Financial Review
Operating Results

Overview
In the year ended March 31, 2014,
SECOM CO., LTD. and its subsidiaries(collectively, “the Company”) sought toprovide high-quality products and services
that respond to the needs of customers in
its core security services segment, as wellas in its fire protection services, medical
services, insurance services, geographic
information services, information andcommunication related services, and realestate and other services segments.
Consolidated net sales and operating
revenue rose 7.3%, or ¥62.7 billion, to¥921.2 billion. This result was attributableprincipally to increases in net sales andoperating revenue contributions from At
Tokyo and certain subsidiaries providing
security services, all of which were newly
consolidated in the previous period, as wellas to higher net sales and operating revenue in all segments except for real estateand other services. Operating income grew
5.8%, or ¥6.5 billion, to ¥120.1 billion,
bolstered by an increase in net sales andoperating revenue and a decline in costof sales in the fire protection services
segment, a full year of contributions fromAt Tokyo to results in the information andcommunication related services segment,
and higher net sales and operating revenue in the security services segment.
Net income attributable to SECOM CO.,LTD., advanced 4.8%, or ¥3.4 billion, to¥74.0 billion.
Effective from the period under review,
losses attributable to certain businesses in
the real estate and other services segment
are reclassified and presented as “lossfrom discontinued operations, net of tax”
in the consolidated statements of income.
Certain segment results for previous fiscal
years have been restated to conform withthis change.
Net Sales and Operating Revenue
Consolidated net sales and operating
revenue rose 7.3%, or ¥62.7 billion, to¥921.2 billion, bolstered by increases inthe security services, information and communication related services, medical services, fire protection services, geographic
information services and insurance services
segments. Net sales and operating revenue
in the real estate and other services segment declined. (For further details, pleasesee Segment Information below.)32

SECOM Annual Report 2014

Costs and Expenses
Total costs and expenses increased 7.5%,
or ¥56.2 billion, to ¥801.1 billion. Costof sales, at ¥628.9 billion, was up 8.4%,
or ¥48.8 billion, and was equivalent to68.3% of net sales and operating revenue,
up from 67.6% in the previous fiscal
year, an increase due primarily to outlays
for the expansion and modification of
hospitals, which pushed up cost of sales
as a percentage of net sales and operating
revenue in the medical services segment.
Selling, general and administrative(SG&A) expenses rose 3.1%, or ¥4.9
billion, to ¥166.0 billion. SG&A expenses
were equivalent to 18.0% of net sales
and operating revenue, an improvementfrom 18.8% in the previous fiscal year. The
Company also recognized an impairment
loss on certain long-lived assets in the
medical services segment of ¥2.8 billion,¥2.4 billion higher than in the preceding
period, as well as a loss on sales and disposal of fixed assets, net, of ¥3.2 billion,
an increase of ¥1.0 billion. In contrast,
impairment loss on goodwill decreased¥901 million, to ¥151 million.
Operating Income
Operating income grew 5.8%, or ¥6.5 billion, to ¥120.1 billion, although operating
income as a percentage of net sales andoperating revenue edged down to 13.0%,
from 13.2% in the previous fiscal year. The
Company’s segments, in order of contribution to operating income, were security
services, fire protection services, information and communication related services,
real estate and other services, geographic
information services, medical services andinsurance services. (For further details,
please see Segment Information below.)
Other Income and Expenses
Other income increased ¥1.7 billion,to ¥11.7 billion, while other expenses
declined ¥148 million, to ¥3.0 billion,
resulting in net other income of ¥8.7
billion, up ¥1.9 billion from the preceding
period. Principal factors behind this result
included increases in gain on sales of
securities, net, which rose ¥785 million,to ¥935 million, and a gain on private
equity investments, which advanced¥469 million, to ¥5.6 billion.

Income Before Income Taxes andEquity in Net Income of AffiliatedCompanies
Income before income taxes and equity in
net income of affiliated companies rose
7.0%, or ¥8.4 billion, to ¥128.8 billion,
reflecting gains in operating income andnet other income.
Income Taxes
Income taxes were up ¥3.0 billion, to¥49.7 billion, equivalent to 38.6% ofincome before income taxes and equity
in net income of affiliated companies,
compared with 38.8% in the previous
fiscal year. This result was due mainly to a
decline in the statutory tax rate as a resultof changes to Japan’s tax regulations anda corresponding write-down of certain
components of net deferred tax assets,
which were offset by a reassessment of
the recoverability of these assets and areversal of valuation allowance.
Equity in Net Income of AffiliatedCompanies
Equity in net income of affiliated companies increased ¥122 million from theprevious fiscal year, to ¥4.0 billion.
Loss from Discontinued Operations
Discontinued operations include any
component of an entity with its own
identifiable operations and cash flows thathas been disposed of or is to be sold andin which the Company has no significant
continuous involvement. The Company
discontinued certain businesses in the realestate and other services segment in theprevious fiscal year and has plans to sell
these businesses in the fiscal year ending
March 31, 2015. In the period underreview the Company posted a loss fromdiscontinued operations, net of tax, of¥138 million, an improvement from¥912 million in the preceding period.
Net Income Attributable to
Noncontrolling Interests
Net income attributable to noncontrollinginterests amounted to ¥9.0 billion, up ¥2.9
billion from the previous fiscal year. This
result reflected an increase in net incomein the fire protection services business andthe inclusion of a full year of contributions
from subsidiaries newly consolidated in thepreceding period.

Segment Information(For further information, please see Note 27 of the accompanying Notes to the Consolidated
Financial Statements.)

Net Income Attributable to SECOM
CO., LTD.
Net income attributable to SECOM CO.,LTD. rose 4.8%, or ¥3.4 billion, to ¥74.0
billion, equivalent to 8.0% of net sales andoperating revenue, compared with 8.2%
in the preceding period. Net income attributable to SECOM CO., LTD. per share was¥338.94, up from ¥323.36. Subsequent
to the fiscal year ended March 31, 2014, a
proposal to pay cash dividends of ¥115.00
per share, an increase of ¥10.00 per sharefrom the previous fiscal year, was approvedat the general shareholders’ meeting heldon June 25, 2014.

acquired at the beginning of the fourth
quarter of the previous fiscal year. Armoredcar services, which involve the transport ofcash, securities and other valuables using
specially fitted armored cars and security
professionals, reported net sales and operating revenue of ¥20.8 billion, up 1.1%, or¥235 million.
The merchandise and other category
encompasses sales of a wide range of
security products, including security
camera systems, access control systems,
automated fire extinguishing systems andexternal monitoring systems, which can be
freestanding or linked to on-line security
systems. Net sales and operating revenue
in this category increased 21.6%, or ¥14.5
billion, to ¥81.9 billion, bolstered by the
inclusion of a full year of results in thiscategory of the aforementioned subsidiaryacquired at the beginning of the fourth
quarter of the previous fiscal year, andby an increase in sales of security camera
systems.
Operating income in the security services segment edged up 1.7%, or¥1.7 billion, to ¥104.1 billion, owing tohigher segment net sales and operating
revenue. The operating margin slipped
to 21.9%, from 23.0% in the preceding
period. This decrease was attributable tothe fact that the business portfolio of thesubsidiary acquired at the beginning of
the fourth quarter of the previous fiscal
year centers on static guard services andmerchandise and other, margins for which
are lower than those for electronic security
services, as well as to an increase in costs
and expenses accompanying forwardlooking investments to revamp on-line
security systems with the aim of securing
future growth.
In light of the increasing significanceof construction and installation services,
these services—formerly included in the
security services segment—have been
reclassified and are included in the realestate and other services segment to facilitate more adequate disclosure and improvethe effectiveness of segment information.
Certain segment results for previous fiscal
years have been restated to conform withthis change.

Financial Review

Security Services
The security services segment comprises
electronic security services, which centeron on-line security systems; other security
services; and merchandise and other. In the
period under review, net sales and operating revenue in this segment increased
6.7%, or ¥29.7 billion, to ¥475.3 billion.
Excluding intersegment transactions, net
sales and operating revenue in this segment
amounted to ¥472.4 billion, representing
51.3% of overall net sales and operating
revenue, down slightly from 51.6% in theprevious period.
In addition to on-line commercial andhome security systems (centralized systems), electronic security services include
large-scale proprietary security systems,
which center on surveillance services forthe subscriber’s premises. On-line commercial and home security systems use sensors,
controllers and other equipment installed at
the subscriber’s premises to detect events,
including intrusions, fires and equipment
malfunctions. Equipment is linked to a
SECOM control center via telecommunications circuits to facilitate around-the-clock
remote monitoring. Should an irregularity
be detected, relevant information is relayed
to the control center, where staff dispatch
emergency response personnel to takeappropriate measures. Control center staff
also notify the police or fire department, if
necessary. The Company has established an
integrated approach, whereby it takes full
responsibility for all aspects of its on-line
commercial and home security systems,
from R&D through to equipment manufacturing, sales, security planning, installation,
monitoring, emergency response services
and equipment maintenance. Net sales andoperating revenue from electronic security
services rose 3.5%, or ¥10.6 billion, to¥318.1 billion, owing to the expansion of
the Company’s lineup of value-added services that respond to diverse security needs
and firm sales of on-line home security systems, as well as to the positive impact ofyen depreciation and an increase in contract volume on the net sales and operating
revenue of overseas subsidiaries.
Other security services include static
guard services and armored car services.
Static guard services, which are provided byhighly trained professional security guards
for situations requiring human judgment
and flexible responsiveness, generated
net sales and operating revenue of ¥51.7
billon, up 7.9%, or ¥3.8 billion, owing
principally to the inclusion of a full yearof net sales and operating revenue in thestatic guard services business of a subsidiaryFire Protection Services
This segment focuses on high-grade,tailored automatic fire alarm systems,
fire extinguishing systems and other fire
protection systems for a wide range ofapplications, including office buildings,
plants, tunnels, cultural properties, ships
and residences. During the period under

SECOM Annual Report 201433

Financial Review

review, Nohmi Bosai and Nittan, two ofJapan’s leading domestic fire protection
services providers, leveraged their respective business foundations and productdevelopment capabilities to secure orders
for fire protection systems.
Net sales and operating revenue in thissegment advanced 7.4%, or ¥8.7 billion in
the period under review, to ¥127.2 billion,
owing to active efforts to market systems
that respond to needs, particularly in therenovations market. Operating income was¥10.5 billion, an increase of 75.0%, or¥4.5 billion, thanks mainly to cost reductions. The operating margin improved to
8.2%, from 5.0%.
Medical Services
The medical services segment encompasses
home medical services, which center onhome nursing and pharmaceutical dispensing services, as well as the operation ofresidences for seniors, electronic medical
report systems, sales of medical equipment,
personal care services, and support forthe management of hospitals and healthcare-related institutions. The segment also
includes the operations of variable interest
entities of which the Company is the primary beneficiary, which manage hospitals
and health care-related institutions.
Segment net sales and operating revenue rose 6.8%, or ¥9.6 billion, to ¥150.7
billion. The principal factor behind thisresult was an increase in contributions fromoperations of the aforementioned variableinterest entities attributable to the expansion and modification of hospitals, and torobust sales of pharmaceuticals, among
others. Operating income fell 50.4%,
or ¥2.8 billion, to ¥2.7 billion, while theoperating margin slipped to 1.8%, from
3.9%, primarily reflecting the recognitionof impairment losses on certain real estate
and the aforementioned expansion andrefurbishment of hospitals.
Insurance Services
In addition to security services, which arepreventative by nature, the Company
offers non-life insurance, which looks after
customers in the event of misfortune.
The insurance services segment offers anextensive lineup that includes the Security
Discount Fire Policy, a commercial fire insurance policy, and SECOM Anshin My Home,a comprehensive fire insurance policy forhomes—both of which offer discounts
on premiums to customers who haveinstalled on-line security systems, recognizing this as a risk-mitigating factor—and
SECOM Anshin My Car, a comprehensive

34

SECOM Annual Report 2014

automobile insurance policy that offers onsite support services provided by SECOM
emergency response personnel should thepolicyholders be involved in an accident.
Other offerings include MEDCOM, anunrestricted cancer treatment policy thatcovers the entire cost of medical treatment
for cancer.
In the period under review, net sales
and operating revenue in this segment
increased 3.3%, or ¥1.3 billion, to ¥39.9
billion, primarily reflecting an increase ininsurance premiums attributable to firmsales of fire insurance policies and the
MEDCOM unrestricted cancer insurance
policy and net realized investment gains.
The segment reported operating income of¥2.0 billion, a decline of 26.0%, or ¥705
million, and an operating margin of 5.0%,
down from 7.0% in the previous fiscal year,
owing mainly to a higher loss ratio resulting from claims related to snow damage,among others, which pushed up costs andexpenses related to insurance contracts.
Geographic Information Services
The geographic information services segment includes the collection of geographic
data from satellite images, aerial photography and vehicle-based ground surveying, which it integrates, processes andanalyzes to provide a variety of geospatial
information services to national and local
governments and private sector customers
in Japan. The Company also extends geospatial information services to government
agencies overseas, including in emerging
economies and developing countries.
Segment net sales and operating
revenue rose 6.7%, or ¥3.4 billion, to¥54.8 billion, spurred by firm sales topublic-sector entities in Japan. Operating
income rose 61.7%, or ¥1.4 billion, to¥3.7 billion, while the operating margin
improved to 6.8%, from 4.5%, reflecting
improved margins in overseas markets
and the absence of an impairment loss on
goodwill reported in the preceding period,a consequence largely of the Eurozone
crisis.
Information and Communication
Related Services
Information and communication related
services focus on data center services,
as well as uniquely SECOM BCP support
services, information security services andcloud-based services.
Net sales and operating revenue in the
period under review climbed 53.3%, or¥18.5 billion, to ¥53.4 billion, bolsteredmainly by a full year of contributions fromAt Tokyo, one of Japan’s leading data center services firms in terms of power supply
stability and security level, which became
a consolidated subsidiary on October 31,
2012. The inclusion of a full year ofoperating income from At Tokyo boosted
segment operating income 62.8%, or¥2.5 billion, to ¥6.4 billion. The operating
margin improved to 11.9%, from 11.2%
in the previous fiscal year.
In light of the increasing significance of
information and communication related
services, these services, formerly included in
the information and communication related
and other services segment, are now
presented separately as the informationand communication related services segment to facilitate more adequate disclosureof the Company’s business activities andimprove the effectiveness of segment
information. Certain segment results forprevious fiscal years have been restated toconform with this change.
Real Estate and Other Services
The real estate and other services segment
encompasses the development and sales ofcondominiums equipped with sophisticatedsecurity and disaster-preparedness features,
as well as real estate leasing, construction
and installation and other services.
Segment net sales and operating
revenue declined 19.7%, or ¥9.7 billion, to¥39.7 billion, primarily as a consequenceof falling sales of condominiums, which
pushed down sales in the real estate development and sales business. Owing mainly
to a decrease in write-downs on real estate
inventories, operating income edged up
1.4%, or ¥63 million, to ¥4.7 billion, andthe operating margin improved to 11.8%,
from 9.4% in the previous fiscal year.
Previously, real estate development
and sales were presented as a reportablesegment. However, owing to a decreasein their significance, effective from thefiscal year ended March 31, 2014, thesebusinesses were reclassified under the otherservices segment, which was renamed thereal estate and other services segment.
Certain segment results for previous fiscal
years have been restated to conform withthis change.

Financial Position

Total assets as of March 31, 2014,
amounted to ¥1,440.7 billion, ¥100.4
billion higher than at the end of theprevious period. Total current assets, at¥578.1 billion, advanced ¥12.1 billion,
and accounted for 40.1% of total assets.
Cash and cash equivalents totaled ¥230.8
billion, an increase of ¥8.1 billion, owing
to the fact that net cash provided by operating activities exceeded net cash used ininvesting and financing activities. (For further details, please see Cash Flows, which
follows this section.) Notes and accounts
receivable, trade, rose ¥8.1 billion, to¥128.0 billion, a consequence primarily ofhigher net sales and operating revenue inthe fire protection services and geographic
information services segments—both ofwhich tend to see increases in net sales
and operating revenue toward the end of
the fiscal year—and an increase in security
system installations. Inventories, at ¥51.9
billion, were down ¥6.2 billion, primarilyreflecting a decline in real estate inventories, a consequence of the delivery ofcondominiums. With both current assets
and current liabilities up, the current ratio
was 2.0 times as of March 31, 2014, onlevel with the previous fiscal year-end.
Investments and long-term receivablesrose ¥67.0 billion, to ¥324.7 billion, or
22.5% of total assets. Investment securities increased ¥49.5 billion, to ¥204.6
billion, owing principally to a review
of investment assets in the insurance
services segment, which resulted in thepurchase of bonds, among others.

Investments in affiliated companies
increased ¥10.6 billion, to ¥49.8 billion,
pushed up mainly by firm earnings atoverseas affiliated companies and by thedepreciation of the yen.
Property, plant and equipment, lessaccumulated depreciation, advanced ¥9.1
billion, to ¥394.4 billion, equivalent to27.4% of total assets. With the openingof new Secure Data Center facilities, buildings and improvements rose ¥11.7 billion,to ¥297.3 billion. Construction in progress
amounted to ¥7.8 billion, up ¥4.2 billion,a result largely of the expansion and modification of hospitals managed by variableinterest entities.
Other assets were up ¥12.1 billion, to¥143.5 billion, and accounted for 10.0%
of total assets. Prepaid pension and severance costs rose ¥10.5 billion, to ¥22.1 billion, bolstered primarily by robust returns
on pension assets.
Total liabilities as of March 31, 2014,
increased ¥19.6 billion, to ¥580.3 billion, and accounted for 40.3% of total
liabilities and equity. Total current liabilities
rose ¥7.6 billion, to ¥295.1 billion, andrepresented 20.5% of total liabilities andequity. Bank loans were up ¥13.5 billion,to ¥52.5 billion. Deposits received declined¥7.7 billion, to ¥22.4 billion, largely
because of a temporary shift in the balance of bank loans and deposits received
for cash collection and deposit services.
Notes and accounts payable, trade, at¥50.0 billion, were up ¥5.0 billion, owing
primarily to an increase in orders placed

for the construction of security systems forlease near the fiscal year-end.
Total long-term liabilities increased¥12.0 billion, to ¥285.2 billion, and represented 19.8% of total liabilities and equity.
Higher sales of fire insurance policies led
to an increase in the reserve for unearned
premiums, pushing unearned premiums
and other insurance liabilities up ¥8.3 billion, to ¥98.7 billion.
Interest-bearing debt, comprising bankloans, long-term debt and the current
portion of long-term debt, advanced¥10.7 billion, to ¥115.8 billion. This result
was due largely to a temporary increase inbank loans for cash collection and deposit
services.
Total SECOM CO., LTD. shareholders’equity rose ¥73.9 billion, to ¥753.1 billion,
and was equivalent to 52.3% of total
liabilities and equity. This was attributable
to a ¥51.0 billion increase in retained
earnings, to ¥674.6 billion, owing mainly
to net income attributable to SECOM CO.,LTD. and to the payment of cash dividends. Accumulated other comprehensive
income was ¥1.7 billion, compared withan accumulated other comprehensive lossof ¥21.2 billion in the previous fiscal year,
owing primarily to a decrease in the loss
resulting from foreign currency translation
adjustments which shrank to ¥1.9 billion,
from ¥18.7 billion in the preceding period,
due to yen depreciation. As a result, theequity ratio rose to 52.3%, from 50.7%
at the end of the previous period.

SECOM CO., LTD.
Shareholders’ Equity per ShareTotal Assets(Year ended March 31, 2014)(In yen)
4,000(In billions of yen)

3,000

1,200

2,000

800

1,000

400

5.1%

4.1%

5.9%
4.0%

16.3%

51.3%

13.3%
Security Services
Medical Services
Geographic Information Services
Real Estate andOther Services

Fire Protection Services
Insurance Services
Information andCommunication
Related Services

Financial Review

Percentage of Consolidated
Net Sales and Operating Revenue*

1,600

0

0

10 11 12 13 14

10 11 12 13 14* Pie chart shows percentage of consolidated net sales andoperating revenue (excluding intersegment transactions)

SECOM Annual Report 201435

Financial Review
Cash Flows

The Company is committed to maintaining
sufficient liquidity to allow flexibility in its
operations and ensure a solid financial
foundation. To the best of its ability, theCompany is also firmly committed tofinancing strategic investments with cash
generated by its operating activities.
In the period under review, net cash
provided by operating activities amounted
to ¥123.2 billion. Significant factors
contributing to this result included net
income of ¥82.9 billion and non-cash
items, notably depreciation and amortization, including amortization of deferredcharges, of ¥66.7 billion, which werepartially offset by an increase in deferredcharges of ¥16.4 billion, an increase inreceivables and due from subscribers,
net of allowances, of ¥10.2 billion. Thesecharges consisted primarily of costs related
to the installation of security equipment
as part of on-line security systems. (Forfurther details, please see Note 2 (12) of
the accompanying Notes to Consolidated
Financial Statements.) Net cash provided
by operating activities was ¥34.2 billion
lower than in the preceding period.
Principal factors behind this result included
an increase in income tax payments,

owing to the fact that lower interim payments resulted in an increase in accrued
income taxes at the previous fiscal yearend; a significant decline in real estate
inventories as a result of the sale of major
condominium complexes to customers in
the preceding period; and a decrease indeposits received for cash collection anddeposit services.
Net cash used in investing activities
amounted to ¥95.3 billion. This result
reflected payments for purchases of investment securities of ¥76.3 billion, a consequence of a review of investment assets in
the insurance services segment; paymentsfor purchases of property, plant andequipment of ¥56.3 billion, attributable toincreases in the purchase of security equipment and control stations due to a greaternumber of security services subscribers
and in the purchase of property, plantand equipment for the expansion andmodification of hospitals managed by variable interest entities. These outlays werepartially offset by proceeds from sales andredemptions of investment securities of¥43.8 billion. Despite the increase in payments for purchases of investment securities, net cash used in investing activities

was down ¥23.3 billion from the previous
period, owing mainly to the use of cash
for acquisitions, net of cash acquired,
and to payments for purchases of property, plant and equipment related to the
opening of new hospitals managed byvariable interest entities, which pushed up
net cash used in investing activities in thepreceding period.
Net cash used in financing activities
amounted to ¥21.9 billion. This included
dividends paid to SECOM CO., LTD.
shareholders of ¥22.9 billion. Net cashused in financing activities was down
¥8.5 billion from the previous period,
owing largely to a temporary increase inbank loans for cash collection and deposit
services, which were partially offset by
an increase in dividends paid to SECOM
CO., LTD. shareholders, and to higher net
repayments of long-term debt.
The Company’s operating, investing
and financing activities in the period
under review resulted in net cash andcash equivalents at end of year of ¥230.8
billion, up ¥8.1 billion from net cash andcash equivalents at beginning of year,
which were ¥222.7 billion.

Capital Expenditures

Cash Flows(In billions of yen)

(In billions of yen)

(In billions of yen)

80

80

200

60

60

40

40

Depreciation andAmortization

150
100
50
0
20

–50

20

–100
0

10 11 12 13 14

0

–150

10 11 12 13 14

12

13

14

Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities

36

SECOM Annual Report 2014