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One Step Ahead of the Future
Annual Report 2006
Year ended March 31, 2006

Table of contents

  • Page 1
    Annual Report 2006 Year ended March 31, 2006 One Step Ahead of the Future

  • Page 2
    ... 18 Board of Directors 19 Executive Officers 20 The Business of Hitachi 22 Review of Operations 22 23 24 25 26 27 27 Information & Telecommunication Systems Electronic Devices Power & Industrial Systems Digital Media & Consumer Products High Functional Materials & Components Logistics, Services...

  • Page 3
    ... Technology/Products High Functional Materials Semiconductors, LCDs, HDDs â- Motors â- Logistics Services â- Financial Services â- â- Social Infrastructure Business Power Systems IP Networks â- Railway Systems â- Water Treatment and Environment Systems â- â- Industrial Infrastructure...

  • Page 4
    ... of security systems. The latest detection systems are used by companies such as Japan Airlines Corporation, All Nippon Airways Co., Ltd. and Yusen Air & Sea Service Co., Ltd. Coal-fired Power Plants Hitachi boasts integrated capabilities extending from the design, manufacture and assembly...

  • Page 5
    ... from small and midsize models to ultra-large excavators with an impressive operating weight of 780 tons. Hitachi Construction Machinery manufactures products locally in Europe, the U.S. and Asia, commanding high shares in each market. Industrial Infrastructure Business Hitachi, Ltd. Annual Report...

  • Page 6
    ... housing products business. Hitachi conducts a wide range of businesses in the digital consumer electronics field. Its operations include plasma and LCD flat-panel TVs, LCD projectors, HDD/DVD recorders, DVD camcorders, mobile phones and optical disk drives. In these fields, Hitachi is making new...

  • Page 7
    ... Co., Ltd. with anisotropic conductive films for displays, Hitachi Metals, Ltd. with sputtering target materials for LCDs, and Hitachi Cable, Ltd. with semiconductor packaging materials. Hitachi Cable TAB tapes for high-density mounting for semiconductors LCDs Hitachi's IPS (In-Plane-Switching...

  • Page 8
    ...everything from large to small and medium-size systems, Hitachi sells products that envisage various business scenes. These products include management software and virtualization technology for simplifying storage operation and management. Disk array subsystem 06 Hitachi, Ltd. Annual Report 2006

  • Page 9
    ... accepted in Japan, operating income is presented as total revenues less cost of sales and selling, general and administrative expenses. The Company believes that this is useful to investors in comparing the Company's financial results with those of other Japanese companies. Under accounting...

  • Page 10
    To Our Shareholders Etsuhiko Shoyama Chairman and Director Kazuo Furukawa President and Director 08 Hitachi, Ltd. Annual Report 2006

  • Page 11
    ... shareholders, customers and employees, and contribute to the advancement of society. Through this process we believe that we can increase long-term shareholder value. June 27, 2006 Etsuhiko Shoyama Chairman and Director Kazuo Furukawa President and Director Hitachi, Ltd. Annual Report 2006 09

  • Page 12
    ... II" were to reshape our business portfolio, accelerate globalization and create new businesses. We set four specific goals for fiscal 2005 when the plan was launched in 2003: positive FIV*1, an operating margin of at least 5%, ROE of at least 8%, and maintaining a single-A grade long-term credit...

  • Page 13
    ... company, Hitachi Mobile repairs and sells automotive components as well as provides related maintenance services. We made this move to create an integrated framework for automotive systems that extends from development to manufacturing through engineering services. Hitachi, Ltd. Annual Report 2006...

  • Page 14
    ...and Hitachi Home & Life Solutions, Inc. The former manufactures and constructs air conditioning systems, while the latter manufactures and sells home appliances. This merger has reinforced the comprehensive air conditioning business, which supplies products ranging from home to commercial systems on...

  • Page 15
    ...from display panels to TV sets. A number of concrete initiatives will be or have been taken to make this business more competitive. We have upgraded product development capabilities so that we can launch new models twice a year. Furthermore, a new plasma panel plant that will come on line in October...

  • Page 16
    ... of ethics in management. We are also aware that our corporate social responsibility extends to conducting business with due consideration for the natural environment. I would like to thank shareholders and other investors for their support of Hitachi. (June 2006) 14 Hitachi, Ltd. Annual Report...

  • Page 17
    ..., Hitachi is working to create a framework for quick business operation, while making management highly transparent by having four outside directors on the Board of Directors. In terms of the basic policy for corporate governance of the Hitachi Group, Hitachi, Ltd. Standards of Corporate Conduct is...

  • Page 18
    ...: three outside directors and two other directors who are full-time Audit Committee members. Regarding the reliability of financial reports, the Audit Committee monitors the accounting auditors, and receives the audit plans of the accounting auditors in advance to ensure that these auditors are not...

  • Page 19
    ..., make publicly available one or more documents which purport to summarize all aspects of its corporate governance guidelines, or adopt a code of business conduct and ethics for its directors, officers and employees that complies fully with the NYSE's requirements. Hitachi, Ltd. Annual Report 2006...

  • Page 20
    ... Executive Vice President and Executive Officer Honorary President, Japan Association for the Advancement of Working Women Senior Corporate Advisor, Asahi Glass Co., Ltd. Representative Director and Chairman of the Board, Nippon Steel Corporation Partner, Mori Hamada & Matsumoto Tohru Motobayashi...

  • Page 21
    ... Management, Business Development, Finance and Corporate Pension System Representative Executive Officer Senior Vice President and Executive Officer Tadahiko Ishigaki Sales Operations, Digital Media Business, Hitachi Group Global Business and Corporate Export Regulation Hitachi, Ltd. Annual Report...

  • Page 22
    ...25% 05 06 2,515.3 2,805.1 Digital Media & Consumer Products 12% 05 06 1,280.3 1,305.6 High Functional Materials & Components 15% 05 06 1,504.3 1,600.2 Logistics, Services & Others 11% 05 06 1,248.2 1,214.7 Financial Services 5% 20 Hitachi, Ltd. 05 06 529.6 517.9 Annual Report 2006

  • Page 23
    ... Power Plants â- Industrial Machinery and Plants â- Automotive Products â- â- Construction Machinery Elevators â- Escalators â- Railway Vehicles â- Air-Conditioning Equipment â- â- 05 06 8.6 (35.7) Optical Disk Drives TVs â- Plasma Displays â- LCD Projectors â- Mobile Phones...

  • Page 24
    ... appliance field. Server operations saw sales fall as demand shifted to low-priced models. PC operations also posted lower sales because of price declines. HitachiOmron Terminal Solutions, Corp., formed in October 2004 from a merger of Hitachi's information equipment businesses with those of Omron...

  • Page 25
    ...The higher sales reflected strong sales of X-ray systems and other equipment. Earnings declined year on year due to the impact of lower prices. 2.2-inch QVGA TFT LCD for mobile phones Exposure system for large-size glass substrate "APERTO Inspire" open MRI system Hitachi, Ltd. Annual Report 2006...

  • Page 26
    ... provides related maintenance services. Inverter junior waterace pump (upper), inverter-equipped screw compressor (right), industrial-use ink-jet printer (lower) IT condominium systems Clean room for the electronics industry at Hitachi Plant Technologies 24 Hitachi, Ltd. Annual Report 2006

  • Page 27
    ...and cost reductions offset the impact of lower prices and an escalation in the cost of materials. DVD camcorders, plasma TV, DVD/HDD recorder Room air conditioner, washing machine, refrigerator, vacuum cleaner Hitachi Maxell's recordable DVD and computer tape Hitachi, Ltd. Annual Report 2006 25

  • Page 28
    ... varnishes as well as strong growth in sales of automotive-related products such as automotive molded parts and disc brake pads. In housing equipment and environmental facilities, sales rose on higher sales of natural refrigerant heat pump water heaters, although prefabricated bathroom unit...

  • Page 29
    ... the number of cardholders in the card businesses. The provision of new insurance products in the non-life insurance business and an increase in the customer base in the outsourcing business also drove volume higher. Earnings rose on the higher volume and other factors. Hitachi, Ltd. Annual Report...

  • Page 30
    ... 2005 2004 Number of employees Information & Telecommunication Systems ...Electronic Devices ...Power & Industrial Systems ...Digital Media & Consumer Products ...High Functional Materials & Components ...Logistics, Services & Others ...Financial Services ...Subtotal ...Corporate ...Total ... 92...

  • Page 31
    ... 2006 Capital investment (Property, plant and equipment) Information & Telecommunication Systems ...Electronic Devices ...Power & Industrial Systems ...Digital Media & Consumer Products ...High Functional Materials & Components ...Logistics, Services & Others ...Financial Services ...Subtotal...

  • Page 32
    ... accepted in Japan, operating income (loss) is presented as total revenues less cost of sales and selling, general and administrative expenses. The Company believes that this is useful to investors in comparing the Company's financial results with those of other Japanese companies. Under accounting...

  • Page 33
    ... our Business 3. Disclosure of Information and Stakeholder Engagement 4. Corporate Ethics and Human Rights 5. Environmental Conservation 6. Corporate Citizenship Activities 7. Working Environment 8. Responsible Partnership with Business Partners (Adopted March 2005) Hitachi, Ltd. Annual Report 2006...

  • Page 34
    ... supplying products and services, the Hitachi Group is actively engaged in youth development and initiatives to raise interest in science and technology. Specific activities include offering, primarily through research laboratories, science seminars to give elementary and junior high school children...

  • Page 35
    ... Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Five-Year Summary Hitachi, Ltd. Annual Report 2006...

  • Page 36
    ... 5,097,882 45,474,017 Net property, plant and equipment ... 2,460,186 2,357,931 21,027,231 Other assets (notes 9 and 10) ... 1,018,531 ¥10,021,195 1,144,630 ¥9,736,247 8,705,393 $85,651,239 See accompanying notes to consolidated financial statements. 34 Hitachi, Ltd. Annual Report 2006

  • Page 37
    ... Stockholders' Equity Short-term debt (note 11) ...Current portion of long-term debt (notes 7 and 11) ...Trade payables: Notes ...Accounts ...Accrued expenses ...Income...021,195 See accompanying notes to consolidated financial statements. ¥9,736,247 $85,651,239 Hitachi, Ltd. Annual Report 2006 35

  • Page 38
    ...of U.S. dollars (note 3) 2006 Revenues: Product sales (note 5) ...Financial and other services ...Total revenues ...Cost of sales: Product sales ...Financial and other services ...Total cost of sales ...Selling, general and administrative expenses ...Impairment losses for long-lived assets (note 19...

  • Page 39
    ...stock (notes 11 and 13): Balance at beginning of year ...Conversion of convertible debentures ...Balance at end of year ...Capital surplus (note 13): Balance at beginning of year ...Gains on sales of treasury stock ...Gains on stock... financial statements....Hitachi, Ltd. Annual Report 2006 37

  • Page 40
    ...debt ...Payments on long-term debt ...Proceeds (payments) on subsidiaries' common stock, net ...Dividends paid to stockholders ...Dividends paid to minority stockholders of subsidiaries ...Acquisition of common stock for treasury ...Proceeds from sales of treasury stock ...Net cash used in financing...

  • Page 41
    ...located in Japan. The Company's and its subsidiaries' businesses are diverse, and include information and telecommunication systems, electronic devices, power and industrial systems, digital media and consumer products, high functional materials and components, and other services including financial...

  • Page 42
    ... than at the end of each semi-annual period, the Company evaluates an availablefor-sale security, a held-to-maturity security and a cost-method investment for possible impairment. Fair value is determined based on quoted market prices, projected discounted cash flows or other valuation techniques as...

  • Page 43
    ... programs. Under those programs, certain financial assets such as lease receivables, trade receivables and others are sold to Special Purpose Entities (SPEs) which are funded through the issuance of asset-backed securities to investors. When a transfer of financial assets is eligible to be accounted...

  • Page 44
    ... highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge accounting is discontinued for ineffective hedges, if any. Subsequent changes in the fair value of derivatives related to discontinued hedges are recognized in earnings immediately. 42 Hitachi, Ltd. Annual...

  • Page 45
    ...system products, construction equipment, displays, disk drives, televisions, air conditioners, batteries, magnetic tapes, high functional materials, cable products and automotive equipment. Revenues for railway vehicles are recognized upon acceptance or shipment, depending on contract terms. Product...

  • Page 46
    ...from time service contracts is recognized as services are rendered. Revenue from long-term fixed price service contracts such as support or maintenance contracts is recognized ratably over the contractual period. Finance lease income is recognized at level rates of return over the term of the leases...

  • Page 47
    ... requires a dual presentation of basic and diluted net income per share amounts on the face of the statements of income. Under this standard, basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during each year. Diluted net income per...

  • Page 48
    ...Flows." SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Also, the SEC issued Staff Accounting Bulletin No. 107, in which...

  • Page 49
    ...Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3." This statement provides the guidance for the accounting for and reporting of a change in accounting principle and the correction of an error, and requires retrospective application to prior periods' financial statements of a voluntary...

  • Page 50
    ... fair value of available-for-sale securities by the consolidated balance sheets classification as of March 31, 2006 and 2005. Millions of yen Amortized cost basis Gross gains Gross losses Aggregate fair value 2006 Amortized cost basis Gross gains Gross losses Aggregate fair value 2005 Short-term...

  • Page 51
    The following is a summary of gross unrealized holding losses on available-for-sale securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2006 and ...

  • Page 52
    ...adverse effect on their fair value. The aggregate fair values of investments in affiliated companies, for which a quoted market price was available, as of...Â¥8,669 million, respectively. Summarized combined financial information relating to affiliated companies accounted for by the equity method is as...

  • Page 53
    ... dollars 2006 2006 2005 2004 Revenues ...Purchases ... ¥535,084 315,356 ¥559,954 362,771 ¥498,564 299,331 $4,573,368 2,695,350 5. RECEIVABLES The aggregate annual maturities of the long-term trade receivables after March 31, 2007 included in trade receivablesaccounts are as follows: Years...

  • Page 54
    ... agreement for a portion of the land. The lease back is classified as an operating lease with a term of 25 years. The gain of the leased back portion in the amount of ¥2,736 million ($23,385 thousand) has been deferred and is being recognized over the lease term. 52 Hitachi, Ltd. Annual Report...

  • Page 55
    ... the years ended March 31, 2006, 2005 and 2004, Hitachi Capital Corporation and certain other financing subsidiaries sold primarily lease receivables to Special Purpose Entities (SPE) and the SPEs issued asset-backed commercial paper to investors. The investors and the SPEs have no recourse to the...

  • Page 56
    ...main component of intangible assets subject to amortization was capitalized software. Amortization of capitalized costs for software to be sold, leased or otherwise marketed is charged to cost of sales. ... ¥ - ¥123,384 173,402 99,070 34,602 ¥430,458 ¥ 9,382 54 Hitachi, Ltd. Annual Report 2006

  • Page 57
    ... $392,290 130,521 (12,410) 38,402 $548,803 Mainly due to severe demands for price reduction in the Automotive Industry reporting units in the Power and Industrial Systems, operating profits and cash flows were lower than expected. Based on that trend, the earnings forecast for the next three years...

  • Page 58
    10. INCOME TAXES Components, as either domestic or foreign, of income before income taxes and minority interests, and income taxes attributable to continuing operations ...,264 89,293 ¥182,557 ¥26,149 28,335 (12,237) ¥16,098 ¥237,149 121,599 77,056 ¥198,655 56 Hitachi, Ltd. Annual Report 2006

  • Page 59
    ... changes in tax laws and rates in Japan ...Change in valuation allowance ...Other comprehensive income (loss), net of reclassification adjustments: Minimum pension liability adjustments ...Net unrealized holding gain on available-for-sale securities ...Cash flow hedges ... ¥120,533 (5,716) - 39,531...

  • Page 60
    ...in Japan ...Change...plant and equipment, due to differences in depreciation . . Net operating loss carryforwards ...Other ...Valuation allowance ...Total gross deferred tax liabilities: Deferred profit on sale of properties ...Tax purpose reserves regulated by Japanese...Hitachi, Ltd. Annual Report 2006

  • Page 61
    ...with Accounting Research Bulletin No. 51, "Consolidated Financial Statements," as of March 31, 2006 and 2005 are reflected in the accompanying consolidated balance ... not result in material additional Japanese income taxes because of available foreign tax credits. Hitachi, Ltd. Annual Report 2006 59

  • Page 62
    ... zero coupon ...Series B, due 2009, zero coupon ...Loans, principally from banks and insurance companies: Secured by various assets and mortgages on property, plant and equipment, maturing 2006-2015, interest 0.85-4.65% ...Unsecured, maturing 2006-2020, interest 0.4-5.7% ...Capital lease obligations...

  • Page 63
    .... The initial conversion price was ¥1,009 per share for both bonds at which time the fair value of the Company's common stock was ¥686. In accordance with the terms of the debenture, the conversion price was adjusted to ¥822 ($7.03) on October 19, 2005 for series A zero coupon convertible bonds...

  • Page 64
    ... and loss are amortized using the straight-line method over the average remaining service period of active employees. The Employees Pension Fund (EPF) stipulated by the Japanese Pension Insurance Law is one of the defined benefit pension plans to which the Company and certain domestic subsidiaries...

  • Page 65
    ... pension plan ...Transfer of substitutional portion ...Settlement ...Foreign currency exchange rate changes ...Fair value of plan assets at end of year ...Funded status ...Unrecognized prior service benefit ...Unrecognized actuarial loss ...Net amount recognized in the consolidated balance...

  • Page 66
    ... periodic pension cost for the years ended March 31, 2006, 2005 and 2004 are as follows: 2006 2005 2004 Discount rate ...Expected long-term return on plan assets ...Rate of compensation increase ... 2.5% 3.0% 2.9% 2.5% 3.0% 3.1% 2.5% 3.7% 3.3% The expected long-term rate of return on plan assets...

  • Page 67
    ...of the Company's investment policy is to ensure a stable return from the plan's investments over the long term, which allows the Company's and certain subsidiaries' pension funds to meet their future obligations. In order to achieve the above objective, a target rate of return is established, taking...

  • Page 68
    ... with the provisions of the Japanese Commercial Code, the former Japanese corporate law, by crediting one-half of the conversion price to each of the common stock accounts and the capital surplus accounts. 14. LEGAL RESERVE AND CASH DIVIDENDS The Japanese Corporate Law provides that earnings in...

  • Page 69
    ... be publicly traded and do not carry a voting right. The JCL also states that a shareholder holding shares less than a minimum trading lot is entitled to request the company to sell its treasury stock, if any, to the shareholder up to a minimum trading lot, provided that sale of treasury stock is...

  • Page 70
    ...sale securities: Balance at beginning of year ...Other comprehensive income, net of reclassification adjustments ...Net transfer from (to) minority interests ...Balance at end of year ...Cash flow hedges: Balance...,864) $(2,577,128) 1,765,120 (8,479) $ (820,487) 68 Hitachi, Ltd. Annual Report 2006

  • Page 71
    ...amounts of income tax expense or benefit allocated to each component of other comprehensive income (loss), including reclassification adjustments. ......Minimum pension liability adjustments ...Net unrealized holding gain on available-for-sale securities ...Cash flow...Hitachi, Ltd. Annual Report 2006 69

  • Page 72
    ... adjustments: Foreign currency translation adjustments ...Minimum pension liability adjustments ...Net unrealized holding gain on available-for-sale securities ...Cash flow hedges ... ¥ (42,535) 619...709 (3,777) (34,275) 366,707 26,635 49 ¥359,116 70 Hitachi, Ltd. Annual Report 2006

  • Page 73
    ... to stand ready to perform over the term of the guarantees in the event the customer can not make its scheduled payments. The subsidiaries provide certain revolving lines of credit to its credit card holders in accordance with the terms of the credit card business customer service contracts...

  • Page 74
    ... equipment located in Japan, which primarily consisted of ¥13,391 million in the Corporate division and ¥8,175 million in the Information & Telecommunication Systems division. These losses, in part, were the result of change in the manner the assets were used. 72 Hitachi, Ltd. Annual Report 2006

  • Page 75
    ... & Components division. The following represent significant restructuring activities for the year ended March 31, 2005 by business line: 1. Information & Telecommunication Systems division restructured in order to strengthen its business structure primarily in Japan. The accrued special termination...

  • Page 76
    ... restructuring activities for the year ended March 31, 2004 by business line: 1. Power & Industrial Systems division restructured in order to address the general weakness in demand primarily in Japan. The accrued special termination benefits expensed during the year ended March 31, 2004 amounted...

  • Page 77
    ... as follows: Number of shares 2006 2005 2004 Weighted average number of shares on which basic net income per share is calculated ...Effect of dilutive securities: Series A zero coupon convertible bonds ...Series B zero coupon convertible bonds ...Stock options ...Number of shares on which diluted...

  • Page 78
    ...from sale of investments and subsidiaries' common stock on the consolidated statements of cash flows. 26. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Overall risk profile The major manufacturing bases of the Company and its subsidiaries are located in Japan and Asia. The selling bases are located...

  • Page 79
    ...manage fluctuations in fair value resulting from interest rate risk. Under the interest rate swaps, the Company and certain financing subsidiaries receive fixed interest rate payments associated with medium-term notes and make variable interest rate payments, thereby creating variable-rate long-term...

  • Page 80
    ...transactions is approximately 33 months. Interest rate exposure Changes in fair values of interest rate swaps designated as hedging instruments for the variability of cash flows associated with long-term debt obligations are reported in AOCI. These amounts subsequently are reclassified into interest...

  • Page 81
    ...fair value of long-term debt is estimated based on quoted market prices or the present value of future cash flows using the Company's and its subsidiaries' incremental borrowing rates for similar borrowing arrangements. Cash and cash equivalents, Trade receivables, Short-term debt and Trade payables...

  • Page 82
    ..., 2004. As a result, ¥12,509 million of gains on stock exchange upon the merger was credited to capital surplus. TOKICO manufactures automotive components and pneumatic equipment. The Company has strategically targeted the automotive products business and the purpose of the merger with TOKICO is to...

  • Page 83
    ...'s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management...

  • Page 84
    ... accepted in Japan, operating income (loss) is presented as total revenues less cost of sales and selling, general and administrative expenses. The Company believes that this is useful to investors in comparing the Company's financial results with those of other Japanese companies. Under accounting...

  • Page 85
    ... 94005-1845 TEL: +1-650-244-7902 E-mail: [email protected] Depositary and Registrar for American Depositary Receipts (New York Stock Exchange Listed Symbol - HIT) Citibank, N.A. Shareholder Services P.O. Box 43077 Providence, Rhode Island 02940-3077 USA TEL: U.S.A. 1-877-248-4237 CITI...

  • Page 86
    This annual report was printed on recycled paper. Printed in Japan