Annual Report2003 Financial Section
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Financial Review

JFE Holdings

JFE Holdings ("the Company") was established as a holding company on September 27, 2002, through a stock-for-stock exchange process, with Kawasaki Steel and NKK as its wholly owned subsidiaries. Consequently, the Company's consolidated results for the year ended March 31, 2003, comprise the respective consolidated performances of Kawasaki Steel and NKK for the year ended March 31, 2003, as well as the Company's own results for the period from September 27, 2002 to March 31, 2003. Note that the pooling-of-interests method has been applied to consolidated processes for corporate combination through the transfer of Kawasaki Steel and NKK stock at the time of the Company's establishment.

Summary
In steel operations, the primary activity of the JFE Group, companies under the JFE Steel umbrella encountered sluggish demand for steel used in domestic construction projects but favorable demand from clients in the manufacturing sector, particularly automakers. Export activity showed an increase, supported largely by shipments to other parts of Asia. With recovery in market conditions, the price of steel improved.

In engineering operations, the second core segment of the JFE Group, a drop in public works spending and lower private-sector capital investment led to stiffer competition over available products and a more challenging order environment.

Consolidated Results
Net sales reached ¥2,426.8 billion, and operating income amounted to ¥146.8 billion, for an operating margin of 6.1%. Ordinary income came to ¥104.6 billion, for a ratio of ordinary income to net sales of 4.3%. Net income settled at ¥15.9 billion.


Cash Flow Status
Cash flows from operating activities were ¥240.6 billion, net cash used in investing activities was ¥126.8 billion, and net cash used in financing activities was ¥183.7 billion. As a result, cash and cash equivalents decreased ¥78.2 billion from the beginning of the fiscal year, to ¥87.3 billion.

Debt outstanding stood at ¥2,057.1 billion, as of March 31, 2003.

Kawasaki Steel
Consolidated Results
Kawasaki Steel recorded net sales of ¥1,115.7 billion in the year ended March 31, 2003, down 8.2% from a year earlier. The primary cause of this decline was the March 2002 transfer of resin compound operations in the United States and the leasing and installment sales businesses of Kawasaki Lease.

Operating income increased 80.0%, to ¥78.9 billion. The company's steel operations benefited significantly from higher steel prices as well as concerted efforts to reduce costs. In the LSI and information and communications business, Kawasaki Microelectronics delivered a huge improvement in operating income. Owing to these contributions, the operating margin reached 7.1%, up 3.5 percentage points from a year earlier.

Nonoperating expenses declined ¥3.2 billion, despite an increasingly unfavorable gap in exchange rates, because of a better balance of financial expenses and higher investment gains through the equity method. Ordinary income surged 157.2%, to ¥62.7 billion, on the dramatic increase in operating income. The ratio of ordinary income to net sales thus grew 3.6 percentage points, to 5.6%.

Despite extraordinary loss expanding ¥33.5 billion, Kawasaki Steel was able to boost net income 219.4%, to ¥21.7 billion.

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NKK

With National Steel Corporation's March 2002 filing for protection under Chapter 11 of the U.S. Federal Bankruptcy Code, the once-consolidated subsidiary of NKK was excluded from the company's scope of consolidation. The components of National Steel's income statement were, however, reflected in NKK's consolidated statement of operations for the year ended March 31, 2002. This was not the case in the period under review. To accurately compare changes in the status of operations and management from year to year in the performance assessments below, we have used figures for the year ended March 31, 2002, that for the sake of convenience exclude the influence of National Steel. These figures are not audited.

Consolidated Results
NKK posted net sales of ¥1,331.6 billion in the period under review, down 1.4% from a year earlier. The decrease is largely due to the September 2002 sales of the engineering segment's shipbuilding operation to Universal Shipbuilding Corporation.

Operating income jumped 36.0%, to ¥67.2 billion, thanks to a soaring 89.8% improvement in the steel segment achieved through on-schedule cost rationalization efforts and higher sales prices, particularly on exports. This result offset a 25.5% decline in the engineering segment that came about despite determined cost-reduction efforts because worsening business conditions hit operations rather hard.

The operating margin thus edged up 1.4 percentage points, to 5.1%.

Nonoperating expenses, at ¥25.7 billion, were ¥1.7 billion less than a year ago, primarily owing to a better balance of financial expenses.

Ordinary income soared 89.5%, to ¥41.5 billion, propelled by the increase in operating income. The ratio of ordinary income to net sales was 3.1%, a 1.5 percentage point gain from 1.6% in the previous period.

The company's extraordinary loss deepened ¥2.0 billion,and contributed to a net loss of ¥5.9 billion. This was still ¥1.5 billion less than the ¥7.4 billion net loss recorded in the previous period, however.


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