Canon 2005 Annual Report Download - page 41

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SUMMARY OF OPERATIONS
Thousands of
Millions of yen U.S. dollars
2005 change 2004 change 2003 2005
Net sales ¥3,754,191 +8.3% 3,467,853 +8.4% 3,198,072 $31,815,178
Operating profit 583,043 +7.2 543,793 +19.7 454,424 4,941,042
Income before income taxes and minority interests 612,004 +10.8 552,116 +23.2 448,170 5,186,475
Net income 384,096 +11.9 343,344 +24.5 275,730 3,255,051
CONSOLIDATED RESULTS OF OPERATIONS
Sales
Canon’s consolidated net sales in fiscal 2005 totaled
¥3,754,191 million (U.S.$31,815 million). This represents an
8.3% increase from the previous fiscal year, reflecting signifi-
cant growth in sales of digital cameras, color network digital
MFDs and projection aligners.
Overseas operations are significant to Canon’s operating
results and generated approximately 74% of total net sales in
fiscal 2005. 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, includ-
ing localizing some manufacturing and procuring parts and
materials from overseas suppliers, Canon believes such fluctua-
tions have had and will continue to have a significant effect on
results of operations.
The average value of the yen in fiscal 2005 was ¥110.58 to
the U.S. dollar, and ¥137.04 to the euro, representing a depre-
ciation of 2% against both currencies, compared with the pre-
vious year. These effects of foreign exchange rate fluctuations
favorably impacted net sales by approximately ¥66,400 million.
Net sales denominated in foreign currency increased by approx-
imately ¥41,500 million in U.S. dollars, increased by ¥16,300
million in euro, and increased by ¥8,600 million in other for-
eign currencies.
Cost of Sales
Cost of sales principally reflects the cost of raw materials, parts
and labor used by Canon in the manufacture of its products. A
portion of the raw materials used by Canon is imported or
includes imported materials. Such raw materials are subject to
fluctuations in world market prices and exchange rates that
may affect Canon’s cost of sales. Other components of cost of
sales include depreciation expenses from plants, maintenance
expenses, light and fuel expenses and rent expenses. The ratio
of cost of sales to net sales for fiscal 2005, 2004 and 2003 was
51.5%, 50.6% and 49.7%, respectively.
Gross Profit
Canon’s gross profit in fiscal 2005 increased by 6.2% to
¥1,819,043 million (U.S.$15,416 million) from fiscal 2004.
Despite such negative factors as escalating prices of raw mate-
rials and a severe price competition, gross profit ratio for the
year remained at high, with a decrease of 0.9 points from the
previous year, owing to cost reductions realized through ongo-
ing production-reform and procurement-reform efforts.
available during the period to the maturity of the pension ben-
efits. 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 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 2006, 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 approxi-
mately ¥2,730 million in net periodic benefit cost. Canon multi-
plies 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 of unrecognized actuarial gains
(losses) affects the value of plan assets in future fiscal years
and, ultimately, future pension income (expense).