Annual Report 2008

ANNUAL REPORT 2008104.7% at the end of the previous fiscal year to 86.7%. Thecurrent ratio, which stood at 119.1% at the end of the prioryear, was 119.1% at the end of the fiscal year under review.MANAGEMENT INDICATORSThe Company’s objective is to meet and exceed the expectationsof investors for profitability. The management indicatorwe have selected is before-tax return on invested capital (ROIC),which measures how efficiently the Company uses its capital.As it works to maximize before-tax ROIC, the Company isworking to strengthen its financial position by implementingmeasures to expand profit and simultaneously reduce investedcapital. Before-tax ROIC is computed by calculating the ratio ofearnings before interest and taxes (EBIT) to the sum of interestbearingdebt and total shareholders’ equity.Applying this formula, before-tax ROIC for the year underreview was 11.2%, which was 2.5 percentage points higherthan the 8.7% figure for the prior year.In addition, under the Group’s Medium-Term BusinessPlan “Global K,” announced in September 2006, the Group isaiming to strengthen its earning power and has therefore alsoadopted the ratio of recurring profit to net sales as a key managementindicator. Recurring profit is used in accounting standardsgenerally accepted in Japan. It is the sum of operatingincome, net interest income (expenses), dividend income, andother non-operating and recurring items.For the fiscal year under review, the Group’s ratio ofrecurring profit to net sales was 4.3%, which was 0.9 percentagepoint higher than the 3.4% reported for the prior year.CASH FLOWSDuring fiscal 2008, net cash provided by operating activitieswas ¥75.8 billion, ¥29.9 billion higher than during the previousfiscal year. Principal cash inflow items were income beforeincome taxes and minority interests of ¥58.1 billion, depreciationand amortization of ¥37.5 billion, and an increase in tradepayables of ¥26.9 billion. Among cash outflow items, theincrease in inventories amounted to ¥19.0 billion.Net cash used for investing activities amounted to ¥49.1billion, ¥5.8 billion higher than in the previous fiscal year. Theprincipal use of this cash was for acquisition of property, plantand equipment.Free cash flow, which is the net amount of cash fromoperating and investing activities, amounted to an inflow of¥26.7 billion, versus an inflow of ¥2.5 billion in free cash flowfor the previous fiscal year.Net cash used for financing activities amounted to ¥27.4billion, which was ¥26.1 billion higher than in the previousfiscal year. This increase was mainly due to redemption ofcorporate bonds and payment of cash dividends.As a result of these cash flows, cash and cash equivalentsat the end of fiscal 2008 amounted to ¥38.2 billion, whichwas ¥1.1 billion less than at the beginning of the fiscal year.DIVIDENDSThe Company’s policy is to pay stable cash dividends to itsshareholders, giving due consideration to increasing retainedearnings to strengthen and expand its business foundationsfor future growth.The Company’s basic policy regarding cash dividends fromretained earnings is to pay two dividends, one for the interimperiod and the other at the end of the fiscal period. The entitymaking final decisions on dividends is the meeting of theBoard of Directors for the interim dividend and the generalmeeting of shareholders for the year-end dividend.In view of the Company’s policy of paying stable cash dividends,the decision was made to pay a dividend of ¥5 pershare (an interim dividend of ¥0 and a year-end dividend of¥5). The remainder of retained earnings will be used to makeinvestments related to the Company’s businesses, the repaymentof borrowings, and for other uses.Please note that the Company’s Articles of Incorporationprovide for paying an interim dividend as stipulated in Article454-5 of the Japanese Corporate Law.BUSINESS RISKExternal factors that may have an effect on the KHI Group’sperformance and financial position include the following:(1) Political and Economic ConditionsThe Group conducts its business activities not only in Japan butalso elsewhere in Asia, North America, Europe, and other areasand is subject to the consequences of political and economicdevelopments in these regions. For example, trends in personalconsumption may have an impact on sales of the ConsumerProducts & Machinery segment, while trends in private-sectorcapital investment and public works investment may have aninfluence on orders of the Gas Turbines & Machinery and the31