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CANON ANNUAL REPORT 2010 53
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 profi t ratio. To reduce the fi nancial risks from changes
in foreign exchange rates, Canon utilizes derivative fi nancial
instruments, which consist principally of forward currency
exchange contracts.
The operating profi t on foreign operation sales is usually
lower than that from domestic operations because foreign
operations consist mainly of marketing activities. Marketing
activities are generally less profi table than production activities,
which are mainly conducted by the Company and its domestic
subsidiaries. Please refer to the table of geographic information
in Note 24 of the Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents in fi scal 2010 increased by
¥45,545 million (U.S.$562 million) to ¥840,579 million (U.S.$10,378
million), compared with ¥795,034 million in fi scal 2009 and
¥679,196 million in fi scal 2008. Canon’s cash and cash equiva-
lents are typically denominated both in Japanese yen and in U.S.
dollar, with the remainder denominated in foreign currencies.
Net cash provided by operating activities in fi scal 2010
increased by ¥133,178 million (U.S.$1,644 million) from the pre-
vious year to ¥744,413 million (U.S.$9,190 million), as a result of
signifi cant increase of profi t. Cash fl ow from operating activities
consisted of the following key components: the major compo-
nent of Canon’s cash infl ow is cash received from customers,
and the major components of Canon’s cash outfl ow are pay-
ments for parts and materials, selling, general and administra-
tive expenses, and income taxes.
For fi scal 2010, cash infl ow from cash received from custom-
ers increased, due to the signifi cant increase of sales. There
were no signifi cant changes in Canon’s collection rates. Cash
outfl ow for payments for parts and materials also increased, as
a result of an increase in net sales, however this increase
remained within a range of net sales increase due to cost
reductions activities. Cost reductions refl ect 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 promot-
ing effi ciency in operations. Cash outfl ow for payments for sell-
ing, general and administrative expenses increased, however,
also remained within the range of sales increase due to cost-
cutting efforts.
Net cash used in investing activities in fi scal 2010 was
¥342,133 million (U.S.$4,224 million), compared with ¥ 370,244
million in fi scal 2009 and ¥472,480 million in fi scal 2008, con-
sisting primarily of purchases of fi xed assets and acquisition of
shares of Océ. The purchases of fi xed assets, which totaled
¥199,152 million (U.S.$2,459 million) in fi scal 2010, were focused
on items relevant to raising production capacity and reducing
production cost.
Canon defi nes “free cash fl ow” by deducting the cash fl ows
from investing activities from the cash fl ows from operating
activities. For fi scal 2010, free cash fl ow totaled ¥402,280 million
(U.S.$4,966 million) as compared with ¥240,991 million for fi scal
2009. Canon’s management recognizes that constant and
intensive investment in facilities and R&D is required to main-
tain and strengthen the competitiveness of its products.
Canon’s management seeks to meet its capital requirements
with cash fl ow principally earned from its operations, therefore,
its capital resources are primarily sourced from internally gen-
erated funds. Accordingly, Canon has included the information
with regard to free cash fl ow as its management frequently
monitors this indicator, and believes that such indicator is ben-
efi cial to the understanding of investors. Furthermore, Canon’s
management believes that this indicator is signifi cant in under-
standing Canon’s current liquidity and the alternatives of use in
fi nancing activities because it takes into consideration its oper-
ating and investing activities. Canon refers to this indicator
together with relevant U.S. GAAP fi nancial measures shown in
its consolidated statements of cash fl ows and consolidated bal-
ance sheets for cash availability analysis.
Net cash used in fi nancing activities totaled ¥279,897 million
(U.S.$3,456 million) in fi scal 2010, mainly resulting from the divi-
dend payout of ¥136,103 million (U.S.$1,680 million), repurchase
of treasury stock and repayment of borrowings of Océ N.V. The
Company paid dividends in fi scal 2010 of ¥110.00 (U.S.$1.36)
per share.
To the extent Canon relies on external funding for its liquidity
and capital requirements, it generally has access to various
funding sources, including the issuance of additional share cap-
ital, long-term debt or short-term loans. While Canon has been
able to obtain funding from its traditional fi nancing sources and
from the capital markets, and believes it will continue to be
able to do so in the future, there can be no assurance that
adverse economic or other conditions will not affect Canon’s
liquidity or long-term funding in the future.
Short-term loans (including the current portion of long-term
debt) amounted to ¥7,200 million (U.S.$89 million) at December
31, 2010 compared with ¥4,869 million at December 31, 2009.
Long-term debt (excluding the current portion) amounted to
¥4,131 million (U.S.$51 million) at December 31, 2010 compared
with ¥4,912 million at December 31, 2009.
Canon’s long-term debt (excluding the current portion) main-
ly consists of lease obligations.
In order to facilitate access to global capital markets, Canon
obtains credit ratings from two rating agencies: Moody’s
Investors Services, Inc. (“Moody’s”) and Standard and Poor’s
Ratings Services (“S&P”). In addition, Canon maintains a rating
from Rating and Investment Information, Inc. (“R&I”), a rating
agency in Japan, for access to the Japanese capital market.
As of March 15, 2011, Canon’s debt ratings are: Moody’s: Aa1
(long-term); S&P: AA (long-term), A-1+ (short-term); and R&I:
AA+ (long-term). Canon does not have any rating downgrade
triggers that would accelerate the maturity of a material
amount of its debt. A downgrade in Canon’s credit ratings or
outlook could, however, increase the cost of its borrowings.
Increase in property, plant and equipment on an accrual
basis in fi scal 2010 amounted to ¥158,976 million (U.S.$1,963
million) compared with ¥216,128 million in fi scal 2009 and
¥361,988 million in fi scal 2008. In fi scal 2010, decrease in