Canon 2005 Annual Report Download - page 53

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Canon’s exposure to the risk of changes in interest rates
relates primarily to its debt obligations. The variable-rate debt
obligations expose Canon to variability in their cash flows due
to change in interest rates. To manage the variability in cash
flows caused by interest rate changes, Canon enters into inter-
est rate swaps when it is determined to be appropriate based
on market conditions. The interest rate swaps change variable-
rate debt obligations to fixed-rate debt obligations by primarily
entering into pay-fixed, receive-variable interest rate swaps.
For debt obligations, the table below presents principal
cash flows by expected maturity dates and related weighted
average interest rates, as of December 31, 2005.
Derivative financial instruments designated as fair value
hedges principally relate to interest rate swaps associated with
fixed-rate debt obligations. Changes in fair values of the
hedged debt obligations and derivative instruments designated
as fair value hedges of these debt obligations are recognized in
other income (deductions). There is no hedging ineffectiveness
or net gains or losses excluded from the assessment of hedge
effectiveness for fiscal 2004 and 2003 as the critical terms of
the interest rate swaps match the terms of the hedged debt
obligations. Canon had no fair value hedges in 2005.
Changes in the fair value of derivative financial instruments
designated as cash flow hedges, including foreign exchange
contracts associated with forecasted intercompany sales and
interest rate swaps associated with variable rate debt obliga-
tions, are reported in accumulated other comprehensive
income (loss). These amounts are subsequently reclassified into
earnings through other income (deductions) in the same period
as the hedged items affect earnings. Substantially all amounts
recorded in accumulated other comprehensive income (loss) at
year-end is expected to be recognized in earnings over the next
twelve months. Canon excludes the time value component
from the assessment of hedge effectiveness.
The amounts of the hedging ineffectiveness are not mate-
rial for the years ended December 31, 2005, 2004 and 2003.
The amounts of net gains or losses excluded from the assess-
ment of hedge effectiveness which are recorded in other
income (deductions) are net losses of ¥3,725 million (U.S.$32
million), ¥2,096 million and ¥490 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
Canon has entered into certain foreign currency exchange
contracts to manage its foreign currency exposures. These for-
eign currency exchange contracts have not been designated as
hedges. Accordingly, the changes in fair values of the contracts
are recorded in earnings immediately.
LOOKING FORWARD
Through Phase I (1996 to 2000) and Phase II (2001 to 2005) of
its “Excellent Global Corporation Plan,” the Canon Group pur-
sued 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 corporate
structure for high profitability.
The business environment the Canon Group will face in the
future will likely be characterized by ongoing economic global-
ization against the background of stable economic growth at
the global level, as well as further adoption of broadband net-
work and explosive growth of the digital imaging business
sector.
Viewing these conditions as a business opportunity, the
Canon Group will continuously try to boldly apply the opera-
tional, technological, personnel, financial and other business
resources it has built up in ways that make further sound
growth possible. Toward that end, we have formulated a new
five-year plan—Phase III (2006 to 2010) of our “Excellent
Global Corporation Plan.”
LONG-TERM DEBT (including due within one year) Millions of yen
Weighted average Expected maturity date Estimated
interest rates Total 2006 2007 2008 2009 2010 Thereafter Fair Value
Japanese yen notes 2.61% ¥20,000 — 10,000 10,000 — — — 20,848
Japanese yen convertible
debentures 1.30% 649 — — 649 — — — 3,052
Other long-term debt 2.40% 11,425 4,992 3,318 1,702 895 417 101 11,294
Total ¥32,074 4,992 13,318 12,351 895 417 101 35,194
LONG-TERM DEBT (including due within one year) Thousands of U.S. dollars
Weighted average Expected maturity date Estimated
interest rates Total 2006 2007 2008 2009 2010 Thereafter Fair Value
Japanese yen notes 2.61% $169,492 — 84,746 84,746 — — — 176,678
Japanese yen convertible
debentures 1.30% 5,500 — — 5,500 — — — 25,864
Other long-term debt 2.40% 96,821 42,305 28,118 14,423 7,585 3,534 856 95,712
Total $271,813 42,305 112,864 104,669 7,585 3,534 856 298,254
Note: All long-term debt is fixed rate.