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Annual Report 2006
April 2005 – March 2006

Table of contents

  • Page 1
    Annual Report 2006 April 2005 - March 2006

  • Page 2
    Epson Management Innovation: The "Creativity and Challenge 1000" Mid-Range Business Plan

  • Page 3
    In March 2006, Epson established "Creativity and Challenge 1000," a new mid-range business plan designed to achieve a recovery in business performance and put Epson back on a growth path by revolutionizing its management. Centered on extensive enhancement of Epson's earnings capabilities, the new ...

  • Page 4
    ... for Displays ...Research and Development Strategies ...Patent Strategies ...Implementing Trust-Based Management ...Management Topics ...Epson at a Glance ...In this annual report, "Epson" refers to the Epson Group, while "the Company" refers to the parent company, Seiko Epson Corporation. 3 4 6 12...

  • Page 5
    Consolidated Financial Highlights SEIKO EPSON CORPORATION AND SUBSIDIARIES 2004 Millions of yen Year ended March 31 2005 2006 Thousands of U.S. dollars Year ended March 31, 2006 Statements of income data: Net sales Gross profit Selling, general and administrative expenses Operating income ...

  • Page 6
    ... in the core inkjet printer business were outpaced by a decline in average selling prices and rising costs associated with improved product functionality. This had a significant impact on earnings, which fell sharply year on year. Seiji Hanaoka President & COO 4 Seiko Epson Annual Report 2006

  • Page 7
    ... sales of LCDs for mobile phones, driven by the full-year contribution of Sanyo Epson Imaging Devices Corporation, where operations commenced in October 2004. The second was the start of operations in October 2005 at Epson Toyocom Corporation, a new company integrating the quartz device operations...

  • Page 8
    ... changes, curbing costs in response to falling prices, and quickly recouping investments. In one of Epson's core businesses, inkjet SE07 Medium- to Long-Term Corporate Vision Targeting the convergence of imaging domains Printers Core devices Projectors Displays 6 Seiko Epson Annual Report 2006

  • Page 9
    ... position and rolling out a powerful product lineup centered on timing, sensing and optical devices. On the far left is semiconductors (IC), where Epson has a relatively weak market position and the proportion of fixed costs is high. Major streamlining is in order for this business. The plan is to...

  • Page 10
    ... strategy Inkjet printers Laser printers Business systems 3LCD projectors Small- and medium-sized LCDs High-temperature polysilicon TFTLCD panels for 3LCD projectors Semiconductors Quartz devices High Create products for future growth areas Market growth rate Low Low LCD IC HTPS LP Watch Optical...

  • Page 11
    ...64.0 HTPS Other (reduction in force in European area, etc.) Workforce streamlining Total Reduce contingent workforce by 3,000 over 3 years 46.3 3.0 49.3 16.0 * Figures based on forecasts made at the announcement of the mid-range business plan in March 2006. Seiko Epson Annual Report 2006 9

  • Page 12
    ... engineers and researchers from the R&D organizations of the information-related equipment divisions, corporate R&D, and corporate R&D support departments under one roof. By encouraging the fusion of ideas and technologies, our aim is to provide the catalyst that will one day lead to the creation...

  • Page 13
    ... as in a renewed commitment to our long-cherished spirit of creativity and challenge. We are determined to win back the trust of our stakeholders as quickly as possible, and ask for the ongoing understanding and support of all of you as we work to do so. Seiko Epson Annual Report 2006 11

  • Page 14
    ... A3 printers) â- All-in-one printers Source: Based on data compiled by the Company Small photo printers include sublimation printers. Prior to the fiscal year ending March 31, 2005 the small photo printers category was classified under single-function printers. 12 Seiko Epson Annual Report 2006

  • Page 15
    ...products, Epson will continue efforts to expand sales of photo-only and all-in-one printers, A3 printer models for professional and serious amateur photographers, and large-paper inkjet printers for the professional printing market, all of which utilize pigment inks. At the same time, the Company is...

  • Page 16
    ...projection TVs Source: Based on data compiled by the Company its three primary colors of red, green and blue. Each color is then separately passed through three high-temperature polysilicon (HTPS) TFT-LCD panels, reassembled via a prism and projected as an image. 14 Seiko Epson Annual Report 2006

  • Page 17
    ... of these panels at its Chitose Plant, where it has adopted production technology utilizing 300-mm (12-inch) quartz glass wafers. While keeping a close watch on market trends, Epson is progressively upgrading capacity to ensure the stable supply of these products. Seiko Epson Annual Report 2006 15

  • Page 18
    ...) (estimate) (estimate) â- Passive matrix LCDs (monochrome) â- Passive matrix LCDs (color) â- Active matrix LCDs (color) Source: Based on data compiled by Sanyo Epson Note: On pages 16 and 17 "the Company" refers to Sanyo Epson Imaging Devices Corporation. 16 Seiko Epson Annual Report 2006

  • Page 19
    ...-term earnings growth by expanding sales of LCDs for mobile phones, and through ongoing business domain expansion. Distinction Through HighAdded-Value Technology and Business Domain Expansion Sanyo Epson is enhancing its product capabilities over the medium term, Seiko Epson Annual Report 2006 17

  • Page 20
    ... High-performance engines Ultra-low power/resource Professional photo quality related equipment, began full-scale operations from April 2006. Established on the grounds of Epson's Hirooka Office in Nagano, Japan, the center is a cornerstone of Epson's medium- to Personalized/localized printing and...

  • Page 21
    from diverse parts of the organization under one roof. In doing so, the ultimate goal is to spark the creation of revolutionary new products. Epson also has another center, established in 2000, at its Fujimi Plant in Nagano, Japan, for the development of electronic devices, specializing in ...

  • Page 22
    ...E Ink Corporation also worked with Epson on joint development of a microcapsule-type EPD module used in the "Future Now" wristwatch unveiled in 2005. A6-size (7.1 inches on the diagonal) electronic paper prototype High-temperature polysilicon (HTPS) TFT liquid crystal panel 20 Seiko Epson Annual...

  • Page 23
    ... Research Agreement with Shinshu University In a move aimed at furthering their mutual development, Epson and publicly funded Shinshu University made a comprehensive OLED method-based print head prototype Signing ceremony with Shinshu University in January 2006 Seiko Epson Annual Report 2006...

  • Page 24
    ... Limited Sony Corporation General Electric Company Seiko Epson Corporation Infineon Technologies AG Robert Bosch GmbH Fuji Photo Film Co., Ltd. Microsoft Corporation Texas Instruments Incorporated Honda Motor Co., Ltd. Koninklijke Philips Electronics N.V. 767 Source: Epson, compiled from date...

  • Page 25
    ... of high-definition, OLED displays using inkjet technology. An Epson representative receives the 21st Century Invention Award from Japan's Prince Hitachi-no-miya. Examples of Recent Lawsuits Related to Counterfeit Printer (As of May 20, 2006) Ink Cartridges Date* May 2005 Region UK Details and...

  • Page 26
    ... once every three months, those responsible for business operations must report to the board of directors on the following items: • Current business performance and the performance outlook • Risk management • Important matters concerning business operations 24 Seiko Epson Annual Report 2006

  • Page 27
    ...of Epson's Internal Control System General Shareholders' Meeting Elect Report Audit Elect Submit/Report Audit Elect Board of Directors Elect Report Independent Public Accountant Proposal/Report Nominating Committee Compensation Committee Corporate Strategy Council Trust-Based Management Promotion...

  • Page 28
    ... a number of publications, including its annual report, shareholder newsletters, and materials from its business presentations. Moreover, presentations and audio voiceovers made at earnings announcements can be easily accessed in the IR section of Epson's corporate website. Risks Managed by Epson...

  • Page 29
    ... end-of-life printers, projectors, and POS systems on a voluntary basis, and has proactively sought to reuse metals and plastics collected in the process. Epson's recycling rate for items recovered from the Japanese market is 69%. Europe In accordance with Europe's Waste Electrical and Electronic...

  • Page 30
    ...collection center Used ink cartridges for Epson inkjet printers, and used laser toner cartridges Participating school Collection center Cartridges go to school collection boxes Certificate Home Pickup of collected cartridges Bellmark point certificate issued 28 Seiko Epson Annual Report 2006

  • Page 31
    ... from the fiscal year ending March 31, 2007. Tree-Planting Programs Epson has been involved in tree-planting programs in Indonesia, China and other parts of the world where it operates. Since 2002, Epson has supported research efforts by Japan's Shinshu University in China aimed at reforesting...

  • Page 32
    ... to share more efficiently markets, technologies, development resources and other assets held by both companies. In implementing its 3D Strategy going forward, Epson Toyocom will push for the horizontal development of its timing, sensing and optical device operations, along with the aggressive...

  • Page 33
    ...Categories at the TIPA Awards 2006 The Epson Perfection V750 Pro flatbed scanner, the Epson Stylus Photo RX640 all-in-one printer, and Epson UltraChrome K3 ink technology each won awards at the Technical Imaging Press Association (TIPA) European Photo and Imaging Awards 2006. Epson products took top...

  • Page 34
    ... 600 100 80 60 40 20 0 PictureMate 500 (small photo printer) 60.2% 400 200 0 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 EMP-TWD1 (home projector) Electronic Devices 600 50 40 30 Panel featuring Photo Fine Chromarich technology for a wide color gamut 500 400 20 10 0 -10 32...

  • Page 35
    ...UltraChrome K3 pigment inks, enabling these printers to offer stable grayscale balance, precise color control and smooth tone transitions. Epson commenced sales of inkjet printers for high-quality photo printing, using a process that combines photographic paper, for a beautiful finish, with a number...

  • Page 36
    ... (Philippines), Inc. Sanyo Epson Imaging Devices (Phils.) Inc. Epson Toyocom Malaysia Sdn. Bhd. 72 other companies Japan Japan Japan Japan Japan Japan U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. Netherlands U.K. Germany Germany France Italy Spain U.K. China Republic of Korea China China Taiwan Singapore...

  • Page 37
    ... Balance Sheets ...48 Consolidated Statements of Income ...50 Consolidated Statements of Changes in Shareholders' Equity ...51 Consolidated Statements of Cash Flows ...52 Notes to Consolidated Financial Statements . . 53 Report of Independent Auditors ...74 Seiko Epson Annual Report 2006 35

  • Page 38
    ... LCD projectors in line with lower demand. Sales of system LSIs and LCD driver ICs, meanwhile, were affected by both lower sales volumes and falling prices accompanying increased competition. Elsewhere, sales benefited from the full-year contribution of SANYO EPSON IMAGING DEVICES CORPORATION, where...

  • Page 39
    ... inkjet printer prices. The electronic devices segment recorded an operating loss of ¥9,759 million, a decline of ¥48,312 million from last year's profit. This was attributable to a decline in the gross profit margin due to several factors: lower revenue from HTPS TFT-LCD panels for LCD projectors...

  • Page 40
    ... enabled the Company to newly acquire commercial paper to enhance working capital efficiency. Meanwhile, the decrease in fixed assets was the result of efforts to restrain capital investment and impairment losses, particularly in the electronic devices segment. 38 Seiko Epson Annual Report 2006

  • Page 41
    ... of supply in mobile communications devices and related devices has currently caused a remarkable decline in prices of electronic components for mobile communications devices, such as color LCDs and LCD-driver ICs, and could similarly affect other products. Epson is striving to improve profitability...

  • Page 42
    ...'s sales and profit. There are third parties who supply ink cartridges that can be used in Epson printers. These alternative products are generally sold at prices cheaper than Epson's brand products, and they are slowly gaining market share in Japan and the United States, but even more so in Europe...

  • Page 43
    ..., and organic light-emitting diodes (OLED). Epson will also further build on and expand its inherent strengths, and through a fusion of such things as semiconductor technology and color image display technology create technologies that cannot be copied by other companies and utilize them in creating...

  • Page 44
    ... year ending March 2006 were overseas sales. Epson has production bases all over Asia, such as China, Indonesia, Singapore, and Malaysia, and in the United States, the United Kingdom, Mexico, and Brazil. It has also established many distribution companies all over the world. Epson's employees...

  • Page 45
    ... research and development bases and design bases both in Japan and overseas. But if Epson is unable to continue to use or employ enough qualified engineers and other technical personnel, the carrying out of its business plans could be adversely affected. Seiko Epson Annual Report 2006 43

  • Page 46
    ... exchange rates such as the U.S. dollar or euro against the yen could adversely affect Epson's results. (16) There are risks inherent in pension systems As of April 2006, the Company and some of its consolidated subsidiaries in Japan have integrated the defined-benefit pension plan (contract-type...

  • Page 47
    ... products with less diffusion and manage their plants more stringently. Also, because of the development of global warming measures to be taken after 2013, known as "post-Kyoto" measures, further greenhouse-effect-gas reduction measures need to be implemented. Seiko Epson Annual Report 2006 45

  • Page 48
    ... an Epson inkjet printer Consolidated class action complaints are pending against Epson America, Inc. ("EAI") in the United States, wherein a certified class is seeking an injunction and unspecified damages arising from the adequacy of Epson's communication of ink levels in Epson ink jet cartridges...

  • Page 49
    ... of Seiko Corporation sells the plastic corrective lenses, which are manufactured by Epson, in the United States and Europe, it is also subject to certain regulations in these regions-for example, relevant authorities in the United States make it generally compulsory to carry out tests of new drugs...

  • Page 50
    ... SEIKO EPSON CORPORATION AND SUBSIDIARIES Millions of yen March 31 ASSETS Current assets: Cash and cash equivalents Time deposits Short-term investments Notes and accounts receivable, trade Inventories Deferred income taxes Other current assets Allowance for doubtful accounts Total current assets...

  • Page 51
    ... adjustments Treasury stock, at cost 2005 - 689 shares, 2006 - 1,307 shares Total shareholders' equity Commitments and contingent liabilities Total liabilities and shareholders' equity The accompanying notes are an integral part of these financial statements. Seiko Epson Annual Report 2006 49

  • Page 52
    ... Income SEIKO EPSON CORPORATION AND SUBSIDIARIES 2004 Millions of yen Year ended March 31 2005 2006 Thousands of U.S. dollars Year ended March 31, 2006 Net sales Cost of sales Gross profit Selling, general and administrative expenses: Salaries and wages Advertising Sales promotion Research and...

  • Page 53
    ... Statements of Changes in Shareholders' Equity SEIKO EPSON CORPORATION AND SUBSIDIARIES Number of shares issued Common stock Additional paid-in capital Millions of yen Net unrealized gains on Retained other earnings securities Translation adjustments Treasury stock, at cost Total Balance at...

  • Page 54
    ... SEIKO EPSON CORPORATION AND SUBSIDIARIES 2004 Millions of yen Year ended March 31 2005 2006 Thousands of U.S. dollars Year ended March 31, 2006 ... stock Proceeds from issuance of subsidiaries' stock Cash dividends Other Net cash provided by (used in) financing activities Effect of exchange rate...

  • Page 55
    ...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/Oceania...

  • Page 56
    ...of other securities are reflected in current income. Derivative financial instruments: Derivative instruments (i.e., forward exchange contracts, interest rate swaps and currency options) are recognized as either assets or liabilities at their respective fair values at the date of contract, and gains...

  • Page 57
    ... are provided for the estimated amounts which Epson is obligated to pay to employees after the fiscal year-end, based on services provided during the current period. Accrued bonuses to directors and statutory auditors are provided for the estimated amounts which the Company is obligated to pay to...

  • Page 58
    ... venture company called SANYO EPSON IMAGING DEVICES CORPORATION ("SANYO EPSON"). The paid-in capital of SANYO EPSON was ¥15,000 million and it is owned 55% and 45% by the Company and by SANYO, respectively. SANYO EPSON is a consolidated subsidiary of the Company. 56 Seiko Epson Annual Report 2006

  • Page 59
    ... company, Epson Toyocom Corporation ("Epson Toyocom"). Under business merger agreement and corporate split agreement, the Company split-off its quartz device business (excluding optical devices) and contributed these assets to Epson Toyocom. The Company acquired 99,000,000 shares of common stock...

  • Page 60
    ...Â¥28,024 Thousands of U.S. dollars March 31, 2006 Gross unrealized Cost Gains Losses Market value (carrying value) Equity securities Debt securities Other Total $94,015 451 1,890 $96,356 $142,385 9 - $142,394 $(187) (-) (-) $(187) $236,213 460 1,890 $238,563 58 Seiko Epson Annual Report 2006

  • Page 61
    ... of the director of Epson in charge of the finance function based on the above-mentioned internal rules and policies. Execution and management of transactions are done by the responsible section in the financial department and reported to the general manager. Seiko Epson Annual Report 2006 59

  • Page 62
    ... 1,070 195 114 707 919 144 649 ¥ 7,873 16,515 980 1,053 194 115 702 921 145 649 ¥ (82) (587) (9) 17 1 (1) 5 (2) (1) 0 There were no interest rate swap transactions outstanding at March 31, 2006 other than derivatives eligible for hedge accounting. 60 Seiko Epson Annual Report 2006

  • Page 63
    ...,731 212,859 30,000 20,000 2,700 ¥429,094 1.20% 1.26 1.24 1.05 1.44 - 2007 2007 2011 2010 2012 2009 $ 423,972 968,171 1,812,029 255,384 170,256 22,985 $3,652,797 Average interest rates are calculated using weighted-average interest rates as at March 31, 2006. Seiko Epson Annual Report 2006 61

  • Page 64
    ... pension plan ¥ 9,352 5,608 (5,055) (529) 9,537 18,913 - ¥18,913 ¥ 7,397 4,355 (4,728) (2,752) 8,849 13,121 2,067 ¥15,188 ¥ 7,889 4,862 (5,079) (2,733) 8,382 13,321 2,976 ¥16,297 $ 67,158 41,389 (43,237) (23,265) 71,354 113,399 25,334 $138,733 62 Seiko Epson Annual Report 2006

  • Page 65
    ... such appropriations are recorded at the time of resolution. The Company may pay interim dividends by resolution of the board of directors once during each fiscal year in accordance with the Commercial Code of Japan and the Company's Articles of Incorporation. Seiko Epson Annual Report 2006 63

  • Page 66
    ... ended March 31, 2006 approved at the general shareholders' meeting, which was held on June 23, 2006, was as follows: Millions of yen Thousands of U.S. dollars Cash dividends at ¥16 per share ¥3,142 $26,747 The Company's common stock was listed on the First Section of the Tokyo Stock Exchange...

  • Page 67
    ... March 31, 2006 Deferred tax assets: Property, plant and equipment and intangible assets Net operating tax loss carry-forwards Accrued pension and severance costs Inter-company profits on inventories and write downs Devaluation of investment securities Accrued warranty costs Accrued bonuses Accrued...

  • Page 68
    ... income. Therefore, the aggregated statutory income tax rate for Epson was 40.4% for the years ended March 31, 2005 and 2006. 14. Research and development costs: Research and development costs, which are included in cost of sales and selling, general and administrative expenses, totaled ¥90,485...

  • Page 69
    ...) (20,116) (17,026) $2,384,558 The Company obtained marketable securities, the fair value of which was ¥10,003 million ($85,154 thousand) at March 31, 2006, as deposit for the short-term loan receivables above. 18. Leases: As described in Note 2 (17), Epson, as a lessee, charges periodic capital...

  • Page 70
    ...property acquired from the SANYO Group in connection with the creation of SANYO EPSON. The acquisition cost, less accumulated depreciation and net book value transferred from the SANYO Group as capital leases that do not transfer the ownership of the assets to the lessee at the end of the lease term...

  • Page 71
    ... engaged in the development, manufacture and sale of computer printers, liquid crystal displays ("LCDs"), semiconductor products and other products. Epson operates manufacturing facilities in Japan, Asia, the Americas and Europe, and markets its products internationally through a global network...

  • Page 72
    ..., label writers and personal computers. Electronic devices segment, including small- and medium-sized LCDs, HTPS-TFT panels for 3LCD projectors, CMOS LSI, crystal units and crystal oscillators. Precision products segment, including watches, watch movements, plastic corrective lenses, precision...

  • Page 73
    ...-related equipment segment, electronic devices segment, precision products segment and other segment was ¥426 million ($3,626 thousand), ¥33,343 million ($283,843 thousand), ¥416 million ($3,541 thousand) and ¥118 million ($1,005 thousand), respectively. Seiko Epson Annual Report 2006 71

  • Page 74
    ..., 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, Australia, New Zealand, Indonesia, Korea...

  • Page 75
    ...Thousands of U.S. dollars Year ended March 31, 2006 Geographic region Eliminations and corporate Japan The Americas Europe Asia/Oceania Consolidated Net sales: Customers Inter-segment Total Operating...23.1 27.2 68.7% $ 2,427,232 3,046,182 3,592,356 $ 9,065,770 Seiko Epson Annual Report 2006 73

  • Page 76
    ...To the Board of Directors of Seiko Epson Corporation We have audited the accompanying consolidated balance sheets of Seiko Epson Corporation and its consolidated subsidiaries as of March 31, 2005 and 2006, and the related consolidated statements of income, changes in shareholders' equity, and cash...

  • Page 77
    ... Corporation â- Main Businesses • Information-related equipment: includes printers and related supplies, color image scanners, mini-printers, POS systems and related products, 3LCD projectors, large LCD projection TVs, LCD monitors, label writers, PCs, and other products • Electronic devices...

  • Page 78
    3-5 Owa 3-chome Suwa, Nagano 392-8502, Japan Tel: +81-266-52-3131 (main) http://www.epson.co.jp/e/ This report was produced from recycled and tree-free paper and soy ink. Printed in Japan