Canon 2006 Annual Report Download - page 43

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SUMMARY OF OPERATIONS
Thousands of
Millions of yen U.S. dollars
2006 Change 2005 Change 2004 2006
Net sales ¥4,156,759 +10.7% 3,754,191 +8.3% 3,467,853 $ 34,930,748
Operating profit 707,033 +21.3 583,043 +7.2 543,793 5,941,454
Income before income taxes and minority interests 719,143 +17.5 612,004 +10.8 552,116 6,043,218
Net income 455,325 +18.5 384,096 +11.9 343,344 3,826,261
CONSOLIDATED RESULTS OF OPERATIONS
Sales
Canon’s consolidated net sales in fiscal 2006 totaled
¥4,156,759 million (U.S.$34,931 million). This represents a
10.7% increase from the previous fiscal year, reflecting solid
rises 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.
Overseas operations are significant to Canon’s operating
results and generated approximately 75% of total net sales in
fiscal 2006. 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 2006 was ¥116.43 to
the U.S. dollar, and ¥146.51 to the euro, representing depreci-
ation of about 5% against the U.S. dollar, and 7% against the
euro, compared with the previous year. The effects of foreign
exchange rate fluctuations favorably impacted net sales by
approximately ¥138,700 million. This favorable impact was
comprised of approximately ¥67,800 million for U.S. dollar
denominated sales, ¥65,900 million for euro-denominated
sales and ¥5,000 million for other foreign currency-denomi-
nated sales.
In preparing its financial statements for fiscal 2006, Canon
estimated a discount rate of 2.7% and an expected long-term
rate of return on plan assets of 4.8%. In estimating the 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 amorti-
zation 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 the Statement of Financial Accounting Standards (“SFAS”)
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 expense in the
following years, and vice versa. For fiscal 2007, 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
¥3,040 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 affects the value of plan assets in
future fiscal years and, ultimately, future pension income
(expense).
On December 31, 2006, Canon adopted the recognition
and disclosure provisions of SFAS 158. SFAS 158 required
Canon to recognize the funded status (i.e., the difference
between the fair value of plan assets and the projected benefit
obligations) of its pension plans in the December 31, 2006 con-
solidated balance sheet, with a corresponding adjustment to
accumulated other comprehensive income (loss), net of tax.
Effective January 1, 2007, Canon and certain of its domes-
tic subsidiaries have amended their defined benefit pension
plans, and the projected benefit obligation has decreased by
¥101,620 million (U.S.$853,950 thousand). This decrease will
be amortized as a reduction of net periodic benefit cost over
the employees’ average remaining service period. The amount
will be approximately ¥5,834 million (U.S.$49,025 thousand)
per year. In conjunction therewith, Canon and certain of its
domestic subsidiaries have implemented a defined contribution
pension plan for certain future pension benefits attributable to
employees’ future services.