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
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 30 facilities 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.
Showa Corporation and its global group Companies 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 andFinancial Section ... 11
Corporate Information ... 30
Board of Directors and Corporate Auditors ... 31
Thousands of
Millions of yen
U.S. dollars
2005
2006
2006
Motor vehicle parts
¥228,197
¥244,818
$2,084,089
Other
5,359
5,630
47,927
Total
¥233,557
¥250,448
$2,132,016
Thousands of
Millions of yen
U.S. dollars
2005
2006
2006
Japan
¥100,921
¥105,625
$
0,
899,165
North America
76,473
80,066
681,586
Europe
18,723
17,617
149,970
Others
37,439
47,139
401,285
Total ¥233,557
¥250,448
$2,132,016
Financial and Operating Highlights
SHOWA CORPORATION and Consolidated Subsidiaries Years ended 31st March, 2005 and 2006
Thousands of
Millions of yen
U.S. dollars
2005
2006
2006
Net sales
¥233,557
¥250,448
$2,132,016
Operating income
16,675
17,175
146,207
Income before income taxes and minority interests
16,272
18,564
158,031
Net income
9,196
10,451
88,967
Cash dividends paid during the period
987
1,367
11,637
Total assets
133,165
151,354
1,288,448
Shareholders’ equity
73,530
87,825
747,637
Depreciation and amortisation
6,197
6,758
57,529
Capital expenditures
8,728
11,777
100,255
Per share amounts:
Yen
U.S. dollars
Net income (basic)
¥
0
121.03
¥
0
137.56
$
2,077
1.17
Cash dividends
15.00
20.00
0.17
Shareholders’ equity
967.84
1,156.02
9.84
• Throughout this report, U.S. dollar amounts have been translated from Japanese yen solely for the convenience of the reader at the rate of ¥117.47=U.S.$1.00, the exchange rate prevailing at 31st March, 2006.
• 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
*Figures exclude the intra-group transactions.
NET SALES BY BUSINESS SEGMENTS
NET SALES BY GEOGRAPHICAL AREAS*
Review of Fiscal 2006
Looking back at the economic environments surrounding
the Showa Groups for this fiscal year, we note that the
recovery in the U.S. has been quite considerate while that in
Europe took place at moderate pace. Turning the eyes to
Asia, the economic expansion has continued. Japan also
enjoyed a steady recovery trend.
Now, when we review the motor vehicle industries of
the world, we can see that the new car sales in the U.S.
exceeded that in the previous period as the increase in the
sales of passenger cars offset the decrease in light trucks.
No substantial change has been seen in the European
markets. In Japan, driven by strong export demands, the
automotive production has increased. Though the
automotive demands were generally strong throughout Asia,
notably strong demands were seen for automobile in China
and motorcycle in the several ASEAN countries.
Under these circumstances, and making the most of
production bases that are strategically deployed worldwide,
the Showa Group has actively expanded production,
procurement and sales, and enhanced various measurers of
quality control.
We are today delighted to be able to report the financial
highlights as follows. net sales increased by 7.2% to
¥250,448 million (US$2,132 million). Operating income
increased by 3.0% to ¥17,175 million (US$146 million) due to
increase in revenues. Ordinary income increased by 4.1% to
¥17,716 million (US$150 million), and net income increased
by 13.7% to ¥10,451 million (US$88 million).
Outlook for Fiscal 2007
Looking to the future, we believe that the U.S. economic
recovery will continue to be stable, while that in the
European economy will be gradual. Although the economy
in Thailand and Indonesia may slow down slightly, the Asian
region as a whole will be able to keep up the economic
growth. Japan is expected to show far economic recovery.
Generally speaking, we consider that the world economy
will continue to stay in a healthy condition.
With China being the primary driving force, we believe
the development in the automotive industry in Asia will
continue. However, in view of the various uncertain and
unstable factors such as the unpredictable oil price, cost of
materials and fluctuation in foreign exchange, we will need
to take new initiatives in the fields ranging from R&D to
production. In order to improve product quality and
strengthen our overall cost competitiveness, we will further
shift our operations to the more local production and local
procurement.
We aim to embody our goal “Committed to customer
Message from the President
<Medium-term Goal>
Committed to customer satisfaction through global enterprise
<Strategic Orientation> Quality is No. 1
World-class cost competitiveness
The best technology to boost our product competitiveness
Personnel and a corporate culture that support a global corporation
<Behavioral Guideline>
A thorough system of reporting, communicating, and consulting
Speed, Challenge, and Straightforward Action
Improving our skills, boosting motivation levels, and upholding ethical integrity
Elimination of waste of materials, funds, and human resources.
satisfaction through global enterprise” by continuing to
invest in people, encourage the independence of the
overseas affiliate companies, reinforce the business
infrastructure, and improve the constitution of the Group.
Strengthening Competitiveness
Domestic Operations:We will continue to accelerate in-house production of rubber
and forged products. By doing so, we hope to accumulate
advanced technology in-house, improve product quality and
strengthen cost competitiveness, which in turn will result in
stronger product competitiveness. Reconstruction of the R&D
center, one to develop the shock absorbers for automobiles
and the other for motorcycles, will create an environment in
which R&D and production are efficiently integrated. This
will contribute to improving the speed of development.
Global Operations:
In order to respond to the demand for automobiles in Asia,
we will set up the following three plants to increase the
capacity of production; a plant for manufacturing the shock
absorbers and power steering systems in Wuhan, Hubei,
China, a plant for components for the electric power steering
systems in Faridabad, India, and a plant for the power
steering components in Chonburi, Thailand. Elsewhere, we
will enhance an integrated manufacturing base in Canada for
the pumps for hydraulic power steering. At the same time,
we will make capital investments in the U.S. to bolster the
capacity of in-house production of the springs, pressed and
sintered components. We firmly believe that these
developments will further enrich and enlarge the business of
the 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
retained earnings to be important in order to develop
business and strengthen corporate structures for the future
business considerations.
The year-end dividend for Fiscal 2006 was ¥10 per share.
Combined with the interim payment of the dividend, the
total amount paid out per share for this fiscal period was
¥20. As a result, the payout ratio was 18.65%, the return on
equity was 11.9%, and the dividend rate for shareholders'
equity was 2.1% respectively for this fiscal year.
Capital from retained earnings will be put toward
meeting capital requirements for future overseas
development, product development, and improvement in
our efforts to improve profitability and to strengthen the
company’s financial structure.
Status of Corporate Governance
Basic Approach to Corporate GovernanceShowa Corporation aims to be a company that enjoys the
trust of its shareholders and society as a whole, and that
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
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 its businesses
through the Board of Directors and the Board of Auditors.
The Board of Directors is comprised of 16 Directors and
makes decisions regarding important business matters and
other statutory issues, and oversees the execution of the
business operations.
The Board of Auditors is comprised of 4 Auditors
(including 3 outside Auditors), and each Corporate Auditor
attends meeting of the Board of Directors and other
important internal meetings in accordance with the 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. The Board of Auditors
works closely with the Internal Auditing Committee and an
independent auditing firm, and is reported by them with
regard to such issues as audit plans and their results. The
external members of the Board of Auditors have no
business interest whatsoever with the Company.
Fork pipes for
motorcycles from
China to Vietnam
Rear cushions,
Damper components,
Fork and Sheet pipes for
motorcycles from
China to Spain
Complete bottom tubes
Springs and Press parts
for automobiles from
Thailand to Malaysia
Fork pipes, Springs
and Rods for
motorcycles from
Indonesia to Malaysia
Complete bottom tubes,
Springs and Press parts
for automobiles
from Thailand to Indonesia
Complete bottom tubes,
Springs and Press parts
for automobiles
from Thailand to Pakistan
Cylinders and Gear housings
for automobiles from
Indonesia to the U.K.
Rods and Rear cushions
for motorcycles
from Indonesia to Spain
Shockabsorbers
Shock absorbers Shock
absorbers
Gas springs Shock absorbers
Shock
absorbers Steering gearsfor HPS Steering gearsfor EPS
Gas springs
Shock absorbers
Shock absorbers
Gas springs
Shock absorbers
Shock absorbers
Shock absorbers
Steering gears for HPS Shock absorbers
Steering gears for EPS
Steering gears for HPS
Pumps for HPS
for EPS for HPS
Steering gears Steering gears
Steering gears for EPS
NISSIN SHOWA UK LTD.
SHANGHAI SHOWA AUTO PARTS CO., LTD.
P.T.SHOWA INDONESIA MANUFACTURING 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.
KAI FA INDUSTRY CO., LTD.
Showa’s Global Network and
Small parts for
automobiles from
the U.S.A. to Japan
Power steering components
(Pinion gear comp)
from China to Thailand
Small parts
for automobiles from
China to Japan
Gear housings
for automobiles
from Indonesia to China
Gear housings
for automobiles
from Indonesia to Thailand
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.
Mutually Complementary Parts Production Base Showa Corporation
Major Technical Collaboration Showa Group
Mutually Complementary Parts Supply Network
Global Products Supply Network
Fork pipes
Sheet pipes
Rear cushions
Springs Rods Damper components
Shock absorbers
Front and rear suspension
modules Press
parts
Springs Complete bottom tubes
Cylinders for steering systems
Gear housing for steering systems
Small parts
Mutually Complementary Parts Products
Shock absorbers
Steering gears for EPS
Pumps for HPS Steering gears
for HPS
Gas springs Propeller
shafts For Automobiles
For Motorcycles
Review of Operations
Fiscal 2006 Results
Shown below is an explanation of the breakdown of net
sales.
Sales by product
Automotive components: ¥168,090 million (US$1,430
million), up 5.4% from the previous fiscal year.
Motorcycle components: ¥76,730 million (US$653
million), up 11.6% from the previous fiscal year.
Other: ¥5,630 million (US$47 million), up 5.0% from the
previous fiscal year (mostly outboard marine engine
components).
Sales by customer’s location
Japan: Proceeds from motorcycle components and
automotive components grew, producing an increase in
net sales of 5.9% from the previous fiscal year, to ¥98,620
million (US$839 million).
Asia (excluding Japan): Helped by strong demands for
motorcycle components in Indonesia and Thailand, and
for automotive components, notably power steering
systems and shock absorbers, in Thailand and China, net
sales recorded ¥38,490 million (US$327 million), a strong
increase by 16.3% from the previous fiscal year.
Europe: Decreases in the sale of motorcycle components
of the Spanish subsidiary and of the automotive
components of the British subsidiary were reflected in
the aggregated sale of ¥18,150 million (US$154 million)
in Europe, down 6.8% from the previous fiscal year.
North America: Decreases in the sales of the motorcycle
components in America and the sub-assembled
components in Canada were offset by an increase in the
sales of shock absorbers and power steering systems for
automobiles in America, resulting in net sales of ¥80,270
million (US$683 million) for the region, up 3.1% from the
previous fiscal year.
By product By customer's location
’06
’05 ’05 ’06
0 50 100 150 200 250 0 50 100 150 200 250 233.5 250.4 233.5 Motorcycle components 68.7 Automotive components 159.4 77.8 19.4 33.1 93.1 10.0 250.4 80.2 18.1 38.4 98.6 14.9 Other 5.3 5.6 168.0 76.7 0 50 100 150 200 By product 0 50 100 150 200
’05 ’06 ’05 ’06
159.4 159.4
Drive train products 21.0 Power steering systems 59.9 Shock absorbers 52.5 EPS 20.0 1.7 66.5 64.5 13.3 13.2 168.0 1.9 69.2 67.6 12.6 16.6 Others 25.9 168.0 21.7 65.4 55.7 23.3 25.1
By customer's location
South America: As a result of our Brazilian customer
expanding its business, the sales of both motorcycle and
automotive components also increased to bring the total to
¥14,920 million (US$126 million), a fantastic 49.0% increase
from the previous fiscal year.
Automotive components
Net sales for automotive components came to ¥168,090
million (US$1,430 million), an increase by 5.4% from the
previous fiscal year. The following shows its breakdown.
Sales by product
Shock absorbers: ¥55,790 million (US$474 million), up
6.3% from the previous fiscal year.
Power steering systems: ¥65,430 million (US$556 million),
up 9.1% from the previous fiscal year.
Drive-train products: ¥21,700 million (US$184 million), up
3.0% from the previous fiscal year.
Other products: ¥25,170 million (US$214 million), down
2.9% from the previous fiscal year reflecting a decrease in
production of suspension modules in Canada.
Among the sales of power steering systems, that of the
electric power steering system (EPS) counted for ¥23,370
million (US$198 million) for this fiscal year, up 16.6% from
¥20,050 million (US$170 million) of the previous fiscal
year.
Sales by customer’s location
Japan: Although there was a decrease in the sales among
certain segment of our customers, the sales for shock
absorbers, power steering systems and drive-train products
increased among other major customers, resulting in net
sales of ¥67,630 million (US$575 million), up 4.8% from the
previous fiscal year.
Asia (excluding Japan): Reflecting an increase in the sales
of shock absorbers and power steering systems primarily
Automotive components
(Billions of yen)
Fiscal 2006 Results
in Thailand and China, net sales for Asia rose to ¥16,620
million (US$141 million), up 25.8% from the previous
fiscal year.
Europe: An increase in the sales of drive-train products
was offset by a decrease in the sales of shock absorbers
and power steering systems. As a result, the total
European sales declined to ¥12,610 million (US$107
million), down 5.2% from the previous fiscal year.
North America: In America, the sales of shock absorbers
and power steering systems increased by 4.9% and 7.7%
respectively on a U.S. dollar basis. In Canada, the sales of
drive-train products increased by 9.7%, but that of the
sub-assembled components decreased by 12.7%.
However, due to the stronger Canadian dollars against
Yen, the net sales for North America rose to ¥69,270
million (US$589 million), up 4.0% from the previous fiscal
year.
South America: Due to good business performance of a
certain major customer of ours, net sales increased to
¥1,960 million (US$16 million), up 10.4% from the
previous fiscal year.
Motorcycle components
Net sales for motorcycle components, mostly shock
absorbers, came to ¥76,730 million (US$653 million), an
increase by 11.6% from the previous fiscal year. The
following shows its breakdown.
Sales by product
Shock absorbers: ¥74,290 million (US$632 million), up
11.5% from the previous fiscal year.
Drive-train products: ¥2,440 million (US$20 million), up
14.6% from the previous fiscal year.
0 20 40 60 80
’05 ’06 ’05 ’06
20 40 60 80 By product 0 68.7 68.7 Drive train products 2.1 76.7 2.4 74.2 10.6 6.0 19.5 24.3 8.2 76.7 10.4 5.5 21.5 26.3 12.9 Shock absorbers 66.6
By customer's location
0 2 4 6 8 0 2 4 6 8 By product
’05 ’06 ’05 ’06
5.3 5.3 Others 1.3 Boats 4.0 5.6 1.4 4.2 Others 0.1 4.2 0.3 0.6 5.6 0.3 0.0 4.6 0.6
By customer's location
Sales by customer’s location
Japan: Due to strong demands from major customers, net
sales increased to ¥26,350 million (US$224 million), up
8.4% from the previous fiscal year.
Asia (excluding Japan): Driven by the vigorous ASEAN
market, predominantly Indonesia, net sales increased to
¥21,560 million (US$183 million), up 10.3% from the
previous fiscal year.
Europe: Due to a decrease in the sales among one of the
major customers, net sales in Europe finished at ¥5,510
million (US$46 million), down 9.1% from the previous
fiscal year.
North America: Reflecting the unfavorable business
conditions of customers, net sales also decreased to
¥10,400 million (US$88 million), down 1.9% from the
previous fiscal year.
South America: Against the background of an rapidly
expanding motorcycle market, net sales recorded ¥12,910
million (US$109 million), a notable 56.8% increase from
the previous fiscal year.
Other
Sales of outboard marine engine components were
¥4,220 million (US$35 million), up 4.2% from the
previous fiscal year. Including sales of others, net sales of
“other” counted for ¥5,630 million (US$47 million), up
5.0% from the previous fiscal year.
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. DaimlerChrysler added as a new customer
DaimlerChrysler Corporation has been added as a new
customer of Showa Canada Inc., a Canadian subsidiary of
Showa Group. The new customer has placed an order for
propeller shafts and the first batch of them has already been
delivered.
Vehicle model: Dodge Caliber (SUV)
Component:
Propeller shafts
First delivery:
January 2006
As the Caliber of DaimlerChrysler Corporation and the
Outlander of Mitsubishi Motors Corporation are the sister
products jointly developed by the two automotive
manufacturers, orders were received in Japan and the U.S.
simultaneously for each vehicle models. The propeller shafts
were developed by our R&D centers in Japan and the U.S.
By making most of the established production bases in
North America, we will further promote sales and reinforce
development on a global basis to design expand our business.
2. The new design system lead to shortening of
development time
We have introduced a new design system to help develop
new products. At each development stage, the system refers
to an electronic database, which compiles our know-how
about manufacturing methods and product quality, and
automatically detects and corrects any design defects. This
new system has enabled us to shorten the lead time of R&D,
while enhancing the product quality at the same time.
3. Quantity output of the newly developed spring
system by in-house production
In the strut suspension system that is commonly used for
front wheels of vehicles, the shock absorbers are subject to
side-forces because the vertical motion axis of tires cannot
be set in complete parallel with the actuation axis of shock
absorbers. This has for long interfered with the ideal
actuation of the shock absorbers.
The conventional solution to this defect was to use the
“off-set spring system” in which the spring was set slightly
off the center of the axis. However, we succeeded in
developing the “Side Force Cancel (SFC) spring”, which
efficiently cancels the side forces by bending the axis of
reaction force of the spring itself.
The SFC spring system, which was 16% lighter and 10%
smaller compared with the conventional off-set spring
system, was adopted by the new models that went on the
market in May 2005.
4. Boosting production capacity in Asia
We have already boosted the capacity of production to meet
the ever increasing demands in Asia, and we will continue
to make further investment to satisfy a variety of the needs
of our customer around the world. As part of that effort, this
year, we will set up new manufacturing bases in China,
India and Thailand. The outlines of the projected
establishments are as follows.
■
A new plant in Wuhan, Hubei, China
Products:
Shock absorbers, Power steering
systems
Start of operation: January 2007 (expected)
Expected output:
200,000 units/year in 2009
■
A new company in Faridabad, Haryana, India
Products:
Electric power steering systems
Start of operation: April 2007 (expected)
Expected output:
386,000 units/year in 2010
■
A new company in Chonburi, Thailand
Products:
Power steering components
Start of operation: November 2007 (expected)
Expected output:
200,000 units/year in 2010
5. Support continuously provided to Honda Racing F1
Team and A.G.R. on I.R.L.
We have been supporting the B•A•R Honda in terms of
developing and providing of shock absorbers, and we
continue to provide the same support after the team
changed its name to Honda Racing F1 Team in 2006. Also,
we have been supporting A.G.R. (Andretti Green Racing) on
I.R.L. (Indy Racing League) in North America, and we do
same support for this season. By participating in the Formula
One World Championship and I.R.L., we do not only foster
our challenging spirits but also feed back the advanced
technology and product reliability obtained through the
racing activities to commercial production.
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
On the back of the increasing demands for automobiles in China and other Asian countries, and of the excellent sales results of our major customers elsewhere, we have aggressively promoted sales activities to receive new orders and further set forward the overseas opera-tions during this fiscal year. As a result, the net sales of the Group for the current consolidated fiscal year increased 7.2% compared to the previous consolidated fiscal year to ¥250,448 million (US$2,132 million).
Operating Income
Operating income of ¥17,175 million (US$146 million) for the current consolidated fiscal year, which increased 3.0% compared to the previous consolidated fiscal year, reflects the results of our continued efforts to offset the various increases in the cost of sales. To compensate enlarging expenses such as the cost of raw materials and labor, we have succeeded in increasing revenues, cutting cost and improving productivity.
SG&A Expenses
Sales, general and administrative expenses for the cur-rent consolidated fiscal year increased 2.8% compared to the previous consolidated fiscal year to ¥21,982 mil-lion (US$187 milmil-lion) due primarily to an increase in the cost of R&D.
R&D Expenses
As a leading manufacturer of precise functional compo-nents for transport machinery, the Showa Group, Showa Corporation and its consolidated subsidiaries, continue to make efforts to identify the various social needs promptly, respond to them accurately, and develop products with strong competitiveness using cutting-edge electronic and light-weight technology. The R&D division of the Group puts the focus primarily on the development of motor vehicle parts. R&D expenses for the current consolidated fiscal year increased 12.6% compared to the previous consoli-dated fiscal year to ¥7,433 million (US$63.2 million). R&D expenses by business segments are as follows.
Motor Vehicle Parts
R&D expenses in relation to the motor vehicle parts for the current consolidated fiscal year increased 12.8% compared to the previous consolidated fiscal year to ¥7,200 million (US$61.2 million). During this fiscal year, we have constructed a new R&D building and introduced a new development system to improve the quality of drawings, which has contributed to improving efficiency and enhancing capability of our product development.
Other
R&D expenses in relation to the other for the current consolidated fiscal year increased 7.8% compared to the previous consolidated fiscal year to ¥233 million (US$1.9 million). 50 100 150 200 250 300
’02 ’03 ’04 ’05 Net Sales
(Billions of yen)
196.6 177.3 219.5 233.5 ’06 250.4 0 ’05 94.4 106.8 101.0 121.0 137.5 0 2 4 6 8 10 12 14
’02 ’03 ’04 Net Income/
Net Income per Share
(Billions of yen) (Yen)
0 20 40 60 80 100 120 140 Net Income Net Income per Share
8.0 6.7 9.1 7.5 ’05 ’06 10.4 59.2 105.2 112.4 Total Assets Shareholders’ Equity Shareholders’ Equity per Share
0 20 40 60 80 100 120 160 140
’02 ’03 ’04 Total Assets/ Shareholders’ Equity/
Shareholders’ Equity per Share
(Billions of yen) (Yen)
Income before Income Taxes and Minority Interests
Income before income taxes and minority interests for the current consolidated fiscal year, which increased 14.1% compared to the previous consolidated fiscal year to ¥18,564 million (US$158 million), reflects other income of ¥2,401 million (US$20.4 million) realized as a gain on transfer of the benefit obligation of the substitu-tional portion of the employee’s pension fund, which was then offset by other expenses of ¥1,173 million (US$9.9 million) posted as a warranty expenses.
Equity in Earnings of Affiliates
The Group’s equity in earnings of affiliates accounted for under the equity method increased by 5.4 % compared to the previous fiscal year, to ¥203 million (US$1.7 mil-lion).
Net Income
Net income for the current consolidated fiscal year increased 13.7% compared to the previous consoli-dated fiscal year to ¥10,451 million (US$88.9 million).
Cash Flows
Consolidated cash and cash equivalents (referred to as cash hereinafter) increased ¥2,740 million (US$23.3 million) to a cash balance at the fiscal year end of ¥31,287 million (US$266 million), due to the high level of income before income taxes and minority interests, despite expenditures for acquiring tangible fixed assets and expenditures for debt repayment. 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 ¥1,054 million com-pared to the previous consolidated fiscal year to ¥16,996 million (US$144 million). This is due primarily to an increase in the income before income taxes and minority interests.
Net Cash Used in Investing Activities
Net cash used in investing activities for the current con-solidated fiscal year increased ¥3,230 million compared to the previous consolidated fiscal year to ¥11,435 million (US$97.3 million). This is due primarily to 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 increased ¥1,315 million compared to the previous consolidated fiscal year to ¥2,897 million (US$24.6 million). This is due primarily to an increase in net repayment of borrowings.
0 2 4 6 8 12 10 Capital Expenditures Depreciation and Amortisation
’02 ’03 ’04 ’05 Capital Expenditures/
Depreciation and Amortisation
(Billions of yen)
6.4 6.5 6.8 5.2 6.1 8.7 6.3 5.7 ’06 6.7 11.7
6.8 7.0 6.6
0 2 4 6 8 10
’02 ’03 ’04 ’05 R&D Expenses
(Billions of yen)
7.8 ’06 7.4 14.0 12.2 13.2 0 3 6 9 12 15
’02 ’03 ’04 ’05 Return on Equity
(%)
14.2
’06 13.0 R&D Expenses By Business Segments
Millions of yen
2005 2006
Motor vehicle parts ¥6,384 ¥7,200
Other 216 233
Segment Information
Business Segmentation Motor Vehicle Parts
In Japan, the sales of both automotive and motorcycle components increased. As for the automotive compo-nents, the increase was attributable to a good demand for the shock absorbers and power steering systems from major customers. Increased sale of shock absorber for motorcycle also contributed to the strong results.
Turning the eyes to North America, while the U.S. subsidiary recorded an increase in revenues following increased new car production by major customers, the Canadian subsidiary booked a decrease as a result of strong sale of propeller shafts having been offset by decreased sale of sub-assembled suspensions.
In Europe, revenue of the British subsidiary decreased as an increase in the sale of drive-train com-ponents was offset by a decrease in the sale of shock absorbers and power steering systems. The Spanish subsidiary also suffered a decrease in revenue due to shrinkage of sale of motorcycles in the region.
In the other countries, as customers turned to increase production on the back of a vigorous market, the subsidiaries in Indonesia and Thailand both recorded an increase in revenue. The Brazilian sub-sidiary booked a record increase in revenue as a result of rapidly expanding motorcycle market of the country. In China where the demand for automobiles has contin-ued to expand, our major customers demanded more shock absorbers and electric power steering systems as they increased production. As a result, the Chinese subsidiary booked a significant increase in revenue.
As a result, net sales in the motor vehicle parts busi-ness increased 7.3% compared to the previous consoli-dated fiscal year to ¥244,818 million (US$2,084 million). Operating income increased 3.1% from the previous con-solidated fiscal year to ¥15,985 million (US$136 million).
Other
In “other” segment, net sales of outboard marine engine components increased. As a result, net sales related to “other” segment increased 5.0% compared to the previ-ous consolidated fiscal year to ¥5,630 million (US$47.9 million). Operating income increased 1.8% from the pre-vious consolidated fiscal year to ¥1,190 million (US$10.1 million).
Capital Expenditures
Showa Group (Showa Corporation and its consolidated subsidiaries) has actively been making capital investments focused on production facilities with the aim to produce core technologies for automotive parts in house and expand production capabilities. Total capital expenditures for the current consolidated fiscal year rose 34.9% compared to the previous consolidated fiscal year to ¥11,777 million (US$100 million).
In order to reinforce, and to promote streamlining and renewal of the existing production facilities, we have made capital investments to processing facilities for drive train gear components, and to in-house production facilities for key components for power steering systems. We also constructed a new R&D building.
Investments were also made to overseas subsidiaries. The investment in Chinese, Indonesian and Thai subsidiaries was made in order to enlarge production capacity, and that in American subsidiaries was made to in-house production facilities for the power steering components. Combined together, capital expenditures accounted for ¥10,436 million (US$88.8 million).
Capital investment by business segment is as follows.
Capital Expenditures by Business Segments
Millions of yen
2005 2006
Motor Vehicle Parts ¥8,650 ¥10,436
Other 37 1,310
Total ¥8,688 ¥11,747
Eliminations or corporate 39 29
Net sales and Operating Income by Business Segments
Millions of yen
2005 2006
Net Operating Net Operating Sales Income Sales Income
Motor Vehicle
Parts ¥228,197 ¥15,506 ¥244,818 ¥15,985
Other 5,359 1,169 5,630 1,190
Total ¥233,557 ¥16,675 ¥250,448 ¥17,175
[Reference]
Non-Consolidated Net sales by Business Segments (information only)
Millions of yen
2005 2006
Motor Vehicle Parts ¥127,752 ¥134,362 Automotive components 89,429 93,734 Motorcycle components 38,323 40,627
Other 6,595 7,117
Total ¥134,347 ¥141,479
Geographical Segmentation Japan
As for the motor vehicle parts, sale increased both in the automotive and motorcycle components. Sale of outboard marine engine components also increased. As a result, net sales increased 5.2% compared to the pre-vious consolidated fiscal year to ¥140,637 million (US$1,197 million), and operating income increased 8.2% compared to the previous consolidated fiscal year to ¥9,044 million (US$76.9 million).
North America
The U.S. subsidiary recorded an increase in the auto-motive components. On the other hand, revenue of the Canadian subsidiary declined as an increase in sale of propeller shafts was offset by a decrease in the sale of sub-assembly of suspensions. The outboard marine engine components also gave way. As a result, net sales increased 4.9% compared to the previous consol-idated fiscal year to ¥81,437 million (US$693 million), and operating income decreased 19.0% compared to the previous consolidated fiscal year to ¥3,072 million (US$26.1 million).
Europe
In Europe, the automotive revenue of the British subsidiary fell as an increase in the drive-train components was offset by a decrease in the shock absorbers and power steering systems. The Spanish subsidiary also suffered a decrease in revenue due to shrinkage of sale of motorcycles in the region. As a result, net sales decreased 5.8% compared to the previous consolidated fiscal year to ¥17,765 million (US$151 million), and operating income decreased 67.3% compared to the previous consolidated fiscal year to ¥142 million (US$1.2 million).
Other regions
The subsidiaries in Indonesia and Thailand recorded a strong increase both for the automotive and motorcycle components. In Brazil, where the motorcycle market is expanding at a rapid pace, the Brazilian subsidiary booked a record increase in revenue. In China, where the demand for automobiles has been continuing to expand, the Chinese subsidiary recorded significant increase in revenue. As a result, net sales increased 27.3% compared to the previous consolidated fiscal year to ¥49,781 million (US$423 million), and operating income increased 18.9% compared to the previous consolidated fiscal year to ¥5,775 million (US$49.1 million).
Net Sales and Operating Income by Geographical Segments
Millions of yen
2005 2006
Net Operating Net Operating Sales Income Sales Income
Japan ¥133,663 ¥ 8,356 ¥140,637 ¥ 9,044 North America 77,614 3,793 81,437 3,072
Europe 18,855 435 17,765 142
Other regions 39,114 4,858 49,781 5,775 Total ¥269,247 ¥17,443 ¥289,621 ¥18,034 Elimination or
Thousands of Millions of yen U.S. dollars (Note 3)
ASSETS
2005 2006 2006Current assets:
Cash on hand and in banks (Note 8) ¥ 26,410 ¥ 29,136 $ 248,029 Notes and accounts receivable:
Trade 24,468 27,141 231,046
Unconsolidated subsidiaries and affiliates 11,473 10,247 87,230
Allowance for doubtful receivables (84) (88) (749)
Held-to-maturity securities (Notes 5 and 8) 2,135 1,720 14,642
Inventories (Note 4) 18,004 22,224 189,188
Deferred tax assets (Note 7) 2,379 2,313 19,690
Other (Note 8) 1,436 1,698 14,454
Total current assets 86,224 94,394 803,558
Investments and long-term advances:
Investments in unconsolidated subsidiaries and affiliates 8,147 10,705 91,129
Other investments in securities (Note 5) 1,784 2,629 22,380
Deferred tax assets (Note 7) 21 28 238
Long-term prepaid expenses 119 90 766
Other 803 923 7,857
Total investments and long-term advances 10,876 14,377 122,388
Property, plant and equipment, at cost:
Land (Note 6) 4,337 6,520 55,503
Buildings and structures 23,451 25,394 216,174
Machinery, vehicles and equipment 94,522 103,040 877,160
Construction in progress 1,780 2,255 19,196
124,092 137,211 1,168,051
Accumulated depreciation (88,393) (95,148) (809,977)
Property, plant and equipment, net 35,698 42,063 358,074
Other assets 365 519 4,418
Total assets ¥133,165 ¥151,354 $1,288,448
See accompanying notes to consolidated financial statements. SHOWA CORPORATION and Consolidated Subsidiaries 31st March, 2005 and 2006
Thousands of Millions of yen U.S. dollars (Note 3)
LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS’ EQUITY
2005 2006 2006Current liabilities:
Short-term borrowings (Note 6) ¥ 3,949 ¥ 3,449 $ 29,360
Current portion of long-term debt (Note 6) 162 — —
Notes and accounts payable:
Trade 32,964 33,677 286,685
Construction 304 501 4,264
Unconsolidated subsidiaries and affiliates 641 534 4,545
Other 1 3 25
Accrued income taxes (Note 7) 2,551 2,302 19,596
Accrual for warranty expenses 121 684 5,822
Other 5,325 5,522 47,007
Total current liabilities 46,022 46,677 397,352
Long-term liabilities:
Accrued retirement benefits (Note 12) 5,350 3,629 30,892
Deferred tax liabilities (Note 7) 569 2,141 18,225
Accrual for warranty expenses — 711 6,052
Other 390 378 3,217
Total long-term liabilities 6,310 6,862 58,414
Minority interests 7,301 9,989 85,034
Shareholders’ equity(Note 14):
Common stock, no par value: Authorised: 180,000,000 shares Issued:
31st March, 2005 – 76,020,019 shares 12,698 — —
31st March, 2006 – 76,020,019 shares — 12,698 108,095
Capital surplus 13,558 13,558 115,416
Retained earnings 49,727 58,812 500,655
Net unrealised holding gain on securities 3,709 5,501 46,828
Translation adjustments, net (6,117) (2,696) (22,950)
Less treasury stock, at cost (47) (48) (408)
Total shareholders’ equity 73,530 87,825 747,637
Contingent liabilities (Note 9)
Total liabilities, minority interests and shareholders’ equity ¥133,165 ¥151,354 $1,288,448
Thousands of Millions of yen U.S. dollars (Note 3)
2005 2006 2006
Net sales (Note 15) ¥233,557 ¥250,448 $2,132,016
Cost of sales 195,502 211,290 1,798,672
Gross profit 38,054 39,157 333,336
Selling, general and administrative expenses (Note 10) 21,379 21,982 187,128
Operating income 16,675 17,175 146,207
Other income (expenses):
Interest and dividend income 321 462 3,932
Interest expense (136) (141) (1,200)
Exchange loss, net (78) (114) (970)
Gain on sales of other investments in securities (Note 5) — 15 127 Loss on sale and disposal of property, plant and equipment, net (218) (263) (2,238)
Equity in earnings of affiliates 192 203 1,728
Warranty expenses — (1,173) (9,985)
Gain on transfer of the benefit obligation of the substitutional portion
of the employees’ pension fund (Note 12) — 2,401 20,439
Retirement benefit expenses for prior periods (Note 12) — (131) (1,115)
Prior periods' adjustment (note 17) (526) — —
Other, net 42 131 1,115
(402) 1,388 11,815
Income before income taxes and minority interests 16,272 18,564 158,031
Income taxes (Note 7):
Current 5,477 5,447 46,369
Deferred (204) 403 3,430
5,273 5,851 49,808
Minority interests (1,802) (2,261) (19,247)
Net income (Note 13) ¥ 9,196 ¥ 10,451 $ 88,967
See accompanying notes to consolidated financial statements. SHOWA CORPORATION and Consolidated Subsidiaries Year ended 31st March, 2005 and 2006
Thousands of Millions of yen U.S. dollars (Note 3)
2005 2006 2006
Common stock
Beginning of year ¥12,698 ¥12,698 $108,095
End of year ¥12,698 ¥12,698 $108,095
Capital surplus
Beginning of year ¥13,558 ¥13,558 $115,416
End of year ¥13,558 ¥13,558 $115,416
Retained earnings
Beginning of year ¥41,519 ¥49,727 $423,316
Add:
Net income 9,196 10,451 88,967
Deduct:
Cash dividends paid 987 1,367 11,637
End of year ¥49,727 ¥58,812 $500,655
Net unrealised holding gains on securities
Beginning of year ¥ 3,304 ¥ 3,709 $ 31,574
Net change during the year 405 1,791 15,246
End of year ¥ 3,709 ¥ 5,501 $ 46,828
Translation adjustments
Beginning of year ¥ (5,645) ¥ (6,117) $ (52,072)
Net change during the year (471) 3,420 29,113
End of year ¥ (6,117) ¥ (2,696) $ (22,950)
Treasury stock, at cost
Beginning of year ¥ (45) ¥ (47) $ (400)
Net change during the year (1) (1) (8)
End of year ¥ (47) ¥ (48) $ (408)
See accompanying notes to consolidated financial statements. SHOWA CORPORATION and Consolidated Subsidiaries Year ended 31st March, 2005 and 2006
Thousands of Millions of yen U.S. dollars (Note 3)
2005 2006 2006
Cash flows from operating activities:
Income before income taxes and minority interests ¥16,272 ¥18,564 $158,031
Depreciation and amortisation 6,197 6,758 57,529
Increase (decrease) in allowance for doubtful receivable 18 (0) (0) (Decrease) increase in accrual for warranty expenses (161) 1,232 10,487 Increase (decrease) in accrued retirement benefits 866 (1,732) (14,744)
Exchange gain, net (8) (1) (8)
Equity in earnings of affiliates (192) (203) (1,728)
Loss on sale and disposal of property, plant and equipment, net 218 263 2,238
Gain on sales of other investments in securities — (15) (127)
(Increase) decrease in trade receivables (1,868) 230 1,957
Increase in inventories (2,010) (2,425) (20,643)
Increase in trade payables 2,245 291 2,477
Other, net (5,634) (5,966) (50,787)
Net cash provided by operating activities 15,941 16,996 144,683
Cash flows from investing activities:
Purchases of property, plant and equipment (8,160) (11,220) (95,513)
Proceeds from sale of property, plant and equipment 47 35 297
Purchases of other investments in securities (7) (7) (59)
Proceeds from sales of other investments in securities — 17 144
Increase in investments in affiliates (55) (128) (1,089)
Other, net (29) (131) (1,115)
Net cash used in investing activities (8,204) (11,435) (97,344)
Cash flows from financing activities:
Increase (decrease) in short-term borrowings 406 (775) (6,597)
Decrease in long-term debt (446) (165) (1,404)
Cash dividends (987) (1,367) (11,637)
Cash dividends to minority shareholders (540) (576) (4,903)
Other, net (12) (12) (102)
Net cash used in financing activities (1,581) (2,897) (24,661)
Effect of exchange rate changes on cash and cash equivalents (377) 77 655
Net increase in cash and cash equivalents 5,778 2,740 23,325
Cash and cash equivalents at beginning of year 22,768 28,546 243,006
Cash and cash equivalents at end of year (Note 8) ¥28,546 ¥31,287 $266,340
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ¥ 135 ¥ 133 $ 1,132
Income taxes 5,569 5,615 47,799
See accompanying notes to consolidated financial statements. SHOWA CORPORATION and Consolidated Subsidiaries Year ended 31st March, 2005 and 2006
1. Basis of Preparation
SHOWA CORPORATION (the “Company”) and its domestic subsidiaries 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 accounting principles generally accepted in Japan, which are different 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 excess of cost over underlying net assets at fair value at the date of acquisition is amortised over a period of five years on a straight-line basis except that when the excess is immaterial, it is fully charged to income in the year of acquisition.
(b) Foreign Currency Translation
The revenue and expense accounts of the foreign 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 presented as a component of shareholders’ equity 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-SHOWA CORPORATION and Consolidated Subsidiaries
Notes to Consolidated Financial Statements
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 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 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. Changes in Method of Accounting
Prior to this fiscal year, accrual for warranty expenses had been provided for future warranty claims based on the basic parts supply contracts with customers as an esti-mate of specifically identified warranty claim as (ii) above, while warranty expenses related to (i) above had been expensed as paid.
At the beginning of this fiscal year, 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 experi-ences and an estimate of the probability of future warranty expenses. The new accounting method was adopted because historical warranty claim experiences were accu-mulated and, therefore, accuaccu-mulated data became analysable and also because the new method results in a better matching of cost and revenue and better financial positions.
The effect of the change for the year ended 31st March, 2006, is an increase in selling, general and adminis-trative expenses by ¥137 million ($1,166 thousand), a decrease in operating income by ¥137 million ($1,166 thousand), an increase in other expenses by ¥1,173 million ($9,985 thousand), and a resultant decrease in income before income taxes and minority interests by ¥1,311 mil-lion ($11,160 thousand).
( l ) Appropriation of Retained Earnings
Under the Commercial Code of Japan, the appropriation of retained earnings with respect to a given financial year is made by resolution of the shareholders at a general meet-ing to be held subsequent to the close of such financial year. The amounts for that year do not, therefore, reflect such appropriations.
(m) New Accounting Standards
Effective the year ended 31st March, 2006, the Company and its consolidated subsidiaries have adopted a new accounting standard for the impairment of fixed assets which requires that tangible and intangible fixed assets be carried at cost less depreciation, and be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company and its consolidated sub-sidiaries would be required to recognise an impairment loss 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. The standard states that impair-ment losses should be measured as the excess of the book value over the higher of (1) the fair market value of the asset, net of disposition costs and (2) the present value of future cash flows arising ongoing utilisation of the asset and from disposal after asset use. The standard covers land, factories, buildings and other forms of property, plant and equipment as well as intangible assets. Fixed assets will be grouped at the lowest level for which there is identifi-able cash flows that are independent of cash flows of other groups of assets.
The adoption of this standard had no effect on the con-solidated financial statements.
3. U.S. Dollar Amounts
The translation of yen amounts into U.S. dollar amounts is included solely for the convenience and has been made, as a matter of arithmetic computation only, at the rate of ¥117.47 = U.S.$1.00, the exchange rate prevailing at 31st March, 2006. The translation should not be construed as a representation that yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at the above or any other rate.
4. Inventories
Inventories consist of the following:
Thousands of Millions of yen U.S. dollars
31st March, 2005 2006 2006
Finished goods ¥ 3,417 ¥ 3,661 $ 31,165
Work in process 2,436 2,921 24,865
Raw materials and
supplies 12,150 15,641 133,148
Total ¥18,004 ¥22,224 $189,188
(g) Research and Development Expenses
Research and development expenses are charged to income as incurred.
(h) Leases
Non-cancellable leases of the Company and its certain consolidated subsidiaries are accounted for as operating leases (whether such leases are classified as operating or finance leases) except for lease agreements stipulating the transfer of ownership of the leased assets to the lessee which are accounted for as finance leases.
(i) Retirement Benefits
Accrued retirement benefits for employees of the Company and its several consolidated subsidiaries are provided prin-cipally 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 tised principally over 15 years. Prior service cost is amor-tised as incurred by the straight-line method principally over 15 years which are shorter than the average remaining years of service of the employees. Principal actuarial gain or loss is 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.
The allowance for directors’ and statutory auditors’ retirement benefits, included in Long-term liabilities – other, is provided for the payment of retirement benefits to direc-tors and statuary audidirec-tors at an amount that would be payable in accordance with its internal rules and regulation if all eligible directors and statutory auditors were to resign at the fiscal year end.
( 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 gains or losses charged or credited to opera-tions, except for those which meet the criteria for deferral hedge accounting under which unrealised gains or losses are deferred as an asset or a liability.
(k) Income Taxes
Income taxes is computed based on income before income taxes included in the consolidated statement of income.
5. Securities
Marketable securities
Information regarding marketable securities classified as other securities at 31st March, 2005 and 2006 was as fol-lows:
Other securities
Millions of yen
Acquisition Carrying Unrealised 31st March, 2005 cost value gain
Securities whose carrying value exceeds their acquisition cost:
Stocks ¥1,182 ¥7,590 ¥6,408
Debt securities — — —
Other — — —
Subtotal 1,182 7,590 6,408
Securities whose acquisition cost exceeds their carrying value:
Stocks — — —
Debt securities — — —
Other — — —
Subtotal — — —
Total ¥1,182 ¥7,590 ¥6,408
Millions of yen
Acquisition Carrying Unrealised
31st March, 2006 cost value gain
Securities whose carrying value exceeds their acquisition cost:
Stocks ¥1,189 ¥10,573 ¥9,383
Debt securities — — —
Other — — —
Subtotal 1,189 10,573 9,383
Securities whose acquisition cost exceeds their carrying value:
Stocks — — —
Debt securities — — —
Other — — —
Subtotal — — —
Total ¥1,189 ¥10,573 ¥9,383
Thousands of U.S. dollars Acquisition Carrying Unrealised
31st March, 2006 cost value gain
Securities whose carrying value exceeds their acquisition cost:
Stocks $10,121 $90,005 $79,875
Debt securities — — —
Other — — —
Subtotal 10,121 90,005 79,875
Securities whose acquisition cost exceeds their carrying value:
Stocks — — —
Debt securities — — —
Other — — —
Subtotal — — —
Total $10,121 $90,005 $79,875
The proceeds from sales of marketable securities amounted to ¥17 million ($144 thousand) with an aggre-gate gain of ¥15 million ($127 thousand) for the year ended 31st March, 2006.
Non-marketable securities
Information regarding non-marketable securities classified as held-to-maturity securities and other securities at 31st March, 2005 and 2006 was as follows:
Millions of yen
31st March, 2005 Book value
Held-to-maturity securities:
Commercial paper ¥2,135
Other securities:
Unlisted securities ¥ 180
Thousands of Millions of yen U.S. dollars
31st March, 2006 Book value Book value
Held-to-maturity securities:
Commercial paper ¥1,720 $14,642
Other securities:
Unlisted securities ¥ 184 $ 1,566
6. Short-Term Borrowings and Long-Term Debt
Short-term borrowings were unsecured with average inter-est rates of 3.33% and 3.80% for the years ended 31st March, 2005 and 2006, respectively.
The Company’s assets pledged as collateral for long-term debt as of 31st March, 2005 and 2006 were as fol-lows:
Thousands of Millions of yen U.S. dollars
31st March, 2005 2006 2006
