Omron 2005 Annual Report Download - page 42

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Fiscal 2004 Management’s Discussion and Analysis
(including Business and Other Risks)
The Macroeconomic Environment
1. Japan
It is possible to summarize fiscal 2004 as a year in which the
overall expansion of economic conditions apparently slowed. In
particular, there was a marked slowdown in private capital
expenditures during the second and third quarters of fiscal 2004,
an area where significant recovery occurred during fiscal 2003.
This was due mainly to the inventory adjustment in digital con-
sumer electronics, semiconductors and other aspects of the IT
industry. However, even this inventory adjustment has basically
passed its cyclical crisis point, and something of a recovery was
noted in the fourth quarter of fiscal 2004. Moreover, the actual
growth rate of consumer spending exceeded 1.0 percent for the
first time in eight years since fiscal 1996. Export fluctuations
were seen from the second fiscal quarter when a sense of cau-
tion over restraining the overheated economic conditions in
China and uncertainty over currency exchange movements pre-
vailed. While this is certainly an unsteady economic footing, the
issues of excess equipment, personnel and liabilities, three
major strains on the Japanese economy since the collapse of the
bubble, have essentially been settled. Thus, expectations are still
strong for medium to long-term economic expansion, and the
Nikkei average stock prices have firmly remained at the ¥11,000
to ¥12,000 level.
2. Overseas
In the United States, economic conditions continued to feel the
impact of housing investment and capital expenditures. The real
GDP growth rate rose to 4.4 percent in fiscal 2004 (calendar year)
from 3 percent in fiscal 2003. However, in the latter half of the fis-
cal year, a slight slackening of the pace of growth was evident due
to unsteady elements such as the gradual weakening of tax cut
effects, an increase in long-term interest rates, and soaring energy
prices. In Europe as well, there was a partial recovery in capital
200
100
400
300
500
600
700
Net Sales and Operating Income
0
FY00 FY01 FY02 FY03 FY04
Net sales
Operating income
(Billions of yen)
10
20
30
SG&A Expenses Ratio and
R&D Expenses Ratio
0
(%)
FY00 FY01 FY02 FY03
SG&A expenses ratio
R&D expenses ratio
FY04
-10 -5
10 5
00
20
30
10
40 20
15
Net Income (Loss) and ROE
-20 -10
(Billions of yen) (%)
FY00 FY01 FY02 FY03
Net income (loss) [left axis]
ROE [right axis]
FY04
expenditures and solid economic growth in fiscal 2004. The
impact of a stronger euro and soaring prices for raw materials,
however, slowed the pace of growth in the latter half of the fiscal
year. The Asian economy has continued to be generally favorable.
In China in particular, last fiscal year’s momentum continued, and
fiscal 2004 (calendar year) saw a real GDP growth rate of 9.5 per-
cent (compared to 9.3 percent for fiscal 2003). Although China has
on occasion controlled excessive economic expansion, given the
acceleration of its buying power and upcoming large-scale events
such as the Olympics and World Exposition, it is likely to still expe-
rience high growth in the medium to long term.
General Overview of Fiscal 2004 Results
Net sales increased 4.1 percent over the previous fiscal year,
while operating income and net income showed significant
increases of 9.2 percent and 12.6 percent, respectively. Operating
income and net income levels have been the highest on record
for two consecutive terms. The Group has identified the primary
causes for the change in operating income as follows: A sharp
rise in materials expenses of approximately ¥1.0 billion, currency
exchange fluctuations of approximately ¥800 million, and the
roughly ¥5 billion increase in selling, general and administrative
(SG&A) expenses, including research and development (R&D)
expenses. However, these negative factors were absorbed on the
plus side by the increased net sales of ¥10.5 billion, and cost
reductions amounting to about ¥1.0 billion. Return on sharehold-
ers’ equity (ROE) reached 10.4 percent, again clearing the target
of 10 percent, after registering 10.2 percent in fiscal 2003.
Improvements in balance sheet efficiency and financial health
have also continued. Total assets shrank by approximately ¥6.9
billion in line with inventory reductions, etc. Total liabilities shrank
by approximately ¥38.0 billion, primarily due to reductions in long-
term and short-term borrowings. As a result, the shareholders’
equity ratio increased by 5.8 percentage points to 52.2 percent.