Canon 2003 Annual Report Download - page 28

26
FINANCIAL OVERVIEW
GENERAL
The following discussion and analysis provides information that
management believes to be relevant to understanding Canon’s
consolidated financial condition and result 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
manufacture and sale of these products domestically and
internationally. 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 2003, although economic
conditions in the United States remained stagnant during the first
half of the year, a recovery quickly took hold from the third
quarter, led by healthy consumer spending resulting from tax
cuts, and growth in capital investment in the private sector,
which was supported by the low-interest rate monetary policy.
The economies of Europe remained flat through most of 2003,
although an increase in exports accompanying the upturn in the
U.S. economy pointed to signs of a recovery in the region in the
latter half of the year. Asian economies grew substantially during
2003, particularly in China, as the adverse effects of the Severe
Acute Respiratory Syndrome (SARS) epidemic were kept to a
minimum. In Japan, while there were no signs of a turnaround in
consumer spending or employment and income conditions, a
gradual recovery was evident during the second half of the year
as exports and capital investment showed steady improvement.
Summary of operations
Canon achieved record highs in both consolidated net sales and
net income, and a fourth consecutive year of sales and profit
growth, mainly due to a significant increase in sales of digital
cameras and color network digital multifunction devices
(“MFDs”). In fiscal 2003, Canon achieved 8.8% growth in net
sales, to ¥3,198,072 million (U.S.$29,889 million) marking the
first time it has surpassed the ¥3,000 billion level, and a 44.6%
increase in net income, to ¥275,730 million (U.S.$2,577 million).
Canon’s gross profit increased by 14.9% to ¥1,608,900 million
(U.S.$15,036 million). This improvement was the result of an
increase in sales volume as well an improved gross profit ratio,
made possible through development reforms that shortened lead
times for new product launches and cost savings realized
through sustained production reforms.
Key performance indicators
Following are the key performance indicators (“KPI”) that Canon
uses in managing its business. The changes from year to year in
these KPI are set forth in the table shown on page 27.
-Revenues-
As Canon seeks to become a truly excellent global company,
one indicator that Canon’s management puts strong emphasis on
is revenue. Following are some of the KPI relating to revenues
that management considers to be important.
Net sales is one of the KPI. Canon derives net sales primarily
from products, and services relating to its products. These sales
vary based on such factors as product demand, the number and
size of transactions within the reporting period, and the impact of
changes in sales prices. Other factors involved are market share
and market environment. In addition to net sales, sales by
product group is considered important, since this will work as a
measurement in identifying Canon’s performance in relation to
market trends.
Gross profit ratio (Gross profit to net sales ratio) is another
KPI for Canon. Through enhanced development reforms
activities, Canon has been aiming 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 production reforms activities. These
achievements have worked to improve Canon’s gross profit ratio,
and Canon will continue to pursue these approaches.
Operating profit ratio (Operating profit to net sales ratio) and
research and development (“R&D”) expense to net sales ratio are
also considered by Canon to be KPI. Canon puts significant
emphasis on operating profit. Canon focuses on two areas for the
improvement of operating profit. On one side, Canon strives to
control and reduce its selling, general and administrative
expenses. On the other side, Canon’s R&D policy is designed to
maintain a high level of spending in core technology, in order to
sustain Canon’s leading position in its current fields of business,
and also for exploring possibilities in other markets. Such
investments will be the basis for future success in Canon’s
business and operations.
-Cash Flow Management-
Canon also places significant emphasis on cash flow
management. The following are the KPI relating to cash flow
management that Canon believes to be important.
Inventory turnover within days is a KPI because it is a
measure of supply-chain management efficiency. Inventories have