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Seiko Epson Corporation
Annual Report 2010
April 2009-March 2010

Table of contents

  • Page 1
    Seiko Epson Corporation Annual Report 2010 April 2009-March 2010

  • Page 2
    ... to timely introduce new products and services in markets, consumption trends, competition, technology trends, and exchange rate fluctuations. In this annual report, "Epson" refers to the Epson Group, while "the Company" may refer to the Group or the parent company, Seiko Epson Corporation. 1

  • Page 3
    ... Financial Statements...48 Report of Independent Auditors ...74 Additional Information ...75 1. Principal subsidiaries and affiliates ...75 2. Distribution of ownership among shareholders ...79 3. Major shareholders ...80 4. Epson stock price ...81 5. Corporate data and investor information...82 2

  • Page 4
    ... data Net sales Information-related equipment Electronic devices Precision products Other Eliminations and corporate Gross profit Selling, general and administrative expenses Operating income (loss) Income (loss) before income taxes and minority interests Net income (loss) Research and development...

  • Page 5
    ... Current assets Property, plant and equipment (net of accumulated depreciation) Total assets Current liabilities Noncurrent liabilities Net assets Number of employees Per share data (yen and U.S. dollars) Net income (loss) Cash dividends Shareholders' equity Financial ratios (%) Shareholders' equity...

  • Page 6
    ...format inkjet Epson El Paso, Inc. Epson Deutschland GmbH printers and related Epson Precision (Hong Epson France S.A. supplies, color Kong) Ltd. Epson Italia s.p.a. image scanners, Singapore Epson Industrial Epson Iberica, S.A. mini-printers, POS Pte. Ltd. Epson (China) Co., Ltd. system products and...

  • Page 7
    ... (Hong Epson Europe Electronics GmbH projectors and others Kong) Ltd. Quartz device Crystal units, Epson Toyocom Corporation Epson Hong Kong Ltd. Epson Taiwan Technology & business crystal oscillators, Akita Epson Corporation Trading Ltd. quartz sensors, Epson Toyocom Malaysia Epson Singapore Pte...

  • Page 8
    ... Business Main products category Manufacturing companies Sales companies Watch business Watches, watch movements and others Plastic corrective lenses and others Epson Precision (Hong Kong) Ltd. Singapore Epson Industrial Pte. Ltd. Seiko Lens Service Center Corporation Philippines Epson Optical Inc...

  • Page 9
    ... Information-related equipment 3LCD projector component manufacturing facilities Liquid crystal panel and Electronic devices Precision products factory automation manufacturing facilities Other facilities Liquid crystal panel manufacturing facilities Semiconductor manufacturing facilities Research...

  • Page 10
    ...Hong Kong) Ltd. (Hong Kong, China) Singapore Epson Industrial Pte. Ltd. (Singapore) P.T. Indonesia Epson Industry (Bekasi, Indonesia) Epson Precision (Philippines), Inc. (Cabuyao, Philippines) Epson Toyocom Malaysia Sdn. Bhd. (Kuala Lumpur, Malaysia) Information-related equipment Electronic devices...

  • Page 11
    ... equipment and facilities for printers and 3LCD projectors amounted to ¥12,502 million in the fiscal year under review. Electronic devices Investment for commercializing new products, and for maintaining and renewing equipment and facilities for small- and medium-sized LCDs and quartz devices...

  • Page 12
    ...fiscal year ending March 31, 2011. The breakdown by business segment is as follows. Planned amount of capital expenditures (100 millions of yen) 210 180 30 40 460 Business segment Information-related equipment Electronic devices Precision products Other and overall Total Main types and purposes of...

  • Page 13
    ... Country Type of contract Contract period December 22, 2000 until the expiry of the patents Research Corporation Technologies, Inc. U.S.A. License to use patents relating to printing technologies for printers (2) Reciprocal technical assistance agreements Name of contracting company Seiko Epson...

  • Page 14
    ... trend in prices Market prices for printers, projectors and other information-related equipment have been on a continuous decline due to intensified competition and a shift in demand toward lower-priced products. Meanwhile, prices for crystal devices and color LCDs for mobile phones are being...

  • Page 15
    ...March 2010 were overseas sales. Epson has production sites all over Asia, including China, Indonesia, Singapore and Malaysia, as well as in the United States, the United Kingdom, Mexico, and other countries. It has also established many sales companies all over the world. Epson' s employees overseas...

  • Page 16
    ... technologies, digital control technologies and digital color image processing technologies. By evolving and fusing these technologies, Epson has been able to manufacture and sell products that meet customers' needs, thereby developing the presence that it has today. The rate of technological...

  • Page 17
    ... currency exchanges create risks for Epson A significant portion of Epson' s sales are denominated in U.S. dollars or the euro. Epson is continuing to expand its overseas procurement and move its production sites overseas, thereby attracting an increase in expenses in foreign currencies linked to...

  • Page 18
    ... to allegations concerning a TFT-LCD price-fixing cartel, and received from competition authorities in the United States and elsewhere instructions and notices to submit relevant materials. In August 2009, a consolidated subsidiary of the Company concluded a plea agreement by which it paid a fine...

  • Page 19
    ...natural disaster Epson is undertaking a global expansion of its sites for research and development, procurement, manufacturing, logistics, sales and services. It is possible that the regions concerned could be affected by any number of unpredictable events, such as a natural disaster, computer virus...

  • Page 20
    ... sales or profit, but Epson is subject to the permission and other regulations of relevant authorities in its manufacturing and manufacturing/sales of those products in Japan. Also, because the plastic corrective lenses, which are manufactured by Epson, are sold in the United States, Europe and Asia...

  • Page 21
    ... recovery trend was weak and unit sales remained weak. The serial dot-matrix printer (SIDM) market is contracting in North America, Europe, and Japan, but demand remained firm in some countries, including China, Singapore and some of the surrounding countries. Sales of POS systems turned upward as...

  • Page 22
    ... mobile phone, PMP, and other equipment manufacturers that accompanied the reorganization of the business. The quartz device business reported a slight increase in net sales. Although net sales were moderated by the effects of lower prices associated with yen appreciation and changes in the product...

  • Page 23
    ... fiscal year; the effect of human resources reassignments and other fixed cost reductions; and an increase in capacity utilization rates as the inventory correction cycle neared its end. As a result of the foregoing factors, full-year net sales in the electronic device segment were ¥248,001 million...

  • Page 24
    ... Year ended March 31, 2010 (From April 1, 2009, to March 31, 2010) (Millions of yen) 688,955 200,642 53,266 795 Information-related equipment Electronic devices Precision products Other Total 943,660 Notes 1. The above figures are based on sales prices. Intersegment transactions are offset...

  • Page 25
    ... to low-cost products and a stronger yen. Page printer unit shipments increased as a result of stronger focus on tender business, but they were also affected by falling prices and the recent historical trend of declining sales volumes. At the same time, net sales from 3LCD projectors remained steady...

  • Page 26
    ... assets resulting from worsening profitability in the quartz device business, and further steps in setting the direction of the small- and medium-sized display and semiconductor businesses based on the new SE15 long-range vision. Loss before income taxes and minority interests As a result, Epson...

  • Page 27
    ... ¥25,784 million. The decrease in current assets was due mainly to a decline in marketable securities. The decrease in fixed assets was primarily the result of selective capital spending and impairment losses on business assets in the electronic devices business. Total liabilities were ¥587,226...

  • Page 28
    ... crystal panels fabricated with Epson's original C2 FineTM inorganic alignment layer. The projector produces vivid, high-quality images that brightness alone cannot provide. Electronic devices In the quartz device business, Epson developed a six-axis sensor (incorporating a three-axis gyro-sensor...

  • Page 29
    approximately five meters. Other businesses and company-wide Our researchers established technology for depositing uniform layers using an inkjet process. The process exploits Epson's proprietary Micro Piezo inkjet technology to achieve markedly greater accuracy in organic material deposition than ...

  • Page 30
    ...TFT LCD technology, and enter and develop new business domains. Quartz devices and sensors By making Epson Toyocom a wholly owned subsidiary in June 2009 to improve management responsiveness and efficiency, Epson aims to reinforce Epson Toyocom's position as the leading company in the crystal device...

  • Page 31
    ... with our policy of returning stable profits to shareholders, we are paying a year-end dividend of ¥10 per share. The Company's Articles of Incorporation allow the Company to issue an interim dividend with a base date of September 30 every year by resolution of the board of directors. The Company...

  • Page 32
    ... checks and balances and to assure corporate ethics compliance. In so doing, the Company seeks to ensure the transparency and soundness of management in the eyes of its customers, shareholders, employees and other stakeholders. Epson has a board of directors and a board of auditors. The ten-member...

  • Page 33
    ..., and to realize the mission stated in the Management Philosophy, the Company established "Principles of Corporate Behavior," rules for proper business conduct that are shared across the Group, worldwide. Departments within Epson pursue improvements to internal controls based on the Principles of...

  • Page 34
    ... the auditors to conduct audits based on the same information as that available to directors. Statutory auditors also routinely review important documents related to management decision making. Epson has established an Audit Staff Office with specialized personnel to assist the statutory auditors in...

  • Page 35
    ... position of director as an additional post. 3. Epson introduced a stock performance (stock-based) component to the remuneration system to link remuneration more closely to share price, so Epson stock accounts for a portion of basic salary. 4. A resolution of the general shareholders' meeting held...

  • Page 36
    ... team The auditing team comprises 43 staff including eight certified public accountants, 16 junior accountants, and 19 other accounting staff. (7) Outline of contract limiting liability The Company's contract with the outside statutory auditor is based on Article 427, Paragraph 1, of the Japanese 35

  • Page 37
    ...the provisions of the Japanese Companies Act. (10) Items for the General Shareholders' Meeting that can be determined by the board of directors Treasury stock acquisition The Company's Articles of Incorporation allow the Company to acquire treasury stock through stock market trade and other means by...

  • Page 38
    ...for consultancy services relating to internal control systems, in particular financial reporting. Fiscal year under review Remuneration paid for non-audit work performed by the auditing certified public accountant was for consultancy services, in particular training courses. (4) Governing policy for...

  • Page 39
    ... the Plan, and the Epson board of directors shall give maximum regard to that advice before implementing their resolutions promptly as an organ of the Japanese Companies Act. * Please refer to the following release for a more detailed explanation. http://global.epson.com/newsroom/2008/news 20080430...

  • Page 40
    ... Sales & Marketing Planning Division, and President, Epson Sales Japan Corporation. General Administrative Manager, Human Resources Division, and Chairman, Epson Europe B.V. Chief Operating Officer, Imaging Products Operations Segment General Administrative Manager, Corporate Research & Development...

  • Page 41
    ..., Imaging Products Business Planning & Management Office Vice-Chairman, Epson (China) Co., Ltd. Chief Operating Officer, Watch Operations Division Chairman and President, Epson (China) Co., Ltd. Chief Operating Officer, Semiconductor Operations Division, and President, Tohoku Epson Corporation...

  • Page 42
    Index to Consolidated Financial Statements Seiko Epson Corporation and Subsidiaries Consolidated Balance Sheets...Consolidated Statements of Income...Consolidated Statements of Changes in Net Assets...Consolidated Statements of Cash Flows...Notes to Consolidated Financial Statements ...42 44 45 47 ...

  • Page 43
    ... and finished goods Work in process Raw materials and supplies Deferred tax assets Other Allowance for doubtful accounts Total current assets Noncurrent assets Property, plant and equipment Buildings and structures Machinery, equipment and vehicles Tools, furniture and fixtures Land Construction in...

  • Page 44
    ... for product warranties Provision for loss on litigation Negative goodwill Other Total noncurrent liabilities Total liabilities Net assets Shareholders' equity Capital stock Authorized - 607,458,368 shares Issued - 199,817,389 shares Capital surplus Retained earnings Treasury stock March 31, 2010...

  • Page 45
    ...2009 Net sales Cos t of sales Gros s profit Selling, general and administrative expenses Operating income (loss ) Non-operating income: Interes t income Rent... 96,331 (89,559) 7,744 18,443 26,188 (4,425) (¥111,322) March 31, 2010 ¥985,363 725,894 259,469 241,241 18,227 1,259 1,014 1,368 4,084 7,726 ...

  • Page 46
    ...in Net Assets Millions of yen March 31, 2009 Shareholders' equity Capital stock ...shareholders' equity Balance at the end of previous period Changes of items during the period Increase by share exchanges Dividends from surplus Net income (loss) Purchase of treasury stock Disposal of treasury stock...

  • Page 47
    ...net assets Balance at the end of previous period Changes of items during the period Increase by share exchanges Dividends from surplus Net income (loss) Purchase of treasury stock Disposal of treasury stock Net changes of items other than shareholders' equity...U.S. dollars March 31, 2010 (414,842) (53...

  • Page 48
    ..., plant and equipment Purchase of intangible assets Proceeds from sales of intangible assets Purchase of long-term prepaid expenses Purchase of investments in subsidiaries Other, net Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Net increase...

  • Page 49
    ... as a manufacturer of watches but later expanded its business to provide key devices and solutions for the digital color imaging markets through the application of its proprietary technologies. The Company operates its manufacturing and sales business mainly in Japan, the Americas, Europe and Asia...

  • Page 50
    ... are accounted for using the equity method. Consolidated income includes Epson's current equity in net income or loss of affiliates after elimination of significant unrealized inter-company profits. The difference between the cost and the underlying net assets of investments in subsidiaries is...

  • Page 51
    ... accumulated depreciation. Maintenance and repairs, including minor renewals and improvements, are charged to income as incurred. Depreciation of property, plant and equipment is mainly computed based on the declining-balance method for the Company and its Japanese subsidiaries, and on the straight...

  • Page 52
    ... amounts that the Company is obligated to pay to directors and statutory auditors subject to the resolution of the general shareholders' meeting held subsequent to the fiscal year-end. (10) Provision for product warranties Epson provides an accrual for estimated future warranty costs based on the...

  • Page 53
    ... and accepted by customers. (16) Research and development costs Research and development costs are charged as incurred. (17) Leases Epson leases certain office space, machinery and equipment and computer equipment from third parties using capital leases. Most of the capital leases are other than...

  • Page 54
    ... shown in U.S. dollars are for convenience only, a rate of ¥93.04 = U.S.$1, the exchange rate prevailing on March 31, 2010, has been used. 6. Inventories Losses recognized and charged to cost of sales as a result of valuations on March 31, 2009 and 2010, were ¥30,979 million and ¥30,115 million...

  • Page 55
    ... of other securities and the related gains for the year ended March 31, 2009, are not disclosed herein since they are insignificant to the consolidated results. The total sales of other securities, the related gains and losses for the year ended March 31, 2010, were ¥551 million ($5,922 thousand...

  • Page 56
    ... on bonds payable, short-term loans payable and long-term loans payable as of March 31, 2010. Average interest rates on lease obligations are not disclosed herein since interest expenses included in lease payments are allocated based on the straight-line method for the corresponding fiscal years...

  • Page 57
    ... March 31 2009 Goodwill Negative goodwill 10. Retirement benefits ¥469 2,199 2010 ¥3,703 830 The Company and its Japanese subsidiaries maintain corporate defined benefit pension plans and defined contribution pension plans covering the majority of their employees. Some of the Company's Japanese...

  • Page 58
    ... computation of the retirement benefit obligations for the years ended March 31, 2009 and 2010, were primarily as follows: Year ended March 31 Discount rate Long-term rate of return on plan assets 11. Net assets The Japanese Companies Act stipulates that an amount equal to 10% of dividends shall be...

  • Page 59
    ..., is as follows: Millions of yen Year ended March 31 2009 (Â¥111,322) 2010 (Â¥19,791) Net income (loss) attributable to common shares Thousands of U.S. dollars Year ended March 31, 2010 ($212,714) Thousands of shares Weighted-average number of common shares outstanding 196,361 Yen (Â¥566.92) 199...

  • Page 60
    ... of yen March 31 2009 2010 Deferred tax assets: Property, plant and equipment and intangible assets (Impairment loss and excess of depreciation) Net operating tax loss carry-forwards Inter-company profits on inventories and write downs Provision for bonuses Devaluation of investment securities...

  • Page 61
    ...segment under the Company's management accounting system, and their cash flows are continuously monitored. Assets that Epson plans to sell and idle assets are separately assessed for impairment on the individual asset level. Impairment tests are performed for both types of assets. The net book value...

  • Page 62
    ... tools, furniture and fixtures. The recoverable amounts are determined using their net selling price, which were assessed on the basis of reasonable estimates. 17. Leases As of March 31, 2009 and 2010, capital leases, mainly comprised of plants, production equipment in the electronic devices segment...

  • Page 63
    ..., 2009 and 2010, by transaction and type of instrument, excluding derivatives qualifying for hedge accounting. (a) Currency-related transactions Millions of yen March 31, 2009 Notional amounts Unrealized gains (losses) Instruments Forward exchange contracts: Sold U.S. dollar (purchased Japanese yen...

  • Page 64
    ... 31, 2010 Notional amounts Unrealized gains (losses) Instruments Forward exchange contracts: Sold U.S. dollar (purchased Japanese yen) Euro (purchased Japanese yen) Australian dollar (purchased Japanese yen) Singapore dollar (purchased Japanese yen) Hong Kong dollar (purchased Japanese yen) Euro...

  • Page 65
    ... is calculated based on prices obtained from financial institutions. (b) Interest-related transactions Millions of yen March 31, 2010 Due after Notional one year amounts Instruments Interest rate swaps: Pay-fixed, receive-floating Hedged items Floating interest rate in long-term loans payables...

  • Page 66
    ... Market risk Epson principally manages its exposure to fluctuations in exchange rates on a net basis and mainly uses forward exchange contracts to reduce the exposures. For risks associated with foreign currency fluctuations, for operating receivables and payables based on foreign currency, Epson...

  • Page 67
    swap transactions are approved and executed based on the authorization of Epson's director responsible for finance based on internal rules and policies concerning financial management. For investment securities, Epson regularly reviews the market value and financial results, etc., of the issuing ...

  • Page 68
    ... with floating rates are affected in the short term by fluctuations in market interest rates, and because Epson's credit status has not changed greatly since they were implemented, it is assumed that their fair value is equal to the carrying amounts. The fair value of loans payable based on fixed 67

  • Page 69
    ...are calculated using the same method as used for determining the fair value of long-term loans payable based on fixed interest rates. Limitations Fair value estimates are based on relevant market information. These estimates involve uncertainties and therefore changes in assumptions could affect the...

  • Page 70
    ... LCDs, HTPS-TFT panels for 3LCD projectors, crystal units, crystal oscillators, quartz sensors, optical devices and CMOS LSI. The precision products segment mainly includes watches, watch movements, plastic corrective lenses, precision industrial robots, IC handlers and industrial inkjet equipment...

  • Page 71
    Millions of yen Year ended March 31, 2010 InformationElectronic related devices equipment Net sales: Customers Inter-segment Total Operating expenses Operating income (loss) Identifiable assets Depreciation and amortization Impairment loss Capital expenditures ¥711,378 1,314 712,692 ¥674,662 ¥38,...

  • Page 72
    ..., Chile, Argentina, Costa Rica, Colombia, Venezuela, Mexico and Peru. "Europe" mainly includes the United Kingdom, the Netherlands, Germany, France, Italy, Spain, Portugal and Russia. "Asia/Oceania" mainly includes China (including Hong Kong), Singapore, Malaysia, Taiwan, Thailand, the Philippines...

  • Page 73
    ...$9,351,784 The Americas Europe Asia/Oceania Total Eliminations and Consolidated corporate The amounts of corporate assets included in "Eliminations and corporate" were ¥293,829 million and ¥277,820 million ($2,986,027 thousand) at March 31, 2009 and 2010, respectively, and mainly comprised cash...

  • Page 74
    ... a TFT-LCD price-fixing cartel, and received from competition authorities in the United States and elsewhere instructions and notices to submit relevant materials. In August 2009, Epson Imaging Devices Corporation, a consolidated subsidiary of the Company, concluded a plea agreement by which...

  • Page 75
    Report of Independent Auditors 74

  • Page 76
    ... devices Manufacture and sales of 100.0 LCDs, Rental of assets, Guaranty of liabilities Regional headquarters in 100.0 Americas, Interlocking directors Sales of printers and other 100.0 PC peripherals, and sales of (100.0) factory automation products, Interlocking directors 100.0 Sales of electronic...

  • Page 77
    ...Epson Italia s.p.a. Milan, Italy Epson Iberica, S.A. Cerdanyola, Spain Epson (China) Co., Ltd. Beijing, China *1 Epson Korea Co., Ltd. Seoul, Korea Epson (Shanghai) Shanghai, Information Equipment China Co., Ltd. 100.0 Sales of printers and other (100.0) PC peripherals Hong Kong, Epson Hong...

  • Page 78
    ... Epson Toyocom Malaysia Sdn. Bhd. 63 other companies Singapore Bekasi, Indonesia Cabuyao, Philippines Kuala Lumpur, Malaysia - - - - - Company name Location Paid-in capital or amount invested Main business Ownership Relationship between parent percentage of company and affiliate voting...

  • Page 79
    5. As a result of the share exchange of June 1, 2009, the Company' s assumed 100% of the voting rights in Epson Toyocom Corporation and Epson Toyocom Malaysia Sdn. Bhd. 78

  • Page 80
    ...and regional individuals Total financial securities Japanese one unit public institutions companies corporations Institutions Individuals and others (Shares) bodies Share ownership (100 shares per unit) Category Number of shareholders (Persons) Number of shares owned Units - 67 47 406 357 25...

  • Page 81
    ...account) Seiko Holdings Corporation Japan Trustee Services Bank, Ltd. (Trustee Account) Yasuo Hattori Reijiro Hattori The Dai-ichi Mutual Life Insurance Company Seiko Epson Corporation Employees' Shareholding Association Noboru Hattori Total Address 5-8 Ginza 3-chome, Chuo-ku, Tokyo Number of shares...

  • Page 82
    ...660 66th year March 2008 4,320 1,997 67th year March 2009 3,300 1,001 68th year March 2010 1,715 1,216 Note High and low stock prices noted above are based on the Tokyo Stock Exchange (First Section) data. (2) High and low stock prices for the previous six months Month High (Â¥) Low (Â¥) October...

  • Page 83
    ... data and investor information (1) Company name (2) Founded (3) Head office Seiko Epson Corporation May 1942 3-5 Owa 3-chome, Suwa, Nagano 392-8502, Japan Tel: -81-266-52-3131(main) (4) Tokyo office Shinjuku NS Building, 4-1 Nishishinjuku 2-chome, Shinjuku-ku Tokyo 163-0811, Japan Tel: +81-3-3348...

  • Page 84
    3-5 Owa 3-chome, Suwa, Nagano 392-8502, Japan Tel: +81-266-52-3131 (main) http://global.epson.com