Annual Report 2005 Year ended March 31, 2005 C O N T E N T S 1 2 4 6 7 11 15 16 18 20 22 24 26 28 29 30 32 34 36 37 75 77 Profile Snapshot Financial Highlights Message from the Chairman Message from the President Special Feature: Technology-Driven Sustainable Growth Begins Now Segment Information Business Lineup Industrial Automation Business (IAB) Electronic Components Business (ECB) Automotive Electronic Components Business (AEC) Social Systems Business (SSB) Healthcare Business (HCB) Business Development Group and Other Businesses Management Systems Corporate Governance and Legal Compliance Corporate Social Responsibility Intellectual Property Strategy Directors, Corporate Auditors and Executive Officers Financial Section Global Network Corporate and Stock Information S H I F T I N G G E A R S T O V A Sustainability Report 2005 For information on Omron’s sustainability ini- tiatives, please refer to “Sustainability Report 2005”, a report on social and environmental activities to our stakeholders, including employees, clients and customers, sharehold- ers, and the regional community. http://www.omron.com/corporate/csr/ Financial Fact Book 2005 For financial data from the past 10 years, please refer to “Fact Book 2005”. http://www.omron.com/ir/ir_factbook.html A Caution Concerning Forward-Looking Statements Statements in this annual report with respect to Omron’s plans, strategies and benefits, 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 servic- es in these highly competitive markets; and movements of currency exchange rates. Definition of Terms All references to “Omron” and “the Company” herein are to Omron Corporation; references to “the Omron Group” and “the Group” refer to Omron Corporation and consolidated subsidiaries and affiliates. P R O F I L E The Omron Group has developed its business in a global setting, aiming to provide innovative devices and solutions that meet the requirements of industry and society, and that help to improve the quality of life. FY2004 was the first fiscal year of the Second Stage (FY2004 to FY2007) of the Omron Group’s Grand Design 2010, our long-term management plan up to 2010. As was the case last year, we have been able to increase both sales and profit this year as well, beating all our previ- ous performances. The theme of the Second Stage is “Balancing Growth & Earnings,” and we are making significant strides toward achieving that aim. Leveraging our core sensing & control technology competencies in combination with our know-how, we will continue to pursue our goal of becoming the leading company in the global industry as we steadily fulfill our mission to contribute meaningfully to the development of society. L U E - O R I E N T E D G R O W T H 1 S N A P S H O T WE ARE STEADILY WORKING OUR WAY TOWARD THE ESTABLISHMENT OF PLATFORMS FOR SUSTAINED GROWTH. MAXIMIZE LONG-TERM CORPORATE VALUE In 2001, the Omron Group formulated Grand Design 2010 (GD2010), a long-term management plan expressing the desired direction for the Group over the coming decade, with a priority goal of maximizing corporate value over the long term. Furthermore, we divided the GD2010 into three stages (Medium-term Management Plans) and have assigned a theme to each of them. Currently in the second stage, we are working on Balancing Growth & Earnings, with the target of doubling total business value. 1st Stage 2nd Stage 3rd Stage Maximize Long-Term Corporate Value Establish a profit structure Balancing growth & earnings Achieve a growth structure FY 2001 FY 2004 FY 2007 FY 2010 Target ROE 10% Double total business value THREE CONSECUTIVE TERMS OF INCREASE IN BOTH SALES AND PROFIT ACHIEVED The Omron Group is steadily expanding its performance, aiming to achieve the final goal of the second stage (net sales of ¥750 billion and operating income of ¥75 billion in fiscal 2007). In fiscal 2004, we broke our record in both operating income and net income with the double effects of an increase in sales and improvement in profit structure based on structural reforms. (Billions of yen) 800 Net sales (left axis) Operating income (left axis) Opreating income margin (right axis) 600 400 200 0 (%) 12 9 6 3 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2007 (Target) (FY) 1st Stage 2nd Stage 3rd Stage 2 BUSINESS DOMAIN STRUCTURAL REFORMS (1) We are increasing our net sales ratio for the ECB and AEC segments to establish a business pillar at a level consistent with the IAB segment. Sales Breakdown by Segment 10.7 7.7 23.1 9.4 6.6 9.2 7.6 23.9 24.0 19.7 21.8 9.5 15.2 6.5 7.9 4.2 8.0 21.8 23.3 11.1 14.8 10.1 15.2 4.5 8.3 18.9 10.6 16.6 38.7 38.3 34.5 37.8 39.3 41.1 (%) 100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 (FY) Note: Until FY2000, AEC was included in ECB. I A B : Industrial Automation Business ECB: Electronic Components Business AEC: Automotive Electronic Components Business SSB: Social Systems Business HCB: Healthcare Business (2) We are focusing on increasing our sales in the Chinese market. Asia and other (including greater China) Europe North America Japan (including export) Sales Breakdown by Region 6.7 11.0 10.7 7.6 10.3 10.8 8.5 12.2 12.3 9.9 10.2 10.4 13.7 14.4 12.7 11.0 15.2 10.8 71.5 71.3 67.0 63.7 64.3 63.7 Other HCB SSB AEC ECB IAB (%) 100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 (FY) OPERATIONAL STRUCTURAL REFORMS We are reducing sales management expenses to establish a strong structure of high profitability. SG&A Expense Ratio 25.3 25.3 24.1 24.3 23.5 22.1 (%) 26.0 25.0 24.0 23.0 22.0 21.0 20.0 1999 2000 2001 2002 2003 2004 (FY) Note: Excluding extraordinary factor of response to hazardous chemical substance regulations in FY2004. 3 F I N A N C I A L H I G H L I G H T S Omron Corporation and Consolidated Subsidiaries Years ended March 31, 2005, 2004 and 2003 Operating Results (for the year): Net sales Gross profit Selling, general and administrative expenses Millions of yen Thousands of U.S. dollars (Note 2) 2005/3 2004/3 2003/3 2005/3 ¥608,588 ¥584,889 ¥535,073 $5,687,738 249,771 240,054 207,660 2,334,308 (Except research and development expenses) 144,219 142,157 135,112 1,347,841 Research and development expenses Operating income EBITDA (Note 3) Foreign exchange loss, net Net income Cash Flows (for the year): Net cash provided by operating activities Net cash used in investing activities Free cash flow (Note 4) Net cash used in financing activities Financial Position (at year-end): Total assets Total interest-bearing liabilities Total shareholders’ equity Per Share Data: Net income Basic Diluted Shareholders’ equity Cash dividends (Note 5) Ratios: Gross profit margin Operating income margin R&D expenses ratio Return on shareholders’ equity (ROE) Ratio of shareholders’ equity to total assets Employees (persons) Average Currency Exchange Rate: 49,441 56,111 84,753 75 30,176 61,076 (36,050) 25,026 (40,684) 585,429 24,759 305,810 46,494 51,403 79,065 1,254 26,811 80,687 (34,484) 46,203 (28,119) 592,273 56,687 274,710 40,235 32,313 61,989 575 511 41,854 (30,633) 11,221 (1,996) 462,065 524,402 792,084 701 282,019 570,803 (336,914) 233,889 (380,223) 567,399 71,260 251,610 5,471,299 231,393 2,858,037 Yen U.S. dollars (Note 2) ¥ 126.5 ¥ 110.7 ¥ 2.1 $ 1.18 1.17 12.01 0.22 124.8 1,284.8 24.0 41.0% 9.2% 8.1% 10.4% 52.2% 24,904 107.5 1148.3 20.0 41.0% 8.8% 7.9% 10.2% 46.4% 24,324 2.1 1036.0 10.0 38.8% 6.0% 7.5% 0.2% 44.3% 23,476 US$ EUR ¥ 107.3 ¥ 113.4 ¥ 122.1 135.0 132.4 121.1 Notes: 1. Financial Highlights are based on U.S. GAAP. 2. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate on March 31, 2005, of ¥107=$1. 3. EBITDA = Operating income + Depreciation and amortization. 4. Free cash flow = Net cash provided by operating activities – Net cash used in investing activities. 5. Cash dividends per share represent the amounts applicable to the respective year, including dividends to be paid after the end of the year. 4 Net Sales and Operating Income Margin (Billions of yen) 700 600 500 400 300 200 100 0 Net Income (Loss) and ROE Free Cash Flow (%) 14 12 10 8 6 4 2 0 (Billions of yen) 30 20 10 0 -10 -20 (%) 15 10 5 0 -5 -10 (Billions of yen) 50 40 30 20 10 0 -10 01/3 02/3 03/3 04/3 05/3 01/3 02/3 03/3 04/3 05/3 01/3 02/3 03/3 04/3 05/3 Net sales Operating income margin Net income (loss) ROE Shareholders’ Equity and Ratio of Shareholders’ Equity to Total Assets Cash Dividends per Share (Billions of yen) 350 300 250 200 150 100 50 0 (%) 70 60 50 40 30 20 10 0 (Yen) 25 20 15 10 5 0 R&D Expenses and R&D Expenses Ratio (Billions of yen) 50 40 30 20 10 0 （%） 10 9 8 7 6 5 01/3 02/3 03/3 04/3 05/3 Shareholders’ equity Ratio of shareholders’ equity to total assets 01/3 02/3 03/3 04/3 05/3 01/3 02/3 03/3 04/3 05/3 R&D expenses R&D expenses ratio Domestic Macroeconomic Environment Real GDP Growth Rate (%) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0 -1.0 -2.0 4-6 7-9 10-12 1-3 2003 Real Private Capital Investment Growth Rate Machinery Orders Growth Rate (Manufacturing) (%) 20.0 15.0 10.0 5.0 0 -5.0 -10.0 -15.0 (%) 30.0 25.0 20.0 15.0 10.0 5.0 0 -5.0 -10.0 4-6 7-9 10-12 1-3 2005 (month) (year) 4-6 7-9 10-12 1-3 2003 2004 4-6 7-9 10-12 1-3 2005 2004 (month) (year) 4-6 7-9 10-12 1-3 2003 4-6 7-9 10-12 1-3 2005 (month) (year) 2004 Source: Cabinet Office, Government of Japan (annualized rate of change from the previous quarter, seasonally adjusted) Please refer to Six-Year Financial Summary (page 38) 5 T O O U R S H A R E H O L D E R S , C U S T O M E R S , A N D A L L O T H E R S T A K E H O L D E R S M e s s a g e f r o m t h e C h a i r m a n To always remain one step ahead in anticipating social concepts and needs and to respond accordingly with a daring spirit of challenge led by technology that is itself one step ahead— this is the heart of Omron’s corporate DNA and the very essence of our cor- porate mission. WHAT IS OMRON’S CORPORATE DNA? As Chairman of the Board of Directors (BOD), I would like to present an overview of the Omron Group’s DNA—our fun- damental principles and philosophy. DNA is precisely what forms the foundation for our company’s management and business strategy. Understanding the company’s DNA means that one can foresee how that company thinks and operates in certain environments. In this sense, I believe that a company’s DNA is also an important form of informa- tion disclosure. The OMRON Group uses the SINIC (Seed-Innovation to Need-Impetus Cyclic Evolution) Theory as a compass to guide its management. This is a theory, presented in 1970 by founder Kazuma Tateisi, for predicting future social and business trends. It forecasts that in 2005 there will be a shift from industrialized society to an “Optimization Society.” Rather than merely providing the kind of material prosperity achieved by industrialized soci- ety, Optimization Society emphasizes spiritual richness and more holistic human life that involves security, safety, environmental conservation, and health. It is also considered a society that opti- mally fuses previously contradictory concepts, such as individual/society, culture/nature, and human/machine. Observing the diversification of today’s social needs and the heightened interest in corporate social responsibility (CSR), I believe that the transition to an Optimization Society is rightly predicted. From this perspective, the OMRON Group has been exploring social needs based on our future projections that ask: What is the ideal form of society? How does a society change? And what types of needs are generated? Based on such predictions, we have been using our own proprietary technology to provide the most optimal products and serv- ices. The core of our operations is constantly pulsating with a sense of challenge, as we strive to lead the world in exploring potential social needs. As our 7:3 theory states, a 70% chance of success warrants an attempt, but contin- gency plans must also be made for the 30% chance of failure. Our exploration of social needs and sense of chal- lenge make up our corporate DNA, which is deeply pervasive throughout the OMRON Group. 2005: THE FOUNDING YEAR OF OPTIMIZATION SOCIETY As mentioned above, 2005 marks the advent of the Opti- mization Society under the SINIC Theory. It is considered a year of great importance, a defining moment both for soci- ety to advance toward optimization and for the OMRON Group to cultivate social needs. The industrialized society of the past was built from the standpoint of the manufacturer with efficiency and productivity being the ultimate goal. This overlooked essential issues such as environmental pollution, energy, resource depletion, and growing industrial waste, as well as security, safety, health, and human rights—all neces- sary for us to lead more fulfilling lives. In the emerging Optimization Society, we must not simply pursue efficiency and productivity, but also resolve issues neglected by indus- trialized society in order to create a society rich in human values. To adequately meet this goal, it is time for us now to begin taking action in earnest. The OMRON Group will mark this turning point for society as the Founding Year of Optimization and steer its efforts in a new direction. MAXIMIZING CORPORATE VALUE Turning our attention to the present eco- nomic environment, the volatile exchange rates, sudden rise in crude oil prices, and many other factors adversely affect cor- porate performance. While it is important that we deal with these issues, the pres- ent concern is whether we can steadily shift gears to establish a future platform for growth without being held back by oncoming obstacles. Success will depend on four factors: our grasp of the major trends of society, science, and technology indicated by the SINIC Theory; drawing up a 10 to 20-year vision; determining future growth markets as well as our present stance; and advancing the development of new technology needs. I believe that this will lead to the maximizing of long-term corporate value, which is the goal of our Grand Design 2010. We are confident that the OMRON Group is firmly rooted in the spirit of our corporate DNA, vigorously pushing forward toward becoming a future growth company. July 2005 6 Yoshio Tateisi, Chairman of the BOD Y O S H I O T A T E I S I Chairman of the BOD M e s s a g e f r o m t h e Pr e s i d e n t The Omron Group has now entered a phase of growth with an offensive/defensive bal- ance, and our strategy to achieve our midterm goals is steadily gaining results. We will cement our solid footing with vigilance, while making every effort to enhance our top line growth potential by boldly accelerating our advance investments. RETROSPECTIVE ON FISCAL 2004 1. Operating Environment Entering a short-term adjustment phase The long-term recovery of the Japanese economy took a temporary step back in fiscal 2004, ended March 31, 2005, as the recovery trend entered a period of short-term adjust- ment. For the Omron Group, our business environment remained robust in the first half of the fiscal year before experiencing a reversal from early autumn, when in addition to the high price of crude oil and other uncertain factors, the IT and digital consumer electronics markets that had sup- ported Japan’s export and capital expenditure recovery experienced an adjustment. Coupled with this is an increas- ing sense of caution regarding China, which while being a major growth engine in the world economy is also moving toward policies that will bring its eco- nomic overheating under control. Medium to long-term recovery trend remains sound Expectations concerning the medium to long-term forecast for the Japanese economy remain strong, due in part to the belief that Japan has turned the cor- ner on dealing with its non-performing loans problem and other structural reforms. Consumption and employment levels are also showing a modest yet steady recovery, while growth in the Nikkei Stock Average remains brisk. 2. Operating Results of the Omron Group Three consecutive years of increased sales and profits In spite of the business environment, the Omron Group still realized increased sales and profits in fiscal 2004, again achieving its highest-ever profits and extending the record began in fiscal 2003. Net sales for the fiscal year increased 4.1% year-on-year to ¥608.6 billion, operating income was up 9.2% to ¥56.1 billion, and net income rose 12.6% to ¥30.2 billion. In addition, operating income and net income each outpaced our initial targets by 3.9% and 4.1%, respectively. Steep rise in material prices and heavier advance investments offset by higher net sales A comparison of operating income with the previous year’s results demonstrate that as raw material prices skyrocketed, rising material costs resulted in a negative impact totaling about ¥1 billion. Nearly the same amount, however, was absorbed thanks to our ongoing cost-saving activities. Moreover, exchange rate fluctuations accounted for a negative effect of about ¥800 million, while selling, general and administrative (SG&A) expenses includ- research and development ing expenses to further cement our techno- logical edge accounted for a negative effect of about ¥5 billion. Nevertheless, these negative factors were more than offset by our higher net sales (about ¥10.5 billion). H I S A O S A K U T A President and CEO Breakdown of Changes in Operating Income (Billions of yen) Sales increase Exchange losses -0.8 Rise of the cost of materials Cost reductions, etc. -1.0 -1.0 10.5 Increase in SG&A expenses -2.1 R&D expenses -2.9 51.4 Change in gross profit FY2003 Operating income Change in SG&A expenses, R&D expenses 56.1 FY2004 Operating income Sales growth in nearly all business segments Asia maintains high growth As Omron transferred its sales function in the ATM and other information equipment business market to Hitachi- Omron Terminal Solutions Corp. (HOTS), a joint venture in which we hold a 45% stake, in October 2004, our overall sales grew by only 4.1%. Excluding this special factor, however, sales growth stood at 8%. Each of our individual segments apart from the Social Systems Business (SSB), which was affected by the aforementioned special factor, recorded higher sales in fiscal 2004. In the Industrial Automation Business (IAB), sales of equipment and control components for factory automation as well as industrial equipment remained strong domestically and in Europe. 7 Global Production Reform SG&A Expenses Reform (Billions of yen) 400 300 200 100 0 9% 20% 71% 12% 21% 67% Production in Greater China to increase by 4.5 times 30% 19% 51% 800 600 400 200 0 (Billions of yen) Sales SG&A Expenses 584.9 608.6 28% sales growth planned 750.0 625.0 Increase of SG&A expenses controlled 24.3% 71% 23.5% ※ 23.3% ※ 22.0% 2003 2004 Japan Overseas Production (Excluding China Area) (FY) 2007 (Target) China Area Production 2003 2004 2005 (Plan) 2007 (Target) (FY) * Excluding extraordinary factor of response to hazardous chemical substance regulations in FY2004 and FY2005 For the Electronic Components Business (ECB), exports of mobile components increased sharply, mainly to China. In the Healthcare Business (HCB), blood pressure monitors, body composition monitors, and other healthcare devices for home use recorded steady sales. With respect to the Automotive Electronic Components Business (AEC), sales of relays, sensors, and other electronic parts for automo- biles, which are becoming increasingly automated, also showed tremendous growth in Europe and Asia. Geograph- ically, sales grew both in Japan and overseas. In particular, overseas sales grew by 8% (27% in China on a dollar basis), continuing the high growth trend from fiscal 2003. Strengthening our financial foundation, improving management efficiency and other structural improvements to produce ongoing results We are continuing to strengthen our balance sheet, reduc- ing our total interest-bearing liabilities by ¥31.9 billion from the end of fiscal 2003 and shrinking inventory by ¥1.7 bil- lion. At the same time, a ¥31.1 billion increase in total shareholders’ equity resulted in a ratio of shareholders’ equity to total assets of 52.2%, a significant year-on-year increase of 5.8 percentage points. Our cost structure improvements have also shown further progress, with the ratio of SG&A expenses to net sales falling 0.8 percentage points year-on-year to 23.5% (excluding extraordinary fac- tor of response to hazardous chemical substance regulations), and the fixed manufacturing cost ratio falling 0.8 percentage points to 16.2%. Quick start toward growth based on an offensive/defensive balance As a result of the foregoing, we achieved business expan- sion while recording a return on shareholders’ equity (ROE) of 10.4%, thereby maintaining the absolute target of 10% set out in the Omron Group’s long-term management plan Grand Design 2010 (GD2010). In so doing, we have moved from our phase through fiscal 2003 that emphasized “defense” in the form of improved stability (stronger profit structure) to a stage under which continued attention is given to stability improvement (firmed up defense), while simultaneously realizing increased growth potential (“offense”). This is the basic policy of GD2010 2nd stage (FY2004-2007). I strongly believe that the aforementioned results are indicative of a smooth start in fiscal 2004, the first year of the 2nd stage, and are perfectly in line with that basic policy. FUTURE OUTLOOK AND BASIC STRATEGY Two Basic Strategies: Operating Structure Reform and Business Domain Reform The Omron Group aims to increase sales and profits in fis- cal 2005. In particular, as of July 2005, we aim to record ¥625 billion in net sales (a 2.7% increase over fiscal 2004), ¥65 billion in operating income (15.8% increase), ¥36 bil- lion in net income (19.3% increase), and an ROE of 10.8% (0.4 percentage point increase). While we will naturally strive to achieve these fiscal 2005 goals, I believe that my mission as President and CEO is to go beyond these and to include a medium to long-term perspective in our oper- ations. As such, this means improving the three elements of corporate value—profitability, growth potential, and sta- bility—in a balanced manner, and expanding corporate value by building a strong profit structure capable of with- standing volatility in the external environment. There are two main policies toward this purpose. The first is operat- ing structure reform that strengthens profitability and cost structure. The second is business domain reform that identifies growth markets and technologies to pursue, and continually recombines business domains toward top line growth. We will take a medium to long-term stance in business domain reform, through which the Omron Group will establish its future footing. We will also determine and closely watch growing sectors, regions, and technologies, 8 Sales Growth in New Tech Fields Sales Growth in Greater China (Billions of yen) 80 60 40 20 0 18.0 2003 28.8 71% 2004 68.0 45.0 (Millions of USD) 1,400 1,330 1,200 1,000 800 600 400 200 0 4X in 4 years 551 412 +34% 325 246 201 +22% +32% +27% Over ¥100B (=USD 1B) Sales increase 2005 (Plan) 2007 (Target) (FY) 2001 2002 2003 2004 2005 （Plan） 2007 （Target） (FY) and we will not hesitate to make the necessary advance investments. 1) Advancing toward a strong profit structure: Operating structure reform Production structure reform—shift in production to China GD2010 2nd stage sets a goal of lowering our fixed manu- facturing cost ratio to 15% from the fiscal 2003 level of 17%. One key aspect of this goal is a continuation of our shift in production to the Chinese market, where our pro- duction ratio grew from 9% in fiscal 2003 to 12% in fiscal 2004. By fiscal 2007, the final year of GD2010 2nd stage, we expect the rate to rise to 30%. SG&A structural reform—Containing costs apart from advance investments to maintain our edge As mentioned earlier, the ratio of SG&A expenses to net sales fell from 24.3% in fiscal 2003 to 23.5% in fiscal 2004. We will reduce this ratio by a further 0.2 percentage points to 23.3% in fiscal 2005, and reduce it further to 22.0% by fiscal 2007. 2) Shifting our footing and directing advance investments toward growing sectors, regions, and technologies (domain structure reform) Semiconductor and digital consumer electronics industries, automobile industry Although there will be short-term fluctuations, the potential for business growth in the medium to long term for the semiconductor, digital consumer electronics, and automo- bile industries is expected to remain high. Even though the digital consumer electronics industry experienced an inven- tory adjustment in fiscal 2004, I believe that medium to long-term demand will continue to grow as long as there are further size reductions of equipment and components as well as greater advances in digitalization. Demand for LCD backlights is expected to continue rising, and the Omron Group will consider this area a new business domain as it accelerates development in our core techno- logical competencies and advances R&D investment. At the same time, the automobile industry remains on firm ground. While there may be short-term fluctuations in unit sales, the strong trend of increased use of electronic parts is continuing to gather speed. Demands for automobile safety, security, and environmental considerations are also on the rise. The Group has set laser radars (sensors that monitor the space between two vehicles to prevent colli- sions) as a new business domain, and we will actively invest in the development of new technologies and prod- ucts. In seven business domains including these two (please refer to page 12), the Group sharply expanded its net sales in the new businesses from ¥18 billion in fiscal 2003 to ¥28.8 billion in fiscal 2004. We will aim to continue increasing sales to ¥45 billion in fiscal 2005 and to ¥68 bil- lion in fiscal 2007. … And then there is China We consider China to be a regional engine of growth. While we will certainly see short-term fluctuations flowing from China’s economic overheating and its control, it is unthink- able to expect that the great waves generated by the movements of this giant market of 1.3 billion people are close to an end. With respect to China, it will be important to take a medium to long-term stance and take time in our efforts. Our net sales in China grew 27% in fiscal 2004 to US$412 million. We plan to increase our sales to US$551 million in fiscal 2005 and to US$1.33 billion in fiscal 2007. Determination to carry out necessary investments Along the lines of the abovementioned two basic strategies, the Group will boldly make advance investments as neces- sary to expand the top line. Specifically, in fiscal 2005 we will increase capital investment from the fiscal 2004 level of ¥37.4 billion to ¥42 billion, and raise R&D expenditures from 9 Definition of Business Value Double the Total Business Value Omron defines business value as the total of present values of future FCF (Free Cash Flow) generated by each business unit (Billions of yen) 1,200 New Tech Fields Existing Businesses New Technological Fields Simulate 10-year FCF based on five-year plan. Stabilize FCF with lasting value after 11 years. Existing + Greater China Market Simulate 3-year FCF Stabilize FCF with lasting value after 4 years. Lasting value DCF: Present value of FCF Lasting value DCF: Present value of FCF Business value FY11 & after Business value 1 FY4 & after ¥49.4 billion to ¥50.0 billion. As for details regarding tech- nology that distinguishes the Group from its competitors for the purpose of expanding new business domains, please see the feature, “Technology-Driven Sustainable Growth Begins Now” (pages 11-14). Doubling total business value The final goal of GD2010 2nd Stage is to double the total business value of our various businesses through the abovementioned strategies. We define business value as the present value, calculated by discounting the future free cash flow anticipated from the Group’s various business domains. According to our internal estimates, total busi- ness value in fiscal 2003 reached ¥600 billon. Going forward, we will make every effort to increase this value to ¥1.2 trillion by fiscal 2007. For fiscal 2004, the business value of existing businesses increased by ¥120 billion, while that of new businesses and business domains went up by ¥130 billion. In fiscal 2005, we aim to increase the total business value by ¥110 billion. APPROACHES TO STRENGTHEN THE MANAGEMENT SYSTEM AND THE RETURN TO SHAREHOLDERS Strengthening governance and promoting active information disclosure Even as the Omron Group firms up our defense, we are pursuing a strategy of gradually shifting our footing toward top line growth. I am well aware that the quicker our growth, the more our risk will increase. In order to pursue sustainable growth while controlling that risk, we must continually improve management transparency and sound- ness, and earn the unwavering support of our stakeholders by strengthening governance and promoting more active information disclosure. It is also important that we fulfill our corporate social responsibility (CSR) and fully imple- ment compliance strategies. Gaining the support of not only our shareholders, but our broad range of stakeholders 960 160 800 850 130 720 600 600 1,000 800 600 400 200 0 1,200 250 950 2003 2004 2005 （Plan） 2007 （Target） (FY) including society at large, is a fundamental principle that has been deeply embedded in the fabric of Omron since its founding. Return to shareholders based on a medium to long-term expansion of corporate value and appropriate dividends I am well aware that tackling the issue of return to share- holders with a positive commitment is another managerial mission, and one that ultimately enhances corporate value. We intend to continue toward our goal of a dividend payout rate of 20% of consolidated current net income. Our policy is to maintain a minimum annual dividend of ¥10 per share even in the event of deteriorated business results. The divi- dend for fiscal 2004 was increased by ¥4 to ¥24 for the year, in line with this goal. However, as the Omron Group is shifting its management to an offensive footing, we will give priority to the distribution of profits to retained earn- ings for the purpose of investment in line with growth, aiming to achieve a medium to long-term increase in corpo- rate value. As for cash flows beyond that, we will not only pay dividends but also actively repurchase our own shares and return as much value as possible to our shareholders. It is both our mission and our pleasure at the Omron Group to use our technological edge to provide better products and services to meet various social needs in order to earn the further confidence of all of our stakeholders. Your con- tinued support will be greatly appreciated. July 2005 Hisao Sakuta, President and CEO 10 S P E C I A L F E A T U R E : T E C H N O L O G Y- D R I V E N S U S T A I N A B L E G R O W T H B E G I N S N O W One of the pillars of the Group’s growth strategy is the expansion of new business domains. This means creating new business areas through differentiated new technologies and expanding sales. Our aim is to carry out continuous investment for such technological development, to heighten the Group’s superiority, and achieve sustainable growth and increased corporate value driven by technology. In this special feature, we spotlight themes in new business domains that are already starting to be realized, as well as themes based on technologies that are still in the basic research stage but are expected to be real- ized in the next three to five years. 11 The Omron Group seeks to achieve the final goal of GD2010 2nd Stage, doubling our total business value, by using the four core differentiated technologies we have cultivated during our more than 70 years of experience to advance the development of new growth domains. In fiscal 2004, our sales results in new business domains based on new technologies were ¥28.8 billion. We plan to expand this to ¥68 billion by fiscal 2007. BASIC CONCEPTS BEHIND OUR TECHNOLOGY-DRIVEN STRATEGY In order to maintain our competitive superiority and raise corporate value in the future, the Omron Group will estab- lish business strategy areas from the standpoint of our core technologies, and therein set our foundations for top line growth. This is the idea behind the main theme of GD2010 2nd Stage, “Balancing growth and earnings.” We have also defined core technologies (see below) as a common aware- ness of the Omron Group, in an effort to become a corporate group in which each business increases one another’s strengths by tapping into a group-wide synergy. Definition of Core Technologies 1. Technologies that are the source of the Group’s com- petitive superiority 2. Proprietary technologies that are backed by patents and expertise, and difficult for our competitors to replicate 3. Technologies that can raise profitability and growth potential of key businesses through their combination, and be sustained and strengthened company-wide through business development CAPTURING SEVEN BUSINESS DOMAINS THROUGH FOUR CORE TECHNOLOGIES The Omron Group’s core technologies start with sensing and control technology. That is, technology for sensing a wide range of situations involving people, machines, and natural phenomena, for extracting and generating valuable information from this, and for executing control in the most appropriate form. Based on the aforementioned technology-driven strat- egy concept, we have put together a four-point technology platform that supports sensing and control consisting of: (1) Ultra-precision 3D fabrication and replication technology as well as Micro Electro Mechanical Systems (MEMS) technol- ogy; (2) lightwave control technology; (3) sensing technology (vision sensing technology, lightwave sensing technology, and radio wave sensing technology); and (4) knowledge and Four Core Technologies and Seven New Growth Domains Ultra-precision 3D fabrication and replication technology MEMS technology Optical display devices Lightwave control technology MEMS Optical communications devices RFID In-vehicle QLM Vision sensing technology Lightwave sensing technology Radio wave sensing technology Knowledge and information control technology Power electronics technology Energy 12 information technology. We also believe that we should combine these proprietary technologies, and aggressively introduce our management resources in our unrivaled com- bined technology domains. Therefore, focusing attention on synergy between (1) and (2), and between (3) and (4), we are looking to capture domains in the six areas of optical display devices, optical communications devices, MEMS, in-vehicle, Quality Lifecycle Management (QLM), and Radio Frequency Identification (RFID), as well as a seventh—new energy— through alliances with other companies. TWO GROWTH DOMAINS WITH GREAT TECHNOLOGI- CAL SYNERGY (1) Synergy between ultra-precision 3D fabrication and replication technology/MEMS technology, and light- wave control technology Ultra-precision 3D fabrication and replication technology is a manufacturing technology that combines master, electrotyp- ing, reproduction, and materials technologies to realize microminiaturization and mass production of electronic devices. MEMS technology is a means of manufacturing micromachine devices. The Omron Group participated in the “R&D of Micromachine Technology” national project that began as a 10-year project in 1991, and was also one of the earliest MEMS researchers. As a result, the Omron Group is continually developing next-generation products, including the world’s smallest and most precise micro-sensors. At the same time, we possess the world’s top-class technologies in the area of lightwave control technology, which controls the direction of light and brings out maximum properties of light such as brightness, speed, and energy. We are applying these technologies in areas such as optical display devices and optical communications devices. (2) Synergy between vision, lightwave, and radio wave sensing technologies, and knowledge and informa- tion control technology Vision sensing technology uses visual data to give human visual functions to machines. Lightwave and radio wave sensing technology utilizes the property of waves that pass through and reflect off physical objects. Knowledge and information control technology produces an “intellect” that allows machines to extract valuable information from infor- mation obtained by sensors, learn (accumulate data), and make inferences. In particular, the Omron Group holds a large number of world-class basic patents in the area of fuzzy logic, which is the basis of knowledge and information control technology. Areas in which we are applying these technologies include next-generation base inspection sys- tems, facial recognition devices, and driving safety systems. GOALS FOR FISCAL 2007 AND OUR PROGRESS The main goal of GD2010 2nd Stage is not merely the achievement of period income; rather, the essential objec- tive is to “balance growth and earnings.” The reason we are boldly aiming to double business value, which we relate to future growth potential, is to come together as a group and build an operating base that has high future growth potential. Our minimum goals to achieve this dou- bling of business value are to establish new business domains that can be expected to grow by an average of 20% or greater, in principle over a 5 to 10-year growth cycle, and to secure ¥68 billion or greater in sales by fiscal 2007 (a ¥50 billion increase in sales over fiscal 2003). As for progress made thus far, our sales results for new business domains in fiscal 2004 were ¥28.8 billion, 60% higher than in fiscal 2003. Our technology-driven growth strategy con- SPECIFIC EXAMPLES OF NEW BUSINESS DOMAINS tinues to advance steadily, with expectations to secure 50% or greater growth in fiscal 2005. Sales Growth in New Tech Fields (Billions of yen) 90 AEC (Automotive Electronic Components): Laser radars for automobiles MEMS: MEMS Sensors, etc. LCD BL: Liquid crystal backlight Q L M : Automated Optical Inspection Machines, etc 28.8 Others AEC MEMS LCD BL QLM 2004 18.0 2003 45.0 Others AEC MEMS LCD BL QLM 2005 (Plan) 60 30 0 Others ¥50b increase from FY2003 180 2007 (Target) GD2010 2nd Stage Target: ¥68b (1) Liquid crystal display devices—making great strides in brightness improvement and low power consumption Liquid crystal displays project images not through an emission of light from liquid crystals themselves, but by shining light onto a liquid crys- tal panel. Through our proprietary technology, the Omron Group developed the Micro-Lens Array (MLA), which combines several mil- lion refined micro-sized lenses on a single board. With the MLA, which refracts light that usually disperses in all directions in a single direction, we have developed and are manufacturing and marketing an epoch-making LCD backlight unit for use in cellular phones and digital cameras. The unit maximizes the efficiency of light utilization and has brightness, compactness, and low power consumption prop- erties. Until now, liquid crystal display used in mobile phones have employed two or more LEDs, which are the light sources behind the liquid crystals. However, the backlight unit manufactured by Omron realizes equivalent brightness while using only one LED. Moreover, we are evolving the MLA, and through double prism technology (which adds a sub-prism to eliminate the need for sheets) and nano- prism technology (which increases the transparency of the optical waveguide), we are developing a reversible light that combines the liquid crystal panel’s backlight and front light into one light. (2) OKAO Vision—machines that recognize human faces MLA Technology An array of micro-sized lenses. Sub side (front light) Main side (backlight) 2 backlights Main liquid crystal display Sub liquid crystal display Reversible light Liquid crystal display Main side Sub side Main side Backlight Sub side Front light Old system Reversible light The Omron Group is developing OKAO Vision, a technology for discerning human faces by detecting distinctive information from images (dot aggregations) obtained by sensors. OKAO Vision is comprised of five elemental technologies: (1) detection of the face; (2) detection of parts of the face; (3) facial recognition; (4) inference of gender, age, and race; and (5) optimal enhance- ment of facial images. Technology that extracts only the information necessary for discernment and inference and uses efficient algorithms makes possible high-speed detection using small, mobile equipment. Facial image enhancement functions* are already in use by home-use ink-jet printers, but as needs for preventing misuse of cellular phones with fund transfer functions rise, the use of facial recognition functions as a new security measure for cellular phones is gaining attention. There has also been ongoing development of devices that enable vehicles to ensure safety by detecting a driver’s condition of fatigue and the likelihood of a driver falling asleep at the wheel. In such ways, the applica- tion domain of facial recognition technology is expanding to include a wide range of areas. Detection of parts of the face Gender, age, and race inference Optimal enhancement of facial image Detection of the face Facial recognition Female, 20s Ms. OKAO * Facial image enhancement functions: Functions to enhance skin color and so forth at the time of printing by the detection of a “face” from an image obtained by a digital camera, etc. 13 (3) Laser radar and Tire Pressure Monitoring Systems—securing vehicle safety Controller Brake fluid pressure Alarm Elapsed time Brake fluid pressure Braking Elapsed time Automatic following distance control system Laser radar sensor Buzzer Display device Brake actuator The Advanced Safety Vehicle (ASV), a vehicle that can ensure safety by assessing situations on its own by way of features such as lane keep systems and collision- damage mitigating braking, is coming into practical use. Against this backdrop, the Omron Group is marketing a laser radar based on optical sensing technology that maintains a fixed distance between a vehi- cle and the vehicle in front of it, and supports safe driving. As this product can be offered at lower prices than expensive milliwave radars, we aim to market it not only for luxury cars, but also for economy cars. The product realizes high performance by carrying out efficient and high-precision sens- ing that concentrates laser light only in the range where vehicles in front may exist, and by enabling the detection of pedestrians several tens of meters ahead (which was difficult to achieve with milliwaves). The laser radar is already available with the new models of major domestic automo- bile manufacturers. At the same time, from fiscal 2005 we will introduce to the North American market the Tire Pressure Monitoring System (TPMS), an applica- tion of our radio wave sensing technology. The TPMS receives information from sensors located in each of the four tires via the high-frequency receiver of a wireless central processing unit. It performs concentrated management of the information, conveys information regarding tire pressure and internal temperature to the driver, and sounds an alarm in cases of abnor- mality. In North America, where long-distance travel is common, the need for this system is rising rapidly, and installation of TPMS devices on all vehicles is scheduled to be compulsory in the future. (4) A solution to improve product quality—machines accumulate expertise comparable to skilled inspectors Even at automobile production sites on the cutting edge of automation, in the engine inspection process, skilled inspec- tors are the ones who detect defective items by checking sounds and vibrations. Therefore, the Omron Group has col- lected data on the waveforms of sounds and vibrations through its original analytical technology, and developed an Auto Sen- sory Inspection System that can judge sounds and vibrations as well as skilled inspectors. Over long years of working to improve manufacturing processes, the Omron Group has trans- lated into algorithms the know-how of skilled inspectors and their insights into the genesis of defective products. We are combining sensing technology and fuzzy logic methods with this accumulated digital expertise, and evolving our quality guarantee approach from “eliminating outflow of defective items to the market” to “establishing high-quality processes” (i.e., processes that do not generate defective items). More- over, we are researching “growing production equipment” that generates greater quality and productivity with each use. This equipment accumulates production and inspection data for each manufacturing process, which can be used at all times to discover causes of defects and for the analysis of line improve- ments. The data can assist in setting optimal manufacturing conditions, and predicting the occurrence of defective items. 14 Q-upNavi System DB P/Z/S 3-process verification (using images and data) Defect cause inference variation control Reduction of over-inspection Post-printing inspection machine (P inspection machine) Post-mounting inspection machine (Z inspection machine) Post-reflow inspection machine (S inspection machine) Manufacturing processes are improved in the PCB line through a 3-process verification that integrates the results obtained during each of the processes of printing (P), mounting (Z), and reflow (S). Signarc System Auto Sensory Inspection System Production line MIC Vibration sensor Knowledge from the manufacturing floor condensed into algorithms Control panel (customer) Office Quality guarantee division Development and design division Quality control and analysis server S E G M E N T I N F O R M A T I O N C O N T E N T S 16 18 20 22 24 26 28 Business Lineup Industrial Automation Business (IAB) Electronic Components Business (ECB) Automotive Electronic Components Business (AEC) Social Systems Business (SSB) Healthcare Business (HCB) Business Development Group and Other Businesses 15 B U S I N E S S L I N E U P Summary of Business and Market Position % of Net Sales Net Sales (Billions of yen) I A B I N D U S T R I A L A U T O M A T I O N B U S I N E S S Top Market Share for High-Precision Sensors in Japan The IAB segment is Japan’s foremost manufacturer of control devices for factory automation (FA) (our high preci- sion sensors account for approximately 60% of the domestic market*), providing high precision sensing and control equipment that contributes considerably to the improved productivity, profitability, safety, and quality of manufacturers in a wide range of industries. * Market share data obtained from the Nippon Electric Control Equip- ment Industries Association (NECA). E C B E L E C T R O N I C C O M P O N E N T S B U S I N E S S Strong presence by pushing ahead of competitors with our proprietary technology The ECB segment manufactures and sells mainly elec- tronic products such as relays, switches, and connectors for appliances, communications, and industrial equip- ment. Recently, through cutting-edge technologies such as light wave control technology and MEMS technology, we have made efforts to develop new growth areas. 41.1% 16.6% 250.3 229.6 202.5 2002 2003 2004 (FY) 101.1 89.0 79.4 2002 2003 2004 (FY) A E C A U T O M O T I V E E L E C T R O N I C C O M P O N E N T S B U S I N E S S Pushing ahead of the competition through products based on new needs in the automobile industry The AEC segment is carrying out operations with a focus on providing components built into automobiles, such as controllers, sensors, switches, and relays. In the fast evolving automotive electronics market, the Omron Group is actively developing new cutting-edge products such as sensors for measuring the distance between vehicles. S S B S O C I A L S Y S T E M S B U S I N E S S H C B H E A L T H C A R E B U S I N E S S Top domestic market share for automated gates at stations Since achieving the world’s first “unstaffed train station system” using our proprietary automation and labor sav- ing technology in 1967, the SSB segment has been producing and selling equipment and providing services with railway station service systems and road traffic con- trol systems as its main market. Note: The ATM business were transferred to Hitachi-Omron Terminal Solutions, Corp. on October 1, 2004. Top Global Brand in Blood Pressure Monitors for Home Use With our proprietary bio-information sensing technology as our base, the HCB segment produces and sells healthcare and medical equipment such as blood pressure monitors, digital thermometers, pedometers, and body composition monitors. In particular, our main product, blood pressure monitors for home use has the top domestic market share at approximately 60%* and is the top global brand. * Market share is according to the result of a survey by a private research institute. B U S I N E S S D E V E L O P M E N T G R O U P A N D O T H E R B U S I N E S S E S Initial Development of New Businesses This segment includes the initial development of new businesses undertaken by the Business Development Group and other businesses not listed above. This seg- ment is now developing commercial game machines, RFID tag systems, vehicle disturbance surveillance devices, content distribution services for cellular phones, and other new businesses. 10.6% 59.5 58.8 64.6 18.9% 2002 2003 2004 (FY) 136.0 116.7 115.2 2002 2003 2004 (FY) 8.3% 47.0 50.6 42.3 2002 2003 2004 (FY) 4.5% 34.7 24.5 26.8 16 2002 2003 2004 (FY) Operating income*(billions of yen) and Operating income margin*(%) Main Products and Services 41.4 16.5 34.2 14.9 24.1 11.9 2002 2003 2004 (FY) (cid:127) Control Relays (Relays, Timers, Counters, etc.) (cid:127) Control Switches (Limit Switches, Micro Switches, Manipulate Switches, etc.) (cid:127) Control Devices (Temperature Controllers, Power Supplies, Level Controllers, Protective Devices, Digital Power Meters, Transmission Units, Wireless Units, Energy-Saving Devices, etc.) (cid:127) Sequence Control Equipment (PLCs, Industrial Networking Equipment, Programmable Terminals, Application Software, etc.) (cid:127) Motion Controllers (Inverters, Servo Motors, etc.) (cid:127) Sensors (Photoelectric Sensors, Proximity Sensors, Displacement Sensors, Pressure Sensors, Ultrasound Sensors, Operating income Operating income margin (%) Measurement Sensors, Vision Sensors, Visual Components, Information Sensing Equipment, etc.) (cid:127) Inspection Systems (PCB Inspection Systems, Sheet Inspection Systems, etc.) (cid:127) Safety-Related Devices (Safety Relays, Door Switches, Safety Controller, Area Sensors, Safety Mats, etc.) 16.1 14.6 16.4 15.9 10.3 13.0 2002 2003 2004 (FY) 4.3 7.1 1.0 1.7 (1.4) (0.9) 2002 2003 2004 (FY) 10 5 0 -5 Operating income Operating income margin (%) Operating income Operating income margin (%) 7.6 10.4 5.6 6.4 1.0 1.2 2002 2003 2004 (FY) Operating income Operating income margin (%) 7.2 7.6 15.3 15.1 3.8 9.1 2002 2003 2004 (FY) Operating income Operating income margin (%) 4.5 3.8 3.8 15.5 14.2 12.9 2002 2003 2004 (FY) Operating income Operating income margin (%) (cid:127) Switches (Micro Switches, Tactile Switches, Trigger Switches, etc.) (cid:127) Relays (General-Purpose Relays, PCB Relays, relays for telecommunications equipment, etc.) (cid:127) Amusement Components, Units and Systems (Sensors, Keys, ICs, IC Coin Systems, etc.) (cid:127) Connectors, Sensors for Consumer, Micro Lens Alleys (cid:127) Components for Printers and Photocopiers (Toner Sensors, Facial Recognition Systems Software Components, etc.) (cid:127) Components for Mobile Equipment (Backlights and Flash Lights for Mobile Phones, etc.) (cid:127) Various Automotive Relays, Switches, Keyless Entry Systems, Power Window Switches, Electric Power Steering Controllers, Various Controllers, Laser Radar Devices, etc. (cid:127) Electronic Fund Transfer Systems and Modules (Automated Teller Machines, Cash Dispensers, Automated Bill Changers, Automated Loan Application Machines, Credit/Debit Card Transaction Terminals, etc.) (cid:127) Public Transportation Systems and Modules (Automated Ticket Venders, Automated Passenger Gates, Automated Fare Adjustment Systems, Commuter Ticket Issuing Machines, Ticket Window Machines, etc.) (cid:127) Traffic and Road Management Systems (Traffic Management Systems, Vehicle Information and Communication Systems, Travel Time Measurement Systems, Public Transportation Priority Systems, etc.) (cid:127) Room Access Control Systems, Facial Recognition Systems, Card Readers/Writers (cid:127) Circulatory System Devices and Bio-Chemistry System Devices (Blood Pressure Monitors for home use, Blood Pres- sure Monitors for professional use) (cid:127) Obesity Solution Devices (Body Composition Monitor, Pedometer) (cid:127) Lifestyle Improvement Programs (“Kenko Tatsujin”, “Kenko partner”) (cid:127) Other Medical and Healthcare Devices (Thermometer, Massager, Nebulizer) (cid:127) Personal Computer Peripherals (ADSL Modems, Broadband Routers, Uninterruptible Power Supplies, etc.) (cid:127) RFID Systems (IC Tags, Reader/Writer, Antenna, etc.) (cid:127) Remote Supervisory Systems, Vehicle Disturbance Surveillance Devices (cid:127) Commercial Game Machines (Photo Sticker Machine) * Operating income indicates income including internal income prior to the deduction of amounts such as interseg- ment transactions and headquarters expenses that are not apportionable. 17 I N D U S T R I A L A U T O M A T I O N B U S I N E S S ( I A B ) Manufacture and sale of control equipment for factory automation Amid the trend toward a borderless global economy, a crucial factor in ensuring survival in the manufacturing industry is the ability to manufacture products efficiently with high precision and quality. The Industrial Automation Business (IAB) segment, a leading man- ufacturer of control equipment for factory automation, will meet these expanding needs through leading-edge technology and strength in the development of solutions. F U M I O T A T E I S I , Executive Vice President, Company President, Industrial Automation Company REVIEW OF FISCAL 2004 (cid:127)Maintaining strength in Japan and Europe In domestic operations, the digital consumer appliance mar- ket performed well in the first half of the fiscal year 2004, but entered an adjustment phase in the latter half of the year. Nevertheless, inquiries from makers of semiconductor manufacturing equipment and automobiles held steady, and demand for investments to improve quality and safety rose, stimulating robust performance in areas such as PCB inspection systems and safety equipment. In overseas oper- ations, sales of PLCs* and general-purpose sensors increased in China and other parts of Asia, where we have strengthened our marketing base. Our sales remained steady in North America and Europe. As a result, sales in the IAB increased 9.0% year-on-year to ¥250.3 billion. This helped to boost our operating income by 21.2% year-on- year to ¥41.4 billion, and led to an increase in our operating income margin of 1.6 percentage points to 16.5%. * Programmable Logic Controllers, intelligent control devices used in production processes, control equipment efficiently by processing information from various control components such as sensors, timers, temperature regulators (con- trollers), and switches. BUSINESS ENVIRONMENT AND KEY STRATEGY (cid:127)An approach that emphasizes the need for improve- ments in quality, safety, and the environment In the domestic manufacturing industry, capital expendi- tures are currently in the final stage of inventory adjustments in the digital consumer appliance and semi- conductor industries, and should return to a path of recovery beginning in the second half of fiscal 2005. Capi- tal expenditures in the automobile industry are also likely to grow steadily, particularly among Japanese manufacturers that have significantly improved their international competi- tiveness. From a geographical point of view, China, which has been transformed from the “world’s factory” to the largest consumer market on earth, is expected to expand its manufacturing base. The IAB segment has established as its basic strategy to carefully look at these trends in the expansion of manufacturing bases, and respond to the growing needs for improvements in quality, safety, and the environment in manufacturing processes, as well as develop a total solution-oriented marketing operation for the realization of growth, with a focus on the following: (1) develop further core sensing and control technology, which is our area of strength, and (2) establish a QLM* solu- t i o n s b u s i ness for total control of manufacturing processes aimed at dramatically improving quality. We are particularly eager to speed up investment in China, our most important overseas operating region, with a view to strengthening marketing and production activities there. * Quality Lifecycle Management is a technique in which the quality control expert- ise of highly-experienced technicians serves as a model to guarantee manufacturing processes in order to achieve quality assurance. MEASURES FOR ACCELERATING GROWTH (cid:127)Improving solutions-based expertise through alliances In November 2004, Omron formed a partnership with the U.S. firm Delmia Corp. in the field of automation for the manufacturing industry. Delmia Corp. is highly skilled in the development of software that facilitates the streamlining of manufacturing processes. Until now, the IAB segment has made strides in strengthening its solutions business focused on increasing the value of our client companies. With this partnership, the segment can systematically pro- vide controllers, networks, and software to our client companies and significantly contribute to shortening each manufacturing process from product design to manufactur- ing and production design. The segment will also develop new products that integrate our leading-edge automation equipment such as PLCs with the innovative software of Delmia Corp. (cid:127)Expansion of manufacturing bases in China In Shanghai, China, the IAB segment until now has oper- ated development and production companies that specialize in: (1) programmable logic controllers (PLCs), (2) sensors, and (3) temperature regulators (controllers) and other devices. Through the integration of these three bases dispersed in Shanghai City, we will strengthen their design and production capabilities and establish infrastructure for distribution, information management, and other functions in China. (The integration of these bases was completed in July of fiscal 2005.) The IAB segment will also enhance its marketing capabilities in Shanghai through the establish- ment of a facility provisionally named the IAB China Business Center. With these moves, we will boost our price competitiveness, quality expertise, and customer support capabilities, as well as conduct activities that spark demand for improvements in the productivity, efficiency, and quality of China’s manufacturing industry. 18 Sales Breakdown, by Product (Fiscal 2004 Actual) Industrial Equipment 40% (Power supplies, Temperature controllers, Control relays, Timers, Switches etc.) System Equipment 33% (PLCs, Inverters, Motion controllers etc.) Sensors 27% (Application sensors, Photoelectric sensors, Proximity sensors etc.) IAB RESULTS AND PLANS Billions of yen Net sales* Domestic Overseas North America Europe Asia China Direct exports FY2005 Plan 267.5 135.5 132.0 21.1 70.3 11.5 24.8 4.3 FY2004 250.3 130.2 120.1 20.3 65.6 10.4 19.5 4.3 Operating income* Operating income margin* R&D expenses Depreciation and amortization Capital expenditures 42.0 41.4 15.7% 16.5% 17.5 7.7 10.0 16.7 7.6 8.8 Y o Y 109.0% 111.1% 106.8% 103.9% 108.2% 76.3% 105.9% 1672.1% 121.2% +1.6 pt. 114.8% 76.4% 120.4% FY2003 229.6 117.1 112.5 19.6 60.7 13.6 18.4 0.3 FY2002 202.5 102.2 100.3 19.9 53.0 12.1 15.0 0.3 34.2 24.1 14.9% 11.9% 14.5 10.0 7.3 13.4 8.7 8.0 * Projections for FY2005 are based on an exchange rate of ¥100/US$ and ¥130/Euro. * The sales figures given indicate sales to external customers and exclude intersegment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as intersegment transactions and headquarters expenses that are not apportionable. Core IAB Products Solution Service Business for SMT Process Improvement Solution Service Business for SMT Process Improvement This solution service promotes minimization of losses This solution service promotes minimization of losses caused by mounting errors and introduction of lead-free caused by mounting errors and introduction of lead-free technology in SMT process through providing the customers technology in the SMT process through providing customers with printed circuit board inspection systems, and software with printed circuit board inspection systems and software for defect analysis and/or introduction of lead-free technol- for defective analysis and/or lead-free introduction, as well ogy, as well as consulting services. as consulting services. Safety Network Controller type NEIA-SCPU01 This is the world’s first controller with the DeviceNet Safety interface built in, meeting the world’s highest safety standards. Smart Sensor type ZFV This sensor is the fastest shape measurement sensor in the industry. It has a super fast response time making it possi- ble to handle high-speed production lines. 19 E L E C T R O N I C C O M P O N E N T S B U S I N E S S ( E C B ) Manufacture and sale of electronic components for consumer appliances, telecommunications equipment, and industrial equipment. The principal markets in which the Electronic Components Business (ECB) operates represent growth domains that spawn such major trends as the acceleration of digiti- zation, downsizing, and multifunctional design of products and components. While they undergo brief swings, they are also domains that allow full use of our techno- logical advantages. Our ongoing strategy is to develop a business that fosters the creation of added value by investing aggressively in technological development. S O I C H I Y U K A W A , Senior Managing Officer, Company President, Electronic Components Company REVIEW OF FISCAL 2004 (cid:127)Substantial expansion of components for mobile equipment through exports mainly to Greater China In the domestic market, robust performance in such product areas as relays, switches, and connectors for the consumer and commerce components market was fueled not only by the strength of the semiconductor industry and dramatic growth of flat-panel televisions and other electronics products, but also by the increased production of air conditioners and rises in electric power demand driven by high summer temperatures. Overseas, sales of LCD backlights are growing due to the worldwide popu- larity of mobile phones and portable music players. Our various devices experienced a significant increase in sales to the IT industries in China and Europe, which have moved briskly to deploy telecommunications infrastructure, as well as in East Asia where demand for air conditioners grew. As a result of these developments, the ECB segment increased sales by 13.6% year-on-year to ¥101.1 billion and achieved a 10.1% increase in operating income to ¥16.1 billion. In addition, despite some neg- ative factors including soaring materials costs and sales price drops, operating income margins remained high at 15.9%. BUSINESS ENVIRONMENT AND KEY STRATEGY (cid:127)Strengthening our technological advantages in growth fields and areas The ECB segment targets a wide range of industries in its pursuit of technological development. These include the consumer appliance industry, with its shift to multifunctional devices and digitization, the telecommunications industry, which is moving toward large-capac- ity, high-speed capabilities, and the amusement and mobile equipment industries. Of these, part of the semiconductor and other industries experienced a strong phase of inventory adjustments, but they are generally past this stage with some products already begin- ning to show signs of recovery. These industries are expected to return to a medium to long-term trajectory of growth in the latter half of fiscal 2005 and thereafter. In recognition of the business environ- ment, the segment’s geographic strategy has positioned China at the top of its priority list in terms of markets and manufacturing bases. Although China is likely to enter occasional periods of policy adjustment to avoid a slightly overheated economy, medium to long-term growth potential in China will remain extremely high. In view of these conditions, we will continue to push forward with the following measures: (1) construction of a plating plant to establish an integrated production system from the component stage; (2) improvement of productivity to further reduce costs and expansion of production capabilities; and (3) reinforcement of sales structure by increasing the number of sales offices. Additionally the ECB segment will promote the develop- ment of new products supported by its own technological advantages, as typified by products already developed as mainstays such as LCD backlights. MEASURES FOR ACCELERATING GROWTH (cid:127)Expansion of production bases in China for the manufacture of relays used in telecommunications equipment In China and other parts of Asia, the installation of telephone lines is proceeding at a rapid pace, and demand for relays for telecommunications equipment is increasing sharply in response to the worldwide expansion of ADSL. Squarely meet- ing this opportunity, we expanded our Shanghai plant in March 2005 and commenced production of fourth-generation relays using the latent miniaturization technology. (cid:127)Expanded structure for provision of large LCD backlights The ECB segment has positioned its large-scale LCD back- lights operations at the core of its growth business domains. To exploit this growth potential, a plant in Taiwan in which Omron has a 10% stake commenced operations in Decem- ber 2004, providing a structure that integrates development, manufacturing, and sales. The market for flat-panel televi- sions that use large flat-panel displays (FPDs) is expected to continue growing at a sharp pace for the time being and lead to the creation of many new production lines by major LCD manufacturers. Success or failure in the flat-panel television market, however, will be determined by measures such as cost reductions, shortening of delivery times, and swift adap- tation to new products. For this reason, we will improve further our cost competitiveness and accelerate the estab- lishment of customer-oriented services and sales systems, particularly in Taiwan due to its large customer base. (cid:127)New product development for the IT and mobile markets The ECB segment marketed its OKAO Vision Face Recognition Sensor, a device that can recognize and verify an owner by his or her face. This sensor can be implemented in PDAs, mobile phones, or other mobile devices with a camera function. Other products marketed by the ECB include the world’s thinnest vibration motor and multi-functional input devices optimal for the main operation parts in mobile phone use, and the XF2- series with FPC connectors, which boasts a narrow pitch, low profile, and small surface area. In this way, we are expanding our lineup of new products for the IT and mobile markets. 20 Sales Breakdown, by Product (Fiscal 2004 Actual) Consumer Electronic Components 58% (Connectors, Switches, Relays, Built-in sensors, etc.) Semiconductors 14% (B-MLA etc.) Amusement equipment 19% (IC coin systems, etc.) Other 9% (Mobile equipment (LED backlight, transducer), Toner sensors for office automation equipment, etc.) ECB RESULTS AND PLANS Billions of yen Net sales* Domestic Overseas North America Europe Asia China Direct exports FY2005 Plan 114.0 55.0 59.0 10.1 13.3 6.4 18.5 10.7 FY2004 101.1 51.8 49.3 9.5 12.0 5.6 11.6 10.7 Operating income* Operating income margin* R&D expenses Depreciation and amortization Capital expenditures 16.0 16.1 14.0% 15.9% 9.5 7.5 10.0 7.9 5.8 9.1 Y o Y FY2003 FY2002 113.6% 109.2% 118.7% 90.7% 115.4% 111.2% 126.4% 163.6% 110.1% (0.5 pt.) 117.2% 98.3% 127.6% 89.0 47.5 41.5 10.5 10.4 5.0 9.1 6.6 79.4 43.1 36.3 11.6 9.3 4.7 7.5 3.1 14.6 10.3 16.4% 13.0% 6.7 5.9 7.1 6.0 8.2 6.9 * Projections for FY2005 are based on an exchange rate of ¥100/US$ and ¥130/Euro. * The sales figures given indicate sales to external customers and exclude intersegment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as intersegment transactions and headquarters expenses that are not apportionable. Core ECB Products MEMS Flow Sensor This sensor utilizes the most cutting-edge MEMS device to detect extremely low flow rates with high precision. It is expected that MEMS Flow Sensors will be installed in digi- tal equipment including computers, airconditioners, and a variety of other equipment, such as fuel cells. (The bottom- right photo shows a MEMS Flow Chip with a surface area of 1.55mm x 1.55mm and a thickness of 0.4mm.) LED backlights for large LCD televisions These backlights utilize durable, energy efficient LEDs as a light source for large flat-panel LCD televisions. This enables such televisions to have a thickness of less than 10cm, while still naturally and reliably reproducing colors on screen. Commercial production is expected to commence within FY2005. OKAO Vision Face Recognition Sensor This sensor, which can be implemented in mobile devices with cameras, including mobile phones and PDAs, is capable of identifying the owner’s face within one second. By dramati- cally improving the speed and efficiency of algorithms, it has become possible to install this sensor in mobile devices while still maintaining high precision. 21 A U T O M O T I V E E L E C T R O N I C C O M P O N E N T S B U S I N E S S ( A E C ) Manufacture and sale of electronic components for automobiles The increasing use of electronic components for automobiles has become a major world- wide trend today. Needs for safety in particular are ever increasing in this domain. The Omron Group will utilize its advanced core Sensing and Control technology to respond to driving safety needs by providing sensing systems that assist drivers by measuring the distance to the vehicle ahead and assessing driver fatigue. Through these advanced capabilities, the Group intends to realize the excellent growth potential of this domain. H I R O K I T O Y A M A , Managing Officer, Company President, Automotive Electronic Components Company REVIEW OF FISCAL 2004 (cid:127)Growth in the European and Asian Markets —Overall performance declines as the burden of advance investments erodes profits In fiscal 2004, the Automotive Electronic Components Busi- ness (AEC) was impacted as the sales results of some major customers dropped amidst intensifying global com- petition in the automobile industry. However, sales were strong, centering on sensors and various control units, whose performance was driven by the growing use of elec- tronic components in automobiles. A regional analysis reveals that sales in the European markets grew substan- tially for reasons including benefits from the acquisition of a relay company. In addition, sales in Asian markets expanded significantly due to the release of many new models by Korean manufacturers that have expanded their exports to North America. Sales were also firm in the Japan- ese and North American markets, despite inactivity among some customers. As a result, sales grew 9.7% year-on-year to ¥64.6 billion. However, profits suffered due to an increase in advanced investments in R&D expenses and transient costs for quality improvements. The result was an operating loss of ¥900 million, in contrast to fiscal 2003, in which the AEC segment posted a profit of ¥1 billion. BUSINESS ENVIRONMENT AND KEY STRATEGY (cid:127)Responding to new needs The AEC segment expects that although automobile sales in fiscal 2005 will vary widely by manufacturer and region, per- formance overall will remain firm. With the growing use of electronic components in automobiles and the need for safety, the market growth for automotive electronics is expected to surpass growth in the production of automobiles. Based on this recognition of the business environment, we will move for- ward with technological development and new product introductions to respond to the needs for safety, comfort, and environmental friendliness. Specific plans include the market launch of electric power steering controllers that help to improve automobile fuel efficiency. Another new product is laser radar for driver assistance systems that feature (1) adap- tive cruise control systems, (2) a collision mitigation device, and (3) a low speed following device. The laser radar will be first introduced into luxury models manufactured by major domes- tic automakers. To address automotive needs already growing in North America, we plan to introduce a tire pressure monitor- ing system (TPMS). 22 In fiscal 2005, the AEC segment will pursue ongoing development and the release of new products stated above to respond to the introduction of new models by our domestic and overseas client manufacturers, and further step up investment in R&D and globalization to gain indus- try recognition as a leading company. MEASURES FOR ACCELERATING GROWTH (cid:127)Acquisition of automotive relay firm In October 2004, the Omron Group purchased Europe’s third-ranked automotive relay business from Bitron Industrie SpA of Italy, establishing a joint venture company with Bitron. Automotive relays have many uses in cars, from headlights and fans to power switches for a variety of motors. The two main types of relays are the plug-in type used for high current switches and a type mounted directly on PCBs (PCB relays). The ability to satisfy customer needs by handling both types of relays and demonstrating techno- logical synergies is a competitive edge for global expansion. Our new acquisition has enabled the AEC segment to secure a production base for plug-in type relays, which it had not handled previously in Europe, as well as acquiring distribution channels to customers in the European market. Through this new capability, we will seek a rapid business expansion in this market, which, combined with our 30% share of the North American market, will place us in the world number one position in automotive relays. (cid:127)Expansion of R&D investment The AEC segment’s R&D expenses for fiscal 2004 increased by 23.3% year-on-year to ¥6.4 billion. Within the automobile industry, the automotive electronics field is experiencing an expansionary trend stimulated by expand- ing needs for safety, comfort, and environmental friendliness. Therefore, we are moving to enhance signifi- cantly our R&D organization. Specifically, we aim to promote the commercial use of new technologies needed today, including a more highly refined version of the laser radar for driver assistance systems mentioned above, high dynamic range CMOS technology capable of sensing con- ditions of extreme brightness and darkness, systems for determining a driver’s condition from facial expression and other data, and systems for enhancing security, thereby contributing to industrial needs. Sales Breakdown, by Product (Fiscal 2004 Actual) Switches 30% (Power window switches, Power seat switches, etc.) Automotive Relays 22% (PCB relays, Power relays, etc.) Electric Control Equipment 44% (Keyless remote controllers, etc.) Other 4% (Laser radar devices, Sensors, etc.) AEC RESULTS AND PLANS Billions of yen Net sales* Domestic Overseas North America Europe Asia China Direct exports Operating income* Operating income margin* R&D expenses Depreciation and amortization Capital expenditures FY2005 Plan 72.0 28.0 44.0 24.4 6.4 13.1 1.1 0 2.5 3.5% 7.5 6.1 11.5 FY2004 64.6 26.0 38.6 21.0 5.4 11.9 0 0.3 (0.9) — 6.4 3.3 7.6 Y o Y FY2003 FY2002 109.7% 104.6% 113.5% 100.7% 134.4% 135.5% — 85.4% 58.8 24.8 34.0 20.9 4.0 8.8 — 0.3 59.5 23.6 35.9 23.4 3.7 8.6 — 0.2 — — 1.0 1.7% 4.3 7.1% 123.3% 109.0% 83.9% 5.2 3.0 9.0 4.0 6.1 6.2 * Projections for FY2005 are based on an exchange rate of ¥100/US$ and ¥130/Euro. * The sales figures given indicate sales to external customers and exclude intersegment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as intersegment transactions and headquarters expenses that are not apportionable. Core AEC Products Automotive Laser Radar Measures the distance to the vehicle ahead by sensitive, wide-field laser for traffic control purposes. People and bicy- cles are also detectable. Automotive Relay High reliability and longevity are the important qualities required of automotive relays. Demand for automotive PBC relays for use in motor control is rapidly increasing. Tire Pressure Monitoring Systems (TPMS) This is a tire pressure monitoring system for automobiles. Data received from wireless sensors attached to tires enable tire pressure measurement while driving. Products like this allow us to respond to heightened automobile safety needs. 23 S O C I A L S Y S T E M S B U S I N E S S ( S S B ) Manufacturing, sales, and service provision for railways, traffic management, and security systems The Social Systems Business (SSB) segment is engaged in activities related to important infrastructure in society, such as railroads as well as traffic and road man- agement. In addition, the SSB segment will explore new and future business domains with high added value while accurately grasping the potential of ever-grow- ing needs for safety and security, and responding to them with solutions which leverage our edge. Y U T A K A T A K I G A W A , Senior Managing Officer, Company President, Social Systems Solutions Business Company REVIEW OF FISCAL 2004 (cid:127)Decrease in sales due to the transfer of the ATM business In domestic operations, our electronic fund transfer sys- tems business benefited from the opportunity made possible by the issuance of new yen notes, which required replacement of automated teller machines (ATM) and auto- mated bill changers as well as the conversion of existing machines. Overseas, demand associated with the need to adapt financial terminal machines for use with IC cards expanded in Taiwan. Our train station management and electronic fund transfer systems businesses saw demand related to the accommodation of new yen notes and the introduction of IC cards as a security measure, as well as several major sources of demand that emerged accompa- nying the extension of railroad lines and the opening of new lines. On the other hand, our traffic and road management systems business posted a major decline in sales due to factors including the retreat of large-scale demand associ- ated with an urban expressway that arose in the preceding term and the delayed emergence of demand for new road management systems. Moreover, our financial terminal machine business, which handles ATMs and other equip- ment, was transferred to Hitachi-Omron Terminal Solutions Corp. (HOTS) (an associate in which Omron has a 45% capi- tal stake) in October 2004 and the result is excluded from consolidated sales. Consequently, our sales declined 15.3% from the previous fiscal year to ¥115.2 billion. Meanwhile, operating income fell 38.0% to ¥6.4 billion, and operating income margin declined 2.0 percentage points to 5.6%. BUSINESS ENVIRONMENT AND KEY STRATEGY (cid:127)Developing a solutions business underpinned by our technological edge In fiscal 2005, demand for new road management systems should arise. However, impediments to the development of the SSB segment’s train station management and electronic fund transfer systems businesses are likely to occur. While orders for the replacement and conversion of various types of equipment to adapt to IC integration of train passenger tickets and increased demand for transaction terminals is expected, special demand for automated ticket venders and other machines to adapt to the new yen notes issued in fis- cal 2004 will wind down. Thus, businesses within the SSB segment are characterized by high volatility in which demand for infrastructure development tends to build up at certain times. One of our key priorities then is overcoming this volatility and realizing sustained, stable growth. The SSB segment has taken a step in this direction by starting to approach the security industry as a new area of business, studying means of providing systems, equipment, and solu- tions for preventing information disclosure risk and other problems to the manufacturing industry with which we have had long-term connections. The SSB segment also has its eyes fixed on increased demand associated with the devel- opment of railroad infrastructure overseas. MEASURES FOR ACCELERATING GROWTH (cid:127)Full-scale participation in social systems business in China To establish a social systems business in China, Omron signed a blanket cooperation agreement with Peking Uni- versity Founder Group Corporation* in July 2004. The business domain of cooperative work principally concerns the automated fare collection systems business for rail- roads, including automated passenger gate machines and automated ticket venders in the Chinese market. Omron has begun efforts jointly with Peking University Founder Group Corporation to secure orders for automatic charge collection systems for subways in various cities in China. Going forward, we intend to contribute to the development of social infrastructure in China, which will proceed at a rapid pace in preparation for the Beijing Olympics in 2008 and the Shanghai International Exposition in 2010. * Peking University Founder Group Corporation is a major system integrator estab- lished in 1986 through a capital contribution by Peking University. (cid:127)Launch of a security solutions business In April 2005, we launched a security solutions business geared toward assisting manufacturing facilities. There is a rapidly growing risk of information disclosure at factories and research centers associated with the widespread use of IT technology. In addition, the diversification of working styles and expanded use of outsourcing has made compa- nies more aware of security measures. In response, the SSB segment intends to provide innovative solutions to ensure security at production sites by monitoring and ana- lyzing the entry and exit as well as movement of workers, components, and products using the Group’s proprietary technology. Omron has also formed a business alliance with the Sompo Japan Group to develop a new solutions business, wedding the Sompo Japan Group’s non-life insurance products with Omron’s security assessment expertise. 24 Sales Breakdown, by Product (Fiscal 2004 Actual) Train Station Management 26% (Sales of equipment and solutions such as automated passenger gates, automated ticket venders) Financial 23% (Sales of equipment and solutions such as automated teller machines and cash dispensers) Transportation 7% (Traffic management systems, Traffic light control equipment) Other 43% (Installation and maintenance of equipment, Software development) SSB RESULTS AND PLANS Billions of yen Net sales* Domestic Overseas North America Europe Asia China Direct exports Operating income* Operating income margin* R&D expenses Depreciation and amortization Capital expenditures FY2005 Plan 91.0 88.0 3.0 0.9 0 0 0 2.1 3.0 3.3% 3.5 2.6 3.5 FY2004 115.2 108.6 6.6 0.2 0.4 0 0 6.0 6.4 5.6% 5.3 6.1 4.1 Y o Y 84.7% 85.9% 68.7% 85.7% 40.6% 27.9% 3.9% 74.6% 62.0% (2.0 pt.) 69.5% 91.8% 129.4% FY2003 136.0 126.4 9.6 0.2 0.9 — 0.4 8.0 10.4 7.6% 7.6 6.6 3.2 FY2002 116.7 104.8 11.9 0.3 — 0.1 0.3 11.2 1.2 1.0% 5.4 3.2 4.5 * Projections for FY2005 are based on an exchange rate of ¥100/US$ and ¥130/Euro. * The sales figures given indicate sales to external customers and exclude intersegment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as intersegment transactions and headquarters expenses that are not apportionable. * In October 1, 2004, the financial terminal machine business responsible for ATMs and other such equipment was transferred to Hitachi- Omron Terminal Solutions Corp., in which Hitachi and Omron have a 55% stake and 45% stake respectively. Core SSB Products Automatic Gate State-of-the-art automatic gate developed through advanced software technology that enables rapid-conveying and simultaneous processing of multiple tickets. Traffic Management Systems We are contributing to the creation of a safe society through systems that control traffic lights on highways and provide a variety of traffic information. Security Solutions In response to information leakage risks, we have created and now provide an optimal security solution package designed to protect our client assets of “people, goods, information, and the environment.” 25 H E A L T H C A R E B U S I N E S S ( H C B ) Manufacture and sale of medical devices for home and professional use OMRON HEALTHCARE Co., Ltd. (HCB) commands an overwhelming market share across the globe for digital blood pressure monitors for home use. By taking advan- tage of this strong consumer brand, we intend to expand our business into the new home medical care domain, which connects patient homes and medical institutions, with a view to reinforcing our platform for profitability. K E I I C H I R O A K A H O S H I , OMRON HEALTHCARE Co., Ltd. Representative Director and Chief Executive Officer REVIEW OF FISCAL 2004 (cid:127)Keeping the expansion on track The home healthcare and medical equipment market expanded steadily on the global scale in response to an increase in the number of patients with lifestyle-related dis- eases and the rising awareness of self-care. Although sharp growth in the Chinese market was dampened temporarily by government measures to suppress the overheated econ- omy, we nevertheless maintained sales at a high level there. A breakdown by product reveals that the HCB segment’s mainstay products of digital blood pressure monitors for home use and body composition monitors with scales per- formed well. Growth in sales of digital blood pressure monitors for home use was particularly strong and sus- tained in the U.S., and in Japan, sales of body composition monitors with scales climbed steeply thanks to aggressive advertising and promotion. As a result, the HCB segment’s sales increased 7.7% year-on-year to ¥50.6 billion and oper- ating income increased 6.2% to ¥7.6 billion. Meanwhile, operating income margin declined 0.1 percentage points to 15.1% because of increased temporary expenditures for quality enhancements. BUSINESS ENVIRONMENT AND KEY STRATEGY (cid:127)Expanding our existing domains and developing new growth domains using our outstanding brand strength Health consciousness is growing around the world, accom- panying such trends as aging populations and increases in lifestyle-related diseases caused by irregular diet and stress, including hypertension and diabetes, which occur primarily in advanced countries. These trends have raised expectations for a continuous global expansion of demand for healthcare and medical equipment such as digital blood pressure monitors for home use and body composition monitors with scales. The HCB segment will aggressively expand sales of its digital blood pressure monitors, already established as the world’s top brand, in China and Europe where the potential is especially high. In the domestic mar- ket, too, we will be determinedly addressing the health needs of consumers through expanded sales of body composition monitors with scales and portable electrocar- diographs. In addition, we plan to actively develop the home medical care domain, a field in which bio-informa- tion such as blood pressure measured at home is used at medical institutions. 26 MEASURES FOR ACCELERATING GROWTH (cid:127)Expansion and reinforcement of our mainstay bio-infor- mation sensing systems business In June 2005, we purchased Colin Medical Technology Corporation (CMT), the top manufacturer of blood pres- sure monitors for medical institutions. We intend to use this opportunity to incorporate CMT products for medical institutions such as inpatient blood pressure monitoring devices and vascular screening devices into our home healthcare and medical equipment business. With this acquisition, we will now be able to create a system that can provide bio-information sensing systems for use in loca- tions ranging from homes to surgery rooms and hospital wards. The acquisition is expected to yield valuable syner- gies from the use of CMT’s sales channels into medical institutions and the joint development of next-generation products utilizing the strong technological skills of both companies. In the term ended December 2004, CMT’s net sales amounted to ¥8.6 billion. With the strategic benefits to be derived from this acquisition, the Omron healthcare group is aiming for sales of ¥75.0 billion and an operating income margin of 15% in fiscal 2007. (cid:127)Launch of new category products Recent years have seen the field of preventive medicine grow in importance. Preventive medicine requires daily attention to one’s state of health, and it is increasingly rec- ognized that bio-information obtained, for instance, by blood pressure measurements taken at home can be use- ful even in diagnoses performed at medical institutions. For this reason, we are focusing attention on product develop- ment that links home health checks to medical institutions. We have already begun sales (in January 2005) of a portable electrocardiograph that can display electrocardio- gram waveforms, information useful at medical institutions. We have also commenced sales (in April 2005) of Medinote, a blood pressure monitor and manager designed under guidelines for self-monitoring of blood pressure at home prepared by the Japanese Society of Hypertension. We intend to propel growth upward by aggressively introducing this new category of products. Sales Breakdown, by Product (Fiscal 2004 Actual) Blood pressure monitors 58% Thermometers 9% Body composition monitor with scale 10% Nebulizers 6% Other 17% Net sales* Domestic Overseas North America Europe Asia China Direct exports HCB RESULTS AND PLANS Billions of yen FY2005 Plan 54.0 25.0 29.0 15.0 8.9 1.5 3.3 0.3 FY2004 50.6 23.1 27.5 14.6 8.9 1.4 2.6 0.1 Y o Y FY2003 FY2002 107.7% 108.2% 107.3% 109.4% 106.5% 117.3% 95.0% 107.4% 47.0 21.3 25.7 13.3 8.3 1.2 2.7 0.1 42.3 18.9 23.4 12.7 7.5 1.2 2.0 0.1 Operating income* Operating income margin* R&D expenses Depreciation and amortization Capital expenditures 8.5 7.6 15.7% 15.1% 106.4% (0.1 pt.) 7.2 15.3% 3.8 9.1% 3.0 0.9 1.8 2.7 0.7 2.1 99.6% 82.2% 108.4% 2.7 0.9 1.9 2.5 1.6 1.9 * Projections for FY2005 are based on an exchange rate of ¥100/US$ and ¥130/Euro. * The sales figures given indicate sales to external customers and exclude intersegment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as intersegment transactions and headquarters expenses that are not apportionable. * FY2005 plan does not include the effect of the Colin Medical Technology Corporation acquisition. Core HCB Products Body Composition Monitor with Scale “Karada Scan” [control] HBF-359 Useful in diet programs, this monitor measures skeletal muscle according to six levels. The monitor provides data that can be checked to maintain and increase skeletal mus- cle mass while removing excessive body fat, thereby enabling healthier dieting. Portable Electrocardiograph Omron Portable Electrocardiograph HCG 801 Useful at medical centers, this portable electrocardiograph can display electrocardiogram waveforms. Users can take their own electrocardiogram waveform when symptoms arise. Blood Pressure Monitor and Manager “Medinote” HEM-5001 This is Japan’s first upper-arm cuff blood pressure monitor useful for measuring blood pressure upon rising and at bed- time to check morning hypertension. The monitor automatically stores measurement results and can display graphs of average values. 27 B U S I N E S S D E V E L O P M E N T G R O U P A N D O T H E R B U S I N E S S E S Initial development of new businesses and businesses not covered by existing segments The Business Development Group is engaged in the initial development of new busi- nesses under a mandate to expand the platform of the Omron Group’s growth domains. It also actively supports technological development and commercialization, thereby contributing to the enhancement of the Group’s corporate value. K A Z U N O B U A M A M I Y A , Executive Officer, Senior General Manager, Business Development Group REVIEW OF FISCAL 2004 In existing businesses, we expanded contents distribution for cellular phones in the entertainment business and increased sales in areas including modems and broadband routers in the PC peripherals business. Accomplishments in the exploration and fostering of businesses included expanded sales of easy-to-install vehicle anti-theft systems and the growing popularity of RFID tag systems*. Thanks to these results of the Business Development Group and the activities of businesses not covered by other seg- ments, segment sales rose 9.4% year-on-year to ¥26.8 billion. Operating income, meanwhile, held at the previous year’s level of ¥3.8 billion. * RFID (Radio Frequency Identification) tag systems are anticipated as next-gener- ation technology to replace bar codes, which can automatically take simultaneous, multiple readings. BUSINESS ENVIRONMENT AND KEY STRATEGY (cid:127)Exploration and fostering of new businesses are key The existing businesses of the Business Development Group, including the entertainment and PC peripherals businesses, are strongly influenced by domestic consumer trends, and thus they operate in an environment that does not always imbue optimism. In response, we channel our efforts to specific areas within these two businesses. In the entertainment business, this includes content distribu- tion for mobile phones and the prize business for commer- cial game machines, as well as our existing business in photo sticker machines. In the PC peripherals business, we are promoting sales of telecommunications and power supply equipment. Our activities in the exploration and fos- tering of new businesses include the expansion of easy-to-install vehicle anti-theft systems and full-scale busi- ness development of RFID tag systems, which are expected to experience rapid market growth. MEASURES FOR ACCELERATING GROWTH (cid:127)Seeking an expansion of the RFID business In March 2005, we commenced delivery of UHF-band RFID tag systems (such as IC tags that can be read even at a dis- tance of about three meters) to suppliers of the world’s largest retailer Wal-Mart, representing a first among Japan- ese manufacturers. Going forward, we plan to expand our sphere of activity as an RFID vender by aggressively devel- oping the North American market using our expertise based on our extensive and proven business experience in introducing RFID systems, combined with our exceptional product technology skills. At the same time, we intend to strengthen our market research in Europe and Asia and aim for a global expansion of our RFID business in line with trends in the distribution business and regulations for wire- less communications in the countries concerned. Core Other Business Products RFID Tag Systems There are great expectations for RFID as a next-generation technology to replace bar codes. RFID is gaining signifi- cant attention in the logistics and distribution sectors. BUSINESS DEVELOPMENT GROUP AND OTHER BUSINESSES RESULTS AND PLANS Net sales* Domestic Overseas FY2005 Plan 26.5 26.5 0 North America 0 Europe 0 Asia 0 China 0 Direct exports 0 Operating income* 2.0 Operating income margin* 7.5% R&D expenses 9.0 Depreciation and amortization 5.2 5.2 Capital expenditures FY2004 26.8 26.4 0.4 0 0 0 0.3 0.1 3.8 14.2% 10.6 5.1 5.8 Y o Y 109.4% 110.4% 67.0% (15.7%) 30.0% 0.0% 60.7% 873.3% 99.8% (1.3 pt.) 107.8% 394.6% 61.1% Billions of yen FY2002 34.7 32.8 1.9 — — — 1.6 0.2 4.5 12.9% 8.9 1.9 7.1 FY2003 24.5 24.0 0.5 0.1 0 0 0.4 0 3.8 15.5% 9.8 1.3 9.5 * Projections for FY2005 are based on an exchange rate of ¥100/US$ and ¥130/Euro. * The sales figures given indicate sales to external customers and exclude intersegment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as intersegment transactions and headquarters expenses that are not apportionable. 28 M A N A G E M E N T S Y S T E M S C O N T E N T S 30 32 34 36 Corporate Governance and Legal Compliance Corporate Social Responsibility Intellectual Property Strategy Directors, Corporate Auditors and Executive Officers 29 C O R P O R A T E G O V E R N A N C E A N D L E G A L C O M P L I A N C E It is not enough to construct a system of Governance and Compliance. Only after the system actually starts to function will it gain the steadfast support of our stakeholders, and lead to everlasting growth through distinguishing our- selves from our competitors—that is what we at Omron believe. CORPORATE GOVERNANCE STRUCTURE Basic Policies Our Group deems long-term maximization of its corporate value to be our ultimate management goal. We believe that accomplishing that goal does not mean merely responding to the expectations of the capital market, but to the expectations of all stakeholders including our cus- tomers and society at large. Through efficient and competitive management, we will achieve greater corporate value. Furthermore, we will always be aware of the three perspectives of fulfilling management accountability, achiev- ing management transparency, and pursuing high business ethics in order to strengthen corporate governance. Progress Status In 1999, our Group implemented the Managing Officer Sys- tem and the Internal Company System, thus separating the roles of corporate management and business execution. Seizing this opportunity, decision-making authority is dele- gated to a great extent to the presidents of each internal company, who possess a deep knowledge of their respec- tive fields, in order for the Company to be the strongest in its respective fields. This system facilitated swift decision- making and enhanced productivity. The delegation of authority to the presidents is naturally accompanied by their fulfillment of responsibility and operation. Therefore, we thoroughly ensure that each company implements per- formance-based compensation and a committed operation of various management goals including profits. 1) Business Execution Structure We are now operating with a small Board of Directors, which consists of seven members, to speed up decision-making. Our management monitoring functions were also enhanced by a separation of the duties of corporate management and business execution; the President & CEO is charged with the execution of both, while the former is the domain of the direc- tors, and the latter the responsibility of the executive officers. Furthermore, in order to enforce our management objectivity, in fiscal 2003 we increased the number of outside directors from one to two and outside corporate auditors from two to three (one of whom works full time). In addition, the Chairman of the Board of Directors oversees business operations as a representative of stakeholders without actually taking part in the execution of business. In terms of the appointment, pro- motion, and compensation of all Board Members (Directors, Auditors, Managing Officers) we have established a Personnel Advisory Committee and a Compensation Advisory Commit- tee within the Board of Directors to enhance transparency, as well as to maintain objectivity by having the outside directors chair each of the committees. 2) Auditing Functions The Board of Corporate Auditors, which consists of four auditors (three of whom are outside corporate auditors), checks expected governance and management conditions, and monitors daily activities of management, including the board of directors. Also, as a means of its internal auditing function, the Audit Office, which functions directly under the President & CEO, periodically conducts internal audits of accounting, administration, business risks, and compli- ance for each headquarters division and each company. In addition to its checking functions, the Audit Office also offers concrete advice for administrative improvement. Efforts Made in Fiscal 2004 • One more director was added to further strengthen moni- toring and supervision of execution. • The retirement bonus system for directors and auditors that emphasized deferred compensation was abolished and replaced with a system that reflects annual results and performance. • To make inviting outside directors onto the board sim- pler, an internal provision was established to enable outside directors to sign a contract limiting their obliga- tions to Omron within the scope of laws and regulations, and this contract was put into effect. LEGAL COMPLIANCE STRUCTURE Basic Policies One of our management philosophies is to maintain corpo- rate ethics while promoting corporate activities. Additionally, we consider risk management as a strategic investment for greater competitiveness. Upon such basic policies, in April 2004 we established the Corporate Ethics & Business Conduct Committee. Chaired by our President & CEO, this committee designs overall policies and plans, monitors their state of implementation, and conducts deliberations and adjustments of important affairs. Progress Status The Corporate Ethics & Business Conduct Committee was established to integrate existing corporate ethics and risk management. The general manager of each division and 30 the president of each company are members of this com- mittee, and they report on corporate ethics efforts for their respective organizations in accordance with Omron’s cor- porate ethics and conduct framework and on the status of response to each risk. Moreover, the Corporate Ethics & Business Conduct Committee has established a whistle- blower hotline called “Corporate Ethics Hotline” at its offices within the Corporate General Affairs Division and is preparing a system for receiving reports directly from employees and their families. Furthermore, based on the results of risk analysis across the Omron Group as a whole, the Earthquake Risk Expert Committee has been created to respond to risks characterized by substantial urgency and importance, and the Information Risk Expert Committee has been established to thoroughly control and safeguard confidential information and customer and personal infor- mation. Structure of Omron Corporate Governance Shareholders General Meeting Board of Directors Board of Auditors Board of Auditors Office Auditing Firm Personnel Advisory Committee Compensation Advisory Committee Executive Organization President & CEO Corporate Environmental Activity Committee Corporate Ethics & Conduct Committee Executive Council Audit Office CSR Management Headquarters 31 Efforts Made in Fiscal 2004 • “Corporate Ethics Hotlines” were established at a non- company location (an attorney’s office), and in North America. • In addition to the Group “Corporate Ethics Action Guide- lines” for Japan, North America, Europe, China, an edition for Asia-Pacific was also prepared, and additional training was provided for domestic employees and managers at companies overseas. • As part of Corporate Ethics Month in October 2004, employees worldwide were given a “Corporate Ethics Card.” RISK MANAGEMENT STRUCTURE Our Group is improving its risk management system as it believes that all risk arising from business operations must be accurately assessed and controlled in order to appropri- ately manage operations, continue stable growth, and secure the required level of management resources. To this end, Omron is firmly establishing risk management systems for detecting, analyzing, countering, and monitoring risk in each division and internal company. Moreover, the Corpo- rate General Affairs Division is responsible for risk management oversight functions, and Omron is improving and promoting its risk management system and working to understand and control risk throughout the Group. Board of Directors This Board monitors executive operations (President and Chief Executive Officer) and decides important business practices and strategies for matters such as company objectives and management strategy. The Board is chaired by the Chairman of the Board of Directors, who monitors executive activi- ties and represents stakeholders who do not hold executive positions. Board of Auditors This Board consists of four auditors, of whom three are outside auditors. The Board checks expected governance and management conditions, and it monitors daily activities of management, including the Board of Directors. Personnel Advisory Committee This Committee, formed of outside directors, receives guidance from the Chairman of the Board of Directors and from the President, sets election standards for the Board of Directors, Board of auditors and executive officers, selects candidates, and evaluates current officers. Compensation Advisory Committee This Committee, which consists of outside directors, receives guidance from the Chairman of the Board of Directors and from the President, decides the compensation structure for the Board of Directors, board of auditors and executive officers, sets evalua- tion standards, and evaluates current officers. Executive Council This Council determines and reviews important executive matters that are within the scope of authority of the President. Under the inter- nal company system, decision-making is streamlined and operations made more efficient by transferring authority to the presidents of each company. Audit Office This Office periodically conducts internal audits of accounting, administration, business risks, and compliance for each headquarters divi- sion and each company, and it offers concrete advice for monitoring and administrative improvement. C O R P O R A T E S O C I A L R E S P O N S I B I L I T Y Since the establishment in 1959 of the company motto, “At work for a better life, a better world for all,” Omron has emphasized the public character of companies and carried out CSR activities in two spheres: business endeavors and societal challenges. In the future as well, we aim to be a leading company which will contribute to society’s sustainable development. THE BASIC SPIRIT OF CSR Under the basic idea that companies can be thought of as public entities in the sense that their purpose of existence is not only to seek profits but also to contribute to society, Omron has been a forerunner in implementing CSR prac- tice since its founding through the creation of social needs (i.e., business activities) and activities as a corporate citizen (i.e., social activities). Now that we have entered the 21st century, the Group’s CSR activities will focus on the societal challenges which have been left behind in the rapid development of the global economy up to now, such as challenges related to energy, industrial waste, resources, food, and human rights. Thus, in response to these challenges, we have established a corporate responsibility plan based on three main pillars: (1) Contribute to a better society through busi- nesses operations, (2) Always demonstrate business integrity in the promotion of corporate activities, and (3) Tackle societal issues as a concerned party. While earning the trust of all of our stakeholders, we aim to contribute to the sustainable development of society. Moreover, we have chosen the following four specific areas for our CSR activities through fiscal 2007: Four areas of Focus for CSR Activities through Fiscal 2007 1) Cultivation of social needs through our businesses oper- ations 2) Strengthening legal compliance and corporate ethics 3) Respecting diversity in the workplace, especially by pro- moting employment of and support for people with disabilities, and by promoting the success of women in the workforce. 4) Commitment to environmental conservation Supporting the Employment of the Handicapped through a “Best Matching of Machines to People” Diversity is an up-and-coming challenge in society. A soci- ety in which we recognize each other’s differences and promote our individual strengths while compensating for weaknesses must be built. Based on this awareness, Omron has been actively assisting handicapped people since even before legislation was passed covering the employment of the physically and mentally challenged. In particular, the Omron Group is aiming for the cre- ation of a society that features a “best matching of machines to people” in which machines work based on an understanding of what people want; this is accomplished through “sensing and control technology,” which is our core competence. This management concept naturally includes the realization of a society in which machines will support handicapped people in their desire to do work. Our Group not only provides workplaces for the handi- capped; an important mission for us is to actively use our core competence to prepare a working environment that supports the handicapped in their efforts towards self real- ization. In 1972, Omron established Omron Taiyo Co., Ltd, the first factory in Japan that cre- ated an environment specially designed for the employment of the physically handi- capped. We actively support handicapped people participating in the Wheelchair Marathon and the Handicapped Arts Festival. ENVIRONMENTAL MANAGEMENT Basic Thoughts About Environmental Management The Omron Group is of course working to reduce the bur- den on the environment in its own activities as a “good corporate citizen.” We see environmental problems as an important management issue and are working to create products and technology that will help in the preservation of the environment. Our aim is to be a 21st century com- pany that brings together ecology and economy. In other words, this means the long-term maximization of corpo- rate value and the realization of a sustainable society that recycles. Results Obtained in Fiscal 2004 and Plans for the Future Based on this basic spirit, following the Environmental Dec- laration made in 1998, the Omron Group established the environmental management vision Green Omron 21 in May 2002. Since then, we have been actively tackling environ- mental problems with specific goals to be achieved by fiscal 2005. Looking at the results obtained in fiscal 2004, not only did we achieve zero emissions at all of our domes- tic production facilities through the complete recycling and reuse of waste materials, but in response to the Restriction of Hazardous Substances (RoHS) directive which will go 32 into effect in July 2006, we obtained information regarding the amount of regulated chemical compounds present in about 170,000 purchased parts, materials, and products, and discontinued the use of banned substances in about 30% of our products by replacing parts and materials. In the future, we will further raise our goals under Green Omron 21 and work towards new targets to be attained by 2010. Regarding CO2 emissions in particular, we intend to reduce energy use by all of the companies in the group in accordance with the reduction goals set under the Kyoto Protocol. Therefore, as well as continuing and strengthening our in-house energy-saving policy, we will add to our options the introduction of clean energy gener- ated from wind power and biomass energy and the use of Kyoto mechanisms, such as the purchase of emissions credits, and work towards the attainment of our goals. ENVIRONMENTAL DECLARATION We pledge to aspire to harmonize with nature and work for a better environment through activities showing a strong sense of public responsibility. Environmental Vision “Green Omron 21” Creating a 21st Century Company Development of society Contributing to the sustainable development of society Maximizing Omron value on a long-term basis Topics Dealing with RoHS: Plan to Finish in Fiscal 2005 Europe has issued the RoHS (Restriction of Haz- ardous Substances) directive, which bans the use of six hazardous materials used in electronic equip- ment, including lead and mercury. This directive will go into effect in July 2006. The Omron Group is actively responding to the issue of these regulated chemical compounds, eliminating hazardous sub- stances not only in the parts we purchase but also in our manufacturing processes, and working towards the building of environmental security sys- tems at the developmental and design stages. In fiscal 2005, we will make great efforts to remove all of these regulated chemical substances from our products using this framework. Our goal is to elimi- nate the use of these substances in all products by the end of March 2006. Disclosure of environmental information and environmental contribution activities Environmentally-friendly logistics Eco-Logistics Eco- Communication Creating environmentally- friendly products, environmentally- conscious products Eco- Factories/ Laboratories/ Offices Eco- Management Eco-Products Eco-Mind High environmental awareness of all empoloyees Environmentally-friendly business activities Environmental efforts in corporate management For more details, please see The Company’s Sustainability Report 2005 We believe it is important that we fulfill our responsibility of creating dialog with more of our stakeholders, explaining our thoughts regarding the expectations people hold for us, and having everyone understand our position. Thus, we started, in 2004, to issue The Company’s Sustainability Report, which adds a social report to the environmental report we were issuing previously, and are now making it available on our website. For more details regarding Omron’s CSR ideas, plans, and activity report, please refer to The Company’s Sustainability Report 2005. We would be happy to hear everyone’s frank opinions. http://www.omron.com/corporate/csr/ 33 I N T E L L E C T U A L P R O P E R T Y S T R A T E G Y Intellectual property is one of Omron’s most important manage- ment resources. It determines our growth potential, profitability, and sustainability. THE SIGNIFICANCE OF INTELLECTUAL PROPERTY FOR OMRON’S MANAGEMENT At Omron, we have set maximizing corporate value as the goal of GD2010. In keeping with this goal, we are seeking first to double by 2007 the total business value achieved in FY 2003, based on the present value (PV) of cash flows anticipated from the Group’s various business domains. For this purpose, operating with a balance between increasing top line growth potential and improving prof- itability will be essential. We believe that the core technologies Omron has devel- oped through the years, along with the intellectual property that supports them, will be the greatest driving force behind this simultaneous realization of growth potential and prof- itability. Strengthening our position in highly unique technologies or intellectual property (IP) that our competitors cannot easily duplicate, with the backing of strong patents and high-caliber expertise, will create a synergistic effect and contribute to the realization of these elements. Strategic utilization of intellectual property enables profitable growth. We therefore regard it as one of our most important management resources. R&D SYSTEM AND ORGANIZATION FOR ENHANCING INTELLECTUAL PROPERTY 1) Investment in R&D While there have been fluctuations depending on the fiscal year, the overall trend for our R&D expenses ratio has remained steady at an annual rate of around 8%. Despite the effects of annual fluctuations in the business environ- ment, we believe that increasing our medium to long-term corporate value results in extending merits to our share- holders, investors, and all other stakeholders. Among these expenses, the ratio of investment in basic technology development to investment in product business develop- ment in fiscal 2004 was about one to five. Looking at the trends of these two portions of expenses, investment in basic technology development has remained stable, while the ratio of investment in product development has contin- ually increased over the past three years. 2) Personnel involved in R&D We believe that R&D greatly contributes to maximizing cor- porate value. In that regard, we look to further motivate our R&D personnel in ways that include abolishing ceilings on compensatory payments and recognizing not only domes- tic but also overseas sales results. We are also placing efforts on cultivating personnel who can make business contributions. For example, for employees who possess extremely high levels of professional expertise in areas such as electrical engineering, molding technology, and license negotiation, we will commence the operation of a specialist manager system that offers them company-wide career opportunities. Maximizing corporate value by strengthening and leveraging our intellectual property portfolio Intellectual property: developing a strategy and business growth scenario GD2010 Long-term maximization of corporate value Doubling of total business value over FY2003 Increased growth potential and elevated profitability Strengthened intellectual property portfolio Creation of highly original core technologies Management/ Business Strategy Original technologies = maximization of corporate value by the power of intellectual property Shared Growth Strategy Technology Strategy Strengthening our technical edge through the creation of core technologies Intellectual Property Strategy Development of strong intellectual property and mitigation of risk Group Structure Management Planning Office /Intellectual Property Dept. Intellectual property group for each segment Overall management Technology headquarters Expansion of business Development of core technologies Foundation of Intellectual Property Strategy Strengthening and Leveraging our Intellectual Property Portfolio Patents, know-how, copyrights, trademarks, etc. 34 3) R&D system and organization Beginning with our core technologies, the scenario for building a growth structure in three to five years was estab- lished at the management level. This scenario is divided into three themes: group growth strategy, group company growth strategy, and core technology development. The first and second themes are carried out jointly by the busi- ness companies and R&D headquarters, while the third is carried out solely by the R&D headquarters. As of March 31, 2005, there were 1,384 R&D personnel, their organiza- tion detailed in the chart below. R&D Organization CEO Research and Development Headquarters Business Company Advance Device Laboratory Sensing & Control Laboratory R&D Center SBU (Strategic Business Unit) Product Development Department INTELLECTUAL PROPERTY STRATEGY At the Omron Group, our fundamental intellectual property strategy is to strengthen our IP portfolio, including patents, know-how, copyrights and trademarks and utilizing it effec- tively to maximize corporate value. To that end we have created a structure for effectively sharing management resources, technology and intellectual property. Our aim is to construct scenarios for success that will lead to tremendous business growth through utilizing intellectual property in business and technology strategies. Specifically, we will create technology that will form the core for business growth, and further expand business opportuni- ties through the acquisition of strong intellectual property. Company-wide intellectual property strategy that aligns technology with business strategy is led by the Intellectual Property Department of the Corporate Planning Division, which maintains close contact with intellectual property departments established in each business segment. To ensure that intellectual property does not leak out- side of the company, we have adopted a system of rules for managing confidential information. In recent years, the circulation of large numbers of imi- tation Omron brand products, mainly in China, has resulted in damage to our corporate value. In response, we have ini- tiated countermeasures by first, stationing representatives in Shanghai; second, creating an original “Omron Anti- Counterfeit Manual,” and distributing it to administrative agencies; and third and lastly, periodically conducting anti- counterfeiting campaigns. Intellectual Property and R&D-related Data FY2005 Plan FY2004 FY2003 FY2002 Number of patents Applied for Registered Number of patents Total IAB ECB AEC SSB HCB Other businesses (Business Development Group and other segments) R&D expenses (Billions of yen) R&D expenses ratio R&D staff (persons) 1,300 700 4,500 50.0 17.5 9.5 7.5 3.5 3.0 9.0 8.0% 1,216 676 4,426 49.4 16.7 7.9 6.4 5.3 2.7 10.6 8.1% 1,384 1,170 580 4,154 46.5 14.5 6.7 5.2 7.6 2.7 9.8 7.9% 1,594 1,141 543 4,068 40.2 13.4 6.0 4.0 5.4 2.5 8.9 7.5% 1,378 35 D I R E C T O R S , C O R P O R A T E A U D I T O R S A N D E X E C U T I V E O F F I C E R S (As of June 23, 2005) DIRECTORS Chairman of the BOD Yoshio Tateisi President and CEO Hisao Sakuta Director and Executive Vice President Shingo Akechi Tadao Tateisi Senior Managing Director Tsukasa Yamashita Director (external) Noriyuki Inoue Kakutaro Kitashiro CORPORATE AUDITORS Corporate Auditors Tsutomu Ozako Yoshisaburo Mogi (external) Yoshio Nakano (external) Hidero Chimori (external) Executive Officers Yukio Kobayashi Yoshinobu Morishita Takuji Yamamoto Yoshinori Suzuki Hiroshi Fujiwara Kazunobu Amemiya Hideo Higuchi Yutaka Fujiwara Tatsunosuke Goto Mike van Gendt EXECUTIVE OFFICERS Executive Vice President Fumio Tateisi Senior Managing Officers Fujio Tokita Soichi Yukawa Yutaka Takigawa Managing Officers Yasuhira Minagawa Kuniyasu Kihira Toshio Ochiai Hiroki Toyama Kojiro Tobita Kuninori Hamaguchi Koichi Imanaka 36 3 4 5 6 7 1 2 1. Yoshio Tateisi Chairman of the BOD 2. Hisao Sakuta President and CEO 3. Noriyuki Inoue Director (external) 4. Kakutaro Kitashiro Director (external) 5. Shingo Akechi Director and Executive Vice President 6. Tadao Tateisi Director and Executive Vice President 7. Tsukasa Yamashita Senior Managing Director FINANCIAL SECTION CONTENTS 38 39 40 46 48 49 50 51 52 74 Six–year Financial Summary Eight–quarter Financial Summary Fiscal 2004 Management’s Discussion and Analysis (including Business and Other Risks) Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors’ Report Note: Six-year Financial Summary, Eight-quarter Financial Summary, Fiscal 2004 Management’s Discussion and Analysis (including Business and Other Risks) are unaudited. 37 S i x – y e a r F i n a n c i a l S u m m a r y O M R O N C o r p o r a t i o n a n d S u b s i d i a r i e s Y e a r s e n d e d M a r c h 3 1 Operating Results: Net sales (Note 3) ........................................................ Industrial Automation Business (IAB) ...................... Electronic Components Business (ECB).................. Automotive Electronic Components Business (AEC).... Social Systems Business (SSB) ............................... Healthcare Business (HCB) ...................................... Other Businesses..................................................... Cost of sales ................................................................ Gross profit .................................................................. SG&A expenses (excluding R&D expenses)................ R&D expenses ............................................................. Operating income ........................................................ EBITDA (Note 4)........................................................... Net income (loss)......................................................... Cash Flows: Net cash provided by operating activities ................... Net cash used in investing activities ........................... Free cash flow (Note 5) ............................................... Net cash used in financing activities ......................... Cash and cash equivalents at end of the year ............ Financial Position (At Year-End): Total assets.................................................................. Working capital ............................................................ Interest-bearing debt ................................................... Shareholders’ equity.................................................... Per Share Data (Yen): Net income (loss): Basic......................................................................... Diluted ...................................................................... Shareholders’ equity.................................................... Cash dividends (Note 6) .............................................. Ratios: Gross profit margin ..................................................... Operating income margin............................................ EBITDA margin (Note 4) .............................................. SG&A expenses (excluding R&D expenses)/Net sales... R&D expenses/Net sales ............................................. Return on assets (ROA) (Note 7) ................................. Return on shareholders’ equity (ROE) ......................... Inventory turnover (times) ........................................... Assets turnover (times) ............................................... Ratio of shareholders’ equity to total assets............... Current ratio................................................................. Debt/equity ratio (times) .............................................. Interest coverage ratio (times)..................................... Other Financial Data: Capital expenditures (cash basis)................................ Depreciation and amortization .................................... Employees (persons) ................................................... Note: 1. Six-year Financial Summary are based on U.S. GAAP. Millions of Yen (unless otherwise specified) 2005 2004 2003 2002 2001 2000 ¥ 608,588 250,329 101,127 64,558 115,205 50,583 26,786 358,817 249,771 144,219 49,441 56,111 84,753 30,176 ¥ 584,889 229,638 88,988 58,824 135,997 46,962 24,480 344,835 240,054 142,157 46,494 51,403 79,065 26,811 ¥ 535,073 202,518 79,365 59,480 116,652 42,331 34,727 327,413 207,660 135,112 40,235 32,313 61,989 511 ¥ 533,964 184,185 81,062 50,800 128,057 40,617 49,243 353,429 180,535 134,907 41,407 4,221 37,790 (15,773) ¥ 594,259 227,691 129,444 — 141,928 39,327 55,869 376,194 218,065 131,203 42,513 44,349 76,566 22,297 ¥ 555,358 215,087 109,661 — 128,534 42,640 59,436 358,911 196,447 133,662 36,605 26,180 57,625 11,561 61,076 (36,050) 25,026 (40,684) 80,619 585,429 132,952 24,759 305,810 126.5 124.8 1,284.8 24.0 41.0% 9.2% 13.9% 23.7% 8.1% 8.9% 10.4% 5.17 1.03 52.2% 181.6% 0.91 53.36 38,579 28,642 24,904 80,687 (34,484) 46,203 (28,119) 95,059 592,273 131,678 56,687 274,710 110.7 107.5 1,148.3 20.0 41.0% 8.8% 13.5% 24.3% 7.9% 8.3% 10.2% 4.73 1.01 46.4% 171.4% 1.16 43.27 38,115 27,662 24,324 41,854 (30,633) 11,221 (1,996) 79,919 567,399 143,536 71,260 251,610 2.1 2.1 1,036.0 10.0 38.8% 6.0% 11.6% 25.3% 7.5% 0.8% 0.2% 4.36 0.96 44.3% 194.7% 1.26 23.59 34,454 29,676 23,476 33,687 (40,121) (6,434) (12,056) 70,779 549,366 148,053 58,711 298,234 (63.5) (63.5) 1,201.2 13.0 33.8% 0.8% 7.1% 25.3% 7.8% (4.4%) (5.1%) 4.25 0.93 54.3% 214.4% 0.84 4.36 38,896 33,569 25,124 50,796 (32,365) 18,431 (24,582) 85,621 593,144 145,489 67,213 325,958 87.4 85.3 1,311.1 13.0 36.7% 7.5% 12.9% 22.1% 7.2% 6.8% 6.7% 4.44 1.01 55.0% 179.3% 0.82 26.83 37,583 32,217 24,997 59,926 (34,180) 25,746 (23,785) 88,670 579,489 169,797 69,472 336,062 45.0 44.5 1,308.6 13.0 35.4% 4.7% 10.4% 24.1% 6.6% 3.6% 3.5% 4.56 0.96 58.0% 215.1% 0.72 14.64 31,146 31,445 24,821 2. Six-year Financial Summary are unaudited. 3. Certain reclassifications have been made to the net sales amounts of ECB and AEC previously reported for the year ended March 2002 in order for them to conform to the categories of the year ended March 2003. The amounts previously reported for the year ended March 2002 were: IAB, ¥186,984 million; ECB, ¥128,193 million; SSB, ¥124,627 million. These same reclassifications could not be made to net sales amounts previously reported for the year ended March and earlier because the necessary data is not readily available. 4. EBITDA = Operating income + Depreciation and amortization EBITDA margin = EBITDA/Net sales x 100. 5. Free cash flow = Net cash provided by operating activities – Net cash used in investing activities. 6. Cash dividends per share represent the amounts applicable to the respective year, including dividends to be paid after the end of the year. 7. Return on assets (ROA)=Income (loss) before income taxes, minority interests and cumulative effect of accounting change/Total assets x 100. Total assets are based on the simple average of assets at the beginning and end of each fiscal year. 38 E i g h t – q u a r t e r F i n a n c i a l S u m m a r y O M R O N C o r p o r a t i o n a n d S u b s i d i a r i e s Y e a r s e n d e d M a r c h 3 1 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter For the year 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 Millions of Yen Operating Results: Net sales ................................... IAB .......................................... 147,930 134,382 154,342 135,810 147,335 146,645 158,981 168,052 608,588 584,889 63,979 54,477 63,230 56,128 60,358 57,934 62,762 61,099 250,329 229,638 ECB......................................... 24,834 22,341 25,122 21,201 26,098 23,360 25,073 22,086 101,127 88,988 AEC......................................... 14,913 14,593 15,300 13,631 16,982 14,995 17,363 15,605 64,558 58,824 SSB ......................................... 26,474 25,648 32,398 28,010 21,170 30,795 35,163 51,544 115,205 135,997 HCB ........................................ 12,376 11,693 11,520 11,119 14,696 13,328 11,991 10,822 50,583 46,962 Other Businesses ................... Operating income ..................... IAB .......................................... 5,354 5,630 6,772 5,721 8,031 6,233 6,629 6,896 26,786 24,480 15,206 9,886 15,992 11,654 14,647 15,793 10,266 14,070 56,111 51,403 12,721 8,098 10,904 ECB......................................... 4,298 4,116 4,050 AEC......................................... SSB ......................................... (278) 123 356 (431) (686) 3,615 HCB ........................................ 2,323 1,918 677 536 (61) 1,465 8,234 3,392 11 1,558 1,894 1,921 8,602 3,884 248 1,221 2,933 1,394 8,753 3,889 9,198 3,834 9,096 41,425 34,181 3,198 16,066 14,595 170 (416) 464 (877) 1,001 3,989 2,947 1,041 1,474 1,688 401 5,508 6,433 10,369 420 902 7,621 3,796 7,179 3,803 (4,517) (3,855) (4,288) (5,356) (3,635) (4,996) (5,913) (5,518) (18,353) (19,725) Other Businesses ................... Eliminations & Corporate........ Cash Flows: Net cash provided by operating activities ................. 10,689 14,192 22,892 21,353 2,868 9,984 24,627 35,158 61,076 80,687 Net cash used in investing activities.................. (5,379) (6,059) (11,106) (9,492) (11,063) (5,053) (8,502) (13,880) (36,050) (34,484) Net cash used in financing activities.................. (3,528) (3,403) (33,737) (14,538) 1,274 (1,506) (4,693) (8,672) (40,684) (28,119) Cash and cash equivalents at end of the year ................... 96,962 84,378 (19,475) (5,119) (8,656) 2,142 11,788 13,658 80,619 95,059 Note: Eight-quarter Financial Summary are unaudited. 39 F i s c a l 2 0 0 4 M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s ( i n c l u d i n g B u s i n e s s a n d O t h e r R i s k s ) The Macroeconomic Environment 1. Japan It is possible to summarize fiscal 2004 as a year in which the overall expansion of economic conditions apparently slowed. In particular, there was a marked slowdown in private capital expenditures during the second and third quarters of fiscal 2004, an area where significant recovery occurred during fiscal 2003. This was due mainly to the inventory adjustment in digital con- sumer electronics, semiconductors and other aspects of the IT industry. However, even this inventory adjustment has basically passed its cyclical crisis point, and something of a recovery was noted in the fourth quarter of fiscal 2004. Moreover, the actual growth rate of consumer spending exceeded 1.0 percent for the first time in eight years since fiscal 1996. Export fluctuations were seen from the second fiscal quarter when a sense of cau- tion over restraining the overheated economic conditions in China and uncertainty over currency exchange movements pre- vailed. While this is certainly an unsteady economic footing, the issues of excess equipment, personnel and liabilities, three major strains on the Japanese economy since the collapse of the bubble, have essentially been settled. Thus, expectations are still strong for medium to long-term economic expansion, and the Nikkei average stock prices have firmly remained at the ¥11,000 to ¥12,000 level. 2. Overseas In the United States, economic conditions continued to feel the impact of housing investment and capital expenditures. The real GDP growth rate rose to 4.4 percent in fiscal 2004 (calendar year) from 3 percent in fiscal 2003. However, in the latter half of the fis- cal year, a slight slackening of the pace of growth was evident due to unsteady elements such as the gradual weakening of tax cut effects, an increase in long-term interest rates, and soaring energy prices. In Europe as well, there was a partial recovery in capital expenditures and solid economic growth in fiscal 2004. The impact of a stronger euro and soaring prices for raw materials, however, slowed the pace of growth in the latter half of the fiscal year. The Asian economy has continued to be generally favorable. In China in particular, last fiscal year’s momentum continued, and fiscal 2004 (calendar year) saw a real GDP growth rate of 9.5 per- cent (compared to 9.3 percent for fiscal 2003). Although China has on occasion controlled excessive economic expansion, given the acceleration of its buying power and upcoming large-scale events such as the Olympics and World Exposition, it is likely to still expe- rience high growth in the medium to long term. General Overview of Fiscal 2004 Results Net sales increased 4.1 percent over the previous fiscal year, while operating income and net income showed significant increases of 9.2 percent and 12.6 percent, respectively. Operating income and net income levels have been the highest on record for two consecutive terms. The Group has identified the primary causes for the change in operating income as follows: A sharp rise in materials expenses of approximately ¥1.0 billion, currency exchange fluctuations of approximately ¥800 million, and the roughly ¥5 billion increase in selling, general and administrative (SG&A) expenses, including research and development (R&D) expenses. However, these negative factors were absorbed on the plus side by the increased net sales of ¥10.5 billion, and cost reductions amounting to about ¥1.0 billion. Return on sharehold- ers’ equity (ROE) reached 10.4 percent, again clearing the target of 10 percent, after registering 10.2 percent in fiscal 2003. Improvements in balance sheet efficiency and financial health have also continued. Total assets shrank by approximately ¥6.9 billion in line with inventory reductions, etc. Total liabilities shrank by approximately ¥38.0 billion, primarily due to reductions in long- term and short-term borrowings. As a result, the shareholders’ equity ratio increased by 5.8 percentage points to 52.2 percent. Net Sales and Operating Income SG&A Expenses Ratio and R&D Expenses Ratio Net Income (Loss) and ROE (Billions of yen) 700 600 500 400 300 200 100 0 (%) 30 20 10 0 (Billions of yen) 40 30 20 10 0 -10 -20 (%) 20 15 10 5 0 -5 -10 FY00 FY01 FY02 FY03 FY04 FY00 FY01 FY02 FY03 FY04 FY00 FY01 FY02 FY03 FY04 Net sales Operating income SG&A expenses ratio R&D expenses ratio Net income (loss) [left axis] ROE [right axis] 40 Review and Analysis of the Income Statement Sales Sales increased 4.1 percent over the previous fiscal year to ¥608,588 million. Geographically, there was an increase in revenue in all regions including Japan, North America, Europe and Asia. For all business segments, all areas showed an increase in revenue, with the exception of the Social Systems Business (SSB). Cost of Sales and SG&A Expenses In line with expanded sales, cost of sales and SG&A expenses (excluding R&D expenses) increased by 4.1 percent and 1.5 per- cent year-on-year respectively, in accordance with expanded sales. As for increased materials expenses as part of the cost of sales, there was an increase in materials expenses of roughly ¥1.0 billion. This was, however, absorbed by equivalent cost reductions, and the gross profit margin was maintained on par with the previous year at 41.0 percent. Also, the ratio of the cost of sales and SG&A expenses (excluding R&D expenses) improved by 0.6 percentage points over the previous year to 23.7 percent. R&D expenses increased by ¥2,947 million over the previous year to ¥49,441 million, and its ratio to net sales increased from 7.9 percent in the previous year to 8.1 percent. This represents part of the Omron Group’s strategy to accelerate performance growth by further strengthening its technological edge. In future policy, the net sales ratio for this expense will be maintained around roughly the 8 percent level. Non-operating Profit and Loss Net non-operating loss came to ¥3,563 million, on par with that for the previous year (loss of ¥3,419 million). Net interest income and expenses improved significantly due to reductions in interest- bearing debts from a loss of ¥317 million in the previous year to ¥216 million for this current year. Also, foreign exchange loss was reduced from ¥1,254 million in the previous year to ¥75 million. However, other expenses increased by ¥1,856 million to ¥3,704 million, up from ¥1,848 million in the previous year. The primary cause was an increase in losses by companies accounted for under the equity method. Net Income before Income Taxes, Net Income and Profit Distribution Due to the results noted above, net income before taxes showed a 9.5 percent increase over the previous year to ¥52,548 million. Moreover, net income showed a 12.6 percent increase over the previous year to ¥30,176 million. This means that basic net income per share reached ¥126.5, in contrast to ¥110.7 for the previous year. Based on its profit distribution policy, an ordinary cash dividend was set at ¥14.0 per share in consideration of the current and previous fiscal years’ results. In combination with the previous interim dividend of ¥10.0, the total dividend for the fiscal year came to ¥24.0 with a dividend payout ratio of 19.0 percent. Segment Information Sales in the segment information column show sales to external customers, excluding intersegment transactions. Conversely, operating income shows operating income including internal prof- its, prior to the deduction of amounts such as intersegment trans- actions and headquarters expenses that are not apportionable. Sales Breakdown by Business Segment FY2004 FY2003 IAB ...................................... 41.1% ECB ..................................... 16.6% AEC ..................................... 10.6% SSB ..................................... 18.9% HCB..................................... Other................................... 8.3% 4.5% 39.3% 15.2% 10.1% 23.3% 8.0% 4.2% 1. By Business Segment •Industrial Automation Business (IAB) Sales of the Industrial Automation Business (IAB) for this year showed a slowdown over the previous year. However, with sup- port from comparatively firm capital expenditures demand, there was an increase of 9.0 percent over the previous year to ¥250,329 million (accounting for 41.1 percent of consolidated net sales). Domestically, the market for cellular phone and digital con- sumer electronics, which had done favorably in the first half of the year, entered a phase of reduction in the second half of the year. However, consumer willingness to invest in improved quali- ty and safety was strong. With the provision of “Total solutions for improved quality” and “IT integration of the manufacturing process” to the semiconductor, flat panel display (FPD), electron- ic component, automobile, food, machine tool, transportation equipment, and packaging equipment industries, there was an increase in sales including PCB Inspection Systems, displace- ment sensors, vision sensors, network devices, motion con- trollers, and safety-related devices. Overseas, there was an impact on growth in mainland China from measures to control the overheating of economic conditions, casting a shadow on the market’s vitality. However, sales in China and Southeast Asia showed significant increases due to direct marketing aimed at customers, enhancement of sales channels, and stronger efforts on social infrastructure. In Europe also, pri- mary manufacturers relocated their manufacturing bases, advanc- ing demand for capital expenditures in Northern and Eastern Europe and leading to a rapid increase in sales. Furthermore, con- ditions were favorable in North America as well, focused on the automotive industry. Along with increased sales, operating income increased 21.2 percent over the previous year to ¥41,425 million. 41 •Electronic Components Business (ECB) With a focus on expansion of high value-added products with unique technology, sales in the Electronic Components Business (ECB) for this year increased 13.6 percent over the previous year to ¥101,127 million (accounting for 16.6 percent of consolidated net sales). In particular, in terms of backlight operations, there were negative factors such as reductions in selling price due to fierce price competition. However, in conjunction with the expansion in the cellular telephone market, sales showed a significant increase. Domestically, semiconductor-related industries performed favor- ably with increases in demand for electric power due to hot weath- er and a buildup of the digital consumer electronics market includ- ing flat screen televisions. As a result, sales of industrial and con- sumer equipment relays, switches and connectors were favorable. Overseas, spurred by a global boom in cellular telephones and portable music devices, there was an increase in demand for cel- lular phone LED backlights and FPC (flexible printed circuit) con- nectors produced via ultra-precision 3D fabrication and replication technology. Furthermore, use of signal relays for base stations increased in the IT industry in Europe and China, where a rapid development of the communications infrastructure is planned. In East Asia, the market was also favorable for various devices in the air conditioning industry. Operating income increased 10.1 percent over the previous year to ¥16,066 million in accordance with increased sales. •Automotive Electronics Components Business (AEC) Sales of the Automotive Electronics Components Business (AEC) for this year increased 9.7 percent over the previous year to ¥64,558 million (accounting for 10.6 percent of consolidated net sales). This was due to firm growth in the number of vehicles pro- duced, in addition to benefits from increases in the installation rate of electrical equipment for vehicles. Domestically, although the total number of vehicles produced rose only marginally, AEC sales increased thanks in part to the launch of new products such as laser radar, electric power steer- ing controllers and door lock controllers. Overseas, severe conditions continued, particularly in the North American market, due to gradual decrease in vehicle production by the Big Three American automotive manufacturers, a continued strong yen, and intensified price competition for automotive relays. Conversely, in the European, Korean and Asian markets, where subsequent growth is anticipated, steady growth in sales was enabled through proactive customer development. In particular, sales in Korea were favorable in those areas where exports to the U.S. market increased. Also, in Europe where automotive relays are gathering momentum, there were rapid sales increases due to acquisition of relay companies. However, in terms of profit and loss, with the impact of tran- sient costs generated by quality upgrades, in addition to an increased burden from R&D expenses, operating profit and loss- es showed a loss of ¥877 million (compared to a profit of ¥1.0 bil- lion in fiscal 2003). •Social Systems Business (SSB) In terms of sales of the Social Systems Business (SSB) for this year, in the electronic funds transfer systems business, there was a significant increase in demand for upgrades to ATM and auto- mated bill changers, as well as modifications to existing equip- ment in the domestic market to handle the newly introduced paper currency during the first half of the year. Overseas, there was a strong increase in demand in Taiwan due to measures for financial equipment able to handle IC cards. In addition, in the train station management and approval sys- tems business, there were demands for updating and modifying ticketing devices, in accordance with the issuance of new bills, as well as large-scale demand generated in accordance with rail line extensions and the inauguration of new lines. These contributed to expanded sales, as did expansion of demand for approval devices for handling IC cards, as a means of dealing with counterfeiting. However, in the Traffic and Road Management Systems busi- ness, the large-scale demand for urban highways projects experi- enced in the previous fiscal year did not recur. Demand for new road management systems slowed. The impact of administrative and budgetary pressures and intensifying market competition caused demand for traffic management systems to decrease. Due to these and other factors, sales decreased substantially. Furthermore, control of the financial equipment business of handling ATMs (automated teller machines) was transferred in October 2004 to Hitachi-Omron Terminal Solutions, Corp., a company accounted for by the equity method (with 55 percent equity participation by Hitachi, Ltd. and 45 percent by Omron Corporation). As a result of this extraordinary circumstance, sales of SSB for this year decreased 15.3 percent over the previous year to ¥115,205 million (accounting for 18.9 percent of consoli- dated net sales). Operating income decreased 38.0 percent over the previous fiscal year to ¥6,433 million in accordance with decreased sales. •Healthcare Business (HCB) Net sales of the Healthcare Business (HCB) for this year increased 7.7 percent over the previous fiscal year to ¥50,583 mil- lion (accounting for 8.3 percent of consolidated net sales), due to increased consciousness about health globally. Domestically, as an effect of advertisements advances were made in terms of market share for body composition monitors with scales. Likewise, awareness of self-care needs was height- ened with respect to patients with high blood pressure, bolster- ing sales of digital blood pressure monitors. Overseas, there was a significant expansion in digital blood pressure monitors in North America. Conversely, while the devel- opment of marketing centers in China led to rapid growth in sales there in fiscal 2003, the Chinese market stalled impacted by the measures to control the overheating of economic conditions. While there were temporary expenses generated in accor- dance with improved quality, operating income increased 6.2 per- cent over the previous year to ¥7,621 million, in accordance with increased sales. 42 •Other Businesses Sales of Other Businesses for this year increased 9.4 percent over the previous year to ¥26,786 million (accounting for 4.5 percent of consolidated net sales). Other businesses are focused primarily on two pillars: (1) the Business Development Group’s exploration and nurturing of new businesses, and (2) fostering and strengthening of businesses not covered by a specific internal company. Within existing business lines, intensified competition for com- mercial game machines continued in the entertainment area. However, there was a favorable trend in mobile contents, and overall sales showed an increase over those of the previous year. In addition, in terms of the PC peripherals business, modems and broadband routers recorded firm sales. Also, the systems integra- tion business also expanded smoothly against a backdrop of business IT investment. As for the exploration and nurturing of new businesses, in terms of the wireless sensing business, sales of personal auto- motive antitheft devices grew. The RFID (radio frequency identifi- cation) business also underwent steady growth. Operating income decreased 0.2 percent over the previous year to ¥3,796 million, due to an increased burden from R&D expenses. 2. Review of Operations by Region •Japan Sales for all business segments grew, with the exception of a decrease in the Social Systems Business (SSB) given the transfer of the financial equipment business to the joint venture Hitachi- Omron Terminal Solutions, Corp. in October 2004. As a result, there was an increase in domestic sales of 3.0 percent over the previous year to ¥387,627 million. •North America Sales increased steadily for the Industrial Automation Business (IAB), Automotive Electronics Components Business (AEC) and Healthcare Business (HCB). The fall in income in the Electronic Components Business (ECB) due to growth issues for digital con- sumer electronics as well as the impact of a strong yen was cov- ered by increased income from other business segments. As a result, the increase in sales in North America was 1.5 percent over the previous year to ¥65,612 million. Sales Breakdown by Region 71.3% 10.8% 10.3% 7.6% 67.0% 12.3% 12.2% 8.5% 63.7% 12.7% 13.7% 9.9% 64.3% 11.0% 14.4% 10.2% 63.7% 10.8% 15.2% 10.3% FY00 FY01 FY02 FY03 FY04 Japan North America Europe Asia and Other 43 •Europe With the exception of the Social Systems Business (SSB), proactive developmental operations showed good results. Supplemented by a high euro and low yen, all business sectors saw growth in sales. As a result, there was an increase in sales in Europe of 9.4 percent over the previous year to ¥92,239 million. •Asia and Other Sales of the Electronic Components Business (ECB) and Automotive Electronics Components Business (AEC) increased. Conversely, while there were firm sales in China, there was also a large-scale impact from reductions in the digital economic conditions throughout the rest of Asia, and the Industrial Automation Business (IAB) experienced a loss in income. As a result, sales in Asia increased 5.8 percent over the previous year to ¥63,110 million. Explanation of Balance Sheets Assets, Liabilities and Shareholders’ Equity Small, efficient and firm financial development continued, resulting in total assets at the end of this year being reduced by 1.2 percent over the previous year to ¥585,429 million. A primary cause of asset reductions was a 6.4 percent decrease in current assets over the previous year to ¥295,940 million. The reduction in cur- rent assets was primarily caused by the following: (1) a reduction in free cash flow of ¥21,177 million through tax and other payment increases, resulting in a reduction of ¥14,440 million in cash and cash equivalents (15.2 percent reduction over the previous year) and (2) thorough inventory management, and a reduction in inven- tory assets of ¥1,756 million (2.5 percent) over the previous year. Conversely, growth investment for property, plant and equipment was proactively implemented, leading to an increase of ¥3,966 mil- lion (2.6 percent) over the previous year. Investments and other assets increased ¥9,476 million (7.6 percent) over the previous year due to acquisition of relay companies in Europe. The total for current liabilities, long-term debt and minority interests in subsidiaries at the end of the current year was reduced by ¥6,844 million (1.2 percent) over the previous year to ¥585,429 million. In accordance with a bond redemption in September 2004, the long-term debt scheduled to be repaid with- in one year was reduced ¥19,533 million to ¥10,503 million, and the current ratio increased to 182 percent from 171 percent at the end of previous year. Also, as an aspect of long-term debt, bond redemption was advanced as an underlying asset for stable cash inflow, and long-term debt was reduced ¥9,375 million compared to the end of previous year to ¥1,832 million. As a result, total interest-bearing liabilities were reduced ¥31,928 million (56.3 per- cent) over the previous year to ¥24,759 million. Termination and retirement benefits were reduced ¥7,750 million (6.5 percent) in comparison with the end of previous year to ¥111,988 million. Shareholders’ equity increased 11.3 percent over the previous year to ¥305,810 million. The primary cause was an increase in “other” surplus funds of ¥24,255 million resulting from increased net income. Treasury stock increased ¥2,943 million compared to the end of previous year to ¥23,207 million, due to acquisitions dur- ing that time. As a result, the ratio of shareholders’ equity to total assets increased to 52.2% from 46.4% at the end of the previous year, and the debt/equity ratio improved to 0.91 from 1.16 in the previous year. Shareholder’s equity per share based on the number of shares outstanding at the end of the year was ¥1,284.81, com- pared to ¥1,148.33 at the end of the previous year. Cash Flow Cash and cash equivalents at the end of this year were reduced ¥14,440 million over the previous year to ¥80,619 million with minimal effects of exchange rate fluctuations this year. In terms of cash flows from operating activities, net income increased ¥3,365 million. However, there was also an increase in tax payments, leading to an inflow decrease of ¥19,611 million over the previous year to ¥61,076 million. With regard to cash flows from investing activities, capital expenditures for growth infrastructure development and invest- ments in affiliates were proactively implemented, leading to an increase in outflow of ¥1,566 million over the previous year to ¥36,050 million. As for cash flows from financing activities, due to increases in repayment of borrowed money in sums above those in the previ- ous year, outflow reached ¥40,684 million (in comparison to a ¥28,199 million outflow in the previous year). Business and Other Risks The following risks may influence the Omron Group’s manage- ment results and financial condition (including share price), and Omron believes that these items may substantially affect investor decisions. Note that items referring to the future reflect the Omron Group’s forecasts and assumptions as of June 24, 2005, the date of publication of these materials. 1. Economic Conditions The primary business of the Omron Group is consumer and com- merce electronic components used in the manufacture of control system equipment and other electrical and electronic equipment by the manufacturing sector and in capital investment related areas. Accordingly, demand for Omron Group products is affect- ed by economic conditions in these markets. Also, the Omron Group procures raw materials and semi-finished products in a wide variety of forms, and rapid increases in demand could result in supply shortages and/or sudden increases in prices that could halt production and/or cause sudden increases in costs. Both in Japan and overseas, therefore, market forces affecting suppliers to, and purchasers from, the Omron Group can result in the contraction of demand for our products, thereby possibly hav- ing a negative impact on the Group’s operating results and finan- cial condition. 2. Risks Accompanying Overseas Business Activities The Omron Group actively conducts business activities such as production and sales in overseas markets. The Group may be subject to operating difficulties in overseas countries related to possible social unrest due to factors including differences in cul- ture or religion, political turmoil and uncertainty in economic trends, differences in business customs in areas such as the structure of relationships with local businesses and collection of receivables, specific legal systems and investment regulations, changes in tax systems, labor shortages and problems in the labor-management relationship, epidemics, and terrorism, wars, and other political circumstances. Working Capital and Current Ratio Outstanding Interest-Bearing Debts and Debt/Equity Ratio Free Cash Flow (Billions of yen) 150 100 50 0 (%) 300 200 100 0 (Billions of yen) 80 60 40 20 0 (Times) 2.0 1.5 1.0 0.5 0 (Billions of yen) 50 40 30 20 10 0 -10 FY00 FY01 FY02 FY03 FY04 FY00 FY01 FY02 FY03 FY04 FY00 FY01 FY02 FY03 FY04 Working capital [left axis] Current ratio [right axis] Outstanding interest-bearing debts [left axis] Free cash flow Debt/equity ratio [right axis] 44 These various risks associated with overseas operations may have a negative impact on the Omron Group’s operating results and financial condition. 3. Exchange Rate Fluctuation The Omron Group has 97 overseas affiliated companies and con- tinues to reinforce its business operations in overseas markets, such as China for which major market growth is anticipated in the future. The percentages of consolidated net sales accounted for by overseas sales during the fiscal years ended March 2004 and March 2005 were 38.3 percent and 39.9 percent, respectively, and Omron expects further increases in the overseas operations ratio due to factors such as production shifts. The Omron Group seeks to hedge against exchange rate risk in such ways as bal- ancing imports and exports denominated in foreign currencies. Exchange rate fluctuations, however, could have a negative impact on the Group’s operating results and financial condition. 4. Product Defects The Omron Group is committed to the management philosophy of maximizing customer satisfaction, and implements the philoso- phy by providing the best quality products and services based on the Group’s motto of “quality first.” The Group has strict quality control standards in place, and develops and manufactures its products accordingly. The Corporate General Affairs Division of the parent company conducts quality audits, and a Group-wide quality check system is in place for the ongoing improvement of the quality of the Group’s entire line of products and services. Nevertheless, there is no assurance that all of the Group’s prod- ucts are without defects, and that recalls will not occur in the future. Large-scale recalls and/or product defects resulting in lia- bility-related damages could impose huge costs, could severely influence evaluations of the Omron Group, and could result in reduced sales. Such events could exert a negative impact on the Group’s operating results and financial condition. 5. Regulated Chemical Substances The Omron Group currently manufactures products with materi- als containing regulated chemical substances such as lead and cadmium that will be banned from use in the EU from July 2006. At present, in cooperation with suppliers the Omron Group has nearly completed an investigation of the status of regulated chemical substances in all of the components and materials the Group uses, and is accelerating efforts to switch to substitute components and materials that do not contain regulated chemical substances. The Omron Group has constructed an IT system to support the steady, efficient implementation of the investigation of materials and components and the switch to substitute materi- als and components, and is working to make Omron Group prod- ucts throughout the world “environmentally warranted products” by the end of March 2006. However, delays in the switchover due to shortages of substitute parts and materials could impact nega- tively on our operating results and financial condition. 6. Information Leakage All aspects of the operations of the Omron Group depend on per- sonal computers and an IT environment, including production, R&D, sales, and management, with external data exchange being conducted in the course of sales and procurement activities. With recent rapid advances in the Internet and large-capacity media, moreover, there is an increasing possibility that important internal information such as customer information could be leaked to out- side of the Group. The Omron Group is strengthening its security measures to prevent external entry into its internal information systems, and a special committee has been established center- ing on the Corporate General Affairs Division. Steps are accord- ingly being taken to reinforce control over the information we han- dle, and to further improve employees’ information literacy. The Omron Group acquires information (including information on individuals) regarding the private and credit information of cus- tomers and other entities and other types of classified informa- tion through its business processes and important information in the course of business. The Omron Group is strengthening secu- rity to prevent external entry into its internal information systems and misappropriation by third parties, and a special committee has been established centering on the Corporate General Affairs Division. Steps are being taken to reinforce control over the infor- mation the Group handles, and to further improve employees’ information literacy. Unanticipated leakage of internal information, however, due for example to invasion of internal information systems using tech- nology exceeding implemented security levels, could exert a neg- ative impact on the Omron Group’s operating results and financial condition. 7. Counterfeiting of Omron Group Products The Omron Group has accumulated technology and expertise allowing it to differentiate its products from those of its competi- tors. However, it is impossible to completely protect all of the Group’s intellectual property consisting of proprietary technology and expertise, due to legal restrictions in specific regions, includ- ing China, and conditions that allow only limited protection. At present, the Omron Group is working on intellectual property pro- tection against imitation products, through such measures as the placement of full-time personnel (including local staff) in Shanghai. However, it is possible that the Group will not be able to complete- ly prevent third parties from using its intellectual property in the manufacture of imitation products. In China, skills in the methods needed to manufacture and sell imitations of the Omron Group’s products improve each year, and organizations that manufacture and market counterfeit prod- ucts have become extremely troublesome. The circulation of low-quality counterfeits that fraudulently use the Omron Group brand in Asia, including China, could damage trust in the Omron Group’s products and the Group’s brand image, and could exert a negative impact on the Omron Group’s operating results and financial condition. 45 C o n s o l i d a t e d B a l a n c e S h e e t s O M R O N C o r p o r a t i o n a n d S u b s i d i a r i e s M a r c h 3 1 , 2 0 0 5 a n d 2 0 0 4 ASSETS Millions of yen Thousands of U.S. dollars (Note 2) 2005 2004 2005 Current Assets: ........................................................................................................ Cash and cash equivalents.................................................................................. ¥ 80,619 ¥ 95,059 $ 753,449 Notes and accounts receivable — trade............................................................. 124,409 124,891 1,162,701 Allowance for doubtful receivables..................................................................... Inventories (Note 3) ............................................................................................. Deferred income taxes (Note 11) ........................................................................ Other current assets............................................................................................ (2,757) 68,585 17,240 7,844 (2,823) 70,341 18,458 10,300 (25,766) 640,981 161,121 73,308 Total Current Assets ......................................................................................... 295,940 316,226 2,765,794 Property, Plant and Equipment: Land ..................................................................................................................... Buildings .............................................................................................................. Machinery and equipment .................................................................................. Construction in progress..................................................................................... 43,794 110,367 143,111 5,946 45,583 107,852 141,932 3,760 409,290 1,031,467 1,337,486 55,570 Total ................................................................................................................. 303,218 299,127 2,833,813 Accumulated depreciation .................................................................................. (148,529) (148,404) (1,388,121) Net Property, Plant and Equipment .................................................................. 154,689 150,723 1,445,692 Investments and Other Assets:................................................................................ Investments in and advances to affiliates (Note 4)............................................. Investment securities (Note 4) ............................................................................ Leasehold deposits ............................................................................................. Deferred income taxes (Note 11) ........................................................................ Other (Note 5)...................................................................................................... 17,343 49,764 8,595 41,499 17,599 1,245 50,331 8,777 47,301 17,670 162,084 465,084 80,327 387,841 164,477 Total Investments and Other Assets ................................................................. 134,800 125,324 1,259,813 Total Assets ............................................................................................................. ¥ 585,429 ¥ 592,273 $ 5,471,299 See notes to consolidated financial statements. 46 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Millions of yen Thousands of U.S. dollars (Note 2) 2005 2004 2005 Bank loans (Note 6) ............................................................................................. ¥ 12,424 ¥ 15,444 $ 116,112 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) ......................................................... 75,866 26,701 12,724 24,770 10,503 79,345 26,146 10,114 23,463 30,036 709,028 249,542 118,916 231,495 98,159 Total Current Liabilities ..................................................................................... 162,988 184,548 1,523,252 Long-Term Debt (Note 6)......................................................................................... 1,832 11,207 17,121 Deferred Income Taxes (Note 11)............................................................................ 1,199 483 11,206 Termination and Retirement Benefits (Note 8)......................................................... 111,988 119,738 1,046,617 Other Long-Term Liabilities...................................................................................... 63 140 589 Minority Interests in Subsidiaries............................................................................. 1,549 1,447 14,477 Total Liabilities.................................................................................................. 279,619 317,563 2,613,262 Shareholders’ Equity (Note 9): Common stock, no par value: Authorized: 487,000,000 shares Issued: 249,121,372 shares in 2005 and 249,109,236 shares in 2004...................................................... Additional paid-in capital ..................................................................................... Legal reserve ....................................................................................................... Retained earnings................................................................................................ Accumulated other comprehensive loss (Note 15) ............................................ 64,100 98,726 7,649 199,551 (41,009) 64,082 98,705 7,450 175,296 (50,559) 599,065 922,674 71,486 1,864,962 (383,262) Treasury stock, at cost — 11,101,591 shares in 2005 and 9,884,413 shares in 2004 ....................................... (23,207) (20,264) (216,888) Total Shareholders’ Equity ............................................................................... 305,810 274,710 2,858,037 Total Liabilities and Shareholders’ Equity ................................................................ ¥ 585,429 ¥ 592,273 $ 5,471,299 See notes to consolidated financial statements. 47 C o n s o l i d a t e d S t a t e m e n t s o f I n c o m e O M R O N C o r p o r a t i o n a n d S u b s i d i a r i e s Y e a r s e n d e d M a r c h 3 1 , 2 0 0 5 , 2 0 0 4 a n d 2 0 0 3 Millions of yen Thousands of U.S. dollars (Note 2) 2005 2004 2003 2005 Net Sales ....................................................................................... ¥ 608,588 ¥ 584,889 ¥ 535,073 $ 5,687,738 Costs and Expenses: Cost of sales ............................................................................. Selling, general and administrative expenses .......................... Research and development expenses ..................................... Interest expense (income), net (Note 6) ................................... Foreign exchange loss, net....................................................... Other expenses, net (Note 10) ................................................. 358,817 144,219 49,441 (216) 75 3,704 344,835 142,157 46,494 317 1,254 1,848 327,413 135,112 40,235 348 575 26,658 3,353,430 1,347,841 462,065 (2,019) 701 34,617 Total....................................................................................... 556,040 536,905 530,341 5,196,635 Income before Income Taxes and Minority Interests..................... 52,548 47,984 4,732 491,103 Income Taxes (Note 11) ................................................................ 22,108 20,762 3,936 206,617 Income before Minority Interests .................................................. 30,440 27,222 796 284,486 Minority Interests .......................................................................... 264 411 285 2,467 Net Income.................................................................................... ¥ 30,176 ¥ 26,811 ¥ 511 $ 282,019 2005 Yen 2004 U.S. dollars (Note 2) 2003 2005 Per Share Data (Note 13): Net Income Basic ...................................................................................... Diluted ................................................................................... ¥ 126.5 ¥ 110.7 ¥ 124.8 107.5 $ 2.1 2.1 1.18 1.17 See notes to consolidated financial statements. 48 C o n s o l i d a t e d S t a t e m e n t s o f C o m p r e h e n s i v e I n c o m e ( L o s s ) O M R O N C o r p o r a t i o n a n d S u b s i d i a r i e s Y e a r s e n d e d M a r c h 3 1 , 2 0 0 5 , 2 0 0 4 a n d 2 0 0 3 Net Income ................................................................................... ¥ 30,176 ¥ 26,811 ¥ 511 $ 282,019 Millions of yen Thousands of U.S. dollars (Note 2) 2005 2004 2003 2005 Other Comprehensive Income (Loss), Net of Tax (Note 15): Foreign currency translation adjustments: Foreign currency translation adjustments arising during the year ....................................................... 5,071 (6,680) (2,227) 47,393 Reclassification adjustment for the portion realized in net income ....................................................... — 462 222 — Net change in foreign currency translation adjustments during the year.............................................. 5,071 (6,218) (2,005) 47,393 Minimum pension liability adjustments.................................... 4,115 3,470 (27,484) 38,458 Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) arising during the year................................................................... 1,274 11,916 (6,400) 11,907 Reclassification adjustment for losses on impairment realized in net income .................................... 13 Reclassification adjustment for net losses (gains) on sales realized in net income (loss) ............................... (465) 500 (613) 692 661 121 (4,346) Net unrealized gains (losses) .................................................... 822 11,803 (5,047) 7,682 Net gains (losses) on derivative instruments: Net gains (losses) on derivative instruments designated as cash flow hedges during the year ................................ (1,004) Reclassification adjustment for net losses (gains) realized in net income (loss) .............................................. 546 Net gains (losses) .................................................................. (458) 639 (344) 295 (788) (9,383) 778 5,102 (10) (4,281) Other Comprehensive Income (Loss) ............................................ 9,550 9,350 (34,546) 89,252 Comprehensive Income (Loss) ...................................................... ¥ 39,726 ¥ 36,161 ¥ (34,035) $ 371,271 See notes to consolidated financial statements. 49 C o n s o l i d a t e d S t a t e m e n t s o f S h a r e h o l d e r s ’ E q u i t y O M R O N C o r p o r a t i o n a n d S u b s i d i a r i e s Y e a r s e n d e d M a r c h 3 1 , 2 0 0 5 , 2 0 0 4 a n d 2 0 0 3 Millions of yen Number of common shares issued Common stock Additional paid-in capital Legal reserve Retained earnings Accumulated other comprehensive income (loss) Treasury stock 249,109,236 ¥ 64,082 ¥ 98,705 ¥ 7,660 ¥ 155,069 ¥ (25,363) ¥ (1,919) (41) 511 (2,455) 41 (32) (34,546) (10,218) 116 249,109,236 64,082 98,705 7,619 153,134 (59,909) (12,021) (169) 26,811 (4,808) 169 (10) 9,350 (8,411) 168 249,109,236 64,082 98,705 7,450 175,296 (50,559) (20,264) 30,176 (5,713) (199) 199 3 19 (1) 9,550 (3,065) 16 1 105 (9) Balance, April 1, 2002 .............................. Net income .......................................... Cash dividends, ¥10 per share ............ Reversal of legal reserve ..................... Other comprehensive loss .................. Acquisition of treasury stock............... Reissuance of treasury stock (Note 9) ............................................ Balance, March 31, 2003 .......................... Net income .......................................... Cash dividends, ¥20 per share ............ Reversal of legal reserve ..................... Other comprehensive income............. Acquisition of treasury stock............... Exercise of stock options .................... Balance, March 31, 2004 .......................... Net income .......................................... Cash dividends, ¥24 per share ............ Transfer to legal reserve...................... Other comprehensive income............. Acquisition of treasury stock .............. Sale of treasury stock ......................... Exercise of stock options .................... Balance, March 31, 2005 .......................... Conversion of convertible bonds ........ 12,136 18 249,121,372 ¥ 64,100 ¥ 98,726 ¥ 7,649 ¥ 199,551 ¥ (41,009) ¥ (23,207) Balance, March 31, 2004............................................... Net income............................................................... Cash dividends, $0.22 per share.............................. Transfer to legal reserve .......................................... Other comprehensive income ................................. Acquisition of treasury stock ................................... Sale of treasury stock .............................................. Conversion of convertible bonds............................. 168 Exercise of stock options......................................... Balance, March 31, 2005............................................... See notes to consolidated financial statements. Thousands of U.S. dollars (Note 2) Common stock Additional paid-in capital Legal reserve Retained earnings Accumulated other comprehensive income (loss) Treasury stock $598,897 $922,477 $69,626 $1,638,280 $(472,514) $(189,383) 282,019 (53,393) (1,860) 1,860 28 178 (9) 89,252 (28,645) 150 9 981 (84) $599,065 $922,674 $71,486 $1,864,962 $(383,262) $(216,888) 50 C o n s o l i d a t e d S t a t e m e n t s o f C a s h F l o w s O M R O N C o r p o r a t i o n a n d S u b s i d i a r i e s Y e a r s e n d e d M a r c h 3 1 , 2 0 0 5 , 2 0 0 4 a n d 2 0 0 3 Operating Activities: Net income ........................................................................................ Adjustments to reconcile net income to net 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 ............................................................................ Equity in loss (earnings) of affiliates ............................................... Net loss (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 current liabilities........................... Other, net ........................................................................................ Millions of yen Thousands of U.S. dollars (Note 2) 2005 2004 2003 2005 ¥ 30,176 ¥ 26,811 ¥ 511 $ 282,019 28,642 27,662 29,676 267,682 918 614 (987) 366 140 1,956 1,715 264 1,483 — (2,762) (1,964) 934 (4,908) 2,423 2,114 (48) 479 41 (1,039) 2,413 0 5,016 7,235 411 (92) 494 (10,853) 4,105 891 10,976 6,015 (52) 174 11 4,231 1,221 2,269 465 (1,087) (3,915) 285 59 (1,550) 1,363 (1,918) 214 9,770 232 130 (113) 8,579 5,738 (9,224) 3,421 1,308 18,280 16,028 2,467 13,860 — (25,813) (18,355) 8,729 (45,869) 22,645 19,757 (449) Total adjustments ........................................................................... 30,900 53,876 41,343 288,784 Net cash provided by operating activities................................... 61,076 80,687 41,854 570,803 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 in leasehold deposits ......................................................... Proceeds from sales of property, plant and equipment .................... Acquisition of minority interests ........................................................ Increase in investment in and loans to affiliates................................ Proceeds from sale of business entities, net..................................... Payment for acquisition of business entities, net.............................. 1,867 (267) (38,579) 221 4,343 (515) (1,233) (1,111) (776) 1,894 (1,617) (38,115) 312 4,808 (1,738) — (365) 337 1,388 (739) (34,454) 592 1,641 (101) — 1,450 (410) 17,449 (2,495) (360,551) 2,065 40,589 (4,813) (11,523) (10,383) (7,252) Net cash used in investing activities........................................... (36,050) (34,484) (30,633) (336,914) Financing Activities: Net borrowings (repayments) of short-term bank loans.................... Proceeds from issuance of long-term debt ....................................... Repayments of long-term debt .......................................................... Dividends paid by the Company ........................................................ Dividends paid to minority interests .................................................. Acquisition of treasury stock.............................................................. Sale of treasury stock ......................................................................... Exercise of stock options ................................................................... (3,860) 1,924 (30,238) (5,611) (59) (2,954) 19 95 (4,842) 1,011 (13,093) (2,792) (150) (8,411) — 158 2,909 10,358 (1,960) (2,855) (230) (10,218) — — (36,075) 17,981 (282,598) (52,439) (551) (27,607) 178 888 Net cash used in financing activities .......................................... Effect of Exchange Rate Changes on Cash and Cash Equivalents........... Net Increase (Decrease) in Cash and Cash Equivalents........................... Cash and Cash Equivalents at Beginning of the Year .............................. Cash and Cash Equivalents at End of the Year........................................ (40,684) 1,218 (14,440) 95,059 ¥ 80,619 (28,119) (2,944) 15,140 79,919 ¥ 95,059 (1,996) (85) 9,140 70,779 ¥ 79,919 (380,223) 11,381 (134,953) 888,402 $ 753,449 See notes to consolidated financial statements. 51 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s O M R O N C o r p o r a t i o n a n d S u b s i d i a r i e s 1. Summary of Significant Accounting Policies Nature of Operations Certain reclassifications have been made to amounts previ- OMRON Corporation (the “Company”) is a multinational manufac- ously reported in order to conform to 2005 classifications. turer of automation components, equipment and systems with advanced computer, communications and control technologies. Principles of Consolidation The Company conducts business in over 30 countries around the The consolidated financial statements include the accounts of world and strategically manages its worldwide operations the Company and its subsidiaries (together the “Companies”). through 5 regional management centers in Japan, North America, All significant intercompany accounts and transactions have Europe, Asia-Pacific and China. Products, classified by type and been eliminated. market, are organized into five internal companies and one busi- Investments in which the Companies have a 20% to 50% ness development group, as described below. interest (affiliates) are accounted for using the equity method. Industrial Automation Business manufactures and sells control components and systems including programmable logic Use of Estimates controllers, sensors and switches used in automatic systems in The preparation of consolidated financial statements in conformi- industry. In the global market, the Company offers many services, ty with accounting principles generally accepted in the United such as those involving labor-saving automation, environmental States of America requires management to make estimates and protection, safety improvement, and inspection-automization assumptions that affect the reported amounts of assets and liabil- solutions for highly developed production systems. ities and disclosure of contingent assets and liabilities at the date Electronic Components Business manufactures and sells electric and electronic components found in such consumer of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. goods as home appliances as well as such business equipment Actual results could differ from those estimates. as telephone systems, vending machines, and office equipment. Automotive Electronic Components Business develops and produces automotive electronic components and other com- Cash Equivalents Cash equivalents consist of highly liquid investments with original ponents for automobiles and automotive electronic components maturities of three months or less, including time deposits, com- manufacturers throughout the world. mercial paper, securities purchased with resale agreements and Social Systems Solutions Business encompasses the sale of automated teller machines and card authorization terminals money market instruments. mainly for the domestic markets. Passing gates and automated Allowance for Doubtful Receivables ticket machines and electronic panels and terminal displays for An allowance for doubtful receivables is established in amounts traffic information and monitoring purposes are also supplied for considered to be appropriate based primarily upon the the domestic market. Companies’ past credit loss experience and an evaluation of Healthcare Business sells blood pressure monitors, digital thermometers, body-fat monitors, nebulizers and infra-red thera- py devices aimed at both the consumer and institutional markets. Business Development Group consists of businesses with high growth potential. The group provides the peripheral equip- potential losses in the receivables outstanding. Marketable Securities and Investments The Companies classify all of their marketable debt and equity securities as available-for-sale. Available-for-sale securities are ment used in office automation equipment, modems, terminal carried at market value with the corresponding recognition of adapters, scanners and uninterrupted power supplies. net unrealized holding gains and losses as a separate compo- Basis of Financial Statements nent of accumulated other comprehensive income, net of relat- ed taxes, until recognized. If necessary, individual securities The accompanying consolidated financial statements, stated in classified as available-for-sale are reduced to fair value by a Japanese yen, include certain adjustments, not recorded on the charge to income in the period in which the decline is deemed books of account, to present these statements in accordance to be other than temporary. The Companies principally consider with accounting principles generally accepted in the United that an other-than-temporary impairment has occurred when the States of America, except for the omission of segment informa- decline in fair value below the carrying value continues for over tion required by Statement of Financial Accounting Standards nine consecutive months. The Companies may also consider (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise other factors, including their ability and intent to hold the appli- and Related Information.” cable investment securities until maturity, and the severity of 52 the decline in fair value. Shipping and Handling Charges Other investments are stated at the lower of cost or estimat- Shipping and handling charges were ¥7,720 million ($72,150 ed net realizable value. The cost of securities sold is determined thousand), ¥8,061 million and ¥7,300 million for the years ended on the average cost basis. Inventories March 31, 2005, 2004 and 2003, respectively, and are included in selling, general and administrative expenses in the consolidated statements of operations. Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market. Termination and Retirement Benefits Property, Plant and Equipment Termination and retirement benefits are accounted for in accor- dance with SFAS No. 87, “Employers’ Accounting for Pensions” Property, plant and equipment is stated at cost. Depreciation of and are disclosed in accordance with SFAS No. 132 (revised property, plant and equipment has been computed principally on 2003), “Employers’ Disclosures about Pensions and Other a declining balance method based upon the estimated useful Postretirement Benefits.” The provision for termination and retire- lives of the assets. The estimated useful lives primarily range ment benefits includes amounts for directors and corporate audi- from 3 to 50 years for buildings and from 2 to 15 years for tors of the Company. machinery and equipment. Income Taxes Goodwill and Other Intangible Assets Deferred income taxes reflect the tax consequences on future The Company accounts for its goodwill and other intangible assets years of differences between the tax bases of assets and liabili- in accordance with SFAS No. 142, “Goodwill and Other Intangible ties and their financial reporting amounts. Future tax benefits, Assets,” which requires that goodwill no longer be amortized, but such as net operating loss carryforwards and tax credit carryfor- instead tested for impairment at least annually. SFAS No. 142 also wards, are recognized to the extent that such benefits are more requires recognized intangible assets be amortized over their likely than not to be realized. The effect on deferred tax assets respective estimated useful lives and reviewed for impairment. and liabilities of a change in tax rates is recognized in income in Any recognized intangible asset determined to have an indefinite the period that includes the enactment date. useful life is not to be amortized, but instead tested for impair- ment until its life is determined to no longer be indefinite. Product Warranties Long-Lived Assets A liability for the estimated warranty related cost is established at the time revenue is recognized and is included in other cur- Long-lived assets are reviewed for impairment whenever events rent liabilities. The liability is established using historical infor- or changes in circumstances indicate that the carrying amount of mation including the nature, frequency, and average cost of an asset may not be recoverable. Recoverability of assets to be warranty claims. held and used is measured by a comparison of the carrying amount of an asset to undiscounted cash flows expected to be Derivatives generated by the asset. If such assets are considered to be Derivative instruments and hedging activities are accounted for in impaired, the impairment to be recognized is measured by the accordance with SFAS No. 133, “Accounting for Derivative amount by which the carrying amount of the assets exceed the Instruments and Hedging Activities,” SFAS No. 138, “Accounting fair value. Assets to be disposed of other than by sale are consid- for Certain Derivative Instruments and Certain Hedging Activities, ered held and used until disposed of. Assets to be disposed of by an amendment of FASB Statement No. 133,” and SFAS No. 149, sale are reported at the lower of the carrying amount or fair value “Amendment of Statement 133 on Derivative Instruments and less costs to sell. Advertising Costs Hedging Activities.” These standards establish accounting and reporting standards for derivative instruments and for hedging activities, and require that an entity recognize all derivatives as Advertising costs are charged to earnings as incurred. Advertising either assets or liabilities in the balance sheet and measure those expense was ¥8,718 million ($81,477 thousand), ¥8,391 million instruments at fair value. and ¥7,196 million for the years ended March 31, 2005, 2004 and For foreign exchange forward contracts and foreign currency 2003, respectively. 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 “for- 53 eign currency” hedge). The Companies formally document all rela- Revenue Recognition tionships between hedging instruments and hedged items, as The Companies recognize revenue when persuasive evidence of well as its risk management objective and strategy for undertaking an arrangement exists, delivery has occurred and title and risk of various hedge transactions. This process includes linking all deriva- loss has transferred, the sales price is fixed or determinable, and tives that are designated as cash flow or foreign currency hedges collectibility is probable. These criteria are met when products are to specific assets and liabilities on the consolidated balance sheet received by customers or services are performed. or to specific firm commitments or forecasted transactions. Based on the Companies’ policy, all foreign exchange forward contracts Stock-Based Compensation and foreign currency options entered into must be highly effective The Companies account for stock-based awards to employees in offsetting changes in cash flows of hedged items. using the intrinsic value method in accordance with APB Opinion Changes in fair value of a derivative that is highly effective No. 25, “Accounting for Stock Issued to Employees,” including and that is designated and qualifies as a cash flow or foreign cur- related interpretations, and follow the disclosure only provision of rency hedge are recorded in other comprehensive income (loss), SFAS No. 123, “Accounting for Stock Based Compensation.” until earnings are affected by the variability in cash flows of the At March 31, 2005, the Company had a stock-based employ- designated hedged item. Cash Dividends ee 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 Cash dividends are reflected in the consolidated financial state- had an exercise price exceeding the market value of the underly- ments at proposed amounts in the year to which they are applica- ing common stock on the date of grant. The following table illus- ble, even though payment is not approved by shareholders until trates the effect on net income and net income per share if the the annual general meeting of shareholders held early in the fol- Company had applied the fair value recognition provisions of lowing fiscal year. Resulting dividends payable are included in SFAS No. 123, to stock-based employee compensation. Other current liabilities in the consolidated balance sheets. Millions of yen (except per share data) 2005 2004 2003 Thousands of U.S. dollars (except per share data) 2005 Net income, as reported ................................................................... ¥ 30,176 ¥ 26,811 ¥ 511 $ 282,019 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards ....... 97 106 Pro forma net income ....................................................................... ¥ 30,079 ¥ 26,705 91 ¥ 420 907 $ 281,112 Net income per share (yen and U.S. dollars): Basic — as reported ...................................................................... ¥ 126.5 ¥ 110.7 ¥ 2.1 $ Basic — pro forma......................................................................... Diluted — as reported ................................................................... Diluted — pro forma ...................................................................... 126.1 124.8 124.4 110.2 107.5 107.1 1.7 2.1 1.7 1.18 1.18 1.17 1.16 New Accounting Standards fair value. In April 2005, the Securities and Exchange Commission Share Based Payment — In December 2004, the FASB issued announced a deferral of the effective date of SFAS No. 123 SFAS No. 123 (revised 2004), “Share Based Payment”. This state- (revised 2004). Under this deferral, SFAS No. 123 (revised 2004) is ment is applicable to awards issued after the effective date and all required to be adopted as of the beginning of the Companies’ first awards prior to the effective date that remain unvested on the annual reporting period that begins after June 15, 2005. The effective date and requires that all equity-based compensation be Companies do not expect SFAS No. 123 (revised 2004) to have recorded in the consolidated financial statements at the grant date material effect on the consolidated financial statements. 54 2. Translation into United States Dollars The consolidated financial statements are stated in Japanese yen, the approximate rate of exchange at March 31, 2005. Such trans- the currency of the country in which the Company is incorporated lations should not be construed as representations that the and operates. The translation of Japanese yen amounts into U.S. Japanese yen amounts could be converted into U.S. dollars at the dollar amounts is included solely for the convenience of readers above or any other rate. outside of Japan and has been made at the rate of ¥107 to $1, 3. Inventories Inventories at March 31 consisted of: Finished products ................................................................................................... ¥ 38,893 ¥ 34,983 $ 363,486 Work-in-process ...................................................................................................... Materials and supplies ............................................................................................ 10,882 18,810 15,725 19,633 101,701 175,794 Total ..................................................................................................................... ¥ 68,585 ¥ 70,341 $ 640,981 Millions of yen Thousands of U.S. dollars 2005 2004 2005 4. Marketable Securities and Investments Available-for-sale securities are recorded at fair value, with unrealized gains and losses excluded from income and reported in other com- prehensive income (loss), net of tax. Cost, gross unrealized holding gains and losses and fair value of securities, excluding equity securities with no readily determinable pub- lic market value, by major security type at March 31 were as follows: Millions of yen 2005 2004 Cost (*) Gross unrealized gains Gross unrealized losses Fair value Cost (*) Gross unrealized gains Gross unrealized losses Fair value Available-for-sale securities: Debt securities ................ ¥ 1,064 ¥ 237 ¥ — ¥ 1,301 ¥ 62 ¥ — ¥ — ¥ 62 Equity securities.............. 24,600 19,584 (381) 43,803 26,949 18,915 (81) 45,783 Total available-for-sale securities ..................... ¥ 25,664 ¥ 19,821 ¥ (381) ¥ 45,104 ¥ 27,011 ¥ 18,915 ¥ (81) ¥ 45,845 Thousands of U.S. dollars 2005 Cost (*) Gross unrealized gains Gross unrealized losses Fair value Available-for-sale securities: Debt securities ............................................................................................. $ 9,944 $ 2,215 $ — $ 12,159 Equity securities........................................................................................... 229,907 183,028 (3,561) 409,374 Total available-for-sale securities ................................................................. $ 239,851 $ 185,243 $ (3,561) $ 421,533 (*) Cost represents amortized cost for debt securities and acquisition cost for equity securities. 55 Maturities of debt securities as available-for-sale at March 31 were as follows: Millions of yen Thousands of U.S. dollars 2005 2004 2005 Cost Fair Value Cost Fair Value Cost Fair Value Due after one year through five years......................... ¥ 1,064 ¥ 1,301 ¥ 62 ¥ 62 $ 9,944 $ 12,159 Gross unrealized holding losses and fair value of certain available-for-sale, equity securities, aggregated by length of time that such secu- rities have been in a continuous unrealized loss position at March 31 were as follows: Millions of yen Thousands of U.S. dollars Less than 12 months 2005 2004 2005 Fair Value Gross Unrealized Holding losses Fair Value Gross Unrealized Holding losses Fair Value Gross Unrealized Holding losses Available-for-sale securities: Equity securities....................................................... ¥ 3,671 ¥ (381) ¥ 404 ¥ (81) $ 34,308 $ (3,561) There were no securities which have been in a continuous unreal- and 2004, respectively. ized loss position over 12 months at March 31, 2005. Proceeds from sales of available-for-sale securities were ¥1,638 Aggregate cost of non-marketable equity securities accounted million ($15,308 thousand), ¥1,833 million and ¥1,240 million for the for under the cost method totaled ¥4,660 million ($43,551 thou- years ended March 31, 2005, 2004 and 2003, respectively. Gross sand) and ¥4,486 million at March 31, 2005 and 2004, respective- realized gains on sales were ¥788 million ($7,364 thousand), ¥1,120 ly. Investments with an aggregate cost of ¥4,593 million ($42,925 million and ¥78 million for the years ended March 31, 2005, 2004 thousand) were not evaluated for impairment because (a) the and 2003, respectively. Companies did not estimate the fair value of those investments Gross realized losses on sales were ¥0 million ($0 thousand), as it was not practicable to estimate the fair value of the invest- ¥82 million and ¥1,218 million for the years ended March 31, ment and (b) the Companies did not identify any events or 2005, 2004 and 2003, respectively. changes in circumstances that might have had significant The Company entered into a joint venture agreement with adverse effect on the fair value of those investments. Hitachi, Ltd. on May 11, 2004. In accordance with the agreement, Losses on impairment of available-for-sale securities recog- the Company transferred Automated Teller Machines and other nized to reflect the decline in market value considered to be other information equipment businesses to the joint venture called than temporary were ¥22 million ($206 thousand), ¥847 million Hitachi-Omron Terminal Solutions Corp. (“HOTS”) and was given and ¥1,194 million for the years ended March 31, 2005, 2004 and a 45% interest in exchange for the transferred assets and liabili- 2003, respectively. ties on October 1, 2004. Total assets and net assets transferred Net unrealized holding gains (losses) on available-for-sale secu- to HOTS as of October 1, 2004 were ¥22,443 million ($209,748 rities, net of related taxes, increased by ¥822 million ($7,682 thou- thousand) and ¥16,270 million ($152,056 thousand), respectively. sand) and by ¥11,803 million for the years ended March 31, 2005 56 5. Goodwill and Other Intangible Assets The components of acquired intangible assets excluding goodwill at March 31, 2005 and 2004 were as follows: Millions of yen 2005 2004 Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization Intangible assets subject to amortization: Software.................................................................................... ¥ 27,535 ¥ 16,150 ¥ 24,531 ¥ 14,392 Other ......................................................................................... 4,113 3,277 4,001 2,952 Total .......................................................................................... ¥ 31,648 ¥ 19,427 ¥ 28,532 ¥ 17,344 Thousands of U.S. dollars 2005 Gross Amount Accumulated Amortization Intangible assets subject to amortization: Software......................................................................................................................................... $ 257,336 $ 150,935 Other .............................................................................................................................................. 38,439 30,626 Total ............................................................................................................................................... $ 295,775 $ 181,561 Intangible assets not subject to amortization at March 31, 2005 ¥4,625 million and ¥4,544 million for the years ended March 31, and 2004 were immaterial. Aggregate amortization expense relat- 2005, 2004 and 2003, respectively. ed to intangible assets was ¥4,827 million ($45,112 thousand), Estimated amortization expense for the next five years ending March 31 is as follows: Years ending March 31 Millions of yen Thousands of U.S. dollars 2006 .............................................................................................................................................. ¥ 3,819 $ 35,692 2007 .............................................................................................................................................. 2008 .............................................................................................................................................. 2009 .............................................................................................................................................. 2010 .............................................................................................................................................. 3,389 2,520 1,718 587 31,673 23,551 16,056 5,486 The carrying amount of goodwill at March 31, 2005 and 2004 and changes in its carrying amount for the years ended March 31, 2005 and 2004 were immaterial. 57 6. Bank Loans and Long-Term Debt The weighted average annual interest rates of short-term bank loans at March 31, 2005 and 2004 were 1.0% and 1.2%, respectively. Long-term debt at March 31 consisted of the following: Millions of yen Thousands of U.S. dollars 2005 2004 2005 Unsecured debt: Convertible bonds at 1.7%, due in September 2004 ........................................ ¥ — ¥ 29,735 $ — Loans from banks and other financial institutions, generally at 0.4% to 3.8%, due on various dates through 2006....................................... Other ...................................................................................................................... Total.................................................................................................................... Less portion due within one year .......................................................................... 10,779 1,556 12,335 10,503 10,986 522 41,243 30,036 100,738 14,542 115,280 98,159 Long-term debt, less current portion .................................................................... ¥ 1,832 ¥ 11,207 $ 17,121 The annual maturities of long-term debt outstanding at March 31, 2005 were as follows: Years ending March 31 Millions of yen Thousands of U.S. dollars 2006 .............................................................................................................................................. ¥ 10,503 $ 98,159 2007 .............................................................................................................................................. 2008 .............................................................................................................................................. 2009 .............................................................................................................................................. 2010 .............................................................................................................................................. Thereafter....................................................................................................................................... 697 535 191 136 273 6,514 5,000 1,785 1,271 2,551 Total ............................................................................................................................................... ¥ 12,335 $ 115,280 As is customary in Japan, additional security must be given if sidiaries maintain deposit balances with banks with which they requested by a lending bank, and banks have the right to offset have short- or long-term borrowings. Such deposit balances are cash deposited with them against any debt or obligation that not legally or contractually restricted as to withdrawal. becomes due and, in case of default and certain other specified Total interest cost incurred and charged to expense for the events, against all debt payable to the banks. The Companies years ended March 31, 2005, 2004 and 2003 amounted to ¥1,083 have never received any such requests. million ($10,121 thousand), ¥1,217 million and ¥1,430 million, As is customary in Japan, the Company and domestic sub- respectively. 58 7. Leases The Companies do not have any material capital lease agree- expire generally are expected to be renewed or replaced by other ments. leases. At March 31, 2005, future minimum rental payments appli- The Companies have operating lease agreements primarily cable to non-cancelable leases having initial or remaining non-can- involving offices and equipment for varying periods. Leases that celable lease terms in excess of one year were as follows: Years ending March 31 Millions of yen Thousands of U.S. dollars 2006 .............................................................................................................................................. ¥ 2,799 $ 26,159 2007 .............................................................................................................................................. 2008 .............................................................................................................................................. 2009 .............................................................................................................................................. 2010 .............................................................................................................................................. 2,609 2,292 1,748 1,640 24,383 21,421 16,336 15,327 Thereafter....................................................................................................................................... 14,421 134,776 Total ............................................................................................................................................... ¥ 25,509 $ 238,402 Rental expense amounted to ¥11,151 million ($104,215 thousand), ¥11,059 million and ¥12,818 million for the years ended March 31, 2005, 2004 and 2003, respectively. 8. Termination and Retirement Benefits The Company and its domestic subsidiaries sponsor termination The process of separating the substitutional portion from the and retirement benefit plans which cover substantially all domestic corporate portion occurs in four phases. EITF Issue 03-2 requires employees. Benefits are based on the employee’s years of service, that the separation process should be accounted for upon com- with some plans considering compensation and certain other fac- pletion of the transfer to the government of the substitutional por- tors. If the termination is involuntary, the employee is usually enti- tion of the benefit obligation and related plan assets as the culmi- tled to greater payments than in the case of voluntary termination. nation of a series of steps in a single settlement transaction. The Company and its domestic subsidiaries fund a portion of Under the consensus reached, at the time the assets are trans- the obligations under these plans. The general funding policy is to ferred to the government in an amount sufficient to complete the contribute amounts computed in accordance with actuarial meth- separation process, the transaction is considered to be complete ods acceptable under Japanese tax law. The Company and sub- and the elimination of the entire substitutional portion of the ben- stantially all domestic subsidiaries have a contributory termination efit obligation would be accounted for as a settlement at that and retirement plan which is interrelated with the Japanese gov- time. The difference between the obligation settled and the ernment social welfare program and consists of a substitutional assets transferred to the government should be accounted for as portion requiring employee and employer contributions plus an a subsidy from the government. additional portion established by the employers. The Company received the Japanese government’s approval of Periodic pension benefits required under the substitutional por- exemption from the obligation for benefits related to future tion are prescribed by the Japanese Ministry of Health, Labour and employee service in April, 2004 and past employee service in Welfare, commence at age 65 and continue until the death of the May, 2005 with respect to the substitutional portion of its pension surviving spouse. Benefits under the additional portion are usually plan. The effect on the consolidated financial statements of the paid in a lump sum at the earlier of termination or retirement future transfer of the assets and liabilities related to the substitu- although periodic payments are available under certain conditions. tional portion of its pension plan has not yet been determined. In January 2003, Emerging Issues Task Force (“EITF”) reached Effective April 2004, the Company introduced an amended a final consensus on Issue 03-2, “Accounting for the Transfer to plan to establish a new formula for determining pension bene- the Japanese Government of the Substitutional Portion of fits including a “point-based benefits system,” under which ben- Employee Pension Fund Liabilities.” EITF Issue 03-2 addresses efits are calculated based on accumulated points allocated to accounting for a transfer to the Japanese government of a substi- employees each year according to their job classification and tutional portion of an Employees’ Pension Fund plan. performance. 59 Obligations and Funded status The following table is the reconciliation of beginning and ending balances of the benefit obligations and the fair value of the plan assets Millions of yen Thousands of U.S. dollars 2005 2004 2005 Change in benefit obligation: Benefit obligation at beginning of year ............................................................... ¥ 259,647 ¥ 248,378 $ 2,426,607 Service cost, less employees’ contributions ...................................................... Interest cost......................................................................................................... Employees’ contributions.................................................................................... Plan amendments ............................................................................................... Actuarial loss (gain) ............................................................................................. Benefits paid ...................................................................................................... Settlement paid ................................................................................................... 5,822 5,022 — (15,546) (3,428) (3,544) (1,023) 7,981 4,968 931 — 2,813 (4,443) (981) 54,411 46,935 — (145,290) (32,037) (33,121) (9,561) Benefit obligation at end of year ..................................................................... ¥ 246,950 ¥ 259,647 $ 2,307,944 Change in plan assets: Fair value of plan assets at beginning of year .................................................... 117,171 105,311 1,095,056 Actual return on plan assets ............................................................................... Employers’ contributions .................................................................................... Employees’ contributions.................................................................................... Benefits paid ....................................................................................................... 1,146 6,348 — (3,544) 8,368 5,789 931 (3,228) 10,710 59,327 — (33,121) Fair value of plan assets at end of year........................................................... ¥ 121,121 ¥ 117,171 $ 1,131,972 Funded status ......................................................................................................... Unrecognized net actuarial loss.............................................................................. Unrecognized prior service benefit......................................................................... (125,829) 107,487 (17,812) (142,476) 108,395 (3,603) (1,175,972) 1,004,551 (166,467) Net amount recognized ................................................................................... ¥ (36,154) ¥ (37,684) $ (337,888) Amounts recognized in the consolidated balance sheets: Accrued liability ................................................................................................... ¥ (107,278) ¥ (115,784) $ (1,002,598) Accumulated other comprehensive loss (gross of tax) ...................................... 71,124 78,100 664,710 Net amount recognized ................................................................................... Accumulated benefit obligation at end of year ........................................................ ¥ (36,154) ¥ (37,684) $ (337,888) ¥ 228,399 ¥ 232,955 $ 2,134,570 Components of Net Periodic Benefit Cost The expense recorded for the contributory termination and retirement plans included the following components for the years ended March 31: Millions of yen Thousands of U.S. dollars 2005 2004 2003 2005 Service cost, less employees’ contributions................................ ¥ 5,822 ¥ 7,981 ¥ 9,611 $ 54,411 Interest cost on projected benefit obligation............................... Expected return on plan assets.................................................... Amortization ................................................................................. 5,022 (4,301) 2,565 4,968 (4,210) 3,530 5,804 (4,072) 2,742 46,935 (40,196) 23,972 Net periodic benefit cost .......................................................... ¥ 9,108 ¥ 12,269 ¥ 14,085 $ 85,122 The provisions of SFAS No. 87, “Employers’ Accounting for assets and accrued pension liabilities. The net change in the mini- Pensions,” require the recognition of an additional minimum pen- mum pension liability is reflected as other comprehensive income, sion liability for each defined benefit plan to the extent that a plan’s net of related tax effect. The unrecognized net actuarial loss and accumulated benefit obligation exceeds the fair value of plan the prior service benefit are being amortized over 15 years. 60 Measurement Date The Company and certain of its domestic subsidiaries use a December 31 measurement date for the majority of their plans. Assumptions Weighted-average assumptions used to determine benefit obligations at March 31, 2005 and 2004 are as follows: Discount rate ..................................................................................................................................... Compensation increase rate ............................................................................................................. 2005 2.0% 2.0 2004 2.0% 2.0 Weighted-average assumptions used to determine net periodic benefit cost for the years ended March 31,2005, 2004 and 2003 are as follows: Discount rate........................................................................................................... Compensation increase rate ................................................................................... Expected long-term rate of return on plan assets.................................................. 2005 2.0% 2.0 3.0 2004 2.0% 2.0 3.0 2003 2.5% 3.0 4.0 The expected return on plan assets is determined by estimating the future rate of return on each category of plan assets considering actual historical returns and current economic trends and conditions. Plan assets The Company’s pension plan weighted-average asset allocation by asset category is as follows: Asset Category Cash ................................................................................................................................................... Equity Securities................................................................................................................................ Debt Securities .................................................................................................................................. Life insurance company general accounts ....................................................................................... Other.................................................................................................................................................. 2005 20.0% 15.9 42.4 10.3 11.4 2004 14.4% 25.0 43.5 10.8 6.3 Total ................................................................................................................................................... 100.0% 100.0% The Company investment policies are designed to ensure ade- and actual return of invested plan assets on an annual basis to quate plan assets are available to provide future payments of determine if such differences necessitate a revision in the model pension benefits to eligible participants. Taking into account the portfolio. The Company revises the model portfolio when and to expected long-term rate of return on plan assets, the Company the extent considered necessary to achieve the expected long- formulates a model portfolio comprised of the optimal combina- term rate of return on plan assets. tion of equity and debt securities in order to produce a total Equity securities include common stock of the Company in return that will match the expected return on a mid-term to long- the amounts of ¥10 million ($93 thousand) (0.01% of total domes- term basis. tic plan assets) and ¥53 million (0.04% of total domestic plan The Company evaluates the gap between expected return assets) at December 31, 2004 and 2003, respectively. 61 Cash Flows Contributions plans in the year ending March 31, 2006. Estimated Future Benefit Payments The Company expects to contribute ¥5,910 million ($55,234 The following benefit payments, which reflect expected thousand) to its domestic termination and retirement benefit future service, as appropriate, are expected to be paid: Years ending March 31 Millions of yen Thousands of U.S. dollars 2006 ............................................................................................................................................... ¥ 5,419 $ 50,645 2007 ............................................................................................................................................... 2008 ............................................................................................................................................... 2009 ............................................................................................................................................... 2010 ............................................................................................................................................... 6,104 7,339 8,221 9,015 57,047 68,589 76,832 84,252 2011-2015 ...................................................................................................................................... 49,463 462,271 Certain employees of European subsidiaries are covered by a approval by the shareholders before payment. The Companies defined benefit pension plan. The projected benefit obligation for record provisions for termination benefits sufficient to state the the plan and related fair value of plan assets were ¥1,979 million liability equal to the plans’ vested benefits, which exceed the ($18,495 thousand) and ¥1,599 million ($14,944 thousand), plans’ accumulated benefit obligations. respectively, at March 31, 2005 and ¥1,285 million and ¥1,125 The aggregate liability for the termination plans excluding the million, respectively, at March 31, 2004. funded contributory termination and retirement plan in Japan, as The Companies also have unfunded noncontributory termi- of March 31, 2005 and 2004 was ¥4,710 million ($44,019 thou- nation plans administered by the Companies. These plans pro- sand) and ¥3,954 million, respectively. The aggregate net periodic vide lump-sum termination benefits and are paid at the earlier of benefit cost for such plans for the years ended March 31, 2005, the employee’s termination or mandatory retirement age, except 2004 and 2003 was ¥1,241 million ($11,598 thousand), ¥1,688 for payments to directors and corporate auditors which require million and ¥890 million, respectively. 9. Shareholders’ Equity Japanese companies are subject to the Japanese Commercial tion of capital surplus and legal reserve to the common stock by Code (the “Code”) to which various amendments have become resolution of the Board of Directors. effective since October 1, 2001. The revised Code eliminated restrictions on the repurchase The Code was revised whereby common stock par value and use of treasury stock allowing Japanese companies to repur- was eliminated resulting in all shares being recorded with no par chase treasury stock by a resolution of the shareholders at the value and at least 50% of the issue price of new shares is general shareholders meeting or by resolution of the Board of required to be recorded as common stock and the remaining net Directors provided it is stipulated in the articles of incorporation proceeds as additional paid-in capital, which is included in capital and to dispose of such treasury stock by resolution of the Board surplus. The Code permits Japanese companies, upon approval of Directors. The repurchased amount of treasury stock cannot of the Board of Directors, to issue shares to existing shareholders exceed the amount available for future dividends plus amount of without consideration as a stock split. Such issuance of shares common stock, capital surplus or legal reserve to be reduced in generally does not give rise to changes within the shareholders’ the case where such reduction was resolved at the general share- accounts. holders meeting. The revised Code also provides that an amount at least equal The Code permits companies to transfer a portion of addition- to 10% of the aggregate amount of cash dividends and certain al paid-in capital and legal reserve to stated capital by resolution of other appropriations of retained earnings associated with cash the Board of Directors. The Code also permits companies to trans- outlays applicable to each period shall be appropriated as a legal fer a portion of unappropriated retained earnings, available for divi- reserve (a component of retained earnings) until such reserve and dends, to stated capital by resolution of the shareholders. capital surplus equals 25% of common stock. The amount of Dividends are approved by the shareholders at a meeting total capital surplus and legal reserve that exceeds 25% of the held subsequent to the fiscal year to which the dividends are common stock may be available for dividends by resolution of the applicable. Semiannual interim dividends may also be paid upon shareholders. In addition, the Code permits the transfer of a por- resolution of the Board of Directors, subject to certain limitations 62 imposed by the Code. on the effective date of acquisition. The loss was charged directly Under the Code, the amount legally available for dividends is to retained earnings. based on retained earnings as recorded in the books of the Company for Japanese financial reporting purposes. At March 31, Stock Options 2005, retained earnings amounting to ¥41,432 million ($387,215 The Company has authorized the grant of options to purchase thousand) were available for future dividends subject to legal common stock of the Company to certain directors and officers reserve requirements. of the Company under a fixed stock option plan. All of the author- In 2003, the Company acquired the minority interests of cer- ized shares available for grant have been granted. tain domestic subsidiaries in exchange for the Company’s com- Under the above plan, the exercise price of each option mon stock previously held in its treasury. The Company reissued exceeded the market price of the Company’s common stock on 52,275 shares of treasury stock to acquire minority interests with the date of grant and the options expire 5 years after the date of book values and fair values equal to ¥84 million. These transac- the grant. Generally, options become fully vested and exercisable tions resulted in a combined loss on reissuance of treasury stock after 3 years. A summary of the Company’s fixed stock option of ¥32 million, representing the aggregate difference between the plan activity and related information is as follows: cost of shares repurchased and the fair value of shares reissued Fixed options Shares Weighted-average exercise price Yen Weighted-average fair value of options granted during the year Options outstanding at April 1, 2002............................................................... Granted......................................................................................................... Options outstanding at March 31, 2003.......................................................... Granted......................................................................................................... Exercised ..................................................................................................... 695,000 276,000 971,000 204,000 (86,000) Options outstanding at March 31, 2004.......................................................... 1,089,000 Granted......................................................................................................... Exercised ..................................................................................................... Exercised ..................................................................................................... Expired ......................................................................................................... 204,000 (46,000) (5,000) (11,000) ¥ 2,446 1,913 2,294 2,435 1,839 2,357 2,580 1,839 1,913 1,839 Options outstanding at March 31, 2005.......................................................... 1,231,000 ¥ 2,419 285 736 186 U.S. dollars Weighted-average exercise price Weighted-average fair value of options granted during the year Options outstanding at March 31, 2004....................................................................................... $ 22.03 Granted...................................................................................................................................... Exercised................................................................................................................................... Exercised................................................................................................................................... Expired ...................................................................................................................................... 24.11 17.19 17.88 17.19 Options outstanding at March 31, 2005....................................................................................... $ 22.61 $ 1.74 Options exercisable at March 31, 2003........................................................................................ Options exercisable at March 31, 2004........................................................................................ Options exercisable at March 31, 2005........................................................................................ 63 Yen Weighted-average exercise price ¥ 2,547 ¥ 2,531 ¥ 2,376 Shares 403,000 609,000 823,000 U.S. dollars Shares Weighted-average exercise price Options exercisable at March 31, 2005 ............................................................................................ 823,000 $ 22.21 The following summarizes information about fixed stock options at March 31, 2005: Options outstanding Options exercisable Yen Range of exercise prices ¥ 2,936 2,306 1,913 2,435 2,580 Shares 260,000 292,000 271,000 204,000 204,000 ¥1,913 to ¥2,936 1,231,000 Weighted-average remaining contractual life 0.25 years 1.25 years 2.25 years 3.25 years 4.25 years 2.09 years Yen Weighted-average exercise price ¥ 2,936 2,306 1,913 2,435 2,580 Shares 260,000 292,000 271,000 — — Yen Weighted-average exercise price ¥ 2,936 2,306 1,913 — — ¥ 2,419 823,000 ¥ 2,376 Options outstanding Options exercisable U.S. dollars Range of exercise prices $ 27.44 21.55 17.88 22.76 24.11 Shares 260,000 292,000 271,000 204,000 204,000 $17.88 to $27.44 1,231,000 Weighted-average remaining contractual life 0.25 years 1.25 years 2.25 years 3.25 years 4.25 years 2.09 years U.S. dollars Weighted-average exercise price $ 27.44 21.55 17.88 22.76 24.11 Shares 260,000 292,000 271,000 — — U.S. dollars Weighted-average exercise price $ 27.44 21.55 17.88 — — $ 22.61 823,000 $ 22.21 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.......................................................................................................... 2005 0.628% 10.0 0.783 2004 0.738% 45.0 0.857 2003 0.271% 25.0 0.559 Expected life ........................................................................................................... 3.5 years 3.5 years 3.5 years The Black-Scholes option valuation model used by the Company options have characteristics significantly different from those of was developed for use in estimating the fair value of fully tradable traded options and because changes in the subjective input options, which have no vesting restrictions and are fully transfer- assumptions can materially affect the fair value estimate, the able. In addition, option valuation models require the input of existing models do not necessarily provide a reliable single meas- highly subjective assumptions including the expected stock price ure of the fair value of its stock options. volatility. It is management’s opinion that the Company’s stock 64 10. Other Expenses, net Other expenses, net for the years ended March 31, 2005, 2004 and 2003 consisted of the following: Millions of yen Thousands of U.S. dollars 2005 2004 2003 2005 Business restructuring expenses ................................................. ¥ 1,767 ¥ Equity in loss (earnings) of affiliates............................................. Loss on impairment of investment securities and other assets .... 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................................................................ Net loss (gain) on sales of business entities................................ Voluntary early retirement program ............................................. Other, net...................................................................................... 1,483 366 918 614 (987) — — (457) — (92) 2,413 479 41 (1,039) 494 — (448) ¥ — 59 2,269 $ 16,514 13,860 3,421 11 4,231 1,221 (1,550) 18,968 1,449 8,579 5,738 (9,224) — — (4,271) Total....................................................................................... ¥ 3,704 ¥ 1,848 ¥ 26,658 $ 34,617 The Companies assessed the potential impairment of certain During the year ended March 31, 2003 the Company and long-lived assets in consideration of future alternate uses, includ- most domestic subsidiaries implemented a voluntary early retire- ing disposal by sale. As a result, certain land and buildings, princi- ment program to all employees fulfilling certain conditions such pally idle assets in 2005 and 2003, and dormitories in 2004, were as age and duration of employment. Employees accepting this deemed to be impaired and written down to fair value. The esti- offer received an additional lump sum payment, along with their mated fair value of these assets was primarily determined by previously earned retirement benefits. independent real estate appraisals of land and buildings. 11. Income Taxes The provision for income taxes for the years ended March 31, 2005, 2004 and 2003 consisted of the following: Millions of yen Thousands of U.S. dollars 2005 2004 2003 2005 Current income tax expense ........................................................ ¥ 20,393 ¥ 13,527 ¥ 7,851 $ 190,589 Deferred income tax expenses (benefit), exclusive of the following ......................................................... Change in the valuation allowance............................................... 2,160 (445) 7,135 (27) (5,600) 136 20,187 (4,159) Adjustments of deferred tax assets and liabilities for enacted changes in tax rates .............................................. — 127 1,549 — Total....................................................................................... ¥ 22,108 ¥ 20,762 ¥ 3,936 $ 206,617 65 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: Permanently non-deductible items ..................................................................... Tax credit for research and development expenses........................................... Losses of subsidiaries for which no tax benefit was provided .......................... Tax loss on sale of subsidiary ............................................................................. Difference in subsidiaries’ tax rates .................................................................... Change in the valuation allowance ..................................................................... Effects of enacted change in tax rates ............................................................... Other, net ............................................................................................................ 2005 41.0% 2004 42.0% 2003 42.0% 3.0 (3.4) 1.5 — (0.9) 0.9 — 0.0 1.0 — 1.0 — (0.6) (0.1) 0.3 (0.3) 7.7 — 38.7 (33.0) (14.9) 2.9 32.7 7.1 Effective tax rates ............................................................................................ 42.1% 43.3% 83.2% The Company and its domestic subsidiaries are subject to a num- tive April 1, 2004. Deferred income tax assets and liabilities as of ber of taxes based on income, which in the aggregate resulted in March 31, 2003 and 2004 were measured at appropriate tax rates a normal tax rate of approximately 41.0% in 2005, and 42.0% in considering the period the deferred tax asset or liability would be 2004 and 2003. realized. The effect was an increase in the provision for income An amendment to Japanese tax regulations was enacted taxes of ¥127 million and ¥1,549 million for the year ended March into law on March 31, 2003. As a result of this amendment, the 31, 2004 and 2003, respectively. normal income tax rate was reduced from 42.0% to 41.0% effec- The approximate effect of temporary differences and tax credit and loss carryforwards that gave rise to deferred tax balances at March 31, 2005 and 2004 were as follows: Millions of yen 2005 2004 Deferred tax assets Deferred tax liabilities Deferred tax assets Deferred tax liabilities Inventory valuation ....................................................................... ¥ 2,735 ¥ Accrued bonuses and vacations .................................................. Termination and retirement benefits............................................ Enterprise taxes............................................................................ Intercompany profits .................................................................... Marketable securities ................................................................... Property, plant and equipment..................................................... Allowance for doubtful receivables.............................................. Minimum pension liability adjustment ......................................... Other temporary differences........................................................ Tax credit carryforwards............................................................... Operating loss carryforwards....................................................... Subtotal ........................................................................................ Valuation allowance...................................................................... 5,206 9,493 1,329 2,790 — 1,410 3,005 29,161 12,267 4,411 4,714 76,521 (7,268) — — — — — 7,954 — 42 — 3,814 — — 11,810 — ¥ 3,215 ¥ 5,432 14,942 676 2,349 — 1,683 1,249 32,020 10,641 4,205 6,185 82,597 (7,118) — — — — — 7,721 — 47 — 2,578 — — 10,346 — Total .......................................................................................... ¥ 69,253 ¥ 11,810 ¥ 75,479 ¥ 10,346 66 Thousands of U.S. dollars 2005 Deferred tax assets Deferred tax liabilities Inventory valuation ............................................................................................................................ $ 25,561 $ Accrued bonuses and vacations ....................................................................................................... Termination and retirement benefits................................................................................................. Enterprise taxes................................................................................................................................. Intercompany profits ......................................................................................................................... Marketable securities ........................................................................................................................ Property, plant and equipment.......................................................................................................... Allowance for doubtful receivables................................................................................................... Minimum pension liability adjustment .............................................................................................. Other temporary differences............................................................................................................. Tax credit carryforwards.................................................................................................................... Operating loss carryforwards ............................................................................................................ Subtotal.............................................................................................................................................. Valuation allowance........................................................................................................................... 48,654 88,720 12,421 26,075 — 13,178 28,084 272,533 114,645 41,224 44,056 715,151 (67,925) — — — — — 74,336 — 393 — 35,645 — — 110,374 — Total ............................................................................................................................................... $ 647,226 $ 110,374 The total valuation allowance increased by ¥150 million ($1,402 on unremitted earnings of certain subsidiaries to the extent that thousand) in 2005 and decreased by ¥1,230 million and ¥1,226 they are believed to be indefinitely reinvested. The unremitted million in 2004 and 2003, respectively. earnings of the foreign subsidiaries which are considered to be As of March 31, 2005, the Company and certain subsidiaries indefinitely reinvested and for which Japanese income taxes have had operating loss carryforwards approximating ¥12,505 million not been provided were ¥54,813 million ($512,271 thousand) and ($116,869 thousand) available for reduction of future taxable ¥47,638 million at March 31, 2005 and 2004, respectively. income, the majority of which expire by 2010. Dividends received from domestic subsidiaries are expected to The Company has not provided for Japanese income taxes be substantially free of tax. 12. Foreign Operations Net sales and total assets of foreign subsidiaries for the years ended March 31, 2005, 2004 and 2003 were as follows: Net sales....................................................................................... Total assets .................................................................................. ¥ 220,961 ¥ 178,038 ¥ 208,540 ¥ 162,630 ¥ 194,498 $ 2,065,056 ¥ 158,300 $ 1,663,907 Millions of yen Thousands of U.S. dollars 2005 2004 2003 2005 67 13. Per Share Data The Company accounts for its net income per share in accor- income per share reflects the potential dilution of convertible dance with SFAS No. 128, “Earnings per Share.” Basic net bonds and stock options, and has been computed by the if-con- income per share has been computed by dividing net income verted method for convertible bonds and by the treasury stock available to common shareholders by the weighted-average num- method for stock options. ber of common shares outstanding during each year. Diluted net A reconciliation of the numerators and denominators of the basic and diluted net income per share computations is as follows: Net income ................................................................................... ¥ 30,176 ¥ 26,811 Effect of dilutive securities: Convertible bonds, due 2004 ................................................ 165 327 Diluted income.......................................................................... ¥ 30,341 ¥ 27,138 Millions of yen 2005 2004 Thousands of U.S. dollars 2005 $ 282,019 1,542 $ 283,561 2003 ¥ 511 — ¥ 511 Number of shares 2005 2004 2003 Weighted average common shares outstanding ................................................... 238,505,304 242,296,332 247,336,015 Dilutive effect of: Convertible bonds, due 2004........................................................................... 4,623,997 10,026,639 Stock options ................................................................................................... 76,574 53,053 — — Diluted common shares outstanding.................................................................. 243,205,875 252,376,024 247,336,015 For the year ended March 31, 2003, the assumed conversion of For the year ended March 31, 2003, the assumed exercise of convertible bonds, giving effect to the incremental shares and the stock options, giving effect to the incremental shares, was anti- adjustment to reduce interest expenses, was anti-dilutive and dilutive and has been excluded from the computation. has, therefore, been excluded from the computation. 14. Supplemental Information for Cash Flows Supplemental cash flow information for the years ended March 31, 2005, 2004 and 2003 was as follows: 2005 Interest paid.................................................................................. ¥ 1,098 Income taxes paid ........................................................................ 17,815 Non-cash investing and financing activities: Liabilities assumed in connection with capital expenditures... Stock issued due to convertible bonds .................................... Transfer of assets and liabilities to joint venture...................... 2,671 38 16,270 Fair value of minority interests acquired by the reissuance of treasury stock ...................................... — Millions of yen 2004 ¥ 1,217 7,508 2003 ¥ 1,431 7,588 3,848 1,320 — — — — — 84 Thousands of U.S. dollars 2005 $ 10,262 166,495 24,963 355 152,056 — 68 15. Other Comprehensive Income (Loss) The change in each component of accumulated other comprehensive income (loss) for the years ended March 31, 2005, 2004 and 2003 was as follows: Millions of yen Thousands of U.S. dollars 2005 2004 2003 2005 Foreign currency translation adjustments: Beginning balance .................................................................... ¥ (15,625) ¥ (9,407) ¥ (7,402) $ (146,028) Change for the year .................................................................. Ending balance ......................................................................... 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 ......................................................................... Net gains (losses) on derivative instruments: Beginning balance .................................................................... Change for the year .................................................................. Ending balance ......................................................................... Total accumulated other comprehensive loss: 5,071 (10,554) (45,238) 4,115 (41,123) 10,087 822 10,909 217 (458) (241) (6,218) (15,625) (48,708) 3,470 (45,238) (1,716) 11,803 10,087 (78) 295 217 (2,005) (9,407) (21,224) (27,484) (48,708) 3,331 (5,047) (1,716) (68) (10) (78) 47,393 (98,635) (422,785) 38,458 (384,327) 94,271 7,682 101,953 2,028 (4,281) (2,253) Beginning balance .................................................................... Change for the year .................................................................. (50,559) 9,550 (59,909) 9,350 (25,363) (34,546) (472,514) 89,252 Ending balance ......................................................................... ¥ (41,009) ¥ (50,559) ¥ (59,909) $ (383,262) 69 Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments for the years ended March 31, 2005, 2004 and 2003 were as follows: Millions of yen 2005 Tax (expense) benefit Before-tax amount Net-of-tax amount Before-tax amount 2004 Tax (expense) benefit Net-of-tax amount Before-tax amount 2003 Tax (expense) benefit Net-of-tax amount Foreign currency translation adjustments: Foreign currency translation adjustments arising during the year........... ¥ 5,437 ¥ (366) ¥5,071 ¥ (6,875) ¥ 195 ¥(6,680) ¥ (2,227) ¥ — ¥ (2,227) Reclassification adjustment for the portion realized in net income ........ — — — 462 — 462 222 — 222 Net change in foreign currency translation adjustments during the year .... Minimum pension liability adjustments ........... Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) 5,437 6,974 (366) (2,859) 5,071 4,115 (6,413) 5,880 195 (2,410) (6,218) 3,470 (2,005) (47,387) — 19,903 (2,005) (27,484) arising during the year................................. 2,159 (885) 1,274 20,196 (8,280) 11,916 (11,036) 4,636 (6,400) Reclassification adjustment for losses on impairment realized in net income ....... 22 (9) 13 847 (347) 500 1,194 (502) 692 Reclassification adjustment for net losses (gains) on sales realized in net income ...... Net unrealized gains (losses) .......................... (788) 1,393 323 (571) (465) 822 (1,038) 20,005 425 (8,202) (613) 11,803 1,140 (8,702) (479) 3,655 661 (5,047) Net gains (losses) on derivative instruments: Net gains (losses) on derivative instruments designated as cash flow hedges during the year ............................... Reclassification adjustment for net (1,702) 698 (1,004) 1,095 (456) 639 (1,358) 570 (788) losses (gains) realized in net income ......... Net gains (losses) on derivative instruments... Other comprehensive income (loss).......... 929 (773) ¥13,031 (383) 315 ¥(3,481) 546 (458) ¥9,550 (592) 503 ¥19,975 248 (208) ¥(10,625) (344) 295 ¥ 9,350 1,340 (18) ¥(58,112) (562) 8 ¥23,566 778 (10) ¥(34,546) Thousands of U.S. dollars 2005 Before-tax amount Tax (expense) benefit Net-of-tax amount Foreign currency translation adjustments: Foreign currency translation adjustments in consolidated foreign entities held at end of year................................................... Reclassification adjustment for the portion realized in net income .............................. Net change in foreign currency translation adjustments during the year ..................... Minimum pension liability adjustments .............................................................................. Unrealized gains (losses) on available-for-sale securities: $ 50,813 — 50,813 65,178 $ (3,420) — (3,420) (26,720) $ 47,393 — 47,393 38,458 Unrealized holding gains (losses) arising during the year ............................................. Reclassification adjustment for losses on impairment realized in net income............. Reclassification adjustment for net losses (gains) on sales realized in net income ..... Net unrealized losses ..................................................................................................... 20,178 205 (7,364) 13,019 (8,271) (84) 3,018 (5,337) 11,907 121 (4,346) 7,682 Net gains (losses) on derivative instruments: Net gains (losses) on derivative instruments designated as cash flow hedges during the year ......................................................................... Reclassification adjustment for net losses (gains) realized in net income.................... Net gains (losses) on derivative instruments................................................................. Other comprehensive income (loss) .......................................................................... (15,906) 8,682 (7,224) $ 121,786 6,523 (3,580) 2,943 $ (32,534) (9,383) 5,102 (4,281) $ 89,252 70 16. Financial Instruments and Risk Management Financial Instruments The following table presents the carrying amounts and estimated fair values as of March 31, 2005 and 2004, of the Companies’ financial instruments. Nonderivatives: Millions of yen 2005 2004 Carrying amount Fair value Carrying amount Fair value Long-term debt, including current portion ............................... ¥ (12,335) ¥ (12,356) ¥ (41,243) ¥ (42,707) Derivatives: Included in Other current assets (liabilities): Forward exchange contracts ................................................ Foreign currency options ...................................................... (402) 51 (402) 51 613 — 613 — Thousands of U.S. dollars 2005 Carrying amount Fair value Nonderivatives: Long-term debt, including current portion .................................................................................... $(115,280) $(115,477) Derivatives: Included in Other current assets: Forward exchange contracts...................................................................................................... Foreign currency options ........................................................................................................... (3,757) 477 (3,757) 477 The following methods and assumptions were used to estimate amounts that the Companies would receive or pay to terminate the fair values of each class of financial instruments for which it is the contracts at the reporting date, thereby taking into account practicable to estimate that value: Nonderivatives the current unrealized gains or losses of open contracts. Dealer quotes are available for most of the Companies’ derivatives; oth- erwise, pricing or valuation models are applied to current market (1) Cash and cash equivalents, notes and accounts receivable, information to estimate fair value. The Companies do not use bank loans and notes and accounts payable: derivatives for trading purposes. The carrying amounts approximate fair values. Changes in the fair value of foreign exchange forward con- (2) Short-term investments and investment securities (see Note 4): tracts and foreign currency options designated and qualifying as The fair values are estimated based on quoted market prices cash flow hedges are reported in accumulated other comprehen- or dealer quotes for marketable securities or similar instru- sive income (loss). These amounts are subsequently reclassified ments. Certain equity securities included in investments have into earnings through Foreign exchange loss, net in the same no readily determinable public market value, and it is not prac- period as the hedged items affect earnings. Substantially all of ticable to estimate their fair values. the accumulated other comprehensive income (loss) in relation to (3) Long-term debt: foreign exchange forward contracts at March 31, 2005 is expect- For convertible bonds, the fair values are estimated based on ed to be reclassified into earnings within twelve months. quoted market prices. For other debt, the fair values are esti- The effective portions of changes in the fair value of foreign mated using present value of discounted future cash flow exchange forward contracts and foreign currency options desig- analysis, based on the Companies’ current incremental issuing nated as cash flow hedges and reported in accumulated other rates for similar types of arrangements. comprehensive income (loss), net of the related tax effect, are Derivatives losses of ¥1,004 million ($9,383 thousand ) and gains of ¥639 mil- lion for the years ended March 31, 2005 and 2004, respectively. The fair value of derivatives generally reflects the estimated The amounts, which were reclassified out of accumulated other 71 comprehensive income (loss) into Foreign exchange loss, net options: depending on their nature, net of the related tax effect, are net The Companies enter into foreign exchange forward con- gains of ¥546 million ($5,103 thousand) and net gains of ¥344 mil- tracts and combined purchased and written foreign currency lion for the years ended March 31, 2005 and 2004, respectively. option contracts to hedge foreign currency transactions (primarily The amount of the hedging ineffectiveness is not material for the the U.S. dollar and the EURO) on a continuing basis for periods years ended March 31, 2005 and 2004. consistent with their committed exposure. The terms of the cur- The Companies enter into interest rate swap agreements, rency derivatives are typically less than 10 months. The credit which do not meet the hedging criteria of SFAS No. 133. These exposure of foreign exchange contracts are represented by the interest rate swap agreements are recorded at fair value in the fair value of the contracts at the reporting date. Management consolidated balance sheets. The changes in fair values are considers the exposure to credit risk to be minimal since the recorded in current period earnings. counterparties are major financial institutions. Foreign exchange forward contracts and foreign currency The notional amounts of contracts to exchange foreign currency outstanding at March 31, 2005 and 2004 were as follows: Millions of yen Thousands of U.S. dollars 2005 2004 2005 Forward exchange contracts .................................................................................. ¥ 37,680 ¥ 35,597 $ 352,150 Foreign currency options ........................................................................................ 2,000 — 18,692 The notional amounts do not represent the amounts exchanged rency, these assets and liabilities are translated at currency by the parties to derivatives and are not a measure of the exchange rates in effect on the balance sheet date. The effects of Companies’ exposure through its use of derivatives. The amounts changes in currency exchange rates are reported in earnings and exchanged are determined by reference to the notional amounts included in Foreign exchange loss, net in the consolidated state- and the other terms of the derivatives. ments of income. Currency forward contracts and options desig- The Companies hedge certain exposures to fluctuations in nated as hedges of the monetary assets and liabilities are also foreign currency exchange rates that occur prior to conversion of marked to market rates with the resulting gains and losses report- foreign currency denominated monetary assets and liabilities into ed in the consolidated statements of income. the functional currency. Prior to conversion to the functional cur- 17. Related Party Transaction The Company has an operating lease agreement for its head payment of ¥106 million ($991 thousand) and a security deposit office, including land and a building, with a company owned by of ¥2,600 million ($24,299 thousand) which is refundable when the family of the Company’s founder, which includes the the agreement expires. During the years ended March 31, 2005, Company’s chairman and representative director, a director, and 2004 and 2003, the Company paid ¥1,272 million ($11,888 thou- certain managing officers. This lease agreement has an initial sand), in rental expense and the security deposit at March 31, non-cancelable lease term to 2020 and requires a monthly rental 2005 and 2004 was ¥2,600 million ($24,299 thousand). 18. Commitments and Contingent Liabilities The Company has commitments at March 31, 2005 of approxi- thousand) for the year ending March 31, 2006. The annual service mately ¥1,365 million ($12,757 thousand) related to contracts for fee will gradually decrease each year during the contract term to construction of a new building in Komaki city. ¥4,518 million ($42,224 thousand) for 2008. The contract is cance- The Company has commitments at March 31, 2005 of lable at any time subject to a penalty of 15% of aggregate service approximately ¥13,784 million ($128,822 thousand) related to fees payable for the remaining term of the contract. contracts for outsourcing computer services through 2008. The The Company and certain of its subsidiaries are defendants contracts require an annual service fee of ¥4,676 million ($43,701 in several pending lawsuits. However, based upon the informa- 72 tion currently available to both the Company and its legal counsel, panies. The guarantees for the other companies are made to management of the Company believes that damages from such ensure that those companies operate with less finance costs. The lawsuits, if any, would not have a material effect on the consoli- maximum payments in the event of default is ¥1,350 million dated financial statements. ($12,617 thousand) at March 31, 2005. The carrying amounts of the liabilities recognized under those guarantees at March 31, Concentration of Credit Risk 2005 were immaterial. Financial instruments that potentially subject the Companies to Bank loans of ¥784 million ($7,327 thousand) of an unaffiliated concentrations of credit risk consist principally of short-term cash company were jointly and severally guaranteed by the Company investments and trade receivables. The Companies place their and six other unaffiliated companies. According to an agreement short-term cash investments with high-credit-quality financial between the seven companies, any loss on these guarantees is to institutions. Concentrations of credit risk with respect to trade be borne equally among the companies. receivables, as approximately 75% of total sales are concentrated in Japan, are limited due to the large number of well-established Product Warranties customers and their dispersion across many industries. The The Companies issue contractual product warranties under Company normally requires customers to deposit funds to serve which they generally guarantee the performance of products as security for ongoing credit sales. Guarantees delivered and services rendered for a certain period or term. Changes in accrued product warranty cost for the year ended March 31, 2005 and 2004 are summarized as follows: The Company provides guarantees for bank loans of other com- Balance at beginning of year .................................................................................. ¥ 3,153 ¥ 2,752 $ 29,467 Addition ............................................................................................................... Utilization ............................................................................................................. 2,683 (3,527) 4,188 (3,787) 25,075 (32,963) Balance at end of year ............................................................................................ ¥ 2,309 ¥ 3,153 $ 21,579 Millions of yen Thousands of U.S. dollars 2005 2004 2005 19. Subsequent Events On May 11, 2005, the Company management declared a plan to Company’s discretion with a maximum limit of ¥10,000 million purchase the Company’s shares, subject to approval at the gener- ($93,458 thousand), or 4,000,000 shares, for the period up to the al meeting of shareholders. The execution of the plan is at the date of the June 2006 general meeting of shareholders. 73 Deloitte Touche Tohmatsu Osaka Kokusai Building 2-3-13, Azuchi–machi Chuo–ku, Osaka 541-0052 Japan Tel: +81 (6) 6261 1381 Fax: +81 (6) 6261 1238 www.deloitte.com/jp I n d e p e n d e n t A u d i t o r s ’ R e p o r t To the Board of Directors and Shareholders of OMRON Corporation We have audited the accompanying consolidated balance sheets of OMRON Corporation and subsidiaries (the “Companies”) as of March 31, 2005 and 2004, and the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2005, all expressed in Japanese yen. These financial statements are the responsibility of the Companies’ 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 con- cerning operating segments and other information is required for a complete presentation of the Company’s consolidated financial state- ments. In our opinion, except for the omission of segment information as discussed in the preceding paragraph, the consolidated financial state- ments referred to above present fairly, in all material respects, the financial position of OMRON Corporation and subsidiaries as of March 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2005 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 opinion, such translation has been made in conformity with the basis stated in Note 2 to the consolidated financial statements. Such United States dol- lar amounts are presented solely for the convenience of readers outside Japan. June 10, 2005 74 G l o b a l N e t w o r k EUROPE Regional Headquarters OMRON Europe B.V. (The Netherlands) Phone: 31-23-5681300 Fax: 31-23-5681388 Industrial Automation Business 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: 420-2-3460-2602 Fax: 420-2-3460-2607 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: 33-1-56637000 Fax: 33-1-48559086 OMRON Electronics O.Y. (Finland) Phone: 358-207-464-200 Fax: 358-207-464-210 OMRON Electronics KFT (Hungary) Phone: 36-1-399-3050 Fax: 36-1-399-3060 OMRON Electronics SpA. (Italy) Phone: 39-02-32681 Fax: 39-02-325154 THE AMERICAS Regional Headquarters OMRON Management Center of America, Inc. (U.S.A.) Phone: 1-847-884-0322 Fax: 1-847-884-1866 Industrial Automation Business 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: 1-416-286-6774 OMRON IDM Controls, Inc. (U.S.A.) Phone: 1-713-849-2848Fax: 1-713-849-8900 OMRON Eletro˜ ica do Brasil Ltda. (Brazil) Phone: 55-11-5564-6488 Fax: 55-11-5564-7751 ASIA–PACIFIC Regional Headquarters OMRON Asia Pacific Pte. Ltd. (Singapore) Phone: 65-6835-3011 Fax: 65-6835-2711 Industrial Automation Business OMRON Electronics Pte. Ltd. (Singapore) Phone: 65-6547-6789 Fax: 65-6547-6766 OMRON Electronics Sdn. Bhd. (Malaysia) Phone: 60-3-7623-6300 Fax: 60-3-7665-0078 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 Immobiliare S.r.l. (Italy) Phone: 39-02-32681 Fax: 39-02-325154 TechnoGR S.r.l (Italy) Phone: 39-011-945-2041 Fax: 39-011-945-2090 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: 44-19-0825-8258 Fax: 44-19-0825-8158 OMRON Electronics Manufacturing of Germany G.m.b.H. (Germany) Phone: 49-7032-811-0 Fax: 49-7032-811-199 OMRON Manufacturing of The Netherlands B.V. (The Netherlands) Phone: 31-73-6481811 Fax: 31-73-6420195 OMRON Yasukawa Motion Control B.V. (The Netherlands) Phone: 31-23-5681400 Fax: 31-23-5681388 Retail Solution & Systems S.L. (Spain) Phone: 34-91-312-0632 Fax: 34-91-329-1157 OMRON Development And Engineering Netherlands B.V. (The Netherlands) Phone: 31-736-481-811 Fax: 31-736-420-195 P3S Projects, Solutions, Systems, and Services S.L. (Spain) Phone: 34-93-289-6600 Fax: 34-93-289-5064 Electronic Components Business OMRON Electronic Components Europe B.V. (The Netherlands) Phone: 31-23-5681200 Fax: 31-23-5681212 Automotive Electronic Components Business OMRON Automotive Electronics UK Ltd. (U.K.) Phone: 44-1384-405500 Fax: 44-1384-405508 OMRON Automotive Electronics Technology G.m.b.H. (Germany) Phone: 49-711-686876-0 Fax: 49-711-686876-70 Healthcare Business OMRON Medizintechnik Handelsgesellschaft G.m.b.H. (Germany) Phone: 49-621-83348-8 Fax: 49-621-834-820 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 Electronic Components Business OMRON Electronic Components LLC. (U.S.A.) Phone: 1-847-882-2288 Fax: 1-847-882-2192 Automotive Electronic Components Business OMRON Automotive Electronics, Inc. (U.S.A.) Phone: 1-630-443-6800 Fax: 1-630-443-6898 OMRON Dualtec Automotive Electronics Inc. (Canada) Phone: 1-905-829-0136 Fax: 1-905-829-0432 OMRON Electronica Do Brasil Ltda. (Brazil) Phone: 55-11-5564-6488 Fax: 55-11-5564-7751 Social Systems Business (Advanced Modules) OMRON Systems LLC. (U.S.A.) Phone: 1-847-843-0515 Fax: 1-847-843-7686 P.T. OMRON Electronics (Indonesia) Phone: 62-21-8370-9555 Fax: 62-21-8370-9550 Electronic Components Business OMRON Electronic Components Pte. Ltd. (Singapore) Phone: 65-6446-7400 Fax: 65-6446-7411 OMRON Malaysia Sdn. Bhd. (Malaysia) Phone: 60-3-7884-8000 Fax: 60-3-7884-8008 P.T. OMRON Manufacturing of Indonesia (Indonesia) Phone: 62-21-897-0111 Fax: 62-21-897-0120 OMRON Electronic Components Co., Ltd. (Thailand) Phone: 66-2-619-0292 Fax: 66-2-619-0624 75 OMRON Transaction Systems, Inc. (U.S.A.) Phone: 1-847-843-0515 Fax: 1-847-843-7686 OMRON Business Systemas Eletro˜ icos da America Latina Ltda. (Brazil) Phone: 55-11-251-0073 Fax: 55-11-251-1053 Healthcare Business OMRON Healthcare, Inc. (U.S.A.) Phone: 1-847-680-6200 Fax: 1-847-680-6269 Other OMRON Advanced Systems, Inc. (U.S.A.) Phone: 1-408-727-6644 Fax: 1-408-727-5540 OMRON Finance Canada, Inc. (Canada) Phone: 1-416-286-6465 Fax: 1-416-286-6774 OMRON Electronic Components Sdn. Bhd. (Malaysia) Phone: 60-3-7623-6300 Fax: 60-3-7665-0078 Automotive Electronic Components Business OMRON Automotive Electronics Korea, Co., Ltd. (Korea) Phone: 82-2-850-5700 Fax: 82-2-859-1687 OMRON Automotive Electronics Co., Ltd. (Thailand) Phone: 66-35-227-169 Fax: 66-35-227-167 Healthcare Business OMRON Healthcare Singapore Pte. Ltd. (Singapore) Phone: 65-6736-2345 Fax: 65-6736-2500 CHINESE ECONOMIC AREA Regional Headquarters OMRON (China) Co., Ltd. Headquarters (China) Phone: 86-21-6841-2588 Fax: 86-21-6841-2788 OMRON (China) Group Co.,Ltd. (Hong Kong) Phone: 852-2375-3827 Fax: 852-2375-1475 OMRON Corporation Beijing Office (China) Phone: 86-10-5869-3232 Fax: 86-10-5869-3970 OMRON China Centtalised Procurement Center (China) Phone: 86-755-2601-3666 Fax: 86-755-2698-3988 OMRON Electronics Asia LTD. (Hong Kong) Phone: 852-2375-3827 Fax: 852-2375-1475 Industrial Automation Business OMRON (China) Co., Ltd. (China) Phone: 86-10-58693030 Fax: 86-10-58693815 OMRON (China) Co., Ltd., Shanghai Office (China) Tel: 86-21-5037-2222 Fax: 86-21-5037-2200 OMRON Electronics (Guangzhou) Ltd. (China) Tel: 86-20-8732-0508 Fax: 86-20-8732-1750 OMRON Electronics (Hong Kong) Ltd. (Hong Kong) Phone: 852-2375-3827 Fax: 852-2375-1475 OMRON Taiwan Electronics Inc. (Taiwan) Phone: 886-2-2715-3331 Fax: 886-2-2712-6712 OMRON Taiwan System Inc. (Taiwan) Phone: 886-2-2375-2200 Fax: 886-2-2375-2233 JAPAN Manufacturing Mishima Systems Factory Phone: 81-55-977-9000 Fax: 81-55-977-9080 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 Business 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 OMRON Kansai-Seigyo Corporation Phone: 81-6-6347-1700 Fax: 81-6-6347-1705 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 OMRON Technocult Co., Ltd. Phone: 81-45-321-0471 Fax: 81-45-321-0473 OMRON Trading (Shanghai) Co., Ltd. (China) Phone: 86-21-5046-0660 Fax: 86-21-5046-0998 Tama Fine Opt Inc. (Taiwan) Phone: 886-2-2321-9092 Fax: 886-2-2321-7169 OMRON Trading (Tianjin) Co., Ltd. (China) Phone: 86-22-2420-7209 Fax: 86-22-2420-7217 OMRON Trading (Shenzhen) Co., Ltd. (China) Phone: 86-755-8359-9028 Fax: 86-755-8359-9628 Shanghai OMRON Automation System Co., Ltd. (China) Phone: 86-21-5854-0055 Fax: 86-21-5854-0614 OMRON (Shanghai) Co., Ltd. Phone: 86-21-5854-0055 Fax: 86-21-5854-0614 OMRON (Shanghai) Control System Engineering Co., Ltd. (China) Phone: 86-21-5131-9030 Fax: 86-21-5131-9040 Electronic Components Business OMRON Electronic Components (H.K.) Ltd. (Hong Kong) Phone: 852-2375-3827 Fax: 852-2375-1475 Shanghai OMRON Control Components Co., Ltd. (China) Phone: 86-21-5854-0012 Fax: 86-21-5854-8413 OMRON Electronic Components (Shenzhen) Ltd. (China) Phone: 86-755-8462-0000 Fax: 86-755-8462-1111 Zhejiang OMRON Qiaoh Control Components Co., Ltd. (Taiwan) Phone: 86-755-8462-0000 Fax: 86-755-8462-1111 Social Systems Business OMRON Corporation Beijing Office, Social Systems Business (China) Phone: 86-10-5869-3232 Fax: 86-10-5869-3970 Healthcare Business OMRON(China) Co., Ltd. Shanghai Branch (Healthcare Business) (China) Phone: 86-21-6351-9588 Fax: 86-21-6351-6300 OMRON Industry & Trade (Dalian) Co., Ltd. (China) Phone: 86-411-8731-7201 Fax: 86-411-8731-7191 OMRON Dalian Co., Ltd. (China) Phone: 86-411-8761-4222 Fax: 86-411-8762-8494 OMRON(Dalian) Co., Ltd. Research & Development Center (China) Phone: 86-411-8476-8080 Fax: 86-411-8476-7299 OMRON Healthcare Taiwan Co., Ltd. (Taiwan) Phone: 886-2-8712-0068 Fax: 886-2-8712-6006 OMRON Two Four Service Co., Ltd. Phone: 81-3-5825-2320 Fax: 81-3-5825-2330 OMRON Software Kyushu Co., Ltd. Phone: 81-96-352-8671 Fax: 81-96-352-8677 FA Techno Corporation Phone: 81-3-5297-5223 Fax: 81-3-5297-5224 PiTaPa Goopas Co., Ltd. Phone: 81-6-6252-1723 Fax: 81-6-6252-1727 Electronic Components Business OMRON Kurayoshi Co., Ltd. Phone: 81-858-23-2121 Fax: 81-858-22-1355 OMRON Amusement Co., Ltd. Phone: 81-586-62-7211 Fax: 81-586-62-7291 OMRON Sanyo Co., Ltd. Phone: 81-869-55-1355 Fax: 81-869-55-6048 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 Tama Fine Opt. Co., Ltd. Phone: 81-44-829-1641 Fax: 81-44-813-6415 Automotive Electronic Components Business OMRON Iida Co., Ltd. Phone: 81-44-829-1641 Fax: 81-44-813-6415 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: 81-6-6348-1923 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 TAS Corporation Phone: 81-3-5420-6611 Fax: 81-3-5420-6615 76 Kinki Field Engineering Co., Ltd. Phone: 81-6-4304-1122 Fax: 81-6-6768-8395 Social Systems Business (Advanced Modules) OMRON Nohgata Co., Ltd. Phone: 81-949-22-2811 Fax: 81-949-28-3046 Healthcare Business 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: 81-75-344-7820 Fax: 81-75-344-7830 OMRON Network Applications Co., Ltd. Phone: 81-75-361-2160 Fax: 81-75-361-7329 OMRON Marketing Co., Ltd. Phone: 81-75-344-7048 Fax: 81-75-344-7059 OMRON Logistic Create Co., Ltd. Phone: 81-6-6347-5891 Fax: 81-6-6347-5991 OMRON Credit Service Co., Ltd. Phone: 81-75-241-2475 Fax: 81-75-256-6532 Human Renaissance Institute 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 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 C o r p o r a t e a n d S t o c k I n f o r m a t i o n ( A s o f M a r c h 3 1 , 2 0 0 5 ) 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: 2,645 (Japan) 1,882 (Overseas) Number of patents pending: 4,537 (Japan) 1,698 (Overseas) Number of Employees 24,904 Paid-in Capital ¥64,100 million Common Stock Authorized: 487,000,000 shares Issued: 249,121,372 shares Number of shareholders: 30,947 Stock Listings Osaka Securities Exchange Tokyo Stock Exchange Nagoya Stock Exchange Frankfurt Stock Exchange Common Stock Price Range/ Trading Volume (Osaka Securities Exchange) Ticker Symbol Number 6645 Transfer Agent The Mitsubishi Trust and Banking Corporation 1-4-5, Marunouchi, Chiyoda-ku, Tokyo 100-8212, Japan Depositary and Transfer Agent for American Depositary Receipts JPMorgan Chase Bank 270 Park Avenue, New York, NY 10017-2070, U. S. A. ADR Holder Contact: JPMorgan Service Center P. O. Box 43013 Providence, RI 02940-3013 Phone : 781-575-5328 Fax : 781-575-4082 General E-mail: adr@jpmorgan.com Homepage http://www.omron.co.jp (Japanese) http://www.omron.com (English) L U E - O R I E N T E D G R O W T H 19.9% 21.0% 80 21.5% 23.6% 30.9% 34.4% (Yen) 40,000 30,000 (Yen) 4,000 3,000 Ownership and Distribution of shares (%) 100 2,000 1,000 0 (Shares) 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 Price range of common tock [left axis] Adjusted average for Nikkei 225 stocks [right axis] 20,000 10,000 0 60 40 20 0 5.4% 0.7% 50.4% 4.5% 0.5% 43.1% 4.3% 1.0% 38.9% FY’02 FY’03 FY’04 Financial Institutions Securities Firms Other Corporations Foreign Institutions and Individuals Individuals and Others 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 Trading volume Yearly High and Low Prices FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 High . . . . . . . . . . ¥ 2,700 ¥ 2,380 ¥ 2,810 ¥ 2,220 ¥ 3,360 ¥ 3,180 ¥ 2,515 ¥ 2,080 ¥ 2,740 ¥ 2,880 Low . . . . . . . . . . 1,520 1,720 1,790 1,070 1,501 1,745 1,395 1,341 1,658 2,220 Yen 77 p p 100% Recycled-content level Shiokoji Horikawa, Shimogyo-ku, Kyoto 600-8530, Japan Phone: 81-75-344-7000 Fax: 81-75-344-7001 Homepage: http://www.omron.co.jp (Japanese) http://www.omron.com (English)