Canon 2011 Annual Report Download - page 47

Strategy Business Units Management System FINANCIAL SECTION
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FINANCIAL SECTION
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 consist principally of forward
currency exchange contracts.
The operating profit 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 profitable than production activi-
ties, which are mainly conducted by the Company and its
domestic subsidiaries. Please refer to the table of geographic
information in Note 23 of the Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents in fiscal 2011 decreased by
¥67,352 million (U.S.$863 million) to ¥773,227 million
(U.S.$9,913 million), compared with ¥840,579 million in fis-
cal 2010 and ¥795,034 million in fiscal 2009. Canon’s cash
and cash equivalents are typically denominated both in
Japanese yen and in U.S. dollar, with the remainder denomi-
nated in foreign currencies.
Net cash provided by operating activities in fiscal 2011
decreased by ¥274,851 million (U.S.$3,524 million) from the
previous year to ¥469,562 million (U.S.$6,020 million). Cash
flow from operating activities consisted of the following key
components: the major component of Canon’s cash inflow
is cash received from customers, and the major components
of Canon’s cash outflow are payments for parts and materi-
als, selling, general and administrative expenses, and
income taxes.
For fiscal 2011, cash inflow from cash received from cus-
tomers decreased due to the decrease of sales. There were no
significant changes in Canon’s collection rates. Cash out-
flow for payments for parts and materials increased, as a
result of our efforts to optimize inventory levels in order to
avoid losing potential sales opportunities while simultane-
ously increasing flexibility in response to unexpected risks
and events. Cash outflow for payments for selling, general
and administrative expenses decreased owing to thorough
spending cuts across the Canon Group implemented after
the earthquake to control expenses more efficiently. Cash
out flow for income taxes decreased due to decrease of tax-
able income.
Net cash used in investing activities in fiscal 2011 was
¥256,543 million (U.S.$3,289 million), decreased by ¥85,590
(U.S.$1,097 million) million from ¥342,133 million in fiscal
2010, mainly as a result of corporate acquisition conducted
in the previous year. The purchases of fixed assets, which
totaled ¥238,129 million (U.S.$3,053 million) in fiscal 2011,
were focused on items relevant to raising production capacity
and reducing production cost.
Canon defines !free cash flow"by deducting the cash flows
from investing activities from the cash flows from operating
activities. For fiscal 2011, free cash flow totaled ¥213,019 mil-
lion (U.S.$2,731 million) as compared with ¥402,280 million
for fiscal 2010. Canon’s management recognizes that con-
stant and intensive investment in facilities and R&D is
required to maintain and strengthen the competitiveness of
its products. Canon’s management seeks to meet its capital
requirements with cash flow principally earned from its oper-
ations, therefore, its capital resources are primarily sourced
from internally generated funds. Accordingly, Canon has
included the information with regard to free cash flow as its
management frequently monitors this indicator, and believes
that such indicator is beneficial to the understanding of
investors. Furthermore, Canon’s management believes that
this indicator is significant in understanding Canon’s current
liquidity and the alternatives of use in financing activities
because it takes into consideration its operating and invest-
ing activities. Canon refers to this indicator together with
relevant U.S. GAAP financial measures shown in its consoli-
dated statements of cash flows and consolidated balance
sheets for cash availability analysis.
Net cash used in financing activities totaled ¥257,513 mil-
lion (U.S.$3,301 million) in fiscal 2011, mainly resulting from
the dividend payout of ¥152,784 million (U.S.$1,959 million),
and repurchase of treasury stock. The Company paid divi-
dends in fiscal 2011 of ¥125.00 (U.S.$1.60) per share.
To the extent Canon relies on external funding for its liq-
uidity and capital requirements, it generally has access to
various funding sources, including the issuance of addi-
tional share capital, long-term debt or short-term loans.
While Canon has been able to obtain funding from its tradi-
tional financing 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 ¥8,343 million (U.S.$107 million) at
December 31, 2011 compared with ¥7,200 million at
December 31, 2010. Long-term debt (excluding the current
portion) amounted to ¥3,368 million (U.S.$43 million) at
December 31, 2011 compared with ¥4,131 million at
December 31, 2010.
Canon’s long-term debt (excluding the current portion)
mainly 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.