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Financial Information:
Annual Report 2005
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Management’s
Discussion and Analysis of
Business Results and Financial Position |
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(1) Overview
NSK achieved record-high net sales, operating income,
ordinary income and net income in fiscal 2004, ended
March 31, 2005. Alongside healthy demand, earnings
were sharply higher on the back of price revisions, internal
cost-cutting measures and other actions that absorbed
the negative impact of higher costs from rising
steel prices. Looking at each business segment, while
profits were flat in Automotive Products due to rising
production costs accompanying efforts to meet sharply
higher demand, NSK boosted profitability in Industrial
Machinery Bearings by a substantial margin. Precision
Machinery and Parts also ended the year in positive territory.
This was another factor that contributed heavily to
overall earnings growth. By geographical segment, while
overall profitability in Asia was lower year on year as a
result of higher upfront expenses related to investments
in China, profits were up in Europe and the Americas.
In the external business environment in fiscal 2005,
NSK expects a buoyant Japanese economy, largely on
strong domestic demand. A robust showing is expected
in the automotive industry as well as the machine tool
and industrial machinery sectors. Forecasts predict a
recovery in demand for semiconductor and liquid crystal
display (LCD) production equipment from the second
half of this year. Overseas, China is expected to continue
expanding its market, while signs of economic recovery
continue to emerge in the Americas and Europe. However,
escalating prices for raw materials, geopolitical
crises, and risks stemming from the yen’s rapid appreciation
versus the U.S. dollar, are among the destabilizing
factors that pose a threat to corporate earnings in the
year ahead.
Although NSK continues to foresee growth in sales
and earnings in each of its business segments, attaining
growth in Automotive Products may require increasing
depreciation and amortization expenses or a heavier R&D
expenditure burden: therefore, we expect profit growth
in this segment to be minimal.
(2) Analysis of Fiscal 2004 Business Results
1. Scope of consolidation
The consolidated financial statements reflect financial
statements of NSK Ltd. and its 75 consolidated subsidiaries
(21 in Japan and 54 overseas). NSK’s investments in 22
affiliates (12 in Japan and 10 overseas) are accounted for
by the equity method.
In fiscal 2004, NSK established 3 overseas subsidiaries
specializing in the production of needle roller bearings
that are used in automatic transmissions and other applications.
Another subsidiary was set up in Thailand, this
time as an R&D site for bearings, to respond to the needs
of Japanese automakers and other users operating in the
ASEAN region. Meanwhile, NSK converted a former consolidated
subsidiary into an equity-method affiliate, sold
off another subsidiary and liquidated one more, resulting in
a net increase of one consolidated subsidiary year on year.
Compared to the previous year, NSK saw a net increase
of one affiliate accounted for by the equity method
due to the conversion of a former consolidated subsidiary.
2. Overview of Fiscal 2004
Fiscal 2004 saw the Japanese economy recover, underpinned
by steady improvement in corporate earnings
and growth in capital expenditures. This was complemented
by a gradual increase in consumer spending,
among other factors. The speed of Japan’s recovery,
however, remained modest, due to a slowdown in
exports and consumer spending from autumn onwards.
The U.S. economy, meanwhile, saw capital expenditures
hold firm throughout the year, despite soft consumer
spending from around early spring and slower economic
growth. In Europe, economic conditions remained on a
recovery trajectory, supported by healthy corporate earnings
and rising exports. In Asia, China and Thailand continued
to post strong economic growth, while South Korea’s
economy also headed toward recovery.
Operating in this climate, the NSK Group moved
forward with company-wide profitability improvement
initiatives such as production innovations and balance
sheet reforms —both key medium-term management
issues. In parallel, the Group took a proactive stance in
developing growth strategies for its operations, such as
propelling business expansion in China. As a result, NSK
saw record-setting performance across the board.
Consolidated net sales rose ¥58.8 billion, or 11.3% year
on year, to ¥581.0 billion (U.S. $5,430 million), and operating
income climbed ¥12.3 billion, or 47.4%, to ¥38.3 billion
(U.S. $358 million). Ordinary income jumped ¥14.0
billion, or 73.1%, to ¥33.1 billion (U.S. $309 million), while
net income was up ¥8.1 billion, or 56.4% year on year, to ¥22.3 billion
(U.S. $209 million). Regarding foreign currency
exchange rates for calculating income and loss
items from the financial statements of overseas subsidiaries,
the Japanese yen appreciated approximately 7%
year on year against the U.S. dollar, and declined about
2% against the euro.
3. Net Sales
Net sales rose ¥58.8 billion, or 11.3% year on year, to ¥581.0 billion
(U.S. $5,430 million). Excluding the effects of fluctuations in foreign currency
exchange rates, net
sales rose ¥63.8 billion, or 12.2%. Compared with the
previous year, net sales in Japan climbed ¥31.6 billion, or
11.3%, to ¥310.2 billion (U.S. $2,899 million). In addition
to robust performance from Automotive Products,
strong capital expenditure demand, signified by the
robust investments in automotive production facilities
and semiconductor production equipment, also triggered
strong growth in Industrial Machinery Bearings
and Precision Machinery and Parts. Overseas sales rose ¥27.2 billion, or
11.2%, to ¥270.7 billion (U.S. $2,530
million). Excluding the effects of fluctuations in foreign currency exchange
rates, overseas sales increased ¥32.2
billion, or 13.2%. Besides sales growth in Asia, particularly
China, sales increased in the Americas and Europe on the
back of strong performance in Automotive Products.
4. Cost of Sales, Selling, General and
Administrative Expenses and Operating Income
Cost of sales was ¥450.3 billion (U.S. $4,208 million), compared
to ¥409.9 billion in fiscal 2003. The ratio of cost of
sales to net sales improved 1.0 percentage point to
77.5%. Despite the impact of rapidly rising prices for raw
materials such as steel, benefits from improved capacity
utilization resulting from higher sales and production
volumes, enhanced productivity, reduction of external
procurement costs and other factors led to a reduction
in total costs.
Selling, general and administrative (SG&A) expenses
increased to ¥92.4 billion (U.S. $864 million), compared to ¥86.3 billion
in the previous year, mainly due to an increase in R&D costs and other technology-related
expenses, and higher logistics expenses. Nonetheless, the
ratio of SG&A expenses to net sales improved 0.6 of a
percentage point to 15.9%.
As a result, in fiscal 2004, consolidated operating
income climbed ¥12.3 billion, or 47.4% year on year, to ¥38.3 billion (U.S. $358 million).
| Net Sales |
Gross Profit Margin,
SGA Expenses / Net Sales |
Operating Income,
Operating Income Margin |
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5. Business Segment Information
NSK reorganized its corporate structure from a product-oriented
to a customer-oriented organization in February
2004. In line with this change, the Company
changed its business segmentation effective the year
ended March 31, 2005.
(a) Industrial Machinery Bearings
Sales in this segment rose ¥9.2 billion, or 5.2%, to ¥185.5
billion (U.S. $1,733 million). In Japan, sales were robust to
the machine tool, steel, railway vehicle and general
machinery sectors. Overseas sales were also firm, thanks
to efforts to expand sales to certain targeted sectors such
as steel and machine tools, as well as the aftermarket.
Complementing this was healthy sales growth in the
Americas, Europe and Asia, most notably China.
Operating income jumped ¥7.8 billion, or 64.1%, to ¥19.9
billion (U.S. $186 million), and the operating income
margin improved 3.9 percentage points year on
year to 10.8%. In addition to the effect of increased sales,
earnings in Japan, the Americas and Europe were
boosted by benefits from improved capacity utilization
resulting from expanded production.
(b) Automotive Products
Sales in this segment rose ¥30.3 billion, or 10.6%, to ¥316.2 billion
(U.S. $2,955 million). In automotive bearings,
needle roller bearings for automatic transmissions
sold briskly in Japan. Sales rose sharply on the back of
strong bearing sales in the Americas, following a lackluster
performance a year earlier. Sales also grew in Europe
and Asia, particularly Thailand. In automotive components,
higher sales of electric power steering (EPS) systems
and automatic transmission components in Japan
were complemented by healthy growth in steering columns
in the Americas and Thailand. Operating income
was ¥15.8 billion (U.S. $147 million), largely unchanged
from the previous year due to several factors, among
them higher R&D costs and logistics expenses.
(c) Precision Machinery and Parts
Sales in this segment climbed ¥17.1 billion, or 36.4%, to ¥64.2 billion
(U.S. $600 million). In addition to brisk sales
of products for the semiconductor and LCD production
equipment, general machinery and machine tool sectors,
sales of photofabrication equipment for LCD color filter
production were also sharply higher. Operating income
was ¥4.8 billion (U.S. $45 million), a vast improvement
over the previous fiscal year, which came from improved
capacity utilization due to increased sales and production,
as well as a return to profitability in the Americas
due to reduced labor costs and other measures.
(d) Others
Sales in this segment rose ¥3.8 billion, or 19.3%, to ¥23.2
billion (U.S. $217 million), buoyed mainly by increased
sales of machinery and equipment to Group companies
in Japan and overseas. Operating income jumped ¥0.7
billion, or 56.4%, to ¥1.8 billion (U.S. $17 million).
6. Geographical Segment Information
(a) Japan
Industrial Machinery Bearings sales to the machine tool,
aftermarket and general machinery sectors were robust,
supported by higher capital expenditures and other positive
factors. In Automotive Products, sales of automotive
components such as EPS systems and automatic transmissions
were brisk, as were sales of needle roller, hub unit
and other automotive bearings. In Precision Machinery
and Parts, sales of products for the machine tool sector
remained strong, although sales of products for semiconductor
and LCD production equipment slowed down in
the latter half of the year. As a result, sales in Japan rose ¥47.7 billion,
or 12.2% year on year, to ¥439.5 billion (U.S.
$4,107 million), and operating income climbed ¥8.5 billion,
or 37.0%, to ¥31.4 billion (U.S. $294 million).
(b) The Americas
Economic recovery in the U.S. spurred sales growth in
Industrial Machinery Bearings in the aftermarket, while
robust sales to Japanese automakers also generated growth
in Automotive Products. In Precision Machinery and Parts,
growth was spurred by a recovery in demand centered on
products for semiconductor production equipment, lifting
sales in the Americas ¥6.8 billion, or 9.2%, to ¥80.5 billion
(U.S. $752 million), and operating income ¥2.0 billion, or
335.3%, to ¥2.5 billion (U.S. $24 million).
(c) Europe
Reinforced marketing activities fueled substantial growth
of automotive bearing sales, leading to strong overall sales
in Automotive Products. Similar marketing activities,
coupled with economic recovery in Europe, also supported
growth in Industrial Machinery Bearings and Precision
Machinery and Parts. Sales in Europe rose ¥10.3
billion, or 11.5%, to ¥100.2 billion (U.S. $936 million). Operating
income climbed ¥2.2 billion, or 82.9%, to ¥4.8 billion
(U.S. $45 million), driven by increased sales volumes and
cost-reduction benefits at NSK production sites.
(d) Asia
Increased sales to China and other markets led to robust
Industrial Machinery Bearings sales, despite a dip in
demand for bearings for IT equipment to the ASEAN
region. Complementing this were favorable Automotive
Products sales in Thailand, and a substantial jump in sales
of products for semiconductor and LCD production
equipment in Precision Machinery and Parts to Taiwan
and South Korea. Sales in Asia rose ¥6.6 billion, or 11.4%, to ¥64.2
billion (U.S. $600 million). Operating income,
however, declined ¥0.5 billion, or 13.6%, to ¥3.3 billion
(U.S. $30 million), impacted by rising steel prices and
higher expenses accompanying the establishment of
new production facilities in China.
7. Other Income and Expenses
In fiscal 2004, the redemption of corporate bonds by the
parent company and other efforts to reduce interest-bearing
debts throughout the NSK Group led to an
improvement of ¥1.0 billion in NSK’s net financial
expenses (i.e. the difference between dividends payable
and interest and dividends receivable) to ¥3.6 billion (U.S.
$34 million). Other income included a gain on sales of
investment securities and a gain following the transfer of
part of NSK’s defined-benefit pension plan to a defined-contribution
pension plan. Despite these and other
gains, NSK booked net other expenses of ¥3.3 billion (U.S.
$30 million).
8. Income Before Income Taxes and Minority Interests
Despite an increase in other expenses, higher operating
income lead income before income taxes and minority
interests to increase ¥8.6 billion, or 32.4%, to ¥35.0 billion
(U.S. $327 million).
9. Tax Expenses
The corporate tax ratio (effective tax rate) applied to
NSK’s income before income taxes and minority interests
was 33.1%, 6.9 percentage points lower than the effective
statutory tax rate of 40.0%. This was primarily the
result of a decline in tax expenses due to changes in
valuation allowances after the deduction of losses carried
forward by subsidiaries. Other factors included income
from affiliates accounted for by the equity method,
which has no effect on tax expenses, and differences in
applicable tax rates for foreign subsidiaries.
10. Minority Interests
A recovery in business performance at subsidiaries lifted
minority interests ¥0.4 billion, or 57.9% year on year, to ¥1.1 billion
(U.S. $10 million).
11. Net Income
Net income increased ¥8.1 billion, or 56.4%, to ¥22.3
billion (U.S. $209 million) in fiscal 2004. Net income per
share was ¥41.35 (U.S. $0.386), up from ¥26.12 per share a
year earlier. Return on average shareholders’ equity (ROE)
improved from 8.0% in the previous year to 11.9% in
fiscal 2004.
Net Income (Loss),
Net Income Margin |
ROA and ROE |
Cash Flow |
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12. Cash Flow and Financial Position
(a) Cash Flow
Net cash provided by operating activities amounted to ¥58.0 billion (U.S.
$542 million), an increase of ¥20.1 billion
compared to the previous year. This was due largely
to the ¥8.6 billion increase in income before income
taxes and minority interests to ¥35.0 billion (U.S. $327
million) in fiscal 2004. Efforts to reduce notes and
accounts receivable through securitization of receivables
also contributed to cash flow, as did an increase in notes
and accounts payable. These factors offset cash outflows
resulting from the switch to a defined-contribution
pension plan and other uses of cash.
Net cash used in investing activities was ¥31.6 billion
(U.S. $296 million), an increase of ¥14.7 billion compared
to the previous year. This was due primarily to an
increase in cash used for capital expenditures and a
decline in proceeds from sales of investment securities.
Net cash used in financing activities was ¥46.1 billion
(U.S. $431 million), an increase of ¥25.4 billion compared
to the previous year. Cash was mainly used to reduce
interest-bearing debts to reinforce NSK’s financial structure,
and to pay dividends.
As a result of these activities, cash and cash equivalents
at the end of the fiscal year totaled ¥39.4 billion
(U.S. $368 million), a decline of ¥19.6 billion from ¥59.0
billion in fiscal 2003.
(b) Financial Position
Total assets as of March 31, 2005 amounted to ¥628.6
billion (U.S. $5,875 million), an increase of ¥6.7 billion
from the previous fiscal year-end. This increase was
largely due to a rise in prepaid pension cost at the parent
company, as well as an increase in inventories due to
higher production volumes. These factors outweighed
several decreases, including declines in cash and cash
equivalents from the reduction of interest-bearing debts,
and a drop in notes and accounts receivable from the
securitization of receivables.
Capital Expenditures,
Depreciation and Amortization |
Ratio of Net Worth to Total Capital,
Current Ratio and Interest-Bearing Debts |
Asset Turnover, Inventory Turnover |
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