Financial Information: Annual Report 2004

	Consolidated Financial Review

Scope of Consolidation

The consolidated financial statements reflect financial statements of NSK Ltd. and its 74 consolidated subsidiaries (22 in Japan and 52 overseas). NSK’s investments in 21 affiliates (12 in Japan and nine overseas) are accounted for by the equity method.
  NSK Needle Bearing Ltd., formerly known as NSK Torrington Co., Ltd., a needle bearing production joint venture with U.S-based The Torrington Company, was changed from an affiliate accounted for under the equity method, to a consolidated subsidiary following NSK’s acquisition of full control of the company. Four subsidiaries were sold, including NSK’s seat belt business, two were dissolved and four were newly established. Following the partial sale of NSK’s equity holdings to Amatsuji Steel Ball Mfg. Co., Ltd., AKS East Japan Co., Ltd. —formerly Shinnippon Koukyu Co., Ltd.— was changed from a consolidated subsidiary to an affiliate accounted for under the equity method. As a result, the total number of consolidated subsidiaries decreased by two compared to the previous fiscal year.
  The aforementioned changes and the sale of equity shareholdings in a separate company resulted in the total number of affiliates accounted for under the equity method to decrease by one compared to the previous fiscal year.

Overview of the year ended March 31, 2004

The overall Japanese economy started to recover, with increased demand from the U.S. and China boosting exports to these regions, leading to an increase in domestic capital expenditures.
  In the U.S., the economy grew stronger than the previous year, backed by robust consumer demand and IT-related investments. In Europe, the U.K. economy remained strong, while the German and French economies started gradual, much-awaited recoveries. The overall Asian economy is also on the road to recovery, especially with the continually strong expansion of the Chinese economy.
  Under these conditions, NSK’s consolidated net sales for the year ended March 31, 2004, were ¥522.2 billion (U.S. $4,927 million). This was a decrease of 0.1% from the previous fiscal year due to the effect of business restructuring activities, such as the withdrawal from the seat belt business. Operating income was ¥26.0 billion (U.S. $245 million), up 45.5% from ¥17.8 billion last year, while ordinary income was ¥19.1 billion (U.S. $180 million), an increase of 76.7% from ¥10.8 billion in fiscal 2002. Consequently, after deducting for income taxes and minority interests, and including provisions for deferred income taxes based on the tax effect accounting method, net income improved to ¥14.3 billion (U.S. $135 million), after recording losses of ¥2.7 billion in the previous fiscal year.
  As for the exchange rates used to calculate the profit and loss items on our foreign subsidiaries’ financial statements, the U.S. dollar was approximately 7% weaker against the yen, while the euro was approximately 11% stronger, compared to the previous fiscal year.

Net Sales

Sales

Consolidated net sales in the fiscal year ended March 31, 2004, decreased 0.1% to ¥522.2 billion (U.S. $4,927 million). Excluding the effect of the withdrawal from the seat belt business and the impact of foreign exchange fluctuations, sales increased 5.5% compared to the previous fiscal year. Sales in Japan were ¥278.6 billion (U.S. $2,629 million), a year-on-year decrease of 0.2%. Excluding the effect of business restructuring activities, sales grew 7.2%, backed by the dramatic increase in sales of precision machinery and parts and robust demand for automotive bearings, industrial bearings and automatic transmission components.
  Overseas sales were flat at ¥243.6 billion (U.S. $2,298 million). Excluding the effect of business restructuring and foreign exchange, this was an increase of 3.6% from the previous fiscal year. Sales in Asia, and especially in China, increased, while sales in the Americas remained healthy. The ratio of overseas sales to net sales was 46.6%, the same as the previous fiscal year.

Cost of Sales, and Selling, General and Administrative Expenses

Cost of sales decreased from ¥420.1 billion to ¥409.9 billion (U.S. $3,867 million) in fiscal 2003. The ratio of cost of sales to net sales improved 1.9 percentage points to 78.5%. The ratio improved in Japan due to the effect of business restructuring activities such as the withdrawal from the seat belt business; the consolidation of NSK Needle Bearing Ltd.; the positive effect of improved operating ratios and productivity due to increased sales of precision machinery and parts; and the reduction of external procurement costs.
  Selling, general and administrative expenses increased from ¥84.9 billion in fiscal 2002 to ¥86.3 billion (U.S. $815 million) in fiscal 2003. This increase was mainly due to increased costs in Japan, including labor costs such as retirement benefit expenses and social insurance premiums, R&D-related expenses and logistics expenses. The ratio of SG&A expenses to net sales was 16.5%, a 0.3 percentage point increase compared to the previous year.

Operating Income

In fiscal 2003, consolidated operating income improved ¥8.2 billion to ¥26.0 billion (U.S. $245 million). NSK’s operating income margin improved 1.6 percentage points to 5.0%.

Business Segment Information

Sales of bearings increased 3.4% to ¥332.8 billion (U.S. $3,140 million). Domestic sales increased from the previous fiscal year, with strong sales in the machine tool industry, general industrial sector and to the aftermarket, as well as an increase in demand from the automotive sector, including the truck industry. Overseas sales also rose, with sales of industrial bearings increasing in Asia— especially in China—although demand was weak in the Americas and Europe. Production of automotive bearings increased in Thailand and the U.K. due to rising demand in Thailand and Europe, respectively. Operating income was ¥23.6 billion (U.S. $222 million), with an operating income margin of 7.1%.This was an improvement from 6.9% in fiscal 2002. This 0.2 percentage point improvement is attributable mainly to the improvement of our cost of sales ratio resulting from NSK’s business restructuring activities and reduction in SG&A expenses.

Sales of automotive components fell 14.2% to ¥129.3 billion (U.S. $1,220 million). Excluding the effect of business restructuring activities such as the withdrawal from the seat belt business, sales increased. In Japan, there was a healthy increase in demand for automatic transmission components. Overseas, sales were robust in the Americas and steering column sales increased in Thailand and India. However, overall sales recorded a decrease from the previous year, due to sluggish demand from certain European customers. Operating income was ¥4.3 billion (U.S. $41 million), with operating income margin of 3.3%—an improvement of 0.5 percentage points from 2.8% in fiscal 2002—as a result of NSK’s withdrawal from unprofitable businesses.

Sales of precision machinery and parts increased 34.9% to ¥47.1 billion (U.S. $444 million). Sales in Japan increased 52.4% from the previous year as demand from the liquid crystal display (LCD) and semiconductor production equipment-related industries and machine tool manufacturers recovered dramatically. Overseas, sales increased 13.5%, with sales expansion activities starting to affect Asia and other regions. NSK was able to return operating levels of this business segment to just under break-even in fiscal 2003, after recording a ¥6.3 billion operating loss in the previous year. This was the result of reductions in production costs through productivity improvement activities and improved operating ratios, and NSK is confident it can return this business to profitability in fiscal 2004.

Operating Income

Net Income (Loss)

Geographical Segment Information

In Japan, operating income was ¥22.9 billion (U.S. $216 million), with an operating income margin of 5.9%, an improvement of 1.6 percentage points compared to 4.3% in the previous year. Higher labor costs caused SG&A expenses to increase. Production costs also rose, but the benefits from procurement cost reductions and the positive effect of higher operating ratios on production cost offset these cost increases, leading to an improvement in operating income.

In the Americas, operating income was ¥0.6 billion (U.S. $6 million), a ¥1.4 billion decrease compared to the ¥2.0 billion profit achieved in fiscal 2002. Profits increased in Brazil, but weak sales in the U.S. caused the operating ratio to deteriorate, resulting in a decline in profits for this region.

The European operations resulted in a profit for the first time in six years, recording operating income of ¥2.6 billion (U.S. $25 million), compared to the ¥2.4 billion operating loss recorded last year. This turnaround was brought about through business restructuring activities, such as the consolidation of production facilities in the U.K., reduction of head count and reorganization of the administrative divisions.

Asia recorded operating income of ¥3.8 billion (U.S. $36 million) with an operating income margin of 6.6%, compared to 7.9% in the previous year. Profitability increased at the automotive component production companies in the ASEAN region, but it was not enough to compensate for the profit deterioration of the bearing business.

Other Income and Expenses

In fiscal 2003, NSK incurred a loss from disposal of obsolete production equipment of small-sized ball bearings. Other income includes gains on sales of investment securities and investments in affiliated companies, and sales of overseas assets. By reducing interest-bearing debt throughout the NSK Group through measures such as the reimbursement of corporate bonds by the parent company, NSK’s financial balance (i.e. the difference between dividends payable and interest and dividends receivable) was improved. And although minority interests decreased as result of the changes in scope of consolidation, other income and expenses ended in profit of ¥0.5 billion (U.S. $5 million).

Gross Profit Margin, Operating Income Margin, Net Income Margin, SGA Expenses/Net Sales	ROA and ROE

Income Before Income Tax and Minority Interests

Income before income tax and minority interests was ¥26.5 billion (U.S. $250 million) compared to the ¥2.1 billion loss recorded in fiscal 2002. This was the result of the increase in operating income and the decrease in extraordinary losses.

Tax Expenses

The corporate tax ratio applied to NSK’s income before income tax and minority interests was 43.4%, 1.4% higher than the average Japanese rate of 42.0%. The difference is because valuation allowances for deferred tax assets were appropriated at several subsidiaries in Japan and the U.S. this year, although the different tax rates applied to affiliates accounted for under the equity method, application of various tax reductions and the appropriation of profits at foreign subsidiaries in countries with lower tax rates than Japan, worked in part to offset this effect.

Minority Interests

Minority interests refer to the income or losses that are attributable to the minority shareholders of NSK’s subsidiaries. The exclusion of NSK Autoliv Co., Ltd. from the scope of consolidation, and the return to profitability at other subsidiaries led to the improvement in minority interests from a loss of ¥0.4 billion to a profit of ¥0.7 billion (U.S. $6 million) in fiscal 2003.

Net Income

Net income ended in a profit for the first time in three years, with net income of ¥14.3 billion (U.S. $135 million), compared to the ¥2.7 billion loss in fiscal 2002. NSK’s net income margin was 2.7%.

Cash Flow

Net cash flow provided by operating activities amounted to ¥37.9 billion (U.S. $357 million), an increase of ¥6.9 billion compared to the previous year. This was due to the ¥8.3 billion increase in ordinary income, from ¥10.8 billion to ¥19.1 billion (U.S. $180 million) in fiscal 2003. Cash flow increased as result of inventory-reduction activities carried out as part of NSK’s balance sheet reform program, although because there was an increase in sales, there was an increase in accounts receivables, which ultimately used cash.
  Net cash flow used in investing activities was ¥17.0 billion (U.S. $160 million), an increase of ¥0.7 billion compared to the previous year. The increase was due to the cash used to buy out the remaining shares of NSK Needle Bearing Ltd. However, this was offset in part by the increase in cash obtained through the sale of investment securities and because capital expenditures were lower than the previous year.
  Net cash used in financing activities was ¥20.7 billion (U.S. $196 million), a ¥8.9 billion increase compared to the previous year. Cash was used to reduce interest-bearing debts, in order to reinforce NSK’s financial structure, and to pay dividends.
  As a result of these activities, and taking into account the effect foreign exchange fluctuations had on the translation of cash and cash equivalents of NSK’s foreign subsidiaries into yen, cash and cash equivalents at end of the fiscal year totaled ¥59.0 billion (U.S. $557 million)—an increase of ¥0.1 billion from ¥58.9 billion in fiscal 2002.

Cash Flow

Capital Expenditures, Depreciation and Amortization

Financial Position

Total assets at the end of fiscal 2003 increased ¥28.8 billion to ¥621.9 billion (U.S. $5,867 million), due to the inclusion of NSK Needle Bearing Ltd. in the scope of consolidation and the increase in valuation of NSK’s investment securities following the recovery of the stock market. The major factors that caused a decrease in total assets were the exclusion of companies from the scope of consolidation and the impact of foreign exchange rates when calculating assets of NSK’s foreign subsidiaries into yen.
  Current assets increased ¥9.7 billion to ¥295.5 billion (U.S. $2,788 million). Current liabilities increased ¥18.3 billion to ¥245.6 billion (U.S. $2,317 million), due to an increase in the number of corporate bonds that are due for reimbursement within the year. The current ratio was 120.3%, compared to 125.7% for the previous fiscal year. Interest-bearing debts decreased ¥21.2 billion to ¥246.5 billion (U.S. $2,326 million), following the reimbursement of corporate bonds worth ¥10.0 billion by the parent company, and repayment of bank loans by NSK’s subsidiaries. As a result, the debt-to-equity ratio improved to 1.31 from 1.57 in the previous fiscal year.
  Total shareholders’ equity increased ¥18.1 billion to ¥188.7 billion (U.S. $1,780 million). The main factors behind this were the increase in unrealized holding gains on securities due to the stock market recovery and the increase in net income, although translation adjustments increased due to the stronger yen. Shareholders’ equity per share increased from ¥316.27 in fiscal 2002 to ¥349.83 (U.S. $3.30). NSK’s ratio of net worth to total capital also improved from 28.8% in fiscal 2002 to 30.3% in fiscal 2003.

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

Asset Turnover, Inventory Turnover