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Annual Report 2003

Profile

Showa Corporation manufactures and markets high-precision components for motor vehicles including shock absorbers, steering

systems and drive train products for automobiles, and motorcycles, as well as components for outboard marine engines. The

Company is one of the leading manufacturers of shock absorbers for automobiles and motorcycles in the world today.

Established in 1938, the Company began motor vehicle parts production in 1946. In 1970, the Company became affiliated with

Honda Motor Co., Ltd., a world leader in automobile and motorcycle manufacturing. When merged with Seiki Giken Kogyo Co.,

Ltd., a power steering products manufacturer, the Company was renamed Showa Corporation in 1993. In 1964, Showa’s shares

were listed on the Second Section of the Tokyo Stock Exchange (TSE). In 1985, the Company’s shares were upgraded to the First

Section of the TSE.

Headquartered in Gyoda City, Saitama Prefecture, Japan, Showa operates five manufacturing plants, three research and

development facilities and two affiliated manufacturers within Japan. The Company’s global business operation, a network of 30

manufacturing facilities that includes 10 consolidated subsidiaries, spreads over 15 nations including Japan.

Showa Corporation’s business activities revolve around customer satisfaction, as emphasized by the Company principle

“To meet customer needs with the highest quality and the most competitive product.” Furthermore, at Showa, we strive to maintain

our forward-looking stance and continue to encourage technological, operational and administrative innovation.

Environmental preservation for the benefit of future generations is a great concern and a continuing theme at Showa Corporation.

We actively support a range of environmental preservation initiatives through our product offerings and corporate activities.

Showa Corporation and its global affiliates in 15 nations embrace the Company’s business philosophy described above. The

Company and its affiliates strive to expand their business, providing additional benefits to our customers and shareholders as well

as to the communities and societies where we operate.

Contents

Forward-looking statements: Forward-looking statements made in this annual report concerning performance or business

strategies have been determined according to assumptions and beliefs based on information

available at the time and contain elements of risk and uncertainty.

1 Financial and Operating Highlights

2 Message from the President

4 Showa’s Global Network and Mutually Complementary Parts

6 Review of Operations

8 Showa’s Technology

10 Topics

11 Financial Section

30 Corporate Information

31 Board of Directors and Corporate Auditors

31 Corporate Data

1

SHOWA CORPORATION and Consolidated Subsidiaries

Financial and Operating Highlights

Financial HighlightsThousands of

Millions of yen U.S. dollars(except where noted) (except where noted)

2002 2003 2003

Net sales ¥ 177,373 ¥ 196,655 $ 1,636,064Operating income 12,012 14,934 124,242Income before income taxes and minority interests 11,546 15,059 125,282Net income 6,788 8,018 66,705Cash dividends paid during the period 705 737 6,131

Total assets 105,259 112,443 935,465Shareholders’ equity 53,914 59,283 493,202Depreciation 6,867 6,598 54,891Capital expenditures 6,341 5,784 48,119

Per share amounts: Yen U.S. dollars

Net income (basic) ¥ 94.49 ¥ 106.86 $ 0.88Net income (diluted) 89.38 104.84 0.87Cash dividends 10.00 11.00 0.09Shareholders’ equity 741.62 792.55 6.59

Operating HighlightsThousands of

Millions of yen U.S. dollars

2002 2003 2003

Motor vehicle parts ¥ 172,348 ¥ 191,655 $ 1,594,467Other products 5,025 4,999 41,589

Total ¥ 177,373 ¥ 196,655 $ 1,636,064

Thousands ofMillions of yen U.S. dollars

2002 2003 2003Japan ¥ 93,730 ¥ 94,659 $ 787,512North America 63,212 75,100 624,792Others 20,430 26,895 223,752

Total ¥ 177,373 ¥ 196,655 $ 1,636,064

Years ended 31st March,2002 and 2003

• Throughout this report, U.S. dollar amounts have been translated from Japanese yen solely for the convenience of

the reader at the rate of ¥120.20=U.S.$1, the exchange rate prevailing at 31st March, 2003.

• The breakdown by geographic area is based on the degree of proximity to the geographic region.

• Major countries or regions that fall under a category other than “Japan” are following:

North America: United States, Canada

Others : Europe, South America, Southeast Asia, China

NET SALES BY GEOGRAPHICAL AREA

NET SALES BY BUSINESS SEGMENT

Per share amounts: Yen U.S. dollars

2

Message from the President

Business Overview

Review of Fiscal 2003 >>

During the fiscal year ended 31st March, 2003, Japan’s economy

remained sluggish. In the automobile industry, the main purchaser

of Showa Corporation’s products, the domestic market for automo-

biles was nearly unchanged from the prior year, but total production

increased as a result of growth in exports. In the motorcycle indus-

try, sales rose in the domestic market following the introduction of

low-priced models, but total production declined because of a drop

in exports.

Faced with these circumstances, we focused on improving our

cost-competitiveness and earnings capability. In addition to aggres-

sively developing sales activities aimed at obtaining new orders, we

promoted productivity improvement activity to eliminate production

site waste or loss and improve production and investment efficiency

at our domestic and overseas bases.

As a result, consolidated net sales rose 10.9% compared with

the previous fiscal year, to ¥196,655 million (US$1,636 million), and

consolidated operating income advanced by 24.3% from the previ-

ous term to ¥14,934 million (US$124 million).

Outlook for Fiscal 2004 >>

Turning to the future outlook, we anticipate that severe business

conditions will continue unchanged for the immediate future.

Although the economies of Asian countries are projected to grow,

the U.S. economy faces an uncertain future, and Japan’s economy

does not appear poised for a strong recovery. In the automobile

industry, the domestic passenger-car market will shift further

toward small cars. We anticipate competition to intensify further,

and demands from vehicle manufacturers for cost reductions to

also mount. Given these circumstances, the environment surround-

ing management, such as increasingly severe worldwide competi-

tion to secure orders, creates an unpredictable situation.

Based upon these conditions, we will strive to respond to cus-

tomer needs accurately and promptly by enhancing product com-

petitiveness and seek to boost product quality, increase production

efficiency and lower costs through improvement measures focused

on production sites and production starting points. Furthermore, we

will strengthen our management base and improve operating

results by ensuring close and systematic cooperation with our facili-

ties around the world.

Strengthening Competitiveness

Domestic Operations >>

In order to strengthen our production structure and further facilitate

in-house production of parts, we have implemented following

reorganization measures at our manufacturing bases in Japan:

• Consolidated aluminum casting facilities from the Gotemba

Plant to the Asaba Plant and created a concentrated

production organization.

Medium-Term GoalRapidly enhance product competitiveness, to build a sound foundation for a leading global company

Strategic OrientationEstablish a leading position in cost-competitiveness

Achieve and maintain the highest quality ranking

Gather the resources necessary for an integrated system manufacturer of chassis

Promote overseas business by reinforcing the organization and expanding operations

Behavioral GuidelineBolster synergetic strength, powered by open and wide-ranging communications

Target the maximum efficiency of all assets (human, physical and financial)

Utilize speed and action to attain global standards

3

• Transferred production facilities for steering system parts

from Showa Seiko Co., Ltd. to the Gotemba Plant and

expanded our integrated production system.

• Relocated the head office and plant of Showa Seiko Co.,

Ltd. to the Hadano Plant and enhanced the integrated pro-

duction system for products such as automatic transmission

components.

• Implemented in-house production of plastic molding at the

Nagoya Plant.

• Began in-house assembly of motors for electric steering sys-

tems at the Gotemba Plant.

Global Operations >>

We have implemented the following measures to promote

organizational improvements and business expansion at our

overseas facilities:

• To strengthen the financial position of Showa Europe, S.A.,

our subsidiary in Spain, we injected additional capital in

October 2002.

• To strengthen and promote the automotive components

business at our base in China, we increased registered

capital of Guangzhou Showa Shock Absorber Co., Ltd. in

January 2003.

We changed the name of Guangzhou Showa Shock

Absorber Co., Ltd. to Guangzhou Showa Autoparts Co., Ltd.

• In March 2003, we increased our share of capital in Nissin

Showa UK Ltd., a joint venture with Nissin Kogyo Co., Ltd.,

to strengthen its financial position. This move converted

Nissin Showa UK into a subsidiary with consolidated financial

reporting responsibilities.

• Guangzhou Showa Autoparts Co., Ltd. and Summit Showa

Manufacturing Co., Ltd., our subsidiaries in China and

Thailand, began production of steering systems. Following

our worldwide success in the shock absorber business, we

will strive to develop a global production and supply system

for our steering system business.

• In April 2003, we launched production of gas springs for

automobiles at Shanghai Showa Autoparts Co., Ltd., which

we established in January 2002 as our third base in China.

As these steps demonstrate, Showa Group will contin-

uously strive to facilitate development and expansion of our

business overseas.

As part of the Showa Group’s aim to boost its corporate value,

we see enhancement of corporate governance as one of the

most important management issues, with the goal of ensuring

that Showa maintains the confidence of every shareholder and

customer as well as society.

We look forward to continuously receiving the unwavering

support and guidance from our shareholders in the future.

Masahide MatsushimaPresident

Showa’s Global Network and Mutually Complementary Parts

4

6

Review of Operations

Fiscal 2003 Results

In the motor vehicle parts segment, net sales of motorcycle com-

ponents totaled ¥57,520 million (US$478 million), up 12.5% from

the previous term. Net sales of automotive components increased

10.6% compared to the previous term to ¥134,140 million

(US$1,115 million). Net sales of other, primarily outboard engine

components, declined slightly to ¥5,000 million (US$41 million),

0.4% lower than that of the previous term.

Looking at net sales by area of unit sales, net sales in Japan for

the term were nearly unchanged from the previous term at

¥82,240 million (US$684 million).

In Asia, net sales in Indonesia, Thailand, India and China

expanded sharply, mainly for motorcycle parts, increasing

69.9% for the term to ¥20,180 million (US$167 million).

In Europe, net sales of motorcycle components decreased

as the market for small motorcycles and scooters shrank,

while net sales of automotive components declined because

of efforts to promote local procurement. Overall, net sales fell

17.3% from the level of the previous term to ¥11,410 million

(US$94 million).

Net sales of both motorcycle and automotive components

were healthy in North America, rising by 19.1% from the previ-

ous term to ¥76,430 million (US$635 million). Sales were sup-

ported by strong demand by our major customers in both the

United States and Canada.

Sales also expanded in South America, where sales

expanded for both motorcycle and automotive components

because of good performance at customers in Brazil. Net

sales advanced by 21.2% from the previous term to ¥6,400

million (US$53 million).

Motorcycle Components

Net sales of shock absorbers, which account for the majority of

motorcycle components sales, grew by 12.9% to ¥55,630 mil-

lion (US$462 million). Drive unit products edged upward 3.3% to

¥1,890 million (US$15 million), bringing net sales for the product

segment to ¥57,520 million (US$478 million), 12.5% higher than

in the previous term.

Domestically, sales of motorcycle components to major cus-

tomers fell by ¥1,080 million (US$8 million), but this was offset by

higher sales to other companies. As a result, net sales within Japan

as a whole were ¥21,900 million (US$182 million), 0.2% below the

level of the previous term.

In Asia, sales in Indonesia’s active market surged by ¥3,500

million (US$29 million), while sales in Thailand also rose by ¥2,870

million (US$23 million). Overall, net sales in Asia rose sharply by

57.4% to a total of ¥14,060 million (US$116 million).

In Europe, net sales declined by 12.1% because the market

for small motorcycles and scooters continued to shrink.

Because of the currency translation effect from depreciation of

the yen, however, net sales were off only 1.6% from the previ-

ous term to ¥7,260 million (US$60 million).

Sales in North America increased primarily from sales to

major customers and were also influenced by the yen’s weak-

ness. Overall, net sales grew 13.8%, to ¥9,010 million (US$74

million).

Sales in South America rose based on solid demand from

our major customers. On a local currency basis, sales rose

sharply by 33.6%. Because of the decline in the real, however,

the currency translation effect held net sales to ¥5,290 million

(US$44 million), up 7.0% compared to the previous term.

By product By area of unit sales

600

500

400

300

200

100

0

600

500

400

300

200

100

0

2,000

1,500

1,000

500

0

2,000

1,500

1,000

500

0


Fiscal 2003 Results Motorcycle Components

2002 20032002 20032002 20032002 2003

OTHER

Automotivecomponents

Motorcyclecomponents

Drive unitproducts

Shockabsorbers

50.2

1,212.3

511.2

50.0

1,341.4

575.2

52.8

641.5

137.9

118.8

822.7

64.0

764.3

114.1

201.8

822.4

18.3

492.9

18.9

556.3

49.4

79.2

73.8

89.3

219.5

52.9

90.1

72.6

140.6

219.0Mot

or v

ehic

le c

ompo

nent

s

1,773.7

1,966.6

1,773.7

1,966.6

511.2

575.2

511.2

575.2

(Billions of yen) (Billions of yen)

7

Notes: 1. Showa Corporation presents its Review of Operations based on informa-

tion available to the Company at the time it prepares and publishes each

review. Readers are cautioned to remember when referring to this report

that data are approximate estimates.

2. On local currency basis, net sales at Nissin Showa UK Ltd. jumped 59.0%

compared to the previous term. Because the Company applies equity

method accounting, Nissin Showa’s net sales are not included in Showa’s

consolidated statements of income results for the fiscal year under review,

reflecting the effect from Nissin Showa UK Ltd.’s shift to local procurement.

Automotive Components

As for automotive components sales, net sales increased 10.6%

from the previous term to ¥134,140 million (US$1,115 million).

By product, net sales of shock absorbers were off 0.1% to

¥48,050 million (US$399 million), while net sales of steering sys-

tems increased 5.3% to ¥45,830 million (US$381 million). In

addition, sales of axles charged ahead by 40.2% from the previ-

ous term to ¥18,020 million (US$149 million). Other compo-

nents, the majority of which are suspension modules sold in

Canada, turned in healthy growth and rose 32.8% to ¥22,240

million (US$185 million).

Among steering systems, sales of electric steering systems

were ¥8,300 million (US$69 million) compared to ¥7,700 million

(US$64 million) in the previous term.

In Japan, although Showa’s major customers enjoyed

favorable conditions, demand was strong for products des-

tined for popular models not supported by Showa, which

resulted in net sales falling 1.1% to ¥56,680 million (US$471

million).

In Asia, net sales took giant strides and reached ¥5,800 million

(US$48 million), a jump of 107.1%, mainly because of growth in

Thailand, Indonesia and China.

Showa’s major customers in Europe enjoyed robust sales, but

the Company’s sales of both shock absorbers and steering sys-

tems declined because of the shift to local parts procurement.

Sales of axles, on the other hand, were higher than that of the pre-

vious term. Overall, net sales dropped 35.0% from the previous

term to ¥4,000 million (US$33 million).

Net sales in North America rose 21.7%, to a total of ¥66,550

million (US$553 million), lifted by solid sales at the Company’s

major customers. Sales of shock absorbers increased ¥1,370 mil-

lion (US$11 million), sales of steering systems rose ¥3,210 million

(US$26 million), and sales of suspension modules in Canada grew

by ¥5,780 million (US$48 million). Sales of propeller shafts also

added to the strong results.

Other

Net sales in Showa’s other products segment, which are mainly

outboard engine components, weakened slightly by 0.4% to a

total of ¥5,000 million (US$41 million). Although marine product

components sales rose 8.4% to ¥3,990 million (US$33 million),

sales of the Company’s other products in this segment declined

from the previous term.

1,500

1,200

900

600

300

0

1,500

1,200

900

600

300

0


Automotive Components

60

50

40

30

20

10

0

60

50

40

30

20

10

0

Other


2002 2003 2002 2003 2002 2003 2002 2003

South America

North America

Europe

Asia

Japan

OTHER

Shockabsorbers

Steering systems

OTHER167.5

222.4

128.5

435.3

481.0

180.2

458.3

480.5

3.0

546.8

61.528.0

573.0

11.0

665.5

40.058.0

566.8

13.4

36.8

10.1

39.9

0.3

15.5

2.71.6

30.1

0.08.7

1.53.3

36.5

77.0 83.0

Axles

Boats

1,212.3

1,341.4

1,212.3

1,341.4

50.2 50.0 50.2 50.0

EPS

(Billions of yen) (Billions of yen)

Showa’s Technology

8

2. Steering Systems

Among the components that comprise an automobile, great importance is

placed on steering system performance and reliability. In addition to accu-

rately transmitting the driver’s steering operations to the automobile, the

steering system is the man/machine interface delivering information on run-

ning conditions from the automobile to the driver. “Steering systems” refers

to the components added to assist steering efforts and provide drivers with

comfortable maneuverability. Steering systems are classified into hydraulic

power steering system (HPS), which uses the engine’s power as a drive

source, and electric power steering system (EPS), utilizing the vehicle’s bat-

tery. Showa has a full line of power steering models. In addition to 20 years

of HPS manufacturing experience, Showa also began early efforts to develop

electric power steering system as calls for energy conservation increased.

3. Propeller Shafts

The propeller shaft’s function is to transmit

the driving force generated by the engine to

the wheel axis; it is long and cylindrical, and

rotates at high speed, so this product

requires vibration and noise prevention

along with high durability. Showa supplies

various technologies which structural analy-

sis enables component part reduction and

lighter weight, and introduction of friction

welding procedures to achieve high preci-

sion dynamic balance and ultra-strong part

connections.

5. Differential Gears

The role of a differential mecha-

nism is to absorb the difference

in rotation between the right and

left wheels that occurs when an

automobile is cornering. These

products demand durability,

transmission efficiency, and

quiet operation. Showa’s differ-

ential gears achieve weight

reduction while exhibiting high-

performance, from sub-

compact cars to SUVs.

Automotive ComponentsAutomobiles

Pump

EPS

HPS

1. Shock Absorbers

Shock absorbers are a critical product that

determines an automobile’s character, not

only by improving ride quality but also by

functioning to control the attitude and stabili-

ty of the automobile body. Because of their

superior performance and quality, Showa

brand shock absorbers have earned the

satisfaction of customers around the world.

Showa has many years of experience with

strut modules, and is also working on sus-

pension modules combined with peripheral

components.

1. Shock Absorbers

Showa motorcycle shock absorbers are

used extensively in various motorcycle races

around the world. From racing machines to

scooters, we put our technology and experi-

ence to excellent use to meet a wide variety

of performance needs.

Front forks >>

The front fork is a key structural component

of a motorcycle, holding the front wheel and

providing the steering function. This vital part

demands excellent ability to closely follow

road contours through smooth operation

and steady damping force, while retaining

high rigidity.

4. Gas Springs

Gas springs assists the opening

and closing of automobile engine

compartment hoods and rear

gates, using gas reaction force.

They are also equipped with

speed-adjustment devices that

enable operators to open and

close the hood and trunk at opti-

mal speed. To answer diverse

needs, Showa is developing the

product variations.

Motorcycle ComponentsMotorcycles

Rear cushion >>

The rear cushion is attached to the rear

fork directly or through a link. By control-

ling the attitude and energy absorption of

the motorcycle body, the rear cushion

improves the ability of the rear wheel to

follow road contours.

2. Drive Unit Products

For motorcycle and ATV drive unit products,

Showa has achieved lighter weights through

analysis of functions, shapes, and materials,

while maintaining excellent durability, trans-

mission efficiency, and quiet operation.

Power Trim and Tilt Units

Power trim and tilt units can actively

change the outboard engine angle, and

provide the following three functions. The

trim function provides good screw efficien-

cy and steady cruising by adjusting the

angle of the outboard engine while running.

The tilt function enables owners to prevent

outboard engine damage from shellfish

adhesions, by raising the outboard engine

above the water’s surface when moored.

When driftwood or other objects strike the

outboard engine while under way, shocks

are absorbed, helping to prevent damage

to the outboard engine and boat.

9

Power Trim and Tilt Units for Outboard Engines

Outboard Engine Components

1. Development of Productivity Improvement Activities

The Showa Group is promoting productivity improvement activities

(PIA) as one of the strategies for invigorating the Company. We

have already implemented actions to eliminate production site

waste or loss and improve production and investment efficiency at

our domestic and overseas bases. We’re also working to increase

our cost-competitiveness and earning power. Details of our PIA

campaign are summarized below.

Showa has been addressing these activities in cooperation

with our suppliers since 2002.

Reduce investment >>

• Reduce investment for increasing capacity

• Modify the current production line to create more flexibility in

applications for new models production

• Utilize surplus capacity

• Achieve compact production lines

Improve productivity >>

• Create and apply reserve capacity

• Synchronize production lines

Nurture human resources >>

• Cultivate on-site capabilities

• Improve expertise

2. Motor Production Moved In-House

In March 2003, we started assembly of motors for electric steer-

ing systems at our Gotemba Plant. Our objectives for producing

these motors in-house are to strengthen technical and analytical

capabilities through internal development, improve cost analysis

skills through dispersed purchasing and establish an integrated

production line for electric steering systems. These actions will

improve profitability by bolstering our development capabilities

and analytical skills.

3. Steering Systems Production Begun in China and Thailand

In January 2003, Guangzhou Showa Autoparts Co., Ltd. in China

started production of steering systems, followed in February by

the start of steering systems production at Summit Showa

Manufacturing Co., Ltd. in Thailand. Guangzhou Showa is plan-

ning annual production of 70,000 units in 2003, while Summit

Showa will schedule production of 25,000 units annually.

Showa is establishing a global production and supply net-

work for steering systems in addition to shock absorbers and

propeller shafts.

4. Operations Begun at Shanghai Showa Auto Parts Co., Ltd.

In April 2003, Shanghai Showa Auto Parts Co., Ltd. launched

production of gas springs for automobiles, as our third production

base in China. Production will reach 270,000 units per month by

the end of 2003. The company will export the majority of these

products to Japan at the initial stage and broaden shipments to

other plants worldwide in the future. In addition to gas springs,

Shanghai Showa will also begin producing shock absorbers for

automobiles in the near future.

Showa is extending its production and procurement activities

through its global network and drastically improving cost-competi-

tiveness on a global scale.

5. IRL (Indy Racing League) Dampers

Beginning from the 2003 season, Showa decided to participate

in the Indy-Car Series instead of supplying high-performance

dampers to Team Green, which Showa had supported since the

CART 2001 season. By challenging ourselves through the Indy-

Car Series with its grueling battle fought on an oval track at high

speeds, we supply extremely reliable dampers developed based

on the experience and technology we’ve accumulated in various

formula races, including Formula One.

10

Topics

Shanghai ShowaAuto Parts Co., Ltd.Gas spring

Damper

Guangzhou ShowaAutoparts Co., Ltd.

Summit ShowaManufacturing Co., Ltd.

Rack-assist EPS

11

Financial Section

12 Consolidated Financial Review

(Unaudited and Not Reviewed)

16 Consolidated Balance Sheets

18 Consolidated Statements of Income

19 Consolidated Statements of Shareholders’ Equity

20 Consolidated Statements of Cash Flows

21 Notes to Consolidated Financial Statements

29 Report of Independent Certified Public Accountants

on the Consolidated Financial Statements

Consolidated Financial Review

12

Net SalesShowa’s consolidated net sales for fiscal 2003, ended 31stMarch, 2003, totaled ¥196,655 million (US$1,636 million),up 10.9% from the previous fiscal year.

Operating IncomeOperating income for the Group rose by 24.3% during thecurrent fiscal year to ¥14,934 million (US$124 million), alsoreflecting the increase in sales to major customers.

Selling, General and Administrative (SG&A) ExpensesDuring the current fiscal year under review, SG&A expensesfor the Group rose 6.7%, to ¥17,979 million (US$149 mil-lion). This represented 9.1% of net sales. Research anddevelopment expenses included in SG&A expenses totaled¥5,707 million (US$47 million).

R&D ActivitiesIn order to meet social needs as quickly and as accuratelyas possible, as a manufacturer of high-precision compo-nents for transport vehicles, the Showa Group is strengthen-ing the competitiveness of its products through cutting-edgetechnologies in electronics and miniaturization.

We conduct most of the Group’s R&D at our R&DDivision, focusing chiefly on automotive components. For the fiscal year under review, total R&D expenses were¥7,033 million (US$58 million).

The status of R&D activities for each business segmentduring the fiscal year under review is discussed below.

Motor Vehicle Parts >>In motor vehicle parts, we are aggressively pursuing salesactivities aimed at domestic and overseas customers. Inaddition to promoting cost reductions to increase the com-petitiveness of our existing product groups, beginning withspecification revisions, these efforts include steps such aspresenting specifications that quickly and accurately capturecustomers’ needs. The Company is also engaged in R&Daimed at achieving next-generation products built on thebase of Showa’s existing technology.

R&D expenses related to this business were ¥6,826 mil-lion (US$56 million).

Other >>R&D expenditures in this segment amounted to ¥207 million(US$1,722 thousand).

R&D Expenses by Business SegmentMillions of yen

2002 2003

Motor vehicle parts ¥6,653 ¥6,826

Other 208 207

Total ¥6,861 ¥7,033

Income before Income Taxes and Minority InterestsIncome before taxes and minority interests was ¥15,059million (US$125 million), 30.4% higher than that of theprior fiscal year.

Overview

Net SalesNet Income/ Net Income per Common Share

Total Assets/Shareholders’ Equity/Shareholders’ Equity per Common Share

13

Equity in Earnings of AffiliatesThe Group’s equity in earnings of affiliates accounted forunder the equity method fell 3.2% compared to the prior fiscal year, to ¥335 million (US$2,787 thousand).

Net IncomeFor the fiscal year under review, net income increased18.1%, to ¥8,018 million (US$66 million). This included areversal of prior-year accrued corporate and other taxes of¥1,362 million (US$11 million).

Cash FlowsOn a consolidated basis, the balance of cash and cashequivalents at the end of the fiscal year under review (referredto below as “cash”) was ¥19,497 million (US$162 million).The Company used cash for the acquisition of tangible fixedassets and repayment of long-term debt. Net cash providedby operating activities increased because of higher incomebefore income taxes and minority interests and a decrease intrade receivables. The Company increased cash by ¥9,304million (US$77 million), up 91.3% compared with the prior fiscal year. Cash balance of a newly consolidated subsidiarycontributed the increase in cash.

Cash flows and the major factors affecting cash flows forthe fiscal year under review are described below.

Net Cash Provided by Operating ActivitiesNet cash provided by operating activities was ¥19,359 million(US$161 million), an increase of ¥7,650 million (US$63 mil-lion) (65.3%) compared to the prior fiscal year. This wasmainly because the Group’s income before income taxesand minority interests increased to ¥15,059 million (US$125million) as a result of strong sales, cost reduction measuresand a decrease in trade receivables.

Net Cash Used in Investing ActivitiesNet cash used in investing activities was ¥6,980 million(US$58 million). This was an increase of ¥415 million (US$3million) (6.3%) compared to the prior fiscal year. This mainlyreflected an increase in expenditures for purchases of tangi-ble fixed assets.

Net Cash Used in Financing ActivitiesNet cash used in financing activities increased by ¥1,008 mil-lion (US$8 million) (37.3%) compared to the prior fiscal yearto ¥3,710 million (US$30 million). The main use of funds wasfor repayment of long-term borrowings. The Company wasable to limit new borrowings because of the higher level ofnet cash provided by operating activities.

R&D Expenses

Capital Expenditures/Depreciation Return on Equity

14

Capital ExpendituresInvestments made by the Showa Group totaled ¥5,784 mil-lion (US$48 million), mainly for automotive component manufacturing facilities.

At Showa Corporation, the major investment for automo-tive components was for production equipment related to the transfer of propeller shaft production for automobiles.American Showa, Inc. made investments in casting equipment for in-house production of steering systems components for automobiles, and P.T. Showa IndonesiaManufacturing invested in expansion of production facilitiesfor motorcycle shock absorbers. In total, the Group completed ¥5,705 million (US$47 million) of capital invest-ment in automotive component production facilities.

The Group provided the necessary capital for invest-ments from cash on hand and borrowings.

During the fiscal year under review, the Showa Group didnot complete any sales or disposals of capital equipment thatwill influence production capacity.

Capital Expenditures by Business SegmentMillions of yen

2002 2003


Other 182 66

Total ¥6,335 ¥5,771

Eliminations or corporate (6) (12)

Consolidated ¥6,341 ¥5,784

Business SegmentMotor Vehicle Parts >>Exports of domestically produced automotive parts decreasedbecause of the shift to local parts procurement at our sub-sidiary in the U.K. Although revenues from shock absorbersand steering systems sales declined in the domestic market,overall revenues increased because of growth in axles, mainlynew orders for propeller shafts, and higher sales of steeringsystems. Exports increased for motorcycle components, ourleading products. Sales of motorcycle components declined inthe domestic market, however.

In North America, sales in the automotive component mar-ket increased because of higher sales of steering systems andshock absorbers at our U.S. subsidiary as a result of strongsales to major customers. Sales of motorcycle componentsdeclined, however. At our Canadian subsidiary, net sales rosebecause of expanded sales of suspension modules and pro-peller shafts.

In other regions, net sales of automobiles and motorcycleshock absorbers rose at our Indonesia and Thailand sub-sidiaries because of greater demand. At our subsidiary in Brazil, net sales of motorcycle shock absorbers increased.Sales were also boosted because the subsidiary newly consol-idated a separate automotive components manufacturing andsales company. Because the market for scooters in Europecontinued to shrink, our subsidiary in Spain experienced adecline in sales of shock absorbers for small motorcycles.

As a result, net sales increased 11.2% from the previousfiscal year to ¥191,655 million (US$1,594 million). Operatingincome reached ¥14,033 million (US$116 million), a 25.0%increase from the previous fiscal year, because of the effects ofincreased sales and cost reduction measures at our subsidiaries in North America and Asia.

Other >>Although net sales of marine products increased due to strongmarket demand in North America, other business experienceda decline in net sales.

As a result, net sales related to the segment reached¥4,999 million (US$41 million), a decline of 0.5% from theprior fiscal period. Operating income rose 14.7% to ¥900million (US$7 million).

Segment Information

15

Net Sales and Operating Income by Business Segment

Millions of yen2002 2003

Net Operating Net Operatingsales income sales income

Motor vehicle parts ¥172,348 ¥11,227 ¥191,655 ¥14,033

Other 5,025 785 4,999 900

Total ¥177,373 ¥12,012 ¥196,655 ¥14,934

[Reference] Non-Consolidated Net Sales by Business Segment


Automotive components ¥ 72,497 ¥ 74,472

Motorcycle components 34,920 34,705


Other components 6,501 5,955

Total ¥113,919 ¥115,132

Geographical SegmentJapan >>Domestically, automotive components experienced adecline in shock absorber and hydraulic power steeringsystems sales. Overall, however, net sales rose becauseof growth in axles, mainly new orders for propeller shafts,and expanded sales of electric steering systems.Motorcycle component operations enjoyed higher exports,but sales declined in the domestic market for shockabsorbers, our main product. Because of strong marketdemand in North America, net sales of outboard enginecomponents increased. Net sales in other business, however, declined.

As a result, net sales in Japan increased 1.6% com-pared to the prior fiscal year to ¥114,374 million (US$951million). Operating income fell 12.8% to ¥6,662 million(US$55 million).

North America >>In North America, net sales of steering systems and shockabsorbers increased as a result of strong sales to major cus-tomers of our U.S. subsidiary. At our subsidiary in Canada, netsales rose because of higher sales of suspension modules andpropeller shafts. Sales of motorcycle shock absorbers declinedat our U.S. subsidiary, but sales of marine products increased.

As a result, net sales in North America reached ¥75,238million (US$625 million), an 18.6% increase from the prior fiscalyear. Operating income rose sharply by 55.2% to ¥5,414 mil-lion (US$45 million).

Others >>In other regions, net sales of automotive and motorcycle shockabsorbers increased at our subsidiaries in Indonesia andThailand. At our subsidiary in Brazil, net sales of motorcyclecomponents increased. Sales were also boosted at our opera-tion in Brazil because this subsidiary newly consolidated a sep-arate automotive components manufacturing and sales com-pany. Because of the continued sluggish market for scootersin Europe, our subsidiary in Spain experienced a decline in netsales.

As a result, net sales in other regions increased 31.2%compared to the prior fiscal year to ¥27,274 million (US$226million). Operating income jumped 114.7% compared to theprior fiscal year, to ¥3,773 million (US$31 million).

Net Sales and Operating Income by Geographical Segment


Net Operating Net Operatingsales income sales income

Japan ¥112,612 ¥ 7,637 ¥114,374 ¥6,662

North America 63,428 3,488 75,238 5,414

Others 20,786 1,757 27,274 3,773

Total 196,827 12,883 216,888 15,851

Eliminations or corporate (19,453) (870) (20,232) (916)

Consolidated ¥177,373 ¥12,012 ¥196,655 ¥14,934

ah7007-00_SHOWA 様アニュアルレポート_01.doc 2003/09/17 9:15

16

Millions of yen

Thousands of U.S. dollars (Note 3)

ASSETS 2002 2003 2003

Current assets:

Cash on hand and in banks (Note 8) ............................................................... ¥ 10,193 ¥ 18,894 $ 157,188

Notes and accounts receivable:

Trade............................................................................................................. 17,995 19,918 165,707

Unconsolidated subsidiaries and affiliates .................................................... 13,795 8,996 74,841

Allowance for doubtful receivables ............................................................... (46) (71) (590)

Inventories (Note 4) .......................................................................................... 13,230 16,780 139,600

Deferred tax assets (Note 7)............................................................................. 2,261 2,054 17,088

Other ................................................................................................................ 687 1,204 10,016

Total current assets ............................................................................................. 58,117 67,779 563,885

Investments and long-term advances:

Investments in unconsolidated subsidiaries and affiliates................................ 9,462 6,920 57,570

Other investments in securities (Note 5) .......................................................... 1,308 889 7,396

Deferred tax assets (Note 7)............................................................................. 15 14 116

Long-term prepaid expenses ........................................................................... 54 160 1,331

Excess of cost over net assets acquired .......................................................... 36 – –

Other ................................................................................................................ 1,158 912 7,587

Total investments and long-term advances.........................................................

12,034 8,895 74,001

Property, plant and equipment, at cost:

Land (Note 6) ................................................................................................... 4,145 4,419 36,763

Buildings and structures................................................................................... 22,091 22,953 190,956

Machinery, vehicles and equipment................................................................. 89,108 91,409 760,474

Construction in progress.................................................................................. 1,166 1,304 10,848

116,511 120,087 999,059

Accumulated depreciation................................................................................ (81,483) (84,633) (704,101)

Property, plant and equipment, net ..................................................................... 35,027 35,454 294,958

Other assets ........................................................................................................

80

314

2,612

Total assets ......................................................................................................... ¥ 105,259 ¥ 112,443 $ 935,465


Consolidated Balance Sheets 31st March, 2002 and 2003


17

Millions of yen


LIABILITIES AND SHAREHOLDERS’ EQUITY 2002 2003 2003

Current liabilities:

Short-term borrowings (Note 6)........................................................................ ¥ 3,283 ¥ 3,322 $ 27,637

Current portion of long-term debt (Note 6) ....................................................... 1,048 3,475 28,910

Notes and accounts payable:

Trade ............................................................................................................. 23,568 26,042 216,655

Construction .................................................................................................. 710 270 2,246

Unconsolidated subsidiaries and affiliates .................................................... 1,103 460 3,826

Other ............................................................................................................. 1,554 1,404 11,680

Accrued income taxes (Note 7) ........................................................................ 2,770 3,699 30,773

Other................................................................................................................. 4,464 4,653 38,710

Total current liabilities .......................................................................................... 38,503 43,328 360,465

Long-term liabilities:

Long-term debt (Note 6) ................................................................................... 5,340 594 4,941

Accrued retirement benefits (Note 10).............................................................. 1,719 2,801 23,302

Deferred tax liabilities (Note 7).......................................................................... 469 567 4,717

Other................................................................................................................. 1,922 425 3,535

Total long-term liabilities ...................................................................................... 9,451 4,388 36,505

Minority interests ...............................................................................................

3,390

5,442

45,274

Shareholders’ equity:

Common stock, no par value:

Authorised: 180,000,000 shares

Issued:

31st March, 2002 – 72,703,032 shares....................................................... 11,680 – –

31st March, 2003 – 74,778,192 shares....................................................... – 12,317 102,470

Capital surplus.................................................................................................. 12,547 13,179 109,642

Retained earnings............................................................................................. 27,660 34,973 290,956

Net unrealised holding gain on securities ........................................................ 3,378 2,472 20,565

Translation adjustments ................................................................................... (1,346) (3,616) (30,083)

Less treasury stock, at cost .............................................................................. (3) (43) (357)

Total shareholders’ equity.................................................................................... 53,914 59,283 493,202

Total liabilities and shareholders’ equity.............................................................. ¥105,259 ¥112,443 $935,465

See accompanying notes to consolidated financial statements.


18

Millions of yen


2002 2003 2003

Net sales (Note 12) .............................................................................................. ¥177,373 ¥196,655 $1,636,064

Cost of sales ........................................................................................................ 148,517 163,741 1,362,237

Gross profit .......................................................................................................... 28,856 32,913 273,818

Selling, general and administrative expenses......................................................

16,843

17,979

149,575

Operating income ................................................................................................ 12,012 14,934 124,242

Other income (expenses):

Interest and dividend income ........................................................................... 284 180 1,497

Interest expense ............................................................................................... (517) (327) (2,720)

Exchange loss .................................................................................................. (103) (216) (1,797)

Gain on sale of other investments in securities (Note 5) .................................. – 298 2,479

(Loss) gain on sale and disposal of property, plant and equipment ................ (105) 42 349

Equity in earnings of affiliates ........................................................................... 346 335 2,787

Other, net.......................................................................................................... (369) (187) (1,555)

(465) 125 1,039

Income before income taxes and minority interests ............................................ 11,546 15,059 125,282

Income taxes (Note 7):

Current.............................................................................................................. 4,878 5,686 47,304

Reversal of accrued income taxes.................................................................... – (1,362) (11,331)

Deferred............................................................................................................ (828) 984 8,186

4,050 5,308 44,159

Minority interests.................................................................................................. (707) (1,731) (14,400)

Net income (Note 11)........................................................................................... ¥ 6,788 ¥ 8,018 $ 66,705


Consolidated Statements of Income Year ended 31st March, 2002 and 2003



19

Millions of yen


2002 2003 2003

Common stock

Beginning of year................................................................................................. ¥ 10,341 ¥ 11,680 $ 97,171

Add:

Conversion of convertible bonds...................................................................... 1,339 637 5,299

End of year .......................................................................................................... ¥ 11,680 ¥ 12,317 $ 102,470

Capital surplus


Add:

Conversion of convertible bonds...................................................................... 1,330 632 5,257

End of year .......................................................................................................... ¥ 12,547 ¥ 13,179 $ 109,642

Retained earnings


Add:

Net income ....................................................................................................... 6,788 8,018 66,705

Adjustments for inclusion in consolidation ....................................................... – 80 665

Deduct:

Cash dividends paid......................................................................................... 705 737 6,131

Bonuses to directors and statutory auditors..................................................... 48 48 399

Adjustments for inclusion in the equity method................................................ 18 – –

End of year .......................................................................................................... ¥ 27,660 ¥ 34,973 $ 290,956

Net unrealised holding gain on securities


Net change during the year ................................................................................. 210 (905) (7,529)

End of year .......................................................................................................... ¥ 3,378 ¥ 2,472 $ 20,565

Translation adjustments

Beginning of year................................................................................................. ¥ (3,649) ¥ (1,346) $ (11,198)

Net change during the year ................................................................................. 2,302 (2,269) (18,876)

End of year .......................................................................................................... ¥ (1,346) ¥ (3,616) $ (30,083)

Treasury stock, at cost

Beginning of year................................................................................................. ¥ – ¥ (3) $ (24)

Net change during the year (3) (39) (324)

End of year .......................................................................................................... ¥ (3) ¥ (43) $ (357)


Consolidated Statements of Shareholders’ Equity Year ended 31st March, 2002 and 2003



20

Millions of yen


2002 2003 2003

Cash flows from operating activities Income before income taxes and minority interests ............................................ ¥ 11,546 ¥ 15,059 $ 125,282 Depreciation and amortisation............................................................................. 6,867 6,598 54,891 Amortisation of excess of cost over net assets acquired..................................... 36 54 449 (Decrease) increase in allowance for doubtful receivable ................................... (261) 32 266 Increase in accrued retirement benefits............................................................... 673 1,081 8,993 Exchange loss (gain), net .................................................................................... 263 (68) (565) Equity in earnings of affiliates .............................................................................. (346) (335) (2,787) Loss (gain) on sale and disposal of property, plant and equipment ................... 105 (42) (349) Gain on sale of other investments in securities ................................................... – (298) (2,479) (Increase) decrease in trade receivables............................................................. (1,384) 3,304 27,487 Increase in inventories......................................................................................... (550) (1,988) (16,539) Decrease in trade payables ................................................................................. (2,309) (1,276) (10,615) Other, net............................................................................................................. (2,929) (2,761) (22,970) Net cash provided by operating activities............................................................ 11,709 19,359 161,056 Cash flows from investing activities

Purchases of property, plant and equipment ...................................................... (6,463) (7,780) (64,725) Proceeds from sale of property, plant and equipment ........................................ 107 644 5,357 Purchases of other investments in securities....................................................... (141) (250) (2,079) Proceeds from sale of other investments in securities ........................................ – 320 2,662 Decrease in loans receivable............................................................................... 25 – – Other, net............................................................................................................. (93) 85 707 Net cash used in investing activities .................................................................... (6,565) (6,980) (58,069) Cash flows from financing activities

Decrease in short-term borrowings ..................................................................... (878) (1,514) (12,595) Decrease in long-term debt ................................................................................. (1,029) (1,089) (9,059) Cash dividends.................................................................................................... (705) (737) (6,131) Cash dividends to minority shareholders ............................................................ (84) (312) (2,595) Other, net............................................................................................................. (3) (56) (465) Net cash used in financing activities.................................................................... (2,702) (3,710) (30,865) Effect of exchange rate changes on cash and cash equivalents......................... 92 (463) (3,851) Net increase in cash and cash equivalents ......................................................... 2,534 8,204 68,252 Cash and cash equivalents at beginning of year................................................. 7,658 10,193 84,800 Increase due to inclusion in consolidation .......................................................... – 1,099 9,143 Cash and cash equivalents at end of year (Note 8)............................................. ¥ 10,193 ¥ 19,497 $ 162,204

Supplemental disclosures of cash flow information

Cash paid for: Interest.............................................................................................................. ¥ 526 ¥ 368 $ 3,061

Income taxes .................................................................................................... 3,795 3,866 32,163


Consolidated Statements of Cash Flows Year ended 31st March, 2002 and 2003



21

1. Basis of Preparation SHOWA CORPORATION (the “Company”) and its domestic subsidiaries maintain their accounting records in accordance with accounting principles and practices generally accepted and applied in Japan, and foreign subsidiaries of the Company maintain their books of account in conformity with those of their countries of domicile. The accompanying consolidated financial statements have been compiled from the consolidated financial statements prepared by the Company as required under the Securities and Exchange Law of Japan and, therefore, have been prepared in conformity with accounting principles and practices generally accepted and applied in Japan, which may differ in certain material respects from accounting principles and practices generally accepted in countries and jurisdictions other than Japan.

In addition, the notes to the consolidated financial statements include information which is not required under accounting principles generally accepted in Japan but is presented herein as additional information.

As permitted by the Securities and Exchange Law of Japan, amounts of less than one million yen have been omitted. Consequently, the totals shown in the accompanying consolidated financial statements (both in yen and U.S. dollars) do not necessarily agree with the sums of the individual amounts.

Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year’s presentation. 2. Summary of Significant Accounting Policies (a) Basis of Consolidation and Accounting for Investments in

Unconsolidated Subsidiaries and Affiliates The accompanying consolidated financial statements include the accounts of the Company and companies controlled directly or indirectly by the Company. Companies over which the Company exercises significant influence in terms of their operating and financial policies have been included in the consolidated financial statements on an equity basis. All significant intercompany balances and transactions have been eliminated in consolidation.

Investments in subsidiaries and affiliates which are not consolidated or accounted for by the equity method are carried at cost or less. Where there has been a permanent decline in the value of such investments, the Company has written down the investments.

The excess of cost over underlying net assets at fair value at the date of acquisition is amortised over a period of five years on a straight-line basis except that when the excess is immaterial, it is fully charged to income in the year of acquisition. (b) Foreign Currency Translation The revenue and expense accounts of the foreign consolidated subsidiaries are translated into yen at the average rate of exchange in effect during the year. Except for shareholders’ equity, the balance sheet accounts are translated at the rate of exchange in effect at the balance sheet date. The components of shareholders’ equity are translated at their historical exchange rates. Translation adjustments are presented as a component of shareholders’ equity and minority interests in consolidated

subsidiaries. (c) Investments in Securities Securities other than those of subsidiaries and affiliates are classified into three categories; trading, held-to-maturity or other securities. Trading securities are carried at fair value and held-to-maturity securities are carried at amortised cost. Marketable securities classified as other securities are carried at fair value with changes in unrealised holding gain or loss, net of the applicable income taxes, directly included in shareholders’ equity. Non-marketable securities classified as other securities are carried at cost. Cost of securities sold is determined by the moving average method. (d) Inventories Inventories of the Company and its consolidated subsidiaries are principally stated at cost determined by the average method. (e) Property, Plant and Equipment and Depreciation Property, plant and equipment is stated at cost. Depreciation of property, plant and equipment of the Company and its consolidated subsidiaries is computed principally by the declining-balance method. (f) Research and Development Costs Research and development costs are charged to income as incurred.

Included in manufacturing costs and general and administrative expenses was ¥6,861 million and ¥7,033 million ($58,510 thousand) of research and development costs for the years ended 31st March, 2002 and 2003, respectively. (g) Leases Non-cancelable leases of the Company and its domestic consolidated subsidiaries are accounted for as operating leases (whether such leases are classified as operating or finance leases) except for lease agreements stipulating the transfer of ownership of the leased assets to the lessee which are accounted for as finance leases. However, leases of the foreign consolidated subsidiaries are generally classified and accounted for as either finance leases or operating leases. (h) Retirement Benefits Accrued retirement benefits for employees of the Company and its domestic consolidated subsidiaries are provided principally at an amount calculated based on the retirement benefit obligation and the fair value of the pension plan assets as of the balance sheet date, as adjusted for the unrecognised net retirement benefit obligation at transition, unrecognised actuarial gain or loss and unrecognised prior service cost. The retirement benefit obligation has been attributed to each period by the straight-line method over the estimated years of service of the eligible employees.

Net retirement benefit obligation at transition is being amortised principally over 15 years. Prior service cost is being amortised as incurred by the straight-line method over 15 years which are shorter than the average remaining years of service of the employees. Actuarial gain or loss is being amortised in the year following the year in which the gain or loss is recognised by the declining-balance method over 15 years which are shorter than the average remaining years of service of the employees.


Notes to Consolidated Financial Statements


22

In addition, directors and statutory auditors of the Company and of certain consolidated subsidiaries are customarily entitled to lump-sum payments under their respective unfunded retirement allowances plans. The provisions for retirement allowances for these officers have been made at an estimated amount. (i) Derivative Financial Instruments The Company and certain consolidated subsidiaries utilise forward foreign exchange contracts and interest rate and currency swap agreements in order solely to hedge against risks of adverse fluctuations in foreign currency exchange rates and interest rates. The Company and consolidated subsidiaries do not enter into such financial instruments for trading or speculative purposes.

Derivatives are carried at fair value, with any changes in unrealised gain or loss charged or credited to operations, except for those which meet the criteria for deferral hedge accounting under which unrealised gain or loss is deferred as an asset or a liability. (j) Income Taxes Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities, and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse. (k) Appropriation of Retained Earnings Under the Commercial Code of Japan, the appropriation of retained earnings with respect to a given financial year is made by resolution of the shareholders at a general meeting to be held subsequent to the close of such financial year. The amounts for that year do not, therefore, reflect such appropriations. (l) Treasury Stock and Reduction of Legal Reserves Effective 1st April, 2002 the Company adopted a new accounting standard for treasury stock and reduction of legal reserves. The effect of the adoption of this new accounting standard on operating results was immaterial for the year ended 31st March, 2003. 3. U.S. Dollar Amounts The translation of yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan and has been made, as a matter of arithmetic computation only, at the rate of ¥120.20 = U.S.$1.00, the exchange rate prevailing at 31st March, 2003. The translation should not be construed as a representation that yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at the above or any other rate.

4. Inventories Inventories consist of the following:

Millions of yen Thousands of U.S. dollars

31st March, 2002 2003 2003

Finished goods................. ¥ 2,302 ¥ 3,019 $ 25,116 Work in process................ 2,097 2,378 19,783 Raw materials and supplies........................... 8,830 11,382 94,692

¥13,230 ¥16,780 $139,600

5. Securities Information regarding marketable securities classified as other securities as of 31st March, 2002 and 2003 and held-to-maturity securities as of 31st March, 2003 are as follows: Marketable securities classified as other securities

Millions of yen

31st March, 2002 Acquisition cost Carrying value Unrealised gain (loss)

Securities whose carrying value exceeds their acquisition cost: Stocks ........................... ¥1,010 ¥6,931 ¥5,921 Debt securities .............. – – –

Other ............................. – – –

Subtotal ............................ 1,010 6,931 5,921

Securities whose acquisition cost exceeds their carrying value: Stocks .......................... 281 281 – Debt securities.............. – – –

Other ............................ – – –

Subtotal ........................... 281 281 –

Total................................. ¥1,291 ¥7,212 ¥5,921

Held-to-maturity securities

Millions of yen

31st March, 2003 Carrying value Fair value Unrealised gain (loss)

Securities whose fair value exceeds their carrying value:

Government and municipal bonds ........ ¥ – ¥ – ¥ –

Corporate bonds........... – – – Other ............................. 602 602 –

Total ................................. ¥602 ¥602 ¥ –


23

Held-to-maturity securities

Thousands of U.S. dollars

31st March, 2003 Carrying value Fair value Unrealised gain (loss)

Securities whose fair value exceeds their carrying value: Government and

municipal bonds......... $ – $ – $ – Corporate bonds ........... – – –

Other ............................. 5,008 5,008 –

Total.................................. $5,008 $5,008 $ –

Marketable securities classified as other securities

Millions of yen


Securities whose carrying value exceeds their acquisition cost: Stocks ........................... ¥ 935 ¥ 5,191 ¥ 4,256 Debt securities............... – – –

Other ............................. – – –

Subtotal ............................ 935 5,191 4,256

Securities whose acquisition cost exceeds their carrying value: Stocks ........................... 231 226 (5) Debt securities............... – – –

Other ............................. – – –

Subtotal ............................ 231 226 (5)

Total.................................. ¥1,167 ¥5,418 ¥4,251

Marketable securities classified as other securities

Thousands of U.S. dollars


Securities whose carrying value exceeds their acquisition cost: Stocks ........................... $7,778 $43,186 $35,407 Debt securities............... – – –

Other ............................. – – –

Subtotal ............................ 7,778 43,186 35,407

Securities whose acquisition cost exceeds their carrying value: Stocks ........................... 1,921 1,880 (41) Debt securities............... – – –

Other ............................. – – –

Subtotal ............................ 1,921 1,880 (41)

Total.................................. $9,708 $45,074 $35,366

Sales of other securities amounted to ¥318 million ($2,645 thousand) with an aggregate gain of ¥298 million ($2,479 thousand) and no loss for the year ended 31st March, 2003. 6. Short-Term Borrowings and Long-Term Debt Short-term borrowings are unsecured with average interest rates of 3.99 per cent. for 2002 and 3.98 per cent. for 2003.

Long-term debt consists of the following:


31st March, 2002 2003 2003

Bonds without collateral: 0.5 per cent. convertible

bonds due 2004 ........ ¥ 2,030 ¥ 760 $ 6,322 Secured loans from local government..................... 243 163 1,356

Unsecured loans from banks.............................. 4,114 3,146 26,173

6,388 4,069 33,851

Current portion ................. (1,048) (3,475) (28,910)

¥ 5,340 ¥ 594 $ 4,941

The 0.5 per cent. convertible bonds, unless previously

redeemed, are convertible at any time up to and including 24th March, 2004, into shares of common stock of the Company at the option of the holders at a conversion price of ¥612, per share, at 31st March, 2002 and 2003.

At 31st March, 2003, if all the outstanding convertible bonds had been converted at the then current conversion price, 1,241 thousand new shares would have been issued. Under the provisions of the issue, the conversion price is subject to adjustment in certain cases which include stock splits.

The annual maturities of long-term debt subsequent to 31st March, 2003 are summarised as follows:

Year ending 31st March, Millions of yen Thousands of U.S. dollars

2004........................................................... ¥3,475 $28,910 2005........................................................... 437 3,635

2006........................................................... 156 1,297

¥4,069 $33,851

The Company’s assets pledged as collateral for long-term

debt as of 31st March, 2002 and 2003 are as follows:

Millions of yen Thousands of U.S dollars.

31st March, 2002 2003 2003

Land ............................... ¥542 ¥542 $4,509


24

7. Income Taxes Income taxes applicable to the Company and its domestic consolidated subsidiaries comprised corporation tax, inhabitants’ taxes and enterprise tax which, in the aggregate, resulted in a statutory tax rate of 41.6 per cent. for both 2002 and 2003. Income taxes of the foreign consolidated subsidiaries are based generally on the tax rates applicable in their countries of incorporation.

New legislation was enacted in March 2003 which will change the statutory tax rate from 41.6 per cent. to 40.0 per cent. effective for fiscal years beginning after 1st April, 2004.

The effect of this tax rate change was to decrease long-term deferred tax liabilities, net of long-term deferred tax assets, by ¥8 million ($66 thousand), to increase income taxes – deferred for the year ended 31st March, 2003 by ¥57 million ($474 thousand) and to increase net unrealised holding gain on securities as of 31st March, 2003 by ¥65 million ($540 thousand).

The effective tax rates reflected in the consolidated statements of income for the years ended 31st March, 2002 and 2003 differ from the statutory tax rate for the following reasons: 2002 2003

Statutory tax rate.................................. 41.6% 41.6% Effect of:

Different tax rates applied to foreign subsidiaries ..................................... (5.3) (5.0)

Expenses not deductible for income tax purposes ................................... 0.6 0.4

Stock dividends ................................ – 2.5 Reversal of accrued income taxes.... – (9.0) Foreign tax credits ............................ (1.8) (2.2) Tax rate change................................ – 0.4

Other, net.......................................... – 6.6

Effective tax rates................................. 35.1% 35.3%

The significant components of deferred tax assets and

liabilities as of 31st March, 2002 and 2003 are as follows:


31st March, 2002 2003 2003

Deferred tax assets:.......... Accrued bonuses .......... ¥ 704 ¥ 879 $ 7,312 Accrued enterprise tax .. 239 241 2,004 Deferred tax assets

recognised by foreign subsidiaries ................ 874 408 3,394

Accrued retirement benefits....................... 755 1,191 9,908

Write-off of investments in unconsolidated subsidiaries and affiliates ...................... 255 – –

Unrealised profit ............ 495 488 4,059 Net operating loss

carryforwards ............. 623 741 6,164

Other ............................. 1,545 687 5,715

Total gross deferred tax assets ............................ 5,494 4,638 38,585

Valuation allowance.......... (623) (776) (6,455)

Total deferred tax assets .. 4,871 3,862 32,129 Deferred tax liabilities:

Deferred tax liabilities recognised by foreign subsidiaries ................ (593) (707) (5,881)

Net unrealised holding gain on securities ....... (2,406) (1,648) (13,710)

Other ............................. (64) (5) (41)

Total deferred tax liabilities......................... (3,064) (2,362) (19,650)

Net deferred tax assets..... ¥ 1,806 ¥ 1,499 $ 12,470

8. Supplementary Cash Flow Information a)Cash Equivalents in the Consolidated Statements of Cash Flows The Company and consolidated subsidiaries consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. b)Cash and Cash Equivalents Cash on hand and in banks reported in the consolidated balance sheets and cash and cash equivalents reported in the consolidated statements of cash flows are reconciled as follows:


25


31st March, 2002 2003 2003

Cash on hand and in banks reported in the consolidated balance sheets ........................... ¥10,193 ¥18,894 $157,188

Commercial paper ........... – 602 5,008

Cash and cash equivalents reported in the consolidated statements of cash flows ............................. ¥10,193 ¥19,497 $162,204

9. Leases The following pro forma amounts represent the acquisition costs, accumulated depreciation and net book value of leased assets, which would have been reflected in the consolidated balance sheets if finance lease accounting had been applied to the finance leases currently accounted for as operating leases:


31st March, 2002 2003 2003

Acquisition costs: Equipment .................... ¥3,023 ¥2,331 $19,392

Other assets ................. 319 329 2,737

¥3,343 ¥2,661 $22,138

Accumulated depreciation: Equipment .................... ¥2,378 ¥1,790 $14,891

Other assets ................. 237 242 2,013

¥2,616 ¥2,033 $16,913

Net book value: Equipment .................... ¥ 644 ¥ 541 $ 4,500

Other assets ................. 82 87 723

¥ 727 ¥ 628 $ 5,224

Lease payments relating to finance leases accounted for as

operating leases amounted to ¥382 million and ¥353 million ($2,936 thousand) for the years ended 31st March, 2002 and 2003, respectively, which were equal to the depreciation expense of the leased assets computed by the straight-line method over the respective lease terms.

Future minimum lease payments subsequent to 31st March, 2003 for finance leases accounted for as operating leases are summarised as follows:

Year ending 31st March, Millions of yen Thousands of U.S. dollars

2004............................................................ ¥272 $2,262 2005 and thereafter................................. 355 2,953

¥628 $5,224

10.Retirement Benefit Plans The Company has defined benefit pension plans, i.e., a welfare pension fund plan, a tax-qualified pension plan and a lump-sum payment plan, covering substantially all employees who are entitled to lump-sum or annuity payments, the amounts of which are determined by reference to their basic rates of pay, length of service, and the conditions under which termination occurs. Each of domestic consolidated subsidiaries has its own tax-qualified pension plan as a defined benefit pension plan. Certain foreign consolidated subsidiaries have defined contribution plans in addition to their defined benefit plans.

The following table sets forth the funded and accrued status of the plans, and the amounts recognised in the consolidated balance sheets as of 31st March, 2002 and 2003 for the Company’s and its consolidated subsidiaries’ defined benefit plans:


31st March, 2002 2003 2003

Retirement benefit obligation ........................ ¥(28,407) ¥(33,961) $(282,537)

Plan assets at fair value .... 14,880 14,141 117,645

Unfunded retirement benefit obligation........... (13,526) (19,820) (164,891)

Unrecognised net retirement benefit obligation at transition ... 7,170 6,618 55,058

Unrecognised actuarial loss................................ 5,605 10,991 91,439

Unrecognised prior service cost (credit) ....... (818) (591) (4,916)

Net retirement benefit obligation....................... (1,569) (2,801) (23,302)

Prepaid pension expenses ....................... 150 – –

Accrued retirement benefits.......................... ¥ (1,719) ¥ (2,801) $(23,302)

The government-sponsored portion of the benefits under the

welfare pension fund plans has been included in the amounts shown in the above table.

Due to amendments to the welfare pension fund plan, the Company has an increase in the retirement benefit obligation for the year ended 31st March, 2003.

The components of retirement benefit expenses for the years ended 31st March, 2002 and 2003 are outlined as follows:


26


Year ended 31st March, 2002 2003 2003

Service cost ..................... ¥1,526 ¥1,757 $14,617 Interest cost ..................... 713 708 5,890 Expected return on plan

assets ........................... (569) (593) (4,933) Amortisation of net

retirement benefit obligation at transition .. 551 551 4,584

Amortisation of actuarial loss ............................... 258 796 6,622

Amortisation of prior service cost................... (59) (47) (391)

Total................................. ¥2,421 ¥3,173 $26,397

The assumptions used in accounting for the above plans are

as follows: 2002 2003

Discount rates........................... Primarily 2.5% Primarily 2.0% Rates of expected return on plan assets .............................. Primarily 4.0% Primarily 4.0%

11. Amounts Per Share Yen U.S. dollars

Year ended 31st March, 2002 2003 2003

Net income: Basic ................................ ¥94.49 ¥106.86 $0.88 Diluted.............................. 89.38 104.84 0.87

Cash dividends ................ 10.00 11.00 0.09 Yen U.S. dollars

31st March, 2002 2003 2003

Net assets ........................ ¥741.62 ¥792.55 $6.59 Until the year ended 31st March, 2002, basic net income per share was computed based on the net income reported in the consolidated statements of income and the weighted average number of shares of common stock outstanding during each year, and diluted net income per share was computed based on the net income reported and the weighted average number of shares of common stock outstanding during each year after giving effect to the dilutive potential of shares of common stock to be issued upon the conversion of convertible bonds. Amounts per share of net assets were computed based on the net assets reported in the consolidated balance sheets and the number of shares of common stock outstanding at each balance sheet date.

In accordance with a new accounting standard for earnings per share which became effective 1st April, 2002, basic net income per share was computed based on the net income available for distribution to shareholders of common stock and the weighted

average number of shares of common stock outstanding during the year, and diluted net income per share was computed based on the net income available for distribution to the shareholders and the weighted average number of shares of common stock outstanding during each year after giving effect to the dilutive potential of shares of common stock to be issued upon the conversion of convertible bonds for the year ended 31st March, 2003. Amounts per share of net assets at 31st March, 2003 was computed based on net assets available for distribution to the shareholders and the number of shares of common stock outstanding at the year end. If the previous method of computation had been followed for the year ended 31st March, 2003, basic net income per share, dilutive net income per share and amounts per share of net assets would have been ¥107.58 ($0.89), ¥105.55 ($0.87) and ¥793.27 ($6.59), respectively.

Cash dividends per share represent the cash dividends proposed by the Board of Directors as applicable to the respective years together with the interim cash dividends paid. 12. Related Party Transactions The Company is a 34.2 per cent. – owned affiliate of Honda Motor Co., Ltd. (Honda). Consolidated net sales included those to Honda in the amounts of ¥59,780 million and ¥58,775 million ($488,976 thousand) for the years ended 31st March, 2002 and 2003, respectively.

The terms of transactions referred to above were negotiated and have been determined on an arm’s-length basis. 13. Segment Information The Company and consolidated subsidiaries are primarily engaged in the manufacture and sale of products in Japan and overseas, in one major segment: the motor vehicle parts segment.

The business and geographical segment information for the Company and consolidated subsidiaries for the years ended 31st March, 2002 and 2003 is outlined as follows:


27

Business segments Year ended 31st March, 2002 Millions of yen

Motor vehicle parts Other Total Eliminations or

corporate Consolidated

I. Sales and operating income Sales to third parties .................................................. ¥ 172,348 ¥ 5,025 ¥ 177,373 ¥ – ¥ 177,373 Intergroup sales and transfers ................................... – – – – – Total sales.................................................................. 172,348 5,025 177,373 – 177,373 Operating expenses................................................... 161,121 4,240 165,361 – 165,361

Operating income ...................................................... ¥ 11,227 ¥ 785 ¥ 12,012 ¥ – ¥ 12,012

II. Assets, depreciation and capital expenditures Total assets................................................................ ¥ 82,926 ¥ 3,467 ¥ 86,394 ¥ 18,865 ¥ 105,259 Depreciation............................................................... 6,552 301 6,854 12 6,867 Capital expenditures .................................................. 6,152 182 6,335 6 6,341

Year ended 31st March, 2003 Millions of yen

Motor vehicle parts Other Total Eliminations or

corporate Consolidated

I. Sales and operating income Sales to third parties .................................................. ¥ 191,655 ¥ 4,999 ¥ 196,655 ¥ – ¥ 196,655 Intergroup sales and transfers ................................... – – – – – Total sales.................................................................. 191,655 4,999 196,655 – 196,655 Operating expenses................................................... 177,621 4,099 181,721 – 181,721

Operating income ...................................................... ¥ 14,033 ¥ 900 ¥ 14,934 ¥ – ¥ 14,934

II. Assets, depreciation and capital expenditures Total assets ................................................................ ¥ 86,695 ¥ 2,724 ¥ 89,420 ¥ 23,023 ¥ 112,443 Depreciation............................................................... 6,465 119 6,584 13 6,598 Capital expenditures .................................................. 5,705 66 5,771 12 5,784

Year ended 31st March, 2003 Thousands of U.S. dollars

Motor vehicle parts Other Total Eliminations or corporate Consolidated

I. Sales and operating income Sales to third parties .................................................. $ 1,594,467 $ 41,589 $ 1,636,064 $ – $ 1,636,064 Intergroup sales and transfers ................................... – – – – – Total sales.................................................................. 1,594,467 41,589 1,636,064 – 1,636,064 Operating expenses................................................... 1,477,712 34,101 1,511,821 – 1,511,821

Operating income ...................................................... $ 116,747 $ 7,487 $ 124,242 $ – $ 124,242

II. Assets, depreciation and capital expenditures Total assets................................................................ $ 721,256 $ 22,662 $ 743,926 $ 191,539 $ 935,465 Depreciation............................................................... 53,785 990 54,775 108 54,891 Capital expenditures .................................................. 47,462 549 48,011 99 48,119


28

Geographical areas Year ended 31st March, 2002 Millions of yen

Japan North America Others Total Eliminations or corporate Consolidated

Sales to third parties ............................................... ¥ 93,730 ¥ 63,212 ¥ 20,430 ¥ 177,373 ¥ – ¥ 177,373 Intergroup sales and transfers ................................ 18,881 216 355 19,453 (19,453) – Total sales............................................................... 112,612 63,428 20,786 196,827 (19,453) 177,373 Operating expenses................................................ 104,974 59,940 19,029 183,943 (18,582) 165,361

Operating income ................................................... ¥ 7,637 ¥ 3,488 ¥ 1,757 ¥ 12,883 ¥ (870) ¥ 12,012

Total assets............................................................. ¥ 53,511 ¥ 26,706 ¥ 12,290 ¥ 92,508 ¥ 12,751 ¥ 105,259

Year ended 31st March, 2003 Millions of yen


Sales to third parties ............................................... ¥ 94,659 ¥ 75,100 ¥ 26,895 ¥ 196,655 ¥ – ¥ 196,655 Intergroup sales and transfers ................................ 19,714 138 379 20,232 (20,232) – Total sales............................................................... 114,374 75,238 27,274 216,888 (20,232) 196,655 Operating expenses................................................ 107,711 69,823 23,501 201,036 (19,315) 181,721

Operating income ................................................... ¥ 6,662 ¥ 5,414 ¥ 3,773 ¥ 15,851 ¥ (916) ¥ 14,934

Total assets............................................................. ¥ 50,410 ¥ 24,865 ¥ 22,836 ¥ 98,112 ¥ 14,331 ¥ 112,443

Year ended 31st March, 2003 Thousands of U.S. dollars


Sales to third parties ............................................... $ 787,512 $ 624,792 $ 223,752 $1,636,064 $ – $1,636,064 Intergroup sales and transfers ................................ 164,009 1,148 3,153 168,319 (168,319) – Total sales............................................................... 951,530 625,940 226,905 1,804,392 (168,319) 1,636,064 Operating expenses................................................ 896,098 580,890 195,515 1,672,512 (160,690) 1,511,821

Operating income ................................................... $ 55,424 $ 45,041 $ 31,389 $ 131,871 $ (7,620) $ 124,242

Total assets............................................................. $ 419,384 $ 206,863 $ 189,983 $ 816,239 $ 119,226 $ 935,465

Overseas sales, which include export sales of the Company and sales (other than exports to Japan) of its foreign consolidated subsidiaries, for the years ended 31st March, 2002 and 2003 are summarised as follows:

Year ended 31st March, 2002 Millions of yen North America Others Total

Overseas sales ............................ ¥64,124 ¥30,395 ¥ 94,519 Consolidated net sales ................ – – ¥177,373 Overseas sales as a percentage of consolidated net sales ........... 36.2% 17.1% 53.3%

Year ended 31st March, 2003 Millions of yen North America Others Total

Overseas sales ...................... ¥76,430 ¥36,050 ¥112,480 Consolidated net sales .......... – – ¥196,655 Thousands of U.S. dollars

Overseas sales ...................... $635,856 $299,916 $ 935,773 Consolidated net sales .......... – – $1,636,064 Overseas sales as a percentage of consolidated net sales............................... 38.9% 18.3% 57.2%


29


Report of Independent Certified Public Accountants on the Consolidated Financial Statements

30

Japan

Head Office: 1-14-1, Fujiwara-cho, Gyoda City, Saitama 361-8506Tel: +81-48-554-1151 Fax: +81-48-556-8393

Plants: Saitama Gyoda City, Saitama Hadano Hadano City, Kanagawa Gotemba Gotemba City, ShizuokaAsaba Asaba-cho, Iwata-gun, Shizuoka Nagoya Kasugai City, Aichi

R&D Centers: Tochigi Haga-cho, Haga-gun, Tochigi Saitama Gyoda City, SaitamaAsaba Asaba-cho, Iwata-gun, Shizuoka

Sales Office: Osaka Ikeda City, Osaka

Subsidiaries: Showa Kyushu Corporation* Toyono-cho, Shimomashiki-gun, KumamotoShowa Seiko Co., Ltd.* Hadano City, Kanagawa Honda Verno Kumagaya Co., Ltd. Kumagaya City, Saitama

Overseas

Subsidiaries:North America American Showa Inc.*

(Head Office & Sunbury Plant)(Blanchester Plant)(Los Angeles Office)

Showa Canada Inc.*

South America Showa do Brasil Ltda.*Showa Industria E Comercio Ltda.*

Europe Showa Europe, S.A.*Nissin Showa UK Ltd.*

Asia P.T. Showa Indonesia Manufacturing*Summit Showa Manufacturing Co., Ltd.*Guangzhou Showa Autoparts Co., Ltd.*Shanghai Showa Auto Parts Co., Ltd.+

Corporate Information As of 31st March, 2003

Major Technical Collaboration/Licensing:Asia Honda Atlas Cars Pakistan Ltd.

Daelim Motor Co., Ltd.Atlas Honda Ltd.

Head Office

Overseas Bases

Head Office

Plants

R&D Centers

Sales Office

Subsidiaries

Affiliates:Asia Sicuan Ningjiang Showa Shock

Absorber Co., Ltd.Kaifa Industry Co., Ltd.Munjal Showa Ltd.Machino-Auto Parts Co., Ltd.Armstrong Auto Parts Sdn. Bhd.

* Consolidated subsidiary+ Will become a consolidated subsidiary during the fiscal year ending 31st March, 2004.

Board of Directors and Corporate Auditors As of 27th June, 2003

Corporate Data As of 31st March, 2003

President Masahide Matsushima

Executive Managing DirectorsHidefumi KasagiQuality Coordination Operations

Hiroshi IjimaProduction Operations

Managing DirectorsMichiaki KusuyamaBusiness Management andSupport Operations

Kenshi HiraiSales and Purchasing Operations

Directors Kiyoshi NagashimaBusiness Planning and DevelopmentOffice and Intellectual Assets Management Office

Tadao OnoPresident, Shanghai Showa Autoparts Co., Ltd.

Yoshitaka TerazawaPresident, Showa Canada Inc.

Mitsuhiro NishidaProduction Engineering Operations

Yoshimitsu ZaimaPresident, American Showa Inc.

Norio UkaiResearch and DevelopmentOperations

Tetsurou AoyamaPlant Manager, Gotemba Plant

Takeo HosoiPresident, P.T. ShowaIndonesia Manufacturing

Takashi KondaPlant Manager, Saitama Plant

Board of Corporate Auditors Kunitoshi KyotaniNoboru YaguchiShoichi TanabeHiroo Suzuki

Common Stock Authorized: 180,000,000 sharesIssued: 74,778,192 shares

Number of Shareholders 3,287

Common Stock TradedTokyo

Transfer Agent for Common Stock UFJ Trust Bank Ltd. 7-10-11, Higashisuna, Koto-ku, Tokyo 137-8081, Japan

Ten Largest Shareholders Shares Percent of(Thousands) total (%)

■ Honda Motor Co., Ltd. • • • • • • • • • • • • • • • • • • • • • • • • • • • • 25,447 34.03■ Japan Trustee Services Bank Ltd. • • • • • • • • • • • • • • • 9,253 12.37■ The Master Trust Bank of Japan • • • • • • • • • • • • • • • • • 4,670 6.25■ Trust & Custody Services Bank, Ltd. • • • • • • • • • • • 3,889 5.20■ UFJ Bank Ltd. • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 2,016 2.70■ UFJ Trust Bank Ltd. • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 1,988 2.66■ The Bank of Tokyo-Mitsubishi, Ltd. • • • • • • • • • • • • • 1,895 2.54■ The Mitsubishi Trust and Banking Corp. • • • • • • 1,670 2.23■ Mitsui Asset Trust and Banking Co., Ltd. • • • • • • 1,399 1.87■ The Sumitomo Trust & Banking Co., Ltd. • • • • • • 1,313 1.76

53,542 71.60

31

SHOWA CORPORATION1-14-1, Fujiwara-cho, Gyoda City,

Saitama 361-8506, JapanTel: +81-48-554-1151 Fax: +81-48-556-8393

http://www.showa1.comPrinted in Japan

on 100% recycled paper with soy ink

annual report 2003 - showa1.com · annual report 2003. profile showa corporation manufactures and...

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