SHOWA CORPORATION · products, the Company was renamed Showa Corporation in 1993. In 1964, Showa’s shares were listed on the Second Section of the Tokyo Stock Exchange (TSE). In

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

Printed in Japan on 100% recycled paper with soy ink

ANNUAL REPORT 2007

SHOWA CORPORATION

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

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

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

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

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

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

Contents

Profile

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

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

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

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

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

31

PresidentKazuto Iiyama

Executive Vice PresidentYasuhisa Maekawa

Executive Managing DirectorsHiroshi IjimaKenshi Hirai

Managing DirectorsYoshitaka TerazawaMitsuhiro NishidaTeturo Aoyama

Takeshi KawamotoNorio UkaiHisao Hirono

Directors

Mitsuhiro Chiba

Akira Kadoya

Mitsutaka Sugino

Kazuhiro Takagi

Teru Oda

Atsushi Izumina

Corporate Auditors

Mamoru Morino

Koichi Uchibaba

Hiroshi Iwakami

Akito Sejimo

Common Stock

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

Number of Shareholders

5,603

Common Stock Traded

Tokyo

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

As of 20th June 2007Board of Directors and Corporate Auditors

As of 31st March 2007Corporate Data

Showa's Stock PriceNikkei Average

Showa's Stock Price (’01/4=100)(Yen)

0

50

100

150

200

250

400

350

300

’01/4 4 4 4 4 47 10 ’02/1 7 7 710 10 10 7 10’03/1 ’04/1 ’05/1 ’06/1 37 10 ’07/1

Ten Largest ShareholdersShares Percent of

(Thousands) total (%)

Honda Motor Co., Ltd. 25,447 33.5Japan Trustee Services Bank, Ltd.

(Trust Account) 5,755 7.6The Bank of New York-Jasdec Treaty Account 3,729 4.9The Master Trust Bank of Japan, Ltd.

(Trust Account) 2,830 3.7Luxemburg Offshore Jasdec Lending Account 2,700 3.6The Bank of Tokyo-Mitsubishi UFJ, Ltd. 2,151 2.8Japan Trustee Services Bank, Ltd.

(Trust Account 4) 1,234 1.6Showa Corporation Business Partner’sShareholding Association 1,087 1.4MILLENIUM 1,078 1.4RBC DISB S/A SPARINVEST SICAV-GROBAL

VALUE 936 1.2

46,952 61.76

Showa Corporation manufactures and markets high-precision components for motor vehicles including

shock absorbers, steering systems and drive train products for automobiles and motorcycles, as well as

components for outboard marine engines. The Company is one of the leading manufacturers of shock

absorbers for automobiles and motorcycles in the world today.

Established in 1938, the Company began manufacturing motor vehicle parts in 1946. In 1970, the

Company became affiliated with Honda Motor Co., Ltd., a world leader in automobile and motorcycle

manufacturing. When merged with Seiki Giken Kogyo Co., Ltd., a manufacturer of power steering

products, the Company was renamed Showa Corporation in 1993. In 1964, Showa’s shares were listed

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

upgraded to the First Section of the TSE.

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

research and development facilities and two manufacturing subsidiaries within Japan.

The Company’s global business operation, a network of 25 manufacturing bases that includes 12

consolidated subsidiaries, spreads over 15 nations including Japan.

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

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

products.” Furthermore, at Showa, we strive to maintain our forward-looking stance and continue to

encourage technological, operational and administrative innovation.

Environmental preservation for the benefit of future generations is a great concern and a continuing

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

through our product offerings and corporate activities.

Showa Corporation and its global group Companies in 15 nations embrace the Company’s business

philosophy described above. The Company and its affiliates strive to expand their business, providing

additional benefits to our customers and shareholders as well as to the communities and societies

where we operate.

1

Thousands ofMillions of yen U.S. dollars

2006 2007 2007

Motor vehicle parts ¥244,818 ¥255,985 $2,168,450Other 5,630 5,911 50,078Total ¥250,448 ¥261,897 $2,218,528


2006 2007 2007

Japan ¥105,625 ¥105,056 $ 889,936North America 80,066 80,104 678,562Europe 17,617 18,628 157,804Southeast Asia 24,999 27,826 235,717Others 22,139 30,280 256,508

Total ¥250,448 ¥261,897 $2,218,528

Financial and Operating HighlightsSHOWA CORPORATION and Consolidated SubsidiariesYears ended 31st March, 2006 and 2007


2006 2007 2007

Net sales ¥250,448 ¥261,897 $2,218,528Operating income 17,175 17,698 149,926Income before income taxes and minority interests 18,564 16,137 136,700Net income 10,451 9,083 76,947Cash dividends paid during the period 1,367 1,519 12,871

Total assets 151,354 170,042 1,440,428Shareholders’ equity 97,815 110,740 938,080Depreciation and amortisation 6,758 7,107 60,211Capital expenditures 11,777 17,400 147,403

Per share amounts: Yen U.S. dollars

Net income (basic) ¥ 137.56 ¥ 119.56 $ 1.01Cash dividends 20.00 24.00 0.20Shareholders’ equity 1,156.02 1,285.76 10.89

• Throughout this report, U.S. dollar amounts have been translated from Japanese yen solely for the convenience of the reader at the rate of¥118.05=U.S.$1.00, the exchange rate prevailing at 31st March, 2007.

• The breakdown by geographic area is based on the degree of proximity to the geographic region.• Major countries or regions that fall under a category other than “Japan” are following:

North America: United States, CanadaEurope: Spain, U.K.Southeast Asia: Thailand, Indonesia, Malaysia, VietnamOthers: South America, China, India, Pakistan, Taiwan

*Figures exclude the intra-group transactions.

NET SALES BY BUSINESS SEGMENTS

NET SALES BY GEOGRAPHICAL AREAS*

Operating Highlights

Financial Highlights

2

Message from the President

We are delighted to have this opportunity to express our

gratitude to our shareholders for their outstanding support.

In addition, I am also pleased to present this summary

of results for the 99th term (from April 1, 2006 to March 31,

2007) and would like to make some brief comments on our

operations.

I was appointed president at a meeting of the Board of

Directors held on June 20, 2007. It is my hope that I can

continue to receive the same level of support from our

shareholders that my predecessor, Masahide Matsushima,

enjoyed.

During the term under review, global automotive

demand expanded steadily, principally in Asia where growth

was led by China, and sales to main customers remained

brisk. In this environment, taking advantage of our

worldwide production bases, we sought to bolster global

production and procurement activities and aggressively

promoted sales. At the same time, we took a number of

steps to bolster quality control.

As a result of these initiatives, net sales increased 4.6%

year on year, to ¥261,897 million (US$2,218 million).

Operating income rose 3.0%, to ¥17,698 million (US$149

million), and ordinary income climbed 5.9%, to ¥18,766

Message from the President

The 10th Medium-Term Policies

1) 10th Basic Medium-Term Policies

We will establish high-potential corporate foundations by redesigning ourworkplaces so that they offer opportunities for personal growth. Our aim is toachieve truly world-class quality and technologies.

(1) Rebuild the foundations for production(2) Achieve world-class quality with which we can compete globally(3) Strengthen our technical capabilities to world-leading levels(4) Improve corporate value to the highest in the industry(5) Develop a corporate culture that provides workers with opportunities for

personal growth

2) Action guidelinesLet’s create a liberated, active and open corporate culture.

■ Let’s continually pursue our dreams.■ Let’s act based on the realities of the workplace, our products and the

surrounding environment.

Kazuto IiyamaPresident

3

million (US$158 million). Net income was ¥9,083 million

(US$76 million), a decline of 13.1% from the previous year

when the Company recorded gains from the transfer of the

benefit obligation of the substitution portion of the

employee’s pension fund.

We have decided to increase the year-end dividend for

the term under review by ¥4 (US$0.07) per share, to ¥14

(US$0.11) per share. As a result, full-year dividends,

including the interim dividends of ¥10 (US$0.08) per share,

will be ¥24 (US$0.20) per share.

Looking ahead, we believe that the U.S. economy will

continue to grow steadily, benefiting from strong personal

spending boosted by the expansion of employment, and the

European economy will also continue to recover. Despite a

slowdown in Thailand, the economy in Asia in general is

expected to continue to grow.

As the domestic economy is also expected to grow on

the strength of personal spending, we believe that the

overall global economy will remain steady in the future.

In the motor vehicle industry, demand from Asia, led by

China, and from South America are expected to continue to

grow. However, despite signs of a slowdown in the surge of

crude oil and raw material prices, given the potential impact

of foreign exchange rates and concerns over the growing

presence of Chinese manufacturers into the global market,

the prospects for the industry are far from certain. The

management environment will remain severe, and our

outlook necessarily remains cautious.

In this environment, we are committed to bolster the

competitiveness of our products in terms of quality and cost

by mobilizing the comprehensive strength of the Showa

Group.

We regard the development of human resources as the

key initiative among the measures we are taking to help our

overseas bases achieve self-reliance. We will endeavor to

improve product quality and productivity in light of the

specific characteristics of products, by reviewing the nature

of basic materials and the manufacturing processes of

products. We will also cut costs by increasing local

procurement, and take action worldwide to bolster our

management foundations and strengthen our business

structure. With these initiatives, we will steadily achieve the

Company’s medium-term goal of being “committed to

customer satisfaction through global enterprise.”

June 2007

Shockabsorbers

Shock absorbers

Shockabsorbers

Gas springs

Shock absorbers

Shockabsorbers

Steering gearsfor HPS

Steering gearsfor EPS


Gas springs

Shock absorbers

Shockabsorbers

Gas springs

Shock absorbers

Shock absorbers

Shockabsorbers

Shockabsorbers

Shock absorbers



Pumpsfor HPS

for EPS for HPSSteering gears

Shockabsorbers


Steering gears


NISSIN SHOWA UK LTD.

SHANGHAI SHOWAAUTO PARTS CO., LTD.

P.T.SHOWA INDONESIAMANUFACTURING

SHOWA AUTOPARTS(THAILAND) CO., LTD.

HONDA ATLAS CARSPAKISTAN LTD.

CHENGDU NINGJIANG SHOWA AUTOPARTS CO., LTD.

ATLAS HONDA LTD.

GUANGZHOU SHOWAAUTOPARTS CO,. LTD.

MACHINO AUTO-PARTSCO., LTD.

SUMMIT SHOWAMANUFACTURING CO., LTD.

ARMSTRONG AUTOPARTS SDN. BHD.

MUNJAL SHOWA LTD. DAELIM MOTORCO., LTD.

SHOWA EUROPE, S.A.

SHOWA INDIA PVT. LTD.

KAI FA INDUSTRY CO., LTD.

GUANGZHOU SHOWA AUTOPARTSCO., LTD. WUHAN PLANT

HydraulicPump

GearHousing

Rack

ValveUnit

Cylinder

Showa’s Global Network

4

Shock absorbers

Shock absorbers

Shock absorbers

Propeller shafts Front and rearsuspensionmodules


bsorbers

Steering gears for HPS Pumps for HPS

AMERICAN SHOWA INC. Los Angeles Office

SHOWA CANADA INC.

AMERICAN SHOWA INC. Sunbury Plant & Head Office

SHOWA DO BRASIL LTDA.

AMERICAN SHOWA INC. Blanchester Plant

SHOWA INDUSTRIA ECOMERCIO LTDA.

PARTS

Production BaseShowa Corporation

Major Technical

Collaboration

Showa Group

HydraulicPump

GearHousing

Rack

Shockabsorbers

ValveUnit

CylinderFront and rearsuspensionmodules

Shockabsorbers


Pumps forHPS


Propellershafts

Automobile products

Motorcycle products

Gassprings

Notes: EPS means electric power steeringHPS means hydraulic power steering

5

6

Review of Operations

Results of Fiscal ending as of 31 March 2007Shown below is an explanation of the breakdown of netsales.

Sales by productNet sales of automotive components reached ¥172,745million (US$1,463 million), rising 2.8% from the previousterm.Net sales of motorcycle components increased to ¥83,241million (US$705 million), up 8.5%.Sales of other products, mainly outboard components,rose to ¥5,911 million (US$50 million), climbing 5.0%from the previous term.

Sales by customer’s locationJapan: Even though net sales of motorcycle componentsdeclined, those of automotive components moved higher.Overall net sales in Japan came to ¥99,508 million (US$842million), an increase of 0.9% from the previous term. North America: Net sales decreased both in the UnitedStates and Canada; however, given the effects ofexchange rate changes, the figure stood at ¥80,263million (US$679 million), which is almost on a par withthe results of the previous year. (Effect of exchange ratechanges: +¥5,900 million; -3.4% in real terms)South America: Net sales of motorcycle componentsincreased thanks to the strong business with customers inBrazil, rising a robust 28.6% from the previous year, to¥19,180 million. (Effect of exchange rate changes:+¥2,700 million; +10.5% in real terms)Europe: Even though net sales of automotivecomponents decreased in the United Kingdom, demandfor motorcycle components increased in Spain.Ultimately, the figure was ¥18,582 million (US$157 million),rising 2.4% from the previous year. (Effect of exchange ratechanges: +¥1,260 million; -4.6% in real terms)

By product By customer’s location

0

100

200

300

0

100

200

300

250.4

14.9

250.4

80.2

18.1

38.4

98.6

Other5.6

Automotivecomponents

168.0

Motorcyclecomponents

76.7

’06 ’06’07 ’07

261.85.9

172.7

83.2

261.8

80.2

19.1

18.5

44.3

99.5

0

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100

150

200

By product

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50

100

150

200

’07 ’07

EPS 23.3

1.9

’06 ’06

168.0

69.2

67.6

12.6

16.6

168.0

Drive train products21.7

Power steeringsystems

65.4

Shock absorbers55.7

Others25.1

By customer’s location

172.7

22.1

70.8

55.6

24.1

172.7

68.6

69.5

11.2

21.628.5

1.5

Southeast Asia: Net sales of motorcycle and automotivecomponents increased in Thailand, to a total of ¥28,183million (US$238 million), an increase of 13.0% from theprevious year. (Effect of exchange rate changes: +¥3,090million; +0.6% in real terms)China: Net sales of automotive components rosesignificantly, resulting in a surge in net sales to ¥13,109million (US$111 million) or 35.1% from the previous year.(Effect of exchange rate changes: +¥1,080 million; +24.0%in real terms)Others: Net sales declined to ¥3,073 million (US$26million), down 20.3%.

Automotive componentsOverall, net sales reached ¥172,745 million (US$1,463million), an increase of 2.8%.

Sales by productNet sales of shock absorbers fell to ¥55,602 million(US$471 million), down 0.3%.Net sales of power steering systems were ¥70,870 million,rising 8.3%.Among the power steering systems, net sales of EPSincreased to ¥28,587 million (US$242 million), up 22.0%.Net sales of drive-train products stood at ¥22,136 million(US$187 million), an increase of 2.0%.For other products, net sales declined to ¥24,137 million(US$204 million), down 4.1%.

Sales by destinationJapan: Net sales of power steering systems and shockabsorbers pushed overall results up 3.1%, to ¥69,589million (US$589 million).North America: Net sales of both shock absorbers andpower steering systems declined in the United States withchanges in the model composition and specifications of

Automotive components(Billions of yen)

Fiscal 2007 Results(Billions of yen)

7

delivered products. Meanwhile, net sales of drive-trainproducts and suspension modules fell in Canada. With theeffect of exchange rate changes, overall net sales in NorthAmerica decreased to ¥68,645 million (US$581 million),down 0.9%. (Effect of exchange rate changes: +¥5,320million; -8.6% in real terms)South America: Net sales decreased to ¥1,571 million(US$13 million), a fall of 19.9%. (Effect of exchange ratechanges: +¥100 million; -25.0% in real terms)Europe: Although net sales of power steering systemsmoved higher, demand for shock absorbers and brakecomponents decreased, and overall net sales slipped10.8%, to ¥11,247 million (US$95 million). (Effect ofexchange rate changes: +¥770 million: -16.9% in realterms)Southeast Asia: Net sales increased, mainly for powersteering systems in Thailand, rising 21.9% to ¥7,706million (US$65 million). (Effect of exchange rate changes:+¥1,000 million; +6.2% in real terms)China: Net sales rose for both shock absorbers and powersteering systems because of the increase in demand forautomobiles, rising to a combined total of ¥12,591 million(US$106 million), up 35.6%. (Effect of exchange ratechanges: +¥1,050 million; +24.3% in real terms)

Motorcycle componentsNet sales of motorcycle components increased to ¥83,241million (US$705 million), rising 8.5%. (Effect of exchangerate changes: +¥5,760 million: +1.0% in real terms)

Sales by productShock absorbers: net sales rose to ¥80,829 million(US$684 million), an increase of 8.8%.Drive-train products: net sales slipped to ¥2,412 million(US$20 million), down 1.0%.

0

25

50

75

100

25

50

75

100

By product

0

12.9

76.7 76.7

10.4

5.5

21.5

26.3


’07 ’07’06 ’06

Drive trainproducts 2.4

Shock absorbers74.2

80.8

83.22.4

83.2

10.8

7.2

22.3

25.2

17.5

0

2

4

6

8

0

2

4

6

8

By product

’07 ’07

Others0.0

’06 ’06

5.6

Others1.4

Boats4.2

5.6

4.6

0.60.3


5.9 5.9

4.7

0.7

0.4

0.0

1.6

4.2

Sales by customer’s locationJapan: Net sales decreased to ¥25,211 million (US$213million), falling 4.3% with the decrease in sales to majorcustomers.North America: Net sales increased to ¥10,852 million(US$91 million), up 4.4%, thanks partly to the effect ofexchange rate changes. (Effect of exchange rate changes:+¥550 million; -0.9% in real terms)South America: Net sales rose significantly to ¥17,591million (US$149 million), jumping 36.2% on growth insales to very robust major customers in addition to theeffect of exchange rate changes. (Effect of exchange ratechanges: +¥2,600 million: +16.1% in real terms)Europe: Net sales increased to ¥7,279 million (US$61million), rising 32.0%. (Effect of exchange rate changes:+¥490 million; +23.2% in real terms)Southeast Asia: Net sales increased to ¥ 20,438 million(US$173 million), up 10.4%, on the rise in sales resultingfrom the sustained boom in Thailand, in addition to theeffect of exchange rate changes. (Effect of exchange ratechanges: +¥2,090 million; -0.9% in real terms)China: Net sales increased to ¥455 million (US$3 million),up 12.6%. (Effect of exchange rate changes): +¥30million; +5.2% in real terms)Others: Net sales decreased to ¥1,415 million (US$11million), down 46.6%.

OthersLooking at sales of other products, while sales fromoutboard components were on a par with the previousyear, sales from others increased to ¥5,911 million (US$50million), rising 5.0%. (Effect of exchange rate changes):+¥30 million); +4.4% in real terms)

Motorcycle components(Billions of yen)

Other(Billions of yen)

South AmericaNorth AmericaEuropeAsiaJapan

8

Showa’s Technology

Automotive Components

1. Shock Absorbers 3. Propeller Shafts

2. Steering Systems

PumpHPS

4. Differential Gears

EPS

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

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

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

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

9

5. Gas Springs

2. Drive Unit Products

Motorcycle Components

Power Trim and Tilt Units

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

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

Outboard Engine Components

Rear cushion

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

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

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

Front fork

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

10

Topics

1. North America business restructured andstrengthenedShowa Corporation is restructuring our operations in NorthAmerica to enable a sustained increase in competitiveness.In the United States and Canada, the Company will besetting up new processes and transferring others. We willcontinue with our initiative to bolster the technicalcapabilities and production efficiency of our bases in thisregion.(1) United States (American Showa Inc.)

Description: - Shift to internal production ofproduct components, specificallythose for hydraulic power steeringsystems and shock absorbersystems for automobiles

Start of production: August 2007 (expected)(2) Canada (Showa Canada Inc.)

Description: - Take over the process ofassembling hydraulic power steeringpumps from the United States- Shift to internal production ofproduct components, specificallyprocessing of sintered componentsfor hydraulic pumps

Start of production: March 2007 (expected) for pumpassemblingAugust 2007 (expected) forprocessing of sintered components

2. New company established in ThailandThe Showa Group has aggressively pursued its initiative toincrease production capacity and efficiency to meet theneeds of customers in Asia. In Thailand, the Company set upa new company to manufacture power steering components.We will institute power steering component production atoptimal locations worldwide to develop a global componentsupply capability.Name: Showa Autoparts (Thailand) Co., Ltd.Location: Chonburi, ThailandProducts: Power steering componentsStart of operation: October 2007 (expected)

3. Shifting to internal production of large die castcomponentsShowa Corporation will be upgrading production of die castcomponents at the Asaba Plant, responding to demand forlarger motor-driven power steering components for new carmodels with in-house production. Two large-sized die castmachines-a 1,250-ton machine and an 800-ton model-havebeen introduced to facilitate the transition to internalproduction of die cast products. We will be exploring newtechnologies, bolsteringproduct quality and boostingcost competitiveness.

4. Metal mold plant begins operationAfter long-term preparations for inauguration, a metal moldplant began operation in May 2007 as a second base inSaitama Prefecture. Aiming to produce internally 80% of thedifferent metal models indispensable to manufacturing ofour products, we are taking steps to enhance ourengineering capabilities and our cost competitiveness. Partof the facilities for manufacturing outboard enginecomponents will be transferred from the Saitama Plant tothis new base. We will embark on internal production ofshock absorber components and further build up ourproduction structure to increase the competitiveness of ourshock absorber products.

5. Hypoid gear processing transferredHypoid gear processing requires high precision equipmentand sophisticated technologies. We have developed systemsfor manufacturing hypoid gears not only in Japan but also inIndonesia. Production in Indonesia began in May 2007, andaims to improve the efficiency of supply to Asia as well asthe Showa Group's technical strength and competitiveness.An environmentally friendly gear processing method basedon a fluid-free dry cut method has been adopted to achievean impressive increase in processing speed and higherefficiency than in Japan.

Hypoid gears are quieter and enable smoother powertransmission compared with conventional bevel gears. Whenused as differential gears they permit the design of low-floorvehicles since they enable thepinion shaft and the bevel shaftto be offset and the propellershaft to be placed at a lowerposition. With these advantages,hypoid gears should enjoygrowing demand.

6. New developments in support for Formula One racingTo find solutions to challenging technical issues, develop anadventurous spirit and introduce new technologies to mass-market products, Showa Corporation supports Formula Oneracing and other motor sports.

For the 2007 season, Honda Racing F1 Team, one of theteams backed by the Company, announced a Dream CarProject. Designed to protect the global environment, theproject emphasizes the importance of conserving theenvironment and will be donating part of the sponsorshipfees and general contributions to environmentalorganizations. Introduced in line with the program, the newmachine colors represent the concept of environmentalprotection and conservation. The logotypes of sponsoringfirms do not appear. Showa Corporation supports this spiritof environmental conservationand taking on the challengesproclaimed by the team, and isproud to continue its supportthrough the supply of products.

A 1,250-ton die cast machine

11

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

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

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

Consolidated Statements of Changes in Net Assets .............. 19

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

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

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

12

Consolidated Financial Review

OverviewCorporate group(1) Progress and business results

During the consolidated fiscal year under review, theU.S. economy remained robust and businessconditions continued to pick up in Europe. Backedby an ongoing economic expansion in Asia, theJapanese economy was also firm. In the automotiveindustry, which accounts for the majority of sales ofthe Group’s products, new automobile sales fell fromthe previous consolidated fiscal year, reflecting adecrease in sales of light trucks, offsetting a slightrise in sales of passenger vehicles. Sales in Europerose slightly from the previous consolidated fiscalyear and automotive demand in Asia, particularly inChina, continued to rise. In Japan, although newautomobile sales fell in the face of the lower domesticdemand, production rose on the strength ofimpressive export demand.

In this operating environment, the Group strove toexpand global manufacturing and procurementactivities by deploying its worldwide manufacturingbases, and aggressively promoted sales. At thesame time, the Group has taken a number ofmeasures to enhance quality control.

Consequently, net sales increased 4.6% year onyear, to ¥261,897 mill ion (US$2,218 mill ion).Operating income rose 3.0%, to ¥17,698 million(US$17 million), and income before income taxes andminority interests was down 13%, to ¥16,137 million(US$136 million). Net income reached ¥9,083 million(US$76 million), a decline of 13.1%, from the previousyear since the Group recorded significant gains fromthe transfer of the benefit obligation of the substitutionportion of the employee’s pension fund in theprevious year.

Financial results for fiscal 2007 by businesssegments are as follows.(i) Motor Vehicle Parts

In Japan, sales of automotive componentsincreased, primarily because of an increase insales of shock absorbers and electric powersteering systems. However, sales of motorcyclecomponents decreased with a decline in themarket and lower exports, which in turn as

reflected an increase in local production. As aresult, overall sales declined in Japan.

In North America, our subsidiary in the UnitedStates recorded a decline in revenue as a result ofreduced sales of automotive shock absorbersfollowing changes in the model lineup of majorcustomers, and a decline in sales prices ofproducts accompanying modifications to productspecifications. In Canada, our subsidiary thererecorded a decline in revenue on lower sales ofsub-assembled suspensions, reflecting a revisionof the purchase prices of parts by majorcustomers, and weaker sales of propeller shafts asmajor customers scaled back production of four-wheel-drive vehicles

In Europe, revenue of our British subsidiary fellas an increase in sales of electric power steeringsystems accompanying the introduction of newvehicle models by major customers was offset bya decline in the sale of automotive shockabsorbers as a result of the change in the make-up of certain types of vehicles. Our Spanishsubsidiary recorded higher revenue, reflecting anincrease in the sale of shock absorbers formotorcycles as the motorcycle market in Europestarted to recover.

In Southeast Asia, our Indonesian subsidiaryrecorded a decline in revenue. The fal l wasattributable to a significant decline in sales,principally of shock absorbers for motorcycles inthe first half of the consolidated fiscal year,although sales rose during the second half as theeconomy started to recover. Revenue in yenterms, however, rose slightly thanks to favorablemovements in exchange rates. Sales posted byour subsidiary in Thailand rose, benefiting from anincrease in the sales of power steering systemsfollowing an increase in locally-based production,and more robust sales of shock absorbers formotorcycles to a major customer as a result ofstrong demand for motorcycles

In other countries, our subsidiaries booked anincrease in revenue boosted by higher sales of theshock absorbers for motorcycles thanks to stronglocal demand. In China, revenue rose significantlyon the strength of strong sales of power steeringsystems, automotive shock absorbers, and gas

50

100

150

200

250

300

’03 ’04 ’05

Net Sales

(Billions of yen)

196.6219.5

’06

250.4 261.8

’07

233.5

0 0

2

4

6

8

10

12

14

0

20

40

60

80

100

120

140

(Billions of yen) (Yen)

101.0

121.0 119.5

137.5

’03 ’04

Net Income/Net Income per Share

Net IncomeNet Income per Share

8.0 7.59.1

’05 ’06

10.49.0

’07

106.8

0

25

50

75

100

125

150

175

(Billions of yen) (Yen)

0

200

400

600

800

1,000

1,200

1,400

59.2

Total AssetsShareholders’ EquityShareholders’ Equity per Share

’03 ’04

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

792.5 967.8

133.1

73.5

’05 ’06

87.8

151.3

’07

1,156.01,285.7

65.3

112.4120.5

860.6

170.0

110.7

13

springs, reflecting the continued expansion of theautomotive market.As a result, net sales in the motor vehicle parts

business increased 4.6% compared to the previousconsolidated fiscal year, to ¥255,985 mil l ion(US$2,168 million). Operating income increased3.6% from the previous consolidated fiscal year, to¥16,566 million (US$140 million). (ii) Other

In the “other” segment, net sales increased 5.0%compared to the previous consolidated fiscal year,to ¥5,911 mill ion (US$50 mill ion). Operatingincome declined 4.9% from the previousconsolidated fiscal year, to ¥1,132 million (US$9million).

Net Sales by Business Segments of the Group

Non-Consolidated Net Sales by Business Segments

Looking at other developments during theconsolidated fiscal year, defects in gas springsmanufactured by the Group were found during thefirst half of the term, the gas springs in question werereplaced at customers’ sites. In addition tointroducing comprehensive measures to prevent therecurrence of the incidents that caused theproblems, the Group took action to strengthen thequality control of all the overseas bases by deployingthe expertise in establishing quality control systemsdeveloped in Japan.

To improve its technology and cost competiti-veness, the Group began building new factories todevelop in-house production systems of different typesof molds, which are imperative for the production of theCompany’s products. We also developed in-houseproduction systems for large-scale casting parts,rubber parts and casting products. In addition, weendeavored to improve productivity and the capacity ofin-house production at facilities in Canada and theUnited States by developing the integrated productionof component parts.

The Group also began building new facilities inChina, India and Thailand, to bolster its businessstructure and respond to rising demand forautomobiles in Asia. In Indonesia, to enhancecompetit iveness, we successfully began localproduction of drive-train components, includinggears, which require sophisticated processingtechnologies. We also boosted the rate of localprocurement of component parts, mainly in India andother parts of Asia.

(2) Capital ExpendituresTotal capital expenditures for the consolidated fiscalyear rose 47.8% from the previous consolidatedfiscal year, to ¥17,400 million (US$147 million).

Investments mainly focused on productionfacilities to enhance, streamline, and renew theirproduction processes, including the construction ofan in-house production plant of molds in Japan andthe establishment of new overseas business bases,as previously described. Further investments weremade in the construction of a new R&D building formotorcycle components to enhance the operationenvironment. Combined, total capital expendituresfor business segments related to motor vehicle partsamounted to ¥17,214 million (US$145 million).

(3) Financing ActivitiesThe Group did not raise funds through the issuanceof corporate bonds or new shares during theconsolidated fiscal year under review.

(4) Key Management IssuesThe global economy is generally expected tocontinue to grow. The U.S. economy should remainrobust on the strength of personal spending in line

0

3

6

9

12

18

15

Capital ExpendituresDepreciation and Amortisation

’03 ’04 ’05

Capital Expenditures/Depreciation and Amortisation

(Billions of yen)

6.46.5 6.1

8.7

5.7

’06

6.7

11.7

’07

17.4

5.27.1

7.0 6.6

0

2

4

6

8

10

’03 ’04 ’05

R&D Expenses

(Billions of yen)

7.8

’06

7.4

’07

6.9

12.213.2

0

3

6

9

12

15

’03 ’04 ’05

Return on Equity

(%)

14.2

’06 ’07

13.0

9.8

98th Term 99th TermSegment (From April 2005 (From April 2006 Change

to March 2006) to March 2007)Million yen Million yen %

Motor vehicle parts 244,818 255,985 4.6Other 5,630 5,911 5.0 Total 250,448 261,897 4.6

98th Term 99th TermSegment (From April 2005 (From April 2006 Change

to March 2006) to March 2007)Million yen Million yen %

Automotive components 93,734 94,898 1.2Motorcycle components 40,627 38,462 (5.3)Motor vehicle parts 134,362 133,361 (0.7)Other 7,117 6,872 (3.4)Total 141,479 140,233 (0.9)

with the expansion of employment and the Europeaneconomy appears set to continue its expansion. InAsia, the Thai economy is one exception, as itappears to be slowing. The Japanese economy isalso expected to benefit from buoyant personalspending. Overall, prospects for the global economyremain promising.

In the automotive industry, markets in Asia,particularly in China, are set to continue expanding.Despite signs of a slowdown in the surge of crude oiland raw material prices, however, the potentialimpact from foreign exchange rates and concernsover the expansion of Chinese manufacturers in theglobal market, the prospects for the industry are farfrom certain. The management environment willremain severe, and our outlook necessarily remainscautious.

In this environment, we are committed to bolsterthe competitiveness of our products in terms ofquality and cost by mobilizing the comprehensivestrength of the Showa Group.

We regard the development of human resourcesas the key initiative among the measures we aretaking to help our overseas bases achieve self-reliance. We will endeavor to improve product qualityand productivity in light of the specific characteristicsof products, by reviewing the nature of basicmaterials and the manufacturing processes ofproducts. We will also cut costs by increasing localprocurement, and take action worldwide to bolsterour management foundations and strengthen ourbusiness structure. With these initiatives, we willsteadily achieve the Company’s medium-term goal ofbeing “committed to customer satisfaction throughglobal enterprise.”

(5) Changes in Assets and Profits(i) Changes in Consolidated Assets and Profits

(Notes) 1. The increase in net income for the 98th term was mainlyattributable to gains from the transfer of the benefit obligation ofthe substitution portion of the employee’s pension fund.

2. The decline in net income for the 99th term was mainlyattributable to compensation costs associated with productdefects.

(ii) Changes in Non-Consolidated Assets and ProfitsTerms

(Notes) 1. The increase in net income for the 98th term was mainlyattributable to gains from the transfer of the benefit obligation ofthe substitution portion of the employee’s pension fund.

2. The decline in net income for the 99th term was mainlyattributable to compensation costs associated with productdefects.

Terms 96th Term 97th Term 98th Term 99th Term(From April 2003 (From April 2004 (From April 2005 (From April 2006

Items to March 2004) to March 2005) to March 2006) to March 2007)Net sales(Million yen) 219,535 233,557 250,448 261,897

14,036 16,272 18,564 16,137

Net income(Million yen) 7,577 9,196 10,451 9,083Net income pershare (Yen) 101.09 121.03 137.56 119.56Total assets(Million yen) 120,533 133,165 151,354 170,042Net assets(Million yen) 65,390 73,530 87,825 110,740Net assets pershare (Yen) 860.66 967.84 1,156.02 1,285.76

Cash FlowsCash flow situationConsolidated cash and cash equivalents (“cash” here-inafter) declined ¥6,759 million (US$57 million), to acash balance at the fiscal year end of ¥24,527 million(US$207 million), reflecting outlays to acquire tangiblefixed assets. All cash flows for the fiscal year underreview and their causes are as follows.

Net Cash Provided by Operating ActivitiesNet cash provided by operating activities for the currentconsolidated fiscal year increased ¥205 million (US$1million), or 1.2%, from the previous consolidated fiscalyear, to ¥17,201 million (US$145 million).

Net Cash Used in Investing ActivitiesNet cash used in investing activities for the current con-solidated fiscal year rose ¥11,271 million (US$95 mil-lion), or 98.6%, from the previous consolidated fiscalyear, to ¥22,707 million (US$192 million). This primarilyreflects an increase in expenditures to acquire property,plant and equipment.

Net Cash Used in Financing ActivitiesNet cash used in financing activities for the current con-solidated fiscal year declined ¥1,694 million (US$14 mil-lion), or 58.5%, from the previous consolidated fiscalyear, to ¥1,202 million (US$10 million). This is primarilyattributable to a decline in net repayments of short-termborrowings.

14

Terms 96th Term 97th Term 98th Term 99th Term(From April 2003 (From April 2004 (From April 2005 (From April 2006

Items to March 2004) to March 2005) to March 2006) to March 2007)Net sales(Million yen) 119,943 134,347 141,479 140,233

6,627 9,341 12,161 6,057

Net income(Million yen) 4,666 6,471 8,147 4,018Net income pershare (Yen) 62.27 85.19 107.25 52.90Total assets(Million yen) 91,494 101,796 110,230 115,458Net assets(Million yen) 58,285 64,172 72,742 75,804Net assets pershare (Yen) 767.18 844.69 957.50 997.82

Income beforeincome taxes andminority interests(Million yen)

Income beforeincome taxes andminority interests(Million yen)

15

Segment Information

Results by Business Segments

Motor Vehicle PartsJapanOverall domestic sales declined. The key factor was afall in sales of motorcycle components for export, theresult of a market slowdown and the expansion of localproduction, which offset an increase in sales ofautomotive components, mainly bolstered by higherdemand for shock absorbers and electric powersteering systems.

North AmericaOur subsidiary in the United States recorded a declinein revenue as a result of reduced sales of automotiveshock absorbers following changes in the model lineupof major customers, and a decline in sales prices ofproducts accompanying modifications to productspecifications. In Canada, our subsidiary there recordeda decline in revenue on lower sales of sub-assembledsuspensions, reflecting a revision of the purchase pricesof parts by major customers, and weaker sales ofpropeller shafts as major customers scaled backproduction of four-wheel-drive vehicles.

EuropeIn Britain, revenue of our British subsidiary fell as anincrease in sales of electric power steering systemsaccompanying the introduction of new vehicle modelsby major customers was offset by a decline in the saleof automotive shock absorbers as a result of thechange in the make-up of certain types of vehicles. OurSpanish subsidiary recorded higher revenue, reflectingan increase in the sale of shock absorbers formotorcycles as the motorcycle market in Europe startedto recover.

Southeast AsiaIn Indonesia, our subsidiary recorded a decline inrevenue. The fall was attributable to a significant declinein sales, principally of shock absorbers for motorcyclesin the first half of the consolidated fiscal year, althoughsales rose during the second half as the economystarted to recover. Revenue in yen terms, however, roseslightly thanks to favorable movements in exchangerates. Sales posted by our subsidiary in Thailand rose,benefiting from an increase in the sales of powersteering systems following an increase in locally-basedproduction, and more robust sales of shock absorbersfor motorcycles to a major customer as a result ofstrong demand for motorcycles.

Other regionsIn Brazil, our subsidiaries booked an increase in revenueboosted by higher sales of the shock absorbers formotorcycles thanks to strong local demand. In China,revenue rose significantly on the strength of strong salesof power steering systems, automotive shockabsorbers, and gas springs, reflecting the continuedexpansion of the automotive market.

As a result, net sales in the motor vehicle parts busi-ness increased 4.6% from the previous consolidatedfiscal year, to ¥255,985 million (US$2,168 million).Operating income meanwhile climbed 3.6%, to ¥16,566million (US$140 million).

Net sales: ¥255,985 million (US$2,168 million) (up 4.6%year on year)Operating income: ¥16,566 million (US$140 million) (up3.6% year on year)

OtherIn the “other” segment, net sales rose 5.0% from theprevious consolidated fiscal year, to ¥5,911 million(US$50 million). Operating income declined 4.9%, to¥1,132 million (US$9 million).

Net sales: ¥5,911 million (US$50 million) (up 5.0% yearon year) Operating income: ¥1,132 million (US$9 million) (down4.9% year on year)

16

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

ASSETS 2006 2007 2007

Current assets:Cash on hand and in banks (Note 9) ¥ 29,136 ¥ 27,221 $ 230,591Notes and accounts receivable:

Trade (Note 16) 36,351 40,230 340,791Unconsolidated subsidiaries and affiliates 1,037 1,107 9,381Less allowance for doubtful receivables (88) (110) (936)

Held-to-maturity securities (Notes 6 and 9) 1,720 — —Inventories (Note 5) 22,224 22,612 191,552Deferred tax assets (Note 8) 2,313 3,009 25,495Other (Note 9) 1,698 2,050 17,371

Total current assets 94,394 96,122 814,248

Property, plant and equipment, at cost:Land 6,520 6,867 58,173Buildings and structures 25,394 27,518 233,107Machinery, vehicles and equipment 103,040 111,980 948,585Construction in progress 2,255 9,628 81,558

137,211 155,994 1,321,425Less accumulated depreciation (95,148) (102,547) (868,674)

Property, plant and equipment, net 42,063 53,447 452,750

Investments and other assets:Investments in unconsolidated subsidiaries and affiliates (Note 16) 2,577 4,729 40,064Other investments in securities (Notes 6 and 16) 10,758 11,727 99,347Long-term loans receivable 201 1,846 15,637Deferred tax assets (Note 8) 28 11 99Other 812 793 6,725

Total investments and other assets 14,377 19,109 161,873

Other assets 519 1,364 11,555

Total assets ¥151,354 ¥170,042 $1,440,428

SHOWA CORPORATION and Consolidated Subsidiaries31st March, 2006 and 2007

Consolidated Balance Sheets

17


LIABILITIES AND NET ASSETS 2006 2007 2007

Current liabilities:Short-term borrowings (Note 7) ¥ 3,449 ¥ 3,690 $ 31,264Notes and accounts payable:

Trade 34,209 38,307 324,503Construction 501 870 7,371Unconsolidated subsidiaries and affiliates 2 15 127Other 3 3 32

Accrued income taxes (Note 8) 2,302 1,232 10,444Accrual for warranty expenses 684 1,893 16,037Other 5,522 5,985 50,704

Total current liabilities 46,677 51,999 440,485

Long-term liabilities:Accrued retirement benefits (Note 13) 3,629 3,557 30,139Deferred tax liabilities (Note 8) 2,141 2,576 21,823Accrual for warranty expenses 711 692 5,869Other (Note 18) 378 475 4,030

Total long-term liabilities 6,862 7,302 61,862

Net assets (Note 15):Shareholders’ equity:

Common stock, no par value:Authorised: 180,000,000 sharesIssued:

31st March, 2006 – 76,020,019 shares 12,698 — —31st March, 2007 – 76,020,019 shares — 12,698 107,570

Capital surplus 13,558 13,558 114,855Retained earnings 58,812 66,376 562,274Less treasury stock, at cost (48) (50) (429)

Total shareholders’ equity 85,020 92,583 784,271

Valuation and translation adjustments:Net unrealised holding gain on securities 5,501 6,080 51,504Unrealised losses on derivative instruments, net — (14) (125)Translation adjustments, net (2,696) (967) (8,199)

Total valuation and translation adjustments 2,805 5,097 43,179

Minority interests 9,989 13,059 110,630

Total net assets 97,815 110,740 938,080

Contingent liabilities (Note 10)

Total liabilities and net assets ¥151,354 ¥170,042 $1,440,428

See accompanying notes to consolidated financial statements.

18


2006 2007 2007

Net sales (Note 16) ¥250,448 ¥261,897 $2,218,528Cost of sales 211,290 221,918 1,879,871

Gross profit 39,157 39,978 338,657

Selling, general and administrative expenses (Note 11) 21,982 22,279 188,731

Operating income 17,175 17,698 149,926

Other income (expenses):Interest and dividend income 462 904 7,663Interest expense (141) (187) (1,591)Exchange loss, net (114) (226) (1,915)Gain on sales of other investments in securities (Note 6) 15 — —Loss on sale and disposal of property, plant and equipment, net (263) (345) (2,927)Equity in earnings of affiliates 203 327 2,771Warranty expenses due to accounting change (1,173) — —Provision for the specifically identified warranty claim — (1,716) (14,539)Gain on transfer of the benefit obligation of the substitutional portionof the employees’ pension fund (Note 13) 2,401 — —

Retirement benefit expenses for prior periods (Note 13) (131) — —Royalty expenses applicable to the prior periods — (567) (4,804)Other, net 131 250 2,118

1,388 (1,561) (13,225)

Income before income taxes and minority interests 18,564 16,137 136,700

Income taxes (Note 8):Current 5,447 4,374 37,053Deferred 403 (619) (5,250)

5,851 3,754 31,803

Minority interests (2,261) (3,299) (27,949)

Net income (Note 14) ¥ 10,451 ¥ 9,083 $ 76,947


SHOWA CORPORATION and Consolidated SubsidiariesYear ended 31st March, 2006 and 2007

Consolidated Statements of Income

19

Shareholders’ equity Valuation and translation adjustmentsNet Unrealised

Less unrealised losses onNumber of Common treasury holding derivatives Translation

shares stock, no Capital Retained stock, gains on instruments, adjustments, Minority Totalissued par value surplus earnings at cost securities net net interests net assets

(Thousands) (Millions of yen)

Balance at 31st March, 2005 76,020 ¥12,698 ¥13,558 ¥49,727 ¥(47) ¥3,709 ¥ — ¥(6,117) ¥ 7,301 ¥ 80,832

Cash dividends paid — — — (1,367) — — — — — (1,367)

Net income — — — 10,451 — — — — — 10,451

Purchases of treasury stock — — — — (1) — — — — (1)

Net changes of item other

than shareholders’ equity — — — — — 1,791 — 3,420 2,687 7,900

Balance at 31st March, 2006 76,020 12,698 13,558 58,812 (48) 5,501 — (2,696) 9,989 97,815


Net income — — — 9,083 — — — — — 9,083



than shareholders’ equity — — — — — 578 (14) 1,728 3,070 5,362

Balance at 31st March, 2007 76,020 ¥12,698 ¥13,558 ¥66,376 ¥(50) ¥6,080 ¥(14) ¥ (967) ¥13,059 ¥110,740

Shareholders’ equity Valuation and translation adjustmentsNet Unrealised

Less unrealised losses onNumber of Common treasury holding derivatives Translation

shares stock, no Capital Retained stock, gains on instruments, adjustments, Minority Totalissued par value surplus earnings at cost securities net net interests net assets

(Thousands) (Thousands of U.S. dollars)

Balance at 31st March, 2006 76,020 $107,570 $114,855 $498,197 $(413) $46,600 $ — $(22,839) $ 84,621 $828,593


Net income — — — 76,947 — — — — — 76,947



than shareholders’ equity — — — — — 4,904 (125) 14,639 26,008 45,426

Balance at 31st March, 2007 76,020 $107,570 $114,855 $562,274 $(429) $51,504 $(125) $ (8,199) $110,630 $938,080



Consolidated Statements of Changes in Net Assets

20


2006 2007 2007

Cash flows from operating activities:Income before income taxes and minority interests ¥18,564 ¥16,137 $136,700Depreciation and amortisation 6,758 7,107 60,211(Decrease) increase in allowance for doubtful receivable (0) 12 107Gain on sales of other investments in securities (15) — —Increase in accrual for warranty expenses 1,232 1,171 9,923Decrease in accrued retirement benefits (1,732) (92) (780)Equity in earnings of affiliates (203) (327) (2,771)Loss on sale and disposal of property, plant and equipment, net 263 345 2,927Decrease (increase) in trade receivables 230 (2,977) (25,225)(Increase) decrease in inventories (2,425) 780 6,614Increase in trade payables 291 1,087 9,209Other, net (5,967) (6,044) (51,203)

Net cash provided by operating activities 16,996 17,201 145,714

Cash flows from investing activities:Increase in time deposit — (2,441) (20,678)Purchases of property, plant and equipment (11,220) (14,477) (122,639)Proceeds from sale of property, plant and equipment 35 46 392Purchases of other investments in securities (7) (7) (63)Proceeds from sales of other investments in securities 17 — —Increase in investments in affiliates (128) (4,220) (35,752)Increase in long-term loans receivable — (1,535) (13,002)Other, net (131) (71) (607)

Net cash used in investing activities (11,435) (22,707) (192,351)

Cash flows from financing activities:(Decrease) increase in short-term borrowings (775) 31 268Issuance of stock of consolidated subsidiary — 882 7,477Decrease in long-term debt (165) — —Cash dividends (1,367) (1,518) (12,863)Cash dividends to minority shareholders (576) (591) (5,013)Other, net (12) (6) (53)

Net cash used in financing activities (2,897) (1,202) (10,183)

Effect of exchange rate changes on cash and cash equivalents 77 (52) (442)

Net increase (decrease) in cash and cash equivalents 2,740 (6,759) (57,263)Cash and cash equivalents at beginning of year 28,546 31,287 265,035

Cash and cash equivalents at end of year (Note 9) ¥31,287 ¥24,527 $207,771

Supplemental disclosures of cash flow information:Cash paid for:

Interest ¥ 133 ¥ 196 $ 1,663Income taxes 5,615 5,630 47,692



Consolidated Statements of Cash Flows

21

1. Basis of PreparationShowa Corporation (the “Company”) and its domestic sub-sidiaries maintain their accounting records in accordancewith accounting principles generally accepted in Japan,and foreign subsidiaries of the Company maintain theirbooks of account in conformity with those of their countriesof domicile. The accompanying consolidated financialstatements have been compiled from the consolidatedfinancial statements prepared by the Company as requiredunder the Securities and Exchange Law of Japan and,therefore, have been prepared in conformity with account-ing principles generally accepted in Japan, which are differ-ent in certain respects as to the application and disclosurerequirements of International Financial ReportingStandards.

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

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

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

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

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

The Company does not consolidate nor apply theequity method with respect to the Company’s three othersubsidiaries, as the Company determined those companiesto be insignificant, individually and in the aggregate, to totalassets, sales, net income and retained earnings of theaccompanying consolidated financial statements.

The excess of cost over underlying net assets at fairvalue at the date of acquisition is amortised over the follow-ing period on a straight-line basis or fully charged toincome as incurred if the amount is immaterial:

Showa do Brasil Ltda. 20 yearsOther an estimated useful period

not exceeding 20 years(b) Foreign Currency TranslationThe revenue and expense accounts of the foreign sub-sidiaries are translated into yen at the average rate ofexchange in effect during the year. Except for sharehold-ers’ equity, the balance sheet accounts are translated atthe rate of exchange in effect at the balance sheet date.The components of shareholders’ equity are translated attheir historical exchange rates. Translation adjustments are

SHOWA CORPORATION and Consolidated Subsidiaries

Notes to Consolidated Financial Statements

presented as a component of valuation and translationadjustments and minority interests.(c) SecuritiesSecurities other than equity securities issued by sub-sidiaries and affiliates are classified into three categories;trading, held-to-maturity or other securities. Trading securi-ties are carried at fair value and held-to-maturity securitiesare carried at amortised cost. Marketable securities classi-fied as other securities are carried at fair value withchanges in unrealised holding gains or losses, net of theapplicable income taxes, directly included in net assets.Non-marketable securities classified as other securities arecarried at cost. Cost of securities sold is determined by themoving average method.(d) InventoriesInventories of the Company are stated at cost determinedby the weighted average method, while inventories held bythe consolidated subsidiaries are principally stated at thelower of cost or market determined by the first in, first outmethod or the weighted average method.(e) Property, Plant and Equipment and DepreciationProperty, plant and equipment is stated at cost.Depreciation of property, plant and equipment of theCompany and its domestic consolidated subsidiaries iscomputed principally by the declining-balance method,while the straight-line method is applied to property, plantand equipment of certain foreign subsidiaries.(f) Accrual for Warranty ExpensesAccrual for warranty expenses have been provided forfuture warranty expenses under the basic parts supplycontracts with customers as a total of the following:

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

(ii) an estimate of specifically identified warranty claim.Accrual for warranty expenses which will be utilised

within one year is presented in Current liabilities, and thosewhich will be utilised after one year are presented in Long-term liabilities.Changes in Method of AccountingPrior to the fiscal year ended 31st March, 2006, accrual forwarranty expenses had been provided for future warrantyclaims based on the basic parts supply contracts with cus-tomers as an estimate of specifically identified warrantyclaim as (ii) above, while warranty expenses related to (i)above had been expensed as paid.

On 1st April, 2005, the Company changed its methodof recognising warranty expenses regarding (i) above to themethod under which accrual for warranty expenses hasbeen provided at an estimate of warranty expenses to beincurred during the remaining warranty periods based onhistorical warranty claim experiences and an estimate ofthe probability of future warranty expenses. The newaccounting method was adopted because historical war-ranty claim experiences were accumulated and, therefore,accumulated data became analysable and also becausethe new method results in a better matching of cost andrevenue and better financial positions.

The effect of the change for the year ended 31stMarch, 2006, is an increase in selling, general and adminis-

the enacted tax rates and laws which will be in effect whenthe differences are expected to reverse.( l ) Cash and Cash EquivalentsFor the purposes of consolidated statements of cash flows,the Company considers all highly liquid investments withinsignificant risk of changes in value, with maturities of gen-erally three months or less when purchased, to be cashequivalents.

3. U.S. Dollar AmountsThe translation of yen amounts into U.S. dollar amounts isincluded solely for the convenience and has been made, asa matter of arithmetic computation only, at the rate of¥118.05 = U.S. $1.00, the exchange rate prevailing at 31stMarch, 2007. The translation should not be construed as arepresentation that yen amounts have been, could havebeen, or could in the future be, converted into U.S. dollarsat the above or any other rate.

4. New Accounting Standards(a) Impairment of Fixed AssetsEffective the year ended 31st March, 2006, the Companyand its consolidated subsidiaries have adopted a newaccounting standard for the impairment of fixed assetswhich requires that tangible and intangible fixed assets becarried at cost less depreciation, and be reviewed forimpairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not berecoverable. The Company and its consolidated sub-sidiaries would be required to recognise an impairment lossif certain indicators of asset impairment exist and the bookvalue of an asset exceeds the undiscounted sum of futurecash flows of the asset. The standard states that impair-ment losses should be measured as the excess of thebook value over the higher of (1) the fair market value of theasset, net of disposition costs and (2) the present value offuture cash flows arising ongoing utilisation of the assetand from disposal after asset use. The standard coversland, factories, buildings and other forms of property, plantand equipment as well as intangible assets. Fixed assetswill be grouped at the lowest level for which there is identifi-able cash flows that are independent of cash flows of othergroups of assets.

The adoption of this standard had no effect on the con-solidated financial statements.(b) Presentation of Net Assets in the Balance SheetEffective for the year ended 31st March, 2007, “AccountingStandard for Presentation of Net Assets in the BalanceSheet” (“Accounting Standard No. 5” issued by theAccounting Standards Board of Japan on 9th December,2005), and “Guidance on the Accounting Standard forPresentation of Net Assets in the Balance Sheet”(“Accounting Implementation Guidance No. 8” issued bythe Accounting Standards Board of Japan on 9thDecember, 2005), have been adopted.

The amounts corresponding to total net assets for theyear ended 31st March, 2006 and 2007 under the previousstandards were ¥87,825 million and ¥97,695 million($827,575 thousand), respectively.

22

trative expenses by ¥137 million, a decrease in operatingincome by ¥137 million, an increase in other expenses by¥1,173 million, and a resultant decrease in income beforeincome taxes and minority interests by ¥1,311 million.(g) Research and Development ExpensesResearch and development expenses are charged toincome as incurred.(h) LeasesFinance leases, except those where the legal title of theunderlying property is transferred from the lessor to thelessee by the end of the lease term, are accounted for asoperating leases.(i) Retirement BenefitsAccrued retirement benefits for employees of the Companyand its several consolidated subsidiaries are provided prin-cipally at an amount calculated based on the retirementbenefit obligation and the fair value of the pension planassets as of the balance sheet date, as adjusted for theunrecognised net retirement benefit obligation at transition,unrecognised actuarial gain or loss and unrecognised priorservice cost. The retirement benefit obligation has beenattributed to each period by the straight-line method overthe estimated years of service of the eligible employees.

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

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

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

Deferred tax assets and liabilities are determined basedon the differences between financial reporting and the taxbases of the assets and liabilities, and are measured using

5. InventoriesInventories consist of the following:


31st March, 2006 2007 2007

Finished goods ¥ 3,661 ¥ 3,138 $ 26,590Work in process 2,921 3,602 30,517Raw materials and supplies 15,641 15,871 134,444

¥22,224 ¥22,612 $191,552

6. SecuritiesMarketable securitiesInformation regarding marketable securities classified asother securities at 31st March, 2006 and 2007 was as fol-lows:

Other securitiesMillions of yen

Acquisition Carrying Unrealised31st March, 2006 cost value gain

Securities whose carrying value exceeds their acquisition cost:

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

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

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

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

The proceeds from sales of marketable securitiesamounted to ¥17 million with an aggregate gain of ¥15 mil-lion for the year ended 31st March, 2006.

Millions of yen



Stocks ¥1,197 ¥11,536 ¥10,339Debt securities — — —Other — — —

Subtotal 1,197 11,536 10,339Securities whose acquisition cost exceeds their carrying value:


Subtotal — — —Total ¥1,197 ¥11,536 ¥10,339

23

Thousands of U.S. dollars



Stocks $10,142 $97,725 $87,583Debt securities — — —Other — — —

Subtotal 10,142 97,725 87,583

Securities whose acquisition cost exceeds their carrying value:


Subtotal — — —Total $10,142 $97,725 $87,583

Non-marketable securitiesInformation regarding non-marketable securities classifiedas held-to-maturity securities and other securities at 31stMarch, 2006 and 2007 was as follows:

Millions of yen

31st March, 2006 Book value

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

Other securities:Unlisted securities ¥ 184


31st March, 2007 Book value Book value

Held-to-maturity securities:Commercial paper ¥ — $ —

Other securities:Unlisted securities ¥191 $1,621

7. Short-Term BorrowingsShort-term borrowings were unsecured with average inter-est rates of 3.80% and 4.01% for the years ended 31stMarch, 2006 and 2007, respectively.

8. Income TaxesIncome taxes applicable to the Company comprised cor-poration tax, inhabitants’ taxes and enterprise tax which, inthe aggregate, resulted in a statutory tax rate of 40.0% forthe years ended 31st March, 2006 and 2007. Incometaxes of the consolidated subsidiaries were based on thetax rates applicable in their countries of incorporation.

9. Supplementary Cash Flow InformationCash on hand and in banks reported in the consolidatedbalance sheets and cash and cash equivalents reported inthe consolidated statements of cash flows were reconciledas follows:


31st March, 2006 2007 2007

Cash on hand and in banks ¥29,136 ¥27,221 $230,591Less time deposits with maturities in excess ofthree months when purchased — (2,693) (22,819)

Held-to-maturity securities 1,720 — —Short-term investmentsincluded in othercurrent assets 430 — —

Cash and cash equivalents ¥31,287 ¥24,527 $207,771

10. Contingent LiabilitiesAt 31st March, 2006 and 2007, the Company was contin-gently liable for guarantees given in respect of bank loansof employees amounting to ¥111 million and ¥99 million($846 thousand), respectively.

11. Research and Development ExpensesResearch and development expenses included in selling,general and administrative expenses were ¥7,433 millionand ¥6,962 million ($58,975 thousand) for the years ended31st March, 2006 and 2007, respectively.

12. LeasesLesseeThe following pro forma amounts represent the leasedproperty and the related expenses, with assumed capitali-sation of such finance leases were follows:


31st March, 2006 2007 2007

Leased property:Equipment and other,at cost ¥953 ¥1,023 $8,669

Less accumulateddepreciation (Note) 470 475 4,029

Net equipment and other 482 547 4,640Depreciationexpense (Note) 232 234 1,985

Lease payments 232 234 1,985

(Note) Leased property is depreciated over the lease term by thestraight-line method with no residual value.

Future minimum lease payments subsequent to 31stMarch, 2007 for finance leases accounted for as operatingleases were summarised as follows:

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

2008 ¥197 $1,6712009 and thereafter 350 2,969Total ¥547 $4,640

The effective tax rates reflected in the consolidatedstatements of income for the years ended 31st March,2006 and 2007 differ from the statutory tax rate for the fol-lowing reasons:Year ended 31st March, 2006 2007

Statutory tax rate 40.0% 40.0%Effect of:

Different tax rates applied to foreign subsidiaries (5.9) (9.5)

Refunds of prior periods’ incometaxes paid by foreign subsidiary — (4.4)

Tax credits for research and development expenses (3.5) (2.8)

Non-taxable income (0.6) (2.0)Foreign tax credits (2.2) (1.9)Elimination of dividend income 3.0 4.1Expenses not deductible for income tax purposes 0.6 0.3

Per capita inhabitants tax 0.1 0.2Tax exemption for prior periods in foreign subsidiary (0.7) —

Other, net 0.7 (0.7)Effective tax rates 31.5% 23.3%

The significant components of deferred tax assets andliabilities as of 31st March, 2006 and 2007 were as follows:


31st March, 2006 2007 2007

Deferred tax assets:Accrued retirement benefits ¥1,372 ¥1,401 $11,870

Accrued bonuses 1,068 1,053 8,922Accrual for warrantyexpenses 545 969 8,213

Net operating loss carryforwards 898 960 8,140

Unrealised profit 532 533 4,521Accrued socialinsurance 106 194 1,643

Accrued enterprise tax 208 92 787Other 888 1,457 12,342

Total gross deferred tax assets 5,622 6,662 56,441

Valuation allowance (920) (1,051) (8,908)Total deferred tax assets 4,702 5,611 47,533

Deferred tax liabilities:Net unrealised holding gains on securities (3,753) (4,135) (35,033)

Accelerated depreciation of foreign subsidiaries (645) (823) (6,974)

Other (106) (206) (1,753)Total deferred tax liabilities (4,505) (5,166) (43,761)Net deferred tax assets ¥ 197 ¥ 445 $ 3,771

24

Japanese government of the substitutional portion of thebenefit obligation and related pension plan assets.

As a result, the Company recognised a gain of ¥2,401million as other income for the year ended 31st March,2006.

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

The components of retirement benefit expenses for theyears ended 31st March, 2006 and 2007 were outlined asfollows:


Year ended 31st March, 2006 2007 2007

Service cost ¥1,335 ¥1,401 $11,875Interest cost 568 531 4,499Expected return on plan assets (619) (750) (6,355)

Amortisation of net retirement benefit obligation at transition 434 395 3,351

Amortisation of actuarial loss 683 121 1,026

Amortisation of prior service cost (121) (92) (779)

Total ¥2,282 ¥1,607 $13,617

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

2006 2007

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

14. Amounts Per Share

Yen U.S. dollars


Net income:Basic ¥137.56 ¥119.56 $1.01

Cash dividends 20.00 24.00 0.20

Yen U.S. dollars

31st March, 2006 2007 2007

Net assets ¥1,156.02 ¥1,285.76 $10.89

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

The disclosure of diluted net income per share for theyears ended 31st March, 2006 and 2007 was omittedbecause there were no dilutive instruments, respectively.

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

The following table sets forth the funded and accruedstatus of the plans, and the amounts recognised in theconsolidated balance sheets as of 31st March, 2006 and2007 for the Company’s and its consolidated subsidiaries’defined benefit pension plans:


31st March, 2006 2007 2007

Retirement benefit obligation ¥(25,269) ¥(26,446) $(224,028)

Plan assets at fair value 18,590 20,325 172,179Unfunded retirement benefit obligation (6,679) (6,120) (51,848)

Unrecognised net retirement benefit obligation at transition 3,560 3,165 26,813

Unrecognised actuarial loss 769 585 4,961Unrecognised prior service cost (credit) (1,281) (1,188) (10,065)

Accrued retirement benefits ¥ (3,629) ¥ (3,557) $ (30,139)

Change in Method of AccountingA consolidated subsidiary, P.T. Showa IndonesiaManufacturing adopted the revised accounting standard ofpension accounting in Indonesia (revised at 24th June,2004) at the beginning of the year ended March 31, 2006.

The effect of the revised accounting standard was todecrease selling, general and administrative expenses by¥54 million and to increase in operating income by ¥54 mil-lion and increase other expenses by ¥131 million. As aresult, income before income taxes and minority interestswas decreased by ¥77 million for the year ended 31stMarch, 2006.Additional InformationAs stipulated in the Japanese welfare Pension InsuranceLaw, the “Honda Employees’ Pension Fund (ConfederatedWelfare Pension Fund)”, of which the Company is one ofmembers, obtained an approval from the Ministry ofHealth, Labor and Welfare for exemption from the benefitobligation related to future employee services under thesubstitutional portion on 1st April, 2004. On 1st July, 2005,Ministry of Health, Labor and Welfare also approved thetransfer of remaining benefit obligation of substitutionalportion which was related to past employee services. On9th March 2006, the fund executed actual transfer to the

25

26

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

The business and geographical segment information including overseas sales for the Company and consolidated sub-sidiaries for the years ended 31st March, 2006 and 2007 was outlined as follows:Business segments

Year ended 31st March, 2006 Millions of yen

Eliminations Motor vehicle parts Other Total or corporate Consolidated

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

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

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

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

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

Amounts per share of net assets are computed basedon net assets (excluding minority interests) available fordistribution to the shareholders and the number of sharesof common stock outstanding at the year end.

15. Net Assets and Cash DividendsThe Company’s common stock has no par value in accor-dance with the Japanese Corporate Law (JCL). Under JCL,at least 50% of the amount actually paid in or provided inconsideration for newly issued stocks is designated asstated common stock and proceeds in excess of theamount designated as stated common stock are recordedas capital surplus.

The JCL requires an amount equal to at least 10% ofdistributions of retained earnings be appropriated as legalreserve, which are included in capital surplus and retainedearnings, until legal reserve equals 25% of stated commonstock. In addition, common stock, capital surplus andretained earnings, including legal reserves, can generally betransferred to each other upon resolution of the sharehold-ers’ meeting.

Capital surplus and retained earnings less legalreserves and certain adjustments thereto may be availablefor dividends by resolution of the board of directors’ meet-ing. The accompanying consolidated financial statementsdid not include any provision for the dividends of ¥14

($0.11) per share totaling ¥1,063 million ($9,009 thousand),which were subsequently proposed by the Board ofDirectors in respect of the year ended 31st March, 2007and approved by shareholders at the annual shareholders’meeting held on 20th June, 2007.

16. Related Party TransactionsThe Company is a 33.5% – owned affiliate of Honda MotorCo., Ltd. (Honda). Net sales to Honda included in consoli-dated net sales were ¥64,602 million and ¥63,372 million($536,823 thousand) for the years ended 31st March,2006 and 2007, respectively. In addition, trade accountsreceivable from Honda were ¥9,208 million and ¥9,406 mil-lion ($79,679 thousand) as of 31st March, 2006 and 2007,respectively. In addition, the Company had the investmentin Honda amounted to ¥8,128 million and ¥9,165 million($77,639 thousand) as of 31st March, 2006 and 2007,respectively, which was included in other investments insecurities in the consolidated balance sheets.

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

The company purchased 19% of voting shares ofShowa do Brasil Ltda., a consolidated subsidiary, fromMoto Honda da Amazonia Ltda., which is a subsidiary ofHonda Motor Co., Ltd., during the year ended 31st March,2007.

The purchased price was ¥1,990 million ($16,865 thou-sands) and negotiated and determined based on the thirdparty valuation.

27

Year ended 31st March, 2007 Millions of yen


I. Sales and operating incomeSales to third parties ¥255,985 ¥5,911 ¥261,897 ¥ — ¥261,897Intergroup sales and transfers — — — — —

Total sales 255,985 5,911 261,897 — 261,897Operating expenses 239,418 4,779 244,198 — 244,198

Operating income ¥ 16,566 ¥1,132 ¥ 17,698 ¥ — ¥ 17,698

II. Assets, depreciation and capital expendituresIdentifiable assets ¥129,024 ¥4,715 ¥133,740 ¥36,302 ¥170,042Depreciation and amortization 7,023 64 7,087 20 7,107Capital expenditures 17,214 162 17,377 23 17,400

Year ended 31st March, 2007 Thousands of U.S. dollars


I. Sales and operating incomeSales to third parties $2,168,450 $50,078 $2,218,528 $ — $2,218,528Intergroup sales and transfers — — — — —

Total sales 2,168,450 50,078 2,218,528 — 2,218,528Operating expenses 2,028,113 40,488 2,068,602 — 2,068,602

Operating income $ 140,336 $ 9,590 $ 149,926 $ — $ 149,926

II. Assets, depreciation and capital expendituresIdentifiable assets $1,092,966 $39,944 $1,132,910 $307,517 $1,440,428Depreciation and amortization 59,491 544 60,036 175 60,211Capital expenditures 145,825 1,375 147,201 202 147,403

Geographical areasThousands of

Millions of yen U.S. dollars


Sales to third partiesJapan ¥105,625 ¥105,056 $ 889,936North America 80,066 80,104 678,562Europe 17,617 18,628 157,804Southeast Asia 24,999 27,826 235,717Others 22,139 30,280 256,508Consolidated ¥250,448 ¥261,897 $2,218,528

SalesJapan ¥140,637 ¥139,789 $1,184,152North America 81,437 81,112 687,104Europe 17,765 18,786 159,137Southeast Asia 25,616 28,627 242,502Others 24,164 32,940 279,034Eliminations or corporate (39,173) (39,358) (333,402)Consolidated ¥250,448 ¥261,897 $2,218,528

Operating expenseJapan ¥131,593 ¥132,403 $1,121,588North America 78,365 78,491 664,902Europe 17,623 18,227 154,406Southeast Asia 21,806 23,772 201,373Others 22,199 29,877 253,095Eliminations or corporate (38,314) (38,574) (326,763)Consolidated ¥233,272 ¥244,198 $2,068,602

Operating incomeJapan ¥ 9,044 ¥ 7,385 $ 62,563North America 3,072 2,620 22,202Europe 142 558 4,730Southeast Asia 3,810 4,855 41,129Others 1,965 3,062 25,938Eliminations or corporate (858) (783) (6,638)Consolidated ¥ 17,175 ¥ 17,698 $ 149,926

Identifiable assetsJapan ¥ 60,979 ¥ 64,931 $ 550,031North America 29,446 30,731 260,325Europe 8,511 9,868 83,593Southeast Asia 12,442 18,964 160,649Others 14,220 20,772 175,963Eliminations or corporate 25,753 24,774 209,865Consolidated ¥151,354 ¥170,042 $1,440,428

(Note) The Company changed its reportable geographical areas byadding Southeast Asia since it became material and, as aresult, geographical segment information of the prior periodhad been reclassified to conform to the 2007 presentation.

28

Overseas salesOverseas sales, which include export sales of theCompany and its domestic consolidated subsidiaries andsales (other than exports to Japan) of its foreign sub-sidiaries, for the years ended 31st March, 2006 and 2007were summarised as follows:

Millions of yen

Year ended 31st March, 2006 2007

North America ¥ 80,265 ¥ 80,260Europe 18,147 18,581Southeast Asia 24,944 28,189Others 28,473 35,358Total 151,831 162,389Consolidated net sales ¥250,448 ¥261,897

Overseas salesas a percentage

Thousands of of consolidatedU.S. dollars net sales

Year ended 31st March, 2007 2007

North America $ 679,885 30.6%Europe 157,403 7.1%Southeast Asia 238,792 10.8%Others 299,519 13.5%Total 1,375,601 62.0%Consolidated net sales $2,218,528 —

(Note) The Company changed its reportable geographical areas byadding Southeast Asia since it became material and, as aresult, geographical segment information of the prior periodhad been reclassified to conform to the 2007 presentation.

18. Derivative Financial InstrumentsThe estimated fair values of the derivative financial instru-ments, excluding certain derivatives, which wereaccounted for using hedge accounting, as of 31st March,2007 were follows:

Millions of yen

Notional Estimated UnrealisedYear ended 31st March, 2007 amount fair values losses

Forward exchange contracts: To sell foreign currencies (Euro) ¥713 ¥723 ¥(10)

Thousands of U.S. dollars

Notional Estimated UnrealisedYear ended 31st March, 2007 amount fair values losses

Forward exchange contracts: To sell foreign currencies (Euro) $6,041 $6,126 $(85)

29

Report of Independent Auditors

Report of Independent Auditors

The Board of DirectorsSHOWA CORPORATION

We have audited the accompanying consolidated balance sheets of SHOWA CORPORATIONand consolidated subsidiaries as of 31st March, 2006 and 2007, and the related consolidatedstatements of income, changes in net assets, and cash flows for the years then ended, allexpressed in yen. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financial statements basedon our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan.Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of SHOWA CORPORATION and consolidatedsubsidiaries at 31st March, 2006 and 2007, and the consolidated results of their operations andtheir cash flows for the years then ended in conformity with accounting principles generallyaccepted in Japan.

Supplemental Information

As discussed in Note 2. Summary of Significant Accounting Policies (f) Accrual for WarrantyExpenses, at the beginning of the year ended 31st March, 2006, the Company changed itsmethod of recognising warranty expenses other than those related to specifically identifiedwarranty expenses from the method under which the warranty expenses had been expensed aspaid to the method under which accrual for warranty expenses has been provided at anestimate of warranty expenses to be incurred during the remaining warranty periods based onthe historical warranty claim experiences and an estimate of the probability of future warrantyexpenses.

The U.S. dollar amounts in the accompanying consolidated financial statements with respectto the year ended 31st March, 2007, are presented solely for convenience. Our audit alsoincluded the translation of yen amounts into U.S. dollar amounts and, in our opinion, suchtranslation has been made on the basis described in Note 3.

20th June, 2007

30

OVERSEAS

JAPAN

Corporate Information

Head Office Plants Subsidiaries R&D Centers

Subsidiaries:North America American Showa Inc.*

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

Showa Canada Inc.*

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

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

Asia P.T. Showa Indonesia Manufacturing*Summit Showa Manufacturing Co., Ltd.*Guangzhou Showa Autoparts Co., Ltd*

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

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

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

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

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

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

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

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

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

Sales Office: Osaka Ikeda City, Osaka

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

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

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

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

Head OfficePlantsSubsidiariesR&D Centers

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

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

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

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

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

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

Contents

Profile

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

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

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

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

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

31

PresidentKazuto Iiyama

Executive Vice PresidentYasuhisa Maekawa

Executive Managing DirectorsHiroshi IjimaKenshi Hirai

Managing DirectorsYoshitaka TerazawaMitsuhiro NishidaTeturo Aoyama

Takeshi KawamotoNorio UkaiHisao Hirono

Directors

Mitsuhiro Chiba

Akira Kadoya

Mitsutaka Sugino

Kazuhiro Takagi

Teru Oda

Atsushi Izumina

Corporate Auditors

Mamoru Morino

Koichi Uchibaba

Hiroshi Iwakami

Akito Sejimo

Common Stock

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

Number of Shareholders

5,603

Common Stock Traded

Tokyo

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

As of 20th June 2007Board of Directors and Corporate Auditors

As of 31st March 2007Corporate Data

Showa's Stock PriceNikkei Average

Showa's Stock Price (’01/4=100)(Yen)

0

50

100

150

200

250

400

350

300

’01/4 4 4 4 4 47 10 ’02/1 7 7 710 10 10 7 10’03/1 ’04/1 ’05/1 ’06/1 37 10 ’07/1

Ten Largest ShareholdersShares Percent of

(Thousands) total (%)

Honda Motor Co., Ltd. 25,447 33.5Japan Trustee Services Bank, Ltd.

(Trust Account) 5,755 7.6The Bank of New York-Jasdec Treaty Account 3,729 4.9The Master Trust Bank of Japan, Ltd.

(Trust Account) 2,830 3.7Luxemburg Offshore Jasdec Lending Account 2,700 3.6The Bank of Tokyo-Mitsubishi UFJ, Ltd. 2,151 2.8Japan Trustee Services Bank, Ltd.

(Trust Account 4) 1,234 1.6Showa Corporation Business Partner’sShareholding Association 1,087 1.4MILLENIUM 1,078 1.4RBC DISB S/A SPARINVEST SICAV-GROBAL

VALUE 936 1.2

46,952 61.76

Showa Corporation manufactures and markets high-precision components for motor vehicles including

shock absorbers, steering systems and drive train products for automobiles and motorcycles, as well as

components for outboard marine engines. The Company is one of the leading manufacturers of shock

absorbers for automobiles and motorcycles in the world today.

Established in 1938, the Company began manufacturing motor vehicle parts in 1946. In 1970, the

Company became affiliated with Honda Motor Co., Ltd., a world leader in automobile and motorcycle

manufacturing. When merged with Seiki Giken Kogyo Co., Ltd., a manufacturer of power steering

products, the Company was renamed Showa Corporation in 1993. In 1964, Showa’s shares were listed

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

upgraded to the First Section of the TSE.

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

research and development facilities and two manufacturing subsidiaries within Japan.

The Company’s global business operation, a network of 25 manufacturing bases that includes 12

consolidated subsidiaries, spreads over 15 nations including Japan.

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

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

products.” Furthermore, at Showa, we strive to maintain our forward-looking stance and continue to

encourage technological, operational and administrative innovation.

Environmental preservation for the benefit of future generations is a great concern and a continuing

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

through our product offerings and corporate activities.

Showa Corporation and its global group Companies in 15 nations embrace the Company’s business

philosophy described above. The Company and its affiliates strive to expand their business, providing

additional benefits to our customers and shareholders as well as to the communities and societies

where we operate.

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

Printed in Japan on 100% recycled paper with soy ink

ANNUAL REPORT 2007

SHOWA CORPORATION

Documents

SHOWA CORPORATION · products, the Company was renamed Showa Corporation in 1993. In 1964, Showa’s shares were listed on the Second Section of the Tokyo Stock Exchange (TSE). In