Financial Information: Annual Report 2003

 The consolidated financial statements reflect respective financial statements of NSK Ltd. and its 76 consolidated subsidiaries (23 in Japan and 53 overseas). In addition, our investments in 22 affiliates (13 in Japan and nine overseas) are accounted for by the equity method.

 In Japan, the parent company spun off its precision machinery and parts division into NSK Precision Co., Ltd., while overseas, three companies were added to the scope of consolidation, including NSK Steering Systems Dongguan Co., Ltd., a production and sales company of steering components and Zhangjiagang NSK Precision Machinery Co., Ltd., which will manufacture preprocessed bearing rings. On the other hand, Aeroengine Bearings UK Ltd., our European aerospace bearings production company was changed from a 100%-owned consolidated subsidiary to a company accounted for by the equity method following a change in equity shareholdings. This, together with the sale of another consolidated subsidiary led to the number of overseas consolidated subsidiaries to increase by one, and the total number for the NSK Group to increase by two compared to the previous year.

 Timken-NSK Bearings (Suzhou) Co., Ltd., our Chinese tapered roller bearing joint venture with The Timken Company, U.S., has been added to the companies accounted for by the equity method during the fiscal year under review. Together with the aforementioned change in equity share-holdings of Aeroengine Bearings UK Ltd., this has resulted in the number of companies accounted for by the equity method to increase by two.

 Consolidated net sales in the fiscal year ended March 31, 2003 increased 8.7% to ¥522.8 billion (U.S.$4,357 million) from ¥480.9 billion in the previous period. In the fiscal year under review, the domestic economy maintained a gradual recovery throughout the year, supported by strong automotive exports to the U.S. and a general increase in exports to Asia. However, domestic consumer demand remained sluggish, while capital expenditures fell short of the previous year’s results. Together with the increasing unemployment rate, declining income levels, protracted stock market weakness, and continued fragility of the banking system, the economy stayed weak and the outlook, unclear. Under these conditions, our sales to the automotive industry increased, resulting in overall sales in Japan to increase 8.4% to ¥279.3 billion (U.S.$2,327 million) from ¥257.6 billion in the previous period.

 Overseas, the U.S. economy started the year in healthy conditions, backed by robust consumer demand. However, the delayed recovery of the job market and the uncertainty surrounding the U.S.–Iraq war triggered a gradual slowdown. Capital expenditures also remained weak. In Europe, unfavorable employment conditions weighed down consumer spending. This, in addition to sluggish capital expenditures, particularly in Germany, accelerated the slowdown of the overall European economy. The recovery of the Asian economy has generally been modest, excluding China where the market continues to expand strongly. Under these conditions, overseas sales increased 9.1% to ¥243.5 billion (U.S.$2,030 million) from ¥223.3 billion in the previous period. The ratio of overseas sales to total sales was 46.6%, up 0.2% from the previous period.

Net Sales		Operating Income

 In the fiscal year under review, consolidated gross profit increased 17.7% to ¥102.7 billion (U.S.$856 million) from ¥87.3 billion in the previous period. The gross profit margin improved 1.5 points to 19.6% from the previous period. The ratio of selling, general and administrative expenses to net sales also saw an improvement of 1.1 point to 16.2%. Operating income increased ¥13.9 billion to ¥17.8 billion (U.S.$149 million) from ¥3.9 billion in the previous period. Operating income margin was 3.4%. The benefits derived from the business restructuring activities implemented in Japan and Europe, in addition to the increase in sales to the automotive industry are the sources of the sharp improvement in our operating income.

 Sales of bearings increased 6.5% to ¥322.0 billion (U.S.$2,683 million) from ¥302.4 billion in the previous period, accounting for 61.6% of net sales. In Japan, demand from the automotive industry remained strong throughout the year, and sales to the electrical home appliance manufacturers, IT industries, and the aftermarket also began to recover in the latter half of the year. This resulted in domestic bearing sales increasing 6.9% to ¥150.7 billion (U.S.$1,256 million) from ¥141.0 billion in the previous period. In the Americas, sales to the automotive industry remained healthy, and sales in Asia, especially China, were robust, resulting in overseas sales to increase to ¥171.3 billion (U.S.$1,427 million), up 6.1% from ¥161.4 billion in the previous period. Operating income in the bearing business increased ¥10.8 billion from ¥11.3 billion to ¥22.1 billion (U.S.$185 million), with an operating income margin of 6.9%.

 Sales of automotive components increased 17.6% to ¥150.7 billion (U.S.$1,256 million) from ¥128.2 billion in the previous period, accounting for 28.8% of net sales. Sales in Japan increased to ¥96.0 billion (U.S.$800 million), up 14.7% from ¥83.7 billion in the previous period, backed by a hike in sales of electric power assisted steering (EPS) systems and strong demand for automatic transmission components. Overseas sales were also strong, with production in Thailand doubling that of the previous period. Sales of EPS systems in Europe and steering-related products in the Americas, too, saw a year-on-year increase. As a result, overseas sales jumped 22.9% from ¥44.5 billion to ¥54.7 billion (U.S.$455 million). Operating income in the automotive components business increased ¥3.9 billion from ¥0.4 billion to ¥4.3 billion (U.S.$36 million) with an operating income margin of 2.8%.

 Sales of precision machinery and parts increased 2.7% to ¥34.9 billion (U.S.$291 million) from ¥34.0 billion in the previous period, accounting for 6.7% of net sales. Sales in Japan were ¥19.2 billion (U.S.$160 million), an increase of 2.3% from ¥18.8 billion in the previous period as demand from the semiconductor production equipment related industry and machine tool manufacturers started to recover after bottoming out in the second half of the previous year. Overseas, demand in Europe and the Americas was sluggish, but strong sales of large-sized liquid crystal display (LCD) color filter aligning equipment in Asia contributed to an overall increase of 3.2% in overseas sales to ¥15.7 billion (U.S.$131 million) from ¥15.2 billion in the previous period. Operating losses in precision machinery and parts widened from ¥5.3 billion to ¥6.3 billion (U.S.$52 million), with an operating loss margin of 18.0%.

Net Income (Loss)		Gross Profit Margin, Operating Income Margin,  Net Income Margin, SGA Expenses/Net Sales

 In Japan, sales to the automotive industry were strong throughout the year, while sales to the electrical home appliance manufacturers, IT industries and the aftermarket started to recover only in the second half. Demand for precision machinery and parts from the semiconductor production equipment and machine tool industries also increased. As a result, sales after elimination of interarea sales increased 7.9% to ¥395.5 billion (U.S.$3,296 million) from ¥366.7 billion in the previous period. Operating income rose to ¥17.2 billion (U.S.$143 million), up ¥9.2 billion from ¥8.0 billion in the previous period due to the benefits of business restructuring activities such as reduced procurement and labor costs, in addition to the increase in sales volume.

 In the Americas, sales of precision machinery and parts were disappointing due to weak demand from the semiconductor production equipment sector. On the other hand, sales of automotive components and bearings to the automotive industry both recorded a year-on-year increase in sales. As a result, overall sales increased 5.5% to ¥77.4 billion (U.S.$645 million) from ¥73.3 billion in the previous period. Operating income was ¥2.0 billion (U.S.$17 million), approximately the same level as the previous period.

 In Europe, the decrease in sales of bearings due to the downsizing of local production was offset by a sharp increase in sales of EPS systems. As a result, sales increased 6.5% to ¥85.0 billion (U.S.$708 million) from ¥79.8 billion in the previous period. The curtailing of local production decreased profits, but this was offset by the reduction of headcount, production costs and SGA expenses obtained through business restructuring activities, resulting in operating income to improve ¥4.3 billion from a loss of ¥6.7 billion to a loss of ¥2.4 billion (U.S.$20 million).

 In Asia, sales of bearings increased in China as did sales of automotive components in Thailand following expansion of local production. Precision machinery and parts sales also recorded healthy results, with sales of system products increasing in South Korea and Taiwan. As a result, sales rose to ¥57.5 billion (U.S.$479 million), up 7.0% from ¥53.8 billion in the previous period. Operating income was ¥4.5 billion (U.S.$38 million), up ¥0.9 billion from ¥3.6 billion in the previous period.

ROA and ROE

 Net of interest expense, interest income and dividend income decreased to ¥4.8 billion (U.S.$40 million) from ¥5.6 billion in the previous period, an improvement of ¥0.8 billion, due mainly to the reduction of interest-bearing debts at our overseas affiliate companies. Other expenses for the period under review include ¥15.0 billion (U.S.$125 million) in expenses for business restructuring, which consists of special severance payments following the expanded implementation of an early retirement program in Japan, production transfer, factory consolidation and other redundancy expenses in Europe. Other expenses also include ¥12.9 billion (U.S.$107 million) in loss on devaluation of investment securities due to the weak Japanese stock market and ¥0.8 billion (U.S.$7 million) in loss on sales of investments in affiliated companies following the partial sale of shareholdings in Aeroengine Bearings UK Ltd. As for other income, we posted a ¥11.9 billion (U.S.$99 million) gain from the contribution of company-held shares to the employees’ retirement benefit trust, a ¥3.2 billion (U.S.$27 million) gain on sale of investment securities and a ¥0.9 billion (U.S.$7 million) gain on sale of property, plant and equipment.

 As a result of the above factors, loss before income taxes and minority interests totaled ¥2.1 billion (U.S.$18 million). After deducting for income taxes and minority interests in earnings of consolidated subsidiaries, NSK recorded a net loss of ¥2.7 billion (U.S.$22 million) in the period under review, an improvement of ¥15.0 billion from a loss of ¥17.7 billion in the previous period. Net loss per share in the fiscal year under review was ¥5.22 (U.S.$0.044), with cash dividends applicable to the year at ¥5.00 (U.S.$0.042) per share (¥5.00 in the previous period).

 Net cash provided by operating activities amounted to ¥31.0 billion (U.S.$258 million), an increase of 2.1% from ¥30.3 billion in the previous period. Despite a ¥2.1 billion (U.S.$18 million) loss before income taxes and minority interests, cash was derived primarily from depreciation and amortization worth ¥28.8 billion (U.S.$240 million) and decrease in inventories worth ¥10.6 billion (U.S.$88 million).

 Net cash used by investing activities decreased 52.8% from ¥34.4 billion in the previous period to ¥16.2 billion (U.S.$135 million). Additions to property, plant and equipment decreased ¥17.7 billion to ¥24.7 billion (U.S.$206 million) from the previous period. The geographical breakdown of capital expenditures is 52% in Japan, 16% in the Americas, 16% in Europe and 16% in Asia. On the other hand, sale of investment securities, property, plant and equipment and investments in affiliated companies provided cash of ¥6.1 billion (U.S.$51 million), ¥3.1 billion (U.S.$26 million), and ¥1.0 billion (U.S.$9 million), respectively.

 Net cash used in financing activities was ¥11.8 billion (U.S.$98 million), compared to the ¥12.9 billion in cash provided by financing activities in the previous period. The main contributing factors are the ¥7.0 billion (U.S.$59 million) decrease in short-term debts, ¥3.7 billion (U.S.$31 million) spent for acquisition of NSK treasury stocks, and ¥2.7 billion (U.S.$23 million) spent for payment of dividends by the parent company.

 In the fiscal year under review, the net increase in cash and cash equivalents was ¥2.4 billion (U.S.$20 million) after inclusion of the changes in cash flow and adjustment of differences in foreign exchange conversion. Cash and cash equivalents at the end of the year totaled ¥58.9 billion (U.S.$491 million).

 Total current assets decreased to ¥285.7 billion (U.S.$2,381 million), down ¥5.7 billion from the previous period. The decrease was mainly due to the ¥14.0 billion reduction in global inventories from the previous period.

 Total current liabilities decreased ¥12.1 billion to ¥227.3 billion (U.S.$1,894 million). This was primarily due to a ¥15.4 billion decrease in interest-bearing debts, achieved through the repayment of short-term debts and reimbursement of corporate bonds. As a result, net working capital increased ¥6.3 billion to ¥58.4 billion (U.S.$487 million) with the current ratio increasing to 1.26 from 1.22 of the previous period.

 Interest-bearing debts (short-term debts, the current portion of long-term debts, and long-term debts) decreased by ¥4.6 billion from the previous period to ¥267.8 billion (U.S.$2,231 million).

 Total assets decreased ¥49.7 billion to ¥593.1 billion (U.S.$4,942 million) from the previous period, primarily due to losses on devaluation of investment securities caused by the weakness of the Japanese stock market. Average total asset turnover increased to 0.85 against 0.73 in the previous period.

 Total shareholders' equity decreased ¥37.6 billion to ¥170.6 billion (U.S.$1,421 million). The decrease is primarily due to a loss of ¥19.2 billion on devaluation of investment securities, an additional ¥8.9 billion negative effect in translation adjustments due to the stronger yen, decrease of ¥4.0 billion resulting from purchase of NSK treasury stocks and net loss of ¥2.7 billion (U.S.$22 million). Net asset per share decreased to ¥316.27 (U.S.$2.636) from ¥378.03 in the previous period. Equity ratio was 28.8% against 32.4% in the previous period.

Cash Flow		Capital Expenditures, Depreciation and Amortization

 The NSK Group invoices certain customers in foreign currencies, which creates a risk for NSK created by fluctuation of the exchange rate from the time sales were recorded until the time when the funds are collected and exchanged to a local currency. This normally takes 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.

Ratio of Net Worth to Total Capital,  Current Ratio and Interest-Bearing Debts		Asset Turnover, Inventory Turnover

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