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FINANCIAL REVIEW
JFE Holdings, Inc. and Subsidiaries
Year Ended March 31, 2004
ANALYSIS OF FINANCIAL STATUS
AND BUSINESS RESULTS
1. ANALYSIS OF BUSINESS
RESULTS
The Japanese economy continued to enjoy a
modest recovery during the consolidated financial
year. Recovery in the world economy resulted
in strong export performance, while the domestic
economy saw higher capital investments and
a rebound in consumer spending.
In this economic environment,
the JFE Group accelerated implementation of
its First Medium-Term Business Plan, endeavoring
to maximize the effects of consolidation with
programs and efforts to solidify the earnings
base for the Group as a whole. These efforts
brought steady improvements in results.
Below is a breakdown of results
for the consolidated financial year by business
segment.
The Steel Business posted net
sales of ¥2,103.9 billion, an increase
of ¥126.4 billion (6.4%) from the previous
financial year. Operating income was ¥242.7
billion, up ¥109.7 billion (82.6%) year
on year. Many factors contributed to these
results. The steel business did suffer from
rising raw materials prices, an increase in
depreciation costs due to a change in depreciation
methods, and the impact of stronger foreign
exchange rates. However, these were more than
offset by substantial improvements in sales
prices for its steel, including the effect
of an increased percentage of high value-added
products, productivity gains brought by the
reorganization and closure of facilities following
the merger in an effort to establish an optimized
production structure, significant cost reductions
due to technology integrations, and improvements
due to the reorganization and measures implemented
to strengthen the base of earnings of group
companies.
The Engineering Business posted
net sales of ¥339.4 billion, a decrease
of ¥117.8 billion (25.8%) from the previous
financial year. Operating income was ¥3.1
billion, down ¥9.7 billion (75.6%) year
on year. The company reduced fixed costs and
other expenditures, reviewed the viability
of low-profit businesses, and began exploring
new business areas, but was hurt by deteriorating
business climates, including declines in public
works projects in environmental and other
areas. The results were also affected by the
transfer of business rights to Universal Shipbuilding
Corp. in September 2002 as part of an effort
to reorganize the shipbuilding sector.
The Urban Development Business
posted net sales of ¥26.2 billion, a decrease
of ¥4.6 billion (15.0%) from the previous
financial year. However, operating income
was ¥1.4 billion, up ¥400 million
(36.9%) year on year. The division made steady
progress on the development of large tracts
of group-owned land, expanding its condominium
construction and sales, primarily in the Greater
Tokyo area. While net sales declined due to
the liquidation of a subsidiary, the division
was able to boost sales of high-profit properties,
enabling it to increase operating income.
The LSI Business posted net sales
of ¥40.4 billion, an increase of ¥6.3
billion (18.6%) from the previous financial
year. Operating income was ¥4.9 billion,
up ¥3.7 billion (296.5%) year on year.
Sales were strong to the digital camera and
liquid crystal display markets, and the division
was able to reduce costs as well.
The result for the JFE Group as
a whole was consolidated net sales of ¥2,473.7
billion, an increase of ¥46.8 billion
(1.9%) from the previous financial year. Operating
income was ¥253.6 billion, up a substantial
¥106.7 billion (72.7%) year on year.
The non-operating income/loss
improved ¥7.0 billion (16.5%) to a loss
of ¥35.2 billion due to reductions in
borrowings, bonds and other debt, which combined
with lower interest rates to reduce interest
expense burdens. Also at work in the improvement
was more effective hedging of foreign exchange
rates.
As a result, consolidated ordinary
income was ¥218.3 billion, up a substantial
¥113.7 billion (108.6%) from the previous
financial year.
The extraordinary loss was ¥31.9
billion, an improvement of ¥46.5 billion
(59.3%) from the previous financial year,
due primarily to declines in valuation losses
on the investment securities portfolio, which
had increased in the previous financial year
because of falling share prices. The result
was net income of ¥106.8 billion, up a
substantial ¥90.9 billion (570.0%) from
the previous financial year.
2. ANALYSIS OF CAPITAL
FUNDING AND LIQUIDITY
Turning to cash flow for the financial year,
net cash used in investing activities totaled
¥135.0 billion, an ¥8.1 billion increase
in expenditures from the previous financial
year, in which the Company saw income from
the transfer of business rights to Universal
Shipbuilding Corp. By contrast, cash flow
from operating activities posted income of
¥357.0 billion, an increase of ¥116.3
billion from the previous financial year,
primarily due to higher income before income
taxes and minority interests. Total consolidated
free cash flow for the financial year posted
income of ¥222.0 billion, an increase
of ¥108.1 billion from the previous financial
year. This free cash flow and a portion of
cash and deposits on-hand were used to strengthen
the Company's financial base by repaying borrowings
and redeeming interest-bearing bonds, and
also to fund payments of dividends. As a result,
cash flow from financing activities posted
¥229.2 billion in expenditures, an increase
of ¥45.5 billion in expenditures from
the previous financial year. While free cash
flow increased ¥108.1 billion from the
previous financial year, cash and cash equivalents
declined ¥11.1 billion, which was a ¥67.1
billion smaller decline than in the previous
financial year.
As a result, outstanding debt
at the end of the financial year decreased
year on year by ¥219.70 billion to ¥1,837.4
billion.
BUSINESS RISKS
Below is a discussion of
matters related to the business and financial
circumstances of the JFE Group that could
potentially have a significant impact on investment
decisions.
- 1. GROUP OPERATIONS
- 1) Economic conditions and sales market
environments
- The Group's domestic steel sales take
a wide variety of forms and target a wide
range of industries, including construction,
civil engineering, automobiles, industrial
machinery, and electrical equipment. In addition
to domestic sales, approximately 40% of sales
(JFE Steel Corp.) go to export markets. Main
export markets include China, South Korea
and the ASEAN countries. Therefore, in addition
to domestic demand for steel products, which
will be influenced by domestic economic conditions,
the Group's sales volumes and prices will
also be influenced by global steel demand,
which is in turn influenced by economic conditions
in China, the United States, Asia and other
parts of the world.
The Group is subject to competition
from other companies in all of the product
sectors and regional markets it serves.
- 2) Supply and demand for raw materials
used in steelmaking
- The Group relies primarily on imports
to procure the raw materials required for
steelmaking, including iron ore, coking coal,
ferroalloys and non-ferrous metals. Therefore,
global supply and demand conditions for these
materials will impact results.
- 3) Other factors that could potentially
impact earnings include:
- • New products; research and
development
• Impact of capital investments
• Cost reductions
• Stability of operations for manufacturing
equipment and systems
• Supplies of products to major
customers (including quality of products)
• Disasters and other unforeseeable
impediments to the Group
2. FOREIGN EXCHANGE RATE
FLUCTUATIONS
The Group is influenced by fluctuations in
the foreign exchange rate. Fluctuations in
the foreign exchange rate impact foreign currency-denominated
product exports and raw materials imports.
While these impacts generally offset each
other, the portion that is not offset could
potentially impact the results of the Group.
JFE Steel Corp.'s foreign currency transactions
are generally denominated in US dollars. The
dollar balance for the current financial year
was ¥1.9 billion in net exports. The Company
uses foreign exchange forwards and similar
transactions to hedge foreign exchange rates.
3. INTEREST RATE FLUCTUATIONS
The Group is influenced by interest rate fluctuations,
and this could potentially influence results.
The Company uses interest rate swaps and similar
transactions to hedge the interest on some
of its debt.
4. PUBLIC REGULATION
The Group is subject to import restrictions
and other government regulations in the countries
in which it does business. It is also subject
to trade, patent, tax and other laws and regulations.
5. LIABILITIES FOR RETIREMENT
AND SEVERANCE BENEFITS
The Group's expenses and liabilities for employee
retirement and severance benefits are calculated
from actuarial assumptions concerning discount
rates and other factors and from the expected
rate of return on investments of pension assets.
When actual results differ from assumptions,
the impact may accumulate and be regularly
recognized in the future. It is therefore
possible that this could impact on expenses
ordinarily recognized and liabilities ordinarily
posted in future periods.
6. Fluctuations in the
value of stock holdings
The Group holds stocks and other securities.
Fluctuations in the value of these holdings
may influence the Group's results and financial
condition. Note that at the end of the current
financial year, stocks etc. with market values
held by the Group had an acquisition cost
of ¥118.9 billion and were valued on the
consolidated balance sheet at ¥187.9 billion.
7. DECLINES IN FIXED
ASSET PRICES
The Group holds fixed assets. Declines
in the market prices or profitability of these
assets could result in declines in asset values
that may influence the Group's results and
financial condition.
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