Consolidated Financial Results for the Fiscal Year Ended March 31, 2008

Transcription

1 Consolidated Financial Results for the Fiscal Year Ended March 31, 2008 This document has been prepared as a guide for non-japanese investors and contains forward-looking statements that are based on managements estimates, assumptions and projections at the time of publication. A number of factors could cause actual results to differ materially from expectations. This document is a translation of excerpts taken from the Japanese language original. All numbers are rounded down to the nearest unit in accordance with standard Japanese practice. Please be advised that the Company cannot accept responsibility for investment decisions made based on the information contained in this report. Company Name: KITZ CORPORATION Stock Listing: Tokyo Stock Exchange Stock Code: 6498 Head Office: Chiba (URL: ) President and Chief Executive Officer: Kimio Kobayashi Inquiries: Taro Kimura, General Manager, Accounting Department TEL: Date of General Meeting of Shareholders (Planned): June 27, 2008 Date of Payment of Dividends (Planned): June 12, 2008 Reporting Date of Financial Statement: June 27, Consolidated Financial Results for the Fiscal Year Ended March 2008 (Apr. 1, 2007 Mar 31, 2008) (1) Consolidated Operating Results (Note: In this report, amounts of less than one million yen are omitted and per share figures are rounded down to two decimal places.) Net sales Operating income Ordinary income Net income Millions of yen % Millions of yen % Millions of yen % Millions of yen % Year ended Mar. 31, ,274 (0.2) 11, ,525 (1.2) 6,290 (36.9) Year ended Mar. 31, , , , , Net income per share (basic) Net income per share (diluted) Return on equity Ratio of ordinary income to total assets Ratio of operating income to net sales Yen Yen % % % Year ended Mar. 31, Year ended Mar. 31, Notes: Gain from investments in subsidiaries and affiliates accounted for by the equity method: Year ended Mar. 31, 2008: Year ended Mar. 31, 2007: (2) Consolidated Financial Position Total assets Net asset Equity ratio Net assets per share Millions of yen Millions of yen % Yen Mar. 31, ,310 53, Mar. 31, ,107 52, Reference: Equity Mar. 31, 2008: 52,391 million yen Mar. 31, 2007: 51,704 million yen (3) Consolidated Cash Flows Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Cash and cash equivalents at end of fiscal year Millions of yen Millions of yen Millions of yen Millions of yen Year ended Mar. 31, ,949 (3,288) (8,362) 5,069 Year ended Mar. 31, ,156 (4,245) (1,272) 5,060 1

2 2. Dividends Total dividends Dividends to net Cash dividends per share Payout ratio from surplus assets ratio (Consolidated) Record dates Sept. 30 Mar. 31 Total (Annual) (Consolidated) Yen Yen Yen Millions of yen % % Year ended Mar. 31, , Year ended Mar. 31, , Year ending Mar. 31, 2009 (Planned) Forecast for the Fiscal Year Ending March 2009 (Apr. 1, 2008 Mar. 31, 2009) (Note: Percentages are year on year changes in consolidated figures for the second quarter of the fiscal year and the fiscal year.) Six month period ending Sept. 30, 2009 Year ending Mar. 31, 2009 Net income Net sales Operating income Ordinary income Net income per share Millions of yen % Millions of yen % Millions of yen % Millions of yen % Yen 72,500 (4.6) 5,450 (9.7) 4,950 (12.4) 2,900 (15.0) ,000 (1.5) 11, , , Others (1) Changes in significant subsidiaries (Changes in subsidiaries affecting the scope of consolidation): None (2) Revisions in accounting rules, procedures and presentations concerning preparation of consolidated financial statements (Revisions in significant items concerning the basis for preparing consolidated financial statements) 1. Revisions involving a change to accounting standards: Yes 2. Other revisions No (3) Number of shares outstanding (Common shares) 1. Shares issued and outstanding (including treasury stock) Year ended March 2008: 120,396,511 Year ended March 2007: 120,396, Treasury stock Year ended March 2008: 7,279,922 Year ended March 2007: 4,814,115 Note: Please see Per share data on page 26 for information concerning the number of shares used to calculate consolidated net income per share. 2

3 (Reference) Non-Consolidated Financial Results 1. Non-Consolidated Financial Results for the Fiscal Year Ended March 2008 (Apr. 1, 2007 Mar. 31, 2008) (1) Non-Consolidated Operating Results (Note: In this report, amounts of less than one million yen are omitted and per share figures are rounded down to two decimal places.) Net sales Operating income Ordinary income Net income Millions of yen % Millions of yen % Millions of yen % Millions of yen % Year ended Mar. 31, , , , ,311 (66.5) Year ended Mar. 31, , , , , Net income per share Yen Diluted net income per share Yen Year ended Mar. 31, Year ended Mar. 31, (2) Non-Consolidated Financial Position Total assets Net asset Equity ratio Net assets per share Millions of yen Millions of yen % Yen Mar. 31, ,530 44, Mar. 31, ,983 47, Reference: Equity Mar. 31, 2008: 44,667million yen Mar. 31, 2007: 47,664 million yen 2. Forecast for the Fiscal Year Ending March 2009 (Apr. 1, 2008 Mar. 31, 2009) (Note: Percentages are year on year changes in consolidated figures for the second quarter of the fiscal year and the fiscal year.) Six month period ending Sept. 30, 2008 Year ending Mar. 31, 2009 Net income Net sales Operating income Ordinary income Net income per share Millions of yen % Millions of yen % Millions of yen % Millions of yen % Yen 33,200 (2.8) 3,200 (4.3) 3,200 (10.8) 1, , , ,300 (3.5) 3, Explanation regarding the appropriate use of forecasts of business results and other information The above forecasts are based on information currently available to the Company at the time of the release of this report. Actual results could differ materially from projections due to various factors.refer to page 5 for information regarding the earnings forcast. 3

4 1. Business Results (1) Analysis of Results of Operations 1) Results of operations During the fiscal year ended March , Japan s economy expanded slowly as economic growth was fueled by very strong exports and substantial capital expenditures. However, the price of crude oil rose to a record high and prices of copper, nickel and other metals also rose sharply. Furthermore, delays in receiving approvals for building construction applications due to amendments to Japan s Building Standards Law had a negative impact on the construction and housing industries. The yen s sudden appreciation at the close of the fiscal year created further concern over corporate earnings. Overseas, economies were healthy in Asia and Europe, but the much higher cost of crude oil along with the subprime loan crisis slowed down the U.S. economy as well as economies in other countries. The result was a rapid weakening of the global economy during the final months of the fiscal year. In this environment, the valve manufacturing business performed well, mainly in overseas markets, but there was a decline in unit sales in the brass bar manufacturing business. The result was a 0.2% decrease in sales to 149,274 million yen. Operating income increased 2.4% to 11,615 million yen because of higher earnings in the valve manufacturing and brass bar manufacturing businesses. After the inclusion of a foreign exchange loss resulting from the yen s appreciation, ordinary income was down 1.2% to 10,525 million yen. Net income fell 36.9% to 6,290 million yen. One reason for this was a fixed asset impairment charge of 988 million yen for hotel real estate, which was recorded as an extraordinary loss. Another reason was higher income taxes as corporate income taxes, excluding regional corporate taxes in Japan, returned to their normal level. Results by business segment Valve manufacturing business Sales to external customers decreased 0.2% to 99,118 million yen. KITZ raised sales prices in Japan and overseas in response to reflect the higher price of copper, nickel and other raw materials. In addition, there were higher sales of valves for use on large projects in the Middle East. But in Japan, sales of valves used in buildings and industrial plants declined due to a drop in orders following a rush to purchase valves prior to the price increase. A decline in sales of valves used in semiconductor manufacturing equipment was also responsible for the decrease in segment sales. Although the higher cost of raw materials had a negative effect on earnings, segment operating income increased 0.4% to 14,046 million yen due to efficiency improvements, such as the consolidation of factories, and price increases in Japan and overseas. Brass bar manufacturing business Sales to external customers decreased 2.4% to 40,886 million yen as sales prices rose with the cost of raw materials and the volume of sales declined. Earnings were better than in the previous fiscal year, when price increases could not keep up with the rapid upturn in the cost of raw materials. Despite volatility in the copper and zinc markets, operating income recovered 82.0% to 290 million yen. Services and other business Sales to external customers increased 11.2% to 9,269 million yen in this segment, which includes the fitness business, the hotel business and other services. Sales growth was attributable mainly to the first contribution of fitness centers acquired during the March 2008 fiscal year and to benefits of new facilities in the hotel business. Operating income decreased 6.4% to 332 million yen, the net result of higher earnings in the hotel business as sales increased and lower earnings in the fitness business. 4

5 2) Outlook for the fiscal year ending March 2009 The Japanese economy has been recovering slowly due to strength in exports and privatesector capital expenditures. However, exports are expected to weaken because of the rapid increase in the yen s value and the weakening of the U.S. economy. The downturn in architectural construction, along with the rapid increase in the cost of crude oil and other basic materials, is creating more concern about the economic outlook. Moreover, there are growing concerns about the outlook for the global economy. Slower U.S. economic growth is beginning to affect the EU and other areas of the world. In addition, there are fears about the possibility of a significant negative impact on the global economy from rapid increases in the prices of crude oil, mineral resources, grain and other commodities. Global competition is becoming even more intense in this environment. As a result, the operating environment for KITZ and its group companies is expected to remain challenging in Japan and overseas. The core valve manufacturing business will continue to face challenges from the decline in residential and building construction application approvals associated with the amended Building Standards Law, and from pressure on export profit margins because of the strong yen. However, KITZ plans to take advantage of solid capital expenditures in Japan to increase its sales of industrial valves. Another goal is to further increase sales outside Japan as the higher price of crude oil continues to raise global demand for petrochemical and chemical plants. In manufacturing activities, KITZ aims to achieve further cost reduction and improvements in production efficiency to offset the higher cost of metals, petrochemicals and other raw materials. Output capacity for stainless steel valves will be increased at the Nagasaka factory and a subsidiary in China. Plans also include an increase in the output of cast iron valves by starting production at a new factory in China. Through these actions, KITZ plans to preserve and enhance the quality of its products while offering more competitive prices in Japan and overseas. As for new product development activities, KITZ will maintain a system that accurately targets market needs while reinforcing marketing operations in order to develop products with even greater added value. There was a situation involving water leaks from some KITZ copper alloy insertion joints sold between April 2002 and October 2005 (total of about 980,000 units sold) for residential water and hot water supply fixtures and other equipment. The causes were corrosion and cracking which resulted from the use of these valves in a corrosive environment that KITZ had not anticipated. In response, KITZ switched to making these joints of bronze, which is more resistant to a corrosive environment. Copper alloy insertion joints that have been sold and used in a corrosive environment will be replaced with bronze joints. Based on a reasonable estimate of replacement expenses, KITZ posted a charge of 527 million yen in the fiscal year that ended in March An additional charge of 385 million yen (resulting in a total of 913 million yen) was posted in the March 2008 fiscal year for estimated replacement expenses for joints in which leaks have been newly discovered. As of the end of March 2008, KITZ posted replacement expenses, or recorded these expenses as accounts due, for about 21% of all copper alloy insertion joints sold during the above period. A project team is currently checking the status of these replacements. KITZ plans to replace these joints quickly, with a goal of completing replacements within three years, in order to prevent further leaks from occurring. In the brass bar manufacturing business, it has become difficult to remain consistently profitable because of the significantly higher cost of copper, zinc and other raw materials. In response, plans call for increasing sales not only for ordinary brass bars, but also for new products like lead-free copper alloys, cadmium-free copper alloys and dezincification-free materials. For manufacturing activities, measures will be taken to purchase materials and manufacture products more efficiently. Plans also include cutting administrative costs to improve earnings. In services and other business, Japan is expected to see growth in needs for health-related services, due to the start of a new government program designed to promote good health through metabolic examinations and other means, and travel services, due to the growing number of retirees. In the fitness business, KITZ Wellness and KITZ Wellness Sendai will be merged to create a more effective base of operations, and more fitness centers will be opened. In the hotel business, actions will be taken to attract more guests. 5

6 (2) Analysis of Financial Condition 1) Assets, liabilities and net assets Assets totaled 109,310 million yen at the end of March This was 4,797 million yen less than one year earlier mainly because of a 2,674 million yen decline in investment securities resulting from lower market prices and a decline in land because of asset impairment and sales. Liabilities decreased 5,524 million yen to 55,972 million yen, mainly the result of a 5,265 million yen decrease in debt. Net assets increased 726 million yen to 53,337 million yen. This was mainly the net result of the contribution of net income of 6,290 million yen and deductions from stock repurchases and dividend payments. 2) Cash flows There was a net increase of 9 million yen in cash and cash equivalents to 5,069 million yen. Income before income taxes and minority interests in consilidated subsidiaries was about the same as one year earlier and cash was used for the repayment of debt. Cash flows and their major components were as follows. Operating activities Net cash provided by operating activities was 11,949 million yen compared with 4,156 million yen one year earlier. Income before income taxes and minority interests in consilidated subsidiaries was 9,489 million yen and depreciation was 3,396 million yen, but cash was used by a 1,439 million yen decrease in accounts payable. Investing activities Net cash used in investing activities was 3,288 million yen compared with 4,245 million yen one year earlier. The primary use of cash was 3,974 million yen for the acquisition of property, plant and equipment, mainly in the valve manufacturing business. Financing activities Net cash used in financing activities was 8,362 million yen compared with 1,272 million yen one year earlier. To reduce debt, 1,975 million yen was used for the repayment of short-term bank loans, 6,040 million yen was used for the repayment of long-term bank loans, and 1,050 million yen was used for the redemption of privately placed bonds. Proceeds from long-term loans amounted to only 3,330 million yen and proceeds from the issuance were only 683 million yen. Financing activities also included 1,550 million yen for the purchase of treasury stock and dividend payments of 1,850 million yen. Notes: 1. To be prepared to meet short-term demands for working capital, KITZ has established an 8,000 million yen credit facility with a syndication of banks. As of March 31, 2008, KITZ had no loans through this credit facility. 2. On September 27, 2006, KITZ submitted a shelf registration to issue up to 20,000 million yen of bonds. This was followed on October 26, 2006 with the Company s first issue of unsecured bonds. Totaling 6,000 million yen, this bond issue will reach maturity in five years. 6

7 (Reference) Cash flow indicators Years ended March Return on equity (%) Equity ratio based on market price (%) Ratio of cashflows to interst-bearing debt(%) Interest coverage ratio Equity ratio: Equity divided by total assets Equity ratio based on market price: Market capitalization divided by total assets Ratio of cashflows to interst-bearing debt: Interst-bearing deft by cashflows Interest coverage ratio: Operating cash flows divided by interest expenses Notes: 1. Consolidated financial data is used to calculate all figures. 2. Market capitalization is based on shares outstanding less treasury stock. 3. Cash flows are net operating cash flows. 4. Interest-bearing liabilities is the sum of all debt shown on the balance sheet on which interest is due. (3) Fundamental Policy Regarding Distribution of Earnings KITZ considers the distribution of earnings to shareholders through dividend payments to be one of its highest management priorities. The policy is to pay a consistent and stable dividend while considering operating results: the need for funds for capital expenditures, new product development and M&A activities required for future growth, and the need for funds to repay loans and redeem bonds. Currently, KITZ believes that a dividend payout ratio of about 25% of consolidated net income is appropriate. However, in the future, the Company will aim to distribute about one-third of consolidated net income to shareholders through dividends and stock repurchases. Based on this fundamental policy, KITZ paid an interim dividend of 7 yen per share on December 7, 2007, and plans to pay a year-end dividend of 8 yen per share. This will result in an annual dividend of 15 yen per share, the same as in the previous fiscal year. The 15 yen dividend represents a consolidated payout ratio of 27.5%. To improve return on equity and for other purposes, KITZ repurchased 2,641 shares at a cost of 1,497 million yen in accordance with a resolution approved by the board of directors. Therefore, for the fiscal year, KITZ returned a total of 3,347 million yen to shareholders through dividends and repurchases, representing 53.2% of consolidated net income. For the fiscal year ending in March 2009, KITZ plans to pay an annual dividend of 15 yen per share if consolidated net income is in line with the forecast. (4) Business and Other Risks The following is a list of the major items that may pose significant risks with regard to the KITZ Group s business activities, operating results and financial condition. Forward-looking statements in this section represent the Company s judgments based on information available to the Company at the time these materials were prepared. 1) Items concerning management policies unique to KITZ (a) In the KITZ Group s core valve manufacturing business, 31.0% of products are manufactured outside Japan. The primary overseas manufacturing bases are in Thailand (about 18% share of total valve output), Taiwan (about 6%) and China (about 5%). The ability to supply parts and products and to conduct other business activities may be greatly affected by political and economic developments, laws and taxes, natural disasters and other events in these countries. (b) Overseas markets account for about 20% of the KITZ Group s sales. Major overseas markets based on sales are Asia and North America. Sales volumes and other aspects of business activities as well as operating results in these regions may be greatly affected by political and economic developments, laws and taxes, natural disasters, and other events. (c) Many of the major business sites of KITZ and its group companies are located in northwestern Yamanashi Prefecture and neighboring southern Nagano Prefecture. An earthquake or other major natural disaster in this region may damage or destroy the Groups assets, force a suspension of business activities, or cause other problems that could have a significant impact on the Group s operating results. 7

8 2) Items concerning sudden changes in financial condition and operating results (a) Sales in Japan of valves and other fluid control devices, the major products of KITZ and its group companies, are vulnerable to fluctuations in the level of privatesector capital expenditures. Furthermore, sales in the brass bar manufacturing business are vulnerable to changes in the industries for architectural metal fixtures, electrical and gas devices, and other product categories. Changes in these items may have a significant impact on the Group s operating results. In addition, demand in the semiconductor industry is extremely volatile. Changes in this demand may have a significant impact on the operating results of KITZ subsidiaries, where products used in semiconductor manufacturing equipment account for the majority of sales. (b) Most of the major products of the KITZ Group are sold by trading companies and sales agents in Japan and overseas or directly to engineering companies and end users. A change in the business terms, a dramatic decline in credit standing or any other significant change at these business partners and customers may have an impact on the Group s operating results. (c) In the KITZ Group s core valve manufacturing business, overseas sales accounted for about 28% of total sales and overseas production accounted for about 31% of total output in the fiscal year that ended in March As a result, changes in foreign currency exchange rates may have a significant impact on the Group s operating results. (d) The KITZ Group procures various types of metal (scrap, castings, components) made of copper, stainless steel, aluminum, iron and other materials in conjunction with the manufacture of valves. In addition, the Group procures metal materials such as copper and zinc for manufacturing activities in its brass bar manufacturing business. The Group may become unable to procure the necessary quantities of these materials due to a sudden rise in prices in Japan or on international markets, may be unable to raise prices in a timely manner to reflect higher costs, or may encounter similar problems. These events may have a significant impact on the group s operating results. (e) The KITZ Group exercises care to protect its electric arc furnaces and other equipment and machinery from fires and other disasters. However, an unforeseen event of sufficient magnitude could force a suspension of manufacturing activities or cause other problems that could have an impact on the Group s operating results. (f) KITZ and its group companies exercise extreme care concerning the quality of products and services by conforming to various regulations and quality management standards. However, there is no assurance that all products and services are defect-free and that product liability, business facility liability and other expenses will not be incurred. There was a situation involving water leaks from some KITZ copper alloy insertion joints sold between April 2002 and October 2005 (total of about 980,000 units sold) for residential water and hot water supply fixtures and other equipment. The causes were corrosion and cracking which resulted from the use of these valves in a corrosive environment that KITZ had not anticipated. In response, KITZ switched to making these joints of bronze, which is more resistant to a corrosive environment. Copper alloy insertion joints that have been sold and used in a corrosive environment will be replaced with bronze joints. Based on a reasonable estimate of replacement expenses, KITZ posted a charge of 527 million yen in the fiscal year that ended in March An additional charge of 385 million yen (resulting in a total of 913 million yen) was posted in the March 2008 fiscal year for estimated replacement expenses for joints in which leaks have been newly discovered. As of the end of March 2008, KITZ posted replacement expenses, or recorded these expenses as accounts due, for about 21% of all copper alloy insertion joints sold during the above period. A project team is currently checking the status of these replacements. KITZ plans to replace these joints quickly, with a goal of completing replacements within three years, in order to prevent further leaks from occurring. 8

9 (g) The table below shows data concerning consolidated interest-bearing liabilities during the past two fiscal years. Since these liabilities are high as a percentage of total assets, the KITZ Group is using interest rate swaps to switch to fixed interest rates. However, a significant change in interest rates may affect the group s operating results by raising interest expenses and other expenses. Millions of yen Years ended March Total interest-bearing liabilities 36,247 41,513 Long/short-term loans 24,757 29,673 Bonds 11,490 11,840 Total assets 109, ,107 Interest-bearing liabilities/assets (%) (h) Long-term loans provided by syndicates have covenants placing restrictions on the ability to provide collateral for other liabilities, on the Company s financial position and on the ability to provide collateral for a public bond offering and unsecured bonds. In the event that KITZ violates a covenant, the debt may be regarded as in default. A summary of these covenants is presented below. Paid-in capital must not be less than total common shares on the interim and year-end balance sheet in each fiscal year. Consolidated paid-in capital must not be less than total consolidated common shares on the interim and year-end consolidated balance sheet in each fiscal year. KITZ may not report an operating loss for two consecutive fiscal years as shown in the income statement presented in its financial report. KITZ may not report a consolidated operating loss for two consecutive fiscal years as shown in the consolidated income statement presented in its financial report. Maintain a Japan Credit Rating Agency long-term credit rating of at least BBB- (i) In the event that earnings from assets decline and asset impairment charges are posted for property and equipment, there may be an impact on the Group s operating results. (j)the KITZ Group holds inventories, real estate for business operations, investments in securities, investment real estate, movable property and other assets. A significant decline in the market values of these assets may have an impact on the group s operating results. (k) The KITZ Group has a low income tax rate following the application of tax-effect accounting mainly because of tax-deductible losses carried forward. The use of all remaining losses carried forward or other events may cause a change in income taxes that could have an impact on the Group s operating results. (l) A change in the valuations of investments in and loans to group companies, the need to fulfill loan guarantee obligations and other events associated with financial difficulties at one or more Group companies may have a significant impact on non-consolidated operating results. 3) Establishment of internal control systems The KITZ Group is establishing an internal control system that conforms to provisions of the Financial Instruments and Exchange Law. If the group is unable to establish effective internal controls and maintain effectiveness, the independent accountant to be unable to perform a proper audit of management s evaluations due to ineffective internal controls, or if an independent accountant submits an audit report stating that the group s internal controls for financial reports are ineffective, there may be an impact on the value of KITZ stock on stock exchanges. 4) Environmental regulations The KITZ Group conducts operations in line with its environmental philosophy and in accordance with environmental regulations in all countries where the group operates. If the group is unable to comply with these regulations, there may be severe restrictions on its business operations depending on the nature of the violation. 9

10 5) Legal restrictions applicable to the businesses of the KITZ Group In the valve manufacturing business, which is the core business of the KITZ Group, major products include items that receive Japan Industrial Standard (JIS) certification. A change in the JIS certification system could make it easier for new competitors to enter the valve market. 6) Protection of intellectual assets The KITZ Group has technologies and know-how that differentiate its products from those of competitors as well as valuable brands. Although the Group takes various actions to protect these assets, the Group may not be able to effectively prevent third parties in certain overseas regions from manufacturing and selling products that are copies of KITZ Group products. 7) Information management The operations of the KITZ Group rely on information management systems. Although the Group operates its systems properly and has suitable development and security programs, the operation of an information system could be suspended due to inability to keep up with technological progress or due to a natural disaster, computer virus or another cause. The inability to use an information system could have an impact on the Group s operating results. 8) Infectious diseases If there is an outbreak of infectious disease in an area where the KITZ Group does business, the resulting suspension or other disruption in business operations could have an impact on the Group s operating results. 9) Important items concerning directors, employees, major shareholders, affiliated companies and other parties Yusuke Shimizu, a KITZ director, also serves as president of Kitazawa Museum of Art. KITZ has business transactions with this museum that include the storage and management of works of art, leasing of a parking area, purchase of goods and tickets, and provision of funds for museum operations. 10

11 2. Summary of Corporate Group This information is not provided because there were no significant changes during the fiscal year to the information provided in the business activities section and group activities diagram presented in the securities report dated June 28, Management Policies (1) Fundamental Management Policy The management policy of KITZ is defined by the KITZ Group 21st Century Vision. a. Corporate Philosophy (KITZ Mission Statement) KITZ aims to constantly increase corporate value through the provision of innovative and high-quality products and services, as well as to contribute to society. b. Code of Conduct (Do it the KITZ way) Do it True (Action that is sincere and truthful) Do it Now (Action that is speedy and timely) Do it New (Action that is creative and takes on challenges) (2) Targeted performance indicators, medium- and long-term management strategies and important issues The New Target 2010 medium-term management plan The KITZ Group has established a medium-term management plan called New Target 2010 to provide guidelines for the consistent increase in corporate value through further growth on a global scale and the establishment of a highly profitable operating framework. Operating goals KITZ uses cash return on assets (CROA) and return on equity (ROE) as its goals with regard to increasing corporate value. The Company then established the following targets for sales and earnings needed to raise CROA and ROE. Consolidated sales 180,000 million yen The goal for consolidated sales is 180,000 million yen. To reach this goal, the KITZ Group will have to further expand its current organization while acquiring companies worldwide in order to target new opportunities. KITZ is determined to reach this sales goal by quickly expanding business operations through the use of the Group s strengths, particularly those involving markets associated with established businesses. Operating income margin (vs. sales) 10%+ The Group aims to raise profitability by cutting manufacturing costs and raising operating efficiency while developing products and services with even more added value. Ordinary income margin (vs. sales) 9%+ The Group aims to maintain a high operating income margin by minimizing non-operating expenses through the reduction of interest-bearing liabilities. CROA 10%+ Through earnings growth and the productive use of assets, the Group aims to achieve a high return on its assets. Note: CROA = (net income + depreciation) / total assets ROE 13%+ The goal is to achieve a consistently high level of returns on investments through the efficient use of equity. 11

12 Business strategy Conduct business activities from a global perspective by positioning the valve and flow control, copper rolling, and services businesses as the KITZ Group s core businesses. Valve manufacturing business Sales strategy: Become one of the world s top-three valve companies based on sales. Increase sales in rapidly growing markets such as energy, water and the environment, and semiconductors. Increase market share of established products by offering greater automation, one-touch ease of operation, prefabrication and other forms of added value. Increase efficiency of sales activities by using IT, linking sales activities more closely to customers, and reinforcing the service infrastructure. Increase overseas sales by raising sales in growing overseas markets and using mergers and acquisitions. Manufacturing strategy: Be globally competitive in terms of product quality, cost, and delivery time. Meet global standards for product quality, cost and delivery schedules. Continue moving manufacturing activities to optimal locations. Improve productivity. Product development strategy: Develop unique products and improve the quality of product development activities. Gain expertise in basic technologies. Develop new products quickly. Establish a sound sales support organization. M&A strategy Target companies that can generate substantial synergies, that have a global presence, and that have technologies and products new to the KITZ Group. Brass bar manufacturing business: Increase market share and earnings. Increase sales volumes and market share. Become more profitable. Pursue greater synergies among KITZ Group copper rolling companies. Service business: Offer the best services in each region and become more profitable. Open more fitness clubs. Improve services in each service business and become consistently profitable. Pursue greater synergies. Corporate activities CSR strategy Eliminate all accidents at factories. Establish rigorous internal control and compliance systems. Conduct group environmental management programs. Human resources strategy Recruit and train capable people. Ensure fairness in evaluations and compensation. Fully utilize Group personnel, including the assignment of employees to other group companies. Information strategy Restructure core business processes. Promote the globalization and centralization of information. Speed the dissemination of information and make this process more labor efficient. Financial and capital strategy Further improve financial soundness and credit ratings. Maintain a high stock price and conduct a flexible capital strategy. Aim to distribute one-third of consolidated net income to shareholders. 12

13 (III) Consolidated Financial Statements, etc. 1. Consolidated balance sheets Classification As of Mar. 31, 2008 As of Mar. 31, 2007 Change (Assets) Millions of yen % Millions of yen % Millions of yen I. Current assets 55, , (1,793) Cash in hand and in banks 5,069 5,060 9 Notes and accounts receivable trade 27,549 27, Inventories 19,623 20,046 (423) Deferred tax assets current 1,830 2,724 (894) Other current assets 1,399 2,174 (775) Allowance for doubtful receivables (40) (47) 7 II. Fixed assets 53, , (3,005) 1. Property, plant and equipment 40, , (741) Buildings and structures 15,274 15,608 (334) Machinery, equipment and vehicles 8,167 7, Tools, furniture and fixtures 5,213 5,221 (8) Land 11,634 12,680 (1,046) Construction in progress (222) Others (1) 2. Intangible assets Investments and other assets 12, , (2,301) Investment securities 6,755 9,429 (2,674) Deferred tax assets non-current 1, Others 4,806 5,049 (243) Allowance for doubtful receivables (373) (385) 12 Total assets 109, , (4,797) 13

14 Classification As of Mar. 31, 2008 As of Mar. 31, 2007 Change (Liabilities) Millions of yen % Millions of yen % Millions of yen I. Current liabilities 29, , Notes and accounts payable trade 6,499 7,950 (1,451) Current portion of corporate bonds 2,648 1,050 1,598 Short-term bank loans 4,681 6,617 (1,936) Current portion of long-term debt 6,677 5, Income taxes payable 1, Consumption taxes payable Accrued bonuses to employees 1,740 1,854 (114) Accrued bonuses to directors (44) Other current liabilities 4,826 4, II. Long-term liabilities 26, , (5,780) Corporate bonds 8,842 10,790 (1,948) Long-term debt 13,398 17,100 (3,702) Deferred tax liabilities 1, Accrued retirement benefits to employees (59) Accrued retirement benefits to directors, corporate auditors and operating officers (351) Other long-term liabilities 2,970 2, Total liabilities 55, , (5,524) (Net assets) I. Shareholders equity 50, , ,005 Common shares 21, , Additional paid-in capital 9, , Retained earnings 22, , ,440 Treasury stock (2,395) (2.2) (888) (0.8) (1,507) II. Valuation and translation adjustments 1, , (2,317) Net unrealized gains on other securities 1, , (2,031) Translation adjustment (26) (0.0) (285) III. Minority interests in consilidated subsidiaries Total net assets 53, , Total liabilities and net assets 109, , (4,797) 14

15 2. Consolidated statements of income Classification Apr. 1, 2007-Mar. 31, 2008 Apr. 1, 2006-Mar. 31, 2007 Change Millions of yen % Millions of yen % Millions of yen I. Net sales 149, , (238) II. Cost of sales 117, , (426) Gross profit 32, , III. Selling, general and administrative expenses 20, , (85) Operating income 11, , IV. Non-operating income Interest income (6) Dividend income Assurance income (51) Exchange gain 130 (130) Amortization of negative goodwill 2 36 (34) Others V. Non-operating expenses Total (171) Interest expenses Sales discounts Exchange loss Loss on sales of notes receivable Others (66) Total 1, , Ordinary income 10, , (127) VI. Extraordinary income Gain on sales of property, plant and equipment Gain on sales of investment securities Gain on liquidation of subsidiaryies Reversal of allowance of doubtful accounts 2 32 (30) Others VII. Extraordinary loss Total Loss on sale/removal of property, plant and equipment Impairment loss on fixed assets Write-down of investment in securities Loss on liquidation of affiliated companies Others (103) Total 1, Income before income taxes 9, , (692) Income taxes (Income, Residential and Enterprise taxes) 2,083 1,045 1,038 Income tax adjustment 1,080 (878) 1,958 Minority interest in gains (losses) of consolidated subsidiaries Total 3, , (7) Net income 6, , (3,683) 15

16 3.Consolidated statement of changes in shareholders equity Current fiscal year (April 1, 2007 March 31, 2008) Balance as of Mar. 31, 2007 Changes during fiscal year Common shares Additional paid-in capital Shareholders equity Retained earnings Treasury stock Millions of yen Total shareholders equity 21,207 9,416 17,924 (888) 47,659 Dividends from surplus (1,850) (1,850) Net income 6,290 6,290 Acquisition of treasury stock (1,550) (1,550) Sale of treasury stock Aggregate net change in items other than in the shareholders equity section Total change during Fiscal Year 71 4,439 (1,506) 3,004 Balance as of Mar. 31, ,207 9,488 22,364 (2,395) 50,664 Balance as of Mar. 31, 2007 Changes during fiscal year Dividends from surplus Net income Acquisition of treasury stock Sale of treasury stock Aggregate net change in items other than in the shareholders equity section Total change during fiscal year Balance as of Mar. 31, 2008 Valuation and translation adjustments Net unrealized gains on other securities Translation adjustment Minority interests in consilidated subsidiaries 3, (2,030) (286) 37 (2,030) (286) 37 1,754 (26)

17 Previous fiscal year (April 1, 2006 March 31, 2007) Balance as of Mar. 31, 2006 Changes during fiscal year Common shares Additional paid-in capital Shareholders equity Retained earnings Treasury stock Millions of yen Total shareholders equity 21,207 8,932 9,630 (1,105) 38,664 Dividends from surplus* (1,602) (1,602) Bonuses to directors (76) (76) Net income 9,973 9,973 Acquisition of treasury stock (60) (60) Sale of treasury stock Aggregate net change in items other than in the shareholders equity section Total change during fiscal year 483 8, ,995 Balance as of Mar. 31, ,207 9,416 17,924 (888) 47,659 Balance as of Mar. 31, 2006 Changes during fiscal year Dividends from surplus* Bonuses to directors Net income Acquisition of treasury stock Sale of treasury stock Aggregate net change in items other than in the shareholders equity section Total change during fiscal year Balance as of Mar. 31, 2007 Valuation and translation adjustments Net unrealized gains on other securities Translation adjustment Minority interests in consilidated subsidiaries 3,537 (819) , , , Note: Earnings appropriation of 912 million yen at the June 2006 annual shareholders meeting and interim dividend of 689 million yen approved by the KITZ Board of Directors in November

18 4. Consolidated statements of cash flows Millions of yen Classification Apr. 1, Apr. 1, Mar. 31, 2008 Mar. 31, 2007 Change I. Operating activities Income before income taxes 9,489 10,181 (692) Depreciation 3,396 2, Amortization of negative goodwill (2) (36) 34 Exchange gain/loss (61) (195) 134 Write-down of investment in securities Gain on liquidation of subsidiaries (230) (230) Loss on liquidation of affiliated companies Increase (decrease) in provision for allowance for doubtful accounts (18) (53) 35 Increase (decrease) in accrued bonuses to employees (110) 88 (198) Increase (decrease) in accrued retirement benefits to employees (215) (10) (205) Increase (decrease) in allowance for retirement benefits to directors 0 (3) 3 Increase (decrease) in provision accrued bonuses to directors (44) 116 (160) Interest and dividend income (188) (167) (21) Interest expenses Gain/loss on sale/disposal of property, plant and equipment,net Impairment loss of fixed assets Gain on sale of investment securities (9) (1) (8) (Increase) decrease in notes and accounts receivable (265) (4,388) 4,123 (Increase) decrease in inventories 455 (5,203) 5,658 Increase (decrease) in other current assets 698 (773) 1,471 Increase (decrease) in accounts payable (1,439) 1,544 (2,983) Increase (decrease) in other current liabilities (268) Bonuses to directors paid (76) 76 Other,net (27) Subtotal 13,988 5,924 8,064 Interest and dividend income received Interest expenses paid (829) (788) (41) Income taxes paid (1,397) (1,147) (250) Net cash provided by (used in) operating activities 11,949 4,156 7,793 II. Investing activities Purchase of property, plant and equipment (3,974) (3,991) 17 Sale of property, plant and equipment Purchase of investment securities (273) (117) (156) Sale of investment securities Collection of short-term loans Collection of long-term loans 2 36 (34) Acquision of majority ownership of a company (416) 416 Purchase of investment in subsidiaries (18) 18 Other,net (61) (105) 44 Net cash provided by (used in) investing activities (3,288) (4,245)

19 III. Financing activities Net increase (decrease) in short-term bank loans,net (1,975) 1,412 (3,387) Procurement long-term debt 3,330 8,827 (5,497) Repayment of long-term debt (6,040) (8,801) 2,761 Issuance of bonds 683 7,440 (6,757) Redemption of bonds (1,050) (9,230) 8,180 Sale of treasury stock (647) Acquisition of treasury stock (1,550) (60) (1,490) Cash dividends paid (1,850) (1,602) (248) Cash dividends paid to minority interests (6) (12) 6 Other,net (18) (7) (11) Net cash provided by (used in) financing activities (8,362) (1,272) (7,090) IV. Effect of exchange rate changes on cash and cash equivalents (288) 214 (502) V. Net increase (decrease) in cash and cash equivalents 9 (1,147) 1,156 VI. Cash and cash equivalents at beginning of period 5,060 6,208 (1,148) VII. Cash and cash equivalents at end of period 5,069 5,

20 Notes (Consolidated Statement of Income) Apr. 1, 2007-Mar. 31, 2008 Apr. 1, 2006-Mar. 31, 2007 Impairment loss on fixed assets The KITZ Group recorded impairment losses in the following asset groups. Location Use Category Suwa city, Nagano prefecture Hokuto city, Yamanashi prefecture and others Hotel facility Valve manufacturing equipment Buildings and structures, machinery and equipment, land Machinery and equipment, tools and furniture,fixtures (Background) Based on an appraisal of the hotel properties operated by Hotel Beniya Co., Ltd., there was a decline in the value of these properties that was due in part to the consistently poor performance of the hotel business. As a result, the book value of hotel properties and facilities has been reduced to the amount that can be recovered, and this reduction was recorded as an extraordinary loss. In addition, for valve manufacturing equipment, the book value of idle assets has been reduced to the amount that can be recovered, and the resulting asset impairment of 7 million yen has been recorded as an extraordinary loss. (Amount of Impairment loss) (Category) Buildings,structures 584 million yen Machinery,equipment 25 million yen Tools and furniture,fixtures 0 million yen Land 386 million yen Total 996 million yen (Calculation of amount that can be recovered) Net sales proceeds are used as the basis for the amount that can be recovered for each asset group. Market values are the appraised values in accordance with real estate appraisal standards. (Method for grouping assets) The KITZ Group categorizes assets into business units that can be used for the efficient management of earnings. 20

21 1. Type and number of shares issued and type and number of shares of treasury stock Current fiscal year (April 1, 2007 March 31, 2008) (share) As of Mar. 31, 2007 Increase Decrease As of Mar. 31, 2008 Shares issued Common stock 120, ,396 Total 120, ,396 Treasury stock Common stock 4,814 2, ,279 Total 4,814 2, ,279 Notes: 1. The increase of 2,694 thousand shares of common stock held as treasury stock is due to the repurchase of 2,641 shares in accordance with a resolution of the board of directors and the purchase of 53 thousand shares from share holdings of less than one investment unit. 2. The decrease of 229 thousand shares of common stock held as treasury stock is due to a decrease of 208 thousand shares associated with the exercise of stock options and the sale of 21 thousand shares in amounts of less than one investment unit. Previous fiscal year (April 1, 2006 March 31, 2007) (share) As of Mar. 31, 2006 Increase Decrease As of Mar. 31, 2007 Shares issued Common stock 120, ,396 Total 120, ,396 Treasury stock Common stock 6, ,546 4,814 Total 6, ,546 4,814 Notes: 1. The increase of 62 thousand shares of common stock held as treasury stock is due to purchases of share holdings of less than one investment unit. 2. The decrease of 1,546 thousand shares of common stock held as treasury stock is due to a decrease of 1,544 thousand shares associated with the exercise of stock options and the sale of 2 thousand shares in amounts of less than one investment unit. 21