MANAGEMENT'S DISCUSSION AND ANALYSIS
Fiscal 2001, ended March 31, 2001, comprised a favorable first
half and a challenging second half. In the first half of the year, the domestic
economy showed signs of gradual recovery, supported by brisk capital investment,
particularly in IT-related areas, and by positive economic conditions in other
parts of Asia. In the second half of the year, however, the economic skies over
Japan clouded and even IT-related investment--the driving force of corporate spending
in the first half--tightened. Overseas, the U.S. economy began to slow down, and
Asian economies, including South Korea, entered an adjustment phase.
Income and Expenses
Cost of sales and gross profit
Selling, general and administrative expenses grew 2.4%, to ¥220.2 billion, another consequence of higher net sales, but represented only 12.3% of net sales, or 0.4 percentage point less than in fiscal 2000. This improvement was achieved by curtailing fixed costs and through other concerted groupwide efforts to control costs.
In many of its operating segments, NKK
faced extremely challenging conditions, as heightened competition eroded sales
opportunities. Nevertheless, by maximizing groupwide resources, the Company generated
a 30.1% jump in operating income, to ¥80.6 billion. The ratio of operating
income to net sales thus edged up 0.8 percentage point, to 4.5%.
Selling, general and administrative expenses and operating income
Other expenses plummeted 97.1%, to ¥3.1 billion. On the expenses side, the Company applied ¥25.1 billion to reorganization of welfare and real estate functions, ¥24.5 billion to amortization of transitional obligations caused by changes to accounting standards for retirement benefits, and ¥11.4 billion to cover a special charge arising from employees' termination benefits. On the income side, the Company derived a ¥73.6 billion gain on sales or disposals of fixed assets, such as the head office building in Tokyo and corporate housing and dormitories; a ¥25.0 billion gain on sales of investments in securities; and a ¥6.7 billion gain on the establishment of a pension trust fund following the introduction of retirement benefits accounting on April 1, 2000.
Consequently, NKK recorded ¥77.5 billion in income before income taxes and minority interests, compared with a pretax loss of ¥43.4 billion in fiscal 2000. The before tax profit rate rallied 6.9 percentage points, from -2.6% to 4.3%.
Other (income) expenses, and income (loss) before income taxes and minority interests
At ¥97.0 billion, net income moved
well into the black from a net loss of ¥45.9 billion in fiscal 2000, thanks
to higher income before income taxes and minority interests, as well as a ¥31.4
billion credit generated through deferred tax credit.
Total sales in the Engineering Division improved 3.1%, to ¥449.0 billion, while operating income surged 59.8%, to ¥17.9 billion. Although heightened competition put downward pressure on sales prices and ultimately shaved ¥12.0 billion from anticipated sales value, the Engineering Division was able to realize its vast improvement in operating income thanks to aggregate earnings of ¥19.0 billion, underscored by ¥14.0 billion in cost reductions aimed at securing groupwide profits and expanded orders worth ¥3.0 billion in both new and existing segments.
Total sales in Other Fields climbed 36.1%, to ¥121.8 billion, while operating income rebounded from a negative number in fiscal 2000 to ¥6.3 billion in fiscal 2001. The rally in operating income is underscored by contributions of ¥1.3 billion from the urban development segment on wider sales of condominium units, ¥1.0 billion from operations--fully inaugurated in fiscal 2001--to utilize waste plastics as blast furnace feed, and ¥2.0 billion following NKK's withdrawal from the electronic devices business.
Total assets stood at ¥2,631.2 billion as of March 31, 2001, a 2.1% decrease from a year earlier.
Total current assets settled at ¥945.1 billion at the end of fiscal 2001, down 8.2% from the previous fiscal year-end. The decrease was essentially due to the transfer of ¥109.8 billion in marketable securities out of the current assets category and into the investments and other assets category as part of investments in other securities, paralleling implementation of new accounting standards for financial instruments. While NKK is committed to keeping cash to a minimum, the addition of approximately ¥80 billion to cash as a reserve against corporate bond redemption in the first half of fiscal 2002 pushed the year-end total up ¥49.1 billion.
Property, plant and equipment, net, amounted to ¥1,391.7 billion, or 3.8% less than in the previous fiscal year. Total investments and other assets surged 62.2%, to ¥294.5 billion, owing to the transfer of the marketable securities balance out of the current assets category and into this account. A total of ¥30.5 billion in translation adjustments was removed from the assets category, as translation adjustments became a line item under shareholders' equity and minority interests following a revision to Japanese accounting standards for foreign currency transactions, which came into effect on April 1, 2000.
Total current liabilities settled at ¥986.2 billion, down 14.1% from a year earlier. The major components of this category were accounts payable, up 28.7%, to ¥387.5 billion, the current portion of long-term indebtedness, up 41.1%, to ¥220.0 billion, and short-term bank borrowings and commercial paper, down 68.4%, to ¥142.9 billion.
Outstanding debt, under current liabilities and fixed liabilities, shrank 14.2%, to ¥1,319.1 billion. This achievement is the result of concerted efforts to tighten the balance of interest-bearing liabilities, including short-term borrowings, with the free cash flow resources generated during fiscal 2001.
Total shareholders' equity jumped 31.9%, to ¥376.4 billion, thanks to the dramatic improvement in net income, which turned last year's deficit into retained earnings of ¥56.2 billion.
Investment and Depreciation
Capital investment declined 2.3%, to ¥89.9 billion, owing to the Company's more prudent selection of areas into which funds would be applied.
Depreciation and amortization fell 5.3%, to ¥112.1 billion.
investment and depreciation
| Cash Flow
Net cash provided by operating activities amounted to ¥190.1 billion, an increase of ¥67.7 billion compared with the previous period. The major contributors to this solid expansion in cash flow from operations included a ¥142.9 billion aggregate change in net income, a decrease of ¥51.8 billion in retirement and severance benefits paid, and reduced working capital.
Net cash provided by investing activities reached ¥95.3 billion, a turnaround from ¥173.6 billion used in investing activities in fiscal 2000. This change is due to a gain of ¥134.1 billion in proceeds from sales of property, plant and equipment and ¥64.7 billion in proceeds from sales of investment securities, compared with ¥102.2 billion in expenditures for the acquisition of TOA STEEL CO., LTD.'s business, in fiscal 2000.
Net cash used in financing activities increased more than fivefold, to ¥246.6 billion, primarily because the Company applied funds to the repayment of ¥259.8 billion in short-term borrowings.
As a result, free cash flow--net cash
provided by operating activities and net cash provided by investing activities--totaled