Canon 2012 Annual Report Download - page 43

FINANCIAL OVERVIEW 41
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 activ-
ities, which are mainly conducted by the Company and
its domestic subsidiaries. Please refer to the table of geo-
graphic information in Note 23 of the Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents in fiscal 2012 decreased by
¥106,549 million (U.S.$1,225 million) to ¥666,678 million
(U.S.$7,663 million), compared with ¥773,227 million in fis-
cal 2011 and ¥840,579 million in fiscal 2010. 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 2012
decreased by ¥85,485 million (U.S.$983 million) from the pre-
vious year to ¥384,077 million (U.S.$4,415 million). Cash flow
from operating activities consisted of the following key com-
ponents: 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 materials,
selling, general and administrative expenses, R&D expenses
and income taxes.
For fiscal 2012, 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 outflow
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 simultaneously
increasing flexibility in response to unexpected risks and
events. This has led to an increase in inventory turnover days.
Cash outflow for payments for selling, general and adminis-
trative expenses decreased owing to thorough spending cuts
across the Canon Group implemented after the earthquake in
fiscal 2011 to control expenses more efficiently. Cash outflow
for income taxes decreased due to decrease of taxable income.
Net cash used in investing activities in fiscal 2012 was
¥212,740 million (U.S.$2,445 million), decreasing by ¥43,803
million (U.S.$503 million), from ¥256,543 million in fiscal 2011,
due to the net effect of increased capital investment focused on
boosting production and reducing the amount of time depos-
its included in short-term investments. The purchases of fixed
assets, which totaled ¥316,211 million (U.S.$3,635 million) in
fiscal 2012, were focused on items relevant to raising produc-
tion 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 2012, free cash flow totaled
¥171,337 million (U.S.$1,970 million) as compared with
¥213,019 million for fiscal 2011. Canon’s management recog-
nizes that constant and intensive investment in facilities and
R&D is required to maintain and strengthen the competitive-
ness of its products. Canon’s management seeks to meet its
capital requirements with cash flow principally earned from
its operations. 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 understand-
ing 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
investing activities. Canon refers to this indicator together
with relevant U.S. GAAP financial measures shown in its con-
solidated statements of cash flows and consolidated balance
sheets for cash availability analysis.
Net cash used in financing activities totaled ¥319,739 mil-
lion (U.S.$3,675 million) in fiscal 2012, mainly resulting from
repurchase of treasury stock of ¥149,968 million (U.S.$1,724
million), and the dividend payout of ¥142,362 million
(U.S.$1,636 million). The Company paid dividends in fiscal
2012 of ¥120.00 per share.
To the extent Canon relies on external funding for its liquid-
ity and capital requirements, it generally has access to various
funding sources, including the issuance of additional share
capital, long-term debt or short-term loans. While Canon
has been able to obtain funding from its traditional financ-
ing 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 ¥1,866 million (U.S.$21 mil-
lion) at December 31, 2012 compared with ¥8,343 million
at December 31, 2011. Long-term debt (excluding the cur-
rent portion) amounted to ¥2,117 million (U.S.$24 million)
at December 31, 2012 compared with ¥3,368 million at
December 31, 2011.
Canon’s long-term debt 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 main-
tains 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, 2013, Canon’s debt ratings are: Moody’s:
Aa1 (long-term); S&P: AA (long-term), A-1+ (short-term);