FINANCIAL  SECTION [ Back | Section top | Next ]

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.