Canon 2005 Annual Report Download

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Fiscal Year Ended December 31, 2005
CANON
ANNUAL REPORT 2005

Table of contents

  • Page 1
    CANON ANNUAL REPORT 2005 Fiscal Year Ended December 31, 2005

  • Page 2
    ...maintaining a high profit margin structure. Canon aims to join the ranks of the global top 100 companies by 2010 in terms of such key business performance measures as net sales, profit, stockholders' equity to total assets ratio and market capitalization. Cover Photos: Technological strength is the...

  • Page 3
    ...,073,576 Notes: 1. Canon's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. 2. U.S. dollar amounts are translated from yen at the rate of JPY118=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December...

  • Page 4
    TO OUR STOCKHOLDERS We have successfully completed Phase II of our Excellent Global Corporation Plan

  • Page 5
    and started Phase III 3

  • Page 6
    ... as digital cameras, inkjet printers and MFDs. By strengthening platform technologies and introducing 3D-CAD design systems, we've been able to improve design precision, shorten development times, and consistently launch competitive products in accordance with market needs. The proportion of sales...

  • Page 7
    .... Through increased effort, we aim to elevate Canon to the ranks of the world's top 100 companies by 2010 in terms of such key business performance measures as net sales, profit, stockholders' equity to total assets ratio and market capitalization. We will build upon recent achievements, using...

  • Page 8
    ... opportunities, including high-definition (HD) movies at home, business meetings utilizing multiple TV terminals, and sending and receiving large-volume data and images. The second broad trend is the continued advance of globalization as economic development spreads to more nations of the world...

  • Page 9
    Plan Phase III A key part of our display strategy, our prototype 36-inch SED panels earned high acclaim at Canon EXPO in Tokyo for their crisp images and rapid responsiveness Dress design/YUMI KATSURA 7

  • Page 10
    ... products. • Establish new production systems to sustain international competitiveness New production methods are needed to further boost cost competitiveness. With corporate competition intensifying globally, Canon must work to speedily respond to shifts in technologies and products on the market...

  • Page 11
    ...commercial printers for the print-on-demand (POD) market. We will also forge ahead with full-fledged expansion of our digital radiography business on a global scale. In global operations, we are equipping our regional marketing headquarters, Canon U.S.A., Inc. and Canon Europa N.V., with development...

  • Page 12
    ... Center Headquarters Administrative Divisions Product Group Operations Management Strategy Committee New Business Development Committee Corporate Ethics and Compliance Committee Internal Control Committee Disclosure Committee Subsidiaries & Affiliates Marketing Subsidiaries & Affiliates Global...

  • Page 13
    ... Global 500, Canon placed 154th in revenues and 96th in profits (July 25, 2005 issue). FORTUNE also named Canon CEO Fujio Mitarai as Asian Business Leader of the Year (January 26, 2006 issue). Financial rating agencies also hold Canon in high regard. Standard & Poor's continues to rate Canon's long...

  • Page 14
    ...price. We carefully observe the rules relating to information disclosure to capital markets in Canon's Disclosure Guidelines, strictly controlling undisclosed information and preventing the possibility of insider trading. Section 303A of the New York Stock Exchange (the "NYSE") Listed Company Manual...

  • Page 15
    ... of such plans, with certain limited exceptions. Under the Code, however, a company is only required to obtain shareholder approval if it desires to adopt an equity-compensation plan under which stock acquisition rights are granted to the recipient on especially favorable terms (except where...

  • Page 16
    ...Image Communication Products Operations Yukio Yamashita Chief, Global Marketing Promotion Committee; Group Executive, Human Resources Management & Organization Headquarters Toshio Homma Group Executive, L Printer Business Promotion Headquarters Toshizo Tanaka Group Executive, Finance & Accounting...

  • Page 17
    CORPORATE FUNCTIONS RESEARCH & DEVELOPMENT _____ 16 PRODUCTION _____ 18 SALES & MARKETING _____ 20 CORPORATE SOCIAL RESPONSIBILITY __ 22 15

  • Page 18
    ... detailed photos with no false colors. Canon is making significant progress in terms of bolstering shared platform technologies company-wide through its high-precision color management system. All Canon input/output products, from digital cameras, camcorders and scanners to home-use printers and...

  • Page 19
    ...prevent the leakage of information concerning production technologies and Canon developed DIGIC DVII image engine for high-definition images manufacturing expertise. As part of Canon's international diversification, we are conducting R&D activities that are closely tied to regional characteristics...

  • Page 20
    ...integrate development, manufacturing technology and know-how from the production plant, with the aim of establishing new production methods. Toward the Establishment of New Production Methods In 2005, Canon established the Production Automation Special Committee to study and solve issues related to...

  • Page 21
    ... inkjet printers. In addition, Canon Oita Canon realizes the ultimate in flexible production for Canon's digital cameras completed construction of a new plant at Utsunomiya, Japan in November 2005 for the manufacturing of lenses. Looking globally, Canon Vietnam Co., Ltd. completed construction of...

  • Page 22
    ... supply chain management (SCM) structure, covering SCM from the production plant to the customer, and implement a performance evaluation system for Group companies and divisions in order to optimize the allocation of management resources. Europe In 2005, Europe was once again Canon's largest market...

  • Page 23
    ... Web Self-Service System (WSSS), a Web-based system for providing service and support for users of Canon consumer products for troubleshooting, device driver and user guide downloads, and other services. With new retail shops, Canon expects significant growth in India's market Improving Customer...

  • Page 24
    ... of the plan is Factor 2: a target of at least doubling resource efficiency associated with Canon's entire scope of business activities by 2010 as compared with the baseline year of 2000. Canon continues to develop technologies and strengthen systems in order to meet this goal. Global Warming...

  • Page 25
    ... its logistics operations. Canon is reviewing its product distribution methods, and is actively implementing a modal shift* on a global basis. Canon analyzes logistics at each stage of business activities, from procurement to sales and recovery of products. For international shipping, we are working...

  • Page 26
    ... WWF in several nations, Canon also helps WWF to digitize its superb image collection and to make it readily available online to its global network of offices. Eyes on Yellowstone Eyes on Yellowstone is a collaborative ecological research and teaching initiative funded by Canon to support important...

  • Page 27
    PRODUCT GROUPS Sales Results (Millions of yen) Share of Consolidated Sales 30.7% Business Machines OFFICE IMAGING PRODUCTS 26-27 Office network digital multifunction devices (MFDs) Color network digital MFDs Office copying machines Personal-use copying machines Full-color copying machines, etc....

  • Page 28
    ... broadens, Canon is developing its value-added services for the ultimate in document solutions. Masaki Nakaoka Chief Executive, Office Imaging Products Operations Canon is the world's largest manufacturer of office copying machines and multifunction devices (MFDs), which are business machines with...

  • Page 29
    ... of monochrome machines. We will further develop our operations in the growth markets of Russia and Eastern Europe during 2006. imageRUNNER In Asia, Canon increased its share of unit C3170 sales in the Japan market on the back of strong sales of new color models, recording year-on-year sales growth...

  • Page 30
    ... from documents to Web images, home printing of photos and professional printing. Canon will equip its entire lineup of inkjet printers with photo-printing quality to complement its digital camera strengths. The inkjet printer market experienced moderate growth in 2005. The year saw an extension...

  • Page 31
    ... expanding Asia market, led by China, growing to a market scale on par with that of North PIXMA MP800 America and Europe. Sales in the toner cartridge business increased in 2005, supported by significant sales growth of color models. LBP3000 In flatbed scanners, though the overall market is shifting...

  • Page 32
    ..., Image Communication Products Operations Canon is the world's leading manufacturer of compact digital cameras and digital single lens reflex (SLR) cameras. Canon's 70 years of camera manufacturing know-how combined with its advanced digital technologies has led to the Company's success in digital...

  • Page 33
    ... yen) Fiscal 2005 Review Sales in the cameras segment totaled 900‚000 ¥879 billion, a year-on-year increase of 15.2%. In compact digital cameras, Canon attained record sales of around 15 million units. We introduced seven new models in the PowerShot series, meeting a broad range of picturetaking...

  • Page 34
    ... that meet customer needs. We plan to launch a next-generation ArF stepper in 2006 that can be installed in half the time of current steppers. Canon is also making strides in the development of immersion lithography, and aims to launch sales of a stepper equipped with this technology in 2007. Canon...

  • Page 35
    ... helping Canon to maintain top share in the worldwide market. We are working to expand the domain of X-ray digital cameras, and expect sound sales growth in the digital radiography devices market. Canon maintained its leading position in the market for broadcast CXDI-50G television lenses, supported...

  • Page 36
    ... Canon Semiconductor Engineering Korea Inc. Canon Semiconductor Equipment Taiwan Inc. RESEARCH & DEVELOPMENT Canon Development Americas, Inc. Canon Technology Europe Ltd. Canon Research Centre France S.A.S. Canon Information Systems Research Australia Pty. Ltd. Canon Information Technology (Beijing...

  • Page 37
    ... Accounting Policies (2) Basis of Financial Statement Translation _____ 64 (3) Foreign Operations (4) Marketable Securities and Investments (5) Trade Receivables _____ 66 (6) Inventories _____ 67 (7) Property, Plant and Equipment (8) Finance Receivables and Operating Leases (9) Acquisitions...

  • Page 38
    ... owing to such factors as increased corporate investment supported by favorable corporate profits and improved consumer spending. Market Environment With respect to the markets in which Canon operates, demand in the digital camera segment for single lens reflex ("SLR") models continued to grow...

  • Page 39
    ... lead times in order to achieve early recovery of related product expenses by strengthening supply chain management. Canon's management seeks to meet its liquidity and capital requirements primarily with cash flow from operations and also seeks debt-free operations. For a manufacturing company such...

  • Page 40
    ...-type leases or direct-financing leases are accounted for as operating leases and related revenue is recognized over the lease term. Canon records estimated reductions to sales at the time of sale for sales incentive programs including product discounts, customer promotions and volume-based rebates...

  • Page 41
    ... 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...

  • Page 42
    ..., cameras and optical and other products. • The business machines product group includes office imaging products, computer peripherals and business information products. Office imaging products include office network digital MFDs, color network digital MFDs, office copying machines, personal-use...

  • Page 43
    ... priced models. Inkjet printers recorded an increase in unit sales of more than 10%, with the PIXMA iP3000/4000 and, in markets outside of Japan, the PIXMA MP110/130 maintaining brisk sales. Additionally, newly Return on Sales (%) Sales by Product (Millions of yen) Business Machines Office imaging...

  • Page 44
    ...-series models and Canon's digital SLR. On a yen basis, after accounting for the appreciation of the yen against the U.S. dollar, net sales in the Americas increased by 8.2%. In Europe, net sales increased by 6.1% on a local currency basis mainly due to increased sales of digital cameras and...

  • Page 45
    SEGMENT INFORMATION BY PRODUCT Millions of yen Business machines Cameras Optical and other products Corporate and Eliminations Consolidated 2005: Net sales: Unaffiliated customers Intersegment Total Operating cost and expenses Operating profit Assets Depreciation and amortization Capital ...

  • Page 46
    SEGMENT INFORMATION BY GEOGRAPHIC AREA Millions of yen Japan Americas Europe Others Corporate and Eliminations Consolidated 2005: Net sales: Unaffiliated customers Intersegment Total Operating cost and expenses Operating profit Assets 2004: Net sales: Unaffiliated customers Intersegment Total ...

  • Page 47
    ... 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...

  • Page 48
    ...to fifteen years. In order to facilitate access to global capital markets, Canon obtains credit ratings from two rating agencies, Moody's Investors Services, Inc. ("Moody's") and Standard and Poor's Rating Services ("S&P"). In addition, Canon maintains a rating from Rating and Investment Information...

  • Page 49
    ...for its requirements for the foreseeable future. Canon's capital requirements are primarily dependent on management's business plans regarding the levels and timing of capital expenditures and investments. The working capital ratio (ratio of current assets to current liabilities) for fiscal 2005 was...

  • Page 50
    ...574,839 $2,031,677 Canon provides warranties generally less than one year against defects in materials and workmanship on most of its consumer products. Estimated product warranty related costs are established at the time revenue is recognized and are included in selling, general and administrative...

  • Page 51
    ... lead times. Canon has R&D centers worldwide, including the USA, that closely collaborate in their R&D activities. Some regional R&D centers conduct basic research into technology, and others apply their expertise to develop new products and businesses. The Company's R&D activities are conducted in...

  • Page 52
    ...are internationally recognized financial institutions and contracts are diversified across a number of major financial institutions. Millions of yen Cost Fair Value Thousands of U.S. dollars Cost Fair Value Equity Price Risk Canon holds marketable securities included in current assets as short-term...

  • Page 53
    ...) of its "Excellent Global Corporation Plan," the Canon Group pursued total optimization. Under the policy of putting profits ahead of sales, we pushed forward selection and concentration measures and, amid ongoing product digitalization, worked to enhance our product competitiveness and establish...

  • Page 54
    ... technological competition in terms of picture quality and functions. Profit margins have been shrinking for the overall industry, but Canon has been able to maintain higher margins through reforms of its production and procurement systems. Canon expects the market for compact digital cameras...

  • Page 55
    ... lenses exclusively for digital SLR cameras, and currently has five models in this market. Canon seeks to expand its sales and market share by introducing products especially made for popular class digital SLR cameras. For video camcorders, analog camcorder sales have been further replaced by sales...

  • Page 56
    ... income Percentage of sales Advertising Research and development Depreciation of property, plant and equipment Capital expenditure Long-term debt, excluding current installments Stockholders' equity Total assets Per share data: Income before cumulative effect of change in accounting principle: Basic...

  • Page 57
    ...Thousands of U.S. dollars except per share amounts 2005 827....00 5,620 3,400 872,606 86,673 80.66 79.50 80.66 79.50 17.00 4,200 2,170 870,699...U.S. dollar amounts are translated from yen at the rate of U.S.$1 = ¥118, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, ...

  • Page 58
    ... (note 20) Investments (notes 4 and 11) Property, plant and equipment, net (notes 7, 8 and 11) Other assets (notes 8, 9, 10, 13 and 14) Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term loans and current portion of long-term debt (note 11) Trade payables (note 12...

  • Page 59
    ... of U.S. dollars (note 2) 2003 2005 Millions of yen 2005 2004 Net sales Cost of sales (notes 10, 13 and 20) Gross profit Selling, general and administrative expenses (notes 1, 10, 13 and 20) Research and development expenses Operating profit Other income (deductions): Interest and dividend income...

  • Page 60
    ... of convertible debt and other Stock exchanged under exchange offering Capital transactions by consolidated subsidiaries and affiliated companies Balance at end of year Legal reserve: Balance at beginning of year Transfers from retained earnings Balance at end of year Retained earnings: Balance at...

  • Page 61
    ... used in investing activities Cash flows from financing activities: Proceeds from issuance of long-term debt Repayments of long-term debt Decrease in short-term loans Dividends paid Purchases of treasury stock, net Other, net Net cash used in financing activities Effect of exchange rate changes on...

  • Page 62
    ..."Company") and subsidiaries (collectively "Canon") is one of the world's leading manufacturers in such fields as office imaging products, computer peripherals, business information products, cameras, and optical related products. Office imaging products consist mainly of copying machines and digital...

  • Page 63
    ... Affiliated Companies Investments in affiliated companies over which Canon has the ability to exercise significant influence, but does not hold a controlling financial interest, are accounted for by the equity method. (k) Impairment of Long-Lived Assets Long-lived assets, such as property, plant and...

  • Page 64
    ...-type leases or direct-financing leases are accounted for as operating leases and related revenue is recognized over the lease term. Canon records estimated reductions to sales at the time of sale for sales incentive programs including product discounts, customer promotions and volume-based rebates...

  • Page 65
    ...the commercial user until the customer replaces the equipment. FSP 143-1 is required to be applied to the later of the first reporting period ending after June 8, 2005 or the date of the Directive's adoption into law by the applicable EU member countries. Canon adopted FSP 143-1 in the third quarter...

  • Page 66
    ... Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value 2005: Current: Available-for-sale: Bank debt securities Equity securities Noncurrent: Available-for-sale: Government bonds Corporate debt securities Fund trusts Equity securities Held-to-maturity: Corporate debt securities...

  • Page 67
    ...Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value 2004: Current: Available-for-sale: Corporate debt securities Bank debt securities Fund trusts Equity securities Noncurrent: Available-for-sale: Government bonds Corporate debt securities Fund trusts Equity securities Held...

  • Page 68
    ...investments. Investments in affiliated companies accounted for by the equity method amounted to ¥31,418 million ($266,254 thousand) and ¥26,546 million at December 31, 2005 and 2004, respectively. Canon's share of the net earnings (losses) in affiliated companies accounted for by the equity method...

  • Page 69
    ... Leases Finance receivables represent financing leases which consist of sales-type leases and direct-financing leases resulting from the marketing of Canon's and complementary third-party products. These receivables typically have terms ranging from 1 to 6 December 31 years. The components of...

  • Page 70
    ...financial statements. Intangible assets consist primarily of developed technology, and are subject to a weighted average amortization period of approximately 9 years. In 2004, the Company acquired all of the outstanding common shares of a precision plastic mold manufacturer, in an exchange offering...

  • Page 71
    ...during the year Impairment losses Recognition of acquired company's tax benefits Translation adjustments Balance at end of year During the year ended December 31, 2004, Canon recognized ¥1,298 million of deferred tax benefits relating to preexisting net operating tax losses of a company acquired in...

  • Page 72
    ...CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED CANON INC. AND SUBSIDIARIES (11) Short-Term Loans and Long-Term Debt Short-term loans consisting of bank borrowings at December 31, 2005 were ¥67 million ($568 thousand). The weighted December 31 average interest rate on short-term loans outstanding at...

  • Page 73
    ...employee earnings and years of service. The contributory plans in Japan mainly represent the Employees' Pension Fund plans ("EPFs"), composed of the substitutional portions based on the pay-related part of the old age pension benefits prescribed by the Welfare Pension Insurance Law and the corporate...

  • Page 74
    ...' contributions Benefit paid Settlement on plan termination Transfer of substitutional portion of EPFs to the Japanese government Acquisition Foreign currency exchange rate changes Fair value of plan assets at end of year Funded status Unrecognized actuarial loss Unrecognized prior service cost...

  • Page 75
    ... payments of pension benefits to eligible participants. Taking into account the expected long-term rate of return on plan assets, Canon formulates a "model" portfolio comprised of the optimal combination of equity securities and debt securities. Plan assets are invested in individual equity and debt...

  • Page 76
    ... TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED CANON INC. AND SUBSIDIARIES Contributions Canon expects to contribute ¥45,352 million ($384,339 thousand) to its defined benefit plans for the year ending December 31, 2006. Estimated future benefit payments The following benefit payments, which...

  • Page 77
    ... benefits not recognized on operating losses of subsidiaries Income of foreign subsidiaries taxed at lower than Japanese statutory tax rate Tax credit for research and development expenses Effect of enacted changes in tax laws and rates Other Effective income tax rate Net deferred income tax assets...

  • Page 78
    ... of U.S. dollars 2005 Deferred tax assets: Inventories Accrued business tax Accrued pension and severance cost Minimum pension liability adjustments Research and development - costs capitalized for tax purposes Property, plant and equipment Accrued expenses Net operating losses carried forward...

  • Page 79
    ...2006 upon approval by the stockholders. The amount available for dividends under the Japanese Commercial Code is based on the amount recorded in the Company's nonconsolidated books of account in accordance with financial accounting standards of Japan. Such amount was ¥1,366,355 million ($11,579,280...

  • Page 80
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED CANON INC. AND SUBSIDIARIES (17) Other Comprehensive Income (Loss) Changes in accumulated other comprehensive income (loss) are as follows: Year ended December 31 2005 Millions of yen 2004 2003 Thousands of U.S. dollars 2005 Foreign currency ...

  • Page 81
    ... the year Minimum pension liability adjustments Other comprehensive income (loss) ¥ 55,345 9,005 (10,793) (1,788) (9,137) 8,333 (804) 40,364 ¥ 93,117 (1,366) (3,892) 4,283 391 3,658 (3,335) 323 (19,365) (20,017) 53,979 5,113 (6,510) (1,397) (5,479) 4,998 (481) 20,999 73,100 ¥ 4,400 5,022...

  • Page 82
    ... FINANCIAL STATEMENTS, CONTINUED CANON INC. AND SUBSIDIARIES Year ended December 31 Before-tax amount Millions of yen Tax (expense) or benefit Net-of-tax amount 2003: Foreign currency translation adjustments: Amount arising during the year Reclassification adjustments for gains and losses...

  • Page 83
    ... 72 343,440 Number of shares 275,730 36 86 275,852 $3,255,051 42 153 $3,255,246 887,173,810 885,365,124 878,648,844 123,837 745,954 462,823 2,125,278 2,664,354 6,382,560 888,043,601 887,953,225 887,695,758 Yen U.S. dollars ¥432.94 432...

  • Page 84
    ... fail to meet their obligations, because most of the counterparties are internationally recognized financial institutions and contracts are diversified across a number of major financial institutions. Foreign currency exchange rate risk management Canon's international operations expose Canon to the...

  • Page 85
    ...those companies operate with less financial risk. For each guarantee provided, Canon would have to perform under a guarantee if the borrower defaults on a payment within the contract periods of 1 year to 30 years, in the case of employees with housing loans, and of 1 year to 10 years, in the case of...

  • Page 86
    ... course of business. In accordance with SFAS No. 5, "Accounting for Contingencies," Canon has recorded provisions for liabilities when it is probable that liabilities have been incurred and the amount of loss can be reasonably estimated. Canon reviews these provisions at least quarterly and adjusts...

  • Page 87
    ... of Canon's long-term debt instruments are based on the quoted price in the most active market or the present value of future cash flows associated with each instrument discounted using Canon's current borrowing rate for similar debt instruments of comparable maturity. Foreign exchange contracts The...

  • Page 88
    ... effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant...

  • Page 89
    ... Frankfurt am Main stock exchanges American Depositary Receipts are traded on the New York Stock Exchange (CAJ). Stockholders' Annual General Meeting: March 30, 2006, in Tokyo Further Information: For publications or information, please contact the Corporate Communications Center, Canon Inc., Tokyo...

  • Page 90
    CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan