Annual Report. For the year ended March 31, 2009

Transcription

1 Annual Report 29 For the year ended March 31, 29

2 Profile Since its establishment in 1959 as a manufacturer of sintering metal filters and filtration elements, SMC Corporation has consistently increased its corporate value in the global market as a leading manufacturer of pneumatic equipment. Pneumatic technology has become indispensable not only in various industrial fields of the primary, secondary and tertiary industries but also in the high-tech industries represented by IT. As of March 31, 29, the SMC Group had 64 subsidiaries and affiliates in 5 nations under its firmly established global operating system. The SMC Group is determined to further extend its business fields worldwide through the integration of pneumatic equipment and a variety of advanced technologies. History 1959 Established under the name of Shoketsu Kinzoku Kogyo Co., Ltd. (Sintered Metal Corporation), capitalized at 5 million (Manufacture and sales of sintering metal filters by power metallurgy) Started manufacture of pneumatic air line equipment Embarked on overseas operations with capital participation in Airmate SMC Pty. Ltd., Australia. (Reorganized into a wholly owned subsidiary SMC Pneumatics (Australia) Pty. Ltd. in 198) 1968 Soka 1st Factory completed. 197 Started manufacture of air cylinders Soka 2nd Factory completed SMC Pneumatics, Inc. name changed to SMC Corporation of America in 21, a wholly owned subsidiary, established in the U.S SMC Pneumatik GmbH, a wholly owned subsidiary, established in Germany Tsukuba 1st Factory completed SMC Manufacturing (Singapore) Pte. Ltd., a wholly owned subsidiary established. Corporate name changed to SMC Corporation from Shoketsu Kinzoku Kogyo Co., Ltd Stocks listed on the second section of the Tokyo Stock Exchange; Capital increased to 11,34 million Stocks listed on the first section of the Tokyo Stock Exchange; Tsukuba 2nd and Soka 3rd Factories completed Kamaishi Factory completed. Japan Technical Center completed Yamatsuri Factory completed. SMC (China) Co., Ltd., a wholly owned subsidiary established Tono Factory completed Acquired ISO 91 certification Acquired ISO 141 certification. 2 European Technical Centre established in the U.K. 22 Established the US Technical Center in the United States. 26 Moved Headquarters to new facility. 27 Established the Chinese Technical Center. Contents Financial Highlights 1 Message from the President 2 Corporate Governance 4 Quickly Meeting the Sophisticated and Diversifying Needs of Custumers Worldwide 6 Financial Section 8 Corporate Directory 24 Corporate Information & Board of Directors 25 Notes Regarding Future Plans and Estimates This annual report contains projections concerning the future plans, strategies and estimated performance of SMC. These statements do not include historical data but rather are based on management s projections given the information currently available. Accordingly, these projections involve risks and uncertainties relative to the status of the economy and demand, intensifying competition, exchange rates, taxation and other regulations.

3 Financial Highlights SMC Corporation and Subsidiaries Years ended March 31, 27 (FY26), 28 (FY27), and 29 (FY28) Thousands of Millions of yen Change in % U.S. dollars FY26 FY27 FY28 FY27-28 FY28 Net sales 339, , , % $2,884,561 Operating income 88,964 87,646 49, ,65 Operating expenses 25,725 27, , ,378,496 Net income 63,73 55,985 25, ,38 Cash dividends 7,91 8,588 8, ,757 Total assets 687,831 68,491 67, ,184,297 Shareholders equity 534, ,99 487, ,962,477 Yen Change in % U.S. dollars Per share: Net income % $3.85 Cash dividends Notes: 1. U.S. dollar figures are translated from yen, at the rate of to U.S.$ 1, the approximate rate of exchange on March 31, Net income per share is computed based on the weighted average number of shares outstanding during the respective years. 3. Cash dividends per share are based on the cash dividends paid in respect of the relevant period. Net Sales Operating Income Return on Equity Net Income (Millions of yen) 4, (Millions of yen) 1, (%) 15 (Millions of yen) 75, 3, 8, 12 6, 6, 9 45, 2, 4, 6 3, 1, 2, 3 15, FY FY FY FY

4 M essage from the President Review of Operations During the year ended March 31, 29, the global economy faced an unprecedented stringent setback in the second half against the backdrop of confusion in the global financial markets and the resulting credit crunch, which involved not only the advanced countries but also the emerging economies, following the subprime housing loan crisis and the hike of crude oil and raw material prices. In these circumstances, the SMC Group continued to focus its group-wide efforts on reinforcing sales capabilities in Japan and overseas and further reducing diverse expenses in all aspects of its business operations in response to vehement changes in the demand environment in conjunction with strengthened rationalization and the cost-reduction activities of employees. As a result, consolidated net sales of the SMC Group for the year ended March 31, 29, decreased 2.8% from the previous term to 283,437 million. Consolidated operating income decreased 43.3% to 49,726 million, affected by such factors as the decline in net sales and the negative effect of foreign exchange fluctuations. Net income decreased 53.6% to 25,978 million, reflecting such factors as a foreign exchange loss and an unrealized loss on investment securities. Net cash provided by operating activities for the year ended March 31, 29, was 35,929 million, a 22,936 million decrease from the previous year. Major factors of this contribution were 41,24 million in income before income taxes and minority interests and 13,537 million in depreciation and amortization, which were partly offset by 25,834 million in income taxes paid. Net cash used in investing activities was 27,381 million, a 2,583 million decrease from a year earlier. This was mainly attributable to 17,573 million for purchases of property, plant and equipment and a 13,729 million increase in time deposits. Net cash used in financing activities was 6,877 million, down 23,845 million from a year earlier. This was mainly attributable to 8,229 million for dividends paid. As a result of the above cash flows, a 19,636 million decline in the effect of exchange rate changes and a 1,283 million increase due to a change in the scope of consolidation (inclusion of two consolidated subsidiaries), the SMC Group s cash and cash equivalents at the end of the year decreased 16,682 million, or 12.2% year over year, to 119,97 million. The Company celebrated its 5th anniversary on April 27, 29. Management deeply appreciates the warm-hearted support and encouragement of its customers and business partners. Although the current business environment is extremely harsh, we are determined to survive the crisis via the concerted efforts of the SMC Group. BASIC POLICY ON PROFIT APPROPRIATION The SMC Group maintains a basic long-term policy of ensuring stable dividends to shareholders, while con-stantly improving its financial structure to prepare for changing business conditions and the future development of promising businesses. During the fiscal year ended March 31, 29, by a resolution of the Board of Directors, the Company purchased 2,271 shares of treasury stock by market buying at the acquisition price of 23 million. 2

5 MEDIUM-AND LONG-TERM MANAGEMENT STRATEGY AND OUR TASKS AHEAD The SMC Group is a trailblazer within the industry for the establishment of sales, production, logistics and R&D bases overseas in view of global business development. Today, competitors are seeking international alliances. The Group aims to further globalize its overall corporate activities from R&D and the procurement of raw materials to manufacturing and marketing. To expand its market shares worldwide much further over the medium to long term, the Group intends to carry out the following measures: (1) Globalize its products For the globalization of its products, the SMC Group will reinforce the R&D functions shouldered by the three R&D bases in Japan, the United States and Europe and collect demand and technological information to develop and manufacture optimum products that meet specific local needs in each country and comply with international standards. (2) Globalize its distribution For the globalization of distribution, the Group will reinforce our overseas production bases to establish an effective groupwide logistics system that enables us to provide costcompetitive standard products and applicationspecific custom products with short delivery times in every region of the world. SMC intends to actively dispatch its sales staff to help Group companies strengthen their marketing capabilities. (3) Promote rationalization The SMC Group will make thorough efforts to reduce manufacturing costs including the reform of manu-facturing methods, an enhanced commitment by R&D departments to reduce costs, the expansion of overseas manufacturing, the promotion of a global procurement strategy and more efficient capital investment. Moreover, the Group will improve logistics efficiency by completing logistics bases worldwide and reducing transportation expenses, and review its current indirect operations to streamline administrative departments. ESTIMATED PERFORMANCE IN THE COMING YEAR For the fiscal year ending March 31, 21, the setback of the global economy will likely continue and the momentum of recovery in demand for pneumatic equipment is expected to remain weak. Under these circumstances, the SMC Group will aggressively promote measures to restrict all kinds of expenses and enhance profit-gaining capability through cost-reduction activities at all levels and improvement campaigns to raise productivity. Accordingly, the SMC Group expects, at this time, to attain consolidated net sales of 17, million, or a year-over-year decline of 4.%, and consolidated net income of 2, million, a 92.3% decline, for the fiscal year ending March 31, 21. Katsunori Maruyama President June 29 3

6 Corporate Governance 4 BASIC VIEWS ON CORPORATE GOVERNANCE SMC recognizes the need to reinforce corporate governance, ensuring speedy decision making and transparency of management, as a critical managerial issue in the pursuit of higher corporate value and the complete protection of shareholders rights. CURRENT STATUS OF CORPORATE GOVERNANCE IMPLEMENTED 1 Corporate organs SMC adopts the statutory auditor system, and three of the four statutory auditors are outside auditors as defined in Article 2, Paragraph 16, of the Companies Act. These outside auditors have no special interests in the SMC Group including business transactions. The 19 directors serve as the persons responsible for business execution departments or overseas consolidated subsidiaries and ensure that the businesses under their charge are conducted in compliance with the relevant laws and in an appropriate manner. Moreover, they oversee each other through the Board of Directors. To further improve director accountability, SMC decided the directors term of office up to one year. 2 Improvement of internal control systems and risk management systems In accordance with the resolution of the Board of Directors regarding basic guidelines for the establishment of internal control systems pursuant to the Corporation Law, SMC now addresses the streamlining of more effective and efficient internal control systems. Furthermore, SMC is active in streamlining systems to ensure the propriety of financial reports in accordance with the Financial Instruments and Exchange Act. The outline of the aforementioned Board resolution is as follows: (a) Systems to ensure compliance of the execution of duties by directors and employees with laws, regulations and the Articles of Incorporation SMC shall establish the SMC Ethical and Corporate Principles that declare the basic management philosophy of the SMC Group and the SMC Group Code of Conduct, according to which officers and employees autonomously discipline themselves, in order to create a company trusted by not only customers and business partners but also by society through open and honest business activities in compliance with statutes and ethical norms. SMC shall establish the Compliance Committee, which will be chaired by the President and consist of the Senior General Managers of the respective Headquarters as the responsible persons for the business execution departments and outside experts such as legal advisers, in order to enhance the compliance systems. SMC shall improve the group-wide systems for internal whistle-blowing and the notification of acts that might fall under conflicts of interest in order to prevent and correct any fraudulent acts. The relevant systems cover all the Group companies. SMC shall have no contact, transaction or relation with any antisocial forces. Should any unreasonable demand be claimed, SMC shall systematically take a resolute position as a sound corporate entity in close collaboration with lawyers and the Police. (b) Systems to preserve and manage information pertaining to the execution of duties by directors SMC shall streamline internal regulations including the information management rules and take necessary measures to prevent the leakage of important information such as trade secrets. SMC shall establish the Information Disclosure Committee, which will be chaired by the President and consist of the Senior General Managers of the respective Headquarters and outside experts such as Certified Public Accountants, for the appropriate information disclosure at the proper timing. (c) Rules and other systems regarding risk management Each department of SMC shall check for and point out risks specific to its own business operations, take the necessary countermeasures and study how to cope with the situation if a risk is elicited. SMC shall establish a dedicated department, section or committee that will exclusively engage in handling especially significant risks such as quality, environmental measures, compliance and disaster prevention. Such a department, section or committee shall take the necessary countermeasures and study how to cope with the situation if a risk is elicited. Any and all information related to complaints on quality shall be reported to the Chairman and the President regardless of the value in the damage to our customer(s). Whether appropriate follow-up measures and measures to prevent a recurrence have been taken shall be verified later. SMC shall improve and operate the risk management

7 systems required to ensure the reliability of financial reports (internal controls regarding financial reporting) and endeavor to improve the effectiveness thereof through periodic evaluation. (d) Systems to ensure the efficient execution of duties by directors SMC shall establish the Management Council to facilitate speedier sharing of information. SMC shall set out medium- and long-term business plans, determine annual policies and budgets at the levels of the parent, each department and each subsidiary and carry out appropriate operational management and unified group strategies. The four statutory auditors conduct audits on the legitimacy and propriety of SMC s corporate management in various ways, including attendance at important corporate meetings such as the Board of Directors; listening to reports from directors, employees and the Independent Auditors; and information exchanges at the Board of Statutory Auditors meetings, which are held monthly, in principle. The Audit Office, the Internal Control Promotion Office, the statutory auditors and the Independent Auditors cooperate closely with each other by sharing the necessary information on the status of audits performed, through the exchange of the respective reports and liaison conferences. (e) Systems to ensure efficient audits by the statutory auditors SMC shall assign certain employees to assist with the duties of the statutory auditors. The independence of such employees as assistants for the statutory auditors shall be guaranteed in terms of personnel concerns. The statutory auditors shall have periodic meetings with the President, the Independent Auditors and the staff of the internal auditing department to improve the auditing environment and enhance cooperation with each other. 3 Internal audits, internal control audits and audits conducted by the statutory auditors The Audit Office, which has six staff reporting directly to the President, conducts internal audits within the SMC Group. The audits include auditing the propriety of the performed business operations of the respective Group companies, and the audit results are reported to the President, the applicable responsible directors and the statutory auditors. Furthermore, the Audit Office conducts mission audits, as required, by employees who have the expertise to complement the internal audit function. The Internal Control Promotion Office, which has five staff reporting directly to the President, conducts internal control audits (with independent evaluation). In collaboration with employees who have the expertise, the Internal Control Promotion Office evaluates the improved and operating conditions of the internal control systems regarding financial reporting, provides instruction on the areas that need improvement and reports the results thereof to the President, the applicable responsible directors and the statutory auditors to raise the effectiveness of internal controls regarding financial reporting. 4 Accounting audits (a) Certified Public Accountants and years of service as an auditor Takashi Nishiyama, Certified Public Accountant (Representative Associate Partner, O-YU KYODO JIMUSHO): has engaged in auditing services for 21 years on an ongoing basis Hideo Niwa, Certified Public Accountant (Representative Associate Partner, O-YU KYODO JIMUSHO): Eizaburo Koinuma, Certified Public Accountant (Representative Associate Partner, O-YU KYODO JIMUSHO): Certified Public Accountant Takashi Nishiyama retired from the post of Independent Auditor due to the maturity of his term of office at the conclusion of the 5th Ordinary General Meeting of Shareholders of SMC Corporation held on June 26, 29. As his successor, Takashi Saito, Certified Public Accountant (Representative Associate Partner, O-YU KYODO JIMUSHO), was newly appointed as an Independent Auditor at said Ordinary General Meeting of Shareholders. (b) Composition of assistants Eleven Certified Public Accountants who belong to O-YU KYODO JIMUSHO and one Certified Information System Auditor (c) Judging system The examination of the opinions to be expressed by the relevant Certified Public Accountants is made by several committee members who are not engaged in the duty of audit certification for SMC at the Judging Committee, which is permanently established by O-YU KYODO JIMUSHO. 5

8 Quickly Meeting the Sophisticated and Di Pursuing the Unlimited Possibilities of Pneumatic Equipment and Automatic Controls Number of Engineers R&D Expenses & Ratio to Net Sales In addition to Japan, North America and England, the Group has established similar (Persons) 1,6 (Millions of yen) 2, (%) 1 technical centers in China and Germany as core bases to engage in collaborative R&D 1,2 16, 8 activities to meet a variety of customer needs with high technological standards. The Group 8 12, 8, 6 4 now offers excess of 6, items from standard products to customized products. The pursuit of higher customer satisfaction enhances our expertise in pneumatic control 4 4, 2 technology. FY FY R&D Expenses Ratio to Net Sales R&D Expenses Strong Confidence and High Evaluation among World s Customers The Group was an early promoter of the Four-Pillar Global Frame Network for international business operations with a focus on Japan, North America, Europe and Asia/Oceania. The SMC Group had 32 subsidiaries and affiliates in 5 nations as of March 31, 29. The Group has established a backbone system to ensure the provision of homogenous products and support activities such as those offered in Japan in every region in which we have operated our overseas business activities for more than 4 years. Having established locality-oriented, flexible responses and swift delivery of individualized customer requests, the Group boasts an overwhelming share of more than 6% in the Japanese market Others and a global market share of 26%. Automation Control Equipment Business Division (Overseas) Automation Control Equipment Business Division (Domestic) (addition to property, plant and equipment) (Millions of yen) 2, 16, 12, 8, 4, Capital Expenditures FY

9 versifying Needs of Customers Worldwide Steady Expansion of Production, Sales and Service Bases Consolidated Net Sales & Overseas Sales (Millions of yen) 4, 3, 2, 1, PERCENTAGE OF Net Sales BY AREA (Composite) (%) The Group now has 17 domestic and 13 overseas plants and streamlines its global production system to enable the SMC Group s optimized production that emphasizes cost competitiveness. The number of locally incorporated companies and agencies as sales and service bases around the world has been rising every year. Such concerted efforts are behind our high quality, short delivery times and low costs. FY Consolidated Net Sales Overseas Sales Japan Europe Asia and Oceania North America Results by Area Domestic sales decreased for our products bound for such industries as semiconductors, automobiles and machine tools, all of which are major demand-related industries for the SMC Group and were significantly affected by the largescale production adjustment due to the rapid decline in global demand that started in the second half of the year ended March 31, 29. As a result, SMC s net sales in Japan decreased 22.8% year over year to 22,712 million. Operating income decreased 46.8% to 32,721 million, affected mainly by such factors as the decline in sales, heavier burden of fixed costs due to the production decline and the impact of exchange rate fluctuations. During the year under review, SMC s net sales in North America decreased 18.1% to 38,734 million due to negative factors such as decreases in demand in the semiconductor, electric appliance and automotive industries and a decline resulting from unfavorable fluctuations in foreign exchange rates. Operating income dropped 35.9% year over year to 1,324 million, primarily owing to the decline in sales. SMC s net sales in Europe decreased 22.5% to 51,62 million primarily due to deteriorated results in association with the worsened demand environment for the major consolidated subsidiaries and a decline in sales resulting from unfavorable fluctuations in foreign exchange rates. Operating income fell 75.4% year over year to 1,418 million, reflecting the decline in sales and an increase in selling, general and administrative expenses at several subsidiaries. SMC s net sales in Asia and others decreased 13.5% to 9,697 million, mainly due to decreases in demand for industries such as semiconductors, automobiles and machine tools, all of which were affected by the deteriorated economies in Japan, the United States and Europe; a decline in sales due to unfavorable fluctuations in foreign exchange rates; despite newly inclusion of SMC Pneumaticos do Brasil Ltda as a consolidated subsidiary. Operating income decreased 34.8% year over year to 14,71 million, reflecting the decline in sales and the adverse effect of exchange rate fluctuations, which were partly offset by the positive contribution of subsidiaries in China. 7

10 Financial Section Contents Six-Year Summary 9 Financial Review 1 Consolidated Balance Sheets 12 Consolidated Statements of Income 14 Consolidated Statements of Changes in Net Assets 15 Consolidated Statements of Cash Flows 16 Notes to Consolidated Financial Statements 17 Report of Independent Certified Public Accountants on the Consolidated Financial Statements 23 Notes Regarding Future Plans and Estimates This annual report contains projections concerning the future plans, strategies and estimated performance of SMC. These statements do not include historical data but rather are based on management s projections given the information currently available. Accordingly, these projections involve risks and uncertainties relative to the status of the economy and demand, intensifying competition, exchange rates, taxation and other regulations. 8

11 Six-Year Summary SMC Corporation and Subsidiaries Years ended March 31 Millions of yen FY28 FY27 FY26 FY25 FY24 FY23 Net sales 283, , ,689 37,827 28, ,184 Cost of sales 155, , ,7 163, , ,793 Selling, general and administrative expenses 77,816 84,44 77,718 69,153 62,354 57,216 Operating income 49,726 87,646 88,964 75,525 71,872 56,175 Net income 25,978 55,985 63,73 53,458 49,251 32,222 Total assets 67,669 68, , , , ,549 Shareholders equity 487, ,99 534, ,758 43,86 35,723 Current assets 363,348 49, , ,83 316, ,335 Current liabilities 71, ,21 16,875 99,114 92,833 78,988 Net income per share (Yen) Cash dividends per share (Yen) Return on equity (%) Return on assets (%) Equity ratio (%) Notes: 1. Net income per share is computed based on the weighted average number of shares outstanding during the respective years. 2. Cash dividends per share are based on the cash dividends paid in respect of the relevant period. 9

12 Financial Review REVIEW OF OPERATIONS Sales During the year ended March 31, 29, the global economy faced an unprecedented stringent setback in the second half against the backdrop of confusion in the global financial markets and the resulting credit crunch, which involved not only the advanced countries but also the emerging economies, following the subprime housing loan crisis and the hike of crude oil and raw material prices. Consequently, the Japanese economy quickly experienced an unprecedentedly difficult business climate, affected by such factors as significant drops in domestic and external demand, as well as the appreciation of the yen. In these circumstances, the SMC Group continued to focus its group-wide efforts on reinforcing sales capabilities in Japan and overseas and further reducing diverse expenses in all aspects of its business operations in response to vehement changes in the demand environment in conjunction with strengthened rationalization and the cost-reduction activities of employees. As a result, on a consolidated basis, net sales of the SMC Group for the year ended March 31, 29, decreased 2.8% from the previous term to 283,437 million. Cost of sales decreased 16.1% year over year to 155,895 million, resulting in a decrease of 25.9% in gross profit with a ratio of 45.% compared with 48.1% in the previous term. SG&A expenses and operating income The decrease in net sales led to a 7.8% year-over-year decline in SG&A expenses to 77,816 million, and the ratio to net sales increased to 27.5% from 23.6% for the previous term. As a result, operating income decreased 43.3% to 49,726 million and the operating margin ratio deteriorated to 17.5% from 24.5%. Net income, net income per share and dividends Consolidated net income for the year under review decreased 53.6% from the previous term to 25,978 million. The net profit ratio declined to 9.2% from 15.6% in the previous term. Net income per share decreased to from in the previous term. Regarding the annual cash dividends, our policy is to make a steady and appropriate distribution of our profit. We decided to maintain our annual dividend at the same amount as the previous year, or 12 per share. The payout ratio increased 16.5 percentage points to 31.7%. ANALYSIS OF THE FINANCIAL POSITION As of March 31, 29, the SMC Group s total assets decreased 1.7% from a year earlier to 67,669 million. Current assets decreased 11.3% to 363,348 million, reflecting such factors as a decline in notes and accounts SG&A Expenses to Net Sales Inventory Turnover Ratio Current Ratio & Fixed Ratio Interest-bearing Debts (%) 4 (X) 4 (X) 6 (Millions of yen) 48, , , , FY FY FY FY Current Ratio Fixed Ratio 1

13 receivable resulting from sales decline and a decrease in cash and cash equivalents due to payment of taxes. Investments and other assets decreased 12.1% to 149,981 million, mainly due to a decrease in investment securities as a result of the drop in stock prices. Current liabilities decreased 41.1% to 71,419 million. This decrease was mainly attributable to a decline in notes and accounts payable resulting from decreased purchases of materials and a decrease in income taxes payable due to the profit decline. Long-term liabilities increased 18.6% year over year to 46,752 million mainly due to an increase in long-term borrowings. Net assets decreased 5.8% from the previous year to 489,498 million mainly due to a decline in foreign currency translation adjustments. The equity ratio increased 4.2 percentage points to 8.2%. The return on equity decreased 5.5 percentage points to 5.2%. Cash Flows Cash flows from operating activities Net cash provided by operating activities was 35,929 million, down 22,936 million from the previous year. This was primarily attributable to a decrease of 47,445 million in income before income taxes and minority interests, an increase in inventories and a decrease in notes and accounts payable resulting from decreased purchases of materials despite a considerable decrease in notes and accounts receivable. Cash flows from investing activities Net cash used in investing activities was 27,381 million, down 2,583 million from the previous year. This was primarily attributable to 17,573 million for purchases of property, plant and equipment and a 13,729 million increase in time deposits. Cash flows from financing activities Net cash used in financing activities was 6,877 million, down 23,845 million from the previous year. This was primarily attributable to 8,229 million for dividends paid. After taking into account a decrease of 19,636 million in the effect of exchange rate changes and an increase of 1,283 million due to a change in the scope of consolidation (inclusion of two consolidated subsidiaries) along with the above factors, the SMC Group s cash and cash equivalents at the end of the year decreased 16,682 million, or 12.2%, from the previous year-end to 119,97 million. Shareholders Equity & Equity Ratio Total Assets & Return on Assets Net Income per Share Shareholders Equity Per Share (Millions of yen) 75, (%) 1 (Millions of yen) 75, (%) 1 (Yen) 1, (Yen) 8, 6, 8 6, 8 8 6, 45, 6 45, 6 6 4, 3, 4 3, , 2 15, 2 2 2, FY FY FY FY Shareholders Equity Equity Ratio Total Assets Return on Assets 11

14 SMC Corporation and Subsidiaries Consolidated Balance Sheets As of March 31, 29 (the end of FY28) and 28 (the end of FY27) Thousands of Millions of yen U.S. dollars (Note 1) FY28 FY27 FY28 ASSETS Current Assets: Cash and cash equivalents ,97 136,589 $1,22,33 Short-term investments (Note 3)... 37,528 31, ,926 Receivable - trade: Notes and accounts... 48,756 9, ,194 Inventories (Note 4) , ,884 1,387,665 Deferred income taxes (Note 11)... 9,379 11,62 95,451 Other current assets... 12,47 8, ,98 Less: Allowance for doubtful receivables... (1,44) (1,324) (1,625) 363,348 49,841 3,697,822 Investments and Other Assets: Investment securities: Subsidiaries and affiliates... 11,8 2,61 112,762 Other (Note 3 )... 22,26 35, ,993 Other assets: Refundable insurance payments... 94,442 94, ,144 Deferred income taxes (Note 11)... 1,351 8,812 15,343 Other assets... 12,995 11, ,251 Less: Allowance for doubtful receivables... (1,93) (68) (11,124) 149,981 17,619 1,526,369 Property, Plant and Equipment: Land... 19,942 18,491 22,951 Building and structures... 76,218 82, ,677 Machinery and equipment... 13, ,48 1,33,633 Other... 6,317 2,282 64,289 Less: Accumulated depreciation... (138,885) (136,836) (1,413,444) 94,34 1,31 96,16 67,669 68,491 $6,184,297 See Notes to Consolidated Financial Statements. 12

15 Thousands of Millions of yen U.S. dollars (Note 1) FY28 FY27 FY28 LIABILITIES AND NET ASSETS Current Liabilities: Payable - trade: Notes and accounts... 27,924 46,8 $ 284,185 Short-term borrowings and Current portion of long-term debt (Notes 5)... 22,924 28,66 233,299 Income taxes payable... 2,15 17,514 2,57 Accrued expenses... 1,449 14,424 16,34 Other current liabilities... 8,17 14,523 82,56 71, ,21 726,837 Long-term Liabilities: Bonds, less current portion (Note 5)... 5, 5,1 5,885 Long-term borrowings, less current portion (Notes 5)... 1,161 2,98 13,49 Accrued severance indemnities (Note 6)... 23,674 23,246 24,932 Deferred income taxes (Note 11)... 3,579 3,762 36,424 Other long-term liabilities... 4,338 4,32 44,149 46,752 39,48 475,799 Net Assets (Note 8): Common stock, par value 5 per share: Authorized - 24, thousand shares Issued - 71,869 thousand shares... 61,5 71,869 thousand shares... 61,5 62,853 Additional paid-in capital... 72,678 72, ,65 Retained earnings , ,569 4,413,79 Unrealized gain on investments... (696) 4,38 (7,83) Foreign currency translation adjustments... (35,893) 6,516 (365,286) Treasury stock, at cost... (43,18) (43,167) (439,447) 487, ,99 4,962,477 Minority Interests... 1,885 2,973 19, , ,882 4,981,661 67,669 68,491 $6,184,297 13

16 SMC Corporation and Subsidiaries Consolidated Statements of Income For the years ended March 31, 29 (FY28) and 28 (FY27) Thousands of Millions of yen U.S. dollars (Note 1) FY28 FY27 FY28 Net Sales , ,919 $2,884,561 Cost of Sales (Note 12) , ,869 1,586,556 Gross profit , ,5 1,298,5 Selling, General and Administrative Expenses (Note 12)... 77,816 84,44 791,94 Operating income... 49,726 87,646 56,65 Other Income (Expenses): Interest and dividend income... 4,674 5,896 47,568 Interest expenses... (64) (71) (6,513) Other, net (Note 9)... (12,556) (4,183) (127,784) (8,522) 1,3 (86,729) Income before income taxes and minority interests... 41,24 88, ,336 Income Taxes (Note 11): Current... 1,952 33, ,459 Deferred... 4,219 (1,493) 42,937 15,171 32, ,396 Minority Interests Net income... 25,978 55,985 $ 264,38 Yen U.S. dollars Per Share (Note 13): Net income $ 3.85 Cash dividends See Notes to Consolidated Financial Statements. 14

17 SMC Corporation and Subsidiaries Consolidated Statements of Changes in Net Assets For the years ended March 31, 29 (FY28) and 28 (FY27) Common Additional Retained stock paid-in capital earnings Net unrealized gain on investments Millions of yen Foreign currency translation Treasury stock, at cost Total shareholders' equity adjustments Balance at March 31, ,5 72, ,544 11,629 21,711 (254) 534,313 2,65 536,918 Increase/decrease during the period Cash dividends... (8,588) (8,588) (8,588) Net income... 55,985 55,985 55,985 Acquisition of treasury stocks... (42,927) (42,927) (42,927) Disposal of treasury stocks... () (1) Changes of the scope of consolidation Others... (7,321) (15,195) (22,516) 368 (22,148) Total increase/ decrease during the period... () 48,25 (7,321) (15,195) (42,913) (17,44) 368 (17,36) Balance at March 31, ,5 72, ,569 4,38 6,516 (43,167) 516,99 2, ,882 Increase/decrease during the period Cash dividends... (8,23) (8,23) (8,23) Net income... 25,978 25,978 25,978 Acquisition of treasury stocks... (23) (23) (23) Disposal of treasury stocks... (2) Changes of the scope of consolidation Others... (5,4) (42,49) (47,413) (1,88) (48,51) Total increase/ decrease during the period... 18,13 (5,4) (42,49) (13) (29,296) (1,88) (3,384) Balance at March 31, ,5 72, ,699 (696) (35,893) (43,18) 487,613 1, ,498 Minority interests Total net assets Common Additional Retained stock paid-in capital earnings Net unrealized gain on investments Thousands of U.S. dollars (Note 1) Foreign currency translation Treasury stock, at cost Total shareholders' equity adjustments Balance at March 31, $62,853 $739,65 $4,229,279 $43,843 $ 66,314 $(439,314) $5,26,625 $3,256 $5,29,881 Increase/decrease during the period Cash dividends... (83,757) (83,757) (83,757) Net income ,38 264,38 264,38 Acquisition of treasury stocks... (234) (234) (234) Disposal of treasury stocks... (2) Changes of the scope of consolidation.. 3,98 3,98 3,98 Others... (5,926) (431,6) (482,526) (11,72) (493,598) Total increase/ decrease during the period ,511 (5,926) (431,6) (133) (298,148) (11,72) (39,22) Balance at March 31, $62,853 $739,65 $4,413,79 $ (7,83) $(365,286) $(439,447) $4,962,477 $19,184 $4,981,661 Minority interests Total net assets See Notes to Consolidated Financial Statements. 15

18 SMC Corporation and Subsidiaries Consolidated Statements of Cash Flows For the years ended March 31, 29 (FY28) and 28 (FY27) Thousands of Millions of yen U.S. dollars (Note 1) FY28 FY27 FY28 Cash Flows from Operating Activities: Income before income taxes and minority interests... 41,24 88,649 $ 419,336 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization... 13,537 13,71 137,767 Loss on impairment of long-lived assets... 3,857 39,253 Equity in profit of affiliates... (47) Increase (Decrease) in accrued severance indemnities... 6 (152) 6,16 Decrease in allowance for Directors' bonuses... (4) Increase (Decrease) in allowance for doubtful receivables (141) 3,236 Interest, net... (4,279) (5,556) (43,547) Exchange loss... 1,369 1,197 13,933 (Gain) loss on sales of investment securities (198) 366 Unrealized loss on holding investment securities... 3,366 1,713 34,256 (Increase) Decrease in trade receivables... 34,748 (3,31) 353,633 Increase in inventories... (13,983) (4,84) (142,36) Decrease in trade payables... (11,858) (4,842) (12,68) Increase in other current assets... (4,819) (1,21) (49,43) Increase (Decrease) in other current liabilities... (6,62) 1,684 (67,189) Other, net... () 1,2 () 57,494 88,42 585,121 Interest received... 4,74 5,853 47,873 Interest paid... (435) (32) (4,427) Income taxes paid... (25,834) (35,51) (262,915) Other net Net cash provided by operating activities... 35,929 58, ,652 Cash Flows from Investing Activities: (Increase) Decrease in short-term investments... (8,714) 2,31 (88,683) Proceeds from sale of investment securities... 1,124 8,674 11,439 Payment for purchase of investment securities... (837) (17,123) (8,518) Payment for purchase of property, plant and equipment... (17,573) (2,131) (178,842) Increase in refundable insurance payments... (57) (4,796) (58) Other, net... (1,324) 1,111 (13,474) Net cash used in investing activities... (27,381) (29,964) (278,658) Cash Flows from Financing Activities: Increase (Decrease) in short-term borrowings... (93) 21,88 (9,465) Increase (Decrease) in long-term borrowings... 2,738 (94) 27,865 Payment for retirement of bonds... (425) (2) (4,325) Treasury stock... (42,927) Cash dividends paid and others... (8,229) (8,585) (83,747) Other, net... (31) (4) (316) Net cash used in financing activities... (6,877) (3,722) (69,988) Effect of Exchange Rates Changes on Cash and Cash Equivalents... (19,636) (6,496) (199,837) Net Increase (Decrease) in Cash and Cash Equivalents... (17,965) (8,317) (182,831) Cash and Cash Equivalents at Beginning of Period , ,715 1,39,77 Cash and Cash Equivalents of Newly Consolidated Subsidiaries... 1, ,57 Cash and Cash Equivalents at End of Period ,97 136,589 $1,22,33 See Notes to Consolidated Financial Statements. 16

19 SMC Corporation and Subsidiaries Notes to Consolidated Financial Statements 1. Basis of Presenting Consolidated Financial Statements The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Securities and Exchange Laws of Japan and its related accounting regulations, and in conformity with accounting principles and practice generally accepted in Japan (hereinafter referred to as the GAAP of Japan ), which are different in certain respects as to application and disclosure requirements of International Accounting Standards. In preparing the consolidated financial statements, certain reclassifications have been made to the consolidated financial statements issued in Japan in order to present them in a form which is more familiar to readers outside Japan. Also, certain 2. SummAry of Significant Accounting Policies (a) Principles of consolidation The consolidated financial statements as at, and for the year ended March 31, 28 and 29, include the accounts of SMC Corporation (the Company ), SMC Corporation of America, SMC Pneumatics (Canada) Ltd., SMC Corporation (Mexico) SA. de CV., SMC Pneumatics (Aust.) Pty. Ltd., SMC Pneumatics (N.Z.) Ltd., SMC Manufacturing (Aust.) Pty. Ltd., SMC Pneumatik GmbH., SMC Pneumatics (U.K.) Ltd., SMC Italia S.p.A., SMC Pneumatik AG, SMC Pneumatique SA, SMC Pneumatik GmbH (Austria), SMC España SA, SMC Pneumatics Sweden AB, SMC Pneumatics (Ireland) Ltd., SMC Pneumatik LLC, SMC Manufacturing (Singapore) Pte. Ltd., SMC Pneumatics (S.E.A) Pte. Ltd., SMC Pneumatics (Hong Kong) Ltd., SMC Pneumatics (Taiwan) Co., Ltd., SMC Pneumatics (S.E.A) Sdn. Bhd., SMC Pneumatics (India) Pvt. Ltd., SMC Pneumatics Korea Co., Ltd., SMC (China) Co., Ltd., SMC (Beijing) Manufacturing Co. Ltd, SMC Thailand Ltd., Toyo Warehouse and Transportation Co., Ltd., Nihon Kizai Co., Ltd., Seigyo Kizai Co., Ltd. The consolidated financial statements as at, and for the year ended March 31, 28, include the equity in profit of Advanced Pressure Technology. The consolidated financial statements as at, and for the year ended March 31, 29, also include the accounts of SMC Pneumãicos do Brasil Ltda. and Advanced Pressure Technology due to the increasing significance of their aggregate impact to the consolidated financial statements. Accounts of SMC (China) Co., Ltd. and SMC (Beijing) Manufacturing Co., Ltd, SMC Corporation (Mexico) SA. de CV. And SMC Pneumatik LLC, whose financial year-end of December 31, 27 and 28 and accounts of SMC Pneumãicos do Brasil Ltda., whose financial year-end of December 31, 28 have been adjusted for significant transactions to properly reflect their financial positions at, and the results of operations for the year ended March 31, 28 and 29. The accounts of the other subsidiaries were not included in the consolidated financial statements due to their aggregate sales, total assets, net income and retained earnings were insignificant. Investments in non-consolidated sub sidiaries and affiliates are carried at cost due to their immateriality. All significant intercompany accounts and transactions have been eliminated. (b) Cash and cash equivalents Cash and cash equivalents include all highly liquid investments, generally with original maturities of three months or less. prior accounts have been reclassified to conform to the FY28 presentation. Japanese yen amounts are presented in millions of yen and are rounded to the nearest million yen. U.S. dollar amounts included herein are solely for convenience for readers and have been translated, as a matter of arithmetical computation only, at the rate of to U.S.$1, the exchange rate prevailing at March 31, 29. This translation should not be construed as a representation that the yen amounts actually represent or have been or could be converted into U.S. dollars at this or at any other rate. (c) Short-term investments and investment securities The GAAP of Japan requires the classification of short-term investment and investment securities (except for nonconsolidated subsidiaries and affiliates ) of the Company and its subsidiaries into three categories as follows: i) Debt securities that are expected to be held-to-maturity: carried at accumulated cost using straight-line method ii) Other securities primarily designated as available-for-sale, whose fair values are readily determinable: carried at fair value with unrealized gains or losses included in Shareholders Equity as unrealized gain or loss on investments net of applicable income taxes iii) Other securities primarily designated as available-for-sale, whose fair values are not readily determinable: carried at cost using moving average method (d) Derivative financial instruments The Company and certain of its subsidiaries have entered into foreign exchange agreements and interest rate swap agreements to manage currency and interest rate exposures. These financial instruments include foreign exchange forward contracts and interest rate swap agreements, are used in the Company and its subsidiaries risk management of foreign currency and interest rate risk exposures of its financial assets and liabilities. All derivatives are stated at fair value and the recognition of gain / loss resulting from changes in fair value of all hedging instruments is deferred until the related gain / loss on the hedged item is recognized. However, when an interest rate swap agreement meets certain conditions, the net amount to be paid or received under the contract is added to or deducted from the interest expenses on the hedged item. (e) Inventories Inventories are stated principally at lower of cost or market, cost being determined principally by the monthly average method. (f) Property, plant and equipment Property, plant and equipment (except leased assets) are principally stated at cost. Depreciation of property, plant and equipment of the Company and its consolidated domestic subsidiaries is computed primarily under the declining balance method over the estimated useful lives of the assets, while the straight-line method is applied to the buildings (excluding equipment of building) of the Company and its consolidated domestic subsidiaries newly acquired on and after April 1, 1998, and to the property, plant and equipment of consolidated 17

20 foreign subsidiaries substantially. The range of useful lives is principally from 3 to 5 years for building and structures and from 2 to 2 years for machinery and equipment. (g) Intangible assets Intangible assets (except leased assets) including software are stated at cost. Amortization of intangible assets of the Company and its consolidated domestic subsidiaries is computed under the straight-line method, while its consolidated foreign subsidiaries apply arranged straight-line methods allowed by applicable accounting principle. The software utilized by the Company and its consolidated subsidiaries is amortized over the estimated useful lives (mainly 5 years). (h) Allowance for doubtful receivables The Company and its consolidated domestic subsidiaries have provided an allowance for doubtful receivables on the basis of their past credit loss experience, and on the individual basis, estimated uncorrectable amount have accrued for troubled receivables. Foreign subsidiaries have provided an allowance for doubtful receivables at an estimated uncollectible amount on an individual basis. (i) Foreign currency translation Foreign currency deposits and foreign currency receivables and payables are translated into Japanese yen at the rates prevailing at the balance sheet date, except for those subject to forward contracts, which are translated at the contracted rates. All asset and liability of foreign subsidiaries are translated at the rates of exchange prevailing at the balance sheet date. Income and expense that are translated at average rates of exchange during the fiscal period. Resulting translation adjustments are charged to Minority Interests and Shareholders Equity. (j) Leases Financial leases, which contract was made on and after April 1, 28, other than those that are deemed to transfer the ownership of the leased assets to the lessees are principally accounted for by the method that should be considered it as assets acquisition. Financial leases, which contract was made on or before March 31, 28, other than those that are deemed to transfer the ownership of the leased assets to the lessees are principally accounted for by the method that is applicable to ordinary operating leases. (k) Per share information Net income per share has been computed based on a weighted average number of shares of common stock outstanding during the respective fiscal year. The GAAP of Japan requires deductions of the amounts, with which common stockholders are not vested (e.g. payment of directors and statutory auditors bonuses), from net income at computing net income per share. Cash dividends per share are based on the cash dividends paid in respect of the relevant period. 3. Short-Term Investments and Investment Securities - Other Information that required to be disclosed in the Notes of the consolidated financial statements by the regulations and rules on disclosures under the Securities and Exchange Laws of Japan, as amended to confirm with the certain reclassification of account balances made to present the consolidated financial statements, consisted of the following: (a) At March 31, 28 and 29, Bonds and debentures primarily designated as held-to-maturity whose fair value were readily determinable were as follows: Millions of yen Millions of yen Thousands of U.S. dollars FY28 FY27 FY28 Cost Fair Gains/ Fair Gains/ Fair Gains/ Cost Cost value Losses value Losses value Losses Bonds and debentures $8,712 $8,712 $ (b) At March 31, 28 and 29, other securities primarily designated as available-for-sale whose fair values were readily determinable were as follows: Millions of yen Millions of yen Thousands of U.S. dollars FY28 FY27 FY28 Cost Fair Gains/ Fair Gains/ Fair Gains/ Cost Cost value Losses value Losses value Losses Stocks... 12,21 1,2 (1,821) 12,252 19,112 6,86 $122,339 $13,86 $(18,533) Others... 14,921 12,941 (1,98) 15,983 16, , ,72 (2,15) Total... 26,942 23,141 (3,81) 28,235 35,454 7,219 $274,191 $235,58 $(38,683) (c) For the years ended March 31, 28 and 29, proceeds from sales of other securities designated as available-for-sale with resulting gains and losses were as follows: Millions of yen Millions of yen Thousands of U.S. dollars FY28 FY27 FY28 Proceeds Gross Gross Proceeds Gross Gross Proceeds Gross Gross from realized realized from realized realized from realized realized sales gains losses sales gains losses sales gains losses Available-for-sale securities... 1, , $11,714 $326 $794 18