Management’s Discussion and
Analysis of Business Results and Financial Position
Analysis of Business Results
for the Year Ended March 31, 2007
1. Scope of Consolidation
The consolidated financial statements reflect the financial performance of NSK Ltd. and its 82 consolidated subsidiaries (22 in Japan and 60 overseas). NSK’s investments in 19 affiliates (11 in Japan and 8 overseas) are accounted for by the equity method.
In the year under review, the number of NSK consolidated subsidiaries increased by one from the previous year, as a result of the addition of three newly established subsidiaries, including one sales company in Vietnam, the transfer of one subsidiary to an equity method affiliate due to a change in the percentage of share ownership, and the loss of one subsidiary in Europe due to its liquidation. The number of equity method affiliates increased by one from the previous year due to the addition of one affiliate that was transferred from a consolidated subsidiary as a result of a change in the percentage of share ownership. In the year under review, the year-end for 40 consolidated subsidiaries and three equity method affiliates was changed from December 31 to March 31. The effect of the change is shown in Consolidated Statements of Changes in Net Assets, P47, under Retained earnings.
2. Overview of the Year Ended March 31, 2007
In the year ended March 31, 2007, the Japanese economy, despite some weakness in consumer spending, was on a steady recovery path, led by strong capital investment. In the U.S., consumer spending and capital investment grew, but housing investment declined. Overall, the pace of U.S. economic expansion moderated. For Europe, the economic recovery continued in the Eurozone and the U.K. For Asia, economic expansion continued in China, but Thailand and South Korea saw moderation in their economic growth.
Under these circumstances, the NSK Group created its mid-term vision “To Become No. 1 in Total Quality.” It has strived to enhance profitability, in contrast to focusing only on expansion, in an effort to become a strong company, and aggressively deployed growth strategies for the industrial machinery bearings and automotive products segments.
These strategies produced record sales and profits three fiscal years in a row. Our consolidated net sales were ¥88.8 billion, or 14.1%, higher year on year at ¥717.2 billion (US$6,078 million), while operating income increased by ¥19.8 billion, or 46.6%, to ¥62.4 billion (US$529 million), and net income by ¥9.3 billion, or 36.2%, to ¥34.9 billion (US$295 million).
The yen exchange rates used to translate the financial statements of overseas subsidiaries declined by approximately 6% against the U.S. dollar and, 9% against the euro.
3. Net Sales
Net sales increased by ¥88.8 billion, or 14.1%, to ¥717.2 billion (US$6,078 million). Excluding exchange rate fluctuations, the increase was ¥64.4 billion, or 10.3%. Sales in Japan showed year-on-year growth of ¥34.3 billion, or 10.4%, to ¥364.4 billion (US$3,088 million). Overseas sales increased by ¥54.4 billion, or 18.2%, year on year to ¥352.8 billion (US$2,990 million). Excluding exchange rate fluctuations, the increase was ¥30.1 billion, or 10.1%.
4. Cost of Sales, Selling, General and Administrative Expenses, Operating Income
The cost of sales increased from ¥487.7 billion in the previous year to ¥551.1 billion (US$4,670 million) in the year ended March 31, 2007. The ratio of cost of sales to net sales improved by 0.8 percentage points to 76.8%.
Selling, general and administrative expenses amounted to ¥103.8 billion (US$879 million), compared with ¥98.2 billion in the previous year. The ratio of selling, general and administrative expenses to net sales improved by 1.1 percentage points to 14.5%.
As a result, consolidated operating income increased by ¥19.8 billion, or 46.6%, year on year to ¥62.4 billion (US$529 million). The consolidated operating income margin improved by 1.9 percentage points.
5. Business Segment Information
(a) Industrial Machinery Bearings
In Japan, sales to the steelmaking equipment, machine tools, and general machinery sectors increased, and sales to the electrical machinery and IT equipment sectors remained strong. For the Americas, aftermarket sales in Brazil declined, but sales in the U.S. to the construction machinery and general machinery sectors increased. In Europe, sales to the wind turbine and home appliance sectors surged, and aftermarket sales also rose. In Asia, sales in China to the electrical machinery and IT equipment, machine tools, general machinery and aftermarket sectors increased. In South Korea, sales to the steelmaking equipment and machine tools sectors increased. In addition, aftermarket sales rose in ASEAN countries. As a result, total sales in the industrial machinery bearings segment increased by ¥20.8 billion, or 10.6%, year on year to ¥216.3 billion (US$1,833 million), and operating income increased by ¥7.5 billion, or 34.0%, year on year to ¥29.6 billion (US$250 million), led by enhanced capacity utilization due to volume growth and improvement in the export profit margins brought on by yen depreciation.
(b) Automotive Products
In the area of automotive bearings, we recorded strong global sales of hub unit bearings, standard ball bearings and needle roller bearings. In the automotive components category, there were increases in sales of electric power steering (EPS) systems and automatic transmission (AT) parts in Japan, while steering columns sold well in the Americas, Thailand and China, and sales of electric power steering (EPS) systems increased in Europe. These trends have helped to boost sales in this segment by ¥44.7 billion, or 12.7%, year on year to ¥397.9 billion (US$3,372 million). Operating income for this segment rose by ¥5.3 billion, or 30.5%, to ¥22.7 billion (US$192 million), reflecting volume growth and the resulting improvement in capacity utilization, together with reduced external procurement costs.
(c) Precision Machinery and Parts
In the middle of the year under review, demand for products used in semiconductor and liquid crystal production equipment entered an adjustment phase. However, total sales in the precision machinery and parts segment rose by ¥11.9 billion, or 18.1%, year on year to ¥77.7 billion (US$659 million), led by continued strong sales to the machine tools sector and increased sales of photofabrication equipment for liquid crystal display (LCD) color filter production. Operating income increased by ¥6.0 billion, or 107.3%, year on year to ¥11.5 billion (US$98 million), reflecting enhanced capacity utilization due to volume growth, and cost reductions in external procurement.
(d) Others
Influenced by the new addition of Amatsuji Steel Ball Mfg. Co., Ltd. as a 100% owned consolidated subsidiary as of March 2006, total sales in this segment increased by ¥21.6 billion, or 91.8%, year on year to ¥45.1 billion (US$382 million), and operating income increased by ¥1.1 billion, or 83.9%, year on year to ¥2.4 billion (US$20 million).