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Annual Report 2005
Year ended March 31, 2005

Table of contents

  • Page 1
    Annual Report 2005 Year ended March 31, 2005

  • Page 2
    ..." Businesses 07 Highlights of the Year 08 To Our Shareholders 13 Corporate Governance 16 Board of Directors 17 Executive Officers 18 Review of Operations 18 19 20 21 22 23 23 Information & Telecommunication Systems Electronic Devices Power & Industrial Systems Digital Media & Consumer Products High...

  • Page 3
    ... every day. That's because vital Hitachi technologies play an active role in just about every conceivable field of industry. Take our plasma TVs, refrigerators and other home appliances. Take the µ-chip, which is expected to spawn new solutions. Take rail vehicles and automotive equipment. And...

  • Page 4
    ... Equipment OFFICE BUILDINGS BANKS Escalators CITY HALLS B See page 02 Power Plants Finger Vein Authentication Systems (ATM) SAN/NAS Storage Systems e-Governments Solutions Credit Cards OUTSIDE F See page 04 LCDs for Mobile Phones OUTSIDE H See page 05 Portable Music Players with Internal...

  • Page 5
    ... TVs HDD/DVD Recorders D See page 03 Pumps Distributors Building Management Systems (Elevators) DVDs Power Lines Stores PCs Construction Machinery Consumers µ -chips (Traceability) Refrigerators, Room Air Conditioners, Washing Machines, Vacuum Cleaners AUTOMOBILES J See page 05 Automotive...

  • Page 6
    ... its railway systems business overseas, as well as in Japan. In June 2005, Hitachi won the contract to supply rail vehicles to operate domestic services on the Channel Tunnel Rail Link (CTRL) and local lines in the U.K. This line is scheduled to open in 2009. An ATM equipped with Hitachi's finger...

  • Page 7
    ... strengths of Hitachi, with its in-depth knowledge of industries and markets, can change how business is conducted. Hitachi's µ-chip solutions promise to do just that. Hitachi is developing into a new business pillar the provision of "Urban service infrastructure" that supports the creation...

  • Page 8
    .... This technology offers outstanding features such as a wide viewing angle, improved color reproducibility and a superior response speed for half tones. In small and medium-sized LCDs, Hitachi supplies high-performance, high-resolution displays for mobile phones, digital cameras, video game devices...

  • Page 9
    Hard Disk Drives (HDDs) Plasma TVs Automotive Systems H I J As a leading manufacturer of plasma TVs, Hitachi has helped create the plasma TV market through accomplishments such as the launch of the world's first 32 inch/37 inch high definition plasma TVs and models incorporating high-capacity ...

  • Page 10
    ... thinking. And we will also vigorously take on the challenge of unfamiliar business fields. As has been our hallmark, we will continue to "breathe life into the coming age." A breath of new life. A catalyst of change. To enable and usher in the new era. 06 Hitachi, Ltd. Annual Report 2005

  • Page 11
    ... losses, special termination benefits and the losses resulting from the remeasurement of the obligation upon adoption of EITF Issue No. 03-2, "Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities," are included as part of operating...

  • Page 12
    ... reaped the benefits of past business structural reforms and initiatives to strengthen our businesses. This was underscored with higher sales and earnings. In fiscal 2005, the final year of "i.e.HITACHI Plan II," our current medium-term management plan, we will work to raise our ability to generate...

  • Page 13
    ...-line growth. One reason was the benefits of business reorganization. In addition, many segments posted higher revenues. Power & Industrial Systems segment revenues rose along with growth in construction machinery sales. The Digital Media & Consumer Products segment saw strong growth in plasma TVs...

  • Page 14
    ... highly functional materials and components. And we are growing plasma TVs, LCD projectors and other products. In the "New Era Lifeline Support Solutions" domain, our SAN/ NAS storage solutions business is expanding steadily. Moreover, in the Power & Industrial Systems segment, sales of construction...

  • Page 15
    ... escalators, we intend to expand our solutions business utilizing IT, energy, security and other wide-ranging Hitachi Group management resources. In digital consumer electronic products, our strategy is to leverage vertical integration with LCDs, PDPs, optical disk drives and other core components...

  • Page 16
    ... to deal with unprofitable projects, we expect the segment as a whole to deliver a solid performance in fiscal 2005, paced by construction machinery and urban planning and development systems. In the Digital Media & Consumer Products segment, we will continue to unify PDP and plasma TV business...

  • Page 17
    ... for the execution of business operations, Hitachi is working to create a framework for quick business operation and the execution of core strategies contained in the "i.e.HITACHI Plan II " medium-term management plan, while making management highly transparent by adding four outside directors to...

  • Page 18
    ...the Company's and an individual's personal performance. While Hitachi also grants stock options as an incentive to raise the enterprise value, the Company's remuneration system for executives predominantly involves the payment of remuneration in the form of cash. 14 Hitachi, Ltd. Annual Report 2005

  • Page 19
    ...day operations and legal compliance, so that improvements can be made. Moreover, to ensure strict legal compliance, Hitachi has various committees and a whistle-blower system. The New York Stock Exchange Corporate Governance Listing Standards Hitachi's ADSs are listed on the New York Stock Exchange...

  • Page 20
    ... Director 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 Representative Executive Officer President, Chief Executive Officer and Director Toshiro...

  • Page 21
    ... Industrial Systems Business, Automotive Systems Business, Production Engineering Kazuo Furukawa Information & Telecommunication Systems Business, Digital Media Business, Hitachi Group Global Business, Corporate Export Regulation, Business Development SENIOR VICE PRESIDENTS AND EXECUTIVE OFFICERS...

  • Page 22
    ... and sells printers, to Ricoh Company, Ltd. The CyberGovernment Square showcases Hitachi's e-government solutions A large disk array subsystem "Blade Symphony" blade system, which integrates server, communications, storage and management software functions 18 Hitachi, Ltd. Annual Report 2005

  • Page 23
    ...large LCD panels for TVs at this company in the second quarter of the fiscal year ending March 31, 2007. Hitachi High-Technologies Corporation Sales increased year on year. In electronic device systems, sales soared on the back of strong sales of semiconductor and LCD manufacturing equipment. Sales...

  • Page 24
    ... to higher sales of industrial and air-conditioning equipment. Urban Planning and Development Systems Sales rose from the previous fiscal year due to the consolidation in July 2004 of Guangzhou Hitachi Elevator Co., Ltd., a former equitymethod affiliate that manufactures and sells elevators and...

  • Page 25
    Review of Operations Digital Media & Consumer Products Revenues Operating Income ¥1,280.3 billion Main Products and Services ¥8.6 billion Optical Disk Drives TVs Mobile Phones LCD Projectors Room Air Conditioners Refrigerators Washing Machines Batteries Video Tapes Information Storage...

  • Page 26
    ... Chemical Products Plastic Molded Products LCD-related Materials Specialty Steels Magnetic Materials Ductile Cast-iron Products Forged and Cast-steel Products â- Wires and Cables Copper Products Semiconductor-related Materials Printed Wiring Boards and Related Products Segment revenues...

  • Page 27
    ... overseas posted lower sales, partly due to the transfer to Renesas Technology Corp. of semiconductor sales operations. Earnings declined due to the effect of lower prices for products and services. Hitachi Transport System operates a thirdparty logistics solutions business Review of Operations...

  • Page 28
    ...Number of employees Information & Telecommunication Systems ...Electronic Devices ...Power & Industrial Systems ...Digital Media & Consumer Products ...High Functional Materials & Components ...Logistics, Services & Others ...Financial Services ...Corporate...,572 24 Hitachi, Ltd. Annual Report 2005

  • Page 29
    ... 2005 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 30
    ... losses, special termination benefits and the losses resulting from the remeasurement of the obligation upon adoption of EITF Issue No. 03-2, "Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities," are included as part of operating...

  • Page 31
    ... 31 32 33 77 Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Hitachi, Ltd. Annual Report 2005 27

  • Page 32
    Consolidated Balance Sheets Hitachi, Ltd. and Subsidiaries March 31, 2005 and 2004 Millions of yen Thousands of U.S. dollars (note 3) 2005 Assets Cash and cash equivalents ...Short-term investments (note 4) ...Trade receivables, net of allowance for doubtful receivables and unearned income of ¥...

  • Page 33
    ...term debt (note 11) ...Current portion of long-term debt (notes 7 and 11) ...Trade payables: Notes ...Accounts ...Accrued expenses ...Income taxes (note 10) ...Advances received ...Other current liabilities (note 10) ...Long-term...) (161,084) 21,568,514 $90,992,963 Hitachi, Ltd. Annual Report 2005 29

  • Page 34
    ... 2004 2003 Thousands of U.S. dollars (note 3) 2005 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...

  • Page 35
    ...transfer from (to) minority interests ...Balance at end of year ...Treasury stock, at cost (note 15): Balance at beginning of year ...Acquisition for treasury ...Sales of treasury stock ...Stock exchange upon a merger ...Balance... 374,992 ¥ (467,994) $ 1,347,308 Hitachi, Ltd. Annual Report 2005 31

  • Page 36
    ... ...Net change in inventory-related receivables from financial services (note 2 (y)) ...Other ...Net cash provided by operating activities ...Cash flows from investing activities (note 24): (Increase) decrease in short-term investments ...Capital expenditures ...Purchase of assets to be leased (note...

  • Page 37
    ... Company) is a Japanese corporation, whose principal office is 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...

  • Page 38
    ..., business prospects and credit worthiness of the issuer. Impairment to be recognized is measured based on the amount by which the carrying amount of the investment exceeds the fair value of the investment. Fair value is determined based on quoted market prices, projected discounted cash flows...

  • Page 39
    ..., 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 for as a sale under SFAS No. 140, "Accounting for Transfers and Servicing of...

  • Page 40
    ... with SFAS No. 87, "Employers' Accounting for Pensions." Unrecognized gains and losses are amortized using the straight-line method over the average remaining service period of active employees. (n) Derivative Financial Instruments The Company accounts for derivative financial instruments in...

  • Page 41
    ...are information technology system products, semiconductor manufacturing equipment, test and measurement equipment, construction equipment, displays, disk drives, televisions, air conditioners, batteries, magnetic tapes, high functional materials, cable products and automotive equipment. Revenues for...

  • Page 42
    ... a straight-line basis over the term of the lease. (p) Advertising Advertising costs are expensed as incurred. (q) Research and Development Costs Research and development costs are expensed as incurred. Costs incurred in connection with the development of software products for sale are accounted for...

  • Page 43
    ... 2005, the Company has several stock-based compensation plans, which are described more fully in note 29. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related...

  • Page 44
    ...Statement of Cash 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...

  • Page 45
    ... remain of effect. (y) Presentation of Receivables from Financing Services in Consolidated Statements of Cash Flows Certain financing subsidiaries provide the financing services related to products which the Company and its subsidiaries manufacture under lease agreements. In the prior years, such...

  • Page 46
    ...sale securities by the consolidated balance sheets classification as of March 31, 2005 and 2004. Millions of yen Amortized cost basis Gross gains Gross losses Aggregate fair value 2005 Amortized cost basis Gross gains Gross losses Aggregate fair value 2004 Short-term...Hitachi, Ltd. Annual Report 2005

  • Page 47
    ...unrealized holding losses on available-for-sale securities and the fair value of the related securities, aggregated by investment category ... fair value Gross losses 12 months or longer Aggregate fair value Gross losses 2005 Short-term... $32,169 $157,636 $11,224 Hitachi, Ltd. Annual Report 2005 43

  • Page 48
    ...accounts. The portions of trading gains and losses for the years ended March 31, 2005, 2004 and 2003 that relate to trading securities still held at the balance... effect on their fair value. The aggregate fair values of investments in affiliated companies based on the quoted market price as of March ...

  • Page 49
    ...On April 1, 2003, Renesas Technology Corp. (Renesas), which focuses on system LSI (Large Scale Integration) operations, was incorporated through a corporate split procedure, where the Semiconductor & Integrated Circuits operations of the Company and Mitsubishi Electric Corporation were spun-off from...

  • Page 50
    ...,654 176,570 66,944 104,299 $1,864,720 Total minimum payments to be received ...Amount representing executory costs ...Unearned income ...Allowance for doubtful receivables ...Net investment in financing leases ... ¥510,834 (28,936) (24,620) (5,525) ¥451,753 46 Hitachi, Ltd. Annual Report 2005

  • Page 51
    ...of the gain on sale which represents the present value of the minimum lease payments over the lease term has been deferred and is being recognized over the lease term. This deferral amounted to ¥8,551 million. The following table shows the future minimum lease payments of capital and non-cancelable...

  • Page 52
    ... and ¥86,095 million, respectively. The main component of intangible assets subject to amortization was capitalized software. Amortization of capitalized computer software costs for software to be sold, leased or otherwise marketed is charged to cost of sales. 48 Hitachi, Ltd. Annual Report 2005

  • Page 53
    ...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 was revised. The Company's determination of fair values of...

  • Page 54
    10. INCOME TAXES Components, as either domestic or foreign, of income before income taxes and minority interests, and income taxes attributable to continuing operations ... 76,782 (38,996) ¥37,786 ¥27,580 11,406 3,470 ¥14,876 ¥96,828 88,188 (35,526) ¥52,662 50 Hitachi, Ltd. Annual Report 2005

  • Page 55
    ...on current and deferred tax assets and liabilities. The effect of these changes on the Company's deferred tax balances amounted to ¥2,318 million and ¥27,933 million in income from continuing operations for the years ended March 31, 2004 and 2003, respectively. Hitachi, Ltd. Annual Report 2005 51

  • Page 56
    ... consolidated balance sheets under the following captions: Millions of yen 2005 2004 Thousands of U.S. dollars 2005 Prepaid expenses and other current assets ...Other assets ... ¥11,781 51,610 ¥63,391 ¥10,673 56,843 ¥67,516 $110,103 482,336 $592,439 52 Hitachi, Ltd. Annual Report 2005

  • Page 57
    ... tax credits. Also, prior to April 1, 2003, deferred tax liabilities had not been recognized for excess amounts over the tax basis of investments in affiliated companies as the effects to the Company's financial position and results of operations were not material. Hitachi, Ltd. Annual Report 2005...

  • Page 58
    ... issued by subsidiaries ...Loans, principally from banks and insurance companies: Secured by various assets and mortgages on property, plant and equipment, maturing 2005-2014, interest 0.65-4.65% ...Unsecured, maturing 2005-2015, interest 0.4-5.7% ...Capital lease obligations ...Less current...

  • Page 59
    ... Collateralized number of shares in thousands Fair value as of March 31, 2005 Millions of yen Thousands of U.S. dollars Subsidiary name Percent of ownership Hitachi Powdered Metals Co., Ltd... 17,072 53.3% 2,000 ¥1,614 $15,084 In addition, some other assets are collateralized for bank loans...

  • Page 60
    ...The balance in the notional account is based on principal credits, which are accumulated as employees render services, and interest credits, which are determined based on the market interest rates. Net periodic benefit cost for the funded benefit pension plans and the unfunded lump-sum payment plans...

  • Page 61
    ...Actual return on plan assets ...Employers' contributions ...Employees' contributions ...Benefits paid ...Acquisitions and divestitures ...Transfer to defined contribution pension plan ...Transfer of substitutional portion ...Settlement ...Foreign currency exchange rate changes ...Fair value of plan...

  • Page 62
    ...ended March 31, 2005 and 2004. The Company anticipates that all remaining subsidiaries will transfer the substitutional portion of their benefit obligations and return the related portion of the plan assets to the government during the year ending March 31, 2006. 58 Hitachi, Ltd. Annual Report 2005

  • Page 63
    ... to the government in accordance with EITF Issue No. 03-2, "Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities." The Company's plans to return the substitutional portion of the EPF to the government had been considered in the...

  • Page 64
    ... in connection with the Hitachi Unisia Automotive, Ltd. acquisition shares as discussed in note 28. Conversions of convertible debt issued subsequent to October 1, 1982 into common stock were accounted for in accordance with the provisions of the Japanese Commercial Code by crediting one-half of the...

  • Page 65
    15. TREASURY STOCK The Japanese Commercial Code (JCC) allows a company to acquire treasury stock upon shareholders' approval to the extent that sufficient distributable funds are available. Effective September 25, 2003, the JCC was amended to no longer require shareholders' approval but Board of ...

  • Page 66
    ...sale securities: Balance at beginning of year ...Other comprehensive income (loss), net of reclassification adjustments ...Net transfer from (to) minority interests ...Balance at end of year ...Cash flow hedges: Balance...) $(3,680,972) 866,037 (3,046) $(2,817,981) 62 Hitachi, Ltd. Annual Report 2005

  • Page 67
    ... 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 ...866,037 Hitachi, Ltd. Annual Report 2005 63

  • Page 68
    ... adjustments: Foreign currency translation adjustments ...Minimum pension liability adjustments ...Net unrealized holding gain on available-for-sale securities ...Cash flow hedges ... ¥ (42,535) ...) (3,264) 418 (3,385) (21,833) (438,799) (35,082) (147) ¥(495,861) 64 Hitachi, Ltd. Annual Report 2005

  • Page 69
    ... to stand ready to perform over the term of the guarantees in the event the customer can not make its scheduled payments. HCC provides certain revolving lines of credit to its credit card holders in accordance with the terms of the credit card business customer service contracts. Furthermore...

  • Page 70
    ...a common practice in Japan for companies, in the ordinary course of business, to receive promissory notes in the settlement of trade accounts receivable and to subsequently discount such notes to banks or to transfer them by endorsement to suppliers in the settlement of accounts payable. As of March...

  • Page 71
    ...: Millions of yen 2005 2004 2003 Thousands of U.S. dollars 2005 Balance at beginning of the year ...New charges ...(employees to be terminated) ...Cash payments ...(employees actually terminated) ...Foreign currency exchange rate changes ...Balance at end of the year ... ¥ 908 29,426 3,714 (15...

  • Page 72
    ... net periodic benefit cost of ¥24,857 million which was generated as the result of adopting EITF Issue No. 03-2, "Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities," as described in note 12. 68 Hitachi, Ltd. Annual Report 2005

  • Page 73
    21. SALES OF STOCK BY SUBSIDIARIES OR AFFILIATED COMPANIES In November 2004, Elpida Memory, Inc., an affiliated company which is a Japanese manufacturer of Dynamic Random Access Memory silicon chips, issued 29,150,000 shares of common stock at ¥3,325 ($31) per share to third parties with the ...

  • Page 74
    ... foreign currency exchange rates. The Company's financing subsidiaries in London, New York and Singapore issue U.S. dollar denominated, variable rate, medium-term notes mainly through the Euro markets to finance its overseas long-term operating capital. As a result, the Company and its subsidiaries...

  • Page 75
    ... interest rate swaps to manage fluctuations in cash flows. The interest rate swaps entered into are receive-variable, pay-fixed interest rate swaps. Under the interest rate swaps, the Company and certain subsidiaries receive variable interest rate payments on long-term debt associated with medium...

  • Page 76
    ... Foreign currency exposure Changes in fair value of forward exchange contracts designated and qualifying as cash flow hedges of forecasted transactions are reported in accumulated other comprehensive income (AOCI). These amounts are reclassified into earnings in the same period as the hedged items...

  • Page 77
    ...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 78
    ... million ($116,907 thousand) of gains on stock exchange upon the merger was credited to capital surplus. TOKICO manufactures automotive components and pneumatic equipment. As described above, the Company has strategically targeted the automotive products business and the purpose of the merger with...

  • Page 79
    ... 31, 2002, the Company purchased a majority ownership interest in a company to which the hard disk drive operations and related intellectual property portfolio had been transferred from International Business Machines Corp. (IBM) for a total cash purchase price (excluding acquisition costs) of...

  • Page 80
    ...prices of the stock options outstanding as of March 31, 2005 are ¥1,451 ($13.56), ¥1,270 ($11.87), ¥561 ($5.24), ¥782 ($7.31) and ¥705 ($6.59). In addition, in April 2005, the Board of Directors decided to propose the adoption of stock option plans for non-employee directors, executive officers...

  • Page 81
    ... Public Accounting Firm To the Stockholders and Board of Directors of Hitachi, Ltd.: We have audited the accompanying consolidated balance sheets of Hitachi, Ltd. and subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity, and cash...

  • Page 82
    ... losses, special termination benefits and the losses resulting from the remeasurement of the obligation upon adoption of EITF Issue No. 03-2, "Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities," are included as part of operating...

  • Page 83
    ...-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-ADR International +1-816...

  • Page 84
    This annual report was printed on recycled paper. Printed in Japan