Annual Report 2006
Year Ended March 31, 2006

Founded in 1878, Kawasaki Heavy
Industries, Ltd. (KHI), is a leading global
comprehensive manufacturer of transportation equipment and industrial goods.
With a broad technological base thatencompasses mastery of the land, sea,
and air, the KHI Group manufactures
ships, rolling stock, aircraft and jetengines, gas turbine power generators,
refuse incinerators, industrial plants, steel
structures, and a wide range of manufacturing equipment and systems. KHI also
produces such world-famous consumer
products as Kawasaki-brand motorcycles
and Jet Ski® watercraft.

Contents
Consolidated Financial Highlights
To Our Shareholders
An Interview with Tadaharu Ohashi, President
Review of Operations:
Shipbuilding
Rolling Stock & Construction Machinery
Aerospace
Gas Turbines & Machinery
Plant & Infrastructure Engineering
Consumer Products & Machinery
Other

Cover: L20A gas turbine generator

1
2
6
12
14
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18
20
22
24

Six-Year Summary
Management’s Discussion and Analysis
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Report of Independent Public Accountants
Directors, Corporate Auditors, and Executive Officers
Major Consolidated Subsidiaries and Affiliates
Network
Corporate Data

26
27
34
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55
56
58
61
63

Consolidated Financial Highlights
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
Years ended March 31

Thousands of
U.S. dollars

Millions of yen
2006

2005

2004

2006

¥1,241,592¥1,160,252$11,258,083

For the year:
Net sales..................................................................................................... ¥1,322,487
Operating income .....................................................................................

41,79524,744

22,250355,793

Net income ................................................................................................

16,467

11,4796,333

140,180

Net cash provided by operating activities ..............................................

45,761

71,42242,811

389,555

Capital expenditures.................................................................................

41,72429,692

41,502355,189

Earnings per share—basic ........................................................................

¥11.2

¥7.9

¥4.4

$0.10

Earnings per share—diluted.....................................................................

9.4

6.8

4.2

0.08

Cash dividends ..........................................................................................

3.0

2.5

2.0

0.03

Total assets ................................................................................................ ¥1,284,085¥1,194,473¥1,156,904$10,931,174

237,588

201,465

190,175

2,022,542

Orders received during the fiscal year .................................................... ¥1,351,631¥1,301,845¥1,226,728$11,506,180

Order backlog at fiscal year-end..............................................................

1,254,409

1,189,374

11,155,563

Per share (in yen and U.S. dollars):

At year-end:
Total shareholders’ equity ........................................................................
Orders received and outstanding:
1,310,444

Note: All dollar figures herein refer to U.S. currency. Yen amounts have been translated, for convenience only, at ¥117.47 to US$1, the approximate
rate of exchange at March 31, 2006.

Net Sales

Net Income(Billions of yen)(Billions of yen)(Billions of yen)

20

237.6

201.5

190.2

150

11.5

10

200

174.6

15

167.7

16.5

250

13.0

1,322.5

1,241.6

1,160.3

1,239.6

1,144.5

1,500

1,000

Total Shareholders’ Equity

100

0

6.3

5

6.3

500
50

0

0

02

03

04

05

06

02

03

04

05

06

02

03

04

05

06

Annual Report 2006 | 1

To Our Shareholders

Tadaharu Ohashi
President

Boosting Corporate Value by Taking Our
Management Policy of “Quality Followed
by Quantity” to New Levels

2 | Kawasaki Heavy Industries, Ltd.

Performance in Fiscal 2006

& Machinery segment, and other factors. Net income
amounted to ¥16.5 billion, representing an increase of

The Japanese economy remained on an expansionary¥5.0 billion, or 43.5% over the previous fiscal year.

trend during fiscal 2006, ended March 31, 2006, propelled by growth in personal consumption and exports

Our basic policy is to ensure stable cash dividends

as well as increases in private capital investment driven

for our shareholders while paying careful attention toby an improvement in corporate earnings. Overseas,

increasing retained earnings with a view to strengthen-economic expansion also continued to be generally

ing and expanding our earnings power and businessstrong, especially in the United States and China, withfoundation for future growth. In view of this basic poli-

the economies of Europe experiencing a recovery

cy and after overall consideration of performance, thetrend.

level of retained earnings, and other factors, we proposed and received approval from shareholders to

Nevertheless, the operating environment for theincrease the annual cash dividend for fiscal 2006 to

Kawasaki Heavy Industries (KHI) Group continued to¥3.0 per share.

present challenges. Lackluster conditions prevailed in
the domestic public works market, and prices of raw

Basic Management Policies

materials, such as steel and crude oil, remained at highlevels, while prices of more costly materials, such as

The KHI Group defines its corporate mission as draw-

aluminum and titanium, rose sharply and shortages

ing fully on its broad base of advanced technologies toemerged.

create new value by offering products that almost literally work modern-day wonders on land, at sea, and in

The KHI Group aggressively confronted the chal-

the air while remaining true to its corporate philosophy

lenges and opportunities in the operating environ-of contributing to the development of societies aroundment, successfully securing total orders of ¥1,351.6

the world. Through these activities, the Group endeav-billion, a level that exceeded that of the previous year

ors to enhance customer satisfaction and enhance its

by ¥49.8 billion, or 3.8%. Although orders reported bycorporate value by offering its customers superior

the Shipbuilding and Plant & Infrastructure Engineer-

products and services that are differentiated by theiring segments were down from the previous year, thetechnology and brand power. The ultimate goal of the

Rolling Stock & Construction Machinery and the Gas

Group’s management strategies is to meet the expec-

Turbines & Machinery segments posted increases

tations, first and foremost, of our shareholders as wellin new orders. Turning to revenues, net sales roseas our customers, employees, and the communities we¥80.9 billion, or 6.5%, to ¥1,322.5 billion, mainly due

serve.

to increased sales in the Aerospace and Consumer
Products & Machinery segments.

To respond to investors’ expectations for profitability,
we have adopted before-tax return on invested capital

Operating income climbed a substantial ¥17.1 billion,(ROIC), defined as earnings before interest and taxes

or 68.9%, to ¥41.8 billion. This improvement resulted(EBIT) divided by invested capital, as our measure of

from a combination of the positive effect of a weakerperformance. To maximize ROIC, we are working to

yen against the U.S. dollar, growth in the Aerospace

expand earnings while endeavoring to increase invest-

and Consumer Products & Machinery segments,

ment efficiency, with the goal of strengthening our

improvement in the performance of the Gas Turbines

financial position.

Annual Report 2006 | 3

The current fiscal year, ending in March 2007, is thethe KHI Group is moving ahead steadily with various

final year of an ongoing medium-term business planmeasures to further strengthen its earnings powerthat has the objectives of creating a high-margin

and reform its business portfolio with the objectives of

earnings structure by reforming our business portfolio

consolidating a stable earnings base and achieving sus-

to respond effectively to changes in the operating

tainable growth.

environment and to achieve sustainable growth.
To strengthen our earnings power, we have renewed
In implementing this medium-term plan, we are

our awareness that our technology generates earnings

exercising selectivity and focus in the allocation ofand are determined to reinforce our technologicalresources among our various businesses. We havecapabilities. We are working to enhance our productselected the Aerospace, Consumer Products &development activities and manufacturing technolo-

Machinery, Rolling Stock, and Gas Turbines &gies, with the goals of offering superior products andMachinery businesses as core and developing busi-

reducing costs. In addition, as many of our products

nesses and are prioritizing investments in these areas

vie for business in intensely competitive markets, wewith the goal of strengthening these businesses as key

are endeavoring to improve the non-price competitive-

earnings generators. On the other hand, in view ofness of products by offering items that meet latent

growing international competition and stagnation inclient needs accurately. To this end, in all aspects ofpublic works investment in Japan, we have positioned

our activities, from planning to design, manufacturing,

the Shipbuilding and Plant & Infrastructure Engineeringand the provision of after-sales service, we are bolster-businesses as businesses due for structural reform anding our marketing activities to better offer products

are working to make the necessary realignments andand services that are of true value to our customers.

improve profitability.
In implementing reforms in our business portfolio,
Throughout all our activities, based on our manage-

based on our policy of selectivity and concentration inment policy of “Quality Followed by Quantity,” we areallocating resources, we are clarifying the future objec-

working to enhance our earnings power by differentiat-

tives and vision of each of our businesses and focusing

ing our products and services on the bases of technol-

our corporate resources on those businesses andogy and brand power and reforming our businessproduct areas that have future potential.

model to expand the scope of our services to respondto needs over the full life cycles of our products.

First, for those businesses we have positioned as coreand developing sectors, we are implementing clearly

Medium-Term Management Strategies

focused strategies to strengthen performance. For theConsumer Products & Machinery business, we are

The Japanese economy is continuing to expand, but

working to increase product-competitiveness by creat-

the operating environment for the KHI Group remains

ing stronger design systems at the global level thatchallenging. Specific negative issues we must confront

draw on the capabilities of subsidiaries and affiliates ininclude restraints in domestic public works investment,

Japan and overseas while actively introducing newcontinuing high steel prices, price-hikes and short sup-models. In the Aerospace business, we are engaged inplies of costly materials such as aluminum and titanium,

major projects that include the development of theand a rise in outsourcing and other costs that has accom-

next maritime patrol aircraft and the next transport

panied the economic recovery. Amid this environment,

aircraft under contracts from the Japan Defense Agency

4 | Kawasaki Heavy Industries, Ltd.

(JDA) as well as the development and production ofand staff and has distributed compliance-related

the Boeing 787. Within the Rolling Stock business, we

guidebooks. Along with this, the Group has formed

are strengthening our operational systems for ourcommittees in each of its organizational units to takethree major markets of Japan, North America, and Asia.

the initiative in promoting the self-assessment and ver-In the Gas Turbines & Machinery business, we areification of compliance and is working to make all per-expanding our facilities for developing and manufactur-sonnel fully aware of the laws and regulations they

ing jet aircraft engines to meet expansion in demand

must obey. Going forward, activities will continue tofrom private aircraft producers.

promote awareness and understanding of complianceto ensure that personnel will act with full awarenessFor those businesses we have positioned for struc-“that ethical behavior on the part of each and everytural realignment, namely Shipbuilding and Plant &employee is key to protecting and building the value

Infrastructure Engineering, we have engaged in drasticof the Kawasaki brand.”reforms over the past few years. As part of these activities, we decided to make the environmental plant busi-

The KHI Group is steadily implementing various

ness in the Plant & Infrastructure Engineering segment

policies to strengthen profitability in all its business

into a subsidiary in October 2006. The new company isactivities and reform its business portfolio, with the

expected to increase the management flexibility of its

objective of enhancing its corporate value. We would

operations, and measures to streamline its activities

like to take this opportunity to ask you, our sharehold-are expected to improve its business position. Alongers, for your renewed support and cooperation.

with these initiatives, efforts will focus on upgrading
technological capabilities by concentrating and steadily improving the cost-competitiveness of core technologies with the goal of facilitating future growth. In

June 2006

the steel structures business, which is part of the Plant &Infrastructure Engineering segment, we will implement
further measures to streamline operations and adopt a
policy of employing the Harima Works as the production center for large-scale structures for the KHI Group
as a whole. The Shipbuilding business, which became
the Group’s first subsidiary under the current medium-Tadaharu Ohashi

term plan, is now making steady strides in its opera-

President

tions and is working to expand the production capacityof its affiliated company in China.

Emphasis on Compliance
The compliance of all management and staff with relevant laws and regulations is a key assumption underlying
all our activities. Having prepared internal rules andregulations regarding corporate ethics, the KHI Grouphas begun to conduct training programs for management

Annual Report 2006 | 5

An Interview with Tadaharu Ohashi, President

Q: What development projects does
Kawasaki have ongoing at present?
Major projects include the P-X, the next maritime patrol aircraft, andthe C-X, the next transport aircraft for the JDA. We are developing
these two aircraft simultaneously under a total JDA budget of ¥340 billion,
thus making this the largest aircraft development project in Japan. KHI
was selected as the prime contractor for the development of the P-X and
C-X by the JDA in 2001 and we are coordinating the activities of a large
C-X static test plane

number of other companies that are participating in the project. At present, related work is proceeding smoothly, with the target date for the firsttest flight set for 2007. In the aircraft industry, where suppliers range fromcompanies providing machined parts and sheet metal parts to those supplying sophisticated electronic components, composite materials, and IT,
these development projects require a high level of integration capabilities. Bringing these projects to successful completion will be quite significant for KHI as the prime contractor as they will enhance our technologicalcapabilities substantially.
Also in the aerospace area, we are participating in joint development with

TRENT 1000 engine

the Boeing Company on the next-generation Boeing 787 passenger aircraft. Advanced composite materials are being used extensively in the
787’s fuselage, which will be manufactured using an innovative single-piece

6 | Kawasaki Heavy Industries, Ltd.

The Kawasaki Brand:
Supported by Confidence in
the Company’s Technology

barrel laminating process. These and other features of the 787 are
expected to render its development an epoch-making event in aviation
history. KHI is responsible for major components of the 787, including theforward fuselage, which will be made entirely of composite materials.
Moreover, we are participating as a risk- and revenue-sharing partner with
Rolls-Royce plc in the development and production of the state-of-theart TRENT 1000 jet engine, which will power the Boeing 787. We
are responsible for the design, manufacture, and assembly of the entire
intermediate pressure compression (IPC) module, which will be oneof the eight main modules in the TRENT 1000.
Series N700 Shinkansen train

In addition to these aerospace projects, in our rolling stock business weare principal participating members in two high-speed train car development projects. The first of these is the series N700 Shinkansen train car,which was developed jointly by Central Japan Railway Company (JR Central)and West Japan Railway Company (JR West), and is scheduled to begin
service on the Tokaido and Sanyo Shinkansen in 2007. The other is the

FASTECH 360, an experimental car for the Shinkansen for East
Japan Railway Company (JR East) that is being developed with a technical target of attaining an operating speed of 360 kilometers per hour. For
both these projects, KHI has contributed to the attainment of higher
speeds through the design of the nose configuration, development ofcontrol technology, and work in other areas.
As these examples suggest, we have been actively engaged in major
development projects in recent years, and the number of instanceswhere we are playing a major role is increasing. We are proud that thetechnological capabilities KHI has developed over its many years ofhistory and based on its extensive experience are being highly recog-

FASTECH 360

nized both in Japan and overseas.

Annual Report 2006 | 7

Q: What initiatives is Kawasaki taking in its motorcycle
development activities?
In recent years, we have increased the number of R&D personnel andworked to enhance our R&D capabilities with the aim of building on andfurther developing the style and look of power that Kawasaki motorcycles
are known for. Also, in April 2006, we reorganized the Research &Development Division of the Consumer Products & Machinery Company
and are implementing initiatives to strengthen our comprehensive development capabilities, including basic research functions. Moreover, torespond to market needs, we are continuing to bolster our development
capabilities in the United States and Asia. Reflecting the desires of themany fans of Kawasaki brand motorcycles, our motorcycles must be differentiated by their high quality and performance, and our product line
focuses mainly on sport and large supersport models. In 2006, we introduced a new flagship model, the ZZR1400 (Ninja ZX-14 in the UnitedStates), which was highly acclaimed. Going forward, we want to develop
models that are true to the Kawasaki brand image while being even more
ZZR1400

responsive to emissions regulations and other environmental policies.

Q: Could your give us a summary of the R&D systems of
the KHI Group?
KHI’s Corporate Technology Division, which is Groupwide in scope,is responsible for basic technologies and systems technologies, while
product development and revamping projects are conducted by the
R&D departments located within the in-house companies and Groupsubsidiaries. To encourage joint efforts among R&D units, we have adopted a matrix management approach for R&D across the divisions of theGroup. The Corporate Technology Division provides support for the
product development and revamping projects of the in-house companies

8 | Kawasaki Heavy Industries, Ltd.

and subsidiaries by forming ad hoc task forces comprising specialists in
the requisite component technologies. Looking ahead, based on the fundamental principle that technology is the source of earnings, we are working to strengthen teamwork between the Corporate Technology Divisionand business units and improve the effectiveness of our matrix management approach while proactively committing resources to the reinforcement of our capabilities for product R&D as well as the development of
production technologies.

Q: Going forward, what areas do you plan to reinforce
in your R&D activities?
Nickel-metal hydride Gigacell batteries

We have a wide range of products, but in all areas we would like to put
emphasis on R&D that contributes to environmental compatibility. Of
course, we intend to pursue themes that are common to various manufacturing areas, for example, increasing the speed of transportation equipment,such as rolling stock, and improving the sophistication and performanceof our products and systems, for example, industrial robots. However, inline with the trends toward an environment- and user-friendly society, twoof the prominent trends in R&D in recent years have been lowering theburden on the environment and improving energy efficiency.
For example, in recent years we have developed and have been working
to commercialize nickel-metal hydride Gigacell batteries
that feature both high capacity and high output. These batteries will contribute to the reliability and safety of electric power generation systems
by supplementing supplies of power coming from wind power and solar
power generation systems as well as adjusting for microgrid demand.
These batteries do not contain harmful substances and have been
designed with specifications that make them easy to recover and recycle.

Next-generation light rail vehicle SWIMO

Annual Report 2006 | 9

In addition, KHI is developing the SWIMO, a next-generation lightrail vehicle (LRV) that uses Gigacell batteries as an auxiliary powersource. LRVs are barrier-free electric rail vehicles, with door sills that are
only a small step up from the rail platform. Many potential users aroundthe world are considering the introduction of LRVs in municipal transportation systems. The use of Gigacell batteries as an auxiliary powersource for these LRVs will improve their energy efficiency and eliminate
the need for overhead power lines along some sections of rail lines.
One of the areas where KHI is obtaining good R&D results recently has
been the development of containers for liquid hydrogen.
Hydrogen is expected to be the ultimate form of clean energy when it
comes into wider use in fuel cell vehicles and power generation facilities.
With the increased use of hydrogen, demand for transporting liquidhydrogen will increase, and KHI plans to develop large-scale containers
for transporting hydrogen by rail and ship.
In other areas, we plan to move forward with R&D to increase the efficiency of gas turbines for electric power generation, to develop technologies
for converting waste materials into usable resources, and to improve the
Humanitarian demining system BULLDOG(top: MINEDOG detection vehicle,
above: MINEBULL clearance vehicle)

environmental performance of motorcycles and construction machinery.

Q: I understand that Kawasaki has developed the humanitarian
demining system BULLDOG. Are you making progress
toward the practical application of this system?
A: The BULLDOG system comprises a mine detection vehicle, amine clearance vehicle, and related remote control equipment. We tested the system in Afghanistan from 2004 through 2005. The system proved
to be highly reliable in Afghanistan, detecting all actual (non-decoy)
mines and removing 100% of them safely. An important feature of the
BULLDOG system is the safety provided the operator through the use of

10 | Kawasaki Heavy Industries, Ltd.

remote control systems. Tests of the system are scheduled in Cambodia
between August and December this year and we are working to develop
a system that is suited to the soil, terrain, vegetation, and other featuresof the Cambodian region. The number of land mines planted in various
parts of the world is estimated at more than 100 million; when the BULLDOG system is introduced for practical use, the efficiency of removing
these will improve dramatically. As I mentioned, although the BULLDOG
system may not seem to be related to “environmental preservation” inthe usual sense, it is nevertheless expected to contribute to improving
the safety and quality of the earth’s environment.
Based on KHI’s corporate mission of “contributing to society by creating

New liquid hydrogen container

new value through the application of cutting-edge technology on land, atsea, and in the air,” we intend not only to make our business of offering
ever-improving products to society successful but also to fulfill our corporate social responsibilities. By focusing on
our core businesses, we will, in fact, be contributing to the preservation of the environment and to society. This is the dream, andthe hope, that we have—to be acknowledged
as a company working in basic industries
that serves the needs of Japan and the restof the world.

Annual Report 2006 | 11

Review of Operations
Business Results
Thanks to firm conditions in the world shipping market,
demand for newbuildings during fiscal 2006 remained strong
and ship order prices were relatively high. As a result of securing orders for three LNG carriers, one LPG carrier, one VLCC,
10 bulk carriers, and one submarine, for a total of 16 vessels,
total orders amounted to ¥128.3 billion. Although this figure
was ¥27.5 billion, or 17.7%, lower than in the previous fiscal
year, the level of orders significantly exceeded sales, resulting
in an increase in the backlog of ships on order.
Sales for the fiscal year rose ¥22.6 billion, or 26.0%, to ¥109.7 billion, because of increased sales of newbuildings, but the segment reported an operating loss of ¥1.7 billion because of theadverse effect of higher material costs. During fiscal 2006, theShipbuilding segment delivered two LNG carriers, two VLCCs,
seven bulk carriers, and one submarine for a total of 12 vessels.

OutlookIn 1981, Kawasaki Shipbuilding Corporation, which is the corecompany of this segment, delivered the first LNG carrier built
in Japan. Since then, the Shipbuilding segment has delivered
many vessels to customers in Japan and overseas and has built
a strong position in the LNG carrier field. LNG is drawing attention globally as a clean source of energy, and demand is rising
rapidly around the world. As a consequence, continued robust
demand for LNG carriers is expected in the years ahead. Kawasaki
Shipbuilding manufactures a wide-ranging line of LNG carriers, from small carriers with cargo tank capacities of 19,000m3
to large carriers with capacities of up to 153,000m3. In addition,
Kawasaki Shipbuilding produces a pressure buildup type LNG

carrier for smaller LNG transportation projects in Japan thatwas developed originally by Kawasaki. Looking ahead, planscall for the continued expansion of the LNG carrier businessthrough ongoing efforts to win even greater customer trustand confidence by making improvements in performance andquality.
In addition, Nantong Cosco KHI Ship Engineering Co., Ltd.
(NACKS), which Kawasaki Shipbuilding established as a joint
venture with China Ocean Shipping (Group) Company in 1996,
marked its tenth anniversary in the previous fiscal year and in
fiscal 2006 delivered two pure car carriers with a capacity of
5,000 vehicles each and seven bulk carriers, for a total of ninevessels. NACKS has already become one of the leading shipbuilding companies in China.
The rapid growth in the volume of shipping to and from
China in recent years has played a major role in bringing highlevels of business activity in the shipping and shipbuilding
industries. Going forward, as economic growth continues in
China, demand for shipbuilding for Chinese customers is
expected to remain strong. To meet this robust demand,
NACKS has begun construction on its second expansion
phase. This increased shipbuilding capacity is expected to go
into operation in 2008 and result in a doubling of revenues
and net income.
Kawasaki Shipbuilding and its group of companies, including
NACKS, are working to enhance their technologies related toship design, construction, and quality assurance to strengthen
their international competitiveness from the perspectives ofboth quality and cost and thereby ensure their sustained
development into the future.

Shipbuilding

Sales

Orders Received(Millions of yen)

(Millions of yen)

150,000
100,000

289,227

193,705

128,323

200,000

173,304

40,000123,756

100,000

155,832

250,000
150,000

110,926

109,697263,707300,000

106,106

60,00087,081

94,93992,478100,000
80,000(Millions of yen)

200,000

105,458

120,000

8.3%

Order Backlog

194,275

Percentage of Net Sales

50,00020,00050,0000

002

12 | Kawasaki Heavy Industries, Ltd.

03

04

05

06

0

02

03

04

05

06

02

03

04

05

06

Main Products• LNG carriers• LPG carriers• Container ships• VLCCs (Very Large Crude Carriers)and other types of tankers• Bulk carriers• High-speed vessels• Submarines• Maritime application equipment

Above: LNG Carrier NIZWA LNG
Right: VLCC KATSURAGISAN

Annual Report 2006 | 13

Review of Operations
Systems of the Taipei City Government, and on R160 type subway cars for the New York City Transit Authority.

Business Results
In fiscal 2006, demand for rolling stock, this segment’s corebusiness, was strong, especially in North America and Asia
outside Japan, while demand for construction machinery
expanded in the U.S. market. Orders expanded on thestrength of large contracts for commuter train cars in North
America and other orders from overseas. Overall, orders forthe segment were up ¥24.8 billion, or 13.9%, to ¥203.2 billion.
Sales decreased ¥3.4 billion, or 2.0%, to ¥168.3 billion, despitedeliveries to overseas customers, including of train cars for the
Taiwan High Speed Rail Corporation. Operating income, however, rose ¥1.1 billion, or 13.6%, from the previous fiscal year,to ¥8.8 billion, owing to improvement in the profitability of theconstruction machinery business.

Outlook
Performance in the rolling stock business, especially in the
North American and Asian markets, continued to be robust.
Major new orders in fiscal 2006 included orders for 340 newtype commuter train cars from the Port Authority TransHudson Corporation in the U.S., train cars for a new railway
access for Chiang Kai Shek International Airport in Taiwan, andtrain cars to increase running speed on existing lines in China.
In production activities, major milestones in fiscal 2006 included the completion of train car deliveries for the Taiwan High
Speed Rail Corporation. Also, at present, full-scale productionis under way for subway cars driven by linear induction motors
for use in Guangzhou, China, which will be the fastest subway
cars in the world, with speeds up to 90 km/h. Work is also
ongoing on subway cars for the Department of Rapid Transit

In the United States, rail transportation is being reevaluated as
an environment-friendly and safe choice, and, along with thetrend toward improving the infrastructure in China and otherparts of Asia, demand for train cars is expected to continue tobe strong in these areas.
On the other hand, even in Japan, new types of train cars arebeing developed for Shinkansen and conventional lines for theJapan Railways Group as well as for other public and private
railways. As Japan’s largest manufacturer of rolling stock, KHI
is participating in a range of such projects and is playing aleading role in rolling stock development. Along with the commencement of full-scale production of these new train carsand other developments, we believe we can look forward to
stable replacement demand in Japan in the years to come.
KHI is responding aggressively to demand both in Japan andoverseas and is proceeding with measures to substantially
increase its global presence and to take its place as a leadinginternational supplier of rolling stock.
In the construction machinery business, we are concentratingon the development of environment-friendly products, focusing especially on sales of our V Series wheel loaders, whichhave an established reputation for torque, in the UnitedStates, the Middle East, and Africa.

Rolling Stock &Construction Machinery
Note: The name of this segment was changed to Rolling Stock & Construction Machinery in fiscal 2006 following the transferof the crushing plant business to EarthTechnica Co., Ltd., an affiliate accounted for by the equity method.

Sales

Orders Received(Millions of yen)

(Millions of yen)

50,00050,000

0

03

04

05

06

346,310294,017

273,563

203,165

100,00000

02

300,000

200,000

82,584

100,000

178,369

150,000

153,399

200,000

300,837

400,000

176,693

168,306

171,731
120,597

164,774

121,780

150,000

14 | Kawasaki Heavy Industries, Ltd.

(Millions of yen)

250,000

200,000

12.7%

100,000

Order Backlog

272,642

Percentage of Net Sales

02

03

04

05

06

02

03

04

05

06

Main Products• Electric train cars (including for
Shinkansen bullet trains)• Electric and diesel locomotives• Passenger coaches• Integrated transit systems• Monorail cars
• Platform screen doors• Wheel loaders

Above: R160 next-generation subway cars
for the New York City Transit Authority
Right: Subway cars driven by linear
induction motors in Guangzhou, China

Annual Report 2006 | 15

Review of Operations
Business Results
Orders in the Aerospace segment rose ¥14.6 billion, or 6.8%,
to ¥229.3 billion, mainly on the strength of increased demand
from the private sector, especially with regard to orders for component parts for the Boeing 777 commercial aircraft. This segment’s sales rose ¥30.3 billion, or 16.1%, to ¥218.5 billion, as aresult of increased revenues from the development of the P-X,
the next maritime patrol aircraft, and the C-X, the next transport aircraft, for the JDA and deliveries of component parts for
the Boeing 777 aircraft. Operating income rose ¥3.6 billion, or
59.4%, to ¥9.7 billion, along with the rise in sales.

OutlookThe market for commercial aircraft, which had been lackluster
following the series of terrorist attacks in the United States, isshowing rapid recovery along with the recent expansion in theworld economy. In addition, this segment has two major projects under way for the JDA and other projects for the private
sector. Going forward, the improvement in conditions in thecommercial aircraft market and progress in major projects is
expected to bring further growth in KHI’s aerospace activities.

(AMCM) missions and transportation, and the CH-101 helicopter for Antarctic transportation. As part of our manufacturingof these helicopters under license, we delivered the first
MCH-101 helicopter in March 2006. At present, work is ongoing on the second MCH-101 helicopter and the first CH-101
helicopter.
In the commercial aircraft field, we are working jointly on thedevelopment of the Boeing 787 passenger aircraft. We havecompleted a new plant exclusively for the 787 in KHI’s Nagoya
Works 1, and it went into operation in July 2006. Orders forthe 787 are quite strong and, at present, development is moving forward, with the first test flight scheduled for 2007. On theother hand, having reviewed the allocation of KHI’s resourcesin the area of commercial aircraft—which is enjoying continued favorable conditions—we transferred a portion of the
manufacturing associated with the Embraer 190, now being
developed jointly with Empresa Brasileira de Aeronáutica S.A.
(Embraer) of Brazil, to that company.
By successfully carrying out these major development projects, which are ongoing simultaneously in the Aerospacesegment, we intend to continue to drive toward the further
development of these business operations.

In our defense business activities, where we are playing a keyrole as the prime contractor in the JDA project for the development of the P-X and the C-X, we delivered a C-X static test
plane during the fiscal year under review. At present, we areproceeding with the assembly of a P-X static test plane, andC-X and P-X flight test planes. In addition, KHI has been designated by the JDA as the primary contractor for the MCH-101
helicopter, to be used for Airborne Mine Countermeasures

Aerospace

Sales

Orders Received(Millions of yen)

(Millions of yen)

160,000

03

04

05

06

301,599

287,441

80,0000002240,000

260,321229,257

214,702216,201

163,023

150,000

50,0000

16 | Kawasaki Heavy Industries, Ltd.

200,000

100,000

50,000320,000

151,641

188,255

173,783

154,848

100,000

161,072

200,000

218,533

250,000

16.5%

150,000(Millions of yen)

208,410250,000

Order Backlog

195,447

Percentage of Net Sales

02

03

04

05

06

02

03

04

05

06

Main Products• CH-47, OH-1, and BK117 helicopters• Component parts for the Boeing 777
and 767 passenger airplanes• Component parts for the Embraer 170
and 190 jet aircraft• Missiles• Electronic equipment• Space equipment

Above: Boeing 787 Dreamliner
Right: MCH-101 helicopter to be used
for AMCM missions and transportation

Annual Report 2006 | 17

Review of Operations
Business Results
Orders received by this segment rose ¥25.4 billion, or 15.6%,
from the previous fiscal year, to ¥188.1 billion for the fiscal year
under review, owing to increased orders for component parts
for the TRENT and other commercial aircraft engines. The segment posted a sales gain of ¥20.1 billion, or 14.2%, rising to¥161.4 billion, reflecting an increase in sales of component
parts for commercial aircraft engines. Operating income
rebounded ¥4.1 billion, or 153.8%, to ¥6.8 billion, due toincreased sales and reduced start-up costs for a new typeof gas turbine.

OutlookIn the gas turbine business, we have received orders forour cutting-edge high-efficiency gas turbine generator, theL20A—developed based on proprietary KHI technology inJapan—for five units in Japan and three units for overseas
installations since its debut in 2004 through March 31, 2006,
bringing the total to eight. Demand for gas turbines is expected to rise going forward because they are optimal environment-friendly power sources with high overall heat efficiency
that helps prevent global warming and reduces the load on theenvironment. KHI is drawing on its strengths as the developerof small and medium-sized gas turbines, including the L20A,
and is strengthening its capabilities for offering comprehensive
proposals to potential customers for service and maintenance.
Therefore, KHI will continue to work to expand its businessactivities in this field.

In the jet engine business, which is one mainstay of ourgas turbine operations, we have two major new projects
in progress for the defense and commercial aircraft sectors.
In the defense area, we began the production of RTM322KHI-02/8 engines for the new EH101 helicopters under license.
In the private-sector area, KHI is participating as a risk- andrevenue-sharing partner with Rolls-Royce in the development
and production of the state-of-the-art TRENT 1000 jet engine.
Currently under development, the TRENT 1000 has been chosen to power Boeing’s new 787 passenger aircraft now in thedevelopment phase, and we have received a large number oforders for it. In the jet aircraft engine field, along with theongoing TRENT 1000 program, we anticipate continued
expansion in demand for existing commercial aircraft engines.
Accordingly, we are working to strengthen our production
base through an active program of capital investment.
In addition, our machinery business within this segment
manufactures steam turbine engines for LNG carriers anddiesel engines and propellers for ships as well as a wide rangeof other marine equipment and systems. On the other hand,
KHI’s machinery for land use includes steam turbines for independent power generation, natural gas compression modules,
wind tunnel equipment, tunnel ventilation equipment, and arange of other items. In the machinery business, we plan tocontinue to strengthen our market positions, focusing especially on equipment for ships, where new orders are continuing at a high level, and on energy and environmental plant
equipment, where growth is expected, including in demand
for steam turbines for power generation and natural gas compression modules.

Gas Turbines &Machinery
Sales

Orders Received(Millions of yen)

(Millions of yen)

100,000

50,000

0

03

04

05

06

195,108

50,000002

150,000

163,440

162,700

129,987

132,989

100,000

50,00018 | Kawasaki Heavy Industries, Ltd.

150,000

133,467

161,431

141,366

136,468

150,766

145,651

150,000

140,327

200,000

160,874

200,000

12.2%

100,000(Millions of yen)

188,068

200,000

Order Backlog

191,947

Percentage of Net Sales

0

02

03

04

05

06

02

03

04

05

06

Main Products• Jet engines• Small and medium-sized gas
turbine generators• Gas turbine cogeneration systems• Gas turbines for naval vessels• Steam turbines for marine andindustrial applications• Diesel engines and marine
propulsion systems• Aerodynamic machinery

Above: Combined-cycle power plantutilizing L20A gas turbine generators
at the Chiba Mihama Power
Generation Project
Right: Kawasaki-MAN B&W 12K98ME
electrically controlled diesel engine formarine use

Annual Report 2006 | 19

Review of Operations
far, these facilities will include waste heat recovery boilers for
cement plants and flue gas desulfurization facilities.

Business Results
Orders in the Plant & Infrastructure Engineering segment
decreased a substantial ¥29.1 billion, or 23.0%, from the previous fiscal year, to ¥97.3 billion. This was primarily due to a
decline in major orders in the industrial and environmental
plant businesses and the Company’s policy of accepting
orders on a selective basis. Sales were down ¥26.5 billion, or
13.9%, to ¥164.5 billion, because of the decline in sales oflarge-scale industrial plants for overseas customers and otherfactors. Despite the segment making a provision for losses on
uncompleted construction contracts related to environmental
plants in the domestic market, the operating loss for the fiscal
year decreased ¥6.0 billion, amounting to ¥8.5 billion, mainly
owing to smaller losses in the industrial plant business.

OutlookThe segment’s industrial plant business was set up as a wholly
owned subsidiary, Kawasaki Plant Systems, Ltd. (K Plant), in
April 2005. In fiscal 2006, K Plant received an order from Anhui
Conch Cement Company Limited, China’s largest cement
manufacturer and a member of the Anhui Conch Group, forwaste heat recovery power generation systems with a total
output of 200,000 kW. In addition, K Plant delivered two largescale flue gas desulfurization systems for Hebei GuohuaDingzhou Power Plant in Dingzhou, Hebei Province, China.
Going forward, K Plant will focus on the development and saleof facilities that contribute to increasing energy efficiency
while reducing the load on and protecting the environment. In
addition to industrial plants, which we have focused on thus

Operating conditions for the environmental plant and steel
structures businesses continue to be extremely difficult due
to the prolonged shrinkage in public works spending in Japan.
For this reason, we decided to set up the environmental plantbusiness as a wholly owned subsidiary in October 2006. This
realignment will allow the business to operate flexibly andmanage its activities more efficiently and thereby strengthen
its operating position and cost-competitiveness. In fiscal 2006,
the environmental plant business delivered a highly efficient
stoker-type refuse incineration and power generation plant for
Fukuoka Clean Energy Co., Ltd. The state-of-the-art power
plant is capable of processing 900 tons of refuse daily andmeasures to reduce dioxin emissions in exhaust gases, ash,
and water are being stringently implemented. As a separate
company, the environmental plant business will work to contribute to preventing global warming and creating a recycling
society by continuing to focus on the development of its coretechnologies, including those for the reuse of refuse as
resources and the effective use of waste heat in the refuse
incineration process.
The steel structures business is aiming to build a business structure that is not excessively dependent on public works projects.
As part of related activities, the business is strengthening its
position in the LNG tank and other energy-related areas. In
February 2006, the steel structures business received an order
for a large-scale LNG terminal with a storage capacity of
180,000m3.

Plant &
Infrastructure Engineering
Sales

Orders Received(Millions of yen)

(Millions of yen)

0

03

04

05

06

210,16000

02

100,000

144,147

50,000200,000

273,837

126,403208,268

156,145

100,000

300,000

97,33250,000150,000

160,143

100,000

164,506

191,012200,000

191,412

219,092

150,000

20 | Kawasaki Heavy Industries, Ltd.

400,000

250,000

220,605

200,000(Millions of yen)

327,911250,000

12.4%

Order Backlog

347,496

Percentage of Net Sales

02

03

04

05

06

02

03

04

05

06

Main Products• Steelmaking, cement, chemical,
and other industrial plants• Power plants• Municipal refuse incineration plants• Steel bridges• LNG and LPG tanks• Shield machines and tunnel
boring machines• Wind power generation systems

Above: Large-scale flue gas desulfurization
systems at Hebei Guohua Dingzhou
Power Plant
Right: Stoker-type refuse incineration andpower generation plant for Fukuoka Clean
Energy Co., Ltd.

Annual Report 2006 | 21

Review of Operations
Business Results
Sales by the Consumer Products & Machinery segment in
the fiscal year under review rose ¥28.5 billion, or 8.4%, to¥367.0 billion, boosted by higher sales of motorcycles in North
America and Europe as well as increased revenues from salesof industrial robots in Japan. Worldwide sales of motorcycles,
ATVs (all-terrain vehicles), utility vehicles, and Jet Ski® watercraft amounted to 528,000 units, 13,000 units, or 2.6%, lower
than in the previous fiscal year. By geographical area, sales inJapan amounted to 26,000 units, down 10,000 units, or 27.8%.
Sales in North America, however, rose 23,000 units, or 10.6%,
to 240,000 units, and sales in Europe were up 9,000 units, or
11.4%, to 88,000 units. Sales in all other areas were up 35,000
units, or 16.7%, to 174,000 units. Operating income expanded¥3.2 billion, or 19.1%, to ¥19.9 billion.

New Models
A number of new models were introduced in fiscal 2006,
including those discussed below:
In the motorcycle business, we introduced the ZZR1400(Ninja ZX-14 in the United States), Kawasaki’s image leader,and, in the large supersport class, the Ninja ZX-10R, which was
designed to be No. 1 on the circuit. Among medium-sized
motorcycles, we began marketing the ER-6n, a lightweightsport model that has won high acclaim in the European market
and the ER-6f, a variation model equipped with a full fairing.
For the Japanese market, we commenced sales of the W400,
a sport model featuring a simple yet elegant look that

Consumer Products &Machinery
Sales

Percentage of Net Sales(Millions of yen)

200,000

338,450

318,325

318,025

281,207300,000

366,960

400,000

27.8%

100,000

0

02

22 | Kawasaki Heavy Industries, Ltd.

03

04

05

06

suggests top quality. In the cruiser category, we introduced
the Vulcan 900 Classic, which offers “big bike” styling and toplevel riding performance. For the motocross category, we
introduced the KX450F, which is the first four-stroke engine
model in its class for Kawasaki.
Within the Jet Ski® watercraft series, we reintroduced the Jet
Ski X-2 in the Japanese market—featuring a fixed-mounted
handle bar—bringing it back for the first time in 10 years.

OutlookThe segment is forecasting further growth in the total numberof motorcycles, ATVs, utility vehicles, and personal watercraft
sold, principally in North America and Europe, in fiscal 2007.
The segment will continue to work to build the Kawasaki
brand and expand its business activities by substantiallystrengthening its product development capabilities andimproving the environmental compatibility of its products
while continuing to introduce new models with attractive features tailored to individual markets. In the industrial robot
area, where the demand outlook has improved, the segment
has adopted a policy of investing corporate resources in
additional production capacity.

Main Products• Motorcycles• ATVs• Jet Ski® watercraft• General-purpose gasoline engines• Brush cutters• Transmissions• Industrial robots

Above: ZZR1400
Right: Brute Force 750 4x4i

Annual Report 2006 | 23

Review of Operations
Business Results
Sales in the Other segment rose ¥9.4 billion, or 7.6%, to¥133.1 billion, boosted by continued robust sales of hydraulicmachinery to customers in China. Operating income expanded¥1.6 billion, or 32.8%, to ¥6.7 billion.

Outlook
Kawasaki Precision Machinery Ltd. (KPM), which manufacturesand sells hydraulic machinery, the core product of this segment, continued to report favorable performance in its construction machinery business in the United States and Asia
outside Japan as well as in its business for ship machinery.
Currently, KPM is working to upgrade its manufacturingand marketing systems in overseas markets.
In the United States, where sales of products for construction
machinery continue to be strong, KPM established Kawasaki
Precision Machinery (U.S.A.), Inc., a sales company, in
Michigan in January 2006. Going forward, KPM and its new
U.S. subsidiary plan to focus on accelerating management
decision making, achieving a more efficient allocation of
resources, strengthening sales and service systems, anddeveloping a broader customer base as well as new business activities in the United States.

In addition, in Korea, demand for ship machinery is forecast to
remain robust going forward, supported by an active market
for shipbuilding. To meet this demand, KPM’s subsidiary
Flutek Ltd., completed its new Uiryeong Plant for the production of electric hydraulic steering gears. Looking ahead, thisnew facility is expected to play a major role as a production
base for these products, along with KPM’s headquarters plantin Kobe, Japan.
As a result of these steps to expand its overseas network, KPM
is moving to establish a global system with five centers; with
KPM’s Kobe headquarters plant at its core, the system comprises Kawasaki Precision Machinery (U.K.) Limited, a manufacturing and sales subsidiary in the United Kingdom, KPM(U.S.A.), Flutek in Korea, and KPM (China). Through this system, the KPM group will be much better positioned torespond to customer needs around the world as well as develop and offer high-quality, high-performance products. Alongwith these activities, the KPM group is working to improveoverall customer satisfaction by upgrading its after-sales service and other capabilities and comprehensively expanding its
hydraulic products business.

Also, in China, conditions in the construction machinery
market are expected to continue to be firm, and KPM is planning to begin operations at a new manufacturing company,
Kawasaki Precision Machinery (China) Ltd., in August 2006.

Other

Sales

Orders Received(Millions of yen)

(Millions of yen)

20,00050,00034,053

28,82430,00027,167

138,526

125,389

128,915

117,525

100,000

31,50140,000

119,623

123,697

124,728

126,635

121,741

100,000(Millions of yen)

150,000

10.1%

133,054

150,000

Order Backlog

38,632

Percentage of Net Sales

50,00010,0000

002

24 | Kawasaki Heavy Industries, Ltd.

03

04

05

06

0

02

03

04

05

06

02

03

04

05

06

Main Products• Industrial hydraulic products

Above: Hydraulic products forconstruction machinery use
Right: Uiryeong Plant, Flutek Ltd.

Annual Report 2006 | 25

Six-Year Summary
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
Years ended March 31
Millions of yen
2006

2005

2004

2003

2002

2001

Operating results:
Net sales ................................................................ ¥1,322,487¥1,241,592¥1,160,252¥1,239,598¥1,144,534¥1,060,479

Cost of sales ..........................................................

1,148,547

1,088,219

998,416

1,069,341

977,875

924,522

Gross profit ............................................................

173,940

153,373

161,836

170,257

166,659

135,957

Selling, general andadministrative expenses ......................................

132,145

128,629

139,586

139,714135,348

131,497

Operating income .................................................

41,79524,744

22,25030,54331,311

4,460

Net income (loss) ..................................................

16,467

11,4796,333

13,022

6,282(10,320)

Capital expenditures ............................................

41,72429,692

41,50235,16533,132

32,687

Depreciation and amortization ............................

30,551

31,55532,59031,59531,99833,303R&D expenses .......................................................

27,04013,183

14,741

15,494

16,54917,548Working capital ..................................................... ¥ 113,240¥ 138,523¥ 121,941¥ 137,771¥ 150,114¥ 148,577

Financial position at year-end:
Net property, plant and equipment ....................

246,219

243,166

248,922234,352

241,517

241,893

Total assets ............................................................

1,284,085

1,194,473

1,156,904

1,149,161

1,255,075

1,247,472

Long-term debt, less current portion ..................

157,057

207,279

210,819

226,936

248,170

270,605

Total shareholders’ equity ....................................

237,588

201,465

190,175

174,585

167,731

164,081

¥

¥

¥

¥

Per share amounts ( yen):
Earnings (loss) per share—basic ..........................

¥ 11.24.5¥ (7.4)

Earnings per share—diluted ................................

9.4

7.9
6.8

4.4
4.2

9.3
8.8

4.4

—

Cash dividends ......................................................

3.0

2.5

2.0

2.0

—

—

Shareholders’ equity .............................................

152.5

139.7

131.8

125.6

120.6

118.0

Number of shares issued (millions) ......................

1,558

1,443

1,443

1,391

1,391

1,391

Number of employees ..........................................

28,922

28,682

29,30628,64228,93629,162

Orders received .................................................... ¥1,351,631¥1,301,845¥1,226,728¥1,227,449¥1,034,771¥1,273,686

Order backlog .......................................................

1,254,409

1,189,374

1,175,563

1,240,439

1,320,894

Other data:

26 | Kawasaki Heavy Industries, Ltd.

1,310,444

Management’s Discussion and Analysis
OVERVIEW

improvement in the Gas Turbines & Machinery segment,
operating income climbed ¥17.1 billion, or 68.9%, to ¥41.8
billion. Non-operating income and expenses included a gain
on contribution of securities to the pension trust of ¥12.9 billion, a loss on the restructuring of the commercial aircraft
manufacturing business amounting to ¥15.8 billion, a loss on
the impairment of fixed assets amounting to ¥3.0 billion, anda loss of ¥0.7 billion due to a breach of Japan’s Antimonopoly
Act. As a result of these and other factors, net income
expanded ¥5.0 billion, or 43.5%, to ¥16.5 billion.
The previously mentioned loss on the restructuring of
the commercial aircraft manufacturing business was recognized in anticipation of losses to be incurred in connection
with the transfer of a portion of the manufacturing of the
Embraer 190, which the Company developed jointly with
Empresa Brasileira de Aeronáutica S.A. (Embraer) of Brazil, tothat company. The decision to make this transfer was madein view of the sharp rise in requests for expansion in the production of commercial aircraft from the Boeing Company of
the United States and other companies. The Company
judged that meeting all these requests would be difficult withthe existing production arrangements and therefore decided
to undertake a reallocation of its corporate resources.
The previously mentioned loss due to a breach ofJapan’s Antimonopoly Act was due to assessments, etc.,that the Fair Trade Commission of Japan imposed on the
Company with regard to bids related to steel bridges for the
Ministry of Land, Infrastructure and Transportation and theformer Japan Highway Public Corporation.

During fiscal 2006, ended March 31, 2006, the Japanese
economy remained on an upward trend supported byincreases in personal consumption and exports as well as
growth in private capital investment propelled by expansion
in corporate earnings. Overseas as well, economic conditions
remained generally strong as growth continued, especially in
the United States and China, and the economies of Europe
showed further recovery.
Notwithstanding these generally favorable economic
conditions, the operating environment for the Kawasaki
Heavy Industries Group (the KHI Group, or the Company)
continued to present challenges. Factors responsible for thisincluded persisting weakness in public works investment inJapan and high prices of steel and crude oil as well as rapid
price increases and shortages of high-quality materials, suchas aluminum and titanium.
Amid this operating environment, the KHI Group implemented an active program of marketing activities. As a consequence, although orders in the Shipbuilding and Plant &Infrastructure Engineering segments declined, orders in the
Rolling Stock & Construction Machinery segment as wellas the Gas Turbines & Machinery segment rose, resulting inan overall increase in consolidated orders of ¥49.8 billion,
or 3.8%, to ¥1,351.6 billion. Turning to revenues, net salesrose ¥80.9 billion, or 6.5%, to ¥1,322.5 billion, mainly due toincreased sales in the Aerospace and Consumer Products& Machinery segments.
Profitwise, as a result of the strengthening of the U.S.
dollar against the Japanese yen, growth in the Aerospace
and Consumer Products & Machinery segments, andNet Sales

Sales by Segment

Net Income(Billions of yen)(%)(Billions of yen)

16.5

10.1 8.3

15

12.7
10

11.5

27.8

13.0

1,322.5

1,241.6

1,160.3

1,239.6

1,000

20

1,144.5

1,500

16.5

0

5

6.3

12.4 12.2

6.3

500

0

02

03

04

05

06

Shipbuilding
Rolling Stock & Construction Machinery
Aerospace
Gas Turbines & Machinery
Plant & Infrastructure Engineering
Consumer Products & Machinery
Other

02

03

04

05

06

Annual Report 2006 | 27

RESULTS OF OPERATIONS

Gas Turbines & Machinery segment through the end of fiscal
2003, was reclassified in the Other segment beginning infiscal 2004. Data for previous years shown in this annual
report have been restated to reflect this change.

Net Sales
As mentioned, consolidated net sales expanded ¥80.9 billion, or 6.5%, to ¥1,322.5 billion.
The principal factors accounting for this increase in net
sales were (a) a rise in sales in the Aerospace segment of¥30.3 billion as a result of the increase in revenues from thedevelopment of the next maritime patrol aircraft and the nexttransport aircraft of the Japan Defense Agency (JDA) and again in sales of component parts for Boeing 777 aircraft and(b) a rise in sales of ¥28.5 billion in the Consumer Products &Machinery segment owing to increased sales of motorcycles
for the North American and European markets and industrial
robots for the domestic market.
Overseas sales rose ¥81.9 billion, or 13.3%, to ¥695.8 billion. Sales in North America increased ¥45.3 billion, or 19.1%,
sales in Europe increased ¥8.7 billion, or 8.7%, sales in Asia
increased ¥26.0 billion, or 15.2%, and sales in other areas
increased ¥1.8 billion, or 1.7%. The ratio of overseas sales toconsolidated net sales rose 3.2 percentage points, from
49.4% in the previous fiscal year to 52.6% for the fiscal year
under review.

ShipbuildingThis segment obtained orders for 16 vessels, namely three
LNG carriers, one LPG carrier, one VLCC, 10 bulk carriers,and one submarine. In value terms, this represented adecrease compared with the orders for 15 vessels, namely
five LNG carriers, two LPG carriers, five bulk carriers, andthree VLCCs, received in the previous fiscal year. As a result,orders for the fiscal year under review were down ¥27.5 billion, or 17.7%, from the previous fiscal year, to ¥128.3 billion.
Sales, however, increased ¥22.6 billion, or 26.0%, to ¥109.7
billion, because of higher revenues from newbuildings.
Nevertheless, this segment reported an operating loss of¥1.7 billion owing to the impact of higher costs of materials
and other factors.
Rolling Stock & Construction Machinery
Total orders received in this segment rose ¥24.8 billion, or
13.9%, to ¥203.2 billion, because of major orders received
from overseas customers, including those for commuter railway cars from North America. Sales declined ¥3.4 billion, or
2.0%, to ¥168.3 billion. Operating income expanded ¥1.1 billion, or 13.6%, to ¥8.8 billion, for the fiscal year under review
owing to improvement in the profitability of the construction
machinery business.

The following sections provide further details on performance by industry segment. Operating income or loss
includes intersegment transactions.
Please note that the name of the former Rolling Stock,
Construction Machinery & Crushing Plant segment waschanged to the Rolling Stock & Construction Machinery segment following the transfer of the crushing plant business to
EarthTechnica Co., Ltd., an affiliate accounted for by theequity method beginning in fiscal 2006. The industrial
hydraulic equipment business, which was included in the

Aerospace
Orders from the private sector, especially for component
parts for the Boeing 777 commercial aircraft, increased, andtotal orders for this segment were up ¥14.6 billion, or 6.8%,

Net Income per Share

Working Capital

Total Assets(Yen)(Billions of yen)(Billions of yen)

1,284.1

1,194.5

1,156.9

500

4.4

4.5

5

1,149.2

1,255.1

1,000

113.2

138.5

121.9

137.8

150

100

7.9

9.3

10

1,500

150.1

200

11.2

15

50

0

0

02

03

04

05

06

28 | Kawasaki Heavy Industries, Ltd.

0

02

03

04

05

06

02

03

04

05

06

to ¥229.3 billion. Sales expanded ¥30.3 billion, or 16.1%, to¥218.5 billion, because of higher revenues related to thedevelopment of the next maritime patrol aircraft and the nexttransport aircraft for the JDA as well as increases in sales ofcomponent parts for the Boeing 777. Accompanying theincrease in sales, operating income climbed a strong ¥3.6 billion, or 59.4%, to ¥9.7 billion.

Consumer Products & Machinery
Sales in this segment rose ¥28.5 billion, or 8.4%, to ¥367.0 billion, because of higher sales of motorcycles in the North
American and European markets and a gain in sales of industrial robots in Japan. Operating income expanded ¥3.2 billion, or 19.1%, to ¥19.9 billion.
Other
Sales in this segment rose ¥9.4 billion, or 7.6%, to ¥133.1 billion, as sales of the hydraulic machinery business in China
continued at a high level. Operating income climbed ¥1.6 billion, or 32.8%, to ¥6.7 billion.

Gas Turbines & Machinery
Orders won by this segment rose ¥25.4 billion, or 15.6%,
to ¥188.1 billion, on the strength of brisk demand for component parts for the TRENT and other commercial aircraft
engines. Sales climbed ¥20.1 billion, or 14.2%, to ¥161.4 billion, owing to higher revenues from component parts forcommercial aircraft engines. Operating income rose a strong¥4.1 billion, or 153.8%, to ¥6.8 billion, reflecting the growth insales and the decline in start-up costs for a new type of gas
turbine.

The following sections summarize performance by geographic
segment.
Japan
As a consequence of higher sales by the parent company,
especially in the Aerospace segment, sales in this geographic
segment rose ¥50.0 billion, or 5.3%, to ¥986.3 billion. Operating
income increased ¥20.2 billion, or 96.3%, to ¥41.2 billion,
because of strong performances principally in the Aerospaceand Gas Turbines & Machinery segments and a reduced
operating loss in the Plant & Infrastructure Engineering
segment.

Plant & Infrastructure Engineering
Orders slipped ¥29.1 billion, or 23.0%, to ¥97.3 billion, owing
to a decline in major orders in the industrial and environmental plant businesses and the Company’s policy of accepting
orders on a selective basis. Sales also declined, falling ¥26.5
billion, or 13.9%, to ¥164.5 billion, because of a drop in major
overseas orders in the industrial plant business. The operating loss amounted to ¥8.5 billion, which was an improvementof ¥6.0 billion from the previous fiscal year. This was primarily
due to a decline in the operating loss of the industrial plantbusiness, but some of this improvement was offset by a provision for losses on domestic construction contracts for environmental plants.

North America
Sales in North America rose ¥25.6 billion, or 13.0%, to¥222.5 billion, on the strength of brisk sales of motorcycles.
Operating income also posted an increase, of ¥0.2 billion, or
13.4%, to ¥1.4 billion.

Total Shareholders’ Equity

Total Shareholders’ Equity per Share

Return on Equity(Billions of yen)

(Yen)

(%)
10

7.5
5.9

6

4
50

50

0

2

0

02

03

04

05

06

3.5

3.8

100

7.6

139.7

131.8

125.6

100

152.5

8

150

120.6

190.2

174.6

150

167.7

200

237.6

200

201.5

250

0

02

03

04

05

06

02

03

04

05

06

Annual Report 2006 | 29

Europe
As a result of robust sales of motorcycles in the region,
sales in Europe were up ¥2.8 billion, or 3.6%, to ¥80.8 billion. Operating income rebounded ¥1.1 billion, or 277.5%,
to ¥1.6 billion.
Asia
Owing to a decline in sales of motorcycles in Indonesia
and other factors, sales in this geographic segment declined¥0.3 billion, or 1.4%, to ¥24.8 billion. Operating income
decreased ¥0.4 billion, or 22.0%, to ¥1.5 billion.
Other Areas
Sales in other areas rose ¥2.8 billion, or 52.1%, to ¥8.1 billion, and the operating loss increased ¥0.3 billion, or 66.5%,
to ¥0.6 billion.
Cost, Expenses, and Earnings
The cost of sales was ¥60.3 billion, or 5.5%, higher than in theprevious fiscal year, amounting to ¥1,148.5 billion, one percentage point lower than the 6.5% gain in net sales. As a consequence, gross profit increased ¥20.6 billion, or 13.4%, to¥173.9 billion, and the gross profit margin rose 0.8 percentage point, from 12.4% in the previous fiscal year to 13.2% in
the fiscal year under review.
Selling, general and administrative (SG&A) expenses
rose ¥3.5 billion, or 2.7%, from the previous fiscal year andamounted to ¥132.1 billion, thus offsetting only a relatively
small portion of the increase in gross profit. Operating
income rose a sharp ¥17.1 billion, or 68.9%, and amounted
to ¥41.8 billion. The principal factors accounting for the
improvement in operating income were as follows: (a) the
appreciation of the U.S. dollar against the yen, (b) increases
in operating income along with increased sales in the
Aerospace and Consumer Products & Machinery segments,(c) improved performance in the Gas Turbines & Machinery
segment, and (d) the implementation of across-the-board
measures to improve profitability, including reductions in
production and fixed costs. As a result, the ratio of operating
income to net sales increased 1.2 percentage points, to 3.2%.
Other income (expenses) for fiscal 2006 amounted
to expenses of ¥18.5 billion, compared with expenses of¥4.2 billion in the previous year. The principal factor accounting for this rise was an increase in other, net, from expensesof ¥1.6 billion in the previous fiscal year to expenses of ¥16.1
billion in the fiscal year under review. This rise was due mainlyto (a) a loss on the restructuring of the commercial aircraft
manufacturing business of ¥15.8 billion, (b) a foreign exchange
loss of ¥8.9 billion, compared with a gain of ¥0.2 billion in
the prior year, (c) a loss on impairment of fixed assets of

30 | Kawasaki Heavy Industries, Ltd.

¥3.0 billion, (d) a loss on cleaning of ground pollution of¥1.1 billion, and (e) a loss on breach of the Antimonopoly Actof ¥0.7 billion. In addition to these losses, a gain on contribution of securities to the pension trust of ¥12.9 billion and a gainon sales of marketable securities and investments in securitiesof ¥4.4 billion were included in other, net.
Despite this rise in other expenses, income before
income taxes and minority interests rose ¥2.7 billion, or
13.3%, to ¥23.3 billion. The ratio of net current and deferredincome taxes to income before income taxes was 27.0%, significantly lower than the 41.3% for the previous fiscal year andthe statutory tax rate of approximately 40.5%. The differenceis due mainly to an R&D tax credit in fiscal 2006. As a resultof these factors, after the deduction of minority interests
in net income of consolidated subsidiaries, net income forthe fiscal year increased ¥5.0 billion, or 43.5% comparedwith the previous fiscal year and amounted to ¥16.5 billion.
Accordingly, the ratio of net income to net sales rose 0.3 percentage point, from 0.9% in the previous fiscal year to 1.2% in
the fiscal year under review. In addition, ROE (calculatedusing average shareholders’ equity) increased 1.6 percentage
points, rising from 5.9% to 7.5%.
Capital expenditures for the fiscal year amounted to¥41.7 billion, compared with ¥29.7 billion in the previous fiscal year, and R&D expenses were ¥27.0 billion, versus ¥13.2
billion in the prior year. The Company introduced a newrecording method for R&D expenses in fiscal 2006. For
detailed information, please refer to Note 11 on page 47.

FINANCIAL CONDITION
Total assets at the end of the fiscal year were ¥89.6 billion, or
7.5%, higher than for the end of the previous fiscal year, andamounted to ¥1,284.1 billion. By principal item, current assets
were up ¥78.9 billion, due to increases in trade receivables
and inventories, which rose along with overall expansion in
the Company’s business activities, including the progress inthe development of the next maritime patrol aircraft and thenext transport aircraft for the JDA, increased production of
the component parts for the Boeing 777, capital expenditures for the Boeing 787, and large-scale overseas projects in
the Rolling Stock business. Investments and long-term loans
declined ¥2.8 billion, due mainly to a decrease in investments
in securities. Net property, plant and equipment rose ¥3.1 billion, reflecting the increase in capital expenditures. Intangible
and other assets were up ¥10.5 billion, reflecting a rise indeferred tax assets.
Liabilities increased ¥52.7 billion, or 5.3%, to ¥1,041.0 billion. Of this total, current liabilities rose ¥104.2 billion andlong-term liabilities declined ¥51.5 billion. Among current
liabilities, trade payables rose ¥61.6 billion, along with theoverall expansion in the Company’s business activities, including progress made to date in the development of the next
maritime patrol aircraft and the next transport aircraft for the
JDA, combined with increased production of the Boeing
777, capital expenditures for the Boeing 787 and major overseas projects in the Rolling Stock business. Among longterm liabilities, interest-bearing liabilities decreased ¥34.1
billion, or 9.6%, to ¥319.8 billion, mainly due to increased
shareholders’ equity along with the exercise of bonds withwarrants issued by the Company. Because the increase incurrent assets of ¥78.9 billion was smaller than the increase incurrent liabilities of ¥104.2 billion, the current ratio stood at
114.1% at the end of the fiscal year under review, comparedwith 119.8% at the previous fiscal year-end.
Shareholders’ equity rose ¥36.1 billion, or 17.9%, to¥237.6 billion. This was due to an increase in retained earnings of ¥12.1 billion that reflected the rise in net income aswell as increases in common stock of ¥10.7 billion and in capital surplus of ¥10.7 billion. The rises in common stock andcapital surplus were mainly due to the aformentioned exercise of bonds with warrants issued by the Company.
As a consequence of a higher percentage increase inshareholders’ equity than in total assets, the shareholders’equity ratio rose 1.6 percentage points, from 16.9% at theend of the previous fiscal year to 18.5% at the end of the
fiscal year under review. Also, the net debt/equity ratio (after
the deduction of cash on hand and in banks from interestbearing debt) fell to 118.8%, compared with 153.5% at theend of the previous fiscal year.

MANAGEMENT INDICATORSThe Company’s objective is to exceed the expectations ofinvestors for profitability. The management indicator selected is before-tax return on invested capital (ROIC), whichmeasures how efficiently the Company uses its capital. As it
works to maximize before-tax ROIC, the Company is working
to strengthen its financial position by implementing measures to expand profit and simultaneously reduce invested
capital. Before-tax ROIC is computed by taking the ratioof earnings before interest and taxes (EBIT) to the sum ofinterest-bearing debt and total shareholders’ equity.
Applying this formula, before-tax ROIC for the year underreview was 5.1%, 0.3 percentage point higher than the 4.8%
reported for the previous fiscal year.

CASH FLOWS
During fiscal 2006, net cash provided by operating activitieswas ¥45.8 billion, ¥25.7 billion lower than for the previous fiscal year. This was the consequence of a number of factors,
including (a) an increase of ¥8.3 billion in the provision for
retirement and severance benefits, (b) the provision of ¥9.6
billion for restructuring charges for the commercial aircraft
manufacturing business, (c) a loss of ¥6.3 billion on impairment of inventories for the restructuring of the commercial
aircraft manufacturing business, (d) a gain of ¥12.9 billion oncontribution of securities to the pension trust, (f) a ¥16.9 billion lower increase in trade receivables, (g) a net increaseof ¥54.9 billion in inventories, and (h) a ¥9.7 billion higher
decrease in advances received.
Net cash used for investing activities amounted to¥36.5 billion, representing an ¥18.8 billion increase from ¥17.7
bil-lion reported in the previous year. The principal factors accounting for this increase in cash outflows were an increaseof ¥7.3 billion in the acquisition of property, plant and equipment, an increase of ¥4.5 billion in the acquisition of investments in securities, and a decline of ¥3.0 billion in proceedsfrom sales of property, plant, and equipment.
Free cash flow, which is the net amount of cash fromoperating and investing activities, amounted to an inflow of¥9.3 billion for the fiscal year under review, compared to an
inflow of ¥53.7 billion for the previous fiscal year. This decline
in free cash flow generally reflected the growth in the
Company’s business activities and capital expenditures.
Net cash used for financing activities amounted to¥16.7 billion. The Company used its inflow of free cash flow
and the withdrawals from cash on hand and in banks as the principal sources of funds to reduce its interest-bearing debt. Although net short-term borrowings rose ¥7.4 billion, net repayment of long-term debt totaled ¥20.3 billion.
As a result of these cash flows, cash and cash equivalents
at the end of fiscal 2006 amounted to ¥37.5 billion, ¥6.9 billion lower than at the beginning of the fiscal year.

DIVIDENDS
The Company’s policy is to pay stable cash dividends to its
shareholders, giving due consideration to increasing retained
earnings to strengthen and expand its business foundations
for future growth.
Based on this policy, and after taking into account theCompany’s performance, level of retained earnings, andother factors, management proposed and received approval

Annual Report 2006 | 31

from shareholders to increase the cash dividend payment by¥0.5 per share, to ¥3.0 per share for fiscal 2006.

the countries and regions where it operates. However, theGroup’s operations may be affected if such restrictions are
subject to unpredictable changes and if new restrictions are
put into effect.

BUSINESS RISK
External factors that may have an effect on the KHI Group’s
performance and financial position include the following:(1) Political and Economic Conditions
The Group conducts its business activities not only in Japanbut also elsewhere in Asia, North America, Europe, and otherareas and is subject to the consequences of political andeconomic developments in these regions. For example,
trends in personal consumption may have an impact on thesales of the Consumer Products & Machinery segment, while
trends in private-sector capital investment and public works
investment may have an influence on orders of the Gas
Turbines & Machinery and the Plant & Infrastructure
Engineering segments. Moreover, demand for passenger
air travel and conditions in shipping markets may havean impact on the Aerospace and Shipbuilding segments,
respectively. Disputes and political changes may affect theCompany’s overseas projects.
(2) Fluctuations in Foreign Exchange Rates
During fiscal 2006, overseas sales accounted for 53% of consolidated net sales. Accordingly, the Group has a substantial
volume of transactions denominated in U.S. dollars, euros,and other currencies. To reduce foreign exchange risk, theGroup is working to increase the ratio of the total cost of
goods sold that is denominated in foreign currencies and,while taking into due account trends in foreign exchange
rates, endeavors to take flexible measures to hedge theeffect of exchange rate fluctuations through the use of forward contracts and other hedging techniques. However, themajority of the Group’s manufacturing facilities are located inJapan, and its sales to overseas markets are, therefore, subject to foreign exchange fluctuation risk.
(3) Fluctuations in Prices of Raw Materials
Since the Group has many projects that require considerable
time for completion, from the receipt of orders to final delivery, fluctuations in the prices of steel and other raw materials
may have an impact on the profitability of such projects.
Accordingly, the Group is subject to the risk of fluctuationsin prices of raw materials.
(4) Government regulations
The Group conducts its business activities in compliance withthe restrictions in effect, including laws and regulations, in
32 | Kawasaki Heavy Industries, Ltd.

CORPORATE GOVERNANCE(1) Basic Stance toward Corporate Governance—Enhancing
Internal Control Systems
KHI has created a corporate governance structure appropriate for its operations, with members of the Board of Directors
and auditors playing central roles, and is working to enhanceand improve its internal control systems. Specific aspects ofthis system are as follows. Regarding the decision making
and the conduct of operations of directors and employees,
the scope of authority, responsibilities, and duties of directors and employees are clearly stated in the Company’s internal rules. In addition, those responsible are required to keep
records of actual decisions made and the conduct of operations, and an auditing system has been established to checkon whether the content and form of these decisions and conduct of operations are in accordance with the Company’s
internal rules. As a result, the basic stance of the KHI Group
as a whole regarding corporate governance is to endeavor toincrease its corporate value through the highly transparent,
efficient, and sound management of its operations as theGroup works to build smooth relationships with all its stakeholders, including shareholders, customers, employees, andthe community.
(2) KHI’s Corporate Governance Framework
1. Conduct of Operations
KHI has established a Board of Directors with nine members
who are responsible for formulating management strategy
and supervising the conduct of operations. In addition, tocreate a management system that can respond quickly tochanges in the operating environment, executive officers
are appointed by the Board of Directors to be responsible
for the day-to-day conduct of business operations.
The Board of Directors decides on the basic objectives
and policies for the conduct of operations as it formulates
management plans. These objectives and policies are thenpresented to all the executive officers in the Group Executive
Officer Committee, and the Board of Directors follows up on
the implementation of such objectives and policies periodically. To make the responsibility for management clear, thecompensation of directors is incentive-based, reflecting corporate performance, and directors must stand for re-election
annually. For major management issues, the Management
Committee, which consists of the representative directors

and other members, discusses such issues in detail, then designated matters are decided by the Board of Directors. The
Management Committee, in principle, meets three times amonth, and, in addition to discussing management policy,
management strategy, and important management issues
from the perspective of the Group as a whole, the committee
calls on the management personnel responsible for major
subsidiaries to attend the meetings, as deemed necessary,and acts as an advisory body to the president regarding themanagement of the Group on a consolidated basis.
2. Auditing Functions
KHI has formed a Board of Auditors with four members (twoof whom are outside auditors), and, under the provisions ofJapan’s Company Law, the Board of Auditors conducts
examinations of business operations and audits the financial
accounts. Accordingly, the corporate auditors examine andmonitor the state of operations and Group assets through anumber of activities. These include attending the meetings ofthe Board of Directors and Management Committee, examining important documents, holding periodic meetings withthe representative directors, and auditing KHI’s divisions andsubsidiaries. In addition, the two outside corporate auditorson the Board of Auditors, who have no transactions or otherrelationships that represent a conflict of interest, performtheir surveillance duties as neutral and objective third parties.
The internal corporate auditors share information with theoutside corporate auditors and work to enhance the effectiveness of their management surveillance functions.
Moreover, under the provisions of the Company Law,
KHI has appointed KPMG AZSA & Co. as its independent
public accounting firm, and this firm conducts audits of theCompany’s financial statements. The corporate auditors andthe Board of Auditors receive reports regarding the accounting audit, including the outline of the audit plans of the independent accounting firm, the items the accounting firm
selects for particular focus, and other matters. As deemednecessary, the corporate auditors attend the audits conducted by the independent accounting firm. In particular, reportson the results of audits by the accounting firm are presented

periodically (twice annually), and the corporate auditors andthe accounting firm work closely together, exchanging information and opinions. In addition, the Board of Auditors provides explanations of its auditing plans to the accounting
firm. Moreover, separately from the auditing activities previously mentioned, which are based on the Company Law,
KHI’s Auditing Department monitors the overall conduct ofmanagement activities within the KHI Group and carries out
audits on a continuing basis of whether operations are being
conducted appropriately and in compliance with laws andinternal rules as well as other matters while endeavoring to
upgrade internal control functions. In addition, to raise thelevel of auditing activities, the corporate auditors and the
Auditing Department exchange information on a monthly
basis and share information regarding the results of theirauditing activities and items they have singled out for attention.
3. Compliance Systems
In addition to updating and improving internal regulations
related to ethical matters, the Company has formed a
Corporate Ethics Committee and a Compliance Committee,
while the KHI Group has formed committees in each of its
organizational units in Japan to take the initiative in promoting the self-assessment and verification of compliance. In
addition, a Compliance Guidebook has been prepared anddistributed to employees, not only of the parent company
but also to those of virtually all other subsidiaries and affiliates in Japan, and measures are being implemented to conduct compliance training along with concerted efforts toraise the level of awareness of compliance matters within theGroup. In addition to these initiatives, a Compliance
Reporting and Consultation System has been createdthrough an outside legal office to enable employees toreceive advice without being concerned about being
observed by other employees.

(3) Compensation Paid to Directors and Corporate Auditors
During the fiscal year under review, the amounts of compensation paid to the Company’s directors and corporate auditors
were as follows:

Amounts Paid (Millions of yen)
Directors

Corporate Auditors

Total

¥435

¥64

¥499

Directors’ bonuses appropriated from net income

40

—

40

Retirement payments based on decisions of theGeneral Meeting of Shareholders

294

24

318

Total

¥769

¥88

¥858

Compensation based on the Articles of Incorporation anddecisions of the General Meeting of Shareholders

Annual Report 2006 | 33

Consolidated Balance Sheets
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
As of March 31, 2006 and 2005
Thousands of
U.S. dollars(Note 1)Millions of yen

ASSETS

2006

2005

2006

Current assets:
Cash on hand and in banks .................................................................................... ¥37,650¥44,629$320,507

Receivables:
Trade ....................................................................................................................

422,551

402,255

3,597,097

Other ....................................................................................................................

19,482

17,378

165,847

Allowance for doubtful receivables ...................................................................

(3,829)(6,014)(32,596)...........................................................................................................................................

438,204

413,619

3,730,348

Inventories (Notes 3 and 7) ....................................................................................

383,017332,333

3,260,552

Deferred tax assets (Note 13) ................................................................................

32,39820,219275,798

Other current assets ...............................................................................................

24,63026,205

209,671

Total current assets .............................................................................................

915,899

837,005

7,796,876

67,13069,972571,465

Investments and long-term loans:
Investments in securities (Notes 4 and 5) ..............................................................
Long-term loans ......................................................................................................

1,422

2,514

12,105

Other (Note 7) .........................................................................................................

12,07011,741

102,750

Allowance for doubtful receivables .......................................................................

(3,865)(4,658)(32,902)

Total investments and long-term loans ............................................................

76,75779,569653,418

Land ..........................................................................................................................

65,732

67,998559,564

Buildings and structures .........................................................................................

272,637

269,4072,320,908

Machinery and equipment .....................................................................................

446,182443,594

3,798,263

Property, plant and equipment (Note 7):

Construction in progress ........................................................................................

9,375

5,127

79,808...........................................................................................................................................

793,926

786,126

6,758,543

Accumulated depreciation .....................................................................................

(547,707)(542,960)(4,662,527)

Net property, plant and equipment ..................................................................

246,219

243,166

2,096,016

Deferred tax assets (Note 13) ................................................................................

28,186

19,260239,942

Intangible and other assets (Note 6) .....................................................................

17,024

15,473

144,922...........................................................................................................................................

45,21034,733384,864

Total assets .............................................................................................................. ¥1,284,085¥1,194,473$10,931,174

Intangible and other assets:

The accompanying notes to the consolidated financial statements are an integral part of these statements.

34 | Kawasaki Heavy Industries, Ltd.

Thousands of
U.S. dollars(Note 1)Millions of yen

LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS’ EQUITY

2006

2005

2006

Current liabilities:
Short-term borrowings and current portion¥ 146,605$ 1,385,426

Trade payables (Note 7) .........................................................................................

of long-term debt (Note 7) ................................................................................... ¥ 162,746
409,942

348,3893,489,759

Advances from customers ......................................................................................

98,590106,574

839,278

Income tax payable (Note 13) ................................................................................

19,97812,276

170,069

Accrued bonuses ....................................................................................................

15,198

13,958129,378

Provision for product warranty ...............................................................................

4,200

2,551

35,754

Provision for restructuring charges ........................................................................

9,557

—

81,357

Provision for losses on construction contracts .....................................................

12,613

6,833

107,372

Deferred tax liabilities (Note 13) ............................................................................

111

317

945

Other current liabilities ...........................................................................................

69,72460,979593,547

Total current liabilities ........................................................................................

802,659

698,482

6,832,885

Long-term debt, less current portion (Note 7) .....................................................

157,057

207,279

1,336,997

Employees’ retirement and severance benefits (Note 8) ....................................

69,11372,517588,346

Long-term liabilities:

Directors’ and statutory auditors’ retirement
and severance benefits .........................................................................................

—

905

—

Deferred tax liabilities (Note 13) ............................................................................

3,733

1,980

31,778Other ........................................................................................................................

8,427

7,154

71,737

Total long-term liabilities ...................................................................................

238,330

289,835

2,028,858

5,508

4,691

46,88992,08581,427783,902

Capital surplus .........................................................................................................

42,094

31,390358,338

Retained earnings ...................................................................................................

100,776

88,704

857,887

Contingent liabilities (Note 9)
Minority interests ...........................................................................................................
Shareholders’ equity (Note 10):
Common stock:
Authorized—3,360,000,000 shares
Issued—1,557,714,707 shares in 2006
—1,443,394,172 shares in 2005 ...............................................................

Net unrealized gains on securities ........................................................................

14,097

16,910120,005

Foreign currency translation adjustments .............................................................

(11,426)(16,843)(97,267)

Treasury stock—1,035,104 shares in 2005..............................................................

(38)

(123)

(323)

Total shareholders’ equity ..................................................................................

237,588

201,465

2,022,542

Total liabilities, minority interests and shareholders’ equity ........................... ¥1,284,085¥1,194,473$10,931,174

Treasury stock—208,048 shares in 2006

Annual Report 2006 | 35

Consolidated Statements of Income
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
For the three years ended March 31, 2006, 2005 and 2004
Thousands of
U.S. dollars(Note 1)Millions of yen
2006

2005

2004

2006

Net sales ............................................................................................... ¥1,322,487¥1,241,592¥1,160,252$11,258,083

Cost of sales .........................................................................................

1,088,219

998,416

9,777,365

1,148,547

Gross profit ...................................................................................

173,940

153,373

161,836

1,480,718

Selling, general and administrative expenses (Note 11) .................

132,145

128,629

139,586

1,124,925

Operating income ........................................................................

41,79524,744

22,250355,793

3,225

3,240

3,476

27,454

Other income (expenses):
Interest and dividend income .....................................................
Equity in income (loss) of non-consolidated
subsidiaries and affiliates ...........................................................

(197)

506

941

(1,677)

Interest expense ...........................................................................

(5,377)(6,296)(7,274)(45,773)

Other, net (Note 12) .....................................................................

(16,146)(1,630)(8,151)(137,448)

23,30020,564

11,242

198,349

Current ..........................................................................................

(24,148)(15,869)(16,604)(205,567)

Deferred ........................................................................................

17,843

7,374

11,890151,894

Income before income taxes
and minority interests ............................................................
Income taxes (Note 13):

Minority interests in net incomeof consolidated subsidiaries .............................................................

(528)

Net income ........................................................................................... ¥16,467(590)¥

11,479

(195)
¥

6,333

(4,496)$140,180

U.S. dollars(Note 1)Yen

Per share amounts:
Earnings per share—basic ...........................................................

¥11.2

¥7.9

¥4.4

$0.10

Earnings per share—diluted ........................................................

9.4

6.8

4.2

0.08

Cash dividends .............................................................................

3.0

2.5

2.0

0.03

The accompanying notes to the consolidated financial statements are an integral part of these statements.

36 | Kawasaki Heavy Industries, Ltd.

Consolidated Statements of Shareholders’ Equity
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
For the three years ended March 31, 2006, 2005 and 2004
Thousands
Number ofshares ofcommonstockMillions of yen

Commonstock

Balance at March 31, 2003 ............................................. 1,390,598 ¥ 81,427
Net income for the year ........................................
——
Adjustments from translation of foreign
currency financial statements ...................................
——
Increase in net unrealized gains on securities .....
——
Issue of new shares ................................................
52,796—
Treasury stock purchased, net ..............................
——Cash dividends .......................................................
——
Gain on sales of treasury stock .............................
——
Bonuses to directors and statutory auditors ........
——
Other .......................................................................
——
Balance at March 31, 2004 ............................................. 1,443,394
81,427
Net income for the year ........................................
——
Adjustments from translation of foreign
currency financial statements ...................................
——
Increase in net unrealized gains on securities .....
——
Treasury stock purchased, net ..............................
——Cash dividends .......................................................
——
Gain on sales of treasury stock .............................
——
Bonuses to directors and statutory auditors ........
——
Decrease resulting from change of accounting
periods of consolidated subsidiaries .................
——
Other .......................................................................
——
Balance at March 31, 2005 ............................................. 1,443,394
81,427
Net income for the year ........................................
——
Adjustments from translation of foreign
currency financial statements ...................................
——
Decrease in net unrealized gains on securities ...
——Treasury stock purchased, net ..............................
——Cash dividends .......................................................
——
Gain on sales of treasury stock .............................
——
Bonuses to directors and statutory auditors ........
——
Conversion of convertible bonds ......................... 114,321 10,658
Other (Note 14) ......................................................
——
Balance at March 31, 2006 ........................................... 1,557,715 ¥92,085

CapitalsurplusRetainedearnings

Net
unrealized
gains onsecurities¥ 24,683—¥ 77,069
6,333¥ 3,671—¥ (12,225)—¥ (40)
—

—
—
6,704
—
—
1
—
—
31,388—————(2,781)—(72)(80)
80,46911,479

—
9,595
—
—
—
—
—
—
13,266—(4,058)
—
—
—
—
—
—
—
(16,283)
—

—
—
—
(52)
—
—
—
—
(92)
—

—
—
—
—
2
—

—
—
—
(2,885)
—
(38)

—
3,644
—
—
—
—

(560)
—
—
—
—
—

—
—
(31)
—
—
—

—
—
31,390
—

(222)
(99)
88,704
16,467——
16,910———(16,843)
—

—
—
(123)
—

—
—
5,417
—
(2,813)————(3,606)
—
—
—
—
—
(84)
—
—
—
—
—
(705)
—
—
¥100,776 ¥14,097 ¥(11,426)

—
—
85
—
—
—
—
—
¥ (38)

—
—
—
—
46
—
10,658—¥42,094

Foreigncurrencytranslation
adjustments

Treasurystock

Thousands of U.S. dollars (Note 1)

Commonstock

Capitalsurplus

Balance at March 31, 2005 ............................................................... $ 693,173 $ 267,217
Net income for the year ...........................................................
——
Adjustments from translation of foreign
currency financial statements ...................................................
——
Decrease in net unrealized gains on securities ......................
——
Treasury stock purchased, net .................................................
——Cash dividends ..........................................................................
——
Gain on sales of treasury stock ................................................
—
392
Bonuses to directors and statutory auditors ..........................
——
Conversion of convertible bonds ............................................
90,72990,729Other (Note 14) .........................................................................
——
Balance at March 31, 2006 .............................................................. $783,902 $358,338

Retainedearnings

Net
unrealized
gains onsecurities

Foreigncurrencytranslation
adjustments

Treasurystock$ 755,120 $ 143,952 $(143,381) $(1,047)
140,180—————
46,114—— (23,947)
—
—
—
—
—
724
(30,697)
—
—
—
—
—
—
—
(715)
—
—
—
—
—
—
—
(6,001)———$857,887 $120,005 $ (97,267) $ (323)

The accompanying notes to the consolidated financial statements are an integral part of these statements.

Annual Report 2006 | 37

Consolidated Statements of Cash Flows
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries
For the three years ended March 31, 2006, 2005 and 2004
Thousands of
U.S. dollars(Note 1)Millions of yen
2006

2005

2004

2006

¥20,564¥11,242$198,349

Cash flows from operating activities:
Income before income taxes and minority interests .................................... ¥23,300
Adjustments to reconcile net income before income taxes andminority interests to net cash provided by operating activities:
Depreciation and amortization ..................................................................

30,551

31,55532,590260,075

Loss on impairment of fixed assets ............................................................

3,008

—

—

25,607

Provision for retirement and severance benefits .........................................

17,092

8,779

7,172

145,501

Provision for (reversal of) allowance for doubtful receivables .................

(44)

(213)

817

(375)

Provision for losses on construction contracts ..........................................

5,660

1,841

4,256

48,183——(2,260)

—

9,557

—

—

81,357

6,259

—

—

53,282

Reversal of restructuring charges on consolidation of
manufacturing bases of Plant and Infrastructure
Engineering business ................................................................................
Provision for restructuring charges for the commercial
aircraft manufacturing business ...............................................................
Loss on impairment of inventories for the restructuring of
the commercial aircraft manufacturing business ....................................
Loss on disposal of inventories ..................................................................

1,738

2,141

1,698

14,795Gain on sale of marketable and investment securities ............................

(4,501)(3,774)(1,036)(38,316)

Loss (gain) on sale of property, plant and equipment .............................

960(1,890)

3,345

8,172

Gain on contribution of securities to the pension trust ........................... (12,901)——(109,824)Interest and dividend income ....................................................................

(3,225)(3,240)(3,476)(27,454)

Interest expense ..........................................................................................

5,377

6,296

7,274

45,773

Trade receivables ................................................................................ (14,250)(31,184)

8,777(121,308)

Inventories ........................................................................................... (49,754)

5,117

9,990

(423,546)

Other current assets ............................................................................

(1,247)(3,064)(8,857)(10,615)

55,29459,088(1,022)

470,707

Advances received .............................................................................. (13,821)(4,128)

11,152(117,656)

Changes in assets and liabilities:
Decrease (increase) in:

Increase (decrease) in:
Trade payables ....................................................................................
Accrued bonuses .................................................................................

1,397

(396)

(5,707)

11,892Other current liabilities .......................................................................

1,689

490

(5,176)

14,378Other, net .....................................................................................................

2,583

2,324

604

21,989Subtotal ....................................................................................................

64,72290,306

71,383550,966

Cash received for interest and dividends ......................................................

3,129

4,555

3,395

26,637

Cash paid for interest ......................................................................................

(5,332)(6,294)(7,914)(45,390)

Cash paid for income taxes ............................................................................ (16,581)(16,085)(11,718)(141,151)

Additional payment of construction cost (Note 15) .....................................

—(1,060)——Loss on cleaning of ground pollution ............................................................

(177)

—

—

(1,507)

Reimbursement of overcharged accounts receivable (Note 16) .................

——(12,335)—

Net cash provided by operating activities ................................................

45,761

71,42242,811

389,555(Continues to next page)38 | Kawasaki Heavy Industries, Ltd.

Thousands of
U.S. dollars(Note 1)Millions of yen(Continued from previous page)

2006

2005

2004

2006

Cash flows from investing activities:
101

447

625

860

Acquisition of property, plant and equipment ............................................. (34,657)

Decrease in time deposits with maturities over three months ....................

(27,364)(32,558)(295,029)

Proceeds from sales of property, plant and equipment ..............................

2,232

5,258

8,228

19,001

Acquisition of intangible assets .....................................................................

(4,602)(3,774)(6,332)(39,176)

Proceeds from sales of intangible assets ......................................................

38

320

269

323

Acquisition of investments in securities ........................................................

(5,765)(1,301)(1,029)(49,076)

Proceeds from sale of investments in securities ...........................................

6,871

5,370

2,882

58,492

Decrease (increase) in short-term loans receivable ......................................

(429)

1,465

835

(3,652)

Additions to long-term loans receivable .......................................................

(895)

(290)

(329)

(7,619)Proceeds from collection of long-term loans receivable .............................

428

1,339

591

3,643

Other ................................................................................................................

168

816

950

1,430

Net cash used for investing activities ............................................................ (36,510)(17,714)(25,868)(310,803)(31,736)(16,320)

62,918Cash flows from financing activities:
Increase (decrease) in short-term borrowings ..............................................

7,391

Proceeds from long-term debt ......................................................................

24,65757,73344,499209,900

Repayment of long-term debt ....................................................................... (44,987)(75,241)(60,829)(382,966)

Acquisition of treasury stock ..........................................................................

(51)

(36)

(15)

(434)

Cash dividends paid ........................................................................................

(3,622)(2,844)(2,753)(30,833)

Paid-in capital from minority interests ...........................................................

—

361

—

—

Cash dividends paid to minority interests .....................................................

(109)

(76)

(126)

(928)

Net cash used for financing activities ............................................................ (16,721)(51,839)(35,544)(142,343)

Effect of exchange rate changes ...........................................................................

703

180

(191)

5,985

Net increase (decrease) in cash and cash equivalents .........................................

(6,767)

2,049(18,792)(57,606)

Cash and cash equivalents at beginning of year ..................................................

44,38542,37559,837

377,841

—

(39)

—

—

—

—

1,330

—

(112)

—

—

(953)

Cash and cash equivalents at end of year ............................................................. ¥37,506¥44,385¥42,375$319,282¥44,629¥43,064$320,507

Decrease in cash and cash equivalents by change ofconsolidation period of subsidiaries ...................................................................
Increase in cash and cash equivalents arisingfrom newly consolidated subsidiaries .................................................................
Decrease in cash and cash equivalents arising fromexclusion of subsidiaries from consolidation ......................................................

Supplemental information on cash flows:
Cash and cash equivalents:
Cash on hand and in banks in the balance sheets ................................... ¥37,650
Time deposits with maturities over three months ....................................

(144)

(244)

(689)

(1,225)

Total .......................................................................................................... ¥37,506¥44,385¥42,375$319,282

See Note 17 for significant non-cash transactions.
The accompanying notes to the consolidated financial statements are an integral part of these statements.

Annual Report 2006 | 39

Notes to the Consolidated Financial Statements
Kawasaki Heavy Industries, Ltd. and Consolidated Subsidiaries

1. Basis of presenting
consolidated
financial statements

Kawasaki Heavy Industries, Ltd. (the “Company”) and its consolidated domestic subsidiaries maintain theirofficial accounting and disclosure records in Japanese yen. The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Securities andExchange Law and its related accounting regulations, and in conformity with accounting principles generally
accepted in Japan, which are different in certain respects as to application and disclosure requirements ofInternational Financial Reporting Standards.
The accounts of overseas subsidiaries are based on their accounting records maintained in conformity
with generally accepted accounting principles prevailing in the respective countries of domicile. The accompanying consolidated financial statements have been restructured and translated into English (with some
expanded descriptions and the inclusion of consolidated statements of shareholders’ equity) from the consolidated financial statements of the Company prepared in accordance with Japanese GAAP and filed withthe appropriate Local Finance Bureau of the Ministry of Finance as required by the Securities and Exchange
Law. Some supplementary information included in the statutory Japanese language consolidated financial
statements, but not required for fair presentation, is not presented in the accompanying consolidated
financial statements.
The translations of the Japanese yen amounts into U.S. dollars are included solely for the convenience ofreaders outside Japan, using the prevailing exchange rate at March 31, 2006, which was ¥117.47 to US$1.
The convenience translations should not be construed as representations that the Japanese yen amounts
have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rateof exchange.

2. Significant
accounting
policies(a) Consolidation
The accompanying consolidated financial statements include the accounts of the Company and significant
companies (together the “Companies”), over which the Company has power of control through majority
voting rights or existence of certain conditions evidencing control by the Company.
The consolidated financial statements include the accounts of the Company and 96 (99 in 2005 and 101
in 2004) subsidiaries.
For the year ended March 31, 2006, 5 (4 in 2005 and 5 in 2004) subsidiaries are excluded from the consolidation. The amounts of total assets, net sales, net income and retained earnings of these excluded subsidiaries, in the aggregate, would not have had a material effect on the consolidated financial statements.
( b) Application of the equity method of accounting
Investments in non-consolidated subsidiaries and affiliates, over which the Company has the ability to
exercise significant influence over operating and financial policies of the investees, are accounted for by
the equity method.
For the year ended March 31, 2006, 19 (16 in 2005 and 2004) affiliates are accounted for by the equity
method.
For the year ended March 31, 2006, investments in 5 (4 in 2005 and 5 in 2004) non-consolidated subsidiaries and 15 (14 in 2005 and 13 in 2004) affiliates are stated at cost without applying the equity methodof accounting. If the equity method had been applied for these investments, the amounts of net income andretained earnings of these excluded subsidiaries and affiliates would not have had a material effect on the
consolidated financial statements.
(c) Consolidated subsidiaries’ fiscal year-ends
Fiscal year-ends of 35 (32 in 2005 and 29 in 2004) consolidated subsidiaries are December 31.
As to 5 of these subsidiaries (Kawasaki Motors Corporation Japan, Kawasaki Motors Corp., U.S.A.,
Kawasaki Motors Europe N.V., and two other subsidiaries), the Company consolidates their financial statements as of the consolidated balance sheet date, by changing their accounting period from the 12 months
ended December 31 to the 12 months ended March 31 to improve transparency and quality of consolidated
financial statements.
The other 30 consolidated subsidiaries are consolidated as of each subsidiary’s latest year-end. Unusualsignificant transactions for the period between each subsidiary’s year-end and the Company’s year-end are
adjusted on consolidation.
(d) Elimination of inter-company transactions and accounts
All significant inter-company transactions and accounts and unrealized inter-company profits are eliminatedon consolidation, and the portion thereof attributable to minority interests is credited to minority interests.
In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries, including the
portion attributable to minority shareholders, are evaluated using the fair value at the time the Company
acquired control of the respective subsidiaries.
(e) Foreign currency translation
Receivables and payables denominated in foreign currencies are translated into Japanese yen at the
year-end rate.

40 | Kawasaki Heavy Industries, Ltd.

Balance sheets of consolidated overseas subsidiaries are translated into Japanese yen at the year-end rate
except for shareholders’ equity accounts, which are translated at the historical rates. Income statements ofconsolidated overseas subsidiaries are translated at average rates except for transactions with the Company,
which are translated at the rates used by the Company.
The Company and its domestic subsidiaries report foreign currency translation adjustments in shareholders’ equity (and minority interests).

(f ) Appropriations of retained earnings
Appropriations of retained earnings are recorded in the fiscal year when the proposed appropriations areapproved.
(g ) Revenue recognition
Sale of products and construction contracts
Sales of products such as ships, railcars, airplanes, machinery, motorcycles etc. are principally recognizedwhen delivery has occurred. Contract revenue for construction of plants, machinery, bridges etc. is principally
recognized on a customer acceptance basis. When prices for components or contract amounts for nearlycompleted contracts are not finalized, sales and cost of sales are estimated. The percentage-of-completion
method is applied to long-term contracts such as for ships, airplanes, plants etc. exceeding ¥3,000 million.
The stage of completion is normally determined based on the proportion that costs incurred to date bearto the estimated total costs of the contract. Expected losses on such contracts are also recognized on thepercentage-of-completion basis. The completed-contract method is applied to long-term contracts notexceeding ¥3,000 million.
Effective April 1, 2004, the Company changed its accounting policy for the percentage-of-completion
method to be applied to long-term contracts exceeding ¥3,000 million. Previously, it had been applied tolong-term contracts exceeding ¥5,000 million.
The Company made this change in accounting policy for appropriate periodic accounting of profit andloss, by expanding the range of application of the percentage-of-completion method.
For the year ended March 31, 2005, as a result of this change, net sales increased ¥15,824 million($147,323 thousand). Operating income and income before income taxes and minority interests increased¥2,135 million ($19,877 thousand), compared with the amounts which would have been recognized under
the previous method of accounting.
Service revenue
Service revenues are recognized when services have been rendered. Services include supervisory or installation
services for products such as railcars, machinery, plants, etc. When the prices of such services are individually
determined by the contracts and the collectability of the revenue is reasonably assured, such service revenue
is recognized on an accrual basis. Otherwise, such service revenue is recognized on a completion basis.
( h) Cash and cash equivalents
In preparing the consolidated statements of cash flows, cash on hand, readily-available deposits and shortterm highly liquid and low risk investments with maturities not exceeding three months at the time ofpurchase are considered to be cash and cash equivalents.
(i) Allowance for doubtful receivables
The allowance for possible losses from notes and accounts receivable, loans and other receivables is provided for based on past experience rate and the Companies’ estimates of losses on collection.
( j) Inventories
Inventories are stated at cost, as determined principally by the specific identification cost method, the firstin, first-out method or the moving-average method.
( k) Assets and liabilities arising from derivative transactions
Assets and liabilities arising from derivative transactions are stated at fair value.
( l) Investments in securities
The Company and its consolidated domestic subsidiaries classify securities as (a) debt securities intended tobe held to maturity (hereafter, “held-to-maturity debt securities”), (b) equity securities issued by subsidiaries
and affiliated companies and (c) all other securities that are not classified in the above categories (hereafter,“available-for-sale securities”). There were no trading securities at March 31, 2006 and 2005.
Held-to-maturity debt securities are stated mainly at amortized cost. Equity securities issued by subsidiaries and affiliated companies, which are not consolidated or accounted for using the equity method, arestated at moving-average cost. Available-for-sale securities with available fair market values are stated at fairmarket value. Unrealized gains and unrealized losses on these securities are reported, net of applicable
income taxes, as a separate component of shareholders’ equity. Realized gains and losses on sale of suchsecurities are computed using moving-average cost.
Other securities with no available fair market value are stated at moving-average cost.

Annual Report 2006 | 41

If the market value of held-to-maturity debt securities, equity securities issued by non-consolidated
subsidiaries and affiliated companies and available-for-sale securities declines significantly, such securities
are stated at fair market value and the difference between fair market value and the carrying amount isrecognized as loss in the period of the decline. If the fair market value of equity securities issued by nonconsolidated subsidiaries and affiliated companies, not subject to the equity method, is not readily available,
such securities should be written down to net asset value with a corresponding charge in the statements ofincome in the event net asset value declines significantly. In these cases, such fair market value or the net
asset value will be the carrying amount of the securities at the beginning of the next year.

(m) Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation (except buildings acquired after April 1998 in
Japan) is mainly computed on a declining-balance basis over estimated useful lives. Depreciation of buildings
acquired after April 1998 in Japan is computed on a straight-line basis over estimated useful lives.
(n) Intangible assets
Amortization of intangible assets that include software for the Company’s own use is computed on astraight-line method over estimated useful lives.
Goodwill is amortized over 5 years on a straight-line basis. If the amount is not significant, it is expensed
when incurred.
(o) Impairment of fixed assets
Effective April 1, 2005, the Company and its domestic consolidated subsidiaries adopted a new accounting
standard for impairment of fixed assets (“Opinion on Establishment of Accounting Standard for Impairmentof Fixed Assets” issued by the Business Accounting Deliberation Council on August 9, 2002) and a guidanceon accounting standard for impairment of fixed assets (the “Financial Accounting Standard Guidance No. 6”
issued by the Accounting Standards Board of Japan on October 31, 2003).
As a result of adopting the accounting standard and the guidance, income before income taxes andminority interests decreased ¥3,008 million ($25,607 thousand). Accumulated impairment losses are deductedfrom book values of related fixed assets.
(p) Accrued bonuses
Accrued bonuses for employees are reasonably estimated.
(q) Provision for product warranty
Provision for product warranty is based on past experience and separately provided when reasonably
estimable.
(r) Provision for restructuring of the commercial aircraft manufacturing businessThis provision is for estimated charges as the Company has reached a basic agreement with respect topartial transfer of its manufacturing work on “EMBRAER 190” airplanes to Embraer—Empresa Brasileira de
Aeronáutica S.A., which is the Brazilian co-developer of the airplane.
(s) Provision for losses on construction contracts
The provision for losses on uncompleted construction contracts at the fiscal year-end is made when substantial losses are anticipated for the next fiscal year and later and such losses can be reasonably estimated.
(t) Income taxes
The asset and liability approach is used to recognize deferred tax assets and liabilities for loss carryforwards
and the expected future tax consequences of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes.
(u) Employee’s retirement and severance benefits
Employees who terminate their services with the Company and its domestic consolidated subsidiaries are
generally entitled to lump-sum payments, the amounts of which are determined by reference to their current
basic rates of pay and length of service.
The liabilities and expenses for retirement and severance benefits are determined based on the amounts
actuarially calculated using certain assumptions. The Company and its domestic consolidated subsidiaries
provided the allowance for employees’ retirement and severance benefits based on the estimated amounts
of projected benefit obligation and fair value of plan assets (including retirement benefit trust).
The excess of the projected benefit obligation over the liabilities for retirement and severance benefits
recorded as of April 1, 2000 (the “net transition obligation”) is being recognized in expenses in equalamounts primarily over 10 years commencing with the year ended March 31, 2001. Actuarial gains and losses
and prior service costs are recognized in expenses in equal amounts, within the average of the estimatedremaining service lives of the employees, commencing with the following and the current period, respectively.
Employees of the Company’s overseas consolidated subsidiaries are generally covered by various pension
plans, accounted for in accordance with generally accepted accounting principles in the country of domicile.

42 | Kawasaki Heavy Industries, Ltd.

With corporate separation of the crushing machinery business on April 1, 2005, the Company provided theallowance for retirement and severance benefits to fully amortize net transition obligation for employees ofcrushing machinery business in the amount of ¥1,315 million ($12,243 thousand).

(v) Hedge accounting
The Company and its consolidated subsidiaries employ deferred hedge accounting. If derivative financial
instruments are used as hedges and meet certain hedging criteria, the Company and its consolidated
subsidiaries defer recognition of gains or losses resulting from changes in fair value of derivative financial
instruments until the related losses or gains on the hedged items are recognized.
(w) Finance leases
For the Company and its domestic consolidated subsidiaries, finance leases that do not transfer ownershipand do not have bargain purchase provisions are accounted for in the same manner as operating leases inaccordance with Japanese GAAP.
(x) Earnings per share
The computations of earnings per share shown in the consolidated statements of income are based upon
net income available to common stockholders and weighted average number of shares outstanding during
each period.
Diluted earnings per share is computed based on the assumption that all dilutive convertible bonds wereconverted at the beginning of the year.
(y) Cash dividends
Per share amounts of cash dividends for each period represent dividends declared as applicable to therespective year.
(z) Reclassifications
Certain prior year amounts have been reclassified to conform to the 2006 presentation. These changes had
no impact on previously reported results of operations or shareholders’ equity.

3. Inventories

Inventories as of March 31, 2006 and 2005 are comprised as follows:
Millions of yen
2006
2005

Finished products .............................................................................................. ¥ 73,346
Work in process .................................................................................................. 250,542
Raw materials and supplies ...............................................................................
59,129Total .................................................................................................... ¥383,017

4. Securities¥ 58,716
222,919
50,698¥332,333

Thousands of
U.S. dollars
2006$ 624,381
2,132,817
503,354$3,260,552(a) Acquisition costs and book values (fair values) of available-for-sale securities with available fair values as ofMarch 31, 2006 and 2005 were as follows:
Thousands of
U.S. dollars

Millions of yen
2006

Securities with book values exceeding acquisition costs:
Equity securities .....................................................................
Other securities:
Equity securities .....................................................................
Total ............................................................................................

Acquisition
cost

Book value

Difference

Difference¥7,553¥31,378¥23,825$202,818

107¥7,66080¥31,458(27)¥23,798(230)$202,588

Millions of yen
2005

Securities with book values exceeding acquisition costs:
Equity securities ....................................................................
Other securities:
Equity securities ....................................................................
Total ...........................................................................................

Acquisition
cost

Book value

Difference¥13,200¥42,302¥29,102450¥13,650355¥42,657(95)¥29,007

Annual Report 2006 | 43

(b) Acquisition costs and book values of held-to-maturity debt securities with available fair values as of March 31,
2006 were as follows:
Thousands of
U.S. dollars

Millions of yen
2006

Securities with book values exceeding acquisition costs:
Bonds .......................................................................................

Acquisition
cost

Book value

Difference

Difference

¥303

¥293

¥(10)

$(85)

(c) Book values of investments in securities with no available fair values as of March 31, 2006 and 2005 wereas follows:

Held-to-maturity debt securities:
Non-listed securities ..................................................................................
Available-for-sale securities:
Equity securities .........................................................................................
Other ...........................................................................................................
Total ................................................................................................................
Equity securities issued by non-consolidated subsidiaries
and affiliated companies:
Subsidiaries ................................................................................................
Affiliated companies ..................................................................................
Total ................................................................................................................

Millions of yen
2006
2005
Book value
Book value

Thousands of
U.S. dollars
2006Book value

¥

$

3

¥

3

26

9,357
6,722
¥16,079

9,209
5,044
¥14,253

79,65557,223$136,878

¥

¥

$

97
5,905
¥ 6,002

94,415¥ 4,424

826
50,268$ 51,094(d) Sales amounts of available-for-sale securities and related gains and losses for the years ended March 31,
2006, 2005 and 2004 were as follows:
Thousands of
U.S. dollars

Millions of yen
2006
Sales
amounts

Gains

LossesSalesamounts

Equity securities ............................................................. ¥6,319¥4,398¥(18)$53,792

Gains

Losses$37,439 $(153)

Millions of yen
2005

Equity securities .............................................................

Sales
amounts

Gains

Losses¥5,341¥3,791¥(1)Millions of yen
2004

Equity securities .............................................................

Sales
amounts

Gains

Losses¥1,750¥930¥(245)

5. Investments in
non-consolidated
subsidiaries
and affiliates

Investments in non-consolidated subsidiaries and affiliates as of March 31, 2006 and 2005 were ¥19,291 million($164,221 thousand) and ¥12,857 million, respectively.

6. Goodwill

Goodwill included in intangible and other assets was as follows:
Millions of yen
2006
2005

..................................................................................................................................... ¥1,085

44 | Kawasaki Heavy Industries, Ltd.

¥1,702Thousands of
U.S. dollars
2006$9,236

7. Short-termborrowings andlong-term debt

Short-term borrowings and long-term debt as of March 31, 2006 and 2005 were comprised as follows:
Millions of yen
2006
2005

Short-term borrowings:
Short-term debt, principally bank loans, bearing averageinterest rates of 2.325 percent and 1.823 percent as ofMarch 31, 2006 and 2005, respectively ...................................................
Current portion of long-term debt, bearing averageinterest rates of 1.723 percent and 1.613 percent as ofMarch 31, 2006 and 2005, respectively ...................................................
Total short-term debt ............................................................................
Long-term debt:
Loans from banks and other financial institutions, partly securedby mortgage or other collateral, due from 2005 to 2035,
bearing average interest rates of 1.175 percent and 1.322 percent
as of March 31, 2006 and 2005, respectively .........................................
Notes and bonds issued by the Company:
1.50–1.67 percent notes due 2005 ....................................................
1.87 percent notes due 2006 .............................................................
2.00 percent notes due 2007 .............................................................
2.51–2.775 percent notes due 2008 ..................................................
1.07–2.33 percent notes due 2009 ....................................................
1.60 percent notes due 2011..............................................................
0.75 percent convertible bonds due 2005 .......................................
1.10 percent convertible bonds due 2006 .......................................
0.90 percent convertible bonds due 2008 .......................................
1.00 percent convertible bonds due 2011 .......................................
Zero coupon convertible bonds due 2010* .....................................
Zero coupon convertible bonds due 2011* .....................................
Notes issued by subsidiaries:
1.31 percent notes due 2006 .............................................................
..............................................................................................................................
Less portion due within one year ..............................................................
Total long-term debt .............................................................................

Thousands of
U.S. dollars
2006¥113,758¥106,096$ 968,400

48,988¥162,746

40,509¥146,605

417,026$1,385,426¥ 73,865¥ 74,502$ 628,799—
10,00010,00020,00020,00010,000—17,118
7,520
7,039
5,868
22,635

10,00010,00010,00020,00020,00010,0009,609
17,1187,520
7,039
25,00025,000—85,12885,128170,256
170,256
85,128—145,723
64,01659,922
49,953
192,6882,000
206,045(48,988)¥157,057

2,000
247,788(40,509)¥207,279

17,026
1,754,023(417,026)$1,336,997*All the decreases in the zero coupon convertible bonds due 2010 and 2011 in the year ended March 31, 2006
resulted from conversions.

The convertible bonds due 2006 through 2011 as of March 31, 2006 were convertible into 298,177,218
shares of common stock at the option of the holders at prices of ¥459 ($3.91), ¥598 ($5.09), ¥182 ($1.55) or¥232 ($1.97) per share. The conversion prices are subject to adjustments under specified conditions.
As of March 31, 2006 and 2005, the following assets were pledged as collateral for short-term borrowings
and long-term debt:
Millions of yen
2006
2005

Inventories .............................................................................................................. ¥—Land ......................................................................................................................... 2,279
Buildings ................................................................................................................. 3,416
Machinery and equipment ....................................................................................
—
Other investments ..................................................................................................
318
Total ........................................................................................................ ¥6,013¥ 8,861
2,774
3,932
186
45
¥15,798

Thousands of
U.S. dollars
2006

$
—
19,401
29,080—2,707$51,188

As of March 31, 2006 and 2005, debt secured by the above pledged assets was as follows:
Millions of yen
2006
2005

Trade payables ....................................................................................................... ¥ 58
Short-term and long-term debt ............................................................................ 7,680
Total ........................................................................................................ ¥7,738¥ 105
19,890¥19,995

Thousands of
U.S. dollars
2006

$ 494
65,378$65,872

Annual Report 2006 | 45

The aggregate annual maturities of long-term debt as of March 31, 2006 were as follows:Year ending March 31,

Millions of yen

2007 ............................................................................................................................................. ¥ 48,988
2008 .............................................................................................................................................
31,9532009 .............................................................................................................................................
24,9972010 .............................................................................................................................................
30,0482011 and thereafter ....................................................................................................................
70,059Total ................................................................................................................................ ¥206,045

8. Employees’
retirement andseverance benefits

Thousands of
U.S. dollars$ 417,026
272,010
212,795
255,793596,398$1,754,022

The liabilities for employees’ retirement and severance benefits included in the liability section of the consolidated balance sheets as of March 31, 2006 and 2005 consisted of the following:Thousands of
U.S. dollars
2006

Millions of yen
2006
2005

Projected benefit obligation ............................................................................ ¥ 190,774
Unrecognized prior service costs .....................................................................
18,366
Unrecognized actuarial differences .................................................................
13,430Less fair value of pension assets ...................................................................... (105,083)
Less unrecognized net transition obligation ..................................................
(50,101)
Prepaid pension cost ........................................................................................
1,727
Liability for retirement and severance benefits .......................................... ¥ 69,113¥185,116
20,529(4,282)(66,706)(62,953)813¥ 72,517$1,624,023
156,346
114,327(894,552)(426,500)
14,702$ 588,346

The amount of net transition obligation of retirement and severance benefits for employees of crushingmachinery business was fully amortized in the year ended March 31, 2005.
Retirement and severance benefit expenses in the consolidated statements of income for the years ended
March 31, 2006, 2005 and 2004 were comprised as follows:
2006

Service costs—benefits earned during the year ......................... ¥ 8,548
Interest cost on projected benefit obligation .............................
4,512
Expected return on plan assets ....................................................
(860)
Amortization of actuarial differences ...........................................
1,664
Amortization of prior service costs ..............................................
(2,248)
Amortization of net transition obligation .................................... 12,989
Contribution to the defined contribution pension plans ...........
367
Retirement and severance benefit expenses .......................... ¥24,972

Millions of yen
2005

2004

Thousands of
U.S. dollars
2006¥ 8,742
4,854
(799)
1,932
(1,720)13,969273¥27,251¥ 9,091
5,862
(751)
2,780
(783)
13,342—¥29,541$ 72,768
38,410(7,321)
14,165(19,137)
110,573
3,124$212,582“Amortization of actuarial differences” and “Amortization of net transition obligation” in the year ended
March 31, 2005 include full amortization of the net transition obligation of retirement and severance benefits
for employees of the crushing machinery business.
Basic assumptions and information used to calculate the retirement and severance benefits were as follows:....................................................................................................................................

2006

Discount rate ....................................................................................
mainly 2.5%
Expected rate of return on plan assets(For the Company and consolidated domestic subsidiaries) ...
0.0 to 3.5%
(For consolidated overseas subsidiaries) ..................................
7.75%
Amortization period for prior service costs .................................. 10 to 15 years
Amortization period for actuarial gains and losses ...................... 10 to 15 years
Amortization period for transition obligation ............................... mainly 10 years

2005

2004

mainly 2.5%

mainly 2.5%

0.0 to 3.5%
8.0%
10 to 15 years
10 to 15 years
mainly 10 years

0.0 to 3.5%
8.0%
10 to 15 years
10 to 15 years
mainly 10 years

Effective fiscal year 2004, the Company and certain of its consolidated subsidiaries partly introduced
defined contribution pension plans and cash balance pension plans.

9. Contingent liabilities

Contingent liabilities as of March 31, 2006 and 2005 were as follows:
Millions of yen
2006
2005

As drawer of trade notes discounted ................................................................. ¥84
As endorser of trade notes ..................................................................................
—
As guarantor of indebtedness of employees, unconsolidated
subsidiaries and affiliates, and others .............................................................. 23,903
As issuer of 1.67 percent notes due 2005* .........................................................
—

¥

85
75

21,256
10,000Thousands of
U.S. dollars
2006

$

715
—

203,482—*Based on a debt assumption agreement with a financial institution, the Company transferred the debt repayment
obligation for 1.67 percent notes due 2005 to the financial institution in the year ended March 31, 2005.
46 | Kawasaki Heavy Industries, Ltd.

10. Shareholders’equity(a) Capital surplus
Under the Commercial Code of Japan, the entire amount of the issue price of shares is required to beaccounted for as capital, although a company may, by resolution of its Board of Directors, account for an
amount not exceeding one-half of the issue price of the new shares as additional paid-in capital, which isincluded in capital surplus.
The Commercial Code provides that an amount equal to at least 10 percent of cash dividends and othercash appropriations shall be appropriated and set aside as a legal earnings reserve until the total amount oflegal earnings reserve and additional paid-in capital equals 25 percent of common stock. The total amountof legal earnings reserve and additional paid-in capital of the Company has reached 25 percent of common
stock, and therefore the Company is not required to provide any more legal earnings reserve.
The legal earnings reserve and additional paid-in capital may be used to eliminate or reduce a deficit byresolution of the shareholders’ meeting or may be capitalized by resolution of the Board of Directors. On condition that the total amount of legal earnings reserve and additional paid-in capital remains being equal to or
exceeding 25 percent of common stock, they are available for distribution by the resolution of shareholders’meeting. Legal earnings reserve is included in retained earnings in the accompanying financial statements.
( b) Dividends
The maximum amount that the Company can distribute as dividends is calculated based on the nonconsolidated financial statements of the Company in accordance with the Commercial Code of Japan.
(c) Restrictions on dividends
Under the terms of indentures for certain convertible bonds due through 2007, cumulative cash dividend
payments by the Company are not to exceed an amount equivalent to accumulated net income of theCompany earned during the years such securities are outstanding plus ¥10,000 million.

11. Research anddevelopment
expenses

Research and development expenses, included in selling, general and administrative expenses, were as follows:
2006

Research and development expenses ............................................. ¥27,040

Millions of yen
2005

2004

Thousands of
U.S. dollars
2006¥13,183¥14,741$230,186

Through the year ended March 31, 2005, expenses to develop new models in the Consumer Product andMachinery business had not been presented as research and development expenses. However, as the proportion of the business in the Company grew, the Company decided to include such expenses in researchand development expenses commencing in the year ended March 31, 2006 to improve the usefulness forthe readers’ decision making and comparability of the financial statements.
As a result of this change, research and development expenses increased ¥14,417 million ($122,729 thousand). Applied retroactively for the year ended March 31, 2005, research and development expenses would
have been ¥26,460 million ($225,249 thousand) under the new recording method.

12. Other income(expenses):other, net

Other income (expenses): other, net in the consolidated statements of income is comprised as follows:
2006

Gain on sales of marketable securities and investments
in securities ...................................................................................... ¥ 4,380
Gain on sales of property, plant and equipment ...........................
—
Gain on sales of subsidiaries’ shares ...............................................
277
Foreign exchange gain (loss), net ...................................................
(8,901)
Loss on disposal of inventories .......................................................
—
Amortization of certain subsidiaries’ net transition obligationof retirement and severance benefits ...........................................
—
Loss on reorganization of crushing machinery business ...............
—
Additional costs of plant construction ............................................
—
Loss on business reorganization .....................................................
—
Loss on factory closure .....................................................................
—
Gain on contribution of securities to the pension trust (a) ............
12,901
Loss on the restructuring of the commercial aircraft
manufacturing business (b) ............................................................. (15,816)
Loss on impairment of fixed assets (c) .............................................
(3,008)Loss on cleaning of ground pollution (d) ........................................
(1,054)
Loss on breach of the Antimonopoly Act (e) ..................................
(731)
Loss on sales of subsidiaries’ shares ...............................................
(155)
Other, net ..........................................................................................
(4,039)Total ................................................................................... ¥(16,146)

Millions of yen
2005

2004

Thousands of
U.S. dollars
2006¥ 3,774
2,865—
166(2,141)

¥

918
1,150
117
(2,875)(1,702)$ 37,286—
2,358(75,773)—(205)(1,315)(1,825)
—
—
—

(205)
—
—
(754)
(1,206)
—

—
—
—
—
—
109,824—————(2,949)¥(1,630)—————(3,594)¥(8,151)(134,639)(25,607)(8,973)(6,223)(1,319)(34,382)$(137,448)

Annual Report 2006 | 47

(a) “Gain on contribution of securities to the pension trust” resulted from additional contributions of investment securities to the pension trust.
(b) Loss on the restructuring of the commercial aircraft manufacturing business
As the aerospace business has been receiving requests for sharp increases in production of commercial
aircraft including Boeing aircraft, the Company concluded it would be difficult to accept all of the requests.
As a result of reassessment of our corporate resources in this business, the Company reached a basic
agreement with respect to partial transfer of its manufacturing work on “EMBRAER 190” airplanes to
Embraer—Empresa Brasileira de Aeronáutica S.A., which is our Brazilian co-developer of the airplane.
This transfer gave rise to a loss of ¥15,816 million ($134,639 thousand) composed of expected charges on
us for the transfer, a loss on impairment of work in process and expenses regarding a subsidiary named
Kawasaki Aeronautica Do Brasil Industria Ltda. which is expected to be liquidated.
The amount of loss comprised the following:
Millions of yen

Thousands of
U.S. dollars¥ 6,977
6,259
2,580¥15,816$ 59,394
53,282
21,963$134,639

Expected charges on us for the transfer ...........................................................................
Loss on impairment of work in process .............................................................................
Expenses for liquidation of a subsidiary ...........................................................................
Total .....................................................................................................................

(c) Loss on impairment of fixed assets
Because profitability or market prices of some asset groups declined, the Company and its domestic
consolidated subsidiaries reduced the book value of such assets to the recoverable amounts.
Assets are grouped mainly by units of business and significant assets for rent or which are idling aretreated separately.
The recoverable amounts were measured by net sales value and the net sales value is estimated byappraisal or property tax assessment.
The asset groups for which the Company and subsidiaries recognized impairment losses for the year
ended March 31, 2006 were as follows:
Function or status

Assets for golf links
Idle assets

Location

Type of asset

Tomakomai city, Hokkaido
Chuo-ku, Kobe city etc.

Golf course and buildings, etc.
Land, etc.

The amounts of impairment losses consisted of the following:
Millions of yen

Thousands of
U.S. dollars

¥ 618
1,086
1,304
¥3,008$ 5,261
9,245
11,101$25,607Land........................................................................................................................................
Golf course ............................................................................................................................
Buildings, etc. ........................................................................................................................
................................................................................................................................................

(d) “Loss on cleaning of ground pollution” was due to the ground pollution at the former Yachiyo works.
(e) “Loss on breach of the Antimonopoly Act” is due to assessments etc. that The Fair Trade Commission ofJapan imposed on the Company with regard to bids of steel bridges.

13. Income taxes

Income taxes in Japan applicable to the Company and its domestic consolidated subsidiaries consist of corporation tax (national tax) and enterprise and inhabitants taxes (local taxes) which, in the aggregate, result innormal statutory tax rates of approximately 40.5 percent for the years ended March 31, 2006 and 2005.
The significant differences between the statutory and effective tax rates for the year ended March 31, 2006
are as follows:
2006

Statutory tax rate......................................................................................................................................................... 40.5%
Research and development tax credit ...................................................................................................................... (11.5)
Other............................................................................................................................................................................ (2.0)
Effective tax rate ......................................................................................................................................................... 27.0%

For the years ended March 31, 2005 and 2004, the differences were not significant.

48 | Kawasaki Heavy Industries, Ltd.

Significant components of deferred tax assets and liabilities as of March 31, 2006 and 2005 were as follows:
Millions of yen
2006
2005

Deferred tax assets:
Accrued bonuses ................................................................................................ ¥ 6,943
Retirement benefits ............................................................................................ 45,169
Allowance for doubtful receivables ..................................................................
1,706
Inventories—intercompany profits ...................................................................
4,536
Fixed assets—intercompany profits .................................................................
732
Depreciation .......................................................................................................
1,195
Net operating loss carryforwards ...................................................................... 10,246
Unrealized loss of marketable securities, investments
in securities and other ......................................................................................
2,977
Other ................................................................................................................... 19,189
Gross deferred tax assets .............................................................................. 92,693
Less valuation allowance ...............................................................................
(8,454)
Total deferred tax assets ............................................................................... 84,239
Deferred tax liabilities:
Deferral of gain on sale of fixed assets ............................................................
5,120
Net unrealized gain on securities ..................................................................... 10,600
Unrealized gain on uncompleted contracts .....................................................
155
Unrealized gain on contribution of securities to the pension trust ...............
5,996
Other ...................................................................................................................
5,628
Total deferred tax liabilities ........................................................................... 27,499
Net deferred tax assets ............................................................................. ¥56,740

Thousands of
U.S. dollars
2006¥ 6,081
34,255
3,458
3,383
964
1,319
9,274

$ 59,105
384,515
14,52338,614
6,231
10,17387,222

1,275
6,189
66,198(7,166)59,032

25,343
163,352
789,078(71,967)
717,111

5,065
11,444576—
4,765
21,850¥37,182

43,586
90,236
1,319
51,043
47,910234,094$483,017

14. Retained earnings(“other”)

This decrease of retained earnings for the year ended March 31, 2006, mainly resulted from the cumulative
effect of a new accounting standard in the United Kingdom regarding the unrecognized pension liability ofa subsidiary, Kawasaki Precision Machinery (U.K.) Limited.

15. Additional
payment ofconstruction
cost

Additional payment of construction cost in the consolidated statements of cash flows was caused by thecompensation mainly for delay of plant construction.

16. Reimbursementof overcharged
accounts receivable

Reimbursement of overcharged accounts receivable in the consolidated statements of cash flows was madeby NIPPI Corporation, a consolidated subsidiary, under contracts mainly with the Japan Defense Agency.

17. Significant
non-cashtransactions

The increases in common stock and capital surplus and the decrease of the convertible bonds due to conversion of convertible bonds in the year ended March 31, 2006 was as follows:
Millions of yen

Increase of common stock due to conversion .......................................................................... ¥10,658
Increase of capital surplus due to conversion ........................................................................... 10,658
Decrease of the convertible bonds due to conversion ............................................................ 21,497

Thousands of
U.S. dollars$ 90,729
90,729183,000

The sum of the increases of common stock and capital surplus differed from decrease of the convertible
bonds because the Company provided the bondholders with treasury stock instead of the issuance of
new shares.

18. Derivativetransactions

Since the Company and its consolidated subsidiaries operate internationally and have a substantial volume
of export and import transactions, they enter into foreign currency exchange and option transactions inorder to manage the risks of fluctuations in exchange rates in relation to foreign currency denominatedassets, liabilities and future transactions.
The Company and its consolidated subsidiaries also enter into interest swap and option transactions tohedge against future fluctuations in interest rates on borrowings, primarily to fix, cap or collar interest rates
on variable rate debt.
The Company and its consolidated subsidiaries’ purpose for purchasing derivatives is to hedge against
risks of fluctuations in currency exchange rates and interest rates rather than to be exposed to such risks
through dealing or speculation.
Annual Report 2006 | 49

For derivative transactions that meet the conditions for hedge accounting, the Company and its consolidated subsidiaries apply hedge accounting principles. Derivative transactions that meet the conditions forhedge accounting are required to be disclosed.
In order to minimize credit risk, the Company and its consolidated subsidiaries use only highly-rated
international financial institutions as counterparties to derivative transactions.
The Company and its consolidated subsidiaries have established policies that restrict the use of derivative
instruments, including limits as to the purpose, nature, type and amount, and that require reporting andreview in order to control the use of derivatives and manage risk.
(a) Outstanding positions and recognized gains and losses at March 31, 2006 are as follows:
Contract
amountCurrency related contracts:
Foreign exchange contracts:
To sell .......................................................................................... ¥72,195
To purchase ................................................................................
897
Option contracts:
To sell ..........................................................................................
To purchase ................................................................................
Total .................................................................................................

1,379
1,350

Millions of yen
Marketvalue

Gain(loss)

Thousands of
U.S. dollars
Gain(loss)¥75,141935¥(2,946)
38$(25,078)
323

47
0

(18)
(29)
¥(2,955)

(153)
(247)
$(25,155)(b) Outstanding positions and recognized gains and losses at March 31, 2005 are as follows:
Contract
amountCurrency related contracts:
Foreign exchange contracts:
To sell ........................................................................................... ¥79,799
To purchase .................................................................................
1,542
Option contracts:
To sell ...........................................................................................
To purchase .................................................................................
Total ..................................................................................................

19. Finance leases

2,425
2,340

Millions of yen
Marketvalue

Gain(loss)¥81,0131,554¥(1,214)
12

40
8

7
(39)
¥(1,234)

Finance lease information, as required to be disclosed in Japan, for the respective years is as follows:(a) As lessee
The original costs of leased assets under non-capitalized finance leases and accumulated depreciation,
assuming they are calculated on the straight-line method over lease terms, as of March 31, 2006 and 2005
were as follows:
Millions of yen
2006
2005

Thousands of
U.S. dollars
2006

Property, plant and equipment ........................................................................... ¥ 27,670
Accumulated depreciation ................................................................................... (12,079)................................................................................................................................. ¥ 15,591¥ 25,149(11,602)¥ 13,547$ 235,550(102,826)$ 132,724

Intangible assets ................................................................................................... ¥ 1,351
Accumulated amortization ...................................................................................
(936)................................................................................................................................. ¥415¥ 1,636(1,070)¥566$ 11,501(7,968)$ 3,533

The present values of future minimum lease payments under non-capitalized finance leases as of March
31, 2006 and 2005 are as follows:
Millions of yen
2006
2005

Current portion ...................................................................................................... ¥ 4,454
Non-current portion ............................................................................................... 12,446
Total ............................................................................................................ ¥16,900

50 | Kawasaki Heavy Industries, Ltd.

¥ 4,381
10,693¥15,074

Thousands of
U.S. dollars
2006$ 37,916
105,951$143,867

Lease payments and “as if capitalized” depreciation and amortization and interest expense for noncapitalized finance leases were as follows:
2006

Lease payments ....................................................................................... ¥4,789
Depreciation and amortization .............................................................. 4,469
Interest ......................................................................................................
325

Millions of yen
2005

2004

Thousands of
U.S. dollars
2006¥5,034
4,685
384¥5,1094,762
431$40,768
38,0442,767(b) As lessor
The original costs of leased assets under finance leases and accumulated depreciation, as of March 31, 2006
and 2005 were as follows:
Millions of yen
2006
2005

Thousands of
U.S. dollars
2006

Property, plant and equipment ................................................................................ ¥ 1,629
Accumulated depreciation ....................................................................................... (1,061)..................................................................................................................................... ¥ 568¥1,498(947)¥ 551$13,867(9,032)$ 4,835

Intangible assets ........................................................................................................ ¥Accumulated amortization .......................................................................................
..................................................................................................................................... ¥

¥ 102
(78)
¥ 24

$

65
(41)
24

$

553
(349)
204

The present values of future minimum lease payments to be received under finance leases as of March 31,
2006 and 2005 are as follows:
Millions of yen
2006
2005

Current portion ........................................................................................................... ¥ 428
Non-current portion ...................................................................................................
730
Total ............................................................................................................. ¥1,158

¥ 470
727
¥1,197

Thousands of
U.S. dollars
2006$3,6446,214$9,858

Lease payments received, depreciation and amortization and interest on finance leases were as follows:
2006

Lease payments received ........................................................................... ¥295
Depreciation and amortization .................................................................. 263
Interest .........................................................................................................
27

20. Operating leases

Millions of yen
2005

2004

Thousands of
U.S. dollars
2006

¥311
265
30

¥328
288
41

$2,511
2,239
230

The present values of future minimum lease payments under operating leases as of March 31, 2006 and 2005
are as follows:
Millions of yen
2006
2005

Current portion ........................................................................................................... ¥ 454
Non-current portion ...................................................................................................
718
Total ............................................................................................................. ¥1,172

21. Segment
information

¥ 395
1,024
¥1,419Thousands of
U.S. dollars
2006$3,865
6,112$9,977

Industry segments of the Company and its consolidated subsidiaries are classified based on its internal company system: 1) Shipbuilding, 2) Rolling Stock, Construction Machinery & Crushing Plant, 3) Aerospace, 4) Gas
Turbines & Machinery, 5) Plant & Infrastructure Engineering, 6) Consumer Products & Machinery, and 7) Other.
The Shipbuilding segment manufactures and sells ships, submarines and maritime application equipment.
Operations within the Rolling Stock, Construction Machinery & Crushing Plant segment include the production and sale of rolling stock, construction machines and crushing plants. Products manufactured and soldby the Aerospace segment include airplanes and helicopters. The Gas Turbines & Machinery segment
manufactures and sells gas turbines, airplane engines and prime movers. Operations within the Plant &Infrastructure Engineering segment include the production and sale of boilers, chemical and cement plants,
refuse incineration plants and steel bridges. Products manufactured and sold by the Consumer Products &Machinery segment include motorcycles, ATVs (All-Terrain Vehicles) and Jet Ski® watercraft. Operations
within the Other segment include the production and sale of hospital respiration & medical equipment
and hydraulic components. The operations also involve trade, mediation of overseas sales and orders andother activities.

Annual Report 2006 | 51

(a) Information by industry segment
External
sales

Shipbuilding ........................................... ¥ 109,697
Rolling Stock & Construction
Machinery .............................................
168,306
Aerospace ...............................................
218,533
Gas Turbines & Machinery ....................
161,431
Plant & Infrastructure Engineering .......
164,506
Consumer Products & Machinery .........
366,960
Other .......................................................
133,054
Total .................................................... 1,322,487
Eliminations and corporate ...................
—
Consolidated total ............................. ¥1,322,487

External
sales

Shipbuilding ............................................. ¥ 87,081
Rolling Stock, Construction
Machinery & Crushing Plant .................
171,731
Aerospace ................................................
188,255
Gas Turbines & Machinery .....................
141,366
Plant & Infrastructure Engineering .........
191,012
Consumer Products & Machinery ..........
338,450
Other ........................................................
123,697
Total ...................................................... 1,241,592
Eliminations and corporate ....................
—
Consolidated total .............................. ¥1,241,592

External
sales

Shipbuilding ............................................. ¥ 94,939
Rolling Stock, Construction
Machinery & Crushing Plant .................
120,597
Aerospace ................................................
173,783
Gas Turbines & Machinery .....................
136,468
Plant & Infrastructure Engineering .........
191,412
Consumer Products & Machinery ..........
318,325
Other ........................................................
124,728
Total ...................................................... 1,160,252
Eliminations and corporate ....................
—
Consolidated total .............................. ¥1,160,252

External
sales

Millions of yen
2006
OperatingOperatingexpenses
income (loss)

Intersegment
sales

Total
sales

¥ 1,428¥ 111,125¥ 112,833¥ (1,708) ¥ 105,210¥ 2,700¥ 1,990917
2,013
16,937
20,972
6,759
46,75895,784(95,784)¥—

169,223
220,546
178,368
185,478
373,719
179,812
1,418,271(95,784)¥1,322,487

160,419
210,845
171,564
193,972
353,819
173,154
1,376,606(95,914)¥1,280,692

8,804
179,478
9,701
268,871
6,804
140,900(8,494)135,448
19,900280,972
6,658
168,334
41,665
1,279,213
130
4,872¥41,795 ¥1,284,085

2,350
5,295
2,804
1,859
11,0202,747
28,775
1,776¥30,551

3,272
12,113
2,893
733
15,4804,227
40,708
1,016¥41,724

Intersegment
sales

Total
sales

Millions of yen
2005
OperatingOperatingexpenses
income (loss)

88,206¥¥ 1,125

¥

1,445
1,960
19,75815,353
5,036
43,25487,931(87,931)¥—

173,176
190,215
161,124
206,365
343,486
166,951
1,329,523(87,931)¥1,241,592

Intersegment
sales

¥

976

2,950
1,713
14,95812,882
3,982
42,03979,500(79,500)¥—

Intersegment
sales

¥

Depreciation
Capitaland amortization expenditures¥ 1,031¥ 100,996¥ 2,359¥ 1,630

165,424
184,130
158,443
220,823
326,784
161,939
1,304,718(87,870)¥1,216,848

7,752
6,085
2,681
(14,458)
16,702
5,012
24,805(61)¥ 24,744

157,419
223,010124,063
153,685
253,958
156,040
1,169,171
25,302¥1,194,473

2,437
5,221
2,971
1,942
11,8652,714
29,5092,046¥31,555

2,629
8,163
2,374
640
10,191
3,370
28,997695¥29,692

Total
sales

95,915

¥

Total
sales

Total
assetsDepreciation
Capitaland amortization expenditures

87,175

Millions of yen
2004
OperatingOperatingexpenses
income (loss)

123,547
175,496
151,426
204,294322,307
166,767
1,239,752(79,500)¥1,160,252

Total
assetsTotal
assetsDepreciation
Capitaland amortization expenditures

98,276¥ (2,361)¥

89,850¥ 2,442¥ 5,294

119,225
171,252
146,890203,075
315,057
163,520
1,217,295(79,293)¥1,138,002

4,322
4,244
4,536
1,219
7,250
3,247
22,457(207)¥22,250

127,786
221,960
124,065
177,888
240,242
138,803
1,120,594
36,310¥1,156,904

2,612
4,959
2,962
2,019
12,422
2,709
30,1252,465¥32,590

3,393
9,030
2,955
1,105
15,016
2,053
38,846
2,656¥41,502

Thousands of U.S. dollars
2006
OperatingOperatingexpenses
income (loss)

Total
assets

Shipbuilding ......................................... $ 933,830 $ 12,156 $ 945,986 $ 960,526 $ (14,540) $ 895,633
Rolling Stock & Construction
Machinery ...........................................
1,432,757
7,806
1,440,563
1,365,617
74,946
1,527,862
Aerospace ............................................
1,860,330
17,137
1,877,467
1,794,884
82,583
2,288,848
Gas Turbines & Machinery ..................
1,374,232
144,181
1,518,413
1,460,492
57,921
1,199,455
Plant & Infrastructure Engineering .....
1,400,409
178,531
1,578,940
1,651,247(72,307) 1,153,043
Consumer Products & Machinery .......
3,123,861
57,5383,181,399
3,011,995 169,404
2,391,862
Other .....................................................
1,132,664
398,042
1,530,706
1,474,027
56,6791,432,996
Total .................................................. 11,258,083
815,391 12,073,474 11,718,788 354,686 10,889,699
Eliminations and corporate .................
—(815,391)(815,391)(816,498)
1,107
41,475
Consolidated total ........................... $11,258,083 $— $11,258,083 $10,902,290 $355,793 $10,931,174

Depreciation
Capitaland amortization expenditures$ 22,985$ 16,940

20,00545,07523,87015,825
93,811
23,385244,956
15,119$260,075

27,854
103,116
24,6286,240
131,778
35,984
346,540
8,649$355,189

Effective April 1, 2004, the Company changed its accounting policy for the percentage-of-completion method to be applied to longterm contracts exceeding ¥3,000 million. Previously, it had been applied to long-term contracts exceeding ¥5,000 million. As a result of
this change, in Aerospace, External sales and Total sales increased ¥3,635 million and Operating income increased ¥363 million. In Plant& Infrastructure Engineering, External sales and Total sales increased ¥12,189 million and Operating loss decreased ¥1,772 million in theyear ended March 31, 200552 | Kawasaki Heavy Industries, Ltd.

(b) Information by geographic area
External
sales

Japan ............................................. ¥ 986,266
North America ..............................
222,477
Europe ...........................................
80,818Asia ................................................
24,800
Other areas ...................................
8,126
Total ........................................... 1,322,487
Eliminations and corporate .........
—
Consolidated total .................... ¥1,322,487

External
sales

Japan ............................................... ¥ 936,237
North America ................................
196,840
Europe ............................................
78,027
Asia ..................................................
25,145
Other areas .....................................
5,343
Total ............................................ 1,241,592
Eliminations and corporate ...........
—
Consolidated total ..................... ¥1,241,592

External
sales

Japan ............................................... ¥ 877,222
North America ................................
187,216Europe ............................................
70,951
Asia ..................................................
19,756
Other areas .....................................
5,107
Total ............................................ 1,160,252
Eliminations and corporate ...........
—
Consolidated total ..................... ¥1,160,252

External
sales

Intersegment
sales¥ 247,228
16,588
4,053
16,975141284,985(284,985)¥—

Intersegment
sales¥ 208,048
15,212
3,835
15,89899
243,092(243,092)¥—

Intersegment
sales¥ 182,132
15,267
4,595
13,942
88
216,024(216,024)¥—

Intersegment
sales

Millions of yen
2006
Total
Operatingsales
expenses¥1,233,494
239,065
84,871
41,775
8,267
1,607,472(284,985)¥1,322,487¥1,192,245
237,651
83,30840,3158,893
1,562,412(281,720)¥1,280,692

Millions of yen
2005
Total
Operatingsales
expenses¥1,144,285
212,052
81,862
41,043
5,442
1,484,684(243,092)¥1,241,592¥1,123,267
210,805
81,44839,1715,818
1,460,509(243,661)¥1,216,848

Millions of yen
2004
Total
Operatingsales
expenses¥1,059,354
202,483
75,546
33,6985,195
1,376,276(216,024)¥1,160,252¥1,038,482
202,886
74,91233,062
5,345
1,354,687(216,685)¥1,138,002

Thousands of U.S. dollars
2006
Total
Operatingsales
expenses

Operatingincome (loss)

Total
assets¥41,249
1,414
1,563
1,460
(626)
45,060(3,265)¥41,795¥1,074,688
159,169
63,25424,285
7,324
1,328,720(44,635)¥1,284,085

Operatingincome (loss)

Total
assets¥21,018
1,247
414
1,872
(376)
24,175569¥24,744¥ 996,923
127,798
57,21820,252
3,664
1,205,855(11,382)¥1,194,473

Operatingincome (loss)

Total
assets¥20,872
(403)
634
636
(150)
21,589661¥22,250¥ 975,129
115,262
46,762
19,4202,846
1,159,419(2,515)¥1,156,904

Operatingincome (loss)

Total
assetsJapan ........................................... $ 8,395,897 $ 2,104,605 $10,500,502 $10,149,357 $351,145 $ 9,148,617
North America ............................
1,893,905
141,2112,035,116
2,023,079
12,037
1,354,976
Europe .........................................
687,988
34,503
722,491
709,185
13,306
538,469
Asia ..............................................
211,118
144,505
355,623
343,194
12,429206,733
Other areas .................................
69,175
1,200
70,37575,704(5,329)62,348
Total ......................................... 11,258,083
2,426,024 13,684,107 13,300,519
383,588 11,311,143
Eliminations and corporate .......
— (2,426,024) (2,426,024) (2,398,229)(27,795)(379,969)
Consolidated total .................. $11,258,083 $— $11,258,083 $10,902,290 $355,793 $10,931,174

Effective April 1, 2004, the Company changed its accounting policy for the percentage-of-completion
method to be applied to long-term contracts exceeding ¥3,000 million. Previously, it had been applied tolong-term contracts exceeding ¥5,000 million.
As a result of this change, in Japan, External sales and Total sales increased ¥15,824 million and operating
income increased ¥2,135 million in the year ended March 31, 2005.
North America includes mainly the U.S.A. and Canada. Europe includes mainly the Netherlands, theUnited Kingdom and Germany. Asia includes Thailand, Indonesia, the Philippines and Korea. Other areas
include mainly Australia and Brazil.

(c) Corporate assets
Included in eliminations and corporate in (a) and (b) above under total assets are corporate assets of¥110,476 million ($940,461 thousand), ¥121,602 million and ¥115,811 million at March 31, 2006, 2005 and2004, respectively, which are mainly comprised of cash and time deposits of the Company and property,
plant, equipment and intangible assets of the Company’s Head Office.

Annual Report 2006 | 53

(d) Overseas sales
Overseas sales consist of the total sales of the Company and its consolidated subsidiaries made outside ofJapan. Overseas sales information, for the respective years were as follows:
Millionsof yen%2006
Overseas
Againstsales
net sales

North America ............................. ¥282,149
Europe ......................................... 109,060
Asia ............................................... 197,503
Other areas .................................. 107,103
Total ......................................... ¥695,815

21.3%
8.2
14.9
8.2
52.6%

Millionsof yen%2005
Overseas
Againstsales
net sales

Millionsof yen%2004
Overseas
Againstsales
net sales

Thousands of
U.S. dollars
2006
Overseassales¥236,847
100,362
171,461
105,274¥613,944¥240,121
109,026
91,90881,824¥522,879$2,401,881
928,407
1,681,306
911,748$5,923,342

19.0%
8.1
13.8
8.5
49.4%

20.7%
9.4
7.9
7.1
45.1%

Effective April 1, 2004, the Company changed its accounting policy for the percentage-of-completion
method to be applied to long-term contracts exceeding ¥3,000 million. Previously, it had been applied tolong-term contracts exceeding ¥5,000 million. This change had insignificant effect on overseas sales.
North America includes mainly the U.S.A. and Canada. Europe includes mainly the Netherlands, theUnited Kingdom and Norway. Asia includes Taiwan, China, Korea, the Philippines and Indonesia. Other areas
include mainly Panama, Brazil and Australia.

22. Additional
information(a) On April 1, 2003, NIPPI Corporation became a wholly-owned subsidiary of the Company by exchangeof shares. The acquisition has been accounted for under the purchase method, with the excess of thepurchase price over the estimated fair value of the net assets acquired included in goodwill in the amountof ¥2,974 million.
(b) Effective April 1, 2004, the Company changed the accounting periods for consolidation of five subsidiaries(Kawasaki Motors Japan Ltd., Kawasaki Motors Corp., U.S.A., Kawasaki Motors Europe N.V., and twoother subsidiaries) from the 12 months ended December 31 to the 12 months ended March 31 to improvetransparency and quality of consolidated financial statements.
The effect of this change was to decrease the Company’s retained earnings as of the beginning of thisfiscal year by ¥222 million in the year ended March 31, 2005.
(c) Until for the year ended March 31, 2005, the Company and its domestic consolidated subsidiaries provided for retirement and severance benefits for directors and statutory auditors principally at 50 percent of
the amount required if they retired at the balance sheet date. Effective April 1, 2005, the Company and its
domestic consolidated subsidiaries terminated this plan and changed its presentation from “Directors’and statutory auditors’ retirement and severance benefits” to other long-term liabilities in the consolidatedbalance sheet as of March 31, 2006.

23. Subsequent
eventsOn June 27, 2006, the following appropriation of non-consolidated retained earnings was approved at theordinary meeting of shareholders of the Company:
Cash dividends (¥3.0 per share) .................................................................................................

24. Other matters

Millions of yen

Thousands of
U.S. dollars¥4,673$39,780(a) On August 31, 2005, the Company received a judgment from the Kyoto District Court requiring reimbursement of ¥1,144 million ($9,739 thousand) to Kyoto City in a suit brought by citizens of the city claiming that the Company unfairly bid on a construction contract for a garbage incineration facility in Kyoto
City which the Company was awarded in 1996. On September 12, 2005, the Company appealed against
the judgment to the Osaka High Court.
(b) On April 25, 2006, the Company received a judgment from the Fukuoka District Court requiring reimbursement of ¥2,088 million ($17,775 thousand) jointly with Hitachi Zosen Corporation and three othercompanies to Fukuoka City in a suit brought by citizens of the city claiming that the Company unfairly
bid on a construction contract for a garbage incineration facility in Fukuoka City which Hitachi Zosen
Corporation was awarded in 1996. On May 9, 2006, the Company appealed against the judgment to
the Fukuoka High Court.

54 | Kawasaki Heavy Industries, Ltd.

Report of Independent Public Accountants
To the Shareholders and the Board of Directors of Kawasaki Heavy Industries, Ltd.:We have audited the accompanying consolidated balance sheets of Kawasaki Heavy Industries, Ltd. and consolidated subsidiaries as ofMarch 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three
years in the period ended March 31, 2006, expressed in Japanese yen. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to independently express an opinion on these consolidated financial statements basedon our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Kawasaki Heavy Industries, Ltd. and subsidiaries as of March 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2006, in conformity with accounting principles
generally accepted in Japan.

Without qualifying our opinion, we draw attention to the following.
(1) As discussed in Note 2. (g) to the consolidated financial statements, effective April 1, 2004, the Company changed its accounting
policy for the percentage-of-completion method to be applied to long-term contracts(2) As discussed in Note 2. (o) to the consolidated financial statements, effective April 1, 2005, the Company and its domestic consolidated subsidiaries adopted a new accounting standard for impairment of fixed assets.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2006 arepresented solely for convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts and, in our opinion,such translation has been made on the basis described in Note 1 to the consolidated financial statements.

KPMG AZSA & Co.
Kobe, Japan
June 27, 2006

Annual Report 2006 | 55

Directors, Corporate Auditors, and Executive Officers
DIRECTORSCORPORATE AUDITORS
Tadao Ueda
Akira TanoueHiroshi Kawamoto**
Kenzo Doi**

Masamoto Tazaki
ChairmanTadaharu Ohashi*
President

Masatoshi Terasaki*
Senior Executive Vice President

Takashi Yoshino*

Akira Matsuzaki*

Chikashi Motoyama*

Senior Vice President

Senior Vice President

Senior Vice President

Jiro Noguchi*

Masashi Segawa*Shinichi Tamba*

Senior Vice President

Senior Vice President

Senior Vice President

56 | Kawasaki Heavy Industries, Ltd.

* Representative Director** Outside Auditor

EXECUTIVE OFFICERS
President

Executive Officers

Tadaharu Ohashi

Shigeru Hamada
Shuji Mihara

Senior Executive Vice President

Norio Tanaka

Masatoshi Terasaki

Kouyu Itoga
Fumiaki Amae

Senior Vice Presidents

Kazuhiko Mishima

Takashi Yoshino

Masatoshi Ohyama

President
Gas Turbines & Machinery Company

Shuichi Nose

Akira Matsuzaki

Tamio Nakano

General Manager
Corporate Technology Division

Hidetsugu Horikawa

Chikashi Motoyama

Akira Hattori

President
Aerospace Company

Satoshi Hasegawa

Jiro Noguchi
Senior Manager
Corporate Planning Department

Masashi Segawa
President
Rolling Stock Company

Shinichi Tamba
President
Consumer Products & Machinery Company

Yuichi Asano
Shinichi Suzuki
Toru Yamaguchi
Shigeru Murayama
Mitsutoshi Takao
Sosuke Kinouchi
Yoshio Kawamura
Kyohei Matsuoka
Seiji Yamashita
Takeshi Sugawara(As of June 28, 2006)

Annual Report 2006 | 57

Major Consolidated Subsidiaries and Affiliates

Name

Location

Paid-in Capital

Equity(Millions of yen,unless otherwise noted)(% ownership by
KHI Group)

Principal Businesses

SHIPBUILDING
Kawasaki Shipbuilding CorporationJapan

10,000100.00Design, manufacture, sale, and maintenance ofcommercial and naval vessels and marine application equipment

Nantong Cosco KHI Ship Engineering Co., Ltd.†

China

CNY1,302,200*

50.00

Manufacture and sale of ships

Japan

743

100.00

Sale and repair of construction machinery,

Nichijo Manufacturing Co., Ltd.

Japan

120

50.04

Manufacture and sale of snowplows

Fukae Powtec Corporation

Japan

300

100.00

Manufacture and sale of pulverizing equipment,

Kawasaki Rail Car, Inc.

U.S.A.

US$60,600*

100.00Engineering, manufacture, sale, and after-sales

Kawasaki Construction Machinery Corp.

U.S.A.

US$8,000*

100.00ROLLING STOCK & CONSTRUCTION MACHINERY
Kawasaki Machine Systems, Ltd.
★❊gas turbine generators, and industrial robots

principally generators
service of rolling stock in the United Statesof America
EarthTechnica Co., Ltd.†

Manufacture and sale of construction machineryin the United States

Japan

1,200

50.00

Design, manufacture, and sale of crushers, grinders,sorters, and other equipment

AEROSPACENIPPI Corporation

Japan

6,048

100.00

Manufacture, maintenance, and modification of aircraft and components; manufacture of rocket components, aerospace equipment, targeting systems,
nondestructive testing systems, and industrial fans

Kawasaki Helicopter System Ltd.

Japan

200

100.00Transportation of passengers or cargo by helicopter; maintenance and repair of helicoptersand flight training services; research, design,and construction of heliports

Nippi Kosan Co., Ltd.

Japan

120

100.00Design and supervision of building construction
work, sale of herbicidal soil, manufacturing and saleof rust-resistant packaging materials, and insurance
agency business

Kawasaki Aeronáutica do Brasil Indústria Ltda.

Brazil

R65,000*

100.00Assembly of major wing section for Embraer 190/195

Kawasaki Thermal Engineering Co., Ltd.

Japan

1,460

83.61

Manufacture, sale, and installation of general-

Kawasaki Gas Turbine Europe G.m.b.H.

Germany

A766*

100.00GAS TURBINES & MACHINERY
purpose boilers and air-conditioning equipment
Sales, packaging, installation, after-sales service,
and customer training related to gas turbine
engines, gas turbine generators, and related
machinery
Wuhan Kawasaki Marine Machinery Co., Ltd.

China

1,100

55.00

Manufacture, sale, and after-sales serviceof Kawasaki-brand azimuth thrusters, side thrusters,
and other machinery

Tonfang Kawasaki Air-Conditioning Co., Ltd.†

China

US$9,673,500

50.00

Manufacture, sale, and maintenance of absorption
cooling and heating machinery and refrigerationequipment

58 | Kawasaki Heavy Industries, Ltd.

Name

Location

Paid-in Capital

Equity(Millions of yen,unless otherwise noted)(% ownership
by KHI Group)

Principal Businesses

PLANT & INFRASTRUCTURE ENGINEERING
Kawasaki Plant Systems, Ltd.

Japan

5,000

100.00Design, manufacture, installation, maintenance,and sale of various types of industrial plants

JP Steel Plantech Co.†

Japan

1,995

24.81

Sale of and engineering services for steelworks

Shanghai Cosco Kawasaki Heavy Industries

China

US$29,800*

45.00

Manufacture and sale of steel structures

Kawasaki Motors Corporation Japan

Japan

560

100.00Distribution of motorcycles and Jet Ski® water-

Kawasaki Metal Industries, Ltd.

Japan

350

100.00

Manufacture, processing, and assembly of various

Kawasaki Hydromechanics Corporation

Japan

436

100.00plants and equipment
Steel Structure Co., Ltd.†CONSUMER PRODUCTS & MACHINERY
craft in Japan
steel products
Manufacture, sale, and installation of hydraulicpresses and other hydraulic equipment
Kawasaki Motors Manufacturing Corp., U.S.A.

U.S.A.

US$70,000*

100.00●

Manufacture of motorcycles, ATVs, Jet Ski®
watercraft, small gasoline engines, industrial
robots, and rolling stock

Kawasaki Motors Corp., U.S.A.

U.S.A.

US$65,900*

100.00Distribution of motorcycles, ATVs, Jet Ski®
watercraft, and small gasoline engines in the
United States

Kawasaki Motors Finance Corporation

U.S.A.

US$10,000*

100.00Inventory financing for dealers of Kawasaki
Motors Corp., U.S.A.

KM Receivables Corporation

U.S.A.

US$100100.00Management of accounts receivable of Kawasaki
Motors Finance Corporation

Canadian Kawasaki Motors Inc.

Canada

C$2,000*

100.00Kawasaki Motors Europe N.V.

Netherlands

A14,093*

100.00Distribution of motorcycles, ATVs, and Jet Ski®
watercraft in Canada
Sole distribution of motorcycles, ATVs, Jet Ski®
watercraft, and small gasoline engines in Europe

Kawasaki Motors Pty. Ltd.

Australia

A$2,000*

100.00P.T. Kawasaki Motor Indonesia

Indonesia

US$20,000*

58.50

Distribution of motorcycles, ATVs, and Jet Ski®
watercraft in Australia
Manufacture and distribution of motorcycles
in Indonesia

Kawasaki Motors (Phils.) Corporation

Philippines

P101,430*

50.001

Manufacture and distribution of motorcycles in thePhilippines

Kawasaki Motors Enterprise (Thailand) Co., Ltd.

Thailand

B1,900,000*

92.63

Kawasaki Robotics (U.S.A.), Inc.

U.S.A.

US$1,000*

100.00

Manufacture and distribution of motorcycles
in Thailand
Sale and after-sales service of industrial robots
in the United States

Kawasaki Robotics (UK) Ltd.

U.K.

£917*

100.00

Sale and after-sales service of industrial robots
in the U.K. and Ireland

Kawasaki Machine Systems Korea, Ltd.

Korea

W1,500**100.00

Sale and after-sales service of industrial robots androbot systems

Annual Report 2006 | 59

Name

Location

Kawasaki Precision Machinery Ltd.

Japan

Paid-in Capital

Equity(Millions of yen,unless otherwise noted)(% ownership by
KHI Group)

Principal Businesses

OTHER
3,000

100.00Design, manufacture, sale, after-sales service, andmaintenance for hydraulic machinery and equipment,
electric-powered devices, and control systems

Kawaju Shoji Co., Ltd.

Japan

600

70.00

Trading

Kawasaki Life Corporation

Japan

400

100.00Administration of Company welfare facilities; realestate sales, leasing, and construction; insurance
representation, administration and maintenance,leasing, and provision of loans

Kawasaki Precision Machinery (U.S.A.), Inc.

U.S.A.

US$5,000*

100.00

Manufacture and sale of hydraulic products

Kawasaki Precision Machinery (U.K.) Limited

U.K.

£5,000*100.00

Manufacture and sale of hydraulic products

Kawasaki Heavy Industries (U.K.) Ltd.

U.K.

£500*

100.00

Sale of KHI products in various countries in Europe(principally the U.K.), the Middle East, and Africa;
provision of order intermediation services

Flutek Ltd.

Korea

W1,310**50.38

Manufacture, sale, and after-sales service for

Kawasaki Precision Machinery (China) Ltd.

China

150

100.00Assembly of hydraulic pumps and motors for

Kawasaki Safety Service Industries, Ltd.†

Japan

1,708

34.45

pumps used in construction machinery
construction machinery
Manufacture, sale, and installation of hospital
respiration, fire-extinguishing, and medical
equipment
Kawasaki Setsubi Kogyo Co., Ltd.†

Japan

1,581

33.87

Design and installation of air-conditioning,heating/cooling, water supply/disposal, andsanitary facilities* Monetary unit in thousands** Monetary unit in millions†
Affiliate accounted for using equity method
Partially included in:● Rolling Stock & Construction Machinery★ Gas Turbines & Machinery❊ Consumer Products & Machinery(As of March 31, 2006)

60 | Kawasaki Heavy Industries, Ltd.

Network
Kobe Head Office
Kobe Crystal Tower,
1-3, Higashikawasaki-cho 1-chome,
Chuo-ku, Kobe, Hyogo 650-8680, Japan
Phone: 81-78-371-9530
Fax: 81-78-371-9568

Tokyo Head OfficeWorld Trade Center Bldg.,
4-1, Hamamatsu-cho 2-chome,
Minato-ku, Tokyo 105-6116, Japan
Phone: 81-3-3435-2111
Fax: 81-3-3436-3037

DOMESTIC WORKS
Gifu Works
1, Kawasaki-cho, Kakamigahara,
Gifu 504-8710, Japan
Phone: 81-58-382-5712
Fax: 81-58-382-2981

OVERSEAS OFFICES
Seoul Officec/o Kawasaki Machine Systems Korea, Ltd.
3rd Floor (307), Industrial Complex Support Bldg.,
637, Kojan-Dong, Namdong-Gu,
Incheon, 405-817, Korea
Phone: 82-32-821-6941
Fax: 82-32-821-6947

Kawasaki Shipbuilding Corporation

Beijing Office

1, Kawasaki-cho, Sakaide,
Kagawa 762-8507, Japan
Phone: 81-877-46-1473
Fax: 81-877-46-7006

Room No. 2602, China World Tower 1,
China World Trade Center,
No. 1, Jian Guo Men Wai Avenue,
Beijing 100004,
People’s Republic of China
Phone: 86-10-6505-1350
Fax: 86-10-6505-1351

Shanghai Office

3-11, Kusunoki, Yatomi,
Aichi 498-0066, Japan
Phone: 81-567-68-5117
Fax: 81-567-68-5090

13th Floor, HSBC Tower,
1000, Lujiazui Ring Road,
Pudong New Area,
Shanghai 200120,
People’s Republic of China
Phone: 86-21-6841-3377
Fax: 86-21-6841-2266

Nagoya Works 2

Taipei Office

Nagoya Works 1

7-4, Kanaoka, Tobishima-mura,Ama-gun, Aichi 490-1445, Japan
Phone: 81-567-55-0800
Fax: 81-567-55-0803

Kobe Works
1-1, Higashikawasaki-cho 3-chome,
Chuo-ku, Kobe, Hyogo 650-8670, Japan
Phone: 81-78-682-5001
Fax: 81-78-682-5503

Hyogo Works
1-18, Wadayama-dori 2-chome,
Hyogo-ku, Kobe, Hyogo 652-0884, Japan
Phone: 81-78-682-3111
Fax: 81-78-671-5784

Akashi Works
1-1, Kawasaki-cho, Akashi,
Hyogo 673-8666, Japan
Phone: 81-78-921-1301
Fax: 81-78-921-5313

Seishin Works
8-1, Takatsukadai 2-chome,
Nishi-ku, Kobe, Hyogo 651-2271, Japan
Phone: 81-78-992-1911
Fax: 81-78-992-1910

Kakogawa Works
170, Mukohara, Yamanoue, Hiraoka-cho,
Kakogawa, Hyogo 675-0112, Japan
Phone: 81-79-427-0292
Fax: 81-79-427-0556

Banshu Works
2680, Oka, Inami-cho,Kako-gun, Hyogo 675-1113, Japan
Phone: 81-79-495-1211
Fax: 81-79-495-1226

MAJOR SUBSIDIARIESAND AFFILIATES

15th Floor, Fu-key Bldg.,
99 Jen-Ai Road, Section 2,
Taipei, Taiwan
Phone: 886-2-2322-1752
Fax: 886-2-2322-5009

Bangkok Office
17th Floor, Ramaland Bldg.,
952 Rama 4 Road, Bangrak,
Bangkok 10500, Thailand
Phone: 66-2-632-9511
Fax: 66-2-632-9515

Kuala Lumpur Office
Letter Box No. 162,
6th Floor, UBN Tower,
10 Jalan P. Ramlee 50250,
Kuala Lumpur, Malaysia
Phone: 60-3-2070-5141
Fax: 60-3-2070-5148

Jakarta Office
12th Floor, Skyline Bldg.,
Jl. M.H. Thamrin 9,
Jakarta 10340, Indonesia
Phone: 62-21-314-0737
Fax: 62-21-314-1049

1-1, Higashikawasaki-cho 3-chome, Chuo-ku,
Kobe, Hyogo 650-8670, Japan
Phone: 81-78-682-5501
Fax: 81-78-682-5514

Sakaide Shipyard

Kawasaki Precision Machinery Ltd.
234, Matsumoto, Hazetani-cho, Nishi-ku,
Kobe, Hyogo 651-2239, Japan
Phone: 81-78-991-1133
Fax: 81-78-991-3186

Kawasaki Plant Systems, Ltd.
Kobe Head Office
1-1, Higashikawasaki-cho 3-chome, Chuo-ku,
Kobe, Hyogo 650-8670, Japan
Phone: 81-78-682-5200
Fax: 81-78-682-5574
Tokyo Head Office11-1, Minamisuna 2-chome, Koto-ku,
Tokyo 136-8588, Japan
Phone: 81-3-3615-5200
Fax: 81-78-5690-3159

Kawasaki Thermal Engineering Co., Ltd.
18-31, Higashinakajima 1-chome,
Higashiyodogawa-ku, Osaka 533-0033, Japan
Phone: 81-6-6325-0300
Fax: 81-6-6325-0301

NIPPI Corporation
3175 Showa-machi, Kanazawa-ku,
Yokohama, Kanagawa 236-8540, Japan
Phone: 81-45-773-5100
Fax: 81-45-773-5101

Kawasaki Heavy Industries (U.S.A.), Inc.
599 Lexington Avenue, Suite 3901,
New York, NY 10022, U.S.A.
Phone: 1-212-759-4950
Fax: 1-212-759-6421

Houston Branch
333 Clay Street, Suite 4310,
Houston, TX 77002-4109, U.S.A.
Phone: 1-713-654-8981
Fax: 1-713-654-8187

Kawasaki Rail Car, Inc.
29 Wells Avenue, Building #4,
Yonkers, NY 10701, U.S.A.
Phone: 1-914-376-4700
Fax: 1-914-376-4779

Kawasaki Robotics (U.S.A.), Inc.
28140 Lakeview Drive,
Wixom, MI 48393, U.S.A.
Phone: 1-248-446-4100
Fax: 1-248-446-4200

Harima Works
8, Niijima, Harima-cho,Kako-gun, Hyogo 675-0155, Japan
Phone: 81-79-435-2131
Fax: 81-79-435-2132

Annual Report 2006 | 61

Kawasaki Motors Corp., U.S.A.

KHI Europe Finance B.V.

Kawasaki Motors Enterprise (Thailand) Co., Ltd.

9950 Jeronimo Road,
Irvine, CA 92618-2084, U.S.A.
Phone: 1-949-770-0400
Fax: 1-949-460-5600

Hoekenrode 6,1102 BR Amsterdam,
The Netherlands
Phone: 31-20-6293800
Fax: 31-20-6294661

129 Rama 9 Road, Kwaeng Huaykwang,
Khet Huaykwang, Bangkok 10320, Thailand
Phone: 66-2-246-1510
Fax: 66-2-246-1517

Kawasaki Motors Europe N.V.

6F The Island Plaza, 105 L.P. Leviste St.,
Salcedo Village, Makati, Metro Manila,
The Philippines
Phone: 63-2-810-9213
Fax: 63-2-816-1222

Grand Rapids Office5080 36th Street S.E.,
Grand Rapids, MI 49512, U.S.A.
Phone: 1-616-949-6500
Fax: 1-616-954-3031

Kawasaki Precision Machinery (U.S.A.), Inc.
5080 36th Street S.E.,
Grand Rapids, MI 49512, U.S.A.
Phone: 1-616-949-6500
Fax: 1-616-975-3103

Kawasaki Motors Manufacturing Corp.,
U.S.A.
6600 Northwest 27th Street,
Lincoln, NE 68524, U.S.A.
Phone: 1-402-476-6600
Fax: 1-402-476-6672

Maryville Plant
28147 Business Highway 71,
Maryville, MO 64468, U.S.A.
Phone: 1-660-582-5829
Fax: 1-660-582-5826

Kawasaki Construction Machinery Corp.
of America
2140 Barrett Park Drive, Suite 101,
Kennesaw, GA 30144, U.S.A.
Phone: 1-770-499-7000
Fax: 1-770-421-6842

Canadian Kawasaki Motors Inc.
25 Lesmill Road, Don Mills,
Toronto, ON M3B 2T3, Canada
Phone: 1-416-445-7775
Fax: 1-416-445-0391

Kawasaki do Brasil Indústriae Comércio Ltda.
Avenida Paulista, 542-6 Andar,
Bela Vista, 01310-000, São Paulo, S.P., Brazil
Phone: 55-11-3289-2388
Fax: 55-11-3289-2788

Kawasaki Heavy Industries (U.K.) Ltd.
4th Floor, 3 St. Helen’s Place,
London EC3A 6AB, U.K.
Phone: 44-20-7588-5222
Fax: 44-20-7588-5333

Kawasaki Precision Machinery (U.K.) Limited
Ernesettle Lane, Ernesettle, Plymouth,
Devon PL5 2SA, U.K.
Phone: 44-1752-364394
Fax: 44-1752-364816

Kawasaki Robotics (UK) Ltd.
Units 6 & 7, Easter Court,
Europa Boulevard, Westbrook,
Warrington WA5 7ZB, U.K.
Phone: 44-1925-713000
Fax: 44-1925-713001

Kawasaki Gas Turbine Europe G.m.b.H.
Nehring Strasse 15,61352 Bad Homburg, Germany
Phone: 49-6172-7363-0
Fax: 49-6172-7363-55

Opaallaan 1210,
2132 LN Hoofddorp,
The Netherlands
Phone: 31-23-567-0500
Fax: 31-23-563-9884

U.K. Branch
1 Dukes Meadow,
Millboard Road, Bourne End,
Buckinghamshire SL8 5XF, U.K.
Phone: 44-1628-856600
Fax: 44-1628-856799

Germany Branch
Max-Planck-Strasse 26,
61381 Friedrichsdorf, Germany
Phone: 49-6172-7340
Fax: 49-6172-734160

France Branch
Parc d’Activités de la Clef de Saint-Pierre,
Rond-Point de l’Epine des Champs, Bâtiment 1,
78990 Elancourt Cedex, France
Phone: 33-1-30-69-0000
Fax: 33-1-30-69-5001

Italy Branch
Via Meraviglia 31,
20020 Lainate, Italy
Phone: 39-02-9328521
Fax: 39-02-932852-84

Sweden Branch
Häradsvägen 255,
Huddinge, Sweden
Phone: 46-8-464-0200
Fax: 46-8-464-0240

Spain Branch
Calle Plomo 5-7,
Edificio SERTRAM 4,08038 Barcelona, Spain
Phone: 34-93-223-1460
Fax: 34-93-223-1469

Benelux Brancht Hofveld 6-C2,
1702 Groot-Bijgaarden,
Brussels, Belgium
Phone: 32-2-481-7820
Fax: 32-2-481-7829

Kawasaki Machine Systems Korea, Ltd.
3rd Floor (307),
Industrial Complex Support Bldg.,
637, Kojan-Dong, Namdong-Gu,
Incheon, 405-817, Korea
Phone: 82-32-821-6941~5
Fax: 82-32-821-6947

Flutek Ltd.
Shin Chon Dong 192-11,
Changwon shi, Kyung Nam, Korea
Phone: 82-55-286-5551
Fax: 82-55-286-5553

Wuhan Kawasaki Marine Machinery Co., Ltd.

29 Sperberweg, 41468 Neuss, Germany
Phone: 49-2131-3426-0
Fax: 49-2131-3426-22

No. 43 Wudong Road,
Qingshan, Wuhan,People’s Republic of China
Phone: 86-27-86410132
Fax: 86-27-86410136

Kawasaki Heavy Industries (Europe) B.V.

Kawasaki Heavy Industries (H.K.) Ltd.

Kawasaki Robotics G.m.b.H.

7th Floor, Riverstaete,
Amsteldijk 166,
1079 LH Amsterdam,
The Netherlands
Phone: 31-20-6446869
Fax: 31-20-6425725

62 | Kawasaki Heavy Industries, Ltd.

Room 4211–16, Sun Hong Kai Centre,
30 Harbour Road, Wanchai, Hong Kong,
People’s Republic of China
Phone: 852-2522-3560
Fax: 852-2845-2905

KHI Design & Technical Service Inc.

Kawasaki Motors (Phils.) Corporation
Km. 23 East Service Road,
Bo. Cupang, Alabang, Muntinlupa,
Metro Manila 1771, The Philippines
Phone: 63-2-842-3140
Fax: 63-2-842-2730

Kawasaki Heavy Industries (Singapore) Pte. Ltd.
6 Battery Road, #18-04,
Singapore 049909
Phone: 65-62255133~4
Fax: 65-62249029

P.T. Kawasaki Motor Indonesia
JI. Perintis Kemerdekaan, Kelapa Gading,
Jakarta Utara 14250, Indonesia
Phone: 62-21-452-3322
Fax: 62-21-452-3566

Kawasaki Motors Pty. Ltd.
Unit Q, 10-16 South Street,
Rydalmere, N.S.W. 2116, Australia
Phone: 61-2-9684-2585
Fax: 61-2-9684-4580

Tiesse Robot S.p.A.
Via Isorella 32,
25010 Visano (Brescia), Italy
Phone: 39-30-9958621
Fax: 39-30-9958677

Kawasaki Precision Machinery (China) Ltd.
Yangshan Industrial Park, 9 Guanshan Rd.,
New District, Suzhou, People’s Republic of China
Phone: 86-512-66160365
Fax: 86-512-66160366

Nantong Cosco KHI Ship Engineering Co., Ltd.
117, Linjiang Road, Nantong City,
Jiangsu Province, People’s Republic of China
Phone: 86-513-350-0666
Fax: 86-513-351-4349

Tonfang Kawasaki Air-Conditioning Co., Ltd.
21-22F, B Building, Tsinghua Tongfang,
Hi-tech Plaza, No. 1 Wangzhuang Road,
Haidian District, Beijing, People’s Republic of China
Phone: 86-010-82378866
Fax: 86-010-62341080

Shanghai Cosco Kawasaki Heavy Industries
Steel Structure Co., Ltd.
5198 Hutai Road, Baoshan District,
Shanghai, People’s Republic of China
Phone: 86-21-5602-8888
Fax: 86-21-5602-5198

KHITKAN Co., Ltd.
G.K. Land Industrial Park, Moo 4,
Tambon Pluak Daeng,
Amphur Pluak Daeng, Rayong Province 21140,
ThailandPhone: 66-38-955062~66
Fax: 66-38-955067(As of August 1, 2006)

Corporate Data
Kawasaki Heavy Industries, Ltd.
Kobe Head Office:
Kobe Crystal Tower,
1-3, Higashikawasaki-cho 1-chome,
Chuo-ku, Kobe, Hyogo 650-8680, JapanTokyo Head Office:World Trade Center Bldg.,
4-1, Hamamatsu-cho 2-chome,
Minato-ku, Tokyo 105-6116, JapanFounded: 1878
Incorporated: 1896

Transfer Agent:
The Chuo Mitsui Trust and Banking Company, Limited
33-1, Shiba 3-chome,
Minato-ku, Tokyo 105-8574, Japan
Handling Office:
The Chuo Mitsui Trust and Banking Company, Limited
Osaka Branch Office
2-21, Kitahama 2-chome,
Chuo-ku, Osaka 541-0041, Japan
Independent Auditors:
KPMG AZSA & Co.
Kobe Crystal Tower,
1-3, Higashikawasaki-cho 1-chome,
Chuo-ku, Kobe, Hyogo 650-8680, Japan

Paid-in Capital: ¥92,084,962,505
Number of Shares Issued: 1,557,714,707 shares
Number of Shareholders: 144,073

ADR Facility:
KHI has a sponsored American Depository Receipt (ADR) facility.
ADRs are traded in the over-the-counter (OTC) market in the UnitedStates under CUSIP number 486 359 20 1 with each ADR representing
four ordinary shares.

Number of Employees: 28,922
Stock Exchange Listings:
Tokyo, Osaka, Nagoya
Newspapers in Which Public Notices Are Made:
The Nihon Keizai Shimbun

ADR Depository:
The Bank of New York
101 Barclay St., 22 West,
New York, NY 10286, U.S.A.
Phone: 1-212-815-2042
U.S. Toll Free: 888-269-2377(888-BNY-ADRS)
http://adrbny.com
KHI Web Site at: http://www.khi.co.jp(As of March 31, 2006)

Annual Report 2006 | 63

Kawasaki Heavy Industries, Ltd. Annual Report 2006

Printed in Japan
ISSN 0287 - 1793
This annual report is printed on recycled paper with soy ink by waterless printing.