Canon 2004 Annual Report Download - page 43

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Operating profit by product
Operating profit for business machines in fiscal 2004
increased ¥35,519 million (U.S.$342 million) to ¥521,084
million (U.S.$5,010 million). Despite the effects of the stronger
yen, the gross profit ratio remained at prior year levels, due to
cost reduction efforts, and the sales-to-expense ratio declined,
contributing to an increase in operating profit.
Operating profit for cameras increased ¥4,480 million
(U.S.$43 million) to ¥130,798 million (U.S.$1,258 million).
Despite the negative effects of the stronger yen and price
competition, along with the impact of increased advertising
and sales-promotion spending, a increase in unit sales of digital
cameras contributed to improved profitability.
Optical and other products generated operating profits of
¥28,832 million (U.S.$277 million) in fiscal 2004, as compared
to losses of ¥9,883 million in fiscal 2003, due to a significant
increase in sales of aligners and steppers.
FOREIGN OPERATIONS AND FOREIGN CURRENCY
TRANSACTIONS
Canon’s marketing activities are performed by subsidiaries in
various regions in local currencies, while the cost of sales is
generally in yen. Given Canon’s current operating structure,
appreciation of the yen has a negative impact on net sales and
the gross profit ratio. To reduce the financial risks from
changes in foreign 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 on foreign
operation sales is calculated by dividing net income of foreign
subsidiaries, after factoring in a consolidation adjustment
between foreign subsidiaries, by net sales of foreign subsidiaries.
Marketing activities are generally less profitable than production
activities, which are mainly conducted by the Company and its
domestic subsidiaries. The returns on foreign operation sales in
fiscal 2004, 2003 and 2002 were 2.8%, 3.2% and 2.7%,
respectively. This compares with returns of 9.9%, 8.6% and
6.5% on total operations for the respective years.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents in fiscal 2004 increased
¥197,476 million (U.S.$1,899 million) to ¥887,774 million
(U.S.$8,536 million), compared with ¥690,298 million in fiscal
2003 and ¥521,271 million in fiscal 2002. Canon’s cash and
cash equivalents are typically denominated in Japanese yen,
with the remainder denominated in foreign currencies such as
the U.S. dollar.
Net cash provided by operating activities in fiscal 2004
increased by ¥95,880 million (U.S.$922 million) from the
previous year to ¥561,529 million (U.S.$5,399 million). Cash
flow from operating activities consisted of the following
components: the major component of Canon’s cash inflow is
cash received from customers, while the major components of
Canon’s cash outflow are payments for parts and materials,
selling, general and administrative expenses, and income taxes.
For fiscal 2004, cash inflow from cash received from
customers increased, due to the increase in net sales. This
increase in cash inflow was within the range of the increase in
net sales, as there were no significant changes in Canon’s
collection rates. Cash outflow for payments for parts and
materials also increased, as a result of an increase in net sales.
However, this increase was less than the increase in net sales,
due to the effects of cost reduction. Cost reduction reflects a
decline in unit prices of parts and raw materials, as well as a
streamlining of the process of using these parts and materials
through promoting efficiency in operations. Cash outflow for
payroll payments increased, due to the increase in the number
of employees. The employees in the Asian region increased,
due to the expansion of production in the regions. Cash
outflow for payments for selling, general and administrative
expenses increased, due to the increase in advertising and
marketing expenses, reflecting management’s policy to
strengthen Canon’s corporate brand image. Cash outflow for
payments of income taxes increased, due to the increase in
taxable income.
Net cash used in investing activities in fiscal 2004 was
¥252,967 million (U.S.$2,432 million), compared with
¥199,948 million in fiscal 2003 and ¥230,220 million in fiscal
2002, consisting primarily of capital expenditures. Capital
expenditures in fiscal 2004 totaled ¥318,730 million
(U.S.$3,065 million), mainly due to expanding production
capabilities in Japan and overseas, as well as to bolster
Canon’s R&D-related infrastructure. In November 2004,
Canon also entered into an agreement whereby certain assets
were deposited into an irrevocable trust to meet the debt
service requirements of 1.88% Japanese yen notes, 2.95%
Japanese yen notes, and 2.27% Japanese yen notes in the
aggregate amount of ¥25,000 million (U.S.$240 million).
Upon this agreement, Canon used cash aggregating to
¥26,637 million (U.S.$256 million).