Industrial Products division Net sales rose 5.3%, to ¥41.6 billion. Although domestic sales of such products as engines for small construction machinery declined due to the protracted economic downturn in Japan, sales of electric generator engines increased, and overall domestic sales were maintained at approximately the same level as that of the previous year. Overseas, increases were attained in engine sales to Asia and Europe as well as engines for leisure vehicles in the United States. However, owing to fluctuation in the product model mix as well as severe busi- ness conditions for affiliated companies, an operating loss was recorded for the division of ¥0.8 billion, compared with an operating loss of ¥0.2 billion for the previous fiscal year.  Net sales declined 4.9%, to ¥63.0 billion. Sales in the defense sector expanded on the strength of increased shipments of such products as unmanned target drones and the F-2 sup- port fighter, as well as the commencement of shipments of the new T-7 trainer. Meanwhile, in the commercial sector, although sales to the space industry increased through deliv- ery of the High-Speed-Flight Demonstration Project, sales to The Boeing Company slipped, due to the sharp decline in air travelers following the September 11, 2001, terrorist attacks. Owing to the substantial impact of the decline in orders from Boeing, operating income fell 54.7%, to ¥3.3 billion.  Net sales rose 1.9% to ¥41.4 billion. The Bus division regis- tered a year-on-year decline in sales because of lower orders of bus bodies, mainly for tour buses. Net sales were also down for the House division, which was significantly affected by the decline in public works and restraint in private-sector capital investment. In the Transportation and Environmental divisions, pendulum express railcars were shipped to the Chizu Express Company, and sales of the Fuji Mighty sanita- tion truck grew on strength of special demand stemming from control of exhausted emissions from diesel-powered vehicles. Nevertheless, net sales amounted to less than the comparable figure for the previous fiscal year. However, net sales for FHI’s real estate subsidiary grew, therefore covering the loss of other divisions. Also, an operating loss of ¥3.1 billion was a ¥1.0 billion improvement from the previous fiscal year. The cost of sales rose 1.9%, to ¥1,011.5 billion. Because the percentage rise in the cost of sales was greater than the per- centage rise in sales, gross profit dropped 2.4%, to ¥360.7 billion, and the gross margin rate declined 0.8 point, from 27.1% to 26.3%. SG&A expenses rose 4.3%, to ¥293.2 billion. Consequently, operating income declined 23.7%, to ¥67.5 billion. The ratio of operating income to net sales fell 1.6 points, from 6.5% to 4.9%. Below is an analysis of the factors affecting operating income. Aerospace division Other division  COST OF SALES, EXPENSES, AND OPERATING INCOME Operating Income 2001 2002 2003 2000 1999 0 20 40 60 80 100 (Billions of yen) Net Income 2001 2002 2003 2000 1999 0 5 10 15 20 25 30 35 (Billions of yen) R&D Expenses 2001 2002 2003 2000 1999 0 10 20 30 40 50 60 70 80 (Billions of yen) (%) 2.0 3.0 4.0 5.0 ■■ R&D Expenses ■■ R&D Expenses as a Percentage of Net Sales (right scale) Capital Expenditures and Depreciation and Amortization ■■ Capital Expenditures ■■ Depreciation and Amortization 2001 2002 2003 2000 1999 (Billions of yen) 0 10 20 30 40 50 60 70 80 (Billions of yen) Operating income  Ended March 2002 Operating income  Ended March 2003 Reduction in material costs etc. Gain on  currency exchange Deterioration of sales mix Increase of SG&A expenses and others Increase in R&D expenses 0 30 60 90 120 150 88.4 22.9 3.2 -27.6 -14.2 -5.2 67.5 Analysis of Increases and Decreases in Operating Income (Consolidated Basis) Annual Report 2003 23