TEIKOKU ELECTRIC MFG. CO., LTD. Consolidated Financial Statements for the Year Ended March 31, 2016 and Independent Auditor's Report

Transcription

1 TEIKOKU ELECTRIC MFG. CO., LTD. Consolidated Financial Statements for the Year Ended March 31, 2016 and Independent Auditor's Report

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3 TEIKOKU ELECTRIC MFG. CO., LTD. Consolidated Balance Sheet March 31, 2016 (Note 1) ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 10) 9,545,296 9,590,401 $ 84,756,671 Short-term investments (Notes 3 and 10) 376,713 1,199,582 3,344,989 Receivables (Notes 10 and 13): Trade notes 1,173,958 1,116,977 10,424,067 Trade accounts 5,940,249 5,820,783 52,745,952 Other 297, ,942 2,645,469 Allowance for doubtful accounts (295,101) (308,064) (2,620,329) Inventories (Note 4) 4,273,817 3,980,549 37,949,010 Deferred tax assets (Note 8) 428, ,498 3,808,354 Prepaid expenses and other current assets 215, ,815 1,913,458 Total current assets 21,957,256 22,222, ,967,641 PROPERTY, PLANT AND EQUIPMENT (Note 5): Land 1,688,115 1,688,120 14,989,477 Buildings and structures 5,507,092 5,548,354 48,899,767 Machinery and equipment 4,847,541 4,780,623 43,043,344 Lease assets 1,036, ,189 9,207,226 Construction in progress 923, ,206 8,199,463 Other 1,189,451 1,183,031 10,561,629 Total 15,192,541 14,282, ,900,906 Accumulated depreciation (8,356,306) (7,856,726) (74,199,126) Net property, plant and equipment 6,836,235 6,425,797 60,701,780 INVESTMENTS AND OTHER ASSETS: Investment securities (Notes 3 and 10) 1,423,201 1,739,347 12,637,194 Software 420,651 39,813 3,735,140 Software in progress 399,290 Asset for retirement benefits (Note 6) 1,231 21,487 10,930 Deferred tax assets (Note 8) 287, ,095 2,550,005 Other assets 247, ,005 2,200,023 Allowance for doubtful accounts (25,400) (29,800) (225,537) Total investments and other assets 2,354,631 2,544,237 20,907,755 TOTAL 31,148,122 31,192,517 $ 276,577,176 (Note 1) LIABILITIES AND EQUITY CURRENT LIABILITIES: Short-term bank loans (Notes 5 and 10) 1,093, ,418 $ 9,706,615 Current portion of long-term lease obligations 177, ,027 1,580,373 Payables (Notes 10 and 13): Trade notes 642, ,610 5,709,140 Trade accounts 1,387,201 1,355,149 12,317,534 Notes and accounts payable-construction and other 551, ,851 4,896,203 Income taxes payable (Note 10) 196, ,982 1,745,488 Accrued expenses 640,223 1,017,878 5,684,803 Advances received 509, ,007 4,526,602 Deferred tax liabilities (Note 8) 24, , ,340 Other current liabilities 244, ,860 2,173,131 Total current liabilities 5,468,966 6,308,851 48,561,229 LONG-TERM LIABILITIES: Long-term lease obligations 398, ,556 3,537,103 Liability for retirement benefits (Note 6) 1,007, ,209 8,944,863 Deferred tax liabilities (Note 8) 179,134 31,864 1,590,605 Other long-term liabilities 183, ,209 1,629,480 Total long-term liabilities 1,768,365 1,664,838 15,702,051 CONTINGENT LIABILITIES (Note 11) EQUITY (Notes 7 and 14): Common stock authorized, 69,200,000 shares; issued, 20,400,138 shares in 2016 and ,118,119 3,118,119 27,687,075 Capital surplus 3,306,348 3,306,348 29,358,444 Retained earnings 16,381,219 15,266, ,455,679 Treasury stock at cost, 12,750 shares in 2016 and 2015 (9,727) (9,727) (86,366) Accumulated other comprehensive income: Unrealized gain on available-for-sale securities 400, ,727 3,556,698 Foreign currency translation adjustments 860,052 1,016,064 7,636,759 Defined retirement benefit plans (145,775) (92,788) (1,294,393) Total equity 23,910,791 23,218, ,313,896 TOTAL 31,148,122 31,192,517 $ 276,577,176 See notes to consolidated financial statements

4 TEIKOKU ELECTRIC MFG. CO., LTD. Consolidated Statement of Income Year Ended March 31, 2016 (Note 1) NET SALES (Note 13) 20,411,129 22,083,272 $ 181,238,936 COST OF SALES 12,703,271 13,558, ,797,643 Gross profit 7,707,858 8,524,915 68,441,293 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 9) 5,567,799 6,071,044 49,438,814 Operating income 2,140,059 2,453,871 19,002,479 OTHER INCOME (EXPENSES): Interest and dividend income 47,815 45, ,575 Interest expense (33,677) (39,908) (299,031) Foreign exchange gain (loss) net (223,174) 429,843 (1,981,657) Other net 53, , ,994 Other income (expenses) net (155,767 ) 576,622 (1,383,119 ) INCOME BEFORE INCOME TAXES 1,984,292 3,030,493 17,619,360 INCOME TAXES (Note 8): Current 652,077 1,035,898 5,790,066 Deferred (68,342) 1,245 (606,833) Total income taxes 583,735 1,037,143 5,183,233 NET INCOME 1,400,557 1,993,350 12,436,127 NET INCOME ATTRIBUTABLE TO OWNERS OF THE PARENT 1,400,557 1,993,350 $ 12,436,127 Yen PER SHARE OF COMMON STOCK (Note 2.q): Basic net income* $0.61 Cash dividends applicable to the year* * Per share figures have been restated, as appropriate, to reflect a two-for-one stock split effected October 1, See notes to consolidated financial statements

5 TEIKOKU ELECTRIC MFG. CO., LTD. Consolidated Statement of Comprehensive Income Year Ended March 31, 2016 (Note 1) NET INCOME 1,400,557 1,993,350 $ 12,436,127 OTHER COMPREHENSIVE (LOSS) INCOME (Note 12): Unrealized gain (loss) on available-for-sale securities (214,172) 225,270 (1,901,719) Foreign currency translation adjustments (156,012) 400,589 (1,385,300) Defined retirement benefit plans (52,987) 4,137 (470,489) Total other comprehensive (loss) income (423,171) 629,996 (3,757,508) COMPREHENSIVE INCOME 977,386 2,623,346 $ 8,678,619 TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Owners of the parent 977,386 2,623,346 $8,678,619 See notes to consolidated financial statements

6 TEIKOKU ELECTRIC MFG. CO., LTD. Consolidated Statement of Changes in Equity Year Ended March 31, 2016 Thousands Number of Shares of Common Stock Outstanding* Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income Unrealized Gain Foreign (Loss) on Currency Available-for-Sale Translation Securities Adjustments Defined Retirement Benefit Plans Total Equity BALANCE, APRIL 1, 2014 (as previously reported) 18,187,494 2,116,824 1,904,614 13,462,453 (543,654 ) 389, ,475 (96,925 ) 17,848,244 Cumulative effect of accounting change (Note 2.k) 41,732 41,732 BALANCE, APRIL 1, 2014 (as restated) 18,187,494 2,116,824 1,904,614 13,504,185 (543,654 ) 389, ,475 (96,925 ) 17,889,976 Net income attributable to owners of the parent 1,993,350 1,993,350 Cash dividends, per share* (231,450) (231,450) Purchase of treasury stock (106) (176) (176) Disposal of treasury stock (Note 7) 700, , , ,542 Issuance of new shares (Note 7) 1,500,000 1,001,295 1,001,295 2,002,590 Net change in the year 225, ,589 4, ,996 BALANCE, MARCH 31, ,387,388 3,118,119 3,306,348 15,266,085 (9,727 ) 614,727 1,016,064 (92,788 ) 23,218,828 Net income attributable to owners of the parent 1,400,557 1,400,557 Cash dividends, per share* (285,423) (285,423) Net change in the year (214,172) (156,012) (52,987) (423,171) BALANCE, MARCH 31, ,387,388 3,118,119 3,306,348 16,381,219 (9,727 ) 400, ,052 (145,775 ) 23,910,791 Common Stock Capital Surplus Retained Earnings Treasury Stock (Note 1) Accumulated Other Comprehensive Income Unrealized Gain Foreign (Loss) on Currency Available-for-Sale Translation Securities Adjustments Defined Retirement Benefit Plans Total Equity BALANCE, MARCH 31, 2015 $ 27,687,075 $ 29,358,444 $ 135,553,946 $ (86,366 ) $ 5,458,417 $ 9,022,059 $ (823,904 ) $ 206,169,671 Net income attributable to owners of the parent 12,436,127 12,436,127 Cash dividends, $0.12 per share* (2,534,394) (2,534,394) Net change in the year (1,901,719) (1,385,300) (470,489) (3,757,508) BALANCE, MARCH 31, 2016 $ 27,687,075 $ 29,358,444 $ 145,455,679 $ (86,366 ) $ 3,556,698 $ 7,636,759 $ (1,294,393 ) $ 212,313,896 * Shares and per share figures have been restates, as appropriate, to reflect a two-for-one stock split effected October 1, See notes to consolidated financial statements

7 TEIKOKU ELECTRIC MFG. CO., LTD. Consolidated Statement of Cash Flows Year Ended March 31, 2016 (Note 1) OPERATING ACTIVITIES: Income before income taxes 1,984,292 3,030,493 $ 17,619,360 Adjustments for: Income taxes paid (988,181) (936,976) (8,774,475) Depreciation and amortization 857, ,452 7,609,812 Foreign exchange loss (gain) net 61,991 (222,198) 550,448 Changes in assets and liabilities: Increase in notes and accounts receivable (343,570) (47,433) (3,050,700) (Increase) decrease in inventories (354,210) 99,604 (3,145,182) Decrease in notes and accounts payable (162,149) (27,287) (1,439,786) Changes in asset or liability for retirement benefits 21,425 (61,296) 190,243 Other net (284,573) (405,064) (2,526,845) Net cash provided by operating activities 792,042 2,200,295 7,032,875 INVESTING ACTIVITIES: Purchases of property, plant and equipment (1,185,086) (540,785) (10,522,874 ) Purchases of intangible assets (340,919) (26,102) (3,027,161) Purchases of investment securities (14,799) (15,650) (131,407) Purchases of marketable securities (600,000) Proceeds from redemption of marketable securities 600,000 5,327,650 Payments into time deposits (4,851) (369,270) (43,070) Proceeds from withdrawal of time deposits 190, ,717 1,691,296 Other net 14,354 6, ,458 Net cash used in investing activities (740,827) (1,373,056) (6,578,108) FINANCING ACTIVITIES: (Increase) decrease in short-term bank loans net 482,200 (88,043) 4,281,656 Payments of lease obligations (175,932) (138,670) (1,562,175) Proceeds from issuance of new shares 1,990,823 Repurchase of treasury stock (176) Disposal of treasury stock 929,005 Dividends paid (285,423) (231,450) (2,534,394) Net cash provided by financing activities 20,845 2,461, ,087 FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS (117,165) 377,405 (1,040,361) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (45,105) 3,666,133 (400,507) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,590,401 5,924,268 85,157,178 CASH AND CASH EQUIVALENTS, END OF YEAR 9,545,296 9,590,401 $ 84,756,671 See notes to consolidated financial statements

8 TEIKOKU ELECTRIC MFG. CO., LTD. Notes to Consolidated Financial Statements Year Ended March 31, BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations and in accordance with accounting principles generally accepted in Japan ("Japanese GAAP"), which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards. In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. In addition, certain reclassifications have been made in the 2015 consolidated financial statements to conform to the classifications used in The consolidated financial statements are stated in Japanese yen, the currency of the country in which TEIKOKU ELECTRIC MFG. CO., LTD. (the "Company") is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of to $1, the approximate rate of exchange at March 31, Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Consolidation - The consolidated financial statements as of March 31, 2016, include the accounts of the Company and its all 15 (14 in 2015) subsidiaries (together, the "Group"). Foreign subsidiaries are consolidated using the financial statements as of December 31 because the difference between the closing date of the subsidiaries and that of the Company did not exceed three months. Significant transactions have been adjusted on consolidation. Under the control and influence concepts, those companies in which the Company, directly or indirectly, is able to exercise control over operations are fully consolidated. The excess of the cost of acquisition over the fair value of the net assets of an acquired subsidiary at the date of acquisition is amortized over a period of five years. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is also eliminated

9 b. Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements - In May 2006, the Accounting Standards Board of Japan (the "ASBJ") issued ASBJ Practical Issues Task Force ("PITF") No. 18, "Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements" which was subsequently revised in February 2010 and March 2015 to reflect revisions of the relevant Japanese GAAP or accounting standards in other jurisdictions. PITF No. 18 prescribes that the accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should in principle be unified for the preparation of the consolidated financial statements. However, financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United States of America (Financial Accounting Standards Board Accounting Standards Codification "FASB ASC") tentatively may be used for the consolidation process, except for the following items that should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been recorded in equity through other comprehensive income; (c) expensing capitalized development costs of R&D; and (d) cancellation of the fair value model of accounting for property, plant and equipment and investment properties and incorporation of the cost model of accounting. c. Business Combinations - In September 2013, the ASBJ issued revised ASBJ Statement No. 21, "Accounting Standard for Business Combinations," revised ASBJ Guidance No. 10, "Guidance on Accounting Standards for Business Combinations and Business Divestitures," and revised ASBJ Statement No. 22, "Accounting Standard for Consolidated Financial Statements." Major accounting changes are as follows: (a) Transactions with noncontrolling interest - A parent's ownership interest in a subsidiary might change if the parent purchases or sells ownership interests in its subsidiary. The carrying amount of noncontrolling interest is adjusted to reflect the change in the parent's ownership interest in its subsidiary while the parent retains its controlling interest in its subsidiary. Under the previous accounting standard, any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted is accounted for as an adjustment of goodwill or as profit or loss in the consolidated statement of income. Under the revised accounting standard, such difference is accounted for as capital surplus as long as the parent retains control over its subsidiary. (b) Presentation of the consolidated balance sheet - In the consolidated balance sheet, "minority interest" under the previous accounting standard is changed to "noncontrolling interest" under the revised accounting standard. (c) Presentation of the consolidated statement of income - In the consolidated statement of income, "net income before minority interest" under the previous accounting standard is changed to "net income" under the revised accounting standard, and "net income" under the previous accounting standard is changed to "net income attributable to owners of the parent" under the revised accounting standard

10 (d) Provisional accounting treatments for a business combination - If the initial accounting for a business combination is incomplete by the end of the reporting period in which the business combination occurs, an acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. Under the previous accounting standard guidance, the impact of adjustments to provisional amounts recorded in a business combination on profit or loss is recognized as profit or loss in the year in which the measurement is completed. Under the revised accounting standard guidance, during the measurement period, which shall not exceed one year from the acquisition, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and that would have affected the measurement of the amounts recognized as of that date. Such adjustments shall be recognized as if the accounting for the business combination had been completed at the acquisition date. (e) Acquisition-related costs - Acquisition-related costs are costs, such as advisory fees or professional fees, which an acquirer incurs to effect a business combination. Under the previous accounting standard, the acquirer accounts for acquisition-related costs by including them in the acquisition costs of the investment. Under the revised accounting standard, acquisition-related costs shall be accounted for as expenses in the periods in which the costs are incurred. The above accounting standards and guidance for (a) transactions with noncontrolling interest, (b) presentation of the consolidated balance sheet, (c) presentation of the consolidated statement of income, and (e) acquisition-related costs are effective for the beginning of annual periods beginning on or after April 1, Earlier application is permitted from the beginning of annual periods beginning on or after April 1, 2014, except for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income. In the case of earlier application, all accounting standards and guidance above, except for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income, should be applied simultaneously. Either retrospective or prospective application of the revised accounting standards and guidance for (a) transactions with noncontrolling interest and (e) acquisition-related costs is permitted. In retrospective application of the revised standards and guidance, the accumulated effects of retrospective adjustments for all (a) transactions with noncontrolling interest and (e) acquisition-related costs which occurred in the past shall be reflected as adjustments to the beginning balance of capital surplus and retained earnings for the year of the first-time application. In prospective application, the new standards and guidance shall be applied prospectively from the beginning of the year of the first-time application. The revised accounting standards and guidance for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income shall be applied to all periods presented in financial statements containing the first-time application of the revised standards and guidance. The revised standards and guidance for (d) provisional accounting treatments for a business combination are effective for a business combination which occurs on or after the beginning of annual periods beginning on or after April 1, Earlier application is permitted for a business combination which occurs on or after the beginning of annual periods beginning on or after April 1,

11 The Company applied the revised accounting standards and guidance for (a) transactions with noncontrolling interest, (b) presentation of the consolidated balance sheet, (c) presentation of the consolidated statement of income, and (e) acquisition-related costs above, effective April 1, 2015, and (d) provisional accounting treatments for a business combination above for a business combination which occurred on or after April 1, The revised accounting standards and guidance for (a) transactions with noncontrolling interest and (e) acquisition-related costs were applied prospectively. With respect to (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income, the applicable line items in the 2015 consolidated financial statements have been accordingly reclassified and presented in line with those in There was no impact from these accounting changes. d. Cash Equivalents - Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits, certificates of deposit, commercial paper and bond funds, all of which mature or become due within three months of the date of acquisition. e. Marketable and Investment Securities - Marketable and investment securities are classified and accounted for, depending on management's intent, as follows: (1) held-to-maturity debt securities, for which there is a positive intent and ability to hold to maturity, are reported at amortized cost; and (2) available-for-sale securities, which are not classified as held-to-maturity debt securities, are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity. Nonmarketable available-for-sale securities are stated at cost determined by the moving-average method. For other-than-temporary declines in fair value, investment securities are reduced to net realizable value by a charge to income. f. Allowance for Doubtful Accounts - The allowance for doubtful accounts is stated in amounts considered to be appropriate based on the companies' past credit loss experience and an evaluation of potential losses in the receivables outstanding. g. Inventories - Inventories are stated at the lower of cost, determined by the average cost method, or net selling value for the Company and its domestic subsidiaries and at the lower of cost, determined by the first-in, first-out method, or net selling value for foreign subsidiaries. h. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment of the Company and its consolidated domestic subsidiaries is computed by the declining-balance method based on the estimated useful lives of the assets, while the straight-line method is applied to all property, plant and equipment of consolidated foreign subsidiaries. The range of useful lives is principally from 2 to 50 years for buildings and structures, and from 2 to 12 years for machinery and equipment. The useful lives for lease assets are the terms of the respective leases. i. Long-Lived Assets - The Group reviews its long-lived assets for impairment whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An impairment loss is recognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition

12 j. Software - Software for internal use is amortized by the straight-line method over the estimated usable life. The estimated usable life is from 2 to 5 years. k. Retirement and Pension Plans - The liabilities (assets) for retirement benefits of employees are accounted for based on projected benefit obligations and plan assets at the consolidated balance sheet date. The actuarial differences are mainly amortized from the next year using the decline-balance method over 10 years, which is within the average remaining service period. The prior service costs are mainly amortized by the declining-balance method over 10 years, which is within the average remaining service period. In May 2012, the ASBJ issued ASBJ Statement No. 26, "Accounting Standard for Retirement Benefits" and ASBJ Guidance No. 25, "Guidance on Accounting Standard for Retirement Benefits," which replaced the accounting standard for retirement benefits that had been issued by the Business Accounting Council in 1998 with an effective date of April 1, 2000, and the other related practical guidance, and were followed by partial amendments from time to time through (a) Under the revised accounting standard, actuarial gains and losses and past service costs that are yet to be recognized in profit or loss are recognized within equity (accumulated other comprehensive income), after adjusting for tax effects, and any resulting deficit or surplus is recognized as a liability (liability for retirement benefits) or asset (asset for retirement benefits). (b) The revised accounting standard does not change how to recognize actuarial gains and losses and past service costs in profit or loss. Those amounts are recognized in profit or loss over a certain period no longer than the expected average remaining service period of the employees. However, actuarial gains and losses and past service costs that arose in the current period and have not yet been recognized in profit or loss are included in other comprehensive income, and actuarial gains and losses and past service costs that were recognized in other comprehensive income in prior periods and then recognized in profit or loss in the current period are treated as reclassification adjustments (see Note 12). (c) The revised accounting standard also made certain amendments relating to the method of attributing expected benefit to periods, the discount rate, and expected future salary increases. This accounting standard and the guidance for (a) and (b) above are effective for the end of annual periods beginning on or after April 1, 2013, and for (c) above are effective for the beginning of annual periods beginning on or after April 1, 2014, or for the beginning of annual periods beginning on or after April 1, 2015, subject to certain disclosure in March 2015, all with earlier application being permitted from the beginning of annual periods beginning on or after April 1, However, no retrospective application of this accounting standard to consolidated financial statements in prior periods is required. The Company applied the revised accounting standard and guidance for retirement benefits for (a) and (b) above, effective March 31, 2014, and for (c) above, effective April 1, With respect to (c) above, the Company changed the method of attributing the expected benefit to periods from a straight-line basis to a benefit formula basis, the method of determining the discount rate from using the period which approximates the expected average remaining service period to using a single weighted average discount rate reflecting the estimated timing and amount of benefit payment, and recorded the effect of (c) above as of April 1, 2014, in retained earnings. As a result, retained earnings and noncontrolling interests as of April 1, 2014, decreased by 41,732 thousand. l. Research and Development Costs - Research and development costs are charged to income as incurred

13 m. Leases - Finance leases that were deemed to transfer ownership of the leased property to the lessee were capitalized. However, other finance leases were permitted to be accounted for as operating lease transactions if certain "as if capitalized" information was disclosed in the notes to the lessee's financial statements. The revised accounting standard requires that all finance lease transactions be capitalized by recognizing lease assets and lease obligations in the balance sheet. All other leases are accounted for as operating leases. n. Income Taxes - The provision for income taxes is computed based on the pretax income included in the consolidated statement of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently enacted income tax rates to the temporary differences. o. Foreign Currency Transactions - All short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rates at the balance sheet date. The foreign exchange gains and losses from translation are recognized in the consolidated statement of income to the extent that they are not hedged by forward exchange contracts. p. Foreign Currency Financial Statements - The balance sheet accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date except for equity, which is translated at the historical rate. Differences arising from such translation are shown as "Foreign currency translation adjustments" under accumulated other comprehensive income in a separate component of equity. Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the current exchange rate as of the balance sheet date. q. Per Share Information - Basic net income per share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period, retroactively adjusted for stock splits. The weighted-average number of common shares outstanding used in the computation were 20,387,388 and 19,921,636 for the fiscal years ended March 31, 2016 and 2015, respectively. Diluted net income per share is not presented because there are no potentially dilutive securities outstanding. Cash dividends per share presented in the accompanying consolidated statement of income are dividends applicable to the respective fiscal years, including dividends to be paid after the end of the year. r. Accounting Changes and Error Corrections - In December 2009, the ASBJ issued ASBJ Statement No. 24, "Accounting Standard for Accounting Changes and Error Corrections" and ASBJ Guidance No. 24, "Guidance on Accounting Standard for Accounting Changes and Error Corrections." Accounting treatments under this standard and guidance are as follows: (1) Changes in Accounting Policies When a new accounting policy is applied following revision of an accounting standard, the new policy is applied retrospectively unless the revised accounting standard includes specific transitional provisions, in which case the entity shall comply with the specific transitional provisions. (2) Changes in Presentation When the presentation of financial statements is changed, prior-period financial statements are reclassified in accordance with the new presentation. (3) Changes in Accounting Estimates A change in an accounting estimate is accounted for in the period of the change if the change affects that period only, and is accounted for prospectively if the change affects both the period of the change and future periods. (4) Corrections of Prior-Period Errors When an error in prior-period financial statements is discovered, those statements are restated

14 3. SHORT-TERM INVESTMENTS AND INVESTMENT SECURITIES Short-term investments and investment securities as of March 31, 2016 and 2015, consisted of the following: Current: Time deposits other than cash equivalents 376, ,582 $ 3,344,989 Corporate bonds and other 600,000 Total 376,713 1,199,582 $ 3,344,989 Non-current: Marketable equity securities 1,369,193 1,684,634 $ 12,157,638 Unquoted equity securities 3,727 3,727 33,098 Corporate bonds 38,670 38, ,367 Trust fund investments and other 11,611 12, ,091 Total 1,423,201 1,739,347 $ 12,637,194 The costs and aggregate fair values of marketable and investment securities at March 31, 2016 and 2015, were as follows: March 31, 2016 Cost Unrealized Gains Unrealized Losses Fair Value Securities classified as: Available-for-sale: Equity securities 813, ,151 43,468 1,369,193 Debt securities 17,615 21,055 38,670 Other 10,264 1,346 11,610 March 31, 2015 Cost Unrealized Gains Unrealized Losses Fair Value Securities classified as: Available-for-sale: Equity securities 798, ,274 18,440 1,684,634 Debt securities 17,615 20,840 38,455 Other 10,175 2,356 12,531 Held-to-maturity 600, ,000 March 31, 2016 Cost Unrealized Gains Unrealized Losses Fair Value Securities classified as: Available-for-sale: Equity securities $7,223,496 $5,320,109 $385,967 $12,157,638 Debt securities 156, , ,367 Other 91,136 11, ,

15 4. INVENTORIES Inventories at March 31, 2016 and 2015, consisted of the following: Finished products 1,208,744 1,083,084 $ 10,732,948 Work in process 1,945,215 1,897,587 17,272,377 Raw materials and supplies 1,119, ,878 9,943,685 Total 4,273,817 3,980,549 $ 37,949, SHORT-TERM BANK LOANS Short-term bank loans at March 31, 2016 and 2015, consisted of notes to banks and bank overdrafts. The annual interest rates applicable to the short-term bank loans ranged from 0.39% to 4.14% and 0.43% to 5.40% at March 31, 2016 and 2015, respectively. The assets pledged as collateral for bank guarantees were buildings and structures of 233,763 thousand ($2,075,675) at March 31, RETIREMENT AND PENSION PLANS The Company and certain consolidated subsidiaries have severance payment plans for employees. Under most circumstances, employees terminating their employment are entitled to retirement benefits determined based on the rate of pay at the time of termination, years of service and certain other factors. Such retirement benefits are made in the form of a lump-sum severance payment from the Company or from certain consolidated subsidiaries and annuity payments from a trustee. The Company has contributory funded defined benefit pension plans and unfunded retirement benefit plans for employees. Other consolidated subsidiaries have unfunded retirement benefit plans. (1) The changes in defined benefit obligation for the years ended March 31, 2016 and 2015, were as follows: Balance at beginning of year (as previously reported) 1,328,679 1,359,103 $ 11,797,894 Cumulative effect of accounting change (64,800) Balance at beginning of year (as restated) 1,328,679 1,294,303 11,797,894 Current service cost 111, , ,476 Interest cost 12,591 14, ,801 Actuarial losses 81,949 39, ,659 Benefits paid (122,111) (120,829) (1,084,266) Balance at end of year 1,412,881 1,328,679 $ 12,545,

16 (2) The changes in plan assets for the years ended March 31, 2016 and 2015, were as follows: Balance at beginning of year 416, ,515 $ 3,702,332 Expected return on plan assets 8,339 7,690 74,047 Actuarial (gains) losses (10,887) 34,521 (96,670) Contributions from the employer 46,201 46, ,240 Benefits paid (53,868) (56,522) (478,318) Balance at end of year 406, ,957 $ 3,611,631 (3) Reconciliation between the liability recorded in the consolidated balance sheet and the balances of defined benefit obligation and plan assets Funded defined benefit obligation 405, ,470 $ 3,600,701 Plan assets (406,742) (416,957) (3,611,631) Total (1,231) (21,487) (10,930) Unfunded defined benefit obligation 1,007, ,209 8,944,863 Net liability arising from defined benefit obligation 1,006, ,722 $ 8,933,933 Liability for retirement benefits 1,007, ,209 $ 8,944,863 Asset for retirement benefits (1,231) (21,487) (10,930) Net liability arising from defined benefit obligation 1,006, ,722 $ 8,933,933 (4) The components of net periodic benefit costs for the years ended March 31, 2016 and 2015, were as follows: Service cost 111, ,740 $ 992,476 Interest cost 12,591 14, ,801 Expected return on plan assets (8,339) (7,690) (74,047) Amortization of prior service cost (746) (746) (6,626) Recognized actuarial losses 20,590 19, ,828 Net periodic benefit costs 135, ,441 $ 1,206,

17 (5) Amounts recognized in other comprehensive income (before income tax effect) in respect of defined retirement benefit plans for the years ended March 31, 2016 and 2015 Prior service cost (746) (746) $ (6,626) Actuarial (gains) losses (72,246) 14,193 (641,501) Total (72,992 ) 13,447 $ (648,127 ) (6) Amounts recognized in accumulated other comprehensive income (before income tax effect) in respect of defined retirement benefit plans as of March 31, 2016 and 2015 (7) Plan assets Unrecognized prior service cost (2,101) (2,847) $ (18,652) Unrecognized actuarial losses 212, ,904 1,883,772 Total 210, ,057 $ 1,865,120 a. Components of plan assets Plan assets as of March 31, 2016 and 2015, consisted of the following: Domestic debt investments 31 % 29 % Domestic equity investments Foreign debt investments 9 10 Foreign equity investments General account assets of life insurance 11 9 Cash and cash equivalents 3 3 Others 1 1 Total 100 % 100 % b. Method of determining the expected rate of return on plan assets The expected rate of return on plan assets is determined considering the long-term rates of return which are expected currently and in the future from the various components of the plan assets. (8) Assumptions used for the years ended March 31, 2016 and 2015, are set forth as follows: Discount rate % % Expected rate of return on plan assets 2.00 % 2.00 %

18 (9) Multi-employer plan The Company and some subsidiaries participate in multi-employer plans for which the Company cannot reasonably calculate the amount of plan assets corresponding to the contributions made by the Company. Therefore, it is accounted for using the same method as a defined contribution plan. The contributions to such multi-employer plans, which are accounted for using the same method as a defined contribution plan, were 73,786 thousand ($655,176) and 157,561 thousand for the years ended March 31, 2016 and 2015, respectively. a. The funded status of the multi-employer plans as of March 31, 2015 and 2014, the most recent date on which such data was available: Millions of Yen Plan assets 83,744 75,657 Sum of actuarial liabilities of pension plan and minimum actuarial reserve 104, ,310 Net balance (21,136 ) (26,653 ) The net balance above is mainly caused by past service cost of 22,875 million for 2015 and 23,226 million for The special contributions of 49,187 thousand ($436,756) for 2016 and 52,937 thousand for 2015, which are utilized for such amortization, were expensed in the consolidated statement of income of the Group. b. The contribution ratio of the Group in the multi-employer plan for the years ended March 31, 2016 and 2015, was as follows: The contribution ratio of the Group in the multiemployer plan 2.1% 2.4% The ratios above do not represent the actual actuarial liability ratio of the Group. In addition, "Melco Renkyo Employees Pension Fund," in which a domestic subsidiary has participated, resolved a special dissolution at a conference of representatives on July 17, In the current year, provision for loss on dissolution of employees' pension fund of 19,966 thousand ($177,282) was included in "Other current liabilities" among the current liabilities section of the consolidated balance sheet and provision for loss on dissolution of employees' pension fund of 19,966 thousand ($177,282) was included in "Other net" in the other income (expenses) section of the consolidated statement of income

19 7. EQUITY Japanese companies are subject to the Companies Act of Japan (the "Companies Act"). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below: a. Dividends Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders' meeting. Additionally, for companies that meet certain criteria including (1) having a Board of Directors, (2) having independent auditors, (3) having an Audit & Supervisory Board, and (4) the term of service of the directors being prescribed as one year rather than the normal two-year term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends-in-kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. However, the Company does not meet all the above criteria. The Companies Act permits companies to distribute dividends-in-kind (noncash assets) to shareholders subject to a certain limitation and additional requirements. Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than 3 million. b. Increases/Decreases and Transfer of Common Stock, Reserve and Surplus The Companies Act requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus), depending on the equity account charged upon the payment of such dividends, until the aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paidin capital, other capital surplus and retained earnings can be transferred among the accounts within equity under certain conditions upon resolution of the shareholders. c. Treasury Stock and Treasury Stock Acquisition Rights The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by a specific formula. Under the Companies Act, stock acquisition rights are presented as a separate component of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights. On June 16, 2014, the Company issued and publicly offered 610,000 shares at 2, per share, and disposed of 350,000 shares of treasury stock at 2, per share. The amounts of the issuance of shares and disposal of treasury stocks totaled 1,628,773 thousand and 934,542 thousand, respectively. On June 26, 2014, the Company issued 140,000 shares to a third party at 2, per share. The amount of the issuance of shares totaled 373,817 thousand

20 On October 1, 2014, the Company made a two-for-one stock split by way of a free share distribution based on the resolution of the Board of Directors' meeting held on May 30, INCOME TAXES The Company and its domestic subsidiaries are subject to Japanese national and local income taxes which, in the aggregate, resulted in normal effective statutory tax rates of approximately 33.0% and 35.6% for the years ended March 31, 2016 and 2015, respectively. The tax effects of significant temporary differences and tax loss carryforwards which resulted in deferred tax assets and liabilities at March 31, 2016 and 2015, are as follows: Deferred tax assets: Accrued bonuses 144, ,217 $ 1,286,990 Inventories 69,124 62, ,784 Accrued enterprise tax 15,751 33, ,864 Unrealized intercompany profits 123,788 87,646 1,099,161 Liability for retirement benefits 317, ,961 2,816,393 Long-term accrued expenses 8,933 11,186 79,315 Loss on valuation of golf club membership 8,999 9,499 79,910 Impairment loss 39,998 42, ,156 Other 356, ,805 3,166,618 Less valuation allowance (98,349) (155,068) (873,283) Total 986, ,581 8,763,908 Deferred tax liabilities: Undistributed earnings of foreign subsidiaries 202, ,977 1,800,857 Reserve for special depreciation 9,326 91,675 82,811 Reserve for advanced depreciation of noncurrent assets 84,267 13, ,237 Net unrealized gain on available-for-sale securities 177, ,303 1,576,355 Other 1,040 7,687 9,234 Total 474, ,921 4,217,494 Net deferred tax assets 512, ,660 $ 4,546,414 A reconciliation between the normal effective statutory tax rates and the actual effective tax rates reflected in the accompanying consolidated statement of income for the year ended March 31, 2016 is as follows: 2016 Normal effective statutory tax rate 33.0 % Expenses not deductible for income tax purposes 1.7 Income not taxable for income tax purposes (0.1) Per capita levy 0.6 Lower income tax rates applicable to income in certain foreign countries (5.1) Change in valuation allowance (2.6) Effect of reduction of income tax rates on deferred tax assets 1.3 Other net 0.6 Actual effective tax rate 29.4 %

21 Since the actual effective tax rate at for the year ended March 31, 2015, differed from the normal effective statutory tax rate by less than 5.0%, disclosure of details is omitted. New tax reform laws enacted in 2016 in Japan changed the normal effective statutory tax rate for the fiscal year beginning on or after April 1, 2016, to approximately 30.8% and for the fiscal year beginning on or after April 1, 2018, to approximately 30.6%. The effect of these changes was to decrease deferred tax assets, net of deferred tax liabilities, by 16,446 thousand ($146,033) and increase accumulated other comprehensive income for unrealized gain on available-for-sale securities by 9,664 thousand ($85,811), in the consolidated balance sheet as of March 31, 2016, and to increase income taxes deferred by 26,110 thousand ($231,844) in the consolidated statement of income for the year then ended. 9. RESEARCH AND DEVELOPMENT COSTS Research and development costs charged to income were 475,697 thousand ($4,223,911) and 468,285 thousand for the years ended March 31, 2016 and 2015, respectively. 10. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES (1) Group Policy for Financial Instruments The Group uses financial instruments, mainly long-term debt including bank loans, based on its capital financing plan. Cash surpluses, if any, are invested in low risk financial assets. Short-term bank loans are used to fund the Group's ongoing operations. (2) Nature and Extent of Risks Arising from Financial Instruments and Risk Management for Financial Instruments Receivables, such as trade notes and trade accounts, are exposed to customer credit risk. The Group manages its credit risk from receivables on the basis of internal guidelines. Although receivables in foreign currencies are exposed to the market risk of fluctuation in foreign currency exchange rates, those risks are controlled by netting against the balance of payables in the same foreign currency and exchanging into yen timely monitoring market trends so as not to increase assets in foreign currencies excessively. Investment securities, mainly equity instruments of customers and suppliers of the Group, are exposed to the risk of market price fluctuations. Such investments are managed by monitoring market values and the financial position of issuers on a regular basis. Payment terms of payables, such as trade notes and trade accounts, are less than one year. Although payables in foreign currencies are exposed to the market risk of fluctuation in foreign currency exchange rates, those risks are netted against the balance of receivables denominated in the same foreign currency as noted above. (3) Fair Values of Financial Instruments Fair values of financial instruments are based on quoted prices in active markets. If a quoted price is not available, another rational valuation technique is used instead

22 (a) Fair value of financial instruments The carrying amounts, fair values and unrealized gain/loss as of March 31, 2016 and 2015, are as follows. Note that financial instruments whose fair value cannot be reliably determined are not included (see (b)). March 31, 2016 Carrying Amount Fair Value Unrealized Gain/Loss Cash and cash equivalents 9,545,296 9,545,296 Receivables: Trade notes 1,173,958 Trade accounts 5,940,249 Allowance for doubtful accounts* (294,120) Receivables net 6,820,087 6,820,087 Short-term investments and investment securities 1,796,187 1,796,187 Total 18,161,570 18,161,570 Payables: Trade notes 642, ,963 Trade accounts 1,387,201 1,387,201 Short-term bank loans 1,093,159 1,093,159 Income taxes payable 196, ,577 March 31, 2015 Total 3,319,900 3,319,900 Cash and cash equivalents 9,590,401 9,590,401 Receivables: Trade notes 1,116,977 Trade accounts 5,820,783 Allowance for doubtful accounts* (307,379) Receivables net 6,630,381 6,630,381 Short-term investments and investment securities 2,935,202 2,935,202 Total 19,155,984 19,155,984 Payables: Trade notes 877, ,610 Trade accounts 1,355,149 1,355,149 Short-term bank loans 626, ,418 Income taxes payable 552, ,982 Total 3,412,159 3,412,