Financial and Operating Highlights ... 1
Message from the President ... 2
Showa’s Global Network and
Mutually Complementary Parts & Products ... 4
Review of Operations ... 6
Showa’s Technology ... 8
Topics ... 10
Contents
Profile
Forward-looking statements: Forward-looking statements made in this annual report concerning performance or business strategies have been determined according to assumptions andFinancial Section ... 11
Corporate Information ... 30
Board of Directors and Corporate Auditors ... 31
Corporate Data ... 31
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 manufacturing motor vehicle parts 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 manufacturer of power steering
products, 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 manufacturing subsidiaries within Japan.
The Company’s global business operation, a network of 25 manufacturing bases that includes 12
consolidated subsidiaries, spreads over 15 nations including Japan.
Showa Corporation’s business activities revolve around customer satisfaction, as emphasized in the
Company’s 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 of Showa Corporation. We actively support a range of environmental preservation initiatives
through our product offerings and corporate activities.
Thousands of
Millions of yen
U.S. dollars
2006
2007
2007
Motor vehicle parts
¥244,818
¥255,985
$2,168,450
Other
5,630
5,911
50,078
Total
¥250,448
¥261,897
$2,218,528
Thousands of
Millions of yen
U.S. dollars
2006
2007
2007
Japan
¥105,625
¥105,056
$ 889,936
North America
80,066
80,104
678,562
Europe
17,617
18,628
157,804
Southeast Asia
24,999
27,826
235,717
Others
22,139
30,280
256,508
Total ¥250,448
¥261,897
$2,218,528
Financial and Operating Highlights
SHOWA CORPORATION and Consolidated Subsidiaries Years ended 31st March, 2006 and 2007
Thousands of
Millions of yen
U.S. dollars
2006
2007
2007
Net sales
¥250,448
¥261,897
$2,218,528
Operating income
17,175
17,698
149,926
Income before income taxes and minority interests
18,564
16,137
136,700
Net income
10,451
9,083
76,947
Cash dividends paid during the period
1,367
1,519
12,871
Total assets
151,354
170,042
1,440,428
Shareholders’ equity
97,815
110,740
938,080
Depreciation and amortisation
6,758
7,107
60,211
Capital expenditures
11,777
17,400
147,403
Per share amounts:
Yen
U.S. dollars
Net income (basic)
¥ 137.56
¥ 119.56
$ 1.01
Cash dividends
20.00
24.00
0.20
Shareholders’ equity
1,156.02
1,285.76
10.89
• Throughout this report, U.S. dollar amounts have been translated from Japanese yen solely for the convenience of the reader at the rate of ¥118.05=U.S.$1.00, the exchange rate prevailing at 31st March, 2007.
• 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.
Southeast Asia: Thailand, Indonesia, Malaysia, Vietnam Others: South America, China, India, Pakistan, Taiwan
*Figures exclude the intra-group transactions.
NET SALES BY BUSINESS SEGMENTS
NET SALES BY GEOGRAPHICAL AREAS*
Message from the President
We are delighted to have this opportunity to express our
gratitude to our shareholders for their outstanding support.
In addition, I am also pleased to present this summary
of results for the 99th term (from April 1, 2006 to March 31,
2007) and would like to make some brief comments on our
operations.
I was appointed president at a meeting of the Board of
Directors held on June 20, 2007. It is my hope that I can
continue to receive the same level of support from our
shareholders that my predecessor, Masahide Matsushima,
enjoyed.
During the term under review, global automotive
demand expanded steadily, principally in Asia where growth
was led by China, and sales to main customers remained
brisk. In this environment, taking advantage of our
worldwide production bases, we sought to bolster global
production and procurement activities and aggressively
promoted sales. At the same time, we took a number of
steps to bolster quality control.
As a result of these initiatives, net sales increased 4.6%
year on year, to ¥261,897 million (US$2,218 million).
Operating income rose 3.0%, to ¥17,698 million (US$149
million), and ordinary income climbed 5.9%, to ¥18,766
Message from the President
The 10
thMedium-Term Policies
1) 10th Basic Medium-Term Policies
We will establish high-potential corporate foundations by redesigning our workplaces so that they offer opportunities for personal growth. Our aim is to achieve truly world-class quality and technologies.
(1) Rebuild the foundations for production
(2) Achieve world-class quality with which we can compete globally (3) Strengthen our technical capabilities to world-leading levels (4) Improve corporate value to the highest in the industry
(5) Develop a corporate culture that provides workers with opportunities for personal growth
2) Action guidelines
Let’s create a liberated, active and open corporate culture.
■Let’s continually pursue our dreams.
■Let’s act based on the realities of the workplace, our products and the surrounding environment.
million (US$158 million). Net income was ¥9,083 million
(US$76 million), a decline of 13.1% from the previous year
when the Company recorded gains from the transfer of the
benefit obligation of the substitution portion of the
employee’s pension fund.
We have decided to increase the year-end dividend for
the term under review by ¥4 (US$0.07) per share, to ¥14
(US$0.11) per share. As a result, full-year dividends,
including the interim dividends of ¥10 (US$0.08) per share,
will be ¥24 (US$0.20) per share.
Looking ahead, we believe that the U.S. economy will
continue to grow steadily, benefiting from strong personal
spending boosted by the expansion of employment, and the
European economy will also continue to recover. Despite a
slowdown in Thailand, the economy in Asia in general is
expected to continue to grow.
As the domestic economy is also expected to grow on
the strength of personal spending, we believe that the
overall global economy will remain steady in the future.
In the motor vehicle industry, demand from Asia, led by
China, and from South America are expected to continue to
grow. However, despite signs of a slowdown in the surge of
crude oil and raw material prices, given the potential impact
of foreign exchange rates and concerns over the growing
presence of Chinese manufacturers into the global market,
the prospects for the industry are far from certain. The
management environment will remain severe, and our
outlook necessarily remains cautious.
In this environment, we are committed to bolster the
competitiveness of our products in terms of quality and cost
by mobilizing the comprehensive strength of the Showa
Group.
We regard the development of human resources as the
key initiative among the measures we are taking to help our
overseas bases achieve self-reliance. We will endeavor to
improve product quality and productivity in light of the
specific characteristics of products, by reviewing the nature
of basic materials and the manufacturing processes of
products. We will also cut costs by increasing local
procurement, and take action worldwide to bolster our
management foundations and strengthen our business
structure. With these initiatives, we will steadily achieve the
Company’s medium-term goal of being “committed to
customer satisfaction through global enterprise.”
Shock absorbers
Shock absorbers Shock
absorbers
Gas springs Shock absorbers
Shock
absorbers Steering gearsfor HPS
Steering gears for EPS
Steering gears for EPS
Gas springs
Shock absorbers
Shock absorbers
Gas springs
Shock absorbers
Shock absorbers
Shock absorbers
Shock absorbers
Shock absorbers Steering gears
for EPS
Steering gears for HPS
Pumps for HPS
for EPS for HPS
Steering gears Shock
absorbers
Steering gears for EPS
Steering gears
Steering gears for EPS NISSIN SHOWA UK LTD.
SHANGHAI SHOWA AUTO PARTS CO., LTD.
P.T.SHOWA INDONESIA MANUFACTURING
SHOWA AUTOPARTS (THAILAND) CO., LTD. HONDA ATLAS CARS
PAKISTAN LTD.
CHENGDU NINGJIANG SHOWA AUTOPARTS CO., LTD.
ATLAS HONDA LTD.
GUANGZHOU SHOWA AUTOPARTS CO,. LTD.
MACHINO AUTO-PARTS CO., LTD.
SUMMIT SHOWA MANUFACTURING CO., LTD.
ARMSTRONG AUTO PARTS SDN. BHD.
MUNJAL SHOWA LTD. DAELIM MOTORCO., LTD.
SHOWA EUROPE, S.A.
SHOWA INDIA PVT. LTD.
KAI FA INDUSTRY CO., LTD.
GUANGZHOU SHOWA AUTOPARTS CO., LTD. WUHAN PLANT
Hydraulic Gear Housing
Rack
Valve Cylinder
Shock absorbers
Shock absorbers Shock absorbers Propeller shafts Front and rear
suspension modules
Steering gears for EPS
Steering gears for HPS Pumps for HPS AMERICAN SHOWA INC.
Los Angeles Office
SHOWA CANADA INC.
AMERICAN SHOWA INC. Sunbury Plant & Head Office
SHOWA DO BRASIL LTDA.
AMERICAN SHOWA INC. Blanchester Plant
SHOWA INDUSTRIA E COMERCIO LTDA.
Production Base Showa Corporation
Major Technical Collaboration Showa Group
Hydraulic Pump Gear
Housing
Rack
Shock absorbers
Valve Unit Cylinder
Front and rear suspension
modules Shock
absorbers
Steering gears for EPS
Pumps for HPS Steering gears
for HPS
Propeller shafts
Automobile products
Motorcycle products
Gas springs
Review of Operations
Results of Fiscal ending as of 31 March 2007
Shown below is an explanation of the breakdown of net
sales.
Sales by product
Net sales of automotive components reached ¥172,745
million (US$1,463 million), rising 2.8% from the previous
term.
Net sales of motorcycle components increased to ¥83,241
million (US$705 million), up 8.5%.
Sales of other products, mainly outboard components,
rose to ¥5,911 million (US$50 million), climbing 5.0%
from the previous term.
Sales by customer’s location
Japan: Even though net sales of motorcycle components
declined, those of automotive components moved higher.
Overall net sales in Japan came to ¥99,508 million (US$842
million), an increase of 0.9% from the previous term.
North America: Net sales decreased both in the United
States and Canada; however, given the effects of
exchange rate changes, the figure stood at ¥80,263
million (US$679 million), which is almost on a par with
the results of the previous year. (Effect of exchange rate
changes: +¥5,900 million; -3.4% in real terms)
South America: Net sales of motorcycle components
increased thanks to the strong business with customers in
Brazil, rising a robust 28.6% from the previous year, to
¥19,180 million. (Effect of exchange rate changes:
+¥2,700 million; +10.5% in real terms)
Europe: Even though net sales of automotive
components decreased in the United Kingdom, demand
for motorcycle components increased in Spain.
Ultimately, the figure was ¥18,582 million (US$157 million),
rising 2.4% from the previous year. (Effect of exchange rate
changes: +¥1,260 million; -4.6% in real terms)
By product By customer’s location
0 100 200 300 0 100 200 300 250.4 14.9 250.4 80.2 18.1 38.4 98.6 Other 5.6 Automotive components 168.0 Motorcycle components 76.7
’06 ’07 ’06 ’07
261.8 5.9 172.7 83.2 261.8 80.2 19.1 18.5 44.3 99.5 0 50 100 150 200 By product 0 50 100 150 200 ’07 ’07 EPS 23.3 1.9 ’06 ’06 168.0 69.2 67.6 12.6 16.6 168.0
Drive train products 21.7 Power steering systems 65.4 Shock absorbers 55.7 Others 25.1
By customer’s location
172.7 22.1 70.8 55.6 24.1 172.7 68.6 69.5 11.2 21.6 28.5 1.5
Southeast Asia: Net sales of motorcycle and automotive
components increased in Thailand, to a total of ¥28,183
million (US$238 million), an increase of 13.0% from the
previous year. (Effect of exchange rate changes: +¥3,090
million; +0.6% in real terms)
China: Net sales of automotive components rose
significantly, resulting in a surge in net sales to ¥13,109
million (US$111 million) or 35.1% from the previous year.
(Effect of exchange rate changes: +¥1,080 million; +24.0%
in real terms)
Others: Net sales declined to ¥3,073 million (US$26
million), down 20.3%.
Automotive components
Overall, net sales reached ¥172,745 million (US$1,463
million), an increase of 2.8%.
Sales by product
Net sales of shock absorbers fell to ¥55,602 million
(US$471 million), down 0.3%.
Net sales of power steering systems were ¥70,870 million,
rising 8.3%.
Among the power steering systems, net sales of EPS
increased to ¥28,587 million (US$242 million), up 22.0%.
Net sales of drive-train products stood at ¥22,136 million
(US$187 million), an increase of 2.0%.
For other products, net sales declined to ¥24,137 million
(US$204 million), down 4.1%.
Sales by destination
Japan: Net sales of power steering systems and shock
absorbers pushed overall results up 3.1%, to ¥69,589
million (US$589 million).
North America: Net sales of both shock absorbers and
power steering systems declined in the United States with
changes in the model composition and specifications of
Automotive components
(Billions of yen)
Fiscal 2007 Results
delivered products. Meanwhile, net sales of drive-train
products and suspension modules fell in Canada. With the
effect of exchange rate changes, overall net sales in North
America decreased to ¥68,645 million (US$581 million),
down 0.9%. (Effect of exchange rate changes: +¥5,320
million; -8.6% in real terms)
South America: Net sales decreased to ¥1,571 million
(US$13 million), a fall of 19.9%. (Effect of exchange rate
changes: +¥100 million; -25.0% in real terms)
Europe: Although net sales of power steering systems
moved higher, demand for shock absorbers and brake
components decreased, and overall net sales slipped
10.8%, to ¥11,247 million (US$95 million). (Effect of
exchange rate changes: +¥770 million: -16.9% in real
terms)
Southeast Asia: Net sales increased, mainly for power
steering systems in Thailand, rising 21.9% to ¥7,706
million (US$65 million). (Effect of exchange rate changes:
+¥1,000 million; +6.2% in real terms)
China: Net sales rose for both shock absorbers and power
steering systems because of the increase in demand for
automobiles, rising to a combined total of ¥12,591 million
(US$106 million), up 35.6%. (Effect of exchange rate
changes: +¥1,050 million; +24.3% in real terms)
Motorcycle components
Net sales of motorcycle components increased to ¥83,241
million (US$705 million), rising 8.5%. (Effect of exchange
rate changes: +¥5,760 million: +1.0% in real terms)
Sales by product
Shock absorbers: net sales rose to ¥80,829 million
(US$684 million), an increase of 8.8%.
Drive-train products: net sales slipped to ¥2,412 million
(US$20 million), down 1.0%.
0 25 50 75 100 25 50 75 100 By product 0 12.9 76.7 76.7 10.4 5.5 21.5 26.3
By customer’s location
’07 ’07 ’06 ’06 Drive train products 2.4 Shock absorbers 74.2 80.8 83.2 2.4 83.2 10.8 7.2 22.3 25.2 17.5 0 2 4 6 8 0 2 4 6 8 By product ’07 ’07 Others 0.0 ’06 ’06 5.6 Others 1.4 Boats 4.2 5.6 4.6 0.6 0.3
By customer’s location
5.9 5.9 4.7 0.7 0.4 0.0 1.6 4.2
Sales by customer’s location
Japan: Net sales decreased to ¥25,211 million (US$213
million), falling 4.3% with the decrease in sales to major
customers.
North America: Net sales increased to ¥10,852 million
(US$91 million), up 4.4%, thanks partly to the effect of
exchange rate changes. (Effect of exchange rate changes:
+¥550 million; -0.9% in real terms)
South America: Net sales rose significantly to ¥17,591
million (US$149 million), jumping 36.2% on growth in
sales to very robust major customers in addition to the
effect of exchange rate changes. (Effect of exchange rate
changes: +¥2,600 million: +16.1% in real terms)
Europe: Net sales increased to ¥7,279 million (US$61
million), rising 32.0%. (Effect of exchange rate changes:
+¥490 million; +23.2% in real terms)
Southeast Asia: Net sales increased to ¥ 20,438 million
(US$173 million), up 10.4%, on the rise in sales resulting
from the sustained boom in Thailand, in addition to the
effect of exchange rate changes. (Effect of exchange rate
changes: +¥2,090 million; -0.9% in real terms)
China: Net sales increased to ¥455 million (US$3 million),
up 12.6%. (Effect of exchange rate changes): +¥30
million; +5.2% in real terms)
Others: Net sales decreased to ¥1,415 million (US$11
million), down 46.6%.
Others
Looking at sales of other products, while sales from
outboard components were on a par with the previous
year, sales from others increased to ¥5,911 million (US$50
million), rising 5.0%. (Effect of exchange rate changes):
+¥30 million); +4.4% in real terms)
Motorcycle components
(Billions of yen)
Other
(Billions of yen)
Showa’s Technology
Automotive Components
1. Shock Absorbers
3. Propeller Shafts
2. Steering Systems
Pump HPS
4. Differential Gears
EPS
Among the automobile components, great importance is placed on
the performance and reliability of steering systems. 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. “Power Steering system” refer to a component added
to assist steering efforts and provide drivers with comfortable
maneuverability. Power 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 critical products that
determine 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.
5. Gas Springs
2. Drive Unit Products
Motorcycle Components
Power Trim and Tilt Units
Gas springs assist the opening and
closing of automobile engine
compartment hoods and rear
gates, by 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 a variety
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.
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 fork
Topics
1. North America business restructured and
strengthened
Showa Corporation is restructuring our operations in North
America to enable a sustained increase in competitiveness.
In the United States and Canada, the Company will be
setting up new processes and transferring others. We will
continue with our initiative to bolster the technical
capabilities and production efficiency of our bases in this
region.
(1) United States (American Showa Inc.)
Description:
- Shift to internal production of
product components, specifically
those for hydraulic power steering
systems and shock absorber
systems for automobiles
Start of production: August 2007 (expected)
(2) Canada (Showa Canada Inc.)
Description:
- Take over the process of
assembling hydraulic power steering
pumps from the United States
- Shift to internal production of
product components, specifically
processing of sintered components
for hydraulic pumps
Start of production: March 2007 (expected) for pump
assembling
August 2007 (expected) for
processing of sintered components
2. New company established in Thailand
The Showa Group has aggressively pursued its initiative to
increase production capacity and efficiency to meet the
needs of customers in Asia. In Thailand, the Company set up
a new company to manufacture power steering components.
We will institute power steering component production at
optimal locations worldwide to develop a global component
supply capability.
Name:
Showa Autoparts (Thailand) Co., Ltd.
Location: Chonburi,
Thailand
Products:
Power steering components
Start of operation:
October 2007 (expected)
3. Shifting to internal production of large die cast
components
Showa Corporation will be upgrading production of die cast
components at the Asaba Plant, responding to demand for
larger motor-driven power steering components for new car
models with in-house production. Two large-sized die cast
machines-a 1,250-ton machine and an 800-ton model-have
been introduced to facilitate the transition to internal
production of die cast products. We will be exploring new
technologies, bolstering
product quality and boosting
cost competitiveness.
4. Metal mold plant begins operation
After long-term preparations for inauguration, a metal mold
plant began operation in May 2007 as a second base in
Saitama Prefecture. Aiming to produce internally 80% of the
different metal models indispensable to manufacturing of
our products, we are taking steps to enhance our
engineering capabilities and our cost competitiveness. Part
of the facilities for manufacturing outboard engine
components will be transferred from the Saitama Plant to
this new base. We will embark on internal production of
shock absorber components and further build up our
production structure to increase the competitiveness of our
shock absorber products.
5. Hypoid gear processing transferred
Hypoid gear processing requires high precision equipment
and sophisticated technologies. We have developed systems
for manufacturing hypoid gears not only in Japan but also in
Indonesia. Production in Indonesia began in May 2007, and
aims to improve the efficiency of supply to Asia as well as
the Showa Group's technical strength and competitiveness.
An environmentally friendly gear processing method based
on a fluid-free dry cut method has been adopted to achieve
an impressive increase in processing speed and higher
efficiency than in Japan.
Hypoid gears are quieter and enable smoother power
transmission compared with conventional bevel gears. When
used as differential gears they permit the design of low-floor
vehicles since they enable the
pinion shaft and the bevel shaft
to be offset and the propeller
shaft to be placed at a lower
position. With these advantages,
hypoid gears should enjoy
growing demand.
6. New developments in support for Formula One racing
To find solutions to challenging technical issues, develop an
adventurous spirit and introduce new technologies to
mass-market products, Showa Corporation supports Formula One
racing and other motor sports.
For the 2007 season, Honda Racing F1 Team, one of the
teams backed by the Company, announced a Dream Car
Project. Designed to protect the global environment, the
project emphasizes the importance of conserving the
environment and will be donating part of the sponsorship
fees and general contributions to environmental
organizations. Introduced in line with the program, the new
machine colors represent the concept of environmental
protection and conservation. The logotypes of sponsoring
firms do not appear. Showa Corporation supports this spirit
of environmental conservation
Financial Section
Consolidated Financial Review ... 12(Unaudited and Not Reviewed) Consolidated Balance Sheets ... 16
Consolidated Statements of Income... 18
Consolidated Statements of Changes in Net Assets ... 19
Consolidated Statements of Cash Flows ... 20
Notes to Consolidated Financial Statements ... 21
Consolidated Financial Review
Overview
Corporate group
(1) Progress and business results
During the consolidated fiscal year under review, the U.S. economy remained robust and business conditions continued to pick up in Europe. Backed by an ongoing economic expansion in Asia, the Japanese economy was also firm. In the automotive industry, which accounts for the majority of sales of the Group’s products, new automobile sales fell from the previous consolidated fiscal year, reflecting a decrease in sales of light trucks, offsetting a slight rise in sales of passenger vehicles. Sales in Europe rose slightly from the previous consolidated fiscal year and automotive demand in Asia, particularly in China, continued to rise. In Japan, although new automobile sales fell in the face of the lower domestic demand, production rose on the strength of impressive export demand.
In this operating environment, the Group strove to expand global manufacturing and procurement activities by deploying its worldwide manufacturing bases, and aggressively promoted sales. At the same time, the Group has taken a number of measures to enhance quality control.
Consequently, net sales increased 4.6% year on year, to ¥261,897 million (US$2,218 million). Operating income rose 3.0%, to ¥17,698 million (US$17 million), and income before income taxes and minority interests was down 13%, to ¥16,137 million (US$136 million). Net income reached ¥9,083 million (US$76 million), a decline of 13.1%, from the previous year since the Group recorded significant gains from the transfer of the benefit obligation of the substitution portion of the employee’s pension fund in the previous year.
Financial results for fiscal 2007 by business segments are as follows.
(i) Motor Vehicle Parts
In Japan, sales of automotive components increased, primarily because of an increase in sales of shock absorbers and electric power steering systems. However, sales of motorcycle components decreased with a decline in the market and lower exports, which in turn as
reflected an increase in local production. As a result, overall sales declined in Japan.
In North America, our subsidiary in the United States recorded a decline in revenue as a result of reduced sales of automotive shock absorbers following changes in the model lineup of major customers, and a decline in sales prices of products accompanying modifications to product specifications. In Canada, our subsidiary there recorded a decline in revenue on lower sales of sub-assembled suspensions, reflecting a revision of the purchase prices of parts by major customers, and weaker sales of propeller shafts as major customers scaled back production of four-wheel-drive vehicles
In Europe, revenue of our British subsidiary fell as an increase in sales of electric power steering systems accompanying the introduction of new vehicle models by major customers was offset by a decline in the sale of automotive shock absorbers as a result of the change in the make-up of certain types of vehicles. Our Spanish subsidiary recorded higher revenue, reflecting an increase in the sale of shock absorbers for motorcycles as the motorcycle market in Europe started to recover.
In Southeast Asia, our Indonesian subsidiary recorded a decline in revenue. The fall was attributable to a significant decline in sales, principally of shock absorbers for motorcycles in the first half of the consolidated fiscal year, although sales rose during the second half as the economy started to recover. Revenue in yen terms, however, rose slightly thanks to favorable movements in exchange rates. Sales posted by our subsidiary in Thailand rose, benefiting from an increase in the sales of power steering systems following an increase in locally-based production, and more robust sales of shock absorbers for motorcycles to a major customer as a result of strong demand for motorcycles
In other countries, our subsidiaries booked an increase in revenue boosted by higher sales of the shock absorbers for motorcycles thanks to strong local demand. In China, revenue rose significantly on the strength of strong sales of power steering systems, automotive shock absorbers, and gas
50 100 150 200 250 300
’03 ’04 ’05
Net Sales
(Billions of yen)
196.6 219.5 ’06 250.4 261.8 ’07 233.5 0 0 2 4 6 8 10 12 14 0 20 40 60 80 100 120 140 (Billions of yen) (Yen)
101.0
121.0 119.5 137.5
’03 ’04
Net Income/
Net Income per Share
Net Income
8.0 7.5 9.1
’05 ’06 10.4 9.0 ’07 106.8 0 25 50 75 100 125 150 175
(Billions of yen) (Yen)
0 200 400 600 800 1,000 1,200 1,400 59.2 Total Assets ’03 ’04 Total Assets/ Shareholders’ Equity/
Shareholders’ Equity per Share
792.5 967.8 133.1 73.5 ’05 ’06 87.8 151.3 ’07 1,156.0 1,285.7 65.3 112.4 120.5860.6
170.0
springs, reflecting the continued expansion of the automotive market.
As a result, net sales in the motor vehicle parts business increased 4.6% compared to the previous consolidated fiscal year, to ¥255,985 million (US$2,168 million). Operating income increased 3.6% from the previous consolidated fiscal year, to ¥16,566 million (US$140 million).
(ii) Other
In the “other” segment, net sales increased 5.0% compared to the previous consolidated fiscal year, to ¥5,911 million (US$50 million). Operating income declined 4.9% from the previous consolidated fiscal year, to ¥1,132 million (US$9 million).
Net Sales by Business Segments of the Group
Non-Consolidated Net Sales by Business Segments
Looking at other developments during the consolidated fiscal year, defects in gas springs manufactured by the Group were found during the first half of the term, the gas springs in question were replaced at customers’ sites. In addition to introducing comprehensive measures to prevent the recurrence of the incidents that caused the problems, the Group took action to strengthen the quality control of all the overseas bases by deploying the expertise in establishing quality control systems developed in Japan.
To improve its technology and cost competiti-veness, the Group began building new factories to develop in-house production systems of different types of molds, which are imperative for the production of the Company’s products. We also developed in-house production systems for large-scale casting parts, rubber parts and casting products. In addition, we endeavored to improve productivity and the capacity of in-house production at facilities in Canada and the United States by developing the integrated production of component parts.
The Group also began building new facilities in China, India and Thailand, to bolster its business structure and respond to rising demand for automobiles in Asia. In Indonesia, to enhance competitiveness, we successfully began local production of drive-train components, including gears, which require sophisticated processing technologies. We also boosted the rate of local procurement of component parts, mainly in India and other parts of Asia.
(2) Capital Expenditures
Total capital expenditures for the consolidated fiscal year rose 47.8% from the previous consolidated fiscal year, to ¥17,400 million (US$147 million).
Investments mainly focused on production facilities to enhance, streamline, and renew their production processes, including the construction of an in-house production plant of molds in Japan and the establishment of new overseas business bases, as previously described. Further investments were made in the construction of a new R&D building for motorcycle components to enhance the operation environment. Combined, total capital expenditures for business segments related to motor vehicle parts amounted to ¥17,214 million (US$145 million).
(3) Financing Activities
The Group did not raise funds through the issuance of corporate bonds or new shares during the consolidated fiscal year under review.
(4) Key Management Issues
The global economy is generally expected to continue to grow. The U.S. economy should remain robust on the strength of personal spending in line
0 3 6 9 12 18 15
’03 ’04 ’05
Capital Expenditures/
Depreciation and Amortisation
(Billions of yen)
6.4 6.5 6.1 8.7 5.7 ’06 6.7 11.7 ’07 17.4 5.2 7.1 7.0 6.6 0 2 4 6 8 10
’03 ’04 ’05
R&D Expenses
(Billions of yen)
7.8 ’06 7.4 ’07 6.9 12.2 13.2 0 3 6 9 12 15
’03 ’04 ’05
Return on Equity
(%)
14.2
’06 ’07
13.0
9.8 98th Term 99th Term
Segment (From April 2005 (From April 2006 Change to March 2006) to March 2007)
Million yen Million yen % Motor vehicle parts 244,818 255,985 4.6
Other 5,630 5,911 5.0
Total 250,448 261,897 4.6
98th Term 99th Term
Segment (From April 2005 (From April 2006 Change to March 2006) to March 2007)
Million yen Million yen % Automotive components 93,734 94,898 1.2 Motorcycle components 40,627 38,462 (5.3) Motor vehicle parts 134,362 133,361 (0.7)
Other 7,117 6,872 (3.4)
with the expansion of employment and the European economy appears set to continue its expansion. In Asia, the Thai economy is one exception, as it appears to be slowing. The Japanese economy is also expected to benefit from buoyant personal spending. Overall, prospects for the global economy remain promising.
In the automotive industry, markets in Asia, particularly in China, are set to continue expanding. Despite signs of a slowdown in the surge of crude oil and raw material prices, however, the potential impact from foreign exchange rates and concerns over the expansion of Chinese manufacturers in the global market, the prospects for the industry are far from certain. The management environment will remain severe, and our outlook necessarily remains cautious.
In this environment, we are committed to bolster the competitiveness of our products in terms of quality and cost by mobilizing the comprehensive strength of the Showa Group.
We regard the development of human resources as the key initiative among the measures we are taking to help our overseas bases achieve self-reliance. We will endeavor to improve product quality and productivity in light of the specific characteristics of products, by reviewing the nature of basic materials and the manufacturing processes of products. We will also cut costs by increasing local procurement, and take action worldwide to bolster our management foundations and strengthen our business structure. With these initiatives, we will steadily achieve the Company’s medium-term goal of being “committed to customer satisfaction through global enterprise.”
(5) Changes in Assets and Profits
(i) Changes in Consolidated Assets and Profits
(Notes) 1. The increase in net income for the 98th term was mainly attributable to gains from the transfer of the benefit obligation of the substitution portion of the employee’s pension fund. 2. The decline in net income for the 99th term was mainly
attributable to compensation costs associated with product defects.
(ii) Changes in Non-Consolidated Assets and Profits Terms
(Notes) 1. The increase in net income for the 98th term was mainly attributable to gains from the transfer of the benefit obligation of the substitution portion of the employee’s pension fund. 2. The decline in net income for the 99th term was mainly
attributable to compensation costs associated with product defects.
Terms 96th Term 97th Term 98th Term 99th Term (From April 2003 (From April 2004 (From April 2005 (From April 2006 Items to March 2004) to March 2005) to March 2006) to March 2007) Net sales
(Million yen) 219,535 233,557 250,448 261,897
14,036 16,272 18,564 16,137
Net income
(Million yen) 7,577 9,196 10,451 9,083 Net income per
share(Yen) 101.09 121.03 137.56 119.56 Total assets
(Million yen) 120,533 133,165 151,354 170,042 Net assets
(Million yen) 65,390 73,530 87,825 110,740 Net assets per
share (Yen) 860.66 967.84 1,156.02 1,285.76
Cash Flows Cash flow situation
Consolidated cash and cash equivalents (“cash” here-inafter) declined ¥6,759 million (US$57 million), to a cash balance at the fiscal year end of ¥24,527 million (US$207 million), reflecting outlays to acquire tangible fixed assets. All cash flows for the fiscal year under review and their causes are as follows.
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the current consolidated fiscal year increased ¥205 million (US$1 million), or 1.2%, from the previous consolidated fiscal year, to ¥17,201 million (US$145 million).
Net Cash Used in Investing Activities
Net cash used in investing activities for the current con-solidated fiscal year rose ¥11,271 million (US$95 mil-lion), or 98.6%, from the previous consolidated fiscal year, to ¥22,707 million (US$192 million). This primarily reflects an increase in expenditures to acquire property, plant and equipment.
Net Cash Used in Financing Activities
Net cash used in financing activities for the current con-solidated fiscal year declined ¥1,694 million (US$14 mil-lion), or 58.5%, from the previous consolidated fiscal year, to ¥1,202 million (US$10 million). This is primarily attributable to a decline in net repayments of short-term borrowings.
Terms 96th Term 97th Term 98th Term 99th Term (From April 2003 (From April 2004 (From April 2005 (From April 2006 Items to March 2004) to March 2005) to March 2006) to March 2007) Net sales
(Million yen) 119,943 134,347 141,479 140,233
6,627 9,341 12,161 6,057
Net income
(Million yen) 4,666 6,471 8,147 4,018 Net income per
share(Yen) 62.27 85.19 107.25 52.90 Total assets
(Million yen) 91,494 101,796 110,230 115,458 Net assets
(Million yen) 58,285 64,172 72,742 75,804 Net assets per
share (Yen) 767.18 844.69 957.50 997.82
Income before income taxes and minority interests (Million yen)
Segment Information
Results by Business Segments
Motor Vehicle Parts
Japan
Overall domestic sales declined. The key factor was a fall in sales of motorcycle components for export, the result of a market slowdown and the expansion of local production, which offset an increase in sales of automotive components, mainly bolstered by higher demand for shock absorbers and electric power steering systems.
North America
Our subsidiary in the United States recorded a decline in revenue as a result of reduced sales of automotive shock absorbers following changes in the model lineup of major customers, and a decline in sales prices of products accompanying modifications to product specifications. In Canada, our subsidiary there recorded a decline in revenue on lower sales of sub-assembled suspensions, reflecting a revision of the purchase prices of parts by major customers, and weaker sales of propeller shafts as major customers scaled back production of four-wheel-drive vehicles.
Europe
In Britain, revenue of our British subsidiary fell as an increase in sales of electric power steering systems accompanying the introduction of new vehicle models by major customers was offset by a decline in the sale of automotive shock absorbers as a result of the change in the make-up of certain types of vehicles. Our Spanish subsidiary recorded higher revenue, reflecting an increase in the sale of shock absorbers for motorcycles as the motorcycle market in Europe started to recover.
Southeast Asia
In Indonesia, our subsidiary recorded a decline in revenue. The fall was attributable to a significant decline in sales, principally of shock absorbers for motorcycles in the first half of the consolidated fiscal year, although sales rose during the second half as the economy started to recover. Revenue in yen terms, however, rose slightly thanks to favorable movements in exchange rates. Sales posted by our subsidiary in Thailand rose, benefiting from an increase in the sales of power steering systems following an increase in locally-based production, and more robust sales of shock absorbers for motorcycles to a major customer as a result of strong demand for motorcycles.
Other regions
In Brazil, our subsidiaries booked an increase in revenue boosted by higher sales of the shock absorbers for motorcycles thanks to strong local demand. In China, revenue rose significantly on the strength of strong sales of power steering systems, automotive shock absorbers, and gas springs, reflecting the continued expansion of the automotive market.
As a result, net sales in the motor vehicle parts busi-ness increased 4.6% from the previous consolidated fiscal year, to ¥255,985 million (US$2,168 million). Operating income meanwhile climbed 3.6%, to ¥16,566 million (US$140 million).
Net sales: ¥255,985 million (US$2,168 million) (up 4.6% year on year)
Operating income: ¥16,566 million (US$140 million) (up 3.6% year on year)
Other
In the “other” segment, net sales rose 5.0% from the previous consolidated fiscal year, to ¥5,911 million (US$50 million). Operating income declined 4.9%, to ¥1,132 million (US$9 million).
Net sales: ¥5,911 million (US$50 million) (up 5.0% year on year)
Thousands of Millions of yen U.S. dollars (Note 3)
ASSETS
2006 2007 2007Current assets:
Cash on hand and in banks (Note 9) ¥ 29,136 ¥ 27,221 $ 230,591
Notes and accounts receivable:
Trade (Note 16) 36,351 40,230 340,791
Unconsolidated subsidiaries and affiliates 1,037 1,107 9,381
Less allowance for doubtful receivables (88) (110) (936)
Held-to-maturity securities (Notes 6 and 9) 1,720 — —
Inventories (Note 5) 22,224 22,612 191,552
Deferred tax assets (Note 8) 2,313 3,009 25,495
Other (Note 9) 1,698 2,050 17,371
Total current assets 94,394 96,122 814,248
Property, plant and equipment, at cost:
Land 6,520 6,867 58,173
Buildings and structures 25,394 27,518 233,107
Machinery, vehicles and equipment 103,040 111,980 948,585
Construction in progress 2,255 9,628 81,558
137,211 155,994 1,321,425
Less accumulated depreciation (95,148) (102,547) (868,674)
Property, plant and equipment, net 42,063 53,447 452,750
Investments and other assets:
Investments in unconsolidated subsidiaries and affiliates (Note 16) 2,577 4,729 40,064
Other investments in securities (Notes 6 and 16) 10,758 11,727 99,347
Long-term loans receivable 201 1,846 15,637
Deferred tax assets (Note 8) 28 11 99
Other 812 793 6,725
Total investments and other assets 14,377 19,109 161,873
Other assets 519 1,364 11,555
Total assets ¥151,354 ¥170,042 $1,440,428
SHOWA CORPORATION and Consolidated Subsidiaries 31st March, 2006 and 2007
Thousands of Millions of yen U.S. dollars (Note 3)
LIABILITIES AND NET ASSETS
2006 2007 2007Current liabilities:
Short-term borrowings (Note 7) ¥ 3,449 ¥ 3,690 $ 31,264
Notes and accounts payable:
Trade 34,209 38,307 324,503
Construction 501 870 7,371
Unconsolidated subsidiaries and affiliates 2 15 127
Other 3 3 32
Accrued income taxes (Note 8) 2,302 1,232 10,444
Accrual for warranty expenses 684 1,893 16,037
Other 5,522 5,985 50,704
Total current liabilities 46,677 51,999 440,485
Long-term liabilities:
Accrued retirement benefits (Note 13) 3,629 3,557 30,139
Deferred tax liabilities (Note 8) 2,141 2,576 21,823
Accrual for warranty expenses 711 692 5,869
Other (Note 18) 378 475 4,030
Total long-term liabilities 6,862 7,302 61,862
Net assets(Note 15):
Shareholders’ equity:
Common stock, no par value: Authorised: 180,000,000 shares Issued:
31st March, 2006 – 76,020,019 shares 12,698 — —
31st March, 2007 – 76,020,019 shares — 12,698 107,570
Capital surplus 13,558 13,558 114,855
Retained earnings 58,812 66,376 562,274
Less treasury stock, at cost (48) (50) (429)
Total shareholders’ equity 85,020 92,583 784,271
Valuation and translation adjustments:
Net unrealised holding gain on securities 5,501 6,080 51,504
Unrealised losses on derivative instruments, net — (14) (125)
Translation adjustments, net (2,696) (967) (8,199)
Total valuation and translation adjustments 2,805 5,097 43,179
Minority interests 9,989 13,059 110,630
Total net assets 97,815 110,740 938,080
Contingent liabilities (Note 10)
Total liabilities and net assets ¥151,354 ¥170,042 $1,440,428
Thousands of Millions of yen U.S. dollars (Note 3)
2006 2007 2007
Net sales (Note 16) ¥250,448 ¥261,897 $2,218,528
Cost of sales 211,290 221,918 1,879,871
Gross profit 39,157 39,978 338,657
Selling, general and administrative expenses (Note 11) 21,982 22,279 188,731
Operating income 17,175 17,698 149,926
Other income (expenses):
Interest and dividend income 462 904 7,663
Interest expense (141) (187) (1,591)
Exchange loss, net (114) (226) (1,915)
Gain on sales of other investments in securities (Note 6) 15 — —
Loss on sale and disposal of property, plant and equipment, net (263) (345) (2,927)
Equity in earnings of affiliates 203 327 2,771
Warranty expenses due to accounting change (1,173) — —
Provision for the specifically identified warranty claim — (1,716) (14,539)
Gain on transfer of the benefit obligation of the substitutional portion
of the employees’ pension fund (Note 13) 2,401 — —
Retirement benefit expenses for prior periods (Note 13) (131) — —
Royalty expenses applicable to the prior periods — (567) (4,804)
Other, net 131 250 2,118
1,388 (1,561) (13,225)
Income before income taxes and minority interests 18,564 16,137 136,700
Income taxes (Note 8):
Current 5,447 4,374 37,053
Deferred 403 (619) (5,250)
5,851 3,754 31,803
Minority interests (2,261) (3,299) (27,949)
Net income (Note 14) ¥ 10,451 ¥ 9,083 $ 76,947
See accompanying notes to consolidated financial statements.
SHOWA CORPORATION and Consolidated Subsidiaries Year ended 31st March, 2006 and 2007
Shareholders’ equity Valuation and translation adjustments Net Unrealised
Less unrealised losses on
Number of Common treasury holding derivatives Translation
shares stock, no Capital Retained stock, gains on instruments, adjustments, Minority Total issued par value surplus earnings at cost securities net net interests net assets
(Thousands) (Millions of yen)
Balance at 31st March, 2005 76,020 ¥12,698 ¥13,558 ¥49,727 ¥(47) ¥3,709 ¥ — ¥(6,117) ¥ 7,301 ¥ 80,832
Cash dividends paid — — — (1,367) — — — — — (1,367)
Net income — — — 10,451 — — — — — 10,451
Purchases of treasury stock — — — — (1) — — — — (1)
Net changes of item other
than shareholders’ equity — — — — — 1,791 — 3,420 2,687 7,900
Balance at 31st March, 2006 76,020 12,698 13,558 58,812 (48) 5,501 — (2,696) 9,989 97,815
Cash dividends paid — — — (1,519) — — — — — (1,519)
Net income — — — 9,083 — — — — — 9,083
Purchases of treasury stock — — — — (1) — — — — (1)
Net changes of item other
than shareholders’ equity — — — — — 578 (14) 1,728 3,070 5,362
Balance at 31st March, 2007 76,020 ¥12,698 ¥13,558 ¥66,376 ¥(50) ¥6,080 ¥(14) ¥ (967) ¥13,059 ¥110,740
Shareholders’ equity Valuation and translation adjustments Net Unrealised
Less unrealised losses on
Number of Common treasury holding derivatives Translation
shares stock, no Capital Retained stock, gains on instruments, adjustments, Minority Total issued par value surplus earnings at cost securities net net interests net assets
(Thousands) (Thousands of U.S. dollars)
Balance at 31st March, 2006 76,020 $107,570 $114,855 $498,197 $(413) $46,600 $ — $(22,839) $ 84,621 $828,593
Cash dividends paid — — — (12,871) — — — — — (12,871)
Net income — — — 76,947 — — — — — 76,947
Purchases of treasury stock — — — — (15) — — — — (15)
Net changes of item other
than shareholders’ equity — — — — — 4,904 (125) 14,639 26,008 45,426
Balance at 31st March, 2007 76,020 $107,570 $114,855 $562,274 $(429) $51,504 $(125) $ (8,199) $110,630 $938,080
See accompanying notes to consolidated financial statements.
SHOWA CORPORATION and Consolidated Subsidiaries Year ended 31st March, 2006 and 2007
Thousands of Millions of yen U.S. dollars (Note 3)
2006 2007 2007
Cash flows from operating activities:
Income before income taxes and minority interests ¥18,564 ¥16,137 $136,700
Depreciation and amortisation 6,758 7,107 60,211
(Decrease) increase in allowance for doubtful receivable (0) 12 107
Gain on sales of other investments in securities (15) — —
Increase in accrual for warranty expenses 1,232 1,171 9,923
Decrease in accrued retirement benefits (1,732) (92) (780)
Equity in earnings of affiliates (203) (327) (2,771)
Loss on sale and disposal of property, plant and equipment, net 263 345 2,927
Decrease (increase) in trade receivables 230 (2,977) (25,225)
(Increase) decrease in inventories (2,425) 780 6,614
Increase in trade payables 291 1,087 9,209
Other, net (5,967) (6,044) (51,203)
Net cash provided by operating activities 16,996 17,201 145,714
Cash flows from investing activities:
Increase in time deposit — (2,441) (20,678)
Purchases of property, plant and equipment (11,220) (14,477) (122,639)
Proceeds from sale of property, plant and equipment 35 46 392
Purchases of other investments in securities (7) (7) (63)
Proceeds from sales of other investments in securities 17 — —
Increase in investments in affiliates (128) (4,220) (35,752)
Increase in long-term loans receivable — (1,535) (13,002)
Other, net (131) (71) (607)
Net cash used in investing activities (11,435) (22,707) (192,351)
Cash flows from financing activities:
(Decrease) increase in short-term borrowings (775) 31 268
Issuance of stock of consolidated subsidiary — 882 7,477
Decrease in long-term debt (165) — —
Cash dividends (1,367) (1,518) (12,863)
Cash dividends to minority shareholders (576) (591) (5,013)
Other, net (12) (6) (53)
Net cash used in financing activities (2,897) (1,202) (10,183)
Effect of exchange rate changes on cash and cash equivalents 77 (52) (442)
Net increase (decrease) in cash and cash equivalents 2,740 (6,759) (57,263)
Cash and cash equivalents at beginning of year 28,546 31,287 265,035
Cash and cash equivalents at end of year (Note 9) ¥31,287 ¥24,527 $207,771
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ¥ 133 ¥ 196 $ 1,663
Income taxes 5,615 5,630 47,692
See accompanying notes to consolidated financial statements.
SHOWA CORPORATION and Consolidated Subsidiaries Year ended 31st March, 2006 and 2007
1. Basis of Preparation
Showa Corporation (the “Company”) and its domestic sub-sidiaries maintain their accounting records in accordance 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 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 account-ing principles generally accepted in Japan, which are differ-ent in certain respects as to the application and disclosure requirements of International Financial Reporting Standards.
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 solely for the convenience of readers outside Japan.
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) Principles of Consolidation
The consolidated financial statements include the accounts of the Company’s 12 domestic and foreign subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
Investments in 3 affiliates are accounted for by the equity method with appropriate adjustments for inter-com-pany profits and dividends.
The Company does not consolidate nor apply the equity method with respect to the Company’s three other subsidiaries, as the Company determined those companies to be insignificant, individually and in the aggregate, to total assets, sales, net income and retained earnings of the accompanying consolidated financial statements.
The excess of cost over underlying net assets at fair value at the date of acquisition is amortised over the follow-ing period on a straight-line basis or fully charged to income as incurred if the amount is immaterial:
Showa do Brasil Ltda. 20 years
Other an estimated useful period not exceeding 20 years (b) Foreign Currency Translation
The revenue and expense accounts of the foreign sub-sidiaries are translated into yen at the average rate of exchange in effect during the year. Except for sharehold-ers’ 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
SHOWA CORPORATION and Consolidated Subsidiaries
Notes to Consolidated Financial Statements
presented as a component of valuation and translation adjustments and minority interests.
(c) 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 gains or losses, net of the applicable income taxes, directly included in net assets. 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 are stated at cost determined by the weighted average method, while inventories held by the consolidated subsidiaries are principally stated at the lower of cost or market determined by the first in, first out method or the weighted 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 domestic consolidated subsidiaries is computed principally by the declining-balance method, while the straight-line method is applied to property, plant and equipment of certain foreign subsidiaries.
(f) Accrual for Warranty Expenses
Accrual for warranty expenses have been provided for future warranty expenses under the basic parts supply contracts with customers as a total of the following:
(i) an estimate of warranty expenses to be incurred during the remaining warranty periods based on his-torical warranty claim experiences and an estimate of the probability of future warranty expenses; and (ii) an estimate of specifically identified warranty claim. Accrual for warranty expenses which will be utilised within one year is presented in Current liabilities, and those which will be utilised after one year are presented in Long-term liabilities.
Changes in Method of Accounting
Prior to the fiscal year ended 31st March, 2006, accrual for warranty expenses had been provided for future warranty claims based on the basic parts supply contracts with cus-tomers as an estimate of specifically identified warranty claim as (ii) above, while warranty expenses related to (i) above had been expensed as paid.
On 1st April, 2005, the Company changed its method of recognising warranty expenses regarding (i) above to the method under which accrual for warranty expenses has been provided at an estimate of warranty expenses to be incurred during the remaining warranty periods based on historical warranty claim experiences and an estimate of the probability of future warranty expenses. The new accounting method was adopted because historical war-ranty claim experiences were accumulated and, therefore, accumulated data became analysable and also because the new method results in a better matching of cost and revenue and better financial positions.
