Epson
Annual Report 2011

Plain-text annual report

SEIKO EPSON CORPORATION ANNUAL REPORT 2011 April 2010 - March 2011 Cautionary Statement This report includes forward-looking statements that are based on management’s view from the information available at the time of the announcement. These statements are subject to various 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 timely introduce new products and services in markets, consumption trends, competition, technology trends, and exchange rate fluctuations. In this annual report, “Epson” refers to the Epson Group, while “the Company” may refer to the Group or the parent company, Seiko Epson Corporation. 1 Table of Contents Consolidated Financial Highlights ................................................................................................... 3 Information on the Company .......................................................................................................... 5 1. Overview of the business group ................................................................................................ 5 2. Major equipment and facilities ................................................................................................. 8 3. Overview of capital expenditures ............................................................................................ 10 4. Plans for new additions or disposals ....................................................................................... 11 5. Major management contracts ................................................................................................. 12 Risks Related to Epson’s Business Operations ................................................................................ 13 Business Conditions ....................................................................................................................... 20 1. Overview of business result .................................................................................................... 20 2. Manufacturing, orders received and sales ............................................................................... 23 3. Analysis of financial condition and results of operations .......................................................... 24 4. Research and development activities ....................................................................................... 28 5. Issues for Fiscal 2011 .............................................................................................................. 30 6. Dividend policy ...................................................................................................................... 32 Corporate Governance .................................................................................................................. 33 1. Approach to corporate governance ......................................................................................... 33 2. Details of audit remuneration ................................................................................................. 39 3. Basic policy regarding company control ................................................................................. 40 Management ................................................................................................................................. 41 Index to Consolidated Financial Statements ................................................................................... 43 Consolidated Balance Sheets ...................................................................................................... 44 Consolidated Statements of Income ............................................................................................ 46 Consolidated Statements of Comprehensive Income ................................................................... 47 Consolidated Statements of Changes in Net Assets ...................................................................... 48 Consolidated Statements of Cash Flows ...................................................................................... 50 Notes to Consolidated Financial Statements ................................................................................ 51 Report of Independent Auditors .................................................................................................... 87 Additional Information ................................................................................................................. 88 1. Principal subsidiaries and affiliates ........................................................................................ 88 2. Distribution of ownership among shareholders ....................................................................... 92 3. Major shareholders ................................................................................................................ 93 4. Epson stock price ................................................................................................................... 95 5. Corporate data and investor information ................................................................................ 96 2 Consolidated Financial Highlights Seiko Epson Corporation and Subsidiaries For the years ended March 31 Statements of income data Net sales Information-related equipment Electronic devices Precision products Other Eliminations and corporate Gross profit Selling, general and administrative expenses Operating income (loss) Income (loss) before income taxes and minority interests Net income (loss) Research and development costs Capital expenditures Depreciation and amortization Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Free cash flow Net cash provided by (used in) financing activities 2006 2007 2008 2009 2010 2011 Millions of yen Thousands of U.S. dollars 2011 ¥1,549,568 ¥1,416,032 ¥1,347,841 ¥1,122,497 ¥985,363 ¥973,663 $11,709,717 976,443 526,967 85,778 32,977 (72,597) 354,787 329,029 25,758 (20,047) 916,330 444,703 87,744 30,310 (63,055) 356,773 306,430 50,343 3,476 (17,917) (7,094) 92,939 112,574 109,305 84,690 73,104 89,603 902,970 395,197 83,927 29,124 (63,378) 368,449 310,871 57,577 52,045 19,093 82,870 63,955 79,209 769,850 311,626 72,697 31,828 (63,506) 289,443 291,031 (1,588) (89,559) 712,692 248,001 57,746 19,714 (52,791) 259,469 241,241 18,227 (799) 702,918 231,235 68,276 1,279 (30,046) 262,963 230,253 32,709 15,381 8,453,626 2,780,938 821,118 15,382 (361,347) 3,162,513 2,769,140 393,373 184,978 (111,322) (19,791) 10,239 123,138 82,058 55,624 78,406 68,849 25,937 47,395 54,377 31,813 41,159 653,962 382,597 494,999 117,497 160,229 112,060 44,253 56,542 32,395 389,597 (95,266) (76,419) (50,770) (61,002) (43,203) (23,615) (284,004) 22,231 19,123 83,810 (30,150) 61,289 (70,663) (16,748) (9,558) 13,338 (41,087) 8,780 (42,691) 105,592 (513,421) 3 Balance sheet data Current assets Property, plant and equipment (net of accumulated depreciation) Total assets Current liabilities Noncurrent liabilities Net assets Number of employees Information-related equipment Electronic devices Precision products Other Corporate Total Per share data (yen and U.S. dollars) Net income (loss) Cash dividends Shareholders’ equity Financial ratios (%) Shareholders’ equity ratio ROE (net income (loss)/average shareholders’ equity at beginning and end of year) ROA (income (loss) before income taxes and minority interests/ average total assets at beginning and end of year) ROS (income (loss) before income taxes and minority interest/ net sales) 2006 2007 2008 2009 2010 2011 Millions of yen Thousands of U.S. dollars 2011 ¥795,402 426,118 ¥813,274 379,032 ¥737,245 343,261 1,325,206 1,284,412 1,139,165 507,371 311,610 474,520 476,125 313,952 494,335 46,417 32,849 6,639 2,208 2,588 90,701 43,623 32,551 6,636 2,455 2,361 87,626 385,123 282,595 471,446 47,862 29,609 6,576 2,417 2,461 88,925 ¥617,677 253,712 917,342 283,848 314,862 318,631 41,748 19,818 6,038 2,151 2,571 72,326 (¥91.24) (¥36.13) 29.00 2,416.54 32.00 2,395.14 ¥97.24 32.00 2,277.45 (¥566.92) 35.00 1,541.16 ¥596,210 225,354 ¥543,530 213,623 $6,536,741 2,569,152 798,229 315,422 211,999 270,808 9,599,867 3,793,409 2,549,597 3,256,861 870,090 328,652 258,574 282,864 45,863 22,439 5,839 590 3,206 77,936 (¥99.34) 7.00 44,711 20,659 5,985 245 2,951 74,551 ¥51.25 20 1,407.92 1,347.71 $0.61 0.24 16.20 35.8 (3.8) (1.5) (1.3) 36.6 (1.5) 0.3 0.2 39.3 4.2 4.3 3.9 33.0 (29.7) (8.7) (8.0) 32.3 (6.8) (0.1) (0.1) 33.7 3.7 1.9 1.6 Notes 1. Amounts for periods prior to April 1, 2007, are rounded off. However, amounts for periods from or subsequent to April 1, 2007, are rounded down. Please refer to the “Basis of presenting consolidated financial statements” on page 51. 2. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥83.15=U.S.$1 as of March 31, 2011. 3. In this table, cash dividends per share refers to the amount paid for each share in each fiscal year. 4. Shareholders’ equity is net assets excluding minority interests. 4 Information on the Company 1. Overview of the business group The Epson Group (“Epson” or the “Group”), which includes Seiko Epson Corporation (“the Company”) and related companies, and is mainly comprised of businesses responsible for the development, manufacture and sales of information-related equipment, electronic devices, precision products, and other products. Research and development and product development are mainly conducted by the Company (corporate R&D and operations division R&D). Manufacturing and sales are conducted by the Company and its subsidiaries and affiliates, domestic and abroad, under the management of the Company’s operations divisions. The following is a brief description of each business segment and the main subsidiaries and affiliates of each business segment. (1) Information-related equipment business segment This segment comprises the printer business, the visual instruments business and others. This segment mainly includes the development, manufacture and sales of printers, 3LCD projectors, and personal computers (PCs). Details of the main businesses are as follows. Printer business Based on its digital control technologies and digital color image processing technologies, the printer business is responsible for the development, manufacture and sales of products that offer total solutions of color digital data from input through to output. The main products in this business include inkjet printers, page printers, serial impact dot matrix (“SIDM”) printers, large-format inkjet printers and related consumables, color image scanners, mini-printers, point-of-sale (“POS”) system products and others. Visual instruments business The visual instruments business is responsible for the development, manufacture and sales of 3LCD projectors, label writers and others. The manufacture of high-temperature polysilicon (“HTPS”) TFT liquid crystal panels (“HTPS-TFT panels”), which are the key components in 3LCD projectors, is included in the display business. Others In the PC business, PCs for the Japanese market are sold through a domestic subsidiary. The major subsidiaries and affiliates involved in each segment are as follows: Business category Printer business Main products Inkjet printers, page printers, SIDM printers, large-format inkjet printers and related consumables, color image scanners, mini-printers, POS system products and others Visual instruments business 3LCD projectors, label writers and others Others PCs and others Main subsidiaries and affiliates Manufacturing companies Tohoku Epson Corporation Akita Epson Corporation Epson Portland Inc. Epson El Paso, Inc. Epson Engineering (Shenzhen) Ltd. Singapore Epson Industrial P.T. Indonesia Epson Pte. Ltd. Industry Epson Precision (Philippines), Inc. Tianjin Epson Co., Ltd. Epson Engineering (Shenzhen) Ltd. Epson Precision (Philippines), Inc. Sales companies Epson Sales Japan Corporation Epson America, Inc. Epson Europe B.V. Epson (U.K.) Ltd. Epson Deutschland GmbH Epson France S.A. Epson Italia s.p.a. Epson Iberica, S.A. Epson (China) Co., Ltd. Epson Korea Co., Ltd. Epson Hong Kong Ltd. Epson Taiwan Technology & Trading Ltd. Epson Singapore Pte. Ltd. Epson Australia Pty. Ltd. Epson Direct Corporation – 5 (2) Electronic devices business segment This segment comprises the quartz device business, the semiconductor business and the display business. This segment mainly includes the development, manufacture and sales of crystal oscillators, CMOS LSIs and HTPS-TFT panels for 3LCD projectors. Based on their ultra-fine and ultra-precision processing technologies, low-power consumption technologies and high-density mounting technologies, businesses in this segment offer a wide range of electronic devices that are compact, thin, and which save energy. Products are aimed at handled device and various other applications. Products are also developed and manufactured to respond to the needs of other businesses within the Group. Details of the main businesses are as follows. Quartz device business The quartz device business is responsible for the development, manufacture and sales of crystal units, crystal oscillators, quartz sensors and optical devices for industrial and consumer products in a wide range of markets. Semiconductor business The semiconductor business is responsible for the development, manufacture and sales of mainly CMOS LSIs with low drive voltage, low power consumption and high durability mainly for handheld devices and other information communications equipment, and PC peripherals. It also develops semiconductors and base technologies for other Group businesses. Display business The display business is responsible for the development, manufacture and sales of HTPS-TFT panels for 3LCD projectors, and others. Epson Imaging Devices Corporation, a consolidated subsidiary of the Company, transferred part of its business assets related to the small- to medium-sized TFT-LCD business to the Sony Group as of April 1, 2010, thereby ceasing the related production as of December 31, 2010. The major subsidiaries and affiliates involved in each segment are as follows: Main subsidiaries and affiliates Business category Main products Quartz device business Crystal units, Manufacturing companies Epson Toyocom Corporation crystal oscillators, quartz sensors, optical devices and others Mainly CMOS LSIs Singapore Epson Industrial Akita Epson Corporation Epson Toyocom Malaysia Sdn. Bhd. HTPS-TFT panels for 3LCD projectors and small and medium-sized LCDs Pte. Ltd. Epson Imaging Devices Corporation Suzhou Epson Co., Ltd. Epson Engineering (Shenzhen) Ltd. Sales companies Epson Toyocom Corporation Epson Imaging Devices Corporation Epson Electronics America, Inc. Epson Europe Electronics GmbH Epson Hong Kong Ltd. Epson Taiwan Technology & Trading Ltd. Epson Singapore Pte. Ltd. Semiconductor business Display business (3) Precision products business segment This segment comprises the watch business, the optical products business, and the factory automation products business. This segment mainly includes the development, manufacture and sales of watches, watch movements, plastic corrective lenses, horizontally articulated robots and others. 6 Based on their ultra-fine and ultra-precision processing technologies that originated in mechanical watches, and high-density mounting technologies, this segment is the birthplace of Epson’s micromechatronics technologies. Details of the main businesses are as follows. Watch business The watch business is responsible for the development, manufacture and sales of Seiko brand watches and watch movements. Optical products business The optical products business is responsible for the development, manufacture and sales of Seiko brand plastic corrective lenses. Factory automation products business The factory automation products business is responsible for the development, manufacture and sales of horizontally articulated robots and semiconductor testing equipment known as IC handlers, and industrial inkjet equipment. The major subsidiaries and affiliates involved in each segment are as follows: Business category Main products Watch business Watches, watch movements and others Optical products business Plastic corrective lenses and others Factory automation products business Horizontally articulated robots, IC handlers, industrial inkjet equipment and others Main subsidiaries and affiliates Manufacturing companies Sales companies Epson Precision (Hong Kong) Ltd. Singapore Epson Industrial Pte. Ltd. Seiko Lens Service Center Corporation Philippines Epson Optical Inc. – Time Module (Hong Kong) Ltd. – Epson America, Inc. Epson Deutschland GmbH (4) Other business segment This segment comprises the businesses of subsidiaries that offer services for and within the Epson Group. Details of the main businesses are as follows. Intra-Group service business The intra-Group service business comprises subsidiaries providing a wide range of services for Epson. In particular, this includes Epson Insurance Center, which provides insurance services, and others. 7 2. Major equipment and facilities Epson’s major equipment and facilities are as follows. (1) Seiko Epson Corporation Name of plant (location) Business segment Type of facilities Correct as of March 31, 2011 Book value (Millions of yen) Machinery, Buildings and equipment structures and Land (Area: m2) Other Total Number of employees (Persons) vehicles 1,301 Overall Head Office (Suwa-shi, Nagano) Tokyo Office (Shinjuku-ku, Tokyo) Hirooka Office (Shiojiri-shi, Nagano) administration and Other facilities 2,893 114 (43,888) 146 4,456 899 other Overall administration and Other facilities 76 — other Printer development and Information-related component manufacturing [3,202] — (—) 5,475 14 90 64 equipment facilities 20,504 5,439 (188,118) 2,045 33,465 4,612 [22,983] 3,637 [28,909] 1,375 (160,528) 1,996 (247,143) 2,104 (538,828) 8,303 (40,725) 1,019 Other facilities 892 253 (179,759) 354 5,137 675 [1,758] 453 656 308 (31,340) 463 1,882 721 [918] 1,443 7,105 3,254 (113,082) 841 12,645 1,333 Other Research and development facilities Matsumoto Minami Plant Information-related (Matsumoto-shi, equipment Nagano) Shimauchi Plant (Matsumoto-shi, Nagano) Information-related 3LCD projector development equipment and design facilities. Suwa Minami Plant Electronic devices (Fujimi-machi, Precision products Suwa-gun, Nagano) Other Electronic devices Liquid crystal panel and factory automation manufacturing facilities Other facilities Liquid crystal panel manufacturing facilities Semiconductor manufacturing Electronic devices facilities Other Research and development facilities Chitose Plant (Chitose-shi, Hokkaido) Fujimi Plant (Fujimi-machi, Suwa-gun, Nagano) Sakata Plant (Sakata-shi, Yamagata) Hino Office (Hino-shi, Tokyo) Shiojiri Plant (Shiojiri-shi, Nagano) Matsushima Plant (Minowa-machi, Kamiina-gun, Nagano) 2,974 1,292 11,362 2,705 190 5,832 197 567 16,633 1,218 341 12,606 1,043 73 11,850 391 636 Electronic devices Semiconductor manufacturing facilities 8,652 1,507 Electronic devices Sales facilities 3,473 0 Precision products Watch manufacturing facilities 1,815 959 (41,836) 190 3,985 Precision products Plastic corrective lens manufacturing facilities [5,764] 421 1,399 1,008 (8,931) 80 2,910 438 [31,978] 8  (2) Domestic subsidiaries Company name (location) Business segment Type of facilities Epson Toyocom Corporation Electronic devices (Hino-shi, Tokyo) Crystal device manufacturing facilities Correct as of March 31, 2011 Book value (Millions of yen) Buildings and structures Machinery, Land equipment and vehicles (Area: m2) Other Total Number of employees (Persons) 6,893 4,785 (266,923) 256 19,416 1,577 7,481 Tohoku Epson Corporation (Sakata-shi, Yamagata) Akita Epson Corporation Information-related Printer component equipment manufacturing facilities 5 1 Information-related equipment, electronic Printer component and crystal device manufacturing facilities 1,261 195 (Yuzawa-shi, Akita) devices (3) Overseas subsidiaries [6,163] — (—) 677 (68,992) 249 256 997 108 2,243 936 Company name (location) Business segment Type of facilities Correct as of March 31, 2011 Book value (Millions of yen) Buildings and structures Machinery, Land equipment and vehicles (Area: m2) Other Total Number of employees (Persons) 1,978 2,796 – (–) [64,104] 56 2,070 6,845 13,795 Epson Precision (Hong Kong) Ltd. (Hong Kong, China) Singapore Epson Industrial Pte. Ltd. (Singapore) P.T. Indonesia Epson Industry (Bekasi, Indonesia) Epson Precision (Cabuyao, Philippines) Epson Toyocom Malaysia Sdn. Bhd. (Kuala Lumpur, Information-related Printer, liquid crystal equipment projector, liquid crystal panel Electronic devices and watch manufacturing Precision products facilities Printer consumables Information-related equipment Electronic devices Precision products Information-related equipment manufacturing facilities Printer manufacturing facilities 2,795 1,018 semiconductor and watch 2,884 1,649 (41,065) 302 4,892 4,139 [41,567] – (–) [201,753] 57 925 4,739 6,143 [173,200] 322 (32,437) 32 3,185 2,746 (Philippines), Inc. Information-related equipment Printer and liquid crystal projector manufacturing facilities 1,172 229 (17,489) 429 1,888 4,565 Electronic devices Crystal device manufacturing facilities 344 2,486 Malaysia) Notes 1. The above figures do not include consumption tax. 2. “Other” in book value figures includes tools, furniture and fixtures and other property, plant and equipment, but does not include construction in progress. 3. Portions of the land are rented from companies not included in consolidated accounts. Each area of the rented land is indicated in parenthesis [ ]. 4. Figures for Epson Precision (Hong Kong) Ltd., Singapore Epson Industrial Pte. Ltd. and Epson Precision (Philippines), Inc. are included in consolidated business results. 5. The above book value amounts are after adjustments for consolidated accounts. 9 3. Overview of capital expenditures Capital expenditures for the fiscal year under review were concentrated in key strategic areas, primarily on new products and production capacity expansion to help foster the development of new businesses and prepare for future growth. In addition, Epson made moves to restrain new capital spending and efficiently utilize existing facilities in an effort to improve cash flow. As a result of these efforts, total capital expenditures (including property, plant and equipment, software and lease rights) amounted to ¥31,813 million. No equipment with a significant impact on production capacity was sold or removed. Capital expenditures in each business segment are discussed below. Information-related equipment Investment for commercializing new products and for maintaining and renewing equipment and facilities for printers and 3LCD projectors amounted to ¥17,813 million in the fiscal year under review. Electronic devices Investment for commercializing new products, and for maintaining and renewing equipment and facilities for quartz devices amounted to ¥9,965 million in the fiscal year under review. Precision products Investment for commercializing new products, and for maintaining and renewing equipment and facilities for watches and plastic corrective lenses amounted to ¥1,856 million in the fiscal year under review. Other businesses and company-wide Investment in R&D and other activities amounted to ¥2,179 million in the fiscal year under review. 10 4. Plans for new additions or disposals Epson plans to invest ¥530 billion in capital expenditures for the consolidated fiscal year ending March 31, 2012. The breakdown by business segment is changed from the fiscal year under review as follows. Business segment Information-related equipment Devices & Precision Products Other and overall Total Planned amount of capital expenditures (100 millions of yen) Main types and purposes of equipment and facilities 300 140 90 530 Reinforcing productivity, commercializing new products and maintaining and renewing equipment and facilities, etc. Commercializing new products, reinforcing productivity and maintaining and renewing equipment and facilities, etc. Investment for research and development, etc. – Notes 1. The above amounts do not include consumption tax. 2. Required funds will be covered by current funds in hand. 3. There are no plans to dispose of or sell major equipment and facilities with the exception of disposals and sales associated with regular and ongoing renewals. 4. The above capital expenditure plan includes property, plant and equipment as well as software and lease rights that are included among intangible assets. 11 5. Major management contracts (1) Technology license agreements Name of contracting company Name of other party Country Type of contract Contract period Seiko Epson Corporation Research Corporation Technologies, Inc. U.S.A. License to use patents relating to printing technologies for printers December 22, 2000 until the expiry of the patents (2) Reciprocal technical assistance agreements Name of contracting company Name of other party Country Type of contract Contract period Seiko Epson Corporation Seiko Epson Corporation Seiko Epson Corporation Seiko Epson Corporation Seiko Epson Corporation Seiko Epson Corporation Seiko Epson Corporation Hewlett-Packard Company U.S.A. License to use patents relating to inkjet printers January 1, 2005 until the expiry of the patents International Business Machines Corporation U.S.A. License to use patents relating to information-related equipment April 1, 2006 until the expiry of the patents Microsoft Corporation U.S.A. License to use patents relating to information-related equipment and software used by such equipment September 29, 2006 until the expiry of the patents Eastman Kodak Company U.S.A. License to use patents relating to information-related equipment October 1, 2006 until the expiry of the patents Xerox Corporation U.S.A. Texas Instruments Incorporated U.S.A. License to use patents relating to electrophotography and inkjet printers License to use patents relating to semiconductors and information-related equipment March 31, 2008 until the expiry of the patents April 1, 2008 until March 31, 2018 Canon Incorporated Japan License to use patents relating to information-related equipment August 22, 2008 until the expiry of the patents (3) Other On February 2, 2011, Seiko Epson and Sony Corporation agreed upon and concluded an agreement to transfer all the equity held by Seiko Epson in its consolidated subsidiary Suzhou Epson Co., Ltd., to Sony (China) Limited, a company within the Sony Group. On May 25, 2011, Seiko Epson and its consolidated subsidiary Epson Toyocom Corporation agreed upon and concluded an agreement on an absorption-type corporate split to transfer Epson Toyocom’s quartz device business (excluding a part of the manufacture and sales of quartz devices) to Seiko Epson. 12 Risks Related to Epson’s Business Operations At present, Epson has identified the following significant factors as risks that could have a material adverse affect on its future business, financial condition or operating results and that should thus be taken into account by investors. There may be other risk factors of which Epson is unaware at this time. Epson strives to recognize, prevent, and control potential risks and to address risks that materialize. Also, all forward-looking statements hereunder were made at Epson's discretion as of the date this Annual Report was submitted. 1. Epson relies to a significant degree on sales and profits from its printer business. Epson’s ¥702,918 million in sales from its information-related equipment business for the year ended March 2011 constituted 72.2% of Epson’s consolidated sales, which were ¥973,663 million. Inkjet and other printers, including printer consumables, accounted for a large majority of the sales and profits of the information-related equipment business. A decrease in sales of printers and printer consumables could have a material adverse effect on Epson’s operating results. 2. Price competition could put downward pressure on prices. Market prices for printers and certain electronic devices have been trending downward in recent years primarily due to intensified competition and a shift in demand toward lower-priced products. Epson is striving to improve profitability by reducing production costs, for example, by using low-cost designs. At the same time, it is taking action to fight the trend of declining prices by, for example, developing and expanding sales of high-value-added products. However, there is no assurance that these efforts will succeed, and if Epson is unable to respond effectively to counteract the downward price trend, its operating results might be adversely affected. 3. Epson’s technologies compete with the technologies of other companies. Some of the products that Epson sells contain technology that place Epson in competition against other companies. For example: 1) The Micro Piezo technology*1 that Epson uses in its inkjet printers competes with the thermal inkjet technologies*2 of other companies; and 2) The 3LCD technology*3 that Epson uses in its projectors competes with other companies’ DLP*4 and LCOS*5 technologies. Epson believes the technology it uses in these types of product is superior to the alternative technologies of other companies, but, if consumer opinion with respect to Epson’s technology changes, or if other revolutionary technologies appear on the market and compete with Epson’s technologies, Epson may lose that competitive edge which could adversely affect its operating results. *1. Micro Piezo technology is an inkjet technology created by Epson that manipulates piezoelectric elements to fire small droplets of ink from nozzles. *2. Thermal inkjet technology (also known as bubble-jet technology) is a printer technology in which the ink is heated to create bubbles and the pressure from the bubbles is used to fire the ink. *3. 3LCD technology uses TFT panel as light valves. The light from the light source is divided into the three primary colors (red, blue and green) using special mirrors, the picture is created on separate LCDs for each color, and then the picture is recombined and projected on the screen. *4. DLP technology uses a digital micro-mirror device (DMD) as a display device. A DMD is a semiconductor on which anywhere from hundreds of thousands to millions of micro mirrors are arranged, each mirror directing light onto its own individual pixel. An image is formed by the light from the light source being reflected from the mirrors onto the screen. DLP and DMD are trademarks of Texas Instruments Incorporated. *5. LCOS technology uses liquid crystal on silicon (LCOS ) as a display device. The reflective LCD panels used in LCOS systems are characterized by a high aperture ratio. Because the circuits and the switching elements are etched underneath the reflective layer, there is no need for the BM (a light-blocking layer that prevents light from falling on the pixel transistor area), making for a seamless display of the picture. 4. Epson genuine consumables might lose market share. Ink cartridges are particularly important inkjet consumables in terms of Epson’s sales and profit. There are other 13 parties who supply ink cartridges that can be used in Epson printers. These alternative products are sold for less than genuine Epson ink cartridges and, while they have relatively low market share in Japan and America, they have high market share in certain Asian countries. To mitigate the risk that genuine ink cartridges could lose market share, Epson will pursue a policy of earning sustained customer loyalty by emphasizing the quality of its genuine products as well as by boosting user-friendliness, including by using even longer lasting ink and by providing inkjet printers tailored to applications in each market. Epson will also take legal measures if any of the patent rights or trademark rights it holds over its ink cartridges are infringed. There is no assurance, however, that any of these efforts will be effective, and if Epson’s net sales from consumable products for inkjet printers declines because, for example, the market share of non-genuine ink cartridges increases further or because genuine ink cartridges lose market share or Epson must reduce the prices of Epson brand products, operating results might be adversely affected. 5. Market changes could affect Epson. Epson is concentrating management resources on core businesses in which it can leverage its unique strengths – printers, projectors, quartz devices and sensors – and on future growth areas as it seeks to strengthen its business foundations, while at the same time also cultivating new businesses that will support the next generation. However, because technological innovation and product cycles are changing extremely rapidly in markets where Epson is focusing its managerial resources, the Company may be unable to respond flexibly to such changes and develop and introduce competitive products. In addition, reduced consumption and capital expenditure in Epson’s main markets stemming from economic downturns have hurt demand for Epson’s products in the past and may do so in the future. If, for example, Epson cannot suitably respond to technological innovations in its main markets, or if economic downturns or other factors prevent a recovery in demand, Epson’s operating results could be adversely affected. 6. Trends in the electronic devices market could adversely affect Epson. Certain trends reflect product life cycles and economic conditions in markets for electronic devices such as semiconductors and mobile phone handsets. The electronics industry has historically been subject to large cyclical fluctuations, and Epson has experienced a decline in demand for its products, excess production capacity, and price erosion during downturns. Epson has moved to put its electronic devices businesses in a stronger financial position, primarily through restructuring, and make them more resistant to such market fluctuations. However, if product demand remains sluggish for an extended period of time, or if the market deteriorates further, Epson’s operating results could be adversely affected. There is also no assurance that Epson can always accurately predict future trends, and it is possible that Epson might not be able to make the right investments at the right time in response to market trends. 7. Epson competes with other companies. Epson presently faces competition from powerful companies with abundant financial resources or strong financial compositions, and from companies in such countries and regions as Taiwan, Korea, or China that have the ability to manufacture competitive products or compete on price in Epson’s markets. This competition could adversely affect Epson’s operating results. In addition to such competition, there is also the possibility that powerful companies against which Epson does not currently compete may use their brand power, technological strength, ability to procure funds, marketing power, sales skills or low-cost production ability to newly enter a business area of Epson’s and compete with it. 8. Expanding businesses overseas entails risks for Epson. Epson is continuing to expand its businesses overseas; more than 60% of its consolidated sales for the business year ended March 2011 were overseas sales. Epson has production sites all over Asia, including China, Indonesia, Singapore, Malaysia and the Philippines, as well as in the United States, the United Kingdom, and other countries. It has also established many sales companies all over the world. As of March 2011, overseas employees account for more than 70% of Epson's total workforce. Epson believes that its global presence provides many advantages. For example, it enables Epson to undertake marketing activities aligned with the market needs of individual regions and leads to greater cost-competitiveness by reducing production costs and lead times. There are, however, unavoidable risks 14 associated with overseas production and sales operations. These include but are not limited to changes in national laws, ordinances, or regulations related to production and sales; social, political or economic changes; transport delays; damage to infrastructure (e.g., power supply); currency exchange restrictions; insufficient skilled labor; changes in regional labor environments; changes in taxes, regulations or the like protective of trade; and laws, ordinances, regulations, or the like related to the import and export of Epson products. 9. The intense technological innovation required of Epson entails risks. Epson is engaged in manufacturing and selling products that require advanced technologies, so technological superiority is a vital element of Epson’s competitiveness. Epson possesses core technologies—for example, ultra-fine, ultra-precise processing technologies, low-power consumption technologies, thin-film technologies, surface treatment technologies, high-density mounting technologies, digital control technologies and digital color image processing technologies. By evolving and fusing these technologies, Epson has been able to manufacture and sell products that meet customers’ needs, thereby developing the presence that it has today. The rapid rate of technological innovation required in most of the fields in which Epson is engaged, however, means that, in order to respond swiftly to customer needs in the face of changes in technology, Epson sometimes must undertake long-term investments or capital spending based on product predictions. Thus, while Epson is making every effort to gauge market and customer needs and will maneuver to respond to the rapid technological innovation on which they depend, if Epson is unable to accurately gauge those market trends or customer needs, or if it cannot appropriately respond to the required technological innovations, its operating results might be adversely affected. 10. The short lifecycle of certain products makes Epson vulnerable to certain risks. Epson is manufacturing and selling products that generally have short life cycles, such as consumer products. Epson has its own global distribution network. It gathers information on product needs in different regions through local subsidiaries and branches, and it strives to reduce lead times by establishing production sites in regions close to consumers. If the transitions from existing products to new ones do not go smoothly, however, Epson’s operating results could consequently be adversely affected. Factors that could interfere with the transition to a new product include delays in the development or production of new products, competitors’ timing in introducing their new products, the difficulty in predicting changes in consumers’ needs, a decline in purchases of existing products as consumers anticipate new product introductions, and competition between Epson’s existing and new products. 11. Procuring products and outsourcing the manufacture of products entail risks for Epson. Epson procures parts, semi-finished products and finished products from third parties, but it has generally conducted transactions without entering into any long-term purchase agreements. Epson is developing upon its efficient procurement activities by cooperatively engaging with suppliers in maintaining product quality, improving products and reducing costs. However, if its ability to procure were to be adversely affected by, for example, insufficient supply from a third party or poor quality of products supplied, Epson’s operating results could be adversely affected. In principle, Epson strives to procure parts and the like from multiple suppliers. However, certain inkjet printer and other products parts are procured from a single source due to difficulty in procuring alternative parts from another company. On the manufacturing side of its business, Epson outsources the manufacture of certain inkjet printer and other products. If demand for such products rises suddenly, it may be difficult to secure alternative or additional manufacturers to outsource to, and Epson might become vulnerable to such risks as an increase in costs or a delay in production. 12. Epson faces risks concerning the hiring and retention of personnel. It is vital that Epson hire and retain talented personnel both in Japan and overseas to develop advanced new technologies and manufacture advanced new products, but the competition for such personnel is becoming increasingly intense. Epson is putting considerable effort into securing talented personnel by establishing research and development sites and design sites both in Japan and overseas. If Epson is unable to continue to use or employ an adequate number of talented personnel, however, the implementation of its business plans could be adversely affected. 13. Fluctuations in foreign currency exchanges create risks for Epson. 15 A significant portion of Epson’s sales are denominated in U.S. dollars or the euro. Epson is continuing to expand its overseas procurement and move its production sites overseas, thereby attracting an increase in expenses in the U.S. dollar or other foreign currencies linked to it, and, although its U.S. dollar-denominated sales countervail its U.S. dollar-denominated expenses, its euro-denominated sales are still greater than its euro-denominated expenses. Also, although Epson has executed currency forwards and currency options to hedge against the risks inherent in foreign currency exchanges, unfavorable movements in the exchange rates of foreign currencies such as the U.S. dollar or euro against the yen could adversely affect Epson’s financial situation or business results. 14. There are risks inherent in pension systems. Epson has established defined-benefit pension plans, a tax qualified pension plan, and a termination allowance plan. If, with respect to the defined-benefit pension-type retirement pension plan, there is a change in the operating results of the pension assets or in the ratio used as the basis for calculating retirement allowance liabilities, Epson’s operating results could be adversely affected. 15. Epson’s intellectual property rights activities expose Epson to certain risks. Patent rights and other intellectual property rights are extremely important to Epson for maintaining its competitiveness. Epson has itself developed many of the technologies it needs, and it utilizes them as intellectual property in the form of products or technologies by acquiring patent rights, trademark rights and other intellectual property rights for them or entering into agreements with other companies for them. Epson carefully selects the personnel who manage its intellectual properties and is constantly working to strengthen its intellectual property portfolio. However, if any of the following situations relating to intellectual properties occurs, Epson’s operating results could be adversely affected. 1) An objection might be raised or an application to invalidate might be filed against an intellectual property right of Epson, and as a result, that right might be recognized as invalid. 2) A third party to whom Epson originally had not granted a license might come to possess a license as a result of a merger with or acquisition of another third party, and the competitive advantage that Epson had due to that license might be lost. 3) New restrictions might be imposed on an Epson business that were originally not imposed on it as a result of a merger with or acquisition of a third party, and it might be forced to spend money to find a solution to those restrictions. Intellectual property rights that Epson holds might not give it a competitive advantage or Epson might not be able to use them effectively. 4) 5) Epson or one of its customers might be subject to a third-party’s claim of an infringement of intellectual 6) property rights and have to spend a considerable amount of time and money to resolve the issue, or such a claim might interfere with Epson’s ability to focus its managerial resources. If a third-party’s claim of infringement of intellectual property right is upheld, Epson might incur damage in the form of having to pay considerable compensation or royalties or stop using the applicable technology. 7) A suit might be brought against Epson for payment of remuneration to employees or the like for their inventions or the like, which would mean Epson might be forced to spend a considerable amount of time and money to resolve the issue and, as a result, might be required to pay a considerable amount of money in remuneration. 16. Problems may arise relating to the quality of Epson’s products. The existence of quality guarantees on Epson’s products and the details of those guarantees differ from customer to customer, depending on the agreement it has entered into with them. If an Epson product is defective or does not conform to the required standard, it may have to be replaced or repaired or otherwise reworked at Epson's expense. Or, if the product causes personal injury or property damage, Epson could bear product liability or hold other liability. Also, Epson could be held liable to a customer and could incur expenses for repairs or corrections on the grounds that it did not adequately display or explain an Epson product’s features or performance. Furthermore, 16 if such a problem in quality arises with respect to Epson products, Epson might lose the trust of others in its products, lose major customers or experience a drop in demand for those products, any of which might adversely affect Epson’s operating results. 17. Epson is vulnerable to risks of problems arising relating to the environment. Epson is subject, both in Japan and overseas, to various environmental regulations concerning industrial waste and emissions into the atmosphere that arise from manufacturing processes. Environmental conservation is one of Epson’s most important management policies, and the Company is proactively engaged in environmental conservation on all fronts. For example, Epson has programs to develop and manufacture products that have a smaller environmental burden, reduce energy use, promote the recovery and recycling of end-of-life products, and improve environmental management systems. To date, Epson has not had any serious environmental issue, but there is a possibility that in the future Epson might be affected by a compensation claim, incur expenses (such as cleaning expenses), receive a fine, be ordered to cease production or be otherwise affected as a result of environmental damage or that new regulations might be brought in requiring Epson to pay considerable expenses, and, if such a situation should occur, Epson’s operating results could be adversely affected. 18. Epson is vulnerable to proceedings relating to antitrust laws and regulations. With business operations that span the globe, Epson is subject in Japan and overseas to proceedings relating to antitrust laws and regulations, such as those prohibiting private monopolies and those protecting fair trade. Overseas authorities sometimes investigate and gather information on certain industries and as part of this, Epson’s market conditions and sales methods may come under investigation. Such investigations and proceedings could obstruct Epson’s sales activities and adversely affect Epson’s operating results. 19. Epson is at risk of material legal actions being brought against it. Epson conducts businesses internationally. Its primary businesses are the development, manufacture and sale of information-related equipment, electronic devices and precision equipment. Given the nature of its businesses, there is a possibility that an action could be brought or legal proceedings could be started against it regarding, for example, intellectual property rights, product liability, antitrust laws or environmental regulations. As of the date it submitted its Annual Securities Report, Epson was contending the following material actions. In Germany, the organization for collecting copyright fees on behalf of copyright holders, Verwertungsgesellschaft Wort (“VG Wort”), has brought a series of legal actions seeking payment of copyright fees against importers and venders of PCs, printers and other digital equipment that is capable of reproducing copyrighted works. In January 2004 VG Wort brought a civil action against Epson Deutschland GmbH (“EDG”), a consolidated subsidiary of the Company, to seek payment of copyright fees on single-function printers. The initial judgment determined that the aforementioned printer is subject to a copyright fee and decreed that EDG pay the fee at a rate of between 10 to 256.70 euros per printer depending on the printer’s printable pages per minute. However, the claim was dismissed by the appeals court and the supreme court. The plaintiff, however, unsatisfied with this ruling, appealed to the Federal Constitutional Court of Germany. On December 21, 2010, the Federal Constitutional Court ruled that the August 2008 ruling of the supreme court violates rights set forth in Article 14 of the constitutional law of Germany. It thus dismissed the August 2008 ruling of the supreme court and referred the case back to the supreme court for review. Companies in general, including Epson, and industry organizations are showing a willingness to take a stance against the expansion of the scope of such copyright fees. Apart from this, civil actions have been brought against the Company and certain of its consolidated subsidiaries by multiple customers in multiple countries, including the United States, regarding allegations of involvement in a liquid crystal display price-fixing cartel. It is difficult at this time to predict the outcome of these civil actions and when they may be settled, but Epson's operating results and future business could be affected, depending on the outcomes of suits and legal proceedings. 20. Epson is vulnerable to certain risks in internal control over financial reporting. Epson has established and operates internal control with the aim of ensuring the effectiveness and efficiency of business operations, reliability of financial reporting, compliance with applicable laws and regulations relevant 17 to business activities and safeguarding of assets. With the establishment and operation of internal controls high on its list of important management issues, Epson has been pursuing a Group-wide effort to audit and improve corporate oversight of its subsidiaries and affiliates. However, since there is no assurance that Epson will be able to establish and operate an effective internal control system on a continuous basis, and since there are inherent limitations to internal control systems, if the internal controls that Epson implements fail to function effectively, or if there are deficiencies or material weaknesses in the internal controls, it might adversely affect the reliability of Epson’s financial reporting. 21. Epson is vulnerable to risks inherent in its tie-ups with other companies. One of Epson’s business strategy options is to enter business tie-ups with other companies. However, the parties may review the arrangements of tie-ups, and there is a possibility that tie-ups could be dissolved or be subject to changes. There is also no assurance that the business strategy through the tie-ups will succeed or contribute to Epson’s operating results exactly as expected. 22. Epson might be severely affected in the event of a natural disaster. Epson has research and development, procurement, manufacturing, logistics, sales and services sites around the globe. It is possible that the regions concerned could be affected by any number of unpredictable events, such as a natural disaster, computer virus, outbreak of an influenza pandemic, act of terrorism or war, and that these could adversely affect Epson's operating results. The central region of Nagano Prefecture, where Epson has sites for its primary businesses, has numerous cities and towns designated as "Areas Requiring Enhanced Measures to Respond to Disasters" due to the high risk of a large-scale disaster in the event of an earthquake in the Tokai region. Moreover, an active fault line traces the Itoigawa Shizuoka geotectonic line through the middle of the Nagano Prefecture region. The areas classifiable as Areas Requiring Enhanced Measures to Respond to Disasters in Earthquakes were revised in April 2002, so Epson had to revise its earthquake-response policy, look into strengthening numerous buildings that were not built to resist earthquakes, take measures to avoid losses of materials for important parts, and create plans to prevent damage from earthquakes. Epson is also conducting other countermeasures such as partially dispersing its manufacturing sites throughout other regions. However, if a major earthquake occurs in the central Nagano Prefecture region, it is possible that, despite these countermeasures, the effect on Epson could be extreme. Several of Epson's manufacturing sites and offices in the Tohoku region were damaged by the Great East Japan Earthquake that struck on March 11, 2011. Epson began to ascertain the personal and physical damage immediately following the disaster, took action to ensure business continuity, and gradually restarted production, but Epson's operating results could be adversely affected by the disaster's aftermath, including by difficulty in procuring certain parts, by production constraints arising from a tight power supply, by reduced demand, or by the materialization of other currently unforeseeable factors. Although Epson is insured against losses arising from earthquakes, the scope of indemnification is limited. 23. There are risks related to Epson’s major shareholders. The Hattori family, who founded Epson, and the individual shareholders who are related to the Hattori family, as well as the companies whose major shareholders are the Hattori family or such individual shareholders, have the power, if they jointly exercise their voting rights in Epson, to influence to a significant degree the outcome of resolutions of a general shareholders’ meeting, such as those for the election of directors. It is also possible that the interests of these major shareholders might conflict with the interests of other shareholders. For example, because the Hattori family is the major shareholder of companies such as Seiko Holdings Corporation that have business dealings with Epson, it is possible that a conflict of interest might arise between those companies and Epson in transactions or competing businesses. In particular, Seiko Holdings entrusts a large portion of the manufacturing of its watches, its primary business, to Epson. 24. Laws and regulations pose risks for Epson. Some of Epson's businesses involve products that require legal or regulatory approval or licenses. Plastic corrective lenses, for example, are subject to regulation by certain authorities as they are considered medical equipment in Japan. Such products do not represent a high percentage of Epson’s total net sales or income, but 18 Epson is subject to the approval and regulatory requirements of relevant authorities in its manufacturing and manufacturing/sales of those products in Japan. Also, because the plastic corrective lenses, which are manufactured by Epson, are sold in the United States, Europe and Asia by a sales subsidiary of Seiko Holdings, Epson is also subject to certain regulations in these regions. For example, relevant authorities in the United States generally make it compulsory to carry out tests of these products and to keep designated records relating to them. Regulations governing medical devices in Japan, the United States and other regions have changed in the past, so there is a possibility that they will change again in the future. If they do, there is a possibility the changes might impede the manufacture and sale of Epson’s products and thereby adversely affect Epson’s operating results. 19 Business Conditions 1. Overview of business result (1) Operating results Overall, the global economy saw continued modest growth during the fiscal year under review despite a credit crunch, high unemployment, and other causes of deceleration. The economic picture varied by region. In the U.S., economic stimulus measures spurred modest economic growth, though continued high unemployment and other factors weighed down the recovery. Europe also experienced high unemployment, but the economy bounced off bottom and began to show signs of recovering. China and India recorded growth, mainly due to internal demand. As a whole, the other countries of Asia were also headed toward recovery. The Japanese economy, meanwhile, was picking up in the first half according to indicators such as personal consumption and increases in exports and manufacturing. In the second half, however, the economy was already in a holding pattern when northeastern Japan was struck by the devastating Great East Japan Earthquake that struck on March 11, leaving a great deal of economic uncertainty in its wake. The situation in the main markets of the Epson Group (“Epson”) was as follows. Demand for consumer inkjet printers was steady overall, though there was some regional variation. Business inkjet printer demand was weakened by corporate belt-tightening in the printing industry and other sectors in the face of concern over economic uncertainty in Europe and America. In the expanding economies of China and other parts of Asia, however, business inkjet demand steadily climbed. While the serial dot-matrix printer (SIDM) market is contracting in America, Europe, and Japan, demand remained firm in some regions, including China, Southeast Asia, and South Asia. In POS systems, retailer capital investment trended upward but lacked vigor. In projectors, the expansion of demand lost some of its momentum in the second half. Nevertheless, full-year projector demand grew, especially for low-end business and education models and for full high-definition models for home theater. Demand for the main electronic device applications generally remained steady across the period. New mobile phone demand, underpinned by steady increases in unit volume in India and China, held firm. Upgrade demand drove the mobile phone market as a whole, with faster transmissions speeds providing traction for a raft of new smartphones. The digital camera market remained steady, with sales of SLR models particularly firm. The television market grew, especially in the low price zone. Meanwhile, the market for the closely watched new category of tablet PCs expanded. The portable media player (PMP) market, on the other hand, trended slightly downward as the first round of demand wound down and as media player features become more common on mobile phone handsets. Markets associated with the precision products segment also showed signs of recovery, with demand for watches climbing in tandem with improvement in the economy. With corporate manufacturing on the mend, demand for semiconductor manufacturing equipment and robots increased. In the eyeglass lens market prices continued to erode. Epson is currently operating under a mid-range business plan that seeks to restore profitability and rebuild the business foundations of the company as it moves toward the long-range SE15 goal of becoming a community of robust businesses. Now in the second year of the three-year mid-range plan, we are looking to reach break-even or better in net income and to set a profit-generating corporate structure firmly in place. In conjunction with this effort, we advanced toward completion of a reorganization of the small- and medium-sized displays business and made headway on growth initiatives in the key business domains of printers, projectors and quartz devices. Included in the extraordinary losses recorded for the 2010 fiscal year were a ¥9,909 million in business structure improvement expenses accompanying the transfer of the small- and medium-sized displays business and a ¥4,755 million loss on disaster associated with the effects of the Great East Japan Earthquake. The average exchange rates of the yen against the U.S. dollar and of the yen against the euro during the year under review were ¥85.72 and ¥113.12, respectively. This represents an 8% appreciation in the value of the yen against the dollar and a 14% appreciation in the value of the yen against the euro, year-over-year. As a result of the foregoing factors, net sales for the full fiscal year were ¥973,663 million ($11,709,717 thousand), down 1.2% from the prior year. Operating income was ¥32,709 million ($393,373 thousand), up 20 79.5% from the prior year. Ordinary income was ¥31,174 million ($374,912 thousand), up 124.7% from the prior year. And net income was ¥10,239 million ($123,138 thousand), compared to a net loss of ¥19,791 million in the previous year. A breakdown of the financial results in each reporting segment is provided below. Please note that, with the application on March 27, 2009 of Accounting Standard No. 17, “Revised Accounting Standard for Disclosures about Segments of an Enterprise and Related Information,” Epson has changed the method it uses to account for segment information, effective from the current fiscal year. The main change is that expenses associated with corporate R&D are consolidated under corporate expenses instead of being apportioned to reporting segments as they were in the past. Information-related equipment Net sales in the printer business as a whole declined slightly. Inkjet printer (including consumables, as in all printer discussions below) unit shipments increased, as sales of consumer models in the U.S. remained steady throughout the first half. Unit shipments of large-format printers for enterprise grew, largely due to business wins in the U.S. photo and signage markets and expanded demand in the robust Chinese market. Meanwhile, consumables units shipments declined along with changes in the model mix, while average selling prices rose. Office inkjet printer sales were firm, thanks to a series of business wins. SIDM printer unit shipments rode higher on the back of increased demand associated with China’s tax collection system, while shipments of POS system products grew, owing mainly increased demand from small- and medium-sized retailers. Page printer hardware shipments increased as a result of successful tenders, but net sales were adversely affected by ongoing price erosion, as well as by a decline in sales of consumables due to a smaller page printer install base. Net sales of the printer business were largely canceled out by gains in the yen. The visual instruments business as a whole reported increased net sales. Although tempered to some extent by the strong yen, unit shipments of 3LCD business projectors increased, as demand for education models remained firm in Europe, America, and Asia. Moreover, average selling prices rose as a result of the popularity of short-throw lens projectors and other higher-end models. Increased demand for full-HD home-theater projectors also contributed to higher net sales. Segment income in the information-related equipment segment declined compared to the same period last year, when last year’s segment income is recalculated using the accounting method applied this year (as with all segments below). The decline was due to yen appreciation and price erosion, which outweighed increased unit shipments of SIDM printers and 3LCD projectors. As a result of the foregoing factors, full-year net sales in the information-related equipment segment were ¥702,918 million ($8,453,626 thousand), down 1.4% from the prior year. Segment income was ¥70,151 million ($848,630 thousand), compared to operating income of ¥38,030 million in the previous year. Segment income in the same period last year, recalculated using the accounting method applied this year, was ¥71,748 million. Electronic devices The quartz device business reported higher net sales. Although hurt by yen appreciation, net sales were boosted by increases in shipments of most products due to the economic recovery, which buoyed demand for electronic devices in general. The semiconductor business as a whole saw net sales increase. Unit shipments of silicon foundry products, analog ICs, and monochrome LCD drivers for automotive applications increased due to firm demand for electronic components in general. Higher average selling prices brought about by changes in the model mix were also seen to boost revenue. The displays business as a whole posted sharply lower net sales. Unit shipments of high-temperature polysilicon TFT liquid-crystal panels for 3LCD projectors (“HTPS panels”) increased due to increased demand, especially in the first half, for education and other projectors. However, net sales were hurt by the effects of the strong yen and price erosion. The small- and medium-sized displays business is in the process of being transferred and thus 21 saw net sales decline. Segment income in the electronic devices business segment increased. In addition to higher revenues, an improved product mix, and lower fixed costs in the semiconductor business, segment income benefited from lower costs associated with the small- and medium-sized displays business. Segment income was, however, negatively impacted by factors such as yen appreciation, a worsening of the product mix in the quartz device business, and HTPS panel price erosion. As a result of the foregoing factors, full-year net sales in the electronic devices segment were ¥231,235 million ($2,780,938 thousand), down 6.8% from the prior year, while segment income was ¥5,569 million ($66,975 thousand) versus an operating loss of ¥9,266 million a year ago. Segment income in the same period last year, recalculated using the accounting method applied this year, was ¥1,529 million. Precision products The precision products segment reported higher demand for IC handlers and robots accompanying a rebound in corporate manufacturing. Sales of watches, meanwhile, also showed signs of rebounding, and the segment as a whole posted higher net sales and, along with it, increased segment income. As a result of the foregoing factors, full-year net sales in the precision products segment were ¥68,276 million ($821,118 thousand), up 18.2% from the prior year. Segment income was ¥3,307 million ($39,771 thousand), compared to operating loss of ¥4,111 million in the year ago period. Segment loss in the same period last year, recalculated using the accounting method applied this year, was ¥1,311 million. Other Full-year net sales in the “Other” segment were ¥1,279 million ($15,382 thousand), compared to ¥19,714 million in the same period last year. Segment loss for the year was ¥286 million ($3,451 thousand), compared to an operating loss of ¥6,669 million in the same period last year. The main reason for the decline in income is that subsidiaries that provided internal services to Epson were dissolved and their functions transferred to various Epson businesses in the previous fiscal year. Segment loss in the same period last year, recalculated using the accounting method applied this year, was ¥100 million. Adjustments Segment loss was ¥46,032 million ($533,602 thousand). The loss was primarily due to the recording of research and development expenses for basic research and new businesses that do not belong to a reporting segment, as well as to the recording of selling, general and administrative expenses, largely comprised of Head Office expenses. Segment loss in the same period last year, recalculated using the accounting method applied this year, was ¥53,639 million. (2) Cash Flow Performance Net cash provided by operating activities during the year was ¥32,395 million ($389,597 thousand), compared to ¥56,542 million in the previous fiscal year. This decrease was due mainly to a ¥23,318 million decrease in notes and accounts payable-trade accompanying repayment of things such as notes and accounts payable-trade and a ¥15,665 million ($188,394 thousand) increase in inventories due chiefly to a strategic build-up of product inventory for the following year. On the other hand, income before income taxes and minority interests was ¥15,381 million ($184,978 thousand), depreciation and amortization totaled ¥41,159 million ($494,999 thousand), and notes and accounts receivable-trade decreased by ¥8,225 million ($98,917 thousand). Net cash used in investing activities was ¥23,615 million ($284,004 thousand), compared to ¥43,203 million the previous fiscal year. Comprising the bulk of this was ¥28,308 million ($340,444 thousand) in purchases of property, plant, and equipment associated mainly with new products. Net cash used in financing activities was ¥42,691 million ($513,421 thousand), compared to ¥41,087 million the previous fiscal year. Most of this was used for repayment of loans. As a result, cash and cash equivalents at end of period totaled ¥211,777 million ($2,546,927), compared to ¥254,590 million at the end of the previous fiscal year. * Please refer to the following for historical information about Epson’s financial results: http://global.epson.com/IR/ 22 2. Manufacturing, orders received and sales (1) Actual manufacturing The following table shows actual manufacturing information by segment in the fiscal year under review. Business segment Year ended March 31, 2011 (From April 1, 2010, to March 31, 2011) (Millions of yen) Change compared to previous year (%) Information-related equipment Electronic devices Precision products Total for the reporting segments Other Total 638,794 214,597 66,090 919,483 632 920,115 92.7 107.0 124.1 97.5 99.4 97.5 Notes 1. The above figures are based on sales prices. Intersegment transactions are offset and therefore eliminated. 2. The above figures do not include consumption tax. 3. The above figures include outsourced manufacturing. (2) Orders received Epson’s policy is to manufacture products based on sales forecasts. Accordingly, this section does not apply. (3) Actual sales The following table shows actual sales information by segment in the fiscal year under review. Business segment Year ended March 31, 2011 (From April 1, 2010, to March 31, 2011) (Millions of yen) Change compared to previous year (%) Information-related equipment Electronic devices Precision products Total for the reporting segments Other Total Notes 1. Intersegment transactions are offset and therefore eliminated. 2. The above figures do not include consumption tax. 3. No customer accounts for more than 10% of the actual total sales. 701,879 203,491 66,628 971,999 788 972,788 98.7 94.4 118.4 98.9 66.7 98.8 23 3. Analysis of financial condition and results of operations (1) Analysis of operating results Net Sales Consolidated net sales decreased by ¥11,699 million (1.2%) to ¥973,663 million compared with the previous consolidated fiscal year. Sales in each reporting segment are discussed below. In the information-related equipment segment, net sales were ¥702,918 million, a year-over-year decline of ¥9,774 million (1.4%). The following major factors contributed to the decline. Although consumer inkjet printer unit shipments grew, largely due to strong first-half sales in the Americas, the gains were cancelled out by the effects of yen appreciation and price erosion. Shipments of page printers, especially low-end models, also increased, owing in large part to successful tenders, but net sales were adversely affected by yen appreciation and sluggish consumables sales associated with a smaller page printer install base. In 3LCD projectors, on the other hand, the company saw growth in units shipments of education and home-theater models overseas. Moreover, average selling prices rose as short-throw and full-HD models accounted for a greater percentage of total sales. Serial-impact dot-matrix printer unit shipments also increased, with demand associated with China's tax collection system complemented by steady demand in other emerging economies. Shipments of business inkjet printers to the photo and signage markets grew, largely due to order wins in the U.S. and expanded demand in the robust Chinese market. Net sales in the segment as a whole ended only slightly lower year-over-year, despite the effects of yen appreciation and price erosion. In the electronic devices segment, net sales were ¥231,235 million, a year-over-year decline of ¥16,765 million (6.8%). The following major factors contributed to the decline. Demand for electronic devices in general steadily rose as the economy recovered. In the quartz device business unit shipments of most products increased. Likewise, in the semiconductor business unit shipments of silicon foundry products, analog ICs, and monochrome LCD drivers for automotive applications increased. However, the small- and medium-sized displays business, which was in the process of being transferred, saw its net sales hurt by a decline in unit volume, as well as by price erosion in high-temperature polysilicon TFT LCD panels (“HTPS panels”) used in 3LCD projectors. The precision products segment posted net sales of ¥68,276 million, a year-over-year increase of ¥10,529 million (18.2%). The increase was primarily due to a turnaround in watch unit shipments and to increased sales of IC handlers and robots as corporate capital spending rebounded. In the “Other” segment, net sales were ¥1,279 million, a year-over-year decline of ¥185 million (12.7%). Cost of sales and gross profit The cost of sales was ¥710,700 million, a year-over-year decrease of ¥15,193 million (2.1%). The decrease in cost of sales is primarily a reflection of the effects of yen appreciation, lower R&D expenses due to more rigorous screening and selection of investment projects, continued curtailment of capital spending, and a decline in depreciation and amortization due to the recording of an impairment loss in the electronic devices segment in the previous period. As a result, gross profit was ¥262,963 million, up ¥3,493 million (1.3%) compared to the previous period. Selling, general and administrative expenses and operating income Selling, general and administrative (SG&A) expenses were ¥230,253 million, down ¥10,987 million (4.6%) year-over-year. Amid a slowdown in the pace of the economic recovery, the company once again rigorously screened spending proposals, reduced its R&D, sales promotion, and advertising expenses. SG&A expenses were also helped by the effects of yen appreciation. Logistics expenses also declined, largely as a result of changes that brought greater operational efficiency. Reflecting these factors, operating income rose ¥14,481 million (79.5%), to ¥32,709 million. Segment income in each reporting segment was as follows. Accounting Standard No. 17, “Revised Accounting Standard for Disclosures about Segments of an Enterprise and Related Information,” came into effect on March 24 27, 2009. Effective in the year under review, therefore, the company changed the method it uses to calculate segment income and, for comparison purposes, recalculated the previous period's results using the new method. Segment income in the information-related equipment segment was ¥70,151 million, compared to ¥71,748 million in the previous period. The slight dip came largely because the effects of yen appreciation and price erosion cancelled out the effects of increased unit shipments of 3LCD projectors and SIDM printers for business applications and the effects of increased operational efficiency, which reduced logistics and other SG&A expenses. Segment income in the electronic devices segment was ¥5,569 million, compared to 1,529 million in the previous period. Although negatively impacted by yen appreciation and price erosion affecting quartz devices and HTPS panels, segment income jumped due to a combination of improvement in the semiconductor product mix, increased gross profit owing to reduced expenses for small- and medium-sized displays, and reduced R&D and other SG&A expenses. Segment income in the precision products segment was ¥3,307 million, compared to a ¥1,311 million loss in the previous period. The rebound in income reflects a rise in gross profit that accompanied revenue growth in watches, IC handlers, and robots, among other products. Other segment loss was ¥286 million, compared to a ¥100 million loss in the previous period. As for adjustments, segment loss was ¥46,032 million, compared to a loss of¥ 53,639 million in the previous period. The smaller loss was primarily due to the recording of R&D expenses for basic research and new businesses that do not belong to a reporting segment, as well as to the recording of SG&A expenses, largely comprised of Head Office expenses, and more rigorous screening of budget expenditures. Non-operating income and expenses Non-operating income minus non-operating expenses amounted to a net loss of ¥1,534 million, a ¥2,817 million improvement from the ¥4,351 million loss in the previous period. The main reason for the improvement is that the loss on foreign exchange was ¥1,239 million in the year under review, compared to a loss of ¥5,076 million in the previous period. Ordinary income Ordinary income was ¥31,174 million, up ¥17,299 million (124.7%) compared to the previous period. Extraordinary income and losses Extraordinary income minus extraordinary loss amounted to a net loss of ¥15,793 million, a ¥1,118 million increase in loss from the ¥14,675 million recorded in the previous period. The increase in extraordinary loss was primarily due to a ¥7,269 million impairment loss on business assets in the small- and medium-sized display business in the previous period, as well as the recording of ¥9,909 million in business structure improvement expenses associated with the transfer and termination of the small- and medium-sized displays business and a ¥4,755 million loss on disaster, comprising the loss or damage of inventory as a result of the Great East Japan Earthquake, which combined to negate a ¥2,274 million gain on sales of noncurrent assets from the sale by a subsidiary of buildings and structures during the year under review. Income before income taxes and minority interests Epson thus recorded income before income taxes and minority interests of ¥15,381 million, an increase of ¥16,181 million from the period. Income taxes Income taxes decreased by ¥14,018 million to ¥4,971 million. In the previous period, given the taxable income situation of the domestic group companies presenting a consolidated tax return, the company revised and took a write-down on deferred tax assets. Conversely, in the fiscal year under review the company increased its deferred tax assets as it expects financial improvement of Seiko Epson on a non-consolidated basis. The effective tax rate after the application of deferred tax accounting came to 32.3%. 25 Minority interests in income Minority interests in income for the period under review were ¥170 million, compared to ¥1 million in the previous period. This was due to a decrease in losses distributed proportionally to minority interests in the period under review in conjunction with Epson Toyocom Corporation becoming a wholly owned subsidiary during the previous period. Net income As a result of the foregoing, Epson posted net income of ¥10,239 million, a ¥30,030 million increase from the previous period. (2) Liquidity and capital resources Cash flow Net cash provided by operating activities in the period under review was ¥32,395 million, down ¥24,146 million from the previous period. Among the factors contributing to increased cash flow were the recording of a ¥16,181 million increase in income before income taxes and minority interests, a ¥16,599 million effect from a decrease in notes and accounts receivable-trade, and ¥9,909 million in business structure improvement expenses associated with the transfer of the small- and medium-sized displays business. Factors contributing to the decrease included a ¥40,965 million effect from a decrease in notes and accounts payable-trade accompanying repayments, a ¥8,536 million effect from an increase in inventories due to a strategic build-up of product inventory for the following year, the recording of a ¥7,269 million impairment loss in the preceding period associated with the small- and medium-sized displays business, and a ¥6,236 million decrease in depreciation and amortization due to more rigorous selectivity in investments in past years. Net cash used in investing activities totaled ¥23,615 million, down ¥19,588 million from the previous period. Cash used in the year under review decreased due to ¥13,405 million used to acquire subsidiary company shares in the previous period. Net cash used in financing activities was ¥42,691 million, a ¥1,604 million increase compared to the previous period. While loan repayments decreased, net cash used in financing activities increased mainly as a result of a ¥2,621 million increase in dividend payments as the company's financial performance improved. Due to these factors, as of March 31, 2011, cash and cash equivalents at the end of the period stood at ¥211,777 million, a drop of ¥42,812 million from the previous period , giving Epson sufficient liquidity. The combined total of short- and long-term loans payable was ¥180,722 million, a decrease of ¥28,338 million compared to the previous period, owing to progress in repaying general interest-bearing liabilities. Long-term loans payable (excluding the current portion), which comprise the majority of loans, amount to ¥107,500 million as of March 31, 2011, at a weighted average interest rate of 1.62% and with a repayment deadline of March 2015. These borrowings were obtained as unsecured loans primarily from banks. Financial condition Total assets as of March 31, 2011 stood at ¥798,229 million, a decrease of ¥71,861 million from the previous fiscal year-end due primarily to a decrease in current assets. Current assets declined by ¥52,680 million. The main cause of the decrease was a ¥42,811 million total decline in cash and deposits and in securities, mainly due to repayment of interest-bearing liabilities and payment of notes and accounts payable-trade. Total property, plant and equipment declined by ¥11,731 million, primarily because of a more rigorous approach to the selection of investments. Total liabilities as of March 31, 2011 were ¥527,421 million, down ¥59,804 million from the previous fiscal year. This decrease in total liabilities was due to repayment of interest-bearing liabilities that results in a decrease in short-term loans payable, current portion of bonds, current portion of long-term loans payable, bonds payable, and long-term loans payable totaling ¥38,338 million, as well as a ¥17,935 million decrease in notes and accounts payable-trade. Retained earnings increased by ¥6,243 million, largely as a result of having posted net income. Nevertheless, 26 total net assets decreased by ¥12,056 million compared to the end of the previous period, mainly because of a -¥63,812 million foreign currency translation adjustment, a decline of ¥16,106 million, due to the appreciation of the yen versus the euro and US dollar. Working capital, defined as current assets less current liabilities, was ¥228,108 million, a decrease of ¥39,450 million compared with March 31, 2011. The ratio of interest-bearing liabilities to total assets declined to 34.1% from 35.8% at the end of the previous fiscal year. 27 4. Research and development activities Epson is pursuing innovation in compact, energy-saving, high-precision technologies with the aim of becoming a “community of robust businesses,” as set forth in the company's “SE15” Long-Range Corporate Vision. The company's research and development programs are designed to achieve this and are thus principally focused on boosting competitiveness by concentrating management resources on areas of strength, reinforcing business foundations, and using the technologies and other assets in the company's portfolio to create new businesses. Operations division R&D develops core technologies and shared technology platforms in order to strengthen the company's market position, both short and long term. Corporate R&D’s mission is to develop both new and existing core technologies and shared technology platforms, with the aim of creating new and revolutionizing existing businesses. Total R&D spending in the year under review was ¥54,377 million. This included ¥25,622 million in the information-related equipment segment, ¥7,326 million in the electronic devices segment, ¥3,332 million in the precision products segment, and ¥18,096 million in the other segment and corporate segment. The main R&D accomplishments in each segment are described below. Information-related equipment In the printer business, the company developed a low environmental impact color inkjet printer. Equipped with an energy-saving “deep-sleep” feature that puts the printer in a sleep mode where it uses just 0.8W of power, this inkjet product boasts a TEC value (a value defined by the International ENERGY STAR program that indicates the typical electricity consumption of a product when in operation and standby states) of 1.27 kWh, the lowest*1 TEC value of any high-speed A3 color printer in Japan that prints at least 21 sheets per minute. The company also developed “Epson UltraChrome® GS ink”, a new eco-solvent GS ink for commercial large-format printers that produces little of the odor associated with ordinary solvent-based inks and that does not contain carcinogenic nickel compounds, thus minimizing the harmful impact on the environment and employees. In the visual instruments business, the company developed a mobile 3LCD projector that weighs just 1.7 kg and is an ultra-slim 44 mm, making it the world's thinnest*2 3LCD model. With 3,000 lumens of brightness, the projector is capable of displaying sharp, vivid images even in well-lit rooms. A short-throw lens and both vertical and horizontal keystone correction enable the projector to throw a bright, high-quality picture on large screens even in limited space. *1 As of November 24, 2010, according to Epson research *2 As of September 16, 2010, according to Epson research Electronic devices In the quartz device business, the company developed an ultra-compact yet highly accurate, high-resolution absolute pressure*3 sensor that measures 7.0 x 5.0 mm along the edges and is only 2.0 mm thick. The sensor employs a newly developed, original QMEMS*4 pressure-sensing structure that provides total pressure accuracy of ±30 Pa*5 and a resolution*6 of 0.3 Pa. The company also developed gyroscopic sensors for vehicle attitude sensing applications, such as electronic stability control (ESC) and rollover protection systems. Using QMEMS technology to fabricate crystal sensing elements in an original hammerhead structure, the company was able to realize very small sensors that exhibit stable characteristics over a wide temperature range (-40 to +125°C). Sensor reliability was increased by providing a diagnostic circuit that detects failures at any given time and at startup. Excellent vibration resistance and shock survivability were achieved by optimizing the sensing elements and their support structure. In the semiconductor business, the company developed a display control platform for e-paper displays that provide laser printer-like image quality and fast refresh rates. The platform is built around core semiconductor chips and firmware used to control the driving of e-paper displays. These components are optimized to run together as a fine-tuned system. The platform's new driving scheme employs high-speed image processing technology originally developed for photo printers to enable e-paper displays with resolutions of 300 dpi and higher to be refreshed at high speed. *3 Absolute pressure is the pressure zero-referenced against a perfect vacuum. *4 QMEMS is a combination of “quartz,” a crystalline material that has excellent stability and precision, and 28 “MEMS,” micro electro-mechanical systems engineered using microfabrication technology. QMEMS refers to compact, high-performance devices made from quartz material and is a registered trademark of Epson Toyocom Corporation. *5 Pa (Pascal) is the international unit for pressure. *6 Resolution is the measurement or detection capability of a sensor or device. Precision products In the factory automation products business the company developed new vertical six-axis robots. Equipped with original Smart Motion Control technology*7 that provides outstanding continuous-path control while enabling high speed with low vibration, the new robots also have a slim, space-efficient design that gives them among the shortest cycle times in their class*8. *7 New acceleration/deceleration tuning and other original Epson robot control technologies that enable high speed while achieving low vibration to optimize robot motion (straight and arcing motions, and motion when carrying heavy loads) *8 Compared to other vertically articulated six-axis robots with similar payload and arm length. Source: Epson research, as of the end of December 2010. 29 5. Issues for Fiscal 2011 Epson’s operating environment is marked by an acceleration of trends including the increasing influence of emerging markets on the global economy and a shift to sustainable industrial and economic activities. With society being transformed by changes such as these, Epson believes that customer values are also on the verge of dramatic change. Seeing this situation as an opportunity, Epson is implementing structural changes as it seeks to go forward on a new growth path. To do this, it will rediscover its traditional strengths and concentrate its management resources on businesses that have growth potential and/or strategic importance. Toward this end, Epson established the SE15 Long-Range Corporate Vision in March 2009, setting out its vision for the period up to 2015, and the three-year SE15 Mid-Range Business Plan (FY2009-FY2011). Under the SE15 Long-Range Corporate Vision, Epson will focus on “compact, energy-saving, high-precision technologies” as its core strengths since its foundation, and will leverage these strengths as it looks to achieve sustainable growth. Through the consolidation of management resources on growth businesses and the formation of Group-wide platforms, Epson seeks to become “a community of robust businesses,” creating products and services that emotionally engage customers worldwide. Based on the assumption of continuing severe business conditions, the SE15 Mid-Range Business Plan (FY2009-FY2011) describes how Epson will combine its strengths to respond to this situation. Epson will implement a range of measures to ensure its return to a profit-generating structure on the path to realizing the SE15 Long-Range Corporate Vision. Going forward, Epson will further shift management resources to areas where it can leverage its strengths and to businesses that have growth potential and/or strategic importance, so as to foster new businesses that will drive future growth. In fiscal 2011, the final year of the SE15 Mid-Range Business Plan (FY2009-FY2011), Epson will step up its efforts to move onto the growth path set out in SE15 and will continue to strengthen its business structure and pursue its ongoing structural reforms. By demonstrating Group synergies and launching speedy and efficient initiatives, Epson is looking to achieve by 2015 both ROS and ROE of 10% or above on a continuous basis in addition to boosting net sales. Plans for businesses with growth potential Printers In printers, Epson will leverage its core and proprietary Micro Piezo inkjet technology to further strengthen the foundations of its business. In applications that range from consumer through to business markets, Epson will take the customers’ viewpoint as it develops products that provide ease-of-use and which emotionally engage users. Epson will also expand operations by increasing the number of models for emerging markets and by launching environmentally considerate models. It will also seek to expand into the commercial and industrial sectors through the application of Micro Piezo technology. Projectors As the world’s leading manufacturer, Epson aims to maintain top share, increase its presence in the high-end projector market by leveraging the advantages of its core HTPS TFT LCD technology, and enter and develop new business domains. Quartz devices and sensors By drawing on the technical expertise it has accumulated over the years and by rebuilding its manufacturing infrastructure, Epson is looking to create high-value-added microdevices and reinforce its position as the leading company in the crystal device market. Quartz devices are positioned as the core products of Epson’s electronic devices businesses. By creating synergies with its semiconductor and other technologies, Epson will fortify its lineup of sensing devices and applied products. Please note that Epson manufacturing sites in the Tohoku area of Japan were affected by the Great East Japan Earthquake that struck on March 11, 2011. While carefully confirming the situation regarding employees and 30 facilities, Epson successively restarted production as it sought to resume operations. Going forward, Epson will have to keep a close eye on how the parts procurement situation impacts production of certain finished goods even as it seeks to minimize impacts by sourcing substitute parts or engineering workarounds. 31 6. Dividend policy The Company believes in distributing profits by maintaining stable dividend payments and seeks to increase cash flow through greater management efficiency and improved profitability. On that basis, with the goal of achieving a consistent consolidated dividend payout ratio of 30% over the medium- to long-term, the Company distributes profits to shareholders while taking into account the need for capital to fuel its business strategy and to maintain its business performance and financial standing. The Company’s dividend policy is to pay cash dividends twice a year. The year-end dividend is determined by resolution of the general shareholders’ meeting and the interim dividend is determined at a meeting of the board of directors. Although it recorded unforeseen extraordinary losses during the year, including a ¥4,755 million loss associated with inventory and equipment as a result of the Great East Japan Earthquake that struck on March 11, 2011, the Company increased its annual dividend by 10 yen per share, declaring a 20-yen dividend (10 yen of which was paid as an interim dividend at the end of the first half). The two main considerations in this decision were the Company’s policy of paying stable dividends and the fact that it posted positive net income, thus achieving the goal established at the beginning of the period of reaching or exceeding break-even in this income category. The Company’s Articles of Incorporation allow the Company to issue an interim dividend with a base date of September 30 every year by resolution of the board of directors. The Company’s distribution of retained earnings for the fiscal year under review is as follows: Distribution of retained earnings for the fiscal year under review Date approved October 29, 2010, by resolution of the board of directors June 20, 2011, by resolution of the general shareholders’ meeting Cash dividends (Millions of yen) Cash dividend per share (Yen) 1,997 1,997 10 10 32 Corporate Governance 1. Approach to corporate governance (1) Corporate governance system Outline Epson’s basic approach to corporate governance is encapsulated in its commitment to sustaining trust-based management. Along with ongoing efforts to increase enterprise value, Epson has initiated a number of practices designed to reinforce management checks and balances and to assure corporate ethics compliance. In so doing, the Company seeks to ensure the transparency and soundness of management in the eyes of its customers, shareholders, employees and other stakeholders. The company has a board of directors and a board of auditors. The ten-member board of directors meets once a month and convenes extraordinary meetings as needed. The board of directors makes decisions regarding basic management policies, key business operations, period-end closing, disclosure timeframes, and other important issues. Various other corporate management deliberative bodies are in place to oversee the execution of business operations. The main corporate management meetings and their aims are as follows: Corporate Strategy Council/ corporate management meeting The Corporate Strategy Council and corporate management meetings are convened to thoroughly deliberate matters before they are referred to the board of directors. Trust-Based Management Council The Trust-Based Management Council meets to oversee legal compliance through internal controls, to discuss risk management issues, and to manage the operating effectiveness of internal controls in general. Nomination Committee/ Compensation Committee Epson has established the Nomination Committee for screening board of director candidates and the Compensation Committee for deliberating director remuneration issues. Epson’s system of corporate governance, including the elements above, is as follows: Reasons for adopting the current system of corporate governance Epson is currently reorganizing its businesses, focusing management resources on growth areas and key segments to achieve the goals of “SE15,” its long-range corporate vision. The current system of corporate governance is ideal for driving reorganization and putting Epson back on a growth trajectory. By having directors on the board who understand the situation inside the Company simultaneously oversee the execution of business operations, the Company is able to expedite decisions and manage its businesses in a way that is best 33 for the Epson Group as a whole. Moreover, the engagement of outside auditors and the high degree of independence they bring ensures sufficient oversight of management not only from a compliance perspective but also in terms of advice on the broader aspects of management. Internal control system and risk management improvements Epson considers Epson’s Management Philosophy to be its most important business concept, and to realize the mission stated in the Management Philosophy, the Company established “Principles of Corporate Behavior,” rules for proper business conduct that are shared across the Group, worldwide. Departments within Epson pursue improvements to internal controls based on the Principles of Corporate Behavior. These improvements are reported to the Trust-Based Management Council, which is attended by all directors and auditors. By doing this, Epson is taking action to steadily improve the level of internal control for the entire Group. Business execution system Epson is instituting a system that will ensure the appropriate and efficient execution of business. To that end, Epson has established regulations governing each job function, the division of operational duties, and the management of affiliated companies while distributing power and authority across the entire Group. To ensure the appropriateness of corporate activities, affiliated companies must report or receive prior approval from the parent company for changes in management regulations. Regulations at affiliates that meet certain criteria are put on the agenda for discussion at the parent company’s board meetings, thereby creating a system of business oversight for the Group. Responsibility for the business execution systems of affiliates lies with the person responsible at the relevant operations division, and support for cross-organizational projects and the like is provided by the respective Head Office supervisory departments. Personnel responsible for business operations must report to the board of directors on the items below at least once every three months. • Current business performance and performance outlook • Risk management responses • Status of key business operations Safeguarding and management of work-related information Information on business operations is safeguarded and managed under regulations governing, among other things, document control, management approval, and contracts, with directors and statutory auditors reviewing these and other relevant documents on an ongoing basis. Regulations include the Basic Information Security Regulation, which helps to prevent leaks by providing Group-wide rules for managing information according to the level of sensitivity. Compliance-based management Epson has established Principles of Corporate Behavior for putting its Management Philosophy into practice, as well as regulations that spell out the compliance-based management requirements that underpin the principles, and an organizational compliance framework. The president holds overall responsibility for management’s legal compliance, with the persons responsible at each operations division in charge of compliance management at their respective businesses and subsidiaries. Head Office supervisory departments cooperate with the divisions to drive cross-organizational projects. Epson has installed a legal compliance hotline and other counseling services for reporting any violations. There is also web-based and other in-house compliance training for employees, including those at subsidiaries. The Trust-Based Management Council was established to deliberate legal compliance issues under the leadership of the president. The Trust-Based Management Council manages the overall state of compliance at Epson, including compliance with laws, internal regulations, and corporate ethics, as well as approaches to key areas of compliance. Auditors also take seats on the council to verify the details of legal compliance programs. The president periodically reports to the board of directors on compliance management issues and formulates appropriate measures to respond to these issues. Epson’s Principles of Corporate Behavior categorically state that the Company will not be involved with anti-social elements in any way. 34 Risk management Epson’s risk management system is founded on regulations that define the organization, procedures, and other key elements of this system. Overall responsibility for risk management resides with the president, with the persons responsible at each operations division in charge of risk management at their respective businesses and subsidiaries. The Trust-Based Management Council was established to deliberate risk management issues under the leadership of the president. The Council identifies important Group risks and manages programs to control them. When major risks become apparent, the president leads the entire company in mounting a swift initial response in line with Epson’s prescribed crisis management program. The president periodically reports to the board of directors on risk management issues and formulates appropriate measures to respond to these issues. (2) Audit system Internal audit Epson’s compliance system guards against potential legal and internal regulatory violations in departmental operations, and the Audit Office reports directly to the president the results of routine internal audits, including those conducted at Epson subsidiaries. The Audit Office evaluates the effectiveness of the governance process and requests improvements where needed. Statutory audit Epson has assigned three outside statutory auditors to its five-member board of statutory auditors to ensure greater independence and transparency of audits. Based on corporate regulations governing auditors and audit procedures, statutory auditors have the authority to conduct hearings with directors and other personnel whenever they deem such hearings necessary. Statutory auditors are also authorized to attend important business meetings, which enables the auditors to conduct audits based on the same information as that available to directors. Statutory auditors also routinely review important documents related to management decision making. Epson has established an Audit Staff Office with specialized personnel to assist the statutory auditors in their duties. The views of the board of statutory auditors are given a great deal of weight in the evaluation and transfer of personnel assigned to this office. To improve the effectiveness of their audits, statutory auditors consult on a regular basis with the Audit Office and independent public accountants. Statutory auditors hold regular meetings with representative directors to directly assess business operations. (3) Outside directors and outside statutory auditors Outside statutory auditors Each of Epson’s three outside statutory auditors draws on a wealth of experience and keen insight when conducting audits, and offers frank opinions to the board of directors. There is a high degree of independence between Epson and its three outside statutory auditors because, at present, there are no conflicts of interest between Epson and said auditors, or between Epson and other companies by which the auditors are employed. There is no particular system of coordination between outside statutory auditors and audit functions in the Group; however, statutory auditors actively consult with the Audit Office and independent public accountants. Each time an issue is identified by an audit, details are passed on to the outside statutory auditors to keep them informed as appropriate. Moreover, statutory auditors take seats on the Trust-Based Management Council, which manages the operational effectiveness of internal controls, and they actively seek explanations from departments where there has been an important incident involving internal control. Statutory auditors are thus kept abreast of operational issues and the status of measures to address those issues. Outside directors Epson does not currently have any outside directors. Objective, neutral oversight of management from the outside is an essential element of corporate governance, and oversight of the board of directors at Epson is reinforced by having three outside statutory auditors on its five-member board of statutory auditors. Epson 35 proactively discloses information to statutory auditors, including outside statutory auditors, to ensure the transparency of its decision making and operational processes by, for example, reserving seats for the auditors at all corporate management meetings. (4) Director remuneration Basic policy Directors serve to enhance corporate value, both in the immediate and long terms, and Epson has designed its system of director remuneration to provide them with incentives to improve business performance. The system is detailed as follows. The specific monthly salaries of directors are set according to their title, and in consideration of Epson’s business performance. Director bonuses are paid according to the level of achievement with respect to performance targets predefined by the board of directors. Bonuses are treated as incentives for directors to ensure performance goals for the year are met. Furthermore, a portion of the monthly salaries of directors is paid as Epson stock so that remuneration is linked to share price, and to serve as an incentive for improving business performance in the long term. Remuneration paid Category Total remuneration (millions of yen) Remuneration breakdown (millions of yen) Basic salary Bonus Number of individuals Directors Statutory auditors (including total for outside statutory auditors) Total Notes 1. The numbers above include two directors and one statutory auditor who retired at the closing of the general 408 115 (57) 408 115 (57) 12 6 (3) 523 523 18 - - - shareholders’ meeting on June 22, 2010. 2. Remuneration paid to directors does not include remuneration paid to personnel who hold the position of director as an additional post. 3. Epson introduced a stock performance (stock-based) component to the remuneration system to link remuneration more closely to share price, so Epson stock accounts for a portion of basic salary. 4. A resolution of the general shareholders’ meeting held on June 26, 2001, established the maximum amount of remuneration at ¥70 million per month for directors and at ¥12 million per month for statutory auditors. 5. The remuneration paid does not include director bonuses since bonuses will not be paid for the fiscal year under review. 6. Stock options are not granted as remuneration. 36 (5) Stock holdings Balance sheet total of stocks held for reasons other than pure investment 26 companies ¥10,026 million Issuing company, number, and balance sheet total of stocks held for reasons other than pure investment Company Shares (stock) Balance sheet total (millions of yen) Reason held NGK Insulators, Ltd. 3,757,000 Mizuho Financial Group, Inc. 15,003,480 Seiko Holdings Corporation 1,644,080 The Hachijuni Bank, Ltd. Hakuto Co., Ltd. 489,500 190,000 Iwasaki Electric Co., Ltd. 1,000,000 King Jim Co., Ltd. Marubun Corporation Joshin Denki Co., Ltd. Otuska Corporation Pixelworks, Inc. 221,980 332,640 70,000 10,000 100,000 Mizuho Trust & Banking Co., Ltd. 10,000 5,586 Maintain and strengthen business ties 2,070 Maintain and strengthen business ties 468 Maintain and strengthen business ties 234 Maintain and strengthen business ties 165 Maintain and strengthen business ties 164 Maintain and strengthen business ties 141 Maintain and strengthen business ties 139 Maintain and strengthen business ties 56 Maintain and strengthen business ties 53 Maintain and strengthen business ties 29 Maintain and strengthen business ties 0 Maintain and strengthen business ties 37 (6) Accounting audits (a) Names and other details of corporate public accountants performing audits Name of CPA Audit company No. of successive years performing audits 2 Takashi Ide Seiji Yamamoto Ernst & Young ShinNihon LLC Ernst & Young ShinNihon LLC Designated and Engagement Partner, Certified Public Accountant Designated and Engagement Partner, Certified Public Accountant Designated and Engagement Partner, Certified Public Accountant Note On June 26, 2007, the Fuji Accounting Office and Misuzu Audit Corporation completed their terms as independent auditors. The Company accordingly appointed Ernst & Young ShinNihon as its new independent auditor. The above-mentioned successive years performing audits include audits performed with Misuzu Audit Corporation. Ernst & Young ShinNihon LLC Taisuke Ide 5 2 (b) Composition of auditing team The auditing team comprises 35 staff including 11 certified public accountants, eight junior accountants, and 16 other accounting staff. (7) Outline of contract limiting liability The Company’s contract with the outside statutory auditor is based on Article 427, Paragraph 1, of the Japanese Companies Act, and the contract stipulations determining the liability for damages on Article 423, Paragraph 1, of the same law. Said contract also stipulates that the limit of liability for damages shall be the legal maximum. The scope of liability concerning the outside statutory auditor is limited to errors and omissions that occur in good faith and that are not serious. (8) Number of directors Epson’s Articles of Incorporation determine the maximum number of directors to be ten. (9) Election and retirement of directors According to its Articles of Incorporation, directors of the Company can be elected by a majority vote by at least one third of shareholders with voting rights, and not through cumulative voting. Provisions regarding the retirement of directors do not vary from the provisions of the Japanese Companies Act. (10) Items for the General Shareholders’ Meeting that can be determined by the board of directors Treasury stock acquisition The Company’s Articles of Incorporation allow the Company to acquire treasury stock through stock market trade and other means by resolution of the board of directors. This enables a more flexible capital policy in response to a changing business environment. Director and auditor exemption from liability When liability falls under the requirements stipulated in Article 426, Paragraph 1, of the Japanese Companies Act, the Company’s Articles of Incorporation allow the Company to exempt the directors and auditors from liability for damages in Article 423, Paragraph 1, of the Japanese Companies Act up to the amount remaining after the legal minimum liability is deducted from the total liability amount by resolution of the board of directors. This allows the directors to fully apply themselves to their expected role of building an organization capable of aggressive business expansion, and allows the statutory auditors to fulfill their functions accordingly. 38 Interim dividend The Company’s Articles of Incorporation allow the Company to declare an interim dividend with a date of record of September 30 every year by resolution of the board of directors. This provides the Company with flexibility in paying dividends to shareholders. (11) Special resolution requirements of the General Shareholders’ Meeting The Company’s Articles of Incorporation set forth the requirements for a special resolution of the general shareholders’ meeting stipulated in Article 309, Paragraph 2, of the Japanese Companies Act as a two-thirds majority vote by at least one third of shareholders with voting rights. This policy is intended to ensure smooth operation of the general shareholders’ meeting by relaxing the quorum requirements for special resolutions in the general shareholders’ meeting. 2. Details of audit remuneration (1) Remuneration for audits by certified public accountants (Millions of yen) Category Previous fiscal year Fiscal year under review Remuneration for audit certification work Remuneration for non-audit work Remuneration for audit certification work Remuneration for non-audit work Filing company Consolidated subsidiaries Total 159 146 305 0 - 0 144 124 268 13 - 13 (2) Other important remuneration Previous fiscal year Total payments for audits carried out on behalf of 26 consolidated overseas subsidiaries by auditing certified public accountants belonging to the Ernst & Young network for the fiscal year ended March 31, 2010, amounted to ¥136 million. Fiscal year under review Total payments for audits carried out on behalf of 38 consolidated overseas subsidiaries by auditing certified public accountants belonging to the Ernst & Young network for the fiscal year ended March 31, 2011, amounted to ¥177 million. (3) Non-audit work performed by auditing certified public accountant at filing company Previous fiscal year Remuneration paid for non-audit work performed by the auditing certified public accountant was for consultancy services, in particular training courses. Fiscal year under review Remuneration paid for non-audit work performed by the auditing certified public accountant was for consultancy services in IFRS. (4) Governing policy for auditor remuneration This does not apply because remuneration for auditing services is determined according to the nature of the audit work. 39 3. Basic policy regarding company control At its meeting on April 30, 2008, Epson’s board of directors agreed to the basic policy described below governing persons who control the Company’s financial and business policy decisions (hereinafter the “basic policy”). (1) Overview Epson believes that its shareholders should be determined through free trade on the market. Therefore, the decision as to whether to accept a takeover offer that would allow another party to acquire a controlling share of Epson and thus gain power over the Company’s financial and business decisions should ultimately be put before the shareholders. To ensure and enhance the corporate value and common interests of shareholders, Epson believes it is essential for Epson’s directors, managers, and employees to work as a team to create value, to pursue the Epson tradition of creativity and challenge, and to earn and keep the trust of its customers. Not all large-scale acquisitions of shares enhance the value of the Company whose shares are being acquired, however, nor do they serve the common interests of shareholders. Epson recognizes the need to use all necessary and appropriate means to protect the Company’s corporate value and the common interests of its shareholders against persons seeking to improperly acquire large numbers of shares in an attempt to gain control over decisions concerning the Company’s financial and business policies. (2) Efforts in preventing parties who are deemed inappropriate based on its basic policy from gaining control over Epson’s financial and business policy decision making Aiming to ensure and enhance corporate value and the common interests of its shareholders, Epson introduced a series of measures (the “Plan”) to prevent large-scale acquisition of Epson shares after shareholders approved the Plan at their annual general meeting held on June 25, 2008. The purpose of the Plan is to prevent large-scale acquisitions of Epson stock certificates that do not enhance corporate value or that are not in the common interests of shareholders by having shareholders decide whether to allow such acquisitions and by giving the Epson board of directors the time and information they need to present shareholders with an alternative proposal and enable the board to discuss and negotiate with the acquirer on behalf of shareholders. Specifically, a party that intends to acquire 20% or more of stock certificates outstanding or to stage a takeover bid shall be required to submit in advance to the Epson board of directors a statement of intent as well as sufficient and necessary information for decision-making on the part of shareholders and for evaluation and consideration by a special committee. The party shall also be required to comply with the procedures defined in the Plan. Furthermore, the Plan allows for the activation of provisions to halt the acquisition in question if, for example, it is not conducted in line with the Plan or it is deemed contrary to Epson’s value as a company or the common interest of its shareholders. To prevent the Epson board of directors from making arbitrary decisions on the activation of provision, the question of whether to invoke preventive provisions is subject to the approval of a special committee made up of highly independent external parties. Actions of the special committee shall include examination of stock acquisition details, requesting information from the Epson board of directors regarding alternative proposals, disclosing information to shareholders, and negotiating with parties intending to make acquisitions. The special committee shall advise the Epson board of directors regarding the necessity of the activation of provisions, and the Epson board of directors shall promptly accept or reject a resolution regarding the activation of provisions, paying the utmost consideration to that advice. Since the Plan was to be in force until the close of the June 20, 2011 general shareholders' meeting, the Company decided to renew a revised version of the Plan, subject to the approval of shareholders at the general shareholders' meeting. 40 Management Directors, statutory auditors and executive officers of the Company correct as of the date when the annual securities report (“yukashoken-houkokusho”) was submitted and their functions are listed below. Position Current function Name Seiji Hanaoka Yasuo Hattori Minoru Usui Masayuki Morozumi Chairman Vice Chairman President (Representative Director) Executive Vice President (Representative Director) Kenji Kubota Senior Managing Director (Representative Director) Torao Yajima Managing Director Seiichi Hirano Tadaaki Hagata Managing Director Managing Director Noriyuki Hama Director Yoneharu Fukushima Director Kenji Uchida Standing Statutory Auditor Toru Oguchi Standing Statutory Auditor Yoshiro Yamamoto Tatsuhiro Ishikawa Kenji Miyahara Hiroshi Komatsu Outside Statutory Auditor Outside Statutory Auditor Outside Statutory Auditor Managing Executive Officer John Lang Managing Executive Masataka Kamiyanagi Akihiko Sakai Akio Mori Officer Managing Executive Officer Executive Officer Executive Officer General Administrative Manager, Business Infrastructure Improvement Division, and Chief Operating Officer, Electronic Devices and Precision Products Operations Segment General Administrative Manager, Corporate Strategy Division Chief Operating Officer, Microdevices Operations Division, and President, Epson Toyocom Corporation President, Epson Sales Japan Corporation Chief Operating Officer, Imaging Products Operations segment General Administrative Manager, Human Resources Division General Administrative Manager, Corporate Research & Development Division, and General Manager, I Project Deputy Chief Operating Officer, Imaging Products Operations Segment President and Chief Executive Officer, Epson America, Inc General Administrative Manager, Intellectual Property Division President, Tohoku Epson Corporation Deputy General Administrative Manager, Corporate Research & Development Division 41 Kiyofumi Koike Executive Officer Ryuhei Miyagawa Executive Officer Koichi Endo Executive Officer Hiromi Taba Koichi Kubota Executive Officer Executive Officer Motonori Okumura Executive Officer Takashi Oguchi Shigeki Inoue Executive Officer Executive Officer Chairman and President, Epson (China) Co., Ltd. Deputy Chief Operating Officer, Microdevices Operations Division, Senior General Manager, Sensing System Business Unit, and Senior General Manager, Imaging Interface Business Unit Chairman, Epson Singapore Pte. Ltd. and Chairman, Singapore Epson Industrial Pte. Ltd. President, Epson Europe B.V. Chief Operating Officer, Visual Instruments Operating Division Chief Operating Officer, Imaging & Information Operating Division President, P.T. Indonesia Epson Industry Deputy General Administrative Manager, Corporate Strategy Division 42 Index to Consolidated Financial Statements Seiko Epson Corporation and Subsidiaries Consolidated Balance Sheets……………………………………….. Consolidated Statements of Income………………………………… Consolidated Statements of Comprehensive Income…………… Consolidated Statements of Changes in Net Assets…………….… Consolidated Statements of Cash Flows………………………….… Notes to Consolidated Financial Statements ………………………. 44 46 47 48 50 51 43 Consolidated Balance Sheets As sets Current ass ets Cash and deposits Notes and accounts receivable-trade Short-term investment securities Merchandise and finished goods W ork in process Raw materials and supplies Deferred tax as sets Other Allowance for doubtful accounts Total current as sets Noncurrent assets Property, plant and equipment Buildings and structures Machinery, equipment and vehicles Tools, furniture and fixtures Land Cons truction in progress Other Accumulated depreciation Total property, plant and equipment Intangible assets Goodwill Other Total intangible as sets Investments and other assets Investment s ecurities Long-term loans receivable Deferred tax assets Other Allowance for doubtful accounts Total investments and other as sets Total noncurrent assets Total assets Millions of yen March 31, 2010 March 31, 2011 Thousands of U.S. dollars March 31, 2011 ¥193,117 144,435 51,511 90,284 39,198 21,710 9,307 48,903 (2,258) 596,210 405,096 467,364 174,014 54,912 4,318 127 (880,479) 225,354 2,873 15,187 18,060 16,087 47 4,551 9,978 (200) 30,464 273,879 ¥870,090 ¥125,807 140,564 76,009 90,900 37,133 23,876 12,419 38,821 (2,003) 543,530 399,318 439,113 156,671 54,744 4,792 114 (841,132) 213,623 2,632 11,984 14,616 13,319 47 4,236 8,929 (73) 26,458 254,699 ¥798,229 $1,513,012 1,690,487 914,119 1,093,205 446,578 287,143 149,356 466,929 (24,088) 6,536,741 4,802,381 5,280,974 1,884,197 658,376 57,630 1,432 (10,115,838) 2,569,152 31,653 144,125 175,778 160,180 565 50,944 107,384 (877) 318,196 3,063,126 $9,599,867 The accompanying notes are an integral part of these financial statements. 44 Liabilities Current liabilities Notes and accounts payable-trade Short-term loans payable Current portion of bonds Current portion of long-term loans payable Accounts payable-other Income taxes payable Deferred tax liabilities Provision for bonuses Provision for product warranties Other Total current liabilities Noncurrent liabilities Bonds payable Long-term loans payable Deferred tax liabilities Provision for retirement benefits Provision for loss on litigation Provision for product warranties Provision for recycling costs Other Total noncurrent liabilities Total liabilities Net assets Shareholders' equity Capital s tock Authorized - 607,458,368 s hares Issued - 199,817,389 shares Capital s urplus Retained earnings Treasury s tock March 31, 2011 - 23,924 shares March 31, 2010 - 22,089 shares Total shareholders ' equity Accumulated other comprehensive income Valuation difference on available-for-sale s ecurities Deferred gains or los ses on hedges Foreign currency translation adjustment Total accumulated other comprehensive income Minority interes ts Total net assets Total liabilities and net as sets Millions of yen March 31, 2010 March 31, 2011 Thousands of U.S. dollars March 31, 2011 ¥90,768 ¥72,833 $875,923 21,739 30,000 35,728 58,576 10,024 83 14,484 9,928 57,317 31,129 30,000 42,093 51,112 6,472 116 16,681 8,199 56,782 374,371 360,793 506,229 614,696 77,835 1,395 200,613 98,604 682,950 328,652 315,422 3,793,409 70,000 151,593 10,207 20,008 － 450 396 5,917 258,574 587,226 53,204 84,321 187,358 (35) 324,847 4,023 130 (47,705) (43,552) 1,568 282,864 60,000 107,500 8,921 26,289 2,102 420 478 6,287 211,999 527,421 53,204 84,321 193,602 (38) 331,088 2,558 (572) (63,812) (61,826) 1,545 270,808 ¥870,090 ¥798,229 721,587 1,292,844 107,288 316,163 25,279 5,051 5,748 75,637 2,549,597 6,343,006 639,855 1,014,082 2,328,346 (457) 3,981,826 30,763 (6,879) (767,429) (743,545) 18,580 3,256,861 $9,599,867 The accompanying notes are an integral part of these financial statements. 45 Consolidated Statements of Income Net sales Cost of sales Gross profit Selling, general and administrative expenses Operating income Non-operating income: Interest income Rent income Amortization of negative goodwill Other Total non-operating income Non-operating expenses: Interest expenses Foreign exchange losses Rent expenses on real estates Other Total non-operating expenses Ordinary income Extraordinary income: Gain on sales of noncurrent assets Reversal of provision for product warranties Gain on transfer of business Other Total extraordinary income Extraordinary loss: Loss on disaster Business structure improvement expenses Provision for loss on litigation Other Total extraordinary losses Income (loss) before income taxes and minority interests Income taxes-current Income taxes-deferred Total income taxes Income (loss) before minority interests Minority interests in income Net income (loss) Millions of yen Thousands of U.S. dollars March 31, 2010 March 31, 2011 March 31, 2011 ¥985,363 725,894 259,469 241,241 18,227 ¥973,663 710,700 262,963 230,253 32,709 $11,709,717 8,547,204 3,162,513 2,769,140 393,373 1,259 1,014 1,368 4,084 7,726 5,070 5,076 613 1,318 12,078 13,875 595 87 - 1,394 2,078 - - - 16,753 16,753 (799) 938 1,562 708 3,741 6,951 4,225 1,239 944 2,076 8,485 31,174 2,274 873 513 490 4,152 4,755 9,909 2,013 3,267 19,945 15,381 13,740 5,249 18,989 (19,789) 1 (¥19,791) 9,121 (4,149) 4,971 10,409 170 ¥10,239 11,280 18,785 8,514 45,016 83,595 50,811 14,900 11,352 24,993 102,056 374,912 27,348 10,499 6,169 5,917 49,933 57,185 119,170 24,209 39,303 239,867 184,978 109,692 (49,897) 59,795 125,183 2,045 $123,138 The accompanying notes are an integral part of these financial statements. 46 Consolidated Statements of Comprehensive Income Income (loss ) before minority interes ts Other comprehensive income Valuation difference on available-for-sale s ecurities Deferred gains or loss es on hedges Foreign currency translation adjustment Share of other comprehensive income of as sociates accounted for using equity method Total other comprehensive income Comprehens ive income Comprehens ive income attributable to: Comprehens ive income attributable to owners of the parent Comprehens ive income attributable to minority interests Millions of yen Thous ands of U.S. dollars March 31, 2010 March 31, 2011 March 31, 2011 (¥19,789) ¥10,409 $125,183 1,188 2,306 (8,457) (55) (5,018) (¥24,807) (¥24,746) (¥61) (1,460) (702) (16,099) (135) (18,398) (¥7,988) (¥8,034) ¥46 (17,558) (8,442) (193,627) (1,623) (221,250) ($96,067) ($96,620) $553 The accompanying notes are an integral part of these financial statements. 47 Consolidated Statements of Changes in Net Assets Shareholders' equity Capital s tock Balance at the end of previous period Changes of items during the period Total changes of items during the period Balance at the end of current period Capital s urplus Balance at the end of previous period Changes of items during the period Increase by share exchanges Total changes of items during the period Balance at the end of current period Retained earnings Balance at the end of previous period Changes of items during the period Dividends from surplus Net income (loss ) Total changes of items during the period Balance at the end of current period Treasury stock Balance at the end of previous period Changes of items during the period Purchase of treasury stock Disposal of treasury s tock Total changes of items during the period Balance at the end of current period Total shareholders' equity Balance at the end of previous period Changes of items during the period Increase by share exchanges Dividends from surplus Net income (loss ) Purchase of treasury stock Disposal of treasury s tock Total changes of items during the period Balance at the end of current period Accumulated other comprehensive income Valuation difference on available-for-sale securities Balance at the end of previous period Changes of items during the period Net changes of items other than shareholders ' equity Total changes of items during the period Balance at the end of current period Deferred gains or los ses on hedges Balance at the end of previous period Changes of items during the period Net changes of items other than shareholders ' equity Total changes of items during the period Balance at the end of current period Foreign currency translation adjustment Balance at the end of previous period Changes of items during the period Millions of yen March 31, 2010 March 31, 2011 Thousands of U.S. dollars March 31, 2011 ¥53,204 ¥53,204 $639,855 - 53,204 79,500 4,820 4,820 84,321 - 53,204 - 639,855 84,321 1,014,082 - - 84,321 - - 1,014,082 208,524 187,358 2,253,253 (1,374) (19,791) (21,165) 187,358 (8) (27) 0 (26) (35) (3,995) 10,239 6,243 193,602 (35) (2) - (2) (38) (48,045) 123,138 75,093 2,328,346 (420) (37) - (37) (457) 341,220 324,847 3,906,770 4,820 (1,374) (19,791) (27) 0 (16,372) 324,847 2,835 1,188 1,188 4,023 (2,175) 2,306 2,306 130 - (3,995) 10,239 (2) - 6,241 331,088 4,023 (1,464) (1,464) 2,558 130 (702) (702) (572) - (48,045) 123,138 (37) - 75,056 3,981,826 48,382 (17,619) (17,619) 30,763 1,563 (8,442) (8,442) (6,879) (39,255) (47,705) (573,722) Net changes of items other than shareholders ' equity Total changes of items during the period Balance at the end of current period (8,449) (8,449) (47,705) (16,106) (16,106) (63,812) (193,707) (193,707) (767,429) The accompanying notes are an integral part of these financial statements. 48 Total accumulated other comprehensive income Balance at the end of previous period Changes of items during the period Net changes of items other than shareholders' equity Total changes of items during the period Balance at the end of current period Minority interests Balance at the end of previous period Changes of items during the period Net changes of items other than shareholders' equity Total changes of items during the period Balance at the end of current period Total net assets Balance at the end of previous period Changes of items during the period Increas e by share exchanges Dividends from surplus Net income (loss) Purchase of treas ury stock Dispos al of treasury stock Net changes of items other than shareholders' equity Total changes of items during the period Balance at the end of current period Millions of yen March 31, 2010 March 31, 2011 Thousands of U.S. dollars March 31, 2011 (38,596) (43,552) (523,777) (4,955) (4,955) (43,552) 16,007 (14,439) (14,439) 1,568 (18,274) (18,274) (61,826) 1,568 (22) (22) 1,545 (219,768) (219,768) (743,545) 18,857 (277) (277) 18,580 318,631 282,864 3,401,850 4,820 (1,374) (19,791) (27) 0 (19,394) (35,767) ¥282,864 - (3,995) 10,239 (2) - (18,297) (12,056) ¥270,808 - (48,045) 123,138 (37) - (220,045) (144,989) $3,256,861 The accompanying notes are an integral part of these financial statements. 49 Consolidated Statements of Cash Flows Millions of yen March 31, 2010 March 31, 2011 Thous ands of U.S. dollars March 31, 2011 Consolidated s tatements of cas h flows Net cash provided by (used in) operating activities Income (los s) before income taxes and minority interests Depreciation and amortization Equity in (earnings ) los ses of affiliates Amortization of goodwill Business structure improvement expenses Loss on dis aster Increas e (decreas e) in allowance for doubtful accounts Increas e (decreas e) in provision for bonuses Increas e (decreas e) in provision for product warranties Increas e (decreas e) in provision for retirement benefits Interes t and dividends income Interes t expenses Foreign exchange loss es (gains ) Loss (gain) on sales of noncurrent as sets Loss on retirement of noncurrent as sets Loss (gain) on sales of investment securities Decrease (increase) in notes and accounts receivable-trade Decrease (increase) in inventories Increas e (decreas e) in accrued cons umption taxes Increas e (decreas e) in notes and accounts payable-trade Other, net Subtotal Interes t and dividends income received Interes t expenses paid Income taxes paid Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Decrease (increase) in time deposits Purchase of investment s ecurities Proceeds from s ales of inves tment securities Purchase of property, plant and equipment Proceeds from s ales of property, plant and equipment Purchase of intangible as sets Proceeds from s ales of intangible assets Purchase of long-term prepaid expens es Proceeds from s ales of inves tments in subsidiaries res ulting in change in scope of consolidation Proceeds from trans fer of bus iness Other, net Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Net increas e (decrease) in short-term loans payable Proceeds from long-term loans payable Repayment of long-term loans payable Proceeds from is suance of bonds Redemption of bonds Repayments of lease obligations Purchase of treasury s tock Proceeds from s ales of treas ury stock Cash dividends paid Cash dividends paid to minority shareholders Net cash provided by (used in) financing activities Effect of exchange rate change on cas h and cas h equivalents Net increas e (decreas e) in cash and cash equivalents Cash and cash equivalents at beginning of period Increase in cash and cash equivalents from newly cons olidated s ubsidiary (¥799) 47,395 (126) (462) － － (918) 2,931 58 8,287 (1,536) 5,070 (1,165) (286) 1,038 (365) (8,373) (7,128) (667) 17,646 12,898 73,497 336 (5,131) (12,159) 56,542 523 (14) 929 (27,196) 895 (4,640) 5 (204) － － (13,501) (43,203) (20,382) 2,000 (18,543) － － (2,654) (27) 0 (1,374) (105) (41,087) (2,000) (29,749) 284,340 － ¥15,381 41,159 (77) 240 9,909 4,755 (192) 2,309 (1,309) 329 (1,174) 4,225 (60) (2,303) 895 19 8,225 (15,665) (761) (23,318) 2,643 45,230 2,023 (4,320) (10,538) 32,395 (2) (7) 260 (28,308) 2,844 (2,286) 12 (699) 53 4,062 455 (23,615) 10,092 － (37,728) 20,000 (30,000) (989) (2) － (3,995) (67) (42,691) (9,020) (42,932) 254,590 119 $184,978 494,999 (926) 2,886 119,170 57,185 (2,309) 27,769 (15,742) 3,956 (14,119) 50,811 (721) (27,696) 10,763 228 98,917 (188,394) (9,152) (280,432) 31,785 543,956 24,329 (51,954) (126,734) 389,597 (0) (84) 3,126 (340,444) 34,192 (27,492) 144 (8,406) 637 48,851 5,472 (284,004) 121,371 － (453,734) 240,529 (360,819) (11,894) (24) － (48,045) (805) (513,421) (108,491) (516,319) 3,061,815 1,431 Cash and cash equivalents at end of period ¥254,590 ¥211,777 $2,546,927 The accompanying notes are an integral part of these financial statements. 50 Notes to Consolidated Financial Statements 1. Basis of presenting consolidated financial statements (1) Nature of operations Seiko Epson Corporation (the “Company”) was originally established as a manufacturer of watches but later expanded its business to provide key devices and solutions for the digital color imaging markets through the application of its proprietary technologies. The Company operates its manufacturing and sales business mainly in Japan, the Americas, Europe and Asia/Oceania. (2) Basis of presenting consolidated financial statements The Company and its subsidiaries in Japan maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan. Meanwhile its foreign subsidiaries maintain their records and prepare their financial statements in conformity with International Financial Reporting Standards or the generally accepted accounting principles in the United States. In addition, some items required by Japanese standards should be adjusted in the consolidation process so that net income is accurately accounted for, unless they are not material. In the accompanying consolidated financial statements, “Epson” is referred to as the Company and its consolidated subsidiaries and affiliates. The amounts in the accompanying consolidated financial statements and the notes are rounded down. 2. Number of group companies As of March 31, 2011, the Company had 92 consolidated subsidiaries. It has applied the equity method in respect to one unconsolidated subsidiary and five affiliates. 3. Summary of significant accounting policies (1) Consolidation and investments in affiliates The accompanying consolidated financial statements include the accounts of the Company and those of its subsidiaries that are controlled by Epson. Under the effective control approach, all majority-owned companies are to be consolidated. Additionally, companies in which share ownership equals 50% or less may be required to be consolidated in cases where such companies are effectively controlled by other companies through the interests held by a party who has a close relationship with the parent in accordance with Japanese accounting standards. All significant inter-company transactions and accounts, along with unrealized inter-company profits, are eliminated upon consolidation. 51 Investments in affiliates in which Epson has significant influence are accounted for using the equity method. Consolidated income includes Epson’s current equity in net income or loss of affiliates after elimination of significant unrealized inter-company profits. The difference between the cost and the underlying net assets of investments in subsidiaries is recognized as “goodwill” and is included in the intangible assets account (if the cost is in excess) or in the noncurrent liabilities account (if the underlying net asset is in excess). Goodwill is amortized on a straight-line basis over a period of five years. (2) Foreign currency translation and transactions Foreign currency transactions are translated using foreign exchange rates prevailing at the respective transaction dates. Receivables and payables in foreign currencies are translated at the foreign exchange rates prevailing at the respective balance sheet dates, and the resulting transaction gains or losses are included in income for the current period. All the assets and liabilities of foreign subsidiaries and affiliates are translated at the foreign exchange rates prevailing at the respective balance sheet dates, and all the income and expense accounts are translated at the average foreign exchange rates for the respective periods. Foreign currency translation adjustments are recorded in the consolidated balance sheets as foreign currency translation adjustment and minority interests. (3) Cash and cash equivalents Cash and cash equivalents included in the consolidated financial statements comprise cash on hand, bank deposits that may be withdrawn on demand, and highly liquid investments purchased with initial maturities of three months or less, and which present low risk of fluctuation in value. (4) Financial instruments Investments in debt and equity securities Investments in debt and equity securities are classified into three categories: 1) trading securities, 2) held-to-maturity debt securities, or 3) other securities. These categories are treated differently for purposes of measuring and accounting for changes in fair value. Trading securities held for the purpose of generating profits from changes in market value are recognized at their fair values in the consolidated balance sheets. Changes in unrealized gains and losses are included in current income. Held-to-maturity debt securities are expected to be held to maturity and are recognized at amortized cost computed based on the straight-line method in the consolidated balance sheets. Other securities for which market quotations are available are recognized at fair value in the consolidated balance sheets. Unrealized gains and losses for these other securities 52 are reported as a separate component of net assets, net of taxes. Other securities for which market quotations are unavailable are stated at cost, primarily based on the moving-average cost method. Other-than-temporary declines in the value of other securities are reflected in current income. Derivative instruments Derivative instruments (i.e., forward exchange contracts, interest rate swaps and currency options) are recognized as either assets or liabilities at their respective fair values at the date of contract, and gains and losses arising from changes in fair value are recognized in earnings in the corresponding fiscal period. If certain hedging criteria are met, such gains and losses are deferred and accounted for as deferred gains or losses on hedges in net assets. Interest rate swaps meeting certain hedging criteria are not recognized at their fair values under exceptional processes recognized in Japanese accounting standards. The amounts received or paid for such interest rate swap arrangements are charged or credited to income as incurred. Allowance for doubtful accounts Allowance for doubtful accounts is calculated based on the aggregate amount of estimated credit losses for doubtful receivables plus an amount for receivables other than doubtful receivables calculated using historical write-off experience from certain prior periods. (5) Inventories Inventories are stated at the lower of cost or market value, where cost is primarily determined using the weighted-average cost method. (6) Property, plant and equipment Property, plant and equipment, including significant renewals and improvements, are carried at cost less accumulated depreciation. Maintenance and repairs, including minor renewals and improvements, are charged to income as incurred. Depreciation of property, plant and equipment is mainly computed based on the declining-balance method for the Company and its Japanese subsidiaries, and on the straight-line method for foreign subsidiaries at rates based on estimated useful lives. For buildings acquired by the Company and its Japanese subsidiaries on or after April 1, 1998, depreciation is computed based on the straight-line method, which is prescribed by Japanese income tax laws. The estimated useful lives of significant depreciable assets principally range from 8 to 50 years for buildings and structures, and from 2 to 12 years for machinery, equipment and vehicles. 53 (7) Intangible assets Amortization of intangible assets is computed using the straight-line method. Amortization of software for internal use is computed using the straight-line method over its estimated useful life, ranging from three to five years. (8) Impairment of long-lived assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This review is performed using estimates of future cash flows. If the carrying value of a long-lived asset is considered to be impaired, an impairment charge is recorded for the excess of the carrying value of the long-lived asset over its recoverable amount. (9) Provision for bonuses Provision for bonuses to employees is calculated on the basis of the estimated amounts that Epson is obligated to pay its employees after the fiscal year-end for services provided up to the balance sheet dates. Provision for bonuses to directors and statutory auditors are provided for the estimated amounts that the Company is obligated to pay to directors and statutory auditors subject to the resolution of the general shareholders’ meeting held subsequent to the fiscal year-end. (10) Provision for product warranties Epson provides an accrual for estimated future warranty costs based on the historical relationship of warranty costs to net sales. Specific warranty provisions are made for those products where warranty expenses can be specifically estimated. (11) Provision for loss on litigation Provision for loss on litigation is mainly provided for the estimated future compensation payment and litigation expenses. (12) Income taxes The provision for income taxes is computed based on income before income taxes and minority interest in the consolidated statements of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company applies the consolidated tax return system for the calculation of income taxes. Under the 54 consolidated tax return system, the Company consolidates all wholly-owned domestic subsidiaries based on Japanese tax regulations. (13) Provision for retirement benefits The Company and some of its Japanese subsidiaries recognize provision for retirement benefits to employees based on the actuarial valuation of projected benefit obligation and the fair value of plan assets. Other Japanese subsidiaries recognize provision for retirement benefits to employees based on the voluntary retirement benefit payable at the year-end. Pension benefits are determined based on years of service, basic rates of pay and conditions under which the termination occurs, and are payable at the option of the retiring employee either in a lump-sum amount or as an annuity. Contributions to the plans are funded through several financial institutions in accordance with the applicable laws and regulations. Unrecognized prior service costs are amortized based on the straight-line method over a period of five years beginning at the date of adoption of the plan amendment. Unrecognized actuarial gains and losses are amortized based on the straight-line method over a period of five years starting from the beginning of the subsequent year. Most of the Company’s foreign subsidiaries have various retirement plans, which are primarily defined contribution plans. (14) Provision for recycling costs At the time of sale, provision for recycling costs is calculated based on the estimated future returns of consumer personal computers. (15) Revenue recognition Revenue 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. (16) Research and development costs Research and development costs are charged as incurred. (17) Leases Epson leases certain office space, machinery and equipment and computer equipment from third parties using capital leases. Most of the capital leases are other than those under which ownership of the assets will be transferred to the lessee at the end of the lease term, and are depreciated/amortized in accordance with the 55 straight-line method over the periods of the leases, assuming no residual value. (18) Net income per share Net income per share is computed based on the weighted-average number of common shares outstanding during each fiscal period. (19) Dividends Dividends are charged to retained earnings in the fiscal year in which they are paid after approval by shareholders. In addition to year-end dividends, the board of directors may declare interim cash dividends by resolution to the registered shareholders as of September 30 of each year. (20) Changes in significant accounting policies Effective April 1, 2010, Epson adapted the Accounting Standards Board of Japan (“ASBJ”) Statement No.18, “Accounting Standard for Asset Retirement Obligations” and its Guidance No.21, “Guidance on Accounting Standard for Asset Retirement Obligations,” issued on March 31, 2008. The adoption of these standards did not have a material effect on Epson’s results of operations and financial position for the year ended March 31, 2011. (21) Comprehensive income Effective from the year ended March 31, 2011, Epson adapted ASBJ Statement No. 25, “Accounting Standard for Presentation of Comprehensive Income” which was announced on June 30, 2010. According to the announcement, comprehensive income for the years ended March 31, 2010 and 2011, are presented. 4. U.S. dollar amounts U.S. dollar amounts presented in the accompanying consolidated financial statements and in these notes are included solely for the convenience of readers. These translations should not be construed as representations that the yen amounts actually represent, or have been or could be converted into U.S. dollars at that or any other rate. As the amounts shown in U.S. dollars are for convenience only, a rate of ¥83.15 = U.S.$1, the exchange rate prevailing as of March 31, 2011, has been used. 5. Acquisitions and business transfer (1) Acquisitions As of March 11, 2009, the Company owned 66.69% of the issued and outstanding shares of consolidated subsidiary Epson Toyocom Corporation (“Epson Toyocom”). Aiming to make Epson Toyocom a wholly-owned 56 subsidiary, the Company, from March 12, 2009, to April 23, 2009, undertook a tender offer to acquire all of the issued and outstanding shares of Epson Toyocom. As a result, the Company’s ownership of Epson Toyocom’s issued shares rose to 91.05% as of April 30, 2009. On June 1, 2009, the Company conducted a share exchange by which Epson Toyocom became a wholly-owned subsidiary. By completing this tender offer and share exchange, Epson intended to increase management speed and further improve efficiency with the purpose of enhancing Group synergies, strengthening business foundations and optimizing corporate value. Details such as acquisition cost, share exchange ratio and calculation method, and goodwill generated are as follows: Acquisition cost of the subsidiary’s shares Cash Value of the Company’s shares used for acquisition (Note) Consulting fees, etc. Total acquisition cost Millions of yen ¥13,045 4,820 360 ¥18,225 Note: The value of the Company’s shares was based on its share price on the date of the share exchange. Share exchange ratio and calculation method Exchange ratio: One share of the Company’s common stock for 0.21 share of Epson Toyocom common stock The above share exchange ratio was calculated after Epson Toyocom selected PwC Advisory Co., Ltd. as third-party consultants, and the Company engaged Merrill Lynch Japan Securities Co., Ltd. from the tender offer stage as financial advisors. The ratio was determined after careful deliberations and close consultations among the various parties. Details of the number and value of shares exchanged are as follows: Number of shares exchanged: 3,452,797 Value of shares exchanged: ¥4,820 million Goodwill generated Value of goodwill generated: ¥4,140 million The Company recognizes the difference between the acquisition cost of the outstanding Epson Toyocom shares and the decrease in minority interests as goodwill. Goodwill is amortized over five years using the straight-line 57 method. Accounting for this transaction was based on the “Accounting Standard for Business Combinations” issued by the Business Accounting Council on October 31, 2003 and on the “Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures” issued by ASBJ on November 15, 2007. (2) Business Transfer (a) LCDs business transfer As of April 1, 2010, Epson transferred a part of its business and some assets in the field of small- and medium-sized liquid crystal displays (“LCDs”) to Sony Corporation (“Sony”) and Sony Mobile Display Corporation (“SMD”). In a changing market environment, Epson had found it difficult to distinguish its small- and medium-sized display business from the competition, and judged that transferring the aforementioned business to the Sony Group was the most appropriate way of optimizing its liquid crystal technologies and amorphous silicon TFT production capability. Outline of transfer Date of transfer: April 1, 2010 Gain on business transfer: ¥513 million ($6,169 thousand) Carrying amounts of assets and liabilities transferred: Current assets Noncurrent assets Total Current liabilities Noncurrent liabilities Total Millions of yen Thousands of U.S. dollars ¥3,604 228 ¥3,833 ¥231 54 ¥285 $43,355 2,742 $46,097 $2,778 649 $3,427 The business transferred was included in the electronic devices segment. (b) The subsidiary’s equity transfer As of February 2, 2011, the Company and Sony executed an agreement for transferring all of the equity of Suzhou Epson Co., Ltd. (“Suzhou Epson”), to the Sony Group. As part of its SE15 long-range corporate vision and mid-range business plan, Epson is completing business structure reforms in its small- and medium-sized TFT LCD business. In implementing these reforms, in April 2010 Epson transferred to the Sony Group certain 58 assets of the small- and medium-sized display front-end process manufacturing-related business operated by its subsidiary, Epson Imaging Devices Corporation ("Epson Imaging"). Epson has now determined that it would also be beneficial to transfer Suzhou Epson, which undertook the back-end and touch panel assembly processes of Epson Imaging's display business, to the Sony Group. Outline of transfer Transferred to: Sony (China) Limited Outline of Suzhou Epson: Company name Suzhou Epson Co., Ltd. Business activities Production of small-and medium-sized TFT LCD displays Net sales ¥59,913 million ($720,541 thousand) (fiscal year ended March 31, 2011) Total assets ¥19,443 million ($233,830 thousand) (as of March 31, 2011) Total liabilities ¥8,034 million ($96,620 thousand) (as of March 31, 2011) Ownership before transfer Seiko Epson Corporation 100% (including indirect ownership) Agreed-upon purchase price and date of transfer: Agreed-upon purchase price CNY 775 million (¥9,827 million, calculated at the foreign exchange rate as of March 31, 2011; $118,184 thousand) Ownership after transfer -% Date of transfer Planned for the first half of the fiscal year ending March 31, 2012 The business transferred was included in the electronic devices segment. 6. Inventories Losses recognized and charged to cost of sales as a result of valuations as of March 31, 2010 and 2011, were ¥30,115 million and ¥30,654 million ($368,659 thousand), respectively. 7. Investments in debt and equity securities Epson classifies all investments in debt and equity securities as either held-to-maturity debt securities or other securities. The market value (carrying value) of held-to-maturity debt securities, which was recognized at amortized cost and included in the short-term investments and investment securities accounts at March 31, 2011, comprised the following: Held-to-maturity debt securities March 31, 2011 Millions of yen Thousands of U.S. dollars Commercial paper ¥9,999 $120,253 59 National government bonds Total 109 ¥10,108 1,310 $121,563 The aggregate cost and market value (carrying value) of other securities with market value, which were included in the short-term investment securities account and the investment securities account at March 31, 2010 and 2011, were as follows: Other securities Millions of yen March 31, 2010 Gross unrealized Cost Gains Losses Market value (carrying value) Equity securities Certificate of deposit Other ¥6,300 51,500 227 ¥5,749 - - Total ¥58,027 ¥5,749 (¥88) (-) (-) (¥88) ¥11,961 51,500 227 ¥63,688 Millions of yen March 31, 2011 Gross unrealized Cost Gains Losses Market value (carrying value) Equity securities Certificate of deposit Other ¥6,188 66,000 189 ¥4,049 - - Total ¥72,378 ¥4,049 (¥771) (-) (-) (¥771) ¥9,466 66,000 189 ¥75,655 Thousands of U.S. dollars March 31, 2011 Gross unrealized Cost Gains Losses Market value (carrying value) Equity securities Certificate of deposit Other $74,432 793,746 2,273 $48,682 - - ($9,272) (-) (-) $113,842 793,746 2,273 Total $870,451 $48,682 ($9,272) $909,861 For the years ended March 31, 2010 and 2011, the total amount of other-than-temporary impairments charged to current income for securities with market value is not disclosed herein since it is insignificant to the consolidated results. Impairments are principally recorded in cases where the fair value of other securities with determinable market value has declined in excess of 30% of cost. Those securities are written down to the fair value, and the resulting losses are included in current income for the period. The total sales of other securities, the related gains and losses for the year ended March 31, 2010, were ¥551 million, ¥394 million and ¥29 million, respectively. The total sales of other securities, the related gains and 60 losses for the year ended March 31, 2011, were ¥108 million ($1,298 thousand), ¥6 million ($72 thousand) and ¥26 million ($312 thousand), respectively. Unlisted securities, which were carried at costs of ¥967 million and ¥1,428 million ($17,173 thousand) at March 31, 2010 and 2011 respectively, are not included in this table because market quotations are unavailable, and it is therefore extremely difficult to estimate their market value. The amounts of investments in unconsolidated subsidiaries and affiliates, which were included in the investment securities account at March 31, 2010 and 2011, were ¥2,804 million and ¥2,131 million ($25,628 thousand), respectively. 8. Short-term and long-term loans payable Short-term loans payable and long-term loans payable at March 31, 2010 and 2011, comprised the following: Millions of yen March 31 2010 Amount Amount 2011 Average interest rate Thousands of U.S. dollars March 31, 2011 Last due Amount Short-term loans payable Current portion of long-term loans payable Current portion of lease obligations Long-term loans payable from financial institutions Lease obligations Unsecured bonds issued by the Company Unsecured bonds issued by the Company Unsecured bonds issued by the Company Unsecured bonds issued by the Company Unsecured bonds issued by the Company ¥21,739 35,728 1,059 ¥31,129 42,093 461 0.84% 1.07 - - - - $374,371 506,229 5,544 151,593 107,500 1,533 30,000 20,000 30,000 20,000 - 973 - 20,000 30,000 20,000 20,000 1.62 - 1.05 1.44 1.65 1.70 0.58 2015 1,292,844 2017 2010 2012 2011 2012 2015 11,716 - 240,529 360,793 240,529 240,529 Total ¥311,655 ¥272,157 $3,273,084 Average interest rates are calculated using weighted-average interest rates on short-term loans payable, long-term loans payable and bonds payable, as of March 31, 2011. Average interest rates on lease obligations are not disclosed herein since interest expenses included in lease payments are allocated based on the straight-line method for the corresponding fiscal years. The maturities of long-term loans payable outstanding as of March 31, 2011, were as follows: Year ending March 31 Millions of yen 2012 2013 2014 2015 Total Thousands of U.S. dollars $506,229 366,806 901,986 24,052 ¥42,093 30,500 75,000 2,000 ¥149,593 $1,799,073 61 The maturities of lease obligations outstanding as of March 31, 2011, were as follows: Year ending March 31 Millions of yen Thousands of U.S. dollars $5,544 4,859 4,185 2,345 240 72 ¥461 402 348 195 20 6 ¥1,434 $17,245 Thousands of U.S. dollars $360,793 481,058 240,529 ¥30,000 40,000 20,000 ¥90,000 $1,082,380 2012 2013 2014 2015 2016 Thereafter Total 2012 2013 2016 Total The maturities of bonds outstanding as of March 31, 2011, were as follows: Year ending March 31 Millions of yen 9. Goodwill Epson had goodwill and negative goodwill as of March 31, 2010 and 2011. Goodwill is amortized on a straight-line basis in accordance with Japanese accounting standards. Goodwill or negative goodwill is recorded on the balance sheets after offsetting. The amounts of goodwill and negative goodwill before offsetting as of March 31, 2010 and 2011, were as follows: Millions of yen March 31 2010 ¥3,703 830 2011 ¥2,754 122 Thousands of U.S. dollars March 31, 2011 $33,120 1,467 Goodwill Negative goodwill 62 10. Retirement benefits The Company and its Japanese subsidiaries maintain corporate defined benefit pension plans and defined contribution pension plans covering the majority of their employees. In certain cases, additional severance costs may be provided. The funded status of these plans as of March 31, 2010 and 2011, was as follows: Thousands of Millions of yen U.S. dollars March 31 March 31, 2010 2011 2011 Projected benefit obligations ¥229,649 ¥233,973 $2,813,866 Plan assets at fair value Unfunded status Unrecognized items: 193,268 197,622 2,376,693 36,381 36,351 437,173 Actuarial gains (losses) (17,081) (16,828) (202,381) Prior service cost reduction from plan amendment Provision for retirement benefits - net Prepaid pension cost （476） (219) 18,822 19,303 1,186 1,213 (2,646) 232,146 14,588 Provision for retirement benefits ¥20,008 ¥20,516 $246,734 In addition to the above-mentioned provision for retirement benefits, additional severance costs of ¥5,772 million ($69,416 thousand), which related to business structure improvement, were recorded in provision for retirement benefits as of March 31, 2011. 63 The composition of net pension and severance costs for the years ended March 31, 2010 and 2011, was as follows: Service cost Interest cost Expected return on plan assets Amortization and expenses: Actuarial losses Prior service costs Net pension and severance costs Contribution to defined contribution pension plan Thousands of Millions of yen U.S. dollars Year ended Year ended March 31 March 31, 2010 2011 2011 ¥8,257 ¥7,744 5,944 6,064 (5,720) (6,263) 6,999 3,952 257 257 15,737 11,755 3,581 3,613 $93,132 72,928 (75,321) 47,528 3,104 141,371 43,451 ¥19,319 ¥15,368 $184,822 In addition to the above-mentioned net pension and severance costs, additional severance costs of ¥6,239 million ($75,033 thousand), which related to specific reorganization programs, were recorded in business structure improvement expenses for the year ended March 31, 2011. The assumptions used for the actuarial computation of the retirement benefit obligations for the years ended March 31, 2010 and 2011, were primarily as follows: Discount rate Long-term rate of return on plan assets 11. Net assets Year ended March 31 2010 2011 2.5% 3.2 2.5% 3.2 The Japanese Companies Act stipulates that an amount equal to 10% of dividends shall be distributed as additional paid-in capital or legal reserve on the date of distribution until an aggregated amount of additional paid-in capital and legal reserve equals 25% of common stock. Under the Japanese Companies Act, distributions can be made at any time by resolution of the shareholders, or by the board of directors if certain conditions are met. 64 Under the Japanese Companies Act, the distributions of retained earnings for a fiscal year is made by resolution of shareholders at a general meeting to be held within three months after the balance sheet date, and accordingly such distributions are recorded at the time of resolution. The Company paid the following cash dividends of retained earnings to its registered shareholders at the ends of the fiscal year and interim periods during the years ended March 31, 2010 and 2011: Cash dividends per share Cash dividends Yen Year ended March 31 2010 2011 ¥7.00 - ¥7.00 ¥10.00 ¥10.00 ¥20.00 U.S. dollars Year ended March 31, 2011 $0.12 $0.12 $0.24 Year-end Interim Total Millions of yen Year ended March 31 2010 2011 ¥1,374 - ¥1,374 ¥1,997 ¥1,997 ¥3,995 Thousands of U.S. dollars Year ended March 31, 2011 $24,016 $24,016 $48,045 The effective date of the distribution for year-end cash dividend, which was paid during the year ended March 31, 2010, was June 25, 2009. The effective dates of the distribution for year-end and interim cash dividends, which were paid during the year ended March 31, 2011, were June 23, 2010, and December 3, 2010, respectively. The proposed cash dividends of retained earnings of the Company for the year ended March 31, 2011, approved at the general shareholders’ meeting, which was held on June 20, 2011, were as follows: Cash dividends per share Cash dividends Yen ¥10.00 U.S. dollars $0.12 Millions of yen ¥1,997 Thousands of U.S. dollars $24,016 The effective date of the distribution was June 21, 2011. 65 12. Net income (loss) per share Calculation of net income (loss) per share for the years ended March 31, 2010 and 2011, is as follows: Millions of yen Year ended March 31 Thousands of U.S. dollars Year ended March 31, 2010 2011 2011 Net income (loss) attributable to common shares (¥19,791) ¥10,239 $123,138 Weighted-average number of common shares outstanding 199,225 199,794 Thousands of shares Net income (loss) per share (¥99.34) ¥51.25 $0.61 Yen U.S. dollars Diluted net loss per share is not calculated herein since a net loss was incurred and Epson had no dilutive potential common shares outstanding during the years ended March 31, 2010. Diluted net income per share is not calculated herein since Epson had no dilutive potential common shares outstanding during the year ended March 31, 2011. 66 13. Income taxes Epson is subject to a number of different income taxes that amounted to a statutory income tax rate in Japan of approximately 40.4 % for each of the years ended March 31, 2010 and 2011. The significant components of deferred tax assets and liabilities as of March 31, 2010 and 2011, were as follows: Deferred tax assets: Net operating tax loss carry-forwards Property, plant and equipment and intangible assets (Impairment loss and excess of depreciation) Inter-company profits on inventories and write downs Provision for retirement benefits Provision for bonuses Devaluation of investment securities Provision for product warranties One-time depreciation for assets Others Gross deferred tax assets Less: valuation allowance Total deferred tax assets Deferred tax liabilities: Undistributed earnings of overseas subsidiaries and affiliates Net unrealized gains on land held by a subsidiary Valuation difference on available-for-sale securities Reserve for special depreciation for tax purpose Others Gross deferred tax liabilities Net deferred tax assets Millions of yen March 31 2010 2011 Thousands of U.S. dollars March 31, 2011 ¥52,509 ¥65,424 $786,819 44,082 29,439 354,046 20,207 6,331 4,146 2,900 2,966 1,808 14,558 149,510 (131,482) 18,028 20,820 8,803 5,673 2,842 2,252 1,910 21,381 158,549 (138,170) 20,378 (8,324) (2,613) (1,683) (344) (1,493) (14,459) ¥3,568 (7,504) (2,613) (744) (197) (1,701) (12,760) ¥7,617 250,390 105,868 68,226 34,179 27,083 22,970 257,201 1,906,782 (1,661,707) 245,075 (90,246) (31,425) (8,947) (2,369) (20,483) (153,470) $91,605 The valuation allowance was established mainly against deferred tax assets on future tax-deductible temporary differences and operating tax loss carry-forwards as it is probable that these deferred tax assets will not be realized within the foreseeable future. 67 The differences between Epson’s statutory income tax rate and the income tax rate reflected in the consolidated statements of income were reconciled as follows: Statutory income tax rate Reconciliation: Year ended March 31 2011 2010 40.4% 40.4% Tax rate differences in overseas subsidiaries Entertainment expenses, etc. permanently non-tax deductible Changes in valuation allowance Other 532.9 204.0 (3,168.4) 15.8 (39.8) 22.2 7.1 2.5 Income tax rate per statements of income (2,375.4%) 32.3% 14. Selling, general and administrative expenses The significant components of selling, general and administrative expenses for the years ended March 31, 2010 and 2011, were as follows: Millions of yen Year ended March 31 Thousands of U.S. dollars Year ended March 31, 2010 2011 2011 Salaries and wages ¥73,239 ¥76,609 $921,334 Advertising Sales promotion Shipping costs Research and development costs Allowance for doubtful accounts Other Total 15,303 16,052 14,325 32,316 517 89,485 14,918 15,420 14,815 23,986 266 84,236 ¥241,241 ¥230,253 179,410 185,447 178,171 288,466 3,199 1,013,113 $2,769,140 15. Research and development costs Research and development costs, which are included in the cost of sales and selling, general and administrative expenses, totaled ¥68,849 million and ¥54,377 million ($653,962 thousand) for the years ended March 31, 2010 and 2011, respectively. 68 16. Business structure improvement expenses Business structure improvement expenses for the year ended March 31, 2011, comprised expenses related to the termination of the small- and medium-sized displays business. 17. Loss on disaster Loss on disaster for the year ended March 31, 2011, comprised incurred losses related to the Great East Japan Earthquake. 18. Leases As of March 31, 2010, capital leases, mainly comprised of plants, production equipment in the electronic devices segment, host computers and computer terminals. As of March 31, 2011, capital leases, mainly comprised of uninterruptible power supply, host computers and computer terminals. Future lease payments for non-cancelable operating leases as a lessee at March 31, 2010 and 2011, were as follows: Future lease payments 2010 2011 Millions of yen March 31 Thousands of U.S. dollars March 31, 2011 Due within one year Due after one year ¥2,810 8,872 ¥2,337 6,671 $28,105 80,229 Total ¥11,682 ¥9,008 $108,334 69 19. Cash flow information Cash and cash equivalents as of March 31, 2010 and 2011, were as follows: Cash and deposits Short-term investment securities Short-term loans receivables Millions of yen March 31 Thousands of U.S. dollars March 31, 2010 2011 2011 ¥193,117 ¥125,807 $1,513,012 51,511 10,000 76,009 10,000 914,119 120,264 Less: Short-term loans payable (overdrafts) Time deposits due over three months Short-term investment securities due over three months Cash and cash equivalents (0) (27) (11) (2) (27) (10) (24) (324) (120) ¥254,590 ¥211,777 $2,546,927 The Company obtained marketable securities, the fair value of which was \9,918 million and \10,008 million ($120,360 thousand) as of March 31, 2010 and 2011, respectively, as deposit for the short-term loans receivables above. 70 20. Derivative instruments The table below lists notional amounts and fair value of derivatives as of March 31, 2010 and 2011, by transaction and type of instrument, excluding derivatives qualifying for hedge accounting. Currency-related transactions Millions of yen March 31, 2010 Notional amounts Fair value Unrealized gains (losses) ¥52,622 20,530 1,203 2,675 3,272 38 3 4 124 190 9 1,693 ¥82,369 (¥1,705) 624 (78) (117) (106) 0 (0) 0 0 (4) 0 53 (¥1,332) (¥1,705) 624 (78) (117) (106) 0 (0) 0 0 (4) 0 53 (¥1,332) Millions of yen March 31, 2011 Notional amounts Fair value Unrealized gains (losses) ¥18,241 15,547 190 1,039 98 5 2,867 1 1,746 ¥39,738 (¥328) (788) 0 (39) (2) (0) 30 0 78 (¥1,048) (¥328) (788) 0 (39) (2) (0) 30 0 78 (¥1,048) Instruments Forward exchange contracts: Sold - U.S. dollar (purchased Japanese yen) Euro (purchased Japanese yen) Australian dollar (purchased Japanese yen) Singapore dollar (purchased Japanese yen) Hong Kong dollar (purchased Japanese yen) Euro (purchased Singapore dollar) Australian dollar (purchased Singapore dollar) Purchased - U.S. dollar (sold Japanese yen) Euro (sold Japanese yen) U.S. dollar (sold Taiwan dollar) Sterling pound (sold Singapore dollar) Indonesia rupiah (sold U.S. dollar) Total Instruments Forward exchange contracts: Sold - U.S. dollar (purchased Japanese yen) Euro (purchased Japanese yen) Sterling pound (purchased Japanese yen) Australian dollar (purchased Japanese yen) Euro (purchased Singapore dollar) Australian dollar (purchased Singapore dollar) Purchased - U.S. dollar (sold Japanese yen) Euro (sold Japanese yen) Indonesia rupiah (sold U.S. dollar) Total 71 Instruments Forward exchange contracts: Sold - U.S. dollar (purchased Japanese yen) Euro (purchased Japanese yen) Sterling pound (purchased Japanese yen) Australian dollar (purchased Japanese yen) Euro (purchased Singapore dollar) Australian dollar (purchased Singapore dollar) Purchased - U.S. dollar (sold Japanese yen) Euro (sold Japanese yen) Indonesia rupiah (sold U.S. dollar) Total Thousands of U.S. dollars March 31, 2011 Notional amounts Fair value Unrealized gains (losses) $219,425 186,975 2,285 12,495 1,178 60 34,479 12 20,998 $477,907 ($3,944) (9,477) 0 (469) (24) (0) 360 0 938 ($12,616) ($3,944) (9,477) 0 (469) (24) (0) 360 0 938 ($12,616) The fair value is calculated based on prices obtained from financial institutions. The table below lists notional amounts and fair value of derivatives as of March 31, 2010 and 2011, by transaction and type of instrument, qualifying for hedge accounting. (a) Currency-related transactions Instruments Hedged items Forward exchange contracts: Sold - Millions of yen March 31, 2010 Notional amounts Fair value Euro (purchased Japanese yen) Forecasted transactions in foreign currency sales ¥5,297 ¥179 Purchased - U.S. dollar (sold Japanese yen) U.S. dollar (sold Taiwan dollar) Forecasted transactions in foreign currency purchase 1,077 283 38 (3) Total ¥6,658 ¥215 Instruments Hedged items Millions of yen March 31, 2011 Notional amounts Fair value Forward exchange contracts: Sold - Euro (purchased Japanese yen) Purchased - U.S. dollar (sold Japanese yen) Forecasted transactions in foreign currency sales Forecasted transactions in foreign currency purchase ¥24,454 (¥598) 1,976 44 Total ¥26,430 (¥553) 72 Instruments Hedged items Thousands of U.S. dollars March 31, 2011 Notional amounts Fair value Forward exchange contracts: Sold - Euro (purchased Japanese yen) Purchased - U.S. dollar (sold Japanese yen) Forecasted transactions in foreign currency sales Forecasted transactions in foreign currency purchase $294,095 ($7,179) 23,764 529 Total $317,859 ($6,650) The fair value is calculated based on prices obtained from financial institutions. (b) Interest-related transactions Instruments Hedged items Millions of yen March 31, 2010 Notional amounts Due after one year Interest rate swaps: Pay-fixed, receive-floating Floating interest rate in long-term loans payables ¥78,822 ¥50,093 Instruments Hedged items Millions of yen March 31, 2011 Notional amounts Due after one year Interest rate swaps: Pay-fixed, receive-floating Floating interest rate in long-term loans payables ¥50,093 ¥50,000 Instruments Hedged items Thousands of U.S. dollars March 31, 2011 Notional amounts Due after one year Interest rate swaps: Pay-fixed, receive-floating Floating interest rate in long-term loans payables $602,441 $601,322 The fair value of interest rate swaps meeting certain hedging criteria and recognized under exceptional treatment in Japanese accounting standards are not disclosed herein. They are included in the fair value of the long-term loans payable disclosed in Note 21 “Financial risk management and fair value of financial instruments.” 21. Financial risk management and fair value of financial instruments Financial risk management principles 73 With the maintenance of funding an essential precondition, Epson places great emphasis on safety and liquidity, and selects operational funding methods that are designed to ensure the maximum possible efficiency. Epson uses methods such as bank loans and bonds to procure funds and others. Epson uses derivative instruments only for hedging purposes and not for purposes of trading or speculation. Risks associated with financial instruments Operating receivables such as notes and accounts receivable-trade are exposed to counterparties’ credit risks. Epson operates internationally, exposing its foreign operating receivables to the risk of fluctuations in foreign currency exchange rates. Epson principally manages its exposure to fluctuations in exchange rates on a net basis and mainly uses forward exchange contracts to reduce the exposures. Investment securities are mainly comprised of shares of companies with which Epson maintains business relations, and are exposed to risks associated with market fluctuations. The majority of notes and accounts payable-trade, accounts payable-other have payment due dates of one year or less. Some of these are foreign currency based, and are therefore exposed to risks associated with foreign currency fluctuations. Certain interest expenses are exposed to the risk of interest rate fluctuations because of floating interest rates. Interest rate swaps are utilized to hedge against possible future fluctuations in interest rates on loans. Derivative instruments are mainly comprised of forward exchange contracts and interest rate swaps. Financial risk management (1) Credit and default risk Based on internal rules and policies and procedures, Epson regularly monitors the situation regarding the operating receivables of counterparties, and in addition to reviewing the payment due dates and account balances for each partner, seeks to understand and reduce at an early stage concerns regarding the collection of operating receivables caused by partners’ financial difficulties. Epson’s management believes that credit risk relating to derivative instruments used by Epson is relatively low since all parties relating to the derivative instruments are creditworthy financial institutions. (2) Market risk For risks associated with foreign currency fluctuations, for operating receivables and payables based on foreign currency, Epson, as a basic rule, executes forward exchange transactions for the purpose of hedging for each currency on a monthly basis. Epson makes exchange contracts for foreign currency-based operating receivables and payables that it expects to occur as a result of forecasted transactions. Forward exchange transactions are executed in accordance with internal rules and policies based on foreign exchange management rules and policies. 74 Interest rate swaps are utilized to hedge against possible future fluctuations in interest rates on loans. Interest rate swap transactions are approved and executed based on the authorization of Epson’s director responsible for finance based on internal rules and policies concerning financial management. For investment securities, Epson regularly reviews the market value and financial results, etc., of the issuing company (counterparty) based on rules and policies for managing investment securities. Epson also takes into consideration the state of the relationship with counterparties as it constantly reviews the level of its holdings. (3) Liquidity risk Epson manages liquidity risk by maintaining current liquidity at an appropriate level through creating and updating liquidity plans at appropriate times, and by constantly reviewing the external financial environment. Fair value of financial instruments The fair value of each category of Epson’s financial instruments and their carrying value in Epson’s balance sheets as of March 31, 2010 and 2011, were as follows: Instruments Cash and deposits Notes and accounts receivable-trade Short-term investment securities Investment securities Total Notes and accounts payable-trade Short-term loans payable Accounts payable-other Bonds payable (including current portion) Long-term loans payable (including current portion) Millions of yen March 31, 2010 Carrying value ¥193,117 144,435 51,500 12,188 Fair value ¥193,117 144,435 51,500 12,188 ¥401,241 ¥401,241 90,768 21,739 58,576 100,000 187,322 90,768 21,739 58,576 101,211 189,764 Unrealized gains (losses) - - - - - - - - ¥1,211 2,441 Total ¥458,406 ¥462,059 ¥3,652 Derivative instruments (¥1,116) (¥1,116) - Investments in unconsolidated subsidiaries and affiliates of ¥2,804 million, unlisted securities of ¥967 million, at March 31, 2010, are not included above because there is no market value and it is therefore extremely difficult to estimate their fair value. 75 Instruments Cash and deposits Notes and accounts receivable-trade Short-term investment securities Investment securities Total Notes and accounts payable-trade Short-term loans payable Accounts payable-other Bonds payable (including current portion) Long-term loans payable (including current portion) Millions of yen March 31, 2011 Carrying value ¥125,807 140,564 76,009 9,754 Fair value ¥125,807 140,564 76,009 9,754 ¥352,136 ¥352,136 72,833 31,129 51,112 90,000 149,593 72,833 31,129 51,112 90,755 151,816 Unrealized gains (losses) - - - - - - - - ¥755 2,222 Total ¥394,668 ¥397,646 ¥2,977 Derivative instruments (¥1,602) (¥1,602) - Instruments Cash and deposits Notes and accounts receivable-trade Short-term investment securities Investment securities Total Notes and accounts payable-trade Short-term loans payable Accounts payable-other Bonds payable (including current portion) Long-term loans payable (including current portion) Thousands of U.S. dollars March 31, 2011 Carrying value $1,513,012 1,690,487 914,119 117,306 Fair value $1,513,012 1,690,487 914,119 117,306 $4,234,924 $4,234,924 875,923 374,371 614,696 1,082,380 1,799,073 875,923 374,371 614,696 1,091,459 1,825,795 Unrealized gains (losses) - - - - - - - - $9,079 26,722 Total $4,746,443 $4,782,244 $35,801 Derivative instruments ($19,266) ($19,266) - Derivative instruments in the table above represent a net amount. Unlisted securities of ¥1,428 million ($17,173 thousand) at March 31, 2011 are not included above because there is no market value and it is therefore extremely difficult to estimate their fair value. 76 The fair value of financial instruments was calculated based on the following methods and premises: (1) Cash and deposits, notes and accounts receivable-trade and short-term investment securities Due to the short terms of these financial instruments, it is assumed that their fair value is equal to the carrying amounts. (2) Investment securities Fair value was measured using exchange market value. (3) Notes and accounts payable-trade, short-term loans payable, accounts payable-other Due to the short terms of these financial instruments, it is assumed that their fair value is equal to the carrying amounts. (4) Bonds payable (including current portion) Fair value was measured using market prices. (5) Long-term loans payable (including current portion) Because long-term loans payable that are with floating rates are affected in the short term by fluctuations in market interest rates, and because Epson’s credit status has not changed greatly since they were implemented, it is assumed that their fair value is equal to the carrying amounts. Among items that are based on floating interest rates, the fair value of long-term loans payable whose interest rates become fixed as a result of interest-rate swaps are calculated using the same method as used for determining the fair value of long-term loans payable based on fixed interest rates. The fair value of loans payable based on fixed interest rates are calculated by discounting the total amounts of loans payable using estimated interest rates that would be in effect if similar loan arrangements were entered into. Limitations Fair value estimates are based on relevant market information. These estimates involve uncertainties and therefore changes in assumptions could affect the estimates. 22. Contingent liabilities Contingent liabilities for guarantee of employees’ housing loans from banks and others were \1,413 million and \1,090 million ($13,108 thousand) as of March 31, 2010 and 2011, respectively. 23. Related party transactions The Company has entered into real estate lease agreements with K.K. Sunritz (“Sunritz”). Mr. Yasuo Hattori, a vice-chairman and director of the Company, and his relatives own 9.5% and 71.3% of the outstanding shares of Sunritz, respectively. 77 A subsidiary of the Company has also entered into real estate lease agreements with Hamazawa Investment Company (“Hamazawa”), which is a subsidiary of Sunritz. The company and its subsidiary’s transactions with these related parties for the years ended March 31, 2010 and 2011, and related balances on March 31, 2010 and 2011, were as follows: Transactions: With Sunritz - Rental expenses for real estates With Hamazawa - Rental expenses for real estates Balances: With Sunritz - Other investments Millions of yen Year ended March 31 2011 2010 Thousands of U.S. dollars Year ended March 31, 2011 ¥18 23 ¥18 21 $216 252 Millions of yen Year ended March 31 2011 2010 Thousands of U.S. dollars Year ended March 31, 2011 ¥1 ¥1 $12 78 24. Segment information From the current fiscal year, Epson adopted ASBJ Statement No.17, “Revised Accounting Standard for Disclosures about Segments of an Enterprise and Related Information” (Revised on March 27, 2009) and its implementation guidelines, ASBJ Guidance No.20, “Guidance on Accounting Standard for Disclosures about Segments of an Enterprise and Related Information,” issued on March 21, 2008. As a result, segment information for the years ended March 31, 2010 and 2011 are based on the revised standard. (a) Summary of reporting segments Epson and its subsidiaries conduct manufacturing and sales of products worldwide under the management of the Company’s operations divisions. In order for the board of directors to determine the allocation of resources and assess business results, the operations divisions make individual financial reports, and correspond to business segments that are subject to regular review. Epson has consolidated these business segments into three reporting segments based on the type and characteristics of products and services, and on manufacturing and sales methods. These are the information-related equipment segment, the electronic devices segment and the precision products segment. Epson conducts development, manufacturing and sales within its reporting segments as follows. The information-related equipment segment mainly includes color inkjet printers, page printers, serial impact dot matrix printers, large-format inkjet printers and related supplies, color image scanners, mini-printers, printers for use in POS systems, 3LCD projectors, label writers and personal computers. The electronic devices segment mainly includes crystal units, crystal oscillators, quartz sensors, optical devices, CMOS LSIs, HTPS-TFT panels for 3LCD projectors and small- and medium-sized LCDs. The precision products segment mainly includes watches, watch movements, plastic corrective lenses, precision industrial robots, IC handlers and industrial inkjet equipment. 79 (b) Measurement of the amount of sales, income (loss), assets and other in each reporting segment The accounting policies of the reporting segments are the same as “Basis of presenting consolidated financial statements”. Segment income (loss) is based on operating income (loss). Transfer prices between operating segments are on an arm’s length basis. (c) Information of the amount of sales , income (loss), assets and other in each reporting segment The following table summarizes the reporting segment information of Epson for the years ended March 31, 2010 and 2011: Net sales: Millions of yen Year ended March 31, 2010 Reporting segments Electronic devices Precision products Total Information- related equipment Other [Note 1] Total Adjustments [Note 2] Consolidated statement of income totals [Note 3] Customers ¥711,378 ¥215,534 ¥56,284 ¥983,197 ¥1,182 ¥984,379 1,314 712,692 32,466 248,001 1,461 57,746 35,243 1,018,440 71,748 1,529 (1,311) 71,966 282 1,465 (100) 35,526 1,019,905 ¥983 (35,526) (34,542) ¥985,363 - 985,363 71,866 (53,639) 18,227 302,253 154,693 45,696 502,643 1,411 504,055 366,035 870,090 24,319 10,455 3,842 38,618 38 38,656 8,446 47,103 12,502 9,862 1,876 24,240 7 24,247 2,941 27,189 \- ¥866 \- ¥866 \- ¥866 ¥38 ¥905 80 Inter-segment Total Segment income (loss) Segment assets Other Depreciation and amortization Increase in property, plant, equipment and intangible assets Amortization of goodwill Millions of yen Year ended March 31, 2011 Reporting segments Electronic devices Precision products Total Information- related equipment Other [Note 1] Total Adjustments [Note 2] Consolidated statement of income totals [Note 3] Net sales: Customers ¥701,879 ¥203,491 ¥66,628 ¥971,999 1,039 702,918 27,743 231,235 1,647 68,276 30,430 1,002,430 70,151 5,569 3,307 79,028 ¥788 490 1,279 (286) ¥972,788 30,921 1,003,709 ¥875 (30,921) (30,046) ¥973,663 - 973,663 78,741 (46,032) 32,709 311,486 142,000 46,087 499,574 837 500,412 297,816 798,229 21,638 9,820 3,381 34,840 38 34,879 6,092 40,971 17,813 9,965 1,856 29,634 5 29,639 2,324 31,963 \- ¥910 \- ¥910 \- ¥910 ¥38 ¥949 Inter-segment Total Segment income (loss) Segment assets Other Depreciation and amortization Increase in property, plant, equipment and intangible assets Amortization of goodwill Thousands of U.S. dollars Year ended March 31, 2011 Reporting segments Electronic devices Precision products Total Information- related equipment Other [Note 1] Total Adjustments [Note 2] Consolidated statement of income totals [Note 3] Net sales: Customers $8,441,131 $2,447,276 $801,298 $11,689,705 $9,489 $11,699,194 $10,523 $11,709,717 Inter-segment 12,495 333,662 19,820 365,977 5,893 371,870 (371,870) - Total Segment income (loss) Segment assets Other Depreciation and amortization Increase in property, plant, equipment and intangible assets Amortization of goodwill 8,453,626 2,780,938 821,118 12,055,682 15,382 12,071,064 (361,347) 11,709,717 843,680 66,975 39,771 950,426 (3,451) 946,975 (553,602) 393,373 3,746,085 1,707,757 554,263 6,008,105 10,079 6,018,184 3,581,683 9,599,867 260,241 118,099 40,661 419,001 469 419,470 73,266 492,736 214,228 119,843 22,321 356,392 60 356,452 27,949 384,401 $- $10,944 $- $10,944 $- $10,944 $469 $11,413 81 Notes; 1. Intra-group services are categorized within “Other.” 2. Adjustments were as follows. Net sales Year ended March 31 Corporate expenses Eliminations Total Millions of yen 2010 2011 Thousands of U.S. dollars 2011 ¥3,196 (37,738) (¥34,542) ¥3,764 (33,810) (¥30,046) $45,267 (406,614) ($361,347) Segment income (loss) Year ended March 31 Corporate expenses　[Note] Eliminations Total Millions of yen 2010 2011 Thousands of U.S. dollars 2011 (¥53,831) 191 (¥53,639) (¥46,440) 408 (¥46,032) ($558,508) 4,906 ($553,602) [Note] Corporate expenses that are categorized under adjustments within segment income comprise expenses that do not correspond to the reporting segments. These include expenses relating to research and development for new businesses and basic technology, and general corporate expenses. Segment assets Year ended March 31 Millions of yen 2010 2011 Thousands of U.S. dollars 2011 ¥378,169 (12,134) ¥366,035 ¥310,168 (12,351) ¥297,816 $3,730,221 (148,538) $3,581,683 Corporate expenses Eliminations Total Other (1) Depreciation and amortization that is categorized under adjustments comprises expenses that do not correspond to the reporting segments. It includes expenses relating to research and development for new businesses and basic technology, and general corporate expenses. (2) Increase in property, plant, equipment and intangible assets; Corporate expenses Intangible assets [Note] Total Year ended March 31 Millions of yen 2010 2011 Thousands of U.S. dollars 2011 ¥1,689 1,252 ¥2,941 ¥2,173 151 ¥2,324 $26,134 1,815 $27,949 [Note] Intangible assets are non-subject to regular review as capital expenditure. (3) Amortization of goodwill that is categorized under adjustments does not correspond to the reporting segments. 3. Segment income (loss) has been adjusted to match consolidated operating income (loss). 82 (d) Information of geographic areas Sales by country: The following table summarizes the amount of revenue from external customers for the year ended March 31, 2011: Japan The United States China（including Hong Kong） Other Total Net sales ¥370,124 ¥134,203 ¥107,848 ¥361,487 ¥973,663 Millions of yen Year ended March 31, 2011 Japan The United States China（including Hong Kong） Other Total Net sales $4,451,294 $1,613,986 $1,297,029 $4,347,408 $11,709,717 Thousands of U.S. dollars Year ended March 31, 2011 [Note] Each country’s net sales are based on the location of the customers. Property, plant and equipment by country: The following table summarizes property, plant and equipment by countries for the year ended March 31, 2011: Millions of yen Year ended March 31, 2011 Japan Other Total Property, plant and equipment ¥165,402 ¥48,220 ¥213,623 Thousands of U.S. dollars Year ended March 31, 2011 Japan Other Total Property, plant and equipment $1,989,200 $579,952 $2,569,152 83 (e) Information of impairment loss The following table summarizes information of impairment loss in each reporting segments for the year ended March 31, 2011: Information- related equipment ¥208 Information- related equipment $2,501 Impairment loss Impairment loss Millions of yen Year ended March 31, 2011 Electronic devices Precision products Other Corporate expenses [Note] Total ¥1,052 ¥8 ¥0 ¥428 ¥1,698 Thousands of U.S. dollars Year ended March 31, 2011 Electronic devices Precision products Other Corporate expenses [Note] Total $12,676 $96 $0 $5,147 $20,420 [Note] Impairment loss that is categorized under corporate expenses comprises losses that do not correspond to the reporting segments. It includes losses relating to research and development for new businesses and basic technology, and general corporate losses. (f) Information of goodwill The following table summarizes information of goodwill in each reporting segments for the year ended March 31, 2011: Millions of yen Year ended March 31, 2011 Information- related equipment Electronic devices Precision products Other Corporate expenses [Note] Total Goodwill \- ¥2,664 \- \- ¥89 ¥2,754 Thousands of U.S. dollars Year ended March 31, 2011 Information- related equipment Electronic devices Precision products Other Corporate expenses [Note] Total Goodwill $- $32,050 $- $- $1,070 $33,120 [Note] Goodwill that is categorized under corporate expenses does not correspond to the reporting segments. 84 The following table summarizes information of amortization of negative goodwill and balance of negative goodwill from the subsidiary’s acquisitions before April 1, 2010. Millions of yen Year ended March 31, 2011 Information- related equipment Electronic devices Precision products Other Corporate expenses [Note] Total Amortization of negative goodwill Negative goodwill \- \- ¥660 \- ¥48 ¥122 \- \- \- \- ¥708 ¥122 Thousands of U.S. dollars Year ended March 31, 2011 Information- related equipment Electronic devices Precision products Other Corporate expenses [Note] Total Amortization of negative goodwill Negative goodwill 25. Subsequent events $- $- $7,937 $577 $- $1,467 $- $- $- $- $8,514 $1,467 The Company issued straight bonds, as outlined below, under the following conditions established on June 7, 2011, pursuant to the comprehensive resolution approved by the Company's board of directors held on April 28, 2011. The 6th Series unsecured straight bonds (with inter-bond pari passu clause) Total amount of issuance: ¥20,000 million ($240,529 thousand) Issue price: ¥100 purchase value of ¥100 Interest rate: 0.493% per annum Payment date: June 14, 2011 Maturity date: June 13, 2014 Purpose for funds: Repayment of loans and redemption of bonds The 7th Series unsecured straight bonds (with inter-bond pari passu clause) Total amount of issuance: ¥20,000 million ($240,529 thousand) Issue price: ¥100 purchase value of ¥100 Interest rate: 0.723% per annum Payment date: June 14, 2011 Maturity date: June 14, 2016 Purpose for funds: Repayment of loans and redemption of bonds 85 26. Other The Company and related subsidiaries are subject to allegations concerning a TFT-LCD price-fixing cartel, and received from competition authorities in the United States and elsewhere instructions and notices to submit relevant materials. In August 2009, Epson Imaging Devices Corporation, a consolidated subsidiary of the Company, concluded a plea agreement by which it paid a fine of U.S.$26 million to the United States Department of Justice, and criminal procedures were completed in October 2009. Related civil lawsuits have been brought before courts in United States and elsewhere by clients and others. 86 Report of Independent Auditors 87 Additional Information 1. Principal subsidiaries and affiliates Company name Location Paid-in capital or amount invested Main business Ownership percentage of voting rights (%) Relationship between parent company and subsidiary Consolidated subsidiaries Epson Sales Japan Corporation * Shinjuku-ku, Tokyo 4,000 (million JPY) Epson Direct Corporation Matsumoto-shi, Nagano 150 (million JPY) Sales of information-related equipment Sales of information-related equipment Epson Toyocom Corporation * Hino-shi, Tokyo 12,266 (million JPY) Manufacture and sales of electronic devices Tohoku Epson Corporation Sakata-shi, Yamagata 480 (million JPY) Akita Epson Corporation Yuzawa-shi, Akita 80 (million JPY) Manufacture of information-related equipment Manufacture of information-related equipment and electronic devices 100.0 Sales of printers and other PC peripherals, Rental of assets, Interlocking directors 100.0 (100.0) Sales of PCs, etc., Rental of assets 100.0 100.0 100.0 Manufacture and sales of crystal devices, etc. Rental of assets, Interlocking directors Manufacture of printer components, Loan of assets Manufacture of printer components and crystal devices Financial assistance Epson Imaging Devices Corporation Tottori-shi, Tottori 50 (million JPY) Manufacture and sales of electronic devices 100.0 Manufacture and sales of LCDs, Rental of assets U.S. Epson, Inc. * Long Beach, U.S.A. 111,941 (thousand USD) Regional headquarters 100.0 Epson America, Inc. * Long Beach, U.S.A. 40,000 (thousand USD) Sales of information-related equipment and precision products Epson Electronics America, Inc. San Jose, U.S.A. 10,000 (thousand USD) Sales of electronic devices Epson Portland Inc. * Portland, U.S.A. 31,150 (thousand USD) Epson El Paso, Inc. * El Paso, U.S.A. 51,000 (thousand USD) Epson Europe B.V. * Amsterdam, Netherlands 95,000 (thousand EUR) Manufacture of information-related equipment Manufacture of information-related equipment Regional headquarters, Sales of information-related equipment and precision products Epson (U.K.) Ltd. Hemel Hempstead, UK 1,600 (thousand GBP) Sales of information-related equipment 88 Regional headquarters in Americas, Interlocking directors Sales of printers and other PC peripherals, and sales of factory automation products, Interlocking directors Sales of electronic devices Manufacture of printer consumables, Interlocking directors 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) 100.0 (100.0) Manufacture of printer consumables, Interlocking directors Regional headquarters in Europe, Sales of printers and other PC peripherals, Guaranty of liabilities, Interlocking directors Sales of printers and other PC peripherals Guaranty of liabilities, Interlocking directors 100.0 100.0 (100.0) Company name Location Paid-in capital or amount invested Main business Ownership percentage of voting rights (%) Relationship between parent company and subsidiary Epson Deutschland GmbH Dusseldorf, Germany 5,200 (thousand EUR) Sales of information-related equipment and precision products Epson Europe Electronics GmbH Munich, Germany 2,000 (thousand EUR) Sales of electronic devices Epson France S.A. Levallois- Perret, France 4,000 (thousand EUR) Epson Italia s.p.a. Milan, Italy 3,000 (thousand EUR) Epson Iberica, S.A. Cerdanyola, Spain 1,900 (thousand EUR) Epson (China) Co., Ltd. * Beijing, China 1,211 (million CNY) Epson Korea Co., Ltd. Seoul, Korea 1,466 (million KRW) Epson Hong Kong Ltd. Hong Kong, China 2,000 (thousand HKD) Epson Taiwan Technology & Trading Ltd. Taipei, Taiwan 25,000 (thousand TWD) Epson Singapore Pte. Ltd. Singapore 200 (thousand SGD) Epson Australia Pty. Ltd. North Ryde, Australia 1,000 (thousand AUD) Sales of information-related equipment Sales of information-related equipment Sales of information-related equipment Regional headquarters, sales of information-related equipment Sales of information-related equipment Sales of information-related equipment and electronic devices Sales of information-related equipment and electronic devices Regional headquarters, sales of information-related equipment and electronic devices Sales of information-related equipment Suzhou Epson Co., Ltd. * Suzhou, China 1,043 (million CNY) Manufacture of electronic devices 89 100.0 (100.0) Sales of printers and other PC peripherals, and sales of factory automation products, Guaranty of liabilities, Interlocking directors 100.0 (100.0) Sales of electronic devices, Guaranty of liabilities 100.0 (100.0) Sales of printers and other PC peripherals, Interlocking directors 100.0 (100.0) 100.0 (100.0) 100.0 Sales of printers and other PC peripherals, Guaranty of liabilities, Interlocking directors Sales of printers and other PC peripherals, Guaranty of liabilities, Interlocking directors Regional headquarters in China, Sales of printers and other PC peripheral, Guaranty of liabilities 100.0 Sales of printers and other PC peripherals 100.0 Sales of printers and other PC peripherals, and sales of electronic devices Sales of printers and other PC peripherals, and sales of electronic devices, Guaranty of liabilities Regional headquarters in South-east Asia, Sales of printers and other PC peripherals, and sales of electronic devices, Guaranty of liabilities Sales of printers and other PC peripherals, Guaranty of liabilities, Interlocking directors Manufacture of LCDs 100.0 100.0 100.0 100.0 (80.6) Company name Location Paid-in capital or amount invested Main business Ownership percentage of voting rights (%) Relationship between parent company and subsidiary Tianjin Epson Co., Ltd. Tianjin, China 172 (million CNY) Manufacture of information-related equipment Epson Precision (Hong Kong), Ltd. * Hong Kong, China 81,602 (thousand USD) Manufacture of precision products Epson Engineering (Shenzhen) Ltd. Shenzhen, China 56,641 (thousand USD) Singapore Epson Industrial Pte. Ltd. * P.T. Indonesia Epson Industry * Epson Precision (Philippines), Inc. * Singapore 71,700 (thousand SGD) Bekasi, Indonesia 23,000 (thousand USD Cabuyao, Philippines 57,533 (thousand USD) Manufacture of information-related equipment and electronic devices Manufacture of information-related equipment, electronic devices and precision products Manufacture of information-related equipment Manufacture of information-related equipment and electronic devices Epson Toyocom Malaysia Sdn. Bhd. Kuala Lumpur, Malaysia 16,000 (thousand MYR) Manufacture of electronic devices 80.0 (80.0) Manufacture of printer consumables, etc., Interlocking directors 100.0 Manufacture of watches, etc., Interlocking directors 100.0 (100.0) Manufacture of printers, 3LCD projectors and liquid crystal panels, etc., Interlocking directors 100.0 Manufacture of printer consumables, semiconductors, and watches, etc., Guaranty of liabilities, Interlocking directors 100.0 Manufacture of printers, Guaranty of liabilities, Interlocking directors 100.0 Manufacture of printers and 3LCD projectors, Interlocking directors 100.0 (100.0) Manufacture of crystal devices, Interlocking directors 60 other companies – – – – – Company name Location Paid-in capital or amount invested Main business Ownership percentage of voting rights (%) Relationship between parent company and affiliate Equity method affiliates Time Module (Hong Kong) Ltd. Hong Kong, China 5,001 (thousand HKD) Sales of precision products 33.3 Sales of watch movements Four other companies – – – – – Notes 1. Ownership percentage of voting rights indicated inside parenthesis refers to indirect ownership percentage. 2. * indicates a specified subsidiary (“tokutei-kogaisha”). 3. The net sales (excluding eliminations of sales among consolidated subsidiaries) of Epson Sales Japan Corporation, Epson America, Inc. and Epson Europe B.V. each amount to more than 10% of the consolidated net sales. Key information about operations of those subsidiaries is as follows. 90 Company name Net sales Ordinary income Net income Total net assets Total assets Epson Sales Japan Corporation 204,577 Epson America, Inc. Epson Europe B.V. 180,994 187,079 1,926 4,564 3,473 1,241 2,956 954 11,640 23,531 42,091 60,402 74,738 94,102 Figures for Epson America, Inc. and Epson Europe B.V. are included in consolidated business results. (Millions of yen) 91 2. Distribution of ownership among shareholders Share ownership (100 shares per unit) Government and regional public bodies Japanese financial institutions Japanese securities companies Other Japanese corporations Foreign institutions and others Institutions Individuals Japanese individuals and others Total Shares less than one unit (Shares) Correct as of March 31, 2011 – 71 42 341 347 21 35,134 35,956 – – 591,491 31,612 566,436 334,582 108 472,603 1,996,832 134,189 – 29.62 1.58 28.37 16.75 0.01 23.67 100.00 – Category Number of shareholders (Persons) Number of shares owned （Units） Percentage of shares owned (%) Notes 1. 23,924 shares of treasury stock are included as 239 units in “Japanese individuals and others” and 24 shares in “Shares less than one unit.” 2. Four units in the name of Japan Securities Depository Center, Inc. are included under “Other Japanese corporations.” 92 3. Major shareholders Name Address Correct as of March 31, 2011 Number of shares held Shareholding ratio (%) 5-8 Ginza 3-chome, Chuo-ku, Tokyo 20,718,934 10.36 6-1 Ginza 5-chome, Chuo-ku, Tokyo 14,288,500 Aoyama Kigyo Kabushiki Kaisha Sanko Kigyo Kabushiki Kaisha The Master Trust Bank of Japan, Ltd. (Trust account) Japan Trustee Services Bank, Ltd. (Trustee Account) Seiko Holdings Corporation 11-3 Hamamatsu-cho 2-chome, Minato-ku, Tokyo 8-11, Harumi 1-chome, Chuo-ku, Tokyo 5-11 Ginza 4-chome, Chuo-ku, Tokyo Yasuo Hattori Minato-ku, Tokyo Seiko Epson Corporation Employees’ Shareholding Association 3-5, Owa 3-chome, Suwa-shi, Nagano 6,023,727 10,537,400 9,165,600 7,948,800 7,159,006 5,599,968 4,368,000 7.15 5.27 4.58 3.97 3.58 3.01 2.80 2.18 Noboru Hattori Minato-ku, Tokyo The Dai-ichi Mutual Life Insurance Company (Standing proxy: Trusut & Custody Services Bunk, Ltd.) Mizuho Corporate Bank, Ltd. (Standing proxy: Trusut & Custody Services Bunk, Ltd.) 13-1, Yurakucho 1-chome, Chiyoda-ku, Tokyo) (8-12, Harumi 1-chome, Chuo-ku, Tokyo) 3-3, Marunouchi 1-chome, Chiyoda-ku, Tokyo (8-12, Harumi 1-chome, Chuo-ku, Tokyo) 4,278,100 2.14 Total － 90,088,035 45.08 Notes 1. Mitsubishi UFJ Financial Group, Inc., and its joint holders submitted a Major Shareholding Report as of February 1, 2010, claiming that they hold the Company’s shares as follows as of January 25, 2010. However, we have not been able to confirm the number of shares they held at the end of the fiscal year under review. Therefore, they are not included in the above major shareholders. Name Address Number of shares held The Bank of Tokyo-Mitsubishi UFJ,Ltd. 7-1 Marunouchi 2-chome, Chiyoda-ku,Tokyo,Japan Mitsubishi UFJ Trust and Banking Corporation 4-5 Marunouchi 1-chome, Chiyoda-ku, Tokyo Mitsubishi UFJ Asset Management 4-5 Marunouchi 1-chome, Chiyoda-ku, Tokyo Total － 1,610,000 8,043,700 377,200 10,030,900 Shareholding ratio (%) 0.81 4.03 0.19 5.02 2. Mizuho Corporate Bank, Ltd., and its joint holders submitted a Report of Change as of March 7, 2011, claiming that they held the Company’s shares as follows as of February 28, 2011. However, we have not been able to confirm the number of shares they held at the end of the fiscal year under review. Therefore, they are not included in the above major shareholders. 93 Name Address Mizuho Corporate Bank, Ltd. Mizuho Bank, Ltd. Mizuho Securities Co., Ltd. Mizuho Trust & Banking Co., Ltd. Total 3-3, Marunouchi 1-chome, Chiyoda-ku, Tokyo 1-5, Uchisaiwai-cho 1-chome, Chiyoda-ku, Tokyo 5-1, Otemachi 1-chome, Chiyoda-ku, Tokyo 2-1, Yaesu 1-chome, Chuo-ku, Tokyo — Number of shares held 4,278,100 5,539,900 3,646,153 1,906,200 15,370,353 Shareholding ratio (%) 2.14 2.77 1.82 0.95 7.69 94 4. Epson stock price (1) High and low stock prices for the previous five years Year Fiscal year High (¥) Low (¥) 65th year March 2007 3,610 2,660 66th year March 2008 67th year March 2009 68th year March 2010 69th year March 2011 4,320 1,997 3,300 1,001 1,715 1,216 1,700 1,032 Note High and low stock prices noted above are based on the Tokyo Stock Exchange (First Section) data. (2) High and low stock prices for the previous six months Month October 2010 November December January 2011 February March High (¥) Low (¥) 1,362 1,240 1,493 1,283 1,523 1,363 1,555 1,354 1,423 1,309 1,457 1,032 Note High and low stock prices noted above are based on the Tokyo Stock Exchange (First Section) data. 95 5. Corporate data and investor information (1) Company name Seiko Epson Corporation (2) Founded (3) Head office May 1942 3-5 Owa 3-chome, Suwa, Nagano 392-8502, Japan Tel: -81-266-52-3131(main) (4) Tokyo office Shinjuku NS Building, 4-1 Nishishinjuku 2-chome, Shinjuku-ku Tokyo 163-0811, Japan Tel: +81-3-3348-8531 (5) Investor information Closing of accounts Regular general shareholders’ meeting Date for confirmation to shareholders of March 31 June the cash dividend payment date March 31 Date for confirmation to shareholders of the interim cash dividend payment date September 30 Transfer Agent Mizuho Trust & Banking Co., Ltd. 2-1, Yaesu 1-chome, Chuo-ku, Tokyo Agent’s Business Address: Head Office of Stock Transfer Agency Department Intermediary Offices: Mizuho Trust & Banking Co., Ltd. 2-1, Yaesu 1-chome, Chuo-ku, Tokyo Tel: +81-3-5213-5213 http://www.mizuho-tb.co.jp/english/ Branches of Mizuho Trust & Banking Co., Ltd Head Office and Branches of Mizuho Investors Securities Co., Ltd. Posting of Public Notices Public notices will be posted electronically. In the event of accidents or other circumstances preventing the electronic posting of information, such information will be made available through the Nihon Keizai Shimbun newspaper (Japanese) Web Address http://www.aspir.co.jp/koukoku/6724/6724.html (Japanese) 96 3-3-5 Owa, Suwa, Nagano 392-8502, Japan tel: +81-266-52-3131 http://global.epson.com 

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