Financial Information: Annual Report 2005

	Message From the President and CEO

Business Environment and Results for Fiscal 2004
Fiscal 2004, ended March 31, 2005, was a year of record sales and profits for NSK. While generally favorable business conditions worldwide were a definite boost, the most powerful driver behind this positive performance was the steady emergence of a newfound confidence at NSK. This came as benefits seen in the previous year from structural reforms, organizational improvements and other self-reliance efforts continued to emerge in fiscal 2004.
  Sales rose 11.3% year on year to ¥581.0 billion. Operating income climbed 47.4% to ¥38.3 billion, ordinary income rose 73.1% to ¥33.1 billion, and net income jumped 56.4% to ¥22.3 billion. This marks the second consecutive year that NSK has met the ambitious targets of its three-year, mid-term business plan, launched in fiscal 2003.
  Looking at profits by business segment, Industrial Machinery Bearings achieved a double-digit operating income margin for the year, which contributed heavily to overall earnings. While profits were flat in Automotive Products due to rising costs accompanying increased output, Precision Machinery and Parts ended the year in positive territory for the first time in four business terms as earnings improved sharply.
  By geographical segment, profits in Japan were higher, benefiting from increased capital expenditures, procurement cost reductions and product price increases, in tandem with strong demand. A recovery in demand in the Americas and increased sales volumes in Europe also led to improved profitability in both regions. In Asia, while healthy demand boosted profits from Thailand, overall profitability was lower, as a result of upfront expenses related to investments in China.
  Balance-sheet reform initiatives steadily yielded results. We further improved upon last year’s inventory turnover of 6.6 times, raising it to 7.4 times. As of March 31, 2005, the Company’s balance of interest-bearing debt was ¥207.2 billion, a decline of ¥39.4 billion from a year earlier, and the debt-to-equity (D/E) ratio improved to 1.10. Return on average shareholders’ equity (ROE), meanwhile, was 11.9%, clearing the target of 10% outlined in the mid-term business plan.
  Benefits from organizational reforms enacted last year were another factor underpinning favorable performance in fiscal 2004. We shifted from our conventional approach of organizing operations along product lines to an organizational structure that reflects a keener awareness of target customers. Moreover, the positive effects of enhanced internal auditing functions and risk management, as well as adoption of a new corporate governance system for greater management transparency and flexibility, have begun to be felt throughout the NSK Group.
  In light of recent performance, we declared a dividend of ¥11.0 per share, an increase of ¥4.5 compared to the previous fiscal year.
  Demand for semiconductor and liquid crystal display-related products has grown sluggish since the second half of fiscal 2004. This comes as the impact of the yen’s appreciation, rising steel prices and unstable supply conditions for key materials all grow more acute. These challenges notwithstanding, Japanese automakers, whose performance is likely to remain firm, are expanding their global production targets. Healthy demand supported by capital expenditures is also expected to continue in the private sector. Against this backdrop, and together with internal efforts to further bolster profit improvements and growth strategies, we will strive to deliver higher year-on-year sales and earnings in fiscal 2005. Everyone at NSK is fully committed to achieving the second straight year of record profits.

Towards a More Sophisticated Growth Stage

Enhancing the Ability to Respond to Change
Changes in the global economic picture, growing market complexity, and the diverse nature of risks are all factors that make anticipating changes in the business environment increasingly complicated. In this context, the extent to which one can identify and flexibly respond to these external changes has become the most pressing issue facing management today.
  As companies grow larger, maintaining this flexibility becomes a tougher challenge. NSK has consistently worked to be strong in the face of external changes by pursuing greater selectivity and focus in realigning business operations over the years, transitioning to a new business configuration, and enacting a range of initiatives designed to improve the corporate structure. Going forward, we will strive to further enhance our ability to respond to change in the quest to manage NSK’s businesses with a greater level of sophistication. Among other actions, this will require that we steadily capture demand to yield top-line growth, while at the same time raising the bottom line to bolster profitability.

Net Sales and Operating Income by Business Segment (FY04)

NSK’s Present Business Structure
The Automotive Products Business accounts for around 54% of total sales, meaning that this business, which is also a pillar for earnings stability, is critical to promoting business expansion and other growth strategies. In contrast, the Industrial Machinery Bearings Business, which already generates a double-digit operating income margin, is poised to become the driving force behind future earnings growth. Meanwhile, structural improvements will be implemented in the Precision Machinery and Parts Business, which is sensitive to economic fluctuations. The idea is to ensure this business remains profitable even amid slower demand. In this way, we expect Precision Machinery and Parts to make a substantial contribution to earnings whenever favorable business conditions prevail.

A Stronger Earnings Structure
In addition to accelerating profit improvements in Precision Machinery and Parts, Automotive Products, as a stable earnings source, and Industrial Machinery Bearings, as a growth driver for earnings, are the focus of NSK’s thrust to further enhance profitability.
  Demand in Automotive Products is stable, and this business field is a critical element in NSK’s earnings base. By optimally leveraging its ability to provide technologies that anticipate our increasingly demanding customers’ future needs, by carrying out joint development activities built on lasting relationships of trust with its customers, and by responding to customer needs using its global manufacturing, sales, and R&D network, NSK is dedicated to keeping sales in Automotive Products above the 1% to 2% annual growth expected in global automobile production. To do this, the Company is launching strategic value-added products for which it can reliably anticipate growth in future demand. Ultimately, these products will also help to enhance the profitability of the Automotive Products Business. In automotive bearings, key products include hub unit bearings and needle roller bearings. In automotive components, we have designated electric power steering (EPS) systems and automatic transmission (AT) components as two product categories where NSK will channel resources.
  Furthermore, NSK believes roller bearings hold the key to further bolstering profitability in the Industrial Machinery Bearings Business. Used in an array of industrial machinery applications and equipment, roller bearings are a field that highlights the importance of comprehensive technological know-how, reflecting NSK’s capabilities in product development, applied technology and material engineering. This field is also one that challenges NSK’s comprehensive capabilities as a bearing manufacturer, including the ability to bring powerful information gathering skills to bear in collecting market data, and skills in production technology for responding to a wide range of different production formats in order to propose innovative solutions to its customers and earn their trust.
  For the industrial machinery business, another major point is access to a full menu of aftermarket services. Aftermarket services largely revolve around maintenance and repair demand. The goal of these services is to provide customers with high-added-value beyond the price tag and product quality, thus establishing a strong relationship built on trust and increasing the appreciation of the NSK brand through open communication and proactive training, inspection and maintenance initiatives. To further reinforce global initiatives in this area, we set up the Aftermarket Business Division-Headquarters in July 2004, and are working hard to enhance the earnings capabilities of the Industrial Machinery Bearings Business.

Building a Presence in Emerging Markets
Securing new markets will also be crucial to NSK’s future growth strategies.
  In China, NSK is expanding its production sites for industrial machinery and automotive-related products, and has also set up a technical center to respond quickly to the customer’s R&D and design requirements. In a bid to capture as much of China’s enormous market as possible, we are now focusing on strengthening our marketing and sales organization. NSK is scheduled to establish a wholly owned local sales entity in 2005. By putting in place an integrated production, sales and technology framework inside the country and keeping one step ahead of our competitors in the expansion of our China business, we will endeavor to secure our position as the No. 1 bearing manufacturer in the Chinese market.
  We will also make full use of our numerous facilities in Southeast Asia to accelerate the expansion of our business activities in countries such as Thailand and India, where we expect a sharp growth in demand.

Enhancing Human Resources
Earlier, I talked about key issues in attaining new growth. But the one factor crucial to supporting and realizing this growth remains the same: our human resources. Ensuring that NSK’s sophisticated technological capabilities and our acumen in developing global business operations are passed on to new employees will be essential on the road to the next stage of growth. In conjunction with efforts to systematically raise the level of human resource training company-wide, in December 2004, we established the NSK Manufacturing Center, a training center for engineers, and took steps to maintain and boost onsite skill levels. To boldly remain on the offensive, tackle intense global competition head-on, and establish a presence in new markets, training our up-and-coming human resources is one of management’s most pressing tasks.

Key Issue for Fiscal 2005 — Strengthening Our Manufacturing Capabilities
Fiscal 2005 will be the year in which we lay the groundwork for delivering new growth. And while rising steel and oil prices and uncertainty in the U.S. and Chinese economies remain causes for concern, NSK will continue to work closely across the Group to focus on three key issues: responding to external factors such as higher costs through pricing and rationalization efforts, strengthening product supply capabilities, and enhancing the earnings power of overseas operations. This approach should result in record sales and profits for NSK for the second straight year.
  After ¥36.9 billion in capital expenditures in fiscal 2004, we intend to raise capital expenditures to ¥40.0 billion in the year ahead, above the level of depreciation and amortization. In this vein, we plan to steadily augment production capacity chiefly in strategic products, particularly hub unit bearings, needle roller bearings, roller bearings, EPS systems and AT components.
  With respect to overseas operations, these businesses still lack the earnings ability of our domestic operations. That said, two new plants are scheduled to begin full-scale operations in fiscal 2005: Changshu NSK Needle Bearing Co., Ltd. in China and NSK Steering Systems Europe (Polska) Sp. z o. o. in Poland. Along with the smooth launch of these new production sites, we are looking to raise the earnings ability of each business site through strategic rationalization initiatives that draw on the combined capabilities of the NSK Group.
  But above all else, I want to emphasize that we are committed to achieving the goal of ¥600 billion in sales for the first time in NSK’s history by clearing all the aforementioned hurdles. To realize this, I want NSK this year to get back to its roots as a manufacturer and concentrate again on addressing one fundamental issue—how to strengthen our manufacturing capabilities.
  For manufacturers, business can only get off the ground once production, sales, technology, administration and other key corporate functions are working properly. Through NSK’s Advanced Production System (APS) activities, a set of production innovation initiatives, we seek to minimize waste and deliver a profitable corporate structure by reinforcing the ties between these functions. As we embark on our journey towards this objective of ¥600 billion in sales, we intend to extend and accelerate the implementation of APS activities not only at NSK, but also at our subcontractors and suppliers—in other words, throughout the entire supply chain.
  We plan to leverage the total supply chain by implementing APS activities, being mindful not to rely too heavily on past approaches and always being open to new ideas. In turn, the stronger production capabilities secured in the process will help NSK to leap ahead in its ability to adapt to change, as well as bolster overall earnings power and competitiveness. At the same time, I am confident this step will also enable NSK to maintain an unquestionable level of product quality.

To Our Stakeholders
NSK’s medium-term vision is to use its leading-edge technological capabilities and QCDS (Quality, Cost, Delivery and Service) to become one of the world’s leading companies in customer satisfaction. Fulfilling this vision will ensure that NSK can become a well-trusted enterprise capable of remaining profitable and meeting the expectations of its shareholders and other investors, customers, suppliers, employees and all other stakeholders. In fiscal 2005, the final year of our mid-term business plan launched in fiscal 2003, we will strengthen foundations for our next business plan, and intend to address the issues at hand as we lay the groundwork for NSK’s next phase of growth.
  We hope you will continue to support NSK and we welcome any comments and advice to help us further improve the Company.

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