Canon 2006 Annual Report Download - page 49

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Operating Profit by Product
Operating profit for business machines in fiscal 2006
increased ¥57,201 million (U.S.$481 million) to ¥599,229 million
(U.S.$5,036 million). The gross profit ratio improved compared
to the previous year, due to cost reduction efforts, and the
sales-to-expense ratio declined, contributing to an increase in
operating profit.
Operating profit for cameras increased ¥95,032 million
(U.S.$799 million) to ¥268,738 million (U.S.$2,258 million).
The gross profit ratio for the camera segment improved, due
to such factors as increased sales of new products and cost
reduction efforts.
Operating profit for optical and other products in fiscal
2006 increased ¥2,655 million (U.S.$22 million) to ¥41,475
million (U.S.$349 million). The gross profit ratio increased
compared to the previous year, due to an increase in sales
of steppers.
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 forward
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 subsidiaries,
after factoring in consolidation adjustments between foreign
subsidiaries, by net sales of foreign subsidiaries. Marketing
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
2006, 2005 and 2004 were 3.7%, 3.0% and 2.8%, respectively.
This compares with returns of 11.0%, 10.2% and 9.9% on
total operations for the respective years.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents in fiscal 2006 increased
¥150,673 million (U.S.$1,266 million) to ¥1,155,626 million
(U.S.$9,711 million), compared with ¥1,004,953 million in
fiscal 2005 and ¥887,774 million in fiscal 2004. Canon’s cash
and cash equivalents 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 2006
increased by ¥89,563 million (U.S.$753 million) from the
previous year to ¥695,241 million (U.S.$5,842 million), reflecting
the substantial growth in sales and increased cash proceeds
from sales, combined with a substantial increase in net income.
Cash flow from operating 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 outflow are payments for parts and materials,
selling, general and administrative expenses, and income taxes.
For fiscal 2006, 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
promoting efficiency in operations. Cash outflow for payroll
payments 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 2006 was
¥460,805 million (U.S.$3,872 million), compared with ¥401,141
million in fiscal 2005 and ¥252,967 million in fiscal 2004,
consisting primarily of capital expenditures. Capital expenditures
in fiscal 2006 totaled ¥424,862 million (U.S.$3,570 million),
which was used mainly to expand production 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 ¥234,436 million (U.S.$1,970 million) for
fiscal 2006 as compared to ¥204,537 million for fiscal 2005.