AR2007_E_H1.eps

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21 Business field Market scale (billions of yen) DTS business After integration Wind tunnel balances

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25 Test category Clinical chemistry Market scale 1 trillion Hematology Immunology Hematology analyzers Coagulation 0.2 trillion 0.1 trillion 1 trillion Hospitals Large hospitals testing centers Medium-and Clinical chemistry small-sized hospitals (developed by HORIBA) Private practitioners Hospital units and surgery rooms (POCT) Blood sugar measurement systems (purchased from Sankyo Co., Ltd.), small-sized clinical chemistry analyzers Hematology analyzer systems (developed by HORIBA) Medium- and small-sized hematology analyzers Field in which HORIBA exhibits strength Coagulation reagents (BIOPEP) CRP counters for asthma medication (for inflammation diagnosis)

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36 Selection, Dismissal Business Execution Instructions Supervision Supervision Entrusting Business Execution Direction and Orders Reporting Direction and Orders Appointment, Dismissal Appointment, Dismissal Approval of Resignation, Dismissal, and Reappointment Judging Suitability of the Independent Auditors Reporting Reporting Reporting Supervising, Monitoring Coordination Reporting Reporting Discussed Items Coordination Supervising, Monitoring Reporting Principles Supervising Supervising Coordination Coordination Advisory, Proposals Appointment, Dismissal Financial Audit Committees, etc. refer to committees and conferences that are established and registered based on the "Regulations concerning conferences and committees," such as the Promotion Committee for Management of Business with Public Subsidies and the Safety and Health Committee. The CSR Promotion Committee decides on the CSR Policy and priority measures and organizes CSR-related specific activities. In addition, it discusses and approves the issues and the measures concerning the promotion of risk management.

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38 HORIBA, Ltd. and Consolidated Subsidiaries The years ended March 20, 2003, 2004, 2005, 2006, the year ended December 31, 2006, and the year ended December 31, 2007 Millions of yen Thousands of U.S. dollars (Note 1) 3/2003 3/2004 3/2005 3/ / / /2007 For the Year: Net sales Operating costs and expenses Operating income Income before income taxes Income taxes Net income Capital expenditures Depreciation and amortization Research and development expenses 78,501 73,027 5,474 3,119 2, ,444 2,915 4,044 85,073 78,223 6,850 4,780 2,574 2,074 3,501 3,037 5,129 92,492 83,119 9,373 6,105 2,290 3,524 3,956 2,944 5, ,665 94,390 11,275 10,748 4,214 6,473 5,664 3,173 6, , ,392 11,707 10,588 4,028 6,510 5,059 3,246 6, , ,753 16,530 14,106 5,419 8,691 9,336 4,161 9,474 $1,263,977 1,119, , ,574 47,473 76,137 81,787 36,452 82,996 At Year-End: Total assets Property, plant and equipment, net Net assets 100,542 19,000 40,144 92,657 18,841 43,348 99,913 18,481 52, ,976 20,223 65, ,236 21,700 72, ,367 24,071 80,381 $1,352, , ,170 Per Share Information: Net income Net assets Cash dividends , , , (Notes 2, 3, 4) U.S. dollars (Note 1) , , , $ Financial Ratios: Return on assets (%) Return on equity (%) Inventory turnover (days) Price-earning ratio (times) Shareholders' equity ratio (%) Interest coverage ratio (times) Consolidated dividend payout ratio (%) Non-consolidated dividend payout ratio (%) Notes: 1. The U.S. dollar amounts are provided solely for convenience at the rate of to US$1.00, the rate prevailing on December 31, Effective for the year ended March 20, 2003, the Company adopted the revised accounting standard for per share information. 3. Effective for the year ended December 31, 2006, the Company adopted the revised accounting standard for presentation of net assets in the balance sheet. The amounts in prior years have not been restated. 4. For the year ended December 31, 2006, the accounting term for the Company and HORIBA Advanced Techno Co., Ltd. was only 9 months and 11 days and that for HORIBA STEC Co., Ltd. was only 9 months as a result of a changing in the fiscal year-end to December 31. Computation: Net income per share ( ) = 100 x (net income - projected bonuses to directors and corporate auditors)* / (average number of shares issued and outstanding in the fiscal period, corrected for treasury stock) Net assets per share ( ) = (shareholders equity - projected bonuses to directors and corporate auditors)* / (number of shares issued and outstanding, corrected for treasury stock) Return on assets (ROA, %) = 100 x net income / average total assets in prior fiscal period Return on equity (ROE, %) = 100 x net income / average shareholders equity in prior fiscal period Inventory turnover (days) = average inventory in fiscal period / daily sales Price-earnings ratio (PER, times) = share price at end of fiscal period / net income per share Shareholders equity ratio (%) = 100 x shareholders equity / total assets Interest coverage ratio (times) = (operating income + interest and dividend income) / interest expense and note discount fees Consolidated dividend payout ratio (%) = 100 x dividends paid / net income (consolidated) Non-consolidated dividend payout ratio (%) = 100 x dividends paid / net income (non-consolidated) *Directors' and corporate auditors' bonuses for the year ended December 31, 2006 and 2007 have been recognized in selling, general and administrative expenses.

39 Note: All years referred to in this annual report are fiscal years. For example, 3/2006 refers to the fiscal year ended March 20, 2006, and 12/2007 refers to the fiscal year ended December 31, Net Sales by Segment Operating Income and Net Income and Return on Equity (ROE) Operating Income to Net Sales Millions of Yen Millions of Yen % Millions of Yen % 160,000 18, , Automotive Test Systems Operating Income Net Income Analytical Instruments & Systems 16, ,283 Operating Income to Net Sales ROE Medical-Diagnostic Instruments 9, ,000 & Systems 26,934 16,000 8,691 Semiconductor 10 Instruments & Systems 8,000 14, , , ,665 20,111 25,836 7,000 12,000 11,707 6,473 6, ,000 18,039 11,275 92,492 6, , ,073 18,183 40,038 10,000 9,373 78,501 20,508 80,000 14,764 5, , ,777 17,301 35,054 8, ,672 6,850 4, ,000 15, ,524 29,426 28,510 6,000 5, ,000 27,037 51, ,000 37,945 4, ,074 34, , ,000 27,022 21,131 23,582 2,000 1, /2003 3/2004 3/2005 3/ / / /2003 3/2004 3/2005 3/ / / /2003 3/2004 3/2005 3/ / /2007 Total Assets and Return on Assets (ROA) Inventories and Inventory Turnover (Days) Interest Coverage Ratio Millions of Yen % Millions of Yen Days Times 160, , ,367 33, Total Assets ROA Inventories Days , , , , , , , , ,542 99,913 22, ,000 92, ,000 19, ,336 80, , , ,000 20, ,000 5, /2003 3/2004 3/2005 3/ / / /2003 3/2004 3/2005 3/ / / /2003 3/2004 3/2005 3/ / /2007 Net Income per Share and R&D Expenditures and R&D Cash Dividends per Share Net Assets per Share Expenditures to Net Sales Yen Yen Millions of Yen % Yen 240 2,000 10,000 Net Income per Share 1, R&D Expeditures 9, Net Assets per Share R&D Expeditures to Net Sales 1, , , ,600 8, , , , ,000 6, ,200 6, ,636 6, , , , , , , , /2003 3/2004 3/2005 3/ / /2007 3/2003 3/2004 3/2005 3/ / / /2003 3/2004 3/2005 3/ / /2007

40 HORIBA, Ltd. and Consolidated Subsidiaries Consolidated Financial Review During the fiscal year under review, the global economy was generally solid in the first half of the year, but rising material prices and the worsening subprime loan problem reduced housing construction in the U.S. in the second half. Toward fiscal year). For the year ended December 31, 2007, the operating results of the Company and all of its consolidated subsidiaries were consolidated for a twelve-month period from January through December. the year-end, consumer spending also weakened, leaving a growing sense of an economic slowdown. In Europe, the pace of economic recovery eased somewhat as well. On the other hand, Asian countries, in particular China and India, continued their dynamic economic expansion. Japan s Net Sales In the fiscal year under review, consolidated net sales increased by 28,184 million, or 24.3%, year on year to a record 144,283 million. economy basically sustained a gradual expansion, thanks to a solid performance by the corporate sector in terms of capital spending and exports. In the second half, however, housing spending was acutely depressed and business confidence worsened to a certain degree. During the term, the yen depreciated against the U.S. dollar and the euro, compared to the previous year, but toward the year-end, the yen began to appreciate. In the markets for analytical systems and measurement systems, there was solid demand, thanks to increased investment in facilities and research and development for environmental programs. However, with concerns over a slowdown in the U.S. economy, demand in semiconductor related markets softened, while pricing remained under Business Segments Automotive Test Systems Segment sales increased by 35.7% to 51,475 million. Sales of emission measurement systems, our mainstay, continued to show solid growth as a result of developments in energy saving engines by auto manufacturers. In addition, sales of the automotive development test systems (DTS) business acquired from Germany s Carl Schenck AG in September 2005 expanded thanks to the Company s existing sales and service networks. By geographic region *2, sales in Japan and other Asian countries increased by 48.3% from the previous year, while in the Americas and Europe sales increased by 44.8% and 20.2%, respectively. pressure due to intensifying competition. In this environment, HORIBA embarked on the formulation of a new Mid-Long Term Management Plan from the previous year with the goal set for Under the slogan HORIBA Group is One Company, we promoted group-wide management aimed at realizing the plan s targets of 150 billion in sales, operating income of 10% or more, and ROE Analytical Instruments & Systems Segment sales rose 14.2% to 40,038 million. Sales of analytical and measurement equipment for environmental regulation related business in areas such as air pollution and water quality were brisk, and HORIBA Jobin Yvon SAS in France, a company with considerable expertise in of 11% or more. As a result of our efforts, HORIBA nanotechnology measurement, leveraged its advanced increased consolidated sales from a year ago to a record-high. Operating and net income also grew to record-highs. *1 As a result of a change in the fiscal year-end from March technological capabilities to expand sales in related cutting edge scientific fields. By geographic region *2, sales grew by 28.4% in Japan and other Asian countries and by 16.9% in Europe, but sales in the Americas declined by 38.3%. 20 to December 31, the accounting term for the Company and HORIBA Advanced Techno Co., Ltd. was only 9 months and 11 days and that for HORIBA STEC, Co., Ltd. was only 9 months for the year ended December 31, 2006 (the previous Medical-Diagnostic Instruments & Systems Segment sales increased by 12.4% to 25,836 million. Sales of large hematology analyzers and medium-sized clinical 38 HORIBA, Ltd. Annual Report Fiscal 2007

41 chemistry analyzers increased in the European and American markets, while sales of testing reagents expanded, reflecting strong growth in the number of analyzers in use. By geographic region *2, sales increased by 25.2% in Japan and other Asian countries and by 9.8% in Europe. the actual increase was 6,682 million. Selling, general and administrative (SG&A) expenses increased by 12,506 million to 50,388 million, and their ratio to net sales worsened by 2.3 percentage points to 34.9%, due to the above mentioned change in the accounting method for R&D expenses. Excluding a 2,396 Semiconductor Instruments & Systems Segment sales rose 33.9% to 26,934 million. In spite of decreasing demand in the semiconductor market and the falling prices of semiconductor products (DRAM, etc.) in the second half of the year, sales of mass flow controllers used in semiconductor manufacturing equipment increased on the back of expanded demand in the semiconductor market in million impact from fluctuations in foreign exchange rates, the actual increase in SG&A expenses was 10,110 million rather than the nominal increase of 12,506 million. As a result, consolidated operating income increased by 4,823 million, or 41.2%, year on year to 16,530 million. The operating income ratio was 11.5%, up 1.4 percentage points from 10.1% in the previous year. the first half of the year. By geographic region *2, sales were up 42.0% in Japan and other Asian countries, 11.3% in the Americas, and 27.7% in Europe. Business Segments Automotive Test Systems Segment operating income increased by 83.7% to 6,758 *2 Geographic segmentation is based on the region where sales occur. million, thanks to growth in sales of engine measurement systems and an improvement in the profitability of exports stemming from a stronger yen. These factors offset a loss in The average foreign exchange rate applied in book closings was to the U.S. dollar, compared with the average of in the previous year, and to the euro, compared with in the previous year. Using the exchange rates of the previous year, consolidated sales would have been 136,977 million. Thus, the appreciation of the yen lifted sales by 7,306 million. the DTS business. Analytical Instruments & Systems Segment operating income rose by 0.1% to 2,672 million due to higher sales and increased effectiveness in mass production. Medical-Diagnostic Instruments & Systems Despite sales growth, segment operating income decreased by 12.3% to 1,232 million because the strong Cost of Sales, SG&A Expenses, and Operating Income Consolidated cost of sales increased by 10,855 million to 77,365 million. The cost of sales ratio improved 3.7 percentage points from a year ago to 53.6%. This was caused by thorough cost cutting efforts, including joint purchasing by group companies and other measures and the impact from a change in the accounting method for R&D yen impaired the profitability of France-based HORIBA ABX SAS, which contributes most of the operating income in this segment. Semiconductor Instruments & Systems Segment operating income rose by 48.4% to 5,868 million due to higher sales and increased effectiveness in mass production. expenses from partial accounting in manufacturing costs to full accounting in general and administrative expenses. Cost of sales increased by 10,855 million, but after excluding 4,173 million from fluctuations in foreign exchange rates, Net Income The financial account balance deteriorated by 207 million compared with that of the previous year, due to an increase HORIBA, Ltd. Annual Report Fiscal

42 HORIBA, Ltd. and Consolidated Subsidiaries Consolidated Financial Review in interest bearing debt caused by the third issuance of unsecured straight corporate bonds and other factors. In the current fiscal year, HORIBA recorded special losses, up 8,006 million. This rise mainly reflected an increase of 7,501 million in retained earnings and a respective increase of 214 million in common stock and capital surplus. including a 1,041 million provision for possible losses from litigation and 703 million resulting from the recomputation of beginning inventory balances under the new accounting policy for R&D expenses. In addition, the income tax burden increased. Cash Flows Cash Flow from Operating Activities Net cash provided by operating activities amounted to 13,582 million. This was due mainly to 14,106 million in Nevertheless, operating income growth helped to boost income before income taxes and 4,161 million in pretax income by 3,518 million, or 33.2%, to 14,106 million and net income by 2,181 million, or 33.5%, to 8,691 million. depreciation and amortization, against 5,157 million for income taxes paid and a 2,830 million increase in inventories. Financial Position Total consolidated assets as of December 31, 2007 were 154,367 million, up 25,131 million from December 31, Total current assets rose by 20,570 million to 113,330 million. The main factors contributing to the increase were trade notes and accounts receivable, which increased by 3,388 million mainly due to higher sales, and Cash Flow from Investing Activities Net cash used in investing activities totaled 16,445 million. This was due primarily to a 7,508 million increase in time deposits, a 700 million increase in time deposits restricted for use, 5,701 million in payments for the purchase of property, plant and equipment, and 3,400 million in payments for the purchase of intangibles. inventories, which increased by 2,787 million, reflecting higher procurement levels in response to higher shipment volumes. Total fixed assets increased by 4,561 million to 41,037 million. Net property, plant and equipment increased by 2,371 million to 24,071 million, mainly due to investment related to the new enterprise resource planning Cash Flow from Financing Activities Net cash provided by financing activities amounted to 7,677 million. This was attributable to 9,945 million in proceeds from the issuance of bonds against a 1,193 million outflow for payment of cash dividends. (ERP) system (servers, etc.) and HORIBA ABX SAS (France) acquiring assets for leasing. In addition, intangible fixed assets rose by 2,758 million to 8,502 million due mainly to investment related to the new ERP system (software, etc.) As a result, there was a net increase of 4,892 million in cash and cash equivalents to 20,565 million as of December 31, 2007 Total consolidated liabilities were 73,986 million, up 17,125 million. The main factors behind the increase included an increase of 1,884 million in trade notes and accounts payable to 16,845 million, reflecting higher procurement levels in response to higher shipment volumes, and an increase of 8,954 million to 25,177 million in interest bearing liabilities due primarily to the third issuance of unsecured bonds. Total consolidated net assets amounted to 80,381 million, Dividend Policy HORIBA s basic policy regarding dividends is to maintain its standard payout ratio in which the total dividend payment amount is equal to 30% of the nonconsolidated net income of the Company. In some cases, a portion of extraordinary gains and/or losses may be excluded from the calculation of the payout ratio. The Company receives a certain proportion of the net income of each group company as a dividend. 40 HORIBA, Ltd. Annual Report Fiscal 2007

43 Thus, although dividend payments to shareholders are computed based on the nonconsolidated net income of the Company, they are in effect made on consolidated earnings. In addition the Company intends to appropriate internal reserves for retained earnings as working capital for business expansion, capital expenditures and investments in research and development, with the aim of improving corporate value business operations. HORIBA conducts complete and diligent investigations when making acquisitions and forming alliances in order to avoid a negative impact on earnings and cash flows. However, it is possible that HORIBA s financial condition and business performance could be affected if an acquisition or alliance did not proceed in accordance with initial plans. in the medium to long term. (3) Repairs of Facilities Following Natural Disasters and Major Risks 1. Business Risks (1) Risks Associated with International Business Activities HORIBA conducts business activities in many countries around the world, including the U.S. and countries in Europe and Asia. Major risks associated with the entry into these overseas markets and conducting business there include sudden shifts in economic conditions or in product supply and demand, sudden changes in retail prices due to Associated Delays in Delivery, etc. HORIBA produces products in Japan, Europe (France and Germany), the U.S., Asia (China, South Korea) and other countries. In the case of a major earthquake or other natural disaster, HORIBA may incur substantial costs for repair of manufacturing facilities, etc., or losses may be incurred due to delays in shipments or other factors. Under such circumstances, there would be the possibility of a significant impact on HORIBA s financial condition and business performance. competition, changes in laws, regulations and tax systems and social disruptions such as terrorism or war. These risks could affect HORIBA s financial position and business results. Especially against fluctuations in foreign currency exchange rates, HORIBA promotes local production and supply and employs foreign exchange forward contracts within the limits of its balance of foreign currency denominated receivables and payables related to import and export transactions to minimize foreign exchange risks. However, fluctuations in foreign exchange rates could have an impact when financial (4) Risks Associated with Contracts and Transactions HORIBA concludes various contracts with customers, suppliers and other stakeholders and performs its business activities based on these contracts. Nevertheless, there is a possibility of claims for compensation for damages due to different views of execution and a different understanding of business terms between the parties. It is possible that such circumstances could have a significant impact on HORIBA s financial condition and business performance. statements prepared in local currencies are translated into Japanese yen for the consolidated financial statements, and a major change in foreign exchange rates beyond our estimates could affect our financial condition and business performance. (5) Other Business Risks In addition to the above mentioned risks, there are risks associated with a breakdown or malfunction of information systems and regulations in the environmental area. These risks could affect HORIBA s financial position and business (2) Changes in Performance or Financial Position results. Associated with Acquisitions or Alliances HORIBA has actively promoted corporate acquisitions and alliances to enhance the efficiency and effectiveness of its 2. Risks Associated with Development and Production (1) Compensation for Product Liability HORIBA, Ltd. Annual Report Fiscal

44 HORIBA, Ltd. and Consolidated Subsidiaries Consolidated Financial Review HORIBA conducts optimum quality control for its products performance. and services and strives to maintain the highest standards of reliability. Nevertheless, there is always a possibility of recalls or litigation arising from unforeseen defects. HORIBA carries insurance for product liability compensation, but there can be no guarantee that this insurance would cover the full amount of any unforeseen damages. Such circumstances could have an effect on HORIBA s financial condition and business performance. 3. Financial Risks (1) Shifts in the Market Price of Securities and Other Assets HORIBA holds shares in its major alliance partners and other companies as part of its technology and business strategies for the future. Currently, HORIBA s acquisitions and sales of investment securities are carefully inspected by the Board of (2) Delays in Development of New Products HORIBA s business field, measuring instruments, is extremely specialized and requires high levels of technical capability. HORIBA, therefore, invests large sums in product development. However, it is possible that expected returns will not be realized due to unforeseen circumstances. Directors, market prices of the shares are reported to top management on a timely basis and the purpose of holding investment securities is properly reviewed. In addition, HORIBA implemented impairment accounting in the year ended March 31, 2005, before legally required. However, if further declines in market prices or profitability of land, buildings or other assets occur in the future, there may be a (3) Risks Concerning Intellectual Property Rights HORIBA possesses a wide range of intellectual property negative impact on the financial condition and business performance of HORIBA. rights related to the products it manufactures, including patents, trademarks and expertise, which give it superiority in terms of competitiveness. HORIBA exercises all possible caution regarding management of these intellectual property rights, but in the case of infringement by a third party, it is possible that HORIBA will be unable to attain its expected earnings. There is also a possibility of disputes over intellectual property rights with other companies. Such (2) Reversal of Deferred Tax Assets Resulting from Changes in Systems or Accounting Policies HORIBA considers the deferred tax assets recorded at the end of the current period under review to be fully recoverable with future earnings (taxable income), but it is possible that a reversal of a portion of these assets will be required as a result of systemic changes. circumstances may significantly affect HORIBA s financial condition and business performance. 4. Risks by Business Segment (4) Risks Concerning Fluctuation in Raw Material Prices HORIBA takes account of fluctuation risks in purchasing prices and makes arrangements such as advance purchasing, when necessary. However, significant fluctuation may erode profitability, as a rise in purchasing prices may not be sufficiently reflected in selling prices for some time, since it takes a certain amount of time to pass on arise in purchasing prices to selling prices. Such circumstances may significantly affect HORIBA's financial condition and business HORIBA consists of four business segments: Automotive Test Systems, Analytical Instruments & Systems, Medical-Diagnostic Instruments & Systems, and Semiconductor Instruments & Systems. The Company can achieve balanced growth by overcoming each segment s weakness with complementary strengths among the business segments. Nevertheless, each of the business segments carries risks associated with fluctuations in its respective operations. 42 HORIBA, Ltd. Annual Report Fiscal 2007

45 (1) Automotive Test Systems Emission measurement systems, the main products of this segment. are used by automobile manufacturers, automotive component manufacturers and government agencies. Thus, quickly respond to customers needs. Nevertheless, sharp fluctuations in the semiconductor market and investments by semiconductor manufacturers could affect the financial condition and business performance of HORIBA. the trend of setting legal limits on exhaust emissions affects demand. In such circumstances, it is possible that the financial condition and business performance of HORIBA will be significantly affected by future regulations. Furthermore, with capital expenditures related to shifts in the automation of automotive test systems, there is a possibility of a significant impact on HORIBA s financial condition and business performance. (2) Analytical Instruments & Systems Scientific analysis instruments in this segment are used for R&D or product quality testing, and there are risks that demand may be affected by the R&D budgets of government agencies, investments in R&D and the production of private enterprises. In addition, demand for environmental measuring instruments, such as analyzers for air pollution and water quality, may be affected by changes in environmental regulations. It is possible that such circumstances could have a significant impact on HORIBA s financial condition and business performance. (3) Medical-Diagnostic Instruments & Systems The main products in this segment are hematology analyzers, which target the market for small- and medium-sized equipment used by small- and medium-sized hospitals and medical practitioners. Price competition beyond our expectations could have a significant impact on HORIBA s financial condition and business performance. (4) Semiconductor Instruments & Systems The main products in this segment are fluid control products for semiconductor manufacturing processes and products that support R&D and quality testing by semiconductor manufacturers. To minimize fluctuations in the semiconductor market, HORIBA makes efforts to shorten lead time and HORIBA, Ltd. Annual Report Fiscal

46 Consolidated Balance Sheets 44 HORIBA, Ltd. Annual Report Fiscal 2007

47 HORIBA, Ltd. Annual Report Fiscal

48 Consolidated Statements of Income 46 HORIBA, Ltd. Annual Report Fiscal 2007

49 Consolidated Statements of Changes in Net Assets HORIBA, Ltd. Annual Report Fiscal

50 Consolidated Statements of Cash Flows 48 HORIBA, Ltd. Annual Report Fiscal 2007

51 HORIBA, Ltd. and Consolidated Subsidiaries Notes to Consolidated Financial Statements 1. Basis of presenting consolidated financial statements The accompanying consolidated financial statements of HORIBA, Ltd. ( the Company ) have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Law and its related accounting regulations and in conformity with accounting principles generally accepted in Japan ( Japanese GAAP ), which are different in certain respects as to application and disclosure requirements from International Financial Reporting Standards. The accounts of overseas subsidiaries are based on their accounting records maintained in conformity with generally accepted accounting principles prevailing in the respective countries of domicile. The accompanying consolidated financial statements have been restructured and translated into English (with some expanded descriptions) from the consolidated financial statements of the Company prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Japanese Financial Instruments and Exchange Law. Some supplementary information included in the statutory Japanese language consolidated financial statements, but not required for fair presentation, is not presented in the accompanying consolidated financial statements. The translation of the Japanese yen amounts into U.S. dollars is included solely for the convenience of readers outside Japan, using the prevailing exchange rate at December 31, 2007, which was to U.S.$1.00. The translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be converted into U.S. dollars at this or any other rate of exchange. As a result of a change in the fiscal year-end from March 20 to December 31, the accounting term for the Company and HORIBA Advanced Techno Co., Ltd. was only 9 months and 11 days and that for HORIBA STEC, Co., Ltd. was only 9 months for the year ended December 31, 2006 (the previous fiscal year). For the year ended December 31, 2006 (the previous fiscal year), the operating results of the Company and the two consolidated subsidiaries mentioned above for the nine-month period from April through December and the operating results of the other consolidated subsidiaries for the twelve-month period from January through December were consolidated. For the year ended December 31, 2007, the operating results of the Company and all of its consolidated subsidiaries for the twelve-month period from January through December were consolidated. 2. Summary of significant accounting policies (a) Principles of consolidation The consolidated financial statements include the accounts of the Company and 42 of its subsidiaries ( HORIBA as a consolidated group). The accompanying consolidated financial statements include the accounts of the Company and significant companies over which the Company has control through majority voting rights or certain other conditions evidencing control by the Company. Significant inter-company transactions and accounts have been eliminated in consolidation. In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries, including the portions attributable to minority shareholders, are evaluated using the fair value at the time the Company acquired control of the respective subsidiaries. Acquisition costs in excess of the net assets of acquired subsidiaries and affiliates which cannot be specifically assigned to individual accounts are amortized on a straight-line basis over five years. Some of the overseas consolidated subsidiaries amortize acquisition costs in excess of the net assets of acquired subsidiaries and affiliates which cannot be specifically assigned to individual accounts on a straight-line basis over four to twenty years, in accordance with generally accepted accounting principles of the country of their incorporation. At December 31, 2007, the year-end of the consolidated subsidiaries matches that of the consolidated financial statements (see note 1). One of the Company s subsidiaries is not included in the consolidated accounts as the effect on total assets, sales, income and retained earnings is immaterial. The Company has seven affiliated companies. For one of the seven affiliates, the equity method was applied. Investments in six affiliates (generally 20%-50% ownership) over which the Company has the ability to exercise significant influence over operating and financial policies and one nonconsolidated subsidiary were accounted for on a cost basis, not by the equity method, as the effects on income and retained earnings were immaterial. (b) Cash and cash equivalents Cash and cash equivalents include cash on hand, readily available bank deposits, and short-term highly liquid investments readily convertible into cash with insignificant risk of change in value and original maturities of three months or less from date of purchase. (c) Securities Available-for-sale securities with available fair market values are stated at fair market value. Unrealized gains and losses on securities are reported, net of applicable income taxes, as a separate component of net assets. Realized gains and losses on the sale of such securities are computed using moving average cost. Available-for-sale securities with no available fair market value are stated mainly at moving average cost. (d) Inventories Inventories are stated at cost. Cost is principally determined by the weighted average method for finished products and work-in-process and by the moving average method for raw materials. (e) Property, plant and equipment and depreciation Property, plant and equipment are stated at cost. Depreciation is computed on the following methods over the estimated useful life of the asset. Buildings acquired after April 1, 1998 and the EPR system (server, etc) included in Other property, plant and equipment is depreciated by the straight-line method. HORIBA, Ltd. Annual Report Fiscal

52 HORIBA, Ltd. and Consolidated Subsidiaries Notes to Consolidated Financial Statements Other property, plant and equipment is depreciated by the Company and domestic subsidiaries by the declining balance method and by overseas subsidiaries by the straight-line method over the useful life of the asset. Estimated useful lives of assets are principally as follows: Buildings and structures - 5 to 60 years Machinery, equipment and vehicles - 2 to 12 years (f) Software Amortization of computer software, which is used by HORIBA and included in Other intangibles in the consolidated balance sheets, is computed on the straight-line method over the estimated useful life of 5 to 10 years. (g) Allowance for doubtful receivables The Company and its domestic subsidiaries provide for doubtful accounts principally at an amount computed based on the actual ratio of bad debts in the past plus estimated uncollectible amounts of certain individual receivables. The overseas subsidiaries provide for doubtful accounts based on estimates by management. (h) Accrued bonuses to employees Accrued bonuses to employees are provided for the expected payment of employee bonuses for the current fiscal year to those employees serving at the end of the fiscal year. Effective January 1, 2007, the Company and certain domestic subsidiaries revised the specific computation period. This revision had no impact on the consolidated statements of income for the year ended December 31, (i) Accrued bonuses to directors and corporate auditors The Company s domestic subsidiaries provide for accrued bonuses to directors and corporate auditors for the expected payment of director and corporate auditor bonuses for the current fiscal year to those directors and corporate auditors serving at the end of the fiscal year. Prior to the year ended December 31, 2006, bonuses to directors and corporate auditors were accounted for as a reduction of retained earnings. In the year ended December 31, 2006, the Company and certain domestic subsidiaries adopted Accounting Standard for Directors Bonuses (Accounting Standards Board of Japan Statement No. 4 issued on November 29, 2005) and changed to provide for bonuses to directors and corporate auditors at the end of the fiscal year to which such bonuses were attributable. The effect of the adoption of this new accounting standard on operating income and income before income taxes was 300 million. The effect on segment information is described in Note 14. () Reserve for product warranty Reserve for product warranty is provided for accrued warranty expenses for products of the Company and certain subsidiaries. The provision is determined based on actual product warranty liability incurred in the past. (k) Retirement benefits and pension plans The Company and certain consolidated subsidiaries provide for employees severance and retirement benefits based on estimated amounts of projected benefit obligation and the fair value of plan assets. Actuarial gains or losses are recognized in expenses using the straight-line method over a fixed term of years (5 years) within the average of the estimated remaining service years commencing with the following period. In the Company, prior service costs are recognized in expenses using the straight-line method over a fixed term of years (10 years) within the average of the estimated remaining service years commencing in the period they arise. In certain consolidated subsidiaries, they are expensed in the period they arise. (l) Retirement benefits for directors and corporate auditors Retirement benefits was determined for directors and corporate auditors are provided for at an amount based upon internal rules at the balance sheet date. The Company abolished the rule for retirement benefits for the outside director and the outside auditors and decided the payment of retirement benefits for the termination pursuant to resolutions made at the fixed shareholder s meeting held on March 24, The amount of retirement benefits was determined according to the length of service of the relevant director and auditors was 7 million ($61 thousand) and is presented in Other noncurrent liabilities. (m) Impairment of fixed assets. HORIBA reviewed its long-lived assets for impairment and, as a result, recognized a special loss on impairment of goodwill for the year ended December 31, Location Assets Loss on impairment SRH Systems Ltd. (U.K.) Goodwill 237 million In applying the accounting standard for impairment of fixed assets, HORIBA evaluated indications of impairment by grouping assets on an industry segment basis. HORIBA estimated the recoverability of the goodwill for the investment in SRH Systems Ltd. (U.K.) under the estimated term of future cash flows and recognized an impairment loss for the full amount of the book value. (n) Reserve for loss on guarantees A reserve for loss on guarantees was provided in an estimated amount for an affiliated company after consideration of the company s financial position, etc. (o) Provision for possible losses from litigation A provision for possible losses from litigation was set aside for payments to settle current lawsuits and in preparation for payments that may arise in the future. A lawsuit was filed by Micronics Japan Co., Ltd. against the Company seeking compensation for damages related to an agreement to develop and commercialize liquid-crystal related testing equipment. The Company lost the case in the Tokyo District Court on May 22, 2007 and appealed the decision to the Tokyo High Court. Taking into account the increased possibility of liability, a provision for loss in the amount of 1,204 million ($10,548 thousand), which includes provision for the payment of damages in the amount of 933 million ($8,173 thousand) and related costs and interest, was set aside. After adjustment of accrued legal fee for the previous year, he Company booked 1,041 million ($9,120 thousand) as special loss for the year ended December 31, (p) Foreign currency translation Short-term and long-term receivables and payables in foreign 50 HORIBA, Ltd. Annual Report Fiscal 2007

53 currencies are translated into Japanese yen based on exchange rates at the balance sheet date. Balance sheet accounts of consolidated foreign subsidiaries are translated into Japanese yen at the balance sheet date, except for shareholders equity accounts, which are translated at historical rates. Revenue and expense accounts of consolidated foreign subsidiaries are translated into Japanese yen at average annual exchange rates. Differences arising from the application of the process stated above are separately presented in the consolidated financial statements in Foreign currency translation adjustments and Minority interests in net assets. (q) Finance leases Finance leases that do not transfer ownership or have bargain purchase option provisions are accounted for in the same manner as operating leases in accordance with Japanese GAAP. (r) Derivatives and hedge accounting Derivative financial instruments are stated at fair value, and changes in the fair value are recognized as gains or losses unless derivative financial instruments are used for hedging purposes. HORIBA uses foreign currency exchange contracts to manage risk related to its importing and exporting activities. The use of foreign currency exchange contracts is limited to the amounts of HORIBA s foreign currency denominated receivables and payables. HORIBA also uses interest rate swap contracts to avoid the risk of rising interest rates. Contracts are entered into and controlled by the finance department, which reports results to the Director. Transactions involving derivative contracts are limited to highly rated banking institutions, and HORIBA considers that there are no material credit risks associated with them. In cases where a foreign exchange forward contract meets certain hedging criteria, the hedged item is stated at the forward exchange rate. Hedge effectiveness is evaluated by verifying the currency type, term and identity of the hedged item and the hedging instrument. (s) Research and development expenses Research and development expenses are charged to income when incurred. Research and development expenses charged to income for the years ended December 31, 2006, and December 31, 2007, were 6,136 million and 9,474 million ($82,996 thousand), respectively. Effective January 1, 2007, the Company and certain domestic subsidiaries have changed their accounting policies for research and development expenses, unifying the intergroup definition of manufacturing costs in order to calculate the amount of research and development expenses properly and clarify the relationship between net sales and cost of sales. Under the new accounting policies, certain research and development expenses that were previously accounted for as cost of sales are now included in selling, general and administrative expenses. For the year ended December 31, 2007, cost of sales was 4,808 million less and gross income 4,808 million ($42,120 thousand) more than what they would have been without the change. However, there was no significant impact on operating income because selling and general and administrative expenses also increased by approximately the same amount. Because of a special loss of 703 million ($6,159 thousand) resulting from the recomputation of beginning inventory balances, income before income taxes was 924 million ($8,095 thousand) less. (t) Bond issuance costs Bond issuance costs are charged to income as incurred. (u) Income taxes HORIBA recognizes the tax effects of loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for tax and financial reporting. The provision for current income tax is computed based on the pretax income included in the consolidated statements 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 of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. (v) Per share information The computations of net income per share are based on the weighted average number of shares of common stock outstanding during each period. The weighted average number of common shares used in the computation for the years ended December 31, 2006 and December 31, 2007 were 42,210 thousand and 42,390 thousand, respectively. Diluted net income per share of common stock assumes full conversion of dilutive convertible bonds at the beginning of the year or the later date of issuance with an applicable adjustment for related interest expense, net of tax and dilutive stock option plans. The weighted average number of shares used in the computation for the years ended December 31, 2006 and December 31, 2007 were 42,356 thousand and 42,520 thousand, respectively. Cash dividends per share shown in the consolidated statements of income represent actual amounts applicable to earnings in the respective fiscal year, including dividends to be paid after the end of the period. (w) Presentation of net assets in the balance sheet Effective from the year ended December 31, 2006, the Company adopted Accounting Standard for Presentation of Net Assets in the Balance Sheet (Accounting Standards Board of Japan Statement No. 5 issued on December 9, 2005) and Guidance on Accounting Standard for Presentation of Net Assets in the Balance Sheet (Accounting Standards Board of Japan Guidance No. 8 issued on December 9, 2005). Due to the adoption of these accounting standards, minority interests are included in net assets at December 31, Under the previous presentation rules, minority interests were presented as a separate component in the consolidated balance sheets. The adoption of these accounting standards had no impact on the consolidated statement of income for the year ended December 31, For the year ended December 31, 2006, the amount of shareholders equity would have been 72,371 million if the previous year s presentation was applied. HORIBA, Ltd. Annual Report Fiscal

54 HORIBA, Ltd. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (x) Accounting standard for statement of changes in net assets Effective for the year ended December 31, 2006, the Company and its consolidated subsidiaries adopted new accounting standards, Accounting Standard for Statement of Changes in Net Assets (Accounting Standards Board of Japan Statement No. 6 issued on December 27, 2005) and Guidance on Accounting Standard for Statement of Changes in Net Assets (Accounting Standards Board of Japan Guidance No. 9 issued on December 27, 2005). Previously, consolidated statements of shareholders equity were prepared for purposes of inclusion in the consolidated financial statements although such statements were not required in Japan. (y) Business combination and business separation Effective from the year ended December 31, 2006, the Company adopted Accounting Standard for Business Combination (issued by the Business Accounting Council on October 31, 2003), Accounting Standard for Business Separation (Accounting Standards Board of Japan Statement No. 7 issued on December 27, 2005) and Guidance on Accounting Standard for Business Combination and Business Separation (Accounting Standards Board of Japan Guidance No. 10 issued on December 27, 2005). 52 HORIBA, Ltd. Annual Report Fiscal 2007

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56 HORIBA, Ltd. and Consolidated Subsidiaries Notes to Consolidated Financial Statements 54 HORIBA, Ltd. Annual Report Fiscal 2007

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58 HORIBA, Ltd. and Consolidated Subsidiaries Notes to Consolidated Financial Statements 56 HORIBA, Ltd. Annual Report Fiscal 2007

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60 HORIBA, Ltd. and Consolidated Subsidiaries Notes to Consolidated Financial Statements 58 HORIBA, Ltd. Annual Report Fiscal 2007

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62 HORIBA, Ltd. and Consolidated Subsidiaries Notes to Consolidated Financial Statements 60 HORIBA, Ltd. Annual Report Fiscal 2007

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64 HORIBA, Ltd. and Consolidated Subsidiaries Notes to Consolidated Financial Statements 62 HORIBA, Ltd. Annual Report Fiscal 2007

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66 HORIBA, Ltd. and Consolidated Subsidiaries Notes to Consolidated Financial Statements 64 HORIBA, Ltd. Annual Report Fiscal 2007

67 Independent Auditors' Report HORIBA, Ltd. Annual Report Fiscal

68 Consolidated Balance Sheets 66 HORIBA, Ltd. Annual Report Fiscal 2007

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70 Consolidated Statements of Income 68 HORIBA, Ltd. Annual Report Fiscal 2007

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72 Consolidated Statements of Cash Flows 70 HORIBA, Ltd. Annual Report Fiscal 2007

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74 HORIBA s company motto Joy and Fun Originates from the belief that if we take interest and pride in the work that occupies most of the active time in our lives, in the place where we spend the large part of each day, then as a result our satisfaction with life will increase, and we will be able to enjoy our lives even more. Taking interest and pride in our work leads us to Joy and Fun. Business Operations We, at the HORIBA, apply our most advanced analytical technologies to provide highly original analytical and measuring products and equipment in such fields as engine emissions, scientific analysis, industrial and process control, environment monitoring, semi-conductor process control, medical and health-care, and biotechnology, thereby contributing to the progress of science and technology, improvement in the quality, development and benefit of human health. We are engaging in the new businesses for derivative and peripheral products aim to develop scientific technology and improve the life of the community, while at the same time minimizing the impact on the environment. We strictly abide by all environmental protection laws and regulations in our business activities. In addition, all HORIBA group companies are required to attain the highest levels of quality for establishing, developing, and maintaining environmental systems, including implementing internal control standards that minimize the impact that our business activities have on the environment. We strive to deliver higher value-added products and services in the shortest possible time to customers all over the world, combining the functions and specialties of development, production, sales, and services from globally located points throughout the world. Furthermore, we aim to be the leader in the global market in the fields and product segments in which we operate, to meet all customers needs consistently, and to effectively maximize our limited resources through a policy of selective investment. Customer Responsiveness We maintain a philosophy of pursuing technology to the ultimate degree in both the fundamental and applied technology fields, supplying products that continuously satisfy customers requirements. We are committed to offering top-quality, highly reliable products and services with a consistent level of excellence throughout the world. We are obliged to observe the highest standards for establishing, developing, and maintaining quality control systems. To provide products and services to customers in the fastest delivery time possible, we have adopted the slogan Ultra-Quick Supplier for all our activities. This slogan encompasses not only production lead times but also development, marketing and sales, service, and control functions. Responsibility to Shareholders and Investors Our basic policy is to calculate annual dividends on an allocated rate of net income. Important information regarding management and business operations are fully disclosed on a regular basis to shareholders and potential investors. A timely responsive management control system should be maintained by HORIBA group companies to ensure that company objectives are met, profit generated and the information disclosed represents the true performance of the company as well as its management. Employees We are proud of the entrepreneurial spirit that led to the creation of HORIBA group companies. Each employee is made aware of this heritage, and we actively encourage ideas and innovations from individual employees. HORIBA promotes an open and fair business environment that allows all employees to achieve their individual goals and maximize their potential. To further each employee s personal and professional growth, we encourage thinking from a global perspective and have established a global personnel development program and performance evaluation system. We value employees who challenge their personal abilities and recognize their own accomplishments.

75 Board of Directors Chairman, President & CEO Executive Vice President Managing Director Director As of April 1, 2008 Atsushi Horiba Kozo Ishida Fumitoshi Sato Juichi Saito Director (External) Masahiro Sugita Auditor of Banyu Pharmaceutical Co., Ltd. Auditor Hiroshi Tajima Auditor (External) Kanji Ishizumi President of the Law Offices of Chiyoda Kokusai, Attorney at Law Auditor (External) Keisuke Ishida Chairman of the Board, CEO, Shashin Kagaku Co., Ltd. Corporate Information As of December 31, 2007 Head Office 2, Miyanohigashi-cho, Kisshoin, Minami-ku, Kyoto , Japan Founded October 17, 1945 Incorporated January 26, 1953 Paid-in Capital 11,952,684,480 yen Number of Employees 4,976 (Consolidated) Fiscal Closing Date December 31, annually Annual Meeting of Shareholders Held in March Transfer Agent and Registrar The Chuo Mitsui Trust and Banking Co., Ltd. Independent Auditors KPMG AZSA & Co. Stock Listings Tokyo Stock Exchange, First Section Osaka Securities Exchange, First Section Securities Code: 6856 Major Shareholders As of December 31, 2007 Name of Shareholders Shares (Thousands) Percentage (%) Japan Trustee Service Bank, Ltd. 5, The Master Trust Bank of Japan, Ltd. 5, Taiyo Fund LP 2, Masao Horiba 1, Mitsui Asset Trust and Banking Company, Limited 1, Sony Life Insurance Co., Ltd Mizuho Corporate Bank, Ltd The Bank of Kyoto, Ltd HORIBA Raku-Raku Kai Kyoto Chuo Shinkin Bank Foreign investors 3.7% Securities companies 0.9% Financial institutions 1.4% Number of Shareholders: 5,225 Foreign investors 26.2% Others 7.2% Securities companies 0.6% Ratio of Shareholders Ratio of Shares Number of Shares 42,473,752 Others 3.0% Individual investors 91.0% Individual investors 18.2% Financial institutions 47.8% Stock Price and Volume Trend (Yen) Stock Price (Based on closing price at end of each period)

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