Omron 2004 Annual Report Download - page 34

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FISCAL 2003 MANAGEMENT’S DISCUSSION AND ANALYSIS
THE MACROECONOMIC ENVIRONMENT
1. Japan
The Japanese economy began showing signs of recovery from fiscal
2002, with the pace of recovery accelerating in fiscal 2003, ended
March 2004. Structural dependence on the U.S. decreased as China
emerged as another engine of growth in the world economy, and
exports continued to expand despite the appreciation of the Japanese
yen. One characteristic of the economic recovery in fiscal 2003 was
that domestic demand, after a long period of stagnation, showed
signs of recovery, reinforcing the expansionary undertone. In particu-
lar, private-sector capital investment began showing double-digit
growth from the second half of the fiscal year. New growth industries,
where Japan can fully demonstrate its originality and competitiveness,
such as digital home electronics emerged for the first time in many
years, accompanying a substantial improvement in the corporate men-
tality concerning forward-looking capital investment. In the fourth
quarter, this wave of recovery also began rippling across consumption
and employment.
2. Overseas
Despite elements of uncertainty such as concerns over terrorism and
the federal deficit, real GDP in the U.S. showed a 3.1 percent year-on-
year growth in fiscal 2003, up from 2.2 percent in the previous year.
Tax cuts contributed especially to strength in housing investments and
consumption. Recovery in Europe was softer, as the strong euro
restrained exports and personal consumption did not fully overcome
the continuing stagnation. A bright spot, however, was seen in corpo-
rate profits resulting from structural reforms. The greatest economic
expansion was seen in Asia, as real GDP growth during 2003 exceed-
ed three percent in Hong Kong, Taiwan, and Korea, and hit nine per-
cent in China. Besides dynamism in IT industries, domestic demand
in China remained strong due to ongoing preparations for the 2008
Olympic Games. This strength was spreading to neighboring coun-
tries as well.
GENERAL OVERVIEW OF FISCAL 2003 RESULTS
Although consolidated net sales increased 9.3 percent compared to
fiscal 2002, operating income rose 59.1 percent and net income was
up by a factor of 52, with both figures setting new all-time highs. An
increase in SG&A expenses of ¥13.3 billion, including our aggressive
investments in Research & Development (R&D) to achieve future
growth, was more than covered by the combination of an increase in
revenue (¥22.2 billion) and effects of structural reforms such as reduc-
tions in fixed manufacturing costs (¥10.2 billion). As a result, return on
equity (ROE) jumped to 10.2 percent, up from 0.2 percent in fiscal
2002, allowing the Omron Group to reach its goal of 10 percent ROE
one year earlier than planned. Accordingly, a substantial improvement
was achieved in terms of free cash flow, and the ratio of shareholders’
equity to total assets advanced from 44.3 percent to 46.4 percent.
REVIEW AND ANALYSIS OF THE INCOME STATEMENT
Sales
Consolidated net sales were up 9.3 percent year-on-year to ¥584,889
million. Higher sales were recorded for all regions except North
America, and for all business segments except Automotive Electronic
Components Business (AEC) and Other Businesses.
Cost of Sales and SG&A Expenses
Along with the increase in sales, the cost of sales and SG&A expenses
rose, by 5.3 and 5.2 percent year-on-year, respectively. Partly thanks
to our restructuring efforts through the implementation of the Group’s
Productivity Improvement Reforms (VIC21), however, the cost of sales
and the SG&A expenses ratio declined by 2.2 and 1.0 percent points,
respectively. R&D expenses were up by ¥6,259 million year-on-year,
to ¥46,494 million, rising from 7.5 percent to 7.9 percent as a percent-
age to total net sales. This only reflects the fact that the Omron Group
has promoted R&D investment as a key component of its growth
strategy. The Group plans to maintain future R&D expenses at
approximately eight percent of net sales.
FY99 FY00 FY01 FY03
200
100
400
300
500
600
Net Sales & Operating Income
0
Net sales
Operating income
FY02
(Billions of yen)
FY99 FY00 FY01 FY03
10
20
30
SG&A Expenses Ratio &
R&D Expenses Ratio
0
SG&A expenses ratio
R&D expenses ratio
FY02
(%)
(%)
FY99 FY00 FY01 FY03
-10 -5
10 5
00
20 10
30 15
Net Income (Loss) & ROE
-20 -10
Net income (loss) [left axis]
ROE [right axis]
FY02
(Billions of yen)