annual report 2006 - yokogawa electric · gc1000 mark process gas chromatograph ph450g ph meter...
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New action strategies for growth
ANNUAL REPORT 2006For the year ended March 31, 2006
Yokogawa Electric Corporation
1A N N U A L R E P O R T 2 0 0 6
Industrial automation and control business
PAG
E 16
New
and other businessesP
AGE 20
Test and measurem
ent businessP
AGE 18
Cautionary Statement Regarding Forward-Looking StatementsStatements made in this annual report regarding Yokogawa's plans, estimates, strategies, beliefs, and other statements that are not historical facts, are forward-looking statements about thefuture performance of Yokogawa. These statements are based on management's assumptions and beliefs in the light of the information currently available to it and therefore readers should notplace undue reliance on them. Yokogawa cautions that a number of important factors, such as general economic conditions and exchange rates, could cause actual results to differ materiallyfrom those discussed in the forward-looking statements.
Contents02 Business Overview 06 Second Milestone of Corporate Strategy 10 New Businesses
12 To Our Stakeholders 16 Review of Operations 22 Global Operations
24 R&D and Intellectual Property 26 Corporate Social Responsibility 28 Corporate Governance
30 Global Network 32 History 33 Financial Section
65 Corporate Information
Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Founded in 1915, Yokogawa Electric Corporation (the Company) has devoted the past91 years to the measurement, control, and information businesses, and hascontributed to industry and to the well being of society. The Company has pushedforward with the VISION-21 and ACTION-21 corporate strategy, reaching its FirstMilestone in fiscal year 2005 with the completion of a structural reform phase andrecently making a fresh start toward the Second Milestone with the commencementof a growth phase.
Yokogawa will continue to take on new challenges with the aim of carrying out itsbusiness in a healthy and profitable manner.
As a company, our goal is to contribute to society throughbroad-ranging activities in the areas of measurement, control,and information.Individually, we aim to combine good citizenship with thecourage to innovate.
This emphasizes Yokogawa's focus on the customer's enterprise as ameans of providing optimum support.
Yokogawa is presenting the Enterprise Technology Solutions (ETS) business conceptto industry with the aim of becoming a global service company and ETS provider.
Customers can benefit from Yokogawa's latest and most sophisticatedtechnological services.
Yokogawa offers the solutions that best meet customers' expectationsand needs.
business overv iew
3A N N U A L R E P O R T 2 0 0 6
Production Control SystemsCENTUM distributed control systems for the control and monitoring of plantoperations have been delivered to some 18,000 projects in more than 75countries since this product series was first launched in 1975. Yokogawa hasalso recently released the ProSafe-RS safety instrumented system, which isdesigned to ensure plant safety in full integration with a plant’s productioncontrol system.
Field Instruments and RecordersField instruments are used on production lines to measure parameters suchas pressure, temperature, and flow rate. In addition to the DPharp EJAdifferential pressure transmitter and the ADMAG AXF magnetic flowmeter,Yokogawa supplies analytical instruments such as pH and conductivitymeters. The Company is also introducing paperless recorders that storemeasurement data in electronic form.
Production Support SolutionsYokogawa is expanding its software product lineup in the manufacturingexecution system (MES) domain, which is narrowing the gap betweencorporate management information and production information and therebyimproving the overall efficiency of management. We also develop processdata servers and production optimization software as well as equipmentdiagnosis systems, facilities maintenance and management systems, andother solutions that support safe plant operation.
Medical Information SystemsAt medical institutions, IT-based systems are rapidly being introduced aselectronic chart systems and electronic images captured by CT scanners,MRI systems, and other instruments enter wide use. Yokogawa is doing itsutmost to introduce information systems to medical institutions, making thebest use of the systems integration technologies it has developed in thecontrol systems sector. The Company has been a market leader in thedevelopment of image information systems that, along with electronic chartsystems and comprehensive medical examination systems, are helpingincrease efficiency at medical institutions.
Introduction phase Operation phase Migration phase
CorporateOperations
Corporate Production Management System
Management Information System
Production Site
Manufacturing Execution System (MES)Advanced Control, Simulation, Production Management, Scheduling
Enterprise Resource Planning (ERP)
Production Control
Field Sensors
Lifecycle Solution ProgramWe propose consistent solutions optimized for each lifecycle phase.
Corporate Management
Enterprise Production Management
Yokogawa’s comprehensive solutions
CENTUM CS 3000 R3 Integrated Production Control System
DXAdvanced Data Acquisition and Display Station
DPharp EJADifferential Pressure
Transmitter
GC1000 Mark ProcessGas Chromatograph
PH450GpH Meter ADMAG AXF
Magnetic Flowmeter
ProSafe-RS Safety Instrumented SystemFA-M3 R Range-freeMulti-controller
STARDOM Network-basedControl System
Medical ImageInformation System
ShadeQuest/DIAG Image Viewer
I N D U S T R I A L A U T O M AT I O N A N D C O N T R O L B U S I N E S S
2 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Business Overview
Industrial Automation and Control BusinessYokogawa developed the world’s first distributed production controlsystem for the control and monitoring of production operations atfacilities such as petroleum and petrochemical plants. With itsexcellent project execution capabilities, the Company has won theconfidence of customers and, as a leading company in the industrialautomation and control business, has supported the development ofindustries as varied as petroleum, petrochemicals, iron and steel,paper and pulp, pharmaceuticals, food, and electric power. TheCompany offers a comprehensive range of solutions including fieldinstruments such as differential pressure transmitters, flowmeters,and analyzers; the market leading CENTUM brand of distributedcontrol systems; and a variety of software tools.
The Company has in the past presented its businesses in four segments, namely, industrial automation and control, test andmeasurement, information systems, and aviation and industry support. However, this was changed to the following three segments infiscal year 2006: industrial automation and control, test and measurement, and new and other businesses. The Company integratedthe information systems segment into industrial automation and control and combined its new photonics, advanced stage, and lifescience businesses (formerly part of test and measurement) with aviation to create the new and other businesses segment.
Test and Measurement BusinessMeasurement is the starting point for any technology. With its longbackground in this field, Yokogawa is contributing to industry byproviding measuring instruments that convert values such as voltage,time, temperature, pressure, and wavelength into visible informationand analyze them. In the measuring instrument business, which isindispensable to the development and production of electrical andelectronic products, we offer a rich product lineup and are the topmanufacturer in Japan, with an extensive calibration and servicesystem. We also were an early entrant in the semiconductor testerbusiness and have developed products for the latest high-speed andhigh-performance semiconductors. We always offer the latest testsolutions.
New and Other BusinessesYokogawa has grown with its measurement, control, and informationtechnologies, and has used these to develop new technologies andproducts for a variety of applications. With product groups that arebased on the most advanced leading edge technologies, we are capableof meeting an extensive range of customer needs. These productsinclude aviation and marine equipment, magnetoencephalographs(MEGs) for clinical medicine applications, confocal scanners for thebiotechnology sector, XY stages used in the manufacturing of flat paneldisplays (FPDs), and optical communications devices supporting ultra-high speed and large capacity telecommunications.
business overv iew
5A N N U A L R E P O R T 2 0 0 6
Flat Panel Display forAviation Use
PQ1160C MEGVisionMagnetoencephalograph
Optical Modules 40Gbps OpticalPacket Switch
Large-Scale Precision XY Stage Direct Drive Motors
Aviation EquipmentYokogawa supplies monitoring equipment and sensors for aircraft enginesand fuel systems, leveraging its highly reliable proprietary technologies. Itshighly reliable, high-definition flat panel color LCDs are used in the cockpitsof the latest Airbus aircraft.
MagnetoencephalographsMagnetoencephalographs (MEGs) are devices that use a non-invasive, non-contact method to detect and observe the faint magnetic field generated byneuronal activity in the brain. The PQ1160C is a highly sensitive MEG thatuses a superconducting quantum interference device (SQUID), and it isutilized in the research of physiological and cognitive functions of the brainas well as in the clinical field.
Confocal ScannersConfocal scanners are laser microscopic systems that are used to observemovements of proteins or organs in live cells in real time, and they haveattracted considerable attention in the biotechnology field. The CSU22 is utilizedin state-of-the-art research, including observation of the movements ofproteins, clarification of biological phenomena, and new drug research.
Advanced StageYokogawa supplies a large-scale precision XY stage which accommodateseighth-generation (2,160 mm X 2,400 mm) mother glass substrates andprovides a common platform for various flat panel display (FPD)manufacturing systems. The Company also offers image quality inspectionsystems for FPDs and CMOS/CCD image sensors, as well as direct drivemotors, which are a core component of positioning systems.
Optical Communications Equipment For the backbone optical communications market, Yokogawa provides opticalcommunications modules and subsystems that use the latest compoundsemiconductor technologies. The Company has successfully conducted thefirst ever practical demonstration of image transmission with a 40Gbpsoptical packet network system, which achieves high speed, large capacitycommunications by switching the routes of optical signals. Yokogawa isstriving to put this network system onto the market during fiscal year 2006.
N E W A N D O T H E R B U S I N E S S E S
Confocal Scanner System
4 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Semiconductor Testers and HandlersTo satisfy the needs of customers in the rapidly changing semiconductorindustry, Yokogawa provides high-performance and highly functionalsemiconductor testers that are designed with the aim of lowering the cost oftesting various types of logic, mixed signal, and memory integrated circuits(ICs). The Company has a large share of the market for LCD driver testersused in the production of LCD panels and the market for wafer processmemory testers. We also have a wide-ranging lineup of handlers that, whencombined with a tester, can speedily and accurately sort defective ICs fromthose that meet specifications. Simulator software for verifying device testprograms and software for constructing online semiconductormanufacturing systems are also available. The Company aims to combinethese products to provide optimum test solutions. Furthermore, tostandardize test description languages and thereby reduce the length andcost of the IC development cycle, Yokogawa has formed a consortium withsemiconductor device manufacturers and related companies to promote theSTIL test description language.
Electronic Measuring InstrumentsYokogawa offers a variety of measuring instruments, including the basicdevices used to measure electrical current and voltage, electrical and opticalpower, and waveforms as well as internet protocol (IP) measuringinstruments. Its customers are manufacturers that are developing productsand investing in such fields as information appliances, electronic equipment,automobiles, mechatronics, telecommunications, and broadcasting. Inresponse to its customers’ requirements, the Company creates measuringinstruments using key components that have been designed in-house, thusdifferentiating itself from its rivals. In the digital oscilloscope, power meter,and optical communications measuring instrument categories, we have ahigh share of the global market. We have also delivered many transportstream (TS) integrated monitoring systems that monitor and recordbroadcasting data for terrestrial digital broadcasting, which is planned tocompletely replace analog broadcasting in 2011 in Japan. Thus, the Companyis helping to improve the quality of broadcasts.
T E S T A N D M E A S U R E M E N T B U S I N E S S
MT6121 Memory Test System
HS2000 Pick and PlaceIC Handler
TS6000H++ High-Speed SOC Test System
ST6730 FPD Driver Test System
DL9000 Digital Oscilloscope
AE5511 IP Traffic Generation Tester
TS Integrated Monitoring System
VC3300 WirelessCommunication Tester
WT3000 Precision PowerAnalyzer
AQ6370 Optical Spectrum Analyzer
Second Mi lestone of corporate strategy
7A N N U A L R E P O R T 2 0 0 6
GrowthPhase
Second Milestone ( A p r i l 2 0 0 6 - M a r c h 2 0 1 1 )
CorporatePhilosophy
OVERALL VISIONCommon Values
Principles of Management
Principles of Conduct
VISION-21
INITIATIVES
One Global YOKOGAWACustomer Centric Solutions
Leading Edge Technology
ACTION-21
While the path to the First Milestone was a structual reform phase aimed at establishing an earnings platform,the path to the Second Milestone is a growth phase intended to raise management efficiency and generate largeprofits using the platform established in the preceding phase. The Company will foster the new businesses inwhich it has invested.
Though there is no change in the framework of VISION-21 in the phase leading toward the Second Milestone,we have set a consolidated operating income target of 75 billion yen and a consolidated net sales target of 600billion yen for fiscal year 2010 under ACTION-21, and have worked out measures to achieve the targets. As a OneGlobal YOKOGAWA, with all Group companies operating in truly consolidated fashion, we will strive to realize aHealthy & Profitable Operation by dramatically improving management efficiency and providing CustomerCentric Solutions based on Leading Edge Technology.
6 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
VISION-21 & ACTION-21
CorporatePhilosophy
Structural Reform Phase
First Milestone ( J a n u a r y 2 0 0 0 - M a r c h 2 0 0 6 )
VISION-21
BUSINESS REFORMSTRATEGY
OverallBusiness Strategy
IndividualBusiness Strategy
ACTION-21
OVERALL VISIONCommon Values
Principles of Management
Principles of Conduct
STRATEGY FORGROUP MANAGEMENT
REVITALIZATIONDevelopment Based on
Consolidated Management
Development of Human Resources
Management Quality
To Realize Healthy & Profitable Operation
In January 2000, the Company announced the VISION-21 and ACTION-21 corporate strategy. With the target ofachieving consolidated operating income of 50 billion yen and consolidated net sales of 500 billion yen in fiscalyear 2005, the First Milestone for the strategy, Yokogawa has worked to reform its business and revitalize theGroup’s management.
To reform the business, measures have been implemented to expand orders in the worldwide industrialautomation and control markets, where expectations for growth are strong, and efforts have been made to boostprofitability through the improvement of management efficiency in this business. The Company has drasticallychanged its business structure by concentrating resources in markets that will prosper in the future and inbusinesses that are expected to grow, including semiconductors, optical communications, and life sciences.
To revitalize the Group’s management, the Company has worked to maximize consolidated income byimproving the infrastructure for the enhancement of its management base, including the reorganization andintegration of subsidiaries.
Yokogawa has changed greatly, though it has not yet attained the targets of the First Milestone. TheCompany has carried out management strategies to reform the business and revitalize the Group’smanagement, continues to take on challenges in new fields, and steadily invests in research and development tohone the technologies that will open up new possibilities in the future. As a result of these efforts, Yokogawa hasbeen able to establish a sound foundation for continued profitability.
PlanSecond Milestone of VISION-21 and ACTION-21corporate strategy announced
FY2007
FY2009
FY20102ND MILESTONE
FY2006ORDERS
SALES
OPERATINGINCOME
RETURN ON SALES
7.6%
¥420
¥410
¥31
ORDERS
SALES
OPERATINGINCOME
¥610
12.5%
¥600
¥75
RETURN ON SALES
FY2008
ORDERS
SALES
OPERATINGINCOME
RETURN ON SALES
¥500
¥490
¥55
11.2%
Planned for the three-year period fromfiscal year 2006 to 2008:
Achievement of fiscal year 2010 plan through developmentspending and capital expenditures in growth fields
billion
billion
billion
billion
billion
billion
billionbillion
billion
R&D investment:
Capital expenditures:
120 billion yen in total
110 billion yen in total
Second Mi lestone of corporate strategy
9A N N U A L R E P O R T 2 0 0 6
FY2003
FY2002
FY2001FY2000
FY2004 FY20051ST MILESTONE
¥500Target
¥388.9
SALESResult
OPERATINGINCOME
¥50 ¥25.3Target Result
RETURN ON SALES
10% 6.5%or more
Target Result
billion billion
billion billion
Grow
We will carry out three basic strategies to attain the targets set for the Second Milestone. To expand orders andsales for the achievement of the targets set for fiscal year 2010, we will aggressively increase research anddevelopment spending and capital expenditures in areas of growth. The Company will spend a total of 120 billionyen on research and development in the three-year period from fiscal year 2006 to 2008. An additional 110 billionyen will be spent on plants and equipment in the same period. The aim will be to achieve the profit plan.
Basic strategies.Operating in a truly consolidated manner to dramatically improve managerial efficiency.Boosting sales and profits not only in Japan, but on a global scale by increasing market shareworldwide
.Remaining committed to proactive technology development to create new demand and start up newbusinesses
New management strategies for growth
8 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
new businesses
11A N N U A L R E P O R T 2 0 0 6
Yokogawa aims to obtain a large share of the backboneoptical communications market by developing opticalmodules and subsystems based on its state-of-the-artcompound semiconductor technologies.
The Company has succeeded in developing an opticalpacket switch which switches the routes of optical signalswithout having to convert them to electric signals, pavingthe way for the early realization of optical packetnetworks. We are in effect creating the optical packetnetwork market ourselves, and it is expected to expandrapidly with its application to next-generation computers.
We are currently constructing the Sagamihara Officeas the development and production base for our photonicsbusiness, with a view to completing it in November 2006.
TandemThroughStage
PQ1160C MEGVisionMagnetoencephalograph
Confocal Scanner
Optical Module
40Gbps Optical Packet Switch Sagamihara Office(architectural drawing)
As a new product that prepares the way for larger flat paneldisplays (FPDs) and the expansion of the market, Yokogawahas developed TandemThroughStage, a next-generationplatform for liquid crystal manufacturing systems whichfunctions as a large-format, ultra-precise positioning deviceand as a transfer robot. It is capable of handling eighth-generation (2,160 mm X 2,400 mm) mother glass substrates.
We will lead the world in the large-format, ultra-precisestage business by merging the following three keytechnologies: the ultra-precise positioning controltechnology as used in direct drive motors, the high-performance control technology adopted for programmablecontrollers, and the image quality judging algorithmtechnology realized in the PowerEye image qualityinspection engine for FPDs and CMOS / CCD image sensors.
Yokogawa will also concentrate resources in the fields ofbrain science, which studies the function of the brain, andgenome science, which investigates cells and proteins. Wewill focus on establishing three new businesses: thebioinstrumentation business, centering on magneto-encephalographs that measure brain functions; thebusiness of confocal scanners, which can observemovements in live cells in three dimensions; and the newdrug discovery support business, which covers new drugresearch devices.
The Kanazawa Office was inaugurated in December2005 and all life science related businesses were movedthere in April 2006.
Kanazawa Office
10 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
CreateCreation of next-generation businesses
Three key new businesses forYokogawa’s future-Establishment of business base in promising markets
Yokogawa has won a worldwide reputation and a high marketshare in the industrial automation and control, and test andmeasurement sectors. However, to keep growing and tooptimize corporate value, it is vital to constantly develop newleading edge technologies and create new businesses that willbecome mainstay businesses in the next generation.Yokogawa will establish a solid business base in the marketsthat are expected to flourish in the future by making the mostof the measurement, control, and information technologiesthat it has fostered for many years. In addition, it willstrategically allocate resources to the photonics, advancedstage, and life science areas, and foster their growth so thatthey can generate profits and join industrial automation andcontrol, and test and measurement as mainstay businesses.
Creation ofNew
Businesses
LifeScience
AdvancedStage
Photonics
CORE TECHNOLOGIES
Control Measurement
Information
Photonics– optical communications market
Advanced Stage – semiconductor/liquid crystal-related markets
Life Science – brain science/genomic science markets
to our stakeholders
13A N N U A L R E P O R T 2 0 0 6
remarkably thanks to the single-minded efforts ofall employees who took on the challenge ofachieving high targets. We believe that we havebeen able to build a company that is assured ofbeing profitable while also honing the technologiesthat will open up many possibilities in the future.The Group has finished establishing a base uponwhich a healthy and profitable operation can berealized.
Yokogawa positions the five-year period from fiscalyear 2006 to 2010 as the Second Milestone phase ofVISION-21 and ACTION-21. Though there will be nochange in the framework of VISION-21, we havereset concrete quantitative targets for the ACTION-21 strategy, with fiscal year 2010 as the SecondMilestone of a renewed effort to attain the targets.
While the five-year period leading up to the FirstMilestone was a structural reform phase aimed atestablishing a basis for generating earnings, thefive-year period from fiscal year 2006 is a growthphase in which we intend to use this establishedbasis to increase sales significantly. To turn a profitvery efficiently, we rely on the following three basicstrategies:.Operating in a truly consolidated manner todramatically improve managerial efficiency
.Boosting sales and profits not only in Japan, but ona global scale by increasing market shareworldwide
.Remaining committed to proactive technologydevelopment to create new demand and start upnew businesses
One Global YOKOGAWA, Customer Centric
Isao UchidaPresident and Chief Executive Officer
Yokogawa willcontinue to
advance as itfocuses on
achieving theSecond
Milestonetargets.
12 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Advance
In January 2000, the Yokogawa Group announcedthe VISION-21 and ACTION-21 corporate strategyfor achieving a healthy and profitable operation.Since then, we have been working to reform ourbusiness and revitalize the Group’s management. Infiscal year 2005, the First Milestone of the strategy,we were able, at the consolidated level, to realize a0.5% increase from the previous year in net sales to¥388.9 billion, a 2.3% increase in operating incometo ¥25.3 billion, and a 130% increase in net incometo ¥21.6 billion thanks to a good showing from ourindustrial automation and control business. Thus,the Yokogawa Group set records in net sales as wellas operating income for the third straight year.
Through a massive effort to realize VISION-21 andACTION-21, the Company was able to build a basisfor continued growth, but the quantitative target setfor the First Milestone, an operating income of ¥50billion in fiscal year 2005, has not yet been achieved.
To reform our business structure, weimplemented measures aimed at expanding orders
in the worldwide industrial automation and controlmarkets, which are expected to grow, while makingefforts to boost profitability through theimprovement of management efficiency in thisbusiness. We have drastically changed the businessstructure by concentrating resources on marketsthat will prosper in the future and businesses thatare expected to grow, including semiconductors,optical communications, and life sciences.
Specifically, the Company dissolved and soldjoint ventures in a bid to concentrate resources inspecific business areas. The profits realized on thesale of these operations were used for the growthof existing businesses and for investment in newbusinesses. The Company pushed forward with itsintegration with Ando Electric Co., Ltd., realignedthe production system on a global scale, enhancedthe sales organization with a watchful eye on worldmarkets, and pursued a drastic expansion in salesand income through the Matoi Project. Yokogawaalso launched new businesses including thephotonics business, which covers optical modulesand subsystems, the advanced stage business,centering on ultra-precise positioning technologies,and the life science business, which deals inmagnetoencephalographs (MEGs) and confocalscanners.
We made major efforts to improve theinfrastructure needed to revitalize the Group’smanagement and maximize consolidated income.Specifically, we pursued efficiency by reorganizingGroup companies, introducing a remunerationsystem based on contribution to added value,changing to a defined-contribution pension plan,and streamlining the headquarters organization.We also did our utmost to strengthen systemsrelated to corporate governance and compliance,aiming for the Group to retain the trust of society.
Through such efforts, consolidated net salescontinued to increase after bottoming out in 2001when the information technology (IT) bubble burst.The Group posted record operating income forthree straight years, fiscal years 2003 to 2005, andwe also improved our balance sheets, including thedebt equity (D/E) ratio. Yokogawa has changed
Structural reformfor the
achievement ofthe First Milestone
targets hascreated a basis for
growth.
Yokogawa is entering a new phase as it achievesa healthy and profitable operation
to our stakeholders
15A N N U A L R E P O R T 2 0 0 6
capabilities of Yokogawa. In the communicationsand measurement instrument business, we willintensively allot development resources to marketsthat are expected to expand in the years leading upto 2010; these include the mechatronics and energymarket, the electronics and semiconductor market,and the communications and network market.
In our newly created new and other businessessegment, we will actively work to develop variousbusinesses that will become a source of futureearnings for the Yokogawa Group.
In the photonics category, we will establish abackbone optical communications business. Weaim to expand our share of this market bydeveloping and providing optical modules andsubsystems that are based on leading edgecompound semiconductor technologies that wehave developed over the past 25 years. We will alsoestablish an optical packet network business inanticipation of this technology’s rapid introductionwith next-generation computers.
In the advanced stage category, Yokogawa willfocus on large-scale precision positioning devices(XY stages) that provide a common platform for the
manufacturing of liquid crystal displays andsemiconductors and which are based on key high-precision positioning, high-performance control,and image quality inspection algorithmtechnologies.
In life sciences, Yokogawa integrated itsbioinstrumentation, confocal scanner, and newdrug discovery support divisions at its KanazawaOffice in a bid to increase the synergistic effects ofeach business. Positioning the office as a veryimportant base of operations for the life sciencebusiness, we will concentrate resources on thebrain science and genomic science fields.
Yokogawa will accelerate its activities toimprove the operational efficiency of the entireGroup to maximize consolidated income andcorporate value. We ask for the continuedunderstanding and support of our stakeholders.
Yokogawa willcontinue striving to
maximizecorporate value
and meetstakeholders’expectations.
Isao UchidaPresident and Chief Executive Officer
14 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Solutions, and Leading Edge Technology are thethree key phrases. This is the One GlobalYOKOGAWA with all Group companies operating intruly consolidated fashion and striving to provideCustomer Centric Solutions through Leading EdgeTechnology that opens up future possibilities.
As quantitative targets, Yokogawa aims forconsolidated operating income of ¥75 billion and a
return on sales of 12.5% in fiscal year 2010 – theSecond Milestone. To that end, the Company willtarget consolidated operating income of ¥31 billionand consolidated net sales of ¥410 billion in fiscalyear 2006, the first fiscal year of the phase leadingtoward the Second Milestone, and consolidatedoperating income of ¥55 billion and consolidatednet sales of ¥490 billion in fiscal year 2008, themiddle fiscal year of this phase.
To attain the quantitative targets set for fiscalyear 2010, Yokogawa will aggressively invest ingrowth fields. We plan to spend ¥120 billion onresearch and development and to make ¥110 billionin capital investments over the three-year periodfrom fiscal year 2006 to 2008. In our industrialautomation and control business, we will invest indevelopment of strategic products targeting theglobal market. In the test and measurementbusiness, we will reinforce our semiconductortester product lineup. And regarding the new andother businesses segment, we will aggressivelyallocate investment to the photonics, advancedstage, life science, and other businesses that
promise to become next-generation mainstaybusinesses for Yokogawa. We will also efficientlyinvest in research and development mainly in suchcategories as micromachine technologies,ubiquitous computing, and optical communications.
Yokogawa aims to become a global servicecompany that provides Enterprise TechnologySolutions (ETS), a business concept that focuses onenhancing customers’ management efficiency byresolving specific management issues from theirviewpoint. With this concept to guide us, each of ourbusiness headquarters will continue to boldly takeon new challenges.
In the industrial automation and controlbusiness, we will continue to proactively grow, witha view to becoming the top company in the globalmarket by 2010. By capitalizing on our capabilitiesto propose solutions and on the reliability of ourproducts, we will strive to expand our market sharein Japan, where not only robust replacementdemand, but also new plant investment is expectedfor production expansion and improvement ofefficiency. In markets outside of Japan, theVigilance marketing campaign has made extensiveinroads, emphasizing Yokogawa’s businessapproach of supporting customers’ plants aroundthe clock, 365 days a year. And to establish itsVigilantPlant concept for helping customers achievethe ideal plant, Yokogawa will drive forward productdevelopment and enhance competitiveness withthree initiatives for Production Excellence (therealization of production innovation), AssetExcellence (the maximum utilization of assets), andSafety Excellence (ensuring safety at plants).
In our test and measurement business, we willfurther strengthen the competitiveness of theautomatic test equipment (ATE) business andenhance its product lineup. The improvement oftesting is a major challenge facing our customers.To help our customers, we will build a test solutionbusiness model that improves the overallsemiconductor testing process, from designenvironment and application to service andmaintenance, by fully utilizing the comprehensive
Yokogawa aims tobecome a globalservice companyand ETS provider.
rev iew of operat ions
17A N N U A L R E P O R T 2 0 0 6
Yokogawa receives a sudden call from a plant, a green light comes on, and an operatorenters data on a keyboard.
The hands of the clock at the Global Response Center point to two o’clock in the morning.
Vigilance is all about keeping a close watch, never sleeping, so that customers’ plants neverneed to shut down. This is Yokogawa’s commitment to customers and its mission. Yokogawa ison the job around the clock, throughout the year, so that no electricity, petroleum, gas, or anyother type of plant will ever have to cease operations, not even for a moment. Yokogawa’shighly reliable CENTUM distributed process control system features 99.99999% availabilityand is enabling stable operations at plants all over the world. If an emergency were ever tooccur, the Global Response Center would back up the system and its experienced operatorsand engineers would provide all possible support. Industries and people worldwide depend onYokogawa to keep their plants running, and this is a mission that we are committed tocarrying out.
I N D U S T R I A L A U T O M AT I O N A N D C O N T R O L B U S I N E S S
Outlook and strategic initiativesYokogawa takes a proactive stance in its business and is seton becoming the top company in the industrial automationand control business by the year 2010.
In markets worldwide, where large-scale projects areplanned one after another, Yokogawa has gained widerecognition and an excellent reputation for reliability, andthis is due in part to the effectiveness of the Vigilancemarketing campaign in communicating the Yokogawabusiness approach. The Company is now acting on thisopportunity by enhancing its global development capabilitythrough the expansion of its software package developmentoperation at the Singapore Development Center, with theaim of capturing a larger share of the market. Yokogawawill also reinforce its engineering system in Singapore, theMiddle East, China, North America, and Europe.
In China, where business is expanding rapidly,Yokogawa has established Yokogawa China Co., Ltd. in
Shanghai to oversee all sales, engineering, and servicefunctions, including those of joint ventures. The Companywill aggressively invest its resources, targeting a 30% orhigher share of China’s industrial automation and controland measurement instrument markets and sales of ¥120billion by 2010.
In the Japan market where many plants are beingreplaced with new ones, Yokogawa will push forward withconsulting services to resolve specific issues from thecustomer viewpoint, while proposing comprehensivesolutions that add value for its customers and help themrealize ideal plants.
In fiscal year 2006, Yokogawa has integrated theinformation systems business into its industrial automationand control business segment, and is developing it as oneof the solutions in this segment.
16 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
RespondSupporting customers around the clock, 365 days a year
Overview of business resultsIn the global market, active investment in large petroleum,petrochemical, and natural gas plant facilities continuesdue to increased energy demand and sharp rises in crudeoil prices. In this operating environment, a positive cyclehas been created in which the reliability of Yokogawaproducts and the Company’s extensive project executioncapabilities lead to many project orders, and the resultinghigh evaluation of its project performance produces ordersfor additional projects. In the Middle East, where businessis expanding particularly rapidly, Yokogawa has won ordersfor large plants at Khursaniyah, Hawiyah, and Juaymah inSaudi Arabia as well as an ultra-large petrochemical plantat Rabigh, also in Saudi Arabia. The Company has alsoreceived orders for petroleum refining and natural gasplants in Bahrain and the United Arab Emirates.
In China, an important region in Yokogawa’s globaloperations, a petrochemical complex in Huizhou,
Guangdong Province, has come on stream that uses theCompany’s industrial automation and control systems.Yokogawa will support stable operations throughout thelifecycle of the plant, under a long-term maintenancecontract.
Meanwhile, in the Japan market, replacement demandmainly from the basic materials industry has remained firmand investment to increase the efficiency of existingproduction facilities has moved into high gear. Yokogawahas made every effort to strengthen its earnings base byenhancing its profit management system for each project,while working hard to win orders.
With regard to information systems business, theCompany has focused resources on solutions formanufacturers, an area in which it can make best use of itsstrengths.
CNOOC and Shell Petrochemicals Co., Ltd. in China uses Yokogawa control systems
rev iew of operat ions
19A N N U A L R E P O R T 2 0 0 6
Information appliances are convenient and make our lives more comfortable, andstate-of-the-art semiconductors are important components in these products.Yokogawa’s automatic test equipment (ATE) tests these semiconductors.
People’s lifestyles have become more convenient and comfortable thanks to advancedinformation appliances. For instance, the global positioning system (GPS) functions built intocellular phones can be used to determine the whereabouts of children, people can useremote-control units to turn on their hot water boilers or air conditioners while they are ontheir way home, and the latest films can be enjoyed on large-screen television sets.Semiconductors are a core technology that help make this all possible, and this technology isadvancing at a surprisingly rapid pace. Yokogawa’s leading edge technologies have beenapplied in our semiconductor testers and they play an important role of measuring the qualityand performance of semiconductors at all stages from design and development to massproduction.
It is also necessary during the development and production of information appliances tomake sure that electronic circuits operate as specified and to measure how much electricitythey consume. Yokogawa plays a supporting role that is helping make people’s lives easier byproviding the electronic measurement instruments that are used in the development andproduction processes. The Company will continue to speedily develop test and measurementproducts that meet its customers’ needs.
T E S T A N D M E A S U R E M E N T B U S I N E S S
Outlook and strategic initiativeIn the semiconductor tester business, Yokogawa will makeevery effort to expand its market share among existingcustomers and acquire new customers by focusingdevelopment on system LSIs used in informationappliances and cellular phones, testers for LCD driver ICs,and testers for memory ICs, and will launch new productsin a timely manner that meet customers’ testing needs.Yokogawa will continue to reinforce its capability topropose solutions for all semiconductor test processesranging from the semiconductor design environment toservices, and will work to expand its businesses aroundthe world.
In the communications and measurement business,Yokogawa will concentrate its resources on priority sectorsand accelerate development by making the most of leadingedge measurement and semiconductor technologies. TheCompany will expand operations, targeting the
mechatronics market, which is rapidly growing due toincreasing use of electronics in automobiles; the alternativeenergy market; the electronics and semiconductor market,which is expanding as the use of information appliancesincreases; and the communications and network market,where demand is expected to grow rapidly thanks to thefull-scale introduction of next-generation communications.
18 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
RespondQuick response to customer needs
Overview of business resultsIn the test and measurement business, while Yokogawahas seen orders and sales grow due to the robust LCDdriver tester market, the overall semiconductor testerbusiness has faced harsh conditions because the pace ofsales growth for the mainstay memory testers has slowed.Under these circumstances, Yokogawa has enhancedproduct competitiveness by putting the MT6121 memorytest system and other products on the market while alsostriving to enhance its capability to propose solutionscovering the entire semiconductor test process. Theseinclude a virtual environment that raises efficiency inprocesses ranging from development to prototypemanufacturing, solutions that improve test efficiency in themass production process, and services.
In the communications and measurement instrumentbusiness, the Company has worked to enhance its salesand development systems to promptly reflect the needs of
customers in product development. There have been signsof a slow recovery in the mainstay optical communications-related market. As a result, orders and sales of opticalcommunications-related measurement instruments are onthe rise.
rev iew of operat ions
21A N N U A L R E P O R T 2 0 0 6
N E W A N D O T H E R B U S I N E S S E S
Creation of new businesses with measurement, control, and information technologiesfostered over 90 plus years. Yokogawa will keep taking on new challenges.
Measurement and control, the accurate assessment and manipulation of substances andphysical phenomena, plays a key role in all sciences and technologies. Yokogawa has fosteredleading edge measurement and control technologies throughout its 90 year history. When thesetechnologies are combined, there is no limitation in the number of new businesses that can becreated. For instance, we have developed a highly sensitive magnetic sensor for amagnetoencephalograph (MEG) that can detect the faint magnetic field generated by the humanbrain. Another example is compound semiconductors, which have been developed to accuratelymeasure very high-speed phenomena and have become the basis for the world’s most advancedoptical modules. Motors that are used to accurately move robots and machinery have also beenapplied to the ultra-precise positioning devices used in LCD manufacturing systems, whichrequire precision machining.
Yokogawa will pursue measurement and industrial automation and control technologies,taking on the challenge of opening up new markets.
Outlook and strategic initiativeIn the aviation instrument business, Yokogawa will activelytap both private-sector and existing public-sector demand.
In the photonics business, we will strive to boost salesin the backbone optical communication market throughthe commercialization of next-generation optical modulesand optical communications subsystems, while expandingthe base of the optical packet network business, which isexpected to see rapid growth in demand as this technologyis applied to next-generation computers.
In the advanced stage business, Yokogawa will workhard to increase its market share in the LCD andsemiconductor manufacturing fields, utilizing its worldleading technologies including high precision positioningtechnology, high-function and high-performance controltechnology, and image processing algorithmic technology.
In the life science business, which covers MEGs andnew drug discovery support systems, we will aggressively
allocate resources to and concentrate our energies on thedevelopment of markets.
20 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
RespondDeveloping new businesses to meet marketexpectations
Overview of business resultsYokogawa aims to further develop the aviation instrumentbusiness by aggressively responding to private-sectordemand, focusing on flat panel displays for Europe’sAirbus.
To develop our life science-related businesses such asmagnetoencephalographs (MEGs) for examining brainfunctions, and confocal scanners for observing themovements of live cells in real time, we have relocatedthem to the newly constructed Kanazawa Office, whichstarted operations in January 2006.
For our photonics business, which centers on the 40Gbps optical modules and optical packet networks that arekey technologies for realizing next-generation opticalcommunications networks, the Company is driving forwardwith the commercialization of products in anticipation of afull start-up of the market. To further develop thephotonics business, in December 2005 Yokogawa started
construction of a new office in Sagamihara, KanagawaPrefecture, that is equipped to perform both thedevelopment and production functions, and this is slatedfor completion at the end of November 2006.
To meet the needs of the growing market for flat-screen televisions and other flat-panel displays, Yokogawahas developed TandemThroughStage, a large-scale,precision XY stage that accommodates eighth-generation(2,160 mm X 2,400 mm) mother glass substrates andfeatures a built-in transfer robot function.
global operat ions
23A N N U A L R E P O R T 2 0 0 6
Sales by Geographic Area (March 2006)
53.2%
24.6%
8.8%
5.5%
JapanAsiaEuropeNorth AmericaOther Areas
7.9%
Sales by Customer Location (North America)
03/3 04/3 06/3
40
30
20
10
0
19.918.9
Billions of yen
21.4
05/3
18.2
Sales by Customer Location (Europe)
03/3 04/3 06/3
40
30
20
10
0
34.3
05/3
34.635.2
26.6
Billions of yen
Sales by Customer Location (Other Areas)
03/3 04/3 06/3
40
30
20
10
0
30.5
05/3
15.816.316.3
Billions of yen
Sales by Customer Location (Asia)
03/3 04/3 06/3
120
100
80
60
40
20
0
95.7
05/3
109.6
54.6
86.8
Billions of yen
03/3 05/304/3 06/3
250
200
150
100
50
0
50
40
30
20
10
0
Billions of yen %
Sales Outside Japan
181.9178.2
46.1
158.3
116.4
46.842.6
35.4
Sales outsideJapanAs a percentageof consolidatednet sales
G L O B A L O P E R AT I O N S
Establishing global manufacturing,engineering, and service infrastructureYokogawa is establishing global manufacturing, engineering,and service infrastructure to raise the operating efficiency ofthe entire Yokogawa Group and provide customers aroundthe world with optimum solutions. We have established aglobal manufacturing network that enables us to producethe right products in the right places and which secures astable supply of competitive, high quality products. We areraising our engineering efficiency through the optimumdistribution of engineering resources and the improvementof productivity, with the Global Engineering Center as thecore. To further enhance our engineering capabilities, in thefiscal year ended March 2006 we established an engineeringcompany in the United Arab Emirates and in Bahrain, and weare also setting one up in Saudi Arabia. To strengthenengineering, we also expanded our facilities and resources inHouston, Texas, a world center for the energy industry, and a
new office was constructed for Yokogawa Electric Korea Co.,Ltd.
We have service networks around the world. Our coreGlobal Response Center in Japan provides around-the-clockcustomer support 365 days a year. We also have responsecenters in seven other countries.
In addition to our highly reliable products, ourcomprehensive capabilities in such areas as manufacturing,engineering, and service are helping Yokogawa increase itsmarket share worldwide. Many large internationalconstruction projects are planned and Yokogawa iscontinuing to do its utmost to increase orders and providehigh value-added solutions to customers around the world,with a view to becoming the top company in the industrialautomation and control business by 2010.
22 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
LeadAiming to become a top global company
Continually growing sales outside JapanWith 82 group companies operating in 31 countries aroundthe world, Yokogawa operates globally. The proportion ofthe Company’s business that is conducted outside Japanhas been increasing every year. In the fiscal year endedMarch 2006, sales outside the country accounted for 46.8%of consolidated net sales.
With regard to the industrial automation and controlbusiness, large plants are being constructed worldwidemainly in the petroleum, petrochemical, and natural gassectors. Our Vigilance marketing campaign has beensuccessful at communicating Yokogawa’s commitment tohelping its customers create added value over the longterm through the provision of high quality and highlyreliable products and services. Our clients around theworld hold us in high esteem for the reliability of ourproducts, our extensive capabilities for carrying outprojects, and the accuracy of our systems solutions.
During the fiscal year under review, we have won ordersfor an ultra-large petroleum plant in Rabigh, Saudi Arabia,and for oil refining and natural gas plants in Bahrain andthe United Arab Emirates.
In our test and measurement business, sales of LCDdriver testers have grown thanks to the expansion ofdemand for information appliances such as LCD televisionsets and cellular phones.
Control room for a CNOOC and Shell Petrochemicals plant that uses Yokogawa control systems
R&D and inte l lectual property
25A N N U A L R E P O R T 2 0 0 6
40
30
20
10
0
8
6
4
2
0
Billions of yen %
Core technologies.Test and measurement technologies.Industrial automation and control technologies.Information systems technologies
Productdevelopment
BusinessHeadquarters/
Affiliates
R&D investment / R&D investment to net sales
Incubation
Corporate R&DHeadquarters
Advancedtechnologies.Sensing technologies.MEMS technologies.IPv6 technologies.Security technologies
Commontechnologies.Electronic devicetechnologies
.Network technologies
Commontechnology
developmentResearch
New business
CorporateMarketing
Headquarters
Patent
Utility model
Design
Trademark
Total
TotalRegis-tration
1,955
90
164
717
2,926
Appli-cations
2,929
0
7
33
2,969
Subtotal
4,884
90
171
750
5,895
Regis-tration
720
-
-
358
1,078
Appli-cations
In Japan Outside Japan
590
-
1
82
673
Subtotal
1,310
0
1
440
1,751
6,194
90
172
1,190
7,646
Registrations and applications for patents and other intellectual property rights (as of March 31, 2006)
Functions and roles of R&D
02/3 03/3 04/3 05/3
27.0
7.3
25.2
7.7
29.0
7.5
30.9
8.0
06/3
19.2
6.2
R & D A N D I N T E L L E C T U A L P R O P E R T Y
Intellectual property strategiesYokogawa has developed a three-prong strategy, buildingon its intellectual property, R&D, and business strategies.When we start up new businesses, we seek to createhighly competitive next-generation technologies and toquickly patent these as intellectual property. As for theexisting businesses, we are working to secure thepredominance of products and improve our brandrecognition.
Because Yokogawa operates in a global market, westarted early on aggressively acquiring such intellectualproperty as patents and trademarks internationally, andhave been devoting ourselves to activities to promoteinternational standardization. While taking the lead indisclosing our intellectual property to make Yokogawaproducts and services well known worldwide, therebysecuring a strong position for our business, we are alsocontributing to the formation of sound markets.
Yokogawa has established Invention Handling Regulations,an in-house system related to intellectual propertyactivities. Under this system, aimed at preventingcompensation disputes over inventions and offering properincentives for employees to come up with inventions, wepay rewards to inventors when a patent is applied for andwhen it is registered, and we pay bonus money if the patentmakes a remarkable contribution to our income.
We held 1,955 patents in Japan and 720 patents outsideJapan as of March 2006.
24 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
SeekPursuing leading edge technologies,with an eye on the future
Research and development activitiesTo provide leading edge “mother tools” and basictechnologies to industry, Yokogawa recognizes that thefuture-oriented development of new technologies is one ofits most important management challenges. The Companyis seeking to develop technologies for the core domains oftest and measurement, industrial automation and control,and information systems. Yokogawa is focused ontechnologies that can guarantee high reliability andperformance over the long term.
The Group’s research and development operation isclassified by functions. Our Corporate R&D Headquartersis responsible for research on leading edge technologiesand common basic technologies, and it also shares withthe Corporate Marketing Headquarters the task ofincubating technologies for their commercialization. Theother business headquarters and our Group companiesare also involved in conducting R&D to enhance existingproducts and assist the solution business.
Various Yokogawa technologies entered practical use inthe fiscal year ended March 2006. In June 2005 wesucceeded in an experiment that demonstrated for the firsttime the practicality of using an optical packet network forthe transmission of image data, paving the way forubiquitous computing through the realization of ultra-highspeed, large capacity communications. We also developedthe TandemThroughStage next-generation platform inNovember 2005 to improve the liquid crystal panelmanufacturing process. Among other new products thatwe have released are the MT6121 memory test system; theAQ6370 optical spectrum analyzer; and the ASTREAAM1000, a first for Yokogawa that achieves advancedsecurity by controlling people’s access to buildings.
We spent a record 30.9 billion yen on research anddevelopment in the fiscal year ended March 2006, and thiscame to 8% of net sales. We plan to invest 38 billion yen, or9.3% of net sales, in R&D activities in the current year.
corporate socia l responsib i l i ty
27A N N U A L R E P O R T 2 0 0 6
C O R P O R AT E S O C I A L R E S P O N S I B I L I T Y
Solar energy generation system on the roof of a building in thecorporate headquarters
Inspection line at the Kofu Factory of Yokogawa ManufacturingCorporation, which succeeded in reducing its use of tap water
Commendation ceremony of the third JSEC
The first fuel-cell powered motorbike granted a license plate inJapan - made by Sumida Tech High School
Contributing to societyIn keeping with its corporate social responsibilities,Yokogawa is contributing to society through its operationsand by carrying out philanthropic activities. We are fulfillingour responsibilities as a good corporate citizen throughvarious activities both in Japan, where we areheadquartered, and in other countries around the worldwhere we have established operations.
Since 2004, we have been helping develop humanresources for the future of science and technology bysupporting the Japan Science & Engineering Challenge(JSEC), a science and technology research contest heldunder the auspices of The Asahi Shimbun Company.
To commemorate the 90th anniversary of our founding,in the fiscal year ended March 2006 we held a Friendshipand Appreciation Festival on the grounds of our head officeand hosted a chamber music concert by members ofVienna Philharmonic Orchestra, to which 200 citizens of the
city of Musashino were invited. We also supported thehealthy growth of young people by lending measuringinstruments and sending engineers to help a class ofstudents at Tokyo’s Sumida Tech High School measure theelectrical output of a fuel-cell powered motorbike.
With regard to philanthropic activities in othercountries, Yokogawa donated eight ADMAG AXF magneticflowmeters, which had been produced at Yokogawa ElectricChina Co., Ltd., to the Shanghai Institute of Measurementand Testing Technology, a Chinese public measurementstandard institution. We also donated 10 million yen to theAmerican Red Cross to help victims of Hurricane Katrina,which had hit the southern part of the U.S.
Yokogawa will continue to actively carry out corporatesocial responsibility activities in the belief that harmonywith society is an important issue for a corporate citizen.
26 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
CareBuilding good relations with society
The Company-sponsored Rugby Festival in Musashino
Promoting environmental managementThe environmental management of the Yokogawa Grouprests on three pillars: conducting environmental impactreduction activities to raise operating efficiency byeliminating any waste of resources and energies within theGroup, easing environmental impact on customers byproviding environmental solutions and environmentallysound products, and each employee of Yokogawa striving tocarry out and expand environmental conservation activitiesas a good corporate citizen.
To reduce the impact our operations have on theenvironment, in fiscal year 2000 we began using Eco-Point(EP), an index for calculating our environmental impact.This index enables us to correctly understand the impact ofour operations on the environment and accurately takemeasures to cope with this.
While pushing forward with the development andmanufacturing of products that safeguard the environment
by establishing a guideline for environmentally friendlyproducts and six other design guidelines, Yokogawa ispromoting the reduction of hazardous chemical substancesand aims for zero emissions, recycling more than 99% of itswaste.
In the fiscal year ended March 2006, we strived to slashCO2 emissions through conservation of energy as part ofour activities to help prevent global warming. For instance,we took part in the “Team Minus 6%” global warmingcampaign in Japan intended to achieve the goal to cutgreenhouse gas emissions by 6% from 1990 levels under aprovision contained in the Kyoto Protocol. In its greenproduction line improvement activities, the Kofu Factory ofYokogawa Manufacturing Corporation reduced the amountof tap water used to inspect products by about 84 metrictons a year, a 75% reduction.
corporate governance
29A N N U A L R E P O R T 2 0 0 6
Directors, Corporate Auditors, and Officers (as of June 23, 2006)
Hidehiko BandoSenior Vice PresidentAerospace Products Business Headquarters
Akihiko AnyoujiSenior Vice PresidentAdvanced Stage Business Headquarters
Hiroyuki TanakaSenior Vice PresidentSourcing & Manufacturing Business Headquarters
Masahiro OtsukaVice PresidentTarget Costing Headquarters
Toshiki OkuzumiVice PresidentQuality Assurance Headquarters
Toshiro TomitaVice PresidentIndustrial Solutions Business Headquarters
Kiyoaki OkinoVice PresidentAudit and Compliance Headquarters
Kazutomo NishimuraVice PresidentIndustrial Solutions Business Headquarters
Takashi YoshidaVice PresidentCommunications and Measurement Business Headquarters
Hiroshi YuharaVice PresidentIndustrial Automation Business Headquarters
Sumihide MatsumotoVice PresidentIndustrial Solutions Business Headquarters
Yasunori KawataVice PresidentATE Business Headquarters
Shuuhei SakunoVice PresidentManagement Administration Headquarters
Tomoatsu ShibataVice PresidentATE Business Headquarters
Nobumasa HamaguchiVice PresidentIndustrial Solutions Business Headquarters
Shin-ichi TakigishiVice PresidentLife Science Business Headquarters
Kazumichi MurakamiVice PresidentIndustrial Automation Business Headquarters
Toshiaki ShiraiVice PresidentIndustrial Automation Business Headquarters
Akira MiuraVice PresidentPhotonics Business Headquarters
Satoru KurosuVice PresidentIndustrial Automation Business Headquarters
Isao UchidaPresident and Chief Executive Officer
Fumio Mizoguchi
Teruyoshi MinakiDirector
Executive Vice PresidentInternational Business Headquarters
Taiki Utsumi Takahide Sakurai* Toru Hashimoto* Shigeru Hikuma*
Takashi FujiiDirectorSenior Vice PresidentATE Business Headquarters
Shuzo KaihoriDirectorSenior Vice PresidentIndustrial Automation Business Headquarters
Junji YamamotoDirectorSenior Vice PresidentCorporate Marketing Headquarters
Yoh NarimatsuDirector
Masahisa NaitoOutside Director
Directors
Officers
CorporateAuditors
Akira NagashimaDirector
Executive Vice PresidentCorporate Research and Development Headquarters
Kazunori YagiDirector
Executive Vice PresidentManagement Administration Headquarters
Kazuhiko KimuraDirector
Executive Vice PresidentIndustrial Solutions Business Headquarters
*Outside Corporate Auditors
28 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Board of Directors Accounting Auditors
President
Management Board
Corporate FunctionsVice Presidents
Quality Management
EnvironmentalManagement
Risk Managementand
ComplianceSystem
Export Compliance
Safety andHealth Control
InformationSecurity Management
Business Ethics
Crisis Management
Business Headquarters/Subsidiaries
Internal AuditDepartments
G e n e r a l S h a r e h o l d e r s M e e t i n g
Board of Corporate Auditors
Corporate Governance Structure
Election / Removal
Instructions / Orders / Supervision
Audit / Supervision
Cooperation / Report
Corporate Governance
Aiming to increase efficiency and transparencyof managementAs its basic policy of corporate governance, Yokogawarecognizes the importance of improving managementefficiency and transparency, and maximizing corporatevalue for shareholders and other stakeholders.
The board of directors comprises 10 directors, includingone outside director. As a management decision-makingorgan, it formulates the management policies and strategiesof the overall Yokogawa Group, and monitors and supervisesexecution of duties. We have introduced a corporate officersystem to speed up the execution of day-to-day operationsand clarify responsibilities. To improve managementefficiency, we are striving to grasp managementinformation in a timely manner and to upgrade themanagement information system.
Our board of corporate auditors is composed of twointernal and three outside corporate auditors. Corporate
auditors hold regular meetings with accounting auditorsand the internal audit departments, and audit thedirectors’ execution of their duties. Under the directcontrol of the president, the internal audit departmentsmonitor companies of the Group and report on the state ofinternal auditing to the board of directors and the board ofcorporate auditors.
With regard to compliance, we have established aStandard of Business Conduct for the Yokogawa Group,and are working to communicate our management stanceand emphasize the importance of compliance througheducation and training. We have also set up an internalreport system, expanding compliance Group-wide.
global network
31A N N U A L R E P O R T 2 0 0 6
Production Sales Engineering Others
Yokogawa Corporation of America
Yokogawa USA Inc.
Kokusai Chart Corporation of America
Yokogawa Trading USA Inc.
Yokogawa Canada, Inc.
Yokogawa America do Sul Ltda.
Yokogawa Service S.A.
Yokogawa Europe B.V.
Yokogawa Nederland B.V.
Yokogawa System Center Europe B.V.
Yokogawa GesmbH Central East Europe
Yokogawa Hungaria Kft.
Yokogawa Belgium N.V./S.A.
Yokogawa Italia S.r.l.
Yokogawa Iberia, S.A.
Yokogawa Deutschland GmbH
Yokogawa Measurement Technologies GmbH
Rota Yokogawa GmbH & Co. KG
Yokogawa United Kingdom Limited
Yokogawa Measurement Technologies Ltd.
Yokogawa Marex Limited
Yokogawa Measurement Technologies AB
Yokogawa France S.A.S.
Yokogawa Electric CIS Ltd.
Yokogawa Reinsurance Ltd.
Yokogawa South Africa (Pty) Ltd.
Yokogawa Middle East B.S.C. (c)
Yokogawa Engineering Bahrain SPC
Yokogawa Engineering Middle East FZE
Yokogawa Electric International Pte. Ltd.
Yokogawa Engineering Asia Pte. Ltd.
Yokogawa Measurementation Pte. Ltd.
Plant Electrical Instrumentation Pte. Ltd.
Yokogawa Electric Asia Pte. Ltd.
Yokogawa (Thailand), Ltd.
E and I Solution Co., Ltd.
Yokogawa Electric (Malaysia) Sdn. Bhd.
MIE Industrial Sdn. Bhd.
Yokogawa Kontrol (Malaysia) Sdn. Bhd.
Yokogawa Industrial Safety Systems Sdn. Bhd.
Yokogawa Vietnam Company Limited
P.T.Yokogawa Indonesia
P.T.Yokogawa Manufacturing Batam
Yokogawa Philippines Inc.
Yokogawa China Co., Ltd.
Yokogawa Electric China Co., Ltd.
Yokogawa Xiyi Co., Ltd.
Suzhou Yokogawa Meter Company
Yokogawa Shanghai Instrumentation Co., Ltd.
Shanghai Yokogawa Petrochemical Instrumentation Co., Ltd.
Yokogawa Sichuan Instrument Co., Ltd.
Yokogawa Shanghai Trading Co., Ltd.
Yokoshin Software Engineering (WUXI) Co., Ltd.
Yokogawa Electric Korea Co., Ltd.
Yokogawa Measuring Instruments Korea Corp.
Yokogawa Electronics Manufacturing Korea Co., Ltd.
Yokogawa Taiwan Corp.
Yokogawa India Ltd.
Yokogawa Australia Pty. Ltd.
TechComm Simulation Pty. Ltd.
Yokogawa New Zealand Ltd.
United States
Canada
Brazil
Netherlands
Austria
Hungary
Belgium
Italy
Spain
Germany
United Kingdom
Sweden
France
Russia
Ireland
South Africa
Bahrain
United Arab Emirates
Singapore
Thailand
Malaysia
Vietnam
Indonesia
Philippines
China
Korea
Taiwan
India
Australia
New Zealand
Area Country/Location Company Name
North America
South America
Europe
Africa
Middle East
Asia
Oceania
Industrial Automation and Control Business / Test and Measurement BusinessIndustrial Automation and Control Businesses
Test and Measurement BusinessOther Businesses
30 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Global Network
Subsidiaries and Affiliated Companies in JapanYokogawa Manufacturing CorporationYokogawa Field Engineering Service CorporationYokogawa & Co., Ltd.Yokogawa Denshikiki Co., Ltd.Morioka Tokki CorporationYokogawa Information Systems CorporationYDC CorporationYokogawa Control Engineering CorporationYokogawa Human Create CorporationKokusai Chart CorporationKokusai Printing CorporationSmart ID Tec Corporation
Yokogawa Digital Computer CorporationNippon System Gijutsu Co.Yokogawa Denyo Corporation Yokogawa Meters & Instruments CorporationYokogawa Pionics Co., Ltd.Yokogawa Sertec Co., Ltd.Omega Simulation Co., Ltd.Yokogawa Office Service CorporationYokogawa Foundry Corporation
Global Network
Yokogawa Europe B.V. Yokogawa Middle East B.S.C.(c) Yokogawa Engineering Asia Pte. Ltd.Yokogawa Electric International Pte. Ltd.Yokogawa Electric International Pte. Ltd.Yokogawa Electric International Pte. Ltd.
Yokogawa China Co., Ltd. Yokogawa Electric CorporationNetherlands Bahrain Singapore China Japan United States
Yokogawa Corporation of America
f i n a n c i a l s e c t i o n
33A N N U A L R E P O R T 2 0 0 6
Financial SectionY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S
F O R T H E Y E A R E N D E D M A R C H 3 1 , 2 0 0 6
Contents34 Consolidated 5-year Summary
36 Consolidated Financial Review
40 Consolidated Balance Sheets
42 Consolidated Statements of Income
43 Consolidated Statements of Shareholders’ Equity
44 Consolidated Statements of Cash Flows
46 Notes to the Consolidated Financial Statements
63 Report of Independent Auditors
32 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
History
1915 Tamisuke Yokogawa, Doctor of Architectural Engineering, established an electric meter research institute in Shibuya, Tokyo with Ichiro Yokogawa and Shin Aoki
1917 First to produce and sell electric meters in Japan
1920 Incorporated as Yokogawa Electric Works Ltd.
1933 Started research and manufacture of aircraft instruments and flow, temperature, and pressure controllers
1948 Made the public offering of the Company's stock
1950 Developed Japan's first electronic recorder
1955 Signed a technical assistance agreement for industrial instruments with Foxboro, USA
1957 Established Yokogawa Electric Works, Inc. as North American sales office
1974 Established Yokogawa Electric Singapore Pte. Ltd. as Singapore plant
Established Yokogawa Electric (Europe) B. V. as European sales office
1975 Released CENTUM, the world's first distributed process control system
1983 Formed Yokogawa Hokushin Electric Corp. through merger with Hokushin Electric Works, Ltd.
1984 Released Model 3520 Analog LSI Test System and entered IC tester field
1986 Established Xiyi Yokogawa Co., Ltd. in Xian, China, jointly with Xian Instruments Factory
Changed the Company name to Yokogawa Electric Corporation
1988 Entered the high-frequency measuring instrument business
1990 Established Yokogawa Middle East E.C. in Bahrain
1996 Released confocal scanner and entered biotechnology business
1997 Announced the Enterprise Technology Solutions business concept
2000 Announced the new VISION-21&ACTION-21 corporate strategy
Released magnetoencephalograph
2001 Released the world's first 40Gbps optical communication module and entered the next-generation optical fiber communication field
2002 Acquired 100% of Ando Electric's stock
2004 Developed 40Gbps optical packet switch and entered the optical communication business
Fully integrated Ando Electric's business
2005 Established Yokogawa Electric International Pte. Ltd. in Singapore to oversee global industrial automation business
Shareholders’ Equity / Shareholders’ Equity RatioBillions of yen
131.8169.1 160.3 168.8
Shareholders’ equityShareholders’ equity ratio (Shareholders’ equity / Total assets)*
Interest-bearing Debt / Debt Equity RatioBillions of yen
Interest-bearing debt
Total Assets / Total Assets TurnoverBillions of yen 0.98 0.97
0.91
353.9 364.7 397.4 400.3
Total assets Total assets turnover (Sales/Total assets)*Current ratio (Current assets/Current liabilitiesX100)
Debt equity ratio (Interest-bearing debt/Total shareholders’ equity)
Gross Profit / Gross Profit MarginBillions of yen
35.1 35.433.4
101.1 109.8130.5 137.0
Gross profit Gross profit margin (Gross profit /Net salesX100)
Working Capital / Current RatioBillions of yen
Return on equity (Net income/Shareholders’ equityX100)*
Working capital (Current assets-current liabilities)
Earnings per Share / Price Earning RatioYen
Return on Equity / Return on Assets%
Sales by SegmentBillions of yen
0.62 0.590.82
108.7
65.5
99.6 100.3
Earnings per share
*Calculated using average amount of the beginning and the end of the fiscal year
Price earning ratio (Stock price/Net income per share)
15.5
37.8
-94.57 -108.39
99.84
38.43
154
216201
191
6.42.3-7.3
16.6
5.7
-17.4
75.092.6
121.5 117.1
Control Measurement Information Aviation and industry support
32.5
-12.5
0.81
0.39
-6.0
Return on assets (Net income/Total assetsX100)*
40.3 42.236.1
47.8
59.3
23.9
169.5
76.1
2003.3
69.5
23.5
160.057.8
2002.3
20.5
56.0
98.8
196.6
2004.3
24.6
53.0
103.0
206.5
2005.3 2003.32002.3 2004.3 2005.3
2003.32002.3 2004.3 2005.3
2003.32002.3 2004.3 2005.3
2003.32002.3 2004.3 2005.3
2003.32002.3 2004.3 2005.3
2003.32002.3 2004.3 2005.3
2003.32002.3 2004.3 2005.3
%
%
%
Times
Times
Times
224.6
0.95
417.8
36.8
143.0
0.27
61.3
87.45
23.9
5.3
11.0
125.2
209
53.7
26.9
49.7
86.2
226.1
2006.3 2006.3
2006.3
2006.3
2006.3
2006.3
2006.3
2006.3
f i n a n c i a l s e c t i o n
35A N N U A L R E P O R T 2 0 0 634 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Consolidated 5-year SummaryY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S
F O R T H E Y E A R E N D E D M A R C H 3 1 , 2 0 0 6
Millions ofUS dollars (Note 3)Billions of yen
2002
March
310.8209.8
99.31.70.6
(23.1)
353.9181.965.5
169.147.8
(94.57)7.50
697.10
1,059257.4
243,041,012
328.8219.0
108.21.60.5
(26.2)
364.7230.1108.7131.836.1
(108.39)7.50
542.20
788200.1
253,967,991
371.9241.4
112.218.34.9
24.3
397.4233.299.6
160.340.3
99,847.50
658.97
1,544392.1
253,967,991
387.1250.0
112.324.86.49.4
400.3227.0100.3168.842.2
38.437.50
693.75
1,452368.8
253,967,991
388.9245.9
117.625.3
6.521.6
417.8188.3
61.3224.6
53.7
87.4515.00
854.24
2,095562.8
268,624,510
3,3102,093
1,001216
—184
3,5571,603
5221,912
—
0.740.137.27
184,791
—
2003 2004 2005 2006 2006
March
$¥¥¥¥¥For the year:
SalesCost of salesSelling, general, and
administrative expensesOperating incomeOperating income ratio (%)Net income
At year-end:Total assetsDebtInterest-bearing debtShareholders’ equityShareholders’ equity ratio (%)
Earnings per share:Net income (yen/US dollars)Dividends (yen/US dollars)Shareholders’ equity (yen/US dollars)
Stock information:Stock price at the end of the term (yen/US dollars)Aggregate market valueNumber of shares (shares)
New Business Segments
Industrial Automation andControl Business
Test and MeasurementBusiness
New and OtherBusinesses
Previous Business Segments
Industrial Automation andControl Business
Information SystemsBusiness
Aviation and Industry Support Business
Test and MeasurementBusiness
PhotonicsAdvanced Stage
Life Science
PhotonicsAdvanced Stage
Life Science
We have changed our business segmentsPreviously, our business was made up of four segments: industrial
automation and control, test and measurement, information systems, and
aviation and industry support. However, this was changed in fiscal year
2006 to the following three segments: industrial automation and control,
test and measurement, and new and other businesses. This was done by
integrating information systems into industrial automation and control;
separating the new photonics, advanced stage, and life science
businesses from the test and measurement segment; and combining
these new businesses with aviation to create a new segment: new and
other businesses.
f i n a n c i a l s e c t i o n
37A N N U A L R E P O R T 2 0 0 6
US dollarsYen
38.437.50
693.75
87.4515.00
854.24
0.740.137.27
Net income - basicCash dividendsShareholders' equity
2005
March
2006 2006
March
$¥¥99.847.50
658.97
2004
¥
Millions of US dollarsBillions of yen (percentage of net sales)
(100.0)(64.6)(29.0)(6.4)(5.8)(0.9)(3.0)(3.7)(1.1)(0.2)(2.4)
387.1250.0112.324.822.43.5
11.514.44.2(0.8)9.4
(100.0)(63.2)(30.3)(6.5)(6.8)(3.7)(2.0)(8.5)(2.8)(0.2)(5.5)
388.9245.9117.625.326.414.47.9
32.910.9(0.5)
21.6
3,310 2,093 1,001
216 225 123 67
280 92 (4)
184
Net salesCost of salesSelling, general, and administrative expensesOperating incomeOrdinary incomeExtraordinary incomeExtraordinary expensesIncome before income taxes and minority interestsIncome taxesMinority interest in earnings of consolidated subsidiariesNet income
2005
March
2006 2006
March
$¥¥(100.0)(64.9)(30.2)(4.9)(4.1)(1.7)(4.6)(1.2)
(-5.5)(0.2)(6.5)
371.9 241.4 112.3 18.3 15.3 6.2
17.0 4.5
(20.6)(0.7)
24.3
2004
¥
Per Share Amounts
Operating Results
Millions of US dollarsBillions of yen
207.9 206.5 17.9
92.9 103.0
6.7
25.5 24.6 (1.2)
49.2 53.0 1.4
235.0 226.1 26.1
88.1 86.2 0.0
27.4 26.9 (1.0)
50.0 49.7 0.2
2,0011,925
222
750734
0
233229(8.5)
43420
Industrial Automation and Control BusinessOrders receivedSalesOperating income
Test and Measurement BusinessOrders receivedSalesOperating income
Information Systems BusinessOrders receivedSalesOperating income (loss)
Aviation and Industry Support BusinessOrders receivedSalesOperating income
2005
March
2006 2006
March
$¥¥210.3 196.6 10.2
105.3 98.8 9.8
20.9 20.5 (3.2)
54.0 56.0 1.5
2004
¥
Operating Results by Business
36 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Consolidated Financial ReviewY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S
F O R T H E Y E A R E N D E D M A R C H 3 1 , 2 0 0 6
OverviewThe markets for Yokogawa’s mainstay industrial automationand control business showed a strong positive trend, owing toactive investment in construction of petroleum, petrochemical,and natural gas plants outside of Japan as a result of highcrude oil prices. Capital investments in Japan to construct newproduction facilities as well as to replace existing onescontributed to the trend. In the semiconductor tester market, akey area of the test and measurement business, though theoverall market conditions were robust, both orders and salesdeclined due to lower-than-expected sales of the mainstay LCDdriver IC testers and a slowdown in the growth of memorytester sales resulting from declining investment by customers.
In this business environment, the Company devoted itself tothe implementation of various management policies andcarried out a strategy to increase orders from existingcustomers and cultivate new customers.
As a result, in comparison to the previous year,consolidated net sales for the fiscal year under review rose by0.5% to 388.9 billion yen (US$3,310 million), consolidatedoperating income grew by 2.3% to 25.3 billion yen (US$216million), consolidated ordinary income was up by 17.9% to 26.4billion yen (US$225 million), and consolidated net income roseby 130.0% to 21.6 billion yen (US$184 million).
In Japan, sales declined 7.5% to 260.4 billion yen (US$2,217million) in comparison to the previous year. In the rest of Asia,sales soared 25.1% to 53.1 billion yen (US$452 million). InEurope, sales were up 14.5% to 34.7 billion yen (US$295million). In North America, sales rose 14.1% to 19.9 billion yen(US$169 million). In other areas including the Middle East,sales grew 34.2% to 20.8 billion yen (US$177 million). For thepast year, the ratio of sales from outside Japan (by customerlocation) stood at 46.8%.
Consolidated Statements of IncomeConsolidated operating income rose by 2.3% to 25.3 billion yen(US$216 million). The ratio of cost of sales to net salesimproved by 1.4 percentage points to 63.2%, while the ratio ofselling, general, and administrative expenses to net sales rose1.3 percentage points to 30.3%.
Looking at operating income by location, Japan earned 14.4billion yen (US$123 million), a decrease of 15.5%; the rest of Asiaearned 5.4 billion yen (US$46 million), an increase of 35.2%;Europe earned 3.0 billion yen (US$26 million), an increase of13.9%; North America earned 773 million yen (US$7 million), anincrease of 28.8%; and other regions including the Middle Eastearned 1.1 billion yen (US$9 million), an increase of 402.5%.
Ordinary income rose by 17.9% to 26.4 billion yen (US$225million), and its margin rose by 1.0 percentage point to 6.8%. Thismainly derived from a foreign-exchange gain of 1.6 billion yen(US$14 million) and a decline of 933 million yen (US$8 million) ininventory appraisal loss, in comparison to the previous year.
Extraordinary profits increased by 10.9 billion yen (US$93million) mainly due to the sale of shares in Yokogawa AnalyticalSystems Inc., which had been an affiliate of Yokogawa, to theAgilent Technologies group of the U.S. Extraordinary lossesshrank by 3.5 billion yen (US$30 million) because of a decreasein the loss on restructuring of businesses that was posted inthe preceding term and a decrease in the loss resulting fromchanges in the Company’s retirement benefit system, despiteasset impairment losses of 3.0 billion yen (US$26 million)recorded in the fiscal year under review following theapplication of asset impairment accounting to fixed assets.
As a result, income before income taxes and minorityinterests rose by 18.5 billion yen (US$157 million) to 32.9 billionyen (US$280 million), while net income increased by 12.2 billionyen (US$104 million) to 21.6 billion yen (US$184 million).
Millions of US dollarsBillions of yen
281.4 42.5 30.3 17.4 15.5
387.1
260.4 53.1 34.7 19.9 20.8
388.9
2,217 452 295 169 177
3,310
JapanAsiaEuropeNorth AmericaOther AreaNet Sales
2005
March
2006 2006
March
$¥¥273.9 36.7 29.6 19.2 12.5
371.9
2004
¥
Sales by Geographic Area
f i n a n c i a l s e c t i o n
39A N N U A L R E P O R T 2 0 0 6
Current assets rose by 6.2 billion yen (US$53 million) mainlydue to an increase of 12.1 billion yen (US$103 million) in thebalance of notes and accounts receivable and also because of adecrease of 6.2 billion yen (US$53 million) in inventories. This ischiefly because sales were posted under the percentage ofcompletion method at Group companies outside Japan andinventories were recorded as cost of sales.
Of the fixed assets, tangible fixed assets were 89.7 billionyen (US$764 million), an increase of 11.9 billion yen (US$101million); intangible fixed assets were 12.1 billion yen (US$103million), a decrease of 1.5 billion yen (US$13 million); andinvestments and other assets were 76.1 billion yen (US$648million), an increase of 917 million yen (US$8 million). Tangiblefixed assets grew sharply mainly due to the construction of theKanazawa Office and the Sagamihara Office. Althoughinvestment securities increased by 12.2 billion yen (US$104million) due to a rise in the price of securities holdings,investment and other assets rose by 917 million yen (US$8million) because deferred tax assets shrank by 10.8 billion yen
(US$92 million) as a result of a decrease in a loss carryforwardfor tax purposes caused by an increase in taxable income.
Total liabilities decreased by 38.7 billion yen (US$330million) to 188.3 billion yen (US$1,603 million), with currentliabilities down by 1.8 billion yen (US$15 million) to 114.7 billionyen (US$976 million) and non-current liabilities down by 36.9billion yen (US$314 million) to 73.6 billion yen (US$626 million).Of the 30 billion yen (US$255 million) in euro-yen denominatedconvertible bonds with subscription rights to new shares thatwere issued on November 4, 2003, and are due in 2010,subscription rights worth 29.8 billion yen (US$253 million) wereexercised and converted to shares, which was the main factorcausing a decrease in non-current liabilities. The remaining240 million yen (US$2 million) of subscription rights that hadnot been converted were redeemed prior to maturity. As aresult, total shareholders’ equity rose by 55.8 billion yen(US$475 million) to 224.6 billion yen (US$1,912 million), withthe return on shareholders’ equity ratio increasing by 11.5percentage points to 53.7%.
Millions of US dollarsBillions of yen
400.3 117.1 200.5 100.3 168.8 42.2 59.3
417.8 125.2 209.1 61.3
224.6 53.7 27.3
3,557 1,066
522 1,912
Total assetsWorking capitalCurrent ratio (%)Interest-bearing debtShareholders' equityShareholders' equity ratio (%)Debt to equity ratio (%)
2005
March
2006 2006
March
$¥¥397.4 121.5 215.7 99.6
160.3 40.3 62.1
2004
¥
Financial Position
Millions of US dollarsBillions of yen
29.0 14.3 18.6
253,968 243,208 18,972
2.3 5.7
4.89 0.97
30.9 15.1 29.5
268,625 262,885 17,858
5.3 11.0 5.47 0.95
263 129 251
Research and development investmentDepreciation and amortization Capital expendituresNumber of shares issued (thousands)Number of shares outstanding (thousands)Number of employeesReturn on assets (%)Return on equity (%)Inventory turnover (times)Total assets turnover (times)
2005
March
2006 2006
March
$¥¥27.0 13.5 21.4
253,968 243,294 18,364
6.4 16.6 4.64 0.98
2004
¥
Other Statistics
38 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Cash flow from investing activitiesNet cash flow from investing activities was an outflow of 11.7billion yen (US$100 million). Acquisition of fixed assets,including software and other intangible assets, increased 7.1billion yen (US$61 million) to 25.8 billion yen (US$219 million).This derived from an increase in expenditure for theconstruction of the Sagamihara Office. Income from sale ofinvestment securities rose by 12.1 billion yen (US$103 million)to 15.8 billion yen (US$135 million) due to the sale of shares tothe Agilent Technologies group.
Cash flow from financing activitiesNet cash flow from financial activities was an outflow of 14.1billion yen (US$120 million), an increase of 12.8 billion yen(US$109 million). The principal components were anexpenditure of 7.1 billion yen (US$61 million) for repayment ofshort-term borrowings and an expenditure of 3.0 billion yen(US$26 million) for repayment of commercial paper. Dividendpayments rose by 1.5 billion yen (US$13 million) to 3.3 billionyen (US$28 million) in comparison to the previous year.
Financial PositionTotal assets at the end of the year under review were 417.8billion yen (US$3,557 million), up 17.5 billion yen (US$149million) from the previous year. Current assets stood at 239.9billion yen (US$2,042 million), an increase of 6.2 billion yen(US$53 million), and fixed assets totaled 177.9 billion yen(US$1,515 million), up 11.3 billion yen (US$96 million).
Cash FlowsThe end-of-year balance of consolidated cash and cashequivalents was up by 1.5 billion yen (US$13 million) to 41.6billion yen (US$354 million). Free cash flow, the aggregate ofoperating and investing activities, was an inflow of 13.9 billionyen (US$118 million), compared with a 7.1 billion yen (US$60million) inflow in the previous fiscal year.
The period for debt redemption (Note 1) was 2.4 years, andthe interest coverage ratio (Note 2) was 34.1 times.
Note 1: Number of years for debt redemption = interest-bearing debt / operating cash flowNote 2: Interest coverage ratio = operating cash flow / interest expenses
Cash flow from operating activitiesNet cash flow from operating activities increased by 7.4 billionyen (US$63 million) to a positive 25.6 billion yen (US$218million), due to an 18.5 billion yen (US$157 million) gain inincome before income taxes and minority interests. The declinein the balance of the reserve for retirement benefits, whichcaused a reduction in cash flow in the previous fiscal year,helped cash flow increase by 1.1 billion yen (US$9 million) inthe year under review. The balance of notes and accountsreceivable increased from the previous year caused an 11.3billion yen (US$96 million) reduction in cash flow. A decline inthe balance of unpaid monies due to changes in the retirementbenefit system reduced cash flow by 3.9 billion yen (US$33million); this contrasts with the previous fiscal year, when itincreased cash flow by 6.1 billion yen (US$52 million).
Millions of US dollarsBillions of yen
18.3 (11.2)
7.1 (1.3)(0.1)5.7
34.4 —
40.1
25.6 (11.7)13.9 (14.1)
1.6 1.5
40.1 0.0
41.6
218 (100)118 (120)
14 12
341 0.0 354
Net cash provided by operating activitiesNet cash used in investing activitiesFree cash flowNet cash used in financing activitiesEffect of exchange rate changes on cash and cash equivalentsNet (decrease) increase in cash and cash equivalentsCash and cash equivalents at beginning of yearIncrease for change in scope of consolidated subsidiariesCash and cash equivalents at end of year
2005
March
2006 2006
March
$¥¥8.3 (10.2)(1.9)
(11.4)(0.5)
(13.7)47.8 0.3
34.4
2004
¥
Cash Flow
f i n a n c i a l s e c t i o n
41A N N U A L R E P O R T 2 0 0 6
Thousands ofUS dollars (note 3)Millions of yen
9,3004,944
37,5858,544
46,12913,8732,848
11,08528,173
154116,506
78,040313
6,100324
24,2711,447
110,495
4,515
32,30635,463
106,6648,374(5,871)(8,184)
168,752400,268
8,0564,094
40,58711,94252,52915,783
3,32213,16317,577
175114,699
44,176326
7,314306
20,1671,292
73,581
4,960
43,40150,348
123,31114,864(2,979)(4,379)
224,566417,806
68,58434,851
345,512101,658447,170134,357
28,280112,053149,629
1,489976,413
376,0632,771
62,2642,602
171,67711,000
626,377
42,222
369,465428,604
1,049,719126,531(25,356)(37,274)
1,911,6893,556,701
LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent Liabilities:
Short-term bank loans (note 9)Current portion of long-term debt (note 8)Notes and accounts payable (note 9):
TradeOther
Accrued expensesIncome taxes payableAccrued bonusesAdvances received and other current liabilitiesDeferred tax liabilities - current (note 14)
Total current liabilities
Long-term Debt (notes 8 and 9)Deferred Tax Liabilities - non-current (note 14)Reserve for Retirement Benefits:
Employees (note 15)Directors and corporate auditors
Long-term Accounts Payable (note 15)Other Non-current Liabilities
Total non-current liabilities
Minority Interests in Consolidated Subsidiaries
Commitment and Contingent Liabilities (note 16)
Shareholders’ Equity:Common stock:
Authorized: 483,735,000 sharesIssued: 253,967,991 shares and 268,624,510 shares at March 31, 2005 and 2006, respectively
Capital surplusRetained earningsNet unrealized gains on other securitiesForeign currency translation adjustmentsTreasury stock, at cost, 10,759,967 shares and 5,739,993 shares at March 31, 2005 and 2006, respectively
Total shareholders’ equity
2005
March 31
2006 2006
March 31
$¥¥
The accompanying notes are an integral part of these financial statements.
40 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Consolidated Balance SheetsY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S
A S O F M A R C H 3 1 , 2 0 0 5 A N D 2 0 0 6
Thousands ofUS dollars (note 3)Millions of yen
40,72075
116,9166,099
123,015(1, 780)
121,23551,13711,3729,102
233,641
42,514249
9,474(914)
51,323
39,4139,0589,879
17,4542,021
77,825
13,628
23,851400,268
42,194287
129,0026,071
135,073(1,443)
133,63044,96311,420
7,387239,881
54,707153
8,903(759)
63,004
44,59310,18511,71619,573
3,67689,743
12,090
13,088417,806
359,1922,446
1,098,16851,680
1,149,848(12,285)
1,137,563382,761
97,22062,883
2,042,065
465,7071,305
75,789(6,459)
536,342
379,61286,70799,737
166,61831,292
763,966
102,917
111,4113,556,701
ASSETSCurrent Assets:
Cash and time deposits (note 9)Marketable securities (note 11)Notes and accounts receivable (notes 9 and 10)
TradeOther
Less: allowance for doubtful accounts
Inventories (note 9) Deferred tax assets - current (note 14)Other current assets
Total current assets
Investments and Advances:Investments in securities (notes 9, 11, and 12)Long-term loans Other (note 12)
Less: allowance for doubtful accountsTotal investments and advances
Property, Plant, and Equipment, at net book value (note 4):Buildings and structures (notes 5 and 9)Machinery and equipment (notes 5 and 9)Furniture and fixtures (notes 5 and 9)Land (notes 5 and 9)Construction in progress
Total property, plant, and equipment
Intangible Assets
Deferred Tax Assets - non-current (note 14)
2005
March 31
2006 2006
March 31
$¥¥
The accompanying notes are an integral part of these financial statements.
f i n a n c i a l s e c t i o n
43A N N U A L R E P O R T 2 0 0 6
Millions of yen
131,78531
24,301(47)
(1,822)(29)(77)
1916,013
160,3465
9,373(65)
(1,825)(35)
(138)17
1,074168,752
1221,560
(50)
(3,344)(45)(1)
27
29,759
(1,486)9,382
224,566
Balance at March 31, 2003Other, increaseNet incomeOther, decreaseAppropriations:
Cash dividendsDirectors’ bonuses
Decrease in treasury stockGain on sales of treasury stockAdjustment for the year
Balance at March 31, 2004Other, increaseNet incomeOther, decreaseAppropriations:
Cash dividendsDirectors’ bonuses
Increase in treasury stockGain on sales of treasury stockAdjustment for the year
Balance at March 31, 2005Other, increaseNet incomeOther, decreaseAppropriations:
Cash dividendsDirectors’ bonuses
Decrease in treasury stockGain on sales of treasury stockIssuance of new shares and decrease in
treasury stock due to execution of stockacquisition rights of convertible bonds
Change of accounting standard for pension obligation of subsidiaries outside Japan
Adjustment for the yearBalance at March 31, 2006
Total
(7,969)
(77)
(8,046)
(138)
(8,184)
(1)
3,806
(4,379)
Treasury stock,at cost
(5,562)
(334)(5,896)
25(5,871)
2,892(2,979)
Foreign currencytranslation
adjustments
978
6,3477,325
1,0498,374
6,49014,864
Net unrealizedgains on other
securities
76,77731
24,301(47)
(1,822)(29)
99,2115
9,373(65)
(1,825)(35)
106,66412
21,560(50)
(3,344)(45)
(1,486)
123,311
Retainedearnings
35,255
191
35,446
17
35,463
27
14,858
50,348
Capital surplus
¥¥¥ ¥ ¥ ¥ ¥32,306
32,306
32,306
11,095
43,401
Common stock
243,006,497
287,050
243,293,547
(85,523)
243,208,024
19,974
19,656,519
262,884,517
Number ofshares of
common stock
Thousands of US dollars (note 3)
1,436,553104
183,534(423)
(28,471)(381)(11)
228
253,341
(12,652)79,867
1,911,689
Balance at March 31, 2005Other, increaseNet incomeOther, decreaseAppropriations:
Cash dividendsDirectors’ bonuses
Decrease in treasury stockGain on sales of treasury stockIssuance of new shares and decrease in
treasury stock due to execution of stock acquisition rights of convertible bonds
Change of accounting standard for pension obligation of subsidiaries outside Japan
Adjustment for the yearBalance at March 31, 2006
Total
(69,669)
(11)
32,406
(37,274)
Treasury stock,at cost
(49,982)
24,626(25,356)
Foreign currencytranslation
adjustments
71,290
55,241126,531
Net unrealizedgains on other
securities
908,008104
183,534(423)
(28,471)(381)
(12,652)
1,049,719
Retainedearnings
301,890
228
126,486
428,604
Capital surplus
275,016
94,449
369,465
Common stock
$ $ $ $ $ $ $243,208,024
19,974
19,656,519
262,884,517
Number ofshares of
common stock
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Shareholders’ EquityY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S
F O R T H E T H R E E Y E A R S E N D E D M A R C H 3 1 , 2 0 0 4 , 2 0 0 5 , A N D 2 0 0 6
42 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Consolidated Statements of IncomeY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S
F O R T H E T H R E E Y E A R S E N D E D M A R C H 3 1 , 2 0 0 4 , 2 0 0 5 , A N D 2 0 0 6
Thousands ofUS dollars (note 3)Millions of yen
387,053250,035137,018112,26124,757
1,751(810)
(2,798)2,920(364)
(1,561)—
1,060(4,428)
(2)(2,951)
—(3,158)
14,416
3,0411,1934,234(809)
9,373
388,877245,917142,960117,639
25,321
1,762(768)
(2,091)13,422
1,643(787)
(3,026)1,656
(1,786)(3)
(294)
—(2,159)32,890
4,3156,546
10,861(469)
21,560
3,310,4402,093,4491,216,9911,001,440
215,551
15,003(6,541)
(17,801)114,262
13,988(6,702)
(25,759)14,093
(15,206)(25)
(2,499)
—(18,381)279,983
36,73555,72192,456(3,993)
183,534
Net Sales Cost of Sales (note 17)
Gross profitSelling, General, and Administrative Expenses (notes 17 and 18)
Operating incomeOther Income and Expenses:
Interest and dividend incomeInterest expensesNet loss on disposal/write-down of inventoriesNet gain on sale/write-down of investments in securitiesForeign exchange (loss) gainNet gain (loss) on sale/disposal of property, plant, and equipmentImpairment loss on fixed assets (note 21)Equity in earnings of affiliatesLoss on restructuring (note 19)Gain (loss) on change in equity interest in affiliates (note 20)Loss due to change in retirement benefit plan (note 15)Social insurance premium related to prior year bonus due to enactment of
revised Employees’ Pension Insurance LawOther, net
Income before income taxes and minority interestsIncome Taxes (note 14)
CurrentDeferred
Minority Interests in Earnings of Consolidated SubsidiariesNet income
2005
March 31
2006 2006
March 31
$¥¥371,943241,405130,538112,28218,256
1,735(1,095)(2,236)1,942(1,699)1,165
—1,239(5,340)
222(5,325)
(785)(3,604)4,475
2,911(23,473)(20,562)
(736)24,301
2004
¥
Thousands ofUS dollars (note 3)Millions of yen
38.4335.53
7.5243,244
87.45—
15.0246,527
0.74—
0.13246,527
Per Share (note 23):Net income - basicNet income - dilutedCash dividendsWeighted average number of shares (in thousands)
2005
March 31
2006 2006
March 31
$¥¥99.8496.66
7.5243,148
2004
¥
The accompanying notes are an integral part of these financial statements.
f i n a n c i a l s e c t i o n
45A N N U A L R E P O R T 2 0 0 6
Thousands ofUS dollars (note 3)Millions of yen
40,720(629)
40,091
42,194(629)
41,565
359,192(5,353)
353,839
Cash and Time DepositsTime Deposits Whose Maturity Periods Exceed Three Months
2005
March 31
2006 2006
March 31
$¥34,962(545)
34,417
2004
¥ ¥
Reconciliation between cash and cash equivalents at year-end and the account booked on the balance sheets for the years endedMarch 31, 2004, 2005, and 2006 are as follows:
Thousands ofUS dollars (note 3)Millions of yen
————
11,09514,858
3,80629,759
94,449126,486
32,406253,341
Issuance of New Shares Due to Execution of Stock Acquisition Rights of Convertible Bonds:
Credited to Common Stock Credited to Capital SurplusDebited to Treasury StockDebited to Convertible Bonds
2005
March 31
2006 2006
March 31
$¥
————
2004
¥ ¥
Significant non-cash transactions for the years ended March 31, 2004, 2005, and 2006 are as follows:
The accompanying notes are an integral part of these financial statements.
44 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Consolidated Statements of Cash FlowsY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S
F O R T H E T H R E E Y E A R S E N D E D M A R C H 3 1 , 2 0 0 4 , 2 0 0 5 , A N D 2 0 0 6
Thousands ofUS dollars (note 3)Millions of yen
14,416 14,332
3 (8)
(10,161)1,187 (1,751)
810 (1,060)
120 (3,040)
996 —
974 743
(7,983)2
6,130 2,922
18,632 3,401 (866)
(2,891)18,276
(792)781
(14,299)1,736
(71)3,674 (585)
(1,665)(11,221)
(973)8,000
607 (6,830)
——
(163)(188)
(1,822)64
(1,305)
(76)5,674
34,417 —
40,091
32,890 15,124
— (607)
1,0871,930
(1,762)768
(1,656)79
(13,528)980
3,026(11,309)
7,900 (5,900)
3 (3,881) 1,879
27,023 3,858 (751)
(4,494)25,636
(840)924
(21,995)913
(3,600)15,817
—(2,944)
(11,725)
(7,128)(3,000)
200 (248)
—(240)
(28)(394)
(3,341)88
(14,091)
1,6461,466
40,091 8
41,565
279,983 128,752
— (5,168)9,255
16,431 (15,003)
6,541 (14,093)
675 (115,163)
8,342 25,759
(96,273) 67,248
(50,222)25
(33,040) 15,995
230,044 32,843 (6,395)
(38,254)218,238
(7,151)7,870
(187,237)7,770
(30,647)134,649
—(25,066)(99,812)
(60,684)(25,538)
1,704 (2,112)
—(2,043)
(243)(3,353)
(28,441)754
(119,956)
14,00912,479
341,288 72
353,839
Cash Flows from Operating Activities:Income before income taxes and minority interestsDepreciation and amortizationAmortization of goodwillIncrease (decrease) in allowance for doubtful accounts(Decrease) increase in reserve for retirement benefitsIncrease in accrued bonusInterest and dividend incomeInterest expensesEquity in earnings of affiliatesWrite-down of investments in securitiesNet gain on sale of investments in securitiesLoss on disposal of property, plant, and equipmentImpairment loss on fixed assets(Increase) decrease in trade receivables(Increase) decrease in inventoriesIncrease (decrease) in trade payables(Loss) gain on change in equity interest in affiliatesIncrease (decrease) in long-term accounts payableOther, net
SubtotalInterest and dividend income receivedInterest expenses paidIncome taxes paid
Net cash provided by operating activities
Cash Flows from Investing Activities:Payments for deposit in time depositsProceeds from return on time depositsAcquisition of property, plant, and equipmentProceeds from sale of property, plant, and equipmentAcquisition of investments in securitiesProceeds from sale of investments in securitiesAcquisition of businessOther, net
Net cash used in investing activities
Cash Flows from Financing Activities:Increase (decrease) in short-term bank loans, net(Decrease) increase of commercial paper, netProceeds from issuance of long-term debtRepayment of long-term debtProceeds from issuance of bondsRedemption of bondsPayment for purchase of treasury stockCash dividends paid to minority shareholdersCash dividends paidOther, net
Net cash used in financing activities
Effect of Exchange Rate Change on Cash and Cash EquivalentsNet (Decrease) Increase in Cash and Cash EquivalentsCash and Cash Equivalents at Beginning of YearIncrease for Change in Scope of Consolidated SubsidiariesCash and Cash Equivalents at End of Year
2005
March 31
2006 2006
March 31
$¥4,475 13,456
136 601
(23,796)2,887 (1,735)1,095 (1,239)
189 (2,136)
773 —
(9,474)(8,113)7,872 (222)
22,237 3,655
10,661 1,518 (1,122)(2,757)8,300
(858)720
(13,724)4,968 (2,592)5,478
—(4,163)
(10,171)
997 (35,000)15,000
(508)30,000 (20,253)
(203)(253)
(1,822)688
(11,354)
(482)(13,707)47,810
314 34,417
2004
¥ ¥
f i n a n c i a l s e c t i o n
47A N N U A L R E P O R T 2 0 0 6
(6) InventoriesFinished goods and work in progress are mainly stated atcost, cost being determined by the specific identificationmethod. Other inventories are mainly stated at cost, costbeing determined by the average cost method.
(7) Financial Instruments (a) DerivativesAll derivatives are stated at fair value, with changes in fairvalue included in net profit or loss for the period in which theyarise, except for derivatives that are designated as "hedginginstruments" (see (c) Hedge Accounting below).
(b) SecuritiesSecurities held by the Company and its subsidiaries areclassified into three categories:
Held-to-maturity debt securities that the Company and itssubsidiaries intend to hold to maturity, are stated at cost afteraccounting for premium or discount on acquisition, which areamortized over the period to maturity.
Other securities whose fair value is available are valued atthe fair market value prevailing at the end of the fiscal year.Net unrealized gains or losses on these securities arereported as a separate component of shareholders' equity ata net-of-tax amount. Cost of sales is primarily determinedusing the moving-average method.
Other securities whose fair value is not available arevalued at cost, primarily determined using the moving-average method.
(c) Hedge AccountingAll derivatives are stated at fair value. Gains and losses arisingfrom changes in the fair value of the derivatives designated as“hedging instruments” are deferred as an asset or liability. Ifforward exchange contracts and currency swaps meet theconditions for hedge accounting, the difference between thecontract rate and spot rate as at the date of the contract isrecognized over the period from the contract date to thesettlement date. If interest-rate swaps meet the conditions forhedge accounting and their nominal amount, terms of interestand contract period are substantially the same as those ofhedged items, they are not stated at fair value but accrued, netof the swap interest paid and received.
Derivatives designated as hedging instruments by theCompany are principally forward exchange contracts andcurrency swaps to reduce the exposure to the risk of foreigncurrency exchange rate fluctuation in respect of loans andsuch future transactions, denominated in foreign currencies.In addition, the Company uses interest-rate swaps to reducethe exposure to the risk of interest rate fluctuation, in respect
of loans issued by the Company.The Company has a policy of utilizing the above hedging
instruments in order to reduce the Company’s exposure tothe risk of fluctuation of foreign currency exchange rates andinterest rates.
The Company evaluates the effectiveness of its hedgingactivities in reference to the accumulated gains and losses onthe hedging instruments and the related items from thecommencement of the hedges.
(8) Property, Plant, and EquipmentDepreciation is calculated using the declining-balancemethod based on the estimated useful lives of the assets.
Effective March 31, 1999, the Company reduced theestimated useful lives of buildings, excluding relatedequipment and leasehold improvements, using the straight-line method to calculate depreciation expenses for buildingsacquired on or after April 1, 1998.
Range of estimated useful lives:Buildings and structures: 3 - 50 yearsMachinery and equipment: 4 - 10 years
(9) Intangible AssetsIntangible assets are amortized using the straight-linemethod.
Software for internal use is amortized using the straight-line method over an estimated useful life (mainly over 5 years).
(10) Accounting Standard for Impairment of Fixed AssetsOn August 9, 2002, the Business Accounting Council of Japanissued new accounting standards entitled “Statement ofOpinion on the Establishment of Accounting Standards forImpairment of Fixed Assets”. Further, on October 31, 2003,the Accounting Standards Board of Japan issued FinancialAccounting Standards Implementation Guidance No. 6 -“Application Guidance on Accounting Standards forImpairment of Fixed Assets”. These standards are effectivefrom the fiscal years beginning April 1, 2005.
The Company and its consolidated subsidiaries in Japanadopted these standards in the fiscal year ended March 31,2006.
As a result, an impairment loss of fixed assets increasedoperating income by ¥35 million (US$294 thousand) andreduced income before income taxes and minority interestsby ¥2,980 million (US$25,364 thousand).
Note that accumulated impairment loss is deducteddirectly from each asset, in accordance with the revisedregulations on interim consolidated financial statements.
46 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Notes to the Consolidated Financial StatementsY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S
F O R T H E Y E A R E N D E D M A R C H 3 1 , 2 0 0 6
1Accounting PrinciplesThe accompanying consolidated financial statements havebeen prepared from accounts and records maintained byYokogawa Electric Corporation (the "Company") and itssubsidiaries. The Company and its consolidated subsidiariesin Japan have maintained their accounts and records inaccordance with the provisions set forth in the CommercialCode of Japan and the Securities and Exchange Law and inconformity with generally accepted accounting principles andpractices in Japan, which are different in certain respects asto application and disclosure requirements of InternationalFinancial Reporting Standards.
The consolidated subsidiaries outside Japan havemaintained their accounts and records in conformity withgenerally accepted accounting principles and practices in
their respective countries. Although certain differences existin the accounting principles employed by the subsidiariesoutside Japan, essentially, no adjustments have been made totheir accounts in order to conform to accounting principlesand practices generally accepted in Japan in theaccompanying consolidated financial statements.
Certain items presented in the consolidated financialstatements filed with the Director of Kanto Finance Bureau inJapan have been reclassified for the convenience of readersoutside Japan.
The consolidated financial statements are not intended topresent the consolidated financial position and results ofoperations and cash flows in accordance with accountingprinciples and practices generally accepted in countries andjurisdictions other than Japan.
Basis of Presenting the Consolidated Financial Statements
2(1) Scope of ConsolidationThe consolidated financial statements include the accounts ofthe Company and its 80 subsidiaries as of March 31, 2006 (80for fiscal year 2005).
(2) Elimination and CombinationIn elimination, any difference between the cost of aninvestment in a subsidiary and the amount of underlyingequity in net assets of the subsidiary is treated as an asset ora liability, as the case may be, and amortized over a period offive years on a straight-line basis. Any differences betweenthe cost of an investment in a subsidiary and the amount ofunderlying equity in net assets of the subsidiary has beencharged or credited to income in the year in which it occurs,in the case that such a difference is not significant.
The assets and liabilities of consolidated subsidiaries arerevalued to fair market value as of the date of establishmentof control.
The financial statements of subsidiaries and affiliates areincluded in the accompanying consolidated financialstatements on the basis of respective fiscal year-end.Significant transactions occurring between the respectivefiscal year-end and March 31 are reflected in theaccompanying consolidated financial statements.
(3) Accounting for Investments in UnconsolidatedSubsidiaries and Affiliates
The equity method is applied to the investments in 5 (4 forfiscal year 2005) unconsolidated subsidiaries and 9 (12 for
fiscal year 2005) affiliates since the investments in the otherunconsolidated subsidiaries and remaining affiliates do nothave a material effect on consolidated net income andretained earnings in the consolidated financial statements.
(4) Foreign Currency Translation and TransactionsForeign currency transactions are translated using foreignexchange rates prevailing at the respective transaction dates.Receivables and payables in foreign currencies are translatedat the foreign exchange rates prevailing at the respectivebalance sheet dates and the resulting transaction gains orlosses are taken into income.
All the assets and liabilities of foreign subsidiaries andaffiliates are translated at the foreign exchange ratesprevailing at the respective balance sheet dates, and all theincome and expense accounts are translated at the averageforeign exchange rates for the respective periods. Foreigncurrency financial statement translation differences arerecorded in the consolidated balance sheets as a separatecomponent of shareholders’ equity and minority interest insubsidiaries.
(5) Cash and Cash EquivalentsCash and cash equivalents in the consolidated statements ofcash flows is composed of cash on hand, bank deposits thatare able to be withdrawn on demand, and short-terminvestments with an original maturity of three months or lessand with a minor risk of significant fluctuations in value.
Summary of Significant Accounting Policies
f i n a n c i a l s e c t i o n
49A N N U A L R E P O R T 2 0 0 6
(18) Appropriations of Retained Earnings Appropriations of retained earnings reflected in theaccompanying consolidated financial statements have beenrecorded after approval by the shareholders as requiredunder the Commercial Code of Japan.
(19) Reclassification of AccountsCertain prior year amounts have been reclassified to conformto the current year’s presentation.
3The Company maintains its accounting records in Japaneseyen. The US dollar amounts included in the consolidatedfinancial statements and notes thereto represent thearithmetical results of translating Japanese yen to US dollarson the basis of ¥117.47 = US$1, the approximate effective rate
of exchange prevailing at March 31, 2006. The inclusion ofsuch US dollar amounts is solely for the convenience of thereader and is not intended to imply that Japanese yenamounts have been or could be converted, realized or settledin US dollars at that or any other rate.
United States Dollar Amounts
4Accumulated depreciation deducted from cost of property,plant, and equipment in the accompanying consolidatedbalance sheets amounted to ¥123,288 million and ¥124,651
million (US$1,061,131 thousand) at March 31, 2005 and 2006,respectively.
Accumulated Depreciation
5Idle assets included in property, plant, and equipment are as follows.
Idle Property, Plant, and Equipment
Thousands ofUS dollarsMillions of yen
1,309 ——
1,412 2,721
723 5
17972
1,717
6,158 38
1478,277
14,620
Buildings and structuresMachinery and equipmentFurniture and fixturesLand
Total
2005
March 31
2006 2006
March 31
$¥¥
6The Company and its subsidiaries have various leaseagreements whereby it acts as a lessee. The Company and itsJapan subsidiaries' finance lease contracts which are notdeemed to transfer the ownership of the leased assets are
accounted for by the method applicable to ordinary operatingleases. Significant leased assets under the above leasecontracts of the Company and its subsidiaries in Japan for theyear ended March 31, 2005 and 2006 are as follows:
Lease Transactions
48 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
(11) Allowance for Doubtful AccountsAn allowance for doubtful accounts is made against potentiallosses on collection at an amount measured using ahistorical bad debt ratio, plus an amount individuallymeasured on the collectibility of accounts receivable that areexpected to be uncollectible due to bad financial condition orinsolvency.
(12) Accrued BonusesAccrued bonuses to employees are provided for the estimatedamounts which the Company and its subsidiaries areobligated to pay to employees after the fiscal year-end, basedon services provided during the current period.
(13) Reserve for Retirement BenefitsFor the year ended March 31, 2004, the reserve for retirementbenefits (employees’ portion) represents the estimatedpresent value of projected benefit obligations in excess of thefair value of the plan assets less unrecognized actuarialdifferences and unrecognized prior service costs.Unrecognized actuarial differences are amortized on astraight-line basis over the period of 10 years from the nextyear in which they arise. Unrecognized prior service costs arecharged to expenses on a straight-line basis over the averageremaining service life of the employees (mainly over 10years).
The Company changed its retirement benefit plan from adefined benefit plan to a defined contribution plan on April 1,2004. In the year ended March 31, 2005, certain consolidatedsubsidiaries in Japan changed their retirement benefit plansfrom defined benefit plans to defined contribution plans. TheCompany and its consolidated subsidiaries in Japan appliedFinancial Accounting Standards Implementation GuidanceNo. 1 “Accounting for Transfers between Retirement BenefitPlans” and released a portion of the reserve for retirementbenefits.
For other consolidated subsidiaries, the reserve forretirement benefits (employees’ portion) represents theestimated present value of projected benefit obligations inexcess of the fair value of the plan assets less unrecognizedactuarial differences and unrecognized prior service costs.Unrecognized actuarial differences are amortized on astraight-line basis over the period of 10 years from the nextyear in which they arise. Unrecognized prior service costs arecharged to expenses on a straight-line basis over the averageremaining service life of the employees (mainly over 10years).
The main consolidated subsidiaries generally provide for areserve for retirement benefits to directors and corporateauditors based on their internal rules.
The Company revised the compensation structure forretirement benefits to directors and corporate auditors, and amotion to terminate the retirement benefit plan for directorsand corporate auditors and to provide them with retirementbenefits to which they are entitled was resolved at the generalshareholders’ meeting held on June 25, 2004.
Pursuant to the resolution, retirement benefits were fullypaid out and the reserve was reversed accordingly.
(14) Accounting for LeasesFinance leases other than those for which the ownership ofthe leased assets are considered to be transferred to lesseesare accounted for as operating leases.
(15) Income TaxesThe income taxes of the Company and its consolidatedsubsidiaries in Japan consist of corporate income taxes, localinhabitant taxes, and enterprise taxes. Income taxes aredetermined using the asset and liability approach, wheredeferred tax assets and liabilities are recognized fortemporary differences between the tax basis of assets andliabilities and their reported amount in the financialstatements.
(16) Consumption TaxesConsumption taxes are imposed at the flat rate of 5% on allconsumption of goods and services in Japan (with certainexemptions).
The consumption tax withheld upon sales is not includedin net sales in the accompanying consolidated statements ofincome but is recorded as a liability. The balances ofconsumption tax withheld and consumption tax paid (an assetitem), which is borne by the Company and its consolidatedsubsidiaries on purchases of goods and services, are notincluded in revenue and expenses in the consolidatedstatements of income but are offset, and the net balance inincluded in “Other current assets” or “Advances received andother current liabilities” in the consolidated balance sheets atMarch 31, 2005 and 2006.
(17) Social Insurance Premium Related to BonusEffective from the year ended March 31, 2004, the Companystarted to accrue for social insurance premium related tobonuses, since the rate of social insurance premium forbonuses was increased from April 1, 2003 due to theenactment of the revised Employees’ Pension Insurance Lawetc., and the amount became material. As a result, incomebefore income taxes and minority interests decreased by ¥981million in the year ended March 31, 2004.
f i n a n c i a l s e c t i o n
51A N N U A L R E P O R T 2 0 0 6
7The Company has commitment line agreements with threefinancial institutions in order to obtain funds for operations ina stable and efficient manner. During the fiscal year endedMarch 31, 2005, the Company entered into four-year term
commitment line agreements with thirteen financialinstitutions.
The commitment line of credit as of March 31, 2005 and2006 is as follows.
Commitment Line Agreements
8Long-term debt as of March 31, 2005 and 2006 consisted of the following:
Long-term Debt
Thousands ofUS dollarsMillions of yen
40,000 —
40,000
40,000 —
40,000
340,512 —
340,512
Total commitment line of creditOutstanding borrowings
Net outstanding credit
2005
March 31
2006 2006
March 31
$¥¥
Thousands ofUS dollarsMillions of yen
32,98410,00010,00030,00082,9844,944
78,040
28,27010,00010,000
—48,2704,094
44,176
240,65885,12885,128
—410,91434,851
376,063
Loans from banks and other financial institutions with mortgage and collateral0.850 percent. bonds due on July 19, 20070.740 percent. bonds due on December 19, 2007Zero coupon convertible bonds due on November 4, 2010
Less: current portion
2005
March 31
2006 2006
March 31
$¥¥
The annual average interest rate on long-term loans (excluding current portion) from banks was 0.946%.
Annual maturities of long-term loans from banks and other financial institutions are as follows:Thousands of
US dollarsMillions of yen
4,09410,97110,758
371216
1,86028,270
34,85193,39491,5803,1581,839
15,836240,658
Within one yearOver one year, less than two yearsOver two years, less than three yearsOver three years, less than four yearsOver four years, less than five yearsThereafter
Total
$¥
50 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
(1) Finance Lease Contracts Without Ownership Transfer
Thousands ofUS dollarsMillions of yen
8974
1,039183
2,204
8730608191
1,537
686,2135,1751,626
13,082
Buildings and structuresMachinery and equipmentFurniture and fixturesIntangible assets
Total
Accumulateddepreciation
Balance as ofMarch 31, 2006
Acquisition cost
2006
Balance as ofMarch 31, 2006
2006
$¥¥161,7041,647
3743,741
¥
Millions of yen
1,5761,836
2933,705
7701,168
1392,077
806668154
1,628
Machinery and equipmentFurniture and fixturesIntangible assets
Total
Acquisition cost Accumulateddepreciation
Balance as ofMarch 31, 2005
2005
$¥¥
Future lease payments, interest included in lease contracts as of March 31, 2005 and 2006 are as follows:Thousands of
US dollarsMillions of yen
644984
1,628
617920
1,537
5,2557,827
13,082
Due within one yearDue after one year
2005
March 31
2006 2006
March 31
$¥¥
Thousands ofUS dollarsMillions of yen
894 886 7,543Lease rental expenses for the year
2005
March 31
2006 2006
March 31
$¥¥
(2) Operating Lease ContractsFuture lease payments as of March 31, 2005 and 2006 are as follows:
Thousands ofUS dollarsMillions of yen
1,4394,6616,100
2,9433,6856,628
25,05331,36656,419
Due within one yearDue after one year
2005
March 31
2006 2006
March 31
$¥¥
f i n a n c i a l s e c t i o n
53A N N U A L R E P O R T 2 0 0 6
(2) The cost, book value, and unrealized gains or losses for other securities with market value as of March 31, 2005 and 2006are as follows:
An impairment loss of ¥99 million for other securities withmarket values was recorded in the year ended March 31,2005. No impairment loss was recorded for the year endedMarch 31, 2006. Where the market value is available, othermarketable securities are subject to impairment loss when
the decline in the market value compared to the book value ismore than 30%. In such cases, securities are considered“substantially declined” and are written down unless thedecline is deemed temporary.
Book value over cost:Equity securitiesCorporate bondsOther
Subtotal
Book value equal to or less than cost:Equity securitiesOther
SubtotalTotal
Cost
2005 2006 2006
March 31
Thousands of US dollarsMillions of yen
March 31
7,353——
7,353
59—59
7,412
¥
Book value
Unrealizedgains (losses)
Cost Book value
Unrealizedgains (losses)
Cost Book value
Unrealizedgains (losses)
21,422——
21,422
54—54
21,476
¥ 14,069——
14,069
(5)—(5)
14,064
¥ 9,159—44
9,203
14421
1659,368
¥ 34,238—
16834,406
14017
15734,563
¥ 25,079—
12425,203
(4)(4)(8)
25,195
¥ 77,973375
—78,348
1,226181
1,40779,755
¥ 291,4651,432
—292,897
1,192147
1,339294,236
¥ 213,4921,057
—214,549
(34)(34)(68)
214,481
¥
11(1) The book value, market value, and unrealized gains or losses for held-to-maturity debt securities with market value as
of March 31, 2005 and 2006 are as follows:
Marketable Securities and Investments in Securities
Market value over book value:Government and municipal bonds
Subtotal
Market value equal to or less than book value:Government and municipal bonds
SubtotalTotal
Book value
2005 2006 2006
March 31
Thousands of US dollarsMillions of yen
March 31
55
005
¥
Market value
55
005
¥
Unrealizedgains (losses)
00
——0
¥
Book value
——
1,3001,3001,300
¥
Market value
——
1,2831,2831,283
¥
Unrealizedgains (losses)
——
(17)(17)(17)
¥
Book value
——
11,06511,06511,065
¥
Market value
——
10,92410,92410,924
¥
Unrealizedgains (losses)
——
(141)(141)(141)
$
52 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
9 Collateral and Secured Debt
Note: *1 Assets in subsidiaries outside Japan represents an aggregate amount of buildings and structures put into business in such subsidiaries.
Thousands ofUS dollarsMillions of yen
131,159
902
3,1844,448
121,131
903
3,8795,115
1059,631
76622
33,01943,543
Collateral:Cash and time depositsBuildings and structuresLandInvestments in securitiesAssets in subsidiaries outside Japan (*1)
Total
2005
March 31
2006 2006
March 31
$¥¥
Thousands ofUS dollarsMillions of yen
81205
1,0601,346
21558526
1,105
1834,7504,4769,409
Secured debt:Notes and accounts payableShort-term bank loansLong-term Debt
Total
2005
March 31
2006 2006
March 31
$¥¥
10The Company and certain subsidiaries liquidated their notesand accounts receivable based on an asset transferagreement. The balances of those receivables whose
settlement date has not been reached as of March 31, 2005and 2006 is as follows:
Liquidation of Receivables
Thousands ofUS dollarsMillions of yen
25,946 (6,783)
18,469 (3,819)
157,219 (32,508)
Notes and accounts receivable(with recourse, included in above)
2005
March 31
2006 2006
March 31
$¥¥
f i n a n c i a l s e c t i o n
55A N N U A L R E P O R T 2 0 0 6
Fair Value Information on Derivative Transactions
Millions of yen
—
——
——
——
2,060
333 100
115
12
(52)
4 (0)
(52)
(51)
(151)
Forward exchange contractsSelling contracts
US dollarOther
Buying contractsUS dollarOther
Currency optionsSelling contracts
Yen put-US dollar call(Option premium)
Buying contractsUS dollar put-yen call
(Option premium)Total
March 31, 2005
2,008
329 100
5,073 63
4,800 63
¥ ¥ ¥ $
13Derivative transactions are used in order to manage exchangerisks and the risks of market rate fluctuations which occur inthe normal course of business. The Company does not usethese for speculative purposes or for highly leveraged
transactions.The contracted amounts, fair values, and valuation gains
or losses for derivative transactions related to currencies asof March 31, 2005 and 2006 are as follows:
The above amounts exclude outstanding derivative contracts,which are assigned to monetary rights and obligations, inaccordance with the Japanese Accounting Standards forderivative financial instruments.
Fair value was estimated based on the trading valuequoted by correspondent financial institutions.
There was no disclosure made related to interest-relatedderivative contracts because all outstanding contracts wereassigned to monetary rights and obligations as of March 31,2005 and 2006 in accordance with the Japanese AccountingStandards for derivative financial instruments.
Contract amount etc.
Total Over oneyear
Fair value Valuationgains
(losses)
——
——
——
——
894640
32754
17
8
2932
7 1
5
(14)
60
March 31, 2006
923672
320 53
2,370 22
2,250 22
¥ ¥ ¥ $
Contract amount etc.
Total Over oneyear
Fair value Valuationgains
(losses)
—
——
——
——
7,6095,447
2,781460
147
70
247276
564
44
(120)
507
March 31, 2006
Thousands of US dollars
7,8565,723
2,725456
20,177 191
19,154 190
$ $ $ $
Contract amount etc.
Total Over oneyear
Fair value Valuationgains
(losses)
54 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
(3) Other securities sold during the year ended March 31, 2005 and 2006 are as follows:
Thousands ofUS dollarsMillions of yen
3,025 1,921
20
3,519 2,806
0
29,955 23,890
3
Proceeds from sale of other securitiesGross realized gain on sale of other securitiesGross realized loss on sale of other securities
2005
March 31
2006 2006
March 31
$¥¥
(4) The book value of major securities without market values as of March 31, 2005 and 2006 is as follows:
Thousands ofUS dollarsMillions of yen
15,692110
15,43637
131,407311
Other securitiesUnlisted equity securities (excluding over-the-counter securities)Unlisted debt securities
2005
March 31
2006 2006
March 31
$¥¥
(5) Schedule for redemption of held-to-maturity debt securities and other securities with maturities:
Debt securitiesGovernment and municipal bondsCorporate bonds
Total
Within 1year
2005 2006 2006
March 31
Thousands of US dollarsMillions of yen
March 31
27375
¥ 33740
¥ ———
¥ ———
¥ 25136
287
¥ 1,057—
1,057
¥ ———
¥ ———
¥ 2,135311
2,446
$ 9,000-
9,000
$ ———
$ ———
$
1 to 5 years
5 to 10years
Over 10years
Within 1year
1 to 5 years
5 to 10years
Over 10years
Within 1year
1 to 5 years
5 to 10years
Over 10years
Investments in Unconsolidated Subsidiaries and AffiliatesThousands of
US dollarsMillions of yen
5,306 307
5,613
3,657 250
3,907
31,134 2,128
33,262
Investments in securitiesInvestments and advances - Other
Total
2005
March 31
2006 2006
March 31
$¥¥
12
f i n a n c i a l s e c t i o n
57A N N U A L R E P O R T 2 0 0 6
Reserve for Retirement Benefits15The Company and certain subsidiaries transferred theirretirement plan from a defined benefit plan to a definedcontribution plan. The Company terminated its pension plan(which covers a portion of the governmental pension) onMarch 31, 2004, and terminated its qualified pension plan andlump-sum retirement payment plan on April 1, 2004.
Eight subsidiaries in Japan transferred their retirement
plan from a defined benefit plan to a defined contribution planin the fiscal year ended March 31, 2005.
In certain circumstances, additional payments are madeupon the retirement of employees. Certain subsidiariesoutside Japan also have defined benefit retirement plans.
The reserve for retirement benefits as of March 31, 2005and 2006 is analyzed as follows:
Thousands ofUS dollarsMillions of yen
(14,781) 7,138(7,643)1,666(123)
(6,100)(6,100)
(14,428)7,096(7,332)
148(130)
(7,314)(7,314)
(122,826)60,413(62,413)
1,263(1,114)
(62,264)(62,264)
Projected benefit obligationsPlan assetsUnfunded projected benefit obligationsUnrecognized actuarial differencesUnrecognized prior service costsAccrued pension costsReserve for retirement benefits
2005
March 31
2006 2006
March 31
$¥¥
Notes: 1 Certain consolidated subsidiaries provide for retirement allowance by using expediency methods. For some small and medium sized companies, simplified methods areallowed. For employees, the allowance is provided at the amount which would be required to be paid if all eligible employees voluntarily terminated their employment atthe balance sheet date. In certain cases, amount would be discounted for the period of the remaining service years. For pensioners, the allowance is provided at theamount of the actuarial obligation calculated for the funding purpose.
2 Consolidated subsidiaries which participated in joint pension funds and could not calculate the value of their own plan assets by a reasonable method, expensed theircontribution amount to the funds as pension expenses. The aggregate amounts of the plan assets of the funds are ¥2,887 million, ¥3,469 million (US$29,528 thousand) atMarch 31, 2005 and 2006, respectively.
3 The Company changed its retirement plan to a defined contribution plan on April 1, 2004. The Company has no projected benefit obligation balance as of March 31, 2004.4 Certain subsidiaries in Japan changed their retirement plans to defined contribution plans in the years ended March 31, 2005 and 2006. These Companies have no
projected benefit obligation balance as of March 31, 2005.
The net pension expense related to retirement benefits for the years ended March 31, 2004, 2005, and 2006 is as follows:
Thousands ofUS dollarsMillions of yen
2,657418(291)149(16)
2744,5407,7312,951
10,682
1,776328(246)127(14)53
5,3877,411
2947,705
15,1232,797(2,098)1,080(122)448
45,86263,0902,499
65,589
Service cost (*1, 2)Interest costExpected return on plan assetsAmortization of actuarial differencesAmortization of prior service costsAdditional retirement benefit, etc.Contribution to defined contribution plan
SubtotalLoss on change of retirement plan to defined contribution plan (*3,4)
Net pension expense
2005
March 31
2006 2006
March 31
$¥¥9,7414,125(3,395)4,068(250)
2,898—
17,1875,325
22,512
2004
¥
Notes: *1 Employees’ contributions to the contributory pension plan (which covers a portion of the governmental pension) were deducted.*2 The pension expense of consolidated subsidiaries which applied the expediency method is included in “Service cost.”*3 A loss on the change in retirement benefit plan recognized in the fiscal year ended March 31, 2005 was accounted for by the Company and certain subsidiaries in Japan. *4 A loss on the change in retirement benefit plan recognized in the fiscal year ended March 31, 2006 was accounted for by certain subsidiaries in Japan.
56 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Income Taxes14The significant components of deferred tax assets and liabilities are as follows:
The reconciliation between the statutory tax rate and the effective tax rate for the years ended March 31, 2005 and 2006 is asfollows:
Thousands ofUS dollarsMillions of yen
1,64231,361
7434,1362,258
10,067
11,9043,514
65,625(20,929)44,696
(1,602)(1,914)(5,781)
(642)(9,939)
34,757
1,65420,770
7274,7623,0048,695
15,3905,199
60,201(20,772)38,429
(1,548)(1,810)
(10,229)(834)
(14,421)24,008
14,080176,814
6,19040,54225,56974,016
131,01544,258
512,484(185,344)327,140
(13,180)(15,413)(87,077)(7,098)
(122,768)204,372
Deferred Tax AssetsExcess amount of tax deductible for retirement allowanceNet operating loss carry forwardsExcess amount of tax deductible for loss on devaluation of investments in securitiesExcess amount of tax deductible for accrued bonusExcess amount of tax deductible for loss on write-down of inventoriesExcess amount of tax deductible for accrued expenses due to change in retirement benefitExcess amount of tax deductible for loss on devaluation of investments in subsidiaries and
allowance for doubtful accountsOther items
Subtotal - deferred tax assetsValuation allowance
Total deferred tax assetsDeferred Tax Liabilities
Special tax-purpose reserveSubsidiaries outside JapanNet unrealized gain on other securitiesOther items
Total deferred tax liabilitiesNet deferred tax assets
2005
March 31
2006 2006
March 31
$¥¥
40.7 %
10.8(2.9)
(51.7)33.60.1
(1.2)29.4 %
40.7 %
11.6(2.1)3.4
(15.9)(4.5)(0.2)
33.0 %
Statutory tax rate Permanent differences:
Non-deductible expenses such as entertainment expensesEquity in earnings of affiliates Valuation allowance for deferred tax assets Impairment on investments and receivables in certain subsidiariesStatutory tax rate differences between the Company and subsidiariesOthersEffective tax rate
2005
March 31
2006
f i n a n c i a l s e c t i o n
59A N N U A L R E P O R T 2 0 0 6
Gain (Loss) on Change in Equity Interest in Affiliates20The gain (loss) on change in equity interest in affiliates was the result of a capital increase in a certain affiliate, which isaccounted for by the equity method.
Impairment Loss on Fixed Assets21Impairment losses were recognized for the following groups of assets:
UseBusiness assets
Leased assets to othersIdle assets
CategoryBuildings, land, and other
Land and otherBuildings, land, and other
LocationsKamisu City, Ibaraki Prefecture, and three other
Ome City, Tokyo, and otherHachioji City, Tokyo, and nine other
Due to the low profitability of business assets and leased assets to others and due to significant decline in the market price ofcertain idle assets, an impairment loss of ¥3,026 million (US$25,759 thousand) was recorded.
Grouping of assetsBusiness assets are grouped on the basis of managerialaccounting purposes, and these are the minimum cashgenerating units. Leased assets to others and idle assets aregrouped individually.
Measurement of recoverable valueThe recoverable value is determined by net selling value. Thenet selling value is based on conventional appraisal providedby professional real estate assessors or property taxassessment amount, considering the materiality of the asset.
Thousands ofUS dollarsMillions of yen
5701,989
4673,026
4,85116,9353,973
25,759
CategoryBuildingsLandOther
Total
2006 2006
$¥
March 31 March 31
Related Party Transactions22Disclosure of related party transactions has been omitted as there were no significant transactions with related parties.
58 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
The assumptions used in calculation of the above information are as follows:
Discount rateExpected rate of return on plan assets
Method of attributing the projected benefits to periods of service
Amortization of unrecognized prior service costsAmortization of unrecognized actuarial differences
March 31
2.5 %3.5 %
Mainly point basis
10 years10 years
2004
2.0%1.5%
Mainly straight line amortization
10 years10 years
2.0%1.5%
Mainly straight line amortization
10 years10 years
2005 2006
Commitment and Contingent Liabilities16The Company guaranteed housing loans from financialinstitutions for its employees in the amount of ¥332 millionand ¥202 million (US$1,723 thousand) as of March 31, 2005and 2006, respectively.
The Company also guaranteed overdrafts of employees’bank accounts for company use (advances payments, etc) inthe amount of ¥2 million and ¥2 million (US$17 thousand) asof March 31, 2005 and 2006, respectively.
The Company has an agreement with a financialinstitution to guarantee a bank loan of a third-party companyin the amount of ¥680 million and ¥580 million (US$4,937
thousand) as of March 31, 2005 and 2006, respectively, if thefinancial institution deemed it necessary.
The Company has an agreement with a bank to guaranteethe overdraft of employees’ bank accounts for company use(advances payments, etc) in the amount of ¥73 million and ¥80million (US$679 thousand) as of March 31, 2005 and 2006,respectively, if the financial institution deemed it necessary.
The Company would be required to satisfy customerslease obligations in the event of default. The maximumamount to be paid in such event is ¥2,833 million (US$24,115thousand) as of March 31, 2006.
Research and Development Cost17The research and development cost incurred during the yearsended March 2004, 2005, and 2006 included in cost of salesand selling, general, and administrative expenses aggregated
to ¥26,991 million, ¥28,998 million and ¥30,917 million(US$263,194 thousand), respectively.
Selling, General, and Administrative Expenses18The major elements of selling, general, and administrative expenses for each of the three years ended March 31, 2004, 2005,and 2006 are as follows:
Thousands ofUS dollarsMillions of yen
42,9183,834
42,9685,303
365,77545,141
SalariesProvision for accrued bonuses
2005 2006 2006
$¥¥42,1035,085
2004
¥
Loss on Restructuring19For the years ended March 31, 2004, 2005 and 2006, theCompany and certain subsidiaries recorded a restructuringcharge of ¥5,340, ¥4,428 and ¥1,786 million (US$15,206thousand), respectively, that consisted primarily of employee
termination benefits, losses on disposal of property andequipment, and costs related to the removal of property andequipment, in order to reorganize operational andmanufacturing structures.
f i n a n c i a l s e c t i o n
61A N N U A L R E P O R T 2 0 0 6
(2) Geographic Segment InformationSegment information classified by geographic area (inside and outside Japan) for each of the three years ended March 31, 2004,2005, and 2006, is summarized as follows:
JapanAsiaEuropeNorth AmericaOthers
TotalElimination or unallocated
Consolidated Total
2004
Millions of yen
Sales tooutside
customers
Inter-segment
sales
Totalsales
Operatingexpenses
Operatingincome (loss)
Assets
273,89136,71529,61219,23312,492
371,943—
371,943
¥ ¥ ¥ ¥ ¥ ¥33,07512,6783,5971,150
42950,929(50,929)
—
306,96649,39333,20920,38312,921
422,872(50,929)
371,943
293,11847,50230,88020,21712,544
404,261(50,574)
353,687
13,8481,8912,329
166377
18,611(355)
18,256
287,52537,71219,6116,6067,642
359,09638,319
397,415
JapanAsiaEuropeNorth AmericaOthers
TotalElimination or unallocated
Consolidated Total
2005
Millions of yen
Sales tooutside
customers
Inter-segment
sales
Totalsales
Operatingexpenses
Operatingincome
Assets
281,41642,45230,25417,43115,500
387,053—
387,053
¥ ¥ ¥ ¥ ¥ ¥38,92525,2202,8741,7721,054
69,845(69,845)
—
320,34167,67233,12819,20316,554
456,898(69,845)
387,053
303,26063,69330,45218,60316,344
432,352(70,056)
362,296
17,0813,9792,676
600210
24,546211
24,757
279,87149,14722,1277,765
10,016368,92631,342
400,268
JapanAsiaEuropeNorth AmericaOthers
TotalElimination or unallocated
Consolidated Total
2006
Millions of yen
Sales tooutside
customers
Inter-segment
sales
Totalsales
Operatingexpenses
Operatingincome
Assets
260,40453,12734,65419,88720,805
388,877—
388,877
45,22424,6503,7532,178
67276,477(76,477)
—
305,62877,77738,40722,06521,477
465,354(76,477)
388,877
291,19972,39735,36021,29220,418
440,666(77,110)
363,556
14,4295,3803,047
7731,059
24,688633
25,321
284,46956,99322,1029,720
10,748384,03233,774
417,806
Operatingincome
Assets
122,82945,79725,9356,5839,017
210,1615,390
215,551
2,421,627485,175188,14782,74191,500
3,269,190287,511
3,556,701
Thousands ofUS dollars
2006
Notes: 1 Geographical distances are considered in classification of country or area.2 Major countries or areas included in each segment except for Japan are as follows:
Asia Singapore, China, Korea, etc.Europe The Netherlands, France, the United Kingdom., Germany, etc.North America USAOthers Brazil, Australia, etc.
3 Unallocated assets included in “Elimination or unallocated” mainly consist of surplus funds (cash and marketable securities), long-term investments (investment in securities, etc.), and assets that belong to the administrative department of the Company.
¥ ¥ ¥ ¥ ¥ ¥ $ $
60 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
Net Income and Dividends per Share 23The net income per share shown for each year in theaccompanying consolidated statements of income is basedupon the weighted average number of shares of common
stock outstanding during each year. The basis for the calculation of net income per share for
the years ended March 31, 2004, 2005, and 2006 is as follows:
The cash dividend per share shown for each year in the accompanying consolidated statements of income represents dividendsdeclared as applicable to the respective years, rather than those paid in the respective years.
Thousands ofUS dollarsMillions of yen
9,373
(26)9,347
243,243,513
21,560
—21,560
246,527,449
$183,534
—183,534
246,527,449
Net incomeLess: components not pertaining to common shareholdersBonuses to directors and corporate auditorsNet income pertaining to common stockAverage outstanding shares of common stock (shares)
2005 2006 2006
$¥¥24,301
(24)24,277
243,147,636
2004
¥
Segment Information24(1) Industry Segment InformationNet sales, operating income, and total assets of themeasurement, control, and information equipment businessconstituted more than 90% of the consolidated totals for theyears ended March 31, 2004, 2005, and 2006. Thus, thedisclosure of industry segment information has been omitted.
The measurement, control, and information equipmentbusiness produces and sells a wide range of productsincluding integrated production control systems; distributedcontrol systems; industrial computer systems;
programmable logic controllers; recorders; flowmeters;differential pressure and pressure transmitters; gas andliquid analyzers; oscilloscopes; measuring instruments forelectric power, temperature, and pressure; XY stages;medical information systems; confocal scanners; engine andfuel monitoring devices and sensors for aircraft; navigationequipment; and weather observation equipment.
Other business consists principally of a real estateoperation and temporary personnel services.
63A N N U A L R E P O R T 2 0 0 6
Report of Independent Auditors
To the Board of Directors and Shareholders of Yokogawa Electric Corporation
We have audited the accompanying consolidated balance sheets of Yokogawa Electric Corporation and its subsidiaries as of March31, 2005 and 2006, and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended,all expressed in Japanese Yen. These consolidated financial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements. An audit also includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide areasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidatedfinancial position of Yokogawa Electric Corporation and its subsidiaries as of March 31, 2005 and 2006, and the consolidated resultsof their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted inJapan.
As described in Note 2, Yokogawa Electric Corporation and its domestic consolidated subsidiaries adopted “Accounting Standards forImpairment of Fixed Assets” in the fiscal year ended March 31, 2006.
The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader, have been translated on thebasis set forth in Note 3 to the accompanying consolidated financial statements.
Tokyo, JapanJune 20, 2006
62 Y O K O G A W A E L E C T R I C C O R P O R A T I O N
(3) Export Sales and Sales by Subsidiaries Outside Japan
Overseas salesConsolidated salesRatio
814,727—
24.6%
Asia
2006
Thousands of US dollars
$ 292,324—
8.8%
Europe
$ 181,976—
5.5%
NorthAmerica
$ 259,307—
7.9%
Others
$ 1,548,3343,310,440
46.8%
Total
$
Overseas salesConsolidated salesRatio
86,842—
23.3%
Asia
2004
Millions of yen
¥ 35,248—
9.5%
Europe
¥ 19,940—
5.4%
NorthAmerica
¥ 16,286—
4.4%
Others
¥ 158,316371,943
42.6%
Total
¥
Overseas salesConsolidated salesRatio
109,604—
28.3%
Asia
2005
Millions of yen
¥ 34,630—
9.0%
Europe
¥ 18,164—
4.7%
NorthAmerica
¥ 15,844—
4.1%
Others
¥ 178,242387,053
46.1%
Total
¥
Overseas salesConsolidated salesRatio
95,706—
24.6%
Asia
2006
Millions of yen
¥ 34,339—
8.8%
Europe
¥ 21,377—
5.5%
NorthAmerica
¥ 30,461—
7.9%
Others
¥ 181,883388,877
46.8%
Total
¥
Notes: 1 Geographical distances are considered in classification of country or area.2 Major countries or areas included in each segment except for Japan are as follows;
Asia Singapore, China, Korea, etc.Europe The Netherlands, France, the United Kingdom., Germany, etc.North America USAOthers Brazil, Australia, etc.
3 Overseas sales represent those of the Company and consolidated subsidiaries to countries and areas outside of Japan.
64 Y O K O G A W A E L E C T R I C C O R P O R A T I O N 65A N N U A L R E P O R T 2 0 0 6
corporat ion informat ion
Corporate Information
Shareholders by Category Shareholding by Category (thousand shares)
Individual Investors 21,952 (96.26%)
Foreign Investors 365 (1.60%)
Others 346 (1.52%)
Financial Institutions 98 (0.43%)
Securities Companies 42 (0.18%)
Treasury Stock 1 (0.00%)
Financial Institutions 144,308 (53.72%)
Foreign Investors 75,891 (28.25%)
Individual Investors 29,776 (11.08%)
Others 8,742 (3.25%)
Treasury Stock 5,722 (2.13%)
Securities Companies 4,185 (1.56%)
Company Overview (as of March 31, 2006)
Share Information (as of March 31, 2006)
Corporate NameWebsiteHeadquartersFoundedIncorporatedPaid-in CapitalNumber of EmployeesAffiliates
Yokogawa Electric Corporationhttp://www.yokogawa.com/2-9-32 Nakacho, Musashino-shi, Tokyo 180-8750, JapanSeptember 1, 1915December 1, 192043,401,056,42517,858 (consolidated) 5,212 (non-consolidated)21 affiliates (in Japan)61 affiliates in 30 countries (outside Japan)
Number of shares Authorized Number of Shares of Common Stock IssuedNumber of ShareholdersStock Exchange Listings Administrator of the Register of Shareholders
Annual Meeting
Accounting Auditors
Major Shareholders (Top 10)
483,735,000268,624,51022,804Tokyo Stock Exchange (First Section)The Mizuho Trust & Banking Co., Ltd.1-2-1 Yaesu, Chuo-ku, 103-8670, JapanThe annual general meeting of shareholders of the Company is normally held in June each yearin Tokyo, Japan. In addition, the Company may hold an extraordinary meeting of shareholdersas necessary, giving at least two weeks' prior notice to shareholders.ChuoAoyama Audit Corporation
The Master Trust Bank of Japan, Ltd. (trust account)The Dai-ichi Mutual Life Insurance CompanyJapan Trustee Service Bank, Ltd. (trust account)Nippon Life Insurance CompanyThe Nomura Trust and Banking Co., Ltd. (investment trust account)Mizuho Trust & Banking Co., Ltd. (Employee Retirement Benefit Trust, Mizuho Corporate Bank Account)Yokogawa Electric CorporationState Street Bank and Trust CompanyTokio Marine & Nichido Fire Insurance Co., Ltd.Mizuho Trust & Banking Co., Ltd. (Employee Retirement Benefit Trust, Mizuho Bank Account)
Shareholders
38,514,00022,697,00018,754,00013,284,6156,785,5006,643,9905,721,5534,843,0014,694,9364,617,010
Number of shares held (shares)
14.348.456.984.952.532.472.131.801.751.72
Shareholding ratio (%)
Public Relations & Investor Relations2-9-32 Nakacho, Musashino-shi, Tokyo, 180-8750 JapanPhone: 81-422-52-5530 Facsimile: 81-422-55-6492http://www.yokogawa.com/
Published in July 2006
Yokogawa Electric Corporation
Percentage of Waste Paper pulp 100%