Canon 2004 Annual Report Download - page 37

35
SUMMARY OF OPERATIONS
(Thousands of
(Millions of yen) U.S. dollars)
2004 change 2003 change 2002 2004
Net sales ¥3,467,853 +8.4% 3,198,072 +8.8% 2,940,128 $33,344,740
Operating profit 543,793 +19.7 454,424 +31.2 346,359 5,228,779
Income before income taxes and minority interest 552,116 +23.2 448,170 +35.8 330,017 5,308,808
Net income 343,344 +24.5 275,730 +44.6 190,737 3,301,385
CONSOLIDATED RESULT OF OPERATIONS
Sales
Canon’s consolidated net sales in fiscal 2004 totaled
¥3,467,853 million (U.S.$33,345 million). This represents an
8.4% increase from the previous fiscal year, reflecting
significant growth in sales of digital cameras, color network
digital MFDs and semiconductor-production equipment.
Overseas operations are significant to Canon’s operating
results and generated approximately 73% of total net sales in
fiscal 2004. 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 fiscal 2004 was ¥108.12
to the U.S. dollar, and ¥134.57 to the euro, representing an
appreciation of 7% against the U.S. dollar, and a depreciation
of 3% against the euro, compared with the previous year.
These effects of foreign exchange rate fluctuations
unfavorably impacted net sales by approximately ¥57,000
million. Net sales denominated in foreign currency decreased
by approximately ¥77,700 million in U.S. dollars, increased by
¥20,300 million in euro, and increased by ¥400 million in
other foreign currencies.
Cost of sales
Cost of sales principally reflects 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
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 plan assets based on management’s expectations of
the long-term return of the various plan asset categories in
which it invests. Management develops expectations with
respect to each plan asset category based on actual historical
returns and its current expectations for future returns.
Decreases in discount rates lead to increases in actuarial
pension benefit obligations which, in turn, could lead to an
increase in service cost and amortization cost through
amortization of actuarial gain or loss, a decrease in interest
cost, and vice versa. A decrease of 50 basis points in the
discount rate increases the projected benefit obligation by
approximately 11%. The net effect of changes in the discount
rate, as well as the net effect of other changes in actuarial
assumptions and experience, are deferred until subsequent
periods, as permitted by Statement of Financial Accounting
Standards No. 87, “Employers’ Accounting for Pensions.”
Decrease in expected return on plan assets may increase
net periodic benefit cost by decreasing expected return
amounts, while differences between expected value and actual
fair value of those assets could affect pension income
(expense) in the following years, and vice versa. For fiscal
2005, if a change of 50 basis points in the expected long-term
rate of return on plan assets is to occur, that may cause a
change of approximately ¥2,090 million in net periodic benefit
cost. Canon multiplies management’s expected long-term rate
of return on plan assets by the value of its plan assets, to arrive
at 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).
The Company and certain of its domestic subsidiaries
realized a net gain ¥17,141 million (U.S.$165 million) for fiscal
2004 due to the return to the Japanese Government of the
substitutional portion of the Employee’s Pension Funds.
“Accrued pension and severance cost” decreased in fiscal
2004 compared to fiscal 2003, as a result of the return.