Financial and Operating Highlights ... 1
Message from the President ... 2
Showa’s Global Network and Mutually Complementary Parts ... 4
Review of Operations ... 6
Showa’s Technology ... 8
Topics ... 10
Contents
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, 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 12
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
products.” 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.
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. Financial Section ... 11Corporate Information ... 30
Board of Directors and Corporate Auditors ... 31
Thousands of Millions of yen U.S. dollars
2003 2004 2004
Motor vehicle parts ¥191,655 ¥213,897 $2,023,814
Other products 4,999 5,637 53,335
Total ¥196,655 ¥219,535 $2,077,159
Thousands of Millions of yen U.S. dollars
2003 2004 2004
Japan ¥094,659 ¥090,446 $0(855,766
North America 75,100 81,548 771,577
Europe 6,049 18,552 175,532
Other 20,845 28,988 274,273
Total ¥196,655 ¥219,535 $2,077,159
Financial and Operating Highlights
SHOWA CORPORATION and Consolidated Subsidiaries Years ended 31st March, 2003 and 2004
Thousands of Millions of yen U.S. dollars
(except where noted) (except where noted)
2003 2004 2004
Net sales ¥196,655 ¥219,535 $2,077,159
Operating income 14,934 14,839 140,401
Income before income taxes and minority interests 15,059 14,036 132,803
Net income 8,018 7,577 71,690
Cash dividends paid during the period 737 896 8,477
Total assets 112,443 120,533 1,140,439
Shareholders’ equity 59,283 65,390 618,696
Depreciation and amortisation 6,598 6,480 61,311
Capital expenditures 5,784 5,262 49,787
Per share amounts: Yen U.S. dollars
Net income (basic) ¥0106.86 ¥0101.09 $2,0770.95
Net income (diluted) 104.84 99.72 0.94
Cash dividends 11.00 12.00 0.11
Shareholders’ equity 792.55 860.66 8.14
• Throughout this report, U.S. dollar amounts have been translated from Japanese yen solely for the convenience of the reader at the rate of ¥105.69=U.S.$1.00, the exchange rate prevailing at 31st March, 2004.
• 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 Europe: Spain, U.K.
Others: South America, Southeast Asia, China
NET SALES BY BUSINESS SEGMENT
NET SALES BY GEOGRAPHICAL AREA
Review of Fiscal 2004
In the midst of a gradual recovery in the Japanese economy during the fiscal year ending March 2004, the automotive industry – the main purchaser of Showa Corporation’s products – experienced little change compared to the previous year in terms of both the domestic automobile market and overall automobile exports. As a result, total production for automobiles remained on a par with the previous year. With regard to motorcycles, overall demand dropped both in the domestic market and in all exports, resulting in a dramatic decrease in motorcycle production overall in comparison to Fiscal 2003.
Given these conditions, Showa aggressively promoted expansions in overseas business and sales activities aimed at securing new orders. At the same time, we undertook activities designed to increase production efficiency and developed new policies targeting stronger quality systems.
As a result, consolidated net sales rose 11.6% compared with the previous fiscal year, to ¥219,535 million (US$2,077 million), and consolidated operating income fell 0.6% from the previous term to ¥14,839 million (US$140 million).
Outlook for Fiscal 2005
Turning to the future outlook, the American economy continues to recover, the economies of China, Thailand,
and other Asian countries are still expanding, and recovery trends can be seen in European economies as well, indicating that the global economy is generally strong.
In Japan, although the general tone of economic recovery is expected to continue (for example, with the improved profitability of corporate divisions and the renewal of personal consumption), there are still unpredictable factors, including currency exchange fluctuations. In other words, the current business environment will not allow us to let our guard down. With little prospects for expansion in domestic demand, the automobile industry is characterized by increasingly intense sales competition. Automobile makers are required to implement a wide range of measures, including cost reductions, consideration for the environment, and reductions in vehicle weight to accommodate decreased fuel consumption. Automobile components manufactures are also expected to continue to face similarly harsh
circumstances.
In response to these conditions, Showa will endeavor to further increase its competitive capabilities, strengthen its management base, and improve its corporate structure. We will accomplish this by expanding overseas business, and at the same time by implementing a wide range of measures aimed at building in quality at the production sites and strengthening development capabilities.
Message from the President
<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>
Bolster synergetic strength, powered by open and wide-ranging communications
Target the maximum efficiency of all assets (human, physical and financial)
Utilize speed and action to attain global standards
Strengthening Competitiveness
Domestic Operations
We have undertaken the following activities aimed at improving new product development and sales, as well as production efficiency.
• We developed and sold a new electric power steering system for subcompact cars.
With this new system, we now produce electric power steering systems for vehicles ranging from small to mid sized passenger vehicles.
• We developed and sold a new CVT (Continuously variable transmissions) pump using hydraulic power steering technologies.
• At the Saitama Plant, we implemented a new shock absorber assembly line that dramatically increased production capacity, even while reducing new investments. • We implemented various measures aimed at strengthening
systems for building in quality at the production sites.
Global Operations
We have implemented the following measures to promote structural improvements and expand business in overseas business.
• In July of last year Shanghai Showa Auto Parts Co., Ltd. (which began operations in April 2003), implemented a capital increase of US$2 million (16 million yuan) with the goal of strengthening financial structures and securing business capital for future business expansions. The full amount of this capital increase was received from Showa Corporation.
• In order to bolster the automobile parts business in ever growing Asian region, electric power steering systems production was initiated at Guangzhou Showa Autoparts Co., Ltd. in August 2003. In the following October, similar production was initiated at our subsidiary in Thailand, Summit Showa Manufacturing Co., Ltd..
In this way, we will further improve and expand upon the overseas business of the Showa Group.
Dividends for Shareholders
Showa Corporation considers the return of profits to shareholders based on business performance and results to be an important issue, and moreover, we also believe retaining earnings to be important in order to develop business and strengthen corporate structures for the future business considerations.
The year-end dividends for Fiscal 2004 was six yen per share; combined with the interim dividends, the dividend payment for the year totaled 12 yen per share. As a result, the payout ratio for the year was 19.3%, return on equity was
8.4%, and dividend rate for shareholder’s equity was 1.6%. Capital from retained earnings will be put toward meeting capital requirements for future overseas
development, product development, and improvements in production efficiency. With this in mind, we will continue our efforts to improve profitability and to strengthen the company’s financial structure.
Status of Corporate Governance
Basic Approach to Corporate Governance
Showa Corporation aims to be a company that has the trust of its shareholders and the rest of society, and that it continues to live up to the expectations placed upon it. To achieve this goal, we are flexibly and efficiently developing our business on a global scale in order to increase our corporate value, however we also consider it essential to maintain a clear understanding of the risks involved in such business development, and to undergo checks and balances to ensure that the company is conforming strictly to all relevant laws, regulations, and other conventions both inside and outside of the company.
Executive Management Structures
Showa oversees and audits the execution of business through the Board of Directors and the Board of Auditors.
The Board of Directors, which is comprised of 14 Directors, makes decisions regarding the execution of important business matters and other statutory issues. It also oversees the execution of business operations. The Board of Auditors is comprised of four Corporate Auditors (three of whom are outside Auditors). Each Corporate Auditor attends meetings of the Board of Directors and other important internal meetings in accordance with internal Audit Policies, division of responsibilities, and other directives stipulated by the Board of Auditors. It also oversees the execution of activities by the Directors, in part through audits of the business and financial status of Showa Corporation and its key subsidiaries.
NISSIN SHOWA UK LTD.
KAI FA INDUSTRY CO., LTD.
AMERICAN SHOWA INC. Los Angeles Office
SHOWA CANADA INC.
AMERICAN SHOWA INC. Sunbury plant & Head Office
SHOWA DO BRASIL LTDA.
SHOWA INDUSTRIA E COMERCIO LTDA. AMERICAN SHOWA INC.
Blanchester Plant SHANGHAI SHOWA
AUTO PARTS CO., LTD.
P.T.SHOWA INDONESIA MANUFACTURING
ARMSTRONG AUTO PARTS SDN. BHD. HONDA ATLAS CARS
PAKISTAN LTD.
SICHUAN NINGJIANG SHOWA SHOCK ABSORBER CO., LTD.
ATLAS HONDA LTD.
GUANGZHOU SHOWA AUTOPARTS CO,. LTD. MACHINO-AUTO PARTS CO., LTD. SUMMIT SHOWA MANUFACTURING CO., LTD. MUNJAL SHOWA LTD.
DAELIM MOTOR CO., LTD. SHOWA EUROPE, S.A. Shock absorbers Shock absorbers Shock absorbers Gas spring Shock absorbers Shock absorbers Shock absorbers Shock absorbers Shock absorbers Steering gears for HPS Steering gears for EPS Gas spring Propeller shafts
Front and rear suspension modules Shock absorbers Shock absorbers Gas spring Shock absorbers Shock absorbers Shock absorbers Steering gears for HPS Steering gears for HPS Pumps for HPS Steering gears for HPS Pumps for HPS Shock absorbers Steering gears for EPS Steering gears for HPS Pumps for HPS EPS Steering gears HPS Propeller shafts for
automobiles from Canada to the U.K.
Damper components, fork and sheet pipes for motorcycles from China to Spain
Cylinders and Gear housings for automobiles from Indonesia to the U.K.
Rods and rear cushions for motorcycles from Indonesia to Spain
Complete bottom tubes, springs and press parts for automobiles from Thailand to Pakistan
Complete bottom tubes, springs and press parts for automobiles from Thailand to Indonesia
Fork pipes, springs and rods for motorcycles from Indonesia to Malaysia Gas spring for
automobiles from China to Japan
Small components parts for power steering from China to Japan
Small parts for automobiles from the U.S.A. to Japan
Fork pipes for motorcycles from China to Vietnam Power steering component
(Pinion gear comp) from China to Thailand
Complete bottom tubes, springs and press parts for motorcycles from Thailand to Malaysia
Mutually complementary parts Production base
Supply network mutually complementary parts
Global products supply network Gear housing for automobiles
from Indonesia to China
Gear housing for automobiles from Indonesia to Thailand
Showa’s Global Network and
Mutually Complementary Parts
Propeller shafts Fork pipes Sheet pipes Rear cushions
Springs Rods Damper components Shock absorbers Rods Press parts Springs Complete bottom tubes Cylinders for steering systems
Gear housing for steering systems
Small parts Gas springs Steering gears for EPS Pumps for HPS Differential gears Propeller shafts
Front and rear suspension modules Gas springs Steering gears for HPS Shock absorbers
Mutually Complementary Parts Products
For Automobiles
For Motorcycles
Review of Operations
Fiscal 2004 Results
Net sales of motorcycle components totaled ¥62,660 million (US$592 million), up 9.0% from the previous term. Net sales of automotive components increased 12.7% compared to the previous term, to ¥151,240 million (US$1,430 million). Net sales of other (primarily outboard engine) components totaled ¥5,640 million (US$53 million), up 12.8% from the previous term.
Looking at net sales by area of unit sales, net sales in Japan for the term increased by 2.8% to ¥84,560 million (US$800 million).
In Asia, net sales increased by 26.9% to ¥25,610 million (US$242 million) in part as a result of increased net sales (mainly for motorcycle components) in
Indonesia and Thailand, and the inclusion of subsidiaries in china in the scope of consolidation starting from the term under review.
In Europe, net sales of motorcycle components increased due in part to the effects of currency exchange rates, and net sales of automobile components increased by 72.3% to ¥19,660 million (US$186 million) due to the effects of the inclusion of U.K. subsidiary in the scope of consolidation at the end of the previous fiscal year.
In North America, net sales increased by 6.5% to ¥81,410 million (US$770 million), as sales increased for both motorcycle and automobile components due to the strong support of main customers in both the U.S. and Canada.
In South America, sales expanded by 29.7% to ¥8,300 million (US$78 million) due to increased sales in both
By product By area of unit sales
’03 ’04 ’03 ’04
196.6 196.6 219.5 219.5 6.4 0 50 100 150 200 250 Automotive components 134.1 Motorcycle components 57.5 62.7 151.2 0 50 100 150 200 250 76.4 81.4 19.6 25.6 84.5 11.4 20.2 82.2 8.3 Others 5.0 5.6
By product By area of unit sales
’03 ’04 ’03 ’04
134.1 134.1 151.2 151.2 0 50 100 150 200 Others 22.2 18.4 53.7 51.8 Drive train products
18.0
EPS
8.4 14.8
Power steering systems 45.8 Shock absorbers 48.1 0 50 100 150 200 1.1 1.3 71.1 58.2 8.4 12.2 66.5 56.7 4.0 5.8 27.3
motorcycle and automotive components resulting from good performance at customers in Brazil.
Automotive components
Net sales for automotive components increased by 12.7% compared to the previous term to ¥151,240 million (US$1,430 million).
By product, net sales of shock absorbers were up 7.9% to ¥51,850 million (US$490 million), while net sales of steering systems increased 17.2% to ¥53,690 million (US$507 million). Net sales of drive train products increased by 2.0% to ¥18,380 million (US$173 million), while net sales of other components (the majority of which are suspension modules sold in Canada) were up 22.8% to ¥27,320 million (US$258 million).
Among power steering systems, electric power steering systems accounted for ¥14,800 million (US$140 million), compared to ¥8,350 million (US$79 million) in the previous year.
In Japan, due to new orders, net sales increased by 2.6% compared to the previous term to ¥58,140 million (US$550 million).
In Asia, total net sales increased by 45.3% to a total of ¥8,430 million (US$79 million) due in part to the inclusion of subsidiaries in the scope of consolidation from the term in review.
In Europe, as an effect of the inclusion of U.K. subsidiary in the scope of consolidation from the end of the previous term, net sales of shock absorbers, power steering systems, and drive train products (propeller shafts)
Automotive components
(Billions of yen)
Fiscal 2004 Results
all increased, resulting in total net sales of ¥12,230 million (US$115 million), an increase of 205.7% compared to the preceding year.
Performance in North America rose dramatically on a local currency base due to solid sales at major customers, but net sales were eroded by the effects of the increased value of the yen against the U.S. dollar. Total sales were ¥71,100 million (US$672 million), a year-on-year increase of 6.8%.
In South America, as a result of increased sales due to strong performances at major customers, net sales increased by 20.3% compared to the previous term, to ¥1,340 million (US$12 million).
Motorcycle components
Net sales of shock absorbers, which account for the majority of motorcycle component sales, grew by 8.9% compared to the previous term to ¥60,590 million (US$573 million), while drive train products increased by 10.0% to ¥2,070 million (US$19 million). The result was an overall increase of 9.0% to ¥62,660 million (US$592 million).
In Japan, sales to our major customer, grew, but sales to other customers fell, resulting in a very slight overall increase of 0.9% to ¥22,090 million (US$209 million).
In Asia, net sales increased by 19.6% to ¥16,810 million (US$159 million) due to increased net sales in active markets in Indonesia and Thailand, and as a result of the inclusion of subsidiaries in china in the scope of consolidation starting from the term under review.
By product By area of unit sales
’03 ’04 ’03 ’04
57.5 62.7 57.5 62.7
2.1 0 20 40 60 80 Shock absorbers 55.6 Drive train products 1.9 60.6 0 20 40 60 80 9.0 7.3 14.0 21.9 5.3 9.5 7.4 16.8 22.1 6.9
By product By area of unit sales
’03 ’04 ’03 ’04
5.0 5.6 5.6 0 2 4 6 8 Others 1.0 0.9 4.7 Boats 4.0 0 2 4 6 8 5.0 0.2 0.1 0.0 0.0 0.3 3.7 0.8 4.3 0.4 0.8
In Europe, net sales decreased on a local subsidiary base, but with the weakening of the yen against the Euro, net sales increased by 1.5% to ¥7,370 million (US$69 million).
Net sales in North America increased, mainly due to raised sales to our main customers. Combined with the effects of the strengthened yen against the U.S. dollar, overall sales were ¥9,460 million yen (US$89 million), up 5.0% compared to the previous year.
Sales in South America rose due to strong demand from our major customers, however, net sales were affected by the devaluation of the Brazilian real. Even so, net sales were up 31.1% to ¥6,930 million (US$65 million).
Other
Turning to sales in Showa’s “other product” segment, net sales of outboard engine components (the main product in this segment) were up 18.4% to ¥4,730 million (US$44 million), but other products in this segment fell, resulting in an overall increase of 12.8% to ¥5,640 million (US$53 million).
Notes: Showa Corporation presents its Review of Operations based on information 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.
Motorcycle components
(Billions of yen)
Other
(Billions of yen)
Showa’s Technology
Automotive Components
Automobiles
1. Shock Absorbers 3. Propeller Shafts
2. Steering Systems
4. Gas Springs
2. Drive Unit Products
Motorcycle Components
Motorcycles
Pump HPS
5. Differential Gears
Power Trim and Tilt Units
EPS
Among the components that comprise an automobile, great impor-tance is placed on steering system performance and reliability. In addition to accurately transmitting the driver’s steering operations to the automobile, the steering system is the man/machine interface delivering information on running conditions from the automobile to the driver. “Steering systems” refers to the components added to assist steering efforts and provide drivers with comfortable maneu-verability. 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 battery. Showa has a full line of power steering models. Shock absorbers are a critical product that
determines an automobile’s character, not only by improving ride quality but also by functioning to control the attitude and stability of the automobile body. Because of their superior performance and quality, Showa brand shock absorbers have earned the satisfaction of customers around the world. Showa has many years of experience with strut modules, and is also working on suspension modules combined with peripheral components.
The role of a differential mechanism 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 highperformance, from subcompact cars to SUVs.
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 develops the variations of products.
Power trim and tilt units can actively change the outboard engine angle, and provide the following three functions. The trim function provides good screw efficiency 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 adhe-sions, 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.
Power Trim and Tilt Units
for Outboard Engines
Outboard Engine Components
Rear cushion >>
The rear cushion is attached to the rear fork directly or through a link. By controlling the attitude and energy absorption of the motorcycle body, the rear cushion improves the ability of the rear wheel to follow road contours.
For motorcycle and ATV drive unit products, Showa has achieved lighter weights through analysis of functions, shapes, and materials, while main-taining excellent durability, trans-mission efficiency, and quiet operation.
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 experience to excellent use to meet a wide variety of performance needs.
Front forks >>
The front fork is a key structural com-ponent 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.
Topics
1. New Product Development and Sales
In terms of new products, Showa Corporation has
developed and sold a new electric power steering system for subcompact cars. With this new system, our product lineup now comprises electric power steering systems for vehicles ranging from small to mid sized passenger vehicles, thus responding to a wide range of needs. In order to improve the ability to evaluate and test the product technologies, as well as achieving cost competitiveness, Showa manufactures the motor, one of the main components.
Continuously variable transmissions (CVT) are gaining popularity mainly in small cars, because they achieve low gas consumption on the level of manual transmission vehicles under normal driving conditions. Showa has developed and sold new CVT pumps using hydraulic power steering control technologies.
to turntables), thus achieving increased productivity with minimum investments.
2. New Technology Incorporated into Shock Absorbers for Motocross Motorcycles
The front forks on motocross motorcycles must demonstrate dependable performance even under the harshest of conditions, and as such demand the most reliable operability. In order to respond to these strict demands, Showa has adopted a honing process for the inner surface of the fork pipes which is the same as that used for engine cylinders. In the past, this technology was exclusively for “factory works” machines, however it has been adopted for the first time in commercially produced vehicle models in 2004. Through smoother operations, this technology dramatically improves riding comfort and operability, and has received an excellent response from motorcycle magazines throughout the world, which say these are "the best front forks on the market.”
3. Activities Targeting Improved Production Efficiency
Showa and its subsidiaries has undertaken productivity improvement activities (PIA) aimed at improving production efficiency at production bases in Japan and overseas. Notably, the Saitama Plant has introduced a new automobile shock absorber production line that aims to achieve “increased flexibility to accommodate multiple model production,” “compact space to eliminate waste,” and “reduced investments at the startup of new model
production.” This new production line incorporates Showa’s many technologies (including the shift from specialized to general-use process tools and from straight conveyor belts
Differential gears for automobiles The Saitama Plant
4. Adoption of new drive train part processing methods
The drive train part processing method used for differential gears for automobiles shifted from the conventional “face mill” method to a “face hob” method. The volume production using this method has begun at Showa’s Hadano Plant. In this way, we have achieved the following effects:
• Increased production efficiency, by simultaneously processing all teeth in a set instead of one tooth at a time; • Reduced man-hours by combining the rough and
finishing processes into a single finishing process; and • Improved sound quality through increased gear
engagement accuracy
These effects have in turn enabled both cost reductions and increased quality.
Shanghai Showa Auto Parts Co., Ltd.
5. Expansion and Strengthening of Overseas Business
• At subsidiaries in China and Thailand, we have begun production of electric power steering systems in addition to existing hydraulic power steering systems.
• At Guangzhou Showa Autoparts Co., Ltd., in China, we have begun in-house production of worm gears and worm wheels, which are important component parts of electric power steering systems.
• We implemented a No. 2 gas spring line at Shanghai Showa Auto Parts Co., Ltd., in China, by transferring the rod and tube processing, and assembly line from the Nagoya Plant.
Showa and its subsidiaries will continue to actively promote the development of overseas business, and at the same will work to implement activities targeting production efficiency improvement and policies aimed at strengthening quality structures, while strengthening the management base and improving the overall corporate structure.
Financial Section
Consolidated Financial Review ... 12(Unaudited and Not Reviewed) Consolidated Balance Sheets ... 16
Consolidated Statements of Income... 18
Consolidated Statements of Shareholders’ Equity ... 19
Consolidated Statements of Cash Flows ... 20
Notes to Consolidated Financial Statements ... 21
Consolidated Financial Review
Overview
Net Sales
During the current fiscal year under review, net sales for the Group totaled ¥219,535 million (US$2,077 million), up 11.6% from the previous fiscal year.
Operating Income
During the current fiscal year under review, operating income for the Group fell by 0.6% compared to the previous fiscal year to ¥14,839 million (US$140 million).
SG&A Expenses
During the current fiscal year under review, selling, gen-eral, and administrative (SG&A) expenses for the Group rose by 17.5% compared to the previous year to ¥21,128 million (US$199 million). This represented 9.6% of net sales. Research and development expenses included in SG&A expenses totaled ¥5,996 million (US$56 million).
R&D Activities
As a manufacturer of high-precision components for transport vehicles and equipment, Showa Group has strengthened its product competitiveness through cut-ting-edge technologies in electronics and miniaturization that has quickly and accurately reflect the social needs and requirements.
Most of the Group’s R&D activities are undertaken at our R&D Division in Japan, and focus chiefly on automo-tive components. For the current fiscal year under review, total R&D expenses were ¥7,825 million (US$74 million).
Following is an outline of the status of R&D activities for each business segment during the fiscal year under review.
Motor Vehicle Parts
In motor vehicle parts, we are aggressively pursuing sales activities aimed at domestic and overseas cus-tomers. In addition to promoting cost reductions that include specification reforms aimed at increasing the competitiveness of products in existing product groups, these efforts include steps such as presenting specifica-tions that quickly and accurately reflect the needs of our customers. The Company also undertakes R&D activi-ties aimed at achieving next-generation products based on existing technologies.
R&D expenses related to motor vehicle parts totaled ¥7,581 million (US$71 million).
Other
R&D expenditures in “other product” segment amounted to ¥244 million (US$2 million).
0 50 100 150 200 250
’00 ’01 ’02 ’03 ’04
Net Sales
(Billions of yen)
196.6 219.5 177.3 154.7 133.7 34.4 48.7 94.4 106.8 101.0 0 2 4 6 8 10 12 14
’00 ’01 ’02 ’03 ’04
Net income/
Net Income per Common Share
(Billions of yen) (Yen)
8.0 6.7 3.3 2.3 0 20 40 60 80 100 120 140 7.5 Net income
Net Income per Common Share
96.0 40.4 42.7 59.2 65.3 97.1 105.2 112.4 120.5 Total Assets Shareholders' Equity
Shareholders' Equity per Common Share
0 20 40 60 80 100 120 140
’00 ’01 ’02 ’03 ’04
Total Assets/ Shareholders' Equity/
Shareholders' Equity per Common Share
(Billions of yen) (Yen)
R&D Expenses By Business Segments
Millions of yen
2003 2004
Motor vehicle parts ¥6,826 ¥7,581
Other 207 244
Total ¥7,033 ¥7,825
Income before Income Taxes and Minority Interests Income before taxes and minority interests amounted to ¥14,036 million (US$132 million), a 6.8% decrease compared to the previous fiscal year. The decrease in income before income taxes and minority interests was primarily due to the recognition of warranty expenses of ¥900 million (US$8 million) in accordance with basic product transaction contracts with customers.
Equity in Earnings of Affiliates
The Group’s equity in earnings of affiliates accounted for under the equity method decreased by 14.3% compared to the previous fiscal year, to ¥286 million (US$2 million).
Net Income
For the fiscal year under review, net income fell by 5.5%, to ¥7,577 million (US$71 million).
Cash Flows
On a consolidated base, the balance of cash and cash equivalents at the end of the fiscal year under review (referred to below as “cash”) amounted to ¥22,768 mil-lion (US$215 milmil-lion). The Company used cash for the acquisition of tangible fixed assets and repayment of debt, but cash finally increased by ¥3,121 million (US$29 million) due to factors such as the high level of income before income taxes and minority interests.
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 amounted to ¥14,382 million (US$136 million), a decrease of ¥4,977 million (US$47 million) or 25.7% compared to the previous fiscal year. This was mainly due to increases in trade receivables and payment of corporate and other taxes, partly offset by an increase in trade payables.
Net Cash Used in Investing Activities
Net cash used in investing activities amounted to ¥6,506 million (US$61 million), a decrease of ¥474 million (US$4 million) or 6.8% compared to the previous fiscal year. This mainly reflected a decrease in expendi-tures for purchases of tangible fixed assets.
0 2 4 6 8
6.4 6.5 6.8 6.7 6.9
5.2 6.3
5.6 5.3
Capital Expendenditures Depreciation and Amortisation
’00 ’01 ’02 ’03 ’04
Capital Expendenditures/ Depreciation and Amortisation
(Billions of yen)
5.7 6.1 6.0
6.8 7.0 7.8
0 2 4 6 8 10
’00 ’01 ’02 ’03 ’04
R&D Expenses
(Billions of yen)
6.0 8.0
14.0
12.2
0 3 6 9 12 15
’00 ’01 ’02 ’03 ’04
Return on Equity
(Percent)
Segment Information
Business Segment Motor Vehicle Parts
Regarding motor vehicle parts, domestic revenues from automobile components increased in part due to expanded sales of electric power steering systems. Motorcycle components saw increased revenues for both shock absorbers and drive unit products.
In North America, sales of automobile components increased because of strong sales to our main cus-tomers in the light truck market by subsidiaries in the U.S. and in Canada. Due to favorable market condi-tions, revenue from motorcycle shock absorbers at American subsidiaries increased as well.
In Europe, sales of automobile components increased at U.K. subsidiary, which was included in the scope of consolidation at the end of the previous fiscal year. Revenue from motorcycle shock absorbers at our Spanish subsidiary increased, in part due to the favor-able effects of currency exchange rates, as the com-pany specializes more in parts for mid to large sized motorcycles.
In other regions, net sales increased at our sub-sidiary in Indonesia, mainly in motorcycle shock absorbers. As a result of launching electric power steer-ing system production and strong demands in motorcy-cle and automobile shock absorbers, net sales increased substantially at our subsidiary in Thailand. Sales of motorcycle components also grew dramatically at our subsidiary in Brazil. In China, net sales increased substantially, mainly in automobile components, in part due to the inclusion of subsidiaries in the scope of consolidation from the current fiscal year under review.
As a result, net sales in the motor vehicle parts busi-ness increased 11.6% from the previous fiscal year to ¥213,897 million (US$2,023 million). Operating income totaled ¥13,587 million (US$128 million), a 3.2% decrease from the previous fiscal year.
Other
In “other product” segment, net sales of outboard engine components increased.
As a result, net sales related to “other product” seg-ment reached ¥5,637 million (US$53 million), an increase of 12.8% from the previous fiscal year. Operating income rose 39.0% to ¥1,251 million (US$11 million). Net Cash Used in Financing Activities
Net cash used in financing activities increased by ¥412 million (US$3 million) or 11.1% compared to the previ-ous fiscal year to ¥4,122 million (US$39 million). The main reason for this was an increase in repayment of long-term debt.
Capital Expenditures
Capital investments made by the Showa Group totaled ¥5,262 million (US$49 million), mainly for automotive component production facilities.
At Showa Corporation, the major investments relat-ing to automotive components were for two drive train processing lines: one for automobile power steering systems, and the other for automobile differential gears. Showa Do Brasil Ltda. also introduced a new process-ing line to increase production capacity for motorcycle shock absorbers. Overall, the Group’s investments in automotive component production facilities totaled ¥5,164 million (US$48 million).
The Group raised all funds for capital investments from cash on hand.
During the current fiscal year under review, there were no sales or disposals of facilities that will influence production capacity.
Capital Expenditures by Business Segments
Millions of yen
2003 2004
Motor Vehicle Parts ¥5,705 ¥5,164
Other 66 86
Total ¥5,771 ¥5,250
Eliminations or corporate 12 11
Net sales and Operating Income by Business Segments
Millions of yen
2003 2004
Net Operating Net Operating
Sales Income Sales Income
Motor Vehicle
parts ¥191,655 ¥14,033 ¥213,897 ¥13,587
Other 4,999 900 5,637 1,251
Total ¥196,655 ¥14,934 ¥219,535 ¥14,839
[Reference]
Non-Consolidated Net sales by Business Segments
Millions of yen
2003 2004
Motor vehicle parts ¥109,177 ¥113,717
Automotive components 74,472 77,941
Motorcycle components 34,705 35,776
Other components 5,955 6,226
Total ¥115,132 ¥119,943
Geographical Segments Japan
Domestically, motor vehicle parts enjoyed increased revenue in automobile components due to expanded sales of electric power steering systems. In motorcycle components, we saw increased net sales in both shock absorbers and drive unit products. In “other product” segment, sales of outboard engine components increased.
As a result, net sales in Japan increased 4.2% com-pared to the previous fiscal year to ¥119,191 million (US$1,127 million), while operating income fell 4.1% to ¥6,386 million (US$60 million).
North America
In North America, regarding motor vehicle parts, sales of automobile components increased because of strong sales to our main customers in the light truck market by subsidiaries in the U.S. and in Canada. Due to favorable market conditions, revenue from motorcycle shock absorbers at American subsidiaries increased as well. In “other product” segment, sales of outboard engine components increased.
As a result, net sales in North America increased 10.2% compared to the previous fiscal year to ¥82,923 million (US$784 million), while operating income fell 1.6% to ¥5,329 million (US$50 million).
Europe
In Europe, sales of automobile components increased at our U.K. subsidiary, which was included in the scope of consolidation at the end of the previous fiscal year. Revenue from motorcycle shock absorbers at our Spanish subsidiary increased, in part due to the favor-able effects of currency exchange rates, as the com-pany specializes more in parts for mid to large sized motorcycles.
As a result, net sales in Europe increased 204.6% compared to the previous fiscal year to ¥18,694 million (US$176 million), while operating income improved by ¥373 million (US$3 million).
Other
In other regions, net sales increased at our subsidiary in Indonesia, mainly in motorcycle shock absorbers. As a result of launching electric power steering system pro-duction and strong demands in motorcycle and auto-mobile shock absorbers, net sales increased substan-tially at our subsidiary in Thailand. Sales of motorcycle components also grew dramatically at our subsidiary in Brazil. In China, net sales increased substantially, mainly in automobile components, in part due to the inclusion of subsidiaries in the scope of consolidation from the fiscal year under review.
As a result, net sales in other regions increased 41.9% compared to the previous fiscal year to ¥29,993 million (US$283 million), while operating income fell 9.0% to ¥3,512 million (US$33 million).
Net sales and Operating Income by Geographical Segments
Millions of yen
2003 2004
Net Operating Net Operating
Sales Income Sales Income
Japan ¥114,374 ¥ 6,662 ¥119,191 ¥ 6,386
North America 75,238 5,414 82,923 5,329
Europe 6,137 (84) 18,694 288
Others 21,137 3,858 29,993 3,512
Total ¥216,888 ¥15,851 ¥250,802 ¥15,517
Elimination or
corporate (20,232) (916) (31,266) (677)
Thousands of Millions of yen U.S. dollars (Note 3)
ASSETS 2003 2004 2004
Current assets:
Cash on hand and in banks (Note 8) ¥ 18,894 ¥ 20,675 $ 195,619
Notes and accounts receivable:
Trade 19,918 23,677 224,023
Unconsolidated subsidiaries and affiliates 8,996 10,627 100,548
Allowance for doubtful receivables (71) (62) (586)
Held-to-maturity securities (Notes 5 and 8) 602 2,092 19,793
Inventories (Note 4) 16,780 16,044 151,802
Deferred tax assets (Note 7) 2,054 2,650 25,073
Other 602 855 8,089
Total current assets 67,779 76,560 724,382
Investments and long-term advances:
Investments in unconsolidated subsidiaries and affiliates 6,920 7,329 69,344
Other investments in securities (Note 5) 889 1,737 16,434
Deferred tax assets (Note 7) 14 19 179
Long-term prepaid expenses 160 133 1,258
Other 912 833 7,881
Total investments and long-term advances 8,895 10,053 95,117
Property, plant and equipment, at cost:
Land (Note 6) 4,419 4,365 41,300
Buildings and structures 22,953 23,006 217,674
Machinery, vehicles and equipment 91,409 90,399 855,322
Construction in progress 1,304 1,392 13,170
120,087 119,164 1,127,486
Accumulated depreciation (84,633) (85,647) (810,360)
Property, plant and equipment, net 35,454 33,517 317,125
Other assets 314 401 3,794
Total assets ¥112,443 ¥120,533 $1,140,439
See accompanying notes to consolidated financial statements.
SHOWA CORPORATION and Consolidated Subsidiaries 31st March, 2003 and 2004
Thousands of Millions of yen U.S. dollars (Note 3)
LIABILITIES AND SHAREHOLDERS’ EQUITY 2003 2004 2004
Current liabilities:
Short-term borrowings (Note 6) ¥ 3,322 ¥ 3,496 $ 33,077
Current portion of long-term debt (Note 6) 3,475 444 4,200
Notes and accounts payable:
Trade 26,042 31,150 294,729
Construction 270 197 1,863
Unconsolidated subsidiaries and affiliates 460 498 4,711
Other 1,404 — —
Accrued income taxes (Note 7) 3,699 2,237 21,165
Accrual for warranty costs — 282 2,668
Other 4,653 4,784 45,264
Total current liabilities 43,328 43,093 407,730
Long-term liabilities:
Long-term debt (Note 6) 594 159 1,504
Accrued retirement benefits (Note 11) 2,801 4,491 42,492
Deferred tax liabilities (Note 7) 567 778 7,361
Other 425 378 3,576
Total long-term liabilities 4,388 5,808 54,953
Minority interests 5,442 6,241 59,050
Shareholders’ equity:
Common stock, no par value: Authorised: 180,000,000 shares Issued:
31st March, 2003 – 74,778,192 shares 12,317 — —
31st March, 2004 – 76,020,019 shares — 12,698 120,143
Capital surplus 13,179 13,558 128,280
Retained earnings 34,973 41,519 392,837
Net unrealised holding gain on securities 2,472 3,304 31,261
Translation adjustments (3,616) (5,645) (53,410)
Less treasury stock, at cost (43) (45) (425)
Total shareholders’ equity 59,283 65,390 618,696
Contingent liabilities (Note 9)
Thousands of Millions of yen U.S. dollars (Note 3)
2003 2004 2004
Net sales (Note 13) ¥196,655 ¥219,535 $2,077,159
Cost of sales 163,741 183,567 1,736,843
Gross profit 32,913 35,968 340,316
Selling, general and administrative expenses 17,979 21,128 199,905
Operating income 14,934 14,839 140,401
Other income (expenses):
Interest and dividend income 180 191 1,807
Interest expense (327) (214) (2,024)
Exchange (loss) gain (216) 138 1,305
Gain on sale of other investments in securities (Note 5) 298 — —
Gain (loss) on sale and disposal of property, plant and equipment 42 (270) (2,554)
Equity in earnings of affiliates 335 286 2,706
Warranty expenses — (900) (8,515)
Other, net (187) (35) (331)
125 (804) 7,607
Income before income taxes and minority interests 15,059 14,036 132,803
Income taxes (Note 7):
Current 5,686 6,099 57,706
Reversal of accrued income taxes (1,362) — —
Deferred 984 (1,023) (9,679)
5,308 5,076 48,027
Minority interests (1,731) (1,382) (13,075)
Net income (Note 12) ¥ 8,018 ¥ 7,577 $ 71,690
See accompanying notes to consolidated financial statements.
SHOWA CORPORATION and Consolidated Subsidiaries Year ended 31st March, 2003 and 2004
Thousands of Millions of yen U.S. dollars (Note 3)
2003 2004 2004
Common stock
Beginning of year ¥11,680 ¥12,317 $116,538
Add:
Conversion of convertible bonds 637 381 3,604
End of year ¥12,317 ¥12,698 $120,143
Capital surplus
Beginning of year ¥12,547 ¥13,179 $124,694
Add:
Conversion of convertible bonds 632 378 3,576
End of year ¥13,179 ¥13,558 $128,280
Retained earnings
Beginning of year ¥27,660 ¥34,973 $330,901
Add:
Net income 8,018 7,577 71,690
Adjustments for inclusion in consolidation 80 — —
Deduct:
Cash dividends paid 737 896 8,477
Bonuses to directors and statutory auditors 48 56 529
Adjustments for inclusion in consolidation — 77 728
Adjustments for inclusion in the equity method — 1 9
End of year ¥34,973 ¥41,519 $392,837
Net unrealised holding gain on securities
Beginning of year ¥ 3,378 ¥ 2,472 $ 23,389
Net change during the year (905) 831 7,862
End of year ¥ 2,472 ¥ 3,304 $ 31,261
Translation adjustments
Beginning of year ¥ (1,346) ¥ (3,616) $ (34,213)
Net change during the year (2,269) (2,029) (19,197)
End of year ¥ (3,616) ¥ (5,645) $ (53,410)
Treasury stock, at cost
Beginning of year ¥ (3) ¥ (43) $ (406)
Net change during the year (39) (1) (9)
End of year ¥ (43) ¥ (45) $ (425)
See accompanying notes to consolidated financial statements.
SHOWA CORPORATION and Consolidated Subsidiaries Year ended 31st March, 2003 and 2004
Thousands of Millions of yen U.S. dollars (Note 3)
2003 2004 2004
Cash flows from operating activities:
Income before income taxes and minority interests ¥15,059 ¥14,036 $132,803
Depreciation and amortisation 6,598 6,480 61,311
Amortisation of excess of cost over net assets acquired 54 — —
Increase (decrease) in allowance for doubtful receivable 32 (21) (198)
Increase in accrual for warranty costs — 282 2,668
Increase in accrued retirement benefits 1,081 1,690 15,990
Exchange gain, net (68) (125) (1,182)
Equity in earnings of affiliatest (335) (286) (2,706)
(Gain) loss on sale and disposal of property, plant and equipment (42) 270 2,554
Gain on sale of other investments in securities (298) — —
Decrease (increase) in trade receivables 3,304 (5,753) (54,432)
(Increase) decrease in inventories (1,988) 192 1,816
(Decrease) increase in trade payables (1,276) 3,377 31,951
Other, net (2,761) (5,761) (54,508)
Net cash provided by operating activities 19,359 14,382 136,077
Cash flows from investing activities:
Purchases of property, plant and equipment (7,780) (6,525) (61,737)
Proceeds from sale of property, plant and equipment 644 77 728
Purchases of other investments in securities (250) (7) (66)
Proceeds from sale of other investments in securities 320 — —
Other, net 85 (50) (473)
Net cash used in investing activities (6,980) (6,506) (61,557)
Cash flows from financing activities:
(Decrease) increase in short-term borrowings (1,514) 53 501
Decrease in long-term debt (1,089) (2,732) (25,849)
Cash dividends (737) (897) (8,487)
Cash dividends to minority shareholders (312) (523) (4,948)
Other, net (56) (23) (217)
Net cash used in financing activities (3,710) (4,122) (39,000)
Effect of exchange rate changes on cash and cash equivalents (463) (632) (5,979)
Net increase in cash and cash equivalents 8,204 3,121 29,529
Cash and cash equivalents at beginning of year 10,193 19,497 184,473
Increase due to inclusion in consolidation 1,099 149 1,409
Cash and cash equivalents at end of year (Note 8) ¥19,497 ¥22,768 $215,422
Supplemental disclosures of cash flow information: Cash paid for:
Interest ¥ 368 ¥ 259 $ 2,450
Income taxes 3,866 7,546 71,397
See accompanying notes to consolidated financial statements.
SHOWA CORPORATION and Consolidated Subsidiaries Year ended 31st March, 2003 and 2004
1. Basis of Preparation
SHOWA CORPORATION (the “Company”) and its domes-tic subsidiaries maintain their accounting records in accor-dance with accounting principles generally accepted 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 consoli-dated 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 generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards.
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 accompa-nying 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 finan-cial 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 con-trolled 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.
SHOWA CORPORATION and Consolidated Subsidiaries
Notes to Consolidated Financial Statements
(b) Foreign Currency Translation
The revenue and expense accounts of the foreign consoli-dated 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 sharehold-ers’ equity and minority interests in consolidated sub-sidiaries.
(c) Investments in Securities
Securities other than equity securities issued by sub-sidiaries and affiliates are classified into three categories; trading, held-to-maturity or other securities. Trading securi-ties are carried at fair value and held-to-maturity securisecuri-ties are carried at amortised cost. Marketable securities classi-fied 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 secu-rities are carried at cost. Cost of secusecu-rities sold is deter-mined by the moving average method.
(d) Inventories
Inventories of the Company and its consolidated sub-sidiaries 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) Accrual for Warranty Costs
Accrual for warranty costs is recorded at an estimated amount to cover costs anticipated to be incurred to fulfill the obligation under the basic parts supply contracts with the customers.
(g) Research and Development Costs
Research and development costs are charged to income as incurred.
Included in manufacturing costs and general and administrative expenses was ¥7,033 million and ¥7,825 million ($74,037 thousand) of research and development costs for the years ended 31st March, 2003 and 2004, respectively.
(h) Leases
(m) New Accounting Standards
A new Japanese accounting standard “Impairment of Fixed Assets” was issued in August 2002 that is effective for fis-cal years beginning on or after 1st April, 2005. Early adop-tion is also permitted. The new standard requires that tan-gible and intantan-gible fixed assets be carried at cost less depreciation, and be reviewed for impairment whenever events or changes in circumstances indicate that the carry-ing amount of an asset may not be recoverable. Companies would be required to recognise an impairment loss in their income statement if certain indicators of asset impairment exist and the book value of an asset exceeds the undiscounted sum of future cash flows of the asset.
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 ¥105.69=U.S.$1.00, the exchange rate prevailing at 31st March, 2004. The transla-tion should not be construed as a representatransla-tion 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:
Thousands of Millions of yen U.S. dollars 31st March, 2003 2004 2004
Finished goods ¥ 3,019 ¥ 3,023 $ 28,602
Work in process 2,378 2,251 21,298
Raw materials and
supplies 11,382 10,769 101,892
Total ¥16,780 ¥16,044 $151,802
5. Securities
Information regarding marketable securities classified as held-to-maturity securities and other securities at 31st March, 2003 and 2004 are as follows:
Marketable securities Held-to-maturity securities
Millions of yen
Carrying Unrealised 31st March, 2003 value Fair value gain (loss)
Securities whose fair value exceeds their carrying value:
Government and
municipal bonds ¥ — ¥ — ¥ — Corporate bonds — — —
Other 602 602 —
Total ¥ 602 ¥ 602 ¥ —
(i) 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.
In addition, directors and statutory auditors of the Company and of certain consolidated subsidiaries are cus-tomarily entitled to lump-sum payments under their respec-tive unfunded retirement allowances plans. The provisions for retirement allowances for these officers have been made at an estimated amount.
( j) 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.
(k) 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.
( l ) Appropriation of Retained Earnings
Other securities
Millions of yen
Acquisition Carrying Unrealised 31st March, 2003 cost value 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
Millions of yen
Acquisition Carrying Unrealised
31st March, 2004 cost value gain (loss)
Securities whose carrying value exceeds their acquisition cost:
Stocks ¥1,174 ¥6,909 ¥5,735
Debt securities — — —
Other — — —
Subtotal 1,174 6,909 5,735
Securities whose acquisition cost exceeds their carrying value:
Stocks — — —
Debt securities — — —
Other — — —
Subtotal — — —
Total ¥1,174 ¥6,909 ¥5,735
Thousands of U.S. dollars Acquisition Carrying Unrealised
31st March, 2004 cost value gain (loss)
Securities whose carrying value exceeds their acquisition cost:
Stocks $11,107 $65,370 $54,262
Debt securities — — —
Other — — —
Subtotal 11,107 65,370 54,262
Securities whose acquisition cost exceeds their carrying value:
Stocks — — —
Debt securities — — —
Other — — —
Subtotal — — —
Total $11,107 $65,370 $54,262
Information regarding non-marketable securities classi-fied as held-to-maturity securities and other securities at 31st March, 2004 are as follows:
Non-marketable securities
Thousands of Millions of yen U.S. dollars
31st March, 2004 Book value Book value
Held-to-maturity securities:
Commercial paper ¥2,092 $19,793
Other securities:
Unlisted securities ¥ 179 $ 1,693
6. Short-Term Borrowings and Long-Term Debt Short-term borrowings are unsecured with average interest rates of 3.98 per cent. and 3.07 per cent. for the years ended 31st March, 2003 and 2004, respectively.
Long-term debt consists of the following:
Thousands of Millions of yen U.S. dollars 31st March, 2003 2004 2004
Bonds without collateral: 0.5 per cent. convertible
bonds due 2004 ¥(0,760 ¥ — $ —
Secured loans from local
government 163 83 785
Unsecured loans from
banks 3,146 521 4,929
4,069 604 5,714
Current portion (3,475) (444) (4,200)
The significant components of deferred tax assets and liabilities as of 31st March, 2003 and 2004 are as follows:
Thousands of Millions of yen U.S. dollars 31st March, 2003 2004 2004
Deferred tax assets: Accrued retirement
benefits ¥ 1,191 ¥ 1,881 $ 17,797
Accrued bonuses 879 999 9,452
Net operating loss
carryforwards 741 741 7,011
Unrealised profit 488 463 4,380
Accrued enterprise tax 241 163 1,542
Accrual for warranty
costs — 113 1,069
Accrued social insurance — 106 1,002
Deferred tax assets recognised by foreign
subsidiaries 408 — —
Other 687 1,251 11,836
Total gross deferred tax
assets 4,638 5,721 54,130
Valuation allowance (776) (741) (7,011)
Total deferred tax assets 3,862 4,979 47,109
Deferred tax liabilities: Net unrealised holding
gain on securities (1,648) (2,294) (21,704)
Accelerated depreciation
of foreign subsidiaries — (705) (6,670)
Deferred tax liabilities recognised by foreign
subsidiaries (707) — —
Other (5) (88) (832)
Total deferred tax liabilities (2,362) (3,088) (29,217)
Net deferred tax assets ¥ 1,499 ¥ 1,891 $ 17,891
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
Cash on hand and in banks reported in the consolidated balance sheets and cash and cash equivalents reported in the consolidated statements of cash flows are reconciled as follows:
Thousands of Millions of yen U.S. dollars 31st March, 2003 2004 2004
Cash on hand and in banks ¥18,894 ¥20,675 $195,619
Commercial paper 602 2,092 19,793
Cash and cash equivalents ¥19,497 ¥22,768 $215,422 The annual maturities of long-term debt subsequent to
31st March, 2004 are summarised as follows:
Thousands of Year ending 31st March, Millions of yen U.S. dollars
2005 ¥444 $4,200
2006 159 1,504
Total ¥604 $5,714
The Company’s assets pledged as collateral for long-term debt as of 31st March, 2003 and 2004 are as follows:
Thousands of Millions of yen U.S. dollars 31st March, 2003 2004 2004
Land ¥542 ¥487 $4,607
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 aggre-gate, resulted in a statutory tax rate of 41.6 per cent. for the years ended 31st March, 2003 and 2004. 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 effective tax rates reflected in the consolidated statements of income for the years ended 31st March, 2003 and 2004 differ from the statutory tax rate for the following reasons:
2003 2004
Statutory tax rate 41.6% 41.6%
Effect of:
Different tax rates applied to
foreign subsidiaries (5.0) (3.1)
Expenses not deductible for
income tax purposes 0.4 1.1
Non taxable income (0.1) (0.2)
Stock dividends 2.5 —
Per capita inhabitants tax 0.2 0.2
Foreign tax credits (2.2) (3.9)
Tax credits for research and
development costs — (3.9)
Reversal of accrued income taxes (9.0) —
Tax rate change 0.4 0.5
Other, net 6.5 3.9
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, 2003 and 2004 for the Company’s and its consolidated subsidiaries’ defined benefit plans:
Thousands of Millions of yen U.S. dollars 31st March, 2003 2004 2004
Retirement benefit
obligation ¥(33,961) ¥(35,294) $(333,938)
Plan assets at fair value 14,141 17,906 169,420
Unfunded retirement
benefit obligation (19,820) (17,387) (164,509)
Unrecognised net retirement benefit
obligation at transition 6,618 6,066 57,394
Unrecognised actuarial
loss 10,991 8,274 78,285
Unrecognised prior
service cost (credit) (591) (1,444) (13,662)
Net retirement benefit
obligation (2,801) (4,491) (42,492)
Prepaid pension
expenses — — —
Accrued retirement
benefits ¥ (2,801) ¥ (4,491) $ (42,492)
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 incurred prior service cost (a reduction of the liability) for the years ended 31st March, 2003 and 2004.
The components of retirement benefit expenses for the years ended 31st March, 2003 and 2004 are outlined as follows:
Thousands of Millions of yen U.S. dollars Year ended 31st March, 2003 2004 2004
Service cost ¥1,757 ¥1,896 $17,939
Interest cost 708 656 6,206
Expected return on plan
assets (593) (562) (5,317)
Amortisation of net retirement benefit
obligation at transition 551 551 5,213
Amortisation of actuarial
loss 796 1,560 14,760
Amortisation of prior
service cost (47) (111) (1,050)
Total ¥3,173 ¥3,991 $37,761 9. Contingent Liabilities
At 31st March, 2004, the Company was contingently liable for guarantees given in respect of bank loans of employees amounting to ¥147 million ($1,390 thousand).
10. 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 con-solidated balance sheets if finance lease accounting had been applied to the finance leases currently accounted for as operating leases:
Thousands of Millions of yen U.S. dollars 31st March, 2003 2004 2004
Acquisition costs:
Equipment ¥2,331 ¥1,802 $17,049
Other assets 329 351 3,321
Total ¥2,661 ¥2,154 $20,380
Accumulated depreciation:
Equipment ¥1,790 ¥1,295 $12,252
Other assets 242 233 2,204
Total ¥2,033 ¥1,528 $14,457
Net book value:
Equipment ¥ 541 ¥ 507 $ 4,797
Other assets 87 118 1,116
Total ¥ 628 ¥ 625 $ 5,913
Lease payments relating to finance leases accounted for as operating leases amounted to ¥353 million and ¥340 million ($3,216 thousand) for the years ended 31st March, 2003 and 2004, 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, 2004 for finance leases accounted for as operating leases are summarised as follows:
Thousands of Year ending 31st March, Millions of yen U.S. dollars
2005 ¥250 $2,365
2006 and thereafter 374 3,538
Total ¥625 $5,913
11. Retirement Benefit Plans
