ANNUAL REPORT 2002 HITACHI ZOSEN CORPORATION

Transcription

1 ANNUAL REPORT 2002 Year Ended March 31, 2002 Environmental Systems Industrial Plants Shipbuilding Offshore Structures Steel Structures Construction Machinery Logistics Systems Machinery and Prime Movers Electronics and Information Systems HITACHI ZOSEN CORPORATION

2 CORPORATE DESCRIPTION Hitachi Zosen Corporation is one of Japan s leading manufacturers of heavy industrial machinery. For more than a century, the Osaka-based operation has played an important role in building the nation s infrastructure and serving society s needs. Hitachi Zosen s advanced technologies in such fields as environmental systems and industrial plants, shipbuilding and offshore structures, steel structures, construction machinery and logistics systems, industrial machinery and prime movers, and electronics and information systems have attracted attention worldwide, the Company s dynamic and global network is supported by 100 subsidiaries around the world. Hitachi Zosen s mission is to provide products and services that will contribute to economic development and rising living standards around the world and operate in harmony with local communities and the environment. CONTENTS 1 Selected Financial Data 2 A Message from Management 5 Review of Operations 12 Financial Section 37 Board of Directors and Executive-Officers 37 Corporate Data 38 Corporate Directory

3 SELECTED FINANCIAL DATA Hitachi Zosen Corporation and Consolidated Subsidiaries Net sales Net income (loss)... Net income (loss) per share... Millions except for per share amounts and numbers of employees For the Years Ended 31st March, ,619 (13,254) 517,383 (27,294) 475,360 2, ,202 2, ,109 3,460 (13.22) (27.23) $3, $ 0.03 Total assets... Shareholders equity ,230 90,450 As of 31st March, ,497 59, ,847 55, ,368 59, ,812 61,852 $4, Number of employees... 12,120 11,054 10,867 10,723 10,403 Notes: 1. U.S. dollar amounts in this annual report are translated from yen, for convenience only, at the rate of =U.S.$1. (See Note 1 of the Notes to the Consolidated Financial Statements.) 2. The computation of net income per share is based on the weighted average number of shares outstanding during each period. Net Sales () Shareholders, Equity () , , , , , ,852 59,472 55,405 59,500 90,450 Net Income (Loss) () Total Assets () (27,294) (13,254) 2,374 2,909 3, , , , , ,230 1

4 A MESSAGE FROM MANAGEMENT Overview In fiscal 2002, ended March 31, 2002, overall domestic economic conditions were very severe. Personal consumption continued to decline, reflecting falling incomes and rising unemployment, while public sector investment was generally slow. In addition, the slowdown in the global economy did not help the situation. These factors caused corporate earnings to decrease, leading to a downturn in private sector capital investment. Lower capital investment in the public and private sectors exacerbated the difficulties of Japanese shipbuilding and heavy machinery industries, as did intensifying price competition domestically and abroad. The Hitachi Zosen Group responded to these developments by continuing to forge ahead with Technological Revolution 21, through which Hitachi Zosen aims to drastically improve the competitiveness of its products while securing better-quality orders by stepping up marketing efforts based on its product strategy. At the same time, the Company strove to further lower costs and improve profitability. Nonetheless, these efforts failed to produce material results. Consolidated net sales fell 5.0%, to 439,109 million (U.S.$3,295 million), and operating income decreased 1.1%, to 15,169 million (U.S.$114 million) from the previous fiscal year. On the positive side, net income advanced 18.9%, to 3,460 million (U.S.$26 million). We decided not to pay cash dividends in order to further strengthen our financial position and create a highly profitable organization. New Medium-Term Management Plan Launched We earlier reached an agreement with NKK Corporation to merge shipbuilding businesses on October 1, 2002, through a new company called Universal Shipbuilding Corporation. This integration represents a major transformation for Hitachi Zosen, whose shipbuilding has remained central to the Company s operations since its establishment 120 years ago. After the merger we will endeavor to strengthen our operational base and ensure strong progress in the 21st century. To support these efforts, in April this year we instituted a new five-year management plan, called Hitz-Advance. The Hitz part of this name is a corporate brand that we plan to begin using from October Under our medium-term initiative, we seek to restructure all operations and link Group businesses while unifying management plans and operations. We will create and cultivate new businesses and expand our solutions services, focusing on such core fields as environmental systems, industrial and precision machinery, energy, electronics and information systems, and marine and disaster prevention businesses. With this 2

5 Junichiro Kojima, Chairman Takenao Shigefuji, President restructuring we will move away from heavy industry-oriented areas that have been our main focus to date, building a high-value-added operational structure that comprehensively delivers both products and services. You will see us reborn as Hitz Hitachi Zosen in October. Outlook While merging shipbuilding business with NKK, in this first year of Hitz-Advance we will implement a range of policies while strengthening the revenue and earnings streams of Hitz Hitachi Zosen and building strong financials and operational foundations in order to enhance enterprise value. We will reinforce our efforts under Technological Revolution 21 to improve the competitiveness of our products, conduct aggressive marketing activities in line with our product strategies, bolster the efficiency of related operations, and promote the rationalization of our production structure. In keeping with these goals, we will reorganize and eliminate affiliated companies, as evidenced by the acquisition of HEC Corporation. We will cooperate with, partner with, or simply acquire other companies. Here, for example, we have taken over the environmental business of Niigata Engineering Co., Ltd. Such moves are part of our drive to enhance the comprehensive capabilities of the Group while launching and cultivating new businesses and expanding solutions services. Our 3

6 consolidated financial goals for fiscal 2003, ending March 31, 2003, are to generate net sales of 400,000 million, operating income of 14,000 million, and net income of minus 10,300 million. We are determined to concentrate Group resources to transform ourselves from a heavy industry player into a high-value-added company that provides integrated products and services. We ask you our shareholders, customers, and business partners for your continued support and encouragement for our endeavors. June 2002 Junichiro Kojima, Chairman Takenao Shigefuji, President 4

7 REVIEW OF OPERATIONS Performance Overview In fiscal 2002, the domestic shipbuilding and heavy machinery industries continued to suffer from an adverse operating environment characterized by a slowdown in public sector spending and private sector capital investment, compounded by intense price competition in Japan and abroad. The Hitachi Zosen Group strove to overcome these challenges by pushing ahead with Technological Revolution 21, through which it aims to make its products dramatically more competitive, while obtaining better-quality orders by marketing more aggressively based on product strategy. At the same time, the Group endeavored to boost profitability by slashing costs. Despite these efforts, net sales dropped 5.0%, to 439,109 million (U.S.$3,295 million). This reflected lower sales of Steel Structures, Construction Machinery and Logistics Systems, which overshadowed gains in Machinery and Prime Movers. Operating income slipped 1.1%, to 15,169 million (U.S.$114 million), owing to earnings from most operations save Steel Structures, Construction Machinery and Logistics Systems, where we posted losses amid falling sales. On the positive side, net income advanced 18.9%, to 3,460 million (U.S.$26 million). In Environmental Systems and Industrial Plants, sales slipped 0.7%, to 165,717 million (U.S.$1,244 million), reflecting sluggish public and private sector spending in related areas. Operating income for this segment decreased 31.4%, to 7,379 million (U.S.$55 million), as price competition remained intense, both domestically and abroad. Sales of Shipbuilding and Offshore Structures decreased 2.0%, to 132,794 million (U.S.$997 million). This was because price competition in the international marketplace remained very aggressive, which offset a sustained high level of new ship orders in Japan. In Other Businesses Net Sales Environmental Systems and Industrial Plants Steel Structures, Construction Machinery and Logistics Systems Machinery and Prime Movers Shipbuilding and Offshore Structures 5

8 contrast, operating income increased substantially from 452 million in the previous term, to 8,401 million (U.S.$63 million), on the strength of cost-cutting and the lower yen. In the Steel Structures, Construction Machinery and Logistics Systems segment, sales sharply declined 42.1%, to 41,152 million (U.S.$309 million). This stemmed from sluggish public sector and private sector investment, which greatly hampered orders. We posted an operating loss of 2,160 million (U.S.$16 million) for this segment, compared with an operating income of 1,475 million in fiscal Conditions were generally difficult in Machinery and Prime Movers, reflecting slow public sector spending in related areas and intensified price competition. Nonetheless, we boosted sales in this segment 22.8%, to 61,153 million (U.S.$459 million). Operating income surged 33.8%, to 961 million (U.S.$7 million). In other businesses, which include such operations as Electronics and Information Systems, sales dropped 6.0%, to 46,081 million (U.S.$346 million). Operating income for these business segments decreased from 2,004 million a year earlier, to 578 million (U.S.$4 million). Environmental Systems and Industrial Plants In fiscal 2002, orders for environmental plant and equipment remained severe owing to Japan s lingering recession and massive cuts in environment-related public investments. Under such circumstances, we received several new orders, inclusive of Municipal Refuse Incineration Plants for regional municipalities, the largest Ash Melting System in Japan, a Gasification Melting Furnace, a Bulky Waste Treatment Plant, or Recycling Plaza, and advanced Gas Treatment Systems. We completed and delivered large municipal refuse incinerators to Osaka and Tokyo, as well as recycling plazas and advanced gas treatment systems to other municipalities. We also constructed the most advanced waste-to-energy facility for the creation of a Recycling-Oriented Society to incinerate mixed waste with a municipal wastes of refuse derived fuel (RDF) and industrial wastes for generating electric power. The facility is managed by a publicprivate partnership between a local government and private companies in this area. Municipal refuse incinerator to Tokyo In new environmental businesses, we 6

9 developed a high-speed garbage-reducing system that uses microorganisms to decompose garbage and reduces volume to just one-tenth in a short period of time. We received an operations and management order for this system from the Osaka Prefecture Central Wholesale Market. Also, we reached the practical phase in our research and development on advanced water purification system utilizing bio-activated carbon and membrane filtration and fermentation treatment system for organic waste. In the industrial plants business, we continued to face intense price competition and a prolonged slowdown of orders in Japan and abroad, although there were signs of recovery in some segments of overseas markets. Nevertheless, we won orders to build a poly methyl metha acrylate plant in China and a substitute chlorofluorocarbon plant for a domestic chemical company. We also completed and delivered a titanium oxide plant to a domestic chemical company. We acquired environment-related businesses, mainly in water and sludge treatment areas, from Niigata Engineering, enabling us to reinforce and expand our capabilities in this area. In the air purification system field, we decided to establish new catalysts manufacturing plant and sales offices in the United States to meet growing demand of NOx reduction under the country s enhanced Clean Air Act. Hitachi Zosen, in its environmental service division, plans to boost and broaden its solutions business, focusing on waste processing and after-sales service, plant operations, maintenance, and management using private finance initiatives. Shipbuilding and Offshore Structures Fiscal 2002 was a difficult period. Domestic vessel orders remained high, but price competition was again intense in the international marketplace. In the second half of the year, the marine transportation market deteriorated owing to a global economic slowdown. Under this environment, the Hitachi Zosen Group received orders totaling 2,050,000 deadweight tons (1,120,000 gross tons) for 32 vessels, VLCC NIPPON 7

10 including large oil tankers and dry bulk carriers. We delivered 29 vessels totaling 2,270,000 deadweight tons (1,250,000 gross tons), including large oil tankers and dry bulk carriers. We received repair orders for 268 vessels and completed work on 269 for shipping companies, the Japan Defense Agency, and the Japan Coast Guard. In offshore structures, we received orders for and delivered such structures as floating breakwaters. Steel Structures, Construction Machinery, and Logistics Systems Hitachi Zosen encountered yet another difficult year, with public sector investment and related private sector plant and equipment demand remaining at low ebbs. Nonetheless, Hitachi Zosen was able to attract significant new orders, including the Japan Highway Public Corporation s order for the Suzuka River Bridge on the Higashimeihan Expressway. We secured additional orders from the Ministry of Land, Infrastructure and Transport, local government offices, expressway public corporations, electric power companies, and general contractors for bridges, hydraulic gates, marine engineering structures, and architectural structures. We delivered several bridges and other products during the fiscal year to key customers. They included a viaduct for the Fukuoka-Kitakyushu Urban Expressway Public Corporation and a conduit gate at the Otaki Dam for the Kinki Regional Development Bureau of the Ministry of Land, Infrastructure and Transport. The main offerings in our construction machinery and logistics systems operations are shield tunneling machines, multi-story parking systems, logistics equipment and cranes, which were also affected by the poor economic environment. However, we constructed underground parking machinery facilities in front of Shizuoka Station for the Chubu Regional Bureau of the Ministry of Land, Infrastructure and Transport, and received an order for a shield tunneling machine from Singapore for use in subway construction. We also received orders for and delivered various types of shield tunneling machine, multistory parking systems, and logistics and conveyor systems to local government offices, general contractors, and other companies. We earlier concluded an agreement with Hitachi Construction Machinery Co., The Otani Viaduct Ltd., to jointly purchase materials for and 8

11 develop shield tunneling machines. To further enhance efficiency and strengthen our business foundation in that field, both parties agreed to integrate their production divisions and establish Geological Technology & Machinery Co., Ltd., as of April Machinery and Prime Movers It was a difficult year for Hitachi Zosen, reflecting sluggish capital investment among steel and automobile manufacturers. Against this background, we received and completed orders domestically and abroad for various steelmaking machinery, presses for automobile manufacturers, plastic extruding systems, nonwoven fabric manufacturing facilities, and filling systems from food and pharmaceutical companies. In March 2001, we joined hands Diesel power generation facilities in Ibaraki Works with NKK and Sumitomo Heavy Industries, Ltd., to established JP Steel Plantech Co. to sell steel machinery. To further strengthen sales and engineering capabilities, the partners integrated their engineering operations as of April The economic landscape was generally bleak in prime movers owing to intensified price competition that overshadowed rising demand for large generation facilities as a result of the liberalization of electricity retailing. During the year, our Ibaraki Works and our Maizuru Works delivered diesel power generation facilities to power retailers. We also received and completed orders for variable heat and power gas turbine generators in Japan and diesel engines for domestic and overseas shipyards. Electronics and Information Systems The electronics and information systems business group cooperates with Group companies to develop, design, manufacture, and sell electronic and control equipment and information and telecommunications systems. Highlights of the year included the development of a digital image recorder, as well as orders for and deliveries of medical information systems and various simulators. The recorder, for example, features 16 cameras that can simultaneously capture images in real time. We aim to expand sales for this product. As part of group management, we joined hands with affiliated companies to establish 9

12 two global positioning system companies that will allow us to fully enter the high-precision global positioning business by harnessing electronic standards data provided by the Geographical Survey Institute. Technology Development In April 2002, Hitachi Zosen consolidated its technology development functions by integrating the Technical Research Institute and the Technology Planning and Administration Department to form the Technology Headquarters. Realtime image recorder DreamView The Technology Headquarters aims to accelerate development and commercialization by clarifying our technological strategies and cultivating new business. The Technology Strategy Department takes a leading role in this respect. The Technical and Research Institute, under which each research centers previously supported only related divisions, reorganized its research centers to focus on specific business fields, thereby delivering the best technologies and efficiency. We have also created a structure to enhance our capabilities in fundamental research, manufacturing engineering, and leading-edge technologies to support the product development efforts of each business group and improve quality and speed in entering new fields and product development. To provide research and development support under our new medium-term management plan, in the environmental field we are pushing ahead with the development of industry-leading new business as a top comprehensive environmental systems player. In the marine and disaster-prevention fields, we are exploring development related to urban renewal infrastructures. In the industrial and precision machinery fields, our priorities are development relating to IT-related hardware and nanotechnology. In the information area, we are focusing on the global positioning systems (GPS) and solutions businesses. The Development Project Center concentrates on commercialization as a direct arm of the Technology Headquarters. The office is currently Hi-productive Edge Mirror Polisher For φ300mm Si-wafer exploring 10

13 ways to swiftly commercialize work on an information technology-related polishing machine, hydrogen manufacturing equipment, recycling systems, and the Internet business by transferring it to our business groups. Hitachi Zosen Group Firms At the close of fiscal 2002, the Hitachi Zosen Group comprised 158 companies, of which nine were listed in the Japanese markets. These companies engage in an array of operations. Highlights of the Year We have reached an agreement to merge our core shipbuilding operations in October 2002 with those of NKK Corporation to form Universal Shipbuilding, which will have 150 billion in sales. We plan further strategic mergers and acquisitions to expand our business. In the shield tunneling machine business, for example, we established an integrated production company, Geological Technology & Machinery Co., Ltd., in April 2002 with Hitachi Construction Machinery Co., Ltd. Also, we took over water, sludge processing, and other operations from Niigata Engineering Co., Ltd. on May 1, 2002 to reinforce our environmental business, and plan to acquire HEC Corporation around October 1, In information technology, we made Group company MYTRIP NET Co., Ltd., a wholly owned subsidiary in September The goal was to strengthen our industry-leading reservation site, Tabi-no-madoguchi (travel desk), for hotels. Ataka Construction & Engineering Co., Ltd. which focuses on manufacturing and selling water treatment equipment for the Hitachi Zosen Group, listed on the First Section of the Tokyo Stock Exchange and was appointed to the First Section of the Osaka Securities Exchange in November These moves should position that affiliate for future growth. Hitachi Zosen is concentrating on consolidated management, reinforcing ties between Shaking hands after signing agreement on shipbuilding business merger with NKK Corporation. Group companies, while restructuring and integrating these companies and endeavoring to harness management resources more efficiently. We are stepping up and implementing a Group management approach designed to create new businesses and strengthen competitiveness. These initiatives will transform us from merely being a manufacturing entity to an enterprise that provides products and solutions. 11

14 FINANCIAL SECTION CONSOLIDATED BALANCE SHEETS Hitachi Zosen Corporation and Consolidated Subsidiaries At 31st March, 2001 and 2002 ASSETS 2001 (Note 1) Current assets: Cash and cash equivalents (Note 15): Cash and time deposits... Marketable securities (Note 3)... Receivables: Trade notes and accounts: Non-consolidated subsidiaries and affiliates... Other... Other... Allowance for doubtful receivables... 84,778 6,002 90,780 1, ,308 3,523 (884) 165,093 93,742 1,284 95,026 1, ,084 4,682 (806) 157,741 $ 703,505 9, ,141 13,366 1,141,343 35,137 (6,049) 1,183,797 Inventories (Note 4)... Deferred tax assets (Note 19)... Prepaid expenses and other current assets... Total current assets ,877 7,737 13, , ,842 8,253 13, , ,312 61, ,880 2,857,066 Investments and other non-current assets: Investments in non-consolidated subsidiaries and affiliates (Note 3)... Investments in securities (Notes 3 and 5)... Long-term loans receivable... Deferred tax assets (Note 19)... Other investments and non-current assets... Allowance for doubtful receivables... Total investments and non-current assets... 21,009 23,415 2,019 11,054 16,423 (6,170) 67,750 13,551 22,597 1,007 10,570 13,593 (5,827) 55, , ,584 7,557 79, ,011 (43,730) 416,443 Property, plant and equipment, at cost (Note 5): Land... Buildings and structures... Machinery and equipment... Construction in progress... Less accumulated depreciation... Property, plant and equipment, net , , ,990 1, ,368 (131,704) 202, , , , ,032 (137,734) 197, , , ,253 1,816 2,514,311 (1,033,651) 1,480,660 Intangible assets... Total assets... 4, ,368 5, ,812 39,917 $4,794,086 See the accompanying Notes to the Consolidated Financial Statements. 12

15 LIABILITIES AND SHAREHOLDERS EQUITY 2001 (Note 1) Current liabilities: Short-term loans (Note 5)... Current portion of long-term debt (Note 5)... Notes and accounts payable: Non-consolidated subsidiaries and affiliates... Other... Advances received on work in progress... Accrued income taxes... Reserve for product warranty... Reserve for losses on work in progress... Accrued expenses... Other current liabilities... Total current liabilities... Long-term liabilities: Long-term debt, less current portion (Note 5)... Employees retirement benefits (Note 18)... Deferred tax liabilities (Note 19)... Deferred tax liabilities for land revaluation... Other non-current liabilities... Total long-term liabilities... Total liabilities ,383 34,388 5, ,178 43,249 3,103 1,426 6,700 68,179 7, , ,193 16, ,069 9, , , ,612 51,618 7,214 97,074 47,724 1,902 1,190 6,700 62,647 11, , ,608 16, ,069 11, , ,727 $ 882, ,377 54, , ,154 14,274 8,931 50, ,146 86,462 3,040, , , ,023 87,189 1,189,681 4,230,597 Minority interests in consolidated subsidiaries... 17,906 13,233 99,310 Contingent liabilities (Note 6) Shareholders equity: Common stock Authorised2,340,000,000 shares Issued 1,002,152,579 shares at 31st March, 2001 and Additional paid-in capital... Land revaluation reserve (Note 7)... Net unrealised holding gains on securities... Foreign currency translation adjustments... Retained earnings (deficit)... Treasury stook, at cost... 2,920 shares in 2001 and 66,383 shares in 2002 Total shareholders equity... Total liabilities, minority interests and shareholders equity 50,295 9, (1,482) (0) 59, ,368 50,295 9, (582) 1,982 (4) 61, , ,448 68,007 4,608 3,640 (4,368) 14,874 (30) 464,179 $4,794,086 13

16 CONSOLIDATED STATEMENTS OF INCOME Hitachi Zosen Corporation and Consolidated Subsidiaries For the Years Ended 31st March, 2001 and (Note 1) Net sales... Cost of sales... Gross profit... Selling, general and administrative expenses... Operating income , ,508 58,694 43,359 15, , ,325 60,784 45,615 15,169 $3,295,377 2,839, , , ,838 Other income (expenses): Interest and dividend income... Interest expense... Write-down of securities... Foreign exchange loss... Equity in net income of non-consolidated subsidiaries and affiliates... Gain on sale of property (Note 8)... Gain on sale of investments in an affiliate (Note 9)... Reserve for losses on work in progress... Special payments for retirement benefits (Note 10)... Loss on devaluation of real estate held for sale (Note 11)... Allowance for doubtful receivables (Note 12)... Loss on devaluation of investments in securities (Note 13)... Restructuring losses (Note 14)... Other, net... Total other income (expenses)... 1,860 (5,739) (11) (1,299) 313 3,409 (2,300) (1,258) (1,478) (1,111) (902) (8,516) 1,317 (5,145) (7) (1,563) 478 3,216 (1,322) (1,729) (682) (2,194) (7,631) 9,884 (38,611) (53) (11,730) 3,587 24,135 (9,921) (12,976) (5,118) (16,465) (57,268) Income before income taxes and minority interests... Income taxes-current (Note 19)... Income taxes-deferred (Note 19)... Income before minority interests... Minority interests in net income of consolidated subsidiaries... 6,819 4,682 (1,920) 4,057 (1,148) 7,538 3, ,530 (70) 56,570 28,773 1,306 26,491 (525) Net income... 2,909 3,460 $ 25,966 Net income per share (Note 1) Yen 3.45 $ 0.03 See the accompanying Notes to the Consolidated Financial Statements. 14

17 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Hitachi Zosen Corporation and Consolidated Subsidiaries For the Years Ended 31st March, 2001 and (Note 1) Common stock: Balance at beginning of year... Balance at end of year... 50,295 50,295 50,295 50,295 $377,448 $377,448 Additional paid-in capital: Balance at beginning of year... Balance at end of year... 9,062 9,062 9,062 9,062 $ 68,007 $ 68,007 Land revaluation reserve (Note 7): Balance at beginning of year... Reversal of land revaluation... Balance at end of year (54) $ 4,608 $ 4,608 Net unrealised holding gains on securities: Balance at beginning of year... Revaluation of securities... Balance at end of year $ 2, $ 3,640 Foreign currency translation adjustments: Balance at beginning of year... Translation adjustments... Balance at end of year (1,173) (582) $ 4,435 (8,803) $ (4,368) Retained earnings (deficit): Balance at beginning of year... Net income... Bonuses to directors and statutory auditors... Decrease due to consolidation of additional subsidiaries... Increase due to consolidation of additional subsidiaries... Increase due to merger of consolidated subsidiaries... Increase due to reversal of land revaluation... Increase in companies accounted for by the equity method... Balance at end of year... (4,620) 2,909 (83) (60) (1,482) (1,482) 3,460 (108) ,982 $ (11,122) 25,966 (811) $ 14,874 Treasury stock: Balance at beginning of year... Decrease (Increase) in treasury stock, net... Balance at beginning of year... (0) (0) (0) (0) (4) (4) $ (0) (30) $ (30) See the accompanying Notes to the Consolidated Financial Statements. 15

18 CONSOLIDATED STATEMENTS OF CASH FLOWS Hitachi Zosen Corporation and Consolidated Subsidiaries For the Years Ended 31st March, 2001 and (Note 1) Cash flows from operating activities: Income before income taxes and minority interests... Depreciation... Provision for allowance for doubtful receivables... Reserve for losses on work in progress... Reserve for losses on cancelled construction contracts... Provision for employees retirement benefits... Interest and dividend income... Interest expense... Loss (gain) on sale and disposal of fixed assets, net... Gain on sale of investments in securities... Loss on devaluation of investments in securities... Special payment for retirement benefits... Decrease (increase) in receivables... Decrease in inventories... Decrease in long-term receivables... Increase (decrease) in payables... Increase (decrease) in accrued expenses... Increase (decrease) in advances received... Other... Sub-total... Interest and dividend received... Interest paid... Retirement benefits paid... Income taxes paid... Net cash and cash equivalents provided by (used in) operating activities... Cash flows from investing activities: Purchase of securities... Proceeds from sales of securities... Purchase of property, plant and equipment... Proceeds from sales of property, plant and equipment... Purchase of intangible assets... Purchase of investments in securities... Proceeds from sales of investments in securities... Other... Net cash and cash equivalents provided by (used in) investing activities... Cash flows from financing activities: Decrease in short-term loans and debt, net... Proceeds from long-term debt... Payment of long-term debt... Redemption of debentures... Other... Net cash and cash equivalents provided by (used in) financing activities... 6,819 12,748 (1,290) 2,300 (2,220) 3,319 (1,860) 5,739 (3,199) (9,657) 26,342 6,008 2, (7,989) 3,084 42,796 1,905 (5,307) (3,726) 35,668 7,538 11,920 (425) (786) (1,317) 5, (3,125) 1,729 1,322 9,030 3,044 2,868 (2,249) (5,657) 4,475 (524) 33,582 1,756 (5,427) (1,186) (5,149) 23,576 $ 56,570 89,456 (3,189) (5,899) (9,884) 38,611 4,458 (23,452) 12,976 9,921 67,767 22,844 21,524 (16,878) (42,454) 33,584 (3,932) 252,023 13,178 (40,728) (8,900) (38,642) 176,931 (929) 396 (6,492) 4,602 (1,664) (2,513) 2,652 (910) (4,858) (1,611) 1,983 (6,152) 557 (2,072) (4,983) 11, (681) (12,090) 14,882 (46,169) 4,180 (15,550) (37,396) 86, (5,111) (2,043) 40,305 (19,141) (32,847) (361) (14,087) (9,772) 25,237 (16,592) (19,999) (203) (21,329) (73,336) 189,396 (124,518) (150,086) (1,524) (160,068) Effect of exchange rate changes on cash and cash equivalents... Net increase in cash and cash equivalents... Cash and cash equivalents at beginning of year... Cash and cash equivalents of newly consolidated subsidiaries, at beginning of year... Cash and cash equivalents at end of year (Note 15)... See the accompanying Notes to the Consolidated Financial Statements ,752 73,964 90, ,596 90, , , , $693,396 16

19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Hitachi Zosen Corporation and Consolidated Subsidiaries 1.Basis of Presenting Consolidated Financial Statements Hitachi Zosen Corporation (the Company ) and its consolidated domestic subsidiaries maintain their accounts and records in accordance with the provisions set forth in the Japanese Commercial Code and the Securities and Exchange Law and in conformity with accounting principles and practices generally accepted in Japan ( Japanese GAAP ). The accounts of overseas consolidated subsidiaries are based on their accounting records maintained in conformity with generally accepted accounting principles and practices prevailing in the respective countries of domicile. Certain accounting principles and practices generally accepted in Japan are different from International Accounting Standards and standards in other countries in certain respects as to application and disclosure requirements. Accordingly, the accompanying financial statements are intended for use by those who are informed about Japanese accounting principles and practices. The accompanying financial statements have been restructured and translated into English (with some expanded descriptions and the inclusion of statements of shareholders equity) from the consolidated financial statements of the Company prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Securities and Exchange Law. Some supplementary information included in the statutory Japanese language consolidated financial statements, but not required for fair presentation is not presented in the accompanying financial statements. The translation of the Japanese yen amounts into are included solely for the convenience of readers, using the prevailing exchange rate at 31st March, 2002, which was to U.S.$1.00. The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into at this or any other rate of exchange. 2. Significant Accounting Policies a) Consolidation The accompanying consolidated financial statements include the accounts of the Company and significant companies, over which the Company has power of control through majority voting rights or existence of certain conditions evidencing control by the Company. Investments in non-consolidated subsidiaries and affiliates, over which the Company has ability to exercise significant influences over operating and financial policies of the investees, are accounted for on the equity method. The consolidated financial statements consist of the accounts of the Company and its sixty-seven (sixty-four in 2001) significant subsidiaries that meet the control requirements for consolidation. Intercompany transactions and accounts have been eliminated in the consolidation. Investments in four (four in 2001) non-consolidated subsidiaries and seven (nine in 2001) affiliates are accounted for by the equity method. In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries, including the portion attributable to minority shareholders, are evaluated using the fair value at the time the Company acquired control of the respective subsidiaries. b) Cash Flow Statements In preparing the consolidated statements of cash flows, cash on hand, readily-available deposits and short-term highly liquid investments with maturities of not exceeding three months at the time of purchase are considered to be cash and cash equivalents. c) Translation of Foreign Currencies Short-term receivables and payables denominated in foreign currencies are translated into Japanese yen at the year-end rates. Prior to 1st April, 2000, long-term receivables and payables denominated in foreign currencies were translated at historical rates. Effective 1st April, 2000, the Company and its consolidated subsidiaries (the Companies ) adopted the revised accounting standard for foreign currency translation, Opinion Concerning Revision of Accounting Standard for Foreign Currency Translation, issued by the Business Accounting Deliberation Council on 22nd October, 1999 (the Revised Accounting Standard ). Under the Revised Accounting Standard, long-term receivables and payables denominated in foreign currencies are also translated into Japanese yen at the year-end rate. 17

20 Financial statements of consolidated overseas subsidiaries are translated into Japanese yen using the exchange rates prevailing at the end of each fiscal year, except the exchange rates in effect at the date of transactions are used for shareholders investment. Due to the adoption of the Revised Accounting Standard, the Company and its domestic subsidiaries report foreign currency translation adjustments in the shareholders equity. The prior year s amount, which is included in liabilities, has not been reclassified. As a result of the adoption of the new accounting standard, in the year ended 31st March, 2001, income before income taxes decreased 69 million compared with what would have been recorded under the previous according standard. d) Revenue Recognition The Companies principally record revenues at the time of delivery using the completed contract method. However, the Company records revenues using the percentage of completion method for major contracts ( 5 billion or more) lasting over two years and certain consolidated subsidiaries record revenues using the percentage of completion method for large scale contracts lasting over one year. Effective 1st April, 2000, the Company changed the revenue recognition method concerning a certain part of the construction business from the completed contract method to the percentage of completion method. The Company believes the application of the percentage of completion method for major contracts ( 5 billion or more) lasting over two years, more fairly presents the results of current period activity in view of the present situation in which there is a significant increase in long-term large-scale construction contracts. As a result of this change, net sales were increased by 9,325 million, and income before income taxes was increased by 1,129 million compared with the amounts which would have been recognised if the previous method had been applied consistently. e) Allowance for Doubtful Receivables Effective 1st April, 2000, the Companies adopted the new accounting standard for financial instruments and provided the allowance for doubtful accounts in the following manner. For receivables from insolvent customers, who are undergoing bankruptcy, other collection proceedings or in a similar financial condition, the allowance for doubtful accounts is provided based on the evaluation of each customer s financial condition and the estimation of recoverable amounts due to the existence of security interests or guarantees. For other receivables, the allowance for doubtful accounts is provided based on the Companies actual rate of collection losses in the past. f)securities Effective 1st April, 2000, the Companies adopted the new Japanese accounting standard for financial instruments ( Opinion Concerning Establishment of Accounting Standard for Financial Instruments issued by the Business Accounting Deliberation Council on 22nd January, 1999). Upon applying the new accounting standard, all companies are required to examine the intent of holding each security and classify those securities as (a) securities held for trading purposes (hereafter, trading securities ), (b) debt securities intended to be held to maturity (hereafter, held-to-maturity debt securities ), (c) equity securities issued by subsidiaries and affiliated companies, and (d) for all other securities that are not classified in any of the above categories (hereafter, available-for-sale securities ). Trading securities are stated at fair market value. Gains and losses realised on disposal and unrealised gains and losses from market value fluctuations are recognised as gains or losses in the period of the change. Held-to-maturity debt securities are stated at amortised cost. Available-for-sale securities with available fair market values are stated at fair market value. Unrealised gains and unrealised losses on these securities are reported, net of applicable income taxes, as a separate component of shareholders equity. Realised gains and losses on sale of such securities are computed using moving-average cost. Securities with no available fair market value which are classified as available-for-sale-securities are stated at moving-average cost. If the market value of held-to-maturity debt securities, equity securities issued by unconsolidated subsidiaries and affiliated companies, and available-for-sale securities, declines significantly, such securities are stated at fair market value and the difference between fair market value and the carrying amount is recognised as loss in the period of the decline. If the fair market value of equity securities issued by unconsolidated subsidiaries and affiliated companies not 18

21 on the equity method is not readily available, such securities should be written down to net asset value with a corresponding charge in the income statement in the event net asset value declines significantly. In these cases, such fair market value or the net asset value will be the carrying amount of the securities at the beginning of the next year. As a result of adopting the new accounting standard for financial instruments, income before income taxes for the year ended 31st March, 2001 decreased by 1,769 million. Also, based on the examination of the intent of holding each security upon application of the new accounting standard on 1st April, 2000, trading securities as well as held-tomaturity debt securities and available-for-sale securities maturing within one year from the balance sheet date are included in current assets, and other securities are included in investments and other non-current assets. As a result, at 1st April 2000, securities in current assets decreased by 9,852 million and investment securities increased by the same amount compared with what would have been reported under the previous accounting policy. g) Derivatives and Hedge Accounting Derivatives are stated at fair value at the end of the fiscal year. The new accounting standard for financial instruments, effective from the year ended 31st March, 2001, requires companies to state derivative financial instruments at fair value and to recognise changes in the fair value as gains or losses unless derivative financial instruments are used for hedging purposes. (1) Hedge accounting The Companies adopted the method which defers recognition of gains or losses resulting from changes in fair value of derivative financial instruments until the related losses or gains on the hedged items are recognised. However, if interest rate swap contracts are used as hedges and meet certain hedging criteria, the net amount to be paid or received under the interest rate swap contracts is added to or deducted from the interest on the assets or liabilities for which the swap contract was executed. (2) Hedging instruments and hedged items Hedging instruments : Interest rate swap contracts : Forward foreign currency exchange contacts Hedged items : Interest on loans and bonds payable : Trade receivables and expected trade denominated in foreign currencies from exports of products, trade payables denominated in foreign currencies from imports of materials (3) Hedging policy The Companies use derivative financial instruments to hedge future risks of interest rate fluctuations and future risks of exchange fluctuations in accordance with their internal policies and procedures. (4) Evaluation of hedge effectiveness The Companies evaluate hedge effectiveness by comparing the cumulative changes in cash flows and foreign currency exchange or the changes in fair value of hedged items and the corresponding changes in the hedging derivative instruments. (5) Control over use of derivatives When the accounting sections of group companies use derivatives, they follow the group companies administration rules, which the Board of Directors of the Company have approved to control the risk of using derivatives. h) Inventories Work in progress is composed of the accumulated production cost of contracts. The accumulated production cost includes direct production costs, factory and engineering overhead and other costs incurred. Raw materials and supplies are stated at cost, which is generally determined by the specific identification method and the moving average method, but not to exceed market value. Effective 1st April, 2001, the Company changed the method of determining the cost of raw materials and supplies from the specific identification method and the weighted-average method to the specific identification method and the moving average method. This change enables the Company to present appropriate costs by reflecting the effect on the operating results derived from recent price fluctuations of raw materials and supplies. The effect of this change in accounting method is not material. 19

22 i) Depreciation and Amortisation Depreciation is computed, with minor exceptions, by the declining balance method based on the estimated useful lives of the assets as stipulated by the Corporation Income Tax Law and the related regulations of Japan. Buildings, acquired after 31st March, 1998, are depreciated using the straight-line method. Amortisation is computed on the straight-line method for intangible assets based on useful lives. j) Software Costs The Companies include internal use software in intangible assets and depreciate it using the straight-line method on estimated useful life of five years. k) Reserve for Product Warranty The reserve, which is based on experience of the past two years, for product warranty is provided to cover possible warranty costs incurred after delivery or completion of construction. l) Reserve for Losses on Work in Progress When orders are received for the construction of new products which are in new fields or require the application of new technologies, the possibility of losses cannot be ascertained. If, after commencement of construction, a loss can reasonably be estimated by comparing estimated completion costs with the contract price, a reserve for losses on work in progress is recorded. m) Employees Severance and Retirement Benefits The Companies provide two types of post-employment benefit plans, unfunded lump-sum payment plans and funded non-contributory pension plans, under which all eligible employees are entitled to benefits based on the level of wages and salaries at the time of retirement or termination, length of service and certain other factors. At 31st March, 2000, the Companies accrued liabilities for lump-sum severance and retirement payments equal to 40% of the amount required had all eligible employees voluntarily terminated their employment at the balance sheet date. The Companies recognised pension expense when, and to the extent, payments were made to the pension plans. Effective 1st April, 2000, the Companies adopted the new accounting standard, Opinion on Setting Accounting Standard for Employees Severance and Pension Benefits, issued by the Business Accounting Deliberation Council on 16th June, 1998 (the New Accounting Standard ). Under the New Accounting Standard, the liabilities and expenses for severance and retirement benefits are determined based on the amounts actuarially calculated using certain assumptions. The Companies provided for employees severance and retirement benefits at 31st March, 2001 and 2002 based on the estimated amounts of projected benefit obligation and the fair value of the plan assets at those dates. The excess of the projected benefit obligation over the total of the fair value of pension assets as of 1st April, 2000 and the liabilities for severance and retirement benefits recorded as of 1st April, 2000 (the net transition obligation ) amounted to 34,511 million. The net transition obligation is being recognised in expenses in equal amounts primarily over 15 years commencing with the year ended 31st March, Prior service costs are recognised in expenses in equal amounts over the average of the estimated remaining service lives of the employees, and actuarial gains and losses are recognised in expenses using the declining-balance method over the average of the estimated remaining service lives commencing with the following period. As a result of the adoption of the new accounting standard, in the year ended 31st March, 2001, severance and retirement benefit expenses increased by 2,434 million, and income before income taxes decreased by 2,434 million compared with what would have been recorded under the previous accounting standard. n) Research and Development Expenses Research and development expenses are charged to selling, general and administrative expenses and manufacturing costs as incurred. Research and development expenses amounted to 5,809 million and 6,434 million ($48,285 thousand) for the years ended 31st March, 2001 and 2002 respectively. 20

23 o) Income Taxes The provision for income taxes is based on income for financial statement purposes. Deferred income taxes are recognised for the temporary differences between financial and tax reporting purposes. Income taxes comprise corporation tax, enterprise tax, and prefectural and municipal inhabitants taxes. p) Accounting for Leases Finance leases which do not transfer ownership and do not have bargain purchase provisions are accounted for in the same manner as operating leases under Japanese GAAP. q) Appropriation of Retained Earnings The appropriation of retained earnings, which must be proposed and approved by an ordinary general meeting of shareholders, is recorded in the following financial year. The appropriation of retained earnings of the Company, which is reflected in the accompanying consolidated financial statements for the year ended 31st March, 2002, was proposed and approved at the ordinary general meeting of shareholders held on 28th June, r) Effect of bank holiday on 31st March, 2001 and 2002 As financial institutions in Japan were closed on 31st March, 2001 and 2002, 1,089 million, 1,025 million ($7,692 thousand) of trade notes receivable and 1,204 million, and 803 million ($6,026 thousand) of trade notes payable maturing on 31st March, 2001 and 2002 were settled on the following business day, 2nd April, 2001 and 1st April, 2002 and accounted for accordingly. s) Amounts per Share Computations of net income per share of common stock are based upon the weighted average number of shares outstanding during each year. Convertible bonds were considered as common stock equivalents but had no dilutive effect on the calculation of net income per share. 3. Securities a) The following tables summarise acquisition costs, book values and fair values of securities with available fair values as of 31st March, 2001 and 2002: (1) Trading securities: Book value... Amount of net unrealised losses included in the income statement $1, $ 53 (2) Held-to-maturity debt securities: At 31st March, 2001 Securities with available fair values exceeding book values: Government bonds... Other securities: Government bonds... Other... Total... Book value Fair value Difference 5 0 (7) (7) 21