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CANON
ANNUAL REPORT
2003
Fiscal Year Ended December 31, 2003

Table of contents

  • Page 1
    CANON ANNUAL REPORT 2003 Fiscal Year Ended December 31, 2003

  • Page 2
    Corporate Profile Canon Inc. (NYSE: CAJ) and the Canon Group develop, produce and market a wide range of products used in the home, offices and industry, including business machines, conventional and digital cameras, lenses, digital video camcorders, semiconductor production equipment, television ...

  • Page 3
    ... + 17.2 Notes: 1. Canon's consolidated financial statements conform with accounting principles generally accepted in the United States of America. 2. U.S. dollar amounts are translated from yen at the rate of U.S.$1 = ¥107, the approximate exchange rate on the Tokyo Foreign Exchange Market as of...

  • Page 4
    ... spending resulting from tax cuts and growth in capital investment in the private sector, which was supported by a low-interest rate monetary policy. In the Canon Group's markets, demand for digital cameras and digital video camcorders continued to expand in 2003. Shifting business demand toward...

  • Page 5
    ... companies that possess worldclass technologies for both cameras and photo-quality printers. We intend to continue leveraging this advantage to increase market share and expand new markets, such as home photo printing. In 2003, Canon introduced new semiconductor production equipment based on a new...

  • Page 6
    ... oral business reports from directors and other managerial staff and conducts auditing procedures for the business and property. From May 2003 on, any contracts between Canon and an accounting company must be approved by the auditors' board in advance. In addition, an internal Corporate Audit Center...

  • Page 7
    ...Code of Conduct The Canon Group Code of Conduct, a handbook calling on all executives and employees to perform their duties in compliance with laws and corporate ethics, has been distributed throughout the Canon Group, in nine languages. Our corporate code also encompasses our environmental policies...

  • Page 8
    ... direction they are steering Canon. help but consider the benefits of long-term employment." In the developing markets where Canon maintains production operations, Mr. Mitarai aims to produce products that will be marketed locally. He is vigorously pursuing this strategy, especially in China, where...

  • Page 9
    ... constitution, better cash flow and higher dividends, Mr. Mitarai has produced a recipe for success that has been prescribed for the whole of Japan. A new state-of-the-art technology research center will be located in the compound with the Canon headquarters in Shimomaruko. The Poll of Public...

  • Page 10
    ... jointly conducting SED research and development activities with Toshiba Corporation, focusing on commercial applications. While the technologies under development at Canon hold the promise of exciting new products, Mr. Mitarai's "Companies that lack the strength to keep up with the changing times...

  • Page 11
    ... says, "One thing that sets Canon apart is the huge number of patents we hold. It enables a great reduction in our costs." In September 2003, Canon spun off the Canon Technology Information Service Inc. from the Corporate Intellectual Property & Legal Headquarters in order to achieve more effective...

  • Page 12
    Feature Story : Production Building factories at home, Canon finds new ways to extend its global reach Canon's decision last year to open a new digital camera production facility in Oita, Kyushu (Japan) raised some eyebrows. After all, conventional wisdom for some time now has been to move ...

  • Page 13
    ...important development in Canon's global production strategy. But that certainly does not mean Canon will abandon overseas production. In fact, by the end of 2003, the proportion of Canon goods manufactured outside Japan had reached 42%, a 4% year-onyear increase. At Canon Virginia, Inc., the use of...

  • Page 14
    ... objectively measured and certified in Japan by the governmentaffiliated Japan Environmental Management Association for Industry (JEMAI). Canon cameras, printers and copying machines have been certified for meeting the criteria of the JEMAI program. One of Canon's boldest initiatives to date, Factor...

  • Page 15
    ... of a change in transportation policy. By using an efficient new rail container system, jointly developed with Nippon Express and Japan Freight Railway Company, Canon will take traffic off the roads between Tokyo and Osaka, and thereby cut the associated truck exhaust emissions. Canon has long been...

  • Page 16
    ...common good guides the company, its products and its people into situations where you might otherwise be surprised to see the name. Here are a few recent highlights. WWF PAN Park Support A long-time supporter of the World Wildlife Fund, Canon Europe Ltd. expanded its support in Europe in 2003 of its...

  • Page 17
    Canon Product Groups Office Imaging Products Cameras ©J.LEAGUE PHOTOS Computer Peripherals Optical Products 15

  • Page 18
    Product Group Report Office Imaging Products The introduction of new digital technologies and value-added solutions helped Office Imaging Products to steer successfully through fast-moving markets. are providing about 4% of our [domestic] sales, but we hope to get this figure up to 19% by the end ...

  • Page 19
    ... acclaim from business customers. At the time of publication, the 2003 market share figures for office imaging products were pending, but it would appear that Canon has repeated its 2002 performance: top share for total sales in the three major sales regions of the U.S., Europe and Japan. As the...

  • Page 20
    Product Group Report Computer Peripherals Innovations across the board last year, in hardware as well as in software, enabled Canon to continue expanding its inkjet business in new directions. also see the potential for price reduction at the pro end of the market, and we hope that our technologies...

  • Page 21
    ... technology. Future scanner products will incorporate Canon lens technology, as well as automated scratch/dirt processing for film scanning. This last process uses infrared technology in order to achieve quality results. Lastly, China and Eastern Europe are new markets for Canon scanners, and sales...

  • Page 22
    ... side. We're building a new plant in Oita, Japan where we will manufacture digital cameras. Since cameras have a short lifecycle, being close to the production center will allow us to be more flexible in meeting market demands. Right now, demand is outstripping supply for cameras, so we're looking...

  • Page 23
    ... performance with Canon's digital SLR cameras is planned for 2004. In the worldwide digital video camcorder market, our eight new products gave Canon a 19% share (Canon estimate). Since its introduction, the Optura 300 (MVX 10i) kept the No. 1 position (GfK Japan) for three months from October...

  • Page 24
    Product Group Report Optical Products Unrelenting focus on research and development has put Canon's Optical Products Operations in position to control key markets with leading-edge products. That's the price we have to pay for being on the leading edge. But when we get this technology working, we'...

  • Page 25
    ... manufacturing capacity to meet the growing market demand, Canon holds a huge majority share of this market. Canon plans to maintain its lead by introducing seventh-generation technology and large-scale mirror processing and measurement technology. Unit sales of television broadcasting lenses, used...

  • Page 26
    Product Group Summary Sales results: (Millions of yen) 1,061,099 Share of consolidated sales Business machines Office network digital multifunction devices (MFDs) Color network digital MFDs Office copying machines Personal-use copying machines Full-color copying machines, etc. 861,594 980,053 1,...

  • Page 27
    ... Accounting Policies (2) Financial Statement Translation 54 (3) Foreign Operations (4) Marketable Securities and Investments 55 (5) Trade Receivables 58 (6) Inventories (7) Property, Plant and Equipment (8) Goodwill and Other Intangible Assets 59 (9) Short-term Loans and Long-term Debt...

  • Page 28
    ...one of the world's leading manufacturers of copying machines, laser beam printers, inkjet printers, cameras, steppers and aligners. Canon earns revenues primarily from the manufacture and sale of these products domestically and internationally. Canon's basic management policy is to contribute to the...

  • Page 29
    ...term of the contracts. A substantial portion of office imaging products is sold with service maintenance guarantee contracts for which the customer typically pays a base service fee plus a variable amount based on usage. Valuation of inventories Inventories are stated at the lower of cost or market...

  • Page 30
    ... employee retirement and severance benefit obligations which are developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets. Management must consider current market conditions, including changes in interest rates...

  • Page 31
    ... materials, parts and labor used by Canon in the manufacture of its products. A portion of the raw materials used by Canon is imported or includes imported materials. Such raw materials are subject to fluctuations in world market prices and exchange rates that may affect Canon's cost of sales. Other...

  • Page 32
    ...-color copying machines. Computer peripherals include laser beam printers, inkjet printers, inkjet multifunction peripherals and image scanners. Business information products include micrographic equipment, personal computers and calculators. • The camera product group includes single lens reflex...

  • Page 33
    ... product Canon's sales by product group are summarized as follows: SALES BY PRODUCT (Millions of yen) 2003 change 2002 change 2001 (Thousands of U.S. dollars) 2003 Business machines: Office imaging products Computer peripherals Business information products Cameras Optical and other products Total...

  • Page 34
    ... digital MFDs and laser beam printers. Sales of digital cameras experienced continued strong demand and benefited from the effect of newly-launched products. After accounting for the appreciation of the yen against the U.S. dollar, net sales in the Americas increased by 3.5%. In Europe, net sales...

  • Page 35
    ... GAAP. Business machines Optical and other products Corporate and Eliminations SEGMENT INFORMATION BY PRODUCT (Millions of yen) Cameras Consolidated 2003: Net sales: Unaffiliated customers Intersegment Total Operating cost and expenses Operating profit Assets Depreciation and amortization Capital...

  • Page 36
    SEGMENT INFORMATION BY GEOGRAPHIC AREA (Millions of yen) Japan Americas Europe Others Corporate and Eliminations Consolidated 2003: Net sales: Unaffiliated customers Intersegment Total Operating cost and expenses Operating profit Assets 2002: Net sales: Unaffiliated customers Intersegment Total ...

  • Page 37
    ... employees in the Asian region increased, due to the expansion of production in the region. Cash outflow for payments for selling, general and administrative expenses increased, due to the increase in advertising and marketing expenses, reflecting management's policy to strengthen Canon's corporate...

  • Page 38
    ...). The capital expenditure includes an investment in a new technology development center in Kanagawa, Japan, and a new plant in Oita, Japan for digital camera production, reflecting the worldwide increase in demand. Employer contributions to Canon's worldwide defined benefit pension plans were...

  • Page 39
    ...-term loans. Canon believes its working capital will be sufficient for its requirements for the foreseeable future. Canon's capital requirements are primarily dependent on management's business plans regarding the levels and timing of capital expenditures and investments. The working capital ratio...

  • Page 40
    ...514 million) to purchase property, plant and equipment for use in the ordinary course of its business. Canon anticipates that funds needed to fulfill these commitments will be generated internally through operations. Canon's management believes that current financial resources, cash generated from...

  • Page 41
    ... of Web services that expand its business domains while creating new value for customers. Canon has R&D centers worldwide that closely collaborate in their R&D activities. Some regional R&D centers conduct basic research into technology, and others apply their expertise to develop new products and...

  • Page 42
    ... are internationally recognized financial institutions and the contracts are diversified across a number of major financial institutions. The major manufacturing bases of Canon are located in Japan and other countries in Asia. The sales generated from overseas are mainly denominated in U.S. dollars...

  • Page 43
    ...,384 (1,141) ¥ Thousands of U.S. dollars Forwards to sell foreign currencies: Contract amounts Estimated fair value Forwards to buy foreign currencies: Contract amounts Estimated fair value Canon's exposure to the market risk of changes in interest rates relates primarily to its debt obligations...

  • Page 44
    ... of U.S.dollars) Average pay rate Expected maturity date Total 2004 2005 2006 2007 2008 Thereafter Estimated Fair Value euro 169 2.33% 3.44% 210,878 79,252 79,757 33,748 18,121 - - (514) Note: All long-term debt is fixed rate except loans, principally from banks which include...

  • Page 45
    ... Canon's camera products. Pursuant to the enactment of the new law concerning defined benefit corporate pension plans in Japan, the Company, on March 1, 2003, obtained from the Minister of Health, Labor and Welfare an exemption from its obligation to pay benefits for future employee services related...

  • Page 46
    ...-YEAR FINANCIAL SUMMARY (Millions of yen except per share amounts) 2003 2002 2001 2000 Net sales: Domestic Overseas Total Percentage of previous year Net income Percentage of sales Advertising Research and development Depreciation of property, plant and equipment Capital expenditure ¥ 801,400...

  • Page 47
    ... 870,699 81,009 126.10 123.93 126.10 123.93 17.00 3,400 1,930 868,916 79,799 137.73 134.60 137.73 134.60 17.... 58.04 36.54 Note: U.S. dollar amounts are translated from yen at the rate of U.S.$1= ¥107, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2003. 45

  • Page 48
    ... AND STOCKHOLDERS' 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...

  • Page 49
    CANON INC. AND SUBSIDIARIES Years ended December 31, 2003, 2002 and 2001 CONSOLIDATED STATEMENTS OF INCOME Millions of yen 2003 2002 2001 Thousands of U.S. dollars (note 2) 2003 Net sales Cost of sales Gross profit Selling, general and administrative expenses Operating profit Other income (...

  • Page 50
    ... of year Purchase Balance at end of year Total stockholders' equity Disclosure of comprehensive income: Net income for the year Other comprehensive income (loss) for the year, net of tax (note 16) Total comprehensive income for the year See accompanying notes to consolidated financial statements...

  • Page 51
    ... 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 52
    ... cameras, digital cameras and video camcorders. Optical related products include steppers and aligners used in semiconductor chip production, projection aligners used in the production of liquid crystal displays (LCDs), broadcasting lenses and medical equipment. Canon's sales in the years ended...

  • Page 53
    ... over their operating and financial policies are stated at their underlying equity value. Canon's share of the net earnings (loss) of companies carried on the equity method, included in other income (deductions), and dividends received from those companies for the years ended December 31, 2003, 2002...

  • Page 54
    ... sale of consumer products, equipment, supplies and related services under separate contractual arrangements for each. Canon recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss have been transferred to the customer, the sales price...

  • Page 55
    our financial position or results of operations. Canon records estimated reductions to sales at the time of sale for sales incentive programs including product discounts, customer promotions and volume-based rebates. Estimated reductions in sales are based upon historical trends and other known ...

  • Page 56
    ... to be purchased from the proceeds using the average market price of the Company's common shares). (t) Use of Estimates The preparation of the consolidated financial statements requires management of Canon to make a number of estimates and assumptions relating to the reported amount of assets and...

  • Page 57
    ... Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value 2003: 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...

  • Page 58
    ... FINANCIAL STATEMENTS, CONTINUED (Thousands of U.S. dollars) Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value 2003: Current: Available-for-sale: Japanese and foreign governmental bond securities Corporate debt securities Bank debt securities Fund trusts Equity...

  • Page 59
    ... and ¥9,473 million in the years ended December 31, 2003, 2002 and 2001, respectively. In June 2001, Canon contributed certain marketable equity securities, not including those of its subsidiaries and affiliated companies, to an established employee retirement benefit trust, with no cash proceeds...

  • Page 60
    CANON INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (5) Trade Receivables Trade receivables are summarized as follows: Millions of yen 2003 Thousands of U.S. dollars 2003 2002 Notes Accounts Less allowance for doubtful receivables ¥ ¥ 28,880 524,549 553,429 14,...

  • Page 61
    ... the year ended December 31, 2002, under a continuing negative trend in the business information industries and semiconductor related market, the majority of goodwill impairment loss of ¥503 million was recognized from the business information products and optical and other products reporting units...

  • Page 62
    ... amortization for the years ended December 31, 2003, 2002 and 2001 are as follows: Thousands of U.S. dollars 2003 2003 Millions of yen 2002 2001 Income before cumulative effect of change in accounting principle: Reported income before cumulative effect of change in accounting principle Add back...

  • Page 63
    ...term Loans and Long-term Debt Short-term loans consisted of the following: Millions of yen 2003 Thousands of U.S. dollars 2003 2002 Bank borrowings Long-term debt due within one year ¥ ¥ 2,941 36,195 39,136 47,748 19,006 66,754 $ $ 27,486 338,271 365,757 The weighted average interest rates...

  • Page 64
    ...103 Property, plant and equipment with a book value at December 31, 2003 of ¥11,358 million ($106,150 thousand) were mortgaged to secure loans from banks. As is customary in Japan, both short-term and long-term bank loans are made under general agreements which provide that security and guarantees...

  • Page 65
    ...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 66
    ... at end of year Change in plan assets: Fair value 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...

  • Page 67
    ... policies are designed to ensure adequate plan assets are available to provide future payments of pension benefits to eligible participants. Taking into account the expected long-term rate of return on plan assets, Canon formulates a "model" portfolio comprised of the optimal combination of equity...

  • Page 68
    ... FINANCIAL STATEMENTS, CONTINUED (12) Income Taxes Total income taxes were allocated as follows: Millions of yen 2002 Thousands of U.S. dollars 2003 2003 2001 Income before income taxes and minority interests Stockholders' equity - accumulated other comprehensive income (loss): Foreign...

  • Page 69
    ...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 Effect of enacted changes in tax laws and rates on research and development expenses...

  • Page 70
    ... of U.S. dollars 2003 Millions of yen 2003 2002 Deferred tax assets: Inventories Accrued business tax Accrued pension and severance cost Minimum pension liability adjustments Research and development - costs capitalized for tax purposes Property, plant and equipment Net operating losses carried...

  • Page 71
    ... the Board of Directors in respect of the year ended December 31, 2003. The amount available for dividends under the Japanese Commercial Code is based on the amount recorded in the Company's nonconsolidated books of account in accordance with financial accounting standards of Japan. The adjustments...

  • Page 72
    ... Comprehensive Income (Loss) Change in accumulated other comprehensive income (loss) is as follows: Millions of yen 2002 Thousands of U.S. dollars 2003 2003 2001 Foreign currency translation adjustments: Balance at beginning of year Adjustments for the year Balance at end of year Net unrealized...

  • Page 73
    ... are as follows: Before-tax amount Millions of yen Tax (expense) or benefit Net-of-tax amount 2003: 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...

  • Page 74
    ... 11,414 Thousands of U.S. dollars Before-tax amount Tax (expense) or benefit Net-of-tax amount 2003: 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...

  • Page 75
    ... per share for the year ended December 31, 2001 uses diluted net income and diluted common shares outstanding. For the computation of the diluted net income, the same effect of dilutive securities used for the computation of diluted income before cumulative effect of change in accounting principle...

  • Page 76
    ...'s policy, a specific portion of foreign currency exposure resulting from forecasted intercompany sales are hedged using foreign exchange contracts which principally mature within three months. Interest rate risk management Canon's exposure to the market risk of changes in interest rates relates...

  • Page 77
    ...the related tax effect, is not material for the year ended December 31, 2003. Canon has entered into certain interest rate swap agreements which do not meet the hedging criteria of SFAS 133 and 138. Canon records these interest rate swap agreements on the balance sheet at fair value. The changes in...

  • Page 78
    ... of U.S.dollars Capital Operating Leases Leases 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. Changes in accrued product warranty cost for the year ended December 31...

  • Page 79
    ... (6,604) (6,604) Long-term debt, including current installments: Interest rate swaps: - - Assets Liabilities (55) (55) Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates are...

  • Page 80
    ... for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in...

  • Page 81
    ...Ltd. Canon Finance New Zealand Ltd. Canon (China) Co., Ltd. Canon Singapore Pte. Ltd. Canon Hongkong Co., Ltd. Canon Marketing (Singapore) Pte. Ltd. Canon Marketing (Malaysia) Sdn. Bhd. Canon Marketing (Philippines), Inc. Canon Marketing (Thailand) Co., Ltd. Canon Semiconductor Engineering Korea Inc...

  • Page 82
    ... Receipts (ADRs) are traded on the New York Stock Exchange. Shareholders' annual general meeting: March 30, 2004, 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 80

  • Page 83
    This publication was printed on 70% recycled paper by an ISO 14001-accredited printer. The inks used, containing neither VOCs (volatile organic compounds) nor mineral oils, excel in decomposition and de-inking. PUB. BEP013 0404SZ 19760 Printed in Japan

  • Page 84
    CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan