annual report 2006 - showa1.com · cash dividends paid during the period 987 1,367 11,637 total...

SHOWA CORPORATION1-14-1, Fujiwara-cho, Gyoda City, Saitama 361-8506, JapanTel : +81-48-554-1151Fax : +81-48-556-8393http://www.showa1.com

Printed in Japan on 100% recycled paper with soy ink

ANNUAL REPORT 2006SHOWA CORPORATION

Financial and Operating Highlights ......................... 1

Message from the President .................................... 2

Showa’s Global Network andMutually Complementary Parts & Products ............ 4

Review of Operations .............................................. 6

Showa’s Technology ................................................ 8

Topics ...................................................................... 10

Contents

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 manufacturing motor vehicle parts 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 manufacturer of power steering

products, 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, Japan, Showa operates five manufacturing plants, three

research and development facilities and two manufacturing subsidiaries within Japan.

The Company’s global business operation, a network of 30 facilities that includes 12 consolidated

subsidiaries, spreads over 15 nations including Japan.

Showa Corporation’s business activities revolve around customer satisfaction, as emphasized in the

Company’s principle “To meet customer needs with the highest quality and the most competitive

products.” 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 of Showa Corporation. We actively support a range of environmental preservation initiatives

through our product offerings and corporate activities.

Showa Corporation and its global group Companies 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.

Forward-looking statements:Forward-looking statements made in this annualreport concerning performance or business strategieshave been determined according to assumptions andbeliefs based on information available at the time andcontain elements of risk and uncertainty.

Financial Section ...................................................... 11

Corporate Information ............................................ 30

Board of Directors and Corporate Auditors ............ 31

Corporate Data ........................................................ 31

31

PresidentMasahide Matsushima

Vice PresidentKazuto Iiyama

Executive Managing DirectorsHidefumi KasagiHiroshi Ijima

Managing DirectorsKenshi HiraiYoshitaka TerazawaMitsuhiro Nishida

Tetsuro AoyamaTakeo HosoiTakashi KondaTakeshi KawamotoNorio Ukai

Directors

Haruo Hirano

Mitsuhiro Chiba

Hisao Hirono

Akira Kadoya

Mitsutaka Sugino

Corporate Auditors

Mamoru Morino

Koichi Uchibaba

Kyoji Sano

Sakae Nomura

Common Stock

Authorized:180,000,000 sharesIssued: 76,020,019 shares

Number of Shareholders

6,461

Common Stock Traded

Tokyo

Shareholders’ Register Managerfor Common StockMitsubishi UFJ Trust and BankingCorporation7-10-11,Higashisuna,Koto-ku, Tokyo137-8081,Japan

As of 21st June, 2006Board of Directors and Corporate Auditors

As of 31st March, 2006Corporate Data

Showa's Stock PriceNikkei Average

Showa's Stock Price (’00/4=100)(Yen)

0

50

100

150

200

250

400

350

300

’00/4 4 4 4 4 47 10 ’01/1 7 7 710 10 10 7 10’02/1 ’03/1 ’04/1 ’05/1 37 10 ’06/1

Ten Largest ShareholdersShares Percent of

(Thousands) total (%)

Honda Motor Co., Ltd. 25,447 33.48Japan Trustee Services Bank, Ltd.

(Trust Account) 9,903 13.03The Bank of New York-Jasdec Treaty Account 3,303 4.35The Master Trust Bank of Japan, Ltd.

(Trust Account) 3,003 3.95The Bank of Tokyo-Mitsubishi UFJ, Ltd. 2,151 2.83Luxemburg Offshore Jasdec Lending Account 1,165 1.53Showa Corporation Business Partner’sShareholding Association 1,127 1.48The Chase Manhattan Bank, NA.London Special Account No.1 987 1.30Sanyo Foods Co., Ltd. 823 1.08Trust & Custody Services Bank, Ltd.

(Pension Trust Account) 767 1.01

48,680 64.04

1

Thousands ofMillions of yen U.S. dollars

2005 2006 2006

Motor vehicle parts ¥228,197 ¥244,818 $2,084,089Other 5,359 5,630 47,927Total ¥233,557 ¥250,448 $2,132,016


2005 2006 2006

Japan ¥100,921 ¥105,625 $0,899,165North America 76,473 80,066 681,586Europe 18,723 17,617 149,970Others 37,439 47,139 401,285

Total ¥233,557 ¥250,448 $2,132,016

Financial and Operating HighlightsSHOWA CORPORATION and Consolidated SubsidiariesYears ended 31st March, 2005 and 2006


2005 2006 2006

Net sales ¥233,557 ¥250,448 $2,132,016Operating income 16,675 17,175 146,207Income before income taxes and minority interests 16,272 18,564 158,031Net income 9,196 10,451 88,967Cash dividends paid during the period 987 1,367 11,637

Total assets 133,165 151,354 1,288,448Shareholders’ equity 73,530 87,825 747,637Depreciation and amortisation 6,197 6,758 57,529Capital expenditures 8,728 11,777 100,255

Per share amounts: Yen U.S. dollars

Net income (basic) ¥0121.03 ¥0137.56 $2,0771.17Cash dividends 15.00 20.00 0.17Shareholders’ equity 967.84 1,156.02 9.84

• Throughout this report, U.S. dollar amounts have been translated from Japanese yen solely for the convenience of the reader at the rate of¥117.47=U.S.$1.00, the exchange rate prevailing at 31st March, 2006.

• 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, CanadaEurope: Spain, U.K.Others: South America, Southeast Asia, China

*Figures exclude the intra-group transactions.

NET SALES BY BUSINESS SEGMENTS

NET SALES BY GEOGRAPHICAL AREAS*

Operating Highlights

Financial Highlights

2

Review of Fiscal 2006Looking back at the economic environments surroundingthe Showa Groups for this fiscal year, we note that therecovery in the U.S. has been quite considerate while that inEurope took place at moderate pace. Turning the eyes toAsia, the economic expansion has continued. Japan alsoenjoyed a steady recovery trend.

Now, when we review the motor vehicle industries ofthe world, we can see that the new car sales in the U.S.exceeded that in the previous period as the increase in thesales of passenger cars offset the decrease in light trucks.No substantial change has been seen in the Europeanmarkets. In Japan, driven by strong export demands, theautomotive production has increased. Though theautomotive demands were generally strong throughout Asia,notably strong demands were seen for automobile in Chinaand motorcycle in the several ASEAN countries.

Under these circumstances, and making the most ofproduction bases that are strategically deployed worldwide,the Showa Group has actively expanded production,procurement and sales, and enhanced various measurers ofquality control.

We are today delighted to be able to report the financialhighlights as follows. net sales increased by 7.2% to¥250,448 million (US$2,132 million). Operating income

increased by 3.0% to ¥17,175 million (US$146 million) due toincrease in revenues. Ordinary income increased by 4.1% to¥17,716 million (US$150 million), and net income increasedby 13.7% to ¥10,451 million (US$88 million).

Outlook for Fiscal 2007Looking to the future, we believe that the U.S. economicrecovery will continue to be stable, while that in theEuropean economy will be gradual. Although the economyin Thailand and Indonesia may slow down slightly, the Asianregion as a whole will be able to keep up the economicgrowth. Japan is expected to show far economic recovery.Generally speaking, we consider that the world economywill continue to stay in a healthy condition.

With China being the primary driving force, we believethe development in the automotive industry in Asia willcontinue. However, in view of the various uncertain andunstable factors such as the unpredictable oil price, cost ofmaterials and fluctuation in foreign exchange, we will needto take new initiatives in the fields ranging from R&D toproduction. In order to improve product quality andstrengthen our overall cost competitiveness, we will furthershift our operations to the more local production and localprocurement.

We aim to embody our goal “Committed to customer

Message from the President

<Medium-term Goal>

Committed to customer satisfaction through global enterprise

<Strategic Orientation>

Quality is No. 1

World-class cost competitiveness

The best technology to boost our product competitiveness

Personnel and a corporate culture that support a global corporation

<Behavioral Guideline>

A thorough system of reporting, communicating, and consulting

Speed, Challenge, and Straightforward Action

Improving our skills, boosting motivation levels, and upholding ethicalintegrity

Elimination of waste of materials, funds, and human resources.

Masahide MatsushimaPresident

3

satisfaction through global enterprise” by continuing toinvest in people, encourage the independence of theoverseas affiliate companies, reinforce the businessinfrastructure, and improve the constitution of the Group.

Strengthening CompetitivenessDomestic Operations:

We will continue to accelerate in-house production of rubberand forged products. By doing so, we hope to accumulateadvanced technology in-house, improve product quality andstrengthen cost competitiveness, which in turn will result instronger product competitiveness. Reconstruction of the R&Dcenter, one to develop the shock absorbers for automobilesand the other for motorcycles, will create an environment inwhich R&D and production are efficiently integrated. Thiswill contribute to improving the speed of development.

Global Operations:

In order to respond to the demand for automobiles in Asia,we will set up the following three plants to increase thecapacity of production; a plant for manufacturing the shockabsorbers and power steering systems in Wuhan, Hubei,China, a plant for components for the electric power steeringsystems in Faridabad, India, and a plant for the powersteering components in Chonburi, Thailand. Elsewhere, wewill enhance an integrated manufacturing base in Canada forthe pumps for hydraulic power steering. At the same time,we will make capital investments in the U.S. to bolster thecapacity of in-house production of the springs, pressed andsintered components. We firmly believe that thesedevelopments will further enrich and enlarge the business ofthe Group.

Dividends for Shareholders:Showa Corporation considers the return of profits toshareholders based on business performance and results tobe an important issue, and moreover, we also believeretained earnings to be important in order to developbusiness and strengthen corporate structures for the futurebusiness considerations.

The year-end dividend for Fiscal 2006 was ¥10 per share.Combined with the interim payment of the dividend, thetotal amount paid out per share for this fiscal period was¥20. As a result, the payout ratio was 18.65%, the return onequity was 11.9%, and the dividend rate for shareholders'equity was 2.1% respectively for this fiscal year.

Capital from retained earnings will be put towardmeeting capital requirements for future overseasdevelopment, product development, and improvement inour efforts to improve profitability and to strengthen thecompany’s financial structure.

Status of Corporate GovernanceBasic Approach to Corporate Governance

Showa Corporation aims to be a company that enjoys thetrust of its shareholders and society as a whole, and thatcontinues to live up to the expectations placed upon it. Toachieve this goal, we are flexibly and efficiently developingour business on a global scale in order to increase ourcorporate value, however we also consider it essential tomaintain a clear understanding of the risks involved in suchto ensure that the company is conforming strictly to allrelevant laws, regulations, and other conventions bothinside and outside of the company.

Executive Management Structures

Showa oversees and audits the execution of its businessesthrough the Board of Directors and the Board of Auditors.

The Board of Directors is comprised of 16 Directors andmakes decisions regarding important business matters andother statutory issues, and oversees the execution of thebusiness operations.

The Board of Auditors is comprised of 4 Auditors(including 3 outside Auditors), and each Corporate Auditorattends meeting of the Board of Directors and otherimportant internal meetings in accordance with the internalAudit Policies, division of responsibilities, and otherdirectives stipulated by the Board of Auditors. It alsooversees the execution of activities by the Directors, in partthrough audits of the business and financial status of ShowaCorporation and its key subsidiaries. The Board of Auditorsworks closely with the Internal Auditing Committee and anindependent auditing firm, and is reported by them withregard to such issues as audit plans and their results. Theexternal members of the Board of Auditors have nobusiness interest whatsoever with the Company.

We look forward to the continued invaluable supportand guidance of all shareholders in the years to come.

Fork pipes formotorcycles fromChina to Vietnam

Rear cushions,Damper components, Fork and Sheet pipes for motorcycles from China to Spain

Complete bottom tubesSprings and Press parts

for automobiles fromThailand to Malaysia

Fork pipes, Springsand Rods for

motorcycles fromIndonesia to Malaysia

Complete bottom tubes,Springs and Press parts

for automobilesfrom Thailand to Indonesia

Complete bottom tubes,Springs and Press parts

for automobilesfrom Thailand to Pakistan

Cylinders and Gear housingsfor automobiles fromIndonesia to the U.K.

Rods and Rear cushionsfor motorcycles

from Indonesia to Spain

Shockabsorbers

Shock absorbers

Shockabsorbers

Gas springs

Shock absorbers

Shockabsorbers

Steering gearsfor HPS

Steering gearsfor EPS

Gas springs

Shock absorbers

Shockabsorbers

Gas springs

Shock absorbers

Shock absorbers

Shockabsorbers

Steering gears for HPS

Shock absorbers



Pumpsfor HPS

for EPS for HPSSteering gearsSteering gears


NISSIN SHOWA UK LTD.

SHANGHAI SHOWAAUTO PARTS CO., LTD.

P.T.SHOWA INDONESIAMANUFACTURING

HONDA ATLAS CARSPAKISTAN LTD.

CHENGDU NINGJIANG SHOWA AUTOPARTS CO., LTD.

ATLAS HONDA LTD.

GUANGZHOU SHOWAAUTOPARTS CO,. LTD.

MACHINO AUTO-PARTSCO., LTD.

SUMMIT SHOWAMANUFACTURING CO., LTD.

ARMSTRONG AUTOPARTS SDN. BHD.

MUNJAL SHOWA LTD. DAELIM MOTORCO., LTD.

SHOWA EUROPE, S.A.

KAI FA INDUSTRY CO., LTD.

Showa’s Global Network andMutually Complementary Parts & Products

4

Small parts forautomobiles from

the U.S.A. to Japan

Power steering components(Pinion gear comp)from China to Thailand

Small parts for automobiles fromChina to Japan

Gear housings for automobilesfrom Indonesia to China

Gear housings for automobilesfrom Indonesia to Thailand

Shock absorbers

Shock absorbers

Shock absorbers

Propeller shafts Front and rearsuspensionmodules


Steering gears for HPS Pumps for HPS

AMERICAN SHOWA INC. Los Angeles Office

SHOWA CANADA INC.

AMERICAN SHOWA INC. Sunbury Plant & Head Office

SHOWA DO BRASIL LTDA.

AMERICAN SHOWA INC. Blanchester Plant

SHOWA INDUSTRIA ECOMERCIO LTDA.

Mutually Complementary Parts Production BaseShowa Corporation

Major Technical

Collaboration

Showa Group

Mutually Complementary PartsSupply Network

Global Products

Supply Network

Forkpipes

Sheetpipes

Rearcushions

Springs Rods Dampercomponents

Shockabsorbers

Front and rearsuspensionmodules

Pressparts

Springs Completebottom tubes

Cylinders forsteering systems

Gear housing forsteering systems

Small parts

Mutually Complementary Parts Products

Shockabsorbers


Pumps forHPS


Gassprings

Propellershafts

For Automobiles

For Motorcycles

Notes: EPS means electric power steeringHPS means hydraulic power steering

5

6

Review of Operations

Fiscal 2006 ResultsShown below is an explanation of the breakdown of netsales.

Sales by productAutomotive components: ¥168,090 million (US$1,430million), up 5.4% from the previous fiscal year.Motorcycle components: ¥76,730 million (US$653million), up 11.6% from the previous fiscal year.Other: ¥5,630 million (US$47 million), up 5.0% from theprevious fiscal year (mostly outboard marine enginecomponents).

Sales by customer’s locationJapan: Proceeds from motorcycle components andautomotive components grew, producing an increase innet sales of 5.9% from the previous fiscal year, to ¥98,620million (US$839 million).Asia (excluding Japan): Helped by strong demands formotorcycle components in Indonesia and Thailand, andfor automotive components, notably power steeringsystems and shock absorbers, in Thailand and China, netsales recorded ¥38,490 million (US$327 million), a strongincrease by 16.3% from the previous fiscal year.Europe: Decreases in the sale of motorcycle componentsof the Spanish subsidiary and of the automotivecomponents of the British subsidiary were reflected inthe aggregated sale of ¥18,150 million (US$154 million)in Europe, down 6.8% from the previous fiscal year.North America: Decreases in the sales of the motorcyclecomponents in America and the sub-assembledcomponents in Canada were offset by an increase in thesales of shock absorbers and power steering systems forautomobiles in America, resulting in net sales of ¥80,270million (US$683 million) for the region, up 3.1% from theprevious fiscal year.

By product By customer's location

’06’05 ’06’050

50

100

150

200

250

0

50

100

150

200

250233.5

250.4233.5

Motorcyclecomponents

68.7

Automotivecomponents

159.4

77.8

19.4

33.1

93.1

10.0

250.4

80.2

18.1

38.4

98.6

14.9Other5.3

5.6

168.0

76.7

0

50

100

150

200

By product

0

50

100

150

200

’05 ’06 ’05 ’06

159.4 159.4

Drive train products21.0

Power steeringsystems

59.9

Shock absorbers52.5

EPS 20.0

1.7

66.5

64.5

13.3

13.2

168.01.9

69.2

67.6

12.6

16.6

Others25.9

168.0

21.7

65.4

55.7

23.3

25.1

By customer's location

South America: As a result of our Brazilian customerexpanding its business, the sales of both motorcycle andautomotive components also increased to bring the total to¥14,920 million (US$126 million), a fantastic 49.0% increasefrom the previous fiscal year.

Automotive componentsNet sales for automotive components came to ¥168,090million (US$1,430 million), an increase by 5.4% from theprevious fiscal year. The following shows its breakdown.

Sales by productShock absorbers: ¥55,790 million (US$474 million), up6.3% from the previous fiscal year.Power steering systems: ¥65,430 million (US$556 million),up 9.1% from the previous fiscal year.Drive-train products: ¥21,700 million (US$184 million), up3.0% from the previous fiscal year.Other products: ¥25,170 million (US$214 million), down2.9% from the previous fiscal year reflecting a decrease inproduction of suspension modules in Canada.

Among the sales of power steering systems, that of theelectric power steering system (EPS) counted for ¥23,370million (US$198 million) for this fiscal year, up 16.6% from¥20,050 million (US$170 million) of the previous fiscalyear.

Sales by customer’s locationJapan: Although there was a decrease in the sales amongcertain segment of our customers, the sales for shockabsorbers, power steering systems and drive-train productsincreased among other major customers, resulting in netsales of ¥67,630 million (US$575 million), up 4.8% from theprevious fiscal year.Asia (excluding Japan): Reflecting an increase in the salesof shock absorbers and power steering systems primarily

Automotive components(Billions of yen)

Fiscal 2006 Results(Billions of yen)

7

in Thailand and China, net sales for Asia rose to ¥16,620million (US$141 million), up 25.8% from the previousfiscal year.Europe: An increase in the sales of drive-train productswas offset by a decrease in the sales of shock absorbersand power steering systems. As a result, the totalEuropean sales declined to ¥12,610 million (US$107million), down 5.2% from the previous fiscal year.North America: In America, the sales of shock absorbersand power steering systems increased by 4.9% and 7.7%respectively on a U.S. dollar basis. In Canada, the sales ofdrive-train products increased by 9.7%, but that of thesub-assembled components decreased by 12.7%.However, due to the stronger Canadian dollars againstYen, the net sales for North America rose to ¥69,270million (US$589 million), up 4.0% from the previous fiscalyear.South America: Due to good business performance of acertain major customer of ours, net sales increased to¥1,960 million (US$16 million), up 10.4% from theprevious fiscal year.

Motorcycle componentsNet sales for motorcycle components, mostly shockabsorbers, came to ¥76,730 million (US$653 million), anincrease by 11.6% from the previous fiscal year. Thefollowing shows its breakdown.

Sales by productShock absorbers: ¥74,290 million (US$632 million), up11.5% from the previous fiscal year.Drive-train products: ¥2,440 million (US$20 million), up14.6% from the previous fiscal year.

0

20

40

60

80

’05 ’06 ’05 ’06

20

40

60

80

By product

0

68.7 68.7

Drive trainproducts 2.1

76.7

2.4

74.2

10.6

6.0

19.5

24.3

8.2

76.7

10.4

5.5

21.5

26.3

12.9

Shock absorbers66.6


0

2

4

6

8

0

2

4

6

8

By product

’05 ’06 ’05 ’06

5.3 5.3

Others1.3

Boats4.0

5.6

1.4

4.2

Others0.1

4.2

0.3

0.6

5.6

0.3

0.0

4.6

0.6


Sales by customer’s locationJapan: Due to strong demands from major customers, netsales increased to ¥26,350 million (US$224 million), up8.4% from the previous fiscal year.Asia (excluding Japan): Driven by the vigorous ASEANmarket, predominantly Indonesia, net sales increased to¥21,560 million (US$183 million), up 10.3% from theprevious fiscal year.Europe: Due to a decrease in the sales among one of themajor customers, net sales in Europe finished at ¥5,510million (US$46 million), down 9.1% from the previousfiscal year.North America: Reflecting the unfavorable businessconditions of customers, net sales also decreased to¥10,400 million (US$88 million), down 1.9% from theprevious fiscal year.South America: Against the background of an rapidlyexpanding motorcycle market, net sales recorded ¥12,910million (US$109 million), a notable 56.8% increase fromthe previous fiscal year.

OtherSales of outboard marine engine components were¥4,220 million (US$35 million), up 4.2% from theprevious fiscal year. Including sales of others, net sales of“other” counted for ¥5,630 million (US$47 million), up5.0% from the previous fiscal year.

Motorcycle components(Billions of yen)

Other(Billions of yen)

South AmericaNorth AmericaEuropeAsiaJapan

8

Showa’s Technology

Automotive Components

1. Shock Absorbers 3. Propeller Shafts

2. Steering Systems

PumpHPS

4. Differential Gears

EPS

Among the automobile components, great importance is placed onthe performance and reliability of steering systems. In addition toaccurately transmitting the driver’s steering operations to theautomobile, the steering system is the man/machine interfacedelivering information on running conditions from the automobileto the driver. “Power Steering system” refer to a component addedto assist steering efforts and provide drivers with comfortablemaneuverability. Power Steering systems are classified intohydraulic power steering system (HPS), which uses the engine’spower as a drive source, and electric power steering system (EPS),utilizing the vehicle’s battery. Showa has a full line of powersteering models.

Shock absorbers are critical products thatdetermine an automobile’s character, not only byimproving ride quality but also by functioning tocontrol the attitude and stability of the automobilebody. Because of their superior performance andquality, Showa brand shock absorbers haveearned the satisfaction of customers around theworld. Showa has many years of experience withstrut modules, and is also working on suspensionmodules combined with peripheral components.

The role of a differential mechanismis to absorb the difference in rotationbetween the right and left wheelsthat occurs when an automobile iscornering. These products demanddurability, transmission efficiency,and quiet operation. Showa’s differ-ential gears achieve weight reductionwhile exhibiting highperformance,from subcompact cars to SUVs.

The propeller shafts function is to transmit thedriving force generated by the engine to thewheel axis. They are long and cylindrical, androtate at high speed. Thus, these productsrequires vibration and noise prevention alongwith high durability. Showa supplies varioustechnologies which structural analysis enablescomponent part reduction and lighter weight.Further, friction welding procedures wereintroduced to achieve high precision, dynamicbalance, and ultra–strong part connections.

9

5. Gas Springs

2. Drive Unit Products

Motorcycle Components

Power Trim and Tilt Units

Gas springs assist the opening andclosing of automobile enginecompartment hoods and reargates, by using gas reaction force.They are also equipped withspeed-adjustment devices thatenable operators to open andclose the hood and trunk at opti-mal speed. To answer diverseneeds, Showa develops a varietyof products.

Power trim and tilt units can activelychange the outboard engine angle, andprovide the following three functions.The trim function provides good screwefficiency and steady cruising byadjusting the angle of the outboardengine while running. The tilt functionenables owners to prevent outboardengine damage from shellfish adhe-sions, by raising the outboard engineabove the water’s surface whenmoored. When driftwood or otherobjects strike the outboard enginewhile under way, shocks are absorbed,helping to prevent damage to theoutboard engine and boat.

Outboard Engine Components

Rear cushion

The rear cushion is attached to therear fork directly or through a link. By controlling the attitude and energyabsorption of the motorcycle body,the rear cushion improves the ability ofthe rear wheel to follow road contours.

For motorcycle and ATV drive unitproducts, Showa has achieved lighterweights through analysis of functions,shapes, and materials, while main-taining excellent durability, trans-mission efficiency, and quiet operation.

1. Shock AbsorbersShowa motorcycle shock absorbersare used extensively in variousmotorcycle races around the world.From racing machines to scooters, weput our technology and experience toexcellent use to meet a wide variety of performance needs.

Front fork

The front fork is a key structural com-ponent of a motorcycle, holding thefront wheel and providing the steeringfunction. This vital part demands excellent ability to closely follow roadcontours through smooth operationand steady damping force, whileretaining high rigidity.

10

Topics

1. DaimlerChrysler added as a new customerDaimlerChrysler Corporation has been added as a newcustomer of Showa Canada Inc., a Canadian subsidiary ofShowa Group. The new customer has placed an order forpropeller shafts and the first batch of them has already beendelivered.Vehicle model: Dodge Caliber (SUV) Component: Propeller shaftsFirst delivery: January 2006

As the Caliber of DaimlerChrysler Corporation and theOutlander of Mitsubishi Motors Corporation are the sisterproducts jointly developed by the two automotivemanufacturers, orders were received in Japan and the U.S.simultaneously for each vehicle models. The propeller shaftswere developed by our R&D centers in Japan and the U.S.

By making most of the established production bases inNorth America, we will further promote sales and reinforcedevelopment on a global basis to design expand our business.

2. The new design system lead to shortening ofdevelopment timeWe have introduced a new design system to help developnew products. At each development stage, the system refersto an electronic database, which compiles our know-howabout manufacturing methods and product quality, andautomatically detects and corrects any design defects. Thisnew system has enabled us to shorten the lead time of R&D,while enhancing the product quality at the same time.

3. Quantity output of the newly developed springsystem by in-house productionIn the strut suspension system that is commonly used forfront wheels of vehicles, the shock absorbers are subject toside-forces because the vertical motion axis of tires cannotbe set in complete parallel with the actuation axis of shockabsorbers. This has for long interfered with the idealactuation of the shock absorbers.

The conventional solution to this defect was to use the“off-set spring system” in which the spring was set slightlyoff the center of the axis. However, we succeeded indeveloping the “Side Force Cancel (SFC) spring”, whichefficiently cancels the side forces by bending the axis ofreaction force of the spring itself.

The SFC spring system, which was 16% lighter and 10%smaller compared with the conventional off-set springsystem, was adopted by the new models that went on themarket in May 2005.

4. Boosting production capacity in AsiaWe have already boosted the capacity of production to meetthe ever increasing demands in Asia, and we will continueto make further investment to satisfy a variety of the needsof our customer around the world. As part of that effort, thisyear, we will set up new manufacturing bases in China,India and Thailand. The outlines of the projectedestablishments are as follows.

■ A new plant in Wuhan, Hubei, ChinaProducts: Shock absorbers, Power steering

systemsStart of operation: January 2007 (expected)Expected output: 200,000 units/year in 2009

■ A new company in Faridabad, Haryana, IndiaProducts: Electric power steering systemsStart of operation: April 2007 (expected)Expected output: 386,000 units/year in 2010

■ A new company in Chonburi, ThailandProducts: Power steering componentsStart of operation: November 2007 (expected)Expected output: 200,000 units/year in 2010

5. Support continuously provided to Honda Racing F1Team and A.G.R. on I.R.L.We have been supporting the B•A•R Honda in terms ofdeveloping and providing of shock absorbers, and wecontinue to provide the same support after the teamchanged its name to Honda Racing F1 Team in 2006. Also,we have been supporting A.G.R. (Andretti Green Racing) onI.R.L. (Indy Racing League) in North America, and we dosame support for this season. By participating in the FormulaOne World Championship and I.R.L., we do not only fosterour challenging spirits but also feed back the advancedtechnology and product reliability obtained through theracing activities to commercial production.

Off-set spring system SFC spring system Image of SFC spring

11

Financial Section Consolidated Financial Review ............................................... 12 (Unaudited and Not Reviewed)

Consolidated Balance Sheets ................................................. 16

Consolidated Statements of Income....................................... 18

Consolidated Statements of Shareholders’ Equity ................. 19

Consolidated Statements of Cash Flows ................................ 20

Notes to Consolidated Financial Statements .......................... 21

Report of Independent Auditors .............................................. 29

12

Consolidated Financial Review

Overview

Net SalesOn the back of the increasing demands for automobilesin China and other Asian countries, and of the excellentsales results of our major customers elsewhere, wehave aggressively promoted sales activities to receivenew orders and further set forward the overseas opera-tions during this fiscal year. As a result, the net sales ofthe Group for the current consolidated fiscal yearincreased 7.2% compared to the previous consolidatedfiscal year to ¥250,448 million (US$2,132 million).

Operating IncomeOperating income of ¥17,175 million (US$146 million)for the current consolidated fiscal year, which increased3.0% compared to the previous consolidated fiscalyear, reflects the results of our continued efforts tooffset the various increases in the cost of sales. Tocompensate enlarging expenses such as the cost ofraw materials and labor, we have succeeded inincreasing revenues, cutting cost and improvingproductivity.

SG&A ExpensesSales, general and administrative expenses for the cur-rent consolidated fiscal year increased 2.8% comparedto the previous consolidated fiscal year to ¥21,982 mil-lion (US$187 million) due primarily to an increase in thecost of R&D.

R&D ExpensesAs a leading manufacturer of precise functional compo-nents for transport machinery, the Showa Group,Showa Corporation and its consolidated subsidiaries,continue to make efforts to identify the various socialneeds promptly, respond to them accurately, anddevelop products with strong competitiveness usingcutting-edge electronic and light-weight technology.The R&D division of the Group puts the focus primarilyon the development of motor vehicle parts. R&Dexpenses for the current consolidated fiscal yearincreased 12.6% compared to the previous consoli-dated fiscal year to ¥7,433 million (US$63.2 million).R&D expenses by business segments are as follows.

Motor Vehicle PartsR&D expenses in relation to the motor vehicle parts forthe current consolidated fiscal year increased 12.8%compared to the previous consolidated fiscal year to¥7,200 million (US$61.2 million). During this fiscal year,we have constructed a new R&D building and introduceda new development system to improve the quality ofdrawings, which has contributed to improving efficiencyand enhancing capability of our product development.

OtherR&D expenses in relation to the other for the currentconsolidated fiscal year increased 7.8% compared tothe previous consolidated fiscal year to ¥233 million(US$1.9 million).

50

100

150

200

250

300

’02 ’03 ’04 ’05

Net Sales

(Billions of yen)

196.6

177.3

219.5233.5

’06

250.4

0

’05

94.4106.8

101.0

121.0 137.5

0

2

4

6

8

10

12

14

’02 ’03 ’04

Net Income/Net Income per Share

(Billions of yen) (Yen)

0

20

40

60

80

100

120

140

Net IncomeNet Income per Share

8.0

6.7

9.1

7.5

’05 ’06

10.4

59.2

105.2112.4

Total AssetsShareholders’ EquityShareholders’ Equity per Share

0

20

40

60

80

100

120

160

140

’02 ’03 ’04

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

(Billions of yen) (Yen)

0

200

400

600

800

1,000

1,200

1,400

65.3

120.5

792.5741.6

860.6967.8

133.1

73.5

’05 ’06

87.8

151.3

1,156.0

53.9

13

Income before Income Taxes and Minority InterestsIncome before income taxes and minority interests forthe current consolidated fiscal year, which increased14.1% compared to the previous consolidated fiscalyear to ¥18,564 million (US$158 million), reflects otherincome of ¥2,401 million (US$20.4 million) realized as again on transfer of the benefit obligation of the substitu-tional portion of the employee’s pension fund, whichwas then offset by other expenses of ¥1,173 million(US$9.9 million) posted as a warranty expenses.

Equity in Earnings of AffiliatesThe Group’s equity in earnings of affiliates accounted forunder the equity method increased by 5.4 % comparedto the previous fiscal year, to ¥203 million (US$1.7 mil-lion).

Net IncomeNet income for the current consolidated fiscal yearincreased 13.7% compared to the previous consoli-dated fiscal year to ¥10,451 million (US$88.9 million).

Cash FlowsConsolidated cash and cash equivalents (referred to ascash hereinafter) increased ¥2,740 million (US$23.3 million)to a cash balance at the fiscal year end of ¥31,287 million(US$266 million), due to the high level of income beforeincome taxes and minority interests, despite expendituresfor acquiring tangible fixed assets and expenditures fordebt repayment. All cash flows for the fiscal year underreview and their causes are as follows.

Net Cash Provided by Operating ActivitiesNet cash provided by operating activities for the currentconsolidated fiscal year increased ¥1,054 million com-pared to the previous consolidated fiscal year to¥16,996 million (US$144 million). This is due primarily toan increase in the income before income taxes andminority interests.

Net Cash Used in Investing ActivitiesNet cash used in investing activities for the current con-solidated fiscal year increased ¥3,230 million comparedto the previous consolidated fiscal year to ¥11,435 million(US$97.3 million). This is due primarily to an increase inexpenditures to acquire property, plant and equipment.

Net Cash Used in Financing ActivitiesNet cash used in financing activities for the current con-solidated fiscal year increased ¥1,315 million comparedto the previous consolidated fiscal year to ¥2,897 million(US$24.6 million). This is due primarily to an increase innet repayment of borrowings.

0

2

4

6

8

12

10

Capital ExpendituresDepreciation and Amortisation

’02 ’03 ’04 ’05

Capital Expenditures/Depreciation and Amortisation

(Billions of yen)

6.46.56.8

5.2

6.1

8.7

6.35.7

’06

6.7

11.7

6.8 7.0 6.6

0

2

4

6

8

10

’02 ’03 ’04 ’05

R&D Expenses

(Billions of yen)

7.8

’06

7.4

14.0

12.2

13.2

0

3

6

9

12

15

’02 ’03 ’04 ’05

Return on Equity

(%)

14.2

’06

13.0

R&D Expenses By Business Segments

Millions of yen2005 2006

Motor vehicle parts ¥6,384 ¥7,200Other 216 233

Total ¥6,601 ¥7,433

14

Segment Information

Business SegmentationMotor Vehicle PartsIn Japan, the sales of both automotive and motorcyclecomponents increased. As for the automotive compo-nents, the increase was attributable to a good demandfor the shock absorbers and power steering systemsfrom major customers. Increased sale of shockabsorber for motorcycle also contributed to the strongresults.

Turning the eyes to North America, while the U.S.subsidiary recorded an increase in revenues followingincreased new car production by major customers, theCanadian subsidiary booked a decrease as a result ofstrong sale of propeller shafts having been offset bydecreased sale of sub-assembled suspensions.

In Europe, revenue of the Brit ish subsidiarydecreased as an increase in the sale of drive-train com-ponents was offset by a decrease in the sale of shockabsorbers and power steering systems. The Spanishsubsidiary also suffered a decrease in revenue due toshrinkage of sale of motorcycles in the region.

In the other countries, as customers turned toincrease production on the back of a vigorous market,the subsidiaries in Indonesia and Thailand bothrecorded an increase in revenue. The Brazilian sub-sidiary booked a record increase in revenue as a resultof rapidly expanding motorcycle market of the country.In China where the demand for automobiles has contin-ued to expand, our major customers demanded moreshock absorbers and electric power steering systemsas they increased production. As a result, the Chinesesubsidiary booked a significant increase in revenue.

As a result, net sales in the motor vehicle parts busi-ness increased 7.3% compared to the previous consoli-dated fiscal year to ¥244,818 million (US$2,084 million).Operating income increased 3.1% from the previous con-solidated fiscal year to ¥15,985 million (US$136 million).

OtherIn “other” segment, net sales of outboard marine enginecomponents increased. As a result, net sales related to“other” segment increased 5.0% compared to the previ-ous consolidated fiscal year to ¥5,630 million (US$47.9million). Operating income increased 1.8% from the pre-vious consolidated fiscal year to ¥1,190 mil l ion(US$10.1 million).

Capital ExpendituresShowa Group (Showa Corporation and its consolidatedsubsidiaries) has actively been making capitalinvestments focused on production facilities with theaim to produce core technologies for automotive partsin house and expand production capabilities. Totalcapital expenditures for the current consolidated fiscalyear rose 34.9% compared to the previousconsolidated fiscal year to ¥11,777 million (US$100million).

In order to reinforce, and to promote streamliningand renewal of the existing production facilities, we havemade capital investments to processing facilities fordrive train gear components, and to in-houseproduction facilities for key components for powersteering systems. We also constructed a new R&Dbuilding.

Investments were also made to overseassubsidiaries. The investment in Chinese, Indonesian andThai subsidiaries was made in order to enlargeproduction capacity, and that in American subsidiarieswas made to in-house production facilities for the powersteering components. Combined together, capitalexpenditures accounted for ¥10,436 million (US$88.8million).

Capital investment by business segment is asfollows.

Capital Expenditures by Business Segments


Motor Vehicle Parts ¥8,650 ¥10,436Other 37 1,310

Total ¥8,688 ¥11,747

Eliminations or corporate 39 29

Consolidated ¥8,728 ¥11,777

15

Net sales and Operating Income by Business Segments


Net Operating Net OperatingSales Income Sales Income

Motor Vehicle Parts ¥228,197 ¥15,506 ¥244,818 ¥15,985

Other 5,359 1,169 5,630 1,190

Total ¥233,557 ¥16,675 ¥250,448 ¥17,175

[Reference] Non-Consolidated Net sales by Business Segments(information only)


Motor Vehicle Parts ¥127,752 ¥134,362Automotive components 89,429 93,734Motorcycle components 38,323 40,627

Other 6,595 7,117

Total ¥134,347 ¥141,479

Geographical SegmentationJapanAs for the motor vehicle parts, sale increased both inthe automotive and motorcycle components. Sale ofoutboard marine engine components also increased. Asa result, net sales increased 5.2% compared to the pre-vious consolidated fiscal year to ¥140,637 million(US$1,197 million), and operating income increased8.2% compared to the previous consolidated fiscal yearto ¥9,044 million (US$76.9 million).

North AmericaThe U.S. subsidiary recorded an increase in the auto-motive components. On the other hand, revenue of theCanadian subsidiary declined as an increase in sale ofpropeller shafts was offset by a decrease in the sale ofsub-assembly of suspensions. The outboard marineengine components also gave way. As a result, netsales increased 4.9% compared to the previous consol-idated fiscal year to ¥81,437 million (US$693 million),and operating income decreased 19.0% compared tothe previous consolidated fiscal year to ¥3,072 million(US$26.1 million).

EuropeIn Europe, the automotive revenue of the Britishsubsidiary fel l as an increase in the drive-traincomponents was offset by a decrease in the shockabsorbers and power steering systems. The Spanishsubsidiary also suffered a decrease in revenue due toshrinkage of sale of motorcycles in the region. As aresult, net sales decreased 5.8% compared to theprevious consolidated fiscal year to ¥17,765 million(US$151 million), and operating income decreased67.3% compared to the previous consolidated fiscalyear to ¥142 million (US$1.2 million).

Other regionsThe subsidiaries in Indonesia and Thailand recorded astrong increase both for the automotive and motorcyclecomponents. In Brazil, where the motorcycle market isexpanding at a rapid pace, the Brazilian subsidiarybooked a record increase in revenue. In China, wherethe demand for automobiles has been continuing toexpand, the Chinese subsidiary recorded significantincrease in revenue. As a result, net sales increased27.3% compared to the previous consolidated fiscalyear to ¥49,781 million (US$423 million), and operatingincome increased 18.9% compared to the previousconsolidated fiscal year to ¥5,775 million (US$49.1million).

Net Sales and Operating Income by Geographical Segments


Net Operating Net OperatingSales Income Sales Income

Japan ¥133,663 ¥ 8,356 ¥140,637 ¥ 9,044North America 77,614 3,793 81,437 3,072Europe 18,855 435 17,765 142Other regions 39,114 4,858 49,781 5,775

Total ¥269,247 ¥17,443 ¥289,621 ¥18,034

Elimination or corporate (35,689) (768) (39,173) (858)

Consolidated ¥233,557 ¥16,675 ¥250,448 ¥17,175

16

Thousands ofMillions of yen U.S. dollars (Note 3)

ASSETS 2005 2006 2006

Current assets:Cash on hand and in banks (Note 8) ¥ 26,410 ¥ 29,136 $ 248,029Notes and accounts receivable:

Trade 24,468 27,141 231,046Unconsolidated subsidiaries and affiliates 11,473 10,247 87,230Allowance for doubtful receivables (84) (88) (749)

Held-to-maturity securities (Notes 5 and 8) 2,135 1,720 14,642Inventories (Note 4) 18,004 22,224 189,188Deferred tax assets (Note 7) 2,379 2,313 19,690Other (Note 8) 1,436 1,698 14,454

Total current assets 86,224 94,394 803,558

Investments and long-term advances:Investments in unconsolidated subsidiaries and affiliates 8,147 10,705 91,129Other investments in securities (Note 5) 1,784 2,629 22,380Deferred tax assets (Note 7) 21 28 238Long-term prepaid expenses 119 90 766Other 803 923 7,857

Total investments and long-term advances 10,876 14,377 122,388

Property, plant and equipment, at cost:Land (Note 6) 4,337 6,520 55,503Buildings and structures 23,451 25,394 216,174Machinery, vehicles and equipment 94,522 103,040 877,160Construction in progress 1,780 2,255 19,196

124,092 137,211 1,168,051Accumulated depreciation (88,393) (95,148) (809,977)

Property, plant and equipment, net 35,698 42,063 358,074

Other assets 365 519 4,418

Total assets ¥133,165 ¥151,354 $1,288,448

See accompanying notes to consolidated financial statements.

SHOWA CORPORATION and Consolidated Subsidiaries31st March, 2005 and 2006

Consolidated Balance Sheets

17


LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS’ EQUITY 2005 2006 2006

Current liabilities:Short-term borrowings (Note 6) ¥ 3,949 ¥ 3,449 $ 29,360Current portion of long-term debt (Note 6) 162 — —Notes and accounts payable:

Trade 32,964 33,677 286,685Construction 304 501 4,264Unconsolidated subsidiaries and affiliates 641 534 4,545Other 1 3 25

Accrued income taxes (Note 7) 2,551 2,302 19,596Accrual for warranty expenses 121 684 5,822Other 5,325 5,522 47,007

Total current liabilities 46,022 46,677 397,352

Long-term liabilities:Accrued retirement benefits (Note 12) 5,350 3,629 30,892Deferred tax liabilities (Note 7) 569 2,141 18,225Accrual for warranty expenses — 711 6,052Other 390 378 3,217

Total long-term liabilities 6,310 6,862 58,414

Minority interests 7,301 9,989 85,034

Shareholders’ equity (Note 14):Common stock, no par value:Authorised: 180,000,000 sharesIssued:

31st March, 2005 – 76,020,019 shares 12,698 — —31st March, 2006 – 76,020,019 shares — 12,698 108,095

Capital surplus 13,558 13,558 115,416Retained earnings 49,727 58,812 500,655Net unrealised holding gain on securities 3,709 5,501 46,828Translation adjustments, net (6,117) (2,696) (22,950)Less treasury stock, at cost (47) (48) (408)

Total shareholders’ equity 73,530 87,825 747,637

Contingent liabilities (Note 9)

Total liabilities, minority interests and shareholders’ equity ¥133,165 ¥151,354 $1,288,448


18


2005 2006 2006

Net sales (Note 15) ¥233,557 ¥250,448 $2,132,016Cost of sales 195,502 211,290 1,798,672

Gross profit 38,054 39,157 333,336

Selling, general and administrative expenses (Note 10) 21,379 21,982 187,128

Operating income 16,675 17,175 146,207

Other income (expenses):Interest and dividend income 321 462 3,932Interest expense (136) (141) (1,200)Exchange loss, net (78) (114) (970)Gain on sales of other investments in securities (Note 5) — 15 127Loss on sale and disposal of property, plant and equipment, net (218) (263) (2,238)Equity in earnings of affiliates 192 203 1,728Warranty expenses — (1,173) (9,985)Gain on transfer of the benefit obligation of the substitutional portionof the employees’ pension fund (Note 12) — 2,401 20,439

Retirement benefit expenses for prior periods (Note 12) — (131) (1,115)Prior periods' adjustment (note 17) (526) — —Other, net 42 131 1,115

(402) 1,388 11,815

Income before income taxes and minority interests 16,272 18,564 158,031

Income taxes (Note 7):Current 5,477 5,447 46,369Deferred (204) 403 3,430

5,273 5,851 49,808

Minority interests (1,802) (2,261) (19,247)

Net income (Note 13) ¥ 9,196 ¥ 10,451 $ 88,967


SHOWA CORPORATION and Consolidated SubsidiariesYear ended 31st March, 2005 and 2006

Consolidated Statements of Income

19


2005 2006 2006

Common stockBeginning of year ¥12,698 ¥12,698 $108,095

End of year ¥12,698 ¥12,698 $108,095

Capital surplusBeginning of year ¥13,558 ¥13,558 $115,416

End of year ¥13,558 ¥13,558 $115,416

Retained earningsBeginning of year ¥41,519 ¥49,727 $423,316Add:

Net income 9,196 10,451 88,967Deduct:

Cash dividends paid 987 1,367 11,637

End of year ¥49,727 ¥58,812 $500,655

Net unrealised holding gains on securitiesBeginning of year ¥ 3,304 ¥ 3,709 $ 31,574Net change during the year 405 1,791 15,246

End of year ¥ 3,709 ¥ 5,501 $ 46,828

Translation adjustmentsBeginning of year ¥ (5,645) ¥ (6,117) $ (52,072)Net change during the year (471) 3,420 29,113

End of year ¥ (6,117) ¥ (2,696) $ (22,950)

Treasury stock, at costBeginning of year ¥ (45) ¥ (47) $ (400)Net change during the year (1) (1) (8)

End of year ¥ (47) ¥ (48) $ (408)



Consolidated Statements of Shareholders’ Equity

20


2005 2006 2006

Cash flows from operating activities:Income before income taxes and minority interests ¥16,272 ¥18,564 $158,031Depreciation and amortisation 6,197 6,758 57,529Increase (decrease) in allowance for doubtful receivable 18 (0) (0)(Decrease) increase in accrual for warranty expenses (161) 1,232 10,487Increase (decrease) in accrued retirement benefits 866 (1,732) (14,744)Exchange gain, net (8) (1) (8)Equity in earnings of affiliates (192) (203) (1,728)Loss on sale and disposal of property, plant and equipment, net 218 263 2,238Gain on sales of other investments in securities — (15) (127)(Increase) decrease in trade receivables (1,868) 230 1,957Increase in inventories (2,010) (2,425) (20,643)Increase in trade payables 2,245 291 2,477Other, net (5,634) (5,966) (50,787)

Net cash provided by operating activities 15,941 16,996 144,683

Cash flows from investing activities:Purchases of property, plant and equipment (8,160) (11,220) (95,513)Proceeds from sale of property, plant and equipment 47 35 297Purchases of other investments in securities (7) (7) (59)Proceeds from sales of other investments in securities — 17 144Increase in investments in affiliates (55) (128) (1,089)Other, net (29) (131) (1,115)

Net cash used in investing activities (8,204) (11,435) (97,344)

Cash flows from financing activities:Increase (decrease) in short-term borrowings 406 (775) (6,597)Decrease in long-term debt (446) (165) (1,404)Cash dividends (987) (1,367) (11,637)Cash dividends to minority shareholders (540) (576) (4,903)Other, net (12) (12) (102)

Net cash used in financing activities (1,581) (2,897) (24,661)

Effect of exchange rate changes on cash and cash equivalents (377) 77 655

Net increase in cash and cash equivalents 5,778 2,740 23,325Cash and cash equivalents at beginning of year 22,768 28,546 243,006

Cash and cash equivalents at end of year (Note 8) ¥28,546 ¥31,287 $266,340

Supplemental disclosures of cash flow information:Cash paid for:

Interest ¥ 135 ¥ 133 $ 1,132Income taxes 5,569 5,615 47,799



Consolidated Statements of Cash Flows

21

1. Basis of PreparationSHOWA CORPORATION (the “Company” ) and itsdomestic subsidiaries maintain their accounting records inaccordance with accounting principles generally acceptedin Japan, and foreign subsidiaries of the Company maintaintheir books of account in conformity with those of theircountries of domicile. The accompanying consolidatedfinancial statements have been compiled from theconsolidated financial statements prepared by theCompany as required under the Securities and ExchangeLaw of Japan and, therefore, have been prepared inconformity with accounting principles generally accepted inJapan, which are different in certain respects as to theapplication and disclosure requirements of InternationalFinancial Reporting Standards.

The notes to the consolidated financial statementsinclude information which is not required under accountingprinciples generally accepted in Japan but is presentedherein as additional information solely for the convenienceof readers outside Japan.

As permitted by the Securities and Exchange Law ofJapan, amounts of less than one million yen have beenomitted. Consequently, the totals shown in the accompa-nying consolidated financial statements (both in yen andU.S. dollars) do not necessarily agree with the sums of theindividual amounts.

Certain amounts in the prior year’s consolidated finan-cial statements have been reclassified to conform to thecurrent year’s presentation.

2. Summary of Significant Accounting Policies(a) Principles of ConsolidationThe consolidated financial statements include the accountsof the Company’s 12 domestic and foreign subsidiaries.All significant inter-company balances and transactionshave been eliminated in consolidation.

Investments in 3 affiliates are accounted for by theequity method with appropriate adjustments for inter-com-pany profits and dividends.

The excess of cost over underlying net assets at fairvalue at the date of acquisition is amortised over a periodof five years on a straight-line basis except that when theexcess is immaterial, it is fully charged to income in theyear of acquisition.(b) Foreign Currency TranslationThe revenue and expense accounts of the foreign sub-sidiaries are translated into yen at the average rate ofexchange in effect during the year. Except for sharehold-ers’ equity, the balance sheet accounts are translated atthe rate of exchange in effect at the balance sheet date.The components of shareholders’ equity are translated attheir historical exchange rates. Translation adjustments arepresented as a component of shareholders’ equity andminority interests.(c) SecuritiesSecurities other than equity securities issued by sub-sidiaries and affiliates are classified into three categories;trading, held-to-maturity or other securities. Trading securi-ties are carried at fair value and held-to-maturity securitiesare carried at amortised cost. Marketable securities classi-

SHOWA CORPORATION and Consolidated Subsidiaries

Notes to Consolidated Financial Statements

fied as other securities are carried at fair value withchanges in unrealised holding gains or losses, net of theapplicable income taxes, directly included in shareholders’equity. Non-marketable securities classified as other secu-rities are carried at cost. Cost of securities sold is deter-mined by the moving average method.(d) InventoriesInventories of the Company are stated at cost determinedby the weighted average method, while inventories held bythe consolidated subsidiaries are principally stated at thelower of cost or market determined by the first in, first outmethod or the weighted average method.(e) Property, Plant and Equipment and DepreciationProperty, plant and equipment is stated at cost.Depreciation of property, plant and equipment of theCompany and its domestic consolidated subsidiaries iscomputed principally by the declining-balance method,while the straight-line method is applied to property, plantand equipment of certain foreign subsidiaries.(f) Accrual for Warranty ExpensesAccrual for warranty expenses have been provided forfuture warranty expenses under the basic parts supplycontracts with customers as a total of the following:

(i) an estimate of warranty expenses to be incurredduring the remaining warranty periods based on his-torical warranty claim experiences and an estimateof the probability of future warranty expenses; and

(ii) an estimate of specifically identified warranty claim.Changes in Method of AccountingPrior to this fiscal year, accrual for warranty expenses hadbeen provided for future warranty claims based on thebasic parts supply contracts with customers as an esti-mate of specifically identified warranty claim as (ii) above,while warranty expenses related to (i) above had beenexpensed as paid.

At the beginning of this fiscal year, the Companychanged its method of recognising warranty expensesregarding (i) above to the method under which accrual forwarranty expenses has been provided at an estimate ofwarranty expenses to be incurred during the remainingwarranty periods based on historical warranty claim experi-ences and an estimate of the probability of future warrantyexpenses. The new accounting method was adoptedbecause historical warranty claim experiences were accu-mulated and, therefore, accumulated data becameanalysable and also because the new method results in abetter matching of cost and revenue and better financialpositions.

The effect of the change for the year ended 31stMarch, 2006, is an increase in selling, general and adminis-trative expenses by ¥137 million ($1,166 thousand), adecrease in operating income by ¥137 million ($1,166thousand), an increase in other expenses by ¥1,173 million($9,985 thousand), and a resultant decrease in incomebefore income taxes and minority interests by ¥1,311 mil-lion ($11,160 thousand).

In addition, accrual for warranty expenses which will beutilised within one year is presented in Current liabilities,and those which will be utilised after one year are pre-sented in Long-term liabilities.

( l ) Appropriation of Retained EarningsUnder the Commercial Code of Japan, the appropriation ofretained earnings with respect to a given financial year ismade by resolution of the shareholders at a general meet-ing to be held subsequent to the close of such financialyear. The amounts for that year do not, therefore, reflectsuch appropriations.(m) New Accounting StandardsEffective the year ended 31st March, 2006, the Companyand its consolidated subsidiaries have adopted a newaccounting standard for the impairment of fixed assetswhich requires that tangible and intangible fixed assets becarried at cost less depreciation, and be reviewed forimpairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not berecoverable. The Company and its consolidated sub-sidiaries would be required to recognise an impairment lossif certain indicators of asset impairment exist and the bookvalue of an asset exceeds the undiscounted sum of futurecash flows of the asset. The standard states that impair-ment losses should be measured as the excess of thebook value over the higher of (1) the fair market value of theasset, net of disposition costs and (2) the present value offuture cash flows arising ongoing utilisation of the assetand from disposal after asset use. The standard coversland, factories, buildings and other forms of property, plantand equipment as well as intangible assets. Fixed assetswill be grouped at the lowest level for which there is identifi-able cash flows that are independent of cash flows of othergroups of assets.

The adoption of this standard had no effect on the con-solidated financial statements.

3. U.S. Dollar AmountsThe translation of yen amounts into U.S. dollar amounts isincluded solely for the convenience and has been made, asa matter of arithmetic computation only, at the rate of¥117.47 = U.S.$1.00, the exchange rate prevailing at 31stMarch, 2006. The translation should not be construed asa representation that yen amounts have been, could havebeen, or could in the future be, converted into U.S. dollarsat the above or any other rate.

4. InventoriesInventories consist of the following:


31st March, 2005 2006 2006

Finished goods ¥ 3,417 ¥ 3,661 $ 31,165Work in process 2,436 2,921 24,865Raw materials and supplies 12,150 15,641 133,148

Total ¥18,004 ¥22,224 $189,188

22

(g) Research and Development ExpensesResearch and development expenses are charged toincome as incurred.(h) LeasesNon-cancellable leases of the Company and its certainconsolidated subsidiaries are accounted for as operatingleases (whether such leases are classified as operating orfinance leases) except for lease agreements stipulating thetransfer of ownership of the leased assets to the lesseewhich are accounted for as finance leases.(i) Retirement BenefitsAccrued retirement benefits for employees of the Companyand its several consolidated subsidiaries are provided prin-cipally at an amount calculated based on the retirementbenefit obligation and the fair value of the pension planassets as of the balance sheet date, as adjusted for theunrecognised net retirement benefit obligation at transition,unrecognised actuarial gain or loss and unrecognised priorservice cost. The retirement benefit obligation has beenattributed to each period by the straight-line method overthe estimated years of service of the eligible employees.

Net retirement benefit obligation at transition is amor-tised principally over 15 years. Prior service cost is amor-tised as incurred by the straight-line method principallyover 15 years which are shorter than the average remainingyears of service of the employees. Principal actuarial gainor loss is amortised in the year following the year in whichthe gain or loss is recognised by the declining-balancemethod over 15 years which are shorter than the averageremaining years of service of the employees.

The allowance for directors’ and statutory auditors’retirement benefits, included in Long-term liabilities – other,is provided for the payment of retirement benefits to direc-tors and statuary auditors at an amount that would bepayable in accordance with its internal rules and regulationif all eligible directors and statutory auditors were to resignat the fiscal year end.( j) Derivative Financial InstrumentsThe Company and certain consolidated subsidiaries utiliseforward foreign exchange contracts and interest rate andcurrency swap agreements in order solely to hedge againstrisks of adverse fluctuations in foreign currency exchangerates and interest rates. The Company and consolidatedsubsidiaries do not enter into such financial instruments fortrading or speculative purposes.

Derivatives are carried at fair value, with any changes inunrealised gains or losses charged or credited to opera-tions, except for those which meet the criteria for deferralhedge accounting under which unrealised gains or lossesare deferred as an asset or a liability.(k) Income TaxesIncome taxes is computed based on income beforeincome taxes included in the consolidated statement ofincome.

Deferred tax assets and liabilities are determined basedon the differences between financial reporting and the taxbases of the assets and liabilities, and are measured usingthe enacted tax rates and laws which will be in effect whenthe differences are expected to reverse.

5. SecuritiesMarketable securitiesInformation regarding marketable securities classified asother securities at 31st March, 2005 and 2006 was as fol-lows:

Other securitiesMillions of yen

Acquisition Carrying Unrealised31st March, 2005 cost value gain

Securities whose carrying value exceeds their acquisition cost:

Stocks ¥1,182 ¥7,590 ¥6,408Debt securities — — —Other — — —

Subtotal 1,182 7,590 6,408Securities whose acquisition cost exceeds their carrying value:

Stocks — — —Debt securities — — —Other — — —

Subtotal — — —Total ¥1,182 ¥7,590 ¥6,408

Millions of yen



Stocks ¥1,189 ¥10,573 ¥9,383Debt securities — — —Other — — —

Subtotal 1,189 10,573 9,383Securities whose acquisition cost exceeds their carrying value:


Subtotal — — —Total ¥1,189 ¥10,573 ¥9,383

23

Thousands of U.S. dollars



Stocks $10,121 $90,005 $79,875Debt securities — — —Other — — —

Subtotal 10,121 90,005 79,875

Securities whose acquisition cost exceeds their carrying value:


Subtotal — — —Total $10,121 $90,005 $79,875

The proceeds from sales of marketable securitiesamounted to ¥17 million ($144 thousand) with an aggre-gate gain of ¥15 million ($127 thousand) for the year ended31st March, 2006.Non-marketable securitiesInformation regarding non-marketable securities classifiedas held-to-maturity securities and other securities at 31stMarch, 2005 and 2006 was as follows:

Millions of yen

31st March, 2005 Book value

Held-to-maturity securities:Commercial paper ¥2,135

Other securities:Unlisted securities ¥ 180


31st March, 2006 Book value Book value

Held-to-maturity securities:Commercial paper ¥1,720 $14,642

Other securities:Unlisted securities ¥ 184 $ 1,566

6. Short-Term Borrowings and Long-Term DebtShort-term borrowings were unsecured with average inter-est rates of 3.33% and 3.80% for the years ended 31stMarch, 2005 and 2006, respectively.

The Company’s assets pledged as collateral for long-term debt as of 31st March, 2005 and 2006 were as fol-lows:


31st March, 2005 2006 2006

Land ¥487 — —

8. Supplementary Cash Flow Informationa) Cash Equivalents in the Consolidated Statements of

Cash FlowsThe Company and consolidated subsidiaries consider allhighly liquid investments with a maturity of three months orless when purchased to be cash equivalents.b) Cash and Cash EquivalentsCash on hand and in banks reported in the consolidatedbalance sheets and cash and cash equivalents reported inthe consolidated statements of cash flows are reconciledas follows:


31st March, 2005 2006 2006

Cash on hand and in banks ¥26,410 ¥29,136 $248,029Held-to-maturity securities 2,135 1,720 14,642Short-term investmentsincluded in othercurrent assets — 430 3,660

Cash and cash equivalents ¥28,546 ¥31,287 $266,340

9. Contingent LiabilitiesAt 31st March, 2005 and 2006, the Company was contin-gently liable for guarantees given in respect of bank loansof employees amounting to ¥131 million and ¥111 million($944 thousand), respectively.

10. Research and Development ExpensesResearch and development expenses included in selling,general and administrative expenses were ¥6,601 millionand ¥7,433 million ($63,275 thousand) for the years ended31st March, 2005 and 2006, respectively.

11. LeasesThe following pro forma amounts represent the acquisitioncosts, accumulated depreciation and net book value ofleased assets, which would have been reflected in the con-solidated balance sheets if finance lease accounting hadbeen applied to the finance leases currently accounted foras operating leases:


31st March, 2005 2006 2006

Acquisition costs:Equipment ¥1,297 ¥731 $6,222Other assets 280 221 1,881

¥1,577 ¥953 $8,112Accumulated depreciation:

Equipment ¥ 906 ¥333 $2,834Other assets 176 136 1,157

¥1,083 ¥470 $4,001Net book value:

Equipment ¥ 390 ¥397 $3,379Other assets 103 85 723

¥ 494 ¥482 $4,103

Lease payments relating to finance leases accountedfor as operating leases amounted to ¥255 million and ¥232million ($1,974 thousand) for the years ended 31st March,

7. Income TaxesIncome taxes applicable to the Company comprised cor-poration tax, inhabitants’ taxes and enterprise tax which, inthe aggregate, resulted in a statutory tax rate of 40.0% forthe years ended 31st March, 2005 and 2006. Incometaxes of the consolidated subsidiaries were based on thetax rates applicable in their countries of incorporation.

The effective tax rates reflected in the consolidatedstatements of income for the years ended 31st March,2005 and 2006 differ from the statutory tax rate for the fol-lowing reasons:

2005 2006

Statutory tax rate 40.0% 40.0%Effect of:

Different tax rates applied to foreign subsidiaries (4.9) (5.9)

Tax exemption for prior periodsin foreign consolidated subsidiary — (0.7)

Elimination of dividend income 3.0 3.0Expenses not deductible for income tax purposes 0.6 0.6

Non-taxable income (0.9) (0.6)Per capita inhabitants tax 0.2 0.1Foreign tax credits (3.3) (2.2)Tax credits for research and development expenses (3.7) (3.5)

Other, net 1.4 0.7Effective tax rates 32.4% 31.5%

The significant components of deferred tax assets andliabilities as of 31st March, 2005 and 2006 were as follows:


31st March, 2005 2006 2006

Deferred tax assets:Accrued retirement benefits ¥2,085 ¥1,372 $11,679

Accrued bonuses 1,047 1,068 9,091Net operating loss carryforwards 810 898 7,644

Accrual for warrantyexpenses 48 545 4,639

Unrealised profit 483 532 4,528Accrued enterprise tax 236 208 1,770Accrued socialinsurance 114 106 902

Other 1,082 888 7,559Total gross deferred tax assets 5,910 5,622 47,859

Valuation allowance (810) (920) (7,831)Total deferred tax assets 5,099 4,702 40,027

Deferred tax liabilities:Net unrealised holding gain on securities (2,563) (3,753) (31,948)

Accelerated depreciation of foreign subsidiaries (628) (645) (5,490)

Other (76) (106) (902)Total deferred tax liabilities (3,268) (4,505) (38,350)Net deferred tax assets ¥1,830 ¥ 197 $ 1,677

24

The effect of the revised accounting standard was todecrease selling, general and administrative expenses by¥54 million ($459 thousand) and to increase in operatingincome by ¥54 million ($459 thousand) and increase otherexpenses by ¥131 million ($1,115 thousand). As a result,income before income taxes and minority interests wasdecreased by ¥77 million ($655 thousand) for the yearended 31st March, 2006.Additional InformationAs stipulated in the Japanese welfare Pension InsuranceLaw, the “Honda Employees’ Pension Fund (ConfederatedWelfare Pension Fund)”, of which the Company is one ofmembers, obtained an approval from the Ministry ofHealth, Labor and Welfare for exemption from the benefitobligation related to future employee services under thesubstitutional portion on 1st April, 2004. On 1st July, 2005,Ministry of Health, Labor and Welfare also approved thetransfer of remaining benefit obligation of substitutionalportion which was related to past employee services. On9th March 2006, the fund executed actual transfer to theJapanese government of the substitutional portion of thebenefit obligation and related pension plan assets.

As a result, the Company recognised a gain of ¥2,401million ($20,439 thousand) as other income for the yearended 31st March, 2006.

Furthermore, on 1st July, 2005, the fund was newlychanged to the “Honda Pension Fund”.

The components of retirement benefit expenses for theyears ended 31st March, 2005 and 2006 were outlined asfollows:


Year ended 31st March, 2005 2006 2006

Service cost ¥1,277 ¥1,335 $11,364Interest cost 713 568 4,835Expected return on plan assets (716) (619) (5,269)

Amortisation of net retirement benefit obligation at transition 575 434 3,694

Amortisation of actuarial loss 1,171 683 5,814

Amortisation of prior service cost (167) (121) (1,030)

Total ¥2,854 ¥2,282 $19,426

The assumptions used in accounting for the aboveplans are as follows:

2005 2006

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

2005 and 2006, respectively, which were equal to thedepreciation expense of the leased assets computed bythe straight-line method over the respective lease terms.

Future minimum lease payments subsequent to 31stMarch, 2006 for finance leases accounted for as operatingleases are summarised as follows:

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

2007 ¥188 $1,6002008 and thereafter 294 2,502Total ¥482 $4,103

12. Retirement Benefit PlansThe Company has defined benefit pension plans, i.e., awelfare pension fund plan, a tax-qualified pension plan anda lump-sum payment plan, covering substantially allemployees who are entitled to lump-sum or annuity pay-ments, the amounts of which are determined by referenceto their basic rates of pay, length of service, and the condi-tions under which termination occurs. Each of domesticconsolidated subsidiaries has its own tax-qualified pensionplan or a lump-sum payment plan as a defined benefit pen-sion plan. Certain foreign subsidiaries have defined benefitpension plans or defined contribution pension plans.

The following table sets forth the funded and accruedstatus of the plans, and the amounts recognised in theconsolidated balance sheets as of 31st March, 2005 and2006 for the Company’s and its consolidated subsidiaries’defined benefit pension plans:


31st March, 2005 2006 2006

Retirement benefit obligation ¥(35,891) ¥(25,269) $(215,110)

Plan assets at fair value 19,570 18,590 158,253Unfunded retirement benefit obligation (16,321) (6,679) (56,857)

Unrecognised net retirement benefit obligation at transition 5,620 3,560 30,305

Unrecognised actuarial loss 7,461 769 6,546Unrecognised prior service cost (credit) (2,111) (1,281) (10,904)

Net retirement benefit obligation (5,350) (3,629) (30,892)

Accrued retirement benefits ¥ (5,350) ¥ (3,629) $ (30,892)

The government-sponsored portion of the benefitsunder the welfare pension fund plans was included in theamounts as of 31st March, 2005.Change in Method of AccountingA consolidated subsidiary, P.T. Showa IndonesiaManufacturing adopted the revised accounting standard ofpension accounting in Indonesia (revised at 24th June,2004) at the beginning of this fiscal year.

25

26

16. Segment InformationThe Company and consolidated subsidiaries are primarily engaged in the manufacture and sale of products in Japan and over-seas, in one major segment: the motor vehicle parts segment.

The business and geographical segment information for the Company and consolidated subsidiaries for the years ended31st March, 2005 and 2006 was outlined as follows:Business segments

Year ended 31st March, 2005 Millions of yen

Eliminations Motor vehicle parts Other Total or corporate Consolidated

I. Sales and operating incomeSales to third parties ¥228,197 ¥5,359 ¥233,557 ¥ — ¥233,557Intergroup sales and transfers — — — — —

Total sales 228,197 5,359 233,557 — 233,557Operating expenses 212,691 4,190 216,881 — 216,881

Operating income ¥ 15,506 ¥1,169 ¥ 16,675 ¥ — ¥ 16,675

II. Assets, depreciation and capital expendituresIdentifiable assets ¥101,699 ¥1,995 ¥103,694 ¥29,470 ¥133,165Depreciation and amortization 6,091 87 6,178 18 6,197Capital expenditures 8,650 37 8,688 39 8,728

13. Amounts Per Share

Yen U.S. dollars

Year ended 31st March, 2005 2006 2006

Net income:Basic ¥121.03 ¥137.56 $1.17

Cash dividends 15.00 20.00 0.17

Yen U.S. dollars

31st March, 2005 2006 2006

Net assets ¥967.84 ¥1,156.02 $9.84

The computation of basic net income per share is basedon the net income available for distribution to shareholdersof common stock and the weighted average number ofshares of common stock outstanding during the year, anddiluted net income per share is computed based on the netincome available for distribution to the shareholders andthe weighted average number of shares of common stockoutstanding for the year after giving effect to the dilutivepotential of shares of common stock to be issued upon theconversion of convertible bonds for the year.

The disclosure of diluted net income per share for theyears ended 31st March, 2005 and 2006 was omittedbecause there were no dilutive instruments, respectively.

Cash dividends per share represent the cash dividendsproposed by the Board of Directors as applicable to therespective years together with the interim cash dividendspaid.

Amounts per share of net assets are computed basedon net assets available for distribution to the shareholdersand the number of shares of common stock outstanding atthe year end.

14. Shareholders’ EquityThe new Corporation Law of Japan (the “Law”), whichsuperseded most of the provisions of the CommercialCode of Japan, went into effect on May 1, 2006. The Lawprovides that an amount equal to 10% of the amount to bedistributed as distributions of capital surplus (other than thecapital reserve) and retained earnings (other than the legalreserve) be transferred to the capital reserve and the legalreserve, respectively, until the sum of the capital reserveand the legal reserve equals 25% of the common stockaccount. Such distributions can be made at any time byresolution of the shareholders, or by the Board of Directorsif certain conditions are met, but neither the capital reservenor the legal reserve is available for distributions.

15. Related Party TransactionsThe Company is a 33.5% – owned affiliate of Honda MotorCo., Ltd. (Honda). Net sales to Honda included in consoli-dated net sales is ¥64,794 million and ¥64,602 million($549,944 thousand) for the years ended 31st March,2005 and 2006, respectively.

The terms of transactions referred to above were nego-tiated and have been determined on an arm’s-length basis.

27



I. Sales and operating incomeSales to third parties ¥244,818 ¥5,630 ¥250,448 ¥ — ¥250,448Intergroup sales and transfers — — — — —

Total sales 244,818 5,630 250,448 — 250,448Operating expenses 228,832 4,440 233,272 — 233,272

Operating income ¥ 15,985 ¥1,190 ¥ 17,175 ¥ — ¥ 17,175

II. Assets, depreciation and capital expendituresIdentifiable assets ¥111,175 ¥3,469 ¥114,645 ¥36,709 ¥151,354Depreciation and amortization 6,665 78 6,743 14 6,758Capital expenditures 10,436 1,310 11,747 29 11,777

Year ended 31st March, 2006 Thousands of U.S. dollars


I. Sales and operating incomeSales to third parties $2,084,089 $47,927 $2,132,016 $ — $2,132,016Intergroup sales and transfers — — — — —

Total sales 2,084,089 47,927 2,132,016 — 2,132,016Operating expenses 1,948,003 37,796 1,985,800 — 1,985,800

Operating income $ 136,077 $10,130 $ 146,207 $ — $ 146,207

II. Assets, depreciation and capital expendituresIdentifiable assets $ 946,411 $29,530 $ 975,951 $312,496 $1,288,448Depreciation and amortization 56,737 663 57,401 119 57,529Capital expenditures 88,839 11,151 100,000 246 100,255

Geographical areas


Eliminations Japan North America Europe Others Total or corporate Consolidated

Sales to third parties ¥100,921 ¥76,473 ¥18,723 ¥37,439 ¥233,557 ¥ — ¥233,557Intergroup sales and transfers 32,741 1,141 132 1,674 35,689 (35,689) —

Total sales 133,663 77,614 18,855 39,114 269,247 (35,689) 233,557Operating expenses 125,306 73,820 18,419 34,255 251,803 (34,921) 216,881

Operating income ¥ 8,356 ¥ 3,793 ¥ 435 ¥ 4,858 ¥ 17,443 ¥ (768) ¥ 16,675

Identifiable assets ¥ 59,731 ¥25,685 ¥ 9,161 ¥20,264 ¥114,843 ¥ 18,322 ¥133,165



Sales to third parties ¥105,625 ¥80,066 ¥17,617 ¥47,139 ¥250,448 ¥ — ¥250,448Intergroup sales and transfers 35,012 1,371 147 2,642 39,173 (39,173) —

Total sales 140,637 81,437 17,765 49,781 289,621 (39,173) 250,448Operating expenses 131,593 78,365 17,623 44,005 271,587 (38,314) 233,272

Operating income ¥ 9,044 ¥ 3,072 ¥ 142 ¥ 5,775 ¥ 18,034 ¥ (858) ¥ 17,175

Identifiable assets ¥ 60,979 ¥29,446 ¥ 8,511 ¥26,663 ¥125,601 ¥ 25,753 ¥151,354



Sales to third parties $ 899,165 $681,586 $149,970 $401,285 $2,132,016 $ — $2,132,016Intergroup sales and transfers 298,050 11,671 1,251 22,490 333,472 (333,472) —

Total sales 1,197,216 693,257 151,230 423,776 2,465,489 (333,472) 2,132,016Operating expenses 1,120,226 667,106 150,021 374,606 2,311,969 (326,159) 1,985,800

Operating income $ 76,989 $ 26,151 $ 1,208 $ 49,161 $ 153,520 $ (7,303) $ 146,207

Identifiable assets $ 519,102 $250,668 $ 72,452 $226,977 $1,069,217 $ 219,230 $1,288,448

Overseas salesOverseas sales, which include export sales of the Company and its domestic consolidated subsidiaries and sales (other thanexports to Japan) of its foreign subsidiaries, for the years ended 31st March, 2005 and 2006 were summarised as follows:


North America Europe Others Total

Overseas sales ¥77,876 ¥19,456 ¥41,473 ¥138,806Consolidated net sales ¥233,557Overseas sales as a percentage of consolidated net sales 33.3% 8.3% 17.8% 59.4%



Overseas sales ¥80,265 ¥18,147 ¥53,418 ¥151,831Consolidated net sales ¥250,448



Overseas sales $683,280 $154,481 $454,737 $1,292,508Consolidated net sales $2,132,016Overseas sales as a percentage of consolidated net sales 32.1% 7.2% 21.3% 60.6%

28

17. Prior Periods’ AdjustmentThe “Prior periods’ adjustment” represents a loss from adjusting prior period’s inventory of the foreign subsidiary for the yearended 31st March, 2005.

18. Subsequent EventsOn 21st June, 2006, the Company’s shareholders authorised the appropriation of retained earnings as follows:


AppropriationCash dividends of ¥10.0($0.08) per share ¥759 $6,461

29

Report of Independent Auditors

30

OVERSEAS

JAPAN

Corporate Information

Showa CorporationOverseas Bases

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*

(Head Office & Guangzhou Plant)(Wuhan Plant)**

Shanghai Showa Auto Parts Co., Ltd.*Showa India Pvt. Ltd.** ***Showa Autoparts (Thailand) Co., Ltd.**

Affiliates:Asia Chengdu Ningjiang Showa Autoparts Co., Ltd.

Kai Fa Industry Co., Ltd.Munjal Showa Ltd.Machino Auto-Parts Co., Ltd.

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

Daelim Motor Co., Ltd.Atlas Honda Ltd.Armstrong Auto Parts Sdn. Bhd.

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

Plants: Saitama Gyoda City, SaitamaHadano Hadano City, KanagawaGotemba Gotemba City, ShizuokaAsaba Fukuroi City, ShizuokaNagoya Kasugai City, Aichi

R&D Centers: Tochigi Haga Town, TochigiSaitama Gyoda City, SaitamaAsaba Fukuroi City, Shizuoka

Sales Office: Osaka Ikeda City, Osaka

Subsidiaries: Showa Kyushu Corporation* Uki City, KumamotoShowa Seiko Co., Ltd.* Hadano City, KanagawaHonda Verno Kumagaya Co., Ltd. Kumagaya City, Saitama

Note: *Subsidiaries subject to consolidated financial accounting**Plants under construction. Their operation will be started as follows ;

Guangzhou Showa Autoparts Co., Ltd. (Wuhan Plant) : Jan. 2007 Showa India Pvt. Ltd. : Apr. 2007 Showa Autoparts (Thailand) Co., Ltd. : Nov. 2007

***Showa India Pvt. Ltd. (Provisional name)

Head OfficePlantsR&D CentersSales OfficeSubsidiaries

Financial and Operating Highlights ......................... 1

Message from the President .................................... 2

Showa’s Global Network andMutually Complementary Parts & Products ............ 4

Review of Operations .............................................. 6

Showa’s Technology ................................................ 8

Topics ...................................................................... 10

Contents

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 manufacturing motor vehicle parts 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 manufacturer of power steering

products, 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, Japan, Showa operates five manufacturing plants, three

research and development facilities and two manufacturing subsidiaries within Japan.

The Company’s global business operation, a network of 30 facilities that includes 12 consolidated

subsidiaries, spreads over 15 nations including Japan.

Showa Corporation’s business activities revolve around customer satisfaction, as emphasized in the

Company’s principle “To meet customer needs with the highest quality and the most competitive

products.” 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 of Showa Corporation. We actively support a range of environmental preservation initiatives

through our product offerings and corporate activities.

Showa Corporation and its global group Companies 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.

Forward-looking statements:Forward-looking statements made in this annualreport concerning performance or business strategieshave been determined according to assumptions andbeliefs based on information available at the time andcontain elements of risk and uncertainty.

Financial Section ...................................................... 11

Corporate Information ............................................ 30

Board of Directors and Corporate Auditors ............ 31

Corporate Data ........................................................ 31

31

PresidentMasahide Matsushima

Vice PresidentKazuto Iiyama

Executive Managing DirectorsHidefumi KasagiHiroshi Ijima

Managing DirectorsKenshi HiraiYoshitaka TerazawaMitsuhiro Nishida

Tetsuro AoyamaTakeo HosoiTakashi KondaTakeshi KawamotoNorio Ukai

Directors

Haruo Hirano

Mitsuhiro Chiba

Hisao Hirono

Akira Kadoya

Mitsutaka Sugino

Corporate Auditors

Mamoru Morino

Koichi Uchibaba

Kyoji Sano

Sakae Nomura

Common Stock

Authorized:180,000,000 sharesIssued: 76,020,019 shares

Number of Shareholders

6,461

Common Stock Traded

Tokyo

Shareholders’ Register Managerfor Common StockMitsubishi UFJ Trust and BankingCorporation7-10-11,Higashisuna,Koto-ku, Tokyo137-8081,Japan

As of 21st June, 2006Board of Directors and Corporate Auditors

As of 31st March, 2006Corporate Data

Showa's Stock PriceNikkei Average

Showa's Stock Price (’00/4=100)(Yen)

0

50

100

150

200

250

400

350

300

’00/4 4 4 4 4 47 10 ’01/1 7 7 710 10 10 7 10’02/1 ’03/1 ’04/1 ’05/1 37 10 ’06/1

Ten Largest ShareholdersShares Percent of

(Thousands) total (%)

Honda Motor Co., Ltd. 25,447 33.48Japan Trustee Services Bank, Ltd.

(Trust Account) 9,903 13.03The Bank of New York-Jasdec Treaty Account 3,303 4.35The Master Trust Bank of Japan, Ltd.

(Trust Account) 3,003 3.95The Bank of Tokyo-Mitsubishi UFJ, Ltd. 2,151 2.83Luxemburg Offshore Jasdec Lending Account 1,165 1.53Showa Corporation Business Partner’sShareholding Association 1,127 1.48The Chase Manhattan Bank, NA.London Special Account No.1 987 1.30Sanyo Foods Co., Ltd. 823 1.08Trust & Custody Services Bank, Ltd.

(Pension Trust Account) 767 1.01

48,680 64.04

SHOWA CORPORATION1-14-1, Fujiwara-cho, Gyoda City, Saitama 361-8506, JapanTel : +81-48-554-1151Fax : +81-48-556-8393http://www.showa1.com

Printed in Japan on 100% recycled paper with soy ink

ANNUAL REPORT 2006SHOWA CORPORATION

annual report 2006 - showa1.com · cash dividends paid during the period 987 1,367 11,637 total...

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