FINANCIAL
REVIEW

Operating Results
Overview
In the year ended March 31, 2005, the parent company and its
consolidated subsidiaries (collectively, “the Company”) took avariety of decisive steps aimed at enhancing their operations—which center on security services and also include medical,
insurance, information and GIS services, real estate development and sales, and real estate leasing—by improving services
and expanding marketing and product development. Firm gains
in revenue in all segments, particularly security services, supported a rise in net sales and operating revenue of 6.7%, or¥34.9 billion, to ¥552.4 billion. Operating income increased
39.8%, or ¥21.5 billion, to ¥75.6 billion, reflecting higher net
sales and operating revenue for the period under review, as wellas the absence of ¥8.8 billion in losses recorded a year earlier
owing to a revision of pension plans. Net income totaled ¥52.1billion, up 122.0%, or ¥28.7 billion, as a result of such factors
as improved operating income and ¥9.9 billion in income fromdiscontinued operations, net of tax, compared with a ¥4.2 billion
loss a year earlier.
In the period under review, the consolidated statements ofincome were reclassified. Furthermore, the operating results ofcertain businesses and real estate properties that were sold andwith which the Company will not have significant and continuing
involvement were expressed as “income (loss) from discontinued
operations, net of tax.”
Net Sales and Operating Revenue
Net sales and operating revenue amounted to ¥552.4 billion, up
6.7%, or ¥34.9 billion. Net sales and operating revenue rose inall segments, including security services. (For more details,please see Segment Information below.)
Costs and ExpensesCosts and expenses edged up 2.9%, or ¥13.4 billion, to ¥476.8billion. Cost of sales grew 8.8%, or ¥28.3 billion, to ¥349.2 billion, equivalent to 63.2% of net sales and operating revenue, up
from 62.0% in the previous period. The higher cost-of-sales ratio
was primarily a result of a less favorable loss ratio in the insurance services segment due to damages sustained in typhoons
and other natural disasters, as well as the consolidation of anorganization that manages hospitals and health care-related
institutions. The consolidation was made in line with FASBInterpretation No. 46 (revised December 2003) (“FIN No. 46R”),“Consolidation of Variable Interest Entities—an Interpretation ofARB No. 51,” issued by the Financial Accounting Standards
Board (FASB) of the United States.
Selling, general and administrative expenses fell 2.3%, or¥2.8 billion, to ¥120.2 billion, representing 21.8% of net sales
and operating revenue, down from 23.8% a year earlier. This
reflected cost reduction efforts as well as decreases in net
pension and severance costs and in the provision to allowancefor doubtful accounts.
Impairment loss on long-lived assets shrank ¥3.9 billion, to¥4.6 billion. Loss on sales and disposal of property, plant andequipment, net, amounted to ¥2.8 billion. In the previous fiscal
year, the Company revised its pension plan to strengthen its
financial condition. This resulted in a ¥4.6 billion settlement lossof benefit obligation on transfer to defined contribution pension
plan and a ¥4.2 billion loss on transfer of the substitutional
portion of Employees’ Pension Fund.
Operating Income
Operating income climbed 39.8%, or ¥21.5 billion, to ¥75.6
billion, equivalent to 13.7% of net sales and operating revenue,compared with 10.4% the previous year. Factors influencing
the increase included a rise in net sales and operating revenue,a decrease in selling, general and administrative expenses, adrop in impairment loss on long-lived assets, and the absenceof settlement loss of benefit obligation on transfer to defined
contribution pension plan and loss on transfer of the substitutional portion of Employees’ Pension Fund, both of which wererecorded in the previous year. Higher cost of sales, however,partially offset these positive factors. Operating income fromthe security services segment remained firm. The medical services segment and information and communication related andother services segment both recorded operating income, incontrast to the operating losses recorded the previous fiscalyear. These improvements contributed to the overall increase inoperating income, despite an operating loss from the insurance
services segment. (For more details, please see Segment
Information below.)
Other Income and Expenses
Other income rose 15.8%, or ¥894 million, to ¥6.6 billion. Other
expenses totaled ¥7.9 billion, up 23.2%, or ¥1.5 billion. The totalof other income and expenses was net other expenses of ¥1.3billion, compared with net other expenses of ¥701 million theprevious fiscal year.

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ANNUAL REPORT 2005 21

Financial Review

Income Taxes
Income taxes increased ¥5.8 billion, to ¥31.9 billion, reflecting
higher income from continuing operations before incometaxes. Income taxes were equivalent to 43.0% of income fromcontinuing operations before income taxes, down from 49.0%
a year earlier, owing mainly to a decrease in unrecognized tax
benefits from subsidiaries in loss positions.
Minority Interest in Subsidiaries and Equity in Net Incomeof Affiliated Companies
Minority interest in subsidiaries amounted to ¥2.9 billion, up¥2.5 billion, mainly because of improved income from GIS services. Equity in net income of affiliated companies was ¥2.3 billion, up ¥1.4 billion, owing primarily to solid performances by
Taiwanese and South Korean equity-method affiliates andimproved income in the cable television (CATV) business.
Income from Continuing Operations
Reflecting the above factors, income from continuing operations
rose 50.8%, or ¥14.1 billion, to ¥41.7 billion, amounting to7.6% of net sales and operating revenue, compared with 5.4%
a year earlier.
Income (Loss) from Discontinued Operations
Discontinued operations include any component of an entitywith its own identifiable operations and cash flows which is
disposed of or is classified as held for sale, and with which
the Company will not have significant continuing involvement.
During the period, the Company sold its education services
operations, and its security services operations in theUnited States. The Company also sold certain real estate
properties under operating leases. Income from discontinuedoperations, net of tax, totaled ¥9.9 billion, mainly as a consequence of the gain on sales of discontinued operations, compared with a loss of ¥4.2 billion in the previous period. (Formore information, please refer to Note 25 of the accompanying
Notes to Consolidated Financial Statements.)
Net Income
Net income totaled ¥52.1 billion. Both basic and diluted net
income per share were ¥231.66. Cash dividends per share of¥50.00 were approved at the general shareholders’ meeting
held on June 29, 2005.

22 SECOM CO., LTD.

ANNUAL REPORT 2005

Segment Information
For detailed segment information, please see Note 27 of theNotes to Consolidated Financial Statements. Net sales and operating revenue in the security services segment climbed 4.1%, or¥15.1 billion, to ¥383.7 billion. Excluding intersegment transactions, segment net sales and operating revenue amounted to¥382.4 billion, equivalent to 69.2% of total net sales and operating revenue, down from 71.0%. Net sales and operating revenue from mainstay commercial and home security services
totaled ¥268.4 billion, up 3.1%, or ¥8.1 billion. Large-scale proprietary systems accounted for ¥3.5 billion, a decrease of 2.5%,or ¥91 million. Static guard services represented ¥38.3 billion, arise of 2.0%, or ¥765 million. Armored car services generated¥18.5 billion, a decrease of 0.8%, or ¥156 million. Merchandiseand other contributed ¥53.7 billion, up 13.3%, or ¥6.3 billion.
Operating income in the security services segment totaled ¥90.4billion, an increase of 19.2%, or ¥14.6 billion. The operating
margin rose from 20.6% to 23.6%, mainly owing to firm net
sales and operating revenue in the commercial and home security category and the merchandise and other category. The
improved operating margin was also attributable to the absenceof settlement loss of benefit obligation on transfer to defined
contribution pension plan and loss on transfer of the substitutional portion of Employees’ Pension Fund, both of which wererecorded in the previous year.
The medical services segment generated net sales and operating revenue of ¥34.9 billion, up 63.5%, or ¥13.6 billion. This
reflected the consolidation of an organization that manages hospitals and health care-related institutions—a change in linewith FIN No. 46R. Segment operating income was ¥1.6 billion,
compared with an operating loss of ¥1.5 billion a year earlier,owing mostly to a decrease in provision to allowance for doubtful accounts and the contribution of the newly consolidatedorganization.
In the insurance services segment, net sales and operating
revenue grew 12.7%, or ¥3.3 billion, to ¥29.2 billion, mainly
owing to an increase in net realized investment gains. Segment
operating losses amounted to ¥3.0 billion, in contrast with operating income of ¥2.4 billion the previous fiscal year, reflecting ahigher loss ratio due to damages sustained in typhoons andother natural disasters.
In the information and communication related and otherservices segment, which encompasses information-related services, GIS services, real estate development and sales, and realestate leasing, net sales and operating revenue rose 4.3%, or¥4.7 billion, to ¥113.7 billion. This was mainly the result of
increased revenue from GIS services and the recent consolidation of Japan Image Communications Co., Ltd., a provider ofcommissioned broadcasting services, which only contributed tothree months of consolidated financial results in the previous
fiscal period. Segment operating income amounted to ¥420 million, compared with an operating loss of ¥8.2 billion, primarily
owing to improved operating income from GIS services and adecrease in impairment loss on long-lived assets.
Financial Position
Total assets of the Company as of March 31, 2005, stood at¥1,164.2 billion, down 0.1%, or ¥901 million, from the previous
fiscal year-end.
Total current assets rose 8.5%, or ¥41.2 billion, to ¥526.2billion. This mainly reflected a ¥35.7 billion increase in shortterm investments, to ¥71.6 billion, in line with a shift in theCompany’s insurance business investment portfolio to assets
with higher liquidity. The current ratio was 2.0 times, comparedwith 1.7 times a year earlier, owing to an increase in total
current assets and a decrease in total current liabilities,
mentioned below.
Investments and long-term receivables amounted to ¥314.0billion, up 9.8%, or ¥28.0 billion, mostly following the purchaseof investment securities as part of the aforementioned review of
the Company’s insurance business investment portfolio.

Shareholders’Equity per ShareProperty, plant and equipment, less accumulated depreciation, fell 23.6%, or ¥71.5 billion, to ¥231.4 billion. This was
mainly attributable to the sale of real estate for lease—in line withthe review of its insurance business investment portfolio and its
real estate for lease holdings—and impairment loss on longlived assets.
Other assets increased 1.6%, or ¥1.4 billion, to ¥92.6 billion.
Factors leading to this rise included an increase in goodwill—
due to the consolidation of an organization in line with FIN
No. 46R—and a rise in prepaid pension and severance costs.
These factors were partially offset by a decrease in deferredincome taxes due to an impairment loss and pension andseverance costs.
Total liabilities amounted to ¥673.9 billion, down 6.3%, or¥45.1 billion, from a year earlier.
Total current liabilities fell 5.8%, or ¥16.5 billion, to ¥267.7billion, primarily reflecting a ¥12.5 billion decline in bank loans
and current portion of long-term debt, to ¥112.7 billion.
Long-term debt decreased ¥25.3 billion, to ¥65.8 billion.
Guarantee deposits received amounted to ¥28.1 billion, down
¥6.9 billion, following the sale of real estate for lease. Investment
deposits by policyholders totaled ¥227.7 billion and accounted
for 19.6% of total liabilities and shareholders’ equity.
Total shareholders’ equity increased 10.1%, or ¥42.0 billion,to ¥457.8 billion. Retained earnings rose ¥41.9 billion, to ¥347.5billion. The equity ratio edged up to 39.3%, from 35.7%.

Total Assets

Depreciation andAmortization(In billions of yen)

(In billions of yen)

(In yen)

2,500

1,250

60

2,000

1,000

48

1,500

750

36

1,000500

24500

250

120001 02 03 04 05

01 02 03 04 05

001 02 03 04 05

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ANNUAL REPORT 2005 23

Financial Review

Cash Flows
The Company is committed to maintaining sufficient liquidity toallow flexibility in its operations and ensure a solid financial
foundation. To the best of its ability, the Company is also firmly
committed to financing related strategic investments with cashfrom its operating activities.
In the period under review, net cash provided by operating
activities amounted to ¥85.1 billion. Important items contributing
to this total were net income of ¥52.1 billion and depreciation
and amortization, including amortization of deferred charges, of¥51.5 billion. Operating activities provided ¥4.1 billion less cashthan in the previous period. This was mainly attributable todecreases in losses of such non-cash items as impairment loss
on long-lived assets, including discontinued operations, andan increase in receivables and due from subscribers, net ofallowances, owing to stronger sales in the GIS services category.
These two factors countered the improvement in net income.
Net cash used in investing activities amounted to ¥24.0billion. Payments for purchases of property, plant and equipment totaled ¥43.9 billion, partly the result of purchases ofsecurity equipment and control stations due to growth in thenumber of security services subscribers. Other significant factors were increase in short-term investments and net paymentsfor purchases of investment securities of ¥57.0 billion, reflecting
a review of the Company’s investment portfolio. The Company
recorded proceeds from sales of property, plant and equipmentof ¥88.5 billion, notably real estate for lease. Investing activities
used ¥4.6 billion less than in the previous period, primarily
as a result of an increase in proceeds from sales of property,
plant and equipment, which limited the impact of increase in
short-term investments and net payments for purchases ofinvestment securities.
Net cash used in financing activities totaled ¥57.0 billion.
This amount included a net outlay of ¥43.2 billion for repayments of debt—comprising net repayments of long-term debt
and decrease in bank loans—and dividends paid of ¥10.1 billion.
Net cash used in financing activities rose ¥10.2 billion, largely
the result of intense efforts to reduce interest-bearing debt.
As a result of the operating, investing and financing activities
described above, cash and cash equivalents at end of year
amounted to ¥197.0 billion, up ¥4.1 billion from ¥192.9 billion
a year earlier.

Capital Expenditures

Cash Flows(In billions of yen)

(In billions of yen)

150

1001205090060–50300–10001 02 03 04 05

0304

Cash flows fromoperating activities
Cash flows frominvesting activities
Cash flows fromfinancing activities

24 SECOM CO., LTD.

ANNUAL REPORT 200505