Canon 2006 Annual Report Download - page 40

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FINANCIAL OVERVIEW
GENERAL
The following discussion and analysis provides information
that management believes to be relevant to understanding
Canon’s consolidated financial condition and results of operations.
References in this discussion to the “Company” are to Canon
Inc. and, unless otherwise indicated, references to the financial
condition or operating results of “Canon” refer to Canon Inc.
and its consolidated subsidiaries.
OVERVIEW
Canon is 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 manu-
facture and sale of these products domestically and interna-
tionally. Canon’s basic management policy is to contribute to
the prosperity and well-being of the world while endeavoring
to become a truly excellent global corporate group targeting
continued growth and development.
Canon divides its businesses into three product groups:
business machines, cameras, and optical and other products.
The business machines product group has three sub-groups:
office imaging products, computer peripherals and business
information products.
Economic Environment
Looking back at the global economy in 2006, in the United
States, despite a decrease in housing investment, the economy
continued to display growth with healthy employment condi-
tions and continued growth in consumer spending, along with
an increase in corporate capital investment. In Europe, while
exports appeared somewhat sluggish due to the appreciation
of the euro, the region indicated a trend toward moderate
recovery as domestic demand expanded in major European
countries, boosted by such factors as increased consumer
spending owing to improvements in the employment environ-
ment. Within Asia, the Chinese economy maintained a high
growth rate while other economies in the region also enjoyed
generally favorable conditions. In Japan, although consumer
spending has yet to fully regain its strength, the economy
maintained a trend toward recovery amid increased capital
spending fueled by strong corporate performances.
Market Environment
With respect to the markets in which the Canon Group operates,
within the camera segment demand for digital single-lens reflex
(SLR) cameras and compact digital cameras continued to realize
healthy growth during the term. Within the office imaging
product market, demand for network digital multifunction
devices (MFDs) remained solid as the office market moved
toward color and multifunctionality. As for computer peripherals,
including printers, although demand grew for color as well as
monochrome laser beam printers, and shifted rapidly within
the inkjet printer market from single-function to multifunction
models, the segment suffered amid severe price competition. In
the optical equipment segment, although demand for projection
aligners, which are used to produce liquid crystal display (LCD)
panels, declined due to restrained investment by LCD manu-
facturers, demand for steppers, used in the production of
semiconductors, was strong, supported by increased investment
by manufacturers. The average value of the yen for the year
was ¥116.43 to the U.S. dollar and ¥146.51 to the euro,
representing year-on-year decreases of about 5% against the
U.S. dollar, and 7% against the euro.
Summary of Operations
In 2006, the first year of a new five-year management plan—
Phase III of Canon’s Excellent Global Corporation Plan—Canon
achieved record highs in both consolidated net sales and net
income, and a seventh consecutive year of sales and profit
growth, mainly due to a solid rise in sales of digital cameras
and color network digital MFDs, and laser beam printers, along
with the positive effects of the depreciation of the yen. In fiscal
2006, Canon achieved 10.7% growth in net sales, to ¥4,156,759
million (U.S.$34,931 million), and an 18.5% increase in net
income, to ¥455,325 million (U.S.$3,826 million). Canon’s
gross profit increased by 13.3%, to ¥2,060,480 million
(U.S.$17,315 million).
Key Performance Indicators
Following are the key performance indicators (KPIs) that Canon
uses in managing its business. The changes from year to year in
these KPIs are set forth in the table shown on page 39.
Revenues
As Canon seeks to become a truly excellent global company,
one indicator upon which Canon’s management places strong
emphasis is revenue. Following are some of the KPIs relating to
revenues that management considers to be important.
Net sales is one such KPI. Canon derives net sales primarily
from the sale of products, and to a much lesser extent, the provi-
sion of services relating to its products. Sales vary based on
such factors as product demand, the number and size of trans-
actions within the reporting period, product reputation for new
products, and changes in sales prices. Other factors involved
are market share and market environment. In addition, man-
agement considers an evaluation of net sales by product group
important to assessing Canon’s performance in sales in various
product groups in light of market trends.
Gross profit ratio (ratio of gross profit to net sales) is
another KPIs for Canon. Through its reforms in product develop-
ment, Canon has been striving to shorten product development
lead times in order to launch new, competitively priced products
at a faster pace. In addition, Canon has achieved cost reductions
through efficiency enhancements in production. Canon believes
that these achievements have contributed to improving Canon’s
gross profit ratio, and Canon intends to continue to pursue
further shortening of product development lead times and
reductions in production costs.
Operating profit ratio (ratio of operating profit to net sales)
and research and development (“R&D”) expense to net sales