Canon 2005 Annual Report Download - page 47

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Operating Profit by Product
Operating profit for business machines in fiscal 2005
increased ¥20,944 million (U.S.$177 million) to ¥542,028 mil-
lion (U.S.$4,593 million). The gross profit ratio remained at a
previous year level, due to cost reduction efforts, and the sales-
to-expense ratio declined, contributing to an increase in oper-
ating profit.
Operating profit for cameras increased ¥42,908 million
(U.S.$364 million) to ¥173,706 million (U.S.$1,472 million).
The gross profit ratio improved, due to an increase in unit sales
of digital cameras.
Optical and other products in fiscal 2005 increased ¥9,988
million (U.S.$85 million) to ¥38,820 million (U.S.$329 million).
The gross profit ratio increased compared to the previous year,
due to an increase in sales of aligners.
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 for-
ward currency exchange contracts.
The return on foreign operation sales is usually lower than
that from domestic operations because foreign operations con-
sist mainly of marketing activities. Return on foreign operation
sales is calculated by dividing net income of foreign sub-
sidiaries, after factoring in consolidation adjustments between
foreign subsidiaries, by net sales of foreign subsidiaries. Mar-
keting 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 2005, 2004 and 2003 were 3.0%, 2.8% and 3.2%,
respectively. This compares with returns of 10.2%, 9.9% and
8.6% on total operations for the respective years.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents in fiscal 2005 increased ¥117,179
million (U.S.$993 million) to ¥1,004,953 million (U.S.$8,517
million), compared with ¥887,774 million in fiscal 2004 and
¥690,298 million in fiscal 2003. Canon’s cash and cash equiva-
lents 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 2005
increased by ¥44,149 million (U.S.$374 million) from the previ-
ous year to ¥605,678 million (U.S.$5,133 million), reflecting
the substantial growth in sales and increased cash proceeds
from sales, combined with a substantial increase in net income
and an improvement in working capital. Cash flow from oper-
ating 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 out-
flow are payments for parts and materials, selling, general and
administrative expenses, and income taxes.
For fiscal 2005, cash inflow from cash received from cus-
tomers 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 pro-
moting efficiency in operations. Cash outflow for payroll pay-
ments 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, but the increase was within the range of the
increase in net sales, due to cost-cutting efforts. Cash outflow
for payments of income taxes increased, due to the increase in
taxable income.
Net cash used in investing activities in fiscal 2005 was
¥401,141 million (U.S.$3,400 million), compared with
¥252,967 million in fiscal 2004 and ¥199,948 million in fiscal
2003, consisting primarily of capital expenditures. Capital
expenditures in fiscal 2005 totaled ¥383,784 million
(U.S.$3,252 million), which was used mainly to expand produc-
tion capabilities in Japan and overseas regions and to
strengthen the Company’s R&D-related infrastructure. As a
result, free cash flow, or cash flow from operating activities
minus cash flow from investing activities, totaled ¥204,537 mil-
lion (U.S.$1,733 million) for fiscal 2005 as compared to
¥308,562 million for fiscal 2004.