makino milling machine co., ltd. · makino’s state-of-the-art machine tools and machining...

ANNUAL REPORTYear Ended March 31, 2008

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Millions of yenThousands ofU.S. dollars

2004 2005 2006 2007 2008 2008

Net Sales ¥ 83,835 ¥ 105,082 ¥123,222 ¥137,597 ¥132,740 $1,324,883Net Income (Loss) 1,920 3,123 9,341 9,996 9,003 89,859Total Shareholders’ Equity 46,662 49,191 73,453 — — —Net Assets — — 77,100 97,618 98,521 983,342Total Assets 134,050 144,450 163,530 170,612 171,653 1,713,275

Yen U.S. dollars

Net Income (Loss) per Share Basic ¥ 20 ¥ 34 ¥ 93 ¥ 85 ¥ 76 $ 0.76 Diluted 16 26 — — — —

Number of Employees 2,583 2,897 3,080 3,382 3,773

Note: U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥100.19=U.S.$1, the approximate Tokyo foreign exchange market rate as of March 31, 2008.

MESSAGE TO SHAREHOLDERS AND INVESTORS ........................ 1

CORPORATE GOVERNANCE ....................................................... 3

BUSINESS RISKS ......................................................................... 5

FINANCIAL REVIEW .................................................................... 5

CONSOLIDATED BALANCE SHEETS ............................................ 6

CONSOLIDATED STATEMENTS OF INCOME ................................ 8

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS ......... 9

Makino Milling Machine Co., Ltd. is a manufacturer of advanced machine tools, founded in May 1937. Its corporate

mission is to contribute to the development of industry in Japan and around the world by quickly discerning and

responding to industrial trends with technological innovation.

Makino’s state-of-the-art machine tools and machining technologies are used in the manufacturing systems of

companies in a wide range of industries. Working with local partners possessing strong technical capabilities, Makino has

built an extensive sales network in the United States, Europe and Asia, capable of responding to changes in global

machine tool demand and structural changes in manufacturing operations.

Major products lines: Machining centers, Numerical control (NC) electrical discharge machines (EDM), Milling machines

and other products

PROFILE

CONSOLIDATED STATEMENTS OF CASH FLOWS......................... 10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................. 11

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS .... 19

BOARD OF DIRECTORS AND CORPORATE AUDITORS ................. 20

CORPORATE DATA ..................................................................... 20

GLOBAL NETWORK .................................................................... 21

CONTENTS

FIVE-YEAR FINANCIAL SUMMARYMakino Milling Machine Co., Ltd. and its consolidated subsidiariesYears ended March 31

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(1) Business EnvironmentThe global economy experienced instability during the fiscal year under review, the result of soaring crude oil and raw material prices and upheavals in the financial sector.

Despite these circumstances, orders in the machine tools industry remained strong. Statistics of the Japan Machine Tool Builders’ Association show high levels of monthly orders, which exceeded ¥140 billion in March 2008. Total orders received in 2007 were ¥1,593.9 billion, a record high. Exports played a role in producing this impressive performance. Domestic orders fell from the previous fiscal year for the second consecutive fiscal year.

The Company maintained orders at high levels, backed by active capital expenditure overseas.

Demand was solid in the U.S. market. While there was concern over economic conditions, orders from the manufacturing industry was strong, supported by the effect of a weaker dollar. Orders remained good in the European market. In the Asian market, orders continued to rise from already impressive levels, with China maintaining its strong demand. While investments in the IT industry stalled, capital spending in the automobile and construction machine industries increased. In the Southeast Asian market, orders generally moved higher, although the situation was different in each country. Industrial activity was particularly robust in India, which is experiencing a nationwide industrialization.

By industry, the situation in the auto industry was favorable, with robust global investment in the production of auto parts. Orders from the machinery manufacturing industry were strong in almost every field. Demand for construction and agricultural machines were particularly healthy. Demand from the IT industry tends to be subject to sharp fluctuations, and fell sharply during the fiscal year.

Demand in the domestic market experienced sluggish growth. Demand from the mold industry, the main market for the Company, declined during the fiscal year with a round of capital investment ending by the previous term. Because of the negative effect, domestic orders slipped from the year-ago period.

In operations, to respond accurately to the needs of the market, the Company developed new products: the horizontal machining center MCF5025 for large construction machine and aircraft parts, and the horizontal machining center MCC1513 for molds for automobile interiors—which are becoming larger and more complex—headlights and taillights. The Company

evolved the best-selling machining center V33, which reduces the lead time for precision molds and enables high-quality precision molds, into the vertical machining center V33i. To meet diverse user needs, we also expanded our lineup of 5-axis machining centers and graphite milling machines. Responding to growing demand for micromachining, the Company developed the electrical discharge machine EDFH1 and the wire electrical discharge machine UPN-01, helping to address problems relating to precision electric components. We combined a 5-axis machining center, the automation of which has long been an issue, with the work-holding pallet system, an innovative clamping device that we had developed, and a robot, and thereby developed the processing system μMMC, an fully automatic, unmanned, space-saving system. We received many inquiries for the new system.

The Company displayed its products in a number of exhibitions both in Japan and overseas, and organized practical exhibitions on specific themes, attracting many customers.

In response to demand for its products and services, we expanded and reorganized our sales and service bases in Japan and other countries.

As a result of the above, the Company posted sales of ¥132,740 million (down 3.5% year on year), operating income of ¥14,600 million (falling 13.2%), and net income of ¥9,003 million (slipping 9.9%) on a consolidated basis.

A description of orders and results by region follows:

- The volume of orders in the Japanese market was significantly affected by sluggish growth in capital expenditure in the mold industry, the main market for the Company, and fell from the year-ago period. In contrast, companies in the construction machine industry demonstrated a strong willingness to invest and were actively enhancing production facilities both in Japan and overseas. Capital expenditure for the production of auto parts also remained strong. In these circumstances, Makino J, which is responsible for the market for mass-production parts, including auto components, maintained steady order volumes and posted sales and income largely in line with plans.

- In the U.S. market, soaring crude oil and raw material prices stimulated investment in resources development. In addition, environmental technologies, including technologies for improving fuel efficiency, were introduced in a number of fields, which encouraged demand for machine tools. The U.S. government

TO OUR SHAREHOLDERS AND INVESTORS

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4) We intend to expand our global network of sales & marketing bases and service centers since manufacturers who use machine tools increasingly have production sites dispersed around the world.

(3) Outlook (Fiscal 2009)Although capital expenditure in the domestic mold industry, the major market for the Company, is beginning to recover, we expect that a full recovery will take some time. The U.S. market is active, but orders after 2009, when the economic-stimulus package will expire, could become unstable.

Notwithstanding that, demand for machine tools is firm, as seen in active capital expenditure in regions that are modernizing their industry, the expansion and installation of equipment in anticipation of market expansion, and demands for advanced processing technologies in response to next-generation technologies. Moreover, the rapid development of environmental technologies and a spate of relevant innovations given the urgent need for environmental responsiveness are increasing demand for high-precision machine tools.

The Company will seek to develop products and technologies to meet these needs and will secure revenues by supplying them in the market in a timely manner.

In these circumstances, management forecasts net sales of ¥140 billion, operating income of ¥13 billion, and net income of ¥8 billion on a consolidated basis, and net sales of ¥78 billion, operating income of ¥4.5 billion, and net income of ¥2.5 billion on a non-consolidated basis.

The Company plans to pay total dividends for the year of ¥15 per share.

We will greatly appreciate the continuing support and understanding of our shareholders.

July 2008

Jiro MakinoPresident

hammered out an economic-stimulus package in January 2008 and supported active capital expenditure. Consequently, orders were robust in the aircraft, automobile, and construction machinery industries, among other sectors. Sales of MAKINO INC., which operates in the U.S. market were almost in line with the plan, and earnings exceeded the plan.

- Orders in the Asian market remained generally strong, but the growth rate was short of expectations because of a temporary lull in capital expenditure in the IT sector. The results of MAKINO ASIA PTE LTD, in charge of the Asian market, fell short of the plan in terms of both sales and income, reflecting an increase in expenses in association with the expansion of the sales network in addition to the effect of the IT industry.

- Orders received in the European market also remained strong. Operations in South and Central Europe began to generate considerable revenues. Capital expenditure in Germany has recovered. By industry, we saw a strong investment appetite across a wide range of industries, including the automobile, aircraft, and construction machine sectors. As a consequence, the results of MAKINO Europe GmbH, which had been sluggish for several years, exceeded the plan.

(2) Management PrioritiesThe Company is implementing the following measures to put in place systems capable of swiftly responding to fast-evolving market conditions and to establish a robust corporate structure capable of securing profits even in a tough business environment.

1) We continue to upgrade development capabilities in order to provide high-precision and high-grade machine tools in a timely manner, responding to changing market needs. At the same time, we engage in ongoing research and surveys on various themes in order to develop machine tools attuned to next-generation needs.

2) While cultivating working environments conducive to the creation of high-precision and high-grade products, we are continuously improving production systems, including upgrading of facilities and review of production methods, in order to establish efficient and flexible production systems sensitive to changing market requirements.

3) We are also promoting overseas production and procurement of parts, taking quality and quantity of parts and materials and delivery lead times into account.

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Basic corporate governance rationaleMakino Milling Machine regards strong management

oversight functions as a vital element in the

strengthening of competitiveness, swifter decision-

making and greater transparency.

Corporate governance status1) Governing body

Makino Milling Machine is a company with Board of

Directors. The Company’s Board of Directors consists

of eight directors and at present the Company has no

outside directors. The Board of Directors meets once a

month and, in addition to carrying out the tasks

specified by laws and regulations and by the Articles

of Incorporation, makes decisions on important

matters and supervises operational duties. Whereas

the representative director elected by the Board of

Directors engages in execution of operational duties as

the representative of the Company, specific

operational duties are allocated among non-

representative directors and executed by them. The

term of office of a director is one year and directors

are elected by vote of the annual general meeting of

shareholders.

Makino Milling Machine is also a company with

corporate auditors and with Board of Auditors. The

Company’s Board of Auditors consists of three

statutory auditors (two of whom are full-time

corporate auditors), of whom two are external

auditors. The statutory auditors attend meetings of the

Board of Directors and make remarks, as necessary, in

the course of deliberation on the agenda. Also, the

Board of Auditors meets periodically and, in addition

to items specified by laws and regulations, deliberates

and makes decisions on matters necessary for

statutory auditors’ activities, and audits directors’

execution of operational duties from an independent

standpoint.

2) Internal control systems and risk management systems

At its meeting held on May 1, 2006, the Company’s

Board of Directors passed a resolution concerning

”the development of systems necessary to ensure that

the execution of duties by directors complies with laws

and regulations and the articles of incorporation, and

other systems prescribed by the applicable Ordinance

of the Ministry of Justice as systems necessary to

ensure the properness of operations of a Stock

Company (internal control systems)” provided for in

Article 348 Paragraph 4 and in Article 362 Paragraph

CORPORATE GOVERNANCE

5 of the Corporation Law. The Company’s internal

control systems and risk management systems are

described below.

Positioning risk management as the basis of systems

ensuring properness of execution of duties, the

Company is putting in place risk management systems

not only for the purpose of managing risks that may

cause losses to the Company but also for preventing

deviation from laws and regulations and the Articles of

Incorporation and for ensuring efficient execution of

duties. Directors in charge of operations and

departmental heads are responsible for management

of usual risks. Risks that the directors or the statutory

auditors consider material, and moreover, that they

consider should be examined by the Board of Directors

are examined, judged and dealt with by the Board of

Directors.

The Company has formulated internal rules, including

the Risk Management Rules in which deviation from

laws and regulations and the Articles of Incorporation

is provided for as a type of risk, Employment Rules and

the Security Export Control Program. The Company is

endeavoring to ensure compliance with laws and

regulations, rules and norms by raising employee

awareness through the provision of training for new

employees and periodic and non-periodic training.

Regarding the recording of operational activities,

records are prepared and retained in accordance with

the Rules of the Board of Directors in the case of

information on execution of duties of directors and in

accordance with the Rules for Formal Approvals in the

case of decision-making for routine operations.

Subsidiaries are required to report to the Company on

their execution of duties and risk situations, as

necessary, and the Company’s directors or employees

are dispatched as directors of subsidiaries to

participate in management and be responsible for

oversight.

Regarding audit by auditors, as well as reporting on

important matters at meetings of the Board of

Directors, based on the statutory auditors’ requests

directors make reports or hold a meeting with

statutory auditors, as necessary. Directors and

employees are required to report to statutory auditors

without delay concerning any eventuality that may

cause significant damage or that caused damage to

the Company. In the event that statutory auditors

request assistants, the Company selects such assistants

based on the discussion with statutory auditors about

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On Introduction of Measures against Large-scale purchases of the Company’s Shares (Anti-Takeover Measures) The Company aims to produce reliable products,

providing the machine tools and technologies that are

most suitable for our customers so that they can

manufacture their products efficiently. It is an invaluable

asset to the Company to satisfy their demand and to

maintain strict confidentiality of them.

We believe that we must eliminate large-scale purchases

of the shares which will damage this relationship based

on trust.

The introduction of the Anti-takeover Measures was

approved by the shareholders at the Ordinary General

Meeting of Shareholders on June 20, 2008 and came

into effect.

the number of assistants, positions, affiliation, etc.,

and secures the consent of the Board of Auditors for

treatment of such assistants.

3) Internal audits and audits by auditors

Necessary audits are performed at the Company on

the basis of close cooperation between statutory

auditors, the accounting auditor, the Finance

Department and the General Affairs Department,

totaling around 20 members.

In preparing financial statements, following mutual

internal checks by the Finance Department, the

General Affairs Department, and an external

organization, the Company receives accounting audits

by Gyosei & Co., the accounting auditor, and audits by

auditors.

Regarding audits by the accounting auditor, necessary

coordination, such as for the schedule, is made

internally through discussion between auditors, the

Finance Department, and the General Affairs

Department. Statutory auditors and the Finance

Department periodically exchange views with the

accounting auditor and the necessary coordination is

made. Statutory auditors witness the audit process, as

deemed necessary, to monitor the accounting auditor’s

audit proceedings.

Regarding audits by auditors, the statutory auditors

gather necessary and sufficient information for

conducting audits, including the situation of the

Company and situations of its subsidiaries and

affiliates, on a routine basis through systematic

exchanges of views with directors, managerial

personnel, key employees, and the accounting auditor

of the Company and its subsidiaries and affiliates.

Also, statutory auditors receive reports on the

accounting auditor’s audit results, and use such

information in conducting stringent audits.

4) Accounting audits

Certified public accountants engaged in the

Company’s accounting audits are Mr. Jiro Nakajima

(having been engaged in the audits of the Company

for 23 years) and Mr. Kiyotaka Yamazaki, both of

whom are with Gyosei & Co. Assistants engaged in

the accounting audits comprise six certified public

accountants, three junior accountants and one other

person.

5) Relation with external auditors

There are no personal, capital or transactional relations

between the Company and its two external auditors.

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Cash and cash equivalents (hereinafter ”funds”) on a consolidated basis at the end of the fiscal year ended March 31, 2008 fell ¥2,141 million from the end of the previous fiscal year, to ¥25,621 million.The following is the situation in each cash flow category in the fiscal year:

(i) Cash flows from operating activitiesFunds provided by operating activities were ¥9,343 million, a fall of ¥4,352 million from the previous fiscal year, primarily attributable to income before income taxes of ¥13,124 million, depreciation and amortization of ¥3,084 million and increase in notes and accounts receivable-trade of ¥2,614 million.

(ii) Cash flows from investing activitiesFunds used in investing activities were ¥5,695 million, an increase of ¥2,438 million, reflecting primarily the payment for purchases of property, plant and equipment.

(iii) Cash flows from financing activitiesFunds used in financing activities were ¥5,814 million, a decline of ¥1,575 million. The main factors were the repayment of long-term debt of ¥2,253 million, payment for purchases of treasury stock of ¥1,844 million and dividends paid of ¥1,973 million.

The table below shows trends in cash flow indicators.

FINANCIAL REVIEW

The Group operates around the world, and the

operations are influenced by a range of different factors,

the most important of which are as follows:

- Changes in global economic conditions: The sales

of the Company heavily depend on capital expenditures

in the manufacturing industry in Japan, Asia, and

America. Since the investment appetite of companies is

likely to fall more sharply than the general economy,

there is the possibility that orders and sales of producer

goods will decline rapidly if the global economy slows.

- Trends in individual industries: Many of the

Company’s products are used in automotive companies.

Although trends in capital expenditure in the auto sector

are the most stable in the manufacturing industry, they

have a very substantial effect on sales of the Company

because the capital expenditure, which is large, has a

very significant influence on supply and demand in the

market for machine tools. Sales in growth industries,

including IT and digital home appliances, change sharply

every fiscal year because of violent fluctuations in supply

and demand.

- Exchange rate fluctuations: More than half of the

Company’s products are sold overseas. Moreover, we

have developed a range of operations overseas.

Exchange rates consequently have a significant impact on

the sales and income of the Company.

- Changes in the supply-demand of parts and raw

materials: Machine tools contain many parts and raw

materials. If supply of parts and raw materials tightens,

prices may rise, and this in turn could influence income.

If the needed quality, quantity, and delivery dates are not

secured, it could influence production and sales.

- Country risk: The Company has made inroads into

countries that are modernizing their industries. If

unexpected changes occur in the political, economic, or

social circumstances in these countries, or if legal

regulations are established or tightened, it could affect

the sales and income of the Company.

BUSINESS RISKS

65th term 66th term 67th termTerm ended March 2004

Term ended March 2005


Capital adequacy ratio 34.8 34.1 44.9

Capital adequacy ratio on a market value basis (%) 44.9 38.2 99.1

Ratio of interest-bearing debt to cash flows (%) 270.0 46.9 5.6

Interest coverage ratio (times) 0.2 1.5 7.8

68th term 69th termTerm ended March 2007


Capital adequacy ratio 54.9 55.8

Capital adequacy ratio on a market value basis (%) 105.6 48.4

Ratio of interest-bearing debt to cash flows (%) 1.7 2.5

Interest coverage ratio (times) 16.2 17.0

Capital adequacy ratio: Shareholders’ equity / Total assetsCapital adequacy ratio on a market value basis: Market capitalization / Total assetsRatio of interest-bearing debt to cash flows: Interest-bearing debt / Cash flowsInterest coverage ratio: Cash flows / Interest payment

* Each indicator is calculated from consolidated financial data.

* Market capitalization is computed based on the number of shares issued, excluding treasury stock.

* Cash flows mean cash flows from operating activities.* Interest-bearing debt includes all liabilities bearing interest

posted in the consolidated balance sheets.Interest payment is interest paid recorded in the consolidated statements of cash flows.

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March 31,

Millions of yenThousands of

dollars

2007 2008 2008

ASSETS

Current assets:

Cash and time deposits ¥ 23,704 ¥ 21,003 $ 209,632

Marketable securities (Note 2.e) 4,639 4,737 47,280

Notes and accounts receivable:

Trade 44,063 44,937 448,518

Unconsolidated subsidiaries and affiliates 544 376 3,753

Allowance for doubtful accounts (Note 2.h) (440) (422) (4,212)

Inventories (Notes 2.f and 4) 35,101 36,812 367,422

Deferred income taxes (Notes 2.l and 7) 2,708 2,998 29,923

Other current assets 2,742 3,427 34,205

Total current assets 113,061 113,868 1,136,521

Investments and other assets:

Investment securities (Note 2.e) 14,741 11,171 111,498

Investments in unconsolidated subsidiaries and

affiliates (Note 2.e) 503 415 4,142

Long-term loans receivable 668 587 5,859

Deferred income taxes (Notes 2.l and 7) 953 825 8,234

Others assets 6,151 6,231 62,193

Allowance for doubtful accounts (Note 2.h) (80) (53) (529)

Allowance for investment losses (Note 2.k) — (127) (1,268)

Total investments and other assets 22,936 19,049 190,129

Property, plant and equipment (Note 2.g):

Land 6,938 7,803 77,882

Buildings and structures 43,389 49,832 497,375

Machinery and equipment 22,515 23,367 233,227

Construction in progress 238 265 2,645

73,080 81,267 811,129

Accumulated depreciation (38,465) (42,531) (424,504)

Total property, plant and equipment 34,615 38,736 386,625

Total assets ¥ 170,612 ¥ 171,653 $ 1,713,275

The accompanying notes are an integral part of these statements.

CONSOLIDATED BALANCE SHEETSMAKINO MILLING MACHINE CO., LTD. March 31,2007 and 2008

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March 31,


dollars

2007 2008 2008

LIABILITIES AND NET ASSETS

Current liabilities:

Notes and accounts payable:

Trade ¥ 24,944 ¥ 28,309 $ 282,553

Other 2,473 3,271 32,648

Short-term loans from banks 4,555 4,492 44,835

Current portion of long-term debt (Note 5) 1,567 3,731 37,239

Accrued expenses 6,240 6,828 68,151

Accrued income taxes 3,753 2,221 22,168

Reserve for directors’ bonus (Note 2.i) 80 70 699

Other current liabilities 2,680 2,325 23,206

Total current libabilities 46,292 51,247 511,499

Long-term liabilities:

Long-term debt (Note 5) 18,531 14,926 148,977

Allowance for employees’

retirement benefits (Notes 2.j and 6) 1,668 1,625 16,219

Allowance for directors’ and

corporate auditors’ retirement benefits (Note 2.j) 1,326 1,504 15,011

Deferred income taxes (Notes 2.l and 7) 4,571 3,302 32,957

Other long-term liabilities 606 528 5,270

Total long-term liabilities 26,702 21,885 218,434

Net assets:

Shareholders’ equity

Common stock, no par value 19,263 19,263 192,265

Authorized : 300,000,000 shares in 2007 and 2008

Issued : 119,944,543 shares in 2007 and 2008

Capital surplus 32,620 32,596 325,342

Retained earnings (Note 8) 36,741 45,171 450,853

Treasury stock, at cost (Note 2.o) (318) (2,233) (22,288)

88,306 94,797 946,172

Evaluation and conversion difference

Unrealized gain on available-for-sale

securities (Note 2.e) 6,670 4,255 42,469

Foreign currency

translation adjustments (Note 2.d) (1,346) (3,211) (32,049)

5,324 1,044 10,420

Minority interests 3,988 2,680 26,750

Total net assets 97,618 98,521 983,342

Total liabilities and net assets ¥ 170,612 ¥ 171,653 ¥ 1,713,275The accompanying notes are an integral part of these statements.

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Year ended March 31,


dollars

2007 2008 2008

Net sales ¥ 137,597 ¥ 132,740 $ 1,324,883

Cost of sales 94,827 91,459 912,856

Gross profit 42,770 41,281 412,027

Selling, general and administrative expenses 25,941 26,681 266,304

Operating income 16,829 14,600 145,723

Other income (expenses):

Interest and dividend income 310 405 4,042

Interest expense (890) (549) (5,480)

Gain on sales of property, plant and equipment 82 70 699

Loss on disposal of property, plant and equipment (45) (46) (459)

Loss on disposal of inventories (330) (28) (279)

Loss on valuation of goodwill of foreign subsidiaries — (249) (2,485)

Provision for allowance for investment losses — (127) (1,268)

Provision for retirement allowances

for directors of subsidiaries for previous years — (237) (2,366)

Exchange gains (losses), net 362 (1,056) (10,540)

Other-net 350 341 3,404

Income before income taxes 16,668 13,124 130,991

Income taxes (Note 2.l) - Current 5,249 3,573 35,662

- Deferred 1,028 315 3,144

Income after income taxes 10,391 9,236 92,185

Minority interest in earnings of consolidated subsidiaries (395) (233) (2,326)

Net income ¥ 9,996 ¥ 9,003 $ 89,859

Yen Dollars

Per share of common stock (Note 8):

Net income ¥ 85.35 ¥ 75.79 $ 0.76

Cash dividends applicable to the period 15.00 15.00 0.15


CONSOLIDATED STATEMENTS OF INCOMEMAKINO MILLING MACHINE CO., LTD. For the years ended March 31, 2007 and 2008

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dollars

2007 2008 2008

Common stock:

Balance at beginning of year ¥ 13,623 ¥ 19,263 $ 192,265

Issuance of common stock 5,640 — —

Balance at end of year ¥ 19,263 ¥ 19,263 $ 192,265

Capital surplus:


Issuance of common stock 5,635 — —

Acquisition of treasury stock — (24) (239)


Retained earnings (Note 8):


Net income 9,996 9,003 89,859

Cash dividends (1,483) (1,968) (19,643)

Bonuses to directors and corporate auditors (60) — —

Accumulated other comprehensive loss arising

from minimum pension liability adjustment (99) (189) (1,886)

Increase due to newly consolidated subsidiaries — 1,584 15,810


Unrealized gain on available-for-sale securities (Note 2.e) :


Net change during the year (186) (2,415) (24,105)


Foreign currency translation adjustments (Note 2.d):

Balance at beginning of year ¥ (2,197) ¥ (1,346) $ (13,434)

Net change during the year 851 (1,865) (18,615)

Balance at end of year ¥ (1,346) ¥ (3,211) $ (32,049)

Treasury stock (Note 2.o) :

Balance at beginning of year ¥ (201) ¥ (318) $ (3,174)

Net change during the year (117) (1,915) (19,114)

Balance at end of year ¥ (318) ¥ (2,233) $ (22,288)

Minority interests:


Net change during the year 341 (1,308) (13,054)



CONSOLIDATED STATEMENTS OF NET ASSETSMAKINO MILLING MACHINE CO., LTD. For the years ended March 31, 2007 and 2008

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dollars

2007 2008 2008

Cash flows from operating activities:

Income before income taxes ¥ 16,668 ¥ 13,124 $ 130,991

Adjustments for:

Income taxes paid (4,096) (5,128) (51,183)

Depreciation and amortization 2,811 3,084 30,782

Amortization of goodwill 39 39 389

Increase (decrease) in directors' and corporate auditors'

retirement benefits 235 178 1,777

Increase (decrease) in allowance for employees'

retirement benefits (374) 119 1,188

Increase (decrease) in reserve for directors' bonus 80 (10) (100)

Increase (decrease) in allowance for doubtful accounts 109 (34) (339)

Gain on sales of property, plant and equipment (82) (70) (699)

Loss on disposal of property, plant and equipment 45 46 459

Loss on disposal of inventories 330 28 279

Gain on sales of investment securities (16) — —

(Increase) decrease in notes and accounts receivable, trade (991) (2,614) (26,090)

(Increase) decrease in inventories (1,271) (2,093) (20,890)

Increase (decrease) in notes and accounts payable, trade 2,601 2,572 25,671

Other, net (2,393) 102 1,018

Net cash provided by operating activities 13,695 9,343 93,253

Cash flows from investing activities:

(Increase) decrease in time deposits (362) 562 5,609

Payment for purchases of marketable and investment securities (4) (3) (30)

Proceeds from sales of marketable and investment securities 937 — —

Payment for purchases of property, plant and equipment (4,396) (6,696) (66,833)

Proceeds from sales of property, plant and equipment 1,027 630 6,288

Other, net (459) (188) (1,876)

Net cash used in investing activities (3,257) (5,695) (56,842)

Cash flows from financing activities:

Increase (decrease) in short - term loans, net (4,381) 256 2,555

Repayment of long - term debt (2,703) (2,253) (22,487)

Repayment for redemption of bonds (10,000) — —

Proceeds from issuance of common stock 11,275 — —

Payment for purchases of treasury stock (90) (1,844) (18,405)

Dividends paid (1,490) (1,973) (19,693)

Net cash used in financing activities (7,389) (5,814) (58,030)

Effect of exchange rate changes on cash and cash equivalents 317 (359) (3,583)

Net increase (decrease) in cash and cash equivalents 3,366 (2,525) (25,202)

Increase in cash and cash equivalents arising from newly

consolidated subsidiaries — 384 3,833

Cash and cash equivalents, beginning of year (Note 2.b) 24,396 27,762 277,094

Cash and cash equivalents, end of year (Note 2.b) ¥ 27,762 ¥ 25,621 $ 255,725


CONSOLIDATED STATEMENTS OF CASH FLOWS MAKINO MILLING MACHINE CO., LTD. For the years ended March 31, 2007 and 2008

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1. Basis of Presenting Financial Statements

The accompanying consolidated financial statements of Makino Milling Machine Co., Ltd. (the "Company") have been

prepared in accordance with the provisions set forth in the Japanese Securities and Exchange Law for the fiscal year

ended March 31, 2007 and the Japanese Financial Instruments and Exchange Law for the fiscal year ended March 31,

2008, and their related accounting regulations, and in conformity with accounting principles and practices generally

accepted and applied in Japan, which are different in certain respects as to application and disclosure requirements of

International Financial Reporting Standards.

In preparing the consolidated financial statements, certain reclassifications and rearrangements have been made to

the financial statements issued domestically in Japan in order to present these statements in a form, which is more

familiar to the readers outside Japan.

In addition, the notes to the consolidated financial statements include information, which is not required under

generally accepted accounting principles and practices in Japan but is presented herein as additional information.

2. Summary of Significant Accounting Policies

(a) Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries (22

subsidiaries for 2007 and 25 for 2008). The significant subsidiaries, which are consolidated with the Company, are listed

below:

MAKINO ASIA PTE LTD

MAKINO INC.

MAKINO Europe GmbH

MAKINO RESOURCE DEVELOPMENT PTE LTD

Makino J Co., Ltd.

Makino Denso Co., Ltd.

Makino Technical Service Co., Ltd.

Kanto Bussan Kaisha, Ltd.

Makino Giken Co., Ltd.

Makino Giken Co., Ltd., previously the Company's unconsolidated subsidiary, is newly included in the scope of

consolidation from the fiscal year ended March 31, 2008 due to an increase in its significance.

The remaining subsidiaries, whose assets, net sales, net income and the underlying net equity of retained earnings

in the aggregate are not significant in the consolidated totals, have not been consolidated with the Company.

The fiscal year of the consolidated subsidiaries is the same as the Company’s except for three subsidiaries, Makino

do Brasil Ltda., Makino S de R. L. de C. V. and MAKINO CHINA Co. LTD., whose fiscal years end on December 31.

Significant transactions between December 31 and March 31 are reflected in the consolidated financial statements.

The equity method is not applied since the combined net profit and loss and the underlying net equity of retained

earnings in the aggregate in unconsolidated subsidiaries and affiliates are not significant in the consolidated totals.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMAKINO MILLING MACHINE CO., LTD.

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All significant intercompany accounts and transactions are eliminated in consolidation. The difference between

acquisition cost and the underlying net equity at the time of acquisition is amortized evenly over five years.

(b) Cash equivalents

Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant

risk of changes in value. Cash equivalents include time deposits and certificate of deposits, all of which mature or

become due within three months of the date of acquisition.

(c) Foreign currency translations

All short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into

Japanese yen at the exchange rates at the balance sheet date. The foreign exchange gains and losses from translation are

recognized in the consolidated statements of income unless they are hedged by forward exchange contracts.

(d) Foreign currency financial statements

The balance sheet accounts and revenue and expense accounts of the consolidated overseas subsidiaries are translated

into Japanese yen at the current rates of exchange prevailing at each balance sheet date except as to capital, which is

translated at the historical rates of exchange at dates of acquisition.

Net income and retained earnings of the consolidated overseas subsidiaries are translated at the current rates of

exchange prevailing at each balance sheet date. Differences arising from such translation are shown as “ Foreign currency

translation adjustments” in the net assets in accompanying consolidated balance sheets.

(e) Marketable securities and investment securities

Investments in unconsolidated subsidiaries and affiliates are stated at cost. Equity method is not applied as shown in (a)

above. Marketable securities and investment securities other than investment securities in subsidiaries and affiliates are

stated at market value. However, such securities without market value are stated at cost if they are not significantly

impaired. The Company credits or charges unrealized gain or loss, net of income taxes, on the above securities to net

assets as ”Unrealized gain on available-for-sale securities”.

(f) Inventories

Finished products and work in process are principally valued at cost, determined by the specific identification method.

Raw materials and supplies are stated at the most recent purchase prices.

(g) Property, plant, equipment and depreciation

Property, plant and equipment, including significant renewals and additions, are carried at cost. The cost of property,

plant and equipment retired or otherwise disposed of and accumulated depreciation in respect thereof are eliminated

from the related accounts, and the resulting gain or loss is reflected in income. Maintenance and repairs, including minor

renewals and improvements, are charged to income as incurred.

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Depreciation is mainly computed by the declining balance method using the rates based on estimated useful lives of

the assets, according to general class, type of construction and use. The range of useful lives is principally from 5 to 50

years for buildings and structures and from 3 to 12 years for machinery and equipment.

Effective from April 1, 2007, the Company and its domestic consolidated subsidiaries have adopted the new

depreciation method based on the revised Japanese Corporation Tax Law. The effect of this change was to decrease

operating income and income before income taxes by ¥93 million ($928 thousand), respectively.

Effective from April 1, 2007, the Company and its domestic consolidated subsidiaries have begun to depreciate the

amounts of 5% of acquisition costs of property, plant and equipment acquired before March 31, 2007 after deducting

their memorandum prices, evenly over 5 years. This depreciation starts from the next year after the time when the book

value of property, plant and equipment reaches to 5% of their acquisition costs, and is included in depreciation expenses.

The effect of this change was to decrease operating income and income before income taxes by ¥105 million ($1,048

thousand), respectively.

(h) Allowance for doubtful accounts

The Company provides for possible losses due to uncollectibility of notes, accounts, loans receivable and others based on

the Company’s past credit loss experience and management’s estimate.

(i) Reserve for directors’ bonus

Reserve for directors’ bonus is provided for the estimated payments of directors’ bonus which is applicable for the period.

(j) Allowance for employees’ retirement benefits and directors’ and corporate auditors’ retirement benefits

Employees (excluding directors and corporate auditors) of the Company and most of its domestic consolidated

subsidiaries are covered by a retirement plan whereby each employee, under most circumstances, upon mandatory

retirement at the age of 60 years or earlier termination of employment, is entitled to either a lump sum retirement

payment or pension payment based on compensation at the time of retirement and years of service. These employees’

retirement plans are funded.

The employees’ retirement benefits are accounted for as the liability for retirement benefits based on projected

benefit obligations and plan assets in conformity with the accounting standard for the employees’ retirement benefits.

Directors and corporate auditors are not covered by these plans. However, liabilities for directors’ and corporate

auditors’ retirement benefits include amounts equal to management’s estimate of the amounts payable to them at the

balance sheet dates if they retired at those dates. Amounts payable to directors and corporate auditors upon retirement

are subject to the approval of shareholders.

(k) Allowance for investment losses

Allowance for investment losses is provided for the estimated losses on investments based on the evaluation of the

financial conditions of the investees.

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(l) Income taxes

Deferred income taxes are recognized applying the asset and liability method. Under this method, deferred tax assets and

liabilities are determined based on the difference between the financial reporting and the tax basis of the assets and

liabilities, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to

reverse.

(m) Hedge accounting

The Company uses derivative financial instruments to manage their exposures to fluctuations in foreign exchange and

interest rates. The Company does not enter into derivatives for trading or speculative purposes.

The monetary credit and debt denominated in foreign currencies for which foreign exchange forward contracts are

used to hedge the foreign currency fluctuations are translated at the contracted rates if the derivatives meet certain

hedging criteria.

(n) Appropriations of retained earnings

Appropriations of retained earnings are accounted for and reflected in the accompanying consolidated financial

statements basically when they are approved by the shareholders or resolved by the board of directors.

(o) Treasury stock

The portion of treasury stock attributable to minority shareholders is deducted from minority interests in the

accompanying consolidated balance sheets, and the portion attributable to the Company is deducted from shareholders’

equity

(p) Leases

Leases that transfer substantially all the risks and rewards of ownership of the assets are accounted for as capital leases,

except that leases that do not transfer ownership of the assets at the end of the lease term are accounted for as

operating leases, in accordance with accounting principles and practices generally accepted in Japan.

3. United States Dollar Amounts

The United States dollar amounts presented in the accompanying consolidated financial statements are included solely

for convenience and are stated, as a matter of arithmetical computation only, at the rate of ¥100.19 = U.S.$1.00, which

was the prevailing exchange rate on March 31, 2008.

These translations should not be construed as representations that the Japanese yen amounts actually represent, or

have been or could be converted into United States dollars at that rate.

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The weighted average interest on long-term bank loans on March 31, 2008 was 1.90%.

The aggregate annual maturities of long-term debt on March 31, 2008 were as follows:

Year ending March 31,Millions of

yenThousands of

dollars

2009 ¥ 3,731 $ 37,239

2010 1,361 13,584

2011 3,511 35,043

2012 18 180

2013 and thereafter 36 359

4. Inventories

Inventories as of March 31, 2007 and 2008 comprised the following:

As of March 31,


dollars

2007 2008 2008

Finished products ¥ 9,001 ¥ 10,881 $ 108,604

Work in process 9,256 11,604 115,820

Raw materials and supplies 16,844 14,327 142,998

Total ¥ 35,101 ¥ 36,812 $ 367,422

5. Long-Term Debt

Long-term debt comprised the following:

6. Employees’ Retirement Benefits

The Company and its domestic consolidated subsidiaries have defined benefit pension plans, which consist of a benefit

plan provided under the Welfare Pension Insurance Law of Japan, a tax qualified pension plan and a lump-sum payment

plan as well as defined contribution pension plans.

Some of the overseas consolidated subsidiaries have defined contribution plans as well as defined benefit plans.

As of March 31,


dollars

2007 2008 2008

Long-term bank loans due through 2013 ¥ 10,098 ¥ 8,657 $ 86,406

1.23 per cent. Yen unsecured bonds due 2010 10,000 10,000 99,810

20,098 18,657 186,216

Less: Portion due within one year (1,567) (3,731) (37,239)

Total Long-term debt ¥ 18,531 ¥ 14,926 $ 148,977

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(1) The multi-employer pension plan under which required contributions are accounted for as benefit costs (as of March

31, 2007)

(a) Funded status


dollars

Fair value of plan assets ¥ 132,459 $ 1,322,078

Benefit obligation 139,971 1,397,056

Net amount ¥ (7,512) $ (74,978)

(b) The Group’s proportion of the contributions to the aggregate pension contributions

6.81%

(2) The liability (asset) for employees’ retirement benefitsAs of March 31,


dollars

2007 2008 2008

Projected benefit obligation ¥ 9,457 ¥ 9,585 $ 95,668

Fair value of plan assets (11,706) (10,364) (103,443)

Unrecognized actuarial loss 277 (1,366) (13,634)

Unrecognized prior service cost 509 450 4,491

Prepaid pension cost 3,131 3,320 33,137

Net liability ¥ 1,668 ¥ 1,625 $ 16,219

(3) The components of net periodic benefit costsYear ended March 31,


dollars

2007 2008 2008

Service cost ¥ 474 ¥ 456 $ 4,551

Interest cost 200 207 2,066

Expected return on plan assets (292) (298) (2,974)

Amortization of unrecognized actuarial loss (12) 43 429

Amortization of unrecognized prior service cost (59) (59) (589)

Contribution for Welfare Pension Insurance fund 411 469 4,681

Extra retirement benefit and others 24 9 90

Contribution for defined contribution pension plan 136 151 1,507

Net periodic benefit costs ¥ 882 ¥978 $ 9,761

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7. Income Taxes

The Company and its consolidated domestic subsidiaries are subject to Japanese corporate, enterprise and inhabitant

taxes, based on income, at a combined statutory tax rate of approximately 41 per cent in 2008 and 2007.

The tax effects of significant temporary differences and loss carry forwards, which result in deferred tax assets and

liabilities, were as follows:

(4) Assumptions used in accounting for the plansYear ended March 31,

2007 2008

Period allocation method for estimated retirement benefits Straight-line Straight-line

Discount rate 2.5% 2.5%

Expected rate of return on plan assets 2.5% 2.5%

Recognition period of actuarial gain/loss 10 years 10 years



dollars

2007 2008 2008

Deferred Tax Assets:

Tax loss carry forwards ¥ 1,252 ¥ 736 $ 7,346

Accrued expenses 1,352 1,530 15,271

Directors’ and corporate auditors’ retirement benefits 538 510 5,090

Valuation loss on investment securities 166 846 8,444

Write-down of inventories 124 105 1,048

Employees’ retirement benefits 11 22 220

Unrealized gain on available-for-sale securities 0 9 90

Other 1,672 1,904 19,004

Subtotal 5,115 5,662 56,513

Valuation allowance (453) (744) (7,426)

Deferred tax assets 4,662 4,918 49,087

Deferred Tax Liabilities:

Unrealized gain on available-for-sale securities (3,615) (2,458) (24,534)

Prepaid pension cost (1,180) (1,256) (12,536)

Tax depreciation over book (661) (490) (4,891)

Deferred capital gains from the acquisition cost of replaced property (7) — —

Other (108) (193) (1,926)

Deferred tax liabilities (5,571) (4,397) (43,887)

Net Deferred Tax Assets ¥ (909) ¥ 521 $ 5,200

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8. Retained Earnings and Per Share Data

In accordance with the Japanese Corporation Law, dividends and the related appropriations of retained earnings may be

approved by the shareholders or resolved by the board of directors after the end of each fiscal year. The dividends and

the related appropriations of retained earnings are not reflected in the financial statements at the end of such fiscal years

but recorded at the time they are approved or become effective. However, dividends per share shown in the

accompanying consolidated statements of income are included in the periods to which they are applicable.

Net income (loss) per share is based on the weighted average number of shares of common stock outstanding

during each period.

Cash dividends per share are based on cash dividends declared as applicable to the respective periods.

Diluted net income per share is not disclosed because potentially dilutive securities were not issued for the fiscal

year ended March 31, 2008 and 2007.

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of

Makino Milling Machine Co., Ltd.

GYOSEI& CO.

We have audited the accompanying consolidated balance sheets of Makino Milling Machine Co., Ltd. and

consolidated subsidiaries as of March 31, 2008 and 2007, and the related consolidated statements of income, changes in

net assets and cash flows for the years then ended, all expressed in Japanese yen. These consolidated financial

statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these

consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards, procedures and practices generally accepted and

applied in Japan. Those standards, procedures and practices require that we plan and perform 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 managements, 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 Makino Milling Machine Co., Ltd. and consolidated subsidiaries as of March 31, 2008

and 2007, and the consolidated results of their operations and their cash flows for the years then ended in conformity

with accounting principles and practices generally accepted in Japan.

The United States dollar amounts shown in the consolidated financial statements referred to above have been

translated solely for convenience. We have reviewed this translation and, in our opinion, the consolidated financial

statements expressed in Japanese yen have been translated into United States dollars on the basis described in Note 3.

June 20, 2008

Tokyo, Japan

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BOARD OF DIRECTORS AND CORPORATE AUDITORS

President Jiro Makino

Executive Vice President, Director Shun Makino

Vice President, Director Eiichi Hososhima

Director Takeo Minosawa

Director Akio Koumura

Director Tatsuaki Aiba

Director Shingo Suzuki

Director Yasuyuki Tamura

Corporate Auditor Kouichi Suzuki

Corporate Auditor Eiji Fukui

Corporate Auditor Hirohisa Ozawa

As of June 20, 2008

CORPORATE DATA

Makino Milling Machine Co., Ltd.

Date of Foundation May 1, 1937

Paid-in Capital ¥19,263 million

Activities Manufacture, sale and export of machine tools

Head Office 3-19, Nakane 2-chome, Meguro-ku, Tokyo 152-8578, Japan

Phone : +81-3-3717-1151

Fax : +81-3-3725-2105

Research Laboratory Atsugi (Kanagawa)

Domestic Works Atsugi (Kanagawa), Fuji-Katsuyama (Yamanashi)

Overseas Works MAKINO ASIA PTE. LTD. (Singapore)

MAKINO CHINA CO., LTD (China)

MAKINO INDIA PRIVATE LIMITED (India)

Sales & Service Offices Tokyo, Osaka, Nagoya, and other 15 offices

Overseas Sales & Service Offices

U.S.A., Germany, Singapore, Korea, China, India, and others

Consolidated Subsidiaries

MAKINO ASIA PTE. LTD.

MAKINO RESOURCE DEVELOPMENT PTE.LTD.

MAKINO INC.

MAKINO Europe GmbH

MAKINO J Co., Ltd.

MAKINO DENSO Co., Ltd.

MAKINO TECHNICAL SERVICE Co., Ltd.

KANTO BUSSAN Co., Ltd.

Makino Giken Co., Ltd.

As of June 30, 2008

INDIA

CHINA

Head QuterPlantTechnical CenterSales & Service OfficeAgency

NORTH AMERICA

EUROPE

ASIA

MAKINO ASIA PTE LTD (Singapore)http://www.makino.com.sg/

MAKINO China Co., Ltd.http://www.makino.com.cn/

MAKINO INDIA PRIVATE LIMITEDhttp://makinoindia.co.in/

MAKINO INC.http://www.makino.com/

Makino Europe GmbHhttp://www.makino.de

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21

GLOBAL NETWORK

INDIA

CHINA

Head QuterPlantTechnical CenterSales & Service OfficeAgency

NORTH AMERICA

EUROPE

ASIA

MAKINO ASIA PTE LTD (Singapore)http://www.makino.com.sg/

MAKINO China Co., Ltd.http://www.makino.com.cn/

MAKINO INDIA PRIVATE LIMITEDhttp://makinoindia.co.in/

MAKINO INC.http://www.makino.com/

Makino Europe GmbHhttp://www.makino.de

010_0774001372008.indd 21 2008/07/31 9:49:43

3-19, Nakane 2-chome, Meguro-ku, Tokyo 152-8578, JapanPhone : +81-3-3717-1151Fax : +81-3-3725-2105URL : http://www.makino.co.jp/

Printed in Japan

010_0774001372008.indd 1 2008/07/31 9:49:40

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