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.

Sales
NKK's net sales rebounded from a drop in fiscal 2000, rising 6.0%, to ¥1,787.2 billion. Major contributing factors were strong demand for steel in the first half of the year, which buoyed shipments 8.2% from a year earlier, as well as a solid performance by the Engineering Division, which benefited from favorable demand for oil tankers and urban waste-processing facilities. The Company also posted good sales of condominium units in its urban development segment.

Income and Expenses
Cost of sales expanded 5.5%, to ¥1,486.5 billion, paralleling higher net sales. Gross profit reached ¥300.8 billion, up 8.6%, for a gross profit margin of 16.8%, a 0.4-percentage point improvement over fiscal 2000.

      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.

Steel Division
Total sales in the Steel Division climbed 5.1%, to ¥1,298.4 billion, while operating income rose 6.0%, to ¥60.1 billion. This was despite adverse developments such as operating losses at National Steel Corp. in the United States, and a deteriorating business environment that caused a rise in the price of materials and a fall in sales prices--resulting in the forfeiture of ¥37.0 billion in expected profit. Increased operating income is attributed to earnings contributions--¥40.0 billion by the parent and ¥10.0 billion by domestic Group companies--achieved primarily through expanded production, valued at ¥13.0 billion, at the Fukuyama Works, and continued cost reductions, equivalent to ¥25.0 billion.

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.

Shareholder's equity

      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.

Capital investment and depreciation

      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 ¥285.4 billion.