Canon 2003 Annual Report Download - page 37

35
Operating profit by product
Operating profit for business machines in fiscal 2003 increased
¥76,080 million (U.S.$711 million) to ¥487,096 million
(U.S.$4,552 million). The operating profit ratio also improved by
2.9% to 21.4%. Sales of business machines in 2003 totaled
¥2,273,904 million (U.S.$21,251 million), an increase of 2.1%. In
addition to cost-cutting measures and the introduction of new
price-competitive products, which contributed to an improvement
in the gross profit ratio, a steady increase in sales volume resulted
in an increase in operating profit in 2003 of 18.5%.
Operating profit for cameras increased ¥56,028 million (U.S.$524
million) to ¥126,318 million (U.S.$1,181 million). Significantly
improved profitability for camera products resulted from the rapid
growth in sales of digital cameras, along with a significant
improvement in the gross profit ratio, made possible through
effective cost-saving initiatives in development and production
reforms activities. Consequently, operating profit in the camera
segment increased by 79.7%.
Optical and other products generated operating losses of ¥11,414
million (U.S.$107 million) in 2003, an improvement from losses of
¥11,652 million in fiscal 2002, despite increased sales of 18.5%
for the segment. These continuing operating losses are primarily
the result of severe price competition and a one-time expense for
the disposal of inventories relating to obsolete scanning steppers.
FOREIGN OPERATIONS AND FOREIGN CURRENCY
TRANSACTIONS
Canon’s marketing activities are performed by subsidiaries in
various regions in local currencies, while the cost of goods sold is
generally in yen. Given Canon’s current operating structure,
appreciation of the yen has a negative impact on net sales and the
gross profit ratio. To reduce the financial risks from changes in
foreign exchange rates, Canon utilizes derivative financial
instruments, which are comprised principally of forward currency
exchange contracts.
The return on foreign operation sales is usually lower than that
from domestic operations because foreign operations consist
mainly of marketing activities. Return on foreign operation sales is
calculated by dividing net income of foreign subsidiaries, after
factoring in a consolidation adjustment between foreign
subsidiaries, by net sales of foreign subsidiaries. Marketing
activities are generally less profitable than production activities,
which are mainly conducted by the Company and its domestic
subsidiaries. The returns on foreign operation sales in fiscal 2003,
2002 and 2001 were 3.2%, 2.7% and 1.6%, respectively. This
compares with returns of 8.6%, 6.5% and 5.8% on total
operations for the respective years.
LIQUIDITY
Cash and cash equivalents in fiscal 2003 increased ¥169,027
million (U.S.$1,580 million) to ¥690,298 million (U.S.$6,451
million), compared with ¥521,271 million in fiscal 2002 and
¥506,234 million in fiscal 2001. Canon’s cash and cash
equivalents are typically denominated in Japanese yen, with the
remainder denominated in foreign currencies such as the U.S.
dollar.
Net cash provided by operating activities in fiscal 2003
increased by ¥16,699 million (U.S.$156 million) from the previous
year to ¥465,649 million (U.S.$4,352 million). Cash flow from
operating activities consisted of the following components: the
major component of Canon’s cash inflow is cash received from
customers, while the major components of Canon’s cash outflow
are payments for parts and materials, selling, general and
administrative expenses, and income taxes.
For fiscal 2003, cash inflow from cash received from
customers increased, due to the increase in net sales. This
increase in cash inflow was within the range of the increase in net
sales, as there were no significant changes in Canon’s collection
rates. Cash outflow for payments for parts and materials also
increased, as a result of an increase in net sales. However, this
increase was less than the increase in net sales, due to the effects
of cost reduction. Cost reduction reflects a decline in unit prices of
parts and raw materials, as well as a streamlining of the process of
using these parts and materials through promoting efficiency in
operations. Cash outflow for payroll payments increased, due to the
increase in the number of employees. The 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 brand image. Cash outflow for payments of
income taxes increased, due to the increase in taxable income.
Net cash used in investing activities in fiscal 2003 was
¥199,948 million (U.S.$1,869 million), compared with ¥230,220
million in fiscal 2002 and ¥192,592 million in fiscal 2001, which
consists primarily of capital expenditures. Capital expenditures in
fiscal 2003 totaled ¥210,038 million (U.S.$1,963 million), mainly
to expand production capabilities in Japan and overseas. Of the
¥24,341 million (U.S.$227 million) payment for the purchase of
other investments, ¥12,718 million (U.S.$119 million) is
attributable to the acquisition of Sumitomo Metal System Solutions
Co., Ltd., now Canon System Solutions Inc.
As a result, free cash flow, or cash flow from operating
activities minus cash flow from investing activities, totaled
¥265,701 million (U.S.$2,483 million) for the year ended
December 31, 2003 as compared to ¥218,730 million for the year
ended December 31, 2002.
Net cash used in financing activities totaled ¥102,039 million