Isuzu 2006 Annual Report Download - page 24

22
Financial Section
Isuzu Motors Limited Annual Report 2006
Financial Condition
Cash flow
In fiscal 2006, Isuzu generated cash flow of ¥106,495 million, down
¥28,757 million from the previous year, primarily because it used net
cash flow from operating activities of ¥82,448 million and part of the
fiscal 2005 net cash flow of ¥135,252 million to repay interest-bearing
debt and redeem convertible bonds ahead of schedule.
Net cash provided by operating activities increased ¥16,917 million
(25.8%) from the previous year to ¥82,448 million, because of an in-
crease in net profit before tax and other adjustments and recovery of
receivables that increased temporarily in the previous year, despite some
cash outflows such a rise in inventory.
Net cash used in investing activities increased ¥13,284 million
(170.4%) to ¥21,080 million, primarily because of active capital invest-
ment. Investment in the purchase of investment securities increased to
¥9,717 million as a result of raising our stake in Qingling Motors Co.,
Ltd., a partner in light and medium-duty commercial vehicle production
and sales in the Chinese market, to 20%. Ongoing aggressive capital
investments in expanding production facilities resulted in expenditure of
¥36,306 million in the purchase of fixed assets.
Net cash used in financing activities increased ¥71,127 million
(269.8%) from the previous year to ¥97,493 million. While we raised
¥100,000 million from our second unsecured convertible bond issue
in fiscal 2005, we concentrated on repayment of borrowings in fiscal
2006, and redeemed the full outstanding balance of ¥40,000 million
ahead of schedule.
Assets
As of March 31, 2006, total consolidated assets were ¥1,168,697
million, an increase of ¥26,116 million from a year earlier.
The main factors contributing to the increase were inventory (up
¥13,228 million from ¥124,526 million to ¥137,754 million), tangible
fixed assets (up ¥15,650 million from ¥458,613 million to ¥474,264 mil-
lion), and investment securities (up ¥29,889 million from ¥65,339 mil-
lion to ¥95,229 million). The increase in inventory is the result of sales
growth in Japan and ASEAN, while the increase in tangible fixed assets
is due to former equity-method company Automobile Foundry Co.,
Ltd. becoming a consolidated subsidiary at the end of fiscal 2006. The
main reasons for the increase in investment securities are acquiring ad-
ditional shares in Qingling Motors Co., Ltd., a partner in light and me-
dium-duty commercial vehicle production and sales in the Chinese mar-
ket, substantial increase in the market value of securities holdings amid
Japanese stock price appreciation, and equity-method profit.
Cash and deposits declined ¥30,715 million from ¥139,357 million to
¥108,642 million, mainly due to repayment of interest-bearing debt and
redeeming the outstanding balance of our second unsecured convert-
ible bond issue ahead of schedule.
Liabilities
Total liabilities decreased ¥72,398 million from the previous year to
¥897,529 million. Interest-bearing liabilities (total of short-term borrow-
ings, corporate bonds, and long-term borrowings) decreased ¥43,444
million from ¥393,103 million to ¥349,659 million. We issued corporate
bonds totaling ¥40,000 million in fiscal 2006, using the funds and cash
flow from operating activities to repay group borrowings.
The balance of our second unsecured convertible bond stood at
¥56,000 million at the end of fiscal 2005, of which ¥16,000 million
converted to capital on exercise and the remaining ¥40,000 million was
redeemed ahead of schedule, reducing our liabilities by ¥56,000 million
from the previous year.
Capital
In fiscal 2006, our capital grew ¥85,886 million from a year earlier to
¥244,350 million. In addition to the exercise of ¥16,000 million of con-
vertible bonds increasing capital by the same amount, ¥58,956 million
of net profit was generated, there was an increase in valuation gains on
securities due to stock price appreciation in the Japanese market, and
an improvement in the foreign exchange adjustment account because
of the yen weakening against major currencies. Consequently our equi-
ty ratio improved 7.0 percentage points from a year earlier to 20.9%.
Risks
There are certain risks that could have a significant impact on our
earnings results, financial condition, and other information contained in
the annual securities report, or share price, and these risks are outlined
below. (The following information contains forward-looking statements
that reflect the judgment of management as of March 31,2006).
1. Economic situation/supply and demand trends in our major
markets
Vehicles account for an important portion of the Isuzu group’s
worldwide operating revenue, and demand for these vehicles is af-
fected by the economic situation in the various countries and regions
and markets where we sell vehicles. Therefore, economic recession
and an ensuing decline in demand in our major markets—Japan, North
America, and other Asian countries—could have a negative impact on
the earnings and financial position of the Isuzu group. Price competition
also entails the risk of price fluctuation for our products.
2. Interest rate fluctuations
The Isuzu group tightened its cash flow management and continues
to concentrate on shrinking interest-bearing debt. In fiscal 2006, we al-
located profit from business operations and other funds to the reduc-
tion of interest-bearing debt, whose balance stood at ¥349,659 million
at the end of the fiscal 2006—¥43,444 million less than a year earlier.
This is still a relatively large balance, however, leaving us vulnerable to
the risk of higher interest payments having a negative impact on earn-
ings and financial position of the Isuzu group should market rates rise
sharply.
3. Foreign exchange fluctuations
The business of the Isuzu group includes manufacturing and mar-
keting products in several regions around the world. Local currency
amounts for sales, expenses, assets, and other items are therefore con-
verted into Japanese yen in the preparation of our consolidated finan-
cial statements. Depending on the exchange rate in effect at the time
of conversion, the yen amount for these items may change even if the
underlying local currency value has not changed. Generally, a strength-
ening of the yen relative to other currencies has a negative impact on
the business of the Isuzu group, and a weakening of the yen has a posi-
tive impact.
4. Dependence on General Motors Corporation and other major
customers
The Isuzu group supplies vehicles and vehicle components to General
Motors Corporation (Detroit, MI) and its affiliates as well as to other