NKK CORPORATION: Annual Report 2002
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Management’s Discussion and Analysis

Domestic business conditions continued to deteriorate in fiscal 2002, ended March 31, 2002. In Japan, the economic environment was impacted by sluggish capital investment activities, caused primarily by a slump in information technology (IT) -related demand. Exports dropped considerably, due to the slowing of the U.S. and Asian economies.
Consolidated Fiscal Performance

NKK’s net sales fell 7.5%, to ¥1,653.5 billion, chiefly due to reduced shipping volume caused by retreating demand for steel as well as lower average prices on steel products.

Income and Expenses
Cost of sales decreased 1.8%, to ¥1,459.0 billion. Gross profit dropped 35.3%, to ¥194.5 billion, leading to a gross profit margin of 11.8%, a decline of 5.0 percentage points over fiscal 2001, as efforts to curtail costs were overshadowed by lower volumes and prices.

Cost of Sales and Gross Profit

      Selling, general and administrative expenses were down 8.2%, to ¥202.2 billion. The reduction stems from a lighter burden of selling expenses paralleling reduced sales activity and from continued groupwide efforts to control costs.

      Poor business conditions at home and abroad caused the operating environment for NKK to deteriorate. This situation was especially true for the Steel Division and was manifested in a ¥57.1 billion operating loss for consolidated subsidiary National Steel. As a result, the Corporation recorded an operating loss of ¥7.7 billion, a major reversal from operating income of ¥80.6 billion posted in fiscal 2001.

Selling, General and Administrative Expenses
and Operating (Loss) Income

      Net other expenses surged ¥89.8 billion, to ¥92.9 billion. This huge increase is principally due to three factors: a decrease in gain on sales or disposals of fixed assets; expenses totaling ¥28.6 billion from loss related to investments in subsidiaries and affiliates, etc., including losses connected to National Steel’s filing for protection under Chapter 11 of the U.S. Federal Bankruptcy Code; and loss on writedowns of investments in securities, etc., of ¥21.9 billion.

      Consequently, NKK posted a loss before income taxes and minority interests of ¥100.6 billion, and a net loss of ¥67.6 billion.

Other (Income) Expenses, and (Loss) Income before
Income Taxes and Minority Interests
Divisional Results

Steel Division
Total sales in the Steel Division fell 8.8%, to ¥1,184.5 billion, largely due to a 5.9% decrease in shipments of steel products, to 18.6 million tons, and faltering sales prices, despite the positive influence of exchange rates on sales overseas.

      Concerted efforts to curtail costs were rewarded as the Steel Division bettered its medium-term goal a year ahead of schedule. The Corporation benefited with a profit improvement of about ¥40 billion. Despite this, the deteriorating business climate and the ¥57.1 billion operating loss incurred by National Steel precipitated a ¥32.3 billion operating loss for the Steel Division.

Engineering Division
Total sales in the Engineering Division inched up 0.4%, to ¥450.9 billion, while operating income jumped 15.2%, to ¥20.6 billion. Higher operating income for this division reflected improved groupwide profits through concerted cost-cutting measures implemented to ameliorate the effects of a challenging operating environment.

Other Fields
Total sales in Other Fields retreated 33.1%, to ¥81.6 billion, but operating income decreased only slightly, to ¥5.7 billion, owing to better earnings power. The recycling segment marked a favorable expansion in performance, but the improvement was insufficient to compensate for fewer sales of condominiums by the urban development segment, compared with the results achieved in fiscal 2001 when completion of units was concentrated, and for the exclusion of EXA CORPORATION’s results from the consolidated total. This IT subsidiary became unconsolidated in the second half of fiscal 2002 and is now accounted for under the equity method.
Financial Position

Total assets stood at ¥2,227.4 billion as of March 31, 2002, shrinking 15.3% from a year earlier. The reduction is primarily due to the absence of National Steel’s assets from the consolidated books and the reduction of inventories and receivables.

      Total current liabilities and total long-term liabilities and reserves amounted to ¥1,883.4 billion, down 13.9% year-on-year. The decrease stems from the absence of National Steel’s liabilities from the consolidated books and a reduction in indebtedness through the redemption of corporate bonds.

      NKK squeezed outstanding debt 15.9%, to ¥1,109.3 billion. This was realized by using free cash flow generated in fiscal 2002 and cash accumulated in fiscal 2001 for the redemption of corporate bonds and other purposes. The exclusion of National Steel’s liabilities from the consolidated books also limited consolidated interest-bearing liabilities.

      Total shareholders’ equity was eroded 14.8%, to ¥320.5 billion, largely because of the net loss recorded in fiscal 2002.

Shareholders’ Equity
Capital Investment and Depreciation

Striving to keep capital investment within the range of depreciation and amortization, NKK maintained a prudent approach in its selection of areas where funds would be applied in fiscal 2002. The Corporation trimmed capital investment 22.8%, to ¥69.4 billion. Depreciation and amortization was down 4.0%, to ¥107.6 billion.

Capital Investment and Depreciation
Cash Flow Analysis

Net cash provided by operating activities reached ¥130.2 billion, a decrease of 31.5%, or ¥59.9 billion, as the ¥67.6 billion net loss offset the merits of reduced inventories and receivables.

      Net cash used in investing activities amounted to ¥51.3 billion, compared with net cash provided by investing activities of ¥95.3 billion in fiscal 2001. This is attributable to reductions in proceeds from sales of fixed assets, and in proceeds from sales of investment securities.

      Free cash flow, which is the sum of net cash provided by operating activities and net cash used in investing activities, totaled ¥79.0 billion.

      Net cash used in financing activities dropped 48.7%, or ¥120.2 billion, to ¥126.4 billion, because the Corporation used free cash flow as well as cash accumulated in fiscal 2001 for the redemption of corporate bonds and other purposes to repay indebtedness.

      The balance of outstanding debt at March 31, 2002, came to ¥1,109.3 billion, owing to the repayment of the aforementioned indebtedness as well as the exclusion of National Steel’s portion from the consolidated books.

      Consequently, cash and cash equivalents at the end of the fiscal year reached ¥63.2 billion, down 41.8%, or ¥45.4 billion.

National Steel filed the petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code on March 6, 2002. National Steel’s consolidated financial results are reflected in NKK’s consolidated statement of operations and statement of cash flows through the end of fiscal 2002. Its year-end assets and liabilities are excluded from NKK’s consolidated balance sheet.

      If the income and expenses of National Steel were eliminated from NKK’s consolidated financial statements, the Corporation’s statement of operations and major financial indicators would be as follows:

Notes:  1. 
The amounts in “National Steel-related” are after eliminations.
NKK's loss related to National Steel is included in this total.
NKK's loss related to National Steel, and National Steel's tax benefits, are included in this total.

Notes:  1. 
The amounts in “National Steel-related” are after eliminations.
The amount of outstanding debt excluded from NKK’s consolidated balance sheet is ¥108.9 billion.

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