Management's Discussion and Analysis
In fiscal 2000, Japan's economy remained in a dire state. Despite signs of recovery in private-sector capital investment for information technologies and other industries, personal consumption continued to be stagnant. In contrast, the economies in Asia rebounded and the U.S. economy posted favorable growth.
It was in this severe environment that the NKK Group implemented various measures to achieve a quick recovery in earnings and create an earnings structure that allows the Group to secure profit even under the harshest economic conditions. Specific measures included the spin off of the Group's bars and shapes operations and withdrawal from unprofitable businesses. As a profit-improving measure, Group companies were reorganized so that each company focused on a specific aspect of NKK's operations and full-fledged cost reductions were applied throughout the Group.
Reflecting the stringent market conditions, NKK Group recorded consolidated net sales of ¥1,685.4 billion for the year ended March 31, 2000, a 6.8% slip from a year earlier. Cost of sales dipped 10.5%, to ¥1,408.5 billion, and represented 83.6% of net sales, versus 87.0% in fiscal 1999 and 83.6% in fiscal 1998. Gross profit advanced 18.1%, to ¥276.9 billion, with the gross profit margin at 16.4%, compared with 13.0% and 16.4% in the two previous years.
Selling, general and administrative (SG&A) expenses decreased 9.9%, to ¥215.0 billion, and amounted to 12.7% of net sales, compared with 13.2% in fiscal 1999 and 12.6% in fiscal 1998. Operating income rose to ¥61.9 billion for the period.
Net loss stood at ¥45.9 billion owing to the posting of special charges for structural changes, including retirement and severance expense, and the reorganization of our electrical device operations. Nonetheless, this was still an improvement in net loss of more than ¥60 billion over fiscal 1999.
Summary of Division Performance
Exports grew overall reflecting increased shipments to Asia, mainly the Republic of Korea. However, anti-dumping actions taken against Japan resulted in a continued decline in exports to the United States.
Steel deliveries at the Company's U.S. operations rose but selling prices were down reflecting intense competition.
As a consequence, steel volume rose but sales dropped 7.8%, to ¥1,235.9 billion, held down by flagging steel prices and the yen's appreciation against the dollar. Operating income for the Steel Division shot up ¥47.6 billion, to ¥56.7 billion, owing to Group reduction of labor costs and other fixed costs, as well as outsourcing expenses.
Engineering Division sales were ¥435.7 billion, nearly in line with fiscal 1999, as an increase in new shipbuilding orders compensated for the drop-off in large-scale orders in Energy and Environmental Industries Engineering. Moreover, successful groupwide cost reductions aided in securing profit. Operating income for the Engineering Division in fiscal 2000 was ¥11.2 billion, a major increase over the preceding term.
Total long-term liabilities and reserves rose 9.0%, to ¥1,173.2 billion. However, this rise does not take into account the removal of TOA STEEL CO., LTD., from the Company's consolidated balance sheets from fiscal 1999 (see Note 2). Total current liabilities declined 4.5%, to ¥1,147.6 billion, and represented 42.7% of total liabilities and shareholders' equity, compared with 44.6% in fiscal 1999. Reflecting the increase in the Company's indebtedness, total long-term liabilities and reserves climbed 9.0%, to ¥1,173.2 billion. The current ratio was 0.90, down from 0.95 in fiscal 1999.
Total shareholders' equity slid 13.0%, to ¥285.4 billion. The equity ratio decreased to 10.6%, from 12.2% in fiscal 1999. The debt-to-equity ratio was 5.4:1, as against 4.5:1 in fiscal 1999.
State of Readiness Regarding the Year 2000 Issue
NKK recognized the Year 2000 (Y2K) Issue as a key management concern and took decisive steps to ensure any problems could be managed throughout the Group. Owing to our attentiveness, we did not experience any system, facility or equipment malfunctions related to Y2K between the end of 1999 and the early part of 2000, the period in which problems were most likely to arise. We continue to remain fully alert and ready to handle any such problems should they arise.