Canon 2005 Annual Report Download - page 38

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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 result of operations. Refer-
ences 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, step-
pers and aligners. Canon earns revenues primarily from the
manufacture and sale of these products domestically and inter-
nationally. 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 2005, the U.S. econ-
omy continued to display growth despite concern over the eco-
nomic impact of escalating crude oil prices and the damage
caused by Hurricane Katrina, with healthy employment condi-
tions and continued growth in consumer spending. In Europe,
while the recovery in consumer spending appeared to falter,
such factors as growth in the production sector amid strong
exports indicate a trend toward moderate recovery. As for Asia,
China continued to achieve a high rate of economic growth,
mainly fueled by exports, while other Asian economies also
recorded generally favorable performances. In Japan, the econ-
omy continued to gradually recover owing to such factors as
increased corporate investment supported by favorable corpo-
rate 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 significantly during fiscal 2005.
Sales of digital compact cameras also remained strong to real-
ize healthy overall growth for the segment. Demand for net-
work digital multifunction devices (“MFDs”) remained solid as
the office market, including small-scale enterprises, moved
toward color and multifunctionality. Although sales of com-
puter peripherals, including printers, grew for both multifunc-
tion and color models, the segment suffered amid a shift in
further demand toward high-performance low-priced machines
and severe price competition. Demand for steppers, used in the
production of semiconductors, tapered off after the summer of
2004 as the chip manufacturing market entered a correction
phase. The market for projection aligners, which are used in
the production of liquid crystal display (“LCD”) panels, enjoyed
stable growth, fueled by increased investment by LCD panel
manufacturers amid the rapid expansion of the LCD television
market. The average value of the yen for the year was ¥110.58
to the U.S. dollar and ¥137.04 to the euro, representing a year-
on-year decrease of almost 2% against both currencies.
Summary of Operations
Canon achieved record highs in both consolidated net sales
and net income, and a sixth consecutive year of sales and profit
growth, mainly due to a significant increase in sales of digital
cameras and color network digital MFDs, along with an
increase in sales of projection aligners. In fiscal 2005, Canon
achieved 8.3% growth in net sales, to ¥3,754,191 million
(U.S.$31,815 million), and an 11.9% increase in net income, to
¥384,096 million (U.S.$3,255 million). Canon’s gross profit
increased by 6.2%, to ¥1,819,043 million (U.S.$15,416
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 below.
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 lesser extent, providing of
services relating to its products. Sales vary based on such fac-
tors as product demand, the number and size of transactions
within the reporting period, product reputation for new prod-
ucts, and changes in sales prices. Other factors involved are
market share and market environment. In addition, manage-
ment considers an evaluation of net sales by product group to
be important in assessing Canon’s performance in sales in vari-
ous product groups in light of market trends.
Gross profit ratio (ratio of gross profit to net sales) is
another KPI for Canon. Through its reforms in product develop-
ment, Canon has been striving to shorten product develop-
ment 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
ratio are considered by Canon to be KPIs. Canon is focusing on
two areas for improvement. On the one hand, Canon strives to
control and reduce its selling, general and administrative
expenses. On the other hand, Canon’s R&D policy is designed
to maintain a high level of spending in core technology in order