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CANON
ANNUAL REPORT
2004
Fiscal Year Ended December 31, 2004

Table of contents

  • Page 1
    CANON ANNUAL REPORT Fiscal Year Ended December 31, 2004 2004

  • Page 2
    ... CORPORATE FUNCTIONS RESEARCH & DEVELOPMENT PRODUCTION SALES & MARKETING CORPORATE SOCIAL RESPONSIBILITY Canon's Approach to CSR Encouraging Employee Initiatives Contributing to Society Environment-Conscious Management 21 PRODUCT GROUP SUMMARY 22 CANON PRODUCT GROUPS OFFICE IMAGING PRODUCTS COMPUTER...

  • Page 3
    ...: 1. Canon's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. 2. U.S. dollar amounts are translated from yen at the rate of JPY104=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as...

  • Page 4
    ... our consolidated financial targets for Phase II of our Excellent Global Corporation Plan, covering fiscal 2001 through 2005, ahead of schedule, achieving a shareholders' equity ratio of 61.6% and an debt to total assets ratio of 1.1%. In addition, we were recognized by the investment community for...

  • Page 5
    ... brand (PIXUS brand in Japan) was successful globally and returned Canon to the No. 1 position in the Japanese market for the first time in eight years. We plan to further strengthen our lineups of photo-quality color printers and MFDs. In semiconductor production equipment, our early launch of new...

  • Page 6
    ...Sales Innovations Restructure and consolidate marketing subsidiaries New Diversification Development of new business at headquarters Enhancement of basic research Stability of livelihoods of employees Returns to shareholders Consolidated financial results Contributions to by Product Group Operation...

  • Page 7
    ...of a global sales system 3. 4. 5. 6. suited to the new era Creation and strengthening of nextgeneration businesses Further improvement in technological development capabilities, which is the source of profitability Improvement of Canon's corporate infrastructure Development of human resources and...

  • Page 8
    ... of the world's most respected companies and top managers issued by the Financial Times in November 2004, Fujio Mitarai, President and CEO of Canon, placed 10th and Canon received a ranking of 25th. Canon has also received high evaluations from international and domestic financial rating agencies...

  • Page 9
    ..., Office Imaging Products Operations Tsuneji Uchida Chief Executive, Image Communication Products Operations Shigeru Imaiida Group Executive, Global Manufacturing Headquarters Hironori Yamamoto Group Executive, Core Technology Development Headquarters Managing Directors Yusuke Emura Group...

  • Page 10
    CORPORATE MANAGEMENT Significant Differences in Corporate Governance Practices between Canon and U.S. Companies Listed on the NYSE Information Disclosure Disclosing accurate, fair, and timely information on management, business strategy, and financial results to capital markets is a top priority at...

  • Page 11
    ...director, executive officer, manager, or employee of the Company or its subsidiaries. The Company's current corporate auditor system meets these new requirements. The qualifications for an "outside" corporate auditor under the Special Exception Law are different from the audit committee independence...

  • Page 12
    ... screens that offer brightness and high image resolution comparable with cathode ray tubes but with a thin profile. The Robotics Eye, now under development at Canon is a cutting-edge sensor that can recognize and track human faces. Architect's drawing of a new state-of-the-art technology research...

  • Page 13
    ...-the-line copying machine manufacturing operations. All aspects of these operations, from design through prototypes, full production, quality assurance, and delivery functions are scheduled to be located in the same new CMOS sensors sustain Canon's strong competitive position in digital SLR cameras...

  • Page 14
    ... reduce its ratio of costs to sales. To attain this goal, Canon is closely coordinating product development, production engineering technology, and manufacturing technology. Fujio Mitarai First Step in Production Reform: Cell Production System Canon attained a consolidated gross profit ratio of 49...

  • Page 15
    ...manufacturing equipment for these fully automated assembly systems internally. For the development of next-generation production engineering technology, Canon will concentrate its production engineering technology- related divisions in a center in Kawasaki. Canon's Worldwide Production Sites Canon...

  • Page 16
    ... and promotional activities. Canon is presently implementing a global sales headquarters system divided into five regions. Under this system, the head office provides general supervision to reinforce the operations of marketing companies in the Americas, Europe, Asia outside Japan, Oceania and Japan...

  • Page 17
    ... all the information needed for service support and is linked to the websites of our sales Canon's Worldwide Sales & Marketing Sites A camera sales store in Shanghai companies in all parts of the world. As of December 2004, this system was being accessed about four million times a month in the...

  • Page 18
    ... for consumers worldwide. At the same time, Canon is firmly committed to building a sustainable world that alleviates the burden on the global environment, and to balancing economic and environmental needs in the manufacturing and marketing of its products. Encouraging Employee Initiatives To...

  • Page 19
    ... management of park wildlife and ecosystems. Another element of the program is increased public access via the Internet to the wonders of Yellowstone. Windows into Wonderland (URL: http://www.windowsintowonderland.org/) showcases electronic field trips, with images shot with Canon digital camcorders...

  • Page 20
    ... lead-free operations in Suzhou, China. equipment (RoHS), has conducted on-site confirmations of the facilities of its suppliers. Research and Development As a regular part of the "prototype-less" product development process, the design information in Canon's 3D-CAD systems is checked automatically...

  • Page 21
    ... new closed wastewater processing systems at the Utsunomiya Plant (Japan) and Canon Zhuhai, Inc. (China), and the use of Ultra-Pure Water Recycling Systems at our semiconductor plants. Sales and Logistics Canon has been reducing carbon dioxide emissions in its logistics operations and, by developing...

  • Page 22
    ... from used products are reused in other machines, promoting an effective use of resources. Recycling of Cartridges Since 1990, Canon has led other companies around the world in introducing and operating a Toner Cartridge Collection and Recycling Program on a global scale. Collected cartridges are...

  • Page 23
    ... GROUP SUMMARY (Millions of yen) 1,120,972 Sales Results Share of Consolidated Sales 32.3% Business Machines OFFICE IMAGING PRODUCTS Office network digital multifunction devices (MFDs) Color network digital MFDs Office copying machines Personal-use copying machines Full-color copying machines...

  • Page 24
    ... make a complete shift to a weekly production/sales system that matches actual demand from our sales companies and meets schedules for delivery to customers. In the United States, Canon retained its No. 1 positions in both the monochrome and color equipment markets in terms of brand share. In Canada...

  • Page 25
    Sales Results: Office Imaging Products (Millions of yen) 1,150,000 980,053 1,023,131 1,081,995 Fiscal 2004 Review Demand for network digital MFDs indicated a shift from monochrome to color models, as well as a trend toward higher-end features. The Color imageRUNNER C3200/iR C3200N, which offers...

  • Page 26
    ... printers. Leveraging this outstanding competitive technological advantage in cameras and its strong brand name, Canon aims to be No. 1 in the home printing market. Today's market is moving toward digital photos, and customers need photographic quality prints for a wide range of applications. Canon...

  • Page 27
    ... in major countries toward multifunction printers. In response to this shift, we have introduced a high-speed, high-resolution scanner and a slim-type scanner incorporating Canon's original contact image sensor. We are expanding our market share in countries around the world, especially in Europe...

  • Page 28
    ... In the video camcorder (Digital IXUS 700 in some areas) world market, where more than 80% of units sold are now digital, Canon is aiming to expand its market share by continuing to introduce new products that feature high image quality in a compact body at competitive prices. In the U.S. market, we...

  • Page 29
    ... market conditions, Canon reported strong sales results. Although demand for film cameras is declining, we still retain the No. 1 market position in SLR cameras and a high position in the market for compact cameras. Throughout all categories of video camcorders, including analog models, the global...

  • Page 30
    ... PRODUCTS Canon implemented major structural reforms in its Optical Products Operations and these activities got off to a new start in April 2004. In our Medical Equipment business, we focused on shortening product development time through various reforms and introduced products that meet market...

  • Page 31
    ... fundus cameras. In the digital-radiography system area, Canon continues to hold the top market share with its wide-ranging product offerings. In other product areas, lenses for TV broadcast cameras staged a gradual recovery in 2004 as a result of the movement toward use of digital equipment and...

  • Page 32
    ... Inc. Canon Marketing (Thailand) Co., Ltd. Canon Semiconductor Engineering Korea Inc. Canon Semiconductor Equipment Taiwan Inc. RESEARCH & DEVELOPMENT Canon Development Americas, Inc. Canon Research Centre Europe Ltd. Canon Research Centre France S.A.S. Canon Information Systems Research Australia...

  • Page 33
    ... of Presentation and Significant Accounting Policies 60 (2) Basis of Financial Statement Translation (3) Foreign Operations (4) Marketable Securities and Investments 62 63 (5) Trade Receivables (6) Inventories (7) Property, Plant and Equipment (8) Finance Receivables and Operating Leases 64 65 66...

  • Page 34
    ... various product groups in light of market trends. Gross profit ratio (ratio of gross profit to net sales) is another KPI for Canon. Through its reforms in product development, Canon has been striving to shorten product development lead times in order to launch new, competitively priced products at...

  • Page 35
    ... judgment areas in the application of its accounting policies that currently affect its financial condition and results of operations. Revenue recognition Canon generates revenue principally through the sale of consumer products, equipment, supplies, and related services under separate contractual...

  • Page 36
    ...-type lease or direct-financing lease are accounted for as operating leases and related revenue is recognized over the lease term. Canon records estimated reductions to sales at the time of sale for sales incentive programs including product discounts, customer promotions and volume-based rebates...

  • Page 37
    discount rate, Canon uses available information about rates of return on high-quality fixed-income governmental and corporate bonds currently available and expected to be available during the period to the maturity of the pension benefits. Canon establishes the expected long-term rate of return on ...

  • Page 38
    ... office network digital MFDs, color network digital MFDs, office copying machines, personal-use copying machines and full-color copying machines. Computer peripherals include laser beam printers, inkjet printers, inkjet multifunction peripherals and image scanners. Business information products...

  • Page 39
    ... system business accounted for 14% and 13% of sales of office imaging products in both fiscal 2004 and 2003. Sales by product (Millions of yen) Business Machines Office imaging products Computer peripherals Business information products Sales by region (Millions of yen) Japan Americas Europe...

  • Page 40
    .... In Japan, net sales increased by 6.0% in fiscal 2004 from fiscal 2003. The results were mainly attributable to increased sales of office imaging products and digital cameras. Color network digital MFDs, which include the Color imageRUNNER(iR) C3200/iRC3200N, Canon's first color offering in the...

  • Page 41
    ..., Canon has changed classification of product categories with regards to information system business, which had been classified in "Optical and other products," to "Business machines (Office imaging products)" in order to better reflect current relation with those products. Accordingly, information...

  • Page 42
    ... INFORMATION BY GEOGRAPHIC AREA (Millions of yen) Japan Americas Europe Others Corporate and Eliminations Consolidated 2004: Net sales: Unaffiliated customers Intersegment Total Operating cost and expenses Operating profit Assets 2003: Net sales: Unaffiliated customers Intersegment Total Operating...

  • Page 43
    ...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...

  • Page 44
    ...to fifteen years. In order to facilitate access to global capital markets, Canon obtains credit ratings from two rating agencies, Moody's Investors Services, Inc. ("Moody's") and Standard and Poor's Rating Services ("S&P"). In addition, Canon maintains a rating from Rating and Investment Information...

  • Page 45
    ...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 (ratio of current assets to current liabilities) for fiscal 2004 was...

  • Page 46
    .... through the establishment of a prototype production line. 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 requirements. 44

  • Page 47
    ... 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 48
    ...recognized financial institutions and contracts are diversified across a number of major financial institutions. Millions of yen Cost Fair Value Thousands of U.S. dollars Cost Fair Value Equity price risk Canon holds marketable securities included in current assets for short-term investments, which...

  • Page 49
    ... production, Canon will focus its energies on the in-house production of key components and development of innovative high-efficiency factory automation equipment to realize even greater cost (Millions of yen) Expected maturity date 2005 2006 2007 2008 2009 Thereafter Estimated Fair Value LONG-TERM...

  • Page 50
    ... and software. Canon expects the market for compact digital cameras will expand in the intermediate term. In general, declines in prices and intense competition are causing decrease in profitability in the industry. The compact photo printer market is developing rapidly. Canon expects that the ratio...

  • Page 51
    ... products that incorporate new technology on a timely basis, are competitively priced and achieve market acceptance; the possibility of losses resulting from foreign currency transactions designed to reduce financial risks from changes in foreign exchange rates; and inventory risk due to shifts...

  • Page 52
    ... Overseas Total Percentage of previous year Net income Percentage of sales Advertising Research and development Depreciation of property, plant and equipment Capital expenditure Long-term debt, excluding current installments Stockholders' equity Total assets Per share data: Income before cumulative...

  • Page 53
    ....96 62.73 65.96 62.73 13.00 1,940 1,230 834,329 72,280 3.73 3.72 3.73 3.72 0.63 55.96 47.21 Notes: U.S. dollar amounts are translated from yen at the rate of U.S.$1 = ¥104, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2004. 51

  • Page 54
    ... (note 19) Investments (notes 4 and 10) Property, plant and equipment, net (notes 7, 8 and 10) Other assets (notes 8, 9, 12 and 13) Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term loans and current portion of long-term debt (note 10) Trade payables (note 11...

  • Page 55
    ...OF INCOME Millions of yen 2004 2003 2002 Thousands of U.S. dollars (note 2) 2004 Net sales Cost of sales (notes 9, 12 and 19) Gross profit Selling, general and administrative expenses (notes 1, 9, 12 and 19) Operating profit Other income (deductions): Interest and dividend income Interest expense...

  • Page 56
    ...): Balance at beginning of year Other comprehensive income (loss) for the year, net of tax Balance at end of year Treasury stock: Balance at beginning of year Repurchase, net Stock exchanged under exchange offering Balance at end of year Total stockholders' equity Disclosure of comprehensive income...

  • Page 57
    ...property, plant and equipment Proceeds from sale of property, plant and equipment Purchases of available-for-sale securities Purchases of held-to-maturity securities Proceeds from sale of available-for-sale securities Proceeds from sale of subsidiary common stock Purchases of other investments Other...

  • Page 58
    ..."Company") and subsidiaries (collectively "Canon") is one of the world's leading manufacturers in such fields as office imaging products, computer peripherals, business information products, cameras, and optical related products. Office imaging products consist mainly of copying machines and digital...

  • Page 59
    ... Companies Investments in 20% to 50% owned affiliates in which Canon has the ability to exercise significant influence over their operating and financial policies are accounted for by the equity method. (k) Impairment of Long-Lived Assets Long-lived assets, such as property, plant and equipment...

  • Page 60
    ...-type lease or direct-financing lease are accounted for as operating leases and related revenue is recognized over the lease term. Canon records estimated reductions to sales at the time of sale for sales incentive programs including product discounts, customer promotions and volume-based rebates...

  • Page 61
    ... ("EITF 03-1"), "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." EITF 03-1 provides guidance on other-thantemporary impairment models for marketable debt and equity securities accounted for under Statement of Financial Accounting Standards ("SFAS") No. 115...

  • Page 62
    ...securities by major security type at December 31, 2004 and 2003 were as follows: Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value 2004: Current: Available-for-sale: Corporate debt securities Bank debt securities Fund trusts Equity securities Noncurrent: Available-for-sale...

  • Page 63
    ...,789 (Thousands of U.S. dollars) Cost Fair Value 2004: Current: Available-for-sale: Corporate debt securities Bank debt securities Fund trusts Equity securities Noncurrent: Available-for-sale: Governmental bond securities Corporate debt securities Fund trusts Equity securities Held-to-maturity...

  • Page 64
    ... the fair value of those investments. Investments in affiliated companies accounted for by the equity method amounted to ¥26,546 million ($255,250 thousand) and ¥24,806 million at December 31, 2004 and 2003, respectively. Canon's share of the net earnings (losses) in affiliated companies accounted...

  • Page 65
    ... and direct-financing leases resulting from the marketing of Canon's and complementary third-party products. These receivables typically have terms ranging from December 31 1 to 6 years. The components of the finance receivables, which are included in prepaid expenses and other current assets, and...

  • Page 66
    .... Accumulated depreciation on equipment under operating leases at December 31, 2004 and 2003 was Year ending December 31 ¥52,493...80,534 14,012 3,319 97,865 (Thousands of U.S. dollars) Gross Carrying Amount Accumulated Amortization Software License fees Other Total $ 1,168,712 236,567 67,...

  • Page 67
    ... during the year Impairment losses Recognition of acquired company's tax benefits Translation adjustments Balance at end of year During the year ended December 31, 2004, Canon recognized ¥1,298 million ($12,481 thousand) of deferred tax benefits relating to preexisting net operating tax losses of...

  • Page 68
    CANON INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The aggregate annual maturities of long-term debt outstanding at December 31, 2004 were as follows: Year ending December 31 Millions of yen Thousands of U.S. dollars 2005 2006 2007 2008 2009 Thereafter ¥ ¥ 9,...

  • Page 69
    ...completion of the transfer to the government of the substitutional portion of the benefit obligation and the related plan assets as a single settlement transaction in accordance with EITF 03-2. As a result, Canon recognized a settlement loss of ¥69,651 million ($669,721 thousand) for the year ended...

  • Page 70
    ... Plan participants' contributions Benefit paid Settlement on plan termination Transfer of substitutional portion of EPFs to the government Foreign currency exchange rate changes Other Fair value of plan assets at end of year Funded status Unrecognized actuarial loss Unrecognized prior service...

  • Page 71
    ... 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 securities and debt securities. Plan assets are invested in individual equity and debt...

  • Page 72
    ...) to its defined benefit plans for the year ending December 31, 2005. Estimated future benefit payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Year ending December 31 Millions of yen Thousands of U.S. dollars 2005 2006 2007...

  • Page 73
    ... (reduction) in income taxes resulting from: Expenses not deductible for tax purposes Tax benefits not recognized on operating losses of subsidiaries Income of foreign subsidiaries taxed at lower than Japanese statutory tax rate Tax credit for research and development expenses Effect of enacted...

  • Page 74
    ... of U.S. dollars 2004 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 Accrued expenses Net operating losses carried forward...

  • Page 75
    ... upon stockholder approval. 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. Such amount was ¥1,141,596 million ($10,976,885 thousand...

  • Page 76
    CANON INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (16) Other Comprehensive Income (Loss) Change in accumulated other comprehensive income (loss) is as follows: Year ended December 31 2004 Millions of yen 2003 2002 Thousands of U.S. dollars 2004 Foreign currency ...

  • Page 77
    ... adjustments are as follows: Year ended December 31 Before-tax amount Millions of yen Tax (expense) or benefit Net-of-tax amount 2004: Foreign currency translation adjustments Net unrealized gains and losses on securities: Amount arising during the year Reclassification adjustments for gains and...

  • Page 78
    ...) or benefit (16,429) 565 (15,864) (1,459) (273) (1,732) (610) 2,699 2,089 (15,792) (31,299) Net-of-tax amount ¥ Thousands of U.S. dollars 2004: Foreign currency translation adjustments Net unrealized gains and losses on securities: Amount arising during the year Reclassification adjustments...

  • Page 79
    ... securities: 1% Japanese yen convertible debentures, due 2002 1.20% Japanese yen convertible debentures, due 2005 1.30% Japanese yen convertible debentures, due 2008 Diluted common shares outstanding Net income per share: Basic Diluted ¥ 343,344 - 24 72 343,440 275,730 - 36 86 275,852 Number...

  • Page 80
    ... Activities Risk management policy Canon operates internationally, exposing it to the risk of changes in foreign currency exchange rates and interest rates. Derivative financial instruments are comprised principally of foreign exchange contracts and interest rate swaps utilized by the Company and...

  • Page 81
    ... that those companies operate with less risk of finance. For each guarantee provided, Canon would have to perform under a guarantee, if the borrower defaults on a payment within the contract periods of 1 year to 30 years, in the case of employees with housing loans, and of 1 year to 10 years, in the...

  • Page 82
    ...long-term debt instruments are based on the quoted price in the most active market or the present value of future cash flows associated with each instrument discounted using Canon's current borrowing rate for similar debt instruments of comparable maturity. Derivative financial instruments The fair...

  • Page 83
    ..., Canon is potentially exposed to concentrations of credit risk if the customer failed to perform according to the terms of the contracts. 21) Supplemental Cash Flow Information For the years ended December 31, 2004, 2003 and 2002, aggregate common stock and additional paid-in capital arising...

  • Page 84
    ... of Canon Inc. and subsidiaries (the "Company") as of December 31, 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended, all expressed in Japanese yen. These financial statements are the responsibility of the Company's management. Our...

  • Page 85
    ... traded on the New York Stock Exchange. Shareholders' annual general meeting: March 30, 2005, 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...

  • Page 86
    CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan