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Gearing Up for Growth
FUJITSU LIMITED
Annual Report 2006

Table of contents

  • Page 1
    Gearing Up for Growth FUJITSU LIMITED Annual Report 2006

  • Page 2
    ... forward-looking statements due to, without limitation, the following factors: general economic and market conditions in key markets (particularly in Japan, North America and Europe); rapid changes in the hightechnology market (particularly semiconductors, PCs, etc.); fluctuations in exchange rates...

  • Page 3
    ... elsewhere in this report have been translated from yen, for readers' convenience only, at the rate of Â¥118 = US$1, which was the approximate rate on the Tokyo Foreign Exchange Market at March 31, 2006. â- Net Sales (Billions of Yen) 2004 â- Operating Income and Operating Income Margin 4,766...

  • Page 4
    Èž A Message from Management 2 Fujitsu Limited

  • Page 5
    ... in technology that will drive further growth in this market. This will revolutionize companies, society, and indeed all our lives. We are proud that Fujitsu is one of only a handful of companies capable of offering solutions that can convert IT-enabled innovation into business value for customers...

  • Page 6
    ...forward, we plan to leverage our strengths in software and verification and analysis technologies to offer customers solutions that deliver even greater added value. Our other main segment is Ubiquitous Product Solutions. Hard disk drives (HDDs), personal computers (PCs) and mobile phones are unique...

  • Page 7
    ... of our key overseas geographies. In North America, our optical transmission systems business aimed at communications carriers and our services business performed strongly. In Europe, we posted robust growth in sales of PRIMEPOWER UNIX servers and other serverrelated products, while in services we...

  • Page 8
    .../quality/cost Reinvigorate product-related business units: Renew focus on technology Reenergize manufacturing: Toyota Production System reforms to manufacturing and personnel development Team-building measures: Overhaul management by objective system a How do you plan to grow the services business...

  • Page 9
    ... Data Systems Corporation (EDS) of the US, the world's second biggest IT services vendor, under which EDS will utilize our PRIMEQUEST mission-critical IA server as part of its solutions infrastructure. In addition, we have been steadily opening Platform Solution Centers in various locations...

  • Page 10
    .... In Technology Solutions, we will invest a total of Â¥120.0 billion to bolster our domestic and international outsourcing, server, and next-generation network businesses, while in Ubiquitous Product Solutions we will invest Â¥30.0 billion in our HDD, PC and mobile phone operations. â- Investing...

  • Page 11
    ... principles in all our business activiOur Mission Fujitsu continually seeks to create new value by providing customers with ties. Guided by The FUJITSU Way comprehensive solutions comprising highly reliable high-performance products and services based on powerful technologies. Through this, we aim...

  • Page 12
    ... 2005 2006 Europe We will work to accelerate the growth of Fujitsu Services, mainly focused on outsourcing services, and Fujitsu Siemens Computers, which primarily handles a range of servers and PCs. In addition to maintaining and enhancing its position in the UK public sector, Fujitsu Services is...

  • Page 13
    ...solutions. We will also target growth through alliances, mergers and acquisitions involving Fujitsu Consulting, our principal services company in North America. Japan We plan to shift from our existing focus on systems integration toward greater emphasis on expanding operations-oriented outsourcing...

  • Page 14
    ..., Trade and Industry's Japan Future Store Project. With this system, tagged jeans were placed on "smart shelves" equipped with electronic paper displays that continuously showed updated stock data, allowing customers to check product availability themselves. The pilot test confirmed that as well...

  • Page 15
    .... All data related to orders, sales, costs, procurement and manufacturing received from systems at each of these sites is now stored and managed on an integrated basis using a database at Tamura's head office in Japan, allowing the client to monitor costs and profits for individual products in real...

  • Page 16
    ... optical transmission products, Duquesne has built a network with added redundancy and capacity connecting head office and each local service center. Helping CBOE stay ahead of huge volume growth and fend off competition -The Chicago Board Options Exchange (CBOE)- Delivering network solutions...

  • Page 17
    ... to help the authorities provide assistance to those affected. Rapidly establishing temporary disaster relief call centers -US Federal Emergency Management Agency (FEMA)- Fujitsu has extensive experience in call center, data recovery and other operations, and has assisted many customers to deal...

  • Page 18
    ... the UK Home Office to implement a new shared services approach to IT across the client's entire organization. Fujitsu has helped Cora to install Europe's first-ever integrated self-service supermarket checkout system. The client now plans to extend its use to other sites across France, Belgium, and...

  • Page 19
    ... CAD system is helping Nissan Techno Vietnam to design exciting new cars. Post-installation operation and maintenance is handled by Fujitsu based on an outsourcing arrangement. Fujitsu has secured a contract with Australia's Northern Territory Government to provide services and support for desktop...

  • Page 20
    ... 139 142 164 Technology Solutions 57.4% 2005 2005 2006 2006 2004 948 1,031 1,059 2004 31 31 34 Ubiquitous Product Solutions 20.4% 2005 2005 2006 2006 2004 804 794 707 2004 27 32 33 Device Solutions 2005 2005 13.6% 2006 2006 * Including intersegment sales 18 Fujitsu Limited

  • Page 21
    ...-definition TV broadcasts. Center: The FOMA® F902iS mobile phone is also a full-fledged music player. Right: Fujitsu large-capacity hard disk drives offer high levels of quality and reliability. Logic LSI chips and related electronic components are core technologies that we provide to customers...

  • Page 22
    ... two categories: System Products, covering mainframes and open-standard servers including UNIX, mission-critical Intel Architecture (IA) and PC servers, and storage systems; and Network Products, including optical transmission systems and mobile phone base stations. â- Operating Environment and...

  • Page 23
    ...supported by a steady rise in 3G subscribers in Japan. â- Issues to Be Addressed In System Products, amid the continuing trend toward server consolidation, we will develop our business globally by leveraging our strengths in mission-critical technology, network technology and superior quality. Key...

  • Page 24
    ... business segment comprises products and services primarily for corporate and government customers and, within this, the Services sub-segment includes systems integration, outsourcing and other services. The Services sub-segment is further divided into three categories: Solutions/SI, centered...

  • Page 25
    ... Displays Installed in shopping malls or other sites that attract large numbers of people, UBWALL displays information tailored to individual consumer interests. When users hold up IC card-enabled mobile phones to the screen, the display shows recommended restaurants, products and store locations...

  • Page 26
    ... Product Solutions business segment comprises mainly products sold in high volumes, such as personal computers (PCs), mobile phones and hard disk drives (HDDs). â- Operating Environment and Performance In fiscal 2005, the global PC market grew, paced by overseas demand for notebook PCs. In HDDs...

  • Page 27
    ... on delivering high-value-added products that are compatible with terrestrial digital broadcasting and have larger screens and enhanced security features. Overseas, where continued growth is expected, we plan to expand our business focusing on notebook PCs. In mobile phones, although significant...

  • Page 28
    ... digital AV products and mobile phones. There was a similar picture in the system memory products market, with shipments increasing, primarily for digital AV and mobile phone applications, but prices continuing to decline. 26 Fujitsu Limited In this business climate, Device Solutions posted sales...

  • Page 29
    ... our market presence. *1 Application-specific standard products: Standardized LSI products designed for power supply, file management, image processing and HDTV applications in PCs, mobile devices, communications networks and other products. They can be sold to multiple users. *2 Customer-owned...

  • Page 30
    ... management in terms of both security and cost performance in response to customers' actual utilization needs, including for documents that are compliant with Japan's e-Document Law and electronic medical records. â- High image quality processing technology for PCs and mobile phones quality sound...

  • Page 31
    ... in emerging new fields to support future businesses We will advance R&D efforts to create high-value-added solutions that leverage and combine our wide array of cuttingedge technologies in IT services, computers, networks, electronic devices and other areas. â- Key research themes in fiscal 2006...

  • Page 32
    ... Hitachi, Ltd. Toshiba Corporation Fujitsu Limited Sony Corporation General Electric Company Seiko Epson Corporation Infineon Technologies AG Koninklijke Philips Electronics N.V. Robert Bosch GmbH Fuji Photo Film Co., Ltd. Microsoft Corporation Texas Instruments Incorporated Honda Motor Co., Ltd...

  • Page 33
    ...Solutions 13% Products 29% Fujitsu Laboratories Ltd. Total 84,000 33% 20% Electronic Devices (2) Key Themes Driving Patent Acquisition Activities We are striving to strengthen our patent portfolio guided by key themes in each of our business areas. Using our patent data search system (ATMS/IR...

  • Page 34
    ... Malaysia Eco-Forest Park in the state of Sabah. We plan to continue activities at the same site in 2006. Students at the Japan-America Institute of Management Science (JAIMS) Japan's representatives at the International Mathematical Olympiad Overseas tree-planting activities 32 Fujitsu Limited

  • Page 35
    ... Japanese electronics company. CO2 emissions were cut by around 15% at the AizuWakamatsu Plant in fiscal 2005 The world's first notebook PC with the main housing made from environmentally friendly bio-based plastic Fujitsu obtained worldwide integrated ISO 14001 certification Annual Report 2006...

  • Page 36
    ... Vice Chairman Kunihiko Sawa Advisor Fuji Electric Holdings Co., Ltd. Hiroshi Oura Director and Senior Executive Advisor Advantest Corporation Ikujiro Nonaka Professor Emeritus Hitotsubashi University * Concurrently serve as corporate executive officers Statutory Auditors â- Standing Auditors...

  • Page 37
    ... working to implement and advance the policies outlined below. 2. Framework to Ensure the Propriety of Fujitsu Limited and Fujitsu Group Business Activities (1) System to Ensure Efficient Execution of Duties by the Board of Directors q Management oversight functions and operational execution...

  • Page 38
    ...the business activities of the Fujitsu Group, as well as institute and enforce the necessary rules, training, and monitoring systems to promote compliance by the Fujitsu Group as a whole. r In the event that senior managers or employees become aware of the possibility of a serious operations-related...

  • Page 39
    ... and employees from Fujitsu Limited and each Group company shall make periodic reports to the statutory auditors on issues relating to the execution of business operations. q Senior managers from Fujitsu Limited and each Group company shall regularly exchange...

  • Page 40
    ... stock and holds another 6.68% through trust accounts for employee retirement benefits. Additionally, as of June 28, 2006, an advisor to Fujitsu Limited was serving as a director of Fuji Electric Holdings, in which Fujitsu has a 9.96% stake. Fujitsu Limited and Fuji Electric Holdings have a business...

  • Page 41
    ...re. management strategy Report Corporate Internal Audit Division Audit Audit The FUJITSU Way Promotion Council Compliance Committee Risk Management Committee Environmental Committee Supervision Executive Officers (52 corporate executive officers) Business Groups/Group Companies (II) Directors...

  • Page 42
    ... America, and Europe, key markets where economic trends can significantly impact Fujitsu Group operations. 2) Hi-tech Market Volatility Stock market trends in Japan and overseas have a substantial effect on the value of Group stockholdings in other companies and the management of pension assets...

  • Page 43
    ... and other business partners could affect Group operations. 1) Procurement The Fujitsu Group is committed to bolstering ties with customers, striving to serve as a business partner and provide solutions across the full IT system lifecycle. For semiconductors, HDDs and other operations where the...

  • Page 44
    ... the Tokyo Stock Exchange, in November 2005 we initiated comprehensive inspections of customer systems that play an important role in supporting the societal infrastructure. In cooperation with our customers, we have been checking for any potential problems in these systems, including the operating...

  • Page 45
    ... of electricity or water as a result of earthquakes or other natural disasters and accidents. Such occurrences could interrupt shipments to customers or disrupt shipments of parts for the Group's internal use, thereby affecting factory production at other Group business sites. Semiconductor fabs...

  • Page 46
    ... of Operations ...46 Consolidated Balance Sheets ...54 Consolidated Statements of Operations ...56 Consolidated Statements of Shareholders' Equity ...57 Consolidated Statements of Cash Flows ...58 Notes to Consolidated Financial Statements ...59 Independent Auditors' Report ...82 44 Fujitsu Limited

  • Page 47
    ... ¥ Diluted (192.98) Cash dividends 5.00 Shareholders' equity 426.52 Interest-bearing loans D/E ratio (times) Free cash flow R&D expenses Capital expenditure Number of employees Net sales by customers' geographic location: Japan Europe The Americas Others Total (61.29) ¥ (61.29) - 350.84 24.55 22...

  • Page 48
    ... flat panel display businesses last fiscal year, net sales increased by 2.4%. In Japan, sales of server-related products and PCs declined, but optical transmission systems in North America, outsourcing services in the UK, consulting services in North America, and HDDs for overseas markets all posted...

  • Page 49
    ... accounting policies this fiscal year, operating income increased by ¥16.4 billion. Income was affected by factors such as intensified competition in server-related markets in Japan and overseas, as well as forward-looking investments including accelerated development expenses for certain products...

  • Page 50
    ...models of mobile phone base stations, optical transmission systems and server-related products, the segment posted a marked increase in operating income due to a large reduction in losses from lossgenerating projects and continued strong performance by our outsourcing services business in the UK. In...

  • Page 51
    ...business. However, sluggish sales of server-related products in Japan, costs related to accelerated development of next-generation mobile phone base stations, optical transmission systems and server-related products, and expenses associated with start up the new 300mm wafer semiconductor fabrication...

  • Page 52
    ... an increase in property, plant and equipment less accumulated depreciation from capital expenditures and an increase in the market value of marketable securities. Years ended March 31 2005 2006 Operating income (loss) Japan ...Europe ...The Americas ...Others ...Unallocated operating costs and...

  • Page 53
    ... on marketable securities as a result of the rise in the stock market. As a result of the foregoing, the D/E ratio nearly reached our medium-range target level of 1.0 and the shareholders' equity ratio rose to 24.1%, reflecting the continuing improvement in the Company's overall financial condition...

  • Page 54
    ...that differences may arise from financial statements prepared under Japanese standards. (¥ Billions) Increase (Decrease) Rate (%) Revenue Recognition Technology Solutions ...Ubiquitous Product Solutions . . Device Solutions ...Corporate and others* ...Total ...Japan ...Overseas ... ¥ 65 17 76 22...

  • Page 55
    .... Losses may be recognized when the business is withdrawn or sold by the Group, or when the profitability of the acquired business decreases during the period the Group expected the return. Marketable Securities Retirement Benefits Retirement benefit costs and obligations are determined based on...

  • Page 56
    ...,183 235,904 1,080,263 722,458 196,466 1,999,187 Total assets ¥ 3,640,198 ¥ 3,807,131 $ 32,263,822 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 54 Fujitsu Limited

  • Page 57
    ...: Long-term debt (Note 9) Accrued retirement benefits (Note 10) Provision for loss on repurchase of computers Other long-term liabilities (Notes 11 and 15) Total long-term liabilities Minority interests in consolidated subsidiaries Shareholders' equity: Common stock (Note 12) Authorized-5,000...

  • Page 58
    ... per share of common stock: Basic earnings (Note 17) Diluted earnings (Note 17) Cash dividends ¥ 24.55 22.24 3.00 ¥ 15.42 13.86 6.00 ¥ 32.83 29.54 6.00 $ 0.278 0.250 0.051 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 56 Fujitsu Limited

  • Page 59
    ...Deficit): Balance at beginning of year Net income Decrease as a result of changes in accounting principles and practices in UK subsidiaries (Note 1) Cash dividends paid Bonuses to directors... Notes to Consolidated Financial Statements are an integral part of these statements. Annual Report 2006 57

  • Page 60
    ... of stock exchange Contribution of assets to an affiliated company ¥ 32,084 - 63,949 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. (*) This is referred to as "free cash flow" in Management's Discussion and Analysis of Operations. 58 Fujitsu...

  • Page 61
    ... is set forth in Note 19. For the year ended March 31, 2006, Fujitsu Telecommunications Europe Limited, another UK subsidiary recognized pension obligation which had not been recognized before in conformity with the new UK accounting standard for the retirement benefits (Financial Reporting Standard...

  • Page 62
    ...sales of IT systems and products excluding customized software under development contracts (the "customized software") is recognized upon acceptance by the customers, whereas, revenue from sales of personal computers, other equipment and electronic devices is recognized when the products are shipped...

  • Page 63
    ... is set forth in Note 19. (l) Retirement benefits The Company and the majority of the consolidated subsidiaries have retirement benefit plans. Under the significant defined benefit plans, the actuarial valuation used to determine the pension costs is the projected unit credit method. Annual Report...

  • Page 64
    ... financial statements and the principles of consolidation and in Note 10. (m) Provision for loss on repurchase of computers Certain computers manufactured by the Group are sold to Japan Electronic Computer Co., Ltd. ("JECC") and other leasing companies for leasing to ultimate users under contracts...

  • Page 65
    ... subsidiaries in Japan maintain their books of account in yen. The U.S. dollar amounts included in the accompanying consolidated financial statements and the notes thereto represent the arithmetic results of translating yen into U.S. dollars at ¥118 = US$1, the approximate exchange rate at...

  • Page 66
    ...2005 and 2006, marketable securities included in "short-term investments" and "other investments and long-term loans" were as follows: Yen (millions) U.S. Dollars (thousands) At March 31 2005 2006 2006 Held-to-maturity investments Carrying value (Amortized cost) Market value Net unrealized gain...

  • Page 67
    ... 30,465 ¥65,261 88,286 $553,059 748,186 Carrying value and Market value at March 31, 2006, mainly consisted of increase due to the listing of Spansion Inc. on the NASDAQ exchange. After the shares in Advantest Corporation were sold for the year ended March 31, 2005, Advantest Corporation was no...

  • Page 68
    ...transfer of our plasma display panel business and the shifting of compound semiconductor device business subsidiaries from consolidated subsidiaries to equity method affiliates. Yen (millions) U.S. Dollars (thousands) Years ended March 31 2005 2006 2006 Machinery and equipment...66 Fujitsu Limited

  • Page 69
    ...Term Borrowings and Long-Term Debt Short-term... Secured Unsecured ¥ 600 101,479 ¥102,079 ¥ 760 63,060 ¥63,820 $ 6,440 534,407 $540,847 Long-term ...2006: Secured Unsecured Bonds and notes issued by the Company: Zero coupon unsecured ... 50,000 100,000 50,000 50,000 250,000 50...000 50,000 100,000 50,...

  • Page 70
    ... treated solely as liabilities and value inherent in their conversion feature is not recognized as equity in accordance with accounting principles and practices generally accepted in Japan. The total amount of the convertible bonds has been included in "long-term debt." Assets pledged as collateral...

  • Page 71
    ...of service, basic salary as of the retirement date and the number of years of participation in the Plan. The contributions of the Company and the subsidiaries covered by the Plan and their employees are made to the Fujitsu Corporate Pension Fund which is an external organization. The Fujitsu Welfare...

  • Page 72
    ... Institute of Certified Public Accountants), the Company and certain consolidated subsidiaries in Japan accounted for the elimination of the future and past benefit obligations of the substitutional portion as well as the related government-specified portion of the employees' pension plan assets at...

  • Page 73
    ..., Fujitsu Telecommunications Europe Limited ("FTEL"), a consolidated subsidiary in the UK, recognized the full value of the unrecognized obligation immediately as accrued retirement benefits, in accordance with a new UK accounting standard for the retirement benefits (Financial Reporting Standard...

  • Page 74
    ...The Group is subject to a number of different income taxes. The statutory tax rates in the aggregate in Japan were approximately 42.0% for the year...26.6% (72.5%) 1.3% 58.7% - 2.1% 45.7% 1.3% (0.5%) (1.7%) (2.3%) - (2.2%) 83.0% (9.4%) 5.3% (3.4%) 2.3% (0.8%) 0.5% - - (3.7%) 31.4% 72 Fujitsu Limited

  • Page 75
    ... of computers Intercompany profit on inventory and property, plant and equipment Other Gross deferred tax assets Less: Valuation allowance Total deferred tax assets Deferred tax liabilities: Unrealized gains on securities Gains from establishment of stock holding trust for retirement benefit plan...

  • Page 76
    ...018,213 - - 2,070,018,213 An increase as a result of stock exchange for the year ended March 31, 2005 reflected the issuance of shares in October 2004 by which the Company turned Fujitsu Support and Service Inc. into a wholly owned subsidiary. 13. Commitments and Contingent Liabilities Commitments...

  • Page 77
    ... on changes in the fair market values of the hedging instruments, which consist of forward exchange, option and swap contracts and related complex contracts, are recognized in income when the relating hedged items are reflected in income. Fair Value of Derivative Financial Instruments: At March 31...

  • Page 78
    ... related to certain products of consolidated subsidiaries. 17. Earnings Per Share Yen (millions) U.S. Dollars (thousands) Years ended March 31 2004 2005 2006 2006 Net income Bonuses to directors and statutory auditors from retained earnings (deficit) Net income for common stock shareholders...

  • Page 79
    ... 2006 Settlement gain Gain on business transfer Gain on sales of marketable securities Gain on transfer of substitutional portion of employees' pension funds Gain on sales of property, plant and equipment Amortization of unrecognized obligation for retirement benefits Restructuring charges Loss on...

  • Page 80
    ... of employees' pension funds" for the year ended March 31, 2004. Gain on sales of property, plant and equipment Gain on sales of property, plant and equipment for the year ended March 31, 2004 related to securitization of the land and buildings of Fujitsu Solution Square (located in Kamata, Tokyo...

  • Page 81
    ...Segment Information Business Segment Information Yen (millions) Technology Solutions Ubiquitous Product Solutions Other Operations Elimination & Corporate Years ended March 31 Device Solutions Consolidated 2004 Sales Unaffiliated customers Intersegment Total sales Operating... Annual Report 2006 79

  • Page 82
    ...installation, network construction, custom terminal installation (ATMs, POS systems) (2) Ubiquitous Product Solutions ...Personal computers, mobile phones, HDD (compact magnetic drives), magneto-optical drives, optical modules (3) Device Solutions ...LSI (logic LSI devices, flash memory), electronic...

  • Page 83
    ...by geographical location. 2. The principal countries and regions belonging to geographic segments other than Japan are as follows: (1) Europe ...U.K., Spain, Germany, Finland, the Netherlands (2) The Americas ...U.S.A., Canada (3) Others ...China, Thailand, Vietnam, the Philippines, Singapore, Korea...

  • Page 84
    Èž Independent Auditors' Report 82 Fujitsu Limited

  • Page 85
    ...) Listed Shinko Electric Industries Co., Ltd. Fujitsu Business Systems Ltd. Fujitsu Frontech Ltd. Fujitsu Access Ltd. Fujitsu Devices Inc. Fujitsu Component Ltd. Fujitsu Broad Solution & Consulting Inc. Unlisted Fujitsu Laboratories Ltd. Fujitsu TEN Limited PFU Limited Fujitsu Support and Service...

  • Page 86
    FUJITSU LIMITED Shiodome City Center, 1-5-2 Higashi-Shimbashi, Minato-ku, Tokyo 105-7123, JAPAN Tel. +81-3-6252-2220 ©2006 FUJITSU LIMITED Printed in Japan BA0027-1AP This report is printed on 100% recycled paper with ink containing less than 15% oil-based solvent. www.fujitsu.com