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CANON ANNUAL REPORT 2002
Fiscal Year Ended December 31, 2002

Table of contents

  • Page 1
    C A N O N A N N UA L R E P O R T 20 0 2 Fiscal Year Ended December 31, 2002

  • Page 2
    ... sales of ink-jet multifunction peripherals and prepares to expand portable data terminal business globally 20 Cameras Strong sales achieved for digital cameras and digital video camcorders, as the market continues to shift to digital 24 Optical Products Canon releases the world's first 100x zoom...

  • Page 3
    ...,266,250 Note:U.S. dollar amounts in this Annual Report, solely for the convenience of the reader, are translated from yen at the rate of ¥120 = US$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2002. Consolidated net sales (Millions of yen) Consolidated...

  • Page 4
    ... networked monochrome multifunction devices (MFDs) and Bubble Jet printers contributed to a 22.7% increase in operating profits, to ¥411.0 billion (US$3,425 million). Sales of business systems, including facsimile machines, personal computers, micrographics equipment and calculators, fell mainly...

  • Page 5
    ... high-potential new businesses and further enhancing our financial position. Already the global leader in copying machines and laser beam printers, we are expanding color document handling and developing the print-on-demand (POD) market, as well as systems and hardware solutions businesses. Canon...

  • Page 6
    ... products now on the market were launched within the past two years, which means that we are selling a large number of products with high profitability. While shortening product development lead times, we have also dramatically reduced production defects. These efforts made possible the excellent...

  • Page 7
    ...operations. Managing the Supply Chain Supply chain management (SCM) is improving the way we do business by providing Canon Group operations, from production through sales and marketing, with effective and up-to-date order and procurement information. Canon Inc.´s Ami Plant has begun direct delivery...

  • Page 8
    ... software development. In the area of hardware solutions, we won a large-scale order to provide color copying machine systems with distinctive specifications to one of Japan´s largest convenience store networks, while in the United States we are delivering Bubble Jet printers with specialized...

  • Page 9
    ... in images from Canon the color management database. digital cameras or scanners will be perceived in the same range, whether they are displayed on-screen or output using a Bubble Jet printer, laser beam printer or color copying machine, even though the technologies of these products are different...

  • Page 10
    ... building in this area-from our dry ice parts-cleaning system to soil and groundwater decontamination using photo-functional water-hold the potential to generate high returns for the environment and the Canon Group in years to come. Fujio Mitarai tries out a new digital camera during a plant visit...

  • Page 11
    ... Promotion Headquarters in Canon Inc. Individual product group operations also maintain internal environment management functions, while Environment Promotion committees in the Americas, Europe, Asia and Oceania handle regionspecific activities. Since 2001, Canon has employed an evaluation system...

  • Page 12
    ... Bubble Jet printers realizing both energy savings and resource efficiency Canon's originally developed color IH fixing technology radically reduces warm-up time. Taking a Materials Approach to Cameras To reduce hazardous materials, Canon has adopted lead-free glass in most of its camera and video...

  • Page 13
    .... In related activities, we have developed a simple yet highly effective partscleaning system using dry ice pellets, and a nontoxic organic lens-cleaning solvent. Other environmental businesses are in the making, as we explore the many possibilities made possible by Canon creativity. Building for...

  • Page 14
    ... in products and services based on digital imaging technologies, Canon will continue philanthropic programs using its products and support for the creative activities of digital imaging artists. Supporting research that benefits society through programs under Canon U.S.A.'s Clean Earth Campaign...

  • Page 15
    ... 938,651 Business Machines 9.2% Business Systems Facsimile machines Ink-jet multifunction peripherals Handy Terminals Document scanners Personal information equipment, etc. Cameras Single-lens reflex (SLR) cameras Compact cameras Digital cameras Video camcorders LCD projectors Lenses, etc. 16...

  • Page 16
    ...reinforce our color document business and drive this fast-growing market. *Market share figures calculated by Gartner Dataquest Ikuo Soma, Chief Executive of Office Imaging Products Operations, Talks about Color Digital MFD Strategy The imageRUNNER (iR) series of digital MFDs Canon released in 2000...

  • Page 17
    ... excellent performance, network connectivity and high-level document management capabilities. 841,976 787,359 Canon solidified its leadership of the market for analog personal-use copying machines in 2002. While a major competitor withdrew from this business, we achieved particularly strong sales...

  • Page 18
    ... midrange Bubble Jet printers were the fastest selling models during the year in Japan and contributed to overall sales. In marketing activities, we aggressively promoted the direct print concept, which enables users to connect Canon digital cameras directly to Bubble Jet printers, and began working...

  • Page 19
    ... products such as printers and monitors to enhance competitiveness. We will expand our offerings of slim-profile, energy-saving image scanners featuring our originally developed Contact Image Sensor (CIS) and LiDE technologies. At the high end, we will provide film-compatible high-resolution image...

  • Page 20
    ... portable data terminals, which center on the Japanese market, included the launch of the industry´s first model featuring a 2D-code scanner and printer, as well as a reflective TFT liquid crystal display (LCD) and the Windows ® CE 3.0 operating system. Portable data terminal operating systems are...

  • Page 21
    Facsimile Machines Ink-Jet Multifunction Peripherals and Other Business Machines Canon offers compact and stylish ink-jet multifunction peripherals with printing, copying and scanning functions for home and small office use. Sales results: Business systems (Millions of yen) 400,000 391,586 351,...

  • Page 22
    ... Image Communication Products Operations, Talks about Digital Camera Strategy In the Image Communication Products Operations, we have adopted the business strategy of providing Canon customers with total imaging solutions, from image input to output, in line with the evolution of digital photography...

  • Page 23
    ...lead times, staying ahead in technology development, reducing production costs and reinforcing its sales and support structure. Growth in the digital camera market has hindered demand for conventional silver-halide SLR cameras, though Canon kept a firm grip on its worldwide leadership of this market...

  • Page 24
    ... the worldwide market for digital video camcorders is expanding on a unit basis, intense price competition forced the value of the market down in 2002. On the other hand, Canon reported excellent results for the year. In the extremely competitive entry-level market, we used powerful optical zoom...

  • Page 25
    Digital Cameras, SLR Cameras, Compact Cameras, Lenses, Video Camcorders and Others In the intensely competitive digital video camcorder market, Canon offers a strong product range meeting the needs of users from general consumers to professionals. In our Visual Communications Systems Operations, ...

  • Page 26
    ... to develop products that accurately reflect user needs for large glass substrates and high resolution. Our new mirror-projection mask aligner fueled a market share increase. Akira Tajima, Chief Executive of Optical Products Operations, Talks about Stepper Strategy The Semiconductor Production...

  • Page 27
    ... Medical and Broadcasting Equipment Anticipating a turnaround in demand for semiconductor production equipment, Canon is actively developing new steppers and advanced technologies to expose ultrahigh-precision circuit patterns. Canon added new products to its line of digital radiography systems in...

  • Page 28
    ...while at the same time we are reducing costs to raise our competitiveness in the corporate market. We also plan to expand our lineup of applications-specific products and develop our business among communications carriers. Our industry-leading 100x-zoom television broadcasting lens captures all the...

  • Page 29
    ... Financial Statement Translation (3) Foreign Operations 54 (4) Marketable Securities and Investments 56 (5) Trade Receivables (6) Inventories (7) Property, Plant and Equipment 57 (8) Goodwill and Other Intangible Assets 59 (9) Short-term Loans and Long-term Debt 61 (10) Trade Payables (11) Employee...

  • Page 30
    ...jet printers and scanners. Business systems include fax machines, micrographic equipment, personal computers and calculators. • The camera product group includes cameras, video camcorders and digital cameras. • The optical and other products product group includes steppers for semiconductor chip...

  • Page 31
    ... consecutive year of sales and profit growth, mainly due to a significant rise in sales of digital cameras and digital video camcorders, and steady growth in the copying machine product group. In fiscal 2002, Canon achieved 1.1% growth SUMMARY OF OPERATIONS (Millions of yen except per share amounts...

  • Page 32
    ...office documents, sales of Canon color copying machines decreased slightly in 2002 due to a decrease in unit sales of high-end models. Sales by product (Millions of yen) Business Machines Copying machines Computer peripherals Business Systems Sales by region (Millions of yen) Japan Americas Europe...

  • Page 33
    ... sales of bubble jet printers in the Japanese and U.S. markets. Although unit sales of bubble jet printers decreased in 2002 compared to the prior year, total sales increased due to growth in sales of mid-and high-end models. Sales of the business systems (including facsimile machines, personal...

  • Page 34
    ...Cost-cutting measures, however, along with healthy sales of price-competitive mid-range and high-end copying machines and bubble jet printers favorably affected the operating profit ratio. As a result, operating profit for the business machine segment increased by 22.7%. Operating profit for cameras...

  • Page 35
    SEGMENT INFORMATION BY PRODUCT (Millions of yen) Business machines Cameras Optical and other products Corporate and Eliminations Consolidated 2002: Net sales: Unaffiliated customers Intersegment Total Operating cost and expenses Operating profit Assets Depreciation and amortization Capital ...

  • Page 36
    ... INFORMATION BY GEOGRAPHIC AREA (Millions of yen) Japan Americas Europe Others Corporate and Eliminations Consolidated 2002: Net sales: Unaffiliated customers Intersegment Total Operating cost and expenses Operating profit Assets 2001: Net sales: Unaffiliated customers Intersegment Total Operating...

  • Page 37
    ... it generally has access to various funding sources, including issuance additional share capital, long-term debt or by borrowing in the short-term market. While Canon has been able to obtain funding from its traditional financing sources and from the capital markets, and believes it will continue to...

  • Page 38
    ... or limited purposes. Contractual obligations and Commercial commitments Canon's management believes that current financial resources, cash generated from operations and Canon's potential capacity for additional debt and/or equity financing will be sufficient to fund current and future capital...

  • Page 39
    ... securities and marketable investments. In order to hedge the risks of changes in foreign exchange rates and interest rates, Canon uses derivative financial instruments. Equity price risk Canon holds marketable securities included in current assets for short-term investment. In general, highly...

  • Page 40
    ... financial institutions. The major manufacturing bases of Canon are located in Japan and Asia. The sales generated from overseas are mainly denominated in U.S. dollar or Euro. Therefore, Canon's international operations expose Canon to the risk of changes in foreign currency exchange rate. To manage...

  • Page 41
    ... effectiveness for the year ended December 31, 2002 as the critical terms of the interest rate swaps match the terms of the hedged debt obligations. Changes in the fair value of foreign exchange contracts designated and qualifying as cash flow hedges of forecasted intercompany sales are reported...

  • Page 42
    ... are key assumptions including discount rates and expected return on plan assets. Canon is required to consider current market conditions, including changes in interest rates, in selecting these assumptions. Changes in the related employee retirement and severance benefit costs or credits may occur...

  • Page 43
    ... for Canon's high-value-added products; uncertainty as to the recovery of computer and related markets; uncertainty of recovery in demand for Canon's semiconductor production equipment; Canon's ability to continue to develop products and to market products that incorporate new technology on a timely...

  • Page 44
    ...in accounting principle: Basic 217.56 Diluted 214.80 Net income: Basic 217.56 Diluted 214.80 Cash dividends declared 30.00 Stock price: High 5,250 Low 3,620 Average number of common shares in thousands Number of employees Common stock price range (Yen) 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000...

  • Page 45
    ...,708 1,947,242 1,320,575 1,655,850 677,908 13,266,250 24,522,550 1.81 1.79 1.81 1.79 0.25 43.75 30.17 Notes: U.S. dollar amounts are translated from yen at the rate of ¥120 = U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2002. 43

  • Page 46
    ...' EQUITY Current liabilities: Short-term loans (note 9) Trade payables (note 10) Income taxes (note 12) Accrued expenses (note 19) Other current liabilities (note 12) Total current liabilities Long-term debt, excluding current installments (note 9) Accrued pension and severance cost (note...

  • Page 47
    CANON INC. AND SUBSIDIARIES Years ended December 31, 2002, 2001 and 2000 CONSOLIDATED STATEMENTS OF INCOME Millions of yen 2002 2001 2000 Thousands of U.S. dollars (note 2) 2002 Net sales Cost of sales Gross profit Selling, general and administrative expenses Operating profit Other income (...

  • Page 48
    ...and other (notes 13 and 15) 1,953 Share issued for acquisition of minority interest (notes 13 and 15) 1,052 Capital transactions by consolidated subsidiaries (1,373) Balance at end of year 394,088 Legal reserve: Balance at beginning of year 38,330 Transfers from retained earnings (note 14) 477 Other...

  • Page 49
    ... long-term debt Decrease in short-term loans Dividends paid (note 14) Payment for purchase of treasury stock Other Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents at beginning of year...

  • Page 50
    ... and calculators. Canon's camera business consists mainly of SLR cameras, compact cameras, digital cameras and video camcorders. Optical related products include steppers and aligners used in semiconductor chip production, broadcasting lenses and medical equipment. Canon's sales in the year ended...

  • Page 51
    ... the timing of recognizing losses on such operations. Canon adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 did not have a material affect on Canon's consolidated financial position and results of operations. In accordance with SFAS 144, long-lived assets, such as property, plant, and...

  • Page 52
    ... an arrangement including title transfer exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable. These criteria are met for mass-merchandising products such as printers and cameras at the time when the product is received by the customer based on the...

  • Page 53
    ...) at end of year and at settlement, as were the offsetting foreign exchange losses and gains on the hedged items. Gains and losses on the hedging derivative financial instruments that were designated and effective as hedges of firm commitments were deferred and recognized in income when the sale of...

  • Page 54
    ... effect on Canon's consolidated financial position and results of operations. In January 2003, the Emerging Issues Task Force also reached a final consensus on Issue 03-2 ("EITF 03-2"), "Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund...

  • Page 55
    ... the obligation to pay benefits for future employee service related to the substitutional portion. Management plans to submit another application for separation of the remaining substitutional portion (that is, the benefit obligation related to past services). After Canon's applications are approved...

  • Page 56
    ... Holding Losses (Millions of yen) Cost Fair Value 2002: Current: Available-for-sale: Japanese and foreign governmental bond securities Corporate debt securities Bank debt securities Fund trusts Equity securities Noncurrent: Available-for-sale: Japanese and foreign governmental bond securities...

  • Page 57
    ... of U.S. dollars) Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value 2002: Current: Available-for-sale: Japanese and foreign governmental bond securities $ 492 Corporate debt securities 47,484 Bank debt securities 758 Fund trusts 1,833 Equity securities 9,950...

  • Page 58
    ... Thousands of U.S. dollars 2002 2001 Finished goods Work in process Raw materials ¥ ¥ 288,592 127,769 15,890 432,251 323,910 106,255 18,135 448,300 $ 2,404,933 1,064,742 132,417 $ 3,602,092 (7) Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated...

  • Page 59
    ... 2002 Thousands of U.S. dollars 2002 Balance at beginning of year Goodwill acquired during the year Impairment losses Translation adjustment Balance at end of year Due to a continuing negative trend in the business systems industries and semiconductor related market, operating profit and cash flows...

  • Page 60
    ... in accounting principle" and "Earnings per share before cumulative effect of change in accounting principle" to the amounts adjusted for the exclusion of goodwill amortization for the years ended December 31, 2002, 2001 and 2000 are as follows: Millions of yen 2001 Thousands of U.S. dollars 2002...

  • Page 61
    ...of the acceptances payable by foreign subsidiaries was secured by the subsidiaries' inventories and trade receivables. Long-term debt consisted of the following: Millions of yen 2002 2001 Thousands of U.S. dollars 2002 Loans, principally from banks, maturing in installments through 2030; bearing...

  • Page 62
    ... Long-term agreements with lenders other than banks also generally provide that Canon must give additional security upon request of the lender. The 1-2/10% Japanese yen convertible debentures due 2005 are currently convertible into approximately 3,440,000 shares of common stock at a conversion price...

  • Page 63
    ...employee earnings and years of service. The contributory plans mainly represent the Employees' Pension Fund plans ("EPFs"), composed of the substitutional portions based on the pay-related part of the old age pension benefits prescribed by the Welfare Pension Insurance Law in Japan and the corporate...

  • Page 64
    ...of plan assets at beginning of year Actual return on plan assets Employer contributions Plan participants' contributions Benefits paid Other Fair value of plan assets at end of year Funded status Unrecognized actuarial loss Unrecognized prior service cost Unrecognized net transition obligation being...

  • Page 65
    ... 4,304 22,949 Thousands of U.S. dollars Foreign 330,017 136,491 (1,788) 134,703 281,566 112,982 2,172 115,154 227,196 97,477 (10,280) 87,197 Total 2002: Income before income taxes Income taxes: Current Deferred $ 1,980,642 $ 909,183 (60,100) $ 849,083 769,500 228,242 45,200 273...

  • Page 66
    ... not deductible for tax purposes Tax benefits not recognized on operating losses of subsidiaries Income of foreign subsidiaries taxed at lower than Japanese normal tax rate Tax credit for increased research and development expenses Other Effective income tax rate Net deferred income tax assets and...

  • Page 67
    ... profits and write-downs Accrued business tax Accrued pension and severance cost Minimum pension liability adjustments Property, plant and equipment - intercompany profits Research and development - costs capitalized for tax purposes Depreciation Net operating losses carried forward Other Total...

  • Page 68
    ...dividends in the Company's nonconsolidated books of account under the Japanese Commercial Code amounted to ¥746,101 million ($6,217,508 thousand) at December 31, 2002. (15) Noncash Financing Activities In the years ended December 31, 2002, 2001 and 2000, common stock and additional paid-in capital...

  • Page 69
    ... 2001 Thousands of U.S. dollars 2002 2002 2000 Foreign currency translation adjustments: Balance at beginning of year ¥ (52,660) Adjustments for the year (15,864) Balance at end of year (68,524) Net unrealized gains and losses on securities: Balance at beginning of year 564 Adjustments for the...

  • Page 70
    CANON INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments are as follows: Millions of yen Before-tax amount Tax (expense) or benefit Net-of-tax amount 2002: ...

  • Page 71
    ... U.S. dollars Before-tax amount Tax (expense) or benefit Net-of-tax amount 2002: Foreign currency translation adjustments: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Net unrealized gains and losses on securities...

  • Page 72
    ... earnings per share for "Income before cumulative effect of change in accounting principle" computations is as follows: Millions of yen 2001 Thousands of U.S. dollars 2002 2002 2000 Income before cumulative effect of change in accounting principle Effect of dilutive securities: 1% Japanese yen...

  • Page 73
    ... a number of major financial institutions. Foreign currency exchange rate risk management The major manufacturing bases of Canon are located in Japan and Asia. The sales generated from overseas are mainly denominated in U.S. dollar or Euro. Therefore, Canon's international operations expose Canon to...

  • Page 74
    ... for the years ended December 31, 2002 and 2001 and classified such amount in other income (deductions). Contract amounts of foreign exchange contracts and interest rate swaps at December 31, 2002 and 2001 are set forth below: Millions of yen U.S. dollars Euro Other Total 2002: To sell foreign...

  • Page 75
    ... of yen Thousands of U.S. dollars Canon also issues contractual product warranties under which it generally guarantees the performance of products delivered and services rendered for a certain period or term. Change in accrued product warranty cost for the year ended December 31, 2002 is summarized...

  • Page 76
    ... Assets: Marketable securities and Investments Liabilities: Long-term debt, including current installments Derivatives relating to: Forecasted intercompany sales transactions: Assets Liabilities Trade receivables: Assets Liabilities Long-term debt, including current installments: Interest rate swaps...

  • Page 77
    ... be disclosed in financial statements under accounting principles generally accepted in the United States of America is not presented in the accompanying consolidated financial statements. Foreign issuers are currently exempted from such disclosure requirement in Securities Exchange Act filings with...

  • Page 78
    .... Canon Zhongshan Business Machines Co., Ltd. RESEARCH & DEVELOPMENT Canon Development Americas, Inc. Canon Research Centre Europe Ltd. Canon Research Centre France S.A.S. Canon Information Systems Research Australia Pty. Ltd. Beijing Pecan Information System Co., Ltd. MARKETING & OTHER Canon Sales...

  • Page 79
    ... on the New York Stock Exchange. Shareholders' annual general meeting: March 28, 2003, in Tokyo Other information: For publications or information, please contact the Corporate Communications Center, Canon Inc., Tokyo, or access Canon´s Website at www.canon.com This publication was printed on...

  • Page 80
    CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan