Annual Report 2009 Year ended March 31, 2009 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 9 This mark certifies the use of Green Power (solar power). By using Green Power to print the Annual Report 2009, Omron Corporation is promoting the use of natural energy resources in Japan. IR and M&A Planning Headquarters Investor Relations Department 3-4-10 Toranomon, Minato-ku, Tokyo 105-0001 JAPAN Phone: +81-3-3436-7170 Fax: +81-3-3436-7180 Homepage: http://www.omron.co.jp (Japanese) http://www.omron.com (English) Annual Report 2009 Cover at Communication plaza X-ray timer 1933: The Origins of Innovation A friend of Omron founder Kazuma Tateisi said to him, who worked as an X-ray machine salesman “If there were a high-precision timer for an X-ray photography capable of operating accu- rately at a speed of 1/20 of a second, it would be a huge success.” Inspired by this, Mr. Tateisi began the work process ranging from sketch- ing to production of the timer. In 1933, he delivered a hand- made prototype to Nissei Hospital in Osaka, where it was tested and proved effec- tive in operating at the required speed. After this, he soon began to receive large orders. Caution Concerning Forward- Looking Statements Statements in this annual report with respect to Omron’s plans, strategies, and benefits, as well as other state- ments that are not historical facts, are forward-looking statements involving risks and uncertainties. Important fac- tors that could cause actual results to differ materially from such statements include, but are not limited to, gener- al economic conditions in Omron’s markets, which are primarily Japan, North America, Europe, Asia-Pacific, and Greater China; demand for and competitive pricing pressure on Omron’s products and services in the marketplace; Omron’s ability to con- tinue to win acceptance for its products and services in these highly competi- tive markets; and movements of currency exchange rates. Definition of Terms All references to “Omron” and “the Company” herein are to Omron Corporation and consolidated sub- sidiaries and affiliates. Contents About Us 2 4 8 Core Competence and Business Domains Business Segments and Key Products Ten-Year Financial Highlights To Our Stakeholders 30 Omron at a Glance Business performance and outlook by segment Segment Information 32 IAB Industrial Automation Business 10 Message from the Chairman 34 ECB Electronic Components Business We are advancing a future-oriented man- agement approach focused on medium- and long-term growth and have designated fis- cal 2009 as the “year to solidify our footing and prepare for the future.” 12 Message from the President We are confronting the challenges of the cur- rent conditions with the confidence that we will achieve profit levels exemplifying com- plete recovery. 14 Interview with the President President Sakuta Discusses Omron’s Future “Downsizing for Success” and our Motto, “Change! Challenge! Create!” Feature 1 20 Dialogue between Omron President and CEO Hisao Sakuta and Outside Director Kazuhiko Toyama Outside Director Kazuhiko Toyama brings a unique perspective as an investor and busi- ness leader with management experience at a consulting company and as the former COO of the Industrial Revitalization Corporation of Japan. Mr. Toyama and Omron President Hisao Sakuta conducted an insightful dialogue on the current economic recession, the role of an outside director, the importance of a com- pany’s on-site capabilities, and the governance needed to overcome an economic crisis. Feature 2 25 Omron Makes It Possible In February 2009, Omron released an inno- vative sensor technology that immediately generated media buzz for its innovativeness and surprising applicability. Smile Scan, which measures the degree of a person's smile, was an instant hit, but in fact it was the result of intense development that was launched by an insightful comment from the front line. Feature 3 29 Environmental Solutions Made Possible by Omron Investment to Reduce CO2 Strengthens Companies Highlighting a CO2 reduction solution based on sensing and control technology. 36 AEC Automotive Electronic Components Business 38 SSB Social Systems Business 40 HCB Healthcare Business 42 Other Businesses Environmental Solutions Business HQ, Electronic Systems & Equipments Division HQ, and Other Businesses 43 Intellectual Property Strategy 44 Corporate Governance, Compliance, and Risk Management 48 Corporate Social Responsibility (CSR) 50 Directors, Corporate Auditors, and Executive Officers 51 Financial Section (U.S. GAAP) 89 Internal Control Section 91 Corporate and Stock Information 92 93 Omron’s Management Compass —SINIC Theory Omron: Advancing Sensing and Control Technology Sustainability Report 2009 For information on Omron’s sustainability initiatives, please refer to our Sustainability Report 2009, a report on social and environmental activities for our stakeholders, including employees, clients and customers, shareholders, and local communities. http://www.omron.com/corporate/csr/ A BETTER WORLD FOR ALL THROUGH SENSING & CONTROL PHILOSOPHY 1 A b o u t U s C o r e C o m p e t e n c e a n d B u s i n e s s D o m a i n s Omron is developing a global business of value that supports safety and security, health, and the environment in the business domains of industry, society, and lifestyle. Sensing and Control: Our Core Competence 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 Net Sales 627.2 billion FY2008 AEC Automotive Electronic Components Business SSB Social Systems Business HCB Healthcare Business Sales by Segment 42% 20% 13% 13% 10% Other Businesses Environmental Solutions Business HQ, Electronic Systems & Equipments Division HQ, and Others 2% 2 Global Network To meet customer demand, ‘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, Greater China, and Asia Pacific. Omron provides fast and efficient support to its business partners worldwide through its comprehensive support system, from development to production, distribution, and maintenance. 328.1 80.4 75.2 Europe Subsidiaries 40 Affiliates 1 103.1 06 07 08 Greater China Subsidiaries 25 Affiliates 2 06 07 08 Japan Subsidiaries 46 Affiliates 13 *Includes direct exports 06 07 08 Regional Headquarters Asia-Pacific Subsidiaries 23 Affiliates 2 40.4 06 07 08 06 07 08 North America Subsidiaries 28 Sales Breakdown by Region （Billions of yen） Sales Breakdown by Region Japan *Includes direct exports 52% Other Asia 6% Greater China 12% Europe 16% North America 13% Net Sales 627.2 billion FY2008 Core Technologies Supporting Sensing and Control [1] Micromachining Integrated circuit construction is typically two dimensional. Omron’s micromachining technology employs micro electrical mechanical systems (MEMS) technology to enable three dimensional construction on a micrometer scale for semiconductors. This technology enables production of the world’s smallest radio 3 mm frequency relays and ultra-small gas and fluid pressure sensors. 4 mm [2] Microphotonics Microphotonics is a light wave control technology based on reflected and lenticular optics, allowing greater miniaturization and integration by fabricating various optical component functions (brightness, speed, energy saving, etc.) on a single substrate as with IC and LSIs. Microphotonics technology realizes low-cost optical transmissions and offers potential for revolutionary devices using high-brightness LEDs and other technologies. [3] Image Sensing Image sensing technology mechanically recognizes the movement of an object, such as a human face, by detecting the transmission or reflection of light waves and generates detailed data on the object. This technology is used for a diverse range of applications, including quality inspection, safety in driving, and in security systems. [4] Knowledge Information Control Technology Omron possesses numerous patents in Japan for “fuzzy logic” technology resulting from its research on the theory of human behavior based on know-how and intelligence. By integrating an algorithm of human problem-solving processes into a machine- controlling device, the machine can learn and make decisions. 3 Business Segments and Key Products IAB Industrial Automation Business Segment Information Go to page 32 The top provider of control equipment for the manufacturing industry in Japan*, supporting monozukuriinnovation worldwide IAB provides a wide spectrum of equipment ranging from factory automa- tion (FA) controllers to sensors, switches, relays, and safety equipment that meet some 100,000 specifications and support innovation in monozukuri (the art of product creation) and productivity improvement in all types of pro- duction operations. Commanding top domestic market share*, IAB is the Japanese manufacturing industry’s leading supplier of control equipment. (*July 2009, internal survey) Safety Components Safety components contribute towards the creation of a safe work- place environment. They sense a worker’s presence in areas where robot arms are in operation and in other defined danger zones and auto- matically shut down machinery or sound an alarm. Sensors At manufacturing sites for semicon- ductors, automobiles, consumer electronics, food, and a variety of other products, sensing technology provides high-precision inspection and meas- urement of an item’s shape, position, gaps, and other characteristics to the nanometer scale (1 billionth of a meter), supporting enhancement of productiv- ity and product quality. 28 30 36 Programmable Logic Controllers PLCs accurately process information received from sensors, timers, tempera- ture controllers, switches, and other monitors to enable efficient control of machinery and facilities. Programmable terminals with touch panels facilitate easy control and changes to product line operations. Sensing Devices Control Equipment Safety Devices Vision Sensors Digital Fiber Sensors Digital Timers and Electronic Counters Temperature Controllers Safety Light Curtains Network Automated Optical Inspection (AOI) Devices UV-light Curing System Power Conditioners for Solar Power Generation Systems Programmable Logic Controllers Safety Laser Scanners 4 Global No.1 supplier of small-sized LCD backlights* and leading provider of cutting-edge technology ECB offers an integrated manufacturing system for electronic compo- nents for consumer appliances, telecommunications equipment, mobile devices, amusement devices, office automation (OA), and other equip- ment incorporating our proprietary semiconductors and a wide range of components including all types of relays, switches, connectors, sensors, and optical fiber communications. In particular, Omron is the global leader in the development of cutting-edge devices using MEMS technology, and it holds top global market share in small-sized LCD backlights. (*Fuji Chimera Research Institute, Inc., Survey of shipment fees for LCD backlights, 2008) LCD Backlights LCD backlights utilize microlens tech- nology with several million micron-sized micro lenses to maximize light utilization efficiency to brighten display screens, such as on mobile phones, and reduce power consumption. ECB Electronic Components Business Segment Information Go to page 34 OKAO Vision OKAO Vision is gaining wide use as a technology for correcting expo- sure in digital photography and brightness in photo printing, and its face recognition capability is used in mobile phone user verification as well as estimating age and deter- mining sex. Relays and Switches Relays are composed of electromagnets, which convert electric signals to mechani- cal movement, and switches that turn electricity on and off. Relays and switches are essentially used in all electric and elec- tronic devices, including refrigerators, microwave ovens, and air conditioners. Fiber Optic Communication Devices Omron’s proprietary fine processing technol- ogy for fiber optic communication devices has realized smaller and lower-priced transmission devices for fiber to home (FTTH), supporting constant high-capacity and ultra-high speed network environments. MEMS Microphones RF MEMS Switches Combination Jogs Touch Sensors FPC Connectors Surface Mount Switches LCD Backlights Optical Splitter Modules OKAO Vision Facial Image Sensing Surface Mount High-frequency Receivers 5 AEC Automotive Electronic Components Business Segment Information Go to page 36 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, comfortable, and environmentally friendly automo- tive society. The company conducts contracted design and development of all types of controllers, sensors, switches, relays, and new systems for automak- ers and electronic producers around the world. AEC provides the sensing and control technology for the future of auto manufacturing. Electric Power Steering Controllers Electric power steering controllers are loaded with high-output and high-pre- cision functions which enable smooth steering of the vehicle. These devices help achieve energy savings and better mileage. Electric Power Steering Controllers Smart Entry Smart entry devices are portable, wireless trans- mitters enabling automatic locking and unlocking of doors, authorization for remote engine start-up, and other functions. Smart Entry Systems Automotive Relays Power Window Switches Tire Pressure Monitoring Systems Train Station Solutions SSB solutions for railway stations enhance infrastructure system efficien- cy and support the development of new systems to enhance station safety, secu- rity, and functionality by gathering information via image sensing technolo- gies monitoring the movement and characteristics of people inside stations and the surrounding facilities. SSB Social Systems Business Segment Information Go to page 38 Japan’s No.1 supplier of railway infrastructure systems and creator of a wide variety of social systems Automated Ticket Gates SSB provides a wide variety of sys- tems to support social infrastructure centering on railway and traffic con- trol systems. Recently, SSB has been a major contributor of IC card equipment for railway 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 comfort- able society through innovative solutions utilizing image sensing technologies. Road Traffic Solutions In addition to control systems for traffic volumes and traffic conditions, SSB is developing next-generation traffic safe- ty systems designed to prevent accidents by transmitting data on pedestrians, bicy- cles, and other objects collected by sensors to nearby vehicles. Traffic Control Systems 6 HCB Healthcare Business Segment Information Go to page 40 Healthcare at Home HCB promotes “Healthcare at Home” to prevent, treat, and manage lifestyle-relat- ed diseases by providing home and professional use medical devices that meas- ure biological and behavior information. Global No.1 market share for digital home blood pressure monitors* and numerous products in the prevention, treatment, and health improvement fields HCB provides equipment and services worldwide for personal and professional use to support the prevention, treatment, and health improvement fields. The company’s digital home blood pressure monitors command top market shares, with approximately 70% of the domestic market and 50% of the global market. HCB’s bio-information sensing technology has made it a leader in the home healthcare market, and it is pursuing the concept of home medical care to advance pre- vention, diagnosis, and treatment of lifestyle- related diseases. (*July 2009, internal survey) Healthcare & Medical Devices for Home Use Blood Glucose Meter Digital Blood Pressure Monitors Medical Equipment for Hospital Use Pedometers Body Composition Monitors Electric Toothbrushes Non-invasive Vascular Screening Devices Others Segment Information Go to page 42 Discovering and fostering new business opportunities for Group growth strategies The Others segment explores and develops new businesses out- side the realm of the other segments. The Environmental Solutions Business Headquarters and Electronic Systems and Equipments Division Headquarters play a part in the Omron Group’s growth strat- egy and are currently focusing on the CO2 reduction solutions business and the embedded computers business. Remote Energy Monitoring Systems Embedded Mini-CPU Boards CO2 Reduction Solutions We do not merely provide electric monitoring devices and electric sensors or devices related to energy savings, such as direct cur- rent (DC) relays, but rather we offer a solution-based business that combines all of these factors for the reduction of CO2. 7 10-Year Financial Highlights Omron Corporation and Subsidiaries FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 Operating Results (for the year): (note 2) Net sales Gross profit ¥ 555,358 ¥ 594,259 ¥ 533,964 ¥ 522,535 ¥ 575,157 ¥ 598,727 196,447 218,065 180,535 201,816 235,460 245,298 Selling, general and administrative expenses (excluding research and development expenses) 133,662 131,203 134,907 133,406 139,569 141,185 Research and development expenses Operating income EBITDA (note 3) Net income (loss) 36,605 26,180 57,625 11,561 42,513 44,349 76,566 22,297 Cash Flows (for the year): Net cash provided by operating activities 59,926 Net cash used in investing activities Free cash flow (note 4) (34,180) 25,746 Net cash provided by (used in) financing activities (23,785) 50,796 (32,365) 18,431 (24,582) 41,407 4,221 37,790 (15,773) 33,687 (40,121) (6,434) (12,056) 40,235 28,175 57,851 511 46,494 49,397 77,059 26,811 49,441 54,672 83,314 30,176 41,854 (30,633) 11,221 (1,996) 80,687 (34,484) 46,203 (28,119) 61,076 (36,050) 25,026 (40,684) Financial Position (at year end): Total assets 579,489 593,144 549,366 567,399 592,273 585,429 Total interest-bearing liabilities 69,472 67,213 58,711 71,260 56,687 24,759 Total shareholders’ equity 336,062 325,958 298,234 251,610 274,710 305,810 Per Share Data: Net income (loss) (basic) Shareholders’ equity Cash dividends (note 5) Ratios: Gross profit margin Operating income margin EBITDA margin Return on shareholders’ equity (ROE) 35.4% 4.7% 10.4% 3.5% Ratio of shareholders’ equity to total assets 58.0% Grand Design 2010 (GD2010) Long-term corporate vision （FY2001 〜FY2010） 45.0 87.4 (63.5) 2.1 110.7 126.5 1,308.6 1,311.1 1,201.2 1,036.0 1,148.3 1,284.8 13.0 13.0 13.0 10.0 20.0 24.0 36.7% 7.5% 12.9% 6.7% 55.0% 33.8% 0.8% 7.1% (5.1%) 54.3% 38.6% 5.4% 11.1% 0.2% 44.3% 40.9% 8.6% 13.4% 10.2% 46.4% 41.0% 9.1% 13.9% 10.4% 52.2% FY2001 〜FY2003 1st Stage Establishing a Profit Structure Concentrating on cost structure reform and restructuring the Company as a profit-generating business. Achievements • ROE 10% • Withdrawal from unprofitable business, spin off of Healthcare business. • Raising the level of corporate governance to the global standard. Notes: 1. U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate on March 31, 2009, of ¥98=$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. 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. 8 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. FY2005 FY2006 FY2007 FY2008 Millions of yen Thousands of U.S. dollars (note 1) FY2008 Net Sales and Operating Income Margin Billions of yen 1,000 % 10 ¥ 616,002 ¥ 723,866 ¥ 762,985 ¥ 627,190 $ 6,399,898 248,642 278,241 293,342 218,522 2,229,816 149,274 164,167 176,569 164,284 1,676,367 50,501 60,782 91,607 35,763 52,028 62,046 95,969 38,280 51,520 65,253 101,596 48,899 5,339 38,835 498,969 54,480 396,276 42,383 (29,172) (297,673) 51,699 (43,020) 8,679 (38,320) 40,539 (47,075) (6,536) (4,697) 68,996 (36,681) 32,315 (34,481) 31,408 (40,628) (9,220) 21,867 320,490 (414,571) (94,081) 223,133 589,061 630,337 617,367 538,280 5,492,653 3,813 21,813 19,809 54,859 559,787 362,937 382,822 368,502 298,411 3,045,010 Yen U.S. dollars (note 1) 151.1 165.0 185.9 1,548.1 1,660.7 1,662.3 30.0 34.0 42.0 (132.2) 1,355.4 25.0 (1.35) 13.83 0.26 40.4% 9.9% 14.9% 10.7% 61.6% 38.4% 8.6% 13.3% 10.3% 60.7% 38.4% 8.6% 13.3% 11.3% 59.7% 34.8% 0.9% 6.2% (8.7%) 55.4% FY2004 〜FY2007 FY2008 〜FY2010 2nd Stage Balancing Growth & Earnings Reinforcing business foundations through aggressive investment in growth areas, such as M&A, and cost cutting. Achievements • Increased EPS (earnings per share) from ¥110.7 (FY2003) to ¥185.9 (FY2007). 3rd Stage Achieving a Growth Structure Fortification of growth business (high profitability) Revision of 3rd stage due to abrupt change in business environment Revival Stage (from February 2009 to March 2011) • Emergency Measures (In fiscal 2009, reduce costs by ¥60 billion) 14 months • Structural Reform (Strengthening of profit base over the medium term) 26 months Go to page 14 800 600 400 200 0 60 45 30 15 0 -15 -30 400 300 200 100 0 50 40 30 20 10 0 8 6 4 2 0 (FY) 20 15 10 5 0 -5 -10 (FY) 80 60 40 20 0 (FY) 99 00 01 02 03 04 05 06 07 08 Net sales [left axis] Operating income margin [right axis] Net Income (Loss) and ROE Billions of yen % 99 00 01 02 03 04 05 06 07 08 Net income (loss) [left axis] ROE [right axis] Shareholders’ Equity and Ratio of Shareholders’ Equity to Total Assets Billions of yen % 99 00 01 02 03 04 05 06 07 08 Shareholders’ Equity [left axis] Ratio of Shareholders’ Equity to Total Assets [right axis] Cash dividends yen *2 *1 99 00 01 02 03 04 05 06 07 08 (FY) *1. Commemorative dividend amounting to ¥7.0 is included in the dividends for fiscal 2003. *2. Commemorative dividend amounting to ¥5.0 is included in the dividends for fiscal 2007. 9 To Our Stakeholders Message from the Chairman Fiscal 2009 is the Stage in which we Prepare for Medium- and Long-term Growth Turbulence in worldwide financial markets is having an unprecedented impact on the real economy. Inventory adjustments are coming to an end in some industries, but when capital investment will recover is still anyone’s guess. Times like these, when the ebb in business conditions is at its most severe, reveal a company’s underlying framework and expose ele- ments that are hidden when the tide is high. In these conditions, just as in an emergency situa- tion, of all the management indices for growth, profits, safety, or other targets, safety is the most imperative, and it is essential that we strengthen Omron’s central administration with a focus on the management ele- ments of cash and people. Even more important, because they are directly related to the company’s sus- tainability and future growth, are profit structure building and customer creation. This perspective is the moti- vation behind our designation of fiscal 2009 as the “year to solidify our footing and prepare for the future.” Structural Changes in Society and the Economy Society and the economy are undergoing major struc- tural changes, and when we emerge from the tunnel of recession, the world will undoubtedly be a differ- ent place. China appears to be already moving into recovery, and emerging economies are establishing stronger presences than ever in the world economy. As the cur- rent economic crisis progresses, countries like Japan, where reliance on external demand has been exposed as a weakness, are revising their economic structures to achieve balance between internal and external demand. The aim is to establish an optimal equilibrium between an export-oriented economy and an econo- my based on local production for local consumption. Our industrial society, which has achieved growth while producing more and more CO2 emissions, is now seek- ing to transform itself into a low carbon, sustainable society that grows while reducing CO2 output. In other words, we are evolving from a homogeneous society, where we want what the other person has, to a diver- sified society, where we want to live our own way and want things that fit our lifestyles. I believe this means that companies will need operating structures and man- agement approaches catered to customers at an increasingly individual level. The changes we are now seeing were predicted nearly 40 years ago by Omron’s SINIC (Seed- Innovation to Need-Impetus Cyclic Evolution) theory, and we continue to apply this approach today in the adaptation and evolution of our business and tech- nology. (Please see page 92 for further details on SINIC). In this period of structural transformations in soci- ety and the economy, the Omron Group is rededicating itself to our corporate core value of “Working for the benefit of society.” We are seeking to provide goods that reflect the level of affluence of today’s society, but more importantly fulfill the essential purpose of goods, which is to improve people’s lives by provid- ing safety and security, promoting health, and preserving our environment. Omron endeavors to use its sensing and control technology to create new value and aims to fully manifest its corporate core value in its goods and services. 10 We are advancing a future-oriented management approach focused on medium- and long-term growth and have designated fiscal 2009 as the “year in which we solidify our footing and prepare for the future.” Fortifying our On-Site Capabilities as a Foundation for Customer Creation What is needed in our future-oriented management to “solidify our footing and prepare for the future?” After much contemplation, I recalled the Nishi Health System that Omron founder Kazuma Tateisi was so passionate about. While modern medicine generally views the heart as the pump that powers the circula- tion of blood throughout the body, the Nishi Health System recognizes that contractive motions of capillary blood vessels as they sense changes in external con- ditions also pump the blood. The heart instead serves primarily as a regulating tank for the blood the capil- laries send to it, and arteries and veins are the pipes connecting the pump and tank. Put simply, the capil- laries provide the vitality we need to live. Applied to a business operation, the changes in the market and customers are the external changes, and the capillaries throughout the organization that sense those changes are the company’s on-site capa- bilities, including marketing, development, production, quality assurance, advertising, sales and maintenance. When it becomes too cold (recession), the capillaries don’t function fully and a person can’t survive, yet hasty improvements (quick fixes such as drastic cost cuts) will only result in a temporary recovery. True recovery requires reconnecting even the smallest cap- illaries and recreating a system that will supply energy to the whole body. How healthy company’s on-site capabilities are in times of recession will be revealed in the changes of the company’s market share, which in the future will lead to wider gaps in business results between its competitors. The Omron Group is fortifying its on-site capabilities so that each and every one of its capillaries is fully responsive to the changes in the market and in our customers. We are further emphasizing our corporate core value as the heart and unifying force of the Omron Group and achieving the highest level of corporate governance based on our core values, the Omron Principals, which are shared globally throughout the Omron Group. I believe this is essential as we re-envi- sion our profit structure, advance customer creation, and endeavor to make new contributions to society through the creation of social needs. I wish to express my sincere gratitude to all our stakeholders and request your ongoing support as the Omron Group lays the groundwork for future growth. August 2009 Yoshio Tateisi, Chairman of the BOD 11 To Our Stakeholders Message from the President The Worst Net Loss in the Company’s History The business environment in fiscal 2008 took a dev- astating downturn in the third quarter that led manufacturers to further curb production activity while tightening and even freezing capital investment. These trends deeply impacted business in our core automo- tive, semiconductor, and liquid-crystal electronic components industries, resulting in consolidated net sales in fiscal 2008 falling 17.8% year on year to ¥627.2 billion. The main elements in this decline were the sharp rise in the value of the yen combined with plum- meting demand in the Industrial Automation Business (IAB), Electronic Components Business (ECB), and Automotive Electronic Components Business (AEC), which generate over 70% of the Company’s total sales. The decline in sales contributed to an accompanying drop in operating income, which plunged 91.8% year on year to ¥5.3 billion. The Company additionally booked impairment losses for goodwill, property, plant and equipment, and investment securities. The overall result was a net loss of ¥29.2 billion, marking the worst loss in Omron’s history. Shifting to a “Revival Stage” in which Nothing is Sacred Fiscal 2008 was slated as the first year of the final three- year stage of the Company’s long-term corporate vision, Grand Design 2010 (GD2010). However, in light of the dramatic changes in the operating environment we have revised our initial plan, in which we had aimed to accelerate growth. The revised plan comprises two strategic phases both commencing in February 2009. The first is “Emergency Measures,” covering the 14- month period to March 2010, and the second is “Revival Stage (Structural Reform)”spanning the 26- month period to March 2011. This revision to our medium-term management plan was ultimately necessitated by the subprime loan crisis and the so-called Lehman Shock. Although we repeatedly acknowledged the need to become “lean- er,” the dramatic change in the external business conditions has made it clear that we had gained excess “fat” while achieving six consecutive years of increased revenues and profits. I would like to express my deepest apologies for not recognizing the gravity of the situation and for our severe performance results for fiscal 2008. Consolidated Operating Income Analysis (Year-on-Year) Consolidated Operating Income by Segment (Billions of yen) (Billions of yen) Business FY2008 FY2007 Sales down, product mix -59.2 65.3 Exchange loss SG&A, R&D: M&A -0.6 +6.6 5.3 -17.1 Material costs down +1.1 M&A gain +0.4 Gross profit down ¥74.8 bn +8.8 SG&A, R&D down SG&A, R&D: Exchange gain Operating income down ¥60.0 bn (Exchange loss: ¥8.3 bn) FY2007 Actual 12 FY2008 Actual IAB ECB AEC SSB HCB Others HQ Cost/Elimination Total 20.5 -2.0 -6.4 5.4 4.8 0 -17.0 5.3 51.9 12.6 1.4 7.0 9.4 0.1 -17.1 65.3 We are confronting the challenges of the current conditions with the confidence that we will achieve profit levels exemplifying complete recovery. At this point in time, the economic recession appears to have eased to a certain degree, but we have not crawled out from the bottom yet. As demand was brisk in the first half of fiscal 2008, we anticipate demand to remain substantially below the previous- year level in fiscal 2009. Our foremost priority is to look toward the future and not only survive the current situation but to reemerge in a strong competitive position. We will take this opportunity to make our operations “lean and keen” and take a radical outside-the-box approach to reform our operations in the core IAB, ECB, and AEC segments, along with emergency measures to con- centrate our resources on select domains. Overcoming Adversity to Achieve Complete Recovery We expect the severe operating environment for the Omron Group to persist in the coming year and fore- cast fiscal 2009 net sales falling a further 18.7% year on year to ¥510.0 billion. In addition, under the current situation, we are seeking to avoid producing a loss for the year and to achieve operating income of “positive zero” as a productive step for the future. We are resolved to confront the challenges of the “Grand Design 2010” (GD2010) Omron’s long-term management vision 1st Stage 2nd Stage 3rd Stage Abandon the 3rd stage and designate 26-month period until Mar. 2011 as “Revival Stage;” focus on structural reform 2009/2 Emergency Measures Revival Stage (Structural Reform Period) New Long-term Management Vision (Post-GD2010) Apr. 2001 Apr. 2004 Apr. 2008 Apr. 2009 Apr. 2010 Mar. 2011 current conditions with the confidence that we will achieve profit levels exemplifying a complete recov- ery. At this point in time, it is still impossible to set a target date for achieving recovery. In terms of results, however, we have set the bar for sales at the fiscal 2007 level of ¥750 billion and for operating income above ¥100 billion (compared with ¥65.3 billion in fis- cal 2007). To achieve this, we plan to pare down our operation to only the most essential elements and sub- stantially lower the break-even point for sales. Dividends Depend on Bottom Line and Cash Reserves We intend to continue our basic policy for sharehold- er return of maintaining a minimum 20% dividend payout ratio, and to continue aiming for a 2% dividend on equity (DOE) ratio. In fiscal 2008, taking into con- sideration that we had a net loss of ¥29.2 billion, we paid an annual dividend of ¥25 per share, which rep- resented a ¥17 decrease from the previous fiscal year and a 1.7% DOE ratio. Based on our target of achieving “positive zero” operating income in fiscal 2009, we do not expect to be able to meet our 2% DOE ratio standard. We will review our bottom line and cash reserve status when we have a better view of how the business environ- ment will take shape for the year. We ask for your patience and understanding until we can provide a reliable outlook for shareholder return for the coming year, and we appreciate your ongoing support as we pull together all of our resources to achieve full recovery of the Omron Group. August 2009 Hisao Sakuta, President and CEO 13 President Sakuta Discusses Omron’s Future “Downsizing for Success” and our Motto, “Change! Challenge! Create!” Hisao Sakuta, President and CEO Q Please explain the “operating income of positive zero” objective for fiscal 2009. “Operating Income of Positive Zero” is “Downsizing for Success” We have been aiming to achieve an operating income margin of 10% as a validation of a solid profit struc- ture. We saw our income margin peak at 9.9% in fiscal 2005; however, we only expect to maintain a breakeven margin in fiscal 2009. We have opted to refer to it as “positive zero” rather than simply “zero” profit. The reason behind this is that instead of becoming apathetic and randomly cutting costs and investments to strike a balance between income and expenses, we will maintain certain costs and continue investing in what is necessary for the Company’s future and to nurture our competitive mer- its. In other words, we strongly believe we must forge ahead with “downsizing for success.” Another aspect of this approach is to be humble yet with a positive frame of mind for “starting fresh from zero.” FY2008 Actual and FY2009 Plan Net sales Gross profit SG&A expenses R&D expenses Operating income Non-operating loss, net Net loss before taxes Net loss FY2008 Actual 627.2 218.5 164.3 48.9 5.3 -44.4 -39.1 -29.2 (Billions of yen) FY2009 Plan 510.0 175.0 135.0 40.0 0 -3.5 -3.5 -2.0 Q What are the key emergency measures for achieving operating income of “positive zero?” Cutting Fixed Costs by ¥55 Billion and Variable Costs by ¥5 Billion We are implementing emergency measures to cut approximately ¥60 billion in costs in fiscal 2009. We also plan to reorganize both our business domains and management structure as part of an extensive reform of our operating structures, with the aim of lowering manufacturing fixed costs and variable cost ratios and setting the foundation for fortifying our earnings base for the medium and long term. Specific measures will include cutting labor costs by rescinding a portion of director compensation and management salaries, set- ting up performance-based salary systems, and restricting overtime work. Since the Company is essen- tially in crisis mode, we will strictly limit spending, including even R&D expenses, and restrain capital investment for the future unless there is specific objec- tive and a clear schedule for producing return. Advertising costs, overhead costs, and other peripheral outflows will also be limited to the bare essentials. Also, steps taken in fiscal 2008 to lower goodwill and property, plant and equipment are beginning to produce results, including reducing depreciation costs. We estimate that these measures will put us on track to cut approximately ¥55 billion in fixed costs. Additionally, we plan to lower variable costs by approx- FY2009: Items for Improvements in Profit & Loss Structure Reduce fixed costs • Labor costs, overhead costs • Depreciation (restraints on investment) • Depreciation (impairment of fixed assets) Target value (approx.) ¥55 bn Reduce variable costs • Raw material costs and others ¥5 bn 14 imately ¥5 billion by reducing spending on raw materi- als and other items. We are also preparing to consolidate our large- scale liquid-crystal backlight operations and have made the decision to shut down six domestic and overseas productions sites of semiconductor products, automotive components, and other products. The effects of these measures should begin appearing in fiscal 2009 and contribute to further lowering fixed costs and other expenses. Emergency Measures (Generate profit in FY2009 through cost cuts) Structural Reform (Strengthen profit base over the medium term) Profit Generation [1] Cost cutting Advertising, R&D, indirect costs, etc. [2] Withdrawal from underperforming businesses Four businesses in Japan/abroad (ECB, AEC) [3] Reduction of other fixed costs Return of part of directors’, executive officers’, and managers’ compensation, ban on overtime work, etc. Cash Flow Creation • Freeze on large-scale investments • Reduction in ordinary investments 1. Business Domain Reform Restructure 3 control-based businesses: IAB, ECB, and AEC • IAB: Strengthen front line and profit base • ECB: Re-strengthen mechanical components business • AEC: Implement thorough efforts to improve profitability 2. Operational Structure Reform (1) Elimination and consolidation of production bases, (2) variable cost structure reform, (3) IT structure reform, (4) head office function reform Q How will you reorganize the Company’s business domain? Restructuring Core Segments (IAB, ECB, and AEC) to Consolidate Strengths We have redefined our business domains as industry, society, and lifestyle and will accordingly realign the business structures of the three core segments— IAB (Industrial Automation Business), ECB (Electronic Components Business), and AEC (Automotive Electronics Business)—, which in fiscal 2008 con- tributed approximately 75% of Omron’s total sales. Our aim is to enhance the usage efficiency of man- agement resources and fortify the individual business strengths of each segment by reorganizing the three core segments in the industry domain. Specifically, we will strengthen the marketing capabilities of IAB, fortify the production and development operations of ECB, and spin off AEC segment operations to enable each business to develop to full strength. Omron is a collection of diverse strengths and weaknesses. While we are fully aware of our many weaknesses, rather than seeking to shore up our weak points, we are restructuring with a focus on making our strengths even stronger. We are seeking to strengthen IAB’s marketing capabilities, using distri- bution channels for general-purpose products and to enhance our global production and technical capabilities for control devices used in mechanical components (relays, switches, connectors, and other electronic com- ponents used in machinery), which are fundamental to all three main control-based businesses. We anticipate growing demand for mechanical com- ponents in the BRICs and other emerging economies. However, the market environment is changing and com- petition is intensifying, particularly from Chinese companies. We are therefore taking steps to fortify our leading position now to ensure our continuing com- petitiveness in the future. Business Domain Reform O Omron will restructure its business domains into three categories: Industry, Society a and Lifestyle. L Looking to the future, Omron will implement business domain reform to standardize t the operations of its 3 control-based businesses and avoid dispersal of resources. Control equipment Electronic components Automotive electronic components Train station/ traffic solutions Health/medical care From IAB ECB AEC SSB HCB To Restructure According to Strengths Industry Society Lifestyle SSB HCB Business Development Society (Environment) Q What other specific steps will be taken to consolidate strengths? Strengthening IAB Marketing Capabilities and Fortifying ECB Production and Development We have extensively discussed whether the best mar- keting strategy for IAB would be to conduct direct sales or use distributor sales channels. We believe a dis- tributor-based sales structure is the most effective for broadening sales of general-purpose products like mechanical components to a large number of users. Moreover, IAB uses this sales structure very effec- tively and has become the industry’s top supplier of mechanical components on a global scale. IAB is also very strong in Quality, Cost, and Delivery (QCD), which is essential to remaining a leading competitor in mechanical components field. From this perspective, consolidating our strengths means shifting human resources to augment IAB’s domestic sales and marketing capabilities and devel- oping more deeply integrated operations with distributors. We plan to fortify IAB operations prima- rily by adding approximately 300 people, representing 15 President Sakuta Discusses Omron’s Future a roughly 50% increase in staff, and creating stronger alliances with domestic distributors. We also plan to integrate the sales and marketing functions of ECB’s distribution channels into IAB. Omron’s share of the domestic market for control equipment remains solid at roughly 40%, according to Nippon Electric Control Equipment Industries Association standards, but it has slipped by five per- centage points over the past 10 years. Our performance objective is to regain market share of 45% over the short term. We have decided to have ECB focus its expertise on mechanical components and rename the segment the Electronic and Mechanical Components (EMC) Business Company, with the new name taking effect in September 2009. EMC will take over the develop- Consolidating strengths of the three main control-based businesses ment and manufacturing of mechanical components currently conducted in each of the IAB, ECB, and AEC segments to provide integrated development and manufacture of industrial, consumer electronics, telecommunication, and automotive relays, switches, and connectors. With ECB focusing on mechanical components, micro electronic (ME) components operations will be shifted from ECB to the Others segment. Micro elec- tronic components encompass liquid-crystal backlights and micro electro mechanical systems (MEMS), to which Omron has dedicated significant effort to date. ME is rapidly developing into a new growth field and will be under my direct supervision as we aggressively develop and expand our ME operations. IAB ECB AEC Mechanical Components Business IAB FA Business EMC ME Strengths: Distribution channeles for general-purpose products Strengths: Global production capabilities and technologies Auto- motive relay, switches ECU etc. FA Business Production of industrial relays and switches EMC Production of automotive relays and switches ) New growth fields (MEMS, etc) ME Others AEC ECU etc. Spin off Spin off FA: Factory Automation EMC: Electronic and Mechanical Components (Electronic mechanical components, such as relays, switches, connectors, etc.) ME: Micro Electronic components (Electronic components, MEMS, and other electronic components such as liquid-crystal backlights, etc.) ECU: Electronic Control Units (Automotive electronic control units) Q The three main control-based businesses remain susceptible to economic fluc- tuations. What steps have been taken to address this issue? Building a Production Structure Resilient to Fluctuations in Demand The industrial sector is the main market for IAB, ECB, and AEC and, for that reason, their results are inevitably prone to fluctuate with the economy. We can, how- ever, take steps to make them more adaptable to changes in the business climate by dispersing opera- tions geographically and diversifying business content. Nevertheless, the global recession has made this sus- ceptibility glaringly apparent. While acknowledging that an impact is inevitable during periods of growing economic uncertainty, we must urgently increase their resilience to fluctuations in demand. One step, which we will take while concurrently ramping up production capacity for EMC, will be to create an optimized, hierarchical manufacturing sys- tem. We are gathering our specialized technologies in materials, processing, metal molds, and other areas into our integrated “mother” plant in Japan. These technologies form the nucleus from which arises the unmatched strength of Omron’s products. From this centralized factory, we will then supply products, assembly equipment, and inspection equipment to mass-production plants and subcontractors around the world. We will also retool our second-tier mass- production factories around the world for mass production of general-purpose products and continue supporting our subcontractors in other regions by com- missioning small-scale production of general-purpose products. This three-tier hierarchy of manufacturing operations will further raise QCD while remaining resilient to fluctuations in demand. Efficient And Strengthened Production Capabilities by Three-tiered Hierarchy System Optimal Hierarchy (Factory) Integrated factory (Domestic “mother” factory) Established elemental technology Supplying key parts and equipment for assembly and inspection Mass-production factories (Worldwide) Large-scale production of general- purpose products Supporting subcontractors Subcontractors (Worldwide) Low volume production of general- purpose products 16 Q How will AEC be transformed in light of the huge impact the global recession has had on the automotive industry? AEC to be Spun Off to Leverage Autonomous Management and Collaborative R&D, and Operations Catered to the Automotive Industry Worldwide automobile production has been rapidly declining since reaching a peak in 2007. The industry has been simultaneously undergoing a major transi- tion, bringing rapid growth in demand for compact cars and eco cars along with an increasing need for elec- tronic components. From a long-term perspective, this shift presents a business opportunity for AEC. However, since increasing sales is meaningless if the business still produces a loss, going forward AEC must stress the distinct strengths of its automotive products. We are therefore reorganizing AEC by shifting the mechanical components operation to ECB and focus- ing AEC resources on developing its distinct strengths in electronic control units (ECUs) and other automo- tive electronics. AEC will continue developing ECUs on Omron’s sensing and control technology with a focus on electronic equipment for auto bodies that will contribute to the realization of comfortable and easy- to-use automobiles. The primary focus will be power window switches and keyless entry systems along with next-generation automotive systems, such as passive entry and engine push-start systems (please see page 37 for details). Our strategy is to raise profitability by focusing on specific technologies with worldwide applications. In addition, automotive electronics are being used in a wider range of applications as the industry rapidly advances development of hybrid vehicles, electric cars, and other environmentally friendly automobiles. As the applications become more diverse, the technology is becoming increasingly sophisticated and complex, rais- ing the importance of vigorous and flexible collaborative R&D and operations with other companies. The changes in the automobile industry have made it vital that we modify our previous approach of some Omron Group companies supplying automotive parts to all clients on an equal basis. To this end, we plan to promote the transformation of AEC into a highly spe- cialized company that specializes in electronic equipment for auto bodies by spinning it off in April 2010 to leverage the benefits of autonomous management, the ability to concentrate on core clients, and greater latitude for collaborations with other companies for prod- uct concept generation and business realization. Q What operational reforms will be implemented as part of Omron’s structural reform? Four Areas of Management Reform Management reform will be carried out in four cate- gories. First, we will consolidate our 49 domestic and overseas production sites and reduce the number of sites by one-third. Six production sites are now being shut down, including the Minakuchi Factory (semicon- ductor manufacturing operations were shifted to the larger Yasu Factory) and the automotive electronic com- ponents manufacturing facility in England (we are continuing to meet demand in Europe through exports from other factories). We will keep implementing man- agement reforms as necessary. The second operational reform will be to revise the variable costs structure. We will continue to develop common product formats and to progress with stan- dardization. At the same time, we will reduce the number of parts that must be purchased, conduct bulk purchases to lower materials costs, and decrease the number of man-hours necessary for inspection of com- ponents, quality assurance, and final product inspection. Through these measures, we are aiming to lower the variable cost ratio by 2.5 percentage points by fiscal 2011 in comparison to fiscal 2008. Third is reform of our IT structure. We began reforming the Group’s IT structure in fiscal 2007 with the aims of improving our administrative efficiency and establishing an infrastructure for information shar- ing throughout our worldwide manufacturing, sales, development, and finance operations. We have bud- geted ¥10 billion for investment over a four-year period and expect to have a new IT infrastructure in full oper- ation in fiscal 2010. The fourth operational reform concerns the func- tions of the head offices. We will take a scalpel to the swelling administrative expenses incurred at the head offices as our global operations expanded. The head office staff activities will be divided into support and strategic functions and strictly evaluated for necessi- ty and value to trim any and all excess. Closure/Consolidation of Sites Close/consolidate approx. 30% of production sites from FY08 to FY10. Jan. 2009 Mar. 2011 Number of Production Sites* * Production sites: Sites with production function and/or production management function 49 30̶35 Sites to be closed/consolidated (decided in FY08): Large-sized backlight business: TFO (3 sites) • Automotive electronic components business: • Semiconductor business: Minakuchi factory, Japan • FA business: OMA (Omron Manufacturing of America, Inc., US) OUK (Omron Automotive Electronics UK Ltd.) 17 President Sakuta Discusses Omron’s Future Q Is the Company advancing any growth strategies in new areas? Activating Omron Group Synergies for Full- fledged Entry to the Environmental Business We believe the Omron Group has unique capabilities to help tackle pressing environmental issues. Responding to global warming and other environ- mental issues is critical for the future of humanity, and it has been estimated that by the year 2050 we must reduce total global emissions of greenhouse gases (CO2), by half of the year 2000 level. Achieving this presents a major challenge that will require ground- breaking new technology and ideas. From our point of view, this is the type of challenge that is perfectly suited for developing new businesses for our envi- ronmental business. In March 2009, we established and commenced full-fledged operations of the Environmental Solutions Business Headquarters, which is under my direct supervision. The headquarters is focusing on provid- ing CO2 emission reduction solutions for retail stores, factories, distribution operations, offices, schools, and various other sites and developing total environmental solutions to help clients realize their environmental management objectives. The Omron Group had previously been develop- ing environmental businesses for CO2 emission reduction through each of its business segments. The Environmental Solutions Business Headquarters works laterally with IAB, ECB, and other business segments to integrate components used in each segment’s envi- ronmental solutions operations. It also develops solutions by identifying areas to monitor and provides specific control solutions to further reduce CO2 emis- sion volumes. Environmental business is a new direction that will leverage the synergies of the Omron Group. We are aiming for the environmental business, including the contribution from the Environmental Solutions Business Headquarters, to generate ¥50 billion in sales in fiscal 2013. Q What other growth fields are you focusing on in addition to the environmental business? Actively Developing Sensor Networks, MEMS, and Vision Sensing Advances in sensing technology are increasing the range of potential applications and generating a shift in needs from basic sensing and control functions to information management functions aimed at fulfilling specific objectives. Sensors are playing an increasing- ly central role for supporting administrative functions related to safety, product quality, equipment lifecycles, work environment, and the health and behavior of peo- ple at manufacturing sites as well as across the broader spectrum of industry, society, and lifestyle. This is evi- dent in the intense interest that has been generated in our face recognition systems (see page 25 for details). Technology Driving Future Growth: Progress in Sensing I am speaking in futuristic terms, but we are con- ducting research in several areas to expand and advance sensor applications, such as further inte- grating our MEMS technology into sensor networks (intercommunicating sensors) and autonomous sen- sors required for household electric power generation devices. I also believe we are moving closer to realiz- ing vibration sensors that can sense the changes in vibrational activity that occur as structures age and can be used in bridges or buildings for safety and preven- tion against structural collapse. These sensors could also be paired with permanent sensor systems that can generate electricity from extremely subtle vibra- tional movement. Sensing Technology MEMS/NEMS Specialized nano-thin film Wireless Communication Technology Ubiquitous network Zigbee, RFID Integration Technology Si penetration wiring (MEMS/MOS) Wafer-level package MEMS/MOS vertical integration High accuracy sensor Signal processing IC RFIC Antenna Buildup multilayer memory ASIC 18 Knowledge IC Control Technology Feature extraction Inference learning Knowledge information control Vibration-power generation device Capacitor Power generation device Energy Technology Small and environmental power generation Mass electricity accumulation Eco-technology that converts vibration energy into electricity (Announced on November 11, 2008) Q What are the Company’s policies regarding capital, such as its share- holder return and financial policies? Reinforcing Our Defense with Loans and Improving Cash Flow Omron’s policy on the distribution of profits is to pro- vide the maximum amount possible to shareholders from the Company’s surplus cash account after deter- mining that sufficient funds are maintained for internal reserves for essential R&D, capital investment, and other business growth-related investment, and in con- sideration of the current level of free cash flow. Our policy is to maintain a minimum 20% dividend payout ratio and to target 2% dividend on equity (DOE) ratio. In fiscal 2008, taking into consideration the result of a ¥29.2 billion net loss, we distributed ordinary div- idends of ¥25 per share, representing a ¥17 decrease from the previous fiscal year and a DOE ratio of 1.7%. We have not yet set the dividend rate for fiscal 2009 as we feel it is prudent to wait until we have a better idea of how business conditions will develop and how the Company is progressing toward its forecast targets in this environment. Our financial policy at present is to preserve our cash holdings to ensure we are fully prepared for unan- ticipated contingencies. In fiscal 2008, we secured approximately ¥20 billion in long-term loans for this purpose. In fiscal 2009, we plan to improve total cash flow by approximately ¥25 billion by lowering inven- tories (¥15 billion) and reducing capital investment (¥10 billion). In accordance with the anticipated ongo- ing decline in sales in fiscal 2009, we plan to reduce R&D expenses by ¥8.9 billion and reduce the propor- tion of R&D expenses to sales down to 7.8%. Investment in R&D is directly related to investment in business growth and is not usually an area where we would want to economize. Given the current eco- nomic environment, however, we are concentrating R&D spending on fortifying our competitiveness in mechanical components and in specific fields with strong growth potential, particularly MEMS and envi- ronmental businesses. Depreciation Expense and Capital Investment (Billions of yen) 44.4 33.9 37.1 36.3 36.8 33.5 41.1 30.8 10.3 10.5 37.4 28.6 8.8 0.8 07 3.3 08 04 05 06 27.0 25.0 -2.0 09 Initial Plan (FY) Depreciation Expense Capital Investment Net Capital Investment Q How will Omron be changed when it emerges from this difficult period? Operating Income of ¥100 Billion when Sales Recover to ¥750 Billion When we reached our high point for operating income—¥65.3 billion in fiscal 2007— the Company had been in business for 75 years. For fiscal 2009, a mere two years later, we are challenging ourselves to attain positive zero operating income. Nevertheless, as we discussed earlier, we are approaching this as “positive zero” because it will represent a significant structural reform achievement. We plan to steadily reinforce our profit structure and substantially lower our breakeven sales point as foundational steps for the Company’s future. Our spe- cific goal is to reform and improve our profit structure so that when we raise sales back to the ¥750 billion level achieved in fiscal 2007, our profit structure will yield operating income not of ¥65.3 billion but sur- passing ¥100 billion. The Omron Group is not content to bow our heads and wait for the storm to blow over. We are forging ahead with our heads held high as we put into prac- tice our motto— “Change! Challenge! Create!” Strengthen Profit Base in the Medium Term (Billions of yen) 763.0 627.2 Mainly through emergency measures Mainly through structural reform 510.0 Maintain BEP of approx. JPY 500 bn in sales by restricting/offsetting fixed costs increase and reducing variable cost ratio 750.0 100.0 65.3 5.3 +0 Approx. JPY 60 bn improvement 2007 (Actual) 2008 (Actual) 2009 (Planned) Net sales Operating income 201X (Target) (FY) 19 Feature 1 Dialogue between Omron President and CEO Hisao Sakuta and Outside Director Kazuhiko Toyama Overcoming Crisis through Governance —Management in Times of Adversity— Outside Director Kazuhiko Toyama brings a unique per- spective as an investor and business leader with management experience at a consulting company and as the former COO of the Industrial Revitalization Corporation of Japan. Mr. Toyama and Omron President Hisao Sakuta conducted an insightful dialogue on the the fundamental essence of the current economic reces- sion, the role of outside directors, the importance of a company’s on-site capabilities, and the governance need- ed to overcome an economic crisis. *Messrs. Toyama and Sakuta were interviewed by the annual report editor. O U TS I D E D I R E C T O R K A Z U H I K O T O YA M A S H A R ES H IS T H O U G H T S Kazuhiko Toyama Kazuhiko Toyama has previously held positions at The Boston Consulting Group K.K. and played a role in helping to found and later serving as President and Representative Director of Corporate Directions, Inc., Japan’s first independent management strategy consultancy, which successfully turned around 41 companies in Japan. In 2003, Mr. Toyama was appointed Executive Managing Director and COO of the Industrial Revitalization Corporation of Japan at its inception, and in April 2007, he founded Industrial Growth Platform, Inc., which provides management support services focused on realizing long-term, sustainable business operations and elevating corporate value, and assumed the role of CEO and Representative Director. 20 The “Global Bubble” Has Burst —— What do you view as the fundamental essence of the current economic crisis? Mr. Sakuta I believe the “global bubble” has burst. You could even go so far as to say that one of our val- ues has crumbled. I think many companies are starting to ask themselves, “Why does this company exist? What’s our purpose?” I believe that is the first step in the process of adjustment or normalization. As a mat- ter of fact, all kinds of bubbles arose one after another. I think the current economic crisis is the result of eco- nomic activities and values that place too much emphasis on money gone too far. Mr. Toyama All economies experience bubbles and bubble bursts at certain intervals. The situation has now progressed to an adjustment stage, but I don’t think this will be the last time a bubble like this occurs. At the same time, the occurrence of bubbles is irreg- ular and not cyclical, and can happen in any type of economic system. For example, Japan’s massive eco- nomic bubble in the 1980s occurred despite a very closely regulated, financial industry that was so con- trolled under the convoy-fleet system that it could have been called economic socialism. The conditions are very different this time, since the bubble arose from a system in the United States that could be described as laissez-faire. The real world we live in is too com- plex for academics to come up with economic theories to prevent bubbles. Check the Company’s “Common Sense” —— The current economic environment has led to much discussion about outside directors. What do you consider to be the primary role of outside direc- tors? Mr.Toyama A company is an organic entity.Companies are driven by a collection of stakeholders, or strictly speaking, a group of stakeholders with slightly differ- ent interests. The important thing to note is that there must not be an entity in that organization that has absolute power and that is not monitored by any indi- vidual or group. It is essential for the health of a company to have a mutual oversight and control work- ing among stakeholders. Outside directors play a role in providing such oversight and control. At the same time, the position of the outside director is not absolute, as it is monitored by the General Meeting of Shareholders and the capital markets. I think the outside director is one of the pieces that create that check mechanism. —— What do you expect of an outside director? Mr. Sakuta No company purposely acts against accepted common sense. Nevertheless, companies tend to be made up of individuals with similar values. At Omron, the outside directors provide external per- spectives to ensure the common sense of the Company does not go against the common sense of society at large. We have not had an instance so far where the values of the internal directors were at odds with those of the outside directors. In practice, our outside directors offer a fresh perspective during dis- cussions of our business activities and objectives. On-site Capabilities Cannot be Improved at the Worksite Alone —— You have said that on-site capabilities are important. What are you doing to increase the Company’s on-site capabilities? Mr. Sakuta I always tell our employees to make their jobs more interesting. The Company has a wide range of people involved in production, development, sales, planning, and other operations, and each person has their own understanding of their assignment. I think the starting point for raising our on-site capabilities is for each employee to focus on the specific issues at their own worksite and try to think of solutions. At the same time, raising our on-site capabilities is not done only at the worksite. It’s important to approach it from a posi- tion that is one step above the ground level as well. 21 Feature 1 Dialogue between Omron President and CEO Hisao Sakuta and Outside Director Kazuhiko Toyama Our on-site capabilities will improve when we bring these approaches together. —— As an outside director, how do you feel about this approach? Mr. Toyama On-site capability functions as a part of a very organic interweaving of elements. Because one person’s capabilities are limited, capabilities in reality only arise in relationships. In contrast, blindly follow- ing a strategic formula of keeping some parts and eliminating others can break down important rela- tionships within a company and become an exercise of merely conforming to the strategy that will inevitably lead to failure. The challenge is to find the optimal bal- ance of emotion and logic, and I think Omron is one company that has found that balance. Corporate Philosophy is the Growth Driver —— How are the Omron Principles put into prac- tice? Mr. Sakuta To me, the Omron Principles are just like oxygen. We may not always be conscious of their pres- ence, but we can’t survive without them. The biggest challenge is getting all our employees to understand the principles for themselves so they can decide how to manifest the principles in their actions. The princi- ples are meaningless if they do not lead to action. While we don’t force our employees to act out the principles, we frequently visit work sites to discuss them with our 22 employees. As their understanding deepens, the prin- ciples naturally begin to show in their actions. Mr. Toyama Governance is a crucial element for hedging against terrible consequences, but effective governance alone is not enough to raise a company’s corporate value. Rather, I believe that a company’s principles are the fundamental source of strength for future growth. When the values held by a company’s top executives as well as by all of its employees are values that society recognizes, society then pays for the products that reflect those values. That, I believe, is precisely what corporate value is. 6.7 Billion Stakeholders —— Omron’s corporate motto is “working for a better life, a better world for all.” How does Omron define “world?” Mr. Sakuta In this context, I understand “world” as “people with common interests.” —— Is it just interests? Mr. Sakuta “Interests” goes beyond money and extends to the interests shared by all 6.7 billion peo- ple living on the Earth and our children, future generations. I believe that maintaining a global envi- ronment that will support the survival of mankind is a common interest for everyone. I believe our corporate motto, “At work for a better life, a better world for all,” aligns quite closely with this view. —— In other words, Omron has 6.7 billion stake- holders. How do you prioritize among them? as all lives on Earth pass their batons on to the next generation. Mr. Sakuta When I was appointed president, I always said employees were first, followed by our customers, and then our shareholders. However, after six years in this position, my perspective has changed. A com- pany cannot exist without the support of all its stakeholders, so I no longer see it as a matter of pri- ority. Each stakeholder is essential. Mr. Toyama It is a bad example of reductionist think- ing to break down everything into separate elements and create a hierarchy. Stakeholders have a mutually dependent existence, and it’s a mistake to rank them and put shareholders at the top. People try to explain social phenomena breaking down the whole into indi- vidual elements and pointing to one specific causality that puts them together. That way of thinking is not rooted in reality. The current series of collapses of economic bub- bles have made shareholders aware of their mutual interdependence, and I think now is a good time for all of us to take another look at our role and investment decisions in terms of governance. In other words, I think of shareholders as holding the stakeholder baton over a long time frame. While there will always be shareholders, there is a time when each shareholder receives the baton to carry it for a time along the continuum. If shareholders have a responsibility to society, it is to consider diverse fac- tors from various perspectives, including improving the long-term sustainability of corporate value, and pass the baton to the next generation of shareholders, just Shared Timelines —— What did you learn from your experience at the Industrial Revitalization Corporation of Japan about what is necessary for companies to make it through times of crisis? Mr. Toyama In times like these, it’s important to return to the basics and reconstruct the current issues as they are without colored lenses and think what the company should do. It’s also an important time for managers and all shareholders to be humble and apply intellectual curiosity to reconsider what is happening and what the company’s direction should be. Some companies will go into hibernation while others will bravely implement creative destruction that will put distance between themselves and other companies. their essential 23 Feature 1 Dialogue between Omron President and CEO Hisao Sakuta and Outside Director Kazuhiko Toyama corporate value. I believe I have been asked to do the best I can to help guide the Company over a longer time frame and on a broader axis. —— What expectations do you have for Mr. Toyama as an outside director for the Company? Mr. Sakuta We are envisioning scenarios for the Company when conditions are bad rather than when conditions are good. In these circumstances, I would like Mr. Toyama to take a hard look at Omron using his abundant real-world experience at the Industrial Revitalization Corporation of Japan. I would also like him to provide perspective from outside the “village community” that a company can become. The input of Mr. Toyama and our other outside director, Mr. Masamitsu Sakurai, who has a wealth of experience in management at a company similar to Omron, will be invaluable as management seeks optimum solu- tions for further enhancing the quality of Omron’s corporate value. It’s a difficult time for all companies, which must confront decidedly different issues depending on short-, medium-, and long-term time frames. Stakeholders are tested on how they address these different issues while sharing their different time frames. Simply taking an idealistic long-term approach might lead to bankruptcy in a year, which would com- pletely negate any plans for 10 years in the future. Yet concentrating solely on resolving the issue at hand could force a company to sacrifice something that would be important a decade from now. That’s why I think it is important to ask shareholders and all stake- holders to help find solutions that will work in the short, medium, and long term. These periods of adversity are the time to cultivate human resources, which is essentially the same as improving “on-site capabilities.” I think you’ll find that people grow more in times of hardship than when times are good; in retrospect, that’s been true in my life. A company’s ability to grow over the long term is ultimately decided by the strengths and relationships of its individual employees. The current conditions are an opportunity for many companies, and I think Omron is one of those companies. —— Is Mr. Toyama’s role as an outside director therefore to accommodate the time frames of var- ious stakeholders? Mr. Toyama That is one of my jobs, but I believe I must represent the perspective of how Omron can continue developing and evolving over a longer time frame and on a broader axis. My job is not to represent the interests of any single stakeholder. As an outside director, my job is to provide perspective for the Company’s overall 24 Feature 2 From the Front Line The Birth of Smile Scan — The Front Line Leads the Way — In February 2009, Omron released a new sensor technology that immediately generated media buzz for its innovativeness and surprising applicability. Smile Scan, which measures the degree of a per- son’s smile, was an instant hit. We now report back from the front lines, where the concept of Smile Scan developed. *Interviewed by the annual report editor. O M R O N M A K ES I T P OS SI B L E 25 Feature 2 From the Front Line —— Why did you decide to focus on the face? Mr. Ogawa Omron is an industry leader in sensor technology. Using sensors to “visualize” objects and images is a fundamental competency of Omron, and applying sensors to visualize society is a specific focus of the Social Systems Business (SSB). What does that mean exactly? Omron has focused its business devel- opment on places where people gather, such as train stations, roads, and commercial facilities, and the social climate has inevitably increased need for safety and security in these locations. The application domain of sensing and control technology is also broadening and is now used for such diverse purposes as creating comfortable places and promoting communication among people to new applications in environmental fields. When we first considered how sensors could be used on people —the core component of society— we realized that face recognition presented an enormous range of unique applications that could be pursued. A Product of Our Enthusiasm —— Where did the idea to develop Smile Scan come from? Mr. Sogo Fundamentally, sensors and controllers are used to enhance safety and security, so it was by no means obvious how a sensor that measures people’s smiles could be turned into a marketable product. Although we were able to use it to demonstrate the unique capabilities of our sensors, to be honest, I never thought it could be commercialized. Then, one of our employees who is closely in touch with customer needs included it in a product catalogue and told us, “We have to make this into a product.” Taking his advice, we put it onto a list of product proposals for our customers and received positive feedback from train station workers, nurses, and many others saying they wanted to give it a try. The World’s Finest Face Recognition Technology —— How was Smile Scan developed, and how does it work? Mr. Ohashi As we were researching and developing the face recognition technology, we gradually started noticing the unique changes that occur when a per- son smiles, such as the lowering of the corners of the eyes, the rising corners of the mouth, and increasing wrinkles in certain places. Smile Scan measures and quantifies those changes and gauges a smile on a range from 0 to 100. —— It detects wrinkles too? Mr. Ohashi Yes, it does. However, increasing the number of points where we gather information increas- es the amount of data to be processed and ultimately slows the processing speed. The real challenge was paring down the data to only that which is necessary to produce an accurate reading. To enable instanta- neous data processing, it was critical to create the leanest possible algorithm for the application envi- ronment and objective and then to sense with pinpoint accuracy only the absolutely essential data. —— Is this an example of an Omron strength that is unmatched by other companies? Toshinobu Ogawa Social Systems Solutions Business Company Social Sensor Solutions Division Strategy & Planning Department Manager I would like to see Smile Scan used as a component of an innovative solutions business. Koji Sogo Social Systems Solutions Business Company Social Sensor Solutions Division Solution Engineering Department General Manager There are innumerable applications yet to be discovered. As we uncover them, I am looking forward to developing the second- and third-generation Smile Scans. 26 Makoto Ohashi Social Systems Solutions Business Company Social Sensing Products Department Assistant Manager We will partner with various companies to create fascinating uses for the tech- nology. Mr. Sogo This technology is something we can be proud of. The high-speed and consistently accurate face recognition we have achieved is the result of examining a massive amount of facial data and devel- oping very specific high-performance technology. The face recognition algorithm was developed based on an image database of more than five million faces col- lected over more than a decade. More Accurate Than Subjective Judgment —— Are the devices more accurate than the human eye? Mr. Ohashi The same standards are used to meas- ure every smile, which enables a more objective and quantitative evaluation than the human eye is usually capable of, particularly for complicated smiles. For example, in terms of the capability to determine gen- der and age, people often have some difficulty discerning if a person is in their 20s or 30s. However, a device programmed to identify a person’s sex and age estimates whether the subject is male or female and young or old without subjective parameters. The devices can process a higher volume of data faster and produce assessments more accurately than a per- son can. Half of Annual Sales Target Achieved in the First Quarter —— What has been the reaction to Smile Scan? Mr. Ogawa The first use of Smile Scan was by med- ical staffs in a hospital that wanted to harness the effect the smiling faces of doctors and nurses to increase patient satisfaction. Recently, we are receiv- ing increasing interest from the restaurant industry. In terms of volume, we think sales are off to a good start. Our target was to sell 100 units in this first year, and we have already sold 50 units in the first quarter (of fiscal 2009). This is a product that will find an increasing number of applications, and we see it as an elemental entry product for developing our solu- tions business. We are considering developing a higher-grade model in response to media attention as well as to the spontaneous emergence of poten- tial applications. Smile Scan Smile Scan utilizes a specially programmed sensor to capture an image of a person’s face and automatically gauges the degree of their smile from zero to 100%. Small analog camera Real-time Smile Measurement Technology Model Fitting 3D Face Model Fitting Result Eye closure Eye corner shape Wrinkle shape Mouth corner shape Mouth closure ・ ・ ・ Simultaneous analysis of smiles for multiple people is also possible. Integrated Inference 100% 50% 10% Sensor unit 27 Feature 2 From the Front Line Important to Create Ongoing Relationships to Identify and Resolve New Issues —— The Electronic Components Business (ECB) is also developing products from its OKAO Vision face recognition technology. What are your thoughts on that? Mr. Ohashi ECB is integrating its OKAO vision face recognition technology with precision processing tech- nology into components for camera-equipped mobile phones and other devices. The objectives are slightly different, as ECB is developing products for consumer electronics, such as household electronics, while SSB is advancing its face recognition technology for its social systems solutions business. Maintaining ongo- ing and constructive relationships with client companies involved with social systems will be impor- tant so we can work together to develop solutions to new issues that arise during the operation and main- tenance of the products. It will be necessary to expand the sensor capabil- ities to products that go beyond simply “seeing” to “observing” and “diagnosing.” Our first step in that direction was the release in summer 2008 of “seg- ment sensor” products capable of estimating a person’s sex and age based on facial features. Segment sensors analyze a face based on feature cor- relations. For example, a child’s face differs from an adult’s face because the eyes are bigger and higher, the space between the eyes and eyebrows is wider, and the nose and mouth are smaller. Segment sensors can be placed at entryways or aisles in train stations, department stores, or super- markets to identify the movement activities of men and women and people of different ages, or to assess whether product lineups match the target customer. This data could contribute enormously to a store’s marketing effectiveness and support con- tinuous improvement in store management. Segment sensors are uniquely effective solution devices. Seeing the Unseeable —— Is Omron’s high-level consulting know-how also needed for effective solutions? Mr. Ogawa The technology we have developed for our railway infrastructure and traffic control systems is very highly specialized, and I believe it provides a platform for us to be the industry leader in solutions development for public facilities. We have accumulat- ed extensive know-how from our experience in developing, installing, and operating loyalty-based dis- count systems for commercial facilities during which we had to examine such issues as how increasing loy- alty points affects consumer patterns and sales. Our face recognition technology is a leading-edge technol- ogy that basically makes it possible to “see” data that was previously invisible. Determining how that data can be used and even what would be useful once it becomes visible are emerging issues. Working close- ly with the device users, that is, our customers, will be essential, and we will bring the full depth of our expe- rience to play as we seek to realize the vast potential benefits of the new technology. —— Will Smile Scan also be used to develop Omron’s solutions business? Mr. Sogo In the future, store operators could utilize smile measurement data as an indicator of cheerful- ness within the store or other elements that are now considered intangible yet could become functional data for maintaining and improving business. It’s even said that crime occurs less often in cheerful and pleas- ant environments, so this data could also contribute to safety and security. As Mr. Ogawa said, Smile Scan is fundamentally an elemental entry product to initiate and invite new busi- ness. I would like to see Smile Scan used as a component of a proposal-based business that leads to real business solutions created by listening to the opin- ions and needs of users, primarily at commercial facilities, to maximize the sensor ability to gauge a person’s attrib- utes and monitor the activities and flow of visitors. 28 Feature 3 Environmental Solutions Made Possible by Omron Masaki Teshigahara Executive Officer Senior General Manager Environmental Solutions Business Linking the School New Deal Program to Business Growth Omron’s environmental solutions are effective for a wide range of social needs beyond commercial applications. Omron energy management systems are “visualizing” the energy consumed at 283 kindergartens, elementary, junior high, and high schools in Kyoto. The City of Kyoto Board of Education estimates that the systems saved approxi- mately ¥40 million in electric power costs in fiscal 2006. The School New Deal Program being advanced by the Japanese government calls for solar power generation sys- tems to be installed in elementary, junior high, and high schools across the nation beginning in fiscal 2009. Omron aims to expand its environmental business by contributing to CO2 reduction efforts and promoting envi- ronmental education using an effective combination of solar panel utilization and the energy management system that were successfully demonstrated in the Kyoto school district. INVESTMENT TO REDUCE CO 2 STRENGTHENS COMPANIES CO2 Reduction Solutions Omron will contribute to the fulfillment of the environ- mental management objectives upheld by different companies through our CO2 reduction solutions. We will achieve this through the effective use of sensing and con- trol technologies, the dependability of which has been proven over time and is evident from its versatile applica- bility in fields ranging from manufacturing sites to social infrastructures, and in such areas relating to industrial and social applications as well as in our everyday lives. One of Omron’s CO2 reduction solutions, Green Automation, effectively “visualizes” otherwise imperceptible CO2 emissions, and it centrally manages information on areas that have been detected for improvements. Subsequently, this enables all employees, from administra- tors to on-site workers, to monitor the details of environmental measures and energy usage on a real-time basis during operations. “Visualizing” CO2 facilitates com- pany-wide environmental management by processing and providing data relevant to the measures being activated on each of the administrative, management, and on-site levels. Our total support services begin with consultation on tangible CO2 reduction measures and plan implementa- tion and continue through installation, maintenance, and servicing of equipment with the ultimate result of improved efficiency, even with reduced CO2 emissions. Omron’s CO2 reduction solutions transform the economic benefits of reducing carbon into a point of company strength and contribute to the maximization of the return on carbon (ROC)* ratio. * Return on carbon (ROC) is a new profit indicator that measures the amount of CO2 emissions a company produces (representing the amount of energy consumed) to generate earnings. Company-wide Visualization Level Executive Management Management On-Site Company-wide Visualization Company-wide Environmental Strategies Implement Visualization Check Results Investment Decision-making Implement Visualization Decide Implementation Priority Factory Logistics Office Implement Visualization Implement Visualization Implement Visualization Modify Operations Improve Equipment Modify Operations Improve Equipment Modify Operations Improve Equipment GREEN FACTORY GREEN LOGISTICS GREEN OFFICE 29 Omron at a Glance Performance and Outlook by Segment Segment Sales and Operating Income Sales by Segment (Billions of yen) Operating Income by Segment (Billions of yen) 800 700 600 500 400 300 200 100 0 100 80 60 40 20 0 -20 Others HCB SSB AEC ECB IAB 04 05 06 07 08 (FY) 04 05 06 07 08 (FY) IAB INDUSTRIAL AUTOMATION BUSINESS Sales by Segment 42% ECB ELECTRONIC COMPONENTS BUSINESS Sales by Segment 20% Sales (Billions of yen) Operating Income (Billions of yen) Operating Income Margin (%) Sales (Billions of yen) Operating Income (Billions of yen) Operating Income Margin (%) 350 300 250 200 150 100 50 0 262.9 60 50 40 30 20 10 0 20 15 7.8% 10 20.5 5 0 180 150 120 90 60 30 0 123.9 20 15 10 5 0 -5 04 05 06 07 08 (FY) 04 05 06 07 08 (FY) 04 05 06 07 08 (FY) 04 05 06 07 08 20 15 10 5 -2.0 0 -1.6% -5 (FY) Outlook Outlook IAB is fortifying its customer service and support operations and expanding collaborative sales channel operations with the aim of raising sales. The segment is concentrating on fields where development investment is projected to continue while upgrad- ing its solution proposal capabilities with a focus on issues pertaining to quality, safety, and the environment. IAB is also preparing to aggressively introduce products catered to markets in developing countries. As of September 21, 2009, ECB will become a business that spe- cializes in mechanical components such as relays, switches, and connectors to reinforce our monozukuri(the art of product cre- ation) capabilities. ECB is concentrating its overseas activities on environment related markets with promising future growth potential. 30 AEC AUTOMOTIVE ELECTRONIC COMPONENTS BUSINESS Sales by Segment 13% SSB SOCIAL SYSTEMS BUSINESS Sales by Segment 13% Sales (Billions of yen) Operating Income (Billions of yen) Operating Income Margin (%) Sales (Billions of yen) Operating Income (Billions of yen) Operating Income Margin (%) 150 120 90 60 30 0 82.1 2 0 -2 -4 -6 -8 -10 04 05 06 07 08 (FY) 04 05 06 07 08 5 0 -5 -7.8% -10 -15 -20 -25 (FY) -6.4 150 120 90 60 30 0 79.9 12.5 10.0 7.5 5.0 2.5 0.0 20 15 10 5.4 6.7% 5 0 04 05 06 07 08 (FY) 04 05 06 07 08 (FY) Outlook Outlook While the recovery of the automobile industry is expected to be slow and protracted, we will focus on the electronic equip- ment for auto bodies by applying our proven knowledge and expertise in this field. AEC is also focusing on products for envi- ronmentally friendly vehicles. SSB expects sluggish business conditions to result in a sharp decline in sales. This segment is focusing on creating new safety-and security-related businesses with railway companies. This segment is aiming to expand sensing business sales to the social sector through the newly established social sensor solutions business. HCB HEALTHCARE BUSINESS Sales by Segment 10% OTHERS Sales by Segment 2% 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 63.8 12.5 10.0 7.5 5.0 2.5 0.0 25 20 15 10 7.6% 5 0 4.8 50 40 30 20 10 0 8 6 4 2 0 14.5 40 30 20 10 00.4 0.3% 0 04 05 06 07 08 (FY) 04 05 06 07 08 (FY) 04 05 06 07 08 (FY) 04 05 06 07 08 (FY) Outlook Outlook HCB is expecting business to be slow overall in the year ahead as market conditions in Japan and other developed countries become even more harsh with continuing sluggish private con- sumption and restrained capital investment. Interest in health-related issues is expected to remain high in developing countries, and the segment anticipates that demand for health- care equipment will continue to grow. In the Others, we plan to continue steadily expanding energy con- sumption monitoring and related services. We will also support client efforts to address environmental issues, particularly glob- al warming, and assist client companies to realize their environmental management objectives by developing and pro- posing countermeasure and providing equipment and systems that help clients visualize environmental data. 31 Segment Information IAB INDUSTRIAL AUTOMATION BUSINESS Manufacturing and sales of control systems for factory automation IAB focuses on promoting quality, safety, and environment solutions for production sites and reinforcing the competitiveness of its core % of Net Sales 42% general-purpose components. Fiscal 2008 in Review Restrained equipment investment in the manufac- turing sector caused earnings to plummet in the third quarter IAB net sales declined 20.0% year on year to ¥262.9 billion and operating income fell 60.6% to ¥20.5 billion in fiscal 2008. Capital investment by the Japanese semiconductor, electronic components, automobile, and other sectors was already in a gradual declining trend at the start of the year, but when the economic crisis deepened in the third quar- ter, many companies suddenly began postponing or freezing plans for large-scale equipment investment. IAB sales were hit hard, with full-year domestic sales ultimately down 19.2% year on year. Under the circumstances, IAB highlighted its solutions business, focusing on quality, safety, and the environment, and stepped up marketing of its application sensors, safety components, and other devices. While this management strategy had some success, it was still not enough to make up for the sharp drop in sales of its core general-purpose components. The economic situation also impacted overseas sales, which plummeted 20.7%. In North America, demand in the oil- and gas-related industries started recovering and safe- ty equipment sales were brisk in the first half. The automobile and other industries were investing to enhance existing facilities, but this trend came to a halt in the sec- ond half. IAB sales in North America ultimately ended down 10.7% for the year. In Europe also, in the first half, demand for motion controllers, safety components, and other sys- tems was growing, and sales of power conditioners for solar-power generators were strong. Demand deteriorat- ed from strong to stagnant in the second half in Italy, Spain, Eastern Europe, and other areas, and overall sales in Europe ended up down 23.5% for the year. The repercussions from the economic situation inevitably spread to the Greater China region, and IAB sales in China fell a similar 25.5% for the year. The one bright spot was the Asia Pacific region, where the region’s growth momentum supported a 6.9% growth in sales. 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* 2005 2006 2007 2008 272.7 136.2 136.5 25.4 69.6 12.7 24.0 4.8 41.9 15.4% 18.5 10.2 10.0 305.6 140.8 164.8 34.8 81.3 14.0 28.8 5.8 48.5 15.9% 18.1 11.2 13.7 328.8 144.1 184.7 35.6 92.3 16.2 34.6 6.0 51.9 15.8% 19.5 11.7 8.4 262.9 116.4 146.5 31.7 70.7 17.4 25.7 1.0 20.5 7.8% 18.2 10.1 8.9 （Billions of yen） 2009 （Plan） 193.0 84.5 108.5 24.7 51.0 15.4 17.2 0.2 5.0 2.6% * FY2009 (Plan) adopted from FASB Statement No.131, Disclosures about Segments of an Enterprise and Related Information. * Projections for FY2009 are based on exchange rates of ¥95/US$ and ¥125/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as inter-segment transactions and head office expenses that are not apportionable. * Projected figures for R&D costs, depreciation costs, and capital expenditures are not publicized. 32 Check It Out! Analysis of external environment Indices of industrial production and machinery orders, IAB sales (Billions of yen) 100 80 60 40 20 0 * 200 150 100 50 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY2007 FY2008 Indices of industrial production* (Seasonally adusted) [left axis] Machinery orders* [left axis] IAB sales [right axis] *2000/4–2001/3 avarage=100 *Source: The Ministry of Economy Trade and Industry and the Cabinet Office, Government of Japan IAB sales trends move on a half-year time lag to indices for industrial production and machinery orders. Yoshinobu Morishita Senior Managing Officer Company President, Industrial Automation Company Business Strategy and Outlook for Fiscal 2009 Fortify the business base of general-purpose compo- nents for future growth We forecast a decline of 26.6% year on year to ¥193.0 bil- lion in net sales and a decrease of 75.6% to ¥5.0 billion in operating income in fiscal 2009. Inventory adjustments in the manufacturing sector are progressing and some economic indicators are pointing to improving business conditions. Nevertheless, it remains to be seen uncertain when a full-fledged recovery will start. We anticipate equipment investment to be restrained for some time even after business conditions hit bottom, and forecast IAB sales falling 42.9% in the first half and 1.9% in the second half in fiscal 2009. In line with the Company’s sweeping restructuring (see page 15 for details), IAB plans to reorganize its production structure and deepen coordination with ECB* to enhance operating efficiency. In Japan, the Company will strengthen its marketing abilities for general-purpose components, which are one of its leading product lines, by reassigning sales staff from AEC and other internal companies. IAB will also seek to raise general-purpose component sales from the current low levels by providing comprehensive service support and intensifying usage of its various sales channels. IAB is also aggressively developing quality, safety, and environmental solutions for the photovoltaic and recharge- able battery sector, next-generation equipment sector, and other growth industries where we anticipate steady invest- ment going forward. Overseas, IAB will revise its production and development operating structures in China to enhance its cost competitiveness and will develop the emerging markets in Russia, Brazil, and South Africa. * As of September 21, ECB’s name will be changed to EMC (Electronic and Mechanical Components Business Company). What’s New Improving photovoltaic cell production quality and productivity rates The rapid expansion of the photovoltaic cell market is increasing the need for high- ly efficient, high-quality production methods. Cells used in solar-powered batteries are extremely thin, just 0.2 mm thick, and are easily chipped and cracked during the manufacturing process. Flawed cells in a solar-powered panel are a common cause of defective products, and manufacturers are introducing inspection systems to test for defects. The inspection systems that are currently used present several problems. For example, they become unstable if the cell shape or size changes or if the flow or positioning of the cells is inconsistent. In addition, the complexity involved in setting and adjusting the systems means that getting them up and running requires a significant amount of time. IAB analyzed every aspect of the photovoltaic cell manufacturing process and developed a profile tracking and defect inspection software program that automat- ically identifies cell shapes, sizes, and positioning. The system incorporates the Company’s leading image processing technology, which allows the image settings to be focused and brightened digitally. The result is a straight- forward inspection system that is stable and reliable and does not require extensive training or experience. Micro PLCs Omron realized dramatic cost savings for its micro programmable logic controllers by conduct- ing a cost review of each individual component. Our micro PLCs signif- icantly simplify pro- gramming and wiring systems. Safety Products Safety sensors are key to creating a safe working environment at manufactur- ing sites. These sensors ensure that doors and gates on equipment and at facili- ties are closed when a person tries to enter a danger zone. Automatic Optical Inspection Device Omron’s automatic optical inspection (AOI) devices provide high-precision inspection of sub- strates used in backbone equipment for automo- tive electronic components, mobile phones, and other equipment. AOI devices are also solutions for the prevention of flaw rep- etition and improved manu- facturing quality for a digital society. Cell defect inspection software for the photo- voltaic cell industry using vision sensors 33 Segment Information ECB ELECTRONIC COMPONENTS BUSINESS Manufacture and sales of electronic components for consumer electronics, mobile phones, telecommunications and industrial equipment, and amusement devices ECB applies the Company’s core technologies to strengthen its products and develop innovative monozukuri (the art of product % of Net Sales 20% creation) technology to enhance Omron’s global competitiveness. Fiscal 2008 in Review Sharp drop in sales in the second half of the year produced an operating loss. The LCD backlight oper- ation concentrated on the small and medium-size device market. ECB posted a net sales decline of 19.6% year on year to ¥123.9 billion and an operating loss of ¥2.0 billion in fiscal 2008. In the first half of the fiscal year, ECB posted record sales in Japan for its reputed small-size LCD backlights and sales continued strong for input switches for mobile devices. Sales were also strong for relays and switches in China, accompanying growing local demand for low power consumption air conditioners and other consumer elec- tronics. However, overall sales were strongly affected by the slowing growth of the semiconductor and automotive industries. Stagnant conditions in the business and con- sumer electronic equipment markets also contributed to the slowdown as well. Impacted by such factors, relays for printed circuit boards, switches, connectors, and other mainstay products slowed, resulting in a 9.5% decline in sales in the first half of the fiscal year. Conditions deteriorated further in the second half as concern about the impending global recession compelled manufacturers to accelerate their inventory adjustment efforts, stalling demand even for items that had been mov- ing quickly in the first half. The end result for this fiscal year was an overall 10.3% decline in ECB domestic sales. ECB overseas sales plummeted 26.0% as the weak mar- ket conditions in Europe during the first half combined with an abrupt change in the second half in the business environ- ment in China, which had been a persistent growth market. The stronger yen also greatly impacted overseas results. Management determined that it would be extremely difficult to secure profit in this product category after care- ful consideration of the intensifying competition and strong downward pricing pressure for large-size LCD backlights for LCD TVs. As a result, they decided to dissolve the Company’s operations related to large-size LCD backlights in fiscal 2010. Management will now focus on raising prof- its from its LCD backlight operations by setting its sights exclusively on the markets for small- and medium-sized LCD backlights. 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* 2005 2006 2007 2008 97.7 45.0 52.7 9.9 12.5 6.3 14.5 9.5 11.2 11.5% 7.8 8.4 7.1 138.4 58.8 79.6 11.0 12.0 8.6 35.7 12.4 13.1 9.5% 8.1 9.0 12.8 154.2 62.4 91.8 10.4 12.4 10.3 48.3 10.4 12.6 8.2% 8.2 10.5 14.1 123.9 56.0 68.0 8.6 9.2 8.4 37.8 3.9 (2.0) — 8.1 10.8 17.3 （Billions of yen） 2009 （Plan） 112.0 48.5 63.5 8.6 12.0 7.0 32.3 3.6 3.0 2.7% * FY2009 (Plan) adopted from FASB Statement No.131, Disclosures about Segments of an Enterprise and Related Information. * Projections for FY2009 are based on exchange rates of ¥95/US$ and ¥125/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as inter-segment transactions and head office expenses that are not apportionable. * Projected figures for R&D costs, depreciation costs, and capital expenditures are not publicized. 34 Check It Out! Analysis of external environment Global shipment of electronic components and ECB sales. (Billions of yen) 2,000 (Billions of yen) 50 1,600 1200 800 400 0 40 30 20 10 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY2007 FY2008 Global [left axis] Japan [left axis] ECB [right axis] Source:JEITA ECB sales plummeted as a result of the rapid and widespread imple- mentation of inventory adjustment measures following the sharp dete- rioration in business conditions in the second half of fiscal 2008. Akio Sakumiya Executive Officer Company President Electronic Components Company Business Strategy and Outlook for Fiscal 2009 Focus on regaining profitability and fortifying monozukuriof mechanical components We forecast a decline of 9.6% year on year to ¥112.0 billion in net sales and an improvement to ¥3.0 billion in operating income in fiscal 2009. We anticipate sales continuing to fall at a steep 26.2% year-on-year pace in the first half fol- lowed by an upturn to growth of 13.1% in the second half as industry inventory adjustments are concluded and sales begin recovering overseas. In fiscal 2009, ECB will take over automotive relay oper- ations from the Automotive Electronic Components Business (AEC). ECB will consolidate IAB’s relay and switch product manufacturing operations and AEC’s relay products into the mechanical components business, to minimize the impact of contracting markets and reestablish a founda- tion for continuing competitiveness in the medium and long terms. The Company aims to centralize and strength- en its overall manufacturing operations by building up each company’s materials, metal mold, processing, and other component technologies (manufacturing methods). Subsequently, ECB will be renamed as EMC (Electronic and Mechanical Components Business Company) on September 21, 2009, as a part of the reorganization of Omron’s three control-based businesses. EMC will specialize in mechani- cal components, namely relays, switches and connectors. We also plan to focus on developing the micro elec- tronics (ME) business by using our precision processing technology and applying other methods to add value and enhance product customization. This will include bringing the MEMS, CMOS, and other production lines into the Yasu Factory to combine our semiconductor and compo- nent manufacturing operations with the aim of further establishing the Company’s competitive leadership. Furthermore, as of September 21, 2009, MEMS, semi- conductors and LCD backlights, which had been parts of the ME business and which are still in the incubation stage, will be transferred to the Others segment. What’s New Flexible 0.59 mm thin sheet-type LCD backlight Small-size LCD backlights brighten mobile phone and other mobile device screens from behind to pro- vide consistently bright display in the dark or in direct sunlight. Omron applied its technologies in light-wave control and ultra precise microreplication to develop and manufacture backlights that set a new standard for brightness and low power consumption. We then developed a groundbreaking 0.59-millimeter ultrathin sheet that was one-third thinner than existing sheets and capable of oper- ating even when bent. Omron achieved a significant improvement in LED brightness by using a proprietary special processing method called “radial prism structure” to create a microprism array. By applying this to the connectors of optical waveguide which function to transmit uniform light from the LED light source to the screen, the percentage of light transmitted to the LED screen increased to 95% from the previous 75%. The precision processing and microreplication technologies that resulted from our trial-and-error approach also enabled the mass production of sheet-type LCD backlights using the intricate radial prism structure. The innovation of flexible backlighting creates opportunity for new concepts in display devices. RF MEMS Switches In September 2008, Omron released the world’s smallest packaged MEMS chip that realizes small size, high radio frequency (RF) transmission at 10 GHz, and reliable execution of over 100 million on- off switches. * As of September 21, 2009, ME Business will be transferred to the Others segment. Touch Sensor Solutions Omron has joined with Renesas Technology to develop capacitive touch sensor solutions* for the broadening range of touch sensor appli- cations for home appli- ances, mobile phones, and other devices. * Capacitive touch sensors are sensors that are activated by electric charges stored in the sensor to switch electric charges on or off. Narrow Pitch 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 0.25 mm pitch, making it ideal for mobile phones and other mobile devices. Our FPC connectors use approximately 20% less substrate surface area. 35 Segment Information AEC AUTOMOTIVE ELECTRONICCOMPONENTS BUSINESS Manufacture and sales of electronic components for automobiles AEC is restructuring to improve the profitability of its operations and enhancing the value-added features of its products to keep pace with % of Net Sales 13% the rapidly evolving needs of the car electronics market. Fiscal 2008 in Review The sharp drop in automobile demand in the sec- ond-half caused sales to plummet, resulting in an operating loss. AEC net sales declined 23.6% year on year to ¥82.1 billion. After regaining profitability last year, operating income dropped back to a ¥6.4 billion loss in fiscal 2008. Sales were up year on year in the first half as strong demand in Japan for electric power steering controllers and other components more than made up for faltering vehicle production volumes in the United States and Europe amid rising gasoline prices and economic slowdowns. In China, newly established proj- ects resulted in first-half in sales reaching roughly double the level that was attained in the previous year. In the second half, however, the United States, which is the world’s largest automobile market, became the epi- center for the spreading global recession, and overall automobile demand fell vastly more than anticipated. Demand had held firm in China and developing nations in the first half, but souring economic conditions led to dwin- dling demand in those markets as well. In Japan, the United States, and Europe, demand began shifting away from mid- and large-size vehicles to more economical small cars. AEC sales were also deeply impacted by the large-scale inven- tory reductions and production cuts automakers began implementing at the start of the new calendar year. As a result, AEC second half sales fell far below the previous year level. The rapid and severe changes in the economic envi- ronment have led management to implement strict measures to improve the efficiency of operations. In addi- tion to eliminating unprofitable operations, management has decided to shut down Omron Automotive Electronics UK Ltd., which was established in 1987 to manufacture auto- motive switches and controllers, by the end of March 2011 as a step to reorganizing the global production structure. 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* 2005 2006 2007 2008 （Billions of yen） 2009 （Plan） 77.6 27.2 50.4 28.8 6.2 15.1 0.1 0.0 (2.0) — 6.7 7.0 11.2 93.3 26.1 67.2 37.9 9.8 16.2 1.4 2.0 (1.2) — 7.1 8.1 8.9 107.5 28.0 79.5 42.4 13.9 18.3 3.1 1.9 1.4 1.3% 8.3 8.0 9.1 82.1 25.0 57.1 27.9 9.0 12.5 4.7 3.0 (6.4) — 7.3 5.4 5.6 60.0 24.5 35.5 21.8 1.5 8.0 4.0 0.2 0.0 0.0% * FY2009 (Plan) adopted from FASB Statement No.131, Disclosures about Segments of an Enterprise and Related Information. * Projections for FY2009 are based on exchange rates of ¥95/US$ and ¥125/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as inter-segment transactions and head office expenses that are not apportionable. * Projected figures for R&D costs, depreciation costs, and capital expenditures are not publicized. Check It Out! Analysis of external environment Worldwide automobile production (Millions) 6 EU North America Japan China Asia South America Middle East, Africa 5 4 3 2 1 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY2007 FY2008 Source: CSM Worldwide, Inc. Automobile production output declined sharply, particularly in the United States and European mar- kets, beginning in the second half of fiscal 2008. 36 Yoshinori Suzuki Managing Officer Company President Automotive Electronic Components Company Business Strategy and Outlook for Fiscal 2009 Establish an effective fixed-cost structure for bottom- level automobile production conditions We forecast net sales declining 26.9% year on year to ¥60.0 billion and operating income reaching the breakeven point in fiscal 2009. We anticipate extremely severe market conditions in the first half of fiscal 2009, with new car sales declining in Japan and slow recovery for consumer spending in the United States, the largest automobile market. We forecast first-half sales falling 43.6% from the still-strong sales level of the previous fiscal year. We do not expect a speedy recovery in automobile sales; however, automakers will have made progress in reducing inventory levels. Thus, we forecast second-half sales to decrease 0.6%, a slight reduc- tion from the second half in the previous fiscal year. AEC’s global sales have risen rapidly with the expan- sion of the automobile market. However, conditions in the automobile market have taken a dramatic turn for the worse. Automobile demand has plummeted and leading automakers in the United States have filed for bankrupt- cy. In these severe conditions, AEC will focus on revising its operating structure and rebuilding its earning strength. Management is focusing on constructing a fixed-cost operating structure that will function effectively with auto- mobile production volumes at their lowest levels. Specific measures will be to focus on providing products for small cars and environmentally friendly vehicles; improving our supply of highly-integrated modules and related software technology needed for advanced production technology; expanding operations in low-cost production regions, such as in China and Thailand; and restructuring the North America production bases. We decided to spin off AEC in April 2010 in an effort to improve its earnings and to develop it into a business that specializes in electronic equipment used in auto bodies. We plan on quickly adapting to market needs by applying our proven knowledge and expertise in this field and through our active, yet agile collaboration with other companies. What’s New Passive entry & push start (PEPS) systems for enhanced convenience and security AEC has expanded the functions of keyless entry systems into a dual passive entry & push start (PEPS) system. PEPS combines a passive entry system enabling auto- mobile owners to lock and unlock doors without taking the portable remote transmitter (key fob) out of one’s pocket or bag, instead allowing them to simply touch a button on the car door. Also, the passive engine start system starts and turns off the car engine by pressing a switch on the driver’s side of the dashboard. Combining the locking systems and engine on/off functions demands a high- precision security function. Backed by many years of developing and marketing wireless technology, AEC has been able to develop precision technology that allows the transmitter key to lock and unlock the door only when the key is outside the car and to start the engine only when the transmitter is detected inside the car. AEC continues to hone its wireless technology to provide products that will further enhance convenience and security. Electric Power Steering Controllers Electric power steering controllers facilitate automobile steering. Electric (motorized) power steering systems are more fuel effi- cient than conventional hydraulic steering systems. Multifunction Control Units Multifunction control units combine several functions, such as windshield wipers and door locks, into a single control unit. The units reduce the amount of wires used, save space, and reduce vehicle weight. Battery Cell Monitor Units Cell monitor units gauge the voltage and temperature of batteries in electric vehicles. Transmitter Key Transmitter Key Passive Entry Systems Passive entry systems enable car doors to be locked and unlocked without handling the transmitter key but by pressing a switch on the door or door handle. Passive Engine Start Systems Passive engine start systems enable car engines to be started or shut down without handling the transmitter key but by pressing a switch from the driver’s seat of a car. Battery module 37 Segment Information SSB SOCIAL SYSTEMS BUSINESS Providing solutions and services for realizing a secure, safe, and comfortable society SSB is aggressively reforming its business structure and positioning the social sensor solutions business to be a leading driver of future % of Net Sales 13% business growth. Fiscal 2008 in Review Performance suffered from restrained capital investment SSB net sales declined 6.3% year on year to ¥79.9 billion and operating income fell 24.0% to ¥5.4 billion in fiscal 2008. In the railway infrastructure business, demand contin- ued to grow for ticket gates, system monitoring panels, data collection equipment, and other equipment related to new rail line construction in the first-half, but rapidly deteriorat- ing business conditions led customers to restrain capital investment in the second-half, causing full-year railway infra- structure sales to end up below the previous year level. Market contraction for traffic control and road man- agement systems continued from the previous year, and sales remained sluggish amid restrained public sector investment. In maintenance operations related to the aforementioned segments, railway infrastructure-related project orders grew for IC systems and projects connected to new railway con- struction, but the increases in those segments were not enough to make up for the overall impact from the con- tracting credit industry and restrained capital investment. The ID management solutions business was impacted by the sharp reduction in the manufacturing industry and a dip in demand for projects related to electronic payment. Software business sales declined as demand subsided for account settlement software in the logistics industry, which was a main driver for segment demand last year, and decreasing commissioned development projects for the mobile phone industry. 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* 2005 2006 2007 2008 （Billions of yen） 2009 （Plan） 91.8 90.5 1.3 0.2 0.0 0.0 0.0 1.1 4.4 4.8% 3.9 3.2 4.3 105.9 101.8 4.1 0.5 0.0 0.0 0.0 3.6 8.1 7.6% 5.1 3.3 3.9 85.2 81.0 4.2 0.6 0.0 0.0 0.0 3.6 7.0 8.3% 2.6 3.3 1.7 79.9 75.5 4.4 0.2 0.0 0.0 0.0 4.1 5.4 6.7% 3.4 2.8 1.9 66.0 65.5 0.5 0.0 0.0 0.0 0.0 0.5 4.0 6.1% * FY2009 (Plan) adopted from FASB Statement No.131, Disclosures about Segments of an Enterprise and Related Information. * Projections for FY2009 are based on exchange rates of ¥95/US$ and ¥125/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as inter-segment transactions and head office expenses that are not apportionable. * Projected figures for R&D costs, depreciation costs, and capital expenditures are not publicized. Check It Out! Analysis of external environment [Reference] Change in the number of rail transport passengers (year on year) Private Railways Total JR Railway Company (%) 3 2 1 0 -1 -2 -3 -4 -5 3 FY2008 4 5 6 7 8 9 10 11 12 1 2 3 FY2009 Source: Rail Transport Overview, Ministry of Land, Infrastructure, Transport and Tourism SSB’s business covers a broad range of society, and there are no specific economic indicators that link closely to performance. In the railway segment, for example, SSB sales are strongly influenced by customer budgets for IC card equipment installation and new rail- way construction plans, and these budgets are determined by railway company revenues, which largely depend on the number of passen- gers in a particular year. 38 Hiroshi Fujiwara Managing Officer Company President, Social Systems Solutions Business Company Business Strategy and Outlook for Fiscal 2009 Building up the social sensor solutions business and advancing structural reform We forecast a decline of 17.4% year on year to ¥66.0 billion in net sales and a decrease of 25.3% to ¥4.0 billion in oper- ating income in fiscal 2009. We expect the sluggish business conditions and restrained public investment trend to persist throughout fiscal 2009 and lead to full-year sales declines for the railway infrastructure systems and other businesses. While unfa- vorable conditions persist, SSB management will continue to reinforce its organizational structure and lay the ground- work for a growth structure for the future. While continuing to develop further system needs for enhancing security and safety in the railway industry, we established the social sensor solutions business. The social sensor solutions business is developing sen- sor technology for the social sector using technology cultivated from its extensive operations in factory automa- tion and other fields. Sensors located in public settings can be used to identify and gather data on the movement and changes in movement of people, automobiles, and other objects. The data can then be used to support the creation of safer and more secure communities. SSB is also stepping up to the challenge to leverage the strengths of the Omron Group to develop new markets for the Group’s products and technologies. SSB is currently making great strides in developing wider applications for the Group’s image processing technologies. Image sen- sors are being developed for various applications ranging from improving safety in train stations by sensing the flow of people and crowd congestion on train platforms, to enhancing marketing and sales by identifying visitors to commercial facilities, to identifying vehicles entering fac- tory sites for theft prevention. (Refer to page 25.) What’s New Segment Sensors—Marketing solutions using face recognition technology in com- mercial facilities SSB launched “segment sensors” as its first foray into the social sensor market. Introduced in fiscal 2008, segment sensors integrate Omron’s proprietary face recognition technology with strategically positioned cameras, for example in entry- ways or at commercial facilities. Using the images captured by the cameras, the sensors identify and collect data on the age, sex, and other attributes of each visitor. The increasing diversity in people’s lifestyles is changing the market landscape from an age of “make it and someone will buy it” to an age in which buyers must be provided with a motivation to purchase a product or they will not buy it. Responding to this transformation is a major management issue in the retail industry. It is becoming increasingly critical for store operators to accurately identify their customers along with the changing trends in customer attributes and to implement swift and astute adjustments to their product lineups. Segment sensors are pivotal to meeting these needs. SSB is also seeking to expand the applications for segment sensors outside the retail industry. Solutions are under development for wider area coverage, such as for the expanding commercial use of space inside train stations, and products using image-sensing technology to identify specific attributes other than age and sex. Social Sensing Collection of visitor data Collection of event visitor data Bicycle and Pedestrian Sensors Sensors are fundamental components for real- izing Japan’s national Driving Safety Support System. Mounted primarily at intersections, sensors help prevent accidents involving bicy- clists and pedestrians. Non-Contact IC Card Automated Ticket Gates Non-contact IC-card automated ticket gates instantly read information contained on an IC card held above the machine. These new auto- matic ticket gates control passenger access via a non-contact IC-card system. Monitoring of boarding passengers Collection of visitor data Monitoring of traffic volume Female Age range: 20s Sensing Sensors detecting movement in train stations and commercial facilities contribute to optimal facility design and planning. 39 Segment Information HCB HEALTHCARE BUSINESS Health and medical devices and services for home and medical institutions Omron Healthcare Co., Ltd. (HCB) is seeking to expand business in emerging countries and developing products in line with its “Healthcare % of Net Sales 10% at Home” concept and its long-term business plan. Fiscal 2008 in Review The economic recession and strong yen led to declines in sales and income HCB net sales declined 10.9% year on year to ¥63.8 bil- lion and operating income fell 48.5% to ¥4.8 billion in fiscal 2008. Sales of pedometers and electric toothbrushes were brisk in Japan in the first half. Sales of home blood pres- sure monitors and body composition monitors, which were already slowing in the first half, plummeted in the second half as business conditions worsened and major retailers stepped up their inventory adjustments. Legislation by the Japanese government requiring physical examinations and health guidance to be offered to all holders of national health insurance aged 40 to 70 in fiscal 2008, did not cre- ate the desired, stimulating effect for the market. Equipment sales to medical institutions were boosted in the first half by large-scale orders but started falling in the second half as institutions reduced spending on new equipment. Full-year sales to medical institutions ultimately fell below the previous year level. Overseas sales held strong in the first half, supported by expanded sales channels via major distributors in North America. Sales were also brisk for blood pressure moni- tors in developing countries, specifically China and Russia and countries in Eastern Europe and the Middle East, where awareness of lifestyle-related disease prevention is growing as living standards rise. However, sales in devel- oping nations slowed considerably when the economic recession intensified in the second half. This slowdown, coupled with the strong yen, resulted in sales in develop- ing countries declining 3.1% for the full fiscal year. Recognizing the challenging conditions, HCB launched aggressive marketing initiatives to boost sales in China and focused on fulfilling needs for its higher-priced line of blood pressure monitors. HCB also conducted dynamic market- ing campaigns focused on Mother’s Day, Father’s Day, and other occasions, and displayed large-scale advertise- ments accompanied by in-store promotions. These efforts successfully raised full-year overseas sales above the pre- vious year level. 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* 2005 2006 2007 2008 （Billions of yen） 2009 （Plan） 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 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 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 63.8 28.3 35.5 12.0 14.3 2.1 6.7 0.4 4.8 7.6% 4.4 1.2 1.8 61.5 29.0 32.5 11.0 12.0 2.2 6.8 0.5 4.0 6.5% * FY2009 (Plan) adopted from FASB Statement No.131, Disclosures about Segments of an Enterprise and Related Information. * Projections for FY2009 are based on exchange rates of ¥95/US$ and ¥125/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as inter-segment transactions and head office expenses that are not apportionable. * Projected figures for R&D costs, depreciation costs, and capital expenditures are not publicized. 40 Check It Out! Analysis of external environment Changes in domestic electronics market (blood pressure monitors) (Billions of yen) 18 15 12 9 6 3 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY2007 FY2008 Omron Products Other Products Source: Gfk Domestic sales of blood pressure monitors were slightly affected by sluggish market conditions, but end-user sales regained a recov- ery track in the fourth quarter of fiscal 2008. Yoshihito Yamada Executive Officer Company President Representative Director and CEO, Omron Healthcare Co., Ltd. Business Strategy and Outlook for Fiscal 2009 Expand business in developing nations where health awareness is rising We forecast a decline of 3.6% year on year to ¥61.5 billion in net sales and a decrease of 17.4% to ¥4.0 billion in oper- ating income in fiscal 2009. We expect the market environment to become more severe in Japan and other developed countries with mature economies as the economic recession continues to damp- en private consumption and limit investments by medical institutions. Accordingly, we anticipate sluggish sales of healthcare devices and equipment for medical institutions. Economic conditions will likely make a temporary drop in consumption unavoidable in China, India, Eastern Europe, the Middle East, and other developing countries, but the potential for medium- and long-term growth in the health- care equipment markets in these countries and regions remains unchanged. HCB plans to continue developing innovative equip- ment based on its “Healthcare at Home” concept of personal health management which allows medical facili- ties to utilize, data measured at home. In line with this, HCB is developing healthcare devices compatible with wireless Bluetooth, FeliCa contactless IC cards, and other communications technology, and devices that are com- patible with various types of equipment, such as computers and mobile phones. Following the shift in focus from treat- ment to prevention, HCB is fortifying its ability to develop new product proposals for equipment used in the pre- vention of lifestyle-related diseases, such as vascular screening devices. Overseas, we plan to actively introduce products in lower price brackets in countries where health conscious- ness is rising as a strategy to stimulate demand and further establish the Company’s presence in developing markets. What’s New Expanding sales in developing countries, capturing top Russian market share for blood pressure monitors HCB is aggressively investing to fortify its marketing capabilities in developing coun- tries, primarily China, Russia, India, Mexico, and Brazil, where the standard of living is rising and the growing number of people with lifestyle-related diseases is increas- ing public awareness of health issues. HCB is actively fortifying its worldwide business infrastructure and increasing recognition of the Omron brand as it establishes footholds in growth markets. The Company established a branch office in Russia in 2005 and reorganized its agency network. In October 2008, HCB offered a lineup of blood pressure monitors that succinctly matched the needs in the Russian market, and as quickly as March 2009 claimed top market share (research by RMBC). HCB also actively expanded its sales network across China by adding three new service centers during 2008, and now operates 20 marketing offices and 62 service centers. A marketing office was also established in Mexico in February 2009, and a full-time manager was dispatched from Japan to the marketing office in India. As we solidify our position in growth markets, we are strengthening business infrastructure and raising the profile of the Omron brand. Digital Blood Pressure Monitor “Spot Arm” HEM-1020 The HEM-1020 digital blood pressure monitor automatically notifies users whether or not their arm is in the correct position, which it determines from the angle of the arm band. Users can relax and get a reading without bending their elbow. MediClean Sonic Electric Toothbrush HT-B551 The HT-B551 MediClean Sonic Electric Toothbrush is the world’s first toothbrush with a built-in three-dimen- sional acceleration sensor. The sensor detects which area of the teeth is being brushed and automatically adjusts the bristle move- ment for the most effective brush application. Jog Style Activity Monitor HJA-300 Omron’s Jog Style Activity Monitor HJA-300 allows individual data input for personalized cal- culation of physical exertion. Personalized programming captures detailed individual data for activities ranging from walking to jogging and other high-stress activities and increases the accu- racy of data related to calories burned. 41 Segment Information ENVIRONMENTAL SOLUTIONS BUSINESS HQ, ELECTRONIC SYSTEMS & EQUIPMENTS DIVISION HQ, AND OTHER BUSINESSES Providing environmental equipment and solutions, computer peripheral equipment, and industrial embedded CPU boards In fiscal 2009, the Business Development Group was reorganized into the Environmental Solutions Business Headquarters and the Electronic % of Net Sales 2% Systems and Equipments Division. Fiscal 2008 in Review Earnings declined despite efforts to meet the demand for energy conservation equipment In fiscal 2008, net sales in this division declined 7.0% year on year to ¥14.5 billion and operating income broke even. In existing businesses, restrained capital investment led to sluggish sales of uninterruptible power supply units, broadband routers, and other devices in the computer peripheral equipment business. Intensifying competition caused a decline in sales of radio frequency identification (RFID) devices, which are the core products of the new businesses segment. Sales of energy monitoring systems expanded amid growing awareness of energy consump- tion issues. Business Strategy and Outlook for Fiscal 2009 Establishment of the Environmental Solutions Business Headquarters and Electronic Systems and Equipments Headquarters We forecast an increase of 20.4% year on year to ¥17.5 billion in net sales and an operating loss of ¥1.0 billion in fiscal 2009. In fiscal 2009, the environmental products and com- puter peripheral equipment businesses carried out by the Business Development Group were established as inde- pendent operations and respectively designated the Environmental Solutions Business Headquarters and Electronic Systems and Equipments Headquarters. In addi- tion, the RFID business was transferred to the Industrial Automation Business (IAB) and Electronic Components Business (ECB). The Environmental Solutions Business Headquarters is focused on growing operations of the existing energy management business as well as the industrial and social environmental solutions business. The Omron Group has taken extensive steps to measure and make visible the energy used by each of the Group companies with the result of significant energy savings through fiscal 2008. The new Environmental Solutions Business Head- quarters is charged with cultivating the environmental business operations currently dispersed throughout the Group to create a new profit base for the company, with the objective of raising the total net sales from environ- mental operations to ¥50.0 billion in fiscal 2013. The operations of the Electronic Systems and Equip- ments Headquarters are focused on the computer peripheral equipment business and expanding the mar- ket for embedded computers that are optimized for industrial applications requiring the highest level of relia- bility and consistent long-term supply capabilities. Embedded Mini-CPU Boards Omron’s embedded central processing unit (CPU) board is a high performance and low energy con- sumption processor the size of a credit card. Designed specifically to provide the high level of reliability and long-term steady supply essen- tial for industrial applications, the CPU board’s small size vastly facilitates product development of industrial electronic devices. 2005 2006 2007 2008 （Billions of yen） 2009 （Plan） Check It Out! Analysis of external environment Other Businesses Results and Plans Fiscal Year Net sales* Domestic Overseas Operating income* Operating income margin* R&D expenses* Depreciation and amortization* Capital expenditures* 15.2 15.0 0.2 0.3 2.2% 10.2 1.0 7.0 15.0 14.9 0.1 0.4 2.9% 9.7 1.3 3.6 15.6 15.4 0.3 0.1 0.6% 8.6 1.7 1.4 14.5 14.3 0.2 0.0 0.3% 7.5 3.2 1.4 17.5 16.5 1.0 (1.0) — Changes in Japan’s CO2 emissions level (Million tons) 1,325 1,295 1,265 1,235 1,205 1,175 98 99 00 01 02 03 04 05 06 07 Source: Based on the data of National Institute for Environmental Studies CO2 emission volumes in Japan are rising both overall and on a per-person basis. * FY2009 (Plan) adopted from FASB Statement No.131, Disclosures about Segments of an Enterprise and Related Information. * Projections for FY2009 are based on exchange rates of ¥95/US$ and ¥125/Euro. * The sales figures given indicate sales to external customers and exclude inter-segment transactions. Operating income indicates income including internal income prior to the deduction of amounts such as inter-segment transactions and head office expenses that are not apportionable. * Projected figures for R&D costs, depreciation costs, and capital expenditures are not publicized. 42 Intellectual Property Strategy The Intellectual Property Center contributes to the effective use of the Omron Group’s intellectual asset by analyzing and visualizing potential value and effectiveness of Omron and other companies’ technologies from an independent standpoint. The Center plays a crucial role in technology management, supporting the long-term maximization of Omron’s corporate value. Patent Applications and Approvals in the United States Patent Applications in China 200 150 100 93 137 178 169 163 157 132 127 119 88 82 77 81 62 44 29 50 0 200 150 100 50 38 162 160 150 142 120 105 73 01 02 03 04 05 06 07 08 (FY) 0 01 02 03 04 05 06 07 08 (FY) Applications Approvals Applications Contributing to Efficient and Effective Investment in Development The Intellectual Property Center invests in intellectual prop- erty focused on core business themes with the objective of contributing to business through the efficient and effec- tive use of limited management resources. Investments are made from the immediate perspective of fortifying cur- rent core businesses and from the long-term perspective of advancing in the direction of next-generation techno- logical innovation to ensure that the core businesses will remain vital in the future. Investment target areas are selected using rigorous reviews of the investment effects and follow a policy of utilizing the minimum investment necessary in areas deter- mined to be absolutely essential, such as reducing business risks and improving business positioning. The Center also conducts identification and analysis of technological trends in new markets, such as the devel- oping energy market, to ensure we are fully prepared “to create Omron-style business using fundamental Omron technology” without missing the positive developments that occur in the business environment. The Center conducts operations in accordance with economic conditions while helping to maximize the results of developmental investment by strengthening the Group’s internal coordination and ability to respond to rapidly chang- ing market conditions. This is done by looking at the Group’s fundamental technologies through a larger frame- work and by firmly incorporating them into each business unit’s operations. The Center is a key component for sup- porting the growth of Omron’s business value over the long term. Promoting Globalization of Intellectual Property Intellectual Property and R&D-related Data Capabilities We are continuing to develop our intellectual property capa- bilities on a global scale for the period beyond the Grand Design 2010 (GD2010) management plan. To ensure the most effective use of resources during the current global recession, our overseas activities related to intellectual prop- erty are being concentrated in China and the United States. In China, we have expanded both our production and development capabilities and are establishing intellectual property functions to support localized innovation. However, several issues must still be resolved before we can begin raising expectations for the local creation of key technologies in the medium and long term. We are work- ing to quickly establish a working environment conducive to global development and are conducting local training on intellectual property issues to establish a corporate culture that fully respects intellectual property rights. We are also providing intensive training in Japan for Chinese staff to cultivate local, intellectual property management and spe- cialist staff as well as with the aim of greatly enhancing our intellectual property capabilities in China. Similar train- ing and staff development programs are being conducted at local subsidiaries in the United States. We are making steady progress in fortifying our foun- dation for global intellectual property capabilities through the active cultivation of staff capable of providing signifi- cant contributions to the Group’s intellectual property at our global operating sites. We are also establishing an intel- lectual property management system and reducing intellectual property risks to achieve results that are key components of strong global intellectual capabilities. Fiscal Year Number of patents Applications Approvals Total patents R&D expenses (billions of yen) Sales/R&D expense ratio R&D staff (number of employees) 2004 2005 2006 2007 2008 1,216 676 4,426 49.4 8.1% 1,384 1,509 705 4,538 50.5 8.1% 1,591 1,300 836 5,206 52.0 7.1% 1,630 1,255 943 5,717 51.5 6.7% 1,622 1,119 826 5,205 48.9 7.7% 1,509 43 Corporate Governance, Compliance, and Risk Management Omron is committed to maintaining and exercising a proper governance system while increasing management transparency. To firmly establish a high standard of corporate ethics, we will continue to enhance our compliance system and strengthen a risk management framework that supports ongoing improvement in corporate value. 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, outside directors now represent two out of seven board members. In addition, three out of four corporate auditors are external. Emphasizing the independence of outside directors and external auditors, Omron has specified strict criteria for qualification of candidates, which are even more exact- ing than the regulations of Japanese Corporate Law. For example, candidates for outside directors and the organi- zations to which they belong must not have assumed the role of representative or employee of the independent accounting auditor for the Omron Group for five years prior to the nomination, may not be a director of any principal partner, and may not be a principal shareholder of the Omron Group. Director Compensation The Compensation Advisory Committee under the Board of Directors determines the compensation structure for directors and corporate auditors. The committee comprises four directors, excluding the chairman, vice chairman, and president. The chairman of the committee, appointed by resolution of the Board of Directors, is an outside director. This is to ensure objectivity and to increase transparency. Directors’ and Corporate Auditors’ Remuneration (FY2008) Remuneration (Millions of Yen) 388 80 468 No. of People (Retiring Officers) 11（4） 5（1） 16（5） Directors Corporate Auditors Total No. of Outside Directors and External Corporate Auditors included in Total 7（2） 67 • Director compensation consists of basic compensation (monthly salary), bonus, and stock-based compensation*. • Outside director compensation consists of basic compensation (monthly salary). • Corporate auditor compensation consists of basic compensation (monthly salary). * Stock-based compensation is administered following guidelines specifying set remuneration amounts to be paid on a monthly basis and utilized to acquire Company stock (through a director stock ownership plan), which is then held during the individual’s tenure. Corporate Governance Basic Policies Omron is making an effort to enhance its corporate gov- ernance based on the belief that the most crucial factor in earning stakeholders’ support is to establish an optimal management structure and execute fair and appropriate business operations while ensuring the proper function- ing of a verification system (monitoring system), and to realize the aim for continuous corporate growth. In line with this basic policy, Omron maintains an exec- utive officer system with clearly segregated management oversight and business execution functions to oversee business activities. Directors other than the president do not concurrently serve as executive officers. In addition, the system of internal companies vests each department’s top management with wide-ranging authority with the aim of accelerating decision making and improving operating efficiency. In June 2008, Omron established the Corporate Governance Committee to further enhance management fairness and transparency. Management and Oversight Structure Omron has decreased the number of members of its Board of Directors to seven to improve efficiency and support substantive discussion. In addition, the president is the only director that is also directly involved in business exe- cution. The other directors are distanced from day to day business execution and serve to fulfill a management mon- itoring function. To increase objectivity in management and to strengthen management oversight, the Chairman of the Board of Directors and the CEO are segregated. The Chairman of the Board of Directors serves as a monitor representing stakeholders and does not take part in the execution of business. Advisory committees (personnel, compensation and president & CEO selection) have been established with the two outside board members chairing the committees to enhance objectivity and transparency for nomination, promotion and compensation of directors/executive offi- cers as well as nomination of the president. Auditing Functions The Board of Corporate Auditors, consisting of four audi- tors (including three outside corporate auditors), monitors governance practices, management conditions, and the daily activities of management and directors. The Group Audit Office, which functions directly under the President & CEO, periodically conducts internal audits of account- ing, administration, business risks, and compliance in each headquarters division and in each business company as part of its internal auditing function. The Audit Office also offers specific advice for improving business functions. 44 Corporate Governance Structure Shareholders Meeting Board of Corporate Auditors Board of Directors Board of Corporate Auditors Office Board of Directors Office Independent Auditor Executive Organization President & CEO Executive Council Personnel Advisory Committee President & CEO Selection Advisory Committee Compensation Advisory Committee Corporate Governance Committee Group CSR Committee Head office divisions Business companies Corporate Internal Auditing HQ Board of Directors (BOD) The BOD decides important business matters such as company objectives and management strategies, while overseeing the business practices. 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 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. Corporate Governance Committee Chaired by an outside director, this committee discusses measures to continuously enhance corporate governance and increase fairness and transparency in management. President & CEO Selection Advisory Committee Chaired by an outside director, this 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. Comments by Outside Director Career Summary April 1966 Joined Ricoh Company June 1992 Appointed Director June 1994 Appointed Managing Director April 1996 Appointed President and Representative Director April 2007 Appointed Chairman and Representative Director (current position) June 2008 Appointed Director of Omron Corporation (current position) Masamitsu Sakurai I am honored to be reappointed as an outside director for Omron Corporation. In this economic crisis, which is said to be the worst in a century, we have reached the point where we will learn exactly how the coordinated worldwide financial policies and fis- cal stimulus measures will be able to restore vitality to the global economy. I firmly believe that the world’s corporations and industries must act as the engine in this revitalization. In addition to deciding the current policies and measures, I believe we also must set a medium- and long-term course for the Japanese economy and society. I think it is crucial that we consider the future “make up” of Japan, in other words, what long-term vision we should have for Japan as a nation, and in doing so we must not forget that fundamental structural changes will be needed to realize that vision. One important area in which the advanced nations of the world are demonstrating their leadership is the establishment of a framework for preventing global warming in accor- dance with the Post Kyoto Protocol treaty. Japan is taking the initiative to implement changes needed to create a low-carbon society. Realizing a low-carbon society is pivotal for Japan as a nation and for fortifying the global competitiveness of Japanese companies. Omron is taking an active role by working to reduce the CO2 emissions from its oper- ations and also through its contribution to the School New Deal Program recently announced by Japan’s Ministry of Education, Culture, Sports, Science and Technology to provide tech- nological upgrades to schools in Japan. I am eager to apply my experience to help guide Omron’s management activities as a company working to shape Japan’s future as a nation. Kazuhiko Toyama Dialogue between the President Sakuta and Mr. Toyama is on page 20. 45 Internal Controls Omron conducts two audits to ensure the healthy and effective operation of its organization. The Internal Control Comprehensive Audit is conducted to ensure that the internal controls are functioning effectively in each of the four objective areas of financial report accuracy, legal compliance, operating efficiency, and asset safeguard- ing. The Management Audit examines the solutions and improvement measures implemented for specific man- agement issues. The Internal Control Comprehensive Audit includes a self-assessment system of check sheets designed to enable the audited department to deepen understanding of issues identified in the audit and implement more effec- tive improvement activities. In addition, the Company has established a Corporate Auditor Office and placed full-time auditors in each of four regions of business (the United States, Europe, Asia Pacific, and Greater China) to imple- ment the Internal Control Comprehensive Audit at its business sites worldwide. Award of Excellence received at the 2009 Integrity Award Grand Prize In recognition of the broad coverage and high level of integrity and transparency of its internal control system, Omron was awarded the Award of Excellence at the 2009 Integrity Award Grand Prize ceremony held by the Integrity Award Council. The Company was particular- ly commended for its longstanding management commitment to systematizing and practicing CSR. Compliance and Risk Management Note: Please see Business and Other Risks on page 58 for further details. Basic Policies Omron continually sees to strengthen its compliance sys- tem and maintain a risk management framework to support fair and appropriate business operations through proper administration and control of risk in every aspect of its man- agement and business and to ensure steady corporate growth and preservation of management resources. Global Promotion of Compliance Activities The Omron Group has established a corporate ethics pro- motion system designed not only for domestic affiliated companies but for affiliates outside Japan as well under the Group CSR Committee, which oversees CSR imple- mentation and activities. In fiscal 2008, the Company appointed corporate ethics officers in the Greater China and Asia Pacific regions. We plan to keep appointing cor- porate ethics promotion officers in our operating regions around the world and conduct training on legal and other issues, as we seek to realize comprehensive compliance coverage for the entire Omron Group. We have also des- ignated each October as Corporate Ethics Month in Japan and are inviting external ethics experts to conduct execu- tive training and providing on-the-job training for all employees. 46 Upgrading Whistle Blower Hotline Omron maintains a whistle blower hotline that protects the privacy and anonymity of employees and encourages early discovery of legal violations and employee trans- gressions of the CSR Practice Guidelines to support immediate communication to management and early cor- rection. In Japan and North America, a whistle blower hotline is in place inside and outside of the company for Omron Group executives, full-time employees and tem- porary staff as well as their families. In fiscal 2008, a direct access newly became available through the electronic bul- letin board on Intranets in Japan, in addition to conventional telephone and email accesses. In fiscal 2008, a total of 24 hotline contacts were made in Japan and 8 in North America. The greatest number of contacts in Japan sought advice regarding labor standards compliance and respect for individuality and diversity, which numbered 10. During the fiscal 2008 Corporate Ethics Month, the Company provided power harassment recog- nition training and conducted discussions centered on the theme of human rights at worksite training sessions tar- geting all employees. Fortifying Information Security Management Omron is continually upgrading its information security management system to protect against leaks and ensure the appropriate handling of confidential information sup- plied from business associates, personal information and its own company information. In fiscal 2007, the Company Information Security Management launched Committee to establish management controls and pro- mote employee education on information security issues. the In fiscal 2008, Omron continued education for all Group employees in Japan, while also reviewing and reinforcing individual information management rules. This resulted in full-establishment of a PDCA cycle in Japan to support review of information management sta- tus under the promotion system. In the future, Omron will strive to improve and disseminate regulations and verify whether information security is also maintained properly in regions outside Japan. Crisis Management Omron has established Basic Crisis Management Guidelines designed to minimize the impact of events that, when they arise or as they are occurring, have the poten- tial to significantly impair management resources and business continuity or that can damage social trust (value) in the Company. Based on these guidelines, the Company has specified a separate set of Basic Disaster Countermeasures for natural disasters, such as earthquakes, storms, and floods, and incidents of explosions, fire, or other calamity. In fiscal 2008, the Company commenced a compre- hensive review of its crisis management policies centered on countermeasures for a worldwide outbreak of a new influenza virus. Following the recommendations in the Japanese government action plan and health guidelines, the Company is revising its countermeasures, policies, and actions plan (such as business continuity planning, infec- tion control measures) to ensure maximum effectiveness. BASIC POLICIES STIPULATED IN OMRON’S CRISIS MANAGEMENT RULES 1. Place human life and personal safety at the top of the list of priorities. 2. Give high priority to legal/regulatory compliance and respect for social rules. 3. Minimize the negative impact of crises on customers and society. 4. Curtail the negative impact of crises on Omron’s business and strive to ensure smooth continuation and quick restoration of business operations. 5. Take necessary measures in a sincere and consistent manner. 6. Disclose information appropriately and remain accountable. 47 Corporate Social Responsibility (CSR) Actively practicing the Omron Principles is an integral part of fulfilling our corporate social responsibility. CSR is a fundamental aspect of our management strategy, and we accordingly have set specific objectives for our CSR. Working for the Benefit of Society We place the fundamental tenet of “Working for the ben- efit of society” at the highest level in our corporate value. This belief is our core value that a company exists to serve society, and that only when this is accomplished should the company earn profits, enjoy sustainable growth and receive trust and respect from society as a good corporate citizen. The belief is also to emphasize our commitment to the stakeholders in the society. This is the very spirit behind the Omron Corporate Motto established in 1959, “At work for a better life, a better world for all,” which we practice in every facet of our activities. CSR Basic Policies The long-term management vision GD2010 that will cul- minate in fiscal 2010 places the Company’s involvement in society at the forefront and outlines three aspects of our social participation: 1. contributing to a better society through business operations; 2. always demonstrating fairness and integrity in the promotion of corporate activ- ities; and 3. showing a commitment to addressing societal issues as a concerned party. We are diligently and con- CSR Management Structure scientiously reviewing and addressing issues as we set specific objectives and exercise CSR management with a view to enhancing the Company’s long-term corporate value. CSR Management System Omron considers it essential to embed CSR into its man- agement strategies, and to practice CSR as part of its business operations. As such, Omron has worked to strengthen its CSR management system globally. In the end of fiscal 2007, the Group CSR Committee was set up to help the management team assess the over- all status of CSR and define the specific issues that the Omron Group faces. Chaired by the president, the com- mittee’s main tasks include formulating the Omron Group’s CSR policy and strategies as well as promotion and monitoring of CSR activities in key areas. Members are presidents of business companies, general managers of head office administrative divisions, and presidents of regional group head offices. Business companies and head office divisions (including the environment department and the legal affairs department) are responsible for put- ting into action the policies and strategies determined by the committee. Issues Identified by the Sustainability Strategy Assessment To objectively grasp its own CSR management status, Omron conducted diagnoses of its sustainability strategies in fiscal 2008 using tools developed by an external consult- ing firm. As a result, several issues were discovered including the insufficient assessment of overseas sites' work envi- ronments by the head office and business companies, lack of systematized CSR education for employees, and others. Bases on these findings, Omron intends to enhance glob- al-level CSR activities while at the same time strengthening on-side capabilities to promote CSR practices. CSR Management Dept. Chair: President Group CSR Committee President [Covered Areas] CSR Policies/Strategies, Corporate Ethics, Human Rights/Labor Practices, Environment, CSR Procurement, Information Disclosure, etc BC Presidents Head Office Division General Managers Regional Group Head Office Presidents Issue-specific Promotion Committees Specialized Committees BC CSR Managers BC CSR Promotion Team Business Divisions Head Office Divisions CSR Managers Japanese Group Companies Support Overseas Group Companies 48 CSR through Business Activities: Targets and Results GD 3rd Stage (FY2008 –10) focus activities/targets Take on challenge of creating products/services that contribute to solving social issues with focus on four areas of safety, security, health, and environment. *Rating: Self-assessment was conducted to comprehensively evaluate the progress of activities, including achievement of GD-III (third stage of Grand Design 2010) targets (FY2008–10), degree of global expansion of activities, external evaluation and comparison with other companies, etc. More progress than initially expected Progress Needs more effort FY2008 results Rating* FY2009 policy/targets Safety and Security (Products/services for various sectors of society) Ensuring safety and security for production sites Promoted safety businesses (various safety sensors) to maintain safety at worldwide pro- duction sites. Toward a safer, more secure society Launched social sensor solutions business that contributes to safety and security of society in 4 domains-train stations, roads, industry and commerce. Released 4 vision sensors as core products. Participated in large-scale demonstration tests for driving safety support systems (DSSS) sponsored by Universal Traffic Management Society of Japan. Embedded personal computers that ensure equipment safety and security Promoted R&D for RAS sensing technology for enhancing reliability, availability, and serv- iceability of industrial-use electronic devices using computer technology. Adopted RAS sensing technology for industrial products that require extremely high reliability. Health (Products/services supporting lifestyle disease prevention/treatment) Contributed to prevention, treatment, and management of lifestyle diseases through blood pressure monitors, thermometers, pedometers, and vascular screening devices in 100+ coun- tries throughout the world. Environment (Products/services supporting a small carbon footprint society) Environmental solutions Conducted in-house verification of CO2 reduction solutions business that helps companies prevent global warming. Confirmed possible reduction of 11% in electricity consumption (reduction of 90 tons CO2 per month) through system deployment in a Group company. (See “Special Feature 1” for more details.) Environmental components business • Promoted solar power conditioner*1 business related to new energy sources. • Promoted environmental sensing business (ionizers*2, particle sensors*3, etc., which con- tribute to a cleaner production environment). • Developed battery management system for next-generation electric vehicles. Ensuring safety and security for production sites Continue promoting safety business to maintain safety at glob- al production sites. Note: Aim to establish an indicator for objective measurement of progress by the end of FY2009. Toward safer, more secure road transportation Continue tests with car manufacturers to verify the effective- ness of DSSS systems. Embedded personal computers that ensure equip- ment safety and security Promote adoption of common platform, standardization, and options for RAS sensing technology to expand the range of prod- ucts employing the technology. Note: Aim to establish an indicator for objective measurement of progress by the end of FY2009. Offer home and professional use products/services that help prevent, treat, and manage lifestyle diseases globally. Accelerate sales expansion by meeting needs of emerging and fast-grow- ing countries in FY2009. Note: Aim to establish an indicator for objective measurement of progress by the end of FY2009. Environmental solutions Promote CO2 reduction solutions business designed to help com- panies prevent global warming. • Achieve CO2 emissions reduction rate of approx. 10% on aver- age among client company sites employing Omron solutions. • Develop a new method for further reduction in CO2 emissions and conduct in-house verification. Environmental components business • Promote solar power conditioner business related to new ener- gy sources. • Promote environmental sensing business. • Deploy battery management system on next-generation elec- tric vehicles. *1 A solar power conditioner converts DC power from solar panels to home-use AC power, and connects it to a Note: Aim to establish an indicator for objective measurement of progress by commercial power source from the power company. *2 An ionizer can neutralize and eliminate static electricity generated in production processes. *3 A particle sensor enables high-precision monitoring of airborne particles. the end of FY2009. Inclusion in Internationally Renowned SRI Indices Highly recognized for its proactive CSR practices, Omron has been included in two international SRI indices: Morningstar SRI Index and Ethibel Sustainability Index. Omron is also included in several SRI and eco-friendly funds such as the Corporate Governance Fund set up by Japan’s Pension Fund Association. Since fiscal 2008, Omron has also been included in ASN Bank’s SRI trust fund in the Netherlands in recognition of the Company’s commitment to addressing human rights (as of March 31, 2009). For more details about Omron’s CSR activities, please see our Sustainability Report 2009. http://www.omron.com/corporate/csr/ 49 Directors, Corporate Auditors, and Executive Officers As of June 23, 2009 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 Chairman of the BOD Yoshio Tateisi Soichi Yukawa Satoshi Ando Hidero Chimori Senior Managing Officers Executive Officers Yoshinobu Morishita Director and Eisuke Nagatomo Managing Officers Executive Advisor Nobuo Tateisi Koichi lmanaka Takuji Yamamoto Yoshinori Suzuki Hideo Higuchi Hiroshi Fujiwara Kazunobu Amemiya Yutaka Fujiwara Kojiro Tobita 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 50 Akio Sakumiya Tatsunosuke Goto Yoshisaburo Mogi Hiroshi Miyagawa Koichi Tada Kiichiro Kondo Shigeki Fujimoto Masahiro ljiri Masaki Arao Masayuki Tsuda Hideji Ejima Masaki Teshigahara Taiji Sogo Yoshihito Yamada Masaki Haruta Koji Doi Hisato Takano Takashi Ikezoe Financial Section (U.S. GAAP) CONTENTS 51 Financial Highlights 52 Six-year Summary 53 Fiscal 2008 Management’s Discussion and Analysis 58 Business and Other Risks 63 64 65 66 Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 60 Consolidated Balance Sheets 88 Independent Auditors’ Report 62 Consolidated Statements of Operations Notes: Financial Highlights, Six-year Financial Summary, Fiscal 2008 Management’s Discussion and Analysis, and Business and Other Risks are unaudited. Financial Highlights Omron Corporation and Subsidiaries Years ended March 31, 2009, 2008, and 2007 For the year: Net sales Income (Loss) from continuing operations before income taxes, minority interests, and equity in loss of affiliates Income (Loss) from continuing operations Net income (loss) Per share data (yen and U.S. dollars): income from continuing operations Basic Diluted Net income (loss) Basic Diluted Cash dividends (Note 1) Millions of yen (except per share data) Thousands of U.S. dollars (Note 2) (except per share data) FY2008 FY2007 FY2006 FY2008 ¥ 627,190 ¥ 762,985 ¥ 723,866 $ 6,399,898 (39,133) (29,172) (29,172) 64,166 39,329 42,383 64,279 37,094 38,280 (399,316) (297,673) (297,673) ¥ (132.2) — ¥ 172.5 172.4 ¥ 159.8 159.7 $ (1.35) — (132.2) — 25.0 185.9 185.8 42.0 165.0 164.9 34.0 (1.35) — 0.26 Capital expenditures (cash basis) Research and development expenses ¥ 37,477 48,899 ¥ 37,848 51,520 ¥ 44,689 52,028 $ 382,418 498,969 At year end: Total assets Total shareholders’ equity ¥ 538,280 298,411 ¥ 617,367 368,502 ¥ 630,337 382,822 $ 5,492,653 3,045,010 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, 2009 of ¥98=$1. 51 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 Millions of yen (except per share data) FY2008 FY2007 FY2006 FY2005 FY2004 FY2003 ¥ 262,922 123,937 82,109 79,886 63,797 14,539 627,190 ¥ 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 14,748 575,157 408,668 164,284 48,899 — 44,472 666,323 469,643 176,569 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 Income (Loss) 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 (39,133) (10,495) (277) 811 (29,172) — — (29,172) 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 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) ¥ (132.2) — ¥ 172.5 172.4 ¥ 159.8 159.7 ¥ 152.8 152.7 ¥ 122.5 120.8 ¥ 105.9 103.0 (132.2) — 25.0 ¥ 37,477 538,280 298,411 185.9 185.8 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 34.8 (6.2) (4.7) (6.8) (8.7) 4.54 (8.7) 1.09 0.804 6.01 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 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 2003 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 15 to the consolidated financial statements. 52 Fiscal 2008 Management’s Discussion and Analysis Note: The business divisions 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 subprime loan crisis originating in the United States had strong repercussions on the real economies in coun- tries around the world in fiscal 2008, and when conditions deteriorated abruptly in the third quarter, the economic conditions took on the characteristics of a global recession. Japan’s economy, which relies heavily on exports, was critically damaged during the year. The steep drop in demand and the appreciating value of the yen deeply impacted corporate earnings while employment conditions deteriorated markedly and private consumption continued to decline. Growth Rates of Real GDP for Each Country/Region CY 2007 2008 2009 Estimates Japan 2.4 -0.6 -6.2 U.S. 2.0 1.1 -2.8 EU 2.7 0.9 -4.2 China 13.0 9.0 6.5 Source: IMF “World Economic Outlook,” April 2009 Domestic Macroeconomic Environment Real Private Capital Investment % 5 0 -5 -10 Q1 Q4 Q1 Q2 Q3 2007 Q4 Q2 Q3 2008 (FY) Note: Seasonally adjusted Source: Cabinet Office, Government of Japan Machinery Orders (Manufacturing) Billions of yen % 2,000 1,500 1,000 500 0 Q1 Q4 Q1 Q2 Q3 2007 Q4 Q2 Q3 2008 10 0 -10 -20 -30 -40 -50 (FY) 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 The business environment was extremely harsh for the Omron Group in fiscal 2008. Most manufacturing indus- tries, including the Group’s clients in the automotive and semiconductor industries, implemented production adjust- ments and reduced or postponed capital spending, particularly following the degeneration of business condi- tions in the third quarter. Demand plummeted for the Company’s core factory automation control equipment. Strict inventory adjustments in the business and consumer equipment sectors also led to a steep drop in demand for electronic components. The steep production cuts in the automotive industry also led to a further decline in demand for automotive electronics. On the positive side, demand grew in the first half in some regions for blood pressure monitors and other health-relat- ed equipment on growing health consciousness in emerging economies. External factors influencing profits included a sharp decline in raw material prices and the strengthened yen beginning when economic conditions soured in the third quarter. The strong yen also impacted profits as the aver- age exchange rates increased by ¥13.4 to ¥100.7 versus the U.S. dollar and by ¥17.4 to ¥144.5 versus the euro from the previous fiscal year. Indices of Electronic Parts and Devices (Seasonally adjusted indices, 2005 average =100) Silver and Copper Prices Exchange Rates 250 200 150 100 50 05 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 80 06 07 08 05 06 07 08 05 06 07 08 Productions Shipments Inventory Source: Ministry of Economy, Trade and Industry Silver［left axis］ Copper［right axis］ US$ EUR 53 F i s c a l 2 0 0 8 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 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 companies, operating income represents gross profit minus selling, general and administrative expenses, and research and development expenses. In this market environment, Omron’s fiscal 2008 consoli- dated net sales declined 17.8% year on year to ¥627.2 billion and operating income plummeted 91.8% to ¥5.3 bil- lion despite efforts to reduce costs in every business segment, restricting large investment, and launching wide- ranging structural reform of business operations with the objective of reestablishing our revenue bases. The Company also recorded a consolidated net loss before income taxes of ¥39.1 billion and a net loss of ¥29.2 bil- lion, largely as a result of impairment losses for goodwill, Net Sales & Net Income before Income Taxes Net Income & ROE property, plant and equipment, and investment securities. Total assets declined 12.8% from the previous fiscal year owing to reduced sales and asset impairment losses. The net loss contributed to a 19.0% year-on-year decline in total shareholders’ equity, which lowered the equity ratio to 55.4%, from 59.7% at the end of the previous fiscal year. Return on equity (ROE) fell to -8.7%, as the Group was unable to extend its streak of maintaining ROE above its benchmark 10% level for five consecutive years. Billions of yen % 800 600 400 200 0 -200 Billions of yen Billions of yen 160 120 80 40 0 04 05 06 07 08 -40 (FY) 50 25 0 -25 -50 15 10 5 0 -5 -10 -15 04 05 06 07 08 (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 Consolidated net sales declined 17.8% year on year to ¥627.2 billion as the global recession and the strong yen led to declining revenue in all business segments. By region, sales declined 15.6% in Japan and decreased in all other regions as well, falling 21.1% in North America, 23.3% in Europe, 17.7% in the Greater China region, and 13.5% in Southeast Asia. Cost of Sales and SG&A Expenses The decline in sales led to a 13.0% year-on-year decrease in cost of sales. However, the cost to sales ratio rose 3.6 percentage points to 65.2%. Raw materials prices, which had risen sharply in the previous fiscal year, dropped back as economic conditions worsened, but sales revenue was strongly impacted by downward pressure on product prices and the sharp rise in the value of the yen. SG&A expenses were reduced by 7.0% from the pre- vious fiscal year as a result of company-wide efforts to counter the decline in sales by cutting costs and restrict- ing large investment. The Company reduced R&D by 5.1%, but the rapidity of the drop in sales resulted in the SG&A expense ratio growing 3.1 percentage points to 26.2% and the R&D expense ratio rising 1.0 percentage point to 7.7%. Other Expenses (Income) *See Note 12 on page 79 The net amount of other expenses (income) was a net loss of ¥44.5 billion, as loss in this category expanded ¥43.4 bil- lion from the previous fiscal year. The main factors were impairment losses for goodwill, property, plant and equip- ment, and investment securities. Net Income before Income Taxes, Net Income, and Profit Distribution As a result of the above, net income before income taxes decreased ¥103.3 billion from ¥64.2 billion in the previous fiscal year to a net loss before income taxes of ¥39.1 bil- lion. Net income declined ¥71.6 billion from ¥42.4 billion 54 to a net loss of ¥29.2 billion in fiscal 2008. Basic net income per share decreased to a ¥132.2 net loss per share, down from ¥185.9 in the previous year. Based on our profit distribution policy (see page 19) and in consideration of the earnings results, ordinary dividends of ¥25 per share were distributed in the fiscal year under review. Costs, Expenses, and Income as Percentages of Net Sales Net sales Cost of sales Gross profit Selling, general and administrative expenses Research and development expenses Interest expenses (income), net Income (Loss) from continuing operations before income taxes, minority interests, and equity in loss of affiliates Income taxes Income (Loss) from continuing operations Income from discontinued operations Net income (loss) Segment Information Dividends per Share 50 40 30 20 10 0 yen 04 05 06 07 08 (FY) FY2008 FY2007 FY2006 100.0% 65.2 34.8 26.2 7.7 0.0 (6.2) (1.6) (4.7) — (4.7) 100.0% 61.6 38.4 23.1 6.7 (0.1) 8.4 3.2 5.2 0.4 5.6 100.0% 61.6 38.4 22.6 7.2 (0.1) 8.9 3.6 5.1 0.2 5.3 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 32–42 for detailed segment business results, fiscal 2009 outlook, and strategy. 1. Review of Operations by Business Segment IAB (Industrial Automation Business) IAB net sales declined 20.0% year on year to ¥262.9 bil- lion and operating income fell 60.6% to ¥20.5 billion. Sales were suppressed by the postponement and cancellation of large-scale equipment investment projects beginning in the third quarter, particularly in the semiconductor, flat panel display, and automotive industries. Sales were also down sharply in the Asia Pacific and Greater China regions, where sales had been holding relatively firm. ECB (Electronic Components Business) ECB net sales decreased 19.6% year on year to ¥123.9 bil- lion and operating income declined from ¥12.6 billion in the previous fiscal year to a ¥2.0 billion operating loss in fiscal 2008. The result was mainly due to a further decline in demand from the semiconductor and automotive indus- tries in the second half, stepped up inventory adjustment measures in the business and consumer equipment sec- tors, and a loss of the previously steady momentum in orders for small-sized backlights and input switches for mobile devices. AEC (Automotive Electronic Components Business) AEC net sales declined 23.6% year on year to ¥82.1 billion and operating income declined from ¥1.4 billion in the pre- vious fiscal year to a ¥6.4 billion operating loss in fiscal 2008. The primary factors were the spikes in gasoline prices and the global recession, which combined to sharply reduce automobile demand. Sales were also sluggish in China and emerging economies, largely due to declines in unit sales of mid- and large-size vehicles. 55 F i s c a l 2 0 0 8 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 SSB (Social Systems Business) SSB net sales decreased 6.3% year on year to ¥79.9 bil- lion and operating income fell 24.0% to ¥5.4 billion. New railway line construction led to increased demand for rail- way infrastructure equipment, but the overall restrained spending for corporate capital investment and public sec- tor investment ultimately drew down sales. HCB (Healthcare Business) HCB net sales declined 10.9% year on year to ¥63.8 bil- lion and operating income decreased 48.5% to ¥4.8 billion. Sales of home blood pressure monitors and body compo- sition monitors plummeted amid stagnant demand in the healthcare and medical equipment markets. Sales were improving in the first half due to expanded sales channels in North America and growing demand for blood pressure monitors in China, Russia, Eastern Europe, and the Middle East. However, full-year sales declined, from the impacts of the global recession and strong yen in the second half. Others Other Business net sales declined 7.0% year on year to ¥14.5 billion and operating income dropped 49.4% to ¥4.4 million. Increasing consumer consciousness regarding energy consumption supported steady sales of electricity usage monitoring services. Sales declined for uninter- ruptible power supply units and broadband routers. Growth in Net Sales by Business Segment Composition of Net Sales by Business Segment FY2008 FY2007 FY2006 FY2008 FY2007 FY2006 IAB ECB AEC SSB HCB Others (20.0)% (19.6) (23.6) (6.3) (10.9) (7.0) 7.6% 11.5 15.2 (19.6) 8.9 4.5 12.1% 41.6 20.3 15.4 7.6 (1.3) IAB ECB AEC SSB HCB Others 41.9% 19.8 13.1 12.7 10.2 2.3 43.1% 20.2 14.1 11.2 9.4 2.0 42.2% 19.1 12.9 14.6 9.1 2.1 2. Review of Operations by Region Japan The rapid deterioration in economic conditions led to domestic sales declines of between 10% to 20% for each of the IAB, ECB, AEC, and HCB segments. Restrained cap- ital investment by railway companies held domestic sales flat for the SSB segment. Net sales in Japan declined 15.6% year on year to ¥328.1 billion and operating income decreased 83.3% to ¥8.4 billion in fiscal 2008. North America Sales in North America were brisk for IAB’s oil-related and safety businesses, but the severe production cuts by the automobile industry strongly impacted the sales results of AEC. Net sales in North America fell 21.1% year on year to ¥80.4 billion and operating income declined from ¥2.1 bil- lion in the previous fiscal year to a ¥0.7 billion operating loss. Europe IAB sales in Europe declined 23.5% amid severe deterio- ration in the business environment in Italy, Spain, and Eastern Europe. HCB recorded rising sales of blood pres- sure monitors in Russia, Eastern Europe, and the Middle East, but posted declining sales for the year following a downturn in demand in the second half. Net sales in Europe fell 23.3% year on year to ¥103.1 bil- lion and operating income decreased 55.7% to ¥6.5 billion. Greater China In the Greater China region, encompassing China, Hong Kong, and Taiwan, the rapid worsening in business condi- tions as the global economy deteriorated led to IAB and ECB sales declines of 25.5% and 21.7%, respectively. HCB posted 22.5% sales growth on expanding demand for blood pressure monitors. Total net sales in the Greater China region declined 17.7% year on year to ¥75.2 billion and operating income decreased 61.4% to ¥3.1 billion. Southeast Asia and Others The economic recession and rapid strengthening of the yen were the major factors behind sales drops of 18.3% and 31.6% for ECB and AEC, respectively, in the region. IAB sales edged up 6.9%. Net sales in the Southeast Asia and other areas declined 13.5% year on year to ¥40.4 bil- lion and operating income fell 67.1% to ¥1.5 billion. Sales Breakdown by Region % 100 80 60 40 20 0 5.6% 9.6% 16.1% 13.5% 6.1% 12.0% 17.6% 13.4% 6.4% 12.0% 16.4% 12.8% 55.2% 50.9% 52.4% 06 07 08 (FY) Southeast Asia and Others Greater China Europe North America Japan *Includes direct exports 56 Financial Condition Assets Total assets amounted to ¥538.3 billion in fiscal 2008, representing a decrease of ¥79.1 billion, or 12.8%, from the end of the previous fiscal year. The decline was primarily due to booking impairment losses for goodwill of ¥16.8 billion, property, plant and equipment of ¥21.2 billion, and investment securities of ¥5.4 billion along with a ¥53.3 billion decrease in notes and accounts receivable-trade associated with the drop in sales and a ¥10.4 billion decline in inventories. Liabilities and Shareholders’ Equity Current liabilities, long-term liabilities, and minority inter- ests in subsidiaries amounted to ¥239.9 billion in fiscal 2008, a decline of ¥9.0 billion, or 3.6%, from the previous fiscal year. Notes and accounts payable-trade declined ¥36.5 billion from the previous fiscal year, while an increase in loans raised interest-bearing liabilities by ¥35.1 billion, to ¥54.9 billion. Termination and retirement benefits increased by ¥16.9 billion, or 26.6%, from the previous fis- cal year. Total shareholders’ equity amounted to ¥298.4 billion, representing a ¥70.1 billion, or 19.0%, decrease from the previous fiscal year in addition to a net loss of ¥29.2 billion, primarily due to the strong yen and the differences from securities revaluation. As a result, the shareholders’ equity ratio decreased 4.3 percentage points to 55.4%, from 59.7% in the previ- ous fiscal year, and the debt/equity ratio increased from 0.675 to 0.804 over the same period. Net assets per share based on the number of shares outstanding at the end of the fiscal year was ¥1,355.41, compared to ¥1,662.32 at the end of the previous fiscal year. Working Capital & Current Ratio Outstanding Interest-bearing Debt & Debt/Equity Ratio 200 150 100 50 0 Billions of yen 04 05 06 07 Working capital [left axis] Current ratio [right axis] % 220 190 160 130 100 (FY) 08 60 45 30 15 0 Billions of yen % 2.0 1.5 1.0 0.5 03 04 05 06 07 0.0 (FY) 08 Outstanding interest-bearing debt [left axis] Debt/equity ratio [right axis] Cash Flow Cash and cash equivalents at the end of the fiscal year amounted to ¥46.6 billion, a ¥6.0 billion increase from the end of the previous year. Cash Flow from Operating Activities Cash flow from operating activities decreased by ¥37.6 bil- lion from the previous year to ¥31.4 billion, primarily due to the ¥29.2 billion net loss and the increase in the non- expenditure item of depreciation and amortization from booking impairment losses for goodwill and property, plant and equipment. Cash Flow from Investing Activities Cash flow from investing activities saw a net outflow of ¥40.6 billion representing a ¥3.9 billion increase in outflow from the previous fiscal year. The increase was largely due to decreased proceeds from the sale of property and equip- ment and this is despite limiting capital investment spending below the original plan for the year. Cash Flow from Financing Activities Cash flow from financing activities saw a net inflow of ¥21.9 billion, representing a ¥56.3 billion increase from the net outflow in the previous fiscal year. Inflow from the increase in loans was larger than dividend payments and other outflows. Free Cash Flow 40 30 20 10 0 -10 Billions of yen 04 05 06 07 08 (FY) 57 Business and Other Risks Regarding a number of items described in the Status of Business and the Status of Accounting of this report, some items may pose risks and influence the Omron Group’s management results and financial condition (including share price), and Omron believes that these items may sub- stantially affect investor decisions. Note that items referring to the future reflect the Omron Group’s forecasts and assumptions as of June 24, 2009 (date of submission of the Securities Report). (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 sectors and in capital investment-related areas. Accordingly, demand for Omron Group products is affected by eco- nomic conditions in these markets. 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 prod- ucts, 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 countries outside Japan related to possible social unrest due to fac- tors including differences in culture or religion, political turmoil and uncertainty in economic trends, differences in business customs in areas such as the structure of rela- tionships with local businesses and collection of receivables, specific legal systems and investment regu- lations, changes in tax systems, labor shortages and problems in the labor-management relationship, terrorism, 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 120 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 2008 was 49.7%, and Omron expects further increas- es in the overseas operations ratio due to factors such as production shifts. The Omron Group seeks to hedge against exchange rate risk, for example by balancing imports and exports denominated in foreign currencies. 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 ben- efit of society,” the Omron Group has declared maximum customer satisfaction to be one of its management philoso- phies and implements it by providing the best quality 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 system, and develops and manufactures its products accordingly. 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, taking into consideration of any changes arising in the clients’ environment, 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 product defects resulting in liability-related dam- ages 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 sta- tus of regulated chemical substances in all of the components and materials the Group uses, and is accel- erating efforts to switch to substitute components and materials that do not contain regulated chemical sub- stances with a view to completely eliminating regulated substances from all the Group’s products throughout the world in order to make them more environmentally friend- ly. However, delays in the switchover beyond customer 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 operations for the realization of sustainable growth. As a result, the R&D expenses ratio remains at approximately 8%. The Omron Group strives to increase the new product 58 completely protect all of the Group’s proprietary technology and expertise in certain regions, including China. The Group implements strategic measures to protect its intellectual property rights, but the circulation of low-quality counterfeit items fraudulently bearing the Omron brand has the poten- tial to damage the trust in the Group’s products and the Group’s brand image and could have a negative impact on the Group’s operating activities. Omron has focused on brand management since its inception and in recent years has initiated prompt and appropriate countermeasures to the use of domain names similar to “Omron” that have appeared overseas. Identifying and taking action against all such fraudulent domain names that have been registered is virtually impos- sible. The danger exists that the same or a similar name to “Omron” could be used in a fraudulent business trans- action that could damage the trust in the Group. (8) Natural Disasters A natural disaster, fire, or other calamity, including a large- scale earthquake in Japan’s Tokai, Tonankai, or Tokyo metropolitan areas, could lead to reduced production capa- bility or temporary disruption of distribution and sales routes. The Omron Group has implemented the necessary safety measures and taken steps to facilitate the continu- ity and early restoration of business operations in the case of such an event. The Group maintains operating bases in Japan and around the world, making it virtually impossible to completely avoid the risks that would arise from an unforeseen natural disaster or other calamity. The Omron Group is also formulating action plans, including establishing policies and business continuity plans, for the entire Group as preventive measures for a worldwide flu epidemic. A rapidly spreading influenza virus that develops into a worldwide pandemic within a short period could lead to temporary closures of operating facil- ities and reductions in operations considered unnecessary and nonessential that could impact the Group’s business activities. Events such as the above could have a negative impact on the Group’s performance or financial condition. contribution ratio by reflecting such considerations as mar- ket needs in its R&D projects and goals. However, factors such as delays in R&D or insufficient technological capa- bilities that result in a decrease in the R&D new product 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 customer information through its business processes and acquires important information in the course of busi- ness. 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 sys- tems and misappropriation by third parties resulting from theft or loss of that information. Unanticipated leakage of internal information, howev- er, 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 conducts research on technology devel- oped by other companies and in the public domain in the course of its R&D and design activities. A very large num- ber of intellectual property rights exist within the Group’s range of business and products, and new intellectual prop- erty rights are declared on a daily basis. The potential therefore exists that a third party could present a claim regarding one of the Group’s specific products or compo- nents, which could have a negative impact on the Group’s performance or financial condition. When exercising our intellectual property rights during efforts to resolve issues related to the intellectual proper- ty rights of the Group, disputes with third parties could arise, such as oppositional tactics from the third party sub- ject to the exercise of rights. The Omron Group takes appropriate measures to recognize and compensate employees for inventions, such as through the Employee Invention Compensation Program and the Invention Commendation Program. Disputes regarding the value of an invention can arise with inventors, including inventors who have retired from the Group. The Omron Group has accumulated technology and expertise allowing it to differentiate its products from those of its competitors. However, the ever-increasing sophisti- cation of counterfeit product manufacturing and sales methods and other factors make it virtually impossible to 59 Consolidated Balance Sheets Omron Corporation and Subsidiaries Years ended March 31, 2009 and 2008 ASSETS Current assets: Cash and cash equivalents Notes and accounts receivable – trade Allowance for doubtful receivables Inventories (Note 3) Deferred income taxes (Note 13) Other current assets Millions of yen Thousands of U.S. dollars (Note 2) 2009 2008 2009 ¥ 46,631 113,551 (2,562) 84,708 16,522 17,141 ¥ 40,624 166,878 (2,211) 95,125 19,690 9,948 $ 475,827 1,158,684 (26,143) 864,367 168,592 174,908 Total current assets 275,991 330,054 2,816,235 Property, plant and equipment: Land Buildings Machinery and equipment Construction in progress Total Accumulated depreciation 26,753 120,244 143,801 9,061 27,126 128,183 167,036 6,277 272,990 1,226,980 1,467,357 92,459 299,859 328,622 3,059,786 (167,324) (175,946) (1,707,388) Net property, plant and equipment 132,535 152,676 1,352,398 Investments and other assets: Investments in and advances to affiliates Investment securities (Note 4) Leasehold deposits Deferred income taxes (Note 13) Other (Note 6) 15,638 31,682 7,784 53,783 20,867 16,645 39,139 8,087 28,151 42,615 159,571 323,286 79,429 548,806 212,928 Total investments and other assets 129,754 134,637 1,324,020 Total See notes to consolidated financial statements. ¥ 538,280 ¥ 617,367 $ 5,492,653 60 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Short-term debt (Note 8) Notes and accounts payable – trade Accrued expenses Income taxes payable Other current liabilities (Note 13) Current portion of long-term debt (Note 8) Millions of yen Thousands of U.S. dollars (Note 2) 2009 2008 2009 ¥ 32,970 58,179 24,791 711 17,899 488 ¥ 17,795 94,654 30,622 8,959 24,517 522 $ 336,429 593,663 252,969 7,255 182,643 4,980 Total current liabilities 135,038 177,069 1,377,939 Long-term debt (Note 8) Deferred income taxes (Note 13) 21,401 1,492 218,378 941 3,887 9,602 Termination and retirement benefits (Note 10) 80,443 63,536 820,847 Other long-term liabilities 476 863 4,857 Minority interests in subsidiaries 1,570 2,018 16,020 Shareholders’ equity (Note 11): Common stock, no par value: Authorized: 487,000,000 shares in 2009 and 2008, respectively Issued: 239,121,372 shares in 2009 and 2008, respectively 64,100 64,100 654,082 Capital surplus Legal reserve Retained earnings Accumulated other comprehensive loss (Note 18) Treasury stock, at cost — 18,958,944 shares in 2009 and 99,059 9,059 231,388 (60,744) 98,961 8,673 266,451 (28,217) 1,010,806 92,439 2,361,102 (619,837) 17,441,564 shares in 2008 (44,451) (41,466) (453,582) Total shareholders’ equity 298,411 368,502 3,045,010 Total See notes to consolidated financial statements. ¥ 538,280 ¥ 617,367 $ 5,492,653 61 Consolidated Statements of Operations Omron Corporation and Subsidiaries Years ended March 31, 2009, 2008 and 2007 Net sales Costs and expenses: Cost of sales Selling, general and administrative expenses Research and development expenses Other expenses (income), net (Note 12) Millions of yen Thousands of U.S. dollars (Note 2) 2009 2008 2007 2009 ¥ 627,190 ¥ 762,985 ¥ 723,866 $ 6,399,898 408,668 164,284 48,899 44,472 469,643 176,569 51,520 1,087 445,625 164,167 52,028 (2,233) 4,170,082 1,676,367 498,969 453,796 Total 666,323 698,819 659,587 6,799,214 Income (Loss) from continuing operations before income taxes, minority interests, and equity in loss of affiliates (39,133) 64,166 64,279 (399,316) Income taxes (Note 13) (10,495) 24,272 25,595 (107,092) Income (Loss) from continuing operations before minority interests and equity in loss of affiliates (28,638) 39,894 38,684 (292,224) Minority interests Equity in loss of affiliates (277) 811 217 348 238 (2,827) 1,352 8,276 Income (Loss) from continuing operations (29,172) 39,329 37,094 (297,673) Income from discontinued operations, net of tax (Note 15) — 3,054 1,186 — Net income (loss) ¥ (29,172) ¥ 42,383 ¥ 38,280 $ (297,673) Per share data (Note 16): Income (Loss) from continuing operations Basic Diluted Income from discontinued operations Basic Diluted Net income (loss) Basic Diluted See notes to consolidated financial statements. 2009 Yen 2008 U.S. dollars (Note 2) 2007 2009 ¥ (132.2) — ¥ 172.5 172.4 ¥ 159.8 159.7 $ (1.35) — — — 13.4 13.4 5.2 5.2 — — (132.2) — 185.9 185.8 165.0 164.9 (1.35) — 62 Consolidated Statements of Comprehensive Income (Loss) Omron Corporation and Subsidiaries Years ended March 31, 2009, 2008 and 2007 Net income (loss) Other comprehensive income (loss), net of tax (Note 18): Millions of yen Thousands of U.S. dollars (Note 2) 2009 2008 2007 2009 ¥ (29,172) ¥ 42,383 ¥ 38,280 $ (297,673) Foreign currency translation adjustments: Foreign currency translation adjustments arising during the year Reclassification adjustment for the portion realized in net income (16,537) — (12,342) — 7,907 6 (168,745) — Net change in foreign currency translation adjustments during the year (16,537) (12,342) 7,913 (168,745) Minimum pension liability adjustments — — 1,658 — Pension liability adjustments Pension liability adjustments arising during the year Reclassification adjustment for the portion realized in net income (10,838) (487) (6,707) (369) Net change in pension liability adjustments during the year (11,325) (7,076) — — — (110,592) (4,969) (115,561) 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 (6,722) (6,647) (560) (68,592) 2,987 1,315 85 30,480 (3) — (905) (475) — (5,983) (31) — Net unrealized gains (losses) (3,738) (6,237) (6,933) (38,143) Net gains (losses) on derivative instruments: Net gains (losses) on derivative instruments designated as cash flow hedges during the year 787 1,178 (1,208) 8,031 Reclassification adjustment for net gains (losses) realized in net income (1,714) Net gains (losses) (927) (727) 451 1,172 (17,490) (36) (9,459) Other comprehensive income (loss) (32,527) (25,204) 2,602 (331,908) Comprehensive income (loss) ¥ (61,699) ¥ 17,179 ¥ 40,882 $ (629,581) See notes to consolidated financial statements. 63 Consolidated Statements of Shareholders’ Equity Omron Corporation and Subsidiaries Years ended March 31, 2009, 2008 and 2007 Number of common shares issued Common stock Capital surplus Legal reserve Retained earnings Millions of yen Balance, March 31, 2006 249,121,372 ¥ 64,100 ¥ 98,724 ¥ 8,082 Net income Cash dividends, ¥34 per share Transfer to legal reserve Other comprehensive income Adjustment to initially apply SFAS No.158 (Note 10) 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 Net loss Cash dividends, ¥25 per share Transfer to legal reserve Other comprehensive loss Acquisition of treasury stock Sale of treasury stock Grant of stock options Balance, March 31, 2009 Accumulated other comprehensive income (loss) Treasury stock ¥ (2,971) ¥ (32,789) ¥ 227,791 38,280 (7,839) (174) 174 249,121,372 64,100 (10,000,000) 239,121,372 64,100 239,121,372 ¥ 64,100 1 10 93 98,828 1 (4) 136 98,961 (3) 101 ¥ 99,059 2,602 (2,644) (1) (11,204) 2 585 8,256 258,057 (3,013) (43,406) (266) 42,383 (9,415) (417) 417 (23,858) (33) 266,451 (29,172) (5,505) (386) 8,673 386 (25,204) (22,348) 7 23,858 423 (28,217) (41,466) (32,527) (2,995) 10 ¥ 9,059 ¥ 231,388 ¥ (60,744) ¥ (44,451) Thousands of U.S. dollars (Note 2) Common stock Capital surplus Legal reserve Retained earnings $ 654,082 $ 1,009,806 $ 88,500 3,939 $ 2,718,888 (297,673) (56,174) (3,939) Accumulated other comprehensive income (loss) Treasury stock $ (287,929) $ (423,123) (331,908) (30,561) 102 (31) 1,031 $ 1,010,806 $ 654,082 $ 92,439 $2,361,102 $ (619,837) $ (453,582) Balance, March 31, 2008 Net loss Cash dividends, $0.26 per share Transfer to legal reserve Other comprehensive loss Acquisition of treasury stock Sale of treasury stock Grant of stock options Balance, March 31, 2009 See notes to consolidated financial statements. 64 Consolidated Statements of Cash Flows Omron Corporation and Subsidiaries Years ended March 31, 2009, 2008 and 2007 Operating activities: Net income (loss) 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 Loss on impairment of goodwill Gain on contribution of securities to retirement benefit trust Termination and retirement benefits Deferred income taxes Minority interests Equity in loss of affiliates Net gain on sale of business 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, 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 increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year See notes to consolidated financial statements. Millions of yen Thousands of U.S. dollars (Note 2) 2009 2008 2007 2009 ¥ (29,172) ¥ 42,383 ¥ 38,280 $ (297,673) 33,496 1,983 21,203 (64) 5,401 16,813 — (1,390) (13,895) (277) 811 — 47,526 5,776 (7,689) (34,046) (8,044) (8,290) 1,266 60,580 31,408 1,742 (6,151) (37,477) 228 1,046 — (16) — — (40,628) 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) 341,796 20,235 216,357 (653) 55,112 171,561 — (14,184) (141,786) (2,827) 8,276 — 484,959 58,939 (78,459) (347,408) (82,082) (84,592) 12,918 618,163 320,490 17,775 (62,765) (382,418) 2,327 10,673 — (163) — — (414,571) 15,291 20,000 (916) (9,507) (13) (2,995) 7 — 21,867 (6,640) 6,007 40,624 ¥ 46,631 (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 ¥ 42,995 156,031 204,082 (9,347) (97,010) (133) (30,561) 71 — 223,133 (67,755) 61,296 414,531 $ 475,827 65 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 five regional management centers in Japan, North America, Europe, Asia- Pacific and Greater China. Products, classified by type and market, are organized into five major business segments and an “Others” segment, as described below. Industrial Automation Business (IAB) 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 Business (ECB) manufac- tures and sells electric and electronic components found in such consumer goods as home appliances as well as such business equipment as telecommunications sys- tems, vending machines and office equipment. Automotive Electronic Components Business (AEC) develops and produces automotive electronic components and other equipment for automakers and automotive elec- tronic components manufacturers throughout the world. Social Systems Solutions Business (SSB) encom- passes the sale of card authorization terminals, ticket gates, automated ticket vending machines, electronic panels and terminal displays for traffic information and monitoring purposes, mainly for the domestic market. Healthcare Business (HCB) sells blood pressure mon- itors, digital thermometers, body composition monitors, nebulizers, electronic therapy and other devices aimed at both the consumer and institutional markets. Others consists of businesses with high growth potential. The group provides the peripheral equipment used in office automation equipment, modems, scanners and uninter- rupted power supplies and energy consumption monitoring services in environmental fields. 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 2009 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 comprehensive income (loss), net of related taxes, until recognized. If nec- essary, 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-tem- porary impairment has occurred when the decline in fair value below the carrying value continues for over nine consecu- tive months. The Companies may also consider other factors, including their ability and intent to hold the applicable invest- ment 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. 66 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 their 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 intan- gible assets be amortized over their respective estimated useful lives and reviewed for impairment. Any recognized intangible asset determined to have an indefinite useful life is not to be amortized, but instead tested for impairment until its life is determined to no longer be indefinite. 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 carry- ing amount or fair value less costs to sell. Advertising Costs Advertising costs are charged to earnings as incurred. Advertising expense was ¥7,146 million ($72,918 thou- sand), ¥8,648 million and ¥9,600 million for the years ended March 31, 2009, 2008 and 2007, respectively. Shipping and Handling Charges Shipping and handling charges were ¥7,399 million ($75,500 thousand), ¥8,121 million and ¥8,571 million for the years ended March 31, 2009, 2008 and 2007, respec- tively, and are included in selling, general and administrative expenses in the consolidated statements of operations. Termination and Retirement Benefits Termination and retirement benefits are accounted for in accordance with SFAS No.87, “Employers’ Accounting for Pensions” and SFAS No.158, “Employers’ Accounting for Defined Benefit Pension and Other Post retirement 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 Post retirement 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. The amount of tax benefit related to tax position were recognized greater than 50 percent likely of being realized based on available infor- mation at the reporting date. 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,” SFAS No.149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” and SFAS No.161, “Disclosures about Derivative Instruments and Hedging Activities-an amend- ment of FASB Statement No.133.” These standards establish accounting and reporting standards for deriva- tive instruments and for hedging activities, and require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instru- ments at fair value. For foreign exchange forward contracts, foreign cur- rency swaps and interest rate swaps on the date the deriv- 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 ative contract is entered into, the Companies designate the derivative as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge or “foreign currency” hedge). The Companies formally document all relationships between hedging instruments and hedged items, as well as its risk management objective and strat- egy 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 spe- cific firm commitments or forecasted transactions. Based on the Companies’ policy, all foreign exchange forward contracts, foreign currency swaps and interest rate 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 com- pensation cost measured by the fair value method. New Accounting Standards 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- 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. In March 2008, the FASB issued SFAS No.161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No.133” (“SFAS 161”). SFAS 161 amends and expands the cur- rent disclosures required by SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 161 requires to provide greater transparency about how and why an company uses derivative instru- ments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its inter- pretations, and how derivative instruments and related hedged items affect a company’s financial position, results of operations and cash flows. SFAS 161 does not change the existing standards relative to recognition and meas- urement of derivative instruments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 will not have a material impact on the Companies’ consolidated financial statements. See Note 20 for the disclosures required by SFAS161. In December 2008, the FASB issued FSP FAS No.132(R)-1,“Employers’ Disclosures about Post retirement Benefit Plan Assets” (“FSP 132R-1”). FSP 132R-1 requires additional disclosures about plan assets including investment allocation, fair value of major categories of plan assets, development of fair value measurements, and concentrations of risk. FSP 132R-1 is effective for fiscal years ending after December 15, 2009. The adoption of FSP 132R-1 will not have a material impact on the Companies’ consolidated financial statements. In May 2009, the FASB issued SFAS No.165, “Subsequent Events” (“SFAS 165”). SFAS 165 defines disclosures about the date through which companies have evaluated subsequent events and the nature and financial effect of nonrecognized subsequent events. SFAS 165 is effective for fiscal year ending after June 15, 2009. The adoption of SFAS 165 will not have a material impact on the Companies consolidated financial statements. 68 2. Translation into United States Dollars The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Company is incorporated and operates. The 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 ¥98 to $1, the approximate rate of exchange at March 31, 2009. 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 2009 2008 2009 ¥ 49,122 13,068 22,518 ¥ 84,708 ¥ 53,128 16,656 25,341 ¥ 95,125 $ 501,245 133,347 229,775 $ 864,367 4. Marketable Securities and Investments Investment securities include debt and marketable equity securities and consist of available-for-sale and held-to- maturity securities. Cost, gross unrealized holding gains and losses and fair value of the securities at March 31,2009 and 2008 were as follows: Millions of yen 2009 2008 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 ¥ 19 20,602 ¥ — 7,042 ¥ — (1,237) ¥ 19 26,407 ¥ 1,541 20,802 ¥ — 12,932 ¥ — (662) ¥ 1,541 33,072 ¥ 20,621 ¥ 7,042 ¥ (1,237) ¥ 26,426 ¥ 22,343 ¥ 12,932 ¥ (662) ¥ 34,613 Thousands of U.S. dollars 2009 Cost (*) Gross unrealized gains Gross unrealized losses Fair value 194 210,224 $ — 71,857 $ — (12,622) $ 194 269,459 $ 210,418 $ 71,857 $ (12,622) $ 269,653 Available-for-sale securities $ Debt securities Equity securities Total available-for- sale securities (*) Cost represents amortized cost for debt securities and acquisition cost for equity securities. Millions of yen Thousands of U.S. dollars 2009 Amortized cost Gross unrealized gains Gross unrealized losses Fair value Amortized Cost Gross unrealized gains Gross unrealized losses Fair value Held-to-maturity securities Debt securities ¥ 200 ¥ — ¥ — ¥ 200 $ 2,041 $ — $ — $ 2,041 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 Maturities of debt securities classified as available-for-sale and held-to-maturity securities at March 31 were as follows: Millions of yen Thousands of U.S. dollars 2009 2008 2009 Cost Fair value Cost Fair value Cost Fair value Due after one year through five years Due over five years ¥ 119 ¥ 100 ¥ 119 ¥ 100 ¥ 41 ¥ 1,500 ¥ 41 ¥ 1,500 $ 1,214 $ 1,020 $ 1,214 $ 1,020 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 2009 2008 2009 Fair value Gross unrealized holding losses Fair value Gross unrealized holding losses Fair value Gross unrealized holding losses ¥ 3,740 ¥ (1,237) ¥ 6,270 ¥ (662) $ 38,163 $ (12,622) Proceeds from sales of available-for-sale securities were ¥26 million ($265 thousand), ¥3,403 million and ¥976 mil- lion for the years ended March 31, 2009, 2008 and 2007, respectively. Gross realized gains on sales were ¥7 million ($71 thousand), ¥1,534 million and ¥805 million for the years ended March 31, 2009, 2008 and 2007, respectively. Realized losses on sales were ¥1 million ($10 thou- sand) for the years ended March 31, 2009, and there were no gross realized losses on sales for the years ended March 31, 2008 and 2007. Losses on impairment of available-for-sale securities recognized to reflect declines in market value considered to be other than temporary were ¥5,062 million ($51,653 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 acquisition was to expand and strengthen LCD backlights business 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. thousand), ¥2,228 million and ¥144 million for the years ended March 31, 2009, 2008 and 2007, respectively. Aggregate cost of non-marketable equity securities accounted for under the cost method totaled ¥5,256 mil- lion ($53,633 thousand) and ¥4,526 million at March 31, 2009 and 2008, respectively. Investments with an aggre- gate cost of ¥5,105 million ($52,092 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. 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 aggre- gate amount of ¥11,667 million. This acquisition was to fulfill line-up of safety equip- ment, expand safety business and create cutting-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 val- ues 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 ¥ 2,463 458 11,360 (795) (1,819) ¥ 11,667 (*) Investments and other assets include acquired goodwill of ¥7,044 million. 70 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 aggregate amount of ¥8,099 million. This acquisition was to expand laser business by enhancing line-up of products focusing on laser process- ing 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 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 Minority interest Net assets acquired Millions of yen ¥ 6,186 619 7,354 (3,863) (1,940) (257) ¥ 8,099 (*) Investments and other assets include acquired goodwill of ¥3,668 million The components of acquired intangible assets excluding goodwill at March 31, 2009 and 2008 were as follows: Millions of yen 2009 2008 Thousands of U.S. dollars 2009 Gross amount Accumulated amortization Gross amount Accumulated amortization Gross amount Accumulated amortization Intangible assets subject to amortization: Software Other Total ¥ 30,280 3,458 ¥ 33,738 ¥ 21,900 2,535 ¥ 24,435 ¥ 38,875 4,416 ¥ 43,291 ¥ 25,210 2,845 ¥ 28,055 $ 308,980 35,285 $ 344,265 $ 223,469 25,868 $ 249,337 Aggregate amortization expense related to intangible assets was ¥6,462 million ($65,939 thousand), ¥6,769 million and ¥5,762 million for the years ended March 31, 2009, 2008 and 2007, respectively. Estimated amortization expense for the next five years ending March 31 is as follows: Years ending March 31 2010 2011 2012 2013 2014 Millions of yen Thousands of U.S. dollars ¥ 3,745 2,722 1,525 746 178 $ 38,214 27,776 15,561 7,612 1,816 Intangible assets not subject to amortization at March 31, 2009 and 2008 were immaterial. The carrying amount of goodwill at March 31, 2009 and 2008 and changes in its carrying amount for the years ended March 31, 2009 and 2008 were as follows: Millions of yen Thousands of U.S. dollars Balance at beginning of year Acquisition Impairment Foreign currency translation adjustments and other Balance at end of year 2009 2008 2009 ¥ 22,236 — (16,813) (1,455) ¥ 3,968 ¥ 19,021 4,131 — (916) ¥ 22,236 $ 226,898 — (171,561) (14,847) $ 40,490 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 In accordance with SFAS No.142, the Companies recog- nized the impairment losses for the fiscal year ended March 31, 2009 related to goodwill allocated to the report- ing units of Industrial Automation business, Electronic Components Business, Automotive Electronic Component Business and Healthcare Business. The amounts were ¥9,406 million ($95,980 thousand), ¥191 million ($1,949 thousand), ¥662 million ($6,755 thousand) and ¥6,554 mil- lion ($66,878 thousand), respectively. Due to the sharp deterioration of business environment in automobile sec- tor, FPD sector and medical equipment sector, the fair value of the associated reporting unit was decreased. The impairment losses are included in other expenses (income), net in the consolidated financial statements of operations. The fair value of the reporting unit was estimated using the expected present value of future cash flows. 7. Impairment loss on Long-lived Assets In accordance with SFAS No.144, the Companies recog- nized the impairment losses for the fiscal year ended March 31, 2009 on long-lived assets in Industrial Automation business, Electronic Components Business, Automotive Electronic Component Business and Other Business. The amounts were ¥5,361 million ($54,704 thousand), ¥5,788 million ($59,061 thousand), ¥9,699 mil- lion ($98,969 thousand) and ¥355 million ($3,622 thou- sand), respectively. Due to the sharp deterioration of the business environment in the automobile, FPD and semi- conductor sectors, the carrying amount of the certain groups of assets exceeded their fair value. The impair- ment losses are included in other expenses (income), net in the consolidated financial statements of operations. The fair value of the group assets was estimated using the expected present value of future cash flows. 8. 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 2008 2009 0.8% 0.8% Unsecured debt: Millions of yen 2009 2008 Thousands of U.S. dollars 2009 ¥ 31,000 ¥ 16,000 $ 316,327 The weighted average annual interest rates 1,970 1,795 20,102 5.1% 3.9% 2008 2009 Total Long-term debt at March 31 consisted of the following: Unsecured debt: The weighted average annual interest rates 2008 2009 2.9% 1.3% Other Total Less portion due within one year Long-term debt, less current portion ¥ 32,970 ¥ 17,795 $ 336,429 Millions of yen 2009 2008 Thousands of U.S. dollars 2009 ¥ 20,000 ¥ 384 $ 204,082 1,889 21,889 488 ¥ 21,401 1,630 2,014 522 ¥ 1,492 19,276 223,358 4,980 $ 218,378 The annual maturities of long-term debt outstanding at March 31, 2009 were as follows: Years ending March 31 2010 2011 2012 2013 2014 Thereafter Total 72 Millions of yen Thousands of U.S. dollars ¥ 488 20,049 49 50 52 1,201 ¥ 21,889 $ 4,979 204,582 500 510 531 12,255 $ 223,357 As is customary in Japan, additional security must be given if requested by a lending bank, and banks have the right to offset cash deposited with them against any debt or obligation that becomes due and, in case of default and certain other specified events, against all debt payable to the banks. The Companies have never received any such requests. As is 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, 2009, 2008 and 2007 amounted to ¥1,257million ($12,827 thousand), ¥1,537 million and ¥1,116 million, respectively. 9. 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 peri- ods. Leases that expire generally are expected to be renewed or replaced by other leases. At March 31, 2009, future minimum rental payments applicable to non-can- celable leases having initial or remaining non-cancelable lease terms in excess of one year were as follows: Years ending March 31 2010 2011 2012 2013 2014 Thereafter Total Millions of yen Thousands of U.S. dollars ¥ 2,724 2,343 1,963 1,725 1,474 7,746 ¥ 17,975 $ 27,796 23,908 20,031 17,602 15,041 79,040 $ 183,418 Rental expense amounted to ¥13,787 million ($140,684 thousand), ¥13,292 million and ¥12,598 million for the years ended March 31, 2009, 2008 and 2007, respectively. 10. 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 portion of the obligations under these plans. The general funding policy is to contribute amounts computed in accordance with actuarial methods acceptable under Japanese tax law. The Company and substantially all domestic subsidiaries had a contributory termination and retirement plan which was the Japanese government social welfare program and interrelated with consisted of a substitutional portion requiring employee and employer contributions plus an additional portion established by the employers. 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. 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. 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 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 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 Fair value of assets in retirement benefit trust at end of year Funded status at end of year 2009 2008 2009 ¥ 159,025 3,976 3,180 2,877 (5,064) (1,042) ¥ 162,952 ¥ 89,729 (9,723) 5,272 (3,991) (1,042) ¥ 80,245 10,828 (3,788) ¥ 7,040 ¥ (75,667) ¥ 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) $ 1,622,704 40,571 32,449 29,358 (51,673) (10,633) $ 1,662,776 $ 915,602 (99,214) 53,796 (40,724) (10,633) $ 818,827 110,490 (38,653) $ 71,837 $ (772,112) Amounts recognized in the consolidated balance sheet at March 31, consist of: Termination and retirement benefit ¥ (75,667) ¥ (58,468) $ (772,112) Amounts recognized in accumulated other comprehensive income (loss) at March 31, consist of: Millions of yen 2009 2008 Thousands of U.S. dollars 2009 Net actuarial loss Prior service cost The accumulated benefit obligation at March 31 was as follows: Millions of yen 2009 2008 Thousands of U.S. dollars 2009 ¥ 87,474 (17,855) ¥ 69,619 ¥ 70,637 (19,708) ¥ 50,929 $ 892,592 (182,194) $ 710,398 Millions of yen 2009 2008 Thousands of U.S. dollars 2009 Accumulated benefit obligation ¥ 158,225 ¥ 154,412 $ 1,614,541 74 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 Net periodic benefit cost 2009 ¥ 3,976 3,180 (3,128) 826 ¥ 4,854 Millions of yen 2008 ¥ 3,992 3,091 (2,955) 625 ¥ 4,753 2007 ¥ 3,954 3,091 (3,411) 612 ¥ 4,246 Thousands of U.S. dollars 2009 $ 40,571 32,449 (31,918) 8,429 $ 49,531 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, 2010 are summarized as follows: Net actuarial loss Prior service cost Millions of yen ¥ 2,725 (1,853) Thousands of U.S. dollars $ 27,806 (18,908) 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 retirement benefits. Assumptions Weighted-average assumptions used to determine benefit obligations at March 31, 2009 and 2008 are as follows: Discount rate Compensation increase rate 2009 2.0% 2.0% 2008 2.0% 2.0% Weighted-average assumptions used to termination and retirement benefit cost for the years ended March 31, 2009, 2008 and 2007 are as follows: Discount rate Compensation increase rate Expected long-term rate of return on plan assets 2009 2.0% 2.0% 3.0% 2008 2.0% 2.0% 3.0% 2007 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 2009 2008 0.9% 19.4% 44.5% 17.1% 18.1% 100.0% 1.7% 16.3% 48.4% 14.6% 19.0% 100.0% 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 The assets in the retirement benefit trust at March 31, 2009 and 2008 consisted of 95.3%, 98.1% equity secu- rities, respectively, and consisted of 4.7%, 1.9% 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 partici- pants. 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. Cash Flows Contributions The Companies expect to contribute ¥8,567 million ($87,418 thousand) to their domestic termination and retire- ment benefit plans in the year ending March 31, 2010. Target allocation of plan assets is 20% equity securi- ties, 66% debt securities and life insurance company gen- eral account and 14% other for both 2009 and 2008. The Company evaluates the gap between expected return and actual return of invested plan assets on an annu- al basis to determine if such differences necessitate a revi- sion 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 ¥6 million ($61 thousand) (0.01% of total domestic plan assets), and ¥4 million (0.00% of total domestic plan assets) at March 31, 2009, and 2008, respectively. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Years ending March 31 2010 2011 2012 2013 2014 2015-2019 Millions of yen Thousands of U.S. dollars ¥ 6,114 7,215 6,880 7,054 6,805 35,983 $ 62,388 73,622 70,204 71,980 69,439 367,173 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 ¥2,691 million ($27,459 thousand) and ¥2,135 million ($21,786 thousand), respectively, at March 31, 2009 and ¥2,891 million and ¥2,691 million, respectively, at March 31, 2008. 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 11. 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 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, 2009 and 2008 was ¥4,776 million ($48,735 thousand) and ¥5,068 million, respec- tively. The aggregate net periodic benefit cost for such plans for the years ended March 31, 2009, 2008 and 2007 was ¥702 million ($7,163 thousand), ¥258 million and ¥1,167 million, respectively. 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. 76 The Corporate Law also provides for companies to purchase treasury stock and dispose of such treasury 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 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- 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. Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the arti- 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 ¥36,549 million ($372,949 thousand) at March 31, 2009, based on the amount recorded in the parent company’s general books of account. 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 for the years ended March 31, 2009 is as follows: Fixed options Options outstanding at April 1, 2006 Granted Exercised Expired Options outstanding at March 31, 2007 Granted Exercised Expired Options outstanding at March 31, 2008 Granted Exercised Expired Options outstanding at March 31, 2009 Options exercisable at March 31, 2009 Fixed options Options outstanding at March 31, 2008 Granted Exercised Expired Options outstanding at March 31, 2009 Options exercisable at March 31, 2009 Shares 973,000 217,000 (260,000) (25,000) 905,000 237,000 (181,000) (3,000) 958,000 — — (120,000) 838,000 601,000 Shares 958,000 — — (120,000) 838,000 601,000 Yen Weighted-average exercise price Weighted-average fair value of options granted during the year ¥ 539 ¥ 744 ¥ — ¥ 2,384 3,031 2,284 2,306 ¥ 2,570 3,432 2,131 1,913 ¥ 2,868 — — 2,435 ¥ 2,930 ¥ 2,733 U.S. dollars Weighted-average exercise price Weighted-average fair value of options granted during the year $ — $ 29.27 — — 24.85 $ 29.90 $ 27.89 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 The following summarizes information about fixed stock options at March 31, 2009: Shares Weighted-average remaining contractual life Options outstanding 838,000 1.86 years Options exercisable 601,000 1.31 years Range of exercise prices Weighted-average exercise price Yen ¥ 2,550 to ¥ 3,432 ¥ 2,550 to ¥ 3,031 U.S. dollars $ 26.02 to $ 35.02 $ 26.02 to $ 30.93 Yen ¥ 2,930 U.S. dollars $ 29.90 ¥ 2,733 $ 27.89 The fair value of each option grant was estimated as of the grant date using the Black-Scholes option-pricing model with the following assumptions: Risk-free interest rate Volatility Dividend yield Expected life 2008 1.343% 27.8% 1.166% 3.5 years 2007 1.540% 28.0% 1.068% 3.5 years No fixed stock options were granted for the years ended March 31, 2009. 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 volatility. It is management’s opinion that the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value esti- mate, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. Stock-based compensation cost recognized for the year ended March 31, 2009 was ¥101 million ($1,031 thou- sand). As of March 31, 2009, total compensation cost relat- ed to nonvested options and not yet recognized was ¥24 million ($245 thousand), and the weighted-average peri- od over which it is expected to be recognized is 0.25 years. There were no cash received from options exercised under the plan for the year ended March 31, 2009. When options are exercised, the Company will grant the Company’s treasury stock. 12. Other Expenses (Income), net Other expenses (income), net for the years ended March 31, 2009, 2008 and 2007 consisted of the following: Net loss on sales and disposals of property, plant and equipment Loss on impairment of property, plant and equipment Loss on impairment of investment securities and other assets Loss on impairment of goodwill Net gain on sales of investment securities Gain on contribution of securities to retirement benefit trust Interest income, net Foreign exchange loss, net Dividend income Other, net Total 2009 ¥ 1,983 21,203 5,401 16,813 (64) — (173) (1,060) (786) 1,155 ¥ 44,472 Millions of yen 2008 ¥ 963 168 2,297 — (1,571) — (828) 1,251 (525) (668) ¥ 1,087 2007 ¥ 6,427 1,441 682 — (954) (10,141) (710) 1,086 (654) 590 ¥ (2,233) Thousands of U.S. dollars 2009 $ 20,235 216,357 55,112 171,561 (653) — (1,765) (10,816) (8,020) 11,785 $ 453,796 78 13. Income Taxes The provision for income taxes for the years ended March 31, 2009, 2008 and 2007 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 2009 2008 2007 ¥ 3,400 (14,866) 971 ¥ (10,495) ¥ 24,403 (367) 236 ¥ 24,272 ¥ 21,688 3,541 366 ¥ 25,595 Thousands of U.S. dollars 2009 $ 34,694 (151,694) 9,908 $ (107,092) The Company and its domestic subsidiaries are subject to a number of taxes based on income, which in the aggregate result- ed in a normal tax rate of approximately 41.0% in 2009, 2008 and 2007. 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 2009 41.0% (1.6) 1.2 (11.9) 6.7 (7.1) (1.5) 26.8 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 The approximate effect of temporary differences and tax credit and loss carry forwards that gave rise to deferred tax bal- ances at March 31, 2009 and 2008 were as follows: Millions of yen 2009 2008 Thousands of U.S. dollars 2009 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 ¥ 6,145 4,626 6,446 — — 4,607 3,018 28,544 13,683 4,275 13,691 ¥ 85,035 (10,343) ¥ 74,692 ¥ — — — 246 1,350 — — — 3,888 — — ¥ 5,484 — ¥ 5,484 ¥ 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 $ 62,704 47,204 65,776 — — 47,010 30,796 291,265 139,623 43,622 139,704 $ 867,704 (105,541) $ 762,163 $ — — — 2,510 13,776 — — — 39,673 — — $ 55,959 — $ 55,959 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 The total valuation allowance increased by ¥1,752 million ($17,878 thousand) in 2009 and decreased by ¥235 million in 2008. As of March 31, 2009, certain subsidiaries had oper- ating loss carryforwards approximating ¥45,780 million ($467,143 thousand) available for reduction of future tax- able income, the majority of which expire by 2015. 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. Under Japanese Tax Reform on March, 2009, up to 95% of a dividend received by a company from the foreign subsidiaries is free of tax. As a result, the accumulated unremitted earnings of the foreign sub- sidiaries which the Company has not recognized deferred tax liabilities were ¥71,174 million ($726,265 thousand) and ¥63,180 million at March 31, 2009 and 2008, respec- tively. Dividends received from domestic subsidiaries are expected to be substantially free of tax. 14. 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 of the beginning retained earnings. The Companies believe that the total amount of unrecognized tax benefits as of March 31, 2009 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 operations. 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, 2007 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, 2009, 2008 and 2007 were as follows: Net sales Total assets 15. 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 discon- tinued 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 operations under “Income from discontinued operations, net of tax.” Prior years’ consolidated statements of oper- ations including segment information and other related matters were restated to compare with the consolidated 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 Millions of yen 2009 2008 2007 Thousands of U.S. dollars 2009 ¥ 299,127 ¥ 205,199 ¥ 374,399 ¥ 257,151 ¥ 324,509 ¥ 263,900 $ 3,052,316 $ 2,093,867 statements of operations for the year ended March 31, 2009. On the other hand, the cash flows attributable to the operating, investing and financing activities of the dis- continued operations 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 infor- mation for the years ended March 31, 2008 and 2007 for the discontinued operations. Millions of yen 2008 ¥ — — — 5,177 2,123 ¥ 3,054 2007 ¥ 12,785 10,776 2,009 — 823 ¥ 1,186 80 16. 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 divid- ing net income available to common shareholders by the weighted-average number of common shares outstanding 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: Income from continuing operations ¥ (29,172) ¥ 39,329 ¥ 37,094 $ (297,673) Diluted income from continuing operations ¥ (29,172) ¥ 39,329 ¥ 37,094 $ (297,673) Millions of yen 2009 2008 2007 Thousands of U.S. dollars 2009 Income from discontinued operations ¥ — ¥ 3,054 ¥ 1,186 Diluted income from discontinued operations ¥ — ¥ 3,054 ¥ 1,186 Millions of yen 2009 2008 2007 Millions of yen 2009 2008 2007 Thousands of U.S. dollars 2009 $ $ — — Thousands of U.S. dollars 2009 Net income Diluted income ¥ (29,172) ¥ 42,383 ¥ 38,280 $ (297,673) ¥ (29,172) ¥ 42,383 ¥ 38,280 $ (297,673) Weighted average common shares outstanding Dilutive effect of: Stock options Diluted common shares outstanding 2009 2008 2007 220,747,962 228,005,106 232,059,070 — 220,747,962 61,624 228,066,730 153,918 232,212,988 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 17. Supplemental Information for Cash Flows Supplemental cash flow information for the years ended March 31, 2009, 2008 and 2007 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 2009 ¥ 1,257 18,776 1,567 — Millions of yen 2008 ¥ 1,536 27,216 2,202 — 2007 ¥ 1,130 24,591 2,977 16,019 Thousands of U.S. dollars 2009 $ 12,827 191,592 15,990 — extinguishment of treasury stock — 23,858 — — 18. Other Comprehensive Income (Loss) The change in each component of accumulated other comprehensive income (loss) for the years ended March 31, 2009, 2008 and 2007 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 2009 2008 2007 Thousands of U.S. dollars 2009 ¥ (5,782) (16,537) (22,319) ¥ 6,560 (12,342) (5,782) ¥ (1,353) 7,913 6,560 $ (59,000) (168,745) (227,745) — — — — (29,245) (11,325) — (40,570) 6,501 (3,738) 2,763 309 (927) (618) — — — — (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) — — — — (298,418) (115,562) — (413,980) 66,337 (38,143) 28,194 3,153 (9,459) (6,306) (28,217) (32,527) — ¥ (60,744) (3,013) (25,204) — ¥ (28,217) (2,971) 2,602 (2,644) ¥ (3,013) (287,929) (331,908) — $ (619,837) 82 Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments for the years ended March 31, 2009, 2008 and 2007 were as follows: 2009 Millions of yen 2008 2007 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 ¥(17,054) ¥ 517 ¥(16,537) ¥(12,384) ¥ 42 ¥(12,342) ¥ 8,248 ¥ (341) ¥ 7,907 Reclassification adjustment for the portion realized in net income — — — — — — 6 — 6 Net change in foreign currency translation adjustments during the year Minimum pension liability adjustments Pension liability adjustments Pension liability adjustments (17,054) 517 (16,537) (12,384) 42 (12,342) 8,254 (341) 7,913 — — — — — — 2,811 (1,153) 1,658 arising during the year (18,368) 7,530 (10,838) (11,369) 4,662 (6,707) Reclassification adjustment for the portion realized in net income Net change in pension liability adjustments during the year Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) (826) 339 (487) (625) 256 (369) (19,194) 7,869 (11,325) (11,994) 4,918 (7,076) — — — — — — — — — arising during the year (11,393) 4,671 (6,722) (11,266) 4,619 (6,647) (949) 389 (560) 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: 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) 5,062 (2,075) 2,987 2,229 (914) 1,315 144 (59) 85 (5) 2 (3) (1,534) 629 (905) (805) 330 (475) — (6,336) — 2,598 — (3,738) — (10,571) — 4,334 — (6,237) (10,141) (11,751) 4,158 4,818 (5,983) (6,933) 1,333 (546) 787 1,997 (819) 1,178 (2,047) 839 (1,208) (2,905) (1,572) 1,191 645 (1,714) (927) (1,232) 765 505 (314) (727) 451 1,986 (61) (814) 25 1,172 (36) ¥(44,156) ¥11,629 ¥(32,527) ¥(34,184) ¥ 8,980 ¥(25,204) ¥ (747) ¥ 3,349 ¥ 2,602 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 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 Pension liability adjustments arising during the year Reclassification adjustment for the portion realized in net income Net change in pension liability adjustments during the year 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 2009 Before-tax amount Tax (expense) benefit Net-of-tax amount $ (174,020) — (174,020) — $ 5,275 — 5,275 — $ (168,745) — (168,745) — (187,429) (8,428) (195,857) (116,255) 51,653 (51) 76,837 3,459 80,296 (110,592) (4,969) (115,561) 47,663 (21,173) 20 (68,592) 30,480 (31) — (64,653) — 26,510 — (38,143) 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) 13,602 (29,643) (16,041) $ (450,571) (5,571) 12,153 6,582 $ 118,663 8,031 (17,490) (9,459) $ (331,908) 19. 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, 2009 and 2008, of the Companies’ financial instruments. Millions of yen Thousands of U.S. dollars 2009 2008 2009 Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Nonderivatives: Long-term debt, including current portion ¥ (21,889) ¥ (21,897) ¥ (2,014) ¥ (2,014) $ (223,357) $ (223,439) Derivatives: Included in other current assets (liabilities): Forward exchange contracts Foreign currency swaps Interest rate swap (779) (27) (24) (779) (27) (24) 1,221 12 — 1,221 12 — (7,949) (276) (245) (7,949) (276) (245) The following methods and assumptions were used to estimate the fair values of each class of financial instruments 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. 84 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. 20. Derivatives and Hedging Activities The Companies enter into foreign exchange forward contracts and combined purchased and written foreign currency swap contracts to hedge foreign currency transactions (primarily the U.S. dollar and the EURO). The companies also enter into interest rate swap contracts to hedge interest-rate fluctuations. The Companies do not use derivatives for trading purposes. The Companies are exposed to credit risk in the event of non-performance by counterparties to derivatives, but management considers the exposure to such risk to be minimal since the counterparties are major financial institutions. Changes in the fair value of foreign exchange forward contracts, foreign currency swaps and interest rate swaps designated and qualifying as cash flow hedges are report- ed in accumulated 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 and interest rate at March 31, 2009 is expected to be reclassified into earnings with- in twelve months. The notional amounts of contracts to exchange foreign currency outstanding at March 31, 2009 and 2008 were as follows: Forward exchange contracts Foreign currency swap Interest rate swap Millions of yen 2009 2008 ¥ 63,784 ¥ 2,646 ¥ 20,000 ¥ 64,916 ¥ 620 — Thousands of U.S. dollars 2009 $ 650,857 $ 27,000 $ 204,082 The fair values of derivatives as of March 31, 2009 were as follows: Derivatives designated as hedges Millions of yen Thousands of U.S. dollars Millions of yen Thousands of U.S. dollars Assets 2009 2009 Liabilities 2009 Forward exchange contracts ¥ 875 $ 8,929 Forward exchange contracts Foreign currency swap Interest rate swap ¥ (1,654) (27) (24) $ (16,878) (276) (245) The effects on consolidated statements of operations in fourth quarter were as follows: Derivatives designated as hedges Cash flow hedge Forward exchange contracts Foreign currency swap Interest rate swap Profit and loss of other comprehensive income (loss) [Hedge effective part] Transfer from accumulated other compre- hensive income (loss) to profit and loss [Hedge effective part] Millions of yen Thousands of U.S. dollars Millions of yen Thousands of U.S. dollars 2009 ¥ 809 (8) (14) $ 8,255 (82) (143) ¥ (1,714) 0 — $ (17,490) 0 — The amount of the hedging ineffectiveness was not material. 85 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 21. Commitments and Contingent Liabilities The Company has commitments as of March 31, 2009 of approximately ¥16,727 million ($170,684 thousand) related to contracts for outsourcing computer services through 2013. The contracts require an annual service fee of ¥4,385 million ($44,745 thousand) for the year ending March 31, 2009. The annual service fee will gradually decrease each year during the contract term to ¥4,209 million ($42,949 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. 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 52% of total sales are concentrated in Japan, are limited due to the large Balance at beginning of year Addition Utilization Balance at end of year 22. Fair Value Measurements SFAS 157 “Fair Value Measurements” (“SFAS 157”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure- ment date. SFAS 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value as follows: Level 1— Inputs are quoted prices in active markets for identical assets or liabilities. 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 ¥712 million ($7,265 thousand) at March 31, 2009. The carrying amounts of the liabilities recognized under those guarantees at March 31, 2009 were immaterial. Bank loans of ¥364 million ($3,714 thousand) of an unaffiliated company were jointly and severally guaranteed by the Company and six other unaffiliated companies. According to an agreement between the seven companies, any loss on these guarantees are to be 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, 2009 and 2008 are summarized as follows: Millions of yen 2009 ¥ 1,619 1,475 (1,593) ¥ 1,501 2008 ¥ 2,190 1,507 (2,078) ¥ 1,619 Thousands of U.S. dollars 2009 $ 16,520 15,051 (16,255) $ 15,316 Level 2— Inputs are quoted prices for similar assets or lia- bilities in active markets, quoted prices for iden- tical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3— Inputs are significant to measure fair value of assets or liabilities and unobservable. 86 Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents assets and liabilities that are measured at fair value on a recurring basis at March 31, 2009. Items Assets Investment securities Derivative Liabilities Derivative Millions of yen Thousands of U.S. dollars Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total ¥ 26,426 — ¥ — 875 ¥ — — ¥ 26,426 875 $ 269,653 — $ — 8,929 $ — — $ 269,653 8,929 — 1,705 — 1,705 — 17,398 — 17,398 Investment Securities Investment securities mainly consist of listed stocks. These are classified as Level 1.Because the fair value of the investment securities is valued using a quoted market price in active markets for identical assets and can be observed. Derivatives Derivatives consist of foreign exchange forward contracts, foreign currency swaps and interest rate swaps. These are classified as Level 2. Because the fair value is valued using the observable market data such as foreign exchange rates or interest rates. 23. Business Structure Reform The Companies established a new division, the “Emergency Measures and Structual Reform Headquarters,” headed by Hisao Sakuta, President & CEO, in January 2009 in response to the rapid worsening of the business environ- ment. Since February 2009, the Companies have been implementing “emergency measures” to generate profit, including cost cutting and the consolidation of unprofitable businesses, as well as “structural reform” aimed at strengthening the revenue base in the medium term through the reorganization of core businesses and clo- sure/consolidation of sites. Major business structure reforms on March 31, 2009 are as follows; [1] Electronic Components Business The Companies decided to pull out of the large-size back- light business, which encompasses the development, manufacture and sales of large-size LCD backlights, dis- solving three subsidiaries. According to this decision, the Companies recognized impairment losses on long-lived 24. Subsequent Events No significant event took place. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Non-marketable investment securities with a carrying amount of ¥496 million ($5,061 thousand) were written down to their fair value of ¥153 million ($1,561 thousand), resulting in an other-than-temporary impairment charge of ¥343 million ($3,500 thousand), which was included in earnings for the fiscal year ended March 31,2009. These investments were classified as Level 3. Because these fair values were valued using unobservable inputs. assets and other losses for the fiscal year ended March 31, 2009. The subsidiaries are planned to be liquidated by the end of March 2011. The Companies decided to reorganize semiconductor production sites and close a part of them in Japan. According to this decision, the Companies recognized impairment losses on long-lived assets for the fiscal year ended March 31, 2009. The clo- sure of the site is planned to be completed by the end of March 2010. [2] Automotive Electronic Component Business The Companies decided to reorganize automotive elec- tronic component production sites and dissolve the man- ufacturing subsidiary in the United Kingdom. According to this decision, the Companies recognized impairment losses on long-lived assets and other losses for the fis- cal year ended March 31, 2009. The subsidiary is planned to be liquidated by the end of March 2011. 87 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, 2009 and 2008, and the related consolidated statements of operations, comprehensive income (loss), shareholders‘ equity, and cash flows for each of the three years in the period ended March 31, 2009, all expressed in Japanese yen. These financial statements are the respon- sibility 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 finan- cial 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 rea- sonable 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 con- solidated 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 finan- cial position of Omron Corporation and subsidiaries as of March 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2009, 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 con- venience of readers outside Japan. Osaka, Japan June 8, 2009 88 Internal Control Section Management’s Report on Internal Control NOTE TO READERS: Following is an English translation of management’s report on internal control over financial reporting filed under the Financial Instruments and Exchange Act of Japan. Readers should be aware that this report is presented merely as supplemental information. Readers should be particularly aware of the differences between an assessment of internal control over financial reporting (“ICFR”) under the Financial Instruments and Exchange Act (“ICFR under FIEL”) and one conducted under the standards of the Public Company Accounting Oversight Board (United States) (“ICFR under PCAOB”); • In an assessment of ICFR under FIEL, there is detailed guidance on the scope of an assessment of ICFR, such as quantitative guidance on business location selection and/or account selection. In an assessment of ICFR under PCAOB, there is no such detailed guidance. Accordingly, regarding the scope of assessment of internal control over business processes, we selected locations and business units to be tested based on the previous year’s consolidated net sales (after the elimination of transactions between consolidated companies), and the companies whose net sales reaches two-thirds of total sales for the previous year on a consolidated basis were selected as “significant locations and/or business units.” At selected “significant locations and/or business units” we tested business processes leading to sales, accounts receivable and inventories as significant accounts that may have a material impact on our business objectives. Further, in addition to selected significant locations and/or business units, we also selected for testing, as business processes having greater materiality, business processes relating to (i) greater likelihood of material misstatements and/or (ii) significant accounts involving estimates and the manage- ment’s judgment and/or (iii) a business or operation dealing with high-risk transactions, taking into account their impact on the financial reporting. MANAGEMENT’S REPORT ON INTERNAL CONTROL 1. Matters relating to the basic framework for internal control over financial reporting Hisao Sakuta, President and Chief Executive Officer is respon- sible for designing and operating effective internal control over financial reporting of Omron Corporation (the “Company”) and has designed and operated internal control over financial report- ing in accordance with the basic framework for internal con- trol set forth in, “The Standards and Practice Standards for Management Assessment and Audit Concerning Internal Control Over Financial Reporting (Council Opinions),” released by the Business Accounting Council. The internal control is designed to achieve its objectives to the extent reasonable through the effective function and combination of its basic elements. Therefore, there is a pos- sibility that misstatements may not be completely prevented or detected by internal control over financial reporting. 2. Matters relating to the scope of assessment, the basis date of assessment and the assessment procedures The assessment of internal control over financial reporting was performed as of March 31, 2009 which is the end of this fiscal year. The assessment was performed in accordance with assessment standards for internal control over financial report- ing generally accepted in Japan. In conducting this assessment, we evaluated internal con- trols which may have a material effect on our entire financial reporting on a consolidation basis (“entity-level controls”) and based on the results of this assessment, we selected busi- ness processes to be tested. We analyzed these selected business processes, identified key controls that may have a material impact on the reliability of the Company’s financial reporting, and assessed the design and operation of these key controls. These procedures have allowed us to evaluate the effectiveness of the internal controls of the Company. We determined the required scope of assessment of inter- nal control over financial reporting for the Company, as well as its consolidated subsidiaries and equity-method affiliated companies, from the perspective of the materiality that may affect the reliability of their financial reporting. The materiality that may affect the reliability of the financial reporting is deter- mined by taking into account the materiality of quantitative and qualitative impacts on financial reporting. In light of the results of assessment of entity-level controls conducted for the Company and its consolidated subsidiaries, we reasonably determined the scope of assessment of internal controls over business processes. Regarding a certain number of consoli- dated subsidiaries and equity-method affiliated companies, we concluded that the material impact they would have on the consolidated financial statements would be insignificant and, thus, did not include them in the scope of assessment of enti- ty-level controls. Regarding the scope of assessment of internal control over business processes, we selected locations and business units to be tested based on the previous year’s consolidated net sales (after the elimination of transactions between consoli- dated companies), and the companies whose net sales reach- es two-thirds of total sales for the previous year on a consoli- dation basis were selected as “significant locations and/or busi- ness units.” At selected “significant locations and/or business units” we tested business processes leading to sales, accounts receivable and inventories as significant accounts that may have a material impact on the business objectives of the Company. Further, in addition to selected significant locations and/or business units, we also selected for testing, as busi- ness processes having greater materiality, business processes relating to (i) greater likelihood of material misstatements and/or (ii) significant accounts involving estimates and the manage- ment’s judgment and/or (iii) a business or operation dealing with high-risk transactions, taking into account their impact on the financial reporting. 3. Matters relating to the results of the assessment The aforementioned assessments determined that the Company’s internal control over financial reporting was effective as of the last day of the current fiscal year examined. 4. Additional matters Not applicable. 5. Particular matters Not applicable. Hisao Sakuta President Chief Executive Officer Omron Corporation 89 Internal Control Section Independent Auditors’ Report (filed under the Financial Instruments and Exchange Act of Japan) NOTE TO READERS: Following is an English translation of the Independent Auditors’ Report filed under the Financial Instruments and Exchange Act of Japan. Readers should be aware that this report is presented merely as supplemental information. Readers should be particularly aware of the differences between an audit of internal control over financial reporting (“ICFR”) under the Financial Instruments and Exchange Act (“ICFR under FIEA”) and one conducted under the standards of the Public Company Accounting Oversight Board (United States) (“ICFR under PCAOB”); • In an audit of ICFR under FIEA, the auditors express an opinion on management’s report on ICFR, and do not express an opinion on the Company’s ICFR directly. In an audit of ICFR under PCAOB, the auditors express an opinion on the Company’s ICFR directly. • In an audit of ICFR under FIEA, there is detailed guidance on the scope of an audit of ICFR, such as quantitative guidance on busi- ness location selection and/or account selection. In an audit of ICFR under PCAOB, there is no such detailed guidance. Accordingly, regarding the scope of assessment of internal control over business processes, we selected locations and busi- ness units to be tested based on the previous year’s consolidated net sales (after the elimination of transactions between con- solidated companies), and the companies whose net sales reaches two-thirds of total sales for the previous year on a con- solidation basis were selected as “significant locations and/or business units.” At selected “significant locations and/or business units” we tested business processes leading to sales, accounts receivable and inventories as significant accounts that may have a material impact on the business objectives of Omron Corporation (the “Company”). Further, in addition to selected significant locations and/or business units, we also selected for testing, as business processes having greater materiality, business processes relating to (i) greater likelihood of material misstatements and/or (ii) significant accounts involving estimates and the management’s judgment and/or (iii) a business or operation dealing with high-risk transactions, taking into account their impact on the financial reporting. (TRANSLATION) INDEPENDENT AUDITORS’ REPORT (filed under the Financial Instruments and Exchange Act of Japan) June 23, 2009 To the Board of Directors of Omron Corporation. Deloitte Touche Tohmatsu Designated Partner,Engagement Partner, Certified Public Accountant: Yuji Morita Designated Partner, Engagement Partner, Certified Public Accountant: Teruhisa Tamai Designated Partner, Engagement Partner, Certified Public Accountant: Kenichi Takai Audit of Financial Statements Pursuant to the first paragraph of Article 193-2 of the Financial Instruments and Exchange Act, we have audited the consoli- dated financial statements included in the Financial Section, namely, the consolidated balance sheet and the related con- solidated statements of income, changes in net assets and cash flows, and consolidated supplementary schedules of Omron Corporation and consolidated subsidiaries for the fiscal year from April 1, 2008 to March 31, 2009. These consolidated finan- cial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing stan- dards generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant esti- mates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial posi- tion of Omron Corporation and consolidated subsidiaries as of March 31, 2009, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. However as described in Note 1 to the financial statements, certain segment information is presented in con- formity with Article 15-2 of “Regulation concerning Terminology, Forms and Method of Preparation of Consolidated Financial Statements” (Ordinance of the Ministry of Finance No.28, 1976) in place of Statement of Financial Accounting Standards No.131. Audit of Internal Control over Financial Reporting Pursuant to the second paragraph of Article 193-2 of the Financial Instruments and Exchange Act, we have audited management’s report on internal control over financial reporting of Omron Corporation as of March 31, 2009. The Company’s management is responsible for designing and operating effective internal con- trol over financial reporting and preparing its report on internal control over financial reporting. Our responsibility is to express an opinion on management’s report on internal control over financial reporting based on our audit. There is a possibility that material misstatements will not completely be prevented or detected by internal control over financial reporting. We conducted our audit in accordance with auditing stan- dards for internal control over financial reporting generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether management’s report on internal control over financial report- ing is free of material misstatement. An audit includes examining, on a test basis, the scope, procedures and results of assessment of internal control made by management, as well as evaluating the overall presentation of the management’s report on internal control over financial reporting. We believe that our audit provides a reasonable basis for our opinion. In our opinion, management’s report on internal control over financial reporting referred to above, which represents that the internal control over financial reporting of Omron Corporation as of March 31, 2009 is effectively maintained, presents fairly, in all material respects, the assessment of internal control over financial reporting in conformity with assessment standards for internal control over financial reporting generally accepted in Japan. Our firm and the engagement partners do not have any finan- cial interest in the Company for which disclosure is required under the provisions of the Certified Public Accountants Law. The above represents a translation, for convenience only, of the original report issued in the Japanese language. 90 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, 2009 Date of Establishment May 10, 1933 Number of Employees (Consolidated) 32,583 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 36,811 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 81-3-3436-7011 Fax 81-3-3436-7035 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 Major Domestic Manufacturing, Marketing, and Research & Development Locations Manufacturing Kusatsu Factory Tel 81-77-563-2181 Fax 81-77-565-5588 Ayabe Factory Tel 81-773-42-6611 Fax 81-773-43-0661 Stock Price Osaka Securities Exchange Monthly Volume Omron Nikkei 225 Index Index 120 100 80 60 40 20 0 100 80 60 40 20 0 1,000 Shares 30,000 20,000 10,000 0 2000/3 2001/3 2002/3 2003/3 2004/3 2005/3 2006/3 2007/3 2008/3 2009/3 Note 1. Share index (1999/3E=100) Yearly High and Low Prices Yasu Factory Tel 81-77-588-9000 Fax 81-77-588-9901 Sales & Marketing Osaki Office Tel 81-3-5435-2000 Fax 81-3-5435-2030 Mishima Office Tel 81-55-977-9000 Fax 81-55-977-9080 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 % 22.0% 23.2% 25.1% 42.9% 44.1% 37.9% 4.0% 0.8% 30.4% 4.2% 0.4% 28.1% 0.0% 5.6% 0.4% 31.0% 0.0% 06 07 08 (FY) Individuals and others Foreign institutions and individuals Other corporations Securities firms Financial institutions Government local authority FY High (¥) Low (¥) 1999 3,450 1,500 2000 3,200 1,702 2001 2,560 1,390 2002 2,115 1,320 2003 2,740 1,648 2004 2,885 2,150 2005 3,620 2,210 2006 3,590 2,615 2007 3,510 1,950 2008 2,385 940 * Closing price of Osaka Securities Exchange 91 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 pre- dict 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 plac- ing its priority on activities that bring technologies ever closer to people and fulfill these fundamental desires, while maintain- ing an optimal balance between individuals and society, between humans and the environment, and between people and machines. 92 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 sensing and control technology products that are ahead of our time. The company continues to apply the SINIC theory as a compass to anticipate social needs in various fields and offers lead- ing-edge product and technologies. 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 * ECB will be renamed as EMC (Electronic and Mechanical Components Business Company) on September 21, 2009. 93 Annual Report 2009 Year ended March 31, 2009 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 9 This mark certifies the use of Green Power (solar power). By using Green Power to print the Annual Report 2009, Omron Corporation is promoting the use of natural energy resources in Japan. IR and M&A Planning Headquarters Investor Relations Department 3-4-10 Toranomon, Minato-ku, Tokyo 105-0001 JAPAN Phone: +81-3-3436-7170 Fax: +81-3-3436-7180 Homepage: http://www.omron.co.jp (Japanese) http://www.omron.com (English)