Financial Information: Annual Report 2002

The consolidated financial statements reflect respective financial statements of NSK Ltd. and its 74 consolidated subsidiaries (22 in Japan and 52 overseas). In addition, our investments in 20 affiliates (13 in Japan and seven overseas) are accounted for by the equity method.

In Japan, four companies were newly added to consolidated subsidiaries. The main changes are the inclusion of NSK Fukushima Co., Ltd., to which the parent company spun off the Fukushima Plant, NSK Network & Systems Co., Ltd., to which the information systems division was spun off, and Driveshaft Technology Co., Ltd., which was changed from a company accounted for by the equity method to a 100%-owned consolidated subsidiary. On the other hand, one domestic company was excluded from consolidation due to liquidation. Overseas, four companies ware newly added to consolidated subsidiaries. The main changes include the establishment of NSK Aerospace Europe Limited through the spin-off of our aerospace business in the U.K., which we have decided to sell off. The name of the company was changed to Aeroengine Bearings UK Ltd. in May 2002, following the capital participation of AB SKF. In Thailand, we newly established NSK Bearings Manufacturing (Thailand) Co., Ltd., a production and sales company of automotive bearings, and furthermore, Siam Nastech Co., Ltd. was changed from a company accounted for by the equity method following the change of equity ratio. As a result, the number of consolidated subsidiaries increased by seven.

PT. NSK-AKS Precision Ball Indonesia was newly added to companies accounted for by the equity method during the fiscal year under review. Two companies, as previously mentioned, have been changed to consolidated subsidiaries, while Delphi Chassis NSK Do Brasil Ltda. has been liquidated, resulting in the number of companies accounted for by the equity method to decrease by two.

Consolidated net sales in fiscal year ended March 31, 2002 decreased 9.8% to ¥480.9 billion (U.S. $3,616 million) from ¥533.1 billion in the previous period. In the fiscal year under review, the domestic economy was generally affected by the slowdown in the U.S. economy and sharp decrease in IT (information technology)-related demand, causing further deterioration of the economy, as were seen in sharply decreased exports, lower production resulting from inventory adjustments and reduced capital investments. Moreover, coupled with structural changes such as personnel cuts and factory closures undertaken by private corporations, as well as accelerated shift of production out of Japan, the economy entered into the worst recession in the post-war period. Under these conditions, sales in Japan decreased 15.8% to ¥257.6 billion (U.S. $1,937 million) from ¥305.9 billion in the previous period.

Overseas, the bursting of the IT bubble economy in 2000 triggered the slowdown of the entire U.S. economy, and further weakened by the September 11 terrorist attacks, the world economy found itself losing its driving force. Although the European economy remained comparatively strong, its growth too was adversely affected by recessions in other economic zones such as Japan and the Americas. The Asian economy was also affected by the economic downturn in countries to which it exports its products, resulting in a slowdown in the growth rate in China. Under these conditions, overseas sales decreased 1.7% to ¥223.3 billion (U.S. $1,679 million) from ¥227.2 billion in the previous period. The ratio of overseas sales to total sales was 46.4%, up 3.8% from the previous period.

In the fiscal year under review, consolidated gross profit decreased 16.8% to ¥87.3 billion (U.S. $656 million) from ¥104.9 billion in the previous period. The gross profit margin deteriorated 1.6 points to 18.1% from the previous period. The ratio of selling, general and administrative expenses to net sales deteriorated 2.5 points to 17.3%. Operating income decreased to ¥3.9 billion (U.S. $30 million), down 84.7% from ¥25.8 billion in the previous period, bringing the operating income margin down to 0.8%. Efforts were made to reduce procurement costs, labor costs and capital expenditures, but these efforts were not sufficient to offset the effect of the increased ratio of fixed cost to net sales due to the sharp decline in production and sales quantity, resulting in a sharp drop in operating income.

Sales of bearings decreased 5.0% to ¥302.4 billion (U.S. $2,273 million) from ¥318.4 billion in the previous period, accounting for 62.9% of net sales. In Japan, sales decreased 8.4% to ¥141.0 billion (U.S. $1,060 million) from ¥154.0 billion in the previous period. Sales to the automotive industry slightly increased. However, sales to general industries such as the electrical home appliance and IT industries, machine tool and industrial machinery industries were weak. Overseas, bearing sales were ¥161.4 billion (U.S. $1,214 million), down 1.8% from ¥164.4 billion in the previous period due to sluggish sales to general industries, although sales to the automotive industry remained strong. Operating income in bearings was ¥11.3 billion (U.S. $85 million), with an operating income margin of 3.7%.

Sales of automotive components decreased 3.8% to ¥128.2 billion (U.S. $964 million) from ¥133.2 billion in the previous period, accounting for 26.7% of net sales. Sales of electric power assisted steering (EPS) systems dramatically increased in Japan and Europe, while sales of seat belts and steering columns decreased. As a result, sales in Japan decreased 8.6% to ¥83.7 billion (U.S. $629 million) from ¥91.6 billion in the previous period.
Overseas, sales rose to ¥44.5 billion (U.S.$335 million), up 7.0% from ¥41.6 billion in the previous period. Operating income in automotive components was ¥400 million (U.S. $3 million) with an operating income margin of 0.3%.

Sales of precision machinery and parts decreased 41.4% to ¥34.0 billion (U.S. $255 million) from ¥58.0 billion in the previous period, following a sharp fall in IT-related demand. These sales accounted for 7.1% of net sales. Sales in Japan were ¥18.8 billion (U.S. $141 million), a sharp decrease of 50.7% from ¥38.1 billion in the previous period owing to a sharp decline in sales to the semiconductor production equipment-related industry and machine tool manufacturers. Moreover, overseas sales decreased 23.6% to ¥15.2 billion (U.S. $114 million) from ¥19.9 billion in the previous period, because of sharply lower sales in the Americas. Operating losses in precision machinery and parts were ¥5.3 billion (U.S. $40 million), with an operating loss margin of 15.7%.

In Japan, sales of bearings drastically decreased primarily due to weak demand in the electrical home appliance market, IT industries and the aftermarket. Sales of precision machinery and parts to semiconductor production equipment-related and machine tool industries were also poor. As a result, sales after elimination of intra-area sales decreased 16.3% to ¥366.7 billion (U.S. $2,757 million) from ¥438.1 billion in the previous period. Operating income dropped to ¥8.0 billion (U.S. $60 million), down 67.3% from ¥24.5 billion in the previous period.

In the Americas, our sales in Brazil remained strong with the stabilization of inflation. However, sales of precision machinery and parts and bearings dropped sharply due to the slowing down of the U.S. economy and sluggish demand from the IT industry. As a result, sales decreased 4.7% to ¥73.3 billion (U.S. $551 million) from ¥77.0 billion in the previous period. On a local currency basis, actual sales decreased 12.5%. Operating income was ¥2.0 billion (U.S. $15 million), down 55.2% from ¥4.4 billion in the previous period.

In Europe, sales increased 8.3% to ¥79.8 billion (U.S. $600 million) from ¥73.7 billion in the previous period, due to increased sales of EPS. On a local currency basis, actual sales increased by 1.5%. Operating losses, however, were higher at ¥6.7 billion (U.S.$50 million), an increase of ¥3.8billion from ¥2.9 billion in the previous period. The factors that caused an increase in operating losses include the lower capacity utilization rate in the U.K. plants, the appreciation of the Polish zloty and increase in selling, general and administrative expenses at our U.K. Head Office.

In Asia, sales increased 0.6% to ¥53.8 billion (U.S. $404 million) from ¥53.4 billion in the previous period. However, on a local currency basis, actual sales decreased 6.6% due to the effect of the weak economy, although local production increased in China. Operating income was ¥3.6 billion (U.S. $27 million), down 15.8% from ¥4.3 billion in the previous period.

Net of interest expense, interest income and dividend income decreased to minus ¥5.6 billion (U.S. $42 million) from minus ¥6.9 billion in the previous period, an improvement of ¥1.3 billion, mainly due to the refinancing of high-interest rate corporate bonds of the parent company with funds funded at lower interest rates. Other expenses for the current period include ¥12.9 billion (U.S. $97 million) in losses on devaluation of investment securities due to the weak Japanese stock market and ¥3.9 billion (U.S. $29 million) in expenses for business restructuring mainly in Europe. As for other income, we posted a ¥9.3 billion (U.S. $70 million) in gains on the sale of the former Tamagawa Plant site.

As a result of the above factors, loss before income taxes and minority interests decreased to ¥10.3 billion (U.S. $78 million). After deducting income taxes and minority interests in earnings of consolidated subsidiaries, NSK recorded net loss of ¥17.7 billion (U.S. $133 million) in the current period, a decrease of ¥29.1 billion from the previous period. Net loss per share in the fiscal year under review was ¥31.79 (U.S. $0.239), with cash dividends applicable to the year at ¥5.00 (U.S. $0.038) per share (¥6.00 in the previous period). Common stocks issued at fiscal year-end stood at 551 million shares, a reduction of 11 million shares from the previous period, as a result of purchase of treasury stock by the additional paid-in capital.

Net cash provided by operating activities amounted to ¥30.3 billion (U.S. $228 million), an increase of 24.1% from ¥24.4 billion in the previous period. Despite a ¥10.3 billion (U.S. $78 million) loss before income taxes and minority interests, cash was derived primarily from depreciation and amortization worth ¥27.5 billion (U.S. $207 million), decrease in notes and accounts receivable worth ¥34.8 billion (U.S. $262 million), and decrease in inventory worth ¥10.3 billion (U.S. $77 million).

Net cash used by investing activities was ¥34.4 billion (U.S. $258 million), an increase of 74.4% from ¥19.7 billion in the previous period. Despite ¥11.0 billion (U.S. $83 million) of proceeds from sales of property, plant and equipment such as the former Tamagawa Plant site, additions to property, plant and equipment increased ¥8.5 billion to ¥42.4 billion (U.S. $319 million) from the previous period, due to capital expenditures and construction of a new Research and Development Center. The geographical breakdown of capital expenditures is 51% in Japan, 18% in the Americas, 15% in Europe and 16% in Asia.

Net cash used in financing activities was ¥12.9 billion (U.S. $97 million), an increase of ¥33.0 billion from the previous period, mainly due to a ¥30.6 billion (U.S. $230 million) increase in long-term debts. On the other hand, short-term debts such as commercial papers decreased by ¥9.9 billion (U.S. $74 million). ¥4.5 billion (U.S. $34 million) were spent for acquisition of treasury stocks, and ¥3.1 billion (U.S. $23 million) for payment of dividends by the parent company.

In the fiscal year under review, the net increase in cash and cash equivalents was ¥9.8 billion (U.S. $74 million) after inclusion of the changes in cash flow and adjustment of differences in foreign exchange conversion. Cash and cash equivalents at end of the year were ¥56.6 billion (U.S. $425 million).

Total current assets decreased to ¥291.5 billion (U.S. $2,192 million), down ¥30.1 billion from the previous period. The decrease was mainly due to the ¥35.4 billion decrease in notes and accounts receivable from the previous period. Despite our efforts to reduce inventories in Japan and overseas, decrease was limited to ¥4.9 billion on a yen basis, as the weaker yen exchange rates caused overseas inventory amounts after translation to increase.

Total current liabilities decreased ¥22.6 billion to ¥239.4 billion (U.S. $1,800 million) from the previous period. This was primarily due to an ¥18.6 billion decrease in notes and accounts payable. As a result, net working capital decreased ¥7.5 billion to ¥52.1 billion (U.S. $392 million) from the previous period, resulting in the current ratio to decline to 1.22 from 1.23 in the previous period.

Interest-bearing debts (short-term debts, the current portion of long-term debts, and long-term debts) increased to ¥272.4 billion (U.S. $2,048 million), up ¥26.6 billion from the previous period.

Total assets decreased ¥37.6 billion to ¥642.8 billion (U.S. $4,833 million) from the previous period. Asset turnover dropped to 0.73 against 0.81 in the previous period.

Total shareholders' equity decreased ¥19.2 billion to ¥208.2 billion (U.S. $1,565 million). The decrease is primarily comprised of a net loss of ¥17.7 billion (U.S. $133 million), and decrease of ¥4.4 billion resulting from purchase of treasury stocks by the additional paid-in capital. Also negative effect of translation adjustments narrowed with the weaker yen. Net asset per share decreased to ¥378.03 (U.S. $2,842) from ¥405.12 in the previous period. Equity ratio was 32.4% against 33.4% in the previous period.

The NSK Group bills some customers in foreign currencies, which entails a risk for NSK created by fluctuation of the exchange rate from the time sales were recorded until the funds are collected and exchanged to a local currency, normally between one to four months. The main risks are in exports from the parent company in Japan to other regions (especially where the U.S. dollar or the euro are involved) and from U.K. subsidiaries to other parts of Europe. The majority of the risk is hedged through the use of financial instruments, such as forward exchange contracts, in accordance with corporate policy.