Canon 2003 Annual Report Download - page 31

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CONSOLIDATED RESULTS OF OPERATIONS
Sales
With respect to the markets in which the Canon Group operates,
demand for digital cameras and digital video camcorders continued
to expand in 2003. While shifting business demand toward
multifunctionality and color stimulated strong sales of network digital
MFDs, computer peripherals, which mainly consists of printers,
struggled amid severe price competition. In the field of optical
products, the semiconductor-production equipment market began
to show signs of a recovery while increased demand for liquid crystal
display (“LCD”) televisions fueled growth in the market for projection
aligners. These increases were a result of enhanced development
reforms activities such as 3D computer aided design (“3D-CAD”).
These improvements have significantly shortened product-
development lead times and thus made it possible to launch new,
competitively priced products at a faster pace. Under these
environments, Canon’s consolidated net sales in fiscal 2003 totaled
¥3,198,072 million (U.S.$29,889 million). This represents an 8.8%
increase from the previous fiscal year, reflecting a significant growth
in sales of digital cameras and color network digital MFDs.
Overseas operations are significant to Canon’s operating results
and generated approximately 73% of total net sales in fiscal 2003.
Such sales are denominated in the applicable local currency and are
subject to fluctuations in the value of the yen in relation to such
other currencies. Despite efforts to reduce the impact of currency
fluctuations on operating results, including localizing some
manufacturing and procuring parts and materials from overseas
suppliers, Canon believes such fluctuations have had and will
continue to have a significant effect on results of operations. The
average value of the yen in 2003 was ¥115.61 to the U.S. dollar,
and ¥131.02 to the euro, representing an appreciation of 8% against
the U.S. dollar, and a depreciation of 10% against the euro,
compared with the previous year. These effects of foreign exchange
rate fluctuations unfavorably impacted net sales by approximately
¥25,100 million. Net sales decreased by approximately ¥105,800
million in U.S. dollars, increased by ¥76,400 million in euro, and
increased by ¥4,300 million in other foreign currencies.
Cost of sales
Cost of sales reflects principally the cost of raw 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 components of cost of sales include depreciation
expenses from plants, maintenance expenses, light and fuel
expenses and rent expenses. The ratio of cost of sales to net sales
for the past three years was 49.7%, 52.4% and 56.0%, respectively.
Gross profit
Canon’s gross profit in fiscal 2003 increased by 14.9% to
¥1,608,900 million (U.S.$15,036 million) from fiscal 2002, as a
result of increased sales and an improved gross profit ratio. Gross
SUMMARY OF OPERATIONS
(Thousands of
(Millions of yen) U.S. dollars)
2003 change 2002 change 2001 2003
Net sales ¥3,198,072 +8.8% 2,940,128 +1.1% 2,907,573 $29,888,523
Operating profit 454,424 +31.2 346,359 +22.9 281,839 4,246,953
Income before income taxes and minority interest 448,170 +35.8 330,017 +17.2 281,566 4,188,505
Income before cumulative effect of
change in accounting principle 275,730 +44.6 190,737 +16.4 163,869 2,576,916
Net income 275,730 +44.6 190,737 +13.8 167,561 2,576,916
the expected return on plan assets that is included in pension
income (expense). Canon defers recognition of the difference
between this expected return on plan assets and the actual return
on plan assets. The net deferral of unrecognized asset gains
(losses) affects the value of plan assets in fiscal years and,
ultimately, future pension income (expense).
Canon’s domestic benefit plan weighted-average asset
allocations (see note 11 to the consolidated financial statements)
has changed from fiscal 2002 to fiscal 2003. In particular, cash, as
a percentage of total plan assets, increased to 21.8% in fiscal
2003, compared to 6.8% in fiscal 2002. Canon increased the
relative proportion of cash and decreased the relative proportion of
equity securities and debt securities in anticipation of transferring a
substitutional portion of its defined benefit pension plan to the
Japanese government in fiscal 2004 in compliance with the
Emerging Issues Task Force consensus on Issue 03-2,
“Accounting for the Transfer to the Japanese Government of the
Substitutional Portion of Employee Pension Fund Liabilities”.