Profile
Showa Corporation manufactures and markets high-precision components for motor vehicles including shock absorbers, steering
systems and drive train products for automobiles, and motorcycles, as well as components for outboard marine engines. The
Company is one of the leading manufacturers of shock absorbers for automobiles and motorcycles in the world today.
Established in 1938, the Company began motor vehicle parts production in 1946. In 1970, the Company became affiliated with
Honda Motor Co., Ltd., a world leader in automobile and motorcycle manufacturing. When merged with Seiki Giken Kogyo Co.,
Ltd., a power steering products manufacturer, the Company was renamed Showa Corporation in 1993. In 1964, Showa’s shares
were listed on the Second Section of the Tokyo Stock Exchange (TSE). In 1985, the Company’s shares were upgraded to the First
Section of the TSE.
Headquartered in Gyoda City, Saitama Prefecture, Japan, Showa operates five manufacturing plants, three research and
development facilities and two affiliated manufacturers within Japan. The Company’s global business operation, a network of 30
manufacturing facilities that includes 10 consolidated subsidiaries, spreads over 15 nations including Japan.
Showa Corporation’s business activities revolve around customer satisfaction, as emphasized by the Company principle
“To meet customer needs with the highest quality and the most competitive product.” Furthermore, at Showa, we strive to maintain
our forward-looking stance and continue to encourage technological, operational and administrative innovation.
Environmental preservation for the benefit of future generations is a great concern and a continuing theme at Showa Corporation.
We actively support a range of environmental preservation initiatives through our product offerings and corporate activities.
Showa Corporation and its global affiliates in 15 nations embrace the Company’s business philosophy described above. The
Company and its affiliates strive to expand their business, providing additional benefits to our customers and shareholders as well
as to the communities and societies where we operate.
Contents
Forward-looking statements: Forward-looking statements made in this annual report concerning performance or business strategies have been determined according to assumptions and beliefs based on information available at the time and contain elements of risk and uncertainty.
1
Financial and Operating Highlights
2
Message from the President
4
Showa’s Global Network and
Mutually Complementary Parts
6
Review of Operations
8
Showa’s Technology
10
Topics
11
Financial Section
30
Corporate Information
31
Board of Directors and Corporate Auditors
1 SHOWA CORPORATION and Consolidated Subsidiaries
Financial and Operating Highlights
Financial Highlights
Thousands of Millions of yen U.S. dollars (except where noted) (except where noted)
2002 2003 2003
Net sales ¥ 177,373 ¥ 196,655 $ 1,636,064
Operating income 12,012 14,934 124,242
Income before income taxes and minority interests 11,546 15,059 125,282
Net income 6,788 8,018 66,705
Cash dividends paid during the period 705 737 6,131
Total assets 105,259 112,443 935,465
Shareholders’ equity 53,914 59,283 493,202
Depreciation 6,867 6,598 54,891
Capital expenditures 6,341 5,784 48,119
Per share amounts: Yen U.S. dollars
Net income (basic) ¥ 94.49 ¥ 106.86 $ 0.88
Net income (diluted) 89.38 104.84 0.87
Cash dividends 10.00 11.00 0.09
Shareholders’ equity 741.62 792.55 6.59
Operating Highlights
Thousands of Millions of yen U.S. dollars
2002 2003 2003
Motor vehicle parts ¥ 172,348 ¥ 191,655 $ 1,594,467
Other products 5,025 4,999 41,589
Total ¥ 177,373 ¥ 196,655 $ 1,636,064
Thousands of Millions of yen U.S. dollars
2002 2003 2003
Japan ¥ 93,730 ¥ 94,659 $ 787,512
North America 63,212 75,100 624,792
Others 20,430 26,895 223,752
Total ¥ 177,373 ¥ 196,655 $ 1,636,064
Years ended 31st March, 2002 and 2003
• Throughout this report, U.S. dollar amounts have been translated from Japanese yen solely for the convenience of the reader at the rate of ¥120.20=U.S.$1, the exchange rate prevailing at 31st March, 2003.
• The breakdown by geographic area is based on the degree of proximity to the geographic region. • Major countries or regions that fall under a category other than “Japan” are following:
North America: United States, Canada
Others : Europe, South America, Southeast Asia, China NET SALES BY GEOGRAPHICAL AREA
NET SALES BY BUSINESS SEGMENT
2
Message from the President
Business Overview Review of Fiscal 2003 >>
During the fiscal year ended 31st March, 2003, Japan’s economy remained sluggish. In the automobile industry, the main purchaser of Showa Corporation’s products, the domestic market for automo-biles was nearly unchanged from the prior year, but total production increased as a result of growth in exports. In the motorcycle indus-try, sales rose in the domestic market following the introduction of low-priced models, but total production declined because of a drop in exports.
Faced with these circumstances, we focused on improving our cost-competitiveness and earnings capability. In addition to aggres-sively developing sales activities aimed at obtaining new orders, we promoted productivity improvement activity to eliminate production site waste or loss and improve production and investment efficiency at our domestic and overseas bases.
As a result, consolidated net sales rose 10.9% compared with the previous fiscal year, to ¥196,655 million (US$1,636 million), and consolidated operating income advanced by 24.3% from the previ-ous term to ¥14,934 million (US$124 million).
Outlook for Fiscal 2004 >>
Turning to the future outlook, we anticipate that severe business conditions will continue unchanged for the immediate future. Although the economies of Asian countries are projected to grow,
the U.S. economy faces an uncertain future, and Japan’s economy does not appear poised for a strong recovery. In the automobile industry, the domestic passenger-car market will shift further toward small cars. We anticipate competition to intensify further, and demands from vehicle manufacturers for cost reductions to also mount. Given these circumstances, the environment surround-ing management, such as increassurround-ingly severe worldwide competi-tion to secure orders, creates an unpredictable situacompeti-tion.
Based upon these conditions, we will strive to respond to cus-tomer needs accurately and promptly by enhancing product com-petitiveness and seek to boost product quality, increase production efficiency and lower costs through improvement measures focused on production sites and production starting points. Furthermore, we will strengthen our management base and improve operating results by ensuring close and systematic cooperation with our facili-ties around the world.
Strengthening Competitiveness Domestic Operations >>
In order to strengthen our production structure and further facilitate in-house production of parts, we have implemented following reorganization measures at our manufacturing bases in Japan: • Consolidated aluminum casting facilities from the Gotemba
Plant to the Asaba Plant and created a concentrated production organization.
Medium-Term Goal
Rapidly enhance product competitiveness, to build a sound foundation for a leading global company
Strategic Orientation
Establish a leading position in cost-competitiveness Achieve and maintain the highest quality ranking
Gather the resources necessary for an integrated system manufacturer of chassis Promote overseas business by reinforcing the organization and expanding operations
Behavioral Guideline
3 • Transferred production facilities for steering system parts
from Showa Seiko Co., Ltd. to the Gotemba Plant and expanded our integrated production system.
• Relocated the head office and plant of Showa Seiko Co., Ltd. to the Hadano Plant and enhanced the integrated pro-duction system for products such as automatic transmission components.
• Implemented in-house production of plastic molding at the Nagoya Plant.
• Began in-house assembly of motors for electric steering sys-tems at the Gotemba Plant.
Global Operations >>
We have implemented the following measures to promote organizational improvements and business expansion at our overseas facilities:
• To strengthen the financial position of Showa Europe, S.A., our subsidiary in Spain, we injected additional capital in October 2002.
• To strengthen and promote the automotive components business at our base in China, we increased registered capital of Guangzhou Showa Shock Absorber Co., Ltd. in January 2003.
We changed the name of Guangzhou Showa Shock Absorber Co., Ltd. to Guangzhou Showa Autoparts Co., Ltd.
• In March 2003, we increased our share of capital in Nissin Showa UK Ltd., a joint venture with Nissin Kogyo Co., Ltd., to strengthen its financial position. This move converted Nissin Showa UK into a subsidiary with consolidated financial reporting responsibilities.
• Guangzhou Showa Autoparts Co., Ltd. and Summit Showa Manufacturing Co., Ltd., our subsidiaries in China and Thailand, began production of steering systems. Following our worldwide success in the shock absorber business, we will strive to develop a global production and supply system for our steering system business.
• In April 2003, we launched production of gas springs for automobiles at Shanghai Showa Autoparts Co., Ltd., which we established in January 2002 as our third base in China.
As these steps demonstrate, Showa Group will contin-uously strive to facilitate development and expansion of our business overseas.
As part of the Showa Group’s aim to boost its corporate value, we see enhancement of corporate governance as one of the most important management issues, with the goal of ensuring that Showa maintains the confidence of every shareholder and customer as well as society.
We look forward to continuously receiving the unwavering support and guidance from our shareholders in the future. Masahide Matsushima
Showa’s Global Network and
Mutually Complementary Parts
6
Review of Operations
Fiscal 2003 Results
In the motor vehicle parts segment, net sales of motorcycle com-ponents totaled ¥57,520 million (US$478 million), up 12.5% from the previous term. Net sales of automotive components increased 10.6% compared to the previous term to ¥134,140 million (US$1,115 million). Net sales of other, primarily outboard engine components, declined slightly to ¥5,000 million (US$41 million), 0.4% lower than that of the previous term.
Looking at net sales by area of unit sales, net sales in Japan for the term were nearly unchanged from the previous term at ¥82,240 million (US$684 million).
In Asia, net sales in Indonesia, Thailand, India and China expanded sharply, mainly for motorcycle parts, increasing 69.9% for the term to ¥20,180 million (US$167 million).
In Europe, net sales of motorcycle components decreased as the market for small motorcycles and scooters shrank, while net sales of automotive components declined because of efforts to promote local procurement. Overall, net sales fell 17.3% from the level of the previous term to ¥11,410 million (US$94 million).
Net sales of both motorcycle and automotive components were healthy in North America, rising by 19.1% from the previ-ous term to ¥76,430 million (US$635 million). Sales were sup-ported by strong demand by our major customers in both the United States and Canada.
Sales also expanded in South America, where sales expanded for both motorcycle and automotive components because of good performance at customers in Brazil. Net sales advanced by 21.2% from the previous term to ¥6,400 million (US$53 million).
Motorcycle Components
Net sales of shock absorbers, which account for the majority of motorcycle components sales, grew by 12.9% to ¥55,630 mil-lion (US$462 milmil-lion). Drive unit products edged upward 3.3% to ¥1,890 million (US$15 million), bringing net sales for the product segment to ¥57,520 million (US$478 million), 12.5% higher than in the previous term.
Domestically, sales of motorcycle components to major cus-tomers fell by ¥1,080 million (US$8 million), but this was offset by higher sales to other companies. As a result, net sales within Japan as a whole were ¥21,900 million (US$182 million), 0.2% below the level of the previous term.
In Asia, sales in Indonesia’s active market surged by ¥3,500 million (US$29 million), while sales in Thailand also rose by ¥2,870 million (US$23 million). Overall, net sales in Asia rose sharply by 57.4% to a total of ¥14,060 million (US$116 million).
In Europe, net sales declined by 12.1% because the market for small motorcycles and scooters continued to shrink. Because of the currency translation effect from depreciation of the yen, however, net sales were off only 1.6% from the previ-ous term to ¥7,260 million (US$60 million).
Sales in North America increased primarily from sales to major customers and were also influenced by the yen’s weak-ness. Overall, net sales grew 13.8%, to ¥9,010 million (US$74 million).
Sales in South America rose based on solid demand from our major customers. On a local currency basis, sales rose sharply by 33.6%. Because of the decline in the real, however, the currency translation effect held net sales to ¥5,290 million (US$44 million), up 7.0% compared to the previous term.
By product By area of unit sales
600 500 400 300 200 100 0 600 500 400 300 200 100 0 2,000 1,500 1,000 500 0 2,000 1,500 1,000 500 0
By product By area of unit sales
Fiscal 2003 Results Motorcycle Components
2002 2003 2002 2003 2002 2003 2002 2003 OTHER Automotive components Motorcycle components Drive unit products Shock absorbers 50.2 1,212.3 511.2 50.0 1,341.4 575.2 52.8 641.5 137.9 118.8 822.7 64.0 764.3 114.1 201.8 822.4 18.3 492.9 18.9 556.3 49.4 79.2 73.8 89.3 219.5 52.9 90.1 72.6 140.6 219.0
Motor vehicle components
1,773.7 1,966.6 1,773.7 1,966.6 511.2 575.2 511.2 575.2
7 Notes: 1. Showa Corporation presents its Review of Operations based on
informa-tion available to the Company at the time it prepares and publishes each review. Readers are cautioned to remember when referring to this report that data are approximate estimates.
2. On local currency basis, net sales at Nissin Showa UK Ltd. jumped 59.0% compared to the previous term. Because the Company applies equity method accounting, Nissin Showa’s net sales are not included in Showa’s consolidated statements of income results for the fiscal year under review, reflecting the effect from Nissin Showa UK Ltd.’s shift to local procurement.
Automotive Components
As for automotive components sales, net sales increased 10.6% from the previous term to ¥134,140 million (US$1,115 million).
By product, net sales of shock absorbers were off 0.1% to ¥48,050 million (US$399 million), while net sales of steering sys-tems increased 5.3% to ¥45,830 million (US$381 million). In addition, sales of axles charged ahead by 40.2% from the previ-ous term to ¥18,020 million (US$149 million). Other compo-nents, the majority of which are suspension modules sold in Canada, turned in healthy growth and rose 32.8% to ¥22,240 million (US$185 million).
Among steering systems, sales of electric steering systems were ¥8,300 million (US$69 million) compared to ¥7,700 million (US$64 million) in the previous term.
In Japan, although Showa’s major customers enjoyed favorable conditions, demand was strong for products des-tined for popular models not supported by Showa, which resulted in net sales falling 1.1% to ¥56,680 million (US$471 million).
In Asia, net sales took giant strides and reached ¥5,800 million (US$48 million), a jump of 107.1%, mainly because of growth in Thailand, Indonesia and China.
Showa’s major customers in Europe enjoyed robust sales, but the Company’s sales of both shock absorbers and steering sys-tems declined because of the shift to local parts procurement. Sales of axles, on the other hand, were higher than that of the pre-vious term. Overall, net sales dropped 35.0% from the prepre-vious term to ¥4,000 million (US$33 million).
Net sales in North America rose 21.7%, to a total of ¥66,550 million (US$553 million), lifted by solid sales at the Company’s major customers. Sales of shock absorbers increased ¥1,370 mil-lion (US$11 milmil-lion), sales of steering systems rose ¥3,210 milmil-lion (US$26 million), and sales of suspension modules in Canada grew by ¥5,780 million (US$48 million). Sales of propeller shafts also added to the strong results.
Other
Net sales in Showa’s other products segment, which are mainly outboard engine components, weakened slightly by 0.4% to a total of ¥5,000 million (US$41 million). Although marine product components sales rose 8.4% to ¥3,990 million (US$33 million), sales of the Company’s other products in this segment declined from the previous term.
1,500 1,200 900 600 300 0 1,500 1,200 900 600 300 0
By product By area of unit sales
Automotive Components 60 50 40 30 20 10 0 60 50 40 30 20 10 0 Other
By product By area of unit sales
2002 2003 2002 2003 2002 2003 2002 2003
South America North America Europe Asia Japan OTHER Shock absorbers Steering systems OTHER 167.5 222.4 128.5 435.3 481.0 180.2 458.3 480.5 3.0 546.8 61.5 28.0 573.0 11.0 665.5 40.0 58.0 566.8 13.4 36.8 10.1 39.9 0.3 15.5 2.7 1.6 30.1 0.0 8.7 1.5 3.3 36.5 77.0 83.0 Axles Boats 1,212.3 1,341.4 1,212.3 1,341.4
50.2 50.0 50.2 50.0
EPS
Showa’s Technology
8
2. Steering Systems
Among the components that comprise an automobile, great importance is placed on steering system performance and reliability. In addition to accu-rately transmitting the driver’s steering operations to the automobile, the steering system is the man/machine interface delivering information on run-ning conditions from the automobile to the driver. “Steering systems” refers to the components added to assist steering efforts and provide drivers with comfortable maneuverability. Steering systems are classified into hydraulic power steering system (HPS), which uses the engine’s power as a drive source, and electric power steering system (EPS), utilizing the vehicle’s bat-tery. Showa has a full line of power steering models. In addition to 20 years of HPS manufacturing experience, Showa also began early efforts to develop electric power steering system as calls for energy conservation increased.
3. Propeller Shafts
The propeller shaft’s function is to transmit the driving force generated by the engine to the wheel axis; it is long and cylindrical, and rotates at high speed, so this product requires vibration and noise prevention along with high durability. Showa supplies various technologies which structural analy-sis enables component part reduction and lighter weight, and introduction of friction welding procedures to achieve high preci-sion dynamic balance and ultra-strong part connections.
5. Differential Gears
The role of a differential mecha-nism is to absorb the difference in rotation between the right and left wheels that occurs when an automobile is cornering. These products demand durability, transmission efficiency, and quiet operation. Showa’s differ-ential gears achieve weight reduction while exhibiting high-performance, from sub-compact cars to SUVs.
Automotive Components
Automobiles
Pump
EPS
HPS
1. Shock Absorbers
1. Shock Absorbers
Showa motorcycle shock absorbers are used extensively in various motorcycle races around the world. From racing machines to scooters, we put our technology and experi-ence to excellent use to meet a wide variety of performance needs.
Front forks >>
The front fork is a key structural component of a motorcycle, holding the front wheel and providing the steering function. This vital part demands excellent ability to closely follow road contours through smooth operation and steady damping force, while retaining high rigidity.
4. Gas Springs
Gas springs assists the opening and closing of automobile engine compartment hoods and rear gates, using gas reaction force. They are also equipped with speed-adjustment devices that enable operators to open and close the hood and trunk at opti-mal speed. To answer diverse needs, Showa is developing the product variations.
Motorcycle Components
Motorcycles
Rear cushion >>
The rear cushion is attached to the rear fork directly or through a link. By control-ling the attitude and energy absorption of the motorcycle body, the rear cushion improves the ability of the rear wheel to follow road contours.
2. Drive Unit Products
For motorcycle and ATV drive unit products, Showa has achieved lighter weights through analysis of functions, shapes, and materials, while maintaining excellent durability, trans-mission efficiency, and quiet operation. Power Trim and Tilt Units
Power trim and tilt units can actively change the outboard engine angle, and provide the following three functions. The trim function provides good screw efficien-cy and steady cruising by adjusting the angle of the outboard engine while running. The tilt function enables owners to prevent outboard engine damage from shellfish adhesions, by raising the outboard engine above the water’s surface when moored. When driftwood or other objects strike the outboard engine while under way, shocks are absorbed, helping to prevent damage to the outboard engine and boat.
9
Power Trim and Tilt Units
for Outboard Engines
1. Development of Productivity Improvement Activities The Showa Group is promoting productivity improvement activities (PIA) as one of the strategies for invigorating the Company. We have already implemented actions to eliminate production site waste or loss and improve production and investment efficiency at our domestic and overseas bases. We’re also working to increase our cost-competitiveness and earning power. Details of our PIA campaign are summarized below.
Showa has been addressing these activities in cooperation with our suppliers since 2002.
Reduce investment >>
• Reduce investment for increasing capacity
• Modify the current production line to create more flexibility in applications for new models production
• Utilize surplus capacity
• Achieve compact production lines Improve productivity >>
• Create and apply reserve capacity • Synchronize production lines Nurture human resources >> • Cultivate on-site capabilities • Improve expertise
2. Motor Production Moved In-House
In March 2003, we started assembly of motors for electric steer-ing systems at our Gotemba Plant. Our objectives for producsteer-ing these motors in-house are to strengthen technical and analytical capabilities through internal development, improve cost analysis skills through dispersed purchasing and establish an integrated production line for electric steering systems. These actions will improve profitability by bolstering our development capabilities and analytical skills.
3. Steering Systems Production Begun in China and Thailand In January 2003, Guangzhou Showa Autoparts Co., Ltd. in China started production of steering systems, followed in February by the start of steering systems production at Summit Showa
Manufacturing Co., Ltd. in Thailand. Guangzhou Showa is plan-ning annual production of 70,000 units in 2003, while Summit Showa will schedule production of 25,000 units annually.
Showa is establishing a global production and supply net-work for steering systems in addition to shock absorbers and propeller shafts.
4. Operations Begun at Shanghai Showa Auto Parts Co., Ltd. In April 2003, Shanghai Showa Auto Parts Co., Ltd. launched production of gas springs for automobiles, as our third production base in China. Production will reach 270,000 units per month by the end of 2003. The company will export the majority of these products to Japan at the initial stage and broaden shipments to other plants worldwide in the future. In addition to gas springs, Shanghai Showa will also begin producing shock absorbers for automobiles in the near future.
Showa is extending its production and procurement activities through its global network and drastically improving cost-competi-tiveness on a global scale.
5. IRL (Indy Racing League) Dampers
Beginning from the 2003 season, Showa decided to participate in the Indy-Car Series instead of supplying high-performance dampers to Team Green, which Showa had supported since the CART 2001 season. By challenging ourselves through the Indy-Car Series with its grueling battle fought on an oval track at high speeds, we supply extremely reliable dampers developed based on the experience and technology we’ve accumulated in various formula races, including Formula One.
10
Topics
Shanghai Showa Auto Parts Co., Ltd. Gas spring
Damper
Guangzhou Showa Autoparts Co., Ltd.
11
Financial Section
12
Consolidated Financial Review
(Unaudited and Not Reviewed)
16
Consolidated Balance Sheets
18
Consolidated Statements of Income
19
Consolidated Statements of Shareholders’ Equity
20
Consolidated Statements of Cash Flows
21
Notes to Consolidated Financial Statements
Consolidated Financial Review
12
Net Sales
Showa’s consolidated net sales for fiscal 2003, ended 31st March, 2003, totaled ¥196,655 million (US$1,636 million), up 10.9% from the previous fiscal year.
Operating Income
Operating income for the Group rose by 24.3% during the current fiscal year to ¥14,934 million (US$124 million), also reflecting the increase in sales to major customers.
Selling, General and Administrative (SG&A) Expenses During the current fiscal year under review, SG&A expenses for the Group rose 6.7%, to ¥17,979 million (US$149 mil-lion). This represented 9.1% of net sales. Research and development expenses included in SG&A expenses totaled ¥5,707 million (US$47 million).
R&D Activities
In order to meet social needs as quickly and as accurately as possible, as a manufacturer of high-precision compo-nents for transport vehicles, the Showa Group is strengthen-ing the competitiveness of its products through cuttstrengthen-ing-edge technologies in electronics and miniaturization.
We conduct most of the Group’s R&D at our R&D Division, focusing chiefly on automotive components. For the fiscal year under review, total R&D expenses were ¥7,033 million (US$58 million).
The status of R&D activities for each business segment during the fiscal year under review is discussed below.
Motor Vehicle Parts >>
In motor vehicle parts, we are aggressively pursuing sales activities aimed at domestic and overseas customers. In addition to promoting cost reductions to increase the com-petitiveness of our existing product groups, beginning with specification revisions, these efforts include steps such as presenting specifications that quickly and accurately capture customers’ needs. The Company is also engaged in R&D aimed at achieving next-generation products built on the base of Showa’s existing technology.
R&D expenses related to this business were ¥6,826 mil-lion (US$56 milmil-lion).
Other >>
R&D expenditures in this segment amounted to ¥207 million (US$1,722 thousand).
R&D Expenses by Business Segment
Millions of yen
2002 2003
Motor vehicle parts ¥6,653 ¥6,826
Other 208 207
Total ¥6,861 ¥7,033
Income before Income Taxes and Minority Interests Income before taxes and minority interests was ¥15,059 million (US$125 million), 30.4% higher than that of the prior fiscal year.
Overview
Net Sales
Net Income/
Net Income per Common Share
Total Assets/ Shareholders’ Equity/
13 Equity in Earnings of Affiliates
The Group’s equity in earnings of affiliates accounted for under the equity method fell 3.2% compared to the prior fiscal year, to ¥335 million (US$2,787 thousand).
Net Income
For the fiscal year under review, net income increased 18.1%, to ¥8,018 million (US$66 million). This included a reversal of prior-year accrued corporate and other taxes of ¥1,362 million (US$11 million).
Cash Flows
On a consolidated basis, the balance of cash and cash equivalents at the end of the fiscal year under review (referred to below as “cash”) was ¥19,497 million (US$162 million). The Company used cash for the acquisition of tangible fixed assets and repayment of long-term debt. Net cash provided by operating activities increased because of higher income before income taxes and minority interests and a decrease in trade receivables. The Company increased cash by ¥9,304 million (US$77 million), up 91.3% compared with the prior fiscal year. Cash balance of a newly consolidated subsidiary contributed the increase in cash.
Cash flows and the major factors affecting cash flows for the fiscal year under review are described below.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was ¥19,359 million (US$161 million), an increase of ¥7,650 million (US$63 mil-lion) (65.3%) compared to the prior fiscal year. This was mainly because the Group’s income before income taxes and minority interests increased to ¥15,059 million (US$125 million) as a result of strong sales, cost reduction measures and a decrease in trade receivables.
Net Cash Used in Investing Activities
Net cash used in investing activities was ¥6,980 million (US$58 million). This was an increase of ¥415 million (US$3 million) (6.3%) compared to the prior fiscal year. This mainly reflected an increase in expenditures for purchases of tangi-ble fixed assets.
Net Cash Used in Financing Activities
Net cash used in financing activities increased by ¥1,008 mil-lion (US$8 milmil-lion) (37.3%) compared to the prior fiscal year to ¥3,710 million (US$30 million). The main use of funds was for repayment of long-term borrowings. The Company was able to limit new borrowings because of the higher level of net cash provided by operating activities.
R&D Expenses
Capital Expenditures/
14
Capital Expenditures
Investments made by the Showa Group totaled ¥5,784 mil-lion (US$48 milmil-lion), mainly for automotive component manufacturing facilities.
At Showa Corporation, the major investment for automo-tive components was for production equipment related to the transfer of propeller shaft production for automobiles. American Showa, Inc. made investments in casting equipment for in-house production of steering systems components for automobiles, and P.T. Showa Indonesia Manufacturing invested in expansion of production facilities for motorcycle shock absorbers. In total, the Group completed ¥5,705 million (US$47 million) of capital invest-ment in automotive component production facilities.
The Group provided the necessary capital for invest-ments from cash on hand and borrowings.
During the fiscal year under review, the Showa Group did not complete any sales or disposals of capital equipment that will influence production capacity.
Capital Expenditures by Business Segment Millions of yen
2002 2003
Motor vehicle parts ¥6,152 ¥5,705
Other 182 66
Total ¥6,335 ¥5,771
Eliminations or corporate (6) (12)
Consolidated ¥6,341 ¥5,784
Business Segment Motor Vehicle Parts >>
Exports of domestically produced automotive parts decreased because of the shift to local parts procurement at our sub-sidiary in the U.K. Although revenues from shock absorbers and steering systems sales declined in the domestic market, overall revenues increased because of growth in axles, mainly new orders for propeller shafts, and higher sales of steering systems. Exports increased for motorcycle components, our leading products. Sales of motorcycle components declined in the domestic market, however.
In North America, sales in the automotive component mar-ket increased because of higher sales of steering systems and shock absorbers at our U.S. subsidiary as a result of strong sales to major customers. Sales of motorcycle components declined, however. At our Canadian subsidiary, net sales rose because of expanded sales of suspension modules and pro-peller shafts.
In other regions, net sales of automobiles and motorcycle shock absorbers rose at our Indonesia and Thailand sub-sidiaries because of greater demand. At our subsidiary in Brazil, net sales of motorcycle shock absorbers increased. Sales were also boosted because the subsidiary newly consol-idated a separate automotive components manufacturing and sales company. Because the market for scooters in Europe continued to shrink, our subsidiary in Spain experienced a decline in sales of shock absorbers for small motorcycles.
As a result, net sales increased 11.2% from the previous fiscal year to ¥191,655 million (US$1,594 million). Operating income reached ¥14,033 million (US$116 million), a 25.0% increase from the previous fiscal year, because of the effects of increased sales and cost reduction measures at our
subsidiaries in North America and Asia.
Other >>
Although net sales of marine products increased due to strong market demand in North America, other business experienced a decline in net sales.
As a result, net sales related to the segment reached ¥4,999 million (US$41 million), a decline of 0.5% from the prior fiscal period. Operating income rose 14.7% to ¥900 million (US$7 million).
15 Net Sales and Operating Income
by Business Segment
Millions of yen
2002 2003
Net Operating Net Operating
sales income sales income
Motor vehicle parts ¥172,348 ¥11,227 ¥191,655 ¥14,033
Other 5,025 785 4,999 900
Total ¥177,373 ¥12,012 ¥196,655 ¥14,934
[Reference]
Non-Consolidated Net Sales by Business Segment
Millions of yen
2002 2003
Automotive components ¥ 72,497 ¥ 74,472
Motorcycle components 34,920 34,705
Motor vehicle parts ¥107,418 ¥109,177
Other components 6,501 5,955
Total ¥113,919 ¥115,132
Geographical Segment Japan >>
Domestically, automotive components experienced a decline in shock absorber and hydraulic power steering systems sales. Overall, however, net sales rose because of growth in axles, mainly new orders for propeller shafts, and expanded sales of electric steering systems.
Motorcycle component operations enjoyed higher exports, but sales declined in the domestic market for shock absorbers, our main product. Because of strong market demand in North America, net sales of outboard engine components increased. Net sales in other business, however, declined.
As a result, net sales in Japan increased 1.6% com-pared to the prior fiscal year to ¥114,374 million (US$951 million). Operating income fell 12.8% to ¥6,662 million (US$55 million).
North America >>
In North America, net sales of steering systems and shock absorbers increased as a result of strong sales to major cus-tomers of our U.S. subsidiary. At our subsidiary in Canada, net sales rose because of higher sales of suspension modules and propeller shafts. Sales of motorcycle shock absorbers declined at our U.S. subsidiary, but sales of marine products increased.
As a result, net sales in North America reached ¥75,238 million (US$625 million), an 18.6% increase from the prior fiscal year. Operating income rose sharply by 55.2% to ¥5,414 mil-lion (US$45 milmil-lion).
Others >>
In other regions, net sales of automotive and motorcycle shock absorbers increased at our subsidiaries in Indonesia and Thailand. At our subsidiary in Brazil, net sales of motorcycle components increased. Sales were also boosted at our opera-tion in Brazil because this subsidiary newly consolidated a sep-arate automotive components manufacturing and sales com-pany. Because of the continued sluggish market for scooters in Europe, our subsidiary in Spain experienced a decline in net sales.
As a result, net sales in other regions increased 31.2% compared to the prior fiscal year to ¥27,274 million (US$226 million). Operating income jumped 114.7% compared to the prior fiscal year, to ¥3,773 million (US$31 million).
Net Sales and Operating Income by Geographical Segment
Millions of yen
2002 2003
Net Operating Net Operating
sales income sales income
Japan ¥112,612 ¥ 7,637 ¥114,374 ¥6,662 North America 63,428 3,488 75,238 5,414
Others 20,786 1,757 27,274 3,773
Total 196,827 12,883 216,888 15,851
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Millions of yen
Thousands of U.S. dollars (Note 3)
ASSETS
2002 2003 2003Current assets:
Cash on hand and in banks (Note 8) ... ¥ 10,193 ¥ 18,894 $ 157,188 Notes and accounts receivable:
Trade ... 17,995 19,918 165,707 Unconsolidated subsidiaries and affiliates ... 13,795 8,996 74,841 Allowance for doubtful receivables ... (46) (71) (590) Inventories (Note 4) ... 13,230 16,780 139,600 Deferred tax assets (Note 7)... 2,261 2,054 17,088 Other ... 687 1,204 10,016
Total current assets ... 58,117 67,779 563,885
Investments and long-term advances:
Investments in unconsolidated subsidiaries and affiliates... 9,462 6,920 57,570 Other investments in securities (Note 5) ... 1,308 889 7,396 Deferred tax assets (Note 7)... 15 14 116 Long-term prepaid expenses ... 54 160 1,331
Excess of cost over net assets acquired ... 36 – –
Other ... 1,158 912 7,587 Total investments and long-term advances... 12,034 8,895 74,001
Property, plant and equipment, at cost:
Land (Note 6) ... 4,145 4,419 36,763 Buildings and structures... 22,091 22,953 190,956 Machinery, vehicles and equipment... 89,108 91,409 760,474 Construction in progress ... 1,166 1,304 10,848
116,511 120,087 999,059
Accumulated depreciation... (81,483) (84,633) (704,101) Property, plant and equipment, net ... 35,027 35,454 294,958
Other assets ... 80 314 2,612 Total assets ... ¥ 105,259 ¥ 112,443 $ 935,465
SHOWA CORPORATION and Consolidated Subsidiaries
Consolidated Balance Sheets
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Millions of yen
Thousands of U.S. dollars (Note 3)
LIABILITIES AND SHAREHOLDERS’ EQUITY
2002 2003 2003Current liabilities:
Short-term borrowings (Note 6)... ¥ 3,283 ¥ 3,322 $ 27,637 Current portion of long-term debt (Note 6) ... 1,048 3,475 28,910 Notes and accounts payable:
Trade ... 23,568 26,042 216,655 Construction ... 710 270 2,246 Unconsolidated subsidiaries and affiliates ... 1,103 460 3,826 Other ... 1,554 1,404 11,680 Accrued income taxes (Note 7) ... 2,770 3,699 30,773 Other... 4,464 4,653 38,710
Total current liabilities ... 38,503 43,328 360,465
Long-term liabilities:
Long-term debt (Note 6) ... 5,340 594 4,941 Accrued retirement benefits (Note 10)... 1,719 2,801 23,302 Deferred tax liabilities (Note 7)... 469 567 4,717 Other... 1,922 425 3,535
Total long-term liabilities ... 9,451 4,388 36,505
Minority interests... 3,390 5,442 45,274
Shareholders’ equity:
Common stock, no par value: Authorised: 180,000,000 shares Issued:
31st March, 2002 – 72,703,032 shares... 11,680 – –
31st March, 2003 – 74,778,192 shares... – 12,317 102,470 Capital surplus... 12,547 13,179 109,642 Retained earnings... 27,660 34,973 290,956 Net unrealised holding gain on securities ... 3,378 2,472 20,565 Translation adjustments ... (1,346) (3,616) (30,083) Less treasury stock, at cost ... (3) (43) (357) Total shareholders’ equity... 53,914 59,283 493,202 Total liabilities and shareholders’ equity... ¥105,259 ¥112,443 $935,465
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Millions of yen
Thousands of U.S. dollars (Note 3)
2002 2003 2003
Net sales (Note 12) ... ¥177,373 ¥196,655 $1,636,064 Cost of sales ... 148,517 163,741 1,362,237 Gross profit ... 28,856 32,913 273,818
Selling, general and administrative expenses... 16,843 17,979 149,575 Operating income ... 12,012 14,934 124,242
Other income (expenses):
Interest and dividend income ... 284 180 1,497 Interest expense ... (517) (327) (2,720) Exchange loss ... (103) (216) (1,797)
Gain on sale of other investments in securities (Note 5) ... – 298 2,479
(Loss) gain on sale and disposal of property, plant and equipment ... (105) 42 349
Equity in earnings of affiliates ... 346 335 2,787 Other, net... (369) (187) (1,555)
(465) 125 1,039
Income before income taxes and minority interests ... 11,546 15,059 125,282
Income taxes (Note 7):
Current... 4,878 5,686 47,304 Reversal of accrued income taxes... – (1,362) (11,331) Deferred... (828) 984 8,186
4,050 5,308 44,159
Minority interests... (707) (1,731) (14,400) Net income (Note 11)... ¥ 6,788 ¥ 8,018 $ 66,705
SHOWA CORPORATION and Consolidated Subsidiaries
Consolidated Statements of Income
Year ended 31st March, 2002 and 2003
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Millions of yen
Thousands of U.S. dollars (Note 3)
2002 2003 2003
Common stock
Beginning of year... ¥ 10,341 ¥ 11,680 $ 97,171 Add:
Conversion of convertible bonds... 1,339 637 5,299 End of year ... ¥ 11,680 ¥ 12,317 $ 102,470
Capital surplus
Beginning of year... ¥ 11,216 ¥ 12,547 $ 104,384 Add:
Conversion of convertible bonds... 1,330 632 5,257 End of year ... ¥ 12,547 ¥ 13,179 $ 109,642
Retained earnings
Beginning of year... ¥ 21,643 ¥ 27,660 $ 230,116 Add:
Net income ... 6,788 8,018 66,705
Adjustments for inclusion in consolidation ... – 80 665
Deduct:
Cash dividends paid ... 705 737 6,131
Bonuses to directors and statutory auditors... 48 48 399
Adjustments for inclusion in the equity method... 18 – – End of year ... ¥ 27,660 ¥ 34,973 $ 290,956
Net unrealised holding gain on securities
Beginning of year... ¥ 3,167 ¥ 3,378 $ 28,103 Net change during the year ... 210 (905) (7,529) End of year ... ¥ 3,378 ¥ 2,472 $ 20,565
Translation adjustments
Beginning of year... ¥ (3,649) ¥ (1,346) $ (11,198) Net change during the year ... 2,302 (2,269) (18,876) End of year ... ¥ (1,346) ¥ (3,616) $ (30,083)
Treasury stock, at cost
Beginning of year... ¥ – ¥ (3) $ (24)
Net change during the year (3) (39) (324)
End of year ... ¥ (3) ¥ (43) $ (357)
SHOWA CORPORATION and Consolidated Subsidiaries
Consolidated Statements of Shareholders’ Equity
Year ended 31st March, 2002 and 2003
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Millions of yen
Thousands of U.S. dollars (Note 3)
2002 2003 2003
Cash flows from operating activities
Income before income taxes and minority interests ...
¥ 11,546
¥ 15,059 $
125,282
Depreciation and amortisation...
6,867
6,598 54,891
Amortisation of excess of cost over net assets acquired...
36
54 449
(Decrease) increase in allowance for doubtful receivable ...
(261)
32 266
Increase in accrued retirement benefits...
673
1,081 8,993
Exchange loss (gain), net ...
263
(68) (565)
Equity in earnings of affiliates ...
(346)
(335) (2,787)
Loss (gain) on sale and disposal of property, plant and equipment ...
105
(42) (349)
Gain on sale of other investments in securities ...
–
(298) (2,479)
(Increase) decrease in trade receivables...
(1,384)
3,304 27,487
Increase in inventories...
(550)
(1,988) (16,539)
Decrease in trade payables ...
(2,309)
(1,276) (10,615)
Other, net...
(2,929)
(2,761)
(22,970)
Net cash provided by operating activities...
11,709
19,359 161,056
Cash flows from investing activities
Purchases of property, plant and equipment ...
(6,463)
(7,780) (64,725)
Proceeds from sale of property, plant and equipment ...
107
644 5,357
Purchases of other investments in securities...
(141)
(250) (2,079)
Proceeds from sale of other investments in securities ...
–
320 2,662
Decrease in loans receivable...
25
– –
Other, net...
(93)
85
707
Net cash used in investing activities ...(6,565)
(6,980) (58,069)
Cash flows from financing activities
Decrease in short-term borrowings ...
(878)
(1,514) (12,595)
Decrease in long-term debt ...
(1,029)
(1,089) (9,059)
Cash dividends...(705)
(737) (6,131)
Cash dividends to minority shareholders ...
(84)
(312) (2,595)
Other, net...(3)
(56)
(465)
Net cash used in financing activities...
(2,702)
(3,710) (30,865)
Effect of exchange rate changes on cash and cash equivalents...
92
(463)
(3,851)
Net increase in cash and cash equivalents ...
2,534
8,204 68,252
Cash and cash equivalents at beginning of year...7,658
10,193 84,800
Increase due to inclusion in consolidation ...
–
1,099
9,143
Cash and cash equivalents at end of year (Note 8)...
¥ 10,193
¥ 19,497 $
162,204
Supplemental disclosures of cash flow information
Cash paid for:
Interest...
¥
526
¥
368 $ 3,061
Income taxes ...3,795
3,866 32,163
SHOWA CORPORATION and Consolidated Subsidiaries
Consolidated Statements of Cash Flows
Year ended 31st March, 2002 and 2003
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1. Basis of Preparation
SHOWA CORPORATION (the “Company”) and its domestic subsidiaries maintain their accounting records in accordance with accounting principles and practices generally accepted and applied in Japan, and foreign subsidiaries of the Company maintain their books of account in conformity with those of their countries of domicile. The accompanying consolidated financial statements have been compiled from the consolidated financial statements prepared by the Company as required under the Securities and Exchange Law of Japan and, therefore, have been prepared in conformity with accounting principles and practices generally accepted and applied in Japan, which may differ in certain material respects from accounting principles and practices generally accepted in countries and jurisdictions other than Japan. In addition, the notes to the consolidated financial statements include information which is not required under accounting principles generally accepted in Japan but is presented herein as additional information.
As permitted by the Securities and Exchange Law of Japan, amounts of less than one million yen have been omitted. Consequently, the totals shown in the accompanying consolidated financial statements (both in yen and U.S. dollars) do not necessarily agree with the sums of the individual amounts.
Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year’s presentation.
2. Summary of Significant Accounting Policies
(a) Basis of Consolidation and Accounting for Investments in Unconsolidated Subsidiaries and Affiliates
The accompanying consolidated financial statements include the accounts of the Company and companies controlled directly or indirectly by the Company. Companies over which the Company exercises significant influence in terms of their operating and financial policies have been included in the consolidated financial statements on an equity basis. All significant intercompany balances and transactions have been eliminated in consolidation.
Investments in subsidiaries and affiliates which are not consolidated or accounted for by the equity method are carried at cost or less. Where there has been a permanent decline in the value of such investments, the Company has written down the investments.
The excess of cost over underlying net assets at fair value at the date of acquisition is amortised over a period of five years on a straight-line basis except that when the excess is immaterial, it is fully charged to income in the year of acquisition.
(b) Foreign Currency Translation
The revenue and expense accounts of the foreign consolidated subsidiaries are translated into yen at the average rate of exchange in effect during the year. Except for shareholders’ equity, the balance sheet accounts are translated at the rate of exchange in effect at the balance sheet date. The components of shareholders’ equity are translated at their historical exchange rates. Translation adjustments are presented as a component of shareholders’ equity and minority interests in consolidated
subsidiaries.
(c) Investments in Securities
Securities other than those of subsidiaries and affiliates are classified into three categories; trading, held-to-maturity or other securities. Trading securities are carried at fair value and held-to-maturity securities are carried at amortised cost. Marketable securities classified as other securities are carried at fair value with changes in unrealised holding gain or loss, net of the applicable income taxes, directly included in shareholders’ equity. Non-marketable securities classified as other securities are carried at cost. Cost of securities sold is determined by the moving average method.
(d) Inventories
Inventories of the Company and its consolidated subsidiaries are principally stated at cost determined by the average method. (e) Property, Plant and Equipment and Depreciation
Property, plant and equipment is stated at cost. Depreciation of property, plant and equipment of the Company and its consolidated subsidiaries is computed principally by the declining-balance method.
(f) Research and Development Costs
Research and development costs are charged to income as incurred.
Included in manufacturing costs and general and administrative expenses was ¥6,861 million and ¥7,033 million ($58,510 thousand) of research and development costs for the years ended 31st March, 2002 and 2003, respectively.
(g) Leases
Non-cancelable leases of the Company and its domestic consolidated subsidiaries are accounted for as operating leases (whether such leases are classified as operating or finance leases) except for lease agreements stipulating the transfer of ownership of the leased assets to the lessee which are accounted for as finance leases. However, leases of the foreign consolidated subsidiaries are generally classified and accounted for as either finance leases or operating leases.
(h) Retirement Benefits
Accrued retirement benefits for employees of the Company and its domestic consolidated subsidiaries are provided principally at an amount calculated based on the retirement benefit obligation and the fair value of the pension plan assets as of the balance sheet date, as adjusted for the unrecognised net retirement benefit obligation at transition, unrecognised actuarial gain or loss and unrecognised prior service cost. The retirement benefit obligation has been attributed to each period by the straight-line method over the estimated years of service of the eligible employees.
Net retirement benefit obligation at transition is being amortised principally over 15 years. Prior service cost is being amortised as incurred by the straight-line method over 15 years which are shorter than the average remaining years of service of the employees. Actuarial gain or loss is being amortised in the year following the year in which the gain or loss is recognised by the declining-balance method over 15 years which are shorter than the average remaining years of service of the employees.
SHOWA CORPORATION and Consolidated Subsidiaries
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In addition, directors and statutory auditors of the Company and of certain consolidated subsidiaries are customarily entitled to lump-sum payments under their respective unfunded retirement allowances plans. The provisions for retirement allowances for these officers have been made at an estimated amount.
(i) Derivative Financial Instruments
The Company and certain consolidated subsidiaries utilise forward foreign exchange contracts and interest rate and currency swap agreements in order solely to hedge against risks of adverse fluctuations in foreign currency exchange rates and interest rates. The Company and consolidated subsidiaries do not enter into such financial instruments for trading or speculative purposes.
Derivatives are carried at fair value, with any changes in unrealised gain or loss charged or credited to operations, except for those which meet the criteria for deferral hedge accounting under which unrealised gain or loss is deferred as an asset or a liability.
(j) Income Taxes
Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities, and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse.
(k) Appropriation of Retained Earnings
Under the Commercial Code of Japan, the appropriation of retained earnings with respect to a given financial year is made by resolution of the shareholders at a general meeting to be held subsequent to the close of such financial year. The amounts for that year do not, therefore, reflect such appropriations.
(l) Treasury Stock and Reduction of Legal Reserves
Effective 1st April, 2002 the Company adopted a new accounting standard for treasury stock and reduction of legal reserves. The effect of the adoption of this new accounting standard on operating results was immaterial for the year ended 31st March, 2003.
3. U.S. Dollar Amounts
The translation of yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan and has been made, as a matter of arithmetic computation only, at the rate of ¥120.20 = U.S.$1.00, the exchange rate prevailing at 31st March, 2003. The translation should not be construed as a representation that yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at the above or any other rate.
4. Inventories
Inventories consist of the following:
Millions of yen
Thousands of U.S. dollars
31st March, 2002 2003 2003
Finished goods... ¥ 2,302 ¥ 3,019 $ 25,116
Work in process... 2,097 2,378 19,783
Raw materials and
supplies... 8,830 11,382 94,692
¥13,230 ¥16,780 $139,600
5. Securities
Information regarding marketable securities classified as other securities as of 31st March, 2002 and 2003 and held-to-maturity securities as of 31st March, 2003 are as follows:
Marketable securities classified as other securities
Millions of yen
31st March, 2002 Acquisition cost Carrying value
Unrealised gain (loss)
Securities whose carrying value exceeds their acquisition cost:
Stocks ... ¥1,010 ¥6,931 ¥5,921
Debt securities ... – – –
Other ... – – –
Subtotal... 1,010 6,931 5,921
Securities whose
acquisition cost exceeds their carrying value:
Stocks ... 281 281 –
Debt securities... – – –
Other ... – – –
Subtotal ... 281 281 –
Total... ¥1,291 ¥7,212 ¥5,921 Held-to-maturity securities
Millions of yen
31st March, 2003 Carrying value Fair value
Unrealised gain (loss)
Securities whose fair value exceeds their carrying value:
Government and
municipal bonds ... ¥ – ¥ – ¥ –
Corporate bonds... – – –
Other ... 602 602 –
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Held-to-maturity securities
Thousands of U.S. dollars
31st March, 2003 Carrying value Fair value
Unrealised gain (loss)
Securities whose fair value exceeds their carrying value:
Government and
municipal bonds... $ – $ – $ –
Corporate bonds ... – – –
Other ... 5,008 5,008 –
Total... $5,008 $5,008 $ –
Marketable securities classified as other securities
Millions of yen
31st March, 2003 Acquisition cost Carrying value
Unrealised gain (loss)
Securities whose carrying value exceeds their acquisition cost:
Stocks ... ¥ 935 ¥ 5,191 ¥ 4,256
Debt securities... – – –
Other ... – – –
Subtotal ... 935 5,191 4,256
Securities whose
acquisition cost exceeds their carrying value:
Stocks ... 231 226 (5)
Debt securities... – – –
Other ... – – –
Subtotal ... 231 226 (5)
Total... ¥1,167 ¥5,418 ¥4,251
Marketable securities classified as other securities
Thousands of U.S. dollars
31st March, 2003 Acquisition cost Carrying value
Unrealised gain (loss)
Securities whose carrying value exceeds their acquisition cost:
Stocks ... $7,778 $43,186 $35,407
Debt securities... – – –
Other ... – – –
Subtotal ... 7,778 43,186 35,407
Securities whose
acquisition cost exceeds their carrying value:
Stocks ... 1,921 1,880 (41)
Debt securities... – – –
Other ... – – –
Subtotal ... 1,921 1,880 (41)
Total... $9,708 $45,074 $35,366
Sales of other securities amounted to ¥318 million ($2,645 thousand) with an aggregate gain of ¥298 million ($2,479 thousand) and no loss for the year ended 31st March, 2003.
6. Short-Term Borrowings and Long-Term Debt
Short-term borrowings are unsecured with average interest rates of 3.99 per cent. for 2002 and 3.98 per cent. for 2003.
Long-term debt consists of the following:
Millions of yen
Thousands of U.S. dollars
31st March, 2002 2003 2003
Bonds without collateral: 0.5 per cent. convertible
bonds due 2004 ... ¥ 2,030 ¥ 760 $ 6,322
Secured loans from local
government... 243 163 1,356
Unsecured loans from
banks ... 4,114 3,146 26,173
6,388 4,069 33,851
Current portion ... (1,048) (3,475) (28,910)
¥ 5,340 ¥ 594 $ 4,941
The 0.5 per cent. convertible bonds, unless previously redeemed, are convertible at any time up to and including 24th March, 2004, into shares of common stock of the Company at the option of the holders at a conversion price of ¥612, per share, at 31st March, 2002 and 2003.
At 31st March, 2003, if all the outstanding convertible bonds had been converted at the then current conversion price, 1,241 thousand new shares would have been issued. Under the provisions of the issue, the conversion price is subject to adjustment in certain cases which include stock splits.
The annual maturities of long-term debt subsequent to 31st March, 2003 are summarised as follows:
Year ending 31st March, Millions of yen
Thousands of U.S. dollars
2004... ¥3,475 $28,910 2005... 437 3,635 2006... 156 1,297
¥4,069 $33,851
The Company’s assets pledged as collateral for long-term debt as of 31st March, 2002 and 2003 are as follows:
Millions of yen
Thousands of U.S dollars.
31st March, 2002 2003 2003
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7. Income Taxes
Income taxes applicable to the Company and its domestic consolidated subsidiaries comprised corporation tax, inhabitants’ taxes and enterprise tax which, in the aggregate, resulted in a statutory tax rate of 41.6 per cent. for both 2002 and 2003. Income taxes of the foreign consolidated subsidiaries are based generally on the tax rates applicable in their countries of incorporation.
New legislation was enacted in March 2003 which will change the statutory tax rate from 41.6 per cent. to 40.0 per cent. effective for fiscal years beginning after 1st April, 2004.
The effect of this tax rate change was to decrease long-term deferred tax liabilities, net of long-term deferred tax assets, by ¥8 million ($66 thousand), to increase income taxes – deferred for the year ended 31st March, 2003 by ¥57 million ($474 thousand) and to increase net unrealised holding gain on securities as of 31st March, 2003 by ¥65 million ($540 thousand).
The effective tax rates reflected in the consolidated statements of income for the years ended 31st March, 2002 and 2003 differ from the statutory tax rate for the following reasons:
2002 2003
Statutory tax rate... 41.6% 41.6%
Effect of:
Different tax rates applied to foreign
subsidiaries ... (5.3) (5.0)
Expenses not deductible for income
tax purposes ... 0.6 0.4
Stock dividends ... – 2.5
Reversal of accrued income taxes.... – (9.0)
Foreign tax credits ... (1.8) (2.2)
Tax rate change... – 0.4
Other, net... – 6.6
Effective tax rates... 35.1% 35.3%
The significant components of deferred tax assets and liabilities as of 31st March, 2002 and 2003 are as follows:
Millions of yen
Thousands of U.S. dollars
31st March, 2002 2003 2003
Deferred tax assets:...
Accrued bonuses ... ¥ 704 ¥ 879 $ 7,312
Accrued enterprise tax .. 239 241 2,004
Deferred tax assets recognised by foreign
subsidiaries ... 874 408 3,394
Accrued retirement
benefits... 755 1,191 9,908
Write-off of investments in unconsolidated subsidiaries and
affiliates ... 255 – –
Unrealised profit ... 495 488 4,059
Net operating loss
carryforwards ... 623 741 6,164
Other ... 1,545 687 5,715
Total gross deferred tax
assets ... 5,494 4,638 38,585
Valuation allowance... (623) (776) (6,455)
Total deferred tax assets .. 4,871 3,862 32,129
Deferred tax liabilities: Deferred tax liabilities
recognised by foreign
subsidiaries ... (593) (707) (5,881)
Net unrealised holding
gain on securities ... (2,406) (1,648) (13,710)
Other ... (64) (5) (41)
Total deferred tax
liabilities... (3,064) (2,362) (19,650)
Net deferred tax assets... ¥ 1,806 ¥ 1,499 $ 12,470
8. Supplementary Cash Flow Information
a)Cash Equivalents in the Consolidated Statements of Cash Flows The Company and consolidated subsidiaries consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
b)Cash and Cash Equivalents
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25 Millions of yen
Thousands of U.S. dollars
31st March, 2002 2003 2003
Cash on hand and in banks reported in the consolidated balance
sheets ... ¥10,193 ¥18,894 $157,188
Commercial paper ... – 602 5,008
Cash and cash
equivalents reported in the consolidated statements of cash
flows ... ¥10,193 ¥19,497 $162,204
9. Leases
The following pro forma amounts represent the acquisition costs, accumulated depreciation and net book value of leased assets, which would have been reflected in the consolidated balance sheets if finance lease accounting had been applied to the finance leases currently accounted for as operating leases:
Millions of yen
Thousands of U.S. dollars
31st March, 2002 2003 2003
Acquisition costs:
Equipment ... ¥3,023 ¥2,331 $19,392
Other assets ... 319 329 2,737
¥3,343 ¥2,661 $22,138
Accumulated depreciation:
Equipment ... ¥2,378 ¥1,790 $14,891
Other assets ... 237 242 2,013
¥2,616 ¥2,033 $16,913
Net book value:
Equipment ... ¥ 644 ¥ 541 $ 4,500
Other assets ... 82 87 723
¥ 727 ¥ 628 $ 5,224
Lease payments relating to finance leases accounted for as operating leases amounted to ¥382 million and ¥353 million ($2,936 thousand) for the years ended 31st March, 2002 and 2003, respectively, which were equal to the depreciation expense of the leased assets computed by the straight-line method over the respective lease terms.
Future minimum lease payments subsequent to 31st March, 2003 for finance leases accounted for as operating leases are summarised as follows:
Year ending 31st March, Millions of yen
Thousands of U.S. dollars
2004... ¥272 $2,262 2005 and thereafter... 355 2,953
¥628 $5,224
10.Retirement Benefit Plans
The Company has defined benefit pension plans, i.e., a welfare pension fund plan, a tax-qualified pension plan and a lump-sum payment plan, covering substantially all employees who are entitled to lump-sum or annuity payments, the amounts of which are determined by reference to their basic rates of pay, length of service, and the conditions under which termination occurs. Each of domestic consolidated subsidiaries has its own tax-qualified pension plan as a defined benefit pension plan. Certain foreign consolidated subsidiaries have defined contribution plans in addition to their defined benefit plans.
The following table sets forth the funded and accrued status of the plans, and the amounts recognised in the consolidated balance sheets as of 31st March, 2002 and 2003 for the Company’s and its consolidated subsidiaries’ defined benefit plans:
Millions of yen
Thousands of U.S. dollars
31st March, 2002 2003 2003
Retirement benefit
obligation ... ¥(28,407) ¥(33,961) $(282,537)
Plan assets at fair value .... 14,880 14,141 117,645
Unfunded retirement
benefit obligation... (13,526) (19,820) (164,891)
Unrecognised net retirement benefit
obligation at transition ... 7,170 6,618 55,058
Unrecognised actuarial
loss... 5,605 10,991 91,439
Unrecognised prior
service cost (credit) ... (818) (591) (4,916)
Net retirement benefit
obligation... (1,569) (2,801) (23,302)
Prepaid pension
expenses ... 150 – –
Accrued retirement
benefits... ¥ (1,719) ¥ (2,801) $(23,302)
The government-sponsored portion of the benefits under the welfare pension fund plans has been included in the amounts shown in the above table.
Due to amendments to the welfare pension fund plan, the Company has an increase in the retirement benefit obligation for the year ended 31st March, 2003.
