Financial Information: Annual Report 2004

	To Our Shareholders, Customers, and Employees

President & CEO Seiichi Asaka

Looking Back on Fiscal 2003

1. External Business Environment

•Strong, Broad-Based Upturn
In fiscal 2003, ended March 31, 2004, the Japanese economy returned to full-scale growth, building on the recovery that started in fiscal 2002. Business restructuring at Japanese companies are near completion, particularly at large corporations, and a new growth industry showcasing Japanese ingenuity—digital home appliances—has emerged. For these reasons, corporate Japan seems to have regained some confidence and has started making forward-looking investments, resulting in a sharp doubledigit year-on-year increase in private-sector capital expenditures. This is in sharp contrast to previous years, with the single exception of fiscal 2000. Despite the stronger yen compared to fiscal 2002, exports recorded double-digit growth. Momentum in the U.S. economy also picked up in fiscal 2003. Despite areas of uncertainty, including potential acts of terrorism and increasing government deficits, consumer spending and the housing market remained firm, partially a result of tax reductions. The recovery of the European economy was hesitant, owing both to exportrelated concerns stemming from the strong euro and to unstable employment conditions. The overall Asian economy was extremely strong, particularly in China, where domestic demand rose sharply in line with the nation’s ongoing transition from the “world’s factory” to an enormous consumer market. This transition had a positive effect on various industries and the global economy as a whole, especially the steel and other heavy-duty industries in Japan, which saw a turnaround in demand during the year after a prolonged period of contraction.

2. Consolidated Business Results

• Overview: Confidence-Inspiring Results
Fiscal 2003 was the initial year of our three-year mid-term business plan unveiled in February 2003. The business results for the year have further increased our confidence regarding our ability to achieve the targets set out in this plan. I am certain that by steadily improving our financial structure and by leveraging the NSK Group’s management resources, including our R&D and marketing capabilities, we have succeeded in building a strong foundation for further growth.

• Strategies for Strengthening Operating Foundations
and Generating Synergies Starting to Bear Fruit Net sales exceeded the Company’s initial target, announced at the start of the fiscal year, by 6.1%. The 0.1% year-on-year decline in net sales reflected, first, the impact of the sale of our seat belt operations in April 2003 as part of our select and focus business strategy, and, second, the stronger yen vis-a-vis fiscal 2002. Excluding those two factors, sales rose 5.5%. Admittedly, the business environment was extremely supportive. More importantly, however, I believe this increase in sales was due to our efforts to reinforce our R&D and marketing capabilities as well as to the synergistic effects of our products. Despite a lack of growth in automobile production volume, there was an increase in sales of our major products, such as hub unit bearings, steering-related products, and automatic transmission components. Moreover, these effects are visible in our ability to attract demand from the newly emerging digital home appliance industry, in the form of higher sales of photofabrication equipment for liquid crystal display (LCD) color filter production. We have developed this equipment by applying our advanced precision positioning, high-precision control, and measurement technologies accumulated over the years. During the year, our photofabrication equipment won high acclaim from LCD panel manufacturers both in Japan and overseas. (For more on the NSK Group’s strategy for growth through synergies among businesses, please refer to pages 10-14).

Our various business restructuring activities and high-value-added strategy to leverage synergies among businesses and products have yielded strongly improved business results, emboldening us to embark on the next stage of growth.

• Benefits of Structural Reforms Beginning to Emerge
NSK enjoyed strong profit growth in fiscal 2003, with operating income and ordinary income rising 45.5% and 76.7%, respectively, compared with fiscal 2002. Net income improved to ¥14.3 billion compared with a net loss of ¥2.7 billion in the previous fiscal year. Both operating income and net income exceeded our initial targets, by 18.1% and 78.7%, respectively. During fiscal 2003, NSK recorded an ¥8.1 billion increase in employee retirement expenses, social insurance premiums and labor costs, all mainly in Japan, as well as a decline in sales prices. Setting aside the ¥4.7 billion profit contribution attributable to higher sales volume, NSK was able to increase profits in spite of higher costs and lower sales prices as a result of benefits derived from Group efforts to strengthen cost-competitiveness. These benefits included ¥6.0 billion from structural reforms, primarily in Japan and Europe; ¥7.8 billion from external procurement cost reductions; and approximately ¥1.0 billion from the aforementioned implementation of select and focus strategies.

• Improvements to Financial Structure Also Progressing Steadily
Although we are only one year into our three-year mid-term business plan, I feel confident that we will achieve our ultimate mid-term goals. The mid-term business plan consists of two components: making structural reforms with the objective of strengthening profitability, and implementing separate growth strategies for each business segment. As I have already touched on, we have made steady headway in implementing growth strategies. Our structural reforms, as well, are yielding visible benefits. For example, the midterm business plan targets ROE of over 10% at the end of fiscal 2005, the final year of the mid-term business plan, but we have already achieved ROE of 8.0% at the end of fiscal 2003, the plan’s initial year, against ROE of –1.4% at the fiscal 2002 year-end. We also reduced our interestbearing debt by ¥21.3 billion in fiscal 2003, to ¥246.5 billion. As a result, the debt / equity ratio at the end of fiscal 2003 decreased to 1.3 from 1.6 one year earlier, a satisfactory start toward the mid-term business plan’s goal of a debt/equity ratio of less than 1.0. Also, by the fiscal 2003 year-end we reduced inventories to ¥75.9 billion from ¥83.5 billion at the end of the previous fiscal year.

Analysis of the Improvements in Operating Income (FY2002 vs. FY2003)



Improved Profitability during Fiscal 2003 (quarterly)

• Results, by Segment and Region: Strong Recovery in the Precision Machinery Segment and in Europe
We succeeded in improving profitability in all our business segments. The Bearings segment’s operating income margin rose from 6.9% in fiscal 2002 to 7.1% in fiscal 2003, while that of the Automotive Components segment rose from 2.8% to 3.3%. Truly remarkable, however, was the dramatic recovery in the Precision Machinery and Parts segment. After incurring an operating loss of ¥6.3 billion in fiscal 2002, we managed to nearly break-even in fiscal 2003. Looking only at the fourth quarter of fiscal 2003, the segment achieved an operating income margin of 9.0%. Although partly due to a turnaround in the business environment, this was mostly due to increased productivity and successful sales promotion activities for such mainstream products as ball screws.
  Looking at results by region, the highlight of fiscal 2003 was the return to profitability of our European operations. NSK earned ¥2.6 billion in operating income from European operations in fiscal 2003, the first positive operating-level result in six years. This was the result of both financial restructuring and production-related reforms such as headcount reductions and the transfer of commodity production from the U.K. to Poland.

3. Outlook for Fiscal 2004

• Aiming for Growth through Continued “Self-Help” Efforts
The business environment forecast for fiscal 2004 is characterized by several factors that lead me to believe that the global economy will probably remain stable. First, in Japan, machinery and production equipment have become seriously outdated owing to the long suppression of capital expenditures. As a result, replacement demand is very strong. Second, in China, robust demand continues for infrastructure and resource development. Third, further innovations are expected in semiconductor and LCD production processes and equipment.
  Negative factors also exist, however, such as rising crude oil prices and the specter of terrorist strikes, making the economic outlook somewhat uncertain. Therefore, as in fiscal 2003, the NSK Group will continue working to increase earnings through “self-help” efforts. Specifically, we will strive for further financial structural improvements and production innovations. At the same time, NSK will work to boost its production capacity and technological development capabilities to enable better responses to customer needs.

• Aiming for Record Operating Income in Fiscal 2004 through the Steady Execution of Mid-Term Business Strategies
In terms of business structure, I believe NSK will start to reap the benefits of the organizational changes made in February 2004. We have adopted a new system under which each business unit controls its entire process flow, from R&D through to manufacturing and sales. This has not only enabled us to respond more swiftly to customer needs but also clarified profit responsibilities among business units.
  In terms of marketing, we remain focused on expanding sales, particularly of high-value-added products. At the same time, we continue to penetrate into high-profit markets, such as the large-sized general industrial bearings market and the aftermarket. As a result, we forecast a 6.3% year-on-year increase in net sales in fiscal 2004, to ¥555.0 billion.
  While pursuing these expansionary “offense” strategies, the NSK Group will continue to reinforce its “defense” strategies. Specifically, the Group will undertake further financial structural improvements and production efficiency enhancements. As a result, NSK intends to reduce interest-bearing debt by another ¥30.0 billion in fiscal 2004. This goal is fully achievable, considering that the strategies carried out to date have increased profits and improved inventory turnover from 6.3 in fiscal 2002 to 6.9 in fiscal 2003, thereby creating a source of excess capital. We also plan to implement measures such as reducing capital reserves. In addition, we intend to further reduce external procurement costs by reviewing our global purchasing practices and procurement sources. Accordingly, in fiscal 2004 we expect to reduce procurement costs by a further ¥4.5 billion. On the assumption that these measures will provide synergistic benefits, we forecast a 34.8% increase in operating income in fiscal 2004, to ¥35.0 billion, which would be a new record high for the NSK Group. Maintaining a balance between “offense” and “defense” strategies, we intend not only to meet our internal targets but also to enhance our reputation by becoming the world leader in customer satisfaction, utilizing our industry-leading technologies and superior QCDS (quality, cost, delivery, and service) capabilities.

While continuing our “defense” strategies, the NSK Group will now place greater emphasis on “offense” strategies, based on a new, more efficient organizational structure and highly differentiating technologies.

4. Corporate Governance and Shareholder Returns
• Earning Stakeholders’ Staunch Support and Trust I fully recognize that a strong corporate governance system is vital to transparent, flexible, strong, and responsive management, which in turn will enable us to win the trust of our stakeholders and facilitate sustainable growth. To date, NSK has worked to strengthen corporate governance, with the goal of increasing management transparency and strength, under a management system comprising a Board of Directors, executive officers, and a Board of Statutory Auditors. To make further progress in corporate governance, in June 2004 we adopted the “company with committees” system, an alternative Western-style corporate governance system acknowledged by the revised Japanese Commercial Code, effective April 1, 2003. As a result, a large portion of management authority has been transferred from the Board of Directors to the executive officers. With this transfer, we expect to attain greater efficiency and flexibility in management, facilitating quick, decisive responses to the rapidly changing business environment and various business risks, while at the same time maintaining the governance functions that suits NSK’s style of business operations.

A Message from NSK Management to All Stakeholders

NSK is firmly committed to increasing corporate value in a sustainable manner.
We will achieve this through constant communications
with our stakeholders, including investors, customers and employees,
through the disclosure of corporate information.
The comments and opinions of our stakeholders will also play a large role,
and we hope you will continue to provide us with pointed advice and constructive criticisms.
We thank you in advance for your continued participation and support of our business activities.

• To Our Shareholders:
The NSK Group endeavors to manage its business with due consideration to the interests of shareholders. In fiscal 2003, we increased the annual per-share dividend by ¥1.5, to ¥6.5. Going forward, we will continue to do our utmost to return profits to shareholders, particularly by paying dividends that reflect the level of our consolidated earnings and always adhering to our basic policy of maintaining stable dividends. We are also keenly aware that the best way to reward our shareholders and investors is to further increase our corporate value, and this we will do by steadily executing the aforementioned “offense” and “defense” strategies.

• To Our Customers:
The NSK Group will strive relentlessly to meet the needs and requirements of customers. To that end, we will continue to aggressively invest both in upgrading our technical and developmental capabilities and in improving our marketing and sales systems. In line with our corporate philosophy of “contributing to society through our ‘Motion & Control’ technologies,” we aim to develop high-valueadded businesses based on our differentiating core technologies.

• To Our Employees:
NSK’s current business recovery is the result of our employees’ efforts, for which I express my deepest thanks. We have gone through a period of tough structural reforms, with the result that the NSK Group’s profitability has been strengthened substantially. Rather than rest on our laurels, however, we must now look toward the next stage of growth. It is my firm belief that, by deftly ascertaining customers’ diversifying and increasingly sophisticated needs and responding with differentiated products and services, we will increase our presence in the market and in society, transforming NSK into a formidable group of highly competitive business units of which we can all be proud to be a part.

July 1, 2004