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ANNUAL REPORT 2004
Digital Image Innovation
~ Targeting the Convergence of Imaging Domains ~

Table of contents

  • Page 1
    ANNUAL REPORT 2004 Digital Image Innovation ~ Targeting the Convergence of Imaging Domains ~

  • Page 2
    ... of quartz watches. This has been achieved by our distinctive development and production of our unrivaled low power consumption key devices. These base technologies are directly linked to the evolution and development of information-related equipment and electronic devices-the core elements of Epson...

  • Page 3
    SEIKO EPSON CORPORATION 1

  • Page 4
    ... development capabilities that support strong finished products and key devices. "Print Image Matching," a software solution that spurred the growth of the color imaging technology Epson has accumulated in the printer business, is now accepted by virtually all digital camera manufacturers in Japan...

  • Page 5
    SEIKO EPSON CORPORATION 3

  • Page 6
    ... at overseas production sites, allowing us to enhance our cost competitiveness, respond to exchange rate fluctuations, and reduce lead times. On the sales side, Epson is structuring a sales system optimized to each region, to design products and develop sales and service strategies attuned to...

  • Page 7
    SEIKO EPSON CORPORATION 5

  • Page 8
    ...Projector Business ...18 Strategies for Display Business ...20 In this annual report, "Epson" refers to the Seiko Epson Group, while "the Company" refers to the parent company, SEIKO EPSON CORPORATION. Cautionary Statement This report includes forward-looking statements which are based on management...

  • Page 9
    ....37) 18.00 ¥ 81.08 18.00 ¥ 204.70 18.00 $ 1.94 0.17 Balance sheet data: Current assets Property, plant and equipment (net of depreciation) Total assets Current liabilities Long-term liabilities Shareholders' equity ¥ 622,415 502,251 1,241,161 600,891 357,549 280,349 ¥ 645,310 442,769 1,196,080...

  • Page 10
    ... Business Plan In January 2003, we announced our medium-to-long-term fundamental concept, SE07. SE07 clarifies Epson's direction for the future. Under the key slogan "Digital Image Innovation," we will concentrate management resources in three fields that comprise our strengths: printers, projectors

  • Page 11
    ... profit margin to a record level of 7% as quickly as possible, boosting it to 10% over the medium to long term. Advanced Technology Development Capabilities for Distinctive Products Epson's strength lies in the ability to apply expertise in precision processing to produce in-house the key devices...

  • Page 12
    ... products for home photo printing to make digital photography a more integral part of daily life. Tenacious R&D to Build the Foundation for Future Growth Epson's tenacious R&D capabilities are a key factor in its development of key devices. By persevering in areas that other companies have declared...

  • Page 13
    ...our customers can enjoy using, as well as generating stable profits over the long term for our shareholders and investors. It's also about making a worthwhile contribution to the creation of a better society, and establishing a base from which our employees can remain highly motivated with the Epson...

  • Page 14
    12 SEIKO EPSON CORPORATION Presenting Action07- the Action Plan for Realizing SE07 Amid far-reaching reforms to its earnings structure, Epson is seizing definitive opportunities for growth by taking advantage of its strengths in key devices to rapidly deliver high-added-value products to the market...

  • Page 15
    ... Broadcast Wireless Action07 Net Sales ¥1,770 billion Recurring Profit Margin --------- 9.0% or higher (Financial targets for the fiscal year ending March 31, 2007) i1: Moving Epson's Photo Strategy Forward i2: Making Information Stations a Reality i3: Targeting the Top Spot in Mobile Displays

  • Page 16
    ...) • Capital investment ...¥320 billion (cumulating from FY2004 to FY2006) Note: Targets in the above chart do not include the impact of the establishment of a new company, SANYO EPSON IMAGING DEVICES CORPORATION, announced on March 24, 2004. • Net debt outstanding ...Aim at zero net debt by...

  • Page 17
    ... year ending March 31, 2005, due mainly to lower sales prices for finished products and changes in Epson's product mix. In response, Epson is cutting costs companywide by at least ¥100.0 billion to lower the total cost to sales ratio. In these activities, Epson will reaffirm its commitment to the...

  • Page 18
    ... printer models for home photo printing during the year, including a multifunction printer in October 2003, PictureMate, a portable Micro Piezo Printer Heads > Epson's printer heads utilize vibrations from a piezo element to fire ink. This method offers superior advantages in terms of high image...

  • Page 19
    ...anywhere in the home a snap. printer with a convenient handle for easy carrying, in April 2004. Epson will continue to introduce new products for home photo printing to make digital photography a more integral part of daily life. Business Model Innovation to Secure Earnings Through Products To grow...

  • Page 20
    ... high resolution at an affordable price. Substantial growth is predicted in the upcoming years for LCD projectors, including business projectors, home projectors and projection systems for large-screen LCD projection televisions. By zeroing in on these three markets, Epson seeks to extend its reach...

  • Page 21
    ... broadcasts, DVDs and other visual content, Epson offered a new way of enjoying video and visual images by launching an LCD projection TV, called "Livingstation," in the U.S. market in March 2004. (Sales in Japan began in May 2004.) Watching television on a large screen is not the only attraction of...

  • Page 22
    ... up its presence in mobile displays as the world's preeminent manufacturer of small- and medium-sized color LCDs. Enhancing Productivity in Active Color Displays The Crystal-Fine series is currently Epson's mainstay product in MDTFD-type active color LCD modules. Epson is building a solid market...

  • Page 23
    ...an Epson subsidiary, SANYO EPSON IMAGING DEVICES CORPORATION on October 1, 2004. Based on results of the two companies in 2003, the new company would have had a 28% share in LCDs for color mobile phones, a 28% share in LCDs for digital cameras, and a 36% share in LCDs for electronic viewfinders (EVF...

  • Page 24
    ... for Epson on the corporate level. These expenditures were largely for next-generation core technologies, EPSON'S DEVELOPMENT VISION Printers displays, semiconductors, and i1 imaging on paper LCD projectors imaging on screen i2 other technologies for development over the medium and long term...

  • Page 25
    ... direct control of the corporate Head Office. An NV (non-volatile memory) project was also established during the fiscal year ended March 31, 2004. Development of Highly Durable Ink Epson began mass production of both pigment and dye-based archivalquality inks that dramatically improve the storage...

  • Page 26
    .... Epson is pursuing development of these displays, ideal for applications from mobile phones to TVs, with the goal of commercialization in 2007. FEATURES OF EPSON OLED DISPLAYS Organic Light-Emitting Diode (OLED) Displays Classification by Material These are the different types of OLED materials...

  • Page 27
    ...-cost processes, is taking part in Japan's New Energy and Industrial Technology Development Organization (NEDO) Project. Epson and other cooperative partners on the project are involved in joint research into the development of technology for using liquid raw materials in the production of silicon...

  • Page 28
    ... for managing patents within Seiko Epson Corporation, and created a system for consolidating patent applications filed by Epson affiliates worldwide. This regulation provides for Epson a worldwide patent reward program. Through this program, applicable to ideas for business models at sales companies...

  • Page 29
    ... Electronics NV. Sony Corporation FUJITSU LIMITED Samsung Electronics Co., Ltd. Mitsubishi Electric Corporation TOSHIBA CORPORATION NEC Corporation General Electric Company Advanced Micro Devices, Inc. FUJI PHOTO FILM CO., LTD. SEIKO EPSON CORPORATION Texas Instruments Incorporated Robert Bosch GmbH...

  • Page 30
    ...by reinforcing functions for checking management's activities and corporate ethical compliance so as to ensure highly transparent and sound management in the eyes of its customers, shareholders, employees and other stakeholders. This goes hand in hand with Epson's ongoing pursuit of enterprise value...

  • Page 31
    ... units and Epson subsidiaries, reporting its findings directly to the president. "No Hiding," "No Tricks," and "Report Bad News Quickly": Epson's Mantras for Maintaining a Sound Corporate Culture Epson views compliance as a means of preventing one of the risks that corporations face: management...

  • Page 32
    ... Committee for building and maintaining Epson's compliance structure •A Legal Compliance Promotion Office responsible for operating the internal Compliance Hotline for reporting compliance issues •In-house compliance training, including a Code of Conduct manual and Web-based seminars When...

  • Page 33
    ...Epson has established an Investor Relations Dept. specializing in information disclosure. As well as daily corporate communications activities, the department is also charged with the swift announcement of quarterly financial results, ensuring a range of disclosure, organizing business presentations...

  • Page 34
    ... 31, 2004, 12 of Epson's production sites outside Japan achieved Zero Emissions Level 1, Epson's in-house standard for 100% recycling of waste generated by business activities. By the end of the fiscal year, this resulted in Epson achieving its objectives for comprehensive medium-term environmental...

  • Page 35
    ...-54 LCD projectors under the EcoLeaf label in Japan. The inkjet printer business, certified in October 2003, released the PX-V600 color inkjet printer under the EcoLeaf label. Epson Given "AA" Environmental Rating by Tomatsu Evaluation and Certification Organization In March 2004, Epson received an...

  • Page 36
    ...of Epson and its employees. See Epson's Sustainability Report for more information on this and other aspects of its social contribution activities. Social Contribution Philosophy The Seiko Epson Group, with the goal of coexistence with society as a responsible corporate citizen, and Group employees...

  • Page 37
    ... Orchestra in 1989. Since 1992, Epson has been a key corporate sponsor of the Saito Kinen Foundation, lending support to the annual Saito Kinen Festival Matsumoto in Nagano Prefecture. Epson creates the world's largest photo-collage Epson Singapore Pte. Ltd., alongside local volunteer associations...

  • Page 38
    ...-screen televisions. In early March 2004, Epson marked its full-scale entry into the home TV market by launching an LCD projection television with a built-in color printer under the brand name "Livingstation" for the North American market. Leveraging its long-standing expertise in LCD projection...

  • Page 39
    ... required of mobile phones and other next-generation mobile equipment. It should also contribute to greater battery life, a present concern with mobile devices, and enable the provision of easier-to-use mobile equipment. Epson Develops the World's Smallest Micro Flying Robot Blazing a trail...

  • Page 40
    ... •Crystal units •Crystal oscillators Sales Composition Precision Products Segment 5.5% Product Lineup Watches •Quartz watches •Watch movements Optical Products •Plastic corrective lenses •Optical devices Factory Automation Systems •Precision industrial robots •IC handlers

  • Page 41
    ... Japan-based production company, is established. Suwa Seikosha Co., Ltd., and Epson Corporation merge to become Seiko Epson Corporation. Epson Europe B.V., Epson's European regional headquarters, established in Amsterdam, the Netherlands. Seiko Group chosen as the official timekeeper for the Olympic...

  • Page 42
    ... Division Corporate Research & Development Division Production Engineering & Development Division Production Management Division OLED Technological President Development Division Strategic Business Development Division Imaging Products Marketing Division Inkjet Printer & Photo Imaging & Information...

  • Page 43
    SEIKO EPSON CORPORATION 41 Financial Section Contents Management's Discussion and Analysis of Financial Condition and Results of Operations ...42 Consolidated Balance Sheets ...46 Consolidated Statements of Income ...48 Consolidated Statements of Changes in Shareholders' Equity ...49 Consolidated ...

  • Page 44
    ... category were as follows. Sales of IC handlers climbed along with rising capital expenditures by semiconductor manufacturers. Sales of watches were lower. This was the net result of higher unit prices as Epson adopted a strategy of targeting opportunities created by the increasing sophistication...

  • Page 45
    SEIKO EPSON CORPORATION 43 Net Sales by Business Segments Millions of yen, except percentages Year ended March 31 2002 2003 2004 Information-related equipment Electronic devices Precision products Other Total (Eliminations and corporate) Total net sales ¥ 902,248 312,082 78,188 25,828 1,318,346 ...

  • Page 46
    ... cash flows and long-term and short-term loans from banks. In the year under review, Epson also procured funds through the issuance of common stock. Net cash provided by operating activities increased from ¥159,504 million to ¥182,669 million in the fiscal year ended March 31, 2004. In the year...

  • Page 47
    ... in current liabilities was due mainly to decrease in short-term bank loans and the current portion of long-term debt. A decline in long-term debt was primarily responsible for the decrease in long-term liabilities. Working capital, defined as current assets less current liabilities, increased from...

  • Page 48
    ... and other assets: Investment securities Investments in affiliates Long-term loans receivable Deferred income taxes Intangible assets Other assets Allowance for doubtful accounts 24,778 11,128 2,038 9,929 26,955 34,053 (880) 108,001 Total assets The accompanying notes are an integral part of these...

  • Page 49
    SEIKO EPSON CORPORATION 47 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term bank loans Current portion of long-term debt Notes and accounts payable, trade Accounts payable, other Income taxes payable Deferred income taxes Accrued bonuses Accrued warranty costs Other current ...

  • Page 50
    ... EPSON CORPORATION AND SUBSIDIARIES Millions of yen Year ended March 31 2003 Thousands of U.S. dollars Year ended March 31, 2004 2002 2004 Net sales Cost of sales Gross profit Selling, general and administrative expenses: Salaries and wages Advertising Sales promotion Research and development...

  • Page 51
    ...' Equity SEIKO EPSON CORPORATION AND SUBSIDIARIES Millions of yen Net unrealized gains on Retained other earnings securities Additional paid-in capital Number of shares issued Common stock Translation Treasury adjustments stock Total Balance at March 31, 2001 Net loss Cash dividends Bonuses to...

  • Page 52
    ... payable, trade Other Net cash provided by operating activities Cash flows from investing activities: Payments for purchases of property, plant and equipment Proceeds from sales of property, plant and equipment Payments for purchases of intangible assets Payments of long-term prepaid expenses...

  • Page 53
    ... Financial Statements SEIKO EPSON CORPORATION AND SUBSIDIARIES 1. Basis of presenting consolidated financial statements (1) Background Seiko Epson Corporation (the "Company") was originally established as a manufacturer of watches but later expanded its business to provide key devices and solutions...

  • Page 54
    ... of property, plant and equipment is mainly computed based on the decliningbalance method for the Company and its Japanese subsidiaries and on the straight-line method for foreign subsidiaries at rates based on the estimated useful lives. For buildings acquired by the Company and its Japanese...

  • Page 55
    ... reported if the previous standards had been applied consistently. (9) Accrued bonuses Accrued bonuses to employees 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. On March 9, 2004...

  • Page 56
    ... from sale of goods is recognized at the time when goods are shipped. Revenue from services is recognized when services are rendered and accepted by customers. (14) Research and development costs Research and development costs are expensed as incurred. (15) Leases Epson leases certain office space...

  • Page 57
    SEIKO EPSON CORPORATION 55 4. Inventories Losses recognized and charged to cost of sales as a result of valuation at the lower of cost or market value at March 31, 2003 and 2004 were ¥12,493 million and ¥8,300 million ($78,532 thousand), respectively. 5. Investments in debt and equity securities...

  • Page 58
    ... net equity of investments in subsidiaries as at March 31, 2003 and 2004, included in intangible assets, were ¥954 million and ¥270 million ($2,555 thousand), respectively. 7. Derivative financial instruments Epson enters into forward exchange contracts, currency options and interest rate swaps...

  • Page 59
    SEIKO EPSON CORPORATION 57 Millions of yen March 31, 2004 Instruments Contract amounts Fair values Unrealized gains (losses) Forward exchange contracts... rate swap transactions outstanding at March 31, 2004 other than derivatives eligible for hedge accounting. These forward exchange contracts were...

  • Page 60
    58 SEIKO EPSON CORPORATION 8. Short-term bank loans and long-term debt Short-term bank loans and long-term debt from banks at March 31, 2003 and 2004 consisted of the following: Millions of yen March 31 2003 2004 Weighted average interest rate Thousands of U.S. dollars March 31, 2004 Amount Last ...

  • Page 61
    ... rate Long-term rate of return on plan assets 3.0% 3.5 3.0% 3.5 2.5% 3.5 In addition to the above-mentioned net pension and severance costs, additional severance costs of ¥1,701 million, ¥181 million and ¥1,182 million ($11,184 thousand), which related to specific reorganization programs...

  • Page 62
    ... SEIKO EPSON CORPORATION The Company has made amendments to the welfare pension plan by raising the commencement age to receive benefits and reduced the related interest rate under the pension plan in the fiscal years ended March 31, 2001 and 2002. Further, effective at March 31, 2004, the Company...

  • Page 63
    SEIKO EPSON CORPORATION 61 The proposed appropriation of retained earnings of the Company for the year ended March 31, 2004 approved at the general shareholders' meeting, which was held on June 25, 2004, was as follows: Millions of yen Thousands of U.S. dollars Cash dividends at ¥9 per share ...

  • Page 64
    ... dollars March 31, 2004 Deferred tax assets: Property, plant and equipment and intangible assets Net operating tax loss carry-forwards Inter-company profits on inventories and write downs Accrued bonuses Devaluation of investment securities Accrued warranty costs Accrued pension and severance costs...

  • Page 65
    ... taxes adjustment of ¥1,166 million, offset by income tax refunds related to advanced pricing agreements of ¥2,302 million. 13. Research and development costs Research and development costs, which are included in cost of sales and selling, general and administrative expenses, totaled ¥79,742...

  • Page 66
    64 SEIKO EPSON CORPORATION 15. Cash flow information Cash and cash equivalents at March 31, 2003 and 2004 were composed of the following: Millions of yen March 31 2003 2004 Thousands of U.S. dollars March 31, 2004 Cash and deposits Less: Short-term bank loans (overdrafts) Time deposits due over ...

  • Page 67
    ... terms and conditions stipulated in sales agreements. The Company and Seiko Corporation have also entered into other various types of agreements. All the transactions and balances stated in the table below are up to June 30, 2001. The Company's management believes that all transactions with related...

  • Page 68
    ... assets Other investments With other related companies - Other current assets Payables 4 - 4 1 38 9 1 38 - - - - ¥ 2 ¥2 $19 19. Segment information (1) Business segment information Epson is primarily engaged in the development, manufacture and sale of computer printers, liquid crystal displays...

  • Page 69
    SEIKO EPSON CORPORATION 67 Electronic devices segment, including small and medium-sized LCD modules, TFT LCD modules for LCD projectors, CMOS LSI, crystal units and crystal oscillators. Precision products segment, including watches, watch movements, plastic corrective lenses, optical devices, ...

  • Page 70
    ... Chile, Argentina, Costa Rica, Colombia, Venezuela, Mexico and Peru. "Europe" mainly includes the United Kingdom, the Netherlands, Germany, France, Italy, Spain and Portugal. "Asia/Oceania" mainly includes China (including Hong Kong), Singapore, Malaysia, Taiwan, Thailand, the Philippines, Australia...

  • Page 71
    SEIKO EPSON CORPORATION 69 Millions of yen Year ended March 31, 2003 Geographic region The Americas Asia/ Oceania Eliminations and corporate Japan Europe Consolidated Net sales: Customers Inter-segment Total Operating expenses Operating income Identifiable assets ¥ ¥ 637,544 478,441 1,115,985...

  • Page 72
    ... approved. On October 1, 2004, the Company and SANYO, including its subsidiaries Tottori SANYO Electric Co., Ltd. and SANYO LCD Engineering Co., Ltd. will transfer their liquid crystal businesses to a joint venture company called SANYO EPSON IMAGING DEVICES CORPORATION ("SANYO EPSON"). The paid-in...

  • Page 73
    SEIKO EPSON CORPORATION 71 Report of Independent Auditors 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, 2003 and 2004, and the related consolidated ...

  • Page 74
    .... Epson El Paso, Inc. Epson Europe B.V. Epson (U.K.) Ltd. Epson Deutschland GmbH Epson Europe Electronics GmbH Epson France S.A. Epson Italia s.p.a. Epson Iberica, S.A. Epson Telford Ltd. Epson (China) Co., Ltd. Epson Korea Co., Ltd. Epson (Shanghai) Information Equipment Co., Ltd. Epson Hong Kong...

  • Page 75
    ... a public notice, the Company has presented its balance sheets and statements of income on its Web site (http:// www.epson.co.jp/IR/). Investor Information: SEIKO EPSON CORPORATION Investor Relations Department Shinjuku NS Bldg., 4-1 Nishishinjuku 2-chome, Shinjuku-ku, Tokyo 163-0811, Japan Tel...

  • Page 76
    3-5 Owa 3-chome Suwa, Nagano 392-8502, Japan Tel: +81-266-52-3131 (main) URL: http://www.epson.co.jp/e/ This report was produced from recycled and tree-free paper and soy ink. Printed in Japan