A Growing Solutions Company Toward our next century Giving shape to the future! Annual Report 2006

Transcription

1 A Growing Solutions Company Toward our next centurygiving shape to the future! Annual Report 2006

2 profile A century has passed since the founding of Tsukishima Kikai in Over the years, Tsukishima Kikai has remained a company that contributes to society and the global environment by providing industrial plant facilities, water and wastewater facilities, and environmental preservation facilities. As we enter our second century, we have taken up the challenge of entering new technological fields, including vacuum technology and biomass technology. We aim to be a growing solutions company that accurately gauges the present and gives shape to the future. To remain a highly profitable and competitive corporate group, Tsukishima Kikai is actively engaged in various initiatives for business infrastructure development. In 2006, the start of our second century, Tsukishima Kikai has embarked on a journey to the next stage of evolution. TSK s Business Areas Food & pharmaceutical plants Chemical plants Industrial field Vacuum equipment Core Technologies Waterworks and sewage treatment Bio technology Environmental field Waste and wastewater treatment Antipollution plants 1

3 Topics for 2006 Orders for driers from China and Southeast Asia develop favorably. Tsukishima Kikai is building up its overseas business, which we expect to continue to grow in the coming years. Orders for Steam Tube Dryer for chemical plants in China and Southeast Asia developed favorably in fiscal The company also obtained an order for drying facilities for Coal Moisture Control at a steel mill, an example of extending sales of steam tube driers to a new field. We aim to increase the contribution of overseas sales to total sales by increasing orders for chemical process plants and environmental equipment such as exhaust-gas desulfurizers. Construction begins on a commercial demonstration plant for the early realization of biomass utilization technology. Biomass utilization technology is attracting widespread attention in Japan and overseas. In fiscal 2005, Tsukishima Kikai obtained an order for a commercial demonstration plant for biomass ethanol production. Furthermore, we are working toward the practical application of a compact gasification power generation system that uses thermal conversion. We aim to commercialize resource recycling systems that take full advantage of these biomass utilization technologies and the sludge incineration technology we have developed over the years as a leader in the field of sludge treatment. Tsukishima Kikai implements business structure reform based on the Next 100 new medium-term management plan. Tsukishima Kikai has designated the three-year period beginning in fiscal 2006 as the timeframe for the attainment of business self-reliance in preparation for its next 100 years in business. Accordingly, we have formulated the Next 100 medium-term management plan with the aim of implementing business structure reform and attaining leadership in global niche markets. We have actively engaged in business infrastructure development with the aim of further strengthening the environmental business, with a focus on the water and wastewater sector. For instance, we have strengthened collaboration with Fuji Electric Systems Co., Ltd., which has expertise in power generation facilities and control technologies. 2

4 a message from the management Aiming for Leadership in Global Niche Markets Kazuhiko Yamada President and Chief Executive Officer, Representative Director I am pleased to provide our stakeholders with Tsukishima Kikai s Annual Report In fiscal 2005 (the year ended March 31, 2006) the Japanese economy experienced a gradual recovery that brought an increase in capital investment supported by solid corporate profits. Improvement in the employment situation led to higher personal income and personal consumption. Nevertheless, a sharp increase in the price of crude oil, curtailment of public investment, and other downside factors suggest that future economic prospects continue to bear watching. In these circumstances, to further increase profitability and competitiveness the Tsukishima Kikai Group (Tsukishima Kikai Co., Ltd. and its consolidated subsidiaries) focused management resources on the development of new technologies and markets and actively invested in IT systems to increase productivity and improve business process quality. We have engaged in group-wide measures, including structural reform on the basis of selection and concentration, while striving for thoroughgoing cost reductions and improvement in technological capabilities. Sales, Profit and Orders Received Consolidated net sales in fiscal 2005 were 74,183 million (an increase of 1.5% year on year). Major items in sales included construction of a new fertilizer plant for JPec Co., Ltd. in Japan and terephthalic acid driers for customers in China. With regard to profit, intensification of market competition led to deterioration in profitability that exceeded the impact of group-wide cost reduction efforts. As a result, ordinary income and net income declined from the previous year. Ordinary income was 2,570 million (a decrease of 17.0% year on year), and net income was 1,660 million (a decrease of 37.4% year on year). Orders received fell by 10.7% from the previous year to 73,606 million, owing to worsening of the selling environment. Major orders received 3

5 included a bioethanol production plant for Bioethanol Japan Kansai Co., Ltd. in Japan and equipment for a polycarbonate plant in Taiwan. Capital Investment Capital investment in fiscal 2005 was 2,506 million. Major items were electronic beam welding facilities and cleanroom expansion (including the fabrication of vacuum chambers for liquid crystal panel manufacturing). The Company also invested in IT systems to increase productivity and improve business process quality. Sales () 73,119 69,193 73,100 74,183 Research and Development Investment in research and development was 1,625 million (an increase of 7.0% year on year). The entire Tsukishima Group engages in R&D activities, with Tsukishima Kikai s R&D Division, group-member laboratories, and the Environmental Technology Development Center playing central roles. In addition to research and development in current business areas, we actively engage in R&D in new fields, including joint research with universities, NEDO, and companies from other industries Operating income () 4,258 Future Outlook and Management Priorities Economic recovery in Japan is expected to continue, supported by domestic private-sector demand fueled by the positive effect of improvement in corporate profits on employment and personal consumption. However, the business environment facing Japan s companies will continue to bear watching owing to crude oil price and interest rate trends and the continued contraction of public investment. In this operating environment, the Tsukishima Kikai Group has designated the three-year period beginning in fiscal 2006 (the year from April 1, 2006 to March 31, 2007) as the timeframe for the attainment of business self-reliance in preparation for its next 100 years in business and formulated the Next 100 Plan, a medium-term management plan with the aim of attaining leadership in global niche markets. In the coming years, the Tsukishima Kikai Group will clearly define the responsibilities of its business divisions by adopting a divisional organization and transfer operational authority to the business divisions. We will engage in focused investment of management resources in growth areas by means of selection and concentration and engineer a recovery in profits by striving for product differentiation in niche sectors and higher added value to be achieved through rigorous cost reductions. We request the continued support and cooperation of our shareholders, investors, and customers in the years ahead. 2,887 2,472 2, Shareholder s equity () 54,363 48,318 45,421 39,

6 board of directors Kunihiko Sawa Board Member Tokio Motohashi Board Member, Executive Officer Katsumi Ishiyama Board Member, Executive Officer Katsunori Nishida Board Member, Executive Officer Koji Sakashita Board Member, Executive Officer Kazuhiko Yamada President and Chief Executive Officer, Representative Director Toshiharu Nagamine Board Member, Managing Executive Officer Toshio Tanei Senior Managing Executive Officer, Representative Director 5

7 FINANCIAL SECTION Five-Year Summary (Consolidated) TSUKISHIMA KIKAI CO., LTD. and its consolidated subsidiaries Years ended March 31 (Note 1) For the year: Net sales... 74,184 73,100 69,193 73,119 81,475 $631,514 Operating income... 2,300 2,472 4,258 2,887 3,543 19,579 Income before income taxes... 2,598 3,721 4,034 1,737 2,582 22,116 Net income... 1,660 2,653 2, ,397 14,131 At year-end: Total assets ,924 97,245 91,022 85,291 99, ,737 Shareholders equity... 54,364 48,318 45,421 39,831 40, ,791 Yen Per share: Net income $0.30 Cash dividends Number of shares outstanding (in thousands)... 45,626 45,626 45,626 45,626 45,626 Note: U.S. dollar amounts are translated from yen at the rate of to US$1, solely for the convenience of the reader. The fiscal year ended March 31, 2005 dividend includes a commemorative dividend of 5.00 per share. Net Income per Share Return on Equity Equity per Share (Yen) 8 (%) 1,300 (Yen) ,200 1, , , ,

8 Consolidated Balance Sheets TSUKISHIMA KIKAI CO., LTD. and its consolidated subsidiaries Years ended March 31, 2006 and 2005 ASSETS (Note 1) Current assets: Cash and time deposits... 18,188 21,524 $154,831 Marketable securities (Notes 2, 7)... 1,401 1,605 11,926 Notes and accounts receivable... 36,088 33, ,210 Allowance for doubtful accounts (Note 2)... (61) (59) (519) Inventories (Notes 2, 4, 6)... 5,178 3,901 44,079 Deferred income taxes (Note 11)... 1,802 1,507 15,341 Other current assets ,865 Total current assets... 63,050 62, ,733 Property, plant and equipment (Notes 2, 3, 8): Land... 6,853 6,855 58,338 Buildings and structures... 8,804 8,757 74,947 Machinery and equipment... 14,334 15, ,023 Construction in progress ,617 30,181 31, ,925 Less: accumulated depreciation... (15,736) (16,365) (133,957) Net property, plant and equipment... 14,445 15, ,968 Investments and other assets: Software... 1, ,663 Investments in securities (Notes 2, 7, 8)... 25,849 16, ,048 Long-term loans (Note 8) ,929 Deferred income taxes (Note 11)... 1, ,811 Other assets... 2, ,718 Less: allowance for doubtful accounts (Note 2)... (603) (136) (5,133) Total investments and other assets... 30,429 19, ,036 Total assets ,924 97,245 $918,737 See Notes to Consolidated Financial Statements. 7

9 LIABILITIES AND SHAREHOLDERS EQUITY (Note 1) Current liabilities: Notes and accounts payable Trade... 26,834 25,970 $228,433 Other... 2,969 2,376 25,275 Short-term bank loans (Note 8) ,087 Current portion of long-term bank loans (Note 8)... 1, ,880 Accrued income taxes (Note 11)... 1, ,509 Accrued expenses... 1,983 1,937 16,881 Accrued warranty (Note 2) ,798 Advances received... 2,332 2,604 19,852 Other current liabilities ,206 7,490 Total current liabilities... 39,729 36, ,205 Long-term liabilities: Long-term bank loans (Note 8)... 1,114 3,362 9,483 Deferred income taxes (Note 11)... 6,106 2,636 51,979 Provision for post-employment benefits (Notes 2, 9)... 6,107 5,962 51,988 Reserve for retirement payments to officers (Note 2) ,337 Other Total long-term liabilities 13,725 12, ,839 Minority interests Contingent liability (Note 12) Shareholders equity: Common stock, Authorized: 180 million shares in 2006 and 60 million shares in 2005 Issued: 45,625,800 shares in 2006 and ,647 Additional paid-in capital... 5,486 Retained earnings... 32,390 Net unrealized gains on available-for-sale securities... 9,918 Treasury stock... (77) Total shareholders equity 54,364 Total liabilities and shareholders equity ,924 6,647 5,486 31,567 4,671 (53) 48,318 97,245 56,585 46, ,730 84,430 (655) 462,791 $918,737 See Notes to Consolidated Financial Statements. 8

10 Consolidated Statements of Income TSUKISHIMA KIKAI CO., LTD. and its consolidated subsidiaries Years ended March 31, 2006 and 2005 (Note 1) Net sales (Note 16)... 74,184 73,100 $631,514 Cost of sales (Note 4)... 61,167 59, ,703 Gross profit (Note 4)... 13,017 13, ,811 Selling, general and administrative expenses (Note 4)... 10,717 11,336 91,232 Operating income (Note 4) 2,300 2,472 19,579 Other income (expenses): Interest and dividend income ,801 Interest expenses... (98) (93) (834) Gain on sales of investments in securities ,645 Gain on sale of business Gain on liquidation of consolidated subsidiary Loss on disposal of property, plant and equipment... (322) (44) (2,741) Loss on disposal of inventories... (18) (63) (153) Provision of allowance for doubtful accounts... (462) (3,933) Other, net (Note 13)... (29) 101 (248) 298 1,249 2,537 Income before income taxes (Note 4) 2,598 3,721 22,116 Income taxes (Notes 2, 11): Current... 1,387 1,243 11,807 Deferred... (494) (234) (4,205) Total income taxes 893 1,009 7,602 Minority interests... (45) (59) (383) Net income... 1,660 2,653 $ 14,131 Yen Per share Net income $0.30 Cash dividends See Notes to Consolidated Financial Statements. 9

11 Consolidated Statements of Shareholders Equity TSUKISHIMA KIKAI CO., LTD. and its consolidated subsidiaries Years ended March 31, 2006 and 2005 Thousands Number of Additional Net unrealized gains shares of common Common paid-in Retained on available-for-sale Treasury stock issued stock capital earnings securities stock Balance as of March 31, ,626 6,647 5,486 29,666 3,650 (28) Cash dividends... (684) Bonuses to officers... (68) Net income for the year ended March 31, ,653 Change of unrealized gains on available-for-sale securities... 1,021 Treasury stock... (25) Balance as of March 31, ,626 6,647 5,486 31,567 4,671 (53) Cash dividends... (911) Bonuses to officers... (57) Net income for the year ended March 31, ,660 Change from the merger of a consolidated and a non-consolidated subsidiary Change of unrealized gains on available-for-sale securities... 5,247 Treasury stock... (24) Balance as of March 31, ,626 6,647 5,486 32,390 9,918 (77) Thousands (Note 1) Number of Additional Net unrealized gains shares of common Common paid-in Retained on available-for-sale Treasury stock issued stock capital earnings securities stock Balance as of March 31, ,626 $ 56,585 $ 46,701 $ 268,724 $ 39,763 $(451) Cash dividends... (7,756) Bonuses to officers... (485) Net income for the year ended March 31, ,131 Change from the merger of a consolidated and a non-consolidated subsidiary... 1,116 Change of unrealized gains on available-for-sale securities... 44,667 Treasury stock... (204) Balance as of March 31, ,626 $56,585 $46,701 $275,730 $84,430 $(655) See Notes to Consolidated Financial Statements. 10

12 Consolidated Statements of Cash Flows TSUKISHIMA KIKAI CO., LTD. and its consolidated subsidiaries Years ended March 31, 2006 and 2005 (Note 1) Cash flows from operating activities: Income before income taxes and minority interests... Adjustments for: Depreciation and amortization... Amortization of goodwill arising from consolidation... Increase in provision for post-employment benefits... Increase in accrued bonus... Increase in reserve for retirement payments to officers... Increase (decrease) in allowance for doubtful accounts... Interest and dividend income... Interest expenses... Loss on disposal of property, plant and equipment... Gain on sales of investments in securities... Gain on liquidation of consolidated subsidiary... Gain on sale of business... Increase in notes and accounts receivable... Decrease in advances received... (Increase) decrease in inventories... Increase in notes and accounts payable, trade... Bonuses to officers... Other... Subtotal... 2,598 1, (329) (898) (2,605) (299) (1,194) 589 (57) (319) (71) 3,721 1,433 (40) (12) (446) (2) (66) (834) (4,811) (3,487) 2,907 4,551 (69) (44) 3,314 $ 22,116 11,135 1, ,933 (2,801) 834 2,741 (7,645) (22,176) (2,545) (10,164) 5,014 (485) (2,715) (604) Interest and dividend income received... Interest expenses paid... Income taxes paid... Net cash provided by (used in) operating activities... Cash flows from investing activities: Purchase of marketable securities... Proceeds from sales of marketable securities... Purchase of property, plant and equipment... Proceeds from sales of property, plant and equipment... Purchase of intangible fixed assets... Purchase of investments in securities... Proceeds from sales of investments in securities... Payments for loans receivable... Collection of loans receivable... Payments for liquidation of consolidated subsidiary... Proceeds from sale of business... Proceeds from acquisition of subsidiary stock resulting in changes in the scope of consolidation... Other... Net cash provided by (used in) investing activities... Cash flows from financing activities: Increase (decrease) in short-term bank loans... Proceeds from long-term bank loans... Repayments of long-term bank loans... Additions of treasury stock Dividends paid... Net cash used in financing activities... Net decrease in cash and cash equivalents... Cash and cash equivalents at beginning of period (Note 2,5)... Increase resulting from the merger of a consolidated subsidiary with a non-consolidated subsidiary... Cash and cash equivalents at end of period (Note 2,5) (100) (411) (246) (504) 2,100 (1,128) 7 (1,252) (2,948) 2,251 (245) 242 (19) (1,496) 200 (953) (24) (911) (1,688) (3,430) 21, (93) (2,772) 896 (800) 400 (1,773) 21 (89) (251) 206 (3) 43 (79) 1, (1,095) 200 (406) (25) (685) (2,011) (939) 22,418 2,860 (851) (3,499) (2,094) (4,290) 17,877 (9,602) 60 (10,658) (25,096) 19,162 (2,086) 2,060 (162) (12,735) 1,703 (8,113) (204) (7,756) (14,370) (29,199) 182, ,163 21, $154,618 See Notes to Consolidated Financial Statements. 11

13 Notes to Consolidated Financial Statements 1. Basis of Presenting Consolidated Financial Statements The accompanying consolidated financial statements have been prepared from the financial statements filed with the Financial Services Agency as required by the Japanese Securities and Exchange Law in accordance with accounting principles and practices generally accepted in Japan, which are different from the accounting and disclosure requirements of International Accounting Standards. Certain reclassifications have been made to present the accompanying consolidated financial statements in a format which is familiar to readers outside Japan. For the convenience of the reader, the accompanying consolidated financial statements have been presented in by translating all Japanese yen amounts at the exchange rate of to $1, the approximate rate of exchange at March 31, These translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollar amounts at the above rate or at any other rate. 2. Summary of Significant Accounting Policies (a) The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. The investments in unconsolidated subsidiaries and an affiliate are stated at cost and the equity method is not applied for the valuation of such investments since they are considered immaterial in the aggregate. The four major subsidiaries that have been consolidated with the Company are listed below: Tsukishima Technology Maintenance Service Co., Ltd. Tsukishima Techno Machinery Co., Ltd. Sun Eco Thermal Co., Ltd. Tsukishima Nittetsu Chemical Engineering, Ltd. Tsukishima Nittetsu Chemical Engineering changed its name to Tsukishima Kankyo Engineering, Ltd. in April (b) Marketable Securities and Investments in Securities. All of the Group s securities are classified as follows: i) Held-to-maturity debt securities, which management has the positive intent and ability to hold to maturity, are reported at amortized cost. ii) Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of shareholders equity. The cost of securities sold is determined based on the moving-average method. Non-marketable available-for-sale securities are stated at cost, determined by the movingaverage method. (c) Inventories (1) Raw materials are stated at cost which is determined by the periodic average method. (2) Supplies are stated at cost which is determined by the moving-average method. (3) Work in process is stated at cost which is determined by the specific cost method. (d) Property, Plant and Equipment Property, plant and equipment are carried at cost. Depreciation is computed by the declining balance method over the estimated useful lives of the assets, except for buildings placed in service after April 1, 1998, for which depreciation is computed on the straight-line method. The range of useful lives is from 3 to 60 years for buildings and structures and from 2 to 13 years for machinery and equipment. (e) Allowance for Doubtful Accounts The allowance for doubtful accounts is provided for in an amount sufficient to cover possible losses on collection. It consists of the estimated uncollectible amount with respect to identified doubtful receivables and an amount calculated on the historical loss experience with respect to remaining receivables. 12

14 (f) Accrued Warranty The accrued warranty is provided for based on the amounts to be determined as a certain percentage (which is distinguished between domestic and overseas construction) of the amount of completed construction contracts for the year, which is computed as a ratio of the actual repair costs incurred under the warranty against the amounts of completed construction contracts during the past years. In addition, the estimated repair costs for identified individual construction are provided. (g) Provision for Post-employment Benefits Employees who terminate their services with the Company and its consolidated subsidiaries are generally entitled to lump-sum severance payments based on their current basic rates of pay and length of service. In addition, the Company has the tax-qualified pension plans with insurance companies and trust banks. The provision for post-employment benefits recorded in the balance sheets less the pension plan assets was sufficient to satisfy the projected benefit obligation for employee s services up to the balance sheet date. (h) Reserve for Retirement Payments to Officers The Company and major consolidated subsidiaries have provided for reserve for retirement payments to officers under the retirement benefits plan which are calculated by the estimated amount to be paid if all officers retired at the balance sheet date. With respect to officers resignations, the retirement payments calculated under the retirement benefits plan are normally paid subject to approval of the shareholders. The retirement payments to officers should be provided for when such costs can be reasonably estimated. (i) Income Taxes The Company and its consolidated subsidiaries have adopted the asset-liability method of tax effect accounting to recognize the effect of all temporary differences in the recognition of the tax basis assets and liabilities and their financial reporting amounts. (j) Translation of Foreign Currencies Foreign currency receivables and payables are translated at the appropriate year-end current rate. Revenue and expense accounts are translated at the rates closely approximate to those prevailing on the transaction dates. Exchange gains and losses arising from the above foreign currency translations and transactions are included in other income or expenses. (k) Research and Development Costs Research and development costs are charged to income as incurred. (l) Recognition of Contract Revenue Sales of construction regarding contracts both with an amount of over 0.3 billion and a period of over one year are recognized by the percentage of completion method. Other sales are recognized by the completed contract method. (m) Cash Equivalents For the purpose of the consolidated statements of cash flows, cash and cash equivalents include highly liquid investments which can be withdrawn without any restriction and with minimum market risk. (n) Derivative Financial Instruments Derivative financial instruments utilized by the Company are comprised principally of foreign exchange contracts used to hedge currency risk. The carrying amount of derivative financial instruments, consisting principally of foreign exchange contracts, all of which are used for hedge purposes, are estimated by obtaining quotes from brokers. 13

15 3. Change in Accounting Policy (Accounting Standard for Impairment of Fixed Assets) Effective from this year, the Company and its consolidated subsidiaries have adopted the Accounting Standard for Impairment of Fixed Assets issued by the Business Accounting Council in Japan on August 9, 2002 and Implementation Guidance for the Accounting Standard for Impairment of Fixed Assets issued by the Accounting Standard Board of Japan on October 31, The adoption of these standards has no effect on consolidated statements of income. 4. Additional Information Effective from this year,the Company implemented a new product cost management system. By adoption of a new system,the part of expense which previous method had been dealt with selling, general and administrative expenses was stated at cost of sales. The effect of this change was to increase inventories by 239 million($2,034 thousand) and cost of sales by 202 million($1,720 thousand) and to decrease selling, general and administrative expenses by 441 million($3,754 thousand) and to decrease gross profit by 202 million($1,720 thousand) and to increase operating income and income before income taxes by 239 million ($2,034 thousand) for the year ended March 31, 2006 as compared with the corresponding amounts which would have been recorded if the previous method had been followed. 5. Cash and Cash Equivalents (a) Cash and cash equivalents as of March 31, 2006 and 2005 consisted of the following: Cash and time deposits... Less: time deposits that mature or become due over three months after the date of acquisition... Cash and cash equivalents... 18,188 21,524 $154,831 (25) 18,163 (45) 21,479 (213) $154, Inventories Inventories as of March 31, 2006 and 2005 consisted of the following: Work in process... Raw materials and supplies... 5,029 3,749 $42, ,268 5,178 3,901 $44,079 14

16 7. Marketable Securities and Investments in Securities (a) Marketable securities and investments in securities as of March 31, 2006 and 2005 consisted of the following: Current: Government and corporate bonds... Non-current: Equity securities... Government and corporate bonds... Others... 1,401 1,401 25, ,849 1,605 1,605 14,211 2, ,822 $ 11,926 $ 11,926 $213,987 5, $220,048 (b) The carrying amounts and aggregate fair values of marketable and investment securities at March 31, 2006 and 2005 were as follows: 2006 Unrealized Unrealized Cost gains losses Fair value Securities classified as: Available-for-sale: Equity securities... 7,893 16,721 (12) 24,602 Others ,903 16,722 (12) 24,613 Held-to-maturity securities... 2,101 4 (0) 2, Unrealized Unrealized Cost gains losses Fair value Securities classified as: Available-for-sale: Equity securities... 6,148 7,943 (69) 14,022 Others (3) 7 6,158 7,943 (72) 14,029 Held-to-maturity securities... 4, (0) 4, Unrealized Unrealized Cost gains losses Fair value Securities classified as: Available-for-sale: Equity securities... $67,192 $142,342 $(102) $209,432 Others $67,277 $142,351 $(102) $209,526 Held-to-maturity securities... $17,885 $ 34 $ (0) $ 17,919 15

17 (c) Available-for-sale securities whose fair values were not readily determinable as of March 31, 2006 and 2005 were as follows: Carrying Amount Available-for-sale: Equity securities... Other $3, $3, Short-term Bank Loans and Long-term Bank Loans Short-term bank loans are represented by 12-month notes, and the weighted average interest rate applicable to such loans as of March 31, 2006 and 2005 were approximately 0.9 percent and 1.1 percent respectively. Long-term bank loans as of March 31, 2006 and 2005 consisted of the following: Loans, from banks, due Less: portion due within one year... 2,862 (1,748) 1,114 3,815 (453) 3,362 $ 24,363 (14,880) $ 9,483 The following assets were pledged as collateral for the above long-term bank loans and short-term bank loans: Property, plant and equipment (Net book value) Land... Buildings and structures... Investments in securities... Long-term loans $1,941 2, $5,218 Interest rates of long-term bank loans as of March 31, 2006 and 2005 were between 0.56 percent and 3.15 percent for both years. The aggregate annual maturities of long-term bank loans outstanding as of March 31, 2006 were as follows: The aggregate annual maturities of long-term bank loans payable Years ending March ,748 $14, , and thereafter ,963 16

18 9. Provision for Post-employment Benefits Employees who terminate their service with the Company and its consolidated subsidiaries are generally entitled to lump-sum severance payments. In addition, the Company has tax-qualified pension plans. Provision for post-employment benefit obligations as of March 31, 2006 and 2005 consisted of the following: a. Post-employment benefit obligations... b. Pension assets... c. Net-total (a+b)... d. Unrecognized actuarial differences... e. Provisions for post-employment benefits (c+d)... (8,816) 1,742 (7,074) 967 (6,107) (8,749) 1,597 (7,152) 1,190 (5,962) $(75,049) 14,829 (60,220) 8,232 $(51,988) Post-employment benefit expenses for the year ended March 31, 2006 and 2005 consisted of the following: a. Service costs... b. Interest costs... c. Expected return... d. Amortization of unrecognized actuarial differences... e. Post-employment benefit expenses total (24) (24) $4,759 1,771 (204) 1,310 $7,636 Basic measurement of post-employment benefit obligations and other items a. Allocation method for projected post-employment benefits... Straight-line method Straight-line method b. Discount rate % 2.5% c. Expected rate of return % 1.5% d. Year over which the actuarial differences obligations are allocated... 7 years 7 years 10. Research and Development Costs Research and development costs charged to income for the years ended March 31, 2006 and 2005 amounted to 1,625 million ($13,833 thousand) and 1,519 million respectively. 17

19 11. Income Taxes Income taxes applicable to the Company and its consolidated subsidiaries consist of corporate income tax, enterprise taxes and corporate inhabitants taxes. The effective income tax rates of the Company and its consolidated subsidiaries differ from the statutory tax rate for the following reasons: Statutory tax rate... Expenses not deductible for tax purposes... Non-taxable dividend income... Per capita levy of inhabitant taxes... Use of net operating loss carry forwards... Tax credit... Othernet... Effective tax rate % 8.9 (5.7) 1.3 (9.3) (1.5) 34.4% 40.7% 7.0 (25.6) 0.9 (0.8) % Deferred tax assets and liabilities at March 31, 2006 and 2005 were composed of the following: Deferred tax assets: Accrued cost of sales... Accrued enterprise taxes... Accrued warranty... Provision for post-employment benefits... Write-down of golf club membership... Intangible fixed assets... Unrealized profit... Accrued bonus to employees... Net operating loss carry forwards... Others... Total deferred tax assets , , , ,446 $ 1,830 1,243 3,175 21,146 1,328 1,022 5,278 6,921 41,943 Deferred tax liabilities: Reserve for deferred gains on sales of fixed assets for tax purposes... Net unrealized gains on available-for-sale securities... Total deferred tax liabilities... Net deferred tax liabilities... (1,403) (6,792) (8,195) (3,268) (1,415) (3,200) (4,615) (169) (11,943) (57,819) (69,762) $(27,819) 12. Contingent Liability The Company and its consolidated subsidiaries were contingently liable for the following items: Guarantees for indebtedness of non-consolidated subsidiaries and others $6,631 18

20 13. Other Income/ (Expenses)Other, Net Other income/(expenses)other, net consisted of the following items: As of March 31 Gain on insurance... Depreciation of prepaid expenses... Depreciation of intangible fixed assets... Other, net (43) (10) (36) 64 (47) (25) 109 $ 511 (366) (85) (308) (29) 101 $(248) 14. Subsequent Events The following appropriations of unappropriated retained earnings were approved at the meeting of shareholders of the Company held on June 29, Cash dividends $3, per share (applicable to the six-month period ended March 31, 2006) Bonuses to directors and statutory auditors Finance Leases Finance leases, except those leases for which the ownership of the leased assets is considered to be transferred to the lessee, are accounted for as operating leases. The Company and its consolidated subsidiaries lease certain buildings and structures, tools, furniture, fixtures, and other assets. The pro forma information of leased assets under finance leases that do not transfer ownership of the leased assets to the lessee on an as if capitalized basis for the years ended March 31, 2006 and 2005 is as follows: Buildings and structures... Machinery and equipment... Tools, furniture and fixtures... Other assets... Less: accumulated depreciation (494) (412) 489 $ 4, , (4,205) $ 4,197 Obligations under finance leases as of March 31, 2006 and 2005 were as follows: Due within one year... Due after one year $1,022 3, $4,197 19

21 Total rental expenses for the above leases were 118 million ($1,005 thousand) and 27 million for the years ended March 31, 2006 and 2005, respectively. The pro forma depreciation expense computed by the straight-line method was 118 million ($1,005 thousand) and 27 million for the years ended March 31, 2006 and 2005, respectively. The pro forma information above does not exclude the imputed interest portion because the remaining financial lease obligations are not material, compared with the book values of property, plant and equipment. 16. Segment Information (a) Information by Industry Segment The Company and its consolidated subsidiaries are primarily engaged in the following two major industry segments: Plant: Plants for environmental protection, water purification and sewage treatment, food, chemicals. Equipment and other: Dryers, filter press, gas holders, maintenance controls, repairs, etc. Year ended March 31, 2006 Equipment Plant and other Total Eliminations Consolidated Sales: Customers... 36,728 37,456 74,184 74,184 Intersegment... Total... 36,728 37,456 74,184 74,184 Operating expenses... 36,226 35,658 71,884 71,884 Operating income ,798 2,300 2,300 Total assets... 30,175 31,792 61,967 45, ,924 Depreciation ,247 1,247 Capital expenditures... 1,302 1,205 2,507 2,507 Year ended March 31, 2005 Equipment Plant and other Total Eliminations Consolidated Sales: Customers... 42,219 30,881 73,100 73,100 Intersegment... Total... 42,219 30,881 73,100 73,100 Operating expenses... 40,363 30,265 70,628 70,628 Operating income... 1, ,472 2,472 Total assets... 27,652 29,614 57,266 39,979 97,245 Depreciation ,372 1,372 Capital expenditures ,802 1,802 20

22 Year ended March 31, 2006 Equipment Plant and other Total Eliminations Consolidated Sales: Customers... $312,658 $318,856 $631,514 $ $631,514 Intersegment... Total , , , ,514 Operating expenses , , , ,935 Operating income... 4,273 15,306 19,579 19,579 Total assets , , , , ,737 Depreciation... 3,209 7,406 10,615 10,615 Capital expenditures... 11,084 10,258 21,342 21,342 (b) Overseas Sales Overseas sales by area and percentage of overseas sales over consolidated net sales for the years ended March 31, 2006 and 2005 were as follows: Percentage Area: Asia... 9,017 8,057 $76, % 11.0% Other , % 0.2% 9,880 8,199 $84, % 11.2% Major countries and areas included in each geographic area are as follows: Asia: China, Taiwan, India Other: Australia 21

23 INDEPENDENT AUDITORS REPORT 22

24 Non-Consolidated Balance Sheets TSUKISHIMA KIKAI CO., LTD. Years ended March 31, 2006 and 2005 ASSETS (Note 1) Current assets: Cash and time deposits... 13,213 17,215 $ 112,480 Marketable securities (Notes 2, 7)... 1,401 1,605 11,926 Notes and accounts receivable... 30,832 28, ,467 Allowance for doubtful accounts (Note 2)... (45) (42) (383) Inventories (Notes 2, 4, 6)... 3,726 2,751 31,719 Deferred income taxes (Note 10)... 1,228 1,055 10,454 Other current assets ,345 Total current assets... 50,748 51, ,008 Property, plant and equipment (Notes 2, 3, 8): Land... 6,483 6,483 55,189 Buildings and structures... 7,894 7,716 67,200 Machinery and equipment... 9,936 11,055 84,583 Construction in progress ,524 24,492 26, ,496 Less: accumulated depreciation... (12,491) (13,323) (106,334) Net property, plant and equipment... 12,001 12, ,162 Investments and other assets: Software... 1, ,692 Investments in securities (Notes 2, 7)... 25,723 16, ,975 Investments and long-term loans to subsidiaries (Note 8)... 1, ,581 Other assets... 2, ,379 Less: allowance for doubtful accounts (Note 2)... (603) (136) (5,133) Total investments and other assets... 29,543 18, ,494 Total assets... 92,292 82,673 $ 785,664 See Notes to Non-Consolidated Financial Statements. 23

25 LIABILITIES AND SHAREHOLDERS EQUITY (Note 1) Current liabilities: Accounts payable Trade... 23,912 23,708 $203,558 Other... 2,608 2,028 22,201 Short-term bank loans (Note 8) Current portion of long-term bank loans (Note 8) Accrued income taxes (Note 10) ,878 Accrued expenses ,525 Accrued warranty (Note 2) ,521 Advances received... 1,987 1,786 16,915 Other current liabilities ,576 Total current liabilities... 31,499 30, ,145 Long-term liabilities: Long-term bank loans (Note 8) Deferred income taxes (Note 10)... 6,106 2,636 51,979 Provision for post-employment benefits (Note 2)... 3,841 3,850 32,698 Reserve for retirement payments to officers (Note 2) ,545 Other Total long-term liabilities... 10,277 6,839 87,486 Contingent liability (Note 11) Shareholders equity: Common stock, Authorized: 180 million shares in 2006 and 60 million shares in 2005 Issued: 45,625,800 shares in 2006 and ,647 6,647 56,585 Additional paid-in capital... 5,486 5,486 46,701 Retained earnings... 28,543 28, ,981 Net unrealized gains on available-for-sale securities... 9,917 4,671 84,421 Treasury stock... (77) (53) (655) Total shareholders equity... 50,516 45, ,033 Total liabilities and shareholders equity... 92,292 82,673 $785,664 See Notes to Non-Consolidated Financial Statements. 24

26 Non-Consolidated Statements of Income TSUKISHIMA KIKAI CO., LTD. Years ended March 31, 2006 and 2005 (Note 1) Net sales... 56,247 60,482 $478,820 Cost of sales (Note 4)... 47,577 49, ,014 Gross profit (Note 4)... 8,670 10,962 73,806 Selling, general and administrative expenses (Note 4)... 8,117 9,698 69,098 Operating income (Note 4) ,264 4,708 Other income (expenses): Interest and dividend income ,967 Interest expenses... (1) (5) (9) Gain on sales of investments in securities ,645 Gain on liquidation of consolidated subsidiary Loss on disposal of property, plant and equipment... (297) (35) (2,528) Loss on disposal of inventories... (18) (63) (153) Provision of allowance for doubtful accounts... (462) (3,933) Other, net (Note 12)... (26) 86 (222) ,767 Income before income taxes (Note 4)... 1,113 1,911 9,475 Income taxes (Notes 2, 10): Current ,184 Deferred... (297) (181) (2,528) Total income taxes ,656 Net income ,705 $ 6,819 Yen Per share Net income $ 0.14 Cash dividends See Notes to Non-Consolidated Financial Statements. 25

27 Non-Consolidated Statements of Shareholders Equity TSUKISHIMA KIKAI CO., LTD. Years ended March 31, 2006 and 2005 Thousands Number of Additional Net unrealized gains shares of common Common paid-in Retained on available-for-sale Treasury stock issued stock capital earnings securities stock Balance as of March 31, ,626 6,647 5,486 27,729 3,650 (28) Cash dividends... (684) Bonuses to officers... (52) Net income for the year ended March 31, ,705 Change of unrealized gains on available-for-sale securities... 1,021 Treasury stock... (25) Balance as of March 31, ,626 6,647 5,486 28,698 4,671 (53) Cash dividends... (911) Bonuses to officers... (45) Net income for the year ended March 31, Change of unrealized gains on available-for-sale securities... 5,246 Treasury stock... (24) Balance as of March 31, ,626 6,647 5,486 28,543 9,917 (77) Thousands (Note 1) Number of Additional Net unrealized gains shares of common Common paid-in Retained on available-for-sale Treasury stock issued stock capital earnings securities stock Balance as of March 31, ,626 $ 56,585 $ 46,701 $ 244,301 $ 39,763 $ (451) Cash dividends... (7,756) Bonuses to officers... (383) Net income for the year ended March 31, ,819 Change of unrealized gains on available-for-sale securities... 44,658 Treasury stock... (204) Balance as of March 31, ,626 $56,585 $46,701 $242,981 $84,421 $(655) See Notes to Non-Consolidated Financial Statements. 26

28 Non-Consolidated Statements of Cash Flows TSUKISHIMA KIKAI CO., LTD. Years ended March 31, 2006 and 2005 (Note 1) Cash flows from operating activities: Income before income taxes... Adjustments for: Depreciation and amortization... Increase (decrease) in provision for post-employment benefits... Increase (decrease) in accrued bonus... Increase in reserve for retirement payments to officers... Increase (decrease) in allowance for doubtful accounts... Interest and dividend income... Interest expenses... Loss on disposal of property, plant and equipment... Gain on sales of investments in securities... Gain on liquidation of consolidated subsidiary... Increase in notes and accounts receivable... Increase (decrease) in advances received... (Increase) decrease in inventories... Increase in accounts payable, trade... Bonuses to officers... Other... Subtotal... Interest and dividend income received... Interest expenses paid... Income taxes paid... Net cash provided by (used in) operating activities... 1, (9) (65) (466) (898) (2,777) 200 (976) 205 (45) (333) (2,353) 475 (1) 229 (1,650) 1,911 1, (8) (570) 5 35 (2) (92) (4,346) (3,557) 3,217 3,726 (52) (82) 1, (4) (1,829) 121 $ 9,475 7,610 (77) (553) 349 3,958 (3,967) 9 2,528 (7,645) (23,640) 1,703 (8,309) 1,745 (383) (2,834) (20,031) 4,044 (9) 1,950 (14,046) Cash flows from investing activities: Purchase of marketable securities... Proceeds from sales of marketable securities... Purchase of property, plant and equipment... Proceeds from sales of property, plant and equipment... Purchase of intangible fixed assets... Purchase of investments in securities... Proceeds from sales of investments in securities... Payments for loans receivable... Collection of loans receivable... Proceeds from liquidation of consolidated subsidiary... Other... Net cash used in investing activities... (504) 2,100 (1,047) 5 (1,248) (2,946) 2,251 (195) (1,333) (800) 400 (1,641) 21 (56) (282) ,748 9 (359) (4,290) 17,877 (8,913) 43 (10,624) (25,079) 19,162 (1,660) 2, (11,347) Cash flows from financing activities: Decrease in short-term bank loans... Proceeds from long-term bank loans... Repayments of long-term bank loans... Additions of treasury stock... Dividends paid... Net cash used in financing activities... (64) (24) (911) (999) (895) 200 (64) (25) (684) (1,468) (545) (204) (7,756) (8,505) Net decrease in cash and cash equivalents... Cash and cash equivalents at beginning of period (Notes 2,5)... Cash and cash equivalents at end of period (Notes 2,5)... (3,982) 17,170 13,188 (1,706) 18,876 17,170 (33,898) 146,165 $112,267 See Notes to Non-Consolidated Financial Statements. 27

29 Notes to Non-Consolidated Financial Statements 1. Basis of Presenting Non-Consolidated Financial Statements The accompanying non-consolidated financial statements have been prepared from the financial statements filed with the Financial Services Agency as required by the Japanese Securities and Exchange Law in accordance with accounting principles and practices generally accepted in Japan, which are different from the accounting and disclosure requirements of International Accounting Standards. Certain reclassifications have been made to present the accompanying non-consolidated financial statements in a format which is familiar to readers outside Japan. For the convenience of the reader, the accompanying non-consolidated financial statements have been presented in by translating all Japanese yen amounts at the exchange rate of to $1, the approximate rate of exchange at March 31, These translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollar amounts at the above rate or at any other rate. 2. Summary of Significant Accounting Policies (a) Marketable Securities and Investments in Securities The Company s securities are classified as follows: i) Held-to-maturity debt securities, which management has the positive intent and ability to hold to maturity, are reported at amortized cost. ii) Equity securities, which were issued by subsidiaries, are stated at moving-average cost. iii) Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of shareholders equity. The cost of securities sold is determined based on the moving-average method. Non-marketable available-for-sale securities are stated at cost, determined by the movingaverage method. (b) Inventories (1) Raw materials are stated at cost which is determined by the periodic average method. (2) Supplies are stated at cost which is determined by the moving-average method. (3) Work in process is stated at cost which is determined by the specific cost method. (c) Property, Plant and Equipment Property, plant and equipment are carried at cost. Depreciation is computed by the declining balance method over the estimated useful lives of the assets, except for buildings placed in service after April 1, 1998, for which depreciation is computed on the straight-line method. The range of useful lives is from 3 to 60 years for buildings and structures and from 2 to 13 years for machinery and equipment. (d) Allowance for Doubtful Accounts The allowance for doubtful accounts is provided for in an amount sufficient to cover possible losses on collection. It consists of the estimated uncollectible amount with respect to identified doubtful receivables and an amount calculated on the historical loss experience with respect to remaining receivables. (e) Accrued Warranty The accrued warranty is provided for based on the amounts to be determined as a certain percentage (which is distinguished between domestic and overseas construction) of the amount of completed construction contracts for the year, which is computed as a ratio of the actual repair costs incurred under the warranty against the amounts of completed construction contracts during the past years. In addition, the estimated repair costs for identified individual construction are provided. (f) Provision for Post-employment Benefits Employees who terminate their services with the Company are generally entitled to lump-sum severance payments based on their current basic rates of pay and length of service. In addition, the Company has the tax-qualified pension plans with insurance companies and trust banks. The provision for post-employment benefits recorded in the balance sheets less the pension plan assets was sufficient to satisfy the projected benefit obligation for employee s services up to the balance sheet date. 28

30 (g) Reserve for Retirement Payments to Officers The Company has provided for reserve for retirement payments to officers under the retirement benefits plan which are calculated by the estimated amount to be paid if all officers retired at the balance sheet date. With respect to officers resignations, the retirement payments calculated under the retirement benefits plan are normally paid subject to approval of the shareholders. The retirement payments to officers should be provided for when such costs can be reasonably estimated. (h) Income Taxes The Company has adopted the asset-liability method of tax effect accounting to recognize the effect of all temporary differences in the recognition of the tax basis assets and liabilities and their financial reporting amounts. (i) Translation of Foreign Currencies Foreign currency receivables and payables are translated at appropriate year-end current rate. Revenue and expense accounts are translated at the rates closely approximate to those prevailing on the transaction dates. Exchange gains and losses arising from above foreign currency translations and transactions are included in other income or expenses. (j) Research and Development Costs Research and development costs are charged to income as incurred. (k) Recognition of Contract Revenue Sales of construction regarding contracts both with an amount of over 0.3 billion and a period of over one year are recognized by the percentage of completion method. Other sales are recognized by the completed contract method. (l) Cash Equivalents For the purpose of the non-consolidated statements of cash flows, cash and cash equivalents include highly liquid investments which can be withdrawn without any restriction and with minimum market risk. (m) Derivative Financial Instruments Derivative financial instruments utilized by the Company are comprised principally of foreign exchange contracts used to hedge currency risk. The carrying amount of derivative financial instruments, consisting principally of foreign exchange contracts, all of which are used for hedge purposes, are estimated by obtaining quotes from brokers. 3. Change in Accounting Policy (Accounting Standard for Impairment of Fixed Assets) Effective from this year, the Company has adopted the Accounting Standard for Impairment of Fixed Assets issued by the Business Accounting Council in Japan on August 9, 2002 and Implementation Guidance for the Accounting Standard for Impairment of Fixed Assets issued by the Accounting Standard Board of Japan on October 31, The adoption of these standards has no effect on non-consolidated statements of income. 29