIHS2 in the U.S.3 In the IIHS safety performance assessment, the Impreza, Crosstrek, Legacy, Outback, and WRX (models equipped with EyeSight and Steering Responsive Headlights) received the 2018 Top Safety Pick Plus (TSP+) rating. The 2018 TSP/TSP+ awards only apply to the North America models. 1 NCAP： New Car Assessment Program 2 IIHS： Insurance Institute for Highway Safety 3 For ratings details, please refer to rating agency websites. 21 Annual Report 2018 Europe Euro NCAP 5★ Japan U.S.A. JNCAP 5★ JNCAP ASV＋＋ IIHS TSP+ or TSP U.S.A. Australia ANCAP 5★ US-NCAP 5★ JNCAP ASV++ rated models: Levorg and WRX (models equipped with EyeSight) in 2017 JNCAP 5-star rated models: Impreza and SUBARU XV in 2016 2018 IIHS TSP rated models: 2018 Forester (models equipped with EyeSight and Steering Responsive Headlights) 2018 IIHS TSP+ rated models: 2018 Impreza, Crosstrek, Legacy, Outback, and WRX (models equipped with EyeSight and Steering Responsive Headlights) US-NCAP 5-star rated models: 2018 Impreza, Crosstrek, Legacy, Outback, and Forester Euro NCAP 5-star rated models: Impreza and SUBARU XV in 2017 ANCAP 5-star rated model: SUBARU XV in 2017 SUBARU Core Technologies Horizontally-Opposed Engine (Boxer engine) Compact, low center of gravity The horizontally opposed engine has pistons arranged symmetrically to the left and right of the crankshaft. Since the opposed pistons mutually cancel out engine vibrations, the engine can rotate smoothly, which reduces vibrations conveyed to the vehicle interior. The engineʼs low height and compact design contribute to low vehicle center of gravity. The stable attitude provides a high sense of security during driving. Symmetrical All-Wheel Drive (AWD) Superior overall weight distribution The combination of 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 maximizes all-wheel drive capability and delivers superb driving performance in various conditions. SUBARU has been committed to 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. Subaru Global Platform A next-generation vehicle platform designed with the future in mind, looking ahead to 2025 SUBARU is sequentially introducing the Subaru Global Platform, starting with the all-new Impreza launched in October 2016. The new vehicle platform substantially increases body and chassis rigidity and further lowers vehicle center of gravity, raising the level of active safety and passive safety and delivering responsive handling performance and a comfortable ride with reduced unpleasant vibration and noise. EyeSight Driver Assist System Stereo cameras for advanced object recognition capabilities The use of two cameras positioned to the left and right, like human eyes, contributes to preventive safety by helping avoid accidents, reduce impact, and alleviate driver burden by enabling three-dimensional recognition of cars, pedestrians, and other objects in front of the vehicle and accurate recognition of the distance, shape, and speed of movement of these objects. SUBARU began development of a driver assist system using stereo cameras in 1989. Application of research results and experience accumulated over many years since then has culminated in EyeSight, a system that anyone can use with peace of mind. In 2017, we introduced EyeSight Touring Assist, which dramatically reduces driver fatigue by automatically assisting accelerator, brake, and steering operation at a wide range of speeds from 0 to approximately 120 km/h for expressway driving. SUBARU will continue to work to realize an accident-free future. SUBARU Boxer Conventional In-Line Engine Symmetrical All-Wheel Drive (AWD) Subaru Global Platform Stereo cameras Stereo camera recognition image Annual Report 2018 22 Business Overview A New 3-Row SUV Developed Exclusively for the North American Market Debut of the all-new ASCENT The ASCENT is a crossover SUV newly developed for family users who require a 3-row SUV not available in the previous lineup. It forms part of the plan to achieve sustained growth in North America, SUBARU’s most important market. Designed for families who want to get the most out of their active lives, the ASCENT delivers the enjoyment of being able to go anywhere with peace of mind. Comfortable cabin environment realized by a package design that gives all passengers a pleasant ride experience in any seat, ample interior features, and vibration noise suppression made possible by the Subaru Global Platform’s increased body rigidity Standard EyeSight Driver Assist Technology and pursuit of top-of-class safety performance Powered by an all-new 2.4-liter four-cylinder Boxer direct fuel injection turbo engine, offering drivability and fuel economy equal to or better than that of six-cylinder engines Standard SUBARU Symmetrical All-Wheel Drive and X-Mode offer the optimal blend of drivability and SUV capability To be built in the U.S. with start of sales scheduled for early summer 2018 23 Annual Report 2018 The Head of Development Discusses his Vision of the ASCENT Uncompromising Attention to Detail in a Vehicle Designed for North America Background to the Birth of the ASCENT SUBARUʼs vehicle lineup for North America consists mainly of compact to mid-size SUVs. There are no vehicles that families with more than three children can continue to drive, and some customers switch to vehicles of other automakers. Development of the ASCENT, a crossover SUV exclusively for North America, began in response to strong requests from dealers in North America who argued that a 3-row SUV is absolutely necessary for customers to continue to drive SUBARU vehicles throughout their life. Uncompromising Attention to the Third-row Seats and Comfort Ordinarily, the third row of seats is cramped, the air conditioning doesnʼt reach the passengers, visibility is poor, and itʼs difﬁ cult to converse with passengers in the second row. We aimed to eliminate the disadvantages of what is derisively called the “penalty box” and instead create third-row seats that would actually make children enjoy riding there. We had North American dealer employees ride in full-size mockups and went through a repeated process of trial and error based on their impressions and opinions. Our highest priority in development was to uncompromisingly create a comfortable cabin space in each row. Of course, we also included ample interior features conceived from the perspective of families and children to ensure that every member of the family enjoys the ride. In addition, in planning the interior features, we set an objective of not giving people a reason for rejection on the grounds of unavailability of a particular feature offered by other automakers. Project General Manager Product & Portfolio Planning Division* Yasunori Kumagai Uncompromising Attention to Driving Performance Although 3.5-liter six-cylinder engines are the norm in this class for other automakers, we newly developed a 2.4-liter four cylinder downsized turbocharged direct-injection boxer engine to meet recent environmental requirements and realize top-of-class fuel efficiency. To make the ASCENT suitable for daily family use, we use an engine that runs on budget- friendly regular gasoline. We dispelled the conventional image of a four-cylinder engine, giving the engine powerful driving performance in no way inferior to competitorsʼ six-cylinder engines in freeway merging and high-speed passing situations. To the contrary, I think that the end result is a vehicle that will enable customers to personally experience the high-RPM boost and exhilarating driving performance distinctive to a turbocharged engine. Uncompromising Attention to Safety Passive safety for third-row passengers was a focus of uncompromising attention from the very beginning of development. The ASCENT is vastly superior to vehicles of other automakers with respect to the extent of head injuries and integrity of passenger survival space in a rear-end collision. Committed to protecting the rearmost passengers, we designed a thick rear frame and at the early stage of development created a structure capable of absorbing impact. While the ASCENT has of course successfully passed the assessments of third-party ratings organizations as proof of safety, third-row safety is not included in those assessments. Even so, we are fully committed to protecting drivers and all passengers in the real world, beyond what tests demand. Thatʼs the SUBARU safety concept. Since the ASCENT is for family use, we focused on quiet and smooth ride comfort, and throughout development boosted our objectives in these areas several times. We upgraded our objectives and embraced the challenge of outstripping other automakers when competitors increased the performance of their vehicles during the ASCENTʼs prototype stage and at the latter stages of development. We have collaborated time and again with employees of dealers in North America and SIA to put the ﬁ nishing touches on a car that dealers and makers would want for themselves. It was the desire of the entire development team to create a vehicle that customers will be truly glad they purchased and that others will recognize as a high-quality vehicle and wise purchase. *As of September 30, 2018 Annual Report 2018 24 Business Overview Aerospace Company Leveraging tradition and innovative technologies to develop and produce a wide variety of aircraft. SUBARUʼs roots trace to 1917 and Aircraft Research Laboratory, later to become Nakajima Aircraft. The Aerospace Company, which has inherited Nakajima Aircraftʼs manufacturing technologies and spirit, leads Japanʼs aerospace industry and develops and produces a wide variety of aircraft. In the defense program, we develop, manufacture, maintain, repair, and provide technical support for products such as the UH-1J multipurpose helicopter used by the Japan Ground Self-Defense Force for disaster relief and other purposes, the T-5 Maritime Self-Defense Force trainer, unmanned aerial vehicles (more than 15 models developed over a half century), and flight simulators. In the commercial program, we participate in many international joint development projects for Boeing. We are responsible for the development and manufacturing of the center wing box as well as wing-to-body fairings and the integration of the center wing box with the main landing gear for the 777X, Boeingʼs newest large passenger airliner, and other Boeing aircraft. In addition, taking advantage of an alliance with Bell Helicopter Textron, we are jointly developing the SUBARU BELL 412EPX. Boeing 777X By further reﬁ ning our technologies through involvement in a wide variety of aircraft programs, we will continue to take on additional challenges for growing into an aircraft manufacturer with a global presence. SUBARU BELL 412EPX This will become the basis for the UH-X, which is a new multipurpose helicopter for the Japan Ground Self-Defense Force. Consolidated Net Sales Contribution Ratio of the Aerospace Company 4.2% 25 Annual Report 2018 Net Sales (Billions of yen) Operating Income (Billions of yen) 152.8 142.8 138.8 142.2 124.4 200 100 100 50 0 18.9 18.2 14.1 12.3 9.1 20 15 10 5 0 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 Overview of Center Wing Box and SUBARUʼs Technology SUBARUʼs advanced technological capabilities continue to support the development and production of wings that have proven their worth in the worldʼs skies for more than forty years. Since first participating in Boeing passenger program in 1973, we have been involved in development and production as a key partner of Boeing for more than forty years. We manufacture the center wing box, the critical aircraft section where the right and left wings are attached to the forward and aft fuselage sections. Since the center wing box contains the fuel, they must have high mechanical strength and high ﬂ uid tightness. For these reasons, great accuracy and advanced assembly technologies are required for its manufacture, and SUBARU is one of the few companies capable of making them. The Handa Plant, where center wing boxes are manufactured, is a global-level production center that produces these parts for the new Boeing 777X as well as for the 777 large airliner, the 787 mid-size airliner, the Ministry of Defenseʼs P-1 maritime patrol aircraft, and the C-2 transport aircraft. SUBARUʼs advanced technological capabilities are recognized worldwide. For example, we also cooperate in A380 super jumbo airliner program with Airbus. We engage in development on the “Drop test for Simpliﬁ ed Evaluation of Non-symmetrically Distributed sonic boom” Project (D-SEND) together with Japan Aerospace Exploration Agency (JAXA). A center wing box (Handa Plant) President Aerospace Company Shoichiro Tozuka Message from the Company President The Aerospace Company will contribute to the enhancement of the SUBARU brand. We are a start-to-ﬁ nish aircraft builder that is capable of the complete development and manufacturing of aircraft fuselages, from materials development to quality assurance, including ﬂ ight testing. Flight safety is an important factor for aircraft. And for many years we have fostered a culture in which quality and safety are recognized as inextricably linked and uncompromisingly pursued. This total safety concept applied to aircraft, from materials development to quality assurance, including ﬂ ight testing, is at the core of SUBARUʼs DNA. The Aerospace Company currently faces a major inflection point. A change of mainstay production models is underway at Boeing, with production of the Boeing 777 decreasing, due to development of the 777X, and the production rate of the 787 increased to 14 shipsets per month in its stead. At the same time, we have entered the design and production phase of new business activities that will support the future growth of the Aerospace Company, such as 777X center wing box, the SUBARU BELL 412EPX and other projects. So our engineering load and facilities investments have peaked. Also, although continued growth in global air passenger demand is forecast, price competition for fuselages is intensifying. We will continue to steadily and reliably play a role in enhancing the SUBARU brand by further honing our technological strengths in areas including wing design and manufacturing. Annual Report 2018 26 History 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 1968 Establishment of Subaru of America, Inc. (SOA) 1931 Establishment of Nakajima Aircraft Co., Ltd. 1968 Dissolution of the business alliance with Isuzu Motors Ltd. 1945 Change of company name from Nakajima Aircraft to Fuji Sangyo 1968 Signing of a business alliance agreement with Nissan Motor Co., Ltd. 1946 Production of the ﬁ rst Rabbit Scooter 1968 Start of exports of Robin engines for snowmobiles to Polaris (USA) 1969 Start of operation of the Yajima Plant 1953 Establishment of Fuji Heavy Industries Ltd. Start of aircraft production and automobile development 1960 Opening of the Gunma Main Plant 1960 Listing of shares on the Tokyo Stock Exchange 1972 Release of the Leone 4WD Estate Van, the world’s ﬁ rst mass-production 4WD passenger vehicle 1978 Conclusion of a 767 business agreement with Boeing 1983 Start of full-scale operation of the Oizumi Plant 1987 Release of the Justy model equipped with the world’s ﬁ rst electro-continuously variable transmission (ECVT) 1966 Signing of a business alliance agreement with Isuzu Motors Ltd. 1987 Establishment of Subaru-Isuzu Automotive, Inc. (SIA) in the U.S. in a joint venture with Isuzu Motors Ltd. SUBARU Models through the Years 1966 1972 1984 1958 1969 1977 1985 SUBARU 1000 four-door sedan released Rex released Justy released SUBARU 360 released R-2 released Brat released Alcyone released 1961 1971 1983 1989 SUBARU Sambar truck released 27 Annual Report 2018 Leone coupe released Domingo released Legacy series released Origin 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 reﬂ ects the fact that Fuji Heavy Industries was formed from capital contributions from ﬁ ve companies that sprang from Nakajima Aircraft. 1989 Establishment of Subaru Canada, Inc. (SCI) 1989 Completion of Subaru Research & Testing Center (SKC) 1990 Subaru of America (SOA) made a wholly owned subsidiary 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 1991 Participation in the Boeing 777 program 1993 Start of operation of the Handa Plant 1999 Capital and business alliance with General Motors Corporation (GM) (USA) 1999 Business alliance with Suzuki Motor Corporation 2000 2002 2003 2003 2005 Dissolution of the business alliance with Nissan Motor Co., Ltd. Dissolution of the SIA joint venture with Isuzu and formal signing of a contract production agreement The Legacy wins the 2003–2004 Car of the Year Japan award 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 ﬁ xed-wing patrol aircraft 2012 2012 2014 2016 Start of knockdown production of the SUBARU XV in Malaysia 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 Termination of contract production of the Toyota Camry at SIA Transfer of production of Impreza vehicles for North America to SIA 2016 All-new Impreza Sport/GR wins the 2016–2017 Car of the Year Japan award 2017 Change of company name to SUBARU CORPORATION 2017 Termination of production and sales of SUBARU general-purpose engines and generators 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 8 2018 Forester released B9 Tribeca released SUBARU XV released Ascent released Annual Report 2018 28 Directors, Auditors, and Executive Ofﬁ cers (As of October 1, 2018) Directors of the Board Director of the Board Chairman Yasuyuki Yoshinaga “Tadashii-Kaisha” Promotion Dept., Compliance Ofﬁ ce, Quality Representative Director of the Board President CEO (Chief Executive Ofﬁ cer) Tomomi Nakamura Aerospace Company Representative Director of the Board Executive Vice President CIO (Chief Information Ofﬁ cer) Masaki Okawara IT Strategy Div., Manufacturing Director of the Board Executive Vice President CFO (Chief Financial Ofﬁ cer) Toshiaki Okada Corporate Planning Dept., Secretarial Ofﬁ ce, Finance & Accounting Dept., Human Resources Dept., “Tadashii-Kaisha” Promotion Dept., Compliance Ofﬁ ce, SUBARU Next Story Promotion Ofﬁ ce Director of the Board Executive Vice President Yoichi Kato External Relations Dept., General Administration Dept., CSR & Environment Dept., Group Company Management Dept., Legal Dept., Internal Audit Dept. Director of the Board Executive Vice President CTO (Chief Technology Ofﬁ cer) Tetsuo Onuki Engineering Management Div., Engineering Div. 1, Engineering Div. 2, Intellectual Property Dept. Outside Director Yoshinori Komamura Outside Director Shigehiro Aoyama Auditors Standing Corporate Auditor Akira Mabuchi Standing Corporate Auditor Shuzo Haimoto Outside Corporate Auditor Shinichi Mita Outside Corporate Auditor Yasuyuki Abe 29 Annual Report 2018 Executive Ofﬁ cers Title Name Areas of Responsibility Executive Vice President Katsuyuki Mizuma Overseas Sales & Marketing Div. 1, Overseas Sales & Marketing Div. 2 Senior Vice President Hideaki Matsuki Parts & Accessories Div. Senior Vice President Hiromi Tsutsumi Corporate Communications Dept., Human Resources Dept. Senior Vice President Shoichiro Tozuka Aerospace Company Senior Vice President Toshiaki Tamegai Manufacturing Div. Senior Vice President Takuji Dai Product & Portfolio Planning Div. Senior Vice President Fumiaki Hayata Corporate Planning Dept. Senior Vice President Atsushi Osaki CQO (Chief Quality Ofﬁ cer), Quality Assurance Div. Senior Vice President Tatsuro Kobayashi Purchasing Div. Vice President Hiroki Kurihara Customer Service Div. Vice President Katsuo Saito Business Planning Dept., General Administration Dept., CSR & Environment Dept., Group Company Management Dept. Vice President Yasuhiro Hamanaka Aerospace Company Vice President Eiji Ogino SIA1 Vice President Yasushi Nagae Quality Assurance Div., Customer Service Div. Vice President Jinya Shoji Overseas Sales & Marketing Div. 1, SCI 2, NASI 3 Vice President Hiromi Tamo Engineering Management Div., Technical Research Center Vice President Yoichi Sato Japan Sales & Marketing Div. Vice President Takeshi Seiyama SIA1 Vice President Osamu Eriguchi Engineering Div. 2 Vice President Tomoaki Emori Global Marketing Div. Vice President Tatsuya Okuno Engineering Div. 1 Vice President Tamotsu Inui Cost Planning & Management Div. 1 Subaru of Indiana Automotive, Inc. 2 Subaru Canada, Inc. 3 North American Subaru, Inc. Annual Report 2018 30 Corporate Governance Basic Policy on Corporate Governance Based on the corporate philosophy, SUBARU aspires to be a compelling company with a strong market presence. The enhancement of corporate governance is one of the managementʼs top priorities as SUBARU works to gain the satisfaction and trust of all its stakeholders by achieving sustainable growth and improving its corporate value in the medium to long term based on the “Customer First” principle. SUBARU clearly separates the function of decision making and the oversight of corporate management from that of the execution of business operations and aims to realize effective corporate management by expediting decision making. SUBARU ensures proper decision making and the oversight of corporate management and the execution of business operations as well as enhances compliance and its risk management system through the monitoring of its management and operations and advice provided by outside ofﬁ cers. SUBARU implements proper and timely disclosure of information in order to improve the transparency of management. 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. SUBARU has instituted the Corporate Governance Guidelines with the objective of clearly defining its basic policy on corporate governance, governance framework, and operating policy. WEB Corporate Governance Guidelines and Corporate Governance Report https://www.subaru.co.jp/en/csr/governance.html *We plan to revise the guidelines and report by December 31, 2018 in light of the content of the June 2018 revisions to Japanʼs Corporate Governance Code. Management Organization The Company has chosen to be a company with a board of corporate auditors as its corporate governance structure, and the Board of Directors decides and supervises, and the Board of Corporate Auditors audits, the execution of important business. 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. 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 ofﬁ cers Board of Directors: 8 Executive Nomination Meeting* Directors: 6 Executive Compensation Meeting* Outside directors: 2 Decision making Submission and reporting * The Executive Nomination Meeting and Executive Compensation Meeting consist of the representative directors of the board, director in charge of the Secretariat Ofﬁ ce, and outside directors. Collaboration Internal Audit Department Reporting Reporting President Executive Management Board Meeting Auditing Instructions and oversight Reporting Election and dismissal Vice Presidents Shared Corporate Operations Departments at HQ SUBARU Automobiles Division Executive Meeting Aerospace Company Executive Meeting Group companies Submission and reporting of important matters Policy instructions Approval of plans, etc. Plan proposal reports, etc. Committees CSR Committee Compliance Committee Quality Improvement Committee Central Safety and Health Committee Environmental Committee Social Contribution Committee Corporate Governance Planning Committee etc. i d n a 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 s n o i t a r e p o s s e n i s u B n o i t c n u f n o i t u c e x e 31 Annual Report 2018 With regard to the business operation system, the Company has established the Executive Management Board Meeting as a preliminary consultation body to conduct deliberations on companywide management strategies and the execution of important business before their presentation at the Board of Directorsʼ Meeting. In addition, the Company has adopted a vice president system and established the Executive Board Meeting as the decision-making body of each business department, and converted the Aerospace division into an internal company, in order to clarify responsibilities and accelerate the execution of business operations. The Company currently has three special advisors, none of whom is a retired representative director of the board and president or CEO. The principle role of special advisors is to make themselves available on a regular basis to provide business advice upon request. The special advisors do not participate in meetings and are not involved in management. In principle, the term of ofﬁ ce of special advisors is one year. SUBARU has abolished the Senior Advisor System. Development of Internal Control Systems The Company has adopted by resolution of the Board of Directors a basic policy on development of a system to ensure that execution of duties by directors complies with laws and regulations and the Articles of Incorporation in accordance with the Companies Act and the Ordinance for Enforcement of the Companies Act as well as other systems stipulated by ordinance of the Ministry of Justice as necessary to ensure the properness of operations of a stock company and a corporate group consisting of the stock company and its subsidiaries. SUBARU occasionally plans, develops, and applies revisions to this basic policy. Internal Audits and Auditing by Corporate Auditors SUBARU has established the Audit Department as an internal auditing organization and conducts internal audits of business execution at SUBARU and its domestic and overseas Group companies. At the beginning of the ﬁ scal year, the Audit Department prepares an internal audit plan for the ﬁ scal year that takes into consideration the internal control status of the Group as a whole and systematically implements the plan. The Department prepares and distributes to the directors, corporate auditors, and concerned parties audit reports on the results of internal audits and reports quarterly at the Executive Management Board Meeting. SUBARUʼs corporate auditors attend meetings of the Board of Directors and other important meetings, inspect business sites and subsidiaries, interview members of the Audit Department, and audit the execution of duties by the directors and others in accordance with the audit policy and audit plan established by the Board of Corporate Auditors. The Audit Department and corporate auditors work to deepen collaboration and strengthen the auditing function through monthly internal audit report meetings held by the Audit Department and quarterly dialogues about internal control. The Audit Department and corporate auditors endeavor to strengthen the auditing function through quarterly information sharing with the accounting auditors. Evaluation of Internal Control System for Financial Reporting An evaluation of the internal control system related to ﬁ nancial reporting in connection with the internal control reporting system based on Japanʼs Financial Instruments and Exchange Act is conducted using the ﬁ nal date of the ﬁ scal year of the consolidated ﬁ nancial statements as the reference date. The evaluation conforms to the standards for evaluation of internal control related to ﬁ nancial reporting that are generally accepted to be fair and reasonable. The Chief Executive Ofﬁ cer (CEO) and the Chief Financial Ofﬁ cer (CFO) evaluated the status of the development of the internal control system related to ﬁ nancial reporting as of March 31, 2018 and afﬁ rmed that it has been established properly and functions effectively and issued an internal control report audited by the Accounting Auditors to that effect. Policy on Appointing Senior Management and Nominating Candidates for Director and Corporate Auditor The Board of Directors, when nominating candidates for directors and corporate auditors and appointing vice presidents, nominates persons with extensive experience, high levels of ability and insight, and advanced expertise commensurate with a position as a director, corporate auditor, or vice president within the Company in order to contribute to achieving the Companyʼs corporate philosophy and effective corporate governance, as well as sustainable growth and improvement in corporate value in the medium and long term. The Board of Directors appoints two or more independent outside directors from the viewpoint of giving consideration to diversity, etc., within the Board of Directors, and improving the transparency of management and shareholder value through independent oversight of management. Annual Report 2018 32 Corporate Governance Reasons for Appointing the Outside Ofﬁ cers and Status of Principal Activities Outside Directors Independent Ofﬁ cer Status 1 Reasons for Appointing Meeting Attendance Board of Directors Signiﬁ cant Concurrent Positions 2 Yoshinori Komamura ○ Shigehiro Aoyama ○ Mr. Yoshinori Komamura has served three years as an independent outside director of the Company as of the conclusion of the 87th Ordinary General Meeting of Shareholders. 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. Therefore, 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 Companyʼs management from an independent standpoint as an outside director. Mr. Shigehiro Aoyama has served two years as an independent outside director of the Company as of the conclusion of the 87th Ordinary General Meeting of Shareholders. 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. Therefore, 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 Companyʼs management from an independent standpoint as an outside director. Attended 17 of 17 meetings Adviser, Komatsu Ltd. Member of the Board, Institute for Strategic Leadership (ISL) Attended 17 of 17 meetings Supreme Advisor, Suntory Holdings Limited External Director, Takamatsu Construction Group Co., Ltd. President, The Distribution Economics Institute of Japan Director, Japan Marketing Association Outside Corporate Auditors Independent Ofﬁ cer Status 1 Reasons for Appointing Shinichi Mita Yasuyuki Abe ○ ○ Mr. Shinichi Mita has served three years as an independent outside corporate auditor of the Company as of the conclusion of the 87th 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 execution, and particularly extensive experience and insight into accounting and finance in corporate activities, gained as a director and executive ofﬁ cer of Kao Corporation. Mr. Yasuyuki Abe has served two years as an independent outside corporate auditor of the Company as of the conclusion of the 87th Ordinary General Meeting of Shareholders. The Company has appointed him in the belief that he is well qualiﬁ ed 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 ofﬁ cer and member of the board of Sumitomo Corporation. Meeting Attendance Board of Directors Board of Corporate Auditors Attended 17 of 17 meetings Attended 12 of 12 meetings Attended 15 of 17 meetings Attended 11 of 12 meetings Signiﬁ cant Concurrent Positions 2 Adviser, Mizuho Capital Partners Co., Ltd. Member of the Board, Japan Association for Chief Financial Ofﬁ cers (JACFO) Advisor, Sumitomo Corporation Director of the Board (External), Chairman of the Board, JVC KENWOOD Corporation Advisor, ORANGE AND PARTNERS CO., LTD. Inappropriate practices, such as the performance of ﬁ nal vehicle inspections by persons not certiﬁ ed as ﬁ nal inspectors, inappropriate conduct in the form of alteration of measurement data at the time of fuel economy and emissions sampling in the ﬁ nal vehicle inspection process, and inappropriate measurement procedures by which vehicle fuel economy and emissions measurements were treated as valid measurements despite trace errors and humidity errors have been identiﬁ ed at the SUBARU Gunma Manufacturing Division. Although the outside directors and outside corporate auditors were not aware of these facts before they came to light, they regularly offer opinions about the importance of compliance and internal control based on their extensive experience and keen insights and, since the time these facts came to light, have discharged their ofﬁ cial responsibilities by receiving reports on and ascertaining the status of progress with investigations into the facts, responding to demands from the Ministry of Land, Infrastructure, Transport and Tourism in a timely and appropriate manner, striving to further strengthen and inculcate compliance, and calling for appropriate measures to prevent any reoccurrence of such issues. 1 Outside directors and outside corporate auditors unlikely to have conﬂ icts of interest with general shareholders as stipulated by the Tokyo Stock Exchange 2 As of March 31, 2018 Executive Nomination Meeting To ensure fairness and transparency of decisions on executive appointments, the Executive Nomination Meeting deliberates nominations of candidates for director and corporate auditor and appointments of vice presidents and submits reports to the Board of Directors on nomination proposals unanimously approved by its members. Nominations are decided by resolution of the Board of Directors. Explanations of matters such as the candidateʼs background, the status of concurrent positions, insight, and expected roles at the Company are provided for each nomination and appointment. Approval of the Board of Corporate Auditors is obtained for nominations of candidates for corporate auditor. The Executive Nomination Meeting consists of the representative directors, the director in charge of the Secretariat Ofﬁ ce, and outside directors and is chaired by the representative director of the Board and chairman (the representative director of the Board and President if the position of representative director of the Board and chairman is vacant or an accident has occurred). The Executive Nomination Meeting was convened twice in FYE 2018 and submitted reports mainly on the executive structure and appointments, the division of duties of executives, and the appointment of representatives of major subsidiaries. 33 Annual Report 2018 Policy for Determining the Amount of Compensation for Directors and the Calculation Method Compensation, etc., of directors is determined in view of the following items. Compensation, etc., is at a level commensurate with the roles and responsibilities of directors and is appropriate, fair, and balanced. The compensation structure is determined by giving consideration to providing motivation for sustained improvement in corporate performance and corporate value and securing talented personnel. By a resolution passed at the 85th Ordinary General Meeting of Shareholders, held on June 28, 2016, the maximum total amount of annual compensation, etc., for directors is 1.2 billion yen (including 200 million yen for outside directors), and the Executive Compensation Meeting determines compensation within that limit by delegation of the Board of Directors. The speciﬁ c composition of compensation, etc., is as described below. The total amount of compensation and level of each compensation type is set according to job responsibilities and status as inside or outside director utilizing survey data from specialized outside agencies, etc. The maximum total amount of monetary compensation related to long- term incentives is 200 million yen per year. 1) Basic compensation : a fixed portion, with the specific amount determined based on job 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 income for the current ﬁ scal year, taking into consideration improvement in ROE and the shareholdersʼ equity ratio, personnel development, and the business environment 3) Long-term incentives: compensation to grant restricted stock for the purpose of providing an incentive for sustained improvement of the Companyʼs corporate value and further value sharing with the shareholders In view of the role of outside directors in management monitoring and oversight from an independent standpoint, the Company does not provide short-term performance-linked compensation or long-term incentives to outside directors. By a resolution passed at the 75th Ordinary General Meeting of Shareholders, held on June 27, 2006, the maximum total amount of annual compensation, etc., 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. Total Amount of Compensation for Directors and Corporate Auditors by Type Classiﬁ cation Number Basic compensation (paid in ﬁ xed monthly installments) Total compensation (millions of yen) Performance-linked compensation Short-term performance-linked compensation Long-term incentives Directors (excluding outside directors) Corporate auditors (excluding outside corporate auditors) Outside executive ofﬁ cers Total 8 2 4 14 298 56 46 400 151 ーー 151 37 ̶ ̶ 37 486 56 46 588 Note: The above table includes two directors who resigned before the last day of the ﬁ scal year under review. At the end of the ﬁ scal year under review, there were 8 directors (including 2 outside directors) and 4 corporate auditors (including 2 outside corporate auditors). Executive Compensation Meeting The Executive Compensation Meeting determines the compensation of directors and vice presidents, while taking into consideration factors such as the compensation levels of appropriately comparable other companies, the compensation of the Companyʼs employees, the social situation, and the performance evaluation of vice presidents. The Executive Compensation Meeting consists of the representative directors of the board, the director in charge of the Secretariat Ofﬁ ce, and outside directors and is chaired by the representative director of the board and chairman (the representative director of the board and president if the position of representative director of the board and chairman is vacant or an accident has occurred). The Executive Compensation Meeting was convened twice in FYE 2018, engaged in discussion of the compensation structure, and determined matters such as performance-linked compensation for directors (excluding outside directors) and vice presidents in accordance with performance evaluation and the amount of monetary compensation claims in respect of restricted stock compensation for each individual recipient. Annual Report 2018 34 Corporate Governance Policy on Cross-Shareholdings Regarding major listed stocks held by the Company as cross-shareholdings, the Board of Directors ascertains whether the holding of these shares will contribute to management of the Company in the medium to long term, after a comprehensive consideration of factors such as medium- to long-term corporate value enhancement, importance to business strategy, and business relationships with business partners and an assessment of economic rationality in view of risks and returns. As of March 31, 2018, the number of issues of investment securities held for purposes other than pure investment and the total amount reported on the balance sheet were 49 issues and 9,371 million yen, respectively. Number of Issues of Investment Securities Held for Purposes Other than Pure Investment and Total Amount Reported on the Balance Sheet Category Number of issues Amount reported on the balance sheet (millions of yen) FYE 2015 91 39,055 FYE 2016 63 28,764 FYE 2017 62 13,339 FYE 2018 49 9,371 Board of Directorsʼ Meeting Participation Rate (Most Recent Five Years) Category Number of meetings held Attendance rate FYE 2014 17 times 82.4% FYE 2015 14 times 100% FYE 2016 15 times 96.3% FYE 2017 15 times 96.3% FYE 2018 17 times 99.0% *Attendance rates for newly elected directors and corporate ofﬁ cers are calculated based on the number of Board of Directorsʼ meetings held after they assumed ofﬁ ce. So that the directors and corporate auditors fully discharge their duties, the Company holds study meetings to continuously provide them with information and knowledge related to business activities necessary for management oversight. In addition, to continuously provide the outside officers with information about SUBARUʼs management philosophy, corporate culture, and business environment, etc., the Company provides business reports from the operating divisions and opportunities for plant tours and has prepared an environment that encourages sharing of information and exchange of ideas among executives. Analysis and Evaluation of the Effectiveness of the Board of Directors In accordance with the Corporate Governance Guidelines, the Companyʼs Board of Directors analyzes and evaluates the effectiveness of the Board, then considers and implements measures to improve any issues identiﬁ ed. In FYE 2018, the Board confirmed measures to address issues identified in previous evaluations and, in response to the occurrence of improprieties relating to ﬁ nal vehicle inspections, performed analysis and evaluation after changing the implementation procedure and questionnaire items in the interest of performing a detailed evaluation of the effectiveness of the Board of Directorsʼ oversight function. A report on the analysis results follows. Evaluation and Analysis Methods Timing of implementation: March 2018 Respondents: All directors and auditors (12 in total, including outside ofﬁ cers) Implementation procedure: Self-evaluation using a questionnaire prepared by a third-party organization (An anonymous questionnaire format has been adopted beginning in FYE 2018.) 1) A third-party organization conducted a self-evaluation questionnaire survey of all directors and corporate auditors using an anonymous questionnaire. 2) The third-party organization aggregated and analyzed the questionnaire data. 3) A report received from the third-party organization was veriﬁ ed and discussed by the Board of Directors. Questionnaire items: 1) Board of Directorsʼ management structure 2) Board of Directorsʼ oversight function 3) Shareholder dialogue Evaluation Results As was the case with the evaluation results up to FYE 2017, it was conﬁ rmed that open and frank discussion is conducted from a Company-wide perspective at meetings of the Board of Directors on the basis of the chairpersonʼs leadership and mutual understanding among the members. There was a consensus on the appropriateness of the size of the Board of Directors and proportion of outside directors, directors comprising the Executive Nomination Meeting and Executive Compensation Meeting, and on matters such as the appropriateness of sharing of feedback from shareholders and investors was conﬁ rmed. 35 Annual Report 2018 Further strengthening of the Board of Directorsʼ risk identification and management system and enhancement of discussion of medium- to long-term business strategy were identified as areas in which future improvement and functional enhancement can be expected. Future Initiatives The Board of Directors conﬁ rmed that it will discuss medium- to long-term management strategy and take action to ensure rigorous implementation of measures to prevent any reoccurrence of improprieties, focusing on further strengthening of the risk identiﬁ cation and management system. On April 1, 2018, the Company established the “Tadashii-Kaisha” Promotion Department and the Compliance Ofﬁ ce to reinforce efforts to address issues the Company faces with respect to legal compliance and corporate culture reforms, and the Board of Directors conﬁ rmed that it will carefully watch Group-wide activities spearheaded by these organizations and work to restore stakeholder trust. The Board of Directors will improve Board functions, strengthen corporate governance, and promote continuous enhancement of corporate value by continuing to evaluate the effectiveness of the Board of Directors. Aggregated Questionnaire Responses Board of Directorsʼ Management Structure Ⅰ-1) Board of Directorsʼ composition Board of Directorsʼ Oversight Function and Shareholder Dialogue Ⅱ-1) Board of Directorsʼ supervisory function 4.0 3.0 2.0 1.0 Ⅰ-5) Board of Directorsʼ contribution Ⅰ-2) Board of Directorsʼ management Ⅲ) Shareholder dialogue 4.0 3.03 0 3.0 2.02 2.0 1.01 1.0 Ⅱ-2) Board of Directorsʼ risk management systems Ⅰ-4) Board of Directorsʼ Ⅰ-3) Decision-making support structure process Ⅱ-4) Executive nomination and compensation Ⅱ-3) Board of Directorsʼ discussion Questions Category Ⅰ. Board of Directorsʼ management structure Matters Examined 1) Board of Directorsʼ composition 2) Board of Directorsʼ management Board of Directorsʼ size Board of Directorsʼ composition (proportion of inside and outside directors) Board of Directorsʼ composition (diversity and specialty) Frequency, duration, and distribution of meetings Appropriateness of agenda Quality and quantity of documents Timing of document distribution Pre-meeting explanation Content of explanations and reports 3) Decision-making process Chairʼs leadership Adequate discussion 4) Board of Directorsʼ support structure 5) Board of Directorsʼ contribution Environment and systems for providing information Provision of information to outside directors Training of outside directors Training of inside directors Stance toward initiatives Diverse values Company-wide perspective Mutual respect Stakeholder perspective Ⅱ. Board of Directorsʼ oversight function 1) Board of Directorsʼ supervisory function 2) Board of Directorsʼ risk management systems 3) Board of Directorsʼ discussion Reporting systems Supervision of management Risk management systems Subsidiary management systems Information-sharing on risks and risk response Systems for managing progress of response measures Thorough awareness of compliance issues Discussion of management strategy Discussion of capital policy Discussion of cross holdings Discussion on strengthening governance Responses to social and environmental issues 4) Executive nomination and compensation Composition of Executive Nomination Meeting and Executive Compensation Meeting Successor development Incentive-based compensation Ⅲ． Shareholder dialogue Shareholder dialogue Sharing shareholder and investor views Enhancement of shareholder and investor dialogue Annual Report 2018 36 Corporate Governance Messages from the Outside Directors My Role as an Outside Director I think that the role of outside directors is to actively speak out and participate in decisions at Board of Directorsʼ meetings from an outside, independent position unconstrained by internal company logic, implicit knowledge, or personal relationships. I base my thinking as an outside director on maximization of the interests and value of all SUBARU stakeholders (customers, employees, partner companies, dealers, shareholders and investors, and local communities). Furthermore, the outside and inside directors are not in an oppositional relationship. Rather, although our approach differs due to differences in position, experience, and knowledge, we share the same goal of enhancing SUBARUʼs corporate value and aiming for sustained growth. Thoughts as an Outside Director on what is Necessary to be “a Company that does the Right Thing in the Right Way” I think that SUBARU deserves praise for having rapidly increased sales from the one- trillion yen to the three-trillion yen level in the short period of the past few years. On the other hand, to maintain continuity as a three-trillion yen company, SUBARU must not only be able to sustain business performance but also to think and act in a way appropriate to its social position. A high level of awareness of safety, the environment, compliance, and governance will increasingly be necessary in addition to maximization of sales and proﬁ ts. I think that as SUBARU aims to achieve further quantitative and qualitative growth into the future, it must meet and exceed higher standards of responsibility. How Discussion and Advice Take Place at Board of Directorsʼ Meetings I am convinced that SUBARUʼs Board of Directors must rank near the top among Japan companies in the number of comments by outside directors at Board meetings. That SUBARUʼs top management has the ﬂ exibility to listen to outside opinions and the strength to heed them is cause for great pride, and I have deep respect for the executive team. It is only natural that SUBARU, a company with an overseas sales ratio exceeding 85% and a foreign shareholding percentage exceeding 30%, pursues globally high standards of value. I hope to engage in more in-depth discussion at Board meetings going forward. What is Required for Sustained Corporate Value Enhancement From the viewpoint of all stakeholders, including customers, the SUBARU brand consists of trust and conﬁ dence in SUBARU. I think that from SUBARUʼs perspective, the brand may consist of a promise from SUBARU to its stakeholders. It is often said that although it takes decades to win trust and conﬁ dence, they can be lost overnight. For SUBARU to continue to win the trust and conﬁ dence of stakeholders, I think it is necessary to draw a sharper distinction between what to preserve and what to change in step with changes in the world and business scale expansion. Personally, I think what should be preserved is an insatiable spirit of inquiry with respect to advanced technology development and the earnestness to face customers sincerely, and what should be changed is to undertake a transformation of awareness as a company that has grown from one trillion yen to three trillion yen. In my role as an outside director, I want to contribute to the best of my ability to SUBARUʼs evolution to the next operational level together with the inside directors, executive ofﬁ cers, and employees. Outside Director Yoshinori Komamura 37 Annual Report 2018 Outside Director Shigehiro Aoyama My Role as an Outside Director The outside directors are expected to engage in management oversight, provide multifaceted advice on improving business performance, and express their views 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 a corporate culture that has become entrenched in internal logic. The recent repeated improprieties indicate the necessity of transforming a corporate culture that was incapable of restraining internal logic that had been repeated over many years. In my role as an outside director, I will strive to ensure that such incidents never happen again. Thoughts as an Outside Director on what is Necessary to be “a Company that does the Right Thing in the Right Way” I consider high quality to be the key factor influencing the value of SUBARUʼs corporate brand. However, there is risk of confidence in quality leading to over- confidence. Times change, and to continue to create the quality that is SUBARUʼs core competence, the Company must constantly reﬁ ne and perfect that quality and also add transformation of manufacturing processes. Of particular importance, a compliance perspective is essential in business management today. Work-style innovation isnʼt only a matter of working hours and work-life balance. It also involves inculcating ways of working imbued with the spirit of compliance required in this day and age. That is a necessary condition for SUBARU to be “a company that does the right thing in the right way.” How Discussion and Advice Take Place at Board of Directorsʼ 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. The outside directors actively express their opinions to promote a governance system aligned with current global standards. However, I think further effort is required to ensure that our opinions fully mesh with those of the directors in charge of business execution. That is to say, since there is a tendency for discussion at SUBARU to disproportionately emphasize individual optimization, I would like discussion to extend to total optimization of business. What is Required for Sustained Corporate Value Enhancement For corporations today, there can be no growth without consideration of sustained value enhancement. Although enhancement of ﬁ nancial value is essential, companies must also consider non-ﬁ nancial value from an environmental, social and governance (ESG) perspective. SUBARU must implement environmental measures including a response to emissions regulations, must respond to social needs such as automobile safety and security, and, in the area of governance, must develop an organizational structure to implement these initiatives. This will contribute to enhancing the value of the SUBARU brand. A sense of urgency and alacrity is necessary for accomplishing this, and I hope to see a higher level of innovation from a management structure capable of pursuing sustained growth for SUBARU. Annual Report 2018 38 CSR in the SUBARU Group CSR The SUBARU Group contributes to society through our businesses and engages in CSR activities to help create a sustainable society. 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. Corporate Code of Conduct SUBARU CORPORATION sets down the Corporate Code of Conduct to comply with laws and regulations and to fulﬁ ll its social responsibilities based on its corporate philosophy. We will continue to strive to become a company loved by all and contribute to making society more afﬂ uent by respecting individuals and the Corporate Code of Conduct and acting on the same sense of values. 1. We develop and provide creative products and services while paying sufﬁ cient attention to the environment and safety. 2. We respect the rights and characteristics of individuals. 3. We promote harmony with society and contribute to the prosperity of society. 4. We meet social norms and act honestly and fairly. 5. We maintain global perspective and aim to be in harmony with international society. Management Philosophy Aiming to be a compelling company with a strong market presence built upon its customer-ﬁ rst principle. 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 Promotion System SUBARU has set up the CSR Committee as a forum for discussing CSR initiatives. The Committee conﬁ rms the status of the PDCA cycle of each specialized committee and department. The CSR Committee, which is chaired by SUBARUʼs director of the board and chairman and includes all executives as members, will consider and discuss the social aspects of SUBARUʼs businesses and work to strengthen CSR initiatives. Board of Directors Executive Management Board Meeting CSR Committee Specialized committees Departments Afﬁ liated companies Secretariat Ofﬁ ce: CSR & Environment Department 39 Annual Report 2018 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 Groupʼs business domain also requires initiatives on diverse themes such as reducing environmental impact, preventing traffic accidents, and alleviating trafﬁ c 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. The automotive industry has entered a once-in-a-century transition period, and the social environment is constantly changing. SUBARU considers it necessary to promote and ensure the penetration of CSR initiatives on a group-wide, global scale to contribute to society through our businesses and meet stakeholder expectations and demands. To that end, we have reviewed the Eight CSR Action Items and newly deﬁ ned Six Priority Areas for CSR. By applying the thought process behind the Six Priority Areas for CSR to how we conduct business, we will fulﬁ ll our social responsibilities as a corporation and continue to provide “Enjoyment and Peace of Mind” to our customers and other stakeholders. In so doing, the SUBARU Group will become a corporate group trusted by society and contribute to the creation of a more afﬂ uent, sustainable society as a truly global company. Six Priority Areas for CSR In conjunction with STEP, the new mid-term management vision, the SUBARU Group has reviewed the previous Eight CSR Action Items and newly selected Six Priority Areas for CSR: people-oriented car culture, resonance and coexistence, peace of mind, diversity, environment, and compliance. In selecting the priority areas, we ﬁ rst identiﬁ ed forty-one societal requirements and expectations as CSR priority items and conducted a questionnaire survey of experts and investors in North America and Japan. Finally, we considered CSR from two perspectives: areas for contributing to society by taking advantage of business strengths, and areas for meeting the expectations of society. As a result, we selected people-oriented car culture, resonance and coexistence, peace of mind, and diversity as areas for contributing to society by taking advantage of business strengths. Although peace of mind and diversity overlap, we selected peace of mind because it is an area in which the requirements of society and the SUBARU Groupʼs business strengths coincide and selected diversity because we broadly deﬁ ne it as including not only the diversity required by society but also diversity in the products we provide to our customers. Since information disclosure and dialogue with stakeholders and reﬂ ection of stakeholder feedback in management are essential for recovering trust, we will implement what we call “6M+1E” initiatives: the six priority areas (“6M,” with “M” standing for materiality) plus information disclosure and dialogue with stakeholders and reflection of feedback in management (“1E,” with “E” standing for engagement). Annual Report 2018 40 CSR in the SUBARU Group Application of the Six Priority Areas for CSR in Management SUBARU The SUBARU Group Board of Directors Executive Management Board Meeting Application in management Information disclosure and dialogues Stakeholders 6 Priority Areas for CSR o t i c ﬁ c e p s s e i t i r o i r P U R A B U S s ʼ y t e c o S i s n o i t a t c e p x e People-oriented Car Culture Resonance and Coexistence Peace of Mind Diversity Environment Compliance Our Six Priority Areas for CSR and Basic Approach People-oriented Car Culture SUBARU believes that cars are more than a mere means of transportation. SUBARU places importance on how people feel “Enjoyment and Peace of Mind,” delivers high-added-value products and services to customers as a partner that enriches peopleʼs hearts and lives, and fosters a sustainable mobility culture. Resonance and Coexistence SUBARU will become a company that is trusted by, resonates with, and coexists with people by expanding personal communication and sincerely listening to the views and opinions of each customer and society as a whole. Peace of Mind SUBARU will become a company that allows all stakeholders to feel ultimate peace of mind. Diversity Environment Compliance The SUBARU Group promotes diversity, which we deﬁ ne as providing products that reﬂ ect respect for diverse market value and respecting and reflecting the diverse values of everyone who works in the SUBARU Group. “The earth, the sky and nature” form our fields of business. In order to bequeath these to future generations, SUBARU will consider its effect on the environment across the entire spectrum of corporate activities. SUBARU will become a company where business operations conform to laws, regulations, and social norms and where a mindset of respecting and prioritizing compliance permeates everything and everyone in the SUBARU Group. SDGs Initiatives The SUBARU Group recognizes the importance of responding to the Sustainable Development Goals (SDGs), which are aimed at achieving a more sustainable future by 2030. To respond to climate change, we aim to reduce the SUBARU Groupʼs direct CO2 emissions (Scope 1 and 2) to 30% below FYE 2017 levels (on a total emissions volume basis) by FYE 2031. To reduce trafﬁ c accident fatalities and injuries, we have set a target of eliminating fatal accidents involving SUBARU vehicles* by 2030. Through these initiatives, we are contributing to the creation of a sustainable society. * Elimination of accidents resulting in the death of drivers or passengers in SUBARU vehicles and accidents resulting in the death of pedestrians, cyclists, or other persons due to collision with SUBARU vehicles 41 Annual Report 2018 Environment SUBARU Environmental Policies SUBARU Sustainability Principles “The earth, the sky and nature” are SUBARUʼs ﬁ elds of business. With the automotive and aerospace businesses as the pillars of SUBARUʼs operations, our ﬁ elds 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 ﬁ rst, we will develop and deliver products that can contribute to protecting the earthʼs 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. Environmental Principles SUBARUʼs ﬁ elds of business are the earth, the sky and nature. SUBARU understands that the health and preservation of biodiversity and controlling climate change are critical to ensuring a sustainable future for our planet earth, nature, communities and businesses. Products: We develop our products and conduct R&D in light of the lifecycle environmental impacts of our products. Purchasing: Our purchasing activities reﬂ ect consideration for biodiversity and other aspects of environmental protection. Production: We strive to minimize our environmental impact through improving energy efﬁ ciency and waste management. Logistics: We strive to minimize our environmental impact through enhancing energy efﬁ ciency and promoting pollution prevention. Sales: We endeavor to recycle resources efﬁ ciently and reduce waste. Management: We will strive to improve our sustainability program through contributions that meet societal needs and by publicizing our activities as Team SUBARU. [Established: April 1998, Revised: April 2017] Aiming for Signiﬁ cant Reduction in CO2 Emissions SUBARU has set a new target of reducing the SUBARU Groupʼs direct CO2 emissions (Scope 1 and 2) to 30% below FYE 2017 levels (on a total emissions volume basis) by FYE 2031. We have also begun formulating an Environmental Action Plan. The opening initiative under the plan is partial adoption (approximately 11,500 MWh/year) at the Aerospace Companyʼs Utsunomiya Plant of the “Tochigi Furusato Denki Program,” Japanʼs first program for locally produced and consumed CO2-free electricity, with the aim of achieving emissions reduction of approximately 5,400 t-CO2. Furthermore, we plan to expand introduction of renewable energy facilities. Environmental Action Plan Roadmap (FYE) 2019 2021 Phase Ⅲ: Challenge Consideration and implementation of all available means of reducing CO2 from a group-wide perspective, taking into consideration external factors such as technological innovation, markets, and regulations Phase Ⅰ: Preparation • Formulation of the next Environmental Action Plan • Implementation of voluntary CO2 reductions ahead of schedule while continuing the current plan (The Sixth Voluntary Plan) 2026 Phase Ⅱ: Approach In anticipation of a CO2 increase accompanying an increase in production activities, active introduction of renewable energy and CO2-free power sources in addition to advancing energy conservation Target 30% reduction in direct CO2 emissions (Scope 1 and 2) from the FYE 2017 level 2031 Annual Report 2018 42 CSR in the SUBARU Group Message from the General Manager of the Human Resources Department Senior Vice President General Manager, Human Resources Department Hiromi Tsutsumi Making the most of human resources Proﬁ le of the Ideal SUBARU Employee I consider the role of the general manager of the Human Resources Department to be to design policies and programs for making the most of human resources and to make continuous improvements to these policies and programs while conﬁ rming their status of operation, industry trends, and other matters. The following is a proﬁ le of the ideal SUBARU employee. Always a challenger and an explorer One who tenaciously strives to achieve objectives One who thinks through to address challenges One who thinks of others When the Company name was changed to SUBARU CORPORATION in April 2017, after careful consideration we selected these expressions to indicate what we consider important and what we will continue to consider important in SUBARU employees. We believe that cultivation of human resources that emphasizes these four items will become the foundation for gaining the trust of customers and enhancing SUBARUʼs corporate value. Human Resources Development The basis of human resources development at SUBARU is on-the-job training, and we are developing an education and training system with a curriculum adapted to employee rank and ﬁ eld of specialization. Priority areas targeted for further reinforcement are 1) thoroughly train employees while they are young, 2) cultivate specialists who will open the way to the future, and 3) nurture many strong leaders. These are essential areas targeted for reinforcement to ensure that SUBARU continues to provide added value to customers during a period of transformation for the automotive industry. For example, we are planning and implementing education programs adapted to the individual characteristics of employees and management training enhancements. Also, the introduction of multifaceted assessment of managers, employee surveys, and stress checks in recent years has enabled us to identify HR management issues in the workplace, and we are reinforcing linkage of the results obtained from these measures to solutions on the basis of data analysis. 43 Annual Report 2018 Advancing Diversity Activities SUBARU has made implementing “Change the Culture” corporate culture reforms a key priority in the STEP mid-term management vision. We have designated increasing diversity as a priority area of CSR activities for achieving these reforms and aim to make SUBARU a company capable of contributing to diverse values, both inside and outside the Company. For the products and services that SUBARU provides to be accepted by people with wide-ranging values, with “Enjoyment and Peace of Mind” as the cornerstone of the value proposition, SUBARU must realize diversity in the organizations and human resources that create value. In that sense, diversity is the foundation of organizational vitalization. Our employees have diverse personalities, and to enable all employees to demonstrate their individual capabilities to the utmost, SUBARU values differences in gender, nationality, culture, and lifestyles and strives to create workplace environments in which everyone ﬁ nds it easy to work. Our vision of diversity is “a profusion of ﬂ owers all abloom.” The Diversity Promotion Office, established in January 2015, engages in activities under four priority themes: 1) promoting active roles for female employees, 2) employing people with disabilities, 3) planning and promoting employment of non-Japanese nationals, and 4) promoting employment of the elderly. We are currently placing particular emphasis on efforts to promote active roles for female employees. Although the automotive industry is a male-centered world and most of the technicians and line workers at automakers are men, more than a few buyers and drivers are women. To be accepted by greater numbers of customers, SUBARU needs products and services that incorporate a womanʼs perspective. However, as at other automakers, men make up an overwhelmingly large proportion of SUBARUʼs workforce, and we must increase opportunities for women to play active roles. Two challenges in promoting active roles for female employees are retention and effective utilization of employees. To retain female employees, we have programs such as a ﬂ exible working hours system for the purpose of helping employees balance work and parenting. In efforts to effectively utilize female employees, with the objective of increasing the number of female managers, we have introduced an initiative to increase the number of managers skilled at cultivating female subordinates and instituted a mentor system for female manager candidates. Through such initiatives, we aim to create an environment in which women can work with vitality and motivation and produce results. Promoting Work-Life Balance Balancing work time and free time and leading a fulﬁ lling private life has the added beneﬁ t of creating a virtuous cycle at work. As a concrete initiative to support work-life balance, SUBARU is creating an environment that will help employees control their own working hours and curb long working hours by bolstering the no-overtime day system and increasing the ﬂ exibility of the ﬂ ex-time system. TOPICS Initiatives to Promote Active Roles for Women SUBARU has formulated an employer action plan aimed at promoting active roles for women in accordance with the Act on Promotion of Womenʼs 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 ﬁ ve times the number in 2014 (from four to twenty), and we are working to achieve this goal. We will expand the pool of female candidates for executive officer, department general manager, and section manager as we approach 2020 and move beyond it. Annual Report 2018 44 CSR in the SUBARU Group Compliance Basic Approach and Policy In view of the causes and background of the occurrence of improprieties relating to final vehicle inspection work at SUBARU discovered in FYE 2018, SUBARU considers the practice of compliance the most important management priority for SUBARUʼs rebirth as “a company that does the right thing in the right way.” We are keenly aware that rigorous group-wide compliance forms the foundation for the Groupʼs management, and we will instill in each employee not only compliance with all laws, ordinances, and internal regulations required in business activities, but also rigorous pursuit of open and fair business activities that conform to the ethical principles, common practices, and norms of society at large. From there, we will strive to recover the trust of SUBARUʼs customers and other concerned parties and stakeholders. Corporate Code of Conduct and Conduct Guidelines SUBARU has established the Corporate Code of Conduct (see page 39) and Conduct Guidelines as compliance standards for the practice of compliance-oriented corporate activities. In FYE 2018, we revised the content of the Conduct Guidelines to further promote Group compliance. We explain the Code and Guidelines in detail in the Compliance Manual, which is carried by all employees of SUBARU and Group companies in Japan and overseas, and strive to ensure compliance in their day-to-day actions. The Corporate Code of Conduct stipulates the basic policies that all ofﬁ cers and employees should follow in relation to customers, business partners, shareholders, local communities, and other stakeholders in accordance with SUBARUʼs corporate philosophy (see page 39). The Conduct Guidelines stipulate specific standards of conduct to ensure that all officers and employees put into practice the basic policies indicated in the Corporate Code of Conduct (see page 39) in the course of their daily business activities. Compliance Regulations SUBARU instituted the Compliance Regulations in 2001 with the approval of the Board of Directors as basic regulations that stipulate the system, organization, and methods of operation related to compliance. In FYE 2018, following discussion by the Compliance Committee and with the approval of the Board of Directors, we revised the regulations by ascertaining and reviewing the status of operation of the regulations since their institution, conﬁ rming discrepancies between the regulations and the actual situation, and reﬂ ecting the results in the revisions. Compliance System, Organization, and Operation SUBARU established the Compliance Committee as a group-wide committee to promote compliance. The Committee deliberates, discusses, decides, and exchanges information on important compliance matters. Each department institutes its own compliance action plan (compliance program) to promote compliance and engages in continuous and systematic autonomous activities. Following the discovery of improprieties relating to ﬁ nal vehicle inspection work at SUBARU, in FYE 2019 Director of the Board and Chairman Yasuyuki Yoshinaga (Representative Director of the Board and President until June 22) became chairman of the Compliance Committee, which is fundamentally reviewing and implementing compliance-related initiatives. Following the improprieties relating to final vehicle inspection work at SUBARU, in FYE 2019 we established the Compliance Ofﬁ ce as an independent organization to strengthen group-wide compliance-oriented initiatives with the aim of preventing any repetition of similar mistakes. The Compliance Ofﬁ ce, as the Compliance Committeeʼs secretarial ofﬁ ce, mainly engages in the following work as a hands-on organization for compliance promotion in the SUBARU Group. Planning, devising, and implementing compliance promotion activities for the entire SUBARU Group Conducting compliance training, education, and internal awareness activities and operating the SUBARU Groupʼs internal reporting system (Compliance Hotline), which is foundational to an open and transparent workplace 45 Annual Report 2018 Compliance Hotline System In addition to seeking solutions through their superiors, regular and temporary employees who work at SUBARU and Group companies have the option of using the Compliance Hotline to seek consultation about any compliance-related problems they have discovered within the Group. The Hotline Desk has been set up within the Company, and employees assigned to the Hotline Desk in accordance with internal rules directly accept reports by post, telephone, and e-mail, engage in fact-finding investigations, and respond to reports. The names and departments of persons making reports are kept strictly conﬁ dential and are not disclosed without their consent, and due consideration is given to ensuring that they suffer no disadvantage due to the consultation. Since April 2008, we have added an external specialist organization as a point of contact and worked to make the system easier to use by extending its hours and reinforcing the mechanisms that ensure the conﬁ dentiality of the names and departments of persons seeking consultation. The Compliance Hotline received 163 consultation requests in FYE 2018, and the general manager of the Legal Department played a central role in expeditiously solving problems following fact-ﬁ nding investigations (following a change of the organization responsible for the system in FYE 2019, this responsibility now falls to the general manager of the Compliance Ofﬁ ce). Matters reported to the Compliance Hotline are reported to management or the Compliance Committee as necessary, and measures are taken to prevent any reoccurrence of problems. To publicize the Compliance Hotline System, we have distributed cards that provide information on how the hotline system works and contact details to employees of SUBARU and Group companies and put up posters in workplaces. We have included an explanation of the service provided by the external specialist in the posters and posted it on the Company intranet. Compliance Activity Achievements In the belief that the entire SUBARU Group must work in harmony to achieve rigorous compliance, we provide compliance training and practical legal training to the employees of all Group companies. This training is organized by the Legal Department, Compliance Ofﬁ ce (established in April 2018), and the human resource and education sections. Each department and Group company incorporates its own education program into its action program (compliance program) and complements this training by holding study meetings on important work-related laws and ordinances as well as holding compliance awareness training conducted by SUBARU Legal Department employees and others. In FYE 2018, some 4,500 persons participated in training organized or supported by the Legal Department. We prepare and provide various support tools to promote the day-to-day practice of compliance, including tools specifically intended for Group companies and SUBARU distributors in Japan. In addition, we distribute urgent information on a timely basis in our Compliance Information and work to raise compliance awareness group-wide. In FYE 2019, we are providing Normative Consciousness Enhancement Education f o r S U B A R U a n d G r o u p c o m p a n y managers and sharing information on the causes and background of the occurrence of improprieties relating to ﬁ nal vehicle inspection work at SUBARU a n d p ro m o t i n g m e a s u re s i n e a c h department to prevent the occurrence of similar improprieties. Also, we are redeveloping work regulations group- wide and plan to expand the scope of persons who receive compliance training and continuously provide compliance education. We will also distribute an essential edition of the Compliance Manual to all employees. System of Compliance Annual Report 2018 46 Consolidated Ten-Year Financial Summary SUBARU Corporation and its consolidated subsidiaries Years ended March 31 Operating results (for the year) Net sales Cost of sales Gross proﬁ t Selling, general and administrative expenses Operating income (loss) Income (loss) before income taxes Net income (loss) attributable to owners of parent Depreciation/amortization Capital expenditures2 R&D expenses Financial position (at year-end) Net assets Shareholdersʼ equity Total assets Ratio of shareholdersʼ equity to total assets Cash ﬂ ows Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Free cash ﬂ ow Net cash provided by (used in) ﬁ nancing activities Per share Net income (loss) (EPS) Net assets (BPS) Dividends Other information Millions of yen Millions of yen Millions of yen Millions of yen Millions of yen Millions of yen ʼ09/3 ʼ10/3 ʼ11/3 ʼ12/3 ¥1,445,790 1,164,564 281,226 ¥1,428,690 1,152,763 275,927 ¥1,580,563 1,241,427 339,136 ¥1,517,105 1,222,419 294,686 287,029 248,577 255,001 250,727 （5,803）（21,517） 27,350 （443） Millions of yen （69,933）（16,450） Millions of yen Millions of yen Millions of yen 74,036 95,153 42,831 65,785 89,077 37,175 84,135 63,214 50,326 56,062 67,378 42,907 43,959 52,879 38,453 58,611 67,035 48,115 Millions of yen Millions of yen Millions of yen 394,719 393,946 1,165,431 381,893 380,587 1,231,367 413,963 412,661 1,188,324 451,607 450,302 1,352,532 % 33.8 30.9 34.7 33.3 Millions of yen （26,892） 176,734 138,208 54,865 Millions of yen （72,385）（62,656）（51,109）（26,602） Millions of yen （99,277） 114,078 87,099 Millions of yen 80,449 （18,560）（39,408） Yen Yen Yen （91.97） 505.59 4.5 （21.11） 488.58 0 Non-consolidated exchange rate Number of shares issued Number of shareholders3 Number of employees (parent only) Number of employees (consolidated) Yen to the U.S. dollar Thousands of shares Persons Persons Persons Number of units Consolidated automobile unit sales4 SUBARU vehicle unit production Domestic U.S.A. (SIA)5 Thousand units Thousand units Thousand units Thousand units 102 782,865 40,839 12,137 27,659 555 566 474 92 93 782,865 39,223 12,483 27,586 563 557 453 104 28,263 2,586 49.27 576.97 9 79 782,865 33,139 12,359 27,123 640 635 465 171 64.56 528.88 9 86 782,865 34,240 12,429 27,296 657 624 459 165 1. U.S. dollar ﬁ gures have been translated from yen, for convenience only, at the rate of ¥106.27 to US$1.00, the approximate rate of exchange at March 31, 2018. 2. Increase in property, plant and equipment and intangible assets 3. Number of shares per trading unit: 100 shares 4. Automobile unit sales of SUBARU CORPORATION and its consolidated subsidiaries 5. U.S. production base Subaru of Indiana Automotive, Inc. 47 Annual Report 2018 ʼ13/3 ʼ14/3 ʼ15/3 ʼ16/3 ʼ17/3 ʼ18/3 ʼ18/3 （Thousands of U.S. dollars）1 ¥1,912,968 1,501,809 411,159 ¥2,408,129 1,728,271 679,858 ¥2,877,913 2,017,490 860,423 ¥3,232,258 2,187,136 1,045,122 ¥3,325,992 2,386,266 939,726 ¥3,405,221 2,442,706 962,515 $32,043,107 22,985,847 9,057,260 290,748 120,411 93,082 119,588 61,544 94,986 49,141 353,369 326,489 328,865 206,616 61,486 98,537 60,092 437,378 423,045 392,206 261,873 71,821 135,346 83,535 479,533 565,589 619,003 436,654 72,938 168,338 102,373 528,916 410,810 394,695 282,354 85,653 196,616 114,215 583,068 379,447 297,340 220,354 102,102 193,789 121,084 5,486,666 3,570,594 2,797,967 2,073,530 960,779 1,823,553 1,139,400 596,813 595,365 1,577,454 770,071 765,544 1,888,363 1,030,719 1,022,417 2,199,714 1,349,411 1,343,732 2,592,410 1,464,888 1,458,664 2,762,321 1,561,023 1,552,844 2,884,313 14,689,216 14,612,252 27,141,366 37.7 40.5 46.5 51.8 52.8 53.8 ̶ 166,715 313,024 311,543 614,256 345,442 366,298 3,446,862 （71,370）（33,903）（172,780）（255,676）（254,252）（150,711）（1,418,190） 95,345 279,121 138,763 358,580 91,190 215,587 2,028,672 （60,766）（63,011）（110,546）（126,190）（189,044）（170,937）（1,608,516） 153.23 762.87 15 82 782,865 28,890 12,717 27,509 724 692 511 181 264.76 980.98 53 100 782,865 51,386 13,034 28,545 825 772 609 164 335.57 1,310.15 68 559.54 1,721.90 144 365.77 1,902.56 144 287.40 2,025.31 144 （U.S. dollars） 2.70 19.06 1.36 108 782,865 70,942 13,883 29,774 911 887 681 207 121 782,865 79,594 14,234 31,151 958 929 693 236 108 769,175 76,471 14,708 32,599 1,065 1,033 698 335 111 769,175 132,570 14,879 33,544 1,067 1,036 687 349 ̶ ̶ ̶ ̶ ̶ ̶ ̶ ̶ ̶ Annual Report 2018 48 Five-Year Unit Sales Years ended March 31 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 ʼ14/3 ʼ15/3 ʼ16/3 ʼ17/3 ʼ18/3 （Number of units） 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 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 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 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 9,328 66,748 18,139 21,342 8,252 3,498 1,879 2,889 480 132,555 30,889 163,444 670,931 56,820 7,729 40,228 55,674 26,872 45,231 903,485 281,846 306,673 260,853 3,913 42,739 1 7,460 0 0 903,485 825,098 910,695 957,865 1,064,542 1,066,929 *Automobile sales of SUBARU CORPORATION and its consolidated subsidiaries Consolidated Automobile Sales by Region Consolidated Automobile Sales by Model Japan Europe United States Australia Canada China Russia Others 958 911 825 (Thousand units) 1,200 1,000 800 600 400 200 0 Legacy WRX OEM Impreza Tribeca Others Forester Exiga Minicars Levorg SUBARU BRZ (Thousand units) 1,200 1,065 1,067 1,065 1,067 958 911 825 1,000 800 600 400 200 0 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 *Automobile sales of SUBARU CORPORATION and its consolidated subsidiaries *Automobile sales of SUBARU CORPORATION and its consolidated subsidiaries 49 Annual Report 2018 Non-Consolidated Automobile Sales （Number of units） ʼ14/3 ʼ15/3 ʼ16/3 ʼ17/3 ʼ18/3 Domestic units Legacy Impreza Forester Levorg WRX Exiga SUBARU BRZ OEM Passenger cars Minicars Domestic total Export units Legacy Impreza Forester Levorg WRX Exiga SUBARU BRZ OEM Export total Complete knockdown (CKD) overseas Total Grand total 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 7,644 145 15,118 86 499,194 165,554 850,589 U.S. retail sales (Calendar year: January to December) Legacy Impreza Forester WRX Tribeca SUBARU BRZ U.S. total ʼ13 160,340 130,567 123,591 0 1,598 8,587 424,683 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 5 8,418 135 545,609 222,513 935,269 ʼ14 191,060 128,952 159,953 25,492 732 7,504 513,693 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 7,005 0 576,483 242,424 968,948 ʼ15 212,741 155,712 175,192 33,734 0 5,296 582,675 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 6,653 0 570,743 9,753 68,937 19,000 22,525 8,284 3,833 1,999 2,862 137,193 31,717 168,910 32,122 214,631 254,397 3,813 44,053 0 7,451 0 556,467 353,770 348,144 1,088,208 1,073,521 （Number of units） ʼ16 248,204 150,915 178,593 33,279 0 4,141 615,132 ʼ17 238,723 196,181 177,563 31,358 0 4,131 647,956 Non-Consolidated Domestic Automobile Sales by Model Non-Consolidated Automobile Export Units by Model Legacy Exiga Impreza SUBARU BRZ Forester OEM Levorg Minicars WRX Legacy WRX Impreza Exiga Forester SUBARU BRZ Levorg OEM 167 164 169 150 (Thousand units) 200 186 150 100 50 0 (Thousand units) 600 500 400 300 200 100 0 546 576 571 556 499 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 Annual Report 2018 50 Financial Review Business Segments and Scope of Consolidation The SUBARU Group (“the Group”) consists of three business segments: the core Automotive Business Unit, which accounts for approximately 95% of consolidated net sales; the Aerospace Company; and Other Businesses, consisting of businesses that do not belong to either of the other two segments. In the ﬁ scal year ended March 31, 2018 (April 1, 2017 to March 31, 2018; the “fiscal year under review”), SUBARU CORPORATION (“the Company”), 75 subsidiaries, and 8 equity-method afﬁ liated companies were included in the scope of consolidation. Overview of Business Performance As the employment and income environment improved supported by various policies, the Japanese economy continued on a gradual recovery path in the ﬁ scal year under review., Although the economic development in China and other Asian emerging markets, the impact from political uncertainties, and trends in the ﬁ nancial and capital markets were of note, the global economy, especially the United States, steadily recovered. Given this backdrop, the exchange rate was mostly stable, with the yen against the U.S. dollar getting slightly stronger in the fourth quarter. The North American market, our key market, continued to drive global sales, and we had steady results over the ﬁ scal year under review, including the achievement of record-high automobile unit sales. Consolidated net sales increased by 79.2 billion yen (2.4%) from the previous ﬁ scal year to a record 3,405.2 billion yen, owing to net sales pushed up by the favorable foreign exchange rates and higher automobile unit sales. Consolidated operating income decreased by 31.4 billion yen (7.6%) year on year to 379.4 billion yen, due to the increase in selling expenses associated with rising interest rates in the U.S., the effect of raw materials market, and higher R&D expenses, despite the positive effect from the foreign exchange rates. Net income attributable to owners of parent decreased by 62.0 billion yen (22.0%) year on year to 220.4 billion yen partly owing to airbag related extraordinary loss of 81.3 billion yen. Net Sales (Billions of yen) 4,000 3,000 2,000 1,000 0 3,232.3 3,326.0 3,405.2 2,877.9 2,408.1 Operating Income／ Net Income Attributable to Owners of Parent Operating income Net income attributable to owners of parent (Billions of yen) 565.6 423.0 436.7 410.8 379.4 326.5 261.9 206.6 282.4 220.4 600 500 400 300 200 100 0 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 Analysis of Increase and Decrease in Operating Income Changes (Consolidated) (Billions of yen) Sales volume & mixture and others 137.7 Cost reduction 32.2 565.6 Gain on currency exchange 32.7 410.8 -169.1 SG&A expenses and others -143.8 Loss on currency exchange -11.8 R&D expenses 379.4 -44.2 SG&A expenses and others -7.7 Cost reduction -6.9 R&D expenses -5.3 Sales volume & mixture and others ’16/3 Operating income -154.8 billion yen ’17/3 Operating income -31.4 billion yen ’18/3 Operating income 51 Annual Report 2018 Segment Information Automotive Business Unit Net sales from the Automotive Business Unit were 3,234.9 billion yen, up by 82.9 billion yen (2.6%), and segment income was 361.5 billion yen, down by 36.2 billion yen (9.1%), compared with the previous ﬁ scal year. Consolidated global unit sales reached a record high for the sixth consecutive year, increasing by 2,000 vehicles (0.2%) year on year to 1,067,000 units. Total automobile demand in Japan, in the ﬁ scal year under review, increased 2.3% year on year to 5,197,000 units due to factors including continued steady sales of passenger cars and increased minicar sales compared with the previous ﬁ scal year. The Groupʼs unit sales in Japan increased by 5,000 units (2.8%) year on year to 163,000 units. Although minicar unit sales reached no further than 31,000 units, down by 2,000 units (5.1%) from the previous ﬁ scal year, passenger car sales remained strong, led mainly by the all-new SUBARU XV, resulting in a sales increase of 6,000 units (4.9%) to 133,000 units. The total automobile demand in the United States, which is our key market, was 17,308,000 units, a 1.0% decrease year on year, shifting further from passenger vehicles to light trucks, including SUVs. The Groupʼs overseas unit sales marked a slight decrease of 2,000 units (0.2%) to 903,000 units. While the unit sales in the U.S. stayed strong, reaching a record-high for the ninth consecutive ﬁ scal year, the unit sales in China decreased owing to fierce competition. By region, sales volume increased by 7,000 units (1.0%) year on year to 728,000 units in North America, increased by 2,000 units (3.7%) to 48,000 units in Europe and Russia, increased by 7,000 units (13.4%) to 56,000 units in Australia, decreased by 17,000 units (38.9%) to 27,000 units in China, and decreased by less than 1,000 units (0.8%) to 45,000 units in other regions. Aerospace Company Net sales from the Aerospace Company were 142.2 billion yen, up by 3.4 billion yen (2.5%), and segment income was 12.3 billion yen, up by 3.2 billion yen (34.7%), compared with the previous ﬁ scal year. Sales of products for the Japan Ministry of Defense saw an increase from the previous ﬁ scal year, mainly due to current development under a contract for the new UH-X multi-purpose helicopter. Sales of products for the commercial sector also grew year on year with the increase in production of the Boeing 787, covering the decline in production of the Boeing 777. Other Businesses Net sales from Other Businesses were 28.2 billion yen, down by 7.1 billion yen (20.1%), and segment income was 5.1 billion yen, up by 1.6 billion yen (44.2%), compared with the previous ﬁ scal year. Net Sales by Segment (Billions of yen) Operating Income by Segment (Billions of yen) ʼ14/3 ʼ15/3 ʼ16/3 ʼ17/3 ʼ18/3 ʼ14/3 ʼ15/3 ʼ16/3 ʼ17/3 ʼ18/3 Automotive 2,246.6 2,699.0 3,039.4 3,152.0 3,234.9 Automotive 309.0 400.9 543.6 397.7 361.5 Aerospace 124.4 142.8 152.8 138.8 142.2 Industrial products Other Total 29.8 29.0 ̶ ̶ ̶ 7.3 7.1 40.0 35.3 28.2 Aerospace 14.1 18.9 18.2 9.1 12.3 Industrial products Other Corporate and elimination 0.6 2.1 0.6 0.8 1.9 0.6 ̶ 3.0 0.8 ̶ 3.5 0.5 ̶ 5.1 0.7 2,408.1 2,877.9 3,232.3 3,326.0 3,405.2 Total 326.5 423.0 565.6 410.8 379.4 * Following the decision in November 2016 to terminate the Industrial Products business, the said business has been included in the Other Businesses segment since FYE March 2017. Figures for FYE March 2016 in the tables above have been restated to comply with the new segment classiﬁ cation. R&D Expenses In the ﬁ scal year under review, R&D expenses increased by 6.9 billion yen (6.0%) compared with the previous ﬁ scal year to 121.1 billion yen. Of that amount, 117.6 billion yen was related to the Automotive Business Unit. In FYE March 2019, the Group plans to reduce R&D spending by 1.1 billion yen (1.0%) year on year to 120.0 billion yen. Annual Report 2018 52 Financial Review Capital Expenditures and Depreciation In the ﬁ scal year under review, the Group made capital expenditures of 141.4 billion yen, a decrease of 17.1 billion yen (10.8%) compared with the previous ﬁ scal year. Among the total capital expenditures, 133.4 billion yen has been spent in relation to the Automotive Business Unit. The Company made investments of 63.0 billion yen in the automotive business, primarily for augmenting production capacity accompanying the increase in unit sales and for developing and expanding production facilities for new products, R&D facilities, and sales networks. Subaru of Indiana Automotive, Inc. (SIA), our production base in the U.S., made investments of 39.5 billion yen, mainly for new products and production facilities to boost production capacity. Subaru of America, Inc. (SOA), a sales subsidiary in the U.S., also spent 9.0 billion yen mainly for the relocation of its head ofﬁ ce. Depreciation expenses in the ﬁ scal year under review increased by 12.8 billion yen (16.6%) year on year to 89.8 billion yen. Capital expenditures in FYE March 2019 are projected to decrease by 11.4 billion yen (8.1%) year on year to 130.0 billion yen, and depreciation expenses to increase by 3.2 billion yen (3.6%) to 93.0 billion yen. R&D Expenses Capital Expenditures／Depreciation Expenses Capital expenditures Depreciation expenses (Billions of yen) (Billions of yen) 121.1 114.2 102.4 83.5 60.1 150 120 90 60 30 0 200 150 100 50 0 158.5 141.4 135.7 110.7 68.5 54.9 64.8 65.0 89.8 77.0 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 Liquidity and Source of Funds Financial Position Total assets as of March 31, 2018 were 2,884.3 billion yen, an increase of 122.0 billion yen compared with the previous ﬁ scal year-end. Property, plant and equipment, funds in hand (the sum of cash and deposits and short-term investment securities), and deferred tax assets increased by 45.8 billion yen, 28.6 billion yen, and 26.5 billion yen, respectively. Total liabilities amounted to 1,323.3 billion yen, up by 25.9 billion yen from the previous ﬁ scal year-end. While the total of short- term loans payable and both current and noncurrent long-term loans payable decreased by 62.1 billion yen, provision for loss related to airbags and accrued expenses increased by 64.7 billion yen and 34.6 billion yen, respectively. The ﬁ scal Total Assets／Net Assets／ Ratio of Shareholders’ Equity to Total Assets Total assets (Left) Ratio of shareholders’ equity to total assets (Right) Net assets (Left) 2,762.3 2,884.3 2,592.4 51.8 52.8 1,349.4 1,349.4 1,464.9 1,464.9 53.8 1,561.0 (Billions of yen) 3,000 2,000 1,888.4 2,199.7 46.5 1,030.7 1,030.7 40.5 770.1 1,000 0 Interest-Bearing Debt／D/E Ratio Interest-bearing debt (Left) D/E ratio (Right) (Billions of yen) 300 250 200 150 100 50 0 269.7 211.2 0.350.35 170.0 148.3 0.210.21 86.2 0.130.13 0.100.10 0.060.06 (Times) 0.6 0.5 0.4 0.3 0.2 0.1 0 (%) 90 60 30 0 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 53 Annual Report 2018 year-end balance of interest-bearing debt decreased by 62.1 billion yen from the previous ﬁ scal year-end to 86.2 billion yen. The debt/equity ratio (interest-bearing debt over shareholdersʼ equity) was 0.06, remaining at a safe level. Net assets stood at 1,561.0 billion yen, an increase of 96.1 billion yen compared with the previous ﬁ scal year-end, mainly due to an increase in retained earnings of 110.3 billion yen. The shareholdersʼ equity ratio resulted in 53.8%. Cash Flows In the ﬁ scal year under review, net cash provided by operating activities was 366.3 billion yen. Major cash in-ﬂ ow items were income before income taxes of 297.3 billion yen, and provision for loss related to airbags of 64.7 billion yen. Net cash used in investing activities was 150.7 billion yen. Major cash out-flow items included purchase of non-current assets (net of proceeds from sales) of 146.5 billion yen. As a result, free cash ﬂ ow for the ﬁ scal year under review was 215.6 billion yen. Net cash used in ﬁ nancing activities totaled 170.9 billion yen. Major cash out-ﬂ ow items were cash dividends paid of 110.3 billion yen, repayments of long-term loans payable (net of proceeds) of 40.9 billion yen, and net decrease in short-term loans payable of 18.4 billion yen. As a result of the above cash ﬂ ows, including the effect of translation adjustments, cash and cash equivalents at the end of the ﬁ scal year under review amounted to 765.6 billion yen. Cash Flows from Operating Activities and Investing Activities Free Cash Flow Cash flows from operating activities Cash flows from investing activities (Billions of yen) (Billions of yen) 800 600 400 200 0 -200 -400 614.3 313.0 311.5 345.4 366.3 -33.9 -172.8 -255.7 -254.3 -150.7 400 300 200 100 0 358.6 279.1 215.6 138.8 91.2 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 ’14/3 ’15/3 ’16/3 ’17/3 ’18/3 Basic Policy on Proﬁ t Distribution and Dividends The Company regards shareholder interests as an important management priority and applies a performance-linked approach to shareholder returns by considering the business performance of each ﬁ scal year, investment plans, and the business environment, while maintaining a basic policy of paying continuous dividends. The Company determines dividend payments for each fiscal year based on a consolidated dividend payout ratio range of 30-50%, 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 ﬁ scal year under review, the same as the previous ﬁ scal year. Internal reserves are allocated to investments for future growth, such as strengthening production and sales systems as well as research and development activities for the purpose of offering appealing products, while bolstering the ﬁ nancial position. In July 2018, the Company announced its future capital policy in the new mid-term management vision “STEP,” the details of which are explained on pages 13-14. For FYE March 2019, the Company plans to pay a dividend of 144 yen per share (interim and year-end dividends of 72 yen each), the same as for the ﬁ scal year under review. Business Performance in FYE March 2019 The Company forecasts the consolidated automobile sales volume in FYE March 2019 will continue to increase, mainly in the North America market, to 1,100,000 units. Consolidated net sales are forecasted to mark 3,250.0 billion yen, due to the negative effect of foreign exchange rate ﬂ uctuations and changes in accounting policies. In terms of income, despite the expected increase in automobile unit sales, the Company forecasts consolidated operating income of 300.0 billion yen, consolidated ordinary income of 305.0 billion yen, and net income attributable to owners of parent of 220.0 billion yen, due to the increase in selling expenses from higher interest rates in the U.S., and higher raw material costs. The exchange rate assumptions used for the full-year forecast of consolidated business performance are 105 yen/1 U.S. dollar (actual rate of 111 yen in FYE 2018) and 130 yen/1 euro (actual rate of 130 yen in FYE 2018). Annual Report 2018 54 Financial Review Business Risks Operational and other risks that could signiﬁ cantly inﬂ uence the decisions of investors and impact the Companyʼs ﬁ nancial status are set out below. Based on information available to the Group as of the end of the consolidated ﬁ scal year under review, the enumerated risks include forward-looking statements, but do not encompass every possible risk posed to the Group. As such, there are other risk factors which could inﬂ uence investors and their decisions. (1) Economic Trends Economic trends in countries and regions that comprise important markets for the Group could potentially impact the Groupʼs business performance. In Japan and North America, key markets for the Group, economic recession, decreasing demand or increasing price competition could undermine the sales and proﬁ tability of the Groupʼs products and services. (2) Currency Exchange Rate Fluctuations The Groupʼs ratio of overseas net sales stood at 80.4%. The Groupʼs consolidated ﬁ nancial statements, which are presented in Japanese yen, are affected by translation of overseas net sales, operating income and assets from local currencies, particularly U.S. dollars, into yen. Accordingly, in the event that discrepancies arise between projected exchange rates in full-year forecasts and actual rates at the time of account settlement, the Groupʼs business performance and financial position may be adversely affected when the yen appreciates or positively affected when the yen depreciates. The Company uses forward exchange rate contracts and other circumstance-appropriate risk hedges to minimize the Groupʼs sensitivity to such currency exchange risks. However, the effect of severe ﬂ uctuations in currency exchange rates at the end of the fiscal year could result in a loss on valuation of derivatives and have a major impact on non-operating expenses. (3) Dependence on Certain Businesses The Group is mainly comprised of the Automobiles and Aerospace business segments. However, the Automobiles business segment accounts for the overwhelming majority of the Groupʼs business operations. Accordingly, in the event that automobile-related demand, market conditions, price competition with other automakers, or other factors exceed projected levels, the entire Groupʼs overall business performance and ﬁ nancial position could be signiﬁ cantly affected. (4) Changes in Market Appraisal The Group develops, manufactures and releases new products based on appropriate timing and pricing in line with product planning that reflects market demand and customer needs. Such actions are the most important factors in maintaining stable increases in Group business performance. In the event that market appraisals of new model vehicles and other new products do not meet sales plan expectations or that the obsolescence rate of current products exceeds forecasts, the Groupʼs business performance and ﬁ nancial position could be signiﬁ cantly affected. (5) Dependence on Speciﬁ c Suppliers, Raw Materials, and Components The Group procures raw materials, components and other items from numerous suppliers. However, there are cases in which the Group relies on certain items and/or a limited number of suppliers. Due to tightening supply and demand or other factors, the inability to procure supplies in a manner that ensures stable costs, delivery dates and quality could seriously impact the Groupʼs business performance and ﬁ nancial position. (6) Protection of intellectual property The Group is strongly committed to protecting its intellectual property in areas, such as technologies and expertise, that ensure product differentiation. However, in cases where a third party makes unauthorized use of the Groupʼs intellectual property to manufacture similar products and in cases where a dispute relating to intellectual property arises and a decision disadvantageous to the Company is made, the Groupʼs business results and financial condition may be significantly affected. (7) Product Defects The Group places the highest priority on the safety of the products it develops, manufactures and sells. However, completely avoiding defects and recalls, etc. regarding all products and services is impossible. The substantial cost, damage to our brand image, etc. associated with a major recall could signiﬁ cantly affect the Groupʼs business performance and ﬁ nancial position. 55 Annual Report 2018 (8) Retirement Beneﬁ ts and Retirement Beneﬁ t Obligations The Groupʼs employee retirement benefit costs and obligations are calculated based on the following assumptions: retirement beneﬁ t obligation discount rates and the expected long-term rate of return on pension assets, both of which are established based on mathematical calculations. However, in the event that actual performance differs from the assumptions, the Groupʼs business performance and ﬁ nancial position could be affected over the long term. (9) Environmental and Other Legal Regulations The Group is subject to various domestic and overseas legal regulations in relation to automobile fuel efﬁ ciency, exhaust emissions, energy conservation, noise, recycling, the level of pollutants emitted from manufacturing facilities, and the safety of automobiles and other products. The Groupʼs business performance and ﬁ nancial position could be affected by cost increases due to future tightening of such regulations. (10) Impact of Natural Disasters, War, Terror, Strikes and Other Events The occurrence of natural disasters such as major earthquakes, typhoons, etc., and diseases, wars, terrorist attacks or other events, could impede the Groupʼs business activities as well as delay or suspend raw material/component purchases, production, product sales/transport, and the provision of services. The Groupʼs business performance and ﬁ nancial position could be affected in the event that such delays or suspensions are prolonged. (11) International Business Activities Though the Group focuses on the U.S., it does business in countries around the world. Business activities in overseas markets entail the following types of risk. If any of these risks materializes, the Groupʼs business performance and ﬁ nancial position could be adversely affected. (cid:129) Unfavorable political or economic factors (cid:129) Difﬁ culties arising from changes in laws or regulations (cid:129) Revisions to taxes, duties, or other taxation systems (cid:129) Difﬁ culties in hiring and retaining personnel (12) Impact of Information Security The Group uses various kinds of information technology, networks, and systems in product development, production, sales, and other business activities. Although safety measures have been implemented with respect to information technology, networks, and systems, interruption of important work or services, data corruption or loss, leaks of conﬁ dential information, or other problems could occur due to cyberattacks, hacking, computer virus attacks, or the like. This could damage the brand image or adversely affect the Groupʼs business performance and ﬁ nancial position. (13) Compliance and Reputation The Group considers rigorous compliance one of the most important management priorities and strives to avoid or minimize compliance risks through compliance with all laws, ordinances, and internal regulations required in corporate activities and the execution of fair and equitable corporate activities in conformity with social norms. Nevertheless, the occurrence of a material legal violation could have a signiﬁ cant impact on the Group and adversely affect the Groupʼs business performance and financial position due to loss of customer confidence and trust, or damage to the Groupʼs reputation in society. Annual Report 2018 56 Location Land Area (Thousand m2) Building Area (Thousand m2) Number of Employees (Person) Main Products Corporate Information Domestic Facilities Name Head Ofﬁ ce (Ebisu) SUBARU Training Facility (SUBARU Academy) Head Ofﬁ ce Other Parts Distribution Center, Pre Delivery Inspection Center, parking lot, Vicinity of Oizumi Plant etc. Tokyo Tokyo 4 10 Gunma 572 ［15］ Tokyo Ofﬁ ce Tokyo 158 Gunma Main Plant Gunma 585 ［12］ Gunma Yajima Plant Gunma 550 259 3,041 Automotive Business Gunma Plant Gunma Oizumi Plant Gunma Gunma Ota North Plant Gunma 304 44 SUBARU R&E Center (Sano) SUBARU R&E Center (Bifuka) Tochigi 1,081 Hokkaido 3,614 14 13 164 76 332 599 38 142 1,664 4,416 229 2,637 25 25 2 232 27 14 0 171 0 1,849 277 45 ̶ ̶ ̶ ̶ LEVORG, IMPREZA, SUBARU XV, WRX and SUBARU BRZ LEGACY, OUTBACK, IMPREZA, SUBARU XV and FORESTER Automobile engines and transmissions ̶ ̶ ̶ Aircraft Aircraft Aircraft 573 59 42 7,596 1,412 14,879 767 111 219 45 184 6 143 0 0 100 7 66 1 92 1,475 266 9,071 1,678 Aerospace Company Subtotal (1) Utsunomiya Plant Handa Plant Handa West Plant The site of airport Utsunomiya airstrip Welfare facility Other Lease to afﬁ liates Isesaki business ofﬁ ce Eco Utsunomiya factory Saitama Plant Subtotal (2) Total (1)+(2) Tochigi Aichi Aichi Gunma Tochigi ̶ Aichi Gunma Tochigi Saitama 1. [ ]: area of tenancy 2. Welfare facility includes 37 sites of dormitories and company houses. 3. Number of employees excludes executive ofﬁ cers, advisors and dispatches. 57 Annual Report 2018 Main Subsidiaries (Domestic) (As of May 1, 2018) (Number of Employees: as of March 31, 2018) Name Established Location Representa- tive Capital (Millions of yen) Equity Interest (%) Number of Employees (Persons) FYE 2018 Net sales (Millions of yen) Operations Fuji Machinery Co., Ltd. 1950. 7. 18 Gunma Ichitan Co., Ltd. 1951. 2. 2 Gunma KIRYU INDUSTRY Co., Ltd. 1960. 12. 23 Gunma Subaru Tecnica International Inc. 1988. 4. 2 Tokyo Subaru Used cars Sales & Marketing Co., Ltd. 1988. 4. 2 Kanagawa Subaru Auto Accessories Ltd. 1987. 3. 9 Saitama Subaru Logistics Co., Ltd. 1986. 3. 27 Gunma H. B. C. Co., Ltd. 1983. 8. 29 Kanagawa Subaru Finance Co., Ltd. 1988. 7. 1 Tokyo SUBARU TECHNO CORPORATION 1985. 3. 2 Tokyo Subaru Intelligent Service Ltd. 2005. 3. 1 Tokyo Yusoki Kogyo K. K. 1950. 7. 15 Aichi Yasuhiro Arai Satoshi Maeda Yukio Nakano Yoshio Hirakawa Masahiro Maeda Toshio Masuda Tamaki Kamogawa Kei Ono Mitsuru Takahashi Tatsuhiko Mukawa Kunihiko Tashiro Eiji Tanikawa 480 100.0 448 36,671 Manufacture and sales of automobile parts, industrial product parts and agricultural transmissions 480 100.0 226 18,993 Manufacture and sales of forging parts of automobile and industrial machinery 400 97.7 274 11,763 250 100.0 97 4,594 Manufacture of specially-equipped SUBARU automobiles, engines, sheet metal repair parts and remanufacture of transmissions Management of motor sports activities, sales of motor sports parts and merchandise, technical development, R&D support, and automobile maintenance 100 100.0 20 3,723 Tack-related operation of used cars, head ofﬁ ce of SUAA Kanto, sales of supplies 70 100.0 66 14,519 96 100.0 339 21,991 Sales, research & development, licensing of technology and import-export business of automobile accessories, parts and service materials Shipping, land freight, warehousing, maintenance and insurance for automobiles and their components 490 68.0 9 712 Storing and shipping of automobiles for international sales 2,000 100.0 221 19,799 Leasing and rental of SUBARU automobiles, credit, ﬁ nancing and sales of auto insurance 70 100.0 854 7,943 Design, plan, research, experiment, examination and compile technical material of automobile, aircraft, general-purpose engine and environmental tool 40 75.0 56 2,056 Development of technical service documents including service manuals and owners manuals 100 100.0 130 2,070 Manufacture and sales of aircraft parts Fuji Aircraft Maintenance Co., Ltd. 1988. 10. 31 Tokyo Takayuki Kobayashi 30 100.0 181 1,440 Inspection, service and maintenance of aircraft and onboard equipment Fuji Aerospace Corporation. 1991. 6. 14 Tochigi Fuji Aerospace Technology Co., Ltd. 1994. 4. 1 Tochigi Fuji Heavy Industries House Co., Ltd. 1999. 9. 1 Gunma Industrial Products Co., Ltd. 2017. 10. 1 Saitama Subaru Kohsan Co., Ltd. 1977. 2. 2 Tokyo SUBARU IT CREATIONS CORPORATION 1993. 4. 1 Saitama Subaru Living Service Co., Ltd. 1988. 4. 2 Tokyo Shareholdings of SUBARU Corporation Eishi Umehara Hiroshi Wakai Kazuo Terauchi Kazuto Shimada Yasuo Kosakai Nozomu Oyama Masami Iida 30 100.0 132 1,388 Processing and assembly of aircraft parts 20 100.0 93 2,741 200 87.2 37 2,320 20 100.0 219 1,955 675 100.0 64 6,276 100 100.0 261 13,535 Contract design, drafting, translation, calculation, analytical testing and software development for aircraft Rental/lease/sales of temporary houses, transport and set up of temporary houses, deal of used houses Customer support for small general-purpose engines and associated parts, including quality assurance and spare part sales Deal/rental of real estate, administrative operation of rental hall and conference room, administrative operation/rental of parking ground, travel agency Development, maintenance and operation of information systems and related consulting services; sales and leasing of information equipment 20 100.0 351 16,118 Sales of ofﬁ ce supplies and daily commodities, real estate services, and personal import services Annual Report 2018 58 Corporate Information Main Subsidiaries (Overseas) (As of April 1, 2018) (Number of Employees: as of March 31, 2018) Region Name Established Address Represen- tative Equity Interest (%) Number of Employees (Persons) Operations Subaru of America, Inc. 1990.9 One Subaru Drive, Camden, NJ 08013, U.S.A. Thomas J. Doll 100 1,304 Sales of SUBARU vehicles and supplies Subaru of Indiana Automotive, Inc. 1987.3 5500 State Road 38 East, Lafayette, IN 47905, U.S.A. Eiji Ogino 100 5,613 North American Subaru, Inc. 1985.9 C/O Subaru of America, Inc. Subaru Plaza, 2235 Route 70 West Cherry Hill, NJ 08002, U.S.A. Shinichiro Sumi 100 76 Manufacture of SUBARU vehicles, purchasing of parts, sales for Subaru of America, Inc. Technical research on SUBARU vehicles in North American market, government relations North America Subaru Research & Development, Inc. 1986.6 Subaru Canada, Inc. 1989.1 Subaru Europe N.V./S.A. 2002.3 Subaru Italia S.p.A. 1985.7 Europe N.V. Subaru Benelux 1974.3 3995 Research Park Drive, Ann Arbor, MI 48108, U.S.A. 6431 Global Drive Cypress, CA 90630, U.S.A. 14382 Chambers Road, Tustin, CA 92780, U.S.A. 46718 Fremont Blvd, Fremont, CA 94538, U.S.A. C/O Subaru of Indiana Automotive, Inc. 5500 State Road 38 East, Lafayette, IN 47905, U.S.A. 560 Suffolk Court Mississauga, Ontario, L5R 4J7, Canada Leuvensesteenweg 555 B/8, 1930 Zaventem, Belgium Via Montefeltro, 6/A, 20156 Milano, Italy Leuvensesteenweg 555 B/1, 1930 Zaventem, Belgium Subaru Vehicle Distribution B.V. 2001.5 Merseyweg 40, 3197 KG Botlek, Netherlands Subaru of China Ltd. 2006.3 Beijing Landmark Towers Ofﬁce Building 2-1501, 8 North Dongsanhuan Road, Chaoyang District, Beijing 100004, China Tetsuo Onuki 100 81 Compiling of technical information about automobile market of North America, research and development of SUBARU vehicles Yasushi Enami Masamichi Kudo Takashi Yamada Shunsuke Sawada Shunsuke Sawada 100 100 100 100 50 148 Sales of SUBARU vehicles and supplies 45 53 42 1 Sales of SUBARU vehicles and supplies Sales of SUBARU vehicles and supplies Sales of SUBARU vehicles and supplies Contract of discharging and transporting inland for dealers in Middle Europe, PDI operation Yasushi Nagae 60 199 Sales of SUBARU vehicles and supplies Asia Subaru Technology Beijing. Co., Ltd. 2013.6 Beijing Landmark Towers Ofﬁce Building 1-802, 8 North Dongsanhuan Road, Chaoyang District, Beijing 100004, China Hisato Imamura SUBARU ASIA PTE. LTD. 1995.2 24 Rafﬂes Place, #26-06B Clifford Centre, Singapore 048621 Takuma Noguchi 100 100 31 2 Authentication, research and development of SUBARU vehicles in Chinese market Launch support of SUBARU vehicle production in Asia 59 Annual Report 2018 Sales Agents (Domestic) (As of July 1, 2018) Area Group Head Agent Subsidiary Location President New Car Base Hokkaido Tohoku area (9) Kanto Koshinetsu Hokuriku area (12) Chubu Kinki area (11) Chugoku Shikoku Kyushu area (12) Tohoku region Hoku Shinetsu region Tokyo/Yamanashi Tokai region Kinki region Chugoku/ Shikoku region Kyushu region Kushiro Subaru Inc. Obihiro Subaru Inc Hokkaido Subaru Inc. ○ Miyagi Subaru Inc Aomori Subaru Inc. Iwate Subaru Inc Akita Subaru Inc. Yamagata Subaru Inc Fukushima Subaru Inc. ○ Niigata Subaru Inc Subaru Shinshu Inc. Hokuriku Subaru Inc. Nanshin Subaru Inc Fuji Subaru Inc Tochigi Subaru Inc Ibaraki Subaru Inc Saitama Subaru Inc Kanagawa Subaru Inc Chiba Subaru Inc Tokyo Subaru Inc Yamanashi Subaru Inc. Shizuoka Subaru Inc. ○ Nagoya Subaru Inc. Gifu Subaru Inc Mie Subaru Inc. Subaru Higashi Aichi Inc. Fukui Minami Subaru Inc. Nara Subaru Inc. ○ Osaka Subaru Inc Kyoto Subaru Inc. Shiga Subaru Inc. Hyogo Subaru Inc. ○ Hiroshima Subaru Inc. Sanin Subaru Inc. Okayama Subaru Inc Yamaguchi Subaru Inc. Higashi Shikoku Subaru Inc Shikoku Subaru Inc. ○ Fukuoka Subaru Inc Nishi Kyushu Subaru Inc Kumamoto Subaru Inc Oita Subaru Inc. Minami Kyushu Subaru Inc Okinawa Subaru Inc Total 6 44 Hokkaido Hiroshi Uehara Hokkaido Takashi Ishihara Hokkaido Tomoo Takenaka Miyagi Aomori Iwate Akita Makoto Hada Kenichi Kobayashi Yasuo Watanabe Takaharu Mitsui Yamagata Toshiki Sugihara Fukushima Ryoichi Uchida Niigata Nagano Ishikawa Nagano Gunma Tochigi Ibaraki Tatsuya Yamano Kinya Abe Shiro Ohta Hirotada Shibata Wataru Miyata Kazumasa Kodaira Naoki Otsuki Saitama Hiroshi Yoshizawa Kanagawa Katsuhisa Iiyama Chiba Tokyo Tsuguto Nakamura Kazuo Hosoya Yamanashi Hirohiko Kumada Shizuoka Shinichi Ishida Aichi Gifu Mie Aichi Fukui Nara Osaka Kyoto Shiga Hyogo Takumi Ogasawara Koichi Numa Masato Yachida Yasuo Nishikawa Satoshi Okada Yuzuru Takagi Motoya Yamamoto Tetsuo Inoue Tomio Sogou Syuji Sunaga Hiroshima Ken Fukuda Tottori Nobuhiro Mori Okayama Sadayuki Hata Yamaguchi Wataru Ishihara Kagawa Ehime Hiromi Fujita Tsukasa Morita Fukuoka Kazuto Sakamoto Nagasaki Makoto Kimura Kumamoto Tetsuya Matsumoto Oita Eiji Akamine Kagoshima Hiroshi Kurotani Okinawa Masaaki Kakazu ̶ ̶ 1 1 20 11 6 9 6 5 11 11 10 12 1 17 12 10 16 26 20 32 3 12 22 9 7 3 1 5 26 8 7 18 9 7 7 8 8 7 16 7 8 5 10 3 453 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 33 Annual Report 2018 60 Corporate Information Distributors (Overseas) Region Market Company Location (As of July 1 2018) (Dealer numbers: as of December 31, 2017) Number of Dealers SUBARU Ownership North America U.S. Subaru of America, Inc. Camden, NJ, U.S.A. Canada Subaru Canada, Inc. Mississauga, Ontario, Canada Total 3 countries Germany SUBARU DEUTSCHLAND GMBH Friedberg, Germany Europe Switzerland SUBARU SCHWEIZ AG Safenwil, Switzerland Sweden Subaru Nordic AB Arlöv, Sweden Total 30 countries CIS・Middle East・Africa Israel Russia Egypt Total 19 countries Japanauto-Israel Auto Corporation Ltd. Petah Tikva, Israel SUBARU MOTOR (RUSSIA) LLC Moscow, Russia ABOU GHALY MOTORS Cairo, Arab Republic of Egypt Oceania Australia Subaru (Aust) Pty Ltd. Sydney, Australia New Zealand Subaru of New Zealand Auckland, New Zealand Total 8 countries Latin America Chile Peru Subaru Chile S.A. Vitacura Santiago, Chile Inchcape del Perù S.A. Lima, Peru Mexico SGM Automotoriz de México S.A. de C.V. Mexico, D.F., Mexico Total 24 countries Taiwan Subaru of Taiwan Co.,Ltd. Taoyuan City, Taiwan Asia Philippines Motor Image Philipinas, Inc. Pasig City, Metro Manila, Philippines Singapore Motor Image Enterprises Pte Ltd Singapore Total 9 countries China Subaru of China Ltd. Beijing, China Total 1 country 630 93 ̶ 179 157 133 ̶ 13 47 31 ̶ 116 16 ̶ 24 10 13 ̶ 23 17 2 ̶ 208 ̶ 100% 100% ̶ 29% 0% 0% ̶ 0% 33% 0% ̶ 8% 0% ̶ 0% 0% 0% ̶ 35% 0% 0% ̶ 60% ̶ 61 Annual Report 2018 Global Network Main Overseas Business Sites 4 2 1 3 5 6 1 12 11 9 10 7 8 1 Subaru Europe N.V./S.A. 7 Subaru of America, Inc. 2 Subaru Italia S.p.A. 3 N.V. Subaru Benelux 8 North American Subaru, Inc. 9 Subaru Research & Development, Inc. 4 Subaru Vehicle Distribution B.V. 10 Subaru of Indiana Automotive, Inc. 5 Subaru of China Ltd. 6 Subaru Technology Beijing. Co.Ltd. Production Models: Legacy, Outback, Impreza, Ascent 11 Subaru Canada, Inc. 12 SUBARU ASIA PTE. LTD. Main Domestic Business Sites Automotive Business Unit Gunma Plant Plant Production Models Main Plant Levorg, Impreza, SUBARU XV, WRX, SUBARU BRZ Yajima Plant Oizumi Plant Legacy, Outback, Impreza, SUBARU XV, Forester Automobile engines and transmissions Aerospace Company Handa Plant Handa West Plant Aerospace Company Utsunomiya Plant Tokyo Ofﬁ ce 1 Head Ofﬁ ce Annual Report 2018 62 Corporate Information Corporate Data (As of March 31, 2018) Company Name SUBARU CORPORATION Main Businesses Established July 15, 1953 Paid-In Capital ¥153,795 million Fiscal Year-End March 31 Accounting Auditors KPMG AZSA LLC Automotive: The manufacture, sale, and repair of passenger cars and their components Aerospace: The manufacture, sale, and repair of airplanes, aerospace-related machinery and their components Number of Afﬁ liates 75 consolidated subsidiaries and 8 equity-method afﬁ liated companies Number of Employees 14,879 (consolidated: 33,544) (excluding executive ofﬁ cers, advisors and dispatches) Website Addresses Corporate website: https://www.subaru.co.jp/en/ Investor information website: https://www.subaru.co.jp/en/ir/ Stock Information (As of March 31, 2018) Common Stock Authorized 1,500,000,000 shares Breakdown of Shareholders Common Stock Issued 769,175,873 shares Number of Shareholders 138,794 Number of Shares per Trading Unit 100 shares Stock Exchange Listing Tokyo Stock Exchange Securities Code Transfer Agent Major Shareholders 7270 Mizuho Trust & Banking Co., Ltd. 2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan Telephone: 0120-288-324 (toll-free) Securities companies 32,136,000 shares 4.2% Individuals and others 91,637,000 shares 11.9% Japanese corporations and others 157,018,000 shares 20.4% Treasury stock 2,055,000 shares 0.3% Financial institutions 248,835,000 shares 32.4% Foreign institutions and others 237,492,000 shares 30.9% Name Toyota Motor Corporation The Master Trust Bank of Japan, Ltd. (Trust account) Japan Trustee Services Bank, Ltd. (Trust account) BNYM TREATY DTT 15 Japan Trustee Services Bank, Ltd. (Trust account 5) STATE STREET BANK WEST CLIENT-TREATY 505234 Japan Trustee Services Bank, Ltd. (Trust account 4) Mizuho Bank, Ltd. MIZUHO SECURITIES ASIA LIMITED-CLIENT A/C Sompo Japan Nipponkoa Insurance Inc. Number of Shares Held (in thousands) Percentage of Total Shares Held 129,000 16.82% 49,904 44,410 14,055 11,863 11,048 10,433 10,078 10,002 9,726 6.51% 5.79% 1.83% 1.55% 1.44% 1.36% 1.31% 1.30% 1.27% *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) 63 Annual Report 2018 Ebisu 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, 2018 and 2017 106.27 ASSETS Current assets: Cash and deposits (Note 4 and 5) Notes and accounts receivable-trade (Note 5) Lease investment assets (Note 5 and 17) 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 2018 2017 Thousands of U.S. dollars (Note 1) 2018 ¥765,397 155,247 17,120 242,573 202,435 52,307 42,448 124,766 185,364 107,893 (340) 1,895,210 1,698,491 (968,876) (26,507) 703,108 28,293 106,964 9,817 82 32,244 111,957 (3,362) 285,995 ¥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 $7,202,381 1,460,873 161,099 2,282,610 1,904,912 492,209 399,435 1,174,047 1,744,274 1,015,272 (3,198) 17,833,914 15,982,789 (9,117,117) (249,431) 6,616,241 266,237 1,006,531 92,378 772 303,416 1,053,513 (31,636) 2,691,211 ¥2,884,313 ¥2,762,321 $27,141,366 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 Provision for loss related to airbags Other current liabilities (Note 5 and 7) Total current liabilities Long-term liabilities: Long-term debts (Note 5 and 7) Net defined benefit liability(Note 11) Provision for product warranties Deferred tax liabilities (Note 12) Other long-term liabilities (Note 7) Total long-term liabilities Contingent liabilities (Note 19) 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, 2018— 2017— Total shareholders’ equity 2,455,039 shares 2,490,224 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 2018 2017 Thousands of U.S. dollars (Note 1) 2018 ¥320,137 64,863 22,082 42,982 255,914 24,131 34,743 45,372 3,098 64,711 172,973 1,051,006 21,138 19,337 35,801 20,305 175,703 272,284 ¥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 $3,012,487 610,360 207,791 404,460 2,408,149 227,073 326,931 426,950 29,152 608,930 1,627,676 9,889,959 198,908 181,961 336,887 191,070 1,653,365 2,562,191 純資産 ← 153,795 160,197 1,283,539 (7,054) 153,795 160,178 1,173,277 (7,173) 1,447,210 1,507,453 12,078,094 (66,379) 1,590,477 1,480,077 14,966,378 7,038 (36,193) (10,136) 1,658 (37,633) 8,179 1,561,023 8,099 (16,631) (10,996) (1,885) (21,413) 6,224 1,464,888 66,227 (340,576) (95,379) 15,602 (354,126) 76,964 14,689,216 ¥2,884,313 ¥2,762,321 $27,141,366 Consolidated Statements of Income SUBARU CORPORATION AND CONSOLIDATED SUBSIDIARIES Years ended March 31, 2018 and 2017 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) Depreciation Cost of Settlement Impairment loss (Note 9) Loss on related to airbags(Note 16) Loss on business liquidation(Note 16) Other, net Income before income taxes Income taxes (Note 12): Current Deferred Net income Net income attributable to non-controlling Interests Net income attributable to owners of the parent 106.27 Thousands of U.S. dollars (Note 1) 2018 $32,043,107 22,985,847 9,057,260 5,486,666 3,570,594 77,030 (12,976) 7,321 (69,587) 21,323 (45,516) 43,455 (9,645) - (292) (764,665) - (19,075) (772,627) 2,797,967 1,064,788 (353,384) 711,404 2,086,563 13,033 Millions of yen 2017 ¥3,325,992 2,386,266 939,726 528,916 410,810 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 2018 ¥3,405,221 2,442,706 962,515 583,068 379,447 8,186 (1,379) 778 (7,395) 2,266 (4,837) 4,618 (1,025) - (31) (81,261) - (2,027) (82,107) 297,340 113,155 (37,554) 75,601 221,739 1,385 ¥220,354 ¥282,354 $2,073,530 Per share data (Note 2) : Net income —Basic —Diluted * Net assets Cash dividends (Note 13) The accompanying notes are an integral part of these statements. Yen ¥365.77 - 1,902.56 ¥144.00 U.S. dollars (Note 1) $2.70 - 19.06 $1.36 ¥287.40 - 2,025.31 ¥144.00 *For the year ended March 31, 2018 and 2017 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, 2018 and 2017 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 2018 ¥221,739 (1,061) (18,985) 860 3,543 (54) (15,697) Millions of yen 2017 ¥283,552 (3,245) (2,968) 1,812 984 (783) (4,200) Thousands of U.S. dollars (Note 1) 2018 $2,086,563 (9,985) (178,649) 8,093 33,340 (508) (147,709) 206,042 ¥279,352 $1,938,854 204,449 ¥1,593 278,689 ¥663 1,923,864 $14,990 Consolidated Statements of Changes in Net Assets SUBARU CORPORATION AND CONSOLIDATED SUBSIDIARIES As of March 31, 2018 and 2017 106.27 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 Adjustments due to change in fiscal year end of consolidated subsidiaries Change of scope of consolidation 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 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 Adjustments due to change in fiscal year end of consolidated subsidiaries Change of scope of consolidation 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) 2018 2017 2018 ¥153,795 153,795 160,178 19 - - - 19 160,197 ¥153,795 153,795 $1,447,210 1,447,210 160,071 1,507,274 1 (46,973) 46,972 107 107 160,178 179 - - - 179 1,507,453 1,173,277 1,049,016 11,040,529 (110,463) 220,354 - 828 (355) 922 - (1,024) 110,262 1,283,539 (7,173) (11) 130 - 119 (7,054) (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) (1,039,456) 2,073,530 - 7,791 (3,341) 8,676 - (9,635) 1,037,565 12,078,094 (67,498) (104) 1,223 - 1,119 (66,379) 1,480,077 1,361,480 13,927,515 (110,463) 220,354 (11) 149 828 (355) 922 (1,024) 110,400 ¥1,590,477 (111,446) 282,354 (52,744) 0 - - 325 108 118,597 ¥1,480,077 (1,039,456) 2,073,530 (104) 1,402 7,791 (3,341) 8,676 (9,635) 1,038,863 $14,966,378 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 Millions of yen Thousands of U.S. dollars (Note 1) 2018 2017 2018 ¥8,099 (1,061) (1,061) 7,038 (16,631) (19,562) (19,562) (36,193) (10,996) 860 860 (10,136) (1,885) 3,543 3,543 1,658 (21,413) (16,220) (16,220) (37,633) 6,224 1,955 1,955 8,179 ¥11,344 $76,212 (3,245) (3,245) 8,099 (9,985) (9,985) 66,227 (13,415) (156,498) (3,216) (3,216) (16,631) (184,078) (184,078) (340,576) (12,808) (103,472) 1,812 1,812 (10,996) (2,869) 984 984 (1,885) 8,093 8,093 (95,379) (17,738) 33,340 33,340 15,602 (17,748) (201,496) (3,665) (3,665) (21,413) 5,679 545 545 6,224 (152,630) (152,630) (354,126) 58,568 18,396 18,396 76,964 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 Adjustments due to change in fiscal year end of consolidated subsidiaries Change of scope of consolidation 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. 1,464,888 1,349,411 13,784,587 (110,463) 220,354 (11) 149 828 (355) 922 (1,024) (14,265) 96,135 ¥1,561,023 (111,446) 282,354 (52,744) 0 - - 325 108 (3,120) 115,477 ¥1,464,888 (1,039,456) 2,073,530 (104) 1,402 7,791 (3,341) 8,676 (9,635) (134,234) 904,629 $14,689,216 Consolidated Statements of Cash Flows SUBARU CORPORATION AND CONSOLIDATED SUBSIDIARIES Years ended March 31, 2018 and 2017 Net cash provided by (used in) operating activities Income before income taxes Depreciation and amortization Increase (decrease) in allowance for doubtful accounts Increase (decrease) in provision for loss related to airbags Interest and dividends income Interest expenses Loss (gain) on sales and retirement of noncurrent assets Loss (gain) on sales and valuation of investment securities Decrease (increase) in operating loans receivable Decrease (increase) in notes and accounts receivable-trade Decrease (increase) in inventories Increase (decrease) in notes and accounts payable-trade Increase (decrease) in accrued expenses Other, net Interest and dividends income received Interest expenses paid 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 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(Note 4) Increase (decrease) in cash and cash equivalents resulting from change of scope of consolidation Increase (decrease) in cash and cash equivalents resulting from change in fiscal period of consolidated subsidiaries Cash and cash equivalents at end of the period(Note 4) The accompanying notes are an integral part of these statements. 106.27 Millions of yen Thousands of U.S. dollars (Note 1) 2018 2017 2018 ¥297,340 102,102 (149) 64,711 (8,186) 1,379 4,837 (4,096) (7,799) 40 (15,922) (54,159) 40,158 20,336 440,592 8,397 (1,446) (81,245) 366,298 (7,219) (143,418) 168,525 (149,897) 3,413 (52,645) 34,272 (123,552) 120,383 (573) (150,711) (18,393) 3,500 (44,443) - (11) (110,326) (1,264) (170,937) (10,831) 33,819 ¥394,695 85,653 (189) - (4,616) 1,846 3,270 (9,322) (3,898) (19,684) (32,444) 24,458 88,159 22,320 550,248 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) (3,129) (189,044) (2,991) (100,845) $2,797,967 960,779 (1,402) 608,930 (77,030) 12,976 45,516 (38,543) (73,389) 376 (149,826) (509,636) 377,887 191,363 4,145,968 79,016 (13,607) (764,515) 3,446,862 (67,931) (1,349,562) 1,585,819 (1,410,530) 32,116 (495,389) 322,499 (1,162,624) 1,132,803 (5,391) (1,418,190) (173,078) 32,935 (418,208) - (104) (1,038,167) (11,894) (1,608,516) (101,919) 318,237 728,616 829,461 6,856,272 (534) 3,690 ¥765,591 - (5,025) - ¥728,616 34,722 $7,204,206 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, 2018, which was ¥106.27 to U.S. $1. The convenience translation should not be construed as a representation that the Japanese yen amounts have been, could have been, or could in the future be converted into U.S. dollars at this or any other rate of exchange. We are planning to voluntarily adopt International Financial Reporting Standards (IFRS) to the Group's consolidated financial statements from the fiscal year ending March 31, 2020, instead of the Japanese Generally Accepted Accounting Principles currently adopted. 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 ended March 31, 2017, the fiscal year-end of those subsidiaries was December 31. The operating results of those subsidiaries that had different fiscal year-end were consolidated by using the financial statements as of each subsidiary’s respective fiscal year-end, the necessary adjustments being made in consolidation if there were any significant transactions between January 1 and March 31. To synchronize the reporting period, Subaru of China Ltd. changed its reporting period for consolidation purposes by conducting a provisional book-closing from the consolidated fiscal year ended March 31, 2018. This change allows the consolidated financial statements as of and for the 12 months period ended March 31, 2018 to include the financial information of Subaru of China Ltd. in the same period. Net operating results of Subaru of China Ltd. from January 1, 2017 to March 31, 2017 have been reflected as a change in retained earnings in the consolidated financial statement. The consolidated financial statements include the accounts of 75 and 77 subsidiaries in the fiscal years ended March 31, 2018 and 2017, respectively. In addition, 8 and 2 affiliated companies were accounted for by the equity method in the fiscal years ended March 31, 2018 and 2017, respectively. Investments in insignificant non-consolidated subsidiaries and affiliated companies not accounted for by the equity method are carried at cost. 1 [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 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. 2 [10] Provision for Loss on business liquidation The provision for losses on business liquidation is provided due to important business liquidation. [11] Provision for loss related to airbags The provision for losses on quality-assurance expenses is provided for the market measures relating to airbags in the future. [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) 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 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. [17] Goodwill Goodwill is principally amortized by the straight-line method over 5 years. 3 [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 121,084 million yen (US$ 1,139,400 thousand) and 114,215 million yen for the fiscal years ended March 31, 2018 and 2017, 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] Changes in Accounting Estimates (Provision for product warranties) In the current consolidated fiscal year, there was a change in accounting estimate due to the fact that the expenses for after-sales services in the future can be estimated more precisely. The effect of this change on profit and loss for current consolidated fiscal year is immaterial. [23] Changes in Presentation (Consolidated Statements of Cash Flows) Consolidated Statements of Cash Flows for the fiscal year ended March 31, 2018 include the following reclassifications. “Increase (decrease) in provision for loss on business liquidation”, 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. In addition, “Dividends paid to non-controlling interests”, which was presented as a separate item in “Net cash provided by (used in) financing activities”, is included in “Other, net” in “Net cash provided by (used in) financing activities” in the current fiscal year due to its decreased financial materiality. To reflect these changes, 3,317 million yen of “Increase (decrease) in provision for loss on business liquidation” has been reclassified into “Other, net” in “Net cash provided by (used in) operating activities”, in addition, (1,944) million yen of “Dividends paid to non-controlling interests” has been reclassified into “Other, net” in “Net cash provided by (used in) financing activities”. As a result, “Other, net” in “Net cash provided by (used in) operating activities” is 22,320 million yen. In addition, “Other, net” in “Net cash provided by (used in) financing activities” is (3,129) million yen. 4 3. Other comprehensive income Amounts reclassified to net income (loss) for the fiscal years ended March 31, 2018 and 2017, 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 2018 2017 Thousands of U.S. dollars 2018 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) ¥1,815 (4,243) (2,428) 1,367 (1,061) (18,985) - (18,985) - (18,985) (933) 2,135 1,202 (342) 860 4,932 - 4,932 (1,389) 3,543 ¥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 $17,080 (39,927) (22,847) 12,862 (9,985) (178,649) - (178,649) - (178,649) (8,779) 20,090 11,311 (3,218) 8,093 46,410 - 46,410 (13,070) 33,340 (54) - (54) - (54) (¥15,697) (639) (144) (783) - (783) (¥4,200) (508) - (508) - (508) ($147,709) 5 4. Additional Cash Flow Information Cash and cash equivalents as of March 31, 2018 and 2017, 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 2018 ¥765,397 242,573 1,007,970 (158,576) (83,803) 2017 ¥658,822 320,579 979,401 (151,924) (98,861) Thousands of U.S. dollars 2018 $7,202,381 2,282,610 9,484,991 (1,492,199) (788,586) ¥765,591 ¥728,616 $7,204,206 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. Short-term investment securities mainly consist of investments in short-term financial instruments, and investment securities mainly consist of investments in stocks of the companies with business or capital alliances, and are subject to risk of market price fluctuation. 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 6 years after March 31, 2018 at the latest. Derivative transactions include foreign exchange forward contracts to hedge against exchange rate fluctuations associated with trade accounts receivables and liabilities denominated in foreign currencies. [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. 6 (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. 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 financial institutions 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. 7 (2) Items with Regard to Fair Value of Financial Instruments The consolidated balance sheet amounts, the fair value and difference as of March 31, 2018 and 2017 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, 2018 Consolidated balance sheet amounts ¥765,397 155,247 (60) 155,187 17,120 (3) 17,117 185,364 (274) 185,090 129,886 1,252,677 320,137 64,863 22,082 42,982 45,372 255,914 21,138 772,488 Millions of yen Fair Value Difference ¥765,397 155,187 ¥- - 18,766 1,649 192,393 7,303 129,886 1,261,629 320,137 64,863 22,082 43,042 45,372 255,914 21,208 772,618 - 8,952 - - - 60 - - 70 130 - ¥- 5,177 ¥- 5,177 ¥- 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 Accrued income taxes Accrued expenses Long-term loans payable Total Liabilities Derivative transactions (*2) hedge accounting is not applied hedge accounting is applied 8 As of March 31, 2018 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 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 $7,202,381 $7,202,381 $- 1,460,873 (564) 1,460,309 161,099 (28) 161,071 1,744,274 (2,578) 1,741,696 1,460,309 - 176,588 15,517 1,810,417 68,721 1,222,226 1,222,226 11,787,683 11,871,921 3,012,487 3,012,487 610,360 610,360 207,791 207,791 405,025 404,460 426,950 426,950 2,408,149 2,408,149 199,567 198,908 7,269,105 7,270,329 - 84,238 - - - 565 - - 659 1,224 48,716 48,716 $- $- - $- *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 ( ). 9 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 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 ¥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 ¥- *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 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. 10 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, Electronically recorded obligations-operating, 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. [2] Financial instruments which fair value is extremely difficult to measure Consolidated balance sheet amount as of March 31, 2018 and 2017: Stocks of non-consolidated subsidiary and affiliated companies Other securities (available-for-sale securities) Certificate of deposit Commercial paper Money management fund Unlisted stocks (excluding over-the-counter stocks) Medium Term Note Trust beneficiary right Other Investments and other assets Investments in equity of affiliated companies and others 2018 ¥6,501 Millions of yen 2017 ¥1,232 Thousands of U.S. dollars 2018 $61,174 55,000 17,499 116,270 874 20,000 10,000 3 135,000 42,499 104,218 866 20,000 - 3 517,550 164,665 1,094,100 8,224 188,200 94,100 28 ¥1,090 ¥1,661 $10,257 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” and “Investment securities". 11 [3] Scheduled redemption of monetary assets and securities with maturity As of March 31, 2018: 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, 2018: 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 Within 1 Year ¥765,397 144,170 6,626 71,620 1 to 5 Years ¥- 11,077 10,471 112,068 17,013 6,632 102,658 18,337 26,315 1,732 Millions of yen 5 to 10 Years ¥- - 23 1,676 7,018 4,160 923 Over 10 years ¥- - - - 4,793 5,271 6,526 Within 1 Year $7,202,381 1,356,639 62,351 1 to 5 Years $- 104,234 98,532 673,944 1,054,559 Thousands of U.S. dollars Over 10 years $- - - - 5 to 10 Years $- - 216 15,771 160,092 62,407 $966,011 172,551 247,624 $16,298 66,039 39,146 $8,685 45,102 49,600 $61,410 Within 1 Year ¥658,822 145,641 6,136 73,229 1 to 5 Years ¥- 12,813 12,393 101,058 Millions of yen Over 10 years ¥- - - - 5 to 10 Years ¥- - 9 2,146 10,574 8,270 ¥197,517 17,959 25,433 ¥1,175 5,080 4,939 ¥917 3,594 4,265 ¥5,595 12 [4] Amount of repayment for long-term debt and other interest-bearing debt As of March 31, 2018: Short-term loans payable Long-term loans payable As of March 31, 2018: Short-term loans payable Long-term loans payable As of March 31, 2017: Short-term loans payable Long-term loans payable Within 1 Year ¥22,082 ¥42,982 1 to 5 Years ¥- ¥20,675 Millions of yen Over 10 years ¥- ¥- 5 to 10 Years ¥- ¥463 Within 1 Year $207,791 $404,460 1 to 5 Years $- $194,552 Thousands of U.S. dollars Over 10 Years $- $- 5 to 10 Years $- $4,356 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 6. Short-Term Investment Securities and Investment Securities Information on the value of short-term investment securities and investment securities as of March 31, 2018 and 2017 was as follows: (1) Other securities (available-for-sale securities): As of March 31, 2018: 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 Millions of yen Difference ¥30,619 ¥19,748 ¥10,871 4,356 3,068 1,027 39,070 4,326 3,032 1,016 28,122 389 471 42,805 39,309 8,313 90,816 ¥129,886 43,345 40,023 8,488 92,327 ¥120,449 30 36 11 10,948 (82) (540) (714) (175) (1,511) ¥9,437 13 As of March 31, 2018: 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 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 $288,125 $185,829 $102,296 40,990 28,870 9,664 367,649 40,708 28,531 9,561 264,629 282 339 103 103,020 3,660 4,432 (772) 402,795 369,897 78,225 854,577 $1,222,226 407,876 376,616 79,872 868,796 $1,133,425 (5,081) (6,719) (1,647) (14,219) $88,801 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 20,077 21,301 4,403 49,347 ¥112,782 110 157 41 12,548 (2,504) (240) (245) (69) (3,058) ¥9,490 14 (2) Other securities (available-for-sale securities) sold during the fiscal years ended March 31, 2018 and 2017: The fiscal year ended March 31, 2018: Equity securities Debt securities Government and municipal bonds Corporate bonds Other Total The fiscal year ended March 31, 2018: Equity securities Debt securities Sales amount Total gains Total losses Millions of yen ¥7,022 ¥4,399 32,982 19,794 142,999 ¥202,797 97 119 3 ¥4,618 ¥149 254 84 35 ¥522 Sales amount Total gains Total losses $66,077 $41,395 $1,402 Thousands of U.S. dollars Government and municipal bonds Corporate bonds Other Total $310,360 $186,261 $1,345,620 $1,908,318 $913 $1,120 $28 $43,456 $2,390 $790 $329 $4,911 The fiscal year ended March 31, 2017: Sales amount Total gains Total losses Millions of yen Equity securities Debt securities Government and municipal bonds Corporate bonds Other Total ¥23,650 ¥9,968 28,576 9,586 82,906 ¥144,718 128 45 3 ¥10,144 ¥419 219 45 46 ¥729 15 7. Short-Term Loans Payable and Long-Term Debts Short-term loans payable as of March 31, 2018 and 2017, consisted of the following: Millions of yen 2017 Thousands of U.S. dollars 2018 2018 Bank loans with average interest rate of 2.03% and 1.40% per annum as of March 31, 2018 and 2017, respectively ¥22,082 ¥43,205 $207,791 Long-term debts as of March 31, 2018 and 2017 consisted of the following: Loans principally from banks and insurance companies due through 2024 with average interest rate of 0.48% and 0.51% per annum as of March 31, 2018 and 2017, respectively Subtotal Less-Portion due within one year Total Millions of yen 2017 Thousands of U.S. dollars 2018 2018 ¥64,120 ¥105,055 $603,368 64,120 (42,982) ¥21,138 105,055 (44,443) ¥60,612 603,368 (404,460) $198,908 Annual maturities of long-term loans payable as of March 31, 2018 were as follows: 2019 2020 2021 2022 2023 2024 and thereafter Total Millions of yen ¥42,982 7,872 7,300 4,121 1,382 463 ¥64,120 Thousands of U.S. dollars $404,460 74,075 68,693 38,779 13,005 4,356 $603,368 Lease obligations as of March 31, 2018 and 2017 consisted of the following: Lease obligations due within one year as of March 31, 2018 Lease obligations due after one year as of March 31, 2018 Total Millions of yen 2017 ¥1,189 1,765 ¥2,954 2018 ¥1,157 1,810 ¥2,967 Thousands of U.S.dollars 2018 $10,887 17,032 $27,919 16 Annual maturities of lease obligations as of March 31, 2018 were as follows: 2019 2020 2021 2022 2023 2024 and thereafter Total Millions of yen ¥1,157 1,484 152 113 46 15 ¥2,967 Thousands of U.S. dollars 10,887 13,964 1,430 1,063 433 142 $27,919 The following assets as of March 31, 2018 and 2017 were pledged as collateral for certain loans: Property, plant and equipment Total Millions of yen 2017 ¥32,520 ¥32,520 Thousands of U.S. dollars 2018 $270,556 $270,556 2018 ¥28,752 ¥28,752 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 237,441 million yen (US$2,234,318 thousand) as of March 31, 2018. At the end of the fiscal year, there were no borrowings under the commitment line. 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, 2018 and 2017 was as follows: Derivative transactions to which hedge accounting is not applied (1) Foreign currency contracts: As of March 31, 2018 Notional Amount Millions of yen Valuation Fair value gain (loss) Thousands of U.S. dollars Valuation Fair value gain (loss) Notional Amount Foreign exchange forward contracts: Sell- U.S. dollar Euro Canadian dollar Total ¥254,467 5,997 25,349 ¥285,813 ¥4,163 132 882 ¥5,177 ¥4,163 $2,394,533 56,432 238,534 ¥5,177 $2,689,499 132 882 $39,174 1,242 8,300 $48,716 $39,174 1,242 8,300 $48,716 17 As of March 31, 2017 Foreign exchange forward contracts: Sell- U.S. dollar Euro Canadian dollar Total Notional Amount Fair value Millions of yen Valuation gain (loss) ¥262,186 3,421 21,521 ¥287,128 ¥2,585 11 315 ¥2,911 ¥2,585 11 315 ¥2,911 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 Millions of yen Notional Amount Over 1 year Fair value Interest rate swap contracts: Receive floating rate pay fixed rate (*) 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. ¥1,000 ¥- 9. Property, Plant and Equipment Property, plant and equipment as of March 31, 2018 and 2017 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 2018 ¥441,879 609,736 22,648 371,661 1,445,924 196,659 55,908 (968,876) (26,507) ¥703,108 Millions of yen 2017 ¥407,758 603,416 15,391 354,599 1,381,164 195,783 45,416 (937,015) (28,083) ¥657,265 Thousands of U.S. dollars 2018 $4,158,078 5,737,612 213,118 3,497,327 13,606,135 1,850,560 526,094 (9,117,117) (249,431) $6,616,241 18 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, 2018 and 2017 was as follows: Total overdraft facilities and lending commitments Less amounts currently executed Unexecuted balance Millions of yen 2017 ¥4,800 1,263 ¥3,537 Thousands of U.S. dollars 2018 $45,168 15,404 $29,764 2018 ¥4,800 1,637 ¥3,163 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. 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, 2018, 54 companies including the Company and its consolidated domestic subsidiaries 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 2 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 2018 ¥115,699 6,563 796 1,446 (4,620) - (47) ¥119,837 Millions of yen 2017 ¥116,331 6,752 679 (3,149) (4,373) (15) (526) ¥115,699 Thousands of U.S. dollars 2018 $1,088,727 61,758 7,490 13,607 (43,474) - (443) $1,127,665 19 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 Balance at the end of the period 2018 ¥104,828 1,917 513 3,441 (2,929) - ¥107,770 Millions of yen 2017 ¥105,917 1,953 (3,258) 3,290 (2,886) (188) ¥104,828 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 2018 ¥6,813 820 (417) (28) ¥7,188 Millions of yen 2017 ¥6,398 841 (383) (43) ¥6,813 Thousands of U.S. dollars 2018 $986,431 18,039 4,827 32,380 (27,562) - $1,014,115 Thousands of U.S. dollars 2018 $64,110 7,716 (3,924) (263) $67,639 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 2018 109,766 (108,110) 1,656 17,599 Millions of yen 2017 ¥105,901 (105,157) 744 16,940 Thousands of U.S. dollars 2018 $1,032,897 (1,017,314) 15,583 165,606 19,255 17,684 181,189 19,337 (82) ¥19,255 18,615 (931) ¥17,684 181,961 (772) $181,189 20 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 Millions of yen 2017 ¥6,752 679 (1,953) 2,560 (6) 225 841 Thousands of U.S. dollars 2018 $61,758 7,490 (18,039) 20,156 (56) 3,218 7,716 (149) ¥8,949 - $82,243 2018 ¥6,563 796 (1,917) 2,142 (6) 342 820 - ¥8,740 Adjustments for retirement benefit (before tax effect) a. Past service costs b. Actuarial gains and losses Total 2018 (¥6) 1,208 ¥1,202 Millions of yen 2017 (¥21) 2,465 ¥2,444 Accumulated adjustments for retirement benefit (before tax effect) Thousands of U.S. dollars 2018 ($56) 11,367 $11,311 Thousands of U.S. dollars 2018 $2,578 2018 ¥274 Millions of yen 2017 ¥267 14,290 15,498 134,469 ¥14,564 ¥15,765 $137,047 2018 44% 16% 29% 11% 100% Percentage 2017 47% 16% 28% 9% 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. 21 Actuarial assumptions The principal actuarial assumptions 2018 2017 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 0.6% 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) 13 to 18 years Benefit formula method 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 e. Amortization of past service cost Defined contribution pension plan The amount required to contribute to defined contribution plans was 5,161 million yen (US$48,565 thousand) and 4,698 million yen for the fiscal years ended March 31, 2018 and 2017, 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, 2018 and 2017) Plan assets Projected benefit obligation Funded status 2018 ¥9,130 11,180 (¥2,050) Millions of yen 2017 ¥10,660 11,320 (¥660) Thousands of U.S. dollars 2018 $85,913 105,204 ($19,291) (2) Contributions by the Company and its consolidated domestic subsidiaries as a percentage of total contributions to the multi-employer pension plan for the fiscal years ended March 31, 2018 and 2017 were 4% and 4% respectively. Other than the above, “Accrued expenses” and “Other long-term liabilities” include 24,606 million yen (US$231,542 thousand) and 27,795 million yen of postretirement benefit plan obligations of certain U.S. subsidiaries as of March 31, 2018 and 2017, respectively. 22 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% for the fiscal years ended March 31, 2018 and 2017. A reconciliation of the statutory income tax rate in Japan to the Company’s effective income tax rate for the fiscal years ended March 31, 2018 and 2017 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 by change of the tax rate Entertainment expenses not qualifying for deduction Correction for income tax in previous years Changes in valuation allowance and tax benefits realized from loss carry forwards Deduction of research and development expense Other Effective income tax rate 2018 30.7% 2017 30.7% 0.5% 0.1% 0.1% 0.6% (0.4)% (6.3)% 0.1% 25.4% 2.4% - 0.1% - 0.0% (4.7)% (0.3)% 28.2% Significant components of the deferred tax assets and liabilities as of March 31, 2018 and 2017 were as follows: Deferred tax assets: Accrued expenses Unrealized profit on inventories Provision for product warranties Net defined benefit liability Depreciation and amortization expenses Provision for bonuses Long-term accounts payable-other Accrued enterprise tax 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 23 Millions of yen 2017 Thousands of U.S. dollars 2018 ¥53,348 22,748 19,875 15,082 11,307 7,493 10,858 677 2,247 20,623 164,258 (8,778) 155,480 $725,398 189,423 184,935 138,920 80,785 71,563 58,493 26,753 24,259 194,681 1,695,210 (69,681) 1,625,529 (26,494) (22,466) (2,354) (1,770) (932) (744) (54,760) ¥100,720 (154,710) (133,904) (22,659) (15,903) (4,959) (7,001) (339,136) $1,286,393 2018 ¥77,088 20,130 19,653 14,763 8,585 7,605 6,216 2,843 2,578 20,689 180,150 (7,405) 172,745 (16,441) (14,230) (2,408) (1,690) (527) (744) (36,040) ¥136,705 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 Long-term liabilities—Deferred tax liabilities Total net deferred tax assets Millions of yen 2017 ¥109,600 20,922 (29,802) ¥100,720 Thousands of U.S. dollars 2018 $1,174,047 303,416 (191,070) $1,286,393 2018 ¥124,766 32,244 (20,305) ¥136,705 Revision of deferred tax assets and liabilities due to change in income tax rate In the United States, the Tax Cuts and Jobs Act was enacted on December 22, 2017, and the federal income tax rate was reduced from 35% to 21% for fiscal years beginning on or after January 1, 2018. The effect of the change in the tax rate is immaterial. 13. Net Assets Under Japanese laws and regulations, the entire amount paid for new shares is required to be designated as common stock. However, a company may, by a resolution of its Board of Directors, designate an amount not exceeding one half of the price of the new shares as additional paid-in capital, which is included in capital surplus. Under the Japanese Companies Act (“the Act”), in cases where a dividend distribution of surplus is made, the smaller of an amount equal to 10% of the dividend or the excess, if any, of 25% of common stock over the total of additional paid-in capital and legal earnings reserve must be set aside as additional paid-in capital or legal earnings reserve. Legal earnings reserve is included in retained earnings in the accompanying consolidated balance sheets. Under the Act, both legal earnings reserve and additional paid-in capital used to eliminate or reduce a deficit generally require a resolution of the shareholders’ meeting. Additional paid-in capital and legal earnings reserve may not be distributed as dividends. Under the Act, all additional paid-in capital and all legal earnings reserve may be transferred to other capital surplus and retained earnings, respectively, which are potentially available for dividends. The maximum amount that the Company can distribute as dividends is calculated based on the non-consolidated financial statements of the Company in accordance with the Act. At the annual shareholders’ meeting held on June 22, 2018, the shareholders approved cash dividends amounting to 55,233 million yen (US$519,742 thousand). Such appropriations have not been accrued in the consolidated financial statements as of March 31, 2018. Such appropriations are recognized in the period in which they are approved by the shareholders. 14. Presentation of inventories and provision for loss on construction contracts "Provision for loss on construction contracts" included in "Cost of sales" for the fiscal years ended March 31, 2018 and 2017 is provision of 95 million yen (US$ 894 thousand) and reversal of 579 million yen, respectively. 24 15. Selling, General and Administrative Expenses Selling, general and administrative expenses for the fiscal years ended March 31, 2018 and 2017 consisted of the following: Millions of yen 2017 ¥27,813 80,780 137,209 55,123 113,490 114,501 ¥528,916 2018 ¥28,438 82,801 173,785 58,002 120,330 119,712 ¥583,068 Thousands of U.S. dollars 2018 $267,601 779,157 1,635,316 545,798 1,132,305 1,126,489 $5,486,666 Freightage and packing expenses Advertising expenses Sales incentives Salaries and bonuses Research and development expenses Other Total 16. Extraordinary loss (The fiscal year ended March 31, 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 of loss on fixed assets, 2,127 million yen on inventory valuation, and 471 million yen on others. The loss on fixed assets above includes impairment losses on the following assets. 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 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 of impairment losses were recognized. The recoverable amounts are 25 measured at net realizable value, calculated based on real estate appraisal value. (The fiscal year ended March 31, 2018) Loss on related to airbags The loss was recognized due to the market measures concerning Takata airbag inflator not containing desiccant (hereinafter referred to as "the airbag"). It is quality-assurance expenses which further market measures relating to the airbags to be taken in the current fiscal year and beyond. 17. 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, 2018 and 2017 were as follows: Lease revenue receivable Estimated residual value Interest income portion Lease investment assets Millions of yen 2017 ¥22,210 386 (4,058) ¥18,538 Thousands of U.S. dollars 2018 $193,225 3,717 (35,843) $161,099 2018 ¥20,534 395 (3,809) ¥17,120 (2) Lease revenue related to lease investment assets Amounts of collections on lease receivable after the fiscal years ended March 31, 2018 and 2017 were as follows: Within 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years Over 5 years Millions of yen 2017 ¥7,355 6,022 4,590 2,638 1,594 ¥11 Thousands of U.S. dollars 2018 $74,170 51,341 32,879 21,850 12,675 $310 2018 ¥7,882 5,456 3,494 2,322 1,347 ¥33 18. Operating Lease Information as Lessee The future minimum lease/rent payments, excluding the portion of interest thereon, as of March 31, 2018 and 2017, were as follows: Operating leases: Due within one year Due after one year Total Millions of yen 2017 Thousands of U.S. dollars 2018 ¥3,490 17,101 ¥20,591 $31,730 132,192 $163,922 2018 ¥3,372 14,048 ¥17,420 26 Information as Lessor The future minimum lease/rent payments receivable, excluding the portion of interest thereon, as of March 31, 2018 and 2017 were as follows: Operating leases: Due within one year Due after one year Total 19. Contingent Liabilities Contingent liabilities as of March 31, 2018 and 2017 were as follows: Millions of yen 2017 Thousands of U.S. dollars 2018 ¥137 72 ¥209 $1,176 668 $1,844 2018 ¥125 71 ¥196 Thousands of Millions of yen U.S. dollars 2018 2017 2018 As guarantor of third-party indebtedness from financial institutions ¥29,795 ¥28,555 $280,371 (The fiscal year ended March 31, 2017) 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. (The fiscal year ended March 31, 2018) 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, 2018. There is a possibility that additional expense may be accrued required due to events in the future. 20. The Amount of Discount of Export Bill The amount of discount of export bill as of March 31, 2018 and 2017 were as follows: The amount of discount of export bill Thousands of Millions of yen U.S. dollars 2018 $17,794 2017 ¥1,210 2018 ¥1,891 27 21. Transfer of Financial Assets to Special Purpose Company The balance of financial assets transferred to special purpose company as of March 31, 2018 and 2017 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 2018 2017 2018 ¥4,251 ¥4,488 $40,002 22. 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 do not belong to Automobile nor Aerospace. Automobile segment manufactures and sells vehicles and related products. Aerospace segment manufactures aircrafts, parts of space-related devices. (2)Calculation method of sales, profit or loss, assets, liabilities and other items by reportable segments Accounting method for reportable segments is almost the same as "2. Summary of Significant Accounting Policies". Segment 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, 2018 and 2017 were 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 Millions of yen 2017 2018 Thousands of U.S. dollars 2018 ¥3,234,866 2,918 3,237,784 ¥3,151,961 4,720 3,156,681 $30,440,068 27,458 30,467,526 142,163 5 142,168 28,192 23,852 52,044 3,431,996 (26,775) ¥3,405,221 138,759 - 138,759 1,337,753 47 1,337,800 35,272 23,785 59,057 3,354,497 (28,505) ¥3,325,992 265,287 224,447 489,734 32,295,060 (251,953) $32,043,107 28 Segment income: Automobiles Aerospace Other (*1) Total Adjustment (*2) Consolidated total (*3) 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 29 Millions of yen 2017 2018 Thousands of U.S. dollars 2018 ¥361,454 12,259 5,066 378,779 668 ¥379,447 ¥397,657 9,102 3,512 410,271 539 ¥410,810 $3,401,280 115,357 47,671 3,564,308 6,286 $3,570,594 Millions of yen 2017 2018 Thousands of U.S. dollars 2018 ¥2,598,192 234,619 77,583 2,910,394 (26,081) ¥2,884,313 ¥2,477,309 223,148 87,484 2,787,941 (25,620) $24,448,970 2,207,763 730,055 27,386,788 (245,422) ¥2,762,321 $27,141,366 Millions of yen 2017 2018 Thousands of U.S. dollars 2018 ¥95,193 5,298 1,611 102,102 - 102,102 3,461 - 54 3,515 - 3,515 185,056 8,316 417 193,789 - ¥193,789 ¥80,058 3,663 1,932 85,653 - 85,653 1,467 - - 1,467 - 1,467 $895,766 49,854 15,159 960,779 - 960,779 32,568 - 508 33,076 - 33,076 180,469 14,699 1,448 196,616 - ¥196,616 1,741,376 78,254 3,923 1,823,553 - $1,823,553 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. 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, 2018 and 2017 was summarized as follows: Sales: (*1) Japan North America [United States] (*2) Europe Asia Other Consolidated total Millions of yen 2017 2018 Thousands of U.S. dollars 2018 ¥668,566 2,305,797 [2,152,276] 119,113 140,577 171,168 ¥3,405,221 ¥650,343 2,192,260 [2,056,176] 112,602 211,325 159,462 ¥3,325,992 $6,291,202 21,697,535 [20,252,903] 1,120,853 1,322,829 1,610,688 $32,043,107 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 as of March 31, 2018 and 2017 was summarized as follows: Millions of yen 2017 2018 Thousands of U.S. dollars 2018 Property, plant and equipment: (*1) Japan North America [United States] (*2) Europe Other ¥527,698 174,290 [173,557] 519 601 ¥703,108 ¥489,383 166,665 [165,877] 425 792 ¥657,265 4,965,635 1,640,068 [1,633,170] 4,884 5,654 6,616,241 Consolidated total 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, 2018 and 2017 30 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, 2018 and 2017 was summarized as follows: Impairment loss in fixed assets: Automobiles Aerospace Other Total Adjustment Total Millions of yen 2017 2018 Thousands of U.S. dollars 2018 ¥31 - - 31 - ¥31 ¥3 - 2,386 2,389 - ¥2,389 $292 - - 292 - $292 “Other” represents the business segments which are not included in any reportable business segments. It includes 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 as of March 31, 2018 and 2017 was summarized as follows: Goodwill 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 Millions of yen 2017 Thousands of U.S. dollars 2018 ¥206 - - 206 - 206 1,867 - - 1,867 - ¥1,867 $1,986 - - 1,986 - 1,986 14,736 - - 14,736 - $14,736 2018 ¥211 - - 211 - 211 1,566 - - 1,566 - ¥1,566 Information on Negative Goodwill by Reportable segments No items to be reported. 23. 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 the fiscal years ended March 31, 2018 and 2017, and fair value as of March 31, 2018 and 2017 were as follows: 31 The fiscal year ended March 31, 2018 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 The fiscal year ended March 31, 2018 ¥27,036 ¥242 ¥27,278 ¥40,136 ¥13,712 (¥253) ¥13,459 ¥22,804 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 The fiscal year ended March 31, 2017 $254,409 $2,277 $256,686 $377,679 $129,030 ($2,381) $126,649 $214,585 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 ¥29,243 (¥2,207) ¥27,036 ¥40,819 ¥14,495 (¥783) ¥13,712 ¥21,490 Note 1. The amounts of consolidated balance sheet exclude 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 year ended March 31, 2018, principal increases were 1,539 million yen (US$14,482 thousand) of properties acquisitions and 720 million yen (US$6,775 thousand) of other, and principal decreases were 1,001 million yen (US$9,419 thousand) of depreciation, 1,469 million yen (US$13,823 thousand) of loss on sales and retirement. Among changes in the amount of investment and rental property and properties that include portions used as investment and rental property during the fiscal year ended March 31, 2017, principal increases were 1,337 million yen of properties acquisitions, and principal decreases were 1,071 million yen of depreciation, 1,203 million yen of impairment losses, 568 million yen of loss on sales and retirement, 928 million yen of end of contracts, and 543 million yen of other decreases. 3. Fair values of main properties are calculated based on the appraised value of the external real-estate appraiser. Some of them are adjusted by the Company using relevant indicators etc. Fair values of the remaining properties are estimated by the Company mainly using the assessed land values that are used to calculate property taxes. 32 Profit and loss in the fiscal years ended March 31, 2018 and 2017 from investment and rental property and properties that include portions used as investment and rental property were as follows: The fiscal year ended March 31, 2018 Rental income Rental expenses Difference Millions of yen Other profit and loss Investment and rental property Properties that include portions used as investment and rental property ¥3,825 ¥2,043 ¥1,782 ¥780 ¥1,198 (¥418) ¥15 ¥- The fiscal year ended March 31, 2018 Investment and rental property Properties that include portions used as investment and rental property The fiscal year ended March 31, 2017 Investment and rental property Properties that include portions used as investment and rental property Thousands of U.S. dollars Rental income Rental expenses Difference Other profit and loss $35,993 $19,225 $16,768 $141 $7,340 $11,273 ($3,933) $- Rental income Rental expenses Difference Millions of yen Other profit and loss ¥3,909 ¥2,059 ¥1,850 (¥1,133) ¥775 ¥1,224 (¥449) ¥- 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. 33

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