Annual Report 2008 Year ended March 31, 2008 O M R O N C o r p o r a t i o n A n n u a l R e p o r t 2 0 0 8 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) A N N U A L R E P O R T 2 0 0 8 C O N T E N T S 2 2 4 8 10 10 About Us Core Competence and Business Domain Business Segments and Key Products 10-Year Financial Highlights To Our Stakeholders Message from the Chairman Celebrating 75 years, Omron accelerates future- oriented management with its corporate DNA. 12 Message from the President Looking back on FY2007 record-high perform- ance. Aggressive agenda for long-term maximiza- tion of corporate value. 14 Interview with the President Top priorities on strengthening existing business- es and aggressive investment for the future. Applying cash assets for paying dividends and buying back shares. 20 Special Feature: MEMS Business Strategy “Beyond the Semiconductor” Omron takes the lead to control the MEMS market. Focusing on developing high value-added MEMS beyond the capabilities of semiconductor and component makers. 28 30 32 34 36 38 40 41 42 42 45 46 48 49 87 88 89 Omron at a Glance Segment Business Performance and GD2010, 3rd Stage key Strategies IAB Industrial Automation Business ECB Electronic Components Business AEC Automotive Electronic Components Business SSB Social Systems Business HCB Healthcare Business Business Development Group and Other Businesses Intellectual Property Strategy Corporate Governance, Compliance, and Risk Management Corporate Governance Compliance and Risk Management Corporate Social Responsibility (CSR) Directors, Corporate Auditors and Executive Officers Financial Section (U.S. GAAP) Corporate and Stock Information Omron’s Management Compass —SINIC Theory Omron: Advancing Sensing and Control Technology Sustainability Report 2008 For information on Omron’s sustainability initiatives, please refer to “Sustainability Report 2008”, a report on social and environmental activities to our stakeholders, including employees, clients and customers, sharehold- ers, and regional communities. http://www.omron.com/corporate/csr/ Financial Fact Book 2008 For financial data from the past 10 years, please refer to “Fact Book 2008”. 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 services 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 and consolidated subsidiaries and affiliates. A B E T T E R W O R L D F O R A L L PHILOSOPHY T H R O U G H S E N S I N G & C O N T R O L 1 A b o u t U s Core Competence and Business Domain Omron is developing a global business of value that supports safety and security, health, and the environment in business domains of industry, electronic devices, society, lifestyles, and medicine and healthcare. Our Core Competence is in Sensing and Control The value that Omron provides is in applying its core competence in sensing and control technologies providing functions approaching the human five senses (sight, hearing, smell, taste, and touch) to create an ideal balance and harmony between people and machines with devices. IAB INDUSTRIAL AUTOMATION BUSINESS ECB ELECTRONIC COMPONENTS BUSINESS AEC AUTOMOTIVE ELECTRONIC COMPONENTS BUSINESS SSB SOCIAL SYSTEMS BUSINESS HCB HEALTHCARE BUSINESS BUSINESS DEVELOPMENT GROUP AND OTHER BUSINESSES Core Technologies Supporting Sensing and Control [1] Micromachining Omron micromachining technology employs micro electro [2] Microphotonics Microphotonics is a light-wave mechanical systems (MEMS) technology enabling the control technology allowing enhancement of semiconductor two-dimensional inte- greater miniaturization and grated circuit construction to three-dimensional construc- integration by fabricating vari- Integrated Nanoprism and Microprism Arrays tion. This technology enables ous optical component functions (brightness, speed, ener- production of the world’s small- est radio-frequency relays and ultra-small gas and fluid pres- sure sensors. gy saving, etc.) on a single substrate as with IC and LSIs. Microphotonics technology realizes low-cost optical trans- missions and presents potential for revolutionary devices using high-brightness LEDs and other technologies. Ultra-small RF MEMS Switches 2 Global Network To provide customers with what they want when they want it, Omron has established a global network and a closely linked service system covering our operating regions of Japan, North America, Europe, China, and Asia Pacific. Omron provides fast and efficient support to its business partners worldwide from its comprehensive support system from development to production, distribution, and maintenance. Europe Subsidiaries 39 China Subsidiaries 24 Affiliates 2 Japan Subsidiaries 50 Affiliates 17 Asia-Pacific Subsidiaries 23 Affiliates 3 Regional Headquarters North America Subsidiaries 26 Business Development Group and Other Businesses 2% IAB 43% Other Asia 8% HCB 9% SSB 11% AEC 14% ECB 20% Sales by Segment China 13% Europe 18% North America 13% Sales by Region Japan (including exports) 48% Net Sales ¥763.0 billion (FY2007) [3] Image Sensing Image sensing technology [4] Knowledge Information Control Technology Omron possesses numerous patents in Japan for “fuzzy mechanically recognizes logic” technology resulting from its research in the theory the movement of an object, of human behavior based on know-how and intelligence. such as a human face, by Integrating an algorithm of human problem-solving detecting the transmission processes into a machine-controlling device provides the OKAO Vision accurately identifies any number of faces of any shape or size. or reflection of light waves and generates detailed data on the object. The technology is used for a diverse range of application, including quality inspection, safety systems, and face authentication. machine with the ability to learn and make decisions. Sound pitch Accident 1? Loudness Machine Accident 2? Sound continuity Accident 3? Abnormal Noise Detection Systems mechanically identify sounds only highly trained specialists have been able to hear and enable vibration-based quality inspection. 3 Business Segments and Key Products IAB INDUSTRIAL AUTOMATION BUSINESS Segment Information Go to page30 Control Equipment and FA Systems Business The top provider of control equipment for the manufacturing industry in Japan and supporting monozukuri innovation worldwide IAB provides a wide spectrum of equipment ranging from factory automation (FA) controllers to sensors, switches, relays, and safety equipment that meet some 100,000 specifications and support monozukuri(the art of producing things) innovation and productivi- ty improvement in all types of production operations in 80 countries. Commanding 40% domestic market share, IAB is the Japanese man- ufacturing industry’s leading supplier of control equipment. Safety Components Safety components sense worker pres- ence in defined or irregular danger zones and automatically shut down machinery or sound an alarm. Sensors At manufacturing sites for semiconductors, automobiles, consumer electronics, food, and a variety of other products, sensing technology provides high-precision inspec- tion and measurement of an item’s shape, position, gaps, and other characteristics to the nanometer (1 billionth of a meter) sup- porting enhancement of productivity and product quality. Programmable Logic Controllers PLCs accurately process information received from sensors, timers, tem- perature controllers, switches, and other monitors to enable efficient control of machinery and facilities. Programmable terminals with touch panels facilitate easy control and change of product line operations. Sensing Devices Control Equipment Safety Devices Real Color Visual Sensors Real Color 3D Visual Sensors Digital Timers and Electronic Counters Temperature Controllers Safety Light Curtains Network Automated Optical Inspection (AOI) Devices Portable Multidata Loggers Temperature Control Modules Multiple Input Units Safety Laser Scanners 4 ECB ELECTRONIC COMPONENTS BUSINESS Segment Information Go to page32 Electronics Components Business Global No.1 supplier of small-sized LCD backlights and leading supplier of cutting-edge technology ECB offers an integrated manufacturing system for electronic components for consumer appliances, telecommunications equipment, mobile devices, amusement devices, office automa- tion (OA) and other equipment incorporating our proprietary semi- conductors and a wide range of components including all types of relays, switches, connectors, sensors, and optical fiber communica- tions. In particular, Omron is the global leader in the development of cutting-edge devices using MEMS technology, and holds top global market share in small-sized LCD backlights. Relays and Switches Relays are composed of electromag- nets that convert electric signals to mechanical movement and switches that turn electricity on and off. Relays and switches are commonly used in refrigerators, microwave ovens, air conditioners and essentially all electric and electronic devices. OKAO Vision OKAO Vision is gaining wide use as a technology for correcting exposure in camera photography and brightness in photo printing, and its face recognition capability is used for mobile phone owner verification as well as estimating age and determining sex. LCD Backlights LCD backlights utilize microlens technology with several million micron-sized micro lenses to maximize light utilization efficien- cy to brighten display screens, such as on mobile phones, and reduce power consumption. Fiber Optic Communications Devices Omron’s proprietary fine processing technology for fiber optic communications devices have realized smaller and lower-priced transmission devices for fiber to the home (FTTH) supporting constant high capacity, ultra-high speed network environments. MEMS Microphones RF MEMS Switches Combination Jogs Touch Sensors FPC Connectors Surface Mount Switches LCD Backlights Optical Splitter Modules Ultra Wideband (UWB) Antennas Surface Mount High-frequency Receivers 5 AEC AUTOMOTIVE ELECTRONIC COMPONENTS BUSINESS Segment Information Go to page34 Electronic Components for Automobiles Business Contributing to safe and comfortable automobiles worldwide AEC is an active contributor to the rapidly advancing car electronics market in the drive to realize a safe and comfortable automotive society. The company conducts contracted design and development of all types of controllers, sensors, switches, relays, and new systems for automakers and electronics producers around the world. AEC provides the sensing and control technology for the future of auto manufacturing. Smart Entry Smart entry devices are portable, wireless trans- mitters enabling automat- ic locking and unlocking of doors, authorization for remote engine start-up, and other functions. Laser Radars Laser radars are a key step to realizing a “crashless car” and utilize highly sensitive wide-field laser radar to measure the distance between cars and detect potential obstacles, such as pedestrians and bicycles. Laser Radars Electric Power Steering Controllers Automotive Relays Smart Entry Systems Power Window Switches Japan’s No.1 supplier of railway infrastructure systems and creator of a wide variety of social systems SSB provides a wide variety of systems to support social infrastructure centering on railway and traffic control systems. Recently, SSB has been a major contributor of IC card equipment for railway infrastruc- ture systems building on its position as the top domestic supplier of automated ticket gates and ticket machines. The company has further expanded its business scope to contribute to the realization of a safe, secure, and comfortable society through innovative solutions utilizing image sensing and other technologies. SSB SOCIAL SYSTEMS BUSINESS Segment Information Go to page36 Social Systems Business Train Station Solutions SSB solutions for railway stations enhance infrastructure system efficiency and support the development of new systems to enhance station safety, security, and functionality by gathering information via image sensing and other technologies monitoring the movement and characteristics of people inside stations and the surrounding facilities. Road Traffic Solutions In addition to control systems for traffic volume and traffic conditions, SSB is developing next-generation traffic safety systems designed to prevent potential accidents by transmitting data on pedes- trians, bicycles, and other objects col- lected by sensors to nearby vehicles. Automated Ticket Gates Road Traffic Control Systems 6 HCB HEALTHCARE BUSINESS Segment Information Go to page38 Health and Medical Equipment and Services Business Medical Equipment World’s No.1 market share for digital home blood pressure monitors and numerous products in the medical prevention, treatment, and health improvement fields HCB provides equipment and services worldwide for home health- care monitoring and medical institutions to support the prevention, treatment, and health improvement fields. The company’s digital home blood pressure monitors command top market shares at approximately 70% of the domestic and 50% of the global market. HCB’s bio-information sensing technology has made it a leader in the home healthcare market and is pursuing the concept of home medical care to advance prevention, diagnosis, and treatment of lifestyle- related diseases. Non-invasive Vascular Screening Devices Healthcare at Home HCB promotes “Healthcare at Home” necessary to prevent, treat, and manage lifestyle-related diseases by providing devices for measuring a person’s biolog- ical and activity information whether at home or in a medical facility. Home Healthcare Devices Electric Toothbrushes Self Blood Glucose Checker Digital Blood Pressure Monitors Pedometers Body Composition Monitors BUSINESS DEVELOPMENT GROUP AND OTHER BUSINESSES Segment Information Go to page40 Seeking and fostering new business opportunities for Group growth strategies The Other Business segment explores and develops new businesses outside the realm of the other five segments. The Business Development Group plays a part in the Omron Group’s growth strat- egy, and is currently focusing on the RFID business and the remote energy monitoring service business. Energy Monitoring Business Wireless energy monitoring devices gauge the consumption of electricity, gas, water, and other resources used by a diverse range of equipment in factories and retail stores.Information is gathered in a database and can be transmitted to customer computers, mobile phones, and/or where it can be applied to energy conservation and cost reduction efforts to support operating efficiency. UHF-band RFID Reader/Writers UHF-band RFID Inlays Remote Energy Monitoring Systems Uninterruptible Power Supply Units 7 10-Year Financ ial Highlights OMRON Corporation and Subsidiaries Operating Income Omron applies “single step” presentation of income under US GAAP (i.e. the various levels of income are not presented) in its consolidated statements of income. For easier comparison to other companies, operating income is presented as gross profit less selling, general and administrative expenses, and research and development expenses. Discontinued Operations Figures for FY2002 onward have been restated to account for businesses discontinued in FY2007. Operating Results (for the year): Net sales Gross profit Selling, general and administrative expenses (excluding research and development expenses) Research and development expenses Operating income EBITDA (note 3) Net income (loss) 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) Shareholders’ equity Cash dividends (note 5) Ratios: FY2007 FY2006 FY2005 FY2004 ¥ 762,985 293,342 ¥ 723,866 278,241 ¥ 616,002 248,642 ¥ 598,727 245,298 176,569 51,520 65,253 101,596 42,383 68,996 (36,681) 32,315 (34,481) 164,167 52,028 62,046 95,969 38,280 40,539 (47,075) (6,536) (4,697) 149,274 50,501 60,782 91,607 35,763 51,699 (43,020) 8,679 (38,320) 141,185 49,441 54,672 83,314 30,176 61,076 (36,050) 25,026 (40,684) 617,367 19,809 368,502 630,337 21,813 382,822 589,061 3,813 362,937 585,429 24,759 305,810 185.9 1,662.3 42.0 165.0 1,660.7 34.0 151.1 1,548.1 30.0 126.5 1,284.8 24.0 Gross profit margin Operating income margin EBITDA margin Return on shareholders’ equity (ROE) Ratio of shareholders’ equity to total assets 38.4% 8.6% 13.3% 11.3% 59.7% 38.4% 8.6% 13.3% 10.3% 60.7% 40.4% 9.9% 14.9% 10.7% 61.6% 41.0% 9.1% 13.9% 10.4% 52.2% Net Sales and Operating Income Margin Net Income (Loss) and ROE Billions of yen 1,000 % 10 800 600 400 200 0 98 99 00 01 02 03 04 05 06 07 8 6 4 2 0 (FY) 60 45 30 15 0 -15 -30 Billions of yen % 98 99 00 01 02 03 04 05 06 07 20 15 10 5 0 -5 -10 (FY) Net sales [left axis] Operating income margin [right axis] Net income (loss) [left axis] ROE [right axis] Notes: 1. U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate on March 31, 2008, of ¥100=$1. 2. Profit or loss (excluding the balance of obligation settled) recognized on the transfer of employee pension fund liabilities in March 31, 2006 is not included in “cost of sales”, “selling, general & administrative expenses” or “research and development expenses”, to enable easy comparison with previous fiscal years. It is assumed that this profit or loss is allocated in one lump sum. 8 FY2003 FY2002 FY2001 FY2000 FY1999 FY1998 Millions of yen Thousands of U.S. dollars (note 1) FY2007 ¥ 575,157 235,460 ¥ 522,535 201,816 ¥ 533,964 180,535 ¥ 594,259 218,065 ¥ 555,358 196,447 ¥ 555,280 190,966 $ 7,629,850 2,933,420 139,569 46,494 49,397 77,059 26,811 80,687 (34,484) 46,203 (28,119) 133,406 40,235 28,175 57,851 511 41,854 (30,633) 11,221 (1,996) 134,907 41,407 4,221 37,790 (15,773) 33,687 (40,121) (6,434) (12,056) 131,203 42,513 44,349 76,566 22,297 50,796 (32,365) 18,431 (24,582) 133,662 36,605 26,180 57,625 11,561 59,926 (34,180) 25,746 (23,785) 136,734 42,383 11,849 43,245 2,174 29,583 (29,011) 572 21,629 1,765,690 515,200 652,530 1,015,960 423,830 689,960 (366,810) 323,150 (344,810) 592,273 56,687 274,710 567,399 71,260 251,610 549,366 58,711 298,234 593,144 67,213 325,958 579,489 69,472 336,062 580,586 86,723 321,258 6,173,670 198,090 3,685,020 110.7 1,148.3 20.0 2.1 1,036.0 10.0 (63.5) 1,201.2 13.0 87.4 1,311.1 13.0 45.0 1,308.6 13.0 8.3 1,249.5 13.0 1.86 16.62 0.42 Yen U.S. dollars (note 1) 40.9% 8.6% 13.4% 10.2% 46.4% 38.6% 5.4% 11.1% 0.2% 44.3% 33.8% 0.8% 7.1% (5.1%) 54.3% 36.7% 7.5% 12.9% 6.7% 55.0% 35.4% 4.7% 10.4% 3.5% 58.0% 34.4% 2.1% 7.8% 0.7% 55.3% Free Cash Flow Shareholders’ Equity and Ratio of Shareholders’ Equity to Total Assets 1 0 - Y e a r F n a n c a i i l i H g h l i g h t s Billions of yen % 80 50 40 30 20 10 0 -10 Billions of yen 98 99 00 01 02 03 04 05 06 07 (FY) 400 300 200 100 0 98 99 00 01 02 03 04 05 06 07 Shareholders’ equity [left axis] Ratio of shareholders’ equity to total assets [right axis] 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. 60 40 20 0 (FY) 9 To Our Stakeholder s Message fr om the C hair man Omron celebrates the 75th anniversary of its founding in 2008. The company has seen its shares of peaks and valley since 1933, but has steadfastly maintained its dedication to raising corporate value through the best and worst of times thanks to the unswerving understanding and support of its stakeholders. The business environment is once again presenting a formidable challenge as we enter our fourth quarter century, yet we are eagerly advancing with renewed vigor for a new phase in our corporate development. 10 Contributing to realizing a global sustainable society The Omron Group is guided by the management prin- The Omron Group has utilized the SINIC theory as a management compass and is already actively work- ing on “innovation driven by social needs” in areas ciple of “working for the benefit of society” which is ranging from protecting the environment, saving and comprised of the two elements inherent to our corpo- seeking alternative resources and energy, enhancing rate DNA: “challenging ourselves to always do better” safety and security, and maintaining and improving and “innovation driven by social needs”. As we have people’s health. applied these tenets, we have steadily evolved into a We see fiscal 2008, during which we anticipate global corporation that currently sells 50% of its prod- increasing inflationary pressure on raw material and ucts, employs 66% of its employees, and maintains staple foods and various factors combining to produce 44% of its shareholders outside of Japan. deteriorating business conditions, as an opportunity to The concept of corporate value has also evolved further strengthen our contact with customers and fully with the times and has grown beyond profitability, advance our “future-oriented management”. For exam- growth potential, and other aspects that make up eco- ple, we can engage our principle of “innovation driven nomic value to also embrace corporate social value. I by social needs” with our MEMS and face authentica- believe our corporate principles, characterized by our tion technologies to create new products, new produc- core value of working for the benefit of society set at tion techniques, and new marketing methods that Group’s founding and reified in our corporate motto in contribute to international society while also establish- 1959 as “At work for a better life, a better world for ing firm foundation for future growth of Group earnings. all”, are common values held by stakeholders in all countries and regions. As we look ahead to our 100th year, we are com- mitted to continue applying and evolving our good cor- Aiming for the highest level of corporate governance The newly appointed directors and myself are dedicat- porate culture and the corporate DNA established at ed to applying the Corporate Principles in every facet of our founding as we earnestly seek to grow and devel- our operations and realizing the highest level of corpo- op into a corporate Group that contributes to realizing a rate governance based on the common values of our global sustainable society. global enterprise. Future-oriented management must be pursued even in rough times While the pace of globalization is accelerating, spurred by the rapid rise of the BRICs and other developing nations, serious issues that call for the concerted efforts of the world, such as global warming, quickly rising prices for crude oil and other raw materials, and staple foods, as well as product safety, poverty, and human rights, have begun coming to light. The SINIC (Seed-Innovation to Need-Impetus Cyclic Evolution) Theory created by Omron founder Kazuma Tateisi in 1970 predicted that an Optimization Society would emerge after the final stage of industrial society, and this prediction indeed appears to be coming true. (Please see page 88 for further details on SINIC.) As Omron enters its 75th year, I wish to express my sincere gratitude to all our stakeholders and request your ongoing support and understanding as the Omron Group lays the groundwork for future growth. July 2008 Yoshio Tateisi, Chairman of the BOD T o O u r S t a k e h o d e r s l M e s s a g e f r o m t h e C h a i r m a n 11 To Our Stakeholder s Message fr om the Pr esident In fiscal year 2007, Omron once again set new record highs for sales, operating income, and net income and entered the final stage of our 10 year long-term corporate vision, “Grand Design 2010”. Buoyed by our strong performance, we have raised our sales target to ¥1 trillion as we set an aggressive agenda for investment in growth and aim to maximize our corporate value over the long term. In the 3rd Stage, we will return our focus to fortifying existing businesses Omron is aiming to establish a business model to make us a major contributor to development of 21st Century society, and this is the essence of our goal to realize long-term maximization of corporate value as set forth in our long-term corporate vision, Grand Design 2010 (GD2010), to the year 2010. In the 2nd Stage of GD2010, covering fiscal years 2004 to 2007, we designated safety and security, health, and the environment as our focus areas for the social needs for the next 10 years and beyond. Fiscal 2008 marks the start of the 3rd and final stage of GD2010, covering fiscal years 2008 to 2010. The 3rd Stage strategies center on fortifying the exist- ing businesses selected in the 2nd Stage as our core business domains and laying the groundwork for sev- eral of our businesses to pursue the leading position in global markets. We are also continuing to foster new businesses with significant profit potential beyond the GD2010 plan period (Please see page 18 for details). In par- ticular, we are planning major investment in the MEMS business, which is primed to debut after more than 20 years since we first began research in the technology. (Please see the Special Feature on page 20 for details). Our regional growth strategies will continue to focus on China. Sixth consecutive year of record highs for sales, operating income, and net income in fiscal 2007 Boosted by contributions from newly acquired opera- tions, a favorable yen rate, and the rise to profitability of the Automotive Electronic Components Business (AEC), Omron’s earnings results in fiscal 2007 included 5.4% year on year growth in net sales to ¥763.0 billion and a 5.2% rise in operating income to ¥65.3 billion. Net income increased 10.7% to ¥42.3 billion, which was partially due to a capital gain from a business transfer. The results mark the sixth consecutive year of record highs for net sales, operating income, and net income. In addition, ROE amounted to 11.3% in fiscal 12 2007, as we achieved our 2nd Stage objective of main- taining ROE above 10%. Despite the solid performance, we fell short of our 2nd Stage target of ¥75.0 billion in operating income. Our outlook assumed that the industry demand for products related to safety, security, and the environ- ment would remain steady even amid a temporary lull in economic growth. However, the rapid deterioration of overall business conditions beginning in the third quarter diminished demand for these social needs. Dividends were raised for the fifth straight term and the dividend payout ratio reached 23% Our basic policy for shareholder return is to maintain a minimum dividend payout ratio of 20% of consolidated net income, and we accordingly distributed a ¥20 per share dividend at year-end. In addition, we added a commemorative dividend of ¥5 in celebration of the forthcoming 75th anniversary of the founding of Omron in May 2008, which raised the year-end divi- dend payment to ¥25 per share. In fiscal 2007, we paid total dividends of ¥42 per share, which is an ¥8 increase over the previous fiscal year and representing a 22.6% dividend payout ratio. (Please see page 19 for Omron‘s capital policy.) Net sales and Operating income Billions of yen 780.0 763.0 723.9 598.7 616.0 575.2 534.0 522.5 60.8 62.0 65.3 60.0 54.7 49.4 28.2 4.2 01 02 03 04 05 06 07 1st STAGE 2nd STAGE Net sales Operating income (FY) 08 (Plan) 3rd STAGE Note: Fiscal year 2006 and previous year results have been revised to exclude contributions from the business that was discontinued in the first quarter of fiscal 2007 (the entertainment business of the Others business segment). Fiscal 2008 is expected to result in a seventh year of sales growth while profits decline because of increased investment for growth It is nearly impossible to predict how business condi- tions will develop in fiscal 2008, as we see no reason to expect the surge in raw material prices to abate and anticipate an increase in speculative investment. These combine with concern of the subprime loan crisis in the United States spurring a global economic recession and a rapidly weakening dollar to present a triple threat to the business environment. Amid the increasingly severe business climate, we expect full-year contributions from previous-year busi- ness acquisitions to support a 2.2% year on year growth in sales to ¥780.0 billion in fiscal 2008, enabling us to achieve seven consecutive years of rising sales. However, our investment focus during the year will be on fortifying our foundation for growth rather than on securing profits for a single term. Our aggressive plans for capital investment and R&D spending coupled with our depreciation expenses are expected to increase our cost burden by about ¥11.0 billion. (Please see page 18 for details of Omron’s capital expenditures.) We also anticipate an approximately ¥8.0 billion impact from a weaker dollar and general conditions in the foreign currency exchange market. As a result, we expect the first decline in income in seven years in fiscal 2008, with operating income decrease 8.1% to ¥60.0 billion and net income declin- ing 13.9% to ¥36.5 billion. Striving to be a ¥1 trillion-sales corporation Omron transformed into a true global corporation dur- ing the four years of the 2nd Stage of GD2010 as our overseas sales more than doubled to exceed domestic sales for the first time in our history. In the 3rd Stage, I would like to crown this achievement by fulfilling our vision of attaining ¥1 trillion in net sales and ¥95-100 bil- lion in operating income with an operating income mar- gin near 10%. I hope that our shareholders have high expectations for Omron’s future, and I look forward to your ongoing support and cooperation through the year ahead. July 2008 T o O u r S t a k e h o d e r s l M e s s a g e f r o m t h e P r e s i d e n t Hisao Sakuta, President and CEO 13 Inter view with the Pr esident Q A The company posted record highs in sales, operating income, and net profit for the sixth consecutive year in fiscal 2007. How do you view the performance in terms of the GD2010 targets? I think it is important to state at the M&A effects, at the start of fiscal 2007 we start that we understand that our fore- raised our net sales target for the 2nd Stage’s casts were overly ambitious and I final year from ¥750 billion to ¥800 billion and would like to apologize for not reaching our aimed to generate more than ¥75 billion in 2nd- stage goal. It is my hope that our share- operating income. However, deteriorating busi- holders will recognize the significant advances ness conditions in the second half of fiscal we made during the year, which I will discuss 2007 caused a sudden slowdown in our busi- below, and continue to support our ongoing ness momentum resulting in net sales of efforts. ¥763.0 billion and operating income of ¥65.3 2nd Stage Targets and Results billion for the year. In reviewing performance for the year, the largest factor weighing on our results was the combined ¥15.4 billion operating income short- We fell slightly short of our targets, yet I fall for the Industrial Automation Business (IAB) believe our achievement of an EPS of ¥185 and Electronic Components Business (ECB). is significant. IAB was only able to generate a 2.3% rise in Encouraged by the greater-than-expected domestic sales, well short of the 7.2% target progress of our structural reform in fiscal 2006, for growth. ECB performance suffered from a the third year of the 2nd Stage, and anticipating stagnating LCD backlight market and declining In the 2nd stage, we selected our businesses and established a revenue structure that is stronger than it appears. Our main objective going forward is to continue steadily progressing with the GD2010 Plan. sales of the high-margin amusement devices. IAB domestic sales were supported by strong fundamental demand for safety, securi- ty and environmental products, but we were slow to respond to the market with new prod- uct proposals while the situation was further exacerbated by a worsening business climate. In particular, we were also unprepared for the weakening demand for capital investment in FY2007 Operating Income: Target vs. Actual Result Billions of yen the second half of the year. At the same time, although the business conditions were anything but favorable, we steadily raised both sales and profit in each of the four years of the 2nd Stage and increased EPS from ¥110 to ¥185. Sales decline, product mix, etc. Raw material prices -0.9 -23.7 Gross profit, M&A +4.0 75.0 +5.9 Gross profit, exchange rate Manufacturing fixed costs (Exchange rate -0.9) (M&A -2.4) (Net decline in manufacturing fixed costs +1.9) -1.4 SG&A and R&D costs, exchange rate -3.1 -1.9 SG&A and R&D costs, M&A +6.1 Lower SG&A costs +5.3 Lower R&D costs 65.3 Gross profit -16.1 Operating income - 9.7 (Exchange rate boost to operating profit +1.9) 07 Target 14 07 (FY) Actual Result Overview of the 2nd Stage of GD2010 contributions. Ultimately, however, we achieved new business sales of ¥89.8 billion, which was approximately ¥10.0 billion short of the Progress in two growth strategies and new target. The primary reason for the operating structure reform shortfall was the unexpectedly sluggish sales We committed in the 2nd stage to advancing of small- and large- sized LCD backlights after two growth strategies and to a sweeping substantially increasing our profile in LCD reform of our operating structure to fortify our backlights through M&A. earning structure. The growth strategies aimed at achieving IAB is focusing on Greater China and sales expansion in new business segments aiming to raise sales by over 20% and in Greater China. The operating structure China, being both the “world’s factory” and reform sought to realize an earning structure the world’s largest “consumer nation”, is a of 40% gross profit margin, a 30% SG&A very promising market for the group, and we expense ratio (including an 8% R&D expense set a sales target of US$1,330 million, quadru- ratio), and a 10% operating income margin. ple our fiscal 2003 sales in Greater China. Our Specifically, we planned to shift production to actual result for the year, however, was $928 Greater China and enhance productivity million, or $402 million short of the target. Our through plant consolidation while revising our expectations for the Greater China market are business portfolio with a priority on efficiency. unchanged. The underperformance was large- Sales Growth in New Business Segments keting structure, including our training of local ly due to difficulties establishing the IAB mar- Billions of yen 89.8 67.9 34.3 28.8 18.0 160% 119% 198% 132% 03 04 05 06 07 (FY) In new business segments, the LCD backlight business struggled more than anticipated Our first growth target in new business segment was to raise new business sales from ¥18.0 billion in fiscal 2003 by ¥50.0 billion, excluding M&A contributions, to ¥68.0 staff, as well as the sluggish business condi- tions in the LCD backlight industry, for which, as with many other new business fields, the majority of manufacturing and sales operations takes place in the region. IAB is our core rev- enue generator, and we will continue forging its marketing structure to maintain our goal of raising Greater China sales by over 20% with a fiscal 2010 target of US$1,800 million. Sales Growth in Greater China MUSD Approx. 1,800 Over 20% YoY Growth Approx. 1,080 928 726 billion. Encouraged by aggressive M&A 411 412 325 moves, we subsequently revised the target upward to ¥100.0 billion including the M&A 03 04 05 06 07 08 (Forecast) 09 10 (Target) (FY) I n t e r v e w w i i t h t h e P r e s d e n t i 15 I n t er v i e w w i t h t h e P r e s i d e n t SG&A ratio reduced, business restructuring increased our production capacity in Greater advanced more than is apparent China by 2.3 times the level in fiscal 2003. Our business restructuring measures were Fulfillment of these measures in fiscal 2007 unable to keep pace with changes in the busi- has greatly contributed to the improvement of ness environment in fiscal 2007, and our oper- the Group’s overall manufacturing operations. ating income margin was 8.6%, the same level as before the start of the 2nd stage. Difficulties securing profits amid rising raw material costs Steady Progress in the Production Shift to the China Region and downward pressure on product prices China Production Grew 2.3x undoubtedly contributed to this result. However, the biggest factor was the less-than-expected growth in sales which occurred despite tangi- ble progress in various areas, such as structur- al reform of our manufacturing operations, and which prevented improvement in earnings indicators. 13% 25% 21% 21% 9% 20% 12% 21% 12% 23% 71% 67% 65% 62% 58% 03 04 05 06 07 (FY) Japan production Overseas production (excluding China) China region production We also reorganized the production processes for our relays (electrical circuit switches), which represent large percentages of the total sales of each of IAB, ECB, and AEC. To establish a more effective develop- ment system for high-value-added products, we set up an intracompany Relay Business Improvement Project and eliminated overlap- ping entities within the Group. We also took measures to revise our busi- ness portfolio by following up the transfer of the SSB ATM business to Hitachi-Omron Manufacturing operation reform Terminal Solutions, Corp. (in which Omron progressed through factory consolidation holds a 45% stake) with a further concentra- and the shift to Greater China tion of the SSB core business including reor- Amid the adverse business conditions, we con- ganizing its business processes and fortifying tinued implementing the reforms to our manu- its solutions development capability. These facturing operation outlined in the 2nd Stage efforts helped SSB improve its operating plan and shifted production operations to income margin to 8.3%, exceeding our target Greater China. We also implemented large- and marking a significant improvement on the scale restructuring of our domestic plants. In 5.6% in fiscal 2004. the core IAB company, we consolidated three Efforts to revise our operating structure will plants into a single plant in Shanghai, China, not be limited to the 2nd stage period but will and moved the development and production continue as necessary to improve performance functions of the Mishima and Okayama plants to maintain our competitiveness and respond to onto the Kusatsu Plant site. Extensive reorgan- changes in business conditions. We will endeav- ization of the manufacturing operations at the or to apply value analysis (VA) and value engi- China plant has positioned it as the primary pro- neering (VE) on every level and across the board. ducer of IAB general-purpose products and 16 Q A The GD2010 3rd Stage drive to strengthen existing businesses is based on a strategic shift to position the company to become the top global company in its field. What are the specific points of this strategy? Strengthen existing businesses to Our objective is to achieve balance provide steady income growth between business units and secure a 10% The main strategy in the 3rd stage is operating income margin to implement aggressive measures to estab- Given the varying levels of profitability of each lish prominent positions in the global markets business segment, it may seem more prudent for our core businesses, which have the great- to focus our efforts on the high-profit segments. est influence on our short- and medium- term However, the vast scope of our businesses— performance. spanning some 120 business units—means In the IAB, the focus will be on strengthen- that numerous business opportunities exist ing high-value-added businesses in equipment across the Group, and we believe our most and solutions services, mainly in the safety effective approach will be to integrate the oper- equipment*1, quality lifecycle management ations and maximize business synergy effects. (QLM)*2, and micro programmable logic con- Rather than following strict business classifica- troller (PLC)*3 businesses. The ECB strategy tions for our business segments, we are centers on the LCD backlight business and pro- approaching the individual business units from motes development and launch of slimmer as the product portfolio management (PPM), well as mid- size products along with a revision product life-cycle, and other perspectives with of production processes. AEC will seek to the aim of realizing an overall balance for the maintain and promote strong sales growth for Omron Group and a target of a 10% operating its electric power steering controllers, which income margin. have received high acclaim for improving auto- mobile fuel efficiency and are attracting increasing demand, and to improve the effi- ciency of its development and production sys- tems. SSB will strengthen its safety and security equipment lines for the railway and traffic control fields. The HCB strategy is to introduce new blood pressure monitoring equipment and to expand the sale of its body composition monitor products on a global scale. In addition, we will implement a group-wide project to accelerate the establishment of glob- ally integrated purchasing and highly efficient R&D processes for our relay technologies. *1 The Safety Equipment Business manufactures and markets control devices and provides consulting services to support safety for workers, equipment, and devices at the plant site. *2 QLM Business provides equipment enabling quality testing equal to expert professionals, which it complements with a solutions business to support efficient and effective quality improvement and quality control. *3 PLCs are intelligent control devices used in production process- es. PLCs control equipment by processing information from various control components such as sensors, timers, tempera- ture regulators and switches. The top priority in the 3rd stage is to strengthen our existing businesses. Strategic Shift for Attaining Top Global Position * Circle size indicates the approximate scale of sales G r o w t h P o t e n t i a l Relays LCD Backlights EPS (electric power steering controllers) Safety Equipment Blood Pressure Monitors QLM (automated optical inspection equipment) Body Composition Monitors Micro PLCs Profit Potential I n t e r v e w w i i t h t h e P r e s d e n t i 17 I n t er v i e w w i t h t h e P r e s i d e n t Q What is your vision for business growth and your investment plan for beyond GD2010? Capital investment will increase by 50% in fiscal 2008. A The 3rd Stage of the GD2010 Plan will focus on strengthening our existing business- es and on building new businesses through aggressive capital investment and R&D invest- ment anticipating the social needs for safety and security, health, and the environment. In the first year of the 3rd Stage, we plan to raise capital investment by a substantial ¥18.9 billion from fiscal 2007 to ¥56.0 billion in Capital Investment and Depreciation Expense Billions of yen 56.0 38.1 38.6 40.6 27.7 10.5 28.6 30.8 9.9 9.7 44.4 33.9 10.5 03 04 05 06 37.1 36.3 1.5 07 40.0 16.0 (FY) 08 Plan fiscal 2008 and to increase our R&D budget by Net capital investment ¥5.5 billion to ¥57.0 billion. In sum, we plan to increase our costs related to growth invest- Capital investment Depreciation expense ments, including higher depreciation costs and business. We have allotted ¥7.0 billion to R&D spending, by approximately ¥11.0 billion. increase our MEMS production capacity, Strengthen existing business and aggressively invest for long-term growth. centered on constructing a new MEMS plant at the Yasu Factory site. We will continue to aggressively invest in MEMS in fiscal 2009. (Please see the Special Feature on MEMS on page 20.) Billions of yen Our second focus of capital investment, ¥3.5 billion, will be on IT to add speed to our management and operations. ECB will invest ¥2.0 billion to expand its production facilities to support development of mid-size products for the LCD backlight busi- ness. Capital investment in IAB and AEC will aim at fortifying and expanding production, in IAB for general-purpose products in China and in AEC for electric power steering controllers. We are also increasing R&D investment for future business growth in the areas of safety and security, health, and the environment. (Please see Table below.) 56.0 Planned 08 (FY) IT Structural Reform Other approx. +2.5 Headquarters approx. +3.5 AEC approx. +2.0 EPS Equipment Capital Investment Increase Increase OPT Production Expand Yasu Facility ECB approx. +2.0 +18.9 Increase OMS Production IAB approx.+2.0 ECB approx. +7.0 37.1 Actual 07 Major investment planned for the MEMS business The biggest increase in the capital investment planned for fiscal 2008 will be for the ECB micro electro mechanical systems (MEMS) New Business Expansion: 3rd Stage Strategies for New Growth Business Category Safety and Security Industrial Social Health Environment and Energy Main Projects Laser Precision Processing MEMS Face Recognition Systems Social Sensors Internet Health Care Electric Power Gauges Solar Power Conditioners Action Plan Promote OLFT Acquisition effect Promote MEMS microphones, strengthen OMRON Semiconductors product development and production capability Strengthen face recognition and search technology Identify needs, strengthen technology and product development Develop products for the Internet Develop high precision electric power gauge technology Develop core technologies 18 Q The company forecasts a profit decline in fiscal 2008. How will this affect shareholder return and what is the company’s policy going forward? We will seek to fulfill shareholder business environment. We fully expect to expectations for both performance reestablish our strong record for shareholder A and business stability return in fiscal 2008 and beyond. We intend to maintain our dividend payments and share buyback programs each term as our Our policy is to proactively retire treasury business performance allows. At the same stock above a set percentage of total stock time, Omron is still evolving and developing as We will continue repurchasing shares to raise a company, and we believe our priority should capital efficiency and enhance shareholder be placed on capital investment and R&D return. In principle, repurchasing company spending to strengthen our ability to grow. Our shares enhances shareholder return when the policy is to maintain a minimum 20% divi- treasury stock is cancelled, not by holding on to dend payout ratio and 2% dividend on equity the shares. Our fundamental policy is to retire (DOE) ratio. treasury stock that represents more than 10% In fiscal 2007, we paid an annual dividend of the total number of outstanding shares. In of ¥42 per share, including a ¥5 commemorative line with this policy, we bought back six million dividend for the 75th anniversary of our shares at a price of about ¥13.5 billion during founding, representing an increase of ¥8 over February and March and retired 10 million the previous fiscal year, a 23% dividend payout shares at the end of the fiscal 2008. We are ratio and 2.5% DOE. The ordinary dividend fully aware of the expectations of our share- (excluding the ¥5 commemorative dividend) holders, and will continue to apply available was ¥37, representing an increase of ¥3 over cash assets to proactively raise dividends and the previous fiscal year, a 20% dividend pay repurchase shares. I n t e r v e w w i i t h t h e P r e s d e n t i out ratio, and 2.2% DOE. While we anticipate a decline in income in fiscal 2008, our forecast is primarily based on our increased spending for business growth and the temporary affects of the uncertain We will continue steadily producing shareholder return in fiscal 2008 and beyond Dividends and Dividend Payout Ratio Treasury Stock Holdings 1.8% 1.9% 2.0% 2.0% ¥34 ¥30 2.5% ¥42 ¥24 22.6% 18.9% 19.7% 20.6% ¥20 17.8% 10,000 shares 1,000 （Cancellation） 2,744 2,144 1,860 10% (2,412） 1,744 1,477 1,110 988 600 03 04 05 06 07 (FY) 03 04 05 06 Dividend amount Dividend on equity Dividend payout ratio Treasury stock at end of term Acquisition of treasury stock Cancellation of treasury stock 07 (At end- December) (FY) 07 (Additional repurchase) 07 (After cancellation) Total number of outstanding shares 249,121,372 239,121,372 19 Spec ial Featur e: MEMS Business S trategy “Beyond the Semiconductor” Omron takes the lead to control the MEMS market. Under the banner “Beyond the Semiconductor”, Omron launched the first 8-inch MEMS (micro electro mechanical systems) production line in Japan capable of comprehen- sively producing semiconductors perfectly suited for mass production and chips integrated with MEMS. We have focused our development on high value-added MEMS that are beyond the process capabilities of semiconductor man- ufacturers and component makers on their own. We are also integrating our original MEMS into our wide array of components and modules as we seek to further raise the high value-added features of all our product lines. Michinao Maeba General Manager, Sales Department Microdevice Division, Semiconductor Division Headquarters 20 MEMS MEMS: Micro Electro Mechanical Systems ity and higher response speeds. In sensors, for exam- MEMS are ultra-small scale electrical mechanical sys- ple, MEMS enables higher and faster responsivity. For tems. The MEMS scale has shrunk from the microme- sensors measuring physical quantity by the flexibility of ter level (1 millionth of a meter), which is currently used thin sheets, thin sensors enable more accurate detec- in devices, to the molecular level of nanometers (1 bil- tion of physical quantity because of their flexibility, and lionth of a meter). for sensors measuring fluctuations in heat conduction, MEMS are essential components enabling the ultra-small areas enable quicker detection (see chart below). technological enhancement and miniaturization of most common electronic devices, from mobile phones MEMS mass production using semiconductor to computers and digital electronics, allowing them to manufacturing technology become smaller, thinner, and consume less energy Three-dimensional structures with sensing functions while making them functional in ways that simply were are built into MEMS via repeated coating, lithography, not possible before. and etching, like the semiconductor production process charted below. Smaller for higher performance MEMS chips can be mass produced by creating a While it is generally believed that smallness is achieved three-dimensional structure through a process of apply- at the cost of performance, for MEMS it is the oppo- ing photoresists over a silicon wafer, using irradiation site. Our efforts to bring MEMS sensors down to the to transfer the design structure en masse, and filing off nanotechnology level is not just to facilitate smaller and unnecessary residue. lighter electronic devices but to realize higher sensitiv- MEMS Production Process Overview MEMS Design S p e c a i l F e a t u r e M E M S B u s i n e s s S t r a t e g y Design of theoretical circuit Photomask Production Production of base circuit pattern (photomask) MEMS Substrate (CMOS) Wafer Production Slicing silicon into thin circular boards Silicon Wafer Processing To imprint the circuit pattern, the wafer surface is fitted with oxidized film and coated with photoresists Stepper (reductive projection lithography equipment) Light Source Wet Etching Creating a three-dimensional structure using a solution bath to dissolve oxidized film and silicon to trim un- needed areas Wafer Etching Solution Projection Lens Stage Lithography Process The circuit pattern designed by the engineer is finely imprinted on the silicon wafer using a lens Dicing Cutting MEMS chips one by one 21 S p ec i a l F e a t ur e : M E MS B u s i n e s s S t r a t e g y MEMS Market Trend Accelerated growth after fiscal 2010 reaching a First in becomes the winner ¥2.4 trillion domestic market While the long-term prospects for the MEMS market Data from the nonprofit foundation Micromachine are substantial, current conditions are quite severe. Center estimates the MEMS market in Japan was a The development speed of MEMS technology must ¥440 billion industry in fiscal 2005, and profitable keep pace with the rapid evolution of electronics MEMS were relatively limited. Since then, however, devices featuring new functions. Being the first to image processors in digital cameras that correct image develop and supply the MEMS chip when a new appli- blurring due to hand jiggle, mobile phones with face cation is developed and meeting the customer’s recognition functions, and other portable devices with (user’s) design specifications creates an immeasurable built-in sensors have become increasingly common. competitive advantage. From a different perspective, Acceleration sensors are used for GPS functions, the reality is that falling behind in development and which are rapidly becoming standard in products rang- being late releasing even a somewhat better perform- ing from automobiles to mobile phones, and are essen- ing product would not recoup the capital investment. tial components in increasingly popular game equipment Time really is money in the MEMS industry, and the that feature motion-sensitive controllers. The appli- first to arrive will be the industry winner. cations for MEMS sensors are expanding rapidly in Be the first to identify client needs, assess the prof- manufacturing machinery, telecommunications, home it potential, swiftly develop a prototype product, and electronics, entertainment systems, automobiles, trans- show that you are capable of stable mass production— portation systems, biotechnology and medical devices these are the fundamental conditions required to and for environmental preservation, energy conserva- emerge a victor in the MEMS market. tion, and crime and disaster prevention. The Micromachine Center forecasts massive growth Japan MEMS Market Growth Forecast in the domestic MEMS market to ¥1.17 trillion in fiscal 2010 and ¥2.4 trillion in fiscal 2015. MEMS applications are expected to continue increasing until they are ubiq- uitous in essentially every product industry. Billions of yen 2,400 1,170 440 05 10 15 (FY) 22 Omron’s Strengths 1) MEMS pioneer in Japan with technology 3) Integrated production from proprietary semi- cultivated over more than 20 years conductors to components at the Yasu Facility Omron has been developing MEMS for more than 20 In April 2007, Omron acquired the CMOS* production years since we first introduced the MEMS manufac- assets (Yasu Facility) of Seiko Epson, and in April 2008 turing concept for applications in semiconductor pro- completed Japan’s first 8-inch MEMS mass production duction technology in Japan in the late 1980s. We line. In addition, unlike rival makers that are limited to began mass production in 1996 of pressure sensors*1 commission manufacturing at dedicated semiconduc- for portable blood pressure monitors and acceleration tor makers or that procure semiconductors from exter- sensors*2 for automobile antilock brake systems. We nal sources to develop and supply components, we not have since expanded to a wide range of products, such only develop components but are also fully equipped as pressure sensors for gas meters. *1 Pressure sensor: measure pressures changes in a gas or liquid. *2 Acceleration sensor: gauges displacement using a spring-loaded weight. 2) In-depth contact with diverse users for integrated production of components using exclu- sive MEMS semiconductors. * Complementary Metal Oxide Semiconductors (CMOS): feature low power consumption and simple construction. CMOS are the most widely used type of semiconductors in integrated circuits (IC) and large- scale integration (LSI) for digital instruments. Success in the MEMS industry requires more than technical capability; the ability to gather and assimilate 4) Eight-inch MEMS line offers low unit cost and high-speed mass production information is crucial. As a MEMS developer and man- Omron, which has been a producer of 5-inch MEMS ufacturer, Omron is unparalleled in its ability to work line, in fiscal 2008 began accelerating its shift to 8- closely with customers to ascertain their needs and inch MEMS production line to increase productivity provide components for industrial instruments, home and lower manufacturing unit costs. The shift allows electronics, automobiles, social infrastructure instru- higher chip yield from a single wafer. In addition, the ments, medical equipment, and multitude of other introduction of a high-speed flow control system at devices. This gives us first-mover advantage. the Yasu Facility production line has enhanced our ability to provide quick delivery and mass production while meeting high precision specifications and lowering unit costs. Quick delivery and stable mass production capabilities is essential for component suppliers to high-volume industries such as mobile phones, and the first 8-inch MEMS production line in Japan gives Omron a distinct advantage. Integrated manufacture from semiconductor to component (Example: MEMS flow sensor in fuel cell battery) Semiconductor and MEMS manufacturing technology Component development MEMS flow sensor in fuel cell battery MEMS chip sensor elements ＋ 500μm ⇒ S p e c a i l F e a t u r e M E M S B u s i n e s s S t r a t e g y 23 S p ec i a l F e a t ur e : M E MS B u s i n e s s S t r a t e g y 5) Reinforcing our global standard surface micro- 6) Patented manufacturing techniques, including machining know-how circular wet etching The acquisition of the semiconductor manufacturing Omron also features a variety of patented manufacturing assets of the Yasu Facility has enabled Omron to techniques. One of our unique processes is our circular complement and reinforce its surface micromachining wet etching method, which is used to produce the technology. recently developed world’s smallest microphone chip. There are two types of MEMS manufacturing Microphone chips are three-layer structures with a processes depending on whether etching is necessary diaphragm over a cavity in the backchamber*1. When on the silicon substrate. Surface micromachining is the diaphragm vibrates in response to sound pressure, common with IC and LSI chips with flat surfaces; it the vibration is converted into an electrical signal, entails few processes and etching only on the coating which is then transmitted externally. In the manufac- materials, and thus features lower cost. Bulk microma- turing process, during the surface processing of the chining entails etching directly on the silicon substrate silicon substrate, circular wet etching is used to cre- as well as on the coating materials and permits greater ate the rhombus-shaped cavity in the backchamber. design flexibility with three-dimensional chip structures. This process technique enables a larger diaphragm for Omron has cultivated its specialty in bulk microma- acoustic sensitivity as well as increased capacity in the chining processing technologies for deep lengthwise backchamber, which improves acoustic sensitivity. The etching, and the addition of the Yasu Facility enables process was also a key element in the successful cre- the company to meet the complete needs of the ation of a highly sensitive, world’s smallest microphone MEMS market by adding the equipment and know-how chip. In addition, because it is a wet etching process*2, for surface micromachining, which is more common several dozen chips can be dipped together in the solu- overseas. By offering manufacturing capability in both tion bath*3 to clear away residue, thereby supporting types of machining processes, Omron now has a rapid mass production and making it less costly than springboard for developing global supply operations. dry etching methods*4, which require each chip to be exposed to a gas chemical reaction individually when making the chip structure. Production of World’s Smallest MEMS Microphone Chip and Omron’s Proprietary Etching Method Etching method 1.0mm Omron’s proprietary Circular Wet Etching method Deep dry etching Backplate Diaphragm Substrate Backchamber Traditional etching methods * To achieve high sensitivity, a large diaphragm surface area and large backchamber capacity are necessary *1 Backchamber: cavity over which the diaphragm is placed to allow the diaphragm to vibrate unobstructed in response to sound pressure. *2 Wet etching: method of chip construction utilizing chemical liquids with corrosive properties to dissolve metals, semiconductor materials or other substances. *3 Solution bath: contains chemical liquids to dissolve oxidized film or silicon in the chip configuration process. *4 Dry etching: method of chip construction utilizing ion or other element chemical reactions instead of chemical liquids. 24 Omron’s MEMS Business Plan Mass production of four new products We will also add several high value-added products in fiscal 2008 in the near future, including a thermal array sensor that We plan to enter four new products into mass produc- features multiple microscopic sensors aligned as one tion in fiscal 2008. These are 1) the world’s smallest, and the high-performance microphone module, a com- thinnest, and highest sensitivity MEMS microphone chip, posite component with amplifier circuitry and sound 2) an RF MEMS switch*1 for semiconductor testers and distinguishing software. high frequency meters capable of over 100 million on-off Omron is also currently seeking to develop a SNA- switches, 3) a thermal sensor for microwave ovens and MEMS chip the size of a grain of sand mounting a wide security equipment, and 4) a combination sensor com- variety of functions on silicon coupled with an ASIC*2 bining flow and pressure sensors. for function control, utilizing its MEMS technology that *1 RF (radio frequency) MEMS switch: routes radio frequency signals. can respond to dozens of nanosize particles. *2 ASIC (application-specific integrated circuit): semiconductor customized for a specific use MEMS Products Combination Sensor Thermal Array Sensor Combination SNA-MEMS High-performance Microphone Module Microphone Module Integration RF Switch MEMS Microphone Sensing Cell Blood Pressure Gauge Sensor Automobile Acceleration Sensor Gas Pressure Sensor Flow Sensor Thermal Sensor 1995 2000 2008〜 2010〜 (FY) MEMS Scheduled for Mass Production on the 8-inch Line in Fiscal 2008 Product MEMS Microphone Chip RF MEMS Switch Thermal Sensor Combination Sensor (flow and pressure sensors) Anticipated Application Mobile device microphones Semiconductor testers and high frequency meters Home, personal electronics, and security devices Medical equipment, fuel cell batteries, and boilers S p e c a i l F e a t u r e M E M S B u s i n e s s S t r a t e g y 25 S p ec i a l F e a t ur e : M E MS B u s i n e s s S t r a t e g y MEMS microphones—aiming for 40% global market share The majority of small microphones used in mobile phones are electret condenser microphones (ECMs), and the market is esti- mated to be worth over ¥100 billion. We developed the world’s smallest high-sensitivity MEMS microphone with the express objective of replacing ECMs. The organic materials used in ECMs make them sensitive to Small Microphone Market heat and they must be assembled in separate process with the other electronic components. Silicon-based microphones can withstand heat of up to 200˚ Celsius (390˚F) and can be assem- bled together with other electronic components via reflow sol- dering*. This reduces the number of production processes required. These advantages attracted numerous inquiries from potential customers, and we are launching mass productions using the new 8-inch MEMS mass production line. We aim to capture 30-40% of the global market share for MEMS micro- phone chips in fiscal 2010. * Reflow soldering: heat-generating mounting process that uses solder to set the electronic components. 06 07 08 ECM MEMS Source: Figures Omron estimates Million units 2,260 1,559 10 (CY) 2,194 912 09 MEMS facility expansion plans for fiscal 2008 and 2009 The Yasu Facility will continue to be a main focus of capital investment into fiscal 2009. During fiscal 2008, as we concentrate our semiconductor and MEMS busi- ness planning, development, production, and admin- istration functions to the Yasu Facility, we will also commence construction of a new facility on the site with its completion scheduled for April 2009. In addi- tion, we will partially shift our production of our con- nectors for mobile phones, music players, and other mobile devices, which have strong demand for minia- turization. With this we will construct an comprehen- sive high-precision production system ranging from plating and metal die making to mass production of components. 26 Site of the Yasu Facility and a planned new building MEMS-related business growing to ¥50 billion in Setting the MEMS paradigm shift in motion fiscal 2013 with myriad ripple effects When imagining the future market for MEMS, it is easy Mass production of microphone chips at the Yasu Facility to envision their usage in everyday electronics and will start in September 2008. We plan to steadily ramp up automobile components that use miniature sensors, operation, beginning in fiscal 2010, of the new 8-inch but inexpensive ultraminiature sensors can invite a par- wafer mass production line as the market grows. adigm shift in a broad range of fields. Omron’s MEMS-related sales targets are ¥20 bil- For example, sensors the size of a grain of rice are lion in fiscal 2010 followed by a surge in growth to ¥50 attracting attention for their potential to realize a wire- billion in fiscal 2013. In addition, the Omron group plans less sensor network for information terminals. If a to steadily introduce new highly differentiated sensors, network like this were in place, the sensors would dra- programmable logic controllers, healthcare equipment matically enhance safety and environmental measures and other devices of all types integrating our MEMS at factories and buildings. During earthquakes or other technology, made using our unique semiconductors, disasters as well, the sensors could detect danger with features unavailable in common devices and cost levels in factories, building, bridges, and other infra- performance. We anticipate MEMS technology to structure and instantly convey that information wire- bring a myriad of positive ripple effects throughout the lessly to nearby cars and pedestrians. Omron Group. Projected MEMS-related Sales Billions of yen 50 20 10 10 07 13 (FY) MEMS are also attracting increasing attention from the medical and biotechnology fields for numerous applications. Potential uses include sensors that mechanically prevent medical malpractice; sensor sys- tems that can automatically provide the names of dis- eases based on measurements of blood pressure, heart rate, blood sugar levels, and other data; sensors enabling remote medical care; and molecular level sen- sors that can play a role in diagnosing and treatment of ailments linked to cerebral, DNA, and other sources. Demand is also growing for sensors that can help maintain ideal growing conditions for agricultural crops. Taken to this level, it is simply fascinating imagining the potential applications for MEMS. To maximize its corporate value, Omron is responding to social needs and is determined to advance aggressively into the MEMS field where it believes the first to arrive will be the industry winner. Sensors for detecting abnormal vibrations in bridges S p e c a i l F e a t u r e M E M S B u s i n e s s S t r a t e g y 27 Omr on at a G lanc e Segment Business Performance and GD2010, 3rd Stage Key Strategies Segment Sales and Operating Income Performance Sales by Segment (Billions of yen) Operating Income by Segment (Billions of yen) 800 700 600 500 400 300 200 100 0 90 80 70 60 50 40 30 20 10 0 Business Development Group and Other Businesses HCB SSB AEC ECB IAB 03 04 05 06 07 (FY) 03 04 05 06 07 (FY) IAB INDUSTRIAL AUTOMATION BUSINESS ECB ELECTRONIC COMPONENTS BUSINESS Sales (Billions of yen) 328.8 +7.6% 350 300 250 200 150 100 50 0 03 04 05 06 07 (FY) Operating Income (Billions of yen) Operating Income Margin (%) Sales (Billions of yen) Operating Income (Billions of yen) Operating Income Margin (%) 60 50 40 30 20 10 0 20 51.9 +7.1% 15.8% 15 10 5 0 03 04 05 06 07 (FY) 180 150 120 90 60 30 0 154.2 +11.5% 20 15 10 5 0 03 04 05 06 07 (FY) 20 15 12.6 -3.4% 10 8.2% 5 0 03 04 05 06 07 (FY) IAB is fortifying its safety, QLM*, micro PLC, and other businesses to enhance its application business meeting emerging needs for quality, safety, and the environment. * Quality Lifecycle Management (QLM) is an Omron solution service equipping machines with the same quality-testing capability as experts in the field to realize efficient and effective quality improvement and control. ECB aims to enhance productivity for relays, switches, and other existing electronics components as well as for the promising MEMS business and to raise sales and profitability of the LCD backlight business. Note: Operating income includes internal income prior to the deduction of amounts such as inter-segment transactions and headquarters expenses that are not apportionable. 28 AEC AUTOMOTIVE ELECTRONIC COMPONENTS BUSINESS SSB SOCIAL SYSTEMS BUSINESS Sales (Billions of yen) 107.5 +15.2% 150 120 90 60 30 0 03 04 05 06 07 (FY) Operating Income (Billions of yen) Operating Income Margin (%) 5.0 1.4 Return to Profitability 2.5 1.3% 0.0 -2.5 -5.0 03 04 05 06 07 (FY) 5.0 2.5 0.0 -2.5 -5.0 150 120 90 60 30 0 Sales (Billions of yen) Operating Income (Billions of yen) Operating Income Margin (%) 85.2 -19.6% 12.5 10.0 7.5 5.0 2.5 0.0 03 04 05 06 07 (FY) 20 15 7.0 -12.7% 10 8.3% 5 0 03 04 05 06 07 (FY) AEC is focused on expanding sales of strategic prod- ucts, including electric power steering controllers for domestic and foreign automakers’ new car models. SSB is fortifying its earnings structure and expanding its product applications focused on its social sensors* for railway and road infrastructure, commercial facilities, and other applications. * Social sensors are sensor systems designed to meet the safety, security, and environmental needs of society. HCB HEALTHCARE BUSINESS BUSINESS DEVELOPMENT GROUP AND OTHER BUSINESSES Sales (Billions of yen) Operating Income (Billions of yen) Operating Income Margin (%) Sales (Billions of yen) Operating Income (Billions of yen) Operating Income Margin (%) 100 80 60 40 20 0 71.6 +8.9% 12.5 10.0 7.5 5.0 2.5 0.0 03 04 05 06 07 (FY) 9.4 +8.2% 20 18 16 14 13.1% 12 10 03 04 05 06 07 (FY) 50 40 30 20 10 0 15.6 +4.5% 03 04 05 06 07 (FY) 8 6 4 2 0 40 30 20 10 0.1 -79.8% 0.6% 0 03 04 05 06 07 (FY) HCB aims to raise sales and income and is enhancing its lineup to provide total support for Healthcare at Home and medical institutions with particular focus on lifestyle- related disease prevention devices. The Business Development Group is a central driver of the Omron Group’s growth strategy, and is currently focusing on the RFID business and the remote energy monitoring service business. O m r o n a t a G a n c e l S e g m e n t B u s i n e s s P e r f o r m a n c e a n d G D 2 0 1 0 , 3 r d S t a g e K e y S t r a t e g i e s 29 Yoshinobu Morishita Senior Managing Officer Company President, Industrial Automation Company IAB focuses on the highest priority top- ics at production sites—quality, safety and the environment—and is promot- ing expansion of the solutions business. IAB INDUSTRIAL AUTOMATION BUSINESS Manufacturing and sales of control systems for factory automation 43.1% % of Net Sales Fiscal 2007 Management Review Increased sales and income on strong overseas sales products to expand the application and safety components businesses. In June 2007, Omron acquired a 95% stake in Omron Laser Front Co., Ltd. (OLFT), a developer and man- ufacturer of laser fine processing devices, to bring about In fiscal 2007, IAB posted growth in net sales of 7.6% year synergies with IAB. OLFT’s previous entity recorded net on year to ¥328.8 billion and operating income of 7.1% to sales of ¥10.3 billion in fiscal 2006. ¥51.9 billion. Brisk plant and equipment investment in Europe boost- In Japan, capital investment continued with a generally ed sales of programmable logic controllers (PLCs), motion strong undertone through the year in manufacturing indus- controllers, and image sensors. In China, sales rose for tries, particularly in the automobile sector. However, equip- PLCs, print automatic optical inspection (AOI) equipment, ment-related demand grew slower than expected in the and other equipment as we focused on meeting the spe- semiconductor, electronic components, and flat panel dis- cific needs of local customers by aggressively releasing play (FPD) sectors, which are the primary drivers of our new products and fortifying the business capabilities of our sales growth. In this environment, we focused on our distributors. Sales in North America grew only marginally as themes of quality, safety, and the environment at the pro- demand for oil and gas-related control devices plummeted duction site. We also enhanced our specialized sales staff in the fourth quarter amid the economic instability caused and augmented consultation services for our wide range of by the subprime loan crisis. IAB Results and Plans Fiscal Year Net sales* Domestic Overseas North America Europe Asia China Direct exports Operating income* Operating income margin* R&D expenses Depreciation and amortization Capital expenditures 2008 Plan 337.5 150.0 187.5 30.5 94.0 23.0 38.0 2.0 50.0 14.8% 21.0 12.5 10.0 2007 328.8 144.1 184.7 35.6 92.3 16.2 34.6 6.0 51.9 15.8% 19.5 11.7 8.4 YoY 107.6% 102.3% 112.1% 102.0% 113.5% 116.2% 120.1% 103.6% 107.1% (0.1%pt.) 107.5% 104.8% 61.3% 2006 305.6 140.8 164.8 34.8 81.3 14.0 28.8 5.8 48.5 15.9% 18.1 11.2 13.7 Billions of yen 2004 250.3 130.2 120.1 20.3 65.6 10.4 19.5 4.3 41.4 16.5% 16.7 7.6 8.8 2005 272.7 136.2 136.5 25.4 69.6 12.7 24.0 4.8 41.9 15.4% 18.5 10.2 10.0 * Projections for FY2008 are based on exchange rates of ¥100/US$ and ¥155/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including inter- nal income prior to the deduction of amounts such as inter-segment transactions and headquarters expenses that are not apportionable. 30 Full Color, Three-dimensional Visual Sensors IAB has introduced the world’s first three-dimen- sional visual sensor utilizing a dual camera system capable of measuring depth within a production line. Demand is strong from the automotive indus- try where the sensors are used to verify alignment after body assembly and in other automated systems. Multi-Input Units for PLCs Multi-input units for PLCs are process input units incorporating heat, displacement, pres- sure and other sensors in a single body that perform a range of functions, including collecting and catego- rizing data and report- ing safety information. Power Conditioners Power Conditioners are power control units for solar power generation systems. They convert electricity generated by the photovoltaic cells of solar power systems from direct current (DC) to alter- nating current (AC) for household use and thus control power generation conditions to ideal levels. Business Strategy and Outlook for Fiscal 2008 work to market OLFT’s precision laser processing tech- Rising income on expanding domestic application business sales and sales to developing markets We forecast 2.6% year on year growth in net sales to nologies, which command top global share for laser CVD repair systems* for LCD panels. Overseas, we will fortify our marketing capabilities in India, Russia, and other emerging markets. In China, we will ¥337.5 billion and a 3.7% decline in operating income to continue upgrading the facilities at Omron (Shanghai) Co., ¥50.0 billion in fiscal 2008. Ltd., which commenced operations in June 2006, while In Japan, we anticipate a recovery for the FPD sector introducing new safety components, application sensors, with the proliferation of digital broadcasting. However, we and other products to boost sales. We expect these initia- also anticipate restrained capital investment during the year tives to counter the negative impact of diminishing demand owing to the rapid appreciation of the yen against the US from oil and gas-related businesses in the United States dollar, rising raw material prices, and the slowing economy and from a strong yen against the US dollar, allowing IAB to in the United States along with the impact on the world secure sales growth for our overseas operations. economy that it brings. Our strategy for the domestic market is to continue strengthening our sales structure to expand the application business, aggressively promote our solutions for users’ quality, safety, and environment issues, and establish a close link with sales channels to increase sales of general- purpose products. We will also expand the scope of the quality solutions business by leveraging the IAB sales net- * CVD repair systems for LCD displays: Chemical vapor deposition (CVD) repair systems improve LCD production yield by repairing areas in the metal wiring pattern on LCD substrates that have been flawed during the LCD manufacturing process. The repair process irradiates flawed areas using lasers, applies thin film pattern cuts, fusion joining, and reconnection of wiring with laser CVD film. Laser CVD is a coating method based on the formation of a membrane through chemical and physical reactions of raw material gas on a laser irradiated surface achieved by irradiating laser beams on a substrate placed in the gas. Introduction of new safety light curtains with double the detection distance Safety Safety light curtains are photoelectric transmissive sensors used with industrial robots and hazardous areas near machinery and equipment to automatically shut down the operation when a worker’s fingers, hands, legs, or other body parts enter or pass through the sensor detection range. The Industrial Safety and Health Law revision in April 2007 is expected to bring steady domestic demand for Safety Light Curtains in the medium and long-term. The combination of safety and productivity is also becoming a major business issue at production facilities overseas, and IAB is focusing on cultivating its overseas safety component busi- ness. In January 2008, we introduced a new safety light curtain for large machinery with a maximum detection range of 20 meters, more than double the previous range capability. We anticipate demand for the new model in particular for use in automotive assembly lines; LCD production lines; automated operating areas with machine tools, metal- working machinery and casting equipment; areas employing industrial robots; and automatic warehousing. IAB safety equipment commands top share in the Japanese and Asian automotive and semiconductor industries, and we plan to leverage the June 2006 acquisition of the safety equipment business of a top manufacturer in North America to become the number one supplier of safety equipment worldwide. S e g m e n t i n f o r m a t i o n 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 31 Soichi Yukawa Senior Managing Officer Company President, Electronic Components Company ECB actively introduces new products and develops new markets under a strategy of developing semiconductor technology applications for all fields to differentiate Omron. ECB ELECTRONIC COMPONENTS BUSINESS Manufacture and sales of electronic components for consumer electronics, mobile phones, telecommunications and industrial equipment, and amusement devices 20.2% % of Net Sales Fiscal 2007 Management Review Income declined on struggling results for amusement device components ECB net sales increased 11.5% year on year to ¥154.2 bil- lion while operating income decreased 3.4% to ¥12.6 billion in fiscal 2007. In Japan, demand from the semiconductor and auto- motive industries slowed from last year when these sec- tors were key drivers for our earnings, and inventory adjustments in the business and consumer equipment sec- tors impacted sales. Overseas results were affected by the deteriorating business conditions worldwide beginning in the second half as the global economy reacted to the deep- ening subprime loan crisis in the United States. In this environment, demand continued growing for our mainstay relays for printed-circuit board, with notably strong demand from air conditioner manufacturers in the BRICs and other developing nations. Sales also grew for input switches, connectors, and other components as demand grew in line with the development of ever-thinner mobile devices. The full-year contribution of the multi-light source LCD backlight manufacturing operation acquired in August 2006 and sales growth in the expanding China market, a key marketing base, also contributed to sales. However, the deteriorating economic conditions resulted in fewer large-scale orders than we anticipated from panel makers during the year. Also, sales of transmission relays slowed substantially in North America and Europe from the strong demand in fiscal 2006. Amid the unstable business conditions, the full-year contribution from the newly acquired LCD backlight opera- tion increased net sales over the previous fiscal year. Overall, however, ECB product profitability declined from stagnating sales in the high-margin amusement device busi- ness and rising raw material costs and downward pricing pressure in the backlight operation, which undermined efforts to improve profitability. ECB Results and Plans Fiscal Year Net sales* Domestic Overseas North America Europe Asia China Direct exports Operating income* Operating income margin* R&D expenses Depreciation and amortization Capital expenditures 2008 Plan 154.5 62.5 92.0 9.5 13.0 10.0 53.0 6.5 11.5 7.4% 9.0 12.0 22.0 2007 154.2 62.4 91.8 10.4 12.4 10.3 48.3 10.4 12.6 8.2% 8.2 10.5 14.1 YoY 111.5% 106.2% 115.4% 95.0% 102.7% 120.4% 135.4% 84.3% 96.6% (1.3%pt.) 100.9% 115.7% 110.0% 2006 138.4 58.8 79.6 11.0 12.0 8.6 35.7 12.4 13.1 9.5% 8.1 9.0 12.8 Billions of yen 2004 101.1 51.8 49.3 9.5 12.0 5.6 11.6 10.7 16.1 15.9% 7.9 5.8 9.1 2005 97.7 45.0 52.7 9.9 12.5 6.3 14.5 9.5 11.2 11.5% 7.8 8.4 7.1 * Projections for FY2008 are based on exchange rates of ¥100/US$ and ¥155/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including inter- nal income prior to the deduction of amounts such as inter-segment transactions and headquarters expenses that are not apportionable. 32 MEMS Microphones The MEMS microphone utilizes the world’s small- est microphone chip — a mere 1.2mm x 1.3mm x 0.4mm — in an ultra-thin 1.1mm package. Ultra-slim FPC Connectors Omron’s ultra-slim connector for flexible print- ed circuits (FPCs) with a superior impact-resist- ant backlock mechanism has an ultra-low 0.6 mm profile, making it ideally suitable for mobile phones, note- book computers, and other mobile devices. Sheet-type Backlights Omron has developed a flexible sheet-type LCD backlight using a proprietary production method for placing microlenses on a 0.59 mm polycarbonate sheet. Business Strategy and Outlook for Fiscal 2008 Leveraging the backlight business and launching new products to maintain sales We forecast growth of 0.2% year on year to ¥154.5 billion in net sales and a decline of 9.0% to ¥11.5 billion in operat- ing income in fiscal 2008. We anticipate an ongoing deterioration in domestic and worldwide business conditions in the year ahead. We expect business conditions in the United States to worsen further as slowing housing construction starts impact demand for home electronics and housing equipment and facilities. We expect an additional negative influence on operating income from a strong yen versus the dollar. Our business strategy for the year is to aggressively release new products focused primarily on the growth mar- kets of automotive components and mobile devices. In the LCD backlight business, which has been struggling to secure profits, we will seek to expand market share in the large-size LCD backlight market by developing our small- size LCD backlight technology for applications in thin-type large-size LCD TVs. We will also work to generate demand for ultra-thin LCD backlights for mobile phones. Moreover, we will widen our presence in the mid-size LCD backlight market by developing applications for car navigation sys- tems, notebook computers, and other devices. To support these strategies and enhance operating efficiency, we plan to invest in automation equipment for our backlight produc- tion bases in China. The Yasu Facility semiconductor production operation acquired at the end of fiscal 2006 has been established as our semiconductor and MEMS* manufacturing base. We plan to improve operating efficiency and reduce lead times, and commence mass production of high value-added prod- ucts, such as the world’s smallest, high-sensitivity MEMS* microphone chip for mobile phones. We are also construct- ing a new facility at the Yasu plant (scheduled to start oper- ations in April 2009) to become a base to reinforce our strategy of developing semiconductor applications for all fields by expanding our product lineup incorporating our pro- prietary semiconductor devices. We will develop business overseas by establishing engineering centers to enable sales closely linked with local users and support business growth in the priority China and Eastern Europe regions and accelerate our entry into the Mexico and Vietnam markets. * See the MEMS Special Feature on page 20. Safety and Further advances in OKAO Vision facial image recognition Security ECB has been advancing development of its OKAO Vision face recognition technology since 1995. The technology is capable of collecting and analyzing a matrix of facial data, including position tracking, per- sonal verification, the direction faced, line of sight, degree of opening of the eyes and mouth, and can estimate and determine the age and sex of the individual. The technology has numerous applications for safety and security, such as personal identity ver- ification for mobile phone owners. It is also used in various elec- tronic devices, including the autofocus mechanism in digital cameras and correcting skin tone when printing photographs from printers. In fiscal 2007, ECB developed real-time smile measurement technology using three-dimensional model fitting technology* that locates a person’s face from an image and rates a smile on a scale of 0% to 100%. Real-time Smile Measurement Technology Model Fitting 3D Face Model Fitting Result Eye closure Eye corner geometry Wrinkle geometry Mouth corner geometry Mouth closure ・ ・ ・ Simultaneous analysis of smiles for multiple people is also possible. Integrated Inference 100% 50% 10% * 3D Model Fitting Technology: The 3D model fitting technology is a high-speed fitting system of two-dimensional face image data with three- dimension data collected from thousands of face images. The technology conducts a comprehensive analysis by applying the latest statistical identification methods to observed changes in the distinctive details of each face, such as the wrinkles created when smiling, to produce a rating for the degree of a person’s smile. S e g m e n t i n f o r m a t i o n 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 33 Yoshinori Suzuki Managing Officer Company President, Automotive Electronic Components Company AEC focuses on enhancing manufactur- ing productivity while contributing to “safe automobiles that are gentle on both people and the environment” and developing business in new arenas. AEC AUTOMOTIVE ELECTRONIC COMPONENTS BUSINESS Manufacture and sales of electronic components for automobiles 14.1% % of Net Sales Fiscal 2007 Management Review Sales growth achieves profitability for first time in four years Automobile industry-related producers are shifting manu- facturing operations to China and the country is becoming a global supply center for the automobile industry. Sales also rose significantly in Europe as the results of our acquisition In fiscal 2007, AEC net sales rose 15.2% year on year to in 2004 of Europe’s third largest maker of automotive relays ¥107.5 billion and the division recorded operating income of and efforts to develop new markets started to appear. The ¥1.4 billion, marking the return to profitability for the first North America automobile market, the world’s largest mar- time in four years. ket, struggled under deteriorating economic conditions in Worldwide demand for automobiles steadily expanded the second half of the year. However, sales continued to be during the year led by growing demand from China and brisk for our keyless entry systems, tire pressure monitor- developing automobile markets even as demand slowed in ing systems*, and other wireless equipment. Japan and the United States. Sales expanded largely from Earnings were affected by the steep rise in raw materi- the increasing use of AEC products in new automobile als costs that reduced the profitability of our relay products. models as automakers are incorporating more electronic We responded by raising productivity and adjusting product components to enhance vehicle safety and environmental prices while implementing group initiatives to improve earn- performance. ings, such as enhancing operating efficiency through In Japan, where unit volume of new car sales has alliances with IAB and ECB. As a result, AEC attained its peaked, rising export volumes of models with superior envi- goal of achieving profitability. ronmental performance and other value-added features boosted AEC sales. The company also attracted steady order growth and increased production output in China. * Tire pressure monitoring systems: Legislation requires all automobiles sold in the United States from September 2007 to be equipped with a tire pressure monitoring system to warn of inadequate tire pressure. AEC Results and Plans Fiscal Year Net sales* Domestic Overseas North America Europe Asia China Direct exports Operating income* Operating income margin* R&D expenses Depreciation and amortization Capital expenditures 2008 Plan 108.5 33.0 75.5 37.5 14.5 17.5 3.5 2.5 0.5 0.5% 8.5 8.5 9.5 2007 107.5 28.0 79.5 42.4 13.9 18.3 3.1 1.9 1.4 1.3% 8.3 8.0 9.1 YoY 115.2% 107.4% 118.3% 112.0% 141.2% 113.0% 226.8% 93.2% — — 116.5% 98.8% 101.7% 2006 93.3 26.1 67.2 37.9 9.8 16.2 1.4 2.0 (1.2) — 7.1 8.1 8.9 Billions of yen 2004 64.6 26.0 38.6 21.0 5.4 11.9 0 0.3 (0.9) — 6.4 3.3 7.6 2005 77.6 27.2 50.4 28.8 6.2 15.1 0.1 0 (2.0) — 6.7 7.0 11.2 * Projections for FY2008 are based on exchange rates of ¥100/US$ and ¥155/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including inter- nal income prior to the deduction of amounts such as inter-segment transactions and headquarters expenses that are not apportionable. 34 Laser Radars Laser Radar is a key part of cutting-edge safety systems that aid in driving control, with highly sensitive and wide-field lasers to anticipate dan- ger of collision and reduce injury from impact. Smart Entry Systems Smart Entry systems are portable devices that enhance automobile security on several levels, including transmitting signals to automatical- ly lock and unlock doors and an authorization function during keyless engine start-up. Electric Power Steering Controllers Electric Power Steering Controllers assist driver steering. Electric (motorized) power steering sys- tems enable better fuel efficiency than conven- tional hydraulic steer- ing systems. Business Strategy and Outlook for Fiscal 2008 AEC is preparing by improving productivity through Expand electric power steering component and strategic product sales For fiscal 2008, we project 0.9% year on year growth in net value analysis/value engineering-based cost reductions and by shifting to local production operations in growth markets. With the rise in oil prices spurring demand for more energy efficient vehicles, we plan to expand sales of sales to ¥108.5 billion and a ¥900 million decline in operat- our electric power steering controllers and other strategic ing income to ¥500 million. products. During the year, we plan to increase spending We anticipate ongoing rises in automobile production to develop safety and environmental products to meet output in China, India, Eastern Europe, South America, and growing demand. We expect this strategic investment other growing markets, but expect oil prices to continue ris- coupled with the impact from a fluctuating foreign currency ing and create severe repercussions in the world economy. exchange market to have a net effect of lowering operating Particularly, the business environment for automobile sales margin for the year. appears on the verge of deteriorating further in Japan and the United States. Safety Developing a high-performance image sensor to bring about “crashless” cars Amid the increasing attention given to automobile safe- ty features, AEC has developed over five years a high performance image chip, called a high dynamic range CMOS* (HDRC), and has begun shipping sample HDRC sensors to clients. The image chip (image pickup device) features the world’s widest dynamic range at 170 decibels and can produce clear images even in the dark and in harsh back light. The sensor can become the “eyes” of the car to verify safety in front by recognizing other cars, obstacles, or whether the car itself is between the white lines on the road. A sensor mounted in the rear of the car can identify an object in blind spots from the driver’s position. High tech devices such as these are currently appearing in the safety systems of luxury vehicles but are expected to eventually become widely available in standard vehicles in the future. AEC is com- bining its laser radar technology and high performance image sensors into unique sensor fusion technology with the aim of contributing to the realization of crashless cars. * Image sensors with imaging pickup devices containing CMOS (complementary metal oxide semiconductors) Sensor Fusion Combined sensor data from laser radar and image sensors enables recognition differentiation between automobiles and pedestrians. S e g m e n t i n f o r m a t i o n 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 35 Hiroshi Fujiwara Managing Officer Company President, Social Systems Solutions Business Company SSB develops a variety of systems and offers Omron’s unique solutions to con- tribute to the creation of a society that is safe, secure, and comfortable. SSB SOCIAL SYSTEMS BUSINESS Providing solutions and services for realizing a secure, safe, and comfortable social environment 11.2% % of Net Sales Fiscal 2007 Management Review Ebbing demand for railway IC card equipment reduced sales while profitability steadily improved posting brisk sales of its new ID entry key devices used for access control at companies and offices and for other security applications. This was despite slowing sales to the credit industry, which restrained investment in the face of SSB net sales fell 19.6% year on year to ¥85.2 billion while a lowered maximum interest rate and revised credit limits operating income declined 12.7% to ¥7.0 billion in fiscal 2007. for borrowers. The passing of the demand peak for IC card readers for In the software business, sales increased for account automated passenger gates and ticket vending machines settlement software to the logistics industry and for plug-in led to lower sales in the railway infrastructure business and software incorporating character input conversion and other was the main factor in the decline in overall SSB sales. The functions to the mobile phone industry. market for traffic control and road management systems Overall, while the decline in sales related to railway continued to shrink due to restrained public sector invest- infrastructure strongly impacted SSB sales revenue, efforts ment. The railway infrastructure maintenance business was to reform operations by reducing fixed costs and leverag- also weak, with sales declining for IT-related maintenance ing our solutions expertise supported steady improvement and services. in profitability. The ID management solutions business, which sup- plies security and account settlement solutions, continued SSB Results and Plans Fiscal Year Net sales* Domestic Overseas North America Europe Asia China Direct exports Operating income* Operating income margin* R&D expenses Depreciation and amortization Capital expenditures 2008 Plan 90.0 88.0 2.0 0.5 0 0 0 1.5 8.0 8.9% 4.0 3.5 2.0 2007 85.2 81.0 4.2 0.6 0 0 0 3.6 7.0 8.3% 2.6 3.3 1.7 YoY 80.4% 79.6% 101.7% 120.0% — — — 99.1% 87.3% +0.7%pt. 52.1% 99.8% 44.3% 2006 105.9 101.8 4.1 0.5 0 0 0 3.6 8.1 7.6% 5.1 3.3 3.9 Billions of yen 2004 115.2 108.6 6.6 0.2 0.4 0 0 6.0 6.4 5.6% 5.3 6.1 4.1 2005 91.8 90.5 1.3 0.2 0 0 0 1.1 4.4 4.8% 3.9 3.2 4.3 * Projections for FY2008 are based on exchange rates of ¥100/US$ and ¥155/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including inter- nal income prior to the deduction of amounts such as inter-segment transactions and headquarters expenses that are not apportionable. 36 Next-Generation Road and Traffic Image Sensors Image sensors that can accurately recognize moving objects are gaining increasing applica- tions for vehicle detection in road traffic control Incorporating sensor technology systems. designed to identify people or objects, Omron is working to realize “social sensing” to contribute to the creation of new social systems and the betterment of society. Non-Contact IC-Card Automated Ticket Gates Non-contact IC-card automated ticket gates instantly read information contained in an IC card held above the machine. These new auto- matic ticket gates control passenger access via a non-contact IC-card system. Business Strategy and Outlook for Fiscal 2008 which we marketed aggressively in fiscal 2007. Expanding new businesses centered on solutions and double-digit income growth We forecast growth of 5.6% year on year in net sales to In the ID management solutions business, we forecast higher sales largely on demand for new services using IC cards and sensing devices using image processing technolo- gy. This will be complemented by the maintenance business, ¥90.0 billion and 13.6% in operating income to ¥8.0 billion which will strengthen operations in new fields, such as spe- in fiscal 2008. cialized services for the engineering and IT infrastructure We anticipate weak sales in the railway infrastructure fields. We will also expand the software business by mar- business now that investment in IC card equipment has run keting electronic money solutions and acquiring new users in its course. We forecast sales growth in the traffic control and the information appliance and mobile phone industries. road management system business on replacement demand from law enforcement agencies. In addition, we expect tan- gible results for our Driving Safety Support Systems (DSSS)*, * Driving Safety Support Systems (DSSS) utilize sensors to protect against potential accidents by alerting nearby vehicles when the system identifies pedestrians in crosswalks, bicycles approaching intersections, passing motorcycles, or other potential traffic dangers. Safety and Security Sensors: the five senses of society SSB’s objective is to apply its sensing Social Sensing technology to creating new social sys- tems and enhancing value to contribute to security and safety, comfort and convenience, and the environment. The company’s proprietary sensing systems, for example, add value by enhancing railway station and commercial facility safety and security by identifying the presence or movement of an unauthorized person or suspicious object and automatically alerting an authority figure to prevent incidents or accidents before they occur. The systems also collect informa- tion on visitor attributes, providing valuable information for marketing. SSB’s devices can also be used for sound warning alerts when danger occurs. Applications range from reading road and rail line vibrations to identifying irreg- ularities; recognizing the presence of harmful ultravio- let waves, which are invisible to the naked eye; and measuring environmentally harmful CO2 emissions. SSB is seeking to develop and apply the Omron Group’s innovative sensor technologies in a variety of areas to act as society’s “five senses” and contribute to building a better society through “social sensing,” or the application of our technology for the benefit of society. Sensors detecting crowd congestion on train platforms help prevent accidents and optimize train schedules. Collection of visitor data Collection of event visitor data Monitoring of boarding passengers Collection of visitor data Monitoring of traffic volume Sensors detecting movement in train stations and commercial facilities contribute to optimal facility design and planning. S e g m e n t i n f o r m a t i o n S S B S o c i a l S y s t e m s B u s i n e s s 37 Yoshihito Yamada Executive Officer Representative Director and CEO, OMRON Healthcare Co., Ltd. HCB is proactively introducing new products based on the fundamental concept of “Healthcare at Home” in line with the positive health trend around the world. HC B HEALTHCARE BUSINESS Health and medical devices and services for home and medical institutions 9.4% % of Net Sales Fiscal 2007 Management Review Rising sales and income on growing demand in Japan and in developing countries which is spurring demand for healthcare devices, particu- larly blood pressure monitors. In China, the newly launched blood glucose checker business is off to a strong start with sales up 50% over the previous year and exceeding our ini- In fiscal 2007, HCB recorded rises of 8.9% year on year to tial expectations. Conversely, sluggish private consumption ¥71.6 billion in net sales and 8.2% to ¥9.4 billion in operat- in the United States led to a roughly 10% year on year drop ing income. in sales, including diminished demand for our core blood In Japan, sales of blood pressure monitors and pedome- pressure monitors. Other than in Japan and China, sales in ters continued brisk amid high awareness of metabolic syn- drome* and supported by the government’s required physical examinations and health guidance for all holders of Asia remained flat from the previous year. In December 2007, our new factory in Vietnam began producing 40,000-50,000 units monthly of low-cost home- national health insurance aged 40 to 74. Electric toothbrush use blood pressure monitors for the markets in Europe and sales also increased backed by effective TV commercials. North America. Sales of body composition monitors decreased amid inten- sifying competition. Overseas, sales in the Europe region continued surging as the rising economic strength and living standards in Russia, Eastern Europe, and developing countries is gener- ating increasing awareness of lifestyle-related diseases, * Metabolic syndrome, or visceral adiposity syndrome, is a condition characterized by obesity accompanied by various symptoms, including high blood pressure, diabetes, and abnormal lipid metabolism. The World Health Organization (WHO) has identified metabolic syndrome as creating an extremely high risk of heart attack and other cardiovascular diseases, and Metabolic syndrome is gaining increasing attention as a new risk factor in lifestyle-related diseases. HCB Results and Plans Fiscal Year Net sales* Domestic Overseas North America Europe Asia China Direct exports Operating income* Operating income margin* R&D expenses Depreciation and amortization Capital expenditures 2008 Plan 74.0 36.5 37.5 11.5 17.0 2.0 6.0 1.0 9.5 12.8% 5.5 1.5 2.5 2007 71.6 35.0 36.6 12.5 15.9 2.1 5.5 0.7 9.4 13.1% 4.3 1.1 2.4 YoY 108.9% 106.6% 111.2% 90.1% 120.8% 100.5% 152.6% 268.1% 108.2% (0.1%pt.) 111.6% 109.7% 163.5% 2006 65.7 32.8 32.9 13.8 13.1 2.1 3.6 0.3 8.7 13.2% 3.9 1.0 1.5 Billions of yen 2004 50.6 23.1 27.5 14.6 8.9 1.4 2.6 0.1 7.6 15.1% 2.7 0.7 2.1 2005 61.1 30.3 30.8 15.4 10.6 1.6 2.9 0.2 8.7 14.2% 3.3 1.1 1.6 * Projections for FY2008 are based on exchange rates of ¥100/US$ and ¥155/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including inter- nal income prior to the deduction of amounts such as inter-segment transactions and headquarters expenses that are not apportionable. 38 Activity Monitors Activity monitors contain triaxial acceleration sensors that can identify the type of activity, such as walking, and gauge the amount of activ- ity. Additional software can be used to upload the data to a computer. Digital Blood Pressure Monitors Our automatic digital blood pressure monitors enable detection of morning hypertension, which is difficult to diagnose at doctor’s visit. The monitors display a warning icon when the weekly average readings exceed 135/85mm Hg in the morning, the upper range limit for normal blood pressure levels measured at home. Body Composition Monitors Body composition monitors measure the amount of visceral fat and percentage of subcutaneous fat. The analyzers measure visceral fat to a precise- ness of 0.5 units and com- pares the results with the average values for people in the same age group. Business Strategy and Outlook for Fiscal 2008 devices. Overseas, we are aiming to attract demand for our Ongoing sales and income growth on increasing health consciousness in Japan and worldwide We forecast growth of 3.4% year on year in net sales to blood pressure monitors in China, Russia, Eastern Europe, India and other developing countries. We will accordingly double the monthly output of blood pressure monitors at the Vietnam plant to above 100,000 units as we steadily raise ¥74.0 billion and 1.0% in operating income to ¥9.5 billion in production to a target of over 450,000 units monthly in 2010. fiscal 2008. We expect the unfavorable marketing conditions for While overall private consumption is expected to wors- vital sign monitors for medical institutions to persist owing en in developed nations amid stagflation and economic dete- to the government’s reduced reimbursement rates for rioration, we anticipate ongoing increasing demand for blood medical treatment fees. At the same time, we anticipate pressure monitors and pedometers supported by the rising the shift in perception from treatment to prevention to spur health consciousness in Japan and overseas. We also increased sales of vascular screening devices, heart blood expect Japan’s new physical examinations and health guid- pressure monitors, and other equipment used in the pre- ance national program in April this year to help boost our vention of lifestyle-related diseases to general practitioners. market share in lifestyle disease prevention and treatment New services leveraging IT to prevent and treat lifestyle-related diseases Health The prevention and treatment of lifestyle-related dis- eases requires more than using monitoring devices to assess one’s personal condition, it requires improvement in one’s dietary and exercise habits. HCB is seeking to develop behavior mod- ification technology that can create specific health improvement pro- grams catered to each individual and offers one-on-one lifestyle habit improvement programs based on behavioral science. Over 600,000 people have used HCB’s programs and the company has presented more than 30 academic reports on program results. HCB is integrating information technology at all levels, from home- use devices to medical institution equipment. Network connections are making possible a diverse range of health management, and HCB is developing blood pressure monitors, pedometers, body composi- tion monitors, and other devices equipped with wireless Bluetooth, high-speed infrared simple shot (IrSS), and other communication func- tions. In addition, the company has developed lifestyle disease treat- ment support applications utilizing IT as a new tool employing monitoring devices to support personal health management and dis- ease prevention and launched the new product line in April 2008. The start of the physical examination and health guidance system in Japan is expected to provide a solid demand base among medical insurers and health-related institutions. Body Composition Monitor Pedometer 12/1 wed 12/2 thu 12/3 fri 12/4 sat 12/1 sun 12/1 wed 12/2 thu 12/3 fri 12/4 sat 12/1 sun 12/1 wed 12/2 thu 12/3 fri 12/4 sat 12/1 sun Blood Pressure Monitor S e g m e n t i n f o r m a t i o n H C B H e a l t h c a r e B u s i n e s s 39 Masaki Teshigahara Executive Officer Senior General Manager, Business Development Group The Business Development Group contributes to establishing the foundation for the Omron Group’s growth by exploring and cultivating new business fields, such as energy management and RFID, as well as supporting technological development and fostering new business. BUSINESS DEVELOPMENT GROUP AND OTHER BUSINESSES Seeking New Business Opportunities and Businesses that are Not Part of Other Omron Companies 2.0% % of Net Sales Fiscal 2007 Management Review Business Strategy and Outlook for Fiscal 2008 Entertainment business transfer reduced operating income Continue focusing on remote energy monitoring equipment In fiscal 2007, the Business Development Group recorded 4.5% year on year growth to ¥15.6 billion in net sales and a In fiscal 2008, we forecast a decline in net sales of 0.9% year on year to ¥15.5 billion and a decrease to breakeven in ¥300 million decline to ¥100 million in operating income. operating income owing to increased R&D expenses. In existing businesses, sales of uninterruptible power We plan to increase sales of computer peripheral equip- supply units and broadband routers increased in the com- ment by expanding our lineup and diversifying the applica- puter peripherals business. In new businesses, heightened tions of our uninterruptible power supply units. We also competition coupled with slower-than-expected market anticipate growing sales for our RFID equipment on the growth slowed the sales growth for radio frequency identi- trend of increasing use of IC tags in Japan. Moreover, we fication (RFID) devices. Corporate demand for energy con- plan to expand our energy management business, focused sumption reduction support continued and sales were brisk on remote energy monitoring equipment, to capitalize on for our remote energy monitoring equipment. the increasing attention to reducing energy costs accompa- nying the sharp increases in raw material prices. Remote energy usage monitor capable of monitoring over wider areas Environment Our remote energy monitoring equipment supports cost savings by provid- ing wireless, 24-hour real-time monitoring of the energy consumption of plants, facilities, and equipment. The monitors play a key role in lowering electricity and other energy-related costs, reducing energy consumption and protecting the environment. In July 2007, we introduced a new remote energy monitor capable of monitoring energy consumption over wider areas within large factories, office buildings, and retail stores featuring local area network (LAN) routers rather than built-in communi- cation equipment. Remote Energy Monitoring System Business Development Group and Other Businesses Results and Plans Billions of yen Fiscal Year Net sales* Domestic Overseas Operating income* Operating income margin* R&D expenses Depreciation and amortization Capital expenditures 2008 Plan 15.5 15.0 0.5 0 0.0% 9.0 2.0 10.0 2007 15.6 15.4 0.3 0.1 0.6% 8.6 1.7 1.4 YoY 104.5% 103.5% 238.8% 20.2% (2.3%pt.) 88.3% 137.7% 37.7% 2006 15.0 14.9 0.1 0.4 2.9% 9.7 1.3 3.6 2005 15.2 15.0 0.2 0.3 2.2% 10.2 1.0 7.0 2004 16.9 16.5 0.4 2.4 13.9% 10.6 5.1 5.8 * Projections for FY2008 are based on exchange rates of ¥100/US$ and ¥155/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including inter- nal income prior to the deduction of amounts such as inter-segment transactions and headquarters expenses that are not apportionable. * Figures for FY2004 onward have been restated to account for businesses discontinued in FY2007. S e g m e n t i n f o r m a t i o n 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 40 Intellec tual Pr oper ty S trategy The Intellectual Property Center contributes to the effective use of intellectual assets of the Group and each business segment by analyzing and visualizing potential value and effectiveness of Omron and other company technologies from an independent standpoint. The center plays a crucial role in technology management that supports the long-term maximization of the Omron Group corporate value. Patent Applications and Approvals in the United States Patent Applications in China 200 150 100 93 178 169 163 157 137 132 127 119 88 82 62 44 29 200 150 100 50 38 162 160 150 142 120 105 50 0 01 02 03 04 05 06 07 0 (FY) 01 02 03 04 05 06 07 (FY) Applications Approvals Applications Identifying useful and competitive technologies and supporting development investment The Intellectual Property Center reviews all of our techni- In addition to our R&D activities in Japan, our develop- ment bases overseas, including the Omron R&D Collaborative Innovation Center in Shanghai, China established in June cal assets using patent information and identifies key tech- 2007, are independently pursuing themes to respond to nologies applicable for widespread use in our businesses local needs and conducting research that will become an that can be used to reinforce our competitive superiority. essential part of our core technologies in the future. To sup- The center also devises strategies to further substantiate port these initiatives, we are aggressively implementing our core competence in sensing and control technology. training to stimulate the intellect of local engineers, foster- By analyzing technologies both inside and outside the com- ing a culture of valuing intellectual property, and localizing pany, the center identifies and selects the technologies R&D in a comprehensive effort to strengthen our global that will become the foundation for technological man- development system. agement after GD2010. These activities are key elements in our program to The center also coordinates internal operations to ensure actively promote development of our human resources, the best timing and best application of resources for the establish administrative systems for our intellectual assets, development of the technologies selected as fundamental and reduce intellectual property risk in each of our regions technologies. These activities enable maximum return on of business. It is our common practice to apply exhaustive development investment and support the growth of measures to ensure our technical development does not Omron’s business value over the long term. infringe on patents held by other companies. In addition, we Stepping up patent applications in the United States and strengthening our global development structure As we establish our presence in the global arena during the produce practicable guidelines and take steps to ensure engineers at R&D operation are deeply versed in the guide- lines. We also give special consideration to the specific characteristics of each business region. Accordingly, we are advancing our applications for foreign patents in line with an 3rd Stage of GD2010, we are stepping up efforts to acquire expansion in our area of strict enforcement, from China to patents in the United States, which are recognized world- the Asia Pacific region, against copied goods. wide, as well as in the China growth market. Intellectual Property and R&D-related Data Fiscal Year Number of patents Applications Approvals Total patents R&D expenses (billions of yen) R&D expense ratio R&D staff (persons) 2007 2006 2005 2004 2003 1,255 943 5,717 51.5 6.7% 1,622 1,300 836 5,206 52.0 7.1% 1,630 1,509 705 4,538 50.5 8.1% 1,591 1,216 676 4,426 49.4 8.1% 1,384 1,170 580 4,154 46.5 7.9% 1,594 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 41 Corpor ate G over nanc e, C omplianc e, and Risk Management Omron is committed to full accountability to stakeholders, increasing management transparency and maintaining and exercising a proper governance system. To firmly establish a high standard of corporate ethics, we will continue to strengthen our compliance system and maintain a risk management framework that supports ongoing improvement in sustainable corporate value. Corporate Governance Basic Policies Basic Structure: Separation of Management Oversight and Business Execution Omron believes the purpose of corporate governance is to earn the support of stakeholders and to function as a verifi- cation system (monitoring system) when planning to strengthen corporate competitiveness with the objective of realizing continuous corporate growth. Omron aims to establish an optimal management structure and conduct fair and appropriate business operations to attain maximum long-term corporate value and fulfill the expectations of all stakeholders. In line with this basic policy, we strive to strengthen our corporate governance by conscientiously Omron has established the Board of Corporate Auditors to promote high management transparency and an executive officer system with clearly segregated management over- sight and business execution functions to oversee busi- ness activities. In addition, in consideration of the different operating environments of each of our internal companies, the com- pany presidents have been given greater authority with the aim of accelerating decision making and improving operating efficiency. This business promotion structure allows the practicing accountability, transparent management, and business divisions to function independently and clarifies the business ethics. roles and responsibilities of the president, executive officers, and the top management of each divisional company while supporting a performance-based compensation program linked to management commitment to specific performance targets, including profit results for each division company. This structure supports corporate value management based on the shareholder value of the entire Omron Group. Corporate Governance Structure Shareholders’ Meeting Board of Corporate Auditors Board of Directors Independent Auditor Personnel Advisory Committee Compensation Advisory Committee CEO Selection Advisory Committee Executive Organization President & CEO Group CSR Committee Executive Council Corporate Auditors Office Board of Directors (BOD) The BOD decides important business matters such as company objectives and management strategies, while overseeing the business practices of the President (CEO). Board of Corporate Auditors This board verifies the effectiveness of the corporate governance system and its implementation, while also monitoring the day- to-day operations of executives including directors. The board consists of four corporate auditors, three of whom are outside auditors. Personnel Advisory Committee This committee, chaired by an outside director, sets election standards for directors, corporate auditors and executive officers, selects candidates, and evaluates current executives. Compensation Advisory Committee Also chaired by an outside director, this committee determines the compensation structure for directors, corporate auditors and executive officers, sets evaluation standards, and evaluates current executives. CEO Selection Advisory Committee Dedicated to nomination of the President, this committee deliberates on selection of the new President for the next term and a succession plan in preparation for a contingency. Executive Council This council determines and reviews important business operation matters that are within the scope of authority of the President. 42 Management and oversight structure agement specialist on the basis of his extensive experience Omron has decreased the number of members of its Board of Directors to seven to improve efficiency and support sub- and knowledge gained in the management of several com- panies, and Mr. Sakurai has been selected for his abundant stantive discussion. In addition, the company President is the only director that is also directly involved in business experience and broad insight to executive management. Omron looks forward to benefiting from the experience and execution. The other directors are distanced from day to day business execution and serve to fulfill a management wisdom of the two outside directors in the management of the company. monitoring function. The Chairman of the Board of Directors serves as a monitor representing stakeholders and does not The outside directors attend and provide advice and rec- ommendations at monthly Board meetings and director liai- take part in the execution of business. To ensure our management objectivity and transparen- son meetings (forums for open discussion and information sharing on management strategies held after the Board cy, the appointment, promotion, and compensation of all officers (directors, auditors, and managing officers) is con- meetings) as well as technology liaison meetings for nar- rowing down specific technical themes. The outside direc- ducted by three advisory committees—the personnel, com- pensation, and CEO selection advisory committees—with tors also serve as chairmen of the Personnel Advisory Committee, Compensation Advisory Committee, and the two outside board members chairing the committees. These committees allow discussion of personnel and com- President & CEO Selection Advisory Committee to which they provide and maintain an objective perspective. pensation matters relating to all officers without the pres- ence of the Chairman of the Board or President. Auditing functions Improvement of the Internal Control System Framework The Board of Corporate Auditors, consisting of four auditors (including three outside corporate auditors), monitors gov- Legislation termed J-SOX* came into effect in April 2008. Omron was quick to recognize the importance of ernance practices, management conditions and the daily enhancing internal controls to respond to the legislation, activities of the Board of Directors and other management. and began taking preparatory steps in November 2004. The Audit Office, which functions directly under the Since then, Omron has been working to establish full- President & CEO, periodically conducts internal audits of fledged self-assessment and internal control systems. accounting, administration, business risks, and compliance in each headquarters division and in each division company as part of its internal auditing function. The Audit Office also offers specific advice for improving business functions. Appointment of outside directors To allow the Board of Directors to monitor business prac- tices from a position that represents Omron’s shareholders and other stakeholders, the number of outside directors * J-SOX legislation: Officially known as Article 24-4-4 of the Financial Instruments and Exchange Law, this legislation stipulates that all listed companies must submit a statement that assesses and verifies the proper functioning of the system for preparing financial statements and other financial information in an appropriate manner (internal control report) to the Prime Minister in conjunction with their securities report. Investor Relations now numbers two out of seven board members. Also, Open general meeting of shareholders three out of four corporate auditors are outside auditors. Omron holds “open” General Meetings of Shareholders Emphasizing the independence of these outside direc- with the aim of making the meetings as open and accessi- tors and auditors, Omron has specified strict criteria for ble as possible. The meetings are held at a convenient loca- qualification of candidates, which are even more exacting tion, a meeting hall in Kyoto Station building on days the than the regulations of Japanese Corporate Law. For exam- largest number of shareholders are likely to be available and ple, candidates for outside directors and the organizations TV monitors are set up outside the hall for full viewing by to which they belong must not have assumed the role of the news media. Shareholders who are unable to attend representative or employee of the independent accounting the meeting may exercise their voting rights through elec- auditor for the Omron Group for five years prior to the nom- tronic voting. Substantial steps were taken in fiscal 2006 to ination, may not be a principal shareholder of the Omron make the exercise of voting rights available to all share- Group, may not be a director of any principal partner, and holders through the initiation of an electronic voting plat- may not have kinship with any current director of the form for institutional investors enabling trust banks, Omron Group. Role of the outside directors In accordance with the selection standards for outside directors, Omron has appointed Mr. Kazuhiko Toyama and Mr. Masamitsu Sakurai to serve as the company’s two out- side directors. Mr. Toyama has been selected as a man- non-resident investors, and other shareholders with materi- al voting rights through institutional investors. A record high 586 people attended the General Meeting of Shareholders held on June 21, 2007. A total of 8,033 shareholders, representing 77.8% of all shareholders with voting rights, voted either in person, by written ballot, or via the Internet. C o r p o r a t e G o v e r n a n c e , C o m p l i a n c e , i a n d R s k M a n a g e m e n t 43 C o r p or a t e G o v er n a nc e , C o m p l i a nc e , a n d R i s k M a n a g e m e n t Outside Director Comments Kazuhiko Toyama Masamitsu Sakurai Persistent pressure from the blind capitalism of funds (i.e. those that pursue only profits) and the issue of I am honored to be appointed an outside director for Omron. How are companies expected to react to the seri- shareholder sovereignty over corporate governance in the knowledge-based industry, which recently came to the ous global issues we are facing? I believe they are being asked to combine the strength that has made them global- forefront with Microsoft’s attempted takeover of Yahoo, have made corporate governance a topic of discussion ly competitive and the friendliness that has earned them the trust of international society to become a powerful ally around the world. It has also made corporate governance more complicated. Corporate governance has become a on social issues. Each company, for better or worse, over many years of operation has developed its own corporate major topic not just for Omron but for all companies culture. All employees of any company have a standard for around the world, and corporate leaders must go beyond value judgment that does not exist in any manual. Fostering the philosophical and logical aspects of the question “To a culture that is appropriately responsive to the changes in whom does a company belong?” to sincerely and boldly the environment requires a management structure that is address the more integral and practical questions of the sensitive to the changes and executives capable of well- essence and purpose of corporate governance. timed leadership by example. From this perspective, I hope Corporate governance is not simply appointing commit- to apply my experience from both my successes and fail- tees and external directors, following what others are doing ures to help lead Omron in its transformation into a strong and keeping up appearances; it speaks to the very question and friendly corporation. of what actions, both practical and fitting Omron’s unique situation, should be taken as a real corporate entity. Career Summary Career Summary April 1966 June 1992 June 1994 April 1996 April 2007 June 2008 Joined Ricoh Company Appointed Director Appointed Managing Director Appointed President and Representative Director Appointed Chairman and Representative Director (current position) Appointed Director, OMRON Corporation (current position) April 1985 March 1986 Resigned from The Boston Consulting Joined The Boston Consulting Group K.K. Group K.K. Established Corporate Directions, Inc. April 1986 March 1993 Appointed Director, Corporate Directions, Inc. April 2000 Appointed Managing Director, Corporate April 2001 Directions, Inc. Appointed President and Representative Director of Corporate Directions, Inc. March 2003 Resigned from Corporate Directions, Inc. Appointed Executive Managing Director April 2003 and COO, Industrial Revitalization Corporation of Japan March 2007 Industrial Revitalization Corporation of April 2007 Japan is dissolved Appointed CEO & Representative Director, Industrial Growth Platform, Inc. (current position) June 2007 Appointed Director, OMRON Corporation June 2008 (current position) Appointed Director, PIA Corporation 44 Compliance and Risk Management Omron takes preventive action against both internal and external risk that could impede ongoing improvement in sustainable corporate value by seeking to fully identify risk and conduct risk management and maintaining a system to prevent potential unlawful acts by employees and other risk. Note: Please see Business and Other Risks on page 56 for further details. Compliance Enforcement Constant implementation of four key measures Omron emphasizes compliance activities on four key areas- monitoring, implementing the PDCA (plan-do-check-act) cycle, compliance education, and rebuilding our compliance structure to ensure compliance is thoroughly understood and laws and regulations are proactively followed by all of our Group companies in Japan and overseas. In fiscal 2007, we continued to hold compliance officer meetings in Japan and the China region to enhance com- pliance activities and implemented compliance monitoring at 14 affiliated companies, including newly acquired companies, in Japan and abroad. We plan to dis- patch compliance officers to affiliated companies in all regions and establish compliance promotion sys- tems while conducting reg- Meeting of compliance officers. ular monitoring. Internal reporting system Compliance education measures Omron provides companywide education and awareness programs along with compliance education catered to the organizational structure and business content of each com- pany. In Japan, the company has designated each October as Corporate Ethics Month and conducts compliance edu- cational activities for the executives and employees of all Group companies. In fiscal 2007, compliance experts were invited to lead training seminars for executive officers and on-site training for all employees, and the President, company presidents, and affiliated company presidents each issued personal statements to employees regarding compliance matters. The company also proactively distributed and displayed posters, information cards, and other items to maintain vig- ilant compliance awareness. As part of our routine educa- tion program, Group companies can access the Corporate Ethics Bulletin Board, a permanent internal corporate net- work site presenting compliance-related information and case simulations with instructional Q&A sessions to intro- duce ways to deal with compliance issues. Risk Management Measures In Japan and the North America region, we have established Integrated management system for private and third-party corporate ethics communications centers to confidential information receive reports directly from employees and their families As a fundamental responsibility to its stakeholders, Omron via telephone, email, or post. To promote usage, we is continually upgrading its information security to protect distributed corporate ethics cards with information about against leaks and ensure the appropriate handling of private the internal reporting centers to all employees in fiscal 2007. and confidential information. We also held sessions for counselors on a regular basis. In fiscal 2007, the company launched the Information Categories and Number of Reports to Domestic Group Companies of Fiscal 2007 Respect for human rights Workplace labor standards and respecting diversity Workplace health and safety Management of information and intellectual property Healthy competition and fair trade practices Abolishment of abuse of administrative authority Private acts to damage the corporate brand Other Total 1 10 1 1 1 1 1 5 21 Security Management Committee to further strengthen the integrated control system for private and confidential infor- mation. The committee conducted a thorough review of information security measures and enhanced employee education for Group employees in Japan, including issuing information sheets on relevant regulations and procedures and promoting the e-learning program. The company has also performed a detailed assessment of its information security management using the Information Security Measures Benchmark of the Information-Technology Promotion Agency, Japan (IPA) and is using the results to further improve its security measures. Omron is also vigilant in protecting highly sensitive infor- mation maintained by its systems and group companies and has received Information Security Management Systems (ISMS) certification for four systems and PrivacyMark accreditation from the Japan Information Processing Development Corporation for four Group companies. C o r p o r a t e G o v e r n a n c e , C o m p l i a n c e , i a n d R s k M a n a g e m e n t 45 Corpor ate S ocial Responsibility (CSR) We believe that practicing the Omron Principles is none other than fulfilling our corporate social responsibility. As a fundamental premise of our basic philosophy, we seek to become aware, through dialogue with our diverse stakeholders, of the materiality of the CSR that Omron is expected to fulfill, and accordingly activate measures and set targets. The basic philosophy of CSR — Working for the Benefit of Society Engaging the Three Pillars of CSR Omron’s corporate core value, “Working for the benefit of society” arises from the principle that companies exist to benefit society and must continually earn the trust of socie- ty and validate its existence as a good corporate citizen by conducting business that emphasizes its commitment to the stakeholders that make up society. This is the very spir- it behind the Omron Corporate Motto established in 1959, “At work for a better life, a better world for all,” that we practice in every facet of our activities. Following the chief tenet in the Omron Principles of service to society, the Omron Group aims for its operations to fulfill stakeholder* expectations in line with the concept of survival of the fittest under which only the companies that are vital to and trusted by society survive. * Omron considers as its stakeholders employees and potential employees, business partners, customers, shareholders and investors, and society (representing all interested parties who are affected by Omron’s activities). Under the long-term management vision GD2010, the Omron Group established the “Omron’s CSR vision 10 years into the future” and a “Materiality Map” to identify important issues and endeavor to achieve set targets based on three pillars of CSR: Contributing to a better society through business operations; Always demonstrating fair- ness and integrity in the promotion of corporate activities; and Showing a commitment to addressing societal issues as a concerned party. (For further details, please see CSR Performance and Objectives on the following page.) Practicing these activities has clarified the direction that the Omron Group should take in the long term, and we intend to diligently and conscientiously review and address the issues as part of our efforts to enhance our long-term corporate value. CSR management structure revised to enhance effectiveness and thoroughness In fiscal 2007, we reorganized our CSR management struc- ture by moving the CSR Department, which was under direct control of the President, into the Corporate Strategic Planning Headquarters and renaming it the CSR Management Department. Further,in April 2008,we created Group CSRCommittee. Comprised of business-company presidents, head office administrative division general managers, and the overseas regional headquarters presidents, the committee discusses the various stakeholder perspectives, reviews the Group’s overall CSR conditions and issues, and sets the course for future CSR activities. Thus by making top management fully accountable for CSR activities and encouraging them to take initiatives in such activities, we intend to enhance the effectiveness and thoroughness of our CSR-oriented management. CSR Management Structure President CSR Management Dept. Covered Areas CSR Policies/ Strategies Group CSR Committee Chair: President Corporate Ethics Human Rights/ Labor Practices Environment CSR Procurement Information Disclosure Business-Company (BC) Presidents Administrative Division Regional Group Head Office Presidents BC CSR Managers BC CSR Promotion Team Business Divisions Head Office Administrative Divisions CSR Managers Issue-specific Promotion Committees Specialized Committees Japanese Group Companies Support Overseas Group Companies 46 CSR Targets and Results * Degree of progress: Self-assessment was conducted to comprehensively evaluate the progress of activities, including achievement of GD-II (FY2005-07) targets, degree of global expansion of activities, external evaluation, comparison with other companies, etc. ★★★Significant progress ★★Progress ★Need more efforts CSR issue and basic policy FY2007 results Degree of progress* FY2008 policy/targets 1. Contribute to a better society through business operations Innovation driven by social needs Provided the following products and services to help solve social challenges: • Safety light curtain designed to support operator safety at man- ★★ ufacturing sites • Flow sensor, an essential component of fuel cell systems • Blood glucose self-monitor designed to support prevention and treatment of lifestyle diseases • Continue working on developing products/services capable of solv- ing issues related to safety, security, environmental conservation and healthcare. • Consider CO2 reduction solutions for the business sector designed to help prevent global warming. Customer issues • MC-670-E digital thermometer selected for German iF Product ★ • Promote Monozukuri** innovation to further improve quality of Design Gold Award. products/services. • Established Omron Group voluntary action plan for product safety. • Develop safe and easy-to-use Universal Design products by incor- porating customer feedback. 2. Always demonstrate fairness and integrity in the promotion of corporate activities Organizational governance • Top executives gave presentations to share the Omron Principles ★★ at 23 overseas sites. • Held explanatory sessions for CSR Practice Guidelines around the world to accompany presentations. Fair operating practices • Published regional editions of CSR Practice Guidelines. Held ★★★ explanatory sessions for managers. • Held compliance officer meeting in China. • Continue top executives’ efforts to share the Omron Principles mainly with companies that have recently joined the Group through M&A. • Assess the degree of implementation and instillation of the Omron Principles through employee awareness surveys, and compile issues. • Establish a system to promote corporate ethics and compliance in each region of the world. • Continue conducting employee awareness surveys regarding cor- porate ethics and compliance. 3. Show a commitment to addressing societal issues as a concerned party Human rights • Introduced basic human rights guidelines at explanatory sessions ★ Labor practices for CSR Practice Guidelines held at overseas sites. • Offered training on the theme of sexual harassment and helped raise consultation skills of sexual harassment advisors at Group companies in Japan. • Achieved Group-wide average disabled employee ratio of 2.3% in ★ Japan. • Introduced personnel appraisal system for managerial class, based on evaluation of their implementation and sharing of the Omron Principles. • Opened second onsite daycare center. • Launched career reentry system to support work-life balance from mid/long-term perspective. • Continued female leader training while improving training programs. Environment • Collected information in preparation for the second step in China RoHS and REACH regulations and conducted worksite survey to assess the current status. • Launched resource productivity improvement initiative for select- ★★ ed models on a trial basis. • Establish a system in each region of the world to implement activ- ities for raising awareness of human rights at the global level. • Conduct human rights education and awareness-enhancing activ- ities more strongly connected with the Omron Principles and CSR. • Launch global Challenge Commendation Program targeting the entire Omron Group, which commemorates and honors teams/individuals that are committed to taking on challenges. • Promote normalization at Group companies in Japan and further improve ratio of disabled employees. • Gather information on ideal ways and methodologies to support disabled persons’ involvement in society. • Conduct employee awareness-enhancing activities regarding work-life balance support initiatives. • Expand female leader training program. • Introduce an energy monitoring system to production sites in Japan to promote CO2 reduction through visualization. • Select model sites and product models subject to resource pro- ductivity improvement and continue efforts. • Acquire integrated ISO 14001 certification for non-production sites • Conducted corporate environmental audits for 11 production sites of Omron Corporation. Community involvement and development Supply chain management in Japan and 2 sites abroad. • Although CO2 emissions increased 5% overseas compared to FY2006, emissions per unit of production decreased 19%. • Studied basic scheme of employment support for persons with disabilities. Supported their community involvement through spon- sorship of sports events for disabled persons. • Approx. 10,200 employees worldwide participated in Founder’s Day volunteer activities. • Launched “Omron Outreach” initiative aimed at improving living standards in underprivileged communities in Southeast Asia. • Conducted interviews with main suppliers in Japan, asking for ★★ • Continue support activities/programs that conform to Omron’s pol- icy of improving QOL*** for people with limitations. • Continue implementing activities of Kyoto recruitment agent net- work for disabled persons; plan and implement support measures. • Conduct “Ecovolun” initiative to promote social contributions and environmental conservation activities of employees at the global level, in conjunction with the company’s 75th anniversary. ★★ • Conduct questionnaire survey on CSR targeting all suppliers in cooperation in CSR procurement. Japan and China. • Conducted questionnaire survey regarding CSR targeting 94 main • Promote closing of basic contracts including CSR provisions with suppliers (69 in Japan and 25 in China) on a trial basis. suppliers in China. • Suppliers with whom Omron reached contracts including CSR pro- visions numbered 249 in China, accounting for 81% of total. ** Monozukuri is a Japanese term meaning “the art of producing things.” It generally relates to craftsmanship in developing and manufacturing products. *** QOL (Quality of Life) is a scale for measuring the degree to which a person enjoys a rewarding life as desired. For more details about Omron’s CSR activities, please see our Sustainability Report 2008. http://www.omron.com/corporate/csr/ C o r p o r a t e S o c a i l R e s p o n s b i i l i t y ( C S R ) 47 Directors, Corporate Auditors and Executive Officers As of June 24, 2008 Kazuhiko Toyama Director (external) Masamitsu Sakurai Director (external) Hisao Sakuta President and CEO Yutaka Takigawa Director and Executive Vice President Fumio Tateisi Director and Executive Vice Chairman Yoshio Tateisi Chairman of the BOD Keiichiro Akahoshi Director and Executive Vice President Directors Corporate Auditors Executive Officers Tsutomu Ozako Satoshi Ando Hidero Chimori Eisuke Nagatomo Executive Advisor Nobuo Tateisi Senior Managing Officers Soichi Yukawa Yoshinobu Morishita Managing Officers Koichi lmanaka Takuji Yamamoto Yoshinori Suzuki Yukio Kobayashi Hideo Higuchi Hiroshi Fujiwara Kazunobu Amemiya Yutaka Fujiwara Kojiro Tobita Executive Officers Akio Sakumiya Tatsunosuke Goto Mike van Gendt Toshio Yamashita Roberto Maietti Yoshisaburo Mogi Hiroshi Miyagawa Koichi Tada Kiichiro Kondo Shigeki Fujimoto Masahiro ljiri Masaki Arao Masayuki Tsuda Hideji Ejima Masaki Teshigahara Taiji Sogo Yoshihito Yamada Chairman of the BOD Yoshio Tateisi Director and Executive Vice Chairman Fumio Tateisi President and CEO Hisao Sakuta Director and Executive Vice President Keiichiro Akahoshi Director and Executive Vice President Yutaka Takigawa Directors (external) Kazuhiko Toyama Masamitsu Sakurai 48 Financial Section (U.S. GAAP) 49 50 51 56 58 60 Financial Highlights Six-year Summary Fiscal 2007 Management’s Discussion and Analysis Business and Other Risks Consolidated Balance Sheets 61 62 63 64 86 Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors’ Report Consolidated Statements of Income Notes: Financial Highlights, Six-year Financial Summary, Fiscal 2007 Management’s Discussion and Analysis (including Business and Other Risks) are unaudited. Financial Highlights OMRON Corporation and Subsidiaries Years ended March 31, 2008, 2007 and 2006 For the year: Net sales Income from continuing operations before income taxes, minority interests, and equity in loss of affiliates Income from continuing operations Net income Per share data (yen and U.S. dollars): Income from continuing operations Basic Diluted Net income Basic Diluted Cash dividends (Note 1) Millions of yen (except per share data) Thousands of U.S. dollars (Note 2) (except per share data) FY2007 FY2006 FY2005 FY2007 ¥ 762,985 ¥ 723,866 ¥ 616,002 $ 7,629,850 64,166 39,329 42,383 64,279 37,094 38,280 63,506 36,162 35,763 641,660 393,290 423,830 ¥ 172.5 172.4 ¥ 159.8 159.7 ¥ 152.8 152.7 $ 1.73 1.72 185.9 185.8 42.0 165.0 164.9 34.0 151.1 151.1 30.0 1.86 1.86 0.42 Capital expenditures (cash basis) Research and development expenses (Note 3) ¥ 37,848 51,520 ¥ 44,689 52,028 ¥ 40,560 55,315 $ 378,480 515,200 At year end: Total assets Total shareholders’ equity ¥ 617,367 368,502 ¥ 630,337 382,822 ¥ 589,061 362,937 $ 6,173,670 3,685,020 Notes:1. Cash dividends per share represent the amounts applicable to the respective year, including dividends to be paid after the end of the year. 2. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at March 31, 2008 of ¥100=$1. 3. A loss of ¥4,814 million in connection with the transfer of the substitutional portion of the benefit obligation and related plan assets is allocated to Research and Development Expenses for FY2005. F i n a n c a i l S e c t i o n ( U S . . G A A P ) F i n a n c i a l H i g h l i g h t s 49 Six-year Summary OMRON Corporation and Subsidiaries Years ended March 31 Net sales (Note 2 and 3): Industrial Automation Business Electronic Components Business Automotive Electronic Components Business Social Systems Business Healthcare Business Other Businesses Costs and expenses: Cost of sales Selling, general and administrative expenses Research and development expenses Subsidy from the government Other expenses (income), net Income from continuing operations before income taxes, minority interests, and equity in loss of affiliates Income taxes Minority interests Equity in loss (earnings) of affiliates Income (loss) from continuing operations Income from discontinued operations, net of tax (Note 4) Cumulative effect of accounting change, net of tax Net income (loss) Per share data (yen): Income (loss) from continuing operations Basic Diluted Net income (loss) Basic Diluted Cash dividends (Note 1) Capital expenditures (cash basis) Total assets Total shareholders’ equity Value indicators: Gross profit margin (%) Income (loss) before tax/Net sales (%) Return on sales (%) Return on assets (%) Return on equity (%) Inventory turnover (times) Price/earning ratio (times) Assets turnover (times) Debt/equity ratio (times) Interest coverage ratio (times) Millions of yen (except per share data) FY2007 FY2006 FY2005 FY2004 FY2003 FY2002 ¥ 328,811 154,233 107,521 85,223 71,562 15,635 762,985 ¥ 305,568 138,352 93,321 105,944 65,726 14,955 723,866 ¥ 272,657 97,699 77,593 91,804 61,090 15,159 616,002 ¥ 250,329 101,127 64,558 115,205 50,583 16,925 598,727 ¥ 229,638 88,988 58,824 135,997 46,962 14,748 575,157 ¥ 202,518 79,365 59,480 116,652 42,331 22,189 522,535 469,643 176,569 51,520 — 1,087 698,819 445,625 164,167 52,028 — (2,233) 659,587 383,335 157,909 55,315 (41,339) (2,724) 552,496 353,429 141,185 49,441 — 2,225 546,280 339,697 139,569 46,494 — 3,491 529,251 320,719 133,406 40,235 — 27,496 521,856 64,166 24,272 217 348 39,329 3,054 — 42,383 64,279 25,595 238 1,352 37,094 1,186 — 38,280 63,506 26,701 150 493 36,162 802 (1,201) 35,763 52,447 21,482 264 1,483 29,218 958 — 30,176 45,906 19,930 411 (92) 25,657 1,154 — 26,811 679 2,250 285 59 (1,915) 2,426 — 511 ¥ 172.5 172.4 ¥ 159.8 159.7 ¥ 152.8 152.7 ¥ 122.5 120.8 ¥ 105.9 103.0 ¥ (7.7) (7.7) 185.9 185.8 42.0 ¥ 37,848 617,367 368,502 165.0 164.9 34.0 ¥ 44,689 630,337 382,822 151.1 151.1 30.0 ¥ 40,560 589,061 362,937 126.5 124.8 24.0 ¥ 38,579 585,429 305,810 110.7 107.5 20.0 ¥ 38,115 592,273 274,710 2.1 2.1 10.0 ¥ 34,454 567,399 251,610 38.4 8.4 5.6 10.3 11.3 4.96 10.7 1.22 0.675 44.34 38.4 8.9 5.3 10.5 10.3 5.27 19.1 1.19 0.647 57.82 37.8 10.3 5.8 10.8 10.7 5.34 22.2 1.05 0.623 69.95 41.0 8.8 5.0 8.9 10.4 5.09 18.5 1.02 0.914 52.05 40.9 8.0 4.7 7.9 10.2 4.66 23.3 0.99 1.156 41.63 38.6 0.1 0.1 0.1 0.2 4.27 900.8 0.94 1.255 20.69 Notes:1. Cash dividends per share represent the amounts applicable to the respective year, including dividends to be paid after the end of the year. 2. The Automotive Electronic Components Business has been classified separately from the Electronic Components Business effective from April 2003. Figures for FY2002 have been reclassified in accordance with the change. 3. As of October 1, 2004, the ATM and other information equipment business that was included in the Social Systems Business was transferred to an affiliate accounted for using the equity method. 4. In accordance with Statement of Financial Accounting Standards No.144, “Accounting for the Impairment of Disposal of Long-Lived Assets”, the figures of the consolidated statements of income for the prior years related to the discontinued operations have been separately reported from the ongoing operating results to conform with the current year presentation. See Note 14 to the consolidated financial statements. 50 Fiscal 2007 Management’s Discussion and Analysis Note: The divisional companies are presented using their abbreviated names Industrial Automation Business (IAB), Electronic Components Business (ECB), Automotive Electronic Components Business (AEC), Social Systems Business (SSB), Healthcare Business (HCB). Market Environment 1. Macroeconomic Environment The global economy destabilized in the second half of the fiscal year on steep price rises for crude oil and raw mate- rials and on the widening impact on financial markets around the world from the subprime loan crisis in the United States. These conditions led to a marked slow- down in corporate earnings growth, but capital invest- ment and private consumption remained firm in Japan with added support from growing exports. Overseas, how- ever, housing investment and private consumption declined sharply in the United States and economic growth in Europe gradually slowed in the second half, while the economic expansion continued brisk in China and Southeast Asia. Growth rates of real GDP for each country CY 2003 2004 2005 2006 2007 Japan U.S. 1.4 2.7 1.9 2.4 2.1 2.5 3.6 3.1 2.9 2.2 EU 1.3 2.5 1.9 3.0 2.8 China 10.0 10.1 10.4 11.6 11.9 Source: Cabinet Office “Overseas Economic Data” May 2008, etc. Domestic Macroeconomic Environment Real Private Capital Investment Growth Rate % 10 5 0 -5 -10 Q1 Q4 Q1 Q2 Q3 2006 Q4 Q2 Q3 2007 (FY) Note: Seasonally adjusted Source: Cabinet Office, Government of Japan Machinery Orders Growth Rate (Manufacturing) 1,600 1,500 1,400 1,300 1,200 Billions of yen % 10 5 0 -5 -10 (FY) Q1 Q2 Q3 2006 Q4 Q1 Q4 Q2 Q3 2007 Orders [left axis] Change from the previous quarter [right axis] Note: Seasonally adjusted Source: Cabinet Office, Government of Japan 2. The Omron Group Market Environment Investment in plant and machinery, which influences orders for the Group’s core factory automation control equipment, continued strong through the year, while the growth pace in the semiconductor and flat panel display manufacturing industries slowed, leading to a period of inventory adjustments for electronic components and devices. Meanwhile, last year’s surge in demand to upgrade railway equipment with IC card reading systems ran its course. The sharp gasoline price rises and other factors stimulated increased demand for energy conser- vation products for automotive electronics. Demand also grew for blood pressure monitors and other health-related equipment as interest in health issues expanded from developed to the newly developing countries. Profits were negatively affected by rising prices for sil- ver, copper, and other raw materials, but were supported by favorable foreign currency exchange rates, specifically a weak yen and strong euro. Indices of Electronic Parts and Devices (Seasonally adjusted indices, 2005 average =100) Silver and Copper Prices Exchange Rates 180 140 100 60 04 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Yen/kg Yen/kg 1,500 1,200 900 600 300 0 Yen 170 160 150 140 130 120 110 100 90 05 06 07 (FY) 04 05 06 07 (FY) 04 05 06 07 (FY) Productions Shipments Inventory Source: Ministry of Economy, Trade and Industry Silver［left axis］ Copper［right axis］ US$ EUR F i n a n c a i l S e c t i o n ( U S . . G A A P ) S i x - y e a r S u m m a r y F i s c a l 2 0 0 7 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 51 F i s c a l 2 0 0 7 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 Overview of Consolidated Results and Financial Condition In this market environment, the Group raised net sales 5.4% year on year and net income 10.7% to post its sixth consecutive year of record levels in both categories. Income from continuing operations income taxes, minor- ity interests, and net income before equity in loss of affil- iates* (hereafter “net income before income taxes”) decreased by 0.2% from the previous year owing to the recording of a gain on the contribution of securities to retirement benefit trusts in fiscal 2006. Total assets decreased 2.1% from the end of the previous fiscal year owing to a loss on impairment of investment securities Net Sales & Net Income before Income Taxes Net Income & ROE reflecting the general decline in stock prices. The asso- ciated decline in valuation of investment securities reduced the value of total shareholders’ equity by 3.7%, which lowered the equity ratio to 59.7%, from 60.7% at the end of the previous fiscal year. Return on equity (ROE) was 11.3%, as the Group cleared its benchmark of maintaining 10% ROE for a fifth consecutive year. * Figures for operations discontinued in fiscal 2007 are reclassified from fiscal 2006 in accordance with the Statement of Financial Accounting Standards (FSAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” 800 600 400 200 0 Billions of yen Billions of yen 160 120 80 40 0 03 04 05 06 07 (FY) 50 40 30 20 10 0 Billions of yen 03 04 05 06 07 % 12.5 10.0 7.5 5.0 2.5 0.0 (FY) Net sales [left axis] Net income before income taxes [right axis] Net income [left axis] ROE [right axis] * Figures have been restated to account for businesses discontinued in FY2007. Review and Analysis of the Statements of Income Sales *Please see Note 5 on page 69 for corporate acquisition information. Consolidated net sales rose 5.4% year on year to ¥763.0 billion. Sales volume was boosted by the acquisition of a 95% stake in Omron Laser Front Co., Ltd., (OLFT) in June 2007 and the full-year contribution of Omron Precision Technology (OPT) acquired in August 2006. The weak yen and strong euro currency translations provided an additional favorable effect. By region, sales declined 2.7% in Japan while rising in all other regions for a combined 13.9% growth in over- seas sales, which comprised 52.0% of total sales. Sales in the China region, a particularly key region for the Group, rose 31.7% to ¥91.5 billion, continuing the strong growth momentum from fiscal 2006. Cost of Sales and SG&A Expenses In line with the overall growth in sales, cost of sales increased 5.4% year on year and SG&A rose 7.6% in fiscal 2007. Cost reduction measures were outpaced by the sharp rises in raw material prices, including copper and silver, and the cost to sales ratio remained even with the previ- ous year level at 61.6%. Aggressive efforts to fortify Group operations con- tributed to a 0.5 percentage point rise in the SG&A expense ratio to 23.1%. The increase in sales accompanying business acquisi- tions reduced the ratio of R&D expense to sales by 0.5 percentage point to 6.7% even as R&D spending decreased by ¥500 million to ¥51.5 billion. Aggressive investment in R&D is a vital part of the Group growth strategy, and we expect the ratio of R&D expense to sales to increase in fis- cal 2008. Other Expenses (Income) *See Note 11 on page 77 The net amount of other expenses (income) was a net loss of ¥1.1 billion, as income in this category declined ¥3.3 billion from the previous fiscal year. The main ele- ments were a ¥10.1 billion gain on the contribution of securities to retirement benefit trusts and a ¥5.9 billion loss on the sale of property at the Tokyo head office, which produced an extraordinary gain of ¥4.2 billion. 52 Net Income before Income Taxes, Net Income and Profit Distribution As a result of the above, net income before income taxes decreased by ¥100 million, or 0.2%, from the previous year to ¥64.2 billion. Net income increased by ¥4.1 billion, or 10.7%, to ¥42.4 billion, largely owing to the booking of a pretax gain of ¥5.2 billion (¥3.1 billion after taxes) from the transfer of the entertainment business. Basic net income per share was ¥185.9, up from ¥165.0 in the previous year. Based on our profit distribution poli- cy (see page 19), an ordinary dividend of ¥37 per share was paid to which was added a special ¥5 commemorative dividend to mark the 75th anniversary of the founding of the company, bringing the total dividend paid per share to ¥42 for fiscal 2007. Dividends per Share 50 40 30 20 10 0 yen 03 04 05 06 07 (FY) Costs, Expenses and Income as Percentages of Net Sales *based on the assumption that the all the profit from the transfer of the substitutional portion of employees’ pension fund was accounted for in a lump sum Net sales Cost of sales Gross profit Selling, general and administrative expenses Research and development expenses Transfer of substitutional portion of employees’ pension fund Interest expenses (income), net Income from continuing operations before income taxes, minority interests, and equity in loss of affiliates Income taxes Income from continuing operations Income from discontinued operations Cumulative effect of accounting change Net income Segment Information FY2007 100.0% 61.6 38.4 23.1 6.7 — (0.1) 8.4 3.2 5.2 0.4 — 5.6 FY2006 100.0% 61.6 38.4 22.6 7.2 — (0.1) 8.9 3.6 5.1 0.2 — 5.3 FY2005 100.0% 62.2 37.8 25.6 9.0 — (0.1) 59.6* 40.4* 24.2* 8.2* (1.9)* 10.3 4.3 5.9 0.1 (0.2) 5.8 Note: Segment operating income is prepared using the single-step method (that does not show individual income levels) based on U.S. GAAP. For easier comparison to other segment companies, operating income represents gross profit minus selling, general and administrative expenses and research and development expenses. Note: In segment information, sales represents sales to external customers and excludes inter-segment transactions. Conversely, operating income includes income from inter-segment income transactions before deductions of headquarters expenses and other non-apportionable amounts. Please refer to pages 30-40 for detailed segment business results, fiscal 2008 outlook, and strategy. 1. Conditions by Business Segment IAB net sales rose 7.6% year on year to ¥328.8 billion and operating income increased 7.1% to ¥51.9 billion boosted by sales growth in the application sensor and safety component businesses, which focused on the themes of quality, safety, and the environment. ECB net sales grew 11.5% to ¥154.2 billion supported by a full-year contribution from OPT in the small-size back- light business and the launch of made-to-order semicon- ductor production at Omron Semiconductors in April 2007. However, ECB operating income declined 3.4% to ¥12.6 billion on sluggish sales in the high-margin amusement equipment business. AEC net sales increased 15.2% to ¥107.5 billion as the themes of safety and the environment in the automobile industry led to increasingly use of AEC automotive com- ponents in new car models. Productivity improvements F i n a n c a i l S e c t i o n ( U S . . G A A P ) F i s c a l 2 0 0 7 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 53 F i s c a l 2 0 0 7 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 and product price adjustments helped raise AEC operating income to ¥1.4 billion from a ¥1.2 billion loss in the pre- vious year, marking the first profitable result in four years. SSB net sales fell 19.6% to ¥85.2 billion and operating income declined 12.7% to ¥7.0 billion, primarily due to the drop in large-scale orders for IC card equipment in the railway equipment sector. HCB net sales increased 8.9% to ¥71.6 billion and oper- ating income rose 8.2% to ¥9.4 billion supported by the growing awareness worldwide of preventive measures for lifestyle-related diseases. Other Business net sales increased 4.5% to ¥15.6 bil- lion, largely on steady growth in the electricity usage mon- itoring business. Intensified competition in the RFID equip- ment market and other factors reduced Other Business operating profit by 79.8% to ¥87 million. Growth in Net Sales by Business Segment Composition of Net Sales by Business Segment FY2007 FY2006 FY2005 FY2007 FY2006 FY2005 IAB ECB AEC SSB HCB Other 7.6% 11.5 15.2 (19.6) 8.9 4.5 12.1% 41.6 20.3 15.4 7.6 (1.3) 8.9% (3.4) 20.2 (20.3) 20.8 (10.4) IAB ECB AEC SSB HCB Other 43.1% 20.2 14.1 11.2 9.4 2.0 42.2% 19.1 12.9 14.6 9.1 2.1 44.3% 15.8 12.6 14.9 9.9 2.5 2. Review of Sales by Region Japan Domestic sales increased at IAB, ECB, AEC, and HCB, but the steep drop in sales at SSB owing to the sharp fall in large-scale orders for IC card equipment for railway infrastructure systems led to a 2.7% year on year decline in net sales to ¥388.6 billion and a 16.7% drop in operat- ing income to ¥50.2 billion in Japan. North America Rising energy prices and the subprime loan crisis caused a rapid deterioration in housing investment and private consumption in the United States. However, boosted by a substantial ¥4.5 billion increase in AEC sales from grow- ing usage of its automotive components in new car mod- els, net sales rose 4.0% to ¥101.9 billion and operating income increased 551.1% to ¥2.1 billion in North America. Europe Sluggish private consumption led to a gradual slowing of the economic growth in Europe in the second half of the fiscal year. However, IAB’s fortified sales network sup- ported an ¥11.0 billion growth in sales and HCB’s blood pressure monitors attracted growing demand in Russia and Eastern Europe. Net sales in Europe increased 15.5% to ¥134.4 billion and operating income grew 41.6% to ¥14.6 billion. Greater China In the China region, encompassing China, Hong Kong and Taiwan, IAB expanded sales by focusing on strengthening its operations and launching new products, ECB benefited from the previous year’s addition of OPT’s small-size backlight business, and AEC raised its plant capacity utilization rate to meet the local procurement needs of customers in China. China region net sales increased 31.7% to ¥91.5 billion and operating income grew 443.6% to ¥8.1 billion. Southeast Asia and Others IAB, ECB, and AEC each posted sales growth buoyed by the rapid economic expansion in Southeast Asia. Net sales in the region rose 14.5% to ¥46.7 billion and operating income increased 12.0% to ¥4.5 billion. Sales Composition, by Region % 100 80 60 40 20 0 5.8% 6.8% 16.1% 12.9% 5.6% 9.6% 16.1% 13.5% 6.1% 12.0% 17.6% 13.4% 58.4% 55.2% 50.9% 05 06 07 (FY) Southeast Asia and Others Greater China Europe North America Japan 54 Financial Condition Assets Total assets decreased ¥13.0 billion, or 2.1% from the end of the previous fiscal year to ¥617.4 billion. Notes and accounts receivable-trade declined ¥8.8 billion from the previous fiscal year, largely due to the backlash effect after the sharp rise in demand for the railway infrastructure system business in the fourth quarter of fiscal 2006. The general decline in stock prices reduced the value of investment securities by ¥7.6 billion. liabilities, long-term Liabilities and Shareholders’ Equity Current liabilities and minority interests increased ¥1.4 billion, or 0.5%, from the previous fiscal year to ¥248.9 billion. Interest-bearing liabilities decreased by ¥2.0 billion to ¥19.8 billion, while termination and retirement benefits increased by ¥10.8 billion, or 21.4%, to ¥63.5 billion. Shareholders’ equity declined by ¥14.3 billion, or 3.7%, from the previous fiscal year to ¥368.5 billion. Capital sur- plus increased with the ¥42.4 billion in net income for the year, while foreign currency translation adjustments led to a ¥12.3 billion decline and the decline in overall stock prices lowered the unrealized gains on available-for-sale securities by ¥6.2 billion. As a result, the shareholders’ equity ratio decreased 1.0 percentage point to 59.7 %, from 60.7% in the previ- ous fiscal year, and the debt/equity ratio increased from 0.647 to 0.675 over the same period. In addition, net assets per share based on the number of shares out- standing at the end of the fiscal year was ¥1,660.68, com- pared to ¥1,662.32 at the end of the previous fiscal year. Working Capital & Current Ratio Outstanding Interest-Bearing Debt & Debt/Equity Ratio Billions of yen % 200 150 100 50 0 200 180 160 140 120 100 60 45 30 15 0 Billions of yen % 2.0 1.5 1.0 0.5 03 04 05 06 07 (FY) 0 Outstanding interest-bearing debt [left axis] Debt/equity ratio [right axis] 03 04 05 06 07 Working capital [left axis] Current ratio [right axis] (FY) Cash Flow Cash and cash equivalents at the end of the fiscal year amounted to ¥40.6 billion, a ¥2.4 billion decrease from the end of the previous year. Cash Flow from Operating Activities Cash flow from operating activities increased by ¥28.5 billion from the previous year to ¥69.0 billion primarily due to the ¥42.4 billion in net income and the increase in the non-cash items of depreciation and amortization. Cash Flow from Financing Activities Cash flow from financing activities saw a net outflow of ¥34.5 billion, up from the ¥29.8 billion outflow in the pre- vious year, owing mainly to the acquisition of treasury stock and dividend payments. Cash Flow from Investing Activities Cash flow from investing activities saw a net outflow of ¥36.7 billion despite cash inflow from the sale of a busi- ness, representing a ¥10.4 billion decrease in outflow from the previous fiscal year. The Group continued to invest aggressively for its future growth and utilized invest- ment funds for business acquisitions. Free Cash Flow 50 40 30 20 10 0 -10 Billions of yen 03 04 05 06 07 (FY) F i n a n c a i l S e c t i o n ( U S . . G A A P ) F i s c a l 2 0 0 7 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 55 Business and Other Risks The following risks may influence the Omron Group’s management 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 fore- casts and assumptions as of June 25, 2008. (1) Economic Conditions The primary business of the Omron Group is consumer and commercial electronic components used in the man- ufacture of electrical and electronic equipment, as well as control system equipment used by manufacturing sec- tors and in capital investment related areas. Accordingly, demand for Omron Group products is affected by eco- nomic 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 increas- es 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 having a negative impact on the Group’s operating results and financial 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 culture or religion, political turmoil and uncertainty in economic trends, differences in busi- ness customs in areas such as the structure of relation- ships 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 ter- rorism, wars, and other political circumstances. These 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 119 overseas affiliated companies and continues to reinforce its business operations in over- seas markets, such as China for which major market growth is anticipated in the future. The percentage of con- solidated net sales accounted for by overseas sales during fiscal 2007 was 52.0 percent, 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 cur- rencies. Exchange rate fluctuations, however, could have a negative impact on the Omron Group’s operating results and financial condition. (4) Product Defects Based on its core corporate value of “working for the benefit of society,” the Omron Group has declared max- imum customer satisfaction to be one of its management philosophies and implements it by providing the best qual- ity products and services based on the Group’s motto of quality first. In particular, the Group has established strict quality control standards and built a quality control sys- tem, and develops and manufactures its products accord- ingly. 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 products are without defects, and that recalls will not occur in the future. Large-scale recalls and/or prod- uct defects resulting in liability-related damages could impose huge costs, severely influence evaluations of the Omron Group, and result in reduced sales. Such events could exert a negative impact on the Group’s operating results and financial condition. In addition, to respond to an EU directive banning the use of lead, cadmium and certain other chemical sub- stances in electric and electronic products in the European Union from July 2006, the Omron Group, in cooperation with its suppliers, is in the process of investigating the status of regulated chemical substances in all of the com- ponents and materials the Group uses, and is accelerating efforts to switch to substitute components and materi- als that do not contain regulated chemical substances with a view to completely eliminating regulated sub- stances from all the Group’s products throughout the world in order to make them environmentally friendly products. However, delays in the switchover beyond cus- tomer deadlines due to a late response by suppliers in providing substitute components and other factors could result in liability-related damages or a violation of the EU directive, which could have a negative impact on the Omron Group’s operating results and financial condition. (5) Research and Development Activities Based on a policy of securing a balance between growth and income, the Omron Group invests aggressively in R&D as part of its technology-centered business opera- tions. As a result, the R&D expenses ratio remains at approximately 7 percent. The Omron Group strives to increase the new product contribution ratio by reflecting such considerations as mar- ket needs in its R&D themes and goals. However, fac- tors such as delays in R&D or insufficient technological capabilities that result in a decrease in the R&D new prod- 56 nesses and organizations registering and using similar domain names, and there is a danger that such entities will resort to unethical business practices such as the use of identical or similar domain names which could damage the Group’s reputation. This is not limited to the problem of imitation products and domain names; when exercising our intellectual property rights, including the granting or assigning of licenses for the intellectual property of the Omron Group, disputes could arise with third parties, such as oppositional tactics from the party which is subject to the exercise of rights. For its R&D and design, the Omron Group uses a ded- icated system to conduct surveys of technologies in the public domain and those of other companies. However, because Group products cover a diverse range of fields in which there are many patents and other intellectual prop- erty rights, and in which the number of new patents and intellectual property rights is constantly growing, the pos- sibility exists that a third party could make a claim against the Group with respect to a specific product or part. The Omron Group is working to improve employee morale through measures such as revising its employee inven- tion compensation policy in line with revisions to Japan’s Patent Law and introducing a new award system. However, disputes could arise with respect to the value of an invention with inventors who have retired from the Group, and this could exert a negative impact on the Omron Group’s operating results and financial condition. (8) Natural Disasters Because of the possibility of reduction of production capa- bility, temporary disruption of distribution and sales routes, or other consequences of a natural disaster, fire or other calamity, including a large-scale earthquake in areas such as Tokai and Tonankai or directly below the Tokyo area, the Omron Group has identified risks and implemented the necessary safety measures and measures for contin- uation and early recovery of its businesses. However, the Omron Group’s operating bases are located in Japan and around the world, and it is impossible to avoid all risks due to a natural disaster, fire or other calamity. As a result, a natural disaster, fire or other calami- ty could exert a negative impact on the Omron Group’s operating results and financial condition. uct contribution ratio could have a negative impact on the Omron Group’s operating results and financial condition. (6) Information Leakage The Omron Group acquires personal information and clas- sified information of customers through its business processes and acquires important information in the course of business. The Omron Group is taking steps to reinforce control over the information the Group handles and to further improve employees’ information literacy, with the goal of preventing external entry into its internal information systems and misappropriation by third par- ties resulting from theft or loss of that information. Unanticipated leakage of internal information, how- ever, due for example to invasion of internal information systems using technology exceeding implemented secu- rity levels, could exert a negative impact on the Omron Group’s operating results and financial condition. (7) Risks Associated with Patent Rights and Other Intellectual Property Rights The Omron Group has accumulated technology and expertise allowing it to differentiate its products from those of its competitors. 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, including China, and conditions that allow only limited protection. At pres- ent, the Omron Group is working on intellectual property protection against imitation products, through such meas- ures as the placement of full-time personnel (including local staff) in Shanghai. However, it is possible that the Group will not be able to completely prevent third parties from using its intellectual property in the manufacture of imitation products. In China, skills in the methods needed to manufac- ture and sell imitations of the Omron Group’s products improve each year, and organizations that manufacture and market counterfeit products 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 activities. Omron has always focused on managing its brands. Recently, however, it has discovered that several over- seas businesses and organizations are using domain names similar to Omron’s. Omron has identified some of these and is responding with measures including issuing warning notices. However, although Omron is monitoring the registra- tion of illegal domain names on a global level and on a daily basis, it is difficult to identify and deal with all busi- F i n a n c a i l S e c t i o n ( U S . . G A A P ) B u s i n e s s a n d O t h e r R i s k s 57 Consolidated Balance Sheets OMRON Corporation and Subsidiaries Years ended March 31, 2008, 2007 ASSETS Current assets: Cash and cash equivalents Notes and accounts receivable - trade Allowance for doubtful receivables Inventories (Note 3) Deferred income taxes (Note 12) Other current assets Millions of yen Thousands of U.S. dollars (Note 2) 2008 2007 2008 ¥ 40,624 166,878 (2,211) 95,125 19,690 9,948 ¥ 42,995 175,700 (2,297) 94,109 19,985 11,567 $ 406,240 1,668,780 (22,110) 951,250 196,900 99,480 Total current assets 330,054 342,059 3,300,540 Property, plant and equipment: Land Buildings Machinery and equipment Construction in progress Total Accumulated depreciation 27,126 128,183 167,036 6,277 28,271 125,227 175,398 6,389 271,260 1,281,830 1,670,360 62,770 328,622 335,285 3,286,220 (175,946) (175,970) (1,759,460) Net property, plant and equipment 152,676 159,315 1,526,760 Investments and other assets: Investments in and advances to affiliates Investment securities (Note 4) Leasehold deposits Deferred income taxes (Note 12) Other (Note 6) 16,645 39,139 8,087 28,151 42,615 16,677 46,770 8,650 17,293 39,573 166,450 391,390 80,870 281,510 426,150 Total investments and other assets 134,637 128,963 1,346,370 Total See notes to consolidated financial statements. ¥ 617,367 ¥ 630,337 $ 6,173,670 58 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Short-term debt (Note 7) Notes and accounts payable - trade Accrued expenses Income taxes payable Other current liabilities (Note 12) Current portion of long-term debt (Note 7) Millions of yen Thousands of U.S. dollars (Note 2) 2008 2007 2008 ¥ 17,795 94,654 30,622 8,959 24,517 522 ¥ 19,868 91,543 32,548 11,467 33,170 264 $ 177,950 946,540 306,220 89,590 245,170 5,220 Total current liabilities 177,069 188,860 1,770,690 Long-term debt (Note 7) Deferred income taxes (Note 12) 1,492 3,887 1,681 2,006 14,920 38,870 Termination and retirement benefits (Note 9) 63,536 52,700 635,360 Other long-term liabilities 863 830 8,630 Minority interests in subsidiaries 2,018 1,438 20,180 Shareholders’ equity (Note 10): Common stock, no par value: Authorized: 487,000,000 shares in 2008 and 2007, respectively Issued: 239,121,372 shares and 249,121,372 shares in 2008 and 2007, respectively Capital surplus Legal reserve Retained earnings Accumulated other comprehensive loss (Note 17) Treasury stock, at cost — 17,441,564 shares in 2008 and 64,100 64,100 641,000 98,961 8,673 266,451 (28,217) 98,828 8,256 258,057 (3,013) 989,610 86,730 2,664,510 (282,170) 18,599,842 shares in 2007 (41,466) (43,406) (414,660) Total shareholders’ equity 368,502 382,822 3,685,020 Total See notes to consolidated financial statements. ¥ 617,367 ¥ 630,337 $ 6,173,670 F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 59 Consolidated Statements of Income OMRON Corporation and Subsidiaries Years ended March 31, 2008, 2007 and 2006 Net sales Costs and expenses: Cost of sales Selling, general and administrative expenses Research and development expenses Subsidy from the government (Note 9) Other expenses (income), net (Note 11) Millions of yen Thousands of U.S. dollars (Note 2) 2008 2007 2006 2008 ¥ 762,985 ¥ 723,866 ¥ 616,002 $ 7,629,850 469,643 176,569 51,520 — 1,087 445,625 164,167 52,028 — (2,233) 383,335 157,909 55,315 (41,339) (2,724) 4,696,430 1,765,690 515,200 — 10,870 Total 698,819 659,587 552,496 6,988,190 Income from continuing operations before income taxes, minority interests, and equity in loss of affiliates 64,166 64,279 63,506 641,660 Income taxes (Note 12) 24,272 25,595 26,701 242,720 Income from continuing operations before minority interests and equity in loss of affiliates 39,894 38,684 36,805 398,940 Minority interests Equity in loss of affiliates 217 348 238 1,352 150 493 2,170 3,480 Income from continuing operations 39,329 37,094 36,162 393,290 Income from discontinued operations, net of tax (Note 14) 3,054 1,186 802 30,540 Cumulative effect of accounting change, net of tax (Note 9) — — (1,201) — Net income ¥ 42,383 ¥ 38,280 ¥ 35,763 $ 423,830 2008 Yen 2007 U.S. dollars (Note 2) 2006 2008 ¥ 172.5 172.4 ¥ 159.8 159.7 ¥ 152.8 152.7 $ 1.73 1.72 13.4 13.4 — — 5.2 5.2 — — 3.4 3.4 (5.1) (5.0) 185.9 185.8 165.0 164.9 151.1 151.1 0.13 0.13 — — 1.86 1.86 Per share data (Note 15): Income from continuing operations Basic Diluted Income from discontinued operations Basic Diluted Cumulative effect of accounting change Basic Diluted Net income Basic Diluted See notes to consolidated financial statements. 60 Consolidated Statements of Comprehensive Income (Loss) OMRON Corporation and Subsidiaries Years ended March 31, 2008, 2007 and 2006 Net income Other comprehensive income (loss), net of tax (Note 17): Millions of yen Thousands of U.S. dollars (Note 2) 2008 2007 2006 2008 ¥ 42,383 ¥ 38,280 ¥ 35,763 $ 423,830 Foreign currency translation adjustments: Foreign currency translation adjustments arising during the year (12,342) 7,907 9,201 (123,420) Reclassification adjustment for the portion realized in net income — 6 — — Net change in foreign currency translation adjustments during the year (12,342) 7,913 9,201 (123,420) Minimum pension liability adjustments — 1,658 19,940 — Pension liability adjustments (7,076) — — (70,760) Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) arising during the year Reclassification adjustment for losses on impairment realized in net income Reclassification adjustment for net gains on sales realized in net income Reclassification adjustment for net gains on contribution of (6,647) (560) 10,905 (66,470) 1,315 85 287 13,150 (905) (475) (2,430) (9,050) securities to retirement benefit trust realized in net income — (5,983) — — Net unrealized gains (losses) (6,237) (6,933) 8,762 (62,370) Net gains (losses) on derivative instruments: Net gains (losses) on derivative instruments designated as cash flow hedges during the year 1,178 (1,208) (1,282) 11,780 Reclassification adjustment for net gains (losses) realized in net income (727) 1,172 1,417 (7,270) Net gains (losses) 451 (36) 135 4,510 Other comprehensive income (loss) (25,204) 2,602 38,038 (252,040) Comprehensive income See notes to consolidated financial statements. ¥ 17,179 ¥ 40,882 ¥ 73,801 $ 171,790 F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 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 ) 61 Consolidated Statements of Shareholders’ Equity OMRON Corporation and Subsidiaries Years ended March 31, 2008, 2007 and 2006 Number of common shares issued Common stock Capital surplus Legal reserve Retained earnings Millions of yen Balance, April 1, 2005 249,121,372 ¥ 64,100 ¥ 98,726 ¥ 7,649 Net income Cash dividends, ¥30 per share Transfer to legal reserve Other comprehensive income Acquisition of treasury stock Sale of treasury stock Exercise of stock options Balance, March 31, 2006 Net income Cash dividends, ¥34 per share Transfer to legal reserve Other comprehensive income Adjustment to initially apply SFAS No.158 (Note 9) Acquisition of treasury stock Sale of treasury stock Exercise of stock options Grant of stock options Balance, March 31, 2007 Amendment to adoption of FIN No.48 Net income Cash dividends, ¥42 per share Transfer to legal reserve Other comprehensive loss Acquisition of treasury stock Sale of treasury stock Retirement of treasury stock Exercise of stock options Grant of stock options Balance, March 31, 2008 249,121,372 64,100 249,121,372 64,100 1 (3) 98,724 1 10 93 98,828 (10,000,000) 239,121,372 ¥ 64,100 1 (4) 136 ¥ 98,961 ¥ 199,551 35,763 (7,078) (433) (12) 227,791 38,280 (7,839) (174) 433 8,082 174 Accumulated other comprehensive income (loss) Treasury stock ¥ (41,009) ¥ (23,207) (10,075) 2 491 (32,789) 38,038 (2,971) 2,602 (2,644) (1) (11,204) 2 585 8,256 258,057 (3,013) (43,406) 417 (266) 42,383 (9,415) (417) (23,858) (33) (25,204) (22,348) 7 23,858 423 ¥ 8,673 ¥ 266,451 ¥ (28,217) ¥ (41,466) Thousands of U.S. dollars (Note 2) Common stock Capital surplus Legal reserve Retained earnings Accumulated other comprehensive income (loss) Treasury stock $ (30,130) $ (434,060) (252,040) (223,480) 70 238,580 4,230 $ 2,580,570 (2,660) 423,830 (94,150) (4,170) (238,580) (330) $ 86,730 $ 2,664,510 $ (282,170) $ (414,660) $ 641,000 $ 988,280 $ 82,560 4,170 10 (40) 1,360 $ 989,610 $ 641,000 Balance, March 31, 2007 Amendment to adoption of FIN No.48 Net income Cash dividends, $0.42 per share Transfer to legal reserve Other comprehensive loss Acquisition of treasury stock Sale of treasury stock Retirement of treasury stock Exercise of stock options Grant of stock options Balance, March 31, 2008 See notes to consolidated financial statements. 62 Consolidated Statements of Cash Flows OMRON Corporation and Subsidiaries Years ended March 31, 2008, 2007 and 2006 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 gain on sales of investment securities Loss on impairment of investment securities and other assets Subsidy from the government Gain on contribution of securities to retirement benefit trust Termination and retirement benefits Deferred income taxes Minority interests Equity in loss of affiliates Cumulative effect of accounting change Net gain on sales of business entities Changes in assets and liabilities: Notes and accounts receivable – trade, net Inventories Other assets Notes and accounts payable – trade Income taxes payable Accrued expenses and other current liabilities Other, net Total adjustments Net cash provided by operating activities Investing activities: Proceeds from sales or maturities of investment securities Purchase of investment securities Capital expenditures Decrease (increase) in leasehold deposits Proceeds from sales of property, plant and equipment Acquisition of minority interests Decrease (increase) in investment in and loans to affiliates Proceeds from sale of business entities, net Payment for acquisition of business entities, net Net cash used in investing activities Financing activities: Net borrowings (repayments) of short-term debt 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 Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year See notes to consolidated financial statements. Millions of yen Thousands of U.S. dollars (Note 2) 2008 2007 2006 2008 ¥ 42,383 ¥ 38,280 ¥ 35,763 $ 423,830 36,343 963 168 (1,571) 2,297 — — (1,722) (131) 217 348 — (5,177) 4,977 (3,002) 644 5,305 (2,663) (10,846) 463 26,613 68,996 3,955 (7,456) (37,848) 417 5,038 — (850) 8,089 (8,026) (36,681) 33,923 6,445 1,441 (954) 682 — (10,141) (1,403) 3,887 238 1,352 — — (19,773) (13,955) 2,248 (5,674) (2,244) 6,480 (293) 2,259 40,539 1,643 (2,108) (44,689) (9) 17,930 (15) (1,189) — (18,638) (47,075) 30,825 42 — (4,302) 757 (41,339) — 29,254 3,962 150 493 1,201 (194) (9,629) (2,098) (560) 7,079 (685) 1,411 (431) 15,936 51,699 6,830 (1,294) (40,560) 161 1,981 (200) 251 (544) (9,645) (43,020) 363,430 9,630 1,680 (15,710) 22,970 — — (17,220) (1,310) 2,170 3,480 — (51,770) 49,770 (30,020) 6,440 53,050 (26,630) (108,460) 4,630 266,130 689,960 39,550 (74,560) (378,480) 4,170 50,380 — (8,500) 80,890 (80,260) (366,810) (3,523) 28 (772) (8,252) (7) (22,348) 7 386 (34,481) (205) (2,371) 42,995 ¥ 40,624 13,812 242 (455) (7,680) (9) (11,204) 3 594 (4,697) 1,943 (9,290) 52,285 ¥ 42,995 (11,813) 318 (11,012) (6,190) (28) (10,075) 3 477 (38,320) 1,307 (28,334) 80,619 ¥ 52,285 (35,230) 280 (7,720) (82,520) (70) (223,480) 70 3,860 (344,810) (2,050) (23,710) 429,950 $ 406,240 F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 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 63 Notes to Consolidated Financial Statements OMRON Corporation and Subsidiaries 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations OMRON Corporation (the “Company”) is a multinational manufacturer of automation components, equipment and systems with advanced computer, communications and control technologies. The Company conducts business in over 30 countries around the world and strategically manages its worldwide operations through 5 regional management centers in Japan, North America, Europe, Asia-Pacific and China. Products, classified by type and market, are organized into five business segments and one business development group, as described below. Industrial Automation Business manufactures and sells control components and systems including pro- grammable logic controllers, sensors and switches used in automatic systems in industry. In the global market, the Company offers many services, such as those involving labor-saving automation, environmental protection, safety improvement, and inspection-automization solutions for highly developed production systems. Electronic Components Businessmanufactures and sells electric and electronic components found in such consumer goods as home appliances as well as such busi- ness equipment as telephone systems, vending machines and office equipment. Automotive Electronic Components Businessdevel- ops and produces automotive electronic components and other components for automobiles and automotive elec- tronic components manufacturers throughout the world. Social Systems Solutions Business encompasses the sale of card authorization terminals mainly for the domestic markets. Passing gates, automated ticket machines, electronic panels and terminal displays for traf- fic information and monitoring purposes are also supplied for the domestic market. Healthcare Business sells blood pressure monitors, digital thermometers, body-fat monitors, nebulizers and infra-red therapy devices aimed at both the consumer and institutional markets. Business Development Group consists of busi- nesses with high growth potential. The group provides the peripheral equipment used in office automation equip- ment, modems, terminal adapters, scanners and uninter- rupted power supplies. Basis of Financial Statements The accompanying consolidated financial statements, stat- ed in Japanese yen, include certain adjustments, not recorded on the books of account, to present these state- ments in accordance with accounting principles generally accepted in the United States of America, except for the omission of segment information required by Statement of Financial Accounting Standards (“SFAS”) No.131, “Disclosures about Segments of an Enterprise and Related Information.” Certain reclassifications have been made to amounts previously reported in order to conform to 2008 classifications. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries (together the “Companies”). All significant intercompany accounts and transactions have been eliminated. Investments in which the Companies have a 20% to 50% interest (affiliates) are accounted for using the equity method. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents consist of highly liquid investments with original maturities of three months or less, including time deposits, commercial paper, and securities purchased with resale agreements and money market instruments. Allowance for Doubtful Receivables An allowance for doubtful receivables is established in amounts considered to be appropriate based primarily upon the Companies’ past credit loss experience and an evalua- tion of 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 carried at market value with the corresponding recognition of net unrealized holding gains and losses as a separate component of accumulated other comprehen- sive income (loss), net of related taxes, until recognized. If necessary, individual securities classified as available-for- sale are reduced to fair value by a charge to income in the period in which the decline is deemed to be other than temporary. The Companies principally consider that an other-than-temporary impairment has occurred when the decline in fair value below the carrying value continues for over nine consecutive months. The Companies may also consider other factors, including their ability and intent to hold the applicable investment securities until maturity, and the severity of the decline in fair value. Other investments are stated at the lower of cost or estimated net realizable value. The cost of securities sold is determined on the average cost basis. 64 Inventories Domestic inventories are mainly stated at the lower of cost, determined by the first-in, first-out method, or mar- ket. Also overseas inventories are mainly stated at the lower of cost, determined by the moving-average method, or market. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment has been computed principally on a declining balance method based upon the estimated useful lives of the assets. The estimated useful lives primarily range from 3 to 50 years for buildings and from 2 to 15 years for machinery and equipment. Goodwill and Other Intangible Assets The Companies account for its goodwill and other intan- gible assets in accordance with SFAS No.142, “Goodwill and Other Intangible Assets,” which requires that goodwill no longer be amortized, but instead tested for impairment at least annually. SFAS No.142 also requires recognized intangible assets be amortized over their respective esti- mated useful lives and reviewed for impairment. Any rec- ognized intangible asset determined to have an indefinite useful life is not to be amortized, but instead tested for impair- ment until its life is determined to no longer be indefinite. Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the car- rying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value. Assets to be disposed of other than by sale are considered held and used until disposed of. Assets to be disposed of by sale are reported at the lower of the car- rying amount or fair value less costs to sell. Advertising Costs Advertising costs are charged to earnings as incurred. Advertising expense was ¥8,648 million ($86,480 thou- sand), ¥9,600 million and ¥9,734 million for the years ended March 31, 2008, 2007 and 2006, respectively. Shipping and Handling Charges Shipping and handling charges were ¥8,121 million ($81,210 thousand), ¥8,571 million and ¥7,310 million for the years ended March 31, 2008, 2007 and 2006, respec- tively, and are included in selling, general and administra- tive expenses in the consolidated statements of income. Termination and Retirement Benefits Termination and retirement benefits are accounted for in accordance with SFAS No.87, “Employers’ Accounting for Pensions” and SFAS No.158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” based on the fiscal year-end fair value of plan assets and the projected benefit obligations of employ- ees, and are disclosed in accordance with SFAS No.132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” and SFAS No.158. The provision for termination and retirement benefits includes amounts for directors and corporate auditors of the Company. Income Taxes Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts, operating loss carryforwards and tax credit carryforwards. Future tax benefits, such as net operating loss carryfor- wards and tax credit carryforwards, are recognized to the extent that such benefits are more likely than not to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Companies adopted FASB Interpretation (“FIN”) No.48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.109,” for the year beginning after April 1, 2007. FIN No.48 clarifies the accounting for uncertainty in income taxes by prescrib- ing the recognition threshold a tax position is required to meet before being recognized in the financial statements. The Companies decreased ¥266 million ($2,660 thousand) of the beginning retained earnings by the effect from adoption of FIN No.48, but had no material impact on Net Income for the year ended March 31, 2008. The Company and certain domestic subsidiaries com- pute current income taxes based on the consolidated tax- able income as permitted by Japanese tax regulations for the year beginning after April 1, 2006. Product Warranties A liability for the estimated warranty related cost is estab- lished at the time revenue is recognized and is included in other current liabilities. The liability is established using historical information including the nature, frequency, and average cost of warranty claims. Derivatives Derivative instruments and hedging activities are account- ed for in accordance with SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No.138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No.133,” and SFAS No.149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” These standards establish accounting and reporting standards for derivative instruments and for F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 65 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 OMRON Corporation and Subsidiaries hedging activities, and require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. For foreign exchange forward contracts and foreign currency swaps, on the date the derivative contract is entered into, the Companies designate the derivative as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge or “foreign currency” hedge). The Companies formally document all relation- ships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow or foreign currency hedges to specific assets and liabilities on the consolidated balance sheet or to specific firm commitments or forecasted transactions. Based on the Companies’ policy, all foreign exchange forward con- tracts and foreign currency swaps entered into must be highly effective in offsetting changes in cash flows of hedged items. Changes in fair value of a derivative that is highly effec- tive and that is designated and qualifies as a cash flow or foreign currency hedge are recorded in other compre- hensive income (loss), until earnings are affected by the variability in cash flows of the designated hedged item. Cash Dividends Cash dividends are reflected in the consolidated financial statements at proposed amounts in the year to which they are applicable, even though payment is not approved by shareholders until the annual general meeting of share- holders held early in the following fiscal year. Resulting dividends payable are included in Other current liabilities in the consolidated balance sheets. Revenue Recognition The Companies recognize revenue when persuasive evi- dence of an arrangement exists, delivery has occurred and title and risk of loss has transferred, the sales price is fixed or determinable, and collectibility is probable. These criteria are met when products are received by customers or services are performed. Stock-Based Compensation The Companies applied revised SFAS No.123, “Share Based Payment,” and recognized a stock-based compensation cost measured by the fair value method. For the year ended March 31, 2006, the Companies applied Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees,” and recognized a stock-based com- pensation cost measured by the intrinsic value method. The following table illustrates the effect on net income and net income per share if the Companies had applied the fair value method to stock-based compensation cost. Net income as reported Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards Pro forma net income Net income per share (yen) Basic - as reported Basic - pro forma Diluted - as reported Diluted - pro forma Millions of yen (except per share data) 2006 ¥ 35,763 73 ¥ 35,690 ¥ 151.1 150.8 151.1 150.7 New Accounting Standards In September 2006, the FASB issued SFAS No.157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value meas- urements. SFAS 157 is effective for fiscal years begin- ning after November 15, 2007. The adoption of SFAS 157 will not have a material impact on the Companies’ con- solidated financial statements. In February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No.115” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and lia- bilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of 66 SFAS 159 will not have a material impact on the Companies’ consolidated financial statements. In June 2007, the FASB ratified the EITF Issued No.07- 3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and cap- italized and recognized as an expense as the goods are delivered or the related services are performed. EITF 07- 3 is effective, on a prospective basis, for fiscal years begin- ning after December 15, 2007. The adoption of EITF 07-3 will not have a material impact on the Companies’ con- solidated financial statements. In December 2007, the FASB issued SFAS No.141 (revised 2007), “Business Combinations”(“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes dis- 2. Translation into United States Dollars closure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 141R will not have a material impact on the Companies’ con- solidated financial statements. In December 2007, the FASB issued SFAS No.160, “Noncontrolling Interests in Consolidated Financial Statement, an amendment of ARB No.51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments then a sub- sidiary is deconsolidated. SFAS 160 also establishes dis- closure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adop- tion of SFAS 160 will not have a material impact on the Companies’ consolidated financial statements. The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Company is incorporated and operates. The translation of Japanese yen amounts into U.S. dollar amounts is included solely for convenience of the readers outside of Japan and has been made at the rate of ¥100 to $1, the approximate rate of exchange at March 31, 2008. Such translation should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at the above or any other rate. 3. Inventories Inventories at March 31 consisted of: Finished products Work-in-process Materials and supplies Total Millions of yen Thousands of U.S. dollars 2008 2007 2008 ¥ 53,128 16,656 25,341 ¥ 95,125 ¥ 53,331 14,043 26,735 ¥ 94,109 $ 531,280 166,560 253,410 $ 951,250 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 comprehensive income (loss), net of tax. Cost, gross unrealized holding gains and losses and fair value of securities, excluding equity securities with no readily determinable public market value, by major security type at March 31 were as follows: F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 67 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 OMRON Corporation and Subsidiaries Millions of yen 2008 2007 Cost (*) Gross unrealized gains Gross unrealized losses Fair value Cost (*) Gross unrealized gains Gross unrealized losses Fair value Available-for-sale securities Debt securities Equity securities Total available-for- sale securities ¥ 1,541 20,802 ¥ — 12,932 ¥ — (662) ¥ 1,541 33,072 ¥ 2,559 16,063 ¥ 510 22,351 ¥ — (12) ¥ 3,069 38,402 ¥ 22,343 ¥ 12,932 ¥ (662) ¥ 34,613 ¥ 18,622 ¥ 22,861 ¥ (12) ¥ 41,471 Thousands of U.S. dollars 2008 Cost (*) Gross unrealized gains Gross unrealized losses Fair value Available-for-sale securities Debt securities Equity securities Total available-for- sale securities $ 15,410 208,020 $ — 129,320 $ — (6,620) $ 15,410 330,720 $ 223,430 $ 129,320 $ (6,620) $ 346,130 (*) Cost represents amortized cost for debt securities and acquisition cost for equity securities. Maturities of debt securities classified as available-for-sale at March 31 were as follows: Millions of yen Thousands of U.S. dollars 2008 2007 2008 Cost Fair value Cost Fair value Cost Fair value Due after one year through five years Due over five years ¥ 41 ¥ 1,500 ¥ 41 ¥ 1,500 ¥ 1,059 ¥ 1,500 ¥ 1,569 ¥ 1,500 $ 410 $ 15,000 $ 410 $ 15,000 Gross unrealized holding losses and fair value of certain available-for-sale, equity securities, aggregated by length of time that such securities have been in a continuous unrealized loss position at March 31 were as follows: Less than 12 months Equity securities Millions of yen Thousands of U.S. dollars 2008 2007 2008 Fair value Gross unrealized holding losses Fair value Gross unrealized holding losses Fair value Gross unrealized holding losses ¥ 6,270 ¥ (662) ¥ 312 ¥ (12) $ 62,700 $ (6,620) Aggregate cost of non-marketable equity securities accounted for under the cost method totaled ¥4,526 mil- lion ($45,260 thousand) and ¥5,299 million at March 31, 2008 and 2007, respectively. Investments with an aggre- gate cost of ¥4,495 million ($44,950 thousand) were not evaluated for impairment because (a) the Companies did not estimate the fair value of those investments as it was not practicable to do so and (b) the Companies did not identify any events or changes in circumstances that might have had a significant adverse effect on the fair value of those investments. Losses on impairment of available-for-sale securities recognized to reflect declines in market value considered to be other than temporary were ¥2,228 million ($22,280 thousand), ¥144 million and ¥487 million for the years ended March 31, 2008, 2007 and 2006, respectively. Proceeds from sales of available-for-sale securities were ¥3,403 million ($34,030 thousand), ¥976 million and ¥6,511 million for the years ended March 31, 2008, 2007 and 2006, respectively. Gross realized gains on sales were ¥1,534 million ($15,340 thousand), ¥805 million and ¥4,119 million for the years ended March 31, 2008, 2007 and 2006, respectively. There were no gross realized losses on sales for the years ended March 31, 2008, 2007 and 2006. The fair value of available-for-sale securities contributed to a retirement benefit trust was ¥16,019 million and the gain on contribution was ¥10,141 million for the year ended March 31, 2007. 68 5. Acquisition In August 2006, the Company acquired 100% of the issued common stock of Pioneer Precision Machinery Corporation (now OMRON Precision Technology Co., Ltd., “OPT”) for cash in the aggregate amount of ¥7,721 million. This acqui- sition was to expand and strengthen LCD backlights busi- ness from small-size to large-size. The consolidated financial statements for the year ended March 31, 2007 include the operating results of OPT from the date of acquisition. The estimated fair values of the assets acquired and liabilities assumed at the date of acquisition were as follows: Current assets Property, plant and equipment Investments and other assets (*) Current liabilities Long term liabilities Net assets acquired Millions of yen ¥ 18,299 3,788 3,855 (16,284) (1,937) ¥ 7,721 (*) Investments and other assets include acquired goodwill of ¥2,179 million. In September 2006, OMRON Management Center of America, Inc., a subsidiary of the Company, acquired 100% of the issued common stock of Scientific Technologies Incorporated (now OMRON Scientific Technologies Incorporated, “OSTI”) for cash in the aggregate amount of ¥11,667 million. This acquisition was to fulfill line-up of safety equipment, expand safety business and create cut- ting-edge equipment. The consolidated financial statements for the year ended March 31, 2007 include the operating results of OSTI from the date of acquisition. The estimated fair values of the assets acquired and liabilities assumed at the date of acquisition were as follows: 6. Goodwill and Other Intangible Assets Current assets Property, plant and equipment Investments and other assets (*) Current liabilities Long term liabilities Net assets acquired Millions of yen ¥ 2,463 458 11,360 (795) (1,819) ¥ 11,667 (*) Investments and other assets include acquired goodwill of ¥7,044 million. In June 2007, the Company acquired 95% of the issued common stock of Laserfront Technologies Co., Ltd. (now OMRON Laserfront Inc., “OLFT”) for cash in the aggre- gate amount of ¥8,099 million ($80,990 thousand). This acquisition was to expand laser business by enhancing line- up of products focusing on laser processing technology. The consolidated financial statements for the year ended March 31, 2008 include the operating results of OLFT from July 2007. The estimated fair values of the assets acquired and liabilities assumed at the date of acqui- sition were as follows: Millions of yen Current assets Property, plant and equipment Investments and other assets (*) Current liabilities Long term liabilities Minority interest Net assets acquired ¥ 6,186 619 7,354 (3,863) (1,940) (257) ¥ 8,099 Thousands of U.S. dollars $ 61,860 6,190 73,540 (38,630) (19,400) (2,570) $ 80,990 (*) Investments and other assets include acquired goodwill of ¥3,668 million ($36,680 thousand). The components of acquired intangible assets excluding goodwill at March 31, 2008 and 2007 were as follows: Millions of yen 2008 2007 Thousands of U.S. dollars 2008 Gross amount Accumulated amortization Gross amount Accumulated amortization Gross amount Accumulated amortization Intangible assets subject to amortization: Software Other Total ¥ 38,875 4,416 ¥ 43,291 ¥ 25,210 2,845 ¥ 28,055 ¥ 37,141 4,895 ¥ 42,036 ¥ 21,426 2,897 ¥ 24,323 $ 388,750 44,160 $ 432,910 $ 252,100 28,450 $ 280,550 Aggregate amortization expense related to intangible assets was ¥6,769 million ($67,690 thousand), ¥5,762 million and ¥5,133 million for the years ended March 31, 2008, 2007 and 2006, respectively. F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 69 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 OMRON Corporation and Subsidiaries Estimated amortization expense for the next five years ending March 31 is as follows: Years ending March 31 2009 2010 2011 2012 2013 Millions of yen Thousands of U.S. dollars ¥ 6,341 4,341 2,714 1,420 365 $ 63,410 43,410 27,140 14,200 3,650 Intangible assets not subject to amortization at March 31, 2008 and 2007 were immaterial. The carrying amount of goodwill at March 31, 2008 and 2007 and changes in its carrying amount for the years ended March 31, 2008 and 2007 were as follows: Millions of yen Thousands of U.S. dollars Balance at beginning of year Acquisition Foreign currency translation adjustments and other Balance at end of year 7. Short-Term Debt and Long-Term Debt Short-term debt at March 31 consisted of the following: Commercial Paper The weighted average annual interest rates 2007 0.8% 2008 0.8% Unsecured debt: 2008 2007 2008 ¥ 19,021 4,131 (916) ¥ 22,236 ¥ 8,895 10,080 46 ¥ 19,021 $ 190,210 41,310 (9,160) $ 222,360 Millions of yen 2008 2007 Thousands of U.S. dollars 2008 ¥ 16,000 ¥ 16,000 $ 160,000 The weighted average annual interest rates 1,795 3,868 17,950 2007 5.0% 2008 5.1% Total Long-term debt at March 31 consisted of the following: Unsecured debt: The weighted average annual interest rates 2007 2008 5.4% 2.9% Other Total Less portion due within one year Long-term debt, less current portion ¥ 17,795 ¥ 19,868 $ 177,950 Millions of yen 2008 2007 Thousands of U.S. dollars 2008 ¥ 384 ¥ 120 $ 3,840 1,630 2,014 522 ¥ 1,492 1,825 1,945 264 ¥ 1,681 16,300 20,140 5,220 $ 14,920 70 The annual maturities of long-term debt outstanding at March 31, 2008 were as follows: Years ending March 31 2009 2010 2011 2012 2013 Thereafter Total Millions of yen Thousands of U.S. dollars ¥ 522 72 61 61 63 1,235 ¥ 2,014 $ 5,220 720 610 610 630 12,350 $ 20,140 As is customary in Japan, additional security must be given if requested by a lending bank, and banks have the right to offset cash deposited with them against any debt or obliga- tion that becomes due and, in case of default and certain other specified events, against all debt payable to the banks. The Companies have never received any such requests. As is also customary in Japan, the Company and domestic subsidiaries maintain deposit balances with banks with which they have short- or long-term debt. Such deposit balances are not legally or contractually restricted as to withdrawal. Total interest cost incurred and charged to expense for the years ended March 31, 2008, 2007 and 2006 amounted to ¥1,537 million ($15,370 thousand), ¥1,116 million and ¥898 million, respectively. 8. Leases The Companies do not have any material capital lease agreements. The Companies have operating lease agreements pri- marily involving offices and equipment for varying periods. Leases that expire generally are expected to be renewed or replaced by other leases. At March 31, 2008, future minimum rental payments applicable to non-cancelable leases having initial or remaining non-cancelable lease terms in excess of one year were as follows: Years ending March 31 2009 2010 2011 2012 2013 Thereafter Total Millions of yen Thousands of U.S. dollars ¥ 2,625 2,040 1,800 1,631 1,491 9,393 ¥ 18,980 $ 26,250 20,400 18,000 16,310 14,910 93,930 $ 189,800 Rental expense amounted to ¥13,292 million ($132,920 thousand), ¥12,598 million and ¥11,675 million for the years ended March 31, 2008, 2007 and 2006, respectively. 9. Termination and Retirement Benefits The Company and its domestic subsidiaries sponsor ter- mination and retirement benefit plans which cover sub- stantially all domestic employees. Benefits were based on the employee’s years of service, with some plans con- sidering compensation and certain other factors. The Company, effective from April 2004, and its domestic subsidiaries, effective from April 2005, introduced an amended plan to establish a new formula for determin- ing pension benefits including a “point-based benefits system,” under which benefits are calculated based on accumulated points allocated to employees each year according to their job classification and performance. If the termination is involuntary, the employee is usually entitled to greater payments than in the case of volun- tary termination. The Company and its domestic subsidiaries fund a por- tion of the obligations under these plans. The general fund- ing policy is to contribute amounts computed in accordance with actuarial methods acceptable under Japanese tax law. The Company and substantially all domestic subsidiaries had a contributory termination and retirement plan which was interrelated with the Japanese government social wel- fare program and consisted of a substitutional potion requir- ing employee and employer contributions plus an additional portion established by the employers. F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 71 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 OMRON Corporation and Subsidiaries Periodic pension benefits required under the substi- tutional portion were prescribed by the Japanese Ministry of Health, Labour and Welfare, commence at age 65 and continue until the death of the surviving spouse. Benefits under the additional portion were usually paid in a lump sum at the earlier of termination or retirement although periodic payments were available under certain conditions. In January 2003, EITF reached a final consensus on Issue 03-2, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities.” EITF Issue 03-2 addresses accounting for a transfer to the Japanese government of a substitutional portion of an Employees’ Pension Fund plan. The process of separating the substitutional portion from the corporate portion occurs in four phases. EITF Issue 03-2 requires that the separation process should be accounted for upon completion of the transfer to the government of the substitutional portion of the benefit obligation and related plan assets as the culmination of a series of steps in a single settlement transaction. Under the consensus reached, at the time the assets are transferred to the government in an amount sufficient to complete the separation process, the transaction is considered to be complete and the elimination of the entire substitutional portion of the benefit obligation would be accounted for as a settlement at that time. The difference between the obligation settled and the assets transferred to the government should be accounted for as a subsidy from the government. The Company received the Japanese government’s approval of exemption from the obligation for benefit related to future employee service on April 26, 2004 and past employee service on May 1, 2005 with respect to the sub- stitutional portion of its termination and retirement benefit plans. The substitutional portion of the benefit obligation and related plan assets were transferred to the govern- ment on September 29, 2005. The transfer resulted in the Company recording a subsidy from the government of ¥41,339 million representing the difference between the accumulated benefit obligation of the substitutional por- tion and the related plan assets. Additionally, the Company recorded a reduction in net periodic benefit cost related to the derecognition of previously accrued salary pro- gression of ¥8,870 million and a settlement loss of ¥38,294 million. The net amount of derecognition of pre- viously accrued salary progression and settlement loss is allocated to cost of sales of ¥15,975 million, selling, gen- eral and administrative expenses of ¥8,635 million and research and development expenses of ¥4,814 million. On March 31, 2007, the Companies adopted the recognition and disclosure provisions of SFAS No.158. SFAS No.158 required the Companies to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of their pension plans in the consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income (loss) as pension liability adjust- ments. Before adoption of SFAS No.158, an additional minimum pension liability was recognized based on a plan’s accumulated benefit obligation (projected benefit obligation, less future compensation increase), pursuant to SFAS No.87. 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 at March 31: Millions of yen Thousands of U.S. dollars Change in benefit obligation: Benefit obligation at beginning of year Service cost, less employees’ contributions Interest cost Actuarial loss (gain) Benefits paid Settlement paid Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employers’ contributions Benefits paid Settlement paid Fair value of plan assets at end of year Fair value of assets in retirement benefit trust at beginning of year Actual return on assets in retirement benefit trust Employers’ contributions Fair value of assets in retirement benefit trust at end of year Funded status at end of year 72 2008 2007 2008 ¥ 154,529 3,992 3,091 2,772 (4,306) (1,053) ¥ 159,025 ¥ 93,462 (4,516) 5,120 (3,284) (1,053) ¥ 89,729 ¥ 13,750 (2,922) — ¥ 10,828 ¥ (58,468) ¥ 154,531 3,954 3,091 (2,521) (3,477) (1,049) ¥ 154,529 ¥ 89,287 2,894 5,110 (2,780) (1,049) ¥ 93,462 ¥ — (2,269) 16,019 ¥ 13,750 ¥ (47,317) $ 1,545,290 39,920 30,910 27,720 (43,060) (10,530) $ 1,590,250 $ 934,620 (45,160) 51,200 (32,840) (10,530) $ 897,290 $ 137,500 (29,220) — $ 108,280 $ (584,680) Amounts recognized in the consolidated balance sheet at March 31, consist of: Termination and retirement benefit ¥ (58,468) ¥ (47,317) $ (584,680) Amounts recognized in accumulated other comprehensive income (loss) at March 31, consist of: Millions of yen 2008 2007 Thousands of U.S. dollars 2008 Net actuarial loss Prior service cost The accumulated benefit obligation at March 31 was as follows: Millions of yen 2008 2007 ¥ 70,637 (19,708) ¥ 50,929 ¥ 59,950 (21,561) ¥ 38,389 Thousands of U.S. dollars 2008 $ 706,370 (197,080) $ 509,290 Millions of yen 2008 2007 Thousands of U.S. dollars 2008 Accumulated benefit obligation ¥ 154,412 ¥ 150,045 $ 1,544,120 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: Service cost, less employees’ contributions Interest cost on projected benefit obligation Expected return on plan assets Amortization Settlement loss Derecognition of previously accrued salary progression Net periodic benefit cost 2008 ¥ 3,992 3,091 (2,955) 625 — — ¥ 4,753 Millions of yen 2007 ¥ 3,954 3,091 (3,411) 612 — — ¥ 4,246 2006 ¥ 3,979 3,926 (3,620) 2,336 38,294 (8,870) ¥ 36,045 Thousands of U.S. dollars 2008 $ 39,920 30,910 (29,550) 6,250 — — $ 47,530 The unrecognized net actuarial loss and the prior service benefit are being amortized over 15 years. The estimated net actuarial loss and prior service benefit that will be amortized from accumulated other compre- hensive income (loss) into net periodic benefit cost for the year ending March 31, 2009 are summarized as follows: Net actuarial loss Prior service cost Millions of yen ¥ 2,679 (1,853) Thousands of U.S. dollars $ 26,790 (18,530) Measurement Date The Company and certain of its domestic subsidiaries use March 31 as the measurement date for projected benefit obligation and plan assets of the termination and retire- ment benefits. During the year ended March 31, 2006, the companies changed the measurement date from December 31 to March 31. The purpose of this change was to enable more timely reflection of factors, such as the effect of plan amendments and fluctuation of num- ber of employees in accounting for the termination and retirement benefits, in the projected benefit obligation and retirement benefit expense. A cumulative effect (net of tax) of this change was recognized in the consolidated statement of income for the year ended March 31, 2006, which reduced net income for the period by ¥1,201 million. F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 73 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 OMRON Corporation and Subsidiaries Assumptions Weighted-average assumptions used to determine benefit obligations at March 31, 2008 and 2007 are as follows: Discount rate Compensation increase rate 2008 2.0% 2.0% 2007 2.0% 2.0% Weighted-average assumptions used to termination and retirement benefit cost for the years ended March 31, 2008, 2007 and 2006 are as follows: Discount rate Compensation increase rate Expected long-term rate of return on plan assets 2008 2.0% 2.0% 3.0% 2007 2.0% 2.0% 3.0% 2006 2.0% 2.0% 3.0% 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 (except for assets in retirement benefit trust) by asset cat- egory is as follows: Asset category Cash Equity securities Debt securities Life insurance company general accounts Other Total 2008 2007 1.7% 16.3% 48.4% 14.6% 19.0% 100.0% 0.0% 21.1% 48.8% 13.8% 16.3% 100.0% The assets in the retirement benefit trust at March 31, 2008 and 2007 consisted of 98.1%, 99.7% equity secu- rities, respectively, and consisted of 1.9%, 0.3% other, respectively. The Company investment policies are designed to ensure that adequate plan assets are available to provide future payments of pension benefits to eligible participants. Taking into account the expected long-term rate of return on plan assets, the Company formulates a model portfolio comprised of the optimal combination of equity and debt securities in order to produce a total return that will match the expected return on a mid-term to long-term basis. Target allocation of plan assets is 20% equity securities, 66% debt securities and life insurance company general account and 14% other for both 2008 and 2007. The Company evaluates the gap between expected return and actual return of invested plan assets on an annual basis to determine if such differences necessitate a revision in the model portfolio. The Company revises the model portfolio to the extent considered necessary to achieve the expected long-term rate of return on plan assets. Equity securities include a common stock of the Company in the amounts of ¥4 million ($40 thousand) (0.00% of total domestic plan assets), and ¥1 million (0.00% of total domestic plan assets) at March 31, 2008, and 2007, respectively. Cash Flows Contributions The Companies expect to contribute ¥5,120 million ($51,200 thousand) to their domestic termination and retirement benefit plans in the year ending March 31, 2009. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: 74 Years ending March 31 2009 2010 2011 2012 2013 2014-2015 Millions of yen Thousands of U.S. dollars ¥ 5,322 6,605 6,888 6,592 6,774 34,144 $ 53,220 66,050 68,880 65,920 67,740 341,440 Certain employees of European subsidiaries are covered by a defined benefit pension plan. The projected benefit obligation for the plan and related fair value of plan assets were ¥2,891 million ($28,910 thousand) and ¥2,691 million ($26,910 thousand), respectively, at March 31, 2008 and ¥2,687 million and ¥2,555 million, respectively, at March 31, 2007. The Companies also have unfunded noncontributory termination plans administered by the Companies. These plans provide lump-sum termination benefits are paid at the earlier of the employee’s termination or mandatory retirement age, except for payments to directors and cor- porate auditors which require approval by the shareholders before payment. The Companies record provisions for termination benefits sufficient to state the liability equal to the plans’ vested benefits, which exceed the plans’ accu- mulated benefit obligations. The aggregate liability for the termination plans exclud- ing the funded contributory termination and retirement plan in Japan, as of March 31, 2008 and 2007 was ¥5,068 million ($50,680 thousand) and ¥5,383 million, respec- tively. The aggregate net periodic benefit cost for such plans for the years ended March 31, 2008, 2007 and 2006 was ¥258 million ($2,580 thousand), ¥1,167 million and ¥618 million, respectively. 10. Shareholders’ Equity Japanese companies are subjected to the Corporate Law. The Corporate Law requires that all shares of com- mon stock be issued with no par value and at least 50% of amount paid of the issue price of new shares is required to be recorded as common stock and the remaining net proceeds are required to be presented as additional paid- in capital, which is included in capital surplus. The Corporate Law permits Japanese companies, upon approval of the Board of Directors, to issue shares to existing shareholders without consideration by way of a stock split. Such issuance of shares generally does not give rise to changes within the shareholders’ accounts. The Corporate Law also requires that an amount equal to 10% of dividends must be appropriated as a legal reserve or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Corporate Law, the total amount of additional paid-in cap- ital and legal reserve may be reversed without limitation of such threshold. The Corporate Law also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be trans- ferred among the accounts under certain conditions upon resolution of the shareholders. stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is deter- mined by specific formula. Under the Corporate Law, stock acquisition rights, which were previously presented as a liability, are now pre- sented as a separate component of shareholders’ equity. The Corporate Law also provides that companies can purchase both treasury stock acquisition rights and treas- ury stock. Such treasury stock acquisition rights are pre- sented as a separate component of shareholders’ equity or deducted directly from stock acquisition rights. Under the Corporate Law, companies can pay divi- dends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders meeting. For companies that meet certain criteria such as; (1) having the Board of Directors, (2) having inde- pendent auditors, (3) having the Board of Corporate Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends in kind) if the company has prescribed so in its articles of incorporation. The Corporate Law permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to a certain limitation and additional requirements. The Corporate Law also provides for companies to purchase treasury stock and dispose of such treasury Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the arti- F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 75 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 OMRON Corporation and Subsidiaries cles of incorporation of the company so stipulate. Under the Corporate Law, certain limitations were imposed on the amount of capital surplus and retained earnings avail- able for dividends. The Corporate Law also provides cer- tain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3 million. Such amount avail- able for the dividends under the Corporate Law was ¥65,027 million ($650,270 thousand) at March 31, 2008, based on the amount recorded in the parent company’s general books of account. Stock Options The Companies has authorized the grant of options to purchase common stock of the Company to certain direc- tors and executive officers of the Company under a fixed stock option plan. Under the above plan, the exercise price of each option exceeded the market price of the Company’s com- mon stock on the date of grant and the options expire 5 years after the date of the grant. Generally, options become fully vested and exercisable after 2 years. A sum- mary of the Company’s fixed stock option plan activity and related information is as follows: Fixed options Options outstanding at April 1, 2005 Granted Exercised Expired Options outstanding at March 31, 2006 Granted Exercised Expired Options outstanding at March 31, 2007 Granted Exercised Expired Options outstanding at March 31, 2008 Options exercisable at March 31, 2008 Fixed options Options outstanding at March 31, 2007 Granted Exercised Expired Options outstanding at March 31, 2008 Options exercisable at March 31, 2008 Shares 1,246,000 213,000 (226,000) (260,000) 973,000 217,000 (260,000) (25,000) 905,000 237,000 (181,000) (3,000) 958,000 504,000 Shares 905,000 237,000 (181,000) (3,000) 958,000 504,000 Yen Weighted-average exercise price Weighted-average fair value of options granted during the year ¥ 415 ¥ 539 ¥ 744 ¥ 2,421 2,550 2,111 2,936 ¥ 2,384 3,031 2,284 2,306 ¥ 2,570 3,432 2,131 1,913 ¥ 2,868 ¥ 2,533 U.S. dollars Weighted-average exercise price Weighted-average fair value of options granted during the year $ 7.44 $ 25.70 34.32 21.31 19.13 $ 28.68 $ 25.33 The following summarizes information about fixed stock options at March 31, 2008: Shares Weighted-average remaining contractual life Options outstanding 958,000 2.53 years Options exercisable 504,000 1.42 years Range of exercise prices Weighted-average exercise price Yen ¥ 2,435 to ¥ 3,432 ¥ 2,435 to ¥ 2,580 U.S. dollars $ 24.35 to $ 34.32 $ 24.35 to $ 25.80 Yen ¥ 2,868 U.S. dollars $ 28.68 ¥ 2,533 $ 25.33 76 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: 2008 1.343% 27.8% 1.166% 3.5 years 2007 1.540% 28.0% 1.068% 3.5 years 2006 1.540% 23.0% 0.982% 3.5 years Stock-based compensation cost recognized for the year ended March 31, 2008 was ¥136 million ($1,360 thousand). As of March 31, 2008, total compensation cost related to nonvested options and not yet recognized was ¥125 million ($1,250 thousand), and the weighted-aver- age period over which it is expected to be recognized is 1.13 years. Cash received from options exercised under the plan for the year ended March 31, 2008 was ¥386 million ($3,860 thousand). When options are exercised, the Company will grant the Company’s treasury stock. Risk-free interest rate Volatility Dividend yield Expected life The Black-Scholes option valuation model used by the Company was developed for use in estimating the fair value of fully tradable options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatili- ty. It is management’s opinion that the Company’s stock options have characteristics significantly different from those of traded options and because changes in the sub- jective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. 11. Other Expenses (Income), net Other expenses (income), net for the years ended March 31, 2008, 2007 and 2006 consisted of the following: Net loss on sales and disposals of property, plant and equipment Loss on impairment of property, plant and equipment Business restructuring expenses Loss on impairment of investment securities and other assets Net gain on sales of investment securities Gain on contribution of securities to retirement benefit trust Net gain on sales of business entities Interest income, net Foreign exchange loss, net Dividend income Other, net Total 2008 ¥ 963 168 264 2,297 (1,571) — — (828) 1,251 (525) (932) ¥ 1,087 Millions of yen 2007 2006 ¥ 6,427 1,441 713 682 (954) (10,141) — (710) 1,086 (654) (123) ¥ (2,233) ¥ 22 — 749 757 (4,302) — (194) (598) 1,306 (511) 47 ¥ (2,724) Thousands of U.S. dollars 2008 $ 9,630 1,680 2,640 22,970 (15,710) — — (8,280) 12,510 (5,250) (9,320) $ 10,870 Certain manufacturing assets of Automotive Electronic Components Business were deemed to be impaired and written down to fair value for the year ended March 31, 2007. The fair value was measured by discounted cash flows expected to be generated by the assets. F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 77 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 OMRON Corporation and Subsidiaries 12. Income Taxes The provision for income taxes for the years ended March 31, 2008, 2007 and 2006 consisted of the following: Current income tax expense Deferred income tax expenses, exclusive of the following Change in the valuation allowance Total Millions of yen 2008 2007 2006 ¥ 24,403 (367) 236 ¥ 24,272 ¥ 21,688 3,541 366 ¥ 25,595 ¥ 22,662 4,024 15 ¥ 26,701 Thousands of U.S. dollars 2008 $ 244,030 (3,670) 2,360 $ 242,720 The Company and its domestic subsidiaries are subject to a number of taxes based on income, which in the aggregate resulted in a normal tax rate of approximately 41.0% in 2008, 2007 and 2006. 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 Difference in subsidiaries’ tax rates Change in the valuation allowance Other, net Effective tax rates 2008 41.0% 0.9 (4.6) 1.0 (1.7) 0.4 0.8 37.8 2007 41.0% 0.5 (4.0) 3.7 (2.0) 0.6 0.0 39.8 2006 41.0% 0.9 (3.5) 0.4 3.2 0.0 0.0 42.0 The approximate effect of temporary differences and tax credit and loss carry forwards that gave rise to deferred tax bal- ances at March 31, 2008 and 2007 were as follows: Millions of yen 2008 2007 Thousands of U.S. dollars 2008 Deferred tax assets Deferred tax liabilities Deferred tax assets Deferred tax liabilities Deferred tax assets Deferred tax liabilities Inventory valuation Accrued bonuses and vacations Termination and retirement benefits Enterprise taxes Marketable securities Property, plant and equipment Allowance for doubtful receivables Pension liability adjustment Other temporary differences Tax credit carryforwards Operating loss carryforwards Subtotal Valuation allowance Total ¥ 7,788 5,913 7,023 1,001 — 849 1,195 20,881 8,632 5,025 3,483 ¥ 61,790 (8,591) ¥ 53,199 ¥ — — — — 3,673 — — — 5,704 — — ¥ 9,377 — ¥ 9,377 ¥ 7,746 5,779 6,279 756 — 958 1,088 15,739 9,363 4,997 3,469 ¥ 56,174 (8,826) ¥ 47,348 ¥ — — — — 9,214 — — — 3,056 — — ¥ 12,270 — ¥ 12,270 $ 77,880 59,130 70,230 10,010 — 8,490 11,950 208,810 86,320 50,250 34,830 $ 617,900 (85,910) $ 531,990 $ — — — — 36,730 — — — 57,040 — — $ 93,770 — $ 93,770 78 The total valuation allowance decreased by ¥235 million ($2,350 thousand) in 2008 and increased by ¥1,623 million in 2007. As of March 31, 2008, certain subsidiaries had oper- ating loss carryforwards approximating ¥10,060 million ($100,600 thousand) available for reduction of future tax- able income, the majority of which expire by 2014. The Company has not provided for Japanese income taxes on unremitted earnings of certain foreign sub- sidiaries to the extent that they are believed to be indefi- nitely reinvested. The accumulated unremitted earnings of the foreign subsidiaries which are considered to be indef- initely reinvested and for which Japanese income taxes have not been provided were ¥63,180 million ($631,800 thousand) and ¥55,211 million at March 31, 2008 and 2007, respectively. Dividends received from domestic subsidiaries are expected to be substantially free of tax. 13. Foreign Operations The Companies adopted FIN No.48 for the year begin- ning April 1, 2007. As a result of this adoption, the Companies decreased ¥266 million ($2,660 thousand) of the beginning retained earnings. The Companies believe that the total amount of unrecognized tax benefits as of March 31, 2008 is not material to its result of operations, financial condition or cash flows. The Companies recognize interest and penalties accrued related to unrecognized tax benefits in income taxes in the consolidated statements of income. The companies file income tax returns in Japanese and foreign jurisdictions. With few exceptions, tax exam- inations in Japan for the year on and before ended March 31, 2005 have been finished. With few exceptions, tax examinations in foreign countries for the year on and before ended March 31, 2003 have been finished. Net sales and total assets of foreign subsidiaries for the years ended March 31, 2008, 2007 and 2006 were as follows: Millions of yen 2008 2007 2006 Thousands of U.S. dollars 2008 ¥ 374,399 ¥ 257,151 ¥ 324,509 ¥ 263,900 ¥ 256,116 ¥ 209,038 $ 3,743,990 $ 2,571,510 Net sales Total assets 14. Discontinued Operations On April 1, 2007, the Company sold the entire business of Omron Entertainment Co., Ltd, which had been a con- solidated subsidiary, to a third party. In accordance with SFAS No.144, the Companies presented the gains (net of tax) of its disposal business and the results of discontinued operations (including operations of subsidiaries that either have been disposed of or classified as held for sale) as separate line item in the consolidated statements of income under “Income from discontinued operations, net of tax.” Prior years’ consolidated statements of income including segment information and other related matters were restated to compare with the consolidated state- ments of income for the year ended March 31, 2008. On the other hand, the cash flows attributable to the operating, investing and financing activities of the discontinued oper- ations were not presented separately from the cash flows attributable to activities of the continuing operations. The Companies have no continuing involvement with the business of Omron Entertainment Co., Ltd. The following table summarizes selected financial information for the years ended March 31, 2006, 2007 and 2008 for the discontinued operations. Net sales Cost of sales and expenses Income from discontinued operations before income taxes Net gain on sales of business entities Income taxes Income from discontinued operations, net of tax 2008 ¥ — — — 5,177 2,123 ¥ 3,054 Millions of yen 2007 2006 ¥ 12,785 10,776 2,009 — 823 ¥ 1,186 ¥ 10,780 9,441 1,339 — 537 ¥ 802 Thousands of U.S. dollars 2008 $ — — — 51,770 21,230 $ 30,540 F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 79 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 OMRON Corporation and Subsidiaries 15. Per Share Data The Company accounts for its net income per share in accordance with SFAS No.128, “Earnings per Share.” Basic net income per share has been computed by dividing net income available to common shareholders by the weighted-average number of common shares outstand- ing during each year. Diluted net income per share reflects the potential dilution of convertible bonds and stock options, and has been computed by the if-converted method for convertible bonds and by the treasury stock method for stock options. A reconciliation of the numerators and denominators of the basic and diluted net income per share computations is as follows: Millions of yen 2008 2007 2006 Thousands of U.S. dollars 2008 Income from continuing operations ¥ 39,329 ¥ 37,094 ¥ 34,961 $ 393,290 Diluted income from continuing operations ¥ 39,329 ¥ 37,094 ¥ 34,961 $ 393,290 Income from discontinued operations ¥ 3,054 ¥ 1,186 ¥ 802 $ 30,540 Diluted income from discontinued operations ¥ 3,054 ¥ 1,186 ¥ 802 $ 30,540 Millions of yen 2008 2007 2006 Thousands of U.S. dollars 2008 Cumulative effect of accounting change Diluted cumulative effect of accounting change Net income Diluted income Weighted average common shares outstanding Dilutive effect of: Stock options Diluted common shares outstanding Millions of yen 2008 2007 2006 ¥ ¥ — — ¥ ¥ — — ¥ (1,201) ¥ (1,201) Millions of yen 2008 2007 2006 Thousands of U.S. dollars 2008 $ $ — — Thousands of U.S. dollars 2008 ¥ 42,383 ¥ 38,280 ¥ 35,763 $ 423,830 ¥ 42,383 ¥ 38,280 ¥ 35,763 $ 423,830 2008 2007 2006 228,005,106 232,059,070 236,625,818 61,624 228,066,730 153,918 232,212,988 131,711 236,757,529 80 16. Supplemental Information for Cash Flows Supplemental cash flow information for the years ended March 31, 2008, 2007 and 2006 was as follows: Interest paid Income taxes paid Non-cash investing and financing activities: Liabilities assumed in connection with capital expenditures Fair value of securities contributed to retirement benefit trust Decrease in retained earnings as a result of 2008 ¥ 1,536 27,216 2,202 — Millions of yen 2007 ¥ 1,130 24,591 2,977 16,019 2006 ¥ 898 23,843 3,220 — Thousands of U.S. dollars 2008 $ 15,360 272,160 22,020 — extinguishment of treasury stock 23,858 — — 238,580 17. Other Comprehensive Income (Loss) The change in each component of accumulated other comprehensive income (loss) for the years ended March 31, 2008, 2007 and 2006 was as follows: Foreign currency translation adjustments: Beginning balance Change for the year Ending balance Minimum pension liability adjustments: Beginning balance Change for the year Adjustment to initially apply SFAS No.158 Ending balance Pension liability adjustments: Beginning balance Change for the year Adjustment to initially apply SFAS No.158 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: Beginning balance Change for the year Adjustment to initially apply SFAS No.158 Ending balance Millions of yen 2008 2007 2006 Thousands of U.S. dollars 2008 ¥ 6,560 (12,342) (5,782) ¥ (1,353) 7,913 6,560 ¥ (10,554) 9,201 (1,353) $ 65,600 (123,420) (57,820) — — — — (22,169) (7,076) — (29,245) 12,738 (6,237) 6,501 (142) 451 309 (21,183) 1,658 19,525 — — — (22,169) (22,169) 19,671 (6,933) 12,738 (106) (36) (142) (41,123) 19,940 — (21,183) — — — — 10,909 8,762 19,671 (241) 135 (106) — — — — (221,690) (70,760) — (292,450) 127,380 (62,370) 65,010 (1,420) 4,510 3,090 (3,013) (25,204) — ¥ (28,217) (2,971) 2,602 (2,644) ¥ (3,013) (41,009) 38,038 — ¥ (2,971) (30,130) (252,040) — $ (282,170) F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 81 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 OMRON Corporation and Subsidiaries Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments for the years ended March 31, 2008, 2007 and 2006 were as follows: 2008 Millions of yen 2007 2006 Before-tax amount Tax (expense) benefit Net-of-tax amount Before-tax amount Tax (expense) benefit Net-of-tax amount Before-tax amount Tax (expense) benefit Net-of-tax amount Foreign currency translation adjustments: Foreign currency translation adjustments arising during the year ¥ (12,384) ¥ 42 ¥ (12,342) ¥ 8,248 ¥ (341) ¥ 7,907 ¥ 9,458 ¥ (257) ¥ 9,201 Reclassification adjustment for the portion realized in net income Net change in foreign currency — — — 6 — 6 — — — translation adjustments during the year (12,384) 42 (12,342) 8,254 (341) 7,913 9,458 (257) 9,201 Minimum pension liability adjustments Pension liability adjustments Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) — (11,994) — 4,918 — (7,076) 2,811 — (1,153) — 1,658 — 33,797 — (13,857) — 19,940 — arising during the year (11,266) 4,619 (6,647) (949) 389 (560) 18,469 (7,564) 10,905 Reclassification adjustment for losses on impairment realized in net income Reclassification adjustment for net 2,229 (914) 1,315 144 (59) 85 487 (200) 287 gains on sales realized in net income (1,534) 629 (905) (805) 330 (475) (4,119) 1,689 (2,430) Reclassification adjustment for net gains on contribution of securities to retirement benefit trust realized in net income Net unrealized gains (losses) Net gains (losses) on derivative instruments: Net gains (losses) on derivative instruments designated as cash flow hedges during the year Reclassification adjustment for net gains (losses) realized in net income Net gains (losses) Other comprehensive income (losses) — (10,571) — 4,334 — (6,237) (10,141) (11,751) 4,158 4,818 (5,983) (6,933) — 14,837 — (6,075) — 8,762 1,997 (819) 1,178 (2,047) 839 (1,208) (2,173) 891 (1,282) (1,232) 765 505 (314) (727) 451 1,986 (61) (814) 25 1,172 (36) 2,400 227 (983) (92) 1,417 135 ¥ (34,184) ¥8,980 ¥ (25,204) ¥ (747) ¥ 3,349 ¥ 2,602 ¥ 58,319 ¥ (20,281) ¥ 38,038 82 Foreign currency translation adjustments: Foreign currency translation adjustments arising during the year Reclassification adjustment for the portion realized in net income Net change in foreign currency translation adjustments during the year Minimum pension liability adjustments Pension liability adjustments Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) arising during the year Reclassification adjustment for losses on impairment realized in net income Reclassification adjustment for net gains on sales realized in net income Reclassification adjustment for net gains on contribution of securities to retirement benefit trust realized in net income Net unrealized gains (losses) Net gains (losses) on derivative instruments: Thousands of U.S. dollars 2008 Before-tax amount Tax (expense) benefit Net-of-tax amount $ (123,840) — (123,840) — (119,940) $ 420 — 420 — 49,180 $ (123,420) — (123,420) — (70,760) (112,660) 22,290 (15,340) 46,190 (9,140) 6,290 — (105,710) — 43,340 (66,470) 13,150 (9,050) — (62,370) Net gains (losses) on derivative instruments designated as cash flow hedges during the year Reclassification adjustment for net gains (losses) realized in net income Net gains (losses) Other comprehensive income (losses) 19,970 (12,320) 7,650 $ (341,840) (8,190) 5,050 (3,140) $ 89,800 11,780 (7,270) 4,510 $(252,040) 18. Financial Instruments and Risk Management Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values as of March 31, 2008 and 2007, of the Companies’ financial instruments. Millions of yen Thousands of U.S. dollars 2008 2007 2008 Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Nonderivatives: Long-term debt, including current portion ¥ (2,014) ¥ (2,014) ¥ (1,945) ¥ (1,945) $ (20,140) $ (20,140) Derivatives: Included in other current assets (liabilities): Forward exchange contracts Foreign currency swaps 1,221 12 1,221 12 (286) 47 (286) 47 12,210 120 12,210 120 The following methods and assumptions were used to estimate the fair values of each class of financial instru- ments for which it is practicable to estimate that value: Nonderivatives (1) Cash and cash equivalents, notes and accounts receiv- able, short-term debt and notes and accounts payable: The carrying amounts approximate fair values. (2) Investment securities (see Note 4): The fair values are estimated based on quoted market prices or dealer quotes for marketable securities or similar instruments. Certain equity securities includ- ed in investments have no readily determinable public market value, and it is not practicable to estimate their fair values. (3) Long-term debt: The fair values are estimated using present value of discounted future cash flow analysis, based on the Companies’ current incremental issuing rates for sim- ilar types of arrangements. Derivatives The fair value of derivatives generally reflects the esti- mated amounts that the Companies would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotes are available for most of the Companies’ derivatives; otherwise, pricing or valu- ation models are applied to current market information to estimate fair value. The Companies do not use deriva- tives for trading purposes. F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 83 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 OMRON Corporation and Subsidiaries Derivatives and Hedging Activities Changes in the fair value of foreign exchange forward contracts and foreign currency swaps designated and qualifying as cash flow hedges are reported in accumu- lated other comprehensive income (loss). These amounts are subsequently reclassified into other expenses (income), net in the same period as the hedged items affect earnings. Substantially all of the accumulated other comprehensive income (loss) in relation to foreign exchange forward contracts at March 31, 2008 is expect- ed to be reclassified into earnings within twelve months. The effective portions of changes in the fair value of foreign exchange forward contracts and foreign curren- cy swaps designated as cash flow hedges and reported in accumulated other comprehensive income (loss), net of the related tax effect, are gains of ¥1,178 million ($11,780 thousand) and losses of ¥1,208 million for the years ended March 31, 2008 and 2007, respectively. The amounts, which were reclassified out of accumulated other com- prehensive income (loss) into other expenses (income), net depending on their nature, net of the related tax effect, are net losses of ¥727 million ($7,270 thousand) and net gains of ¥1,172 million for the years ended March 31, 2008 and 2007, respectively. The amount of the hedging ineffectiveness is not material for the years ended March 31, 2008 and 2007. Foreign exchange forward contracts and foreign cur- rency swaps: The Companies enter into foreign exchange forward contracts and combined purchased and written foreign currency swap contracts to hedge foreign currency trans- actions (primarily the U.S. dollar and the EURO) on a con- tinuing basis for periods consistent with their committed exposure. The terms of the currency derivatives are typi- cally less than ten months. The credit exposure of for- eign exchange contracts are represented by the fair value of the contracts at the reporting date. Management con- siders the exposure to credit risk to be minimal since the counterparties are major financial institutions. The notional amounts of contracts to exchange for- eign currency outstanding at March 31, 2008 and 2007 were as follows: Forward exchange contracts Foreign currency swaps Millions of yen 2008 2007 ¥ 64,916 ¥ 620 ¥ 59,596 ¥ 2,100 Thousands of U.S. dollars 2008 $ 649,160 $ 6,200 The Companies hedge certain exposures to fluctua- tions in foreign currency exchange rates that occur prior to conversion of foreign currency denominated monetary assets and liabilities into the functional currency. Prior to conversion to the functional currency, these assets and lia- bilities are translated at currency exchange rates in effect on the balance sheet date. The effects of changes in cur- rency exchange rates are reported in earnings and includ- ed in other expenses (income), net in the consolidated statements of income. Currency forward contracts and swaps designated as hedges of the monetary assets and liabilities are also marked to market rates with the result- ing gains and losses reported in the consolidated state- ments of income. 19. Commitments and Contingent Liabilities The Company has commitments at March 31, 2008 of approximately ¥23,377 million ($233,770 thousand) relat- ed to contracts for outsourcing computer services through 2013. The contracts require an annual service fee of ¥5,419 million ($54,190 thousand) for the year ending March 31, 2008. The annual service fee will gradually decrease each year during the contract term to ¥4,629 million ($46,290 thousand) for the year ending March 31, 2013. The contract is cancelable at any time subject to a penalty of 15% of aggregate service fees payable for the remaining term of the contract. The Company and certain of its subsidiaries are defen- dants in several pending lawsuits. However, based upon the information currently available to both the Company and its legal counsel, management of the Company believes that damages from such lawsuits, if any, would not have a material effect on the consolidated financial statements. 84 Concentration of Credit Risk Financial instruments that potentially subject the Companies to concentrations of credit risk consist principally of short- term cash investments and trade receivables. The Companies place their short-term cash investments with high-credit-quality financial institutions. Concentrations of credit risk with respect to trade receivables, as approximately 51% of total sales are concentrated in Japan, are limited due to the large number of well-established customers and their dispersion across many industries. The Company normally requires customers to deposit funds to serve as security for ongoing credit sales. Guarantees The Company provides guarantees for bank loans of other companies. The guarantees for the other companies are made to ensure that those companies operate with less finance costs. The maximum payments in the event of default is ¥869 million ($8,690 thousand) at March 31, 2008. The carrying amounts of the liabilities recognized under those guarantees at March 31, 2008 were immaterial. Bank loans of ¥469 million ($4,690 thousand) of an unaffiliated company were jointly and severally guaran- teed by the Company and six other unaffiliated compa- nies. According to an agreement between the seven com- panies, any loss on these guarantees are to be borne equally among the companies. Product Warranties The Companies issue contractual product warranties under which they generally guarantee the performance of prod- ucts delivered and services rendered for a certain period or term. Changes in accrued product warranty cost for the years ended March 31, 2008 and 2007 are summarized as follows: Balance at beginning of year Addition Utilization Balance at end of year 20. Subsequent Events Millions of yen 2008 ¥ 2,190 1,507 (2,078) ¥ 1,619 2007 ¥ 1,678 2,082 (1,570) ¥ 2,190 Thousands of U.S. dollars 2008 $ 21,900 15,070 (20,780) $ 16,190 On May 15, 2008, the Company’s board of directors approved a resolution, which is subject to approval at the general meeting of shareholders, outlining a plan to pur- chase the Company’s shares. The execution of the plan is at the Company’s discretion with a maximum aggregate purchase of ¥10,000 million ($100,000 thousand), or 3,000,000 shares, for the period up to the date of the June 2009 general meeting of shareholders. F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 85 Yodoyabashi Mitsui Building, 4-1-1 Imabashi, Chuo-ku, Osaka-city, Osaka 541-0042 Japan Tel: +81 6 4560 6000 Fax: +81 6 4560 6001 http://www.deloitte.com/jp Independent Auditors’ Report To the Board of Directors and Stockholders of OMRON Corporation We have audited the accompanying consolidated balance sheets of OMRON Corporation and subsidiaries (the “Company”) as of March 31, 2008 and 2007, 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, 2008, all expressed in Japanese yen. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 concerning operating segments and other information is required for a complete presentation of the Company’s consolidated financial statements. In our opinion, except for the omission of segment information as discussed in the preceding paragraph, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OMRON Corporation and subsidiaries as of March 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2008, 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 dollar amounts are presented solely for the convenience of readers outside Japan. Osaka, Japan June 10, 2008 F i n a n c a i l S e c t i o n ( U S . . G A A P ) 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 86 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 As of March 31, 2008 Date of Establishment May 10, 1933 Number of Employees (Consolidated) 35,426 Depositary and Transfer Agent for American Depositary Receipts JPMorgan Chase Bank, N. A. 4 New York Plaza, New York, NY 10004, U. S. A. Overseas Headquarters Europe OMRON Europe B.V. (The Netherlands) Tel 31-23-568-1300 Fax 31-23-568-1391 Paid-in Capital ¥64,100 million Common Stock Authorized 487,000,000 shares Issued 239,121,372 shares Number of shareholders 33,166 Stock Listings Osaka Securities Exchange Tokyo Stock Exchange Nagoya Stock Exchange Frankfurt Stock Exchange Ticker Symbol Number 6645 Custodian of Register of Shareholders Mitsubishi UFJ Trust and Banking Corporation 1-4-5, Marunouchi, Chiyoda-ku, Tokyo 100-8212, Japan ADR Holder Contact : JPMorgan Service Center P.O. Box 64504 St. Paul, MN 55164-0504 U.S.A. Tel 1-800-990-1135 E-mail jpmorgan.adr@ wellsfargo.com Homepage http://www.omron.co.jp (Japanese) http://www.omron.com (English) Head Office Shiokoji Horikawa, Shimogyo-ku, Kyoto 600-8530, Japan Tel 81-75-344-7000 Fax 81-75-344-7001 Tokyo Head Office 3-4-10, Toranomon, Minato-ku, Tokyo 105-0001, Japan Tel 81-3-3436-7170 Fax 81-3-3436-7180 North America OMRON Management Center of America, Inc. (Illinois) Tel 1-224-520-7650 Fax 1-224-520-7680 Asia-Pacific OMRON Asia Pacific Pte. Ltd. (Singapore) Tel 65-6835-3011 Fax 65-6835-2711 Greater China OMRON (China) Co., Ltd. (Shanghai) Tel 86-21-5888-1666 Fax 86-21-5888-7633 /7933 Major Domestic Manufacturing, Marketing, and Research & Development Locations Manufacturing Mishima Systems Factory Tel 81-55-977-9000 Fax 81-55-977-9080 Kusatsu Plant Tel 81-77-563-2181 Fax 81-77-565-5588 Yearly High and Low Prices Osaka Securities Exchange Volume Omron Nikkei 225 Index Index 200 150 100 50 0 100 80 60 40 20 0 1,000 Shares 1,500 1,000 500 0 1999/3 2000/3 2001/3 2002/3 2003/3 2004/3 2005/3 2006/3 2007/3 2008/3 Note1. Share Index (1999/3E=100) Note2. The volume is average of 1 month Yearly High and Low Prices * Ayabe Office Tel 81-773-42-6611 Fax 81-773-43-0661 Minakuchi Factory Tel 81-748-62-6851 Fax 81-748-62-6854 Marketing Osaki Office Tel 81-3-5435-2000 Fax 81-3-5435-2030 Nagoya Office Tel 81-52-571-6461 Fax 81-52-565-1910 Osaka Office Tel 81-6-6347-5800 Fax 81-6-6347-5900 Fukuoka Office Tel 81-92-414-3200 Fax 81-92-414-3201 Research & Development Keihanna Technology Innovation Center Tel 81-774-74-2000 Fax 81-774-74-2001 Komaki Automotive Electronics Office Tel 81-568-78-6160 Fax 81-568-78-6188 Okayama Office Tel 81-86-277-6111 Fax 81-86-276-6013 Ownership and Distribution of shares % 20.9% 22.0% 23.2% 39.7% 42.9% 44.1% 4.1% 0.9% 4.0% 0.8% 4.2% 0.4% 34.5% 30.4% 28.1% 05 06 07 (FY) Financial Institutions Securities Firms Other Corporations Foreign Institutions and Individuals Individuals and Others FY High (¥) Low (¥) 1998 2,220 1,070 1999 3,360 1,501 2000 3,180 1,745 2001 2,515 1,395 2002 2,080 1,341 2003 2,740 1,658 2004 2,880 2,220 2005 3,520 2,230 2006 3,570 2,625 2007 3,500 1,991 * Closing price of Osaka Securities Exchange 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 87 Omron’s Management Compass—SINIC Theory SINIC DIAGRAM Seed-Innovation to Need-Impetus Cyclic Evolution A g r i cultural Society c i e t y o Colle ctiv e S d i t i o n a l h n i c s c e r T a T Handicraft Technics ciety o e S itiv m i r P Primitive Technics a r y Prim Scie n c e A ncient Science e n imitiv eligio r P R Seed Innovation Need Impetus Cyclic Evolution Seed Technology Innovation Impetus Need Progress- oriented motivation Science Society Renaiss Scie n c e a n c e s c s d t S r o i a c l i i e z t a y t I n I n d u d s u t r i a l S o c i e t y i o n Handicraft S o cie t y I n d u T e c s t r i a l i z h n i e M S c o i d e n c e r n e C o n t r o l S c i e n c e T e c h n i c s M o d e r n M e c S h o a c i n i z e t y a t i o n A u t o m T a e c ti c h C n i c o s n tr ol C y b ern etics ciety al S o r u t a N s u o m o ciety So Auton ic g o l o h c y s p - a t e M i s c n h c e T s c i t e n o h c y s Meta-P A S m uto o ciety ation p ti m ization S o ciety O Cybernation Society Electronic Control Technics n tr o l s o B i o l o g i c C T e c h n i c Bionetics Psycho-Biologic Technics h o n etics c s y P What is SINIC Theory? The SINIC theory grew from the idea that, in order to manage a business by anticipating social needs, it is necessary to predict future society. Based on this theory, OMRON has been able to continually make social proposals marked by foresight. The SINIC theory is a future prediction method that OMRON founder Kazuma Tateisi developed and presented at the International Future Research Conference in 1970. Announced in the midst of Japan’s rapid-paced economic growth, before PCs and the Internet even existed, this theory drew a highly accurate picture of society up to the middle of the 21st centu- ry, including the appearance of the Information Society. SINIC stands for Seed-Innovation to Need-Impetus Cyclic Evolution. According to the SINIC theory, science, technology and society share a cyclical relationship, mutually impacting and influencing each other in two distinct ways. In one direction, scientific breakthroughs yield new technologies that help soci- ety to advance. In the other direction, social needs spur on technological development and expectations for new scientif- ic advancement. Thus, both of these factors affect each other in a cyclical manner, propelling further social evolution. The Future Envisioned by OMRON’s Founder According to the SINIC theory, the world established an Industrialized Society upon the foundation of a conventional Agricultural Society in the 14th century. The SINIC theory divides this Industrialized Society into five phases: first, there was a shift from a Handicraft Society to an Industrialization Society; then, 1870 saw the advent of a Mechanization Society; an Automation Society developed in the 20th century; and from the end of the 20th century until the dawn of the 21st century was an Information Society. According to the SINIC theory, the Optimization Society will follow the Information Society, the final phase of the Industrialized Society, in 2005, which will subsequently shift to the Autonomous Society in 2025. Presently, Japan is about to enter that Optimization Society. While the Industrialized Society generated material wealth, it also left behind many negative factors. These included increasing energy and resource depletion, growing industrial waste, food shortages, as well as problems related to human rights and ethics among many others. In the Optimization Society it is predicted that these negative effects will be redressed and people will shift from the values of the Industrialized Society, as typified by the pursuit of efficiency and productivity, to values in which psychological abundance is sought and the quality and true joy of life become increasingly important. With its unique technologies, OMRON is well positioned to help the Optimization Society create a complete balance and harmonious relationship between individuals and society, between humans and the environment, and between people and machines. OMRON in the Optimization Society In the Information Society, knowledge information could only be exchanged as numerical data in the form of ONs and OFFs or 1s and 0s. The Optimization Society will see further progress in technologies that support and extract knowledge and sensi- tivity, with the result that aspects such as natural language and human knowledge and sensitivity will be directly exchanged, expressed, and acted on. In other words, tech- nologies that automate parts of our human intellect and sen- sations will form the foundation for future development. In the Optimization Society, people and machines will find an ideal level of harmony. Instead of pursuing productivity and efficiency, people will then place more emphasis on finding new ways to live their lives and searching for self-fulfillment. When this happens, it is predicted that people will begin to place their priority on more fundamental desires, such as the desire to be healthy and live a long life, the desire for a com- fortable life, the quest of lifelong learning, and the wish to enjoy leisure time. In order to further advance the fields of safety/security, healthcare and environmental preservation, OMRON is also placing its priority on activities that bring technologies ever closer to people and fulfill these fundamental desires, while maintaining an optimal balance between individuals and society, between humans and the environment, and between people and machines. 88 Omron: Advancing Sensing and Control Technology Founding 1933 10th Year 1943 Microswitches Electromagnetic Relays 20th Year 1953 Omron has a long history of developing and advancing a variety of unique sensing and control technology products. The company continues to apply the SINIC Theory as a compass to anticipate social needs in various fields and develop leading-edge product ideas. l o r t n o C & g n i s n e S : y g o l o n h c e t e r o C Proximity Switches Contactless Switches Coin-operated Timers Pressure Switches 30th Year 1963 Miniature Power Relays Automatic Ticket Gates Automatic Food Ticket Vending Machines Automated Teller Machines (ATMs) 40th Year 1973 Sequence Controllers Photoelectric Switches Calculators Electronic Blood Pressure Monitors Electronic Temperature Controllers Servomotors Electronic Registers Solid-state Relays 50th Year 1983 PCB Solder Inspection Equipment Digital Thermometers Radio Frequency Smart Entry Systems Electric Power Steering Controllers Travel Time Measurement Systems 60th Year 1993 Switch Mode Power Supplies Smart Sensors Ultra-small Pressure Sensors for Wrist Blood Pressure Monitors Body Composition Monitors LED Backlights 70th Year 2003 Current Business Divisions IAB Industrial Automation Business ECB Electronic Components Business AEC Automotive Electronic Components Business SSB Social Systems Business HCB Healthcare Business S I N I C T h e o r y O m r o n : i A d v a n c n g S e n s i n g a n d C o n t r o l T e c h n o o g y l 89 Annual Report 2008 Year ended March 31, 2008 O M R O N C o r p o r a t i o n A n n u a l R e p o r t 2 0 0 8 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)