DNP Annual Report 2006 Year ended March 31, 2006 “Taiwa” is a process that entails identifying problems and finding solutions through the exchange of viewpoints and ideas “Taiwa” is a process that entails identifying problems and finding solutions through the exchange of viewpoints and ideas Message to DNP ANNUAL REPORT 2006 DNP in Brief Special Feature Segment Information Sustainable Development Financial Section Our Shareholders Table of Contents 2 Message to Our Shareholders 72 Electronics 72 Financial Results 74 Business Strategies DNP in Brief 8 78 Topics 10 Overview 18 Key Figures for 2006 82 Sustainable Development 20 DNP At a Glance 84 Legal Compliance and Corporate Ethics 22 DNP Solutions Businesses 86 Product Safety 24 Major Events of the Fiscal Year Ended March 2006 88 Information Security 27 Corporate Governance 89 Approach to Research & Development 33 Board of Directors, Statutory Auditors and 90 Managing Intellectual Property Corporate Officers 92 Environmental Protection 34 Investor Information 94 Creating Lively Workplaces 97 Cultural Activities 36 Special Feature: Building “TAIWA”– P&I Solutions DNP Financial Section 38 Taiwa with Our Customers 98 38 Louvre Museum 100 Management’s Discussion and Analysis 40 Mizuho Bank, Ltd. 110 Selected Financial Data 42 Kirin Beverage Corporation 112 Consolidated Financial Statements 44 Mitsui Chemicals, Inc. 117 Notes to Consolidated Financial Statements 46 Intel Corporation 133 Independent Auditors’ Report 48 Q&A 134 Appendix: Printing Processes and Expansion Printing 52 Segment Information 140 Major Subsidiaries and Affiliates 142 Sources of Information About DNP 54 Information Communication 54 Financial Results 56 Business Strategies 59 Topics 63 Lifestyle and Industrial Supplies 63 Financial Results This annual report is aimed at providing information about DNP’s businesses, management vision, and business results. Opinions and forecasts contained in the 65 Business Strategies report were based on the best judgment of management at the time the report was prepared, so we cannot guarantee that all information contained in the report is 68 Topics completely infallible. 1 Yoshitoshi Kitajima President 2 Message to DNP ANNUAL REPORT 2006 DNP in Brief Special Feature Segment Information Sustainable Development Financial Section Our Shareholders Message to Our Shareholders This term, for the third year in a row, DNP achieved growth to record levels in sales and profits. We believe this demonstrates that we chose the right path by having the entire company pull together as one unit to fulfill our vision of DNP as a “P&I Solutions” provider. On the other hand, the business environment surrounding DNP remains as harsh as ever: unit sale prices fall while materials costs shoot up, technological development is faster than ever, and alliances cross industry and national boundaries, forcing companies to be more competitive than ever in order to survive. Throughout our history, we always identified the direction we needed to take in the course of dialogue with everyone who holds a stake in DNP. Even in these times of rapid change, we feel sure that by placing emphasis on taiwa* we can identify problems, provide effective solutions, and create new value and new markets. In October 2006, we will mark the 130th anniversary of our founding. In every era, we have always run ahead of the pack. At the time of our founding, our slogan was “Business for Civilization.” We have been expanding our fields of business based on the conviction that “We can print on anything other than water or air.” Today, we are giving optimal form to information that is formless, and actively advancing into the Internet and other digital media. We currently do business with more than 30,000 companies, which is testimony to the extent to which we provide things that are indispensable to corporations and consumers as part of everyday life. Going forward, we want to further expand the fields to which we apply Printing Technology and Information Technology in order to generate new businesses. We the management of DNP want to enhance the taiwa that we have with all of our stakeholders. We intend to fulfill our social responsibilities and continue to be a trusted company as we aim for sustainable growth. *“Ta i w a ” is a process that entails identifying problems and finding solutions through the exchange of viewpoints and ideas. 3 ■ Fiscal Year Results Results by Segment and Plans for the Immediate Future Record High Sales, Operating Profit and Net Profit In Information Communication, sales of printed This fiscal year through March 2006, the Japanese materials improved along with the general economy. economy continued its gradual recovery, evidenced We also experienced good sales in commercial by such signs as increased capital investment backed printing, particularly of items like pamphlets and by improved corporate profits and a solid trend in coupons. We secured an overwhelming share of the individual consumption. However, in the printing market for smart cash cards and other smart cards by industry, the business environment remained harsh making the most of our strength in software devel- due to the influence of factors like cost increases opment. Our information processing services (IPS) accompanying spiking oil prices, and lower unit business received more orders. As a result, the order prices due to increased competition. Information Communication segment’s net sales Despite this difficult business environment, we can grew 3.4% from the previous year, to 662.5 billion report to our shareholders that we achieved a third yen, while operating income grew 3.4% to 51.0 consecutive year of growth in sales and profits, and set billion yen. In the fiscal year ending March 2007, we new records for corporate performance. Net sales rose will strive to continue to expand orders of printed 5.8% from the previous year to 1,507.5 billion yen, materials, boost sales in commercial printing in line operating income increased by 0.1% to 120.7 billion with increased corporate spending on advertising, yen and net profit increased by 8.8% to 65.2 billion further expand our share of the IPS and smart card yen. All of these figures represent new record highs markets, and increase profits by reducing costs. for DNP. We also increased dividend payments by 2 The packaging sector of Lifestyle & Industrial yen per share to 26 yen, marking the fourth consecu- Supplies performed well thanks to sales of aseptic tive term in which we increased our dividend payout. filling systems for PET* bottles and the resulting We believe that we were able to maintain this big increase in sales of pre-formed bottles, as well as steady growth because we placed importance on stronger sales of flexible packaging and paper cups. taiwa with each and every customer, discovered each In decorative materials, we sold more environmen- customer’s problems, and strove to offer the best tally-friendly residential materials, and in industrial solutions to those problems. We worked at getting supplies, optical films used for displays and ink to know our customers thoroughly through sales ribbons for color printers were among the items that activities, developed and combined printing and sold better than the previous year. Overall, the information technologies, created planning, research Lifestyle & Industrial Supplies segment’s net sales and production systems that allow us to offer unique increased by 6.7% year on year to 480.0 billion yen, solutions, grappled head-on with the problems of a while operating income grew 4.4% to 37.6 billion variety of customers, and cultivated our desire to yen. In the fiscal year ending March 2007, we will solve problems. We believe that the effort we have aim to increase sales and profits as we expect to see expended to expand our business in line with our more orders for high added-value eco-friendly corporate visions — “Business for Civilization,” decorative materials accompanying increased demand “Expansion Printing,” and now “P&I Solutions” — for condominiums and other residential units, and we has borne fruit in various ways. Going forward, we intend to win much larger orders for aseptic filling intend to further accelerate this growth and do our systems and industrial supplies. utmost to attain sustainable growth while fulfilling In the Electronics segment, net sales rose 10.1% our social responsibilities. to 296.8 billion yen, but because unit prices for color *PET = polyethylene terephthalate 4 Message to DNP ANNUAL REPORT 2006 DNP in Brief Special Feature Segment Information Sustainable Development Financial Section Our Shareholders filters declined and sales of projection screens and turing technologies, we have the technology to shadowmasks declined, operating income dropped develop card operating systems and applications such 4.7% to 37.8 billion yen. In the fiscal year through as biometric identification and one-time password March 2007, we will still feel the effects of lower authentication, and other technologies that allow us unit prices for color filters and increased deprecia- to do things like securely encode digital data and tion expenses, but we will work hard to improve sales issue cards after registering customer data. DNP and profits as we expect to inaugurate a new inkjet- currently produces almost all of the smart cash cards method production line for color filters. Also, we issued by Japanese megabanks, and holds roughly expect to start mass production of 65nm photomasks 50% of the overall Japanese smart card market. in addition to the 90nm products that we are already Examples of our information processing services equipped to mass produce both in Japan and (IPS) include printing and sending individually overseas. tailored promotional information and invoices, etc. for mail-order businesses. This is an example of merging new applications for such technologies as ■ Medium-term Vision digital data processing, software development, and database management. Our IPS business is growing Accelerating the “P&I Solutions” That Have rapidly, partly thanks to increased demand for full- Already Begun Contributing to Profits color invoices.