Omron Corporation
Annual Report 2003

Plain-text annual report

The Productivity to Create Annual Report 2003 Year ended March 31, 2003 Profile In May 2003, Omron Corporation marked its 70th year of operations. Since its establishment, Omron has been quick to grasp social needs and turn them into businesses. Today, Omron conducts a wide range of businesses that aim to provide innovative solutions for industry, society and daily life. In the fiscal year ended March 31, 2003, Omron moved ahead with its Structural Reforms for Group Productivity to build a solid earnings infrastructure, toward the realization of Grand Design 2010 (GD2010), Omron’s long-term Group management vision established in May 2001. During the year to March 2004, to further strengthen its operations, the Company will complete the Structural Reforms for Group Productivity and enter its next stage of growth, shifting from reform to creation. In the future, Omron will continue to transform itself and contribute to the development of society as a global corporation centered on the core strength of its expertise in sensing and control technology. Contents Financial Highlights............................................................................ 1 To Our Shareholders ......................................................................... 2 Message from CEO Hisao Sakuta .................................................... 4 Topics for Omron’s 70th Anniversary: Evolving Venture DNA ......... 8 Omron at a Glance ............................................................................ 10 Review of Operations ........................................................................ 12 Corporate Citizenship Activities ........................................................ 17 Environmental Activities .................................................................... 18 Board of Directors, Corporate Auditors and Corporate Officers ................................................................. 20 Financial Section................................................................................ 21 Global Network .................................................................................. 53 Investor Information........................................................................... 55 A Caution Concerning Forward-Looking Statements Statements in this annual report with respect to Omron’s plans, strategies and beliefs, as well as other statements that are not historical facts, are forward-looking statements involving risks and uncertainties. Important factors that could cause actual results to differ materially from such statements include, but are not limited to, general economic conditions in Omron’s markets, which are primarily Japan, North America, Europe, Asia-Pacific and China; demand for, and competitive pricing pressure on, Omron’s products and services in the marketplace; Omron’s ability to continue to win acceptance for its products and services in these highly competitive markets; and movements of currency exchange rates. Financial Highlights OMRON Corporation and Subsidiaries Years ended March 31, 2003, 2002 and 2001 Millions of yen (except per share data) Thousands of U.S. dollars (Note 2) (except per share data) 2003 2002 2001 2003 For the Year: Net Sales ....................................................................................... ¥535,073 Income (Loss) before Income Taxes, Minority Interests ¥533,964 ¥594,259 $4,458,942 and Cumulative Effect of Accounting Change........................... 4,732 (25,373) 40,037 39,433 Income (Loss) before Cumulative Effect of Accounting Change.................................. Net Income (Loss) ......................................................................... 511 511 (16,157) (15,773) 22,297 22,297 4,258 4,258 Per Share Data (yen and U.S. dollars): Income (Loss) before Cumulative Effect of Accounting Change Basic................................................................................. ¥ 2.1 2.1 Diluted .............................................................................. ¥ (65.0) (65.0) ¥ 87.4 85.3 $ Net Income (Loss) Basic................................................................................. Diluted .............................................................................. Cash Dividends (Note 1) ......................................................... 2.1 2.1 10.0 (63.5) (63.5) 13.0 87.4 85.3 13.0 0.02 0.02 0.02 0.02 0.08 Capital Expenditures (cash basis) ................................................. ¥ 34,454 40,235 Research and Development Expenses ......................................... ¥ 38,896 41,407 ¥ 37,583 42,513 $ 287,117 335,292 At Year End: Total Assets................................................................................... ¥567,399 251,610 Total Shareholders’ Equity ............................................................ ¥549,366 298,234 ¥593,144 325,958 $4,728,325 2,096,750 Notes: 1. Cash dividends per share represent the amounts applicable to the respective year, including dividends to be paid after the end of the year. 2. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at March 31, 2003, of ¥120=$1. Income (Loss) before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change Net Income (Loss) Net Income (Loss) per Share (Diluted) (Billions of Yen) (Billions of Yen) 50 40 30 20 10 0 30 20 10 0 (Yen) 100 80 60 40 20 0 Net Sales (Billions of Yen) 600 500 400 300 200 100 0 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 -25.4 -15.8 -63.5 A n n u a l R e p o r t 2 0 0 3 • 1 (Left) Yoshio Tateisi Chairman and Representative Director (Right) Hisao Sakuta Chief Executive Officer and Representative Director To Our Shareholders The Omron Group is currently operating under Grand Design 2010 (GD2010), a long-term vision announced in May 2001 for the Omron Group’s first decade in the 21st century. Since April 2002, we have been carrying out Structural Reforms for Group Productivity to ensure that we achieve the goals of GD2010. The benefits of these structural reforms began to take effect during the fiscal year ended March 31, 2003, and contributed to a dramatic improvement in profits. In the fiscal year ending March 2004, we will continue to execute these reforms and build a strong earnings structure to place the Omron Group on a firm footing for growth in the years ahead. 2 • O m r o n C o r p o r a t i o n ➤ Operating Results Backed by a worldwide recovery in production and a bottoming-out of consumption, the Industrial Automation Company (IAB), the Electronic Components Company (ECB) and the Healthcare Company (HCB) performed well. As a result, despite the loss of sales due to business transfers made as part of the structural reforms, consolidated net sales for the year ended March 31, 2003 increased 0.2 percent year-on-year to ¥535.1 billion. However, challenging conditions persisted in the Social Systems Business, reflecting a severe operating environment in the financial industry as well as a downward trend in capital investment due to sluggish passenger revenues in the public transportation market. Consolidated profits reflected the expansion in sales of IAB and ECB, Omron’s core businesses, as well as the cost reductions achieved as a result of the structural reform measures that were implemented throughout the Omron Group to raise productivity. Consequently, operating income improved considerably, totaling ¥32.3 billion, more than seven times the level of the previous fiscal year. Omron posted non-operating expenses that included additional retirement payments associated with the implementation of an early retirement program as part of the structural reforms; impairment losses associated with the sale and disposal of idle assets; and losses on the sale and impairment of securities. As a result, income before income taxes, minority interests and cumulative effect of accounting change was ¥4.7 billion, compared with a loss of ¥25.4 billion in the previous fiscal year. Net income was ¥0.5 billion, compared with a net loss of ¥15.8 billion in the previous fiscal year. ➤ Execution and Results of Structural Reforms Given the deterioration of results in the previous fiscal year, we carried out structural reforms to raise productivity across the entire Omron Group. As specific measures, we implemented an early retirement program aimed at rightsizing our workforce; consolidated or closed operating bases and reassigned the affected businesses and employees; accelerated the shift of production to overseas factories, particularly in China; and withdrew from low-profit and unprofitable businesses. These initiatives are now yielding steady results, and we plan to complete them during the first half of the current fiscal year. In addition to our efforts to build a sustainable earnings base for the future, the R&D results from the Omron Keihanna Innovation Center, which opened in May 2003, will support long-term maximization of corporate value, the management objective of GD2010. ➤ New Management Structure At the 66th General Meeting of Shareholders held on June 25, 2003, and the Board of Directors meeting that followed, Hisao Sakuta took over as chief executive officer and representative director of the Company, and Yoshio Tateisi was appointed chairman and representative director. Under this new management structure, we aim to achieve long-term maximization of corporate value as a truly global enterprise. In this fiscal year, Omron will shift from structural reform to the stage of business growth, and will take numerous measures that together will transform the Company. We look forward to sharing with you in the growth of the Omron of tomorrow. Yoshio Tateisi Chairman and Representative Director Hisao Sakuta Chief Executive Officer and Representative Director A n n u a l R e p o r t 2 0 0 3 • 3 Message from CEO Hisao Sakuta I assumed the position of Chief Executive Officer and Representative Director in June 2003. I would like to take this opportunity to explain my management stance and the direction in which I will guide the Omron Group. Today, the times are becoming more and more volatile. Yet even in these circumstances, I believe Omron has the potential to survive and develop into the next generation by further extending the entrepreneurial spirit and the philosophy of cultivating social needs that have characterized Omron since its founding. I will listen to the opinions of our shareholders and all of our stakeholders, and diligently and boldly carry out management with speed. I am committed to maximizing Omron’s corporate value and leading the Omron Group’s transformation into a truly global enterprise. Achieving the Goals of GD2010 In May 2001, Omron began implementation of Grand Design 2010 (GD2010) to establish the direction of the Omron Group over the next ten years. We also set the goal of achieving ROE of 10 percent by the year ending March 2005, the midway point of GD2010. I intend to maintain GD2010 as Omron’s basic policy and continue executing management to achieve long-term maximization of the Group’s corporate value. To do this, we will first complete the establishment of a solid earnings structure and manage the Omron Group’s operations to ensure the achievement of 10 percent ROE in the year ending March 2005. 4 • O m r o n C o r p o r a t i o n Position in the Current Fiscal Year For the year ending March 31, 2004, we will focus on establishing a strong and sustainable earnings structure, with the objective of maximizing business strength. In the first half of the period, we will push ahead with the VIC21 (Value-added Innovation Committee 21) Structural Reforms for Group Productivity that are currently under way. We initiated VIC21 because major changes in the economic environment and deterioration of business results just after the start of GD2010 had caused us to deviate from the path to profitability that we had originally set. In implementing the VIC21 reforms, we have reduced our domestic workforce by 1,460 people through an early retirement program, closed three domestic production facilities, and sold or integrated eight businesses and ten subsidiaries. In addition to these results, by completing the various measures we are currently implementing, we expect to nearly achieve all of the structural reform targets necessary to reduce Group consolidated fixed and variable costs by ¥30 billion. In the second half of the fiscal year, we will maintain our stronger earnings base, and gradually steer our efforts toward improving our platform for growth. Management Stance Maximizing Group Corporate Value on a Long-Term Basis through GD2010 3/2011 1st STAGE 2nd STAGE VIC21 3/2005 Target 3/2004 (est.) 7.5% 3/2001 6.7% 3/2000 3.5% GD2010 Medium-Term Target ROE 10% 3/2003 0.2% 3/2002 (5.1%) l e u a V e t a r o p r o C p u o r G For our growth platform, our basic policy for the first two years will be to focus on linking the existing seeds of growth, including internal companies, to businesses, rather than creating new seeds for growth. Toward this aim, we will accelerate the creation of a high-profit model in our core businesses. In addition, we will position “Sensing Network Solutions” as the image of our targeted growth businesses, and establish the Device Business and the Solutions Business as our two main strategic areas. A n n u a l R e p o r t 2 0 0 3 • 5 Shifting Gears toward Growth Orientation of Growth Strategy Our objectives for March 2005 are as follows. Accelerating Creation of a High-Profit Business Model for Core Businesses “Sensing Network Solution” Device Business Solutions Business Use our strength in SENSING components in the growing NETWORK market to shift to SOLUTION-based added value Toward the Second Stage of GD2010 ➤ Device Business We will establish a profit model for Omron’s device business targeting the fields of optical devices (optical communications, MLA) and MEMS, so that it can be established as a full-scale Device Business in ECB. ➤ Solutions Business In the Solutions Business, which is centered in IAB, we will complete our examination of the market for a high-profit business model based on sensing components, and develop this into a core business. While completing VIC21 and shifting to the growth stage, we will aim to restore ROE to 7.5% in the fiscal year ending March 31, 2004 and work to ensure achievement of our ROE target of 10% in the year ending March 31, 2005. In the second stage, from April 2005 and beyond, our goal will be to maintain profitability while generating growth toward 2010. Simply stated, we will practice “corporate value management.” ➤ Corporate Value Management For Omron, corporate value management enables generation of growth while maintaining profitability – in other words, it is management that seeks long-term maximization of Group corporate value. To put corporate value management into practice, we will embrace indicators, such as cash flow, that provide a more comprehensive understanding of the Group’s financial condition, and use them as benchmarks for evaluation. We must also link these indicators to our day-to-day business activities, to bring them into line. We will develop these conditions with the aim of completion in the second stage. In managing the Group, we will adhere to “selection and focus,” “core competence” and “employee self-management” as the three key strategies of corporate value management. ➤ Selection and Focus We will expedite maximization of corporate value through a strategy of selection and focus. Omron’s businesses operate autonomously in frameworks such as the internal company system. As exemplified by the separation of the Healthcare Company on July 1, 2003, we will accelerate autonomous management in an even greater variety of forms in order to maximize the value of each business. After creating these frameworks, we will speed up the redistribution of management resources based on careful assessment of the future value of each business to restructure them as a collection 6 • O m r o n C o r p o r a t i o n of highly profitable businesses, which will support maximization of the Group’s corporate value. The value assessment standards used for this redistribution will be determined in consideration of the new business evaluation standards mentioned earlier. ➤ Core Competence As we work to maximize the Omron Group’s corporate value, we will practice management that turns to technology for the sources of competitive strength in our core businesses. In GD2010, “Sensing & Control” is positioned as the core competence of the Omron Group. In the future, we will expedite the realization of Sensing & Control to further strengthen our technologies. I believe that superior technologies should back not only our products but also quality management and all of our business processes. These technologies are also core competencies that contribute to increasing corporate value. I aspire to the type of management where our outstanding technologies are exhibited in all our businesses, products and business processes. ➤ Employee Self-Management What will ultimately bring about maximization of Omron’s corporate value is people. Omron’s management has always valued people, and I will not change that. Omron values people by providing opportunities and compensation to employees who contribute to increasing the Group’s corporate value and who themselves aspire to grow – in other words, self- managing individuals who can make decisions, think and act on their own. In an increasingly volatile business environment, this quality of self-management in employees will be needed even more. I plan to reexamine ways to create a relationship of continuous give-and-take between Omron and its self-managing employees, including a review of our compensation system. Through the measures outlined here, I intend to expend every effort to advance toward maximization of Omron’s corporate value. I ask for your support and guidance. Ideal Image of OMRON Creating a 21st century company Mission Contributing to the development of society Management Objective Maximizing corporate value on a long-term basis Offering maximum satisfaction to customers Becoming a global winner Self-Reliant Management Self-Reliant Business Units Self-Reliant Individuals Vision that requires consistent evolution Corporate Transformation Vision Vision that needs to be preserved Identity Vision Corporate Philosophy Core Competence Management Vision supporting the achievement of an ideal image Internal Business Company Vision Industrial Business, Social Business, Lifestyle Business A n n u a l R e p o r t 2 0 0 3 • 7 Topics for Omron’s 70th Anniversary: Evolving Venture DNA Omron celebrated the 70th anniversary of its founding in May 2003. While continuing to evolve original technologies in its core competence area of sensing and control, Omron has expanded into new business areas. “To the machine, the work of the machine; to man, the thrill of further creation” — the venture spirit manifested in this corporate philosophy has been passed down since Omron’s inception, and helps the Company to evolve with the times. Omron will work to meet the new social needs engendered by the network society, and to create customer value that stays ahead of social change. 1933 ➤1952 Established through the development of a timer for X-ray machines using proprietary technology Kazuma Tateisi founded Tateisi Electric Manufacturing Co., which would later become Omron Corporation. Successfully developing a timer for X-ray Successful commercialization of timers for X-ray photography in 1933 photography and a precision switch, the subsequent establishment of the Company led to the opportunity for development of advanced automated control (cybernation) technology. Tateisi Electric was incorporated after it had passed Japan Electrical Measuring Instruments Association testing of its current limiters, which were in demand during the fuel shortages after World War II, and became a designated manufacturer. The first precision switch made in Japan ➤1953 ➤1962 Developing businesses as a forerunner in the new age of automation After Kazuma Tateisi’s 1953 inspection tour of electrical Automated passenger gate installed at Hankyu Kita-senri Station ➤1963 ➤1978 Successive development of numerous “world-first” products through the cybernation revolution Omron developed an electronic vending machine and a bill changer to display at the 1963 Tokyo International Trade Fair. Thereafter, Omron established the foundation of its present social systems business through such feats as successful field tests of its automatic traffic signal at the Kawaramachi-Sanjo intersection in Kyoto, introduction of its multi-function automated ticket vending machine at the Kokutetsu (currently JR) Kobe Station, and the joint development of automated passenger gate systems with Kinki Nippon Railway and Kinki Sharyo Research Institute. For the manufacturing floor, Omron launched a sequence programmer in 1968 and an IC-based programmable controller called SYSMAC in 1972. Both products contributed substantially to factory automation. Furthermore, the Company launched its international business with incorporations overseas in 1970, upon the occasion of founder Kazuma Tateisi’s announcement of his Seed-Innovation to Need-Impetus Cyclic factories in the United States, the Company began to bring Evolution (SINIC) Theory, a tool for many control components for automated systems onto the management to make predictions regarding market. In 1960, the Company succeeded in developing the society’s future needs. In 1972, Omron “dream switch,” a solid state contactless proximity switch using transistors, and the solid state contactless relay, both established OMRON Taiyo Co., Ltd., a joint venture with welfare organization Japan Sun Founder Kazuma Tateisi of which were hailed as breakthrough, pioneering technological innovations on a worldwide level. In the same year, the Company established the Central R&D Laboratory in Nagaoka, Kyoto as the foundation for further technological development. Industries that employs physically challenged employees. OMRON Taiyo Co., Ltd. 8 • O m r o n C o r p o r a t i o n Solid state switch The SINIC Theory, which attracted worldwide attention ➤1979 ➤1986 Developing a dynamic business strategy as a global company In June 1979, President Kazuma Tateisi became Chairman and Takao Tateisi became President of Omron. The Company went on to strengthen its business foundation and its domestic bases. These efforts included widespread introduction of computers and the creation of a mission critical system. Furthermore, operations at the main sensor factory in Ayabe were strengthened, and other production bases were expanded. Measures to dramatically improve production efficiency Group-wide included the adoption of new production systems through high- mix, low-volume automated production, such as FIMS. The FIMS line of controller parts Keihanna Innovation Center (opened in May 2003) Regional headquarters, together with the head office in Japan, divide global operations into four areas (photographs from time of announcement). Europe Americas Asia/Pacific ➤1987 ➤1989 Building a foundation for Omron’s “Third Inauguration” in the 21st century New president Yoshio Tateisi led Omron in accelerating infrastructure upgrades for growth in the next century. Active preparations for the third phase of business creation for the 21st century included the establishment of a system of two head offices in Kyoto and Tokyo, enhancement of R&D bases and the establishment of regional headquarters in three major regions around the world in addition to Japan. In 1987, the Fuzzy logic products Company developed the world’s first super-high-speed fuzzy logic controller, and worked to expand its fuzzy logic business. ➤1990 ➤1999 Promoting management strategies for creating corporate value to become a 21st century company The company name was changed to Omron Corporation. Omron put its Golden ’90s Plan into practice. This long-term vision aimed for substantial global growth for the ten years starting in April 1990, as a “New Omron” that aimed to be a high- quality growth company. Omron also established its fuzzy logic technology, a company strength, and made Omron a leading name in the field through the launch of a stream of fuzzy logic-based products. ➤2000 ➤2003 Working to maximize corporate value on a long-term basis through GD2010 Against the backdrop of globalization and the spread of the IT revolution, Omron announced its Grand Design 2010 (GD2010) plan outlining the ideal image of the Omron Group in 2010. Omron worked aggressively to develop its high- value-added device business for the broadband era and a solutions business for industry and society, and opened a China Headquarters with the ultimate goal of establishing a “Second Omron” overseas. In 2003, the 70th anniversary of its founding, Omron completed its Keihanna Innovation Center, the focal point of the R&D that will support the Company’s growth in the 21st century. Through collaboration that incorporates advanced outside technologies, Omron has polished its sensing and control business to create new value that inspires a sense of wonder for the emerging Optimization Society. From Tateisi Electric to Omron Corporation A n n u a l R e p o r t 2 0 0 3 • 9 Omron at a Glance Industrial Automation Company (IAB) Electronic Components Company (ECB) Automotive Electronic Components Company Social Systems Solutions and Service Business Company (SSB) Advanced Modules Business Company (AMB) Healthcare Company (HCB) Others % of Net Sales 37.8% 25.9% 21.8% 7.9% 6.6% Note: The Automotive Electronic Components Company, formerly part of the Electronic Components Company, was reclassified as a separate internal company as of April 2003. 1 0 • O m r o n C o r p o r a t i o n Net Sales (Billions of Yen) 202.5 184.2 2002 2003 131.9 138.8 2002 2003 128.1 116.7 2002 2003 40.6 42.3 2002 2003 49.2 34.7 2002 2003 Main Products Control Relays (Relays, Timers, Counters) Control Switches (Limit Switches, Micro Switches, Manipulate Switches) Control Devices (Temperature Controllers, Power Supplies, Level Controllers, Protective Devices, Digital Power Meters, Transmission Units, Wireless Units, Energy-Saving Devices, etc.) Sequence Control Equipment (PLCs, Industrial Networking Equipment, Programmable Terminals, Application Software, etc.) Motion Controllers (Inverters, Servo Motors, etc.) Sensors (Photoelectric Sensors, Proximity Sensors, Displacement Sensors, Pressure Sensors, Ultrasound Sensors, Measurement Sensors, Vision Sensors, Visual Components, Information Sensing Equipment, etc.) Inspection Systems (Solder Paste Printing, Sheet Inspection Systems, PCB Inspection Systems, etc.) Safety-Related Devices (Safety Relays, Door Switches, Area Sensors, Safety Mats, etc.) ELECTRONIC COMPONENTS COMPANY: Switches (Micro Switches, Tactile Switches, Trigger Switches, DIP Switches, etc.) Relays (General-Purpose Relays, PCB Relays) Amusement Components, Units and Systems (Sensors, Keys, IC’s, IC Coin Systems, Game Controllers, etc.) Connectors, Sensors for Consumer, Micro Lens Alleys, Components for Printers and Photocopiers (Toner Sensors, Counterfeit Detectors, etc.) Components for Mobile Equipment (Flash Lights For Mobile Phones with Digital Cameras, etc.) AUTOMOTIVE ELECTRONIC COMPONENTS COMPANY: Automotive Devices (Keyless Entry Systems, Power Window Switches, Various Automotive Relays, Electric Power Steering Controllers, Detection Switches, Multiplex Controllers, Power Seat Switches, Buckle Switches, Laser Radar Devices, etc.) SOCIAL SYSTEMS SOLUTIONS AND SERVICE BUSINESS COMPANY: Electronic Fund Transfer Systems (Automated Teller Machines, Cash Dispensers, Automated Bill Changers, Automated Loan Application Machines, POS Systems, Credit/Debit Card Transaction Terminals, etc.) Public Transportation Systems (Automated Ticket Venders, Automated Passenger Gates, Automated Fare Adjustment Systems, Commuter Ticket Issuing Machines, Ticket Window Machines etc.) Traffic and Road Management Systems (Traffic Management Systems, Vehicle Information and Communication Systems, Travel Time Measurement Systems, Public Transportation Priority Systems, etc.) Room Access Control Systems, Face Recognition Systems ADVANCED MODULES BUSINESS COMPANY: Bank Note Processing Systems (Bill Processing Modules, Coin Processing Modules) Tickets Processing Systems (Ticket Conveying Modules, Ticket Issuing Modules) Video Vehicle Detectors (Silhouette Vision Sensor, Laser Sensors) Card Reader/Writer Healthcare Equipment (Digital Blood Pressure Monitors, Digital Thermometers, Electronic Pulse Massagers, Chair Massagers, Pedometers, Body-Fat Analyzers, etc.) Medical Equipment (Nebulizers, Professional Digital Blood Pressure Monitors, etc.) Health Management Services (Consultations, Health Promotion Programs, etc.) Personal Computer Peripherals (ADSL Modems, Terminal Adapters, Backup Power Supplies, Mobile Phone Modems, Fingerprint Authentication Units) RF-ID Tags, Speech Recognition and Voice Authentication Systems, Remote Supervisory System, Anti-Theft System for Automobiles, Vehicle Disturbance Surveillance Device, Photo-Sticker Vending Machines, Contents Distribution Services for Mobile Phone A n n u a l R e p o r t 2 0 0 3 • 1 1 Digital Controller E5 R The speed and precision of the E5 R are among the highest in the industry. It uses a function-based modular structure, which speeds delivery lead time. Programmable Logic Controller CJ1M This is the industry’s smallest programmable logic controller, and is ideal for use in machinery such as equipment that assembles electronic components, food processing equipment and packaging equipment. PCB Inspection System VT-WIN II Omron’s top PCB solder inspection system, the VT-WIN II is equipped with a high-resolution camera, and features twice the inspection speed of existing equipment. It is also compatible with lead-free solder, which manufacturers are increasingly adopting as an environmental measure. FPD Seal Profile Sensor Z5FP This sensor measures the profile of seals used to bond flat panel displays (FPD) with both high speed and high precision to effectively improve manufacturing process yields and quality. Industrial Automation Company ➤ Business Overview For the fiscal year ended March 31, 2003, net sales of the Industrial Automation Company (IAB) increased 10.0 percent from the previous fiscal year to ¥202.5 billion. While overall investment in all types of machinery and equipment was weak, sales expanded in greater China and Southeast Asia. By industry, sales to semiconductor and flat panel display (FPD) manufacturers rebounded moderately, and sales to the automobile and food industries were firm. By application, sales expanded in the areas of equipment safety and advanced automation of inspection. In the domestic market, IAB reinforced strategic activities targeting specific industries and provided solutions to promote the use of information technology (IT) among manufacturers. As a result, sales of safety-related components and sensors, FA auto identification components, displacement sensors, vision sensors, motion control components and other products increased substantially. Overseas, sales in North America increased strongly, led by sales of sensing equipment. Sales in Europe were flat due to the effect of restrained investment in the electronics and electrical equipment industries. Sales in Southeast Asia and in greater China increased substantially as IAB strengthened direct marketing and sales channels, and increased its emphasis on social infrastructure projects and implemented other initiatives. ➤➤ Strategies and Outlook IAB will concentrate on maximizing customer satisfaction and adding value for component packages composed of controllers, sensors and control systems, as well as inspection systems and service, with a focus on industries and applications including automobiles, semiconductors, LCDs and food. At the same time, IAB will design product platforms and launch modular products, while boosting its cost competitiveness and profitability by continuously reducing manufacturing costs. Efforts to expand sales will focus on measures such as strengthening global marketing tie-ups and improving regional sales channels through relationships with sales agents and distributors. In particular, IAB aims to substantially increase profitability by raising the volume and quality of sales activities in greater China and introducing the most suitable products for given areas. Moreover, IAB will work to continuously increase productivity by investing in and generating returns from IT, particularly customer relationship management (CRM). 1 2 • O m r o n C o r p o r a t i o n ➤ Business Overview The Electronic Components Company (ECB) posted net sales of ¥138.8 billion, a year-on-year increase of 5.3 percent. While consumer spending and capital investment declined due to the global deflationary economy, the shift of customers overseas and the emergence of Chinese manufacturers exposed ECB to intensifying competition and price pressure. In Japan, sales growth was strong for backlights for cellular phones and integrated circuit (IC) coin systems for the amusement industry, both introduced in the previous fiscal year. In the consumer and commerce components business, although sales of relays for telecommunications equipment were weak, exports of relays and switches for consumer appliances remained firm. Sales of automotive electronic components also expanded strongly, benefiting from increased exports and the growing importance of electronics in automobiles. ECB also formed a new marketing organization to strengthen sales of components for mobile devices. This strategy has started to produce results, including the launch of a new flash for cameras in cell phones. In overseas markets, although the telecommunications equipment industry was in a downturn in North America, Europe and Asia, sales of relays and switches for consumer appliances remained firm and sales of automotive devices expanded strongly. ➤➤ Strategies and Outlook Although the emergence of Chinese manufacturers is expected to lead to increased price competition, ECB will reinforce its overseas production capabilities, and optimize its sales network and strengthen marketing capabilities to enhance its competitiveness in China. ECB will also augment resources in key sectors such as automotive components, amusement-related products, and optical communication devices. In addition, the planning and development divisions of the core relay business were integrated with a manufacturing subsidiary to create a new company, Omron Relay and Device Co., Ltd., on April 1, 2003. The new organization will enable prompt response to customer needs. It will also integrate four overseas production facilities and unify the management of the relay business, raising its speed and operating efficiency. Electronic Components Company DR-LED Omron’s DR-LED more than doubles the level of brightness. LED Backlight Achieves a high level of brightness with low energy consumption Optical Communications Devices Optical communications devices support next-generation optical networks, particularly access home network fields. (Photo: optical switches) A n n u a l R e p o r t 2 0 0 3 • 1 3 Bill Circulation Unit EX-BH High-performance bill handling equipment used in applications such as railway station ticket vending machines Card Reader/Writer Applicable in all industrial fields, including financial systems, security systems, card issuing machines and ID systems Automated Teller Machine A totally barrier-free ATM designed for ease of use “goopas” Content Delivery Service A new system that customizes and transmits selected information when a pass for public transportation is passed through a passenger gate Social Systems Business ➤ Business Overview The Social Systems Business posted net sales of ¥116.7 billion, a year-on-year decrease of 8.9 percent. In June 2002, this business was divided into the Social Systems Solutions and Service Business Company (SSB), which operates the solutions and service businesses, and the Advanced Modules Business Company (AMB), which is involved in the modules business. Social Systems Solutions and Service Business Company (SSB) The electronic fund transfer systems sector was affected by reduced capital investment due to the overall weakness of the financial industry. As a result, sales fell sharply. In the public transportation systems sector, sales increased considerably as SSB obtained a major ticket vending machine order in the Kanto region that had been deferred from the previous fiscal year. In the traffic control and road information systems sector, despite significant demand in certain areas, sales decreased because of reduced public works investment. Also, SSB transferred its parking systems business during the period. ➤➤ Strategies and Outlook As markets for existing products mature, SSB will focus on customer-oriented solutions and shift its emphasis to services. In particular, as the spreading use of IC cards and mobile devices integrates businesses such as finance, retail and transportation, SSB will concentrate on these areas, especially the rapidly expanding sector of transportation IC cards. ➤ Business Overview AMB generated growth in sales of electronic fund transfer systems, supported by strong demand in South Korea and Taiwan. In the domestic market, however, sales declined sharply due to a lull in deliveries of ATMs for convenience stores, which made a large contribution to sales in the prior fiscal year. Sales were down in the card reader business and in the overseas public transportation systems business. ➤➤ Strategies and Outlook AMB plans to increase sales, particularly in overseas markets, by developing products with a focus on its core module business, collaborating with equipment manufacturers and strengthening its sales organization. In addition, AMB will establish an earnings structure through stronger cost reduction activities by expanding production at overseas bases. Advanced Modules Business Company (AMB) 1 4 • O m r o n C o r p o r a t i o n ➤ Business Overview Healthcare Company (HCB) sales were buoyed by a moderate recovery in consumption in the early part of the fiscal year. However, consumption slowed toward the end of the period. As a result, HCB sales increased 4.2 percent year-on-year to ¥42.3 billion. Blood pressure monitors, thermometers and nebulizers, the core products of this division, sold well, and sales of a new compact, low-cost massage chair expanded steadily in a brisk market. However, sales of products in other categories such as electronic pulse massagers and pedometers declined. By region, although sales in Japan were unchanged from the previous fiscal year, overseas sales grew strongly. Sales increased substantially in the Asia/Oceania region, centered on Australia, and in China, where HCB expanded sales offices and strengthened user support functions. ➤➤ Strategies and Outlook HCB will work to expand its business by aggressively introducing new products, as well as strengthening overseas sales channels and raising the power of its brands by marketing products that meet local market needs. Additionally, monitoring lifestyle-related diseases is a core business domain, and HCB will develop hardware and create services in this new field. HCB will also create a new business model that generates growth by supporting the prevention of lifestyle-related diseases. Healthcare Company Blood Pressure Monitor HEM-637IT The first in Japan with a guide for placement on the arm when measuring, this monitor allows daily management of blood pressure data on a personal computer. Mesh-Type Nebulizer NE-U22 The world’s smallest and lightest pocket-sized nebulizer, this unit allows inhalation at any angle. Massage Chair Pisu HM-601 This low-priced, comfortable reclining chair incorporates a massage unit that gives a full- fledged massage. A n n u a l R e p o r t 2 0 0 3 • 1 5 Vehicle Disturbance Surveillance Device Carmoni 200 Using Omron’s original sound and pressure sensor, this device detects disturbances to a vehicle (break-in, window breakage, hit- and-run, etc.), uses light and sound to startle the perpetrator, and sends notification to the owner’s remote control. High-Speed VPN Broadband Router Viaggio MR104DV This ultra-high-speed throughput broadband router (maximum 92 Mbps) offers high-performance firewall and virtual private network (VPN) functions for solid Internet security. Others ➤ Business Overview Other businesses posted net sales, including royalty income, of ¥34.7 billion, a decrease of 30 percent from the previous fiscal year. The Business Development Group explores and nurtures new businesses, and develops and strengthens existing businesses that are not formally classified under other internal business companies. In addition, Omron reassessed some businesses as part of its business structure reforms. Among new businesses, Omron began marketing new products in the machine-to-machine business, including a tank monitoring system and a vehicle anti-theft system, and verified their future marketability. In existing businesses, sales of entertainment equipment declined due to factors including increased competition resulting from the entry of other companies into the market. Sales of automated voice answering systems were negatively impacted by restrained corporate investment due to the slump in the IT industry. Despite a decline in domestic shipments of personal computers, sales of PC peripherals were essentially unchanged from the previous fiscal year because of Omron’s focus on developing the market for uninterruptible power supplies. Sales of RFID tag systems were firm, reflecting growing interest in IC tags in both manufacturing and consumer sectors. The Creative Service Company has been engaged in the outsourcing business, mainly for administrative work. However, after reassessing its businesses as part of the Group productivity structural reforms, Omron placed each business under the control of the head office to increase Group productivity by focusing on internal services in specialized fields. As a result, in March 2003, the Creative Service Company was dissolved as an internal company. ➤➤ Strategies and Outlook The Business Development Group will explore and nurture new businesses, and will reinforce and assess existing businesses that are not classified as part of any of the current internal companies. 1 6 • O m r o n C o r p o r a t i o n Corporate Citizenship Activities Omron revolutionized corporate Japan in 1956 when the Company adopted a corporate philosophy emphasizing a commitment to fulfilling public responsibilities. Since that time, Omron has worked to contribute to society through its operations as well as its corporate citizenship activities. EXAMPLES OF OMRON’S CORPORATE CITIZENSHIP ACTIVITIES Omron’s corporate citizenship activities revolve around four main areas: science & technology, social welfare, arts & culture, and the global environment. Omron has joined the non-profit organization Japan Alliance for Humanitarian Demining Support, and played a major role in the development of the Mine Eye, an innovative landmine detector that uses electromagnetic waves to detect both metal and non-metal mines. Every year, approximately 50 Omron employees participate as volunteers at the Oita International Wheelchair Marathon, helping to set up for the closing ceremony and passing out beverages to athletes after the race. Omron donated a pipe organ to the Kyoto Concert Hall, which was completed in the fall of 1995. The Company also co-sponsors concerts to give residents the opportunity to enjoy pipe organ music. Based on an awareness of the role forests play in environmental preservation, “Forest Volunteers” thin forests and prune branches. Activities in 2002 were carried out in cooperation with Keihokucho in Kyoto. Science & Technology Social Welfare Arts & Culture Global Environment Striving to create greater harmony between people and machines Creating employment opportunities for the disabled Enriching society by developing arts and culture Omron is dedicated to helping Omron believes strongly in the Becoming one of the most environmentally conscious companies of the 21st century To help create a society in physically challenged individuals importance of culture and the arts, Omron’s environmental which people and machines can co- find employment opportunities and demonstrating its support by co- objectives include not only meeting exist in harmony, Omron provides achieve independence. In 1972, sponsoring the Omron Kyoto the criteria for ISO 14001 assistance to researchers involved in Omron established Omron Taiyo Cultural Forum and organizing certification, but also minimizing the the development of advanced Co., Ltd. in Beppu, Oita Prefecture concerts and exhibitions of environmental impact of its technologies and helps to publicize -- the first factory in Japan run by traditional performing arts. operations by developing their findings. Through the Tateisi physically challenged people. A Science and Technology Foundation, similar factory, Omron Kyoto Taiyo Omron supports joint research and Co., Ltd., was built in Kyoto in 1985. technological exchange not only in In addition, Omron sponsors events Japan but all over the world. such as wheelchair marathon races, In addition, Omron is using its art festivals and other events for sensing and control technology to disabled people. contribute to causes around the world such as landmine removal. environmentally friendly products utilizing the company’s sensing and control technology, conserving energy and resources, and reducing industrial waste. In addition, as a responsible corporate citizen, Omron is involved in community service activities such as clean-ups, area beautification projects and planting trees. Omron’s long-term, sustainable approach towards both domestic and international environmental issues is preparing us for the emerging “Optimization Society.” A n n u a l R e p o r t 2 0 0 3 • 1 7 Environmental Activities Using its sensing and control technologies, Omron contributes to environmental protection through development of products and systems that reduce environmental impact. Major environmental activities during the year ended March 31, 2003 are as follows: Theme Environmental education Eco-Mind Promotion of environmental awareness Environmental accounting Eco-Management Pollution control/ Environmental risk management ISO 14001 certification Results of Activities •Conducted training for internal environmental auditors and environmental education for new employees (total of 3 times). •Invited and awarded employee suggestions (592 entries submitted). •NE-U22 nebulizer received Environmental Grand Prize. •Expanded scope of data gathering to 24 sites: 15 domestic production sites and 9 domestic non-production sites. •No instances of law infringement, environmental accidents, claims or complaints. •OMRON Field Engineering Co., Ltd. received ISO 14001 certification. •48 sites received or maintained certification from outside audit organization. Development and marketing of eco-products •Launched 26 Eco-Products and 21 products with the Eco label Eco-Products Creation of products with less or no regulated chemical substances Promotion of green procurement Product recycling and reuse Promotion of CO2 emissions reduction Promotion of waste recycling (cumulative total of 119 products). •Launched 26 products for lead-free soldering. •Evaluated 527 major domestic suppliers and certified 502 as green procurement suppliers. •Conducted ATM recycling in western Japan. •Achieved recycling rate of more than 98 percent (over 1,400 units recycled). •Reduced CO2 emissions from energy usage to 42,486 tons-CO2 (11% reduction compared to FY 1995). •Waste recycling rate of 95.1%, final disposal rate of 2.0%. •Zero emissions achieved at 10 domestic production sites; achieved at 12 of 15 sites to date. Eco-Factories/ Laboratories/ Offices Eco-Logistics Eco-Communication Promotion of green procurement (indirect materials) •Operated Strategic Linkage for Intelligent Procurement Management (SLIM) system and promoted purchasing of green products (green product purchasing rate: 82%). Reduction of environmental impact in distribution •Reduced CO2 emissions 18.6% (828 tons-CO2) from fiscal 2001 by introducing rail shipping from Kyushu to Nagoya, and from Kyushu to Tokyo, and by adjusting distribution routes. Promotion of resource conservation •Implemented container returnable system at 140 key domestic distributors in distribution (cardboard boxes for product packing reduced 30%). Promotion of environmental communication •Issued environmental report (10,000 in Japanese, 1,000 in English). •Posted site reports of major production bases on Omron Web site (30 sites). •Participated in environmental exhibitions (Lake Biwa Environmental Business Messe and Eco-Products exhibit). •Carried out Omron Day activities at all sites. Performed volunteer forest preservation activities at Kyoto Office. Note: In the year ended March 31, 2003, the unit for CO2 emission volume was changed from tons-C to tons-CO2. 1 8 • O m r o n C o r p o r a t i o n Topics Activities to Reduce Environmental Impact • Reduction of CO2 Emissions from Energy Usage To help prevent global warming, Omron sets targets each fiscal year for reduction of carbon dioxide emissions, and takes steps to achieve them. In the year ended March 31, 2003, the target for the total volume of CO2 emissions at domestic production sites was 45,239 tons-CO2, a 5 percent reduction compared with the level in the year ended March 1996. The actual result was an 11 percent reduction to 42,486 tons-CO2. Despite an increase in production volume, CO2 emissions per unit of production improved 10 percent from the previous fiscal year due to higher productivity and improved yield. At overseas production sites, the total volume of CO2 emissions was 30,236 tons-CO2. • Wastes and Recycling Omron’s targets for the year ended March 2003 were a recycling rate of 94.0 percent and a final disposal rate of 4.0 percent. Actual results were a recycling rate of 95.1 percent and a final disposal rate of 2.0 percent. Total waste volume was 3,882 tons, a 3 percent reduction from the previous fiscal year, and the final disposal volume was 78 tons, a 60 percent reduction. In the past fiscal year, ten more domestic production sites achieved zero emissions, and 12 of the 15 sites have now done so. Overseas, total waste volume was 2,964 tons. • Reduction of Environmental Impact in Distribution (1) Environmental protection cost: ¥2,190 million (investment ¥570 million, expenses ¥1,620 million) (2) Economic benefits: ¥110 million (Actual benefits only, not including intangible benefits) (3) Quantitative benefits: CO2 emissions reduced 1,796 tons (3.5% reduction from previous fiscal year), volume of waste reduced 219 tons (5% reduction from previous fiscal year) Creation of Eco-Products Omron has been promoting the creation of eco-products since it established the ISO 14021-based “Eco-Product Approval System” in 1998. In the year ended March 2003, 47 products were approved (26 Eco- Products, 21 products with the Eco label), bringing the cumulative total to 119 products. Eco-products (including products approved for the Eco label) accounted for 14 percent of all new products in the year ended March 2003. Omron will accelerate the creation of eco-products, aiming to raise the eco-product ratio to 50 percent in the current fiscal year. Green Procurement • Purchasing Green Parts and Materials Using green procurement standards, Omron conducted evaluations of 527 suppliers in the year ended March 2003, and certified 502 (95 percent) of them as green suppliers. Purchases from green suppliers constitute 91 percent of Omron’s parts and material purchases. Omron plans to give green suppliers preferential status in purchasing in the future. Omron took steps to reduce the environmental impact of its distribution • Purchasing Green Indirect Materials operations in the year ended March 2003. Measures included implementing rail shipping from Kyushu to Nagoya, and from Kyushu to Tokyo, as well as shortening shipping distances by changing distribution routes. As a result, total CO2 emissions were reduced 18.6 percent, or 828 tons-CO2, from the previous fiscal year. Omron also introduced a container returnable system at 140 major domestic distributors, and consequently reduced cardboard boxes for product packing by 30 percent (46.2 tons) compared with the previous fiscal year. Reduction of Regulated Chemical Substances • Operation of Database for Regulated Chemical Substances The content of regulated chemical substances in all major components and materials purchased by the Company is registered in a database that Omron began using in the year ended March 2003. In the future, Omron will be able to use this database in product assessments at the development and design stage to reduce the amount of regulated chemical substances contained in products. • Environmental Accounting In the year ended March 2003, Omron adopted environmental accounting at 9 domestic non-production sites, after introducing it for 15 domestic production sites in the previous fiscal year. Results for domestic production and non-production sites in the year ended March 2003 are as follows: An Indirect Materials Purchasing Management System has been adopted and put into operation at Omron Group companies in Japan to promote purchasing of green products and reduce costs. In the year ended March 2003, the green product purchasing rate was 82 percent. Omron plans to enhance this system by expanding its application to include office equipment and office furniture. Total CO2 Emissions from Omron Factories in Japan (t-CO2) 50,000 45,000 40,000 35,000 30,000 0 Domestic sites (target) Overseas sites (actual total) Domestic sites (actual) CO2 emissions-to-production unit ratio 0 4 7 , 6 0 1 4 7 , 6 0 1 4 6 , 5 8 9 -9 4 2 , 7 4 2 -15 4 6 , 2 5 2 4 5 , 3 2 0 4 8 , 8 0 7 4 5 , 9 1 4 -18 -5 4 5 , 5 7 7 4 4 , 0 2 2 2 7 , 9 2 8 4 5 , 2 3 9 -14 4 2 , 4 8 6 3 0 , 2 3 2 (FY) 1995 1998 1999 2000 2001 2002 (%) 0 -10 -20 -30 -40 -50 Note: In addition to the above, CO2 emissions from 9 offices and laboratories totaled 9,218t-CO2 during the year ended March 31, 2003. In the year ended March 31, 2003, the unit for CO2 emission volume was changed from tons-C to tons-CO2. A n n u a l R e p o r t 2 0 0 3 • 1 9 Board of Directors, Corporate Auditors and Corporate Officers Board of Directors Corporate Officers Chairman and Representative Director Yoshio Tateisi CEO and Representative Director Hisao Sakuta Vice President and Director Tatsuro Ichihara Senior Managing Director Tadao Tateisi Directors (Non-executive) Shozo Hashimoto Noriyuki Inoue Corporate Auditors Tsutomu Ozako Yoshisaburo Mogi Yoshio Nakano Hidero Chimori Executive Vice Presidents Shingo Akechi Fumio Tateisi Senior Managing Officers Yoshifumi Kajiya Fujio Tokita Akihiko Otani Soichi Yukawa Managing Officers Minoru Tamura Tsukasa Yamashita Yutaka Takigawa Yasuhira Minagawa Kuniyasu Kihira Toshio Ochiai Hiroki Toyama Kojiro Tobita Keizo Kadono Hiroyuki Nishimura Kuninori Hamaguchi Executive Officers Yukio Kobayashi Yoshinobu Morishita Takuji Yamamoto Yoshinori Suzuki Akio Sakumiya Yoshio Tateisi Hisao Sakuta Tatsuro Ichihara Tadao Tateisi Shozo Hashimoto Noriyuki Inoue 2 0 • O m r o n C o r p o r a t i o n (As of June 25, 2003) Financial Section Contents 22 23 28 30 31 32 33 34 52 Six–year Summary Management’s Discussion and Analysis Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors’ Report A n n u a l R e p o r t 2 0 0 3 • 2 1 Six-year Summary OMRON Corporation and Subsidiaries Years ended March 31 2003 2002 2001 2000 1999 1998 Millions of yen (except per share data) Net Sales (Notes 2 and 3): Industrial Automation ...................................... Electronic Components ................................... Social Systems Business ................................ Healthcare ....................................................... Open Systems ................................................. Control Components and Systems ................. Specialty Products .......................................... Others .............................................................. Costs and Expenses: Cost of sales.................................................... Selling, general and administrative expenses ... Research and development expenses ............ Interest expenses, net ..................................... Foreign exchange loss, net ............................. Other expenses (income), net.......................... Income (Loss) before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change ....................... Income Taxes .................................................... Minority Interests .............................................. Income (Loss) before Cumulative Effect of Accounting Change ......................... Net Income (Loss) ............................................. Per Share Data (yen): Income (Loss) before Cumulative Effect of Accounting Change ¥202,518 138,845 116,652 42,331 — — — 34,727 535,073 327,413 135,112 40,235 348 575 26,658 530,341 4,732 3,936 285 511 511 ¥184,185 131,862 128,057 40,617 — — — 49,243 533,964 353,429 134,907 41,407 223 1,506 27,865 559,337 (25,373) (9,348) 132 (16,157) (15,773) ¥227,691 129,444 141,928 39,327 — — — 55,869 594,259 376,194 131,203 42,513 111 1,389 2,812 554,222 40,037 17,318 422 22,297 22,297 ¥215,087 109,661 128,534 42,640 — — — 59,436 555,358 358,911 133,662 36,605 750 2,841 1,553 534,322 21,036 9,048 427 11,561 11,561 ¥245,785 56,673 135,872 43,729 — — — 73,221 555,280 364,314 136,734 42,383 862 2,766 (28) 547,031 8,249 6,044 31 2,174 2,174 ¥ — — 138,203 40,793 50,131 313,642 47,263 21,763 611,795 387,445 138,404 39,914 682 4,419 (1,312) 569,552 42,243 23,371 168 18,704 18,704 Basic ........................................................ Diluted ..................................................... ¥ 2.1 2.1 ¥ (65.0) (65.0) ¥ 87.4 85.3 ¥ 45.0 44.5 ¥ 8.3 8.3 ¥ 71.4 69.8 Net Income (Loss) Basic ........................................................ Diluted ..................................................... Cash Dividends (Note 1) ................................ Capital Expenditures (cash basis) ................... Total Assets ....................................................... Total Shareholders’ Equity ............................... Value Indicators: 2.1 2.1 10.0 ¥ 34,454 567,399 251,610 Gross profit margin (%) ................................... Income (loss) before tax/Net sales (%)............ Return on sales (%) ......................................... Return on assets (%) ....................................... Return on equity (%)........................................ Inventory turnover (times) ................................ Price/earning ratio (times)................................ Assets turnover (times) .................................... Debt/equity ratio (times) .................................. Interest coverage ratio (times) ......................... 38.8 0.9 0.1 0.8 0.2 4.36 900.8 0.96 1.255 23.59 (63.5) (63.5) 13.0 ¥ 38,896 549,366 298,234 87.4 85.3 13.0 ¥ 37,583 593,144 325,958 45.0 44.5 13.0 ¥ 31,146 579,489 336,062 8.3 8.3 13.0 ¥ 36,696 580,586 321,258 71.4 69.8 13.0 ¥ 35,896 593,129 343,066 33.8 (4.8) (3.0) (4.4) (5.1) 4.25 — 0.93 0.842 4.36 36.7 6.7 3.8 6.8 6.7 4.44 23.6 1.01 0.820 26.83 35.4 3.8 2.1 3.6 3.5 4.56 64.9 0.96 0.724 14.64 34.4 1.5 0.4 1.4 0.7 4.18 175.0 0.95 0.807 5.56 36.7 6.9 3.1 7.0 5.5 4.28 28.3 1.02 0.729 20.05 Notes: 1. Cash dividends per share represent the amounts applicable to the respective year, including dividends to be paid after the end of the year. 2. Certain reclassifications have been made to the net sales amounts previously reported for 2002 in order for them to conform to 2003 categories. The amounts previously reported for 2002 were: Industrial Automation, ¥186,984 million; Electronic Components, ¥128,193 million; Social Systems, ¥124,627 million. These same reclassifications could not be made to net sales amounts previously reported for 2001 and earlier because the necessary data is not readily available. 3. Categories within net sales for 1998 reflect the categories at that time, which can not be restated to conform to present categories following reorganization. 2 2 • O m r o n C o r p o r a t i o n Management’s Discussion and Analysis Financial Strategy the tax burden resulting from implementation of a new The financial policies aimed at strengthening the earn- factor-based standard for use in calculating the effective ings base of Omron Corporation and the Omron Group of tax rate, net income totaled ¥511 million, compared to a companies include improving asset efficiency, disciplined net loss of ¥15,773 million for the previous fiscal year. liquidity management and efforts to raise competitive- ness. In addition, Omron invests capital according to spe- Sales cific plans and keeps capital expenditures within the Consolidated net sales increased 0.2 percent year-on- scope of cash flow, while focusing on high-profit busi- year to ¥535,073 million. Overall, sales in Japan nesses to increase corporate value. decreased year-on-year, while overseas sales increased, General Overview resulting in the marginal year-on-year increase in net sales. While overall capital investment in all types of con- During the fiscal year ended March 31, 2003, economic trol devices, machinery and equipment remained low, concerns in Japan due to issues such as the continuing sales in China and Southeast Asia were higher. problems in disposing of nonperforming loans restrained both consumer spending and corporate capital invest- Cost of Sales, SGA Expenses and Income ment. The U.S economy drew support from housing Cost of sales decreased ¥26,016 million, or 7.4 percent, investment and consumer spending during the first half to ¥327,413 million, reflecting Omron’s progress in reduc- of the year, but conditions worsened in the second half ing manufacturing costs and raising efficiency through because of higher oil prices, a weak stock market and the the Structural Reforms for Group Productivity. As a result, situation in Iraq. Europe showed signs of recovery, while gross profit increased ¥27,125 million, or 15.0 percent, to increased exports and growth in consumer spending led ¥207,660 million. The gross profit margin was 38.8 per- to expansion in the economies of Asia, particularly in cent, compared to 33.8 percent for the previous fiscal greater China. year. Selling, general and administrative (SGA) expenses In the markets where Omron conducts business, a increased marginally, and represented 25.3 percent of net recovery in production and steady consumption lent sales, unchanged from the previous fiscal year. Research vigor to the Industrial Automation Company, the and development expenses decreased 2.8 percent to Electronic Components Company and the Healthcare ¥40,235 million, and represented 7.5 percent of net sales, Company. However, the Social Systems Business, which compared to 7.7 percent in the previous fiscal year. R&D includes the Social Systems Solutions and Service is essential to the Group’s future growth, and Omron’s Business Company and the Advanced Modules Business policy is to maintain R&D expenses close to 7 percent of Company, faced challenging conditions, including net sales each year. restrained capital investment among financial institutions and public entities. As a result of these factors, consolidated net sales increased 0.2 percent compared with the previous fiscal year to ¥535,073 million. Omron recorded non-operating expenses including retirement payments associated with the implementation of an early retirement program as part of the Group’s structural reform measures, a loss associat- ed with the sale and disposal of idle assets, and loss on sale and impairment of investment securities. Income before income taxes, minority interests and cumulative effect of accounting change totaled ¥4,732 million, com- pared to a loss before income taxes, minority interests and cumulative effect of accounting change of ¥25,373 million for the previous fiscal year. Despite the effect of Gross Profit Margin (%) SGA Expenses/Net Sales and R&D Expenses/Net Sales (%) ● SGA Expenses/Net Sales ■ (excluding R&D Expenses) ● R&D Expenses/Net Sales 34.4 35.4 36.7 33.8 38.8 24.6 24.1 22.1 25.3 25.3 7.6 6.6 7.1 7.7 7.5 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 A n n u a l R e p o r t 2 0 0 3 • 2 3 Costs, Expenses and Income as Percentages of Net Sales 2003 2002 2001 Net sales ................................... 100.0% 100.0% 100.0% Cost of sales ............................. Gross profit .............................. 61.2 38.8 66.2 33.8 63.3 36.7 Selling, general and administrative expenses ........ Research and development expenses .......... Interest expenses, net ............. Income (loss) before income taxes, minority interests and cumulative effect of accounting change ................. Income taxes ............................ Income (loss) before cumulative effect of accounting change ...... Cumulative effect of accounting change ................. Net income (loss)..................... 25.3 25.3 22.1 7.5 0.1 0.9 0.7 7.7 0.0 7.1 0.0 (4.8) (1.8) 6.7 2.9 0.1 (3.0) 3.8 — 0.1 0.0 (3.0) — 3.8 assessment of impairment of certain long-lived assets at Omron and its subsidiaries, with consideration given to future transfer, including the possibility of disposal. As a result, certain land and buildings, which were not expect- ed to recover their entire carrying value through future cash flows, were written down to fair value. Earnings per Share and Price/Earnings Ratio (Yen/Times) ■ Earnings per Share ● Price/Earnings Ratio* Net Income (Loss) per Employee (Millions of Yen) 3 8 . . 5 4 4 . 3 5 8 . 5 3 6 - 1 2 . 1 0 . 5 0 . 9 0 . . 6 0 - 0 0 . 900.8 175.0 64.9 23.6 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 * Not calculated in 2002 due to net loss. Other expenses, net, decreased to ¥26,658 million from ¥27,865 million for the previous fiscal year. The primary Despite the effect of other expenses, net, the increase in component of this total was a charge of ¥18,968 million in gross profit supported income before income taxes, connection with Omron’s voluntary early retirement pro- minority interests and cumulative effect of accounting gram, under which participating employees received a change of ¥4,732 million, compared to a loss before lump sum payment in addition to the retirement benefits income taxes of ¥25,373 million for the previous fiscal they had earned. Management believes that the cost and year. Net income totaled ¥511 million, compared to a net efficiency benefits of this program will support consis- loss of ¥15,773 million for the previous fiscal year. Basic tently higher earnings. Loss on impairment of investment net income per share was ¥2.1, compared to a net loss per securities and other assets decreased substantially to share of ¥63.5 for the previous fiscal year. After consider- ¥2,269 million from ¥17,199 million for the previous fiscal ing performance and the Group’s capital requirements as year. Loss on impairment of property, plant and equip- it invests to generate profitable long-term growth, Omron ment totaled ¥4,231 million, compared to ¥6,815 million paid cash dividends applicable to the fiscal year totaling for the previous fiscal year. The Group carried out an ¥10.00 per share, compared to cash dividends of ¥13.00 per share applicable to the previous fiscal year. Income (Loss) Before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change/Net Sales and Net Income (Loss)/ Net Sales (%) ● Income (Loss) Before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change/Net Sales ● Net Income (Loss)/Net Sales Interest Expenses and Interest Coverage (Millions of Yen/Times) ■ Interest Expenses ● Interest Coverage Review of Operations by Company Because of divisional restructuring among companies, prior-year net sales of internal companies have been recalculated to present a more realistic year-on-year com- 8 1 5 , 2 7 9 8 , 1 1 3 7 , 1 1 9 2 , 1 0 3 4 , 1 parison. 26.83 23.59 Composition of Net Sales 6.7 3.8 3.8 2.1 1.5 0.4 -3.0 -4.8 0.9 0.1 14.64 5.56 4.36 2003 2002 2001 Industrial Automation ............. 37.8% 34.5% 38.3% Electronic Components ........... Social Systems Business ........ Healthcare ................................ Others ....................................... 25.9 21.8 7.9 6.6 24.7 24.0 7.6 9.2 21.8 23.9 6.6 9.4 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Note: The composition of net sales is based on the classifications reported in the Six-year Summary. 2 4 • O m r o n C o r p o r a t i o n Industrial Automation Company Sales of the Social Systems Solutions and Service Net sales of the Industrial Automation Company (IAB), Business Company (SSB) decreased substantially due to excluding intercompany transactions, increased 10.0 per- reduced capital investment in electronic fund transfer sys- cent from the previous fiscal year to ¥202,518 million, and tems due to the overall weakness of the financial indus- accounted for 37.8 percent of net sales. Overall, sales to try. In the public transportation systems sector, sales semiconductor and flat panel display (FPD) manufacturers increased considerably as Omron received a major ticket rebounded moderately, and sales to the automobile and vending machine order in the Kanto region that had been food industries were firm. In Japan, sales of devices used deferred from the previous fiscal year. In the traffic con- for safety, information sensing equipment, displacement trol and road information systems sector, sales decreased sensors, vision sensors, motion controllers and other because of reduced public works investment, and Omron products increased substantially. Sales in North America transferred operations related to equipment sales in its increased, led by sales of sensing equipment. Restrained parking systems business during the period. investment in the electronics and electrical equipment The Advanced Modules Business Company (AMB) industries resulted in flat sales in Europe. Sales in greater increased sales of electronic fund transfer systems, sup- China and Southeast Asia increased substantially as IAB ported by solid demand in South Korea and Taiwan. strengthened direct marketing and sales channels, and Sales of ATMs for convenience stores in Japan, however, increased its emphasis on social infrastructure projects. decreased as the latest sales cycle came to an end. Sales also declined in the card reader business and in the over- Electronic Components Company seas public transportation systems business. Net sales for the Electronic Components Company (ECB), excluding intercompany transactions, increased Healthcare Company 5.3 percent from the previous fiscal year to ¥138,845 mil- Net sales for the Healthcare Company (HCB), excluding lion, and accounted for 25.9 percent of net sales. In intercompany transactions, increased 4.2 percent from Japan, sales of backlights for cellular phones and inte- the previous fiscal year to ¥42,331 million, and accounted grated circuit (IC) coin systems for the amusement indus- for 7.9 percent of net sales. While continued consumer try increased substantially. In the consumer and com- frugality in Japan impacted discretionary spending, over- merce components business, sales of relays for all consumption recovered moderately. The introduction telecommunications equipment were sluggish, but of new products including a new type of massage chair, exports of relays and switches for consumer appliances increased distribution efficiency and support for sales remained firm. Sales of automotive electronic compo- outlets allowed HCB to maintain sales at the prior-year nents expanded strongly, benefiting from increased level. Overseas, results were firm in almost every region. exports and the growing importance of electronics in By region, HCB strengthened relationships with large- automobiles. ECB also formed a new marketing organiza- scale retail chains in the United States. In Europe, HCB tion to strengthen sales of components for mobile worked to construct an efficient sales system in ways devices. In overseas markets, sales of relays and switches including optimizing its network of sales agents. In Asia, for consumer appliances offset slumping demand in the HCB strengthened its efforts in the growth areas of telecommunications equipment industry in North Taiwan and Australia. In China, HCB added sales bases America, Europe and Asia, and sales of automotive and enhanced user support. devices expanded strongly. Others Social Systems Business Net sales of other divisions, excluding intercompany Net sales for the Social Systems Business, excluding transactions, decreased 29.5 percent from the previous intercompany transactions, decreased 8.9 percent from fiscal year to ¥34,727 million, and accounted for 6.6 per- the previous fiscal year to ¥116,652 million, and account- cent of net sales. The decrease reflected in part the exclu- ed for 21.8 percent of net sales. On July 1, 2002, the sion of Omron Alphatech Corporation from the scope of Social Systems Business was divided into the Social consolidation in the second half of the fiscal year. The Systems Solutions and Service Business Company, which Creative Service Company increased sales of outsourcing is involved in the solutions and service businesses, and services, mainly business services for corporate adminis- the Advanced Modules Business Company, which is trative operations. However, as part of the company-wide involved in the module business. structural reform program, Omron dissolved the Creative A n n u a l R e p o r t 2 0 0 3 • 2 5 Service Company in March 2003 and reoriented its opera- prospects. IAB, ECB and HCB generated firm results, sup- tions to an in-company focus. The Business Development ported by the depreciation of the yen against the euro from Group is responsible for exploring and nurturing new the previous fiscal year. As a result, total sales to external businesses, as well as developing and strengthening customers increased 12.6 percent to ¥73,513 million. businesses that are not formally internal companies. New businesses include a remote supervisory system for the Asia and Other machine-to-machine field and a vehicle anti-theft system, The economies of Asia, particular those of greater which are now on the market. The Business Development China, continued to expand because of increased exports Group will assess additional market opportunities in and consumer spending. IAB, ECB and HCB generated these sectors. Increase (Decrease) in Sales of Internal Business Companies 2003 2002 2001 Industrial Automation ............. 10.0% (17.9)% 11.2% Electronic Components ........... 5.3 (1.0) Social Systems Business ........ (8.9) (12.2) Healthcare ................................ 4.2 Others ....................................... (29.5) 3.3 (4.2) 7.5 10.4 (7.8) (6.0) Note: The increase or decrease in sales for 2001 and 2002 is based on the amounts previously reported for the respective years, prior to the reclassifications made in the following year. Review of Operations by Region Japan solid results in this environment. As a result, total sales to external customers increased 17.4 percent year-on-year to ¥53,099 million. Sales by Region (%) ■ Japan ■ North America ■ Europe ■ Asia and Other 1999 2000 2001 2002 2003 69.8 71.6 71.3 67.0 63.7 10.5 13.9 5.8 10.7 11.0 6.7 10.8 10.3 7.6 12.3 12.2 8.5 12.7 13.7 9.9 The disposal of nonperforming loans continued to Assets, Liabilities and Shareholders’ Equity weigh on Japan’s economy. Concerns about the future As of March 31, 2003, total assets were ¥567,399 million, restrained personal consumption and capital expendi- an increase of ¥18,033 million, or 3.3 percent, from March tures, which weakened domestic demand. IAB and ECB 31, 2002. Current assets increased ¥17,615 million, or 6.3 achieved solid results during the past fiscal year. The envi- percent, to ¥295,113 million. The return to profitability and ronment remained challenging for SSB and AMB, as diffi- improved cash flow resulted in an increase of ¥9,140 mil- cult conditions in the financial markets held back capital lion, or 12.9 percent, in cash and cash equivalents, and investment and public-sector investment was restrained. deferred income taxes also increased. Omron also transferred the operations of consolidated Net property, plant and equipment decreased ¥3,249 subsidiary Omron Alphatech Corporation as part of its million, or 2.1 percent, to ¥149,045 million. Investment in ongoing structural reforms, which reduced net sales. As a machinery and equipment offset the effect of the write result, total sales to external customers for the fiscal year down of buildings to fair value as discussed above. decreased 4.8 percent year-on-year to ¥340,575 million. Investments and other assets increased ¥3,667 million, North America or 3.1 percent, to ¥123,241 million. An increase in deferred income taxes offset the decrease in the market value of During the first half of the fiscal year, the economy of investment securities. the United States remained the driving force of the global The total of current liabilities, long-term liabilities and economy with support from firm housing investment and minority interests in subsidiaries increased ¥64,657 mil- consumer spending. In the second half, however, weak- lion, or 25.7 percent, to ¥315,789 million. Current liabilities ness in the stock market and events in Iraq exerted an increased ¥22,132 million, or 17.1 percent, to ¥151,577 mil- unfavorable effect. In this environment, IAB, ECB and lion, due primarily to an increase of ¥4,225 million in bank HCB generated solid results. Total sales to external cus- loans to ¥18,948 million and an increase of ¥10,805 million tomers increased 3.5 percent to ¥67,886 million. in the current portion of long-term debt to ¥11,997 million. Europe Working capital at the balance sheet date decreased ¥4,517 million, or 3.1 percent, to ¥143,536 million, and the The economies of Europe showed indications of moder- current ratio was 195 percent, compared to 214 percent a ate recovery, along with growing concerns about future year earlier. Long-term debt decreased by a net ¥2,481 2 6 • O m r o n C o r p o r a t i o n million, or 5.8 percent, to ¥40,315 million, as new long- times a year earlier. Shareholders’ equity per share was term debt totaling ¥8,398 million offset the shift of matur- ¥1,036.01, compared to ¥1,201.23 a year earlier. ing long-term debt to current liabilities. Interest-bearing liabilities, defined as the sum of bank loans, the current Cash Flow portion of long-term debt and long-term debt, increased Cash and cash equivalents at March 31, 2003 increased ¥12,549 million, or 21.4 percent, to ¥71,260 million. ¥9,140 million from a year earlier, or 12.9 percent, to Termination and retirement benefits increased ¥45,363 ¥79,919 million. The effect of exchange rates on cash and million, or 60.2 percent, to ¥120,730 million. cash equivalents was negligible. Shareholders’ equity decreased ¥46,624 million, or 15.6 Net cash provided by operating activities increased percent, from a year earlier to ¥251,610 million, due pri- ¥8,167 million to ¥41,854 million. The return to net prof- marily to an increase in accumulated other comprehen- itability was a primary factor in the year-on-year increase. sive loss totaling ¥34,546 million that resulted primarily Omron also generated a net ¥9,791 million in cash from from the increase in the minimum pension liability. changes in working capital, compared to ¥4,719 million Accumulated other comprehensive loss includes foreign for the previous fiscal year. currency translation adjustments, minimum pension liabil- Net cash used in investing activities decreased ¥9,488 ity adjustments, unrealized gains or losses on available- million to ¥30,633 million. Net proceeds from sales or for-sale securities and net losses on derivative instru- maturities of short-term investments and investment ments. Note 15 of the Notes to the Consolidated Financial securities totaled ¥649 million, compared to net purchas- Statements provides additional explanation. es totaling ¥3,070 million in the previous fiscal year, or a The ratio of shareholders’ equity to total assets was 44.3 year-on-year contribution to cash flow totaling ¥3,719 mil- percent, compared to 54.3 percent as of March 31, 2002. lion. Omron also reduced capital expenditures by ¥4,442 The debt/equity ratio, defined as total liabilities divided by million, or 11.4 percent, to ¥34,454 million, reflecting shareholders’ equity, was 1.255 times, compared to 0.842 greater selectivity in making capital commitments. Working Capital and Current Ratio (Millions of Yen/%) ■ Working Capital ● Current Ratio 0 1 6 , 4 6 1 7 9 7 , 9 6 1 9 8 4 , 5 4 1 3 5 0 , 8 4 1 6 3 5 , 3 4 1 195 214 215 204 179 Inventory Turnover (Times) Omron also generated cash totaling ¥1,450 million from proceeds from sales of business entities. Net cash used in financing activities decreased ¥10,060 million to ¥1,996 million. Net cash generated from external sources totaled ¥11,307 million, consisting of net borrow- 4.56 ings of short-term bank loans totaling ¥2,909 million, and 4.18 4.44 4.25 4.36 net proceeds from long-term debt totaling ¥8,398 million. The amount raised externally compared a total of ¥13,303 million in cash used for dividends paid by Omron totaling ¥2,855 million, and cash used to repurchase shares of Omron Corporation totaling ¥10,218 million. Dividends paid by Omron decreased ¥375 million, or 11.6 percent. 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Return on Assets (%) Price/Book Value Ratio (Times) Return on Tangible Fixed Assets (%) Return on Shareholders’ Equity (%) 14.1 7.2 1.3 6.7 3.5 0.3 0.7 0.2 6.8 2.23 3.6 1.4 0.8 1.18 1.88 1.62 1.60 -4.4 -10.1 -5.1 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 A n n u a l R e p o r t 2 0 0 3 • 2 7 Consolidated Balance Sheets OMRON Corporation and Subsidiaries March 31, 2003 and 2002 ASSETS Current Assets: Millions of yen Thousands of U.S. dollars (Note 2) 2003 2002 2003 Cash and cash equivalents............................................................................ ¥ 79,919 ¥ 70,779 $ 665,992 Notes and accounts receivable – trade ......................................................... 113,595 114,906 Allowance for doubtful receivables................................................................ (3,484) Inventories (Note 3)........................................................................................ Deferred income taxes (Note 11) ................................................................... Other current assets ...................................................................................... 75,446 20,139 9,498 (2,755) 74,617 13,001 6,950 946,625 (29,033) 628,717 167,825 79,149 Total Current Assets ................................................................................ 295,113 277,498 2,459,275 Property, Plant and Equipment: Land ............................................................................................................... Buildings ........................................................................................................ 46,094 99,455 Machinery and equipment ............................................................................. 137,710 Construction in progress ............................................................................... 11,313 Total ........................................................................................................... 294,572 46,979 108,547 133,672 8,642 297,840 384,117 828,792 1,147,583 94,275 2,454,767 Accumulated depreciation............................................................................. (145,527) Net Property, Plant and Equipment........................................................ 149,045 (145,546) 152,294 (1,212,725) 1,242,042 Investments and Other Assets: Investments in and advances to associates.................................................. Investment securities (Note 4) ....................................................................... Leasehold deposits........................................................................................ Deferred income taxes (Note 11) ................................................................... Other (Note 5) ................................................................................................ 1,187 30,861 9,173 64,305 17,715 785 43,431 10,653 43,901 20,804 Total Investments and Other Assets ...................................................... 123,241 119,574 Total .................................................................................................................. ¥ 567,399 ¥ 549,366 9,892 257,175 76,442 535,875 147,624 1,027,008 $ 4,728,325 See notes to consolidated financial statements. 2 8 • O m r o n C o r p o r a t i o n Millions of yen Thousands of U.S. dollars (Note 2) LIABILITIES AND SHAREHOLDERS’ EQUITY 2003 2002 2003 Current Liabilities: Bank loans (Note 6) ....................................................................................... ¥ 18,948 ¥ 14,723 $ 157,900 Notes and accounts payable – trade............................................................. Accrued expenses (Note 18) ......................................................................... Income taxes payable.................................................................................... Other current liabilities (Note 11) ................................................................... Current portion of long-term debt (Note 6).................................................... 67,773 24,394 4,095 24,370 11,997 60,000 22,748 3,832 26,950 1,192 564,775 203,283 34,125 203,084 99,975 Total Current Liabilities ........................................................................... 151,577 129,445 1,263,142 Long-Term Debt (Note 6)................................................................................. 40,315 42,796 335,958 Deferred Income Taxes (Note 11) ................................................................... 643 436 5,358 Termination and Retirement Benefits (Note 8).............................................. 120,730 75,367 1,006,083 Other Long-Term Liabilities............................................................................ 52 291 434 Minority Interests in Subsidiaries .................................................................. 2,472 2,797 20,600 Shareholders’ Equity (Note 9): Common stock, no par value: Authorized: 487,000,000 shares lssued: 249,109,236 shares................................................................ Additional paid-in capital ............................................................................... Legal reserve ................................................................................................. 64,082 98,705 7,619 Retained earnings .......................................................................................... 153,134 Accumulated other comprehensive loss (Note 15)........................................ (59,909) 64,082 98,705 7,660 155,069 (25,363) Treasury stock, at cost — 6,245,053 shares in 2003 and 836,289 shares in 2002 .................................... (12,021) (1,919) Total Shareholders’ Equity ...................................................................... 251,610 Total .................................................................................................................. ¥567,399 298,234 ¥549,366 534,017 822,542 63,491 1,276,117 (499,242) (100,175) 2,096,750 $4,728,325 See notes to consolidated financial statements. A n n u a l R e p o r t 2 0 0 3 • 2 9 Consolidated Statements of Operations OMRON Corporation and Subsidiaries Years ended March 31, 2003, 2002 and 2001 Millions of yen Thousands of U.S. dollars (Note 2) 2003 2002 2001 2003 Net Sales ................................................................................................. ¥535,073 ¥533,964 ¥594,259 $4,458,942 Costs and Expenses: Cost of sales ......................................................................................... 327,413 Selling, general and administrative expenses ...................................... 135,112 Research and development expenses ................................................. 40,235 Interest expense, net (Note 6)............................................................... Foreign exchange loss, net................................................................... 348 575 353,429 134,907 41,407 223 1,506 Other expenses, net (Note 10) .............................................................. 26,658 27,865 376,194 131,203 42,513 111 1,389 2,812 2,728,442 1,125,933 335,292 2,900 4,792 222,150 Total.................................................................................................. 530,341 559,337 554,222 4,419,509 4,732 3,936 (25,373) (9,348) 40,037 17,318 (16,025) 22,719 132 422 (16,157) 22,297 384 — 39,433 32,800 6,633 2,375 4,258 — ¥ (15,773) ¥ 22,297 $ 4,258 Yen 2002 U.S. dollars (Note 2) 2001 2003 ¥(65.0) (65.0) (63.5) (63.5) ¥87.4 85.3 87.4 85.3 $0.02 0.02 0.02 0.02 796 285 511 — 511 2003 ¥2.1 2.1 2.1 2.1 Income (Loss) before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change.......................................... Income Taxes (Note 11) .......................................................................... Income (Loss) before Minority Interests and Cumulative Effect of Accounting Change.......................................... Minority Interests ................................................................................... Income (Loss) before Cumulative Effect of Accounting Change....... Cumulative Effect of Accounting Change............................................ Net Income (Loss) .................................................................................. ¥ Per Share Data (Note 13): Income (Loss) before Cumulative Effect of Accounting Change Basic................................................................................................. Diluted .............................................................................................. Net Income (Loss) Basic................................................................................................. Diluted .............................................................................................. See notes to consolidated financial statements. 3 0 • O m r o n C o r p o r a t i o n Consolidated Statements of Comprehensive Income (Loss) OMRON Corporation and Subsidiaries Years ended March 31, 2003, 2002 and 2001 Net Income (Loss) .................................................................................. ¥ 511 ¥(15,773) ¥22,297 $ 4,258 Millions of yen Thousands of U.S. dollars (Note 2) 2003 2002 2001 2003 Other Comprehensive Income (Loss), Net of Tax (Note 15): Foreign currency translation adjustments: Amount arising during the year on investments in consolidated foreign entities held at end of year ........................ (2,227) 6,310 7,286 (18,557) Reclassification adjustment for the portion realized upon sale or liquidation of investments in foreign entities ....................... 222 — — 1,856 Net change in foreign currency translation adjustments during the year ................................................................................ (2,005) 6,310 Minimum pension liability adjustments................................................. (27,484) (13,973) 7,286 (7,251) (16,701) (229,031) Unrealized gains (losses) on available-for-sale securities: Unrealized holding losses arising during the year ............................ (6,400) (7,570) (8,532) (53,337) Reclassification adjustment for losses on impairment realized in net income (loss) ......................................................................... Reclassification adjustment for net losses (gains) on sales realized in net income (loss).............................................. 692 661 Net unrealized losses ........................................................................ (5,047) Net gains (losses) on derivative instruments: 8,030 391 5,771 (746) (286) (2,072) (10,213) 5,510 (42,056) Net losses on derivative instruments designated as cash flow hedges during the year ................................................................... (788) (1,673) Reclassification adjustment for net losses realized in net income (loss) ......................................................................... Net losses ......................................................................................... 778 (10) 1,605 (68) — — — (6,563) 6,467 (96) Other Comprehensive Loss................................................................... (34,546) (8,017) (10,178) (287,884) Comprehensive Income (Loss) ............................................................. ¥(34,035) ¥(23,790) ¥12,119 $(283,626) See notes to consolidated financial statements. A n n u a l R e p o r t 2 0 0 3 • 3 1 Consolidated Statements of Shareholders’ Equity OMRON Corporation and Subsidiaries Years ended March 31, 2003, 2002 and 2001 Number of common shares issued Common stock Additional paid-in capital Legal reserve Retained earnings Accumulated other comprehensive income (loss) Treasury stock Millions of yen Balance, April 1, 2000 ........................ 257,109,236 ¥64,082 ¥98,705 ¥7,250 ¥173,804 ¥ (7,168) ¥ (611) Net income....................................... Cash dividends, ¥13 per share ........ Transfer to legal reserve .................. Other comprehensive loss ............... Acquisition of treasury stock ........... Exercise of stock options................. 22,297 (3,284) (402) 402 (10,178) (749) 148 Share buyback and retirement......... (8,000,000) (18,338) Balance, March 31, 2001 ................... 249,109,236 64,082 98,705 7,652 174,077 (17,346) (1,212) Net loss ............................................ Cash dividends, ¥13 per share ........ Transfer to legal reserve .................. Other comprehensive loss ............... Acquisition of treasury stock ........... Exercise of stock options................. (15,773) (3,227) (8) 8 (8,017) (725) 18 Balance, March 31, 2002 ................... 249,109,236 64,082 98,705 7,660 155,069 (25,363) (1,919) Net income....................................... Cash dividends, ¥10 per share ........ Reversal of legal reserve.................. Other comprehensive loss ............... Acquisition of treasury stock ........... Reissuance of treasury stock (Note 9)... (41) 511 (2,455) 41 (32) (34,546) (10,218) 116 Balance, March 31, 2003 ................... 249,109,236 ¥64,082 ¥98,705 ¥7,619 ¥153,134 ¥(59,909) ¥(12,021) Thousands of U.S. dollars (Note 2) Common stock Additional paid-in capital Legal reserve Retained earnings Accumulated other comprehensive income (loss) Treasury stock Balance, March 31, 2002................................................ $534,017 $822,542 $63,833 $1,292,242 $(211,358) $ (15,992) Net income ................................................................... Cash dividends, $0.08 per share .................................. Reversal of legal reserve............................................... (342) Other comprehensive loss............................................ Acquisition of treasury stock ........................................ Reissuance of treasury stock (Note 9).......................... 4,258 (20,458) 342 (267) (287,884) (85,150) 967 Balance, March 31, 2003................................................ $534,017 $822,542 $63,491 $1,276,117 $(499,242) $(100,175) See notes to consolidated financial statements. 3 2 • O m r o n C o r p o r a t i o n Consolidated Statements of Cash Flows OMRON Corporation and Subsidiaries Years ended March 31, 2003, 2002 and 2001 Operating Activities: Net income (loss) .................................................................................... ¥ Adjustments to reconcile net income (loss) to net 511 ¥(15,773) ¥ 22,297 $ 4,258 Millions of yen Thousands of U.S. dollars (Note 2) 2003 2002 2001 2003 cash provided by operating activities: Depreciation and amortization ............................................................ Net loss on sales and disposals of property, plant and equipment.... Loss on impairment of property, plant and equipment....................... Net loss (gain) on sales of short-term investments and investment securities ................................................................. Loss on impairment of investment securities and other assets.......... Bad debt expenses ............................................................................. Termination and retirement benefits ................................................... Deferred income taxes ........................................................................ Minority interests................................................................................. Cumulative effect of accounting change ............................................ Net gain on sales of business entities................................................. Changes in assets and liabilities: Notes and accounts receivable — trade, net .................................. Inventories ....................................................................................... Other assets .................................................................................... Notes and accounts payable — trade............................................. Income taxes payable ..................................................................... Accrued expenses and other .......................................................... Other, net ............................................................................................ Total adjustments ............................................................................ Net cash provided by operating activities ................................... Investing Activities: Proceeds from sales or maturities of short-term investments and investment securities ............................................................................ Purchase of short-term investments and investment securities ............ Capital expenditures............................................................................... Decrease (increase) in leasehold deposits ............................................. Proceeds from sales of property, plant and equipment ......................... Acquisition of minority interests ............................................................. Proceeds from sales of business entities ............................................... Acquisition of business entities .............................................................. Net cash used in investing activities............................................ 29,676 11 4,231 1,221 2,269 465 (1,087) (3,915) 285 — (1,550) 1,363 (1,918) 214 9,770 232 130 (54) 41,343 41,854 1,388 (739) (34,454) 592 1,641 (101) 1,450 (410) (30,633) Financing Activities: 2,909 Net borrowings (repayments) of short-term bank loans......................... 10,358 Proceeds from issuance of long-term debt ............................................ (1,960) Repayments of long-term debt............................................................... (2,855) Dividends paid by the Company ............................................................ (230) Dividends paid to minority ...................................................................... — Share buyback........................................................................................ (10,218) Treasury stock ........................................................................................ — Exercise of stock options ....................................................................... (1,996) Net cash used in financing activities ........................................... (85) Effect of Exchange Rate Changes on Cash and Cash Equivalents..... 9,140 Net Increase (Decrease) in Cash and Cash Equivalents ...................... Cash and Cash Equivalents at Beginning of the Year .......................... 70,779 Cash and Cash Equivalents at End of the Year ..................................... ¥ 79,919 See notes to consolidated financial statements. 33,569 1,314 6,815 (1,008) 17,199 520 2,616 (16,131) 132 (384) — 19,402 17,403 2,279 (22,291) (10,992) (1,082) 99 49,460 33,687 3,111 (6,181) (38,896) 506 1,450 (111) — — (40,121) 5,786 13,102 (26,970) (3,230) (37) — (725) 18 (12,056) 3,648 (14,842) 85,621 ¥ 70,779 32,217 760 — (3,703) 2,460 3,810 4,990 (5,402) 422 — — (5,593) (13,320) 875 3,620 3,438 4,140 (215) 28,499 50,796 9,746 (5,761) (37,583) (538) 1,953 (182) — — (32,365) (1,371) 715 (1,650) (3,337) — (18,338) (749) 148 (24,582) 3,102 (3,049) 88,670 ¥ 85,621 247,300 92 35,258 10,175 18,908 3,875 (9,058) (32,625) 2,375 — (12,917) 11,358 (15,983) 1,783 81,417 1,933 1,083 (450) 344,524 348,782 11,567 (6,158) (287,117) 4,933 13,675 (842) 12,083 (3,416) (255,275) 24,242 86,317 (16,333) (23,792) (1,916) — (85,150) — (16,632) (708) 76,167 589,825 $ 665,992 A n n u a l R e p o r t 2 0 0 3 • 3 3 Notes to Consolidated Financial Statements OMRON Corporation and Subsidiaries 1. Summary of Significant Accounting Policies Nature of Operations OMRON Corporation (the “Company”) is a multinational manufacturer of automation components, equipment and systems with advanced computer, communications and control technologies. The Company conducts busi- ness in over 30 countries around the world and strategically manages its worldwide operations through 5 regional management centers, Japan, North America, Europe, Asia-Pacific and China. Products, classified by type and mar- ket, are organized into six internal companies and one business development group, as described below. Industrial Automation manufactures and sells control components and systems including programmable logic controllers, sensors and switches used in automatic systems in industry. In the global market, the company offers many services, such as those involving laborsaving automation, environmental protection, safety improvement, and inspection-automization solutions for highly developed production systems. Electronic Components manufactures and sells electric and electronic components found in such consumer goods as home appliances and automobiles as well as such business equipment as telephone systems, vending machines, and office equipment. Social Systems Solutions Business encompasses the sale of automated teller machines, card authorization ter- minals and point of sales systems mainly for the domestic markets. Passing gates and automated ticket machines and electronic panels and terminal displays for traffic information and monitoring purposes are also supplied for the domestic market. Advanced Modules Business manufactures products for the Social Systems Business, and also sells products for certain domestic customers and overseas markets. Healthcare sells blood pressure monitors, digital thermometers, body-fat monitors, nebulizers and infra-red ther- apy devices aimed at both the consumer and institutional markets. Creative Service provides such outsourcing services as distribution, advertising and public relations, personnel, information systems, administration, employee benefit schemes and accounting. Business Development Group consists of businesses with high growth potential. The group provides the peripheral equipment loaded in office automation equipment, modems, terminal adapters, scanners and uninter- rupted power supplies. Basis of Financial Statements The accompanying consolidated financial statements, stated in Japanese yen, include certain adjustments, not recorded on the books of account, to present these statements in accordance with accounting principles generally accepted in the United States of America, except for the omission of segment information required by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Certain reclassifications have been made to amounts previously reported in order to conform to 2003 classifications. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries (together the “Companies”). All significant intercompany accounts and transactions have been eliminated. The Companies’ investments in companies in which ownership is from 20% to 50% (associates) are accounted for using the equity method. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the report- ed amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents consist of highly liquid investments with original maturities of three months or less, including time deposits, commercial paper, securities purchased with resale agreements and money market instruments. Allowance for Doubtful Receivables An allowance for doubtful receivables is established in amounts considered to be appropriate based primarily upon the Companies’ past credit loss experience and an evaluation of potential losses in the receivables outstanding. Short-Term Investments and Investment Securities The Companies classify all of their marketable debt and equity securities as available-for-sale. Available-for-sale securities are carried at market value with the corresponding recognition of net unrealized holding gains and losses as a separate component of accumulated other comprehensive income, net of related taxes, until recognized. Individual securities classified as available-for-sale are reduced to net realizable value by a charge to income in the period in which the decline is deemed to be other than temporary. 3 4 • O m r o n C o r p o r a t i o n Other investments are stated at the lower of cost or estimated net realizable value. The cost of securities sold is determined on the average cost basis. Inventories Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market. Property, Plant and Equipment Property, plant and equipment is stated at cost. Depreciation of property, plant and equipment has been com- puted principally on a declining balance method based upon the estimated useful lives of the assets. The estimated useful lives primarily range from 3 to 50 years for buildings and from 2 to 15 years for machinery and equipment. Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the pur- chase method of accounting be used for all business combinations completed after June 30, 2001. SFAS No. 141 also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. SFAS No. 142 requires that goodwill no longer be amortized, but instead tested for impairment at least annually. SFAS No. 142 also requires recognized intangible assets be amortized over their respective estimat- ed useful lives and reviewed for impairment. Any recognized intangible asset determined to have an indefinite useful life is not to be amortized, but instead tested for impairment until its life is determined to no longer be indefinite. The Companies adopted the provision of SFAS No. 141 and SFAS No. 142 on April 1, 2002. In connection with the transitional goodwill impairment evaluation, SFAS No. 142 required the Companies to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. This initial test resulted in no goodwill impairment charges. Other intangible assets were amortized on a straight-line basis over the expected useful lives principally up to 5 years. Long-Lived Assets In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale; and broadens the scope of businesses to be dis- posed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Companies adopted SFAS No. 144 on April 1, 2002. The adoption of SFAS No.144 did not have a material impact on the operating results or financial position of the Companies. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of other than by sale are considered held and used until disposed of. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell. Advertising Costs Advertising costs are charged to earnings as incurred. Advertising expense was ¥7,196 million ($59,967 thou- sand), ¥7,931 million and ¥8,796 million for the years ended March 31, 2003, 2002 and 2001, respectively. Shipping and Handling Charges Shipping and handling charges were ¥7,300 million ($60,833 thousand), ¥7,342 million and ¥8,027 million for the years ended March 31, 2003, 2002 and 2001, respectively, and are included in selling, general and administrative expenses in the consolidated statements of operations. Termination and Retirement Benefits Termination and retirement benefits are accounted for in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” and are disclosed in accordance with SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The provision for termination and retirement benefits includes amounts for directors and corporate auditors of the Company. A n n u a l R e p o r t 2 0 0 3 • 3 5 Income Taxes Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. Future tax benefits, such as net operating loss carryfor- wards and tax credit carryforwards, are recognized to the extent that such benefits are more likely than not to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the peri- od that includes the enactment date. Product Warranties A liability for the estimated warranty related cost is established at the time revenue is recognized and is included in other current liability. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims. Derivatives On April 1, 2001 the Companies adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133.” Both standards establish accounting and reporting standards for deriva- tive instruments and for hedging activities, and require that an entity recognize all derivatives as either assets or lia- bilities in the balance sheet and measure those instruments at fair value. For foreign exchange forward contracts and foreign currency options, on the date the derivative contract is entered into, the Companies designate the derivative as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge or “foreign currency” hedge). The Companies formally document all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow or foreign currency hedges to specific assets and liabilities on the consolidated balance sheet or to specific firm commitments or forecasted transactions. Based on the Companies’ policy, all foreign exchange forward contracts and foreign currency options entered into must be highly effective in offsetting changes in cash flows of hedged items. Changes in fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow or foreign currency hedge are recorded in other comprehensive income (loss), until earnings are affected by the vari- ability in cash flows of the designated hedged item. The cumulative effect adjustment upon the adoption SFAS No. 133 and No. 138, net of the related income tax effect resulted in a decrease to net loss of approximately ¥384 million. Prior to the adoption of SFAS No. 133 and No. 138, derivative financial instruments that were designated and effective as hedges of forecasted transactions for which there was no firm commitment were marked to market, and gains and losses on such derivatives were recorded in Foreign exchange loss, as were the offsetting foreign exchange losses and gains on the hedged items. Gains and losses on the derivative financial instruments that were designated and effective as hedges of firm commitments were deferred and recognized in income upon maturity of the hedged transaction. Amounts receivable or payable under derivative financial instruments used to manage interest rate risks arising from financial assets and liabilities were recognized as a component of the interest income or expense of such related underlying assets or liabilities. Cash Dividends Cash dividends are reflected in the consolidated financial statements at proposed amounts in the year to which they are applicable, even though payment is not approved by shareholders until the annual general meeting of shareholders held early in the following fiscal year. Resulting dividends payable are included in Other current liabili- ties in the consolidated balance sheets. Comprehensive Income (Loss) Comprehensive income (loss) consists of net income (loss), foreign currency translation adjustments, minimum pension liability adjustments, unrealized gains and losses on available-for-sale securities and net gains and losses on derivative instruments, and is presented in the consolidated statements of comprehensive income (loss). Revenue Recognition The Companies recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred and title has transferred, the sales price is fixed or determinable, and collectibility is probable. These criteria are met when products are shipped or services are performed. Stock-Based Compensation The Companies account for stock-based awards to employees using the intrinsic value method in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” including related interpretations, and follow the disclosure only provision of SFAS No. 123, “Accounting for Stock Based Compensation.” 3 6 • O m r o n C o r p o r a t i o n At March 31, 2003, the Company had a stock-based employee compensation plan, which is described more fully in Note 9. No stock-based employee compensation cost is reflected in the results of operations, as all options granted under those plans had an exercise price exceeding the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation. Net income (loss), as reported................................................. Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards ........................................................ Millions of yen (except per share data) 2002 ¥(15,773) 2003 ¥511 2001 ¥22,297 91 100 78 Pro forma net income (loss) ..................................................... ¥420 ¥(15,873) ¥22,219 Earnings per share (yen and U.S. dollars): Basic – as reported .............................................................. Basic – pro forma................................................................. Diluted – as reported............................................................ Diluted – pro forma .............................................................. ¥ 2.1 1.7 2.1 1.7 ¥ (63.5) (63.9) (63.5) (63.9) ¥ 87.4 87.1 85.3 85.0 Thousands of U.S. dollars (except per share data) 2003 $ 4,258 758 $ 3,500 $ 0.02 0.01 0.02 0.01 New Accounting Standards In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligation,” which is effective for financial statements issued for fiscal years beginning after June 15, 2002. The pronouncement addresses the recognition and remeasurement of obligations associated with the retirement of a tangible long-lived asset. The Companies expect that the adoption of SFAS No. 143 will not be material. In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit and Disposal Activities.” SFAS No. 146 nullifies Emerging Issues Task Force (“EITF”) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under EITF Issue 94-3, a liability for an exit cost is recognized at the date of an entity’s commit- ment to an exit plan. Under SFAS No. 146, the liabilities associated with an exit or disposal activity will be mea- sured at fair value and recognized when the liability is incurred and meets the definition of a liability in the conceptu- al framework of the FASB. This statement is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the operating results or financial position of the Companies. In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 addresses the disclosures to be made by a guarantor about its obligations under certain guarantees it has issued and clarifies the accounting for such guarantees. FIN No. 45 requires the recognition of a liability by a guarantor for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN No. 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002, and the disclo- sure requirements are effective for periods ending after December 15, 2002. The adoption of FIN No. 45 did not have a material impact on the operating results or financial position of the Companies. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” an amendment of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 amends the disclosure requirements for stock-based compensation for annual periods ending after December 15, 2002 and for interim periods beginning after December 15, 2002. The disclosure requirements apply to all companies, includ- ing those that continue to recognize stock-based compensation under the intrinsic value provisions of APB Opinion 25. SFAS No. 148 also provides three alternative transition methods for companies that choose to adopt the fair value measurement provisions of SFAS No. 123. The Company has adopted the pro forma disclosure requirements of SFAS No. 148 during the year ended March 31, 2003. In January 2003, EITF reached a final consensus on Issue 03-2, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities.” EITF Issue 03-2 addresses accounting for a transfer to the Japanese government of a substitutional portion of an Employees’ Pension Fund plan which is a defined benefit pension plan established under the Welfare Pension Insurance Law. The Company has not yet decided if they will apply for the transfer. In February 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” which addresses the consolidation by business enterprises of variable interest entities, which have one or both of the following charac- teristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without addition- A n n u a l R e p o r t 2 0 0 3 • 3 7 al financial support from other parties, or (2) the equity investors lack one or more of the following essential charac- teristics of a controlling financial interest: (a) the direct or indirect ability to make decisions about the entity’s activi- ties through voting or similar rights, (b) the obligation to absorb the expected losses of the entity if they occur, or (c) the right to receive the expected residual returns of the entity if they occur. FIN No. 46 will have a significant effect on existing practice because it requires existing variable interest entities to be consolidated if those entities do not effectively disperse risks among parties involved. FIN No. 46 applies immediately to variable interest entities creat- ed after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN No. 46 may be applied prospec- tively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The adoption of FIN No. 46 did not have a material impact on the operating results or financial position of the Companies. 2. Translation into United States Dollars The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Company is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for convenience of the readers and have been made at the rate of ¥120 to $1, the approximate free rate of exchange at March 31, 2003. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at the above or any other rate. 3. Inventories Inventories at March 31 consisted of: Finished products............................................................................................ Work-in-process.............................................................................................. Materials and supplies..................................................................................... Total............................................................................................................. Millions of yen 2003 ¥39,264 16,608 19,574 ¥75,446 2002 ¥39,772 14,923 19,922 ¥74,617 Thousands of U.S. dollars 2003 $327,200 138,400 163,117 $628,717 4. Short-Term Investments and Investment Securities Available-for-sale securities are recorded at fair value, with unrealized gains and losses excluded from income and reported in other comprehensive income (loss), net of tax. Cost, gross unrealized holding gains and losses and fair value of securities, excluding equity securities with no readily determinable public market value, by major security type at March 31 were as follows: 2003 2002 Millions of yen Gross unrealized gains Gross unrealized losses Fair value Cost (*) Gross unrealized gains Gross unrealized losses Fair value Cost (*) Available-for-sale securities: Debt securities ............... ¥ Equity securities............. 44 27,947 Total available-for-sale ¥ — ¥ — ¥ 4,000 (5,171) 44 26,776 ¥ 33 31,185 ¥ — 8,346 ¥ — ¥ (815) 33 38,716 securities.......................... ¥27,991 ¥4,000 ¥(5,171) ¥26,820 ¥31,218 ¥8,346 ¥(815) ¥38,749 Available-for-sale securities: Debt securities ........................................................................ $ Equity securities ...................................................................... Thousands of U.S. dollars 2003 Gross unrealized gains Gross unrealized losses Fair value Cost (*) 367 $ — $ — $ 367 232,892 33,333 (43,092) 223,133 Total available-for-sale securities ............................................... $233,259 $33,333 $(43,092) $223,500 *Cost represents amortized cost for debt securities and acquisition cost for equity securities. 3 8 • O m r o n C o r p o r a t i o n 5. Goodwill and Other Intangible Assets Losses on impairment of available-for-sale securities recognized to reflect the decline in market value considered to be other than temporary were ¥1,194 million ($9,950 thousand), ¥13,845 million and ¥674 million for the years ended March 31, 2003, 2002 and 2001, respectively. Net unrealized holding gains (losses) on available-for-sale securities, net of related taxes, decreased by ¥5,047 million ($42,058 thousand) and ¥286 million for the years ended March 31, 2003 and 2002, respectively. Debt secu- rities classified as available-for-sale investment securities mature in various amounts through 2005. Proceeds from sales of available-for-sale securities were ¥1,240 million ($10,333 thousand), ¥2,750 million and ¥9,372 million for the years ended March 31, 2003, 2002 and 2001, respectively. Gross realized gains on sales were ¥78 million ($650 thousand), ¥1,608 million and ¥3,579 million for the years ended March 31, 2003, 2002 and 2001, respectively. Gross realized losses on sales were ¥1,218 million ($10,150 thousand), ¥321 million and ¥8 million for the years ended March 31, 2003, 2002 and 2001, respectively. The components of acquired intangible assets excluding goodwill at March 31, 2003 and 2002 were as follows: Millions of yen 2003 2002 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Intangible assets subject to amortization: Software .................................................................................. ¥21,780 ¥10,268 ¥22,250 ¥11,023 Other ....................................................................................... 3,842 2,838 3,680 2,674 Total ........................................................................................ ¥25,622 ¥13,106 ¥25,930 ¥13,697 Thousands of U.S. dollars 2003 Gross Carrying Amount Accumulated Amortization Intangible assets subject to amortization: Software........................................................................................................................... $181,500 $ 85,567 Other ................................................................................................................................ 32,017 23,650 Total ................................................................................................................................. $213,517 $109,217 Intangible assets not subject to amortization at March 31, 2003 and 2002 were immaterial. Aggregate amortization expense for the year ended March 31, 2003 was ¥4,544 million ($37,867 thousand). Estimated amortization expense for the next five years ending March 31 is as follows: Years ending March 31 Millions of yen 2004 ..................................................................................................................... ¥4,095 2005 ..................................................................................................................... 2006 ..................................................................................................................... 2007 ..................................................................................................................... 2008 ..................................................................................................................... 3,473 2,853 1,525 486 Thousands of U.S. dollars $34,125 28,942 23,775 12,708 4,050 The carrying amount of goodwill at March 31, 2003 and 2002 and its movement for the year ended March 31, 2003 were immaterial. A n n u a l R e p o r t 2 0 0 3 • 3 9 6. Bank Loans and The weighted average annual interest rates of short-term bank loans at March 31, 2003 and 2002 were 1.2% and Long-Term Debt 1.7%, respectively. Long-term debt at March 31 consisted of the following: Millions of yen 2003 2002 Thousands of U.S. dollars 2003 Unsecured debt: Convertible bonds at 1.7%, due in 2004..................................................... ¥29,735 ¥29,735 $247,792 Loans from banks and other financial institutions, generally at 0.4% to 3.8%, due serially through 2006 .................................. Other................................................................................................................ Total............................................................................................................. Less portion due within one year .................................................................... 21,802 775 52,312 11,997 12,541 1,712 43,988 1,192 181,683 6,458 435,933 99,975 Long-term debt, less current portion .............................................................. ¥40,315 ¥42,796 $335,958 The annual maturities of long-term debt outstanding at March 31, 2003 were as follows: Years ending March 31 Millions of yen 2004 ..................................................................................................................... ¥11,997 2005 ..................................................................................................................... 2006 ..................................................................................................................... 30,235 10,080 Thousands of U.S. dollars $ 99,975 251,958 84,000 Total ..................................................................................................................... ¥52,312 $435,933 The convertible bonds may be purchased at any time by the Company or its subsidiaries principally at any price in the open market or otherwise, and may be redeemed at the Company’s option prior to maturity. The convertible bonds became redeemable, in whole or in part, beginning October 1997 at 106% of face value, decreasing 1% per year. At March 31, 2003 the convertible bonds were redeemable, in whole or in part, at 101%. The number of contingently issuable shares of common stock related to the convertible bonds as of March 31, 2003 was 10,026,639 shares. The conversion price per share at March 31, 2003 was ¥2,965 ($24.71), subject to anti-dilutive provisions. As is customary in Japan, additional security must be given if requested by a lending bank, and banks have the right to offset cash deposited with them against any debt or obligation that becomes due and, in case of default and certain other specified events, against all debt payable to the banks. The Companies have never received any such requests. As is customary in Japan, the Company and domestic subsidiaries maintain deposit balances with banks with which they have short- or long-term borrowings. Such deposit balances are not legally or contractually restricted as to withdrawal. Total interest cost incurred and charged to expense for the years ended March 31, 2003, 2002 and 2001 amount- ed to ¥1,430 million ($11,917 thousand), ¥1,291 million and ¥1,731 million, respectively. 7. Leases The Companies have operating lease agreements primarily involving offices and equipment for varying periods. Leases that expire generally are expected to be renewed or replaced by other leases. At March 31, 2003, future minimum rental payments applicable to non-cancelable leases having initial or remaining non-cancelable lease terms in excess of one year were as follows: Years ending March 31 Millions of yen 2004 ..................................................................................................................... ¥ 2,686 2005 ..................................................................................................................... 2006 ..................................................................................................................... 2007 ..................................................................................................................... 2008 ..................................................................................................................... 2,461 2,217 2,088 1,928 2009 and thereafter.............................................................................................. 17,163 Total ..................................................................................................................... ¥28,543 Thousands of U.S. dollars $ 22,383 20,508 18,475 17,400 16,067 143,025 $237,858 Rental expense amounted to ¥12,818 million ($106,817 thousand), ¥11,322 million and ¥11,232 million for the years ended March 31, 2003, 2002 and 2001, respectively. 4 0 • O m r o n C o r p o r a t i o n 8. Termination and Retirement Benefits The Company and its domestic subsidiaries sponsor termination and retirement benefit plans which cover sub- stantially all domestic employees. Benefits are based on the employee’s years of service, with some plans consid- ering compensation and certain other factors. If the termination is involuntary, the employee is usually entitled to greater payments than in the case of voluntary termination. The Company and its domestic subsidiaries fund a portion of the obligations under these plans. The general funding policy is to contribute amounts computed in accordance with actuarial methods acceptable under Japanese tax law. The Company and substantially all domestic subsidiaries have a contributory termination and retirement plan which is interrelated with the Japanese government social welfare program and consists of a basic portion requiring employee and employer contributions plus an additional portion established by the employers. Periodic pension benefits required under the basic portion are prescribed by the Japanese Ministry of Health, Labour and Welfare, commence at age 65 and continue until the death of the surviving spouse. Benefits under the additional portion are usually paid in a lump sum at the earlier of termination or retirement although periodic pay- ments are available under certain conditions. The following table is the reconciliation of beginning and ending balances of the benefit obligations and the fair value of the plan assets at March 31: Millions of yen 2003 2002 Change in benefit obligation: Benefit obligation at beginning of year........................................................ ¥ 232,178 9,611 Service cost, less employees’ contributions ............................................... 5,804 Interest cost................................................................................................. 942 Employees’ contributions ............................................................................ — Plan amendments........................................................................................ 13,340 Actuarial losses............................................................................................ (8,829) Benefits paid ............................................................................................... (4,668) Settlement paid ........................................................................................... ¥205,907 8,401 6,042 1,053 (4,504) 20,138 (3,590) (1,269) Thousands of U.S. dollars 2003 $1,934,817 80,092 48,367 7,850 — 111,167 (73,575) (38,900) Benefit obligation at end of year.............................................................. ¥ 248,378 ¥232,178 $2,069,818 Change in plan assets: Fair value of plan assets at beginning of year ............................................. Actual return on plan assets ........................................................................ Employers’ contributions............................................................................. Employees’ contributions ............................................................................ Benefits paid................................................................................................ 119,487 (17,608) 6,233 942 (3,743) 121,875 (7,974) 6,922 1,053 (2,389) 995,725 (146,733) 51,942 7,850 (31,192) Fair value of plan assets at end of year ................................................... ¥ 105,311 ¥119,487 $ 877,592 Funded status.................................................................................................. Unrecognized net actuarial loss ...................................................................... Unrecognized prior service credit ................................................................... Unrecognized transition obligation.................................................................. (143,067) 113,301 (3,904) 268 (112,691) 81,051 (4,204) 538 (1,192,226) 944,175 (32,532) 2,233 Net amount recognized ........................................................................... ¥ (33,402) ¥ (35,306) $ (278,350) Amounts recognized in the consolidated balance sheets: Accrued liability ........................................................................................... ¥(117,382) 83,980 Accumulated other comprehensive loss (gross of tax) ............................... ¥ (71,899) $ (978,183) 699,833 36,593 Net amount recognized ........................................................................... ¥ (33,402) ¥ (35,306) $ (278,350) Accumulated benefit obligation at end of year........................................... ¥ 222,693 ¥191,386 $1,855,775 The provisions of SFAS No. 87, “Employers’ Accounting for Pensions,” require the recognition of an additional minimum pension liability for each defined benefit plan to the extent that a plan’s accumulated benefit obligation exceeds the fair value of plan assets and accrued pension liabilities. The net change in the minimum pension liabili- ty is reflected as other comprehensive income, net of related tax effect. The unrecognized transition obligation, the unrecognized net actuarial loss and the prior service credit are being amortized over 15 years. A n n u a l R e p o r t 2 0 0 3 • 4 1 Key assumptions utilized in calculating the actuarial present value of benefit obligations are as follows: Discount rate ................................................................................................................ 2.0% Compensation increase rate ........................................................................................ 2.0 Expected long-term rate of return on plan assets ....................................................... 3.0 2003 2002 2.5% 3.0 4.0 2001 3.0% 3.0 4.0 The expense recorded for the contributory termination and retirement plans included the following components for the years ended March 31: Service cost, less employees’ contributions ................................................... Interest cost on projected benefit obligation................................................... Expected return on plan assets....................................................................... Amortization .................................................................................................... Net expense................................................................................................. 2003 ¥ 9,611 5,804 (4,072) 2,742 ¥14,085 Millions of yen Thousands of U.S. dollars 2003 $ 80,092 48,367 (33,933) 22,850 2002 ¥ 8,401 6,042 (5,010) 1,681 ¥11,114 $117,376 9. Shareholders’ Equity Some part of the employees of European subsidiaries are covered by a defined benefit pension plan. The project- ed benefit obligations for the plan and related fair value of plan assets were ¥1,315 million ($10,958 thousand) and ¥887 million ($7,392 thousand), respectively, at March 31, 2003 and ¥1,176 million and ¥793 million, respectively, at March 31, 2002. The Companies also have unfunded noncontributory termination plans administered by the Companies. These plans provide lump-sum termination benefits and are paid at the earlier of the employee’s termination or mandatory retirement age, except for payments to directors and corporate auditors which require approval by the shareholders before payment. The Companies record provisions for termination benefits sufficient to state the liability equal to the plans’ vested benefits, which exceed the plans’ accumulated benefit obligations. Sum of the consolidated liability for the termination plans other than the funded contributory termination and retirement plan in Japan, as of March 31, 2003 and 2002 was ¥3,348 million ($27,900 thousand) and ¥3,468 million, respectively. The consolidated expense for the noncontributory termination and retirement plans for the years ended March 31, 2003, 2002 and 2001 was ¥890 million ($7,417 thousand), ¥2,385 million and ¥1,015 million, respectively. Japanese companies are subject to the Japanese Commercial Code (the “Code”) to which certain amendments became effective as from October 1, 2001. Prior to October 1, 2001, the Code required at least 50% of the issue price of new shares, with a minimum of the par value thereof, to be designated as stated capital as determined by resolution of the Board of Directors. Proceeds in excess of amounts designated as stated capital were credited to additional paid-in capital. Effective October 1, 2001, the Code was revised and common stock par values were eliminated resulting in all shares being recorded with no par value. Prior to October 1, 2001, the Code also provided that an amount at least equal to 10% of the aggregate amount of cash dividends and certain other cash payments which are made as an appropriation of retained earnings applic- able to each fiscal period shall be appropriated and set aside as a legal reserve until such reserve equals 25% of stated capital. Effective October 1, 2001, the revised Code allows for such appropriations to be set aside as a legal reserve until the total additional paid-in capital and legal reserve equals 25% of stated capital. The amount of total additional paid-in capital and legal reserve which exceeds 25% of stated capital can be transferred to retained earnings by resolution of the shareholders, which may be available for dividends. Under the Code, companies may issue new common shares to existing shareholders without consideration as a stock split pursuant to a resolution of the Board of Directors. Prior to October 1, 2001, the amount calculated by dividing the total amount of shareholders’ equity by the number of outstanding shares after the stock split could not be less than ¥50. The revised Code eliminated this restriction. Prior to October 1, 2001, the Code imposed certain restrictions on the repurchase and use of treasury stock. Effective October 1, 2001, the Code eliminated these restrictions allowing companies to repurchase treasury stock by a resolution of the shareholders at the general shareholders’ meeting and dispose of such treasury stock by res- olution of the Board of Directors after March 31, 2002. The repurchased amount of treasury stock cannot exceed the amount available for future dividend plus amount of stated capital, additional paid-in capital or legal reserve to be reduced in the case where such reduction was resolved at the general shareholders’ meeting. The Code permits companies to transfer a portion of additional paid-in capital and legal reserve to stated capital by resolution of the Board of Directors. The Code also permits companies to transfer a portion of unappropriated retained earnings, available for dividends, to stated capital by resolution of the shareholders. Dividends are approved by the shareholders at a meeting held subsequent to the fiscal year to which the divi- dends are applicable. Semiannual interim dividends may also be paid upon resolution of the Board of Directors, subject to certain limitations imposed by the Code. 4 2 • O m r o n C o r p o r a t i o n Under the Code, the amount legally available for dividends is based on retained earnings as recorded in the books of the Company for Japanese financial reporting purposes. At March 31, 2003, retained earnings amounting to ¥36,472 million ($303,933 thousand) were available for future dividends subject to legal reserve requirements. The Company acquired the minority interests of certain domestic subsidiaries in exchange for the Company’s common stock previously held in its treasury. For the year ended March 31, 2003, the Company reissued 52,275 shares of treasury stock to acquire minority interests with book values and fair values of ¥84 million ($700 thou- sand). These transactions resulted in a combined loss on reissuance of treasury stock of ¥32 million ($267 thou- sand), representing the aggregate difference between the cost of shares repurchased and the fair market value of shares reissued on the effective date of acquisition. The loss was charged directly to retained earnings. Stock Options The Company has authorized the grant of options to purchase common stock of the Company to certain direc- tors and officers of the Company under a fixed stock option plan. All of the authorized shares available for grant have been granted. Under the above plan, the exercise price of each option exceeded the market price of the Company’s common stock on the date of grant and the options expire 5 years after the date of the grant. Generally, options become fully vested and exercisable after 3 years. A summary of the Company’s fixed stock option plan activity and related information is as follows: Fixed options Shares Weighted-average exercise price Yen Weighted-average fair value of options granted during the year Options outstanding at April 1, 2000................................................. 307,000 Granted.......................................................................................... 260,000 (64,000) Exercised ....................................................................................... (5,000) Forfeited ........................................................................................ Options outstanding at March 31, 2001............................................ 498,000 Granted.......................................................................................... 292,000 (10,000) Exercised ....................................................................................... (85,000) Expired........................................................................................... Options outstanding at March 31, 2002............................................ 695,000 Granted.......................................................................................... 276,000 ¥1,995 2,936 2,161 1,839 2,467 2,306 1,839 2,161 2,446 1,913 Options outstanding at March 31, 2003............................................ 971,000 ¥2,294 ¥424 325 285 U.S. dollars Weighted-average exercise price Weighted-average fair value of options granted during the year Options outstanding at March 31, 2002 .............................................................. Granted ............................................................................................................ Options outstanding at March 31, 2003 .............................................................. $20.4 15.9 $19.1 Shares 85,000 Options exercisable at March 31, 2001 ................................................................... Options exercisable at March 31, 2002 ................................................................... 143,000 Options exercisable at March 31, 2003 ................................................................... 403,000 $2.4 Yen Weighted-average exercise price ¥2,161 ¥1,839 ¥2,547 U.S. dollars Weighted-average exercise price Options exercisable at March 31, 2003............................................................................................ $21.2 A n n u a l R e p o r t 2 0 0 3 • 4 3 The following summarizes information about fixed stock options at March 31, 2003: Yen Range of exercise prices ¥1,839 2,936 2,306 1,913 ¥1,839 to ¥2,936 U.S. dollars Range of exercise prices $15.3 24.5 19.2 15.9 $15.3 to $24.5 Options outstanding Yen Weighted-average remaining contractual life Weighted-average exercise price 1.25 years 2.25 years 3.25 years 4.25 years 2.97 years ¥1,839 2,936 2,306 1,913 ¥2,294 Shares 143,000 260,000 292,000 276,000 971,000 Options exercisable Yen Shares 143,000 260,000 — — 403,000 Weighted-average exercise price ¥1,839 2,936 — — ¥2,547 Options outstanding Options exercisable U.S. dollars U.S. dollars Shares 143,000 260,000 292,000 276,000 971,000 Weighted-average remaining contractual life Weighted-average exercise price 1.25 years 2.25 years 3.25 years 4.25 years 2.97 years $15.3 24.5 19.2 15.9 $19.1 Shares 143,000 260,000 — — 403,000 Weighted-average exercise price $15.3 24.5 — — $21.2 The fair value of each option grant was estimated as of the grant date using the Black-Scholes option-pricing model with the following assumptions: Risk-free interest rate ....................................................................................... Volatility ........................................................................................................... Dividend yield ................................................................................................... Expected life ..................................................................................................... 3.5 years 0.271% 25.0 0.559 0.560% 20.0 0.576 3.5 years 0.650% 20.0 0.451 3.5 years 2003 2002 2001 The Black-Scholes option valuation model used by the Company was developed for use in estimating the fair value of fully tradable options, which have no vesting restrictions and are fully transferable. In addition, option valu- ation models require the input of highly subjective assumptions including the expected stock price volatility. It is management’s opinion that the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value esti- mate, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. Other expenses (income), net for the years ended March 31, 2003, 2002 and 2001 consisted of the following: Loss on relocation ........................................................... Loss on impairment of investment 2003 ¥ — Millions of yen 2002 ¥ — 2001 ¥ 2,312 Thousands of U.S. dollars 2003 $ — securities and other assets............................................ 2,269 17,199 2,460 18,908 Net loss (gain) on sales and disposals of property, plant and equipment, excluding loss on relocation .......................................... 11 Loss on impairment of property, plant and equipment ...................................... 4,231 Net loss (gain) on sales of short-term investments and investment securities.............................................. Net gain on sales of business entities ............................. Voluntary early retirement program ................................. Other, net......................................................................... 1,221 (1,550) 18,968 1,508 1,314 6,815 (1,008) — — 3,545 (43) — (3,703) — — 1,786 92 35,258 10,175 (12,917) 158,067 12,567 Total ............................................................................. ¥26,658 ¥27,865 ¥ 2,812 $222,150 10. Other Expenses, net 4 4 • O m r o n C o r p o r a t i o n During the year ended March 31, 2001 the Company recognized a net loss of ¥2,312 million ($19,267 thousand) as a result of an office relocation plan, primarily consisting of the relocation of the headquarters within Kyoto, Japan. In 2003 and 2002, the Companies assessed the potential impairment of certain long-lived assets in consideration of future alternate uses, including disposal by sale. As a result, certain land and buildings, principally laboratories in 2003 and dormitories for employees in 2002, were deemed to be impaired and written down to fair value because the assets are not expected to recover their entire carrying value through future cash flows. The estimated fair value of these assets was primarily determined by independent real estate appraisals of land and buildings. The resulting loss on impairment of land and buildings was ¥4,231 million ($35,258 thousand) and ¥6,815 million for the years ended March 31, 2003 and 2002, respectively. There was no such loss for the year ended March 31, 2001. During the year ended March 31, 2003 the Company and most domestic subsidiaries implemented a voluntary early retirement program to all employees fulfilling certain conditions such as age and duration of employment. Employees accepting this offer received an additional lump sum payment, along with their previously earned retire- ment benefits. The resulting expenses in connection with this program were ¥18,968 million ($158,067 thousand) for the year ended March 31, 2003. 11. Income Taxes The provision for income taxes for the years ended March 31, 2003, 2002 and 2001 consisted of the following: Current income tax expense ........................................... Deferred income tax benefit, exclusive of the following.... Change in the beginning of the year balance of 2003 ¥ 7,851 (5,600) Millions of yen 2002 ¥ 6,783 (17,679) 2001 ¥22,720 (5,367) Thousands of U.S. dollars 2003 $ 65,425 (46,667) the valuation allowance for deferred tax assets ............ 136 1,548 Adjustments of deferred tax assets and liabilities for enacted changes in tax rates ................................... Total ............................................................................. 1,549 ¥ 3,936 (35) — 1,134 12,908 — ¥ (9,348) ¥17,318 $ 32,800 The effective income tax rates of the Companies differ from the normal Japanese statutory rates as follows for the years ended March 31: Normal Japanese statutory rates ............................................................................. Increase (decrease) in taxes resulting from: 2003 42.0% 2002 (42.0)% 2001 42.0% Permanently non-deductible items ...................................................................... Losses of subsidiaries for which no tax benefit was provided............................. Tax loss on sale of subsidiary .............................................................................. Difference in subsidiaries’ tax rates...................................................................... Change in the beginning of the year balance of the valuation allowance for deferred tax assets ................................................. Effects of enacted change in tax rates ................................................................. Other, net.............................................................................................................. 7.7 38.7 (33.0) (14.9) 2.9 32.7 7.1 1.9 3.3 — (1.3) 0.4 — 0.9 2.4 2.6 — (2.5) (0.1) — (1.1) Effective tax rates ............................................................................................. 83.2% (36.8)% 43.3% The Company and its domestic subsidiaries are subject to a number of taxes based on income, which in the aggregate resulted in a normal tax rate of approximately 42.0% in 2003, 2002 and 2001. An amendment to Japanese tax regulations was enacted into law on March 31, 2003. As a result of this amend- ment, the normal income tax rate was reduced from 42.0% to 41.0% effective April 1, 2004. Deferred income tax assets and liabilities as of March 31, 2003 were measured at both tax rates considering the period the deferred tax asset or liability will be realized. The effect on the provision for income taxes was a ¥1,549 million ($12,908 thou- sand) increase for the year ended March 31, 2003. A n n u a l R e p o r t 2 0 0 3 • 4 5 The approximate effect of temporary differences and tax credit and loss carryforwards that gave rise to deferred tax balances at March 31, 2003 and 2002 were as follows: Millions of yen 2003 2002 Thousands of U.S. dollars 2003 Inventory valuation ....................................... Accrued bonuses and vacations .................. Termination and retirement benefits ............ Enterprise taxes............................................ Intercompany profits .................................... Marketable securities ................................... Property, plant and equipment..................... Allowance for doubtful receivables .............. Gain on sale of land...................................... Minimum pension liability adjustment .......... Other temporary differences ........................ Tax credit carryforwards .............................. Operating loss carryforwards ....................... Deferred tax assets ¥ 3,761 4,682 12,319 150 2,547 480 2,369 2,531 — 34,431 10,827 4,124 16,226 Deferred tax assets Deferred tax liabilities ¥ — ¥ 3,521 3,492 12,912 164 2,540 — 2,789 2,711 — 15,369 11,871 3,689 12,961 — — — — — — 99 1,050 — 1,792 — — Subtotal ........................................................ Valuation allowance...................................... 94,447 (8,348) 2,941 — 72,019 (9,574) Deferred tax liabilities ¥ — — — — — 3,164 — 180 1,311 — 1,639 — — 6,294 — Deferred tax assets $ 31,342 39,017 102,658 1,250 21,225 4,000 19,742 21,092 — 286,925 90,225 34,367 135,217 787,060 (69,567) Deferred tax liabilities $ — — — — — — — 825 8,750 — 14,933 — — 24,508 — Total ...................................................... ¥86,099 ¥2,941 ¥62,445 ¥6,294 $717,493 $24,508 The total valuation allowance decreased by ¥1,226 million ($10,217 thousand) in 2003 and increased by ¥1,779 million and ¥1,310 million in 2002 and 2001, respectively. As of March 31, 2003, the Company and certain subsidiaries had operating loss carryforwards approximating ¥40,408 million ($336,733 thousand) available for reduction of future taxable income, the majority of which expire in 2008. The Company has not provided for Japanese income taxes on unremitted earnings of subsidiaries to the extent that they are believed to be indefinitely reinvested. The unremitted earnings of the foreign subsidiaries which are considered to be indefinitely reinvested and for which Japanese income taxes have not been provided were ¥62,094 million ($517,450 thousand) and ¥53,928 million at March 31, 2003 and 2002, respectively. It is not practi- cable to estimate the amount of unrecognized deferred Japanese income taxes on these unremitted earnings. Dividends received from domestic subsidiaries are expected to be substantially free of tax. 12. Foreign Net sales and total assets of foreign subsidiaries for the years ended March 31, 2003, 2002 and 2001 were as Operations follows: Net sales ............................................................................ ¥194,498 Total assets ........................................................................ ¥158,300 2003 Millions of yen 2002 ¥176,096 ¥146,734 2001 ¥170,434 ¥141,966 Thousands of U.S. dollars 2003 $1,620,817 $1,319,167 13. Per Share Data The Company accounts for its earnings per share in accordance with SFAS No. 128, “Earnings per Share.” Basic net income (loss) per share has been computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during each year. Diluted net income (loss) per share reflects the potential dilution of convertible bonds and stock options, and has been computed by the if-converted method for convertible bonds and by the treasury stock method for stock options. A reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share compu- tations is as follows: Millions of yen 2003 2002 2001 Thousands of U.S. dollars 2003 Income (loss) before cumulative effect of accounting change ............................................ ¥511 ¥(16,157) ¥22,297 $4,258 Effect of dilutive securities: Convertible bonds, due 2004 ..................................... Diluted net income (loss) ................................................ — ¥511 — 325 — ¥(16,157) ¥22,622 $4,258 4 6 • O m r o n C o r p o r a t i o n Net income (loss)................................................................ Effect of dilutive securities: Convertible bonds, due 2004 ..................................... Diluted net income (loss) ................................................ 2003 ¥511 — ¥511 2003 Weighted average common shares outstanding ................. 247,336,015 Dilutive effect of: Convertible bonds, due 2004 ....................................... Stock options................................................................ — — Millions of yen 2002 ¥(15,773) 2001 ¥22,297 Thousands of U.S. dollars 2003 $4,258 — 325 — ¥(15,773) ¥22,622 $4,258 Number of shares 2002 248,401,803 2001 255,031,698 — — 10,026,639 62,449 Diluted common shares outstanding ............................... 247,336,015 248,401,803 265,120,786 For the years ended March 31, 2003 and 2002, the assumed conversion of convertible bonds, giving effect to the incremental shares and the adjustment to reduce interest expenses, was anti-dilutive and has, therefore, been excluded from the computation. For the years ended March 31, 2003 and 2002, the assumed exercise of stock options, giving effect to the incre- mental shares, was anti-dilutive and has been excluded from the computation. Supplemental cash flow information for the years ended March 31, 2003, 2002 and 2001 was as follows: Interest paid ....................................................................... Income taxes paid.............................................................. Non-cash investing and financing activities: Liabilities assumed in connection 2003 ¥1,431 7,588 Millions of yen 2002 ¥ 1,264 17,748 2001 ¥ 1,765 19,257 Thousands of U.S. dollars 2003 $11,925 63,233 14. Supplemental Information for Cash Flows 15. Other Comprehensive Income (Loss) with capital expenditures ............................................. 1,320 1,516 1,803 11,000 Fair value of minority interests acquired by the reissuance of treasury stock ............................. 84 — — 700 The change in each component of accumulated other comprehensive income (loss) for the years ended March 31, 2003, 2002 and 2001 was as follows: Millions of yen 2003 2002 2001 Thousands of U.S. dollars 2003 Foreign currency translation adjustments: Beginning balance.......................................................... ¥ (7,402) (2,005) Change for the year........................................................ Ending balance............................................................... (9,407) Minimum pension liability adjustments: Beginning balance.......................................................... Change for the year........................................................ Ending balance............................................................... Unrealized gains (losses) on available-for-sale securities: Beginning balance.......................................................... Change for the year........................................................ Ending balance............................................................... (21,224) (27,484) (48,708) 3,331 (5,047) (1,716) Net losses on derivative instruments: Beginning balance.......................................................... Change for the year........................................................ Ending balance............................................................... (68) (10) (78) Total accumulated other comprehensive loss: ¥(13,712) 6,310 (7,402) (7,251) (13,973) (21,224) 3,617 (286) 3,331 — (68) (68) ¥(20,998) 7,286 (13,712) $ (61,682) (16,701) (78,383) — (7,251) (7,251) 13,830 (10,213) 3,617 — — — (176,867) (229,031) (405,898) 27,758 (42,056) (14,298) (567) (96) (663) Beginning balance.......................................................... Change for the year........................................................ (25,363) (34,546) (17,346) (8,017) (7,168) (10,178) (211,358) (287,884) Ending balance............................................................... ¥(59,909) ¥(25,363) ¥(17,346) $(499,242) A n n u a l R e p o r t 2 0 0 3 • 4 7 Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments for the years ended March 31, 2003, 2002 and 2001 were as follows: 2003 Tax (expense) benefit Before-tax amount Millions of yen 2002 Net-of-tax amount Before-tax amount Tax (expense) benefit Net-of-tax Before-tax amount amount 2001 Tax (expense) benefit Net-of-tax amount Foreign currency translation adjustments: Amount arising during the year on investments in consolidated foreign entities held at end of year............................................ ¥ (2,227) ¥ — ¥ (2,227) ¥ 6,310 ¥ — ¥ 6,310 ¥ 7,286 ¥ — ¥ 7,286 Reclassification adjustment for the portion realized upon sale or liquidation of investments in foreign entities ........................ 222 Net change in foreign currency translation adjustments during the year ........................... (2,005) — — 222 — — — — (2,005) 6,310 — 6,310 7,286 — — Minimum pension liability adjustments ............ (47,387) 19,903 (27,484) (24,091) 10,118 (13,973) (12,502) 5,251 — 7,286 (7,251) Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) arising during period................................................... (11,036) 4,636 (6,400) (13,052) 5,482 (7,570) (14,711) 6,179 (8,532) Reclassification adjustment for losses on impairment realized in net income (loss)......... 1,194 (502) 692 13,845 (5,815) 8,030 674 (283) 391 Reclassification adjustment for net losses (gains) on sales realized in net income (loss) ............................................. 1,140 (479) 661 (1,287) Net unrealized losses........................................ (8,702) 3,655 (5,047) (494) 541 208 (746) (3,571) (286) (17,608) 1,499 7,395 (2,072) (10,213) Net gains (losses) on derivative instruments: Net losses on derivative instruments designated as cash flow hedges during the year ................................................ Reclassification adjustment for net losses (1,358) 570 (788) (2,884) 1,211 (1,673) realized in net loss .......................................... 1,340 (562) Net losses ......................................................... (18) 8 778 (10) 2,767 (1,162) 1,605 (117) 49 (68) — — — — — — — — — Other comprehensive loss ............................ ¥(58,112) ¥23,566 ¥(34,546) ¥(18,392) ¥10,375 ¥(8,017) ¥(22,824) ¥12,646 ¥(10,178) Thousands of U.S. dollars 2003 Before-tax amount Tax (expense) benefit Net-of-tax amount Foreign currency translation adjustments: Amount arising during the year on investments in consolidated foreign entities held at end of year............................................................................................... $ (18,557) $ Reclassification adjustment for the portion realized upon sale or liquidation of investments in foreign entities ..................................................................................................... Net change in foreign currency translation adjustments during the year ...................................... 1,856 (16,701) — — — Minimum pension liability adjustments ......................................................................................... (394,881) 165,850 Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) arising during period................................................................. Reclassification adjustment for losses on impairment realized in net income (loss) ..................... Reclassification adjustment for net losses (gains) on sales realized in net income (loss) ............. Net unrealized losses ..................................................................................................................... Net gains (losses) on derivative instruments: Net losses on derivative instruments designated as cash flow hedges during the year ............... Reclassification adjustment for net losses realized in net loss...................................................... Net losses ...................................................................................................................................... (91,963) 9,950 9,500 (72,513) (11,315) 11,149 (166) 38,626 (4,179) (3,990) 30,457 4,752 (4,682) 70 $ (18,557) 1,856 (16,701) (229,031) (53,337) 5,771 5,510 (42,056) (6,563) 6,467 (96) Other comprehensive loss ......................................................................................................... $(484,261) $196,377 $(287,884) 4 8 • O m r o n C o r p o r a t i o n 16. Financial Financial Instruments Instruments and Risk Management The following table presents the carrying amounts and estimated fair values as of March 31, 2003 and 2002, of the Companies’ financial instruments. Millions of yen 2003 2002 Thousands of U.S. dollars 2003 Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Nonderivatives: Long-term debt, including current portion .... ¥(52,312) ¥(53,669) ¥(43,988) ¥(46,307) $(435,933) $(447,242) Derivatives: Included in Other current liabilities: Forward exchange contracts ................. Foreign currency options ....................... Interest rate swaps................................. (198) — — (198) — — (540) (65) (15) (540) (65) (15) (1,650) — — (1,650) — — The following methods and assumptions were used to estimate the fair values of each class of financial instru- ments for which it is practicable to estimate that value: Nonderivatives (1) Cash and cash equivalents, notes and accounts receivable, bank loans and notes and accounts payable: The carrying amounts approximate fair values. (2) Short-term investments and investment securities (see Note 4): The fair values are estimated based on quoted market prices or dealer quotes for marketable securities or similar instruments. Certain equity securities included in investments have no readily determinable public market value, and it is not practicable to estimate their fair values. (3) Long-term debt: For convertible bonds, the fair values are estimated based on quoted market prices. For other debt, the fair val- ues are estimated using present value of discounted future cash flow analysis, based on the Companies’ current incremental issuing rates for similar types of arrangements. Derivatives The fair value of derivatives generally reflects the estimated amounts that the Companies would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotes are available for most of the Companies’ derivatives; otherwise, pricing or valuation models are applied to current market information to estimate fair value. The Companies do not use derivatives for trading purposes. Changes in the fair value of foreign exchange forward contracts and foreign currency options designated and qualifying as cash flow hedges are reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassified into earnings through Foreign exchange loss, net in the same period as the hedged items affect earnings. Substantially all of the accumulated other comprehensive income (loss) in relation to foreign exchange forward contracts at March 31, 2003 is expected to be reclassified into earnings within twelve months. The effective portions of changes in the fair value of foreign exchange forward contracts and foreign currency options designated as cash flow hedges and reported in accumulated other comprehensive income (loss), net of the related tax effect, are losses of ¥788 million ($6,563 thousand ) and ¥1,673 million for the years ended March 31, 2003 and 2002, respectively. The amounts, which were reclassified out of accumulated other comprehensive income (loss) into Foreign exchange loss, net or Interest expense, net, depending on their nature, net of the related tax effect, are net losses of ¥778 million ($6,467 thousand ) and ¥1,605 million for the years ended March 31, 2003 and 2002, respectively. The amount of the hedging ineffectiveness is not material for the years ended March 31, 2003 and 2002. The Companies enter into interest rate swap agreements, which do not meet the hedging criteria of SFAS No. 133. These interest rate swap agreements are recorded at fair value in the consolidated balance sheets. The changes in fair values are recorded in current period earnings. (1) Interest rate swap contracts: The Companies enter into interest rate swap agreements to manage exposure to fluctuations in interest rates. These agreements involve the exchange of interest obligations on fixed and floating interest rate debt without exchange of the underlying principal amounts. The agreements generally mature at the time the related debt matures. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expense. Notional amounts are used to express the volume of interest rate swap agreements. The notional amounts do not represent cash flows and are not subject to risk of loss. In the unlikely event the coun- A n n u a l R e p o r t 2 0 0 3 • 4 9 terparty fails to meet the terms of an interest rate swap agreement, the Companies’ exposure is limited to the interest rate differential. Management considers the exposure to credit risk to be minimal since the counterpar- ties are major financial institutions. At March 31, 2002, the notional amounts on which the Companies had interest rate swap agreements out- standing aggregated ¥2,500 million. The estimated fair values of interest rate swap contracts are based on pre- sent value of discounted future cash flow analysis. (2) Foreign exchange forward contracts and foreign currency options: The Companies enter into foreign exchange forward contracts and combined purchased and written foreign currency option contracts to hedge foreign currency transactions (primarily the U.S. dollar and the EURO) on a continuing basis for periods consistent with their committed exposure. The terms of the currency derivatives are rarely more than 10 months. The credit exposure of foreign exchange contracts are represented by the fair value of the contracts at the reporting date. Management considers the exposure to credit risk to be minimal since the counterparties are major financial institutions. The notional amounts of contracts to exchange foreign currency (forward contracts) outstanding at March 31, 2003 and 2002 were as follows: Forward exchange contracts ................................................................... Foreign currency options ......................................................................... Millions of yen 2003 ¥24,326 — 2002 ¥16,328 8,049 Thousands of U.S. dollars 2003 $202,717 — The notional amounts do not represent the amounts exchanged by the parties to derivatives and are not a measure of the Companies’ exposure through its use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives. The Companies hedge certain exposures to fluctuations in foreign currency exchange rates that occur prior to conversion of foreign currency denominated monetary assets and liabilities into the functional currency. Prior to conversion to the functional currency, these assets and liabilities are translated at currency exchange rates in effect on the balance sheet date. The effects of changes in currency exchange rates are reported in earnings and included in Foreign exchange loss, net in the consolidated statements of operations. Currency forward con- tracts and options designated as hedges of the monetary assets and liabilities are also marked to spot rates with the resulting gains and losses reported in the consolidated statements of operations. Concentration of Credit Risk Financial instruments that potentially subject the Companies to concentrations of credit risk consist principally of short-term cash investments and trade receivables. The Companies place their short-term cash investments with high-credit-quality financial institutions. Concentrations of credit risk with respect to trade receivables, as approxi- mately 75% of total sales are concentrated in Japan, are limited due to the large number of well-established cus- tomers and their dispersion across many industries. The Company normally requires customers to deposit funds to serve as security for ongoing credit sales. In August 2000, the Company entered into an operating lease agreement for a new head office, including land and a building, with a company owned by the family of the Company’s founder, which includes the Company’s chairman and representative director, representative director and chief executive officer, and certain managing offi- cers at that time. This lease agreement has an initial non-cancelable lease term of 20 years and requires a monthly rental payment of ¥106 million ($883 thousand) and a security deposit of ¥2,600 million ($21,667 thousand) which is refundable when the agreement expires. During the years ended March 31, 2003, 2002 and 2001, the Company paid ¥1,272 million ($10,600 thousand), ¥1,272 million and ¥954 million, respectively, for rentals and the balance of the security deposit at March 31, 2003 and 2002 was ¥2,600 million ($21,667 thousand). The Company has commitments at March 31, 2003 of approximately ¥3,170 million ($26,417 thousand) related to contracts for the construction of a new research and development laboratory building in Kyoto. The Company has commitments at March 31, 2003 of approximately ¥23,395 million ($194,958 thousand) related to contracts for outsourcing computer services. The contract requires an annual service fee of ¥4,846 million ($40,383 thousand) for the year ending March 31, 2004. The annual service fee will gradually decrease each year during the contract term to ¥4,518 million ($37,650 thousand) for 2008. The contract is cancelable subject to a penalty of 15% of aggregate service fees payable for the remaining term of the contract. The Company and certain of its subsidiaries are defendants in several pending lawsuits. However, based upon the information currently available to both the Company and its legal counsel, the Company management believes that damages from such lawsuits, if any, would not have a material effect on the consolidated financial statements. 17. Related Party Transaction 18. Commitments and Contingent Liabilities 5 0 • O m r o n C o r p o r a t i o n Guarantees The Company provides guarantees to third parties of bank loans of associates and other companies. The guaran- tees for the associates and other companies are made to ensure that those companies operate with less costs of finance. The maximum payments in the event of default is ¥2,287 million ($19,058 thousand) at March 31, 2003. The carrying amounts of the liabilities recognized under those guarantees at March 31, 2003 were immaterial. Bank loans of ¥994 million ($8,283 thousand) of an unaffiliated company were jointly and severally guaranteed by the Company and six other unaffiliated companies. According to an agreement between the seven companies, any loss on these guarantees are to be equally borne among the companies. The Company also provides guarantees to third parties of certain obligations of consolidated subsidiaries. At March 31, 2003, these guarantees amounted to ¥113 million ($942 thousand). All intercompany guarantees are eliminated in consolidation. Product Warranties The Companies issue contractual product warranties under which they generally guarantee the performance of products delivered and services rendered for a certain period or term. Changes in accrued product warranty cost for the year ended March 31, 2003 are summarized as follows: Balance at beginning of year ...................................................................................... Addition ................................................................................................................... Utilization................................................................................................................. Balance at end of year ................................................................................................ Millions of yen 2003 ¥ 1,890 3,493 (2,631) ¥ 2,752 Thousands of U.S. dollars 2003 $ 15,750 29,108 (21,925) $ 22,933 19. Subsequent Events On May 8, 2003, the Company management declared a plan to repurchase the Company’s outstanding shares, subject to approval at the general meeting of shareholders. The execution of the plan is at the Company’s discre- tion with a maximum limit of ¥10,000 million ($83,333 thousand), or 5,000,000 shares, for the period up to the date of the June 2004 general meeting of shareholders. A n n u a l R e p o r t 2 0 0 3 • 5 1 Independent Auditors’ Report To the Board of Directors and Shareholders of OMRON Corporation We have audited the accompanying consolidated balance sheets of OMRON Corporation and subsidiaries as of March 31, 2003 and 2002, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2003, all expressed in Japanese yen. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclo- sures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Certain information required by Statement of Financial Accounting Standards No.131, “Disclosures about Segments of an Enterprise and Related Information,” has not been presented in the accompanying consolidated financial statements. In our opinion, presentation concerning operating segments and other information is required for a complete presentation of the Company’s consolidated financial statements. In our opinion, except for the omission of segment information as discussed in the preceding paragraph, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OMRON Corporation and subsidiaries as of March 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Our audits also comprehended the translation of Japanese yen amounts into United States dollar amounts and, in our opin- ion, such translation has been made in conformity with the basis stated in Note 2 to the consolidated financial statements. Such United States dollar amounts are presented solely for the convenience of readers outside Japan. Osaka, Japan June 17, 2003 5 2 • O m r o n C o r p o r a t i o n Global Network EUROPE Regional Headquarters OMRON Europe B.V. (The Netherlands) Phone: 31-23-5681300 Fax: 31-23-5681391 [Industrial Automation Company] OMRON Electronics Ges.m.b.H. (Austria) Phone: 43-1-80190-0 Fax: 43-1-804-48-46 OMRON Electronics N.V./S.A. (Belgium) Phone: 32-2-4662480 Fax: 32-2-4660687 OMRON Electronics AG (Switzerland) Phone: 41-41-748-13-13 Fax: 41-41-748-13-45 OMRON Electronics, Spol. S.r.o. (Czech Rep.) Phone: 420-2-6731-1254 Fax: 420-2-7173-5613 OMRON Electronics G.m.b.H. (Germany) Phone: 49-2173-6800-0 Fax: 49-2173-6800-400 OMRON Fabrikautomation G.m.b.H. (Germany) Phone: 49-2103-203-3 Fax: 49-2103-203-400 OMRON Electronics A/S. (Denmark) Phone: 45-4344-0011 Fax: 45-4344-0211 OMRON Electronics S.A. (Spain) Phone: 34-91-37-77-9-00 Fax: 34-91-37-77-9-56 OMRON Electronics S.a.r.l. (France) Phone: 33-1-49747000 Fax: 33-1-48760930 OMRON Electronics O.Y. (Finland) Phone: 358-9-5495-800 Fax: 358-9-5495-8150 OMRON Electronics KFT (Hungary) Phone: 36-1-399-3050 Fax: 36-1-399-3060 OMRON Electronics S.r.l. (Italy) Phone: 39-02-32681 Fax: 39-02-325154 OMRON Immobiliare S.r.l. (Italy) Phone: 39-02-32681 Fax: 39-02-325154 OMRON Electronics Norway A/S. (Norway) Phone: 47-22-657500 Fax: 47-22-658300 OMRON Electronics B.V. (The Netherlands) Phone: 31-23-5681100 Fax: 31-23-5681188 OMRON Electronics Lda. (Portugal) Phone: 351-21-942-9400 Fax: 351-21-941-7899 OMRON Electronics Sp. Z.o.o. (Poland) Phone: 48-22-645-7860 Fax: 48-22-645-7863 OMRON Electronics A.B. (Sweden) Phone: 46-8-632-3500 Fax: 46-8-632-3510 OMRON Electronics Ltd. (Turkey) Phone: 90-216-474-0040 Fax: 90-216-474-0047 OMRON Electronics Ltd. (U.K.) Phone: 44-20-8450-4646 Fax: 44-20-8450-8087 OMRON Electronics Manufacturing of Germany G.m.b.H. (Germany) Phone: 49-7032-811-111 Fax: 49-7032-811-199 OMRON Manufacturing of The Netherlands B.V. (The Netherlands) Phone: 31-73-6481811 Fax: 31-73-6420195 OMRON Yasukawamotion Control B.V. (The Netherlands) Phone: 31-23-5867400 Fax: 31-23-5867488 [Electronic Components Company] OMRON Electronic Components Europe B.V. (The Netherlands) Phone: 31-23-5681200 Fax: 31-23-5681212 [Automotive Electronic Components Company] OMRON Electronic Components Ltd. (U.K.) Phone: 44-1384-405500 Fax: 44-1384-405508 IMS Vision Motion Control G.m.b.H. (Germany) Phone: 49-711-686876-0 Fax: 49-711-686876-70 [Omron Healthcare Co., Ltd.] OMRON Medizintechnik Handelsgesellschaft G.m.b.H. (Germany) Phone: 49-621-83348-8 Fax: 49-621-8334820 OMRON Healthcare Europe B.V. (The Netherlands) Phone: 31-20-354-8200 Fax: 31-20-354-8201 OMRON Healthcare UK Ltd. (U.K.) Phone: 44-1-273-495033 Fax: 44-1-273-495123 THE AMERICAS Regional Headquarters OMRON Management Center of America, Inc. (U.S.A.) Phone: 1-847-884-0322 Fax: 1-847-884-1866 — Information Technology Center (U.S.A.) Phone: 1-408-919-2828 Fax: 1-408-919-2829 [Industrial Automation Company] OMRON Electronics Llc. (U.S.A.) Phone: 1-847-843-7900 Fax: 1-847-843-7787 OMRON Manufacturing of America, Inc. (U.S.A.) Phone: 1-630-513-0400 Fax: 1-630-513-1027 OMRON Canada Inc. (Canada) Phone: 1-416-286-6465 Fax: 1-416-286-6648 OMRON IDM Controls, Inc. (U.S.A.) Phone: 1-713-849-1900 Fax: 1-713-849-4666 OMRON Eletrõnica do Brasil Ltda. (Brazil) Phone: 55-11-5564-6488 Fax: 55-11-5564-7751 [Automotive Electronic Components Company] OMRON Automotive Electronics, Inc. (U.S.A.) Phone: 1-248-539-4700 Fax: 1-248-539-4710 OMRON Dualtec Automotive Electronics Inc. (Canada) Phone: 1-905-829-0136 Fax: 1-905-829-0432 [Advanced Modules Business Company] OMRON Systems Llc. (U.S.A.) Phone: 1-847-843-0515 Fax: 1-847-843-7686 OMRON Transaction Systems, Inc. (U.S.A.) Phone: 1-847-843-0515 Fax: 1-847-843-7686 OMRON Business Systemas Eletrônicos da América Latina Ltda. (Brazil) Phone: 55-11-251-0073 Fax: 55-11-251-1053 [Healthcare Company] OMRON Healthcare, Inc. (U.S.A.) Phone: 1-847-680-6200 Fax: 1-847-680-6269 [Other] OMRON Finance Canada, Inc. (Canada) Phone: 1-416-286-6465 Fax: 1-416-286-6648 OMRON Advanced Systems, Inc. (U.S.A.) Phone: 1-408-727-6644 Fax: 1-408-727-5540 OMRON Logistics of America, Inc. (U.S.A.) Phone: 1-630-513-6750 Fax: 1-630-513-1382 ASIA–PACIFIC Regional Headquarters OMRON Asiapacific Pte. Ltd. (Singapore) Phone: 65-6835-3011 Fax: 65-6835-2711 [Industrial Automation Company] OMRON Electronics Pte. Ltd. (Singapore) Phone: 65-6835-3011 Fax: 65-6835-2711 OMRON Electronics Sdn. Bhd. (Malaysia) Phone: 603-7628-8388 Fax: 603-7628-8333 OMRON Electronics Pty. Ltd. (Australia) Phone: 61-2-9878-6377 Fax: 61-2-9878-6981 OMRON Electronics Ltd. (New Zealand) Phone: 64-9-358-4400 Fax: 64-9-358-4411 OMRON Electronics Co., Ltd. (Thailand) Phone: 66-2-937-0500 Fax: 66-2-937-0501 OMRON Korea Co., Ltd. (Korea) Phone: 82-2-549-2766 Fax: 82-2-517-9033 P.T. OMRON Electronics (Indonesia) Phone: 62-21-8370-9555 Fax: 62-21-8370-9550 [Electronic Components Company] OMRON Malaysia Sdn. Bhd. (Malaysia) Phone: 603-7876-1411 Fax: 603-7876-1954 P.T. OMRON Manufacturing of Indonesia (Indonesia) Phone: 62-21-8970111 Fax: 62-21-8970120 OMRON Electronic Components Pte. Ltd. (Singapore) Phone: 65-6848-8800 Fax: 65-6848-8811 OMRON Electronic Components Co., Ltd. (Thailand) Phone: 66-2-619-0292 Fax: 66-2-619-0624 [Automotive Electronic Components Company] OMRON Automotive Electronics Korea, Co., Ltd. (Korea) Phone: 82-2-850-5700 Fax: 82-2-859-1687 [Advanced Modules Business Company] OMRON Business Systems Singapore (Pte.) Ltd. (Singapore) Phone: 65-6736-3900 Fax: 65-6736-2736 OMRON Business Systems (Malaysia) Sdn. Bhd. (Malaysia) Phone: 603-7880-9119 Fax: 603-7880-9559 OMRON Mechatronics of The Philippines Corp. (Philippines) Phone: 63-47-252-1490 Fax: 63-47-252-1491 OMRON Technical Service Malaysia Sdn. Bhd. (Malaysia) Phone: 603-7954-3119 Fax: 603-7954-1559 [Healthcare Company] OMRON Healthcare Singapore Pte. Ltd. (Singapore) Phone: 65-6736-2345 Fax: 65-6736-2500 A n n u a l R e p o r t 2 0 0 3 • 5 3 CHINESE ECONOMIC AREA Regional Headquarters OMRON (China) Co., Ltd. (China) Phone: 86-10-8391-3005 Fax: 86-10-8391-3688 OMRON Electronics Asia Ltd. (Hong Kong) Phone: 852-2375-3827 Fax: 852-2375-1475 [Industrial Automation Company] OMRON Trading (Shenzhen) Co., Ltd. (China) Phone: 86-755-359-9028 Fax: 86-755-359-9628 OTE Engineering Inc. (Taiwan) Phone: 886-3-352-4442 Fax: 886-3-352-4239 OMRON Taiwan Electronics Inc. (Taiwan) Phone: 886-2-2715-3331 Fax: 886-2-2712-6712 Shanghai OMRON Automation System Co., Ltd. (China) Phone: 86-21-5050-4535 Fax: 86-21-5854-2658 OMRON (Shanghai) Co., Ltd. (China) Phone: 86-21-5854-0055 Fax: 86-21-5854-0614 OMRON Trading (Tianjin) Co., Ltd. (China) Phone: 86-22-2576-0295 Fax: 86-22-2576-3032 OMRON Taiwan System Inc. (Taiwan) Phone: 886-2-2375-2200 Fax: 886-2-2375-2233 OMRON Electronics (HK) Ltd. (Hong Kong) Phone: 852-2375-3827 Fax: 852-2375-1475 OMRON Trading (Shanghai) Co., Ltd. (China) Phone: 86-21-5037-2222 Fax: 86-21-5037-2200 OMRON (Shanghai) Control System Engineering Co., Ltd. (China) Phone: 86-21-5131-9030 Fax: 86-21-5131-9040 [Electronic Components Company] Shanghai OMRON Control Components Co., Ltd. (China) Phone: 86-21-5854-0012 Fax: 86-21-5854-8413 OMRON Electronic Components (Hong Kong) Ltd. (Hong Kong) Phone: 852-2375-3827 Fax: 852-2375-1475 OMRON Electronic Components (Shenzhen) Ltd. (China) Phone: 86-755-462-0000 Fax: 86-755-462-1111 [Healthcare Company] OMRON Dalian Co., Ltd. (China) Phone: 86-411-761-4222 Fax: 86-411-761-6602 OMRON Industry & Trade (Dalian) Co., Ltd. (China) Phone: 86-411-7317201 Fax: 86-411-7317191 OMRON Technocult Co., Ltd. Phone: 81-45-321-0471 Fax: 81-45-321-0473 OMRON Two Four Service Co., Ltd. Phone: 81-3-5825-2320 Fax: 81-3-5825-2330 FA Techno Corporation Phone: 81-3-5297-5223 Fax: 81-3-5297-5224 [Electronic Components Company] OMRON Kurayoshi Co., Ltd. Phone: 81-858-23-2121 Fax: 81-858-22-1355 OMRON Ichinomiya Co., Ltd. Phone: 81-586-62-7211 Fax: 81-586-62-7291 OMRON Sanyo Co., Ltd. Phone: 81-8695-5-1355 Fax: 81-8695-5-1359 OMRON Relay & Devices Corporation Phone: 81-968-44-4101 Fax: 81-968-44-4161 OMRON Taiyo Co., Ltd. Phone: 81-977-66-4447 Fax: 81-977-67-5112 [Automotive Electronic Components Company] OMRON Iida Co., Ltd. Phone: 81-265-26-6000 Fax: 81-265-26-6030 [Social Systems Business] OMRON Field Engineering Co., Ltd. Phone: 81-3-3448-8111 Fax: 81-3-3442-2269 OMRON Software Co., Ltd. Phone: 81-75-352-7400 Fax: 81-75-352-7210 NishiNihon Field Engineering Co., Ltd. Phone: 81-6-6348-1270 Fax: 81-6-6349-1923 OMRON Field Engineering Kyushu Co., Ltd. Phone: 81-92-451-6748 Fax: 81-92-472-5136 OMRON Field Engineering Hokkaido Co., Ltd. Phone: 81-11-281-5121 Fax: 81-11-281-0917 OMRON T.A.S. Co., Ltd. Phone: 81-3-5420-6611 Fax: 81-3-5420-6615 OMRON Software Kyushu Co., Ltd. Phone: 81-96-352-8671 Fax: 81-96-352-8677 OMRON Software Hokkaido Co., Ltd. Phone: 81-11-898-6711 Fax: 81-11-898-6710 [Advanced Modules Business Company] OMRON Nohgata Co., Ltd. Phone: 81-949-22-2811 Fax: 81-949-28-3046 [Healthcare Company] OMRON Healthcare, Co., Ltd. Phone: 81-75-322-9300 Fax: 81-75-322-9301 OMRON Matsusaka Co., Ltd. Phone: 81-598-29-2715 Fax: 81-598-29-1207 [Other] OMRON Finance Co., Ltd. Phone: 81-3-3436-7160 Fax: 81-3-3436-7165 OMRON Network Applications Co., Ltd. Phone: 81-75-361-2160 Fax: 81-75-361-7329 OMRON Creative Delica Co., Ltd. Phone: 81-75-344-7883 Fax: 81-75-353-9026 Shiga Creative Delica Co., Ltd. Phone: 81-77-569-1271 Fax: 81-77-561-7160 OMRON Marketing Co., Ltd. Phone: 81-75-344-7048 Fax: 81-75-344-7059 OMRON Logistic Create Co., Ltd. Phone: 81-6-6282-2530 Fax: 81-6-6282-2786 OMRON Credit Service Co., Ltd. Phone: 81-75-241-2475 Fax: 81-75-256-6532 Human Renaissance Institute Co., Ltd. Phone: 81-3-3438-0920 Fax: 81-3-3438-0921 Sanno Consulting Corp. Phone: 81-3-5350-9291 Fax: 81-3-5350-9283 OMRON Personnel Creative Service Co., Ltd. Phone: 81-75-344-0901 Fax: 81-75-344-0902 OMRON Business Associates Co., Ltd. Phone: 81-75-344-7359 Fax: 81-75-344-7265 OMRON Entertainment Co., Ltd. Phone: 81-3-5728-1761 Fax: 81-3-5489-9310 JAPAN Manufacturing Mishima Systems Factory Phone: 81-559-77-9000 Fax: 81-559-77-9080 Kusatsu Plant Phone: 81-77-563-2181 Fax: 81-77-565-5588 Ayabe Office Phone: 81-773-42-6611 Fax: 81-773-43-0661 Minakuchi Factory Phone: 81-748-62-6851 Fax: 81-748-62-6854 Marketing Osaki Office Phone: 81-3-5435-2000 Fax: 81-3-5435-2030 Nagoya Office Phone: 81-52-571-6461 Fax: 81-52-565-1910 Osaka Office Phone: 81-6-6347-5800 Fax: 81-6-6347-5900 Fukuoka Office Phone: 81-92-414-3200 Fax: 81-92-414-3201 Research and Development Keihanna Technology Innovation Center Phone: 81-774-74-2000 Fax: 81-774-74-2001 [Industrial Automation Company] OMRON Okayama Co., Ltd. Phone: 81-86-277-6111 Fax: 81-86-276-6013 OMRON Izumo Co., Ltd. Phone: 81-853-22-2212 Fax: 81-853-22-2396 OMRON Takeo Co., Ltd. Phone: 81-954-23-4151 Fax: 81-954-23-4159 OMRON Aso Co., Ltd. Phone: 81-967-22-1311 Fax: 81-967-22-3526 Settsu Denki Phone: 81-6-6443-8008 Fax: 81-6-6443-5233 Gyoden Corporation Phone: 81-29-302-1211 Fax: 81-29-302-1222 OMRON Kyoto Taiyo Co., Ltd. Phone: 81-75-672-0911 Fax: 81-75-681-4700 5 4 • O m r o n C o r p o r a t i o n Investor Information Head Office Shiokoji Horikawa, Shimogyo-ku, Kyoto 600-8530, Japan Phone: 81-75-344-7000 Fax: 81-75-344-7001 Tokyo Head Office 3-4-10, Toranomon, Minato-ku, Tokyo 105-0001, Japan Phone: 81-3-3436-7170 Fax: 81-3-3436-7180 Osaka Office 16F Dojima AVANZA, 1-6-20 Dojima, Kita-ku, Osaka 530-0003, Japan Phone: 81-6-6347-5800 Fax: 81-6-6347-5900 Keihanna Technology Innovation Center 9-1-1, Kizugawadai, Kizu-cho, Soraku-gun, Kyoto 619-0283, Japan Phone: 81-774-74-2000 Fax: 81-774-74-2001 Date of Establishment May 10, 1933 Industrial Property Rights Number of patents: 2,495 (Japan) 1,573 (Overseas) Number of patents pending: 5,451 (Japan) 1,198 (Overseas) Number of Employees 23,751 Paid–in Capital ¥64,082 million Common Stock Authorized: 487,000,000 shares Issued: 249,109,236 shares Number of shareholders: 23,574 Stock Listings Osaka Securities Exchange Tokyo Stock Exchange Nagoya Stock Exchange Frankfurt Stock Exchange Ticker Symbol Number 6645 Transfer Agent The Mitsubishi Trust and Banking Corporation 1-4-5, Marunouchi, Chiyoda-ku, Tokyo 100-8212, Japan (As of March 31, 2003) Common Stock Price Range/Trading Volume (Osaka Securities Exchange) Adjusted Average for Nikkei 225 Stocks (Right Scale) (¥) 25,000 20,000 15,000 10,000 5,000 (¥) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 (Shares) 80,000,000 60,000,000 40,000,000 20,000,000 0 Price Range of Common Stock (Left Scale) IV I III II 1993 IV I III II 1994 IV I III II 1995 III II 1996 IV I III II 1997 IV I IV I III II 1998 IV I III II 1999 III II 2000 IV I IV I III II 2001 III II 2002 0 IV I 2003 Trading Volume IV I III II 1993 IV I III II 1994 IV I III II 1995 III II 1996 IV I III II 1997 IV I IV I III II 1998 IV I III II 1999 III II 2000 IV I IV I III II 2001 III II 2002 IV I 2003 Yearly High and Low Prices Years ended March 31 High (yen) Low (yen) 1994 1,820 1,230 1995 1,910 1,450 1996 2,710 1,500 1997 2,400 1,690 1998 2,900 1,760 1999 2,230 1,059 2000 3,450 1,500 2001 3,200 1,702 2002 2,560 1,390 2003 2,080 1,341 Notes: 1. Prices have been retroactively adjusted for free share distributions. 2. Trading volume includes shares traded on both the Tokyo Stock Exchange and the Osaka Securities Exchange. A n n u a l R e p o r t 2 0 0 3 • 5 5 This annual report is printed on recycled paper. Printed in Japan Shiokoji Horikawa, Shimogyo-ku, Kyoto 600-8530, Japan Phone: 81-75-344-7000 Fax: 81-75-344-7001 Home page: http://www.omron.co.jp (Japanese) Home page: http://www.omron.com (English) 

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