Annual Report 2006 Contents
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FUJITSU LIMITED Annual Report 2006 Gearing Up for Growth FUJITSU LIMITED Annual Report 2006 Contents Financial Highlights ............................................................................. 1 A Message from Management ............................................................ 2 A Conversation with the President .................................................... 4 Growth through Global Business Expansion ................................... 10 Business Overview ................................................................................. 18 Operational Review and Outlook....................................................... 20 Research & Development .................................................................... 28 Intellectual Property ............................................................................. 30 Social and Environmental Activities .................................................. 32 Management........................................................................................... 34 Corporate Governance ......................................................................... 35 Business and Other Risks .................................................................... 40 Financial Section ................................................................................... 44 Principal Subsidiaries and Affiliates .................................................. 83 Shareholders’ Data ................................................................................ 83 Forward-looking Statements * This annual report may contain forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results may differ materially from those projected or implied in the 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 high- technology market (particularly semiconductors, PCs, etc.); fluctuations in exchange rates or interest rates; fluctuations in capital markets; intensifying price competition; changes in market positioning due to competition in R&D; changes in the environment for the procurement of parts and components; changes in competitive relationships relating to collaborations, alliances and technical provisions; potential emergence of unprofitable projects; and, changes in accounting policies. Financial Highlights Fujitsu Limited and Consolidated Subsidiaries Yen U.S. Dollars (millions) (thousands) (excluding inventory turnover ratio, D/E ratio) Years ended March 31 2004 2005 2006 2006 Net sales ¥4,766,888 ¥4,762,759 ¥4,791,416 $40,605,220 Operating income 150,342 160,191 181,488 1,538,034 Income before income taxes and minority interests 157,018 223,526 118,084 1,000,712 Net income 49,704 31,907 68,545 580,890 Total assets ¥3,865,589 ¥3,640,198 ¥3,807,131 $32,263,822 Shareholders’ equity 827,177 856,990 917,045 7,771,568 Inventories 521,126 478,510 408,710 3,463,644 Inventory turnover ratio 8.53 9.53 10.80 Interest-bearing loans ¥1,277,121 ¥1,082,788 ¥ 928,613 $ 7,869,601 D/E ratio (times) 1.54 1.26 1.01 Note: The U.S. dollar amounts stated above and elsewhere in this report have been translated from yen, for readers’ convenience only, at the rate of ¥118 = US$1, which was the approximate rate on the Tokyo Foreign Exchange Market at March 31, 2006. ■ Net Sales ■ Operating Income and Operating Income Margin (Billions of Yen) 2004 4,766 2004 150 3.2 2005 4,762 2005 160 3.4 2006 4,791 2006 181 3.8 Operating Income (Billions of Yen) Operating Income Margin (%) ■ Inventories and Inventory Turnover Ratio ■ Interest-bearing Loans and D/E Ratio 2004 521 2004 1,277 8.53 1.54 2005 478 2005 1,082 9.53 1.26 2006 408 2006 928 10.80 1.01 Inventories (Billions of Yen) Interest-bearing Loans (Billions of Yen) Inventory Turnover Ratio (%) D/E Ratio (Times) Annual Report 2006 1 A Message from Management 2 Fujitsu Limited The information technology market is undergoing a sea change—as tech- nologies converge and become increasingly complex, and services become more diverse—while at the same time expanding on a global scale. Of course it is continual advances in technology that will drive further growth in this mar- ket. 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 offer- ing solutions that can convert IT-enabled innovation into business value for customers worldwide. In the current fiscal year, ending in March 2007, our overarching objec- tive is to deliver sustained growth by transforming Fujitsu into a truly power- ful company. To achieve this, we will work even harder to meet the four key challenges we focused on in fiscal 2005: strengthening our existing businesses, creating and cultivating new businesses, reforming our organization and approach, and reforming our management systems. Left: Naoyuki Akikusa Right: Hiroaki Kurokawa Chairman President Annual Report 2006 3 A Conversation with the President a What prompted the change to Fujitsu’s business segments in fiscal 2005? Our operations were previously categorized under Software & Services, Plat- forms, and Electronic Devices, in other words, from the producer’s perspec- tive. We decided to change these business segment classifications to make them more customer-centric and ensure they better reflect the nature of our businesses. We have also added the term “solutions” to each segment to clearly emphasize our business objective at Fujitsu—provide solutions that convert technology into business value for our customers. First, I’d like to talk about our Technology Solutions segment. IT systems only begin to generate value once they are in operation and actually being utilized. But if we just talk to customers about IT services or servers, they see them as nothing more than structural elements of their IT operations. With IT becoming increasingly complex, we have decided to focus on providing value by helping to weave together these various elements for customers. So, aiming to link technology with actual usage as our business objective, we have brought together Services and System Platforms under the same Technol- ogy Solutions segment. Next is our Device Solutions segment. Electronic devices are central to our technology, and in this area we have nearly completed our shift in focus to logic LSI devices. Going 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 com- puters (PCs) and mobile phones are unique markets in their own right and are characterized by intensi- fying global competition. Focusing on achieving even greater sophistication in our supply chain management and in manufacturing innovation, we created this new segment in order to pursue further advances in these operations as independent businesses. a How would you assess Fujitsu’s performance in fiscal 2005? Consolidated net sales in fiscal 2005 grew just 0.6% year on year to ¥4,791.4 billion. This primarily reflected strong growth in overseas sales, particularly in optical transmission systems in North America and outsourcing services in the UK, as opposed to Japan, where sales of servers and in some other businesses were sluggish. Buoyed by higher revenues from overseas busi- ness, as well as success in enhancing manufacturing innovation to cut costs, and reducing losses from loss-generating systems integration projects in Japan, we reported an increase in operating income of 13.3%, to ¥181.4 billion. 4 Fujitsu Limited One thing is very clear in my mind: Fujitsu must become a company capable of consistently generat- ing profits. I believe this is the foundation for realizing growth. Increasing sales remains an important issue that we have to tackle, but I think our results for fiscal 2005 show that we are steadily becoming a company that can deliver stable profits. Another feature of our performance in fiscal 2005 was the progress we made in strengthening our financial position, as illustrated by improvements in our inventory turnover and D/E ratios. I think this shows that our efforts to transform Fujitsu into a truly powerful company are starting to bear fruit. a What were the reasons behind Fujitsu’s growth overseas and its relatively weak performance in Japan? Our approach of implementing strategies tailored to each market resulted in sales and earnings growth in each 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 server- related products, while in services we achieved steady growth in sales and earn- ings, particularly in the UK, by continuing our success in winning new large-scale outsourcing contracts. This is an area where we have continued high expectations going forward. The picture was different in Japan, where sales of server-related products and PCs declined, and services were impacted by sluggish corporate IT investment. However, our server-related business regained some strength in the second half