The Items Published on the Internet Website
Concerning the Notice of the 196th Ordinary
General Meeting of Shareholders–1–

6. System to ensure that Directors’ execution of duties complies withlaws and regulations and the Articles of Incorporation, othersystems to ensure proper execution of business and overview ofoperation status of such systems
At the Board of Directors Meeting of May 24, 2006, the Company made a resolution
regarding the basic policies on the establishment of internal control systems pursuant to
the Companies Act and confirmed the status of established internal control systems.
Henceforth, whenever there are organizational changes or changes to company rules,
resolutions are made at Board of Directors meetings with regard to the revision of thebasic policies. The details of resolutions regarding the basic policies as of the end of the
fiscal year under review and an overview of the operation status of internal control
systems for the fiscal year under review are as follows:
I. Basic policy for developing internal control systems
In an effort to embody KHI’s management philosophy, which is indicated in theGroup Mission (missions and roles which must be carried out) “Kawasaki, working as
one for the good of the planet” (Enriching lifestyles and helping safeguard theenvironment: Global Kawasaki), “Kawasaki Value,” “The Kawasaki Group Management
Principles” and “The Kawasaki Group Action Guidelines,” the KHI Group develops andmaintains internal control systems to ensure formation of proper organizational
structures, development of company rules and regulations, dissemination of
information and proper execution of operations. KHI strives to improve its internal
controls by constantly reviewing them, and in doing so improves the efficiency andlawfulness of company systems which contribute to the Group’s sound and sustained
growth.
More specifically, a resolution was made at the Board of Directors Meeting with respect
to the Company’s efforts to establish the following internal control systems and to
streamline, maintain, and improve them based on this basic policy.
1. Necessary systems to ensure proper execution of business of theCompany(1) Systems to ensure that execution of duties by the Company’s
Directors and employees are compliant with laws and the Articles ofIncorporation(i) We thoroughly ensure compliance with laws and regulations and the Articles
of Incorporation and other KHI regulations and policies by establishingethical standards to serve as the basis for decisions in taking an action as
the “The Kawasaki Group Code of Conduct” and ensuring that Directors andAudit & Supervisory Board Members (hereinafter, “Officers”) are thoroughlyfamiliar with the guideline.
(ii) We establish a system to promote measures, with President as the chief
executive of internal controls and General Manager of each division as the
manager in charge of internal controls, and manage the internal control
systems in a unified way. We do so based on the roles and responsibilities
given to Officers and employees, in order to ensure the appropriateness ofbusiness operations by achieving objectives such as effective and efficientbusiness operations, reliable financial reporting, compliance with laws, andsafeguarding of assets.
(iii) We deliberate and make decisions on policies and measures, under thegovernance of President, for the Corporate CSR Committee and the CSR
Committee (consisting of Officers and other employees) to comply with the“The Kawasaki Group Code of Conduct” and to take thoroughgoingcompliance initiatives. We continue to improve understanding andawareness of compliance through ongoing education and training activities–2–

for various types of legal compliance and also monitor operational status.
(iv) We work to enhance compliance systems by establishing the whistleblowing system to report information regarding compliance breaches.
(v) Executive Officers who are delegated to execute business operations within
an appropriate scope are appointed at Board of Directors meetings.
Meanwhile by appointing outside directors (independent officers stipulated
in the Regulations of the Tokyo Stock Exchange) who are not likely to haveany conflicts of interest with any general shareholder, the Company
enhances the supervisory and monitoring functions of the Board of Directors
for overall management. In addition, by appointing Outside Audit &Supervisory Board Members (independent officers stipulated in theRegulations of the Tokyo Stock Exchange) who are not likely to have any
conflicts of interest with any general shareholder, the Company ensures theobjectivity and neutrality of the management monitoring function by the
Audit & Supervisory Board, and enhances the monitoring function.
(vi) The Internal Audit Department carries out KHI’s business audits andevaluation/assessment of internal controls over financial reporting to ensure
the proper execution of duties and the reliability of financial reporting.
(2) Systems for storage and management of information related to
execution of duties by the Company’s Directors(i) Information pertaining to execution of duties by Directors (meeting minutes,
decision making records and appurtenant materials, account books, accountslips and other information) shall be appropriately stored and managed inaccordance with applicable internal regulations. The information shall bemade accessible at any time to Directors and employees nominated thereby.
(ii) Confidential information and personal information shall be appropriately
stored and managed in accordance with internal regulations andenforcement thereof shall be ensured through such measures as businessaudits.
(3) Systems for management of risk of loss of the Company(i) With President as the chief executive of risk management, officer in chargeof risk management as chief risk officer and General Manager of eachdivision as risk manager, we grasp the assumed risk in detail, and establish
a risk management system, which is designed to avoid or minimize risk orlosses caused by such risk.
(ii) With respect to risks pertaining to management strategies, risk analysis andconsideration of countermeasures shall be conducted in advance by theconcerned divisions in accordance with applicable internal regulations. Then,deliberations and decision making regarding those risks shall be carried out
at Board of Directors meetings. In particular, we implement risk
management individually for major projects that have a significant impact
on business operations.
(iii) As a measure to be taken when a risk becomes evident, we set forth codesof conduct in the event of emergencies, and also appoint persons in chargeof crisis management at each place of business to establish the system,
which is designed to minimize losses.
(iv) When a material risk becomes evident, reports are immediately given to
President, who is the chief executive of risk management, in accordancewith the reporting route specified in advance.
(v) In particular, in anticipation of the occurrence of disasters, including largescale earthquakes and pandemic diseases, we predetermine important
operations to which priority should be given to ensure the continuation or
recovery of the operations in order to minimize the impact on KHI’s business.
–3–

We also formulate a business continuity plan to shorten the length of time
until recovery.
(4) Systems to ensure efficient execution of duties by the Company’s
Directors(i) Based on the role and objectives of the corporate group consisting of theCompany and its subsidiaries (hereinafter, the “KHI Group”) as articulated
in the Kawasaki Group Mission Statement, we share final goals for the futureby setting forth a long-term vision for the whole group and each businessdivision.
(ii) To attain the goals set forth in the long-term vision, we have formulated
specific action plans, including the Medium-Term Business Plan and ShortTerm Business Plan, and have determined goals for each organization,
Director and employee. Furthermore, by conducting regular reviews of theserespective plans and goals, we aim to secure a system that enables more
appropriate and efficient execution of business operations.
(iii) We have stipulated matters such as division of roles and approval authority
in internal regulations. We have also appointed Executive Officers based ona resolution passed at Board of Directors meetings to clarify the Systems
for Execution of Business Operations. As a result of establishing thesesystems, we aim to efficiently execute business operations in each businessand function area.
(iv) Upon exercise of authority delegated to President in internal regulations, weensure appropriateness and efficiency of executing business operations bymaking discussions at the Management Committee, which acts as anadvisory organ for President, due to its significance and others. Furthermore,
we have established the Executive Officers Committee as a place for
ensuring familiarity and exchange of opinions, etc. of management policies
and plans for Executive Officers to build a common understanding inbusiness management of the KHI Group.
(v) According to the in-house company system, each business division makes
decisions on its own under delegated authority and responsibility, andexecutes flexible business operations to adapt to changes in theenvironment. We have also established the Company Management
Committee in each Company, and it is led by the Company President who
assumes the ultimate responsibility for execution of duties of company’sbusiness operations.
2. Necessary systems to ensure proper execution of business of KHI Group
Companies
We ensure proper execution of business of the KHI Group through efforts toestablish the following systems according to business contents, size, region andsignificance of each subsidiary (hereinafter, “Group Companies”).
(1) Systems to ensure that execution of duties by Directors andemployees of Group Companies are compliant with laws and the
Articles of Incorporation(i) The Company governs internal controls of Group Companies from theperspective of the parent company and establishes a system to ensure theappropriateness of business operations. It does so by achieving objectives
regarding matters such as the effectiveness and efficiency of business
operations, reliability of financial reporting, compliance with laws andsafeguarding of assets as a whole group.

–4–

(ii) The Company establishes a system to have the Corporate CSR Committee
deliberate strategies and policies and measures concerning the “The
Kawasaki Group Code of Conduct” and compliance as the entire KHI Group,and check operational status.
(iii) The Company implements controls as shareholders of Group Companies
through the execution of voting rights at the General Meeting of
Shareholders, and also carries out management supervision and monitoringover the operation thereof by dispatching part-time Directors or part-time
Audit & Supervisory Board Members who are not engaged in the executionof business operations of Group Companies, or both (hereinafter, “Part-Time
Officer”), to Group Companies, on an as-needed basis. In addition, we
secure appropriate Group business management systems by establishing adepartment which presides over subsidiaries’ operation.
(iv) The Internal Audit Department ensures the appropriateness of operations
and reliability of financial reports through business audits and assessmentof internal controls over financial reporting at Group Companies.
(2) Systems with regard to reporting to the Company on execution ofduties by directors of Group Companies(i) The Company receives reports regarding the status of execution of duties
by directors of Group Companies through a Part-Time Officer who isdispatched thereto.
(ii) Group Companies regularly report on the status of business operation as amanagement report and have discussions in advance with the relevant
department of the Company with regard to important matters subject todecision-making on corporate management in accordance with applicableinternal regulations.
(3) Regulations for management of risk of loss of Group Companies andother systems(i) The Company promotes group-wide risk management, striving to preventor minimize risk or losses caused by such risk.
(ii) As a measure to be taken when a risk becomes evident at Group Companies,
the Company instructs Group Companies to formulate crisis handlingmeasures and policies to establish the crisis management system.
(iii) When a material risk becomes evident, reports are immediately given to theCompany, in accordance with the reporting route specified in advance.
(4) Systems to ensure efficient execution of duties by Directors of Group
Companies(i) With respect to the management at each Group Company, while respecting
the autonomy thereof, the Company establishes a system in which executionof duties is ensured in a fair and efficient manner by sharing the basic
philosophy and vision indicated in the “Kawasaki Group Mission Statement,”
long-term vision, the Medium-Term Business Plan, and so forth, andclarifying group-wide final goals.
(ii) The Company instructs Group Companies to develop Approval Standards toensure efficient execution of business.

–5–3. Necessary matters for the Company’s Audit & Supervisory Board
Members to execute duties(1) Policies regarding employees in cases where the Company’s Audit &Supervisory Board Member requests appointment of employees toassist with his/her duties
We allocate the required employee according to the Audit & Supervisory
Board Members’ requests.
(2) Policies regarding independence of employees who assist with theduties of the Company’s Audit & Supervisory Board Members from theCompany’s Directors and matters regarding ensuring efficiency indirections given to employees who assist with the duties of theCompany’s Audit & Supervisory Board Members
The employee who assists with the duties of the Audit & Supervisory Board
Member shall follow the Audit & Supervisory Board Member’s directions andorders. For personnel transfer, personnel performance evaluation anddisciplinary punishment, prior consent of the Audit & Supervisory Board isrequired.
(3) Systems for the Company’s Directors and employees to report to theCompany’s Audit & Supervisory Board Members and systems for
Directors and employees of Group Companies and those who receive
reports from the said Directors and employees of Group Companies
to give reports to the Company’s Audit & Supervisory Board Members(i) The Company’s Audit & Supervisory Board Members attend Board of
Directors meetings, the Management Committees, Executive Officers
Committees and companywide meetings, including the Corporate CSR
Committee and the Corporate Risk Management Committee. At thesemeetings, the Company’s Directors and employees shall provide theCompany’s Audit & Supervisory Board with reports concerning importantmatters about group management and business operations, including
matters regarding compliance, risk management and internal controls, andthe status of execution of duties.
(ii) The Company’s Directors and employees shall immediately report to theCompany’s Audit & Supervisory Board when discovering that there is a riskof the KHI Group suffering significant damage.
(iii) Directors and employees of Group Companies shall immediately report to
the relevant department of the Company when discovering that there is arisk of the KHI Group suffering significant damage. Upon receiving reports,
the said department shall report the details to the Company’s Audit &Supervisory Board.
(iv) The Company’s employees shall, in accordance with applicable internal
regulations, report to the Company’s Audit & Supervisory Board regarding
the execution of business operations of the KHI Group by circulation ofinternal memos.
(v) The Company’s Auditing Department and Accounting Auditors from time totime report to, and exchange information with the Company’s Audit &Supervisory Board regarding the status of audits on the KHI Group.
(4) System to ensure that those who give reports described in thepreceding Item (3) will not be treated disadvantageously for reasonof having made such report
The Company stipulates a provision regarding the prohibition of unfair andunfavorable treatment of those who give reports described in the preceding
Item (3). The Company also instructs Group Companies to stipulate a–6–

provision of the same contents in their company regulations.
(5) Policies on prepaid expenses for the execution of the duties of theCompany’s Audit & Supervisory Board Members, or expenses forprocedures for repayment and the execution of other relevant duties,
or on debt processing
When Audit & Supervisory Board Members request the Company to makeprepayment on execution of duties pursuant to the Companies Act, theCompany shall promptly proceed with payment of appropriate expenses anddebt settlement, except where the expense or debt whose payment isrequested is deemed unnecessary to execute their duties.
(6) Other systems to ensure the effective conduct of audits by theCompany’s Audit & Supervisory Board Members(i) Directors and Audit & Supervisory Board Members regularly hold meetings
to ensure mutual understanding, and Audit & Supervisory Board Members
also attend important meetings such as Board of Directors meeting andManagement Committee meeting, and directly express their opinion
regarding execution of duties by Directors.
(ii) The Company’s Directors and Group Companies’ Directors promotecollaboration between the Company’s Audit & Supervisory Board Members,
the Company’s Internal Audit Department and Group Companies’ Audit &Supervisory Board Members, and cooperate to establish systems whichenable greater effectiveness in the conduct of audits.
(iii) The Company and Group Companies obtain the consent of the Audit &Supervisory Board Members or approval of the Audit & Supervisory Boardof the relevant company with regard to proposals for the election of Audit &Supervisory Board Members and their remuneration, and so forth, of therelevant company, in accordance with laws and regulations and the Articles
of Incorporation.
(iv) Of Audit & Supervisory Board Members appointed by the Company, one ormore shall have substantial knowledge about finance and accounting.
4. System regarding expulsion of anti-social forces
Because our Group resolutely refuses to comply with any unreasonable
demands from anti-social forces, and works to cut off all relations with anti-social
forces, we distribute the “Compliance Guidebook” to all Officers and employees.
The Guidebook explains the prohibition of “giving favors to anti-social forces” bylisting specific examples of prohibited acts. We work to ensure that Officers andemployees are thoroughly familiar with the matters contained in the Compliance
Guidebook by conducting training, and so forth, and do not merely distribute theguidebook.
Furthermore, with respect to internal systems, we have established adepartment in the headquarters which is responsible for overseeing handling of
expulsion of anti-social forces, established close cooperation with external
specialized organizations such as the police force, and in collaboration with theconcerned departments, we systematically handle unreasonable requests fromanti-social forces.

–7–II. Overview of the operation status of internal control systems
An overview of the operation status of internal control systems for the fiscal year
under review is as follows. The said operating status is assessed at the end of every
fiscal period and the assessment results are reported to the Board of Directors Meeting.
1. Efforts on internal control systems in general(i) We have specified the “The Kawasaki Group Code of Conduct” (hereinafter,
the “Code of Conduct”) as ethical standards to serve as the basis for decisions
when the KHI Group’s Officers and employees take an action, and ensure
thorough dissemination of the Code of Conduct by implementing initiatives
such as distributing the booklet to employees, posting the Code of Conduct
on the intranet and providing various training programs.
(ii) The Internal Audit Department carries out evaluation/assessment of internal
controls over business audits and financial reporting for the KHI Group to
ensure effectiveness and efficiency of business operations and reliability offinancial reporting.
2. Efforts on compliance(i) We establish the Corporate CSR Committee, which is responsible fordeliberating and making decisions on policies and measures to promotecompliance at a group-wide level and monitoring the compliance status
thereof. The said committee also plays the leading role in the establishmentof related internal regulations, preparation and distribution of the “Compliance
Guidebook” (hereinafter, the “Guidebook”), provision of various training
programs, and operation of the whistle-blowing system. In addition, weestablish the CSR Committee, which performs compliance activities for eachbusiness division, and implement appropriate measures for each businessenvironment.
(ii) We specify cutoff of any relations with anti-social forces in the Code of
Conduct, and ensure thorough dissemination by distributing the Guidebook
that lists specific examples of prohibited acts, offering training and othermeans.
3. Efforts on risk management(i) We build a risk management system on a companywide level based on the
Risk Management Regulations. We also prepare a manual to explain theprocedures of specific risk management practices and exhaustively grasp theassumed risks on a scale common to the Group to prevent and minimize risk
or losses caused by such risk. In addition, we hold Risk Management
Committee meetings on an as-needed basis at both the companywide leveland divisional level to report and deliberate on determination of material risks,
designation of risks to be addressed, results of risk monitoring and otherimportant matters.
(ii) For major projects that have a significant impact on business operations, ahead office division conducts risk assessment and considers risk control
measures before accepting orders. In addition, while spotting any sign ofdeterioration earlier through progress monitoring control of projects
underway and working to prevent profitability deterioration, and so forth, we
also evaluate the profitability after completion, conduct factor analysis on
projects that have significantly deteriorated and do the mean level
development of other projects to bring stronger risk management.
(iii) In anticipation of the occurrence of large-scale disasters and pandemic
diseases, we proactively formulate a business continuity plan for eachbusiness division, and conduct annual assessment and review thereof. We also–8–

establish and build a system to minimize losses in case we suffer damage indisasters.
During the fiscal period under review, we reviewed estimates of damage by
disasters in major areas in Japan, performed disaster prevention drills and
BCP drills, and conducted safety confirmation drills for all the employees.
4. Efforts to ensure efficient execution of duties(i) Based on the companywide policies and strategies determined with reference
to the contents of the Kawasaki Group Mission Statement, which stipulates
the KHI Group’s role and objectives, we determine the ideal way to be in eachbusiness area as well as the medium-term business plan and the short-termbusiness plan to clearly show our final goals and share them. In addition, eachorganization and Directors and employees strive to execute business more
appropriately and efficiently by setting their own objective to achieve thesegoals.
(ii) We articulate division of roles and approval authority to enhance efficiency of
execution of duties in each business and function area. We also give various
types of guidance to Group Companies to enhance efficiency of execution ofduties.
(iii) We strive to thoroughly deliberate important management policies,
management strategies and other matters at Board of Directors meetings andManagement Committee meetings and form a common understanding among
Directors to ensure that Directors efficiently execute duties.
5. Efforts on management of Group Companies(i) We exert group-wide efforts to work on compliance and risk management andsuccessively develop these systems to overseas Group Companies. In orderto ensure further dissemination and familiarization, we will establish andoperate the systems according to business contents, size, region andsignificance of each Group Company.
(ii) We carry out management supervision and monitoring over the operation ofGroup Companies by dispatching Part-Time Officers to Group Companies toattend Board of Directors meetings thereof. We regularly receive reports on
the status of business operation from Group Companies and the responsible
department of the Company and the relevant Group Companies havediscussions in advance with regard to important matters subject to decisionmaking on corporate management of the Group Companies in accordancewith applicable internal regulations.
6. Efforts on ensuring appropriateness of audits performed by theCompany’s Audit & Supervisory Board Members(i) We assign two employees who are dedicated to assist with the duties of Audit& Supervisory Board Members. For personnel transfer, personnel performance
evaluation and disciplinary punishment of these employees, we obtain priorconsent of the Audit & Supervisory Board.
(ii) Audit & Supervisory Board Members attend the Company’s important
meetings. Directors and employees provide the Company’s Audit &Supervisory Board with reports concerning important matters about corporate
management and business operations as well as the status of execution ofduties through the said meetings, and report to the Company’s Audit &Supervisory Board regarding the execution of business operations by
circulation of internal memos.
(iii) We establish regulations that prohibit unfair and unfavorable treatment of
those who cooperate with Audit & Supervisory Board Members to perform
audits and give reports to Audit & Supervisory Board Members pursuant to–9–the “Basic Policy for the Establishment of Internal Control System.” In addition,
Group Companies are also proceeding with establishment of structures andsystems according to region, size and others of each Group Company,
including development of rules.
(iv) The Auditing Department and Accounting Auditor regularly hold liaison
meetings or discussions with Audit & Supervisory Board Members to exchange
information and opinions with him/her so as to ensure close communication.
(v) We establish regulations regarding requests for prepaid expenses incurred forthe execution of the duties of Audit & Supervisory Board Members, and soforth.

– 10 –

Consolidated Statement of Changes in Net Assets(From April 1, 2018 to March 31, 2019)(Unit: Millions of yen)
Shareholders’ equity
Common stock
Balance at the beginning of
the period

104,484

CapitalsurplusRetained earnings

Treasury stock

Total
shareholders’equity54,573308,010(124)

466,944

Changes of items during
the period
Cash dividends(10,858)(10,858)

Net income attributableto owners of parent

27,45327,453

Treasury stock
purchased
Treasury stock disposed(0)

Transfer of loss on
disposal of treasury
stock

0

Capital increase of
consolidated subsidiaries

(7)

(7)

1

1

(0)

－

(30)

(30)

Net changes of items
other than shareholders’equityTotal changes of items
during the period
Balance at the end of theperiod(30)

16,595(5)

16,558104,484

54,542

324,606(130)

483,502

Accumulated other comprehensive income
Net
Accumulated
Total
DeferredForeignunrealized
adjustment accumulated Non-controllinggains
currencyinterests
gains onfor
other(losses) on translation
securities,
retirement comprehensive
hedges adjustments
incomenet of tax
benefits
Balance at the beginning of
the period

3,526

403

719

(5,532)(883)

15,324Total
net
assets481,386

Changes of items during
the period
Cash dividends(10,858)

Net income attributableto owners of parent

27,453

Treasury stock
purchased(7)

Treasury stock disposed

1

Transfer of loss on
disposal of treasury
stock

－

Capital increase of
consolidated subsidiaries
Net changes of items
other than shareholders’equity

(30)

(843)

(630)

(5,275)– 11 –

517(6,232)549(5,683)

Total changes of items
during the period

(843)

(630)

(5,275)517(6,232)549

10,875

Balance at the end of theperiod

2,682

(227)

(4,556)(5,014)(7,115)

15,874492,261– 12 –

Notes to the Consolidated Financial Statements(Notes to the basis for preparation of consolidated financial statements)
1. Scope of consolidation(1) Number of consolidated subsidiaries and names of
94 in total
principal consolidated subsidiaries(Domestic) Kawasaki Trading Co., Ltd., Kawasaki Machine Systems, Ltd., NIPPICorporation, Kawasaki Motors Corporation Japan, Kawasaki ThermalEngineering Co., Ltd., EarthTechnica Co., Ltd.
(Overseas) Kawasaki Motors Corp., U.S.A., Kawasaki Motors Manufacturing Corp.,
U.S.A., Kawasaki Motors Europe N.V., Kawasaki Motors Enterprise(Thailand) Co., Ltd., Kawasaki Rail Car, Inc., Kawasaki Motors (Phils.)
Corporation, Kawasaki Precision Machinery (Suzhou) Ltd., PT. Kawasaki
Motor Indonesia, Kawasaki Precision Machinery Trading (Shanghai)Co., Ltd.
Two newly established subsidiaries have been included in the scope of
consolidation.
One consolidated subsidiary was excluded from the scope of consolidation following
its absorption-type merger with other consolidated subsidiary.
(2) Names of principal non-consolidated subsidiaries, etc.
Green Park Chiba Shin-Minato and other companies(Reason for exclusion from scope of consolidation)
The non-consolidated subsidiaries were excluded from the scope of consolidation
because they are small in size, and its accounts, such as total assets, net sales, net
income (for the Company’s equity interest) and retained earnings (for theCompany’s equity interest), have no significant effects on the Company’s
consolidated financial statements.
2. Application of the equity method(1) Number of affiliates which are subject to application
17 in totalof the equity method
Name of principal company
Nantong COSCO KHI Ship Engineering Co.,Ltd.
(2) Non-consolidated subsidiaries not subject to application of the equity method(Green Park Chiba Shin-Minato and other companies) and affiliates(Commercial Airplane Co., Ltd. and other companies) are excluded from thescope of application of the equity method, because they only have minimal
effects on the Company’s consolidated financial statements with respect to net
income (for the Company’s equity interest) and retained earnings (for theCompany’s equity interest), and they have no significance as a whole.

– 13 –

3. Significant accounting policies(1) Standards and methods for evaluation of significant assets(i) Marketable securities
a. Bonds held to maturity
Amortized cost method (straight-line method) is principally applied.
b. Other marketable securities
Securities with market valueMarket value method based on the market value as of the accountclosing date (with all valuation differences charged to net assets and thecost of sale computed mainly by the moving-average method) is applied.
Securities without market value
The cost method based on the moving-average method is principally
applied.
(ii) Inventories
Stated at cost principally using the specific identification method, themoving-average method and the first-in first-out method (balance sheet
amounts are determined based on the method of lowering the book value inaccordance with the deterioration of profitability).
(iii) Derivatives
Stated at market value.
(2) Depreciation and amortization method for significant depreciable assets(i) Net property, plant and equipment (other than leased assets)
The straight-line method is principally applied.
(ii) Intangible assets (other than leased assets)
The straight-line method is applied. The software used by the Company issubject to amortization based on the internal useful life (generally five years).
(iii) Leased assets
The leased assets involved in finance lease transactions that involve transferof ownership
The same method as that applied to property, plant and equipment isapplied.
The leased assets involved in finance lease transactions that do not involve
transfer of ownership
The straight-line method, whereby the leasing period is deemed to be theduration of useful life and the residual value as zero is applied.
Of the finance lease transactions that do not involve transfer of ownership,
the lease transactions which commenced on or prior to March 31, 2008 are
accounted for in conformity with the accounting process applicable tooperating lease transactions.
(3) Accounting standards for significant provisions(i) Allowance for doubtful receivables
In order to provide for losses due to doubtful accounts from bad debts
including trade receivables and loan receivables, allowance for doubtfulreceivables is provided based on the historical default rate of normal
receivables and with reference to the collectability of receivables fromcompanies in financial difficulty.
(ii) Accrued bonuses
To cover bonus payments to employees, provision for bonuses is provided
in the amount for the consolidated fiscal year based on the estimated amountof payment.

– 14 –

(iii) Provision for product warranties
A provision is recorded for expenditures for warranties concerning
construction contracts based on past experience or on estimations ofindividual cases.
(iv) Provision for losses on construction contracts
A provision for an estimated amount of losses is recorded for the next fiscal
year and thereafter concerning construction works which are anticipated toincur significant losses and which allow reasonable estimation of the loss
incurred at the end of the consolidated fiscal year under review among those
construction works that have not been delivered as of the end of the fiscal
year.
(v) Provision related to in-service issues regarding commercial aircraft jet engines
A provision for the amount expected to be covered by the Company withregard to costs associated with significant in-service issues arising in theRolls-Royce Trent 1000 engine program for Boeing 787, in which the Company
has participated as a risk and revenue sharing partner (RRSP).

(4) Method of accounting treatment for retirement benefits(i) Method of allocation of expected retirement benefit payments
In calculation of retirement benefit obligations, the method of attributing
the projected benefits to periods until the end of the current consolidated
fiscal year is based on the benefit formula basis.
(ii) Method of amortization of actuarial gains or losses and prior service cost
Prior service cost will be recognized as expenses mainly by amortizing theamount by the straight-line method over a certain period of time (mainly 10
years) which is shorter than the employees’ average remaining service period.
Actuarial differences are amortized from the year following the year inwhich the differences are recognized using the straight-line method over the
average remaining years of service of the employees (mainly 10 years).
(iii) Method of accounting treatment for unrecognized actuarial gains and losses,
and unrecognized past service costs
Unrecognized actuarial gains and losses, and unrecognized past service
cost, net of applicable taxes, are recorded in “Accumulated adjustment for
retirement benefits” of “Accumulated other comprehensive income” in “Netassets.”(iv) Simplified accounting method used by small companies
Certain consolidated subsidiaries apply a simplified accounting method inwhich the calculation of liabilities for retirement benefits and retirement
benefit expenses is carried out by using a method in which the retirement
benefit obligations are deemed to be the amount of retirement benefits to be
paid in cases where all eligible employees retired at the fiscal year-end date.
(5) Standards for the recognition of significant revenues and expenses
Recognition of net sales of completed construction contracts and cost of sales ofcompleted construction contracts
a. Construction activities whose outcome from the completed portion as of theend of the consolidated fiscal year are deemed to be definite
Percentage-of-completion method (the cost-to-cost method is used toestimate the percentage of completion) is applied.
b. Other construction activities
Completed-contract method is applied.

– 15 –

(6) Standards for the translation of major assets or liabilities denominated in foreign
currencies
Receivables and payables denominated in foreign currencies are translated into
yen at the foreign exchange spot rate on the date of the balance sheet, anddifferences arising from the translation are calculated as gains or losses. The
Company translates assets and liabilities of foreign consolidated subsidiaries into
yen at the foreign exchange spot rate on the date of the balance sheet of each of
those subsidiaries. Revenues and expenses are translated using the average
foreign exchange rate of the statement of income’s period. Translation
adjustments are included in “Foreign currency translation adjustments” and “Noncontrolling interests” in “Net assets.”(7) Method of significant hedge accounting(i) Method of hedge accounting
Deferred hedge accounting is applied.
(ii) Hedging instruments and hedged items
Hedging instrument
Hedged items
Forward exchange contracts,
Receivables and payables (including
currency options
forecast transactions) denominated inforeign currency
Interest rate swaps, currency swaps
Borrowings(iii) Hedging policy
Hedging is conducted as a measure against the risk of interest rate variationand foreign currency variation based on company rules of respective
subsidiaries.
(iv) Method of assessing hedging effectivenessHedging effectiveness is evaluated based on fluctuation amounts of hedged
items and hedging instruments by comparing the cumulative changes ofmarket fluctuations between the hedged item with the hedging instrument
during the period between the start of the transaction to the point at which
effectiveness is assessed.
(8) Method and period for amortization of goodwill
Goodwill equivalent is equally amortized over the estimated effective period of
the investment. However, goodwill is amortized in lump-sum in the fiscal year
when incurred if the amount is minimal.
(9) Other significant matters for preparing the consolidated financial statements(i) Accounting treatment for consumption taxes
The tax-exclusion method is applied for the consumption tax and the local
consumption tax.
(ii) Application of the consolidated taxation system
The consolidated tax system is applied.

– 16 –

(Changes in presentation methods)
Consolidated Balance SheetThe Group has applied the “Partial Amendments to Accounting Standard for Tax EffectAccounting” (ASBJ Statement No. 28, February 16, 2018) effective from the consolidated
fiscal year under review. Accordingly, deferred tax assets, if any, were presented under“investments and other assets” and deferred tax liabilities, if any, were presented under“long-term liabilities.”
Consolidated Statement of Income
Effective from the consolidated fiscal year under review, “gain on sales of securities,”
which was included in “other” under “non-operating income” for the previous consolidated
fiscal year, is presented separately as a result of an increase in its quantitative materiality.
(Notes to Consolidated Balance Sheet)
1. The amounts presented are rounded down to the nearest unit.
2. Accumulated depreciation of property, plant and equipment
3. Assets pledged as collateral and Liabilities relating to collateral(1)
Assets pledged as collateral
Buildings and structures, net
Investments in securities
Other
Total

¥838,423 million¥61 million¥17 million¥80 million¥158 million(2)

Liabilities relating to collateral
Short-term debt and current portion of long-term debt
¥2 million
Long-term debt, less current portion¥16 million
Other¥3 million
Total¥21 million
4. Guarantee obligations for bank loans of subsidiaries andaffiliates, etc. and employees¥24,384 million
5. With respect to some work in process, a trust beneficiary right has been establishedwith the expected trade receivables as a trust asset. Work in process related to thesaid trust asset amounts to ¥4,926 million.
6. In some overseas construction works for LNG tanks, a petition for arbitration has
been filed with the ICC (The International Chamber of Commerce) during the fiscal
year under review concerning losses incurred by the Company due to a breach ofcontract because of non-fulfillment of contract by an overseas contractor and otherfactors. The Company plans to redeem the amount of loss in connection with thismatter (approximately ¥51 billion) through future arbitration and has recorded apart of the expected amount in “others” under “investments and other assets.”(Notes to Consolidated Statement of Income)1. The amounts presented are rounded down to the nearest unit.
2. Payments for the in-service issues of commercial aircraft jet engines have beenrecorded in the amount expected to be covered by the Company with regard to costs
associated with significant in-service issues arising in the Rolls-Royce Trent 1000
engine program for Boeing 787, in which the Company has participated as a risk andrevenue sharing partner (RRSP).
(Notes to Consolidated Statement of Changes in Net Assets)
1. The amounts presented are rounded down to the nearest unit.

– 17 –

2. Total number of shares issued as of end of the consolidated fiscal year under review
Ordinary share 167,080,532 shares
3. Dividends
Resolution
GeneralMeeting of
Shareholders
on June 27,
2018
Board ofDirectors
Meeting on
October 30,
2018
Scheduled dateof resolution
GeneralMeeting of
Shareholders
on June 26,
2019

Total dividend(millions ofyen)

Dividend pershare (yen)Record date

Effective date

5,011

30

March 31, 2018

June 28, 2018

5,846

35

September 30,
2018

December 3,
2018

Record date

Effective date

March 31, 2019

June 27, 2019

Total dividend(millions ofyen)

Dividend pershare (yen)

5,846

35

(Notes to Financial Instruments)
1. Matters regarding financial instruments
KHI Group raises necessary funds, in light of its business plans; for long-term working
capital and capital expenditure funds the Group predominantly raises funds through bankloans and issuance of corporate bonds, for short-term working capital it raises funds
through bank loans and issuance of short-term bonds (electronic commercial paper), andso forth. Temporary surplus funds are invested in highly secure financial assets. We use
derivatives to avoid risks described hereunder and do not engage in speculativetransactions.
Operating receivables, namely, trade receivables are exposed to counterparty credit
risk. The currency exchange risk of the debts and credits in foreign currencies whicharise from global business operations is hedged by using foreign exchange forward
contracts, and so forth in principle against the net amount of the debts and credits in theforeign currency. Investments in securities are mainly shares of corporations which wehave business dealings with, and of these investments, those shares that are listed are
exposed to the risk of market price fluctuations.
Most trade payables, which are operating liabilities, have maturities of less than one
year. Some of those are denominated in foreign currencies due to the import of materials,
and so forth, and although they are exposed to the risk of currency fluctuation, most arewithin the limit of the balance of accounts receivable in the same foreign currency. Debts
payable that are composed of borrowings and corporate bonds are raised for the purposeof securing working capital and capital investments, and the longest maturity from thedate of balance sheet is about 18 years. Some of those instruments have floating interest
and are denominated in foreign currencies and are therefore exposed to the risk ofinterest rate and currency exchange fluctuations, however we hedge those risks asrequired by using derivatives transactions (interest rate swap transactions and currency
swap transactions).
Derivative transactions are transactions which include exchange forward contracts andcurrency options and currency swap transactions for the purpose of hedging exchange– 18 –

fluctuation risks of the debts and credits in foreign currencies, and interest rate swap
transactions and so forth for the purpose of hedging interest fluctuation risks of debts
payable. Details of hedging instruments, hedged items, hedging policies, assessment ofhedging effectiveness of hedge accounting are stated in “3. Significant accounting
policies, (7) Method of significant hedge accounting” of “Notes to the basis for
preparation of consolidated financial statements” described above.
2. Matters concerning market value, etc. of financial instruments
The prices recorded in the consolidated balance sheet, market values and the difference
between those as of the end of this consolidated fiscal year are as follows.
(Unit: Millions of yen)Price recorded in
the consolidatedbalance sheet (*)
74,311
427,665
8,140[247,191][123,083](1) Cash on hand and in banks(2) Trade receivables(3) Investments in securities(4) Trade payables(5) Electronically recorded
obligations(6) Short-term debt and current[100,023]
portion of long-term debt
(7) Current portion of bonds[10,000](8) Bonds payable[140,000](9) Long-term debt, less current[187,568]
portion(10) Derivative transactions[1,511](*) Figures which are posted as liabilities are shown in [ ].

Marketvalue (*)
74,311
427,641
8,140[247,191][123,083]

Difference
–

(23)
–
–
–

[100,023]–[10,000][142,106][187,231](2,106)337[1,511]––(Note 1) Matters concerning the method for calculating the market value of financial
instruments and marketable securities and derivatives transactions(1) Cash on hand and in banks
These instruments can be settled within short term and the market value is roughly
equal to book value, therefore the fair market value is stated at book value.
(2) Trade receivables
Trade receivables are grouped into a specified period, and are stated at market
value calculated by the discount rate, which takes into account the respective period
to maturity and credit risk.
(3) Investments in securities
The market value for these securities is stated at the price listed on the exchange.
(4) Trade payables, (5) Electronically recorded obligations, (6) Short-term debt andcurrent portion of long-term debt, (7) Current portion of bonds
These instruments can be settled within short term and market value is roughly equal
to book value, therefore the fair market value is stated at book value.
(8) Bonds payable
The fair market value of these instruments is stated at the market value.
(9) Long-term debt, less current portion
The market value of long-term debt is determined by discounting the total ofprincipal and interest by the interest rate on similar new debt.
(10) Derivatives transactions
The market value of derivatives is stated at the forward exchange rate or the priceoffered by the trading financial institution.
(Note 2) Financial instruments whose market value is deemed extremely difficult toascertain
Shares of affiliates, investments in affiliates and unlisted stocks, and investments in– 19 –

silent partnerships (amount recorded in the consolidated balance sheet was ¥82,575
million) are not included in the table above, as it is deemed to be extremely difficult
to ascertain fair market value because those instruments have no market prices, and
it is not possible to estimate their future cash flows.
(Notes to Per Share Information)
1. Net assets per share¥ 2,851.84
2. Net income per share¥ 164.34(Other)(Damage caused to NIPPI Corporation by snowfall)
The heavy snowfall on February 15, 2014 caused a hangar roof in Atsugi Works of
NIPPI Corporation, which is KHI’s consolidated subsidiary, to collapse, causing
damage to aircrafts of the Japan Maritime Self-Defense Force that was undergoingregular maintenance. The Company and NIPPI Corporation pursued discussions on
handling of this matter with the Ministry of Defense. Nevertheless, in July 2017, theMinistry of Defense set off ¥1.9 billion against the Company’s right to charge to theministry (government), claiming that the ministry sustained losses of the sameamount. Since the Company cannot accept the claim of the Ministry of Defense andthe offsetting, the Company pressed the ministry for payment of 1.9 billion yen,which was set off. However, the Ministry of Defense refused the payment, andtherefore the Company filed a lawsuit seeking payment of the amount with theTokyo District Court in October 2017. Depending on the future outcome of thelawsuit, operating results of the KHI Group may be affected.

– 20 –

Non-consolidated Statement of Changes in Net Assets(From April 1, 2018 to March 31, 2019)

Balance at beginning of
the period
Changes of items during
the period
Cash dividends
Net income
Treasury stock
purchased
Treasury stock disposed
Transfer of loss on
disposal of treasury
stock
Reversal of reserve for
special depreciation
Reserve for advanced
depreciation of fixed
assets
Reversal of provision foradvanced depreciationof fixed assets
Net changes of items
other thanshareholders’ equity
Total changes of items
during the period
Balance at end of theperiodCommonstock

Shareholders’ equity
Capital surplus
Retained earnings
Other retained earnings
Provision for Retained
Legal
Other
for advanced
capitalcapital Provision
specialdepreciation earnings
surplus surplus depreciation
brought
of fixed
forwardassets104,484

52,210

0

2,630

9,599

(Unit: Millions of yen)

Total
Treasury shareholders’stockequity150,909(124)(10,858)
15,097(10,858)
15,097(0)0319,710

(7)

(7)

1

1

(0)

–

450

–

118

(118)

–

(242)

242

–

(450)





(0)

(450)

(123)

4,813

(5)

4,232

104,484

52,210

－

2,180

9,475

155,722(130)

323,943

Valuation and translation adjustments
Net
Deferred
unrealized
Total valuation
gains
gains onand translation(losses) on
securities,
adjustments
hedgesnet tax
Balance at beginning of theperiodChanges of items during theperiodCash dividends

2,688

393

3,082

Total
net assets

322,792(10,858)

Net income

15,097

Treasury stock purchased(7)

Treasury stock disposed
Transfer of loss on disposal oftreasury stockReversal of reserve for special
depreciation
Reserve for advanced
depreciation of fixed assets
Reversal of provision foradvanced depreciation of
fixed assets
Net changes of items otherthan shareholders’ equity
Total changes of items during theperiodBalance at end of the period

1
–
–
–
–
(796)

(680)

(1,477)(1,477)

(796)

(680)

(1,477)

2,755

1,891

(286)

1,604

325,548– 21 –

Notes to the Non-consolidated Financial Statements(Significant accounting policies)
1. Valuation standards and methods of assets(1) Valuation standards and methods of marketable securities(i) Shares of subsidiaries and affiliates
Stated at cost using the moving-average method.
(ii) Other marketable securities
Securities with market value
Stated at market value based on the market price on the account closing date(net unrealized gains or losses on these securities are reported as a separate
item in the net assets on a net-of-tax basis. Cost of securities sold isdetermined by the moving-average method).
Securities without market value
Stated at cost using the moving-average method.
(2) Valuation standards and methods of inventories
Stated at cost using the specific identification method and the movingaverage method (balance sheet amounts are determined based on themethod of writing down book value in accordance with decreased profitabilityof assets).
(3) Valuation standards and methods of derivatives
Stated at market value.
2. Method of depreciation of fixed assets(1) Net property, plant and equipment (other than leased assets)
The straight-line method is used.
(2) Intangible assets (other than leased assets)
The straight-line method is used.
Software for internal use is amortized by the straight-line method over theinternally estimated useful lives (within 5 years).
(3) Leased assets
Finance lease transactions involving the transfer of ownership
The same method as the method of depreciation of fixed assets applied to selfowned fixed assets is used.
Finance lease transactions not involving the transfer of ownership
The leased assets involved in finance lease transactions that do not involve
transfer of ownership are subject to the straight-line method, whereby the leasing
period is deemed to be the duration of useful life and the residual value as zero.
In addition, out of the finance lease transactions that do not transfer ownership,lease transactions whose lease transaction commencement date was on or prior
to March 31, 2008 are accounted for on a basis similar to ordinary rental
transactions.
3. Standards of accounting for provisions(1) Allowance for doubtful receivables
In order to provide for losses due to doubtful accounts from trade receivables andloan receivables, allowance for doubtful receivables is provided principally basedon the historical default rate of normal receivables and with reference to thecollectability of receivables from companies in financial difficulty.
(2) Accrued bonuses
To prepare for the bonus payments to employees, provision for bonuses isprovided in the amount based on the estimated amount of bonus payment.
(3) Provision for product warranties
A provision is recorded for expenditures for warranties concerning construction
contracts based on past experience or on estimations of individual cases.
(4) Provision for losses on construction contracts
A provision for an estimated amount of losses is recorded for the next fiscal year
and thereafter concerning construction works which are anticipated to incur– 22 –

significant losses and which allow reasonable estimation of the loss incurred at
the end of the fiscal year under review among those construction works that havenot been delivered as of the end of the fiscal year.
(5) Employees’ retirement and severance benefits
Employees’ retirement and severance benefits is recorded based on the estimatedamount of retirement benefit obligations and plan assets as of the end of the fiscal
year under review (including the retirement benefit trust) in order to coveremployee retirement benefits.
(i) Allocation of expected retirement benefit payments
When calculating retirement benefit obligations, the benefit formula basis isused to allocate expected retirement benefit payments to the period as of theend of the fiscal year.
(ii) Method of recognizing actuarial differences and prior service costs
The past service costs are amortized using the straight-line method over acertain years (10 years) within the average remaining service period of theemployees when the costs incurred in each year.
Actuarial differences are amortized from the year following the year in which
the differences are recognized using the straight-line method over the averageremaining years of service of the employees (10 years).
(6) Provision related to in-service issues regarding commercial aircraft jet engines
A provision for the amount expected to be covered by the Company with regard
to costs associated with significant in-service issues arising in the Rolls-Royce
Trent 1000 engine program for Boeing 787, in which the Company has participated
as a risk and revenue sharing partner (RRSP).
4. Standards for recognition of revenue and expenses
Recognition of net sales of completed construction contracts and cost of sales ofcompleted construction contracts(i) Construction activities whose outcome from the completed portion as of the endof the fiscal year are deemed to be definite
Percentage-of-completion method (the cost-to-cost method is principally used toestimate the percentage of completion) is applied.
(ii) Other construction activities
Completed-contract method is applied.
5. Other important matters forming the basis for preparing the non-consolidated
financial statements(1) Accounting treatment for hedges(i) Method of hedge accounting
Deferred hedge accounting is applied.
(ii) Hedging instruments and hedged items
Hedging instrument
Hedged items
Forward exchange contracts,
Receivables and payables (including
currency options
forecast transactions) denominated inforeign currency
Interest rate swaps, currency swaps
Borrowings(iii) Hedging policy
Hedging is conducted as a measure against the risk of foreign currency
variation and interest rate variation based on company rules.
(iv) Method of assessing hedging effectivenessHedging effectiveness is evaluated based on fluctuation amounts of hedged
items and hedging instruments by comparing the cumulative changes ofmarket fluctuations between the hedged item with the hedging instrument
during the period between the start of the transaction to the point at which
effectiveness is assessed.
(2) Standards for the translation of assets or liabilities denominated in foreign
currencies– 23 –

Receivables and payables denominated in foreign currencies are translated into
yen at the foreign exchange spot rate on the date of the balance sheet, anddifferences arising from the translation are calculated as gains or losses.
(3) Accounting treatment for retirement benefits
Accounting treatment for unrecognized actuarial gains or losses and unrecognized
past service cost for retirement benefits are different from accounting treatment
for them in the consolidated financial statements.
(4) Accounting treatment for consumption taxes
Consumption tax and local consumption tax are accounted for by the taxexclusion method.
(5) Application of the consolidated taxation system
The consolidated taxation system is applied.
(Changes in presentation methods)
Non-consolidated Balance Sheet
The Company has applied the “Partial Amendments to Accounting Standard for Tax EffectAccounting” (ASBJ Statement No. 28, February 16, 2018) effective from the fiscal year
under review. Accordingly, deferred tax assets, if any, were presented under “investments
and other assets” and deferred tax, if any, liabilities were presented under “long-term
liabilities.”(Notes to Non-consolidated Balance Sheet)
1. The amounts presented are rounded down to the nearest unit.
2. Accumulated depreciation of property, plant and equipment
3. Monetary receivables from and payables to affiliates
Short-term monetary assets
Long-term monetary assets
Short-term monetary liabilities
4. Asset pledged as collateral and liability relating to collateral(1) Assets pledged as collateral
Buildings
Investments in securities
Stock of affiliates
Total¥630,831 million¥174,718 million¥477 million¥89,200 million¥61 million¥14 million¥67 million¥142 million(2) Liability relating to collateral
Short-term debt
¥2 million
Long-term debt, less current portion¥16 million
Total¥18 million
5. Guarantee liability for bank loans of subsidiaries and affiliates,etc. and employees¥28,788 million
6. With respect to some work in process, a trust beneficiary right has been establishedwith the expected trade receivables as a trust asset. Work in process related to thesaid trust asset amounts to ¥4,926 million.
7. In some overseas construction works for LNG tanks, a petition for arbitration has
been filed with the ICC (The International Chamber of Commerce) during the fiscal
year under review concerning losses incurred by the Company due to a breach ofcontract because of non-fulfillment of contract by an overseas contractor and otherfactors. The Company plans to redeem the amount of loss in connection with thismatter (approximately ¥51 billion) through future arbitration and has recorded apart of the expected amount in “others” under “investments and other assets.”(Notes to Non-consolidated Statement of Income)1. The amounts presented are rounded down to the nearest unit.
2. Transactions with affiliates– 24 –

Transaction from operating transactions
Net sales¥430,388 million
Purchases¥184,825 million
Transaction from non-operating transactions¥21,800 million
3. Payments for the in-service issues of commercial aircraft jet engines have beenrecorded in the amount expected to be covered by the Company with regard to costs
associated with significant in-service issues arising in the Rolls-Royce Trent 1000
engine program for Boeing 787, in which the Company has participated as a risk andrevenue sharing partner (RRSP).
(Notes to Non-consolidated Statement of Changes in Net Assets)
1. The amounts presented are rounded down to the nearest unit.
2. Type of treasury shares and number of shares at the end of the current fiscal year
Ordinary share 35,196 shares(Notes to Tax Effect Accounting)Among other factors, the main contributing factor to deferred tax assets is thedisallowance of various provisions such as the employees’ retirement and severance
benefits and the losses on construction contracts, and the main contributing factor to thedeferred tax liabilities incurred is provision for advanced depreciation of fixed assets.
(Notes to Leased Fixed Assets)
Other than the fixed assets recorded on the balance sheet, certain manufacturing
facilities are used under finance lease contracts not involving the transfer of theownership of the leased property.
(Notes to Transactions with Interested Parties)
Not applicable.
(Notes to Per Share Information)
1. Net assets per share¥1,948.86
2. Net income per share¥90.37(Other)(Damage caused to NIPPI Corporation by snowfall)
The heavy snowfall on February 15, 2014 caused a hangar roof in Atsugi Works of
NIPPI Corporation, which is KHI’s consolidated subsidiary, to collapse, causing
damage to aircrafts of the Japan Maritime Self-Defense Force that was undergoingregular maintenance. The Company and NIPPI Corporation pursued discussions on
handling of this matter with the Ministry of Defense. Nevertheless, in July 2017, theMinistry of Defense set off ¥1.9 billion against the Company’s right to charge to theministry (government), claiming that the ministry sustained losses of the sameamount. Since the Company cannot accept the claim of the Ministry of Defense andthe offsetting, the Company pressed the ministry for payment of 1.9 billion yen,which was set off. However, the Ministry of Defense refused the payment, andtherefore the Company filed a lawsuit seeking payment of the amount with theTokyo District Court in October 2017. Depending on the future outcome of thelawsuit, operating results of the Company may be affected.

– 25 –