S E I K O E P S O N C O R P O R A T I O N A N N U A L R E P O R T 2 0 0 7 Seiko Epson Corporation Annual Report 2007 April 2006 – March 2007 3-5 Owa 3-chome, Suwa, Nagano 392-8502, Japan Tel: +81-266-52-3131 (main) http://www.epson.co.jp/e/ This report was produced from recycled and tree-free paper and soy ink. Corporate Data Management Philosophy (As of March 31, 2007) Epson is a progressive company, trusted throughout the world because of our commitment to customer satisfaction, ■ Company Name Seiko Epson Corporation ■ Paid-in Capital ¥53,204 million environmental conservation, individuality, and teamwork. ■ Founded May 1942 ■ Number of Employees Epson Group (consolidated): 87,626 ■ Head Office 3-5 Owa 3-chome, Suwa, Parent Company: 13,039 We are confident of our collective skills Nagano 392-8502, Japan ■ Group Companies 117 (domestic: 33, overseas: 84) and meet challenges with innovative and creative solutions. Tel: +81-266-52-3131 (main) *Including Seiko Epson Corporation (The Epson Management Philosophy has been translated into 14 languages, ■ Tokyo Office Shinjuku NS Building, and is shared by all members of the Epson Group worldwide.) 4-1 Nishishinjuku 2-chome, Shinjuku-ku Tokyo 163-0811, Japan Tel: +81-3-3348-8531 (main) ■ Corporate History May 1942 Daiwa Kogyo Ltd. (the predecessor of Seiko Oct. 1992 Complete elimination of CFCs from manufacturing Epson Corporation) is established. processes is achieved at all factories and affiliates in Japan. Epson receives the 1992 Stratospheric May 1959 Daiwa Kogyo and the Suwa Plant of Daini Ozone Protection Award from the U.S. Seikosha Co., Ltd. (now Seiko Instruments, Inc.) Environmental Protection Agency. merge as Suwa Seikosha Co., Ltd. Apr. 1994 ISO 9000 series certification for quality manage- Dec. 1961 Shinshu Seiki Co., Ltd. (name changed to Epson ment system is acquired by all Epson plants in Corporation in 1982) is established. Japan. Oct. 1964 The Seiko Group is selected as the official time- Feb. 1998 The Seiko Group is chosen as the official time- keeper for the Olympic Games in Tokyo. keeper for the Olympic Winter Games in Nagano. The compact tabletop quartz clock, Crystal Chronometer QC-951, and printing timer play Apr. 1998 Epson (China) Co., Ltd. is established in Beijing as important roles at the event. Epson’s regional headquarters in China. Aug. 1968 Tenryu (Singapore) Pte. Ltd. (now Singapore May 2001 ISO 14001 certification obtained for environmental Epson Industrial Pte. Ltd.), the first overseas man- management systems at all of Epson’s 68 major Laying the foundations for sales and income growth, Epson ufacturing affiliate, is established. business sites around the world. Sep. 1968 The EP-101, the world’s first mini-printer, is launched. Jun. 2002 Epson receives the Corporate Innovation is driving reforms forward and cultivating new businesses. Recognition Award from the Institute of Electrical and Electronics Engineers Inc. (IEEE). Jun. 2003 Epson is listed on the First Section of the Tokyo Stock Exchange. Dec. 1969 The world’s first analog quartz watch (Seiko Quartz Astron 35SQ) goes on sale. Apr. 1975 Epson America, Inc., the first overseas sales sub- sidiary, is established. Jun. 1975 The Epson brand is established. Oct. 2004 Sanyo Epson Imaging Devices Corporation (now Epson Imaging Devices Corporation) is May 1983 Epson Sales Japan Corporation is established as established. a domestic marketing company. Nov. 2004 Seiko Quartz Astron 35SQ, the world’s first Jan. 1985 Shonai Denki Kogyo Co., Ltd. (now Tohoku Epson quartz wristwatch, receives the prestigious Corporation) is established as a domestic manufac- IEEE Milestone Award. turer. Nov. 1985 Suwa Seikosha Co., Ltd. and Epson Corporation merge to form Seiko Epson Corporation. Jan. 1990 Epson Europe B.V., Epson’s European regional headquarters, is established in Amsterdam, the Netherlands. Apr. 2005 The global tagline “Exceed Your Vision” is intro- duced to strengthen brand promotion worldwide. Oct. 2005 Epson Toyocom Corporation is established. Annual Report 2007 87 Contents Consolidated Financial Highlights.......................................... 2 To Our Stakeholders .............................................................. 4 An Interview with the President: Approaching the Second Year of the Creativity and Challenge 1000 Mid-Range Business Plan ................................. 6 An Interview with the President: Approaching the Second Year of the Creativity and Challenge Developing Inkjet Printers for 1000 Mid-Range Business Plan ............................................. page 6 Business and Industry 14 Epson at a Glance.................................................................. 16 Outline of Epson’s Businesses and Related Growth Strategies ............................... 18 Information-Related Equipment Segment Printer Business.......................................................... 18 Visual Instruments Business....................................... 21 Developing Inkjet Printers for Business and Industry page 14 Electronic Devices Segment Display Business ........................................................ 22 Semiconductor Business............................................ 24 Quartz Device Business ............................................. 24 Precision Products Segment............................................ 25 Corporate Governance .......................................... 26 Management System ....................................................... 26 Outline of Epson’s Businesses and Director Remuneration ..................................................... 27 Related Growth Strategies Internal Control System Improvements............................ 27 page 18 Returning Free Cash Flow to Shareholders (Dividend Policy) ... 30 Communication with Shareholders and Investors ........... 30 Management .................................................................... 31 Environmental and Corporate Citizenship Programs............. 32 Research and Development Strategies ................................. 34 Patent Strategies.................................................................... 36 Principal Subsidiaries and Affiliates....................................... 38 Financial Section.................................................................... 39 Investor Information ............................................................... 86 In this annual report, “Epson” refers to the Epson Group, while Corporate Data ...................................................................... 87 “the Company” may refer to the Group or the parent company, Seiko Epson Corporation. Cautionary Statement This report includes forward-looking statements that are based on management’s views in light of information available at the time of the announcement. These statements involve risks and uncertainties. Actual results may be materially different from those discussed in the forward-looking statements. The factors that may affect Epson include, but are not limited to, general economic conditions, the ability of Epson to continue to introduce new products and services on a timely basis, consumption trends, competition, technology trends, and exchange rate fluctuations. Annual Report 2007 1 Consolidated Financial Highlights Seiko Epson Corporation and Subsidiaries For the years ended March 31 Thousands of Millions of yen U.S. dollars 2002 2003 2004 2005 2006 2007 2007 Statements of income data Net sales ¥1,274,109 ¥1,322,453 ¥1,413,243 ¥1,479,750 ¥1,549,568 ¥1,416,032 $11,995,188 Information-related equipment 902,248 915,857 920,380 946,029 976,443 916,330 7,762,219 Electronic devices 312,082 354,288 441,153 482,611 526,967 444,703 3,767,073 Precision products 78,188 79,745 81,102 81,143 85,778 87,744 743,278 Other 25,828 26,310 29,457 34,510 32,977 30,310 256,756 Eliminations and corporate (44,237) (53,747) (58,849) (64,543) (72,597) (63,055) (534,138) Gross profit 336,108 362,588 399,284 409,739 354,787 356,773 3,022,219 Selling, general and administrative expenses 309,912 313,228 321,883 318,772 329,029 306,430 2,595,764 Operating income 26,196 49,360 77,401 90,967 25,758 50,343 426,455 Income (loss) before income taxes and minority interest (18,382) 31,629 65,058 73,647 (20,047) 3,476 29,445 Net income (loss) (18,432) 12,510 38,031 55,689 (17,917) (7,094) (60,093) Research and development costs 79,742 85,761 90,485 89,042 92,939 84,690 717,408 Capital expenditures 197,533 89,111 70,379 157,535 118,283 77,548 656,908 Depreciation and amortization 129,151 125,809 110,314 104,241 109,305 89,603 759,026 Cash flows from operating activities 151,284 159,504 182,669 162,489 117,497 160,229 1,357,298 Cash flows from investing activities (278,358) (107,943) (65,329) (99,396) (95,266) (76,419) (647,344) Free cash flow (127,074) 51,561 117,340 63,093 22,231 83,810 709,954 Cash flows from financing activities 101,701 9,111 (40,918) (96,373) 19,123 (30,150) (255,400) Net Sales (Billions of yen) Operating Income (Billions of yen) Net Income (Loss) (Billions of yen) 1,549.6 1,479.8 1,413.2 1,416.0 1,322.5 1,274.1 91.0 55.7 77.4 38.0 49.4 50.3 12.5 26.2 25.8 -18.4 -17.9 -7.1 2002 20032004 2005 2006 2007 2002 20032004 2005 2006 2007 2002 20032004 2005 2006 2007 2 Seiko Epson Corporation Thousands of Millions of yen U.S. dollars 2002 2003 2004 2005 2006 2007 2007 Balance sheet data Current assets ¥ 622,415 ¥ 645,310 ¥ 709,169 ¥ 746,712 ¥ 795,402 ¥ 813,274 $ 6,889,233 Property, plant and equipment (net of accumulated depreciation) 502,251 442,769 393,031 441,355 426,118 379,032